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Lorenzo vs Ona


Julia Buñales died leaving as heirs her surviving spouse, Lorenzo Oña and her five children. A civil case
was instituted for the settlement of her state, in which Oña was appointed administrator and later on the
guardian of the three heirs who were still minors when the project for partition was approved. This
shows that the heirs have undivided ½ interest in 10 parcels of land, 6 houses and money from the War
Damage Commission.

Although the project of partition was approved by the Court, no attempt was made to divide the
properties and they remained under the management of Oña who used said properties in business by
leasing or selling them and investing the income derived therefrom and the proceeds from the sales
thereof in real properties and securities. As a result, petitioners’ properties and investments gradually
increased. Petitioners returned for income tax purposes their shares in the net income but they did not
actually receive their shares because this left with Oña who invested them.

Based on these facts, CIR decided that petitioners formed an unregistered partnership and therefore,
subject to the corporate income tax, particularly for years 1955 and 1956. Petitioners asked for
reconsideration, which was denied hence this petition for review from CTA’s decision.


W/N there was a co-ownership or an unregistered partnership

W/N the petitioners are liable for the deficiency corporate income tax


Unregistered partnership. The Tax Court found that instead of actually distributing the estate of the
deceased among themselves pursuant to the project of partition, the heirs allowed their properties to
remain under the management of Oña and let him use their shares as part of the common fund for their
ventures, even as they paid corresponding income taxes on their respective shares.

Yes. For tax purposes, the co-ownership of inherited properties is automatically converted into an
unregistered partnership the moment the said common properties and/or the incomes derived therefrom
are used as a common fund with intent to produce profits for the heirs in proportion to their respective
shares in the inheritance as determined in a project partition either duly executed in an extrajudicial
settlement or approved by the court in the corresponding testate or intestate proceeding. The reason is
simple. From the moment of such partition, the heirs are entitled already to their respective definite
shares of the estate and the incomes thereof, for each of them to manage and dispose of as exclusively
his own without the intervention of the other heirs, and, accordingly, he becomes liable individually for all
taxes in connection therewith. If after such partition, he allows his share to be held in common with his
co-heirs under a single management to be used with the intent of making profit thereby in proportion to
his share, there can be no doubt that, even if no document or instrument were executed, for the
purpose, for tax purposes, at least, an unregistered partnership is formed.
For purposes of the tax on corporations, our National Internal Revenue Code includes these
partnerships —

The term “partnership” includes a syndicate, group, pool, joint venture or other unincorporated
organization, through or by means of which any business, financial operation, or venture is carried on…
(8 Merten’s Law of Federal Income Taxation, p. 562 Note 63; emphasis ours.)

with the exception only of duly registered general copartnerships — within the purview of the term
“corporation.” It is, therefore, clear to our mind that petitioners herein constitute a partnership, insofar as
said Code is concerned, and are subject to the income tax for corporations. Judgment affirmed.

Gatchalian vs CIR


On December 15, 1934, the plaintiffs, all 15 of them, each contributed in order to buy a sweepstakes
ticket worth Php 2.00.

That immediately thereafter but prior to December 16, 1934, plaintiffs purchased, in the ordinary course
of business, from one of the duly authorized agents of the National Charity Sweepstakes Office one
ticket bearing No. 178637 for the sum of two pesos (P2) and that the said ticket was registered in the
name of Jose Gatchalian and Company.

The above-mentioned ticket bearing No. 178637 won one of the third prizes in the amount of P50,000
and that the corresponding check covering the above-mentioned prize of P50,000 was drawn by the
National Charity Sweepstakes Office in favor of Jose Gatchalian & Company against the Philippine
National Bank, which check was cashed during the latter part of December, 1934 by Jose Gatchalian &

Thereafter, Jose Gatchalian was required by income tax examiner Alfredo David to file the
corresponding income tax return covering the prize won by Jose Gatchalian & Company and that on
December 29, 1934

The defendant made an assessment against Jose Gatchalian & Company requesting the payment of
the sum of P1,499.94 to the deputy provincial treasurer of Pulilan, Bulacan. Tthe plaintiffs requested
exemption from the payment of the income tax but it was rejected. The plaintiffs paid in protest the tax
assessment given to them.


Whether the plaintiffs formed a partnership, thus not exempted from paying income tax


Yes, the plaintiffs formed a partnership

The Supreme Court held that according to the stipulated facts the plaintiffs organized a partnership of a
civil nature because each of them put up money to buy a sweepstakes ticket for the sole purpose of
dividing equally the prize which they may win, as they did in fact in the amount of P50,000.

The partnership was not only formed, but upon the organization thereof and the winning of the prize,
Jose Gatchalian personally appeared in the office of the Philippine Charity Sweepstakes, in his capacity
as co-partner, as such collected the prize, the office issued the check for P50,000 in favor of Jose
Gatchalian and company, and the said partner. in the same capacity, collected the said check.

Having organized and constituted a partnership of a civil nature, the said entity is the one bound to pay
the income tax which the defendant collected under the aforesaid section 10 (a) of Act No. 2833, as
amended by section 2 of Act No. 3761.

Sardane vs CA


Petitioner brought an action in the collection of a sum of P5,217.25 based on promissory notes executed
by the herein private respondent NobioSardane in favor of the herein petitioner. Petitioner based his
right to collect on the promissory notes executed by respondent on different dates. It has been
established in the trial court that on many occasions, the petitioner demanded the payment of the total
amount of P5,217.25. The failure of the private respondent to pay the said amount prompted the
petitioner to seek the services of lawyer who made a letter (Exhibit 1) formally demanding the return of
the sum loaned. Because of the failure of the private respondent to heed the demands extrajudicially
made by the petitioner, the latter was constrained to bring an action for collection of sum of
money.During the scheduled day for trial, private respondent failed to appear and to file an answer. On
motion of petitioner, he was granted to present evidence ex parte. Private respondent filed a motion to
lift the order of default which was granted by the City Court in an order dated May 24, 1976, taking into
consideration that the answer was filed within two hours after the hearing of the evidence presented ex-
parte by the petitioner. The trial court favored plaintiff’s petition. One of the questions raised in the
review was whether the oral testimony for the therein private respondent Sardane that a partnership
existed between him and therein petitioner Acojedo are admissible to vary the meaning of the
abovementioned promissory notes.

ISSUE: Whether a partnership exists between the parties

RULING: The Court of Appeals held, and agreed with by the Court, that even if evidence aliunde other
than the promissory notes may be admitted to alter the meaning conveyed thereby, still the evidence is
insufficient to prove that a partnership existed between the private parties hereto. As manager of the
basnig Sarcado naturally some degree of control over the operations and maintenance thereof had to be
exercised by herein petitioner. The fact that he had received 50% of the net profits does not conclusively
establish that he was a partner of the private respondent herein. Article 1769(4) of the Civil Code is
explicit that while the receipt by a person of a share of the profits of a business is prima facie evidence
that he is a partner in the business, no such inference shall be drawn if such profits were received in
payment as wages of an employee. Furthermore, herein petitioner had no voice in the management of
the affairs of the Basnig. Under similar facts, this Court in the early case of Fortis vs. Gutierrez
Hermanos, in denying the claim of the plaintiff therein that he was a partner in the business of the
defendant, declared: This contention cannot be sustained. It was a mere contract of employment. The
plaintiff had no voice nor vote in the management of the affairs of the company. The fact that the
compensation received by him was to be determined with reference to the profits made by the
defendant in their business did not in any sense make him a partner therein. Hence, there no
partnership exists in the case.

Deluao vs Casteel

-Casteel was the original occupant and applicant of a fishpond area since before the last World War. He
wanted to preclude subsequent applicants from entering and spreading themselves within the area by
expanding his occupation thereof by the construction of dikes and the cultivation of marketable fishes.

-Thus, he borrowed P27, 000 from the Deluaos to finance needed improvements for the fishpond, and
was compelled by force of this circumstance to enter into the contract of partnership, with an agreement
to divide the fishpond after the award. Eventually, Casteel administered the said property and single-
handedly opposed rival applicants who occupied portions of the fishpond area. He relentlessly pursued
his claim to the said area up to the Office of the DANR Secretary, until it was finally awarded to him.

Issue: WON the parties can now validly divide the said fishpond as agreed upon by them? NO.


-Spouses Deluaos’ statement that the beneficial right over the fishpond in question is the "specific
partnership property" contemplated by art. 1811 of the Civil Code is incorrect. A reading of the said
provision will show that what is meant is tangible property, such as a car, truck or a piece of land, but
not an intangible thing such as the beneficial right to a fishpond. If what they have in mind is the
fishpond itself, they are grossly in error. A fishpond of the public domain can never be considered a
specific partnership property because only its use and enjoyment — never its title or ownership — is
granted to specific private persons.

-Since we held as illegal the second part of the contract of partnership between the parties to divide the
fishpond between them after the award, a fortiori, no rights or obligations could have arisen therefrom.
Inescapably, no trust could have resulted because trust is founded on equity and can never result from
an act violative of the law. Art. 1452 of the Civil Code does not support the appellees' stand because it
contemplates an agreement between two or more persons to purchase property — capable of private
ownership — the legal title of which is to be taken in the name of one of them for the benefit of all. In the
case at bar, the parties did not agree to purchase the fishpond, and even if they did, such is prohibited
by law, a fishpond of the public domain not being susceptible of private ownership.

-It must be observed that, despite the decisions of the DANR Secretary in DANR cases 353 and 353-B
awarding the area to Casteel, and despite the latter's proposal that they divide the fishpond between
them, the Deluaos unequivocally expressed in their aforequoted letter their decision not to share the
fishpond with Casteel. This produced the dissolution of the entire contract of partnership (to jointly
administer and to divide the fishpond after the award) between the parties, not to mention its automatic
dissolution for being contrary to law.

-Pettioner’s final proposition that only by giving effect to the confirmed intention of the parties may the
cause of equity and justice be served, we must state that since the contract of service is contrary to law
and, therefore, null and void, it is not and can never be considered as the law between the parties.

Kiel vs Estate of Sabert


Albert F. Kiel commenced to work on certain public lands situated in the municipality of Parang,
Cotabato, known as Parang Plantation Company. In 1910, Kiel and P. S. Sabert entered into an
agreement to develop the plantation. Sabert was to furnish the capital and Kiel was to manage it. It
seems that this partnership was formed so that the land could be acquired in the name of Sabert, Kiel
being a German citizen and not deemed eligible to acquire public lands in the Philippines.
During the World War, Kiel was deported from the Philippines. Five persons, including P. S. Sabert,
organized the Nituan Plantation Company, to which Sabert transferred all the rights and interests of the
Parang Plantation Company. Kiel appears to have tried to secure a settlement from Sabert. But Sabert's
death came before any amicable arrangement could be reached and before an action by Kiel against
Sabert could be decided. So these proceedings against the estate of Sabert.


What is the nature of the proceeding? Is this an action to establish a resulting trust in the land of Sabert?


The court held that a ruling on the issue of establishing trust is not needed. Note that the complaint as
framed asks for a straight money judgment against an estate. In no part of the complaint did plaintiff
allege any interest in land, claim any interest in land, or pretend to establish a resulting trust in land. This
is not an action to establish trust in the land, because a trust will not be created when, for the purpose of
evading the law prohibiting one from taking or holding real property, he takes a conveyance thereof in
the name of a third person.

Also, no partnership agreement in writing was entered into by Kiel and Sabert. Thus the real issue is
whether or not the alleged verbal copartnership formed by Kiel and Sabert has been proved. The court
held that declarations of one partner, not made in the presence of his copartner, are not competent to
prove the existence of a partnership between them, and that the existence of a partnership cannot be
established by general reputation, rumor, or hearsay.

Although we feel that competent evidence exists establishing the partnership, Kiel under the facts had
no standing in court to ask for any part of the land and in fact he does not do so. His only legal right is to
ask for what is in effect an accounting with reference to its improvements and income when Sabert
became the trustee of the estate on behalf of Kiel.

Kiel is not entitled to any share in the land itself, but he has clearly shown his right to one-half of the
value of the improvements and personal property on the land. The value of these improvements and of
the personal property cannot be ascertained from the record and the case must therefore be remanded
for further proceedings.

Jo Chung Cang vs Pacific Commercial Co.


In an insolvency proceedings of petitioner-establishment, “Sociedad Mercantil, Teck Seing & Co.,

Ltd.”, creditors, Pacific Commercial and others filed a motion with the Court to declare the individual
partners parties to the proceeding, for each to file an inventory, and for each to be adjudicated as
insolvent debtors.

RTC granted the motion but subsequently denied it.

Hence this appeal.


Whether the nature of the mercantile establishment, Teck Seing & Co., Ltd. is a limited partnership.



The contract of partnership established a general partnership.

By process of elimination, Teck Seing & Co., Ltd. Is not a corporation nor an accidental partnership (joint
account association).

To establish a limited partnership, there must be, at least, one general partner and the name of at least
one of the general partners must appear in the firm name. This requirement has not been fulfilled. Those
who seek to avail themselves of the protection of laws permitting the creation of limited partnerships
must the show a substantially full compliance with such laws. It must be noted that all the requirements
of the Code have been met w/ the sole exception of that relating to the composition of the firm name.

The legal intention deducible from the acts of the parties controls in determining the existence of a
partnership. If they intend to do a thing w/c in law constitutes a partnership, they are partners although
their very purpose was to avoid the creation of such relation. Here the intention of the persons making
up, Teck Seing & Co., Ltd. Was to establish partnership w/c they erroneously denominated as a limited

Order appealed from is reversed.

English translation of Spanish Docu from full text


"Know all for the present:

"That we, Santiago Jo Chung Cang, of legal age, Trader, neighbor and resident of the municipality of
Tabogon, Province of Cebu, Philippines, Go Tayco, of legal age, Merchant, neighbor and resident of the
municipality of Cebu, Province Of Cebu, Philippine Islands, Yap Gueco, of legal age, trader, Neighbor
and resident of the municipality and Province of Cebu, Islas Philippines, Lim Yogsing, of legal age,
trader, neighbor and Resident of the municipality of Cebu, Province of Cebu, Islands Philippines, and Jo
Ybec, of legal age, trader, Resident of the municipality of Jagna, Province of Bohol, Islands

Philippines, we hereby state that we constitute and We form a limited trading company, under the laws
in force

In the Philippines, and to be registered in accordance with the Regulations of the Commercial Code in
the Philippines.

"That the business name shall be named" Teck Seing & Co., Ltd. "and Will have its main address at
Calle Magallanes No. 94, of the City of Cebu, Province of Cebu, Philippine Islands.

"That the social capital will be thirty thousand pesos (P30,000) Currency of the Philippine Islands,
divided into five shares of P6,000 as follows: Santiago Jo Chung Cang; P6,000.00 - Go Tayco; 6,000.00
- Yap Gueco; 6,000.00 - Jo Ybec; 6,000.00- Lim Yogsing - 6,000.00

Total ................................................. ......... 30,000.00

"That the duration of the partnership shall be six years, from The date of this deed, and this time may be
extended to Unanimous discretion of all shareholders.

"The object of the partnership will be the purchase and sale of goods in general.

"The administrator or administrators of the company may, With prior agreement of the shareholders,
establish how many Branches or establishments deemed necessary to facilitate Their business and the
greater development of the trade in which the Society, verifying all the operations they create Suitable
for the promotion of its capital.

"The profits or losses that result during each year Shall be distributed proportionally among the
shareholders, According to the capital contributed by each one of them.

"The profits that will result in each commercial year, if Result in some gains, they can not be withdrawn
by the
Shareholders within a period of three years from the date of Date of the first annual balance of the
business, leaving therefore Reserves in order to increase the capital contributed by The shareholders
and thus expand the sphere of action undertaken by the same company. To the The three-year term
expires, each shareholder may Withdraw or deposit in the hands of the company, the profits Should
correspond during that three-year term.

"That shareholders may not extract or dispose in any Time any quantity or quantities of the company,
which Has been contributed by them, to meet their expenses Not even paying any income on the
amount Attempt to dispose of or extract from that company.

"The shareholder Mr. Lim Yogsing will be in charge, in union of the Mr. Vicente Jocson Jo, the
Company's management, who May use the social signature indistinctly, being for Consequently
authorized both to do on her behalf All kinds of business operations, business speculations, Practicing
judicially and extrajudicially how many acts For the good of society, appoint attorneys-in-fact or Lawyers
for claims and collection of credits and to propose Exceptions. In case of absence, illness or Any other
impediment of shareholder Mr. Lim Yogsing, it may confer general or special power to the shareholder
Which creates convenient for which in union of the administrator Assistant to Mr. Vicente Jocson Jo,
could both administer Conveniently the business of the company. That the Administrators may have the
necessary employees for the Management of the company's businesses, and will determine the That
these employees should receive for services rendered to the society.

"That both administrators may have one thousand two hundred Pesos (P1,200) Philippine currency,
annually, for your expenses Particular, said quantity of P1,200 being that corresponding to To each of
said administrators, as emoluments Wages that are assigned to each, For his work in the administration
of society.

It being understood that, shareholders may dispose of each purpose Year the bonus to be granted to
each manager, if the Businesses of the year were buoyant and justified the granting of a Special bonus,
apart from the salary set forth here and specified.

"That passed the term of six years, and is of the convenience of The shareholders continued the
business of this company, Term will be extended for an equal number of years, without Of the granting
of further deeds, leaving the present in Force until the term established by all shareholders.

"That any differences that may arise between Shareholders, either for the reason stipulated in this deed,
Already by acts in the course and direction of the businesses in her Will be arranged to arrange between
the same friendly and Extrajudicially, and if an arrangement is not achieved in this way, Such
shareholders shall appoint an arbitrator whose resolution is All bound and hereby undertake and
undertake to Accept it in all its parts, renouncing further resources.

"In what terms do we make this deed of Company, and we promise to keep it faithfully and Strictly
according to the pacts we have established.

"In testimony of all of which, we signed in the City of Cebu, Province of Cebu, Philippine Islands, today,
October 31, thousand Nine hundred and ten.

"In the Municipality of Cebu, of the aforementioned Province, I. F., Today, October 31, 1919, A. D.,
before me, a Notary Public who Subscribe, personally appeared Santiago Jo Chung Cang, Go Tayco,
Yap Gueco, Lim Yogsing and Jo Ybec, represented The latter by Ho Seng Sian, as authorized in
Telegram dated September 27, 1919 that I have been Presented at the same event, of whom I give the
assurance I know for being the same people who gave the preinsert Document, ratifying before me its
content and stating that it is the Itself an act of his free and voluntary bestowal. Mr. Santiago Jo Chung
Cang showed me his personal certificate issued

In Cebu, Cebu, I.F. on September 19, 1919 under No.

H77742, Go Tayco also showed me his issued in Cebu,

Cebu, I.F., on October 9, 1919 under No. G2042490, Yap Gueco also showed me his one issued in
Cebu, Cebu, I.F. On January 20, 1919 under No. F1452296, Lim Yogsing. I also exhibited his own
issued in Cebu, Cebu, I.F., the day February 26, 1919 under No. F1455662, and Ho Seng Sian
Representative of Jo Ybec, showed me his personal certificate issued In Cebu, Cebu, I. F. on February
4, 1919 under No.

"In front of me,

(Signed) "F. V. ARIAS

"Public notary

"Until January 1, 1920

"Seat No. 157

Page 95 of my

Notary Registration

Agad vs Mabato

Facts: Petitioner Mauricio Agad claims that he and defendant Severino Mabato are partners in a
fishpond business to which they contributed P1000 each. As managing partner, Mabato yearly rendered
the accounts of the operations of the partnership. However, for the years 1957-1963, defendant failed to
render the accounts despite repeated demands. Petitioner filed a complaint against Mabato to which a
copy of the public instrument evidencing their partnership is attached. Aside from the share of profits
(P14,000) and attorney’s fees (P1000), petitioner prayed for the dissolution of the partnership and
winding up of its affairs.

Mabato denied the existence of the partnership alleging that Agad failed to pay hisP1000 contribution.
He then filed a motion to dismiss on the ground of lack of cause of action. The lower court dismissed the
complaint finding a failure to state a cause of action predicated upon the theory that the contract of
partnership is null and void, pursuant to Art. 1773 of our Civil Code, because an inventory of the
fishpond referred in said instrument had not been attached thereto.

Art. 1771. A partnership may be constituted in any form, except where immovable property or real rights
are contributed thereto, in which case a public instrument shall be necessary.

Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if
inventory of said property is not made, signed by the parties; and attached to the public instrument.

Issue: Whether or not immovable property or real rights have been contributed to the partnership.

Held: Based on the copy of the public instrument attached in the complaint, the partnership was
established to operate a fishpond", and not to "engage in a fishpond business.” Thus, Mabato’s
contention that “it is really inconceivable how a partnership engaged in the fishpond business could exist
without said fishpond property (being) contributed to the partnership” is without merit. Their contributions
were limited to P1000 each and neither a fishpond nor a real right thereto was contributed to the

Therefore, Article 1773 of the Civil Code finds no application in the case at bar. Case remanded to the
lower court for further proceedings.

Tuason vs Bolanos

Plaintiff’s complaint against defendant was to recover possession of a registered land. In the complaint,
the plaintiff is represented by its Managing Partner, Gregorio Araneta, Inc., another corporation.
Defendant, in his answer, sets up prescription and title in himself thru "open, continuous, exclusive and
public and notorious possession under claim of ownership, adverse to the entire world by defendant and
his predecessors in interest" from "time immemorial". After trial, the lower court rendered judgment for
plaintiff, declaring defendant to be without any right to the land in question and ordering him to restore
possession thereof to plaintiff and to pay the latter a monthly rent. Defendant appealed directly to the
Supreme Court and contended, among others, that Gregorio Araneta, Inc. can not act as managing
partner for plaintiff on the theory that it is illegal for two corporations to enter into a partnership


Whether or not a corporation may enter into a joint venture with another corporation.


It is true that the complaint states that the plaintiff is "represented herein by its Managing Partner
Gregorio Araneta, Inc.", another corporation, but there is nothing against one corporation being
represented by another person, natural or juridical, in a suit in court. The contention that Gregorio
Araneta, Inc. cannot act as managing partner for plaintiff on the theory that it is illegal for two
corporations to enter into a partnership is without merit, for the true rule is that "though a corporation has
no power to enter into a partnership, it may nevertheless enter into a joint venture with another where
the nature of that venture is in line with the business authorized by its charter." (Wyoming-Indiana Oil
Gas Co. vs. Weston, 80 A. L. R., 1043, citing 2. Fletcher Cyc. of Corp., 1082.). There is nothing in the
record to indicate that the venture in which plaintiff is represented by Gregorio Araneta, Inc. as "its
managing partner" is not in line with the corporate business of either of them.

Aurbach vs Sanitary

Aurbach v Sanitary Wares

December 15, 1989
CRUX vs.
G.R. Nos. 75975-76: LUCIANO E. SALAZAR vs.
SUMMARY: Saniwares was a domestic corporation which entered into an agreement w/ the ASI foreign
group in order to expand their business internationally. In the election of their board members, they
agreed that 3 of the 9 directors shall be designated by ASI while the other 6 shall be designated by the
Filipino stockholders. Dispute ensued when ASI invoked their right to cumulative voting and nominated
another candidate. In order to determine who the directors are, the court discussed whether the
business was a joint venture or a corporation. HELD: The important provisions of the parties’
agreement, as well as testimonial evidence, showed that the parties agreed to establish a joint venture
and not an ordinary corporation, implying that rigid principles of corporation law need not be applied.
NOTE: I think the discussion on joint venture was done in order to show that this is a corporate joint
venture, not an ordinary corporation and as such rigid principles of the Corporation law are not
controlling; hence, no need to stick to cumulative voting because they may, by agreement, agree on a
different method. There are special contractual agreements which are given effect and this includes the
fact that ASI, the foreign group, is only a minority group as agreed and despite the # of their shares, it
was agreed also that they can only nominate up to 3 candidates, no more no less. It’s not unfair
because there are other provisions w/c protect ASI anyway.
DOCTRINE: The rule is that whether the parties to a particular contract have thereby established among
themselves a joint venture or some other relation depends upon their actual intention which is
determined in accordance with the rules governing the interpretation and construction of contracts. A
joint venture is a form of partnership and should thus be governed by the law of partnerships. SC has
however recognized a distinction between these two business forms, and has held that although a
corporation cannot enter into a partnership contract, it may however engage in a joint venture with
others. (See whole par. in #2)
 Case involves a dispute bet. 2 groups (ASI-foreign & Young-domestic) as to who Saniwares’ duly
elected board of directors are.
 1961: Sanitary Wares Mftg. Corp. (Saniware) is a domestic corp. incorporated for the primary
purpose of manufacturing and marketing sanitary wares (hindi nga). Young, one of the
incorporators, went abroad to look for foreign partners for its expansion.
 Aug. 15, 1962: American Standard Inc. (ASI), a foreign corp., entered into an Agreement with
Saniwares & some Filipino investors
o To participate in the ownership of an enterprise w/c would engage primarily in the business
of manufacturing in RP and selling here and abroad vitreous china and sanitary wares.
o Business operations in RP shall be thru an incorporated enterprise w/ initial name of
"Sanitary Wares Mftg. Corp."
 Agreement contained provisions relevant to the nomination and election of the directors of the corp.
o Sec. 3. (a) - Articles of Incorporation: (a) The Articles of Incorporation of the Corporation shall
be substantially in the form annexed hereto as Exhibit A and, insofar as permitted under
Philippine law, shall specifically provide for: (1) Cumulative voting for directors
o Sec. 5. (a) - Management: (a) The management of the Corporation shall be vested in a Board
of Directors, which shall consist of 9 individuals. As long as American-Standard shall own
at least 30% of the outstanding stock of the Corporation, 3 of the 9 directors shall be
designated by American-Standard, and the other 6 shall be designated by the other
stockholders of the Corporation.
 The agreement also contained provisions designed to protect ASI as a minority group such as;
o grant of veto powers over a number of corporate acts
o right to designate certain officers, such as a member of the Exec. Committee whose vote was
required for important corporate transactions, right to designate the president and plant
o the vote of 7 out of 9 directors q/c is required in certain enumerated corporate acts
o requirement of a 75% super-majority vote for the amendment of the articles and by-laws of
o sales policy of Saniwares shall be that which is normally followed by ASI and that Saniwares
should not export "Standard" products otherwise than through ASI's Export Marketing
o ASI agreed to provide technology and know-how to Saniwares and the latter paid royalties for
the same
 Later, the 30% capital stock of ASI was increased to 40%. It was also registered with the Board of
Investments for availment of incentives with the condition that at least 60% of the capital stock of
the corporation shall be owned by Filipinos.
 The joint enterprise prospered. However, the initial harmonious relations bet. the 2 groups
 Accdg. to the Filipino group, they desired to expand the export operations of the company but ASI
objected as it had other subsidiaries of joint venture groups in countries where Philippine exports
were contemplated.
 The annual stockholders' meeting was held and the stockholders proceeded to elect the members
of the board of directors.
 ASI group nominated 3 persons: Wolfgang Aurbach, John Griffin and David P. Whittingham.
 Philippine investors nominated 6: Ernesto Lagdameo, Sr., Raul Boncan, Ernesto Lagdameo, Jr.,
George Lee, and Baldwin Young.
 Eduardo Ceniza then nominated Luciano Salazar, who in turn nominated Charles Chamsay.
 Young, the chairman, ruled the last 2 nominations out of order on the basis of Sec. 5 (a) of
the Agreement, and practice of the parties to nominate only 9 persons as nominees for the
9-member board of directors.
 ASI representative appealed to the body of stockholders to vote on Chairman’s ruling but this was
overruled by Young.
 Young then instructed the Corporate Sec. to cast all the votes present and represented by proxy
equally for the 6 nominees of the Phil. Investors and the 3 nominees of ASI, thus excluding the 2
additional persons nominated, Salazar & Chamsay.
 ASI representative protested the decision of the Chairman and announced that all votes
accruing to ASI shares were being cumulatively voted for the 3 ASI nominees & Charles
Chamsay (bale 4 na so contrary sa agreement), and instructed the Secretary to so vote.
(Cumulative voting example: 4 vacant positions, voter has 500 shares so she has 2000 votes
(500x4): for regular voting -> voter can choose to give all candidates 500 votes each but only up to
500 BUT for cumulative voting -> voter can choose to give all 2000 votes to 1 candidate or divide it
bet diff candidates; in the Agreement in this case, strictly 3 nominations from ASI and 6 from local
group, they cannot add more to the people they can nominate even if they still have votes left)
 Salazar and other proxy holders announced that all the votes owned by them were being voted
cumulatively in favor of Salazar.
 Chairman Young still overruled them so the Secretary certified for election only those designated by
Philippine investors & ASI.
 ASI representative moved to recess the meeting which was seconded. However, there was also a
motion to adjourn, so meeting was adjourned by Young.
 Having been ignored, ASI representative declared that such was merely a recess and asked for a
meeting to be reconvened in the next room. ASI Group, Salazar and other stockholders, allegedly
representing 53 or 54% of Saniwares’ shares decided to continue the meeting at the elevator lobby
of the American Standard Building.
 On the basis of the cumulative votes cast earlier in the meeting, ASI Group nominated its 4
nominees. Salazar voted for himself.
 Thus the said 5 directors were certified as elected directors by the Acting Secretary with the
explanation that there was a tie among the other 6 nominees for the 4 remaining positions of
directors and that the body decided not to break the tie.
 These incidents triggered off the filing of separate petitions by the parties with the SEC.
 First petition. For preliminary injunction by Saniwares & Lagdameo group against Salazar and
 Second petition. For quo warranto and application for receivership by ASI group w/ Salazar &
Chamsay against the group of Young and Lagdameo and Avelino Cruz.
 Both sets of parties except for Cruz claimed to be the legitimate directors of the corporation. The
two petitions were consolidated and tried jointly.
 SEC HEARING OFFICER: Upholding Lagdameo Group’s election and dismissing Salazar &
Chamsay’s quo warranto petition
 ASI Group and Salazar appealed the decision to the SEC en banc
 SEC: Affirmed the hearing officer's decision.
 2 separate appeals were filed with IAC by ASI group and by Salazar.
 IAC: Consolidated the petitions. Ordered the remand of the case to SEC with the directive that a
new stockholders' meeting of Saniwares be ordered convoked as soon as possible, under the
supervision of the SEC
 Lagdameo group filed MR
 CA: Set aside earlier decision the then IAC. In all subsequent elections for directors of Saniwares,
ASI cannot nominate more than 3 directors.
o Filipino stockholders shall not interfere in ASI's choice of its 3 nominees
o Filipino stockholders can nominate only 6 candidates. In the event they cannot agree on the 6
nominees, they shall vote only among themselves to determine who the 6 nominees will
be, with cumulative voting to be allowed but without interference from ASI.
 G.R. No. 75875: ASI group filed petition for review assailing the decision for upholding election of
Lagdameo group when there was no election at all; for prohibiting the stockholders from exercising
their full voting rights represented by the number of shares in Saniwares, thus depriving them and
ASI of their property rights without due process.
 G.R. Nos. 75975-76: Salazar assails the amended decision on the ff. grounds:
o Disregard of binding contractual agreements entered into by stockholders and the
replacement of the conditions of such agreements with terms never contemplated by the
stockholders but merely dictated by the CA .
o Deprivation of the property rights of stockholders without due process of law in order that a
favored group of stockholders may be illegally benefited and guaranteed a continuing
monopoly of the control of a corporation
 G.R. No. 75951: Lagdameo group assails CA amended decision. While recognizing that the
stockholders of Saniwares are divided into 2 blocks, it fails fully to enforce the basic intent of the
Agreement and the law. CA also did not categorically rule that Lagdameo Group were the duly
elected directors during the annual stockholders’ meeting
MAIN ISSUE: Who were the duly elected directors of Saniwares for the year 1983 during its annual
stockholders' meeting held on March 8, 1983? (Lagdameo group + 3 nominees of ASI excluding
Chamsay & Salazar meaning SC ruled in favor of Lagdameo group)
1) Whether the nature of the business established by the parties was a joint venture or a corporation?
(Joint venture)
2) Whether ASI Group may vote their additional 10% equity during elections of Saniwares’ board of
directors? (NO) [May ASI invoke cumulative voting in order to nominate an additional candidate despite
clear agreement that they may only nominate 3? NO ]
 To answer who were the duly elected directors of Saniwares, the ff. should be determined: (1) the
nature of the business established by the parties and (2) whether or not the ASI Group may vote
their additional 10% equity during elections of Saniwares' board of directors
 The rule is that whether the parties to a particular contract have thereby established among
themselves a joint venture or some other relation depends upon their actual intention which is
determined in accordance with the rules governing the interpretation and construction of contracts.
(Terminal Shares, Inc. v. Chicago)
 ASI Group & Salazar: Actual intention of the parties should be viewed strictly on the "Agreement"
wherein it is clearly stated that the parties' intention was to form a corporation and not a joint
o No. 16 under Miscellaneous Provisions of Agreement: c) nothing herein contained shall be
construed to constitute any of the parties hereto partners or joint venturers in respect of
any transaction hereunder.
o They object to the admission of other evidence which tends to show that the parties'
agreement was to establish a joint venture presented by the Lagdameo & Young Group on
the ground that it contravenes the parol evidence rule. Lagdameo and Young Group never
pleaded in their pleading that the "Agreement" failed to express the true intent of the
 Lagdameo & Young Group in their Reply w/ SEC: Agreement failed to express the true intent of
the parties.
o While certain provisions of the Agreement would make it appear that the parties disclaim
being partners or joint venturers, such disclaimer is directed at third parties and does not
preclude the existence of 2 distinct groups of stockholders in Saniwares one of which (the
Philippine Investors) shall constitute the majority, and the other ASI shall constitute the
minority stockholder.
o Evident intention of the Philippine Investors and ASI in entering into the Agreement is to
enter into a joint venture enterprise, and if some words in the Agreement appear to be
contrary to the evident intention of the parties, the latter shall prevail over the former (NCC
 Binder v. Kessler: In an action at law, where there is evidence tending to prove that the parties
joined their efforts in furtherance of an enterprise for their joint profit, the question whether they
intended by their agreement to create a joint adventure, or to assume some other relation is a
question of fact for the jury.
 Provisions of the Agreement as well as the testimonial evidence presented by Lagdameo &
Young Group shows that the parties agreed to establish a joint venture and NOT a
 The history of the organization of Saniwares and the unusual arrangements which govern its policy
making body are all consistent with a joint venture and NOT with an ordinary corporation.
 SEC (SC agrees): Under the Agreement there are 2 groups of stockholders who established a
corporation with provisions for a special contractual relationship bet. the parties, i.e., ASI and
the other stockholders. (Basta hindi ordinary corp. ito)
o ASI agreed to accept the role of minority vis-a-vis the Philippine National group of investors,
on the condition that the Agreement should contain provisions to protect ASI as the
o This included ASI’s right of a 7 out of 9 votes of the board of directors for certain actions, w/c
in effect gave ASI (which designates 3 directors under the Agreement) an effective veto
o Grant of such rights to ASI (see facts) esp. the right of ASI to designate 3 out of the 9
directors while the other stockholders shall designate the other 6, clearly indicate that
there are: 1) 2 distinct groups in Saniwares, namely ASI, which owns 40% of the capital
stock and the Philippine National stockholders who own the balance of 60%, and that 2)
ASI is given certain protections as the minority stockholder.
 Sec. 5 (a) of the agreement uses the word "designated" and not "nominated" or "elected" in the
selection of the 9 directors on a 6 to 3 ratio. Each group is assured of a fixed number of directors
in the board.
 ASI in its communications referred to the enterprise as joint venture.
 Sec. 16(c) of the Agreement that "Nothing herein contained shall be construed to constitute any of
the parties hereto partners or joint venturers in respect of any transaction hereunder" was merely to
obviate the possibility of the enterprise being treated as partnership for tax purposes and liabilities
to third parties.
 There is danger from arrangements such as these joint ventures w/ foreign groups since they may,
from the start, intend to establish their own sole operations and merely use the joint venture
arrangement to gain a foothold or test the Philippine waters. Or later, the foreign group will
undermine the local majority ownership and actively try to completely take over the entire company.
 To the extent that the undermining of joint ventures can be lawfully prevented, the courts should
extend protection especially in industries where constitutional and legal requirements reserve
controlling ownership to Filipino citizens.
 Lagdameo Group (and SC agrees): Philippine Corporation Code itself recognizes the right of
stockholders to enter into agreements regarding the exercise of their voting rights.
o Sec. 100. (2): Agreements by stockholders - An agreement bet. 2 or more stockholders, if in
writing and signed by the parties thereto, may provide that in exercising any voting rights,
the shares held by them shall be voted as therein provided, or as they may agree, or as
determined in accordance with a procedure agreed upon by them.
 ASI Group: Above provision is included in the Corporation Code's chapter on close corporations
and Saniwares cannot be a close corporation because it has 95 stockholders. (Close corporation in
Investopedia: Usu. small number of people who hold its shares mostly a family corp.; shares are
closed to the public; in Corp Code, must not be more than 20)
 Lagdameo Group/SC: Rigid principles of Corporation law are not applied in agreements between
corporate joint ventures. Even assuming that sec. 5(a) of the Agreement relating to the designation
or nomination of directors restricts the right of the Agreement's signatories to vote for directors,
such contractual provision, is valid and binding upon the signatories thereto, which include
ASI group.
 First. 95 stockholders are not separate from each other but are divisible into groups representing a
single identifiable interest. (ASI accounts for 13 of the 95, Young family: 13, Chamsay family: 8,
Santos family: 9, Dy family: 7) If the members of one family are considered as one, there were only
17 stockholders of Saniwares.
 Second. Even assuming that Saniwares is technically not a close corporation because it has more
than 20 stockholders, the undeniable fact is that it is a close-held corporation. Saniwares is not a
public issue or a widely held corporation.
 Express arrangements between corporate joint ventures should be construed with less emphasis
on the ordinary rules of law usually applied to corporate entities and with more
consideration given to the nature of the agreement between the joint venturers. Substantial
justice lay with those litigants who relied on the joint venture agreement rather than the litigants who
relied on the orthodox principles of corporation law.
 Participants in a joint venture, in organizing the joint venture, deviate from the traditional pattern of
corporation management.
 Third. Sec. 100, par. 2 of the Corporation Code does not necessarily imply that agreements
regarding the exercise of voting rights are allowed only in close corporations. Stockholders should
not be precluded from entering into contracts like voting agreements if these are otherwise valid.
(2) ASI group may not vote their additional equity during elections of Saniwares' board of directors.
 CA/SC: As in other joint venture companies, the extent of ASI's participation in the management of
the corporation is spelled out in the Agreement. The allocation of board seats is in consonance with
the minority position of ASI.
 ASI group: Any allocation of board seats, even in joint venture corporations, are null and void to
the extent that such may interfere with the stockholder's rights to cumulative voting as provided in
Sec. 24 of the Corp. Code.
 CA/SC: Court not prepared to hold that any agreement which curtails in any way cumulative voting
should be struck down. However, cumulative voting rights may be voluntarily waived by
stockholders who enter into special relationships with each other to pursue and implement
specific purposes, as in joint venture relationships between foreign and local stockholders,
so long as such agreements do not adversely affect third parties.
 While, the clearly established minority position of ASI and the contractual allocation of board seats
cannot be disregarded, the rights of the stockholders to cumulative voting should also be protected.
Thus, we recognize the division of the company into 2 groups and also allow the exercise of the
rights to cumulative voting.
 This means that if the Filipino stockholders cannot agree who their 6 nominees will be, a vote would
have to be taken among the Filipino stockholders only. During this voting, each Filipino stockholder
can cumulate his votes.
 ASI, however, should not be allowed to interfere in the voting within the Filipino group. Otherwise,
ASI would be able to designate more than the 3 directors it is allowed to designate, and may even
be able to get a majority of the board seats, a result which is clearly contrary to the contractual
intent of the parties.
 ASI Group & Salazar: ASI Group has the right to vote their additional equity pursuant to Sec. 24 of
the Corp. Code which gives the stockholders of a corporation the right to cumulate their votes in
electing directors. This right, if granted, would not necessarily mean a violation of the Anti-Dummy
Act since such Act allows the election of aliens as members of the Board in partially nationalized
activities in proportion to their allowable share in the capital of the entity.
 SC: ASI Group's argument is correct within the context of Sec. 24 of the Corporation Code. The
point of query, however, is whether or not that provision is applicable to a joint venture with
clearly defined agreements. (Apparently NO bec. agreement rules!)
CORPORATION MAY ENGAGE IN JOINT VENTURES (Ito lang impt. girls @ hindi siya gaanong
connected sa issue bwisit!!)
 The legal concept of a joint venture is of common law origin. It has no precise legal definition but it
has been generally understood to mean an organization formed for some temporary purpose.
(Gates v. Megargel)
 SIMILAR: It is in fact hardly distinguishable from the partnership, since their elements are similar
community of interest in the business, sharing of profits and losses, and a mutual right of control
(Blackner v. Mc Dermott).
 DISTINCT: The main distinction cited by most opinions in common law jurisdictions is that the
PARTNERSHIP contemplates a general business with some degree of continuity, while the
JOINT VENTURE is formed for the execution of a single transaction, and is thus of a temporary
nature. (Tufts v. Mann).
 In This Jurisdiction: This observation is not entirely accurate in this jurisdiction, since under the Civil
Code, a partnership may be particular or universal, and a particular partnership may have for its
object a specific undertaking. (Art. 1783).
 Under Philippine law: A joint venture is a form of partnership and should thus be governed by
the law of partnerships.
 SC has however recognized a distinction between these two business forms, and has held
that although a corporation cannot enter into a partnership contract, it may however engage
in a joint venture with others. (Tuazon v. Bolanos)
 SC: Moreover, the usual rules as regards the construction and operations of contracts generally
apply to a contract of joint venture. (O' Hara v. Harman).
 Thus, the resolution of the question of whether or not the ASI Group may vote their additional equity
lies in the agreement of the parties. CA was correct in upholding the agreement of the parties as
regards the allocation of director seats and the right of each group of stockholders to cumulative
voting in the process of determining who the group's nominees would be.
 Sec. 5 (a) of the Agreement relates to the manner of nominating the members of the board of
directors while Sec. 3 (a) (1) relates to the manner of voting for these nominees.
 To allow the ASI Group to vote their additional equity to help elect even a Filipino director who
would be beholden to them would obliterate their minority status as agreed upon by the parties.
As to circumvention of Anti-Dummy Act
 Salazar: Anti-Dummy Act allows the ASI group to elect board directors in proportion to their share
in the capital of the entity.
 SC: Same law also limits the election of aliens as members of the board of directors in proportion to
their allowance participation of said entity.
 CAB: ASI was limited to designate 3 directors. This is the allowable participation of the ASI Group.
Hence, in future dealings, this limitation of 6 to 3 board seats should always be maintained as long
as the joint venture agreement exists, considering that there are provisions already agreed upon to
protect the interests arising from the minority status of the foreign investors. .
As to Cumulative Voting
 Lagdameo &Young Group: Objects to a cumulative voting during the election of the board of
directors (ito yung sa Filipino group na lang). 6 directors allotted to the Filipino stockholders should
be selected by consensus pursuant to Sec. 5 (a) of the Agreement which uses the word "designate"
meaning "nominate, delegate or appoint."
o Also, ASI Group might take control of the enterprise if the Filipino stockholders are allowed to
select their nominees separately and not as a common slot determined by the majority of
their group.
 SC: Sec. 5 (a) of the Agreement should be construed in relation to Sec. 3 (a) (1) w/c relates to the
manner of voting for these nominees which is cumulative voting while the former relates to the
manner of nominating the members of the board of directors.
 HOWEVER: That the ASI Group may be able to control the enterprise under the cumulative voting
procedure cannot be ignored. The validity of the cumulative voting procedure is dependent on the
directors thus elected being genuine members of the Filipino group, not voters whose interest is to
increase the ASI share in the management of Saniwares.
 The joint venture character of the enterprise must always be taken into account, so long as the
company exists under its original agreement.
 Cumulative voting may not be used as a device to enable ASI to achieve stealthily or indirectly what
they cannot accomplish openly. There are substantial safeguards in the Agreement which are
intended to preserve the majority status of the Filipino investors as well as to maintain the minority
status of the foreign investors group as earlier discussed. They should be maintained.
DISPOSITIVE: G.R. Nos. 75975-76 (Salazar) & G.R. No. 75875 (Aurbach) DISMISSED. G.R. No.
75951 (Saniwares) partly GRANTED. CA MODIFIED in that Lagdameo Group + Wolfgang Aurbach
John Griffin & David Whittingham are declared as the duly elected directors of Saniwares at the Mar.
8,1983 annual stockholders' meeting. In all other respects, CA decision AFFIRMED.