G.R. No.
L-43350 December 23, 1937
CAGAYAN FISHING DEVELOPMENT CO., INC., plaintiff-appellant,
vs.
TEODORO SANDIKO, defendant-appellee.
Arsenio P. Dizon for appellant.
Sumulong, Lavides and Sumulong for appellee.
LAUREL, J.:
This is an appeal from a judgment of the Court of First Instance of Manila absolving the
defendant from the plaintiff's complaint.
Manuel Tabora is the registered owner of four parcels of land situated in the barrio of Linao,
town of Aparri, Province of Cagayan, as evidenced by transfer certificate of title No. 217 of the
land records of Cagayan, a copy of which is in evidence as Exhibit 1. To guarantee the payment
of a loan in the sum of P8,000, Manuel Tabora, on August 14, 1929, executed in favor of the
Philippine National Bank a first mortgage on the four parcels of land above-mentioned. A second
mortgage in favor of the same bank was in April of 1930 executed by Tabora over the same
lands to guarantee the payment of another loan amounting to P7,000. A third mortgage on the
same lands was executed on April 16, 1930 in favor of Severina Buzon to whom Tabora was
indebted in the sum of P2,9000. These mortgages were registered and annotations thereof
appear at the back of transfer certificate of title No. 217.
On May 31, 1930, Tabora executed a public document entitled "Escritura de Transpaso de
Propiedad Inmueble" (Exhibit A) by virtue of which the four parcels of land owned by him was
sold to the plaintiff company, said to under process of incorporation, in consideration of one peso
(P1) subject to the mortgages in favor of the Philippine National Bank and Severina Buzon and,
to the condition that the certificate of title to said lands shall not be transferred to the name of the
plaintiff company until the latter has fully and completely paid Tabora's indebtedness to the
Philippine National Bank.
The plaintiff company filed its article incorporation with the Bureau of Commerce and Industry on
October 22, 1930 (Exhibit 2). A year later, on October 28, 1931, the board of directors of said
company adopted a resolution (Exhibit G) authorizing its president, Jose Ventura, to sell the four
parcels of lands in question to Teodoro Sandiko for P42,000. Exhibits B, C and D were thereafter
made and executed. Exhibit B is a deed of sale executed before a notary public by the terms of
which the plaintiff sold ceded and transferred to the defendant all its right, titles, and interest in
and to the four parcels of land described in transfer certificate in turn obligated himself to
shoulder the three mortgages hereinbefore referred to. Exhibit C is a promisory note for P25,300.
drawn by the defendant in favor of the plaintiff, payable after one year from the date thereof.
Exhibit D is a deed of mortgage executed before a notary public in accordance with which the
four parcels of land were given a security for the payment of the promissory note, Exhibit C. All
these three instrument were dated February 15, 1932.
The defendant having failed to pay the sum stated in the promissory note, plaintiff, on January
25, 1934, brought this action in the Court of First Instance of Manila praying that judgment be
rendered against the defendant for the sum of P25,300, with interest at legal rate from the date
of the filing of the complaint, and the costs of the suits. After trial, the court below, on December
18, 1934, rendered judgment absolving the defendant, with costs against the plaintiff. Plaintiff
presented a motion for new trial on January 14, 1935, which motion was denied by the trial court
on January 19 of the same year. After due exception and notice, plaintiff has appealed to this
court and makes an assignment of various errors.
In dismissing the complaint against the defendant, the court below, reached the conclusion that
Exhibit B is invalid because of vice in consent and repugnancy to law. While we do not agree
with this conclusion, we have however voted to affirm the judgment appealed from the reasons
which we shall presently state.
The transfer made by Tabora to the Cagayan fishing Development Co., Inc., plaintiff herein, was
affected on May 31, 1930 (Exhibit A) and the actual incorporation of said company was affected
later on October 22, 1930 (Exhibit 2). In other words, the transfer was made almost five months
before the incorporation of the company. Unquestionably, a duly organized corporation has the
power to purchase and hold such real property as the purposes for which such corporation was
formed may permit and for this purpose may enter into such contracts as may be necessary
(sec. 13, pars. 5 and 9, and sec. 14, Act No. 1459). But before a corporation may be said to be
lawfully organized, many things have to be done. Among other things, the law requires the filing
of articles of incorporation (secs. 6 et seq., Act. No. 1459). Although there is a presumption that
all the requirements of law have been complied with (sec. 334, par. 31 Code of Civil Procedure),
in the case before us it can not be denied that the plaintiff was not yet incorporated when it
entered into a contract of sale, Exhibit A. The contract itself referred to the plaintiff as "una
sociedad en vias de incorporacion." It was not even a de facto corporation at the time. Not being
in legal existence then, it did not possess juridical capacity to enter into the contract.
Corporations are creatures of the law, and can only come into existence in the manner
prescribed by law. As has already been stated, general law authorizing the formation of
corporations are general offers to any persons who may bring themselves within their
provisions; and if conditions precedent are prescribed in the statute, or certain acts are
required to be done, they are terms of the offer, and must be complied with substantially
before legal corporate existence can be acquired. (14 C. J., sec. 111, p. 118.)
That a corporation should have a full and complete organization and existence as an
entity before it can enter into any kind of a contract or transact any business, would seem
to be self evident. . . . A corporation, until organized, has no being, franchises or
faculties. Nor do those engaged in bringing it into being have any power to bind it by
 contract, unless so authorized by the charter there is not a corporation nor does it
possess franchise or faculties for it or others to exercise, until it acquires a complete
existence. (Gent vs. Manufacturers and Merchant's Mutual Insurance Company, 107 Ill.,
652, 658.)
Boiled down to its naked reality, the contract here (Exhibit A) was entered into not between
Manuel Tabora and a non-existent corporation but between the Manuel Tabora as owner of the
four parcels of lands on the one hand and the same Manuel Tabora, his wife and others, as
mere promoters of a corporations on the other hand. For reasons that are self-evident, these
promoters could not have acted as agent for a projected corporation since that which no legal
existence could have no agent. A corporation, until organized, has no life and therefore no
faculties. It is, as it were, a child in ventre sa mere. This is not saying that under no
circumstances may the acts of promoters of a corporation be ratified by the corporation if and
If the plaintiff corporation could not and did not acquire the four parcels of land here involved, it
follows that it did not possess any resultant right to dispose of them by sale to the defendant,
Teodoro Sandiko.
Some of the members of this court are also of the opinion that the transfer from Manuel Tabora
to the Cagayan Fishing Development Company, Inc., which transfer is evidenced by Exhibit A,
was subject to a condition precedent (condicion suspensiva), namely, the payment of the
mortgage debt of said Tabora to the Philippine National Bank, and that this condition not having
been complied with by the Cagayan Fishing Development Company, Inc., the transfer was
ineffective. (Art. 1114, Civil Code; Wise & Co. vs. Kelly and Lim, 37 Phil., 696; Manresa, vol. 8, p.
141.) However, having arrived at the conclusion that the transfer by Manuel Tabora to the
Cagayan Fishing Development Company, Inc. was null because at the time it was affected the
corporation was non-existent, we deem it unnecessary to discuss this point. lawphil.net

when subsequently organized. There are, of course, exceptions (Fletcher Cyc. of Corps.,
permanent edition, 1931, vol. I, secs. 207 et seq.), but under the peculiar facts and The decision of the lower court is accordingly affirmed, with costs against the appellant. So
circumstances of the present case we decline to extend the doctrine of ratification which would Ordered.
result in the commission of injustice or fraud to the candid and unwary.(Massachusetts rule,
Abbott vs. Hapgood, 150 Mass., 248; 22 N. E. 907, 908; 5 L. R. A., 586; 15 Am. St. Rep., 193; Villa-Real, Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.
citing English cases; Koppel vs. Massachusetts Brick Co., 192 Mass., 223; 78 N. E., 128;
Holyoke Envelope Co., vs. U. S. Envelope Co., 182 Mass., 171; 65 N. E., 54.) It should be
observed that Manuel Tabora was the registered owner of the four parcels of land, which he
succeeded in mortgaging to the Philippine National Bank so that he might have the necessary
funds with which to convert and develop them into fishery. He appeared to have met with
financial reverses. He formed a corporation composed of himself, his wife, and a few others.
From the articles of incorporation, Exhibit 2, it appears that out of the P48,700, amount of capital G.R. No. L-48627
stock subscribed, P45,000 was subscribed by Manuel Tabora himself and P500 by his wife,
Rufina Q. de Tabora; and out of the P43,300, amount paid on subscription, P42,100 is made to
FERMIN Z. CARAM, JR. and ROSA O. DE CARAM, petitioners
appear as paid by Tabora and P200 by his wife. Both Tabora and His wife were directors and
vs.
the latter was treasurer as well. In fact, to this day, the lands remain inscribed in Tabora's name.
THE HONORABLE COURT OF APPEALS and ALBERTO V. ARELLANO, respondents.
The defendant always regarded Tabora as the owner of the lands. He dealt with Tabora directly.
Jose Ventura, president of the plaintiff corporation, intervened only to sign the contract, Exhibit
B, in behalf of the plaintiff. Even the Philippine National Bank, mortgagee of the four parcels of
land, always treated Tabora as the owner of the same. (See Exhibits E and F.) Two civil suits
(Nos. 1931 and 38641) were brought against Tabora in the Court of First Instance of Manila and
in both cases a writ of attachment against the four parcels of land was issued. The Philippine CRUZ, J.:
National Bank threatened to foreclose its mortgages. Tabora approached the defendant Sandiko
and succeeded in the making him sign Exhibits B, C, and D and in making him, among other
We gave limited due course to this petition on the question of the solidary liability of the
things, assume the payment of Tabora's indebtedness to the Philippine National Bank. The
petitioners with their co-defendants in the lower court 1 because of the challenge to the following
promisory note, Exhibit C, was made payable to the plaintiff company so that it may not attached
paragraph in the dispositive portion of the decision of the respondent court: *
by Tabora's creditors, two of whom had obtained writs of attachment against the four parcels of
land.
1. Defendants are hereby ordered to jointly and severally pay the plaintiff the amount of
P50,000.00 for the preparation of the project study and his technical services that led to
the organization of the defendant corporation, plus P10,000.00 attorney's fees; 2
The petitioners claim that this order has no support in fact and law because they had no contract
whatsoever with the private respondent regarding the above-mentioned services. Their position
is that as mere subsequent investors in the corporation that was later created, they should not
be held solidarily liable with the Filipinas Orient Airways, a separate juridical entity, and with
Barretto and Garcia, their co-defendants in the lower court, ** who were the ones who requested
the said services from the private respondent. 3
We are not concerned here with the petitioners' co-defendants, who have not appealed the
decision of the respondent court and may, for this reason, be presumed to have accepted the
same. For purposes of resolving this case before us, it is not necessary to determine whether it
is the promoters of the proposed corporation, or the corporation itself after its organization, that
shall be responsible for the expenses incurred in connection with such organization.
The only question we have to decide now is whether or not the petitioners themselves
are also and personally liable for such expenses and, if so, to what extent.
The reasons for the said order are given by the respondent court in its decision in this wise:
As to the 4th assigned error we hold that as to the remuneration due the plaintiff for the
preparation of the project study and the pre-organizational services in the amount of
P50,000.00, not only the defendant corporation but the other defendants including
defendants Caram should be jointly and severally liable for this amount. As we above
related it was upon the request of defendants Barretto and Garcia that plaintiff handled
the preparation of the project study which project study was presented to defendant
Caram so the latter was convinced to invest in the proposed airlines. The project study
was revised for purposes of presentation to financiers and the banks. It was on the basis
of this study that defendant corporation was actually organized and rendered operational.
Defendants Garcia and Caram, and Barretto became members of the Board and/or
officers of defendant corporation. Thus, not only the defendant corporation but all the
other defendants who were involved in the preparatory stages of the incorporation, who
caused the preparation and/or benefited from the project study and the technical services
of plaintiff must be liable. 4
It would appear from the above justification that the petitioners were not really involved in the
initial steps that finally led to the incorporation of the Filipinas Orient Airways. Elsewhere in the
decision, Barretto was described as "the moving spirit." The finding of the respondent court is
that the project study was undertaken by the private respondent at the request of Barretto and
Garcia who, upon its completion, presented it to the petitioners to induce them to invest in the
proposed airline. The study could have been presented to other prospective investors. At any
rate, the airline was eventually organized on the basis of the project study with the petitioners as
major stockholders and, together with Barretto and Garcia, as principal officers.
The following portion of the decision in question is also worth considering:
... Since defendant Barretto was the moving spirit in the pre-organization work of
defendant corporation based on his experience and expertise, hence he was logically
compensated in the amount of P200,000.00 shares of stock not as industrial partner but
more for his technical services that brought to fruition the defendant corporation. By the
same token, We find no reason why the plaintiff should not be similarly compensated not
only for having actively participated in the preparation of the project study for several
months and its subsequent revision but also in his having been involved in the pre-
organization of the defendant corporation, in the preparation of the franchise, in inviting
the interest of the financiers and in the training and screening of personnel. We agree
that for these special services of the plaintiff the amount of P50,000.00 as compensation
is reasonable. 5
The above finding bolsters the conclusion that the petitioners were not involved in the initial
stages of the organization of the airline, which were being directed by Barretto as the main
promoter. It was he who was putting all the pieces together, so to speak. The petitioners were
merely among the financiers whose interest was to be invited and who were in fact persuaded,
on the strength of the project study, to invest in the proposed airline.
Significantly, there was no showing that the Filipinas Orient Airways was a fictitious corporation
and did not have a separate juridical personality, to justify making the petitioners, as principal
stockholders thereof, responsible for its obligations. As a bona fide corporation, the Filipinas
Orient Airways should alone be liable for its corporate acts as duly authorized by its officers and
directors.
In the light of these circumstances, we hold that the petitioners cannot be held personally liable
for the compensation claimed by the private respondent for the services performed by him in the
organization of the corporation. To repeat, the petitioners did not contract such services. It was
only the results of such services that Barretto and Garcia presented to them and which
persuaded them to invest in the proposed airline. The most that can be said is that they
benefited from such services, but that surely is no justification to hold them personally liable
therefor. Otherwise, all the other stockholders of the corporation, including those who came in
later, and regardless of the amount of their share holdings, would be equally and personally
liable also with the petitioners for the claims of the private respondent.
The petition is rather hazy and seems to be flawed by an ambiguous ambivalence. Our
impression is that it is opposed to the imposition of solidary responsibility upon the Carams but
seems to be willing, in a vague, unexpressed offer of compromise, to accept joint liability. While it
is true that it does here and there disclaim total liability, the thrust of the petition seems to be
against the imposition of solidary liability only rather than against any liability at all, which is what
it should have categorically argued.
Categorically, the Court holds that the petitioners are not liable at all, jointly or jointly and
severally, under the first paragraph of the dispositive portion of the challenged decision. So
holding, we find it unnecessary to examine at this time the rules on solidary obligations, which
the parties-needlessly, as it turns out have belabored unto death.
WHEREFORE, the petition is granted. The petitioners are declared not liable under the
challenged decision, which is hereby modified accordingly. It is so ordered.
Yap (Chairman), Narvasa, Melencio-Herrera, Feliciano and Sarmiento, JJ., concur.
Gancayco, J., took no part.
G.R. No. L-2598 June 29, 1950
C. ARNOLD HALL and BRADLEY P. HALL, petitioners,
vs.
EDMUNDO S. PICCIO, Judge of the Court of First Instance of Leyte, FRED BROWN, EMMA
BROWN, HIPOLITA CAPUCIONG, in his capacity as receiver of the Far Eastern Lumber
and Commercial Co., Inc.,respondents.
Claro M. Recto for petitioners.
Ramon Diokno and Jose W. Diokno for respondents.
BENGZON, J.:
This is petition to set aside all the proceedings had in civil case No. 381 of the Court of First
Instance of Leyte and to enjoin the respondent judge from further acting upon the same.
Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and Bradley P. Hall, and the
respondents Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella, signed
and acknowledged in Leyte, the article of incorporation of the Far Eastern Lumber and
Commercial Co., Inc., organized to engage in a general lumber business to carry on as general
contractors, operators and managers, etc. Attached to the article was an affidavit of the treasurer
stating that 23,428 shares of stock had been subscribed and fully paid with certain properties
transferred to the corporation described in a list appended thereto.
(2) Immediately after the execution of said articles of incorporation, the corporation proceeded to
do business with the adoption of by-laws and the election of its officers.
(3) On December 2, 1947, the said articles of incorporation were filed in the office of the
Securities and Exchange Commissioner, for the issuance of the corresponding certificate of
incorporation.
(4) On March 22, 1948, pending action on the articles of incorporation by the aforesaid
governmental office, the respondents Fred Brown, Emma Brown, Hipolita D. Chapman and
Ceferino S. Abella filed before the Court of First Instance of Leyte the civil case numbered 381,
entitled "Fred Brown et al. vs. Arnold C. Hall et al.", alleging among other things that the Far
Eastern Lumber and Commercial Co. was an unregistered partnership; that they wished to have
it dissolved because of bitter dissension among the members, mismanagement and fraud by the
managers and heavy financial losses.
(5) The defendants in the suit, namely, C. Arnold Hall and Bradley P. Hall, filed a motion to
dismiss, contesting the court's jurisdiction and the sufficiently of the cause of action.
(6) After hearing the parties, the Hon. Edmund S. Piccio ordered the dissolution of the company;
and at the request of plaintiffs, appointed of the properties thereof, upon the filing of a P20,000
bond.
(7) The defendants therein (petitioners herein) offered to file a counter-bond for the discharge of
the receiver, but the respondent judge refused to accept the offer and to discharge the receiver.
Whereupon, the present special civil action was instituted in this court. It is based upon two main
propositions, to wit:
(a) The court had no jurisdiction in civil case No. 381 to decree the dissolution of the company,
because it being a de facto corporation, dissolution thereof may only be ordered in a quo
warranto proceeding instituted in accordance with section 19 of the Corporation Law.
(b) Inasmuch as respondents Fred Brown and Emma Brown had signed the article of
incorporation but only a partnership.
Discussion: The second proposition may at once be dismissed. All the parties are informed that
the Securities and Exchange Commission has not, so far, issued the corresponding certificate of
incorporation. All of them know, or sought to know, that the personality of a corporation begins to
exist only from the moment such certificate is issued — not before (sec. 11, Corporation Law).
The complaining associates have not represented to the others that they were incorporated any
more than the latter had made similar representations to them. And as nobody was led to believe
anything to his prejudice and damage, the principle of estoppel does not apply. Obviously this is
not an instance requiring the enforcement of contracts with the corporation through the rule of
estoppel.
The first proposition above stated is premised on the theory that, inasmuch as the Far Eastern
Lumber and Commercial Co., is a de facto corporation, section 19 of the Corporation Law
applies, and therefore the court had not jurisdiction to take cognizance of said civil case number
381. Section 19 reads as follows:
. . . The due incorporation of any corporations claiming in good faith to be a corporation
under this Act and its right to exercise corporate powers shall not be inquired into
collaterally in any private suit to which the corporation may be a party, but such inquiry
may be had at the suit of the Insular Government on information of the Attorney-General.
There are least two reasons why this section does not govern the situation. Not having obtained
the certificate of incorporation, the Far Eastern Lumber and Commercial Co. — even its
stockholders — may not probably claim "in good faith" to be a corporation.
Under our statue it is to be noted (Corporation Law, sec. 11) that it is the issuance of a
certificate of incorporation by the Director of the Bureau of Commerce and Industry which
calls a corporation into being. The immunity if collateral attack is granted to corporations
"claiming in good faith to be a corporation under this act." Such a claim is compatible
with the existence of errors and irregularities; but not with a total or substantial disregard
of the law. Unless there has been an evident attempt to comply with the law the claim to
be a corporation "under this act" could not be made "in good faith." (Fisher on the
Philippine Law of Stock Corporations, p. 75. See also Humphreys vs. Drew, 59 Fla., 295;
52 So., 362.)
Second, this is not a suit in which the corporation is a party. This is a litigation between
stockholders of the alleged corporation, for the purpose of obtaining its dissolution. Even the
existence of a de jure corporation may be terminated in a private suit for its dissolution between
stockholders, without the intervention of the state.
There might be room for argument on the right of minority stockholders to sue for
dissolution;1 but that question does not affect the court's jurisdiction, and is a matter for decision
by the judge, subject to review on appeal. Whkch brings us to one principal reason why this
petition may not prosper, namely: the petitioners have their remedy by appealing the order of
dissolution at the proper time.
There is a secondary issue in connection with the appointment of a receiver. But it must be
admitted that receivership is proper in proceedings for dissolution of a company or corporation,
and it was no error to reject the counter-bond, the court having declared the dissolution. As to
the amount of the bond to be demanded of the receiver, much depends upon the discretion of
the trial court, which in this instance we do not believe has been clearly abused.
Judgment: The petition will, therefore, be dismissed, with costs. The preliminary injunction
heretofore issued will be dissolved.
Ozaeta, Pablo, Tuason, Montemayor, and Reyes, JJ., concur.
G.R. No. L-11442 May 23, 1958
MANUELA T. VDA. DE SALVATIERRA, petitioner,
vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of
Leyte, Branch II, and SEGUNDINO REFUERZO, respondents.
Jimenez, Tantuico, Jr. and Tolete for petitioner.
Francisco Astilla for respondent Segundino Refuerzo.
FELIX, J.:
This is a petition for certiorari filed by Manuela T. Vda. de Salvatierra seeking to nullify the order
of the Court of First Instance of Leyte in Civil Case No. 1912, dated March 21, 1956, relieving
Segundino Refuerzo of liability for the contract entered into between the former and the
Philippine Fibers Producers Co., Inc., of which Refuerzo is the president. The facts of the case
are as follows:
Manuela T. Vda. de Salvatierra appeared to be the owner of a parcel of land located at
Maghobas, Poblacion, Burauen, Teyte. On March 7, 1954, said landholder entered into a
contract of lease with the Philippine Fibers Producers Co., Inc., allegedly a corporation "duly
organized and existing under the laws of the Philippines, domiciled at Burauen, Leyte,
Philippines, and with business address therein, represented in this instance by Mr. Segundino Q.
Refuerzo, the President". It was provided in said contract, among other things, that the lifetime of
the lease would be for a period of 10 years; that the land would be planted to kenaf, ramie or
other crops suitable to the soil; that the lessor would be entitled to 30 per cent of the net income
accruing from the harvest of any, crop without being responsible for the cost of production
thereof; and that after every harvest, the lessee was bound to declare at the earliest possible
time the income derived therefrom and to deliver the corresponding share due the lessor.
Apparently, the aforementioned obligations imposed on the alleged corporation were not
complied with because on April 5, 1955, Alanuela T. Vda, de Salvatierra filed with the Court of
First Instance of Leyte a complaint against the Philippine Fibers Producers Co., Inc., and
Segundino Q. Refuerzo, for accounting, rescission and damages (Civil Case No. 1912). She
averred that sometime in April, 1954, defendants planted kenaf on 3 hectares of the leased
property which crop was, at the time of the commencement of the action, already harvested,
processed and sold by defendants; that notwithstanding that fact, defendants refused to render
an accounting of the income derived therefrom and to deliver the lessor's share; that the
estimated gross income was P4,500, and the deductible expenses amounted to P1,000; that as
defendants' refusal to undertake such task was in violation of the terms of the covenant entered
into between the plaintiff and defendant corporation, a rescission was but proper.
As defendants apparently failed to file their answer to the complaint, of which they were allegedly
notified, the Court declared them in default and proceeded to receive plaintiff's evidence.
On June 8, 1955, the lower Court rendered judgment granting plaintiff's prayer, and required
defendants to render a complete accounting of the harvest of the land subject of the proceeding
within 15 days from receipt of the decision and to deliver 30 per cent of the net income realized
from the last harvest to plaintiff, with legal interest from the date defendants received payment
for said crop. It was further provide that upon defendants' failure to abide by the said
requirement, the gross income would be fixed at P4,200 or a net income of P3,200 after
deducting the expenses for production, 30 per cent of which or P960 was held to be due the
plaintiff pursuant to the aforementioned contract of lease, which was declared rescinded.
No appeal therefrom having been perfected within the reglementary period, the Court, upon
motion of plaintiff, issued a writ of execution, in virtue of which the Provincial Sheriff of Leyte
caused the attachment of 3 parcels of land registered in the name of Segundino Refuerzo. No
property of the Philippine Fibers Producers Co., Inc., was found available for attachment. On
January 31, 1956, defendant Segundino Refuerzo filed a motion claiming that the decision
rendered in said Civil Case No. 1912 was null and void with respect to him, there being no
allegation in the complaint pointing to his personal liability and thus prayed that an order be
issued limiting such liability to defendant corporation. Over plaintiff's opposition, the Court a
quo granted the same and ordered the Provincial Sheriff of Leyte to release all properties
belonging to the movant that might have already been attached, after finding that the evidence
on record made no mention or referred to any fact which might hold movant personally liable
therein. As plaintiff's petition for relief from said order was denied, Manuela T. Vda. de
Salvatierra instituted the instant action asserting that the trial Judge in issuing the order
complained of, acted with grave abuse of discretion and prayed that same be declared a nullity.
From the foregoing narration of facts, it is clear that the order sought to be nullified was issued
by tile respondent Judge upon motion of defendant Refuerzo, obviously pursuant to Rule 38 of
the Rules of Court. Section 3 of said Rule, however, in providing for the period within which such
a motion may be filed, prescribes that:
SEC. 3. WHEN PETITION FILED; CONTENTS AND VERIFICATION. — A petition
provided for in either of the preceding sections of this rule must be verified, filed within
sixty days after the petitioner learns of the judgment, order, or other proceeding to be set
aside, and not more than six months after such judgment or order was entered, or such
proceeding was taken; and must be must be accompanied with affidavit showing the
fraud, accident, mistake, or excusable negligence relied upon, and the facts constituting
the petitioner is good and substantial cause of action or defense, as the case may be,
which he may prove if his petition be granted". (Rule 38)
The aforequoted provision treats of 2 periods, i.e., 60 days after petitioner learns of the
judgment, and not more than 6 months after the judgment or order was rendered, both of which
must be satisfied. As the decision in the case at bar was under date of June 8, 1955, whereas
the motion filed by respondent Refuerzo was dated January 31, 1956, or after the lapse of 7
months and 23 days, the filing of the aforementioned motion was clearly made beyond the
prescriptive period provided for by the rules. The remedy allowed by Rule 38 to a party adversely
affected by a decision or order is certainly an alert of grace or benevolence intended to afford
said litigant a penultimate opportunity to protect his interest. Considering the nature of such relief
and the purpose behind it, the periods fixed by said rule are non-extendible and never
interrupted; nor could it be subjected to any condition or contingency because it is of itself
devised to meet a condition or contingency (Palomares vs. Jimenez,* G.R. No. L-4513, January
31, 1952). On this score alone, therefore, the petition for a writ of certiorari filed herein may be
granted. However, taking note of the question presented by the motion for relief involved herein,
We deem it wise to delve in and pass upon the merit of the same.
Refuerzo, in praying for his exoneration from any liability resulting from the non-fulfillment of the
obligation imposed on defendant Philippine Fibers Producers Co., Inc., interposed the defense
that the complaint filed with the lower court contained no allegation which would hold him liable
personally, for while it was stated therein that he was a signatory to the lease contract, he did so
in his capacity as president of the corporation. And this allegation was found by the Court a quo
to be supported by the records. Plaintiff on the other hand tried to refute this averment by
contending that her failure to specify defendant's personal liability was due to the fact that all the
time she was under the impression that the Philippine Fibers Producers Co., Inc., represented by
Refuerzo was a duly registered corporation as appearing in the contract, but a subsequent
inquiry from the Securities and Exchange Commission yielded otherwise. While as a general rule
a person who has contracted or dealt with an association in such a way as to recognize its
existence as a corporate body is estopped from denying the same in an action arising out of
such transaction or dealing, (Asia Banking Corporation vs. Standard Products Co., 46 Phil., 114;
Compania Agricola de Ultramar vs. Reyes, 4 Phil., 1; Ohta Development Co.; vs. Steamship
Pompey, 49 Phil., 117), yet this doctrine may not be held to be applicable where fraud takes a
part in the said transaction. In the instant case, on plaintiff's charge that she was unaware of the
fact that the Philippine Fibers Producers Co., Inc., had no juridical personality, defendant
Refuerzo gave no confirmation or denial and the circumstances surrounding the execution of the
contract lead to the inescapable conclusion that plaintiff Manuela T. Vda. de Salvatierra was
really made to believe that such corporation was duly organized in accordance with law.
There can be no question that a corporation with registered has a juridical personality separate
and distinct from its component members or stockholders and officers such that a corporation
cannot be held liable for the personal indebtedness of a stockholder even if he should be its
president (Walter A. Smith Co. vs. Ford, SC-G.R. No. 42420) and conversely, a stockholder or
member cannot be held personally liable for any financial obligation be, the corporation in
excess of his unpaid subscription. But this rule is understood to refer merely to registered
corporations and cannot be made applicable to the liability of members of an unincorporated
association. The reason behind this doctrine is obvious-since an organization which before the
law is non-existent has no personality and would be incompetent to act and appropriate for itself
the powers and attribute of a corporation as provided by law; it cannot create agents or confer
authority on another to act in its behalf; thus, those who act or purport to act as its
representatives or agents do so without authority and at their own risk. And as it is an elementary
principle of law that a person who acts as an agent without authority or without a principal is
himself regarded as the principal, possessed of all the rights and subject to all the liabilities of a
principal, a person acting or purporting to act on behalf of a corporation which has no valid
existence assumes such privileges and obligations and comes personally liable for contracts
entered into or for other acts performed as such, agent (Fay vs. Noble, 7 Cushing [Mass.] 188.
Cited in II Tolentino's Commercial Laws of the Philippines, Fifth Ed., P. 689-690). Considering
that defendant Refuerzo, as president of the unregistered corporation Philippine Fibers
Producers Co., Inc., was the moving spirit behind the consummation of the lease agreement by
acting as its representative, his liability cannot be limited or restricted that imposed upon
corporate shareholders. In acting on behalf of a corporation which he knew to be unregistered,
he assumed the risk of reaping the consequential damages or resultant rights, if any, arising out
of such transaction.
Wherefore, the order of the lower Court of March 21, 1956, amending its previous decision on
this matter and ordering the Provincial Sheriff of Leyte to release any and all properties of
movant therein which might have been attached in the execution of such judgment, is hereby set
aside and nullified as if it had never been issued. With costs against respondent Segundino
Refuerzo. It is so ordered.
Paras, C.J., Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes,
J.B.L., and Endencia, JJ., concur.
G.R. No. L-18805 August 14, 1967
1
THE BOARD OF LIQUIDATORS representing THE GOVERNMENT OF THE REPUBLIC OF
THE PHILIPPINES,plaintiff-appellant,
vs.
HEIRS OF MAXIMO M. KALAW,2 JUAN BOCAR, ESTATE OF THE DECEASED CASIMIRO
GARCIA,3 and LEONOR MOLL, defendants-appellees.
Simeon M. Gopengco and Solicitor General for plaintiff-appellant.
L. H. Hernandez, Emma Quisumbing, Fernando and Quisumbing, Jr.; Ponce Enrile, Siguion
Reyna, Montecillo and Belo for defendants-appellees.
SANCHEZ, J.:
The National Coconut Corporation (NACOCO, for short) was chartered as a non-profit
governmental organization on May 7, 1940 by Commonwealth Act 518 avowedly for the
protection, preservation and development of the coconut industry in the Philippines. On August
1, 1946, NACOCO's charter was amended [Republic Act 5] to grant that corporation the express
power "to buy, sell, barter, export, and in any other manner deal in, coconut, copra, and
dessicated coconut, as well as their by-products, and to act as agent, broker or commission
merchant of the producers, dealers or merchants" thereof. The charter amendment was enacted
to stabilize copra prices, to serve coconut producers by securing advantageous prices for them,
to cut down to a minimum, if not altogether eliminate, the margin of middlemen, mostly aliens.4
General manager and board chairman was Maximo M. Kalaw; defendants Juan Bocar and
Casimiro Garcia were members of the Board; defendant Leonor Moll became director only on
December 22, 1947.
NACOCO, after the passage of Republic Act 5, embarked on copra trading activities. Amongst
the scores of contracts executed by general manager Kalaw are the disputed contracts, for the
delivery of copra, viz:
(a) July 30, 1947: Alexander Adamson & Co., for 2,000 long tons, $167.00: per ton, f. o.
b., delivery: August and September, 1947. This contract was later assigned to Louis
Dreyfus & Co. (Overseas) Ltd.
(b) August 14, 1947: Alexander Adamson & Co., for 2,000 long tons $145.00 per long
ton, f.o.b., Philippine ports, to be shipped: September-October, 1947. This contract was
also assigned to Louis Dreyfus & Co. (Overseas) Ltd.
(c) August 22, 1947: Pacific Vegetable Co., for 3,000 tons, $137.50 per ton, delivery:
September, 1947.
(d) September 5, 1947: Spencer Kellog & Sons, for 1,000 long tons, $160.00 per ton,
c.i.f., Los Angeles, California, delivery: November, 1947.
(e) September 9, 1947: Franklin Baker Division of General Foods Corporation, for 1,500
long tons, $164,00 per ton, c.i.f., New York, to be shipped in November, 1947.
(f) September 12, 1947: Louis Dreyfus & Co. (Overseas) Ltd., for 3,000 long tons,
$154.00 per ton, f.o.b., 3 Philippine ports, delivery: November, 1947.
(g) September 13, 1947: Juan Cojuangco, for 2,000 tons, $175.00 per ton, delivery:
November and December, 1947. This contract was assigned to Pacific Vegetable Co.
 (h) October 27, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton, c.i.f., Pacific
ports, delivery: December, 1947 and January, 1948. This contract was assigned to
Pacific Vegetable Co.
(i) October 28, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton, c.i.f., Pacific
ports, delivery: January, 1948. This contract was assigned to Pacific Vegetable Co.
An unhappy chain of events conspired to deter NACOCO from fulfilling these contracts. Nature
supervened. Four devastating typhoons visited the Philippines: the first in October, the second
and third in November, and the fourth in December, 1947. Coconut trees throughout the country
suffered extensive damage. Copra production decreased. Prices spiralled. Warehouses were
destroyed. Cash requirements doubled. Deprivation of export facilities increased the time
necessary to accumulate shiploads of copra. Quick turnovers became impossible, financing a
problem.
When it became clear that the contracts would be unprofitable, Kalaw submitted them to the
board for approval. It was not until December 22, 1947 when the membership was completed.
Defendant Moll took her oath on that date. A meeting was then held. Kalaw made a full
disclosure of the situation, apprised the board of the impending heavy losses. No action was
taken on the contracts. Neither did the board vote thereon at the meeting of January 7, 1948
following. Then, on January 11, 1948, President Roxas made a statement that the NACOCO
head did his best to avert the losses, emphasized that government concerns faced the same
risks that confronted private companies, that NACOCO was recouping its losses, and that Kalaw
was to remain in his post. Not long thereafter, that is, on January 30, 1948, the board met again
with Kalaw, Bocar, Garcia and Moll in attendance. They unanimously approved the contracts
hereinbefore enumerated.
As was to be expected, NACOCO but partially performed the contracts, as follows:
Buyers Tons Delivered Undelivered
Pacific Vegetable Oil 2,386.45 4,613.55
Spencer Kellog None 1,000
Franklin Baker 1,000 500
Louis Dreyfus 800 2,200
Louis Dreyfus (Adamson contract of July 30, 1947) 1,150 850
Louis Dreyfus (Adamson Contract of August 14, 1947) 1,755 245
TOTALS
7,091.45 9,408.55
The buyers threatened damage suits. Some of the claims were settled, viz: Pacific Vegetable Oil
Co., in copra delivered by NACOCO, P539,000.00; Franklin Baker Corporation, P78,210.00;
Spencer Kellog & Sons, P159,040.00.
But one buyer, Louis Dreyfus & Go. (Overseas) Ltd., did in fact sue before the Court of First
Instance of Manila, upon claims as follows: For the undelivered copra under the July 30 contract
(Civil Case 4459); P287,028.00; for the balance on the August 14 contract (Civil Case 4398),
P75,098.63; for that per the September 12 contract reduced to judgment (Civil Case 4322,
appealed to this Court in L-2829), P447,908.40. These cases culminated in an out-of-court
amicable settlement when the Kalaw management was already out. The corporation thereunder
paid Dreyfus P567,024.52 representing 70% of the total claims. With particular reference to the
Dreyfus claims, NACOCO put up the defenses that: (1) the contracts were void because Louis
Dreyfus & Co. (Overseas) Ltd. did not have license to do business here; and (2) failure to deliver
was due to force majeure, the typhoons. To project the utter unreasonableness of this
compromise, we reproduce in haec verba this finding below:
x x x However, in similar cases brought by the same claimant [Louis Dreyfus & Co.
(Overseas) Ltd.] against Santiago Syjuco for non-delivery of copra also involving a claim
of P345,654.68 wherein defendant set up same defenses as above, plaintiff accepted
a promise of P5,000.00 only (Exhs. 31 & 32 Heirs.) Following the same proportion, the
claim of Dreyfus against NACOCO should have been compromised for only P10,000.00,
if at all. Now, why should defendants be held liable for the large sum paid as compromise
by the Board of Liquidators? This is just a sample to show how unjust it would be to hold
defendants liable for the readiness with which the Board of Liquidators disposed of the
NACOCO funds, although there was much possibility of successfully resisting the claims,
or at least settlement for nominal sums like what happened in the Syjuco case.5
All the settlements sum up to P1,343,274.52.
In this suit started in February, 1949, NACOCO seeks to recover the above sum of
P1,343,274.52 from general manager and board chairman Maximo M. Kalaw, and directors Juan
Bocar, Casimiro Garcia and Leonor Moll. It charges Kalaw with negligence under Article 1902 of
the old Civil Code (now Article 2176, new Civil Code); and defendant board members, including
Kalaw, with bad faith and/or breach of trust for having approved the contracts. The fifth amended
complaint, on which this case was tried, was filed on July 2, 1959. Defendants resisted the action
upon defenses hereinafter in this opinion to be discussed.
The lower court came out with a judgment dismissing the complaint without costs as well as
defendants' counterclaims, except that plaintiff was ordered to pay the heirs of Maximo Kalaw
the sum of P2,601.94 for unpaid salaries and cash deposit due the deceased Kalaw from
NACOCO.
Plaintiff appealed direct to this Court.
Plaintiff's brief did not, question the judgment on Kalaw's counterclaim for the sum of P2,601.94.
Right at the outset, two preliminary questions raised before, but adversely decided by, the court
below, arrest our attention. On appeal, defendants renew their bid. And this, upon established
jurisprudence that an appellate court may base its decision of affirmance of the judgment below
on a point or points ignored by the trial court or in which said court was in error.6
1. First of the threshold questions is that advanced by defendants that plaintiff Board of
Liquidators has lost its legal personality to continue with this suit.
Accepted in this jurisdiction are three methods by which a corporation may wind up its affairs: (1)
under Section 3, Rule 104, of the Rules of Court [which superseded Section 66 of the
Corporation Law]7 whereby, upon voluntary dissolution of a corporation, the court may direct
"such disposition of its assets as justice requires, and may appoint a receiver to collect such
assets and pay the debts of the corporation;" (2) under Section 77 of the Corporation Law,
whereby a corporation whose corporate existence is terminated, "shall nevertheless be
continued as a body corporate for three years after the time when it would have been so
dissolved, for the purpose of prosecuting and defending suits by or against it and of enabling it
gradually to settle and close its affairs, to dispose of and convey its property and to divide its
capital stock, but not for the purpose of continuing the business for which it was established;"
and (3) under Section 78 of the Corporation Law, by virtue of which the corporation, within the
three year period just mentioned, "is authorized and empowered to convey all of its property to
trustees for the benefit of members, stockholders, creditors, and others interested."8
It is defendants' pose that their case comes within the coverage of the second method. They
reason out that suit was commenced in February, 1949; that by Executive Order 372, dated
November 24, 1950, NACOCO, together with other government-owned corporations, was
abolished, and the Board of Liquidators was entrusted with the function of settling and closing its
affairs; and that, since the three year period has elapsed, the Board of Liquidators may not now
continue with, and prosecute, the present case to its conclusion, because Executive Order 372
provides in Section 1 thereof that —
Sec.1. The National Abaca and Other Fibers Corporation, the National Coconut
Corporation, the National Tobacco Corporation, the National Food Producer Corporation
and the former enemy-owned or controlled corporations or associations, . . . are hereby
abolished. The said corporations shall be liquidated in accordance with law, the
provisions of this Order, and/or in such manner as the President of the Philippines may
direct; Provided, however, That each of the said corporations shall nevertheless be
continued as a body corporate for a period of three (3) years from the effective date of
this Executive Order for the purpose of prosecuting and defending suits by or against it
and of enabling the Board of Liquidators gradually to settle and close its affairs, to
dispose of and, convey its property in the manner hereinafter provided.
Citing Mr. Justice Fisher, defendants proceed to argue that even where it may be found
impossible within the 3 year period to reduce disputed claims to judgment, nonetheless, "suits by
or against a corporation abate when it ceases to be an entity capable of suing or being sued"
(Fisher, The Philippine Law of Stock Corporations, pp. 390-391). Corpus Juris
Secundum likewise is authority for the statement that "[t]he dissolution of a corporation ends its
existence so that there must be statutory authority for prolongation of its life even for purposes of
pending litigation"9and that suit "cannot be continued or revived; nor can a valid judgment be
rendered therein, and a judgment, if rendered, is not only erroneous, but void and subject to
collateral attack." 10 So it is, that abatement of pending actions follows as a matter of course
upon the expiration of the legal period for liquidation, 11 unless the statute merely requires a
commencement of suit within the added time. 12 For, the court cannot extend the time alloted by
statute. 13
We, however, express the view that the executive order abolishing NACOCO and creating the
Board of Liquidators should be examined in context. The proviso in Section 1 of Executive Order
372, whereby the corporate existence of NACOCO was continued for a period of three years
from the effectivity of the order for "the purpose of prosecuting and defending suits by or against
it and of enabling the Board of Liquidators gradually to settle and close its affairs, to dispose of
and convey its property in the manner hereinafter provided", is to be read not as an isolated
provision but in conjunction with the whole. So reading, it will be readily observed that no time
limit has been tacked to the existence of the Board of Liquidators and its function of closing the
affairs of the various government owned corporations, including NACOCO.
By Section 2 of the executive order, while the boards of directors of the various corporations
were abolished, their powers and functions and duties under existing laws were to be assumed
and exercised by the Board of Liquidators. The President thought it best to do away with the
boards of directors of the defunct corporations; at the same time, however, the President had
chosen to see to it that the Board of Liquidators step into the vacuum. And nowhere in the
executive order was there any mention of the lifespan of the Board of Liquidators. A glance at
the other provisions of the executive order buttresses our conclusion. Thus, liquidation by the
Board of Liquidators may, under section 1, proceed in accordance with law, the provisions of the
executive order, "and/or in such manner as the President of the Philippines may direct." By
Section 4, when any property, fund, or project is transferred to any governmental instrumentality
"for administration or continuance of any project," the necessary funds therefor shall be taken
from the corresponding special fund created in Section 5. Section 5, in turn, talks of special
funds established from the "net proceeds of the liquidation" of the various corporations
abolished. And by Section, 7, fifty per centum of the fees collected from the copra
standardization and inspection service shall accrue "to the special fund created in section 5
hereof for the rehabilitation and development of the coconut industry." Implicit in all these, is that
the term of life of the Board of Liquidators is without time limit. Contemporary history gives us the
fact that the Board of Liquidators still exists as an office with officials and numerous employees
continuing the job of liquidation and prosecution of several court actions.
Not that our views on the power of the Board of Liquidators to proceed to the final determination
of the present case is without jurisprudential support. The first judicial test before this Court
is National Abaca and Other Fibers Corporation vs. Pore, L-16779, August 16, 1961. In that
case, the corporation, already dissolved, commenced suit within the three-year extended period
for liquidation. That suit was for recovery of money advanced to defendant for the purchase of
hemp in behalf of the corporation. She failed to account for that money. Defendant moved to
dismiss, questioned the corporation's capacity to sue. The lower court ordered plaintiff to include
as co-party plaintiff, The Board of Liquidators, to which the corporation's liquidation was
entrusted by Executive Order 372. Plaintiff failed to effect inclusion. The lower court dismissed
the suit. Plaintiff moved to reconsider. Ground: excusable negligence, in that its counsel
prepared the amended complaint, as directed, and instructed the board's incoming and outgoing
correspondence clerk, Mrs. Receda Vda. de Ocampo, to mail the original thereof to the court and
a copy of the same to defendant's counsel. She mailed the copy to the latter but failed to send
the original to the court. This motion was rejected below. Plaintiff came to this Court on appeal.
We there said that "the rule appears to be well settled that, in the absence of statutory provision
to the contrary, pending actions by or against a corporation are abated upon expiration of the
period allowed by law for the liquidation of its affairs." We there said that "[o]ur Corporation Law
contains no provision authorizing a corporation, after three (3) years from the expiration of its
lifetime, to continue in its corporate name actions instituted by it within said period of three (3)
years." 14 However, these precepts notwithstanding, we, in effect, held in that case that the Board
of Liquidators escapes from the operation thereof for the reason that "[o]bviously, the complete
loss of plaintiff's corporate existence after the expiration of the period of three (3) years for the
settlement of its affairs is what impelled the President to create a Board of Liquidators, to
continue the management of such matters as may then be pending." 15 We accordingly directed
the record of said case to be returned to the lower court, with instructions to admit plaintiff's
amended complaint to include, as party plaintiff, the Board of Liquidators.
Defendants' position is vulnerable to attack from another direction.
By Executive Order 372, the government, the sole stockholder, abolished NACOCO, and placed
its assets in the hands of the Board of Liquidators. The Board of Liquidators thus became
the trustee on behalf of the government. It was an express trust. The legal interest became
vested in the trustee — the Board of Liquidators. The beneficial interest remained with the sole
stockholder — the government. At no time had the government withdrawn the property, or the
authority to continue the present suit, from the Board of Liquidators. If for this reason alone, we
cannot stay the hand of the Board of Liquidators from prosecuting this case to its final
conclusion. 16 The provisions of Section 78 of the Corporation Law — the third method of winding
up corporate affairs — find application.
We, accordingly, rule that the Board of Liquidators has personality to proceed as: party-plaintiff in
this case.
2. Defendants' second poser is that the action is unenforceable against the heirs of Kalaw.
Appellee heirs of Kalaw raised in their motion to dismiss, 17 which was overruled, and in their
nineteenth special defense, that plaintiff's action is personal to the deceased Maximo M. Kalaw,
and may not be deemed to have survived after his death.18 They say that the controlling statute
is Section 5, Rule 87, of the 1940 Rules of Court.19which provides that "[a]ll claims for money
against the decedent, arising from contract, express or implied", must be filed in the estate
proceedings of the deceased. We disagree.
The suit here revolves around the alleged negligent acts of Kalaw for having entered into the
questioned contracts without prior approval of the board of directors, to the damage and
prejudice of plaintiff; and is against Kalaw and the other directors for having subsequently
approved the said contracts in bad faith and/or breach of trust." Clearly then, the present case is
not a mere action for the recovery of money nor a claim for money arising from contract. The suit
involves alleged tortious acts. And the action is embraced in suits filed "to recover damages for
an injury to person or property, real or personal", which survive. 20
The leading expositor of the law on this point is Aguas vs. Llemos, L-18107, August 30, 1962.
There, plaintiffs sought to recover damages from defendant Llemos. The complaint averred that
Llemos had served plaintiff by registered mail with a copy of a petition for a writ of possession in
Civil Case 4824 of the Court of First Instance at Catbalogan, Samar, with notice that the same
would be submitted to the Samar court on February 23, 1960 at 8:00 a.m.; that in view of the
copy and notice served, plaintiffs proceeded to the said court of Samar from their residence in
Manila accompanied by their lawyers, only to discover that no such petition had been filed; and
that defendant Llemos maliciously failed to appear in court, so that plaintiffs' expenditure and
trouble turned out to be in vain, causing them mental anguish and undue embarrassment.
Defendant died before he could answer the complaint. Upon leave of court, plaintiffs amended
their complaint to include the heirs of the deceased. The heirs moved to dismiss. The court
dismissed the complaint on the ground that the legal representative, and not the heirs, should
have been made the party defendant; and that, anyway, the action being for recovery of money,
testate or intestate proceedings should be initiated and the claim filed therein. This Court, thru
Mr. Justice Jose B. L. Reyes, there declared:
Plaintiffs argue with considerable cogency that contrasting the correlated provisions of
the Rules of Court, those concerning claims that are barred if not filed in the estate
settlement proceedings (Rule 87, sec. 5) and those defining actions that survive and may
be prosecuted against the executor or administrator (Rule 88, sec. 1), it is apparent that
actions for damages caused by tortious conduct of a defendant (as in the case at bar)
survive the death of the latter. Under Rule 87, section 5, the actions that are abated by
death are: (1) claims for funeral expenses and those for the last sickness of the
 decedent; (2) judgments for money; and (3) "all claims for money against the
decedent, arising from contract express or implied." None of these includes that of the
plaintiffs-appellants; for it is not enough that the claim against the deceased party be for
money, but it must arise from "contract express or implied", and these words (also used
by the Rules in connection with attachments and derived from the common law) were
construed in Leung Ben vs. O'Brien, 38 Phil. 182, 189-194,
"to include all purely personal obligations other than those which have their
source in delict or tort."
Upon the other hand, Rule 88, section 1, enumerates actions that survive against a
decedent's executors or administrators, and they are: (1) actions to recover real and
personal property from the estate; (2) actions to enforce a lien thereon; and (3) actions to
recover damages for an injury to person or property. The present suit is one for damages
under the last class, it having been held that "injury to property" is not limited to injuries
to specific property, but extends to other wrongs by which personal estate is injured or
diminished (Baker vs. Crandall, 47 Am. Rep. 126; also 171 A.L.R., 1395). To maliciously
cause a party to incur unnecessary expenses, as charged in this case, is certainly injury
to that party's property (Javier vs. Araneta, L-4369, Aug. 31, 1953).
The ruling in the preceding case was hammered out of facts comparable to those of the present.
No cogent reason exists why we should break away from the views just expressed. And, the
conclusion remains: Action against the Kalaw heirs and, for the matter, against the Estate of
Casimiro Garcia survives.
The preliminaries out of the way, we now go to the core of the controversy.
3. Plaintiff levelled a major attack on the lower court's holding that Kalaw justifiedly entered into
the controverted contracts without the prior approval of the corporation's directorate. Plaintiff
leans heavily on NACOCO's corporate by-laws. Article IV (b), Chapter III thereof, recites, as
amongst the duties of the general manager, the obligation: "(b) To perform or execute on behalf
of the Corporation upon prior approval of the Board, all contracts necessary and essential to the
proper accomplishment for which the Corporation was organized."
Not of de minimis importance in a proper approach to the problem at hand, is the nature of a
general manager's position in the corporate structure. A rule that has gained acceptance through
the years is that a corporate officer "intrusted with the general management and control of its
business, has implied authority to make any contract or do any other act which is necessary or
appropriate to the conduct of the ordinary business of the corporation. 21 As such officer, "he
may, without any special authority from the Board of Directors perform all acts of an ordinary
nature, which by usage or necessity are incident to his office, and may bind the corporation by
contracts in matters arising in the usual course of business. 22
The problem, therefore, is whether the case at bar is to be taken out of the general concept of
the powers of a general manager, given the cited provision of the NACOCO by-laws requiring
prior directorate approval of NACOCO contracts.
The peculiar nature of copra trading, at this point, deserves express articulation. Ordinary in this
enterprise are copra sales for future delivery. The movement of the market requires that sales
agreements be entered into, even though the goods are not yet in the hands of the seller. Known
in business parlance as forward sales, it is concededly the practice of the trade. A certain
amount of speculation is inherent in the undertaking. NACOCO was much more conservative
than the exporters with big capital. This short-selling was inevitable at the time in the light of
other factors such as availability of vessels, the quantity required before being accepted for
loading, the labor needed to prepare and sack the copra for market. To NACOCO, forward sales
were a necessity. Copra could not stay long in its hands; it would lose weight, its value decrease.
Above all, NACOCO's limited funds necessitated a quick turnover. Copra contracts then had to
be executed on short notice — at times within twenty-four hours. To be appreciated then is the
difficulty of calling a formal meeting of the board.
Such were the environmental circumstances when Kalaw went into copra trading.
Long before the disputed contracts came into being, Kalaw contracted — by himself alone as
general manager — for forward sales of copra. For the fiscal year ending June 30, 1947, Kalaw
signed some 60 such contracts for the sale of copra to divers parties. During that period, from
those copra sales, NACOCO reaped a gross profit of P3,631,181.48. So pleased was
NACOCO's board of directors that, on December 5, 1946, in Kalaw's absence, it voted to grant
him a special bonus "in recognition of the signal achievement rendered by him in putting the
Corporation's business on a self-sufficient basis within a few months after assuming office,
despite numerous handicaps and difficulties."
These previous contract it should be stressed, were signed by Kalaw without prior authority from
the board. Said contracts were known all along to the board members. Nothing was said by
them. The aforesaid contracts stand to prove one thing: Obviously, NACOCO board met the
difficulties attendant to forward sales by leaving the adoption of means to end, to the sound
discretion of NACOCO's general manager Maximo M. Kalaw.
Liberally spread on the record are instances of contracts executed by NACOCO's general
manager and submitted to the board after their consummation, not before. These agreements
were not Kalaw's alone. One at least was executed by a predecessor way back in 1940, soon
after NACOCO was chartered. It was a contract of lease executed on November 16, 1940 by the
then general manager and board chairman, Maximo Rodriguez, and A. Soriano y Cia., for the
lease of a space in Soriano Building On November 14, 1946, NACOCO, thru its general
manager Kalaw, sold 3,000 tons of copra to the Food Ministry, London, thru Sebastian Palanca.
On December 22, 1947, when the controversy over the present contract cropped up, the board
voted to approve a lease contract previously executed between Kalaw and Fidel Isberto and
Ulpiana Isberto covering a warehouse of the latter. On the same date, the board gave its nod to
a contract for renewal of the services of Dr. Manuel L. Roxas. In fact, also on that date, the board
requested Kalaw to report for action all copra contracts signed by him "at the meeting
immediately following the signing of the contracts." This practice was observed in a later
instance when, on January 7, 1948, the board approved two previous contracts for the sale of
1,000 tons of copra each to a certain "SCAP" and a certain "GNAPO".
And more. On December 19, 1946, the board resolved to ratify the brokerage commission of 2%
of Smith, Bell and Co., Ltd., in the sale of 4,300 long tons of copra to the French Government.
Such ratification was necessary because, as stated by Kalaw in that same meeting, "under an
existing resolution he is authorized to give a brokerage fee of only 1% on sales of copra made
through brokers." On January 15, 1947, the brokerage fee agreements of 1-1/2% on three export
contracts, and 2% on three others, for the sale of copra were approved by the board with a
proviso authorizing the general manager to pay a commission up to the amount of 1-1/2%
"without further action by the Board." On February 5, 1947, the brokerage fee of 2% of J.
Cojuangco & Co. on the sale of 2,000 tons of copra was favorably acted upon by the board. On
March 19, 1947, a 2% brokerage commission was similarly approved by the board for Pacific
Trading Corporation on the sale of 2,000 tons of copra.
It is to be noted in the foregoing cases that only the brokerage fee agreements were passed
upon by the board, not the sales contracts themselves. And even those fee agreements were
submitted only when the commission exceeded the ceiling fixed by the board.
Knowledge by the board is also discernible from other recorded instances. 1äw phï1.ñët
When the board met on May 10, 1947, the directors discussed the copra situation: There was a
slow downward trend but belief was entertained that the nadir might have already been reached
and an improvement in prices was expected. In view thereof, Kalaw informed the board that "he
intends to wait until he has signed contracts to sell before starting to buy copra."23
In the board meeting of July 29, 1947, Kalaw reported on the copra price conditions then current:
The copra market appeared to have become fairly steady; it was not expected that copra prices
would again rise very high as in the unprecedented boom during January-April, 1947; the prices
seemed to oscillate between $140 to $150 per ton; a radical rise or decrease was not indicated
by the trends. Kalaw continued to say that "the Corporation has been closing contracts for the
sale of copra generally with a margin of P5.00 to P7.00 per hundred kilos." 24
We now lift the following excerpts from the minutes of that same board meeting of July 29, 1947:
521. In connection with the buying and selling of copra the Board inquired whether it is
the practice of the management to close contracts of sale first before buying. The
General Manager replied that this practice is generally followed but that it is not always
possible to do so for two reasons:
(1) The role of the Nacoco to stabilize the prices of copra requires that it should not
cease buying even when it does not have actual contracts of sale since the suspension
of buying by the Nacoco will result in middlemen taking advantage of the temporary
inactivity of the Corporation to lower the prices to the detriment of the producers.
(2) The movement of the market is such that it may not be practical always to wait for the
consummation of contracts of sale before beginning to buy copra.
The General Manager explained that in this connection a certain amount of speculation
is unavoidable. However, he said that the Nacoco is much more conservative than the
other big exporters in this respect.25
Settled jurisprudence has it that where similar acts have been approved by the directors as a
matter of general practice, custom, and policy, the general manager may bind the company
without formal authorization of the board of directors. 26 In varying language, existence of such
authority is established, by proof of the course of business, the usage and practices of the
company and by the knowledge which the board of directors has, or must bepresumed to have,
of acts and doings of its subordinates in and about the affairs of the corporation. 27 So also,
x x x authority to act for and bind a corporation may be presumed from acts of
recognition in other instances where the power was in fact exercised. 28
x x x Thus, when, in the usual course of business of a corporation, an officer has been
allowed in his official capacity to manage its affairs, his authority to represent the
corporation may be implied from the manner in which he has been permitted by the
directors to manage its business.29
In the case at bar, the practice of the corporation has been to allow its general manager to
negotiate and execute contracts in its copra trading activities for and in NACOCO's
behalf without prior board approval. If the by-laws were to be literally followed, the board should
give its stamp of prior approval on all corporate contracts. But that board itself, by its acts and
through acquiescence, practically laid aside the by-law requirement of prior approval.
Under the given circumstances, the Kalaw contracts are valid corporate acts.
4. But if more were required, we need but turn to the board's ratification of the contracts in
dispute on January 30, 1948, though it is our (and the lower court's) belief that ratification here is
nothing more than a mere formality.
Authorities, great in number, are one in the idea that "ratification by a corporation of an
unauthorized act or contract by its officers or others relates back to the time of the act or contract
ratified, and is equivalent to original authority;" and that " [t]he corporation and the other party to
the transaction are in precisely the same position as if the act or contract had been authorized at
the time." 30 The language of one case is expressive: "The adoption or ratification of a contract
by a corporation is nothing more or less than the making of an original contract. The theory of
corporate ratification is predicated on the right of a corporation to contract, and any ratification or
adoption is equivalent to a grant of prior authority." 31
Indeed, our law pronounces that "[r]atification cleanses the contract from all its defects from the
moment it was constituted." 32 By corporate confirmation, the contracts executed by Kalaw are
thus purged of whatever vice or defect they may have. 33
In sum, a case is here presented whereunder, even in the face of an express by-law requirement
of prior approval, the law on corporations is not to be held so rigid and inflexible as to fail to
recognize equitable considerations. And, the conclusion inevitably is that the embattled contracts
remain valid.
5. It would be difficult, even with hostile eyes, to read the record in terms of "bad faith and/or
breach of trust" in the board's ratification of the contracts without prior approval of the board. For,
in reality, all that we have on the government's side of the scale is that the board knew that the
contracts so confirmed would cause heavy losses.
As we have earlier expressed, Kalaw had authority to execute the contracts without need of prior
approval. Everybody, including Kalaw himself, thought so, and for a long time. Doubts were first
thrown on the way only when the contracts turned out to be unprofitable for NACOCO.
Rightfully had it been said that bad faith does not simply connote bad judgment or negligence; it
imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it means
breach of a known duty thru some motive or interest or ill will; it partakes of the nature of
fraud.34 Applying this precept to the given facts herein, we find that there was no "dishonest
purpose," or "some moral obliquity," or "conscious doing of wrong," or "breach of a known duty,"
or "Some motive or interest or ill will" that "partakes of the nature of fraud."
Nor was it even intimated here that the NACOCO directors acted for personal reasons, or to
serve their own private interests, or to pocket money at the expense of the corporation. 35 We
have had occasion to affirm that bad faith contemplates a "state of mind affirmatively operating
with furtive design or with some motive of self-interest or ill will or for ulterior purposes." 36 Briggs
vs. Spaulding, 141 U.S. 132, 148-149, 35 L. ed. 662, 669, quotes with approval from Judge
Sharswood (in Spering's App., 71 Pa. 11), the following: "Upon a close examination of all the
reported cases, although there are many dicta not easily reconcilable, yet I have found no
judgment or decree which has held directors to account, except when they have themselves
been personally guilty of some fraud on the corporation, or have known and connived at some
fraud in others, or where such fraud might have been prevented had they given ordinary
attention to their duties. . . ." Plaintiff did not even dare charge its defendant-directors with any of
these malevolent acts.
Obviously, the board thought that to jettison Kalaw's contracts would contravene basic dictates
of fairness. They did not think of raising their voice in protest against past contracts which
brought in enormous profits to the corporation. By the same token, fair dealing disagrees with
the idea that similar contracts, when unprofitable, should not merit the same treatment. Profit or
loss resulting from business ventures is no justification for turning one's back on contracts
entered into. The truth, then, of the matter is that — in the words of the trial court — the
ratification of the contracts was "an act of simple justice and fairness to the general manager and
the best interest of the corporation whose prestige would have been seriously impaired by a
rejection by the board of those contracts which proved disadvantageous." 37
The directors are not liable." 38
6. To what then may we trace the damage suffered by NACOCO.
The facts yield the answer. Four typhoons wreaked havoc then on our copra-producing regions.
Result: Copra production was impaired, prices spiralled, warehouses destroyed. Quick turnovers
could not be expected. NACOCO was not alone in this misfortune. The record discloses that
private traders, old, experienced, with bigger facilities, were not spared; also suffered
tremendous losses. Roughly estimated, eleven principal trading concerns did run losses to about
P10,300,000.00. Plaintiff's witness Sisenando Barretto, head of the copra marketing department
of NACOCO, observed that from late 1947 to early 1948 "there were many who lost money in
the trade." 39 NACOCO was not immune from such usual business risk.
The typhoons were known to plaintiff. In fact, NACOCO resisted the suits filed by Louis Dreyfus
& Co. by pleading in its answers force majeure as an affirmative defense and there vehemently
asserted that "as a result of the said typhoons, extensive damage was caused to the coconut
trees in the copra producing regions of the Philippines and according to estimates of competent
authorities, it will take about one year until the coconut producing regions will be able to produce
their normal coconut yield and it will take some time until the price of copra will reach normal
levels;" and that "it had never been the intention of the contracting parties in entering into the
contract in question that, in the event of a sharp rise in the price of copra in the Philippine market
produce by force majeure or by caused beyond defendant's control, the defendant should buy
the copra contracted for at exorbitant prices far beyond the buying price of the plaintiff under the
contract." 40
A high regard for formal judicial admissions made in court pleadings would suffice to deter us
from permitting plaintiff to stray away therefrom, to charge now that the damage suffered was
because of Kalaw's negligence, or for that matter, by reason of the board's ratification of the
contracts. 41
Indeed, were it not for the typhoons, 42 NACOCO could have, with ease, met its contractual
obligations. Stock accessibility was no problem. NACOCO had 90 buying agencies spread
throughout the islands. It could purchase 2,000 tons of copra a day. The various contracts
involved delivery of but 16,500 tons over a five-month period. Despite the typhoons, NACOCO
was still able to deliver a little short of 50% of the tonnage required under the contracts.
As the trial court correctly observed, this is a case of damnum absque injuria. Conjunction of
damage and wrong is here absent. There cannot be an actionable wrong if either one or the
other is wanting. 43
7. On top of all these, is that no assertion is made and no proof is presented which would link
Kalaw's acts — ratified by the board — to a matrix for defraudation of the government. Kalaw is
clear of the stigma of bad faith. Plaintiff's corporate counsel 44 concedes that Kalaw all along
thought that he had authority to enter into the contracts, that he did so in the best interests of the
corporation; that he entered into the contracts in pursuance of an overall policy to stabilize
prices, to free the producers from the clutches of the middlemen. The prices for which NACOCO
contracted in the disputed agreements, were at a level calculated to produce profits and higher
than those prevailing in the local market. Plaintiff's witness, Barretto, categorically stated that "it
would be foolish to think that one would sign (a) contract when you are going to lose money" and
that no contract was executed "at a price unsafe for the Nacoco." 45 Really, on the basis of prices
then prevailing, NACOCO envisioned a profit of around P752,440.00. 46
Kalaw's acts were not the result of haphazard decisions either. Kalaw invariably consulted with
NACOCO's Chief Buyer, Sisenando Barretto, or the Assistant General Manager. The dailies and
quotations from abroad were guideposts to him.
Of course, Kalaw could not have been an insurer of profits. He could not be expected to predict
the coming of unpredictable typhoons. And even as typhoons supervened Kalaw was not
remissed in his duty. He exerted efforts to stave off losses. He asked the Philippine National
Bank to implement its commitment to extend a P400,000.00 loan. The bank did not release the
loan, not even the sum of P200,000.00, which, in October, 1947, was approved by the bank's
board of directors. In frustration, on December 12, 1947, Kalaw turned to the President,
complained about the bank's short-sighted policy. In the end, nothing came out of the
negotiations with the bank. NACOCO eventually faltered in its contractual obligations.
That Kalaw cannot be tagged with crassa negligentia or as much as simple negligence, would
seem to be supported by the fact that even as the contracts were being questioned in Congress
and in the NACOCO board itself, President Roxas defended the actuations of Kalaw. On
December 27, 1947, President Roxas expressed his desire "that the Board of Directors should
reelect Hon. Maximo M. Kalaw as General Manager of the National Coconut
Corporation." 47 And, on January 7, 1948, at a time when the contracts had already been openly
disputed, the board, at its regular meeting, appointed Maximo M. Kalaw as acting general
manager of the corporation.
Well may we profit from the following passage from Montelibano vs. Bacolod-Murcia Milling Co.,
Inc., L-15092, May 18, 1962:
"They (the directors) hold such office charged with the duty to act for the corporation according
to their best judgment, and in so doing they cannot be controlled in the reasonable exercise and
performance of such duty. Whether the business of a corporation should be operated at a loss
during a business depression, or closed down at a smaller loss, is a purely business and
economic problem to be determined by the directors of the corporation, and not by the court. It is
a well known rule of law that questions of policy of management are left solely to the honest
decision of officers and directors of a corporation, and the court is without authority to substitute
its judgment for the judgment of the board of directors; the board is the business manager of the
corporation, and so long as it acts in good faith its orders are not reviewable by the courts."
(Fletcher on Corporations, Vol. 2, p. 390.) 48
Kalaw's good faith, and that of the other directors, clinch the case for defendants. 49
Viewed in the light of the entire record, the judgment under review must be, as it is hereby,
affirmed.
Without costs. So ordered.
Reyes, J.B.L., Makalintal, Bengzon, J.P., Zaldivar, Castro and Angeles, JJ., concur.
Fernando, J., took no part.
Concepcion, C.J. and Dizon, J., are on leave.
G.R. No. L-14441 December 17, 1966
PEDRO R. PALTING, petitioner,
vs.
SAN JOSE PETROLEUM INCORPORATED, respondent.
BARRERA, J.:
This is a petition for review of the order of August 29, 1958, later supplemented and amplified by
another dated September 9, 1958, of the Securities and Exchange Commission denying the
opposition to, and instead, granting the registration, and licensing the sale in the Philippines, of
5,000,000 shares of the capital stock of the respondent-appellee San Jose Petroleum, Inc.
(hereafter referred to as SAN JOSE PETROLEUM), a corporation organized and existing in the
Republic of Panama.
On September 7, 1956, SAN JOSE PETROLEUM filed with the Philippine Securities and
Exchange Commission a sworn registration statement, for the registration and licensing for sale
in the Philippines Voting Trust Certificates representing 2,000,000 shares of its capital stock of a
par value of $0.35 a share, at P1.00 per share. It was alleged that the entire proceeds of the sale
of said securities will be devoted or used exclusively to finance the operations of San Jose Oil
Company, Inc. (a domestic mining corporation hereafter to be referred to as SAN JOSE OIL)
which has 14 petroleum exploration concessions covering an area of a little less than 1,000,000
hectares, located in the provinces of Pangasinan, Tarlac, Nueva Ecija, La Union, Iloilo,
Cotabato, Davao and Agusan. It was the express condition of the sale that every purchaser of
the securities shall not receive a stock certificate, but a registered or bearer-voting-trust
certificate from the voting trustees named therein James L. Buckley and Austin G.E. Taylor, the
first residing in Connecticut, U.S.A., and the second in New York City. While this application for
registration was pending consideration by the Securities and Exchange Commission, SAN JOSE
PETROLEUM filed an amended Statement on June 20, 1958, for registration of the sale in the
Philippines of its shares of capital stock, which was increased from 2,000,000 to 5,000,000, at a
reduced offering price of from P1.00 to P0.70 per share. At this time the par value of the shares
has also been reduced from $.35 to $.01 per share.1
Pedro R. Palting and others, allegedly prospective investors in the shares of SAN JOSE
PETROLEUM, filed with the Securities and Exchange Commission an opposition to registration
and licensing of the securities on the grounds that (1) the tie-up between the issuer, SAN JOSE
PETROLEUM, a Panamanian corporation and SAN JOSE OIL, a domestic corporation, violates
the Constitution of the Philippines, the Corporation Law and the Petroleum Act of 1949; (2) the
issuer has not been licensed to transact business in the Philippines; (3) the sale of the shares of
the issuer is fraudulent, and works or tends to work a fraud upon Philippine purchasers; and (4)
the issuer as an enterprise, as well as its business, is based upon unsound business principles.
Answering the foregoing opposition of Palting, et al., the registrant SAN JOSE PETROLEUM
claimed that it was a "business enterprise" enjoying parity rights under the Ordinance appended
to the Constitution, which parity right, with respect to mineral resources in the Philippines, may
be exercised, pursuant to the Laurel-Langley Agreement, only through the medium of a
corporation organized under the laws of the Philippines. Thus, registrant which is allegedly
qualified to exercise rights under the Parity Amendment, had to do so through the medium of a
domestic corporation, which is the SAN JOSE OIL. It refused the contention that the Corporation
Law was being violated, by alleging that Section 13 thereof applies only to foreign corporations
doing business in the Philippines, and registrant was not doing business here. The mere fact that
it was a holding company of SAN JOSE OIL and that registrant undertook the financing of and
giving technical assistance to said corporation did not constitute transaction of business in the
Philippines. Registrant also denied that the offering for sale in the Philippines of its shares of
capital stock was fraudulent or would work or tend to work fraud on the investors. On August 29,
1958, and on September 9, 1958 the Securities and Exchange Commissioner issued the orders
object of the present appeal.
The issues raised by the parties in this appeal are as follows:
1. Whether or not petitioner Pedro R. Palting, as a "prospective investor" in respondent's
securities, has personality to file the present petition for review of the order of the
Securities and Exchange Commission;
2. Whether or not the issue raised herein is already moot and academic;
3. Whether or not the "tie-up" between the respondent SAN JOSE PETROLEUM, a
foreign corporation, and SAN JOSE OIL COMPANY, INC., a domestic mining
corporation, is violative of the Constitution, the Laurel-Langley Agreement, the Petroleum
Act of 1949, and the Corporation Law; and
4. Whether or not the sale of respondent's securities is fraudulent, or would work or tend
to work fraud to purchasers of such securities in the Philippines.
1. In answer to the notice and order of the Securities and Exchange Commissioner, published in
2 newspapers of general circulation in the Philippines, for "any person who is opposed" to the
petition for registration and licensing of respondent's securities, to file his opposition in 7 days,
herein petitioner so filed an opposition. And, the Commissioner, having denied his opposition
and instead, directed the registration of the securities to be offered for sale, oppositor Palting
instituted the present proceeding for review of said order.
Respondent raises the question of the personality of petitioner to bring this appeal, contending
that as a mere "prospective investor", he is not an "Aggrieved" or "interested" person who may
properly maintain the suit. Citing a 1931 ruling of Utah State Supreme Court2 it is claimed that
the phrase "party aggrieved" used in the Securities Act3and the Rules of Court4 as having the
right to appeal should refer only to issuers, dealers and salesmen of securities.
It is true that in the cited case, it was ruled that the phrase "person aggrieved" is that party
"aggrieved by the judgment or decree where it operates on his rights of property or bears directly
upon his interest", that the word "aggrieved" refers to "a substantial grievance, a denial of some
personal property right or the imposition upon a party of a burden or obligation." But a careful
reading of the case would show that the appeal therein was dismissed because the court held
that an order of registration was not final and therefore not appealable. The foregoing
pronouncement relied upon by herein respondent was made in construing the provision
regarding an order of revocation which the court held was the one appealable. And since the law
provides that in revoking the registration of any security, only the issuer and every registered
dealer of the security are notified, excluding any person or group of persons having no such
interest in the securities, said court concluded that the phrase "interested person" refers only to
issuers, dealers or salesmen of securities.
We cannot consider the foregoing ruling by the Utah State Court as controlling on the issue in
this case. Our Securities Act in Section 7(c) thereof, requires the publication and notice of the
registration statement. Pursuant thereto, the Securities and Exchange Commissioner caused the
publication of an order in part reading as follows:
. . . Any person who is opposed with this petition must file his written opposition with this
Commission within said period (2 weeks). . . .
In other words, as construed by the administrative office entrusted with the enforcement of the
Securities Act, any person (who may not be "aggrieved" or "interested" within the legal
acceptation of the word) is allowed or permitted to file an opposition to the registration of
securities for sale in the Philippines. And this is in consonance with the generally accepted
principle that Blue Sky Laws are enacted to protect investors and prospective purchasers and to
prevent fraud and preclude the sale of securities which are in fact worthless or worth
substantially less than the asking price. It is for this purpose that herein petitioner duly filed his
opposition giving grounds therefor. Respondent SAN JOSE PETROLEUM was required to reply
to the opposition. Subsequently both the petition and the opposition were set for hearing during
which the petitioner was allowed to actively participate and did so by cross-examining the
respondent's witnesses and filing his memorandum in support of his opposition. He therefore to
all intents and purposes became a party to the proceedings. And under the New Rules of
Court,5 such a party can appeal from a final order, ruling or decision of the Securities and
Exchange Commission. This new Rule eliminating the word "aggrieved" appearing in the old
Rule, being procedural in nature,6 and in view of the express provision of Rule 144 that the new
rules made effective on January 1, 1964 shall govern not only cases brought after they took
effect but all further proceedings in cases then pending, except to the extent that in the opinion
of the Court their application would not be feasible or would work injustice, in which event the
former procedure shall apply, we hold that the present appeal is properly within the appellate
jurisdiction of this Court.
The order allowing the registration and sale of respondent's securities is clearly a final order that
is appealable. The mere fact that such authority may be later suspended or revoked, depending
on future developments, does not give it the character of an interlocutory or provisional ruling.
And the fact that seven days after the publication of the order, the securities are deemed
registered (Sec. 7, Com. Act 83, as amended), points to the finality of the order. Rights and
obligations necessarily arise therefrom if not reviewed on appeal.
Our position on this procedural matter — that the order is appealable and the appeal taken here
is proper — is strengthened by the intervention of the Solicitor General, under Section 23 of Rule
3 of the Rules of Court, as the constitutional issues herein presented affect the validity of Section
13 of the Corporation Law, which, according to the respondent, conflicts with the Parity
Ordinance and the Laurel-Langley Agreement recognizing, it is claimed, its right to exploit our
petroleum resources notwithstanding said provisions of the Corporation Law.
2. Respondent likewise contends that since the order of Registration/Licensing dated September
9, 1958 took effect 30 days from September 3, 1958, and since no stay order has been issued
by the Supreme Court, respondent's shares became registered and licensed under the law as of
October 3, 1958. Consequently, it is asserted, the present appeal has become academic.
Frankly we are unable to follow respondent's argumentation. First it claims that the order of
August 29 and that of September 9, 1958 are not final orders and therefor are not appealable.
Then when these orders, according to its theory became final and were implemented, it argues
that the orders can no longer be appealed as the question of registration and licensing became
moot and academic.
But the fact is that because of the authority to sell, the securities are, in all probabilities, still
being traded in the open market. Consequently the issue is much alive as to whether
respondent's securities should continue to be the subject of sale. The purpose of the inquiry on
this matter is not fully served just because the securities had passed out of the hands of the
issuer and its dealers. Obviously, so long as the securities are outstanding and are placed in the
channels of trade and commerce, members of the investing public are entitled to have the
question of the worth or legality of the securities resolved one way or another.
But more fundamental than this consideration, we agree with the late Senator Claro M. Recto,
who appeared as amicus curiae in this case, that while apparently the immediate issue in this
appeal is the right of respondent SAN JOSE PETROLEUM to dispose of and sell its securities to
the Filipino public, the real and ultimate controversy here would actually call for the construction
of the constitutional provisions governing the disposition, utilization, exploitation and
development of our natural resources. And certainly this is neither moot nor academic.
3. We now come to the meat of the controversy — the "tie-up" between SAN JOSE OIL on the
one hand, and the respondent SAN JOSE PETROLEUM and its associates, on the other. The
relationship of these corporations involved or affected in this case is admitted and established
through the papers and documents which are parts of the records: SAN JOSE OIL, is a domestic
mining corporation, 90% of the outstanding capital stock of which is owned by respondent SAN
JOSE PETROLEUM, a foreign (Panamanian) corporation, the majority interest of which is owned
by OIL INVESTMENTS, Inc., another foreign (Panamanian) company. This latter corporation in
turn is wholly (100%) owned by PANTEPEC OIL COMPANY, C.A., and PANCOASTAL
PETROLEUM COMPANY, C.A., both organized and existing under the laws of Venezuela. As of
September 30, 1956, there were 9,976 stockholders of PANCOASTAL PETROLEUM found in 49
American states and U.S. territories, holding 3,476,988 shares of stock; whereas, as of
November 30, 1956, PANTEPEC OIL COMPANY was said to have 3,077,916 shares held by
12,373 stockholders scattered in 49 American state. In the two lists of stockholders, there is no
indication of the citizenship of these stockholders,7 or of the total number of authorized stocks of
each corporation, for the purpose of determining the corresponding percentage of these listed
stockholders in relation to the respective capital stock of said corporation.
Petitioner, as well as the amicus curiae and the Solicitor General8 contend that the relationship
between herein respondent SAN JOSE PETROLEUM and its subsidiary, SAN JOSE OIL,
violates the Petroleum Law of 1949, the Philippine Constitution, and Section 13 of the
Corporation Law, which inhibits a mining corporation from acquiring an interest in another mining
corporation. It is respondent's theory, on the other hand, that far from violating the Constitution;
such relationship between the two corporations is in accordance with the Laurel-Langley
Agreement which implemented the Ordinance Appended to the Constitution, and that Section 13
of the Corporation Law is not applicable because respondent is not licensed to do business, as it
is not doing business, in the Philippines.
Article XIII, Section 1 of the Philippine Constitution provides:
SEC. 1. All agricultural, timber, and mineral lands of the public domain, waters, minerals,
coal, petroleum, and other mineral oils, all forces of potential energy, and other natural
resources of the Philippines belong to the State, and their disposition, exploitation,
development, or utilization shall be limited to citizens of the Philippines, or to
corporations or associations at least sixty per centum of the capital of which is owned by
such citizens, subject to any existing right, grant, lease or concession at the time of the
inauguration of this Government established under this Constitution. . . . (Emphasis
supplied)
In the 1946 Ordinance Appended to the Constitution, this right (to utilize and exploit our natural
resources) was extended to citizens of the United States, thus:
Notwithstanding the provisions of section one, Article Thirteen, and section eight, Article
Fourteen, of the foregoing Constitution, during the effectivity of the Executive Agreement
entered into by the President of the Philippines with the President of the United States on
the fourth of July, nineteen hundred and forty-six, pursuant to the provisions of
Commonwealth Act Numbered Seven hundred and thirty-three, but in no case to extend
beyond the third of July, nineteen hundred and seventy-four, the disposition, exploitation,
development, and utilization of all agricultural, timber, and mineral lands of the public
domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential
energy, and other natural resources of the Philippines, and the operation of public utilities
shall, if open to any person, be open to citizens of the United States, and to all forms of
business enterprises owned or controlled, directly or indirectly, by citizens of the United
States in the same manner as to, and under the same conditions imposed upon, citizens
of the Philippines or corporations or associations owned or controlled by citizens of the
Philippines (Emphasis supplied.)
In the 1954 Revised Trade Agreement concluded between the United States and the Philippines,
also known as the Laurel-Langley Agreement, embodied in Republic Act 1355, the following
provisions appear:
ARTICLE VI
1. The disposition, exploitation, development and utilization of all agricultural, timber, and
mineral lands of the public domain, waters, minerals, coal, petroleum and other mineral
oils, all forces and sources of potential energy, and other natural resources of either
Party, and the operation of public utilities, shall, if open to any person, be open to citizens
of the other Party and to all forms of business enterprise owned or controlled, directly or
indirectly, by citizens of such other Party in the same manner as to and under the same
conditions imposed upon citizens or corporations or associations owned or controlled by
citizens of the Party granting the right.
2. The rights provided for in Paragraph 1 may be exercised, . . . in the case of citizens of
the United States, with respect to natural resources in the public domain in the
Philippines, only through the medium of a corporation organized under the laws of the
Philippines and at least 60% of the capital stock of which is owned or controlled by
citizens of the United States. . . .
3. The United States of America reserves the rights of the several States of the United
States to limit the extent to which citizens or corporations or associations owned or
controlled by citizens of the Philippines may engage in the activities specified in this
Article. The Republic of the Philippines reserves the power to deny any of the rights
specified in this Article to citizens of the United States who are citizens of States, or to
corporations or associations at least 60% of whose capital stock or capital is owned or
controlled by citizens of States, which deny like rights to citizens of the Philippines, or to
corporations or associations which are owned or controlled by citizens of the Philippines.
. . . (Emphasis supplied.)
Re-stated, the privilege to utilize, exploit, and develop the natural resources of this country was
granted, by Article XIII of the Constitution, to Filipino citizens or to corporations or associations
60% of the capital of which is owned by such citizens. With the Parity Amendment to the
Constitution, the same right was extended to citizens of the United States and business
enterprises owned or controlled directly or indirectly, by citizens of the United States.
There could be no serious doubt as to the meaning of the word "citizens" used in the
aforementioned provisions of the Constitution. The right was granted to 2 types of persons:
natural persons (Filipino or American citizens) and juridical persons (corporations 60% of which
capital is owned by Filipinos and business enterprises owned or controlled directly or indirectly,
by citizens of the United States). In American law, "citizen" has been defined as "one who, under
the constitution and laws of the United States, has a right to vote for representatives in congress
and other public officers, and who is qualified to fill offices in the gift of the people. (1 Bouvier's
Law Dictionary, p. 490.) A citizen is —
One of the sovereign people. A constituent member of the sovereignty, synonymous with
the people." (Scott v. Sandford, 19 Ho. [U.S.] 404, 15 L. Ed. 691.)
 A member of the civil state entitled to all its privileges. (Cooley, Const. Lim. 77. See U.S.
v. Cruikshank 92 U.S. 542, 23 L. Ed. 588; Minor v. Happersett 21 Wall. [U.S.] 162, 22 L.
Ed. 627.)
These concepts clarified, is herein respondent SAN JOSE PETROLEUM an American business
enterprise entitled to parity rights in the Philippines? The answer must be in the negative, for the
following reasons:
Firstly — It is not owned or controlled directly by citizens of the United States, because it is
owned and controlled by a corporation, the OIL INVESTMENTS, another foreign (Panamanian)
corporation.
Secondly — Neither can it be said that it is indirectly owned and controlled by American citizens
through the OIL INVESTMENTS, for this latter corporation is in turn owned and controlled, not by
citizens of the United States, but still by two foreign (Venezuelan) corporations, the PANTEPEC
OIL COMPANY and PANCOASTAL PETROLEUM.
Thirdly — Although it is claimed that these two last corporations are owned and controlled
respectively by 12,373 and 9,979 stockholders residing in the different American states, there is
no showing in the certification furnished by respondent that the stockholders of PANCOASTAL
or those of them holding the controlling stock, are citizens of the United States.
Fourthly — Granting that these individual stockholders are American citizens, it is yet necessary
to establish that the different states of which they are citizens, allow Filipino citizens or
corporations or associations owned or controlled by Filipino citizens, to engage in the
exploitation, etc. of the natural resources of these states (see paragraph 3, Article VI of the
Laurel-Langley Agreement, supra). Respondent has presented no proof to this effect.
Fifthly — But even if the requirements mentioned in the two immediately preceding paragraphs
are satisfied, nevertheless to hold that the set-up disclosed in this case, with a long chain of
intervening foreign corporations, comes within the purview of the Parity Amendment regarding
business enterprises indirectly owned or controlled by citizens of the United States, is to unduly
stretch and strain the language and intent of the law. For, to what extent must the word
"indirectly" be carried? Must we trace the ownership or control of these various corporations ad
infinitum for the purpose of determining whether the American ownership-control-requirement is
satisfied? Add to this the admitted fact that the shares of stock of the PANTEPEC and
PANCOASTAL which are allegedly owned or controlled directly by citizens of the United States,
are traded in the stock exchange in New York, and you have a situation where it becomes a
practical impossibility to determine at any given time, the citizenship of the controlling stock
required by the law. In the circumstances, we have to hold that the respondent SAN JOSE
PETROLEUM, as presently constituted, is not a business enterprise that is authorized to
exercise the parity privileges under the Parity Ordinance, the Laurel-Langley Agreement and the
Petroleum Law. Its tie-up with SAN JOSE OIL is, consequently, illegal.
What, then, would be the Status of SAN JOSE OIL, about 90% of whose stock is owned by SAN
JOSE PETROLEUM? This is a query which we need not resolve in this case as SAN JOSE OIL
is not a party and it is not necessary to do so to dispose of the present controversy. But it is a
matter that probably the Solicitor General would want to look into.
There is another issue which has been discussed extensively by the parties. This is whether or
not an American mining corporation may lawfully "be in anywise interested in any other
corporation (domestic or foreign) organized for the purpose of engaging in agriculture or in
mining," in the Philippines or whether an American citizen owning stock in more than one
corporation organized for the purpose of engaging in agriculture or in mining, may own more
than 15% of the capital stock then outstanding and entitled to vote, of each of such corporations,
in view of the express prohibition contained in Section 13 of the Philippine Corporation Law. The
petitioner in this case contends that the provisions of the Corporation Law must be applied to
American citizens and business enterprise otherwise entitled to exercise the parity privileges,
because both the Laurel-Langley Agreement (Art. VI, par. 1) and the Petroleum Act of 1948 (Art.
31), specifically provide that the enjoyment by them of the same rights and obligations granted
under the provisions of both laws shall be "in the same manner as to, and under the same
conditions imposed upon, citizens of the Philippines or corporations or associations owned or
controlled by citizens of the Philippines." The petitioner further contends that, as the enjoyment
of the privilege of exploiting mineral resources in the Philippines by Filipino citizens or
corporations owned or controlled by citizens of the Philippines (which corporation must
necessarily be organized under the Corporation Law), is made subject to the limitations provided
in Section 13 of the Corporation Law, so necessarily the exercise of the parity rights by citizens
of the United States or business enterprise owned or controlled, directly or indirectly, by citizens
of the United States, must equally be subject to the same limitations contained in the aforesaid
Section 13 of the Corporation Law.
In view of the conclusions we have already arrived at, we deem it not indispensable for us to
pass upon this legal question, especially taking into account the statement of the respondent
(SAN JOSE PETROLEUM) that it is essentially a holding company, and as found by the
Securities and Exchange Commissioner, its principal activity is limited to the financing and giving
technical assistance to SAN JOSE OIL.
4. Respondent SAN JOSE PETROLEUM, whose shares of stock were allowed registration for
sale in the Philippines, was incorporated under the laws of Panama in April, 1956 with an
authorized capital stock of $500,000.00, American currency, divided into 50,000,000 shares at
par value of $0.01 per share. By virtue of a 3-party Agreement of June 14, 1956, respondent was
supposed to have received from OIL INVESTMENTS 8,000,000 shares of the capital stock of
SAN JOSE OIL (at par value of $0.01 per share), plus a note for $250,000.00 due in 6 months,
for which respondent issued in favor of OIL INVESTMENTS 16,000,000 shares of its capital
stock, at $0.01 per share or with a value of $160,000.00, plus a note for $230,297.97 maturing in
2 years at 6% per annum interest,9 and the assumption of payment of the unpaid price of
7,500,000 (of the 8,000,000 shares of SAN JOSE OIL).
On June 27, 1956, the capitalization of SAN JOSE PETROLEUM was increased from
$500,000.00 to $17,500,000.00 by increasing the par value of the same 50,000,000 shares, from
$0.01 to $0.35. Without any additional consideration, the 16,000,000 shares of $0.01 previously
issued to OIL INVESTMENTS with a total value of $160,000.00 were changed with 16,000,000
shares of the recapitalized stock at $0.35 per share, or valued at $5,600,000.00. And, to make it
appear that cash was received for these re-issued 16,000,000 shares, the board of directors of
respondent corporation placed a valuation of $5,900,000.00 on the 8,000,000 shares of SAN
JOSE OIL (still having par value of $0.10 per share) which were received from OIL
INVESTMENTS as part-consideration for the 16,000,000 shares at $0.01 per share.
In the Balance Sheet of respondent, dated July 12, 1956, from the $5,900,000.00, supposedly
the value of the 8,000,000 shares of SAN JOSE OIL, the sum of $5,100,000.00 was deducted,
corresponding to the alleged difference between the "value" of the said shares and the
subscription price thereof which is $800,000.00 (at $0.10 per share). From this $800,000.00, the
subscription price of the SAN JOSE OIL shares, the amount of $319,702.03 was deducted, as
allegedly unpaid subscription price, thereby giving a difference of $480,297.97, which was
placed as the amount allegedly paid in on the subscription price of the 8,000,000 SAN JOSE OIL
shares. Then, by adding thereto the note receivable from OIL INVESTMENTS, for $250,000.00
(part-consideration for the 16,000,000 SAN JOSE PETROLEUM shares), and the sum of
$6,516.21, as deferred expenses, SAN JOSE PETROLEUM appeared to have assets in the sum
of $736,814.18.
These figures are highly questionable. Take the item $5,900,000.00 the valuation placed on the
8,000,000 shares of SAN JOSE OIL. There appears no basis for such valuation other than belief
by the board of directors of respondent that "should San Jose Oil Company be granted the bulk
of the concessions applied for upon reasonable terms, that it would have a reasonable value of
approximately $10,000,000." 10 Then, of this amount, the subscription price of $800,000.00 was
deducted and called it "difference between the (above) valuation and the subscription price for
the 8,000,000 shares." Of this $800,000.00 subscription price, they deducted the sum of
$480,297.97 and the difference was placed as the unpaid portion of the subscription price. In
other words, it was made to appear that they paid in $480,297.97 for the 8,000,000 shares of
SAN JOSE OIL. This amount ($480,297.97) was supposedly that $250,000.00 paid by OIL
INVESMENTS for 7,500,000 shares of SAN JOSE OIL, embodied in the June 14 Agreement,
and a sum of $230,297.97 the amount expended or advanced by OIL INVESTMENTS to SAN
JOSE OIL. And yet, there is still an item among respondent's liabilities, for $230,297.97
appearing as note payable to Oil Investments, maturing in two (2) years at six percent (6%) per
annum. 11 As far as it appears from the records, for the 16,000,000 shares at $0.35 per share
issued to OIL INVESTMENTS, respondent SAN JOSE PETROLEUM received from OIL
INVESTMENTS only the note for $250,000.00 plus the 8,000,000 shares of SAN JOSE OIL, with
par value of $0.10 per share or a total of $1,050,000.00 — the only assets of the corporation. In
other words, respondent actually lost $4,550,000.00, which was received by OIL
INVESTMENTS.
But this is not all. Some of the provisions of the Articles of Incorporation of respondent SAN
JOSE PETROLEUM are noteworthy; viz:
(1) the directors of the Company need not be shareholders;
(2) that in the meetings of the board of directors, any director may be represented and
may vote through a proxy who also need not be a director or stockholder; and
(3) that no contract or transaction between the corporation and any other association or
partnership will be affected, except in case of fraud, by the fact that any of the directors
or officers of the corporation is interested in, or is a director or officer of, such other
association or partnership, and that no such contract or transaction of the corporation
with any other person or persons, firm, association or partnership shall be affected by the
fact that any director or officer of the corporation is a party to or has an interest in, such
contract or transaction, or has in anyway connected with such other person or persons,
firm, association or partnership; and finally, that all and any of the persons who may
become director or officer of the corporation shall be relieved from all responsibility for
which they may otherwise be liable by reason of any contract entered into with the
corporation, whether it be for his benefit or for the benefit of any other person, firm,
association or partnership in which he may be interested.
These provisions are in direct opposition to our corporation law and corporate practices in this
country. These provisions alone would outlaw any corporation locally organized or doing
business in this jurisdiction. Consider the unique and unusual provision that no contract or
transaction between the company and any other association or corporation shall be affected
except in case of fraud, by the fact that any of the directors or officers of the company may be
interested in or are directors or officers of such other association or corporation; and that none of
such contracts or transactions of this company with any person or persons, firms, associations or
corporations shall be affected by the fact that any director or officer of this company is a party to
or has an interest in such contract or transaction or has any connection with such person or
persons, firms associations or corporations; and that any and all persons who may become
directors or officers of this company are hereby relieved of all responsibility which they would
otherwise incur by reason of any contract entered into which this company either for their own
benefit, or for the benefit of any person, firm, association or corporation in which they may be
interested.
The impact of these provisions upon the traditional judiciary relationship between the directors
and the stockholders of a corporation is too obvious to escape notice by those who are called
upon to protect the interest of investors. The directors and officers of the company can do
anything, short of actual fraud, with the affairs of the corporation even to benefit themselves
directly or other persons or entities in which they are interested, and with immunity because of
the advance condonation or relief from responsibility by reason of such acts. This and the other
provision which authorizes the election of non-stockholders as directors, completely disassociate
the stockholders from the government and management of the business in which they have
invested.
To cap it all on April 17, 1957, admittedly to assure continuity of the management and stability of
SAN JOSE PETROLEUM, OIL INVESTMENTS, as holder of the only subscribed stock of the
former corporation and acting "on behalf of all future holders of voting trust certificates," entered
into a voting trust agreement12 with James L. Buckley and Austin E. Taylor, whereby said
Trustees were given authority to vote the shares represented by the outstanding trust certificates
(including those that may henceforth be issued) in the following manner:
(a) At all elections of directors, the Trustees will designate a suitable proxy or proxies to
vote for the election of directors designated by the Trustees in their own discretion,
having in mind the best interests of the holders of the voting trust certificates, it being
understood that any and all of the Trustees shall be eligible for election as directors;
(b) On any proposition for removal of a director, the Trustees shall designate a suitable
proxy or proxies to vote for or against such proposition as the Trustees in their own
discretion may determine, having in mind the best interest of the holders of the voting
trust certificates;
(c) With respect to all other matters arising at any meeting of stockholders, the Trustees
will instruct such proxy or proxies attending such meetings to vote the shares of stock
held by the Trustees in accordance with the written instructions of each holder of voting
trust certificates. (Emphasis supplied.)
It was also therein provided that the said Agreement shall be binding upon the parties thereto,
their successors, and upon all holders of voting trust certificates.
And these are the voting trust certificates that are offered to investors as authorized by Security
and Exchange Commissioner. It can not be doubted that the sale of respondent's securities
would, to say the least, work or tend to work fraud to Philippine investors.
FOR ALL THE FOREGOING CONSIDERATIONS, the motion of respondent to dismiss this
appeal, is denied and the orders of the Securities and Exchange Commissioner, allowing the
registration of Respondent's securities and licensing their sale in the Philippines are hereby set
aside. The case is remanded to the Securities and Exchange Commission for appropriate action
in consonance with this decision. With costs. Let a copy of this decision be furnished the Solicitor
General for whatever action he may deem advisable to take in the premises. So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar and
Sanchez, JJ., concur.
Castro, J., took no part.
G.R. No. 136426 August 6, 1999
E. B. VILLAROSA & PARTNER CO., LTD., petitioner,
vs.
HON. HERMINIO I. BENITO, in his capacity as Presiding Judge, RTC, Branch 132, Makati
City
and IMPERIAL DEVELOPMENT CORPORATION, respondent.
GONZAGA-REYES, J.:
Before this Court is a petition for certiorari and prohibition with prayer for the issuance of a
temporary restraining order and/or writ of preliminary injunction seeking to annul and set aside
the Orders dated August 5, 1998 and November 20, 1998 of the public respondent Judge
Herminio I. Benito of the Regional Trial Court of Makati City, Branch 132 and praying that the
public respondent court be ordered to desist from further proceeding with Civil Case No. 98-824.
Petitioner E.B. Villarosa & Partner Co., Ltd. is a limited partnership with principal office address
at 102 Juan Luna St., Davao City and with branch offices at 2492 Bay View Drive, Tambo,
Parañaque, Metro Manila and Kolambog, Lapasan, Cagayan de Oro City. Petitioner and private
respondent executed a Deed of Sale with Development Agreement wherein the former agreed to
develop certain parcels of land located at Barrio Carmen, Cagayan de Oro belonging to the latter
into a housing subdivision for the construction of low cost housing units. They further agreed that
in case of litigation regarding any dispute arising therefrom, the venue shall be in the proper
courts of Makati.
On April 3, 1998, private respondent, as plaintiff, filed a Complaint for Breach of Contract and
Damages against petitioner, as defendant, before the Regional Trial Court of Makati allegedly for
failure of the latter to comply with its contractual obligation in that, other than a few unfinished
low cost houses, there were no substantial developments therein.1
Summons, together with the complaint, were served upon the defendant, through its Branch
Manager Engr. Wendell Sabulbero at the stated address at Kolambog, Lapasan, Cagayan de
Oro City2 but the Sheriff's Return of Service3stated that the summons was duly served "upon
defendant E.B. Villarosa & Partner Co., Ltd. thru its Branch Manager Engr. WENDELL
SALBULBERO on May 5, 1998 at their new office Villa Gonzalo, Nazareth, Cagayan de Oro
City, and evidenced by the signature on the face of the original copy of the summons. 1âwphi1.nêt
On June 9, 1998, defendant filed a Special Appearance with Motion to Dismiss4 alleging that on
May 6, 1998, "summons intended for defendant" was served upon Engr. Wendell Sabulbero, an
employee of defendant at its branch office at Cagayan de Oro City. Defendant prayed for the
dismissal of the complaint on the ground of improper service of summons and for lack of
jurisdiction over the person of the defendant. Defendant contends that the trial court did not
acquire jurisdiction over its person since the summons was improperly served upon its employee
in its branch office at Cagayan de Oro City who is not one of those persons named in Section
11, Rule 14 of the 1997 Rules of Civil Procedure upon whom service of summons may be made.
Meanwhile, on June 10, 1998, plaintiff filed a Motion to Declare Defendant in Default5 alleging
that defendant has failed to file an Answer despite its receipt allegedly on May 5, 1998 of the
summons and the complaint, as shown in the Sheriffs Return.
On June 22, 1998, plaintiff filed an Opposition to Defendant's Motion to Dismiss6 alleging that the
records show that defendant, through its branch manager, Engr. Wendell Sabulbero actually
received the summons and the complaint on May 8, 1998 as evidenced by the signature
appearing on the copy of the summons and not on May 5, 1998 as stated in the Sheriffs Return
nor on May 6, 1998 as stated in the motion to dismiss; that defendant has transferred its office
from Kolambog, Lapasan, Cagayan de Oro to its new office address at Villa Gonzalo, Nazareth,
Cagayan de Oro; and that the purpose of the rule is to bring home to the corporation notice of
the filing of the action.
On August 5, 1998, the trial court issued an Order7 denying defendant's Motion to Dismiss as
well as plaintiffs Motion to Declare Defendant in Default. Defendant was given ten (10) days
within which to file a responsive pleading. The trial court stated that since the summons and
copy of the complaint were in fact received by the corporation through its branch manager
Wendell Sabulbero, there was substantial compliance with the rule on service of summons and
consequently, it validly acquired jurisdiction over the person of the defendant.
On August 19, 1998, defendant, by Special Appearance, filed a Motion for
Reconsideration8 alleging that Section 11, Rule 14 of the new Rules did not liberalize but, on the
contrary, restricted the service of summons on persons enumerated therein; and that the new
provision is very specific and clear in that the word "manager" was changed to "general
manager", "secretary" to "corporate secretary", and excluding therefrom agent and director.
On August 27, 1998, plaintiff filed an Opposition to defendant's Motion for
Reconsideration9 alleging that defendant's branch manager "did bring home" to the defendant-
corporation the notice of the filing of the action and by virtue of which a motion to dismiss was
filed; and that it was one (1) month after receipt of the summons and the complaint that
defendant chose to file a motion to dismiss.
On September 4, 1998, defendant, by Special Appearance, filed a Reply10 contending that the
changes in the new rules are substantial and not just general semantics.
Defendant's Motion for Reconsideration was denied in the Order dated November 20, 1998.11
Hence, the present petition alleging that respondent court gravely abused its discretion
tantamount to lack or in excess of jurisdiction in denying petitioner's motions to dismiss and for
reconsideration, despite the fact that the trial court did not acquire jurisdiction over the person of
petitioner because the summons intended for it was improperly served. Petitioner invokes
Section 11 of Rule 14 of the 1997 Rules of Civil Procedure.
Private respondent filed its Comment to the petition citing the cases Kanlaon Construction
Enterprises Co., Inc. vs.NLRC12 wherein it was held that service upon a construction project
manager is valid and in Gesulgon vs. NLRC13which held that a corporation is bound by the
service of summons upon its assistant manager.
The only issue for resolution is whether or not the trial court acquired jurisdiction over the person
of petitioner upon service of summons on its Branch Manager.
When the complaint was filed by Petitioner on April 3, 1998, the 1997 Rules of Civil Procedure
was already in force.14
Sec. 11, Rule 14 of the 1997 Rules of Civil Procedure provides that:
When the defendant is a corporation, partnership or association organized under the
laws of the Philippines with a juridical personality, service may be made on the president,
managing partner, general manager, corporate secretary, treasurer, or in-house counsel.
(emphasis supplied).
This provision revised the former Section 13, Rule 14 of the Rules of Court which provided that:
Sec. 13. Service upon private domestic corporation or partnership. — If the defendant is
a corporation organized under the laws of the Philippines or a partnership duly
registered, service may be made on the president, manager, secretary, cashier, agent, or
any of its directors. (emphasis supplied).
Petitioner contends that the enumeration of persons to whom summons may be served is
"restricted, limited and exclusive" following the rule on statutory construction expressio unios est
exclusio alterius and argues that if the Rules of Court Revision Committee intended to liberalize
the rule on service of summons, it could have easily done so by clear and concise language.
We agree with petitioner.
Earlier cases have uphold service of summons upon a construction project manager15; a
corporation's assistant manager16; ordinary clerk of a corporation17; private secretary of corporate
executives18; retained counsel19; officials who had charge or control of the operations of the
corporation, like the assistant general manager20; or the corporation's Chief Finance and
Administrative Officer21. In these cases, these persons were considered as "agent" within the
contemplation of the old rule.22 Notably, under the new Rules, service of summons upon an
agent of the corporation is no longer authorized.
The cases cited by private respondent are therefore not in point.
In the Kanlaon case, this Court ruled that under the NLRC Rules of Procedure, summons on the
respondent shall be served personally or by registered mail on the party himself; if the party is
represented by counsel or any other authorized representative or agent, summons shall be
served on such person. In said case, summons was served on one Engr. Estacio who managed
and supervised the construction project in Iligan City (although the principal address of the
corporation is in Quezon City) and supervised the work of the employees. It was held that as
manager, he had sufficient responsibility and discretion to realize the importance of the legal
papers served on him and to relay the same to the president or other responsible officer of
petitioner such that summons for petitioner was validly served on him as agent and authorized
representative of petitioner. Also in the Gesulgon case cited by private respondent, the
summons was received by the clerk in the office of the Assistant Manager (at principal office
address) and under Section 13 of Rule 14 (old rule), summons may be made upon the clerk who
is regarded as agent within the contemplation of the rule.
The designation of persons or officers who are authorized to accept summons for a domestic
corporation or partnership is now limited and more clearly specified in Section 11, Rule 14 of the
1997 Rules of Civil Procedure. The rule now states "general manager" instead of only
"manager"; "corporate secretary" instead of "secretary"; and "treasurer" instead of "cashier." The
phrase "agent, or any of its directors" is conspicuously deleted in the new rule.
The particular revision under Section 11 of Rule 14 was explained by retired Supreme Court
Justice Florenz Regalado, thus:23
. . . the then Sec. 13 of this Rule allowed service upon a defendant corporation to "be
made on the president, manager, secretary, cashier, agent or any of its directors." The
aforesaid terms were obviously ambiguous and susceptible of broad and sometimes
illogical interpretations, especially the word "agent" of the corporation. The Filoil case,
involving the litigation lawyer of the corporation who precisely appeared to challenge the
validity of service of summons but whose very appearance for that purpose was seized
upon to validate the defective service, is an illustration of the need for this revised section
with limited scope and specific terminology. Thus the absurd result in the Filoil case
necessitated the amendment permitting service only on the in-house counsel of the
corporation who is in effect an employee of the corporation, as distinguished from an
independent practitioner. (emphasis supplied).
Retired Justice Oscar Herrera, who is also a consultant of the Rules of Court Revision
Committee, stated that "(T)he rule must be strictly observed. Service must be made to one
named in (the) statute . . . .24
It should be noted that even prior to the effectivity of the 1997 Rules of Civil Procedure, strict
compliance with the rules has been enjoined. In the case of Delta Motor Sales Corporation
vs. Mangosing,25 the Court held:
A strict compliance with the mode of service is necessary to confer jurisdiction of the
court over a corporation. The officer upon whom service is made must be one who is
named in the statute; otherwise the service is insufficient. . . .
The purpose is to render it reasonably certain that the corporation will receive prompt
and proper notice in an action against it or to insure that the summons be served on a
representative so integrated with the corporation that such person will know what to do
with the legal papers served on him. In other words, "to bring home to the corporation
notice of the filing of the action." . . . .
The liberal construction rule cannot be invoked and utilized as a substitute for the plain
legal requirements as to the manner in which summons should be served on a domestic
corporation. . . . . (emphasis supplied).
Service of summons upon persons other than those mentioned in Section 13 of Rule 14 (old
rule) has been held as improper.26 Even under the old rule, service upon a general manager of a
firm's branch office has been held as improper as summons should have been served at the
firm's principal office. In First Integrated Bonding & Inc. Co., Inc. vs. Dizon,27 it was held that the
service of summons on the general manager of the insurance firm's Cebu branch was improper;
default order could have been obviated had the summons been served at the firm's principal
office.
And in the case of Solar Team Entertainment, Inc. vs. Hon. Helen Bautista Ricafort, et al.28 the
Court succinctly clarified that, for the guidance of the Bench and Bar, "strictest" compliance with
Section 11 of Rule 13 of the 1997 Rules of Civil Procedure (on Priorities in modes of service and
filing) is mandated and the Court cannot rule otherwise, lest we allow circumvention of the
innovation by the 1997 Rules in order to obviate delay in the administration of justice.
Accordingly, we rule that the service of summons upon the branch manager of petitioner at its
branch office at Cagayan de Oro, instead of upon the general manager at its principal office at
Davao City is improper. Consequently, the trial court did not acquire jurisdiction over the person
of the petitioner.
The fact that defendant filed a belated motion to dismiss did not operate to confer jurisdiction
upon its person. There is no question that the defendant's voluntary appearance in the action is
equivalent to service of summons.29Before, the rule was that a party may challenge the
jurisdiction of the court over his person by making a special appearance through a motion to
dismiss and if in the same motion, the movant raised other grounds or invoked affirmative relief
which necessarily involves the exercise of the jurisdiction of the court.30 This doctrine has been
abandoned in the case of La Naval Drug Corporation vs. Court of Appeals, et al.,31 which
became the basis of the adoption of a new provision in the former Section 23, which is now
Section 20 of Rule 14 of the 1997 Rules. Section 20 now provides that "the inclusion in a motion
to dismiss of other grounds aside from lack of jurisdiction over the person of the defendant shall
not be deemed a voluntary appearance." The emplacement of this rule clearly underscores the
purpose to enforce strict enforcement of the rules on summons. Accordingly, the filing of a
motion to dismiss, whether or not belatedly filed by the defendant, his authorized agent or
attorney, precisely objecting to the jurisdiction of the court over the person of the defendant can
by no means be deemed a submission to the jurisdiction of the court. There being no proper
service of summons, the trial court cannot take cognizance of a case for lack of jurisdiction over
the person of the defendant. Any proceeding undertaken by the trial court will consequently be
null and void.32
WHEREFORE, the petition is hereby GRANTED. The assailed Orders of the public respondent
trial court are ANNULLED and SET ASIDE. The public respondent Regional Trial Court of
Makati, Branch 132 is declared without jurisdiction to take cognizance of Civil Case No. 98-824,
and all its orders and issuances in connection therewith are hereby ANNULLED and SET
ASIDE. 1âwphi 1.nêt
SO ORDERED.
Melo, Vitug, Panganiban and Purisima, JJ., concur.
G.R. No. L-45911 April 11, 1979
JOHN GOKONGWEI, JR., petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M. SORIANO,
ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE,
MIGUEL ORTIGAS, ANTONIO PRIETO, SAN MIGUEL CORPORATION, EMIGDIO
TANJUATCO, SR., and EDUARDO R. VISAYA, respondents.
De Santos, Balgos & Perez for petitioner.
Angara, Abello, Concepcion, Regala, Cruz Law Offices for respondents Sorianos
Siguion Reyna, Montecillo & Ongsiako for respondent San Miguel Corporation.
R. T Capulong for respondent Eduardo R. Visaya.
ANTONIO, J.:
The instant petition for certiorari, mandamus and injunction, with prayer for issuance of writ of
preliminary injunction, arose out of two cases filed by petitioner with the Securities and Exchange
Commission, as follows:
SEC CASE NO 1375
On October 22, 1976, petitioner, as stockholder of respondent San Miguel Corporation, filed with
the Securities and Exchange Commission (SEC) a petition for "declaration of nullity of amended
by-laws, cancellation of certificate of filing of amended by- laws, injunction and damages with
prayer for a preliminary injunction" against the majority of the members of the Board of Directors
and San Miguel Corporation as an unwilling petitioner. The petition, entitled "John Gokongwei Jr.
vs. Andres Soriano, Jr., Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio Bunao,
Walthrode B. Conde, Miguel Ortigas, Antonio Prieto and San Miguel Corporation", was docketed
as SEC Case No. 1375.
As a first cause of action, petitioner alleged that on September 18, 1976, individual respondents
amended by bylaws of the corporation, basing their authority to do so on a resolution of the
stockholders adopted on March 13, 1961, when the outstanding capital stock of respondent
corporation was only P70,139.740.00, divided into 5,513,974 common shares at P10.00 per
share and 150,000 preferred shares at P100.00 per share. At the time of the amendment, the
outstanding and paid up shares totalled 30,127,047 with a total par value of P301,270,430.00. It
was contended that according to section 22 of the Corporation Law and Article VIII of the by-
laws of the corporation, the power to amend, modify, repeal or adopt new by-laws may be
delegated to the Board of Directors only by the affirmative vote of stockholders representing not
less than 2/3 of the subscribed and paid up capital stock of the corporation, which 2/3 should
have been computed on the basis of the capitalization at the time of the amendment. Since the
amendment was based on the 1961 authorization, petitioner contended that the Board acted
without authority and in usurpation of the power of the stockholders.
As a second cause of action, it was alleged that the authority granted in 1961 had already been
exercised in 1962 and 1963, after which the authority of the Board ceased to exist.
As a third cause of action, petitioner averred that the membership of the Board of Directors had
changed since the authority was given in 1961, there being six (6) new directors.
As a fourth cause of action, it was claimed that prior to the questioned amendment, petitioner
had all the qualifications to be a director of respondent corporation, being a Substantial
stockholder thereof; that as a stockholder, petitioner had acquired rights inherent in stock
ownership, such as the rights to vote and to be voted upon in the election of directors; and that in
amending the by-laws, respondents purposely provided for petitioner's disqualification and
deprived him of his vested right as afore-mentioned hence the amended by-laws are null and
void. 1
As additional causes of action, it was alleged that corporations have no inherent power to
disqualify a stockholder from being elected as a director and, therefore, the questioned act
is ultra vires and void; that Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing
other corporations, entered into contracts (specifically a management contract) with respondent
corporation, which was allowed because the questioned amendment gave the Board itself the
prerogative of determining whether they or other persons are engaged in competitive or
antagonistic business; that the portion of the amended bylaws which states that in determining
whether or not a person is engaged in competitive business, the Board may consider such
factors as business and family relationship, is unreasonable and oppressive and, therefore, void;
and that the portion of the amended by-laws which requires that "all nominations for election of
directors ... shall be submitted in writing to the Board of Directors at least five (5) working days
before the date of the Annual Meeting" is likewise unreasonable and oppressive.
It was, therefore, prayed that the amended by-laws be declared null and void and the certificate
of filing thereof be cancelled, and that individual respondents be made to pay damages, in
specified amounts, to petitioner.
On October 28, 1976, in connection with the same case, petitioner filed with the Securities and
Exchange Commission an "Urgent Motion for Production and Inspection of Documents", alleging
that the Secretary of respondent corporation refused to allow him to inspect its records despite
request made by petitioner for production of certain documents enumerated in the request, and
that respondent corporation had been attempting to suppress information from its stockholders
despite a negative reply by the SEC to its query regarding their authority to do so. Among the
documents requested to be copied were (a) minutes of the stockholder's meeting field on March
13, 1961, (b) copy of the management contract between San Miguel Corporation and A. Soriano
Corporation (ANSCOR); (c) latest balance sheet of San Miguel International, Inc.; (d) authority of
the stockholders to invest the funds of respondent corporation in San Miguel International, Inc.;
and (e) lists of salaries, allowances, bonuses, and other compensation, if any, received by
Andres M. Soriano, Jr. and/or its successor-in-interest.
The "Urgent Motion for Production and Inspection of Documents" was opposed by respondents,
alleging, among others that the motion has no legal basis; that the demand is not based on good
faith; that the motion is premature since the materiality or relevance of the evidence sought
cannot be determined until the issues are joined, that it fails to show good cause and constitutes
continued harrasment, and that some of the information sought are not part of the records of the
corporation and, therefore, privileged.
During the pendency of the motion for production, respondents San Miguel Corporation, Enrique
Conde, Miguel Ortigas and Antonio Prieto filed their answer to the petition, denying the
substantial allegations therein and stating, by way of affirmative defenses that "the action taken
by the Board of Directors on September 18, 1976 resulting in the ... amendments is valid and
legal because the power to "amend, modify, repeal or adopt new By-laws" delegated to said
Board on March 13, 1961 and long prior thereto has never been revoked of SMC"; that contrary
to petitioner's claim, "the vote requirement for a valid delegation of the power to amend, repeal or
adopt new by-laws is determined in relation to the total subscribed capital stock at the time the
delegation of said power is made, not when the Board opts to exercise said delegated power";
that petitioner has not availed of his intra-corporate remedy for the nullification of the
amendment, which is to secure its repeal by vote of the stockholders representing a majority of
the subscribed capital stock at any regular or special meeting, as provided in Article VIII, section
I of the by-laws and section 22 of the Corporation law, hence the, petition is premature; that
petitioner is estopped from questioning the amendments on the ground of lack of authority of the
Board. since he failed, to object to other amendments made on the basis of the same 1961
authorization: that the power of the corporation to amend its by-laws is broad, subject only to the
condition that the by-laws adopted should not be respondent corporation inconsistent with any
existing law; that respondent corporation should not be precluded from adopting protective
measures to minimize or eliminate situations where its directors might be tempted to put their
personal interests over t I hat of the corporation; that the questioned amended by-laws is a
matter of internal policy and the judgment of the board should not be interfered with: That the by-
laws, as amended, are valid and binding and are intended to prevent the possibility of violation of
criminal and civil laws prohibiting combinations in restraint of trade; and that the petition states
no cause of action. It was, therefore, prayed that the petition be dismissed and that petitioner be
ordered to pay damages and attorney's fees to respondents. The application for writ of
preliminary injunction was likewise on various grounds.
Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to the petition,
denying the material averments thereof and stating, as part of their affirmative defenses, that in
August 1972, the Universal Robina Corporation (Robina), a corporation engaged in business
competitive to that of respondent corporation, began acquiring shares therein. until September
1976 when its total holding amounted to 622,987 shares: that in October 1972, the Consolidated
Foods Corporation (CFC) likewise began acquiring shares in respondent (corporation. until its
total holdings amounted to P543,959.00 in September 1976; that on January 12, 1976,
petitioner, who is president and controlling shareholder of Robina and CFC (both closed
corporations) purchased 5,000 shares of stock of respondent corporation, and thereafter, in
behalf of himself, CFC and Robina, "conducted malevolent and malicious publicity campaign
against SMC" to generate support from the stockholder "in his effort to secure for himself and in
representation of Robina and CFC interests, a seat in the Board of Directors of SMC", that in the
stockholders' meeting of March 18, 1976, petitioner was rejected by the stockholders in his bid to
secure a seat in the Board of Directors on the basic issue that petitioner was engaged in a
competitive business and his securing a seat would have subjected respondent corporation to
grave disadvantages; that "petitioner nevertheless vowed to secure a seat in the Board of
Directors at the next annual meeting; that thereafter the Board of Directors amended the by-laws
as afore-stated.
As counterclaims, actual damages, moral damages, exemplary damages, expenses of litigation
and attorney's fees were presented against petitioner.
Subsequently, a Joint Omnibus Motion for the striking out of the motion for production and
inspection of documents was filed by all the respondents. This was duly opposed by petitioner.
At this juncture, respondents Emigdio Tanjuatco, Sr. and Eduardo R. Visaya were allowed to
intervene as oppositors and they accordingly filed their oppositions-intervention to the petition.
On December 29, 1976, the Securities and Exchange Commission resolved the motion for
production and inspection of documents by issuing Order No. 26, Series of 1977, stating, in part
as follows:
Considering the evidence submitted before the Commission by the petitioner and
respondents in the above-entitled case, it is hereby ordered:
1. That respondents produce and permit the inspection, copying and
photographing, by or on behalf of the petitioner-movant, John Gokongwei, Jr., of
the minutes of the stockholders' meeting of the respondent San Miguel
Corporation held on March 13, 1961, which are in the possession, custody and
control of the said corporation, it appearing that the same is material and relevant
to the issues involved in the main case. Accordingly, the respondents should
allow petitioner-movant entry in the principal office of the respondent
Corporation, San Miguel Corporation on January 14, 1977, at 9:30 o'clock in the
morning for purposes of enforcing the rights herein granted; it being understood
that the inspection, copying and photographing of the said documents shall be
undertaken under the direct and strict supervision of this Commission. Provided,
however, that other documents and/or papers not heretofore included are not
covered by this Order and any inspection thereof shall require the prior
permission of this Commission;
2. As to the Balance Sheet of San Miguel International, Inc. as well as the list of
salaries, allowances, bonuses, compensation and/or remuneration received by
respondent Jose M. Soriano, Jr. and Andres Soriano from San Miguel
International, Inc. and/or its successors-in- interest, the Petition to produce and
inspect the same is hereby DENIED, as petitioner-movant is not a stockholder of
San Miguel International, Inc. and has, therefore, no inherent right to inspect said
documents;
3. In view of the Manifestation of petitioner-movant dated November 29, 1976,
withdrawing his request to copy and inspect the management contract between
San Miguel Corporation and A. Soriano Corporation and the renewal and
amendments thereof for the reason that he had already obtained the same, the
Commission takes note thereof; and
4. Finally, the Commission holds in abeyance the resolution on the matter of
production and inspection of the authority of the stockholders of San Miguel
Corporation to invest the funds of respondent corporation in San Miguel
International, Inc., until after the hearing on the merits of the principal issues in
the above-entitled case.
This Order is immediately executory upon its approval. 2
Dissatisfied with the foregoing Order, petitioner moved for its reconsideration.
Meanwhile, on December 10, 1976, while the petition was yet to be heard, respondent
corporation issued a notice of special stockholders' meeting for the purpose of "ratification and
confirmation of the amendment to the By-laws", setting such meeting for February 10, 1977. This
prompted petitioner to ask respondent Commission for a summary judgment insofar as the first
cause of action is concerned, for the alleged reason that by calling a special stockholders'
meeting for the aforesaid purpose, private respondents admitted the invalidity of the
amendments of September 18, 1976. The motion for summary judgment was opposed by private
respondents. Pending action on the motion, petitioner filed an "Urgent Motion for the Issuance of
a Temporary Restraining Order", praying that pending the determination of petitioner's
application for the issuance of a preliminary injunction and/or petitioner's motion for summary
judgment, a temporary restraining order be issued, restraining respondents from holding the
special stockholder's meeting as scheduled. This motion was duly opposed by respondents.
On February 10, 1977, respondent Commission issued an order denying the motion for issuance
of temporary restraining order. After receipt of the order of denial, respondents conducted the
special stockholders' meeting wherein the amendments to the by-laws were ratified. On
February 14, 1977, petitioner filed a consolidated motion for contempt and for nullification of the
special stockholders' meeting.
A motion for reconsideration of the order denying petitioner's motion for summary judgment was
filed by petitioner before respondent Commission on March 10, 1977. Petitioner alleges that up
to the time of the filing of the instant petition, the said motion had not yet been scheduled for
hearing. Likewise, the motion for reconsideration of the order granting in part and denying in part
petitioner's motion for production of record had not yet been resolved.
In view of the fact that the annul stockholders' meeting of respondent corporation had been
scheduled for May 10, 1977, petitioner filed with respondent Commission a Manifestation stating
that he intended to run for the position of director of respondent corporation. Thereafter,
respondents filed a Manifestation with respondent Commission, submitting a Resolution of the
Board of Directors of respondent corporation disqualifying and precluding petitioner from being a
candidate for director unless he could submit evidence on May 3, 1977 that he does not come
within the disqualifications specified in the amendment to the by-laws, subject matter of SEC
Case No. 1375. By reason thereof, petitioner filed a manifestation and motion to resolve pending
incidents in the case and to issue a writ of injunction, alleging that private respondents were
seeking to nullify and render ineffectual the exercise of jurisdiction by the respondent
Commission, to petitioner's irreparable damage and prejudice, Allegedly despite a subsequent
Manifestation to prod respondent Commission to act, petitioner was not heard prior to the date of
the stockholders' meeting.
Petitioner alleges that there appears a deliberate and concerted inability on the part of the SEC
to act hence petitioner came to this Court.
SEC. CASE NO. 1423
Petitioner likewise alleges that, having discovered that respondent corporation has been
investing corporate funds in other corporations and businesses outside of the primary purpose
clause of the corporation, in violation of section 17 1/2 of the Corporation Law, he filed with
respondent Commission, on January 20, 1977, a petition seeking to have private respondents
Andres M. Soriano, Jr. and Jose M. Soriano, as well as the respondent corporation declared
guilty of such violation, and ordered to account for such investments and to answer for damages.
On February 4, 1977, motions to dismiss were filed by private respondents, to which a
consolidated motion to strike and to declare individual respondents in default and an
opposition ad abundantiorem cautelam were filed by petitioner. Despite the fact that said
motions were filed as early as February 4, 1977, the commission acted thereon only on April 25,
1977, when it denied respondents' motion to dismiss and gave them two (2) days within which to
file their answer, and set the case for hearing on April 29 and May 3, 1977.
Respondents issued notices of the annual stockholders' meeting, including in the Agenda
thereof, the following:
6. Re-affirmation of the authorization to the Board of Directors by the
stockholders at the meeting on March 20, 1972 to invest corporate funds in other
companies or businesses or for purposes other than the main purpose for which
the Corporation has been organized, and ratification of the investments thereafter
made pursuant thereto.
By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an urgent motion for
the issuance of a writ of preliminary injunction to restrain private respondents from taking up Item
6 of the Agenda at the annual stockholders' meeting, requesting that the same be set for hearing
on May 3, 1977, the date set for the second hearing of the case on the merits. Respondent
Commission, however, cancelled the dates of hearing originally scheduled and reset the same to
May 16 and 17, 1977, or after the scheduled annual stockholders' meeting. For the purpose of
urging the Commission to act, petitioner filed an urgent manifestation on May 3, 1977, but this
notwithstanding, no action has been taken up to the date of the filing of the instant petition.
With respect to the afore-mentioned SEC cases, it is petitioner's contention before this Court that
respondent Commission gravely abused its discretion when it failed to act with deliberate
dispatch on the motions of petitioner seeking to prevent illegal and/or arbitrary impositions or
limitations upon his rights as stockholder of respondent corporation, and that respondent are
acting oppressively against petitioner, in gross derogation of petitioner's rights to property and
due process. He prayed that this Court direct respondent SEC to act on collateral incidents
pending before it.
On May 6, 1977, this Court issued a temporary restraining order restraining private respondents
from disqualifying or preventing petitioner from running or from being voted as director of
respondent corporation and from submitting for ratification or confirmation or from causing the
ratification or confirmation of Item 6 of the Agenda of the annual stockholders' meeting on May
10, 1977, or from Making effective the amended by-laws of respondent corporation, until further
orders from this Court or until the Securities and Ex-change Commission acts on the matters
complained of in the instant petition.
On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a restraining order
had been issued by this Court, or on May 9, 1977, the respondent Commission served upon
petitioner copies of the following orders:
(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's motion for
reconsideration, with its supplement, of the order of the Commission denying in part petitioner's
motion for production of documents, petitioner's motion for reconsideration of the order denying
the issuance of a temporary restraining order denying the issuance of a temporary restraining
order, and petitioner's consolidated motion to declare respondents in contempt and to nullify the
stockholders' meeting;
(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run as a director
of respondent corporation but stating that he should not sit as such if elected, until such time that
the Commission has decided the validity of the bylaws in dispute, and denying deferment of Item
6 of the Agenda for the annual stockholders' meeting; and
(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's motion for
reconsideration of the order of respondent Commission denying petitioner's motion for summary
judgment;
It is petitioner's assertions, anent the foregoing orders, (1) that respondent Commission acted
with indecent haste and without circumspection in issuing the aforesaid orders to petitioner's
irreparable damage and injury; (2) that it acted without jurisdiction and in violation of petitioner's
right to due process when it decided en banc an issue not raised before it and still pending
before one of its Commissioners, and without hearing petitioner thereon despite petitioner's
request to have the same calendared for hearing , and (3) that the respondents acted
oppressively against the petitioner in violation of his rights as a stockholder, warranting
immediate judicial intervention.
It is prayed in the supplemental petition that the SEC orders complained of be declared null and
void and that respondent Commission be ordered to allow petitioner to undertake discovery
proceedings relative to San Miguel International. Inc. and thereafter to decide SEC Cases No.
1375 and 1423 on the merits.
On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed their
comment, alleging that the petition is without merit for the following reasons:
(1) that the petitioner the interest he represents are engaged in business competitive and
antagonistic to that of respondent San Miguel Corporation, it appearing that the owns and
controls a greater portion of his SMC stock thru the Universal Robina Corporation and the
Consolidated Foods Corporation, which corporations are engaged in business directly and
substantially competing with the allied businesses of respondent SMC and of corporations in
which SMC has substantial investments. Further, when CFC and Robina had accumulated
investments. Further, when CFC and Robina had accumulated shares in SMC, the Board of
Directors of SMC realized the clear and present danger that competitors or antagonistic parties
may be elected directors and thereby have easy and direct access to SMC's business and trade
secrets and plans;
(2) that the amended by law were adopted to preserve and protect respondent SMC from the
clear and present danger that business competitors, if allowed to become directors, will illegally
and unfairly utilize their direct access to its business secrets and plans for their own private gain
to the irreparable prejudice of respondent SMC, and, ultimately, its stockholders. Further, it is
asserted that membership of a competitor in the Board of Directors is a blatant disregard of no
less that the Constitution and pertinent laws against combinations in restraint of trade;
(3) that by laws are valid and binding since a corporation has the inherent right and duty to
preserve and protect itself by excluding competitors and antogonistic parties, under the law of
self-preservation, and it should be allowed a wide latitude in the selection of means to preserve
itself;
(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and 1423 was due to
petitioner's own acts or omissions, since he failed to have the petition to suspend, pendente
lite the amended by-laws calendared for hearing. It was emphasized that it was only on April 29,
1977 that petitioner calendared the aforesaid petition for suspension (preliminary injunction) for
hearing on May 3, 1977. The instant petition being dated May 4, 1977, it is apparent that
respondent Commission was not given a chance to act "with deliberate dispatch", and
(5) that, even assuming that the petition was meritorious was, it has become moot and academic
because respondent Commission has acted on the pending incidents, complained of. It was,
therefore, prayed that the petition be dismissed.
On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his comment, alleging that the
petition has become moot and academic for the reason, among others that the acts of private
respondent sought to be enjoined have reference to the annual meeting of the stockholders of
respondent San Miguel Corporation, which was held on may 10, 1977; that in said meeting, in
compliance with the order of respondent Commission, petitioner was allowed to run and be voted
for as director; and that in the same meeting, Item 6 of the Agenda was discussed, voted upon,
ratified and confirmed. Further it was averred that the questions and issues raised by petitioner
are pending in the Securities and Exchange Commission which has acquired jurisdiction over the
case, and no hearing on the merits has been had; hence the elevation of these issues before the
Supreme Court is premature.
Petitioner filed a reply to the aforesaid comments, stating that the petition presents justiciable
questions for the determination of this Court because (1) the respondent Commission acted
without circumspection, unfairly and oppresively against petitioner, warranting the intervention of
this Court; (2) a derivative suit, such as the instant case, is not rendered academic by the act of
a majority of stockholders, such that the discussion, ratification and confirmation of Item 6 of the
Agenda of the annual stockholders' meeting of May 10, 1977 did not render the case moot; that
the amendment to the bylaws which specifically bars petitioner from being a director is void since
it deprives him of his vested rights.
Respondent Commission, thru the Solicitor General, filed a separate comment, alleging that after
receiving a copy of the restraining order issued by this Court and noting that the restraining order
did not foreclose action by it, the Commission en banc issued Orders Nos. 449, 450 and 451 in
SEC Case No. 1375.
In answer to the allegation in the supplemental petition, it states that Order No. 450 which denied
deferment of Item 6 of the Agenda of the annual stockholders' meeting of respondent
corporation, took into consideration an urgent manifestation filed with the Commission by
petitioner on May 3, 1977 which prayed, among others, that the discussion of Item 6 of the
Agenda be deferred. The reason given for denial of deferment was that "such action is within the
authority of the corporation as well as falling within the sphere of stockholders' right to know,
deliberate upon and/or to express their wishes regarding disposition of corporate funds
considering that their investments are the ones directly affected." It was alleged that the main
petition has, therefore, become moot and academic.
On September 29,1977, petitioner filed a second supplemental petition with prayer for
preliminary injunction, alleging that the actuations of respondent SEC tended to deprive him of
his right to due process, and "that all possible questions on the facts now pending before the
respondent Commission are now before this Honorable Court which has the authority and the
competence to act on them as it may see fit." (Reno, pp. 927-928.)
Petitioner, in his memorandum, submits the following issues for resolution;
(1) whether or not the provisions of the amended by-laws of respondent corporation,
disqualifying a competitor from nomination or election to the Board of Directors are valid and
reasonable;
(2) whether or not respondent SEC gravely abused its discretion in denying petitioner's request
for an examination of the records of San Miguel International, Inc., a fully owned subsidiary of
San Miguel Corporation; and
(3) whether or not respondent SEC committed grave abuse of discretion in allowing discussion of
Item 6 of the Agenda of the Annual Stockholders' Meeting on May 10, 1977, and the ratification
of the investment in a foreign corporation of the corporate funds, allegedly in violation of section
17-1/2 of the Corporation Law.
I in a position, based upon said evidence, to decide the case on its merits. 8 It is settled that the
Whether or not amended by-laws are valid is purely a legal question which public interest
requires to be resolved —
It is the position of the petitioner that "it is not necessary to remand the case to respondent SEC
for an appropriate ruling on the intrinsic validity of the amended by-laws in compliance with the
principle of exhaustion of administrative remedies", considering that: first: "whether or not the
provisions of the amended by-laws are intrinsically valid ... is purely a legal question. There is no
factual dispute as to what the provisions are and evidence is not necessary to determine
whether such amended by-laws are valid as framed and approved ... "; second: "it is for the
interest and guidance of the public that an immediate and final ruling on the question be made ...
"; third: "petitioner was denied due process by SEC" when "Commissioner de Guzman had
openly shown prejudice against petitioner ... ", and "Commissioner Sulit ... approved the
amended by-laws ex-parte and obviously found the same intrinsically valid; and finally: "to
remand the case to SEC would only entail delay rather than serve the ends of justice."
Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that this Court resolve
the legal issues raised by the parties in keeping with the "cherished rules of procedure" that "a
court should always strive to settle the entire controversy in a single proceeding leaving no root
or branch to bear the seeds of future ligiation", citing Gayong v. Gayos. 3 To the same effect is
the prayer of San Miguel Corporation that this Court resolve on the merits the validity of its
amended by laws and the rights and obligations of the parties thereunder, otherwise "the time
spent and effort exerted by the parties concerned and, more importantly, by this Honorable
Court, would have been for naught because the main question will come back to this Honorable
Court for final resolution." Respondent Eduardo R. Visaya submits a similar appeal.
It is only the Solicitor General who contends that the case should be remanded to the SEC for
hearing and decision of the issues involved, invoking the latter's primary jurisdiction to hear and
decide case involving intra-corporate controversies.
It is an accepted rule of procedure that the Supreme Court should always strive to settle the
entire controversy in a single proceeding, leaving nor root or branch to bear the seeds of future
litigation. 4 Thus, in Francisco v. City of Davao, 5 this Court resolved to decide the case on the
merits instead of remanding it to the trial court for further proceedings since the ends of justice
would not be subserved by the remand of the case. In Republic v. Security Credit and
Acceptance Corporation, et al., 6 this Court, finding that the main issue is one of law, resolved to
decide the case on the merits "because public interest demands an early disposition of the
case", and in Republic v. Central Surety and Insurance Company, 7 this Court denied remand of
the third-party complaint to the trial court for further proceedings, citing precedent where this
Court, in similar situations resolved to decide the cases on the merits, instead of remanding them
to the trial court where (a) the ends of justice would not be subserved by the remand of the case;
or (b) where public interest demand an early disposition of the case; or (c) where the trial court
had already received all the evidence presented by both parties and the Supreme Court is now
doctrine of primary jurisdiction has no application where only a question of law is
involved. 8a Because uniformity may be secured through review by a single Supreme Court,
questions of law may appropriately be determined in the first instance by courts. 8b In the case at
bar, there are facts which cannot be denied, viz.: that the amended by-laws were adopted by the
Board of Directors of the San Miguel Corporation in the exercise of the power delegated by the
stockholders ostensibly pursuant to section 22 of the Corporation Law; that in a special meeting
on February 10, 1977 held specially for that purpose, the amended by-laws were ratified by more
than 80% of the stockholders of record; that the foreign investment in the Hongkong Brewery
and Distellery, a beer manufacturing company in Hongkong, was made by the San Miguel
Corporation in 1948; and that in the stockholders' annual meeting held in 1972 and 1977, all
foreign investments and operations of San Miguel Corporation were ratified by the stockholders.
II
Whether or not the amended by-laws of SMC of disqualifying a competitor from nomination or
election to the Board of Directors of SMC are valid and reasonable —
The validity or reasonableness of a by-law of a corporation in purely a question of law. 9 Whether
the by-law is in conflict with the law of the land, or with the charter of the corporation, or is in a
legal sense unreasonable and therefore unlawful is a question of law. 10 This rule is subject,
however, to the limitation that where the reasonableness of a by-law is a mere matter of
judgment, and one upon which reasonable minds must necessarily differ, a court would not be
warranted in substituting its judgment instead of the judgment of those who are authorized to
make by-laws and who have exercised their authority. 11
Petitioner claims that the amended by-laws are invalid and unreasonable because they were
tailored to suppress the minority and prevent them from having representation in the Board", at
the same time depriving petitioner of his "vested right" to be voted for and to vote for a person of
his choice as director.
Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San Miguel
Corporation content that ex. conclusion of a competitor from the Board is legitimate corporate
purpose, considering that being a competitor, petitioner cannot devote an unselfish and
undivided Loyalty to the corporation; that it is essentially a preventive measure to assure
stockholders of San Miguel Corporation of reasonable protective from the unrestrained self-
interest of those charged with the promotion of the corporate enterprise; that access to
confidential information by a competitor may result either in the promotion of the interest of the
competitor at the expense of the San Miguel Corporation, or the promotion of both the interests
of petitioner and respondent San Miguel Corporation, which may, therefore, result in a
combination or agreement in violation of Article 186 of the Revised Penal Code by destroying
free competition to the detriment of the consuming public. It is further argued that there is not
vested right of any stockholder under Philippine Law to be voted as director of a corporation. It is
alleged that petitioner, as of May 6, 1978, has exercised, personally or thru two corporations
owned or controlled by him, control over the following shareholdings in San Miguel
Corporation, vis.: (a) John Gokongwei, Jr. — 6,325 shares; (b) Universal Robina Corporation —
738,647 shares; (c) CFC Corporation — 658,313 shares, or a total of 1,403,285 shares. Since
the outstanding capital stock of San Miguel Corporation, as of the present date, is represented
by 33,139,749 shares with a par value of P10.00, the total shares owned or controlled by
petitioner represents 4.2344% of the total outstanding capital stock of San Miguel Corporation. It
is also contended that petitioner is the president and substantial stockholder of Universal Robina
Corporation and CFC Corporation, both of which are allegedly controlled by petitioner and
members of his family. It is also claimed that both the Universal Robina Corporation and the CFC
Corporation are engaged in businesses directly and substantially competing with the alleged
businesses of San Miguel Corporation, and of corporations in which SMC has substantial
investments.
ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S CORPORATIONS AND SAN
MIGUEL CORPORATION
According to respondent San Miguel Corporation, the areas of, competition are enumerated in its
Board the areas of competition are enumerated in its Board Resolution dated April 28, 1978,
thus:
Product Line Estimated Market Share Total
1977 SMC Robina-CFC
Table Eggs 0.6% 10.0% 10.6%
Layer Pullets 33.0% 24.0% 57.0%
Dressed Chicken 35.0% 14.0% 49.0%
Poultry & Hog Feeds 40.0% 12.0% 52.0%
Ice Cream 70.0% 13.0% 83.0%
Instant Coffee 45.0% 40.0% 85.0%
Woven Fabrics 17.5% 9.1% 26.6%
Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC involved
product sales of over P400 million or more than 20% of the P2 billion total product sales of SMC.
Significantly, the combined market shares of SMC and CFC-Robina in layer pullets dressed
chicken, poultry and hog feeds ice cream, instant coffee and woven fabrics would result in a
position of such dominance as to affect the prevailing market factors.
It is further asserted that in 1977, the CFC-Robina group was in direct competition on product
lines which, for SMC, represented sales amounting to more than ?478 million. In addition, CFC-
Robina was directly competing in the sale of coffee with Filipro, a subsidiary of SMC, which
product line represented sales for SMC amounting to more than P275 million. The CFC-Robina
group (Robitex, excluding Litton Mills recently acquired by petitioner) is purportedly also in direct
competition with Ramie Textile, Inc., subsidiary of SMC, in product sales amounting to more than
P95 million. The areas of competition between SMC and CFC-Robina in 1977 represented,
therefore, for SMC, product sales of more than P849 million.
According to private respondents, at the Annual Stockholders' Meeting of March 18, 1976, 9,894
stockholders, in person or by proxy, owning 23,436,754 shares in SMC, or more than 90% of the
total outstanding shares of SMC, rejected petitioner's candidacy for the Board of Directors
because they "realized the grave dangers to the corporation in the event a competitor gets a
board seat in SMC." On September 18, 1978, the Board of Directors of SMC, by "virtue of
powers delegated to it by the stockholders," approved the amendment to ' he by-laws in
question. At the meeting of February 10, 1977, these amendments were confirmed and ratified
by 5,716 shareholders owning 24,283,945 shares, or more than 80% of the total outstanding
shares. Only 12 shareholders, representing 7,005 shares, opposed the confirmation and
ratification. At the Annual Stockholders' Meeting of May 10, 1977, 11,349 shareholders, owning
27,257.014 shares, or more than 90% of the outstanding shares, rejected petitioner's candidacy,
while 946 stockholders, representing 1,648,801 shares voted for him. On the May 9, 1978
Annual Stockholders' Meeting, 12,480 shareholders, owning more than 30 million shares, or
more than 90% of the total outstanding shares. voted against petitioner.
AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS
EXPRESSLY CONFERRED BY LAW
Private respondents contend that the disputed amended by laws were adopted by the Board of
Directors of San Miguel Corporation a-, a measure of self-defense to protect the corporation from
the clear and present danger that the election of a business competitor to the Board may cause
upon the corporation and the other stockholders inseparable prejudice. Submitted for resolution,
therefore, is the issue — whether or not respondent San Miguel Corporation could, as a measure
of self- protection, disqualify a competitor from nomination and election to its Board of Directors.
It is recognized by an authorities that 'every corporation has the inherent power to adopt by-laws
'for its internal government, and to regulate the conduct and prescribe the rights and duties of its
members towards itself and among themselves in reference to the management of its
affairs. 12 At common law, the rule was "that the power to make and adopt by-laws
was inherent in every corporation as one of its necessary and inseparable legal incidents. And it
is settled throughout the United States that in the absence of positive legislative provisions
limiting it, every private corporation has this inherent power as one of its necessary and
inseparable legal incidents, independent of any specific enabling provision in its charter or in
general law, such power of self-government being essential to enable the corporation to
accomplish the purposes of its creation. 13
In this jurisdiction, under section 21 of the Corporation Law, a corporation may prescribe in its
by-laws "the qualifications, duties and compensation of directors, officers and employees ... "
This must necessarily refer to a qualification in addition to that specified by section 30 of the
Corporation Law, which provides that "every director must own in his right at least one share of
the capital stock of the stock corporation of which he is a director ... " In Government v. El
Hogar, 14 the Court sustained the validity of a provision in the corporate by-law requiring that
persons elected to the Board of Directors must be holders of shares of the paid up value of
P5,000.00, which shall be held as security for their action, on the ground that section 21 of the
Corporation Law expressly gives the power to the corporation to provide in its by-laws for the
qualifications of directors and is "highly prudent and in conformity with good practice. "
NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR
Any person "who buys stock in a corporation does so with the knowledge that its affairs
are dominated by a majorityof the stockholders and that he impliedly contracts that the will of the
majority shall govern in all matters within the limits of the act of incorporation and lawfully
enacted by-laws and not forbidden by law." 15 To this extent, therefore, the stockholder may be
considered to have "parted with his personal right or privilege to regulate the disposition of his
property which he has invested in the capital stock of the corporation, and surrendered it to the
will of the majority of his fellow incorporators. ... It cannot therefore be justly said that the
contract, express or implied, between the corporation and the stockholders is infringed ... by any
act of the former which is authorized by a majority ... ." 16
Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of
incorporation by a vote or written assent of the stockholders representing at least two-thirds of
the subscribed capital stock of the corporation If the amendment changes, diminishes or restricts
the rights of the existing shareholders then the disenting minority has only one right, viz.: "to
object thereto in writing and demand payment for his share." Under section 22 of the same law,
the owners of the majority of the subscribed capital stock may amend or repeal any by-law or
adopt new by-laws. It cannot be said, therefore, that petitioner has a vested right to be elected
director, in the face of the fact that the law at the time such right as stockholder was acquired
contained the prescription that the corporate charter and the by-law shall be subject to
amendment, alteration and modification. 17
It being settled that the corporation has the power to provide for the qualifications of its directors,
the next question that must be considered is whether the disqualification of a competitor from
being elected to the Board of Directors is a reasonable exercise of corporate authority.
A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS
SHAREHOLDERS
Although in the strict and technical sense, directors of a private corporation are not regarded as
trustees, there cannot be any doubt that their character is that of a fiduciary insofar as the
corporation and the stockholders as a body are concerned. As agents entrusted with the
management of the corporation for the collective benefit of the stockholders, "they occupy a
fiduciary relation, and in this sense the relation is one of trust." 18 "The ordinary trust relationship
of directors of a corporation and stockholders", according to Ashaman v. Miller, 19 "is not a matter
of statutory or technical law. It springs from the fact that directors have the control and guidance
of corporate affairs and property and hence of the property interests of the stockholders. Equity
recognizes that stockholders are the proprietors of the corporate interests and are ultimately the
only beneficiaries thereof * * *.
Justice Douglas, in Pepper v. Litton, 20 emphatically restated the standard of fiduciary obligation
of the directors of corporations, thus:
A director is a fiduciary. ... Their powers are powers in trust. ... He who is in such
fiduciary position cannot serve himself first and his cestuis second. ... He cannot
manipulate the affairs of his corporation to their detriment and in disregard of the
standards of common decency. He cannot by the intervention of a corporate
entity violate the ancient precept against serving two masters ... He cannot utilize
his inside information and strategic position for his own preferment. He cannot
violate rules of fair play by doing indirectly through the corporation what he could
 not do so directly. He cannot violate rules of fair play by doing indirectly though
the corporation what he could not do so directly. He cannot use his power for his
personal advantage and to the detriment of the stockholders and creditors no
matter how absolute in terms that power may be and no matter how meticulous
he is to satisfy technical requirements. For that power is at all times subject to the
equitable limitation that it may not be exercised for the aggrandizement,
preference or advantage of the fiduciary to the exclusion or detriment of the
cestuis.
And in Cross v. West Virginia Cent, & P. R. R. Co., 21 it was said:
... A person cannot serve two hostile and adverse master, without detriment to
one of them. A judge cannot be impartial if personally interested in the cause. No
more can a director. Human nature is too weak -for this. Take whatever statute
provision you please giving power to stockholders to choose directors, and in
none will you find any express prohibition against a discretion to select directors
having the company's interest at heart, and it would simply be going far to deny
by mere implication the existence of such a salutary power
... If the by-law is to be held reasonable in disqualifying a stockholder in a competing company
from being a director, the same reasoning would apply to disqualify the wife and immediate
member of the family of such stockholder, on account of the supposed interest of the wife in her
husband's affairs, and his suppose influence over her. It is perhaps true that such stockholders
ought not to be condemned as selfish and dangerous to the best interest of the corporation until
tried and tested. So it is also true that we cannot condemn as selfish and dangerous and
unreasonable the action of the board in passing the by-law. The strife over the matter of control
in this corporation as in many others is perhaps carried on not altogether in the spirit of brotherly
love and affection. The only test that we can apply is as to whether or not the action of the Board
is authorized and sanctioned by law. ... . 22
These principles have been applied by this Court in previous cases.23
AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A STOCKHOLDER
INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO DIRECTOR IN A CORPORATION WHOSE
BUSINESS IS IN COMPETITION WITH THAT OF THE OTHER CORPORATION, HAS BEEN
SUSTAINED AS VALID
It is a settled state law in the United States, according to Fletcher, that corporations have the
power to make by-laws declaring a person employed in the service of a rival company to be
ineligible for the corporation's Board of Directors. ... (A)n amendment which renders ineligible, or
if elected, subjects to removal, a director if he be also a director in a corporation whose business
is in competition with or is antagonistic to the other corporation is valid." 24This is based upon the
principle that where the director is so employed in the service of a rival company, he cannot
serve both, but must betray one or the other. Such an amendment "advances the benefit of the
corporation and is good." An exception exists in New Jersey, where the Supreme Court held that
the Corporation Law in New Jersey prescribed the only qualification, and therefore the
corporation was not empowered to add additional qualifications. 25 This is the exact opposite of
the situation in the Philippines because as stated heretofore, section 21 of the Corporation Law
expressly provides that a corporation may make by-laws for the qualifications of directors. Thus,
it has been held that an officer of a corporation cannot engage in a business in direct competition
with that of the corporation where he is a director by utilizing information he has received as such
officer, under "the established law that a director or officer of a corporation may not enter into a
competing enterprise which cripples or injures the business of the corporation of which he is an
officer or director. 26
It is also well established that corporate officers "are not permitted to use their position of trust
and confidence to further their private interests." 27 In a case where directors of a corporation
cancelled a contract of the corporation for exclusive sale of a foreign firm's products, and after
establishing a rival business, the directors entered into a new contract themselves with the
foreign firm for exclusive sale of its products, the court held that equity would regard the new
contract as an offshoot of the old contract and, therefore, for the benefit of the corporation, as a
"faultless fiduciary may not reap the fruits of his misconduct to the exclusion of his principal. 28
The doctrine of "corporate opportunity" 29 is precisely a recognition by the courts that the fiduciary
standards could not be upheld where the fiduciary was acting for two entities with competing
interests. This doctrine rests fundamentally on the unfairness, in particular circumstances, of an
officer or director taking advantage of an opportunity for his own personal profit when the interest
of the corporation justly calls for protection. 30
It is not denied that a member of the Board of Directors of the San Miguel Corporation has
access to sensitive and highly confidential information, such as: (a) marketing strategies and
pricing structure; (b) budget for expansion and diversification; (c) research and development; and
(d) sources of funding, availability of personnel, proposals of mergers or tie-ups with other firms.
It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel
Corporation, who is also the officer or owner of a competing corporation, from taking advantage
of the information which he acquires as director to promote his individual or corporate interests to
the prejudice of San Miguel Corporation and its stockholders, that the questioned amendment of
the by-laws was made. Certainly, where two corporations are competitive in a substantial sense,
it would seem improbable, if not impossible, for the director, if he were to discharge effectively
his duty, to satisfy his loyalty to both corporations and place the performance of his corporation
duties above his personal concerns.
Thus, in McKee & Co. v. First National Bank of San Diego, supra the court sustained as valid
and reasonable an amendment to the by-laws of a bank, requiring that its directors should not be
directors, officers, employees, agents, nominees or attorneys of any other banking corporation,
affiliate or subsidiary thereof. Chief Judge Parker, in McKee, explained the reasons of the court,
thus:
... A bank director has access to a great deal of information concerning the
business and plans of a bank which would likely be injurious to the bank if known
to another bank, and it was reasonable and prudent to enlarge this minimum
disqualification to include any director, officer, employee, agent, nominee, or
attorney of any other bank in California. The Ashkins case, supra, specifically
recognizes protection against rivals and others who might acquire information
which might be used against the interests of the corporation as a legitimate
object of by-law protection. With respect to attorneys or persons associated with
a firm which is attorney for another bank, in addition to the direct conflict or
potential conflict of interest, there is also the danger of inadvertent leakage of
confidential information through casual office discussions or accessibility of files.
Defendant's directors determined that its welfare was best protected if this
opportunity for conflicting loyalties and potential misuse and leakage of
confidential information was foreclosed.
In McKee the Court further listed qualificational by-laws upheld by the courts, as follows:
(1) A director shall not be directly or indirectly interested as a stockholder in any
other firm, company, or association which competes with the subject corporation.
(2) A director shall not be the immediate member of the family of any stockholder
in any other firm, company, or association which competes with the subject
corporation,
(3) A director shall not be an officer, agent, employee, attorney, or trustee in any
other firm, company, or association which compete with the subject corporation.
(4) A director shall be of good moral character as an essential qualification to
holding office.
(5) No person who is an attorney against the corporation in a law suit is eligible
for service on the board. (At p. 7.)
These are not based on theorical abstractions but on human experience — that a person cannot
serve two hostile masters without detriment to one of them.
The offer and assurance of petitioner that to avoid any possibility of his taking unfair advantage
of his position as director of San Miguel Corporation, he would absent himself from meetings at
which confidential matters would be discussed, would not detract from the validity and
reasonableness of the by-laws here involved. Apart from the impractical results that would ensue
from such arrangement, it would be inconsistent with petitioner's primary motive in running for
board membership — which is to protect his investments in San Miguel Corporation. More
important, such a proposed norm of conduct would be against all accepted principles underlying
a director's duty of fidelity to the corporation, for the policy of the law is to encourage and enforce
responsible corporate management. As explained by Oleck: 31 "The law win not tolerate the
passive attitude of directors ... without active and conscientious participation in the managerial
functions of the company. As directors, it is their duty to control and supervise the day to day
business activities of the company or to promulgate definite policies and rules of guidance with a
vigilant eye toward seeing to it that these policies are carried out. It is only then that directors
may be said to have fulfilled their duty of fealty to the corporation."
Sound principles of corporate management counsel against sharing sensitive information with a
director whose fiduciary duty of loyalty may well require that he disclose this information to a
competitive arrival. These dangers are enhanced considerably where the common director such
as the petitioner is a controlling stockholder of two of the competing corporations. It would seem
manifest that in such situations, the director has an economic incentive to appropriate for the
benefit of his own corporation the corporate plans and policies of the corporation where he sits
as director.
Indeed, access by a competitor to confidential information regarding marketing strategies and
pricing policies of San Miguel Corporation would subject the latter to a competitive disadvantage
and unjustly enrich the competitor, for advance knowledge by the competitor of the strategies for
the development of existing or new markets of existing or new products could enable said
competitor to utilize such knowledge to his advantage. 32
There is another important consideration in determining whether or not the amended by-laws are
reasonable. The Constitution and the law prohibit combinations in restraint of trade or unfair
competition. Thus, section 2 of Article XIV of the Constitution provides: "The State shall regulate
or prohibit private monopolies when the public interest so requires. No combinations in restraint
of trade or unfair competition shall be snowed."
Article 186 of the Revised Penal Code also provides:
Art. 186. Monopolies and combinations in restraint of trade. —The penalty of
prision correccional in its minimum period or a fine ranging from two hundred to
six thousand pesos, or both, shall be imposed upon:
1. Any person who shall enter into any contract or agreement or shall take part in
any conspiracy or combination in the form of a trust or otherwise, in restraint of
trade or commerce or to prevent by artificial means free competition in the
market.
 2. Any person who shag monopolize any merchandise or object of trade or
commerce, or shall combine with any other person or persons to monopolize said
merchandise or object in order to alter the price thereof by spreading false
rumors or making use of any other artifice to restrain free competition in the
market.
3. Any person who, being a manufacturer, producer, or processor of any
merchandise or object of commerce or an importer of any merchandise or object
of commerce from any foreign country, either as principal or agent, wholesale or
retailer, shall combine, conspire or agree in any manner with any person likewise
engaged in the manufacture, production, processing, assembling or importation
of such merchandise or object of commerce or with any other persons not so
similarly engaged for the purpose of making transactions prejudicial to lawful
commerce, or of increasing the market price in any part of the Philippines, or any
such merchandise or object of commerce manufactured, produced, processed,
assembled in or imported into the Philippines, or of any article in the manufacture
of which such manufactured, produced, processed, or imported merchandise or
object of commerce is used.
There are other legislation in this jurisdiction, which prohibit monopolies and combinations in
restraint of trade. 33
Basically, these anti-trust laws or laws against monopolies or combinations in restraint of trade
are aimed at raising levels of competition by improving the consumers' effectiveness as the final
arbiter in free markets. These laws are designed to preserve free and unfettered competition as
the rule of trade. "It rests on the premise that the unrestrained interaction of competitive forces
will yield the best allocation of our economic resources, the lowest prices and the highest quality
... ." 34 they operate to forestall concentration of economic power. 35 The law against monopolies
and combinations in restraint of trade is aimed at contracts and combinations that, by reason of
the inherent nature of the contemplated acts, prejudice the public interest by unduly restraining
competition or unduly obstructing the course of trade. 36
The terms "monopoly", "combination in restraint of trade" and "unfair competition" appear to
have a well defined meaning in other jurisdictions. A "monopoly" embraces any combination the
tendency of which is to prevent competition in the broad and general sense, or to control prices
to the detriment of the public. 37 In short, it is the concentration of business in the hands of a few.
The material consideration in determining its existence is not that prices are raised and
competition actually excluded, but that power exists to raise prices or exclude competition when
desired. 38 Further, it must be considered that the Idea of monopoly is now understood to include
a condition produced by the mere act of individuals. Its dominant thought is the notion of
exclusiveness or unity, or the suppression of competition by the qualification of interest or
management, or it may be thru agreement and concert of action. It is, in brief, unified tactics with
regard to prices. 39
From the foregoing definitions, it is apparent that the contentions of petitioner are not in accord
with reality. The election of petitioner to the Board of respondent Corporation can bring about an
illegal situation. This is because an express agreement is not necessary for the existence of a
combination or conspiracy in restraint of trade. 40 It is enough that a concert of action is
contemplated and that the defendants conformed to the arrangements, 41 and what is to be
considered is what the parties actually did and not the words they used. For instance, the
Clayton Act prohibits a person from serving at the same time as a director in any two or more
corporations, if such corporations are, by virtue of their business and location of
operation, competitors so that the elimination of competition between them would constitute
violation of any provision of the anti-trust laws. 42 There is here a statutory recognition of the anti-
competitive dangers which may arise when an individual simultaneously acts as a director of two
or more competing corporations. A common director of two or more competing corporations
would have access to confidential sales, pricing and marketing information and would be in a
position to coordinate policies or to aid one corporation at the expense of another, thereby
stifling competition. This situation has been aptly explained by Travers, thus:
The argument for prohibiting competing corporations from sharing even one
director is that the interlock permits the coordination of policies between
nominally independent firms to an extent that competition between them may be
completely eliminated. Indeed, if a director, for example, is to be faithful to both
corporations, some accommodation must result. Suppose X is a director of both
Corporation A and Corporation B. X could hardly vote for a policy by A that would
injure B without violating his duty of loyalty to B at the same time he could hardly
abstain from voting without depriving A of his best judgment. If the firms really do
compete — in the sense of vying for economic advantage at the expense of the
other — there can hardly be any reason for an interlock between competitors
other than the suppression of competition. 43 (Emphasis supplied.)
According to the Report of the House Judiciary Committee of the U. S. Congress on section 9 of
the Clayton Act, it was established that: "By means of the interlocking directorates one man or
group of men have been able to dominate and control a great number of corporations ... to the
detriment of the small ones dependent upon them and to the injury of the public. 44
Shared information on cost accounting may lead to price fixing. Certainly, shared information on
production, orders, shipments, capacity and inventories may lead to control of production for the
purpose of controlling prices.
Obviously, if a competitor has access to the pricing policy and cost conditions of the products of
San Miguel Corporation, the essence of competition in a free market for the purpose of serving
the lowest priced goods to the consuming public would be frustrated, The competitor could so
manipulate the prices of his products or vary its marketing strategies by region or by brand in
order to get the most out of the consumers. Where the two competing firms control a substantial
segment of the market this could lead to collusion and combination in restraint of trade. Reason
and experience point to the inevitable conclusion that the inherent tendency of interlocking
directorates between companies that are related to each other as competitors is to blunt the
edge of rivalry between the corporations, to seek out ways of compromising opposing interests,
and thus eliminate competition. As respondent SMC aptly observes, knowledge by CFC-Robina
of SMC's costs in various industries and regions in the country win enable the former to practice
price discrimination. CFC-Robina can segment the entire consuming population by geographical
areas or income groups and change varying prices in order to maximize profits from every
market segment. CFC-Robina could determine the most profitable volume at which it could
produce for every product line in which it competes with SMC. Access to SMC pricing policy by
CFC-Robina would in effect destroy free competition and deprive the consuming public of
opportunity to buy goods of the highest possible quality at the lowest prices.
Finally, considering that both Robina and SMC are, to a certain extent, engaged in agriculture,
then the election of petitioner to the Board of SMC may constitute a violation of the prohibition
contained in section 13(5) of the Corporation Law. Said section provides in part that "any
stockholder of more than one corporation organized for the purpose of engaging in agriculture
may hold his stock in such corporations solely for investment and not for the purpose of bringing
about or attempting to bring about a combination to exercise control of incorporations ... ."
Neither are We persuaded by the claim that the by-law was Intended to prevent the candidacy of
petitioner for election to the Board. If the by-law were to be applied in the case of one
stockholder but waived in the case of another, then it could be reasonably claimed that the by-
law was being applied in a discriminatory manner. However, the by law, by its terms, applies to
all stockholders. The equal protection clause of the Constitution requires only that the by-law
operate equally upon all persons of a class. Besides, before petitioner can be declared ineligible
to run for director, there must be hearing and evidence must be submitted to bring his case
within the ambit of the disqualification. Sound principles of public policy and management,
therefore, support the view that a by-law which disqualifies a competition from election to the
Board of Directors of another corporation is valid and reasonable.
In the absence of any legal prohibition or overriding public policy, wide latitude may be accorded
to the corporation in adopting measures to protect legitimate corporation interests. Thus, "where
the reasonableness of a by-law is a mere matter of judgment, and upon which reasonable minds
must necessarily differ, a court would not be warranted in substituting its judgment instead of the
judgment of those who are authorized to make by-laws and who have expressed their
authority. 45
Although it is asserted that the amended by-laws confer on the present Board powers to
perpetua themselves in power such fears appear to be misplaced. This power, but is very nature,
is subject to certain well established limitations. One of these is inherent in the very convert and
definition of the terms "competition" and "competitor". "Competition" implies a struggle for
advantage between two or more forces, each possessing, in substantially similar if not Identical
degree, certain characteristics essential to the business sought. It means an independent
endeavor of two or more persons to obtain the business patronage of a third by offering more
advantageous terms as an inducement to secure trade. 46 The test must be whether the business
does in fact compete, not whether it is capable of an indirect and highly unsubstantial duplication
of an isolated or non-characteristics activity. 47 It is, therefore, obvious that not every person or
entity engaged in business of the same kind is a competitor. Such factors as quantum and place
of business, Identity of products and area of competition should be taken into consideration. It is,
therefore, necessary to show that petitioner's business covers a substantial portion of the same
markets for similar products to the extent of not less than 10% of respondent corporation's
market for competing products. While We here sustain the validity of the amended by-laws, it
does not follow as a necessary consequence that petitioner is ipso facto disqualified. Consonant
with the requirement of due process, there must be due hearing at which the petitioner must be
given the fullest opportunity to show that he is not covered by the disqualification. As trustees of
the corporation and of the stockholders, it is the responsibility of directors to act with fairness to
the stockholders.48Pursuant to this obligation and to remove any suspicion that this power may
be utilized by the incumbent members of the Board to perpetuate themselves in power, any
decision of the Board to disqualify a candidate for the Board of Directors should be reviewed by
the Securities behind Exchange Commission en banc and its decision shall be final unless
reversed by this Court on certiorari. 49 Indeed, it is a settled principle that where the action of a
Board of Directors is an abuse of discretion, or forbidden by statute, or is against public policy, or
is ultra vires, or is a fraud upon minority stockholders or creditors, or will result in waste,
dissipation or misapplication of the corporation assets, a court of equity has the power to grant
appropriate relief. 50
III
Whether or not respondent SEC gravely abused its discretion in denying petitioner's request for
an examination of the records of San Miguel International Inc., a fully owned subsidiary of San
Miguel Corporation —
Respondent San Miguel Corporation stated in its memorandum that petitioner's claim that he
was denied inspection rights as stockholder of SMC "was made in the teeth of undisputed facts
that, over a specific period, petitioner had been furnished numerous documents and
information," to wit: (1) a complete list of stockholders and their stockholdings; (2) a complete list
of proxies given by the stockholders for use at the annual stockholders' meeting of May 18,
1975; (3) a copy of the minutes of the stockholders' meeting of March 18,1976; (4) a breakdown
of SMC's P186.6 million investment in associated companies and other companies as of
December 31, 1975; (5) a listing of the salaries, allowances, bonuses and other compensation or
remunerations received by the directors and corporate officers of SMC; (6) a copy of the US
$100 million Euro-Dollar Loan Agreement of SMC; and (7) copies of the minutes of all meetings
of the Board of Directors from January 1975 to May 1976, with deletions of sensitive data, which
deletions were not objected to by petitioner.
Further, it was averred that upon request, petitioner was informed in writing on September 18,
1976; (1) that SMC's foreign investments are handled by San Miguel International, Inc.,
incorporated in Bermuda and wholly owned by SMC; this was SMC's first venture abroad, having
started in 1948 with an initial outlay of ?500,000.00, augmented by a loan of Hongkong $6
million from a foreign bank under the personal guaranty of SMC's former President, the late Col.
Andres Soriano; (2) that as of December 31, 1975, the estimated value of SMI would amount to
almost P400 million (3) that the total cash dividends received by SMC from SMI since 1953 has
amount to US $ 9.4 million; and (4) that from 1972-1975, SMI did not declare cash or stock
dividends, all earnings having been used in line with a program for the setting up of breweries by
SMI
These averments are supported by the affidavit of the Corporate Secretary, enclosing
photocopies of the afore-mentioned documents. 51
Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of all
business transactions of the corporation and minutes of any meeting shall be open to the
inspection of any director, member or stockholder of the corporation at reasonable hours."
The stockholder's right of inspection of the corporation's books and records is based upon their
ownership of the assets and property of the corporation. It is, therefore, an incident of ownership
of the corporate property, whether this ownership or interest be termed an equitable ownership,
a beneficial ownership, or a ownership. 52 This right is predicated upon the necessity of self-
protection. It is generally held by majority of the courts that where the right is granted by statute
to the stockholder, it is given to him as such and must be exercised by him with respect to his
interest as a stockholder and for some purpose germane thereto or in the interest of the
corporation. 53 In other words, the inspection has to be germane to the petitioner's interest as a
stockholder, and has to be proper and lawful in character and not inimical to the interest of the
corporation. 54 In Grey v. Insular Lumber, 55 this Court held that "the right to examine the books of
the corporation must be exercised in good faith, for specific and honest purpose, and not to
gratify curiosity, or for specific and honest purpose, and not to gratify curiosity, or for speculative
or vexatious purposes. The weight of judicial opinion appears to be, that on application for
mandamus to enforce the right, it is proper for the court to inquire into and consider the
stockholder's good faith and his purpose and motives in seeking inspection. 56 Thus, it was held
that "the right given by statute is not absolute and may be refused when the information is not
sought in good faith or is used to the detriment of the corporation." 57 But the "impropriety of
purpose such as will defeat enforcement must be set up the corporation defensively if the Court
is to take cognizance of it as a qualification. In other words, the specific provisions take from the
stockholder the burden of showing propriety of purpose and place upon the corporation the
burden of showing impropriety of purpose or motive. 58 It appears to be the general rule that
stockholders are entitled to full information as to the management of the corporation and the
manner of expenditure of its funds, and to inspection to obtain such information, especially
where it appears that the company is being mismanaged or that it is being managed for the
personal benefit of officers or directors or certain of the stockholders to the exclusion of
others." 59
While the right of a stockholder to examine the books and records of a corporation for a lawful
purpose is a matter of law, the right of such stockholder to examine the books and records of a
wholly-owned subsidiary of the corporation in which he is a stockholder is a different thing.
Some state courts recognize the right under certain conditions, while others do not. Thus, it has
been held that where a corporation owns approximately no property except the shares of stock
of subsidiary corporations which are merely agents or instrumentalities of the holding company,
the legal fiction of distinct corporate entities may be disregarded and the books, papers and
documents of all the corporations may be required to be produced for examination, 60 and that a
writ of mandamus, may be granted, as the records of the subsidiary were, to all incontents and
purposes, the records of the parent even though subsidiary was not named as a
party. 61 mandamus was likewise held proper to inspect both the subsidiary's and the parent
corporation's books upon proof of sufficient control or dominion by the parent showing the
relation of principal or agent or something similar thereto. 62
On the other hand, mandamus at the suit of a stockholder was refused where the subsidiary
corporation is a separate and distinct corporation domiciled and with its books and records in
another jurisdiction, and is not legally subject to the control of the parent company, although it
owned a vast majority of the stock of the subsidiary. 63Likewise, inspection of the books of an
allied corporation by stockholder of the parent company which owns all the stock of the
subsidiary has been refused on the ground that the stockholder was not within the class of
"persons having an interest." 64
In the Nash case, 65 The Supreme Court of New York held that the contractual right of former
stockholders to inspect books and records of the corporation included the right to inspect
corporation's subsidiaries' books and records which were in corporation's possession and control
in its office in New York."
In the Bailey case, 66 stockholders of a corporation were held entitled to inspect the records of a
controlled subsidiary corporation which used the same offices and had Identical officers and
directors.
In his "Urgent Motion for Production and Inspection of Documents" before respondent SEC,
petitioner contended that respondent corporation "had been attempting to suppress information
for the stockholders" and that petitioner, "as stockholder of respondent corporation, is entitled to
copies of some documents which for some reason or another, respondent corporation is very
reluctant in revealing to the petitioner notwithstanding the fact that no harm would be caused
thereby to the corporation." 67 There is no question that stockholders are entitled to inspect the
books and records of a corporation in order to investigate the conduct of the management,
determine the financial condition of the corporation, and generally take an account of the
stewardship of the officers and directors. 68
In the case at bar, considering that the foreign subsidiary is wholly owned by respondent San
Miguel Corporation and, therefore, under its control, it would be more in accord with equity, good
faith and fair dealing to construe the statutory right of petitioner as stockholder to inspect the
books and records of the corporation as extending to books and records of such wholly
subsidiary which are in respondent corporation's possession and control.
IV
Whether or not respondent SEC gravely abused its discretion in allowing the stockholders of
respondent corporation to ratify the investment of corporate funds in a foreign corporation
Petitioner reiterates his contention in SEC Case No. 1423 that respondent corporation invested
corporate funds in SMI without prior authority of the stockholders, thus violating section 17-1/2 of
the Corporation Law, and alleges that respondent SEC should have investigated the charge,
being a statutory offense, instead of allowing ratification of the investment by the stockholders.
Respondent SEC's position is that submission of the investment to the stockholders for
ratification is a sound corporate practice and should not be thwarted but encouraged.
Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other
corporation or business or for any purpose other than the main purpose for which it was
organized" provided that its Board of Directors has been so authorized by the affirmative vote of
stockholders holding shares entitling them to exercise at least two-thirds of the voting power. If
the investment is made in pursuance of the corporate purpose, it does not need the approval of
the stockholders. It is only when the purchase of shares is done solely for investment and not to
accomplish the purpose of its incorporation that the vote of approval of the stockholders holding
shares entitling them to exercise at least two-thirds of the voting power is necessary. 69
As stated by respondent corporation, the purchase of beer manufacturing facilities by SMC was
an investment in the same business stated as its main purpose in its Articles of Incorporation,
which is to manufacture and market beer. It appears that the original investment was made in
1947-1948, when SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong
(Hongkong Brewery & Distillery, Ltd.) for the manufacture and marketing of San Miguel beer
thereat. Restructuring of the investment was made in 1970-1971 thru the organization of SMI in
Bermuda as a tax free reorganization.
Under these circumstances, the ruling in De la Rama v. Manao Sugar Central Co., Inc.,
supra, appears relevant. In said case, one of the issues was the legality of an investment made
by Manao Sugar Central Co., Inc., without prior resolution approved by the affirmative vote of 2/3
of the stockholders' voting power, in the Philippine Fiber Processing Co., Inc., a company
engaged in the manufacture of sugar bags. The lower court said that "there is more logic in the
stand that if the investment is made in a corporation whose business is important to the investing
corporation and would aid it in its purpose, to require authority of the stockholders would be to
unduly curtail the power of the Board of Directors." This Court affirmed the ruling of the court a
quo on the matter and, quoting Prof. Sulpicio S. Guevara, said:
"j. Power to acquire or dispose of shares or securities. — A private corporation, in
order to accomplish is purpose as stated in its articles of incorporation, and
subject to the limitations imposed by the Corporation Law, has the power to
acquire, hold, mortgage, pledge or dispose of shares, bonds, securities, and
other evidence of indebtedness of any domestic or foreign corporation. Such an
act, if done in pursuance of the corporate purpose, does not need the approval of
stockholders; but when the purchase of shares of another corporation is done
solely for investment and not to accomplish the purpose of its incorporation, the
vote of approval of the stockholders is necessary. In any case, the purchase of
such shares or securities must be subject to the limitations established by the
Corporations law; namely, (a) that no agricultural or mining corporation shall be
restricted to own not more than 15% of the voting stock of nay agricultural or
mining corporation; and (c) that such holdings shall be solely for investment and
not for the purpose of bringing about a monopoly in any line of commerce of
combination in restraint of trade." The Philippine Corporation Law by Sulpicio S.
Guevara, 1967 Ed., p. 89) (Emphasis supplied.)
40. Power to invest corporate funds. — A private corporation has the power to
invest its corporate funds "in any other corporation or business, or for any
purpose other than the main purpose for which it was organized, provide that 'its
board of directors has been so authorized in a resolution by the affirmative vote
of stockholders holding shares in the corporation entitling them to exercise at
least two-thirds of the voting power on such a propose at a stockholders' meeting
called for that purpose,' and provided further, that no agricultural or mining
corporation shall in anywise be interested in any other agricultural or mining
corporation. When the investment is necessary to accomplish its purpose or
purposes as stated in its articles of incorporation the approval of the stockholders
is not necessary."" (Id., p. 108) (Emphasis ours.) (pp. 258-259).
Assuming arguendo that the Board of Directors of SMC had no authority to make the assailed
investment, there is no question that a corporation, like an individual, may ratify and thereby
render binding upon it the originally unauthorized acts of its officers or other agents. 70 This is true
because the questioned investment is neither contrary to law, morals, public order or public
policy. It is a corporate transaction or contract which is within the corporate powers, but which is
defective from a supported failure to observe in its execution the. requirement of the law that the
investment must be authorized by the affirmative vote of the stockholders holding two-thirds of
the voting power. This requirement is for the benefit of the stockholders. The stockholders for
whose benefit the requirement was enacted may, therefore, ratify the investment and its
ratification by said stockholders obliterates any defect which it may have had at the outset.
"Mere ultra vires acts", said this Court in Pirovano, 71 "or those which are not illegal and void ab
initio, but are not merely within the scope of the articles of incorporation, are merely voidable and
may become binding and enforceable when ratified by the stockholders.
Besides, the investment was for the purchase of beer manufacturing and marketing facilities
which is apparently relevant to the corporate purpose. The mere fact that respondent corporation
submitted the assailed investment to the stockholders for ratification at the annual meeting of
May 10, 1977 cannot be construed as an admission that respondent corporation had committed
an ultra vires act, considering the common practice of corporations of periodically submitting for
the gratification of their stockholders the acts of their directors, officers and managers.
WHEREFORE, judgment is hereby rendered as follows:
The Court voted unanimously to grant the petition insofar as it prays that petitioner be allowed to
examine the books and records of San Miguel International, Inc., as specified by him.
On the matter of the validity of the amended by-laws of respondent San Miguel Corporation, six
(6) Justices, namely, Justices Barredo, Makasiar, Antonio, Santos, Abad Santos and De Castro,
voted to sustain the validity per se of the amended by-laws in question and to dismiss the
petition without prejudice to the question of the actual disqualification of petitioner John
Gokongwei, Jr. to run and if elected to sit as director of respondent San Miguel Corporation
being decided, after a new and proper hearing by the Board of Directors of said corporation,
whose decision shall be appealable to the respondent Securities and Exchange Commission
deliberating and acting en banc and ultimately to this Court. Unless disqualified in the manner
herein provided, the prohibition in the afore-mentioned amended by-laws shall not apply to
petitioner.
The afore-mentioned six (6) Justices, together with Justice Fernando, voted to declare the issue
on the validity of the foreign investment of respondent corporation as moot.
Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-laws, pending
hearing by this Court on the applicability of section 13(5) of the Corporation Law to petitioner.
Justice Fernando reserved his vote on the validity of subject amendment to the by-laws but
otherwise concurs in the result.
Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez and Guerrero filed a
separate opinion, wherein they voted against the validity of the questioned amended bylaws and
that this question should properly be resolved first by the SEC as the agency of primary
jurisdiction. They concur in the result that petitioner may be allowed to run for and sit as director
of respondent SMC in the scheduled May 6, 1979 election and subsequent elections until
disqualified after proper hearing by the respondent's Board of Directors and petitioner's
disqualification shall have been sustained by respondent SEC en banc and ultimately by final
judgment of this Court.
In resume, subject to the qualifications aforestated judgment is hereby rendered GRANTING the
petition by allowing petitioner to examine the books and records of San Miguel International, Inc.
as specified in the petition. The petition, insofar as it assails the validity of the amended by- laws
and the ratification of the foreign investment of respondent corporation, for lack of necessary
votes, is hereby DISMISSED. No costs.
Makasiar, Santos Abad Santos and De Castro, JJ., concur.
Aquino, and Melencio Herrera JJ., took no part.
G.R. No. L-23241 March 14, 1925
HENRY FLEISCHER, plaintiff-appellee,
vs.
BOTICA NOLASCO CO., INC., defendant-appellant.
Antonio Gonzalez for appellant.
Emilio M. Javier for appellee.
JOHNSON, J.:
This action was commenced in the Court of First Instance of the Province of Oriental Negros on
the 14th day of August, 1923, against the board of directors of the Botica Nolasco, Inc., a
corporation duly organized and existing under the laws of the Philippine Islands. The plaintiff
prayed that said board of directors be ordered to register in the books of the corporation five
shares of its stock in the name of Henry Fleischer, the plaintiff, and to pay him the sum of P500
for damages sustained by him resulting from the refusal of said body to register the shares of
stock in question. The defendant filed a demurrer on the ground that the facts alleged in the
complaint did not constitute sufficient cause of action, and that the action was not brought
against the proper party, which was the Botica Nolasco, Inc. The demurrer was sustained, and
the plaintiff was granted five days to amend his complaint.
On November 15, 1923, the plaintiff filed an amended complaint against the Botica Nolasco,
Inc., alleging that he became the owner of five shares of stock of said corporation, by purchase
from their original owner, one Manuel Gonzalez; that the said shares were fully paid; and that the
defendant refused to register said shares in his name in the books of the corporation in spite of
repeated demands to that effect made by him upon said corporation, which refusal caused him
damages amounting to P500. Plaintiff prayed for a judgment ordering the Botica Nolasco, Inc. to
register in his name in the books of the corporation the five shares of stock recorded in said
books in the name of Manuel Gonzalez, and to indemnify him in the sum of P500 as damages,
and to pay the costs. The defendant again filed a demurrer on the ground that the amended
complaint did not state facts sufficient to constitute a cause of action, and that said amended
complaint was ambiguous, unintelligible, uncertain, which demurrer was overruled by the court.
The defendant answered the amended complaint denying generally and specifically each and
every one of the material allegations thereof, and, as a special defense, alleged that the
defendant, pursuant to article 12 of its by-laws, had preferential right to buy from the plaintiff said
shares at the par value of P100 a share, plus P90 as dividends corresponding to the year 1922,
and that said offer was refused by the plaintiff. The defendant prayed for a judgment absolving it
from all liability under the complaint and directing the plaintiff to deliver to the defendant the five
shares of stock in question, and to pay damages in the sum of P500, and the costs.
Upon the issue presented by the pleadings above stated, the cause was brought on for trial, at
the conclusion of which, and on August 21, 1924, the Honorable N. Capistrano, judge, held that,
in his opinion, article 12 of the by-laws of the corporation which gives it preferential right to buy
its shares from retiring stockholders, is in conflict with Act No. 1459 (Corporation Law), especially
with section 35 thereof; and rendered a judgment ordering the defendant corporation, through its
board of directors, to register in the books of said corporation the said five shares of stock in the
name of the plaintiff, Henry Fleischer, as the shareholder or owner thereof, instead of the original
owner, Manuel Gonzalez, with costs against the defendant.
The defendant appealed from said judgment, and now makes several assignment of error, all of
which, in substance, raise the question whether or not article 12 of the by-laws of the corporation
is in conflict with the provisions of the Corporation Law (Act No. 1459).
There is no controversy as to the facts of the present case. They are simple and may be stated
as follows:
That Manuel Gonzalez was the original owner of the five shares of stock in question, Nos. 16,
17, 18, 19 and 20 of the Botica Nolasco, Inc.; that on March 11, 1923, he assigned and delivered
said five shares to the plaintiff, Henry Fleischer, by accomplishing the form of endorsement
provided on the back thereof, together with other credits, in consideration of a large sum of
money owed by Gonzalez to Fleischer (Exhibits A, B, B-1, B-2, B-3, B-4); that on March 13,
1923, Dr. Eduardo Miciano, who was the secretary-treasurer of said corporation, offered to buy
from Henry Fleischer, on behalf of the corporation, said shares of stock, at their par value of
P100 a share, for P500; that by virtue of article 12 of the by-laws of Botica Nolasco, Inc., said
corporation had the preferential right to buy from Manuel Gonzalez said shares (Exhibit 2); that
the plaintiff refused to sell them to the defendant; that the plaintiff requested Doctor Miciano to
register said shares in his name; that Doctor Miciano refused to do so, saying that it would be in
contravention of the by-laws of the corporation.
It also appears from the record that on the 13th day of March, 1923, two days after the
assignment of the shares to the plaintiff, Manuel Gonzales made a written statement to the
Botica Nolasco, Inc., requesting that the five shares of stock sold by him to Henry Fleischer be
noted transferred to Fleischer's name. He also acknowledged in said written statement the
preferential right of the corporation to buy said five shares (Exhibit 3). On June 14, 1923,
Gonzalez wrote a letter to the Botica Nolasco, withdrawing and cancelling his written statement
of March 13, 1923 (Exhibit C), to which letter the Botica Nolasco on June 15, 1923, replied,
declaring that his written statement was in conformity with the by-laws of the corporation; that his
letter of June 14th was of no effect, and that the shares in question had been registered in the
name of the Botica Nolasco, Inc., (Exhibit X).
As indicated above, the important question raised in this appeal is whether or not article 12 of
the by-laws of the Botica Nolasco, Inc., is in conflict with the provisions of the Corporation Law
(Act No. 1459). Appellant invoked said article as its ground for denying the request of the plaintiff
that the shares in question be registered in his (plaintiff's) name, and for claiming that it (Botica
Nolasco, Inc.) had the preferential right to buy said shares from Gonzalez. Appellant now
contends that article 12 of the said by-laws is in conformity with the provisions of Act No. 1459.
Said article is as follows:
ART. 12. Las acciones de la Corporacion pueden ser transferidas a otra persona, pero
para que estas transferencias tengan validez legal, deben constar en los registros de la
Corporacion con el debido endoso del accionista a cuyo nombre se ha expedido la
accion o acciones que se transfieran, o un documento de transferencia. Entendiendose
que, ningun accionista transferira accion alguna a otra persona sin participar antes por
escrito al Secretario-Tesorero. En igualdad de condiciones, la sociedad tendra el
derecho de adquirir para si la accion o acciones que se traten de transferir. (Exhibit 2.)
The above-quoted article constitutes a by-law or regulation adopted by the Botica Nolasco, Inc.,
governing the transfer of shares of stock of said corporation. The latter part of said article creates
in favor of the Botica Nolasco, Inc., a preferential right to buy, under the same conditions, the
share or shares of stock of a retiring shareholder. Has said corporation any power, under the
Corporation Law (Act. No. 1459), to adopt such by-law?
The particular provisions of the Corporation Law referring to transfer of shares of stock are as
follows:
SEC. 13. Every corporation has the power:
xxx xxx xxx
(7) To make by-laws, not inconsistent with any existing law, for the fixing or changing of
the number of its officers and directors within the limits prescribed by law, and for
the transferring of its stock, the administration of its corporate affairs, etc.
xxx xxx xxx
SEC. 35. The capital stock of stock corporations shall de divided into shares for which
certificates signed by the president or the vice-president, countersigned by the secretary
or clerk and sealed with the seal of the corporation, shall be issued in accordance with
 the by-laws. Shares of stock so issued are personal property and may be transferred by
delivery of the certificate indorsed by the owner or his attorney in fact or other person
legally authorized to make the transfer. No transfer, however, shall be valid, except as
between the parties, until the transfer is entered and noted upon the books of the
corporation so as to show the names of the parties to the transaction, that date of the
transfer, the number of the certificate, and the number of shares transferred.
No share of stock against which the corporation holds any unpaid claim shall be
transferable on the books of the corporation.
Section 13, paragraph 7, above-quoted, empowers a corporation to make by-laws, not
inconsistent with any existing law, for the transferring of its stock. It follows from said provision,
that a by-law adopted by a corporation relating to transfer of stock should be in harmony with the
law on the subject of transfer of stock. The law on this subject is found in section 35 of Act No.
1459 above quoted. Said section specifically provides that the shares of stock "are personal
property and may be transferred by delivery of the certificate indorsed by the owner, etc." Said
section 35 defines the nature, character and transferability of shares of stock. Under said section
they are personal property and may be transferred as therein provided. Said section
contemplates no restriction as to whom they may be transferred or sold. It does not suggest that
any discrimination may be created by the corporation in favor or against a certain purchaser. The
holder of shares, as owner of personal property, is at liberty, under said section, to dispose of
them in favor of whomsoever he pleases, without any other limitation in this respect, than the
general provisions of law. Therefore, a stock corporation in adopting a by-law governing transfer
of shares of stock should take into consideration the specific provisions of section 35 of Act No.
1459, and said by-law should be made to harmonize with said provisions. It should not be
inconsistent therewith.
The by-law now in question was adopted under the power conferred upon the corporation by
section 13, paragraph 7, above quoted; but in adopting said by-law the corporation has
transcended the limits fixed by law in the same section, and has not taken into consideration the
provisions of section 35 of Act No. 1459.
As a general rule, the by-laws of a corporation are valid if they are reasonable and calculated to
carry into effect the objects of the corporation, and are not contradictory to the general policy of
the laws of the land. (Supreme Commandery of the Knights of the Golden Rule vs. Ainsworth, 71
Ala., 436; 46 Am. Rep., 332.)
On the other hand, it is equally well settled that by-laws of a corporation must be reasonable and
for a corporate purpose, and always within the charter limits. They must always be strictly
subordinate to the constitution and the general laws of the land. They must not infringe the policy
of the state, nor be hostile to public welfare. (46 Am. Rep., 332.) They must not disturb vested
rights or impair the obligation of a contract, take away or abridge the substantial rights of
stockholder or member, affect rights of property or create obligations unknown to the law.
(People's Home Savings Bank vs. Superior Court, 104 Cal., 649; 43 Am. St. Rep., 147;
Ireland vs. Globe Milling Co., 79 Am. St. Rep., 769.)
The validity of the by-law of a corporation is purely a question of law. (South Florida Railroad
Co. vs. Rhodes, 25 Fla., 40.)
The power to enact by-laws restraining the sale and transfer of stock must be found in
the governing statute or the charter. Restrictions upon the traffic in stock must have their
source in legislative enactment, as the corporation itself cannot create such
impediments. By-law are intended merely for the protection of the corporation, and
prescribe regulation and not restriction; they are always subject to the charter of the
corporation. The corporation, in the absence of such a power, cannot ordinarily inquire
into or pass upon the legality of the transaction by which its stock passes from one
person to another, nor can it question the consideration upon which a sale is based. A
by-law cannot take away or abridge the substantial rights of stockholder. Under a statute
authorizing by- laws for the transfer of stock, a corporation can do no more than
prescribe a general mode of transfer on the corporate books and cannot justify an
unreasonable restriction upon the right of sale. (4 Thompson on Corporations, sec. 4137,
p. 674.
The right of unrestrained transfer of shares inheres in the very nature of a corporation,
and courts will carefully scrutinize any attempt to impose restrictions or limitations upon
the right of stockholders to sell and assign their stock. The right to impose any restraint in
this respect must be conferred upon the corporation either by the governing statute or by
the articles of the corporation. It cannot be done by a by-law without statutory or charter
authority. (4 Thompson on Corporations, sec. 4334, pp. 818, 819.)
The jus disponendi, being an incident of the ownership of property, the general rule
(subject to exceptions hereafter pointed out and discussed) is that every owner of
corporate shares has the same uncontrollable right to alien them which attaches to the
ownership of any other species of property. A shareholder is under no obligation to
refrain from selling his shares at the sacrifice of his personal interest, in order to secure
the welfare of the corporation, or to enable another shareholder to make gains and
profits. (10 Cyc., p. 577.)
It follows from the foregoing that a corporation has no power to prevent or to restrain
transfers of its shares, unless such power is expressly conferred in its charter or
governing statute. This conclusion follows from the further consideration that by-laws or
other regulations restraining such transfers, unless derived from authority expressly
granted by the legislature, would be regarded as impositions in restraint of trade. (10
Cyc., p. 578.)
The foregoing authorities go farther than the stand we are taking on this question. They hold that
the power of a corporation to enact by-laws restraining the sale and transfer of shares, should
not only be in harmony with the law or charter of the corporation, but such power should be
expressly granted in said law or charter.
The only restraint imposed by the Corporation Law upon transfer of shares is found in section 35
of Act No. 1459, quoted above, as follows: "No transfer, however, shall be valid, except as
between the parties, until the transfer is entered and noted upon the books of the corporation so
as to show the names of the parties to the transaction, the date of the transfer, the number of the
certificate, and the number of shares transferred." This restriction is necessary in order that the
officers of the corporation may know who are the stockholders, which is essential in conducting
elections of officers, in calling meeting of stockholders, and for other purposes. but any
restriction of the nature of that imposed in the by-law now in question, is ultra vires, violative of
the property rights of shareholders, and in restraint of trade.
inasmuch as the signing and registration of shares is incumbent upon said officers pursuant to
section 35 of the Corporation Law. This contention cannot be sustained now. The question
should have been raised in the lower court. It is too late to raise it now in this appeal. Besides, as
stated above, the corporation was made defendant in this action upon the demurrer of the
attorney of the original defendant in the lower court, who contended that the Botica Nolasco,
Inc., should be made the party defendant in this action. Accordingly, upon order of the court, the
complaint was amended and the said corporation was made the party defendant.
Whenever a corporation refuses to transfer and register stock in cases like the present,
mandamus will lie to compel the officers of the corporation to transfer said stock upon the books
of the corporation. (26 Cyc. 347; Hager vs. Bryan, 19 Phil., 138.)
In view of all the foregoing, we are of the opinion, and so hold, that the decision of the lower
court is in accordance with law and should be and is hereby affirmed, with costs. So ordered.

And moreover, the by-laws now in question cannot have any effect on the appellee. He had no Malcolm, Villamor, Ostrand, Johns, and Romualdez, JJ., concur.
knowledge of such by-law when the shares were assigned to him. He obtained them in good
faith and for a valuable consideration. He was not a privy to the contract created by said by-law
between the shareholder Manuel Gonzalez and the Botica Nolasco, Inc. Said by-law cannot
operate to defeat his rights as a purchaser.

An unauthorized by-law forbidding a shareholder to sell his shares without first offering
them to the corporation for a period of thirty days is not binding upon an assignee of the
stock as a personal contract, although his assignor knew of the by-law and took part in
its adoption. (10 Cyc., 579; Ireland vs. Globe Milling Co., 21 R.I., 9.)

When no restriction is placed by public law on the transfer of corporate stock, a

purchaser is not affected by any contractual restriction of which he had no notice.
(Brinkerhoff-Farris Trust and Savings Co. vs. Home Lumber Co., 118 Mo., 447.)

The assignment of shares of stock in a corporation by one who has assented to an

unauthorized by-law has only the effect of a contract by, and enforceable against, the
assignor; the assignee is not bound by such by-law by virtue of the assignment alone.
(Ireland vs. Globe Milling Co., 21 R.I., 9.)

A by-law of a corporation which provides that transfers of stock shall not be valid unless
approved by the board of directors, while it may be enforced as a reasonable regulation
for the protection of the corporation against worthless stockholders, cannot be made
available to defeat the rights of third persons. (Farmers' and Merchants' Bank of
Lineville vs. Wasson, 48 Iowa, 336.)

Counsel for defendant incidentally argues in his brief, that the plaintiff does not have any right of
action against the defendant corporation, but against the president and secretary thereof,