Gokongwei Vs SEC

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-45911 April 11, 1979
JOHN GOKONGWEI, JR., petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M. SORIANO,
ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL
ORTIGAS, ANTONIO PRIETO, SAN MIGUEL CORPORATION, EMIGDIO TANJUATCO, SR., and
EDUARDO R. VISAYA, respondents.
De Santos, Balgos & Perez for petitioner.
Angara, Abello, Concepcion, Regala, Cruz Law Offices for respondents Sorianos
Siguion Reyna, Montecillo & Ongsiako for respondent San Miguel Corporation.
R. T Capulong for respondent Eduardo R. Visaya.
ANTONIO, J.:
The instant petition for certiorari, mandamus and injunction, with prayer for issuance of writ of preliminary
injunction, arose out of two cases filed by petitioner with the Securities and Exchange Commission, as
follows:
SEC CASE NO 1375
On October 22, 1976, petitioner, as stockholder of respondent San Miguel Corporation, filed with the
Securities and Exchange Commission (SEC) a petition for "declaration of nullity of amended by-laws,
cancellation of certificate of filing of amended by- laws, injunction and damages with prayer for a
preliminary injunction" against the majority of the members of the Board of Directors and San Miguel
Corporation as an unwilling petitioner. The petition, entitled "John Gokongwei Jr. vs. Andres Soriano, Jr.,
Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio Bunao, Walthrode B. Conde, Miguel Ortigas,
Antonio Prieto and San Miguel Corporation", was docketed as SEC Case No. 1375.
As a first cause of action, petitioner alleged that on September 18, 1976, individual respondents amended
by bylaws of the corporation, basing their authority to do so on a resolution of the stockholders adopted
on March 13, 1961, when the outstanding capital stock of respondent corporation was only
P70,139.740.00, divided into 5,513,974 common shares at P10.00 per share and 150,000 preferred
shares at P100.00 per share. At the time of the amendment, the outstanding and paid up shares totalled
30,127,047 with a total par value of P301,270,430.00. It was contended that according to section 22 of
the Corporation Law and Article VIII of the by-laws of the corporation, the power to amend, modify, repeal
or adopt new by-laws may be delegated to the Board of Directors only by the affirmative vote of
stockholders representing not less than 2/3 of the subscribed and paid up capital stock of the corporation,
which 2/3 should have been computed on the basis of the capitalization at the time of the amendment.
Since the amendment was based on the 1961 authorization, petitioner contended that the Board acted
without authority and in usurpation of the power of the stockholders.
As a second cause of action, it was alleged that the authority granted in 1961 had already been exercised
in 1962 and 1963, after which the authority of the Board ceased to exist.
As a third cause of action, petitioner averred that the membership of the Board of Directors had changed
since the authority was given in 1961, there being six (6) new directors.
As a fourth cause of action, it was claimed that prior to the questioned amendment, petitioner had all the
qualifications to be a director of respondent corporation, being a Substantial stockholder thereof; that as a
stockholder, petitioner had acquired rights inherent in stock ownership, such as the rights to vote and to
be voted upon in the election of directors; and that in amending the by-laws, respondents purposely
provided for petitioner's disqualification and deprived him of his vested right as afore-mentioned hence
the amended by-laws are null and void. 1
As additional causes of action, it was alleged that corporations have no inherent power to disqualify a
stockholder from being elected as a director and, therefore, the questioned act is ultra vires and void; that
Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing other corporations, entered into
contracts (specifically a management contract) with respondent corporation, which was allowed because
the questioned amendment gave the Board itself the prerogative of determining whether they or other
1|Page C O R P O R AT I O N C A S E S _ 2 n d S E T
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persons are engaged in competitive or antagonistic business; that the portion of the amended bylaws
which states that in determining whether or not a person is engaged in competitive business, the Board
may consider such factors as business and family relationship, is unreasonable and oppressive and,
therefore, void; and that the portion of the amended by-laws which requires that "all nominations for
election of directors ... shall be submitted in writing to the Board of Directors at least five (5) working days
before the date of the Annual Meeting" is likewise unreasonable and oppressive.
It was, therefore, prayed that the amended by-laws be declared null and void and the certificate of filing
thereof be cancelled, and that individual respondents be made to pay damages, in specified amounts, to
petitioner.
On October 28, 1976, in connection with the same case, petitioner filed with the Securities and Exchange
Commission an "Urgent Motion for Production and Inspection of Documents", alleging that the Secretary
of respondent corporation refused to allow him to inspect its records despite request made by petitioner
for production of certain documents enumerated in the request, and that respondent corporation had been
attempting to suppress information from its stockholders despite a negative reply by the SEC to its query
regarding their authority to do so. Among the documents requested to be copied were (a) minutes of the
stockholder's meeting field on March 13, 1961, (b) copy of the management contract between San Miguel
Corporation and A. Soriano Corporation (ANSCOR); (c) latest balance sheet of San Miguel International,
Inc.; (d) authority of the stockholders to invest the funds of respondent corporation in San Miguel
International, Inc.; and (e) lists of salaries, allowances, bonuses, and other compensation, if any, received
by Andres M. Soriano, Jr. and/or its successor-in-interest.
The "Urgent Motion for Production and Inspection of Documents" was opposed by respondents, alleging,
among others that the motion has no legal basis; that the demand is not based on good faith; that the
motion is premature since the materiality or relevance of the evidence sought cannot be determined until
the issues are joined, that it fails to show good cause and constitutes continued harrasment, and that
some of the information sought are not part of the records of the corporation and, therefore, privileged.
During the pendency of the motion for production, respondents San Miguel Corporation, Enrique Conde,
Miguel Ortigas and Antonio Prieto filed their answer to the petition, denying the substantial allegations
therein and stating, by way of affirmative defenses that "the action taken by the Board of Directors on
September 18, 1976 resulting in the ... amendments is valid and legal because the power to "amend,
modify, repeal or adopt new By-laws" delegated to said Board on March 13, 1961 and long prior thereto
has never been revoked of SMC"; that contrary to petitioner's claim, "the vote requirement for a valid
delegation of the power to amend, repeal or adopt new by-laws is determined in relation to the total
subscribed capital stock at the time the delegation of said power is made, not when the Board opts to
exercise said delegated power"; that petitioner has not availed of his intra-corporate remedy for the
nullification of the amendment, which is to secure its repeal by vote of the stockholders representing a
majority of the subscribed capital stock at any regular or special meeting, as provided in Article VIII,
section I of the by-laws and section 22 of the Corporation law, hence the, petition is premature; that
petitioner is estopped from questioning the amendments on the ground of lack of authority of the Board.
since he failed, to object to other amendments made on the basis of the same 1961 authorization: that the
power of the corporation to amend its by-laws is broad, subject only to the condition that the by-laws
adopted should not be respondent corporation inconsistent with any existing law; that respondent
corporation should not be precluded from adopting protective measures to minimize or eliminate
situations where its directors might be tempted to put their personal interests over t I hat of the
corporation; that the questioned amended by-laws is a matter of internal policy and the judgment of the
board should not be interfered with: That the by-laws, as amended, are valid and binding and are
intended to prevent the possibility of violation of criminal and civil laws prohibiting combinations in
restraint of trade; and that the petition states no cause of action. It was, therefore, prayed that the petition
be dismissed and that petitioner be ordered to pay damages and attorney's fees to respondents. The
application for writ of preliminary injunction was likewise on various grounds.
Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to the petition, denying the
material averments thereof and stating, as part of their affirmative defenses, that in August 1972, the
Universal Robina Corporation (Robina), a corporation engaged in business competitive to that of
respondent corporation, began acquiring shares therein. until September 1976 when its total holding
amounted to 622,987 shares: that in October 1972, the Consolidated Foods Corporation (CFC) likewise
began acquiring shares in respondent (corporation. until its total holdings amounted to P543,959.00 in
September 1976; that on January 12, 1976, petitioner, who is president and controlling shareholder of
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Robina and CFC (both closed corporations) purchased 5,000 shares of stock of respondent corporation,
and thereafter, in behalf of himself, CFC and Robina, "conducted malevolent and malicious publicity
campaign against SMC" to generate support from the stockholder "in his effort to secure for himself and in
representation of Robina and CFC interests, a seat in the Board of Directors of SMC", that in the
stockholders' meeting of March 18, 1976, petitioner was rejected by the stockholders in his bid to secure
a seat in the Board of Directors on the basic issue that petitioner was engaged in a competitive business
and his securing a seat would have subjected respondent corporation to grave disadvantages; that
"petitioner nevertheless vowed to secure a seat in the Board of Directors at the next annual meeting; that
thereafter the Board of Directors amended the by-laws as afore-stated.
As counterclaims, actual damages, moral damages, exemplary damages, expenses of litigation and
attorney's fees were presented against petitioner.
Subsequently, a Joint Omnibus Motion for the striking out of the motion for production and inspection of
documents was filed by all the respondents. This was duly opposed by petitioner. At this juncture,
respondents Emigdio Tanjuatco, Sr. and Eduardo R. Visaya were allowed to intervene as oppositors and
they accordingly filed their oppositions-intervention to the petition.
On December 29, 1976, the Securities and Exchange Commission resolved the motion for production and
inspection of documents by issuing Order No. 26, Series of 1977, stating, in part as follows:
Considering the evidence submitted before the Commission by the petitioner and
respondents in the above-entitled case, it is hereby ordered:
1. That respondents produce and permit the inspection, copying and photographing, by
or on behalf of the petitioner-movant, John Gokongwei, Jr., of the minutes of the
stockholders' meeting of the respondent San Miguel Corporation held on March 13, 1961,
which are in the possession, custody and control of the said corporation, it appearing that
the same is material and relevant to the issues involved in the main case. Accordingly,
the respondents should allow petitioner-movant entry in the principal office of the
respondent Corporation, San Miguel Corporation on January 14, 1977, at 9:30 o'clock in
the morning for purposes of enforcing the rights herein granted; it being understood that
the inspection, copying and photographing of the said documents shall be undertaken
under the direct and strict supervision of this Commission. Provided, however, that other
documents and/or papers not heretofore included are not covered by this Order and any
inspection thereof shall require the prior permission of this Commission;
2. As to the Balance Sheet of San Miguel International, Inc. as well as the list of salaries,
allowances, bonuses, compensation and/or remuneration received by respondent Jose
M. Soriano, Jr. and Andres Soriano from San Miguel International, Inc. and/or its
successors-in- interest, the Petition to produce and inspect the same is hereby DENIED,
as petitioner-movant is not a stockholder of San Miguel International, Inc. and has,
therefore, no inherent right to inspect said documents;
3. In view of the Manifestation of petitioner-movant dated November 29, 1976,
withdrawing his request to copy and inspect the management contract between San
Miguel Corporation and A. Soriano Corporation and the renewal and amendments thereof
for the reason that he had already obtained the same, the Commission takes note
thereof; and
4. Finally, the Commission holds in abeyance the resolution on the matter of production
and inspection of the authority of the stockholders of San Miguel Corporation to invest the
funds of respondent corporation in San Miguel International, Inc., until after the hearing
on the merits of the principal issues in the above-entitled case.
2
This Order is immediately executory upon its approval.
Dissatisfied with the foregoing Order, petitioner moved for its reconsideration.
Meanwhile, on December 10, 1976, while the petition was yet to be heard, respondent corporation issued
a notice of special stockholders' meeting for the purpose of "ratification and confirmation of the
amendment to the By-laws", setting such meeting for February 10, 1977. This prompted petitioner to ask
respondent Commission for a summary judgment insofar as the first cause of action is concerned, for the
alleged reason that by calling a special stockholders' meeting for the aforesaid purpose, private
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respondents admitted the invalidity of the amendments of September 18, 1976. The motion for summary
judgment was opposed by private respondents. Pending action on the motion, petitioner filed an "Urgent
Motion for the Issuance of a Temporary Restraining Order", praying that pending the determination of
petitioner's application for the issuance of a preliminary injunction and/or petitioner's motion for summary
judgment, a temporary restraining order be issued, restraining respondents from holding the special
stockholder's meeting as scheduled. This motion was duly opposed by respondents.
On February 10, 1977, respondent Commission issued an order denying the motion for issuance of
temporary restraining order. After receipt of the order of denial, respondents conducted the special
stockholders' meeting wherein the amendments to the by-laws were ratified. On February 14, 1977,
petitioner filed a consolidated motion for contempt and for nullification of the special stockholders'
meeting.
A motion for reconsideration of the order denying petitioner's motion for summary judgment was filed by
petitioner before respondent Commission on March 10, 1977. Petitioner alleges that up to the time of the
filing of the instant petition, the said motion had not yet been scheduled for hearing. Likewise, the motion
for reconsideration of the order granting in part and denying in part petitioner's motion for production of
record had not yet been resolved.
In view of the fact that the annul stockholders' meeting of respondent corporation had been scheduled for
May 10, 1977, petitioner filed with respondent Commission a Manifestation stating that he intended to run
for the position of director of respondent corporation. Thereafter, respondents filed a Manifestation with
respondent Commission, submitting a Resolution of the Board of Directors of respondent corporation
disqualifying and precluding petitioner from being a candidate for director unless he could submit
evidence on May 3, 1977 that he does not come within the disqualifications specified in the amendment to
the by-laws, subject matter of SEC Case No. 1375. By reason thereof, petitioner filed a manifestation and
motion to resolve pending incidents in the case and to issue a writ of injunction, alleging that private
respondents were seeking to nullify and render ineffectual the exercise of jurisdiction by the respondent
Commission, to petitioner's irreparable damage and prejudice, Allegedly despite a subsequent
Manifestation to prod respondent Commission to act, petitioner was not heard prior to the date of the
stockholders' meeting.
Petitioner alleges that there appears a deliberate and concerted inability on the part of the SEC to act
hence petitioner came to this Court.
SEC. CASE NO. 1423
Petitioner likewise alleges that, having discovered that respondent corporation has been investing
corporate funds in other corporations and businesses outside of the primary purpose clause of the
corporation, in violation of section 17 1/2 of the Corporation Law, he filed with respondent Commission, on
January 20, 1977, a petition seeking to have private respondents Andres M. Soriano, Jr. and Jose M.
Soriano, as well as the respondent corporation declared guilty of such violation, and ordered to account
for such investments and to answer for damages.
On February 4, 1977, motions to dismiss were filed by private respondents, to which a consolidated
motion to strike and to declare individual respondents in default and an opposition ad abundantiorem
cautelam were filed by petitioner. Despite the fact that said motions were filed as early as February 4,
1977, the commission acted thereon only on April 25, 1977, when it denied respondents' motion to
dismiss and gave them two (2) days within which to file their answer, and set the case for hearing on April
29 and May 3, 1977.
Respondents issued notices of the annual stockholders' meeting, including in the Agenda thereof, the
following:
6. Re-affirmation of the authorization to the Board of Directors by the stockholders at the
meeting on March 20, 1972 to invest corporate funds in other companies or businesses
or for purposes other than the main purpose for which the Corporation has been
organized, and ratification of the investments thereafter made pursuant thereto.
By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an urgent motion for the
issuance of a writ of preliminary injunction to restrain private respondents from taking up Item 6 of the
Agenda at the annual stockholders' meeting, requesting that the same be set for hearing on May 3, 1977,
the date set for the second hearing of the case on the merits. Respondent Commission, however,
cancelled the dates of hearing originally scheduled and reset the same to May 16 and 17, 1977, or after
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the scheduled annual stockholders' meeting. For the purpose of urging the Commission to act, petitioner
filed an urgent manifestation on May 3, 1977, but this notwithstanding, no action has been taken up to the
date of the filing of the instant petition.
With respect to the afore-mentioned SEC cases, it is petitioner's contention before this Court that
respondent Commission gravely abused its discretion when it failed to act with deliberate dispatch on the
motions of petitioner seeking to prevent illegal and/or arbitrary impositions or limitations upon his rights as
stockholder of respondent corporation, and that respondent are acting oppressively against petitioner, in
gross derogation of petitioner's rights to property and due process. He prayed that this Court direct
respondent SEC to act on collateral incidents pending before it.
On May 6, 1977, this Court issued a temporary restraining order restraining private respondents from
disqualifying or preventing petitioner from running or from being voted as director of respondent
corporation and from submitting for ratification or confirmation or from causing the ratification or
confirmation of Item 6 of the Agenda of the annual stockholders' meeting on May 10, 1977, or from
Making effective the amended by-laws of respondent corporation, until further orders from this Court or
until the Securities and Ex-change Commission acts on the matters complained of in the instant petition.
On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a restraining order had been
issued by this Court, or on May 9, 1977, the respondent Commission served upon petitioner copies of the
following orders:
(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's motion for reconsideration,
with its supplement, of the order of the Commission denying in part petitioner's motion for production of
documents, petitioner's motion for reconsideration of the order denying the issuance of a temporary
restraining order denying the issuance of a temporary restraining order, and petitioner's consolidated
motion to declare respondents in contempt and to nullify the stockholders' meeting;
(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run as a director of
respondent corporation but stating that he should not sit as such if elected, until such time that the
Commission has decided the validity of the bylaws in dispute, and denying deferment of Item 6 of the
Agenda for the annual stockholders' meeting; and
(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's motion for reconsideration
of the order of respondent Commission denying petitioner's motion for summary judgment;
It is petitioner's assertions, anent the foregoing orders, (1) that respondent Commission acted with
indecent haste and without circumspection in issuing the aforesaid orders to petitioner's irreparable
damage and injury; (2) that it acted without jurisdiction and in violation of petitioner's right to due process
when it decided en banc an issue not raised before it and still pending before one of its Commissioners,
and without hearing petitioner thereon despite petitioner's request to have the same calendared for
hearing , and (3) that the respondents acted oppressively against the petitioner in violation of his rights as
a stockholder, warranting immediate judicial intervention.
It is prayed in the supplemental petition that the SEC orders complained of be declared null and void and
that respondent Commission be ordered to allow petitioner to undertake discovery proceedings relative to
San Miguel International. Inc. and thereafter to decide SEC Cases No. 1375 and 1423 on the merits.
On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed their comment,
alleging that the petition is without merit for the following reasons:
(1) that the petitioner the interest he represents are engaged in business competitive and antagonistic to
that of respondent San Miguel Corporation, it appearing that the owns and controls a greater portion of
his SMC stock thru the Universal Robina Corporation and the Consolidated Foods Corporation, which
corporations are engaged in business directly and substantially competing with the allied businesses of
respondent SMC and of corporations in which SMC has substantial investments. Further, when CFC and
Robina had accumulated investments. Further, when CFC and Robina had accumulated shares in SMC,
the Board of Directors of SMC realized the clear and present danger that competitors or antagonistic
parties may be elected directors and thereby have easy and direct access to SMC's business and trade
secrets and plans;
(2) that the amended by law were adopted to preserve and protect respondent SMC from the clear and
present danger that business competitors, if allowed to become directors, will illegally and unfairly utilize
their direct access to its business secrets and plans for their own private gain to the irreparable prejudice
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of respondent SMC, and, ultimately, its stockholders. Further, it is asserted that membership of a
competitor in the Board of Directors is a blatant disregard of no less that the Constitution and pertinent
laws against combinations in restraint of trade;
(3) that by laws are valid and binding since a corporation has the inherent right and duty to preserve and
protect itself by excluding competitors and antogonistic parties, under the law of self-preservation, and it
should be allowed a wide latitude in the selection of means to preserve itself;
(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and 1423 was due to
petitioner's own acts or omissions, since he failed to have the petition to suspend, pendente lite the
amended by-laws calendared for hearing. It was emphasized that it was only on April 29, 1977 that
petitioner calendared the aforesaid petition for suspension (preliminary injunction) for hearing on May 3,
1977. The instant petition being dated May 4, 1977, it is apparent that respondent Commission was not
given a chance to act "with deliberate dispatch", and
(5) that, even assuming that the petition was meritorious was, it has become moot and academic because
respondent Commission has acted on the pending incidents, complained of. It was, therefore, prayed that
the petition be dismissed.
On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his comment, alleging that the petition has
become moot and academic for the reason, among others that the acts of private respondent sought to
be enjoined have reference to the annual meeting of the stockholders of respondent San Miguel
Corporation, which was held on may 10, 1977; that in said meeting, in compliance with the order of
respondent Commission, petitioner was allowed to run and be voted for as director; and that in the same
meeting, Item 6 of the Agenda was discussed, voted upon, ratified and confirmed. Further it was averred
that the questions and issues raised by petitioner are pending in the Securities and Exchange
Commission which has acquired jurisdiction over the case, and no hearing on the merits has been had;
hence the elevation of these issues before the Supreme Court is premature.
Petitioner filed a reply to the aforesaid comments, stating that the petition presents justiciable questions
for the determination of this Court because (1) the respondent Commission acted without circumspection,
unfairly and oppresively against petitioner, warranting the intervention of this Court; (2) a derivative suit,
such as the instant case, is not rendered academic by the act of a majority of stockholders, such that the
discussion, ratification and confirmation of Item 6 of the Agenda of the annual stockholders' meeting of
May 10, 1977 did not render the case moot; that the amendment to the bylaws which specifically bars
petitioner from being a director is void since it deprives him of his vested rights.
Respondent Commission, thru the Solicitor General, filed a separate comment, alleging that after
receiving a copy of the restraining order issued by this Court and noting that the restraining order did not
foreclose action by it, the Commission en banc issued Orders Nos. 449, 450 and 451 in SEC Case No.
1375.
In answer to the allegation in the supplemental petition, it states that Order No. 450 which denied
deferment of Item 6 of the Agenda of the annual stockholders' meeting of respondent corporation, took
into consideration an urgent manifestation filed with the Commission by petitioner on May 3, 1977 which
prayed, among others, that the discussion of Item 6 of the Agenda be deferred. The reason given for
denial of deferment was that "such action is within the authority of the corporation as well as falling within
the sphere of stockholders' right to know, deliberate upon and/or to express their wishes regarding
disposition of corporate funds considering that their investments are the ones directly affected." It was
alleged that the main petition has, therefore, become moot and academic.
On September 29,1977, petitioner filed a second supplemental petition with prayer for preliminary
injunction, alleging that the actuations of respondent SEC tended to deprive him of his right to due
process, and "that all possible questions on the facts now pending before the respondent Commission are
now before this Honorable Court which has the authority and the competence to act on them as it may
see fit." (Reno, pp. 927-928.)
Petitioner, in his memorandum, submits the following issues for resolution;
(1) whether or not the provisions of the amended by-laws of respondent corporation, disqualifying a
competitor from nomination or election to the Board of Directors are valid and reasonable;
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(2) whether or not respondent SEC gravely abused its discretion in denying petitioner's request for an
examination of the records of San Miguel International, Inc., a fully owned subsidiary of San Miguel
Corporation; and
(3) whether or not respondent SEC committed grave abuse of discretion in allowing discussion of Item 6
of the Agenda of the Annual Stockholders' Meeting on May 10, 1977, and the ratification of the investment
in a foreign corporation of the corporate funds, allegedly in violation of section 17-1/2 of the Corporation
Law.
I
Whether or not amended by-laws are valid is purely a legal question which public interest requires to be
resolved
It is the position of the petitioner that "it is not necessary to remand the case to respondent SEC for an
appropriate ruling on the intrinsic validity of the amended by-laws in compliance with the principle of
exhaustion of administrative remedies", considering that: first: "whether or not the provisions of the
amended by-laws are intrinsically valid ... is purely a legal question. There is no factual dispute as to what
the provisions are and evidence is not necessary to determine whether such amended by-laws are valid
as framed and approved ... "; second: "it is for the interest and guidance of the public that an immediate
and final ruling on the question be made ... "; third: "petitioner was denied due process by SEC" when
"Commissioner de Guzman had openly shown prejudice against petitioner ... ", and "Commissioner
Sulit ... approved the amended by-laws ex-parte and obviously found the same intrinsically valid; and
finally: "to remand the case to SEC would only entail delay rather than serve the ends of justice."
Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that this Court resolve the legal
issues raised by the parties in keeping with the "cherished rules of procedure" that "a court should always
strive to settle the entire controversy in a single proceeding leaving no root or branch to bear the seeds of
future ligiation", citing Gayong v. Gayos. 3 To the same effect is the prayer of San Miguel Corporation that
this Court resolve on the merits the validity of its amended by laws and the rights and obligations of the
parties thereunder, otherwise "the time spent and effort exerted by the parties concerned and, more
importantly, by this Honorable Court, would have been for naught because the main question will come
back to this Honorable Court for final resolution." Respondent Eduardo R. Visaya submits a similar
appeal.
It is only the Solicitor General who contends that the case should be remanded to the SEC for hearing
and decision of the issues involved, invoking the latter's primary jurisdiction to hear and decide case
involving intra-corporate controversies.
It is an accepted rule of procedure that the Supreme Court should always strive to settle the entire
controversy in a single proceeding, leaving nor root or branch to bear the seeds of future litigation. 4 Thus,
in Francisco v. City of Davao, 5 this Court resolved to decide the case on the merits instead of remanding
it to the trial court for further proceedings since the ends of justice would not be subserved by the remand
of the case. In Republic v. Security Credit and Acceptance Corporation, et al., 6 this Court, finding that the
main issue is one of law, resolved to decide the case on the merits "because public interest demands an
early disposition of the case", and in Republic v. Central Surety and Insurance Company, 7 this Court
denied remand of the third-party complaint to the trial court for further proceedings, citing precedent
where this Court, in similar situations resolved to decide the cases on the merits, instead of remanding
them to the trial court where (a) the ends of justice would not be subserved by the remand of the case; or
(b) where public interest demand an early disposition of the case; or (c) where the trial court had already
received all the evidence presented by both parties and the Supreme Court is now in a position, based
upon said evidence, to decide the case on its merits. 8 It is settled that the doctrine of primary jurisdiction
has no application where only a question of law is involved. 8a Because uniformity may be secured
through review by a single Supreme Court, questions of law may appropriately be determined in the first
instance by courts. 8b In the case at bar, there are facts which cannot be denied, viz.: that the amended
by-laws were adopted by the Board of Directors of the San Miguel Corporation in the exercise of the
power delegated by the stockholders ostensibly pursuant to section 22 of the Corporation Law; that in a
special meeting on February 10, 1977 held specially for that purpose, the amended by-laws were ratified
by more than 80% of the stockholders of record; that the foreign investment in the Hongkong Brewery and
Distellery, a beer manufacturing company in Hongkong, was made by the San Miguel Corporation in
1948; and that in the stockholders' annual meeting held in 1972 and 1977, all foreign investments and
operations of San Miguel Corporation were ratified by the stockholders.
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II
Whether or not the amended by-laws of SMC of disqualifying a competitor from nomination or election to
the Board of Directors of SMC are valid and reasonable
The validity or reasonableness of a by-law of a corporation in purely a question of law. 9 Whether the by-
law is in conflict with the law of the land, or with the charter of the corporation, or is in a legal sense
unreasonable and therefore unlawful is a question of law. 10 This rule is subject, however, to the limitation
that where the reasonableness of a by-law is a mere matter of judgment, and one upon which reasonable
minds must necessarily differ, a court would not be warranted in substituting its judgment instead of the
judgment of those who are authorized to make by-laws and who have exercised their authority. 11
Petitioner claims that the amended by-laws are invalid and unreasonable because they were tailored to
suppress the minority and prevent them from having representation in the Board", at the same time
depriving petitioner of his "vested right" to be voted for and to vote for a person of his choice as director.
Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San Miguel Corporation
content that ex. conclusion of a competitor from the Board is legitimate corporate purpose, considering
that being a competitor, petitioner cannot devote an unselfish and undivided Loyalty to the corporation;
that it is essentially a preventive measure to assure stockholders of San Miguel Corporation of reasonable
protective from the unrestrained self-interest of those charged with the promotion of the corporate
enterprise; that access to confidential information by a competitor may result either in the promotion of the
interest of the competitor at the expense of the San Miguel Corporation, or the promotion of both the
interests of petitioner and respondent San Miguel Corporation, which may, therefore, result in a
combination or agreement in violation of Article 186 of the Revised Penal Code by destroying free
competition to the detriment of the consuming public. It is further argued that there is not vested right of
any stockholder under Philippine Law to be voted as director of a corporation. It is alleged that petitioner,
as of May 6, 1978, has exercised, personally or thru two corporations owned or controlled by him, control
over the following shareholdings in San Miguel Corporation, vis.: (a) John Gokongwei, Jr. 6,325
shares; (b) Universal Robina Corporation 738,647 shares; (c) CFC Corporation 658,313 shares, or
a total of 1,403,285 shares. Since the outstanding capital stock of San Miguel Corporation, as of the
present date, is represented by 33,139,749 shares with a par value of P10.00, the total shares owned or
controlled by petitioner represents 4.2344% of the total outstanding capital stock of San Miguel
Corporation. It is also contended that petitioner is the president and substantial stockholder of Universal
Robina Corporation and CFC Corporation, both of which are allegedly controlled by petitioner and
members of his family. It is also claimed that both the Universal Robina Corporation and the CFC
Corporation are engaged in businesses directly and substantially competing with the alleged businesses
of San Miguel Corporation, and of corporations in which SMC has substantial investments.
ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S CORPORATIONS AND SAN MIGUEL
CORPORATION
According to respondent San Miguel Corporation, the areas of, competition are enumerated in its Board
the areas of competition are enumerated in its Board Resolution dated April 28, 1978, thus:
Product Line Estimated Market Share Total
1977 SMC Robina-CFC
Table Eggs 0.6% 10.0% 10.6%
Layer Pullets 33.0% 24.0% 57.0%
Dressed Chicken 35.0% 14.0% 49.0%
Poultry & Hog Feeds 40.0% 12.0% 52.0%
Ice Cream 70.0% 13.0% 83.0%
Instant Coffee 45.0% 40.0% 85.0%
Woven Fabrics 17.5% 9.1% 26.6%
Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC involved product
sales of over P400 million or more than 20% of the P2 billion total product sales of SMC. Significantly, the
combined market shares of SMC and CFC-Robina in layer pullets dressed chicken, poultry and hog feeds
ice cream, instant coffee and woven fabrics would result in a position of such dominance as to affect the
prevailing market factors.
It is further asserted that in 1977, the CFC-Robina group was in direct competition on product lines which,
for SMC, represented sales amounting to more than ?478 million. In addition, CFC-Robina was directly
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competing in the sale of coffee with Filipro, a subsidiary of SMC, which product line represented sales for
SMC amounting to more than P275 million. The CFC-Robina group (Robitex, excluding Litton Mills
recently acquired by petitioner) is purportedly also in direct competition with Ramie Textile, Inc., subsidiary
of SMC, in product sales amounting to more than P95 million. The areas of competition between SMC
and CFC-Robina in 1977 represented, therefore, for SMC, product sales of more than P849 million.
According to private respondents, at the Annual Stockholders' Meeting of March 18, 1976, 9,894
stockholders, in person or by proxy, owning 23,436,754 shares in SMC, or more than 90% of the total
outstanding shares of SMC, rejected petitioner's candidacy for the Board of Directors because they
"realized the grave dangers to the corporation in the event a competitor gets a board seat in SMC." On
September 18, 1978, the Board of Directors of SMC, by "virtue of powers delegated to it by the
stockholders," approved the amendment to ' he by-laws in question. At the meeting of February 10, 1977,
these amendments were confirmed and ratified by 5,716 shareholders owning 24,283,945 shares, or
more than 80% of the total outstanding shares. Only 12 shareholders, representing 7,005 shares,
opposed the confirmation and ratification. At the Annual Stockholders' Meeting of May 10, 1977, 11,349
shareholders, owning 27,257.014 shares, or more than 90% of the outstanding shares, rejected
petitioner's candidacy, while 946 stockholders, representing 1,648,801 shares voted for him. On the May
9, 1978 Annual Stockholders' Meeting, 12,480 shareholders, owning more than 30 million shares, or more
than 90% of the total outstanding shares. voted against petitioner.
AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS EXPRESSLY
CONFERRED BY LAW
Private respondents contend that the disputed amended by laws were adopted by the Board of Directors
of San Miguel Corporation a-, a measure of self-defense to protect the corporation from the clear and
present danger that the election of a business competitor to the Board may cause upon the corporation
and the other stockholders inseparable prejudice. Submitted for resolution, therefore, is the issue
whether or not respondent San Miguel Corporation could, as a measure of self- protection, disqualify a
competitor from nomination and election to its Board of Directors.
It is recognized by an authorities that 'every corporation has the inherent power to adopt by-laws 'for its
internal government, and to regulate the conduct and prescribe the rights and duties of its members
towards itself and among themselves in reference to the management of its affairs. 12 At common law, the
rule was "that the power to make and adopt by-laws was inherent in every corporation as one of its
necessary and inseparable legal incidents. And it is settled throughout the United States that in the
absence of positive legislative provisions limiting it, every private corporation has this inherent power as
one of its necessary and inseparable legal incidents, independent of any specific enabling provision in its
charter or in general law, such power of self-government being essential to enable the corporation to
accomplish the purposes of its creation. 13
In this jurisdiction, under section 21 of the Corporation Law, a corporation may prescribe in its by-laws
"the qualifications, duties and compensation of directors, officers and employees ... " This must
necessarily refer to a qualification in addition to that specified by section 30 of the Corporation Law, which
provides that "every director must own in his right at least one share of the capital stock of the stock
corporation of which he is a director ... " In Government v. El Hogar, 14 the Court sustained the validity of a
provision in the corporate by-law requiring that persons elected to the Board of Directors must be holders
of shares of the paid up value of P5,000.00, which shall be held as security for their action, on the ground
that section 21 of the Corporation Law expressly gives the power to the corporation to provide in its by-
laws for the qualifications of directors and is "highly prudent and in conformity with good practice. "
NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR
Any person "who buys stock in a corporation does so with the knowledge that its affairs are dominated by
a majority of the stockholders and that he impliedly contracts that the will of the majority shall govern in all
matters within the limits of the act of incorporation and lawfully enacted by-laws and not forbidden by law."
15
To this extent, therefore, the stockholder may be considered to have "parted with his personal right or
privilege to regulate the disposition of his property which he has invested in the capital stock of the
corporation, and surrendered it to the will of the majority of his fellow incorporators. ... It cannot therefore
be justly said that the contract, express or implied, between the corporation and the stockholders is
infringed ... by any act of the former which is authorized by a majority ... ." 16
Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of incorporation by
a vote or written assent of the stockholders representing at least two-thirds of the subscribed capital stock
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of the corporation If the amendment changes, diminishes or restricts the rights of the existing
shareholders then the disenting minority has only one right, viz.: "to object thereto in writing and demand
payment for his share." Under section 22 of the same law, the owners of the majority of the subscribed
capital stock may amend or repeal any by-law or adopt new by-laws. It cannot be said, therefore, that
petitioner has a vested right to be elected director, in the face of the fact that the law at the time such right
as stockholder was acquired contained the prescription that the corporate charter and the by-law shall be
subject to amendment, alteration and modification. 17
It being settled that the corporation has the power to provide for the qualifications of its directors, the next
question that must be considered is whether the disqualification of a competitor from being elected to the
Board of Directors is a reasonable exercise of corporate authority.
A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS
SHAREHOLDERS
Although in the strict and technical sense, directors of a private corporation are not regarded as trustees,
there cannot be any doubt that their character is that of a fiduciary insofar as the corporation and the
stockholders as a body are concerned. As agents entrusted with the management of the corporation for
the collective benefit of the stockholders, "they occupy a fiduciary relation, and in this sense the relation is
one of trust." 18 "The ordinary trust relationship of directors of a corporation and stockholders", according
to Ashaman v. Miller, 19 "is not a matter of statutory or technical law. It springs from the fact that directors
have the control and guidance of corporate affairs and property and hence of the property interests of the
stockholders. Equity recognizes that stockholders are the proprietors of the corporate interests and are
ultimately the only beneficiaries thereof * * *.
20
Justice Douglas, in Pepper v. Litton, emphatically restated the standard of fiduciary obligation of the
directors of corporations, thus:
A director is a fiduciary. ... Their powers are powers in trust. ... He who is in such fiduciary
position cannot serve himself first and his cestuis second. ... He cannot manipulate the
affairs of his corporation to their detriment and in disregard of the standards of common
decency. He cannot by the intervention of a corporate entity violate the ancient precept
against serving two masters ... He cannot utilize his inside information and strategic
position for his own preferment. He cannot violate rules of fair play by doing indirectly
through the corporation what he could not do so directly. He cannot violate rules of fair
play by doing indirectly though the corporation what he could not do so directly. He
cannot use his power for his personal advantage and to the detriment of the stockholders
and creditors no matter how absolute in terms that power may be and no matter how
meticulous he is to satisfy technical requirements. For that power is at all times subject to
the equitable limitation that it may not be exercised for the aggrandizement, preference or
advantage of the fiduciary to the exclusion or detriment of the cestuis.
21
And in Cross v. West Virginia Cent, & P. R. R. Co., it was said:
... A person cannot serve two hostile and adverse master, without detriment to one of
them. A judge cannot be impartial if personally interested in the cause. No more can a
director. Human nature is too weak -for this. Take whatever statute provision you please
giving power to stockholders to choose directors, and in none will you find any express
prohibition against a discretion to select directors having the company's interest at heart,
and it would simply be going far to deny by mere implication the existence of such a
salutary power
... If the by-law is to be held reasonable in disqualifying a stockholder in a competing company from being
a director, the same reasoning would apply to disqualify the wife and immediate member of the family of
such stockholder, on account of the supposed interest of the wife in her husband's affairs, and his
suppose influence over her. It is perhaps true that such stockholders ought not to be condemned as
selfish and dangerous to the best interest of the corporation until tried and tested. So it is also true that we
cannot condemn as selfish and dangerous and unreasonable the action of the board in passing the by-
law. The strife over the matter of control in this corporation as in many others is perhaps carried on not
altogether in the spirit of brotherly love and affection. The only test that we can apply is as to whether or
not the action of the Board is authorized and sanctioned by law. ... . 22
These principles have been applied by this Court in previous cases. 23
10 | P a g e C O R P O R AT I O N C A S E S _ 2 n d S E T
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AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A STOCKHOLDER
INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO DIRECTOR IN A CORPORATION WHOSE BUSINESS
IS IN COMPETITION WITH THAT OF THE OTHER CORPORATION, HAS BEEN SUSTAINED AS VALID
It is a settled state law in the United States, according to Fletcher, that corporations have the power to
make by-laws declaring a person employed in the service of a rival company to be ineligible for the
corporation's Board of Directors. ... (A)n amendment which renders ineligible, or if elected, subjects to
removal, a director if he be also a director in a corporation whose business is in competition with or is
antagonistic to the other corporation is valid." 24 This is based upon the principle that where the director is
so employed in the service of a rival company, he cannot serve both, but must betray one or the other.
Such an amendment "advances the benefit of the corporation and is good." An exception exists in New
Jersey, where the Supreme Court held that the Corporation Law in New Jersey prescribed the only
qualification, and therefore the corporation was not empowered to add additional qualifications. 25 This is
the exact opposite of the situation in the Philippines because as stated heretofore, section 21 of the
Corporation Law expressly provides that a corporation may make by-laws for the qualifications of
directors. Thus, it has been held that an officer of a corporation cannot engage in a business in direct
competition with that of the corporation where he is a director by utilizing information he has received as
such officer, under "the established law that a director or officer of a corporation may not enter into a
competing enterprise which cripples or injures the business of the corporation of which he is an officer or
director. 26
It is also well established that corporate officers "are not permitted to use their position of trust and
confidence to further their private interests." 27 In a case where directors of a corporation cancelled a
contract of the corporation for exclusive sale of a foreign firm's products, and after establishing a rival
business, the directors entered into a new contract themselves with the foreign firm for exclusive sale of
its products, the court held that equity would regard the new contract as an offshoot of the old contract
and, therefore, for the benefit of the corporation, as a "faultless fiduciary may not reap the fruits of his
misconduct to the exclusion of his principal. 28
The doctrine of "corporate opportunity" 29 is precisely a recognition by the courts that the fiduciary
standards could not be upheld where the fiduciary was acting for two entities with competing interests.
This doctrine rests fundamentally on the unfairness, in particular circumstances, of an officer or director
taking advantage of an opportunity for his own personal profit when the interest of the corporation justly
calls for protection. 30
It is not denied that a member of the Board of Directors of the San Miguel Corporation has access to
sensitive and highly confidential information, such as: (a)
marketing strategies
and pricing structure; (b) budget for expansion and diversification; (c) research and development; and (d)
sources of funding, availability of personnel, proposals of mergers or tie-ups with other firms.
It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel Corporation,
who is also the officer or owner of a competing corporation, from taking advantage of the information
which he acquires as director to promote his individual or corporate interests to the prejudice of San
Miguel Corporation and its stockholders, that the questioned amendment of the by-laws was made.
Certainly, where two corporations are competitive in a substantial sense, it would seem improbable, if not
impossible, for the director, if he were to discharge effectively his duty, to satisfy his loyalty to both
corporations and place the performance of his corporation duties above his personal concerns.
Thus, in McKee & Co. v. First National Bank of San Diego, supra the court sustained as valid and
reasonable an amendment to the by-laws of a bank, requiring that its directors should not be directors,
officers, employees, agents, nominees or attorneys of any other banking corporation, affiliate or
subsidiary thereof. Chief Judge Parker, in McKee, explained the reasons of the court, thus:
... A bank director has access to a great deal of information concerning the business and
plans of a bank which would likely be injurious to the bank if known to another bank, and
it was reasonable and prudent to enlarge this minimum disqualification to include any
director, officer, employee, agent, nominee, or attorney of any other bank in California.
The Ashkins case, supra, specifically recognizes protection against rivals and others who
might acquire information which might be used against the interests of the corporation as
a legitimate object of by-law protection. With respect to attorneys or persons associated
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with a firm which is attorney for another bank, in addition to the direct conflict or potential
conflict of interest, there is also the danger of inadvertent leakage of confidential
information through casual office discussions or accessibility of files. Defendant's
directors determined that its welfare was best protected if this opportunity for conflicting
loyalties and potential misuse and leakage of confidential information was foreclosed.
In McKee the Court further listed qualificational by-laws upheld by the courts, as follows:
(1) A director shall not be directly or indirectly interested as a stockholder in any other
firm, company, or association which competes with the subject corporation.
(2) A director shall not be the immediate member of the family of any stockholder in any
other firm, company, or association which competes with the subject corporation,
(3) A director shall not be an officer, agent, employee, attorney, or trustee in any other
firm, company, or association which compete with the subject corporation.
(4) A director shall be of good moral character as an essential qualification to holding
office.
(5) No person who is an attorney against the corporation in a law suit is eligible for
service on the board. (At p. 7.)
These are not based on theorical abstractions but on human experience that a person cannot serve
two hostile masters without detriment to one of them.
The offer and assurance of petitioner that to avoid any possibility of his taking unfair advantage of his
position as director of San Miguel Corporation, he would absent himself from meetings at which
confidential matters would be discussed, would not detract from the validity and reasonableness of the
by-laws here involved. Apart from the impractical results that would ensue from such arrangement, it
would be inconsistent with petitioner's primary motive in running for board membership which is to
protect his investments in San Miguel Corporation. More important, such a proposed norm of conduct
would be against all accepted principles underlying a director's duty of fidelity to the corporation, for the
policy of the law is to encourage and enforce responsible corporate management. As explained by Oleck:
31
"The law win not tolerate the passive attitude of directors ... without active and conscientious
participation in the managerial functions of the company. As directors, it is their duty to control and
supervise the day to day business activities of the company or to promulgate definite policies and rules of
guidance with a vigilant eye toward seeing to it that these policies are carried out. It is only then that
directors may be said to have fulfilled their duty of fealty to the corporation."
Sound principles of corporate management counsel against sharing sensitive information with a director
whose fiduciary duty of loyalty may well require that he disclose this information to a competitive arrival.
These dangers are enhanced considerably where the common director such as the petitioner is a
controlling stockholder of two of the competing corporations. It would seem manifest that in such
situations, the director has an economic incentive to appropriate for the benefit of his own corporation the
corporate plans and policies of the corporation where he sits as director.
Indeed, access by a competitor to confidential information regarding marketing strategies and pricing
policies of San Miguel Corporation would subject the latter to a competitive disadvantage and unjustly
enrich the competitor, for advance knowledge by the competitor of the strategies for the development of
existing or new markets of existing or new products could enable said competitor to utilize such
knowledge to his advantage. 32
There is another important consideration in determining whether or not the amended by-laws are
reasonable. The Constitution and the law prohibit combinations in restraint of trade or unfair competition.
Thus, section 2 of Article XIV of the Constitution provides: "The State shall regulate or prohibit private
monopolies when the public interest so requires. No combinations in restraint of trade or unfair
competition shall be snowed."
Article 186 of the Revised Penal Code also provides:
Art. 186. Monopolies and combinations in restraint of trade. The penalty of prision
correccional in its minimum period or a fine ranging from two hundred to six thousand
pesos, or both, shall be imposed upon:
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1. Any person who shall enter into any contract or agreement or shall take part in any
conspiracy or combination in the form of a trust or otherwise, in restraint of trade or
commerce or to prevent by artificial means free competition in the market.
2. Any person who shag monopolize any merchandise or object of trade or commerce, or
shall combine with any other person or persons to monopolize said merchandise or
object in order to alter the price thereof by spreading false rumors or making use of any
other artifice to restrain free competition in the market.
3. Any person who, being a manufacturer, producer, or processor of any merchandise or
object of commerce or an importer of any merchandise or object of commerce from any
foreign country, either as principal or agent, wholesale or retailer, shall combine, conspire
or agree in any manner with any person likewise engaged in the manufacture,
production, processing, assembling or importation of such merchandise or object of
commerce or with any other persons not so similarly engaged for the purpose of making
transactions prejudicial to lawful commerce, or of increasing the market price in any part
of the Philippines, or any such merchandise or object of commerce manufactured,
produced, processed, assembled in or imported into the Philippines, or of any article in
the manufacture of which such manufactured, produced, processed, or imported
merchandise or object of commerce is used.
There are other legislation in this jurisdiction, which prohibit monopolies and combinations in restraint of
trade. 33
Basically, these anti-trust laws or laws against monopolies or combinations in restraint of trade are aimed
at raising levels of competition by improving the consumers' effectiveness as the final arbiter in free
markets. These laws are designed to preserve free and unfettered competition as the rule of trade. "It
rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of
our economic resources, the lowest prices and the highest quality ... ." 34 they operate to forestall
concentration of economic power. 35 The law against monopolies and combinations in restraint of trade is
aimed at contracts and combinations that, by reason of the inherent nature of the contemplated acts,
prejudice the public interest by unduly restraining competition or unduly obstructing the course of trade. 36
The terms "monopoly", "combination in restraint of trade" and "unfair competition" appear to have a well
defined meaning in other jurisdictions. A "monopoly" embraces any combination the tendency of which is
to prevent competition in the broad and general sense, or to control prices to the detriment of the public. 37
In short, it is the concentration of business in the hands of a few. The material consideration in
determining its existence is not that prices are raised and competition actually excluded, but that power
exists to raise prices or exclude competition when desired. 38 Further, it must be considered that the Idea
of monopoly is now understood to include a condition produced by the mere act of individuals. Its
dominant thought is the notion of exclusiveness or unity, or the suppression of competition by the
qualification of interest or management, or it may be thru agreement and concert of action. It is, in brief,
unified tactics with regard to prices. 39
From the foregoing definitions, it is apparent that the contentions of petitioner are not in accord with
reality. The election of petitioner to the Board of respondent Corporation can bring about an illegal
situation. This is because an express agreement is not necessary for the existence of a combination or
conspiracy in restraint of trade. 40 It is enough that a concert of action is contemplated and that the
defendants conformed to the arrangements, 41 and what is to be considered is what the parties actually
did and not the words they used. For instance, the Clayton Act prohibits a person from serving at the
same time as a director in any two or more corporations, if such corporations are, by virtue of their
business and location of operation, competitors so that the elimination of competition between them
would constitute violation of any provision of the anti-trust laws. 42 There is here a statutory recognition of
the anti-competitive dangers which may arise when an individual simultaneously acts as a director of two
or more competing corporations. A common director of two or more competing corporations would have
access to confidential sales, pricing and marketing information and would be in a position to coordinate
policies or to aid one corporation at the expense of another, thereby stifling competition. This situation has
been aptly explained by Travers, thus:
The argument for prohibiting competing corporations from sharing even one director is
that the interlock permits the coordination of policies between nominally independent
firms to an extent that competition between them may be completely eliminated. Indeed,
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if a director, for example, is to be faithful to both corporations, some accommodation must
result. Suppose X is a director of both Corporation A and Corporation B. X could hardly
vote for a policy by A that would injure B without violating his duty of loyalty to B at the
same time he could hardly abstain from voting without depriving A of his best judgment. If
the firms really do compete in the sense of vying for economic advantage at the
expense of the other there can hardly be any reason for an interlock between
competitors other than the suppression of competition. 43 (Emphasis supplied.)
According to the Report of the House Judiciary Committee of the U. S. Congress on section 9 of the
Clayton Act, it was established that: "By means of the interlocking directorates one man or group of men
have been able to dominate and control a great number of corporations ... to the detriment of the small
ones dependent upon them and to the injury of the public. 44
Shared information on cost accounting may lead to price fixing. Certainly, shared information on
production, orders, shipments, capacity and inventories may lead to control of production for the purpose
of controlling prices.
Obviously, if a competitor has access to the pricing policy and cost conditions of the products of San
Miguel Corporation, the essence of competition in a free market for the purpose of serving the lowest
priced goods to the consuming public would be frustrated, The competitor could so manipulate the prices
of his products or vary its marketing strategies by region or by brand in order to get the most out of the
consumers. Where the two competing firms control a substantial segment of the market this could lead to
collusion and combination in restraint of trade. Reason and experience point to the inevitable conclusion
that the inherent tendency of interlocking directorates between companies that are related to each other
as competitors is to blunt the edge of rivalry between the corporations, to seek out ways of compromising
opposing interests, and thus eliminate competition. As respondent SMC aptly observes, knowledge by
CFC-Robina of SMC's costs in various industries and regions in the country win enable the former to
practice price discrimination. CFC-Robina can segment the entire consuming population by geographical
areas or income groups and change varying prices in order to maximize profits from every market
segment. CFC-Robina could determine the most profitable volume at which it could produce for every
product line in which it competes with SMC. Access to SMC pricing policy by CFC-Robina would in effect
destroy free competition and deprive the consuming public of opportunity to buy goods of the highest
possible quality at the lowest prices.
Finally, considering that both Robina and SMC are, to a certain extent, engaged in agriculture, then the
election of petitioner to the Board of SMC may constitute a violation of the prohibition contained in section
13(5) of the Corporation Law. Said section provides in part that "any stockholder of more than one
corporation organized for the purpose of engaging in agriculture may hold his stock in such corporations
solely for investment and not for the purpose of bringing about or attempting to bring about a combination
to exercise control of incorporations ... ."
Neither are We persuaded by the claim that the by-law was Intended to prevent the candidacy of
petitioner for election to the Board. If the by-law were to be applied in the case of one stockholder but
waived in the case of another, then it could be reasonably claimed that the by-law was being applied in a
discriminatory manner. However, the by law, by its terms, applies to all stockholders. The equal protection
clause of the Constitution requires only that the by-law operate equally upon all persons of a class.
Besides, before petitioner can be declared ineligible to run for director, there must be hearing and
evidence must be submitted to bring his case within the ambit of the disqualification. Sound principles of
public policy and management, therefore, support the view that a by-law which disqualifies a competition
from election to the Board of Directors of another corporation is valid and reasonable.
In the absence of any legal prohibition or overriding public policy, wide latitude may be accorded to the
corporation in adopting measures to protect legitimate corporation interests. Thus, "where the
reasonableness of a by-law is a mere matter of judgment, and upon which reasonable minds must
necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment of
those who are authorized to make by-laws and who have expressed their authority. 45
Although it is asserted that the amended by-laws confer on the present Board powers to perpetua
themselves in power such fears appear to be misplaced. This power, but is very nature, is subject to
certain well established limitations. One of these is inherent in the very convert and definition of the terms
"competition" and "competitor". "Competition" implies a struggle for advantage between two or more
forces, each possessing, in substantially similar if not Identical degree, certain characteristics essential to
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the business sought. It means an independent endeavor of two or more persons to obtain the business
patronage of a third by offering more advantageous terms as an inducement to secure trade. 46 The test
must be whether the business does in fact compete, not whether it is capable of an indirect and highly
unsubstantial duplication of an isolated or non-characteristics activity. 47 It is, therefore, obvious that not
every person or entity engaged in business of the same kind is a competitor. Such factors as quantum
and place of business, Identity of products and area of competition should be taken into consideration. It
is, therefore, necessary to show that petitioner's business covers a substantial portion of the same
markets for similar products to the extent of not less than 10% of respondent corporation's market for
competing products. While We here sustain the validity of the amended by-laws, it does not follow as a
necessary consequence that petitioner is ipso facto disqualified. Consonant with the requirement of due
process, there must be due hearing at which the petitioner must be given the fullest opportunity to show
that he is not covered by the disqualification. As trustees of the corporation and of the stockholders, it is
the responsibility of directors to act with fairness to the stockholders. 48 Pursuant to this obligation and to
remove any suspicion that this power may be utilized by the incumbent members of the Board to
perpetuate themselves in power, any decision of the Board to disqualify a candidate for the Board of
Directors should be reviewed by the Securities behind Exchange Commission en banc and its decision
shall be final unless reversed by this Court on certiorari. 49 Indeed, it is a settled principle that where the
action of a Board of Directors is an abuse of discretion, or forbidden by statute, or is against public policy,
or is ultra vires, or is a fraud upon minority stockholders or creditors, or will result in waste, dissipation or
misapplication of the corporation assets, a court of equity has the power to grant appropriate relief. 50
III
Whether or not respondent SEC gravely abused its discretion in denying petitioner's request for an
examination of the records of San Miguel International Inc., a fully owned subsidiary of San Miguel
Corporation
Respondent San Miguel Corporation stated in its memorandum that petitioner's claim that he was denied
inspection rights as stockholder of SMC "was made in the teeth of undisputed facts that, over a specific
period, petitioner had been furnished numerous documents and information," to wit: (1) a complete list of
stockholders and their stockholdings; (2) a complete list of proxies given by the stockholders for use at
the annual stockholders' meeting of May 18, 1975; (3) a copy of the minutes of the stockholders' meeting
of March 18,1976; (4) a breakdown of SMC's P186.6 million investment in associated companies and
other companies as of December 31, 1975; (5) a listing of the salaries, allowances, bonuses and other
compensation or remunerations received by the directors and corporate officers of SMC; (6) a copy of the
US $100 million Euro-Dollar Loan Agreement of SMC; and (7) copies of the minutes of all meetings of the
Board of Directors from January 1975 to May 1976, with deletions of sensitive data, which deletions were
not objected to by petitioner.
Further, it was averred that upon request, petitioner was informed in writing on September 18, 1976; (1)
that SMC's foreign investments are handled by San Miguel International, Inc., incorporated in Bermuda
and wholly owned by SMC; this was SMC's first venture abroad, having started in 1948 with an initial
outlay of ?500,000.00, augmented by a loan of Hongkong $6 million from a foreign bank under the
personal guaranty of SMC's former President, the late Col. Andres Soriano; (2) that as of December 31,
1975, the estimated value of SMI would amount to almost P400 million (3) that the total cash dividends
received by SMC from SMI since 1953 has amount to US $ 9.4 million; and (4) that from 1972-1975, SMI
did not declare cash or stock dividends, all earnings having been used in line with a program for the
setting up of breweries by SMI
These averments are supported by the affidavit of the Corporate Secretary, enclosing photocopies of the
afore-mentioned documents. 51
Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of all business
transactions of the corporation and minutes of any meeting shall be open to the inspection of any director,
member or stockholder of the corporation at reasonable hours."
The stockholder's right of inspection of the corporation's books and records is based upon their ownership
of the assets and property of the corporation. It is, therefore, an incident of ownership of the corporate
property, whether this ownership or interest be termed an equitable ownership, a beneficial ownership, or
a ownership. 52 This right is predicated upon the necessity of self-protection. It is generally held by
majority of the courts that where the right is granted by statute to the stockholder, it is given to him as
such and must be exercised by him with respect to his interest as a stockholder and for some purpose
BOD
germane thereto or in the interest of the corporation. 53 In other words, the inspection has to be germane
to the petitioner's interest as a stockholder, and has to be proper and lawful in character and not inimical
to the interest of the corporation. 54 In Grey v. Insular Lumber, 55 this Court held that "the right to examine
the books of the corporation must be exercised in good faith, for specific and honest purpose, and not to
gratify curiosity, or for specific and honest purpose, and not to gratify curiosity, or for speculative or
vexatious purposes. The weight of judicial opinion appears to be, that on application for mandamus to
enforce the right, it is proper for the court to inquire into and consider the stockholder's good faith and his
purpose and motives in seeking inspection. 56 Thus, it was held that "the right given by statute is not
absolute and may be refused when the information is not sought in good faith or is used to the detriment
of the corporation." 57 But the "impropriety of purpose such as will defeat enforcement must be set up the
corporation defensively if the Court is to take cognizance of it as a qualification. In other words, the
specific provisions take from the stockholder the burden of showing propriety of purpose and place upon
the corporation the burden of showing impropriety of purpose or motive. 58 It appears to be the general
rule that stockholders are entitled to full information as to the management of the corporation and the
manner of expenditure of its funds, and to inspection to obtain such information, especially where it
appears that the company is being mismanaged or that it is being managed for the personal benefit of
officers or directors or certain of the stockholders to the exclusion of others." 59
While the right of a stockholder to examine the books and records of a corporation for a lawful purpose is
a matter of law, the right of such stockholder to examine the books and records of a wholly-owned
subsidiary of the corporation in which he is a stockholder is a different thing.
Some state courts recognize the right under certain conditions, while others do not. Thus, it has been held
that where a corporation owns approximately no property except the shares of stock of subsidiary
corporations which are merely agents or instrumentalities of the holding company, the legal fiction of
distinct corporate entities may be disregarded and the books, papers and documents of all the
corporations may be required to be produced for examination, 60 and that a writ of mandamus, may be
granted, as the records of the subsidiary were, to all incontents and purposes, the records of the parent
even though subsidiary was not named as a party. 61 mandamus was likewise held proper to inspect both
the subsidiary's and the parent corporation's books upon proof of sufficient control or dominion by the
parent showing the relation of principal or agent or something similar thereto. 62
On the other hand, mandamus at the suit of a stockholder was refused where the subsidiary corporation
is a separate and distinct corporation domiciled and with its books and records in another jurisdiction, and
is not legally subject to the control of the parent company, although it owned a vast majority of the stock of
the subsidiary. 63 Likewise, inspection of the books of an allied corporation by stockholder of the parent
company which owns all the stock of the subsidiary has been refused on the ground that the stockholder
was not within the class of "persons having an interest." 64
In the Nash case, 65 The Supreme Court of New York held that the contractual right of former stockholders
to inspect books and records of the corporation included the right to inspect corporation's subsidiaries'
books and records which were in corporation's possession and control in its office in New York."
In the Bailey case, 66 stockholders of a corporation were held entitled to inspect the records of a controlled
subsidiary corporation which used the same offices and had Identical officers and directors.
In his "Urgent Motion for Production and Inspection of Documents" before respondent SEC, petitioner
contended that respondent corporation "had been attempting to suppress information for the
stockholders" and that petitioner, "as stockholder of respondent corporation, is entitled to copies of some
documents which for some reason or another, respondent corporation is very reluctant in revealing to the
petitioner notwithstanding the fact that no harm would be caused thereby to the corporation." 67 There is
no question that stockholders are entitled to inspect the books and records of a corporation in order to
investigate the conduct of the management, determine the financial condition of the corporation, and
generally take an account of the stewardship of the officers and directors. 68
In the case at bar, considering that the foreign subsidiary is wholly owned by respondent San Miguel
Corporation and, therefore, under its control, it would be more in accord with equity, good faith and fair
dealing to construe the statutory right of petitioner as stockholder to inspect the books and records of the
corporation as extending to books and records of such wholly subsidiary which are in respondent
corporation's possession and control.
IV
BOD
Whether or not respondent SEC gravely abused its discretion in allowing the stockholders of respondent
corporation to ratify the investment of corporate funds in a foreign corporation
Petitioner reiterates his contention in SEC Case No. 1423 that respondent corporation invested corporate
funds in SMI without prior authority of the stockholders, thus violating section 17-1/2 of the Corporation
Law, and alleges that respondent SEC should have investigated the charge, being a statutory offense,
instead of allowing ratification of the investment by the stockholders.
Respondent SEC's position is that submission of the investment to the stockholders for ratification is a
sound corporate practice and should not be thwarted but encouraged.
Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other corporation or
business or for any purpose other than the main purpose for which it was organized" provided that its
Board of Directors has been so authorized by the affirmative vote of stockholders holding shares entitling
them to exercise at least two-thirds of the voting power. If the investment is made in pursuance of the
corporate purpose, it does not need the approval of the stockholders. It is only when the purchase of
shares is done solely for investment and not to accomplish the purpose of its incorporation that the vote of
approval of the stockholders holding shares entitling them to exercise at least two-thirds of the voting
power is necessary. 69
As stated by respondent corporation, the purchase of beer manufacturing facilities by SMC was an
investment in the same business stated as its main purpose in its Articles of Incorporation, which is to
manufacture and market beer. It appears that the original investment was made in 1947-1948, when
SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong (Hongkong Brewery &
Distillery, Ltd.) for the manufacture and marketing of San Miguel beer thereat. Restructuring of the
investment was made in 1970-1971 thru the organization of SMI in Bermuda as a tax free reorganization.
Under these circumstances, the ruling in De la Rama v. Manao Sugar Central Co., Inc., supra, appears
relevant. In said case, one of the issues was the legality of an investment made by Manao Sugar Central
Co., Inc., without prior resolution approved by the affirmative vote of 2/3 of the stockholders' voting power,
in the Philippine Fiber Processing Co., Inc., a company engaged in the manufacture of sugar bags. The
lower court said that "there is more logic in the stand that if the investment is made in a corporation
whose business is important to the investing corporation and would aid it in its purpose, to require
authority of the stockholders would be to unduly curtail the power of the Board of Directors." This Court
affirmed the ruling of the court a quo on the matter and, quoting Prof. Sulpicio S. Guevara, said:
"j. Power to acquire or dispose of shares or securities. A private corporation, in order to
accomplish is purpose as stated in its articles of incorporation, and subject to the
limitations imposed by the Corporation Law, has the power to acquire, hold, mortgage,
pledge or dispose of shares, bonds, securities, and other evidence of indebtedness of
any domestic or foreign corporation. Such an act, if done in pursuance of the corporate
purpose, does not need the approval of stockholders; but when the purchase of shares of
another corporation is done solely for investment and not to accomplish the purpose of
its incorporation, the vote of approval of the stockholders is necessary. In any case, the
purchase of such shares or securities must be subject to the limitations established by
the Corporations law; namely, (a) that no agricultural or mining corporation shall be
restricted to own not more than 15% of the voting stock of nay agricultural or mining
corporation; and (c) that such holdings shall be solely for investment and not for the
purpose of bringing about a monopoly in any line of commerce of combination in restraint
of trade." The Philippine Corporation Law by Sulpicio S. Guevara, 1967 Ed., p. 89)
(Emphasis supplied.)
40. Power to invest corporate funds. A private corporation has the power to invest its
corporate funds "in any other corporation or business, or for any purpose other than the
main purpose for which it was organized, provide that 'its board of directors has been so
authorized in a resolution by the affirmative vote of stockholders holding shares in the
corporation entitling them to exercise at least two-thirds of the voting power on such a
propose at a stockholders' meeting called for that purpose,' and provided further, that no
agricultural or mining corporation shall in anywise be interested in any other agricultural
or mining corporation. When the investment is necessary to accomplish its purpose or
purposes as stated in its articles of incorporation the approval of the stockholders is not
necessary."" (Id., p. 108) (Emphasis ours.) (pp. 258-259).
BOD
Assuming arguendo that the Board of Directors of SMC had no authority to make the assailed investment,
there is no question that a corporation, like an individual, may ratify and thereby render binding upon it the
originally unauthorized acts of its officers or other agents. 70 This is true because the questioned
investment is neither contrary to law, morals, public order or public policy. It is a corporate transaction or
contract which is within the corporate powers, but which is defective from a supported failure to observe in
its execution the. requirement of the law that the investment must be authorized by the affirmative vote of
the stockholders holding two-thirds of the voting power. This requirement is for the benefit of the
stockholders. The stockholders for whose benefit the requirement was enacted may, therefore, ratify the
investment and its ratification by said stockholders obliterates any defect which it may have had at the
outset. "Mere ultra vires acts", said this Court in Pirovano, 71 "or those which are not illegal and void ab
initio, but are not merely within the scope of the articles of incorporation, are merely voidable and may
become binding and enforceable when ratified by the stockholders.
Besides, the investment was for the purchase of beer manufacturing and marketing facilities which is
apparently relevant to the corporate purpose. The mere fact that respondent corporation submitted the
assailed investment to the stockholders for ratification at the annual meeting of May 10, 1977 cannot be
construed as an admission that respondent corporation had committed an ultra vires act, considering the
common practice of corporations of periodically submitting for the gratification of their stockholders the
acts of their directors, officers and managers.
WHEREFORE, judgment is hereby rendered as follows:
The Court voted unanimously to grant the petition insofar as it prays that petitioner be allowed to examine
the books and records of San Miguel International, Inc., as specified by him.
On the matter of the validity of the amended by-laws of respondent San Miguel Corporation, six (6)
Justices, namely, Justices Barredo, Makasiar, Antonio, Santos, Abad Santos and De Castro, voted to
sustain the validity per se of the amended by-laws in question and to dismiss the petition without
prejudice to the question of the actual disqualification of petitioner John Gokongwei, Jr. to run and if
elected to sit as director of respondent San Miguel Corporation being decided, after a new and proper
hearing by the Board of Directors of said corporation, whose decision shall be appealable to the
respondent Securities and Exchange Commission deliberating and acting en banc and ultimately to this
Court. Unless disqualified in the manner herein provided, the prohibition in the afore-mentioned amended
by-laws shall not apply to petitioner.
The afore-mentioned six (6) Justices, together with Justice Fernando, voted to declare the issue on the
validity of the foreign investment of respondent corporation as moot.
Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-laws, pending hearing
by this Court on the applicability of section 13(5) of the Corporation Law to petitioner.
Justice Fernando reserved his vote on the validity of subject amendment to the by-laws but otherwise
concurs in the result.
Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez and Guerrero filed a separate
opinion, wherein they voted against the validity of the questioned amended bylaws and that this question
should properly be resolved first by the SEC as the agency of primary jurisdiction. They concur in the
result that petitioner may be allowed to run for and sit as director of respondent SMC in the scheduled
May 6, 1979 election and subsequent elections until disqualified after proper hearing by the respondent's
Board of Directors and petitioner's disqualification shall have been sustained by respondent SEC en banc
and ultimately by final judgment of this Court.
In resume, subject to the qualifications aforestated judgment is hereby rendered GRANTING the petition
by allowing petitioner to examine the books and records of San Miguel International, Inc. as specified in
the petition. The petition, insofar as it assails the validity of the amended by- laws and the ratification of
the foreign investment of respondent corporation, for lack of necessary votes, is hereby DISMISSED. No
costs. Makasiar, Santos Abad Santos and De Castro, JJ., concur. Aquino, and Melencio Herrera JJ., took
no part.
BOD

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