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G.R. No.

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

when subsequently organized. There are, of course, exceptions (Fletcher Cyc. of Corps.,
permanent edition, 1931, vol. I, secs. 207 et seq.), but under the peculiar facts and The decision of the lower court is accordingly affirmed, with costs against the appellant. So
circumstances of the present case we decline to extend the doctrine of ratification which would Ordered.
result in the commission of injustice or fraud to the candid and unwary.(Massachusetts rule,
Abbott vs. Hapgood, 150 Mass., 248; 22 N. E. 907, 908; 5 L. R. A., 586; 15 Am. St. Rep., 193; Villa-Real, Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.
citing English cases; Koppel vs. Massachusetts Brick Co., 192 Mass., 223; 78 N. E., 128;
Holyoke Envelope Co., vs. U. S. Envelope Co., 182 Mass., 171; 65 N. E., 54.) It should be
observed that Manuel Tabora was the registered owner of the four parcels of land, which he
succeeded in mortgaging to the Philippine National Bank so that he might have the necessary
funds with which to convert and develop them into fishery. He appeared to have met with
financial reverses. He formed a corporation composed of himself, his wife, and a few others.
From the articles of incorporation, Exhibit 2, it appears that out of the P48,700, amount of capital G.R. No. L-48627
stock subscribed, P45,000 was subscribed by Manuel Tabora himself and P500 by his wife,
Rufina Q. de Tabora; and out of the P43,300, amount paid on subscription, P42,100 is made to
FERMIN Z. CARAM, JR. and ROSA O. DE CARAM, petitioners
appear as paid by Tabora and P200 by his wife. Both Tabora and His wife were directors and
vs.
the latter was treasurer as well. In fact, to this day, the lands remain inscribed in Tabora's name.
THE HONORABLE COURT OF APPEALS and ALBERTO V. ARELLANO, respondents.
The defendant always regarded Tabora as the owner of the lands. He dealt with Tabora directly.
Jose Ventura, president of the plaintiff corporation, intervened only to sign the contract, Exhibit
B, in behalf of the plaintiff. Even the Philippine National Bank, mortgagee of the four parcels of
land, always treated Tabora as the owner of the same. (See Exhibits E and F.) Two civil suits
(Nos. 1931 and 38641) were brought against Tabora in the Court of First Instance of Manila and
in both cases a writ of attachment against the four parcels of land was issued. The Philippine CRUZ, J.:
National Bank threatened to foreclose its mortgages. Tabora approached the defendant Sandiko
and succeeded in the making him sign Exhibits B, C, and D and in making him, among other
We gave limited due course to this petition on the question of the solidary liability of the
things, assume the payment of Tabora's indebtedness to the Philippine National Bank. The
petitioners with their co-defendants in the lower court 1 because of the challenge to the following
promisory note, Exhibit C, was made payable to the plaintiff company so that it may not attached
paragraph in the dispositive portion of the decision of the respondent court: *
by Tabora's creditors, two of whom had obtained writs of attachment against the four parcels of
land.
1. Defendants are hereby ordered to jointly and severally pay the plaintiff the amount of
P50,000.00 for the preparation of the project study and his technical services that led to
the organization of the defendant corporation, plus P10,000.00 attorney's fees; 2
The petitioners claim that this order has no support in fact and law because they had no contract ... Since defendant Barretto was the moving spirit in the pre-organization work of
whatsoever with the private respondent regarding the above-mentioned services. Their position defendant corporation based on his experience and expertise, hence he was logically
is that as mere subsequent investors in the corporation that was later created, they should not compensated in the amount of P200,000.00 shares of stock not as industrial partner but
be held solidarily liable with the Filipinas Orient Airways, a separate juridical entity, and with more for his technical services that brought to fruition the defendant corporation. By the
Barretto and Garcia, their co-defendants in the lower court, ** who were the ones who requested same token, We find no reason why the plaintiff should not be similarly compensated not
the said services from the private respondent. 3 only for having actively participated in the preparation of the project study for several
months and its subsequent revision but also in his having been involved in the pre-
We are not concerned here with the petitioners' co-defendants, who have not appealed the organization of the defendant corporation, in the preparation of the franchise, in inviting
decision of the respondent court and may, for this reason, be presumed to have accepted the the interest of the financiers and in the training and screening of personnel. We agree
same. For purposes of resolving this case before us, it is not necessary to determine whether it that for these special services of the plaintiff the amount of P50,000.00 as compensation
is the promoters of the proposed corporation, or the corporation itself after its organization, that is reasonable. 5
shall be responsible for the expenses incurred in connection with such organization.
The above finding bolsters the conclusion that the petitioners were not involved in the initial
The only question we have to decide now is whether or not the petitioners themselves stages of the organization of the airline, which were being directed by Barretto as the main
are also and personally liable for such expenses and, if so, to what extent. promoter. It was he who was putting all the pieces together, so to speak. The petitioners were
merely among the financiers whose interest was to be invited and who were in fact persuaded,
The reasons for the said order are given by the respondent court in its decision in this wise: on the strength of the project study, to invest in the proposed airline.

As to the 4th assigned error we hold that as to the remuneration due the plaintiff for the Significantly, there was no showing that the Filipinas Orient Airways was a fictitious corporation
preparation of the project study and the pre-organizational services in the amount of and did not have a separate juridical personality, to justify making the petitioners, as principal
P50,000.00, not only the defendant corporation but the other defendants including stockholders thereof, responsible for its obligations. As a bona fide corporation, the Filipinas
defendants Caram should be jointly and severally liable for this amount. As we above Orient Airways should alone be liable for its corporate acts as duly authorized by its officers and
related it was upon the request of defendants Barretto and Garcia that plaintiff handled directors.
the preparation of the project study which project study was presented to defendant
Caram so the latter was convinced to invest in the proposed airlines. The project study In the light of these circumstances, we hold that the petitioners cannot be held personally liable
was revised for purposes of presentation to financiers and the banks. It was on the basis for the compensation claimed by the private respondent for the services performed by him in the
of this study that defendant corporation was actually organized and rendered operational. organization of the corporation. To repeat, the petitioners did not contract such services. It was
Defendants Garcia and Caram, and Barretto became members of the Board and/or only the results of such services that Barretto and Garcia presented to them and which
officers of defendant corporation. Thus, not only the defendant corporation but all the persuaded them to invest in the proposed airline. The most that can be said is that they
other defendants who were involved in the preparatory stages of the incorporation, who benefited from such services, but that surely is no justification to hold them personally liable
caused the preparation and/or benefited from the project study and the technical services therefor. Otherwise, all the other stockholders of the corporation, including those who came in
of plaintiff must be liable. 4 later, and regardless of the amount of their share holdings, would be equally and personally
liable also with the petitioners for the claims of the private respondent.
It would appear from the above justification that the petitioners were not really involved in the
initial steps that finally led to the incorporation of the Filipinas Orient Airways. Elsewhere in the The petition is rather hazy and seems to be flawed by an ambiguous ambivalence. Our
decision, Barretto was described as "the moving spirit." The finding of the respondent court is impression is that it is opposed to the imposition of solidary responsibility upon the Carams but
that the project study was undertaken by the private respondent at the request of Barretto and seems to be willing, in a vague, unexpressed offer of compromise, to accept joint liability. While it
Garcia who, upon its completion, presented it to the petitioners to induce them to invest in the is true that it does here and there disclaim total liability, the thrust of the petition seems to be
proposed airline. The study could have been presented to other prospective investors. At any against the imposition of solidary liability only rather than against any liability at all, which is what
rate, the airline was eventually organized on the basis of the project study with the petitioners as it should have categorically argued.
major stockholders and, together with Barretto and Garcia, as principal officers.
Categorically, the Court holds that the petitioners are not liable at all, jointly or jointly and
The following portion of the decision in question is also worth considering: severally, under the first paragraph of the dispositive portion of the challenged decision. So
holding, we find it unnecessary to examine at this time the rules on solidary obligations, which (3) On December 2, 1947, the said articles of incorporation were filed in the office of the
the parties-needlessly, as it turns out have belabored unto death. Securities and Exchange Commissioner, for the issuance of the corresponding certificate of
incorporation.
WHEREFORE, the petition is granted. The petitioners are declared not liable under the
challenged decision, which is hereby modified accordingly. It is so ordered. (4) On March 22, 1948, pending action on the articles of incorporation by the aforesaid
governmental office, the respondents Fred Brown, Emma Brown, Hipolita D. Chapman and
Yap (Chairman), Narvasa, Melencio-Herrera, Feliciano and Sarmiento, JJ., concur. Ceferino S. Abella filed before the Court of First Instance of Leyte the civil case numbered 381,
Gancayco, J., took no part. entitled "Fred Brown et al. vs. Arnold C. Hall et al.", alleging among other things that the Far
Eastern Lumber and Commercial Co. was an unregistered partnership; that they wished to have
it dissolved because of bitter dissension among the members, mismanagement and fraud by the
managers and heavy financial losses.

(5) The defendants in the suit, namely, C. Arnold Hall and Bradley P. Hall, filed a motion to
dismiss, contesting the court's jurisdiction and the sufficiently of the cause of action.
G.R. No. L-2598 June 29, 1950
(6) After hearing the parties, the Hon. Edmund S. Piccio ordered the dissolution of the company;
C. ARNOLD HALL and BRADLEY P. HALL, petitioners, and at the request of plaintiffs, appointed of the properties thereof, upon the filing of a P20,000
vs. bond.
EDMUNDO S. PICCIO, Judge of the Court of First Instance of Leyte, FRED BROWN, EMMA
BROWN, HIPOLITA CAPUCIONG, in his capacity as receiver of the Far Eastern Lumber (7) The defendants therein (petitioners herein) offered to file a counter-bond for the discharge of
and Commercial Co., Inc.,respondents. the receiver, but the respondent judge refused to accept the offer and to discharge the receiver.
Whereupon, the present special civil action was instituted in this court. It is based upon two main
Claro M. Recto for petitioners. propositions, to wit:
Ramon Diokno and Jose W. Diokno for respondents.
(a) The court had no jurisdiction in civil case No. 381 to decree the dissolution of the company,
BENGZON, J.: because it being a de facto corporation, dissolution thereof may only be ordered in a quo
warranto proceeding instituted in accordance with section 19 of the Corporation Law.
This is petition to set aside all the proceedings had in civil case No. 381 of the Court of First
Instance of Leyte and to enjoin the respondent judge from further acting upon the same. (b) Inasmuch as respondents Fred Brown and Emma Brown had signed the article of
incorporation but only a partnership.
Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and Bradley P. Hall, and the
respondents Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella, signed Discussion: The second proposition may at once be dismissed. All the parties are informed that
and acknowledged in Leyte, the article of incorporation of the Far Eastern Lumber and the Securities and Exchange Commission has not, so far, issued the corresponding certificate of
Commercial Co., Inc., organized to engage in a general lumber business to carry on as general incorporation. All of them know, or sought to know, that the personality of a corporation begins to
contractors, operators and managers, etc. Attached to the article was an affidavit of the treasurer exist only from the moment such certificate is issued — not before (sec. 11, Corporation Law).
stating that 23,428 shares of stock had been subscribed and fully paid with certain properties The complaining associates have not represented to the others that they were incorporated any
transferred to the corporation described in a list appended thereto. more than the latter had made similar representations to them. And as nobody was led to believe
anything to his prejudice and damage, the principle of estoppel does not apply. Obviously this is
(2) Immediately after the execution of said articles of incorporation, the corporation proceeded to not an instance requiring the enforcement of contracts with the corporation through the rule of
do business with the adoption of by-laws and the election of its officers. estoppel.

The first proposition above stated is premised on the theory that, inasmuch as the Far Eastern
Lumber and Commercial Co., is a de facto corporation, section 19 of the Corporation Law
applies, and therefore the court had not jurisdiction to take cognizance of said civil case number
381. Section 19 reads as follows:

. . . The due incorporation of any corporations claiming in good faith to be a corporation


under this Act and its right to exercise corporate powers shall not be inquired into
collaterally in any private suit to which the corporation may be a party, but such inquiry G.R. No. L-11442 May 23, 1958
may be had at the suit of the Insular Government on information of the Attorney-General.
MANUELA T. VDA. DE SALVATIERRA, petitioner,
There are least two reasons why this section does not govern the situation. Not having obtained vs.
the certificate of incorporation, the Far Eastern Lumber and Commercial Co. — even its HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of
stockholders — may not probably claim "in good faith" to be a corporation. Leyte, Branch II, and SEGUNDINO REFUERZO, respondents.

Under our statue it is to be noted (Corporation Law, sec. 11) that it is the issuance of a Jimenez, Tantuico, Jr. and Tolete for petitioner.
certificate of incorporation by the Director of the Bureau of Commerce and Industry which Francisco Astilla for respondent Segundino Refuerzo.
calls a corporation into being. The immunity if collateral attack is granted to corporations
"claiming in good faith to be a corporation under this act." Such a claim is compatible FELIX, J.:
with the existence of errors and irregularities; but not with a total or substantial disregard
of the law. Unless there has been an evident attempt to comply with the law the claim to This is a petition for certiorari filed by Manuela T. Vda. de Salvatierra seeking to nullify the order
be a corporation "under this act" could not be made "in good faith." (Fisher on the of the Court of First Instance of Leyte in Civil Case No. 1912, dated March 21, 1956, relieving
Philippine Law of Stock Corporations, p. 75. See also Humphreys vs. Drew, 59 Fla., 295; Segundino Refuerzo of liability for the contract entered into between the former and the
52 So., 362.) Philippine Fibers Producers Co., Inc., of which Refuerzo is the president. The facts of the case
are as follows:
Second, this is not a suit in which the corporation is a party. This is a litigation between
stockholders of the alleged corporation, for the purpose of obtaining its dissolution. Even the Manuela T. Vda. de Salvatierra appeared to be the owner of a parcel of land located at
existence of a de jure corporation may be terminated in a private suit for its dissolution between Maghobas, Poblacion, Burauen, Teyte. On March 7, 1954, said landholder entered into a
stockholders, without the intervention of the state. contract of lease with the Philippine Fibers Producers Co., Inc., allegedly a corporation "duly
organized and existing under the laws of the Philippines, domiciled at Burauen, Leyte,
There might be room for argument on the right of minority stockholders to sue for Philippines, and with business address therein, represented in this instance by Mr. Segundino Q.
dissolution;1 but that question does not affect the court's jurisdiction, and is a matter for decision Refuerzo, the President". It was provided in said contract, among other things, that the lifetime of
by the judge, subject to review on appeal. Whkch brings us to one principal reason why this the lease would be for a period of 10 years; that the land would be planted to kenaf, ramie or
petition may not prosper, namely: the petitioners have their remedy by appealing the order of other crops suitable to the soil; that the lessor would be entitled to 30 per cent of the net income
dissolution at the proper time. accruing from the harvest of any, crop without being responsible for the cost of production
thereof; and that after every harvest, the lessee was bound to declare at the earliest possible
There is a secondary issue in connection with the appointment of a receiver. But it must be time the income derived therefrom and to deliver the corresponding share due the lessor.
admitted that receivership is proper in proceedings for dissolution of a company or corporation,
and it was no error to reject the counter-bond, the court having declared the dissolution. As to Apparently, the aforementioned obligations imposed on the alleged corporation were not
the amount of the bond to be demanded of the receiver, much depends upon the discretion of complied with because on April 5, 1955, Alanuela T. Vda, de Salvatierra filed with the Court of
the trial court, which in this instance we do not believe has been clearly abused. First Instance of Leyte a complaint against the Philippine Fibers Producers Co., Inc., and
Segundino Q. Refuerzo, for accounting, rescission and damages (Civil Case No. 1912). She
Judgment: The petition will, therefore, be dismissed, with costs. The preliminary injunction averred that sometime in April, 1954, defendants planted kenaf on 3 hectares of the leased
heretofore issued will be dissolved. property which crop was, at the time of the commencement of the action, already harvested,
processed and sold by defendants; that notwithstanding that fact, defendants refused to render
Ozaeta, Pablo, Tuason, Montemayor, and Reyes, JJ., concur. an accounting of the income derived therefrom and to deliver the lessor's share; that the
estimated gross income was P4,500, and the deductible expenses amounted to P1,000; that as The aforequoted provision treats of 2 periods, i.e., 60 days after petitioner learns of the
defendants' refusal to undertake such task was in violation of the terms of the covenant entered judgment, and not more than 6 months after the judgment or order was rendered, both of which
into between the plaintiff and defendant corporation, a rescission was but proper. must be satisfied. As the decision in the case at bar was under date of June 8, 1955, whereas
the motion filed by respondent Refuerzo was dated January 31, 1956, or after the lapse of 7
As defendants apparently failed to file their answer to the complaint, of which they were allegedly months and 23 days, the filing of the aforementioned motion was clearly made beyond the
notified, the Court declared them in default and proceeded to receive plaintiff's evidence. prescriptive period provided for by the rules. The remedy allowed by Rule 38 to a party adversely
On June 8, 1955, the lower Court rendered judgment granting plaintiff's prayer, and required affected by a decision or order is certainly an alert of grace or benevolence intended to afford
defendants to render a complete accounting of the harvest of the land subject of the proceeding said litigant a penultimate opportunity to protect his interest. Considering the nature of such relief
within 15 days from receipt of the decision and to deliver 30 per cent of the net income realized and the purpose behind it, the periods fixed by said rule are non-extendible and never
from the last harvest to plaintiff, with legal interest from the date defendants received payment interrupted; nor could it be subjected to any condition or contingency because it is of itself
for said crop. It was further provide that upon defendants' failure to abide by the said devised to meet a condition or contingency (Palomares vs. Jimenez,* G.R. No. L-4513, January
requirement, the gross income would be fixed at P4,200 or a net income of P3,200 after 31, 1952). On this score alone, therefore, the petition for a writ of certiorari filed herein may be
deducting the expenses for production, 30 per cent of which or P960 was held to be due the granted. However, taking note of the question presented by the motion for relief involved herein,
plaintiff pursuant to the aforementioned contract of lease, which was declared rescinded. We deem it wise to delve in and pass upon the merit of the same.

No appeal therefrom having been perfected within the reglementary period, the Court, upon Refuerzo, in praying for his exoneration from any liability resulting from the non-fulfillment of the
motion of plaintiff, issued a writ of execution, in virtue of which the Provincial Sheriff of Leyte obligation imposed on defendant Philippine Fibers Producers Co., Inc., interposed the defense
caused the attachment of 3 parcels of land registered in the name of Segundino Refuerzo. No that the complaint filed with the lower court contained no allegation which would hold him liable
property of the Philippine Fibers Producers Co., Inc., was found available for attachment. On personally, for while it was stated therein that he was a signatory to the lease contract, he did so
January 31, 1956, defendant Segundino Refuerzo filed a motion claiming that the decision in his capacity as president of the corporation. And this allegation was found by the Court a quo
rendered in said Civil Case No. 1912 was null and void with respect to him, there being no to be supported by the records. Plaintiff on the other hand tried to refute this averment by
allegation in the complaint pointing to his personal liability and thus prayed that an order be contending that her failure to specify defendant's personal liability was due to the fact that all the
issued limiting such liability to defendant corporation. Over plaintiff's opposition, the Court a time she was under the impression that the Philippine Fibers Producers Co., Inc., represented by
quo granted the same and ordered the Provincial Sheriff of Leyte to release all properties Refuerzo was a duly registered corporation as appearing in the contract, but a subsequent
belonging to the movant that might have already been attached, after finding that the evidence inquiry from the Securities and Exchange Commission yielded otherwise. While as a general rule
on record made no mention or referred to any fact which might hold movant personally liable a person who has contracted or dealt with an association in such a way as to recognize its
therein. As plaintiff's petition for relief from said order was denied, Manuela T. Vda. de existence as a corporate body is estopped from denying the same in an action arising out of
Salvatierra instituted the instant action asserting that the trial Judge in issuing the order such transaction or dealing, (Asia Banking Corporation vs. Standard Products Co., 46 Phil., 114;
complained of, acted with grave abuse of discretion and prayed that same be declared a nullity. Compania Agricola de Ultramar vs. Reyes, 4 Phil., 1; Ohta Development Co.; vs. Steamship
Pompey, 49 Phil., 117), yet this doctrine may not be held to be applicable where fraud takes a
From the foregoing narration of facts, it is clear that the order sought to be nullified was issued part in the said transaction. In the instant case, on plaintiff's charge that she was unaware of the
by tile respondent Judge upon motion of defendant Refuerzo, obviously pursuant to Rule 38 of fact that the Philippine Fibers Producers Co., Inc., had no juridical personality, defendant
the Rules of Court. Section 3 of said Rule, however, in providing for the period within which such Refuerzo gave no confirmation or denial and the circumstances surrounding the execution of the
a motion may be filed, prescribes that: contract lead to the inescapable conclusion that plaintiff Manuela T. Vda. de Salvatierra was
really made to believe that such corporation was duly organized in accordance with law.
SEC. 3. WHEN PETITION FILED; CONTENTS AND VERIFICATION. — A petition
provided for in either of the preceding sections of this rule must be verified, filed within There can be no question that a corporation with registered has a juridical personality separate
sixty days after the petitioner learns of the judgment, order, or other proceeding to be set and distinct from its component members or stockholders and officers such that a corporation
aside, and not more than six months after such judgment or order was entered, or such cannot be held liable for the personal indebtedness of a stockholder even if he should be its
proceeding was taken; and must be must be accompanied with affidavit showing the president (Walter A. Smith Co. vs. Ford, SC-G.R. No. 42420) and conversely, a stockholder or
fraud, accident, mistake, or excusable negligence relied upon, and the facts constituting member cannot be held personally liable for any financial obligation be, the corporation in
the petitioner is good and substantial cause of action or defense, as the case may be, excess of his unpaid subscription. But this rule is understood to refer merely to registered
which he may prove if his petition be granted". (Rule 38) corporations and cannot be made applicable to the liability of members of an unincorporated
association. The reason behind this doctrine is obvious-since an organization which before the
law is non-existent has no personality and would be incompetent to act and appropriate for itself SANCHEZ, J.:
the powers and attribute of a corporation as provided by law; it cannot create agents or confer
authority on another to act in its behalf; thus, those who act or purport to act as its The National Coconut Corporation (NACOCO, for short) was chartered as a non-profit
representatives or agents do so without authority and at their own risk. And as it is an elementary governmental organization on May 7, 1940 by Commonwealth Act 518 avowedly for the
principle of law that a person who acts as an agent without authority or without a principal is protection, preservation and development of the coconut industry in the Philippines. On August
himself regarded as the principal, possessed of all the rights and subject to all the liabilities of a 1, 1946, NACOCO's charter was amended [Republic Act 5] to grant that corporation the express
principal, a person acting or purporting to act on behalf of a corporation which has no valid power "to buy, sell, barter, export, and in any other manner deal in, coconut, copra, and
existence assumes such privileges and obligations and comes personally liable for contracts dessicated coconut, as well as their by-products, and to act as agent, broker or commission
entered into or for other acts performed as such, agent (Fay vs. Noble, 7 Cushing [Mass.] 188. merchant of the producers, dealers or merchants" thereof. The charter amendment was enacted
Cited in II Tolentino's Commercial Laws of the Philippines, Fifth Ed., P. 689-690). Considering to stabilize copra prices, to serve coconut producers by securing advantageous prices for them,
that defendant Refuerzo, as president of the unregistered corporation Philippine Fibers to cut down to a minimum, if not altogether eliminate, the margin of middlemen, mostly aliens.4
Producers Co., Inc., was the moving spirit behind the consummation of the lease agreement by
acting as its representative, his liability cannot be limited or restricted that imposed upon General manager and board chairman was Maximo M. Kalaw; defendants Juan Bocar and
corporate shareholders. In acting on behalf of a corporation which he knew to be unregistered, Casimiro Garcia were members of the Board; defendant Leonor Moll became director only on
he assumed the risk of reaping the consequential damages or resultant rights, if any, arising out December 22, 1947.
of such transaction.
NACOCO, after the passage of Republic Act 5, embarked on copra trading activities. Amongst
Wherefore, the order of the lower Court of March 21, 1956, amending its previous decision on the scores of contracts executed by general manager Kalaw are the disputed contracts, for the
this matter and ordering the Provincial Sheriff of Leyte to release any and all properties of delivery of copra, viz:
movant therein which might have been attached in the execution of such judgment, is hereby set
aside and nullified as if it had never been issued. With costs against respondent Segundino
(a) July 30, 1947: Alexander Adamson & Co., for 2,000 long tons, $167.00: per ton, f. o.
Refuerzo. It is so ordered.
b., delivery: August and September, 1947. This contract was later assigned to Louis
Dreyfus & Co. (Overseas) Ltd.
Paras, C.J., Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes,
J.B.L., and Endencia, JJ., concur.
(b) August 14, 1947: Alexander Adamson & Co., for 2,000 long tons $145.00 per long
ton, f.o.b., Philippine ports, to be shipped: September-October, 1947. This contract was
also assigned to Louis Dreyfus & Co. (Overseas) Ltd.

(c) August 22, 1947: Pacific Vegetable Co., for 3,000 tons, $137.50 per ton, delivery:
September, 1947.
G.R. No. L-18805 August 14, 1967
(d) September 5, 1947: Spencer Kellog & Sons, for 1,000 long tons, $160.00 per ton,
1
THE BOARD OF LIQUIDATORS representing THE GOVERNMENT OF THE REPUBLIC OF c.i.f., Los Angeles, California, delivery: November, 1947.
THE PHILIPPINES,plaintiff-appellant,
vs. (e) September 9, 1947: Franklin Baker Division of General Foods Corporation, for 1,500
HEIRS OF MAXIMO M. KALAW,2 JUAN BOCAR, ESTATE OF THE DECEASED CASIMIRO long tons, $164,00 per ton, c.i.f., New York, to be shipped in November, 1947.
GARCIA,3 and LEONOR MOLL, defendants-appellees.
(f) September 12, 1947: Louis Dreyfus & Co. (Overseas) Ltd., for 3,000 long tons,
Simeon M. Gopengco and Solicitor General for plaintiff-appellant. $154.00 per ton, f.o.b., 3 Philippine ports, delivery: November, 1947.
L. H. Hernandez, Emma Quisumbing, Fernando and Quisumbing, Jr.; Ponce Enrile, Siguion
Reyna, Montecillo and Belo for defendants-appellees. (g) September 13, 1947: Juan Cojuangco, for 2,000 tons, $175.00 per ton, delivery:
November and December, 1947. This contract was assigned to Pacific Vegetable Co.
(h) October 27, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton, c.i.f., Pacific 7,091.45 9,408.55
ports, delivery: December, 1947 and January, 1948. This contract was assigned to
Pacific Vegetable Co.
The buyers threatened damage suits. Some of the claims were settled, viz: Pacific Vegetable Oil
(i) October 28, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton, c.i.f., Pacific Co., in copra delivered by NACOCO, P539,000.00; Franklin Baker Corporation, P78,210.00;
ports, delivery: January, 1948. This contract was assigned to Pacific Vegetable Co. Spencer Kellog & Sons, P159,040.00.

An unhappy chain of events conspired to deter NACOCO from fulfilling these contracts. Nature But one buyer, Louis Dreyfus & Go. (Overseas) Ltd., did in fact sue before the Court of First
supervened. Four devastating typhoons visited the Philippines: the first in October, the second Instance of Manila, upon claims as follows: For the undelivered copra under the July 30 contract
and third in November, and the fourth in December, 1947. Coconut trees throughout the country (Civil Case 4459); P287,028.00; for the balance on the August 14 contract (Civil Case 4398),
suffered extensive damage. Copra production decreased. Prices spiralled. Warehouses were P75,098.63; for that per the September 12 contract reduced to judgment (Civil Case 4322,
destroyed. Cash requirements doubled. Deprivation of export facilities increased the time appealed to this Court in L-2829), P447,908.40. These cases culminated in an out-of-court
necessary to accumulate shiploads of copra. Quick turnovers became impossible, financing a amicable settlement when the Kalaw management was already out. The corporation thereunder
problem. paid Dreyfus P567,024.52 representing 70% of the total claims. With particular reference to the
Dreyfus claims, NACOCO put up the defenses that: (1) the contracts were void because Louis
When it became clear that the contracts would be unprofitable, Kalaw submitted them to the Dreyfus & Co. (Overseas) Ltd. did not have license to do business here; and (2) failure to deliver
board for approval. It was not until December 22, 1947 when the membership was completed. was due to force majeure, the typhoons. To project the utter unreasonableness of this
Defendant Moll took her oath on that date. A meeting was then held. Kalaw made a full compromise, we reproduce in haec verba this finding below:
disclosure of the situation, apprised the board of the impending heavy losses. No action was
taken on the contracts. Neither did the board vote thereon at the meeting of January 7, 1948 x x x However, in similar cases brought by the same claimant [Louis Dreyfus & Co.
following. Then, on January 11, 1948, President Roxas made a statement that the NACOCO (Overseas) Ltd.] against Santiago Syjuco for non-delivery of copra also involving a claim
head did his best to avert the losses, emphasized that government concerns faced the same of P345,654.68 wherein defendant set up same defenses as above, plaintiff accepted
risks that confronted private companies, that NACOCO was recouping its losses, and that Kalaw a promise of P5,000.00 only (Exhs. 31 & 32 Heirs.) Following the same proportion, the
was to remain in his post. Not long thereafter, that is, on January 30, 1948, the board met again claim of Dreyfus against NACOCO should have been compromised for only P10,000.00,
with Kalaw, Bocar, Garcia and Moll in attendance. They unanimously approved the contracts if at all. Now, why should defendants be held liable for the large sum paid as compromise
hereinbefore enumerated. by the Board of Liquidators? This is just a sample to show how unjust it would be to hold
defendants liable for the readiness with which the Board of Liquidators disposed of the
As was to be expected, NACOCO but partially performed the contracts, as follows: NACOCO funds, although there was much possibility of successfully resisting the claims,
or at least settlement for nominal sums like what happened in the Syjuco case.5

Buyers Tons Delivered Undelivered All the settlements sum up to P1,343,274.52.


Pacific Vegetable Oil 2,386.45 4,613.55
In this suit started in February, 1949, NACOCO seeks to recover the above sum of
Spencer Kellog None 1,000 P1,343,274.52 from general manager and board chairman Maximo M. Kalaw, and directors Juan
Bocar, Casimiro Garcia and Leonor Moll. It charges Kalaw with negligence under Article 1902 of
Franklin Baker 1,000 500 the old Civil Code (now Article 2176, new Civil Code); and defendant board members, including
Kalaw, with bad faith and/or breach of trust for having approved the contracts. The fifth amended
Louis Dreyfus 800 2,200 complaint, on which this case was tried, was filed on July 2, 1959. Defendants resisted the action
Louis Dreyfus (Adamson contract of July 30, 1947) 1,150 850 upon defenses hereinafter in this opinion to be discussed.

Louis Dreyfus (Adamson Contract of August 14, 1947) 1,755 245 The lower court came out with a judgment dismissing the complaint without costs as well as
defendants' counterclaims, except that plaintiff was ordered to pay the heirs of Maximo Kalaw
TOTALS
the sum of P2,601.94 for unpaid salaries and cash deposit due the deceased Kalaw from continued as a body corporate for a period of three (3) years from the effective date of
NACOCO. this Executive Order for the purpose of prosecuting and defending suits by or against it
and of enabling the Board of Liquidators gradually to settle and close its affairs, to
Plaintiff appealed direct to this Court. dispose of and, convey its property in the manner hereinafter provided.

Plaintiff's brief did not, question the judgment on Kalaw's counterclaim for the sum of P2,601.94. Citing Mr. Justice Fisher, defendants proceed to argue that even where it may be found
impossible within the 3 year period to reduce disputed claims to judgment, nonetheless, "suits by
Right at the outset, two preliminary questions raised before, but adversely decided by, the court or against a corporation abate when it ceases to be an entity capable of suing or being sued"
below, arrest our attention. On appeal, defendants renew their bid. And this, upon established (Fisher, The Philippine Law of Stock Corporations, pp. 390-391). Corpus Juris
jurisprudence that an appellate court may base its decision of affirmance of the judgment below Secundum likewise is authority for the statement that "[t]he dissolution of a corporation ends its
on a point or points ignored by the trial court or in which said court was in error.6 existence so that there must be statutory authority for prolongation of its life even for purposes of
pending litigation"9and that suit "cannot be continued or revived; nor can a valid judgment be
rendered therein, and a judgment, if rendered, is not only erroneous, but void and subject to
1. First of the threshold questions is that advanced by defendants that plaintiff Board of
collateral attack." 10 So it is, that abatement of pending actions follows as a matter of course
Liquidators has lost its legal personality to continue with this suit.
upon the expiration of the legal period for liquidation, 11 unless the statute merely requires a
commencement of suit within the added time. 12 For, the court cannot extend the time alloted by
Accepted in this jurisdiction are three methods by which a corporation may wind up its affairs: (1) statute. 13
under Section 3, Rule 104, of the Rules of Court [which superseded Section 66 of the
Corporation Law]7 whereby, upon voluntary dissolution of a corporation, the court may direct
We, however, express the view that the executive order abolishing NACOCO and creating the
"such disposition of its assets as justice requires, and may appoint a receiver to collect such
Board of Liquidators should be examined in context. The proviso in Section 1 of Executive Order
assets and pay the debts of the corporation;" (2) under Section 77 of the Corporation Law,
372, whereby the corporate existence of NACOCO was continued for a period of three years
whereby a corporation whose corporate existence is terminated, "shall nevertheless be
from the effectivity of the order for "the purpose of prosecuting and defending suits by or against
continued as a body corporate for three years after the time when it would have been so
it and of enabling the Board of Liquidators gradually to settle and close its affairs, to dispose of
dissolved, for the purpose of prosecuting and defending suits by or against it and of enabling it
and convey its property in the manner hereinafter provided", is to be read not as an isolated
gradually to settle and close its affairs, to dispose of and convey its property and to divide its
provision but in conjunction with the whole. So reading, it will be readily observed that no time
capital stock, but not for the purpose of continuing the business for which it was established;"
limit has been tacked to the existence of the Board of Liquidators and its function of closing the
and (3) under Section 78 of the Corporation Law, by virtue of which the corporation, within the
affairs of the various government owned corporations, including NACOCO.
three year period just mentioned, "is authorized and empowered to convey all of its property to
trustees for the benefit of members, stockholders, creditors, and others interested."8
By Section 2 of the executive order, while the boards of directors of the various corporations
were abolished, their powers and functions and duties under existing laws were to be assumed
It is defendants' pose that their case comes within the coverage of the second method. They
and exercised by the Board of Liquidators. The President thought it best to do away with the
reason out that suit was commenced in February, 1949; that by Executive Order 372, dated
boards of directors of the defunct corporations; at the same time, however, the President had
November 24, 1950, NACOCO, together with other government-owned corporations, was
chosen to see to it that the Board of Liquidators step into the vacuum. And nowhere in the
abolished, and the Board of Liquidators was entrusted with the function of settling and closing its
executive order was there any mention of the lifespan of the Board of Liquidators. A glance at
affairs; and that, since the three year period has elapsed, the Board of Liquidators may not now
the other provisions of the executive order buttresses our conclusion. Thus, liquidation by the
continue with, and prosecute, the present case to its conclusion, because Executive Order 372
Board of Liquidators may, under section 1, proceed in accordance with law, the provisions of the
provides in Section 1 thereof that —
executive order, "and/or in such manner as the President of the Philippines may direct." By
Section 4, when any property, fund, or project is transferred to any governmental instrumentality
Sec.1. The National Abaca and Other Fibers Corporation, the National Coconut "for administration or continuance of any project," the necessary funds therefor shall be taken
Corporation, the National Tobacco Corporation, the National Food Producer Corporation from the corresponding special fund created in Section 5. Section 5, in turn, talks of special
and the former enemy-owned or controlled corporations or associations, . . . are hereby funds established from the "net proceeds of the liquidation" of the various corporations
abolished. The said corporations shall be liquidated in accordance with law, the abolished. And by Section, 7, fifty per centum of the fees collected from the copra
provisions of this Order, and/or in such manner as the President of the Philippines may standardization and inspection service shall accrue "to the special fund created in section 5
direct; Provided, however, That each of the said corporations shall nevertheless be hereof for the rehabilitation and development of the coconut industry." Implicit in all these, is that
the term of life of the Board of Liquidators is without time limit. Contemporary history gives us the We, accordingly, rule that the Board of Liquidators has personality to proceed as: party-plaintiff in
fact that the Board of Liquidators still exists as an office with officials and numerous employees this case.
continuing the job of liquidation and prosecution of several court actions.
2. Defendants' second poser is that the action is unenforceable against the heirs of Kalaw.
Not that our views on the power of the Board of Liquidators to proceed to the final determination
of the present case is without jurisprudential support. The first judicial test before this Court Appellee heirs of Kalaw raised in their motion to dismiss, 17 which was overruled, and in their
is National Abaca and Other Fibers Corporation vs. Pore, L-16779, August 16, 1961. In that nineteenth special defense, that plaintiff's action is personal to the deceased Maximo M. Kalaw,
case, the corporation, already dissolved, commenced suit within the three-year extended period and may not be deemed to have survived after his death.18 They say that the controlling statute
for liquidation. That suit was for recovery of money advanced to defendant for the purchase of is Section 5, Rule 87, of the 1940 Rules of Court.19which provides that "[a]ll claims for money
hemp in behalf of the corporation. She failed to account for that money. Defendant moved to against the decedent, arising from contract, express or implied", must be filed in the estate
dismiss, questioned the corporation's capacity to sue. The lower court ordered plaintiff to include proceedings of the deceased. We disagree.
as co-party plaintiff, The Board of Liquidators, to which the corporation's liquidation was
entrusted by Executive Order 372. Plaintiff failed to effect inclusion. The lower court dismissed The suit here revolves around the alleged negligent acts of Kalaw for having entered into the
the suit. Plaintiff moved to reconsider. Ground: excusable negligence, in that its counsel questioned contracts without prior approval of the board of directors, to the damage and
prepared the amended complaint, as directed, and instructed the board's incoming and outgoing prejudice of plaintiff; and is against Kalaw and the other directors for having subsequently
correspondence clerk, Mrs. Receda Vda. de Ocampo, to mail the original thereof to the court and approved the said contracts in bad faith and/or breach of trust." Clearly then, the present case is
a copy of the same to defendant's counsel. She mailed the copy to the latter but failed to send not a mere action for the recovery of money nor a claim for money arising from contract. The suit
the original to the court. This motion was rejected below. Plaintiff came to this Court on appeal. involves alleged tortious acts. And the action is embraced in suits filed "to recover damages for
We there said that "the rule appears to be well settled that, in the absence of statutory provision an injury to person or property, real or personal", which survive. 20
to the contrary, pending actions by or against a corporation are abated upon expiration of the
period allowed by law for the liquidation of its affairs." We there said that "[o]ur Corporation Law
The leading expositor of the law on this point is Aguas vs. Llemos, L-18107, August 30, 1962.
contains no provision authorizing a corporation, after three (3) years from the expiration of its
There, plaintiffs sought to recover damages from defendant Llemos. The complaint averred that
lifetime, to continue in its corporate name actions instituted by it within said period of three (3)
Llemos had served plaintiff by registered mail with a copy of a petition for a writ of possession in
years." 14 However, these precepts notwithstanding, we, in effect, held in that case that the Board
Civil Case 4824 of the Court of First Instance at Catbalogan, Samar, with notice that the same
of Liquidators escapes from the operation thereof for the reason that "[o]bviously, the complete
would be submitted to the Samar court on February 23, 1960 at 8:00 a.m.; that in view of the
loss of plaintiff's corporate existence after the expiration of the period of three (3) years for the
copy and notice served, plaintiffs proceeded to the said court of Samar from their residence in
settlement of its affairs is what impelled the President to create a Board of Liquidators, to
Manila accompanied by their lawyers, only to discover that no such petition had been filed; and
continue the management of such matters as may then be pending." 15 We accordingly directed
that defendant Llemos maliciously failed to appear in court, so that plaintiffs' expenditure and
the record of said case to be returned to the lower court, with instructions to admit plaintiff's
trouble turned out to be in vain, causing them mental anguish and undue embarrassment.
amended complaint to include, as party plaintiff, the Board of Liquidators.
Defendant died before he could answer the complaint. Upon leave of court, plaintiffs amended
their complaint to include the heirs of the deceased. The heirs moved to dismiss. The court
Defendants' position is vulnerable to attack from another direction. dismissed the complaint on the ground that the legal representative, and not the heirs, should
have been made the party defendant; and that, anyway, the action being for recovery of money,
By Executive Order 372, the government, the sole stockholder, abolished NACOCO, and placed testate or intestate proceedings should be initiated and the claim filed therein. This Court, thru
its assets in the hands of the Board of Liquidators. The Board of Liquidators thus became Mr. Justice Jose B. L. Reyes, there declared:
the trustee on behalf of the government. It was an express trust. The legal interest became
vested in the trustee — the Board of Liquidators. The beneficial interest remained with the sole Plaintiffs argue with considerable cogency that contrasting the correlated provisions of
stockholder — the government. At no time had the government withdrawn the property, or the the Rules of Court, those concerning claims that are barred if not filed in the estate
authority to continue the present suit, from the Board of Liquidators. If for this reason alone, we settlement proceedings (Rule 87, sec. 5) and those defining actions that survive and may
cannot stay the hand of the Board of Liquidators from prosecuting this case to its final be prosecuted against the executor or administrator (Rule 88, sec. 1), it is apparent that
conclusion. 16 The provisions of Section 78 of the Corporation Law — the third method of winding actions for damages caused by tortious conduct of a defendant (as in the case at bar)
up corporate affairs — find application. survive the death of the latter. Under Rule 87, section 5, the actions that are abated by
death are: (1) claims for funeral expenses and those for the last sickness of the
decedent; (2) judgments for money; and (3) "all claims for money against the The problem, therefore, is whether the case at bar is to be taken out of the general concept of
decedent, arising from contract express or implied." None of these includes that of the the powers of a general manager, given the cited provision of the NACOCO by-laws requiring
plaintiffs-appellants; for it is not enough that the claim against the deceased party be for prior directorate approval of NACOCO contracts.
money, but it must arise from "contract express or implied", and these words (also used
by the Rules in connection with attachments and derived from the common law) were The peculiar nature of copra trading, at this point, deserves express articulation. Ordinary in this
construed in Leung Ben vs. O'Brien, 38 Phil. 182, 189-194, enterprise are copra sales for future delivery. The movement of the market requires that sales
agreements be entered into, even though the goods are not yet in the hands of the seller. Known
"to include all purely personal obligations other than those which have their in business parlance as forward sales, it is concededly the practice of the trade. A certain
source in delict or tort." amount of speculation is inherent in the undertaking. NACOCO was much more conservative
than the exporters with big capital. This short-selling was inevitable at the time in the light of
Upon the other hand, Rule 88, section 1, enumerates actions that survive against a other factors such as availability of vessels, the quantity required before being accepted for
decedent's executors or administrators, and they are: (1) actions to recover real and loading, the labor needed to prepare and sack the copra for market. To NACOCO, forward sales
personal property from the estate; (2) actions to enforce a lien thereon; and (3) actions to were a necessity. Copra could not stay long in its hands; it would lose weight, its value decrease.
recover damages for an injury to person or property. The present suit is one for damages Above all, NACOCO's limited funds necessitated a quick turnover. Copra contracts then had to
under the last class, it having been held that "injury to property" is not limited to injuries be executed on short notice — at times within twenty-four hours. To be appreciated then is the
to specific property, but extends to other wrongs by which personal estate is injured or difficulty of calling a formal meeting of the board.
diminished (Baker vs. Crandall, 47 Am. Rep. 126; also 171 A.L.R., 1395). To maliciously
cause a party to incur unnecessary expenses, as charged in this case, is certainly injury Such were the environmental circumstances when Kalaw went into copra trading.
to that party's property (Javier vs. Araneta, L-4369, Aug. 31, 1953).
Long before the disputed contracts came into being, Kalaw contracted — by himself alone as
The ruling in the preceding case was hammered out of facts comparable to those of the present. general manager — for forward sales of copra. For the fiscal year ending June 30, 1947, Kalaw
No cogent reason exists why we should break away from the views just expressed. And, the signed some 60 such contracts for the sale of copra to divers parties. During that period, from
conclusion remains: Action against the Kalaw heirs and, for the matter, against the Estate of those copra sales, NACOCO reaped a gross profit of P3,631,181.48. So pleased was
Casimiro Garcia survives. NACOCO's board of directors that, on December 5, 1946, in Kalaw's absence, it voted to grant
him a special bonus "in recognition of the signal achievement rendered by him in putting the
The preliminaries out of the way, we now go to the core of the controversy. Corporation's business on a self-sufficient basis within a few months after assuming office,
despite numerous handicaps and difficulties."
3. Plaintiff levelled a major attack on the lower court's holding that Kalaw justifiedly entered into
the controverted contracts without the prior approval of the corporation's directorate. Plaintiff These previous contract it should be stressed, were signed by Kalaw without prior authority from
leans heavily on NACOCO's corporate by-laws. Article IV (b), Chapter III thereof, recites, as the board. Said contracts were known all along to the board members. Nothing was said by
amongst the duties of the general manager, the obligation: "(b) To perform or execute on behalf them. The aforesaid contracts stand to prove one thing: Obviously, NACOCO board met the
of the Corporation upon prior approval of the Board, all contracts necessary and essential to the difficulties attendant to forward sales by leaving the adoption of means to end, to the sound
proper accomplishment for which the Corporation was organized." discretion of NACOCO's general manager Maximo M. Kalaw.

Not of de minimis importance in a proper approach to the problem at hand, is the nature of a Liberally spread on the record are instances of contracts executed by NACOCO's general
general manager's position in the corporate structure. A rule that has gained acceptance through manager and submitted to the board after their consummation, not before. These agreements
the years is that a corporate officer "intrusted with the general management and control of its were not Kalaw's alone. One at least was executed by a predecessor way back in 1940, soon
business, has implied authority to make any contract or do any other act which is necessary or after NACOCO was chartered. It was a contract of lease executed on November 16, 1940 by the
appropriate to the conduct of the ordinary business of the corporation. 21 As such officer, "he then general manager and board chairman, Maximo Rodriguez, and A. Soriano y Cia., for the
may, without any special authority from the Board of Directors perform all acts of an ordinary lease of a space in Soriano Building On November 14, 1946, NACOCO, thru its general
nature, which by usage or necessity are incident to his office, and may bind the corporation by manager Kalaw, sold 3,000 tons of copra to the Food Ministry, London, thru Sebastian Palanca.
contracts in matters arising in the usual course of business. 22 On December 22, 1947, when the controversy over the present contract cropped up, the board
voted to approve a lease contract previously executed between Kalaw and Fidel Isberto and
Ulpiana Isberto covering a warehouse of the latter. On the same date, the board gave its nod to (1) The role of the Nacoco to stabilize the prices of copra requires that it should not
a contract for renewal of the services of Dr. Manuel L. Roxas. In fact, also on that date, the board cease buying even when it does not have actual contracts of sale since the suspension
requested Kalaw to report for action all copra contracts signed by him "at the meeting of buying by the Nacoco will result in middlemen taking advantage of the temporary
immediately following the signing of the contracts." This practice was observed in a later inactivity of the Corporation to lower the prices to the detriment of the producers.
instance when, on January 7, 1948, the board approved two previous contracts for the sale of
1,000 tons of copra each to a certain "SCAP" and a certain "GNAPO". (2) The movement of the market is such that it may not be practical always to wait for the
consummation of contracts of sale before beginning to buy copra.
And more. On December 19, 1946, the board resolved to ratify the brokerage commission of 2%
of Smith, Bell and Co., Ltd., in the sale of 4,300 long tons of copra to the French Government. The General Manager explained that in this connection a certain amount of speculation
Such ratification was necessary because, as stated by Kalaw in that same meeting, "under an is unavoidable. However, he said that the Nacoco is much more conservative than the
existing resolution he is authorized to give a brokerage fee of only 1% on sales of copra made other big exporters in this respect.25
through brokers." On January 15, 1947, the brokerage fee agreements of 1-1/2% on three export
contracts, and 2% on three others, for the sale of copra were approved by the board with a Settled jurisprudence has it that where similar acts have been approved by the directors as a
proviso authorizing the general manager to pay a commission up to the amount of 1-1/2% matter of general practice, custom, and policy, the general manager may bind the company
"without further action by the Board." On February 5, 1947, the brokerage fee of 2% of J. without formal authorization of the board of directors. 26 In varying language, existence of such
Cojuangco & Co. on the sale of 2,000 tons of copra was favorably acted upon by the board. On authority is established, by proof of the course of business, the usage and practices of the
March 19, 1947, a 2% brokerage commission was similarly approved by the board for Pacific company and by the knowledge which the board of directors has, or must bepresumed to have,
Trading Corporation on the sale of 2,000 tons of copra. of acts and doings of its subordinates in and about the affairs of the corporation. 27 So also,

It is to be noted in the foregoing cases that only the brokerage fee agreements were passed x x x authority to act for and bind a corporation may be presumed from acts of
upon by the board, not the sales contracts themselves. And even those fee agreements were recognition in other instances where the power was in fact exercised. 28
submitted only when the commission exceeded the ceiling fixed by the board.
x x x Thus, when, in the usual course of business of a corporation, an officer has been
Knowledge by the board is also discernible from other recorded instances. 1äw phï1.ñët

allowed in his official capacity to manage its affairs, his authority to represent the
corporation may be implied from the manner in which he has been permitted by the
When the board met on May 10, 1947, the directors discussed the copra situation: There was a directors to manage its business.29
slow downward trend but belief was entertained that the nadir might have already been reached
and an improvement in prices was expected. In view thereof, Kalaw informed the board that "he In the case at bar, the practice of the corporation has been to allow its general manager to
intends to wait until he has signed contracts to sell before starting to buy copra."23 negotiate and execute contracts in its copra trading activities for and in NACOCO's
behalf without prior board approval. If the by-laws were to be literally followed, the board should
In the board meeting of July 29, 1947, Kalaw reported on the copra price conditions then current: give its stamp of prior approval on all corporate contracts. But that board itself, by its acts and
The copra market appeared to have become fairly steady; it was not expected that copra prices through acquiescence, practically laid aside the by-law requirement of prior approval.
would again rise very high as in the unprecedented boom during January-April, 1947; the prices
seemed to oscillate between $140 to $150 per ton; a radical rise or decrease was not indicated Under the given circumstances, the Kalaw contracts are valid corporate acts.
by the trends. Kalaw continued to say that "the Corporation has been closing contracts for the
sale of copra generally with a margin of P5.00 to P7.00 per hundred kilos." 24
4. But if more were required, we need but turn to the board's ratification of the contracts in
dispute on January 30, 1948, though it is our (and the lower court's) belief that ratification here is
We now lift the following excerpts from the minutes of that same board meeting of July 29, 1947: nothing more than a mere formality.

521. In connection with the buying and selling of copra the Board inquired whether it is Authorities, great in number, are one in the idea that "ratification by a corporation of an
the practice of the management to close contracts of sale first before buying. The unauthorized act or contract by its officers or others relates back to the time of the act or contract
General Manager replied that this practice is generally followed but that it is not always ratified, and is equivalent to original authority;" and that " [t]he corporation and the other party to
possible to do so for two reasons: the transaction are in precisely the same position as if the act or contract had been authorized at
the time." 30 The language of one case is expressive: "The adoption or ratification of a contract Obviously, the board thought that to jettison Kalaw's contracts would contravene basic dictates
by a corporation is nothing more or less than the making of an original contract. The theory of of fairness. They did not think of raising their voice in protest against past contracts which
corporate ratification is predicated on the right of a corporation to contract, and any ratification or brought in enormous profits to the corporation. By the same token, fair dealing disagrees with
adoption is equivalent to a grant of prior authority." 31 the idea that similar contracts, when unprofitable, should not merit the same treatment. Profit or
loss resulting from business ventures is no justification for turning one's back on contracts
Indeed, our law pronounces that "[r]atification cleanses the contract from all its defects from the entered into. The truth, then, of the matter is that — in the words of the trial court — the
moment it was constituted." 32 By corporate confirmation, the contracts executed by Kalaw are ratification of the contracts was "an act of simple justice and fairness to the general manager and
thus purged of whatever vice or defect they may have. 33 the best interest of the corporation whose prestige would have been seriously impaired by a
rejection by the board of those contracts which proved disadvantageous." 37
In sum, a case is here presented whereunder, even in the face of an express by-law requirement
of prior approval, the law on corporations is not to be held so rigid and inflexible as to fail to The directors are not liable." 38
recognize equitable considerations. And, the conclusion inevitably is that the embattled contracts
remain valid. 6. To what then may we trace the damage suffered by NACOCO.

5. It would be difficult, even with hostile eyes, to read the record in terms of "bad faith and/or The facts yield the answer. Four typhoons wreaked havoc then on our copra-producing regions.
breach of trust" in the board's ratification of the contracts without prior approval of the board. For, Result: Copra production was impaired, prices spiralled, warehouses destroyed. Quick turnovers
in reality, all that we have on the government's side of the scale is that the board knew that the could not be expected. NACOCO was not alone in this misfortune. The record discloses that
contracts so confirmed would cause heavy losses. private traders, old, experienced, with bigger facilities, were not spared; also suffered
tremendous losses. Roughly estimated, eleven principal trading concerns did run losses to about
As we have earlier expressed, Kalaw had authority to execute the contracts without need of prior P10,300,000.00. Plaintiff's witness Sisenando Barretto, head of the copra marketing department
approval. Everybody, including Kalaw himself, thought so, and for a long time. Doubts were first of NACOCO, observed that from late 1947 to early 1948 "there were many who lost money in
thrown on the way only when the contracts turned out to be unprofitable for NACOCO. the trade." 39 NACOCO was not immune from such usual business risk.

Rightfully had it been said that bad faith does not simply connote bad judgment or negligence; it The typhoons were known to plaintiff. In fact, NACOCO resisted the suits filed by Louis Dreyfus
imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it means & Co. by pleading in its answers force majeure as an affirmative defense and there vehemently
breach of a known duty thru some motive or interest or ill will; it partakes of the nature of asserted that "as a result of the said typhoons, extensive damage was caused to the coconut
fraud.34 Applying this precept to the given facts herein, we find that there was no "dishonest trees in the copra producing regions of the Philippines and according to estimates of competent
purpose," or "some moral obliquity," or "conscious doing of wrong," or "breach of a known duty," authorities, it will take about one year until the coconut producing regions will be able to produce
or "Some motive or interest or ill will" that "partakes of the nature of fraud." their normal coconut yield and it will take some time until the price of copra will reach normal
levels;" and that "it had never been the intention of the contracting parties in entering into the
Nor was it even intimated here that the NACOCO directors acted for personal reasons, or to contract in question that, in the event of a sharp rise in the price of copra in the Philippine market
serve their own private interests, or to pocket money at the expense of the corporation. 35 We produce by force majeure or by caused beyond defendant's control, the defendant should buy
have had occasion to affirm that bad faith contemplates a "state of mind affirmatively operating the copra contracted for at exorbitant prices far beyond the buying price of the plaintiff under the
with furtive design or with some motive of self-interest or ill will or for ulterior purposes." 36 Briggs contract." 40
vs. Spaulding, 141 U.S. 132, 148-149, 35 L. ed. 662, 669, quotes with approval from Judge
Sharswood (in Spering's App., 71 Pa. 11), the following: "Upon a close examination of all the A high regard for formal judicial admissions made in court pleadings would suffice to deter us
reported cases, although there are many dicta not easily reconcilable, yet I have found no from permitting plaintiff to stray away therefrom, to charge now that the damage suffered was
judgment or decree which has held directors to account, except when they have themselves because of Kalaw's negligence, or for that matter, by reason of the board's ratification of the
been personally guilty of some fraud on the corporation, or have known and connived at some contracts. 41
fraud in others, or where such fraud might have been prevented had they given ordinary
attention to their duties. . . ." Plaintiff did not even dare charge its defendant-directors with any of Indeed, were it not for the typhoons, 42 NACOCO could have, with ease, met its contractual
these malevolent acts. obligations. Stock accessibility was no problem. NACOCO had 90 buying agencies spread
throughout the islands. It could purchase 2,000 tons of copra a day. The various contracts
involved delivery of but 16,500 tons over a five-month period. Despite the typhoons, NACOCO "They (the directors) hold such office charged with the duty to act for the corporation according
was still able to deliver a little short of 50% of the tonnage required under the contracts. 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
As the trial court correctly observed, this is a case of damnum absque injuria. Conjunction of during a business depression, or closed down at a smaller loss, is a purely business and
damage and wrong is here absent. There cannot be an actionable wrong if either one or the economic problem to be determined by the directors of the corporation, and not by the court. It is
other is wanting. 43 a well known rule of law that questions of policy of management are left solely to the honest
decision of officers and directors of a corporation, and the court is without authority to substitute
7. On top of all these, is that no assertion is made and no proof is presented which would link its judgment for the judgment of the board of directors; the board is the business manager of the
Kalaw's acts — ratified by the board — to a matrix for defraudation of the government. Kalaw is corporation, and so long as it acts in good faith its orders are not reviewable by the courts."
clear of the stigma of bad faith. Plaintiff's corporate counsel 44 concedes that Kalaw all along (Fletcher on Corporations, Vol. 2, p. 390.) 48
thought that he had authority to enter into the contracts, that he did so in the best interests of the
corporation; that he entered into the contracts in pursuance of an overall policy to stabilize Kalaw's good faith, and that of the other directors, clinch the case for defendants. 49
prices, to free the producers from the clutches of the middlemen. The prices for which NACOCO
contracted in the disputed agreements, were at a level calculated to produce profits and higher Viewed in the light of the entire record, the judgment under review must be, as it is hereby,
than those prevailing in the local market. Plaintiff's witness, Barretto, categorically stated that "it affirmed.
would be foolish to think that one would sign (a) contract when you are going to lose money" and
that no contract was executed "at a price unsafe for the Nacoco." 45 Really, on the basis of prices Without costs. So ordered.
then prevailing, NACOCO envisioned a profit of around P752,440.00. 46
Reyes, J.B.L., Makalintal, Bengzon, J.P., Zaldivar, Castro and Angeles, JJ., concur.
Kalaw's acts were not the result of haphazard decisions either. Kalaw invariably consulted with Fernando, J., took no part.
NACOCO's Chief Buyer, Sisenando Barretto, or the Assistant General Manager. The dailies and Concepcion, C.J. and Dizon, J., are on leave.
quotations from abroad were guideposts to him.

Of course, Kalaw could not have been an insurer of profits. He could not be expected to predict
the coming of unpredictable typhoons. And even as typhoons supervened Kalaw was not
remissed in his duty. He exerted efforts to stave off losses. He asked the Philippine National
Bank to implement its commitment to extend a P400,000.00 loan. The bank did not release the
loan, not even the sum of P200,000.00, which, in October, 1947, was approved by the bank's G.R. No. L-14441 December 17, 1966
board of directors. In frustration, on December 12, 1947, Kalaw turned to the President,
complained about the bank's short-sighted policy. In the end, nothing came out of the PEDRO R. PALTING, petitioner,
negotiations with the bank. NACOCO eventually faltered in its contractual obligations. vs.
SAN JOSE PETROLEUM INCORPORATED, respondent.
That Kalaw cannot be tagged with crassa negligentia or as much as simple negligence, would
seem to be supported by the fact that even as the contracts were being questioned in Congress BARRERA, J.:
and in the NACOCO board itself, President Roxas defended the actuations of Kalaw. On
December 27, 1947, President Roxas expressed his desire "that the Board of Directors should This is a petition for review of the order of August 29, 1958, later supplemented and amplified by
reelect Hon. Maximo M. Kalaw as General Manager of the National Coconut another dated September 9, 1958, of the Securities and Exchange Commission denying the
Corporation." 47 And, on January 7, 1948, at a time when the contracts had already been openly opposition to, and instead, granting the registration, and licensing the sale in the Philippines, of
disputed, the board, at its regular meeting, appointed Maximo M. Kalaw as acting general 5,000,000 shares of the capital stock of the respondent-appellee San Jose Petroleum, Inc.
manager of the corporation. (hereafter referred to as SAN JOSE PETROLEUM), a corporation organized and existing in the
Republic of Panama.
Well may we profit from the following passage from Montelibano vs. Bacolod-Murcia Milling Co.,
Inc., L-15092, May 18, 1962:
On September 7, 1956, SAN JOSE PETROLEUM filed with the Philippine Securities and 1. Whether or not petitioner Pedro R. Palting, as a "prospective investor" in respondent's
Exchange Commission a sworn registration statement, for the registration and licensing for sale securities, has personality to file the present petition for review of the order of the
in the Philippines Voting Trust Certificates representing 2,000,000 shares of its capital stock of a Securities and Exchange Commission;
par value of $0.35 a share, at P1.00 per share. It was alleged that the entire proceeds of the sale
of said securities will be devoted or used exclusively to finance the operations of San Jose Oil 2. Whether or not the issue raised herein is already moot and academic;
Company, Inc. (a domestic mining corporation hereafter to be referred to as SAN JOSE OIL)
which has 14 petroleum exploration concessions covering an area of a little less than 1,000,000 3. Whether or not the "tie-up" between the respondent SAN JOSE PETROLEUM, a
hectares, located in the provinces of Pangasinan, Tarlac, Nueva Ecija, La Union, Iloilo, foreign corporation, and SAN JOSE OIL COMPANY, INC., a domestic mining
Cotabato, Davao and Agusan. It was the express condition of the sale that every purchaser of corporation, is violative of the Constitution, the Laurel-Langley Agreement, the Petroleum
the securities shall not receive a stock certificate, but a registered or bearer-voting-trust Act of 1949, and the Corporation Law; and
certificate from the voting trustees named therein James L. Buckley and Austin G.E. Taylor, the
first residing in Connecticut, U.S.A., and the second in New York City. While this application for
4. Whether or not the sale of respondent's securities is fraudulent, or would work or tend
registration was pending consideration by the Securities and Exchange Commission, SAN JOSE
to work fraud to purchasers of such securities in the Philippines.
PETROLEUM filed an amended Statement on June 20, 1958, for registration of the sale in the
Philippines of its shares of capital stock, which was increased from 2,000,000 to 5,000,000, at a
reduced offering price of from P1.00 to P0.70 per share. At this time the par value of the shares 1. In answer to the notice and order of the Securities and Exchange Commissioner, published in
has also been reduced from $.35 to $.01 per share.1 2 newspapers of general circulation in the Philippines, for "any person who is opposed" to the
petition for registration and licensing of respondent's securities, to file his opposition in 7 days,
herein petitioner so filed an opposition. And, the Commissioner, having denied his opposition
Pedro R. Palting and others, allegedly prospective investors in the shares of SAN JOSE
and instead, directed the registration of the securities to be offered for sale, oppositor Palting
PETROLEUM, filed with the Securities and Exchange Commission an opposition to registration
instituted the present proceeding for review of said order.
and licensing of the securities on the grounds that (1) the tie-up between the issuer, SAN JOSE
PETROLEUM, a Panamanian corporation and SAN JOSE OIL, a domestic corporation, violates
the Constitution of the Philippines, the Corporation Law and the Petroleum Act of 1949; (2) the Respondent raises the question of the personality of petitioner to bring this appeal, contending
issuer has not been licensed to transact business in the Philippines; (3) the sale of the shares of that as a mere "prospective investor", he is not an "Aggrieved" or "interested" person who may
the issuer is fraudulent, and works or tends to work a fraud upon Philippine purchasers; and (4) properly maintain the suit. Citing a 1931 ruling of Utah State Supreme Court2 it is claimed that
the issuer as an enterprise, as well as its business, is based upon unsound business principles. the phrase "party aggrieved" used in the Securities Act3and the Rules of Court4 as having the
Answering the foregoing opposition of Palting, et al., the registrant SAN JOSE PETROLEUM right to appeal should refer only to issuers, dealers and salesmen of securities.
claimed that it was a "business enterprise" enjoying parity rights under the Ordinance appended
to the Constitution, which parity right, with respect to mineral resources in the Philippines, may It is true that in the cited case, it was ruled that the phrase "person aggrieved" is that party
be exercised, pursuant to the Laurel-Langley Agreement, only through the medium of a "aggrieved by the judgment or decree where it operates on his rights of property or bears directly
corporation organized under the laws of the Philippines. Thus, registrant which is allegedly upon his interest", that the word "aggrieved" refers to "a substantial grievance, a denial of some
qualified to exercise rights under the Parity Amendment, had to do so through the medium of a personal property right or the imposition upon a party of a burden or obligation." But a careful
domestic corporation, which is the SAN JOSE OIL. It refused the contention that the Corporation reading of the case would show that the appeal therein was dismissed because the court held
Law was being violated, by alleging that Section 13 thereof applies only to foreign corporations that an order of registration was not final and therefore not appealable. The foregoing
doing business in the Philippines, and registrant was not doing business here. The mere fact that pronouncement relied upon by herein respondent was made in construing the provision
it was a holding company of SAN JOSE OIL and that registrant undertook the financing of and regarding an order of revocation which the court held was the one appealable. And since the law
giving technical assistance to said corporation did not constitute transaction of business in the provides that in revoking the registration of any security, only the issuer and every registered
Philippines. Registrant also denied that the offering for sale in the Philippines of its shares of dealer of the security are notified, excluding any person or group of persons having no such
capital stock was fraudulent or would work or tend to work fraud on the investors. On August 29, interest in the securities, said court concluded that the phrase "interested person" refers only to
1958, and on September 9, 1958 the Securities and Exchange Commissioner issued the orders issuers, dealers or salesmen of securities.
object of the present appeal.
We cannot consider the foregoing ruling by the Utah State Court as controlling on the issue in
The issues raised by the parties in this appeal are as follows: this case. Our Securities Act in Section 7(c) thereof, requires the publication and notice of the
registration statement. Pursuant thereto, the Securities and Exchange Commissioner caused the by the Supreme Court, respondent's shares became registered and licensed under the law as of
publication of an order in part reading as follows: October 3, 1958. Consequently, it is asserted, the present appeal has become academic.
Frankly we are unable to follow respondent's argumentation. First it claims that the order of
. . . Any person who is opposed with this petition must file his written opposition with this August 29 and that of September 9, 1958 are not final orders and therefor are not appealable.
Commission within said period (2 weeks). . . . Then when these orders, according to its theory became final and were implemented, it argues
that the orders can no longer be appealed as the question of registration and licensing became
In other words, as construed by the administrative office entrusted with the enforcement of the moot and academic.
Securities Act, any person (who may not be "aggrieved" or "interested" within the legal
acceptation of the word) is allowed or permitted to file an opposition to the registration of But the fact is that because of the authority to sell, the securities are, in all probabilities, still
securities for sale in the Philippines. And this is in consonance with the generally accepted being traded in the open market. Consequently the issue is much alive as to whether
principle that Blue Sky Laws are enacted to protect investors and prospective purchasers and to respondent's securities should continue to be the subject of sale. The purpose of the inquiry on
prevent fraud and preclude the sale of securities which are in fact worthless or worth this matter is not fully served just because the securities had passed out of the hands of the
substantially less than the asking price. It is for this purpose that herein petitioner duly filed his issuer and its dealers. Obviously, so long as the securities are outstanding and are placed in the
opposition giving grounds therefor. Respondent SAN JOSE PETROLEUM was required to reply channels of trade and commerce, members of the investing public are entitled to have the
to the opposition. Subsequently both the petition and the opposition were set for hearing during question of the worth or legality of the securities resolved one way or another.
which the petitioner was allowed to actively participate and did so by cross-examining the
respondent's witnesses and filing his memorandum in support of his opposition. He therefore to But more fundamental than this consideration, we agree with the late Senator Claro M. Recto,
all intents and purposes became a party to the proceedings. And under the New Rules of who appeared as amicus curiae in this case, that while apparently the immediate issue in this
Court,5 such a party can appeal from a final order, ruling or decision of the Securities and appeal is the right of respondent SAN JOSE PETROLEUM to dispose of and sell its securities to
Exchange Commission. This new Rule eliminating the word "aggrieved" appearing in the old the Filipino public, the real and ultimate controversy here would actually call for the construction
Rule, being procedural in nature,6 and in view of the express provision of Rule 144 that the new of the constitutional provisions governing the disposition, utilization, exploitation and
rules made effective on January 1, 1964 shall govern not only cases brought after they took development of our natural resources. And certainly this is neither moot nor academic.
effect but all further proceedings in cases then pending, except to the extent that in the opinion
of the Court their application would not be feasible or would work injustice, in which event the 3. We now come to the meat of the controversy — the "tie-up" between SAN JOSE OIL on the
former procedure shall apply, we hold that the present appeal is properly within the appellate one hand, and the respondent SAN JOSE PETROLEUM and its associates, on the other. The
jurisdiction of this Court. relationship of these corporations involved or affected in this case is admitted and established
through the papers and documents which are parts of the records: SAN JOSE OIL, is a domestic
The order allowing the registration and sale of respondent's securities is clearly a final order that mining corporation, 90% of the outstanding capital stock of which is owned by respondent SAN
is appealable. The mere fact that such authority may be later suspended or revoked, depending JOSE PETROLEUM, a foreign (Panamanian) corporation, the majority interest of which is owned
on future developments, does not give it the character of an interlocutory or provisional ruling. by OIL INVESTMENTS, Inc., another foreign (Panamanian) company. This latter corporation in
And the fact that seven days after the publication of the order, the securities are deemed turn is wholly (100%) owned by PANTEPEC OIL COMPANY, C.A., and PANCOASTAL
registered (Sec. 7, Com. Act 83, as amended), points to the finality of the order. Rights and PETROLEUM COMPANY, C.A., both organized and existing under the laws of Venezuela. As of
obligations necessarily arise therefrom if not reviewed on appeal. September 30, 1956, there were 9,976 stockholders of PANCOASTAL PETROLEUM found in 49
American states and U.S. territories, holding 3,476,988 shares of stock; whereas, as of
Our position on this procedural matter — that the order is appealable and the appeal taken here November 30, 1956, PANTEPEC OIL COMPANY was said to have 3,077,916 shares held by
is proper — is strengthened by the intervention of the Solicitor General, under Section 23 of Rule 12,373 stockholders scattered in 49 American state. In the two lists of stockholders, there is no
3 of the Rules of Court, as the constitutional issues herein presented affect the validity of Section indication of the citizenship of these stockholders,7 or of the total number of authorized stocks of
13 of the Corporation Law, which, according to the respondent, conflicts with the Parity each corporation, for the purpose of determining the corresponding percentage of these listed
Ordinance and the Laurel-Langley Agreement recognizing, it is claimed, its right to exploit our stockholders in relation to the respective capital stock of said corporation.
petroleum resources notwithstanding said provisions of the Corporation Law.
Petitioner, as well as the amicus curiae and the Solicitor General8 contend that the relationship
2. Respondent likewise contends that since the order of Registration/Licensing dated September between herein respondent SAN JOSE PETROLEUM and its subsidiary, SAN JOSE OIL,
9, 1958 took effect 30 days from September 3, 1958, and since no stay order has been issued violates the Petroleum Law of 1949, the Philippine Constitution, and Section 13 of the
Corporation Law, which inhibits a mining corporation from acquiring an interest in another mining
corporation. It is respondent's theory, on the other hand, that far from violating the Constitution; oils, all forces and sources of potential energy, and other natural resources of either
such relationship between the two corporations is in accordance with the Laurel-Langley Party, and the operation of public utilities, shall, if open to any person, be open to citizens
Agreement which implemented the Ordinance Appended to the Constitution, and that Section 13 of the other Party and to all forms of business enterprise owned or controlled, directly or
of the Corporation Law is not applicable because respondent is not licensed to do business, as it indirectly, by citizens of such other Party in the same manner as to and under the same
is not doing business, in the Philippines. conditions imposed upon citizens or corporations or associations owned or controlled by
citizens of the Party granting the right.
Article XIII, Section 1 of the Philippine Constitution provides:
2. The rights provided for in Paragraph 1 may be exercised, . . . in the case of citizens of
SEC. 1. All agricultural, timber, and mineral lands of the public domain, waters, minerals, the United States, with respect to natural resources in the public domain in the
coal, petroleum, and other mineral oils, all forces of potential energy, and other natural Philippines, only through the medium of a corporation organized under the laws of the
resources of the Philippines belong to the State, and their disposition, exploitation, Philippines and at least 60% of the capital stock of which is owned or controlled by
development, or utilization shall be limited to citizens of the Philippines, or to citizens of the United States. . . .
corporations or associations at least sixty per centum of the capital of which is owned by
such citizens, subject to any existing right, grant, lease or concession at the time of the 3. The United States of America reserves the rights of the several States of the United
inauguration of this Government established under this Constitution. . . . (Emphasis States to limit the extent to which citizens or corporations or associations owned or
supplied) controlled by citizens of the Philippines may engage in the activities specified in this
Article. The Republic of the Philippines reserves the power to deny any of the rights
In the 1946 Ordinance Appended to the Constitution, this right (to utilize and exploit our natural specified in this Article to citizens of the United States who are citizens of States, or to
resources) was extended to citizens of the United States, thus: corporations or associations at least 60% of whose capital stock or capital is owned or
controlled by citizens of States, which deny like rights to citizens of the Philippines, or to
Notwithstanding the provisions of section one, Article Thirteen, and section eight, Article corporations or associations which are owned or controlled by citizens of the Philippines.
Fourteen, of the foregoing Constitution, during the effectivity of the Executive Agreement . . . (Emphasis supplied.)
entered into by the President of the Philippines with the President of the United States on
the fourth of July, nineteen hundred and forty-six, pursuant to the provisions of Re-stated, the privilege to utilize, exploit, and develop the natural resources of this country was
Commonwealth Act Numbered Seven hundred and thirty-three, but in no case to extend granted, by Article XIII of the Constitution, to Filipino citizens or to corporations or associations
beyond the third of July, nineteen hundred and seventy-four, the disposition, exploitation, 60% of the capital of which is owned by such citizens. With the Parity Amendment to the
development, and utilization of all agricultural, timber, and mineral lands of the public Constitution, the same right was extended to citizens of the United States and business
domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential enterprises owned or controlled directly or indirectly, by citizens of the United States.
energy, and other natural resources of the Philippines, and the operation of public utilities
shall, if open to any person, be open to citizens of the United States, and to all forms of There could be no serious doubt as to the meaning of the word "citizens" used in the
business enterprises owned or controlled, directly or indirectly, by citizens of the United aforementioned provisions of the Constitution. The right was granted to 2 types of persons:
States in the same manner as to, and under the same conditions imposed upon, citizens natural persons (Filipino or American citizens) and juridical persons (corporations 60% of which
of the Philippines or corporations or associations owned or controlled by citizens of the capital is owned by Filipinos and business enterprises owned or controlled directly or indirectly,
Philippines (Emphasis supplied.) by citizens of the United States). In American law, "citizen" has been defined as "one who, under
the constitution and laws of the United States, has a right to vote for representatives in congress
In the 1954 Revised Trade Agreement concluded between the United States and the Philippines, and other public officers, and who is qualified to fill offices in the gift of the people. (1 Bouvier's
also known as the Laurel-Langley Agreement, embodied in Republic Act 1355, the following Law Dictionary, p. 490.) A citizen is —
provisions appear:
One of the sovereign people. A constituent member of the sovereignty, synonymous with
ARTICLE VI the people." (Scott v. Sandford, 19 Ho. [U.S.] 404, 15 L. Ed. 691.)

1. The disposition, exploitation, development and utilization of all agricultural, timber, and
mineral lands of the public domain, waters, minerals, coal, petroleum and other mineral
A member of the civil state entitled to all its privileges. (Cooley, Const. Lim. 77. See U.S. What, then, would be the Status of SAN JOSE OIL, about 90% of whose stock is owned by SAN
v. Cruikshank 92 U.S. 542, 23 L. Ed. 588; Minor v. Happersett 21 Wall. [U.S.] 162, 22 L. JOSE PETROLEUM? This is a query which we need not resolve in this case as SAN JOSE OIL
Ed. 627.) is not a party and it is not necessary to do so to dispose of the present controversy. But it is a
matter that probably the Solicitor General would want to look into.
These concepts clarified, is herein respondent SAN JOSE PETROLEUM an American business
enterprise entitled to parity rights in the Philippines? The answer must be in the negative, for the There is another issue which has been discussed extensively by the parties. This is whether or
following reasons: not an American mining corporation may lawfully "be in anywise interested in any other
corporation (domestic or foreign) organized for the purpose of engaging in agriculture or in
Firstly — It is not owned or controlled directly by citizens of the United States, because it is mining," in the Philippines or whether an American citizen owning stock in more than one
owned and controlled by a corporation, the OIL INVESTMENTS, another foreign (Panamanian) corporation organized for the purpose of engaging in agriculture or in mining, may own more
corporation. than 15% of the capital stock then outstanding and entitled to vote, of each of such corporations,
in view of the express prohibition contained in Section 13 of the Philippine Corporation Law. The
Secondly — Neither can it be said that it is indirectly owned and controlled by American citizens petitioner in this case contends that the provisions of the Corporation Law must be applied to
through the OIL INVESTMENTS, for this latter corporation is in turn owned and controlled, not by American citizens and business enterprise otherwise entitled to exercise the parity privileges,
citizens of the United States, but still by two foreign (Venezuelan) corporations, the PANTEPEC because both the Laurel-Langley Agreement (Art. VI, par. 1) and the Petroleum Act of 1948 (Art.
OIL COMPANY and PANCOASTAL PETROLEUM. 31), specifically provide that the enjoyment by them of the same rights and obligations granted
under the provisions of both laws shall be "in the same manner as to, and under the same
conditions imposed upon, citizens of the Philippines or corporations or associations owned or
Thirdly — Although it is claimed that these two last corporations are owned and controlled
controlled by citizens of the Philippines." The petitioner further contends that, as the enjoyment
respectively by 12,373 and 9,979 stockholders residing in the different American states, there is
of the privilege of exploiting mineral resources in the Philippines by Filipino citizens or
no showing in the certification furnished by respondent that the stockholders of PANCOASTAL
corporations owned or controlled by citizens of the Philippines (which corporation must
or those of them holding the controlling stock, are citizens of the United States.
necessarily be organized under the Corporation Law), is made subject to the limitations provided
in Section 13 of the Corporation Law, so necessarily the exercise of the parity rights by citizens
Fourthly — Granting that these individual stockholders are American citizens, it is yet necessary of the United States or business enterprise owned or controlled, directly or indirectly, by citizens
to establish that the different states of which they are citizens, allow Filipino citizens or of the United States, must equally be subject to the same limitations contained in the aforesaid
corporations or associations owned or controlled by Filipino citizens, to engage in the Section 13 of the Corporation Law.
exploitation, etc. of the natural resources of these states (see paragraph 3, Article VI of the
Laurel-Langley Agreement, supra). Respondent has presented no proof to this effect.
In view of the conclusions we have already arrived at, we deem it not indispensable for us to
pass upon this legal question, especially taking into account the statement of the respondent
Fifthly — But even if the requirements mentioned in the two immediately preceding paragraphs (SAN JOSE PETROLEUM) that it is essentially a holding company, and as found by the
are satisfied, nevertheless to hold that the set-up disclosed in this case, with a long chain of Securities and Exchange Commissioner, its principal activity is limited to the financing and giving
intervening foreign corporations, comes within the purview of the Parity Amendment regarding technical assistance to SAN JOSE OIL.
business enterprises indirectly owned or controlled by citizens of the United States, is to unduly
stretch and strain the language and intent of the law. For, to what extent must the word
4. Respondent SAN JOSE PETROLEUM, whose shares of stock were allowed registration for
"indirectly" be carried? Must we trace the ownership or control of these various corporations ad
sale in the Philippines, was incorporated under the laws of Panama in April, 1956 with an
infinitum for the purpose of determining whether the American ownership-control-requirement is
authorized capital stock of $500,000.00, American currency, divided into 50,000,000 shares at
satisfied? Add to this the admitted fact that the shares of stock of the PANTEPEC and
par value of $0.01 per share. By virtue of a 3-party Agreement of June 14, 1956, respondent was
PANCOASTAL which are allegedly owned or controlled directly by citizens of the United States,
supposed to have received from OIL INVESTMENTS 8,000,000 shares of the capital stock of
are traded in the stock exchange in New York, and you have a situation where it becomes a
SAN JOSE OIL (at par value of $0.01 per share), plus a note for $250,000.00 due in 6 months,
practical impossibility to determine at any given time, the citizenship of the controlling stock
for which respondent issued in favor of OIL INVESTMENTS 16,000,000 shares of its capital
required by the law. In the circumstances, we have to hold that the respondent SAN JOSE
stock, at $0.01 per share or with a value of $160,000.00, plus a note for $230,297.97 maturing in
PETROLEUM, as presently constituted, is not a business enterprise that is authorized to
2 years at 6% per annum interest,9 and the assumption of payment of the unpaid price of
exercise the parity privileges under the Parity Ordinance, the Laurel-Langley Agreement and the
7,500,000 (of the 8,000,000 shares of SAN JOSE OIL).
Petroleum Law. Its tie-up with SAN JOSE OIL is, consequently, illegal.
On June 27, 1956, the capitalization of SAN JOSE PETROLEUM was increased from But this is not all. Some of the provisions of the Articles of Incorporation of respondent SAN
$500,000.00 to $17,500,000.00 by increasing the par value of the same 50,000,000 shares, from JOSE PETROLEUM are noteworthy; viz:
$0.01 to $0.35. Without any additional consideration, the 16,000,000 shares of $0.01 previously
issued to OIL INVESTMENTS with a total value of $160,000.00 were changed with 16,000,000 (1) the directors of the Company need not be shareholders;
shares of the recapitalized stock at $0.35 per share, or valued at $5,600,000.00. And, to make it
appear that cash was received for these re-issued 16,000,000 shares, the board of directors of (2) that in the meetings of the board of directors, any director may be represented and
respondent corporation placed a valuation of $5,900,000.00 on the 8,000,000 shares of SAN may vote through a proxy who also need not be a director or stockholder; and
JOSE OIL (still having par value of $0.10 per share) which were received from OIL
INVESTMENTS as part-consideration for the 16,000,000 shares at $0.01 per share.
(3) that no contract or transaction between the corporation and any other association or
partnership will be affected, except in case of fraud, by the fact that any of the directors
In the Balance Sheet of respondent, dated July 12, 1956, from the $5,900,000.00, supposedly or officers of the corporation is interested in, or is a director or officer of, such other
the value of the 8,000,000 shares of SAN JOSE OIL, the sum of $5,100,000.00 was deducted, association or partnership, and that no such contract or transaction of the corporation
corresponding to the alleged difference between the "value" of the said shares and the with any other person or persons, firm, association or partnership shall be affected by the
subscription price thereof which is $800,000.00 (at $0.10 per share). From this $800,000.00, the fact that any director or officer of the corporation is a party to or has an interest in, such
subscription price of the SAN JOSE OIL shares, the amount of $319,702.03 was deducted, as contract or transaction, or has in anyway connected with such other person or persons,
allegedly unpaid subscription price, thereby giving a difference of $480,297.97, which was firm, association or partnership; and finally, that all and any of the persons who may
placed as the amount allegedly paid in on the subscription price of the 8,000,000 SAN JOSE OIL become director or officer of the corporation shall be relieved from all responsibility for
shares. Then, by adding thereto the note receivable from OIL INVESTMENTS, for $250,000.00 which they may otherwise be liable by reason of any contract entered into with the
(part-consideration for the 16,000,000 SAN JOSE PETROLEUM shares), and the sum of corporation, whether it be for his benefit or for the benefit of any other person, firm,
$6,516.21, as deferred expenses, SAN JOSE PETROLEUM appeared to have assets in the sum association or partnership in which he may be interested.
of $736,814.18.
These provisions are in direct opposition to our corporation law and corporate practices in this
These figures are highly questionable. Take the item $5,900,000.00 the valuation placed on the country. These provisions alone would outlaw any corporation locally organized or doing
8,000,000 shares of SAN JOSE OIL. There appears no basis for such valuation other than belief business in this jurisdiction. Consider the unique and unusual provision that no contract or
by the board of directors of respondent that "should San Jose Oil Company be granted the bulk transaction between the company and any other association or corporation shall be affected
of the concessions applied for upon reasonable terms, that it would have a reasonable value of except in case of fraud, by the fact that any of the directors or officers of the company may be
approximately $10,000,000." 10 Then, of this amount, the subscription price of $800,000.00 was interested in or are directors or officers of such other association or corporation; and that none of
deducted and called it "difference between the (above) valuation and the subscription price for such contracts or transactions of this company with any person or persons, firms, associations or
the 8,000,000 shares." Of this $800,000.00 subscription price, they deducted the sum of corporations shall be affected by the fact that any director or officer of this company is a party to
$480,297.97 and the difference was placed as the unpaid portion of the subscription price. In or has an interest in such contract or transaction or has any connection with such person or
other words, it was made to appear that they paid in $480,297.97 for the 8,000,000 shares of persons, firms associations or corporations; and that any and all persons who may become
SAN JOSE OIL. This amount ($480,297.97) was supposedly that $250,000.00 paid by OIL directors or officers of this company are hereby relieved of all responsibility which they would
INVESMENTS for 7,500,000 shares of SAN JOSE OIL, embodied in the June 14 Agreement, otherwise incur by reason of any contract entered into which this company either for their own
and a sum of $230,297.97 the amount expended or advanced by OIL INVESTMENTS to SAN benefit, or for the benefit of any person, firm, association or corporation in which they may be
JOSE OIL. And yet, there is still an item among respondent's liabilities, for $230,297.97 interested.
appearing as note payable to Oil Investments, maturing in two (2) years at six percent (6%) per
annum. 11 As far as it appears from the records, for the 16,000,000 shares at $0.35 per share
The impact of these provisions upon the traditional judiciary relationship between the directors
issued to OIL INVESTMENTS, respondent SAN JOSE PETROLEUM received from OIL
and the stockholders of a corporation is too obvious to escape notice by those who are called
INVESTMENTS only the note for $250,000.00 plus the 8,000,000 shares of SAN JOSE OIL, with
upon to protect the interest of investors. The directors and officers of the company can do
par value of $0.10 per share or a total of $1,050,000.00 — the only assets of the corporation. In
anything, short of actual fraud, with the affairs of the corporation even to benefit themselves
other words, respondent actually lost $4,550,000.00, which was received by OIL
directly or other persons or entities in which they are interested, and with immunity because of
INVESTMENTS.
the advance condonation or relief from responsibility by reason of such acts. This and the other
provision which authorizes the election of non-stockholders as directors, completely disassociate
the stockholders from the government and management of the business in which they have
invested.

To cap it all on April 17, 1957, admittedly to assure continuity of the management and stability of
SAN JOSE PETROLEUM, OIL INVESTMENTS, as holder of the only subscribed stock of the
former corporation and acting "on behalf of all future holders of voting trust certificates," entered G.R. No. 136426 August 6, 1999
into a voting trust agreement12 with James L. Buckley and Austin E. Taylor, whereby said
Trustees were given authority to vote the shares represented by the outstanding trust certificates E. B. VILLAROSA & PARTNER CO., LTD., petitioner,
(including those that may henceforth be issued) in the following manner: vs.
HON. HERMINIO I. BENITO, in his capacity as Presiding Judge, RTC, Branch 132, Makati
(a) At all elections of directors, the Trustees will designate a suitable proxy or proxies to City
vote for the election of directors designated by the Trustees in their own discretion, and IMPERIAL DEVELOPMENT CORPORATION, respondent.
having in mind the best interests of the holders of the voting trust certificates, it being
understood that any and all of the Trustees shall be eligible for election as directors; GONZAGA-REYES, J.:

(b) On any proposition for removal of a director, the Trustees shall designate a suitable Before this Court is a petition for certiorari and prohibition with prayer for the issuance of a
proxy or proxies to vote for or against such proposition as the Trustees in their own temporary restraining order and/or writ of preliminary injunction seeking to annul and set aside
discretion may determine, having in mind the best interest of the holders of the voting the Orders dated August 5, 1998 and November 20, 1998 of the public respondent Judge
trust certificates; Herminio I. Benito of the Regional Trial Court of Makati City, Branch 132 and praying that the
public respondent court be ordered to desist from further proceeding with Civil Case No. 98-824.
(c) With respect to all other matters arising at any meeting of stockholders, the Trustees
will instruct such proxy or proxies attending such meetings to vote the shares of stock Petitioner E.B. Villarosa & Partner Co., Ltd. is a limited partnership with principal office address
held by the Trustees in accordance with the written instructions of each holder of voting at 102 Juan Luna St., Davao City and with branch offices at 2492 Bay View Drive, Tambo,
trust certificates. (Emphasis supplied.) Parañaque, Metro Manila and Kolambog, Lapasan, Cagayan de Oro City. Petitioner and private
respondent executed a Deed of Sale with Development Agreement wherein the former agreed to
It was also therein provided that the said Agreement shall be binding upon the parties thereto, develop certain parcels of land located at Barrio Carmen, Cagayan de Oro belonging to the latter
their successors, and upon all holders of voting trust certificates. into a housing subdivision for the construction of low cost housing units. They further agreed that
in case of litigation regarding any dispute arising therefrom, the venue shall be in the proper
courts of Makati.
And these are the voting trust certificates that are offered to investors as authorized by Security
and Exchange Commissioner. It can not be doubted that the sale of respondent's securities
would, to say the least, work or tend to work fraud to Philippine investors. On April 3, 1998, private respondent, as plaintiff, filed a Complaint for Breach of Contract and
Damages against petitioner, as defendant, before the Regional Trial Court of Makati allegedly for
FOR ALL THE FOREGOING CONSIDERATIONS, the motion of respondent to dismiss this failure of the latter to comply with its contractual obligation in that, other than a few unfinished
appeal, is denied and the orders of the Securities and Exchange Commissioner, allowing the low cost houses, there were no substantial developments therein.1
registration of Respondent's securities and licensing their sale in the Philippines are hereby set
aside. The case is remanded to the Securities and Exchange Commission for appropriate action Summons, together with the complaint, were served upon the defendant, through its Branch
in consonance with this decision. With costs. Let a copy of this decision be furnished the Solicitor Manager Engr. Wendell Sabulbero at the stated address at Kolambog, Lapasan, Cagayan de
General for whatever action he may deem advisable to take in the premises. So ordered. Oro City2 but the Sheriff's Return of Service3stated that the summons was duly served "upon
defendant E.B. Villarosa & Partner Co., Ltd. thru its Branch Manager Engr. WENDELL
Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar and SALBULBERO on May 5, 1998 at their new office Villa Gonzalo, Nazareth, Cagayan de Oro
Sanchez, JJ., concur. City, and evidenced by the signature on the face of the original copy of the summons. 1âwphi1.nêt

Castro, J., took no part.


On June 9, 1998, defendant filed a Special Appearance with Motion to Dismiss4 alleging that on Defendant's Motion for Reconsideration was denied in the Order dated November 20, 1998.11
May 6, 1998, "summons intended for defendant" was served upon Engr. Wendell Sabulbero, an
employee of defendant at its branch office at Cagayan de Oro City. Defendant prayed for the Hence, the present petition alleging that respondent court gravely abused its discretion
dismissal of the complaint on the ground of improper service of summons and for lack of tantamount to lack or in excess of jurisdiction in denying petitioner's motions to dismiss and for
jurisdiction over the person of the defendant. Defendant contends that the trial court did not reconsideration, despite the fact that the trial court did not acquire jurisdiction over the person of
acquire jurisdiction over its person since the summons was improperly served upon its employee petitioner because the summons intended for it was improperly served. Petitioner invokes
in its branch office at Cagayan de Oro City who is not one of those persons named in Section Section 11 of Rule 14 of the 1997 Rules of Civil Procedure.
11, Rule 14 of the 1997 Rules of Civil Procedure upon whom service of summons may be made.
Private respondent filed its Comment to the petition citing the cases Kanlaon Construction
Meanwhile, on June 10, 1998, plaintiff filed a Motion to Declare Defendant in Default5 alleging Enterprises Co., Inc. vs.NLRC12 wherein it was held that service upon a construction project
that defendant has failed to file an Answer despite its receipt allegedly on May 5, 1998 of the manager is valid and in Gesulgon vs. NLRC13which held that a corporation is bound by the
summons and the complaint, as shown in the Sheriffs Return. service of summons upon its assistant manager.

On June 22, 1998, plaintiff filed an Opposition to Defendant's Motion to Dismiss6 alleging that the The only issue for resolution is whether or not the trial court acquired jurisdiction over the person
records show that defendant, through its branch manager, Engr. Wendell Sabulbero actually of petitioner upon service of summons on its Branch Manager.
received the summons and the complaint on May 8, 1998 as evidenced by the signature
appearing on the copy of the summons and not on May 5, 1998 as stated in the Sheriffs Return When the complaint was filed by Petitioner on April 3, 1998, the 1997 Rules of Civil Procedure
nor on May 6, 1998 as stated in the motion to dismiss; that defendant has transferred its office was already in force.14
from Kolambog, Lapasan, Cagayan de Oro to its new office address at Villa Gonzalo, Nazareth,
Cagayan de Oro; and that the purpose of the rule is to bring home to the corporation notice of
Sec. 11, Rule 14 of the 1997 Rules of Civil Procedure provides that:
the filing of the action.
When the defendant is a corporation, partnership or association organized under the
On August 5, 1998, the trial court issued an Order7 denying defendant's Motion to Dismiss as
laws of the Philippines with a juridical personality, service may be made on the president,
well as plaintiffs Motion to Declare Defendant in Default. Defendant was given ten (10) days
managing partner, general manager, corporate secretary, treasurer, or in-house counsel.
within which to file a responsive pleading. The trial court stated that since the summons and
(emphasis supplied).
copy of the complaint were in fact received by the corporation through its branch manager
Wendell Sabulbero, there was substantial compliance with the rule on service of summons and
consequently, it validly acquired jurisdiction over the person of the defendant. This provision revised the former Section 13, Rule 14 of the Rules of Court which provided that:

On August 19, 1998, defendant, by Special Appearance, filed a Motion for Sec. 13. Service upon private domestic corporation or partnership. — If the defendant is
Reconsideration8 alleging that Section 11, Rule 14 of the new Rules did not liberalize but, on the a corporation organized under the laws of the Philippines or a partnership duly
contrary, restricted the service of summons on persons enumerated therein; and that the new registered, service may be made on the president, manager, secretary, cashier, agent, or
provision is very specific and clear in that the word "manager" was changed to "general any of its directors. (emphasis supplied).
manager", "secretary" to "corporate secretary", and excluding therefrom agent and director.
Petitioner contends that the enumeration of persons to whom summons may be served is
On August 27, 1998, plaintiff filed an Opposition to defendant's Motion for "restricted, limited and exclusive" following the rule on statutory construction expressio unios est
Reconsideration9 alleging that defendant's branch manager "did bring home" to the defendant- exclusio alterius and argues that if the Rules of Court Revision Committee intended to liberalize
corporation the notice of the filing of the action and by virtue of which a motion to dismiss was the rule on service of summons, it could have easily done so by clear and concise language.
filed; and that it was one (1) month after receipt of the summons and the complaint that
defendant chose to file a motion to dismiss. We agree with petitioner.

On September 4, 1998, defendant, by Special Appearance, filed a Reply10 contending that the Earlier cases have uphold service of summons upon a construction project manager15; a
changes in the new rules are substantial and not just general semantics. corporation's assistant manager16; ordinary clerk of a corporation17; private secretary of corporate
executives18; retained counsel19; officials who had charge or control of the operations of the Retired Justice Oscar Herrera, who is also a consultant of the Rules of Court Revision
corporation, like the assistant general manager20; or the corporation's Chief Finance and Committee, stated that "(T)he rule must be strictly observed. Service must be made to one
Administrative Officer21. In these cases, these persons were considered as "agent" within the named in (the) statute . . . .24
contemplation of the old rule.22 Notably, under the new Rules, service of summons upon an
agent of the corporation is no longer authorized. It should be noted that even prior to the effectivity of the 1997 Rules of Civil Procedure, strict
compliance with the rules has been enjoined. In the case of Delta Motor Sales Corporation
The cases cited by private respondent are therefore not in point. vs. Mangosing,25 the Court held:

In the Kanlaon case, this Court ruled that under the NLRC Rules of Procedure, summons on the A strict compliance with the mode of service is necessary to confer jurisdiction of the
respondent shall be served personally or by registered mail on the party himself; if the party is court over a corporation. The officer upon whom service is made must be one who is
represented by counsel or any other authorized representative or agent, summons shall be named in the statute; otherwise the service is insufficient. . . .
served on such person. In said case, summons was served on one Engr. Estacio who managed
and supervised the construction project in Iligan City (although the principal address of the The purpose is to render it reasonably certain that the corporation will receive prompt
corporation is in Quezon City) and supervised the work of the employees. It was held that as and proper notice in an action against it or to insure that the summons be served on a
manager, he had sufficient responsibility and discretion to realize the importance of the legal representative so integrated with the corporation that such person will know what to do
papers served on him and to relay the same to the president or other responsible officer of with the legal papers served on him. In other words, "to bring home to the corporation
petitioner such that summons for petitioner was validly served on him as agent and authorized notice of the filing of the action." . . . .
representative of petitioner. Also in the Gesulgon case cited by private respondent, the
summons was received by the clerk in the office of the Assistant Manager (at principal office The liberal construction rule cannot be invoked and utilized as a substitute for the plain
address) and under Section 13 of Rule 14 (old rule), summons may be made upon the clerk who legal requirements as to the manner in which summons should be served on a domestic
is regarded as agent within the contemplation of the rule. corporation. . . . . (emphasis supplied).

The designation of persons or officers who are authorized to accept summons for a domestic Service of summons upon persons other than those mentioned in Section 13 of Rule 14 (old
corporation or partnership is now limited and more clearly specified in Section 11, Rule 14 of the rule) has been held as improper.26 Even under the old rule, service upon a general manager of a
1997 Rules of Civil Procedure. The rule now states "general manager" instead of only firm's branch office has been held as improper as summons should have been served at the
"manager"; "corporate secretary" instead of "secretary"; and "treasurer" instead of "cashier." The firm's principal office. In First Integrated Bonding & Inc. Co., Inc. vs. Dizon,27 it was held that the
phrase "agent, or any of its directors" is conspicuously deleted in the new rule. service of summons on the general manager of the insurance firm's Cebu branch was improper;
default order could have been obviated had the summons been served at the firm's principal
The particular revision under Section 11 of Rule 14 was explained by retired Supreme Court office.
Justice Florenz Regalado, thus:23
And in the case of Solar Team Entertainment, Inc. vs. Hon. Helen Bautista Ricafort, et al.28 the
. . . the then Sec. 13 of this Rule allowed service upon a defendant corporation to "be Court succinctly clarified that, for the guidance of the Bench and Bar, "strictest" compliance with
made on the president, manager, secretary, cashier, agent or any of its directors." The Section 11 of Rule 13 of the 1997 Rules of Civil Procedure (on Priorities in modes of service and
aforesaid terms were obviously ambiguous and susceptible of broad and sometimes filing) is mandated and the Court cannot rule otherwise, lest we allow circumvention of the
illogical interpretations, especially the word "agent" of the corporation. The Filoil case, innovation by the 1997 Rules in order to obviate delay in the administration of justice.
involving the litigation lawyer of the corporation who precisely appeared to challenge the
validity of service of summons but whose very appearance for that purpose was seized Accordingly, we rule that the service of summons upon the branch manager of petitioner at its
upon to validate the defective service, is an illustration of the need for this revised section branch office at Cagayan de Oro, instead of upon the general manager at its principal office at
with limited scope and specific terminology. Thus the absurd result in the Filoil case Davao City is improper. Consequently, the trial court did not acquire jurisdiction over the person
necessitated the amendment permitting service only on the in-house counsel of the of the petitioner.
corporation who is in effect an employee of the corporation, as distinguished from an
independent practitioner. (emphasis supplied).
The fact that defendant filed a belated motion to dismiss did not operate to confer jurisdiction
upon its person. There is no question that the defendant's voluntary appearance in the action is
equivalent to service of summons.29Before, the rule was that a party may challenge the Angara, Abello, Concepcion, Regala, Cruz Law Offices for respondents Sorianos
jurisdiction of the court over his person by making a special appearance through a motion to
dismiss and if in the same motion, the movant raised other grounds or invoked affirmative relief Siguion Reyna, Montecillo & Ongsiako for respondent San Miguel Corporation.
which necessarily involves the exercise of the jurisdiction of the court.30 This doctrine has been
abandoned in the case of La Naval Drug Corporation vs. Court of Appeals, et al.,31 which R. T Capulong for respondent Eduardo R. Visaya.
became the basis of the adoption of a new provision in the former Section 23, which is now
Section 20 of Rule 14 of the 1997 Rules. Section 20 now provides that "the inclusion in a motion
to dismiss of other grounds aside from lack of jurisdiction over the person of the defendant shall
not be deemed a voluntary appearance." The emplacement of this rule clearly underscores the
purpose to enforce strict enforcement of the rules on summons. Accordingly, the filing of a ANTONIO, J.:
motion to dismiss, whether or not belatedly filed by the defendant, his authorized agent or
attorney, precisely objecting to the jurisdiction of the court over the person of the defendant can The instant petition for certiorari, mandamus and injunction, with prayer for issuance of writ of
by no means be deemed a submission to the jurisdiction of the court. There being no proper preliminary injunction, arose out of two cases filed by petitioner with the Securities and Exchange
service of summons, the trial court cannot take cognizance of a case for lack of jurisdiction over Commission, as follows:
the person of the defendant. Any proceeding undertaken by the trial court will consequently be
null and void.32 SEC CASE NO 1375

WHEREFORE, the petition is hereby GRANTED. The assailed Orders of the public respondent On October 22, 1976, petitioner, as stockholder of respondent San Miguel Corporation, filed with
trial court are ANNULLED and SET ASIDE. The public respondent Regional Trial Court of the Securities and Exchange Commission (SEC) a petition for "declaration of nullity of amended
Makati, Branch 132 is declared without jurisdiction to take cognizance of Civil Case No. 98-824, by-laws, cancellation of certificate of filing of amended by- laws, injunction and damages with
and all its orders and issuances in connection therewith are hereby ANNULLED and SET prayer for a preliminary injunction" against the majority of the members of the Board of Directors
ASIDE. 1âwphi 1.nêt
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,
SO ORDERED. Walthrode B. Conde, Miguel Ortigas, Antonio Prieto and San Miguel Corporation", was docketed
as SEC Case No. 1375.
Melo, Vitug, Panganiban and Purisima, JJ., concur.
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
G.R. No. L-45911 April 11, 1979 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
JOHN GOKONGWEI, JR., petitioner, delegated to the Board of Directors only by the affirmative vote of stockholders representing not
vs. less than 2/3 of the subscribed and paid up capital stock of the corporation, which 2/3 should
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M. SORIANO, have been computed on the basis of the capitalization at the time of the amendment. Since the
ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, amendment was based on the 1961 authorization, petitioner contended that the Board acted
MIGUEL ORTIGAS, ANTONIO PRIETO, SAN MIGUEL CORPORATION, EMIGDIO without authority and in usurpation of the power of the stockholders.
TANJUATCO, SR., and EDUARDO R. VISAYA, respondents.
As a second cause of action, it was alleged that the authority granted in 1961 had already been
De Santos, Balgos & Perez for petitioner. 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 faith; that the motion is premature since the materiality or relevance of the evidence sought
changed since the authority was given in 1961, there being six (6) new directors. 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
As a fourth cause of action, it was claimed that prior to the questioned amendment, petitioner corporation and, therefore, privileged.
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 During the pendency of the motion for production, respondents San Miguel Corporation, Enrique
ownership, such as the rights to vote and to be voted upon in the election of directors; and that in Conde, Miguel Ortigas and Antonio Prieto filed their answer to the petition, denying the
amending the by-laws, respondents purposely provided for petitioner's disqualification and substantial allegations therein and stating, by way of affirmative defenses that "the action taken
deprived him of his vested right as afore-mentioned hence the amended by-laws are null and by the Board of Directors on September 18, 1976 resulting in the ... amendments is valid and
void. 1 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
As additional causes of action, it was alleged that corporations have no inherent power to to petitioner's claim, "the vote requirement for a valid delegation of the power to amend, repeal or
disqualify a stockholder from being elected as a director and, therefore, the questioned act adopt new by-laws is determined in relation to the total subscribed capital stock at the time the
is ultra vires and void; that Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing delegation of said power is made, not when the Board opts to exercise said delegated power";
other corporations, entered into contracts (specifically a management contract) with respondent that petitioner has not availed of his intra-corporate remedy for the nullification of the
corporation, which was allowed because the questioned amendment gave the Board itself the amendment, which is to secure its repeal by vote of the stockholders representing a majority of
prerogative of determining whether they or other persons are engaged in competitive or the subscribed capital stock at any regular or special meeting, as provided in Article VIII, section
antagonistic business; that the portion of the amended bylaws which states that in determining I of the by-laws and section 22 of the Corporation law, hence the, petition is premature; that
whether or not a person is engaged in competitive business, the Board may consider such petitioner is estopped from questioning the amendments on the ground of lack of authority of the
factors as business and family relationship, is unreasonable and oppressive and, therefore, void; Board. since he failed, to object to other amendments made on the basis of the same 1961
and that the portion of the amended by-laws which requires that "all nominations for election of authorization: that the power of the corporation to amend its by-laws is broad, subject only to the
directors ... shall be submitted in writing to the Board of Directors at least five (5) working days condition that the by-laws adopted should not be respondent corporation inconsistent with any
before the date of the Annual Meeting" is likewise unreasonable and oppressive. 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
It was, therefore, prayed that the amended by-laws be declared null and void and the certificate personal interests over t I hat of the corporation; that the questioned amended by-laws is a
of filing thereof be cancelled, and that individual respondents be made to pay damages, in matter of internal policy and the judgment of the board should not be interfered with: That the by-
specified amounts, to petitioner. 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
On October 28, 1976, in connection with the same case, petitioner filed with the Securities and
ordered to pay damages and attorney's fees to respondents. The application for writ of
Exchange Commission an "Urgent Motion for Production and Inspection of Documents", alleging
preliminary injunction was likewise on various grounds.
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 Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to the petition,
despite a negative reply by the SEC to its query regarding their authority to do so. Among the denying the material averments thereof and stating, as part of their affirmative defenses, that in
documents requested to be copied were (a) minutes of the stockholder's meeting field on March August 1972, the Universal Robina Corporation (Robina), a corporation engaged in business
13, 1961, (b) copy of the management contract between San Miguel Corporation and A. Soriano competitive to that of respondent corporation, began acquiring shares therein. until September
Corporation (ANSCOR); (c) latest balance sheet of San Miguel International, Inc.; (d) authority of 1976 when its total holding amounted to 622,987 shares: that in October 1972, the Consolidated
the stockholders to invest the funds of respondent corporation in San Miguel International, Inc.; Foods Corporation (CFC) likewise began acquiring shares in respondent (corporation. until its
and (e) lists of salaries, allowances, bonuses, and other compensation, if any, received by total holdings amounted to P543,959.00 in September 1976; that on January 12, 1976,
Andres M. Soriano, Jr. and/or its successor-in-interest. 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
The "Urgent Motion for Production and Inspection of Documents" was opposed by respondents,
against SMC" to generate support from the stockholder "in his effort to secure for himself and in
alleging, among others that the motion has no legal basis; that the demand is not based on good
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 San Miguel International, Inc. and has, therefore, no inherent right to inspect said
secure a seat in the Board of Directors on the basic issue that petitioner was engaged in a documents;
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 3. In view of the Manifestation of petitioner-movant dated November 29, 1976,
Directors at the next annual meeting; that thereafter the Board of Directors amended the by-laws withdrawing his request to copy and inspect the management contract between
as afore-stated. San Miguel Corporation and A. Soriano Corporation and the renewal and
amendments thereof for the reason that he had already obtained the same, the
As counterclaims, actual damages, moral damages, exemplary damages, expenses of litigation Commission takes note thereof; and
and attorney's fees were presented against petitioner.
4. Finally, the Commission holds in abeyance the resolution on the matter of
Subsequently, a Joint Omnibus Motion for the striking out of the motion for production and production and inspection of the authority of the stockholders of San Miguel
inspection of documents was filed by all the respondents. This was duly opposed by petitioner. Corporation to invest the funds of respondent corporation in San Miguel
At this juncture, respondents Emigdio Tanjuatco, Sr. and Eduardo R. Visaya were allowed to International, Inc., until after the hearing on the merits of the principal issues in
intervene as oppositors and they accordingly filed their oppositions-intervention to the petition. the above-entitled case.

On December 29, 1976, the Securities and Exchange Commission resolved the motion for This Order is immediately executory upon its approval. 2
production and inspection of documents by issuing Order No. 26, Series of 1977, stating, in part
as follows: Dissatisfied with the foregoing Order, petitioner moved for its reconsideration.

Considering the evidence submitted before the Commission by the petitioner and Meanwhile, on December 10, 1976, while the petition was yet to be heard, respondent
respondents in the above-entitled case, it is hereby ordered: 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
1. That respondents produce and permit the inspection, copying and prompted petitioner to ask respondent Commission for a summary judgment insofar as the first
photographing, by or on behalf of the petitioner-movant, John Gokongwei, Jr., of cause of action is concerned, for the alleged reason that by calling a special stockholders'
the minutes of the stockholders' meeting of the respondent San Miguel meeting for the aforesaid purpose, private respondents admitted the invalidity of the
Corporation held on March 13, 1961, which are in the possession, custody and amendments of September 18, 1976. The motion for summary judgment was opposed by private
control of the said corporation, it appearing that the same is material and relevant respondents. Pending action on the motion, petitioner filed an "Urgent Motion for the Issuance of
to the issues involved in the main case. Accordingly, the respondents should a Temporary Restraining Order", praying that pending the determination of petitioner's
allow petitioner-movant entry in the principal office of the respondent application for the issuance of a preliminary injunction and/or petitioner's motion for summary
Corporation, San Miguel Corporation on January 14, 1977, at 9:30 o'clock in the judgment, a temporary restraining order be issued, restraining respondents from holding the
morning for purposes of enforcing the rights herein granted; it being understood special stockholder's meeting as scheduled. This motion was duly opposed by respondents.
that the inspection, copying and photographing of the said documents shall be
undertaken under the direct and strict supervision of this Commission. Provided, On February 10, 1977, respondent Commission issued an order denying the motion for issuance
however, that other documents and/or papers not heretofore included are not of temporary restraining order. After receipt of the order of denial, respondents conducted the
covered by this Order and any inspection thereof shall require the prior special stockholders' meeting wherein the amendments to the by-laws were ratified. On
permission of this Commission; February 14, 1977, petitioner filed a consolidated motion for contempt and for nullification of the
special stockholders' meeting.
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 A motion for reconsideration of the order denying petitioner's motion for summary judgment was
respondent Jose M. Soriano, Jr. and Andres Soriano from San Miguel filed by petitioner before respondent Commission on March 10, 1977. Petitioner alleges that up
International, Inc. and/or its successors-in- interest, the Petition to produce and to the time of the filing of the instant petition, the said motion had not yet been scheduled for
inspect the same is hereby DENIED, as petitioner-movant is not a stockholder of 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 By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an urgent motion for
scheduled for May 10, 1977, petitioner filed with respondent Commission a Manifestation stating the issuance of a writ of preliminary injunction to restrain private respondents from taking up Item
that he intended to run for the position of director of respondent corporation. Thereafter, 6 of the Agenda at the annual stockholders' meeting, requesting that the same be set for hearing
respondents filed a Manifestation with respondent Commission, submitting a Resolution of the on May 3, 1977, the date set for the second hearing of the case on the merits. Respondent
Board of Directors of respondent corporation disqualifying and precluding petitioner from being a Commission, however, cancelled the dates of hearing originally scheduled and reset the same to
candidate for director unless he could submit evidence on May 3, 1977 that he does not come May 16 and 17, 1977, or after the scheduled annual stockholders' meeting. For the purpose of
within the disqualifications specified in the amendment to the by-laws, subject matter of SEC urging the Commission to act, petitioner filed an urgent manifestation on May 3, 1977, but this
Case No. 1375. By reason thereof, petitioner filed a manifestation and motion to resolve pending notwithstanding, no action has been taken up to the date of the filing of the instant petition.
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 With respect to the afore-mentioned SEC cases, it is petitioner's contention before this Court that
Commission, to petitioner's irreparable damage and prejudice, Allegedly despite a subsequent respondent Commission gravely abused its discretion when it failed to act with deliberate
Manifestation to prod respondent Commission to act, petitioner was not heard prior to the date of dispatch on the motions of petitioner seeking to prevent illegal and/or arbitrary impositions or
the stockholders' meeting. 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
Petitioner alleges that there appears a deliberate and concerted inability on the part of the SEC due process. He prayed that this Court direct respondent SEC to act on collateral incidents
to act hence petitioner came to this Court. pending before it.

SEC. CASE NO. 1423 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
Petitioner likewise alleges that, having discovered that respondent corporation has been respondent corporation and from submitting for ratification or confirmation or from causing the
investing corporate funds in other corporations and businesses outside of the primary purpose ratification or confirmation of Item 6 of the Agenda of the annual stockholders' meeting on May
clause of the corporation, in violation of section 17 1/2 of the Corporation Law, he filed with 10, 1977, or from Making effective the amended by-laws of respondent corporation, until further
respondent Commission, on January 20, 1977, a petition seeking to have private respondents orders from this Court or until the Securities and Ex-change Commission acts on the matters
Andres M. Soriano, Jr. and Jose M. Soriano, as well as the respondent corporation declared complained of in the instant petition.
guilty of such violation, and ordered to account for such investments and to answer for damages.
On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a restraining order
On February 4, 1977, motions to dismiss were filed by private respondents, to which a had been issued by this Court, or on May 9, 1977, the respondent Commission served upon
consolidated motion to strike and to declare individual respondents in default and an petitioner copies of the following orders:
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, (1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's motion for
1977, when it denied respondents' motion to dismiss and gave them two (2) days within which to reconsideration, with its supplement, of the order of the Commission denying in part petitioner's
file their answer, and set the case for hearing on April 29 and May 3, 1977. 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
Respondents issued notices of the annual stockholders' meeting, including in the Agenda order, and petitioner's consolidated motion to declare respondents in contempt and to nullify the
thereof, the following: stockholders' meeting;

6. Re-affirmation of the authorization to the Board of Directors by the (2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run as a director
stockholders at the meeting on March 20, 1972 to invest corporate funds in other of respondent corporation but stating that he should not sit as such if elected, until such time that
companies or businesses or for purposes other than the main purpose for which the Commission has decided the validity of the bylaws in dispute, and denying deferment of Item
the Corporation has been organized, and ratification of the investments thereafter 6 of the Agenda for the annual stockholders' meeting; and
made pursuant thereto.
(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's motion for (4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and 1423 was due to
reconsideration of the order of respondent Commission denying petitioner's motion for summary petitioner's own acts or omissions, since he failed to have the petition to suspend, pendente
judgment; 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
It is petitioner's assertions, anent the foregoing orders, (1) that respondent Commission acted hearing on May 3, 1977. The instant petition being dated May 4, 1977, it is apparent that
with indecent haste and without circumspection in issuing the aforesaid orders to petitioner's respondent Commission was not given a chance to act "with deliberate dispatch", and
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 (5) that, even assuming that the petition was meritorious was, it has become moot and academic
before one of its Commissioners, and without hearing petitioner thereon despite petitioner's because respondent Commission has acted on the pending incidents, complained of. It was,
request to have the same calendared for hearing , and (3) that the respondents acted therefore, prayed that the petition be dismissed.
oppressively against the petitioner in violation of his rights as a stockholder, warranting
immediate judicial intervention. 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
It is prayed in the supplemental petition that the SEC orders complained of be declared null and respondent sought to be enjoined have reference to the annual meeting of the stockholders of
void and that respondent Commission be ordered to allow petitioner to undertake discovery respondent San Miguel Corporation, which was held on may 10, 1977; that in said meeting, in
proceedings relative to San Miguel International. Inc. and thereafter to decide SEC Cases No. compliance with the order of respondent Commission, petitioner was allowed to run and be voted
1375 and 1423 on the merits. 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
On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed their are pending in the Securities and Exchange Commission which has acquired jurisdiction over the
comment, alleging that the petition is without merit for the following reasons: case, and no hearing on the merits has been had; hence the elevation of these issues before the
Supreme Court is premature.
(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 Petitioner filed a reply to the aforesaid comments, stating that the petition presents justiciable
controls a greater portion of his SMC stock thru the Universal Robina Corporation and the questions for the determination of this Court because (1) the respondent Commission acted
Consolidated Foods Corporation, which corporations are engaged in business directly and without circumspection, unfairly and oppresively against petitioner, warranting the intervention of
substantially competing with the allied businesses of respondent SMC and of corporations in this Court; (2) a derivative suit, such as the instant case, is not rendered academic by the act of
which SMC has substantial investments. Further, when CFC and Robina had accumulated a majority of stockholders, such that the discussion, ratification and confirmation of Item 6 of the
investments. Further, when CFC and Robina had accumulated shares in SMC, the Board of Agenda of the annual stockholders' meeting of May 10, 1977 did not render the case moot; that
Directors of SMC realized the clear and present danger that competitors or antagonistic parties the amendment to the bylaws which specifically bars petitioner from being a director is void since
may be elected directors and thereby have easy and direct access to SMC's business and trade it deprives him of his vested rights.
secrets and plans;
Respondent Commission, thru the Solicitor General, filed a separate comment, alleging that after
(2) that the amended by law were adopted to preserve and protect respondent SMC from the receiving a copy of the restraining order issued by this Court and noting that the restraining order
clear and present danger that business competitors, if allowed to become directors, will illegally did not foreclose action by it, the Commission en banc issued Orders Nos. 449, 450 and 451 in
and unfairly utilize their direct access to its business secrets and plans for their own private gain SEC Case No. 1375.
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 In answer to the allegation in the supplemental petition, it states that Order No. 450 which denied
less that the Constitution and pertinent laws against combinations in restraint of trade; 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
(3) that by laws are valid and binding since a corporation has the inherent right and duty to petitioner on May 3, 1977 which prayed, among others, that the discussion of Item 6 of the
preserve and protect itself by excluding competitors and antogonistic parties, under the law of Agenda be deferred. The reason given for denial of deferment was that "such action is within the
self-preservation, and it should be allowed a wide latitude in the selection of means to preserve authority of the corporation as well as falling within the sphere of stockholders' right to know,
itself; 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 court should always strive to settle the entire controversy in a single proceeding leaving no root
petition has, therefore, become moot and academic. 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
On September 29,1977, petitioner filed a second supplemental petition with prayer for amended by laws and the rights and obligations of the parties thereunder, otherwise "the time
preliminary injunction, alleging that the actuations of respondent SEC tended to deprive him of spent and effort exerted by the parties concerned and, more importantly, by this Honorable
his right to due process, and "that all possible questions on the facts now pending before the Court, would have been for naught because the main question will come back to this Honorable
respondent Commission are now before this Honorable Court which has the authority and the Court for final resolution." Respondent Eduardo R. Visaya submits a similar appeal.
competence to act on them as it may see fit." (Reno, pp. 927-928.)
It is only the Solicitor General who contends that the case should be remanded to the SEC for
Petitioner, in his memorandum, submits the following issues for resolution; hearing and decision of the issues involved, invoking the latter's primary jurisdiction to hear and
decide case involving intra-corporate controversies.
(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 It is an accepted rule of procedure that the Supreme Court should always strive to settle the
reasonable; entire controversy in a single proceeding, leaving nor root or branch to bear the seeds of future
litigation. 4 Thus, in Francisco v. City of Davao, 5 this Court resolved to decide the case on the
(2) whether or not respondent SEC gravely abused its discretion in denying petitioner's request merits instead of remanding it to the trial court for further proceedings since the ends of justice
for an examination of the records of San Miguel International, Inc., a fully owned subsidiary of would not be subserved by the remand of the case. In Republic v. Security Credit and
San Miguel Corporation; 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
(3) whether or not respondent SEC committed grave abuse of discretion in allowing discussion of
the third-party complaint to the trial court for further proceedings, citing precedent where this
Item 6 of the Agenda of the Annual Stockholders' Meeting on May 10, 1977, and the ratification
Court, in similar situations resolved to decide the cases on the merits, instead of remanding them
of the investment in a foreign corporation of the corporate funds, allegedly in violation of section
to the trial court where (a) the ends of justice would not be subserved by the remand of the case;
17-1/2 of the Corporation Law.
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
I 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
Whether or not amended by-laws are valid is purely a legal question which public interest involved. 8a Because uniformity may be secured through review by a single Supreme Court,
requires to be resolved — 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
It is the position of the petitioner that "it is not necessary to remand the case to respondent SEC Board of Directors of the San Miguel Corporation in the exercise of the power delegated by the
for an appropriate ruling on the intrinsic validity of the amended by-laws in compliance with the stockholders ostensibly pursuant to section 22 of the Corporation Law; that in a special meeting
principle of exhaustion of administrative remedies", considering that: first: "whether or not the on February 10, 1977 held specially for that purpose, the amended by-laws were ratified by more
provisions of the amended by-laws are intrinsically valid ... is purely a legal question. There is no than 80% of the stockholders of record; that the foreign investment in the Hongkong Brewery
factual dispute as to what the provisions are and evidence is not necessary to determine and Distellery, a beer manufacturing company in Hongkong, was made by the San Miguel
whether such amended by-laws are valid as framed and approved ... "; second: "it is for the Corporation in 1948; and that in the stockholders' annual meeting held in 1972 and 1977, all
interest and guidance of the public that an immediate and final ruling on the question be made ... foreign investments and operations of San Miguel Corporation were ratified by the stockholders.
"; third: "petitioner was denied due process by SEC" when "Commissioner de Guzman had
openly shown prejudice against petitioner ... ", and "Commissioner Sulit ... approved the II
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." 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 —
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
The validity or reasonableness of a by-law of a corporation in purely a question of law. 9 Whether According to respondent San Miguel Corporation, the areas of, competition are enumerated in its
the by-law is in conflict with the law of the land, or with the charter of the corporation, or is in a Board the areas of competition are enumerated in its Board Resolution dated April 28, 1978,
legal sense unreasonable and therefore unlawful is a question of law. 10 This rule is subject, thus:
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 Product Line Estimated Market Share Total
warranted in substituting its judgment instead of the judgment of those who are authorized to 1977 SMC Robina-CFC
make by-laws and who have exercised their authority. 11
Table Eggs 0.6% 10.0% 10.6%
Petitioner claims that the amended by-laws are invalid and unreasonable because they were Layer Pullets 33.0% 24.0% 57.0%
tailored to suppress the minority and prevent them from having representation in the Board", at Dressed Chicken 35.0% 14.0% 49.0%
the same time depriving petitioner of his "vested right" to be voted for and to vote for a person of Poultry & Hog Feeds 40.0% 12.0% 52.0%
his choice as director. Ice Cream 70.0% 13.0% 83.0%
Instant Coffee 45.0% 40.0% 85.0%
Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San Miguel Woven Fabrics 17.5% 9.1% 26.6%
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 Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC involved
undivided Loyalty to the corporation; that it is essentially a preventive measure to assure product sales of over P400 million or more than 20% of the P2 billion total product sales of SMC.
stockholders of San Miguel Corporation of reasonable protective from the unrestrained self- Significantly, the combined market shares of SMC and CFC-Robina in layer pullets dressed
interest of those charged with the promotion of the corporate enterprise; that access to chicken, poultry and hog feeds ice cream, instant coffee and woven fabrics would result in a
confidential information by a competitor may result either in the promotion of the interest of the position of such dominance as to affect the prevailing market factors.
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 It is further asserted that in 1977, the CFC-Robina group was in direct competition on product
combination or agreement in violation of Article 186 of the Revised Penal Code by destroying lines which, for SMC, represented sales amounting to more than ?478 million. In addition, CFC-
free competition to the detriment of the consuming public. It is further argued that there is not Robina was directly competing in the sale of coffee with Filipro, a subsidiary of SMC, which
vested right of any stockholder under Philippine Law to be voted as director of a corporation. It is product line represented sales for SMC amounting to more than P275 million. The CFC-Robina
alleged that petitioner, as of May 6, 1978, has exercised, personally or thru two corporations group (Robitex, excluding Litton Mills recently acquired by petitioner) is purportedly also in direct
owned or controlled by him, control over the following shareholdings in San Miguel competition with Ramie Textile, Inc., subsidiary of SMC, in product sales amounting to more than
Corporation, vis.: (a) John Gokongwei, Jr. — 6,325 shares; (b) Universal Robina Corporation — P95 million. The areas of competition between SMC and CFC-Robina in 1977 represented,
738,647 shares; (c) CFC Corporation — 658,313 shares, or a total of 1,403,285 shares. Since therefore, for SMC, product sales of more than P849 million.
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
According to private respondents, at the Annual Stockholders' Meeting of March 18, 1976, 9,894
petitioner represents 4.2344% of the total outstanding capital stock of San Miguel Corporation. It
stockholders, in person or by proxy, owning 23,436,754 shares in SMC, or more than 90% of the
is also contended that petitioner is the president and substantial stockholder of Universal Robina
total outstanding shares of SMC, rejected petitioner's candidacy for the Board of Directors
Corporation and CFC Corporation, both of which are allegedly controlled by petitioner and
because they "realized the grave dangers to the corporation in the event a competitor gets a
members of his family. It is also claimed that both the Universal Robina Corporation and the CFC
board seat in SMC." On September 18, 1978, the Board of Directors of SMC, by "virtue of
Corporation are engaged in businesses directly and substantially competing with the alleged
powers delegated to it by the stockholders," approved the amendment to ' he by-laws in
businesses of San Miguel Corporation, and of corporations in which SMC has substantial
question. At the meeting of February 10, 1977, these amendments were confirmed and ratified
investments.
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
ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S CORPORATIONS AND SAN ratification. At the Annual Stockholders' Meeting of May 10, 1977, 11,349 shareholders, owning
MIGUEL CORPORATION 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 will of the majority of his fellow incorporators. ... It cannot therefore be justly said that the
more than 90% of the total outstanding shares. voted against petitioner. 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
AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS
EXPRESSLY CONFERRED BY LAW 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
Private respondents contend that the disputed amended by laws were adopted by the Board of the subscribed capital stock of the corporation If the amendment changes, diminishes or restricts
Directors of San Miguel Corporation a-, a measure of self-defense to protect the corporation from the rights of the existing shareholders then the disenting minority has only one right, viz.: "to
the clear and present danger that the election of a business competitor to the Board may cause object thereto in writing and demand payment for his share." Under section 22 of the same law,
upon the corporation and the other stockholders inseparable prejudice. Submitted for resolution, the owners of the majority of the subscribed capital stock may amend or repeal any by-law or
therefore, is the issue — whether or not respondent San Miguel Corporation could, as a measure adopt new by-laws. It cannot be said, therefore, that petitioner has a vested right to be elected
of self- protection, disqualify a competitor from nomination and election to its Board of Directors. 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
It is recognized by an authorities that 'every corporation has the inherent power to adopt by-laws amendment, alteration and modification. 17
'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 It being settled that the corporation has the power to provide for the qualifications of its directors,
affairs. 12 At common law, the rule was "that the power to make and adopt by-laws the next question that must be considered is whether the disqualification of a competitor from
was inherent in every corporation as one of its necessary and inseparable legal incidents. And it being elected to the Board of Directors is a reasonable exercise of corporate authority.
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 A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS
inseparable legal incidents, independent of any specific enabling provision in its charter or in SHAREHOLDERS
general law, such power of self-government being essential to enable the corporation to
accomplish the purposes of its creation. 13 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
In this jurisdiction, under section 21 of the Corporation Law, a corporation may prescribe in its corporation and the stockholders as a body are concerned. As agents entrusted with the
by-laws "the qualifications, duties and compensation of directors, officers and employees ... " management of the corporation for the collective benefit of the stockholders, "they occupy a
This must necessarily refer to a qualification in addition to that specified by section 30 of the fiduciary relation, and in this sense the relation is one of trust." 18 "The ordinary trust relationship
Corporation Law, which provides that "every director must own in his right at least one share of of directors of a corporation and stockholders", according to Ashaman v. Miller, 19 "is not a matter
the capital stock of the stock corporation of which he is a director ... " In Government v. El of statutory or technical law. It springs from the fact that directors have the control and guidance
Hogar, 14 the Court sustained the validity of a provision in the corporate by-law requiring that of corporate affairs and property and hence of the property interests of the stockholders. Equity
persons elected to the Board of Directors must be holders of shares of the paid up value of recognizes that stockholders are the proprietors of the corporate interests and are ultimately the
P5,000.00, which shall be held as security for their action, on the ground that section 21 of the only beneficiaries thereof * * *.
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. " Justice Douglas, in Pepper v. Litton, 20 emphatically restated the standard of fiduciary obligation
of the directors of corporations, thus:
NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR
A director is a fiduciary. ... Their powers are powers in trust. ... He who is in such
Any person "who buys stock in a corporation does so with the knowledge that its affairs fiduciary position cannot serve himself first and his cestuis second. ... He cannot
are dominated by a majorityof the stockholders and that he impliedly contracts that the will of the manipulate the affairs of his corporation to their detriment and in disregard of the
majority shall govern in all matters within the limits of the act of incorporation and lawfully standards of common decency. He cannot by the intervention of a corporate
enacted by-laws and not forbidden by law." 15 To this extent, therefore, the stockholder may be entity violate the ancient precept against serving two masters ... He cannot utilize
considered to have "parted with his personal right or privilege to regulate the disposition of his his inside information and strategic position for his own preferment. He cannot
property which he has invested in the capital stock of the corporation, and surrendered it to the 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 serve both, but must betray one or the other. Such an amendment "advances the benefit of the
the corporation what he could not do so directly. He cannot use his power for his corporation and is good." An exception exists in New Jersey, where the Supreme Court held that
personal advantage and to the detriment of the stockholders and creditors no the Corporation Law in New Jersey prescribed the only qualification, and therefore the
matter how absolute in terms that power may be and no matter how meticulous corporation was not empowered to add additional qualifications. 25 This is the exact opposite of
he is to satisfy technical requirements. For that power is at all times subject to the the situation in the Philippines because as stated heretofore, section 21 of the Corporation Law
equitable limitation that it may not be exercised for the aggrandizement, expressly provides that a corporation may make by-laws for the qualifications of directors. Thus,
preference or advantage of the fiduciary to the exclusion or detriment of the it has been held that an officer of a corporation cannot engage in a business in direct competition
cestuis. 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
And in Cross v. West Virginia Cent, & P. R. R. Co., 21 it was said: competing enterprise which cripples or injures the business of the corporation of which he is an
officer or director. 26
... 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 It is also well established that corporate officers "are not permitted to use their position of trust
more can a director. Human nature is too weak -for this. Take whatever statute and confidence to further their private interests." 27 In a case where directors of a corporation
provision you please giving power to stockholders to choose directors, and in cancelled a contract of the corporation for exclusive sale of a foreign firm's products, and after
none will you find any express prohibition against a discretion to select directors establishing a rival business, the directors entered into a new contract themselves with the
having the company's interest at heart, and it would simply be going far to deny foreign firm for exclusive sale of its products, the court held that equity would regard the new
by mere implication the existence of such a salutary power 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
... 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 The doctrine of "corporate opportunity" 29 is precisely a recognition by the courts that the fiduciary
member of the family of such stockholder, on account of the supposed interest of the wife in her standards could not be upheld where the fiduciary was acting for two entities with competing
husband's affairs, and his suppose influence over her. It is perhaps true that such stockholders interests. This doctrine rests fundamentally on the unfairness, in particular circumstances, of an
ought not to be condemned as selfish and dangerous to the best interest of the corporation until officer or director taking advantage of an opportunity for his own personal profit when the interest
tried and tested. So it is also true that we cannot condemn as selfish and dangerous and of the corporation justly calls for protection. 30
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 It is not denied that a member of the Board of Directors of the San Miguel Corporation has
love and affection. The only test that we can apply is as to whether or not the action of the Board access to sensitive and highly confidential information, such as: (a) marketing strategies and
is authorized and sanctioned by law. ... . 22 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.
These principles have been applied by this Court in previous cases.23
It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel
AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A STOCKHOLDER Corporation, who is also the officer or owner of a competing corporation, from taking advantage
INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO DIRECTOR IN A CORPORATION WHOSE of the information which he acquires as director to promote his individual or corporate interests to
BUSINESS IS IN COMPETITION WITH THAT OF THE OTHER CORPORATION, HAS BEEN the prejudice of San Miguel Corporation and its stockholders, that the questioned amendment of
SUSTAINED AS VALID 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
It is a settled state law in the United States, according to Fletcher, that corporations have the his duty, to satisfy his loyalty to both corporations and place the performance of his corporation
power to make by-laws declaring a person employed in the service of a rival company to be duties above his personal concerns.
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 Thus, in McKee & Co. v. First National Bank of San Diego, supra the court sustained as valid
is in competition with or is antagonistic to the other corporation is valid." 24This is based upon the and reasonable an amendment to the by-laws of a bank, requiring that its directors should not be
principle that where the director is so employed in the service of a rival company, he cannot 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, from such arrangement, it would be inconsistent with petitioner's primary motive in running for
thus: 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 bank director has access to a great deal of information concerning the a director's duty of fidelity to the corporation, for the policy of the law is to encourage and enforce
business and plans of a bank which would likely be injurious to the bank if known responsible corporate management. As explained by Oleck: 31 "The law win not tolerate the
to another bank, and it was reasonable and prudent to enlarge this minimum passive attitude of directors ... without active and conscientious participation in the managerial
disqualification to include any director, officer, employee, agent, nominee, or functions of the company. As directors, it is their duty to control and supervise the day to day
attorney of any other bank in California. The Ashkins case, supra, specifically business activities of the company or to promulgate definite policies and rules of guidance with a
recognizes protection against rivals and others who might acquire information vigilant eye toward seeing to it that these policies are carried out. It is only then that directors
which might be used against the interests of the corporation as a legitimate may be said to have fulfilled their duty of fealty to the corporation."
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 Sound principles of corporate management counsel against sharing sensitive information with a
potential conflict of interest, there is also the danger of inadvertent leakage of director whose fiduciary duty of loyalty may well require that he disclose this information to a
confidential information through casual office discussions or accessibility of files. competitive arrival. These dangers are enhanced considerably where the common director such
Defendant's directors determined that its welfare was best protected if this as the petitioner is a controlling stockholder of two of the competing corporations. It would seem
opportunity for conflicting loyalties and potential misuse and leakage of manifest that in such situations, the director has an economic incentive to appropriate for the
confidential information was foreclosed. benefit of his own corporation the corporate plans and policies of the corporation where he sits
as director.
In McKee the Court further listed qualificational by-laws upheld by the courts, as follows:
Indeed, access by a competitor to confidential information regarding marketing strategies and
(1) A director shall not be directly or indirectly interested as a stockholder in any pricing policies of San Miguel Corporation would subject the latter to a competitive disadvantage
other firm, company, or association which competes with the subject corporation. 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
(2) A director shall not be the immediate member of the family of any stockholder competitor to utilize such knowledge to his advantage. 32
in any other firm, company, or association which competes with the subject
corporation, 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
(3) A director shall not be an officer, agent, employee, attorney, or trustee in any competition. Thus, section 2 of Article XIV of the Constitution provides: "The State shall regulate
other firm, company, or association which compete with the subject corporation. or prohibit private monopolies when the public interest so requires. No combinations in restraint
of trade or unfair competition shall be snowed."
(4) A director shall be of good moral character as an essential qualification to
holding office. Article 186 of the Revised Penal Code also provides:

(5) No person who is an attorney against the corporation in a law suit is eligible Art. 186. Monopolies and combinations in restraint of trade. —The penalty of
for service on the board. (At p. 7.) prision correccional in its minimum period or a fine ranging from two hundred to
six thousand pesos, or both, shall be imposed upon:
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. 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
The offer and assurance of petitioner that to avoid any possibility of his taking unfair advantage
market.
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
2. Any person who shag monopolize any merchandise or object of trade or From the foregoing definitions, it is apparent that the contentions of petitioner are not in accord
commerce, or shall combine with any other person or persons to monopolize said with reality. The election of petitioner to the Board of respondent Corporation can bring about an
merchandise or object in order to alter the price thereof by spreading false illegal situation. This is because an express agreement is not necessary for the existence of a
rumors or making use of any other artifice to restrain free competition in the combination or conspiracy in restraint of trade. 40 It is enough that a concert of action is
market. 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
3. Any person who, being a manufacturer, producer, or processor of any Clayton Act prohibits a person from serving at the same time as a director in any two or more
merchandise or object of commerce or an importer of any merchandise or object corporations, if such corporations are, by virtue of their business and location of
of commerce from any foreign country, either as principal or agent, wholesale or operation, competitors so that the elimination of competition between them would constitute
retailer, shall combine, conspire or agree in any manner with any person likewise violation of any provision of the anti-trust laws. 42 There is here a statutory recognition of the anti-
engaged in the manufacture, production, processing, assembling or importation competitive dangers which may arise when an individual simultaneously acts as a director of two
of such merchandise or object of commerce or with any other persons not so or more competing corporations. A common director of two or more competing corporations
similarly engaged for the purpose of making transactions prejudicial to lawful would have access to confidential sales, pricing and marketing information and would be in a
commerce, or of increasing the market price in any part of the Philippines, or any position to coordinate policies or to aid one corporation at the expense of another, thereby
such merchandise or object of commerce manufactured, produced, processed, stifling competition. This situation has been aptly explained by Travers, thus:
assembled in or imported into the Philippines, or of any article in the manufacture
of which such manufactured, produced, processed, or imported merchandise or The argument for prohibiting competing corporations from sharing even one
object of commerce is used. director is that the interlock permits the coordination of policies between
nominally independent firms to an extent that competition between them may be
There are other legislation in this jurisdiction, which prohibit monopolies and combinations in completely eliminated. Indeed, if a director, for example, is to be faithful to both
restraint of trade. 33 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
Basically, these anti-trust laws or laws against monopolies or combinations in restraint of trade injure B without violating his duty of loyalty to B at the same time he could hardly
are aimed at raising levels of competition by improving the consumers' effectiveness as the final abstain from voting without depriving A of his best judgment. If the firms really do
arbiter in free markets. These laws are designed to preserve free and unfettered competition as compete — in the sense of vying for economic advantage at the expense of the
the rule of trade. "It rests on the premise that the unrestrained interaction of competitive forces other — there can hardly be any reason for an interlock between competitors
will yield the best allocation of our economic resources, the lowest prices and the highest quality other than the suppression of competition. 43 (Emphasis supplied.)
... ." 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 According to the Report of the House Judiciary Committee of the U. S. Congress on section 9 of
the inherent nature of the contemplated acts, prejudice the public interest by unduly restraining the Clayton Act, it was established that: "By means of the interlocking directorates one man or
competition or unduly obstructing the course of trade. 36 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
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 Shared information on cost accounting may lead to price fixing. Certainly, shared information on
tendency of which is to prevent competition in the broad and general sense, or to control prices production, orders, shipments, capacity and inventories may lead to control of production for the
to the detriment of the public. 37 In short, it is the concentration of business in the hands of a few. purpose of controlling prices.
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 Obviously, if a competitor has access to the pricing policy and cost conditions of the products of
desired. 38 Further, it must be considered that the Idea of monopoly is now understood to include San Miguel Corporation, the essence of competition in a free market for the purpose of serving
a condition produced by the mere act of individuals. Its dominant thought is the notion of the lowest priced goods to the consuming public would be frustrated, The competitor could so
exclusiveness or unity, or the suppression of competition by the qualification of interest or manipulate the prices of his products or vary its marketing strategies by region or by brand in
management, or it may be thru agreement and concert of action. It is, in brief, unified tactics with order to get the most out of the consumers. Where the two competing firms control a substantial
regard to prices. 39 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 does in fact compete, not whether it is capable of an indirect and highly unsubstantial duplication
edge of rivalry between the corporations, to seek out ways of compromising opposing interests, of an isolated or non-characteristics activity. 47 It is, therefore, obvious that not every person or
and thus eliminate competition. As respondent SMC aptly observes, knowledge by CFC-Robina entity engaged in business of the same kind is a competitor. Such factors as quantum and place
of SMC's costs in various industries and regions in the country win enable the former to practice of business, Identity of products and area of competition should be taken into consideration. It is,
price discrimination. CFC-Robina can segment the entire consuming population by geographical therefore, necessary to show that petitioner's business covers a substantial portion of the same
areas or income groups and change varying prices in order to maximize profits from every markets for similar products to the extent of not less than 10% of respondent corporation's
market segment. CFC-Robina could determine the most profitable volume at which it could market for competing products. While We here sustain the validity of the amended by-laws, it
produce for every product line in which it competes with SMC. Access to SMC pricing policy by does not follow as a necessary consequence that petitioner is ipso facto disqualified. Consonant
CFC-Robina would in effect destroy free competition and deprive the consuming public of with the requirement of due process, there must be due hearing at which the petitioner must be
opportunity to buy goods of the highest possible quality at the lowest prices. 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
Finally, considering that both Robina and SMC are, to a certain extent, engaged in agriculture, the stockholders.48Pursuant to this obligation and to remove any suspicion that this power may
then the election of petitioner to the Board of SMC may constitute a violation of the prohibition be utilized by the incumbent members of the Board to perpetuate themselves in power, any
contained in section 13(5) of the Corporation Law. Said section provides in part that "any decision of the Board to disqualify a candidate for the Board of Directors should be reviewed by
stockholder of more than one corporation organized for the purpose of engaging in agriculture the Securities behind Exchange Commission en banc and its decision shall be final unless
may hold his stock in such corporations solely for investment and not for the purpose of bringing reversed by this Court on certiorari. 49 Indeed, it is a settled principle that where the action of a
about or attempting to bring about a combination to exercise control of incorporations ... ." 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,
Neither are We persuaded by the claim that the by-law was Intended to prevent the candidacy of dissipation or misapplication of the corporation assets, a court of equity has the power to grant
petitioner for election to the Board. If the by-law were to be applied in the case of one appropriate relief. 50
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 III
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 Whether or not respondent SEC gravely abused its discretion in denying petitioner's request for
to run for director, there must be hearing and evidence must be submitted to bring his case an examination of the records of San Miguel International Inc., a fully owned subsidiary of San
within the ambit of the disqualification. Sound principles of public policy and management, Miguel Corporation —
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. 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
In the absence of any legal prohibition or overriding public policy, wide latitude may be accorded that, over a specific period, petitioner had been furnished numerous documents and
to the corporation in adopting measures to protect legitimate corporation interests. Thus, "where information," to wit: (1) a complete list of stockholders and their stockholdings; (2) a complete list
the reasonableness of a by-law is a mere matter of judgment, and upon which reasonable minds of proxies given by the stockholders for use at the annual stockholders' meeting of May 18,
must necessarily differ, a court would not be warranted in substituting its judgment instead of the 1975; (3) a copy of the minutes of the stockholders' meeting of March 18,1976; (4) a breakdown
judgment of those who are authorized to make by-laws and who have expressed their of SMC's P186.6 million investment in associated companies and other companies as of
authority. 45 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
Although it is asserted that the amended by-laws confer on the present Board powers to $100 million Euro-Dollar Loan Agreement of SMC; and (7) copies of the minutes of all meetings
perpetua themselves in power such fears appear to be misplaced. This power, but is very nature, of the Board of Directors from January 1975 to May 1976, with deletions of sensitive data, which
is subject to certain well established limitations. One of these is inherent in the very convert and deletions were not objected to by petitioner.
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 Further, it was averred that upon request, petitioner was informed in writing on September 18,
degree, certain characteristics essential to the business sought. It means an independent 1976; (1) that SMC's foreign investments are handled by San Miguel International, Inc.,
endeavor of two or more persons to obtain the business patronage of a third by offering more incorporated in Bermuda and wholly owned by SMC; this was SMC's first venture abroad, having
advantageous terms as an inducement to secure trade. 46 The test must be whether the business 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. Some state courts recognize the right under certain conditions, while others do not. Thus, it has
Andres Soriano; (2) that as of December 31, 1975, the estimated value of SMI would amount to been held that where a corporation owns approximately no property except the shares of stock
almost P400 million (3) that the total cash dividends received by SMC from SMI since 1953 has of subsidiary corporations which are merely agents or instrumentalities of the holding company,
amount to US $ 9.4 million; and (4) that from 1972-1975, SMI did not declare cash or stock the legal fiction of distinct corporate entities may be disregarded and the books, papers and
dividends, all earnings having been used in line with a program for the setting up of breweries by documents of all the corporations may be required to be produced for examination, 60 and that a
SMI 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
These averments are supported by the affidavit of the Corporate Secretary, enclosing party. 61 mandamus was likewise held proper to inspect both the subsidiary's and the parent
photocopies of the afore-mentioned documents. 51 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
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 On the other hand, mandamus at the suit of a stockholder was refused where the subsidiary
inspection of any director, member or stockholder of the corporation at reasonable hours." 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
The stockholder's right of inspection of the corporation's books and records is based upon their owned a vast majority of the stock of the subsidiary. 63Likewise, inspection of the books of an
ownership of the assets and property of the corporation. It is, therefore, an incident of ownership allied corporation by stockholder of the parent company which owns all the stock of the
of the corporate property, whether this ownership or interest be termed an equitable ownership, subsidiary has been refused on the ground that the stockholder was not within the class of
a beneficial ownership, or a ownership. 52 This right is predicated upon the necessity of self- "persons having an interest." 64
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 In the Nash case, 65 The Supreme Court of New York held that the contractual right of former
interest as a stockholder and for some purpose germane thereto or in the interest of the stockholders to inspect books and records of the corporation included the right to inspect
corporation. 53 In other words, the inspection has to be germane to the petitioner's interest as a corporation's subsidiaries' books and records which were in corporation's possession and control
stockholder, and has to be proper and lawful in character and not inimical to the interest of the in its office in New York."
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 In the Bailey case, 66 stockholders of a corporation were held entitled to inspect the records of a
gratify curiosity, or for specific and honest purpose, and not to gratify curiosity, or for speculative controlled subsidiary corporation which used the same offices and had Identical officers and
or vexatious purposes. The weight of judicial opinion appears to be, that on application for directors.
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 In his "Urgent Motion for Production and Inspection of Documents" before respondent SEC,
that "the right given by statute is not absolute and may be refused when the information is not petitioner contended that respondent corporation "had been attempting to suppress information
sought in good faith or is used to the detriment of the corporation." 57 But the "impropriety of for the stockholders" and that petitioner, "as stockholder of respondent corporation, is entitled to
purpose such as will defeat enforcement must be set up the corporation defensively if the Court copies of some documents which for some reason or another, respondent corporation is very
is to take cognizance of it as a qualification. In other words, the specific provisions take from the reluctant in revealing to the petitioner notwithstanding the fact that no harm would be caused
stockholder the burden of showing propriety of purpose and place upon the corporation the thereby to the corporation." 67 There is no question that stockholders are entitled to inspect the
burden of showing impropriety of purpose or motive. 58 It appears to be the general rule that books and records of a corporation in order to investigate the conduct of the management,
stockholders are entitled to full information as to the management of the corporation and the determine the financial condition of the corporation, and generally take an account of the
manner of expenditure of its funds, and to inspection to obtain such information, especially stewardship of the officers and directors. 68
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 In the case at bar, considering that the foreign subsidiary is wholly owned by respondent San
others." 59 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
While the right of a stockholder to examine the books and records of a corporation for a lawful books and records of the corporation as extending to books and records of such wholly
purpose is a matter of law, the right of such stockholder to examine the books and records of a subsidiary which are in respondent corporation's possession and control.
wholly-owned subsidiary of the corporation in which he is a stockholder is a different thing.
IV acquire, hold, mortgage, pledge or dispose of shares, bonds, securities, and
other evidence of indebtedness of any domestic or foreign corporation. Such an
Whether or not respondent SEC gravely abused its discretion in allowing the stockholders of act, if done in pursuance of the corporate purpose, does not need the approval of
respondent corporation to ratify the investment of corporate funds in a foreign corporation 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
Petitioner reiterates his contention in SEC Case No. 1423 that respondent corporation invested vote of approval of the stockholders is necessary. In any case, the purchase of
corporate funds in SMI without prior authority of the stockholders, thus violating section 17-1/2 of such shares or securities must be subject to the limitations established by the
the Corporation Law, and alleges that respondent SEC should have investigated the charge, Corporations law; namely, (a) that no agricultural or mining corporation shall be
being a statutory offense, instead of allowing ratification of the investment by the stockholders. 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
Respondent SEC's position is that submission of the investment to the stockholders for
combination in restraint of trade." The Philippine Corporation Law by Sulpicio S.
ratification is a sound corporate practice and should not be thwarted but encouraged.
Guevara, 1967 Ed., p. 89) (Emphasis supplied.)
Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other
40. Power to invest corporate funds. — A private corporation has the power to
corporation or business or for any purpose other than the main purpose for which it was
invest its corporate funds "in any other corporation or business, or for any
organized" provided that its Board of Directors has been so authorized by the affirmative vote of
purpose other than the main purpose for which it was organized, provide that 'its
stockholders holding shares entitling them to exercise at least two-thirds of the voting power. If
board of directors has been so authorized in a resolution by the affirmative vote
the investment is made in pursuance of the corporate purpose, it does not need the approval of
of stockholders holding shares in the corporation entitling them to exercise at
the stockholders. It is only when the purchase of shares is done solely for investment and not to
least two-thirds of the voting power on such a propose at a stockholders' meeting
accomplish the purpose of its incorporation that the vote of approval of the stockholders holding
called for that purpose,' and provided further, that no agricultural or mining
shares entitling them to exercise at least two-thirds of the voting power is necessary. 69
corporation shall in anywise be interested in any other agricultural or mining
corporation. When the investment is necessary to accomplish its purpose or
As stated by respondent corporation, the purchase of beer manufacturing facilities by SMC was purposes as stated in its articles of incorporation the approval of the stockholders
an investment in the same business stated as its main purpose in its Articles of Incorporation, is not necessary."" (Id., p. 108) (Emphasis ours.) (pp. 258-259).
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
Assuming arguendo that the Board of Directors of SMC had no authority to make the assailed
(Hongkong Brewery & Distillery, Ltd.) for the manufacture and marketing of San Miguel beer
investment, there is no question that a corporation, like an individual, may ratify and thereby
thereat. Restructuring of the investment was made in 1970-1971 thru the organization of SMI in
render binding upon it the originally unauthorized acts of its officers or other agents. 70 This is true
Bermuda as a tax free reorganization.
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
Under these circumstances, the ruling in De la Rama v. Manao Sugar Central Co., Inc., defective from a supported failure to observe in its execution the. requirement of the law that the
supra, appears relevant. In said case, one of the issues was the legality of an investment made investment must be authorized by the affirmative vote of the stockholders holding two-thirds of
by Manao Sugar Central Co., Inc., without prior resolution approved by the affirmative vote of 2/3 the voting power. This requirement is for the benefit of the stockholders. The stockholders for
of the stockholders' voting power, in the Philippine Fiber Processing Co., Inc., a company whose benefit the requirement was enacted may, therefore, ratify the investment and its
engaged in the manufacture of sugar bags. The lower court said that "there is more logic in the ratification by said stockholders obliterates any defect which it may have had at the outset.
stand that if the investment is made in a corporation whose business is important to the investing "Mere ultra vires acts", said this Court in Pirovano, 71 "or those which are not illegal and void ab
corporation and would aid it in its purpose, to require authority of the stockholders would be to initio, but are not merely within the scope of the articles of incorporation, are merely voidable and
unduly curtail the power of the Board of Directors." This Court affirmed the ruling of the court a may become binding and enforceable when ratified by the stockholders.
quo on the matter and, quoting Prof. Sulpicio S. Guevara, said:
Besides, the investment was for the purchase of beer manufacturing and marketing facilities
"j. Power to acquire or dispose of shares or securities. — A private corporation, in which is apparently relevant to the corporate purpose. The mere fact that respondent corporation
order to accomplish is purpose as stated in its articles of incorporation, and submitted the assailed investment to the stockholders for ratification at the annual meeting of
subject to the limitations imposed by the Corporation Law, has the power to 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 Makasiar, Santos Abad Santos and De Castro, JJ., concur.
the gratification of their stockholders the acts of their directors, officers and managers.
Aquino, and Melencio Herrera JJ., took no part.
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, G.R. No. L-23241 March 14, 1925
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 HENRY FLEISCHER, plaintiff-appellee,
Gokongwei, Jr. to run and if elected to sit as director of respondent San Miguel Corporation vs.
being decided, after a new and proper hearing by the Board of Directors of said corporation, BOTICA NOLASCO CO., INC., defendant-appellant.
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 Antonio Gonzalez for appellant.
herein provided, the prohibition in the afore-mentioned amended by-laws shall not apply to Emilio M. Javier for appellee.
petitioner.
JOHNSON, J.:
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. This action was commenced in the Court of First Instance of the Province of Oriental Negros on
the 14th day of August, 1923, against the board of directors of the Botica Nolasco, Inc., a
Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-laws, pending corporation duly organized and existing under the laws of the Philippine Islands. The plaintiff
hearing by this Court on the applicability of section 13(5) of the Corporation Law to petitioner. prayed that said board of directors be ordered to register in the books of the corporation five
shares of its stock in the name of Henry Fleischer, the plaintiff, and to pay him the sum of P500
Justice Fernando reserved his vote on the validity of subject amendment to the by-laws but for damages sustained by him resulting from the refusal of said body to register the shares of
otherwise concurs in the result. stock in question. The defendant filed a demurrer on the ground that the facts alleged in the
complaint did not constitute sufficient cause of action, and that the action was not brought
Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez and Guerrero filed a against the proper party, which was the Botica Nolasco, Inc. The demurrer was sustained, and
separate opinion, wherein they voted against the validity of the questioned amended bylaws and the plaintiff was granted five days to amend his complaint.
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 On November 15, 1923, the plaintiff filed an amended complaint against the Botica Nolasco,
of respondent SMC in the scheduled May 6, 1979 election and subsequent elections until Inc., alleging that he became the owner of five shares of stock of said corporation, by purchase
disqualified after proper hearing by the respondent's Board of Directors and petitioner's from their original owner, one Manuel Gonzalez; that the said shares were fully paid; and that the
disqualification shall have been sustained by respondent SEC en banc and ultimately by final defendant refused to register said shares in his name in the books of the corporation in spite of
judgment of this Court. repeated demands to that effect made by him upon said corporation, which refusal caused him
damages amounting to P500. Plaintiff prayed for a judgment ordering the Botica Nolasco, Inc. to
In resume, subject to the qualifications aforestated judgment is hereby rendered GRANTING the register in his name in the books of the corporation the five shares of stock recorded in said
petition by allowing petitioner to examine the books and records of San Miguel International, Inc. books in the name of Manuel Gonzalez, and to indemnify him in the sum of P500 as damages,
as specified in the petition. The petition, insofar as it assails the validity of the amended by- laws and to pay the costs. The defendant again filed a demurrer on the ground that the amended
and the ratification of the foreign investment of respondent corporation, for lack of necessary complaint did not state facts sufficient to constitute a cause of action, and that said amended
votes, is hereby DISMISSED. No costs. complaint was ambiguous, unintelligible, uncertain, which demurrer was overruled by the court.
The defendant answered the amended complaint denying generally and specifically each and of March 13, 1923 (Exhibit C), to which letter the Botica Nolasco on June 15, 1923, replied,
every one of the material allegations thereof, and, as a special defense, alleged that the declaring that his written statement was in conformity with the by-laws of the corporation; that his
defendant, pursuant to article 12 of its by-laws, had preferential right to buy from the plaintiff said letter of June 14th was of no effect, and that the shares in question had been registered in the
shares at the par value of P100 a share, plus P90 as dividends corresponding to the year 1922, name of the Botica Nolasco, Inc., (Exhibit X).
and that said offer was refused by the plaintiff. The defendant prayed for a judgment absolving it
from all liability under the complaint and directing the plaintiff to deliver to the defendant the five As indicated above, the important question raised in this appeal is whether or not article 12 of
shares of stock in question, and to pay damages in the sum of P500, and the costs. the by-laws of the Botica Nolasco, Inc., is in conflict with the provisions of the Corporation Law
(Act No. 1459). Appellant invoked said article as its ground for denying the request of the plaintiff
Upon the issue presented by the pleadings above stated, the cause was brought on for trial, at that the shares in question be registered in his (plaintiff's) name, and for claiming that it (Botica
the conclusion of which, and on August 21, 1924, the Honorable N. Capistrano, judge, held that, Nolasco, Inc.) had the preferential right to buy said shares from Gonzalez. Appellant now
in his opinion, article 12 of the by-laws of the corporation which gives it preferential right to buy contends that article 12 of the said by-laws is in conformity with the provisions of Act No. 1459.
its shares from retiring stockholders, is in conflict with Act No. 1459 (Corporation Law), especially Said article is as follows:
with section 35 thereof; and rendered a judgment ordering the defendant corporation, through its
board of directors, to register in the books of said corporation the said five shares of stock in the ART. 12. Las acciones de la Corporacion pueden ser transferidas a otra persona, pero
name of the plaintiff, Henry Fleischer, as the shareholder or owner thereof, instead of the original para que estas transferencias tengan validez legal, deben constar en los registros de la
owner, Manuel Gonzalez, with costs against the defendant. Corporacion con el debido endoso del accionista a cuyo nombre se ha expedido la
accion o acciones que se transfieran, o un documento de transferencia. Entendiendose
The defendant appealed from said judgment, and now makes several assignment of error, all of que, ningun accionista transferira accion alguna a otra persona sin participar antes por
which, in substance, raise the question whether or not article 12 of the by-laws of the corporation escrito al Secretario-Tesorero. En igualdad de condiciones, la sociedad tendra el
is in conflict with the provisions of the Corporation Law (Act No. 1459). derecho de adquirir para si la accion o acciones que se traten de transferir. (Exhibit 2.)

There is no controversy as to the facts of the present case. They are simple and may be stated The above-quoted article constitutes a by-law or regulation adopted by the Botica Nolasco, Inc.,
as follows: governing the transfer of shares of stock of said corporation. The latter part of said article creates
in favor of the Botica Nolasco, Inc., a preferential right to buy, under the same conditions, the
That Manuel Gonzalez was the original owner of the five shares of stock in question, Nos. 16, share or shares of stock of a retiring shareholder. Has said corporation any power, under the
17, 18, 19 and 20 of the Botica Nolasco, Inc.; that on March 11, 1923, he assigned and delivered Corporation Law (Act. No. 1459), to adopt such by-law?
said five shares to the plaintiff, Henry Fleischer, by accomplishing the form of endorsement
provided on the back thereof, together with other credits, in consideration of a large sum of The particular provisions of the Corporation Law referring to transfer of shares of stock are as
money owed by Gonzalez to Fleischer (Exhibits A, B, B-1, B-2, B-3, B-4); that on March 13, follows:
1923, Dr. Eduardo Miciano, who was the secretary-treasurer of said corporation, offered to buy
from Henry Fleischer, on behalf of the corporation, said shares of stock, at their par value of SEC. 13. Every corporation has the power:
P100 a share, for P500; that by virtue of article 12 of the by-laws of Botica Nolasco, Inc., said
corporation had the preferential right to buy from Manuel Gonzalez said shares (Exhibit 2); that xxx xxx xxx
the plaintiff refused to sell them to the defendant; that the plaintiff requested Doctor Miciano to
register said shares in his name; that Doctor Miciano refused to do so, saying that it would be in
(7) To make by-laws, not inconsistent with any existing law, for the fixing or changing of
contravention of the by-laws of the corporation.
the number of its officers and directors within the limits prescribed by law, and for
the transferring of its stock, the administration of its corporate affairs, etc.
It also appears from the record that on the 13th day of March, 1923, two days after the
assignment of the shares to the plaintiff, Manuel Gonzales made a written statement to the
xxx xxx xxx
Botica Nolasco, Inc., requesting that the five shares of stock sold by him to Henry Fleischer be
noted transferred to Fleischer's name. He also acknowledged in said written statement the
preferential right of the corporation to buy said five shares (Exhibit 3). On June 14, 1923, SEC. 35. The capital stock of stock corporations shall de divided into shares for which
Gonzalez wrote a letter to the Botica Nolasco, withdrawing and cancelling his written statement certificates signed by the president or the vice-president, countersigned by the secretary
or clerk and sealed with the seal of the corporation, shall be issued in accordance with
the by-laws. Shares of stock so issued are personal property and may be transferred by (People's Home Savings Bank vs. Superior Court, 104 Cal., 649; 43 Am. St. Rep., 147;
delivery of the certificate indorsed by the owner or his attorney in fact or other person Ireland vs. Globe Milling Co., 79 Am. St. Rep., 769.)
legally authorized to make the transfer. No transfer, however, shall be valid, except as
between the parties, until the transfer is entered and noted upon the books of the The validity of the by-law of a corporation is purely a question of law. (South Florida Railroad
corporation so as to show the names of the parties to the transaction, that date of the Co. vs. Rhodes, 25 Fla., 40.)
transfer, the number of the certificate, and the number of shares transferred.
The power to enact by-laws restraining the sale and transfer of stock must be found in
No share of stock against which the corporation holds any unpaid claim shall be the governing statute or the charter. Restrictions upon the traffic in stock must have their
transferable on the books of the corporation. source in legislative enactment, as the corporation itself cannot create such
impediments. By-law are intended merely for the protection of the corporation, and
Section 13, paragraph 7, above-quoted, empowers a corporation to make by-laws, not prescribe regulation and not restriction; they are always subject to the charter of the
inconsistent with any existing law, for the transferring of its stock. It follows from said provision, corporation. The corporation, in the absence of such a power, cannot ordinarily inquire
that a by-law adopted by a corporation relating to transfer of stock should be in harmony with the into or pass upon the legality of the transaction by which its stock passes from one
law on the subject of transfer of stock. The law on this subject is found in section 35 of Act No. person to another, nor can it question the consideration upon which a sale is based. A
1459 above quoted. Said section specifically provides that the shares of stock "are personal by-law cannot take away or abridge the substantial rights of stockholder. Under a statute
property and may be transferred by delivery of the certificate indorsed by the owner, etc." Said authorizing by- laws for the transfer of stock, a corporation can do no more than
section 35 defines the nature, character and transferability of shares of stock. Under said section prescribe a general mode of transfer on the corporate books and cannot justify an
they are personal property and may be transferred as therein provided. Said section unreasonable restriction upon the right of sale. (4 Thompson on Corporations, sec. 4137,
contemplates no restriction as to whom they may be transferred or sold. It does not suggest that p. 674.
any discrimination may be created by the corporation in favor or against a certain purchaser. The
holder of shares, as owner of personal property, is at liberty, under said section, to dispose of The right of unrestrained transfer of shares inheres in the very nature of a corporation,
them in favor of whomsoever he pleases, without any other limitation in this respect, than the and courts will carefully scrutinize any attempt to impose restrictions or limitations upon
general provisions of law. Therefore, a stock corporation in adopting a by-law governing transfer the right of stockholders to sell and assign their stock. The right to impose any restraint in
of shares of stock should take into consideration the specific provisions of section 35 of Act No. this respect must be conferred upon the corporation either by the governing statute or by
1459, and said by-law should be made to harmonize with said provisions. It should not be the articles of the corporation. It cannot be done by a by-law without statutory or charter
inconsistent therewith. authority. (4 Thompson on Corporations, sec. 4334, pp. 818, 819.)

The by-law now in question was adopted under the power conferred upon the corporation by The jus disponendi, being an incident of the ownership of property, the general rule
section 13, paragraph 7, above quoted; but in adopting said by-law the corporation has (subject to exceptions hereafter pointed out and discussed) is that every owner of
transcended the limits fixed by law in the same section, and has not taken into consideration the corporate shares has the same uncontrollable right to alien them which attaches to the
provisions of section 35 of Act No. 1459. ownership of any other species of property. A shareholder is under no obligation to
refrain from selling his shares at the sacrifice of his personal interest, in order to secure
As a general rule, the by-laws of a corporation are valid if they are reasonable and calculated to the welfare of the corporation, or to enable another shareholder to make gains and
carry into effect the objects of the corporation, and are not contradictory to the general policy of profits. (10 Cyc., p. 577.)
the laws of the land. (Supreme Commandery of the Knights of the Golden Rule vs. Ainsworth, 71
Ala., 436; 46 Am. Rep., 332.) It follows from the foregoing that a corporation has no power to prevent or to restrain
transfers of its shares, unless such power is expressly conferred in its charter or
On the other hand, it is equally well settled that by-laws of a corporation must be reasonable and governing statute. This conclusion follows from the further consideration that by-laws or
for a corporate purpose, and always within the charter limits. They must always be strictly other regulations restraining such transfers, unless derived from authority expressly
subordinate to the constitution and the general laws of the land. They must not infringe the policy granted by the legislature, would be regarded as impositions in restraint of trade. (10
of the state, nor be hostile to public welfare. (46 Am. Rep., 332.) They must not disturb vested Cyc., p. 578.)
rights or impair the obligation of a contract, take away or abridge the substantial rights of
stockholder or member, affect rights of property or create obligations unknown to the law.
The foregoing authorities go farther than the stand we are taking on this question. They hold that inasmuch as the signing and registration of shares is incumbent upon said officers pursuant to
the power of a corporation to enact by-laws restraining the sale and transfer of shares, should section 35 of the Corporation Law. This contention cannot be sustained now. The question
not only be in harmony with the law or charter of the corporation, but such power should be should have been raised in the lower court. It is too late to raise it now in this appeal. Besides, as
expressly granted in said law or charter. stated above, the corporation was made defendant in this action upon the demurrer of the
attorney of the original defendant in the lower court, who contended that the Botica Nolasco,
The only restraint imposed by the Corporation Law upon transfer of shares is found in section 35 Inc., should be made the party defendant in this action. Accordingly, upon order of the court, the
of Act No. 1459, quoted above, as follows: "No transfer, however, shall be valid, except as complaint was amended and the said corporation was made the party defendant.
between the parties, until the transfer is entered and noted upon the books of the corporation so
as to show the names of the parties to the transaction, the date of the transfer, the number of the Whenever a corporation refuses to transfer and register stock in cases like the present,
certificate, and the number of shares transferred." This restriction is necessary in order that the mandamus will lie to compel the officers of the corporation to transfer said stock upon the books
officers of the corporation may know who are the stockholders, which is essential in conducting of the corporation. (26 Cyc. 347; Hager vs. Bryan, 19 Phil., 138.)
elections of officers, in calling meeting of stockholders, and for other purposes. but any
restriction of the nature of that imposed in the by-law now in question, is ultra vires, violative of In view of all the foregoing, we are of the opinion, and so hold, that the decision of the lower
the property rights of shareholders, and in restraint of trade. court is in accordance with law and should be and is hereby affirmed, with costs. So ordered.

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

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

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


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

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


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

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

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