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parcels of land described in transfer certificate of title No.

217 for P25,300; and


[ G. R. No. 43350, December 23, 1937 ] the defendant in turn obligated himself to shoulder the three mortgages
hereinbefore referred to. Exhibit C is a promissory note for P25,300 drawn by
the defendant in favor of the plaintiff, payable after one year from the date
CAGAYAN FISHING DEVELOPMENT CO., INC., PLAINTIFF AND
thereof. Exhibit D is a deed of mortgage executed before a notary public in
APPELLANT, VS. TEODORO SANDIKO, DEFENDANT AND
accordance with which the four parcels of land were given as security for the
APPELLEE.
payment of the promissory note, Exhibit C. All these three instruments were
dated February 15, 1932.
DECISION
LAUREL, J.:
The defendant having failed to pay the sum stated in the promissory note,
This is an appeal from a judgment of the Court of First Instance of Manila plaintiff, on January 25, 1934, brought this action in the Court of First Instance
absolving the defendant from the plaintiff's complaint. Manuel Tabora is the of Manila praying that judgment be rendered against the defendant for the
registered owner of four parcels of land situated in the barrio of Linao, town of sum of P25,300, with interest at the legal rate from the date of the filing of the
Aparri, Province of Cagayan, as evidenced by transfer certificate of title No. 217 complaint, and the costs of the suit. After trial, the court below, on December
of the land records of Cagayan, a copy of which is in evidence as Exhibit 1. To 18, 19C4, rendered judgment absolving the defendant, with costs against the
guarantee the payment of a loan in the sum of P8,000, Manuel Tabora, on plaintiff. Plaintiff presented a motion for new trial on January 14, 1935, which
August 14, 1929, executed in favor of the Philippine National Bank a first motion was denied by the trial court on January 19 of the same year. After due
mortgage on the four parcels of land above-mentioned. A second mortgage in exception and notice, plaintiff has appealed to this court and makes an
favor of the same bank was in April of 1930 executed by Tabora over the same assignment of various errors.
lands to guarantee the payment of another-loan amounting to P7,000. A third
mortgage on the same lands was executed on April 16, 1930 in favor of Severina In dismissing the complaint against the defendant, the court below reached
Buzon to whom Tabora was indebted in the sum of P2,900. These mortgages the conclusion that Exhibit B is invalid because of vice in consent and
were registered and annotations thereof appear at the back of transfer repugnancy to law. While we do not agree with this conclusion, we have
certificate of title.No. 217. however voted to affirm the judgment appealed from for reasons which we
shall presently state.
On May 31, 1930, Tabora executed a public document entitled "Escritura de
Traspaso de Propiedad Inmueble" (Exhibit A) by virtue of which the four The transfer made by Tabora to the Cagayan Fishing Development Co., Inc.,
parcels of land owned, by him were sold to the plaintiff company, said to be plaintiff herein, was effected on May 31, 1930 (Exhibit A) and the actual
under process of incorporation, in consideration of one peso (P1) subject to the incorporation of said company was effected later on October 22, 1930 (Exhibit
mortgages in favor of the Philippine National Bank and Severina Buzon and, 2). In other words, the transfer was made almost five months before the
to the condition that the certificate of title to said lands shall not be transferred incorporation of the company. Unquestionably, a duly organized corporation
to the name of the plaintiff company until the latter has fully and completely has the power to purchase and hold such real property as the purposes for
paid Tabora's indebtedness to the Philippine National Bank. which such corporation was formed may permit and for this purpose may enter
into such contracts as may be necessary (sec. 13, pars. 5 and 9, and sec. 14, Act
The plaintiff company filetfits articles of incorporation with the Bureau of No. 1459). But before a corporation may be said to be lawfully organized, many
Commerce and Industry' on October 22, 1930 (Exhibit 2). A year later, on things have to be done. Among other things, the law requires the riling of
October 28, 1931, the board of directors of the said company adopted a articles of incorporation (sees. 6 et seq., Act No. 1459). Although there is a
resolution (Exhibit G) authorizing its president, Jose Ventura, to sell the four presumption that all the requirements of law have been complied with (sec.
parcels of land in question to Teodoro Sandiko for P42,000. Exhibits B, C and 334, par. 31, Code of Civil Procedure), in the case before us it can not be denied
D were thereafter made and executed. Exhibit B is a deed of sale executed that the plaintiff was not yet incorporated when it entered into/the contract of
before a notary public by the terms of which the plaintiff sold, ceded and sale, Exhibit A. The contract itself referred to the plaintiff as "una sociedad en
transferred to the defendant all its rights, titles and interest in and to the four vias de incrporacion." It was not even a de facto corporation at the time. Not
being in legal existence then, it did not possess juridical capacity to enter into
1
the contract. incorporation, Exhibit 2, it appears that out of the P48,700, amount of capital
stock subscribed, P45,000 was subscribed by Manuel Tabora himself and
"Corporations are creatures of the law, and can only come into existence in the P500 by his wife, Rufina Q. de Tabora; and out of the P43,300, amount paid
manner prescribed by law. As has already been stated, general laws on subscriptions, P42,100 is made to appear as paid by Tabora and P200 by
authorizing the formation of corporations are general offers to any persons his wife. Both Tabora and his wife were directors and the latter was treasurer
who may bring themselves within their provisions; and if conditions precedent as well. In fact, to this day, the lands remain inscribed in Tabora's name. The
are prescribed in the statute, or certain acts are required to be done, they are defendant always regarded Tabora as the owner of the lands. He dealt with
terms of the offer, and must be complied with substantially before legal Tabora directly. Jose Ventura, president of the plaintiff corporation,
corporate existence can be acquired." (14 C. J., sec. 111, p. 118.) 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
"That a corporation should have a full and complete organization and existence treated Tabora as the owner of the same. (See Exhibits E and F.) Two civil suits
as an, entity before it can enter into any kind of a contract or transact any (Nos. 1931 and 38641) were brought against Tabora in the Court of First
business, would seem to be self evident. * * * A corporation, until organized, Instance of Manila and in both cases a writ of attachment against the four
has no being, franchises or faculties. Nor do those engaged in bringing it into parcels of land was issued. The Philippine National Bank threatened to
being have any power to bind it by contract, unless so authorized by the foreclose its mortgages. Tabora • approached the defendant Sandiko and
charter. Until organized as authorized by the charter there is not a corporation, succeeded in making him sign Exhibits B, C, and D and in making him, among
nor does it possess franchises or faculties for it or others to exercise, until it other things, assume the payment of Tabora's indebtedness to the Philippine
acquires a complete existence." (Gent vs. Manufacturers and Merchants' National Bank. The promissory note, Exhibit C, was made payable to the
Mutual Insurance Company, 107 I11., 652, 658.) plaintiff company so that it may not be attached by Tabora's creditors, two of
whom had obtained writs of attachment against the four parcels of land.
Boiled down to its naked reality, the contract here (Exhibit A) was entered into
not only between Manuel Tabora and a non-existent corporation but between If the plaintiff corporation could not and did not acquire the four parcels of
Manuel Tabora as owner of four parcels of land on the one hand and the same land here involved, it follows that it did not possess any resultant right to
Manuel Tabora, his wife and others, as mere promoters of a corporation on the dispose of them by sale to the defendant, Teodoro Sandiko.
other hand. For reasons that are self-evident, these promoters could neft have
acted as agents for a projected corporation sinceri;hat which had no legal Some of the members of this court are also of the opinion that the transfer from
existence could have no agent. A corporation, until organized, has no life and Manuel Tabora to the Cagayan Fishing Development Company, Inc., which
therefore no faculties. It is, as it were, a child in venire sa mere. This is not transfer is evidenced by Exhibit A, was subject to a condition precedent
saying that under no circumstances may the acts of promoters of a corporation (condition suspensiva), namely, the payment of a mortgage debt of the said
be ratified by the corporation if and when subsequently organized. There are, Tabora to the Philippine National Bank, and that this condition not having
of course, exceptions (Fletcher Cyc. of Corps., permanent edition, 1931, vol. I, been complied with by the Cagayan Fishing Development Company, Inc., the
secs. 207 et seq.) but under the peculiar facts and circumstances of the present transfer was ineffective. (Art. 1114, Civil Code; Wise & Co. vs. Kelly and Lim,
case we decline to extend the doctrine of ratification which would result in the 37 Phil., 696; Manresa, vol. 8, p. 141.) However, having arrived at the
commission of Injustice or fraud to the candid and unwary. (Massachusetts conclusion that the transfer by Manuel Tabora to the Cagayan Fishing
rule, Abbott vs. Hapgood, 150 Mass., 248; 22 N. E., 907, 908; 5 L. R. A., 586; Development Company, Inc. was null because at the time it was effected the
15 Am. St. Rep., 193; citing English cases; Koppel vs. Massachusetts Brick Co., corporation was non-existent, we deem it unnecessary to discuss this point.
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 decision of the lower court is accordingly affirmed, with costs against the
the registered owner of the four parcels Of land, which he succeeded in appellant. So ordered.
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
2
235 Phil. 369 project study which project study was presented to defendant Caramso the
latter was convinced to invest in the proposed airlines. The project study was
revised for purposes of presentation to financiers and the banks. It was on the
basis of this study that defendant corporation was actually organized and
CRUZ, J.: rendered operational. Defendants Garcia and Caram,
We gave limited due course to this petition on the question of and Barretto became members of the Board and/or officers of defendant
the solidary liability of the petitioners with their co-defendants in the lower corporation. Thus, not only the defendant corporation but all the other
court[1] because of the challenge to the following paragraph in defendants who were involved in the preparatory stages of the incorporation,
the dispositive portion of the decision of the respondent court:* who caused the preparation and/or benefited from the project study and the
technical services of plaintiff must be liable." [4]
"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, 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
plus P10,000.00 attorney's fees;"[2]
Orient Airways. Elsewhere in the decision, Barretto was described as "the
moving spirit." The finding of the respondent court is that the project study
The petitioners claim that this order has no support in fact and law because was undertaken by the private respondent at the request of Barretto and
they had no contract whatsoever with the private respondent regarding the Garcia who, upon its completion, presented it to the petitioners to induce them
above-mentioned services. Their position is that as mere subsequent investors to invest in the proposed airline. The study could have been presented to other
in the corporation that was later created, they should not be prospective investors. At any rate, the airline was eventually organized on the
held solidarily liable with the Filipinas Orient Airways, a separate juridical basis of the project study with the petitioners as major stockholders and,
entity, and with Barretto and Garcia, their co-defendants in the lower together with Barretto and Garcia, as principal officers.
court,** who were the ones who requested the said services from the private
respondent.[3] The following portion of the decision in question is also worth considering:

We are not concerned here with the petitioners' co-defendants, who have not "x x x. Since defendant Barretto was the moving spirit in the pre-organization
appealed the decision of the respondent court and may, for this reason, be work of defendant corporation based on his experience and expertise, hence
presumed to have accepted the same. For purposes of resolving this case he was logically compensated in the amount of P200,000.00 shares of stock
before us, it is not necessary to determine whether it is the promoters of the not as industrial partner but more for his technical services that brought to
proposed corporation, or the corporation, itself after its organization, that fruition the defendant corporation. By the same token, We find no reason why
shall be responsible for the expenses incurred in connection with such the plaintiff should not be similarly compensated not only for having actively
organization. participated in the preparation of the project study for several months and its
The only question we have to decide now is whether or not the petitioners subsequent revision but also in his having been involved in the pre-
themselves are also and personally liable for such expenses and, if so, to what organization of the defendant corporation, in the preparation of the franchise,
extent. in inviting the interest of the financiers and in the training and screening of
personnel. We agree that for these special services of the plaintiff the amount
The reasons for the said order are given by the respondent court in its decision of P50,000.00 as compensation is reasonable."[5]
in this wise:
"As to the 4th assigned error we hold that as to the remuneration due the The above finding bolsters the conclusion that the petitioners were not
plaintiff for the preparation of the project study and the pre-organizational involved in the initial stages of the organization of the airline, which were being
services in the amount of P50,000.00, not only the defendant corporation but directed by Barretto as the main promoter. It was he who was putting all the
the other defendants including defendants Caram should be jointly and sever- pieces together, so to speak. The petitioners were merely among the financiers
ally liable for this amount. As we above related it was upon the request whose interest was to be invited and who were in fact persuaded, on the
of defendants Barretto and Garcia that plaintiff handled the preparation of the strength of the project study, to invest in the proposed airline.

3
Significantly, there was no showing that the Filipinas Orient Airways was a
fictitious corporation and did not have a separate juridical personality, to
justify making the petitioners, as principal stockholders thereof, responsible
for its obligations. As a bona fide corporation, the Filipinas Orient Airways
should alone be liable for its corporate acts as duly authorized by its officers
and directors.
In the light of these circumstances, we hold that the petitioners cannot be held
personally liable for the compensation claimed by the private respondent for
the services performed by him in the organization of the corporation. To
repeat, the petitioners did not contract such services. It was only the results of
such services that Barretto and Garcia presented to them and which persuaded
them to invest in the proposed airline. The most that can be said is that they
benefited from such services, but that surely is no justification to hold them
personally liable therefor. Otherwise, all the other stockholders of the
corporation, including those who came in later, and regardless of the amount
of their shareholdings, would be equally and personally liable also with the
petitioners for the claims of the private respondent.
The petition is rather hazy and seems to be flawed by an ambiguous
ambivalence. Our impression is that it is opposed to the imposition
of solidary responsibility upon the Carams but seems to be willing, in a vague,
unexpressed offer of compromise, to accept joint liability. While it is true that
it does here and there disclaim total liability the thrust of the petition seems to
be against the imposition of solidaryliability only rather than against any
liability at all, which is what it should have categorically argued.
Categorically, the Court holds that the petitioners are not liable at all, jointly
or jointly and severally, under the first paragraph of the dispositive portion of
the challenged decision. So holding, we find it unnecessary to examine at this
time the rules on solidary obligations, which the parties - needlessly, as it turns
out - have belabored unto death.
WHEREFORE, the petition is granted. The petitioners are declared not
liable under the challenged decision, which is hereby modified accordingly. It
is so ordered.
Yap, (Chairman), Narvasa, Melencio-Herrera, Feliciano, and Sarmiento,
JJ., concur.
Gancayco, J., no part. See page 1.

4
86 Phil. 603 the offer and to discharge the receiver. Whereupon the present special civil
action was instituted in this court. It is based upon two main propositions, to
wit:

BENGZON, J.: (a) The court had no jurisdiction in civil case No. 381 to decree the dissolution
of the company, because it being a de facto corporation, dissolution thereof
This is a petition to set aside all the proceedings had in Civil Case No. 381 of may only be ordered in a quo warranto proceeding instituted in accordance
the Court of First Instance of Leyte and to enjoin the respondent judge from with Section 19 of the Corporation Law.
further acting upon the same.
(b) Inasmuch as respondents Fred Brown and Emma Brown had signed the
Facts: 1. On May 26, 1947, the petitioners C. Arnold Hall and Bradley P. Hall, articles of incorporation, they are estopped from claiming that it is not a
and the respondents Fred Brown, Emma Brown, Hipolita D, Chapman and corporation but only a partnership.
Ceferino S. Abella, signed and acknowledged in Leyte, the articles of Discussion: The second proposition may at once be dismissed. All the parties
incorporation of the Far Eastern Lumber and Commercial Co., Inc., organized are informed that the Securities and Exchange Commission has not, so far,
to engage in a general lumber business, to carry on as general contractors, issued the corresponding certificate of incorporation. All of them know, or
operators and managers, etc. Attached to the articles was an affidavit of the ought to know, that the personality of a corporation begins to exist only from
treasurer stating that 23,428 shares of stock had been subscribed and fully the moment such certificate is issued not before (Sec. 11, Corporation Law).
paid with certain properties transferred to the corporation described in a list The complaining associates have not represented to the others that they were
appended thereto. incorporated any more than the latter had made similar representations to
(2) Immediately after the execution of said articles of incorporation, the them. And as nobody was led to believe anything to his prejudice and damage,
corporation proceeded to do business with the adoption of by-laws and the the principle of estoppel does not apply. Obviously this is not an instance
election of its officers. requiring the enforcement of contracts with the corporation through the rule
of estoppel.
(3) On December 2, 1947, the said articles were filed in the office of the
Securities and Exchange Commissioner, for the issuance of the corresponding The first proposition above stated is premised on the theory that, inasmuch as
certificate of incorporation. the Far Eastern Lumber and Commercial Co. is a de factocorporation, section
19 of the Corporation Law applies, and therefore the court had no jurisdiction
(4) On March 22, 194&, pending action on the articles of incorporation by the to take cognizance of said civil case number 381. Section 19 reads in part as
aforesaid governmental office, the respondents Fred Brown, Emma Brown, follows:
Hipolita D. Chapman and Ceferino S. Abella filed before the Court of First
Instance of Leyte the civil case numbered 381, entitled "Fred Brown et al., vs. "* * * The due incorporation of any corporation claiming in good faith to be a
Arnold C. Hall et al.", alleging among other things that the Far Eastern Lumber corporation under this Act and its right to exercise corporate powers shall not
and Commercial Co. was an unregistered partnership; that they wished to have be inquired into collaterally in any private suit to which the corporation may
it dissolved because of bitter dissension among the members, mismanagement be a party, but such inquiry may be had at the suit of the Insular Government
and fraud by the managers and heavy financial losses. on information of the Attorney-General.

(5) The defendants in the suit, namely, C. Arnold Hall and Bradley P. Hall, filed There are at least two reasons why this section does not govern the situation.
a motion to dismiss, contesting the court's jurisdiction and the sufficiency of Not having obtained the certificate of incorporation, the Far Eastern Lumber
the cause of action. and Commercial Co. even its stockholders may not probably claim "in good
(6) After hearing the parties, the Hon. Edmundo S. Piccio ordered the faith" to be a corporation.
dissolution of the company; and at the request of plaintiffs, appointed the "Under our statute it is to be noted (Corporation Law, Sec. 11) that it is the
respondent Pedro A. Capuciong as receiver of the properties thereof, upon the issuance of a certificate of incorporation by the Director of the Bureau of
filing of a twenty-thousand-peso bond. Commerce and Industry which calls a corporation into being. The immunity
(7) The defendants therein (petitioners herein) offered to file a counter-bond to collateral attack is granted to corporations 'claiming in good faith to be a
for the discharge of the receiver. But the respondent judge refused to accept corporation under this act.' Such a claim is compatible with the existence

5
of.errors and irregularities; but not with a total or substantial disregard of the
law. Unless there has been an evident attempt to comply with the law the claim
to be a corporation 'under this Act' could not be made 'in good faith.' " (Fisher
on The Philippine Law of Stock Corporations, p. 75. See alsoHumphreys vs.
Drew, 59 Fla. 295, 52 So. 362.)
Second, this is not a suit in which the corporation is a party. This is a litigation
between stockholders of the alleged corporation, for the purpose of obtaining
its dissolution. Even the existence of a de jure corporation may be terminated
in a private suit for its dissolution between stockholders, without the
intervention of the state.
There might be room for argument on the right of minority stockholders to sue
for dissolution;[1] but that question does not affect the court's jurisdiction, and
is a matter for decision by the judge, subject to review on appeal. Which brings
us to one principal reason why this petition may not prosper, namely: the
petitioners have their remedy by appealing the order of dissolution at the
proper time.
There is a secondary issue in connection with the appointment of a receiver.
But it must be admitted that receivership is proper in proceedings for
dissolution of a company or corporation, and it was no error to reject the
counter-bond, the court having decreed the dissolution. As to the amount of
the bond to be demanded of the receiver, much depends upon the discretion
of the trial court, which in this instance we do not believe has been clearly
abused.
Judgment: The petition will, therefore, be dismissed, with costs. The
preliminary injunction heretofore issued will be dissolved.
Ozaeta, Pablo, Tuason, Montemayor, and Reyes, JJ., concur.

6
103 Phil. 757 defendants' failure to abide by the said requirement, the gross income would
be fixed at P4,200.00 or a net income of P3,200.00 after deducting the
expenses for production, 30% of which or P960.00 was held to be due the
plaintiff pursuant to the aforementioned contrast of lease, which was declared
FELIX, J.: rescinded.
This is a petition fro certiorari filed by Manuela T. Vda. de Salvatierra seeking No appeal therefrom having been perfected within the reglementary period,
to nullity the order of the Court of First Instance of Leyte in Civil Case No. 1912, the Court, upon montion of plaintiff, issued a writ of execution, in virtue of
dated March 21, 1956, relieving Segundino Refuezo for liability for the contract which of Provincial Sherrif of Leyte caused the attachement of 3 parcels of land
entered d into between the former and the Philippine Fibers Producers Co., registered in the name of the land registered in the name of Segundino
Inc., of which Refuerzo is the president. The facts of the case are as follows: Refuerzo. No property of the Philippine Fibers Producers Co., Inc., was found
available for attachement.
Manuela T. Vda. de Salvatierra appeared to be the owner of the parcel of land
located at Manghobas, Poblacion, Burauen, Leyte. On March 7, 1954, said On January 31, 1956, defendant Seguindino Regundino filed a motion claiming
landowner entered d into a contract of lease with the Philippine Fibers that the decision rendered in said Civil Case No. 1912 was null and void with
Producers Co., Inc., allegedly are corporation "duly organized and existing respect to kim, there being on allegation in the complaint pointing to his
under the laws of the Philippines, domiciled at Burauen, Leyte, Philippines, personal liability and thus prayed that an order be issued limiting such liability
and with business address therein, represented in the instance by Mr. to defendant corporation. Over plaintiff's opposition, the Court a quo granted
Seguindino Q. Refuerzo, the President".It was provided in said contract, the same and orderd the Provincial Sheriff of Leyte to release all properties
among other things, that the land would be planted to kenaf, remie or other belonging to the movant that might have already been attached, after finding
crops suitable to the soil; that the lessor would be entitled to 30 % of the net that the evidence on record made on mention or referred to any fact which
income accruing from the harvest of any crop without being responsible for might hold movant personally liable therein. As plaintiff's petition for relief
the cost of production thereof; and that after every harvest, the leasee was from said order was denied, Manuela T. Vda. de Salvatierra instituted the
bound to declare at the earliest possible time the income derived therefrom order complained of, acted with grace abuse of discretion and prayed that the
and to deliver the corresponding share due the lessor. same be declared a nullity.
Apparently, the aforementioned obligations imposed on the alleged From the foregoing narration of facts, it is clear that the order sought to be
corporation were not complied with because on April 5, 1955, Manuela T. Vda. nullified was issued by the respondent Judge upon motion of defendant
de Salvatierra filed with the Court of First Instance of Leyte a complaint against Refuerzo, obviously pusuant to Rule 38 of the Rules of Court. Section 3 of said
the Philippine Fiber Producers Co., Inc., and Seguindino Q. Refuerzo, for Rule, however, in providing for the period within such a notion may be filed,
accounting, rescission and damages (Civil Case No. 1912). She averred that prescribed that:
sometime in April, 1954, defendants planted kenaf on 3 hectares of leased
property which crop was, at the time of the commencement of the action,
already harvested, processed and sold by defendants; that nowithstanding that
the estimated gross income P4,500.00, and the deductible expenses amounted "SEC.3. WHEN PETION FILED; CONTENTS AND VERIFICATION. A
to P1,000.00; that as defendants' refusal to undertake such task was in petition provided for in either of the proceeding sections of this rule must be
violation of the terms of the covernant entered into between the plaintiff and verified, filed within sixty days after the petitioner learns of the judgment,
defendant corporation, a recission was but proper. order, or other proceeding to be set aside, and not more than six months after
such judgment or order was orderd, or such proceeding was taken; and must
As defendants apparently failed to file their answer to the complaint, of which
be accompanied with affidavits showing the fraud, accident, mistake, or
they were allegly notified, the court declared them in default and proceeded to
excusable negligence relied upon, and the facts constituting the petitioner's
recieve plaintiff's evidence. On June 8, 1955, the Lower Court rendered
good and substantial cause of action or defense, as the case may be, which he
judgment granting plaintiff's prayer, and required defendants to render a
may prove if his petition be granted". (Rule 38)
complete accounting of the harvest of the land subject of the proceeding within
15 days from receipt of the decision and to deliver 30% of the net income
realized from the last harvest to plaintiff, with legal interest from the date The aforequoted provision threats of 2 period, i.e., 60 days after petitioner
defendants received payment for said crop. It was further provided that upon learns of the judgment, anmd not here than 6 months after the judgment or

7
order was rendered, both of which must be satisfied. as the decision in the case liability of members of unincorporated association. The reason behind this
at bar was under date of June 8, 1955, whereas the motion filed by respondent doctrine is obvious since an organization which before the law is non-existent
Refuezo was dated January 31, 1956, or after the lapse of 7 months and 23 days, has no personality and would be incompetent to act and appropriate for itself
the filling of the aforementioned motion was clearly made beyond the the powers and attributes of a corporation as provided by law, it cannot create
prespective period provided for by the rules. The remedy allowed by Rule 38 agents or confer authority on another to act in its representatives or agents do
to a party adversely affected by a decision or order is certainly an act of grace so without authority and at their own risk. And as it is and elementary principle
or benevolence intended to afford said litigant a penultimate opportunity to of law that a person who acts as an agent without authority or without a
protect his interest. Considering the nature of such relief and the purpose principal is himself regarded as the principal, possessed of all the rights and
behind it, the periods fixed by said rule are non-extendible and never subject to all the liabilities of a principal, a person acting or purporting to act
interrupted; nor could it be subjected to any condition or contigency because on behalf of a corporation which has no void existence assumes such privileges
it is of itself devised to meet a condition or contigency (Palomares vs. Jimenez, obligations and becomes personally liable for contracts entered into or for
G. R. No. L-4513, January 31, 1952). On this score alone, therefore, the petition other acts performed as such agent (Fay vs. Noble, 7 Cushing [Mass.] 188.
for a writ of certiorari filed herein maybe granted. However, taking note of the Cited in IT Tolentino's Commercial Laws of the Philippines, Fifth Ed., p. 689-
question presented by the motion for relief involved herein, We deem it wise 690). Considering that defendant Refuerzo, as president of the unregistered
to delve in and pass upon the merit of the same. corporation Philippine Fibers Producers Co., Inc., was the moving spirit
behind the consummation of the lease agreement by acting as its
Refuerzo, in praying for his exoneration from any liabilities resulting from the representative, his liability cannot be limited or restricted to that imposed
non-fulfillment of the obligation imposed on defendant Philippine Fibers Co., upon corporate shareholder. In acting on behalf of a corporation which he
Inc., interposed the defense that the complaint filed with the lower court knew to be unregistered, he assumed the risk or reaping the consequential
contained no allegation which would hold him liable personally, for while it damages or resultant rights, if any, arising out of such transaction.
was stated therein that he was found by the Court a quo to be supported by the
records. Plaintiff on the other hand tried to refute this averment by contending WHEREFORE, the order of the lower Court of March 21, 1956, amending its
that her failure to specify that all the time she was under the impression that previous decision on this matter and ordering the Provincial Sheridd of Leyte
the Philippine Fibers Producers Co., Inc., represented by Refuerzo was duly to release any attached in the execution of such judgment, is hereby set aside
registered corporation as appearing in the contract, but a subsequent inquiry and nullified as if it had never been issued. With costs against respondent
from the Securities & Exchange Commission yielded otherwise. While as a Segundino Refuerzo. It is so ordered.
general rule a person who has contracted or dealt with an association in such
a was as to recognize its existence as a corporate body is estopped from denying Paras, C. J., Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador,
the same in an action arising out of such transaction or dealing, (Asia Banking Concepcion, Reyes, J. B. L.,, Endencia, and Felix, JJ., concur.
Corporation vs. Standard Products Co., 46 Phil. 1; Ohta Development Co. vs.
Steamship Pompey, 49 Phil. 177), yet this doctrine may not be held to be
applicable where fraud takes that the plaintiff's charge that she was unaware
of the fact that the Philippine Fibers Producers Co., Inc., had no judicial
personality, defendant Refuerzo gave no confirmation or denial and the
circumstances surrounding the execution of the contract load to the
inescapable conclusion that the plaintiff Manuela T. Vda. de Salvatierra was
really made to believe that such corporation was duly in accordance with law.
There can be no question that a corporation when registered has a juridical
personality separate and distinct from its component numbers or stockholders
and officers, such thata corporation cannot be held liable for the personal
indebtedness of a stockholder even if he should be its president (Walter A.
Smith Co. vs. Ford, SC-G. R. No. 42420) and conversely, a stockholder or
member cannot be held personally liable for any financial obligation by the
corporation in excess of his unpaid subscription. But this rule is understood to
refer merely to registered corporations and cannot be made applicable to the

8
127 Phil. 399 (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.

SANCHEZ, J.: (h) October 27, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton,
c.i.f., Pacific ports, delivery: December, 1947 and January, 1948. This
The National Coconut Corporation (NACOCO, for short) was chartered as a contract was assigned to Pacific Vegetable Co.
non-profit governmental organization on May 7, 1940 by Commonwealth Act
518 avowedly for the protection, preservation and development of the coconut (i) October 28, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton,
industry in the Philippines. On August 1, 1946, NACOCO's charter was c.i.f., Pacific ports, delivery: January, 1948. This contract was assigned to
amended [Republic Act 5] to grant that corporation the express power "to buy, Pacific Vegetable Co.
sell, barter, export, and in any other manner deal in, coconut, copra, An unhappy chain of events conspired to deter NACOCO from fulfilling these
and dessicated coconut, as well as their by-products, and to act as agent, contracts. Nature supervened. Four devastating typhoons visited the
broker or commission merchant of the producers, dealers or merchants" Philippines: the first in October, the second and third in November, and the
thereof. The charter amendment was enacted to stabilize copra prices, to serve fourth in December, 1947. Coconut trees throughout the country suffered
coconut producers by securing advantageous prices for them, to cut down to a extensive damage. Copra production
minimum, if not altogether eliminate, the margin of middlemen, mostly decreased. Prices spiralled. Warehouses were destroyed. Cash requirements
aliens.[4] doubled. Deprivation of export facilities increased the time necessary to
General manager and board chairman was Maximo M. Kalaw; defendants accumulate shiploads of copra. Quick turnovers became impossible, financing
Juan Bocar and Casimiro Garcia were members of the Board; a problem.
defendant Leonor Moll became director only on December 22, 1947. When it became clear that the contracts would be
NACOCO, after the passage of Republic Act 5, embarked on copra trading unprofitable, Kalaw submitted them to the board for approval. It was not until
activities. Amongst the scores of contracts executed by general December 22, 1947 when the membership was completed. Defendant Moll
manager Kalaw are the disputed contracts, for the delivery of copra, viz: took her oath on that date. A meeting was then held. Kalawmade a full
disclosure of the situation, apprised the board of the impending heavy
(a) July 30, 1947: Alexander Adamson & Co., for 2,000 long tons, $167.00 per losses. No action was taken on the contracts. Neither did the board vote
ton, f.o.b., delivery: August and September, 1947. This contract was later thereon at the meeting of January 7, 1948 following. Then, on January 11,
assigned to Louis Dreyfus & Co. (Overseas) Ltd. 1948, President Roxas made a statement that the NACOCO head did his best
to avert the losses, emphasized that government concerns faced the same risks
(b) August 14, 1947: Alexander Adamson & Co., for 2,000 long tons, $145.00 that confronted private companies, that NACOCO was recouping its losses,
per long ton, f.o.b., Philippine ports, to be shipped: September/October, and that Kalaw was to remain in his post. Not long thereafter, that is, on
1947. This contract was also assigned to Louis Dreyfus & Co. (Overseas) Ltd. January 30, 1948, the board met again with Kalaw, Bocar, Garcia and Moll in
(c) August 22, 1947: Pacific Vegetable Co., for 3,000 tons, $137.50 per ton, attendance. They unanimously approved the contracts hereinbefore
delivery: September, 1947. enumerated.

(d) September 5, 1947: Spencer Kellog & Sons, for 1,000 long tons, $160.00 As was to be expected, NACOCO but partially performed the contracts, as
per ton, c.i.f., Los Angeles, California, delivery: November, 1947. follows:

(e) September 9, 1947: Franklin Baker Division of General Foods Corporation, Buyers Tons Delivered Undelivered
for 1,500 long tons, $164.00 per ton, c.i.f., New York, to be shipped in
November, 1947. Pacific Vegetable Oil 2,386.45 4,613.55
(f) September 12, 1947: Louis Dreyfus & Co. (Overseas) Ltd., for 3,000 long
tons, $154.00 per ton, f.o.b., 3 Philippine ports, delivery: November, 1947. Spencer Kellog None 1, 000

9
Franklin Baker 1,000 500 Board of
Liquidators? This is just a sample to show how unjust it would be to hold defe
Louis Dreyfus 800 2,200 ndants liable for the readiness with which theBoard of Liquidators disposed o
f the NACOCO funds, altho there was much possibility of successfully resistin
g the claims,
Louis Dreyfus (Adamson
or at leastsettlement for nominal sums like what happened in the Syjuco case.
contract
1,150 850 "[5]

Of July 30, 1947)


All the settlements sum up to P1,343,274.52.

Louis Dreyfus (Adamson In this suit started in February, 1949, NACOCO seeks to recover the above sum
contract of P1,343,274.52 from general manager and board
1,755 245 chairman Maximo M. Kalaw, and directors Juan Bocar, Casimiro Garcia
and Leonor Moll. It charges Kalaw with negligence under Article 1902 of the
Of August 14, 1947) 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
T O T A L S ------------------ 7,091. 45 9,408.55 approved the contracts. The fifth amended complaint, on which this case was
tried, was filed on July 2, 1959. Defendants resisted the action upon defenses
hereinafter in this opinion to be discussed.
The buyers threatened damage suits. Some of the claims were settled, viz:
Pacific Vegetable Oil Co., in copra delivered by NACOCO, P539,000.00; The lower court came out with a judgment dismissing the complaint without
Franklin Baker Corporation, P78,210.00; Spencer Kellog & Sons, costs as well as defendants' counterclaims, except that plaintiff was ordered to
P159,040.00. pay the heirs of Maximo Kalaw the sum of P2,601.94 for unpaid salaries and
cash deposit due the deceased Kalawfrom NACOCO.
But one buyer, Louis Dreyfus & Co. (Overseas) Ltd., did in fact sue before the
Court of First Instance of Manila, upon claims as follows: For the undelivered Plaintiff appealed direct to this Court.
copra under the July 30 contract (Civil Case 4459), P287,028.00; for the
balance on the August 14 contract (Civil Case 4398), P75,098.63; for that per Plaintiff's brief did not question the judgment on Kalaw's counterclaim for the
the September 12 contract reduced to judgment (Civil Case 4322, appealed to sum of P2,601.94.
this Court in L-2829), P447,908.40. These cases culminated in an out-of- Right at the outset, two preliminary questions raised before, but adversely
court amicable settlement - when the Kalaw management was already decided by, the court below, arrest our attention. On appeal, defendants
out. The corporation thereunder paid Dreyfus P567,024.52 representing 70% renew their bid. And this, upon established jurisprudence that an appellate
of the total claims. With particular reference to the Dreyfus claims, NACOCO court may base its decision of affirmance of the judgment below on a point or
put up the defenses that: (1) the contracts were void because Louis Dreyfus & points ignored by the trial court or in which said court was in error. [6]
Co. (Overseas) Ltd. did not have license to do business here; and (2) failure to
deliver was due to force majeure, the typhoons. To project the utter 1. First of the threshold questions is that advanced by defendants that plaintiff
unreasonableness of this compromise, we reproduce in haec verba this finding Board of Liquidators has lost its legal personality to continue with this suit.
below:
Accepted in this jurisdiction are three methods by which a corporation may
"x x x However, in similar cases brought by the same claimant [Louis Dreyfus wind up its affairs: (1) under Section 3, Rule 104, of the Rules of Court [which
& Co. (Overseas) Ltd.] against Santiago Syjuco for non-delivery of copra also superseded Section 66 of the Corporation Law] [7] whereby, upon voluntary
involving a claim of P345,654.68 wherein defendant set up same defenses as dissolution of a corporation, the court may direct "such disposition of its assets
above, plaintiff accepted a promiseof P5,000.00 only (Exhs. 31 & 32- as justice requires, and may appoint a receiver to collect such assets and pay
Heirs). Following the same proportion, the claim of Dreyfus against NACOCO the debts of the corporation;" (2) under Section 77 of the Corporation Law,
should have been compromised for only P10,000.00, if at all. Now, why whereby a corporation whose corporate existence is terminated, "shall
nevertheless be continued as a body corporate for three years after the time
should defendant be held liable for the large sum paid as compromise by the
10
when it would have been so dissolved, for the purpose of prosecuting and We, however, express the view that the executive order abolishing NACOCO
defending suits by or against it and of enabling it gradually to settle and close and creating the Board of Liquidators should be examined in context. The
its affairs, to dispose of and convey its property and to divide its capital stock, proviso in Section 1 of Executive Order 372, whereby the corporate existence
but not for the purpose of continuing the business for which it was of NACOCO was continued for a period of three years from the effectivity of
established"; and (3) under Section 78 of the Corporation Law, by virtue of the order for "the purpose of prosecuting and defending suits by or against it
which the corporation, within the three-year period just mentioned, "is and of enabling the Board of Liquidators gradually to settle and close its affairs,
authorized and empowered to convey all of its property to trustees for the to dispose of and convey its property in the manner hereinafter provided", is
benefit of members, stockholders, creditors, and others interested." [8] to be read not as an isolated provision but in conjunction with the whole. So
reading, it will be readily observed that no time limit has been tackled to the
It is defendants' pose that their case comes within the coverage of the second existence of the Board of Liquidators and its function of closing the affairs of
method. They reason out that suit was commenced in February, 1949; that by the various government-owned corporations, including NACOCO.
Executive Order 372, dated November 24, 1950, NACOCO, together with other
government-owned corporations, was abolished, and the Board of Liquidators By Section 2 of the executive order, while the boards of directors of the various
was entrusted with the function of settling and closing its affairs; and that, corporations were abolished, their powers and functions and duties under
since the three-year period has elapsed, the Board of Liquidators may not now existing laws were to be assumed and exercised by the Board of
continue with, and prosecute, the present case to its conclusion, because Liquidators. The President thought it best to do away with the boards of
Executive Order 372 provides in Section 1 thereof that - directors of the defunct corporations; at the same time, however, the President
had chosen to see to it that the Board of Liquidators step into the vacuum. And
"SECTION 1. The National Abaca and Other Fibers Corporation, the National nowhere in the executive order was there any mention of the lifespan of the
Coconut Corporation, the National Tobacco Corporation, the National Food Board of Liquidators. A glance at the other provisions of the executive order
Products Corporation and the former enemy-owned or controlled buttresses our conclusion. Thus, liquidation by the Board of Liquidators may,
corporations or associations, x x xare hereby abolished. The said corporations under section 1, proceed in accordance with law, the provisions of the executive
shall be liquidated in accordance with law, the provisions of this Order, and/or order, "and/or in such manner as the President of thePhilippines may direct."
in such manner as the President of the Philippines may By Section 4, when any property, fund, or project is transferred to any
direct; Provided, however, That each of the said corporations shall governmental instrumentality "for administration or continuance of any
nevertheless be continued as a body corporate for a period of three (3) years project", the necessary funds therefor shall be taken from the corresponding
from the effective date of this Executive Order for the purpose of prosecuting special fund created in Section 5. Section 5, in turn, talks of special funds
and defending suits by or against it and of enabling the Board of Liquidators established from the "net proceeds of the liquidation" of the various
corporations abolished. And by Section 7, fifty per centum of the fees collected
gradually to settle and close its affairs, to dispose of and convey its property in
from the copra standardization and inspection service shall accrue "to the
the manner hereinafter provided." special fund created in section 5 hereof for the rehabilitation and development
of the coconut industry." Implicit in all these, is that the term of life of the
Citing Mr. Justice Fisher, defendants proceed to argue that even where it may Board of Liquidators is without time limit. Contemporary history gives us the
be found impossible within the 3-year period to reduce disputed claims to fact that the Board of Liquidators still exists as an office with officials and
judgment, nonetheless, "suits by or against a corporation abate when it ceases numerous employees continuing the job of liquidation and prosecution of
to be an entity capable of suing or being sued" (Fisher, The Philippine Law of several court actions.
Stock Corporations, pp. 390-391). Corpus JurisSecundum likewise is
authority for the statement that "[t]he dissolution of a corporation ends its Not that our views on the power of the Board of Liquidators to proceed to the
existence so that there must be statutory authority for prolongation of its final determination of the present case is without jurisprudential support. The
life even for purposesof pending litigation";[9] and that suit "cannot be first judicial test before this Court is National Abaca and Other Fibers
continued or revived; nor can a valid judgment be rendered therein, and a Corporation vs. Pore, L-16779, August 16, 1961. In that case, the corporation,
judgment, if rendered, is not only erroneous, but void and subject to collateral already dissolved, commenced suit within the three-year extended period for
attack."[10] So it is, that abatement of pending actions follows as a matter of liquidation. That suit was for recovery of money advanced to defendant for the
course upon the expiration of the legal period for liquidation,[11] unless the purchase of hemp in behalf of the corporation. She failed to account for that
statute merely requires a commencement of suit within the added time. [12] For, money. Defendant moved to dismiss, questioned the corporation's capacity to
the court cannot extend the time allotted by statute. [13] sue. The lower court ordered plaintiff to include as co-party

11
plaintiff, The Board of Liquidators, to which the corporation's liquidation was Appellee heirs of Kalaw raised in their motion to dismiss,[17] which was
entrusted by Executive Order 372. Plaintiff failed to effect inclusion. The overruled, and in their nineteenth special defense, that plaintiff's action is
lower court dismissed the suit. Plaintiff moved to reconsider. Ground: personal to the deceased Maximo M. Kalaw, and may not be deemed to have
excusable negligence, in that its counsel prepared the amended complaint, as survived after his death.[18] They say that the controlling statute is Section 5,
directed, and instructed the board's incoming and outgoing correspondence Rule 87, of the 1940 Rules of Court,[19] which provides that "[a]ll claims for
clerk, Mrs. Receda Vda. deOcampo, to mail the original thereof to the court money against the decedent, arising from contract, express or implied", must
and a copy of the same to defendant's counsel. She mailed the copy to the be filed in the estate proceedings of the deceased. We disagree.
latter but failed to send the original to the court. This motion was rejected
below. Plaintiff came to this Court on appeal. We there said that "the rule The suit here revolves around the alleged negligent acts of Kalaw for having
appears to be well settled that, in the absence of statutory provision to the entered into the questioned contracts without prior approval of the board of
contrary, pending actions by or against a corporation are abated upon directors, to the damage and prejudice of plaintiff; and is against Kalaw and
expiration of the period allowed by law for the liquidation of its affairs." We the other directors for having subsequently approved the said contracts in bad
there noted that "[o]ur Corporation Law contains no provision authorizing a faith and/or breach of trust. Clearly then, the present case is not a mere action
corporation, after three (3) years from the expiration of its lifetime, to continue for the recovery of money nor a claim for money arising from contract. The
in its corporate name actions instituted by it within said period of three (3) suit involves alleged tortious acts. And the action is embraced in suits filed "to
years."[14] However, these precepts notwithstanding, we, in effect, held in that recover damages for an injury to person or property, real or personal", which
case that the Board of Liquidators escapes from the operation thereof for the survive.[20]
reason that The leading expositor of the law on this point is Aguas vs. Llemos, L-18107,
"[o]bviously, the complete loss of plaintiff's corporateexistence after the expir August 30, 1962. There, plaintiffs sought to recover damages from
ation of the period of three (3) years for the settle- defendant Llemos. The complaint averred that Llemos had served plaintiff by
ment of its affairs is what impelled the President to create aBoard of Liquidat registered mail with a copy of a petition for a writ of possession in Civil Case
ors, to continue the management of such matters as may then be pending."[15] 4824 of the Court of First Instance at Catbalogan, Samar, with notice that the
We accordingly directed the record of said case to be returned to the lower same would be submitted to the Samar court on February 23, 1960 at 8:00
court, with instructions to admit plaintiff's amended complaint to include, as a.m.; that in view of the copy and notice served, plaintiffs proceeded to the said
party plaintiff, The Board of Liquidators. court of Samarfrom their residence in Manila accompanied by their lawyers,
Defendant's position is vulnerable to attack from another direction. only to discover that no such petition had been filed; and that
defendant Llemos maliciously failed to appear in court, so that plaintiffs'
By Executive Order 372, the government, the sole stockholder, abolished expenditure and trouble turned out to be in vain, causing them mental anguish
NACOCO, and placed its assets in the hands of the Board of Liquidators. The and undue embarrassment. Defendant died before he could answer the com-
Board of Liquidators thus became the trustee on behalf of the government. It plaint. Upon leave of court, plaintiffs amended their complaint to include the
was an express trust. The legal interest became vested in the trustee - the heirs of the deceased. The heirs moved to dismiss. The court dismissed the
Board of Liquidators. The beneficial interest remained with the sole complaint on the ground that the legal representative, and not the heirs,
stockholder the government. At no time had the government withdrawn the should have been made the party defendant; and that, anyway, the action being
property, or the authority to continue the present suit, from the Board of for recovery of money, testate or intestate proceedings should be initiated and
Liquidators. If for this reason alone, we cannot stay the hand of the Board of the claim filed therein. This Court, thru Mr. Justice Jose B. L. Reyes, there
Liquidators from prosecuting this case to its final conclusion. [16] The declared:
provisions of Section 78 of the Corporation Law - the third method of winding
up corporate affairs - find application. "Plaintiffs argue with considerable cogency that contrasting the correlated
provisions of the Rules of Court, those concerning claims that are barred if not
We, accordingly, rule that the Board of Liquidators has personality to proceed filed in the estate settlement proceedings (Rule 87, sec. 5) and those defining
as party-plaintiff in this case. actions that survive and may be prosecuted against the executor or
2. Defendant's second poser is that the action is unenforceable against the administrator (Rule 88, sec. 1), it is apparent that actions for damages caused
heirs of Kalaw. by tortious conduct of a defendant (as in the case at bar) survive the death of
the latter. Under Rule 87, section 5, the actions that are abated by death
are: (1) claims for funeral expenses and those for the last sickness of the

12
decedent; (2) judgments for money; and (3) 'all claims for money against the corporation."[21] As such officer, "he may, without any special authority from
decedent, arising from contract express or implied.' None of these includes the Board of Directors, perform all acts of an ordinary nature, which by usage
that of the plaintiffs-appellants; for it is not enough that the claim against the or necessity are incident to his office, and may bind the corporation by
deceased party be for money, but it must arise from 'contract express or contracts in matters arising in the usual course of business." [22]
implied', and these words (also used by the Rules in connection with The problem, therefore, is whether the case at bar is to be taken out of the
attachments and derived from the common law) were construed in Leung Ben general concept of the powers of a general manager, given the cited provision
vs. O'Brien, 38 Phil. 182, 189-194, of the NACOCO by-laws requiring prior directorate approval of NACOCO
contracts.
'to include all purely personal obligations other than those which have their The peculiar nature of copra trading, at this point, deserves express
source in delict or tort.' articulation. Ordinary in this enterprise are copra sales for future
delivery. The movement of the market requires that sales agreements be
Upon the other hand, Rule 88, section 1, enumerates actions that survive entered into, even though the goods are not yet in the hands of the
against a decedent's executors or administrators, and they are: (1) actions to seller. Known in business parlance as forward sales, it is concededly the
recover real and personal property from the estate; (2) actions to enforce a lien practice of the trade. A certain amount of speculation is inherent in the
thereon; and (3) actions to recover damages for an injury to person or undertaking. NACOCO was much more conservative than the exporters with
property. The present suit is one for damages under the last class, it having big capital. This short selling was inevitable at the time in the light of other
been held that 'injury to property' is not limited to injuries to specific property, factors, such as availability of vessels, the quantity required before being
but extends to other wrongs by which personal estate is injured or diminished accepted for loading, the labor needed to prepare and sack the copra for
(Baker vs. Crandall, 47 Am. Rep. 126; also 171 A.L.R., 1395). To maliciously market. To NACOCO, forward sales were a necessity. Copra could not stay
cause a party to incur unnecessary expenses, as charged in this case, is long in its hands; it would lose weight, its value decrease. Above
certainly injury to that party's property (Javier vs. Araneta, L-4369, Aug. 31, all, NACOCO's limited funds necessitated a quick turnover. Copra contracts
1953)." then had to be executed on short notice - at times within twenty-four hours. To
be appreciated then is the difficulty of calling a formal meeting of the board.
The ruling in the preceding case was hammered out of facts comparable to
those of the present. No cogent reason exists why we should break away from Such were the environmental circumstances when Kalaw went into copra
the views just expressed. And, the conclusion remains: Action against trading.
the Kalaw heirs and, for that matter, against the Estate of Casimiro Garcia,
survives. Long before the disputed contracts came into being, Kalaw contracted - by
himself alone as general manager - for forward sales of copra. For
The preliminaries out of the way, we now go to the core of the controversy. the fiscal year ending June 30, 1947, Kalaw signed some 60 such contracts for
the sale of copra to divers parties. During that period, from those copra sales,
3. Plaintiff levelled a major attack on the lower court's holding NACOCO reaped a gross profit of P3,631,181.48. So pleased
that Kalaw justifiedly entered into the controverted contracts without the was NACOCO's board of directors that, on December 5, 1946,
prior approval of the corporation's directorate. Plaintiff leans heavily in Kalaw's absence, it voted to grant him a special bonus "in recognition of the
on NACOCO's corporate by-laws. Article IV (b), Chapter III thereof, recites, as signal achievement rendered by him in putting the Corporation's business on
amongst the duties of the general manager, the obligation: "(b) To perform or a self-sufficient basis within a few months after assuming office, despite
execute on behalf of the Corporation upon prior approval of the Board, all numerous handicaps and difficulties."
contracts necessary and essential to the proper accomplishment for which the
Corporation was organized." These previous contracts, it should be stressed, were signed
by Kalaw without prior authority from the board. Said contracts were known
Not of de minimis importance in a proper approach to the problem at hand, is all along to the board members. Nothing was said by them. The aforesaid
the nature of a general manager's position in the corporate structure. A rule contracts stand to prove one thing. Obviously, NACOCO board met the
that has gained acceptance through the years is that a corporate officer difficulties attendant to forward sales by leaving the adoption of means to end,
"intrusted with the general management and control of its business, has to the sound discretion of NACOCO's general manager Maximo M. Kalaw.
implied authority to make any contract or do any other act which is necessary
or appropriate to the conduct of the ordinary business of the
13
Liberally spread on the record are instances of contracts executed intends to wait until he has signed con-
by NACOCO's general manager and submitted to the board after their tracts to sell before starting to buy copra."[23]
consummation, not before. These agreements were not Kalaw's alone. One at
least was executed by a predecessor way back in 1940, soon after NACOCO was In the board meeting of July 29, 1947, Kalaw reported on the copra price
chartered. It was a contract of lease executed on November 16, 1940 by the conditions then current: The copra market appeared to have become fairly
then general manager and board chairman, Maximo Rodriguez, and steady; it was not expected that copra prices would again rise very high as in
A. Soriano y Cia., for the lease of a space in Soriano Building. On November the unprecedented boom during January-April, 1947; the prices seemed to
14, 1946, NACOCO, thru its general manager Kalaw, sold 3,000 tons of copra oscillate between $140 to $150 per ton; a radical rise or decrease was not
to the Food Ministry, London, thru Sebastian Palanca. On December 22, 1947, indicated by the trends. Kalawcontinued to say that
when the controversy over the present contracts cropped up, the board voted "the Corporation has been closing contracts for the sale of copra generally
to approve a lease contract previously executed between Kalaw and with a margin of P5.00 to P7.00 per hundred kilos.[24]
Fidel Isberto and Ulpiana Isberto covering a warehouse of the latter. On the We now lift the following excerpts from the minutes of that same board
same date, the board gave its nod to a contract for renewal of the services of meeting of July 29, 1947:
Dr. Manuel L. Roxas. In fact, also on that date, the board requested Kalaw to
report for action all copra contracts signed by him "521. In connection with the buying and selling of copra the Board
"at the meeting immediately following the signing of the contracts." This inquired whether it is the practice of the Management to closecontracts of sal
practice was observed in a later instance when, on January 7, 1948, the board e first before buying. The General Manager replied
approved two previous contracts for the sale of 1,000 tons of copra each to a that this practice is generally followed but that it is not always possible to do
certain "SCAP" and a certain "GNAPO." so for two reasons:
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 (1) The role of the Nacoco to stabilize the prices of copra requires that it should
copra to the French Government. Such ratification was necessary because, as not cease buying even when it does not have actual contracts of sale since the
stated by Kalaw in that same meeting, "under an existing resolution he is suspension of buying by the Nacoco will result in middlemen taking advantage
authorized to give a brokerage fee of only 1% on sales of copra made through of the temporary inactivity of the Corporation to lower the prices to the
brokers." On January 15, 1947, the brokerage fee agreements of 1-1/2% on
detriment of the producers.
three export contracts, and 2% on three others, for the sale of copra were
approved by the board with a proviso authorizing the general manager to pay
a commission up to the amount of 1-1/2% (2) The movement of the market is such that it may not be practical always to
"without further action by theBoard." On February 5, 1947, the brokerage fee wait for the consummation of contracts of sale before beginning to buy copra.
of 2% of J. Cojuangco & Co. on the sale of 2,000 tons of copra was favorably
acted upon by the board. On March 19, 1947, a 2% brokerage commission was
The General Manager explained that in this connection a certain amount of
similarly approved by the board for Pacific Trading Corporation on the sale of
2,000 tons of copra. speculation is unavoidable. However he said that the Nacoco is much more
conservative than the other big exporters in this respect."[25]
It is to be noted in the foregoing cases that only the brokerage fee agreements
were passed upon by the board, not the sales contracts themselves. And even Settled jurisprudence has it that where similar acts have been approved by the
those fee agreements were submitted only when the commission exceeded the directors as a matter of general practice, custom, and policy, the general
ceiling fixed by the board. manager may bind the company without formal authorization of the board of
Knowledge by the board is also discernible from other recorded instances. directors.[26] In varying language, existence of such authority is established, by
proof of the course of business, the usages and practices of the company and
When the board met on May 10, 1947, the directors discussed the copra price by the knowledge which the board of directors has, or must be presumed to
situation: There was a slow downward trend but belief was entertained that have, of acts and doings of its subordinates in and about the affairs of the
the nadir might have already been reached and an improvement in prices was corporation.[27] So also,
expected. In view thereof, Kalaw informed the board that "he

14
"x x x authority to act for and bind a corporation may be presumed from acts government's side of the scale is that the board knew that the contracts so
of recognition in other instances where the power was in fact exercised."[28] confirmed would cause heavy losses.
As we have earlier expressed, Kalaw had authority to execute the contracts
"x x x Thus, when, in the usual course of business of a corporation, an officer without need of prior approval. Everybody, including Kalawhimself, thought
has been allowed in his official capacity to manage its affairs, his authority to so, and for a long time. Doubts were first thrown on the way only when the
represent the corporation may be implied from the manner in which he has contracts turned out to be unprofitable for NACOCO.
been permitted by the directors to manage its business."[29]
Rightfully had it been said that bad faith does not simply connote bad
judgment or negligence; it imports a dishonest purpose or some moral
In the case at bar, the practice of the corporation has been to allow its general obliquity and conscious doing of wrong; it means breach of a known duty thru
manager to negotiate and execute contracts in its copra trading activities for some motive or interest or ill will; it partakes of the nature of
and in NACOCO's behalf without prior board approval. If the by-laws were to fraud.[34] Applying this precept to the given facts herein, we find that there was
be literally followed, the board should give its stamp of prior approval on all no "dishonest purpose", or "some moral obliquity", or "conscious doing of
corporate contracts. But that board itself, by its acts and through acquiescence wrong", or "breach of a known duty", or "some motive or interest or ill will"
practically laid aside the by-law requirement of prior approval. that "partakes of the nature of fraud."
Under the given circumstances, the Kalaw contracts are valid corporate acts. Nor was it even intimated here that the NACOCO directors acted for personal
reasons, or to serve their own private interests, or to pocket money at the
4. But if more were required, we need but turn to the board's ratification of the
expense of the corporation.[35] We have had occasion to affirm that bad faith
contracts in dispute on January 30, 1948, though it is our (and the lower
contemplates a "state of mind affirmatively operating with furtive design or
court's) belief that ratification here is nothing more than a mere formality.
with some motive of self-interest or ill will or for ulterior purpose."[36] Briggs
Authorities, great in number, are one in the idea that "ratification by a vs. Spaulding, 141 U.S. 132, 148-149, 35 L. ed. 662, 669, quotes with approval
corporation of an unauthorized act or contract by its officers or others relates from Judge Sharswood (in Spering's App., 71 Pa. 11), the following: "Upon a
back to the time of the act or contract ratified, and is equivalent to original close examination of all the reported cases, although there are many dicta not
authority;" and that "[t]he corporation and the other party to the transaction easily reconcilable, yet I have found no judgment or decree which has held
are in precisely the same position as if the act or contract had been authorized directors to account, except when they have themselves been personally guilty
at the time."[30] The language of one case is expressive: "The adoption or of some fraud on the corporation, or have known and connived at some fraud
ratification of a contract by a corporation is nothing more nor less than the in others, or where such fraud might have been prevented had they given
making of an original contract. The theory of corporate ratification ordinary attention to their duties. x xx." Plaintiff did not even dare charge its
is predicated on the right of a corporation to contract, and any ratification or defendant-directors with any of these malevolent acts.
adoption is equivalent to a grant of prior authority."[31]
Obviously, the board thought that to jettison Kalaw's contracts would
Indeed, our law pronounces that "[r]atification cleanses the contract from all contravene basic dictates of fairness. They did not think of raising their voice
its defects from the moment it was constituted."[32] By corporate confirmation, in protest against past contracts which brought in enormous profits to the
the contracts executed by Kalaw are thus purged of whatever vice or defect corporation. By the same token, fair dealing disagrees with the idea that
they may have.[33] similar contracts, when unprofitable, should not merit the same
treatment. Profit or loss resulting from business ventures is no justification
In sum, a case is here presented whereunder, even in the face of an express by- for turning one's back on contracts entered into. The truth, then, of the matter
law requirement of prior approval, the law on corporations is not to be held so is that - in the words of the trial court - the ratification of the contracts was "an
rigid and inflexible as to fail to recognize equitable considerations. And, the act of simple justice and fairness to the general manager and in the best
conclusion inevitably is that the embattled contracts remain valid. interest of the corporation whose prestige would have been seriously impaired
by a rejection by the board of those contracts which proved
5. It would be difficult, even with hostile eyes, to read the record in terms of disadvantageous."[37]
"bad faith and/or breach of trust" in the board's ratification of the contracts
without prior approval of the board. For, in reality, all that we have on the The directors are not liable.[38]
6. To what then may we trace the damage suffered by NACOCO?
15
The facts yield the answer. Four typhoons wreaked havoc then on our copra- interests of the corporation; that he entered into the contracts in pursuance of
producing regions. Result: Copra production was impaired, prices spiralled, an overall policy to stabilize prices, to free the producers from the clutches of
warehouses destroyed. Quick turnovers could not be expected. NACOCO was the middlemen. The prices for which NACOCO contracted in the disputed
not alone in this misfortune. The record discloses that private traders, agreements, were at a level calculated to produce profits and higher than those
old, experienced, with bigger facilities, were not spared; also suffered prevailing in the local market. Plaintiff's witness, Barretto, categorically
tremendous losses. Roughly estimated, eleven principal trading concerns did stated that "it would be foolish to think that one would sign (a) contract when
run losses to about P10,300,000.00. Plaintiff's witness Sisenando Barretto, you are going to lose money" and that no contract was executed "at a price
head of the copra marketing department of NACOCO, observed that from late unsafe for the Nacoco."[45] Really, on the basis of prices then prevailing,
1947 to early 1948 "there were many who lost money in the trade."[39]NACOCO NACOCO envisioned a profit of around P752,440.00.[46]
was not immune from such usual business risk.
Kalaw's acts were not the result of haphazard decisions
The typhoons were known to plaintiff. In fact, NACOCO resisted the suits filed either. Kalaw invariably consulted with NACOCO's Chief
by Louis Dreyfus & Co. by pleading in its answers forcemajeure as an Buyer, SisenandoBarretto, or the Assistant General Manager. The dailies and
affirmative defense, and there vehemently asserted that "as a result of the said quotations from abroad were guideposts to him.
typhoons, extensive damage was caused to the coconut trees in the copra
producing regions of the Philippines and according to estimates of competent Of course, Kalaw could not have been an insurer of profits. He could not be
authorities, it will take about one year until the coconut producing regions will expected to predict the coming unpredictable typhoons. And even as typhoons
be able to produce their normal coconut yield, and it will take some time until supervened, Kalaw was not remiss in his duty. He exerted efforts to stave off
the price of copra will reach normal levels"; and that "it had never been the losses. He asked the Philippine National Bank to implement its commitment
intention of the contracting parties in entering into the contract in question to extend a P400,000.00 loan. The bank did not release the loan, not even the
that, in the event of a sharp rise in the price of copra in the Philippine market sum of P200,000.00, which, in October, 1947, was approved by the bank's
produced by force majeure or by causes beyond defendant's control, the board of directors. In frustration, on December 12, 1947, Kalaw turned to the
defendant should buy the copra contracted for at exorbitant prices far beyond President, complained about the bank's short-sighted policy. In the end,
the buying price of the plaintiff under the contract."[40] nothing came out of the negotiations with the bank. NACOCO eventually
faltered in its contractual obligations.
A high regard for normal judicial admissions made in court pleadings would
suffice to deter us from permitting plaintiff to stray away therefrom, to charge That Kalaw cannot be tagged with crassa negligentia or as much as simple
now that the damage suffered was because of Kalaw's negligence, or for that negligence, would seem to be supported by the fact that even as the contracts
matter, by reason of the board's ratification of the contracts.[41] were being questioned in Congress and in the NACOCO board itself,
President Roxas defended the actuations of Kalaw. On December 27, 1947,
Indeed, were it not for the typhoons,[42] NACOCO could have, with ease, met President Roxas expressed his desire "that the Board of Directors should
its contractual obligations. Stock accessibility was no problem. NACOCO had reelect Hon. Maximo M. Kalaw as General Manager of the National Coconut
90 buying agencies spread throughout the islands. It could purchase 2,000 Corporation."[47] And, on January 7, 1948, at a time when the contracts had
tons of copra a day. The various contracts involved delivery of but 16,500 tons already been openly disputed, the board, at its regular meeting,
over a five-month period. Despite the typhoons, NACOCO was still able to appointed Maximo M. Kalaw as acting general manager of the corporation.
deliver a little short of 50% of the tonnage required under the contracts.
Well may we profit from the following passage from Montelibano vs. Bacolod-
As the trial court correctly observed, this is a case Murcia Milling Co., Inc., L-15092, May 18, 1962:
of damnum absque injuria. Conjunction of damage and wrong is here
absent. There cannot be an actionable wrong if either one or the other is "'They (the directors) hold such office charged with the duty to act for the
wanting.[43] corporation according to their best judgment, and in so doing they cannot be
controlled in the reasonable exercise and performance of such duty. Whether
7. On top of all these, is that no assertion is made and no proof is presented the business of a corporation should be operated at a loss during a business
which would link Kalaw's acts - ratified by the board - to a matrix depression, or closed down at a smaller loss, is a purely business and economic
for defraudation of the government. Kalaw is clear of the stigma of bad problem to be determined by the directors of the corporation, and not by the
faith. Plaintiff's corporate counsel[44] concedes that Kalawall along thought
court. It is a well-known rule of law that questions of policy of management
that he had authority to enter into the contracts; that he did so in the best
are left solely to the honest decision of officers and directors of a corporation,
16
and the court is without authority to substitute its judgment for the judgment
of the board of directors; the board is the business manager of the corporation,
and so long as it acts in good faith its orders are not reviewable by the courts.'
(Fletcher on Corporations, Vol. 2, p. 390.)"[48]

Kalaw's good faith, and that of the other directors, clinch the case for
defendants.[49]
Viewed in the light of the entire record, the judgment under review must
be, as it is hereby, affirmed.
Without costs.
SO ORDERED.

17
[ G.R. No. L-14441, December 17, 1966 ] Constitution of the Philippines, the Corporation Law and the Petroleum Act of
1949; (2) the issuer has not been licensed to transact business in the
Philippines; (3) the sale of the share of the issuer is fraudulent, and works or
PEDRO R. PALTING, PETITIONER, VS. SAN JOSE PETROLEUM
tends to work a fraud upon Philippine purchasers; and (4) the issuer as an
INCORPORATED, RESPONDENT.
enterprise, as well as its business, is based upon unsound business principles.
Answering the foregoing opposition if Palting, et al., the registrant SAN JOSE
DECISION PETROLEUM claimed that it was a "business enterprise" enjoying parity
BARRERA, J.: rights under the Ordinance appended to the Constitution, which parity right,
with respect to mineral resources in the Philippines, may be exercised,
pursuant to the Laurel-Langley Agreement, only through the medium of a
corporation organized under the laws of the Philippines. Thus, registrant
This is a petition for review of the order of August 29, 1958, later supplemented which is allegedly qualified to exercise rights under the Parity Amendment,
and amplified by another dated September 9, 1958, of the Securities and had to do so through the medium of a domestic corporation, which is the SAN
Exchange Commissioner denying the opposition to, and instead, granting the JOSE OIL. It refuted the contention that the CorporationLaw was being
registration, and licensing the sale in the Philippines, of 5,000,000 shares of violated, by alleging that Section V3 thereof applies only to foreign
the capital stock of the respondent-appellee San Jose Petroleum, Inc. corporations doing business in the Philippines, and registrant was not doing
(hereafter referred to as SAN JOSE PETROLEUM), a corporation organized business here. The mere fact that it was a holding company of SAN JOSE OIL
and existing in the Republic of Panama. and that registrant undertook the financing of and giving technical assistance
to said corporation did not constitute transaction of business in the
On September 7, 1956, JOSE PETROLEUM filed with the Philippine Securities Philippines. Registrant also denied that the offering for sale in the Philippines
and Exchange Commission a sworn registration statement, for the registration of its shares of capital stock was fraudulent or would work or tend to work
and licensing for sale in the Philippines Voting Trust Certificates representing fraud on the investors. On August 29, 1953, and on September 9, 1958 the
2,000,000 shares of its capital stock of a par value of $0.35 a share, at P1.00 Securities and Exchange Commissioner issued the orders object of the present
per share. It was alleged that the entire proceeds of the sale of said securities appeal.
will be devoted or used exclusively to finance the operations of San Jose Oil
Company, Inc. (a domestic mining corporation hereafter to be referred to as The issues raised by the parties in this appeal are as follows:
SAN JOSE OIL) which has 14 petroleum exploration concessions covering an
area of a little less than 1,000,000 hectares, located in the provinces of 1. Whether or not petitioner Pedro R. Palting, as a "prospective investor"
Pangasinan, Tarlac, Nueva Ecija, La Union, Iloilo, Cotabato, Davao and in respondent's securities, has personality to file the present petition
Agusan. It was the express condition of the sale that every purchaser of the for review of the order of the Securities and Exchange Commissioner;
securities shall not receive a stock certificate, but a registered or bearer-voting- 2. Whether or not the issue raised herein is already moot and academic;
trust certificate from the voting trustees named therein James L. Buckley and 3. Whether or not the "tie-up" between the respondent SAN JOSE
Austin G.E. Taylor, the first residing in Connecticut, U.S.A., and the second in PETROLEUM, a foreign corporation, and SAN JOSE OIL COMPANY,
New York City. While this application for registration was pending INC., a domestic mining corporation, is violative of the Constitution,
consideration by the Securities and Exchange Commission, SAN JOSE the Laurel-Langley Agreement, the Petroleum Act of 1949, and the
PETROLEUM filed an amended Statement on June 20, 1958, for registration Corporation Law; and
of the sale in the Philippines of its shares of capital stock, which was increased 4. Whether or not the sale of respondent's securities is fraudulent, or
from 2,000,000 to 5,000,000, at a reduced offering price of from P1.00 to would work or tend to work fraud to purchasers of such securities in
P0.70 per share. At this time the par value of the shares has also been reduced the Philippines.
from $.35 to $.01 per share.[1]
1. In answer to the notice and order of the Securities and Exchange
Pedro R. Palting and others, allegedly prospective investors in the shares of Commissioner, published in 2 newspapers of general circulation in the
SAN JOSE PETROLEUM, filed with the Securities and Exchange Commission Philippines, for "any person who is opposed" to the petition for
an opposition to the registration and licensing of the securities on the grounds registration and licensing of respondent's securities, to file his
that (1) the tie-up between the issuer, SAN JOSE PETROLEUM, a Panamanian opposition in 7 days, herein petitioner so filed an opposition. And, the
corporation, and SAN JOSE OIL, a domestic corporation, violates the Commissioner, having denied his opposition and instead, directed the
18
registration of the securities to be offered for sale, oppositor Parting herein petitioner duly filed his opposition giving grounds therefor.
instituted the present proceeding for review of said order. Respondent SAN JOSE PETROLEUM was required to reply to the
Respondent raises the question of the personality of petitioner to bring opposition. Subsequently both the petition and the opposition were
this appeal, contending that as a mere "prospective investor", he is not set for hearing during which the petitioner was allowed to actively
an "aggrieved" or "interested" person who may properly maintain the participate and did so by cross-examining the respondent's witnesses
suit. Citing a 1931 ruling of Utah State supreme court,[2] it is claimed and filing his memorandum in support of his opposition. He therefore
that the phrase "party aggrieved" used in the Securities Act [3] and the
to all intents and purposes became a party to the proceedings. And
Rules of Court[4] as having the right to appeal should refer only to
issuers, dealers and salesmen of securities.It is true that in the cited under the New Rules of Court,[5] such a party can appeal from a final
case, it was ruled that the phrase "person aggrieved" is that party order, ruling or decision of the Securities and Exchange Commission.
"aggrieved by the judgment or decree where it operates on his rights This new Rule eliminating the word "aggrieved" appearing in the old
of property or bears directly upon his interest", that the word Rule, being procedural in nature,[6] and in view of the express
"aggrieved" refers to "a substantial grievance, a denial of some provision of Rule 144 that the new rules made effective on January 1,
personal property right or the imposition upon a party of a burden or 1964 shall govern not only cases brought after they took effect but all
obligation." But a careful reading of the case would show that the further proceedings in cases then pending, except to the extent that in
appeal therein was dismissed because the court held that an order of the opinion of the Court their application would not be feasible or
registration was not final and therefore not appealable. The foregoing would work injustice, in which event the former procedure shall apply,
pronouncement relied upon by herein respondent was made in we hold that the present appeal is properly within the appellate
construing the provision regarding an order of revocation which the jurisdiction of this Court.
court held was the one appealable. And since the law provides that in
revoking the registration of any security, only the issuer and every
registered dealer of the security are notified, excluding any person or The order allowing the registration and sale of respondent's securities
group of persons having no such interest in the securities, said court is clearly a final order that is appealable. The mere fact that such
concluded that the phrase "interested person" refers only to issuers, authority may be later suspended or revoked, depending on future
dealers or salesmen of securities.We cannot consider the foregoing developments, does not give it the character of an interlocutory or
ruling by the Utah State Court as controlling on the issue in this case. provisional ruling. And the fact that seven days after the publication
Our Securities Act in Section 7(c) thereof, requires the publication and of the order, the securities are deemed registered (Sec. 7, Com. Act 83,
notice of the registration statement. Pursuant thereto, the Securities as amended), points to the finality of the order. Rights and obligations
and Exchange Commissioner caused the publication of an order in necessarily arise therefrom if not reviewed on appeal.
part reading as follows: Our position on this procedural matter that the order is appealable
and the appeal taken here is proper is strengthened by the intervention
"x x x Any person who is opposed to this petition must file his written of the Solicitor General, under Section 23 of Rule 3 of the Rules of
opposition with this Commission within said period (2 weeks). x x x Court, as the constitutional issues herein presented affect the validity
x." of Section 13 of the Corporation Law, which, according to the
respondent, conflicts with the Parity Ordinance and the Laurel-
Langley Agreement recognizing, it is claimed, its right to exploit our
In other words, as construed by the administrative office entrusted
petroleum resources notwithstanding said provisions of the
with the enforcement of the Securities Act, any person (who may not Corporation Law.
be "aggrieved" or "interested" within the legal acceptation of the word)
is allowed or permitted to file an opposition to the registration of
2. Respondent likewise contends that since the order of
securities for sale in the Philippines. And this is in, consonance with Registration/Licensing dated September 9, 1958 took effect 30 days
the generally accepted principle that Blue Sky Laws are enacted to from September 3, 1958, and since no stay order has been issued by
protect investors and prospective purchasers and to prevent fraud and the Supreme Court, respondent's shares became registered and
preclude the sale of securities which are in fact worthless or worth licensed under the law as of October 3, 1950. Consequently; it is
substantially less than the asking price. It is for this purpose that asserted, the present appeal has become academic. Frankly we are

19
unable to follow respondent's argumentation. First it claims that the is no indication of the citizenship of these stockholders, [7] or of the
order of August 29 and that of September 9, 1958 are not final orders total number of authorized stocks of each corporation, for the purpose
and therefore are not appealable. Then when these orders, according of determining the corresponding percentage of these listed
to its theory, became final and were implemented, it argues that the stockholders in relation to the respective capital stock af said
orders can no longer be appealed as the question of registration and corporation.
licensing became moot and academic.
Petitioner, as well as the amicus curiae and the Solicitor
But the fact is that because of the authority to sell, the securities are, General[8] contend that the relationship between herein respondent
in all probabilities, still being traded in the open market. Consequently SAN JOSE PETROLEUM and its subsidiary, SAN JOSE OIL, violates
the issue is much alive as to whether respondent's securities should the Petroleum Law of 1949, the Philippine Constitution, and Section
continue to be the subject of sale. The purpose of the inquiry on this 13 of the Corporation Law, which inhibits a mining corporation from
matter is not fully seived just because the securities had passed out of acquiring an interest in another raining corporation. It is respondent's
the hands of the issuer and its dealers. Obviously, so long as the theory, on the other hand, that far from violating the Constitution,
securities are outstanding and are placed in the channels of trade and such relationship between the two corporations is in accordance with
commerce, members of the investing public are entitled to have the the Laurel-Langley Agreement which implemented the Ordinance
question of the worth or legality of the securities: resolved one way or Appended to the Constitution, and that Section 13 of the Corporation
another. law is not applicable because respondent is not licensed to do
business, as it is not doing business, in the Philippines.
But more fundamental than this consideration, we agree with the late
Senator Glaro M. Recto, who appeared as amicus curiae in this case, Article XIII, Section 1 of the Philippine Constitution provides:
that while apparently the immediate issue in this appeal is the right of
respondent SAN JOSE PETROLEUM to dispose of and sell its "SEC. 1. All agricultural, timber, and mineral lands of the public
securities to the Filipino public, the real and ultimate controversy here domain, waters, minerals, coal, petroleum,and other mineral oils, all
would actually call for the construction of the constitutional provisions forces of potential energy, and other natural resources of the
governing the disposition, utilization, exploitation and development
Philippines belong to the State, and their disposition, exploitation,
of our natural resources. And certainly this is neither moot nor
development, or utilization shall be limited to citizens of the
academic.
Philippines, or to corporations or associations at least sixty per
3. We now come to the meat of the controversy the "tie-up" between SAN centum of the capital of which is owned by such citizens, subject to
JOSE OIL on the one hand, and the respondent SAN JOSE any existing right, grant, lease or concession at the time of the
PETROLEUM and its associates, on the other. The relationship of inauguration of this Government established under this Constitution,
these corporations involved or affected in this case is admitted and x x x x."(Italics supplied)
established through the papers and documents which are parts of the
records: SAN JOSE OIL, is a domestic mining corporation, 90% of the In the 1946 Ordinance Appended to the Constitution, this right (to
outstanding capital stock of which is owned by respondent SAN JOSE
utilize and exploit our natural resources) was extended to citizens of
PETROLEUM, a foreign (Panamanian) corporation, the majority
interest of which is owned by OIL INVESTMENTS, Inc., another the United States, thus:
foreign (Panamanian) company. This latter corporation in turn is
wholly (100%) owned by PANTEPEC OIL COMPANY, C.A., and "Notwithstanding the provisions of Section one, Article Thirteen, and
PANCOASTAL PETROLEUM COMPANY, C.A., both organized and section eight, Article Fourteen, of the foregoing Constitution, during
existing under the laws of Venezuela. As of September 30, 1956, there the effectivity of the Executive Agreement entered into by the
were 9,979 stockholders of PANCOASTAL PETROLEUM found in 49 President of the Philippines with the President of the United States on
American states and U.S. territories, holding 3,476,988 shares of the fourth of July, nineteen hundred and forty-six, pursuant to the
stock; whereas, as of November 30, 1956, PANTEPEC OIL COMPANY provisions of Commonwealth Act numbered Seven Hundred and
was said to have 3,077,916 shares held by 12,373 stockholders Thirty-Three, but in no case to extend beyond the third of July,
scattered in 49 American states. In the two list of stockholders, there
20
nineteen hundred and seventy-four, the disposition, exploitation, rights specified in this Article to citizens" of the United States who are
development, and utilization of all agricultural, timber, and mineral citizens of States "or to corporations or associations at least 60% of
lands of the public d&main, waters, minerals, coal, petroleum, and whose capital stock or capital is owned or controlled by citizens of
other mineral oils, all forces of potential energy, and other natural States, which deny like rights to citizens of the Philippines, or to
resources of the Philippines, and the operation of public utilities corporations or associations which are owned or controlled by
shall, if open to any person, be open to citizens of the United States, citizens of the Philippines. x x x." (Italics supplied.)
and to all forms of business enterprise owned or controlled, directly
or indirectly, by citizens of the United States in the same manner as Re-stated, the privilege to utilize, exploit, and develop the natural
to, and under the same conditions imposed upon citizens of the resources of this country was granted, by Article XIII of the
Philippines or corporations "or association owned or controlled by Constitution, to Filipino citizens or to corporation or associations 60%
citizens of the Philippines. (Italics supplied) of the capital of which is owned by such citizens. With the Parity
Amendment to the Constitution, the same right was extended
to citizens of the United States and business enterprises owned or
In the 1954 Revised Trade Agreement concluded between the United
controlled, directly or indirectly, by citizens of the United States.
States and the Philippines, also known as Laurel-Langley Agreement,
embodied in Republic Act 1355, the following provisions appear:
There could be no serious doubt as to the meaning of the word
"citizens" used in the aforementioned provisions of the Constitution.
The right was granted to 2 types of persons: natural persons (Filipino
or American citizens) and juridical persons (corporations 60% of
"ARTICLE VI
which capital is owned by Filipinos and business enterprises owned or
controlled directly or indirectly, by citizens of the United States). In
"1. The disposition, exploitation, development and utilization of all American law, "citizen" has been defined as "one who, under the
agticultural, timber, and mineral iinds of the public domain, waters, constitution and laws of the United States, has a right to vote for
minerals, coal, petroleum and other mineral oils, all forces and sources representatives in congress and other public officers, and who is
ot potential energy, and other natural resources of either Party, and qualified to fill offices in the gift of the people." (1 Bouvier's Law
the operation of public utilities, shall, if open to any person, be open Dictionary, p. 490.) A citizen is
to citizens of the other Party and to all forms of business enterprise
owned or controlled, directly or indirectly, by citizens of such other "One of the sovereign people. A constituent member of the
Party in the same manner as to and under the same conditions sovereignty, synonymous with the people." (Scott v. Sandford, 19 Ho.
imposed upon citizens or corporations or associations ownecfor /U.S./ 404, 15 L. Ed. 691.)
controlled by citizens of the Party granting the right.
"A member of the civil state entitled to all its privileges. (Cooley, Const.
"2. The rights provided for in Paragraph 1 may be exercised, x x x in Lim. 77. See U.S. v. Cruikshank, 92 U.S. 542, 23 L. Ed. 588; Minor v.
the case of citizens of the United States. with respect to natural Happersett, 21 Wall. /U.S./ 162, 22 L. Ed. 627.)
resources in the public domain in the Philippines, only through the
medium of a corporation organized under the laws of the Philippines These concepts clarified, is herein respondent SAN JOSE
and at least 60% of the capital stock of which is owned or controlled PETROLEUM an American business enterprise entitled to parity
by citizens of the United States. xxx. " rights in the Philippines? The answer must be in the negative, for the
following reasons:
"3. The United States of America reserves the rights of the several
States of the United States to limit the extent to which citizens or Firstly, It is not owned or controlled directly by citizens of the United
corporations or associations owned or controlled by citizens of the States, because it is owned and controlled by a corporation, the OIL
Philippines may engage in the activities specified in this Article. The INVESTMENTS, another foreign (Panamanian) corporation.
Republic of the Philippines reserves the power to deny any "of the
21
Secondly either can it be said that it is indirectly owned and controlled and it is not necessary to do so to dispose of the present controversy.
by American citizens through the OIL INVESTMENTS, for this latter But it is a matter that probably the Solicitor General would want to
corporation is in turn owned and controlled, not by citizens of the look into.
United States, but still by two foreign (Venezuelan) corporations, the
PANTEPEC OIL COMPANY and PANCOASTAL PETROLEUM. There is another issue which has been discussed extensively by the
parties. This is whether or not an American mining corporation may
Thirdly Although it is claimed that these two last corporations are lawfully "be in anywise interested in any other corporation (domestic
owned and controlled respectively by 12,373 and 9,979 stockholders or foreign) organized for the purpose of engaging in agriculture or in
residing in the different American states, there is no showing in the mining," in the Philippines or whether an American citizen owning
certification furnished by respondent that the stockholders of stock in more than one corporation organized for the purpose of
PANCOASTAL or those of them holding the controlling stock, are engaging in agriculture or in mining, may ownmore than 15% of the
citizens of the United States. capital stock then outstanding and entitled to vote, of each of such
corporations, in view of the express prohibition contained in Section
Fourthly Granting that these individual stockholders are American 13 of the Philippine Corporation Law. The petitioner in this case
citizens, it is yet necessary to establish that the different states of contends that the provisions of the Corporation Law must be applied
which they are citizens, allow Filipino citizens or corporations or to American citizens and business enterprise otherwise entitled to
associations owned or controlled by Filipino citizens, to engage in the exercise the parity privileges, because both the Laurel-Langley
exploitation, etc. of the natural resources of those states (see Agreement (Art. VI, para. 1) and the Petroleum Act of 1949 (Art. 31),
paragraph 3, Article VI of the Laurel-Langley Agreement, supra). specifically provide that the enjoyment by them of the same rights and
Respondent has presented no proof to this effect. obligations granted under the provisions of both laws shall be "in the
same manner as to, and under the same conditions imposed upon,
Fifthly But even if the requirements mentioned in the two citizens of the Philippines or corporations or associations owned or
immediately preceding paragraphs are satisfied, nevertheless to hold controlled by citizens of the Philippines." The petitioner further
that the set-up disclosed in this case, with a long chain of intervening contends that, as the enjoyment of the privilege of exploiting mineral
foreign corporations, comes within the purview of the Parity resources in the Philippines by Filipino citizens or corporations owned
Amendment regarding business enterprises indirectly owned or or controlled by citizens of the Philippines (which corporation must
controlled by citizens of the United States, is to unduly stretch and necessarily be organized under the Corporation Law), is made subject
strain the language and intent of the law. For, to what extent must ttie to the limitations provided in Section 13 of the Corporation Law, so
word "indirectly" be carried? Must we trace the ownership or control necessarily the exercise of the parity rights by citizens of the United
of these various corporations ad infinitum for the purpose of States or business enterprise owned or controlled, directly or
determining whether the American ownership-control-requirement is indirectly, by citizens of the United States, must equally be subject to
satisfied? Add to this the admitted fact that the shares of stock of the the same limitations contained in the aforesaid Section 13 of the
PANTEPEC and PANCOASTAL which are allegedly owned or Corporation Law.
controlled directly by citizens of the United States, are traded in the
stock exchange in New York, and you have a situation where it In view of the conclusions we have already arrived at, we deem it not
becomes a practical impossibility to determine at any given time, the indispensable for us to pass upon this legal question, especially taking
citizenship of the controlling stock required by the law. In the into account the statement of the respondent (SAN JOSE
circumstances, we have to hold that the respondent SAN JOSE PETROLEUM) that it is essentially a holding company, and as found
PETROLEUM, as presently constituted, is not a business enterprise by the Securities and Exchange Commissioner, its principal activity is
that is authorized to exercise the parity privileges under the Parity limited to the financing and giving technical assistance to SAN JOSE
Ordinance, the Laurel-Langley Agreement and the Petroleum Law. Its OIL.
tie-up with SAN JOSE OIL is, consequently, illegal.
4. Respondent SAN JOSE PETROLEUM, whose shares of stock were
What, then, would be the status of SAN JOSE OIL, about 90% of allowed registration for sale in the Philippines, was incorporated
whose stock is owned by SAN JOSE PETROLEUM? This is a query under the laws of Panama in April, 1956, with an authorized capital
which we need not resolve in this case as SAN JOSE OIL is not a party stock of $500,000.00, American currency, divided into 50,000,000
22
shares at par value of $0.01 per share. By virtue of a 3-party shares." Of this $800,000.00 subscription price, they deducted the sum of
Agreement of June 14, 1956, respondent was supposed to have $480,297.97 and the difference was placed as the unpaid portion of the
received from OIL INVESTMENTS 8,000,000 shares of the capital subscription price. In other woirds, it was made to appear that they paid in
stock of SAN JOSE OIL (at par value of $0.01 per share), plus a note $480,297.97 for the 8,000,000 shares of SAN JOSE OIL. This amount
for $250,000.00 due in 6 months, for which respondent issued in ($480,297.97) was supposedly that $250,000.00 paid by OIL INVESTMENTS
favor of OIL INVESTMENTS 16,000,000 shares of its capital stock, at for 7,500,000 shares of SAN JOSE OIL, embodied in the June 14-Agreement,
$0.01 per share or with a value of $160,000.00, plus a note for and a sum of $230,297.97 the amount expended or advanced by OIL
$230,297.97 maturing in 2 years at 6% per annum interest,[9] and the INVESTMENTS to SAN JOSE OIL. And yet, there is still an item among
assumption of payment of the unpaid price of 7,500,000 (of the respondent's liabilities, for $230,297.97 appearing as note payable to Oil
8,000,000) shares of SAN JOSE OIL. Investments, maturing in 2 years at 6% interest per annum.[11] As far as it
appears from the records, for the 16,000,000 shares at $0.35 per share issued
On June 27, 1956, the capitalization of SAN JOSE PETROLEUM was increased to OIL INVESTMENTS, respondent SAN JOSE PETROLEUM received from
from $500,000.00 to $17,500,000.00 by increasing the par value of the same OIL INVESTMENTS only the note for $250,000.00 plus the 8,000,000 shares
50,000,000 shares, from $0.01 to $0.35. Without any additional of SAN JOSE OIL, with par value of $0.10 per share or a total of $1,050,000.00
consideration, the 16,000,000 shares of $0.01 previously issued to OIL the only assets of the corporation. In other words, respondent actually lost
INVESTMENTS with a total value of $160,000.00 were changed with $4,550,000.00, which was received by OIL INVESTMENTS.
16,000,000 shares of the recapitalized stock, at $0.35 per share, or valued at
But this is not all. Some of the provisions of the Articles of Incorporation of
$5,600,000.00. And, to make it appear that cash was received for these re-
respondent SAN JOSE PETROLEUM are noteworthy; viz:
issued 16,000,000 shares, the board of directors of respondent corporation
placed a valuation of $5,900,000.00 on the 8,000,000 shares of SAN JOSE
(1) the directors of the Company need not be share-holders;
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 (2) that in the meetings of the board of directors, any director may be
share. represented and may vote through a proxy who also need not be a director or
stockholder; and
In the Balance Sheet of respondent, dated July 12, 1956, from the
$5,900,000.00, supposedly the value of the 8,000,000 shares of SAN JOSE (3) that no contract or transaction between the corporation and any other
OIL, the sum of $5,100,000.00 was deducted, corresponding to the alleged association or partnership will be affected, except in case of fraud, by the fact
difference between the "value" of the said shares and the subscription price that any of the directors or officers of the corporation is interested in, or is a
thereof which is $300,000.00 (at $0.10 per share). From this $800,000.00, director or officer of, such other association or partnership, and that no such
the subscription price of the SAN JOSE OIL shares, the amount of $319,702.03 contract or transaction of the corporation with any other person or persons,
was deducted, as allegedly unpaid subscription price, thereby giving a firm, association or partnership shall be affected by the fact that any director
difference of $480,297.97, which was placed as the amount allegedly paid in or officer of the corporation is a party to or has an interest in, such contract or
on the subscription price of the 3,000,000 SAN JOSE OIL-shares. Then, by transaction, or has in anyway connection with such other person or persons,
adding thereto the note receivable from OIL INVESTMENTS, for firm, association or partnership; and finally, that all and any of the persons
$250,000.00 (part-consideration for the 16,000,000 SAN JOSE who may become director or officer of the corporation shall be relieved from
PETROLEUM-shares) and the sum of $6,516.21, as deferred expenses, SAN all responsibility for which they may otherwise be liable by reason of any
JOSE PETROLEUM appeared to have assets in the sum of $736,814.18. contract entered into with the corporation, whether it be for his benefit or for
the benefit of any other person, firm, association or partnership in which he
These figures are highly questionable. Take the item $5,900,000.00 the
may be interested.
valuation placed on the 3,000,000 shares of SAN JOSE OIL. There appears no
basis for such valuation other than belief by the board of directors of These provisions are in direct opposition to our corporation law and corporate
respondent that "should San Jose Oil Company ife granted the bulk of the practices in this country. These provisions alone would outlaw any corporation
concessions applied for upon reasonable terms, that it would have a reasonable locally organized or doing business in this jurisdiction. Consider the unique
value of approximately $10,000,000."[10] Then, of this amount, the and unusual provision that no contract or transaction between the company
subscription price of $800,000.00 was deducted and called it "difference and any otner association or corporation shall be affected except in case of
between the (above) valuation and the subscription price for the 8,000,000 fraud, by the fact that any of the directors or officers of the company may be
23
interested in or are directors or officers of such other association or It was also therein provided that the said Agreement shall be binding upon the
corporation; and that none of such contracts or transactions of this company parties thereto, their successors, and upon all holders of voting trust
with any person or persons, firms, associations or corporations shall be certificates.
affected by the fact that any director or officer of this company is a party to or
has an interest in such contract or transaction or has any connection with such And these are the voting trust certificates that are offered to investors at
person or persons, firms, associations or corporations; and that any and all authorized by Security and Exchange Commissioner. It can not be doubted
persons who may become directors or officers of this company are hereby that the sale of respondent's securities would, to say the least, work or tend to
relieved of all responsibility which they would otherwise incur by reason of any work fraud to Philippine investors.
contract entered into which this company either for their own benefit, or for FOR ALL THE FOREGOING CONSIDERATIONS, the motion of
the benefit of any person, firm, association or corporation in which they may respondent to dismiss this appeal, is denied, and the orders of the Securities
be interested. and Exchange Commissioner, allowing the registration of Respondent's
The impact of these provisions upon the traditional fiduciary relationship securities and licensing their sale in the Philippines are hereby set aside. The
between the directors and the stockholders of a corporation is too obvious to case is remanded to the Securities and Exchange Commission for appropriate
escape notice by those who are called upon to protect the interest of investors. action in consonance with this decision. With costs. Let a copy of this decision
The directors and officers of the company can do anything, short of actual be furnished the Solicitor General for wnatever action he may deem advisable
fraud, with the affairs of the corporation even to benefit themselves directly or to take in the premises.
other persons or entities in which they are interested, and with immunity SO ORDERED.
because of the advance condonation or relief from responsibility by reason of
such acts. This and the other provision which authorizes the election of non-
stockholders as directors, completely disassociate the stockholders from the
government and management of the business in which they have invested.
To cap it all on April 17, 1957, admittedly to assure continuity of the
management and stability of SAN JOSE PETROLEUM, OIL INVESTMENTS,
as holder of the only subscribed stock of the former corporation and acting "on
behalf of All future holders of voting trust certificates", entered into a voting
trust agreement[12] with James L. Buckley and Austin E. Taylor, whereby said
Trustees were given authority to vote the shares represented by the
outstanding trust certificates (including those that may henceforth be issued)
in the following manner:
(a) At all elections of directors, the Trustees designate a suitable proxy or
proxies to vote for the election of directors designated bv the Trustees in their
own discretion, having in mind the best interests of the holders of the voting
trust certificates, it being understood that any and all of the Trustees shall be
eligible for election as directors;
(b) On any proposition for removal of a director, the Trustees shall designate
a suitable proxy or proxies to vote for or against such proposition as the
Trustees in their own discretion may determine, having in mind the
best interest of the holders of the voting trust certificates:
(c) With respect to all other matters arising at any meeting of stockholders,
the Trustees will instruct such proxy or proxies attending such meetings to vote
the shares of stock held by the Trustees in accordance with the written
instructions of each holder of voting trustcertificates. (Italics supplied.)

24
370 Phil. 921 branch office at Cagayan de Oro City. Defendant prayed for the dismissal of
the complaint on the ground of improper service of summons and for lack of
jurisdiction over the person of the defendant. Defendant contends that the trial
court did not acquire jurisdiction over its person since the summons was
GONZAGA-REYES, J.: improperly served upon its employee in its branch office at Cagayan de Oro
Before this Court is a petition for certiorari and prohibition with prayer for the City who is not one of those persons named in Section 11, Rule 14 of the 1997
issuance of a temporary restraining order and/or writ of preliminary Rules of Civil Procedure upon whom service of summons may be made.
injunction seeking to annul and set aside the Orders dated August 5, 1998 and
November 20, 1998 of the public respondent Judge Herminio I. Benito of the Meanwhile, on June 10, 1998, plaintiff filed a Motion to Declare Defendant in
Regional Trial Court of Makati City, Branch 132 and praying that the public Default[5] alleging that defendant has failed to file an Answer despite its receipt
respondent court be ordered to desist from further proceeding with Civil Case allegedly on May 5, 1998 of the summons and the complaint, as shown in the
No. 98-824. Sheriff's Return.

Petitioner E.B. Villarosa & Partner Co., Ltd. is a limited partnership with On June 22, 1998, plaintiff filed an Opposition to Defendant's Motion to
principal office address at 102 Juan Luna St., Davao City and with branch Dismiss[6] alleging that the records show that defendant, through its branch
offices at 2492 Bay View Drive, Tambo, Parañaque, Metro Manila and manager, Engr. Wendell Sabulbero actually received the summons and the
Kolambog, Lapasan, Cagayan de Oro City. Petitioner and private respondent complaint on May 8, 1998 as evidenced by the signature appearing on the copy
executed a Deed of Sale with Development Agreement wherein the former of the summons and not on May 5, 1998 as stated in the Sheriff's Return nor
agreed to develop certain parcels of land located at Barrio Carmen, Cagayan de on May 6, 1998 as stated in the motion to dismiss; that defendant has
Oro belonging to the latter into a housing subdivision for the construction of transferred its office from Kolambog, Lapasan, Cagayan de Oro to its new
low cost housing units. They further agreed that in case of litigation regarding office address at Villa Gonzalo, Nazareth, Cagayan de Oro; and that the
any dispute arising therefrom, the venue shall be in the proper courts of purpose of the rule is to bring home to the corporation notice of the filing of
Makati. the action.

On April 3, 1998, private respondent, as plaintiff, filed a Complaint for Breach On August 5, 1998, the trial court issued an Order [7] denying defendant's
of Contract and Damages against petitioner, as defendant, before the Regional Motion to Dismiss as well as plaintiff's Motion to Declare Defendant in
Trial Court of Makati allegedly for failure of the latter to comply with its Default. Defendant was given ten (10) days within which to file a responsive
contractual obligation in that, other than a few unfinished low cost houses, pleading. The trial court stated that since the summons and copy of the
there were no substantial developments therein. [1] complaint were in fact received by the corporation through its branch manager
Wendell Sabulbero, there was substantial compliance with the rule on service
Summons, together with the complaint, were served upon the defendant, of summons and consequently, it validly acquired jurisdiction over the person
through its Branch Manager Engr. Wendell Sabulbero at the stated address at of the defendant.
Kolambog, Lapasan, Cagayan de Oro City[2] but the Sheriff's Return of
Service[3] stated that the summons was duly served "upon defendant E. B. On August 19, 1998, defendant, by Special Appearance, filed a Motion for
Villarosa & Partner Co., Ltd. thru its Branch Manager Engr. WENDELL Reconsideration[8] alleging that Section 11, Rule 14 of the new Rules did not
SALBULBERO on May 5, 1998 at their new office Villa Gonzalo, Nazareth, liberalize but, on the contrary, restricted the service of summons on persons
Cagayan de Oro City, and evidenced by the signature on the face of the original enumerated therein; and that the new provision is very specific and clear in
copy of the summons." that the word "manager" was changed to "general manager", "secretary" to
"corporate secretary", and excluding therefrom agent and director.
On June 9, 1998, defendant filed a Special Appearance with Motion to
Dismiss[4]alleging that on May 6, 1998, "summons intended for defendant" On August 27, 1998, plaintiff filed an Opposition to defendant's Motion for
was served upon Engr. Wendell Sabulbero, an employee of defendant at its Reconsideration[9] alleging that defendant's branch manager "did bring home"
to the defendant-corporation the notice of the filing of the action and by virtue
25
of which a motion to dismiss was filed; and that it was one (1) month after "SEC. 13. Service upon private domestic corporation or partnership. - If the
receipt of the summons and the complaint that defendant chose to file a defendant is a corporation organized under the laws of the Philippines or a
motion to dismiss. partnership duly registered, service may be made on the president, manager,
secretary, cashier, agent, or any of its directors." (underscoring supplied).
On September 4, 1998, defendant, by Special Appearance, filed a
Reply[10] contending that the changes in the new rules are substantial and not Petitioner contends that the enumeration of persons to whom summons may
just general semantics. be served is "restricted, limited and exclusive" following the rule on statutory
construction expressio unios est exclusio alterius and argues that if the Rules
Defendant's Motion for Reconsideration was denied in the Order dated of Court Revision Committee intended to liberalize the rule on service of
November 20, 1998.[11] summons, it could have easily done so by clear and concise language.

Hence, the present petition alleging that respondent court gravely abused its We agree with petitioner.
discretion tantamount to lack or in excess of jurisdiction in denying
petitioner's motions to dismiss and for reconsideration, despite the fact that Earlier cases have uphold service of summons upon a construction project
the trial court did not acquire jurisdiction over the person of petitioner because manager[15]; a corporation's assistant manager[16]; ordinary clerk of a
the summons intended for it was improperly served. Petitioner invokes Section corporation[17]; private secretary of corporate executives[18]; retained
11 of Rule 14 of the 1997 Rules of Civil Procedure. counsel[19]; officials who had charge or control of the operations of the
corporation, like the assistant general manager[20]; or the corporation's Chief
Private respondent filed its Comment to the petition citing the cases of Finance and Administrative Officer[21]. In these cases, these persons were
Kanlaon Construction Enterprises Co., Inc. vs. NLRC[12] wherein it was held considered as "agent" within the contemplation of the old rule. [22] Notably,
that service upon a construction project manager is valid and in Gesulgon vs. under the new Rules, service of summons upon an agent of the corporation is
NLRC[13] which held that a corporation is bound by the service of summons no longer authorized.
upon its assistant manager.
The cases cited by private respondent are therefore not in point.
The only issue for resolution is whether or not the trial court acquired
jurisdiction over the person of petitioner upon service of summons on its In the Kanlaon case, this Court ruled that under the NLRC Rules of Procedure,
Branch Manager. summons on the respondent shall be served personally or by registered mail
on the party himself; if the party is represented by counsel or any other
When the complaint was filed by Petitioner on April 3, 1998, the 1997 Rules of authorized representative or agent, summons shall be served on such person.
Civil Procedure was already in force.[14] In said case, summons was served on one Engr. Estacio who managed and
supervised the construction project in Iligan City (although the principal
Section 11, Rule 14 of the 1997 Rules of Civil Procedure provides that: address of the corporation is in Quezon City) and supervised the work of the
employees. It was held that as manager, he had sufficient responsibility and
"When the defendant is a corporation, partnership or association organized discretion to realize the importance of the legal papers served on him and to
under the laws of the Philippines with a juridical personality, service may be relay the same to the president or other responsible officer of petitioner such
made on the president, managing partner, general manager, corporate that summons for petitioner was validly served on him as agent and authorized
secretary, treasurer, or in-house counsel." (underscoring supplied). representative of petitioner. Also in the Gesulgon case cited by private
respondent, the summons was received by the clerk in the office of the
Assistant Manager (at principal office address) and under Section 13 of Rule
This provision revised the former Section 13, Rule 14 of the Rules of Court 14 (old rule), summons may be made upon the clerk who is regarded as agent
which provided that: within the contemplation of the rule.

26
The designation of persons or officers who are authorized to accept summons x.
for a domestic corporation or partnership is now limited and more clearly
specified in Section 11, Rule 14 of the 1997 Rules of Civil Procedure. The rule The liberal construction rule cannot be invoked and utilized as a substitute for
now states "general manager" instead of only "manager"; "corporate secretary" the plain legal requirements as to the manner in which summons should be
instead of "secretary"; and "treasurer" instead of "cashier." The phrase "agent, served on a domestic corporation. x x x." (underscoring supplied).
or any of its directors" is conspicuously deleted in the new rule.
Service of summons upon persons other than those mentioned in Section 13 of
The particular revision under Section 11 of Rule 14 was explained by retired Rule 14 (old rule) has been held as improper.[26] Even under the old rule,
Supreme Court Justice Florenz Regalado, thus: [23] service upon a general manager of a firm's branch office has been held as
improper as summons should have been served at the firm's principal office.
"x x x the then Sec. 13 of this Rule allowed service upon a defendant In First Integrated Bonding & Ins. Co., Inc. vs. Dizon, [27] it was held that the
corporation to `be made on the president, manager, secretary, cashier, agent service of summons on the general manager of the insurance firm's Cebu
or any of its directors.' The aforesaid terms were obviously ambiguous and branch was improper; default order could have been obviated had the
susceptible of broad and sometimes illogical interpretations, especially the summons been served at the firm's principal office.
word `agent' of the corporation. The Filoil case, involving the litigation lawyer
of the corporation who precisely appeared to challenge the validity of service And in the case of Solar Team Entertainment, Inc. vs. Hon. Helen Bautista
of summons but whose very appearance for that purpose was seized upon to Ricafort, et al.[28] the Court succinctly clarified that, for the guidance of the
validate the defective service, is an illustration of the need for this revised Bench and Bar, "strictest" compliance with Section 11 of Rule 13 of the 1997
section with limited scope and specific terminology. Thus the absurd result in Rules of Civil Procedure (on Priorities in modes of service and filing) is
the Filoil case necessitated the amendment permitting service only on the in- mandated and the Court cannot rule otherwise, lest we allow circumvention of
house counsel of the corporation who is in effect an employee of the the innovation by the 1997 Rules in order to obviate delay in the administration
corporation, as distinguished from an independent practitioner." of justice.
(underscoring supplied)
Accordingly, we rule that the service of summons upon the branch manager of
petitioner at its branch office at Cagayan de Oro, instead of upon the general
Retired Justice Oscar Herrera, who is also a consultant of the Rules of Court manager at its principal office at Davao City is improper. Consequently, the
Revision Committee, stated that "(T)he rule must be strictly observed. Service trial court did not acquire jurisdiction over the person of the petitioner.
must be made to one named in (the) statute x x x".[24]
The fact that defendant filed a belated motion to dismiss did not operate to
It should be noted that even prior to the effectivity of the 1997 Rules of Civil confer jurisdiction upon its person. There is no question that the defendant's
Procedure, strict compliance with the rules has been enjoined. In the case of voluntary appearance in the action is equivalent to service of
Delta Motor Sales Corporation vs. Mangosing,[25] the Court held: summons.[29] Before, the rule was that a party may challenge the jurisdiction
of the court over his person by making a special appearance through a motion
"A strict compliance with the mode of service is necessary to confer jurisdiction to dismiss and if in the same motion, the movant raised other grounds or
of the court over a corporation. The officer upon whom service is made must invoked affirmative relief which necessarily involves the exercise of the
be one who is named in the statute; otherwise the service is insufficient. x x x. jurisdiction of the court, the party is deemed to have submitted himself to the
jurisdiction of the court.[30] This doctrine has been abandoned in the case of La
The purpose is to render it reasonably certain that the corporation will receive Naval Drug Corporation vs. Court of Appeals, et al.,[31] which became the basis
prompt and proper notice in an action against it or to insure that the summons of the adoption of a new provision in the former Section 23, which is now
be served on a representative so integrated with the corporation that such Section 20 of Rule 14 of the 1997 Rules. Section 20 now provides that "the
person will know what to do with the legal papers served on him. In other inclusion in a motion to dismiss of other grounds aside from lack of
words, `to bring home to the corporation notice of the filing of the action.' x x jurisdiction over the person of the defendant shall not be deemed a voluntary

27
appearance." The emplacement of this rule clearly underscores the purpose to
enforce strict enforcement of the rules on summons. Accordingly, the filing of
a motion to dismiss, whether or not belatedly filed by the defendant, his
authorized agent or attorney, precisely objecting to the jurisdiction of the court
over the person of the defendant can by no means be deemed a submission to
the jurisdiction of the court. There being no proper service of summons, the
trial court cannot take cognizance of a case for lack of jurisdiction over the
person of the defendant. Any proceeding undertaken by the trial court will
consequently be null and void.[32]

WHEREFORE, the petition is hereby GRANTED. The assailed Orders of


the public respondent trial court are ANNULLED and SET ASIDE. The
public respondent Regional Trial Court of Makati, Branch 132 is declared
without jurisdiction to take cognizance of Civil Case No. 98-824, and all its
orders and issuances in connection therewith are
hereby ANNULLED and SET ASIDE.

SO ORDERED.

28
178 Phil. 266 As a fourth cause of action, it was claimed that prior to the questioned
amendment, petitioner had all the qualifications to be a director of respondent
corporation, being a substantial stockholder thereof; that as a stockholder,
petitioner had acquired rights inherent in stock ownership, such as the rights
ANTONIO, J.: to vote and to be voted upon in the election of directors; and that in amending
the by-laws, respondents purposely provided for petitioner's disqualification
The instant petition for certiorari, mandamus and injunction, with prayer for and deprived him of his vested rights as afore-mentioned, hence the amended
issuance of writ of preliminary injunction, arose out of two cases filed by by-laws are null and void.[1]
petitioner with the Securities and Exchange Commission, as follows:
As additional causes of action, it was alleged that corporations have no
SEC CASE NO. 1375 inherent power to disqualify a stockholder from being elected as a director and,
On October 22, 1976, petitioner, as stockholder of respondent San Miguel therefore, the questioned act is ultra vires and void; that Andres M. Soriano,
Corporation, filed with the Securities and Exchange Commission (SEC) a Jr. and/or Jose M. Soriano, while representing other corporations, entered
petition for "declaration of nullity of amended by-laws, cancellation of into contracts (specifically a management contract) with respondent
certificate of filing of amended by-laws, injunction and damages with prayer corporation, which was allowed because the questioned amendment gave the
for a preliminary injunction" against the majority of the members of the Board Board itself the prerogative of determining whether they or other persons are
of Directors and San Miguel Corporation as an unwilling petitioner. The engaged in competitive or antagonistic business; that the portion of the
petition, entitled "John Gokongwei, Jr., vs. Andres Soriano, Jr., Jose amended by-laws which states that in determining whether or not a person is
M. Soriano, Enrique Zobel, engaged in competitive business, the Board may consider such factors as
Antonio Roxas, Emeterio Buñao, Walthrode B. Conde, Miguel Ortigas, business and family relationship, is unreasonable and oppressive and,
Antonio Prieto and San Miguel Corporation," was docketed as SEC Case No. therefore, void; and that the portion of the amended by-laws which requires
1375. that "all nominations for election of directors * * * shall be submitted in writing
to the Board of Directors at least five (5) working days before the date of the
As a first cause of action, petitioner alleged that on September 18, 1976, Annual Meeting" is likewise unreasonable and oppressive.
individual respondents amended the by-laws of the corporation, basing their
authority to do so on a resolution of the stockholders adopted on March 13, It was, therefore, prayed that the amended by-laws be declared null and void
1961, when the outstanding capital stock of respondent corporation was only and the certificate of filing thereof be cancelled, and that individual
P70,139,740.00, divided into 5,513,974 common shares at P10.00 per share respondents be made to pay damages, in specified amounts, to petitioner.
and 150,000 preferred shares at P100.00 per share. At the time of the On October 28, 1976, in connection with the same case, petitioner filed with
amendment, the outstanding and paid up shares totalled 30,127,043, with a the Securities and Exchange Commission an "Urgent Motion for Production
total par value of P301,270,430.00. It was contended that according to section and Inspection of Documents," alleging that the Secretary of respondent
22 of the Corporation Law and Article VIII of the by-laws of the corporation, corporation refused to allow him to inspect its records despite request made
the power to amend, modify, repeal or adopt new by-laws may be delegated to by petitioner for production of certain documents enumerated in the request,
the Board of Directors only by the affirmative vote of stockholders and that respondent corporation had been attempting to suppress information
representing not less than 2/3 of the subscribed and paid up capital stock of from its stockholders despite a negative reply by the SEC to its query regarding
the corporation, which 2/3 should have been computed on the basis of the their authority to do so. Among the documents requested to be copied
capitalization at the time of the amendment. Since the amendment was based were: (a) minutes of the stockholder's meeting held on March 13, 1961; (b)
on the 1961 authorization, petitioner contended that the Board acted without copy of the management contract between San Miguel Corporation and
authority and in usurpation of the power of the stockholders. A. Soriano Corporation (ANSCOR); (c) latest balance sheet of San Miguel
As a second cause of action, it was alleged that the authority granted in 1961 International, Inc.; (d) authority of the stockholders to invest the funds of
had already been exercised in 1962 and 1963, after which the authority of the respondent corporation in San Miguel International, Inc.; and (e) lists of
Board ceased to exist. salaries, allowances, bonuses, and other compensation, if any, received by
Andres M. Soriano, Jr. and/or Jose M. Soriano from San
As a third cause of action, petitioner averred that the membership of the Board Miguel International, Inc. and/or its successor-in-interest.
of Directors had changed since the authority was given in 1961, there being six
(6) new directors.
29
The "Urgent Motion for Production and Inspection of Documents" was competitive to that of respondent corporation, began acquiring shares therein,
opposed by respondents, alleging, among others, that the motion has no legal until September 1976 when its total holding amounted to 622,987 shares; that
basis; that the demand is not based on good faith; that the motion is premature in October 1972, the Consolidated Foods Corporation (CFC) likewise began
since the materiality or relevance of the evidence sought cannot be determined acquiring shares in respondent corporation, until its total holdings amounted
until the issues are joined; that it fails to show good cause and constitutes to P543,959.00 in September 1976; that on January 12, 1976, petitioner, who
continued harassment; and that some of the information sought are not part is president and controlling shareholder of Robina and CFC (both closed
of the records of the corporation and, therefore, privileged. corporations) purchased 5,000 shares of stock of respondent corporation, and
thereafter, in behalf of himself, CFC and Robina, "conducted malevolent and
During the pendency of the motion for production, respondents San Miguel malicious publicity campaign against SMC" to generate support from the
Corporation, Enrique Conde, Miguel Ortigas and Antonio Prieto filed their stockholder "in his effort to secure for himself and in representation
answer to the petition, denying the substantial allegations therein and stating, of Robina and CFC interests, a seat in the Board of Directors of SMC," that in
by way of affirmative defenses that "the action taken by the Board of Directors the stockholders' meeting of March 18, 1976, petitioner was rejected by the
on September 18, 1976 resulting in the * * * amendments is valid and legal stockholders in his bid to secure a seat in the Board of Directors on the basic
because the power to 'amend, modify, repeal or adopt new By-laws' delegated issue that petitioner was engaged in a competitive business and his securing a
to said Board on March 13, 1961 and long prior thereto has never been revoked, seat would have subjected respondent corporation to grave disadvantages;
withdrawn or otherwise nullified by the stockholders of SMC"; that contrary to that "petitioner nevertheless vowed to secure a seat in the Board of Directors
petitioner's claim, "the vote requirement for a valid delegation of the power to at the next annual meeting"; that thereafter the Board of Directors amended
amend, repeal or adopt new by-laws is determined in relation to the total the by-laws as afore-stated.
subscribed capital stock at the time the delegation of said power is made, not
when the Board opts to exercise said delegated power"; that petitioner has not As counterclaims, actual damages, moral damages, exemplary damages,
availed of his intra-corporate remedy for the nullification of the amendment, expenses of litigation and attorney's fees were presented against petitioner.
which is to secure its repeal by vote of the stockholders representing a majority
of the subscribed capital stock at any regular or special meeting, as provided Subsequently, a Joint Omnibus Motion for the striking out of the motion for
in Article VIII, section 1 of the by-laws and section 22 of the Corporation Law, production and inspection of documents was filed by all the respondents. This
hence the petition is premature; that petitioner is estopped from questioning was duly opposed by petitioner. At this juncture,
the amendments on the ground of lack of authority of the Board, since he failed respondents Emigdio Tanjuatco, Sr. and Eduardo R. Visaya were allowed to
to object to other amendments made on the basis of the same 1961 intervene as oppositors and they accordingly filed their oppositions-in-
authorization; that the power of the corporation to amend its by-laws is broad, intervention to the petition.
subject only to the condition that the by-laws adopted should not be On December 29, 1976, the Securities and Exchange Commission resolved the
inconsistent with any existing law; that respondent corporation should not be motion for production and inspection of documents by issuing Order No. 26,
precluded from adopting protective measures to minimize or eliminate Series of 1977, stating, in part as follows:
situations where its directors might be tempted to put their personal interests
over that of the corporation; that the questioned amended by-laws is a matter "Considering the evidence submitted before the Commission by the petitioner
of internal policy and the judgment of the Board should not be interfered with; and respondents in the above-entitled case, it is hereby ordered:
that the by-laws, as amended, are valid and binding and are intended to
prevent the possibility of violation of criminal and civil laws prohibiting
combinations in restraint of trade; and that the petition states no cause of 1. That respondents produce and permit the inspection, copying and
action. It was, therefore, prayed that the petition be dismissed and that photographing, by or on behalf of the petitioner-movant, John Gokongwei, Jr.,
petitioner be ordered to pay damages and attorney's fees to respondents. The of the minutes of the stockholders' meeting of the respondent San Miguel
application for writ of preliminary injunction was likewise opposed on various Corporation held on March 13, 1961, which are in the possession, custody and
grounds. control of the said corporation, it appearing that the same is material and
relevant to the issues involved in the main case. Accordingly, the respondents
Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their should allow petitioner-movant entry in the principal office of the respondent
opposition to the petition, denying the material averments thereof and stating,
Corporation, San Miguel Corporation on January 14, 1977, at 9:30 o'clock in
as part of their affirmative defenses, that in August 1972, the
Universal Robina Corporation (Robina), a corporation engaged in business the morning for purposes of enforcing the rights herein granted; it being
understood that the inspection, copying and photographing of the said
30
documents shall be undertaken under the direct and strict supervision of this restraining respondents from holding the special stockholders' meeting as
Commission. Provided, however, that other documents and/or papers not scheduled. This motion was duly opposed by respondents.
heretofore included are not covered by this Order and any inspection thereof
On February 10, 1977, respondent Commission issued an order denying the
shall require the prior permission of this Commission;
motion for issuance of temporary restraining order. After receipt of the order
of denial, respondents conducted the special stockholders' meeting wherein
2. As to the Balance Sheet of San Miguel International, Inc. as well as the list the amendments to the by-laws were ratified. On February 14, 1977, petitioner
of salaries, allowances, bonuses, compensation and/or remuneration received filed a consolidated motion for contempt and for nullification of the special
by respondent Jose M. Soriano, Jr. and Andres Soriano from San Miguel stockholders' meeting.
International, Inc. and/or its successors-in-interest, the Petition to produce A motion for reconsideration of the order denying petitioner's motion for
and inspect the same is hereby DENIED, as petitioner-movant is not a summary judgment was filed by petitioner before respondent Commission on
stockholder of San Miguel International, Inc. and has, therefore, no inherent March 10, 1977. Petitioner alleges that up to the time of the filing of the instant
right to inspect said documents; petition, the said motion had not yet been scheduled for hearing. Likewise, the
motion for reconsideration of the order granting in part and denying in part
3. In view of the Manifestation of petitioner-movant dated November 29, petitioner's motion for production of records had not yet been resolved.
1976, with drawing his request to copy and inspect the management contract In view of the fact that the annual stockholders' meeting of respondent
between San Miguel Corporation and A. Soriano Corporation and the renewal corporation had been scheduled for May 10, 1977, petitioner filed with
and amendments thereof for the reason that he had already obtained the same, respondent Commission a Manifestation stating that he intended to run for
the Commission takes note thereof; and the position of director of respondent corporation. Thereafter, respondents
filed a Manifestation with respondent Commission, submitting a Resolution of
4. Finally, the Commission holds in abeyance the resolution on the matter of the Board of Directors of respondent corporation disqualifying and precluding
production and inspection of the authority of the stockholders of San Miguel petitioner from being a candidate for director unless he could submit evidence
on May 3, 1977 that he does not come within the disqualifications specified in
Corporation to invest the funds of respondent corporation in San Miguel
the amendment to the by-laws, subject matter of SEC Case No. 1375. By
International, Inc., until after the hearing on the merits of the principal issues reason thereof, petitioner filed a manifestation and motion to resolve pending
in the above entitled case. 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
This Order is immediately executory upon its approval."[2] jurisdiction by the respondent Commission, to petitioner's irreparable damage
and prejudice. Allegedly despite subsequent Manifestation to prod
respondent Commission to act, petitioner was not heard prior to the date of
Dissatisfied with the foregoing Order, petitioner moved for its reconsideration. the stockholders' meeting.
Meanwhile, on December 10, 1976, while the petition was yet to be Petitioner alleges that there appears a deliberate and concerted inability on the
heard, respondent corporation issued a notice of special stockholders' meeting part of the SEC to act, hence petitioner came to this Court.
for the purpose of "ratification and confirmation of the amendment to the By-
laws," setting such meeting for February 10, 1977. This prompted petitioner to SEC CASE NO. 1423
ask respondent Commission for a summary judgment insofar as the first cause
of action is concerned, for the alleged reason that by calling a special Petitioner likewise alleges that, having discovered that respondent corporation
stockholders' meeting for the aforesaid purpose, private respondents admitted has been investing corporate funds in other corporations and businesses
the invalidity of the amendments of September 18, 1976. The motion for outside of the primary purpose clause of the corporation, in violation of section
summary judgment was opposed by private respondents. Pending action on 17-1/2 of the Corporation Law, he filed with respondent Commission, on
the motion, petitioner filed an "Urgent Motion for the Issuance of a Temporary January 20, 1977, a petition seeking to have private respondents Andres
Restraining Order," praying that pending the determination of petitioner's M. Soriano, Jr. and Jose M. Soriano, as well as the respondent corporation
application for the issuance of a preliminary injunction and/or petitioner's declared guilty of such violation, and ordered to account for such investments
motion for summary judgment, a temporary restraining order be issued, and to answer for damages.

31
On February 4, 1977, motions to dismiss were filed by private respondents, to On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a
which a consolidated motion to strike and to declare individual respondents in restraining order had been issued by this Court, or on May 9, 1977, the
default and an opposition ad abundantiorem cautelam were filed by respondent Commission served upon petitioner copies of the following orders:
petitioner. Despite the fact that said motions were filed as early as February
4, 1977, the Commission acted thereon only on April 25, 1977, when it denied (1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's
respondents' motions to dismiss and gave them two (2) days within which to motion for reconsideration, with its supplement, of the order of the
file their answer, and set the case for hearing on April 29 and May 3, 1977. Commission denying in part petitioner's motion for production of documents,
petitioner's motion for reconsideration of the order denying the issuance of a
Respondents issued notices of the annual stockholders' meeting, including in temporary restraining order, and petitioner's consolidated motion to declare
the Agenda thereof, the following: respondents in contempt and to nullify the stockholders' meeting;
"6. Reaffirmation of the authorizations to the Board of Directors by the (2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to
stockholders at the meeting on March 20, 1972 to invest corporate funds in run as a director of respondent corporation but stating that he should not sit
other companies or businesses or for purposes other than the main purpose as such if elected, until such time that the Commission has decided the validity
for which the Corporation has been organized, and ratification of the of the by-laws in dispute, and denying deferment of Item 6 of the Agenda for
investments thereafter made pursuant thereto." the annual stockholders' meeting; and
(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's
By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an motion for reconsideration of the order of respondent Commission denying
urgent motion for the issuance of a writ of preliminary injunction to restrain petitioner's motion for summary judgment.
private respondents from taking up Item 6 of the Agenda at the annual
stockholders' meeting, requesting that the same be set for hearing on May 3, It is petitioner's assertions anent the foregoing orders, (1) that respondent
1977, the date set for the second hearing of the case on the merits. Respondent Commission acted with indecent haste and without circumspection in issuing
Commission, however, cancelled the dates of hearing originally scheduled and the aforesaid orders to petitioner's irreparable damage and injury; (2) that it
reset the same to May 16 and 17, 1977, or after the scheduled annual acted without jurisdiction and in violation of petitioner' right to due process
stockholders' meeting. For the purpose of urging the Commission to act, when it decided en banc an issue not raised before it and still pending before
petitioner filed an urgent manifestation on May 3, 1977, but this one of its Commissioners, and without hearing petitioner thereon despite
notwithstanding, no action has been taken up to the date of the filing of the petitioner's request to have the same calendared for hearing; and (3) that the
instant petition. respondents acted oppressively against the petitioner in violation of his rights
as a stockholder, warranting immediate judicial intervention.
With respect to the afore-mentioned SEC cases, it is petitioner's contention
before this Court that respondent Commission gravely abused its discretion It is prayed in the supplemental petition that the SEC orders complained of be
when it failed to act with deliberate dispatch on the motions of petitioner declared null and void and that respondent Commission be ordered to allow
seeking to prevent illegal and/or arbitrary impositions or limitations upon his petitioner to undertake discovery proceedings relative to San Miguel
rights as stockholder of respondent corporation, and that respondents are International, Inc. and thereafter to decide SEC Cases Nos. 1375 and 1423 on
acting oppressively against petitioner, in gross derogation of petitioner's rights the merits.
to property and due process. He prayed that this Court direct respondent SEC On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose
to act on collateral incidents pending before it. M. Soriano filed their comment, alleging that the petition is without merit for
On May 6, 1977, this Court issued a temporary restraining order restraining the following reasons:
private respondents from disqualifying or preventing petitioner from running (1) that the petitioner and the interests he represents are engaged in
or from being voted as director of respondent corporation and from submitting businesses competitive and antagonistic to that of respondent San Miguel
for ratification or confirmation or from causing the ratification or confirmation Corporation, it appearing that he owns and controls a greater portion of his
of Item 6 of the Agenda of the annual stockholders' meeting on May 10, 1977, SMC stock thru the Universal Robina Corporation and the Consolidated Foods
or from making effective the amended by-laws of respondent corporation, Corporation, which corporations are engaged in businesses directly and
until further orders from this Court or until the Securities and Exchange substantially competing with the allied businesses of respondent SMC and of
Commission acts on the matters complained of in the instant petition. corporations in which SMC has substantial investments. Further, when CFC
32
and Robina had accumulated shares in SMC, the Board of Directors of SMC the respondent Commission acted without circumspection, unfairly and
realized the clear and present danger that competitors or antagonistic parties oppressively against petitioner, warranting the intervention of this Court; (2)
may be elected directors and thereby have easy and direct access to SMC's a derivative suit, such as the instant case, is not rendered academic by the act
business and trade secrets and plans; of a majority of stockholders, such that the discussion, ratification and
confirmation of Item 6 of the Agenda of the annual stockholders' meeting of
(2) that the amended by-laws were adopted to preserve and protect May 10, 1977 did not render the case moot; that the amendment to the by-laws
respondent SMC from the clear and present danger that business competitors, which specifically bars petitioner from being a director is void since it deprives
if allowed to become directors, will illegally and unfairly utilize their direct him of his vested rights.
access to its business secrets and plans for their own private gain to the
irreparable prejudice of respondent SMC, and, ultimately, its Respondent Commission, thru the Solicitor General, filed a separate comment,
stockholders. Further, it is asserted that membership of a competitor in the alleging that after receiving a copy of the restraining order issued by this Court
Board of Directors is a blatant disregard of no less than the Constitution and and noting that the restraining order did not foreclose action by it, the
pertinent laws against combinations in restraint of trade; Commission en banc issued Orders Nos. 449, 450 and 451 in SEC Case No.
1375.
(3) that the by-laws are valid and binding since a corporation has the inherent
right and duty to preserve and protect itself by excluding competitors and In answer to the allegation in the supplemental petition, it states that Order
antagonistic parties, under the law of self-preservation, and it should be No. 450 which denied deferment of Item 6 of the Agenda of the annual
allowed a wide latitude in the selection of means to preserve itself; stockholders' meeting of respondent corporation, took into consideration an
urgent manifestation filed with the Commission by petitioner on May 3, 1977
(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 which prayed, among others, that the discussion of Item 6 of the Agenda be
and 1423 was due to petitioner's own acts or omissions, since he failed to have deferred. The reason given for denial of deferment was that "such action is
the petition to suspend, pendentelite, the amended by-laws calendared for within the authority of the corporation as well as falling within the sphere of
hearing. It was emphasized that it was only on April 29, 1977 that petitioner stockholders' right to know, deliberate upon and/or to express their wishes
calendared the aforesaid petition for suspension (preliminary injunction) for regarding disposition of corporate funds considering that their investments
hearing on May 3, 1977. The instant petition being dated May 4, 1977, it is are the ones directly affected." It was alleged that the main petition has,
apparent that respondent Commission was not given a chance to act "with therefore, become moot and academic.
deliberate dispatch"; and
On September 29, 1977, petitioner filed a second supplemental petition with
(5) that even assuming that the petition was meritorious, it has become moot prayer for preliminary injunction, alleging that the actuations of respondent
and academic because respondent Commission has acted on the pending SEC tended to deprive him of his right to due process, and "that all possible
incidents complained of. It was, therefore, prayed that the petition be questions on the facts now pending before the respondent Commission are
dismissed. now before this Honorable Court which has the authority and the competence
On May 21, 1977, respondent Emigdio G. Tanjuatco, Sr. filed his comment, to act on them as it may see fit." (Rollo, pp. 927-928.)
alleging that the petition has become moot and academic for the reason, Petitioner, in his memorandum, submits the following issues for resolution:
among others, that the acts of private respondents sought to be enjoined have
reference to the annual meeting of the stockholders of respondent San Miguel (1) whether or not the provisions of the amended by-laws of respondent
Corporation, which was held on May 10, 1977; that in said meeting, in corporation, disqualifying a competitor from nomination or election to the
compliance with the order of respondent Commission, petitioner was allowed Board of Directors are valid and reasonable;
to run and be voted for as director; and that in the same meeting, Item 6 of the
Agenda was discussed, voted upon, ratified and confirmed. Further, it was (2) whether or not respondent SEC gravely abused its discretion in denying
averred that the questions and issues raised by petitioner are pending in the petitioner's request for an examination of the records of San Miguel
Securities and Exchange Commission which has acquired jurisdiction over the International, Inc., a fully owned subsidiary of San Miguel Corporations; and
case, and no hearing on the merits has been had; hence the elevation of these (3) whether or not respondent SEC committed grave abuse of discretion in
issues before the Supreme Court is premature. allowing discussion of Item 6 of the Agenda of the Annual Stockholders'
Petitioner filed a reply to the aforesaid comments, stating that the petition Meeting on May 10, 1977, and the ratification of the investment in a foreign
presents justiciable questions for the determination of this Court because (1)
33
corporation of the corporate funds, allegedly in violation of section 17-1/2 of interest demands an early disposition of the case," and in Republic v. Central
the Corporation Law. Surety and Insurance Company,[7] this Court denied remand of the third-
party complaint to the trial court for further proceedings, citing precedents
I where this Court, in similar situations, resolved to decide the cases on the
Whether or not amended by-laws are valid is purely a legal question, which merits, instead of remanding them to the trial court where (a) the ends of
public interest requires to be resolved - justice would not be subserved by the remand of the case; or (b) where public
interest demands an early disposition of the case; or (c) where the trial court
It is the position of the petitioner that "it is not necessary to remand the case had already received all the evidence presented by both parties and the
to respondent SEC for an appropriate ruling on the intrinsic validity of the Supreme Court is now in a position, based upon said evidence, to decide the
amended by-laws in compliance with the principle of exhaustion of case on its merits.[8] It is settled that the doctrine of primary jurisdiction has
administrative remedies", considering that: first: "whether or not the no application where only a question of law is involved.8a Because uniformity
provisions of the amended by-laws are intrinsically valid * * * is purely a legal may be secured through review by a single Supreme Court, questions of law
question. There is no factual dispute as to what the provisions are and may appropriately be determined in the first instance by courts.8b In the case
evidence is not necessary to determine whether such amended by-laws are at bar, there are facts which cannot be denied, viz.: that the amended by-laws
valid as framed and approved * * *"; second: "it is for the interest and guidance were adopted by the Board of Directors of the San Miguel Corporation in the
of the public that an immediate and final ruling on the question be made * * exercise of the power delegated by the stockholders ostensibly pursuant to
*"; third: "petitioner was denied due process by SEC" when "Commissioner de section 22 of the Corporation Law; that in a special meeting on February 10,
Guzman had openly shown prejudice against petitioner * * *," and 1977 held specially for that purpose, the amended by-laws were ratified by
"Commissioner Sulit * * * approved the amended by-laws ex-parte and more than 80% of the stockholders of record; that the foreign investment in
obviously found the same intrinsically valid"; and finally: "to remand the case the Hongkong Brewery and Distillery, a beer manufacturing company
to SEC would only entail delay rather than serve the ends of justice." in Hongkong, was made by the San Miguel Corporation in 1948; and that in
the stockholders' annual meeting held in 1972 and 1977, all foreign
Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that investments and operations of San Miguel Corporation were ratified by the
this Court resolve the legal issues raised by the parties in keeping with the stockholders.
"cherished rules of procedure" that "a court should always strive to settle the
entire controversy in a single proceeding leaving no root or branch to bear the II
seeds of future litigation," citing Gayos v. Gayos.[3] To the same effect is the
prayer of San Miguel Corporation that this Court resolve on the merits the Whether or not the amended by-laws of SMC disqualifying a competitor from
validity of its amended by-laws and the rights and obligations of the nomination or election to the Board of Directors of SMC are valid and
parties thereunder, otherwise "the time spent and effort exerted by the parties reasonable -
concerned and, more importantly, by this Honorable Court, would have been The validity or reasonableness of a by-law of a corporation is purely a question
for naught because the main question will come back to this Honorable Court of law.[9] Whether the by-law is in conflict with the law of the land, or with the
for final resolution." Respondent Eduardo R. Visaya submits a similar appeal charter of the corporation, or is in a legal sense unreasonable and therefore
It is only the Solicitor General who contends that the case should be remanded unlawful is a question of law.[10] This rule is subject, however, to the limitation
to the SEC for hearing and decision of the issues involved, invoking the latter's that where the reasonableness of a by-law is a mere matter of judgment, and
primary jurisdiction to hear and decide cases involving intra-corporate one upon which reasonable minds must necessarily differ, a court would not
controversies. be warranted in substituting its judgment instead of the judgment of those who
are authorized to make by-laws and who have exercised their authority.[11]
It is an accepted rule of procedure that the Supreme Court should always strive
to settle the entire controversy in a single proceeding, leaving no root or branch Petitioner claims that the amended by-laws are invalid and unreasonable
to bear the seeds of future litigation. [4] Thus, in Francisco v. City because they were "tailored to suppress the minority and prevent them from
of Davao,[5] this Court resolved to decide the case on the merits instead of having representation in the Board," at the same time depriving petitioner of
remanding it to the trial court for further proceedings since the ends of justice his "vested right" to be voted for and to vote for a person of his choice as
would not be subserved by the remand of the case. In Republic v. Security director.
Credit and Acceptance Corporation, et al.,[6] this Court, finding that the main
issue is one of law, resolved to decide the case on the merits "because public
34
Upon the other hand, respondents Andres M. Soriano, Jr., Jose Layer Pullets 33.0% 24.0% 57.0%
M. Soriano and San Miguel Corporation content that exclusion of a competitor
from the Board is a legitimate corporate purpose, considering that being a
Dressed Chicken 35.0% 14.0% 49.0%
competitor, petitioner cannot devote an unselfish and undivided loyalty to the
corporation; that it is essentially a preventive measure to assure stockholders
of San Miguel Corporation of reasonable protection from the unrestrained self- Poultry & Hog Feeds 40.0% 12.0% 52.0%
interest of those charged with the promotion of the corporate enterprise; that
access to confidential information by a competitor may result either in the Ice Cream 70.0% 13.0% 83.0%
promotion of the interest of the competitor at the expense of the San Miguel
Corporation, or the promotion of both the interests of petitioner and
respondent San Miguel Corporation, which may, therefore, result in a Instant Coffee 45.0% 40.0% 85.0%
combination or agreement in violation of Article 186 of the Revised Penal Code
by destroying free competition to the detriment of the consuming public. It is Woven Fabrics 17.5% 9.1% 26.6%
further argued that there is no vested right of any stockholder under Philippine
law to be voted as director of a corporation.
Thus, according to respondent SMC, in 1976, the areas of competition affecting
It is alleged that petitioner, as of May 6, 1978 has exercised, personally or thru SMC involved product sales of over P400 million or more than 20% of the P2
two corporations owned or controlled by him, control over the following billion total product sales of SMC. Significantly, the combined market shares
shareholdings in San Miguel Corporation, viz.: (a) John Gokongwei, Jr. - of SMC and CFC-Robina in layer pullets, dressed chicken, poultry and hog
6,325 shares; (b) Universal Robina Corporation - 738,647 shares; (c) CFC feeds, ice cream, instant coffee and woven fabrics would result in a position of
Corporation - 658,313 shares, or a total of 1,403,285 shares. Since the such dominance as to affect the prevailing market factors.
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 It is further asserted that in 1977, the CFC-Robina group was in direct
owned or controlled by petitioner represents 4.2344% of the total outstanding competition on product lines which, for SMC, represented sales amounting to
capital stock of San Miguel Corporation. It is also contended that petitioner is more than P478 million. In addition, CFC-Robina was directly competing in
the president and substantial stockholder of Universal Robina Corporation the sale of coffee with Filipro, a subsidiary of SMC, which product line
and CFC Corporation, both of which are allegedly controlled by petitioner and represented sales for SMC amounting to more than P275 million. The CFC-
members of his family. It is also claimed that both the Robina group (Robitex, excluding Litton Mills recently acquired by petitioner)
Universal Robina Corporation and the CFC Corporation are engaged in is purportedly also in direct competition with Ramie Textile, Inc., another
businesses directly and substantially competing with the allied businesses of subsidiary of SMC, in product sales amounting to more than P95 million. The
San Miguel Corporation, and of corporations in which SMC has substantial areas of competition between SMC and CFC-Robina in 1977 represented,
investments. therefore, for SMC, product sales of more than P849 million.

ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S According to private respondents, at the Annual Stockholders' Meeting of
CORPORATIONS AND SAN MIGUEL CORPORATION March 18, 1976, 9,894 stockholders, in person or by proxy, owning 23,436,754
shares in SMC, or more than 90% of the total outstanding shares of SMC,
According to respondent San Miguel Corporation, the areas of competition are rejected petitioner's candidacy for the Board of Directors because they
enumerated in its Board Resolution dated April 28, 1978, thus: "realized the grave dangers to the corporation in the event a competitor gets a
board seat in SMC." On September 18, 1978, the Board of Directors of SMC,
PRODUCT LINE ESTIMATED 1977 MARKET SHARETOTAL by "virtue of powers delegated to it by the stockholders," approved the
amendment to the by-laws in question. At the meeting of February 10, 1977,
SMC ROBINA-CFC these amendments were confirmed and ratified by 5,716 shareholders owning
24,283,945 shares, or more than 80% of the total outstanding shares. Only 12
shareholders, representing 7,005 shares, opposed the confirmation and
Table Eggs 0.6% 10.0% 10.6%
ratification. At the Annual Stockholders' Meeting of May 10, 1977, 11,349
shareholders, owning 27,257,014 shares, or more than 90% of the outstanding
shares, rejected petitioner's candidacy, while 496 stockholders, representing
35
1,648,801 shares voted for him. On the May 9, 1978 Annual Stockholders' matters within the limits of the act of incorporation and lawfully enacted by-
Meeting, 12,480 shareholders, owning more than 30 million shares, or more laws and not forbidden by law,"[15] To this extent, therefore, the stockholder
than 90% of the total outstanding shares, voted against petitioner. may be considered to have "parted with his personal right or privilege to
regulate the disposition of his property which he has invested in the capital
AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF stock of the corporation, and surrendered it to the will of the majority of his
DIRECTORS EXPRESSLY CONFERRED BY LAW fellow incorporators. * * * It can not therefore be justly said that the contract,
Private respondents contend that the disputed amended by-laws were adopted express or implied, between the corporation and the stockholders is infringed
by the Board of Directors of San Miguel Corporation as a measure of self- * * * by any act of the former which is authorized by a majority * * *."[16]
defense to protect the corporation from the clear and present danger that the Pursuant to section 18 of the Corporation Law, any corporation may amend its
election of a business competitor to the Board may cause upon the corporation articles of incorporation by a vote or written assent of the stockholders
and the other stockholders "irreparable prejudice." Submitted for resolution, representing at least two-thirds of the subscribed capital stock of the
therefore, is the issue -- whether or not respondent San Miguel Corporation corporation. If the amendment changes, diminishes or restricts the rights of
could, as a measure of self-protection, disqualify a competitor from the existing shareholders, then the dissenting minority has only one
nomination and election to its Board of Directors. right, viz.: "to object thereto in writing and demand payment for his
It is recognized by all authorities that "every corporation has the inherent share." Under section 22 of the same law, the owners of the majority of the
power to adopt by-laws 'for its internal government, and to regulate the subscribed capital stock may amend or repeal any by-law or adopt new by-
conduct and prescribe the rights and duties of its members towards itself and laws. It cannot be said, therefore, that petitioner has a vested right to be
among themselves in reference to the management of its affairs.'" [12] At elected director, in the face of the fact that the law at the time such right as
common law, the rule was "that the power to make and adopt by-laws stockholder was acquired contained the prescription that the corporate charter
was inherent in every corporation as one of its necessary and inseparable legal and the by-law shall be subject to amendment, alteration and modification. [17]
incidents. And it is settled throughout the United States that in the absence of It being settled that the corporation has the power to provide for the
positive legislative provisions limiting it, every private corporation has this qualifications of its directors, the next question that must be considered is
inherent power as one of its necessary and inseparable legal incidents, whether the disqualification of a competitor from being elected to the Board of
independent of any specific enabling provision in its charter or in general law, Directors is a reasonable exercise of corporate authority.
such power of self-government being essential to enable the corporation to
accomplish the purposes of its creation."[13] A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE
CORPORATION AND ITS SHAREHOLDERS
In this jurisdiction, under section 21 of the Corporation Law, a corporation
may prescribe in its by-laws "the qualifications, duties and compensation of Although in the strict and technical sense, directors of a private corporation
directors, officers and employees * * *." This must necessarily refer to a are not regarded as trustees, there cannot be any doubt that their character is
qualification in addition to that specified by section 30 of the Corporation Law, that of a fiduciary insofar as the corporation and the stockholders as a body are
which provides that "every director must own in his right at least one share of concerned. As agents entrusted with the management of the corporation for
the capital stock of the stock corporation of which he is a director * * *." the collective benefit of the stockholders, "they occupy a fiduciary relation, and
In Government v. El Hogar,[14] the Court sustained the validity of a provision in this sense the relation is one of trust."[18] "The ordinary trust relationship of
in the corporate by-law requiring that persons elected to the Board of Directors directors of a corporation and stockholders," according to Ashman v.
must be holders of shares of the paid up value of P5,000.00, which shall be Miller[19] "is not a matter of statutory or technical law. It springs from the fact
held as security for their action, on the ground that section 21 of the that directors have the control and guidance of corporate affairs and property
Corporation Law expressly gives the power to the corporation to provide in its and hence of the property interests of the stockholders. Equity recognizes that
by-laws for the qualifications of directors and is "highly prudent and in stockholders are the proprietors of the corporate interests and are ultimately
conformity with good practice." the only beneficiaries thereof * * *."
NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR Justice Douglas, in Pepper v. Litton,[20] emphatically restated the standard of
fiduciary obligation of the directors of corporations, thus:
Any person "who buys stock in a corporation does so with the knowledge that
its affairs are dominated by a majority of the stockholders and that he "A director is a fiduciary. * * * Their powers are powers in trust. * * * He who
impliedly contracts that the will of the majority shall govern in all is in such fiduciary position cannot serve himself first and his cestuis second. *
36
* * He cannot manipulate the affairs of his corporation to their detriment and It is a settled state law in the United States, according to Fletcher, that
in disregard of the standards of common decency. He cannot by the corporations have the power to make by-laws declaring a person employed in
intervention of a corporate entity violate the ancient precept against serving the service of a rival company to be ineligible for the corporation's Board of
two masters. * * * He cannot utilize his inside information and strategic Directors. "* * * (A)n amendment which renders ineligible, or if elected,
position for his own preferment. He cannot violate rules of fair play by doing subjects to removal, a director if he be also a director in a corporation whose
indirectly through the corporation what he could not do so directly. He cannot business is in competition with or is antagonistic to the other corporation is
valid."[24] This is based upon the principle that where the director is so
use his power for his personal advantage and to the detriment of the
employed in the service of a rival company, he cannot serve both, but must
stockholders and creditors no matter how absolute in terms that power may betray one or the other. Such an amendment "advances the benefit of the
be and no matter how meticulous he is to satisfy technical requirements. For corporation and is good." An exception exists in New Jersey, where the
that power is at all times subject to the equitable limitation that it may not be Supreme Court held that the Corporation Law in New Jersey prescribed the
exercised for the aggrandizement, preference, or advantage of the fiduciary to only qualification, and therefore the corporation was not empowered to add
the exclusion or detriment of the cestuis." additional qualifications.[25] This is the exact opposite of the situation in the
Philippines because as stated heretofore, section 21 of the Corporation Law
And in Cross v. West Virginia Cent. & P. R. R. Co.,[21] it was said: expressly provides that a corporation may make by-laws for the qualifications
of directors. Thus, it has been held that an officer of a corporation cannot
"* * * A person cannot serve two hostile and adverse masters without detriment engage in a business in direct competition with that of the corporation where
to one of them. A judge cannot be impartial if personally interested in the he is a director by utilizing information he has received as such officer, under
cause. No more can a director. Human nature is too weak for this. Take "the established law that a director or officer of a corporation may not enter
whatever statute provision you please giving power to stockholders to choose into a competing enterprise which cripples or injures the business of the
directors, and in none will you find any express prohibition against a discretion corporation of which he is an officer or director."[26]
to select directors having the company's interest at heart, and it would simply It is also well established that corporate officers "are not permitted to use their
be going far to deny by mere implication the existence of such a salutary power. position of trust and confidence to further their private interests."[27] In a case
where directors of a corporation cancelled a contract of the corporation for
"* * * If the by-law is to be held reasonable in disqualifying a stockholder in a exclusive sale of a foreign firm's products, and after establishing a rival
competing company from being a director, the same reasoning would apply to business, the directors entered into a new contract themselves with the foreign
firm for exclusive sale of its products, the court held that equity would regard
disqualify the wife and immediate member of the family of such stockholder,
the new contract as an offshoot of the old contract and, therefore, for the
on account of the supposed interest of the wife in her husband's affairs, and
benefit of the corporation, as a "faultless fiduciary may not reap the fruits of
his supposed influence over her. It is perhaps true that such stockholders his misconduct to the exclusion of his principal.[28]
ought not to be condemned as selfish and dangerous to the best interest of the
corporation until tried and tested. So it is also true that we cannot condemn The doctrine of "corporate opportunity"[29] is precisely a recognition by the
as selfish and dangerous and unreasonable the action of the board in passing courts that the fiduciary standards could not be upheld where the fiduciary was
the by-law. The strife over the matter of control in this corporation as in many acting for two entities with competing interests. This doctrine rests
others is perhaps carried on not altogether in the spirit of brotherly love and fundamentally on the unfairness, in particular circumstances, of an officer or
affection. The only test that we can apply is as to whether or not the action of director taking advantage of an opportunity for his own personal profit when
the interest of the corporation justly calls for protection.[30]
the Board is authorized and sanctioned by law. * * *." [22]
It is not denied that a member of the Board of Directors of the San Miguel
These principles have been applied by this Court in previous cases. [23] Corporation has access to sensitive and highly confidential information, such
as: (a) marketing strategies and pricing structure; (b) budget for expansion
AN AMENDMENT TO THE CORPORATE BY-LAW WHICH RENDERS A and diversification; (c) research and development; and (d) sources of funding,
STOCKHOLDER INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO availability of personnel, proposals of mergers or tie-ups with other firms.
DIRECTOR IN A CORPORATION WHOSE BUSINESS IS IN COMPETITION
WITH THAT OF THE OTHER CORPORATION, HAS BEEN SUSTAINED AS It is obviously to prevent the creation of an opportunity for an officer or
VALID director of San Miguel Corporation, who is also the officer or owner of a
37
competing corporation, from taking advantage of the information which he (3) A director shall not be an officer, agent, employee, attorney, or trustee in
acquires as director to promote his individual or corporate interests to the any other firm, company, or association which competes with the subject
prejudice of San Miguel Corporation and its stockholders, that the questioned corporation.
amendment of the by-laws was made. Certainly, where two corporations are
competitive in a substantial sense, it would seem improbable, if not
impossible, for the director, if he were to discharge effectively his duty, to (4) A director shall be of good moral character as an essential qualification to
satisfy his loyalty to both corporations and place the performance of his holding office.
corporate duties above his personal concerns.
(5) No person who is an attorney against the corporation in a law suit is
Thus, in McKee Co. v. First National Bank of San Diego, supra, the court
sustained as valid and reasonable an amendment to the by-laws of a bank, eligible for service on the board." (At p. 7.)
requiring that its directors should not be directors, officers, employees, agents,
nominees or attorneys of any other banking corporation, affiliate or subsidiary These are not based on theorical abstractions but on human experience that a
thereof. Chief Judge Parker, in McKee, explained the reasons of the court, person cannot serve two hostile masters without detriment to one of them.
thus:
The offer and assurance of petitioner that to avoid any possibility of his taking
"* * * A bank director has access to a great deal of information concerning the unfair advantage of his position as director of San Miguel Corporation, he
business and plans of a bank which would likely be injurious to the bank if would absent himself from meetings at which confidential matters would be
known to another bank, and it was reasonable and prudent to enlarge this discussed, would not detract from the validity and reasonableness of the by-
minimum disqualification to include any director, officer, employee, agent, laws here involved. Apart from the impractical results that would ensue from
nominee, or attorney of any other bank in California. The Ashkins case, supra, such arrangement, it would be inconsistent with petitioner's primary motive
specifically recognizes protection against rivals and others who might acquire in running for board membership -- which is to protect his investments in San
Miguel Corporation. More important, such a proposed norm of conduct would
information which might be used against the interests of the corporation as a
be against all accepted principles underlying a director's duty of fidelity to the
legitimate object of by-law protection. With respect to attorneys or persons
corporation, for the policy of the law is to encourage and enforce responsible
associated with a firm which is attorney for another bank, in addition to the corporate management. As explained by Oleck:[31] "The law will not tolerate
direct conflict or potential conflict of interest, there is also the danger of the passive attitude of directors * * * without active and conscientious
inadvertent leakage of confidential information through casual office participation in the managerial functions of the company. As directors, it is
discussions or accessibility of files. Defendant's directors determined that its their duty to control and supervise the day to day business activities of the
welfare was best protected if this opportunity for conflicting loyalties and company or to promulgate definite policies and rules of guidance with a
potential misuse and leakage of confidential information was foreclosed." vigilant eye toward seeing to it that these policies are carried out. It is only
then that directors may be said to have fulfilled their duty of fealty to the
corporation."
In McKee, the Court further listed qualificational by-laws upheld by the
courts, as follows: Sound principles of corporate management counsel against sharing sensitive
information with a director whose fiduciary duty of loyalty may well require
"(1) A director shall not be directly or indirectly interested as a stockholder in
that he disclose this information to a competitive rival. These dangers are
any other firm, company, or association which competes with the subject enhanced considerably where the common director such as the petitioner is a
corporation. controlling stockholder of two of the competing corporations. It would seem
manifest that in such situations, the director has an economic incentive to
(2) A director shall not be the immediate member of the family of any appropriate for the benefit of his own corporation the corporate plans and
stockholder in any other firm, company, or association which competes with policies of the corporation where he sits as director.
the subject corporation. Indeed, access by a competitor to confidential information regarding
marketing strategies and pricing policies of San Miguel Corporation would
subject the latter to a competitive disadvantage and unjustly enrich the
competitor, for advance knowledge by the competitor of the strategies for the
38
development of existing or new markets of existing or new products could levels of competition by improving the consumers' effectiveness as the final
enable said competitor to utilize such knowledge to his advantage.[32] arbiter in free markets. These laws are designed to preserve free and
unfettered competition as the rule of trade. "It rests on the premise that the
There is another important consideration in determining whether or not the unrestrained interaction of competitive forces will yield the best allocation of
amended by-laws are reasonable. The Constitution and the law prohibit our economic resources, the lowest prices and the highest quality * *
combinations in restraint of trade or unfair competition. Thus, section 2 of *."[34] They operate to forestall concentration of economic power.35 The law
Article XIV of the Constitution provides: "The State shall regulate or prohibit against monopolies and combinations in restraint of trade is aimed at
private monopolies when the public interest so requires. No combinations in contracts and combinations that, by reason of the inherent nature of the
restraint of trade or unfair competition shall be allowed." contemplated acts, prejudice the public interest by unduly restraining
Article 186 of the Revised Penal Code also provides: competition or unduly obstructing the course of trade. [36]

"Art. 186. Monopolies and combination's in restraint of trade. - The penalty The terms "monopoly," "combination in restraint of trade" and "unfair
competition" appear to have a well defined meaning in other jurisdictions. A
of prision correccional in its minimum period or a fine ranging from two
"monopoly" embraces any combination the tendency of which is to prevent
hundred to six thousand pesos, or both, shall be imposed upon:
competition in the broad and general sense, or to control prices to the
detriment of the public.[37] In short, it is the concentration of business in the
1. Any person who shall enter into any contract or agreement or shall take hands of a few. The material consideration in determining its existence is not
part in any conspiracy or combination in the form of a trust or otherwise, in that prices are raised and competition actually excluded, but that power exists
restraint of trade or commerce or to prevent by artificial means free to raise prices or exclude competition when desired.[38] Further, it must be
competition in the market. considered that the idea of monopoly is now understood to include a condition
produced by the mere act of individuals. Its dominant thought is the notion of
exclusiveness or unity, or the suppression of competition by the unification of
2. Any person who shall monopolize any merchandise or object of trade or interest or management, or it may be thru agreement and concert of action. It
commerce, or shall combine with any other person or persons to monopolize is, in brief, unified tactics with regard to prices. [39]
said merchandise or object in order to alter the price thereof by spreading false
rumors or making use of any other artifice to restrain free competition in the From the foregoing definitions, it is apparent that the contentions of petitioner
market. are not in accord with reality. The election of petitioner to the Board
of respondent corporation can bring about an illegal situation. This is because
an express agreement is not necessary for the existence of a combination or
3. Any person who, being a manufacturer, producer, or processor of any conspiracy in restraint of trade.[40] It is enough that a concert of action is
merchandise or object of commerce or an importer of any merchandise or contemplated and that the defendants conformed to the arrangements,[41] and
object of commerce from any foreign country, either as principal or agent, what is to be considered is what the parties actually did and not the words they
wholesaler or retailer, shall combine, conspire or agree in any manner with any used. For instance, the Clayton Act prohibits a person from serving at the same
person likewise engaged in the manufacture, production, processing, time as a director in any two or more corporations, if such corporations are, by
assembling or importation of such merchandise or object of commerce or with virtue of their business and location of operation, competitors so that the
any other persons not so similarly engaged for the purpose of making elimination of competition between them would constitute violation of any
transactions prejudicial to lawful commerce, or of increasing the market price provision of the anti-trust laws.[42] There is here a statutory recognition of the
anti-competitive dangers which may arise when an individual simultaneously
in any part of the Philippines, or any such merchandise or object of commerce
acts as a director of two or more competing corporations. A common director
manufactured, produced, processed, assembled in or imported into the
of two or more competing corporations would have access to confidential sales,
Philippines, or of any article in the manufacture of which such manufactured, pricing and marketing information and would be in a position to coordinate
produced, processed, or imported merchandise or object of commerce is used." policies or to aid one corporation at the expense of another, thereby stifling
competition. This situation has been aptly explained by Travers, thus:
There are other legislation in this jurisdiction, which prohibit monopolies and
combinations in restraint of trade.[33] Basically, these anti-trust laws or laws "The argument for prohibiting competing corporations from sharing even one
against monopolies or combinations in restraint of trade are aimed at raising director is that the interlock permits the coordination of policies between
nominally independent firms to an extent that competition between them
39
may be completely eliminated. Indeed, if a director, for example, is to be Corporation Law. Said section provides in part that "any stockholder of more
faithful to both corporations, some accommodation must result. Suppose X is than one corporation organized for the purpose of engaging in agriculture may
a director of both Corporation A and Corporation B. X could hardly vote for a hold his stock in such corporations solely for investment and not for the
policy by A that would injure B without violating his duty of loyalty to B; at the purpose of bringing about or attempting to bring about a combination to
same time he could hardly abstain from voting without depriving A of his best exercise control of such corporations * * *."
judgment. If the firms really do compete -- in the sense of vying economic Neither are We persuaded by the claim that the by-law was intended to prevent
advantage at the expense of the other -- there can hardly be any reason for an the candidacy of petitioner for election to the Board. If the by-law were to be
interlock between competitors other than the suppression of applied in the case of one stockholder but waived in the case of another, then
competition."[43] (Italics supplied.) it could be reasonably claimed that the by-law was being applied in a
discriminatory manner. However, the by-law, by its terms, applies to all
According to the Report of the House Judiciary Committee of the U.S. stockholders. The equal protection clause of the Constitution requires only
Congress on section 9 of the Clayton Act, it was established that: "By means of that the by-law operate equally upon all persons of a class. Besides, before
the interlocking directorates one man or group of men have been able to petitioner can be declared ineligible to run for director, there must be hearing
dominate and control a great number of corporations * * * to the detriment of and evidence must be submitted to bring his case within the ambit of the
the small ones dependent upon them and to the injury of the public."[44] disqualification. Sound principles of public policy and management,
therefore, support the view that a by-law which disqualifies a competition from
Shared information on cost accounting may lead to price fixing. Certainly, election to the Board of Directors of another corporation is valid and
shared information on production, orders, shipments, capacity and reasonable.
inventories may lead to control of production for the purpose of controlling
prices. In the absence of any legal prohibition or overriding public policy, wide
latitude may be accorded to the corporation in adopting measures to protect
Obviously, if a competitor has access to the pricing policy and cost conditions legitimate corporate interests. Thus, "where the reasonableness of a by-law is
of the products of San Miguel Corporation, the essence of competition in a free a mere matter of judgment, and upon which reasonable minds must
market for the purpose of serving the lowest priced goods to the consuming necessarily differ, a court would not be warranted in substituting its judgment
public would be frustrated. The competitor could so manipulate the prices of instead of the judgment of those who are authorized to make by-laws and who
his products or vary its marketing strategies by region or by brand in order to have expressed their authority."[45]
get the most out of the consumers. Where the two competing firms control a
substantial segment of the market this could lead to collusion and combination Although it is asserted that the amended by-laws confer on the present Board
in restraint of trade. Reason and experience point to the inevitable conclusion powers to perpetuate themselves in power, such fears appear to be
that the inherent tendency of interlocking directorates between companies misplaced. This power, by its very nature, is subject to certain well established
that are related to each other as competitors is to blunt the edge of rivalry limitations. One of these is inherent in the very concept and definition of the
between the corporations, to seek out ways of compromising opposing terms "competition" and "competitor." "Competition" implies a struggle for
interests, and thus eliminate competition. As respondent SMC aptly observes, advantage between two or more forces, each possessing, in substantially
knowledge by CFC-Robina of SMC's costs in various industries and regions in similar if not identical degree, certain characteristics essential to the business
the country will enable the former to practice price discrimination. CFC- sought. It means an independent endeavor of two or more persons to obtain
Robina can segment the entire consuming population by geographical areas or the business patronage of a third by offering more advantageous terms as an
income groups and change varying prices in order to maximize profits from inducement to secure trade.[46] The test must be whether the business does in
every market segment. CFC-Robina could determine the most profitable fact compete, not whether it is capable of an indirect and highly unsubstantial
volume at which it could produce for every product line in which it competes duplication of an isolated or non-characteristic activity.[47] It is, therefore,
with SMC. Access to SMC pricing policy by CFC-Robina would in effect obvious that not every person or entity engaged in business of the same kind
destroy free competition and deprive the consuming public of opportunity to is a competitor. Such factors as quantum and place of business, identity of
buy goods of the highest possible quality at the lowest prices. products and area of competition should be taken into consideration. It is,
therefore, necessary to show that petitioner's business covers a substantial
Finally, considering that both Robina and SMC are, to a certain extent, portion of the same markets for similar products to the extent of not less than
engaged in agriculture, then the election of petitioner to the Board of SMC may 10% of respondent corporation's market for competing
constitute a violation of the prohibition contained in section 13(5) of the products. While We here sustain the validity of the amended by-laws, it does
40
not follow as a necessary consequence that petitioner dividends received by SMC from SMI since 1953 has amounted to US$9.4
is ipso factodisqualified. Consonant with the requirement of due process, million; and (4) that from 1972-1975, SMI did not declare cash or stock
there must be due hearing at which the petitioner must be given the fullest dividends, all earnings having been used in line with a program for the setting
opportunity to show that he is not covered by the disqualification. As trustees up of breweries by SMI.
of the corporation and of the stockholders, it is the responsibility of directors
to act with fairness to the stockholders. [48] Pursuant to this obligation and to These averments are supported by the affidavit of the Corporate Secretary,
remove any suspicion that this power may be utilized by the incumbent enclosing photocopies of the afore-mentioned documents.[51]
members of the Board to perpetuate themselves in power, any decision of the Pursuant to the second paragraph of section 51 of the Corporation Law,
Board to disqualify a candidate for the Board of Directors should be reviewed "(t)he record of all business transactions of the corporation and minutes of any
by the Securities and Exchange Commission en banc and its decision shall be meeting shall be open to the inspection of any director, member or stockholder
final unless reversed by this Court on certiorari.[49] Indeed, it is a settled of the corporation at reasonable hours."
principle that where the action of a Board of Directors is an abuse of discretion,
or forbidden by statute, or is against public policy, or is ultra vires, or is a fraud The stockholder's right of inspection of the corporation's books and records is
upon minority stockholders or creditors, or will result in waste, dissipation or based upon their ownership of the assets and property of the corporation. It
misapplication of the corporate assets, a court of equity has the power to grant is, therefore, an incident of ownership of the corporate property, whether this
appropriate relief.[50] ownership or interest be termed an equitable ownership, a beneficial
ownership, or a quasi-ownership.[52] This right is predicated upon the
III necessity of self-protection. It is generally held by majority of the courts that
Whether or not respondent SEC gravely abused its discretion in denying where the right is granted by statute to the stockholder, it is given to him as
petitioner's request for an examination of the records of San Miguel such and must be exercised by him with respect to his interest as a stockholder
International, Inc., a fully owned subsidiary of San Miguel Corporation - and for some purpose germane thereto or in the interest of the
corporation.[53] In other words, the inspection has to be germane to the
Respondent San Miguel Corporation stated in its memorandum that petitioner's interest as a stockholder, and has to be proper and lawful in
petitioner's claim that he was denied inspection rights as stockholder of SMC character and not inimical to the interest of the corporation. [54] In Grey v.
"was made in the teeth of undisputed facts that, over a specific period, Insular Lumber,55 this Court held that "the right to examine the books of the
petitioner had been furnished numerous documents and information," to corporation must be exercised in good faith, for specific and honest purpose,
wit: (1) a complete list of stockholders and their stockholdings; (2) a complete and not to gratify curiosity, or for speculative or vexatious purposes." The
list of proxies given by the stockholders for use at the annual stockholders' weight of judicial opinion appears to be, that on application for mandamus to
meeting of May 18, 1975; (3) a copy of the minutes of the stockholders' meeting enforce the right, it is proper for the court to inquire into and consider the
of March 18, 1976; (4) a breakdown of SMC's P186.6 million investment in stockholder's good faith and his purpose and motives in seeking
associated companies and other companies as of December 31, 1975; (5) a inspection.[56] Thus, it was held that "the right given by statute is not absolute
listing of the salaries, allowances, bonuses and other compensations or and may be refused when the information is not sought in good faith or is used
remunerations received by the directors and corporate officers of SMC; (6) a to the detriment of the corporation."[57] But the "impropriety of purpose such
copy of the US$100 million Euro-Dollar Loan Agreement of SMC; and (7) as will defeat enforcement must be set up by the corporation defensively if the
copies of the minutes of all meetings of the Board of Directors from January Court is to take cognizance of it as a qualification. In other words, the specific
1975 to May 1976, with deletions of sensitive data, which deletions were not provisions take from the stockholder the burden of showing propriety of
objected to by petitioner. purpose and place upon the corporation the burden of showing impropriety of
purpose or motive."[58] It appears to be the "general rule that stockholders are
Further, it was averred that upon request, petitioner was informed in writing entitled to full information as to the management of the corporation and the
on September 18, 1976: (1) that SMC's foreign investments are handled by San manner of expenditure of its funds, and to inspection to obtain such
Miguel International, Inc., incorporated in Bermuda and wholly owned by information, especially where it appears that the company is being
SMC; this was SMC's first venture abroad, having started in 1948 with an mismanaged or that it is being managed for the personal benefit of officers or
initial outlay of P500,000.00, augmented by a loan of Hongkong $6 million directors or certain of the stockholders to the exclusion of others." [59]
from a foreign bank under the personal guaranty of SMC's former President,
the late Col. Andres Soriano; (2) that as of December 31, 1975, the estimated While the right of a stockholder to examine the books and records of a
value of SMI would amount to almost P400 million; (3) that the total cash corporation for a lawful purpose is a matter of law, the right of such
41
stockholder to examine the books and records of a wholly-owned subsidiary of be more in accord with equity, good faith and fair dealing to construe the
the corporation in which he is a stockholder is a different thing. statutory right of petitioner as stockholder to inspect the books and records of
the corporation as extending to books and records of such wholly owned
Some state courts recognize the right under certain conditions, while others do subsidiary which are in respondent corporation's possession and control.
not. Thus, it has been held that where a corporation owns approximately no
property except the shares of stock of subsidiary corporations which are IV
merely agents or instrumentalities of the holding company, the legal fiction of
distinct corporate entities may be disregarded and the books, papers and Whether or not respondent SEC gravely abused its discretion in allowing the
documents of all the corporations may be required to be produced for stockholders of respondent corporation to ratify the investment of corporate
examination,[60] and that a writ of mandamus may be granted, as the records funds in a foreign corporation
of the subsidiary were, to all intents and purposes, the records of the parent Petitioner reiterates his contention in SEC Case No. 1423 that respondent
even though the subsidiary was not named as a party.[61]Mandamus was corporation invested corporate funds in SMI without prior authority of the
likewise held proper to inspect both the subsidiary's and the parent stockholders, thus violating section 17-1/2 of the Corporation Law, and alleges
corporation's books upon proof of sufficient control or dominion by the parent that respondent SEC should have investigated the charge, being a statutory
showing the relation of principal or agent or something similar thereto.[62] offense, instead of allowing ratification of the investment by the stockholders.
On the other hand, mandamus at the suit of a stockholder was refused where Respondent SEC's position is that submission of the investment to the
the subsidiary corporation is a separate and distinct corporation domiciled and stockholders for ratification is a sound corporate practice and should not be
with its books and records in another jurisdiction, and is not legally subject to thwarted but encouraged.
the control of the parent company, although it owned a vast majority of the
stock of the subsidiary.[63] Likewise, inspection of the books of an allied Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds
corporation by a stockholder of the parent company which owns all the stock in any other corporation or business or for any purpose other than the main
of the subsidiary has been refused on the ground that the stockholder was not purpose for which it was organized" provided that its Board of Directors has
within the class of "persons having an interest." [64] been so authorized by the affirmative vote of stockholders holding shares
entitling them to exercise at least two-thirds of the voting power. If the
In the Nash case,[65] The Supreme Court of New York held that the contractual investment is made in pursuance of the corporate purpose, it does not need
right of former stockholders to inspect books and records of the corporation the approval of the stockholders. It is only when the purchase of shares is done
"included the right to inspect corporation's subsidiaries' books and records solely for investment and not to accomplish the purpose of its incorporation
which were in corporation's possession and control in its office in New York." that the vote of approval of the stockholders holding shares entitling them to
In the Bailey case,[66] stockholders of a corporation were held entitled to exercise at least two-thirds of the voting power is necessary.[69]
inspect the records of a controlled subsidiary corporation which used the same As stated by respondent corporation, the purchase of beer manufacturing
offices and had identical officers and directors. facilities by SMC was an investment in the same business stated as its main
In his "Urgent Motion for Production and Inspection of Documents" before purpose in its Articles of Incorporation, which is to manufacture and market
respondent SEC, petitioner contended that respondent corporation "had been beer. It appears that the original investment was made in 1947-1948, when
attempting to suppress information from the stockholders" and that SMC, then San Miguel Brewery, Inc., purchased a beer brewery
petitioner, "as stockholder of respondent corporation, is entitled to copies of in Hongkong (Hongkong Brewery & Distillery, Ltd.) for the manufacture and
some documents which for some reason or another, respondent corporation is marketing of San Miguel beer thereat. Restructuring of the investment was
very reluctant in revealing to the petitioner notwithstanding the fact that no made in 1970-1971 thru the organization of SMI in Bermuda as a tax free
harm would be caused thereby to the corporation."[67] There is no question that reorganization.
stockholders are entitled to inspect the books and records of a corporation in Under these circumstances, the ruling in De la Rama v. Ma-ao Sugar Central
order to investigate the conduct of the management, determine the financial Co., Inc., supra, appears relevant. In said case, one of the issues was the
condition of the corporation, and generally take an account of the stewardship legality of an investment made by Ma-ao Sugar Central Co., Inc., without prior
of the officers and directors.[68] resolution approved by the affirmative vote of 2/3 of the stockholders' voting
In the case at bar, considering that the foreign subsidiary is wholly owned by power, in the Philippine Fiber Processing Co., Inc., a company engaged in the
respondent San Miguel Corporation and, therefore, under its control, it would manufacture of sugar bags. The lower court said that "there is more logic in the
42
stand that if the investment is made in a corporation whose business is questioned investment is neither contrary to law, morals, public order or
important to the investing corporation and would aid it in its purpose, to public policy. It is a corporate transaction or contract which is within the
require authority of the stockholders would be to unduly curtail the power of corporate powers, but which is defective from a purported failure to observe in
the Board of Directors." This Court affirmed the ruling of the court a quo on its execution the requirement of the law that the investment must be
the matter and, quoting Prof. Sulpicio S. Guevara, said: authorized by the affirmative vote of the stockholders holding two-thirds of the
voting power. This requirement is for the benefit of the stockholders. The
"'j. Power to acquire or dispose of shares or securities. - A private stockholders for whose benefit the requirement was enacted may, therefore,
corporation, in order to accomplish its purpose as stated in its articles of ratify the investment and its ratification by said stockholders obliterates any
incorporation, and subject to the limitations imposed by the Corporation Law, defect which it may have had at the outset. "Mere ultra vires acts," said this
has the power to acquire, hold, mortgage, pledge or dispose of shares, bonds, Court in Pirovano,[71] "or those which are not illegal and void abinitio, but are
securities, and other evidences of indebtedness of any domestic or foreign not merely within the scope of the articles of incorporation, are
corporation. Such an act, if done in pursuance of the corporate purpose, does merely voidable and may become binding and enforceable when ratified by the
not need the approval of stockholders; but when the purchase of shares of stockholders."
another corporation is done solely for investment and not to accomplish the Besides, the investment was for the purchase of beer manufacturing and
purpose of its incorporation, the vote of approval of the stockholders is marketing facilities which is apparently relevant to the corporate purpose. The
necessary. In any case, the purchase of such shares or securities must be mere fact that respondent corporation submitted the assailed investment to
subject to the limitations established by the Corporation Law; namely, (a) that the stockholders for ratification at the annual meeting of May 10, 1977 cannot
no agricultural or mining corporation shall in anywise be interested in any be construed as an admission that respondent corporation had committed
other agricultural or mining corporation; or (b) that a non-agricultural or non- an ultra vires act, considering the common practice of corporations of
mining corporation shall be restricted to own not more than 15% of the voting periodically submitting for the ratification of their stockholders the acts of
stock of any agricultural or mining corporation; and (c) that such holdings their directors, officers and managers.
shall be solely for investment and not for the purpose of bringing about a
WHEREFORE, judgment is hereby rendered as follows:
monopoly in any line of commerce or combination in restraint of trade.' (The
Philippine Corporation Law by Sulpicio S. Guevara, 1967 Ed., p. 89) (Italics The Court voted unanimously to grant the petition insofar as it prays that
ours.) petitioner be allowed to examine the books and records of San Miguel
International, Inc., as specified by him.
"'40. Power to invest corporate funds. A private corporation has the power On the matter of the validity of the amended by-laws of respondent San Miguel
to invest its corporate funds "in any other corporation or business, or for any Corporation, six (6) Justices, namely, Justices Barredo, Makasiar, Antonio,
purpose other than the main purpose for which it was organized, provided that Santos, Abad Santos and De Castro, voted to sustain the validity per se of the
'its board of directors has been so authorized in a resolution by the affirmative amended by-laws in question and to dismiss the petition without prejudice to
vote of stockholders holding shares in the corporation entitling them to the question of the actual disqualification of petitioner John Gokongwei, Jr. to
exercise at least two-thirds of the voting power on such a proposal at a run and if elected to sit as director of respondent San Miguel Corporation being
stockholders' meeting called for that purpose,' and provided further, that no decided, after a new and proper hearing by the Board of Directors of said
agricultural or mining corporation shall in anywise be interested in any other corporation, whose decision shall be appealable to the respondent Securities
and Exchange Commission deliberating and acting en banc, and ultimately to
agricultural or mining corporation. When the investment is necessary to
this Court. Unless disqualified in the manner herein provided, the prohibition
accomplish its purpose or purposes as stated in its articles of incorporation,
in the afore-mentioned amended by-laws shall not apply to petitioner.
the approval of the stockholder is not necessary."' (Id., p. 108.) (Italics
ours.)" (pp. 258-259.) 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.
Assuming arguendo that the Board of Directors of SMC had no authority to
make the assailed investment, there is no question that a corporation, like an Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended
individual, may ratify and thereby render binding upon it the originally by-laws, pending hearing by this Court on the applicability of section 13(5) of
unauthorized acts of its officers or other agents.[70] This is true because the the Corporation Law to petitioner.
43
Justice Fernando reserved his vote on the validity of subject amendment to the
by-laws but otherwise concurs in the result.
Four (4) Justices, namely, Justices Teehankee, Concepcion Jr., Fernandez and
Guerrero filed a separate opinion, wherein they voted against the validity of
the questioned amended by-laws and that this question should properly be
resolved first by the SEC as the agency of primary jurisdiction. They concur in
the result that petitioner may be allowed to run for and sit as director of
respondent SMC in the scheduled May 6, 1979 election and subsequent
elections until disqualified after proper hearing by the respondent's Board of
Directors and petitioner's disqualification shall have been sustained by
respondent SEC en banc and ultimately by final judgment of this Court.
In resume, subject to the qualifications afore-stated, judgment is hereby
rendered GRANTING the petition by allowing petitioner to examine the books
and records of San Miguel International, Inc. as specified in the petition. The
petition,* insofar as it assails the validity of the amended by-laws and the
ratification of the foreign investment of respondent corporation, for lack of
necessary votes, is hereby DISMISSED. No costs.

44
47 Phil. 583 N. Capistrano, judge, held that, in his opinion, article 12 of the by-laws of the
corporation which gives it preferential right to buy its shares from retiring
stockholders, is in conflict with Act No. 1459 (Corporation Law), especially
with section 35 thereof; and rendered a judgment ordering the defendant
JOHNSON, J.: corporation, through its board of directors, to register in the books of said
corporation the said five shares of stock in the name of the plaintiff, Henry
This action was commenced in the Court of First Instance of the Province of Fleischer, as the shareholder or owner thereof, instead of the original owner,
Oriental Negros on the 14th day of August, 1923, against the board of directors Manuel Gonzalez, with costs against the defendant.
of the Botica Nolasco, Inc., a corporation duly organized and existing under
the laws of the Philippine Islands. The plaintiff prayed that said board of The defendant appealed from said judgment, and now makes several
directors be ordered to register in the books of the corporation five shares of assignments of error, all of which, in substance, raise the question whether or
its stock in the name of Henry Fleischer, the plaintiff, and to pay him the sum not article 12 of the by-laws of the corporation is in conflict with the provisions
of the Corporation Law (Act No. 1459).
of P500 for damages sustained by him resulting from the refusal of said body
to register the shares of stock in question. The defendant filed a demurrer on There is no controversy as to the facts of the present case. They are simple and
the ground that the facts alleged in the complaint did not constitute sufficient may be stated as follows:
cause of action, and that the action was not brought against the proper party,
which was the Botica Nolasco, Inc. The demurrer was sustained, and the That Manuel Gonzalez was the original owner of the five shares of stock in
question, Nos. 16, 17, 18, 19 and 20 of the Botica Nolasco, Inc.; that on March
plaintiff was granted five days to amend his complaint.
11, 1923, he assigned and delivered said five shares to the plaintiff, Henry
On November 15, 1923, the plaintiff filed an amended complaint against the Fleischer, by accomplishing the form of endorsement provided on the back
Botica Nolasco, Inc., alleging that he became the owner of five shares of stock thereof, together with other credits, in consideration of a large sum of money
of said corporation, by purchase from their original owner, one Manuel owed by Gonzalez to Fleischer (Exhibits A, B, B-l, B-2, B-3, B-4); that on March
Gonzalez; that the said shares were fully paid; and that the defendant refused 13, 1923, Dr. Eduardo Miciano, who was the secretary-treasurer of said
to register said shares in his name in the books of the corporation in spite of corporation, offered to buy from Henry Fleischer, on behalf of the corporation,
repeated demands to that effect made by him upon said corporation, which said shares of stock, at their par value of P100 a share, for P500; that by virtue
refusal caused him damages amounting to P500. Plaintiff prayed for a of article 12 of the by-laws of Botica Nolasco, Inc., said corporation had the
judgment ordering the Botica Nolasco, Inc. to register in his name in the books preferential right to buy from Manuel Gonzalez said shares (Exhibit 2); that
of the corporation the five shares of stock recorded in said books in the name the plaintiff refused to sell them to the defendant; that the plaintiff requested
of Manuel Gonzalez, and to indemnify him in the sum of P500 as damages, Doctor Miciano to register said shares in his name; that Doctor Miciano
and to pay the costs. The defendant again filed a demurrer on the ground that refused to do so, saying that it would be in contravention of the by-laws of the
the amended complaint did not state facts sufficient to constitute a cause of corporation.
action, and that said amended complaint was ambiguous, unintelligible, It also appears from the record that on the 13th day of March, 1923, two days
uncertain, which demurrer was overruled by the court. after the assignment of the shares to the plaintiff, Manuel Gonzalez made a
The defendant answered the amended complaint denying generally and written statement to the Botica Nolasco, Inc., requesting that the five shares of
specifically each and every one of the material allegations thereof, and, as a stock sold by him to Henry Fleischer be not transferred to Fleischer's name.
special defense, alleged that the defendant, pursuant to article 12 of its by-laws, He also acknowledged in said written statement the preferential right of the
had preferential right to buy from the plaintiff said shares at the par value of corporation to buy said five shares (Exhibit 3). On June 14, 1923, Gonzalez
P100 a share, plus P90 as dividends corresponding to the year 1922, and that wrote a letter to the Botica Nolasco, withdrawing and cancelling his written
said offer was refused by the plaintiff. The defendant prayed for a judgment statement of March 13, 1923 (Exhibit C), to which letter the Botica Nolasco on
absolving it from all liability under the complaint and directing the plaintiff to June 15, 1923, replied, declaring that his written statement was in conformity
deliver to the defendant the five shares of stock in question, and to pay with the by-laws of the corporation; that his letter of June 14th was of no effect,
damages in the sum of P500, and the costs. and that the shares in question had been registered in the name of the Botica
Nolasco, Inc., (Exhibit X).
Upon the issue presented by the pleadings above stated, the cause was brought
on for trial, at the conclusion, of which, and on August 21, 1924, the Honorable
45
As indicated above, the important question raised in this appeal is whether or as to show the names of the parties to the transaction, the date of the transfer,
not article 12 of the by-laws of the Botica Nolasco, Inc., is in conflict with the the number of the certificate, and the number of shares transferred.
provisions of the Corporation Law (Act No. 1459). Appellant invoked said
article as its ground for denying the request of the plaintiff that the shares in "No share of stock against which the corporation holds any unpaid claim shall
question be registered in his (plaintiff's) name, and for claiming that it (Botica be transferable on the books of the corporation."
Nolasco, Inc.) had the preferential right to buy said shares from Gonzalez.
Appellant now contends that article 12 of the said by-laws is in conformity with Section 13, paragraph 7, above-quoted, empowers a corporation to make by-
the provisions of Act No. 1459. Said article is as follows: laws, not inconsistent with any existing law, for the transferring of its stock.
It follows from said provision, that a by-law adopted by a corporation relating
"Art. 12. Las acciones de la Corporacion pueden ser transferidas a otra persona, to transfer of stock should be in harmony with the law on the subject of transfer
pero para que estas transferencias tengan validez legal, deben constar en los of stock. The law on this subject is found in section 35 of Act No. 1459 above
registros de la Corporacion con el debido endoso del accionista a cuyo nombre quoted. Said section specifically provides that the shares of stock "are personal
se ha expedido la accion o acciones que se transfieran, o un documento de property and may be transferred by delivery of the certificate indorsed by
transferencia. Entendiendose que, ningun accionista transferira accion alguna the owner, etc." Said section 35 defines the nature, character and
a otra persona sin participar antes por escrito al Secretario-Tesorero. En transferability of shares of stock. Under said section they are personal property
igualdad de condiciones, la sociedad tendra el derecho de adquirir para si la and may be transferred as therein provided. Said section contemplates no
accion o acciones que se traten de transferir." (Exhibit 2.) restriction as to whom they may be transferred or sold. It does not suggest that
any discrimination may be created by the corporation in favor or against a
The above-quoted article constitutes a by-law or regulation adopted by the certain purchaser. The holder of shares, as owner of personal property, is at
Botica Nolasco, Inc., governing the transfer of shares of stock of said liberty, under said section, to dispose of them in. favor of whomsoever he
corporation. The latter part of said article creates in favor of the Botica pleases, without any other limitation in this respect, than the general
Nolasco, Inc., a preferential right to buy, under the same conditions, the share provisions of law. Therefore, a stock corporation in adopting a by-law
or shares of stock of a retiring shareholder. Has said corporation any power, governing transfer of shares of stock should take into consideration the specific
under the Corporation Law (Act. No. 1459), to adopt such by-law? provisions of section 35 of Act No. 1459, and said by-law should be made to
harmonize with said provisions. It should not be inconsistent therewith.
The particular provisions of the Corporation Law referring to transfer of shares
of stock are as follows: The by-law now in question was adopted under the power conferred upon the
corporation by section 13, paragraph 7, above quoted; but in adopting said by-
"Sec. 13. Every corporation has the power: law the corporation has transcended the limits fixed by law in the same section,
****** and has not taken into consideration the provisions of section 35 of Act No.
1459.
" (7) To make by-laws, not inconsistent with any existing law, for the fixing
or changing of the number of its officers and directors within the limits As a general rule, the by-laws of a corporation are valid if they are reasonable
prescribed by law, and for the transferring of its stock, the administration of and calculated to carry into effect the objects of the corporation, and are not
its corporate affairs, etc. contradictory to the general policy of the laws of the land. (Supreme
Commandery of the Knights of the Golden Rule vs. Ainsworth, 71 Ala., 436; 46
****** Am. Rep., 332.)

"Sec. 35. The capital stock of stock corporations shall be divided into shares for On the other hand, it is equally well settled that by-laws of a corporation must
which certificates signed by the president or the vice-president, countersigned be reasonable and for a corporate purpose, and always within the charter
by the secretary or clerk and sealed with the seal of the corporation, shall be limits. They must always be strictly subordinate to the constitution and the
issued in accordance with the by-laws. Shares of stock so issued are personal general laws of the land. They must not infringe the policy of the state, nor be
property and may be transferred by delivery of the certificate indorsed by hostile to public welfare. (46 Am. Rep., 332.) They must not disturb vested
the owner or his attorney in fact or other person legally authorized to make the rights or impair the obligation of a contract, take away or abridge the
transfer. No transfer, however, shall be valid, except as between the parties, substantial rights of stockholder or member, affect rights of property or create
until the transfer is entered and noted upon the books of the corporation so obligations unknown to the law. (People's Home Savings Bank vs. Superior

46
Court, 104 Cal., 649; 43 Am. St. Rep., 147; Ireland vs. Globe Milling Co., 79 restraining the sale and transfer of shares, should not only be in harmony with
Am. St. Rep., 769.) the law or charter of the corporation, but such power should be expressly
granted in said law or charter.
The validity of the by-law of a corporation, is purely a question of law. (South
Florida Railroad Co. vs. Rhodes, 25 Fla., 40.) The only restraint imposed by the Corporation Law upon transfer of shares is
found in section 35 of Act No. 1459, quoted above, as follows: "No transfer,
"The power to enact by-laws restraining the sale and transfer of stock must however, shall be valid; except as between the parties, until the transfer is
be found in the governing statute or the charter. Restrictions upon the traffic entered and noted upon the books of the corporation so as to show the names
in stock must have their source in legislative enactment, as the corporation of the parties to the transaction, the date of the transfer, the number of the
itself cannot create such impediments. By-laws are intended merely for the certificate, and the number of shares transferred." This restriction is necessary
protection of the corporation, and prescribe regulation and not restriction; in order that the officers of the corporation may know who are the
they are always subject to the charter of the corporation. The corporation, in stockholders, which is essential in conducting elections of officers, in. calling
the absence of such a power, cannot ordinarily inquire into or pass upon the meetings of stockholders, and for other purposes. But any restriction of the
legality of the transaction by which its stock passes from one person to another, nature of that imposed in the by-law now in question, is ultra vires, violative
nor can it question the consideration upon which a sale is based. A by-law of the property rights of shareholders, and in restraint of trade.
cannot take away or abridge the substantial rights of stockholder. Under a
statute authorizing by-laws for the transfer of stock, a corporation can do no And moreover, the by-law now in question cannot have any effect on the
more than prescribe a general mode of transfer on the corporate books and appellee. He had no knowledge of such by-law when the shares were assigned
cannot justify an unreasonable restriction upon the right of sale." (4 to him. He obtained them in good faith and for a valuable consideration. He
Thompson on Corporations, sec. 4137, p. 674.) 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
"The right of unrestrained transfer of shares inheres in the very nature of a defeat his rights as a purchaser.
corporation, and courts will carefully scrutinize any attempt to impose
restrictions or limitations upon the right of stockholders to sell and assign their "An unauthorized by-law forbidding a shareholder to sell his shares without
stock. The right to impose any restraint in this respect must be conferred first offering them to the corporation for a period of thirty days is not binding
upon the corporation either by the governing statute or by the articles of the upon an assignee of the stock as a personal contract, although his assignor
corporation. It cannot be done by a by-law without statutory or charter knew of the by-law and took part in its adoption." (10 Cyc., 579;
authority." (4 Thompson on Corporations, sec. 4334, pp. 818, 819.) Ireland vs. Globe Milling Co., 21 R. I., 9.)
"The jus disponendi, being an incident of the ownership of property, the "When no restriction is placed by public law on the transfer of corporate stock,
general rule (subject to exceptions hereafter pointed out and discussed) is a purchaser is not affected by any contractual restriction of which he had no
that every owner of corporate shares has the same uncontrollable right to notice." (Brinkerhoff-Farris Trust & Savings Co. vs. Home Lumber Co., 118
alien them which attaches to the ownership of any other species of property. Mo., 447.)
A shareholder is under no obligation to refrain from selling his shares at the
sacrifice of his personal interest, in order to secure the welfare of the "The assignment of shares of stock in a corporation by one who has assented
corporation, or to enable another shareholder to make gains and profits." (10 to an unauthorized by-law has only the effect of a contract by, and enforceable
Cyc., p. 577.) 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.)
"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 "A by-law of a corporation which provides that transfers of stock shall not be
its charter or governing statute. This conclusion follows from the further valid unless approved by the board of directors, while it may be enforced as a
consideration that by-laws or other regulations restraining such transfers, reasonable regulation for the protection of the corporation against worthless
unless derived from authority expressly granted by the legislature would be stockholders, cannot be made available to defeat the rights of third persons."
regarded as impositions in restraint of trade." (10 Cyc., p. 578.) (Farmers' & Merchants' Bank of Lineville vs. Wasson, 48 Iowa, 336.)

The foregoing authorities go farther than the stand we are taking on this Counsel for defendant incidentally argues in his brief, that the plaintiff does
question. They hold that the power of a corporation to enact by-laws not have any right of action against the defendant corporation, but against the

47
president and secretary thereof, inasmuch as the signing and registration of
shares is incumbent upon said officers pursuant to section 35 of the
Corporation Law. This contention cannot be sustained now. The question
should have been raised in the lower court. It is too late to raise it now in this
appeal. Besides, as stated above, the corporation was made defendant in this
action upon the demurrer of the attorney of the original defendant in the lower
court, who contended that the Botica Nolasco, Inc., should be made the party
defendant in this action. Accordingly, upon order of the court, the complaint
was amended and the said corporation was made the party defendant.
Whenever a corporation refuses to transfer and register stock in cases like the
present, mandamus will lie to compel the officers of the corporation to transfer
said stock upon the books of the corporation. (26 Cyc. 347; Hager vs. Bryan,
19 Phil., 138.)
In view of all the foregoing, we are of the opinion, and so hold, that the decision
of the lower court is in accordance with law and should be and is hereby
affirmed, with costs. So ordered.
Malcolm, Villamor, Ostrand, Johns, and Romualdez, JJ., concur.

48