Republic of the Philippines
SUPREME COURT
Manila
EN BANC
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 City of Davao, 5 this Court resolved to decide the case on the merits
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.
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 in a position, based upon said evidence, to decide
the case on its merits. 8 It is settled that the 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.
Separate Opinions
TEEHANKEE, CONCEPCION JR., FERNANDEZ and
GUERRERO, JJ., concurring:
I
As correctly stated in the main opinion of Mr. Justice Antonio, the Court is
unanimous in its judgment granting the petitioner as stockholder of
respondent San Miguel Corporation the right to inspect, examine and
secure copies of the records of San Miguel International, inc. (SMI), a
wholly owned foreign subsidiary corporation of respondent San Miguel
Corporation. Respondent commissions en banc Order No. 449, Series of
19 7 7, denying petitioner's right of inspection for "not being a stockholder
of San Miguel International, Inc." has been accordingly set aside. It need
be only pointed out that:
a) The commission's reasoning grossly disregards the
fact that the stockholders of San Miguel Corporation are
likewise the owners of San Miguel International, Inc. as
the corporation's wholly owned foreign subsidiary and
therefore have every right to have access to its books and
records. otherwise, the directors and management of any
Philippine corporation by the simple device of organizing
with the corporation's funds foreign subsidiaries would be
granted complete immunity from the stockholders'
scrutiny of its foreign operations and would have a
conduit for dissipating, if not misappropriating, the
corporation funds and assets by merely channeling them
into foreign subsidiaries' operations; and
b) Petitioner's right of examination herein recognized
refers to all books and records of the foreign subsidiary
SMI which are which are " in respondent corporation's
possession and control" 1, meaning to say regardless of
whether or not such books and records are physically
within the Philippines. all such books and records of SMI
are legally within respondent corporation's "possession
and control" and if nay books or records are kept abroad,
(e.g. in the foreign subsidiary's state of domicile, as is to
be expected), then the respondent corporation's board
and management are obliged under the Court's judgment
 to bring and make them (or true copies thereof available
within the Philippines for petitioner's examination and
inspection.
II
On the other main issue of the Validity of respondent San Miguel
Corporation's amendment of its by-laws 2 whereby respondent
corporation's board of directors under its resolution dated April 29, 1977
declared petitioner ineligible to be nominated or to be voted or to be
elected as of the board of directors, the Court, composed of 12 members
(since Mme. Justice Ameurfina Melencio Herrera inhibited herself from
taking part herein, while Mr. Justice Ramon C. Aquino upon submittal of
the main opinion of Mr. Justice Antonio decided not to take part), failed to
reach a conclusive vote or, the required majority of 8 votes to settle the
issue one way or the other.
Six members of the Court, namely, Justices Barredo, Makasiar, Antonio,
Santos, Abad Santos and De Castro, considered the issue purely legal
and voted to sustain the validity per se of the questioned amended by-
laws but nevertheless voted that the prohibition and disqualification
therein provided shall not apply to petitioner Gokongwei until and after he
shall have been given a new and proper hearing" by the corporation's
board of directors and the board's decision of disqualification she'll have
been sustained on appeal by respondent Securities and Exchange
Commission and ultimately by this Court.
The undersigned Justices do not consider the issue as purely legal in the
light of respondent commission's Order No. 451, Series of 1977, denying
petitioner's "Motion for Summary Judgment" on the ground that "the
Commission en banc finds that there (are) unresolved and genuine
issues of fact" 3 as well as its position in this case to the Solicitor General
that the case at bar is "premature" and that the administrative remedies
before the commission should first be availed of and exhausted. 4
We are of the opinion that the questioned amended by-laws, as they are,
(adopted after almost a century of respondent corporation's existence as
a public corporation with its shares freely purchased and traded in the
open market without restriction and disqualification) which would bar
petitioner from qualification, nomination and election as director and
worse, grant the board by 3/4 vote the arbitrary power to bar any
stockholder from his right to be elected as director by the simple
expedient of declaring him to be engaged in a "competitive or
antagonistic business" or declaring him as a "nominee" of the competitive
or antagonistic" stockholder are illegal, oppressive, arbitrary and
unreasonable.
We consider the questioned amended by-laws as being specifically
tailored to discriminate against petitioner and depriving him in violation of
substantive due process of his vested substantial rights as stockholder of
respondent corporation. We further consider said amended by-laws as
violating specific provisions of the Corporation Law which grant and
recognize the right of a minority stockholder like petitioner to be elected
director by the process of cumulative voting ordained by the Law (secs
21 and 30) and the right of a minority director once elected not to be
removed from office of director except for cause by vote of the
stockholders holding 2/3 of the subscribed capital stock (sec. 31). If a
minority stockholder could be disqualified by such a by-laws amendment
under the guise of providing for "qualifications," these mandates of the
Corporation Law would have no meaning or purpose.
These vested and substantial rights granted stockholders under the
Corporation Law may not be diluted or defeated by the general authority
granted by the Corporation Law itself to corporations to adopt their by-
laws (in section 21) which deal principally with the procedures governing
their internal business. The by-laws of any corporation must, be always
within the character limits. What the Corporation Law has granted
stockholders may not be taken away by the corporation's by-laws. The
amendment is further an instrument of oppressiveness and arbitrariness
in that the incumbent directors are thereby enabled to perpetuate
themselves in office by the simple expedient of disqualifying any
unwelcome candidate, no matter how many votes he may have.
However, in view of the inconclusiveness of the vote, we sustain
respondent commission's stand as expressed in its Orders Nos. 450 and
451, Series of 1977 that there are unresolved and genuine issues of fact"
and that it has yet to rule on and finally decide the validity of the disputed
by-law provision", subject to appeal by either party to this Court.
In view of prematurity of the proceedings here (as likewise expressed by
Mr. Justice Fernando), the case should as a consequence be remanded
to the Securities and Exchange Commission as the agency of primary
jurisdiction for a full hearing and reception of evidence of all relevant facts
(which should property be submitted to the commission instead of the
piecemeal documents submitted as annexes to this Court which is not a
trier of facts) concerning not only the petitioner but the members of the
board of directors of respondent corporation as well, so that it may
determine on the basis thereof the issue of the legality of the questioned
amended by-laws, and assuming Chat it holds the same to be valid
whether the same are arbitrarily and unreasonably applied to petitioner
vis a vis other directors, who, petitioner claims, should in such event be
likewise disqualified from sitting in the board of directors by virtue of
conflict of interests or their being likewise engaged in competitive or
antagonistic business" with the corporation such as investment and
finance, coconut oil mills cement, milk and hotels. 5
It should be noted that while the petition may be dismissed in view of the
inconclusiveness of the vote and the Court's failure to affair, the required
8-vote majority to resolve the issue, such as dismissal (for lack of
necessary votes) is of no doctrine value and does not in any manner
resolve the issue of the validity of the questioned amended by-laws nor
foreclose the same. The same should properly be determined in a proper
case in the first instance by the Securities and Exchange Commission as
the agency of primary jurisdiction, as above indicated.
The Court is unanimous, therefore, in its judgment that petitioner
Gokongwei may run for the office of, and if elected, sit as, member of the
board of directors of respondent San Miguel Corporation as stated in the
dispositive portion of the main opinion of Mr. Justice Antonio, to wit: Until
and after petitioner has been given a "new and proper hearing by the
board of directors of said corporation, whose decision shall be
appealable Lo the respondent Securities and Exchange Commission
deliverating and acting en banc and ultimately to this Court" and until '
disqualified in the manner herein provided, the prohibition in the
aforementioned amended by-laws shall not apply to petitioner," In other
words, until and after petitioner shall have been given due process and
proper hearing by the respondent board of directors as to the question of
his qualification or disqualification under the questioned amended by-
laws (assuming that the respondent Securities and Exchange C
commission ultimately upholds the validity of said by laws), and such
disqualification shall have been sustained by respondent and Exchange
Commission and ultimately by final judgment of this Court, petitioner is
deemed eligible for all legal purposes and effects to be nominated and
voted and if elected to sit as a member of the hoard of directors of
respondent San Miguel Corporation.
In view of the Court's unanimous judgment on this point the portion of
respondent commission's Order No. 450, Series of 977 which imposed
"the condition that he [petitioner] cannot sit as board member if elected
until after the Commission shall have finally decided the validity of the
disputed by-law provision" has been likewise accordingly set aside.
III
By way of recapitulation, so that the Court's decision and judgment may
be clear and not subject to ambiguity, we state the following.
1. With the votes of the six Justices concurring unqualifiedly in the main
opinion added to our four votes, plus the Chief Justice's vote and that of
Mr. Justice Fernando, the Court has by twelve (12) votes unanimously
rendered judgment granting petitioner's right to examine and secure
copies of the books and records of San Miguel International, Inc. as a
foreign subsidiary of respondent corporation and respondent
commission's Order No. 449, Series of 1977, to the contrary is set aside:
2. With the same twelve (12) votes, the Court has also unanimously
rendered judgment declaring that until and afterpetitioner shall have been
given due process and proper hearing by the respondent board of
directors as to the question of his disqualification under the questioned
amended by- laws (assuming that the respondent Securities and
Exchange Commission ultimately upholds the validity of said by laws),
and such disqualification shall have been sustained by respondent
Securities and Exchange Commission and ultimately by final judgment of
this Court petitioner is deemed eligible for all legal purposes and effect to
be nominated and voted and if elected to sit as a member of the board of
directors of respondent San Miguel Corporation. Accordingly, respondent
commission's Order No. 450, Series of 1977 to the contrary has likewise
been set aside; and
3. The Court's voting on the validity of respondent corporation's
amendment of the by-laws (sec. 2, Art. 111) is inconclusive without the
required majority of eight votes to settle the issue one way or the other
having been reached. No judgment is rendered by the Court thereon and
the statements of the six Justices who have signed the main opinion on
the legality thereof have no binding effect, much less doctrinal value.
The dismissal of the petition insofar as the question of the validity of the
disputed by-laws amendment is concerned is not by an judgment with the
required eight votes but simply by force of Rule 56, section II of the Rules
of Court, the pertinent portion of which provides that "where the court en
banc is equally divided in opinion, or the necessary majority cannot be
had, the case shall be reheard, and if on re-hearing no decision is
reached, the action shall be dismissed if originally commenced in the
court ...." The end result is that the Court has thereby dismissed the
petition which prayed that the Court bypass the commission and directly
resolved the issue and therefore the respondent commission may now
proceed, as announced in its Order No. 450, Series of 1977, to hear the
case before it and receive all relevant evidence bearing on the issue as
hereinabove indicated, and resolve the "unresolved and genuine issues
of fact" (as per Order No. 451, Series of 1977) and the issues of legality
of the disputed by-laws amendment.
Teehankee, Concepcion, Jr., and Fernandez, JJ., concur.
Guerrero, J., concurred.
TEEHANKEE, CONCEPCION JR.,
FERNANDEZ and GUERRERO, JJ., concurring:
This supplemental opinion is issued with reference to the advance
separate opinion of Mr. Justice Barredo issued by him as to "certain
misimpressions as to the import of the decision in this case" which might
be produced by our joint separate opinion of April 11, 1979 and
"urgent(ly) to clarify (his) position in respect to the rights of the parties
resulting from the dismissal of the petition herein and the outline of the
procedure by which the disqualification of petitioner Gokongwei can be
made effective."
1. Mr. Justice Barredo's advances separate opinion "that as between the
parties herein, the issue of the validity of the challenged by-laws is
already settled" had, of course, no binding effect. The judgment of the
Court is found on pages 59-61 of the decision of April 11, 1979, penned
by Mr. Justice Antonio, wherein on the question of the validity of the
amended by-laws the Court's inconclusive voting is set forth as follows:
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 by-laws and that this question
should properly be resolved first by the SEC as the
agency of primary jurisdiction ... 1
As stated in said judgment itself, for lack of the necessary votes, the
petition, insofar as it assails the validity of the questioned by-laws, was
dismissed.
2. Mr. Justice Barredo now contends contrary to the undersigned's
understanding, as stated on pages 8 and 9 of our joint separate opinion
of April 11, 1979 that the legal effect of the dismissal of the petition on the
question of validity of the amended by-laws for lack of the necessary
votes simply means that "the Court has thereby dismissed the petition
which prayed that the Court by-pass the commission and directly resolve
the issue and therefore the respondent commission may now proceed, as
announced in its Order No. 450, Series of 1977, to hear the case before it
and receive all relevant evidence bearing on the issue as hereinabove
indicated, and resolve the 'unresolved and genuine issues of fact' (as per
Order No. 451, Series of 1977) and the issue of legality of the disputed
by-laws amendment," that such dismissal "has no other legal
consequence than that it is the law of the case as far as the parties are
concerned, albeit the majority of the opinion of six against four Justices is
not doctrinal in the sense that it cannot be cited as necessarily a
precedent for subsequent cases."
We hold on our part that the doctrine of the law of the case invoked by
Mr. Justice Barredo has no applicability for the following reasons:
a) Our jurisprudence is quite clear that this doctrine may be invoked only
where there has been a final and conclusive determination of an issue in
the first case later invoked as the law of the case.
Thus, in People vs. Olarte, 2 we held that
 "Law of the case" has been defined as the opinion
delivered on a former appeal More specifically, it means
that whatever is once irrevocably established as
the controlling legal rule of decision between the same
parties in the same case continues to he the law of the
case, whether correct on general principles or not, so long
as the facts on which such decision was predicated
continue to be the facts of the case before the court. ...
It need not be stated that the Supreme Court, being the
court of last resort, is the final arbiter of all legal questions
properly brought before it and that its decision in any
given case constitutes the law of that particular case.
Once its judgment becomes final it is binding on all
inferior courts, and hence beyond their power and
authority to alter or modify Kabigting vs. Acting Director of
Prisons, G. R. No. L-15548, October 30, 1962).
The decision of this Court on that appeal by the
government from the order of dismissal, holding that said
appeal did not place the appellants, including Absalon
Bignay, in double jeopardy, signed and concurred in by
six Justices as against three dissenters headed by the
Chief Justice, promulgated way back in the year 1952,
has long become the law of the case. It may be
erroneous, judged by the law on double jeopardy as
recently interpreted by this same Tribunal Even so, it may
not be disturbed and modified. Our recent interpretation of
the law may be applied to new cases, but certainly not to
an oldone finally and conclusively determined. As already
stated, the majority opinion in that appeal is now the law
of the case. (People vs. Pinuila)
The doctrine of the law of the case, therefore, has no applicability
whatsoever herein insofar as the question of the validity or invalidity of
the amended by-laws is concerned. The Court's judgment of April 11,
1979 clearly shows that the voting on this question was inconclusive with
six against four Justices and two other Justices (the Chief Justice and Mr.
Justice Fernando) expressly reserving their votes thereon, and Mr.
Justice Aquino while taking no part in effect likewise expressly reserved
his vote thereon. No final and conclusive determination could be reached
on the issue and pursuant to the provisions of Rule 56, section 11, since
this special civil action originally commenced in this Court, the action was
simply dismissed with the result that no law of the case was laid down
insofar as the issue of the validity or invalidity of the questioned by-laws
is concerned, and the relief sought herein by petitioner that this Court by-
pass the SEC which has yet to hear and determine the same issue
pending before it below and that this Court itself directly resolve the said
issue stands denied.
b) The contention of Mr. Justice Barredo that the result of the dismiss of
the case was that "petitioner Gokongwei may not hereafter act on the
assumption that he can revive the issue of the validity whether in the
Securities and Exchange Commission, in this Court or in any other forum,
unless he proceeds on the basis of a factual milieu different from the
setting of this case Not even the Securities and Exchange Commission
may pass on such question anymore at the instance of herein petitioner
or anyone acting in his stead or on his behalf, " appears to us to be
untenable.
The Court through the decision of April 11, 1979, by the unanimous votes
of the twelve participating Justices headed by the Chief Justice, ruled that
petitioner Gokongwei was entitled to a "new and proper hearing" by the
SMC board of directors on the matter of his disqualification under the
questioned by-laws and that the board's "decision shall be appealable to
the respondent Securities and Exchange Commission deliberating and
acting en banc and ultimately to this Court (and) unless disqualified in the
manner herein provided, the prohibition in the aforementioned amended
by-laws shall not apply to petitioner."
The entire Court, therefore, recognized that petitioner had not been given
procedural due process by the SMC board on the matter of his
disqualification and that he was entitled to a "new and proper hearing". It
stands to reason that in such hearing, petitioner could raise not only
questions of fact but questions of law, particularly questions of law
affecting the investing public and their right to representation on the
board as provided by law — not to mention that as borne out by the fact
that no restriction whatsoever appears in the court's decision, it was
never contemplated that petitioner was to be limited to questions of fact
and could not raise the fundamental questions of law bearing on the
invalidity of the questioned amended by-laws at such hearing before the
SMC board. Furthermore, it was expressly provided unanimously in the
Court's decision that the SMC board's decision on the disqualification of
petitioner ("assuming the board of directors of San Miguel Corporation
should, after the proper hearing, disqualify him" as qualified in Mr. Justice
Barredo's own separate opinion, at page 2) shall be appealable to
respondent Securities and Exchange Commission "deliberating and
acting en banc and "untimately to this Court." Again, the Court's judgment
as set forth in its decision of April 11, 1979 contains nothing that would
warrant the opinion now expressed that respondent Securities and
Exchange Commission may not pass anymore on the question of the
invalidity of the amended by-laws. Certainly, it cannot be contended that
the Court in dismissing the petition for lack of necessary votes actually
by-passed the Securities and Exchange Commission and directly ruled
itself on the invalidity of the questioned by-laws when it itself could not
reach a final and conclusive vote (a minimum of eight votes) on the issue
and three other Justices (the Chief Justice and Messrs. Justices
Fernando and Aquino) had expressly reserved their vote until after further
hearings (first before the Securities and Exchange Commission and
ultimately in this Court).
Such a view espoused by Mr. Justice Barredo could conceivably result in
an incongruous situation where supposedly under the law of this case the
questioned by-laws would be held valid as against petitioner Gokongwei
and yet the same may be stricken off as invalid as to all other SMC
shareholders in a proper case.
3. It need only be pointed out that Mr. Justice Barredo's advance
separate opinion can in no way affect or modify the judgment of this
Court as set forth in the decision of April 11, 1979 and discussed
hereinabove. The same bears the unqualified concurrence of only three
Justices out of the six Justices who originally voted for the validity per se
of the questioned by-laws, namely, Messrs. Justices Antonio, Santos and
De Castro. Messrs. Justices Fernando and Makasiar did not concur
therein but they instead concurred with the limited concurrence of the
Chief Justice touching on the law of the case which guardedly held that
the Court has not found merit in the claim that the amended bylaws in
question are invalid but without in any manner foreclosing the issue and
as a matter of fact and law, without in any manner changing or
modifying the above-quoted vote of the Chief Justice as officially
rendered in the decision of April 11, 1979, wherein he precisely "reserved
(his) vote on the validity of the amended by-laws."
4. A word on the separate opinion of Mr. Justice Pacifico de Castro
attached to the advance separate opinion of Mr. Justice Barredo. Mr.
Justice De Castro advances his interpretation as to a restrictive
construction of section 13(5) of the Philippine Corporation Law, ignoring
or disregarding the fact that during the Court's deliberations it was
brought out that this prohibitory provision was and is not raised in issue in
this case whether here or in the Securities and Exchange Commission
below (outside of a passing argument by Messrs. Angara, Abello,
Concepcion, Regala & Cruz, as counsels for respondent Sorianos in their
Memorandum of June 26, 1978 that "(T)he disputed By-Laws does not
prohibit petitioner from holding onto, or even increasing his SMC
investment; it only restricts any shifting on the part of petitioner from
passive investor to a director of the company." 3
As a consequence, the Court abandoned the Idea of calling for another
hearing wherein the parties could properly raise and discuss this question
as a new issue and instead rendered the decision in question, under
which the question of section 13(5) could be raised at a new and proper
hearing before the SMC board and in the Securities and Exchange
Commission and in due course before this Court (but with the clear
understanding that since both corporations, the Robina and SMC are
engaged in agriculture as submitted by the Sorianos' counsel in their said
memorandum, the issue could be raised likewise against SMC and its
other shareholders, directors, if not against SMC itself. As expressly
stated in the Chief Justices reservation of his vote, the matter of the
question of the applicability of the said section 13(5) to petitioner would
be heard by this Court at the appropriate time after the proceedings
below (and necessarily the question of the validity of the amended by-
laws would be taken up anew and the Court would at that time be able to
reach a final and conclusive vote).
Mr. Justice De Castro's personal interpretation of the decision of April 11,
1979 that petitioner may be allowed to run for election despite adverse
decision of both the SMC board and the Securities and Exchange
Commission "only if he comes to this Court and obtains an injunction
against the enforcement of the decision disqualifying him" is patently
contradictory of his vote on the matter as expressly given in the judgment
in the Court's decision of April 11, 1979 (at page 59) that petitioner could
run and if elected, sit as director of the respondent SMC and could be
disqualified only 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 aforementioned amended
by-laws shall not apply to petitioner."
Teehankee, Concepcion Jr., Fernandez and Guerrero, JJ., concur.
BARREDO, J., concurring:
I reserved the filing of a separate opinion in order to state my own
reasons for voting in favor of the validity of the amended by-laws in
question. Regrettably, I have not yet finished preparing the same. In
view, however, of the joint separate opinion of Justices Teehankee,
Concepcion Jr., Fernandez and Guerrero, the full text of which has just
come to my attention, and which I am afraid might produce certain
misimpressions as to the import of the decision in this case, I consider it
urgent to clarify my position in respect to the rights of the parties resulting
from the dismissal of the petition herein and the outlining of the
procedure by which the disqualification of petitioner Gokongwei can be
made effective, hence this advance separate opinion.
To start with, inasmuch as petitioner Gokongwei himself placed the issue
of the validity of said amended by-laws squarely before the Court for
resolution, because he feels, rightly or wrongly, he can no longer have
due process or justice from the Securities and Exchange Commission,
and the private respondents have joined with him in that respect, the six
votes cast by Justices Makasiar, Antonio, Santos, Abad Santos, de
Castro and this writer in favor of validity of the amended by-laws in
question, with only four members of this Court, namely, Justices
Teehankee, Concepcion Jr., Fernandez and Guerrero opining otherwise,
and with Chief Justice Castro and Justice Fernando reserving their votes
thereon, and Justices Aquino and Melencio Herrera not voting, thereby
resulting in the dismissal of the petition "insofar as it assails the validity of
the amended by- laws ... for lack of necessary votes", has no other legal
consequence than that it is the law of the case as far as the parties
herein are concerned, albeit the majority opinion of six against four
Justices is not doctrinal in the sense that it cannot be cited as necessarily
a precedent for subsequent cases. This means that petitioner Gokongwei
and the respondents, including the Securities and Exchange
Commission, are bound by the foregoing result, namely, that the Court en
banc has not found merit in the claim that the amended by-laws in
question are invalid. Indeed, it is one thing to say that dismissal of the
case is not doctrinal and entirely another thing to maintain that such
dismissal leaves the issue unsettled. It is somewhat of a misreading and
misconstruction of Section 11 of Rule 56, contrary to the well-known
established norm observed by this Court, to state that the dismissal of a
petition for lack of the necessary votes does not amount to a decision on
the merits. Unquestionably, the Court is deemed to find no merit in a
petition in two ways, namely, (1) when eight or more members vote
expressly in that sense and (2) when the required number of justices
needed to sustain the same cannot be had.
I reiterate, therefore, that as between the parties herein, the issue of
validity of the challenged by-laws is already settled. From which it follows
that the same are already enforceable-insofar as they are concerned.
Petitioner Gokongwei may not hereafter act on the assumption that he
can revive the issue of validity whether in the Securities and Exchange
Commission, in this Court or in any other forum, unless he proceeds on
the basis of a factual milieu different from the setting of this case. Not
even the Securities and Exchange Commission may pass on such
question anymore at the instance of herein petitioner or anyone acting in
his stead or on his behalf. The vote of four justices to remand the case
thereto cannot alter the situation.
It is very clear that under the decision herein, the issue of validity is a
settled matter for the parties herein as the law of the case, and it is only
the actual implementation of the impugned amended by-laws in the
particular case of petitioner that remains to be passed upon by the
Securities and Exchange Commission, and on appeal therefrom to Us,
assuming the board of directors of San Miguel Corporation should, after
the proper hearing, disqualify him.
To be sure, the record is replete with substantial indications, nay
admissions of petitioner himself, that he is a controlling stockholder of
corporations which are competitors of San Miguel Corporation. The very
substantial areas of such competition involving hundreds of millions of
pesos worth of businesses stand uncontroverted in the records hereof. In
fact, petitioner has even offered, if he should be elected, as director, not
to take part when the board takes up matters affecting the corresponding
areas of competition between his corporation and San Miguel.
Nonetheless, perhaps, it is best that such evidence be formally offered at
the hearing contemplated in Our decision.
As to whether or not petitioner may sit in the board if he wins, definitely,
under the decision in this case, even if petitioner should win, he will have
to immediately leave his position or should be ousted the moment this
Court settles the issue of his actual disqualification, either in a full blown
decision or by denying the petition for review of corresponding decision of
the Securities and Exchange Commission unfavorable to him. And, of
course, as a matter of principle, it is to be expected that the matter of his
disqualification should be resolved expeditiously and within the shortest
possible time, so as to avoid as much juridical injury as possible,
considering that the matter of the validity of the prohibition against
competitors embodied in the amended by-laws is already unquestionable
among the parties herein and to allow him to be in the board for
sometime would create an obviously anomalous and legally incongruous
situation that should not be tolerated. Thus, all the parties concerned
must act promptly and expeditiously.
Additionally, my reservation to explain my vote on the validity of the
amended by-laws still stands.
Castro, C.J., concurs in Justice Barredo's statement that the dismissal
(for lack of necessary votes) of the petition to the extent that "it assails
the validity of the amended by laws," is the law of the case at bar, which
means in effect that as far and only in so far as the parties and the
Securities and Exchange Commission are concerned, the Court has not
found merit in the claim that the amended by-laws in question are invalid.
Antonio and Santos, JJ., concur.
DE CASTRO, J., concurring:
As stated in the decision penned by Justice Antonio, I voted to uphold the
validity of the amendment to the by-laws in question. What induced me to
this view is the practical consideration easily perceived in the following
illustration: If a person becomes a stockholder of a corporation and gets
himself elected as a director, and while he is such a director, he forms his
own corporation competitive or antagonistic to the corporation of which
he is a director, and becomes Chairman of the Board and President of
his own corporation, he may be removed from his position as director,
admittedly one of trust and confidence. If this is so, as seems
undisputably to be the case, a person already controlling, and also the
Chairman of the Board and President of, a corporation, may be barred
from becoming a member of the board of directors of a competitive
corporation. This is my view, even as I am for a restrictive interpretation
of Section 13(5) of the Philippine Corporation Law, under which I would
limit the scope of the provision to corporations engaged in agriculture, but
only as the word agriculture" refers to its more stated meaning as
distinguished from its general and broad connotation. The term would
then mean "farming" or raising the natural products of the soil, such as by
cultivation, in the manner as is required by the Public Land Act in the
acquisition of agricultural land, such as by homestead, before the patent
may be issued. It is my opinion that under the public land statute, the
development of a certain portion of the land applied for as specified in the
law as a condition precedent before the applicant may obtain a patent, is
cultivation, not let us say, poultry raising or piggery, which may be
included in the term Is agriculture" in its broad sense. For under Section
13(5) of the Philippine Corporation Law, construed not in the strict way as
I believe it should, because the provision is in derogation of property
rights, the petitioner in this case would be disqualified from becoming an
officer of either the San Miguel Corporation or his own supposedly
agricultural corporations. It is thus beyond my comprehension why,
feeling as though I am the only member of the Court for a restricted
interpretation of Section 13(5) of Act 1459, doubt still seems to be in the
minds of other members giving the cited provision an unrestricted
interpretation, as to the validity of the amended by-laws in question, or
even holding them null and void.
I concur with the observation of Justice Barredo that despite that less
than six votes are for upholding the validity of the by-laws, their validity is
deemed upheld, as constituting the "law of the case." It could not be
otherwise, after the present petition is dismissed with the relief sought to
declare null and void the said by-laws being denied in effect. A vicious
circle would be created if, should petitioner Gokongwei be barred or
disqualified from running by the Board of Directors of San Miguel
Corporation and the Securities and Exchange Commission sustain the
Board, petitioner could come again to Us, raising the same question he
has raised in the present petition, unless the principle of the "law of the
case" is applied.
Clarifying therefore, my position, I am of the opinion that with the validity
of the by-laws in question standing unimpaired it is now for petitioner to
show that he does not come within the disqualification as therein
provided, both to the Board and later to the Securities and Exchange
Commission, it being a foregone conclusion that, unless petitioner
disposes of his stockholdings in the so-called competitive corporations,
San Miguel Corporation would apply the by-laws against him, His right,
therefore, to run depends on what, on election day, May 8, 1979, the
ruling of the Board and/or the Securities and Exchange Commission on
his qualification to run would be, certainly, not the final ruling of this Court
in the event recourse thereto is made by the party feeling aggrieved, as
intimated in the "Joint Separate Opinion" of Justices Teehankee,
Concepcion, Jr., Fernandez and Guerrero, that only after petitioner's
"disqualification" has ultimately been passed upon by this Court should
petitioner, not be allowed to run. Petitioner may be allowed to run,
despite an adverse decision of both the Board and the Securities and
Exchange Commission, only if he comes to this Court and obtain an
injunction against the enforcement of the decision disqualifying him.
Without such injunction being required, all that petitioner has to do is to
take his time in coming to this Court, and in so doing, he would in the
meantime, be allowed to run, and if he wins, to sit. This would, however,
be contrary to the doctrine that gives binding, if not conclusive, effect of
findings of facts of administrative bodies exercising quasi-judicial
functions upon appellate courts, which should, accordingly, be enforced
until reversed by this Tribunal.
Fernando and Makasiar, JJ., concurs.
Antonio and Santos, JJ., concur
DE CASTRO, J.: concurring:
As stated in the decision penned by Justice Antonio, I voted to uphold the
validity of the amendment to the by-laws in question. What induced me to
this view is the practical consideration easily perceived in the following
illustration: If a person becomes a stockholder of a corporation and gets
himself elected as a director, and while he is such a director, he forms his
own corporation competitive or antagonistic to the corporation of which
he is a director, and becomes Chairman of the Board and President of
his own corporation, he may be removed from his position as director,
admittedly one of trust case, a person already controlling, and also the
Chairman of the Board and President of, a corporation, may be barred
from becoming a member of the board of directors of a competitive
corporation. This is my view, even as I am for restrictive interpretation of
Section 13(5) of the Philippine Corporation Law, under which I would limit
the scope of the provision to corporations engaged in agriculture, but only
as the word "agriculture" refers to its more limited meaning as
distinguished from its general and broad connotation. The term would
then mean "farming" or raising the natural products of the soil, such as by
cultivation, in the manner as in required by the Public Land Act in the
acquisition of agricultural land, such as by homestead, before the patent
may be issued. It is my opinion that under the public land statute, the
development of a certain portion of the land applied for as specified in the
law as a condition precedent before the applicant may obtain a patent, is
cultivation, not let us say, poultry raising or peggery, whch may be
included in the term "agriculture" in its broad sense. For under Section
13(5) of the Philippine Corporation Law, construed not in the strict way as
I believe it should, because the provision is in derogation of property
rights, the petitioner in this case would be disqualified from becoming an
officer of either the San Miguel Corporation or his own supposedly
agricultural corporations. It is thus beyond my comprehension why,
feeling as though I am the only members of the Court for a restricted
interpretation of Section 13(5) of Act 1459, doubt still seems to be in the
minds of other members giving the cited provision an unrestricted
interpretation, as to the validity of the amended by-laws in question, or
even holding them null and void.
I concur with the observation of Justice Barredo that despite that less
than six votes are for upholding the validity of the by-laws, their validity is
deemed upheld, as constituting the "law of the case." It could not be
otherwise, after the present petition is dimissed with the relief sought to
declare null and void the said by-laws being denied in effect. A vicious
circle would be created if, should petitioner Gokongwei be barred or
disqualified from running by the Board, petitioner could come again to Us,
raising the same question he has raised in the present petition, unless
the principle of the "law of the case" is applied.
Clarifying therefore, my position, I am of the opinion that with the validity
of the by-laws in question standing unimpaired, it is nowfor petitioner to
show that he does not come paired, it is now for petitioner to show that
he does not come within the disqualification as therein provided, both to
the Board and later to the Securities and Exhange Commission, it being a
foregone conclusion that, unless petitioner disposes of his stockholdings
in the so-called competitive corporations, San Miguel Corporation would
apply the by-laws against him. His right, therefore, to run depends on
what, on election day, May 8, 1979, the ruling of the Board and/or the
Securities and Exchange Commission on his qualification to run would
be, certainly, not the final ruling of this Court in the event recourse thereto
is made by the party feeling aggrieved, as intimated in the "Joint
Separate Opinion" of Justices Teehankee, Concepcion, Jr., Fernandez
and Guerrero, that only after petitioner's "disqualification" has ultimately
been passed upon by this Court should petitioner not be allowed to run.
Petitioner may be allowed to run, despite anadverse decision of both the
Board and the Securities and Exchange Commission, only if he comes to
this Court and obtain an injunction against the enforcement of the
decision disqualifying him. Without such injunction being required, all that
petitioner has to do is to take his time in coming to this Court, and in so
doing, he would in the meantime, be allowed to run, and if he wins, to sit.
This would, however, be contrary to the doctrine that gives binding, if not
conclusive, effect of findings of facts of administrative bodies exercising
quasi-judicial functions upon appellate courts, which should, accordingly,
be enforced until reversed by this Tribunal.
Separate Opinions
TEEHANKEE, CONCEPCION JR., FERNANDEZ and
GUERRERO, JJ., concurring:
I On the other main issue of the Validity of respondent San Miguel
As correctly stated in the main opinion of Mr. Justice Antonio, the Court is
unanimous in its judgment granting the petitioner as stockholder of
respondent San Miguel Corporation the right to inspect, examine and
secure copies of the records of San Miguel International, inc. (SMI), a
wholly owned foreign subsidiary corporation of respondent San Miguel
Corporation. Respondent commissions en banc Order No. 449, Series of
19 7 7, denying petitioner's right of inspection for "not being a stockholder
of San Miguel International, Inc." has been accordingly set aside. It need
be only pointed out that:
a) The commission's reasoning grossly disregards the
fact that the stockholders of San Miguel Corporation are
likewise the owners of San Miguel International, Inc. as
the corporation's wholly owned foreign subsidiary and
therefore have every right to have access to its books and
records. otherwise, the directors and management of any
Philippine corporation by the simple device of organizing
with the corporation's funds foreign subsidiaries would be
granted complete immunity from the stockholders'
scrutiny of its foreign operations and would have a
conduit for dissipating, if not misappropriating, the
corporation funds and assets by merely channeling them
into foreign subsidiaries' operations; and
b) Petitioner's right of examination herein recognized
refers to all books and records of the foreign subsidiary
SMI which are which are " in respondent corporation's
possession and control" 1, meaning to say regardless of
whether or not such books and records are physically
within the Philippines. all such books and records of SMI
are legally within respondent corporation's "possession
and control" and if nay books or records are kept abroad,
(e.g. in the foreign subsidiary's state of domicile, as is to
be expected), then the respondent corporation's board
and management are obliged under the Court's judgment
to bring and make them (or true copies thereof available
within the Philippines for petitioner's examination and
inspection.
II
Corporation's amendment of its by-laws 2 whereby respondent
corporation's board of directors under its resolution dated April 29, 1977
declared petitioner ineligible to be nominated or to be voted or to be
elected as of the board of directors, the Court, composed of 12 members
(since Mme. Justice Ameurfina Melencio Herrera inhibited herself from
taking part herein, while Mr. Justice Ramon C. Aquino upon submittal of
the main opinion of Mr. Justice Antonio decided not to take part), failed to
reach a conclusive vote or, the required majority of 8 votes to settle the
issue one way or the other.
Six members of the Court, namely, Justices Barredo, Makasiar, Antonio,
Santos, Abad Santos and De Castro, considered the issue purely legal
and voted to sustain the validity per se of the questioned amended by-
laws but nevertheless voted that the prohibition and disqualification
therein provided shall not apply to petitioner Gokongwei until and after he
shall have been given a new and proper hearing" by the corporation's
board of directors and the board's decision of disqualification she'll have
been sustained on appeal by respondent Securities and Exchange
Commission and ultimately by this Court.
The undersigned Justices do not consider the issue as purely legal in the
light of respondent commission's Order No. 451, Series of 1977, denying
petitioner's "Motion for Summary Judgment" on the ground that "the
Commission en banc finds that there (are) unresolved and genuine
issues of fact" 3 as well as its position in this case to the Solicitor General
that the case at bar is "premature" and that the administrative remedies
before the commission should first be availed of and exhausted. 4
We are of the opinion that the questioned amended by-laws, as they are,
(adopted after almost a century of respondent corporation's existence as
a public corporation with its shares freely purchased and traded in the
open market without restriction and disqualification) which would bar
petitioner from qualification, nomination and election as director and
worse, grant the board by 3/4 vote the arbitrary power to bar any
stockholder from his right to be elected as director by the simple
expedient of declaring him to be engaged in a "competitive or
antagonistic business" or declaring him as a "nominee" of the competitive
or antagonistic" stockholder are illegal, oppressive, arbitrary and
unreasonable.
We consider the questioned amended by-laws as being specifically
tailored to discriminate against petitioner and depriving him in violation of
substantive due process of his vested substantial rights as stockholder of
respondent corporation. We further consider said amended by-laws as
violating specific provisions of the Corporation Law which grant and
recognize the right of a minority stockholder like petitioner to be elected
director by the process of cumulative voting ordained by the Law (secs
21 and 30) and the right of a minority director once elected not to be
removed from office of director except for cause by vote of the
stockholders holding 2/3 of the subscribed capital stock (sec. 31). If a
minority stockholder could be disqualified by such a by-laws amendment
under the guise of providing for "qualifications," these mandates of the
Corporation Law would have no meaning or purpose.
These vested and substantial rights granted stockholders under the
Corporation Law may not be diluted or defeated by the general authority
granted by the Corporation Law itself to corporations to adopt their by-
laws (in section 21) which deal principally with the procedures governing
their internal business. The by-laws of any corporation must, be always
within the character limits. What the Corporation Law has granted
stockholders may not be taken away by the corporation's by-laws. The
amendment is further an instrument of oppressiveness and arbitrariness
in that the incumbent directors are thereby enabled to perpetuate
themselves in office by the simple expedient of disqualifying any
unwelcome candidate, no matter how many votes he may have.
However, in view of the inconclusiveness of the vote, we sustain
respondent commission's stand as expressed in its Orders Nos. 450 and
451, Series of 1977 that there are unresolved and genuine issues of fact"
and that it has yet to rule on and finally decide the validity of the disputed
by-law provision", subject to appeal by either party to this Court.
In view of prematurity of the proceedings here (as likewise expressed by
Mr. Justice Fernando), the case should as a consequence be remanded
to the Securities and Exchange Commission as the agency of primary
jurisdiction for a full hearing and reception of evidence of all relevant facts
(which should property be submitted to the commission instead of the
piecemeal documents submitted as annexes to this Court which is not a
trier of facts) concerning not only the petitioner but the members of the
board of directors of respondent corporation as well, so that it may
determine on the basis thereof the issue of the legality of the questioned
amended by-laws, and assuming Chat it holds the same to be valid
whether the same are arbitrarily and unreasonably applied to petitioner
vis a vis other directors, who, petitioner claims, should in such event be
likewise disqualified from sitting in the board of directors by virtue of
conflict of interests or their being likewise engaged in competitive or
antagonistic business" with the corporation such as investment and
finance, coconut oil mills cement, milk and hotels. 5
It should be noted that while the petition may be dismissed in view of the
inconclusiveness of the vote and the Court's failure to affair, the required
8-vote majority to resolve the issue, such as dismissal (for lack of
necessary votes) is of no doctrine value and does not in any manner
resolve the issue of the validity of the questioned amended by-laws nor
foreclose the same. The same should properly be determined in a proper
case in the first instance by the Securities and Exchange Commission as
the agency of primary jurisdiction, as above indicated.
The Court is unanimous, therefore, in its judgment that petitioner
Gokongwei may run for the office of, and if elected, sit as, member of the
board of directors of respondent San Miguel Corporation as stated in the
dispositive portion of the main opinion of Mr. Justice Antonio, to wit: Until
and after petitioner has been given a "new and proper hearing by the
board of directors of said corporation, whose decision shall be
appealable Lo the respondent Securities and Exchange Commission
deliverating and acting en banc and ultimately to this Court" and until '
disqualified in the manner herein provided, the prohibition in the
aforementioned amended by-laws shall not apply to petitioner," In other
words, until and after petitioner shall have been given due process and
proper hearing by the respondent board of directors as to the question of
his qualification or disqualification under the questioned amended by-
laws (assuming that the respondent Securities and Exchange C
commission ultimately upholds the validity of said by laws), and such
disqualification shall have been sustained by respondent Securities and
Exchange Commission and ultimately by final judgment of this Court,
petitioner is deemed eligible for all legal purposes and effects to be
nominated and voted and if elected to sit as a member of the hoard of
directors of respondent San Miguel Corporation.
In view of the Court's unanimous judgment on this point the portion of
respondent commission's Order No. 450, Series of 977 which imposed
"the condition that he [petitioner] cannot sit as board member if elected
until after the Commission shall have finally decided the validity of the
disputed by-law provision" has been likewise accordingly set aside.
III
By way of recapitulation, so that the Court's decision and judgment may
be clear and not subject to ambiguity, we state the following.
1. With the votes of the six Justices concurring unqualifiedly in the main
opinion added to our four votes, plus the Chief Justice's vote and that of
Mr. Justice Fernando, the Court has by twelve (12) votes unanimously
rendered judgment granting petitioner's right to examine and secure
copies of the books and records of San Miguel International, Inc. as a
foreign subsidiary of respondent corporation and respondent
commission's Order No. 449, Series of 1977, to the contrary is set aside:
2. With the same twelve (12) votes, the Court has also unanimously
rendered judgment declaring that until and afterpetitioner shall have been
given due process and proper hearing by the respondent board of
directors as to the question of his disqualification under the questioned
amended by- laws (assuming that the respondent Securities and
Exchange Commission ultimately upholds the validity of said by laws),
and such disqualification shall have been sustained by respondent
Securities and Exchange Commission and ultimately by final judgment of
this Court petitioner is deemed eligible for all legal purposes and effect to
be nominated and voted and if elected to sit as a member of the board of
directors of respondent San Miguel Corporation. Accordingly, respondent
commission's Order No. 450, Series of 1977 to the contrary has likewise
been set aside; and
3. The Court's voting on the validity of respondent corporation's
amendment of the by-laws (sec. 2, Art. 111) is inconclusive without the
required majority of eight votes to settle the issue one way or the other
having been reached. No judgment is rendered by the Court thereon and
the statements of the six Justices who have signed the main opinion on
the legality thereof have no binding effect, much less doctrinal value.
The dismissal of the petition insofar as the question of the validity of the
disputed by-laws amendment is concerned is not by an judgment with the
required eight votes but simply by force of Rule 56, section II of the Rules
of Court, the pertinent portion of which provides that "where the court en
banc is equally divided in opinion, or the necessary majority cannot be
had, the case shall be reheard, and if on re-hearing no decision is
reached, the action shall be dismissed if originally commenced in the
court ...." The end result is that the Court has thereby dismissed the
petition which prayed that the Court bypass the commission and directly
resolved the issue and therefore the respondent commission may now
proceed, as announced in its Order No. 450, Series of 1977, to hear the
case before it and receive all relevant evidence bearing on the issue as
hereinabove indicated, and resolve the "unresolved and genuine issues
of fact" (as per Order No. 451, Series of 1977) and the issues of legality
of the disputed by-laws amendment.
Teehankee, Concepcion, Jr., and Fernandez, JJ., concur.
Guerrero, J., concurred.
TEEHANKEE, CONCEPCION JR., FERNANDEZ and
GUERRERO, JJ., concurring:
This supplemental opinion is issued with reference to the advance
separate opinion of Mr. Justice Barredo issued by him as to "certain
misimpressions as to the import of the decision in this case" which might
be produced by our joint separate opinion of April 11, 1979 and
"urgent(ly) to clarify (his) position in respect to the rights of the parties
resulting from the dismissal of the petition herein and the outline of the
procedure by which the disqualification of petitioner Gokongwei can be
made effective."
1. Mr. Justice Barredo's advances separate opinion "that as between the
parties herein, the issue of the validity of the challenged by-laws is
already settled" had, of course, no binding effect. The judgment of the
Court is found on pages 59-61 of the decision of April 11, 1979, penned
by Mr. Justice Antonio, wherein on the question of the validity of the
amended by-laws the Court's inconclusive voting is set forth as follows:
 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 by-laws and that this question
should properly be resolved first by the SEC as the
agency of primary jurisdiction ... 1
As stated in said judgment itself, for lack of the necessary votes, the
petition, insofar as it assails the validity of the questioned by-laws, was
dismissed.
2. Mr. Justice Barredo now contends contrary to the undersigned's
understanding, as stated on pages 8 and 9 of our joint separate opinion
of April 11, 1979 that the legal effect of the dismissal of the petition on the
question of validity of the amended by-laws for lack of the necessary
votes simply means that "the Court has thereby dismissed the petition
which prayed that the Court by-pass the commission and directly resolve
the issue and therefore the respondent commission may now proceed, as
announced in its Order No. 450, Series of 1977, to hear the case before it
and receive all relevant evidence bearing on the issue as hereinabove
indicated, and resolve the 'unresolved and genuine issues of fact' (as per
Order No. 451, Series of 1977) and the issue of legality of the disputed
by-laws amendment," that such dismissal "has no other legal
consequence than that it is the law of the case as far as the parties are
concerned, albeit the majority of the opinion of six against four Justices is
not doctrinal in the sense that it cannot be cited as necessarily a
precedent for subsequent cases."
We hold on our part that the doctrine of the law of the case invoked by
Mr. Justice Barredo has no applicability for the following reasons:
a) Our jurisprudence is quite clear that this doctrine may be invoked only
where there has been a final and conclusive determination of an issue in
the first case later invoked as the law of the case.
Thus, in People vs. Olarte, 2 we held that
"Law of the case" has been defined as the opinion
delivered on a former appeal More specifically, it means
that whatever is once irrevocably established as
the controlling legal rule of decision between the same
parties in the same case continues to he the law of the
case, whether correct on general principles or not, so long
as the facts on which such decision was predicated
continue to be the facts of the case before the court. ...
It need not be stated that the Supreme Court, being the
court of last resort, is the final arbiter of all legal questions
properly brought before it and that its decision in any
given case constitutes the law of that particular case.
Once its judgment becomes final it is binding on all
inferior courts, and hence beyond their power and
authority to alter or modify Kabigting vs. Acting Director of
Prisons, G. R. No. L-15548, October 30, 1962).
"The decision of this Court on that appeal by the
government from the order of dismissal, holding that said
appeal did not place the appellants, including Absalon
Bignay, in double jeopardy, signed and concurred in by
six Justices as against three dissenters headed by the
Chief Justice, promulgated way back in the year 1952,
has long become the law of the case. It may be
erroneous, judged by the law on double jeopardy as
recently interpreted by this same Tribunal Even so, it may
not be disturbed and modified. Our recent interpretation of
the law may be applied to new cases, but certainly not to
an oldone finally and conclusively determined. As already
stated, the majority opinion in that appeal is now the law
of the case." (People vs. Pinuila)
The doctrine of the law of the case, therefore, has no applicability
whatsoever herein insofar as the question of the validity or invalidity of
the amended by-laws is concerned. The Court's judgment of April 11,
1979 clearly shows that the voting on this question was inconclusive with
six against four Justices and two other Justices (the Chief Justice and Mr.
Justice Fernando) expressly reserving their votes thereon, and Mr.
Justice Aquino while taking no part in effect likewise expressly reserved
his vote thereon. No final and conclusive determination could be reached
on the issue and pursuant to the provisions of Rule 56, section 11, since
this special civil action originally commenced in this Court, the action was
simply dismissed with the result that no law of the case was laid down
insofar as the issue of the validity or invalidity of the questioned by-laws
is concerned, and the relief sought herein by petitioner that this Court by-
pass the SEC which has yet to hear and determine the same issue
pending before it below and that this Court itself directly resolve the said
issue stands denied.
b) The contention of Mr. Justice Barredo that the result of the dismiss of
the case was that "petitioner Gokongwei may not hereafter act on the
assumption that he can revive the issue of the validity whether in the
Securities and Exchange Commission, in this Court or in any other forum,
unless he proceeds on the basis of a factual milieu different from the
setting of this case Not even the Securities and Exchange Commission
may pass on such question anymore at the instance of herein petitioner
or anyone acting in his stead or on his behalf, " appears to us to be
untenable.
The Court through the decision of April 11, 1979, by the unanimous votes
of the twelve participating Justices headed by the Chief Justice, ruled that
petitioner Gokongwei was entitled to a "new and proper hearing" by the
SMC board of directors on the matter of his disqualification under the
questioned by-laws and that the board's "decision shall be appealable to
the respondent Securities and Exchange Commission deliberating and
acting en banc and ultimately to this Court (and) unless disqualified in the
manner herein provided, the prohibition in the aforementioned amended
by-laws shall not apply to petitioner."
The entire Court, therefore, recognized that petitioner had not been given
procedural due process by the SMC board on the matter of his
disqualification and that he was entitled to a "new and proper hearing". It
stands to reason that in such hearing, petitioner could raise not only
questions of fact but questions of law, particularly questions of law
affecting the investing public and their right to representation on the
board as provided by law — not to mention that as borne out by the fact
that no restriction whatsoever appears in the court's decision, it was
never contemplated that petitioner was to be limited to questions of fact
and could not raise the fundamental questions of law bearing on the
invalidity of the questioned amended by-laws at such hearing before the
SMC board. Furthermore, it was expressly provided unanimously in the
Court's decision that the SMC board's decision on the disqualification of
petitioner ("assuming the board of directors of San Miguel Corporation
should, after the proper hearing, disqualify him" as qualified in Mr. Justice
Barredo's own separate opinion, at page 2) shall be appealable to
respondent Securities and Exchange Commission "deliberating and
acting en banc and "untimately to this Court." Again, the Court's judgment
as set forth in its decision of April 11, 1979 contains nothing that would
warrant the opinion now expressed that respondent Securities and
Exchange Commission may not pass anymore on the question of the
invalidity of the amended by-laws. Certainly, it cannot be contended that
the Court in dismissing the petition for lack of necessary votes actually
by-passed the Securities and Exchange Commission and directly ruled
itself on the invalidity of the questioned by-laws when it itself could not
reach a final and conclusive vote (a minimum of eight votes) on the issue
and three other Justices (the Chief Justice and Messrs. Justices
Fernando and Aquino) had expressly reserved their vote until after further
hearings (first before the Securities and Exchange Commission and
ultimately in this Court).
Such a view espoused by Mr. Justice Barredo could conceivably result in
an incongruous situation where supposedly under the law of this case the
questioned by-laws would be held valid as against petitioner Gokongwei
and yet the same may be stricken off as invalid as to all other SMC
shareholders in a proper case.
3. It need only be pointed out that Mr. Justice Barredo's advance
separate opinion can in no way affect or modify the judgment of this
Court as set forth in the decision of April 11, 1979 and discussed
hereinabove. The same bears the unqualified concurrence of only three
Justices out of the six Justices who originally voted for the validity per se
of the questioned by-laws, namely, Messrs. Justices Antonio, Santos and
De Castro. Messrs. Justices Fernando and Makasiar did not concur
therein but they instead concurred with the limited concurrence of the
Chief Justice touching on the law of the case which guardedly held that
the Court has not found merit in the claim that the amended bylaws in
question are invalid but without in any manner foreclosing the issue and
as a matter of fact and law, without in any manner changing or
modifying the above-quoted vote of the Chief Justice as officially
rendered in the decision of April 11, 1979, wherein he precisely "reserved
(his) vote on the validity of the amended by-laws."
4. A word on the separate opinion of Mr. Justice Pacifico de Castro
attached to the advance separate opinion of Mr. Justice Barredo. Mr.
Justice De Castro advances his interpretation as to a restrictive
construction of section 13(5) of the Philippine Corporation Law, ignoring
or disregarding the fact that during the Court's deliberations it was
brought out that this prohibitory provision was and is not raised in issue in
this case whether here or in the Securities and Exchange Commission
below (outside of a passing argument by Messrs. Angara, Abello,
Concepcion, Regala & Cruz, as counsels for respondent Sorianos in their
Memorandum of June 26, 1978 that "(T)he disputed By-Laws does not
prohibit petitioner from holding onto, or even increasing his SMC
investment; it only restricts any shifting on the part of petitioner from
passive investor to a director of the company." 3
As a consequence, the Court abandoned the Idea of calling for another
hearing wherein the parties could properly raise and discuss this question
as a new issue and instead rendered the decision in question, under
which the question of section 13(5) could be raised at a new and proper
hearing before the SMC board and in the Securities and Exchange
Commission and in due course before this Court (but with the clear
understanding that since both corporations, the Robina and SMC are
engaged in agriculture as submitted by the Sorianos' counsel in their said
memorandum, the issue could be raised likewise against SMC and its
other shareholders, directors, if not against SMC itself. As expressly
stated in the Chief Justices reservation of his vote, the matter of the
question of the applicability of the said section 13(5) to petitioner would
be heard by this Court at the appropriate time after the proceedings
below (and necessarily the question of the validity of the amended by-
laws would be taken up anew and the Court would at that time be able to
reach a final and conclusive vote).
Mr. Justice De Castro's personal interpretation of the decision of April 11,
1979 that petitioner may be allowed to run for election despite adverse
decision of both the SMC board and the Securities and Exchange
Commission "only if he comes to this Court and obtains an injunction
against the enforcement of the decision disqualifying him" is patently
contradictory of his vote on the matter as expressly given in the judgment
in the Court's decision of April 11, 1979 (at page 59) that petitioner could
run and if elected, sit as director of the respondent SMC and could be
disqualified only 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 aforementioned amended
by-laws shall not apply to petitioner."
Teehankee, Concepcion Jr., Fernandez and Guerrero, JJ., concur.
BARREDO, J., concurring:
I reserved the filing of a separate opinion in order to state my own
reasons for voting in favor of the validity of the amended by-laws in
question. Regrettably, I have not yet finished preparing the same. In
view, however, of the joint separate opinion of Justices Teehankee,
Concepcion Jr., Fernandez and Guerrero, the full text of which has just
come to my attention, and which I am afraid might produce certain
misimpressions as to the import of the decision in this case, I consider it
urgent to clarify my position in respect to the rights of the parties resulting
from the dismissal of the petition herein and the outlining of the
procedure by which the disqualification of petitioner Gokongwei can be
made effective, hence this advance separate opinion.
To start with, inasmuch as petitioner Gokongwei himself placed the issue
of the validity of said amended by-laws squarely before the Court for
resolution, because he feels, rightly or wrongly, he can no longer have
due process or justice from the Securities and Exchange Commission,
and the private respondents have joined with him in that respect, the six
votes cast by Justices Makasiar, Antonio, Santos, Abad Santos, de
Castro and this writer in favor of validity of the amended by-laws in
question, with only four members of this Court, namely, Justices
Teehankee, Concepcion Jr., Fernandez and Guerrero opining otherwise,
and with Chief Justice Castro and Justice Fernando reserving their votes
thereon, and Justices Aquino and Melencio Herrera not voting, thereby
resulting in the dismissal of the petition "insofar as it assails the validity of
the amended by- laws ... for lack of necessary votes", has no other legal
consequence than that it is the law of the case as far as the parties
herein are concerned, albeit the majority opinion of six against four
Justices is not doctrinal in the sense that it cannot be cited as necessarily
a precedent for subsequent cases. This means that petitioner Gokongwei
and the respondents, including the Securities and Exchange
Commission, are bound by the foregoing result, namely, that the Court en
banc has not found merit in the claim that the amended by-laws in
question are invalid. Indeed, it is one thing to say that dismissal of the
case is not doctrinal and entirely another thing to maintain that such
dismissal leaves the issue unsettled. It is somewhat of a misreading and
misconstruction of Section 11 of Rule 56, contrary to the well-known
established norm observed by this Court, to state that the dismissal of a
petition for lack of the necessary votes does not amount to a decision on
the merits. Unquestionably, the Court is deemed to find no merit in a
petition in two ways, namely, (1) when eight or more members vote
expressly in that sense and (2) when the required number of justices
needed to sustain the same cannot be had.
I reiterate, therefore, that as between the parties herein, the issue of
validity of the challenged by-laws is already settled. From which it follows
that the same are already enforceable-insofar as they are concerned.
Petitioner Gokongwei may not hereafter act on the assumption that he
can revive the issue of validity whether in the Securities and Exchange
Commission, in this Court or in any other forum, unless he proceeds on
the basis of a factual milieu different from the setting of this case. Not
even the Securities and Exchange Commission may pass on such
question anymore at the instance of herein petitioner or anyone acting in
his stead or on his behalf. The vote of four justices to remand the case
thereto cannot alter the situation.
It is very clear that under the decision herein, the issue of validity is a
settled matter for the parties herein as the law of the case, and it is only
the actual implementation of the impugned amended by-laws in the
particular case of petitioner that remains to be passed upon by the
Securities and Exchange Commission, and on appeal therefrom to Us,
assuming the board of directors of San Miguel Corporation should, after
the proper hearing, disqualify him.
To be sure, the record is replete with substantial indications, nay
admissions of petitioner himself, that he is a controlling stockholder of
corporations which are competitors of San Miguel Corporation. The very
substantial areas of such competition involving hundreds of millions of
pesos worth of businesses stand uncontroverted in the records hereof. In
fact, petitioner has even offered, if he should be elected, as director, not
to take part when the board takes up matters affecting the corresponding
areas of competition between his corporation and San Miguel.
Nonetheless, perhaps, it is best that such evidence be formally offered at
the hearing contemplated in Our decision.
As to whether or not petitioner may sit in the board if he wins, definitely,
under the decision in this case, even if petitioner should win, he will have
to immediately leave his position or should be ousted the moment this
Court settles the issue of his actual disqualification, either in a full blown
decision or by denying the petition for review of corresponding decision of
the Securities and Exchange Commission unfavorable to him. And, of
course, as a matter of principle, it is to be expected that the matter of his
disqualification should be resolved expeditiously and within the shortest
possible time, so as to avoid as much juridical injury as possible,
considering that the matter of the validity of the prohibition against
competitors embodied in the amended by-laws is already unquestionable
among the parties herein and to allow him to be in the board for
sometime would create an obviously anomalous and legally incongruous
situation that should not be tolerated. Thus, all the parties concerned
must act promptly and expeditiously.
Additionally, my reservation to explain my vote on the validity of the
amended by-laws still stands.
Castro, C.J., concurs in Justice Barredo's statement that the dismissal
(for lack of necessary votes) of the petition to the extent that "it assails
the validity of the amended by laws," is the law of the case at bar, which
means in effect that as far and only in so far as the parties and the
Securities and Exchange Commission are concerned, the Court has not
found merit in the claim that the amended by-laws in question are invalid.
Antonio and Santos, JJ., concur.
DE CASTRO, J., concurring:
As stated in the decision penned by Justice Antonio, I voted to uphold the
validity of the amendment to the by-laws in question. What induced me to
this view is the practical consideration easily perceived in the following
illustration: If a person becomes a stockholder of a corporation and gets
himself elected as a director, and while he is such a director, he forms his
own corporation competitive or antagonistic to the corporation of which
he is a director, and becomes Chairman of the Board and President of
his own corporation, he may be removed from his position as director,
admittedly one of trust and confidence. If this is so, as seems
undisputably to be the case, a person already controlling, and also the
Chairman of the Board and President of, a corporation, may be barred
from becoming a member of the board of directors of a competitive
corporation. This is my view, even as I am for a restrictive interpretation
of Section 13(5) of the Philippine Corporation Law, under which I would
limit the scope of the provision to corporations engaged in agriculture, but
only as the word agriculture" refers to its more stated meaning as
distinguished from its general and broad connotation. The term would
then mean "farming" or raising the natural products of the soil, such as by
cultivation, in the manner as is required by the Public Land Act in the
acquisition of agricultural land, such as by homestead, before the patent
may be issued. It is my opinion that under the public land statute, the
development of a certain portion of the land applied for as specified in the
law as a condition precedent before the applicant may obtain a patent, is
cultivation, not let us say, poultry raising or piggery, which may be
included in the term Is agriculture" in its broad sense. For under Section
13(5) of the Philippine Corporation Law, construed not in the strict way as
I believe it should, because the provision is in derogation of property
rights, the petitioner in this case would be disqualified from becoming an
officer of either the San Miguel Corporation or his own supposedly
agricultural corporations. It is thus beyond my comprehension why,
feeling as though I am the only member of the Court for a restricted
interpretation of Section 13(5) of Act 1459, doubt still seems to be in the
minds of other members giving the cited provision an unrestricted
interpretation, as to the validity of the amended by-laws in question, or
even holding them null and void.
I concur with the observation of Justice Barredo that despite that less
than six votes are for upholding the validity of the by-laws, their validity is
deemed upheld, as constituting the "law of the case." It could not be
otherwise, after the present petition is dismissed with the relief sought to
declare null and void the said by-laws being denied in effect. A vicious
circle would be created if, should petitioner Gokongwei be barred or
disqualified from running by the Board of Directors of San Miguel
Corporation and the Securities and Exchange Commission sustain the
Board, petitioner could come again to Us, raising the same question he
has raised in the present petition, unless the principle of the "law of the
case" is applied.
Clarifying therefore, my position, I am of the opinion that with the validity
of the by-laws in question standing unimpaired it is now for petitioner to
show that he does not come within the disqualification as therein
provided, both to the Board and later to the Securities and Exchange
Commission, it being a foregone conclusion that, unless petitioner
disposes of his stockholdings in the so-called competitive corporations,
San Miguel Corporation would apply the by-laws against him, His right,
therefore, to run depends on what, on election day, May 8, 1979, the
ruling of the Board and/or the Securities and Exchange Commission on
his qualification to run would be, certainly, not the final ruling of this Court
in the event recourse thereto is made by the party feeling aggrieved, as
intimated in the "Joint Separate Opinion" of Justices Teehankee,
Concepcion, Jr., Fernandez and Guerrero, that only after petitioner's
"disqualification" has ultimately been passed upon by this Court should
petitioner, not be allowed to run. Petitioner may be allowed to run,
despite an adverse decision of both the Board and the Securities and
Exchange Commission, only if he comes to this Court and obtain an
injunction against the enforcement of the decision disqualifying him.
Without such injunction being required, all that petitioner has to do is to
take his time in coming to this Court, and in so doing, he would in the
meantime, be allowed to run, and if he wins, to sit. This would, however,
be contrary to the doctrine that gives binding, if not conclusive, effect of
findings of facts of administrative bodies exercising quasi-judicial
functions upon appellate courts, which should, accordingly, be enforced
until reversed by this Tribunal.
Fernando and Makasiar, JJ., concurs.
Antonio and Santos, JJ., concur
# Separate Opinions
TEEHANKEE, CONCEPCION JR., FERNANDEZ and
GUERRERO, JJ., concurring:
I
As correctly stated in the main opinion of Mr. Justice Antonio, the Court is
unanimous in its judgment granting the petitioner as stockholder of
respondent San Miguel Corporation the right to inspect, examine and
secure copies of the records of San Miguel International, inc. (SMI), a
wholly owned foreign subsidiary corporation of respondent San Miguel
Corporation. Respondent commissions en banc Order No. 449, Series of
19 7 7, denying petitioner's right of inspection for "not being a stockholder
of San Miguel International, Inc." has been accordingly set aside. It need
be only pointed out that:
 a) The commission's reasoning grossly disregards the
fact that the stockholders of San Miguel Corporation are
likewise the owners of San Miguel International, Inc. as
the corporation's wholly owned foreign subsidiary and
therefore have every right to have access to its books and
records. otherwise, the directors and management of any
Philippine corporation by the simple device of organizing
with the corporation's funds foreign subsidiaries would be
granted complete immunity from the stockholders'
scrutiny of its foreign operations and would have a
conduit for dissipating, if not misappropriating, the
corporation funds and assets by merely channeling them
into foreign subsidiaries' operations; and
b) Petitioner's right of examination herein recognized
refers to all books and records of the foreign subsidiary
SMI which are which are " in respondent corporation's
possession and control" 1, meaning to say regardless of
whether or not such books and records are physically
within the Philippines. all such books and records of SMI
are legally within respondent corporation's "possession
and control" and if nay books or records are kept abroad,
(e.g. in the foreign subsidiary's state of domicile, as is to
be expected), then the respondent corporation's board
and management are obliged under the Court's judgment
to bring and make them (or true copies thereof available
within the Philippines for petitioner's examination and
inspection.
II
On the other main issue of the Validity of respondent San Miguel
Corporation's amendment of its by-laws 2 whereby respondent
corporation's board of directors under its resolution dated April 29, 1977
declared petitioner ineligible to be nominated or to be voted or to be
elected as of the board of directors, the Court, composed of 12 members
(since Mme. Justice Ameurfina Melencio Herrera inhibited herself from
taking part herein, while Mr. Justice Ramon C. Aquino upon submittal of
the main opinion of Mr. Justice Antonio decided not to take part), failed to
reach a conclusive vote or, the required majority of 8 votes to settle the
issue one way or the other.
Six members of the Court, namely, Justices Barredo, Makasiar, Antonio,
Santos, Abad Santos and De Castro, considered the issue purely legal
and voted to sustain the validity per se of the questioned amended by-
laws but nevertheless voted that the prohibition and disqualification
therein provided shall not apply to petitioner Gokongwei until and after he
shall have been given a new and proper hearing" by the corporation's
board of directors and the board's decision of disqualification she'll have
been sustained on appeal by respondent Securities and Exchange
Commission and ultimately by this Court.
The undersigned Justices do not consider the issue as purely legal in the
light of respondent commission's Order No. 451, Series of 1977, denying
petitioner's "Motion for Summary Judgment" on the ground that "the
Commission en banc finds that there (are) unresolved and genuine
issues of fact" 3 as well as its position in this case to the Solicitor General
that the case at bar is "premature" and that the administrative remedies
before the commission should first be availed of and exhausted. 4
We are of the opinion that the questioned amended by-laws, as they are,
(adopted after almost a century of respondent corporation's existence as
a public corporation with its shares freely purchased and traded in the
open market without restriction and disqualification) which would bar
petitioner from qualification, nomination and election as director and
worse, grant the board by 3/4 vote the arbitrary power to bar any
stockholder from his right to be elected as director by the simple
expedient of declaring him to be engaged in a "competitive or
antagonistic business" or declaring him as a "nominee" of the competitive
or antagonistic" stockholder are illegal, oppressive, arbitrary and
unreasonable.
We consider the questioned amended by-laws as being specifically
tailored to discriminate against petitioner and depriving him in violation of
substantive due process of his vested substantial rights as stockholder of
respondent corporation. We further consider said amended by-laws as
violating specific provisions of the Corporation Law which grant and
recognize the right of a minority stockholder like petitioner to be elected
director by the process of cumulative voting ordained by the Law (secs
21 and 30) and the right of a minority director once elected not to be
removed from office of director except for cause by vote of the
stockholders holding 2/3 of the subscribed capital stock (sec. 31). If a
minority stockholder could be disqualified by such a by-laws amendment
under the guise of providing for "qualifications," these mandates of the
Corporation Law would have no meaning or purpose.
These vested and substantial rights granted stockholders under the
Corporation Law may not be diluted or defeated by the general authority
granted by the Corporation Law itself to corporations to adopt their by-
laws (in section 21) which deal principally with the procedures governing
their internal business. The by-laws of any corporation must, be always
within the character limits. What the Corporation Law has granted
stockholders may not be taken away by the corporation's by-laws. The
amendment is further an instrument of oppressiveness and arbitrariness
in that the incumbent directors are thereby enabled to perpetuate
themselves in office by the simple expedient of disqualifying any
unwelcome candidate, no matter how many votes he may have.
However, in view of the inconclusiveness of the vote, we sustain
respondent commission's stand as expressed in its Orders Nos. 450 and
451, Series of 1977 that there are unresolved and genuine issues of fact"
and that it has yet to rule on and finally decide the validity of the disputed
by-law provision", subject to appeal by either party to this Court.
In view of prematurity of the proceedings here (as likewise expressed by
Mr. Justice Fernando), the case should as a consequence be remanded
to the Securities and Exchange Commission as the agency of primary
jurisdiction for a full hearing and reception of evidence of all relevant facts
(which should property be submitted to the commission instead of the
piecemeal documents submitted as annexes to this Court which is not a
trier of facts) concerning not only the petitioner but the members of the
board of directors of respondent corporation as well, so that it may
determine on the basis thereof the issue of the legality of the questioned
amended by-laws, and assuming Chat it holds the same to be valid
whether the same are arbitrarily and unreasonably applied to petitioner
vis a vis other directors, who, petitioner claims, should in such event be
likewise disqualified from sitting in the board of directors by virtue of
conflict of interests or their being likewise engaged in competitive or
antagonistic business" with the corporation such as investment and
finance, coconut oil mills cement, milk and hotels. 5
It should be noted that while the petition may be dismissed in view of the
inconclusiveness of the vote and the Court's failure to affair, the required
8-vote majority to resolve the issue, such as dismissal (for lack of
necessary votes) is of no doctrine value and does not in any manner
resolve the issue of the validity of the questioned amended by-laws nor
foreclose the same. The same should properly be determined in a proper
case in the first instance by the Securities and Exchange Commission as
the agency of primary jurisdiction, as above indicated.
The Court is unanimous, therefore, in its judgment that petitioner
Gokongwei may run for the office of, and if elected, sit as, member of the
board of directors of respondent San Miguel Corporation as stated in the
dispositive portion of the main opinion of Mr. Justice Antonio, to wit: Until
and after petitioner has been given a "new and proper hearing by the
board of directors of said corporation, whose decision shall be
appealable Lo the respondent Securities and Exchange Commission
deliverating and acting en banc and ultimately to this Court" and until '
disqualified in the manner herein provided, the prohibition in the
aforementioned amended by-laws shall not apply to petitioner," In other
words, until and after petitioner shall have been given due process and
proper hearing by the respondent board of directors as to the question of
his qualification or disqualification under the questioned amended by-
laws (assuming that the respondent Securities and Exchange C
commission ultimately upholds the validity of said by laws), and such
disqualification shall have been sustained by respondent Securities and
Exchange Commission and ultimately by final judgment of this Court,
petitioner is deemed eligible for all legal purposes and effects to be
nominated and voted and if elected to sit as a member of the hoard of
directors of respondent San Miguel Corporation.
In view of the Court's unanimous judgment on this point the portion of
respondent commission's Order No. 450, Series of 977 which imposed
"the condition that he [petitioner] cannot sit as board member if elected
until after the Commission shall have finally decided the validity of the
disputed by-law provision" has been likewise accordingly set aside.
III
By way of recapitulation, so that the Court's decision and judgment may
be clear and not subject to ambiguity, we state the following.
1. With the votes of the six Justices concurring unqualifiedly in the main
opinion added to our four votes, plus the Chief Justice's vote and that of
Mr. Justice Fernando, the Court has by twelve (12) votes unanimously
rendered judgment granting petitioner's right to examine and secure
copies of the books and records of San Miguel International, Inc. as a
foreign subsidiary of respondent corporation and respondent
commission's Order No. 449, Series of 1977, to the contrary is set aside:
2. With the same twelve (12) votes, the Court has also unanimously
rendered judgment declaring that until and afterpetitioner shall have been
given due process and proper hearing by the respondent board of
directors as to the question of his disqualification under the questioned
amended by- laws (assuming that the respondent Securities and
Exchange Commission ultimately upholds the validity of said by laws),
and such disqualification shall have been sustained by respondent
Securities and Exchange Commission and ultimately by final judgment of
this Court petitioner is deemed eligible for all legal purposes and effect to
be nominated and voted and if elected to sit as a member of the board of
directors of respondent San Miguel Corporation. Accordingly, respondent
commission's Order No. 450, Series of 1977 to the contrary has likewise
been set aside; and
3. The Court's voting on the validity of respondent corporation's
amendment of the by-laws (sec. 2, Art. 111) is inconclusive without the
required majority of eight votes to settle the issue one way or the other
having been reached. No judgment is rendered by the Court thereon and
the statements of the six Justices who have signed the main opinion on
the legality thereof have no binding effect, much less doctrinal value.
The dismissal of the petition insofar as the question of the validity of the
disputed by-laws amendment is concerned is not by an judgment with the
required eight votes but simply by force of Rule 56, section II of the Rules
of Court, the pertinent portion of which provides that "where the court en
banc is equally divided in opinion, or the necessary majority cannot be
had, the case shall be reheard, and if on re-hearing no decision is
reached, the action shall be dismissed if originally commenced in the
court ...." The end result is that the Court has thereby dismissed the
petition which prayed that the Court bypass the commission and directly
resolved the issue and therefore the respondent commission may now
proceed, as announced in its Order No. 450, Series of 1977, to hear the
case before it and receive all relevant evidence bearing on the issue as
hereinabove indicated, and resolve the "unresolved and genuine issues
of fact" (as per Order No. 451, Series of 1977) and the issues of legality
of the disputed by-laws amendment.
Teehankee, Concepcion, Jr., and Fernandez, JJ., concur.
Guerrero, J., concurred.
TEEHANKEE, CONCEPCION JR., FERNANDEZ and
GUERRERO, JJ., concurring:
This supplemental opinion is issued with reference to the advance
separate opinion of Mr. Justice Barredo issued by him as to "certain
misimpressions as to the import of the decision in this case" which might
be produced by our joint separate opinion of April 11, 1979 and
"urgent(ly) to clarify (his) position in respect to the rights of the parties
resulting from the dismissal of the petition herein and the outline of the
procedure by which the disqualification of petitioner Gokongwei can be
made effective."
1. Mr. Justice Barredo's advances separate opinion "that as between the
parties herein, the issue of the validity of the challenged by-laws is
already settled" had, of course, no binding effect. The judgment of the
Court is found on pages 59-61 of the decision of April 11, 1979, penned
by Mr. Justice Antonio, wherein on the question of the validity of the
amended by-laws the Court's inconclusive voting is set forth as follows:
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 by-laws and that this question
should properly be resolved first by the SEC as the
agency of primary jurisdiction ... 1
As stated in said judgment itself, for lack of the necessary votes, the
petition, insofar as it assails the validity of the questioned by-laws, was
dismissed.
2. Mr. Justice Barredo now contends contrary to the undersigned's
understanding, as stated on pages 8 and 9 of our joint separate opinion
of April 11, 1979 that the legal effect of the dismissal of the petition on the
question of validity of the amended by-laws for lack of the necessary
votes simply means that "the Court has thereby dismissed the petition
which prayed that the Court by-pass the commission and directly resolve
the issue and therefore the respondent commission may now proceed, as
announced in its Order No. 450, Series of 1977, to hear the case before it
and receive all relevant evidence bearing on the issue as hereinabove
indicated, and resolve the 'unresolved and genuine issues of fact' (as per
Order No. 451, Series of 1977) and the issue of legality of the disputed
by-laws amendment," that such dismissal "has no other legal
consequence than that it is the law of the case as far as the parties are
concerned, albeit the majority of the opinion of six against four Justices is
not doctrinal in the sense that it cannot be cited as necessarily a
precedent for subsequent cases."
We hold on our part that the doctrine of the law of the case invoked by
Mr. Justice Barredo has no applicability for the following reasons:
a) Our jurisprudence is quite clear that this doctrine may be invoked only
where there has been a final and conclusive determination of an issue in
the first case later invoked as the law of the case.
Thus, in People vs. Olarte, 2 we held that
"Law of the case" has been defined as the opinion
delivered on a former appeal More specifically, it means
that whatever is once irrevocably established as
the controlling legal rule of decision between the same
parties in the same case continues to he the law of the
case, whether correct on general principles or not, so long
as the facts on which such decision was predicated
continue to be the facts of the case before the court. ...
It need not be stated that the Supreme Court, being the
court of last resort, is the final arbiter of all legal questions
properly brought before it and that its decision in any
given case constitutes the law of that particular case.
Once its judgment becomes final it is binding on all
inferior courts, and hence beyond their power and
authority to alter or modify Kabigting vs. Acting Director of
Prisons, G. R. No. L-15548, October 30, 1962).
"The decision of this Court on that appeal by the
government from the order of dismissal, holding that said
appeal did not place the appellants, including Absalon
Bignay, in double jeopardy, signed and concurred in by
six Justices as against three dissenters headed by the
Chief Justice, promulgated way back in the year 1952,
has long become the law of the case. It may be
erroneous, judged by the law on double jeopardy as
recently interpreted by this same Tribunal Even so, it may
not be disturbed and modified. Our recent interpretation of
the law may be applied to new cases, but certainly not to
an oldone finally and conclusively determined. As already
stated, the majority opinion in that appeal is now the law
of the case." (People vs. Pinuila)
The doctrine of the law of the case, therefore, has no applicability
whatsoever herein insofar as the question of the validity or invalidity of
the amended by-laws is concerned. The Court's judgment of April 11,
1979 clearly shows that the voting on this question was inconclusive with
six against four Justices and two other Justices (the Chief Justice and Mr.
Justice Fernando) expressly reserving their votes thereon, and Mr.
Justice Aquino while taking no part in effect likewise expressly reserved
his vote thereon. No final and conclusive determination could be reached
on the issue and pursuant to the provisions of Rule 56, section 11, since
this special civil action originally commenced in this Court, the action was
simply dismissed with the result that no law of the case was laid down
insofar as the issue of the validity or invalidity of the questioned by-laws
is concerned, and the relief sought herein by petitioner that this Court by-
pass the SEC which has yet to hear and determine the same issue
pending before it below and that this Court itself directly resolve the said
issue stands denied.
b) The contention of Mr. Justice Barredo that the result of the dismiss of
the case was that "petitioner Gokongwei may not hereafter act on the
assumption that he can revive the issue of the validity whether in the
Securities and Exchange Commission, in this Court or in any other forum,
unless he proceeds on the basis of a factual milieu different from the
setting of this case Not even the Securities and Exchange Commission
may pass on such question anymore at the instance of herein petitioner
or anyone acting in his stead or on his behalf, " appears to us to be
untenable.
The Court through the decision of April 11, 1979, by the unanimous votes
of the twelve participating Justices headed by the Chief Justice, ruled that
petitioner Gokongwei was entitled to a "new and proper hearing" by the
SMC board of directors on the matter of his disqualification under the
questioned by-laws and that the board's "decision shall be appealable to
the respondent Securities and Exchange Commission deliberating and
acting en banc and ultimately to this Court (and) unless disqualified in the
manner herein provided, the prohibition in the aforementioned amended
by-laws shall not apply to petitioner."
The entire Court, therefore, recognized that petitioner had not been given
procedural due process by the SMC board on the matter of his
disqualification and that he was entitled to a "new and proper hearing". It
stands to reason that in such hearing, petitioner could raise not only
questions of fact but questions of law, particularly questions of law
affecting the investing public and their right to representation on the
board as provided by law — not to mention that as borne out by the fact
that no restriction whatsoever appears in the court's decision, it was
never contemplated that petitioner was to be limited to questions of fact
and could not raise the fundamental questions of law bearing on the
invalidity of the questioned amended by-laws at such hearing before the
SMC board. Furthermore, it was expressly provided unanimously in the
Court's decision that the SMC board's decision on the disqualification of
petitioner ("assuming the board of directors of San Miguel Corporation
should, after the proper hearing, disqualify him" as qualified in Mr. Justice
Barredo's own separate opinion, at page 2) shall be appealable to
respondent Securities and Exchange Commission "deliberating and
acting en banc and "untimately to this Court." Again, the Court's judgment
as set forth in its decision of April 11, 1979 contains nothing that would
warrant the opinion now expressed that respondent Securities and
Exchange Commission may not pass anymore on the question of the
invalidity of the amended by-laws. Certainly, it cannot be contended that
the Court in dismissing the petition for lack of necessary votes actually
by-passed the Securities and Exchange Commission and directly ruled
itself on the invalidity of the questioned by-laws when it itself could not
reach a final and conclusive vote (a minimum of eight votes) on the issue
and three other Justices (the Chief Justice and Messrs. Justices
Fernando and Aquino) had expressly reserved their vote until after further
hearings (first before the Securities and Exchange Commission and
ultimately in this Court).
Such a view espoused by Mr. Justice Barredo could conceivably result in
an incongruous situation where supposedly under the law of this case the
questioned by-laws would be held valid as against petitioner Gokongwei
and yet the same may be stricken off as invalid as to all other SMC
shareholders in a proper case.
3. It need only be pointed out that Mr. Justice Barredo's advance
separate opinion can in no way affect or modify the judgment of this
Court as set forth in the decision of April 11, 1979 and discussed
hereinabove. The same bears the unqualified concurrence of only three
Justices out of the six Justices who originally voted for the validity per se
of the questioned by-laws, namely, Messrs. Justices Antonio, Santos and
De Castro. Messrs. Justices Fernando and Makasiar did not concur
therein but they instead concurred with the limited concurrence of the
Chief Justice touching on the law of the case which guardedly held that
the Court has not found merit in the claim that the amended bylaws in
question are invalid but without in any manner foreclosing the issue and
as a matter of fact and law, without in any manner changing or
modifying the above-quoted vote of the Chief Justice as officially
rendered in the decision of April 11, 1979, wherein he precisely "reserved
(his) vote on the validity of the amended by-laws."
4. A word on the separate opinion of Mr. Justice Pacifico de Castro
attached to the advance separate opinion of Mr. Justice Barredo. Mr.
Justice De Castro advances his interpretation as to a restrictive
construction of section 13(5) of the Philippine Corporation Law, ignoring
or disregarding the fact that during the Court's deliberations it was
brought out that this prohibitory provision was and is not raised in issue in
this case whether here or in the Securities and Exchange Commission
below (outside of a passing argument by Messrs. Angara, Abello,
Concepcion, Regala & Cruz, as counsels for respondent Sorianos in their
Memorandum of June 26, 1978 that "(T)he disputed By-Laws does not
prohibit petitioner from holding onto, or even increasing his SMC
investment; it only restricts any shifting on the part of petitioner from
passive investor to a director of the company." 3
As a consequence, the Court abandoned the Idea of calling for another
hearing wherein the parties could properly raise and discuss this question
as a new issue and instead rendered the decision in question, under
which the question of section 13(5) could be raised at a new and proper
hearing before the SMC board and in the Securities and Exchange
Commission and in due course before this Court (but with the clear
understanding that since both corporations, the Robina and SMC are
engaged in agriculture as submitted by the Sorianos' counsel in their said
memorandum, the issue could be raised likewise against SMC and its
other shareholders, directors, if not against SMC itself. As expressly
stated in the Chief Justices reservation of his vote, the matter of the
question of the applicability of the said section 13(5) to petitioner would
be heard by this Court at the appropriate time after the proceedings
below (and necessarily the question of the validity of the amended by-
laws would be taken up anew and the Court would at that time be able to
reach a final and conclusive vote).
Mr. Justice De Castro's personal interpretation of the decision of April 11,
1979 that petitioner may be allowed to run for election despite adverse
decision of both the SMC board and the Securities and Exchange
Commission "only if he comes to this Court and obtains an injunction
against the enforcement of the decision disqualifying him" is patently
contradictory of his vote on the matter as expressly given in the judgment
in the Court's decision of April 11, 1979 (at page 59) that petitioner could
run and if elected, sit as director of the respondent SMC and could be
disqualified only 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 aforementioned amended
by-laws shall not apply to petitioner."
Teehankee, Concepcion Jr., Fernandez and Guerrero, JJ., concur.
BARREDO, J., concurring:
I reserved the filing of a separate opinion in order to state my own
reasons for voting in favor of the validity of the amended by-laws in
question. Regrettably, I have not yet finished preparing the same. In
view, however, of the joint separate opinion of Justices Teehankee,
Concepcion Jr., Fernandez and Guerrero, the full text of which has just
come to my attention, and which I am afraid might produce certain
misimpressions as to the import of the decision in this case, I consider it
urgent to clarify my position in respect to the rights of the parties resulting
from the dismissal of the petition herein and the outlining of the
procedure by which the disqualification of petitioner Gokongwei can be
made effective, hence this advance separate opinion.
To start with, inasmuch as petitioner Gokongwei himself placed the issue
of the validity of said amended by-laws squarely before the Court for
resolution, because he feels, rightly or wrongly, he can no longer have
due process or justice from the Securities and Exchange Commission,
and the private respondents have joined with him in that respect, the six
votes cast by Justices Makasiar, Antonio, Santos, Abad Santos, de
Castro and this writer in favor of validity of the amended by-laws in
question, with only four members of this Court, namely, Justices
Teehankee, Concepcion Jr., Fernandez and Guerrero opining otherwise,
and with Chief Justice Castro and Justice Fernando reserving their votes
thereon, and Justices Aquino and Melencio Herrera not voting, thereby
resulting in the dismissal of the petition "insofar as it assails the validity of
the amended by- laws ... for lack of necessary votes", has no other legal
consequence than that it is the law of the case as far as the parties
herein are concerned, albeit the majority opinion of six against four
Justices is not doctrinal in the sense that it cannot be cited as necessarily
a precedent for subsequent cases. This means that petitioner Gokongwei
and the respondents, including the Securities and Exchange
Commission, are bound by the foregoing result, namely, that the Court en
banc has not found merit in the claim that the amended by-laws in
question are invalid. Indeed, it is one thing to say that dismissal of the
case is not doctrinal and entirely another thing to maintain that such
dismissal leaves the issue unsettled. It is somewhat of a misreading and
misconstruction of Section 11 of Rule 56, contrary to the well-known
established norm observed by this Court, to state that the dismissal of a
petition for lack of the necessary votes does not amount to a decision on
the merits. Unquestionably, the Court is deemed to find no merit in a
petition in two ways, namely, (1) when eight or more members vote
expressly in that sense and (2) when the required number of justices
needed to sustain the same cannot be had.
I reiterate, therefore, that as between the parties herein, the issue of
validity of the challenged by-laws is already settled. From which it follows
that the same are already enforceable-insofar as they are concerned.
Petitioner Gokongwei may not hereafter act on the assumption that he
can revive the issue of validity whether in the Securities and Exchange
Commission, in this Court or in any other forum, unless he proceeds on
the basis of a factual milieu different from the setting of this case. Not
even the Securities and Exchange Commission may pass on such
question anymore at the instance of herein petitioner or anyone acting in
his stead or on his behalf. The vote of four justices to remand the case
thereto cannot alter the situation.
It is very clear that under the decision herein, the issue of validity is a
settled matter for the parties herein as the law of the case, and it is only
the actual implementation of the impugned amended by-laws in the
particular case of petitioner that remains to be passed upon by the
Securities and Exchange Commission, and on appeal therefrom to Us,
assuming the board of directors of San Miguel Corporation should, after
the proper hearing, disqualify him.
To be sure, the record is replete with substantial indications, nay
admissions of petitioner himself, that he is a controlling stockholder of
corporations which are competitors of San Miguel Corporation. The very
substantial areas of such competition involving hundreds of millions of
pesos worth of businesses stand uncontroverted in the records hereof. In
fact, petitioner has even offered, if he should be elected, as director, not
to take part when the board takes up matters affecting the corresponding
areas of competition between his corporation and San Miguel.
Nonetheless, perhaps, it is best that such evidence be formally offered at
the hearing contemplated in Our decision.
As to whether or not petitioner may sit in the board if he wins, definitely,
under the decision in this case, even if petitioner should win, he will have
to immediately leave his position or should be ousted the moment this
Court settles the issue of his actual disqualification, either in a full blown
decision or by denying the petition for review of corresponding decision of
the Securities and Exchange Commission unfavorable to him. And, of
course, as a matter of principle, it is to be expected that the matter of his
disqualification should be resolved expeditiously and within the shortest
possible time, so as to avoid as much juridical injury as possible,
considering that the matter of the validity of the prohibition against
competitors embodied in the amended by-laws is already unquestionable
among the parties herein and to allow him to be in the board for
sometime would create an obviously anomalous and legally incongruous
situation that should not be tolerated. Thus, all the parties concerned
must act promptly and expeditiously.
Additionally, my reservation to explain my vote on the validity of the
amended by-laws still stands.
Castro, C.J., concurs in Justice Barredo's statement that the dismissal
(for lack of necessary votes) of the petition to the extent that "it assails
the validity of the amended by laws," is the law of the case at bar, which
means in effect that as far and only in so far as the parties and the
Securities and Exchange Commission are concerned, the Court has not
found merit in the claim that the amended by-laws in question are invalid.
Antonio and Santos, JJ., concur.
DE CASTRO, J., concurring:
As stated in the decision penned by Justice Antonio, I voted to uphold the
validity of the amendment to the by-laws in question. What induced me to
this view is the practical consideration easily perceived in the following
illustration: If a person becomes a stockholder of a corporation and gets
himself elected as a director, and while he is such a director, he forms his
own corporation competitive or antagonistic to the corporation of which
he is a director, and becomes Chairman of the Board and President of
his own corporation, he may be removed from his position as director,
admittedly one of trust and confidence. If this is so, as seems
undisputably to be the case, a person already controlling, and also the
Chairman of the Board and President of, a corporation, may be barred
from becoming a member of the board of directors of a competitive
corporation. This is my view, even as I am for a restrictive interpretation
of Section 13(5) of the Philippine Corporation Law, under which I would
limit the scope of the provision to corporations engaged in agriculture, but
only as the word agriculture" refers to its more stated meaning as
distinguished from its general and broad connotation. The term would
then mean "farming" or raising the natural products of the soil, such as by
cultivation, in the manner as is required by the Public Land Act in the
acquisition of agricultural land, such as by homestead, before the patent
may be issued. It is my opinion that under the public land statute, the
development of a certain portion of the land applied for as specified in the
law as a condition precedent before the applicant may obtain a patent, is
cultivation, not let us say, poultry raising or piggery, which may be
included in the term Is agriculture" in its broad sense. For under Section
13(5) of the Philippine Corporation Law, construed not in the strict way as
I believe it should, because the provision is in derogation of property
rights, the petitioner in this case would be disqualified from becoming an
officer of either the San Miguel Corporation or his own supposedly
agricultural corporations. It is thus beyond my comprehension why,
feeling as though I am the only member of the Court for a restricted
interpretation of Section 13(5) of Act 1459, doubt still seems to be in the
minds of other members giving the cited provision an unrestricted
interpretation, as to the validity of the amended by-laws in question, or
even holding them null and void.
I concur with the observation of Justice Barredo that despite that less
than six votes are for upholding the validity of the by-laws, their validity is
deemed upheld, as constituting the "law of the case." It could not be
otherwise, after the present petition is dismissed with the relief sought to
declare null and void the said by-laws being denied in effect. A vicious
circle would be created if, should petitioner Gokongwei be barred or
disqualified from running by the Board of Directors of San Miguel
Corporation and the Securities and Exchange Commission sustain the shall not be qualified to hold office unless
Board, petitioner could come again to Us, raising the same question he he pledges said five thousand shares to
has raised in the present petition, unless the principle of the "law of the the Corporation to answer for his conduct.
case" is applied.
SECTION 2. Any stockholder having at
Clarifying therefore, my position, I am of the opinion that with the validity least five thousand shares registered in
of the by-laws in question standing unimpaired it is now for petitioner to his name may be elected Director,
show that he does not come within the disqualification as therein provided, however, that no person shall
provided, both to the Board and later to the Securities and Exchange qualify or be eligible for nomination or
Commission, it being a foregone conclusion that, unless petitioner election to the Board of Directors if he is
disposes of his stockholdings in the so-called competitive corporations, engaged in any business which competes
San Miguel Corporation would apply the by-laws against him, His right, with or is antagonistic to that of the
therefore, to run depends on what, on election day, May 8, 1979, the Corporation. Without limiting the generality
ruling of the Board and/or the Securities and Exchange Commission on of the foregoing, a person shall be
his qualification to run would be, certainly, not the final ruling of this Court deemed to be so engaged:
in the event recourse thereto is made by the party feeling aggrieved, as
intimated in the "Joint Separate Opinion" of Justices Teehankee, (a) if he is an officer, manager or
Concepcion, Jr., Fernandez and Guerrero, that only after petitioner's controlling person of, or the owner (either
"disqualification" has ultimately been passed upon by this Court should of record or beneficially) of 10% or more
petitioner, not be allowed to run. Petitioner may be allowed to run, of any outstanding class of shares of, any
despite an adverse decision of both the Board and the Securities and corporation (other than one in which the
Exchange Commission, only if he comes to this Court and obtain an corporation owns at least 30% of the
injunction against the enforcement of the decision disqualifying him. capital stock) engaged in a business
Without such injunction being required, all that petitioner has to do is to which the Board, by at least three-fourths
take his time in coming to this Court, and in so doing, he would in the vote, determines to be competitive or
meantime, be allowed to run, and if he wins, to sit. This would, however, antagonistic to that of the Corporation; or
be contrary to the doctrine that gives binding, if not conclusive, effect of
findings of facts of administrative bodies exercising quasi-judicial (b) If he is an officer, manager or
functions upon appellate courts, which should, accordingly, be enforced controlling person of, or the owner (either
until reversed by this Tribunal. of record or beneficially) or 10% or more
of any oustanding class of shares of, any
#Footnotes other corporation or entity engaged in any
line of business of the Corporation, when
1 The pertinent amendments reads as follows: in the judgment of the Board, by at least
three-fourths vote, the laws against
RESOLVED, That Section 2, Article III of combinations in restraint of trade shall be
the By-laws of San Miguel Corporation, violated by such person's membership in
which reads as follows: the Board of Directors.

SECTION 2. Any stockholder having at (c) If the Board, in the exercise of its
least five thousand shares registered in judgment in good faith, determines by at
his name may be elected director, but he least three-fourths vote that he is the
 nominee of any person set forth in (a) or
(b).
In determining whether or not a person is
a controlling person, beneficial owner, or
the nominee of another, the Board may
take into account such factors as business
and family relationship.
For the proper implementation of this
provision, all nominations for election of
Directors by the stockholders shall be
submitted in writing to the Board of
Directors at least five working days before
the date of the Annual Meeting.' " (Rollo,
pp. 462-463).
2 Annex "H", petition, pp. 168-169, Rollo.
3 L-27812, September 26, 1975, 67 SCRA 146.
4 Gayos v. Gayos, Ibid., citing Marquez v. Marquez, No.
47792, July 24, 1941, 73 Phil. 74, 78; Keramik Industries,
Inc. v. Guerrero, L-38866, November 29, 1974, 61 SCRA
265.
5 L-20654, December 24, 1964, 12 SCRA 628.
6 L-20583, January 23, 1967, 19 SCRA 58.
7 L-27802, October 26, 1968, 25 SCRA 641.
8 Samal v. Court of Appeals, L-8579, May 25, 1956, 99
Phil. 230.
8a 2 Am. Jur. 2d 696. 697.
8b Pan American P. Corp. v. Supreme Court of Delaware,
336 US 656, 6 L. ed. 2d 584.
9 Fleischer v. Botica Nolasco Co., Inc., No. 23241. March
14, 1925, 47 Phil. 583, 590.
10 C.J.S. Corporation, Sec. 189, p. 603.
11 People ex rel. Wildi v. Ittner, 165 III. App. 360, 367
(1911), cited in Flectcher, Cyclopedia Corporations, Sec.
4191.
12 Mckee & Company v. First National Bank of San
Diego, 265 F. Supp. 1 (1967), citing Olicy v. Merle
Norman Cosmetics, Inc., 200 Cal. App. 20, 260, 19 Cal.
Reptr. 387 (1962).
13 Fletcher, Cyclopedia Corporations, Sec. 4171, cited in
McKee & Company, supra.
14 No. 26649, July 13, 1927, 50 Phil. 399, 441.
15 6 Thompson 369, Sec. 4490.
16 Ibid.
17 Mobile Press Register, Inc., v. McGowin, 277 Ala. 414,
124 So. 2d 812; Brundage v. The New Jersey Zinc Co.,
226 A 2d 585.
18 Fletcher, Cyclopedia Corporations, 1975 Ed., Vol. 3 p.
144, Sec. 838.
19 101 Fed. 2d 85, cited in Aleck, Modern Corporation
Law, Vol. 2, Sec. 959.
20 308 U.S. 309; 84 L.ed. 281, 289-291.
21 16 S.E. 587, 18 L.R.A. 582.
22 265 F. Supp., pp. 8-9.
23 Barreto v. Tuason, No. 23923, Mar. 23, 1926, 50 Phil.
888; Severino v. Severino, No. 18058, Jan. 16, 1923, 44
Phil. 343; Thomas v. Pineda, L-2411, June 28, 1951, 89
Phil. 312, 326.
24 2 Fletcher Cyclopedia Corporations, Sec. 297 (1969),
p. 87.
25 Costello v. Thomas Cusack co., 125 A. 15, 94 N.J. Eq.
923, (1923).
26 hall v. Dekker, 115 P. 2d 15, July 9, 1941.
27 Thaver v. Gaebler, 232 NW 563.
28 Sialkot Importing Corporation v. Berlin, 68 NE 2d 501,
503.
29 Schildberg Rock Products Co. v. Brooks, 140 NW 2d
132, 137. Chief Justice Garfield quotes the doctrine as
follows:
(5) The doctrine "corporate opportunity" is
not new to the law and is but one phase of
the cardinal rule of undivided loyalty on
the part of the fiduciaries. 3 Flecther Cyc.
Corporations, Perm. Ed., 1965 Revised
Volume, section 861.1, page 227; 19 Am.
Jur. 2d. corporations, section 1311, page
717. Our own consideration of the quoted
terms as such is mainly in Ontjes v.
MacNider, supra, 232 Iowa 562, 579, 5
N.W., 2d 860, 869, which quotes at length
with approval from Guth v. Loft, Inc., 23
Del. Ch. 255, 270, 5 A 2d 503, 511, a
leading case in this area of the law. The
quotation cites several precedents for this:
"*** if there is presented to a corporate
officer or director a business opportunity
which the corporation is financially able to
undertake, is from its nature, in the line of
the corporation's business and is of
practical advantage to it, is one in which
the corporation has an interest or a
reasonable expectancy, and by embracing
the opportunity, the self-interest of the
officer or director will be brought into seize
the opportunity for himself. And, if, in such
circumstances, the interests of the
corporation are betrayed, the corporation
may elect to claim all of the benefits of the
transaction for itself. and the law will
impress a trust in favor of the corporation
upon the property. interests and profits so
acquired.
30 Paulman v. Kritzer, 74 III. App. 2d 284, 291 NE 2d
541; Tower Recreation, Inc. v. Beard, 141 Ind. App. 649,
231 NE 2d 154.
31 Oleck, Modern Corporation Law, Vol. 2, Section 960.
32 The CFC and Robina companies, which are reportedly
worth more than P500 Million, are principally owned and
controlled by Mr. Gokongwei and are in substantial
competition to San Miguel. As against his almost 100%
ownership in these basically family companies, Mr.
Gokongwei's holding in San Miguel are approximately 4%
of the total shareholdings of your Company. As a
consequence, One Peso (P1.00) of profit resulting from a
sale by CFC and Robina in the lines competing with San
Miquel, is earned almost completely by Mr. Gokongwei,
his immediate family and close associates. On the other
hand, the loss of that sale to San Miguel, resulting in a
One Peso (P1.00) loss of profit to San Miquel, in the lines
competing with CFC and Robina, would result in a loss in
profit of only Four Centavos (0.04) to Mr. Gokongwei."
(Letter to stockholders of SMC, dated April 3, 1978,
Annex "R", Memo for respondent San Miguel Corporation,
rollo, p. 1967.
33 Article 28, Civil Code; Section 4, par. 5, of Rep. Act
No. 5455; and Section 7 (g) of Rep. Act No. 6173. Cf.
Section 17, paragraph 2. of the Judiciary Act.
34 Standard Oil Co. v. United States, 55 L.Ed. 619.
35 Blake & Jones, Contracts in Antitrust Theory, 65 49 Sections 3 and 5 of Presidential Decree No. 902-A
Columbia L. Rev. 377, 383 (1965). provides:

36 Filipinas Compania de Seguros v. Mandanas, L- SEC. 3. The Commission shall have

19638, June 20, 1966, 17 SCRA 391. absolute jurisdiction supervision and
control over all corporations *** who are
37 Love v. Kozy Theater Co., 236 SW 243, 245, 26 ALR grantees of *** license or permit issued by
364. the government ***

38 Aldea-Rochelle, Inc. v. American Society of SEC. 5. In addition to the regulatory and

Composers, Authors and Publishers, D.D. N.Y., 80 F. adjudicative functions of the Securities
Suppl. 888, 893: and Exchange Commission over
corporations partnerships and other forms
39 National Cotton Oil Co. v. State of Texas, 25 S.T. 379, of associations registered with its as
383, 49 L. Ed. 689. expressly granted under existing laws and
decrees, it shall have original and
exclusive jurisdiction to hear and decide
40 Norfolk Monument Co. v. Woodlawn Memorial
cases involving.
Gardens, Inc., 394 U.S. 700; v. General Motors Corp.,
384 U.S. 127.
a) Devices or schemes employed by or
nay acts, of the board of directors,
41 U.S. v. Paramount Pictures, 334 U.S. 131.
business associates, its officers or
partners amounting to fraud and
42 Section 8, 15 U.S.C.A. 19. misrepresentation which may be
detrimental to the interest of the public
43 Travers, Interlocks in Corporate Management and the and/or of the stockholders, partners,
Anti Trust Laws, 46 Texas L. Rev. 819, 840 (1968). members of associations or organizations
registered with the Commission.
44 51 Cong. Rec. 9091.
b) Controversies arising out of intra-
45 People ex rel. Wildi v. Ittner, supra, citing Thompson corporate or partnership relations,
on Corporation, Section 1002 (2nd Ed.). between and among stockholders,
members or associates; between any or
46 Schill v. Remington Putnam Book Co., 17 A 2d 175, all of them and the corporation,
180, 179 Md. 83. partnership or association of which they
are stockholders, members or associates,
47 People ex rel. Broderick v. Goldfogle, 205 NYS 870, respectively; and between such
877, 123 Misc. 399. corporations their individual francise or
right to exist as such entity;
48 Swanson v. American Consumer Industries, Inc., 288
F. Supp. 60. c) Controversies in the election or
appointments of directors, trustees,
 officers or managers of such corporations, 65 Nash v. Gay Apparel Corp., 193 NYS 2d 246.
partnership or associations.
66 Bailey v. Boxbound Products Co., 314 Pa. 45, 170 A.
50 Moore v. Keystone Macaroni Mfg. Co., 29 ALR 2d 127.
1256.
67 Rollo, pp. 50-51.
51 Annex "A" of SMC's Comment on Supplemental
Petition pp. 680-688, Rollo. 68 18 Am. Jur. 2d 718.

52 Fletcher Cyc, Private Corporations, Vol. 5, 1976 Rev. 69 De la Rama v. Ma-ao Sugar Central Co., Inc., L-17504
Ed. Section 2213, p. 693. and L-17506, February 28, 1969, 27 SCRA 247, 260.

53 Fletcher, Ibid., Section 2218, p. 709. 70 Boyce v. Chemical Plastics, 175 F 2d 839, citing 13
Am. Jur., Section 972.
54 Fletcher, Ibid., Section 2222, p. 725.
71 Pirovano v. De la Rama Steamship Co., L-53-7, 96
55 40 O.G., 1st Suppl. 1. April 3, 1939, citing 14 C.J.S. Phil. 335, December 29, 1954.
854, 855.
* Includes the Supplemental petitions filed by petitioner.
56 Fletcher, supra, p. 716.
JOINT SEPARATE OPINION
57 State v. Monida & Yellowstone Stage Co., 110 Minn.
193, 124 NW 791, 125 NW 676; State v. Cities Service 1 Main opinion, p. 55.
Co., 114 A 463.
2 Sec. 2, Art. III of respondent corporation's By-Laws,
58 Fletcher, supra, Section 2220, p. 717. reproduced in footnote 1 of the main opinion, pages 3 and
4.
59 Fletcher, supra, Section 2223, p. 728.
3 Rollo, Vol. I, page 392-E.
60 Martin v. D. B. Martin Co., 10 Del. Ch. 211, 88 A. 612,
102 A. 373. 4 SEC memo, page 9 and 10.

61 Woodward v. Old Second National Bank, 154 Mich, 5 Petitioner's memorandum in support of oral argument,
459, 117 NW 893, 118 NW 581. pp. 18-20

62 Martin v. D.B. Martin Co., supra. SUPPLEMENT TO JOINT SEPARATE OPINION

63 State v. Sherman Oil Co., 1 W.W. Harr. (31 Del) 570, 1 At p. 60; emphasis supplied.
117 A. 122.

64 Lisle v. Shipp, 96 Cal. App. 264, 273 P. 1103.

 2 19 SCRA 494; citing People vs. Pinnila, L-11374, May
30, 1958, cited in Lee vs. Aligaen, 76 SCRA 416 (1977)
per Antonio, J.
3 Soriano's Memorandum at page 94.
dissolution of said corporation. The complaint enumerates seventeen
distinct causes of action, to all of which the defendant has answered
upon the merits, first admitting the averments of the first paragraph in the
statement of the first cause of action, wherein it is alleged that the
defendant was organized in the year 1911 as a building and loan
association under the laws of the Philippine Islands, and that, since its
organization, the corporation has been doing business in the Philippine
Islands, with its principal office in the City of Manila. Other facts alleged in
the various causes of action in the complaint are either denied in the
answer or controverted in legal effect by other facts.

After issue had been thus joined upon the merits, the attorneys entered
into an elaborate agreement as to the fact, thereby removing from the
field of dispute such matters of fact as are necessary to the solution of
the controversy. It follows that we are here confronted only with the legal
questions arising upon the agreed statement.

Republic of the Philippines On March 1, 1906, the Philippine Commission enacted what is known as
SUPREME COURT the Corporation Law (Act No. 1459) effective upon April 1 of the same
Manila year. Section 171 to 190, inclusive, of this Act are devoted to the subject
of building and loan associations, defining their objects making various
EN BANC provisions governing their organization and administration, and providing
for the supervision to be exercised over them. These provisions appear
G.R. No. L-26649 July 13, 1927 to be adopted from American statutes governing building and loan
associations and they of course reflect the ideals and principles found in
THE GOVERNMENT OF THE PHILIPPINE ISLANDS (on relation of American law relative to such associations. The respondent, El Hogar
the Attorney-General), plaintiff, Filipino, was apparently the first corporation organized in the Philippine
vs. Islands under the provisions cited, and the association has been favored
EL HOGAR FILIPINO, defendant. with extraordinary success. The articles of incorporation bear the date of
December 28, 1910, at which time capital stock in the association had
Attorney-General Jaranilla and Solicitor-General Reyes for plaintiff. been subscribed to the amount of P150,000 of which the sum of P10,620
Fisher, DeWitt, Perkins and Brady; Camus, Delgado and Recto and had been paid in. Under the law as it then stood, the capital of the
Antonio Sanz for defendant. Association was not permitted to exceed P3,000,000, but by Act No.
Wm. J. Rohde as amicus curiae. 2092, passed December 23, 1911, the statute was so amended as to
permit the capitalization of building and loan associations to the amount
of ten millions. Soon thereafter the association took advantage of this
STREET, J.:
enactment by amending its articles so as to provide that the capital
should be in an amount not exceeding the then lawful limit. From the time
This is a quo warranto proceeding instituted originally in this court by the of its first organization the number of shareholders has constantly
Government of the Philippine Islands on the relation of the Attorney- increased, with the result that on December 31, 1925, the association
General against the building and loan association known as El Hogar had 5,826 shareholders holding 125,750 shares, with a total paid-up
Filipino, for the purpose of depriving it of its corporate franchise, value of P8,703,602.25. During the period of its existence prior to the
excluding it from all corporate rights and privileges, and effecting a final date last above-mentioned the association paid to withdrawing
stockholders the amount of P7,618,257,.72; and in the same period it
distributed in the form of dividends among its stockholders the sum of
P7,621,565.81.
First cause of action. — The first cause of action is based upon the
alleged illegal holding by the respondent of the title to real property for a
period in excess of five years after the property had been bought in by
the respondent at one of its own foreclosure sales. The provision of law
relevant to the matter is found in section 75 of Act of Congress of July 1,
1902 (repeated in subsection 5 of section 13 of the Corporation Law.) In
both of these provisions it is in substance declared that while
corporations may loan funds upon real estate security and purchase real
estate when necessary for the collection of loans, they shall dispose of
real estate so obtained within five years after receiving the title.
In this connection it appears that in the year 1920 El Hogar Filipino was
the holder of a recorded mortgage upon a tract of land in the municipality
of San Clemente, Province of Tarlac, as security for a loan of P24,000 to
the shareholders of El Hogar Filipino who were the owners of said
property. The borrowers having defaulted in their payments, El Hogar
Filipino foreclosed the mortgage and purchased the land at the
foreclosure sale for the net amount of the indebtedness, namely, the sum
of P23,744.18. The auction sale of the mortgaged property took place
November 18, 1920, and the deed conveying the property to El Hogar
Filipino was executed and delivered December 22, 1920. On December
27, 1920, the deed conveying the property to El Hogar Filipino was sent
to the register of deeds of the Province of Tarlac, with the request that
the certificate of title then standing in the name of the former owners be
cancelled and that a new certificate of title be issued in the name of El
Hogar Filipino. Said deed was received in the office of the register of
deeds of Tarlac on December 28, 1920, together with the old certificate
of title, and thereupon the register made upon the said deed the following
annotation:
The foregoing document was received in this office at 4.10 p. m.,
December 28, 1920, according to entry 1898, page 50 of Book
One of the Day Book and registered on the back of certificate of
title No. 2211 and its duplicate, folio 193 of Book A-10 of the
register of original certificate. Tarlac, Tarlac, January 12, 1921.
(Sgd.) SILVINO LOPEZ DE JESUS, Register of Deeds.
For months no reply was received by El Hogar Filipino from the register
of deeds of Tarlac, and letters were written to him by El Hogar Filipino on
the subject in March and April, 1921, requesting action. No answer
having been received to these letters, a complaint was made by El Hogar
Filipino to the Chief of the General Land Registration Office; and on May
7, 1921, the certificate of title to the San Clemente land was received by
El Hogar Filipino from the register of deeds of Tarlac.
On March 10, 1921, the board of directors of El Hogar Filipino adopted a
resolution authorizing Vicente Bengzon, an agent of the corporation, to
endeavor to find a buyer for the San Clemente land. On July 27, 1921, El
Hogar Filipino authorized one Jose Laguardia to endeavor to find a
purchaser for the San Clemente land for the sum of P23,000 undertaking
to pay the said Laguardia a commission of 5 per centum of the selling
price for his services, but no offers to purchase were obtained through
this agent or through the agent Bengzon. In July, 1923, plans of the San
Clemente land were sent to Mr. Luis Gomez, Mr. J. Gonzalez and Mr.
Alfonso de Castelvi, as prospective purchasers, but no offers were
received from them. In January, 1926, the agent not having succeeded in
finding a buyer, the San Clemente land was advertised for sale by El
Hogar Filipino in El Debate, La Vanguardia and Taliba, three newspapers
of general circulation in the Philippine Islands published in the City of
Manila. On March 16, 1926, the first offer for the purchase of the San
Clemente land was received by El Hogar Filipino. This offer was made to
it in writing by one Alcantara, who offered to buy it for the sum of P4,000,
Philippine currency, payable P500 in cash, and the remainder within thirty
days. Alcantara's offer having been reported by the manager of El Hogar
Filipino to its board of directors, it was decided, by a resolution adopted
at a meeting of the board held on March 25, 1926, to accept the offer,
and this acceptance was communicated to the prospective buyer.
Alcantara was given successive extensions of the time, the last of which
expired April 30, 1926, within which to make the payment agreed upon;
and upon his failure to do so El Hogar Filipino treated the contract with
him as rescinded, and efforts were made at once to find another buyer.
Finally the land was sold to Doña Felipa Alberto for P6,000 by a public
instrument executed before a notary public at Manila, P. I., on July 30,
1926.
Upon consideration of the facts above set forth it is evident that the strict
letter of the law was violated by the respondent; but it is equally obvious
that its conduct has not been characterized by obduracy or pertinacity in
contempt of the law. Moreover, several facts connected with the incident
tend to mitigate the offense. The Attorney-General points out that the
respondent acquired title on December 22, 1920, when the deed was
executed and delivered, by which the property was conveyed to it as
purchaser at its foreclosure sale, and this title remained in it until July 30,
1926, when the property was finally sold to Felipa Alberto. The interval
between these two conveyances is thus more than five years; and it is
contended that the five year period did not begin to run against the
respondent until May 7, 1921, when the register of deeds of Tarlac
delivered the new certificate of title to the respondent pursuant to the
deed by which the property was acquired. As an equitable consideration
affecting the case this contention, though not decisive, is in our opinion
more than respectable. It has been held by this court that a purchaser of
land registered under the Torrens system cannot acquire the status of an
innocent purchaser for value unless his vendor is able to place in his
hands an owner's duplicate showing the title of such land to be in the
vendor (Director of Lands vs. Addison, 49, Phil., 19;
Rodriguez vs. Llorente, G. R. No. 266151). It results that prior to May 7,
1921, El Hogar Filipino was not really in a position to pass an
indefeasible title to any purchaser. In this connection it will be noted that
section 75 of the Act of Congress of July 1, 1902, and the similar
provision in section 13 of the Corporation Law, allow the corporation "five
years after receiving the title," within which to dispose of the property. A
fair interpretation of these provisions would seem to indicate that the date
of the receiving of the title in this case was the date when the respondent
received the owner's certificate, or May 7, 1921, for it was only after that
date that the respondent had an unequivocal and unquestionable power
to pass a complete title. The failure of the respondent to receive the
certificate sooner was not due in any wise to its fault, but to unexplained
delay on the part of the register of deeds. For this delay the respondent
cannot be held accountable.
Again, it is urged for the respondent that the period between March 25,
1926, and April 30, 1926, should not be counted as part of the five-year
period. This was the period during which the respondent was under
obligation to sell the property to Alcantara, prior to the rescission of the
contract by reason of Alcantara's failure to make the stipulated first
payment. Upon this point the contention of the respondent is, in our
opinion, well founded. The acceptance by it of Alcantara's offer obligated
the respondent to Alcantara; and if it had not been for the default of
Alcantara, the effective sale of the property would have resulted. The
respondent was not at all chargeable with the collapse of these
negotiations; and hence in any equitable application of the law this period
should be deducted from the five-year period within which the respondent
ought to have made the sale. Another circumstance explanatory of the
respondent's delay in selling the property is found in the fact that it
purchased the property for the full amount of the indebtedness due to it
from the former owner, which was nearly P24,000. It was subsequently
found that the property was not salable for anything like that amount and
in the end it had to be sold for P6,000, notwithstanding energetic efforts
on the part of the respondent to find a purchaser upon better terms.
The question then arises whether the failure of the respondent to get rid
of the San Clemente property within five years after it first acquired the
deed thereto, even supposing the five-year period to be properly counted
from that date, is such a violation of law as should work a forfeiture of its
franchise and require a judgment to be entered for its dissolution in this
action of quo warranto. Upon this point we do not hesitate to say that in
our opinion the corporation has not been shown to have offended against
the law in a manner that should entail a forfeiture of its charter. Certainly
no court with any discretion to use in the matter would visit upon the
respondent and its thousands of shareholders the extreme penalty of the
law as a consequence of the delinquency here shown to have been
committed.
The law applicable to the case is in our opinion found in section 212 of
the Code of Civil Procedure, as applied by this court in Government of
the Philippine Islands vs. Philippine Sugar Estates Development Co. (38
Phil., 15). This section (212), in prescribing the judgment to be rendered
against a corporation in an action of quo warranto, among other things
says:
. . . When it is found and adjudged that a corporation has
offended in any matter or manner which does not by law work as
a surrender or forfeiture, or has misused a franchise or exercised
a power not conferred by law, but not of such a character as to
work a surrender or forfeiture of its franchise, judgment shall be
rendered that it be outset from the continuance of such offense or
the exercise of such power.
This provision clearly shows that the court has a discretion with respect to
the infliction of capital punishment upon corporation and that there are
certain misdemeanors and misuses of franchises which should not be
recognized as requiring their dissolution. In Government of the Philippine
Islands vs. Philippine Sugar Estates Development Co.(38 Phil., 15), it
was found that the offending corporation had been largely (though
indirectly) engaged in the buying and holding or real property for
speculative purposes in contravention of its charter and contrary to the
express provisions of law. Moreover, in that case the offending
corporation was found to be still interested in the properties so purchased
for speculative at the time the action was brought. Nevertheless, instead
of making an absolute and unconditional order for the dissolution of the
corporation, the judgment of ouster was made conditional upon the
failure of the corporation to discontinue its unlawful conduct within six
months after final decision. In the case before us the respondent appears
to have rid itself of the San Clemente property many months prior to the
institution of this action. It is evident from this that the dissolution of the
respondent would not be an appropriate remedy in this case. We do not
of course undertake to say that a corporation might not be dissolved for
offenses of this nature perpetrated in the past, especially if its conduct
had exhibited a willful obduracy and contempt of law. We content
ourselves with holding that upon the facts here before us the penalty of
dissolution would be excessively severe and fraught with consequences
altogether disproportionate to the offense committed.
The evident purpose behind the law restricting the rights of corporations
with respect to the tenure of land was to prevent the revival of the entail
(mayorazgo) or other similar institution by which land could be fettered
and its alienation hampered over long periods of time. In the case before
us the respondent corporation has in good faith disposed of the piece of
property which appears to have been in its hands at the expiration of the
period fixed by law, and a fair explanation is given of its failure to dispose
of it sooner. Under these circumstances the destruction of the corporation
would bring irreparable loss upon the thousand of innocent shareholders
of the corporation without any corresponding benefit to the public. The
discretion permitted to this court in the application of the remedy of quo
warranto forbids so radical a use of the remedy.
But the case for the plaintiff supposes that the discretion of this court in
matters like that now before us has been expressly taken away by the
third section of Act No. 2792, and that the dissolution of the corporation is
obligatory upon the court a mere finding that the respondent has violated
the provision of the Corporation Law in any respect. This makes
necessary to examine the Act last above-mentioned with some care.
Upon referring thereto, we find that it consists of three sections under the
following style:
No. 2792. — An Act to amend certain sections of the Corporation
Law, Act Numbered Fourteen hundred and fifty-nine, providing for
the publication of the assets and liabilities of corporations
registering in the Bureau of Commerce and Industry, determining
the liability of the officers of corporations with regard to the
issuance of stock or bonus, establishing penalties for certain
things, and for other purposes.
The first two section contain amendments to the Corporation Law with
respect to matters with which we are not here concurred. The third
section contains anew enactment to be inserted as section 190 (A) in the
corporation Law immediately following section 190. This new section
reads as follows:
SEC. 190. (A). Penalties. — The violation of any of the provisions
of this Act and its amendments not otherwise penalized therein,
shall be punished by a fine of not more than one thousand pesos,
or by imprisonment for not more than five years, or both, in the
discretion of the court. If the violation being proved, be dissolved
by quo warranto proceedings instituted by the Attorney-General
or by any provincial fiscal, by order of said Attorney-General:
Provided, That nothing in this section provided shall be construed
to repeal the other causes for the dissolution of corporation
prescribed by existing law, and the remedy provided for in this
section shall be considered as additional to the remedies already
existing.
The contention for the plaintiff is to the effect that the second sentence in
this enactment has entirely abrogated the discretion of this court with
respect to the application of the remedy of qou warranto, as expressed in
section 212 of the Code of Civil Procedure, and that it is now mandatory
upon us to dissolved any corporation whenever we find that it has
committed any violation of the Corporation Law, however trivial. In our
opinion in this radical view of the meaning of the enactment is untenable.
When the statute says, "If the violation is committed by a corporation, the
same shall, upon such violation being proved, be dissolved by quo
warranto proceedings . . .," the intention was to indicate that the remedy
against the corporation shall be by action of quo warranto. There was no
intention to define the principles governing said remedy, and it must be
understood that in applying the remedy the court is still controlled by the
principles established in immemorial jurisprudence. The interpretation
placed upon this language in the brief of the Attorney-General would be
dangerous in the extreme, since it would actually place the life of all
corporate investments in the official. No corporate enterprise of any
moment can be conducted perpetually without some trivial misdemeanor
against corporate law being committed by some one or other of its
numerous employees. As illustrations of the preposterous effects of the
provision, in the sense contended for by the Attorney-General, the
attorneys for the respondent have called attention to the fact that under
section 52 of the Corporation Law, a business corporation is required to
keep a stock book and a transfer book in which the names of
stockholders shall kept in alphabetical order. Again, under section 94,
railroad corporations are required to cause all employees working on
passenger trains or at a station for passengers to wear a badge on his
cap or hat which will indicate his office. Can it be supposed that the
Legislature intended to penalize the violation of such provisions as these
by dissolution of the corporation involved? Evidently such could not have
been the intention; and the only way to avoid the consequence
suggested is to hold, as we now hold, that the provision now under
consideration has not impaired the discretion of this court in applying the
writ of quo warranto.
Another way to put the same conclusion is to say that the expression
"shall be dissolved by quo warrantoproceedings" means in effect, "may
be dissolved by quo warranto proceedings in the discretion of the court."
The proposition that the word "shall" may be construed as "may", when
addressed by the Legislature to the courts, is well supported in
jurisprudence. In the case of Becker vs. Lebanon and M. St. Ry.
Co., (188 Pa., 484), the Supreme Court of Pennsylvania had under
consideration a statute providing as follows:
It shall be the duty of the court . . . to examine, inquire and
ascertain whether such corporation does in fact posses the right
or franchise to do the act from which such alleged injury to private
rights or to the rights and franchises of other corporations results;
and if such rights or franchises have not been conferred upon
such corporations, such courts, it exercising equitable
power, shall, by injunction, at suit of the private parties or other
corporations, restrain such injurious acts.
In an action based on this statute the plaintiff claimed injunctive relief as
a matter of right. But this was denied the court saying:
Notwithstanding, therefore, the use of the imperative "shall" the
injunction is not to be granted unless a proper case for injunction
be made out, in accordance with the principles and practice of
equity. The word "shall" when used by the legislature to a court, is
usually a grant of authority and means "may", and even if it be
intended to be mandatory it must be subject to the necessary
limitation that a proper case has been made out for the exercise
of the power.
Other authorities amply sustain this view (People vs. Nusebaum, 66 N. Y.
Supp., 129, 133; West Wisconsin R. Co. vs. Foley, 94 U. S., 100, 103; 24
Law. Ed., 71; Clancy vs. McElroy, 30 Wash., 567; 70 Pac., 1095;
State vs. West, 3 Ohio State, 509, 511; In re Lent, 40 N. Y. Supp., 570,
572; 16 Misc. Rep., 606; Ludlow vs. Ludlow's Executors, 4 N. J. Law [1
Sothard], 387, 394; Whipple vs. Eddy, 161 Ill., 114;43 N. E., 789, 790;
Borkheim vs. Fireman's Fund Ins. Co., 38 Cal., 505, 506;
Beasley vs. People, 89 Ill., 571, 575; Donnelly vs. Smith, 128 Iowa, 257;
103 N. W., 776).
But section 3 of Act No. 2792 is challenged by the respondent on the
ground that the subject-matter of this section is not expressed in the title
of the Act, with the result that the section is invalid. This criticism is in our
opinion well founded. Section 3 of our organic law (Jones Bill) declares,
among other things, that "No bill which may be enacted into law shall
embrace more than one subject, and that subject shall be expressed in
the title of the bill." Any law or part of a law passed by the Philippine
Legislature since this provision went into effect and offending against its
requirement is necessarily void.
Upon examining the entire Act (No. 2792), we find that it is directed to
three ends which are successively dealt with in the first three sections of
the Act. But it will be noted that these three matters all relate to the
Corporation Law; and it is at once apparent that they might properly have
been embodied in a single Act if a title of sufficient unity and generality
had been prefixed thereto. Furthermore, it is obvious, even upon casual
inspection, that the subject-matter of each of the first two sections is
expressed and defined with sufficient precision in the title. With respect to
the subject-matter of section 3 the only words in the title which can be
taken to refer to the subject-matter of said section are these, "An Act . . .
establishing penalties for certain things, and for other purposes." These
words undoubtedly have sufficient generality to cover the subject-matter
of section 3 of the Act. But this is not enough. The Jones Law requires
that the subject-matter of the bill "shall be expressed in the title of the
bill."
When reference is had to the expression "establishing penalties for
certain things," it is obvious that these words express nothing. The
constitutional provision was undoubtedly adopted in order that the public
might be informed as to what the Legislature is about while bills are in
process of passage. The expression "establishing penalties for certain
things" would give no definite information to anybody as to the project of
legislation intended under this expression. An examination of the decided
cases shows that courts have always been indulgent of the practices of
the Legislature with respect to the form and generality of title, for if
extreme refinements were indulged by the courts, the work of legislation
would be unnecessarily hampered. But, as has been observed by the
California court, there must be some reasonable limit to the generality of
titles that will be allowed. The measure of legality is whether the title is
sufficient to give notice of the general subject of the proposed legislation
to the persons and interests likely to be affected.
In Lewis vs. Dunne (134 Cal., 291), the court had before it a statute
entitled "An Act to revise the Code of Civil Procedure of the State of
California, by amending certain sections, repealing others, and adding
certain new sections." This title was held to embrace more than one
subject, which were not sufficiently expressed in the title. In discussing
the question the court said:
* * * It is apparent that the language of the title of the act in
question, in and of itself, express no subject whatever. No one
could tell from the title alone what subject of legislation was dealt
with in the body of the act; such subject so far as the title of the
act informs us, might have been entirely different from anything to
be found in the act itself.
We cannot agree with the contention of some of respondent's
counsel — apparently to some extent countenanced by a few
authorities — that the provision of the constitution in question can
be entirely avoided by the simple device of putting into the title of
an act words which denote a subject "broad" enough to cover
everything. Under that view, the title, "An act concerning the laws
of the state," would be good, and the convention and people who
framed and adopted the constitution would be convicted of the
folly of elaborately constructing a grave constitutional limitation of
legislative power upon a most important subject, which the
legislature could at once circumvent by a mere verbal trick. The
word "subject" is used in the constitution embrace but "one
subject" it necessarily implies — what everybody knows — that
there are numerous subjects of the legislation, and declares that
only one of these subjects shall embraced in any one act. All
subjects cannot be conjured into one subject by the mere magic
of a word in a title.
In Rader vs. Township of Union (39 N. J. L., 509, 515), the Supreme
Court of New Jersey made the following observation:
* * * It is true, that it may be difficult to indicate, by a formula, how
specialized the title of a statute must be; but it is not difficult to
conclude that it must mean something in the way of being a
notice of what is doing. Unless it does not enough that it
embraces the legislative purpose — it must express it; and where
the language is too general, it will accomplish the former, but not
the latter. Thus, a law entitled "An act for a certain purpose,"
would embrace any subject, but would express none, and,
consequently, it would not stand the constitutional test.
The doctrine properly applicable in matters of this kind is, we think, fairly
summed up in a current repository of jurisprudence in the following
language:
* * * While it may be difficult to formulate a rule by which to
determine the extent to which the title of a bill must specialize its
object, it may be safely assumed that the title must not only
embrace the subject of proposed legislation, but also express it
clearly and fully enough to give notice of the legislative purpose.
(25 R. C. L., p. 853.)
In dealing with the problem now before us the words "and for other
purposes "found at the end of the caption of Act No. 2792, must be laid
completely out of consideration. They express nothing, and amount to
nothing as a compliance with the constitutional requirement to which
attention has been directed. This expression "(for other purposes") is
frequently found in the title of acts adopted by the Philippine Legislature;
and its presence in our laws is due to the adoption by our Legislature of
the style used in Congression allegation. But it must be remembered that
the legislation of Congress is subject to no constitutional restriction with
respect to the title of bills. Consequently, in Congressional legislation the
words "and for other purposes" at least serve the purpose of admonishing
the public that the bill whose heading contains these words contains
legislation upon other subjects than that expressed in the title. Now, so
long as the Philippine Legislature was subject to no restriction with
respect to the title of bills intended for enactment into general laws, the
expression "for other purposes" could be appropriately used in titles, not
precisely for the purpose of conveying information as to the matter
legislated upon, but for the purpose ad admonishing the public that any
bill containing such words in the title might contain other subjects than
that expressed in the definitive part of the title. But, when congress
adopted the Jones Law, the restriction with which we are now dealing
became effective here and the words "for other purposes" could no
longer be appropriately used in the title of legislative bills. Nevertheless,
the custom of using these words has still been followed, although they
can no longer serve to cover matter not germane to the bill in the title of
which they are used. But the futility of adding these words to the style of
any act is now obvious (Cooley, Const. Lims., 8th ed., p. 302)
In the brief for the plaintiff it is intimated that the constitutional restriction
which we have been discussing is more or less of a dead letter in this
jurisdiction; and it seems to be taken for granted that no court would ever
presume to hold a legislative act or part of a legislative act invalid for non-
compliance with the requirement. This is a mistake; and no utterance of
this court can be cited as giving currency to any such notion. On the
contrary the discussion contained in Central Capiz vs. Ramirez (40 Phil.,
883), shows that when a case arises where a violation of the restriction is
apparent, the court has no alternative but to declare the legislation
affected thereby to be invalid.
Second cause of action. — The second cause of action is based upon a
charge that the respondent is owning and holding a business lot, with the
structure thereon, in the financial district of the City of Manila is excess of
its reasonable requirements and in contravention of subsection 5 of
section 13 of the corporation Law. The facts on which this charge is
based appear to be these:
On August 28, 1913, the respondent purchased 1,413 square meters of
land at the corner of Juan Luna Street and the Muelle de la Industria, in
the City of Manila, immediately adjacent to the building then occupied by
the Hongkong and Shanghai Banking Corporation. At the time the
respondent acquired this lot there stood upon it a building, then nearly
fifty years old, which was occupied in part by the offices of an importing
firm and in part by warehouses of the same firm. The material used in the
construction was Guadalupe stone and hewn timber, and the building
contained none of the facilities usually found in a modern office building.
In purchase of a design which had been formed prior to the purchase of
the property, the directors of the El Hogar Filipino caused the old building
to be demolished; and they erected thereon a modern reinforced
concrete office building. As at first constructed the new building was three
stories high in the main, but in 1920, in order to obtain greater advantage
from the use of the land, an additional story was added to the building,
making a structure of four stories except in one corner where an
additional story was place, making it five stories high over an area of
117.52 square meters. It is admitted in the plaintiffs brief that this "noble
and imposing structure" — to use the words of the Attorney-General —
"has greatly improved the aspect of the banking and commercial district
of Manila and has greatly contributed to the movement and campaign for
the Manila Beautiful." It is also admitted that the competed building is
reasonably proportionate in value and revenue producing capacity to the
value of the land upon which it stands. The total outlay of the respondent
for the land and the improvements thereon was P690,000 and at this
valuation the property is carried on the books of the company, while the
assessed valuation of the land and improvements is at P786,478.
Since the new building was completed the respondent has used about
324 square meters of floor space for its own offices and has rented the
remainder of the office space in said building, consisting of about 3,175
square meters, to other persons and entities. In the second cause of
action of the complaint it is supposed that the acquisition of this lot, the
construction of the new office building thereon, and the subsequent
renting of the same in great part to third persons, are ultra vires acts on
the part of the corporation, and that the proper penalty to be enforced
against it in this action is that if dissolution.
With this contention we are unable to agree. Under subsection 5 of
section 13 of the Corporation Law, every corporation has the power to
purchase, hold and lease such real property as the transaction of the
lawful business of the corporation may reasonably and necessarily
require. When this property was acquired in 1916, the business of El
Hogar Filipino had developed to such an extent, and its prospects for the
future were such as to justify its directors in acquiring a lot in the financial
district of the City of Manila and in constructing thereon a suitable
building as the site of its offices; and it cannot be fairly said that the area
of the lot — 1,413 square meters — was in excess of its reasonable
requirements. The law expressly declares that corporations may acquire
such real estate as is reasonably necessary to enable them to carry out
the purposes for which they were created; and we are of the opinion that
the owning of a business lot upon which to construct and maintain its
offices is reasonably necessary to a building and loan association such
as the respondent was at the time this property was acquired. A different
ruling on this point would compel important enterprises to conduct their
business exclusively in leased offices — a result which could serve no
useful end but would retard industrial growth and be inimical to the best
interests of society.
We are furthermore of the opinion that, inasmuch as the lot referred to
was lawfully acquired by the respondent, it is entitled to the full beneficial
use thereof. No legitimate principle can discovered which would deny to
one owner the right to enjoy his (or its) property to the same extent that is
conceded to any other owner; and an intention to discriminate between
owners in this respect is not lightly to be imputed to the Legislature. The
point here involved has been the subject of consideration in many
decisions of American courts under statutes even more restrictive than
that which prevails in this jurisdiction; and the conclusion has uniformly
been that a corporations whose business may properly be conducted in a
populous center may acquire an appropriate lot and construct thereon an
edifice with facilities in excess of its own immediate requirements.
Thus in People vs. Pullman's Palace-Car Co. (175 Ill., 125; 64 L. R. A.,
366), it appeared that the respondent corporation owned and controlled a
large ten-story business block in the City of Chicago, worth $2,000,000,
and that it occupied only about one-fourth thereof for its own purposes,
leasing the remainder to others at heavy rentals. The corporate charter
merely permitted the holding of such real estate by the respondent as
might be necessary for the successful prosecution of its business. An
attempt was made to obtain the dissolution of the corporation in a quo
warranto proceeding similar to that now before us, but the remedy was
denied.
In Rector vs. Hartford Deposit Co., a question was raised as to the power
of the Deposit Company to erect and own a fourteen-story building —
containing eight storerooms, one hundred suites of offices, and one
safety deposit vault, under a statute authorizing the corporation to
possess so much real estate "as shall be necessary for the transaction of
their business." The court said:
That the appellee company possessed ample power to acquire
real property and construct a building thereon for the purpose of
transacting therein the legitimate business of the corporation is
beyond the range of debate. Nor is the contrary contended, but
the insistence is that, under the guise of erecting a building for
corporate purposes, the appellee company purposely constructed
a much larger building than its business required, containing
many rooms intended to be rented to others for offices and
business purposes, — among them, the basement rooms
contracted to be leased to the appellant, — and that in so doing it
designedly exceeded its corporate powers. The position off
appellant therefore is that the appellee corporation has flagrantly
abused its general power to acquire real estate and construct a
building thereon . . . It was within the general scope of the
express powers of the appellee corporation to own and possess a
building necessary for its proper corporate purposes. In planning
and constructing such a building, as was said in People vs.
Pullman's Palace Car Co., supra, the corporation should not
necessarily be restricted to a building containing the precise
number of rooms its then business might require, and no more,
but that the future probable growth and volume of its business
might be considered and anticipated, and a larger building, and
one containing more rooms than the present volume of business
required be erected, and the rooms not needed might be rented
by the corporation, — provided, of course, such course should be
taken in good faith, and not as a mere evasion of the public law
and the policy of the state relative to the ownership of real estate
by corporations. In such state of case the question is whether the
corporation has abused or excessively and unjustifiably used the
power and authority granted it by the state to construct buildings
and own real estate necessary for its corporate purposes.
In Home savings building Association vs. Driver (129 Ky., 754), one of
the questions before the court was precisely the same as that now before
us. Upon this the Supreme Court of Kentucky said:
The third question is, has the association the right to erect,
remodel, or own a building of more than sufficient capacity to
accommodate its own business and to rent out the excess? There
is nothing in the Constitution, charter of the association, or
statutes placing any limitation upon the character of a building
which a corporation may erect as a home in which to conduct its
business. A corporation conducting a business of the character of
that in which appellant is engaged naturally expects its business
to grow and expand from time to time, and, in building a home it
would be exercising but a short-sighted judgment if it did not
make provision for the future by building a home large enough to
 take care of its expanding business, and hence, even if it should
build a house larger and roomier than its present needs or
interests require, it would be acting clearly with the exercise of its
corporate right and power. The limitation which the statute
imposes is that proper conduct of its business, but it does not
attempt to place any restriction or limitation upon the right of the
corporation or association as to the character of building it shall
erect on said real estate; and, while the Constitution and the
statutes provide that no corporation shall engage in any business
other than that expressly authorized by its charter, we are of
opinion that, in renting out the unoccupied and unused portions of
the building so erected, the association could not be said to
engaged in any other business than that authorized by its charter.
The renting of the unused portions of the building is a mere
incident in the conduct of its real business. We would not say that
a building association might embark in the business of building
houses and renting or leasing them, but there is quite a difference
in building or renting a house in which to conduct its own
business and leasing the unused portion thereof for the time
being, or until such time as they may be needed by the
association, and in building houses for the purpose of renting or
leasing them. The one might properly be said to be the proper
exercise of a power incident to the conduct of its legitimate
business, whereas the other would be a clear violation of that
provision of the statute which denies to any corporation the right
to conduct any business other than that authorized by its charter.
To hold otherwise would be to charge most of the banking
institutions, trust companies and other corporations, such as title
guaranty companies, etc., doing with violating the law; for it is
known that there are few of such institutions that do not, at times,
rent out or lease the unneeded portions of the building occupied
by them as homes. We do not think that in so doing they are
violating any provisions of the law, but that the renting out of the
unused or unoccupied portions of their buildings is but an incident
in the conduct of their business.
In Wingert vs. First National Bank of Hagerstown, Md. (175 Fed., 739,
741), a stockholder sought to enjoin the bank from building a six-story
building owned by the bank in the commercial district of Hagerstown of
which only the first story was to be used by the bank, the remaining
stories to be rented out for offices and places of business, on the theory
that such action was ultra vires and in violation of the provisions of the
national banking act confining such corporations to the holding, only, of
such real estate "as shall be necessary for its immediate accommodation
in the transaction of its business."
The injunction was denied, the court adopting the opinion of the lower
court in which the following was said:
'The other ground urged by the complainant is that the proposed
action is violative of the restriction which permits a national bank
to hold only such real estate as shall be necessary for its
immediate accommodation in the transaction of its business, and
that, therefore, the erection of a building which will contain offices
not necessary for the business of the bank is not permitted by the
law, although that method of improving the lot may be the most
beneficial use that can be made of it. It is matter of common
knowledge that the actual practice of national banks is to the
contrary. Where ground is valuable, it may probably be truly said
that the majority of national bank buildings are built with
accommodations in excess of the needs of the bank for the
purpose of lessening the bank's expense by renting out the
unused portion. If that were not allowable, many smaller banks in
cities would be driven to become tenants as the great cost of the
lot would be prohibitive of using it exclusively for the banking
accommodation of a single bank. As indicative of the
interpretation of the law commonly received and acted upon,
reference may be made to the reply of the Comptroller of the
Currency to the injury by the bank in this case asking whether the
law forbids the bank constructing such a building as was
contemplated.
'The reply was follows: "Your letter of the 9th instant received,
stating that the directors contemplate making improvements in
the bank building and inquiring if there is anything in the national
banking laws prohibiting the construction of a building which will
contain floors for offices to be rented out by the bank as well as
the banking room. Your attention is called to the case of Brown
vs. Schleier, 118 Fed., 981 [55 C. C. A, 475], in which the court
held that: 'If the land which a national bank purchases or leases
for the accommodation of its business is very valuable it may
exercise the same rights that belong to other landowners of
improving it in a way that will yield the largest income, lessen its
own rent, and render that part of its funds which are invested in
realty most productive.'" This seems to be the common sense
 interpretation of the act of Congress and is the one which
prevails.'
It would seem to be unnecessary to extend the opinion by lengthy
citations upon the point under consideration, butBrown vs. Schleier (118
Fed., 981), may be cited as being in harmony with the foregoing
authorities. In dealing with the powers of a national bank the court, in this
case, said:
When an occasion arises for an investment in real property for
either of the purposes specified in the statute the national bank
act permits banking associations to act as any prudent person
would act in making an investment in real estate, and to exercise
the same measure of judgment and discretion. The act ought not
to be construed in such as way as to compel a national bank,
when it acquires real property for a legitimate purpose, to deal
with it otherwise than a prudent land owner would ordinarily deal
with such property.
In the brief of the Attorney-General reliance is place almost entirely upon
two Illinois cases, namely Africani Home Purchase and Loan Association
vs. Carroll (267 Ill., 380), and First Methodist Episcopal Church of
Chicago vs. Dixon (178 Ill., 260). In our opinion these cases are either
distinguishable from that now before us, or they reflect a view of the law
which is incorrect. At any rate the weight of judicial opinion is so
overwhelmingly in favor of sustaining the validity of the acts alleged in the
second cause of action to have been done by the respondent in excess
of its powers that we refrain from commenting at any length upon said
cases. The ground stated in the second cause of action is in our opinion
without merit.
Third cause of action. — Under the third cause of action the respondent
is charged with engaging in activities foreign to the purposes for which
the corporation was created and not reasonable necessary to its
legitimate ends. The specifications under this cause of action relate to
three different sorts of activities. The first consist of the administration of
the offices in the El Hogar building not used by the respondent itself and
the renting of such offices to the public. As stated in the discussion
connected with the second cause of action, the respondent uses only
about ten per cent of the office space in the El Hogar building for its own
purposes, and it leases the remainder to strangers. In the years 1924 and
1925 the respondent received as rent for the leased portions of the
building the sums of P75,395.06 and P58,259.27, respectively. The
activities here criticized clearly fall within the legitimate powers of the
respondent, as shown in what we have said above relative to the second
cause of action. This matter will therefore no longer detain us. If the
respondent had the power to acquire the lot, construct the edifice and
hold it beneficially, as there decided, the beneficial administration by it of
such parts of the building as are let to others must necessarily be lawful.
The second specification under the third cause of action has reference to
the administration and management of properties belonging to delinquent
shareholders of the association. In this connection it appears that in case
of delinquency on the part of its shareholders in the payment of interest,
premium, and dues, the association has been accustomed (pursuant to
clause 8 of its standard mortgage) to take over and manage the
mortgaged property for the purpose of applying the income to the
obligations of the debtor party. For these services the respondent
charges a commission at the rate of 2½ per centum on sums collected.
The case for the government supposes that the only remedy which the
respondent has in case of default on the part of its shareholders is to
proceed to enforce collection of the whole loan in the manner
contemplated in section 185 of the Corporation Law. It will be noted,
however, that, according to said section, the association may treat the
whole indebtedness as due, "at the option of the board of directors," and
this remedy is not made exclusive. We see no reason to doubt the
validity of the clause giving the association the right to take over the
property which constitutes the security for the delinquent debt and to
manage it with a view to the satisfaction of the obligations due to the
debtor than the immediate enforcement of the entire obligation, and the
validity of the clause allowing this course to be taken appears to us to be
not open to doubt. The second specification under this cause of action is
therefore without merit, as was true of the first.
The third specification under this cause of action relates to certain
activities which are described in the following paragraphs contained in
the agreed statements of facts:.
El Hogar Filipino has undertaken the management of some
parcels of improved real estate situated in Manila not under
mortgage to it, but owned by shareholders, and has held itself out
by advertisement as prepared to do so. The number of properties
so managed during the years 1921 to 1925, inclusive, was as
follows:
 1921 eight properties
1922 six properties
1923 ten properties
1924 fourteen properties
1925 fourteen properties.
This service is limited to shareholders; but some of the persons
whose properties are so managed for them became shareholders
only to enable them to take advantage thereof.
The services rendered in the management of such improved real
estate by El Hogar Filipino consist in the renting of the same, the
payment of real estate taxes and insurance for the account of the
owner, causing the necessary repairs for upkeep to be made, and
collecting rents due from tenants. For the services so rendered in
the management of such properties El Hogar Filipino receives
compensation in the form of commissions upon the gross receipts
from such properties at rates varying from two and one-half per
centum to five per centum of the sums so collected, according to
the location of the property and the effort involved in its
management.
The work of managing real estate belonging to non-borrowing
shareholders administered by El Hogar Filipino is carried on by
the same members of the staff who attend to the details of the
management of properties administered by the manager of El
Hogar Filipino under the provisions of paragraph 8 of the
standard mortgage form, and of properties bought in on
foreclosure of mortgage.
The practice described in the passage above quoted from the agreed
facts is in our opinion unauthorized by law. Such was the view taken by
the bank examiner of the Treasury Bureau in his report to the Insular
Treasurer on December 21, 1925, wherein the practice in question was
criticized. The administration of property in the manner described is more
befitting to the business of a real estate agent or trust company than to
the business of a building and loan association. The practice to which this
criticism is directed relates of course solely to the management and
administration of properties which are not mortgaged to the association.
The circumstance that the owner of the property may have been required
to subscribe to one or more shares of the association with a view to
qualifying him to receive this service is of no significance. It is a general
rule of law that corporations possess only such express powers. The
management and administration of the property of the shareholders of
the corporation is not expressly authorized by law, and we are unable to
see that, upon any fair construction of the law, these activities are
necessary to the exercise of any of the granted powers. The corporation,
upon the point now under the criticism, has clearly extended itself beyond
the legitimate range of its powers. But it does not result that the
dissolution of the corporation is in order, and it will merely be enjoined
from further activities of this sort.
Fourth cause of action. — It appears that among the by laws of the
association there is an article (No. 10) which reads as follows:
The board of directors of the association, by the vote of an
absolute majority of its members, is empowered to cancel shares
and to return to the owner thereof the balance resulting from the
liquidation thereof whenever, by reason of their conduct, or for
any other motive, the continuation as members of the owners of
such shares is not desirable.
This by-law is of course a patent nullity, since it is in direct conflict with
the latter part of section 187 of the Corporation Law, which expressly
declares that the board of directors shall not have the power to force the
surrender and withdrawal of unmatured stock except in case of
liquidation of the corporation or of forfeiture of the stock for delinquency.
It is agreed that this provision of the by-laws has never been enforced,
and in fact no attempt has ever been made by the board of directors to
make use of the power therein conferred. In November, 1923, the Acting
Insular Treasurer addressed a letter to El Hogar Filipino, calling attention
to article 10 of its by-laws and expressing the view that said article was
invalid. It was therefore suggested that the article in question should be
eliminated from the by-laws. At the next meeting of the board of directors
the matter was called to their attention and it was resolved to recommend
to the shareholders that in their next annual meeting the article in
question be abrogated. It appears, however, that no annual meeting of
the shareholders called since that date has been attended by a sufficient
number of shareholders to constitute a quorum, with the result that the
provision referred to has no been eliminated from the by-laws, and it still
stands among the by-laws of the association, notwithstanding its patent
conflict with the law.
It is supposed, in the fourth cause of action, that the existence of this
article among the by-laws of the association is a misdemeanor on the
part of the respondent which justifies its dissolution. In this view we are
unable to concur. The obnoxious by-law, as it stands, is a mere nullity,
and could not be enforced even if the directors were to attempt to do so.
There is no provision of law making it a misdemeanor to incorporate an
invalid provision in the by-laws of a corporation; and if there were such,
the hazards incident to corporate effort would certainly be largely
increased. There is no merit in this cause of action.
Fifth cause of action. — In section 31 of the Corporation Law it is
declared that, "at all elections of directors there must be present, either in
person or by representative authorized to act by written proxy, the
owners of the majority of the subscribed capital stock entitled to vote. . . ."
Conformably with this requirement it is declared in article 61 of the by-
laws of El Hogar Filipino that, "the attendance in person or by proxy of
shareholders owning one-half plus one of the shareholders shall be
necessary to constitute a quorum for the election of directors. At the
general annual meetings of the El Hogar Filipino held in the years 1911
and 1912, there was a quorum of shares present or represented at the
meetings and directors were duly elected accordingly. As the corporation
has grown, however, it has been fond increasingly difficult to get together
a quorum of the shareholders, or their proxies, at the annual meetings;
and with the exception of the annual meeting held in 1917, when a new
directorate was elected, the meetings have failed for lack of quorum. It
has been foreseen by the officials in charge of the respondent that this
condition of affairs would lead to embarrassment, and a special effort
was made by the management to induce a sufficient number of
shareholders to attend the annual meeting for February, 1923. In addition
to the publication of notices in the newspapers, as required by the by-
laws, a letter of notification was sent to every shareholder at his last
known address, together with a blank form of proxy to be used in the
event the shareholder could not personally attend the meeting.
Notwithstanding these special efforts the meeting was attended only by
shareholders, in person and by proxy, representing 3,889 shares, out of a
total of 106,491 then outstanding and entitled to vote.
Owing to the failure of a quorum at most of the general meetings since
the respondent has been in existence, it has been the practice of the
directors to fill vacancies in the directorate by choosing suitable persons
from among the stockholders. This custom finds its sanction in article 71
of the by-laws, which reads as follows:
ART. 71. The directors shall elect from among the shareholders
members to fill the vacancies that may occur in the board of
directors until the election at the general meeting.
The person thus chosen to fill vacancies in the directorate have, it is
admitted, uniformly been experienced and successful business and
professional men of means, enjoying earned incomes of from P12,000 to
P50,000 per annum, with an annual average of P30,000 in addition to
such income as they derive from their properties. Moreover, it appears
that several of the individuals constituting the original directorate and
persons chosen to supply vacancies therein belong to prominent Filipino
families, and that they are more or less related to each other by blood or
marriage. In addition to this it appears that it has been the policy of the
directorate to keep thereon some member or another of a single
prominent American law firm in the city.
It is supposed in the statement of the fifth cause of action in the complaint
that the failure of the corporation to hold annual meetings and the filling
of vacancies in the directorate in the manner described constitute
misdemeanors on the part of the respondent which justify the resumption
of the franchise by the Government and dissolution of the corporation;
and in this connection it is charge that the board of directors of the
respondent has become a permanent and self perpetuating body
composed of wealthy men instead of wage earners and persons of
moderate means. We are unable to see the slightest merit in the charge.
No fault can be imputed to the corporation on account of the failure of the
shareholders to attend the annual meetings; and their non-attendance at
such meetings is doubtless to be interpreted in part as expressing their
satisfaction of the way in which things have been conducted. Upon failure
of a quorum at any annual meeting the directorate naturally holds over
and continues to function until another directorate is chosen and
qualified. Unless the law or the charter of a corporation expressly
provides that an office shall become vacant at the expiration of the term
of office for which the officer was elected, the general rule is to allow the
officer to holdover until his successor is duly qualified. Mere failure of a
corporation to elect officers does not terminate the terms of existing
officers nor dissolve the corporation (Quitman Oil Company vs. Peacock,
14 Ga. App., 550; Jenkins vs. Baxter, 160 Pa. State, 199; New York B. &
E. Ry. Co. vs. Motil, 81 Conn., 466; Hatch vs. Lucky Bill Mining
Company, 71 Pac., 865; Youree vs. Home Town Matual Ins. Company,
180 Missouri, 153; Cassell vs. Lexington, H. and P. Turnpike Road Co.,
1913
10 Ky. L. R., 486). The doctrine above stated finds expressions in article 15,479.29 27 573.30
..................................
66 of the by-laws of the respondent which declares in so many words that
directors shall hold office "for the term of one year on until their 1914
successors shall have been elected and taken possession of their 19,164.72 27 709.80
..................................
offices."
1915
24,032.85 25 961.31
It result that the practice of the directorate of filling vacancies by the ..................................
action of the directors themselves is valid. Nor can any exception be
1916
taken to then personality of the individuals chosen by the directors to fill 27,539.50 28 983.55
..................................
vacancies in the body. Certainly it is no fair criticism to say that they have
chosen competent businessmen of financial responsibility instead of 1917
electing poor persons to so responsible a position. The possession of 31,327.00 26 1,204.88
..................................
means does not disqualify a man for filling positions of responsibility in
corporate affairs. 1918
32,858.35 20 1,642.91
..................................
Sixth cause of action. — Under the sixth cause of action it is alleged that
the directors of El Hogar Filipino, instead of serving without pay, or 1919
36,318.78 21 1,729.46
receiving nominal pay or a fixed salary, — as the complaint supposes ..................................
would be proper, — have been receiving large compensation, varying in 1920
amount from time to time, out of the profits of the respondent. The facts 63,517.01 28 2,268.46
..................................
relating to this cause of action are in substance these:
1921
36,815.33 25 1,472.61
Under section 92 of the by-laws of El Hogar Filipino 5 per centum of the ..................................
net profit shown by the annual balance sheet is distributed to the
directors in proportion to their attendance at meetings of the board. The 1922
43,133.73 25 1,725.34
compensation paid to the directors from time to time since the ..................................
organization was organized in 1910 to the end of the year 1925, together 1923
with the number of meetings of the board held each year, is exhibited in 39,773.61 27 1,473.09
..................................
the following table:
1924
38,651.92 26 1,486.61
..................................
Number Rate per
Compensation
of meeting 1925
Year paid directors 35,719.27 26 1,373.81
meetings as a ..................................
as a whole
held whole
1911 It will be note that the compensation above indicated as accruing to the
P 4,167.96 25 P 166.71
.................................. directorate as a whole has been divided among the members actually
present at the different meetings. As a result of this practice, and the
1912 liberal measure of compensation adopted, we find that the attendance of
10,511.87 29 362.47
.................................. the membership at the board meetings has been extraordinarily good.
Thus, during the years 1920 to 1925, inclusive, when the board was
composed of nine members, the attendance has regularly been eight
meeting with the exception of two years when the average attendance
was seven. It is insisted in the brief for the Attorney-General that the
payment of the compensation indicated is excessive and prejudicial to he
interests of the shareholders at large. For the respondent, attention is
directed to the fact that the liberal policy adopted by the association with
respect to the compensation of the directors has had highly beneficial
results, not only in securing a constant attendance on the part of the
membership, but in obtaining their intelligent attention to the affairs of the
association. Certainly, in this connection, the following words from the
report of the government examiners for 1918 to the Insular Treasurer
contain matter worthy of consideration:
The management of the association is entrusted to men of recognized
ability in financial affairs and it is believed that they have long foreseen all
possible future contingencies and that under such men the interests of
the stockholders are duly protected. The steps taken by the directorate to
curtail the influx of unnecessary capital into the association's coffers, as
mentioned above, reveals how the men at grasp the situation and to
apply the necessary remedy as the circumstances were found in the
same excellent condition as in the previous examination.
In so far as this court is concerned the question here before us is not one
concerning the propriety and wisdom of the measure of compensation
adopted by the respondent but rather the question of the validity of the
measure. Upon this point there can, it seems to us, be no difference of
intelligent opinion. The Corporation Law does not undertake to prescribe
the rate of compensation for the directors of corporations. The power to
fixed the compensation they shall receive, if any, is left to the corporation,
to be determined in its by-laws(Act No. 1459, sec. 21). Pursuant to this
authority the compensation for the directors of El Hogar Filipino has been
fixed in section 92 of its by-laws, as already stated. The justice and
property of this provision was a proper matter for the shareholders when
the by-laws were framed; and the circumstance that, with the growth of
the corporation, the amount paid as compensation to the directors has
increased beyond what would probably be necessary to secure adequate
service from them is matter that cannot be corrected in this action; nor
can it properly be made a basis for depriving the respondent of its
franchise, or even for enjoining it from compliance with the provisions of
its own by-laws. If a mistake has been made, or the rule adopted in the
by-laws meeting to change the rule. The remedy, if any, seems to lie
rather in publicity and competition, rather than in a court proceeding. The
sixth cause of action is in our opinion without merit.
Seventh cause of action. — It appears that the promoter and organizer of
El Hogar Filipino was Mr. Antonio Melian, and in the early stages of the
organization of the association the board of directors authorized the
association to make a contract with him with regard to the services him
therefor. Pursuant to this authority the president of the corporation, on
January 11, 1911, entered into a written agreement with Mr. Melian,
which is reproduced in the agreed statement of facts and of which the
important clauses are these:
1. The corporation "El Hogar Filipino Sociedad Mutua de
Construccion y Prestamos," and on its behalf its president, Don
Antonio R. Roxas, hereby confers on Don Antonio Melian the
office of manager of said association for the period of one year
from the date of this contract.
2. Don Antonio Melian accepts said office and undertakes to
render the services thereto corresponding for the period of one
year, as prescribed by the by-laws of the corporation, without
salary.
3. Don Antonio Melian furthermore undertakes to pay for his own
account, all the expenses incurred in the organization of the
corporation.
4. Don Antonio Melian further undertakes to lend to the
corporation, without interest the sum of six thousand pesos
(P6,000), Philippine Currency, for the purpose of meeting the
expense of rent, office supplies, etcetera, until such time as the
association has sufficient funds of its own with which to return this
loan: Provided, nevertheless, That the maximum period thereof
shall not exceed three (3) years.
5. Don Antonio Melian undertakes that the capital of the
association shall amount to the sum of four hundred thousand
pesos (P400,000), Philippine currency, par value, during the first
year of its duration.
6. In compensation of the studies made and services rendered by
Don Antonio Melian for its organization, the expenses incurred by
him to that end, and in further consideration of the said loan of six
thousand pesos (P6,000), and of the services to be rendered by
him as manager, and of the obligation assumed by him that the
 nominal value of the capital of the association shall reach the sum
of four hundred thousand pesos (P400,000) during the first year
of its duration, the corporation 'El Hogar Filipino Sociedad Mutua
de Construccion y Prestamos' hereby grants him five per centum
(5%) of the net profits to be earned by it in each year during the
period fixed for the duration of the association by its articles of
incorporation; Provided, that this participation in the profits shall
be transmitted to the heirs of Señor Melian in the event of his
death; And provided further, that the performance of all the
obligations assumed by Señor Melian in favor of the association,
in accordance with this contract, shall and does constitute a
condition precedent to the acquisition by Señor Melian of the right
to the said participation in the profits of the association, unless
the non-performance of such obligations shall be due to a
fortuitous event or force majeure.
In conformity with this agreement there was inserted in section 92 of the
by-laws of the association a provision recognizing the rights of Melian, as
founder, to 5 per centum of the net profits shown by the annual balance
sheet, payment of the same to be made to him or his heirs during the life
of the association. It is declared in said article that this portion of the
earnings of the association is conceded to him in compensation for the
studies, work and contributions made by him for the organization of El
Hogar Filipino and the performance on his part of the contract of January
11, 1911, above quoted. During the whole life of the association, thus far,
it has complied with the obligations assumed by it in the contract above-
mentioned; and during the years 1911 to 1925, inclusive, it paid to him as
founder's royalty the sum of P459,011.19, in addition to compensation
received from the association by him in to remuneration of services to the
association in various official capacities.
As a seventh cause of action it is alleged in the complaint that this royalty
of the founder is "unconscionable, excessive and out of all proportion to
the services rendered, besides being contrary to and incompatible with
the spirit and purpose of building and loan associations." It is not alleged
that the making of this contract was beyond the powers of the association
(ultra vires); nor it alleged that it is vitiated by fraud of any kind in its
procurement. Nevertheless, it is pretended that in making and observing
said contract the respondent committed an offense requiring its
dissolution, or, as is otherwise suggested, that the association should be
enjoined from performing the agreement.
It is our opinion that this contention is entirely without merit. Stated in its
true simplicity, the primary question here is whether the making of a
(possibly) indiscreet contract is a capital offense in a corporation, — a
question which answers itself. No possible doubt exists as to the power
of a corporation to contract for services rendered and to be rendered by a
promoter in connection with organizing and maintaining the corporation. It
is true that contracts with promoters must be characterized by good faith;
but could it be said with certainty, in the light of facts existing at the time
this contract was made, that the compensation therein provided was
excessive? If the amount of the compensation now appears to be a
subject of legitimate criticism, this must be due to the extraordinary
development of the association in recent years.
If the Melian contract had been clearly ultra vires — which is not charged
and is certainly untrue — its continued performance might conceivably be
enjoined in such a proceeding as this; but if the defect from which it
suffers is mere matter for an action because Melian is not a party. It is
rudimentary in law that an action to annul a contract cannot be
maintained without joining both the contracting parties as defendants.
Moreover, the proper party to bring such an action is either the
corporation itself, or some shareholder who has an interest to protect.
The mere fact that the compensation paid under this contract is in excess
of what, in the full light of history, may be considered appropriate is not a
proper consideration for this court, and supplies no ground for interfering
with its performance. In the case of El Hogar Filipino vs. Rafferty (37
Phil., 995), which was before this court nearly ten years ago, this court
held that the El Hogar Filipino is contract with Mr. Melian did not affect
the association's legal character. The inference is that the contract under
consideration was then considered binding, and it occurred to no one that
it was invalid. It would be a radical step indeed for a court to attempt to
substitute its judgment for the judgment of the contracting parties and to
hold, as we are invited to hold under this cause of action, that the making
of such a contract as this removes the respondent association from the
pale of the law. The majority of the court is of the opinion that our
traditional respect for the sanctity of the contract obligation should prevail
over the radical and innovating tendencies which find acceptance with
some and which, if given full rein, would go far to sink legitimate
enterprise in the Islands into the pit of populism and bolshevism. The
seventh count is not sustainable.
Eight cause of action. — Under the fourth cause of action we had case
where the alleged ground for the revocation of the respondent's charter
was based upon the presence in the by-laws of article 10 that was found
to be inconsistent with the express provisions of law. Under the eight
cause of action the alleged ground for putting an end to the corporate life
of the respondent is found in the presence of other articles in the by-laws,
namely, articles 70 and 76, which are alleged to be unlawful but which,
as will presently be seen, are entirely valid. Article 70 of the by-laws in
effect requires that persons elected to the board of directors must be
holders of shares of the paid up value of P5,000 which shall be held as
security may be put up in the behalf of any director by some other holder
of shares in the amount stated. Article 76 of the by-laws declares that the
directors waive their right as shareholders to receive loans from the
association.
It is asserted, under the eight cause of action, that article 70 is
objectionable in that, under the requirement for security, a poor member,
or wage-earner, cannot serve as director, irrespective of other
qualifications and that as a matter of fact only men of means actually sit
on the board. Article 76 is criticized on the ground that the provision
requiring directors to renounce their right to loans unreasonably limits
their rights and privileges as members. There is nothing of value in either
of theses suggestions. 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 the requirement of security from them for the proper
discharge of the duties of their office, in the manner prescribed in article
70, is highly prudent and in conformity with good practice. Article 76,
prohibiting directors from making loans to themselves, is of course
designed to prevent the possibility of the looting of the corporation by
unscrupulous directors. A more discreet provision to insert in the by-laws
of a building and loan association would be hard to imagine. Clearly, the
eighth cause of action cannot be sustained.
Ninth cause of action. — The specification under this head is in effect
that the respondent has abused its franchise in issuing "special" shares.
The issuance of these shares is allege to be illegal and inconsistent with
the plan and purposes of building and loan associations; and in
particular, it is alleged and inconsistent with the plan and purposes of
building and loan associations; and in particular, it is alleged that they
are, in the main, held by well-to-wage-earners for accumulating their
modest savings for the building of homes.
In the articles of incorporation we find the special shares described as
follows:
"Special" shares shall be issued upon the payment of 80 per cent
of their par value in cash, or in monthly dues of P10. The 20 per
cent remaining of the par value of such shares shall be completed
by the accumulation thereto of their proportionate part of the
profits of the corporation. At the end of each quarter the holders
of special shares shall be entitled to receive in cash such part of
the net profits of the corporation corresponding to the amount on
such date paid in by the holders of special shares, on account
thereof, as shall be determined by the directors, and at the end of
each year the full amount of the net profits available for
distribution corresponding to the special shares. The directors
shall apply such part as they deem advisable to the amortization
of the subscription to capital with respect to shares not fully paid
up, and the remainder of the profits, if any, corresponding to such
shares, shall be delivered to the holders thereof in accordance
with the provision of the by-laws.
The ground for supposing the issuance of the "special" shares to be
unlawful is that special shares are not mentioned in the Corporation Law
as one of the forms of security which may be issued by the association.
In the agreed statement of facts it is said that special shares are issued
upon two plans. By the second, the shareholder, upon subscribing, pays
in cash P10 for each share taken, and undertakes to pay P10 a month,
as dues, until the total so paid in amounts to P160 per share. On
December 31, 1925, there were outstanding 20,844 special shares of a
total paid value (including accumulations ) of P3,680,162.51. The practice
of El Hogar Filipino, since 1915, has been to accumulate to each special
share, at the end of the year, one-tenth of the divident declared and to
pay the remainder of the divident in cash to the holders of shares. Since
the same year dividend have been declared on the special and common
shares at the rate of 10 per centum per annum. When the amount paid in
upon any special share plus the accumulated dividends accruing to it,
amounts to the par value of the share (P200), such share matures and
ceases to participate further in the earning. The amount of the par value
of the share (P200) is then returned to the shareholder and the share
cancelled. Holders of special and ordinary shares participate ratably in
the dividends declared and distributed, the part pertaining to each share
being computed on the basis of the capital paid in, plus the accumulated
dividends pertaining to each share at the end of the year. The total
number of shares of El Hogar Filipino outstanding on December 31,
1925, was 125,750, owned by 5,826 shareholders, and dividend into
classes as follows:

Preferred shares .................................. 1,503
Special shares ..................................... 20,884
Ordinary shares .................................. 103,363
The matter of the propriety of the issuance of special shares by El Hogar
Filipino has been before this court in two earlier cases, in both of which
the question has received the fullest consideration from this court. In El
Hogar Filipino vs. Rafferty (37 Phil., 995), it was insisted that the
issuance of such shares constituted a departure on the part of the
association from the principle of mutuality; and it was claimed by the
Collector of Internal Revenue that this rendered the association liable for
the income tax to which other corporate entities are subject. It was held
that this contention was untenable and that El Hogar Filipino was a
legitimate building and loan association notwithstanding the issuance of
said shares. In Sevireno vs. El Hogar Filipino (G. R. No. 24926),2 and the
related cases of Gervasio Miraflores and Gil Lopes against the same
entity, it was asserted by the plaintiffs that the emission of special shares
deprived the herein responded of the privileges and immunities of a
building and loan association and that as a consequence the loans that
had been made to the plaintiffs in those cases were usurious. Upon an
elaborate review of the authorities, the court, though divided, adhered to
the principle announced in the earlier case and held that the issuance of
the special shares did not affect the respondent's character as a building
and loan association nor make its loans usurious. In view of the lengthy
discussion contained in the decisions above-mentioned, it would appear
to be an act of supererogation on our part to go over the same ground
again. The discussion will therefore not be repeated, and what is now to
be said should be considered supplemental thereto.
Upon examination of the nature of the special shares in the light of
American usage, it will be found that said shares are precisely the same
kind of shares that, in some American jurisdictions, are generally known
as advance payment shares; in if close attention be paid to the language
used in the last sentence of section 178 of the Corporation Law, it will be
found that special shares where evidently created for the purpose of
meeting the condition cause by the prepayment of dues that is there
permitted. The language of this provision is as follow "payment of dues or
interest may be made in advance, but the corporation shall not allow
interest on such advance payment at a greater rate than six per centum
per annum nor for a longer period than one year." In one sort of special
shares the dues are prepaid to the extent of P160 per share; in the other
sort prepayment is made in the amount of P10 per share, and the
subscribers assume the obligation to pay P10 monthly until P160 shall
have been paid.
It will escape notice that the provision quoted say that interest shall not
be allowed on the advance payments at a greater rate than six per
centum per annum nor for a longer period than one year. The word
"interest " as there used must be taken in its true sense of compensation
for the used of money loaned, and it not must not be confused with the
dues upon which it is contemplated that the interest may be paid. Now, in
the absence of any showing to the contrary, we infer that no interest is
ever paid by the association in any amount for the advance payments
made on these shares; and the reason is to be found in the fact that the
participation of the special shares in the earnings of the corporation, in
accordance with section 188 of the Corporation Law, sufficiently
compensates the shareholder for the advance payments made by him;
and no other incentive is necessary to induce inventors to purchase the
stock.
It will be observed that the final 20 per centum of the par value of each
special share is not paid for by the shareholder with funds out of the
pocket. The amount is satisfied by applying a portion of the shareholder's
participation in the annual earnings. But as the right of every shareholder
to such participation in the earnings is undeniable, the portion thus
annually applied is as much the property of the shareholder as if it were
in fact taken out of his pocket. It follows that the mission of the special
shares does not involve any violation of the principle that the shares must
be sold at par.
From what has been said it will be seen that there is express authority,
even in the very letter of the law, for the emission of advance-payment or
"special" shares, and the argument that these shares are invalid is seen
to be baseless. In addition to this it is satisfactorily demonstrated
in Severino vs. El Hogar Filipino, supra, that even assuming that the
statute has not expressly authorized such shares, yet the association has
implied authority to issue them. The complaint consequently fails also as
regards the stated in the ninth cause of action.
Tenth cause of action. — Under this head of the complaint it is alleged
that the defendant is pursuing a policy of depreciating, at the rate of 10
per centum per annum, the value of the real properties acquired by it at
its sales; and it is alleged that this rate is excessive. From the agreed
statement it appears that since its organization in 1910 El Hogar Filipino,
prior to the end of the year 1925, had made 1,373 loans to its
shareholders secured by first mortgages on real estate as well as by the
pledge of the shares of the borrowers. In the same period the association
has purchased at foreclosure sales the real estate constituting the
security for 54 of the aforesaid loans. In making these purchases the
association has always bid the full amount due to it from the debtor, after
deducting the withdrawal value of the shares pledged as collateral, with
the result that in no case has the shareholder been called upon to pay a
deficiency judgement on foreclosure.
El Hogar Filipino places real estate so purchased in its inventory at actual
cost, as determined by the amount bid on foreclosure sale; and thereafter
until sold the book value of such real estate is depreciated at the rate
fixed by the directors in accordance with their judgment as to each
parcel, the annual average depreciation having varied from nothing to a
maximum of 14.138 per cent. The sales thereof, but sales are made for
the best prices obtainable, whether greater or less than the book value.
It is alleged in the complaint that depreciation is charged by the
association at the rate of 10 per centum per annum. The agreed
statement of facts on this point shows that the annual average varies
from nothing to a maximum of something over 14 per centum. We are
thus left in the dark as to the precise depreciation allowed from year to
year. It is not claimed for the Government that the association is without
power to allow some depreciation; and it is quite clear that the board of
directors possesses a discretion in this matter. There is no positive
provision of law prohibiting the association from writing off a reasonable
amount for depreciation on its assets for the purpose of determining its
real profits; and article 74 of its by-laws expressly authorizes the board of
directors to determine each year the amount to be written down upon the
expenses of installation and the property of the corporation. There can be
no question that the power to adopt such a by-law is embraced within the
power to make by-laws for the administration of the corporate affairs of
the association and for the management of its business, as well as the
care, control and disposition of its property (Act No. 1459, sec. 13 [7]).
But the Attorney-General questions the exercise of the direction confided
to the board; and it is insisted that the excessive depreciation of the
property of the association is objectionable in several respects, but
mainly because it tends to increase unduly the reserves of the
association, thereby frustrating the right of the shareholders to participate
annually and equally in the earnings of the association.
This count for the complaint proceeds, in our opinion, upon an erroneous
notion as to what a court may do in determining the internal policy of a
business corporation. If the criticism contained in the brief of the
Attorney-General upon the practice of the respondent association with
respect to depreciation be well founded, the Legislature should supply
the remedy by defining the extent to which depreciation may be allowed
by building and loan associations. Certainly this court cannot undertake
to control the discretion of the board of directors of the association about
an administrative matter as to which they have legitimate power of action.
The tenth cause of action is therefore not well founded.
Eleventh and twelfth causes of action. — The same comment is
appropriate with respect to the eleventh and twelfth causes of action,
which are treated together in the briefs, and will be here combined. The
specification in the eleventh cause of action is that the respondent
maintains excessive reserve funds, and in the twelfth cause of action that
the board of directors has settled upon the unlawful policy of paying a
straight annual dividend of 10 per centum, regardless of losses suffered
and profits made by the corporation and in contravention of the
requirements of section 188 of the Corporation Law. The facts relating to
these two counts in the complaint, as set forth in the stipulation, are
these:
In article 92 of the by-laws of El Hogar Filipino it is provided that 5 per
centum of the net profits earned each year, as shown by the annual
balance sheet shall be carried to a reserve fund. The fund so created is
called the General Reserve. Article 93 of the by-laws authorizes the
directors to carry funds to a special reserve, whenever in their judgment it
is advisable to do so, provided that the annual dividend in the year in
which funds are carried to special reserve exceeds 8 per centum. It
appears to have been the policy of the board of directors for several
years past to place in the special reserve any balance in the profit and
loss account after the satisfaction of preferential charges and the
payment of a dividend of 10 per centum to all special and ordinary shares
(with accumulated dividends). As things stood in 1926 the general
reserve contained an amount equivalent to about 5 per centum of the
paid-in value of shared. This fund has never been drawn upon for the
purpose of maintaining the regular annual dividend; but recourse has
been had to the special reserve on three different occasions to make
good the amount necessary to pay dividends. It appears that in the last
five years the reserves have declined from something over 9 per cent to
something over 7.
It is insisted in the brief of the Attorney-General that the maintenance of
reserve funds is unnecessary in the case of building and loan
associations, and at any rate the keeping of reserves is inconsistent with
section 188 of the Corporation Law. Moreover, it is said that the practice
of the association in declaring regularly a 10 per cent dividend is in effect
a guaranty by the association of a fixed dividend which is contrary to the
intention of the statute.
Upon careful consideration of the questions involved we find no reason to
doubt the right of the respondent to maintain these reserves. It is true that
the corporation law does not expressly grant this power, but we think it is
to be implied. It is a fact of common observation that all commercial
enterprises encounter periods when earnings fall below the average, and
the prudent manager makes provision for such contingencies. To regard
all surplus as profit is to neglect one of the primary canons of good
business practice. Building and loan associations, though among the
most solid of financial institutions, are nevertheless subject to
vicissitudes. Fluctuations in the dividend rate are highly detrimental to
any fiscal institutions, while uniformity in the payments of dividends,
continued over long periods, supplies the surest foundations of public
confidence.
The question now under consideration is not new in jurisprudence, for the
American courts have been called upon more than once to consider the
legality of the maintenance of reserves by institutions of this or similar
character.
In Greeff vs. Equitable Life Assurance Society, the court had under
consideration a charter provision of a life insurance company, organized
on the mutual plan, in its relation to the power of the company to provide
reserves. There the statute provided that "the officers of the company,
within sixty days from the expiration of the first five years, from December
31, 1859, and within the first sixty days of every subsequent period of five
years, shall cause a balance to be struck of the affairs of the company,
which shall exhibit its assets and liabilities, both present and contingent,
and also the net surplus, after deducting a sufficient amount to cover all
outstanding risks and other obligations. Each policy holder shall be
credited with an equitable share of the said surplus."
The court said:
No prudent person would be inclined to take a policy in a
company which had so improvidently conducted its affairs that it
only retained a fund barely sufficient to pay its present liabilities,
and, therefore, was in a condition where any change by the
reduction of interest upon, or depreciation in, the value of its
securities, or any increase of mortality, would render it insolvent
and subject to be placed in the hands of a receiver. The evident
purpose of the provisions of the defendant's charter and policy
relating to this subject was to vest in the directors of the
corporation a discretion to determine the proportion of its surplus
which should be dividend each year.
In a friendly suit tried in a circuit court of Wisconsin in 1916,
entitled Boheman Bldg. and Loan Association vs. Knolt, the court, in
commenting on the nature of these reserves, said:
The apparent function of this fund is to insure the stockholders
against losses. Its purpose is not unlike that of the various forms
of insurance now in such common use. This contribution is as
legitimate an item of expense as are the premiums paid on any
insurance policy. (See Clarks and Chase, Building and Loan
Association, footnote, page 344.)
In commenting on the necessity of such funds, Sundheim says:
It is optional with the association whether to maintain such a fund
or not, but justice and good business policy seem to require it.
The retiring stockholder must be paid the value of his stock in
cash and leave for those remaining a large number of securities
and perhaps some real estate purchased to protect the
associations interest. How much will be realized on these
securities, or real estate, no human foresight can tell. Further, the
realizing on these securities may entail considerable litigation and
expense. There are many other contingencies which might cause
a shrinkage in the association's assets, such as defective titles,
undisclosed defalcations on the part of an officer, a miscalculation
of assets and liabilities, and many other errors and omissions
which must always be reckoned within the conduct of human
affairs.
The contingent fund is merely insurance against possible loss.
That losses may occur from time to time seems almost inevitable
 and it is, therefore, inequitable that the remaining stockholders
should be compelled to accept all securities at par, so, to say the
least, the maintenance of this fund is justified. The association
teaches the duty of providing for the proverbial rainy day. Why
should it not provide for the hour of adversity? The reserve fund
has protected the maturing or withdrawing member during the
period of his membership. In case of loss it has or would have
reimbursed him and, at all times, it has protected him and given
strength and standing to the association. Losses may occur, after
his membership ceases, that arose from some mistake or
mismanagement committed during the period of his membership,
and in fairness and equity the remaining members should have
some protection against this. (Sundheim, Law of Building and
Loan Association, sec. 53.)
The government insists, we thing, upon an interpretation of section 188 of
the Corporation Law that is altogether too strict and literal. From the fact
that the statute provides that profits and losses shall be annually
apportioned among the shareholders it is argued that all earnings should
be distributed without carrying anything to the reserve. But it will be noted
that it is provided in the same section that the profits and losses shall be
determined by the board of directors: and this means that they shall
exercise the usual discretion of good businessmen in allocating a portion
of the annual profits to purposes needful to the welfare of the association.
The law contemplates the distribution of earnings and losses after other
legitimate obligations have been met.
Our conclusion is that the respondent has the power to maintain the
reserves criticized in the eleventh and twelfth counts of the complaint;
and at any rate, if it be supposed that the reserves referred to have
become excessive, the remedy is in the hands of the Legislature. It is no
proper function of the court to arrogate to itself the control of
administrative matters which have been confided to the discretion of the
board of directors. The causes of action under discussion must be
pronounced to be without merit.
Thirteenth cause of action. — The specification under this head is, in
effect, that the respondent association has made loans which, to the
knowledge of the associations officers were intended to be used by the
borrowers for other purposes than the building of homes. In this
connection it appears that, though loans have been made by the
association exclusively to its shareholders, no attempt has been made by
it to control the borrowers with respect to the use made of the borrowed
funds, the association being content to see that the security given for the
loan in each case is sufficient. On December 31, 1925, the respondent
had five hundred forty-four loans outstanding secured by mortgages upon
real estate and by the pledge of the borrowers' shares in an amount
sufficient at maturity to amortize the loans. With respect to the nature of
the real estate upon which these loans were made it appears that three
hundred fifty-one loans were secured by mortgages upon city residences,
seven by mortgages upon commercial building in cities, and three
mortgages upon unimproved city lots. At the same time one hundred
eighty-three of the loans were secured by mortgages upon groves, sugar
land, and rice land, with a total area of about 7,558 hectares. From
information gathered by the association from voluntary statements of
borrowers given at the time of application with respect to the use
intended to be made of the borrowed funds, it appears that the amount of
P693,200 was borrowed to redeem real property from existing mortgages
or pactos de retro, P280,800 to buy real estate, P449,100 to erect
buildings, P24,000 to improve and repair buildings, P1,480,900 for
agricultural purposes, while the amount of P5,763,700 was borrowed for
purposes not disclosed.
Upon these facts an elaborate argument has been constructed in behalf
of the plaintiff to the effect that in making loans for other purposes than
the building of residential houses the association has illegally departed
from its character and made itself amenable to the penalty of dissolution.
Aside from being directly opposed to the decision of this court in Lopez
and Javelona vs. El Hogar Filipino and Registrar of Deeds of Occidental
Negros (47 Phil., 249), this contention finds no substantial support in the
prevailing decisions made in American courts; and our attention has not
been directed to a single case wherein the dissolution of a building and
loan association has been decreed in a quo warranto proceeding
because the association allowed its borrowers to use the loans for other
purposes than the acquisition of homes.
The case principally relied upon for the Government appears to
be Pfeister vs. Wheeling Building Association (19 W. Va., 676,
716),which involved the question whether a building and loan association
could recover the full amount of a note given to it by a member and
secured by a mortgage from a stranger. At the time the case arose there
was a statute in force in the State of West Virginia expressly forbidding
building and loan associations to use or direct their funds for or to any
other object or purpose than the buying of lots or houses or in building
and repairing houses, and it was declared that in case the funds should
be improperly directed to other objects, the offending association should
forfeit all rights and privileges as a corporation. Under the statute so
worded the court held that the plaintiff could only recover the amount
actually advanced by it with lawful interest and fines, without premium;
and judgment was given accordingly. The suggestion in that case that the
result would have been the same even in the absence of statute was
mere dictum and is not supported by respectable authority.
Reliance is also placed in the plaintiff's brief upon McCauley vs. Building
& Saving Association. The statute in force in the State of Tennessee at
the time this action arose provided that all loans should be made to the
members of the association at open stated meetings and that the money
should be lent to the highest bidder. Inconsistently with this provision,
there was inserted in the by-laws of the association a provision to the
effect that no loan should be made at a greater premium than 30 per
cent, nor at a less premium than 29 7/8 per cent. It was held that this by-
law made free and open competition impossible and that it in effect
established a fixed premium. It was accordingly held, in the case cited,
that an association could not recover such part of the loan as had been
applied by it to the satisfaction of a premium of 30 per centum.
We have no criticism to make upon the result reached in either of the two
decisions cited, but it is apparent that much of the discussion contained
in the opinions in those cases does not reflect the doctrine now prevailing
in the United States; and much less are those decisions applicable in this
jurisdiction. There is no statute here expressly declaring that loans may
be made by these associations solely for the purpose of building homes.
On the contrary, the building of homes is mentioned in section 171 of the
Corporation Law as only one among several ends which building and
loan associations are designed to promote. Furthermore, section 181 of
the Corporation Law expressly authorities the Board of directors of the
association from time to time to fix the premium to be charged.
In the brief of the plaintiff a number of excerpts from textbooks and
decisions have been collated in which the idea is developed that the
primary design of building and loan associations should be to help poor
people to procure homes of their own. This beneficent end is undoubtedly
served by these associations, and it is not to be denied that they have
been generally fostered with this end in view. But in this jurisdiction at
least the lawmaker has taken care not to limit the activities of building
and loan associations in an exclusive manner, and the exercise of the
broader powers must in the end approve itself to the business
community. Judging from the past history of these institutions it can be
truly said that they have done more to encourage thrift, economy and
saving among the people at large than any other institution of modern
times, not excepting even the saving banks. In this connection Mr.
Sundheim, in a late treatise upon the subject of the law of building and
loan associations, makes the following comment:
They have grown to such an extent in recent years that they no
longer restrict their money to the home buyer, but loan their
money to the mere investor or dealer in real estate. They are the
holder of large mortgages secured upon farms, factories and
other business properties and rows of stores and dwellings. This
is not an abuse of their powers or departure from their main
purposes, but only a natural and proper expansion along healthy
and legitimate lines. (Sundheim, Building and Loan Associations,
sec. 7.)
Speaking of the purpose for which loans may be made, the same author
adds:
Loans are made for the purpose of purchasing a homestead, or
other real estate, or for any lawful purpose or business, but there
is no duty or obligation of the association to inquire for what
purpose the loan is obtained, or to require any stipulation from the
borrower as to what use he will make of the money, or in any
manner to supervise or control its disbursement. (Sundheim,
Building and Loan Association, sec. 111.)
In Lopez and Javelona vs. El Hogar Filipino and Registrar of Deeds of
Occidental Negros, this court had before it the question whether a loan
made by the respondent association upon the security of a mortgage
upon agricultural land, — where the loan was doubtless used for
agricultural purposes, — was usurious or not; and the case turned upon
the point whether, in making such loans, the association had violated the
law and departed from its fundamental purposes. The conclusion of the
court was that the loan was valid and could be lawfully enforced by a
nonjudicial foreclosure in conformity with the terms of the contract
between the association and the borrowing member. We now find no
reason to depart from the conclusion reached in that case, and it is
unnecessary to repeat what was then said. The thirteenth cause of action
must therefore be pronounced unfounded.
Fourteenth cause of action. — The specification under this head is that
the loans made by the defendant for purposes other than building or
acquiring homes have been extended in extremely large amounts and to
wealthy persons and large companies. In this connection attention is
directed to eight loans made at different times in the last several years to
different persons or entities, ranging in amounts from P120,000 to
P390,000 and to two large loans made to the Roxas Estate and to the
Pacific Warehouse Company in the amounts of P1,122,000 and
P2,320,000, respectively. In connection with the larger of the two after
this loan was made the available funds of El Hogar Filipino were reduced
to the point that the association was compelled to take advantage of
certain provisions of its by-laws authorizing the postponement of the
payment of claims resulting from withdrawals, whereas previously the
association had always settled these claims promptly from current funds.
At no time was there apparently any delay in the payment of matured
shares; but in four or five cases there was as much as ten months delay
in the payment of withdrawal applications.
There is little that can be said upon the legal aspects of this cause of
action. In so far, as it relates to the purposes for which these loans were
made, the matter is covered by what was said above with reference to
the thirteenth cause of action; and in so far as it relates to the personality
of the borrowers, the question belongs more directly to the discussion
under the sixteenth cause of action, which will be found below. The point,
then, which remains for consideration here is whether it is a suicidal act
on the part of a building and loan association to make loans in large
amount. If the loans which are here the subject of criticism had been
made upon inadequate security, especially in case of the largest two, the
consequences certainly would have been disastrous to the association in
the extreme; but no such fact is alleged; and it is to be assumed that
none of the ten borrowers have defaulted in their contracts.
Now, it must be admitted that two of these loans at least are of a very
large size, considering the average range of financial transaction in this
country; and the making of the largest loan was followed, as we have
already see, with unpleasant consequences to the association in dealing
with current claims. Nevertheless the agreed statement of facts shoes
that all of the loan referred to are only ten out of a total of five hundred
forty-four outstanding on December 31, 1925; and the average of all the
loans taken together is modest enough. It appears that the chief
examiner of banks and corporations of the Philippine Treasury, after his
examination of El Hogar Filipino at the end of the year 1925, made a
report concerning this association as of January 31, 1926, in which he
criticized the Pacific Warehouse Company loan as being so large that it
temporarily crippled the lending power of the association for some time.
This criticism was apparently justified as proper comment on the activities
of the association; but the question for use here to decide is whether the
making of this and the other large loans constitutes such a misuser of the
franchise as would justify us in depriving the association of its corporate
life. This question appears to us to be so simple as almost to answer
itself. The law states no limit with respect to the size of the loans to be
made by the association. That matter is confided to the discretion of the
board of directors; and this court cannot arrogate to itself a control over
the discretion of the chosen officials of the company. If it should be
thought wise in the future to put a limit upon the amount of loans to be
made to a single person or entity, resort should be had to the Legislature;
it is not a matter amenable to judicial control. The fourteenth cause of
action is therefore obviously without merit.
Fifteenth cause of action. — The criticism here comes back to the
supposed misdemeanor of the respondent in maintaining its reserve
funds, — a matter already discussed under the eleventh and twelfth
causes of action. Under the fifteenth cause of action it is claimed that
upon the expiration of the franchise of the association through the
effluxion of time, or earlier liquidation of its business, the accumulated
reserves and other properties will accrue to the founder, or his heirs, and
the then directors of the corporation and to those persons who may at
that time to be holders of the ordinary and special shares of the
corporation. In this connection we note that article 95 of the by-laws
reads as follows:
ART. 95. The funds obtained by the liquidation of the association
shall be applied in the first place to the repayment of shares and
the balance, if any, shall be distribute in accordance with the
system established for the distribution of annual profits.
It will be noted that the cause of action with which we are now concerned
is not directed to any positive misdemeanor supposed to have been
committed by the association. It has exclusive relation to what may
happen some thirty-five years hence when the franchise expires,
supposing of course that the corporation should not be reorganized and
continued after that date. There is nothing in article 95 of the by-laws
which is, in our opinion, subject to criticism. The real point of criticism is
that upon the final liquidation of the corporation years hence there may
be in existence a reserve fund out of all proportion to the requirements
that may then fall upon it in the liquidation of the company. It seems to us
that this is matter that may be left to the prevision of the directors or to
legislative action if it should be deemed expedient to require the gradual
suppression of the reserve funds as the time for dissolution approaches.
It is no matter for judicial interference, and much less could the
resumption of the franchise on this ground be justified. There is no merit
in the fifteenth cause of action.
Sixteenth cause of action. — This part of the complaint assigns as cause
of action that various loans now outstanding have been made by the
respondent to corporations and partnerships, and that these entities have
in some instances subscribed to shares in the respondent for the sole
purpose of obtaining such loans. In this connection it appears from the
stipulation of facts that of the 5,826 shareholders of El Hogar Filipino,
which composed its membership on December 31, 1925, twenty-eight
are juridical entities, comprising sixteen corporations and fourteen
partnerships; while of the five hundred forty-four loans of the association
outstanding on the same date, nine had been made to corporations an
five to partnerships. It is also admitted that some of these juridical entities
became shareholders merely for the purpose of qualifying themselves to
take loans from the association, and the same is said with respect to
many natural persons who have taken shares in the association. Nothing
is said in the agreed statement of facts on the point whether the
corporations and partnerships that have taken loans from the respondent
are qualified by law governing their own organization to enter into these
contracts with the respondent.
In section 173 of the Corporation Law it is declared that "any person" may
become a stockholder in building and loan associations. The word
"person" appears to be here used in its general sense, and there is
nothing in the context to indicate that the expression is used in the
restricted sense of both natural and artificial persons, as indicated in
section 2 of the Administrative Code. We would not say that the word
"person" or persons," is to be taken in this broad sense in every part of
the Corporation Law. For instance, it would seem reasonable to say that
the incorporators of a corporation ought to be natural persons, although
in section 6 it is said that five or more "persons", although in section 6 it is
said that five or more "persons," not exceeding fifteen, may form a private
corporation. But the context there, as well as the common sense of the
situation, suggests that natural persons are meant. When it is said,
however, in section 173, that "any person" may become a stockholder in
a building and loan association, no reason is seen why the phrase may
not be taken in its proper broad sense of either a natural or artificial
person. At any rate the question whether these loans and the attendant
subscriptions were properly made involves a consideration of the power
of the subscribing corporations and partnerships to own the stock and
take the loans; and it is not alleged in the complaint that they were
without power in the premises. Of course the mere motive with which
subscriptions are made, whether to qualify the stockholders to take a
loan or for some other reason, is of no moment in determining whether
the subscribers were competent to make the contracts. The result is that
we find nothing in the allegations of the sixteenth cause of action, or in
the facts developed in connection therewith, that would justify us in
granting the relief.
Seventeenth cause of action. — Under the seventeenth cause of action,
it is charged that in disposing of real estates purchased by it in the
collection of its loans, the defendant has no various occasions sold some
of the said real estate on credit, transferring the title thereto to the
purchaser; that the properties sold are then mortgaged to the defendant
to secure the payment of the purchase price, said amount being
considered as a loan, and carried as such in the books of the defendant,
and that several such obligations are still outstanding. It is further
charged that the persons and entities to which said properties are sold
under the condition charged are not members or shareholders nor are
they made members or shareholders of the defendant.
This part of the complaint is based upon a mere technicality of
bookkeeping. The central idea involved in the discussion is the provision
of the Corporation Law requiring loans to be stockholders only and on the
security of real estate and shares in the corporation, or of shares alone. It
seems to be supposed that, when the respondent sells property acquired
at its own foreclosure sales and takes a mortgage to secure the deferred
payments, the obligation of the purchaser is a true loan, and hence
prohibited. But in requiring the respondent to sell real estate which it
acquires in connection with the collection of its loans within five years
after receiving title to the same, the law does not prescribe that the
property must be sold for cash or that the purchaser shall be a
shareholder in the corporation. Such sales can of course be made upon
terms and conditions approved by the parties; and when the association
takes a mortgage to secure the deferred payments, the obligation of the
purchaser cannot be fairly described as arising out of a loan. Nor does
the fact that it is carried as a loan on the books of the respondent make it
a loan on the books of the respondent make it a loan in law. The
contention of the Government under this head is untenable.
In conclusion, the respondent is enjoined in the future from administering
real property not owned by itself, except as may be permitted to it by
contract when a borrowing shareholder defaults in his obligation. In all
other respects the complaint is dismissed, without costs. So ordered.
Avanceña, C. J., Johnson, Villamor and Vila-Real, JJ., concur.
Separate Opinions
MALCOLM, J., with whom concur OSTRAND and
JOHNS, JJ., dissenting:
For the second time in the history of the court — so counsel for plaintiff
inform us — we must try a corporation for the violation of a law which
carries with it a death warrant — so counsel for defendant intimates. That
the corporation at bar is wealthy and powerful should neither prejudice us
against it nor cause us to cringe before its might. The court has a duty to
perform and should perform it with fairness to the corporation and with
justice to the public, whose interests are involved. El Hogar Filipino,
deserves exactly the same consideration as any other litigant. No more,
no less.
The proceeding is one of quo warranto, begun by the Government of the
Philippine Islands under authority of section 190-A of the Corporation
Law, and of sections 197-216, 519 of the Code of Civil Procedure. The
complaint contains seventeen causes of action. To all of them, the
defendant has made answer. The facts have been covered by stipulation.
The government asks for an order of dissolution. Defendant tenaciously
resists.
El Hogar de Filipino is a corporation organized as a mutual building and
loan association under the provisions of the Corporation Law (Act No.
1459). The law last mentioned, it may recalled, is divided into two parts.
Chapter one is entitled "General Provisions." In chapter two is entitled
"Special Provisions". In chapter two, section 171 to 190, inclusive, are
found the special provisions pertaining to building and loan corporations.
Section 171 thereof is indicative of the legislative purpose. It provides:
All corporations whose capital stock is required or is permitted to
be paid in by the stockholders in regular, equal, periodical
payments and whose purpose is to accumulate the savings of its
stockholders, to repay to said stockholder their accumulated
savings and profits upon surrender of their stock, to encourage
industry, frugality, and home building among its stockholders, and
to loan its funds and funds borrowed for the purpose to
stockholders on the security of unencumbered real estate and the
pledge of shares of capital stock owned by the stockholders as
collateral security, shall be known as building and loan
corporation, and the words mutual building and loan association
shall form part of the name of every such corporation.
The articles of incorporation of El Hogar Filipino show that the purpose of
the corporation are: (1) The accumulation of the savings of its
shareholders; (2) the return to said shareholders of their accumulated
savings and profits upon the surrender and cancellation of their shares;
(3) the encouragement of industry, frugality, and home building among its
shareholders; (4) the loan of its funds and funds borrowed for the
purpose to its shareholders on the security of unencumbered real estate
and the pledge of shares of capital stock of the company owned by its
shareholders as collateral security; and (5) the borrowing of money upon
the credit of the corporation and the issuance of bonds or other
documents evidencing the existence of such obligations. The capital of
the corporation is made not to exceed P10,000,000. At the end of 1925 it
had 5,826 shareholders holding 125,750 shares, the total paid up value
of which was P8,703,602.25.
El Hogar Filipino having been incorporated under Philippine law as a
mutual building and loan association, the primary inquiry should naturally
be as to the nature, purposes, and operations of mutual building and loan
associations.
In the case of El Hogar Filipino vs. Rafferty ([1918] 37 Phil., 995),this
court had presented the question of whether El Hogar Filipino, as a
building and loan association, was relieved from the necessity of paying
an income tax. It was held that it was. Mr. Justice Johnson, speaking for
the court, said:
A building and loan association is an organization created for the
purpose of accumulating a fund by the monthly subscription or
saving of its members, to assist them in building or purchasing for
themselves dwellings or real estate, by loaning to them the
requisite money from the funds of the society. To all particular
intent it may be said to be to enable a number of associates to
 have and invest their savings to mutual advantage, so that, from
time to time, any individual among them may receive, out of the
accumulation of the pittances which each contributes periodically,
a sum, by way of loan, wherewith to build or pay for a home, and
ultimately making it absolutely his own by the payment of such
small amounts from time to time. (Rhodes vs. Missouri Savings &
Loan Co., 173 Ill., 621; 42 L. R. A., 93.)
The same opinion quoted from Endlich on Building Associations, section
7, who was termed a leading authority upon such associations, on the
subject of the primary designs and general operation of building
associations, the following:
The idea which first gave rise to the institution of building
associations, which furnished their ostensible and
legitimate raison d'etre, and which secured to them their
popularity and their, in many respects, exceptionally favored
position before the law, is that of enabling persons belonging to a
class whose earning are small, and with whom the slowness of
the accumulation discourages the effort, to become by a process
of gradual and compulsory savings, either at the end of a certain
period, or by anticipation of it, the owners of homesteads. The
operation of the scheme may be easily understood.
The same opinion quoted from Thornton and Blackledge in their work on
Building and Loan Associations, at page 6 the following:
Societies, known as building, loan fund, and savings association,
are now recognized as important factors in the social and
economic development of this country. The controlling idea is the
massing of the separate earnings of wage-workers, and the
savings of persons of small means, in such a manner as to aid
them in procuring homes. It is the organization of thrift and self-
help; a practical application of the maxim that in "union there is
strength." The effect of such a movement is to dignify the home;
to foster morality, and to make thoughtful, wise, and responsible
citizens. It is for such reason that the law and the courts, where
such associations have been properly conducted, have looked
upon them with favor. Whether they shall retain the favorable
estimation of legislatures and courts will depend in large measure
upon the wise forecast and determined purpose of those who
control such institutions. Those departures from the original idea,
intended to enhance the profits of investors, without in any
degree aiding those who are endeavoring to build homes, have
been, and in the future probably will be, severely censured by the
courts.
In the case of Lopez and Javelona vs. El Hogar Filipino and Registrar of
Deeds of Occidental Negros ([1925], 47 Phil., 249), the principal issue
had to do with the relation of El Hogar Filipino to the Usury Law
permitting it to charge a higher rate of interest than persons or entities,
charge than similarly organized mutual building and loan associations.
Mr. Justice Johns, in a vigorous dissenting opinion, said:
There must be and is valid reason for the exception made in the
statute which permits building and loan associations to charge
and receive 18 per cent per annum as interest, and which limits
all other loans made by any other person, firm or corporation to
interest at 12 per cent per annum.
All building and loan associations are founded, and exceptions
made in their favor as to the rate of interest, upon the theory that
they will enable a person with small means or small income who
has a family to support, to build a home in which to live and to
improve his property and develop the country. When the
exception was made by the Legislature, it was never intended
that the El Hogar Filipino or any other corporation, under the
guise of a building and loan association, should make a loan
upon a sugar plantation of the nature of the one in question.
xxx xxx xxx
It will be noted that the exception made in the statute above
quoted is for mutual building and loan societies incorporated
under the Corporation Act. The use of the word mutual is
significant and important. Under the statute, it is not sufficient that
the corporation should be a building and loan association. It must
be a mutual building and loan association.
In the same dissent, reference was made to the case of El Hogar Filipino
vs. Rafferty, supra, and the remarks of Endlich, and Thornton and
Blackledge on the purposes of mutual building and loan associations.
Fletcher, Cyclopedia of Corporation, volume 1, page 136, was also
quoted from as follows:
 An incorporated building and loan association is a corporation for
the purpose of raising, by periodical subscriptions of members, a
stock or fund to assist members by advances or loans, generally
on mortgage security, in building or purchasing homes. Such
corporations are different from corporations formed for pecuniary
profit.
The term (building and loan association) does not generally
include corporations unless their purpose is to accumulate funds
and lend the same to members to assists them in purchasing or
building homes . . . (Cases cited.) It does not include a
corporation . . . for the purpose of purchasing and improving real
estate and advancing money on mortgages . . . or a corporation
merely for the purpose of loaning money.
In the same dissent, reference was made to what Corpus Juris, volume 9,
page 920, contains on the subject of the object and purpose of building
and loan associations, namely:
As it is sometimes stated in the statutes relating to, and in the
charters and constitutions of, building and loan associations, the
principal object of a building and loan association is to create a
loan fund for the benefit of its borrowing members, the underlying
idea being that, by means of the system of small periodical
payments provided, people of limited means will be enabled to
become the owners of homes, and thrift, economy, and good
citizenship will thereby be promoted. By reason of the favorable
results attending the operation of these associations, and their
beneficent purposes, they have, especially before they attained
their present tremendous growth, been favored and granted
special privileges by the various legislatures, such as permission
to charge high rates of interest and exemption from taxation. . . ."
In lieu of asterisk the next succeeding sentence from Corpus
Juris could also have been appropriately used: "However, with
the growth of these organizations, evils have crept in, the
privileges granted have in many instances been abused by
unscrupulous officers, and, in recent years, the courts have been
compelled to subject their transactions to closer scrutiny.
Speaking of the purposes for which loans can be made by building and
loan associations, Rosenthal, in his work on Building, Loan and Savings
Associations, third edition, page 108, says:
In our opinion, the object of building, loan and savings
associations is to furnish funds for homes rather than for
mercantile or manufacturing improvements. Some of the larger
associations have granted loans of this character, and we
consider it a dangerous departure from the purposes for which
these associations were created.
Thompson on Building Associations, page 5, 23, 24, 232 and 558, says:
The building association as now existing is a private corporation
designed for the accumulation, by the members, of their money,
by periodical payments into its treasury, to be invested from time
to time in loans to the members upon real estate for home
purposes,
The building association is a home builder. The member by its
system is enabled to acquire a home, and to pay for it he pledges
his future savings. . . . It enforces economy, and awakens
thoughts of citizenship in its better sense of offering homes. This
is the first purpose of these institutions. The language of the
Supreme Court of Georgia is timely: "The they have improved our
towns by leading to the erection of a number of new buildings,
furnished many families with homes of their own, that could not
otherwise have possessed the, given a considerable impulse to
mechanical enterprise, and in many other ways promoted the
prosperity and welfare of the communities where they exist, is
undoubtedly true. But whether they will continue to be entitled to
the epithet of the "poor man's exchequer," and whether they will,
as they promise to do, enable every man to become his own
landlord, will depend entirely upon the manner in which they
conduct their business . . ."
These institutions are well known all over the United States to be
depositories of money savings, and investors of those savings in
homes for members. The legislature has created them in the
interest of good citizenship, to enable the people to save their
money and acquire homes and become steady citizens. The
ultimate legislative purpose is home-building. If it was merely a
depository of savings it would have no strong reason for
existence, because the savings banks furnish that; but it goes
further, and is designed by law to use those savings in procuring
 homes for its members. And the courts should promptly curb any
disposition to depart from the corporate purposes.
. . . But a building association is not an ordinary corporation; in
fact, it exercises some extraordinary privileges, particularly in not
being amenable to the usury laws. It is created for the declared
purposes of accumulating money and lending the accumulation to
members to build or acquire homes for themselves. The
legislature devised this plan of cooperative accumulations for the
purpose of assisting each member to become his own landlord.
The state has a selfish motive in the promotion of a building
association, as through its workings it is planting deeply the roots
of citizenship. The drifting, thriftless classes are offered a school
of economy, and the earnest and economical classes are given
an opportunity. There is, then, the formation of a steady,
energetic and accumulating citizen. The cares of the state are
lessened by decreasing poverty, and its prosperity is increased
by growing material wealth. We may clearly conceive, then, that
the intention of the legislature in the creation of building
associations is, first, to encourage savings; second, to secure
homes for the savers.
In the case of Mandlin vs. American Savings and Loan
Association ([1896],63 Minn., 358), the court said:
So-called "building societies," operated on the plan of the
defendant, have so often become the instrument of oppression
and extortion as to call down the censure of some eminent courts.
The original purpose of building societies, viz., to enable people
of small means to build or buy homes, is entirely wanting.
"Such a body" says Follet, J., in Seibel vs. Victoria Building
Association (43 Ohio St., 371, p. 373), "exists for the equal
benefit of all its members, who are presumed to be persons
whose earnings are small, and who seek to use weekly savings in
procuring suitable homesteads. Every member is presumed to
become after sometime a borrower to the extent of his interest.
Building associations are not intended to enable money lenders
to obtain extraordinary interest, but they are intended to help in
securing homes with the aid of small incomes." (Barry Law of
Building Societies, p. 3, sec. 4.)
In case of North American Building Associaton vs. Sutton ([1860], 35 Pa.,
463), the court said:
It is well known that the original design of the legislature was to
encourage the erection of buildings. The motive for the grant of
the franchise was public improvement. But the practical working
of the associations formed under the law has not been what was
anticipated. Though called "building societies," they are, in truth,
only agencies by which a greater than legal interest is obtained
from the necessitous and unwary.
In the case of Continental National Building and Loan Association vs.
Miller ([1902], 44 Fla., 757), the court said:
When local in their operations and prudently managed they have
served a useful purpose enabling the man of small means to build
his modest homes or to make a safe and profitable investment of
his meager earnings; but when they branch out and forget the
original purposes and limitations that have given them this
favored position, trouble not infrequently arises.
In the case of St. Joseph and Kansas Loan and Building Association vs.
Thompson ([1877], 19 Kansas, 321), the court said:
It was never intended that these corporations, organized as this
one was for the purpose of giving to its members through their
savings an easy way to discharge encumbrances and to build
homes, should loan their funds to others than their own members.
In case of Parker vs. Fulton Loan and Building Association ([1872],46
Ga., 166), the court said:
Whether such a contract though legal upon its face, was, in fact,
illegal, would depend upon the object of the association. If it were,
in truth, a mere devise to evade the usury laws, then it would
depend upon the object of the association. If it were, in truth, a
mere devise to evade the usury laws, then it would be illegal, if in
fact more was taken for the use of money than 7 per cent per
annum. But if the organization were in fact and bona fide a plan
with the real intent and object of accumulating a fund by monthly
subscriptions or savings of the members thereof, to assist them in
procuring for themselves such real estates as they may deem
proper,' then it would not be illegal.
The practical application of the resources of these institutions
(building and loan associations) to the building of homes and
aiding their members to change their conditions from rent-paying
tenants to home-owning citizens has been recognized as a work
of vital importance and of the highest helpfulness to the interest of
the state and nation. (Rosenthal Cyc. of Building, Loan & Savings
Association, p. 73.)
The aim and purpose of a building association is to aid and
encourage its members to learn and practice thrift by regular
systematic saving, and to provide ways and means so that every
family may procure home. (Rosenthal Cyc. of Building, Loan &
Savings Association, p. 9.)
The funds of the first associations were applied to aid its
members to procure homes. This was in fact the one outstanding
feature of the plan and the high purpose for which the association
was organized. The wish and desire to own their own home, was,
in fact the primary, fundamental inspiration on which the first
building association was formed, and has ever continued to be
the shining pole star which has guided and directed the progress
of these building associations to the present day. The desire to
own a home is one of the primary, natural instincts of every real
man or woman. An institution organized and operated on a fair
and equitable plan which has for its object the gratifying of that
desire, is sure to make a strong appeal to all humanity. The
constant appeal which building associations have always made to
this deep-seated human desire, is the real secret of their great
success. (Rosenthal Cyc. of Building, Loan & Savings
Association, p. 13.)
A recent president of the United States League of Local Building
and Loan Associations said the "Our associations are serving just
two classes of customers: receiving the savings of thrifty and
farseeing people, and loaning these funds to members who wish
to buy or build a home. Never was the need for building or owning
a home greater than in the past few years, and as you well know,
lack of sufficient funds has been one of our problems."
Building and Loan Associations started as neighborhood clubs in
most parts of the country. Neighbors wished to become home
owners and began contributing a certain sum monthly to a
treasurer. The aggregate of these monthly payments was soon
sufficient to buy or build a home for one of the members. The
fund was then loaned to one of them, and as other funds
accumulated, others could borrow. The joint purposes of thrift and
home ownership are inseparable and are of equal importance.
There could be no cooperative building and loan association
without both. (Clark and Chase Building and Loan Association, p.
4).
The Commissioner of Internal Revenue of the United States in article 515
of his new regulations, outlines the particular associations entitled to
exemption, under the Federal Law as follows:
In general, a building and loan association entitled to exemption
is one organized pursuant to the laws of any state, territory or the
District of Colulmbia, which accumulates funds to be loaned
primarily to the shareholders for the purpose of building or
acquiring homes. (Rosenthal Cyc. of Building, Loan & Savings
Association, p. 94.)
The authorities could be piled up mountain high. They all disclose that
mutual building and loan associations are peculiar and special
corporations. They can exercise only such powers as are conferred by
the legislative body creating them, either by express terms or by
necessary implication. Their basic and essential idea is mutuality. The
primary object is to encourage thrift and to assist in home building. "El
Hogar Filipino" — or as it is in English "The Filipino Home" — that is the
magic thought which attracts small investors. But when pseudo
associations branch out and forget the original purposes and limitations
that have given them their favored positions, it is incumbent on the
judiciary to place them back in their rightful places. We are frank to say
that it is these elementary principles, which, in our opinion, the majority
have failed to grasp, which have led them into error in the decision of this
case.
Why are mutual building and loan associations granted special
privileges? Why are mutual building and loan associations exempted
from taxation, as disclosed in El Hogar Filipino vs. Rafferty, supra? Why
are building and loan associations permitted to charge high rates of
interest, as disclosed in Lopez and Javelona vs. El Hogar Filipino, and
Registrar of Deeds of Occidental Negros, supra? Why? Need answers be
given. If so, it is so that mutual building and loan associations may with
one hand accept favors rightfully theirs, and with the other hand grasp
favors properly belonging to strictly private corporations or loan societies.
El Hogar Filipino has offended against the law of its creation, and has
departed from the fundamental purposes of mutual building and loan
associations in this:
A. In that it has engaged in business activities entirely foreign to and not
reasonably necessary for the purposes for which it was organized, such
as the administration of properties and the management of properties not
mortgaged;
B. In that it has inserted in article 10 of its by-laws a provision giving the
board of directors, by majority vote, the unqualified right to cancel and
forfeit shares by merely returning to their owners the amount which may
result from the accounting, in violation of the Corporation Law;
C. In that its board of directors has become a permanent and self-
perpetuating body, since with the exception of the years 1911, 1912, and
1917, there has been no election of directors and since between 1912
and 1917, and from 1917 until the present, the membership of the board
has not been changed, except to fill vacancies which have been filled by
the board itself, in violation of the Corporation Law, and of the by-laws of
the corporation;
D. In that the directors, instead of serving without pay or for nominal
salaries, have been receiving relatively large compensations out of the
profits in accordance with article 92 of the by-laws, providing that 5
percent of the annual profits shall be devoted to the compensation of the
directors, according to their attendance at the meetings;
E. In that the corporation has been giving to Antonio Melian, its founder,
under provisions of article 92 of its by-laws 5 per cent of the yearly net
profits, and will continue to do so, for the full fifty-year period of life of the
defendant, and under which Mr. Melian has received a total sum of
P615,834;
F. In that articles 70 and 76 of its by-laws are contrary to law, since they
only permit the election or appointment to the board of directors of
persons owning P5,000 worth of paid up shares, which is made a
condition precedent to eligibility to the board of directors;
G. In that it has issued so-called special shares, in violation both of the
letter and spirit of the Corporation Law;
H. In that it has maintained out of its profits an unnecessarily large
reserve fund, classified into general reserve fund and special reserve
fund, instead of distributing its profits among its members;
I. In that it has made large loans to persons and companies, such as a
loan of P2,320,000 to the Pacific Warehouse Company, which so
depleted the funds of the corporation that for sometime it was unable to
act on applications for small loans and for the retirement of shares;
J. In that under articles 92 and 95 of the by-laws of the corporation, upon
the expiration of its period of life or upon earlier liquidation of its business,
the accumulated reserves and other properties will be distributed among
and will benefit only its directors and its founder, together with a few other
persons;
K. In that its membership is in part composed of corporations, companies,
and associations, for instance of sixteen corporations and fourteen
partnerships;
L. In that it has disposed of real estate purchased by it in the collection of
its loans on credit, thereafter accepting mortgages on the property
transferred, in violation of the Corporation Law;
M. And, lastly, in the El Hogar Filipino has failed to carry our and fulfill the
main purpose for which it was created, and in consideration of which it
has been granted special privileges and exemptions.
The foregoing are not trivial or isolated infractions of the law to be
brushed away with a wave of the hand. They constitute grave abuses.
They disclose El Hogar Filipino as an octopus whose tentacles have
reached out to embrace and stifle vital public interests. The court would
be entirely justified in peremptorily decreeing the dissolution of the
corporation for misuse of its powers.
Section 190-A of the Corporation Law, inserted by section 3 of Act No.
2792, makes it the imperative duty of the court to dissolve a corporation
for any violation which it has committed. It is believed, however, that
counsel for the defendant is entirely correct in his argument to the effect
that the legislature is without power to diminish the jurisdiction of the
court, and to direct a particular judgment in a particular case. Rather
would we prefer to follow the precedent in the case of the Government of
the Philippine Islands vs. Philippine Sugar Estates Development
Company ([1918], 38 Phil., 15),wherein in was ordered that the
corporation be dissolved and prohibited from continuing to do business in
the Philippine Islands unless it complied with the conditions mentioned in
the decision.
In amplification of the above suggestion, it must be said that El Hogar
Filipino is the possessor of important property rights which should not be
disastrously disturbed. It must also be said that a mutual building and
loan association properly conducted is an institution which should be
encourage in the community. The result should, therefore, be to confine
El Hogar Filipino to its legitimate purposes and to force it to eliminate its
illegitimate purposes and The government has made out its case, but the
defendant should be permitted a reasonable time to fulfill the conditions
laid down in this decision.
ROMUALDEZ, J., dissenting:
I believe that the defendant corporation should be compelled to observe
the law and to confine itself to its object and purposes as a building and
loan association existing under Act. No. 1459, and that it should be given
a reasonable period within which to do so.
I am of this opinion on the ground that, to my mind, said corporation has
deviated from the law and its own object and purposes by adopting
articles 10, 70, and 76 of its by-laws in permitting the perpetuation of the
same directors, and in making loans to persons who are not stockholders
and to wealthy persons or companies in extremely large amounts.
SECOND DIVISION
[G.R. No. 108905. October 23, 1997]
GRACE CHRISTIAN HIGH SCHOOL, petitioner,
vs. THE COURT OF APPEALS, GRACE
VILLAGE ASSOCIATION, INC., ALEJANDRO
G. BELTRAN, and ERNESTO L.
GO, respondents.
DECISION
MENDOZA, J.:
The question for decision in this case is the right of
petitioners representative to sit in the board of directors
of respondent Grace Village Association, Inc. as a
permanent member thereof. For fifteen years from 1975
until 1989 petitioners representative had been
recognized as a permanent director of the association.
But on February 13, 1990, petitioner received notice from
the associations committee on election that the latter
was reexamining (actually, reconsidering) the right of
petitioners representative to continue as an unelected
member of the board. As the board denied petitioners
request to be allowed representation without election,
petitioner brought an action for mandamus in the Home
Insurance and Guaranty Corporation. Its action was
dismissed by the hearing officer whose decision was
subsequently affirmed by the appeals board. Petitioner
appealed to the Court of Appeals, which in turn upheld
the decision of the HIGCs appeals board. Hence this
petition for review based on the following contentions:
1. The Petitioner herein has already acquired a vested right to a
permanent seat in the Board of Directors of Grace Village
Association;
2. The amended By-laws of the Association drafted and
promulgated by a Committee on December 20, 1975 is valid
and binding; and
3. The Practice of tolerating the automatic inclusion of
petitioner as a permanent member of the Board of Directors of
the Association without the benefit of election is allowed
under the law.[1]
Briefly stated, the facts are as follows:
Petitioner Grace Christian High School is an
educational institution offering preparatory, kindergarten
and secondary courses at the Grace Village in Quezon
City.Private respondent Grace Village Association, Inc.,
on the other hand, is an organization of lot and/or
building owners, lessees and residents at Grace Village,
while private respondents Alejandro G. Beltran and
Ernesto L. Go were its president and chairman of the
committee on election, respectively, in 1990, when this
suit was brought.
As adopted in 1968, the by-laws of the association
provided in Article IV, as follows:
The annual meeting of the members of the Association shall be
held on the first Sunday of January in each calendar year at the
principal office of the Association at 2:00 P.M. where they
shall elect by plurality vote and by secret balloting, the Board
of Directors, composed of eleven (11) members to serve for
one (1) year until their successors are duly elected and have
qualified.
[2]
It appears, that on December 20, 1975, a committee
of the board of directors prepared a draft of an
amendment to the by-laws, reading as follows: [3]
VI. ANNUAL MEETING
The Annual Meeting of the members of the Association shall
be held on the second Thursday of January of each
year. Each Charter or Associate Member of the Association is
entitled to vote. He shall be entitled to as many votes as he has
acquired thru his monthly membership fees only computed on
a ratio of TEN (P10.00) PESOS for one vote.
The Charter and Associate Members shall elect the Directors
of the Association. The candidates receiving the first fourteen
(14) highest number of votes shall be declared and proclaimed
elected until their successors are elected and
qualified. GRACE CHRISTIAN HIGH SCHOOL
representative is a permanent Director of the ASSOCIATION.
This draft was never presented to the general
membership for approval. Nevertheless, from 1975, after
it was presumably submitted to the board, up to 1990,
petitioner was given a permanent seat in the board of
directors of the association. On February 13, 1990, the
associations committee on election in a letter informed
James Tan, principal of the school, that it was the
sentiment that all directors should be elected by
members of the association because to make a person
or entity a permanent Director would deprive the right of
voters to vote for fifteen (15) members of the Board, and
it is undemocratic for a person or entity to hold office in
perpetuity. For this reason, Tan was told that the
[4]
proposal to make the Grace Christian High School
representative as a permanent director of the
association, although previously tolerated in the past
elections should be reexamined. Following this advice,
notices were sent to the members of the association that
the provision on election of directors of the 1968 by-laws
of the association would be observed.
Petitioner requested the chairman of the election
committee to change the notice of election by following
the procedure in previous elections, claiming that the
notice issued for the 1990 elections ran counter to the
practice in previous years and was in violation of the by-
laws (of 1975) and unlawfully deprive[d] Grace Christian
High School of its vested right [to] a permanent seat in
the board. [5]
As the association denied its request, the school
brought suit for mandamus in the Home Insurance and
Guaranty Corporation to compel the board of directors of
the association to recognize its right to a permanent seat
in the board. Petitioner based its claim on the following
portion of the proposed amendment which, it contended,
had become part of the by-laws of the association as
Article VI, paragraph 2, thereof:
The Charter and Associate Members shall elect the Directors
of the Association. The candidates receiving the first fourteen
(14) highest number of votes shall be declared and proclaimed
elected until their successors are elected and
qualified. GRACE CHRISTIAN HIGH SCHOOL
representative is a permanent Director of the ASSOCIATION.
It appears that the opinion of the Securities and
Exchange Commission on the validity of this provision
was sought by the association and that in reply to the
query, the SEC rendered an opinion to the effect that the
practice of allowing unelected members in the board was
contrary to the existing by-laws of the association and to
92 of the Corporation Code (B.P. Blg. 68).
Private respondent association cited the SEC opinion
in its answer. Additionally, the association contended
that the basis of the petition for mandamus was merely a
proposed by-laws which has not yet been approved by
competent authority nor registered with the SEC or
HIGC. It argued that the by-laws which was registered
with the SEC on January 16, 1969 should be the
prevailing by-laws of the association and not the
proposed amended by-laws. [6]
In reply, petitioner maintained that the amended by-
laws is valid and binding and that the association was
estopped from questioning the by-laws. [7]
A preliminary conference was held on March 29,
1990 but nothing substantial was agreed upon. The
parties merely agreed that the board of directors of the
association should meet on April 17, 1990 and April 24,
1990 for the purpose of discussing the amendment of the
by-laws and a possible amicable settlement of the
case. A meeting was held on April 17, 1990, but the
parties failed to reach an agreement. Instead, the board
adopted a resolution declaring the 1975 provision null
and void for lack of approval by members of the
association and the 1968 by-laws to be effective.
On June 20, 1990, the hearing officer of the HIGC
rendered a decision dismissing petitioners action. The
hearing officer held that the amended by-laws, upon
which petitioner based its claim, [was] merely a proposed
by-laws which, although implemented in the past, had
not yet been ratified by the members of the association
nor approved by competent authority; that, on the
contrary, in the meeting held on April 17, 1990, the
directors of the association declared the proposed by-law
dated December 20, 1975 prepared by the committee on
by-laws . . . null and void and the by-laws of December
17, 1968 as the prevailing by-laws under which the
association is to operate until such time that the
proposed amendments to the by-laws are approved and
ratified by a majority of the members of the association
and duly filed and approved by the pertinent government
agency. The hearing officer rejected petitioners
contention that it had acquired a vested right to a
permanent seat in the board of directors. He held that
past practice in election of directors could not give rise to
a vested right and that departure from such practice was
justified because it deprived members of association of
their right to elect or to be voted in office, not to say that
allowing the automatic inclusion of a member
representative of petitioner as permanent director [was]
contrary to law and the registered by-laws of respondent
association.[8]
The appeals board of the HIGC affirmed the decision
of the hearing officer in its resolution dated September
13, 1990. It cited the opinion of the SEC based on 92 of
the Corporation Code which reads:
92. Election and term of trustees. - Unless otherwise provided
in the articles of incorporation or the by-laws, the board of
trustees of non-stock corporations, which may be more than
fifteen (15) in number as may be fixed in their articles of
incorporation or by-laws, shall, as soon as organized, so
classify themselves that the term of office of one-third (1/3) of
the number shall expire every year; and subsequent elections
of trustees comprising one-third (1/3) of the board of trustees
shall be held annually and trustees so elected shall have a term
of three (3) years.Trustees thereafter elected to fill vacancies
occurring before the expiration of a particular term shall hold
office only for the unexpired period.
The HIGC appeals board denied claims that the school
[was] being deprived of its right to be a member of the
Board of Directors of respondent association, because
the fact was that it may nominate as many
representatives to the Associations Board as it may
deem appropriate. It said that what is merely being
upheld is the act of the incumbent directors of the Board
of correcting a long standing practice which is not
anchored upon any legal basis. [9]
Petitioner appealed to the Court of Appeals but
petitioner again lost as the appellate court on February 9,
1993, affirmed the decision of the HIGC. The Court of
Appeals held that there was no valid amendment of the
associations by-laws because of failure to comply with
the requirement of its existing by-laws, prescribing the
affirmative vote of the majority of the members of the
association at a regular or special meeting called for the
adoption of amendment to the by-laws. Article XIX of the
by-laws provides: [10]
The members of the Association by an affirmative vote of the
majority at any regular or special meeting called for the
purpose, may alter, amend, change or adopt any new by-laws.
This provision of the by-laws actually implements 22
of the Corporation Law (Act No. 1459) which provides:
22. The owners of a majority of the subscribed capital stock, or
a majority of the members if there be no capital stock, may, at
a regular or special meeting duly called for the purpose, amend
or repeal any by-law or adopt new by-laws. The owners of
two-thirds of the subscribed capital stock, or two-thirds of the
members if there be no capital stock, may delegate to the board
of directors the power to amend or repeal any by-law or to
adopt new by-laws: Provided, however, That any power
delegated to the board of directors to amend or repeal any by-
law or adopt new by-laws shall be considered as revoked
whenever a majority of the stockholders or of the members of
the corporation shall so vote at a regular or special
meeting. And provided, further, That the Director of the
Bureau of Commerce and Industry shall not hereafter file an
amendment to the by-laws of any bank, banking institution or
building and loan association, unless accompanied by
certificate of the Bank Commissioner to the effect that such
amendments are in accordance with law.
The proposed amendment to the by-laws was never
approved by the majority of the members of the
association as required by these provisions of the law
and by-laws. But petitioner contends that the members of
the committee which prepared the proposed amendment
were duly authorized to do so and that because the
members of the association thereafter implemented the
provision for fifteen years, the proposed amendment for
all intents and purposes should be considered to have
been ratified by them. Petitioner contends: [11]
Considering, therefore, that the agents or committee were duly
authorized to draft the amended by-laws and the acts done by
the agents were in accordance with such authority, the acts of
the agents from the very beginning were lawful and binding on
the homeowners (the principals) per se without need of any
ratification or adoption. The more has the amended by-laws
become binding on the homeowners when the homeowners
followed and implemented the provisions of the amended by-
laws. This is not merely tantamount to tacit ratification of the
acts done by duly authorized agents but express approval and
confirmation of what the agents did pursuant to the authority
granted to them.
Corollarily, petitioner claims that it has acquired a
vested right to a permanent seat in the board. Says
petitioner:
The right of the petitioner to an automatic membership in the
board of the Association was granted by the members of the
Association themselves and this grant has been implemented
by members of the board themselves all through the
years. Outside the present membership of the board, not a
single member of the Association has registered any desire to
remove the right of herein petitioner to an automatic
membership in the board. If there is anybody who has the right
to take away such right of the petitioner, it would be the
individual members of the Association through a referendum
and not the present board some of the members of which are
motivated by personal interest.
Petitioner disputes the ruling that the provision in
question, giving petitioners representative a permanent
seat in the board of the association, is contrary to
law. Petitioner claims that that is not so because there is
really no provision of law prohibiting unelected members
of boards of directors of corporations. Referring to 92 of
the present Corporation Code, petitioner says:
It is clear that the above provision of the Corporation Code
only provides for the manner of election of the members of the
board of trustees of non-stock corporations which may be
more than fifteen in number and which manner of election is
even subject to what is provided in the articles of incorporation
or by-laws of the association thus showing that the above
provisions [are] not even mandatory.
Even a careful perusal of the above provision of the
Corporation Code would not show that it prohibits a non-stock
corporation or association from granting one of its members a
permanent seat in its board of directors or trustees. If there is
no such legal prohibition then it is allowable provided it is so
provided in the Articles of Incorporation or in the by-laws as
in the instant case.
....
If fact, the truth is that this is allowed and is being practiced by
some corporations duly organized and existing under the laws
of the Philippines.
One example is the Pius XII Catholic Center, Inc. Under the
by-laws of this corporation, that whoever is the Archbishop of
Manila is considered a member of the board of trustees without
benefit of election. And not only that. He also automatically
sits as the Chairman of the Board of Trustees, again without
need of any election.
Another concrete example is the Cardinal Santos Memorial
Hospital, Inc. It is also provided in the by-laws of this
corporation that whoever is the Archbishop of Manila is
considered a member of the board of trustees year after year
without benefit of any election and he also sits automatically
as the Chairman of the Board of Trustees.
It is actually 28 and 29 of the Corporation Law not 92
of the present law or 29 of the former one which require
members of the boards of directors of corporations to be
elected. These provisions read:
28. Unless otherwise provided in this Act, the corporate
powers of all corporations formed under this Act shall be
exercised, all business conducted and all property of such
corporations controlled and held by a board of not less than
five nor more than eleven directors to be elected from among
the holders of stock or, where there is no stock, from the
members of the corporation: Provided, however, That in
corporations, other than banks, in which the United States has
or may have a vested interest, pursuant to the powers granted
or delegated by the Trading with the Enemy Act, as amended,
and similar Acts of Congress of the United States relating to
the same subject, or by Executive Order No. 9095 of the
President of the United States, as heretofore or hereafter
amended, or both, the directors need not be elected from
among the holders of the stock, or, where there is no stock
from the members of the corporation. (emphasis added)
29. At the meeting for the adoption of the original by-laws, or
at such subsequent meeting as may be then determined,
directors shall be elected to hold their offices for one year and
until their successors are elected and qualified. Thereafter
the directors of the corporation shall be elected annually by the
stockholders if it be a stock corporation or by the members if it
be anonstock corporation, and if no provision is made in the
by-laws for the time of election the same shall be held on the
first Tuesday after the first Monday in January. Unless
otherwise provided in the by-laws, two weeks notice of the
election of directors must be given by publication in some
newspaper of general circulation devoted to the publication of
general news at the place where the principal office of the
corporation is established or located, and by written notice
deposited in the post-office, postage pre-paid, addressed to
each stockholder, or, if there be no stockholders, then to each
member, at his last known place of residence. If there be no
newspaper published at the place where the principal office of
the corporation is established or located, a notice of the
election of directors shall be posted for a period of three weeks
immediately preceding the election in at least three public
places, in the place where the principal office of the
corporation is established or located. (Emphasis added)
The present Corporation Code (B.P. Blg. 68), which
took effect on May 1, 1980, similarly provides:
[12]
23. The Board of Directors or Trustees. - Unless otherwise
provided in this Code, the corporate powers of all corporations
formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and
held by the board of directors or trustees to be elected from
among the holders of stocks, or where there is no stock, from
among the members of the corporation, who shall hold office
for one (1) year and until their successors are elected and
qualified. (Emphasis added)
These provisions of the former and present
corporation law leave no room for doubt as to their
meaning: the board of directors of corporations must be
elected from among the stockholders or members. There
may be corporations in which there are unelected
members in the board but it is clear that in the examples
cited by petitioner the unelected members sit as ex
officio members, i.e., by virtue of and for as long as they
hold a particular office. But in the case of petitioner, there
is no reason at all for its representative to be given a
seat in the board. Nor does petitioner claim a right to
such seat by virtue of an office held. In fact it was not
given such seat in the beginning. It was only in 1975 that
a proposed amendment to the by-laws sought to give it
one.
Since the provision in question is contrary to law, the
fact that for fifteen years it has not been questioned or
challenged but, on the contrary, appears to have been
implemented by the members of the association cannot
forestall a later challenge to its validity. Neither can it
attain validity through acquiescence because, if it is
contrary to law, it is beyond the power of the members of
the association to waive its invalidity. For that matter the
members of the association may have formally adopted
the provision in question, but their action would be of no
avail because no provision of the by-laws can be
adopted if it is contrary to law.
[13]
 It is probable that, in allowing petitioners Regalado, (Chairman), J., on leave.
representative to sit on the board, the members of the
association were not aware that this was contrary to
law. It should be noted that they did not actually
implement the provision in question except perhaps SECOND DIVISION
insofar as it increased the number of directors from 11 to
15, but certainly not the allowance of petitioners
representative as an unelected member of the board of [G.R. No. 122452. January 29, 2001]
directors. It is more accurate to say that the members
merely tolerated petitioners representative and tolerance
cannot be considered ratification.
TAM WING TAK, petitioner, vs. HON. RAMON P.
Nor can petitioner claim a vested right to sit in the MAKASIAR (in his Capacity as Presiding Judge
board on the basis of practice. Practice, no matter how of the Regional Trial Court of Manila, Branch 35)
long continued, cannot give rise to any vested right if it is and ZENON DE GUIA (in his capacity as Chief
contrary to law. Even less tenable is petitioners claim State Prosecutor), respondents.
that its right is coterminus with the existence of the
association.[14]
DECISION
Finally, petitioner questions the authority of the SEC QUISUMBING, J.:
to render an opinion on the validity of the provision in
question. It contends that jurisdiction over this case is This is a petition for review on certiorari of the decision of the
Regional Trial Court of Manila, Branch 35, dated September 14, 1995,
exclusively vested in the HIGC.
which dismissed herein petitioners special civil action for mandamus
But this case was not decided by the SEC but by the and sustained the Letter-Order of respondent Chief State
HIGC. The HIGC merely cited as authority for its ruling Prosecutor. The latter dismissed petitioners appeal from the resolution
the opinion of the SEC chairman. The HIGC could have of the City Prosecutor of Quezon City, which, in turn, dismissed
petitioners complaint against Vic Ang Siong for violation of the
cited any other authority for the view that under the law
Bouncing Checks Law or B.P. Blg. 22.
members of the board of directors of a corporation must
be elected and it would be none the worse for doing so. The factual background of this case is as follows:

WHEREFORE, the decision of the Court of Appeals On November 11, 1992, petitioner, in his capacity as director of
Concord-World Properties, Inc., (Concord for brevity), a domestic
is AFFIRMED.
corporation, filed an affidavit-complaint with the Quezon City
SO ORDERED. Prosecutors Office, charging Vic Ang Siong with violation of B.P.
Blg. 22. Docketed by the prosecutor as I.S. No. 93-15886, the
Puno, and Torres, Jr., JJ., concur.
complaint alleged that a check for the amount of P83,550,000.00,
issued by Vic Ang Siong in favor of Concord, was dishonored when
presented for encashment.
Vic Ang Siong sought the dismissal of the case on two
grounds: First, that petitioner had no authority to file the case on
behalf of Concord, the payee of the dishonored check, since the firms
board of directors had not empowered him to act on its behalf. Second,
he and Concord had already agreed to amicably settle the issue after he
made a partial payment of P19,000,000.00 on the dishonored check.
On March 23, 1994, the City Prosecutor dismissed I.S. No. 93-
15886 on the following grounds: (1) that petitioner lacked the requisite
authority to initiate the criminal complaint for and on Concords behalf;
and (2) that Concord and Vic Ang Siong had already agreed upon the
payment of the latters balance on the dishonored check.
A copy of the City Prosecutors resolution was sent by registered
mail to petitioner in the address he indicated in his complaint-
affidavit. Notwithstanding that petitioner was represented by counsel,
the latter was not furnished a copy of the resolution.
On June 27, 1994, petitioners counsel was able to secure a copy of
the resolution dismissing I.S. No. 93-15886. Counting his 15-day
appeal period from said date, petitioner moved for reconsideration on
July 7, 1994.
On October 21, 1994, the City Prosecutor denied petitioners
motion for reconsideration. Petitioners counsel received a copy of the
denial order on November 3, 1994.
On November 7, 1994, petitioners lawyer filed a motion to extend
the period to appeal by an additional 15 days counted from November
3, 1994 with the Chief State Prosecutor. He manifested that it would
take time to communicate with petitioner who is a Hong Kong resident
and enable the latter to verify the appeal as procedurally required.
On November 8, 1994, petitioner appealed the dismissal of his
complaint by the City Prosecutor to the Chief State Prosecutor. The
appeal was signed by petitioners attorney only and was not verified by
petitioner until November 23, 1994.
On December 8, 1994, the Chief State Prosecutor dismissed the
appeal for having been filed out of time. Petitioners lawyer received a
copy of the letter-resolution dismissing the appeal on January 20,
1995.
On January 30, 1995, petitioner moved for reconsideration.
On March 9, 1995, respondent Chief State Prosecutor denied the
motion for reconsideration.
Petitioner then filed Civil Case No. 95-74394 for mandamus with
the Regional Trial Court of Quezon City to compel the Chief State
Prosecutor to file or cause the filing of an information charging Vic
Ang Siong with violation of B.P. Blg. 22.
On September 14, 1995, the trial court disposed of the action as
follows:
WHEREFORE, for utter lack of merit, the petition for
mandamus of petitioner is DENIED and DISMISSED.
SO ORDERED.[1]
Petitioner moved for reconsideration, but the trial court denied
this motion in its order dated October 24, 1995.
Hence, the instant petition.
Before this Court, petitioner claims respondent judge committed
grave errors of law in sustaining respondent Chief State Prosecutor
whose action flagrantly contravenes: (1) the established rule on service
of pleadings and orders upon parties represented by counsel; (b) the
basic principle that except in private crimes, any competent person
may initiate a criminal case; and (3) the B.P. Blg. 22 requirement that
arrangement for full payment of a bounced check must be made by the
drawer with the drawee within five (5) banking days from notification
of the checks dishonor.[2]
We find pertinent for our resolution the following issues:
 (1) Was there valid service of the City Prosecutors resolution upon
petitioner?
(2) Will mandamus lie to compel the City Prosecutor to file the
necessary information in court?
In upholding respondent Chief State Prosecutor, the court a
quo held:
It is a generally accepted principle in the service of orders,
resolutions, processes and other papers to serve them on the
party or his counsel, either in his office, if known, or else in
the residence, also if known. As the party or his counsel is not
expected to be present at all times in his office or residence,
service is allowed to be made with a person in charge of the
office, or with a person of sufficient discretion to receive the
same in the residence.
In the case under consideration, it is not disputed that the
controverted Resolution dismissing the complaint of the
petitioner against Vic Ang Siong was served on the former by
registered mail and was actually delivered by the postmaster
on April 9, 1994 at said petitioners given address in the record
at No.5 Kayumanggi Street, West Triangle, Quezon City. The
registered mail was in fact received by S. Ferraro. The service
then was complete and the period for filing a motion for
reconsideration or appeal began to toll from that date. It
expired on April 24, 1994. Considering that his motion for
reconsideration was filed only on July 7, 1994, the same was
filed beyond the prescribed period, thereby precluding further
appeal to the Office of the respondent.[3]
Petitioner, before us, submits that there is no such generally
accepted practice which gives a tribunal the option of serving
pleadings, orders, resolutions, and other papers to either the opposing
party himself or his counsel. Petitioner insists that the fundamental
rule in this jurisdiction is that if a party appears by counsel, then
service can only be validly made upon counsel and service upon the
party himself becomes invalid and without effect. Petitioner relies
upon Rule 13, Section 2 of the Rules of Court[4] and our ruling in J.M.
Javier Logging Corp. v. Mardo, 24 SCRA 776 (1968) to support his
stand. In the J.M. Javier case, we held:
[W]here a party appears by attorney, notice to the former is not
a notice in law, unless service upon the party himself is
ordered by the court... [5]
The Solicitor General, for respondents, contends that the
applicable rule on service in the present case is Section 2 of the
Department of Justice (DOJ) Order No. 223,[6] which allows service to
be made upon either party or his counsel. Respondents argue that
while a preliminary investigation has been considered as partaking of
the nature of a judicial proceeding,[7]nonetheless, it is not a court
proceeding and hence, falls outside of the ambit of the Rules of Court.
We agree with petitioner that there is no generally accepted
practice in the service of orders, resolutions, and processes, which
allows service upon either the litigant or his lawyer. As a rule, notice
or service made upon a party who is represented by counsel is a
nullity.[8] However, said rule admits of exceptions, as when the court or
tribunal orders service upon the party[9]or when the technical defect is
waived.[10]
To resolve the issue on validity of service, we must make a
determination as to which is the applicable rule the rule on service in
the Rules of Court, as petitioner insists or the rule on service in DOJ
Order No. 223?
The Rules of Court were promulgated by this Court pursuant to
Section 13, Article VII of the 1935 Constitution[11] (now Section 5 [5],
Article VIII of the Constitution)[12] to govern pleadings, practice and
procedure in all courts of the Philippines. The purpose of the Rules is
clear and does not need any interpretation. The Rules were meant to
govern court (stress supplied) procedures and pleadings. As correctly
pointed out by the Solicitor General, a preliminary investigation,
notwithstanding its judicial nature, is not a court proceeding. The
holding of a preliminary investigation is a function of the Executive
Department and not of the Judiciary.[13] Thus, the rule on service
provided for in the Rules of Court cannot be made to apply to the
service of resolutions by public prosecutors, especially as the agency
concerned, in this case, the Department of Justice, has its own
procedural rules governing said service.
A plain reading of Section 2 of DOJ Order No. 223 clearly shows
that in preliminary investigation, service can be made upon the party
himself or through his counsel. It must be assumed that when the
Justice Department crafted the said section, it was done with
knowledge of the pertinent rule in the Rules of Court and of
jurisprudence interpreting it. The DOJ could have just adopted the rule
on service provided for in the Rules of Court, but did not. Instead, it
opted to word Section 2 of DOJ Order No. 223 in such a way as to
leave no doubt that in preliminary investigations, service of resolutions
of public prosecutors could be made upon either the party or his
counsel.
Moreover, the Constitution provides that Rules of procedure of
special courts and quasi-judicial bodies shall remain effective unless
disapproved by the Supreme Court.[14] There is naught in the records to
show that we have disapproved and nullified Section 2 of DOJ Order
No. 223 and since its validity is not an issue in the instant case, we
shall refrain from ruling upon its validity.
We hold that there was valid service upon petitioner pursuant to
Section 2 of DOJ Order No. 223.
On the issue of whether mandamus will lie. In general, mandamus
may be resorted to only where ones right is founded clearly in law and
not when it is doubtful.[15] The exception is to be found in criminal
cases where mandamus is available to compel the performance by the
public prosecutor of an ostensibly discretionary function, where by
reason of grave abuse of discretion on his part, he willfully refuses to
perform a duty mandated by law.[16] Thus, mandamus may issue to
compel a prosecutor to file an information when he refused to do so in
spite of the prima facie evidence of guilt.[17]
Petitioner takes the stance that it was grave abuse for discretion on
the part of respondent Chief State Prosecutor to sustain the dismissal
of I.S. No. 93-15886 on the grounds that: (1) Vic Ang Siongs
obligation which gave rise to the bounced check had already been
extinguished by partial payment and agreement to amicably settle
balance, and (2) petitioner had no standing to file the criminal
complaint since he was neither the payee nor holder of the bad check.
Petitioner opines that neither ground justifies dismissal of his
complaint.
Petitioners stand is unavailing. Respondent Chief State Prosecutor
in refusing to order the filing of an information for violation of B.P.
Blg. 22 against Vic Ang Siong did not act without or in excess of
jurisdiction or with grave abuse of discretion.
First, with respect to the agreement between Concord and Victor
Ang Siong to amicably settle their difference, we find this resort to an
alternative dispute settlement mechanism as not contrary to law, public
policy, or public order. Efforts of parties to solve their disputes outside
of the courts are looked on with favor, in view of the clogged dockets
of the judiciary.
Second, it is not disputed in the instant case that Concord, a
domestic corporation, was the payee of the bum check, not
petitioner. Therefore, it is Concord, as payee of the bounced check,
which is the injured party. Since petitioner was neither a payee nor a
holder of the bad check, he had neither the personality to sue nor a
cause of action against Vic Ang Siong. Under Section 36 of the
Corporation Code[18], read in relation to Section 23,[19] it is clear that
where a corporation is an injured party, its power to sue is lodged with
its board of directors or trustees.[20] Note that petitioner failed to show
any proof that he was authorized or deputized or granted specific
powers by Concords board of director to sue Victor Ang Siong for and
on behalf of the firm. Clearly, petitioner as a minority stockholder and
member of the board of directors had no such power or authority to
sue on Concords behalf. Nor can we uphold his act as a derivative
suit. For a derivative suit to prosper, it is required that the minority
stockholder suing for and on behalf of the corporation must allege in
his complaint that he is suing on a derivative cause of action on behalf

of the corporation and all other stockholders similarly situated who
may wish to join him in the suit.[21] There is no showing that petitioner
has complied with the foregoing requisites. It is obvious that petitioner
has not shown any clear legal right which would warrant the
overturning of the decision of public respondents to dismiss the
complaint against Vic Ang Siong. A public prosecutor, by the nature
of his office, is under no compulsion to file a criminal information
where no clear legal justification has been shown, and no sufficient
evidence of guilt nor prima facie case has been presented by the
petitioner.[22] No reversible error may be attributed to the court a
quo when it dismissed petitioners special civil action for mandamus.
WHEREFORE, the instant petition is DISMISSED for lack of
merit. Costs against petitioner.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr.,
JJ., concur.
[1]
Rollo, p. 33.
[2]
Id. at 6-7.
[3]
Id. at 32.
[4]
Said provision reads:
SEC. 2. Papers to be filed and served. Every order required by its terms to be served,
every pleading subsequent to the complaint, every written motion other than one
which be heard ex parte, and every written notice, appearance, demand, offer of
judgment or similar papers shall be filed with the court and served upon the parties
affected thereby. If any of such parties has appeared by an attorney or attorneys,
service upon him shall be made upon his attorneys or one of them, unless service
upon the party himself is ordered by the court. When one attorney appears for several
parties, he shall only be entitled to one copy of any paper served upon him by the
opposite side.
[5]
24 SCRA 779 (1968) citing Vivero v. Santos, 98 Phil. 500, 504 (1956); Chavani v.
Tancinco, 90 Phil. 862, 864 (1952), San Jacinto v. San Jacinto, 52 Off. Gaz. 2582.
[6]
The provision reads: The appeal must be filed within a period of fifteen (15) days
from receipt of the questioned resolution by the party or his counsel. The period shall
be interrupted only by the filing of a motion for resolution within ten (10) days from
receipt of the resolution and shall continue to run from the time the resolution
denying the counsel has been received by the movant or his counsel. Note that DOJ
Order No. 223 dated June 30, 1993 has already been superseded by DOJ Circular
No. 70 (2000 NPS) dated July 3, 2000, which took effect on September 1, 2000.
[7]
Cojuangco, Jr., v. Presidential Commission on Good Government, 190 SCRA
226, 243 (1990).
[8]
Antonio v. Court of Appeals, 153 SCRA 592, 600 (1987) citing Republic of the
Philippines v. Arro, 150 SCRA 625 (1987).
[9]
Jalover v. Ytorriaga, 80 SCRA 100, 106 (1977) citing J.M. Javier Logging
Corp. v. Mardo, supra; Elli, et al., v. Ditan, et al., 5 SCRA 503 (1962); McGrath v.
Collector of Internal Revenue, 1 SCRA 639 (1961).
[10]
National Lumber & Hardware Co. v. Velasco, 106 Phil. 1098, 1101 (1960).
[11]
The Supreme Court shall have the power to promulgate rules concerning
pleading, practice and procedure in all courts, and the admission to the practice of
law. Said rules shall be uniform for all courts of the same grade and shall not
diminish, increase, or modify substantive rights. The existing laws on pleading,
practice and procedure are hereby repealed as statutes, and are declared Rules of
Court, subject to the power of the Supreme Court to alter and modify the same. The
Congress shall have the power to repeal, alter or supplement the rules concerning
pleading, practice and procedure and the admission to the practice of law in the
Philippines.
[12]
The Supreme Court shall have the following powers:
xxx
[5] Promulgate rules concerning the protection and enforcement of constitutional
rights, pleading, practice, and procedure in all courts, the admission to the practice of
law, the Integrated Bar, and legal assistance to the underprivileged. Such rules shall
provide a simplified and inexpensive procedure for the speedy disposition of cases,
shall be uniform for all courts of the same grade, and shall not diminish, increase, or
modify substantive rights. Rules of procedure of special courts and quasi-judicial
bodies shall remain effective unless disapproved by the Supreme Court.
[13]
Larranaga v. Court of Appeals, 287 SCRA 581, 594-595 (1998); People v.
Navarro, 270 SCRA 393, 400 (1997).
[14]
CONST. art. viii, sec. 5 (5).
[15]
Garces v. Court of Appeals, 259 SCRA 99, 105-106 (1996).
[16]
Regalado, I Remedial Law Compendium (5th ed.) 464 (1988).
[17]
People v. Orais, 65 Phil. 744, 757 (1938). It is undisputed that plaintiffs-appellants, Alfredo Montelibano, Alejandro
[18] Montelibano, and the Limited co-partnership Gonzaga and Company,
SEC. 36. Corporate powers and capacities. Every corporation incorporated
had been and are sugar planters adhered to the defendant-appellee's
under this Code has the power and capacity:
sugar central mill under identical milling contracts. Originally executed in
1. To sue and be sued in its corporate name. 1919, said contracts were stipulated to be in force for 30 years starting
with the 1920-21 crop, and provided that the resulting product should be
xxx
divided in the ratio of 45% for the mill and 55% for the planters.
[19]
SEC. 23. The board of directors or trustees. Unless otherwise provided in this Sometime in 1936, it was proposed to execute amended milling
Code, the corporate powers of all corporations formed under this Code shall be contracts, increasing the planters' share to 60% of the manufactured
exercisedby the board of directors or trustees to be elected from among the holders sugar and resulting molasses, besides other concessions, but extending
of stock, or where there is no stock, from among the members of the corporation, the operation of the milling contract from the original 30 years to 45
who shall hold office for one (1) year and until their successors are elected and years. To this effect, a printed Amended Milling Contract form was drawn
qualified. up. On August 20, 1936, the Board of Directors of the appellee Bacolod-
[20]
Premium Marble Resources, Inc. v. Court of Appeals, 264 SCRA 11, 17 (1996). Murcia Milling Co., Inc., adopted a resolution (Acts No. 11, Acuerdo No.
1) granting further concessions to the planters over and above those
[21]
Western Institute of Technology, Inc. v. Salas, 278 SCRA 216, 225 (1997). contained in the printed Amended Milling Contract. The bone of
[22] contention is paragraph 9 of this resolution, that reads as follows:
D.M. Consunji, Inc. v. Esguerra, 260 SCRA 74, 86 (1996).
ACTA No. 11
SESSION DE LA JUNTA DIRECTIVA
Republic of the Philippines AGOSTO 20, 1936
SUPREME COURT
Manila xxx xxx xxx

EN BANC Acuerdo No. 1. — Previa mocion debidamente

secundada, la Junta en consideracion a una peticion de
G.R. No. L-15092 May 18, 1962 los plantadores hecha por un comite nombrado por los
mismos, acuerda enmendar el contrato de molienda
enmendado medientelas siguentes:
ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,
vs.
BACOLOD-MURCIA MILLING CO., INC., defendant-appellee. xxx xxx xxx

Tañada, Teehankee and Carreon for plaintiffs-appellants. 9.a Que si durante la vigencia de este contrato de
Hilado and Hilado for defendant-appellee. Molienda Enmendado, lascentrales azucareras, de
Negros Occidental, cuya produccion anual de azucar
centrifugado sea mas de una tercera parte de la
REYES, J.B.L., J.:
produccion total de todas lascentrales azucareras de
Negros Occidental, concedieren a sus plantadores
Appeal on points of law from a judgment of the Court of First Instance of mejores condiciones que la estipuladas en el presente
Occidental Negros, in its Civil Case No. 2603, dismissing plaintiff's contrato, entonces esas mejores condiciones se
complaint that sought to compel the defendant Milling Company to concederan y por el presente se entenderan concedidas
increase plaintiff's share in the sugar produced from their cane, from 60%
to 62.33%, starting from the 1951-1952 crop year. 1äwphï1.ñët
 a los platadores que hayan otorgado este Contrato de
Molienda Enmendado.
Appellants signed and executed the printed Amended Milling Contract on
September 10, 1936, but a copy of the resolution of August 10, 1936,
signed by the Central's General Manager, was not attached to the printed
contract until April 17, 1937; with the notation —
Las enmiendas arriba transcritas forman parte del contrato de
molienda enmendado, otorgado por — y la Bacolod-Murcia
Milling Co., Inc.
In 1953, the appellants initiated the present action, contending that three
Negros sugar centrals (La Carlota, Binalbagan-Isabela and San Carlos),
with a total annual production exceeding one-third of the production of all
the sugar central mills in the province, had already granted increased
participation (of 62.5%) to their planters, and that under paragraph 9 of
the resolution of August 20, 1936, heretofore quoted, the appellee had
become obligated to grant similar concessions to the plaintiffs (appellants
herein). The appellee Bacolod-Murcia Milling Co., inc., resisted the claim,
and defended by urging that the stipulations contained in the resolution
were made without consideration; that the resolution in question was,
therefore, null and void ab initio, being in effect a donation that was ultra
viresand beyond the powers of the corporate directors to adopt.
After trial, the court below rendered judgment upholding the stand of the
defendant Milling company, and dismissed the complaint. Thereupon,
plaintiffs duly appealed to this Court.
We agree with appellants that the appealed decisions can not stand. It
must be remembered that the controverted resolution was adopted by
appellee corporation as a supplement to, or further amendment of, the
proposed milling contract, and that it was approved on August 20, 1936,
twenty-one days prior to the signing by appellants on September 10, of
the Amended Milling Contract itself; so that when the Milling Contract was
executed, the concessions granted by the disputed resolution had been
already incorporated into its terms. No reason appears of record why, in
the face of such concessions, the appellants should reject them or
consider them as separate and apart from the main amended milling
contract, specially taking into account that appellant Alfredo Montelibano
was, at the time, the President of the Planters Association (Exhibit 4, p.
11) that had agitated for the concessions embodied in the resolution of
August 20, 1936. That the resolution formed an integral part of the
amended milling contract, signed on September 10, and not a separate
bargain, is further shown by the fact that a copy of the resolution was
simply attached to the printed contract without special negotiations or
agreement between the parties.
It follows from the foregoing that the terms embodied in the resolution of
August 20, 1936 were supported by the same causa or consideration
underlying the main amended milling contract; i.e., the promises and
obligations undertaken thereunder by the planters, and, particularly, the
extension of its operative period for an additional 15 years over and
beyond the 30 years stipulated in the original contract. Hence, the
conclusion of the court below that the resolution constituted gratuitous
concessions not supported by any consideration is legally untenable.
All disquisition concerning donations and the lack of power of the
directors of the respondent sugar milling company to make a gift to the
planters would be relevant if the resolution in question had embodied a
separate agreement after the appellants had already bound themselves
to the terms of the printed milling contract. But this was not the case.
When the resolution was adopted and the additional concessions were
made by the company, the appellants were not yet obligated by the terms
of the printed contract, since they admittedly did not sign it until twenty-
one days later, on September 10, 1936. Before that date, the printed form
was no more than a proposal that either party could modify at its
pleasure, and the appellee actually modified it by adopting the resolution
in question. So that by September 10, 1936 defendant corporation
already understood that the printed terms were not controlling, save as
modified by its resolution of August 20, 1936; and we are satisfied that
such was also the understanding of appellants herein, and that the minds
of the parties met upon that basis. Otherwise there would have been no
consent or "meeting of the minds", and no binding contract at all. But the
conduct of the parties indicates that they assumed, and they do not now
deny, that the signing of the contract on September 10, 1936, did give
rise to a binding agreement. That agreement had to exist on the basis of
the printed terms as modified by the resolution of August 20, 1936, or not
at all. Since there is no rational explanation for the company's assenting
to the further concessions asked by the planters before the contracts
were signed, except as further inducement for the planters to agree to the
extension of the contract period, to allow the company now to retract
such concessions would be to sanction a fraud upon the planters who
relied on such additional stipulations.
The same considerations apply to the "void innovation" theory of
appellees. There can be no novation unless two distinct and successive
binding contracts take place, with the later designed to replace the
preceding convention. Modifications introduced before a bargain
becomes obligatory can in no sense constitute novation in law.
Stress is placed on the fact that the text of the Resolution of August 20,
1936 was not attached to the printed contract until April 17, 1937. But,
except in the case of statutory forms or solemn agreements (and it is not
claimed that this is one), it is the assent and concurrence (the "meeting of
the minds") of the parties, and not the setting down of its terms, that
constitutes a binding contract. And the fact that the addendum is only
signed by the General Manager of the milling company emphasizes that
the addition was made solely in order that the memorial of the terms of
the agreement should be full and complete.
Much is made of the circumstance that the report submitted by the Board
of Directors of the appellee company in November 19, 1936 (Exhibit 4)
only made mention of 90%, the planters having agreed to the 60-40
sharing of the sugar set forth in the printed "amended milling contracts",
and did not make any reference at all to the terms of the resolution of
August 20, 1936. But a reading of this report shows that it was not
intended to inventory all the details of the amended contract; numerous
provisions of the printed terms are alao glossed over. The Directors of the
appellee Milling Company had no reason at the time to call attention to
the provisions of the resolution in question, since it contained mostly
modifications in detail of the printed terms, and the only major change
was paragraph 9 heretofore quoted; but when the report was made, that
paragraph was not yet in effect, since it was conditioned on other centrals
granting better concessions to their planters, and that did not happen
until after 1950. There was no reason in 1936 to emphasize a concession
that was not yet, and might never be, in effective operation.
There can be no doubt that the directors of the appellee company had
authority to modify the proposed terms of the Amended Milling Contract
for the purpose of making its terms more acceptable to the other
contracting parties. The rule is that —
It is a question, therefore, in each case of the logical relation of
the act to the corporate purpose expressed in the charter. If that
act is one which is lawful in itself, and not otherwise prohibited, is
done for the purpose of serving corporate ends, and is
reasonably tributary to the promotion of those ends, in a
substantial, and not in a remote and fanciful sense, it may fairly
be considered within charter powers. The test to be applied is
whether the act in question is in direct and immediate furtherance
of the corporation's business, fairly incident to the express
powers and reasonably necessary to their exercise. If so, the
corporation has the power to do it; otherwise, not. (Fletcher Cyc.
Corp., Vol. 6, Rev. Ed. 1950, pp. 266-268)
As the resolution in question was passed in good faith by the board of
directors, it is valid and binding, and whether or not it will cause losses or
decrease the profits of the central, the court has no authority to review
them.
They 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 depression, or close 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 or 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 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).
And it appearing undisputed in this appeal that sugar centrals of La
Carlota, Hawaiian Philippines, San Carlos and Binalbagan (which
produce over one-third of the entire annual sugar production in
Occidental Negros) have granted progressively increasing participations
to their adhered planter at an average rate of
62.333% for the 1951-52 crop year;
64.2% for 1952-53;
64.3% for 1953-54;
64.5% for 1954-55; and

63.5% for 1955-56,
the appellee Bacolod-Murcia Milling Company is, under the terms of its
Resolution of August 20, 1936, duty bound to grant similar increases to
plaintiffs-appellants herein.
WHEREFORE, the decision under appeal is reversed and set aside; and
judgment is decreed sentencing the defendant-appellee to pay plaintiffs-
appellants the differential or increase of participation in the milled sugar
in accordance with paragraph 9 of the appellee Resolution of August 20,
1936, over and in addition to the 60% expressed in the printed Amended
Milling Contract, or the value thereof when due, as follows:
0,333% to appellants Montelibano for the 1951-1952 crop year,
said appellants having received an additional 2% corresponding
to said year in October, 1953;
2.333% to appellant Gonzaga & Co., for the 1951-1952 crop year;
and to all appellants thereafter —
4.2% for the 1952-1953 crop year;
4.3% for the 1953-1954 crop year;
4.5% for the 1954-1955 crop year;
3.5% for the 1955-1956 crop year;
with interest at the legal rate on the value of such differential during the
time they were withheld; and the right is reserved to plaintiffs-appellants
to sue for such additional increases as they may be entitled to for the
crop years subsequent to those herein adjudged.
Costs against appellee, Bacolod-Murcia Milling Co.
Padilla, Bautista Angelo, Labrador, Concepcion, Barrera, Paredes and
Dizon, JJ., concur.
The Lawphil Project - Arellano Law Foundation
EN BANC
[G.R. No. L-5377. December 29, 1954.]
MARIA CARLA PIROVANO ET AL., Plaintiffs-Appellees, v. THE DE LA
RAMA STEAMSHIP CO., Defendant-Appellant.
Del Rosario & Garcia for Appellant.
Vicente J. Francisco for Appellees.
SYLLABUS
1. CORPORATIONS; DONATIONS; DONATION GIVEN "OUT OF GRATITUDE FOR
SERVICES RENDERED" IS REMUNERATIVE. — A donation given by the
corporation to the minor children of its late president because he "was to a
large extent responsible for the rapid and very successful development and
expansion of the activities of this company" is remunerative in nature in
contemplation of law.
2. ID.; ID.; PERFECTED DONATION CAN ONLY BE RESCINDED ON LEGAL
GROUNDS. — Where the donation made by the corporation has not only been
granted in several resolutions duly adopted by its board of directors but also it
has been formally ratified by its stockholders, with the concurrence of its only
creditor, and accepted by the donee, the donation has reached the stage of
perfection which is valid and binding upon the corporation and as such cannot
be rescinded unless there exist legal grounds for doing so.
3. ID.; ID.; DONATION DISTINGUISHED FROM GRATUITY. — While a donation
may technically be different from a gratuity, in substance they are the same.
They are even similar to a pension. Thus, it was said that "A pension is a
gratuity only when it is granted for services previously rendered, and which at
the time they were rendered gave rise to no legal obligation." (Words and
Phrases, Permanent Edition, p. 675; O’Dea v. Cook, 169 Pac., 306, 176 Cal.,
659.)
4. ID.; POWERS OF A CORPORATION; ACTS PERFORMED WITHIN THE POWERS
GRANTED ARE NOT "ULTRA VIRES. — Where the corporation was given broad
and almost unlimited powers to carry out the purposes for which it was
organized among them, to aid in any other manner any person in the affairs
and prosperity of whom it has a lawful interest, a donation made to the heirs of
its late president in recognition of the valuable services rendered by the latter
which had immensely contributed to its growth, comes within this broad grant
of power and can not be considered an ultra vires act.
5. ID.; ID.; "ULTRA VIRES" ILLEGAL ACTS DISTINGUISHED; EFFECT OF
RATIFICATION BY STOCKHOLDERS. — Illegal acts of a corporation contemplate
the doing of an act which is contrary to law, morals, or public order, or
contravene some rules of public policy or public duty, and are, like similar
transactions between individuals, void. They can not serve as basis of a court
action, nor acquire validity by performance, ratification, or estoppel. On the
other hand, ultra vires acts or those which are not illegal and void ab initio but
are merely within the scope of the article of incorporation, are merely voidable
and may become binding and enforceable when ratified by the stockholders.
6. ID.; ID.; "ULTRA VIRES" ACTS; RATIFICATION BY STOCKHOLDERS OF
"ULTRA VIRES" ACTS CURES INFIRMITY. — The ratification by the stockholders
of an ultra vires act which is not illegal cures the infirmity of the corporate act
and makes it perfectly valid and enforceable, specially so if it is not merely
executory but executed and consummated and no creditors are prejudiced
thereby.
7. ATTORNEY’S FEES, WHEN MAY BE AWARDED AS DAMAGES. — When the
defendant’s act or omission has compelled the plaintiff to litigate with third
persons or to incur expenses to protect his interest, attorney’s fees may be
awarded as damages (Article 2208, paragraph 2, of the new Civil Code).
DECISION
BAUTISTA ANGELO, J.:
This is an appeal from a decision of the Court of First Instance of Rizal
declaring the donation made by the defendant in favor of the minor children of
the late Enrico Pirovano of the proceeds of the insurance policies taken on his
life valid and binding, and ordering said defendant to pay to said minor children
the sum of P583,813.59, with interest thereon at the rate of 5 per cent from
the date of filing of the complaint, plus an additional amount equivalent to 20
per cent of said sum of P583,813.59 as damages by way of attorney’s fees,
and the costs of action.
Plaintiffs herein are the minor children of the late Enrico Pirovano represented
by their mother and judicial guardian Estefania R. Pirovano. They seek to
enforce certain resolutions adopted by the Board of Directors and stockholders
of the defendant company giving to said minor children the proceeds of the
insurance policies taken on the life of their deceased father Enrico Pirovano
with the company as beneficiary. Defendant’s main defense is: that said
resolutions and the contract executed pursuant thereto are ultra vires, and, if
valid, the obligation to pay the amount given is not yet due and demandable.
The trial court resolved all the issues raised by the parties in favor of the
plaintiffs and, after considering the evidence, both oral and documentary,
arrived at the following conclusions:jgc:cha nrob les.co m.ph
"First. — That the contract executed between the plaintiffs and the defendant
is a renumerative donation.
"Second. — That said contract or donation is not ultra vires, but an act
executed within the powers of the defendant corporation in accordance with its
articles of incorporation and by-laws, sanctioned and approved by its Board of
Directors and stockholders; and subsequently ratified by other subsequent acts
of the defendant company.
"Third. — That the said donation is in accordance with the trend of modern and
more enlightened legislation in its treatment of questions between labor and
capital.
"Fourth. — That the condition mentioned in the donation is null and void
because it depends on the provisions of Article 1115 of the old Civil Code.
"Fifth. — That if the condition is valid, its non-fulfillment is due to the
desistance of the defendant company from obeying and doing the wishes and
mandates of the majority of the stockholders.
"Sixth. — That the non-payment of the debt in favor of the National
Development Company is not due to the lack of funds, nor to lack of authority,
but the desire of the President of the corporation to preserve and continue the
Government participation in the company.
"Seventh. — That due demands were made by the plaintiffs and their attorneys
and these demands were rejected for no justifiable or legal grounds." cralaw virt ua1aw lib ra ry
The important facts which need to be considered for purposes of this appeal
may be briefly stated as follows: Defendant is a corporation duly organized in
accordance with law with an authorized capital of P500,000, divided into 5,000
shares, with a par value of P100 each share. The stockholders were: Esteban
de la Rama, 1,800 shares, Leonor de la Rama, 100 shares, Estefania de la
Rama, 100 shares, and Eliseo Hervas, Tomas Concepcion, Antonio G. Juanco,
and Gaudencio Volasote with 5 shares each. Leonor and Estefania are
daughters of Don Esteban, while the rest his employees. Estefania de la Rama
was married to the late Enrico Pirovano and to them four children were born
who are the plaintiffs in this case.
Enrico Pirovano became the president of the defendant company and under his
management the company grew and progressed until it became a multi-million
corporation by the time Pirovano was executed by the Japanese during the
occupation. On May 13, 1941, the capital stock of the corporation was
increased to P2,000,000, after which a 100 per cent stock dividend was
declared. Subsequently, or before the outbreak of the war, new stock dividends
of 200 per cent and 33 1/3 per cent were again declared. On December 4,
1941, the capital stock was once more increased to P5,000,000. Under
Pirovano’s management, the assets of the company grew and increased from
an original paid up capital of around P240,000 to P15,538,024.37 by
September 30, 1941 (Exhibit HH).
In the meantime, Don Esteban de la Rama, who practically owned and
controlled the stock of the defendant corporation, distributed his shareholding
among his five daughters, namely, Leonor, Estefania, Lourdes, Lolita and
Conchita and his wife Natividad Aguilar so that, at that time, or on July 10,
1946, the stockholding of the corporation stood as follows: Esteban de la
Rama, 869 shares, Leonor de la Rama, 3,376 shares, Estefania de la Rama,
3,368 shares, Lourdes de la Rama, 3,368 shares, Lolita de la Rama, 3,368
shares, Conchita de la Rama, 3,376 shares, and Natividad Aguilar, 2,136
shares. The other stockholders, namely, Eliseo Hervas, Tomas Concepcion,
Antonio Juanco, and Jose Aguilar, who were merely employees of Don Esteban,
were given 40 shares each, while Pio Pedrosa, Marcial P. Lichauco and Rafael
Roces, one share each, because they merely represented the National
Development Company. This company was given representation in the Board
of Directors of the corporation because at that time the latter had an
outstanding bonded indebtedness to the National Development Company.
This bonded indebtedness was incurred on February 26, 1940 and was in the
amount of P7,500,00. The bond held by the National Development Company
was redeemable within a period of 20 years from March 1, 1940, bearing
interest at the rate of 5 per cent per annum. To secure said bonded
indebtedness, all the assets of the De la Rama Steamship Co., Inc. and
properties of Don Esteban de la Rama, as well as those of the Hijos de I. de la
Rama & Co., Inc., a sister corporation owned by Don Esteban and his family,
were mortgaged to the National Development Company (Annexes A, B, C, D of
Exhibit 3, Deed of Trust). Payments made by the corporation under the
management of Pirovano reduced this bonded indebtedness to P3,260,855.77.
Upon arrangement made with the National Development Company, the
outstanding bonded indebtedness was converted into non-voting preferred
shares of stock of the De la Rama company under the express condition that
they would bear a fixed cumulative dividend of 6 per cent per annum and
would be redeemable within 15 years (Exhibits 5 and 7). This conversion was
carried out on September 23, 1949, when the National Development Company
executed a "Deed of Termination of Trust and Release of Mortgage" in favor of
the De la Rama company (Exhibit 6). The immediate effect of this conversion
was the released from incumbrance of all the properties of Don Esteban and of
the Hijos de I. de la Rama & Co., Inc., which was apparently favorable to the
interests of the De la Rama company, but, on the other hand, it resulted in the
inconvenience that, as holder of the preferred stock, the National Development
Company, was given the right to 40 percent of the membership of the Board of
Directors of the De la Rama company, which meant an increase in the
representation of the National Development Company from 2 to 4 of the 9
members of said Board of Directors.
The first resolution granting to the Pirovano children the proceeds of the
insurance policies taken on his life by the defendant company was adopted by
the Board of Directors at a meeting held on July 10, 1946, (Exhibit B). This
grant was called in the resolution as "Special Payment to Minor Heirs of the
late Enrico Pirovano." Because of its direct bearing on the issues involved in
this case, said resolution is hereunder reproduced in toto:
jgc:chan roble s.com.p h
"SPECIAL PAYMENT TO MINOR HEIRS OF THE LATE ENRICO PIROVANO
"The President stated that the principal purpose for which the meeting had
been called was to discuss the advisability of making some form of
compensation to the minor heirs of the late Enrico Pirovano, former President
and General Manager of the Company. As every member of the Board knows,
said the President, the late Enrico Pirovano who was largely responsible for the
very successful development of the activities of the Company prior to the war,
was killed by the Japanese in Manila sometime in 1944 leaving as his only heirs
four minor children, Maria Carla, Esteban, Enrico and John Albert. Early in
1941, explained the President, the Company had insured the life of Mr.
Pirovano for a million pesos. Following the occupation of the Philippines by
Japanese forces the Company was unable to pay the premiums on those
policies issued by Filipino companies and these policies had lapsed. But with
regards to the York Office of the De la Rama Steamship Co., Inc. had kept up
payment of the premiums from year to year. The payments made on account
of these premiums, however, are very small compared to the amount which
the Company will now receive as a result of Mr. Pirovano’s death. The President
proposed therefore that out of the proceeds of these policies the sum of
P400,000 be set aside for the minor children of the deceased, said sum of
money to be convertible into 4,000 shares of stock of the Company, at par, or
1,000 shares for each child. This proposal, explained the President as being
made by him upon suggestion of President Roxas, but, he added, that he
himself was very much in favor of it also. On motion of Miss Leonor de la Rama
duly seconded by Mrs. Lourdes de la Rama de Osmeña, the following resolution
was, thereupon, unanimously approved: chan rob1e s virtual 1aw l ibra ry
‘Whereas, the late Enrico Pirovano, President and General Manager of the De la
Rama Steamship Company, died in Manila sometime in November, 1944: chan rob 1es vi rtual 1aw lib rary
‘Whereas, the said Enrico Pirovano was largely responsible for the rapid and
very successful development of the activities of this company;
‘Whereas, early in 1941 this company insured the life of said Enrico Pirovano in
various Philippine and American Life Insurance companies for the total sum of
P1,000,000;
‘Whereas, the said Enrico Pirovano is survived by his widow, Estefania Pirovano
and four minor children, to wit: Esteban, Maria Carla, Enrico and John Albert,
all surnamed Pirovano;
‘Whereas, the said Enrico Pirovano left practically nothing to his heirs and it is
but fit and proper that this company which owes so much to the deceased
should make some provision for his children;
‘Whereas, this company paid premiums on Mr. Pirovano’s life insurance policies
for a period of only 4 years so that it will receive from the insurance companies
sums of money greatly in excess of the premiums paid by this company.
‘Be it resolved, That out of the proceeds to be collected from the life insurance
policies on the life of the late Enrico Pirovano, the sum of P400,000 be set
aside for equal division among the 4 minor children of the deceased, to wit:
Esteban, Maria Carla, Enrico and John Albert, all surnamed Pirovano, which
sum of money shall be convertible into shares of stock of the De la Rama
Steamship Company, at par and, for that purpose, that the present registered
stockholders of the corporation be requested to waive their pre-emptive right
to 4,000 shares of the unissued stock of the company in order to enable each
of the 4 minor heirs of the deceased, to wit: Esteban, Maria Carla, Enrico and
John Albert, all surnamed Pirovano, to obtain 1,000 shares at par;
‘Resolved, further, that in view of the fact that under the provisions of the
indenture with the National Development Company, it is necessary that action
herein proposed be confirmed by the Board of Directors of that company, the
Secretary is hereby instructed to send a copy of this resolution to the proper
officers of the National Development Company for appropriate action.’ (Exhibit
B)
The above resolution, which was adopted on July 10, 1946, was submitted to
the stockholders of the De la Rama company at a meeting properly convened,
and on that same date, July 10, 1946, the same was duly approved.
It appears that, although Don Esteban and the Members of his family were
agreeable to giving to the Pirovano children the amount of P400,000 out of the
proceeds of the insurance policies taken on the life of Enrico Pirovano, they did
not realize that when they provided in the above referred two resolutions that
said amount should be paid in the form of shares of stock, they would be
actually giving to the Pirovano children more than what they intended to give.
This came about when Lourdes de la Rama, wife of Sergio Osmeña, Jr., showed
to the latter copies of said resolutions and asked him to explain their import
and meaning, and it was then that Osmeña explained that because the value
then of the shares of stock was actually 3.6 times their par value, the
donation, although purporting to be only P400,000, would actually amount to a
total of P1,440,000. He further explained that if the Pirovano children would be
given shares of stock in lieu of the amount to be donated, the voting strength
of the five daughters of Don Esteban in the company would be adversely
affected in the sense that Mrs. Pirovano would have a voting power twice as
much as that of her sisters. This caused Lourdes de la Rama to write to the
secretary of the corporation, Atty. Marcial Lichauco, asking him to cancel the
waiver she supposedly gave of her pre-emptive rights. Osmeña elaborated on
this matter at the annual meeting of the stockholders held on December 12,
1946, but at said meeting it was decided to leave the matter in abeyance
pending further action on the part of the members of the De la Rama family.
Osmeña, in the meantime, took up the matter with Don Esteban and, as a
consequence, the latter, on December 30, 1946, addressed to Marcial Lichauco
a letter stating, among other things, that "in view of the total lack of
understanding by me and my daughters of the two Resolutions
abovementioned, namely, Directors’ and Stockholders’ dated July 10, 1946, as
finally resolved by the majority of the Stockholders and Directors present
yesterday, that you consider the abovementioned resolutions nullified."
(Exhibit CC).
On January 6, 1947, the Board of Directors of the De la Rama company, as a
consequence of the change of attitude of Don Esteban, adopted a resolution
changing the form of the donation to the Pirovano children from a donation of
4,000 shares of stock as originally planned into a renunciation in favor of the
children of all the company’s "right, title, and interest as beneficiary in and to
the proceeds of the abovementioned life insurance policies", subject to the
express condition that said proceeds should be retained by the company as a
loan drawing interest at the rate of 5 per cent per annum and payable to the
Pirovano children after the company "shall have first settled in full the balance
of its present remaining bonded indebtedness in the sum of approximately
P5,000,000" (Exhibit C). This resolution was concurred in by the
representatives of the National Development Company. The pertinent portion
of the resolution reads as follows:chan rob1e s virtual 1aw lib rary
‘Be it resolved, that out of gratitude to the late Enrico Pirovano this Company
renounce as it hereby renounces, all of its right, title and interest as
beneficiary in and to the proceeds of the abovementioned life insurance policies
in favor of Esteban, Maria Carla, Enrico and John Albert, all surnamed
Pirovano, subject to the terms and conditions hereinafter provided;
‘That the proceeds of said insurance policies shall be retained by the Company
in the nature of a loan drawing interest at the rate of 5 per cent per annum
from the date of receipt of payment by the Company from the varsious
insurance companies above-mentioned iane gem mula-relox until the time the
same amounts are paid to the minor heirs of Enrico Pirovano previously
mentioned;
‘That all amounts received from the above-mentioned policies shall be divided
equally among the minor heirs of said Enrico Pirovano;
‘That the company shall proceed to pay the proceeds of said insurance policies
plus interests that may have accrued to each of the heirs of the said Enrico
Pirovano or their duly appointed representatives after the Company shall have
first settled in full the balance of its present remaining bonded indebtedness in
the sum of approximately P5,000,000.’
The above resolution was carried out by the company and Mrs. Estefania E.
Pirovano, the latter acting as guardian of her children, by executing a
Memorandum Agreement on January 10, 1947 and June 17, 1947,
respectively, stating therein that the De la Rama Steamship Co., Inc. shall
enter in its books as a loan the proceeds of the life insurance policies taken on
the life of Pirovano totalling $321,500, which loan would earn interest at the
rate of 5 per cent per annum. Mrs. Pirovano, in executing the agreement,
acted with the express authority granted to her by the court in an order dated
March 26, 1947.
On June 24, 1947, the Board of Directors approved a resolution providing
therein that instead of the interest on the loan being payable, together with the
principal, only after the company shall have first settled in full its bonded
indebtedness, said interest may be paid to the Pirovano children "whenever the
company is in a position to meet said obligation" (Exhibit D), and on February
26, 1948, Mrs. Pirovano executed a public document in which she formally
accepted the donation (Exhibit H). The De la Rama company took "official
notice" of this formal acceptance at a meeting held by its Board of Directors on
February 26, 1948.
In connection with the above negotiations, the Board of Directors took up at its
meeting on July 25, 1949, the proposition of Mrs. Pirovano to buy the house at
New Rochelle, New York, owned by the Demwood Realty, a subsidiary of the
De la Rama company at its original cost of $75,000, which would be paid from
the funds held in trust belonging to her minor children. After a brief discussion
relative to the matter, the proposition was approved in a resolution adopted on
the same date.
The formal transfer was made in an agreement signed on September 5, 1949
by Mrs. Pirovano, as guardian of her children, and by the De la Rama company,
represented by its new General Manager, Sergio Osmeña, Jr. The transfer of
this property was approved by the court in its order of September 20, 1949.
On September 13, 1949, or two years and 3 months after the donation had
been approved in the various resolutions herein above mentioned, the
stockholders of the De la Rama company formally ratified the donation (Exhibit
E), with certain clarifying modifications, including the resolution approving the
transfer of the Demwood property to the Pirovano children. The clarifying
modifications are quoted hereunder: jgc:c hanrobles. com.ph
"1. That the payment of the above-mentioned donation shall not be effected
until such time as the Company shall have first duly liquidated its present
bonded indebtedness in the amount of P3,260,855.77 with the National
Development Company, or fully redeemed the preferred shares of stock in the
amount which shall be issued to the National Development Company in lieu
thereof;
"2. That any and all taxes, legal fees, and expenses in any way connected with
the above transaction shall be chargeable and deducted from the proceeds of
the life insurance policies mentioned in the resolutions of the Board of
Directors." (Exhibit E).
Sometime in March, 1950, the President of the corporation, Sergio Osmeña,
Jr., addressed an inquiry to the Securities and Exchange Commission asking for
opinion regarding the validity of the donation of the proceeds of the insurance
policies to the Pirovano children. On June 20, 1950 that office rendered its
opinion holding that the donation was void because the corporation could not
dispose of its assets by gift and therefore the corporation acted beyond the
scope of its corporate powers. This opinion was submitted to the Board of
Directors at its meeting on July 12, 1950, on which occasion the president
recommended that other legal ways be studied whereby the donation could be
carried out. On September 14, 1950, another meeting was held to discuss the
propriety of the donation. At this meeting the president expressed the view
that, since the corporation was not authorized by its charter to make the
donation to the Pirovano children and the majority of the stockholders was in
favor of making provision for said children, the manner he believed this could
be done would be to declare a cash dividend in favor of the stockholders in the
exact amount of the insurance proceeds and thereafter have the stockholders
make the donation to the children in their individual capacity. Notwithstanding
this proposal of the president, the board took no action on the matter, and on
March 8, 1951, at a stockholders’ meeting convened on that date, the majority
of the stockholders voted to revoke the resolution approving the donation to
the Pirovano children. The pertinent portion of the resolution reads as
follows:
jgc:c hanrobles. com.ph
"Be it resolved, as it is hereby resolved, that in view of the failure of
compliance with the above conditions to which the above donation was made
subject, and in view of the opinion of the Securities & Exchange Commissioner,
the stockholders revoke, rescind and annul, as they do hereby revoke, rescind
and annul, its ratification and approval on September 13, 1949 of the
aforementioned resolution of the Board of Directors of January 6, 1947, as
amended on June 24, 1947." (Exhibit T)
In view of the resolution declaring that the corporation failed to comply with
the condition set for the effectivity of the donation and revoking at the same
time the approval given to it by the corporation, and considering that the
corporation can no longer set aside said donation because it had long been
perfected and consummated, the minor children of the late Enrico Pirovano,
represented by their mother and guardian, Estefania R. de Pirovano, demanded
the payment of the credit due them as of December 31, 1951, amounting to
P564,980.89, and this payment having been refused, they instituted the
present action in the Court of First Instance of Rizal wherein they prayed that
they be granted an alternative relief of the following tenor: (1) sentencing
defendant to pay to the plaintiff the sum of P564,980.89 as of December 31,
1951, with the corresponding interest thereon; (2) as an alternative relief,
sentencing defendant to pay to the plaintiffs the interests on said sum of
P564,980.89 at the rate of 5 per cent per annum, and the sum of P564,980.89
after the redemption of the preferred shares of the corporation held by the
National Development Company; and (3) in any event, sentencing defendant
to pay the plaintiffs damages in the amount of not less than 20 per cent of the
sum that may be adjudged to the plaintiffs, and the costs of action.
The only issues which in the opinion of the court need to be determined in
order to reach a decision in this appeal are: (1) Is the grant of the proceeds of
the insurance policies taken on the life of the late Enrico Pirovano as embodied
in the resolution of the Board of Directors of defendant corporation adopted on
January 6, 1947 and June 24, 1947 a remunerative donation as found by the
lower court?; (2) In the affirmative case, has that donation been perfected
before its rescission or nullification by the stockholders of the corporation on
March 8, 1951?; (3) Can defendant corporation give by way of donation the
proceeds of said insurance policies to the minor children of the late Enrico
Pirovano under the law or its articles of incorporation, or is that donation an
ultra vires act?; and (4) has the defendant corporation, by the acts it
performed subsequent to the granting of the donation, deliberately prevented
the fulfillment of the condition precedent to the payment of said donation such
that it can be said it has forfeited its right to demand its fulfillment and has
made the donation entirely due and demandable?
We will discuss these issues separately.
1. To determine the nature of the grant made by the defendant corporation to
the minor children of the late Enrico Pirovano, we do not need to go far nor dig
into the voluminous record that lies at the bottom of this case. We do not even
need to inquire into the interest which has allegedly been shown by President
Roxas in the welfare of the children of his good friend Enrico Pirovano. Whether
President Roxas has taken the initiative in the move to give something to said
children which later culminated in the donation now in dispute, is of no
moment for the fact is that, from the mass of evidence on hand, such a
donation has been given the full indorsement and encouraging support by Don
Esteban de la Rama who was practically the owner of the corporation. We only
need to fall back to accomplish this purpose on the several resolutions of the
Board of Directors of the corporation containing said grant for they clearly
state the reasons and purposes why the donation has been given.
Before we proceed further, it is convenient to state here in passing that, before
the Board of Directors had approved its resolution of January 6, 1947, as later
amended by another resolution adopted on June 24, 1947, the corporation had
already decided to give to the minor children of the late Enrico Pirovano the
sum of P400,000 out of the proceeds of the insurance policies taken on his life
in the form of shares, and that when this form was considered objectionable
because its result and effect would be to give to said children a much greater
amount considering the value then of the stock of the corporation, the Board of
Directors decided to amend the donation in the form and under the terms
stated in the aforesaid resolutions. Thus, in the original resolution approved by
the Board of Directors on July 10, 1946, wherein the reasons for granting the
donation to the minor children of the late Enrico Pirovano were clearly
expressed, we find out the following revealing statements: chanro b1es vi rt ual 1aw li bra ry
‘Whereas, the late Enrico Pirovano, President and General Manager of the De la
Rama Steamship Company, died in Manila sometime in November, 1944;
‘Whereas, the said Enrico Pirovano was largely responsible for the rapid and
very successful development of the activities of this company;
‘Whereas, early in 1941 this company insured the life of said Enrico Pirovano in
various Philippine and American Life Insurance companies for the total sum of
P1,000,000;
‘Whereas, the said Enrico Pirovano is survived by his widow, Estefania Pirovano
and 4 minor children, to wit: Esteban, Maria Carla, Enrico and John Albert, all
surnamed Pirovano;
‘Whereas, the said Enrico Pirovano left practically nothing to his heirs and it is
but fit and proper that this company which owes so much to the deceased
should make some provision for his children;
‘Whereas, this company paid premiums on Mr. Pirovano’s life insurance policies
for a period of only 4 years so that it will receive from the insurance companies
sums of money greatly in excess of the premiums paid by the company,’
Again, in the resolution approved by the Board of Directors on January 6,
1947, we also find the following expressive statements which are but a
reiteration of those already expressed in the original resolution: chan rob 1es vi rtual 1aw lib rary
‘Whereas, the late Enrico Pirovano, President and General Manager of the De la
Rama Steamship Co., Inc., died in Manila sometime during the latter part of
the year 1944;
‘Whereas, the said Enrico Pirovano was to a large extent responsible for the
rapid and very successful development and expansion of the activities of this
company;
‘Whereas, early in 1941, the life of the said Enrico Pirovano was insured in
various life insurance companies, to wit: . . .
‘Whereas, the said Enrico Pirovano is survived by 4 minor children, to wit:
Esteban, Maria Carla, Enrico and John Albert, all surnamed Pirovano; and
‘Whereas, the said Enrico Pirovano left practically nothing to his heirs and it is
but fit and proper that this Company which owes so much to the deceased
should make some provision for his children;
‘Be it resolved, that out of gratitude to the late Enrico Pirovano this Company
renounce as it hereby renounces, . . ." cralaw virtua 1aw lib rary
From the above it clearly appears that the corporation thought of giving the
donation to the children of the late Enrico Pirovano because he "was to a large
extent responsible for the rapid and very successful development and
expansion of the activities of this company" ; and also because he "left
practically nothing to his heirs and it is but fit and proper that this company
which owes so much to the deceased should make some provision to his
children", and so the donation was given "out of gratitude to the late Enrico
Pirovano." We do not need to stretch our imagination to see that a grant or
donation given under these circumstances is remunerative in nature in
contemplation of law.
"That which is made to a person in consideration of his merits or for services
rendered to the donor, provided they do not constitute recoverable debts, or
that in which a burden less than the value of the thing given is imposed upon
the donee, is also a donation." (Art. 619, old Civil Code.) .
"In donations made to a person for services rendered to the donor, the donor’s
will is moved by acts which directly benefit him. The motivating cause is
gratitude, acknowledgement of a favor, a desire to compensate. A donation
made to one who saved the donor’s life, or a lawyer who renounced his fees for
services rendered to the donor, would fall under this class of donations. These
donations are called remunerative donations." (Sinco & Capistrano, The Civil
Code, Vol. 1, p. 676; Manresa, 5th ed., pp. 72-73.)
2. The next question to be determined is whether the donation has been
perfected such that the corporation can no longer rescind it even if it wanted
to. The answer to this question cannot but be in the affirmative considering
that the same has not only been granted in several resolutions duly adopted by
the Board of Directors but it has been formally ratified by the stockholders of
the defendant corporation, and in all these corporate acts the concurrence of
the representatives of the National Development Company, the only creditor
whose interest may be affected by the donation, has been expressly given. The
corporation has even gone further. It actually transferred the ownership of the
credit subject of donation to the Pirovano children with the express
understanding that the money would be retained by the corporation subject to
the condition that the latter would pay interest thereon at the rate of 5 per
cent per annum payable whenever said corporation may be in a financial
position to do so. Thus, the following acts of the corporation as reflected from
the evidence bear this out:chan rob1e s vi rtual 1aw lib rary
(a) The donation was embodied in a resolution duly approved by the Board of
Directors on January 6, 1947. In this resolution, the representatives of the
National Development Company, have given their concurrence. This is the only
creditor which can be considered as being adversely affected by the donation.
The resolution of June 24, 1947 did not modify the substance of the former
resolution for it merely provided that, instead of the interest on the loan being
payable, together with the principal, only after the corporation had first settled
in full its bonded indebtedness, said interest would be paid "whenever the
company is in a position to meet said obligation.
"(b) The resolution of January 6, 1947 was actually carried out when the
company and Mrs. Estefania R. Pirovano executed a memorandum agreement
stating therein that the proceeds of the insurance policies would be entered in
the books of the corporation as a loan which would bear an interest at the rate
of 5 per cent per annum, and said agreement was signed by Mrs. Pirovano as
judicial guardian of her children after she had been expressly authorized by the
court to accept the donation in behalf of her children.
(c) While the donation can be considered as duly executed by the execution of
the document stated in the preceding paragraph, and by the entry in the books
of the corporation of the donation as a loan, a further record of said execution
was made when Mrs. Pirovano executed a public document on February 26,
1948 making a similar acceptance of the donation. And this acceptance was
officially recorded by the corporation when on the same date its Board of
Directors approved a resolution taking "official notice" of said acceptance.
(d) On July 25, 1949, the Board of Directors approved the proposal of Mrs.
Pirovano to buy the house at New Rochelle, New York, owned by a subsidiary
of the corporation at the cost of $75,000 which would be paid from the sum
held in trust belonging to her minor children. And this agreement was actually
carried out in a document signed by the general manager of the corporation
and by Mrs. Pirovano, who acted on the matter with the express authority of
the court.
(e) And on September 30, 1949, or two years and 3 months after the donation
had been executed, the stockholders of the defendant corporation formally
ratified and gave approval to the donation as embodied in the resolutions
above referred to, subject to certain modifications which did not materially
affect the nature of the donation.
There can therefore be no doubt from the foregoing relation of facts that the
donation was a corporate act carried out by the corporation not only with the
sanction of its Board of Directors but also of its stockholders. It is evident that
the donation has reached the stage of perfection which is valid and binding
upon the corporation and as such cannot be rescinded unless there exist legal
grounds for doing so. In this case, we see none. The two reasons given for the
rescission of said donation in the resolution of the corporation adopted on
March 8, 1951, to wit: that the corporation failed to comply with the conditions
to which the above donation was made subject, and that in the opinion of the
Securities and Exchange Commission said donation is ultra vires, are not, in
our opinion, valid and legal as to justify the rescission of a perfected donation.
These reasons, as we will discuss in the latter part of this decision, cannot be
invoked by the corporation to rescind or set at naught the donation, and the
only way by which this can be done is to show that the donee has been in
default, or that the donation has not been validly executed, or is illegal or ultra
vires, and such is not the case as we will see hereafter. We therefore declare
that the resolution approved by the stockholders of the defendant corporation
on March 8, 1951 did not and cannot have the effect of nullifying the donation
in question.
3. The third question to be determined is: Can defendant corporation give by
way of donation the proceeds of said insurance policies to the minor children of
the late Enrico Pirovano under the law or its articles of incorporation, or is that
donation an ultra vires act? To answer this question it is important for us to
examine the articles of incorporation of the De la Rama company to see if the
act or donation is outside of their scope. Paragraph second of said articles
provides:jg c:chan roble s.com.p h
"Second. — The purposes for which said corporation is formed are: chan rob 1es vi rtual 1aw lib rary
(a) To purchase, charter, hire, build, or otherwise acquire steam or other ships
or vessels, together with equipments and furniture therefor, and to employ the
same in conveyance and carriage of goods, wares and merchandise of every
description, and of passengers upon the high seas.
(b) To sell, let, charter, or otherwise dispose of the said vessels or other
property of the company.
(c) To carry on the business of carriers by water.
(d) To carry on the business of shipowners in all of its branches.
(e) To purchase or take on lease, lands, wharves, stores, lighters, barges and
other things which the company may deem necessary or advisable to be
purchased or leased for the necessary and proper purposes of the business of
the company, and from time to time to sell and dispose of the same.
(f) To promote any company or companies for the purposes of acquiring all or
any of the property or liabilities of this company, or both, or for any other
purpose which may seem directly or indirectly calculated to benefit the
company.
(g) To invest and deal with the moneys of the company not immediately
required, in such manner as from time to time may be determined.
(h) To borrow, or raise, or secure the payment of money in such manner as
the company shall think fit.
(i) Generally, to do all such other things and to transact all business as may be
directly or indirectly incidental or conducive to the attainment of the above
object, or any of them respectively.
(j) Without in any particular limiting or restricting any of the objects and
powers of the corporation, it is hereby expressly declared and provided that
the corporation shall have power to issue bonds and other obligations, to
mortgage or pledge any stocks, bonds or other obligations or any property
which may be acquired by said corporation; to secure any bonds, guarantees
or other obligations by it issued or incurred; to lend money or credit to and to
aid in any other manner any person, association, or corporation of which any
obligation or in which any interest is held by the corporation or in the affairs or
prosperity of which this corporation has a lawful interest, and to do such acts
and things as may be necessary to protect, preserve, improve, or enhance the
value of any such obligation or interest; and, in general, to do such other acts
in connection with the purposes for which this corporation has been formed
which is calculated to promote the interest of the corporation or to enhance the
value of its property and to exercise all the rights, powers and privileges which
are now or may hereafter be conferred by the laws of the Philippines upon
corporations formed under the Philippine Corporation Act; to execute from time
to time general or special powers of attorney to persons, firms, associations or
corporations either in the Philippines, in the United States, or in any other
country and to revoke the same as and when the Directors may determine and
to do any and or all of the things hereinafter set forth and to the same extent
as natural persons might or could do." cralaw virtua1aw l ibra ry
After a careful perusal of the provisions above quoted we find that the
corporation was given broad and almost unlimited powers to carry out the
purposes for which it was organized among them, (1) "To invest and deal with
the moneys of the company not immediately required, in such manner as from
time to time may be determined" and, (2) "to aid in any other manner any
person, association, or corporation of which any obligation or in which any
interest is held by this corporation or in the affairs or prosperity of which this
corporation has a lawful interest." The world deal is broad enough to include
any manner of disposition, and refers to moneys not immediately required by
the corporation, and such disposition may be made in such manner as from
time to time may be determined by the corporations. The donation in question
undoubtedly comes within the scope of this broad power for it is a fact
appearing in the evidence that the insurance proceeds were not immediately
required when they were given away. In fact, the evidence shows that the
corporation declared a 100 per cent cash dividend, or P2,000,000, and later on
another 30 per cent cash dividend. This is clear proof of the solvency of the
corporation. It may be that, as insinuated, Don Esteban wanted to make use of
the insurance money to rehabilitate the central owned by a sister corporation,
known as Hijos de I. de la Rama & Co., Inc., situated in Bago, Negros
Occidental, but this, far from reflecting against the solvency of the De la Rama
company, only shows that the funds were not needed by the corporation.
Under the second broad power we have above stated, that is, to aid in any
other manner any person in the affairs and prosperity of whom the corporation
has a lawful interest, the record of this case is replete with instances which
clearly show that the corporation knew well its scope and meaning so much so
that, with the exception of the instant case, no one has lifted a finger to
dispute their validity. Thus, under this broad grant of power, this corporation
paid to the heirs of one Florentino Nonato, an engineer of one of the ships of
the company who died in Japan, a gratuity of P7,000, equivalent to one month
salary for each year of service. It also gave to Ramon Pons, a captain of one of
its ships, a retirement gratuity equivalent to one month salary for every year of
service, the same to be based upon his highest salary. And it contributed
P2,000 to the fund raised by the Associated Steamship Lines for the widow of
the late Francis Gispert, secretary of said Association, of which the De la Rama
Steamship Co., Inc., was a member along with about 30 other steamship
companies. In this instance, Gispert was not even an employee of the
corporation. And invoking this vast power, the corporation even went to the
extent of contributing P100,000 to the Liberal Party campaign funds,
apparently in the hope that by conserving its cordial relations with that party it
might continue to retain the patronage of the administration. All these acts
executed before and after the donation in question have never been questioned
and were willingly and actually carried out.
We don’t see much distinction between these acts of generosity or of
benevolence extended to some employees of the corporation, and even to
some in whom the corporation was merely interested because of certain moral
or political considerations, and the donation which the corporation has seen fit
to give to the children of the late Enrico Pirovano from the point of view of the
power of the corporation as expressed in its articles of incorporation. And if the
former had been sanctioned and had been considered valid and ultra vires, we
see no plausible reason why the latter should now be deemed ultra vires. It
may perhaps be argued that the donation given to the children of the late
Enrico Pirovano is so large and disproportionate that it can hardly be
considered a pension or gratuity that can be placed on a par with the instances
above mentioned, but this argument overlooks one consideration: the gratuity
here given was not merely motivated by pure liberality or act of generosity, but
by a deep sense of recognition of the valuable services rendered by the late
Enrico Pirovano which had immensely contributed to the growth of the
corporation to the extent that from its humble capitalization it blossomed into a
multi-million corporation that it is today. In the words of the very resolutions
granting the donation or gratuity, said donation was given not only because
the company was so indebted to him that it saw fit and proper to make
provisions for his children, but it did so out of a sense of gratitude. Another
factor that we should bear in mind is that Enrico Pirovano was not only a high
official of the company but was at the same time a member of the De la Rama
family, and the recipient of the donation are the grandchildren of Don Esteban
de la Rama. This, we may say, is the motivating root cause behind the grant of
this bounty.
It may be contended that a donation is different from a gratuity. While
technically this may be so in substance they are the same. They are even
similar to a pension. Thus, it was said that "A pension is a gratuity only when it
is granted for services previously rendered, and which at the time they were
rendered gave rise to no legal obligation." (Words & Phrases, Permanent
Edition, p. 675: O’Dea v. Cook, 169 Pac., 306, 176 Cal., 659.) or stated in
another way, a "Gratuity is a mere bounty given by the Government in
consideration or recognition of meritorious services and springs from the
appreciation and graciousness of the Government", (Ilagan v. Ilaya, G.R. No.
33507, Dec. 20, 1930) or "A gratuity is something given freely, or without
recompense, a gift, something voluntarily given in return for a favor or
services; a bounty; a tip." Wood Mercantile Co. v. Cole, 209 S.W. 2d. 290;
Mendoza v. Dizon, 77 Phil., 533, 43 Off. Gaz. p. 4633. We do not see much
difference between this definition of gratuity and a remunerative donation
contemplated in the Civil Code. In essence they are the same. Such being the
case, it may be said that this donation is gratuity in a large sense for it was
given for valuable services rendered, and in this sense the same cannot be
considered an ultra vires act in the light of the following authorities:
jgc:chan rob les.com. ph
"Indeed, some American cases seem to hold that the giving of a pure gratuity
to directors is ultra vires of the corporation, so that it could not be legalized
even by the approval of the shareholders; but this position has no sound
reason to support it, and is opposed to the weight of authority (Suffaker v.
Krieger’s Assignee, 53 S.W. Rep. 288; 107 Ky. 200; 46 L.R.A. 384)." cralaw virtua1aw lib rary
"But although business corporations cannot contribute to charity or
benevolence, yet they are not required always to insist on the full extent of
their legal rights. They are not forbidden from recognizing moral obligations of
which strict law takes no cognizance. They are not prohibited from establishing
a reputation for broad, liberal, equitable dealing which may stand them in good
stead in competition with less fair rivals. Thus, an incorporated fire insurance
company whose policies except losses from explosions may nevertheless pay a
loss from that cause when other companies are accustomed to do so, such
liberal dealing being deemed conducive to the prosperity of the corporation."
(Modern Law of Corporations, Machen, Vol. 1, p. 81)
"So, a bank may grant a five years’ pension to the family of one of its officers.
In all cases of these sorts, the amount of the gratuity rests entirely within the
discretion of the company, unless indeed it be altogether out of reason and
fitness. But where the company has ceased to be a going concern, this power
to make gifts or presents is at an end." (Modern Law of Corporations, Machen,
Vol. 1, p. 82.)
"Payment of Gratuities out of Capital. — There seems on principle no reason to
doubt that gifts or gratuities wherever they are lawful may be paid out of
capital as well as out of profits." (Modern Law of Corporations, Machen, Vol. 1,
p. 38.)
"Whether desirable to supplement implied powers of this kind by express
provisions. — Enough has been said to show that the implied powers of a
corporation to give gratuities to its servants and officers, as well as to
strangers, are ample, so that there is therefore no need to supplement them
by express provisions." (Modern law of Corporations, Machen, Vol. 1, p. 83.) 1
Granting arguendo that the donation given to the Pirovano children is outside
the scope of the powers of the defendant corporation, or the scope of the
powers that it may exercise under the law, or it is an ultra vires act, still it may
be said that the same cannot be invalidated, or declared legally ineffective for
that reason alone, it appearing that the donation represents not only the act of
the Board of Directors but of the stockholders themselves as shown by the fact
that the same has been expressly ratified in a resolution duly approved by the
latter. By this ratification, the infirmity of the corporate act, if any has been
obliterated thereby making the act perfectly valid and enforceable. This is
specially so if the donation is not merely executory but executed and
consummated and no creditors are prejudiced, or if there are creditors
affected, the later have expressly given their conformity.
In making this pronouncement, advertence should be made of the nature of
the ultra vires act that is in question. A little digression needs be made on this
matter to show the different legal effects that may result consequent upon the
performance of a particular ultra vires act on the part of the corporation. Many
authorities may be cited interpreting or defining the meaning, extent, and
scope of an ultra vires act, but all of them are uniform and unanimous that the
same may be either an act performed merely outside the scope of the powers
granted to it by its articles of incorporation, or one which is contrary to law or
violative of any principle which would void any contract whether done
individually or collectively. In other words, a distinction should be made
between corporate acts or contracts which are illegal and those which are
merely ultra vires. The former contemplates the doing of an act which is
contrary to law, morals, or public order, or contravene some rules of public
policy or public duty, and are, like similar transactions between individuals,
void. They cannot serve as basis of a court action, nor acquire validity by
performance, ratification, or estoppel. Mere ultra vires acts, on the other hand,
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.
"Strictly speaking, an ultra vires act is one outside the scope of the powers
conferred by the legislature, and although the term has been used
indiscriminately, it is properly distinguishable from acts which are illegal, in
excess or abuse of power, or executed in an unauthorized manner, or acts
within corporate powers but outside the authority of particular officers or
agents" (19 C.J.S. 419).
"Corporate transactions which are illegal because prohibited by statute or
against public policy are ordinarily void and unenforceable regardless of
performance, ratification, or estoppel; but general prohibitions against
exceeding corporate powers and prohibitions intended to protect a particular
class or specifying the consequences of violation may not preclude
enforcement of the transaction and an action may be had for the part
uneffected by the illegality or for equitable restitution." (19 C.J.S. 421.)
"Generally, a transaction within corporate powers but executed in an irregular
or unauthorized manner is voidable only, and may become enforceable by
reason of ratification or express or implied assent by the stockholders or by
reason of estoppel of the corporation or the other party to the transaction to
raise the objection, particularly where the benefits are retained.
"As appears in paragraphs 960-964 supra, the general rule is that a
corporation must act in the manner and with the formalities, if any, prescribed
by its charter or by the general law. However, a corporation transaction or
contract which is within the corporation powers, which is neither wrong in itself
nor against public policy, but which is defective from a failure to observe in its
execution a requirement of law enacted for the benefit or protection of a
certain class, is voidable only and is valid until avoided, not void until
validated; the parties for whose benefit the requirement was enacted may
ratify it or be estopped to assert its invalidity, and third persons acting in good
faith are not usually affected by an irregularity on the part of the corporation in
the exercise of its granted Powers." (19 C.J.S., 423-24.)
It is true that there are authorities which hold that ultra vires acts, or those
performed beyond the powers conferred upon the corporation either by law or
by its articles of incorporation, are not only voidable, but wholly void and of no
legal effect, and that such acts cannot be validated by ratification or be the
basis of any action in court; but such ruling does not constitute the weight of
authority, the reason being that they fail to make the important distinction we
have above adverted to. Because of the failure to consider such important
distinction, such rule has been rejected by most of the state courts and even
by the modern treatises on corporations (7 Fletcher, Cyc. Corps., 563-564).
And now it can be said that the majority of the cases hold that acts which are
merely ultra vires, or acts which are not illegal, may be ratified by the
stockholders of a corporation (Brooklyn Heights R. Co. v. Brooklyn City R. Co.,
135 N. Y. Supp. 1001).
"Strictly speaking, an act of a corporation outside of its charter powers is just
as such ultra vires where all the stockholders consent thereto as in a case
where none of the stockholders expressly or impliedly consent, and it is
generally held that an ultra vires act cannot be ratified so as to make it valid,
even though all the stockholders consent thereto; but inasmuch as the
stockholders in reality constitute the corporation, it should, it would seem, be
estopped to allege ultra vires, and it is generally so held where there are no
creditors, or the creditors are not injured thereby, and where the rights of the
state or the public are not involved, unless the act is not only ultra vires but in
addition illegal and void. Of course, such consent of all the stockholders cannot
adversely affect creditors of the corporation nor preclude a proper attack by
the state because of such ultra vires act." (7 Fletcher Corp., Sec. 3432, p.
585).
Since it is not contended that the donation under consideration is illegal, or
contrary to any of the express provisions of the articles of incorporation, nor
prejudicial to the creditors of the defendant corporation, we cannot but
logically conclude, on the strength of the authorities we have quoted above,
that said donation, even if ultra vires in the supposition we have adverted to, is
not void, and if voidable its infirmity has been cured by ratification and
subsequent acts of the defendant corporation. The defendant corporation,
therefore, is now prevented or estopped from contesting the validity of the
donation. This is specially so in this case when the very directors who
conceived the idea of granting said donation are practically the stockholders
themselves, with few nominal exception. This applies to the new stockholder
Jose Cojuangco who acquired his interest after the donation has been made
because of the rule that a "purchaser of shares of stock cannot avoid ultra
vires acts of the corporation authorized by its vendor, except those done after
the purchase" (7 Fletcher, Cyc. Corps section 3456, p. 603: Pascual v. Del Saz
Orozco, 19 Phil., 82.) Indeed, how can the stockholders now pretend to revoke
the donation which has been partly consummated? How can the corporation
now set at naught the transfer made to Mrs. Pirovano of the property in New
York, U.S.A., the price of which was paid by her but of the proceeds of the
insurance policies given as a donation. To allow the corporation to undo what it
has done would not only be most unfair but would contravene the well-settled
doctrine that the defense of ultra vires cannot be set up or availed of in
completed transactions (7 Fletcher, Cyc. Corps. Section 3497, p, 652; 19
C.J.S., 431).
4. We now come to the fourth and last question that the defendant
corporation, by the acts it has performed subsequent to the granting of the
donation, deliberately prevented the fulfillment of the condition precedent to
the payment of said donation such that it can be said it has forfeited its right to
demand its fulfillment and has made the donation entirely due and
demandable.
It should be recalled that the original resolution of the Board of Directors
adopted on July 10, 1946 which provided for the donation of P400,000 out of
the proceeds which the De la Rama company would collect on the insurance
policies taken on the life of the late Enrico Pirovano was, as already stated
above, amended on January 6, 1947 to include, among the conditions therein
provided, that the corporation shall proceed to pay said amount, as well as the
interest due thereon, after it shall have settled in full the balance of its bonded
indebtedness in the sum of P5,000,000. It should also be recalled that on
September 13, 1949, or more than 2 years after the last amendment referred
to above, the stockholders adopted another resolution whereby they formally
ratified said donation but subject to the following clarifications: (1) that the
amount of the donation shall not be effected until such time as the company
shall have first duly liquidated its present bonded indebtedness in the amount
of P3,260,855.77 to the National Development Company, or shall have first
fully redeemed the preferred shares of stock in the amount to be issued to said
company in lieu thereof, and (2) that any and all taxes, legal fees, and
expenses connected with the transaction shall be chargeable from the proceeds
of said insurance policies.
The trial court, in considering these conditions in the light of the acts
subsequently performed by the corporation in connection with the proceeds of
the insurance policies, considered said conditions null and void, or at most not
written because in its opinion their non-fulfillment was due to a deliberate
desistance of the corporation and not to lack of funds to redeem the preferred
shares of the National Development Company. The conclusions arrived at by
the trial court on this point are as follows:jgc:chan roble s.com.p h
"Fourth. — That the condition mentioned in the donation is null and void
because it depends on the exclusive will of the donor, in accordance with the
provision of Article 1115 of the Old Civil Code.
"Fifth. — That if the condition is valid, its nonfulfillment is due to the desistance
of the defendant company from obeying and doing the wishes and mandate of
the majority of the stockholders.
"Sixth. — That the non-payment of the debt in favor of the National
Development Company is not due to the lack of funds, nor to lack of authority,
but to the desire of the President of the corporation to preserve and continue
the Government participation in the company." cralaw virt ua1aw lib rary
To this views of the trial court, we fail to agree. There are many factors we can
consider why the failure to immediately redeem the preferred shares issued to
the National Development Company as desired by the minor children of the
late Enrico Pirovano cannot or should not be attributed to a mere desire on the
part of the corporation to delay the redemption, or to prejudice the interest of
the minors, but rather to protect the interest of the corporation itself. One of
them is the text of the very resolution approved by the National Development
Company on February 18, 1949 which prescribed the terms and conditions
under which it expressed its conformity to the conversion of the bonded
indebtedness into preferred shares of stock. The text of the resolution above
mentioned reads: jgc:cha nrob les.co m.ph
"Resolved: That the outstanding bonded indebtedness of the De la Rama
Steamship Co., Inc., in the approximate amount of P3,260,855.77 be
converted into non-voting preferred shares of stock of said company, said
shares to bear a fixed dividend of 6 percent per annum which shall be
cumulative and redeemable within 15 years. Said shares shall be preferred as
to assets in the event of liquidation or dissolution of said Company but shall be
non-participating."cralaw virtua1aw l ibra ry
It is plain from the text of the above resolution that the defendant corporation
had 15 years from February 18, 1949, or until 1964, within which to effect the
redemption of the preferred shares issued to the National Development
Company. This condition cannot but be binding and obligatory upon the
donees, if they desire to maintain the validity of the donation, for it is not only
the basis upon which the stockholders of the defendant corporation expressed
their willingness to ratify the donation, but it is also the way by which its
creditor, the National Development Company, would want it to be. If the
defendant corporation is given 15 years within which to redeem the preferred
shares, and that period would expire in 1964, one cannot blame the
corporation for availing itself of this period if in its opinion it would redound to
its best interest. It cannot therefore be said that the fulfillment of the condition
for the payment of the donation is one that wholly depends on the exclusive
will of the donor, as the lower court has concluded, simply because it failed to
meet the redemption of said shares in the manner desired by the donees.
While it may be admitted that because of the disposition of the assets of the
corporation upon the suggestion of its general manager more than enough
funds had been raised to effect the immediate redemption of the above shares,
it is not correct to say that the management has completely failed in its duty to
pay its obligations for, according to the evidence, a substantial portion of the
indebtedness has been paid and only a balance of about P1,805,169.98 was
outstanding when the stockholders of the corporation decided to revoke or
cancel the donation. (Exhibit P).
But there are other good reasons why all the available funds have not been
actually applied to the redemption of the preferred shares, one of them being
the "desire of the president of the corporation to preserve and continue the
government participation in the company" which even the lower court found it
to be meritorious, which is one way by which it could continue receiving the
patronage and protection of the government. Another reason is that the
redemption of the shares does not depend on the will of the corporation alone
but to a great extent on the will of a third party, the National Development
Company. In fact, as the evidence shows, this Company had pledged these
shares to the Philippine National Bank and the Rehabilitation Finance
Corporation as a security to obtain certain loans to finance the purchase of
certain ships to be built for the use of the company under a management
contract entered into between the corporation and the National Development
Company, and this was what prevented the corporation from carrying out its
offer to pay the sum of P1,956,513.07 on April 5, 1951. Had this offer been
accepted, or favorably acted upon by the National Development Company, the
indebtedness would have been practically liquidated, leaving outstanding only
one certificate worth P217,390.45. Of course, the corporation could have
insisted in redeeming the shares if it wanted to even to the extent of taking a
court action if necessary to force its creditor to relinguish the shares that may
be necessary to accomplish the redemption, but such would be a drastic step
which would have not been advisable considering the policy right along
maintained by the corporation to preserve its cordial and smooth relation with
the government. At any rate, whether such attitude be considered as a mere
excuse to justify the delay in effecting the redemption of the shares, or a mere
desire on the part of the corporation to retain in its possession more funds
available to attend to other pressing need as demanded by the interest of the
corporation, we fail to see in such an attitude an improper motive to
circumvent the early realization of the desire of the minors to obtain the
immediate payment of the donation which was made dependent upon the
redemption of said shares there being no clear evidence that may justify such
design. Anyway, a great portion of the funds went to the stockholders
themselves by way of dividends to offset, so it appears, the huge advances
that the corporation had made to them which were entered in the books of the
corporation as loans and, therefore, they were invested for their own benefit.
As General Manager Osmeña said, "we were first confronted with the problem
of the withdrawals of the family which had to be repaid back to the National
Development Company and one of the most practical solutions to that was to
declare dividends and reduce the amounts of their withdrawals", which then
totalled about P3,000,000.
All things considered, we are of the opinion that the finding of the lower court
that the failure of the defendant corporation to comply with the condition of the
donation is merely due to its desistance from obeying the mandate of the
majority of the stockholders and not to lack of funds, or to lack of authority,
has no foundation in law or in fact, and, therefore, its conclusion that because
of such desistance that condition should be deemed as fulfilled and the
payment of the donation due and demandable, is not justified. In this respect,
the decision of the lower court should be reversed.
Having reached the foregoing conclusion, we deem it unnecessary to discuss
the other issues raised by the parties in their briefs.
The lower court adjudicated to plaintiffs an additional amount equivalent to 20
per cent of the amount claimed as damages by way of attorney’s fees, and in
our opinion, this award can be justified under Article 2208, paragraph 2, of the
new Civil Code, which provides: "When the defendant’s act or omission has
compelled the plaintiff to litigate with third persons or to incur expenses to
protect his interest", attorney’s fees may be awarded as damages. However,
the majority believes that this award should be reduced to 10 per cent.
Wherefore, the decision appealed from should be modified as follows: (a) that
the donation made in favor of the children of the late Enrico Pirovano of the
proceeds of the insurance policies taken on his life is valid and binding on the
defendant corporation, (b) that said donation, which amounts to a total of
P583,813.59, including interest, as it appears in the books of the corporation
as of August 31, 1951, plus interest thereon at the rate of 5 per cent per
annum from the filing of the complaint, should be paid to the plaintiffs after the
defendant corporation shall have fully redeemed the preferred shares issued to
the National Development Company under the terms and conditions stated in
the resolutions of the Board of Directors of January 6, 1947 and June 24, 1947,
as amended by the resolution of the stockholders adopted on September 13,
1949; and (c) defendant shall pay to plaintiffs an additional amount equivalent
to 10 per cent of said amount of P583,813.59 as damages by way of attorney’s
fees, and to pay the costs of action.
Paras, C.J., Pablo, Bengzon, Padilla, Montemayor, Jugo, Concepcion, and
Reyes, J.B.L., JJ., concur.
Reyes, A., concurs in the result.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-18062 February 28, 1963
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs.
ACOJE MINING COMPANY, INC., defendant-appellant.
Office of the Solicitor General for plaintiff-appellee.
Jalandoni & Jamir for defendant-appellant.
BAUTISTA ANGELO, J.:
On May 17, 1948, the Acoje Mining Company, Inc. wrote the Director of
Posts requesting the opening of a post, telegraph and money order
offices at its mining camp at Sta. Cruz, Zambales, to service its
employees and their families that were living in said camp. Acting on the
request, the Director of Posts wrote in reply stating that if aside from free
quarters the company would provide for all essential equipment and
assign a responsible employee to perform the duties of a postmaster
without compensation from his office until such time as funds therefor
may be available he would agree to put up the offices requested. The
company in turn replied signifying its willingness to comply with all the
requirements outlined in the letter of the Director of Posts requesting at
the same time that it be furnished with the necessary forms for the early
establishment of a post office branch.
On April 11, 1949, the Director of Posts again wrote a letter to the
company stating among other things that "In cases where a post office
will be opened under circumstances similar to the present, it is the policy
of this office to have the company assume direct responsibility for
whatever pecuniary loss may be suffered by the Bureau of Posts by
reason of any act of dishonesty, carelessness or negligence on the part
of the employee of the company who is assigned to take charge of the
post office," thereby suggesting that a resolution be adopted by the board
of directors of the company expressing conformity to the above condition
relative to the responsibility to be assumed buy it in the event a post
office branch is opened as requested. On September 2, 1949, the
company informed the Director of Posts of the passage by its board of
directors of a resolution of the following tenor: "That the requirement of
the Bureau of Posts that the Company should accept full responsibility for
all cash received by the Postmaster be complied with, and that a copy of
this resolution be forwarded to the Bureau of Posts." The letter further
states that the company feels that that resolution fulfills the last condition
imposed by the Director of Posts and that, therefore, it would request that
an inspector be sent to the camp for the purpose of acquainting the
postmaster with the details of the operation of the branch office.
The post office branch was opened at the camp on October 13, 1949 with
one Hilario M. Sanchez as postmaster. He is an employee of the
company. On May 11, 1954, the postmaster went on a three-day leave
but never returned. The company immediately informed the officials of
the Manila Post Office and the provincial auditor of Zambales of Sanchez'
disappearance with the result that the accounts of the postmaster were
checked and a shortage was found in the amount of P13,867.24.
The several demands made upon the company for the payment of the
shortage in line with the liability it has assumed having failed, the
government commenced the present action on September 10, 1954
before the Court of First Instance of Manila seeking to recover the
amount of Pl3,867.24. The company in its answer denied liability for said
amount contending that the resolution of the board of directors wherein it
assumed responsibility for the act of the postmaster is ultra vires, and in
any event its liability under said resolution is only that of a guarantor who
answers only after the exhaustion of the properties of the principal, aside
from the fact that the loss claimed by the plaintiff is not supported by the
office record.
Wherefore, the parties respectfully pray that the foregoing stipulation of
facts be admitted and approved by this Honorable Court, without
prejudice to the parties adducing other evidence to prove their case not
covered by this stipulation of facts.
1äw phï1.ñët
After trial, the court a quo found that, of the amount claimed by plaintiff
totalling P13,867.24, only the sum of P9,515.25 was supported by the
evidence, and so it rendered judgment for the plaintiff only for the amount
last mentioned. The court rejected the contention that the resolution
adopted by the company is ultra vires and that the obligation it has
assumed is merely that of a guarantor.
Defendant took the present appeal.
The contention that the resolution adopted by the company dated August
31, 1949 is ultra vires in the sense that it has no authority to act on a
matter which may render the company liable as a guarantor has no
factual or legal basis. In the first place, it should be noted that the
opening of a post office branch at the mining camp of appellant
corporation was undertaken because of a request submitted by it to
promote the convenience and benefit of its employees. The idea did not
come from the government, and the Director of Posts was prevailed upon
to agree to the request only after studying the necessity for its
establishment and after imposing upon the company certain
requirements intended to safeguard and protect the interest of the
government. Thus, after the company had signified its willingness to
comply with the requirement of the government that it furnish free
quarters and all the essential equipment that may be necessary for the
operation of the office including the assignment of an employee who will
perform the duties of a postmaster, the Director of Posts agreed to the
opening of the post office stating that "In cases where a post office will be
opened under circumstances similar to the present, it is the policy of this
office to have the company assume direct responsibility for whatever
pecuniary loss may be suffered by the Bureau of Posts by reason of any
act of dishonesty, carelessness or negligence on the part of the
employee of the company who is assigned to take charge of the post
office," and accepting this condition, the company, thru its board of
directors, adopted forthwith a resolution of the following tenor: "That the
requirement of the Bureau of Posts that the company should accept full
responsibility for all cash received by the Postmaster, be complied with,
and that a copy of this resolution be forwarded to the Bureau of Posts."
On the basis of the foregoing facts, it is evident that the company cannot
now be heard to complain that it is not liable for the irregularity committed
by its employee upon the technical plea that the resolution approved by
its board of directors is ultra vires. The least that can be said is that it
cannot now go back on its plighted word on the ground of estoppel.
The claim that the resolution adopted by the board of directors of
appellant company is an ultra vires act cannot also be entertained it
appearing that the same covers a subject which concerns the benefit,
convenience and welfare of its employees and their families. While as a
rule an ultra vires act is one committed outside the object for which a
corporation is created as defined by the law of its organization and
therefore beyond the powers conferred upon it by law (19 C.J.S., Section
965, p. 419), there are however certain corporate acts that may be
performed outside of the scope of the powers expressly conferred if they
are necessary to promote the interest or welfare of the corporation. Thus,
it has been held that "although not expressly authorized to do so a
corporation may become a surety where the particular transaction is
reasonably necessary or proper to the conduct of its business,"1 and here
it is undisputed that the establishment of the local post office is a
reasonable and proper adjunct to the conduct of the business of
appellant company. Indeed, such post office is a vital improvement in the
living condition of its employees and laborers who came to settle in its
mining camp which is far removed from the postal facilities or means of
communication accorded to people living in a city or municipality..
Even assuming arguendo that the resolution in question constitutes
an ultra vires act, the same however is not void for it was approved not in
contravention of law, customs, public order or public policy. The
term ultra vires should be distinguished from an illegal act for the former
is merely voidable which may be enforced by performance, ratification, or
estoppel, while the latter is void and cannot be validated.2 It being merely
voidable, an ultra vires act can be enforced or validated if there are
equitable grounds for taking such action. Here it is fair that the resolution
be upheld at least on the ground of estoppel. On this point, the authorities
are overwhelming:
The weight of authority in the state courts is to the effect that a
transaction which is merely ultra vires and not malum in
se or malum prohibitum, is, if performed by one party, not void as
between the parties to all intents and purposes, and that an
action may be brought directly on the transaction and relief had
according to its terms. (19 C.J.S., Section 976, p.
432, citing Nettles v. Rhett, C.C.A.S.C., 94 F. 2d, reversing, D.C.,
20 F. Supp. 48)
This rule is based on the consideration that as between private
corporations, one party cannot receive the benefits which are
embraced in total performance of a contract made with it by
another party and then set up the invalidity of the transaction as a
defense." (London & Lancashire Indemnity Co. of America v.
Fairbanks Steam Shovel Co., 147 N.E. 329, 332, 112 Ohio St.
136.)
The defense of ultra vires rests on violation of trust or duty toward
stockholders, and should not be entertained where its allowance
will do greater wrong to innocent parties dealing with corporation..
The acceptance of benefits arising from the performance by the
other party may give rise to an estoppel precluding repudiation of
the transaction. (19 C.J.S., Section 976, p. 433.)
The current of modern authorities favors the rule that where
the ultra vires transaction has been executed by the other party
and the corporation has received the benefit of it, the law
interposes an estoppel, and will not permit the validity of the
transaction or contract to be questioned, and this is especially
true where there is nothing in the circumstances to put the other
party to the transaction on notice that the corporation has
exceeded its powers in entering into it and has in so doing
overstepped the line of corporate privileges. (19 C.J.S., Section
977, pp. 435-437, citing Williams v. Peoples Building & Loan
Ass'n, 97 S.W. 2d 930, 193 Ark. 118; Hays v. Galion Gas Light
Co., 29 Ohio St. 330)
Neither can we entertain the claim of appellant that its liability is only that
of a guarantor. On this point, we agree with the following comment of the
court a quo: "A mere reading of the resolution of the Board of Directors
dated August 31, 1949, upon which the plaintiff based its claim would
show that the responsibility of the defendant company is not just that of a
guarantor. Notice that the phraseology and the terms employed are so
clear and sweeping and that the defendant assumed 'full responsibility for
all cash received by the Postmaster.' Here the responsibility of the
defendant is not just that of a guarantor. It is clearly that of a principal."
WHEREFORE, the decision appealed from is affirmed. No costs.
Bengzon, C.J., Padilla, Labrador, Concepcion, Reyes, J.B.L., Barrera,
Paredes, Dizon, Regala and Makalintal, JJ. concur.
Footnotes
1Thomson on Corporations, 3rd ed. Vol. 3, p. 973 citing Deming v.
Maas, 18 Cal. App. 330, 123 Pac. 204; Depot Realty Syndicate v.
Enterprise Brewing Co., 87 Ore. 560, 170 Pac. 294, 171 Pac.
223, L.R.A. 1918C, 1001.
19 C.J.S., Section 966, p. 422, citing Smith v. Baltimore and O.
2 Among the actions enumerated in the Annexes is Caltex (Phils.), Inc. v.
R. Co., D. C. Pa., 48 F. 2d 861, 870.
G.R. No. 150711 August 10, 2006
CALTEX (PHILIPPINES), INC., Petitioner,
vs.
PNOC SHIPPING AND TRANSPORT CORPORATION, Respondent.
DECISION
CARPIO, J.:
The Case
Before the Court is a petition for review1 assailing the 31 May 2001
Decision2 and 9 November 2001 Resolution3 of the Court of Appeals in
CA-G.R. CV No. 46097. The Court of Appeals reversed the 1 June 1994
Decision4 of the Regional Trial Court of Manila, Branch 51 ("trial court"),
and dismissed the complaint filed by Caltex (Philippines), Inc. ("Caltex")
against PNOC Shipping and Transport Corporation (PSTC).
The Antecedent Facts
On 6 July 1979, PSTC and Luzon Stevedoring Corporation
("LUSTEVECO") entered into an Agreement of Assumption of Obligations
("Agreement"). The Agreement provides that PSTC shall assume all the
obligations of LUSTEVECO with respect to the claims enumerated in
Annexes "A" and "B" ("Annexes") of the Agreement. The Agreement also
provides that PSTC shall control the conduct of any litigation pending or
which may be filed with respect to the claims in the Annexes. The
Agreement further provides that LUSTEVECO shall deliver to PSTC all
papers and records of the claims in the Annexes. Finally, the Agreement
provides that LUSTEVECO appoints and constitutes PSTC as its
attorney-in-fact to demand and receive any claim out of the countersuits
and counterclaims arising from the claims in the Annexes.
Luzon Stevedoring Corporation docketed as AC-G.R. CV No. 62613
which at that time was pending before the then Intermediate Appellate
Court (IAC). The case was an appeal from the Decision by the then Court
of First Instance of Manila (CFI) directing LUSTEVECO to pay
Caltex P103,659.44 with legal interest from the filing of the action until full
payment. In its 12 November 1985 Decision,5 the IAC affirmed with
modification the Decision of the CFI. The dispositive portion of the
Decision reads:
WHEREFORE, the decision appealed from is hereby MODIFIED and
judgment is rendered ordering the defendant [LUSTEVECO] to pay
plaintiff [Caltex]:
(a) P126,771.22 under the first cause of action, with legal interest until
fully paid;
(b) P103,659.44 under the second cause of action with legal interest until
fully paid;
(c) 10% of the sums due as and for attorney’s fees;
(d) costs of the suit.
SO ORDERED.6
The Decision of the IAC became final and executory.
The Regional Trial Court of Manila, Branch 12, issued a writ of execution
in favor of Caltex. However, the judgment was not satisfied because of
the prior foreclosure of LUSTEVECO’s properties. The Manila Bank
Intramuros Branch and the Traders Royal Bank Aduana Branch did not
respond to the notices of garnishment.
Caltex subsequently learned of the Agreement between PSTC and
LUSTEVECO. Caltex sent successive demands to PSTC asking for the
satisfaction of the judgment rendered by the CFI. PSTC requested for the
copy of the records of AC-G.R. CV No. 62613. Later, PSTC informed
Caltex that it was not a party to AC-G.R. CV No. 62613 and thus, PSTC
would not pay LUSTEVECO’s judgment debt. PSTC advised Caltex to
demand satisfaction of the judgment directly from LUSTEVECO.
Caltex continued to send several demand letters to PSTC. On 5 February
1992, Caltex filed a complaint for sum of money against PSTC. The case
was docketed as Civil Case No. 91-59512.
On 1 June 1994, the trial court rendered its Decision, the dispositive
portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered in
favor of the plaintiff, ordering defendant to pay plaintiff the sums due the
latter in the decision rendered by the Court of Appeals in CA-G.R. No.
62613, CALTEX vs. LUSTEVECO, or to pay plaintiff (Exhibit "C"):
(a) P126,771.22 under the first cause of action, with legal interest from
the date of the promulgation of the decision on November 12, 1985 until
fully paid;
(b) P103,659.44 under the second cause of action with legal interest from
the date of the promulgation of the decision on November 12, 1985 until
fully paid;
(c) 10% of the sums due as and for attorney’s fees; and
(d) Costs of suit.
SO ORDERED.7
PSTC appealed the trial court’s Decision.
The Ruling of the Court of Appeals
In its 31 May 2001 Decision, the Court of Appeals found the appeal
meritorious. The Court of Appeals ruled that Caltex has no personality to
sue PSTC. The Court of Appeals held that non-compliance with the
Agreement could only be questioned by the signatories to the contract,
namely, LUSTEVECO and PSTC. The Court of Appeals stated that
LUSTEVECO and PSTC are the only parties who can file an action to
enforce the Agreement. The Court of Appeals considered fatal the
omission of LUSTEVECO, the real party in interest, as a party defendant
in the case. The Court of Appeals further ruled that Caltex is not a
beneficiary of a stipulation pour autrui because there is no stipulation in
the Agreement which clearly and deliberately favors Caltex.
The dispositive portion of the Decision of the Court of Appeals reads:
WHEREFORE, premises considered, the appealed Decision dated June
1, 1994, rendered by the Regional Trial Court of Manila, Branch 51, is
hereby REVERSED and SET ASIDE and a new one entered
DISMISSING the complaint filed by appellee [Caltex], against appellant
[PSTC], for want of cause of action.
SO ORDERED.8
Caltex filed a motion for reconsideration of the 31 May 2001 Decision. In
a Resolution promulgated on 9 November 2001, the Court of Appeals
denied the motion for lack of merit.
Hence, this petition before this Court.
The Issues
The issues in this case are:
1. Whether PSTC is bound by the Agreement when it assumed all
the obligations of LUSTEVECO; and
2. Whether Caltex is a real party in interest to file an action to recover
from PSTC the judgment debt against LUSTEVECO.
The Ruling of this Court
The petition is meritorious.
Caltex May Recover from PSTC Under the Terms of the Agreement
Caltex may recover the judgment debt from PSTC not because of a
stipulation in Caltex’s favor but because the Agreement provides that
PSTC shall assume all the obligations of LUSTEVECO.
In this case, LUSTEVECO transferred, conveyed and assigned to PSTC
all of LUSTEVECO’s business, properties and assets pertaining to its
tanker and bulk business "together with all the obligations relating to the
said business, properties and assets." The Agreement, reproduced here
in full, provides:
AGREEMENT OF ASSUMPTION
OF OBLIGATIONS
KNOW ALL MEN BY THESE PRESENTS:
This Agreement of Assumption of Obligations made and executed this
6th day of July 1979, in the City of Manila, by and between:
LUZON STEVEDORING CORPORATION, a corporation duly organized
and existing under and by virtue of Philippine Laws, with offices at
Tacoma and Second Streets, Port Area, Manila, represented by
GERONIMO Z. VELASCO, in his capacity as Chairman of the Board,
hereinafter referred to as ASSIGNOR,
- and -
PNOC SHIPPING AND TRANSPORT CORPORATION, a corporation
duly organized and existing under and by virtue of Philippine Laws, with
offices at Makati Avenue, Makati, Metro Manila, represented by MARIO
V. TIAOQUI, in his capacity as Vice-President, hereinafter referred to as
ASSIGNEE,
WITNESSETH : T h a t -
WHEREAS, on April 1, 1979, ASSIGNOR, for valuable consideration,
executed an Agreement of Transfer with ASSIGNEE
whereby ASSIGNOR transferred, conveyed and assigned unto
ASSIGNEE all of ASSIGNOR’s business, properties and assets
appertaining to its tanker and bulk all (sic) departments, together
with all the obligations relating to said business, properties and
assets;
WHEREAS, relative to the conduct, operation and management of the
business, properties and assets transferred, conveyed and assigned by
ASSIGNOR to ASSIGNEE certain actions and claims particularly
described in Annex "A" consisting of four (4) pages and Annex "B",
consisting of one (1) page, attached hereto and made integral parts
hereof, have been filed, either with ASSIGNOR or with appropriate courts
and administrative tribunals.
WHEREAS, under the terms and conditions hereinafter mentioned,
ASSIGNEE agree[s] to assume the obligations incident and relative to
the actions and claims enumerated and described in Annexes "A" and "B"
hereof.
NOW, THEREFORE, for and in consideration of the foregoing premises,
the parties hereto have agreed as follows:
1. ASSIGNEE shall assume, as it hereby assumes all the obligations
of ASSIGNOR in respect to the actions and claims and described in
Annexes "A" and "B";
2. ASSIGNEE shall have complete control in the conduct of any and all
litigations now pending or may be filed with respect to the actions and
claims enumerated and described in Annexes "A" and "B";
3. ASSIGNOR shall deliver and convey unto ASSIGNEE all papers,
documents, files and any other records appertaining to the actions and
claims enumerated and described in Annexes "A" and "B";
4. ASSIGNOR hereby constitutes and appoints ASSIGNEE, its
successors and assigns, the true and lawful attorney of ASSIGNOR, with
full power of substitution, for it and in its name, place and stead or
otherwise, but on behalf and for the benefit of ASSIGNEE, its successors
and assigns, to demand and receive any and all claim[s] out of
countersuits or counterclaims arising from the actions and claims
enumerated and described in Annexes "A" and "B".9 (Emphasis supplied)
When PSTC assumed all the properties, business and assets of
LUSTEVECO pertaining to LUSTEVECO’s tanker and bulk business,
PSTC also assumed all of LUSTEVECO’s obligations pertaining to such
business. The assumption of obligations was stipulated not only in the
Agreement of Assumption of Obligations but also in the Agreement of
Transfer. The Agreement specifically mentions the case between
LUSTEVECO and Caltex, docketed as AC-G.R. CV No. 62613, then
pending before the IAC. The Agreement provides that PSTC may
demand and receive any claim out of counter-suits or counterclaims
arising from the actions enumerated in the Annexes.
PSTC is bound by the Agreement. PSTC cannot accept the benefits
without assuming the obligations under the same Agreement. PSTC
cannot repudiate its commitment to assume the obligations after taking
over the assets for that will amount to defrauding the creditors of
LUSTEVECO. It will also result in failure of consideration since the
assumption of obligations is part of the consideration for the transfer of
the assets from LUSTEVECO to PSTC. Failure of consideration will
revert the assets to LUSTEVECO for the benefit of the creditors of
LUSTEVECO. Thus, PSTC cannot escape from its undertaking to
assume the obligations of LUSTEVECO as stated in the Agreement.
Disposition of Assets should not Prejudice Creditors
Even without the Agreement, PSTC is still liable to Caltex.
The disposition of all or substantially all of the assets of a corporation is
allowed under Section 40 of Batas Pambansa Blg. 68, otherwise known
as The Corporation Code of the Philippines ("Corporation Code"). Section
40 provides:
SEC. 40. Sale or other disposition of assets. ─ Subject to the provisions
of existing laws on illegal combinations and monopolies, a corporation
may, by a majority vote of its board of directors, or trustees, sell, lease,
exchange, mortgage, pledge or otherwise dispose of all or substantially
all of its property and assets, including its goodwill, upon such terms and
conditions and for such consideration, which may be money, stocks,
bonds or other instruments for the payment of money or other property or
consideration, as its board of directors or trustees may deem expedient,
when authorized by the vote of the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock; or in case of non-stock
corporation, by the vote of at least two-thirds (2/3) of the members, in a
stockholders’ or members’ meeting duly called for the purpose. Written
notice of the proposed action and of the time and place of the meeting
shall be addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served
personally: Provided, That any dissenting stockholder may exercise his
appraisal right under the conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially all the
corporate property and assets, if thereby the corporation would be
rendered incapable of continuing the business or accomplishing the
purposes for which it was incorporated.
xxxx
While the Corporation Code allows the transfer of all or substantially all
the properties and assets of a corporation, the transfer should not
prejudice the creditors of the assignor. The only way the transfer can
proceed without prejudice to the creditors is to hold the assignee liable
for the obligations of the assignor. The acquisition by the assignee of all
or substantially all of the assets of the assignor necessarily includes the
assumption of the assignor’s liabilities,10 unless the creditors who did not
consent to the transfer choose to rescind the transfer on the ground of
fraud.11 To allow an assignor to transfer all its business, properties and
assets without the consent of its creditors and without requiring the
assignee to assume the assignor’s obligations will defraud the creditors.
The assignment will place the assignor’s assets beyond the reach of its
creditors.
Here, Caltex could not enforce the judgment debt against LUSTEVECO.
The writ of execution could not be satisfied because LUSTEVECO’s
remaining properties had been foreclosed by lienholders. In addition, all
of LUSTEVECO’s business, properties and assets pertaining to its tanker
and bulk business had been assigned to PSTC without the knowledge of
its creditors. Caltex now has no other means of enforcing the judgment
debt except against PSTC.
If PSTC refuses to honor its written commitment to assume the
obligations of LUSTEVECO, there will be fraud on the creditors of
LUSTEVECO. PSTC agreed to take over, and in fact took over, all the
assets of LUSTEVECO upon its express written commitment to pay all
obligations of LUSTEVECO pertaining to those assets, including
specifically the claim of Caltex. LUSTEVECO no longer informed its
creditors of the transfer of all of its assets presumably because PSTC
committed to pay all such creditors. Such transfer, leaving the claims of
creditors unenforceable against the debtor, is fraudulent and
rescissible.12 To allow PSTC now to welsh on its commitment is to
sanction a fraud on LUSTEVECO’s creditors.13
In Oria v. McMicking, the Court enumerated the badges of fraud as
follows:
1. The fact that the consideration of the conveyance is fictitious or is
inadequate.
2. A transfer made by a debtor after suit has been begun and while it
is pending against him.
3. A sale upon credit by an insolvent debtor.
4. Evidence of large indebtedness or complete insolvency.
5. The transfer of all or nearly all of his property by a debtor,
especially when he is insolvent or greatly embarrassed financially.
6. The fact that the transfer is made between father and son, when there
are present other of the above circumstances.
7. The failure of the vendee to take exclusive possession of all the
property.14 (Emphasis supplied)
In Pepsi-Cola Bottling Co. v. NLRC,15 which involved the illegal
dismissal of the employees of Pepsi-Cola Distributors of the Philippines
(PCD), the Court has ruled that Pepsi-Cola Products Philippines, Inc.
(PCPPI) which acquired the franchise of PCD is liable for the
reinstatement of PCD’s employees. The Court rejected PCPPI’s
argument that it is a company separate and distinct from PCD. The Court
ruled that the complaint was filed when PCD was still in existence.
Further, there was no evidence that PCPPI, as the new entity or
purchasing company, was free from any liabilities incurred by PCD.
In this case, PSTC was aware of the pendency of the case between
Caltex and LUSTEVECO. PSTC assumed LUSTEVECO’s obligations,
including specifically any obligation that might arise from Caltex’s suit
against LUSTEVECO. The Agreement transferred the unencumbered
assets of LUSTEVECO to PSTC, making any money judgment in favor of
Caltex unenforceable against LUSTEVECO. To allow PSTC to renege on
its obligation under the Agreement will allow PSTC to defraud Caltex.
This militates against the statutory policy of protecting creditors from
fraudulent contracts.
Article 1313 of the Civil Code provides that "[c]reditors are protected in
cases of contracts intended to defraud them." Further, Article 1381 of the
Civil Code provides that contracts entered into in fraud of creditors may
be rescinded when the creditors cannot in any manner collect the claims
due them.16 Article 1381 applies to contracts where the creditors are
not parties, for such contracts are usually made without their
knowledge. Thus, a creditor who is not a party to a contract can sue to
rescind the contract to prevent fraud upon him. Or, the same creditor can
instead choose to enforce the contract if a specific provision in the
contract allows him to collect his claim, and thus protect him from fraud.
If PSTC does not assume the obligations of LUSTEVECO as PSTC had
committed under the Agreement, the creditors of LUSTEVECO could no
longer collect the debts of LUSTEVECO. The assignment becomes a
fraud on the part of PSTC, because PSTC would then have inveigled
LUSTEVECO to transfer the assets on the promise to pay
LUSTEVECO’s creditors. However, after taking over the assets, PSTC
would now turn around and renege on its promise.
The Agreement, under Article 1291 of the Civil Code,17 is also a novation
of LUSTEVECO’s obligations by substituting the person of the debtor.
Under Article 1293 of the Civil Code, a novation which consists in
substituting a new debtor in place of the original debtor cannot be made
without the consent of the creditor.18 Here, since the Agreement novated
the debt without the knowledge and consent of Caltex, the Agreement
cannot prejudice Caltex. Thus, the assets that LUSTEVECO transferred
to PSTC in consideration, among others, of the novation, or the value of
such assets, remain even in the hands of PSTC subject to execution to
satisfy the judgment claim of Caltex.
Caltex is a Real Party in Interest
Section 2, Rule 3 of the 1997 Rules of Civil Procedure provides:
SEC. 2. Parties in interest. ─ A real party in interest is the party who
stands to be benefited or injured by the judgment in the suit, or the party
entitled to the avails of the suit. Unless otherwise authorized by law or
these Rules, every action must be prosecuted or defended in the name of
the real party in interest.
Ordinarily, one who is not a privy to a contract may not bring an action to
enforce it. However, this case falls under the exception. In Oco v.
Limbaring, we ruled:
The parties to a contract are the real parties in interest in an action upon
it, as consistently held by the Court. Only the contracting parties are
bound by the stipulation in the contract; they are the ones who would
benefit from and could violate it. Thus, one who is not a party to a
contract, and for whose benefit it was not expressly made, cannot
maintain an action on it. One cannot do so, even if the contract
performed by the contracting parties would incidentally inure to one’s
benefit.
As an exception, parties who have not taken part in a contract may show
that they have a real interest affected by its performance or annulment. In
other words, those who are not principally or subsidiarily obligated
in a contract, in which they had no intervention, may show their
detriment that could result from it. x x x19(Emphasis supplied)
Caltex may enforce its cause of action against PSTC because PSTC
expressly assumed all the obligations of LUSVETECO pertaining to its
tanker and bulk business and specifically, those relating to AC-G.R. CV
No. 62613. While Caltex is not a party to the Agreement, it has a real
interest in the performance of PSTC’s obligations under the Agreement
because the non-performance of PSTC’s obligations will defraud Caltex.
Even if PSTC did not expressly assume to pay the creditors of
LUSTEVECO, PSTC would still be liable to Caltex up to the value of the
assets transferred. The transfer of all or substantially all of the
unencumbered assets of LUSTEVECO to PSTC cannot work to defraud
the creditors of LUSTEVECO. A creditor has a real interest to go after
any person to whom the debtor fraudulently transferred its assets.
WHEREFORE, we REVERSE and SET ASIDE the 31 May 2001
Decision and 9 November 2001 Resolution of the Court of Appeals in
CA-G.R. CV No. 46097. We AFFIRM the 1 June 1994 Decision of the
Regional Trial Court of Manila, Branch 51, in Civil Case No. 91-59512.
Costs against respondent.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-30460 March 12, 1929
C. H. STEINBERG, as Receiver of the Sibuguey Trading Company,
Incorporated, plaintiff-appellant,
vs.
GREGORIO VELASCO, ET AL., defendants-appellees.
Frank H. Young for appellant.
Pablo Lorenzo and Delfin Joven for appellees.
STATEMENT
Plaintiff is the receiver of the Sibuguey Trading Company, a domestic
corporation. The defendants are residents of the Philippine Islands.
It is alleged that the defendants, Gregorio Velasco, as president, Felix del
Castillo, as vice-president, Andres L. Navallo, as secretary-treasurer, and
Rufino Manuel, as director of Trading Company, at a meeting of the
board of directors held on July 24, 1922, approved and authorized
various lawful purchases already made of a large portion of the capital
stock of the company from its various stockholders, thereby diverting its
funds to the injury, damage and in fraud of the creditors of the
corporation. That pursuant to such resolution and on March 31, 1922, the
corporation purchased from the defendant S. R. Ganzon 100 shares of its
capital stock of the par value of P10, and on June 29, 1922, it purchased
from the defendant Felix D. Mendaros 100 shares of the par value of
P10, and on July 16, 1922, it purchased from the defendant Felix D.
Mendaros 100 shares of the par value of P10, each, and on April 5, 1922,
it purchased from the defendant Dionisio Saavedra 10 shares of the
same par value, and on June 29, 1922, it purchased from the defendant
Valentin Matias 20 shares of like value. That the total amount of the
capital stock unlawfully purchased was P3,300. That at the time of such
purchase, the corporation had accounts payable amounting to
P13,807.50, most of which were unpaid at the time petition for the
dissolution of the corporation was financial condition, in contemplation of
an insolvency and dissolution.
As a second cause of action, plaintiff alleges that on July 24, 1922, the
officers and directors of the corporation approved a resolution for the
payment of P3,000 as dividends to its stockholders, which was wrongfully
done and in bad faith, and to the injury and fraud of its creditors. That at
the time the petition for the dissolution of the corporation was presented it
had accounts payable in the sum of P9,241.19, "and practically worthless
accounts receivable."
Plaintiff prays judgment for the sum of P3,300 from the defendants
Gregorio Velasco, Felix del Castillo, Andres L. Navallo and Rufino
Manuel, personally as members of the Board of Directors, or for the
recovery from the defendants S. R. Ganzon, of the sum of P1,000, from
the defendant Felix D. Mendaros, P2,000, and from the defendant
Dionisio Saavedra, P100, and under his second cause of action, he prays
judgment for the sum of P3,000, with legal interest against the board of
directors, and costs.
For answer the defendants Felix del Castillo, Rufino Manuel, S. R.
Ganzon, Dionisio Saavedra and Valentin Matias made a general and
specific denial.
In his amended answer, the defendant Gregorio Velasco admits
paragraphs, 1, 2 and 3 of each cause of action of the complaint, and that
the shares mentioned in paragraph 4 of the first cause of action were
purchased, but alleges that they were purchased by virtue of a resolution
of the board of directors of the corporation "when the business of the
company was going on very well." That the defendant is one of the
principal shareholders, and that about the same time, he purchase other
shares for his own account, because he thought they would bring profits.
As to the second cause of action, he admits that the dividends described
in paragraph 4 of the complaint were distributed, but alleges that such
distribution was authorized by the board of directors, "and that the
amount represented by said dividends really constitutes a surplus profit
of the corporation," and as counterclaim, he asks for judgment against
the receiver for P12,512.47 for and on account of his negligence in failing
to collect the accounts.
Although duly served, the defendant Mendaros did not appear or answer.
The defendant Navallo was not served, and the case against him was
dismissed.
April 30, 1928, the case was tried and submitted on a stipulation of facts,
based upon which the lower court dismissed plaintiff's complaint, and
rendered judgment for the defendants, with costs against the plaintiff, and
absolved him from the cross-complaint of the defendant Velasco, and on
appeal, the plaintiff assigns the following errors:
1. In holding that the Sibuguey Trading Company, Incorporated,
could legally purchase its own stock.
2. In holding that the Board of Directors of the said Corporation
could legally declared a dividend of P3,000, July 24, 1922.
JOHNS, J.:
It is stipulated that on July 24, 1922, the directors of the corporation
approved the purchase of stocks as follows:
One hundred shares from S. R. Ganzon for P1,000;
One hundred shares from Felix D. Mendaros at the same price; which
purchase was made on June 29, 1922; another
One hundred shares from Felix D. Mendaros at the same price on July
16, 1922;
Ten shares from Dionisio Saavedra at the same price on June 29, 1922.
That during such times, the defendant Gregorio Velasco purchased 13
shares for the corporation for P130; Felix del Castillo — 42 shares for
P420; Andres Navallo — 15 shares for P150; and the defendant
Mendaros — 10 shares for P100. That during the time these various
purchases were made, the total amount of subscribed and paid up capital
stock of the corporation was P10,030, out of the authorized capital stock
2,000 shares of the par value of P10 each.
Paragraph 4 of the stipulation also recites:
Be it also admitted as a fact that the time of the said purchases
there was a surplus profit of the corporation above-named of
P3,314.72.
Paragraph 5 is as follows:
That at the time of the repeatedly mentioned various purchases of
the said capital stock were made, the said corporation had
Accounts Payable in the total amount of P13,807.50 as shown by
the statement of the corporation, dated June 30, 1922, and the
Accounts Receivable in the sum of P19,126.02 according to the
books, and that the intention of the Board of Directors was to
resell the stocks purchased by the corporations at a sum above
par for each stock, this expectation being justified by the then
satisfactory and sound financial condition of the business of the
corporation.
It is also stipulated that on September 11, 1923, when the petition for the
dissolution of the corporation was presented to the court, according to a
statement made June 30, 1923, it has accounts payable aggregating
P9,41.19, and accounts receivable for P12,512.47.
Paragraph 7 of the stipulation recites:
That the same defendants, mentioned in paragraph 2 of this
stipulation of facts and in the same capacity, on the same date of
July 24, 1922, and at the said meeting of the said Board of
Directors, approved and authorized by resolution the payment of
dividends to its stockholders, in the sum of three thousand pesos
(P3,000), Philippine currency, which payments were made at
different dates, between September 30, 1922, and May 12, 1923,
both dates inclusive, at a time when the corporation had accounts
less in amount than the accounts receivable, which resolution
was based upon the balance sheet made as June 30, 1922, said
balance sheet showing that the corporation had a surplus of
P1,069.41, and a profit on the same date of P2,656.08, or a total
surplus amount of P3,725.49, and a reserve fund of P2,889.23 for
bad and doubtful accounts and depreciation of equipment,
thereby leaving a balance of P3,314.72 of net surplus profit after
paying this dividend.
It is also stipulated at a meeting of the board of directors held on July 24,
1922, as follows:
6. The president and manager submitted to the Board of Directors
his statement and balance sheet for the first semester ending
June 30, 1922 and recommended that P3,000 — out of the
surplus account be set aside for dividends payable, and that
payments be made in installments so as not to effect the financial
condition of the corporation. That stockholders having
outstanding account with the corporation should settle first their
accounts before payments of their dividends could be made. Mr.
Castillo moved that the statement and balance sheet be approved
as submitted, and also the recommendations of the president.
Seconded by Mr. Manuel. Approved.
Paragraph 8 of the stipulation is as follows:
That according to the balance sheet of the corporation, dated
June 30, 1923, it had accounts receivable in the sum of
P12,512.47, due from various contractor and laborers of the
National Coal Company, and also employees of the herein
corporation, which the herein receiver, after his appointment on
February 28, 1924, although he made due efforts by personally
visiting the location of the corporation, and of National Coal
Company, at its offices, at Malangas, Mindanao, and by writing
numerous letters of demand to the debtors of the corporation, in
order to collect these accounts receivable, he was unable to do
so as most of them were without goods or property, and he could
not file any suit against them that might have any property, for the
reason that he had no funds on hand with which to pay the filing
and sheriff fees to Malangas, and other places of their
residences.
From all of which, it appears that on June 30, 1922, the board of directors
of the corporation authorized the purchase of, purchased and paid for,
330 shares of the capital stock of the corporation at the agreed price of
P3,300, and that at the time the purchase was made, the corporation was
indebted in the sum of P13,807.50, and that according to its books, it had
accounts receivable in the sum of P19,126.02. That on September 11,
1923, when the petition was filed for its dissolution upon the ground that it
was insolvent, its accounts payable amounted to P9,241.19, and its
accounts receivable P12,512.47, or an apparent asset of P3,271.28 over
and above its liabilities. But it will be noted that there is no stipulation or
finding of facts as to what was the actual cash value of its accounts
receivable. Neither is there any stipulation that those accounts or any
part of them ever have been or will be collected, and it does appear that
after his appointment on February 28, 1924, the receiver made a diligent
effort to collect them, and that he was unable to do so, and it also
appears from the minutes of the board of directors that the president and
manager "recommended that P3,000 — out of the surplus account to be
set aside for dividends payable, and that payments be made in
installments so as not to effect the financial condition of the corporation."
If in truth and in fact the corporation had an actual bona fide surplus of
P3,000 over and above all of its debt and liabilities, the payment of the
P3,000 in dividends would not in the least impair the financial condition of
the corporation or prejudice the interests of its creditors.
It is very apparent that on June 24, 1922, the board of directors acted on
assumption that, because it appeared from the books of the corporation
that it had accounts receivable of the face value of P19,126.02, therefore
it had a surplus over and above its debts and liabilities. But as stated
there is no stipulation as to the actual cash value of those accounts, and
it does appear from the stipulation that on February 28, 1924, P12,512.47
of those accounts had but little, if any, value, and it must be conceded
that, in the purchase of its own stock to the amount of P3,300 and in
declaring the dividends to the amount of P3,000, the real assets of the
corporation were diminished P6,300. It also appears from paragraph 4 of
the stipulation that the corporation had a "surplus profit" of P3,314.72
only. It is further stipulated that the dividends should "be made in
installments so as not to effect financial condition of the corporation." In
other words, that the corporation did not then have an actual bona
fide surplus from which the dividends could be paid, and that the
payment of them in full at the time would "affect the financial condition of
the corporation."
It is, indeed, peculiar that the action of the board in purchasing the stock
from the corporation and in declaring the dividends on the stock was all
done at the same meeting of the board of directors, and it appears in
those minutes that the both Ganzon and Mendaros were formerly
directors and resigned before the board approved the purchase and
declared the dividends, and that out of the whole 330 shares purchased,
Ganzon, sold 100 and Mendaros 200, or a total of 300 shares out of the
330, which were purchased by the corporation, and for which it paid
P3,300. In other words, that the directors were permitted to resign so that
they could sell their stock to the corporation. As stated, the authorized
capital stock was P20,000 divided into 2,000 shares of the par value of
P10 each, which only P10,030 was subscribed and paid. Deducting the
P3,300 paid for the purchase of the stock, there would be left P7,000 of
paid up stock, from which deduct P3,000 paid in dividends, there would
be left P4,000 only. In this situation and upon this state of facts, it is very
apparent that the directors did not act in good faith or that they were
grossly ignorant of their duties.
Upon each of those points, the rule is well stated in Ruling Case Law, vol.
7, p. 473, section 454 where it is said:
General Duty to Exercise Reasonable Care. — The directors of a
corporation are bound to care for its property and manage its
affairs in good faith, and for a violation of these duties resulting in
waste of its assets or injury to the property they are liable to
account the same as other trustees. Are there can be no doubt
that if they do acts clearly beyond their power, whereby loss
ensues to the corporation, or dispose of its property or pay away
its money without authority, they will be required to make good
the loss out of their private estates. This is the rule where the
disposition made of money or property of the corporation is one
either not within the lawful power of the corporation, or, if within
the authority of the particular officer or officers.
And section 458 which says:
Want of Knowledge, Skill, or Competency. — It has been said
that directors are not liable for losses resulting to the corporation
from want of knowledge on their part; or for mistake of judgment,
provided they were honest, and provided they are fairly within the
scope of the powers and discretion confided to the managing
body. But the acceptance of the office of a director of a
corporation implies a competent knowledge of the duties
assumed, and directors cannot excuse imprudence on the ground
of their ignorance or inexperience; and if they commit an error of
 judgment through mere recklessness or want of ordinary
prudence or skill, they may be held liable for the consequences.
Like a mandatory, to whom he has been likened, a director is
bound not only to exercise proper care and diligence, but ordinary
skill and judgment. As he is bound to exercise ordinary skill and
judgment, he cannot set up that he did not possess them.

Creditors of a corporation have the right to assume that so long as there

are outstanding debts and liabilities, the board of directors will not use the
assets of the corporation to purchase its own stock, and that it will not
declare dividends to stockholders when the corporation is insolvent.

The amount involved in this case is not large, but the legal principles are
important, and we have given them the consideration which they
deserve.

The judgment of the lower court is reversed, and (a), as to the first cause
of action, one will be entered for the plaintiff and against the defendant S.
R. Ganzon for the sum of P1,000, with legal interest from the 10th of
February, 1926, and against the defendant Felix D. Medaros for P2,000,
with like interests, and against the defendant Dionisio Saavedra for P100,
with like interest, and against each of them for costs, each on their
primary liability as purchasers of stock, and (b) against the defendants
Gregorio Velasco, Felix del Castillo and Rufino Manuel, personally, as
members of the board of directors of the Sibuguey Trading Company,
Incorporated, as secondarily liable for the whole amount of such stock
sold and purchased as above stated, and on the second cause of action,
judgment will be entered (c) for the plaintiff and jointly and severally
against the defendants Gregorio Velasco, Felix del Castillo and Rufino
Manuel, personally, as members of the board of directors of the Sibuguey
Trading Company, Incorporated, for P3,000, with interest thereon from
February 10, 1926, at the rate of 6 per cent per annum, and costs. So
ordered.

Johnson, Street, Malcolm, Ostrand, Romualdez and Villa-Real, JJ.,

concur.