G.R. No. L-45911 April 11, 1979 total par value of P301,270,430.00.

It was contended that according to section

22 of the Corporation Law and Article VIII of the by-laws of the corporation, the
JOHN GOKONGWEI, JR., petitioner, power to amend, modify, repeal or adopt new by-laws may be delegated to the
vs. Board of Directors only by the affirmative vote of stockholders representing not
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, less than 2/3 of the subscribed and paid up capital stock of the corporation,
JOSE M. SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO which 2/3 should have been computed on the basis of the capitalization at the
BUNAO, WALTHRODE B. CONDE, MIGUEL ORTIGAS, ANTONIO PRIETO, time of the amendment. Since the amendment was based on the 1961
SAN MIGUEL CORPORATION, EMIGDIO TANJUATCO, SR., and authorization, petitioner contended that the Board acted without authority and
EDUARDO R. VISAYA, respondents. in usurpation of the power of the stockholders.
De Santos, Balgos & Perez for petitioner. As a second cause of action, it was alleged that the authority granted in 1961
Angara, Abello, Concepcion, Regala, Cruz Law Offices for respondents had already been exercised in 1962 and 1963, after which the authority of the
Sorianos Board ceased to exist.

Siguion Reyna, Montecillo & Ongsiako for respondent San Miguel Corporation. As a third cause of action, petitioner averred that the membership of the Board
of Directors had changed since the authority was given in 1961, there being
R. T Capulong for respondent Eduardo R. Visaya. six (6) new directors.

As a fourth cause of action, it was claimed that prior to the questioned

amendment, petitioner had all the qualifications to be a director of respondent
ANTONIO, J.:
corporation, being a Substantial stockholder thereof; that as a stockholder,
The instant petition for certiorari, mandamus and injunction, with prayer for petitioner had acquired rights inherent in stock ownership, such as the rights
issuance of writ of preliminary injunction, arose out of two cases filed by to vote and to be voted upon in the election of directors; and that in amending
petitioner with the Securities and Exchange Commission, as follows: the by-laws, respondents purposely provided for petitioner's disqualification
and deprived him of his vested right as afore-mentioned hence the amended
SEC CASE NO 1375 by-laws are null and void. 1
On October 22, 1976, petitioner, as stockholder of respondent San Miguel As additional causes of action, it was alleged that corporations have no
Corporation, filed with the Securities and Exchange Commission (SEC) a inherent power to disqualify a stockholder from being elected as a director and,
petition for "declaration of nullity of amended by-laws, cancellation of certificate therefore, the questioned act is ultra vires and void; that Andres M. Soriano,
of filing of amended by- laws, injunction and damages with prayer for a Jr. and/or Jose M. Soriano, while representing other corporations, entered into
preliminary injunction" against the majority of the members of the Board of contracts (specifically a management contract) with respondent corporation,
Directors and San Miguel Corporation as an unwilling petitioner. The petition, which was allowed because the questioned amendment gave the Board itself
entitled "John Gokongwei Jr. vs. Andres Soriano, Jr., Jose M. Soriano, Enrique the prerogative of determining whether they or other persons are engaged in
Zobel, Antonio Roxas, Emeterio Bunao, Walthrode B. Conde, Miguel Ortigas, competitive or antagonistic business; that the portion of the amended bylaws
Antonio Prieto and San Miguel Corporation", was docketed as SEC Case No. which states that in determining whether or not a person is engaged in
1375. competitive business, the Board may consider such factors as business and
family relationship, is unreasonable and oppressive and, therefore, void; and
As a first cause of action, petitioner alleged that on September 18, 1976,
that the portion of the amended by-laws which requires that "all nominations
individual respondents amended by bylaws of the corporation, basing their
for election of directors ... shall be submitted in writing to the Board of Directors
authority to do so on a resolution of the stockholders adopted on March 13,
at least five (5) working days before the date of the Annual Meeting" is likewise
1961, when the outstanding capital stock of respondent corporation was only
unreasonable and oppressive.
P70,139.740.00, divided into 5,513,974 common shares at P10.00 per share
and 150,000 preferred shares at P100.00 per share. At the time of the
amendment, the outstanding and paid up shares totalled 30,127,047 with a
It was, therefore, prayed that the amended by-laws be declared null and void petitioner is estopped from questioning the amendments on the ground of lack
and the certificate of filing thereof be cancelled, and that individual of authority of the Board. since he failed, to object to other amendments made
respondents be made to pay damages, in specified amounts, to petitioner. on the basis of the same 1961 authorization: that the power of the corporation
to amend its by-laws is broad, subject only to the condition that the by-laws
On October 28, 1976, in connection with the same case, petitioner filed with adopted should not be respondent corporation inconsistent with any existing
the Securities and Exchange Commission an "Urgent Motion for Production law; that respondent corporation should not be precluded from adopting
and Inspection of Documents", alleging that the Secretary of respondent protective measures to minimize or eliminate situations where its directors
corporation refused to allow him to inspect its records despite request made might be tempted to put their personal interests over t I hat of the corporation;
by petitioner for production of certain documents enumerated in the request, that the questioned amended by-laws is a matter of internal policy and the
and that respondent corporation had been attempting to suppress information judgment of the board should not be interfered with: That the by-laws, as
from its stockholders despite a negative reply by the SEC to its query regarding amended, are valid and binding and are intended to prevent the possibility of
their authority to do so. Among the documents requested to be copied were violation of criminal and civil laws prohibiting combinations in restraint of trade;
(a) minutes of the stockholder's meeting field on March 13, 1961, (b) copy of and that the petition states no cause of action. It was, therefore, prayed that
the management contract between San Miguel Corporation and A. Soriano the petition be dismissed and that petitioner be ordered to pay damages and
Corporation (ANSCOR); (c) latest balance sheet of San Miguel International, attorney's fees to respondents. The application for writ of preliminary injunction
Inc.; (d) authority of the stockholders to invest the funds of respondent was likewise on various grounds.
corporation in San Miguel International, Inc.; and (e) lists of salaries,
allowances, bonuses, and other compensation, if any, received by Andres M. Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition
Soriano, Jr. and/or its successor-in-interest. to the petition, denying the material averments thereof and stating, as part of
their affirmative defenses, that in August 1972, the Universal Robina
The "Urgent Motion for Production and Inspection of Documents" was Corporation (Robina), a corporation engaged in business competitive to that
opposed by respondents, alleging, among others that the motion has no legal of respondent corporation, began acquiring shares therein. until September
basis; that the demand is not based on good faith; that the motion is premature 1976 when its total holding amounted to 622,987 shares: that in October 1972,
since the materiality or relevance of the evidence sought cannot be determined the Consolidated Foods Corporation (CFC) likewise began acquiring shares in
until the issues are joined, that it fails to show good cause and constitutes respondent (corporation. until its total holdings amounted to P543,959.00 in
continued harrasment, and that some of the information sought are not part of September 1976; that on January 12, 1976, petitioner, who is president and
the records of the corporation and, therefore, privileged. controlling shareholder of Robina and CFC (both closed corporations)
During the pendency of the motion for production, respondents San Miguel purchased 5,000 shares of stock of respondent corporation, and thereafter, in
Corporation, Enrique Conde, Miguel Ortigas and Antonio Prieto filed their behalf of himself, CFC and Robina, "conducted malevolent and malicious
answer to the petition, denying the substantial allegations therein and stating, publicity campaign against SMC" to generate support from the stockholder "in
by way of affirmative defenses that "the action taken by the Board of Directors his effort to secure for himself and in representation of Robina and CFC
on September 18, 1976 resulting in the ... amendments is valid and legal interests, a seat in the Board of Directors of SMC", that in the stockholders'
because the power to "amend, modify, repeal or adopt new By-laws" delegated meeting of March 18, 1976, petitioner was rejected by the stockholders in his
to said Board on March 13, 1961 and long prior thereto has never been bid to secure a seat in the Board of Directors on the basic issue that petitioner
revoked of SMC"; that contrary to petitioner's claim, "the vote requirement for was engaged in a competitive business and his securing a seat would have
a valid delegation of the power to amend, repeal or adopt new by-laws is subjected respondent corporation to grave disadvantages; that "petitioner
determined in relation to the total subscribed capital stock at the time the nevertheless vowed to secure a seat in the Board of Directors at the next
delegation of said power is made, not when the Board opts to exercise said annual meeting; that thereafter the Board of Directors amended the by-laws
delegated power"; that petitioner has not availed of his intra-corporate remedy as afore-stated.
for the nullification of the amendment, which is to secure its repeal by vote of As counterclaims, actual damages, moral damages, exemplary damages,
the stockholders representing a majority of the subscribed capital stock at any expenses of litigation and attorney's fees were presented against petitioner.
regular or special meeting, as provided in Article VIII, section I of the by-laws
and section 22 of the Corporation law, hence the, petition is premature; that
Subsequently, a Joint Omnibus Motion for the striking out of the motion for International, Inc., until after the hearing on the merits of the principal issues
production and inspection of documents was filed by all the respondents. This in the above-entitled case.
was duly opposed by petitioner. At this juncture, respondents Emigdio
Tanjuatco, Sr. and Eduardo R. Visaya were allowed to intervene as oppositors This Order is immediately executory upon its approval. 2
and they accordingly filed their oppositions-intervention to the petition. Dissatisfied with the foregoing Order, petitioner moved for its reconsideration.
On December 29, 1976, the Securities and Exchange Commission resolved Meanwhile, on December 10, 1976, while the petition was yet to be heard,
the motion for production and inspection of documents by issuing Order No. respondent corporation issued a notice of special stockholders' meeting for the
26, Series of 1977, stating, in part as follows: purpose of "ratification and confirmation of the amendment to the By-laws",
Considering the evidence submitted before the Commission by the petitioner setting such meeting for February 10, 1977. This prompted petitioner to ask
and respondents in the above-entitled case, it is hereby ordered: respondent Commission for a summary judgment insofar as the first cause of
action is concerned, for the alleged reason that by calling a special
1. That respondents produce and permit the inspection, copying and stockholders' meeting for the aforesaid purpose, private respondents admitted
photographing, by or on behalf of the petitioner-movant, John Gokongwei, Jr., the invalidity of the amendments of September 18, 1976. The motion for
of the minutes of the stockholders' meeting of the respondent San Miguel summary judgment was opposed by private respondents. Pending action on
Corporation held on March 13, 1961, which are in the possession, custody and the motion, petitioner filed an "Urgent Motion for the Issuance of a Temporary
control of the said corporation, it appearing that the same is material and Restraining Order", praying that pending the determination of petitioner's
relevant to the issues involved in the main case. Accordingly, the respondents application for the issuance of a preliminary injunction and/or petitioner's
should allow petitioner-movant entry in the principal office of the respondent motion for summary judgment, a temporary restraining order be issued,
Corporation, San Miguel Corporation on January 14, 1977, at 9:30 o'clock in restraining respondents from holding the special stockholder's meeting as
the morning for purposes of enforcing the rights herein granted; it being scheduled. This motion was duly opposed by respondents.
understood that the inspection, copying and photographing of the said
documents shall be undertaken under the direct and strict supervision of this On February 10, 1977, respondent Commission issued an order denying the
Commission. Provided, however, that other documents and/or papers not motion for issuance of temporary restraining order. After receipt of the order of
heretofore included are not covered by this Order and any inspection thereof denial, respondents conducted the special stockholders' meeting wherein the
shall require the prior permission of this Commission; amendments to the by-laws were ratified. On February 14, 1977, petitioner
filed a consolidated motion for contempt and for nullification of the special
2. As to the Balance Sheet of San Miguel International, Inc. as well as the list stockholders' meeting.
of salaries, allowances, bonuses, compensation and/or remuneration received
by respondent Jose M. Soriano, Jr. and Andres Soriano from San Miguel A motion for reconsideration of the order denying petitioner's motion for
International, Inc. and/or its successors-in- interest, the Petition to produce and summary judgment was filed by petitioner before respondent Commission on
inspect the same is hereby DENIED, as petitioner-movant is not a stockholder March 10, 1977. Petitioner alleges that up to the time of the filing of the instant
of San Miguel International, Inc. and has, therefore, no inherent right to inspect petition, the said motion had not yet been scheduled for hearing. Likewise, the
said documents; motion for reconsideration of the order granting in part and denying in part
petitioner's motion for production of record had not yet been resolved.
3. In view of the Manifestation of petitioner-movant dated November 29, 1976,
withdrawing his request to copy and inspect the management contract In view of the fact that the annul 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 respondent Commission a Manifestation stating that he intended to run for the
same, the Commission takes note thereof; and position of director of respondent corporation. Thereafter, respondents filed a
Manifestation with respondent Commission, submitting a Resolution of the
4. Finally, the Commission holds in abeyance the resolution on the matter of 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
Corporation to invest the funds of respondent corporation in San Miguel on May 3, 1977 that he does not come within the disqualifications specified in
the amendment to the by-laws, subject matter of SEC Case No. 1375. By scheduled and reset the same to May 16 and 17, 1977, or after the scheduled
reason thereof, petitioner filed a manifestation and motion to resolve pending annual stockholders' meeting. For the purpose of urging the Commission to
incidents in the case and to issue a writ of injunction, alleging that private act, petitioner filed an urgent manifestation on May 3, 1977, but this
respondents were seeking to nullify and render ineffectual the exercise of notwithstanding, no action has been taken up to the date of the filing of the
jurisdiction by the respondent Commission, to petitioner's irreparable damage instant petition.
and prejudice, Allegedly despite a subsequent Manifestation to prod
respondent Commission to act, petitioner was not heard prior to the date of With respect to the afore-mentioned SEC cases, it is petitioner's contention
the stockholders' meeting. before this Court that respondent Commission gravely abused its discretion
when it failed to act with deliberate dispatch on the motions of petitioner
Petitioner alleges that there appears a deliberate and concerted inability on seeking to prevent illegal and/or arbitrary impositions or limitations upon his
the part of the SEC to act hence petitioner came to this Court. rights as stockholder of respondent corporation, and that respondent are
acting oppressively against petitioner, in gross derogation of petitioner's rights
SEC. CASE NO. 1423 to property and due process. He prayed that this Court direct respondent SEC
Petitioner likewise alleges that, having discovered that respondent corporation to act on collateral incidents pending before it.
has been investing corporate funds in other corporations and businesses On May 6, 1977, this Court issued a temporary restraining order restraining
outside of the primary purpose clause of the corporation, in violation of section private respondents from disqualifying or preventing petitioner from running or
17 1/2 of the Corporation Law, he filed with respondent Commission, on from being voted as director of respondent corporation and from submitting for
January 20, 1977, a petition seeking to have private respondents Andres M. ratification or confirmation or from causing the ratification or confirmation of
Soriano, Jr. and Jose M. Soriano, as well as the respondent corporation Item 6 of the Agenda of the annual stockholders' meeting on May 10, 1977, or
declared guilty of such violation, and ordered to account for such investments from Making effective the amended by-laws of respondent corporation, until
and to answer for damages. further orders from this Court or until the Securities and Ex-change
On February 4, 1977, motions to dismiss were filed by private respondents, to Commission acts on the matters complained of in the instant petition.
which a consolidated motion to strike and to declare individual respondents in On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a
default and an opposition ad abundantiorem cautelam were filed by petitioner. restraining order had been issued by this Court, or on May 9, 1977, the
Despite the fact that said motions were filed as early as February 4, 1977, the respondent Commission served upon petitioner copies of the following orders:
commission acted thereon only on April 25, 1977, when it denied respondents'
motion to dismiss and gave them two (2) days within which to file their answer, (1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's
and set the case for hearing on April 29 and May 3, 1977. motion for reconsideration, with its supplement, of the order of the Commission
denying in part petitioner's motion for production of documents, petitioner's
Respondents issued notices of the annual stockholders' meeting, including in motion for reconsideration of the order denying the issuance of a temporary
the Agenda thereof, the following: restraining order denying the issuance of a temporary restraining order, and
6. Re-affirmation of the authorization to the Board of Directors by the petitioner's consolidated motion to declare respondents in contempt and to
stockholders at the meeting on March 20, 1972 to invest corporate funds in nullify the stockholders' meeting;
other companies or businesses or for purposes other than the main purpose (2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to
for which the Corporation has been organized, and ratification of the run as a director of respondent corporation but stating that he should not sit as
investments thereafter made pursuant thereto. such if elected, until such time that the Commission has decided the validity of
By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an the bylaws in dispute, and denying deferment of Item 6 of the Agenda for the
urgent motion for the issuance of a writ of preliminary injunction to restrain annual stockholders' meeting; and
private respondents from taking up Item 6 of the Agenda at the annual (3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's
stockholders' meeting, requesting that the same be set for hearing on May 3, motion for reconsideration of the order of respondent Commission denying
1977, the date set for the second hearing of the case on the merits. petitioner's motion for summary judgment;
Respondent Commission, however, cancelled the dates of hearing originally
It is petitioner's assertions, anent the foregoing orders, (1) that respondent antogonistic parties, under the law of self-preservation, and it should be
Commission acted with indecent haste and without circumspection in issuing allowed a wide latitude in the selection of means to preserve itself;
the aforesaid orders to petitioner's irreparable damage and injury; (2) that it
acted without jurisdiction and in violation of petitioner's right to due process (4) that the delay in the resolution and disposition of SEC Cases Nos. 1375
when it decided en banc an issue not raised before it and still pending before and 1423 was due to petitioner's own acts or omissions, since he failed to have
one of its Commissioners, and without hearing petitioner thereon despite the petition to suspend, pendente lite the amended by-laws calendared for
petitioner's request to have the same calendared for hearing , and (3) that the hearing. It was emphasized that it was only on April 29, 1977 that petitioner
respondents acted oppressively against the petitioner in violation of his rights calendared the aforesaid petition for suspension (preliminary injunction) for
as a stockholder, warranting immediate judicial intervention. hearing on May 3, 1977. The instant petition being dated May 4, 1977, it is
apparent that respondent Commission was not given a chance to act "with
It is prayed in the supplemental petition that the SEC orders complained of be deliberate dispatch", and
declared null and void and that respondent Commission be ordered to allow
petitioner to undertake discovery proceedings relative to San Miguel (5) that, even assuming that the petition was meritorious was, it has become
International. Inc. and thereafter to decide SEC Cases No. 1375 and 1423 on moot and academic because respondent Commission has acted on the
the merits. pending incidents, complained of. It was, therefore, prayed that the petition be
dismissed.
On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M.
Soriano filed their comment, alleging that the petition is without merit for the On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his comment,
following reasons: alleging that the petition has become moot and academic for the reason,
among others that the acts of private respondent sought to be enjoined have
(1) that the petitioner the interest he represents are engaged in business reference to the annual meeting of the stockholders of respondent San Miguel
competitive and antagonistic to that of respondent San Miguel Corporation, it Corporation, which was held on may 10, 1977; that in said meeting, in
appearing that the owns and controls a greater portion of his SMC stock thru compliance with the order of respondent Commission, petitioner was allowed
the Universal Robina Corporation and the Consolidated Foods Corporation, to run and be voted for as director; and that in the same meeting, Item 6 of the
which corporations are engaged in business directly and substantially Agenda was discussed, voted upon, ratified and confirmed. Further it was
competing with the allied businesses of respondent SMC and of corporations averred that the questions and issues raised by petitioner are pending in the
in which SMC has substantial investments. Further, when CFC and Robina Securities and Exchange Commission which has acquired jurisdiction over the
had accumulated investments. Further, when CFC and Robina had case, and no hearing on the merits has been had; hence the elevation of these
accumulated shares in SMC, the Board of Directors of SMC realized the clear issues before the Supreme Court is premature.
and present danger that competitors or antagonistic parties may be elected
directors and thereby have easy and direct access to SMC's business and Petitioner filed a reply to the aforesaid comments, stating that the petition
trade secrets and plans; presents justiciable questions for the determination of this Court because (1)
the respondent Commission acted without circumspection, unfairly and
(2) that the amended by law were adopted to preserve and protect respondent oppresively against petitioner, warranting the intervention of this Court; (2) a
SMC from the clear and present danger that business competitors, if allowed derivative suit, such as the instant case, is not rendered academic by the act
to become directors, will illegally and unfairly utilize their direct access to its of a majority of stockholders, such that the discussion, ratification and
business secrets and plans for their own private gain to the irreparable confirmation of Item 6 of the Agenda of the annual stockholders' meeting of
prejudice of respondent SMC, and, ultimately, its stockholders. Further, it is May 10, 1977 did not render the case moot; that the amendment to the bylaws
asserted that membership of a competitor in the Board of Directors is a blatant which specifically bars petitioner from being a director is void since it deprives
disregard of no less that the Constitution and pertinent laws against him of his vested rights.
combinations in restraint of trade;
Respondent Commission, thru the Solicitor General, filed a separate
(3) that by laws are valid and binding since a corporation has the inherent right comment, alleging that after receiving a copy of the restraining order issued
and duty to preserve and protect itself by excluding competitors and by this Court and noting that the restraining order did not foreclose action by
it, the Commission en banc issued Orders Nos. 449, 450 and 451 in SEC Case administrative remedies", considering that: first: "whether or not the provisions
No. 1375. of the amended by-laws are intrinsically valid ... is purely a legal question.
There is no factual dispute as to what the provisions are and evidence is not
In answer to the allegation in the supplemental petition, it states that Order No. necessary to determine whether such amended by-laws are valid as framed
450 which denied deferment of Item 6 of the Agenda of the annual and approved ... "; second: "it is for the interest and guidance of the public that
stockholders' meeting of respondent corporation, took into consideration an an immediate and final ruling on the question be made ... "; third: "petitioner
urgent manifestation filed with the Commission by petitioner on May 3, 1977 was denied due process by SEC" when "Commissioner de Guzman had
which prayed, among others, that the discussion of Item 6 of the Agenda be openly shown prejudice against petitioner ... ", and "Commissioner Sulit ...
deferred. The reason given for denial of deferment was that "such action is approved the amended by-laws ex-parte and obviously found the same
within the authority of the corporation as well as falling within the sphere of intrinsically valid; and finally: "to remand the case to SEC would only entail
stockholders' right to know, deliberate upon and/or to express their wishes delay rather than serve the ends of justice."
regarding disposition of corporate funds considering that their investments are
the ones directly affected." It was alleged that the main petition has, therefore, Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that
become moot and academic. this Court resolve the legal issues raised by the parties in keeping with the
"cherished rules of procedure" that "a court should always strive to settle the
On September 29,1977, petitioner filed a second supplemental petition with entire controversy in a single proceeding leaving no root or branch to bear the
prayer for preliminary injunction, alleging that the actuations of respondent seeds of future ligiation", citing Gayong v. Gayos. 3 To the same effect is the
SEC tended to deprive him of his right to due process, and "that all possible prayer of San Miguel Corporation that this Court resolve on the merits the
questions on the facts now pending before the respondent Commission are validity of its amended by laws and the rights and obligations of the parties
now before this Honorable Court which has the authority and the competence thereunder, otherwise "the time spent and effort exerted by the parties
to act on them as it may see fit." (Reno, pp. 927-928.) concerned and, more importantly, by this Honorable Court, would have been
Petitioner, in his memorandum, submits the following issues for resolution; for naught because the main question will come back to this Honorable Court
for final resolution." Respondent Eduardo R. Visaya submits a similar appeal.
(1) whether or not the provisions of the amended by-laws of respondent
corporation, disqualifying a competitor from nomination or election to the It is only the Solicitor General who contends that the case should be remanded
Board of Directors are valid and reasonable; to the SEC for hearing and decision of the issues involved, invoking the latter's
primary jurisdiction to hear and decide case involving intra-corporate
(2) whether or not respondent SEC gravely abused its discretion in denying controversies.
petitioner's request for an examination of the records of San Miguel
International, Inc., a fully owned subsidiary of San Miguel Corporation; and It is an accepted rule of procedure that the Supreme Court should always strive
to settle the entire controversy in a single proceeding, leaving nor root or
(3) whether or not respondent SEC committed grave abuse of discretion in branch to bear the seeds of future litigation. 4 Thus, in Francisco v. City of
allowing discussion of Item 6 of the Agenda of the Annual Stockholders' Davao, 5 this Court resolved to decide the case on the merits instead of
Meeting on May 10, 1977, and the ratification of the investment in a foreign remanding it to the trial court for further proceedings since the ends of justice
corporation of the corporate funds, allegedly in violation of section 17-1/2 of would not be subserved by the remand of the case. In Republic v. Security
the Corporation Law. 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
I
interest demands an early disposition of the case", and in Republic v. Central
Whether or not amended by-laws are valid is purely a legal question which Surety and Insurance Company, 7 this Court denied remand of the third-party
public interest requires to be resolved — complaint to the trial court for further proceedings, citing precedent where this
Court, in similar situations resolved to decide the cases on the merits, instead
It is the position of the petitioner that "it is not necessary to remand the case of remanding them to the trial court where (a) the ends of justice would not be
to respondent SEC for an appropriate ruling on the intrinsic validity of the subserved by the remand of the case; or (b) where public interest demand an
amended by-laws in compliance with the principle of exhaustion of early disposition of the case; or (c) where the trial court had already received
all the evidence presented by both parties and the Supreme Court is now in a confidential information by a competitor may result either in the promotion of
position, based upon said evidence, to decide the case on its merits. 8 It is the interest of the competitor at the expense of the San Miguel Corporation, or
settled that the doctrine of primary jurisdiction has no application where only a the promotion of both the interests of petitioner and respondent San Miguel
question of law is involved. 8a Because uniformity may be secured through Corporation, which may, therefore, result in a combination or agreement in
review by a single Supreme Court, questions of law may appropriately be violation of Article 186 of the Revised Penal Code by destroying free
determined in the first instance by courts. 8b In the case at bar, there are facts competition to the detriment of the consuming public. It is further argued that
which cannot be denied, viz.: that the amended by-laws were adopted by the there is not vested right of any stockholder under Philippine Law to be voted
Board of Directors of the San Miguel Corporation in the exercise of the power as director of a corporation. It is alleged that petitioner, as of May 6, 1978, has
delegated by the stockholders ostensibly pursuant to section 22 of the exercised, personally or thru two corporations owned or controlled by him,
Corporation Law; that in a special meeting on February 10, 1977 held specially control over the following shareholdings in San Miguel Corporation, vis.: (a)
for that purpose, the amended by-laws were ratified by more than 80% of the John Gokongwei, Jr. — 6,325 shares; (b) Universal Robina Corporation —
stockholders of record; that the foreign investment in the Hongkong Brewery 738,647 shares; (c) CFC Corporation — 658,313 shares, or a total of
and Distellery, a beer manufacturing company in Hongkong, was made by the 1,403,285 shares. Since the outstanding capital stock of San Miguel
San Miguel Corporation in 1948; and that in the stockholders' annual meeting Corporation, as of the present date, is represented by 33,139,749 shares with
held in 1972 and 1977, all foreign investments and operations of San Miguel a par value of P10.00, the total shares owned or controlled by petitioner
Corporation were ratified by the stockholders. represents 4.2344% of the total outstanding capital stock of San Miguel
Corporation. It is also contended that petitioner is the president and substantial
II stockholder of Universal Robina Corporation and CFC Corporation, both of
Whether or not the amended by-laws of SMC of disqualifying a competitor from which are allegedly controlled by petitioner and members of his family. It is
nomination or election to the Board of Directors of SMC are valid and also claimed that both the Universal Robina Corporation and the CFC
reasonable — Corporation are engaged in businesses directly and substantially competing
with the alleged businesses of San Miguel Corporation, and of corporations in
The validity or reasonableness of a by-law of a corporation in purely a question which SMC has substantial investments.
of law. 9 Whether the by-law is in conflict with the law of the land, or with the
charter of the corporation, or is in a legal sense unreasonable and therefore ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S
unlawful is a question of law. 10 This rule is subject, however, to the limitation CORPORATIONS AND SAN MIGUEL CORPORATION
that where the reasonableness of a by-law is a mere matter of judgment, and According to respondent San Miguel Corporation, the areas of, competition
one upon which reasonable minds must necessarily differ, a court would not are enumerated in its Board the areas of competition are enumerated in its
be warranted in substituting its judgment instead of the judgment of those who Board Resolution dated April 28, 1978, thus:
are authorized to make by-laws and who have exercised their authority. 11
Product Line Estimated Market Share Total
Petitioner claims that the amended by-laws are invalid and unreasonable 1977 SMC Robina-CFC
because they were tailored to suppress the minority and prevent them from
having representation in the Board", at the same time depriving petitioner of Table Eggs 0.6% 10.0% 10.6%
his "vested right" to be voted for and to vote for a person of his choice as Layer Pullets 33.0% 24.0% 57.0%
director. Dressed Chicken 35.0% 14.0% 49.0%
Poultry & Hog Feeds 40.0% 12.0% 52.0%
Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano Ice Cream 70.0% 13.0% 83.0%
and San Miguel Corporation content that ex. conclusion of a competitor from Instant Coffee 45.0% 40.0% 85.0%
the Board is legitimate corporate purpose, considering that being a competitor, Woven Fabrics 17.5% 9.1% 26.6%
petitioner cannot devote an unselfish and undivided Loyalty to the corporation;
that it is essentially a preventive measure to assure stockholders of San Miguel Thus, according to respondent SMC, in 1976, the areas of competition
Corporation of reasonable protective from the unrestrained self-interest of affecting SMC involved product sales of over P400 million or more than 20%
those charged with the promotion of the corporate enterprise; that access to of the P2 billion total product sales of SMC. Significantly, the combined market
shares of SMC and CFC-Robina in layer pullets dressed chicken, poultry and It is recognized by an authorities that 'every corporation has the inherent power
hog feeds ice cream, instant coffee and woven fabrics would result in a position to adopt by-laws 'for its internal government, and to regulate the conduct and
of such dominance as to affect the prevailing market factors. prescribe the rights and duties of its members towards itself and among
themselves in reference to the management of its affairs. 12 At common law,
It is further asserted that in 1977, the CFC-Robina group was in direct the rule was "that the power to make and adopt by-laws was inherent in every
competition on product lines which, for SMC, represented sales amounting to corporation as one of its necessary and inseparable legal incidents. And it is
more than ?478 million. In addition, CFC-Robina was directly competing in the settled throughout the United States that in the absence of positive legislative
sale of coffee with Filipro, a subsidiary of SMC, which product line represented provisions limiting it, every private corporation has this inherent power as one
sales for SMC amounting to more than P275 million. The CFC-Robina group of its necessary and inseparable legal incidents, independent of any specific
(Robitex, excluding Litton Mills recently acquired by petitioner) is purportedly enabling provision in its charter or in general law, such power of self-
also in direct competition with Ramie Textile, Inc., subsidiary of SMC, in government being essential to enable the corporation to accomplish the
product sales amounting to more than P95 million. The areas of competition purposes of its creation. 13
between SMC and CFC-Robina in 1977 represented, therefore, for SMC,
product sales of more than P849 million. In this jurisdiction, under section 21 of the Corporation Law, a corporation may
prescribe in its by-laws "the qualifications, duties and compensation of
According to private respondents, at the Annual Stockholders' Meeting of directors, officers and employees ... " This must necessarily refer to a
March 18, 1976, 9,894 stockholders, in person or by proxy, owning 23,436,754 qualification in addition to that specified by section 30 of the Corporation Law,
shares in SMC, or more than 90% of the total outstanding shares of SMC, which provides that "every director must own in his right at least one share of
rejected petitioner's candidacy for the Board of Directors because they the capital stock of the stock corporation of which he is a director ... "
"realized the grave dangers to the corporation in the event a competitor gets a In Government v. El Hogar, 14 the Court sustained the validity of a provision in
board seat in SMC." On September 18, 1978, the Board of Directors of SMC, the corporate by-law requiring that persons elected to the Board of Directors
by "virtue of powers delegated to it by the stockholders," approved the must be holders of shares of the paid up value of P5,000.00, which shall be
amendment to ' he by-laws in question. At the meeting of February 10, 1977, held as security for their action, on the ground that section 21 of the
these amendments were confirmed and ratified by 5,716 shareholders owning Corporation Law expressly gives the power to the corporation to provide in its
24,283,945 shares, or more than 80% of the total outstanding shares. Only 12 by-laws for the qualifications of directors and is "highly prudent and in
shareholders, representing 7,005 shares, opposed the confirmation and conformity with good practice. "
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 NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR
shares, rejected petitioner's candidacy, while 946 stockholders, representing
1,648,801 shares voted for him. On the May 9, 1978 Annual Stockholders' Any person "who buys stock in a corporation does so with the knowledge that
Meeting, 12,480 shareholders, owning more than 30 million shares, or more its affairs are dominated by a majority of the stockholders and that he impliedly
than 90% of the total outstanding shares. voted against petitioner. contracts that the will of the majority shall govern in all matters within the limits
of the act of incorporation and lawfully enacted by-laws and not forbidden by
AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF law." 15 To this extent, therefore, the stockholder may be considered to have
DIRECTORS EXPRESSLY CONFERRED BY LAW "parted with his personal right or privilege to regulate the disposition of his
property which he has invested in the capital stock of the corporation, and
Private respondents contend that the disputed amended by laws were adopted surrendered it to the will of the majority of his fellow incorporators. ... It cannot
by the Board of Directors of San Miguel Corporation a-, a measure of self- therefore be justly said that the contract, express or implied, between the
defense to protect the corporation from the clear and present danger that the corporation and the stockholders is infringed ... by any act of the former which
election of a business competitor to the Board may cause upon the corporation is authorized by a majority ... ." 16
and the other stockholders inseparable prejudice. Submitted for resolution,
therefore, is the issue — whether or not respondent San Miguel Corporation Pursuant to section 18 of the Corporation Law, any corporation may amend its
could, as a measure of self- protection, disqualify a competitor from nomination articles of incorporation by a vote or written assent of the stockholders
and election to its Board of Directors. representing at least two-thirds of the subscribed capital stock of the
corporation If the amendment changes, diminishes or restricts the rights of the
existing shareholders then the disenting minority has only one right, viz.: "to power is at all times subject to the equitable limitation that it may not be
object thereto in writing and demand payment for his share." Under section 22 exercised for the aggrandizement, preference or advantage of the fiduciary to
of the same law, the owners of the majority of the subscribed capital stock may the exclusion or detriment of the cestuis.
amend or repeal any by-law or adopt new by-laws. It cannot be said, therefore, 21
that petitioner has a vested right to be elected director, in the face of the fact And in Cross v. West Virginia Cent, & P. R. R. Co., it was said:
that the law at the time such right as stockholder was acquired contained the ... A person cannot serve two hostile and adverse master, without detriment to
prescription that the corporate charter and the by-law shall be subject to one of them. A judge cannot be impartial if personally interested in the cause.
amendment, alteration and modification. 17 No more can a director. Human nature is too weak -for this. Take whatever
It being settled that the corporation has the power to provide for the statute provision you please giving power to stockholders to choose directors,
qualifications of its directors, the next question that must be considered is and in none will you find any express prohibition against a discretion to select
whether the disqualification of a competitor from being elected to the Board of directors having the company's interest at heart, and it would simply be going
Directors is a reasonable exercise of corporate authority. far to deny by mere implication the existence of such a salutary power

A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE ... If the by-law is to be held reasonable in disqualifying a stockholder in a
CORPORATION AND ITS SHAREHOLDERS competing company from being a director, the same reasoning would apply to
disqualify the wife and immediate member of the family of such stockholder,
Although in the strict and technical sense, directors of a private corporation are on account of the supposed interest of the wife in her husband's affairs, and
not regarded as trustees, there cannot be any doubt that their character is that his suppose influence over her. It is perhaps true that such stockholders ought
of a fiduciary insofar as the corporation and the stockholders as a body are not to be condemned as selfish and dangerous to the best interest of the
concerned. As agents entrusted with the management of the corporation for corporation until tried and tested. So it is also true that we cannot condemn as
the collective benefit of the stockholders, "they occupy a fiduciary relation, and selfish and dangerous and unreasonable the action of the board in passing the
in this sense the relation is one of trust." 18 "The ordinary trust relationship of by-law. The strife over the matter of control in this corporation as in many
directors of a corporation and stockholders", according to Ashaman v. others is perhaps carried on not altogether in the spirit of brotherly love and
Miller, 19 "is not a matter of statutory or technical law. It springs from the fact affection. The only test that we can apply is as to whether or not the action of
that directors have the control and guidance of corporate affairs and property the Board is authorized and sanctioned by law. ... . 22
and hence of the property interests of the stockholders. Equity recognizes that
stockholders are the proprietors of the corporate interests and are ultimately These principles have been applied by this Court in previous cases.23
the only beneficiaries thereof * * *. AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A
Justice Douglas, in Pepper v. Litton, 20 emphatically restated the standard of STOCKHOLDER INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO
fiduciary obligation of the directors of corporations, thus: DIRECTOR IN A CORPORATION WHOSE BUSINESS IS IN COMPETITION
WITH THAT OF THE OTHER CORPORATION, HAS BEEN SUSTAINED AS
A director is a fiduciary. ... Their powers are powers in trust. ... He who is in VALID
such fiduciary position cannot serve himself first and his cestuis second. ... He
cannot manipulate the affairs of his corporation to their detriment and in It is a settled state law in the United States, according to Fletcher, that
disregard of the standards of common decency. He cannot by the intervention corporations have the power to make by-laws declaring a person employed in
of a corporate entity violate the ancient precept against serving two masters ... the service of a rival company to be ineligible for the corporation's Board of
He cannot utilize his inside information and strategic position for his own Directors. ... (A)n amendment which renders ineligible, or if elected, subjects
preferment. He cannot violate rules of fair play by doing indirectly through the to removal, a director if he be also a director in a corporation whose business
corporation what he could not do so directly. He cannot violate rules of fair play is in competition with or is antagonistic to the other corporation is valid." 24 This
by doing indirectly though the corporation what he could not do so directly. He is based upon the principle that where the director is so employed in the
cannot use his power for his personal advantage and to the detriment of the service of a rival company, he cannot serve both, but must betray one or the
stockholders and creditors no matter how absolute in terms that power may be other. Such an amendment "advances the benefit of the corporation and is
and no matter how meticulous he is to satisfy technical requirements. For that good." An exception exists in New Jersey, where the Supreme Court held that
the Corporation Law in New Jersey prescribed the only qualification, and Thus, in McKee & Co. v. First National Bank of San Diego, supra the court
therefore the corporation was not empowered to add additional sustained as valid and reasonable an amendment to the by-laws of a bank,
qualifications. 25 This is the exact opposite of the situation in the Philippines requiring that its directors should not be directors, officers, employees, agents,
because as stated heretofore, section 21 of the Corporation Law expressly nominees or attorneys of any other banking corporation, affiliate or subsidiary
provides that a corporation may make by-laws for the qualifications of thereof. Chief Judge Parker, in McKee, explained the reasons of the court,
directors. Thus, it has been held that an officer of a corporation cannot engage thus:
in a business in direct competition with that of the corporation where he is a
director by utilizing information he has received as such officer, under "the ... A bank director has access to a great deal of information concerning the
established law that a director or officer of a corporation may not enter into a business and plans of a bank which would likely be injurious to the bank if
competing enterprise which cripples or injures the business of the corporation known to another bank, and it was reasonable and prudent to enlarge this
of which he is an officer or director. 26 minimum disqualification to include any director, officer, employee, agent,
nominee, or attorney of any other bank in California. The Ashkins case, supra,
It is also well established that corporate officers "are not permitted to use their specifically recognizes protection against rivals and others who might acquire
position of trust and confidence to further their private interests." 27 In a case information which might be used against the interests of the corporation as a
where directors of a corporation cancelled a contract of the corporation for legitimate object of by-law protection. With respect to attorneys or persons
exclusive sale of a foreign firm's products, and after establishing a rival associated with a firm which is attorney for another bank, in addition to the
business, the directors entered into a new contract themselves with the foreign direct conflict or potential conflict of interest, there is also the danger of
firm for exclusive sale of its products, the court held that equity would regard inadvertent leakage of confidential information through casual office
the new contract as an offshoot of the old contract and, therefore, for the discussions or accessibility of files. Defendant's directors determined that its
benefit of the corporation, as a "faultless fiduciary may not reap the fruits of his welfare was best protected if this opportunity for conflicting loyalties and
misconduct to the exclusion of his principal. 28 potential misuse and leakage of confidential information was foreclosed.

The doctrine of "corporate opportunity" 29 is precisely a recognition by the In McKee the Court further listed qualificational by-laws upheld by the courts,
courts that the fiduciary standards could not be upheld where the fiduciary was as follows:
acting for two entities with competing interests. This doctrine rests
fundamentally on the unfairness, in particular circumstances, of an officer or (1) A director shall not be directly or indirectly interested as a stockholder in
director taking advantage of an opportunity for his own personal profit when any other firm, company, or association which competes with the subject
the interest of the corporation justly calls for protection. 30 corporation.

It is not denied that a member of the Board of Directors of the San Miguel (2) A director shall not be the immediate member of the family of any
Corporation has access to sensitive and highly confidential information, such stockholder in any other firm, company, or association which competes with
as: (a) marketing strategies and pricing structure; (b) budget for expansion and the subject corporation,
diversification; (c) research and development; and (d) sources of funding, (3) A director shall not be an officer, agent, employee, attorney, or trustee in
availability of personnel, proposals of mergers or tie-ups with other firms. any other firm, company, or association which compete with the subject
It is obviously to prevent the creation of an opportunity for an officer or director corporation.
of San Miguel Corporation, who is also the officer or owner of a competing (4) A director shall be of good moral character as an essential qualification to
corporation, from taking advantage of the information which he acquires as holding office.
director to promote his individual or corporate interests to the prejudice of San
Miguel Corporation and its stockholders, that the questioned amendment of (5) No person who is an attorney against the corporation in a law suit is eligible
the by-laws was made. Certainly, where two corporations are competitive in a for service on the board. (At p. 7.)
substantial sense, it would seem improbable, if not impossible, for the director,
These are not based on theorical abstractions but on human experience —
if he were to discharge effectively his duty, to satisfy his loyalty to both
that a person cannot serve two hostile masters without detriment to one of
corporations and place the performance of his corporation duties above his
them.
personal concerns.
The offer and assurance of petitioner that to avoid any possibility of his taking Art. 186. Monopolies and combinations in restraint of trade. —The penalty of
unfair advantage of his position as director of San Miguel Corporation, he prision correccional in its minimum period or a fine ranging from two hundred
would absent himself from meetings at which confidential matters would be to six thousand pesos, or both, shall be imposed upon:
discussed, would not detract from the validity and reasonableness of the by-
laws here involved. Apart from the impractical results that would ensue from 1. Any person who shall enter into any contract or agreement or shall take part
such arrangement, it would be inconsistent with petitioner's primary motive in in any conspiracy or combination in the form of a trust or otherwise, in restraint
running for board membership — which is to protect his investments in San of trade or commerce or to prevent by artificial means free competition in the
Miguel Corporation. More important, such a proposed norm of conduct would market.
be against all accepted principles underlying a director's duty of fidelity to the 2. Any person who shag monopolize any merchandise or object of trade or
corporation, for the policy of the law is to encourage and enforce responsible commerce, or shall combine with any other person or persons to monopolize
corporate management. As explained by Oleck: 31 "The law win not tolerate said merchandise or object in order to alter the price thereof by spreading false
the passive attitude of directors ... without active and conscientious rumors or making use of any other artifice to restrain free competition in the
participation in the managerial functions of the company. As directors, it is their market.
duty to control and supervise the day to day business activities of the company
or to promulgate definite policies and rules of guidance with a vigilant eye 3. Any person who, being a manufacturer, producer, or processor of any
toward seeing to it that these policies are carried out. It is only then that merchandise or object of commerce or an importer of any merchandise or
directors may be said to have fulfilled their duty of fealty to the corporation." object of commerce from any foreign country, either as principal or agent,
wholesale or retailer, shall combine, conspire or agree in any manner with any
Sound principles of corporate management counsel against sharing sensitive person likewise engaged in the manufacture, production, processing,
information with a director whose fiduciary duty of loyalty may well require that assembling or importation of such merchandise or object of commerce or with
he disclose this information to a competitive arrival. These dangers are any other persons not so similarly engaged for the purpose of making
enhanced considerably where the common director such as the petitioner is a transactions prejudicial to lawful commerce, or of increasing the market price
controlling stockholder of two of the competing corporations. It would seem in any part of the Philippines, or any such merchandise or object of commerce
manifest that in such situations, the director has an economic incentive to manufactured, produced, processed, assembled in or imported into the
appropriate for the benefit of his own corporation the corporate plans and Philippines, or of any article in the manufacture of which such manufactured,
policies of the corporation where he sits as director. produced, processed, or imported merchandise or object of commerce is used.
Indeed, access by a competitor to confidential information regarding marketing There are other legislation in this jurisdiction, which prohibit monopolies and
strategies and pricing policies of San Miguel Corporation would subject the combinations in restraint of trade. 33
latter to a competitive disadvantage and unjustly enrich the competitor, for
advance knowledge by the competitor of the strategies for the development of Basically, these anti-trust laws or laws against monopolies or combinations in
existing or new markets of existing or new products could enable said restraint of trade are aimed at raising levels of competition by improving the
competitor to utilize such knowledge to his advantage. 32 consumers' effectiveness as the final arbiter in free markets. These laws are
designed to preserve free and unfettered competition as the rule of trade. "It
There is another important consideration in determining whether or not the rests on the premise that the unrestrained interaction of competitive forces will
amended by-laws are reasonable. The Constitution and the law prohibit yield the best allocation of our economic resources, the lowest prices and the
combinations in restraint of trade or unfair competition. Thus, section 2 of highest quality ... ." 34 they operate to forestall concentration of economic
Article XIV of the Constitution provides: "The State shall regulate or prohibit power. 35 The law against monopolies and combinations in restraint of trade is
private monopolies when the public interest so requires. No combinations in aimed at contracts and combinations that, by reason of the inherent nature of
restraint of trade or unfair competition shall be snowed." the 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

The terms "monopoly", "combination in restraint of trade" and "unfair

competition" appear to have a well defined meaning in other jurisdictions. A
"monopoly" embraces any combination the tendency of which is to prevent According to the Report of the House Judiciary Committee of the U. S.
competition in the broad and general sense, or to control prices to the Congress on section 9 of the Clayton Act, it was established that: "By means
detriment of the public. 37 In short, it is the concentration of business in the of the interlocking directorates one man or group of men have been able to
hands of a few. The material consideration in determining its existence is not dominate and control a great number of corporations ... to the detriment of the
that prices are raised and competition actually excluded, but that power exists small ones dependent upon them and to the injury of the public. 44
to raise prices or exclude competition when desired. 38 Further, it must be
considered that the Idea of monopoly is now understood to include a condition Shared information on cost accounting may lead to price fixing. Certainly,
produced by the mere act of individuals. Its dominant thought is the notion of shared information on production, orders, shipments, capacity and inventories
exclusiveness or unity, or the suppression of competition by the qualification may lead to control of production for the purpose of controlling prices.
of interest or management, or it may be thru agreement and concert of action. Obviously, if a competitor has access to the pricing policy and cost conditions
It is, in brief, unified tactics with regard to prices. 39 of the products of San Miguel Corporation, the essence of competition in a free
From the foregoing definitions, it is apparent that the contentions of petitioner market for the purpose of serving the lowest priced goods to the consuming
are not in accord with reality. The election of petitioner to the Board of public would be frustrated, The competitor could so manipulate the prices of
respondent Corporation can bring about an illegal situation. This is because his products or vary its marketing strategies by region or by brand in order to
an express agreement is not necessary for the existence of a combination or get the most out of the consumers. Where the two competing firms control a
conspiracy in restraint of trade. 40 It is enough that a concert of action is substantial segment of the market this could lead to collusion and combination
contemplated and that the defendants conformed to the arrangements, 41 and in restraint of trade. Reason and experience point to the inevitable conclusion
what is to be considered is what the parties actually did and not the words they that the inherent tendency of interlocking directorates between companies that
used. For instance, the Clayton Act prohibits a person from serving at the same are related to each other as competitors is to blunt the edge of rivalry between
time as a director in any two or more corporations, if such corporations are, by the corporations, to seek out ways of compromising opposing interests, and
virtue of their business and location of operation, competitors so that the thus eliminate competition. As respondent SMC aptly observes, knowledge by
elimination of competition between them would constitute violation of any CFC-Robina of SMC's costs in various industries and regions in the country
provision of the anti-trust laws. 42 There is here a statutory recognition of the win enable the former to practice price discrimination. CFC-Robina can
anti-competitive dangers which may arise when an individual simultaneously segment the entire consuming population by geographical areas or income
acts as a director of two or more competing corporations. A common director groups and change varying prices in order to maximize profits from every
of two or more competing corporations would have access to confidential market segment. CFC-Robina could determine the most profitable volume at
sales, pricing and marketing information and would be in a position to which it could produce for every product line in which it competes with SMC.
coordinate policies or to aid one corporation at the expense of another, thereby Access to SMC pricing policy by CFC-Robina would in effect destroy free
stifling competition. This situation has been aptly explained by Travers, thus: competition and deprive the consuming public of opportunity to buy goods of
the highest possible quality at the lowest prices.
The argument for prohibiting competing corporations from sharing even one
director is that the interlock permits the coordination of policies between Finally, considering that both Robina and SMC are, to a certain extent,
nominally independent firms to an extent that competition between them may engaged in agriculture, then the election of petitioner to the Board of SMC may
be completely eliminated. Indeed, if a director, for example, is to be faithful to constitute a violation of the prohibition contained in section 13(5) of the
both corporations, some accommodation must result. Suppose X is a director Corporation Law. Said section provides in part that "any stockholder of more
of both Corporation A and Corporation B. X could hardly vote for a policy by A than one corporation organized for the purpose of engaging in agriculture may
that would injure B without violating his duty of loyalty to B at the same time hold his stock in such corporations solely for investment and not for the
he could hardly abstain from voting without depriving A of his best judgment. If purpose of bringing about or attempting to bring about a combination to
the firms really do compete — in the sense of vying for economic advantage exercise control of incorporations ... ."
at the expense of the other — there can hardly be any reason for an interlock Neither are We persuaded by the claim that the by-law was Intended to prevent
between competitors other than the suppression of competition. 43 (Emphasis the candidacy of petitioner for election to the Board. If the by-law were to be
supplied.) applied in the case of one stockholder but waived in the case of another, then
it could be reasonably claimed that the by-law was being applied in a
discriminatory manner. However, the by law, by its terms, applies to all candidate for the Board of Directors should be reviewed by the Securities
stockholders. The equal protection clause of the Constitution requires only that behind Exchange Commission en banc and its decision shall be final unless
the by-law operate equally upon all persons of a class. Besides, before reversed by this Court on certiorari. 49 Indeed, it is a settled principle that where
petitioner can be declared ineligible to run for director, there must be hearing the action of a Board of Directors is an abuse of discretion, or forbidden by
and evidence must be submitted to bring his case within the ambit of the statute, or is against public policy, or is ultra vires, or is a fraud upon minority
disqualification. Sound principles of public policy and management, therefore, stockholders or creditors, or will result in waste, dissipation or misapplication
support the view that a by-law which disqualifies a competition from election of the corporation assets, a court of equity has the power to grant appropriate
to the Board of Directors of another corporation is valid and reasonable. relief. 50

In the absence of any legal prohibition or overriding public policy, wide latitude III
may be accorded to the corporation in adopting measures to protect legitimate
corporation interests. Thus, "where the reasonableness of a by-law is a mere Whether or not respondent SEC gravely abused its discretion in denying
matter of judgment, and upon which reasonable minds must necessarily differ, petitioner's request for an examination of the records of San Miguel
a court would not be warranted in substituting its judgment instead of the International Inc., a fully owned subsidiary of San Miguel Corporation —
judgment of those who are authorized to make by-laws and who have Respondent San Miguel Corporation stated in its memorandum that
expressed their authority. 45 petitioner's claim that he was denied inspection rights as stockholder of SMC
Although it is asserted that the amended by-laws confer on the present Board "was made in the teeth of undisputed facts that, over a specific period,
powers to perpetua themselves in power such fears appear to be misplaced. petitioner had been furnished numerous documents and information," to wit:
This power, but is very nature, is subject to certain well established limitations. (1) a complete list of stockholders and their stockholdings; (2) a complete list
One of these is inherent in the very convert and definition of the terms of proxies given by the stockholders for use at the annual stockholders'
"competition" and "competitor". "Competition" implies a struggle for advantage meeting of May 18, 1975; (3) a copy of the minutes of the stockholders'
between two or more forces, each possessing, in substantially similar if not meeting of March 18,1976; (4) a breakdown of SMC's P186.6 million
Identical degree, certain characteristics essential to the business sought. It investment in associated companies and other companies as of December 31,
means an independent endeavor of two or more persons to obtain the 1975; (5) a listing of the salaries, allowances, bonuses and other
business patronage of a third by offering more advantageous terms as an compensation or remunerations received by the directors and corporate
inducement to secure trade. 46 The test must be whether the business does in officers of SMC; (6) a copy of the US $100 million Euro-Dollar Loan Agreement
fact compete, not whether it is capable of an indirect and highly unsubstantial of SMC; and (7) copies of the minutes of all meetings of the Board of Directors
duplication of an isolated or non-characteristics activity. 47 It is, therefore, from January 1975 to May 1976, with deletions of sensitive data, which
obvious that not every person or entity engaged in business of the same kind deletions were not objected to by petitioner.
is a competitor. Such factors as quantum and place of business, Identity of Further, it was averred that upon request, petitioner was informed in writing on
products and area of competition should be taken into consideration. It is, September 18, 1976; (1) that SMC's foreign investments are handled by San
therefore, necessary to show that petitioner's business covers a substantial Miguel International, Inc., incorporated in Bermuda and wholly owned by SMC;
portion of the same markets for similar products to the extent of not less than this was SMC's first venture abroad, having started in 1948 with an initial outlay
10% of respondent corporation's market for competing products. While We of ?500,000.00, augmented by a loan of Hongkong $6 million from a foreign
here sustain the validity of the amended by-laws, it does not follow as a bank under the personal guaranty of SMC's former President, the late Col.
necessary consequence that petitioner is ipso facto disqualified. Consonant Andres Soriano; (2) that as of December 31, 1975, the estimated value of SMI
with the requirement of due process, there must be due hearing at which the would amount to almost P400 million (3) that the total cash dividends received
petitioner must be given the fullest opportunity to show that he is not covered by SMC from SMI since 1953 has amount to US $ 9.4 million; and (4) that from
by the disqualification. As trustees of the corporation and of the stockholders, 1972-1975, SMI did not declare cash or stock dividends, all earnings having
it is the responsibility of directors to act with fairness to the been used in line with a program for the setting up of breweries by SMI
stockholders.48 Pursuant to this obligation and to remove any suspicion that
this power may be utilized by the incumbent members of the Board to These averments are supported by the affidavit of the Corporate Secretary,
perpetuate themselves in power, any decision of the Board to disqualify a enclosing photocopies of the afore-mentioned documents. 51
Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he no property except the shares of stock of subsidiary corporations which are
record of all business transactions of the corporation and minutes of any merely agents or instrumentalities of the holding company, the legal fiction of
meeting shall be open to the inspection of any director, member or stockholder distinct corporate entities may be disregarded and the books, papers and
of the corporation at reasonable hours." documents of all the corporations may be required to be produced for
examination, 60 and that a writ of mandamus, may be granted, as the records
The stockholder's right of inspection of the corporation's books and records is of the subsidiary were, to all incontents and purposes, the records of the parent
based upon their ownership of the assets and property of the corporation. It is, even though subsidiary was not named as a party. 61 mandamus was likewise
therefore, an incident of ownership of the corporate property, whether this held proper to inspect both the subsidiary's and the parent corporation's books
ownership or interest be termed an equitable ownership, a beneficial upon proof of sufficient control or dominion by the parent showing the relation
ownership, or a ownership. 52 This right is predicated upon the necessity of of principal or agent or something similar thereto. 62
self-protection. It is generally held by majority of the courts that where the right
is granted by statute to the stockholder, it is given to him as such and must be On the other hand, mandamus at the suit of a stockholder was refused where
exercised by him with respect to his interest as a stockholder and for some the subsidiary corporation is a separate and distinct corporation domiciled and
purpose germane thereto or in the interest of the corporation. 53 In other words, with its books and records in another jurisdiction, and is not legally subject to
the inspection has to be germane to the petitioner's interest as a stockholder, the control of the parent company, although it owned a vast majority of the
and has to be proper and lawful in character and not inimical to the interest of stock of the subsidiary. 63 Likewise, inspection of the books of an allied
the corporation. 54 In Grey v. Insular Lumber, 55 this Court held that "the right corporation by stockholder of the parent company which owns all the stock of
to examine the books of the corporation must be exercised in good faith, for the subsidiary has been refused on the ground that the stockholder was not
specific and honest purpose, and not to gratify curiosity, or for specific and within the class of "persons having an interest." 64
honest purpose, and not to gratify curiosity, or for speculative or vexatious
purposes. The weight of judicial opinion appears to be, that on application for In the Nash case, 65 The Supreme Court of New York held that the contractual
mandamus to enforce the right, it is proper for the court to inquire into and right of former stockholders to inspect books and records of the corporation
consider the stockholder's good faith and his purpose and motives in seeking included the right to inspect corporation's subsidiaries' books and records
inspection. 56 Thus, it was held that "the right given by statute is not absolute which were in corporation's possession and control in its office in New York."
and may be refused when the information is not sought in good faith or is used In the Bailey case, 66 stockholders of a corporation were held entitled to
to the detriment of the corporation." 57 But the "impropriety of purpose such as inspect the records of a controlled subsidiary corporation which used the same
will defeat enforcement must be set up the corporation defensively if the Court offices and had Identical officers and directors.
is to take cognizance of it as a qualification. In other words, the specific
provisions take from the stockholder the burden of showing propriety of In his "Urgent Motion for Production and Inspection of Documents" before
purpose and place upon the corporation the burden of showing impropriety of respondent SEC, petitioner contended that respondent corporation "had been
purpose or motive. 58 It appears to be the general rule that stockholders are attempting to suppress information for the stockholders" and that petitioner,
entitled to full information as to the management of the corporation and the "as stockholder of respondent corporation, is entitled to copies of some
manner of expenditure of its funds, and to inspection to obtain such documents which for some reason or another, respondent corporation is very
information, especially where it appears that the company is being reluctant in revealing to the petitioner notwithstanding the fact that no harm
mismanaged or that it is being managed for the personal benefit of officers or would be caused thereby to the corporation." 67 There is no question that
directors or certain of the stockholders to the exclusion of others." 59 stockholders are entitled to inspect the books and records of a corporation in
order to investigate the conduct of the management, determine the financial
While the right of a stockholder to examine the books and records of a condition of the corporation, and generally take an account of the stewardship
corporation for a lawful purpose is a matter of law, the right of such stockholder of the officers and directors. 68
to examine the books and records of a wholly-owned subsidiary of the
corporation in which he is a stockholder is a different thing. In the case at bar, considering that the foreign subsidiary is wholly owned by
respondent San Miguel Corporation and, therefore, under its control, it would
Some state courts recognize the right under certain conditions, while others be more in accord with equity, good faith and fair dealing to construe the
do not. Thus, it has been held that where a corporation owns approximately statutory right of petitioner as stockholder to inspect the books and records of
the corporation as extending to books and records of such wholly subsidiary important to the investing corporation and would aid it in its purpose, to require
which are in respondent corporation's possession and control. authority of the stockholders would be to unduly curtail the power of the Board
of Directors." This Court affirmed the ruling of the court a quo on the matter
IV and, quoting Prof. Sulpicio S. Guevara, said:
Whether or not respondent SEC gravely abused its discretion in allowing the "j. Power to acquire or dispose of shares or securities. — A private corporation,
stockholders of respondent corporation to ratify the investment of corporate in order to accomplish is purpose as stated in its articles of incorporation, and
funds in a foreign corporation subject to the limitations imposed by the Corporation Law, has the power to
Petitioner reiterates his contention in SEC Case No. 1423 that respondent acquire, hold, mortgage, pledge or dispose of shares, bonds, securities, and
corporation invested corporate funds in SMI without prior authority of the other evidence of indebtedness of any domestic or foreign corporation. Such
stockholders, thus violating section 17-1/2 of the Corporation Law, and alleges an act, if done in pursuance of the corporate purpose, does not need the
that respondent SEC should have investigated the charge, being a statutory approval of stockholders; but when the purchase of shares of another
offense, instead of allowing ratification of the investment by the stockholders. corporation is done solely for investment and not to accomplish the purpose of
its incorporation, the vote of approval of the stockholders is necessary. In any
Respondent SEC's position is that submission of the investment to the case, the purchase of such shares or securities must be subject to the
stockholders for ratification is a sound corporate practice and should not be limitations established by the Corporations law; namely, (a) that no agricultural
thwarted but encouraged. or mining corporation shall be restricted to own not more than 15% of the
voting stock of nay agricultural or mining corporation; and (c) that such
Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds holdings shall be solely for investment and not for the purpose of bringing
in any other corporation or business or for any purpose other than the main
about a monopoly in any line of commerce of combination in restraint of trade."
purpose for which it was organized" provided that its Board of Directors has
The Philippine Corporation Law by Sulpicio S. Guevara, 1967 Ed., p. 89)
been so authorized by the affirmative vote of stockholders holding shares (Emphasis supplied.)
entitling them to exercise at least two-thirds of the voting power. If the
investment is made in pursuance of the corporate purpose, it does not need 40. Power to invest corporate funds. — A private corporation has the power to
the approval of the stockholders. It is only when the purchase of shares is done invest its corporate funds "in any other corporation or business, or for any
solely for investment and not to accomplish the purpose of its incorporation purpose other than the main purpose for which it was organized, provide that
that the vote of approval of the stockholders holding shares entitling them to 'its board of directors has been so authorized in a resolution by the affirmative
exercise at least two-thirds of the voting power is necessary. 69 vote of stockholders holding shares in the corporation entitling them to
exercise at least two-thirds of the voting power on such a propose at a
As stated by respondent corporation, the purchase of beer manufacturing
stockholders' meeting called for that purpose,' and provided further, that no
facilities by SMC was an investment in the same business stated as its main agricultural or mining corporation shall in anywise be interested in any other
purpose in its Articles of Incorporation, which is to manufacture and market
agricultural or mining corporation. When the investment is necessary to
beer. It appears that the original investment was made in 1947-1948, when
accomplish its purpose or purposes as stated in its articles of incorporation the
SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong
approval of the stockholders is not necessary."" (Id., p. 108) (Emphasis ours.)
(Hongkong Brewery & Distillery, Ltd.) for the manufacture and marketing of
(pp. 258-259).
San Miguel beer thereat. Restructuring of the investment was made in 1970-
1971 thru the organization of SMI in Bermuda as a tax free reorganization. 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
Under these circumstances, the ruling in De la Rama v. Manao Sugar Central
individual, may ratify and thereby render binding upon it the originally
Co., Inc., supra, appears relevant. In said case, one of the issues was the unauthorized acts of its officers or other agents. 70 This is true because the
legality of an investment made by Manao Sugar Central Co., Inc., without prior
questioned investment is neither contrary to law, morals, public order or public
resolution approved by the affirmative vote of 2/3 of the stockholders' voting
policy. It is a corporate transaction or contract which is within the corporate
power, in the Philippine Fiber Processing Co., Inc., a company engaged in the
powers, but which is defective from a supported failure to observe in its
manufacture of sugar bags. The lower court said that "there is more logic in
execution the. requirement of the law that the investment must be authorized
the stand that if the investment is made in a corporation whose business is
by the affirmative vote of the stockholders holding two-thirds of the voting Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez
power. This requirement is for the benefit of the stockholders. The and Guerrero filed a separate opinion, wherein they voted against the validity
stockholders for whose benefit the requirement was enacted may, therefore, of the questioned amended bylaws and that this question should properly be
ratify the investment and its ratification by said stockholders obliterates any resolved first by the SEC as the agency of primary jurisdiction. They concur in
defect which it may have had at the outset. "Mere ultra vires acts", said this the result that petitioner may be allowed to run for and sit as director of
Court in Pirovano, 71 "or those which are not illegal and void ab initio, but are respondent SMC in the scheduled May 6, 1979 election and subsequent
not merely within the scope of the articles of incorporation, are merely voidable elections until disqualified after proper hearing by the respondent's Board of
and may become binding and enforceable when ratified by the stockholders. Directors and petitioner's disqualification shall have been sustained by
respondent SEC en banc and ultimately by final judgment of this Court.
Besides, the investment was for the purchase of beer manufacturing and
marketing facilities which is apparently relevant to the corporate purpose. The In resume, subject to the qualifications aforestated judgment is hereby
mere fact that respondent corporation submitted the assailed investment to rendered GRANTING the petition by allowing petitioner to examine the books
the stockholders for ratification at the annual meeting of May 10, 1977 cannot and records of San Miguel International, Inc. as specified in the petition. The
be construed as an admission that respondent corporation had committed petition, insofar as it assails the validity of the amended by- laws and the
an ultra vires act, considering the common practice of corporations of ratification of the foreign investment of respondent corporation, for lack of
periodically submitting for the gratification of their stockholders the acts of their necessary votes, is hereby DISMISSED. No costs.
directors, officers and managers.
Makasiar, Santos Abad Santos and De Castro, JJ., concur.
WHEREFORE, judgment is hereby rendered as follows:
Aquino, and Melencio Herrera JJ., took no part.
The Court voted unanimously to grant the petition insofar as it prays that
petitioner be allowed to examine the books and records of San Miguel
International, Inc., as specified by him.

On the matter of the validity of the amended by-laws of respondent San Miguel Separate Opinions
Corporation, six (6) Justices, namely, Justices Barredo, Makasiar, Antonio,
Santos, Abad Santos and De Castro, voted to sustain the validity per se of the
amended by-laws in question and to dismiss the petition without prejudice to
TEEHANKEE, CONCEPCION JR., FERNANDEZ and
the question of the actual disqualification of petitioner John Gokongwei, Jr. to
GUERRERO, JJ., concurring:
run and if elected to sit as director of respondent San Miguel Corporation being
decided, after a new and proper hearing by the Board of Directors of said I
corporation, whose decision shall be appealable to the respondent Securities
and Exchange Commission deliberating and acting en banc and ultimately to As correctly stated in the main opinion of Mr. Justice Antonio, the Court is
this Court. Unless disqualified in the manner herein provided, the prohibition unanimous in its judgment granting the petitioner as stockholder of respondent
in the afore-mentioned amended by-laws shall not apply to petitioner. San Miguel Corporation the right to inspect, examine and secure copies of the
records of San Miguel International, inc. (SMI), a wholly owned foreign
The afore-mentioned six (6) Justices, together with Justice Fernando, voted to subsidiary corporation of respondent San Miguel Corporation. Respondent
declare the issue on the validity of the foreign investment of respondent commissions en banc Order No. 449, Series of 19 7 7, denying petitioner's
corporation as moot. right of inspection for "not being a stockholder of San Miguel International, Inc."
has been accordingly set aside. It need be only pointed out that:
Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended
by-laws, pending hearing by this Court on the applicability of section 13(5) of a) The commission's reasoning grossly disregards the fact that the
the Corporation Law to petitioner. stockholders of San Miguel Corporation are likewise the owners of San Miguel
Justice Fernando reserved his vote on the validity of subject amendment to International, Inc. as the corporation's wholly owned foreign subsidiary and
therefore have every right to have access to its books and records. otherwise,
the by-laws but otherwise concurs in the result.
the directors and management of any Philippine corporation by the simple at bar is "premature" and that the administrative remedies before the
device of organizing with the corporation's funds foreign subsidiaries would be commission should first be availed of and exhausted. 4
granted complete immunity from the stockholders' scrutiny of its foreign
operations and would have a conduit for dissipating, if not misappropriating, We are of the opinion that the questioned amended by-laws, as they are,
the corporation funds and assets by merely channeling them into foreign (adopted after almost a century of respondent corporation's existence as a
subsidiaries' operations; and public corporation with its shares freely purchased and traded in the open
market without restriction and disqualification) which would bar petitioner from
b) Petitioner's right of examination herein recognized refers to all books and qualification, nomination and election as director and worse, grant the board
records of the foreign subsidiary SMI which are which are " in respondent by 3/4 vote the arbitrary power to bar any stockholder from his right to be
corporation's possession and control" 1, meaning to say regardless of whether elected as director by the simple expedient of declaring him to be engaged in
or not such books and records are physically within the Philippines. all such a "competitive or antagonistic business" or declaring him as a "nominee" of the
books and records of SMI are legally within respondent corporation's competitive or antagonistic" stockholder are illegal, oppressive, arbitrary and
"possession and control" and if nay books or records are kept abroad, (e.g. in unreasonable.
the foreign subsidiary's state of domicile, as is to be expected), then the
respondent corporation's board and management are obliged under the We consider the questioned amended by-laws as being specifically tailored to
Court's judgment to bring and make them (or true copies thereof available discriminate against petitioner and depriving him in violation of substantive due
within the Philippines for petitioner's examination and inspection. process of his vested substantial rights as stockholder of respondent
corporation. We further consider said amended by-laws as violating specific
II provisions of the Corporation Law which grant and recognize the right of a
minority stockholder like petitioner to be elected director by the process of
On the other main issue of the Validity of respondent San Miguel Corporation's cumulative voting ordained by the Law (secs 21 and 30) and the right of a
amendment of its by-laws 2 whereby respondent corporation's board of minority director once elected not to be removed from office of director
directors under its resolution dated April 29, 1977 declared petitioner ineligible except for cause by vote of the stockholders holding 2/3 of the subscribed
to be nominated or to be voted or to be elected as of the board of directors, capital stock (sec. 31). If a minority stockholder could be disqualified by such
the Court, composed of 12 members (since Mme. Justice Ameurfina Melencio a by-laws amendment under the guise of providing for "qualifications," these
Herrera inhibited herself from taking part herein, while Mr. Justice Ramon C. mandates of the Corporation Law would have no meaning or purpose.
Aquino upon submittal of the main opinion of Mr. Justice Antonio decided not
to take part), failed to reach a conclusive vote or, the required majority of 8 These vested and substantial rights granted stockholders under the
votes to settle the issue one way or the other. Corporation Law may not be diluted or defeated by the general authority
granted by the Corporation Law itself to corporations to adopt their by-laws (in
Six members of the Court, namely, Justices Barredo, Makasiar, Antonio, section 21) which deal principally with the procedures governing their internal
Santos, Abad Santos and De Castro, considered the issue purely legal and business. The by-laws of any corporation must, be always within the character
voted to sustain the validity per se of the questioned amended by-laws but limits. What the Corporation Law has granted stockholders may not be taken
nevertheless voted that the prohibition and disqualification therein provided away by the corporation's by-laws. The amendment is further an instrument of
shall not apply to petitioner Gokongwei until and after he shall have been oppressiveness and arbitrariness in that the incumbent directors are thereby
given a new and proper hearing" by the corporation's board of directors and enabled to perpetuate themselves in office by the simple expedient of
the board's decision of disqualification she'll have been sustained on appeal disqualifying any unwelcome candidate, no matter how many votes he may
by respondent Securities and Exchange Commission and ultimately by this have.
Court.
However, in view of the inconclusiveness of the vote, we sustain respondent
The undersigned Justices do not consider the issue as purely legal in the light commission's stand as expressed in its Orders Nos. 450 and 451, Series of
of respondent commission's Order No. 451, Series of 1977, denying 1977 that there are unresolved and genuine issues of fact" and that it has yet
petitioner's "Motion for Summary Judgment" on the ground that "the to rule on and finally decide the validity of the disputed by-law provision",
Commission en banc finds that there (are) unresolved and genuine issues of subject to appeal by either party to this Court.
fact" 3 as well as its position in this case to the Solicitor General that the case
In view of prematurity of the proceedings here (as likewise expressed by Mr. In view of the Court's unanimous judgment on this point the portion of
Justice Fernando), the case should as a consequence be remanded to the respondent commission's Order No. 450, Series of 977 which imposed "the
Securities and Exchange Commission as the agency of primary jurisdiction for condition that he [petitioner] cannot sit as board member if elected until after
a full hearing and reception of evidence of all relevant facts (which should the Commission shall have finally decided the validity of the disputed by-law
property be submitted to the commission instead of the piecemeal documents provision" has been likewise accordingly set aside.
submitted as annexes to this Court which is not a trier of facts) concerning not
only the petitioner but the members of the board of directors of respondent III
corporation as well, so that it may determine on the basis thereof the issue of By way of recapitulation, so that the Court's decision and judgment may be
the legality of the questioned amended by-laws, and assuming Chat it holds clear and not subject to ambiguity, we state the following.
the same to be valid whether the same are arbitrarily and unreasonably applied
to petitioner vis a vis other directors, who, petitioner claims, should in such 1. With the votes of the six Justices concurring unqualifiedly in the main opinion
event be likewise disqualified from sitting in the board of directors by virtue of added to our four votes, plus the Chief Justice's vote and that of Mr. Justice
conflict of interests or their being likewise engaged in competitive or Fernando, the Court has by twelve (12) votes unanimously rendered judgment
antagonistic business" with the corporation such as investment and finance, granting petitioner's right to examine and secure copies of the books and
coconut oil mills cement, milk and hotels. 5 records of San Miguel International, Inc. as a foreign subsidiary of respondent
corporation and respondent commission's Order No. 449, Series of 1977, to
It should be noted that while the petition may be dismissed in view of the the contrary is set aside:
inconclusiveness of the vote and the Court's failure to affair, the required 8-
vote majority to resolve the issue, such as dismissal (for lack of necessary 2. With the same twelve (12) votes, the Court has also unanimously rendered
votes) is of no doctrine value and does not in any manner resolve the issue of judgment declaring that until and after petitioner shall have been given due
the validity of the questioned amended by-laws nor foreclose the same. The process and proper hearing by the respondent board of directors as to the
same should properly be determined in a proper case in the first instance by question of his disqualification under the questioned amended by- laws
the Securities and Exchange Commission as the agency of primary (assuming that the respondent Securities and Exchange Commission
jurisdiction, as above indicated. ultimately upholds the validity of said by laws), and such disqualification shall
have been sustained by respondent Securities and Exchange Commission
The Court is unanimous, therefore, in its judgment that petitioner Gokongwei and ultimately by final judgment of this Court petitioner is deemed eligible for
may run for the office of, and if elected, sit as, member of the board of directors all legal purposes and effect to be nominated and voted and if elected to sit as
of respondent San Miguel Corporation as stated in the dispositive portion of a member of the board of directors of respondent San Miguel Corporation.
the main opinion of Mr. Justice Antonio, to wit: Until and after petitioner has Accordingly, respondent commission's Order No. 450, Series of 1977 to the
been given a "new and proper hearing by the board of directors of said contrary has likewise been set aside; and
corporation, whose decision shall be appealable Lo the respondent Securities
and Exchange Commission deliverating and acting en banc and ultimately to 3. The Court's voting on the validity of respondent corporation's amendment
this Court" and until ' disqualified in the manner herein provided, the prohibition of the by-laws (sec. 2, Art. 111) is inconclusive without the required majority of
in the aforementioned amended by-laws shall not apply to petitioner," In other eight votes to settle the issue one way or the other having been reached. No
words, until and after petitioner shall have been given due process and proper judgment is rendered by the Court thereon and the statements of the six
hearing by the respondent board of directors as to the question of his Justices who have signed the main opinion on the legality thereof have no
qualification or disqualification under the questioned amended by-laws binding effect, much less doctrinal value.
(assuming that the respondent Securities and Exchange C commission
The dismissal of the petition insofar as the question of the validity of the
ultimately upholds the validity of said by laws), and such disqualification shall
disputed by-laws amendment is concerned is not by an judgment with the
have been sustained by respondent Securities and Exchange Commission
and ultimately by final judgment of this Court, petitioner is deemed eligible for required eight votes but simply by force of Rule 56, section II of the Rules of
Court, the pertinent portion of which provides that "where the court en banc is
all legal purposes and effects to be nominated and voted and if elected to sit
equally divided in opinion, or the necessary majority cannot be had, the case
as a member of the hoard of directors of respondent San Miguel Corporation.
shall be reheard, and if on re-hearing no decision is reached, the action shall
be dismissed if originally commenced in the court ...." The end result is that 2. Mr. Justice Barredo now contends contrary to the undersigned's
the Court has thereby dismissed the petition which prayed that the Court understanding, as stated on pages 8 and 9 of our joint separate opinion of April
bypass the commission and directly resolved the issue and therefore the 11, 1979 that the legal effect of the dismissal of the petition on the question of
respondent commission may now proceed, as announced in its Order No. 450, validity of the amended by-laws for lack of the necessary votes simply means
Series of 1977, to hear the case before it and receive all relevant evidence that "the Court has thereby dismissed the petition which prayed that the Court
bearing on the issue as hereinabove indicated, and resolve the "unresolved by-pass the commission and directly resolve the issue and therefore the
and genuine issues of fact" (as per Order No. 451, Series of 1977) and the respondent commission may now proceed, as announced in its Order No. 450,
issues of legality of the disputed by-laws amendment. Series of 1977, to hear the case before it and receive all relevant
evidence bearing on the issue as hereinabove indicated, and resolve
Teehankee, Concepcion, Jr., and Fernandez, JJ., concur. the 'unresolved and genuine issues of fact' (as per Order No. 451, Series of
Guerrero, J., concurred. 1977) and the issue of legality of the disputed by-laws amendment," that such
dismissal "has no other legal consequence than that it is the law of the case
TEEHANKEE, CONCEPCION JR., as far as the parties are concerned, albeit the majority of the opinion of six
against four Justices is not doctrinal in the sense that it cannot be cited as
FERNANDEZ and GUERRERO, JJ., concurring:
necessarily a precedent for subsequent cases."
This supplemental opinion is issued with reference to the advance separate
We hold on our part that the doctrine of the law of the case invoked by Mr.
opinion of Mr. Justice Barredo issued by him as to "certain misimpressions as
Justice Barredo has no applicability for the following reasons:
to the import of the decision in this case" which might be produced by our joint
separate opinion of April 11, 1979 and "urgent(ly) to clarify (his) position in a) Our jurisprudence is quite clear that this doctrine may be invoked only where
respect to the rights of the parties resulting from the dismissal of the petition there has been a final and conclusive determination of an issue in the first
herein and the outline of the procedure by which the disqualification of case later invoked as the law of the case.
petitioner Gokongwei can be made effective."
Thus, in People vs. Olarte, 2 we held that
1. Mr. Justice Barredo's advances separate opinion "that as between the
parties herein, the issue of the validity of the challenged by-laws is already "Law of the case" has been defined as the opinion delivered on a former
settled" had, of course, no binding effect. The judgment of the Court is found appeal More specifically, it means that whatever is once irrevocably
on pages 59-61 of the decision of April 11, 1979, penned by Mr. Justice established as the controlling legal rule of decision between the same parties
Antonio, wherein on the question of the validity of the amended by-laws the in the same case continues to he the law of the case, whether correct on
Court's inconclusive voting is set forth as follows: general principles or not, so long as the facts on which such decision was
predicated continue to be the facts of the case before the court. ...
Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended
by-laws, pending hearing by this Court on the applicability of section 13(5) of It need not be stated that the Supreme Court, being the court of last resort, is
the Corporation Law to petitioner. the final arbiter of all legal questions properly brought before it and that
its decision in any given case constitutes the law of that particular case. Once
Justice Fernando reserved his vote on the validity of subject amendment to its judgment becomes final it is binding on all inferior courts, and hence beyond
the by-laws but otherwise concurs in the result. their power and authority to alter or modify Kabigting vs. Acting Director of
Prisons, G. R. No. L-15548, October 30, 1962).
Four (4) Justices, namely, Justices Teehankee, Concepcion Jr., Fernandez
and Guerrero filed a separate opinion, wherein they voted against the validity The decision of this Court on that appeal by the government from the order of
of the questioned amended by-laws and that this question should properly be dismissal, holding that said appeal did not place the appellants, including
resolved first by the SEC as the agency of primary jurisdiction ... 1 Absalon Bignay, in double jeopardy, signed and concurred in by six Justices
as against three dissenters headed by the Chief Justice, promulgated way
As stated in said judgment itself, for lack of the necessary votes, the petition,
back in the year 1952, has long become the law of the case. It may be
insofar as it assails the validity of the questioned by-laws, was dismissed.
erroneous, judged by the law on double jeopardy as recently interpreted by
this same Tribunal Even so, it may not be disturbed and modified. Our recent to representation on the board as provided by law — not to mention that as
interpretation of the law may be applied to new cases, but certainly not to borne out by the fact that no restriction whatsoever appears in the court's
an old one finally and conclusively determined. As already stated, the majority decision, it was never contemplated that petitioner was to be limited to
opinion in that appeal is now the law of the case. (People vs. Pinuila) questions of fact and could not raise the fundamental questions of law bearing
on the invalidity of the questioned amended by-laws at such hearing before
The doctrine of the law of the case, therefore, has no applicability whatsoever the SMC board. Furthermore, it was expressly provided unanimously in the
herein insofar as the question of the validity or invalidity of the amended by- Court's decision that the SMC board's decision on the disqualification of
laws is concerned. The Court's judgment of April 11, 1979 clearly shows that petitioner ("assuming the board of directors of San Miguel Corporation should,
the voting on this question was inconclusive with six against four Justices and after the proper hearing, disqualify him" as qualified in Mr. Justice Barredo's
two other Justices (the Chief Justice and Mr. Justice Fernando) expressly own separate opinion, at page 2) shall be appealable to respondent Securities
reserving their votes thereon, and Mr. Justice Aquino while taking no part in and Exchange Commission "deliberating and acting en banc and "untimately
effect likewise expressly reserved his vote thereon. No final and conclusive to this Court." Again, the Court's judgment as set forth in its decision of April
determination could be reached on the issue and pursuant to the provisions of 11, 1979 contains nothing that would warrant the opinion now expressed that
Rule 56, section 11, since this special civil action originally commenced in this respondent Securities and Exchange Commission may not pass anymore on
Court, the action was simply dismissed with the result that no law of the the question of the invalidity of the amended by-laws. Certainly, it cannot be
case was laid down insofar as the issue of the validity or invalidity of the contended that the Court in dismissing the petition for lack of necessary votes
questioned by-laws is concerned, and the relief sought herein by petitioner actually by-passed the Securities and Exchange Commission and directly
that this Court by-pass the SEC which has yet to hear and determine the same ruled itself on the invalidity of the questioned by-laws when it itself could not
issue pending before it below and that this Court itself directly resolve the said reach a final and conclusive vote (a minimum of eight votes) on the issue and
issue stands denied. three other Justices (the Chief Justice and Messrs. Justices Fernando and
b) The contention of Mr. Justice Barredo that the result of the dismiss of the Aquino) had expressly reserved their vote until after further hearings (first
case was that "petitioner Gokongwei may not hereafter act on the assumption before the Securities and Exchange Commission and ultimately in this Court).
that he can revive the issue of the validity whether in the Securities and Such a view espoused by Mr. Justice Barredo could conceivably result in an
Exchange Commission, in this Court or in any other forum, unless he proceeds incongruous situation where supposedly under the law of this case the
on the basis of a factual milieu different from the setting of this case Not even questioned by-laws would be held valid as against petitioner Gokongwei and
the Securities and Exchange Commission may pass on such question yet the same may be stricken off as invalid as to all other SMC shareholders
anymore at the instance of herein petitioner or anyone acting in his stead or in a proper case.
on his behalf, " appears to us to be untenable.
3. It need only be pointed out that Mr. Justice Barredo's advance separate
The Court through the decision of April 11, 1979, by the unanimous votes of opinion can in no way affect or modify the judgment of this Court as set forth
the twelve participating Justices headed by the Chief Justice, ruled that in the decision of April 11, 1979 and discussed hereinabove. The same bears
petitioner Gokongwei was entitled to a "new and proper hearing" by the SMC the unqualified concurrence of only three Justices out of the six Justices who
board of directors on the matter of his disqualification under the questioned originally voted for the validity per se of the questioned by-laws, namely,
by-laws and that the board's "decision shall be appealable to the respondent Messrs. Justices Antonio, Santos and De Castro. Messrs. Justices Fernando
Securities and Exchange Commission deliberating and acting en banc and and Makasiar did not concur therein but they instead concurred with the limited
ultimately to this Court (and) unless disqualified in the manner herein provided, concurrence of the Chief Justice touching on the law of the case which
the prohibition in the aforementioned amended by-laws shall not apply to guardedly held that the Court has not found merit in the claim that the amended
petitioner." bylaws in question are invalid but without in any manner foreclosing the issue
The entire Court, therefore, recognized that petitioner had not been given and as a matter of fact and law, without in any manner changing or
procedural due process by the SMC board on the matter of his disqualification modifying the above-quoted vote of the Chief Justice as officially rendered in
and that he was entitled to a "new and proper hearing". It stands to reason that the decision of April 11, 1979, wherein he precisely "reserved (his) vote on the
in such hearing, petitioner could raise not only questions of fact but questions validity of the amended by-laws."
of law, particularly questions of law affecting the investing public and their right
4. A word on the separate opinion of Mr. Justice Pacifico de Castro attached BARREDO, J., concurring:
to the advance separate opinion of Mr. Justice Barredo. Mr. Justice De Castro
advances his interpretation as to a restrictive construction of section 13(5) of I reserved the filing of a separate opinion in order to state my own reasons for
the Philippine Corporation Law, ignoring or disregarding the fact that during voting in favor of the validity of the amended by-laws in question. Regrettably,
the Court's deliberations it was brought out that this prohibitory provision was I have not yet finished preparing the same. In view, however, of the joint
and is not raised in issue in this case whether here or in the Securities and separate opinion of Justices Teehankee, Concepcion Jr., Fernandez and
Exchange Commission below (outside of a passing argument by Messrs. Guerrero, the full text of which has just come to my attention, and which I am
Angara, Abello, Concepcion, Regala & Cruz, as counsels for respondent afraid might produce certain misimpressions as to the import of the decision in
Sorianos in their Memorandum of June 26, 1978 that "(T)he disputed By-Laws this case, I consider it urgent to clarify my position in respect to the rights of
does not prohibit petitioner from holding onto, or even increasing his SMC the parties resulting from the dismissal of the petition herein and the outlining
investment; it only restricts any shifting on the part of petitioner from passive of the procedure by which the disqualification of petitioner Gokongwei can be
investor to a director of the company." 3 made effective, hence this advance separate opinion.

As a consequence, the Court abandoned the Idea of calling for another hearing To start with, inasmuch as petitioner Gokongwei himself placed the issue of
wherein the parties could properly raise and discuss this question as a new the validity of said amended by-laws squarely before the Court for resolution,
issue and instead rendered the decision in question, under which the question because he feels, rightly or wrongly, he can no longer have due process or
of section 13(5) could be raised at a new and proper hearing before the SMC justice from the Securities and Exchange Commission, and the private
board and in the Securities and Exchange Commission and in due course respondents have joined with him in that respect, the six votes cast by Justices
before this Court (but with the clear understanding that since both Makasiar, Antonio, Santos, Abad Santos, de Castro and this writer in favor of
corporations, the Robina and SMC are engaged in agriculture as submitted by validity of the amended by-laws in question, with only four members of this
the Sorianos' counsel in their said memorandum, the issue could be raised Court, namely, Justices Teehankee, Concepcion Jr., Fernandez and Guerrero
likewise against SMC and its other shareholders, directors, if not against SMC opining otherwise, and with Chief Justice Castro and Justice Fernando
itself. As expressly stated in the Chief Justices reservation of his vote, the reserving their votes thereon, and Justices Aquino and Melencio Herrera not
matter of the question of the applicability of the said section 13(5) to petitioner voting, thereby resulting in the dismissal of the petition "insofar as it assails the
would be heard by this Court at the appropriate time after the proceedings validity of the amended by- laws ... for lack of necessary votes", has no other
below (and necessarily the question of the validity of the amended by-laws legal consequence than that it is the law of the case as far as the parties herein
would be taken up anew and the Court would at that time be able to reach a are concerned, albeit the majority opinion of six against four Justices is not
final and conclusive vote). doctrinal in the sense that it cannot be cited as necessarily a precedent for
subsequent cases. This means that petitioner Gokongwei and the
Mr. Justice De Castro's personal interpretation of the decision of April 11, 1979 respondents, including the Securities and Exchange Commission, are bound
that petitioner may be allowed to run for election despite adverse decision of by the foregoing result, namely, that the Court en banc has not found merit in
both the SMC board and the Securities and Exchange Commission "only if he the claim that the amended by-laws in question are invalid. Indeed, it is one
comes to this Court and obtains an injunction against the enforcement of the thing to say that dismissal of the case is not doctrinal and entirely another thing
decision disqualifying him" is patently contradictory of his vote on the matter to maintain that such dismissal leaves the issue unsettled. It is somewhat of a
as expressly given in the judgment in the Court's decision of April 11, 1979 (at misreading and misconstruction of Section 11 of Rule 56, contrary to the well-
page 59) that petitioner could run and if elected, sit as director of the known established norm observed by this Court, to state that the dismissal of
respondent SMC and could be disqualified only after a "new and proper a petition for lack of the necessary votes does not amount to a decision on the
hearing by the board of directors of said corporation, whose decision shall be merits. Unquestionably, the Court is deemed to find no merit in a petition in
appealable to the respondent Securities and Exchange Commission two ways, namely, (1) when eight or more members vote expressly in that
deliberating and acting en banc and ultimately to this Court. Unless- sense and (2) when the required number of justices needed to sustain the
disqualified in the manner herein provided, the prohibition in the same cannot be had.
aforementioned amended by-laws shall not apply to petitioner."
I reiterate, therefore, that as between the parties herein, the issue of validity of
Teehankee, Concepcion Jr., Fernandez and Guerrero, JJ., concur. the challenged by-laws is already settled. From which it follows that the same
are already enforceable-insofar as they are concerned. Petitioner Gokongwei Castro, C.J., concurs in Justice Barredo's statement that the dismissal (for lack
may not hereafter act on the assumption that he can revive the issue of validity of necessary votes) of the petition to the extent that "it assails the validity of
whether in the Securities and Exchange Commission, in this Court or in any the amended by laws," is the law of the case at bar, which means in effect that
other forum, unless he proceeds on the basis of a factual milieu different from as far and only in so far as the parties and the Securities and Exchange
the setting of this case. Not even the Securities and Exchange Commission Commission are concerned, the Court has not found merit in the claim that the
may pass on such question anymore at the instance of herein petitioner or amended by-laws in question are invalid.
anyone acting in his stead or on his behalf. The vote of four justices to remand
the case thereto cannot alter the situation. Antonio and Santos, JJ., concur.

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

3. It need only be pointed out that Mr. Justice Barredo's advance separate Mr. Justice De Castro's personal interpretation of the decision of April 11, 1979
opinion can in no way affect or modify the judgment of this Court as set forth that petitioner may be allowed to run for election despite adverse decision of
in the decision of April 11, 1979 and discussed hereinabove. The same bears both the SMC board and the Securities and Exchange Commission "only if he
the unqualified concurrence of only three Justices out of the six Justices who comes to this Court and obtains an injunction against the enforcement of the
originally voted for the validity per se of the questioned by-laws, namely, decision disqualifying him" is patently contradictory of his vote on the matter
Messrs. Justices Antonio, Santos and De Castro. Messrs. Justices Fernando as expressly given in the judgment in the Court's decision of April 11, 1979 (at
and Makasiar did not concur therein but they instead concurred with the limited page 59) that petitioner could run and if elected, sit as director of the
concurrence of the Chief Justice touching on the law of the case which respondent SMC and could be disqualified only after a "new and proper
guardedly held that the Court has not found merit in the claim that the amended hearing by the board of directors of said corporation, whose decision shall be
bylaws in question are invalid but without in any manner foreclosing the issue appealable to the respondent Securities and Exchange Commission
and as a matter of fact and law, without in any manner changing or deliberating and acting en banc and ultimately to this Court. Unless-
modifying the above-quoted vote of the Chief Justice as officially rendered in disqualified in the manner herein provided, the prohibition in the
the decision of April 11, 1979, wherein he precisely "reserved (his) vote on the aforementioned amended by-laws shall not apply to petitioner."
validity of the amended by-laws."
Teehankee, Concepcion Jr., Fernandez and Guerrero, JJ., concur.
4. A word on the separate opinion of Mr. Justice Pacifico de Castro attached
to the advance separate opinion of Mr. Justice Barredo. Mr. Justice De Castro BARREDO, J., concurring:
advances his interpretation as to a restrictive construction of section 13(5) of I reserved the filing of a separate opinion in order to state my own reasons for
the Philippine Corporation Law, ignoring or disregarding the fact that during voting in favor of the validity of the amended by-laws in question. Regrettably,
I have not yet finished preparing the same. In view, however, of the joint the setting of this case. Not even the Securities and Exchange Commission
separate opinion of Justices Teehankee, Concepcion Jr., Fernandez and may pass on such question anymore at the instance of herein petitioner or
Guerrero, the full text of which has just come to my attention, and which I am anyone acting in his stead or on his behalf. The vote of four justices to remand
afraid might produce certain misimpressions as to the import of the decision in the case thereto cannot alter the situation.
this case, I consider it urgent to clarify my position in respect to the rights of
the parties resulting from the dismissal of the petition herein and the outlining It is very clear that under the decision herein, the issue of validity is a settled
of the procedure by which the disqualification of petitioner Gokongwei can be matter for the parties herein as the law of the case, and it is only the actual
made effective, hence this advance separate opinion. implementation of the impugned amended by-laws in the particular case of
petitioner that remains to be passed upon by the Securities and Exchange
To start with, inasmuch as petitioner Gokongwei himself placed the issue of Commission, and on appeal therefrom to Us, assuming the board of directors
the validity of said amended by-laws squarely before the Court for resolution, of San Miguel Corporation should, after the proper hearing, disqualify him.
because he feels, rightly or wrongly, he can no longer have due process or
justice from the Securities and Exchange Commission, and the private To be sure, the record is replete with substantial indications, nay admissions
respondents have joined with him in that respect, the six votes cast by Justices of petitioner himself, that he is a controlling stockholder of corporations which
Makasiar, Antonio, Santos, Abad Santos, de Castro and this writer in favor of are competitors of San Miguel Corporation. The very substantial areas of such
validity of the amended by-laws in question, with only four members of this competition involving hundreds of millions of pesos worth of businesses stand
Court, namely, Justices Teehankee, Concepcion Jr., Fernandez and Guerrero uncontroverted in the records hereof. In fact, petitioner has even offered, if he
opining otherwise, and with Chief Justice Castro and Justice Fernando should be elected, as director, not to take part when the board takes up matters
reserving their votes thereon, and Justices Aquino and Melencio Herrera not affecting the corresponding areas of competition between his corporation and
voting, thereby resulting in the dismissal of the petition "insofar as it assails the San Miguel. Nonetheless, perhaps, it is best that such evidence be formally
validity of the amended by- laws ... for lack of necessary votes", has no other offered at the hearing contemplated in Our decision.
legal consequence than that it is the law of the case as far as the parties herein As to whether or not petitioner may sit in the board if he wins, definitely, under
are concerned, albeit the majority opinion of six against four Justices is not the decision in this case, even if petitioner should win, he will have to
doctrinal in the sense that it cannot be cited as necessarily a precedent for immediately leave his position or should be ousted the moment this Court
subsequent cases. This means that petitioner Gokongwei and the settles the issue of his actual disqualification, either in a full blown decision or
respondents, including the Securities and Exchange Commission, are bound by denying the petition for review of corresponding decision of the Securities
by the foregoing result, namely, that the Court en banc has not found merit in and Exchange Commission unfavorable to him. And, of course, as a matter of
the claim that the amended by-laws in question are invalid. Indeed, it is one principle, it is to be expected that the matter of his disqualification should be
thing to say that dismissal of the case is not doctrinal and entirely another thing resolved expeditiously and within the shortest possible time, so as to avoid as
to maintain that such dismissal leaves the issue unsettled. It is somewhat of a much juridical injury as possible, considering that the matter of the validity of
misreading and misconstruction of Section 11 of Rule 56, contrary to the well- the prohibition against competitors embodied in the amended by-laws is
known established norm observed by this Court, to state that the dismissal of already unquestionable among the parties herein and to allow him to be in the
a petition for lack of the necessary votes does not amount to a decision on the board for sometime would create an obviously anomalous and legally
merits. Unquestionably, the Court is deemed to find no merit in a petition in incongruous situation that should not be tolerated. Thus, all the parties
two ways, namely, (1) when eight or more members vote expressly in that concerned must act promptly and expeditiously.
sense and (2) when the required number of justices needed to sustain the
same cannot be had. Additionally, my reservation to explain my vote on the validity of the amended
by-laws still stands.
I reiterate, therefore, that as between the parties herein, the issue of validity of
the challenged by-laws is already settled. From which it follows that the same Castro, C.J., concurs in Justice Barredo's statement that the dismissal (for lack
are already enforceable-insofar as they are concerned. Petitioner Gokongwei of necessary votes) of the petition to the extent that "it assails the validity of
may not hereafter act on the assumption that he can revive the issue of validity the amended by laws," is the law of the case at bar, which means in effect that
whether in the Securities and Exchange Commission, in this Court or in any as far and only in so far as the parties and the Securities and Exchange
other forum, unless he proceeds on the basis of a factual milieu different from
Commission are concerned, the Court has not found merit in the claim that the the said by-laws being denied in effect. A vicious circle would be created if,
amended by-laws in question are invalid. should petitioner Gokongwei be barred or disqualified from running by the
Board of Directors of San Miguel Corporation and the Securities and Exchange
Antonio and Santos, JJ., concur. Commission sustain the Board, petitioner could come again to Us, raising the
DE CASTRO, J., concurring: same question he has raised in the present petition, unless the principle of the
"law of the case" is applied.
As stated in the decision penned by Justice Antonio, I voted to uphold the
validity of the amendment to the by-laws in question. What induced me to this Clarifying therefore, my position, I am of the opinion that with the validity of the
view is the practical consideration easily perceived in the following illustration: by-laws in question standing unimpaired it is now for petitioner to show that he
If a person becomes a stockholder of a corporation and gets himself elected does not come within the disqualification as therein provided, both to the Board
as a director, and while he is such a director, he forms his own corporation and later to the Securities and Exchange Commission, it being a foregone
competitive or antagonistic to the corporation of which he is a director, and conclusion that, unless petitioner disposes of his stockholdings in the so-called
becomes Chairman of the Board and President of his own corporation, he may competitive corporations, San Miguel Corporation would apply the by-laws
be removed from his position as director, admittedly one of trust and against him, His right, therefore, to run depends on what, on election day, May
confidence. If this is so, as seems undisputably to be the case, a person 8, 1979, the ruling of the Board and/or the Securities and Exchange
already controlling, and also the Chairman of the Board and President of, a Commission on his qualification to run would be, certainly, not the final ruling
corporation, may be barred from becoming a member of the board of directors of this Court in the event recourse thereto is made by the party feeling
of a competitive corporation. This is my view, even as I am for a restrictive aggrieved, as intimated in the "Joint Separate Opinion" of Justices Teehankee,
interpretation of Section 13(5) of the Philippine Corporation Law, under which Concepcion, Jr., Fernandez and Guerrero, that only after petitioner's
I would limit the scope of the provision to corporations engaged in agriculture, "disqualification" has ultimately been passed upon by this Court should
but only as the word agriculture" refers to its more stated meaning as petitioner, not be allowed to run. Petitioner may be allowed to run, despite an
distinguished from its general and broad connotation. The term would then adverse decision of both the Board and the Securities and Exchange
mean "farming" or raising the natural products of the soil, such as by Commission, only if he comes to this Court and obtain an injunction against
cultivation, in the manner as is required by the Public Land Act in the the enforcement of the decision disqualifying him. Without such injunction
acquisition of agricultural land, such as by homestead, before the patent may being required, all that petitioner has to do is to take his time in coming to this
be issued. It is my opinion that under the public land statute, the development Court, and in so doing, he would in the meantime, be allowed to run, and if he
of a certain portion of the land applied for as specified in the law as a condition wins, to sit. This would, however, be contrary to the doctrine that gives binding,
precedent before the applicant may obtain a patent, is cultivation, not let us if not conclusive, effect of findings of facts of administrative bodies exercising
say, poultry raising or piggery, which may be included in the term Is agriculture" quasi-judicial functions upon appellate courts, which should, accordingly, be
in its broad sense. For under Section 13(5) of the Philippine Corporation Law, enforced until reversed by this Tribunal.
construed not in the strict way as I believe it should, because the provision is Fernando and Makasiar, JJ., concurs.
in derogation of property rights, the petitioner in this case would be disqualified
from becoming an officer of either the San Miguel Corporation or his own Antonio and Santos, JJ., concur
supposedly agricultural corporations. It is thus beyond my comprehension
why, feeling as though I am the only member of the Court for a restricted
interpretation of Section 13(5) of Act 1459, doubt still seems to be in the minds # Separate Opinions
of other members giving the cited provision an unrestricted interpretation, as
to the validity of the amended by-laws in question, or even holding them null TEEHANKEE, CONCEPCION JR., FERNANDEZ and
and void. GUERRERO, JJ., concurring:

I concur with the observation of Justice Barredo that despite that less than six I
votes are for upholding the validity of the by-laws, their validity is deemed
As correctly stated in the main opinion of Mr. Justice Antonio, the Court is
upheld, as constituting the "law of the case." It could not be otherwise, after
unanimous in its judgment granting the petitioner as stockholder of respondent
the present petition is dismissed with the relief sought to declare null and void
San Miguel Corporation the right to inspect, examine and secure copies of the shall not apply to petitioner Gokongwei until and after he shall have been
records of San Miguel International, inc. (SMI), a wholly owned foreign given a new and proper hearing" by the corporation's board of directors and
subsidiary corporation of respondent San Miguel Corporation. Respondent the board's decision of disqualification she'll have been sustained on appeal
commissions en banc Order No. 449, Series of 19 7 7, denying petitioner's by respondent Securities and Exchange Commission and ultimately by this
right of inspection for "not being a stockholder of San Miguel International, Inc." Court.
has been accordingly set aside. It need be only pointed out that:
The undersigned Justices do not consider the issue as purely legal in the light
a) The commission's reasoning grossly disregards the fact that the of respondent commission's Order No. 451, Series of 1977, denying
stockholders of San Miguel Corporation are likewise the owners of San Miguel petitioner's "Motion for Summary Judgment" on the ground that "the
International, Inc. as the corporation's wholly owned foreign subsidiary and Commission en banc finds that there (are) unresolved and genuine issues of
therefore have every right to have access to its books and records. otherwise, fact" 3 as well as its position in this case to the Solicitor General that the case
the directors and management of any Philippine corporation by the simple at bar is "premature" and that the administrative remedies before the
device of organizing with the corporation's funds foreign subsidiaries would be commission should first be availed of and exhausted. 4
granted complete immunity from the stockholders' scrutiny of its foreign
operations and would have a conduit for dissipating, if not misappropriating, We are of the opinion that the questioned amended by-laws, as they are,
the corporation funds and assets by merely channeling them into foreign (adopted after almost a century of respondent corporation's existence as a
subsidiaries' operations; and public corporation with its shares freely purchased and traded in the open
market without restriction and disqualification) which would bar petitioner from
b) Petitioner's right of examination herein recognized refers to all books and qualification, nomination and election as director and worse, grant the board
records of the foreign subsidiary SMI which are which are " in respondent by 3/4 vote the arbitrary power to bar any stockholder from his right to be
corporation's possession and control" 1, meaning to say regardless of whether elected as director by the simple expedient of declaring him to be engaged in
or not such books and records are physically within the Philippines. all such a "competitive or antagonistic business" or declaring him as a "nominee" of the
books and records of SMI are legally within respondent corporation's competitive or antagonistic" stockholder are illegal, oppressive, arbitrary and
"possession and control" and if nay books or records are kept abroad, (e.g. in unreasonable.
the foreign subsidiary's state of domicile, as is to be expected), then the
respondent corporation's board and management are obliged under the We consider the questioned amended by-laws as being specifically tailored to
Court's judgment to bring and make them (or true copies thereof available discriminate against petitioner and depriving him in violation of substantive due
within the Philippines for petitioner's examination and inspection. process of his vested substantial rights as stockholder of respondent
corporation. We further consider said amended by-laws as violating specific
II provisions of the Corporation Law which grant and recognize the right of a
minority stockholder like petitioner to be elected director by the process of
On the other main issue of the Validity of respondent San Miguel Corporation's cumulative voting ordained by the Law (secs 21 and 30) and the right of a
amendment of its by-laws 2 whereby respondent corporation's board of minority director once elected not to be removed from office of director
directors under its resolution dated April 29, 1977 declared petitioner ineligible except for cause by vote of the stockholders holding 2/3 of the subscribed
to be nominated or to be voted or to be elected as of the board of directors, capital stock (sec. 31). If a minority stockholder could be disqualified by such
the Court, composed of 12 members (since Mme. Justice Ameurfina Melencio a by-laws amendment under the guise of providing for "qualifications," these
Herrera inhibited herself from taking part herein, while Mr. Justice Ramon C. mandates of the Corporation Law would have no meaning or purpose.
Aquino upon submittal of the main opinion of Mr. Justice Antonio decided not
to take part), failed to reach a conclusive vote or, the required majority of 8 These vested and substantial rights granted stockholders under the
votes to settle the issue one way or the other. Corporation Law may not be diluted or defeated by the general authority
granted by the Corporation Law itself to corporations to adopt their by-laws (in
Six members of the Court, namely, Justices Barredo, Makasiar, Antonio, section 21) which deal principally with the procedures governing their internal
Santos, Abad Santos and De Castro, considered the issue purely legal and business. The by-laws of any corporation must, be always within the character
voted to sustain the validity per se of the questioned amended by-laws but limits. What the Corporation Law has granted stockholders may not be taken
nevertheless voted that the prohibition and disqualification therein provided away by the corporation's by-laws. The amendment is further an instrument of
oppressiveness and arbitrariness in that the incumbent directors are thereby words, until and after petitioner shall have been given due process and proper
enabled to perpetuate themselves in office by the simple expedient of hearing by the respondent board of directors as to the question of his
disqualifying any unwelcome candidate, no matter how many votes he may qualification or disqualification under the questioned amended by-laws
have. (assuming that the respondent Securities and Exchange C commission
ultimately upholds the validity of said by laws), and such disqualification shall
However, in view of the inconclusiveness of the vote, we sustain respondent have been sustained by respondent Securities and Exchange Commission
commission's stand as expressed in its Orders Nos. 450 and 451, Series of and ultimately by final judgment of this Court, petitioner is deemed eligible for
1977 that there are unresolved and genuine issues of fact" and that it has yet all legal purposes and effects to be nominated and voted and if elected to sit
to rule on and finally decide the validity of the disputed by-law provision", as a member of the hoard of directors of respondent San Miguel Corporation.
subject to appeal by either party to this Court.
In view of the Court's unanimous judgment on this point the portion of
In view of prematurity of the proceedings here (as likewise expressed by Mr. respondent commission's Order No. 450, Series of 977 which imposed "the
Justice Fernando), the case should as a consequence be remanded to the condition that he [petitioner] cannot sit as board member if elected until after
Securities and Exchange Commission as the agency of primary jurisdiction for the Commission shall have finally decided the validity of the disputed by-law
a full hearing and reception of evidence of all relevant facts (which should provision" has been likewise accordingly set aside.
property be submitted to the commission instead of the piecemeal documents
submitted as annexes to this Court which is not a trier of facts) concerning not III
only the petitioner but the members of the board of directors of respondent
corporation as well, so that it may determine on the basis thereof the issue of By way of recapitulation, so that the Court's decision and judgment may be
the legality of the questioned amended by-laws, and assuming Chat it holds clear and not subject to ambiguity, we state the following.
the same to be valid whether the same are arbitrarily and unreasonably applied 1. With the votes of the six Justices concurring unqualifiedly in the main opinion
to petitioner vis a vis other directors, who, petitioner claims, should in such added to our four votes, plus the Chief Justice's vote and that of Mr. Justice
event be likewise disqualified from sitting in the board of directors by virtue of Fernando, the Court has by twelve (12) votes unanimously rendered judgment
conflict of interests or their being likewise engaged in competitive or granting petitioner's right to examine and secure copies of the books and
antagonistic business" with the corporation such as investment and finance, records of San Miguel International, Inc. as a foreign subsidiary of respondent
coconut oil mills cement, milk and hotels. 5 corporation and respondent commission's Order No. 449, Series of 1977, to
It should be noted that while the petition may be dismissed in view of the the contrary is set aside:
inconclusiveness of the vote and the Court's failure to affair, the required 8- 2. With the same twelve (12) votes, the Court has also unanimously rendered
vote majority to resolve the issue, such as dismissal (for lack of necessary judgment declaring that until and after petitioner shall have been given due
votes) is of no doctrine value and does not in any manner resolve the issue of process and proper hearing by the respondent board of directors as to the
the validity of the questioned amended by-laws nor foreclose the same. The question of his disqualification under the questioned amended by- laws
same should properly be determined in a proper case in the first instance by (assuming that the respondent Securities and Exchange Commission
the Securities and Exchange Commission as the agency of primary ultimately upholds the validity of said by laws), and such disqualification shall
jurisdiction, as above indicated. have been sustained by respondent Securities and Exchange Commission
The Court is unanimous, therefore, in its judgment that petitioner Gokongwei and ultimately by final judgment of this Court petitioner is deemed eligible for
may run for the office of, and if elected, sit as, member of the board of directors all legal purposes and effect to be nominated and voted and if elected to sit as
of respondent San Miguel Corporation as stated in the dispositive portion of a member of the board of directors of respondent San Miguel Corporation.
the main opinion of Mr. Justice Antonio, to wit: Until and after petitioner has Accordingly, respondent commission's Order No. 450, Series of 1977 to the
been given a "new and proper hearing by the board of directors of said contrary has likewise been set aside; and
corporation, whose decision shall be appealable Lo the respondent Securities 3. The Court's voting on the validity of respondent corporation's amendment
and Exchange Commission deliverating and acting en banc and ultimately to of the by-laws (sec. 2, Art. 111) is inconclusive without the required majority of
this Court" and until ' disqualified in the manner herein provided, the prohibition eight votes to settle the issue one way or the other having been reached. No
in the aforementioned amended by-laws shall not apply to petitioner," In other
judgment is rendered by the Court thereon and the statements of the six Justice Fernando reserved his vote on the validity of subject amendment to
Justices who have signed the main opinion on the legality thereof have no the by-laws but otherwise concurs in the result.
binding effect, much less doctrinal value.
Four (4) Justices, namely, Justices Teehankee, Concepcion Jr., Fernandez
The dismissal of the petition insofar as the question of the validity of the and Guerrero filed a separate opinion, wherein they voted against the validity
disputed by-laws amendment is concerned is not by an judgment with the of the questioned amended by-laws and that this question should properly be
required eight votes but simply by force of Rule 56, section II of the Rules of resolved first by the SEC as the agency of primary jurisdiction ... 1
Court, the pertinent portion of which provides that "where the court en banc is
equally divided in opinion, or the necessary majority cannot be had, the case As stated in said judgment itself, for lack of the necessary votes, the petition,
shall be reheard, and if on re-hearing no decision is reached, the action shall insofar as it assails the validity of the questioned by-laws, was dismissed.
be dismissed if originally commenced in the court ...." The end result is that 2. Mr. Justice Barredo now contends contrary to the undersigned's
the Court has thereby dismissed the petition which prayed that the Court understanding, as stated on pages 8 and 9 of our joint separate opinion of April
bypass the commission and directly resolved the issue and therefore the 11, 1979 that the legal effect of the dismissal of the petition on the question of
respondent commission may now proceed, as announced in its Order No. 450, validity of the amended by-laws for lack of the necessary votes simply means
Series of 1977, to hear the case before it and receive all relevant evidence that "the Court has thereby dismissed the petition which prayed that the Court
bearing on the issue as hereinabove indicated, and resolve the "unresolved by-pass the commission and directly resolve the issue and therefore the
and genuine issues of fact" (as per Order No. 451, Series of 1977) and the respondent commission may now proceed, as announced in its Order No. 450,
issues of legality of the disputed by-laws amendment. Series of 1977, to hear the case before it and receive all relevant
Teehankee, Concepcion, Jr., and Fernandez, JJ., concur. evidence bearing on the issue as hereinabove indicated, and resolve
the 'unresolved and genuine issues of fact' (as per Order No. 451, Series of
Guerrero, J., concurred. 1977) and the issue of legality of the disputed by-laws amendment," that such
dismissal "has no other legal consequence than that it is the law of the case
TEEHANKEE, CONCEPCION JR., FERNANDEZ and as far as the parties are concerned, albeit the majority of the opinion of six
GUERRERO, JJ., concurring: against four Justices is not doctrinal in the sense that it cannot be cited as
This supplemental opinion is issued with reference to the advance separate necessarily a precedent for subsequent cases."
opinion of Mr. Justice Barredo issued by him as to "certain misimpressions as We hold on our part that the doctrine of the law of the case invoked by Mr.
to the import of the decision in this case" which might be produced by our joint Justice Barredo has no applicability for the following reasons:
separate opinion of April 11, 1979 and "urgent(ly) to clarify (his) position in
respect to the rights of the parties resulting from the dismissal of the petition a) Our jurisprudence is quite clear that this doctrine may be invoked only where
herein and the outline of the procedure by which the disqualification of there has been a final and conclusive determination of an issue in the first
petitioner Gokongwei can be made effective." case later invoked as the law of the case.

1. Mr. Justice Barredo's advances separate opinion "that as between the Thus, in People vs. Olarte, 2 we held that
parties herein, the issue of the validity of the challenged by-laws is already
settled" had, of course, no binding effect. The judgment of the Court is found "Law of the case" has been defined as the opinion delivered on a former
on pages 59-61 of the decision of April 11, 1979, penned by Mr. Justice appeal More specifically, it means that whatever is once irrevocably
Antonio, wherein on the question of the validity of the amended by-laws the established as the controlling legal rule of decision between the same parties
Court's inconclusive voting is set forth as follows: in the same case continues to he the law of the case, whether correct on
general principles or not, so long as the facts on which such decision was
Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended predicated continue to be the facts of the case before the court. ...
by-laws, pending hearing by this Court on the applicability of section 13(5) of
the Corporation Law to petitioner. It need not be stated that the Supreme Court, being the court of last resort, is
the final arbiter of all legal questions properly brought before it and that
its decision in any given case constitutes the law of that particular case. Once
its judgment becomes final it is binding on all inferior courts, and hence beyond Securities and Exchange Commission deliberating and acting en banc and
their power and authority to alter or modify Kabigting vs. Acting Director of ultimately to this Court (and) unless disqualified in the manner herein provided,
Prisons, G. R. No. L-15548, October 30, 1962). the prohibition in the aforementioned amended by-laws shall not apply to
petitioner."
"The decision of this Court on that appeal by the government from the order of
dismissal, holding that said appeal did not place the appellants, including The entire Court, therefore, recognized that petitioner had not been given
Absalon Bignay, in double jeopardy, signed and concurred in by six Justices procedural due process by the SMC board on the matter of his disqualification
as against three dissenters headed by the Chief Justice, promulgated way and that he was entitled to a "new and proper hearing". It stands to reason that
back in the year 1952, has long become the law of the case. It may be in such hearing, petitioner could raise not only questions of fact but questions
erroneous, judged by the law on double jeopardy as recently interpreted by of law, particularly questions of law affecting the investing public and their right
this same Tribunal Even so, it may not be disturbed and modified. Our recent to representation on the board as provided by law — not to mention that as
interpretation of the law may be applied to new cases, but certainly not to borne out by the fact that no restriction whatsoever appears in the court's
an old one finally and conclusively determined. As already stated, the majority decision, it was never contemplated that petitioner was to be limited to
opinion in that appeal is now the law of the case." (People vs. Pinuila) questions of fact and could not raise the fundamental questions of law bearing
on the invalidity of the questioned amended by-laws at such hearing before
The doctrine of the law of the case, therefore, has no applicability whatsoever the SMC board. Furthermore, it was expressly provided unanimously in the
herein insofar as the question of the validity or invalidity of the amended by- Court's decision that the SMC board's decision on the disqualification of
laws is concerned. The Court's judgment of April 11, 1979 clearly shows that petitioner ("assuming the board of directors of San Miguel Corporation should,
the voting on this question was inconclusive with six against four Justices and after the proper hearing, disqualify him" as qualified in Mr. Justice Barredo's
two other Justices (the Chief Justice and Mr. Justice Fernando) expressly own separate opinion, at page 2) shall be appealable to respondent Securities
reserving their votes thereon, and Mr. Justice Aquino while taking no part in and Exchange Commission "deliberating and acting en banc and "untimately
effect likewise expressly reserved his vote thereon. No final and conclusive to this Court." Again, the Court's judgment as set forth in its decision of April
determination could be reached on the issue and pursuant to the provisions of 11, 1979 contains nothing that would warrant the opinion now expressed that
Rule 56, section 11, since this special civil action originally commenced in this respondent Securities and Exchange Commission may not pass anymore on
Court, the action was simply dismissed with the result that no law of the the question of the invalidity of the amended by-laws. Certainly, it cannot be
case was laid down insofar as the issue of the validity or invalidity of the contended that the Court in dismissing the petition for lack of necessary votes
questioned by-laws is concerned, and the relief sought herein by petitioner actually by-passed the Securities and Exchange Commission and directly
that this Court by-pass the SEC which has yet to hear and determine the same ruled itself on the invalidity of the questioned by-laws when it itself could not
issue pending before it below and that this Court itself directly resolve the said reach a final and conclusive vote (a minimum of eight votes) on the issue and
issue stands denied. three other Justices (the Chief Justice and Messrs. Justices Fernando and
b) The contention of Mr. Justice Barredo that the result of the dismiss of the Aquino) had expressly reserved their vote until after further hearings (first
case was that "petitioner Gokongwei may not hereafter act on the assumption before the Securities and Exchange Commission and ultimately in this Court).
that he can revive the issue of the validity whether in the Securities and Such a view espoused by Mr. Justice Barredo could conceivably result in an
Exchange Commission, in this Court or in any other forum, unless he proceeds incongruous situation where supposedly under the law of this case the
on the basis of a factual milieu different from the setting of this case Not even questioned by-laws would be held valid as against petitioner Gokongwei and
the Securities and Exchange Commission may pass on such question yet the same may be stricken off as invalid as to all other SMC shareholders
anymore at the instance of herein petitioner or anyone acting in his stead or in a proper case.
on his behalf, " appears to us to be untenable.
3. It need only be pointed out that Mr. Justice Barredo's advance separate
The Court through the decision of April 11, 1979, by the unanimous votes of opinion can in no way affect or modify the judgment of this Court as set forth
the twelve participating Justices headed by the Chief Justice, ruled that in the decision of April 11, 1979 and discussed hereinabove. The same bears
petitioner Gokongwei was entitled to a "new and proper hearing" by the SMC the unqualified concurrence of only three Justices out of the six Justices who
board of directors on the matter of his disqualification under the questioned originally voted for the validity per se of the questioned by-laws, namely,
by-laws and that the board's "decision shall be appealable to the respondent
Messrs. Justices Antonio, Santos and De Castro. Messrs. Justices Fernando as expressly given in the judgment in the Court's decision of April 11, 1979 (at
and Makasiar did not concur therein but they instead concurred with the limited page 59) that petitioner could run and if elected, sit as director of the
concurrence of the Chief Justice touching on the law of the case which respondent SMC and could be disqualified only after a "new and proper
guardedly held that the Court has not found merit in the claim that the amended hearing by the board of directors of said corporation, whose decision shall be
bylaws in question are invalid but without in any manner foreclosing the issue appealable to the respondent Securities and Exchange Commission
and as a matter of fact and law, without in any manner changing or deliberating and acting en banc and ultimately to this Court. Unless-
modifying the above-quoted vote of the Chief Justice as officially rendered in disqualified in the manner herein provided, the prohibition in the
the decision of April 11, 1979, wherein he precisely "reserved (his) vote on the aforementioned amended by-laws shall not apply to petitioner."
validity of the amended by-laws."
Teehankee, Concepcion Jr., Fernandez and Guerrero, JJ., concur.
4. A word on the separate opinion of Mr. Justice Pacifico de Castro attached
to the advance separate opinion of Mr. Justice Barredo. Mr. Justice De Castro BARREDO, J., concurring:
advances his interpretation as to a restrictive construction of section 13(5) of I reserved the filing of a separate opinion in order to state my own reasons for
the Philippine Corporation Law, ignoring or disregarding the fact that during voting in favor of the validity of the amended by-laws in question. Regrettably,
the Court's deliberations it was brought out that this prohibitory provision was I have not yet finished preparing the same. In view, however, of the joint
and is not raised in issue in this case whether here or in the Securities and separate opinion of Justices Teehankee, Concepcion Jr., Fernandez and
Exchange Commission below (outside of a passing argument by Messrs. Guerrero, the full text of which has just come to my attention, and which I am
Angara, Abello, Concepcion, Regala & Cruz, as counsels for respondent afraid might produce certain misimpressions as to the import of the decision in
Sorianos in their Memorandum of June 26, 1978 that "(T)he disputed By-Laws this case, I consider it urgent to clarify my position in respect to the rights of
does not prohibit petitioner from holding onto, or even increasing his SMC the parties resulting from the dismissal of the petition herein and the outlining
investment; it only restricts any shifting on the part of petitioner from passive of the procedure by which the disqualification of petitioner Gokongwei can be
investor to a director of the company." 3 made effective, hence this advance separate opinion.
As a consequence, the Court abandoned the Idea of calling for another hearing To start with, inasmuch as petitioner Gokongwei himself placed the issue of
wherein the parties could properly raise and discuss this question as a new the validity of said amended by-laws squarely before the Court for resolution,
issue and instead rendered the decision in question, under which the question because he feels, rightly or wrongly, he can no longer have due process or
of section 13(5) could be raised at a new and proper hearing before the SMC justice from the Securities and Exchange Commission, and the private
board and in the Securities and Exchange Commission and in due course respondents have joined with him in that respect, the six votes cast by Justices
before this Court (but with the clear understanding that since both Makasiar, Antonio, Santos, Abad Santos, de Castro and this writer in favor of
corporations, the Robina and SMC are engaged in agriculture as submitted by validity of the amended by-laws in question, with only four members of this
the Sorianos' counsel in their said memorandum, the issue could be raised Court, namely, Justices Teehankee, Concepcion Jr., Fernandez and Guerrero
likewise against SMC and its other shareholders, directors, if not against SMC opining otherwise, and with Chief Justice Castro and Justice Fernando
itself. As expressly stated in the Chief Justices reservation of his vote, the reserving their votes thereon, and Justices Aquino and Melencio Herrera not
matter of the question of the applicability of the said section 13(5) to petitioner voting, thereby resulting in the dismissal of the petition "insofar as it assails the
would be heard by this Court at the appropriate time after the proceedings validity of the amended by- laws ... for lack of necessary votes", has no other
below (and necessarily the question of the validity of the amended by-laws legal consequence than that it is the law of the case as far as the parties herein
would be taken up anew and the Court would at that time be able to reach a are concerned, albeit the majority opinion of six against four Justices is not
final and conclusive vote). doctrinal in the sense that it cannot be cited as necessarily a precedent for
Mr. Justice De Castro's personal interpretation of the decision of April 11, 1979 subsequent cases. This means that petitioner Gokongwei and the
that petitioner may be allowed to run for election despite adverse decision of respondents, including the Securities and Exchange Commission, are bound
both the SMC board and the Securities and Exchange Commission "only if he by the foregoing result, namely, that the Court en banc has not found merit in
comes to this Court and obtains an injunction against the enforcement of the the claim that the amended by-laws in question are invalid. Indeed, it is one
decision disqualifying him" is patently contradictory of his vote on the matter thing to say that dismissal of the case is not doctrinal and entirely another thing
to maintain that such dismissal leaves the issue unsettled. It is somewhat of a
misreading and misconstruction of Section 11 of Rule 56, contrary to the well- the prohibition against competitors embodied in the amended by-laws is
known established norm observed by this Court, to state that the dismissal of already unquestionable among the parties herein and to allow him to be in the
a petition for lack of the necessary votes does not amount to a decision on the board for sometime would create an obviously anomalous and legally
merits. Unquestionably, the Court is deemed to find no merit in a petition in incongruous situation that should not be tolerated. Thus, all the parties
two ways, namely, (1) when eight or more members vote expressly in that concerned must act promptly and expeditiously.
sense and (2) when the required number of justices needed to sustain the
same cannot be had. Additionally, my reservation to explain my vote on the validity of the amended
by-laws still stands.
I reiterate, therefore, that as between the parties herein, the issue of validity of
the challenged by-laws is already settled. From which it follows that the same Castro, C.J., concurs in Justice Barredo's statement that the dismissal (for lack
are already enforceable-insofar as they are concerned. Petitioner Gokongwei of necessary votes) of the petition to the extent that "it assails the validity of
may not hereafter act on the assumption that he can revive the issue of validity the amended by laws," is the law of the case at bar, which means in effect that
whether in the Securities and Exchange Commission, in this Court or in any as far and only in so far as the parties and the Securities and Exchange
other forum, unless he proceeds on the basis of a factual milieu different from Commission are concerned, the Court has not found merit in the claim that the
the setting of this case. Not even the Securities and Exchange Commission amended by-laws in question are invalid.
may pass on such question anymore at the instance of herein petitioner or Antonio and Santos, JJ., concur.
anyone acting in his stead or on his behalf. The vote of four justices to remand
the case thereto cannot alter the situation. DE CASTRO, J., concurring:

It is very clear that under the decision herein, the issue of validity is a settled As stated in the decision penned by Justice Antonio, I voted to uphold the
matter for the parties herein as the law of the case, and it is only the actual validity of the amendment to the by-laws in question. What induced me to this
implementation of the impugned amended by-laws in the particular case of view is the practical consideration easily perceived in the following illustration:
petitioner that remains to be passed upon by the Securities and Exchange If a person becomes a stockholder of a corporation and gets himself elected
Commission, and on appeal therefrom to Us, assuming the board of directors as a director, and while he is such a director, he forms his own corporation
of San Miguel Corporation should, after the proper hearing, disqualify him. competitive or antagonistic to the corporation of which he is a director, and
becomes Chairman of the Board and President of his own corporation, he may
To be sure, the record is replete with substantial indications, nay admissions be removed from his position as director, admittedly one of trust and
of petitioner himself, that he is a controlling stockholder of corporations which confidence. If this is so, as seems undisputably to be the case, a person
are competitors of San Miguel Corporation. The very substantial areas of such already controlling, and also the Chairman of the Board and President of, a
competition involving hundreds of millions of pesos worth of businesses stand corporation, may be barred from becoming a member of the board of directors
uncontroverted in the records hereof. In fact, petitioner has even offered, if he of a competitive corporation. This is my view, even as I am for a restrictive
should be elected, as director, not to take part when the board takes up matters interpretation of Section 13(5) of the Philippine Corporation Law, under which
affecting the corresponding areas of competition between his corporation and I would limit the scope of the provision to corporations engaged in agriculture,
San Miguel. Nonetheless, perhaps, it is best that such evidence be formally but only as the word agriculture" refers to its more stated meaning as
offered at the hearing contemplated in Our decision. distinguished from its general and broad connotation. The term would then
As to whether or not petitioner may sit in the board if he wins, definitely, under mean "farming" or raising the natural products of the soil, such as by
the decision in this case, even if petitioner should win, he will have to cultivation, in the manner as is required by the Public Land Act in the
immediately leave his position or should be ousted the moment this Court acquisition of agricultural land, such as by homestead, before the patent may
settles the issue of his actual disqualification, either in a full blown decision or be issued. It is my opinion that under the public land statute, the development
by denying the petition for review of corresponding decision of the Securities of a certain portion of the land applied for as specified in the law as a condition
and Exchange Commission unfavorable to him. And, of course, as a matter of precedent before the applicant may obtain a patent, is cultivation, not let us
principle, it is to be expected that the matter of his disqualification should be say, poultry raising or piggery, which may be included in the term Is agriculture"
resolved expeditiously and within the shortest possible time, so as to avoid as in its broad sense. For under Section 13(5) of the Philippine Corporation Law,
much juridical injury as possible, considering that the matter of the validity of construed not in the strict way as I believe it should, because the provision is
in derogation of property rights, the petitioner in this case would be disqualified #Footnotes
from becoming an officer of either the San Miguel Corporation or his own
supposedly agricultural corporations. It is thus beyond my comprehension 1 The pertinent amendments reads as follows:
why, feeling as though I am the only member of the Court for a restricted RESOLVED, That Section 2, Article III of the By-laws of San Miguel
interpretation of Section 13(5) of Act 1459, doubt still seems to be in the minds Corporation, which reads as follows:
of other members giving the cited provision an unrestricted interpretation, as
to the validity of the amended by-laws in question, or even holding them null SECTION 2. Any stockholder having at least five thousand shares registered
and void. in his name may be elected director, but he shall not be qualified to hold office
unless he pledges said five thousand shares to the Corporation to answer for
I concur with the observation of Justice Barredo that despite that less than six his conduct.
votes are for upholding the validity of the by-laws, their validity is deemed
upheld, as constituting the "law of the case." It could not be otherwise, after SECTION 2. Any stockholder having at least five thousand shares registered
the present petition is dismissed with the relief sought to declare null and void in his name may be elected Director, provided, however, that no person shall
the said by-laws being denied in effect. A vicious circle would be created if, qualify or be eligible for nomination or election to the Board of Directors if he
should petitioner Gokongwei be barred or disqualified from running by the is engaged in any business which competes with or is antagonistic to that of
Board of Directors of San Miguel Corporation and the Securities and Exchange the Corporation. Without limiting the generality of the foregoing, a person shall
Commission sustain the Board, petitioner could come again to Us, raising the be deemed to be so engaged:
same question he has raised in the present petition, unless the principle of the
"law of the case" is applied. (a) if he is an officer, manager or controlling person of, or the owner (either of
record or beneficially) of 10% or more of any outstanding class of shares of,
Clarifying therefore, my position, I am of the opinion that with the validity of the any corporation (other than one in which the corporation owns at least 30% of
by-laws in question standing unimpaired it is now for petitioner to show that he the capital stock) engaged in a business which the Board, by at least three-
does not come within the disqualification as therein provided, both to the Board fourths vote, determines to be competitive or antagonistic to that of the
and later to the Securities and Exchange Commission, it being a foregone Corporation; or
conclusion that, unless petitioner disposes of his stockholdings in the so-called
(b) If he is an officer, manager or controlling person of, or the owner (either of
competitive corporations, San Miguel Corporation would apply the by-laws
record or beneficially) or 10% or more of any oustanding class of shares of,
against him, His right, therefore, to run depends on what, on election day, May
8, 1979, the ruling of the Board and/or the Securities and Exchange any other corporation or entity engaged in any line of business of the
Corporation, when in the judgment of the Board, by at least three-fourths vote,
Commission on his qualification to run would be, certainly, not the final ruling
the laws against combinations in restraint of trade shall be violated by such
of this Court in the event recourse thereto is made by the party feeling
aggrieved, as intimated in the "Joint Separate Opinion" of Justices Teehankee, person's membership in the Board of Directors.
Concepcion, Jr., Fernandez and Guerrero, that only after petitioner's (c) If the Board, in the exercise of its judgment in good faith, determines by at
"disqualification" has ultimately been passed upon by this Court should least three-fourths vote that he is the nominee of any person set forth in (a) or
petitioner, not be allowed to run. Petitioner may be allowed to run, despite an (b).
adverse decision of both the Board and the Securities and Exchange
Commission, only if he comes to this Court and obtain an injunction against In determining whether or not a person is a controlling person, beneficial
the enforcement of the decision disqualifying him. Without such injunction owner, or the nominee of another, the Board may take into account such
being required, all that petitioner has to do is to take his time in coming to this factors as business and family relationship.
Court, and in so doing, he would in the meantime, be allowed to run, and if he
For the proper implementation of this provision, all nominations for election of
wins, to sit. This would, however, be contrary to the doctrine that gives binding,
Directors by the stockholders shall be submitted in writing to the Board of
if not conclusive, effect of findings of facts of administrative bodies exercising
Directors at least five working days before the date of the Annual Meeting.' "
quasi-judicial functions upon appellate courts, which should, accordingly, be
(Rollo, pp. 462-463).
enforced until reversed by this Tribunal.
(5) The doctrine "corporate opportunity" is not new to the law and is but one
phase of the cardinal rule of undivided loyalty on the part of the fiduciaries. 3
Flecther Cyc. Corporations, Perm. Ed., 1965 Revised Volume, section 861.1,
page 227; 19 Am. Jur. 2d. corporations, section 1311, page 717. Our own
consideration of the quoted terms as such is mainly in Ontjes v. MacNider,
supra, 232 Iowa 562, 579, 5 N.W., 2d 860, 869, which quotes at length with
approval from Guth v. Loft, Inc., 23 Del. Ch. 255, 270, 5 A 2d 503, 511, a
leading case in this area of the law. The quotation cites several precedents for
this: "*** if there is presented to a corporate officer or director a business
opportunity which the corporation is financially able to undertake, is from its
nature, in the line of the corporation's business and is of practical advantage
to it, is one in which the corporation has an interest or a reasonable
expectancy, and by embracing the opportunity, the self-interest of the officer
or director will be brought into seize the opportunity for himself. And, if, in such
circumstances, the interests of the corporation are betrayed, the corporation
may elect to claim all of the benefits of the transaction for itself. and the law
will impress a trust in favor of the corporation upon the property. interests and
profits so acquired.
G.R. No. 108905 October 23, 1997 As adopted in 1968, the by-laws of the association provided in Article IV, as
follows:
GRACE CHRISTIAN HIGH SCHOOL, petitioner,
vs. The annual meeting of the members of the Association shall be held on the
THE COURT OF APPEALS, GRACE VILLAGE ASSOCIATION, INC., first Sunday of January in each calendar year at the principal office of the
ALEJANDRO G. BELTRAN, and ERNESTO L. GO, respondents. Association at 2:00 P.M. where they shall elect by plurality vote and by secret
balloting, the Board of Directors, composed of eleven (11) members to serve
for one (1) year until their successors are duly elected and have qualified.2
MENDOZA, J.: It appears, that on December 20, 1975, a committee of the board of directors
The question for decision in this case is the right of petitioner's representative prepared a draft of an amendment to the by-laws, reading as follows:3
to sit in the board of directors of respondent Grace Village Association, Inc. as VI. ANNUAL MEETING
a permanent member thereof. For fifteen years — from 1975 until 1989 —
petitioner's representative had been recognized as a "permanent director" of The Annual Meeting of the members of the Association shall be held on
the association. But on February 13, 1990, petitioner received notice from the the second Thursday of January of each year. Each Charter or
association's committee on election that the latter was "reexamining" (actually, Associate Member of the Association is entitled to vote. He shall be entitled to
reconsidering) the right of petitioner's representative to continue as an as many votes as he has acquired thru his monthly membership fees
unelected member of the board. As the board denied petitioner's request to be only computed on a ratio of TEN (P10.00) PESOS for one vote.
allowed representation without election, petitioner brought an action
for mandamus in the Home Insurance and Guaranty Corporation. Its action The Charter and Associate Members shall elect the Directors of the
was dismissed by the hearing officer whose decision was subsequently Association. The candidates receiving the first fourteen (14) highest number
affirmed by the appeals board. Petitioner appealed to the Court of Appeals, of votes shall be declared and proclaimed elected until their successors are
which in turn upheld the decision of the HIGC's appeals board. Hence this elected and qualified. GRACE CHRISTIAN HIGH SCHOOL representative is
petition for review based on the following contentions: a permanent Director of the ASSOCIATION.

1. The Petitioner herein has already acquired a vested right to a permanent This draft was never presented to the general membership for approval.
seat in the Board of Directors of Grace Village Association; Nevertheless, from 1975, after it was presumably submitted to the board, up
to 1990, petitioner was given a permanent seat in the board of directors of the
2. The amended By-laws of the Association drafted and promulgated by a association. On February 13, 1990, the association's committee on election in
Committee on December 20, 1975 is valid and binding; and a letter informed James Tan, principal of the school, that "it was the sentiment
that all directors should be elected by members of the association" because
3. The Practice of tolerating the automatic inclusion of petitioner as a "to make a person or entity a permanent Director would deprive the right of
permanent member of the Board of Directors of the Association without the voters to vote for fifteen (15) members of the Board," and "it is undemocratic
benefit of election is allowed under the law.1 for a person or entity to hold office in perpetuity." 4 For this reason, Tan was
Briefly stated, the facts are as follows: told that "the proposal to make the Grace Christian High School representative
as a permanent director of the association, although previously tolerated in the
Petitioner Grace Christian High School is an educational institution offering past elections should be reexamined." Following this advice, notices were sent
preparatory, kindergarten and secondary courses at the Grace Village in to the members of the association that the provision on election of directors of
Quezon City. Private respondent Grace Village Association, Inc., on the other the 1968 by-laws of the association would be observed.
hand, is an organization of lot and/or building owners, lessees and residents
at Grace Village, while private respondents Alejandro G. Beltran and Ernesto Petitioner requested the chairman of the election committee to change the
L. Go were its president and chairman of the committee on election, notice of election by following the procedure in previous elections, claiming
respectively, in 1990, when this suit was brought. that the notice issued for the 1990 elections ran "counter to the practice in
previous years" and was "in violation of the by-laws (of 1975)" and "unlawfully
deprive[d] Grace Christian High School of its vested right [to] a permanent seat members of the association nor approved by competent authority"; that, on the
in the board." 5 contrary, in the meeting held on April 17, 1990, the directors of the association
declared "the proposed by-law dated December 20, 1975 prepared by the
As the association denied its request, the school brought suit for mandamus in committee on by-laws . . . null and void" and the by-laws of December 17, 1968
the Home Insurance and Guaranty Corporation to compel the board of as the "prevailing by-laws under which the association is to operate until such
directors of the association to recognize its right to a permanent seat in the time that the proposed amendments to the by-laws are approved and ratified
board. Petitioner based its claim on the following portion of the proposed by a majority of the members of the association and duly filed and approved
amendment which, it contended, had become part of the by-laws of the by the pertinent government agency." The hearing officer rejected petitioner's
association as Article VI, paragraph 2, thereof: contention that it had acquired a vested right to a permanent seat in the board
The Charter and Associate Members shall elect the Directors of the of directors. He held that past practice in election of directors could not give
Association. The candidates receiving the first fourteen (14) highest number rise to a vested right and that departure from such practice was justified
of votes shall be declared and proclaimed elected until their successors are because it deprived members of association of their right to elect or to be voted
elected and qualified. GRACE CHRISTIAN HIGH SCHOOL representative is in office, not to say that "allowing the automatic inclusion of a member
a permanent Director of the ASSOCIATION. representative of petitioner as permanent director [was] contrary to law and
the registered by-laws of respondent association." 8
It appears that the opinion of the Securities and Exchange Commission on the
validity of this provision was sought by the association and that in reply to the The appeals board of the HIGC affirmed the decision of the hearing officer in
query, the SEC rendered an opinion to the effect that the practice of allowing its resolution dated September 13, 1990. It cited the opinion of the SEC based
unelected members in the board was contrary to the existing by-laws of the on §92 of the Corporation Code which reads:
association and to §92 of the Corporation Code (B.P. Blg. 68). §92. Election and term of trustees. — Unless otherwise provided in the articles
Private respondent association cited the SEC opinion in its answer. of incorporation or the by-laws, the board of trustees of non-stock corporations,
Additionally, the association contended that the basis of the petition which may be more than fifteen (15) in number as may be fixed in their articles
for mandamus was merely "a proposed by-laws which has not yet been of incorporation or by-laws, shall, as soon as organized, so classify themselves
approved by competent authority nor registered with the SEC or HIGC." It that the term of office of one-third (1/3) of the number shall expire every year;
argued that "the by-laws which was registered with the SEC on January 16, and subsequent elections of trustees comprising one-third (1/3) of the board
1969 should be the prevailing by-laws of the association and not the proposed of trustees shall be held annually and trustees so elected shall have a term of
amended by-laws."6 three (3) years. Trustees thereafter elected to fill vacancies occurring before
the expiration of a particular term shall hold office only for the unexpired period.
In reply, petitioner maintained that the "amended by-laws is valid and binding"
and that the association was estopped from questioning the by-laws. 7 The HIGC appeals board denied claims that the school "[was] being deprived
of its right to be a member of the Board of Directors of respondent association,"
A preliminary conference was held on March 29, 1990 but nothing substantial because the fact was that "it may nominate as many representatives to the
was agreed upon. The parties merely agreed that the board of directors of the Association's Board as it may deem appropriate." It said that "what is merely
association should meet on April 17, 1990 and April 24, 1990 for the purpose being upheld is the act of the incumbent directors of the Board of correcting a
of discussing the amendment of the by-laws and a possible amicable long standing practice which is not anchored upon any legal basis." 9
settlement of the case. A meeting was held on April 17, 1990, but the parties
failed to reach an agreement. Instead, the board adopted a resolution Petitioner appealed to the Court of Appeals but petitioner again lost as the
declaring the 1975 provision null and void for lack of approval by members of appellate court on February 9, 1993, affirmed the decision of the HIGC. The
the association and the 1968 by-laws to be effective. Court of Appeals held that there was no valid amendment of the association's
by-laws because of failure to comply with the requirement of its existing by-
On June 20, 1990, the hearing officer of the HIGC rendered a decision laws, prescribing the affirmative vote of the majority of the members of the
dismissing petitioner's action. The hearing officer held that the amended by- association at a regular or special meeting called for the adoption of
laws, upon which petitioner based its claim, "[was] merely a proposed by-laws amendment to the by-laws. Article XIX of the by-laws provides: 10
which, although implemented in the past, had not yet been ratified by the
The members of the Association by an affirmative vote of the majority at any The right of the petitioner to an automatic membership in the board of the
regular or special meeting called for the purpose, may alter, amend, change Association was granted by the members of the Association themselves and
or adopt any new by-laws. this grant has been implemented by members of the board themselves all
through the years. Outside the present membership of the board, not a single
This provision of the by-laws actually implements §22 of the Corporation Law member of the Association has registered any desire to remove the right of
(Act No. 1459) which provides: herein petitioner to an automatic membership in the board. If there is anybody
§22. The owners of a majority of the subscribed capital stock, or a majority of who has the right to take away such right of the petitioner, it would be the
the members if there be no capital stock, may, at a regular or special meeting individual members of the Association through a referendum and not the
duly called for the purpose, amend or repeal any by-law or adopt new by-laws. present board some of the members of which are motivated by personal
The owners of two-thirds of the subscribed capital stock, or two-thirds of the interest.
members if there be no capital stock, may delegate to the board of directors Petitioner disputes the ruling that the provision in question, giving petitioner's
the power to amend or repeal any by-law or to adopt new by-laws: Provided, representative a permanent seat in the board of the association, is contrary to
however, That any power delegated to the board of directors to amend or law. Petitioner claims that that is not so because there is really no provision of
repeal any by-law or adopt new by-laws shall be considered as revoked law prohibiting unelected members of boards of directors of corporations.
whenever a majority of the stockholders or of the members of the corporation Referring to §92 of the present Corporation Code, petitioner says:
shall so vote at a regular or special meeting. And provided, further, That the
Director of the Bureau of Commerce and Industry shall not hereafter file an It is clear that the above provision of the Corporation Code only provides for
amendment to the by-laws of any bank, banking institution or building and loan the manner of election of the members of the board of trustees of non-stock
association, unless accompanied by certificate of the Bank Commissioner to corporations which may be more than fifteen in number and which manner of
the effect that such amendments are in accordance with law. election is even subject to what is provided in the articles of incorporation or
by-laws of the association thus showing that the above provisions [are] not
The proposed amendment to the by-laws was never approved by the majority even mandatory.
of the members of the association as required by these provisions of the law
and by-laws. But petitioner contends that the members of the committee which Even a careful perusal of the above provision of the Corporation Code would
prepared the proposed amendment were duly authorized to do so and that not show that it prohibits a non-stock corporation or association from granting
because the members of the association thereafter implemented the provision one of its members a permanent seat in its board of directors or trustees. If
for fifteen years, the proposed amendment for all intents and purposes should there is no such legal prohibition then it is allowable provided it is so provided
be considered to have been ratified by them. Petitioner contends: 11 in the Articles of Incorporation or in the by-laws as in the instant case.

Considering, therefore, that the "agents" or committee were duly authorized to xxx xxx xxx
draft the amended by-laws and the acts done by the "agents" were in
accordance with such authority, the acts of the "agents" from the very If fact, the truth is that this is allowed and is being practiced by some
beginning were lawful and binding on the homeowners (the principals) per corporations duly organized and existing under the laws of the Philippines.
se without need of any ratification or adoption. The more has the amended by- One example is the Plus XII Catholic Center, Inc. Under the by-laws of this
laws become binding on the homeowners when the homeowners followed and corporation, that whoever is the Archbishop of Manila is considered a member
implemented the provisions of the amended by-laws. This is not merely of the board of trustees without benefit of election. And not only that. He also
tantamount to tacit ratification of the acts done by duly authorized "agents" but automatically sits as the Chairman of the Board of Trustees, again without
express approval and confirmation of what the "agents" did pursuant to the need of any election.
authority granted to them.
Another concrete example is the Cardinal Santos Memorial Hospital, Inc. It is
Corollarily, petitioner claims that it has acquired a vested right to a permanent also provided in the by-laws of this corporation that whoever is the Archbishop
seat in the board. Says petitioner: of Manila is considered a member of the board of trustees year after year
without benefit of any election and he also sits automatically as the Chairman
of the Board of Trustees.
It is actually §§28 and 29 of the Corporation Law — not §92 of the present law among the holders of stocks, or where there is no stock, from among the
or §29 of the former one — which require members of the boards of directors members of the corporation, who shall hold office for one (1) year and until
of corporations to be elected. These provisions read: their successors are elected and qualified. (Emphasis added)

§28. Unless otherwise provided in this Act, the corporate powers of all These provisions of the former and present corporation law leave no room for
corporations formed under this Act shall be exercised, all business conducted doubt as to their meaning: the board of directors of corporations must be
and all property of such corporations controlled and held by a board of not less elected from among the stockholders or members. There may be corporations
than five nor more than eleven directors to be elected from among the holders in which there are unelected members in the board but it is clear that in the
of stock or, where there is no stock, from the members of the examples cited by petitioner the unelected members sit as ex
corporation: Provided, however, That in corporations, other than banks, in officio members, i.e., by virtue of and for as long as they hold a particular
which the United States has or may have a vested interest, pursuant to the office. But in the case of petitioner, there is no reason at all for its
powers granted or delegated by the Trading with the Enemy Act, as amended, representative to be given a seat in the board. Nor does petitioner claim a right
and similar Acts of Congress of the United States relating to the same subject, to such seat by virtue of an office held. In fact it was not given such seat in the
or by Executive Order No. 9095 of the President of the United States, as beginning. It was only in 1975 that a proposed amendment to the by-laws
heretofore or hereafter amended, or both, the directors need not be elected sought to give it one.
from among the holders of the stock, or, where there is no stock from the
members of the corporation. (emphasis added) Since the provision in question is contrary to law, the fact that for fifteen years
it has not been questioned or challenged but, on the contrary, appears to have
§29. At the meeting for the adoption of the original by-laws, or at such been implemented by the members of the association cannot forestall a later
subsequent meeting as may be then determined, directors shall be elected to challenge to its validity. Neither can it attain validity through acquiescence
hold their offices for one year and until their successors are elected and because, if it is contrary to law, it is beyond the power of the members of the
qualified. Thereafter the directors of the corporation shall be elected annually association to waive its invalidity. For that matter the members of the
by the stockholders if it be a stock corporation or by the members if it be a association may have formally adopted the provision in question, but their
nonstock corporation, and if no provision is made in the by-laws for the time of action would be of no avail because no provision of the by-laws can be adopted
election the same shall be held on the first Tuesday after the first Monday in if it is contrary to law. 13
January. Unless otherwise provided in the by-laws, two weeks' notice of the
election of directors must be given by publication in some newspaper of It is probable that, in allowing petitioner's representative to sit on the board,
general circulation devoted to the publication of general news at the place the members of the association were not aware that this was contrary to law.
where the principal office of the corporation is established or located, and by It should be noted that they did not actually implement the provision in question
written notice deposited in the post-office, postage pre-paid, addressed to except perhaps insofar as it increased the number of directors from 11 to 15,
each stockholder, or, if there be no stockholders, then to each member, at his but certainly not the allowance of petitioner's representative as an unelected
last known place of residence. If there be no newspaper published at the place member of the board of directors. It is more accurate to say that the members
where the principal office of the corporation is established or located, a notice merely tolerated petitioner's representative and tolerance cannot be
of the election of directors shall be posted for a period of three weeks considered ratification.
immediately preceding the election in at least three public places, in the place Nor can petitioner claim a vested right to sit in the board on the basis of
where the principal office of the corporation is established or located. "practice." Practice, no matter how long continued, cannot give rise to any
(Emphasis added) vested right if it is contrary to law. Even less tenable is petitioner's claim that
The present Corporation Code (B.P. Blg. 68), which took effect on May 1, its right is "coterminus with the existence of the association." 14
1980, 12 similarly provides: Finally, petitioner questions the authority of the SEC to render an opinion on
§23. The Board of Directors or Trustees. — Unless otherwise provided in this the validity of the provision in question. It contends that jurisdiction over this
Code, the corporate powers of all corporations formed under this Code shall case is exclusively vested in the HIGC.
be exercised, all business conducted and all property of such corporations
controlled and held by the board of directors or trustees to be elected from
But this case was not decided by the SEC but by the HIGC. The HIGC merely
cited as authority for its ruling the opinion of the SEC chairman. The HIGC
could have cited any other authority for the view that under the law members
of the board of directors of a corporation must be elected and it would be none
the worse for doing so.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED.

SO ORDERED.
G.R. No. 93695 February 4, 1992 In a manifestation dated July 22, 1988, the DBP claimed that it was not
authorized to receive summons on behalf of ALFA since the DBP had not
RAMON C. LEE and ANTONIO DM. LACDAO, petitioners, taken over the company which has a separate and distinct corporate
vs. personality and existence.
THE HON. COURT OF APPEALS, SACOBA MANUFACTURING CORP.,
PABLO GONZALES, JR. and THOMAS GONZALES, respondents. On August 4, 1988, the trial court issued an order advising the private
respondents to take the appropriate steps to serve the summons to ALFA.
Cayanga, Zuniga & Angel Law Offices for petitioners.
On August 16, 1988, the private respondents filed a Manifestation and Motion
Timbol & Associates for private respondents. for the Declaration of Proper Service of Summons which the trial court granted
on August 17, 1988.

GUTIERREZ, JR., J.: On September 12, 1988, the petitioners filed a motion for reconsideration
submitting that Rule 14, section 13 of the Revised Rules of Court is not
What is the nature of the voting trust agreement executed between two parties applicable since they were no longer officers of ALFA and that the private
in this case? Who owns the stocks of the corporation under the terms of the respondents should have availed of another mode of service under Rule 14,
voting trust agreement? How long can a voting trust agreement remain valid Section 16 of the said Rules, i.e., through publication to effect proper service
and effective? Did a director of the corporation cease to be such upon the upon ALFA.
creation of the voting trust agreement? These are the questions the answers
to which are necessary in resolving the principal issue in this petition In their Comment to the Motion for Reconsideration dated September 27,
for certiorari — whether or not there was proper service of summons on Alfa 1988, the private respondents argued that the voting trust agreement dated
Integrated Textile Mills (ALFA, for short) through the petitioners as president March 11, 1981 did not divest the petitioners of their positions as president
and vice-president, allegedly, of the subject corporation after the execution of and executive vice-president of ALFA so that service of summons upon ALFA
a voting trust agreement between ALFA and the Development Bank of the through the petitioners as corporate officers was proper.
Philippines (DBP, for short). On January 2, 1989, the trial court upheld the validity of the service of
From the records of the instant case, the following antecedent facts appear: summons on ALFA through the petitioners, thus, denying the latter's motion
for reconsideration and requiring ALFA to filed its answer through the
On November 15, 1985, a complaint for a sum of money was filed by the petitioners as its corporate officers.
International Corporate Bank, Inc. against the private respondents who, in
turn, filed a third party complaint against ALFA and the petitioners on March On January 19, 1989, a second motion for reconsideration was filed by the
17, 1986. petitioners reiterating their stand that by virtue of the voting trust agreement
they ceased to be officers and directors of ALFA, hence, they could no longer
On September 17, 1987, the petitioners filed a motion to dismiss the third party receive summons or any court processes for or on behalf of ALFA. In support
complaint which the Regional Trial Court of Makati, Branch 58 denied in an of their second motion for reconsideration, the petitioners attached thereto a
Order dated June 27, 1988. copy of the voting trust agreement between all the stockholders of ALFA (the
petitioners included), on the one hand, and the DBP, on the other hand,
On July 18, 1988, the petitioners filed their answer to the third party complaint.
whereby the management and control of ALFA became vested upon the DBP.
Meanwhile, on July 12, 1988, the trial court issued an order requiring the
On April 25, 1989, the trial court reversed itself by setting aside its previous
issuance of an alias summons upon ALFA through the DBP as a consequence
Order dated January 2, 1989 and declared that service upon the petitioners
of the petitioner's letter informing the court that the summons for ALFA was who were no longer corporate officers of ALFA cannot be considered as proper
erroneously served upon them considering that the management of ALFA had
service of summons on ALFA.
been transferred to the DBP.
On May 15, 1989, the private respondents moved for a reconsideration of the (1) that the execution of the voting trust agreement by a stockholders whereby
above Order which was affirmed by the court in its Order dated August 14, all his shares to the corporation have been transferred to the trustee deprives
1989 denying the private respondent's motion for reconsideration. the stockholders of his position as director of the corporation; to rule otherwise,
as the respondent Court of Appeals did, would be violative of section 23 of the
On September 18, 1989, a petition for certiorari was belatedly submitted by Corporation Code ( Rollo, pp. 270-3273); and
the private respondent before the public respondent which, nonetheless,
resolved to give due course thereto on September 21, 1989. (2) that the petitioners were no longer acting or holding any of the positions
provided under Rule 14, Section 13 of the Rules of Court authorized to receive
On October 17, 1989, the trial court, not having been notified of the pending service of summons for and in behalf of the private domestic corporation so
petition for certiorari with public respondent issued an Order declaring as final that the service of summons on ALFA effected through the petitioners is not
the Order dated April 25, 1989. The private respondents in the said Order were valid and ineffective; to maintain the respondent Court of Appeals' position that
required to take positive steps in prosecuting the third party complaint in order ALFA was properly served its summons through the petitioners would be
that the court would not be constrained to dismiss the same for failure to contrary to the general principle that a corporation can only be bound by such
prosecute. Subsequently, on October 25, 1989 the private respondents filed a acts which are within the scope of its officers' or agents' authority (Rollo, pp.
motion for reconsideration on which the trial court took no further action. 273-275)
On March 19, 1990, after the petitioners filed their answer to the private In resolving the issue of the propriety of the service of summons in the instant
respondents' petition for certiorari, the public respondent rendered its decision, case, we dwell first on the nature of a voting trust agreement and the
the dispositive portion of which reads: consequent effects upon its creation in the light of the provisions of the
WHEREFORE, in view of the foregoing, the orders of respondent judge dated Corporation Code.
April 25, 1989 and August 14, 1989 are hereby SET ASIDE and respondent A voting trust is defined in Ballentine's Law Dictionary as follows:
corporation is ordered to file its answer within the reglementary period. (CA
Decision, p. 8; Rollo, p. 24) (a) trust created by an agreement between a group of the stockholders of a
corporation and the trustee or by a group of identical agreements between
On April 11, 1990, the petitioners moved for a reconsideration of the decision individual stockholders and a common trustee, whereby it is provided that for
of the public respondent which resolved to deny the same on May 10, 1990. a term of years, or for a period contingent upon a certain event, or until the
Hence, the petitioners filed this certiorari petition imputing grave abuse of agreement is terminated, control over the stock owned by such stockholders,
discretion amounting to lack of jurisdiction on the part of the public respondent either for certain purposes or for all purposes, is to be lodged in the trustee,
in reversing the questioned Orders dated April 25, 1989 and August 14, 1989 either with or without a reservation to the owners, or persons designated by
of the court a quo, thus, holding that there was proper service of summons on them, of the power to direct how such control shall be used. (98 ALR 2d. 379
ALFA through the petitioners. sec. 1 [d]; 19 Am J 2d Corp. sec. 685).
In the meantime, the public respondent inadvertently made an entry of Under Section 59 of the new Corporation Code which expressly recognizes
judgment on July 16, 1990 erroneously applying the rule that the period during voting trust agreements, a more definitive meaning may be gathered. The said
which a motion for reconsideration has been pending must be deducted from provision partly reads:
the 15-day period to appeal. However, in its Resolution dated January 3, 1991,
the public respondent set aside the aforestated entry of judgment after further Sec. 59. Voting Trusts — One or more stockholders of a stock corporation may
considering that the rule it relied on applies to appeals from decisions of the create a voting trust for the purpose of conferring upon a trustee or trustees
Regional Trial Courts to the Court of Appeals, not to appeals from its decision the right to vote and other rights pertaining to the share for a period rights
to us pursuant to our ruling in the case of Refractories Corporation of the pertaining to the shares for a period not exceeding five (5) years at any one
Philippines v. Intermediate Appellate Court, 176 SCRA 539 [1989]. (CA Rollo, time: Provided, that in the case of a voting trust specifically required as a
pp. 249-250) condition in a loan agreement, said voting trust may be for a period exceeding
(5) years but shall automatically expire upon full payment of the loan. A voting
In their memorandum, the petitioners present the following arguments, to wit: trust agreement must be in writing and notarized, and shall specify the terms
and conditions thereof. A certified copy of such agreement shall be filed with voting trust is executed pursuant to a loan agreement whereby the period is
the corporation and with the Securities and Exchange Commission; otherwise, made contingent upon full payment of the loan.
said agreement is ineffective and unenforceable. The certificate or certificates
of stock covered by the voting trust agreement shall be cancelled and new In the instant case, the point of controversy arises from the effects of the
ones shall be issued in the name of the trustee or trustees stating that they are creation of the voting trust agreement. The petitioners maintain that with the
issued pursuant to said agreement. In the books of the corporation, it shall be execution of the voting trust agreement between them and the other
noted that the transfer in the name of the trustee or trustees is made pursuant stockholders of ALFA, as one party, and the DBP, as the other party, the
to said voting trust agreement. former assigned and transferred all their shares in ALFA to DBP, as trustee.
They argue that by virtue to of the voting trust agreement the petitioners can
By its very nature, a voting trust agreement results in the separation of the no longer be considered directors of ALFA. In support of their contention, the
voting rights of a stockholder from his other rights such as the right to receive petitioners invoke section 23 of the Corporation Code which provides, in part,
dividends, the right to inspect the books of the corporation, the right to sell that:
certain interests in the assets of the corporation and other rights to which a
stockholder may be entitled until the liquidation of the corporation. However, Every director must own at least one (1) share of the capital stock of the
in order to distinguish a voting trust agreement from proxies and other voting corporation of which he is a director which share shall stand in his name on
pools and agreements, it must pass three criteria or tests, namely: (1) that the the books of the corporation. Any director who ceases to be the owner of at
voting rights of the stock are separated from the other attributes of ownership; least one (1) share of the capital stock of the corporation of which he is a
(2) that the voting rights granted are intended to be irrevocable for a definite director shall thereby cease to be director . . . (Rollo, p. 270)
period of time; and (3) that the principal purpose of the grant of voting rights is The private respondents, on the contrary, insist that the voting trust agreement
to acquire voting control of the corporation. (5 Fletcher, Cyclopedia of the Law between ALFA and the DBP had all the more safeguarded the petitioners'
on Private Corporations, section 2075 [1976] p. 331 citing Tankersly v. continuance as officers and directors of ALFA inasmuch as the general object
Albright, 374 F. Supp. 538) of voting trust is to insure permanency of the tenure of the directors of a
Under section 59 of the Corporation Code, supra, a voting trust agreement corporation. They cited the commentaries by Prof. Aguedo Agbayani on the
may confer upon a trustee not only the stockholder's voting rights but also right and status of the transferring stockholders, to wit:
other rights pertaining to his shares as long as the voting trust agreement is The "transferring stockholder", also called the "depositing stockholder", is
not entered "for the purpose of circumventing the law against monopolies and equitable owner for the stocks represented by the voting trust certificates and
illegal combinations in restraint of trade or used for purposes of fraud." (section the stock reversible on termination of the trust by surrender. It is said that the
59, 5th paragraph of the Corporation Code) Thus, the traditional concept of a voting trust agreement does not destroy the status of the transferring
voting trust agreement primarily intended to single out a stockholder's right to stockholders as such, and thus render them ineligible as directors. But a more
vote from his other rights as such and made irrevocable for a limited duration accurate statement seems to be that for some purposes the depositing
may in practice become a legal device whereby a transfer of the stockholder's stockholder holding voting trust certificates in lieu of his stock and being the
shares is effected subject to the specific provision of the voting trust beneficial owner thereof, remains and is treated as a stockholder. It seems to
agreement. be deducible from the case that he may sue as a stockholder if the suit is in
The execution of a voting trust agreement, therefore, may create a dichotomy equity or is of an equitable nature, such as, a technical stockholders' suit in
between the equitable or beneficial ownership of the corporate shares of a right of the corporation. [Commercial Laws of the Philippines by Agbayani, Vol.
stockholders, on the one hand, and the legal title thereto on the other hand. 3 pp. 492-493, citing 5 Fletcher 326, 327] (Rollo, p. 291)

The law simply provides that a voting trust agreement is an agreement in We find the petitioners' position meritorious.
writing whereby one or more stockholders of a corporation consent to transfer Both under the old and the new Corporation Codes there is no dispute as to
his or their shares to a trustee in order to vest in the latter voting or other rights the most immediate effect of a voting trust agreement on the status of a
pertaining to said shares for a period not exceeding five years upon the stockholder who is a party to its execution — from legal titleholder or owner of
fulfillment of statutory conditions and such other terms and conditions specified the shares subject of the voting trust agreement, he becomes the equitable or
in the agreement. The five year-period may be extended in cases where the
beneficial owner. (Salonga, Philippine Law on Private Corporations, 1958 ed., 1. The TRUSTORS hereby assign and deliver to the TRUSTEE the certificate
p. 268; Pineda and Carlos, The Law on Private Corporations and Corporate of the shares of the stocks owned by them respectively and shall do all things
Practice, 1969 ed., p. 175; Campos and Lopez-Campos, The Corporation necessary for the transfer of their respective shares to the TRUSTEE on the
Code; Comments, Notes & Selected Cases, 1981, ed., p. 386; books of ALFA.
Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the
Philippines, Vol. 3, 1988 ed., p. 536). The penultimate question, therefore, is 2. The TRUSTEE shall issue to each of the TRUSTORS a trust certificate for
whether the change in his status deprives the stockholder of the right to qualify the number of shares transferred, which shall be transferrable in the same
as a director under section 23 of the present Corporation Code which deletes manner and with the same effect as certificates of stock subject to the
the phrase "in his own right." Section 30 of the old Code states that: provisions of this agreement;

Every director must own in his own right at least one share of the capital stock 3. The TRUSTEE shall vote upon the shares of stock at all meetings of ALFA,
of the stock corporation of which he is a director, which stock shall stand in his annual or special, upon any resolution, matter or business that may be
name on the books of the corporation. A director who ceases to be the owner submitted to any such meeting, and shall possess in that respect the same
of at least one share of the capital stock of a stock corporation of which is a powers as owners of the equitable as well as the legal title to the stock;
director shall thereby cease to be a director . . . (Emphasis supplied) 4. The TRUSTEE may cause to be transferred to any person one share of
Under the old Corporation Code, the eligibility of a director, strictly speaking, stock for the purpose of qualifying such person as director of ALFA, and cause
cannot be adversely affected by the simple act of such director being a party a certificate of stock evidencing the share so transferred to be issued in the
to a voting trust agreement inasmuch as he remains owner (although beneficial name of such person;
or equitable only) of the shares subject of the voting trust agreement pursuant xxx xxx xxx
to which a transfer of the stockholder's shares in favor of the trustee is required
(section 36 of the old Corporation Code). No disqualification arises by virtue of 9. Any stockholder not entering into this agreement may transfer his shares to
the phrase "in his own right" provided under the old Corporation Code. the same trustees without the need of revising this agreement, and this
agreement shall have the same force and effect upon that said stockholder.
With the omission of the phrase "in his own right" the election of trustees and (CA Rollo, pp. 137-138; Emphasis supplied)
other persons who in fact are not beneficial owners of the shares registered in
their names on the books of the corporation becomes formally legalized Considering that the voting trust agreement between ALFA and the DBP
(see Campos and Lopez-Campos, supra, p. 296) Hence, this is a clear transferred legal ownership of the stock covered by the agreement to the DBP
indication that in order to be eligible as a director, what is material is the legal as trustee, the latter became the stockholder of record with respect to the said
title to, not beneficial ownership of, the stock as appearing on the books of the shares of stocks. In the absence of a showing that the DBP had caused to be
corporation (2 Fletcher, Cyclopedia of the Law of Private Corporations, section transferred in their names one share of stock for the purpose of qualifying as
300, p. 92 [1969] citing People v. Lihme, 269 Ill. 351, 109 N.E. 1051). directors of ALFA, the petitioners can no longer be deemed to have retained
their status as officers of ALFA which was the case before the execution of the
The facts of this case show that the petitioners, by virtue of the voting trust subject voting trust agreement. There appears to be no dispute from the
agreement executed in 1981 disposed of all their shares through assignment records that DBP has taken over full control and management of the firm.
and delivery in favor of the DBP, as trustee. Consequently, the petitioners
ceased to own at least one share standing in their names on the books of Moreover, in the Certification dated January 24, 1989 issued by the DBP
ALFA as required under Section 23 of the new Corporation Code. They also through one Elsa A. Guevarra, Vice-President of its Special Accounts
ceased to have anything to do with the management of the enterprise. The Department II, Remedial Management Group, the petitioners were no longer
petitioners ceased to be directors. Hence, the transfer of the petitioners' shares included in the list of officers of ALFA "as of April 1982." (CA Rollo, pp. 140-
to the DBP created vacancies in their respective positions as directors of 142)
ALFA. The transfer of shares from the stockholder of ALFA to the DBP is the
Inasmuch as the private respondents in this case failed to substantiate their
essence of the subject voting trust agreement as evident from the following
claim that the subject voting trust agreement did not deprive the petitioners of
stipulations:
their position as directors of ALFA, the public respondent committed a NOW, THEREFORE, it is hereby agreed as follows:
reversible error when it ruled that:
xxx xxx xxx
. . . while the individual respondents (petitioners Lee and Lacdao) may have
ceased to be president and vice-president, respectively, of the corporation at 6. This Agreement shall last for a period of Five (5) years, and is renewable
the time of service of summons on them on August 21, 1987, they were at for as long as the obligations of ALFA with DBP, or any portion thereof,
least up to that time, still directors . . . remains outstanding; (CA Rollo, pp. 137-138)

The aforequoted statement is quite inaccurate in the light of the express terms Had the five-year period of the voting trust agreement expired in 1986, the
of Stipulation No. 4 of the subject voting trust agreement. Both parties, ALFA DBP would not have transferred all its rights, titles and interests in ALFA
and the DBP, were aware at the time of the execution of the agreement that "effective June 30, 1986" to the national government through the Asset
by virtue of the transfer of shares of ALFA to the DBP, all the directors of ALFA Privatization Trust (APT) as attested to in a Certification dated January 24,
were stripped of their positions as such. 1989 of the Vice President of the DBP's Special Accounts Department II. In
the same certification, it is stated that the DBP, from 1987 until 1989, had
There can be no reliance on the inference that the five-year period of the voting handled APT's account which included ALFA's assets pursuant to a
trust agreement in question had lapsed in 1986 so that the legal title to the management agreement by and between the DBP and APT (CA Rollo, p. 142)
stocks covered by the said voting trust agreement ipso facto reverted to the Hence, there is evidence on record that at the time of the service of summons
petitioners as beneficial owners pursuant to the 6th paragraph of section 59 of on ALFA through the petitioners on August 21, 1987, the voting trust
the new Corporation Code which reads: agreement in question was not yet terminated so that the legal title to the
stocks of ALFA, then, still belonged to the DBP.
Unless expressly renewed, all rights granted in a voting trust agreement shall
automatically expire at the end of the agreed period, and the voting trust In view of the foregoing, the ultimate issue of whether or not there was proper
certificate as well as the certificates of stock in the name of the trustee or service of summons on ALFA through the petitioners is readily answered in
trustees shall thereby be deemed cancelled and new certificates of stock shall the negative.
be reissued in the name of the transferors.
Under section 13, Rule 14 of the Revised Rules of Court, it is provided that:
On the contrary, it is manifestly clear from the terms of the voting trust
agreement between ALFA and the DBP that the duration of the agreement is Sec. 13. Service upon private domestic corporation or partnership. — If the
contingent upon the fulfillment of certain obligations of ALFA with the DBP. defendant is a corporation organized under the laws of the Philippines or a
This is shown by the following portions of the agreement. partnership duly registered, service may be made on the president, manager,
secretary, cashier, agent or any of its directors.
WHEREAS, the TRUSTEE is one of the creditors of ALFA, and its credit is
secured by a first mortgage on the manufacturing plant of said company; It is a basic principle in Corporation Law that a corporation has a personality
separate and distinct from the officers or members who compose it. (See Sulo
WHEREAS, ALFA is also indebted to other creditors for various financial ng Bayan Inc. v. Araneta, Inc., 72 SCRA 347 [1976]; Osias Academy v.
accomodations and because of the burden of these obligations is encountering Department of Labor and Employment, et al., G.R. Nos. 83257-58, December
very serious difficulties in continuing with its operations. 21, 1990). Thus, the above rule on service of processes of a corporation
enumerates the representatives of a corporation who can validly receive court
WHEREAS, in consideration of additional accommodations from the processes on its behalf. Not every stockholder or officer can bind the
TRUSTEE, ALFA had offered and the TRUSTEE has accepted participation in corporation considering the existence of a corporate entity separate from those
the management and control of the company and to assure the aforesaid who compose it.
participation by the TRUSTEE, the TRUSTORS have agreed to execute a
voting trust covering their shareholding in ALFA in favor of the TRUSTEE; The rationale of the aforecited rule is that service must be made on a
representative so integrated with the corporation sued as to make it a
AND WHEREAS, DBP is willing to accept the trust for the purpose priori supposable that he will realize his responsibilities and know what he
aforementioned. should do with any legal papers served on him. (Far Corporation v. Francisco,
146 SCRA 197 [1986] citing Villa Rey Transit, Inc. v. Far East Motor Corp. 81
SCRA 303 [1978]).

The petitioners in this case do not fall under any of the enumerated officers.
The service of summons upon ALFA, through the petitioners, therefore, is not
valid. To rule otherwise, as correctly argued by the petitioners, will contravene
the general principle that a corporation can only be bound by such acts which
are within the scope of the officer's or agent's authority. (see Vicente v.
Geraldez, 52 SCRA 210 [1973]).

WHEREFORE, premises considered, the petition is hereby GRANTED. The

appealed decision dated March 19, 1990 and the Court of Appeals' resolution
of May 10, 1990 are SET ASIDE and the Orders dated April 25, 1989 and
October 17, 1989 issued by the Regional Trial Court of Makati, Branch 58 are
REINSTATED.

SO ORDERED.
G.R. No. 151969 September 4, 2009 was docketed as SEC Case No. 01-99-6177. The RTC case questioning the
validity of Ramirez’ appointment was docketed as Civil Case No. 68726.
VALLE VERDE COUNTRY CLUB, INC., ERNESTO VILLALUNA, RAY
GAMBOA, AMADO M. SANTIAGO, JR., FORTUNATO DEE, AUGUSTO In his nullification complaint3 before the RTC, Africa alleged that the election
SUNICO, VICTOR SALTA, FRANCISCO ORTIGAS III, ERIC ROXAS, in of Roxas was contrary to Section 29, in relation to Section 23, of the
their capacities as members of the Board of Directors of Valle Verde Corporation Code of the Philippines (Corporation Code). These provisions
Country Club, Inc., and JOSE RAMIREZ, Petitioners, read:
vs.
VICTOR AFRICA, Respondent. Sec. 23. The board of directors or trustees. - Unless otherwise provided in
this Code, the corporate powers of all corporations formed under this Code
DECISION shall be exercised, all business conducted and all property of such
corporations controlled and held by the board of directors or trustees to be
BRION, J.: elected from among the holders of stocks, or where there is no stock, from
In this petition for review on certiorari,1 the parties raise a legal question on among the members of the corporation, who shall hold office for one (1) year
corporate governance: Can the members of a corporation’s board of directors until their successors are elected and qualified.
elect another director to fill in a vacancy caused by the resignation of a hold- xxxx
over director?
Sec. 29. Vacancies in the office of director or trustee. - Any vacancy
THE FACTUAL ANTECEDENTS occurring in the board of directors or trustees other than by removal by the
On February 27, 1996, during the Annual Stockholders’ Meeting of petitioner stockholders or members or by expiration of term, may be filled by the vote of
Valle Verde Country Club, Inc. (VVCC), the following were elected as at least a majority of the remaining directors or trustees, if still constituting a
members of the VVCC Board of Directors: Ernesto Villaluna, Jaime C. quorum; otherwise, said vacancies must be filled by the stockholders in a
Dinglasan (Dinglasan), Eduardo Makalintal (Makalintal), Francisco Ortigas III, regular or special meeting called for that purpose. A director or trustee so
Victor Salta, Amado M. Santiago, Jr., Fortunato Dee, Augusto Sunico, and Ray elected to fill a vacancy shall be elected only for the unexpired term of his
Gamboa.2 In the years 1997, 1998, 1999, 2000, and 2001, however, the predecessor in office. xxx. [Emphasis supplied.]
requisite quorum for the holding of the stockholders’ meeting could not be Africa claimed that a year after Makalintal’s election as member of the VVCC
obtained. Consequently, the above-named directors continued to serve in the Board in 1996, his [Makalintal’s] term – as well as those of the other members
VVCC Board in a hold-over capacity. of the VVCC Board – should be considered to have already expired. Thus,
On September 1, 1998, Dinglasan resigned from his position as member of according to Africa, the resulting vacancy should have been filled by the
the VVCC Board. In a meeting held on October 6, 1998, the remaining stockholders in a regular or special meeting called for that purpose, and not
directors, still constituting a quorum of VVCC’s nine-member board, elected by the remaining members of the VVCC Board, as was done in this case.
Eric Roxas (Roxas) to fill in the vacancy created by the resignation of Africa additionally contends that for the members to exercise the authority to
Dinglasan. fill in vacancies in the board of directors, Section 29 requires, among others,
A year later, or on November 10, 1998, Makalintal also resigned as member that there should be an unexpired term during which the successor-member
of the VVCC Board. He was replaced by Jose Ramirez (Ramirez), who was shall serve. Since Makalintal’s term had already expired with the lapse of the
elected by the remaining members of the VVCC Board on March 6, 2001. one-year term provided in Section 23, there is no more "unexpired term" during
which Ramirez could serve.
Respondent Africa (Africa), a member of VVCC, questioned the election of
Roxas and Ramirez as members of the VVCC Board with the Securities and Through a partial decision4 promulgated on January 23, 2002, the RTC ruled
Exchange Commission (SEC) and the Regional Trial Court (RTC), in favor of Africa and declared the election of Ramirez, as Makalintal’s
respectively. The SEC case questioning the validity of Roxas’ appointment replacement, to the VVCC Board as null and void.
Incidentally, the SEC issued a similar ruling on June 3, 2003, nullifying the Art. 71. The directors shall elect from among the shareholders members to fill
election of Roxas as member of the VVCC Board, vice hold-over director the vacancies that may occur in the board of directors until the election at the
Dinglasan. While VVCC manifested its intent to appeal from the SEC’s ruling, general meeting.
no petition was actually filed with the Court of Appeals; thus, the appellate
court considered the case closed and terminated and the SEC’s ruling final xxxx
and executory.5 Upon failure of a quorum at any annual meeting the directorate naturally holds
THE PETITION over and continues to function until another directorate is chosen and qualified.
Unless the law or the charter of a corporation expressly provides that an office
VVCC now appeals to the Court to assail the RTC’s January 23, 2002 partial shall become vacant at the expiration of the term of office for which the officer
decision for being contrary to law and jurisprudence. VVCC made a direct was elected, the general rule is to allow the officer to hold over until his
resort to the Court via a petition for review on certiorari, claiming that the sole successor is duly qualified. Mere failure of a corporation to elect officers does
issue in the present case involves a purely legal question. not terminate the terms of existing officers nor dissolve the corporation. The
doctrine above stated finds expression in article 66 of the by-laws of the
As framed by VVCC, the issue for resolution is whether the remaining directors respondent which declares in so many words that directors shall hold office
of the corporation’s Board, still constituting a quorum, can elect another "for the term of one year or until their successors shall have been elected and
director to fill in a vacancy caused by the resignation of a hold-over director. taken possession of their offices." xxx.
Citing law and jurisprudence, VVCC posits that the power to fill in a vacancy It results that the practice of the directorate of filling vacancies by the
created by the resignation of a hold-over director is expressly granted to the action of the directors themselves is valid. Nor can any exception be taken
remaining members of the corporation’s board of directors. to the personality of the individuals chosen by the directors to fill vacancies in
Under the above-quoted Section 29 of the Corporation Code, a vacancy the body. [Emphasis supplied.]
occurring in the board of directors caused by the expiration of a member’s term Africa, in opposing VVCC’s contentions, raises the same arguments that he
shall be filled by the corporation’s stockholders. Correlating Section 29 with did before the trial court.
Section 23 of the same law, VVCC alleges that a member’s term shall be for
one year and until his successor is elected and qualified; otherwise THE COURT’S RULING
stated, a member’s term expires only when his successor to the Board is
elected and qualified. Thus, "until such time as [a successor is] elected or We are not persuaded by VVCC’s arguments and, thus, find its petition
qualified in an annual election where a quorum is present," VVCC contends unmeritorious.
that "the term of [a member] of the board of directors has yet not expired." To repeat, the issue for the Court to resolve is whether the remaining directors
As the vacancy in this case was caused by Makalintal’s resignation, not by the of a corporation’s Board, still constituting a quorum, can elect another director
expiration of his term, VVCC insists that the board rightfully appointed Ramirez to fill in a vacancy caused by the resignation of a hold-over director. The
to fill in the vacancy. resolution of this legal issue is significantly hinged on the determination of what
constitutes a director’s term of office.
In support of its arguments, VVCC cites the Court’s ruling in the 1927 El
Hogar6 case which states: The holdover period is not part of the term of office of a member of the board
of directors
Owing to the failure of a quorum at most of the general meetings since the
respondent has been in existence, it has been the practice of the directors to The word "term" has acquired a definite meaning in jurisprudence. In several
fill in vacancies in the directorate by choosing suitable persons from among cases, we have defined "term" as the time during which the officer may claim
the stockholders. This custom finds its sanction in Article 71 of the By-Laws, to hold the office as of right, and fixes the interval after which the several
which reads as follows: incumbents shall succeed one another.7 The term of office is not affected by
the holdover.8 The term is fixed by statute and it does not change simply
because the office may have become vacant, nor because the incumbent
holds over in office beyond the end of the term due to the fact that a successor governance by electing their representatives to the board of directors. The
has not been elected and has failed to qualify. board of directors is the directing and controlling body of the corporation. It is
a creation of the stockholders and derives its power to control and direct the
Term is distinguished from tenure in that an officer’s "tenure" represents the affairs of the corporation from them. The board of directors, in drawing to
term during which the incumbent actually holds office. The tenure may be themselves the powers of the corporation, occupies a position of trusteeship
shorter (or, in case of holdover, longer) than the term for reasons within or in relation to the stockholders, in the sense that the board should exercise not
beyond the power of the incumbent. only care and diligence, but utmost good faith in the management of corporate
Based on the above discussion, when Section 239 of the Corporation Code affairs.12
declares that "the board of directors…shall hold office for one (1) year until The underlying policy of the Corporation Code is that the business and affairs
their successors are elected and qualified," we construe the provision to mean of a corporation must be governed by a board of directors whose members
that the term of the members of the board of directors shall be only for one have stood for election, and who have actually been elected by the
year; their term expires one year after election to the office. The holdover stockholders, on an annual basis. Only in that way can the directors' continued
period – that time from the lapse of one year from a member’s election to the accountability to shareholders, and the legitimacy of their decisions that bind
Board and until his successor’s election and qualification – is not part of the the corporation's stockholders, be assured. The shareholder vote is critical to
director’s original term of office, nor is it a new term; the holdover period, the theory that legitimizes the exercise of power by the directors or officers
however, constitutes part of his tenure. Corollary, when an incumbent member over properties that they do not own.13
of the board of directors continues to serve in a holdover capacity, it implies
that the office has a fixed term, which has expired, and the incumbent is This theory of delegated power of the board of directors similarly explains why,
holding the succeeding term.10 under Section 29 of the Corporation Code, in cases where the vacancy in the
corporation’s board of directors is caused not by the expiration of a member’s
After the lapse of one year from his election as member of the VVCC Board in term, the successor "so elected to fill in a vacancy shall be elected only for the
1996, Makalintal’s term of office is deemed to have already expired. That he unexpired term of the his predecessor in office." The law has authorized the
continued to serve in the VVCC Board in a holdover capacity cannot be remaining members of the board to fill in a vacancy only in specified instances,
considered as extending his term. To be precise, Makalintal’s term of office so as not to retard or impair the corporation’s operations; yet, in recognition of
began in 1996 and expired in 1997, but, by virtue of the holdover doctrine in the stockholders’ right to elect the members of the board, it limited the period
Section 23 of the Corporation Code, he continued to hold office until his during which the successor shall serve only to the "unexpired term of his
resignation on November 10, 1998. This holdover period, however, is not to predecessor in office."
be considered as part of his term, which, as declared, had already expired.
While the Court in El Hogar approved of the practice of the directors to fill
With the expiration of Makalintal’s term of office, a vacancy resulted which, by vacancies in the directorate, we point out that this ruling was made before the
the terms of Section 2911 of the Corporation Code, must be filled by the present Corporation Code was enacted14 and before its Section 29 limited the
stockholders of VVCC in a regular or special meeting called for the purpose. instances when the remaining directors can fill in vacancies in the board, i.e.,
To assume – as VVCC does – that the vacancy is caused by Makalintal’s when the remaining directors still constitute a quorum and when the vacancy
resignation in 1998, not by the expiration of his term in 1997, is both illogical is caused for reasons other than by removal by the stockholders or by
and unreasonable. His resignation as a holdover director did not change the expiration of the term.1avvphi1
nature of the vacancy; the vacancy due to the expiration of Makalintal’s term
had been created long before his resignation. It also bears noting that the vacancy referred to in Section 29 contemplates a
vacancy occurring within the director’s term of office. When a vacancy is
The powers of the corporation’s board of directors emanate from its created by the expiration of a term, logically, there is no more unexpired term
stockholders to speak of. Hence, Section 29 declares that it shall be the corporation’s
VVCC’s construction of Section 29 of the Corporation Code on the authority to stockholders who shall possess the authority to fill in a vacancy caused by the
fill up vacancies in the board of directors, in relation to Section 23 thereof, expiration of a member’s term.
effectively weakens the stockholders’ power to participate in the corporate
As correctly pointed out by the RTC, when remaining members of the VVCC
Board elected Ramirez to replace Makalintal, there was no more unexpired
term to speak of, as Makalintal’s one-year term had already expired. Pursuant
to law, the authority to fill in the vacancy caused by Makalintal’s leaving lies
with the VVCC’s stockholders, not the remaining members of its board of
directors.

WHEREFORE, we DENY the petitioners’ petition for review on certiorari, and

AFFIRM the partial decision of the Regional Trial Court, Branch 152, Manila,
promulgated on January 23, 2002, in Civil Case No. 68726. Costs against the
petitioners.

SO ORDERED.
G.R. No. 153413 March 1, 2007 who were present removed the petitioners as directors of Nephro. Thus,
petitioners filed SEC Case No. 02-98-5902.
NECTARINA S. RANIEL and MA. VICTORIA R. PAG-ONG, Petitioners,
vs. On October 27, 2000, the SEC rendered its Decision, the dispositive portion
PAUL JOCHICO, JOHN STEFFENS and SURYA VIRIYA, Respondents. of which reads:

DECISION WHEREFORE, the Commission so holds that complainants cannot be

awarded the reliefs prayed for in reinstating Nectarina S. Raniel as secretary
AUSTRIA-MARTINEZ, J.: and administrator.
Assailed in the present Petition for Review on Certiorari is the Decision1 of the The corporation acting thru its Board of Directors can validly remove its
Court of Appeals (CA) dated April 30, 2002, affirming with modification the corporate officers, particularly complainant Nectarina S. Raniel as corporate
Decision dated October 27, 2000 rendered by the Securities and Exchange secretary, treasurer and administrator of the Dialysis Clinic.
Commission (SEC) which held as valid the removal of petitioners Ma. Victoria
R. Pag-ong (Pag-ong) as director and Nectarina S. Raniel (Raniel) as director Also, the Commission cannot grant the relief prayed for by complainants in
and corporate officer of Nephro Systems Dialysis Center (Nephro). restraining the respondents from interfering in the administration of the Dialysis
Clinic owned by the corporation and the use of corporate funds.
Petitioners first questioned their removal in SEC Case No. 02-98-5902 for
Declaration of Nullity of the Illegal Acts of Respondents, Damages and The administration of the Dialysis Clinic of the corporation and the use of
Injunction. Petitioners, together with respondents Paul Jochico (Jochico), John corporate funds, rightfully belong to the officers of the corporation, which in
Steffens and Surya Viriya, were incorporators and directors of Nephro, with this case are the respondents.
Raniel acting as Corporate Secretary and Administrator. The conflict started
when petitioners questioned respondents' plan to enter into a joint venture with The counterclaim of respondents to return or assign back the complainants'
the Butuan Doctors' Hospital and College, Inc. sometime in December 1997. shares in favor of respondent Paul Jochico or his nominee is hereby denied
Because of this, petitioners claim that respondents tried to compel them to for lack of merit.
waive and assign their shares with Nephro but they refused. Thereafter, Raniel The respondents failed to show any clear and convincing evidence to rebut
sought an indefinite leave of absence due to stress, but this was denied by the presumption of the validity and truthfulness of documents submitted to the
Jochico, as Nephro President. Raniel, nevertheless, did not report for work, Commission in the grant of corporate license.
causing Jochico to demand an explanation from her why she should not be
removed as Administrator and Corporate Secretary. Raniel replied, expressing The claim for attorney's fees and damages of both parties are likewise denied
her sentiments over the disapproval of her request for leave and respondents' for lack of merit, as neither party should be punished for vindicating a right,
decision with regard to the Butuan venture. which he/she believes should be protected or enforced.

On January 30, 1998, Jochico issued a Notice of Special Board Meeting on SO ORDERED.2
February 2, 1998. Despite receipt of the notice, petitioners did not attend the
Dissatisfied, petitioners filed a petition for review with the CA.
board meeting. In said meeting, the Board passed several resolutions ratifying
the disapproval of Raniel's request for leave, dismissing her as Administrator On April 30, 2002, the CA rendered the assailed Decision, with the following
of Nephro, declaring the position of Corporate Secretary vacant, appointing dispositive portion:
Otelio Jochico as the new Corporate Secretary and authorizing the call of a
Special Stockholders' Meeting on February 16, 1998 for the purpose of the WHEREFORE, in light of the foregoing discussions, the appealed decision of
removal of petitioners as directors of Nephro. the Securities and Exchange Commission is hereby AFFIRMED with the
MODIFICATION that the renewal of petitioners as directors of Nephro is
Otelio Jochico issued the corresponding notices for the Special Stockholders' declared valid.
Meeting to be held on February 16, 1998 which were received by petitioners
on February 2, 1998. Again, they did not attend the meeting. The stockholders SO ORDERED.3
Respondents filed a Manifestation and Motion to Correct Typographical Error, misappreciation of the facts and the applicable laws such that their decisions
stating that the term "renewal" as provided in the CA Decision should be should be overturned.
"removal."4 Petitioners, on the other hand, filed the present petition for review
on certiorari. A corporation exercises its powers through its board of directors and/or its duly
authorized officers and agents, except in instances where the Corporation
On November 20, 2002, the CA issued a Resolution resolving to refrain from Code requires stockholders’ approval for certain specific acts.11
acting on all pending incidents before it in view of the filing of the petition with
the Court.5 Based on Section 23 of the Corporation Code which provides:

In the present petition, petitioners raised basically the same argument they SEC. 23. The Board of Directors or Trustees. Unless otherwise provided in this
had before the SEC and the CA, i.e., their removal from Nephro was not valid. Code, the corporate powers of all corporations formed under this Code shall
be exercised, all business conducted and all property of such corporations
Both the SEC and the CA held that Pag-ong's removal as director and Raniel's controlled and held by the board of directors or trustees x x x.
removal as director and officer of Nephro were valid. For its part, the SEC ruled
that the Board of Directors had sufficient ground to remove Raniel as officer a corporation’s board of directors is understood to be that body which (1)
due to loss of trust and confidence, as her abrupt and unauthorized leave of exercises all powers provided for under the Corporation Code; (2) conducts all
absence exhibited her disregard of her responsibilities as an officer of the business of the corporation; and (3) controls and holds all property of the
corporation and disrupted the operations of Nephro. The SEC also held that corporation. Its members have been characterized as trustees or directors
the Special Board Meeting held on February 2, 1998 was valid and the clothed with a fiduciary character. 12 Moreover, the directors may appoint
resolutions adopted therein are binding on petitioners.6 officers and agents and as incident to this power of appointment, they may
discharge those appointed.13
The CA upheld the SEC's conclusions, adding further that the special
stockholders' meeting on February 16, 1998 was likewise validly held. The CA In this case, petitioner Raniel was removed as a corporate officer through the
also ruled that Pag-ong's removal as director of Nephro was justified as it was resolution of Nephro's Board of Directors adopted in a special meeting on
due to her "undenied delay in the release of Nephro's medical supplies from February 2, 1998. As correctly ruled by the SEC, petitioners' removal was a
the warehouse of the Fly-High Brokerage where she was an officer, on top of valid exercise of the powers of Nephro's Board of Directors, viz.:
her and her co-petitioner Raniel's absence from the aforementioned directors' In the instant complaint, do respondents have sufficient grounds to cause the
and stockholders' meetings of Nephro despite due notice."7 removal of Raniel from her positions as Corporate Secretary, Treasurer and
It is well to stress the settled rule that the findings of fact of administrative Administrator of the Dialysis Clinic? Based on the facts proven during the
bodies, such as the SEC, will not be interfered with by the courts in the hearing of this case, the answer is in the affirmative.
absence of grave abuse of discretion on the part of said agencies, or unless Raniel's letter of January 26, 1998 speaks for itself. Her request for an
the aforementioned findings are not supported by substantial evidence. They indefinite leave, immediately effective yet without prior notice, reveals a
carry even more weight when affirmed by the CA.8 Such findings are accorded disregard of the critical responsibilities pertaining to the sensitive positions she
not only great respect but even finality, and are binding upon this Court, unless held in the corporation. Prior to her hasty departure, Raniel did not make a
it is shown that it had arbitrarily disregarded or misapprehended evidence proper turn-over of her duties and had to be expressly requested to hand over
before it to such an extent as to compel a contrary conclusion had such documents and records, including keys to the office and the cabinets (Exh.
evidence been properly appreciated.9 This rule is rooted in the doctrine that 15).
this Court is not a trier of facts, as well as in the respect to be accorded the
determinations made by administrative bodies in general on matters falling xxxx
within their respective fields of specialization or expertise. 10
Since Raniel occupied all three positions in Nephro, it is not difficult to foresee
A review of the petition failed to demonstrate any reversible error committed the disruption that her immediate and indefinite absence can inflict on the
by the two tribunals, hence, the petition must be denied. It does not present operations of the company. By leaving abruptly, Raniel abandoned the
any argument which convinces the Court that the SEC and the CA made any
positions she is now trying to reclaim. Raniel's actuation has been sufficiently a corporation for the purpose of removal of directors or trustees or any of them,
proven to warrant loss of the Board's confidence.14 must be called by the secretary on order of the president or on the written
demand of the stockholders representing or holding at least a majority of the
The SEC also correctly concluded that petitioner Raniel was removed as an outstanding capital stock, or if it be a non-stock corporation, on the written
officer of Nephro in compliance with established procedure, thus: demand of a majority of the members entitled to vote. x x x Notice of the time
The resolutions of the Board dismissing complainant Raniel from her various and place of such meeting, as well as of the intention to propose such removal,
positions in Nephro are valid. Notwithstanding the absence of complainants must be given by publication or by written notice as prescribed in this Code. x
from the meeting, a quorum was validly constituted. x x x. x x Removal may be with or without cause: Provided, That removal without
cause may not be used to deprive minority stockholders or members of the
xxxx right of representation to which they may be entitled under Section 24 of this
Code. (Emphasis supplied)
Based on its articles of incorporation, Nephro has five directors – two of the
positions were occupied by complainants and the remaining three are held by Petitioners do not dispute that the stockholders' meeting was held in
respondents. This being the case, the presence of all three respondents in the accordance with Nephro's By-Laws. The ownership of Nephro's outstanding
Special Meeting of the Board on February 2, 1998 established a quorum for capital stock is distributed as follows: Jochico - 200 shares; Steffens - 100
the conduct of business. The unanimous resolutions carried by the Board shares; Viriya - 100 shares; Raniel - 75 shares; and Pag-ong - 25 shares,17 or
during such meeting are therefore valid and binding against complainants. a total of 500 shares. A two-thirds vote of Nephro's outstanding capital stock
would be 333.33 shares, and during the Stockholders' Special Meeting held
It bears emphasis that Raniel was given sufficient opportunity to be heard. on February 16, 1998, 400 shares voted for petitioners' removal. Said number
Jochico's letters of January 26, 1998 and January 27, 1998, albeit adversarial,
of votes is more than enough to oust petitioners from their respective positions
recognized her right to explain herself and gave her the chance to do so. In
as members of the board, with or without cause.
fact, Raniel did respond to Jochico's letter on January 28, 1998 and took the
occasion to voice her opinions about Jochico's alleged "practice of using Verily therefore, there is no cogent reason to grant the present petition.
others for your own benefit, without cost." (Exh. 14). Moreover, the Special
Meeting of the Board could have been the appropriate venue for Raniel to air WHEREFORE, the petition is DENIED for lack of merit.
her side. Had Raniel decided to grace the meeting with her presence, she SO ORDERED.
could have explained herself before the board and tried to convince them to
allow her to keep her posts.15

Petitioners Raniel and Pag-ong's removal as members of Nephro's Board of

Directors was likewise valid.

Only stockholders or members have the power to remove the directors or

trustees elected by them, as laid down in Section 28 of the Corporation
Code,16 which provides in part:

SEC. 28. Removal of directors or trustees. -- Any director or trustee of a

corporation may be removed from office by a vote of the stockholders
holding or representing at least two-thirds (2/3) of the outstanding capital
stock, or if the corporation be a non-stock corporation, by a vote of at least
two-thirds (2/3) of the members entitled to vote: Provided, that such removal
shall take place either at a regular meeting of the corporation or at a special
meeting called for the purpose, and in either case, after previous notice to
stockholders or members of the corporation of the intention to propose such
removal at the meeting. A special meeting of the stockholders or members of
G.R. Nos. 188642 & 189425, October 17, 2016 These are consolidated petitions for review on certiorari assailing the Court of
Appeals' (CA) Decision1 and Resolution2 dated November 24, 2008 and June
AGDAO RESIDENTS INC., THE DIRECTORS LANDLESS LANDLESS 19, 2009, respectively, in CA-G.R. SP No. 01858-MIN and CA-G.R. SP No.
ASSOCIATION, BOARD OF OF AGDAO ASSOCIATION, INC., IN THEIR 01861-MIN. The CA affirmed with modification the Decision3 of the Regional
PERSONAL CAPACITY NAMELY: ARMANDO JAVONILLO, MA. ACELITA Trial Court (court a quo) dated July 11, 2007 which ruled in favor of
ARMENTANO, ALEX JOSOL, ANTONIA AMORADA, JULIUS ALINSUB, respondents.
POMPENIANO ESPINOSA, JR., SALCEDO DE LA CRUZ, CLAUDIO LAO,
CONSORCIO DELGADO, ROMEO CABILLO, RICARDO BACONG, The Parties
RODOLFO GALENZOGA, BENJAMIN LAMIGO, AND ASUNCION A.
ALCANTARA, Petitioners, v. ROLANDO MARAMION, LEONIDAS
JAMISOLA, VIRGINIA CANOY, ELIZABETH GONZALES, CRISPINIANO Petitioners are Agdao Landless Residents Association, Inc. (ALRAI), a non-
QUIRE-QUIRE, ERNESTINO DUNLAO, ELLA DEMANDANTE, ELLA RIA stock, non-profit corporation duly organized and existing under and by virtue
DEMANDANTE, ELGIN DEMANDANTE, SATURNINA WITARA, VIRGILIO of the laws of the Republic of the Philippines,4 and its board of
DAYONDON, MELENCIA MARAMION, ANGELICA PENKIAN, directors,5 namely, Armando Javonillo (Javonillo), Ma. Acelita Armentano
PRESENTACION TAN, HERNANI GREGORY, RUDY GIMARINO, (Armentano), Alex Josol, Salcedo de la Cruz, Jr., Claudio Lao, Antonia
VALENTIN CAMEROS, RODEL CAMEROS, ZOLLO JABONETE, LUISITO Amorada, Julius Alinsub, Pompeniano Espinosa, Consorcio Delgado, Romeo
TAN, JOSEPH QUIRE-QUIRE, ERNESTO DUNLAO, JR., FRED DUNLAO, Cabillo, Benjamin Lamigo, Ricardo Bacong, Rodolfo Galenzoga, and Asuncion
LIZA MARAMION, CLARITA ROBILLA, RENATO DUNLAO AND Alcantara (Alcantara).6 Respondents are allegedly ousted members of ALRAI,
PRUDENCIO JUARIZA, JR., Respondents. namely, Rolando Maramion, Leonidas Jamisola, Virginia Canoy (Canoy),
Elizabeth Gonzales, Crispiniano Quire-Quire, Emestino Dunlao, Ella
G.R. NOS. 188888-89 Demandante, Ella Ria Demandante, Elgin Demandante, Satumina Witara
(Witara), Virgilio Dayondon (Dayondon), Melencia Maramion, Angelica
ROLANDO MARAMION, LEONIDAS JAMISOLA, VIRGINIA CANOY, Penkian (Penkian), Presentacion Tan, Hemani Gregory (Gregory), Rudy
ERNESTINO DUNLAO, ELLA DEMANDANTE, ELLA RIA DEMANDANTE, Gimarino (Gimarino), Valentin Cameros, Radel Cameros (Cameros), Zoilo
ELGIN DEMANDANTE, SATURNINA WITARA, MELENCIA MARAMION, Jabonete, Luisito Tan (Tan), Joseph Quire� Quire, Emestino Dunlao, Jr.,
LIZA MARAMION, ANGELICA PENKIAN, PRESENTACION TAN, AS Fred Dunlao, Liza Maramion, Clarita Robilla (Robilla), Renata Dunlao and
SUBSTITUTED BY HIS LEGAL HEIRS: HERNANI GREGORY, RUDY Prudencio Juariza, Jr. (Juariza).7chanrobleslaw
GIMARINO, RODEL CAMEROS, VALENTIN CAMEROS, VIRGILIO
DAYONDON, PRUDENCIO JUARIZA, JR., ZOILO JABONETE, LUISITO The Antecedents
TAN, ERNESTINO DUNLAO, JR., FRED DUNLAO, CLARITA ROBILLA,
AND RENATO DUNLAO, Petitioners, v. AGDAO LANDLESS RESIDENTS Dakudao & Sons, Inc. (Dakudao) executed six Deeds of Donation8 in favor of
ASSOCIATION, INC., THE DIRECTORS LANDLESS BOARD OF OF ALRAI covering 46 titled lots (donated lots).9 One Deed of Donation10 prohibits
AGDAO RESIDENTS ASSOCIATION, INC., IN THEIR PERSONAL ALRAI, as donee, from partitioning or distributing individual certificates of title
CAPACITY, NAMELY: ARMANDO JAVONILLO, MA. ACELITA of the donated lots to its members, within a period of five years from execution,
ARMENTANO, ALEX JOSOL, ANTONIA AMORADA, JULIUS ALINSUB, unless a written authority is secured from Dakudao.11 A violation of the
POMPENIANO ESPINOSA, JR. JACINTO BO-OC, HERMENIGILDO prohibition will render the donation void, and title to and possession of the
DUMAPIAS, SALCEDO DE LA CRUZ, CLAUDIO LAO, CONSORCIO donated lot will revert to Dakudao.12 The other five Deeds of Donation do not
DELGADO, ROMEO CABILLO, RICARDO BACONG, RODOLFO provide for the five-year restriction.
GALENZOGA, BENJAMIN LAMIGO, ROMEO DE LA CRUZ, ASUNCION
ALCANTARA AND LILY LOY, Respondents. In the board of directors and stockholders meetings held on January 5, 2000
DECISION and January 9, 2000, respectively, members of ALRAI resolved to directly
transfer 10 of the donated lots to individual members and non� members of
JARDELEZA, J.: ALRAI.13 Transfer Certificate of Title (TCT) Nos. T-62124 (now T-322968), T-
297811 (now TCT No. T-322966), T-297813 (now TCT No. T-322967) and T-
62126 (now TCT No. T-322969) were transferred to Romeo Dela Cruz (Dela
Cruz). TCT Nos. T-41374 (now TCT No. T-322963) and T-41361 (now TCT
No. T-322962) were transferred to petitioner Javonillo, the president of ALRAI. On July 11, 2007, the court a quo promulgated its Decision,27 the decretal
TCT Nos. T-41365 (now TCT No. T-322964) and T-41370 (now TCT No. T- portion of which reads:
322964) were transferred to petitioner Armentano, the secretary of ALRAI.
TCT Nos. T-41367 (now TCT No. T-322971) and T-41366 were transferred to chanRoblesvirtualLawlibrary
petitioner Alcantara, the widow of the fanner legal counsel of ALRAI. The
donated lot covered by TCT No. T-41366 (replaced by TCT No. T-322970) After weighing the documentary and testimonial evidence presented, as well
was sold to Lily Loy (Loy) and now covered by TCT No. T- as the arguments propounded by the counsels, this Court tilts the scale of
338403.14chanrobleslaw justice in favor of complainants and hereby grants the
following:ChanRoblesVirtualawlibrary
Respondents filed a Complaint15 against petitioners. Respondents alleged that Defendants are enjoined from disposing or selling further the donated lands to
petitioners expelled them as members of ALRAI, and that petitioners are the detriment of the beneficiary-members of the Association;
abusing their powers as officers.16 Respondents further alleged that petitioners
were engaged in the following anomalous and illegal acts: (1) requiring The Complainants and/or the ousted members are hereby restored to their
ALRAI's members to pay exorbitant arrear fees when ALRAI's By-Laws only membership with ALRAI, and a complete list of all bona fide members should
set membership dues at P1.00 per month;17 (2) partially distributing the lands be made and submitted before this Court;
donated by Dakudao to some officers of ALRAI and to some non-members in
The Register of Deeds of the City of Davao is directed to annul the Land Titles
violation of the Deeds of Donation;18 (3) illegally expelling them as members
of ALRAI without due process;19 and (4) being unable to show the books of transferred to Armando Javonillo, Ma. Acelita Armentano, Romeo dela Cruz,
Asuncion Alcantara and Lily Loy with TCT Nos. T-322962, T-322963, T-
accounts of ALRAI.20 They also alleged that Loy (who bought one of the
322964, T-322965, T-322966, T-322967, T-322968, T-322969, T-322971 and
donated lots from Alcantara) was a buyer in bad faith, having been aware of
T-338403 (formerly T-322970), respectively; and to register said titles to the
the status of the land when she bought it.21chanrobleslaw
appropriate donee provided in the Deeds of Donation; and cralawlawlibrary
Thus, respondents prayed for: (1) the restoration of their membership to Defendants are further directed to produce all the Accounting Books of the
ALRAI; (2) petitioners to stop selling the donated lands and to annul the titles Association, receipts of the payments made by all the members, and for an
transferred to Javonillo, Armentano, Dela Cruz, Alcantara and Loy; (3) the accounting of the fees paid by the members from the time of its incorporation
production of the accounting books of ALRAI and receipts of payments from up to the present;
ALRAI's members; (4) the accounting of the fees paid by ALRAI's members;
and (5) damages.22chanrobleslaw Moral, exemplary and attorney's fees being unsubstantiated, the same cannot
be given due course; and cralawlawlibrary
In their Answer,23 petitioners alleged that ALRAI transferred lots to Alcantara
Defendants are ordered to shoulder the costs of suit.
as attorney's fees ALRAI owed to her late husband, who was the legal counsel
of ALRAI.24 On the other hand, Javonillo and Armentano, as president and SO ORDERED.28
secretary of ALRAI, respectively, made a lot of sacrifices for ALRAI, while Dela
Cruz provided financial assistance to ALRAI.25cralawredchanrobleslaw
The court a quo treated the case as an intra-corporate dispute.29 It found
Petitioners also alleged that respondents who are non-members of ALRAI respondents to be bona fide members of ALRAI.30 Being bona fide members,
have no personality to sue. They also claimed that the members who were they are entitled to notices of meetings held for the purpose of suspending or
removed were legally ousted due to their absences in expelling them from ALRAI.31 The court a quo however found that respondents
meetings.26chanrobleslaw were expelled without due process.32 It also annulled all transfers of the
donated lots because these violated the five-year prohibition under the Deeds
The Ruling of the RTC of Donation.33 It also found Loy a purchaser in bad faith.34chanrobleslaw
 meeting.40 The CA found that respondents were not given notices of the
Both Loy and petitioners filed separate appeals with the CA. Loy's appeal was meetings held for the purpose of their termination from ALRAI at least three
docketed as CA-G.R. SP No. 01858;35 while petitioners' appeal was docketed days before the date of the meeting.41 Being existing members of ALRAI,
as CA-G.R. SP No. 1861.36 In its Resolution37 dated October 19, 2007, the CA respondents are entitled to inspect corporate books and demand accounting
ordered the consolidation of the appeals. of corporate funds in accordance with Section 1, Article VII and Section 6,
Article V ofthe ALRAI Constitution.42chanrobleslaw
The Ruling of the Court of Appeals
The CA also noted that among the donated lots transferred, only one [under
The CA affirmed with modification the court a quo's Decision. The decretal TCT No. T-41367 (now TCT No. 322971) and transferred to Alcantara] was
portion of the CA Decision38 dated November 24, 2008 reads: covered by the five-year prohibition.43 Although petitioners attached to their
Memorandum44 dated November 19, 2007 a Secretary's Certificate45 of
chanRoblesvirtualLawlibrary Dakudao resolving to remove the restriction from the land covered by TCT No.
T-41367, the CA did not take this certificate into consideration because
WHEREFORE, the consolidated petitions are PARTLY GRANTED. The petitioners never mentioned its existence in any of their pleadings before the
assailed Decision dated July 11,2007 of the Regional Trial Court (RTC), court a quo. Thus, without the required written authority from the donor, the
Eleventh (11th)Judicial Region, Branch No. 10 of Davao City in Civil Case No. CA held that the disposition of the land covered by TCT No. T-41367 is
29,047-02 is hereby AFFIRMED with MODIFICATION. prohibited and the land's subsequent registration under TCT No. T-322971 is
void.46chanrobleslaw
The following Transfer Certificates of Title are declared VALID:
However, the CA nullified the transfers made to Javonillo and Armentano
TCT Nos. T-322966, T-322967, T-322968 and T-322969 in the name of
because these transfers violated Section 6 of Article IV of the ALRAI
petitioner Romeo C. DelaCruz; and
Constitution. Section 6 prohibits directors from receiving any compensation,
TCT No. T-338403 in the name of petitioner Lily Loy. except for per diems, for their services to ALRAI.47 The CA upheld the validity
of the transfers to Dela Cruz and Alcantara48 because the ALRAI Constitution
The following Transfer Certificates of Title are declared VOID: does not prohibit the same. The CA held that as a consequence, the
subsequent transfer of the lot covered by TCT No. T-41366 to Loy from
TCT Nos. T-322963 and T-322962 in the name of Petitioner Armando
Alcantara was also valid.49chanrobleslaw
Javonillo;

TCT Nos. T-322964 and T-322965 in the name of petitioner Ma. Acelita Both parties filed separate motions for reconsideration with the CA but these
Armentano; and were denied in a Resolution50 dated June 19, 2009.

TCT No. T-322971 in the name of petitioner Asuncion A. Alcantara. Thus, the parties filed separate petitions for review on certiorari under Rule 45
of the Rules of Court with this Court. In a Resolution51 dated September 30,
Petitioners who are members of ALRAI may inspect all the records and books
2009, we resolved to consolidate the petitions considering they assail the
of accounts of ALRAI and demand accounting of its funds in accordance
same CA Decision and Resolution dated November 24, 2008 and June 19,
with Section 1, Article VII and Section 6, Article V of ALRAI's Constitution and
2009, respectively. The petitions also involve the same parties and raise
By-Laws.
interrelated issues.
SO ORDERED.39 The Issues

Under Section 2, Article III of ALRAI's Amended Constitution and By-Laws Petitioners raise the following issues for resolution of the Court, to wit:
(ALRAI Constitution), the corporate secretary should give written notice of all
meetings to all members at least three days before the date of the chanRoblesvirtualLawlibrary
Whether respondents should be reinstated as members of ALRAI; and
chanRoblesvirtualLawlibrary
Whether the transfers of the donated lots are valid.
Sec. 5. - Termination of Membership - Membership may be lost in any of the
following: a) Delinquent in the payment of monthly dues; b) failure to
Our Ruling [attend] any annual or special meeting of the association for three
consecutive times without justifiable cause, and c) expulsion may be
exacted by majority vote of the entire members, on causes which herein
We find the petition partly meritorious. enumerated: 1) Act and utterances which are derogatory and harmful to the
best interest of the association; 2) Failure to attend any annual or special
I. Legality of respondents' termination meeting of the association for six (6) consecutive months, which shall be
construed as lack of interest to continue his membership, and 3) any act to
Petitioners argue that respondents were validly dismissed for violation of the conduct which are contrary to the objectives, purpose and aims of the
ALRAI Constitution particularly for non-payment of membership dues and association as embodied in the charter[.]61
absences in the meetings.52chanrobleslaw

Petitioners' argument is without merit. We agree with the CA's finding that Petitioners allege that the membership of respondents in ALRAI was
respondents were illegally dismissed from ALRAI. terminated due to (a) non-payment of membership dues and (b) failure to
consecutively attend meetings.62 However, petitioners failed to substantiate
We stress that only questions of law may be raised in a petition for review these allegations. In fact, the court a quo found that respondents submitted
on certiorari under Rule 45 of the Rules of Court, since "the Supreme Court is several receipts showing their compliance with the payment of monthly
not a trier of facts."53 It is not our function to review, examine and evaluate or dues.63 Petitioners likewise failed to prove that respondents' absences from
weigh the probative value of the evidence presented. meetings were without any justifiable grounds to result in the loss of their
membership in ALRAI.
When supported by substantial evidence, the findings of fact of the CA are
conclusive and binding on the parties and are not reviewable by this Court, Even assuming that petitioners were able to prove these allegations, the
unless the case falls under any of the recognized exceptions in automatic termination of respondents' membership in ALRAI is still not
Jurisprudence.54chanrobleslaw warranted. As shown above, Section 5 of the ALRAI Constitution does not
state that the grounds relied upon by petitioners will cause
The court a quo held that respondents are bona fide members of the automatic termination of respondents' membership. Neither can
ALRAL55 This finding was not disturbed by the CA because it was not raised petitioners argue that respondents' memberships in ALRAI were terminated
as an issue before it and thus, is binding and conclusive on the parties and under letter (c) of Section 5, to wit:
upon this Court.56 In addition, both the court a quo and the CA found that
respondents were illegally removed as members of ALRAI. Both courts found chanRoblesvirtualLawlibrary
that in terminating respondents from ALRAI, petitioners deprived them of due x x x c) expulsion may be exacted by majority vote of the entire members, on
process.57chanrobleslaw causes which herein enumerated: 1) Act and utterances which are derogatory
and harmful to the best interest of the association; 2) Failure to attend any
Section 9158 of the Corporation Code of the Philippines (Corporation annual or special meeting of the association for six (6) consecutive months,
Code)59 provides that membership in a non-stock, non-profit corporation (as in which shall be construed as lack of interest to continue his membership, and
petitioner ALRAI in this case) shall be terminated in the manner and for the 3) any act to conduct which are contrary to the objectives, purpose and aims
cases provided in its articles of incorporation or the by-laws. of the association as embodied in the charter; x x
x64chanroblesvirtuallawlibrary
In tum, Section 5, Article II of the ALRAI Constitution60 states:
 upon payment of the corresponding dues in arrears or additional contributions
Although termination of membership from ALRAI may be made by a majority and after approval of the board of Directors.70chanrobleslaw
of the members, the court a quo found that the "guideline (referring to Section
2, Article III of the ALRAI Constitution) was not followed, hence, complainants' x x x
ouster from the association was illegally done."65 The court a quo cited Section
2, Article III of the ALRAI Constitution which provides, thus: Article III
xxx
chanRoblesvirtualLawlibrary

Sec. 2. -Notice- The Secretary shall give or cause to be given written notice of Sec. 3. - Any member who shall be absent from any meeting without justifiable
all meetings, regular or special to all members of the association at least three causes shall be liable to a fine of Two Pesos (P 2.00);71
(3) days before the date of each meetings either by mail or personally. Notice
for special meetings shall specify the time and the purposes or purpose for Clearly, members proved to be in arrears in the payment of monthly dues,
which it was called; x x x 66 contributions, or assessments shall only be automatically suspended; while
members who shall be absent from any meeting without any justifiable cause
The CA concurred with the finding of the court a quo.67 The CA noted that the shall only be liable for a fine. Nowhere in the ALRAI Constitution does it say
evidence presented revealed that the General Meeting for the termination of that the foregoing actions shall cause the automatic termination of
membership was to be held on July 29, 2001, at 2 o'clock in the afternoon; but membership. Thus, the CA correctly ruled that "respondents' expulsion
the Notice to all officers and members of ALRAI informing them about the constitutes an infringement of their constitutional right to due process of law
General Meeting appeared to have been signed by ALRAI's President only on and is not in accord with the principles established in Article 19 of the Civil
July 27, 2001.68 Thus, the CA held that the "notice for the July 29, [2001] Code, x x x."72chanrobleslaw
meeting where the general membership of ALRAI approved the expulsion of
some of the respondents was short of the three (3)-day notice requirement. There being no valid termination of respondents' membership m ALRAI,
More importantly, the petitioners have failed to adduce evidence showing that respondents remain as its existing members.73 It follows that as members,
the expelled members were indeed notified of any meeting or investigation respondents are entitled to inspect the records and books of accounts of
proceeding where they are given the opportunity to be heard prior to the ALRAI subject to Section 1, Article VII74 of ALRAI's Constitution, and they can
termination of their membership."69chanrobleslaw demand the accounting of its funds in accordance with Section 6, Article V of
the ALRAI Constitution.75 In addition, Sections 7476 and 7577 of the
The requirement of due notice becomes more essential especially so since the Corporation Code also sanction the right of respondents to inspect the records
ALRAI Constitution provides for the penalties to be imposed in cases where and books of accounts of ALRAI and demand the accounting of its funds.
any member is found to be in arrears in payment of contributions, or is found
to be absent from any meeting without any justifiable cause. Section 3, Article II. On the validity of the donated lots
II and Section 3, Article III of the ALRAI Constitution provide, to wit:
We modify the decision of the CA.
chanRoblesvirtualLawlibrary
At the onset, we find that the cause of action and the reliefs sought in the
Article II complaint pertaining to the donated lands (ALRAI's corporate property) strictly
call for the filing of a derivative suit, and not an individual suit which
xxx respondents filed.

Individual suits are filed when the cause of action belongs to the stockholder
Sec. 3. - Suspension of members Any member who shall be six (6) months in personally, and not to the stockholders as a group, or to the corporation, e.g.
arrears in the payment of monthly dues or additional contributions or denial of right to inspection and denial of dividends to a stockholder. If the
assessments shall be automatically suspended and may be reinstated only
cause of action belongs to a group of stockholders, such as when the rights a) An Order for a writ of PRELIMINARY PROHIBITORY MANDATORY
violated belong to preferred stockholders, a class or representative suit may INJUNCTION to stop the Defendants from disposing the donated lands to the
be filed to protect the stockholders in the group.78chanrobleslaw detriment of the beneficiary-members of the Association[.]

A derivative suit, on the other hand, is one which is instituted by a shareholder xxx
or a member of a corporation, for and in behalf of the corporation for its
protection from acts committed by directors, trustees, corporate officers, and c) To cease and desist from selling donated lands subject of this case and to
even third persons.79 The whole purpose of the law authorizing a derivative annul the titles transferred x x x.
suit is to allow the stockholders/members to enforce rights which are derivative
(secondary) in nature, i.e., to enforce a corporate cause of d) To annul the Land Titles fraudulently and directly transferred from the
action.80chanrobleslaw Dacudao in the names of Defendants Javonillo, Armentano, Romeo de la Cruz
and Alcantara, and subsequently to defendant Lily Loy in the name of Agdao
The nature of the action, as well as which court or body has jurisdiction over Landless Associatidn.83
it, is determined based on the allegations contained in the complaint of the
plaintiff, irrespective of whether or not the plaintiff is entitled to recover upon
all or some of the claims asserted therein.81chanrobleslaw In a strict sense, the first cause of action, and:the reliefs sought, should have
been brought through a derivative suit. The first cause of action pertains to the
In this case, the complaint alleged, thus: corporate right of ALRAI involving its corporate properties which it owned by
virtue of the Deeds of Donation. In derivative suits, the real party-in-interest is
chanRoblesvirtualLawlibrary the corporation, and the suing stockholder is a mere nominal party. 84 A
derivative suit, therefore, concerns "a wrong to the corporation
FIRST CAUSE OF ACTION itself."85chanrobleslaw

9. Sometime in 2001, Complainants accidentally discovered that portions of However, we liberally treat this case (in relation to the cause of action
the aforementioned donated lands were partially distributed by the Officers of pertaining to ALRAI's corporate properties) as one pursued by the corporation
said association, AMONG THEMSELVES, without knowledge of its members. itself, for the following reasons.

xxx First, the court a quo has jurisdiction to hear and decide this controversy.
Republic Act No. 8799,86 in relation to Section 5 of Presidential Decree No.
902-A,87 vests the court a quo with original and exclusive jurisdiction to hear
11. Then there was illegal partial distribution of the donated lands. Not only the and decide cases involving:
President and Secretary of the Association, but also some personalities who
are not members of the association and who themselves own big tracts of land, chanRoblesvirtualLawlibrary
are the recipients of the donated lands, which acts are contrary to the clear
intents as indicated in the deed of donation. x x x82 Sec. 5. x x x

(a) Devices or schemes employed by or any acts, of the board of directors,

In the same complaint, respondents prayed .for the following reliefs, among business associates, its officers or partnership, amounting to fraud and
others, to wit: misrepresentation which may be detrimental to the interest of the public and/or
of the stockholders, partners, members of associations or organizations
chanRoblesvirtualLawlibrary registered with the Commission.

Second, we note that petitioners did not object to the institution of the case (on
the ground that a derivative suit should have been lodged instead of an Commart (Phils.), Inc. v. Securities and Exchange
individual suit) in any of the proceedings before the court a quo or before the Commission (SEC)93 upholds the same principle. In that case, the chairman
CA.88chanrobleslaw and board of directors of Commart were sued for diverting into their private
accounts amounts due to Commart as commissions. Respondents argued that
Third, a reading of the complaint (in relation to the cause of action pertaining the Hearing Panel of the SEC should dismiss the case�on the ground that
to ALRAI's corporate properties) shows that respondents do not pray for reliefs it has no jurisdiction over the matter because the case is not a derivative suit
for their personal benefit; but in fact, for the benefit of the ALRAI, to wit: The Hearing Panel denied the motion, and was affirmed by the SEC. Upon
appeal, this Court affirmed the decision of the SEC, to wit:
chanRoblesvirtualLawlibrary
chanRoblesvirtualLawlibrary
c) To cease and desist from selling donated lands subject of this case and to
annul the titles transferred to Armando Javonillo, Ma. Acelita Armentano, The complaint in SEC Case No. 2673, particularly paragraphs 2 to 9 under
Romeo de Ia Cruz, Asuncion Alcantara and Lily Loy x x x. First Cause of Action, readily shows that it avers the diversion of corporate
income into the private bank accounts of petitioner x x x and his wife. Likewise,
d) To annul the Land Titles fraudulently and directly transferred from the (sic) the principal relief prayed for in the complaint is the recovery of a sum of
Dacudao in the names of Defendants Javonillo, Armentano, Romeo de la Cruz money in favor of the corporation. This being the case, the complaint is
and Alcantara, and subsequently to Defendant Lily Loy in the name of Agdao definitely a derivative suit. xxx
Landless Assiociation.89
xxx

The reliefs sought show that the complaint was filed ultimately to curb the
alleged mismanagement of ALRAI's corporate properties. We note that the In any case, the suit is for the benefit of Commart itself, for a judgment in favor
danger sought to be avoided in Evangelista v. Santos90 does not exist in this of the complainants will necessarily mean recovery by the corporation of the
case. In Santos, plaintiff stockholders sought damages against the principal US$2.5 million alleged to have been diverted from its coffers to the private
officer of the corporation, alleging that the officer's mismanagement of the bank accounts of its top managers and directors. Thus, the prayer in the
affairs and assets of the corporation brought about the loss of the value of its Amended Complaint is for judgment ordering respondents x x x, "to account
stocks. In ruling against the plaintiff-stockholders, this Court held that "[t]he for and to, turn over or deliver to the Corporation" the aforesaid sum, with legal
stockholders may not directly claim those damages for themselves for that interest, and "ordering all the respondents, as members of the Board of
would result in the appropriation by, and the distribution among them of part of Directors to take such remedial steps as would protect the corporation from
the corporate assets before the dissolution of the corporation x x x."91 More, further depredation of the funds and property."94
in Santos, if only the case was brought before the proper venue, this Court
added, "we note that the action stated in their complaint is susceptible of being Fourth, based on the records, we find that there is substantial compliance with
converted into a derivative suit for the benefit of the corporation by a mere the requirements of a derivative suit, to wit:
change in the prayer."92chanrobleslaw
chanRoblesvirtualLawlibrary
In this case, the reliefs sought do not entail the premature distribution of
corporate assets. On the contrary, the reliefs seek to preserve them for the a) [T]he party bringing suit should be a shareholder as of the time of the act or
corporate interest of ALRAI. Clearly then, any benefit that may be recovered transaction complained of, the number of his shares not being material;
is accounted for, not in favor of respondents, but for the corporation, who is
the real party-in-interest Therefore, the occasion for the strict application of the b) [H]e has tried to exhaust intra-corporate remedies, i.e., has made a demand
rule that a derivative suit should be brought in order to protect and vindicate on the board of directors for the appropriate relief but the latter has failed or
the interest of the corporation does not obtain under the circumstances of this refused to heed his plea; and cralawlawlibrary
case.
c) [T]he cause of action actually devolves on the corporation, the wrongdoing
or harm having been, or being caused to the corporation and not to the from petitioners. Ultimately, to make an effort to demand redress within the
particular stockholder bringing the suit.95 corporation will only result in futility, rendering the exhaustion of other
remedies unnecessary.

Here, the court a quo found that respondents are bona fide members of Finally, the third requirement for the institution of a derivative suit is clearly
ALRAI.96 As for the second requisite, respondents also have tried to demand complied with. As discussed in the previous paragraphs, the cause of action
appropriate relief within the corporation, but the demand was unheeded. In and the reliefs sought ultimately redound to the benefit of ALRAI. In this case,
their Memorandum before the CA, respondents alleged, thus: and as in a proper derivative suit, ALRAI is the party-in-interest and
respondents are merely nominal parties.
chanRoblesvirtualLawlibrary

4.18 The occurrence of the series of distressing revelation In view of the foregoing, and considering further the interest of justice, and the
prompted Respondents to confront Defendant Armentano on the accounting length of time that this case has been pending, we liberally treat this case as
of all payments made including the justification for the illegal distribution of the one pursued by the corporation to protect its corporate rights. As the court a
Donated Land to four persons mentioned in preceding paragraph (4.12) of this quo noted, this case "commenced [on] April 2, 2002, blossomed in a full-blown
memorandum. Unfortunately, Petitioner Armentano merely reasoned their trial and ballooned into seven (7) voluminous rollos."99chanrobleslaw
(referring to the four persons) right to claim ownership of the land as
compensation for their service and attorney's fees; We now proceed to resolve the issue of the validity of the transfers of the
donated lots to Javonillo, Armentano, DelaCruz, Alcantara and Loy. We agree
4.19 Anxious of the plan of action taken by the Respondents against the with the CA in ruling that the TCTs issued in the names of Javonillo, Armentano
Petitioners, the latter started harassing the unschooled Respondents by and Alcantara are void.100 We modify the ruling of the CA insofar as we rule
unduly threatening them. Respondents simply wanted the land due them, an that the TCTs issued in the names of Dela Cruz and Loy are also
accounting of the finances of the Association and justification of the illegal void.101chanrobleslaw
disposition of the Donated Land which was donated for the landless members
of the Association; One of the primary purposes of ALRAI is the giving of assistance in uplifting
and promoting better living conditions to all members in particular and the
4.20 As a consequence, Petitioners on their own, with grave abuse of power public in general.102 One of its objectives includes "to uplift and promote better
and in violation of the Constitution and By-Laws of the Association maliciously living condition, education, health and general welfare of all members in
expelled the Respondents particularly those persistently inquisitive about particular and the public in general by providing its members humble shelter
Petitioners' moves and acts which only emphasized their practice of upholding and decent housing."103 Respondents maintain that it is pursuant to this
the MOB RULE by presenting solicited signatures of alleged members and purpose and objective that the properties subject of this case were donated to
non-members written on a scrap of paper signifying confirmation of the ouster ALRAI.104chanrobleslaw
(sic) members. x x x 97
Section 36, paragraphs 7 and 11 of the Corporation Code provide:

We note that respondents' demand on Armentano substantially complies with chanRoblesvirtualLawlibrary

the second requirement. While it is true that the complaining stockholder must
show that he has exhausted all the means within his reach to attain within the Sec. 36. Corporate powers and capacity. - Every corporation incorporated
corporation the redress for his grievances, demand is unnecessary if the under this Code has the power and capacity:ChanRoblesVirtualawlibrary
exercise will result in futility.98 Here, after respondents demanded Armentano xxx
to justify the transfer of ALRAI's properties to the individual petitioners,
respondents were expelled from the corporation, which termination we have
already ruled as invalid. To our mind, the threat of expulsion against 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
respondents is sufficient to forestall any expectation of further demand for relief mortgage and otherwise deal with such real and personal property, including
securities and bonds of other corporations, as the transaction of the lawful both before the Regional Trial Court in Davao City (Civil Case No. 16192) and
business of the corporation may reasonably and necessarily require, subject the Court of Appeals in Manila (CA GR No. 13744). He agreed to render his
to the limitations prescribed by law and the Constitution. services although he was being paid intermittently, with just small amounts, in
the hope that he will be compensated when ALRAI triumphs in the
xxx litigation."108 Petitioners thus claim that "[b]ecause of the legal services of her
husband, who is now deceased, petitioner Alcantara was given by ALRAI two
11. To exercise such other powers as may be essential or necessary to carry (2) lots x x x."109chanrobleslaw
out its purpose or purposes as stated in the articles of
incorporation.105chanroblesvirtuallawlibrary Petitioners admit that Atty. Pedro Alcantara represented ALRAI as counsel on
part contingency basis.110 In their Memorandum before the court a quo,
respondents alleged that, "[i]n fact, Complainants have duly paid Atty.
The Corporation Code therefore tells us that the power of a corporation to Alcantara's legal fees as evidence (sic) by corresponding receipts issued by
validly grant or convey any of its real or personal properties is circumscribed the receiving Officer of the Association."111 The aforementioned
by its primary purpose. It is therefore important to determine whether the grant receipts112 show that Atty. Pedro Alcantara had already been paid the total
or conveyance is pursuant to a legitimate corporate purpose, or is at least amount of P16,845.00.
reasonable and necessary to further its purpose.
In Rayos v. Hernandez,113 we held that a contingent fee arrangement is valid
Based on the records of this case, we find that the transfers of the corporate in this jurisdiction. It is generally recognized as valid and binding, but must be
properties to Javonillo, Armentano, Dela Cruz, Alcantara and Loy are bereft of laid down in an express contract. In the same case, we have identified the
any legitimate corporate purpose, nor were they shown to be reasonably circumstances to be considered in determining the reasonableness of a claim
necessary to further ALRAI's purposes. This is principally because, as for attorney's fees as follows: (1) the amount and character of the service
respondents argue, petitioners "personally benefitted themselves by allocating rendered; (2) labor, time, and trouble involved; (3) the nature and importance
among themselves vast track of lands at the dire expense of the landless of the litigation or business in which the services were rendered; (4) the
general membership of the Association."106chanrobleslaw responsibility imposed; (5) the amount of money or the value of the property
affected by the controversy or involved in the employment; (6) the skill and
We take first the cases of Dela Cruz, Alcantara and Loy. experience called for in the performance of the services; (7) the professional
character and social standing of the attorney; (8) the results secured; (9)
We disagree with theCA in ruling that the TCTs issued in the name of Dela whether the fee is absolute or contingent, it being recognized that an attorney
Cruz are valid. The transfer of property to him does not further the corporate may properly charge a much larger fee when it is contingent than when it is
purpose of ALRAI. To justify the transfer to Dela Cruz, petitioners merely allege not; and (10) the financial capacity and economic status of the client have to
that, "[o]n the other hand, the lots given by ALRAI to Romeo de la Cruz were be taken into account in fixing the reasonableness of the fee.114chanrobleslaw
compensation for the financial assistance he had been extending to
ALRAI."107 Records of this case do not bear any evidence to show how much In this case however, petitioners did not substantiate the extent of the services
Dela Cruz has extended to ALRAI as financial assistance. The want of that Atty. Pedro Alcantara rendered for ALRAL In fact, no engagement or
evidence to support this allegation cannot allow a determination whether the retainer contract was ever presented to prove the terms of their agreement.
amount of the financial help that Dela Cruz extended to ALRAI is Petitioners did not also present evidence as to the value of the ALRAI
commensurate to the amount of the property transferred to him. The lack of properties at the time of transfer to Alcantara. There is therefore no proof that
evidence on this point is prejudicial to ALRAI because ALRAI had parted with the amount of the properties transferred to Alcantara, in addition to the legal
its property without any means by which to determine whether the transfer is fees he received, is commensurate (as compensation) to the reasonable value
fair and reasonable under the circumstances. of his legal services. Using the guidelines set forth in Rayos, absent proof,
there is no basis to determine whether the transfer of the property to Alcantara
The same is true with the transfer of properties to Alcantara. Petitioners allege is reasonable under the circumstances.115chanrobleslaw
that Alcantara's husband, Atty. Pedro Alcantara, "handled all the legal work
The importance of this doctrine in Rayos is emphasized in the Canons of the realty of Dacudao & Sons, Inc., would not have been attained."126 In their
Professional Ethics116 and the Rules of Court.117 In both, the overriding Memorandum, petitioners also alleged that "[t]he most difficult part of their
consideration is the reasonableness of the terms of the contingent fee (Javonillo and Armentano) job was to raise money to meet expenses. x x x It
agreement, so much so that the grant of the contingent fee is subject to the was very difficult for petitioners Javonillo and Armentano when they needed to
supervision of the court.118chanrobleslaw pay P300,000.00 for realty tax on the land donated by Dakudao and Sons, Inc.
to ALRAI. It became more difficult when the Bureau of Internal Revenue was
Spouses Cadavedo v. Lacaya119 further illustrates this principle. In that case, demanding P6,874,000.00 as donor's tax on the donated lands. Luckily, they
this Court was confronted with the issue of whether the contingent attorney's were able to make representation with the BIR to waive the
fees consisting of one-half of the property that was subject of litigation was tax."127chanrobleslaw
valid and reasonable. This Court ruled that the attorney's fee is excessive and
unconscionable, and is therefore void. The Court said that as "matters then These reasons cannot suffice to prove any legitimate corporate purpose in the
stood, [there] was not a sufficient reason to justify a large fee in the absence transfer of the properties to Javonillo and Armentano. For one, petitioners
of any showing that special skills and additional work had been cannot argue that the properties transferred to them will serve as
involved."120 The Court also noted that Spouses Cadavedo and Atty. Lacaya reimbursements of the amounts they advanced for ALRAL There is no
already made arrangements for the cost and expenses for the cases evidence to show that they indeed paid the realty tax on the donated lands.
handled.121chanrobleslaw Neither did petitioners present any proof of actual disbursements they incurred
whenever Javonillo and Armentano allegedly helped Atty. Pedro Alcantara in
Similarly in this case, there is no proof that special skills and additional work handling the cases involving ALRAI.128 Like in the cases of Dela Cruz and
have been put in by Atty. Pedro Alcantara. Further, as adverted to in previous Alcantara, absent proof, there was no basis by which it could have been
paragraphs, receipts show that intermittent payments as legal fees have determined whether the transfer of properties to Javonillo and Armentano was
already been paid to him. We also note that in this case, not only one-half of a reasonable under the circumstances at that time. Second, petitioners cannot
property was transferred to Alcantara as compensation; but two whole parcels argue that the properties are transferred as compensatioh for Javonillo. It is
of land - one with more or less 400 square meters (TCT No. 41366), and the well settled that directors of corporations presumptively serve without
other with more or less 395 square meters (TCT No. 41367). 122 The amount compensation; so that while the directors, in assigning themselves additional
of fee contracted for, standing alone and unexplained would be sufficient to duties, act within their power, they nonetheless act in excess of their authority
show that an unfair advantage had been taken of the client, or that a legal by voting for themselves compensation for such additional duties.129 Even
fraud had been perpetrated on him.123chanrobleslaw then, aside from the claim of petitioners, there is no showing that Javonillo
rendered extraordinary or unusual services to ALRAI.
Consequently, we also find that Alcantara's subsequent sale to Loy is not valid.
Alcantara cannot sell the property, over which she did not have the right to The lack of legitimate corporate purpose is even more emphasized when
own, in the first place. More, based on the records, the court a quo had already Javonillo and Armentano, as a director and an officer of ALRAI, respectively,
made a finding that Loy is guilty of bad faith as to render her purchase of the violated the fiduciary nature130 of their positions in the corporation.
property from Alcantara void. 124chanrobleslaw
Section 32 of the Corporation Code provides, thus:
We likewise find that there is failure to show any legitimate corporate purpose
in the transfer of ALRAI's corporate properties to Javonillo and Armentano. chanRoblesvirtualLawlibrary

The Board Resolution125 confirming the transfer of ALRAI's corporate Sec. 32. Dealings of directors, trustees or officers with the corporation. �A
properties to Javonillo and Armentano merely read, "[t]hat the herein contract of the corporation with one or more of its directors or trustees or
irrevocable confirmation is made in recognition of, and gratitude for the officers is voidable, at the option of such corporation, unless all of the following
outstanding services rendered by x x x Mr. Armando Javonillo, our tireless conditions are present:
President and Mrs. Acelita Armentano, our tactful, courageous, and equally
tireless Secretary, without whose efforts and sacrifices to acquire a portion of chanRoblesvirtualLawlibrary1. That the presence of such director or trustee in
the board meeting in which the contract was approved was not necessary to Second, there is also no showing that there was full disclosure of the adverse
constitute a quorum for such meeting; interest of the directors involved when the Resolution was approved. Full
2. That the vote of such director or trustee was not necessary for the approval disclosure is required under the aforecited Section 32 of the Corporation
of the contract; Code.136chanrobleslaw
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by Third, Section 32 requires that the contract be fair and reasonable under the
the board of directors. circumstances. As previously discussed, we find that the transfer of the
corporate properties to the individual petitioners is not fair and reasonable for
Where any of the first two conditions set forth in the preceding paragraph is (1) want of legitimate corporate purpose, and for (2) the breach of the fiduciary
absent, in the case of a contract with a director or trustee, such contract may nature of the positions held by Javonillo and Armentano. Lacking any of these
be ratified by the vote of the stockholders representing at least two-thirds (2/3) (full disclosure and a showing that the contract is fair and reasonable),
of the outstanding capital stock or of at least two� thirds (2/3) of the ratification by the two-thirds vote would be of no avail.137chanrobleslaw
members in a meeting called for the purpose: Provided, That full disclosure of
the adverse interest of the directors or trustees involved is made at such In view of the foregoing, we rule that the transfers of ALRAI's corporate
meeting: Provided, however, That the contract is fair and reasonable under properties to Javonillo, Armentano, Dela Cruz, Alcantara and Loy are void. We
the circumstances. affirm the finding of the court a quo when it ruled that "[n]o proof was shown to
justify the transfer of the titles, hence, said transfer should be
annulled."138chanrobleslaw
Being the corporation's agents and therefore, entrusted with the management
of its affairs, the directors or trustees and other officers of a corporation occupy WHEREFORE, in view of the foregoing, the petitions for review on certiorari in
a fiduciary relation towards it, and cannot be allowed to contract with the G.R. Nos. 188642 & 189425 and in G.R. Nos. 188888-89 are PARTIALLY
corporation, directly or indirectly, or to sell property to it, or purchase property GRANTED. The Decision of the CA dated November 24, 2008 and its
from it, where they act both for the corporation and for themselves.131 One Resolution dated June 19, 2009 ruling that respondents are reinstated as
situation where a director may gain undue advantage over his corporation is members of ALRAI are hereby AFFIRMED. The Decision of theCA dated
when he enters into a contract with the latter. 132chanrobleslaw November 24, 2008 and its Resolution dated June 19, 2009 are MODIFIED as
follows:
Here, we note that Javonillo, as a director, signed the Board
Resolutions133 confirming the transfer of the corporate properties to himself, chanRoblesvirtualLawlibraryThe following Transfer Certificates of Title
and to Armentano. Petitioners cannot argue that the transfer of the corporate are VOID:ChanRoblesVirtualawlibrary
properties to them is valid by virtue of the Resolution134 by the general
membership of ALRAI confirming the transfer for three reasons. (1) TCT Nos. T-322962 and T-322963 in the name of Armando Javonillo;
(2) TCT Nos. T-322964 and T-322965 in the name of Ma. Acelita Armentano;
First, as cited, Section 32 requires that the contract should be ratified by a vote (3) TCT Nos. T-322966, T-322967, T-322968, and T-322969 in the name of
representing at least two-thirds of the members in a meeting called for the Romeo Dela Cruz;
purpose. Records of this case do not show whether the Resolution was indeed (4) TCT No. T-338403 in the name of Lily Loy; and
voted by the required percentage of membership. In fact, respondents take (5) TCT No. T-322971 in the name of Asuncion Alcantara.
exception to the credibility of the signatures of the persons who voted in the
Resolution. They argue that, "from the alleged 134 signatures, 24 of which are
non-members, 4 of which were signed twice under different numbers, and 27 SOORDERED.chanRoblesvirtualLawlibrary
of which are apparently proxies unequipped with the proper authorization.
Obviously, on such alleged general membership meeting the majority of the
entire membership was not attained."135chanrobleslaw
G.R. No. 147590 April 2, 2007 or factory. Such intentions [sic] was manifested in a letter, allegedly claimed
by [MAC] as its notice filed only on the same day that the operations closed.
ANTONIO C. CARAG, Petitioner,
vs. 4. That at the time of closure, employees who have rendered one to two weeks
NATIONAL LABOR RELATIONS COMMISSION, ISABEL G. work were not paid their corresponding salaries/wages, which remain unpaid
PANGANIBAN-ORTIGUERRA, as Executive Labor Arbiter, NAFLU, and until time [sic] of this writing.
MARIVELES APPAREL CORPORATION LABOR UNION, Respondents.
5. That there are other benefits than those above-mentioned which have been
DECISION unpaid by [MAC] at the time it decided to cease operations, benefits gained by
the workers both by and under the CBA and by operations [sic] of law.
CARPIO, J.:
6. That the closure made by [MAC] in the manner and style done is perce [sic]
The Case illegal, and had caused tremendous prejudice to all of the employees, who
This is a petition for review on certiorari 1 assailing the Decision dated 29 suffered both mental and financial anguish and who in view thereof merits [sic]
February 20002 and the Resolution dated 27 March 20013 of the Court of award of all damages (actual, exemplary and moral), [illegible] to set [an]
Appeals (appellate court) in CA-G.R. SP Nos. 54404-06. The appellate court example to firms who in the future will [illegible] the idea of simply prematurely
affirmed the decision dated 17 June 19944 of Labor Arbiter Isabel Panganiban- closing without complying [with] the basic requirement of Notice of
Ortiguerra (Arbiter Ortiguerra) in RAB-III-08-5198-93 and the resolution dated Closure.6 (Emphasis supplied)
5 January 19955 of the National Labor Relations Commission (NLRC) in NLRC Upon receipt of the records of the case, Arbiter Ortiguerra summoned the
CA No. L-007731-94. parties to explore options for possible settlement. The non-appearance of
Arbiter Ortiguerra held that Mariveles Apparel Corporation (MAC), MAC's respondents prompted Arbiter Ortiguerra to declare the case submitted for
Chairman of the Board Antonio Carag (Carag), and MAC's President Armando resolution "based on the extant pleadings."
David (David) (collectively, respondents) are guilty of illegal closure and are In their position paper dated 3 January 1994, complainants moved to implead
solidarily liable for the separation pay of MAC's rank and file employees. The Carag and David, as follows:
NLRC denied the motion to reduce bond filed by MAC and Carag.
x x x x In the present case, it is unfortunate for respondents that the records
The Facts and evidence clearly demonstrate that the individual complainants are entitled
National Federation of Labor Unions (NAFLU) and Mariveles Apparel to the reliefs prayed for in their complaint. However, any favorable judgment
Corporation Labor Union (MACLU) (collectively, complainants), on behalf of the Honorable Labor Arbiter may render in favor of herein complainants will go
all of MAC's rank and file employees, filed a complaint against MAC for illegal to naught should the Office fails [sic] to appreciate the glaring fact that the
dismissal brought about by its illegal closure of business. In their complaint respondents [sic] corporation is no longer existing as it suddenly stopped
dated 12 August 1993, complainants alleged the following: business operation since [sic] 8 July 1993. Under this given circumstance, the
complainants have no option left but to implead Atty. ANTONIO CARAG, in his
2. Complainant NAFLU is the sole and exclusive bargaining agent official capacity as Chairman of the Board along with MR. ARMANDO DAVID
representing all rank and file employees of [MAC]. That there is an existing as President. Both are also owners of the respondent corporation with office
valid Collective Bargaining Agreement (CBA) executed by the parties and that address at 10th Floor, Gamon Centre, Alfaro Street, Salcedo Village[,]
at the time of the cause of action herein below discussed happened there was Makati[,] Metro Manila although they may be collectively served with summons
no labor dispute between the Union and Management except cases pending and other legal processes through counsel of record Atty. Joshua Pastores of
in courts filed by one against the other. 8th Floor, Hanston Bldg., Emerald Avenue, Ortigas[,] Pasig, Metro Manila.
This inclusion of individual respondents as party respondents in the present
3. That on July 8, 1993, without notice of any kind filed in accordance with case is to guarantee the satisfaction of any judgment award on the basis of
pertinent provisions of the Labor Code, [MAC], for reasons known only by
Article 212(c) of the Philippine Labor Code, as amended, which says:
herself [sic] ceased operations with the intention of completely closing its shop
"Employer includes any person acting in the interest of an employer, directly This is a complaint for illegal dismissal brought about by the illegal closure and
or indirectly. It does not, however, include any labor organization or any of its cessation of business filed by NAFLU and Mariveles Apparel Corporation
officers or agents except when acting as employer." Labor Union for and in behalf of all rank and file employees against
respondents Mariveles Apparel Corporation, Antonio Carag and Armando
The provision was culled from Section 2, Republic Act 602, the Minimum Wage David [who are] its owners, Chairman of the Board and President, respectively.
Act. If the employer is an artificial person, it must have an officer who can be
presumed to be the employer, being "the person acting in the interest of the This case was originally raffled to the sala of Labor Arbiter Adolfo V. Creencia.
employer." The corporation is the employer, only in the technical sense. (A.C. When the latter went on sick leave, his cases were re-raffled and the instant
Ransom Labor Union CCLU VS. NLRC, G.R. 69494, June 10, 1986). Where case was assigned to the sala of the undersigned. Upon receipt of the record
the employer-corporation, AS IN THE PRESENT CASE, is no longer existing of the case, the parties were summoned for them to be able to explore options
and unable to satisfy the judgment in favor of the employee, the officer should for settlement. The respondents however did not appear prompting this Office
be held liable for acting on behalf of the corporation. (Gudez vs. NLRC, G.R. to submit the case for resolution based on extant pleadings, thus this decision.
83023, March 22, 1990). Also in the recent celebrated case of Camelcraft
Corporation vs. NLRC, G.R. 90634-35 (June 6, 1990), Carmen contends that The complainants claim that on July 8, 1993 without notice of any kind the
she is not liable for the acts of the company, assuming it had [acted] illegally, company ceased its operation as a prelude to a final closing of the firm. The
because Camelcraft in a distinct and separate entity with a legal personality of complainants allege that up to the present the company has remained closed.
its own. She claims that she is only an agent of the company carrying out the The complainants bewail that at the time of the closure, employees who have
decisions of its board of directors, "We do not agree," said the Supreme Court. rendered one to two weeks of work were not given their salaries and the same
"She is, in fact and legal effect, the corporation, being not only its president have remained unpaid.
and general manager but also its owner." The responsible officer of an
employer can be held personally liable not to say even criminally liable for The complainants aver that respondent company prior to its closure did not
nonpayment of backwages. This is the policy of the law. If it were otherwise, even bother to serve written notice to employees and to the Department of
corporate employers would have devious ways to evade paying backwages. Labor and Employment at least one month before the intended date of closure.
(A.C. Ransom Labor Union-CCLU V. NLRC, G.R. 69494, June 10, 1986). If no The respondents did not even establish that its closure was done in good faith.
definite proof exists as to who is the responsible officer, the president of the Moreover, the respondents did not pay the affected employees separation pay,
corporation who can be deemed to be its chief operation officer shall be the amount of which is provided in the existing Collective Bargaining
presumed to be the responsible officer. In Republic Act 602, for example, Agreement between the complainants and the respondents.
criminal responsibility is with the "manager" or in his default, the person acting
The complainants pray that they be allowed to implead Atty. Antonio Carag
as such (Ibid.)7 (Emphasis supplied)
and Mr. Armando David[,] owners and responsible officer[s] of respondent
Atty. Joshua L. Pastores (Atty. Pastores), as counsel for respondents, company to assure the satisfaction of the judgment, should a decision
submitted a position paper dated 21 February 1994 and stated that favorable to them be rendered. In support of their claims, the complainants
complainants should not have impleaded Carag and David because MAC is invoked the ruling laid down by the Supreme Court in the case of A.C. Ransom
actually owned by a consortium of banks. Carag and David own shares in MAC Labor Union CCLU vs. NLRC, G.R. No. 69494, June 10, 1986 where it was
only to qualify them to serve as MAC's officers. held that [a] corporate officer can be held liable for acting on behalf of the
corporation when the latter is no longer in existence and there are valid claims
Without any further proceedings, Arbiter Ortiguerra rendered her Decision of workers that must be satisfied.
dated 17 June 1994 granting the motion to implead Carag and David. In the
same Decision, Arbiter Ortiguerra declared Carag and David solidarily liable The complainants pray for the declaration of the illegality of the closure of
with MAC to complainants. respondents' business. Consequently, their reinstatement must be ordered
and their backwages must be paid. Should reinstatement be not feasible, the
The Ruling of the Labor Arbiter complainants pray that they be paid their separation pay in accordance with
In her Decision dated 17 June 1994, Arbiter Ortiguerra ruled as follows: the computation provided for in the CBA. Computations of separation pay due
to individual complainants were adduced in evidence (Annexes "C" to "C-44",
Complainants' Position Paper). The complainants also pray for the award to personality distinct and separate from the stockholders. This concept is known
them of attorney's fee[s]. as corporate fiction. Normally, officers acting for and in behalf of a corporation
are not held personally liable for the obligation of the corporation. In instances
The respondents on the other hand by way of controversion maintain that the where corporate officers dismissed employees in bad faith or wantonly violate
present complaint was filed prematurely. The respondents deny having totally labor standard laws or when the company had already ceased operations and
closed and insist that respondent company is only on a temporary shut-down there is no way by which a judgment in favor of employees could be satisfied,
occasioned by the pending labor unrest. There being no permanent closure corporate officers can be held jointly and severally liable with the company.
any claim for separation pay must not be given due course. This Office after a careful consideration of the factual backdrop of the case is
Respondents opposed the impleader of Atty. Antonio C. Carag and Mr. inclined to grant complainants' prayer for the impleader of Atty. Antonio Carag
Armando David saying that they are not the owners of Mariveles Apparel and Mr. Armando David, to assure that valid claims of employees would not
Corporation and they are only minority stockholders holding qualifying shares. be defeated by the closure of respondent company.
Piercing the veil of corporate fiction cannot be done in the present case for The complainants pray for the award to them of moral and exemplary
such remedy can only be availed of in case of closed or family owned damages, suffice it to state that they failed to establish their entitlement to
corporations. aforesaid reliefs when they did not adduce persuasive evidence on the matter.
Respondents pray for the dismissal of the present complaint and the denial of The claim for attorney's fee[s] will be as it is hereby resolved in complainants'
complainants' motion to implead Atty. Antonio C. Carag and Mr. Armando favor. As a consequence of the illegal closure of respondent company, the
David as party respondents. complainants were compelled to litigate to secure benefits due them under
This Office is now called upon to resolve the following issues: pertinent laws. For this purpose, they secured the services of a counsel to
assist them in the course of the litigation. It is but just and proper to order the
1. Whether or not the respondents are guilty of illegal closure; respondents who are responsible for the closure and subsequent filing of the
case to pay attorney's fee[s].
2. Whether or not individual respondents could be held personally liable; and
WHEREFORE, premises considered, judgment is hereby rendered declaring
3. Whether or not the complainants are entitled to an award of attorney's fees.
respondents jointly and severally guilty of illegal closure and they are hereby
After a judicious and impartial consideration of the record, this Office is of the ordered as follows:
firm belief that the complainants must prevail.
1. To pay complainants separation pay computed on the basis of one (1)
The respondents described the cessation of operations in its premises as a month for every year of service, a fraction of six (6) months to be considered
temporary shut-down. While such posturing may have been initially true, it is as one (1) year in the total amount of ₱49,101,621.00; and
not so anymore. The cessation of operations has clearly exceeded the six
2. To pay complainants attorney's fee in an amount equivalent to 10% of the
months period fixed in Article 286 of the Labor Code. The temporary shutdown judgment award.
has ripened into a closure or cessation of operations for causes not due to
serious business losses or financial reverses. Consequently, the respondents The claims for moral, actual and exemplary damages are dismissed for lack of
must pay the displaced employees separation pay in accordance with the evidence.
computation prescribed in the CBA, to wit, one month pay for every year of
service. It must be stressed that respondents did not controvert the verity of SO ORDERED.8 (Emphasis supplied)
the CBA provided computation. MAC, Carag, and David, through Atty. Pastores, filed their Memorandum
The complainants claim that Atty. Antonio Carag and Mr. Armando David before the NLRC on 26 August 1994. Carag, through a separate counsel, filed
should be held jointly and severally liable with respondent corporation. This an appeal dated 30 August 1994 before the NLRC. Carag reiterated the
bid is premised on the belief that the impleader of the aforesaid officers will arguments in respondents' position paper filed before Arbiter Ortiguerra,
guarantee payment of whatever may be adjudged in complainants' favor by stating that:
virtue of this case. It is a basic principle in law that corporations have
2.1 While Atty. Antonio C. Carag is the Chairman of the Board of MAC and Mr. Ortiguerra, et al.). On 12 July 1999, after all the parties had filed their
Armando David is the President, they are not the owners of MAC; memoranda, we referred the consolidated cases to the appellate court in
accordance with our decision in St. Martin Funeral Home v.
2.2 MAC is owned by a consortium of banks, as stockholders, and Atty. NLRC.11 Respondents filed separate petitions before the appellate court.
Antonio C. Carag and Mr. Armando David are only minority stockholders of
the corporation, owning only qualifying shares; The Ruling of the Appellate Court

2.3 MAC is not a family[-]owned corporation, that in case of a close [sic] On 29 February 2000, the appellate court issued a joint decision on the
corporation, piercing the corporate veil its [sic] possible to hold the separate petitions. The appellate court identified two issues as essential: (1)
stockholders liable for the corporation's liabilities; whether Arbiter Ortiguerra properly held Carag and David, in their capacities
as corporate officers, jointly and severally liable with MAC for the money claims
2.4 MAC is a corporation with a distinct and separate personality from that of of the employees; and (2) whether the NLRC abused its discretion in denying
the stockholders; piercing the corporate veil to hold the stockholders liable for the separate motions to reduce bond filed by MAC and Carag.
corporate liabilities is only true [for] close corporations (family corporations);
this is not the prevailing situation in MAC; The appellate court held that the absence of a formal hearing before the Labor
Arbiter is not a cause for Carag and David to impute grave abuse of discretion.
2.5 Atty. Antonio Carag and Mr. Armando David are professional managers The appellate court found that Carag and David, as the most ranking officers
and the extension of shares to them are just qualifying shares to enable them of MAC, had a direct hand at the time in the illegal dismissal of MAC's
to occupy subject position.9 employees. The failure of Carag and David to observe the notice requirement
Respondents also filed separate motions to reduce bond. in closing the company shows malice and bad faith, which justifies their
solidary liability with MAC. The appellate court also found that the
The Ruling of the NLRC circumstances of the present case do not warrant a reduction of the appeal
bond. Thus:
In a Resolution promulgated on 5 January 1995, the NLRC Third Division
denied the motions to reduce bond. The NLRC stated that to grant a reduction IN VIEW WHEREOF, the petitions are DISMISSED. The decision of Labor
of bond on the ground that the appeal is meritorious would be tantamount to Arbiter Isabel Panganiban-Ortiguerra dated June 17, 1994, and the Resolution
ruling on the merits of the appeal. The dispositive portion of the Resolution of dated January 5, 1995, issued by the National Labor Relations Commission
the NLRC Third Division reads, thus: are hereby AFFIRMED. As a consequence of dismissal, the temporary
restraining order issued on March 2, 1995, by the Third Division of the
PREMISES CONSIDERED, Motions to Reduce Bond for both respondents are
Supreme Court is LIFTED. Costs against petitioners.
hereby DISMISSED for lack of merit. Respondents are directed to post cash
or surety bond in the amount of forty eight million one hundred one thousand SO ORDERED.12 (Emphasis in the original)
six hundred twenty one pesos (₱48,101,621.00) within an unextendible period
of fifteen (15) days from receipt hereof. The appellate court denied respondents' separate motions for
reconsideration.13
No further Motions for Reconsideration shall be entertained.
In a resolution dated 20 June 2001, this Court's First Division denied the
SO ORDERED.10 petition for Carag's failure to show sufficiently that the appellate court
committed any reversible error to warrant the exercise of our discretionary
Respondents filed separate petitions for certiorari before this Court under Rule
appellate jurisdiction. Carag filed a motion for reconsideration of our resolution
65 of the 1964 Rules of Court. Carag filed his petition, docketed as G.R. No.
denying his petition. In a resolution dated 13 August 2001, this Court's First
118820, on 13 February 1995. In the meantime, we granted MAC's prayer for Division denied Carag's reconsideration with finality.
the issuance of a temporary restraining order to enjoin the NLRC from
enforcing Arbiter Ortiguerra's Decision. On 31 May 1995, we granted Despite our 13 August 2001 resolution, Carag filed a second motion for
complainants' motion for consolidation of G.R. No. 118820 with G.R. No. reconsideration with an omnibus motion for leave to file a second motion for
118839 (MAC v. NLRC, et al.) and G.R. No. 118880 (David v. Arbiter reconsideration. This Court's First Division referred the motion to the Court En
Banc. In a resolution dated 25 June 2002, the Court En Banc resolved to grant It is clear from the narration in Arbiter Ortiguerra's Decision that she only
the omnibus motion for leave to file a second motion for reconsideration, summoned complainants and MAC, and not Carag, to a conference for
reinstated the petition, and required respondents to comment on the petition. possible settlement. In her Decision, Arbiter Ortiguerra stated that she
On 25 November 2003, the Court En Banc resolved to suspend the rules to scheduled the conference "upon receipt of the record of the case." At the time
allow the second motion for reconsideration. This Court's First Division of the conference, complainants had not yet submitted their position paper
referred the petition to the Court En Banc on 14 July 2004, and the Court En which contained the motion to implead Carag. Complainants could not have
Banc accepted the referral on 15 March 2005. submitted their position paper before the conference since procedurally the
Arbiter directs the submission of position papers only after the
The Issues conference.21 Complainants submitted their position paper only on 10 January
Carag questions the appellate court's decision of 29 February 2000 by raising 1994, five months after filing the complaint. In short, at the time of the
the following issues before this Court: conference, Carag was not yet a party to the case. Thus, Arbiter Ortiguerra
could not have possibly summoned Carag to the conference.
1. Has petitioner Carag's right to due process been blatantly violated by
holding him personally liable for over ₱50 million of the corporation's Carag vigorously denied receiving summons to the conference, and
liability, merely as board chairman and solely on the basis of the motion to complainants have not produced any order of Arbiter Ortiguerra summoning
implead him in midstream of the proceedings as additional Carag to the conference. A thorough search of the records of this case fails to
respondent, without affording him the right to present evidence and show any order of Arbiter Ortiguerra directing Carag to attend the conference.
in violation of the accepted procedure prescribed by Rule V of the NLRC Rules Clearly, Arbiter Ortiguerra did not summon Carag to the conference.
of Procedure, as to render the ruling null and void? When MAC failed to appear at the conference, Arbiter Ortiguerra declared the
2. Assuming, arguendo, that he had been accorded due process, is the case submitted for resolution. In her Decision, Arbiter Ortiguerra granted
decision holding him solidarily liable supported by evidence when the only complainants' motion to implead Carag and at the same time, in the same
pleadings (not evidence) before the Labor Arbiter and that of the Court of Decision, found Carag personally liable for the debts of MAC consisting of
Appeals are the labor union's motion to implead him as respondent and his ₱49,101,621 in separation pay to complainants. Arbiter Ortiguerra never
opposition thereto, without position papers, without evidence submitted, issued summons to Carag, never called him to a conference for possible
and without hearing on the issue of personal liability, and even when bad faith settlement, never required him to submit a position paper, never set the case
or malice, as the only legal basis for personal liability, was expressly found for hearing, never notified him to present his evidence, and never informed him
absent and wanting by [the] Labor Arbiter, as to render said decision null and that the case was submitted for decision - all in violation of Sections 2, 3, 4,
void? 5(b), and 11(c) of Rule V of The New Rules of Procedure of the NLRC.

3. Did the NLRC commit grave abuse of discretion in denying petitioner's Indisputably, there was utter absence of due process to Carag at the arbitration
motion to reduce appeal bond?14 level. The procedure adopted by Arbiter Ortiguerra completely prevented
Carag from explaining his side and presenting his evidence. This alone
The Ruling of the Court renders Arbiter Ortiguerra's Decision a nullity insofar as Carag is concerned.
While labor arbiters are not required to conduct a formal hearing or trial, they
We find the petition meritorious.
have no license to dispense with the basic requirements of due process such
On Denial of Due Process to Carag and David as affording respondents the opportunity to be heard. In Habana v.
NLRC,22 we held:
Carag asserts that Arbiter Ortiguerra rendered her Decision of 17 June 1994
without issuing summons on him, without requiring him to submit his position The sole issue to be resolved is whether private respondents OMANFIL and
paper, without setting any hearing, without giving him notice to present his HYUNDAI were denied due process when the Labor Arbiter decided the case
evidence, and without informing him that the case had been submitted for solely on the basis of the position paper and supporting documents submitted
decision - in violation of Sections 2,15 3,16 4,17 5(b),18 and 11(c) 19 of Rule V of in evidence by Habana and De Guzman.
The New Rules of Procedure of the NLRC.20
We rule in the affirmative. The manner in which this case was decided by the to use every reasonable means to ascertain the facts of each case, speedily,
Labor Arbiter left much to be desired in terms of respect for the right of private objectively and without regard to technicalities of law or procedure, all in the
respondents to due process - interest of justice and for the purpose of accuracy and correctness in
adjudicating the monetary awards.
First, there was only one conciliatory conference held in this case. This was
on 10 May 1996. During the conference, the parties did not discuss at all the In this case, Carag was in a far worse situation. Here, Carag was not issued
possibility of amicable settlement due to petitioner's stubborn insistence that summons, not accorded a conciliatory conference, not ordered to submit a
private respondents be declared in default. position paper, not accorded a hearing, not given an opportunity to present his
evidence, and not notified that the case was submitted for resolution. Thus, we
Second, the parties agreed to submit their respective motions - petitioner's hold that Arbiter Ortiguerra's Decision is void as against Carag for utter
motion to declare respondents in default and private respondents' motion for absence of due process. It was error for the NLRC and the Court of Appeals
bill of particulars - for the consideration of the Labor Arbiter. The Labor to uphold Arbiter Ortiguerra's decision as against Carag.
Arbitration Associate, one Ms. Gloria Vivar, then informed the parties that they
would be notified of the action of the Labor Arbiter on the pending motions. On the Liability of Directors for Corporate Debts

xxx This case also raises this issue: when is a director personally liable for the
debts of the corporation? The rule is that a director is not personally liable for
Third, since the conference on 10 May 1996 no order or notice as to what the debts of the corporation, which has a separate legal personality of its own.
action was taken by the Labor Arbiter in disposing the pending motions was Section 31 of the Corporation Code lays down the exceptions to the rule, as
ever received by private respondents. They were not declared in default by the follows:
Labor Arbiter nor was petitioner required to submit a bill of particulars.
Liability of directors, trustees or officers. - Directors or trustees who wilfully and
Fourth, neither was there any order or notice requiring private respondents to knowingly vote for or assent to patently unlawful acts of the corporation or who
file their position paper, nor an order informing the parties that the case was are guilty of gross negligence or bad faith in directing the affairs of the
already submitted for decision. What private respondents received was the corporation or acquire any personal or pecuniary interest in conflict with their
assailed decision adverse to them. duty as such directors or trustees shall be liable jointly and severally for all
It is clear from the foregoing that there was an utter absence of opportunity to damages resulting therefrom suffered by the corporation, its stockholders or
be heard at the arbitration level, as the procedure adopted by the Labor Arbiter members and other persons.
virtually prevented private respondents from explaining matters fully and xxxx
presenting their side of the controversy. They had no chance whatsoever to at
least acquaint the Labor Arbiter with whatever defenses they might have to the Section 31 makes a director personally liable for corporate debts if he wilfully
charge that they illegally dismissed petitioner. In fact, private respondents and knowingly votes for or assents to patently unlawful acts of the corporation.
presented their position paper and documentary evidence only for the first time Section 31 also makes a director personally liable if he is guilty of gross
on appeal to the NLRC. negligence or bad faith in directing the affairs of the corporation.

The essence of due process is that a party be afforded a reasonable Complainants did not allege in their complaint that Carag wilfully and knowingly
opportunity to be heard and to submit any evidence he may have in support of voted for or assented to any patently unlawful act of MAC. Complainants did
his defense. Where, as in this case, sufficient opportunity to be heard either not present any evidence showing that Carag wilfully and knowingly voted for
through oral arguments or position paper and other pleadings is not accorded or assented to any patently unlawful act of MAC. Neither did Arbiter Ortiguerra
a party to a case, there is undoubtedly a denial of due process. make any finding to this effect in her Decision.

It is true that Labor Arbiters are not bound by strict rules of evidence and of Complainants did not also allege that Carag is guilty of gross negligence or
procedure. The manner by which Arbiters dispose of cases before them is bad faith in directing the affairs of MAC. Complainants did not present any
concededly a matter of discretion. However, that discretion must be exercised evidence showing that Carag is guilty of gross negligence or bad faith in
regularly, legally and within the confines of due process. They are mandated
directing the affairs of MAC. Neither did Arbiter Ortiguerra make any finding to a patently unlawful act. Mere failure to comply with the notice requirement of
this effect in her Decision. labor laws on company closure or dismissal of employees does not amount to
a patently unlawful act. Patently unlawful acts are those declared unlawful by
Arbiter Ortiguerra stated in her Decision that: law which imposes penalties for commission of such unlawful acts. There must
In instances where corporate officers dismissed employees in bad faith or be a law declaring the act unlawful and penalizing the act.
wantonly violate labor standard laws or when the company had already ceased An example of a patently unlawful act is violation of Article 287 of the Labor
operations and there is no way by which a judgment in favor of employees Code, which states that "[V]iolation of this provision is hereby declared
could be satisfied, corporate officers can be held jointly and severally liable unlawful and subject to the penal provisions provided under Article 288 of this
with the company.23 Code." Likewise, Article 288 of the Labor Code on Penal Provisions and
After stating what she believed is the law on the matter, Arbiter Ortiguerra Liabilities, provides that "any violation of the provision of this Code declared
stopped there and did not make any finding that Carag is guilty of bad faith or unlawful or penal in nature shall be punished with a fine of not less than One
of wanton violation of labor standard laws. Arbiter Ortiguerra did not specify Thousand Pesos (₱1,000.00) nor more than Ten Thousand Pesos
what act of bad faith Carag committed, or what particular labor standard laws (₱10,000.00), or imprisonment of not less than three months nor more than
he violated. three years, or both such fine and imprisonment at the discretion of the court."

To hold a director personally liable for debts of the corporation, and thus pierce In this case, Article 28328 of the Labor Code, requiring a one-month prior notice
the veil of corporate fiction, the bad faith or wrongdoing of the director must be to employees and the Department of Labor and Employment before any
established clearly and convincingly.24 Bad faith is never presumed.25 Bad permanent closure of a company, does not state that non-compliance with the
faith does not connote bad judgment or negligence. Bad faith imports a notice is an unlawful act punishable under the Code. There is no provision in
dishonest purpose. Bad faith means breach of a known duty through some ill any other Article of the Labor Code declaring failure to give such notice an
motive or interest. Bad faith partakes of the nature of fraud.26 In Businessday unlawful act and providing for its penalty.
Information Systems and Services, Inc. v. NLRC,27 we held: Complainants did not allege or prove, and Arbiter Ortiguerra did not make any
There is merit in the contention of petitioner Raul Locsin that the complaint finding, that Carag approved or assented to any patently unlawful act to which
against him should be dismissed. A corporate officer is not personally liable the law attaches a penalty for its commission. On this score alone, Carag
for the money claims of discharged corporate employees unless he acted with cannot be held personally liable for the separation pay of complainants.
evident malice and bad faith in terminating their employment. There is no This leaves us with Arbiter Ortiguerra's assertion that "when the company had
evidence in this case that Locsin acted in bad faith or with malice in carrying already ceased operations and there is no way by which a judgment in favor
out the retrenchment and eventual closure of the company (Garcia vs. NLRC, of employees could be satisfied, corporate officers can be held jointly and
153 SCRA 640), hence, he may not be held personally and solidarily liable severally liable with the company." This assertion echoes the complainants'
with the company for the satisfaction of the judgment in favor of the retrenched claim that Carag is personally liable for MAC's debts to complainants "on the
employees. basis of Article 212(e) of the Labor Code, as amended," which says:
Neither does bad faith arise automatically just because a corporation fails to 'Employer' includes any person acting in the interest of an employer, directly
comply with the notice requirement of labor laws on company closure or or indirectly. The term shall not include any labor organization or any of its
dismissal of employees. The failure to give notice is not an unlawful act officers or agents except when acting as employer. (Emphasis supplied)
because the law does not define such failure as unlawful. Such failure to give
notice is a violation of procedural due process but does not amount to an Indeed, complainants seek to hold Carag personally liable for the debts of
unlawful or criminal act. Such procedural defect is called illegal dismissal MAC based solely on Article 212(e) of the Labor Code. This is the specific
because it fails to comply with mandatory procedural requirements, but it is not legal ground cited by complainants, and used by Arbiter Ortiguerra, in holding
illegal in the sense that it constitutes an unlawful or criminal act. Carag personally liable for the debts of MAC.

For a wrongdoing to make a director personally liable for debts of the We have already ruled in McLeod v. NLRC29 and Spouses Santos v.
corporation, the wrongdoing approved or assented to by the director must be NLRC30 that Article 212(e) of the Labor Code, by itself, does not make a
corporate officer personally liable for the debts of the corporation. The employer" RANSOM. The corporation, only in the technical sense, is the
governing law on personal liability of directors for debts of the corporation is employer.
still Section 31 of the Corporation Code. Thus, we explained in McLeod:
The responsible officer of an employer corporation can be held personally, not
Personal liability of corporate directors, trustees or officers attaches only when to say even criminally, liable for non-payment of back wages. That is the policy
(1) they assent to a patently unlawful act of the corporation, or when they are of the law.
guilty of bad faith or gross negligence in directing its affairs, or when there is a
conflict of interest resulting in damages to the corporation, its stockholders or xxxx
other persons; (2) they consent to the issuance of watered down stocks or (c) If the policy of the law were otherwise, the corporation employer can have
when, having knowledge of such issuance, do not forthwith file with the devious ways for evading payment of back wages. In the instant case, it
corporate secretary their written objection; (3) they agree to hold themselves would appear that RANSOM, in 1969, foreseeing the possibility or
personally and solidarily liable with the corporation; or (4) they are made by probability of payment of back wages to the 22 strikers, organized
specific provision of law personally answerable for their corporate action. ROSARIO to replace RANSOM, with the latter to be eventually phased
http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_COURT/Deci out if the 22 strikers win their case. RANSOM actually ceased operations
sions/2007/jan2007.zip%3E9,df%7C2007/jan2007/146667.htm - on May 1, 1973, after the December 19, 1972 Decision of the Court of
xxx Industrial Relations was promulgated against RANSOM.
http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_COURT/Deci
The ruling in A.C. Ransom Labor Union-CCLU v. sions/2007/jan2007.zip%3E9,df%7C2007/jan2007/146667.htm - (Emphasis
NLRC,http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_COUR supplied)
T/Decisions/2007/jan2007.zip%3E9,df%7C2007/jan2007/146667.htm - which
the Court of Appeals cited, does not apply to this case. We quote pertinent Clearly, in A.C. Ransom, RANSOM, through its President, organized
portions of the ruling, thus: ROSARIO to evade payment of backwages to the 22 strikers. This situation,
or anything similar showing malice or bad faith on the part of Patricio, does not
(a) Article 265 of the Labor Code, in part, expressly provides: obtain in the present case. In Santos v. NLRC,
http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_COURT/Deci
"Any worker whose employment has been terminated as a consequence of an sions/2007/jan2007.zip%3E9,df%7C2007/jan2007/146667.htm - the Court
unlawful lockout shall be entitled to reinstatement with full backwages." held, thus:
Article 273 of the Code provides that: It is true, there were various cases when corporate officers were themselves
"Any person violating any of the provisions of Article 265 of this Code shall be held by the Court to be personally accountable for the payment of wages and
punished by a fine of not exceeding five hundred pesos and/or money claims to its employees. In A.C. Ransom Labor Union-CCLU vs. NLRC,
imprisonment for not less than one (1) day nor more than six (6) months." for instance, the Court ruled that under the Minimum Wage Law, the
responsible officer of an employer corporation could be held personally liable
(b) How can the foregoing provisions be implemented when the employer is a for nonpayment of backwages for "(i)f the policy of the law were otherwise, the
corporation? The answer is found in Article 212 (c) of the Labor Code which corporation employer (would) have devious ways for evading payment of
provides: backwages." In the absence of a clear identification of the officer directly
responsible for failure to pay the backwages, the Court considered the
"(c) 'Employer' includes any person acting in the interest of an employer,
President of the corporation as such officer. The case was cited in Chua vs.
directly or indirectly. The term shall not include any labor organization or any
NLRC in holding personally liable the vice-president of the company, being the
of its officers or agents except when acting as employer."
highest and most ranking official of the corporation next to the President who
The foregoing was culled from Section 2 of RA 602, the Minimum Wage Law. was dismissed for the latter's claim for unpaid wages.
Since RANSOM is an artificial person, it must have an officer who can be
A review of the above exceptional cases would readily disclose the attendance
presumed to be the employer, being the "person acting in the interest of (the)
of facts and circumstances that could rightly sanction personal liability on the
part of the company officer. In A.C. Ransom, the corporate entity was a family Carlos Construction, Inc. v. Marina Properties
corporation and execution against it could not be implemented because Corporation:http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_C
of the disposition posthaste of its leviable assets evidently in order to OURT/Decisions/2007/jan2007.zip%3E9,df%7C2007/jan2007/146667.htm -
evade its just and due obligations. The doctrine of "piercing the veil of
corporate fiction" was thus clearly appropriate. Chua likewise involved We concur with the CA that these two respondents are not liable. Section 31
another family corporation, and this time the conflict was between two brothers of the Corporation Code (Batas Pambansa Blg. 68) provides:
occupying the highest ranking positions in the company. There were "Section 31. Liability of directors, trustees or officers. - Directors or trustees
incontrovertible facts which pointed to extreme personal animosity that who willfully and knowingly vote for or assent to patently unlawful acts of the
resulted, evidently in bad faith, in the easing out from the company of one of corporation or who are guilty of gross negligence or bad faith ... shall be liable
the brothers by the other. jointly and severally for all damages resulting therefrom suffered by the
The basic rule is still that which can be deduced from the Court's corporation, its stockholders and other persons."
pronouncement in Sunio vs. National Labor Relations Commission, thus: The personal liability of corporate officers validly attaches only when (a) they
We come now to the personal liability of petitioner, Sunio, who was made assent to a patently unlawful act of the corporation; or (b) they are guilty of bad
jointly and severally responsible with petitioner company and CIPI for the faith or gross negligence in directing its affairs; or (c) they incur conflict of
payment of the backwages of private respondents. This is reversible error. The interest, resulting in damages to the corporation, its stockholders or other
Assistant Regional Director's Decision failed to disclose the reason why he persons.31 (Boldfacing in the original; boldfacing with underscoring supplied)
was made personally liable. Respondents, however, alleged as grounds Thus, it was error for Arbiter Ortiguerra, the NLRC, and the Court of Appeals
thereof, his being the owner of one-half (½) interest of said corporation, and to hold Carag personally liable for the separation pay owed by MAC to
his alleged arbitrary dismissal of private respondents. complainants based alone on Article 212(e) of the Labor Code. Article 212(e)
Petitioner Sunio was impleaded in the Complaint in his capacity as General does not state that corporate officers are personally liable for the unpaid
Manager of petitioner corporation. There appears to be no evidence on record salaries or separation pay of employees of the corporation. The liability of
that he acted maliciously or in bad faith in terminating the services of private corporate officers for corporate debts remains governed by Section 31 of the
respondents. His act, therefore, was within the scope of his authority and was Corporation Code.
a corporate act. WHEREFORE, we GRANT the petition. We SET ASIDE the Decision dated
It is basic that a corporation is invested by law with a personality separate and 29 February 2000 and the Resolution dated 27 March 2001 of the Court of
distinct from those of the persons composing it as well as from that of any other Appeals in CA-G.R. SP Nos. 54404-06 insofar as petitioner Antonio Carag is
legal entity to which it may be related. Mere ownership by a single stockholder concerned.
or by another corporation of all or nearly all of the capital stock of a corporation SO ORDERED.
is not of itself sufficient ground for disregarding the separate corporate
personality. Petitioner Sunio, therefore, should not have been made personally
answerable for the payment of private respondents' back
salaries.http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_COU
RT/Decisions/2007/jan2007.zip%3E9,df%7C2007/jan2007/146667.htm -

Thus, the rule is still that the doctrine of piercing the corporate veil applies only
when the corporate fiction is used to defeat public convenience, justify wrong,
protect fraud, or defend crime. In the absence of malice, bad faith, or a specific
provision of law making a corporate officer liable, such corporate officer cannot
be made personally liable for corporate liabilities. Neither Article 212[e] nor
Article 273 (now 272) of the Labor Code expressly makes any corporate officer
personally liable for the debts of the corporation. As this Court ruled in H.L.
G.R. No. 161886 March 16, 2007 Asst. Vice-President for Operations - Eliezer B. de Jesus (Director)

FILIPINAS PORT SERVICES, INC., represented by stockholders, Asst. Vice-President for Finance - Mary Jean D. Co (Director)
ELIODORO C. CRUZ and MINDANAO TERMINAL AND BROKERAGE
SERVICES, INC., Petitioners, Asst. Vice-President for Administration - Henry Chua (Director)
vs. Special Asst. to the Chairman - Arsenio Lopez Chua (Director)
VICTORIANO S. GO, ARSENIO LOPEZ CHUA, EDGAR C. TRINIDAD,
HERMENEGILDO M. TRINIDAD, JESUS SYBICO, MARY JEAN D. CO, Special Asst. to the President - Fortunato V. de Castro
HENRY CHUA, JOSELITO S. JAYME, ERNESTO S. JAYME, and ELIEZER
In his aforesaid letter, Cruz requested the board to take necessary
B. DE JESUS, Respondents.
action/actions to recover from those elected to the aforementioned positions
DECISION the salaries they have received.

GARCIA, J.: On 15 September 1992, the board met and took up Cruz’s letter. The records
do not show what specific action/actions the board had taken on the letter.
Assailed and sought to be set aside in this petition for review on certiorari is Evidently, whatever action/actions the board took did not sit well with Cruz.
the Decision1 dated 19 January 2004 of the Court of Appeals (CA) in CA-G.R.
CV No. 73827, reversing an earlier decision of the Regional Trial Court (RTC) On 14 June 1993, Cruz, purportedly in representation of Filport and its
of Davao City and accordingly dismissing the derivative suit instituted by stockholders, among which is herein co-petitioner Mindanao Terminal and
petitioner Eliodoro C. Cruz for and in behalf of the stockholders of co-petitioner Brokerage Services, Inc. (Minterbro), filed with the SEC a petition3 which he
Filipinas Port Services, Inc. (Filport, hereafter). describes as a derivative suit against the herein respondents who were then
the incumbent members of Filport’s Board of Directors, for alleged acts of
The case is actually an intra-corporate dispute involving Filport, a domestic mismanagement detrimental to the interest of the corporation and its
corporation engaged in stevedoring services with principal office in Davao City. shareholders at large, namely:
It was initially instituted with the Securities and Exchange Commission (SEC)
where the case hibernated and remained unresolved for several years until it 1. creation of an executive committee in 1991 composed of seven (7) members
was overtaken by the enactment into law, on 19 July 2000, of Republic Act of the board with compensation of ₱500.00 for each member per meeting, an
(R.A.) No. 8799, otherwise known as the Securities Regulation Code. From office which, to Cruz, is not provided for in the by-laws of the corporation and
the SEC and consistent with R.A. No. 8799, the case was transferred to the whose function merely duplicates those of the President and General
RTC of Manila, Branch 14, sitting as a corporate court. Subsequently, upon Manager;
respondents’ motion, the case eventually landed at the RTC of Davao City
2. increase in the emoluments of the Chairman, Vice-President, Treasurer and
where it was docketed as Civil Case No. 28,552-2001. RTC-Davao City,
Assistant General Manager which increases are greatly disproportionate to the
Branch 10, ruled in favor of the petitioners prompting respondents to go to the
CA in CA-G.R. CV No. 73827. This time, the respondents prevailed, hence, volume and character of the work of the directors holding said positions;
this petition for review by the petitioners. 3. re-creation of the positions of Assistant Vice-Presidents (AVPs) for
Corporate Planning, Operations, Finance and Administration, and the election
The relevant facts:
thereto of board members Edgar C. Trinidad, Eliezer de Jesus, Mary Jean D.
On 4 September 1992, petitioner Eliodoro C. Cruz, Filport’s president from Co and Henry Chua, respectively; and
1968 until he lost his bid for reelection as Filport’s president during the general
4. creation of the additional positions of Special Assistants to the President
stockholders’ meeting in 1991, wrote a letter2 to the corporation’s Board of
Directors questioning the board’s creation of the following positions with a and the Board Chairman, with Fortunato V. de Castro and Arsenio Lopez Chua
elected to the same, the directors elected/appointed thereto not doing any
monthly remuneration of ₱13,050.00 each, and the election thereto of certain
work to deserve the monthly remuneration of ₱13,050.00 each.
members of the board, to wit:

Asst. Vice-President for Corporate Planning - Edgar C. Trinidad (Director)

In the same petition, docketed as SEC Case No. 06-93-4491, Cruz alleged the case was first turned over to the RTC of Manila, Branch 14, sitting as a
that despite demands made upon the respondent members of the board of corporate court. Thereafter, on respondents’ motion, it was eventually
directors to desist from creating the positions in question and to account for transferred to the RTC of Davao City whereat it was docketed as Civil Case
the amounts incurred in creating the same, the demands were unheeded. Cruz No. 28,552-2001 and raffled to Branch 10 thereof.
thus prayed that the respondent members of the board of directors be made
to pay Filport, jointly and severally, the sums of money variedly representing On 10 December 2001, RTC-Davao City rendered its decision5 in the case.
the damages incurred as a result of the creation of the offices/positions Even as it found that (1) Filport’s Board of Directors has the power to create
complained of and the aggregate amount of the questioned increased salaries. positions not provided for in the by-laws of the corporation since the board is
the governing body; and (2) the increases in the salaries of the board
In their common Answer with Counterclaim,4 the respondents denied the chairman, vice-president, treasurer and assistant general manager are
allegations of mismanagement and materially averred as follows: reasonable, the trial court nonetheless rendered judgment against the
respondents by ordering the directors holding the positions of Assistant Vice
1. the creation of the executive committee and the grant of per diems for the President for Corporate Planning, Special Assistant to the President and
attendance of each member are allowed under the by-laws of the corporation; Special Assistant to the Board Chairman to refund to the corporation the
2. the increases in the salaries/emoluments of the Chairman, Vice-President, salaries they have received as such officers "considering that Filipinas Port
Treasurer and Assistant General Manager were well within the financial Services is not a big corporation requiring multiple executive positions" and
capacity of the corporation and well-deserved by the officers elected thereto; that said positions "were just created for accommodation." We quote the fallo
and of the trial court’s decision.

3. the positions of AVPs for Corporate Planning, Operations, Finance and WHEREFORE, judgment is rendered ordering:
Administration were already in existence during the tenure of Cruz as president Edgar C. Trinidad under the third and fourth causes of action to restore to the
of the corporation, and were merely recreated by the Board, adding that all corporation the total amount of salaries he received as assistant vice president
those appointed to said positions of Assistant Vice Presidents, as well as the for corporate planning; and likewise ordering Fortunato V. de Castro and
additional position of Special Assistants to the Chairman and the President, Arsenio Lopez Chua under the fourth cause of action to restore to the
rendered services to deserve their compensation. corporation the salaries they each received as special assistants respectively
In the same Answer, respondents further averred that Cruz and his co- to the president and board chairman. In case of insolvency of any or all of
petitioner Minterbro, while admittedly stockholders of Filport, have no authority them, the members of the board who created their positions are subsidiarily
nor standing to bring the so-called "derivative suit" for and in behalf of the liable.
corporation; that respondent Mary Jean D. Co has already ceased to be a The counter claim is dismissed.
corporate director and so with Fortunato V. de Castro, one of those holding an
assailed position; and that no demand to cease and desist from further From the adverse decision of the trial court, herein respondents went on
committing the acts complained of was made upon the board. By way of appeal to the CA in CA-G.R. CV No. 73827.
affirmative defenses, respondents asserted that (1) the petition is not duly
verified by petitioner Filport which is the real party-in-interest; (2) Filport, as In its decision6 of 19 January 2004, the CA, taking exceptions to the findings
represented by Cruz and Minterbro, failed to exhaust remedies for redress of the trial court that the creation of the positions of Assistant Vice President
within the corporation before bringing the suit; and (3) the petition does not for Corporate Planning, Special Assistant to the President and Special
show that the stockholders bringing the suit are joined as nominal parties. In Assistant to the Board Chairman was merely for accommodation purposes,
support of their counterclaim, respondents averred that Cruz filed the alleged granted the respondents’ appeal, reversed and set aside the appealed
derivative suit in bad faith and purely for harassment purposes on account of decision of the trial court and accordingly dismissed the so-called derivative
his non-reelection to the board in the 1991 general stockholders’ meeting. suit filed by Cruz, et al., thus:

As earlier narrated, the derivative suit (SEC Case No. 06-93-4491) hibernated IN VIEW OF ALL THE FOREGOING, the instant appeal is GRANTED, the
with the SEC for a long period of time. With the enactment of R.A. No. 8799, challenged decision is REVERSED and SET ASIDE, and a new one
entered DISMISSING Civil Case No. 28,552-2001 with no pronouncement as admits of certain exceptions, such as when the findings of fact of the appellate
to costs. court are at variance with those of the trial court,11 as here. For this reason,
and for a proper and complete resolution of the case, we shall delve into the
SO ORDERED. records and reexamine the same.
Intrigued, and quite understandably, by the fact that, in its decision, the CA, The governing body of a corporation is its board of directors. Section 23 of the
before proceeding to address the merits of the appeal, prefaced its disposition Corporation Code12 explicitly provides that unless otherwise provided therein,
with the statement reading "[T]he appeal is bereft of merit,"7 thereby the corporate powers of all corporations formed under the Code shall be
contradicting the very fallo of its own decision and the discussions made in the exercised, all business conducted and all property of the corporation shall be
body thereof, respondents filed with the appellate court a Motion For Nunc Pro controlled and held by a board of directors. Thus, with the exception only of
Tunc Order,8 thereunder praying that the phrase "[T]he appeal is bereft of some powers expressly granted by law to stockholders (or members, in case
merit," be corrected to read "[T]he appeal is impressed with merit." In its of non-stock corporations), the board of directors (or trustees, in case of non-
resolution9 of 23 April 2004, the CA granted the respondents’ motion and stock corporations) has the sole authority to determine policies, enter into
accordingly effected the desired correction. contracts, and conduct the ordinary business of the corporation within the
Hence, petitioners’ present recourse. scope of its charter, i.e., its articles of incorporation, by-laws and relevant
provisions of law. Verily, the authority of the board of directors is restricted to
Petitioners assigned four (4) errors allegedly committed by the CA. For clarity, the management of the regular business affairs of the corporation, unless more
we shall formulate the issues as follows: extensive power is expressly conferred.
1. Whether the CA erred in holding that Filport’s Board of Directors acted within The raison d’etre behind the conferment of corporate powers on the board of
its powers in creating the executive committee and the positions of AVPs for directors is not lost on the Court. Indeed, the concentration in the board of the
Corporate Planning, Operations, Finance and Administration, and those of the powers of control of corporate business and of appointment of corporate
Special Assistants to the President and the Board Chairman, each with officers and managers is necessary for efficiency in any large organization.
corresponding remuneration, and in increasing the salaries of the positions of Stockholders are too numerous, scattered and unfamiliar with the business of
Board Chairman, Vice-President, Treasurer and Assistant General Manager; a corporation to conduct its business directly. And so the plan of corporate
and organization is for the stockholders to choose the directors who shall control
and supervise the conduct of corporate business.13
2. Whether the CA erred in finding that no evidence exists to prove that (a) the
positions of AVP for Corporate Planning, Special Assistant to the President In the present case, the board’s creation of the positions of Assistant Vice
and Special Assistant to the Board Chairman were created merely for Presidents for Corporate Planning, Operations, Finance and Administration,
accommodation, and (b) the salaries/emoluments corresponding to said and those of the Special Assistants to the President and the Board Chairman,
positions were actually paid to and received by the directors appointed thereto. was in accordance with the regular business operations of Filport as it is
authorized to do so by the corporation’s by-laws, pursuant to the Corporation
For their part, respondents, aside from questioning the propriety of the instant
Code.
petition as the same allegedly raises only questions of fact and not of law, also
put in issue the purported derivative nature of the main suit initiated by The election of officers of a corporation is provided for under Section 25 of the
petitioner Eliodoro C. Cruz allegedly in representation of and in behalf of Filport Code which reads:
and its stockholders.
Sec. 25. Corporate officers, quorum. – Immediately after their election, the
The petition is bereft of merit. directors of a corporation must formally organize by the election of a president,
who shall be a director, a treasurer who may or may not be a director, a
It is axiomatic that in petitions for review on certiorari under Rule 45 of the
secretary who shall be a resident and citizen of the Philippines, and such other
Rules of Court, only questions of law may be raised and passed upon by the
officers as may be provided for in the by-laws. (Emphasis supplied.)
Court. Factual findings of the CA are binding and conclusive and will not be
reviewed or disturbed on appeal.10 Of course, the rule is not cast in stone; it In turn, the amended Bylaws of Filport14 provides the following:
Officers of the corporation, as provided for by the by-laws, shall be elected by With regard to the increased emoluments of the Board Chairman, Vice-
the board of directors at their first meeting after the election of Directors. xxx President, Treasurer and Assistant General Manager which are supposedly
disproportionate to the volume and nature of their work, the Court, after a
The officers of the corporation shall be a Chairman of the Board, President, a judicious scrutiny of the increase vis-à-vis the value of the services rendered
Vice-President, a Secretary, a Treasurer, a General Manager and such other to the corporation by the officers concerned, agrees with the findings of both
officers as the Board of Directors may from time to time provide, and these the trial and appellate courts as to the reasonableness and fairness thereof.
officers shall be elected to hold office until their successors are elected and
qualified. (Emphasis supplied.) Continuing, petitioners contend that the CA did not appreciate their evidence
as to the alleged acts of mismanagement by the then incumbent board. A
Likewise, the fixing of the corresponding remuneration for the positions in perusal of the records, however, reveals that petitioners merely relied on the
question is provided for in the same by-laws of the corporation, viz: testimony of Cruz in support of their bold claim of mismanagement. To the
xxx The Board of Directors shall fix the compensation of the officers and mind of the Court, Cruz’ testimony on the matter of mismanagement is bereft
agents of the corporation. (Emphasis supplied.) of any foundation. As it were, his testimony consists merely of insinuations of
alleged wrongdoings on the part of the board. Without more, petitioners’
Unfortunately, the bylaws of the corporation are silent as to the creation by its posture of mismanagement must fall and with it goes their prayer to hold the
board of directors of an executive committee. Under Section 3515 of the respondents liable therefor.
Corporation Code, the creation of an executive committee must be provided
for in the bylaws of the corporation. But even assuming, in gratia argumenti, that there was mismanagement
resulting to corporate damages and/or business losses, still the respondents
Notwithstanding the silence of Filport’s bylaws on the matter, we cannot rule may not be held liable in the absence, as here, of a showing of bad faith in
that the creation of the executive committee by the board of directors is illegal doing the acts complained of.
or unlawful. One reason is the absence of a showing as to the true nature and
functions of said executive committee considering that the "executive If the cause of the losses is merely error in business judgment, not amounting
committee," referred to in Section 35 of the Corporation Code which is as to bad faith or negligence, directors and/or officers are not liable. 17 For them
powerful as the board of directors and in effect acting for the board itself, to be held accountable, the mismanagement and the resulting losses on
should be distinguished from other committees which are within the account thereof are not the only matters to be proven; it is likewise necessary
competency of the board to create at anytime and whose actions require to show that the directors and/or officers acted in bad faith and with malice in
ratification and confirmation by the board.16 Another reason is that, doing the assailed acts. Bad faith does not simply connote bad judgment or
ratiocinated by both the two (2) courts below, the Board of Directors has the negligence; it imports a dishonest purpose or some moral obliquity and
power to create positions not provided for in Filport’s bylaws since the board conscious doing of a wrong, a breach of a known duty through some motive
is the corporation’s governing body, clearly upholding the power of its board to or interest or ill-will partaking of the nature of fraud.18 We have searched the
exercise its prerogatives in managing the business affairs of the corporation. records and nowhere do we find a "dishonest purpose" or "some moral
obliquity," or "conscious doing of a wrong" on the part of the respondents that
As well, it may not be amiss to point out that, as testified to and admitted by "partakes of the nature of fraud."
petitioner Cruz himself, it was during his incumbency as Filport president that
the executive committee in question was created, and that he was even the We thus extend concurrence to the following findings of the CA, affirmatory of
one who moved for the creation of the positions of the AVPs for Operations, those of the trial court:
Finance and Administration. By his acquiescence and/or ratification of the xxx As a matter of fact, it was during the term of appellee Cruz, as president
creation of the aforesaid offices, Cruz is virtually precluded from suing to and director, that the executive committee was created. What is more, it was
declare such acts of the board as invalid or illegal. And it makes no difference appellee himself who moved for the creation of the positions of assistant vice
that he sues in behalf of himself and of the other stockholders. Indeed, as his presidents for operations, for finance, and for administration. He should not be
voice was not heard in protest when he was still Filport’s president, raising a heard to complain thereafter for similar corporate acts.
hue and cry only now leads to the inevitable conclusion that he did so out of
spite and resentment for his non-reelection as president of the corporation.
The increase in the salaries of the board chairman, president, treasurer, and So it is that in Philippine Stock Exchange, Inc. v. CA,21 the Court unequivocally
assistant general manager are indeed reasonable enough in view of the held:
responsibilities assigned to them, and the special knowledge required, to be
able to effectively discharge their respective functions and duties. Questions of policy or of management are left solely to the honest decision of
the board as the business manager of the corporation, and the court is without
Surely, factual findings of trial courts, especially when affirmed by the CA, are authority to substitute its judgment for that of the board, and as long as it acts
binding and conclusive on this Court. in good faith and in the exercise of honest judgment in the interest of the
corporation, its orders are not reviewable by the courts.
There is, however, a factual matter over which the CA and the trial court parted
ways. We refer to the accommodation angle. In a last-ditch attempt to salvage their cause, petitioners assert that the CA
went beyond the issues raised in the court of origin when it ruled on the
The trial court was with petitioner Cruz in saying that the creation of the absence of receipt of actual payment of the salaries/emoluments pertaining to
positions of the three (3) AVPs for Corporate Planning, Special Assistant to the positions of Assistant Vice-President for Corporate Planning, Special
the President and Special Assistant to the Board Chairman, each with a salary Assistant to the Board Chairman and Special Assistant to the President.
of ₱13,050.00 a month, was merely for accommodation purposes considering Petitioners insist that the issue of nonpayment was never raised by the
that Filport is not a big corporation requiring multiple executive positions. respondents before the trial court, as in fact, the latter allegedly admitted the
Hence, the trial court’s order for said officers to return the amounts they same in their Answer With Counterclaim.
received as compensation.
We are not persuaded.
On the other hand, the CA took issue with the trial court and ruled that Cruz’s
accommodation theory is not based on facts and without any evidentiary By claiming that Filport suffered damages because the directors appointed to
substantiation. the assailed positions are not doing anything to deserve their compensation,
petitioners are saddled with the burden of proving that salaries were actually
We concur with the line of the appellate court. For truly, aside from Cruz’s bare paid. Since the trial court, in effect, found that the petitioners successfully
and self-serving testimony, no other evidence was presented to show the fact proved payment of the salaries when it directed the reimbursements of the
of "accommodation." By itself, the testimony of Cruz is not enough to support same, respondents necessarily have to raise the issue on appeal. And the CA
his claim that accommodation was the underlying factor behind the creation of rightly resolved the issue when it found that no evidence of actual payment of
the aforementioned three (3) positions. the salaries in question was actually adduced. Respondents’ alleged
It is elementary in procedural law that bare allegations do not constitute admission of the fact of payment cannot be inferred from a reading of the
evidence adequate to support a conclusion. It is basic in the rule of evidence pertinent portions of the parties’ respective initiatory pleadings. Respondents’
that he who alleges a fact bears the burden of proving it by the quantum of allegations in their Answer With Counterclaim that the officers corresponding
proof required. Bare allegations, unsubstantiated by evidence, are not to the positions created "performed the work called for in their positions" or
equivalent to proof under the Rules of Court.19 The party having the burden of "deserve their compensation," cannot be interpreted to mean that they were
proof must establish his case by a preponderance of evidence.20 "actually paid" such compensation. Directly put, the averment that "one
deserves one’s compensation" does not necessarily carry the implication that
Besides, the determination of the necessity for additional offices and/or "such compensation was actually remitted or received." And because payment
positions in a corporation is a management prerogative which courts are not was not duly proven, there is no evidentiary or factual basis for the trial court
wont to review in the absence of any proof that such prerogative was exercised to direct respondents to make reimbursements thereof to the corporation.
in bad faith or with malice.1awphi1.nét
This brings us to the respondents’ claim that the case filed by the petitioners
Indeed, it would be an improper judicial intrusion into the internal affairs of before the SEC, which eventually landed in RTC-Davao City as Civil Case No.
Filport were the Court to determine the propriety or impropriety of the creation 28,552-2001, is not a derivative suit, as maintained by the petitioners.
of offices therein and the grant of salary increases to officers thereof. Such are
corporate and/or business decisions which only the corporation’s Board of We sustain the petitioners.
Directors can determine.
Under the Corporation Code, where a corporation is an injured party, its power under the complete control of the principal defendants, as here, there is no
to sue is lodged with its board of directors or trustees. But an individual necessity of making a demand upon the directors. The reason is obvious: a
stockholder may be permitted to institute a derivative suit in behalf of the demand upon the board to institute an action and prosecute the same
corporation in order to protect or vindicate corporate rights whenever the effectively would have been useless and an exercise in futility. In fine, we rule
officials of the corporation refuse to sue, or when a demand upon them to file and so hold that the petition filed with the SEC at the instance of Cruz, which
the necessary action would be futile because they are the ones to be sued, or ultimately found its way to the RTC of Davao City as Civil Case No. 28,552-
because they hold control of the corporation.22 In such actions, the corporation 2001, is a derivative suit of which Cruz has the necessary legal standing to
is the real party-in-interest while the suing stockholder, in behalf of the institute.
corporation, is only a nominal party.23
WHEREFORE, the petition is DENIED and the challenged decision of the CA
Here, the action below is principally for damages resulting from alleged is AFFIRMED in all respects.
mismanagement of the affairs of Filport by its directors/officers, it being alleged
that the acts of mismanagement are detrimental to the interests of Filport. No pronouncement as to costs.
Thus, the injury complained of primarily pertains to the corporation so that the SO ORDERED.
suit for relief should be by the corporation. However, since the ones to be sued
are the directors/officers of the corporation itself, a stockholder, like petitioner
Cruz, may validly institute a "derivative suit" to vindicate the alleged corporate
injury, in which case Cruz is only a nominal party while Filport is the real party-
in-interest. For sure, in the prayer portion of petitioners’ petition before the
SEC, the reliefs prayed were asked to be made in favor of Filport.

Besides, the requisites before a derivative suit can be filed by a stockholder

are present in this case, to wit:

a) the party bringing suit should be a shareholder as of the time of the act or
transaction complained of, the number of his shares not being material;

b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand

on the board of directors for the appropriate relief but the latter has failed or
refused to heed his plea; and

c) the cause of action actually devolves on the corporation, the wrongdoing or

harm having been, or being caused to the corporation and not to the particular
stockholder bringing the suit.24

Indisputably, petitioner Cruz (1) is a stockholder of Filport; (2) he sought

without success to have its board of directors remedy what he perceived as
wrong when he wrote a letter requesting the board to do the necessary action
in his complaint; and (3) the alleged wrong was in truth a wrong against the
stockholders of the corporation generally, and not against Cruz or Minterbro,
in particular. In the end, it is Filport, not Cruz which directly stands to benefit
from the suit. And while it is true that the complaining stockholder must show
to the satisfaction of the court that he has exhausted all the means within his
reach to attain within the corporation itself the redress for his grievances, or
actions in conformity to his wishes, nonetheless, where the corporation is
G.R. No. 117847 October 7, 1998 Petitioner is a domestic corporation, which was organized in the middle of 1986
to operate a customs bonded warehouse at the old Manila International Airport
PEOPLE'S AIRCARGO AND WAREHOUSING CO. INC., petitioner, in Pasay City.6
vs.
COURT OF APPEALS and STEFANI SAÑO, respondents. To obtain a license for the corporation from the Bureau of Customs, Antonio
Punsalan Jr., the corporation president, solicited a proposal from private
respondent for the preparation of a feasibility study.7 Private respondent
PANGANIBAN, J.: submitted a letter-proposal dated October 17, 1986 ("First Contract" hereafter)
to Punsalan, which is reproduced hereunder: 8
Contracts entered into by a corporate president without express prior board
approval bind the corporation, when such officer's apparent authority is Dear Mr. Punsalan:
estabished and when these contracts are ratified by the corporation. With reference to your request for professional engineering consultancy
The Case services for your proposed MIA Warehousing Project may we offer the
following outputs and the corresponding rate and terms of agreement:
This principle is stressed by the Court in rejecting the Petition for Review of
the February 28, 1994 Decision and the October 28, 1994 Resolution of the =======================================
Court of Appeals in CA-GR CV No. 30670. Project Feasibility Study consisting of
1
In a collection case filed by Stefani Saño against People's Aircargo and Market Study
Warehousing Co., Inc., the Regional Trial Court (RTC) of Pasay City, Branch
110, rendered a Decision2 dated October 26, 1990, the dispositive portion of Technical Study
which reads: 3
Financial Feasibility Study
WHEREFORE, in light of all the foregoing, Judgment is hereby rendered,
ordering [petitioner] to pay [private respondent] the amount of sixty thousand Preparation of pertinent documentation requirements for the application
(P60,000.00) pesos representing payment of [private respondents] services in _____________________________________________
preparing the manual of operations and in the conduct of a seminar for
[petitioner]. The Counterclaim is hereby dismissed. The above services will be provided for a fee of [p]esos 350,000.00 payable
according to the following schedule:
Aggrieved by what he considered a minuscule award of P60,000, private
respondent appealed to the Court of Appeals4 (CA) which, in its Decision =====================================================
promulgated February 28, 1994, granted his prayer for P400,000, as follows: 5
Fifty percent (50%) upon confirmation of the agreement
WHEREFORE, PREMISES CONSIDERED, the appealed judgment is hereby
Twenty-five percent (25%) 15 days after the confirmation of the agreement
MODIFIED in that [petitioner] is ordered to pay [private respondent] the amount
of four hundred thousand pesos (P400,000.00) representing payment of Twenty-five percent (25%) upon submission of the specified outputs
[private respondent's] services in preparing the manual of operations and in
the conduct of a seminar for [petitioner]. The outputs will be completed and submitted within 30 days upon confirmation
of the agreement and receipt by us of the first fifty percent payment.
As no new ground was raised by petitioner, reconsideration of the above-
mentioned Decision was denied in the Resolution promulgated on October 28, ---------------------------------------------------------------------------------
1994.
Thank you.
The Facts
Yours truly, CONFORME:
(S)STEFANI C. SAÑO (S)ANTONIO C. PUNSALAN, JR. as 1st Installment payment of the service agreement

(T)STEFANI C. SAÑO (T)ANTONIO C. PUNSALAN, JR. dated October 13, 1986.

Consultant for President, PAIRCARGO (S)STEFANI C. SAÑO

Industrial Engineering (T)STEFANI C. SAÑO

Initially, Cheng Yong, the majority stockholder of petitioner, objected to private Accordingly, private respondent prepared a feasibility study for petitioner
respondent's offer, as another company priced a similar proposal at only which eventually paid him the balance of the contract price, although not
P15,000.9 However, Punsalan preferred private respondent's service because according to the schedule agreed upon. 11
of the latter's membership in the task force, which was supervising the
transition of the Bureau of Customs from the Marcos government to the Aquino On December 4, 1986, upon Punsalan's request, private respondent sent
administration. 10 petitioner another letter-proposal ("Second Contract" hereafter), which reads:

On October 17, 1986, pertitioner, through Punsalan, sent private respondent People's Air Cargo & Warehousing Co., Inc.
a letter, confirming their agreement as follows: Old MIA Compound, Metro Manila
Dear Mr. Saño: Attention: Mr. ANTONIO PUN[S]ALAN, JR.
With regard to the services offered by your company in your letter dated 13 President
October 1986, for the preparation of the necessary study and documentations
to support our Application for Authority to Operate a public Customs Bonded Dear Mr. Pun[s]alan:
Warehouse located at the old MIA Compound in Pasay City, please be
informed that our company is willing to hire your services and will pay the This is to formalize our proposal for consultancy services to your company the
scope of which is defined in the attached service description.
amount of THREE HUNDRED FIFTY THOUSAND PESOS (P350,000.00) as
follows: The total service you have decided to avail . . . would be available upon signing
of the conforme below and would come [in] the amount of FOUR HUNDRED
P100,000.00 — uppon signing of the agreement;
THOUSAND PESOS (P400,000.00) payable at the schedule defined as
150,000.00 — on or before October 31, 1986, with the favorable follows (with the balance covered by post-dated cheques):
Recommendation of the CBW on our application.
Downpayment upon signing conforme P80,000.00
100,000.00 — upon receipt of the study in final form.
15 January 1987 53,333.00
Very truly yours,
30 January 1987 53,333.00
(S)ANTONIO C. PUNSALAN
15 February 1987 53,333.00
(T)ANTONIO C. PUNSALAN
28 February 1987 53,333.00
President
15 March1987 53,333.00
CONFORME & RECEIVED from PAIRCARGO, the
30 March 1987 53,333.00
amount of ONE HUNDRED THOUSAND PESOS
With is package, you are assured of the highest service quality as our
(P100,000.00), this 17th day of October, 1986 performance record shows we always deliver no less.

Thank you very much.

Yours truly, he became technical assitant to then Commissioner Miriam Defensor-
Santiago on March 7, 1988. 15 Meanwhile, Punsalan sold his shares in
(S)STEFANI C. SAÑO petitioner-corporation and resigned as its president in 1987. 16
(T)STEFANI C. SAÑO On February 9, 1988, private respondent filed a collection suit against
Industrial Engineering Consultant petitioner. He allege that he had prepared an operations manual for petitioner,
conducted a seminar-workshop for its employees and delivered to it a
CONFORME: computer program; but that, despite demand, petitioner refused to pay him for
his services.
(S)ANTONIO C. PUNSALAN JR.
Petitioner, in its answer, denied that private respondent had prepared an
(T)PAIRCARGO CO. INC.
operations manual and a computer program or conducted a seminar-workshop
During the trial, the lower court observed that the Second Contract bore, at the for its employees. It further alleged that the letter-agreement was signed by
lower right portion of the letter, the following notations in pencil: Punsalan without authority, "in collusion with [private respondent] in order to
unlawfully get some money from [petitioner]," and despite his knowledge that
1. Operations Manual a group of employees of the company had been commissioned by the board
of directors to prepare an operations manual. 17
2. Seminar/workshop for your employees
The trial court declared the Second Contract unenforceable or simulated.
P400,000 — package deal
However, since private respondent had actually prepared the operations
50% upon completion of seminar/workshop manual and conducted a training seminar for petitioner and its employees, the
trial court awarded P60,000 to the former, on the ground that no one should
50% upon approval by the Commissioner be unjustly enriched at the expense of another (Article 2142, Civil Code). The
trial court determined the amount "in light of the evidence presented by
The Manual has already been approved by the Commissioner but payment
defendant on the usual charges made by a leading consultancy firm on similar
has not yet been made.
services." 18
The lower left corner of the letter also contained the following notations:
The Ruling of the Court of Appeals
1st letter — 4 Dec. 1986
To Respondent Court, the pivotal issue of private respondent's appeal was the
2nd letter — 15 June 1987 with enforceability of the Second Contract. It noted that petitioner did not appeal
the Decision of the trial court, implying that it had agreed to pay the P60,000
"Hinanakit". award. If the contract was valid and enforceable, then petitioner should be held
On January 10, 1987, Andy Villaceren, vice president of petitioner, received liable for the full amount stated therein, not P60,000 as held by the lower court.
the operations manual prepared by private respondent. 12 Petitioner submitted Rejecting the finding of the trial court that the December 4, 1986 contract was
said operations manual to the Bureau of Customs is connection with the simulated or unenforceable, the CA ruled in favor of its validity and
former's application to operate a bonded warehouse; thereafter, in May 1987, enforceability. According to the Court of Appeals, the evidence on record
the Bureau issued to it a license to operate, enabling it to become one of the shows that the president of petititoner-corporation had entered into the First
three public bonded warehouses at the international airport. 13 Private Contract, which was similar to the Second Contract. Thus, petitioner had
respondent also conducted, in the third week of January 1987 in the clothed its president with apparent authority to enter into the disputed
warehouse of petitioner, a three-day training seminar for the latter's agreement. As it had also become the practice of the petitioner-corporation to
employees. 14 allow its president to negotiate and execute contracts necessary to secure its
On March 25, 1987, private respondent joined the Bureau of Customs as license as a customs bonded warehouse without prior board approval, the
special assistant to then Commissioner Alex Padilla, a position he held until board itself, by its acts and through acquiescence, practically laid aside the
normal requirement of prior express approval. The Second Contract was The general rule is that, in the absence of authority from the board of directors,
declared valid and binding on the petitioner, which was held liable to private no person, not even its officers, can validly bind a corporation. 21 A corporation
respondent in the full amount of P400,000. is a juridical person, separate and distinct from its stockholders and members,
19
"having . . . powers, attributes and properties expressly authorized by law or
Disagreeing with the CA, petitioner lodged this petition before us. incident to its existence." 22
The Issues Being a juridical entity, a corporation may board of directors, which exercises
Instead of alleging reversible errors, petitioner imputes "grave abuse of almost all corporate powers, lays down all corporate business policies and is
discretion" to the Court of Appeals, viz.: 20 responsible for the efficiency of management, 23 as provided in Section 23 of
the Corporation Code of the Philippines:
I. . . . [I]n ruling that the subject letter-agreement for services was binding on
the corporation simply because it was entered into by its president[;] Sec. 23. The Board of Directors or Trustees. — Unless otherwise provided in
this Code, the corporate powers of all corporations formed under this Code
II. . . . [I]n ruling that the subject letter-agreement for services was binding on shall be exercised, all business conducted and all property of such
the corporation notwithstanding the lack of any board authority since it was the corporations controlled and held by the board of directors or trustees . . . .
purported "practice" to allow the president to enter into contracts of said nature
(citing one previous instance of a similar contract)[;] and Under this provision, the power and the responsibility to decide whether the
corporation should enter into a contract that will bind the corporation is lodged
III. . . . [I]n ruling that the subject letter-agreement for services was a valid in the board, subject to the articles of incorporaration, bylaws, or relevant
contract and not merely simulated. provisions of law. 24 Howeever, just as a natural person may authorize another
to do certain acts for and on his behalf, the board of directors may validly
The Court will overlook the lapse of petitioner in alleging grave abuse of
delegate some of its functions and powers to officers, committees or agents.
discretion as its ground for seeking reversal of the assailed Decision. Although The authority of such individuals to bind the corporation is generally derived
the Rules of Court specify "reversible errors" as grounds for a petition for
from law, corporate bylaws or authorization from the board, either expressly or
review under Rule 45, the Court will lay aside for the nonce this procedural
impliedly by habit, custom or acquiescence in the general course of
lapse and consider the allegations of "grave abuse" as statements of reversible
business, viz.: 25
errors of law.
A corporate officer or agent may represent and bind the corporation in
Petitioner does not contest its liability; it merely disputes the amount of such
transactions with third persons to the extent that [the] authority to do so has
accountability. Hence, the resolution of this petition rests on the sole issue of
been conferred upon him, and this includes powers which have been
the enforceability and validity of the Second Contract, more specifically: (1)
intentionally conferred, and also such powers as, in the usual course of the
whether the president of the petitioner-corporation had apparent authority to
particular business, are incidental to, or may be implied from, the powers
bind petitioner to the Second Contract; and (2) whether the said contract was
intentionally conferred, powers added by custom and usage, as usually
valid and not merely simulated.
pertaining to the particular officer or agent, and such apparent powers as the
The Court's Ruling corporation has caused persons dealing with the officer or agent to believe
that it has conferred.
The petition is not meritorious.
Accordingly, the appellate court ruled in this case that the authority to act for
First Issue: and to bind a corporation may be presumed from acts of recognition in other
instances, wherein the power was in fact exercised without any objection from
Apparent Authority of a Corporate President
its board or shareholders. Petitioner had previously allowed its president to
Petitioner argues that the disputed contract is unenforceable, because enter into the First Contract with private respondent without a board resolution
Punsalan, its president, was not authorized by its board of directors to enter expressly authorizing him; thus, it had clothed its president with apparent
into said contract. authority to execute the subject contract.
Petitioner rebuts, arguing that a single isolated agreement prior to the subject Furthermore, private respondent prepared an operations manual and
contract does not constitute corporate practice, which Webster defines as conducted a seminar for the employees of petitioner in accordance with their
"frequent or custmary action." It cites Board of Liquidators v. Kalaw, 26 in which contract. Petitioner accepted the operations manual, submitted it to the Bureau
the practice of NACOCO allowing its general manager to negotiate and of Customs and allowed the seminar for its employees. As a result of its
execute contract in its copra trading activities for and on its behalf, without prior aforementioned actions, petitioner was given by the Bureau of Customs a
board approval, was inferred from sixty contract — not one, as in present case license to operate a bonded warehouse. Granting arguendo then that the
— previously entered into by the corporation without such board resolution. Second Contract was outside the usual powers of the president, petitioner's
ratification of said contract and acceptance of benefits have made it binding,
Petitioner's argument is not persuasive. Apparent authority is derived not nonetheless. The enforceability of contracts under Article 1403(2) is ratified
merely from practice. Its existence may be ascertained through (1) the general "by the acceptance of benefits under them" under Article 1405.
manner in which the corporation holds out an officer or agent as having the
power to act or, in other words, the apparent authority to act in general, with Inasmuch as a corporate president is often given general supervision and
which it clothes him; or (2) the acquiescence in his acts of a particular nature, control over corporate operations, the strict rule that said officer has no
with actual or constructive knowledge thereof, whether within or beyond the inherent power to act for the corporation is slowly giving way to the realization
scope of his ordinary powers.27 It requires presentation of evidence of similar that such officer has certain limited powers in the transaction of the usual and
act(s) executed either in its favor or in favor of other parties. 28 It is not the ordinary business of the corporation. 31 In the absence of a charter or bylaw
quantity of similar acts which establishes apparent authority, but the vesting of provision to the contrary, the president is presumed to have the authority to
a corporale officer with the power to bind the corporation. act within the domain of the general objectives of its business and within the
scope of his or her usual duties. 32
In the case at bar, petitioner, through its president Antonio Punsalan Jr.,
entered into the First Contract without first securing board approval. Despite Hence, it has been held in other jurisdictions that the president of a corporation
such lack of board approval, petitioner did not object to or repudiate said possesses the power to enter into a contract for the corporation, when the
contract, thus "clothing" its president with the power to bind the corporation. "conduct on the part of both the president and the corporation [shows] that he
The grant of apparent authority to Punsalan is evident in the testimony of Yong had been in the habit of acting in similar matters on behalf of the company and
— senior vice president, treasurer and major stockholder of petitioner. that the company had authorized him so to act and had recognized, approved
Testifying on the First Contract, he said: 29 and ratified his former and similar actions." 33 Furthermore, a party dealing with
the president of a corporation is entitled to assume that he has the authority to
A: Mr. [Punsalan] told me that he prefer[s] Mr. Saño because Mr. Saño is very enter, on behalf of the corporation, into contracts that are within the scope of
influential with the Collector of Customs[s]. Because the Collector of Custom[s] the powers of said corporation and that do not violate any statute or rule on
will be the one to approve our project study and I objected to that, sir. And I public policy. 34
said it [was an exorbitant] price. And Mr. Punsalan he is the [p]resident, so he
[gets] his way. Second Issue:
Alleged Simulation of the First Contract
Q: And so did the company eventually pay this P350,000.00 to Mr. Saño?
As an alternative position, petitioner seeks to pare down its liabilities by limiting
A: Yes, sir. its exposure from P400,000 to only P60,000, the amount awarded by the RTC.
The First Contract was consummated, implemented and paid without a hitch. Petitioner capitalizes on the "badges of fraud" cited by the trial court in
declaring said contract either simulated or unenforceable, viz.:
Hence, private respondent should not be faulted for believing that Punsalan's
conformity to the contract in dispute was also binding on petitioner. It is familiar . . . The October 1986 transaction with [private respondent] involved P350,000.
doctrine that if a corporation knowingly permits one of its officers, or any other The same was embodied in a letter which bore therein not only the conformity
agent, to act within the scope of an apparent authority, it holds him out to the of [petitioner's] then President Punsalan but also drew a letter-confirmation
public as possessing the power to do those acts; and thus, the corporation will, from the latter for, indeed, he was clothed with authority to enter into the
as against anyone who has in good faith dealt with it through such agent, be contract after the same was brought to the attention and consideration of
estopped from denying the agent's authority. 30 [petitioner]. Not only that, a [down payment] was made. In the alleged
agreement of December 4, 1986 subject of the present case, the amount is After judicious deliberation, the Court agrees with the appellate court that the
even bigger - P400,000.00. Yet, the alleged letter-agreement drew no letter of alleged "badges of fraud" mentioned earlier have not affected in any manner
confirmation. And no [down payment] and postdated checks were given. Until the perfection thereof. First, the lack of payment (whether down, partial or full
the filing of the present case in February 1988, no written demand for payment payment), even after completion of private respondent's obligations, imports
was sent to [petitioner]. [Private respondent's] claim that he sent one in writing, only a defect in the performance of the contract on the part of
and one was sent by his counsel who manifested that "[h]e was looking for a petitioner. Second, the delay in the filing of action was not fatal to private
copy in [his] files" fails in light of his failure to present any such copy. These respondent's cause. Despite the lapse of one year after private respondent
and the following considerations, to wit: completed his services or eight months after the alleged last demand for
payment in June 1987, the action was still filed within the allowable period,
1) Despite the fact that no [down payment] and/or postdated checks [partial considering that an action based on a written contract prescribes only after ten
payments] (as purportedly stipulated in the alleged contract) [was given, years from the time the right of action accrues. 37 Third, a misspelling in the
private respondent] went ahead with the services[;] contract does not establish vitiation of consent, cause or object of the
2) [There was a delay in the filing of the present suit, more than a year after contract. Fourth, a confirmation letter is not an essential element of a contract,
[private respondent] allegedly completed his services or eight months after the neither is it necessary to perfect one. Fifth, private respondent's failure to
alleged last verbal demand for payment made on Punsalan in June 1987; implead the corporate president does not establish collusion between them.
Petitioner could have easily filed a third-party claim against Punsalan if it
3) Does not Punsalan's writing allegedly in June 1987 on the alleged letter- believed that it had recourse against the latter. Lastly, the mere fact that the
agreement of "your employees[,]" when it should have been "our employees", contract price was six times the alleged going rate does not invalidate it. 38 In
as he was then still connected with [petitioner], indicate that the letter- short, these "badges" do not establish simulation of said contract.
agreement was signed by Punsalan when he was no longer connected with
[petitioner] or, as claimed by [petitioner], that Punsalan signed it without A fictitious and simulated agreement lacks consent which is essential to a valid
[petitioner's] authority and must have been done "in collusion with plaintiff in and enforceable contract. 39 A contract is simulated if the parties do not intend
order to unlawfully get some money from [petitioner]? to be bound at all (absolutely simulated), 40 or if the parties conceal their true
agreement (relatively simulated).41 In the case at bar, petitioner received from
4) If, as [private respondent] claims, the letter was returned by Punsalan after private respondent a letter-offer containing the terms of the former, including
affixing thereon his conformity, how come . . . when Punsalan allegedly visited a stipulation of the consideration for the latter's services. Punsalan's
[private respondent] in his office at the Bureau of Customs, in June 1987, conformity, as well as the receipt and use of the operations manual, shows
Punsalan "brought" (again?) the letter (with the pencil [notation] at the left petitioner's consent to or, at the very least, ratification of the contract. To
bottom portion allegedly already written)? repeat, petitioner even submitted the manual to the Bureau of Customs and
allowed private respondent to conduct the seminar for its employees. Private
5) How come . . . [private respondent] did not even keep a copy of the alleged
respondent heard no objection from the petitioner, until he claimed payment
service contract allegedly attached to the letter-agreement?
for the services he had rendered.
6) Was not the letter-agreement a mere draft, it bearing the corrections made
Contemporaneous and subsequent acts are also principal factors in the
by Punsalan of his name (the letter "n" is inserted before the last letter "o" in
determination of the will of the contracting parties. 42 The circumstances
Antonio) and of the spelling of his family name (Punsalan, not Punzalan)?
outlined above do not establish any intention to simulate the contract in
7) Why was not Punsalan impleaded in the case? dispute. On the contrary, the legal presumption is always on the validity of
contracts. A corporation, by accepting benefits of a transaction entered into
The issue of whether the contract is simulated or real is factual in nature, and without authority, has ratified the agreement and is, therefore, bound by it. 43
the Court eschews factual examinanon in a petition for review under Rule 45
of the Rules of Court. 35 This rule, however, admits of exceptions, one of which WHEREFORE, the petition is hereby DENIED and the assailed Decision
is a conflict between the factual findings of the lower and of the appellate AFFIRMED. Costs against petitioner.
courts 36 as in the case at bar.
SO ORDERED.
 Right after the plaintiff entered into the aforesaid dealership agreement, he
placed an advertisement in a national, circulating newspaper the fact of his
G.R. No. L-68555 March 19, 1993 being the exclusive dealer of the defendant corporation's white cement
PRIME WHITE CEMENT CORPORATION, petitioner, products in Mindanao area, more particularly, in the Manila Chronicle dated
vs. August 16, 1969 (Exhibits R and R-1) and was even congratulated by his
HONORABLE INTERMEDIATE APPELLATE COURT and ALEJANDRO business associates, so much so, he was asked by some of his businessmen
TE, respondents. friends and close associates if they can be his
sub-dealer in the Mindanao area.
De Jesus & Associates for petitioner.
Relying heavily on the dealership agreement, plaintiff sometime in the months
Padlan, Sutton, Mendoza & Associates for private respondent. of September, October, and December, 1969, entered into a written
agreement with several hardware stores dealing in buying and selling white
cement in the Cities of Davao and Cagayan de Oro which would thus enable
CAMPOS, JR., J.: him to sell his allocation of 20,000 bags regular supply of the said commodity,
by September, 1970 (Exhibits O, O-1, O-2, P, P-1, P-2, Q, Q-1 and Q-2). After
Before Us is a Petition for Review on Certiorari filed by petitioner Prime White the plaintiff was assured by his supposed buyer that his allocation of 20,000
Cement Corporation seeking the reversal of the decision * of the then bags of white cement can be disposed of, he informed the defendant
Intermediate Appellate Court, the dispositive portion of which reads as follows: corporation in his letter dated August 18, 1970 that he is making the necessary
preparation for the opening of the requisite letter of credit to cover the price of
WHEREFORE, in view of the foregoing, the judgment appealed from is hereby
the due initial delivery for the month of September, 1970 (Exhibit B), looking
affirmed in toto.1
forward to the defendant corporation's duty to comply with the dealership
The facts, as found by the trial court and as adopted by the respondent Court agreement. In reply to the aforesaid letter of the plaintiff, the defendant
are hereby quoted, to wit: corporation thru its corporate secretary, replied that the board of directors of
the said defendant decided to impose the following conditions:
On or about the 16th day of July, 1969, plaintiff and defendant corporation thru
its President, Mr. Zosimo Falcon and Justo C. Trazo, as Chairman of the a. Delivery of white cement shall commence at the end of November, 1970;
Board, entered into a dealership agreement (Exhibit A) whereby said plaintiff
b. Only 8,000 bags of white cement per month for only a period of three (3)
was obligated to act as the exclusive dealer and/or distributor of the said
months will be delivered;
defendant corporation of its cement products in the entire Mindanao area for
a term of five (5) years and proving (sic) among others that: c. The price of white cement was priced at P13.30 per bag;
a. The corporation shall, commencing September, 1970, sell to and supply the d. The price of white cement is subject to readjustment unilaterally on the part
plaintiff, as dealer with 20,000 bags (94 lbs/bag) of white cement per month; of the defendant;
b. The plaintiff shall pay the defendant corporation P9.70, Philippine Currency, e. The place of delivery of white cement shall be Austurias (sic);
per bag of white cement, FOB Davao and Cagayan de Oro ports;
f. The letter of credit may be opened only with the Prudential Bank, Makati
c. The plaintiff shall, every time the defendant corporation is ready to deliver Branch;
the good, open with any bank or banking institution a confirmed, unconditional,
and irrevocable letter of credit in favor of the corporation and that upon g. Payment of white cement shall be made in advance and which payment
certification by the boat captain on the bill of lading that the goods have been shall be used by the defendant as guaranty in the opening of a foreign letter of
loaded on board the vessel bound for Davao the said bank or banking credit to cover costs and expenses in the procurement of materials in the
institution shall release the corresponding amount as payment of the goods so manufacture of white cement. (Exhibit C).
shipped.
xxx xxx xxx
Several demands to comply with the dealership agreement (Exhibits D, E, G, PRINCIPLE AND RULE ON FIDUCIARY DUTY OF DIRECTORS AND
I, R, L, and N) were made by the plaintiff to the defendant, however, defendant OFFICERS OF THE CORPORATION.
refused to comply with the same, and plaintiff by force of circumstances was
constrained to cancel his agreement for the supply of white cement with third III
parties, which were concluded in anticipation of, and pursuant to the said THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE
dealership agreement. COURT DISREGARDED THE PRINCIPLE AND JURISPRUDENCE,
Notwithstanding that the dealership agreement between the plaintiff and PRINCIPLE AND RULE ON UNENFORCEABLE CONTRACTS AS
defendant was in force and subsisting, the defendant corporation, in violation PROVIDED IN ARTICLE 1317 OF THE NEW CIVIL CODE.
of, and with evident intention not to be bound by the terms and conditions IV
thereof, entered into an exclusive dealership agreement with a certain
Napoleon Co for the marketing of white cement in Mindanao (Exhibit T) hence, THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE
this suit. (Plaintiff's Record on Appeal, pp. 86-90).2 COURT DISREGARDED THE PRINCIPLE AND JURISPRUDENCE AS TO
WHEN AWARD OF ACTUAL AND MORAL DAMAGES IS PROPER.
After trial, the trial court adjudged the corporation liable to Alejandro Te in the
amount of P3,302,400.00 as actual damages, P100,000.00 as moral V
damages, and P10,000.00 as and for attorney's fees and costs. The appellate
IN NOT AWARDING PETITIONER'S CAUSE OF ACTION AS STATED IN ITS
court affirmed the said decision mainly on the following basis, and We quote:
ANSWER WITH SPECIAL AND AFFIRMATIVE DEFENSES WITH
There is no dispute that when Zosimo R. Falcon and Justo B. Trazo signed COUNTERCLAIM THE INTERMEDIATE APPELLATE COURT HAS
the dealership agreement Exhibit "A", they were the President and Chairman CLEARLY DEPARTED FROM THE ACCEPTED USUAL, COURSE OF
of the Board, respectively, of defendant-appellant corporation. Neither is the JUDICIAL PROCEEDINGS.
genuineness of the said agreement contested. As a matter of fact, it appears
There is only one legal issue to be resolved by this Court: whether or not the
on the face of the contract itself that both officers were duly authorized to enter
"dealership agreement" referred by the President and Chairman of the Board
into the said agreement and signed the same for and in behalf of the
of petitioner corporation is a valid and enforceable contract. We do not agree
corporation. When they, therefore, entered into the said transaction they
with the conclusion of the respondent Court that it is.
created the impression that they were duly clothed with the authority to do so.
It cannot now be said that the disputed agreement which possesses all the Under the Corporation Law, which was then in force at the time this case
essential requisites of a valid contract was never intended to bind the arose,5 as well as under the present Corporation Code, all corporate powers
corporation as this avoidance is barred by the principle of estoppel.3 shall be exercised by the Board of Directors, except as otherwise provided by
law.6 Although it cannot completely abdicate its power and responsibility to act
In this petition for review, petitioner Prime White Cement Corporation made
for the juridical entity, the Board may expressly delegate specific powers to its
the following assignment of errors. 4
President or any of its officers. In the absence of such express delegation, a
I contract entered into by its President, on behalf of the corporation, may still
bind the corporation if the board should ratify the same expressly or impliedly.
THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE Implied ratification may take various forms — like silence or acquiescence; by
COURT ARE UNPRECEDENTED DEPARTURES FROM THE CODIFIED acts showing approval or adoption of the contract; or by acceptance and
PRINCIPLE THAT CORPORATE OFFICERS COULD ENTER INTO retention of benefits flowing therefrom.7 Furthermore, even in the absence of
CONTRACTS IN BEHALF OF THE CORPORATION ONLY WITH PRIOR express or implied authority by ratification, the President as such may, as a
APPROVAL OF THE BOARD OF DIRECTORS. general rule, bind the corporation by a contract in the ordinary course of
II business, provided the same is reasonable under the circumstances. 8 These
rules are basic, but are all general and thus quite flexible. They apply where
THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE the President or other officer, purportedly acting for the corporation, is dealing
COURT ARE CONTRARY TO THE ESTABLISHED JURISPRUDENCE, with a third person, i. e., a person outside the corporation.
The situation is quite different where a director or officer is dealing with his own 4. That in the case of an officer, the contract with the officer has been
corporation. In the instant case respondent Te was not an ordinary previously authorized by the Board of Directors.
stockholder; he was a member of the Board of Directors and Auditor of the
corporation as well. He was what is often referred to as a "self-dealing" Where any of the first two conditions set forth in the preceding paragraph is
director. absent, in the case of a contract with a director or trustee, such contract may
be ratified by the vote of the stockholders representing at least two-thirds (2/3)
A director of a corporation holds a position of trust and as such, he owes a of the outstanding capital stock or of two-thirds (2/3) of the members in a
duty of loyalty to his corporation.9 In case his interests conflict with those of the meeting called for the purpose: Provided, That full disclosure of the adverse
corporation, he cannot sacrifice the latter to his own advantage and benefit. interest of the directors or trustees involved is made at such meeting: Provided,
As corporate managers, directors are committed to seek the maximum amount however, That the contract is fair and reasonable under the circumstances.
of profits for the corporation. This trust relationship "is not a matter of statutory
or technical law. It springs from the fact that directors have the control and Although the old Corporation Law which governs the instant case did not
guidance of corporate affairs and property and hence of the property interests contain a similar provision, yet the cited provision substantially incorporates
of the stockholders." 10 In the case of Gokongwei v. Securities and Exchange well-settled principles in corporate law. 12
Commission, this Court quoted with favor from Pepper v. Litton,11 thus: Granting arguendo that the "dealership agreement" involved here would be
. . . He cannot by the intervention of a corporate entity violate the ancient valid and enforceable if entered into with a person other than a director or
precept against serving two masters. . . . He cannot utilize his inside officer of the corporation, the fact that the other party to the contract was a
information and his strategic position for his own preferment. He cannot violate Director and Auditor of the petitioner corporation changes the whole situation.
rules of fair play by doing indirectly through the corporation what he could not First of all, We believe that the contract was neither fair nor reasonable. The
do directly. He cannot use his power for his personal advantage and to the "dealership agreement" entered into in July, 1969, was to sell and supply to
detriment of the stockholders and creditors no matter how absolute in terms respondent Te 20,000 bags of white cement per month, for five years starting
that power may be and no matter how meticulous he is to satisfy technical September, 1970, at the fixed price of P9.70 per bag. Respondent Te is a
requirements. For that power is at all times subject to the equitable limitation businessman himself and must have known, or at least must be presumed to
that it may not be exercised for the aggrandizement, preference, or advantage know, that at that time, prices of commodities in general, and white cement in
of the fiduciary to the exclusion or detriment of the cestuis. . . . . particular, were not stable and were expected to rise. At the time of the
contract, petitioner corporation had not even commenced the manufacture of
On the other hand, a director's contract with his corporation is not in all white cement, the reason why delivery was not to begin until 14 months later.
instances void or voidable. If the contract is fair and reasonable under the He must have known that within that period of six years, there would be a
circumstances, it may be ratified by the stockholders provided a full disclosure considerable rise in the price of white cement. In fact, respondent Te's own
of his adverse interest is made. Section 32 of the Corporation Code provides, Memorandum shows that in September, 1970, the price per bag was P14.50,
thus: and by the middle of 1975, it was already P37.50 per bag. Despite this, no
provision was made in the "dealership agreement" to allow for an increase in
Sec. 32. Dealings of directors, trustees or officers with the corporation. — A price mutually acceptable to the parties. Instead, the price was pegged at
contract of the corporation with one or more of its directors or trustees or P9.70 per bag for the whole five years of the contract. Fairness on his part as
officers is voidable, at the option of such corporation, unless all the following a director of the corporation from whom he was to buy the cement, would
conditions are present: require such a provision. In fact, this unfairness in the contract is also a basis
1. That the presence of such director or trustee in the board meeting in which which renders a contract entered into by the President, without authority from
the contract was approved was not necessary to constitute a quorum for such the Board of Directors, void or voidable, although it may have been in the
meeting; ordinary course of business. We believe that the fixed price of P9.70 per bag
for a period of five years was not fair and reasonable. Respondent Te, himself,
2. That the vote of such director or trustee was not necessary for the approval when he subsequently entered into contracts to resell the cement to his "new
of the contract; dealers" Henry Wee 13 and Gaudencio Galang 14 stipulated as follows:
3. That the contract is fair and reasonable under the circumstances; and
The price of white cement shall be mutually determined by us but in no case
shall the same be less than P14.00 per bag (94 lbs).

The contract with Henry Wee was on September 15, 1969, and that with
Gaudencio Galang, on October 13, 1967. A similar contract with Prudencio
Lim was made on December 29, 1969. 15 All of these contracts were entered
into soon after his "dealership agreement" with petitioner corporation, and in
each one of them he protected himself from any increase in the market price
of white cement. Yet, except for the contract with Henry Wee, the contracts
were for only two years from October, 1970. Why did he not protect the
corporation in the same manner when he entered into the "dealership
agreement"? For that matter, why did the President and the Chairman of the
Board not do so either? As director, specially since he was the other party in
interest, respondent Te's bounden duty was to act in such manner as not to
unduly prejudice the corporation. In the light of the circumstances of this case,
it is to Us quite clear that he was guilty of disloyalty to the corporation; he was
attempting in effect, to enrich himself at the expense of the corporation. There
is no showing that the stockholders ratified the "dealership agreement" or that
they were fully aware of its provisions. The contract was therefore not valid
and this Court cannot allow him to reap the fruits of his disloyalty.

As a result of this action which has been proven to be without legal basis,
petitioner corporation's reputation and goodwill have been prejudiced.
However, there can be no award for moral damages under Article 2217 and
succeeding articles on Section 1 of Chapter 3 of Title XVIII of the Civil Code in
favor of a corporation.

In view of the foregoing, the Decision and Resolution of the Intermediate

Appellate Court dated March 30, 1984 and August 6, 1984, respectively, are
hereby SET ASIDE. Private respondent Alejandro Te is hereby ordered to pay
petitioner corporation the sum of P20,000.00 for attorney's fees, plus the cost
of suit and expenses of litigation.

SO ORDERED.