Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 75875 December 15, 1989
WOLRGANG AURBACH, OHN GR!""!N, DA#!D P. WH!TT!NGHAM $%& CHARLES CHAMSA',
petitioners,
vs.
SAN!TAR' WARES MANU"ACTUR!NG CORPORATO!N, ERNESTO #. LAGDAMEO, ERNESTO R.
LAGDAMEO, R., ENR!(UE R. LAGDAMEO, GEORGE ". LEE, RAUL A. BONCAN, BALDW!N
'OUNG $%& A#EL!NO #. CRU), respondents.
G.R. No. 75951 December 15, 1989
SAN!TAR' WARES MANU"ACTUR!NG CORPORAT!ON, ERNESTO R. LAGDAMEO, ENR!(UE B.
LAGDAMEO, GEORGE "L .EE RAUL A. BONCAN, BALDW!N 'OUNG $%& A#EL!NO #. CRU*,
petitioners,
vs.
THE COURT O" APPEALS, WOL"GANG AURBACH, OHN GR!""!N, DA#!D P. WH!TT!NGHAM,
CHARLES CHAMSA' $%& LUC!ANO SALA)AR, respondents.
G.R. No+. 75975,7- December 15, 1989
LUC!ANO E. SALA)AR, petitioner,
vs.
SAN!TAR' WARES MANU"ACTUR!NG CORPORAT!ON, ERNESTO #. LAGDAMEO, ERNESTO R.
LAGDAMEO, R., ENR!(UE R. LAGDAMEO, GEORGE ". LEE, RAUL A. BONCAN, BALDW!N
'OUNG, A#EL!NO #. CRU) $%& ./e COURT O" APPEALS, respondents.
Belo, Abiera & Associates for petitioners in 75875.
Sycip, Salazar, Hernandez & Gatmaitan for Luciano . Salazar.

GUT!ERRE), R., J.:
These consolidated petitions see the revie! of the a"ended decision of the #ourt of $ppeals in #$%&.R.
SP Nos. '()'* and '()+, !hich set aside the earlier decision dated -une (, +./), of the then
Inter"ediate $ppellate #ourt and directed that in all subse0uent elections for directors of Sanitar1 2ares
Manufacturin3 #orporation 4Sani!ares5, $"erican Standard Inc. 4$SI5 cannot no"inate "ore than three
465 directors7 that the 8ilipino stocholders shall not interfere in $SI9s choice of its three 465 no"inees7
that, on the other hand, the 8ilipino stocholders can no"inate onl1 si: 4)5 candidates and in the event
the1 cannot a3ree on the si: 4)5 no"inees, the1 shall vote onl1 a"on3 the"selves to deter"ine !ho the
si: 4)5 no"inees !ill be, !ith cu"ulative votin3 to be allo!ed but !ithout interference fro" $SI.
The antecedent facts can be su""ari;ed as follo!s<
In +.)+, Sani!ares, a do"estic corporation !as incorporated for the pri"ar1 purpose of "anufacturin3
and "aretin3 sanitar1 !ares. One of the incorporators, Mr. =ald!in >oun3 !ent abroad to loo for
forei3n partners, ?uropean or $"erican !ho could help in its e:pansion plans. On $u3ust +(, +.)@, $SI,
a forei3n corporation do"iciled in Dela!are, Anited States entered into an $3ree"ent !ith Sani!ares
and so"e 8ilipino investors !hereb1 $SI and the 8ilipino investors a3reed to participate in the o!nership
of an enterprise !hich !ould en3a3e pri"aril1 in the business of "anufacturin3 in the Philippines and
sellin3 here and abroad vitreous china and sanitar1 !ares. The parties a3reed that the business
operations in the Philippines shall be carried on b1 an incorporated enterprise and that the na"e of the
corporation shall initiall1 be BSanitar1 2ares Manufacturin3 #orporation.B
The $3ree"ent has the follo!in3 provisions relevant to the issues in these cases on the no"ination and
election of the directors of the corporation<
6. Articles of !ncorporation
4a5 The $rticles of Incorporation of the #orporation shall be substantiall1 in the for"
anne:ed hereto as ?:hibit $ and, insofar as per"itted under Philippine la!, shall
specificall1 provide for
4+5 #u"ulative votin3 for directors<
::: ::: :::
(. "ana#ement
4a5 The "ana3e"ent of the #orporation shall be vested in a =oard of Directors, !hich
shall consist of nine individuals. $s lon3 as $"erican%Standard shall o!n at least 6'C of
the outstandin3 stoc of the #orporation, three of the nine directors shall be desi3nated
b1 $"erican%Standard, and the other si: shall be desi3nated b1 the other stocholders of
the #orporation. 4pp. (+ D (6, Rollo of ,(/,(5
$t the re0uest of $SI, the a3ree"ent contained provisions desi3ned to protect it as a "inorit1 3roup,
includin3 the 3rant of veto po!ers over a nu"ber of corporate acts and the ri3ht to desi3nate certain
officers, such as a "e"ber of the ?:ecutive #o""ittee !hose vote !as re0uired for i"portant corporate
transactions.
Eater, the 6'C capital stoc of $SI !as increased to *'C. The corporation !as also re3istered !ith the
=oard of Invest"ents for avail"ent of incentives !ith the condition that at least )'C of the capital stoc of
the corporation shall be o!ned b1 Philippine nationals.
The Foint enterprise thus entered into b1 the 8ilipino investors and the $"erican corporation prospered.
Anfortunatel1, !ith the business successes, there ca"e a deterioration of the initiall1 har"onious
relations bet!een the t!o 3roups. $ccordin3 to the 8ilipino 3roup, a basic disa3ree"ent !as due to their
desire to e:pand the e:port operations of the co"pan1 to !hich $SI obFected as it apparentl1 had other
subsidiaries of Foint Foint venture 3roups in the countries !here Philippine e:ports !ere conte"plated. On
March /, +./6, the annual stocholders9 "eetin3 !as held. The "eetin3 !as presided b1 =ald!in >oun3.
The "inutes !ere taen b1 the Secretar1, $velino #ru;. $fter disposin3 of the preli"inar1 ite"s in the
a3enda, the stocholders then proceeded to the election of the "e"bers of the board of directors. The
$SI 3roup no"inated three persons na"el17 2olf3an3 $urbach, -ohn &riffin and David P. 2hittin3ha".
The Philippine investors no"inated si:, na"el17 ?rnesto Ea3da"eo, Sr., Raul $. =oncan, ?rnesto R.
Ea3da"eo, -r., &eor3e 8. Eee, and =ald!in >oun3. Mr. ?duardo R, #eni;a then no"inated Mr. Euciano
?. Sala;ar, !ho in turn no"inated Mr. #harles #ha"sa1. The chair"an, =ald!in >oun3 ruled the last t!o
no"inations out of order on the basis of section ( 4a5 of the $3ree"ent, the consistent practice of the
parties durin3 the past annual stocholders9 "eetin3s to no"inate onl1 nine persons as no"inees for the
nine%"e"ber board of directors, and the le3al advice of Sani!ares9 le3al counsel. The follo!in3 events
then, transpired<
... There !ere protests a3ainst the action of the #hair"an and heated ar3u"ents
ensued. $n appeal !as "ade b1 the $SI representative to the bod1 of stocholders
present that a vote be taen on the rulin3 of the #hair"an. The #hair"an, =ald!in
>oun3, declared the appeal out of order and no vote on the rulin3 !as taen. The
#hair"an then instructed the #orporate Secretar1 to cast all the votes present and
represented b1 pro:1 e0uall1 for the ) no"inees of the Philippine Investors and the 6
no"inees of $SI, thus effectivel1 e:cludin3 the @ additional persons no"inated, na"el1,
Euciano ?. Sala;ar and #harles #ha"sa1. The $SI representative, Mr. -a0ua protested
the decision of the #hair"an and announced that all votes accruin3 to $SI shares, a total
of +,6@.,).( 4p. @,, Rollo, $#%&.R. SP No. '()+,5 !ere bein3 cu"ulativel1 voted for the
three $SI no"inees and #harles #ha"sa1, and instructed the Secretar1 to so vote.
Euciano ?. Sala;ar and other pro:1 holders announced that all the votes o!ned b1 and
or represented b1 the" *),,+., shares 4p. @,, Rollo, $#%&.R. SP No. '()+,5 !ere bein3
voted cu"ulativel1 in favor of Euciano ?. Sala;ar. The #hair"an, =ald!in >oun3,
nevertheless instructed the Secretar1 to cast all votes e0uall1 in favor of the three $SI
no"inees, na"el1, 2olf3an3 $urbach, -ohn &riffin and David 2hittin3ha" and the si:
ori3inall1 no"inated b1 Ro3elio Vinluan, na"el1, ?rnesto Ea3da"eo, Sr., Raul =oncan,
?rnesto Ea3da"eo, -r., ?nri0ue Ea3da"eo, &eor3e 8. Eee, and =ald!in >oun3. The
Secretar1 then certified for the election of the follo!in3 2olf3an3 $urbach, -ohn &riffin,
David 2hittin3ha" ?rnesto Ea3da"eo, Sr., ?rnesto Ea3da"eo, -r., ?nri0ue Ea3da"eo,
&eor3e 8. Eee, Raul $. =oncan, =ald!in >oun3. The representative of $SI then "oved
to recess the "eetin3 !hich !as dul1 seconded. There !as also a "otion to adFourn 4p.
@/, Rollo, $#%&.R. SP No. '()+,5. This "otion to adFourn !as accepted b1 the
#hair"an, =ald!in >oun3, !ho announced that the "otion !as carried and declared the
"eetin3 adFourned. Protests a3ainst the adFourn"ent !ere re3istered and havin3 been
i3nored, Mr. -a0ua the $SI representative, stated that the "eetin3 !as not adFourned but
onl1 recessed and that the "eetin3 !ould be reconvened in the ne:t roo". The
#hair"an then threatened to have the stocholders !ho did not a3ree to the decision of
the #hair"an on the castin3 of votes bodil1 thro!n out. The $SI &roup, Euciano ?.
Sala;ar and other stocholders, alle3edl1 representin3 (6 or (*C of the shares of
Sani!ares, decided to continue the "eetin3 at the elevator lobb1 of the $"erican
Standard =uildin3. The continued "eetin3 !as presided b1 Euciano ?. Sala;ar, !hile
$ndres &at"aitan acted as Secretar1. On the basis of the cu"ulative votes cast earlier in
the "eetin3, the $SI &roup no"inated its four no"inees7 2olf3an3 $urbach, -ohn
&riffin, David 2hittin3ha" and #harles #ha"sa1. Euciano ?. Sala;ar voted for hi"self,
thus the said five directors !ere certified as elected directors b1 the $ctin3 Secretar1,
$ndres &at"aitan, !ith the e:planation that there !as a tie a"on3 the other si: 4)5
no"inees for the four 4*5 re"ainin3 positions of directors and that the bod1 decided not
to brea the tie. 4pp. 6,%6., Rollo of ,(.,(%,)5
These incidents tri33ered off the filin3 of separate petitions b1 the parties !ith the Securities and
?:chan3e #o""ission 4S?#5. The first petition filed !as for preli"inar1 inFunction b1 Sani!ares, ?"esto
V. Ea3da"eo, =ald!in >oun3, Raul $. =onean ?rnesto R. Ea3da"eo, -r., ?nri0ue Ea3da"eo and
&eor3e 8. Eee a3ainst Euciano Sala;ar and #harles #ha"sa1. The case !as deno"inated as S?# #ase
No. @*+,. The second petition !as for 0uo !arranto and application for receivership b1 2olf3an3
$urbach, -ohn &riffin, David 2hittin3ha", Euciano ?. Sala;ar and #harles #ha"sa1 a3ainst the 3roup of
>oun3 and Ea3da"eo 4petitioners in S?# #ase No. @*+,5 and $velino 8. #ru;. The case !as doceted
as S?# #ase No. @,+/. =oth sets of parties e:cept for $velino #ru; clai"ed to be the le3iti"ate directors
of the corporation.
The t!o petitions !ere consolidated and tried Fointl1 b1 a hearin3 officer !ho rendered a decision
upholdin3 the election of the Ea3da"eo &roup and dis"issin3 the 0uo !arranto petition of Sala;ar and
#ha"sa1. The $SI &roup and Sala;ar appealed the decision to the S?# en banc !hich affir"ed the
hearin3 officer9s decision.
The S?# decision led to the filin3 of t!o separate appeals !ith the Inter"ediate $ppellate #ourt b1
2olf3an3 $urbach, -ohn &riffin, David 2hittin3ha" and #harles #ha"sa1 4doceted as $#%&.R. SP No.
'()'*5 and b1 Euciano ?. Sala;ar 4doceted as $#%&.R. SP No. '()+,5. The petitions !ere consolidated
and the appellate court in its decision ordered the re"and of the case to the Securities and ?:chan3e
#o""ission !ith the directive that a ne! stocholders9 "eetin3 of Sani!ares be ordered convoed as
soon as possible, under the supervision of the #o""ission.
Apon a "otion for reconsideration filed b1 the appellees Ea3da"eo &roup5 the appellate court 4#ourt of
$ppeals5 rendered the 0uestioned a"ended decision. Petitioners 2olf3an3 $urbach, -ohn &riffin, David
P. 2hittin3ha" and #harles #ha"sa1 in &.R. No. ,(/,( assi3n the follo!in3 errors<
I. TH? #OART O8 $PP?$ES, IN ?88?#T, APH?ED TH? $EE?&?D ?E?#TION O8
PRIV$T? R?SPOND?NTS $S M?M=?RS O8 TH? =O$RD O8 DIR?#TORS O8
S$NI2$R?S 2H?N IN 8$#T TH?R? 2$S NO ?E?#TION $T $EE.
II. TH? #OART O8 $PP?$ES PROHI=ITS TH? STO#GHOED?RS 8ROM
?H?R#ISIN& TH?IR 8AEE VOTIN& RI&HTS R?PR?S?NT?D => TH? NAM=?R O8
SH$R?S IN S$NI2$R?S, THAS D?PRIVIN& P?TITION?RS $ND TH?
#ORPOR$TION TH?> R?PR?S?NT O8 TH?IR PROP?RT> RI&HTS 2ITHOAT DA?
PRO#?SS O8 E$2.
III. TH? #OART O8 $PP?$ES IMPOS?S #ONDITIONS $ND R?$DS PROVISIONS
INTO TH? $&R??M?NT O8 TH? P$RTI?S 2HI#H 2?R? NOT TH?R?, 2HI#H
$#TION IT #$NNOT E?&$EE> DO. 4p. +,, Rollo%,(/,(5
Petitioner Euciano ?. Sala;ar in &.R. Nos. ,(.,(%,) assails the a"ended decision on the follo!in3
3rounds<
++.+. That$"endedDecision!ouldsanctionthe#$9sdisre3ard of bindin3 contractual
a3ree"ents entered into b1 stocholders and the replace"ent of the conditions of such
a3ree"ents !ith ter"s never conte"plated b1 the stocholders but "erel1 dictated b1
the #$ .
++.@. The $"ended decision !ould lie!ise sanction the deprivation of the propert1
ri3hts of stocholders !ithout due process of la! in order that a favored 3roup of
stocholders "a1 be ille3all1 benefitted and 3uaranteed a continuin3 "onopol1 of the
control of a corporation. 4pp. +*%+(, Rollo%,(.,(%,)5
On the other hand, the petitioners in &.R. No. ,(.(+ contend that<
I
TH? $M?ND?D D?#ISION O8 TH? R?SPOND?NT #OART, 2HIE? R?#O&NIIIN&
TH$T TH? STO#GHOED?RS O8 S$NI2$R?S $R? DIVID?D INTO T2O =EO#GS,
8$IES TO 8AEE> ?N8OR#? TH? =$SI# INT?NT O8 TH? $&R??M?NT $ND TH?
E$2.
II
TH? $M?ND?D D?#ISION DO?S NOT #$T?&ORI#$EE> RAE? TH$T PRIV$T?
P?TITION?RS H?R?IN 2?R? TH? DAE> ?E?#T?D DIR?#TORS DARIN& TH? /
M$R#H +./6 $NNA$E STO#GHOED?RS M??TIN& O8 S$NT2$R?S. 4P. @*, Rollo%
,(.(+5
The issues raised in the petitions are interrelated, hence, the1 are discussed Fointl1.
The "ain issue hin3es on !ho !ere the dul1 elected directors of Sani!ares for the 1ear +./6 durin3 its
annual stocholders9 "eetin3 held on March /, +./6. To ans!er this 0uestion the follo!in3 factors should
be deter"ined< 4+5 the nature of the business established b1 the parties !hether it !as a Foint venture or a
corporation and 4@5 !hether or not the $SI &roup "a1 vote their additional +'C e0uit1 durin3 elections of
Sani!ares9 board of directors.
The rule is that !hether the parties to a particular contract have thereb1 established a"on3 the"selves a
Foint venture or so"e other relation depends upon their actual intention !hich is deter"ined in
accordance !ith the rules 3overnin3 the interpretation and construction of contracts. 4Ter"inal Shares,
Inc. v. #hica3o, =. and J.R. #o. 4D# MO5 )( 8 Supp ),/7 Aniversal Sales #orp. v. #alifornia Press Mf3.
#o. @' #al. @nd ,(+, +@/ P @nd ))/5
The $SI &roup and petitioner Sala;ar 4&.R. Nos. ,(.,(%,)5 contend that the actual intention of the
parties should be vie!ed strictl1 on the B$3ree"entB dated $u3ust +(,+.)@ !herein it is clearl1 stated that
the parties9 intention !as to for" a corporation and not a Foint venture.
The1 specificall1 "ention nu"ber +) under "iscellaneous $ro%isions !hich states<
::: ::: :::
c5 nothin3 herein contained shall be construed to constitute an1 of the parties hereto
partners or Foint venturers in respect of an1 transaction hereunder. 4$t P. )), Rollo%&R
No. ,(/,(5
The1 obFect to the ad"ission of other evidence !hich tends to sho! that the parties9 a3ree"ent !as to
establish a Foint venture presented b1 the Ea3da"eo and >oun3 &roup on the 3round that it contravenes
the parol evidence rule under section ,, Rule +6' of the Revised Rules of #ourt. $ccordin3 to the", the
Ea3da"eo and >oun3 &roup never pleaded in their pleadin3 that the B$3ree"entB failed to e:press the
true intent of the parties.
The parol evidence Rule under Rule +6' provides<
?vidence of !ritten a3ree"ents%2hen the ter"s of an a3ree"ent have been reduced to
!ritin3, it is to be considered as containin3 all such ter"s, and therefore, there can be,
bet!een the parties and their successors in interest, no evidence of the ter"s of the
a3ree"ent other than the contents of the !ritin3, e:cept in the follo!in3 cases<
4a5 2here a "istae or i"perfection of the !ritin3, or its failure to e:press the true intent
and a3ree"ent of the parties or the validit1 of the a3ree"ent is put in issue b1 the
pleadin3s.
4b5 2hen there is an intrinsic a"bi3uit1 in the !ritin3.
#ontrar1 to $SI &roup9s stand, the Ea3da"eo and >oun3 &roup pleaded in their Repl1 and $ns!er to
#ounterclai" in S?# #ase No. @*+, that the $3ree"ent failed to e:press the true intent of the parties, to
!it<
::: ::: :::
*. 2hile certain provisions of the $3ree"ent !ould "ae it appear that the parties
thereto disclai" bein3 partners or Foint venturers such disclai"er is directed at third
parties and is not inconsistent !ith, and does not preclude, the e:istence of t!o distinct
3roups of stocholders in Sani!ares one of !hich 4the Philippine Investors5 shall
constitute the "aForit1, and the other $SI shall constitute the "inorit1 stocholder. In an1
event, the evident intention of the Philippine Investors and $SI in enterin3 into the
$3ree"ent is to enter into aFoint venture enterprise, and if so"e !ords in the $3ree"ent
appear to be contrar1 to the evident intention of the parties, the latter shall prevail over
the for"er 4$rt. +6,', Ne! #ivil #ode5. The various stipulations of a contract shall be
interpreted to3ether attributin3 to the doubtful ones that sense !hich "a1 result fro" all
of the" taen Fointl1 4$rt. +6,*, Ne! #ivil #ode5. Moreover, in order to Fud3e the intention
of the contractin3 parties, their conte"poraneous and subse0uent acts shall be
principall1 considered. 4$rt. +6,+, Ne! #ivil #ode5. 4Part I, Ori3inal Records, S?# #ase
No. @*+,5
It has been ruled<
In an action at la!, !here there is evidence tendin3 to prove that the parties Foined their
efforts in furtherance of an enterprise for their Foint profit, the 0uestion !hether the1
intended b1 their a3ree"ent to create a Foint adventure, or to assu"e so"e other relation
is a 0uestion of fact for the Fur1. 4=inder v. Gessler v @'' $pp. Div. *',+.@ N > S )(67
P1roa v. =ro!nfield 4Te:. #iv. $.5 @6/ S2 ,@(7 Ho3e v. &eor3e, @, 21o, *@6, @'' P .)
66 #.-. p. /,+5
In the instant cases, our e:a"ination of i"portant provisions of the $3ree"ent as !ell as the testi"onial
evidence presented b1 the Ea3da"eo and >oun3 &roup sho!s that the parties a3reed to establish a Foint
venture and not a corporation. The histor1 of the or3ani;ation of Sani!ares and the unusual
arran3e"ents !hich 3overn its polic1 "ain3 bod1 are all consistent !ith a Foint venture and not !ith an
ordinar1 corporation. $s stated b1 the S?#<
$ccordin3 to the unrebutted testi"on1 of Mr. =ald!in >oun3, he ne3otiated the
$3ree"ent !ith $SI in behalf of the Philippine nationals. He testified that $SI a3reed to
accept the role of "inorit1 vis%a%vis the Philippine National 3roup of investors, on the
condition that the $3ree"ent should contain provisions to protect $SI as the "inorit1.
$n e:a"ination of the $3ree"ent sho!s that certain provisions !ere included to protect
the interests of $SI as the "inorit1. 8or e:a"ple, the vote of , out of . directors is
re0uired in certain enu"erated corporate acts KSec. 6 4b5 4ii5 4a5 of the $3ree"entL. $SI is
contractuall1 entitled to desi3nate a "e"ber of the ?:ecutive #o""ittee and the vote of
this "e"ber is re0uired for certain transactions KSec. 6 4b5 4i5L.
The $3ree"ent also re0uires a ,(C super%"aForit1 vote for the a"end"ent of the
articles and b1%la!s of Sani!ares KSec. 6 4a5 4iv5 and 4b5 4iii5L. $SI is also 3iven the ri3ht
to desi3nate the president and plant "ana3er KSec. ( 4)5L. The $3ree"ent further
provides that the sales polic1 of Sani!ares shall be that !hich is nor"all1 follo!ed b1
$SI KSec. +6 4a5L and that Sani!ares should not e:port BStandardB products other!ise
than throu3h $SI9s ?:port Maretin3 Services KSec. +6 4)5L. Ander the $3ree"ent, $SI
a3reed to provide technolo31 and no!%ho! to Sani!ares and the latter paid ro1alties for
the sa"e. 4$t p. @5.
::: ::: :::
It is pertinent to note that the provisions of the $3ree"ent re0uirin3 a , out of . votes of
the board of directors for certain actions, in effect 3ave $SI 4!hich desi3nates 6 directors
under the $3ree"ent5 an effective veto po!er. 8urther"ore, the 3rant to $SI of the ri3ht
to desi3nate certain officers of the corporation7 the super%"aForit1 votin3 re0uire"ents for
a"end"ents of the articles and b1%la!s7 and "ost si3nificantl1 to the issues of t"s case,
the provision that $SI shall desi3nate 6 out of the . directors and the other stocholders
shall desi3nate the other ), clearl1 indicate that there are t!o distinct 3roups in
Sani!ares, na"el1 $SI, !hich o!ns *'C of the capital stoc and the Philippine National
stocholders !ho o!n the balance of )'C, and that @5 $SI is 3iven certain protections as
the "inorit1 stocholder.
Pre"ises considered, !e believe that under the $3ree"ent there are t!o 3roups of
stocholders !ho established a corporation !ith provisions for a special contractual
relationship bet!een the parties, i.e., $SI and the other stocholders. 4pp. *%(5
Section ( 4a5 of the a3ree"ent uses the !ord Bdesi3natedB and not Bno"inatedB or BelectedB in the
selection of the nine directors on a si: to three ratio. ?ach 3roup is assured of a fi:ed nu"ber of directors
in the board.
Moreover, $SI in its co""unications referred to the enterprise as Foint venture. =ald!in >oun3 also
testified that Section +)4c5 of the $3ree"ent that BNothin3 herein contained shall be construed to
constitute an1 of the parties hereto partners or Foint venturers in respect of an1 transaction hereunderB
!as "erel1 to obviate the possibilit1 of the enterprise bein3 treated as partnership for ta: purposes and
liabilities to third parties.
Juite often, 8ilipino entrepreneurs in their desire to develop the industrial and "anufacturin3 capacities of
a local fir" are constrained to see the technolo31 and "aretin3 assistance of hu3e "ultinational
corporations of the developed !orld. $rran3e"ents are for"ali;ed !here a forei3n 3roup beco"es a
"inorit1 o!ner of a fir" in e:chan3e for its "anufacturin3 e:pertise, use of its brand na"es, and other
such assistance. Ho!ever, there is al!a1s a dan3er fro" such arran3e"ents. The forei3n 3roup "a1,
fro" the start, intend to establish its o!n sole or "onopolistic operations and "erel1 uses the Foint
venture arran3e"ent to 3ain a foothold or test the Philippine !aters, so to spea. Or the covetousness
"a1 co"e later. $s the Philippine fir" enlar3es its operations and beco"es profitable, the forei3n 3roup
under"ines the local "aForit1 o!nership and activel1 tries to co"pletel1 or predo"inantl1 tae over the
entire co"pan1. This under"inin3 of Foint ventures is not consistent !ith fair dealin3 to sa1 the least. To
the e:tent that such subversive actions can be la!full1 prevented, the courts should e:tend protection
especiall1 in industries !here constitutional and le3al re0uire"ents reserve controllin3 o!nership to
8ilipino citi;ens.
The Ea3da"eo &roup stated in their appellees9 brief in the #ourt of $ppeal
In fact, the Philippine #orporation #ode itself reco3ni;es the ri3ht of stocholders to enter
into a3ree"ents re3ardin3 the e:ercise of their votin3 ri3hts.
Sec. +''. $3ree"ents b1 stocholders.%
::: ::: :::
@. $n a3ree"ent bet!een t!o or "ore stocholders, if in !ritin3 and si3ned b1 the
parties thereto, "a1 provide that in e:ercisin3 an1 votin3 ri3hts, the shares held b1 the"
shall be voted as therein provided, or as the1 "a1 a3ree, or as deter"ined in accordance
!ith a procedure a3reed upon b1 the".
$ppellants contend that the above provision is included in the #orporation #ode9s chapter
on close corporations and Sani!ares cannot be a close corporation because it has .(
stocholders. 8irstl1, althou3h Sani!ares had .( stocholders at the ti"e of the disputed
stocholders "eetin3, these .( stocholders are not separate fro" each other but are
divisible into 3roups representin3 a sin3le Identifiable interest. 8or e:a"ple, $SI, its
no"inees and la!1ers count for +6 of the .( stocholders. The >oun3>utivo fa"il1 count
for another +6 stocholders, the #ha"sa1 fa"il1 for / stocholders, the Santos fa"il1 for
. stocholders, the D1 fa"il1 for , stocholders, etc. If the "e"bers of one fa"il1 andMor
business or interest 3roup are considered as one 4!hich, it is respectfull1 sub"itted, the1
should be for purposes of deter"inin3 ho! closel1 held Sani!ares is there !ere as of /
March +./6, practicall1 onl1 +, stocholders of Sani!ares. 4Please refer to discussion in
pp. ( to ) of appellees9 ReFoinder Me"orandu" dated ++ Dece"ber +./* and $nne: B$B
thereof5.
Secondl1, even assu"in3 that Sani!ares is technicall1 not a close corporation because it
has "ore than @' stocholders, the undeniable fact is that it is a close&'eld corporation.
Surel1, appellants cannot honestl1 clai" that Sani!ares is a public issue or a !idel1 held
corporation.
In the Anited States, "an1 courts have taen a realistic approach to Foint venture
corporations and have not ri3idl1 applied principles of corporation la! desi3ned pri"aril1
for public issue corporations. These courts have indicated that e:press arran3e"ents
bet!een corporate Foint ventures should be construed !ith less e"phasis on the ordinar1
rules of la! usuall1 applied to corporate entities and !ith "ore consideration 3iven to the
nature of the a3ree"ent bet!een the Foint venturers 4Please see 2abash R1 v. $"erican
Refri3erator Transit #o., , 8 @d 66(7 #hica3o, M D St. P. R1 v. Des Moines Anion R17
@(* $ss9n. @*, AS. *.'97 Seaboard $irline R1 v. $tlantic #oast Eine R17 @*' N.#. *.(,./@
S.?. @d ,,+7 Debo1 v. Harris, @', Md., @+@,++6 $ @d .'67 Hath!a1 v. Porter Ro1alt1
Pool, Inc., @.) Mich. .', .', @.( N.2. (,+7 =eardsle1 v. =eardsle1, +6/ A.S. @)@7 BThe
Ee3al Status of -oint Venture #orporationsB, ++ Vand Ea! Rev. p. )/',+.(/5. These
$"erican cases dealt !ith le3al 0uestions as to the e:tent to !hich the re0uire"ents
arisin3 fro" the corporate for" of Foint venture corporations should control, and the
courts ruled that substantial Fustice la1 !ith those liti3ants !ho relied on the Foint venture
a3ree"ent rather than the liti3ants !ho relied on the orthodo: principles of corporation
la!.
$s correctl1 held b1 the S?# Hearin3 Officer<
It is said that participants in a Foint venture, in or3ani;in3 the Foint venture deviate fro"
the traditional pattern of corporation "ana3e"ent. $ noted authorit1 has pointed out that
Fust as in close corporations, shareholders9 a3ree"ents in Foint venture corporations often
contain provisions !hich do one or "ore of the follo!in3< 4+5 re0uire 3reater than "aForit1
vote for shareholder and director action7 4@5 3ive certain shareholders or 3roups of
shareholders po!er to select a specified nu"ber of directors7 465 3ive to the shareholders
control over the selection and retention of e"plo1ees7 and 4*5 set up a procedure for the
settle"ent of disputes b1 arbitration 4See I O9 Neal, #lose #orporations, +.,+ ed.,
Section +.')a, pp. +(%+)5 4Decision of S?# Hearin3 Officer, P. +)5
Thirdl1 para3raph @ of Sec. +'' of the #orporation #ode does not necessaril1 i"pl1 that
a3ree"ents re3ardin3 the e:ercise of votin3 ri3hts are allo!ed onl1 in close corporations.
$s #a"pos and Eope;%#a"pos e:plain<
Para3raph @ refers to poolin3 and votin3 a3ree"ents in particular. Does this provision
necessaril1 i"pl1 that these a3ree"ents can be valid onl1 in close corporations as
defined b1 the #odeN Suppose that a corporation has t!ent1 five stocholders, and
therefore cannot 0ualif1 as a close corporation under section .), can so"e of the" enter
into an a3ree"ent to vote as a unit in the election of directorsN It is sub"itted that there is
no reason for den1in3 stocholders of corporations other than close ones the ri3ht to
enter into not votin3 or poolin3 a3ree"ents to protect their interests, as lon3 as the1 do
not intend to co""it an1 !ron3, or fraud on the other stocholders not parties to the
a3ree"ent. Of course, votin3 or poolin3 a3ree"ents are perhaps "ore useful and "ore
often resorted to in close corporations. =ut the1 "a1 also be found necessar1 even in
!idel1 held corporations. Moreover, since the #ode li"its the le3al "eanin3 of close
corporations to those !hich co"pl1 !ith the re0uisites laid do!n b1 section .), it is
entirel1 possible that a corporation !hich is in fact a close corporation !ill not co"e
!ithin the definition. In such case, its stocholders should not be precluded fro" enterin3
into contracts lie votin3 a3ree"ents if these are other!ise valid. 4#a"pos D Eope;%
#a"pos, op cit, p. *'(5
In short, even assu"in3 that sec. (4a5 of the $3ree"ent relatin3 to the desi3nation or
no"ination of directors restricts the ri3ht of the $3ree"ent9s si3natories to vote for
directors, such contractual provision, as correctl1 held b1 the S?#, is valid and bindin3
upon the si3natories thereto, !hich include appellants. 4Rollo No. ,(.(+, pp. .'%.*5
In re3ard to the 0uestion as to !hether or not the $SI 3roup "a1 vote their additional e0uit1 durin3
elections of Sani!ares9 board of directors, the #ourt of $ppeals correctl1 stated<
$s in other Foint venture co"panies, the e:tent of $SI9s participation in the "ana3e"ent
of the corporation is spelled out in the $3ree"ent. Section (4a5 hereof sa1s that three of
the nine directors shall be desi3nated b1 $SI and the re"ainin3 si: b1 the other
stocholders, i.e., the 8ilipino stocholders. This allocation of board seats is obviousl1 in
consonance !ith the "inorit1 position of $SI.
Havin3 entered into a !ell%defined contractual relationship, it is i"perative that the parties
should honor and adhere to their respective ri3hts and obli3ations thereunder. $ppellants
see" to contend that an1 allocation of board seats, even in Foint venture corporations,
are null and void to the e:tent that such "a1 interfere !ith the stocholder9s ri3hts to
cu"ulative votin3 as provided in Section @* of the #orporation #ode. This #ourt should
not be prepared to hold that an1 a3ree"ent !hich curtails in an1 !a1 cu"ulative votin3
should be struc do!n, even if such a3ree"ent has been freel1 entered into b1
e:perienced business"en and do not preFudice those !ho are not parties thereto. It "a1
!ell be that it !ould be "ore co3ent to hold, as the Securities and ?:chan3e
#o""ission has held in the decision appealed fro", that cu"ulative votin3 ri3hts "a1 be
voluntaril1 !aived b1 stocholders !ho enter into special relationships !ith each other to
pursue and i"ple"ent specific purposes, as in Foint venture relationships bet!een forei3n
and local stocholders, so lon3 as such a3ree"ents do not adversel1 affect third parties.
In an1 event, it is believed that !e are not here called upon to "ae a 3eneral rule on this
0uestion. Rather, all that needs to be done is to 3ive life and effect to the particular
contractual ri3hts and obli3ations !hich the parties have assu"ed for the"selves.
On the one hand, the clearl1 established "inorit1 position of $SI and the contractual
allocation of board seats #annot be disre3arded. On the other hand, the ri3hts of the
stocholders to cu"ulative votin3 should also be protected.
In our decision sou3ht to be reconsidered, !e opted to uphold the second over the first.
Apon further reflection, !e feel that the proper and Fust solution to 3ive due consideration
to both factors su33ests itself 0uite clearl1. This #ourt should reco3ni;e and uphold the
division of the stocholders into t!o 3roups, and at the sa"e ti"e uphold the ri3ht of the
stocholders !ithin each 3roup to cu"ulative votin3 in the process of deter"inin3 !ho
the 3roup9s no"inees !ould be. In practical ter"s, as su33ested b1 appellant Euciano ?.
Sala;ar hi"self, this "eans that if the 8ilipino stocholders cannot a3ree !ho their si:
no"inees !ill be, a vote !ould have to be taen a"on3 the 8ilipino stocholders onl1.
Durin3 this votin3, each 8ilipino stocholder can cu"ulate his votes. $SI, ho!ever,
should not be allo!ed to interfere in the votin3 !ithin the 8ilipino 3roup. Other!ise, $SI
!ould be able to desi3nate "ore than the three directors it is allo!ed to desi3nate under
the $3ree"ent, and "a1 even be able to 3et a "aForit1 of the board seats, a result !hich
is clearl1 contrar1 to the contractual intent of the parties.
Such a rulin3 !ill 3ive effect to both the allocation of the board seats and the
stocholder9s ri3ht to cu"ulative votin3. Moreover, this rulin3 !ill also 3ive due
consideration to the issue raised b1 the appellees on possible violation or circu"vention
of the $nti%Du""1 Ea! 4#o". $ct No. +'/, as a"ended5 and the nationali;ation
re0uire"ents of the #onstitution and the la!s if $SI is allo!ed to no"inate "ore than
three directors. 4Rollo%,(/,(, pp. 6/%6.5
The $SI &roup and petitioner Sala;ar, no! reiterate their theor1 that the $SI &roup has the ri3ht to vote
their additional e0uit1 pursuant to Section @* of the #orporation #ode !hich 3ives the stocholders of a
corporation the ri3ht to cu"ulate their votes in electin3 directors. Petitioner Sala;ar adds that this ri3ht if
3ranted to the $SI &roup !ould not necessaril1 "ean a violation of the $nti%Du""1 $ct 4#o""on!ealth
$ct +'/, as a"ended5. He cites section @%a thereof !hich provides<
$nd provided finall1 that the election of aliens as "e"bers of the board of directors or
3overnin3 bod1 of corporations or associations en3a3in3 in partiall1 nationali;ed activities
shall be allo!ed in proportion to their allo!able participation or share in the capital of
such entities. 4a"end"ents introduced b1 Presidential Decree ,+(, section +,
pro"ul3ated Ma1 @/, +.,(5
The $SI &roup9s ar3u"ent is correct !ithin the conte:t of Section @* of the #orporation #ode. The point
of 0uer1, ho!ever, is !hether or not that provision is applicable to a Foint venture !ith clearl1 defined
a3ree"ents<
The le3al concept of aFoint venture is of co""on la! ori3in. It has no precise le3al
definition but it has been 3enerall1 understood to "ean an or3ani;ation for"ed for so"e
te"porar1 purpose. 4&ates v. Me3ar3el, @)) 8ed. /++ K+.@'L5 It is in fact hardl1
distin3uishable fro" the partnership, since their ele"ents are si"ilar co""unit1 of
interest in the business, sharin3 of profits and losses, and a "utual ri3ht of control.
=lacner v. Mc Der"ott, +,) 8. @d. *./, K+.*.L7 #arboneau v. Peterson, .( P. @d., +'*6
K+.6.L7 =ucle1 v. #had!ic, *( #al. @d. +/6, @// P. @d. +@ @/. P. @d. @*@ K+.((L5. The
"ain distinction cited b1 "ost opinions in co""on la! Furisdictions is that the partnership
conte"plates a 3eneral business !ith so"e de3ree of continuit1, !hile the Foint venture
is for"ed for the e:ecution of a sin3le transaction, and is thus of a te"porar1 nature.
4Tufts v. Mann ++) #al. $pp. +,', @ P. @d. ('' K+.6+L7 Har"on v. Martin, 6.( +++. (.(,
,+ N? @d. ,* K+.*,L7 &ates v. Me3ar3el @)) 8ed. /++ K+.@'L5. This observation is not
entirel1 accurate in this Furisdiction, since under the #ivil #ode, a partnership "a1 be
particular or universal, and a particular partnership "a1 have for its obFect a specific
undertain3. 4$rt. +,/6, #ivil #ode5. It !ould see" therefore that under Philippine la!, a
Foint venture is a for" of partnership and should thus be 3overned b1 the la! of
partnerships. The Supre"e #ourt has ho!ever reco3ni;ed a distinction bet!een these
t!o business for"s, and has held that althou3h a corporation cannot enter into a
partnership contract, it "a1 ho!ever en3a3e in a Foint venture !ith others. 4$t p. +@,
Tua;on v. =olanos, .( Phil. .') K+.(*L5 4#a"pos and Eope;%#a"pos #o""ents, Notes
and Selected #ases, #orporation #ode +./+5
Moreover, the usual rules as re3ards the construction and operations of contracts 3enerall1 appl1 to a
contract of Foint venture. 4O9 Hara v. Har"an +* $pp. Dev. 4+),5 *6 N>S (()5.
=earin3 these principles in "ind, the correct vie! !ould be that the resolution of the 0uestion of !hether
or not the $SI &roup "a1 vote their additional e0uit1 lies in the a3ree"ent of the parties.
Necessaril1, the appellate court !as correct in upholdin3 the a3ree"ent of the parties as re3ards the
allocation of director seats under Section ( 4a5 of the B$3ree"ent,B and the ri3ht of each 3roup of
stocholders to cu"ulative votin3 in the process of deter"inin3 !ho the 3roup9s no"inees !ould be
under Section 6 4a5 4+5 of the B$3ree"ent.B $s pointed out b1 S?#, Section ( 4a5 of the $3ree"ent relates
to the "anner of no"inatin3 the "e"bers of the board of directors !hile Section 6 4a5 4+5 relates to the
"anner of votin3 for these no"inees.
This is the proper interpretation of the $3ree"ent of the parties as re3ards the election of "e"bers of the
board of directors.
To allo! the $SI &roup to vote their additional e0uit1 to help elect even a 8ilipino director !ho !ould be
beholden to the" !ould obliterate their "inorit1 status as a3reed upon b1 the parties. $s aptl1 stated b1
the appellate court<
... $SI, ho!ever, should not be allo!ed to interfere in the votin3 !ithin the 8ilipino 3roup.
Other!ise, $SI !ould be able to desi3nate "ore than the three directors it is allo!ed to
desi3nate under the $3ree"ent, and "a1 even be able to 3et a "aForit1 of the board
seats, a result !hich is clearl1 contrar1 to the contractual intent of the parties.
Such a rulin3 !ill 3ive effect to both the allocation of the board seats and the
stocholder9s ri3ht to cu"ulative votin3. Moreover, this rulin3 !ill also 3ive due
consideration to the issue raised b1 the appellees on possible violation or circu"vention
of the $nti%Du""1 Ea! 4#o". $ct No. +'/, as a"ended5 and the nationali;ation
re0uire"ents of the #onstitution and the la!s if $SI is allo!ed to no"inate "ore than
three directors. 4$t p. 6., Rollo, ,(/,(5
?0uall1 i"portant as the consideration of the contractual intent of the parties is the consideration as
re3ards the possible do"ination b1 the forei3n investors of the enterprise in violation of the nationali;ation
re0uire"ents enshrined in the #onstitution and circu"vention of the $nti%Du""1 $ct. In this re3ard,
petitioner Sala;ar9s position is that the $nti%Du""1 $ct allo!s the $SI 3roup to elect board directors in
proportion to their s'are in t'e capital of t'e entity. It is to be noted, ho!ever, that the sa"e la! also li"its
the election of aliens as "e"bers of the board of directors in proportion to t'eir allo(ance participation of
said entit1. In the instant case, the forei3n &roup $SI !as li"ited to desi3nate three directors. This is the
allo!able participation of the $SI &roup. Hence, in future dealin3s, this li"itation of si: to three board
seats should al!a1s be "aintained as lon3 as the Foint venture a3ree"ent e:ists considerin3 that in
li"itin3 6 board seats in the .%"an board of directors there are provisions alread1 a3reed upon and
e"bodied in the parties9 $3ree"ent to protect the interests arisin3 fro" the "inorit1 status of the forei3n
investors.
2ith these findin3s, !e the decisions of the S?# Hearin3 Officer and S?# !hich !ere i"pliedl1 affir"ed
b1 the appellate court declarin3 Messrs. 2olf3an3 $urbach, -ohn &riffin, David P 2hittin3ha", ?"esto
V. Ea3da"eo, =ald!in 1oun3, Raul $. =oncan, ?"esto V. Ea3da"eo, -r., ?nri0ue Ea3da"eo, and
&eor3e 8. Eee as the dul1 elected directors of Sani!ares at the March /,+./6 annual stocholders9
"eetin3.
On the other hand, the Ea3da"eo and >oun3 &roup 4petitioners in &.R. No. ,(.(+5 obFect to a
cu"ulative votin3 durin3 the election of the board of directors of the enterprise as ruled b1 the appellate
court and sub"its that the si: 4)5 directors allotted the 8ilipino stocholders should be selected b1
consensus pursuant to section ( 4a5 of the $3ree"ent !hich uses the !ord Bdesi3nateB "eanin3
Bnominate, dele#ate or appoint.B
The1 also stress the possibilit1 that the $SI &roup "i3ht tae control of the enterprise if the 8ilipino
stocholders are allo!ed to select their no"inees separatel1 and not as a co""on slot deter"ined b1 the
"aForit1 of their 3roup.
Section ( 4a5 of the $3ree"ent !hich uses the !ord desi3nates in the allocation of board directors should
not be interpreted in isolation. This should be construed in relation to section 6 4a5 4+5 of the $3ree"ent.
$s !e stated earlier, section 64a5 4+5 relates to the manner of %otin# for these no"inees !hich is
cumulati%e %otin# !hile section (4a5 relates to the "anner of nominatin# t'e members of the board of
directors. The petitioners in &.R. No. ,(.(+ a3reed to this procedure, hence, the1 cannot no! i"pu3n its
le3alit1.
The insinuation that the $SI &roup "a1 be able to control the enterprise under the cu"ulative votin3
procedure cannot, ho!ever, be i3nored. The validit1 of the cu"ulative votin3 procedure is dependent on
the directors thus elected bein3 3enuine "e"bers of the 8ilipino 3roup, not voters !hose interest is to
increase the $SI share in the "ana3e"ent of Sani!ares. The Foint venture character of the enterprise
"ust al!a1s be taen into account, so lon3 as the co"pan1 e:ists under its ori3inal a3ree"ent.
#u"ulative votin3 "a1 not be used as a device to enable $SI to achieve stealthil1 or indirectl1 !hat the1
cannot acco"plish openl1. There are substantial safe3uards in the $3ree"ent !hich are intended to
preserve the "aForit1 status of the 8ilipino investors as !ell as to "aintain the "inorit1 status of the
forei3n investors 3roup as earlier discussed. The1 should be "aintained.
2H?R?8OR?, the petitions in &.R. Nos. ,(.,(%,) and &.R. No. ,(/,( are DISMISS?D and the petition
in &.R. No. ,(.(+ is partl1 &R$NT?D. The a"ended decision of the #ourt of $ppeals is MODI8I?D in
that Messrs. 2olf3an3 $urbach -ohn &riffin, David 2hittin3ha" ?"esto V. Ea3da"eo, =ald!in >oun3,
Raul $. =oncan, ?rnesto R. Ea3da"eo, -r., ?nri0ue Ea3da"eo, and &eor3e 8. Eee are declared as the
dul1 elected directors of Sani!ares at the March /,+./6 annual stocholders9 "eetin3. In all other
respects, the 0uestioned decision is $88IRM?D. #osts a3ainst the petitioners in &.R. Nos. ,(.,(%,) and
&.R. No. ,(/,(.
SO ORD?R?D.
)ernan, *.+., ,*'airman-, Bidin and *ortes, ++., concur.
)eliciano, +., too. no part.
The Ea!phil ProFect % $rellano Ea! 8oundation