097 Gokongwei, Jr. v.

SEC/ Andres & Jose Soriano/ Enrique Zobel/ Miguel Ortigas/ Antonio Prieto/ SanMig Corp, et. al April 11, 1979, GR No. L-45911 TOPIC: Control and Management; Who Exercises Corporate Powers; Stockholders or Members PONTENTE: Antonio, J.,

AUTHOR: Keith Meridores IMHO, this is a very important case. There are several issues all CORPLAW related. Jist: Gokongwei (Universal Robina Corp) as a stockholder of SanMig is throwing a fit because of the acts of the BoD in amending the by-laws resulting in his ineligibility to be elected as a BoD. (The amendment: director from a rival corp. cannot sit as a director in SMC.) Law in effect was Act 1459 (the old corporation law) Counsels for the big-time respondent are all big-time law firms. (ACCRA, Siguion Reyna, Balgos Law, etc.)- d ka pa manalo ewan ko nalang.

FACTS : Prelude to the facts surrounding the case: 1. 2 SEC cases were filed (SEC Case 1375 and SEC Case 1423) 2. Case 1375 is what will be discussed in this digest 3. Case 1423 concerns SMC investing in a foreign corporation and Gokongwei contends that its not in accordance with SMCs primary purpose clause (note: Case 1423 will not be discussed in this digest) SEC Case 1375: 1. Gokongwei is a shareholder of San Miguel Corp. 2. On Oct. of 1976, he filed with the SEC a declaration of nullity of its amended by laws, plus damages, and a prayer for preliminary injunction against the majority of the board of directors. 3. Gokongwei assigned several causes of action all of which stemmed from the act of the board in amending the by-law. - 1st cause of action: Gokongwei alleged that board had no authority; he was assailing the authority granted to the BoD through a resolution by the stockholders in 1961.He contends that the 1961 resolution is no longer applicable because the outstanding capital stock back then was only P70,139,740, and at the time of the amendment in 1976, the outstanding and paid up shares totaled P301,270,430 (presumably, there were more stockholder during the time of the amendment. i.e. new stockholders werent able to give their consent or say in the resolution granting the BoD authority) - 2nd cause of action: authority granted in 1961 was already exercised in 1962-63; authority now ceased to exist - 3rd cause of action: membership of BoD now is different from the time when the authority was given in 1961. (its like saying authority was given to the old BoD) - 4th cause of action: Gokongwei had all the qualifications of being elected to the BoD; and that he had acquired vested rights because he was already a stockholder before the amending of the by-laws - Additional causes: corporations have no inherent power to disqualify a stockholder from being elected as a director; thus, the BoDs acts were ultra vires. 4. A series of motions were filed by both parties 5. Gokongwei filed before the SC this petition for Certiorari, Mandamus, and Injunction assailing the SECs decision. ISSUE: 1. Whether or not the corporation has the power to provide for the qualifications of its directors? 2. Whether or not the disqualification of a competitor from being elected to the Board of Directors is a reasonable exercise of corporate authority? HELD: 1 and 2:YES.

RATIO: Issue 1: 1. Section 21 of the Corporation Law (old corpo law), a corporation may prescribe in its by-laws "the qualifications, duties and compensation of directors, officers and employees." 2. "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.'" 3. 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." 4. Pursuant to section 18 of the Corporation Law (old corpo 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 of the corporation. 5. 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. 6. It cannot be said, therefore, that Gokongwei has a vested right to be elected director Issue 2: 1. 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." 2. Directors have the control and guidance of corporate affairs and property and hence of the property interests of the stockholders. Stockholders are the proprietors of the corporate interests and are ultimately the only beneficiaries thereof." A director is a fiduciary. Their powers are powers in trust. 3. He cannot manipulate the affairs of his corporation to their detriment and in disregard of the standards of common decency. 4. 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. 5. 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. That power is at all times subject to the equitable limitation. 6. The doctrine of "corporate opportunity" 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. (i.e. Gokongwei cannot act as member of the BoD of 2 competing corporations. Yung kanya URC, tapos direct competitor is SMC, both of which hes a board member. 7. Board of Directors of the San Miguel Corporation has access to sensitive and highly confidential information such as marketing, budgets, expansion and diversification plant, R&D, funding, personnel, etc. 8. 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 a director. 9. Gokongwei obviously cannot discharge his functions as a BoD of SMC properly while attending to his own interests. The issue of loyalty comes in and it would be detrimental to SMC. 10. Gokongweis offer that to avoid any possibility of his taking unfair advantage of his position as director, he would absent himself from meetings at which confidential matters would be discussed. This would be impractical since desiring to be a board member precisely calls for the duty of a board member to attend to these meetings and advance the interests of the corporation. 11. The amendment also has a constitutional and statutory basis: - Constitution: 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.(Art. 14, sec. 2) - RPC: Monopolies and combinations in restraint of trade. (Art. 186) (i.e. Gokongwei might use his inside information to create a monopoly)

CASE LAW/ DOCTRINE: 1. 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.

2. 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."

DISSENTING/CONCURRING OPINION: TEEHANKEE, CONCEPCION JR., FERNANDEZ and GUERRERO, JJ., 1. The prohibition and disqualification therein provided shall not apply to petitioner Gokongwei until and after he shall have been given a new and proper hearing" by the corporation's board of directors and the board's decision of disqualification 2. The board by 3/4 vote the arbitrary power to bar any stockholder from his right to be elected as director by the simple expedient of declaring him to be engaged in a "competitive or antagonistic business" or declaring him as a "nominee" of the competitive or antagonistic" stockholder are illegal, oppressive, arbitrary and unreasonable. 3. The questioned amended by-laws specifically tailored to discriminate against petitioner and depriving him in violation of substantive due process of his vested substantial rights as stockholder of respondent corporation. 4. The amended by-laws as violate specific 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 cumulative voting ordained by the Law.