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Course Outline

Corporation Law

A. Corporation
a. Definition
b. Attributes
c. Advantages and Disadvantages
Cases:
Pioneer Insurance&Surety Corp., vs. Court of Appeals, G.r. no.84197, July 28, 1989
B. Classes of corporations
C. Nationality of corporations
a. Incorporation Test
b. Control Test
i. People of the Philippines vs Quasha, June 12, 1953
ii. Tatad vs. Garcia, G.r. no. 114222, April 6, 1995
iii. (IN RE: Rappler Inc., and Rappler Holdings Corporation, SEC Commission En Banc
DECISION, January 11, 2018)1
c. Grandfather rule
i. Narra Nickel Mining, Tesoro & McArthur vs. Redmont Consolidated Mines,
G.r.no.195580, April 21, 2014
D. Corporate Juridical Personality
a. Doctrine of Separate Juridical Personality
i. Sulo ng Bayan Inc., vs. Araneta, G.r. no. L-31061, August 17, 1976
ii. Magsaysay-Labrador vs. Court of Appeals, G.r. no. 58168, December 19, 1989
iii. Western Agro Industrial vs. Court of Appeals, G.r. no. 82558, August 20, 1990
b. Liability for Torts and Crimes
i. PNB vs Court of Appeals, Tapnio & PhilGem, G.r.No. L-27155, May 18, 1978
c. Recovery of Moral Damages
i. Simex International, Inc. vs. Court of Appeals, G.r. 88013, March 19, 1990
ii. ABS-CBN vs. Court of Appeals, G.r. no.128690, January 21, 1999
E. Doctrine of Piercing the Corporate Veil
i. Umali vs. Court of Appeals, G.r. No. 89561, September 13, 1990
ii. Boyer-Roxas vs. Court of Appeals, G.r. no. 100866, July 14, 1992
iii. Traders Royal Bank vs. Court of Appeals, G.r. No. 93397, Mach 3, 1997
iv. Kukan International Corporation vs. Hon. Amor Reyes et al., Gr. 182729,
September 29, 2010
b. Grounds for application of the doctrine
i. Fraud Cases
ii. Alter-Ego Cases
iii. Equity Case
 China Bank vs Dyne-Sem Electronics Corp, G.r. 149237, June 11, 2006
 A.D. Santos, Inc. vs. Vasquez, G.r. L-23586. March 20, 1968
 Buan vs. Alcantara, G.r. L-59592, February 29, 1984
 Heirs of Fe Tan Uy v. International Exchange Bank, G.R. No. 166282,
February 13, 2013
 PNB, Assets Privatization & DBP vs. Hydro Resources Contractors Corp.
(HRC), G.r. 167530, 167561, 167603, March 13, 2013 [consolidated case]

F. Incorporation and Organization


a. Promoter (sec.3.10, R.A. 8799)
b. Promoter’s Contract
c. Number and Qualifications of Incorporators
d. Use of Corporate Name (SEC Memo cir. No.21 Series of 2013)
e. Corporate Term
i. Commencement of corporate existence
f. Minimum Capital Stock and Subscription Requirement
g. Articles of Incorporation
i. Nature and Function
ii. Contents
h. Adoption of By-Laws
i. Nature and Function of By-Laws
1
For discussion purposes only
 Gokongwei Jr. vs. SEC, G.r. L-45911, April 11, 1979
ii. Binding Effects
 Cebu Mactan Members Center Inc., vs. Tuskahara, G.r. 159624, July 17,
2009
 SEC-OGC Opinion No. 16-07, April 04, 2016
iii. Matters that cannot be provided for in By-Laws
iv. Amendment or Revision

G. Corporate Powers
-page 1 of 4-

SECOND DIVISION
CHINA BANKING CORPORATION, G.R. No. 149237
Petitioner,

Present:

PUNO, J., Chairperson,


SANDOVAL-GUTIERREZ,
- v e r s u s - CORONA,
AZCUNA and
GARCIA, JJ.
DYNE-SEM ELECTRONICS
CORPORATION,
Respondent. Promulgated:

June 11, 2006


x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

DECISION
CORONA, J.:

On June 19 and 26, 1985, Dynetics, Inc. (Dynetics) and Elpidio O.


Lim borrowed a total of P8,939,000 from petitioner China Banking
Corporation. The loan was evidenced by six promissory notes. [1]

The borrowers failed to pay when the obligations became


due. Petitioner consequently instituted a complaint for sum of
money[2] on June 25, 1987 against them. The complaint sought
payment of the unpaid promissory notes plus interest and
penalties.

Summons was not served on Dynetics, however, because it had


already closed down. Lim, on the other hand, filed his answer on
December 15, 1987 denying that he promised to pay [the
obligations] jointly and severally to [petitioner]. [3]

On January 7, 1988, the case was scheduled for pre-trial with


respect to Lim. The case against Dynetics was archived.

On September 23, 1988, an amended complaint [4] was filed by


petitioner impleading respondent Dyne-Sem Electronics
Corporation (Dyne-Sem) and its stockholders Vicente Chuidian,
Antonio Garcia and Jacob Ratinoff. According to petitioner,
respondent was formed and organized to be Dynetics alter ego as
established by the following circumstances:

Dynetics, Inc. and respondent are both engaged in the same line of
business of manufacturing, producing, assembling, processing,
importing, exporting, buying, distributing, marketing and testing
integrated circuits and semiconductor devices;
[t]he principal office and factory site of Dynetics, Inc. located at
Avocado Road, FTI Complex, Taguig, Metro Manila, were used by
respondent as its principal office and factory site;
[r]espondent acquired some of the machineries and equipment
of Dynetics, Inc. from banks which acquired the same through
foreclosure;
[r]espondent retained some of the officers of Dynetics, Inc.[5]

xxx xxx xxx

On December 28, 1988, respondent filed its answer, alleging that:

5.1 [t]he incorporators as well as present stockholders of [respondent] are


totally different from those of Dynetics, Inc., and not one of them has
ever been a stockholder or officer of the latter;

5.2 [n]ot one of the directors of [respondent] is, or has ever been, a
director, officer, or stockholder of Dynetics, Inc.;

5.3 [t]he various facilities, machineries and equipment being used by


[respondent] in its business operations were legitimately and validly
acquired, under arms-length transactions, from various corporations
which had become absolute owners thereof at the time of said
transactions; these were not just taken over nor acquired
from Dynetics by [respondent], contrary to what plaintiff falsely and
maliciously alleges;

5.4 [respondent] acquired most of its present machineries and equipment


as second-hand items to keep costs down;

5.5 [t]he present plant site is under lease from Food Terminal, Inc., a
government-controlled corporation, and is located inside the FTI
Complex in Taguig, Metro Manila, where a number of other firms
organized in 1986 and also engaged in the same or similar business
have likewise established their factories; practical convenience, and
nothing else, was behind [respondents] choice of plant site;

5.6 [respondent] operates its own bonded warehouse under authority from
the Bureau of Customs which has the sole and absolute prerogative to
authorize and assign customs bonded warehouses; again, practical
convenience played its role here since the warehouse in question was
virtually lying idle and unused when said Bureau decided to assign it
to [respondent] in June 1986.[6]

On February 28, 1989, the trial court issued an order


archiving the case as to Chuidian, Garcia and Ratinoff since
summons had remained unserved.

After hearing, the court a quo rendered a decision on


December 27, 1991 which read:

xxx [T]he Court rules that Dyne-Sem Electronics Corporation is not


an alter ego of Dynetics, Inc. Thus, Dyne-Sem Electronics
Corporation is not liable under the promissory notes.

xxx xxx xxx


WHEREFORE, judgment is hereby rendered ordering Dynetics,
Inc. and Elpidio O. Lim, jointly and severally, to pay plaintiff.

xxx xxx xxx

Anent the complaint against Dyne-Sem and the latters


counterclaim, both are hereby dismissed, without costs.

SO ORDERED.[7]
From this adverse decision, petitioner appealed to the Court of
Appeals[8] but the appellate court dismissed the appeal and affirmed
the trial courts decision.[9] It found that respondent was indeed not
an alter ego of Dynetics. The two corporations had different articles
of incorporation. Contrary to petitioners claim, no merger or
absorption took place between the two. What transpired was a mere
sale of the assets of Dynetics to respondent. The appellate court
denied petitioners motion for reconsideration. [10]

Hence, this petition for review [11] with the following assigned
errors:
VI.
Issues

What is the quantum of evidence needed for the trial court to determine if
the veil of corporat[e] fiction should be pierced?

[W]hether or not the Regional Trial Court of Manila Branch 15 in its


Decision dated December 27, 1991 and the Court of Appeals in its
Decision dated February 28, 2001 and Resolution dated July 27, 2001,
which affirmed en toto [Branch 15, Manila Regional Trial Courts decision,]
have ruled in accordance with law and/or applicable [jurisprudence] to the
extent that the Doctrine of Piercing the Veil of Corporat[e] Fiction is not
applicable in the case at bar?[12]

We find no merit in the petition.


The question of whether one corporation is merely an alter ego
of another is purely one of fact. So is the question of whether
acorporation is a paper company, a sham or subterfuge or whether
petitioner adduced the requisite quantum of evidence warranting
the piercing of the veil of respondents corporate entity. This Court
is not a trier of facts. Findings of fact of the Court of Appeals,
affirming those of the trial court, are final and conclusive. The
jurisdiction of this Court in a petition for review on certiorari is
limited to reviewing only errors of law, not of fact, unless it is
shown, inter alia, that:
(a) the conclusion is grounded entirely on speculations,
surmises and conjectures; (b) the inference is manifestly mistaken,
absurd and impossible; (c) there is grave abuse of discretion; (d) the
judgment is based on a misapplication of facts; (e) the findings of
fact of the trial court and the appellate court are contradicted by
the evidence on record and (f) the Court of Appeals went beyond the
issues of the case and its findings are contrary to the admissions of
both parties.[13]

We have reviewed the records and found that the factual


findings of the trial and appellate courts and consequently their
conclusions were supported by the evidence on record.

The general rule is that a corporation has a personality


separate and distinct from that of its stockholders and
other corporations to which it may be connected. [14] This is a fiction
created by law for convenience and to prevent injustice. [15]

Nevertheless, being a mere fiction of law, peculiar situations


or valid grounds may exist to warrant the disregard of its
independent being and the piercing of the corporate veil.
[16]
In Martinez v. Court of Appeals,[17] we held:

The veil of separate corporate personality may be lifted when such


personality is used to defeat public convenience, justify wrong, protect
fraud or defend crime; or used as a shield to confuse the legitimate
issues; or when the corporation is merely an adjunct, a business conduit
or an alter ego of another corporation or where the corporation is so
organized and controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of
another corporation; or when the corporation is used as a cloak or cover
for fraud or illegality, or to work injustice, or where necessary to achieve
equity or for the protection of the creditors. In such cases, the corporation
will be considered as a mere association of persons. The liability will
directly attach to the stockholders or to the other corporation.
To disregard the separate juridical personality of
a corporation, the wrongdoing must be proven clearly and
convincingly.[18]

In this case, petitioner failed to prove that Dyne-Sem was


organized and controlled, and its affairs conducted, in a manner
that made it merely an instrumentality, agency, conduit or adjunct
of Dynetics, or that it was established to
defraud Dynetics creditors, including petitioner.

The similarity of business of the two corporations did not


warrant a conclusion that respondent was but a conduit
of Dynetics. As we held in Umali v. Court of Appeals,[19] the mere fact
that the businesses of two or more corporations are interrelated is
not a justification for disregarding their separate personalities,
absent sufficient showing that the corporate entity was purposely
used as a shield to defraud creditors and third persons of their
rights.
Likewise, respondents acquisition of some of the machineries
and equipment of Dynetics was not proof that respondent was
formed to defraud petitioner. As the Court of Appeals found, no
merger[20] took place between Dynetics and respondent Dyne-
Sem.What took place was a sale of the assets [21] of the former to the
latter. Merger is legally distinct from a sale of assets. [22] Thus, where
one corporation sells or otherwise transfers all its assets to another
corporation for value, the latter is not, by that fact alone, liable for
the debts and liabilities of the transferor.

Petitioner itself admits that respondent acquired the


machineries and equipment not directly from Dynetics but from the
various corporations which successfully bidded for them in an
auction sale. The contracts of sale executed between the winning
bidders and respondent showed that the assets were sold for
considerable amounts.[23] The Court of Appeals thus correctly ruled
that the assets were not diverted to respondent as an alter ego
of Dynetics.[24] The machineries and equipment were transferred
and disposed of by the winning bidders in their capacity as owners.

The sales were therefore valid and the transfers of the


properties to respondent legal and not in any way in contravention
of petitioners rights as Dynetics creditor.
Finally, it may be true that respondent later
hired Dynetics former Vice-President Luvinia Maglaya and Assistant
Corporate Counsel Virgilio Gesmundo. From this, however, we
cannot conclude that respondent was an alter ego of Dynetics. In
fact, even the overlapping of incorporators and stockholders of two
or more corporations will not necessarily lead to such inference and
justify the piercing of the veil of corporate fiction. [25] Much more has
to be proven.

Premises considered, no factual and legal basis exists to hold


respondent Dyne-Sem liable for the obligations of Dynetics to
petitioner.

WHEREFORE, the petition is hereby DENIED. The assailed


Court of Appeals decision and resolution in CA-G.R. CV No. 40672
are hereby AFFIRMED.

Costs against petitioner.

SO ORDERED.

Pursuant to Section 13, Article VIII of the Constitution and the


Division Chairpersons Attestation, I certify that the conclusions in
the above decision had been reached in consultation before the
case was assigned to the writer of the opinion of the Courts
Division.

Merger is a union whereby one or more existing corporations are absorbed by another corporation which survives
and continues the combined business. (Villanueva, PHILIPPINE CORPORATE LAW, 1998 Edition, p.
464.)
[21]
In sale of assets, the purchaser is only interested in the raw assets of the selling corporation perhaps to be used to
establish his own business enterprise or as an addition to his on-going business enterprise. (Id., at p. 444.)
[22]
The Court of Appeals differentiated merger from sale of assets in this wise: (1) In merger, a sale of assets is
always involved, while in the latter, the former is not always involved; (2) In the former, there is automatic
assumption by the surviving corporation of the liabilities of the constituent corporations, while in the latter,
the purchasing corporation is not generally liable for the debts and liabilities of the selling corporation; (3)
In the former, there is a continuance of the enterprise and of the stockholders therein though in the altered
form, while in the latter, the selling corporation ordinarily contemplates liquidation of the enterprise; (4) In
the former, the title to the assets of the constituent corporations is by operation of law transferred to the
new corporation, while in the latter, the transfer of title is by virtue of contract; and (5) In the former, the
constituent corporations are automatically dissolved, while in the latter, the selling corporation is not
dissolved by the mere transfer of all its property. (citing de Leon, THE CORPORATION CODE OF THE
PHILIPPINES ANNOTATED, 1989 Edition, pp. 509-510.)
[23]
The total purchases made by respondent from Elders Pica Limited was for the amount of US$1,158,977.77;
from Piso Development Bank, P19,950,000 plus the peso equivalent of US$280,000 and from Private
Development Corporation of the Philippines, P11,956,134.44 plus the peso equivalent of
US$1,616,324.17; rollo, p. 132.

Republic of the Philippines


SUPREME COURT
Manila

EN BANC

G.R. No. L-23586 March 20, 1968

A. D. SANTOS, INC., petitioner,


vs.
VENTURA VASQUEZ, respondent.

Emiliano S. Samson and R. Balderrama-Samson for petitioner.


Orlando L. Espinas for respondent.

SANCHEZ, J.:
Respondent Ventura Vasquez was petitioner's taxi driver. Sometime on December 22 or 23,
1961, at about 11:00 a.m., while driving petitioner's taxicab, he vomitted blood. Aside from his
hemoptysis, he suffered back pains, fever and headache. He reported to petitioner the fact of his
having vomitted blood. He was sent to petitioner company's physician, Dr. Roman, who treated him
and sent him to Sto. Tomas Hospital where he was confined for six days. Thereafter, he was
admitted at the Quezon Institute. There he stayed until March 19, 1962 under the medical care of Dr.
Mario Lirag. Dr. Lirag diagnosed his ailment as pulmonary tuberculosis, moderately advanced in
both lungs. Upon his discharge on March 19, 1962, he was clinically improved. His X-ray
examination, however, showed the same finding, i.e., PTB, moderately advanced. He has not
resumed work.

Offshoot of the foregoing is respondent's claim filed on May 9, 1962 with the Workmen's
Compensation Commission. 1 In affirming the decision of the Hearing Officer, the Commission
ordered petitioner:

1. To pay the claimant, thru this Commission, the sum of THREE THOUSAND
SEVEN HUNDRED THIRTY-TWO and 30/100 (P3,732.30) PESOS as compensation
as of August 11, 1964, and P27.30 thereafter up to a period of 208 weeks, but in no
case said amount of compensation exceed P4,000.00;

2. To reimburse the claimant, thru this Commission, the sum of P53.60 which he had
actually spent for his treatment;

3. To provide claimant continuous medical, surgical and hospital services and


supplies as his illness may warrant;

4. To pay the claimant, also thru this Commission, the sum of P277.92 as Attorney's
fees; and

5. To pay the Commission the sum of P43.00 as costs based on the amount of
compensation already due the claimant as of August 11, 1964, and P1.00 for every
hundred pesos which may accrue in his favor as weekly compensation pursuant to
Section 55 of the Act.

The case is now before us on review.

Two questions are raised by petitioner: (1) respondent's claim should have been dismissed for
his failure to file the notice of injury and claim for compensation required by Section 24 of the
Workmen's Compensation Act; and (2) the claim for compensation is directed against Amador
Santos, not against petitioner.

1. Sickness manifested itself on December 22 or 23, 1961. Claim was filed on May 9, 1962.
Petitioner argues that by Section 24 of the Workmen's Compensation Act, the claim
should be thrown out of court. Because, according to petitioner, such claim was not filed
within two months following illness.

Petitioner's case must fail. Stabilized jurisprudence is that failure of the employer to file with
the Commission notice of controversion set forth in the second paragraph of Section 45 of the
Workmen's Compensation Act is a waiver of the defense that the claim for compensation was not
filed within the statutory period and a forfeiture of the employer's right to controvert the claim.
Petitioner here knew of respondent's illness. Yet, it did not controvert respondent's right to
compensation. Constructively, such failure is an admission that the claim is compensable. 2

2. Petitioner's averment that respondent driver had no cause of action against petitioner is
equally without merit. Respondent's claim for compensation herein is directed against petitioner A.D.
Santos, Inc. Petitioner, in answer to the claim, categorically admitted that claimant was its taxi driver.
Add to this is the fact that the claimant contracted pulmonary tuberculosis by reason of his said
employment. And respondent's cause of action against petitioner is complete.

But petitioner, cites the fact that respondent driver, in the course of his testimony, mentioned
that he worked for the City Cab operated by Amador Santos. This will not detract from the validity of
respondent's right to compensation. For, the truth is that really at one time Amador Santos was the
sole owner and operator of the City Cab. It was subsequently transferred to petitioner A.D. Santos,
Inc. in which Amador Santos was an officer. The mention by respondent of Amador Santos as his
employer in the course of his testimony, in the words of this Court in Sugay vs. Reyes, L-20451,
December 28, 1964, "should not be allowed to confuse the facts relating to employer-employee
relationship" for "when the veil of corporate fiction is made as a shield to perpetrate a fraud and/or
confuse legitimate issues (here, the relation of employer-employee), the same should be pierced."

For the reasons given, the decision under review is hereby affirmed. 1äwphï1.ñët

Costs against petitioner. So ordered.

FIRST DIVISION

[G.R. No. L-59592. February 29, 1984.]

BLESILO BUAN and FLORENCIO BUAN, JR., Petitioners, v. HON. FERNANDO S. ALCANTARA, as
Judge of the Court of First Instance of Tarlac, and A. NATIVIDAD PARAS-NISCE, Respondents.
SYLLABUS

1. MERCANTILE LAW; CORPORATIONS; WHERE ESTATE IS THE MAJORITY STOCKHOLDER, ADMINISTRATOR


AND CORPORATION ARE ALTER EGOS. — The glaring problem in this case is that the intestate case below,
which was instituted in 1953, is still pending despite the lapse of 30 years, mainly on the proposition that
damage suits filed against the administrators in connection with the land transportation business of the
decedents have prevented the settlement of the estate. No account has been taken of the fact that the land
transportation business was incorporated in 1957 as the Philippine Rabbit Bus Lines, Inc. Since the estate
became the owner of practically all the shares of stock of the corporation, the damage suits, thereafter,
should have also become the responsibility of the corporation. At the time of incorporation, the
administrators and the corporation technically became "alter egos", each in respect of the other. The
administrators would still be liable for obligations of the corporation. Similarly, the corporation would have to
be liable for the debts of the administrators.

2. CIVIL LAW; SUCCESSION; PARTITION AND DISTRIBUTION OF ESTATE; PENDENCY OF DAMAGE SUITS
FILED AGAINST ADMINISTRATORS IN CONNECTION WITH DECEDENTS’ TRANSPORTATION BUSINESS, NOT
A VALID REASON TO DEFER SETTLEMENT OF ESTATE; DINGLASAN CASE NOT APPLICABLE IN CASE AT BAR.
— The case of Dinglasan v. Ang Chia, 88 Phil, 476 (1951), upon which respondent Court relied in denying
closure, will not apply, first, because the litigation involved therein was for the recovery of real property
and, second, it was the only property of the estate left subject of administration such that whatever was
determined in the civil case would have had far-reaching effects in the determination and distribution of the
estate. In this case, however, the damage suits bear no intimate connection or close interrelation with the
estate per se, specially after incorporation. It should also be borne in mind that vehicular accidents are a
risk inherent in transportation business, and as long as this business continues in operation, accidents are
bound to occur from time to time with the consequent filing of suits by persons who may be injured. To
await the termination or settlement of all these suits before closing the intestate proceedings will virtually
place the estate under perpetual administration contrary to the intendment of the law.

DECISION
MELENCIO-HERRERA, J.:

Assailed in this petition is the Order dated October 15, 1981 of the then Court of First Instance of Tarlac,
Branch I, in Special Proceedings No. 766 covering the Intestate Estate of Florencio P. Buan and Rizalina
Paras-Buan, denying the Omnibus Motion filed by petitioners Blesilo Buan and Florencio Buan, Jr. principally
praying for the closure of the intestate estate proceedings of their deceased parents, and their applications
for precautionary measures against respondent Administratix A. Natividad Paras-Nisce. chanrobles.com : virtual law library

The antecedent facts, in brief, are: chanrob1es virtual 1aw library

On January 3, 1953, petitioners’ parents, Florencio P. Buan and Rizalina Paras-Buan, owners of Philippine
Rabbit Bus Lines and several other properties, died in a motor vehicle accident. They were survived by their
five then minor children: Jesusa Janina, 12 years old; Lourdes Palmyra, 5; Florencio, 4; Valentino, 3; and
Blesilo, 11 months.

On January 9, 1953, intestate proceedings were commenced Respondent Natividad Paras, younger sister of
the orphans’ mother, still single then, and Bienvenido Buan, younger brother of their father, were appointed
co-administrators of the estate of the deceased spouses. They were also appointed guardians of the children
in Special Proceeding No. 1099.

In 1957, the Philippine Rabbit Bus Lines was incorporated. The Buan estate was the majority stockholder
with 1,992 shares of stock with a par value of P100.00 per share, or 99.67%, with the co-administrators and
the other stockholders, Ricardo L. Paras, Mariano P. Buan, Simplicio P. Buan, Diosdado L. Paras, Alejandro
Paras, Jr. and Lauro P. Pascual, subscribing to one share of stock each. 1

Upon authorization to increase its capital stock from two million to five million pesos 2 having been
obtained, the administrators filed on May 25, 1964, a Petition to Waive Estate’s Pre-emptive Right to
Subscribe to the Increase of Capital Stock. 3 This was granted by respondent Court on May 27, 1964. 4 The
Certificate of Increase of Capital Stock of Philippine Rabbit Bus Lines, Inc. shows that administrators
Bienvenido Buan and Natividad Paras-Nisce subscribed to 9,100 shares of stock each in the total amount of
P1,820,000.00. The six remaining stockholders also bought additional shares: Ricardo L. Paras and Mariano
P. Buan, 1,000 shares each; Simplicio P. Buan, Diosdado L. Paras, Alejandro Paras, Jr. and Lauro P. Pascual,
500 shares each. 5 The controlling interest of the estate was thereby reduced to barely 35% as against the
co-administrators and other relatives 65 % interest in the outstanding capital. cralawnad

In the interim, the co-administrators formed other corporations, the Tarlac Development Bank and Bupar
Motors Corporation.

Tarlac Development Bank was organized on July 5, 1961. It has an authorized capital of P2 million and an
actual subscription of P1,070,000.00. The Development Bank of the Philippines subscribed and paid for
P500,000.00 in preferred stock. Of the common stock. the Buan estate subscribed and paid for shares worth
P350,000.00; respondent administratrix and her husband Ramon Nisce to P600,000.00; Bienvenido P. Buan
and his wife to P65,000.00; the co-administrators, respective brothers, Ricardo L. Paras and Mariano P.
Buan, to P10,000.00 each. The capitalization was later increased to P3 million. Petitioners have no
knowledge of the present status of the stockholdings. 6

Bupar Motors Corporation was put up on March 25, 1963 for the purpose of engaging in the business of
assembly (including bus body building), sale and distribution of motor trucks, spare parts and tire recapping.
The Buan estate subscribed to P50,000.00; worth of shares; from the authorized capital of P1 million. Co-
administrator Bienvenido P. Buan subscribed to P50,000.00 worth of shares; respondent administratrix and
her husband to P50,000.00; Ricardo L. Paras and Mariano P. Buan to P25,000.00 each.

On August 21, 1964, the capitalization was increased to P3 million. The estate subscribed to P850,000.00
worth of shares respondent administratrix and her husband to P700,000.00, co-administrator Bienvenido P.
Buan to P175,000.00; Ricardo L. Paras to P175,000.00; Mariano P. Buan to P100,000.00; and Diosdado L.
Paras to P100,000.00.

Bupar Motors Corporation became the purchasing arm of Philippine Rabbit Bus Lines Inc. An entire tire
section of the bus company was transferred to Bupar. A parcel of land with a concrete building belonging to
the Buan estate was sold to Bupar Motors for P135,000.00. In the petition to waive pre-emptive right to
subscribe to the increase of the capital stock of Philippine Rabbit Bus Lines Inc., the co-administrators gave
as reason therefor, the estate’s alleged controlling interest in this Bupar corporation. 7

On March 26, 1965, the heirs Jesusa Janina Buan-Monteyro and Lourdes Palmyra Buan-Tabamo, filed an
Omnibus Motion praying among others, for their appointment, either solely or jointly, as administratrices of
the estate of their late parents, and on April 11, 1965, an Alternative Motion to Close Administration
Proceedings on the ground that the administrators were not taking positive steps to close the intestate
proceedings instituted some twelve years back. 8

On October 20, 1965, the sisters filed a Supplemental Omnibus Motion for (1) Immediate Removal of Co-
Administrators, (2) Annulment of Illegal Subscription, (3) Return of Shares, (4) Setting Aside Order, (5)
Contempt, principally assailing the actuations of the co-administrators in filing the Petition to Waive Estate’s
Pre-emptive Right to Subscribe to the Increase of Capital Stock, and their subsequent purchase themselves
of additional stock, which reduced the estate into a minority stockholder. The administrators filed an
opposition thereto.chanrobles virtual lawlibrary

On February 24, 1970, administrator Bienvenido Buan died, and respondent Administratrix continued
managing the estate alone.

Another corporation was organized by respondent Administratrix on May 11, 1970, the Ledi Realty
Enterprises Inc., with an authorized capital of P1 million. The principal stockholders are respondent
Administratrix and her husband, with a subscription of P280,000.00. Her brother Diosdado L. Paras,
subscribed to P1,000.00 worth of shares. The heirs Florencio Buan, Jr. and Valentino Buan were made to
appear to have subscribed to P160,000.00 and P59,000.00 worth of shares of stocks, respectively. On May
20, 1970, the corporation bought the inheritance rights in the estate of petitioners’ sisters and co-heirs,
Janina and Palmyra. 9

On October 2, 1974, the sisters finally moved to withdraw the pleadings they had filed. 10 The lower Court
granted the same on October 7, 1974. 11

On February 23, 1981, petitioner Blesilo Buan, with the conformity of his co-heirs Janina Buan-Monteyro,
Lourdes Palmyra Buan and Florencio P. Buan, Jr., filed a Petition for Letters of Co-Administration. 12 Their
brother Valentino died on February 27, 1970. Respondent Administratrix expressed her conformity to the
same in a Manifestation filed on April 3, 1981. 13 After hearing, the Court, on April 9, 1981, appointed
Blesilo P. Buan as co-administrator of the estate of the deceased spouses upon filing of a bond of
P25,000.00. 14

On June 19, 1981, Blesilo and Florencio, Jr., filed an Omnibus Motion praying, principally, for the closure of
the intestate proceedings, having been long deprived of the possession of their inheritance, and,
subsidiarily, for some precautionary remedies by reason of alleged breaches of trust committed by
respondent Administratrix.

In particular, the precautionary or provisional orders prayed for are: jgc:chanrobles.com.ph

"(1) In an order immediately suspending respondent A. Natividad Paras-Nisce as administratrix of the


estate, enjoining her exercise of its powers and performance of its duties;

(2) an order enjoining respondent A. Natividad Paras-Nisce from disposing or in any way encumbering any
of her stockholding interests whether held in her name or in the names of her trustees or nominees in
Philippine Rabbit Bus Lines, Inc., Bupar Motors Corporation, Tarlac Development Corporation and Ledi Realty
Enterprises Inc. charged to have been ‘seized and developed at the expense and with the facilities of’ the
estates;

(3) an order enjoining respondent A. Natividad Paras-Nisce from causing Philippine Rabbit Bus Lines Inc.,
Bupar Motors Corporation and Ledi Realty Enterprises, Inc. charged to have been ‘seized and developed at
the expense and with the facilities of’ the estates to effect any disposition or encumbrance of their assets or
to incur any new obligations without prior authority from the court;

(4) an order instructing and directing the respondent A. Natividad Paras-Nisce to deliver to petitioner-
administrator Blesilo Buan all the properties of the estate including real properties, the stockholding
interests in Philippine Rabbit Bus Lines Inc., Bupar Motors Corporation, Tarlac Development Bank, and Ledi
Realty Enterprises Inc. for him to take and receive said properties and hold and administer them as such
administrator; and

(5) since the properties of the estate particularly the real properties have been mortgaged by respondent A.
Natividad Paras-Nisce to secure loans for the use of the Philippine Rabbit Bus Lines Inc., an order enjoining
said respondent A. Natividad Paras-Nisce or petitioner administrator Blesilo Buan to see to it that the
Philippine Rabbit Bus Lines, Inc. regularly service its obligations obtained on the security of the properties of
the estate and, for the purpose, to order them to cause Philippine Rabbit Bus Lines Inc. to retain the
services of an established auditing firm to take charge of daily collections from the buses and the other
sources of income like the canteen and to control the disbursements of funds so that only legitimate
expenses of operations are met and the balance kept and preserved to pay the obligations of the corporation
obtained on the security of the properties of the estate." 15

Respondent Administratrix opposed the Motion denying the charges of breach of trust and stating that the
delay in the closure of the estate was not caused by her, but was due to the pendency of actions for
damages filed against the administrators of the estate, which have remained pending over the years, and
that the heirs Janina Buan-Monteyro and Lourdes Palmyra Buan had already sold, transferred and conveyed
their hereditary rights over the estate to the Ledi Realty Enterprises, Inc. chanrobles law library

On October 15, 1981, respondent Court issued the challenged Order, decreeing: jgc:chanrobles.com.ph

". . . this Court resolved and hereby declares and holds that: chanrob1es virtual 1aw library

(1) There is no necessity of issuing an order enjoining the administratrix Natividad Paras-Nisce from
performing any act of administration whether involving disposition or mere administration of any and all of
the properties of the estate, not only because there is no ground for the issuance of said order but also
because based on the records, the administratrix has heretofore invariably sought and obtained the approval
of this Court for the acts of administration involving the disposition of the properties of the estate;

(2) For insufficiency of evidence and lack of legal basis (see Secs. 3 and 5[b] P.D. 902-A), the prayer in the
Omnibus Motion that the administratrix Natividad Paras-Nisce be enjoined from disposing or in any way
encumbering any of her stockholding interests whether held by her in her name or in the name of her
alleged trustees, her husband Ramon Nisce, Ricardo L. Paras, Diosdado L. Paras and Mariano P. Buan in
Philippine Rabbit Bus Lines, Inc., Bupar Motors Corporation, Tarlac Development Bank, and Ledi Realty
Enterprises, Inc. is hereby denied;

(3) The prayer in the Omnibus Motion that an order be issued enjoining the administratrix Natividad Paras-
Nisce from causing Philippine Rabbit Bus Lines, Inc., Bupar Motors Corporation, Ledi Realty Enterprises, Inc.
to effect any disposition or encumbrance of their assets or to incur any new obligation without prior
authority from this Court is denied for lack of merit and for the added reason that this Court is of the opinion
that under the present law (Secs. 3 and 5 [b] P.D. 902-A), it has no jurisdiction to issue such an order;

(4) The prayer in the Omnibus Motion that an order be immediately issued instructing and directing the
administratrix Natividad Paras-Nisce to deliver all the properties of the estate including real properties, the
stockholding interests in Philippine Rabbit Bus Lines, Inc. Bupar Motors Corporation, Tarlac Development
Bank, Ledi Realty Enterprises, Inc. and all other businesses and properties allegedly seized and developed at
the expense and with the facilities of the estate and instructing and directing the co-administrator Blesilo
Buan to take and receive said properties and hold and administer them as such administratrix is hereby
denied for lack of merit and for insufficiency of evidence;

(5) The prayer in the Omnibus Motion that an order be issued enjoining the administratrix Natividad Paras-
Nisce and the co-administrator Blesilo Buan to see to it that the Philippine Rabbit Bus Lines, Inc. regularly
service its obligations obtained on the security of the properties of the estate and, for this purpose, to order
them to cause Philippine Rabbit Bus Lines, Inc. to retain the services of an established auditing firm to take
charge of daily collection from the buses and to control the disbursement of funds so that legitimate
expenses of operations are met and the balance kept and preserved to pay the obligations of the corporation
obtained on the security of the properties of the estate is likewise denied for lack of merit and for
insufficiency of evidence;

(6) The prayer in the Omnibus Motion that an order be issued after hearing to approve the alleged partial
project of partition that the administrator Blesilo Buan shall submit pursuant to the alleged extra-judicial
agreement entered into among the heirs and to order the administrator Blesilo Buan to effect such alleged
partial distribution of the estate is hereby denied, no such partial project of partition having been submitted
to this Court;

(7) The prayer in the Omnibus Motion that an order be issued requiring the Administratrix Natividad Paras-
Nisce to submit accounting of her administration within fifteen (15) days from date of the order has become
moot and academic, it appearing from the records that the aforesaid Administratrix had on July 1, 1981 filed
and already submitted her accounting from the year 1976 to 1980. Let the accounting submitted by the
Administratrix for the years 1976 to 1980 be set for hearing on December 7, 1981, at 8:30 in the morning;

(8) The Administratrix having filed her opposition to the Omnibus Motion embodying therein and in her
Rejoinder her answer to the charges of alleged breach of trust, let the hearing of the charges of trust filed
by the movants Blesilo Buan and Florencio Buan, Jr. be set for hearing on November 23, 1981, at 8:30
o’clock in the morning;

For the same reasons already stated in the order of this Court of October 4, 1965 and more specifically
because of the prevailing doctrine laid down by a unanimous Court in Ang Chia v. Dinglasan, 88 Phil. 476,
the petition to close this estate not being legally feasible at this time is hereby denied.

Resolution of paragraphs 9 and 10 of the petitory portion of the Omnibus Motion of June 18, 1981 is hereby
held in abeyance until after the charges on alleged breach of trust shall have been heard and submitted for
resolution and as requested by counsel for movants heirs." cralaw virtua1aw library

Petitioners sought reconsideration of the foregoing Order but respondent Court denied it on February 2,
1982: 16

Petitioners allege: chanrob1es virtual 1aw library

"Respondent Court erred in not ordering the closure of administration now twenty eight years too long.

II

The Probate Court erred in denying closure of administration already twenty eight years long just for a few
remaining pending separate damage suits against the estate arising from vehicular accidents.

III

Respondent Court erred in citing the first order denying closure issued sixteen years ago.

IV
Respondent Court erred in denying the precautionary remedies applied for notwithstanding prima-facie
showing of breach of trust." cralaw virtua1aw library

The glaring problem in this case is that the intestate case below, which was instituted in 1953, is still
pending despite the lapse of 30 years, mainly on the proposition that damage suits filed against the
administrators in connection with the land transportation business of the decedents have prevented the
settlement of the estate. No account has been taken of the fact that the land transportation business was
incorporated in 1957 as the Philippine Rabbit Bus Lines, Inc. Since the estate became the owner of
practically all the shares of stock of the corporation, the damage suits, thereafter, should have also become
the responsibility of the corporation. chanrobles.com : virtual law library

At the time of incorporation, the administrators and the corporation technically became "alter egos", each in
respect of the other. The administrators would still be liable for obligations of the corporation. 17 Similarly,
the corporation would have to be liable for the debts of the administrators.

"A new corporation taking over all of mortgaged assets of old corporation in exchange for all of old
corporation’s capital stock and continuing to operate business formerly operated by old corporation was
‘alter ego’ of old corporation so as to be obligated to pay annual patent royalty which old corporation was
required to pay, notwithstanding that old corporation retained title to mortgaged assets. Dummer v.
Wheeler Osgood Sales Corp., 88 P. 2d 453, 458, 198 Wash. 381." 18

It should be rather clear that, as between the estate and the corporation, the intention of incorporation was
to make the corporation liable for past and pending obligations of the estate as the transportation business
itself was being transferred to and placed in the name of, the corporation. That liability on the part of the
corporation, vis-a-vis the estate, should continue to remain with it even after the percentage of the estate’s
shares of stock in the corporation should be diluted.

The case of Dinglasan v. Ang Chia, 88 Phil, 476 (1951), upon which respondent Court relied in denying
closure, will not apply, first, because the litigation involved therein was for the recovery of real property
and, second, it was the only property of the estate left subject of administration such that whatever was
determined in the civil case would have had far-reaching effects in the determination and distribution of the
estate. In this case, however, the damage suits bear no intimate connection or close interrelation with the
estate per se, specially after incorporation.

It should also be borne in mind that vehicular accidents are a risk inherent in transportation business, and
as long as this business continues in operation, accidents are bound to occur from time to time with the
consequent filing of suits by persons who may be injured. To await the termination or settlement of all these
suits before closing the intestate proceedings will virtually place the estate under perpetual administration
contrary to the intendment of the law.

WHEREFORE, 1) a) the lower Court Order, dated October 15, 1981, denying the closure of the estate is
hereby SET ASIDE and, presuming that estate and inheritance taxes have been paid, said Court or the
corresponding Regional Trial Court to which this case is assigned, is hereby ordered, not later than three (3)
months after receipt hereof, to distribute the assets of the estate to the heirs or their assignees, or their
successors-in-interest, according to the rules on intestate succession or as the heirs may agree;

b) The lower Court shall continue hearings, until final disposition of the exceptions of the heirs to actions
previously taken by the administrator(s), with the Court taking account of Article 2029 of the Civil Code. 19

c) The lower Court shall see to it that the lawyers of Philippine Rabbit Bus Lines, Inc. shall defend all
pending suits against the former administrators, in the understanding that any judgment rendered in favor
of plaintiffs shall be satisfied by said corporation. Should the corporation refuse to pay the judgment, the
administrator may file corresponding complaints against the corporation, and the Court may also authorize
the heirs to sue said corporation, if necessary;

d) The lower Court shall submit a report to this Court within ten (10) days from expiration of the period in
paragraph 1(a) above on the steps it has taken in implementation of this decision.

2) (a) The co-administrators, private-respondent A. Natividad Paras-Nisce, and petitioner Blesilo Buan, are
hereby directed to implement immediately the directive to close the estate within the period given in
paragraph 1(a) above, and to submit a report to this Court within ten (10) days from the expiration of said
period;

b) Private respondent A. Natividad Paras-Nisce, shall render a final accounting to the lower Court not later
than three (3) months after receipt hereof, with copy furnished this Court.

Without pronouncement as to costs.

SO ORDERED.

Teehankee, (Chairman), Plana, Gutierrez, Jr. and De la Fuente, JJ., concur.

Relova, J., concurs in the result.

G.R. No. 166282, February 13, 2013 - HEIRS OF FE TAN UY (REPRESENTED BY HER HEIR, MANLING UY
LIM), Petitioners, v. INTERNATIONAL EXCHANGE BANK, RESPONDENT. - G.R. NO. 166283 - GOLDKEY
DEVELOPMENT CORPORATION, PETITIONER. VS. INTERNATIONAL EXCHANGE BANK, Respondents.
THIRD DIVISION

[G.R. No. 166282, February 13, 2013]

HEIRS OF FE TAN UY (REPRESENTED BY HER HEIR, MANLING UY


LIM), Petitioners, v.INTERNATIONAL EXCHANGE BANK, RESPONDENT.

[G.R. NO. 166283]

GOLDKEY DEVELOPMENT CORPORATION, PETITIONER. VS. INTERNATIONAL EXCHANGE


BANK,Respondents.

DECISION

MENDOZA, J.:

Before the Court are two consolidated petitions for review on certiorari under Rule 45 of the l997 Revised
Rules of Civil Procedure, assailing the August 16, 2004 Decision 1 and the December 2, 2004 Resolution2of
the Court of Appeals (CA) in CA-G.R. CV No. 69817 entitled “International Exchange Bank v. Hammer
Garments Corp., et al.”
The Facts

On several occasions, from June 23, 1997 to September 3, 1997, respondent International Exchange Bank (iBank), granted loans to Hammer Garments Corporation (Hammer), covered by

promissory notes and deeds of assignment, in the following amounts:3

Date of Promissory Note Amount


June 23, 1997 P 5,599,471.33
July 24, 1997 2,700,000.00
July 25, 1997 2,300,000.00
August 1, 1997 2,938,505.04
August 1, 1997 3,361,494.96
August 14, 1997 980,000.00
August 21, 1997 2,527,200.00
August 21, 1997 3,146,715.00
September 3, 1997 1,385,511.75
Total P24,938,898.08
These were made pursuant to the Letter-Agreement,4 dated March 23,

1996, between iBank and Hammer, represented by its President and General Manager, Manuel Chua (Chua)
a.k.a. Manuel Chua Uy Po Tiong, granting Hammer a P 25 Million-Peso Omnibus Line. 5 The loans were
secured by a P 9 Million-Peso Real Estate Mortgage6 executed on July 1, 1997 by Goldkey Development
Corporation (Goldkey) over several of its properties and a P 25 Million-Peso Surety Agreement 7 signed by
Chua and his wife, Fe Tan Uy (Uy), on April 15, 1996.

As of October 28, 1997, Hammer had an outstanding obligation of P25,420,177.62 to iBank. 8 Hammer
defaulted in the payment of its loans, prompting iBank to foreclose on Goldkey’s third-party Real Estate
Mortgage. The mortgaged properties were sold for P 12 million during the foreclosure sale, leaving an
unpaid balance of P 13,420,177.62.9 For failure of Hammer to pay the deficiency, iBank filed a
Complaint10 for sum of money on December 16, 1997 against Hammer, Chua, Uy, and Goldkey before the
Regional Trial Court, Makati City (RTC).11

Despite service of summons, Chua and Hammer did not file their respective answers and were declared in
default. In her separate answer, Uy claimed that she was not liable to iBank because she never executed a
surety agreement in favor of iBank. Goldkey, on the other hand, also denies liability, averring that it acted
only as a third-party mortgagor and that it was a corporation separate and distinct from Hammer. 12

Meanwhile, iBank applied for the issuance of a writ of preliminary attachment which was granted by the RTC
in its December 17, 1997 Order.13

The Notice of Levy on Attachment of Real Properties, dated July 15, 1998, covering the properties under the
name of Goldkey, was sent by the sheriff to the Registry of Deeds of Quezon City. 14

The RTC, in its Decision,15 dated December 27, 2000, ruled in favor of iBank. While it made the
pronouncement that the signature of Uy on the Surety Agreement was a forgery, it nevertheless held her
liable for the outstanding obligation of Hammer because she was an officer and stockholder of the said
corporation. The RTC agreed with Goldkey that as a third-party mortgagor, its liability was limited to the
properties mortgaged. It came to the conclusion, however, that Goldkey and Hammer were one and the
same entity for the following reasons: (1) both were family corporations of Chua and Uy, with Chua as the
President and Chief Operating Officer; (2) both corporations shared the same office and transacted business
from the same place, (3) the assets of Hammer and Goldkey were co-mingled; and (4) when Chua
absconded, both Hammer and Goldkey ceased to operate. As such, the piercing of the veil of corporate
fiction was warranted. Uy, as an officer and stockholder of Hammer and Goldkey, was found liable to iBank
together with Chua, Hammer and Goldkey for the deficiency of P13,420,177.62.

Aggrieved, the heirs of Uy and Goldkey (petitioners) elevated the case to the CA. On August 16, 2004, it
promulgated its decision affirming the findings of the RTC. The CA found that iBank was not negligent in
evaluating the financial stability of Hammer. According to the appellate court, iBank was induced to grant
the loan because petitioners, with intent to defraud the bank, submitted a falsified Financial Report for 1996
which incorrectly declared the assets and cashflow of Hammer.16 Because petitioners acted maliciously and
in bad faith and used the corporate fiction to defraud iBank, they should be treated as one and the same as
Hammer.17

Hence, these petitions filed separately by the heirs of Uy and Goldkey. On February 9, 2005, this Court
ordered the consolidation of the two cases.18

The Issues

Petitioners raise the following issues:

Whether or not a trial court, under the facts of this case, can go out of the issues raised by the
pleadings;19

Whether or not there is guilt by association in those cases where the veil of corporate fiction may
be pierced;20 and

Whether or not the “alter ego” theory in disregarding the corporate personality of a corporation
is applicable to Goldkey.21
Simplifying the issues in this case, the Court must resolve the following: (1) whether Uy can be held liable to
iBank for the loan obligation of Hammer as an officer and stockholder of the said corporation; and (2)
whether Goldkey can be held liable for the obligation of Hammer for being a mere alter ego of the latter.

The Court’s Ruling

The petitions are partly meritorious.

Uy is not liable; The piercing of the


veil of corporate fiction is not justified

The heirs of Uy argue that the latter could not be held liable for being merely an officer of Hammer and
Goldkey because it was not shown that she had committed any actionable wrong 22 or that she had
participated in the transaction between Hammer and iBank. They further claim that she had cut all ties with
Hammer and her husband long before the execution of the loan. 23

The Court finds in favor of Uy.

Basic is the rule in corporation law that a corporation is a juridical entity which is vested with a legal
personality separate and distinct from those acting for and in its behalf and, in general, from the people
comprising it. Following this principle, obligations incurred by the corporation, acting through its directors,
officers and employees, are its sole liabilities. A director, officer or employee of a corporation is generally not
held personally liable for obligations incurred by the corporation.24 Nevertheless, this legal fiction may be
disregarded if it is used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, or to confuse legitimate issues. 25

This is consistent with the provisions of the Corporation Code of the Philippines, which states:

Sec. 31. Liability of directors, trustees or officers. – Directors or trustees who wilfully and knowingly vote for
or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in
directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their
duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and other persons.

Solidary liability will then attach to the directors, officers or employees of the corporation in certain
circumstances, such as:

1. When directors and trustees or, in appropriate cases, the officers of a corporation: (a) vote for or assent
to patently unlawful acts of the corporation; (b) act in bad faith or with gross negligence in directing the
corporate affairs; and (c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders
or members, and other persons;

2. When a director or officer has consented to the issuance of watered stocks or who, having knowledge
thereof, did not forthwith file with the corporate secretary his written objection thereto;

3. When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and
solidarily liable with the corporation; or

4. When a director, trustee or officer is made, by specific provision of law, personally liable for his corporate
action.26

Before a director or officer of a corporation can be held personally liable for corporate obligations, however,
the following requisites must concur: (1) the complainant must allege in the complaint that the director or
officer assented to patently unlawful acts of the corporation, or that the officer was guilty of gross
negligence or bad faith; and (2) the complainant must clearly and convincingly prove such unlawful acts,
negligence or bad faith.27

While it is true that the determination of the existence of any of the circumstances that would warrant the
piercing of the veil of corporate fiction is a question of fact which cannot be the subject of a petition for
review on certiorari under Rule 45, this Court can take cognizance of factual issues if the findings of the
lower court are not supported by the evidence on record or are based on a misapprehension of facts. 28

In this case, petitioners are correct to argue that it was not alleged, much less proven, that Uy committed
an act as an officer of Hammer that would permit the piercing of the corporate veil. A reading of the
complaint reveals that with regard to Uy, iBank did not demand that she be held liable for the obligations of
Hammer because she was a corporate officer who committed bad faith or gross negligence in the
performance of her duties such that the lifting of the corporate mask would be merited. What the complaint
simply stated is that she, together with her errant husband Chua, acted as surety of Hammer, as evidenced
by her signature on the Surety Agreement which was later found by the RTC to have been forged. 29

Considering that the only basis for holding Uy liable for the payment of the loan was proven to be a falsified
document, there was no sufficient justification for the RTC to have ruled that Uy should be held jointly and
severally liable to iBank for the unpaid loan of Hammer. Neither did the CA explain its affirmation of the
RTC’s ruling against Uy. The Court cannot give credence to the simplistic declaration of the RTC that liability
would attach directly to Uy for the sole reason that she was an officer and stockholder of Hammer.

At most, Uy could have been charged with negligence in the performance of her duties as treasurer of
Hammer by allowing the company to contract a loan despite its precarious financial position. Furthermore, if
it was true, as petitioners claim, that she no longer performed the functions of a treasurer, then she should
have formally resigned as treasurer to isolate herself from any liability that could result from her being an
officer of the corporation. Nonetheless, these shortcomings of Uy are not sufficient to justify the piercing of
the corporate veil which requires that the negligence of the officer must be so gross that it could amount to
bad faith and must be established by clear and convincing evidence. Gross negligence is one that is
characterized by the lack of the slightest care, acting or failing to act in a situation where there is a duty to
act, wilfully and intentionally with a conscious indifference to the consequences insofar as other persons may
be affected.30

It behooves this Court to emphasize that the piercing of the veil of corporate fiction is frowned upon and can
only be done if it has been clearly established that the separate and distinct personality of the corporation is
used to justify a wrong, protect fraud, or perpetrate a deception. 31 As aptly explained in Philippine National
Bank v. Andrada Electric & Engineering Company:32

Hence, any application of the doctrine of piercing the corporate veil should be done with caution. A court
should be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was
misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its
rights. The wrongdoing must be clearly and convincingly established; it cannot be presumed. Otherwise, an
injustice that was never unintended may result from an erroneous application. 33

Indeed, there is no showing that Uy committed gross negligence. And in the absence of any of the
aforementioned requisites for making a corporate officer, director or stockholder personally liable for the
obligations of a corporation, Uy, as a treasurer and stockholder of Hammer, cannot be made to answer for
the unpaid debts of the corporation.

Goldkey is a mere alter ego of Hammer

Goldkey contends that it cannot be held responsible for the obligations of its stockholder, Chua. 34Moreover,
it theorizes that iBank is estopped from expanding Goldkey’s liability beyond the real estate mortgage. 35 It
adds that it did not authorize the execution of the said mortgage. 36 Finally, it passes the blame on to iBank
for failing to exercise the requisite due diligence in properly evaluating Hammer’s creditworthiness before it
was extended an omnibus line.37

The Court disagrees with Goldkey.

There is no reason to discount the findings of the CA that iBank duly inspected the viability of Hammer and
satisfied itself that the latter was a good credit risk based on the Financial Statement submitted. In addition,
iBank required that the loan be secured by Goldkey’s Real Estate Mortgage and the Surety Agreement with
Chua and Uy. The records support the factual conclusions made by the RTC and the CA.

To the Court’s mind, Goldkey’s argument, that iBank is barred from pursuing Goldkey for the satisfaction of
the unpaid obligation of Hammer because it had already limited its liability to the real estate mortgage, is
completely absurd. Goldkey needs to be reminded that it is being sued not as a consequence of the real
estate mortgage, but rather, because it acted as an alter ego of Hammer. Accordingly, they must be treated
as one and the same entity, making Goldkey accountable for the debts of Hammer.

In fact, it is Goldkey who is now precluded from denying the validity of the Real Estate Mortgage. In its
Answer with Affirmative Defenses and Compulsory Counterclaim, dated January 5, 1998, it already admitted
that it acted as a third-party mortgagor to secure the obligation of Hammer to iBank. 38 Thus, it cannot, at
this late stage, question the due execution of the third-party mortgage.

Similarly, Goldkey is undoubtedly mistaken in claiming that iBank is seeking to enforce an obligation of
Chua. The records clearly show that it was Hammer, of which Chua was the president and a stockholder,
which contracted a loan from iBank. What iBank sought was redress from Goldkey by demanding that the
veil of corporate fiction be lifted so that it could not raise the defense of having a separate juridical
personality to evade liability for the obligations of Hammer.

Under a variation of the doctrine of piercing the veil of corporate fiction, when two business enterprises are
owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect
the rights of third parties, disregard the legal fiction that two corporations are distinct entities and treat
them as identical or one and the same.39

While the conditions for the disregard of the juridical entity may vary, the following are some probative
factors of identity that will justify the application of the doctrine of piercing the corporate veil, as laid down
in Concept Builders, Inc. v NLRC:40

(1) Stock ownership by one or common ownership of both corporations;


(2) Identity of directors and officers;
(3) The manner of keeping corporate books and records, and
(4) Methods of conducting the business.41

These factors are unquestionably present in the case of Goldkey and

Hammer, as observed by the RTC, as follows:

1. Both corporations are family corporations of defendants Manuel Chua and his wife Fe Tan Uy. The
other incorporators and shareholders of the two corporations are the brother and sister of Manuel
Chua (Benito Ng Po Hing and Nenita Chua Tan) and the sister of Fe Tan Uy, Milagros Revilla. The
other incorporator/share holder is Manling Uy, the daughter of Manuel Chua Uy Po Tiong and Fe Tan
Uy.
The stockholders of Hammer Garments as of March 23, 1987, aside from spouses Manuel and Fe
Tan Uy are: Benito Chua, brother Manuel Chua, Nenita Chua Tan, sister of Manuel Chua and Tessie
See Chua Tan. On March 8, 1988, the shares of Tessie See Chua Uy were assigned to Milagros T.
Revilla, thereby consolidating the shares in the family of Manuel Chua and Fe Tan Uy.

2. Hammer Garments and Goldkey share the same office and practically transact their business
from the same place.

3. Defendant Manuel Chua is the President and Chief Operating Officer of both corporations. All
business transactions of Goldkey and Hammer are done at the instance of defendant Manuel Chua
who is authorized to do so by the corporations.

The promissory notes subject of this complaint are signed by him as Hammer’s President and
General Manager. The third-party real estate mortgage of defendant Goldkey is signed by him for
Goldkey to secure the loan obligation of Hammer Garments withplaintiff "iBank''. The other third-
party real estate mortgages which Goldkey executed in favor of the other creditor banks of Hammer
are also signed by Manuel Chua.

4. The assets of Goldkey and Hammer are co-mingled. The real properties of Goldkey are
mortgaged to secure Hammer's obligation with creditor hanks.

The proceeds of at least two loans which Hammer obtained from plaintiff "iBank", purportedly to
finance its export to WalMart are instead used to finance the purchase of a manager's check payable
to Goldkey. The defendants' claim that Goldkey is a creditor of Hammer to justify its receipt of the
Manager's cheek is not substantiated by evidence. Despite subpoenas issued by this Court, Goldkey
thru its treasurer, defendant Fe Tan Uy and or its corporate secretary Manling Uy failed to produce
the Financial Statement of Goldke.

5. When defendant Manuel Chua "disappeared", the defendant Goldkey ceased to operate despite
the claim that the other "officers" and stockholders like Benito Chua, Nenita Chua Tan, Fe Tan Uy,
Manling Uy and Milagros T. Revilla are still around and may be able to continue the business of
Goldkey, if it were different or distinct from Hammer which suffered financial set back. 42

Based on the foregoing findings of the RTC, it was apparent that Goldkey was merely an adjunct of Hammer
and, as such, the legal fiction that it has a separate personality from that of Hammer should be brushed
aside as they are, undeniably, one and the same.

WHEREFORE, the petitions are PARTLY GRANTED. The August 16, 2004 Decision and the December 2,
2004 Resolution of the Court of Appeals, in CA-G.R. CV No. 69817, are hereby MODIFIED. Fe Tan Uy is
released from any liability arising from the debts incurred by Hammer from iBank. Hammer Garments
Corporation, Manuel Chua Uy Po Tiong and Goldkey Development Corporation are jointly and severally liable
to pay International Exchange Bank the sum of P13,420,177.62 representing the unpaid loan obligation of
Hammer as of December 12, 1997 plus interest. No costs.

SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 167530 March 13, 2013

PHILIPPINE NATIONAL BANK, Petitioner,


vs.
HYDRO RESOURCES CONTRACTORS CORPORATION, Respondent.

G.R. No. 167561

ASSET PRIVATIZATION TRUST, Petitioner,


vs.
HYDRO RESOURCES CONTRACTORS CORPORATION, Respondent.

G.R. No. 167603


DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner,
vs.
HYDRO RESOURCES CONTRACTORS CORPORATION, Respondent.

DECISION

LEONARDO-DE CASTRO, J.:

These petitions for review on certiorari1 assail the Decision 2 dated November 30, 2004 and the
Resolution3 dated March 22, 2005 of the Court of Appeals in CA-G.R. CV No. 57553. The said
Decision affirmed the Decision4 dated November 6, 1995 of the Regional Trial Court (RTC) of Makati
City, Branch 62, granting a judgment award of ₱8,370,934.74, plus legal interest, in favor of
respondent Hydro Resources Contractors Corporation (HRCC) with the modification that the
Privatization and Management Office (PMO), successor of petitioner Asset Privatization Trust
(APT),5 has been held solidarily liable with Nonoc Mining and Industrial Corporation (NMIC) 6 and
petitioners Philippine National Bank (PNB) and Development Bank of the Philippines (DBP), while
the Resolution denied reconsideration separately prayed for by PNB, DBP, and APT.

Sometime in 1984, petitioners DBP and PNB foreclosed on certain mortgages made on the
properties of Marinduque Mining and Industrial Corporation (MMIC). As a result of the foreclosure,
DBP and PNB acquired substantially all the assets of MMIC and resumed the business operations of
the defunct MMIC by organizing NMIC.7 DBP and PNB owned 57% and 43% of the shares of NMIC,
respectively, except for five qualifying shares.8As of September 1984, the members of the Board of
Directors of NMIC, namely, Jose Tengco, Jr., Rolando Zosa, Ruben Ancheta, Geraldo Agulto, and
Faustino Agbada, were either from DBP or PNB.9

Subsequently, NMIC engaged the services of Hercon, Inc., for NMIC’s Mine Stripping and Road
Construction Program in 1985 for a total contract price of ₱35,770,120. After computing the
payments already made by NMIC under the program and crediting the NMIC’s receivables from

Hercon, Inc., the latter found that NMIC still has an unpaid balance of ₱8,370,934.74. 10 Hercon, Inc.
made several demands on NMIC, including a letter of final demand dated August 12, 1986, and
when these were not heeded, a complaint for sum of money was filed in the RTC of Makati, Branch
136 seeking to hold petitioners NMIC, DBP, and PNB solidarily liable for the amount owing Hercon,
Inc.11 The case was docketed as Civil Case No. 15375.

Subsequent to the filing of the complaint, Hercon, Inc. was acquired by HRCC in a merger. This
prompted the amendment of the complaint to substitute HRCC for Hercon, Inc. 12

Thereafter, on December 8, 1986, then President Corazon C. Aquino issued Proclamation No. 50
creating the APT for the expeditious disposition and privatization of certain government corporations
and/or the assets thereof. Pursuant to the said Proclamation, on February 27, 1987, DBP and PNB
executed their respective deeds of transfer in favor of the National Government assigning,
transferring and conveying certain assets and liabilities, including their respective stakes in
NMIC.13 In turn and on even date, the National Government transferred the said assets and liabilities
to the APT as trustee under a Trust Agreement.14 Thus, the complaint was amended for the second
time to implead and include the APT as a defendant.

In its answer,15 NMIC claimed that HRCC had no cause of action. It also asserted that its contract
with HRCC was entered into by its then President without any authority. Moreover, the said contract
allegedly failed to comply with laws, rules and regulations concerning government contracts. NMIC
further claimed that the contract amount was manifestly excessive and grossly disadvantageous to
the government. NMIC made counterclaims for the amounts already paid to Hercon, Inc. and
attorney’s fees, as well as payment for equipment rental for four trucks, replacement of parts and
other services, and damage to some of NMIC’s properties. 16

For its part, DBP’s answer17 raised the defense that HRCC had no cause of action against it because
DBP was not privy to HRCC’s contract with NMIC. Moreover, NMIC’s juridical personality is separate
from that of DBP. DBP further interposed a counterclaim for attorney’s fees. 18

PNB’s answer19 also invoked lack of cause of action against it. It also raised estoppel on HRCC’s
part and laches as defenses, claiming that the inclusion of PNB in the complaint was the first time a
demand for payment was made on it by HRCC. PNB also invoked the separate juridical personality
of NMIC and made counterclaims for moral damages and attorney’s fees.20

APT set up the following defenses in its answer21: lack of cause of action against it, lack of privity
between Hercon, Inc. and APT, and the National Government’s preferred lien over the assets of
NMIC.22
After trial, the RTC of Makati rendered a Decision dated November 6, 1995 in favor of HRCC. It
pierced the corporate veil of NMIC and held DBP and PNB solidarily liable with NMIC:

On the issue of whether or not there is sufficient ground to pierce the veil of corporate fiction, this
Court likewise finds for the plaintiff.

From the documentary evidence adduced by the plaintiff, some of which were even adopted by
defendants and DBP and PNB as their own evidence (Exhibits "I", "I-1", "I-2", "I-3", "I-4", "I-5", "I5-A",
"I-5-B", "I-5-C", "I-5-D" and submarkings, inclusive), it had been established that except for five (5)
qualifying shares, NMIC is owned by defendants DBP and PNB, with the former owning 57% thereof,
and the latter 43%. As of September 24, 1984, all the members of NMIC’s Board of Directors,
namely, Messrs. Jose Tengco, Jr., Rolando M. Zosa, Ruben Ancheta, Geraldo Agulto, and Faustino
Agbada are either from DBP or PNB (Exhibits "I-5", "I-5-C", "I-5-D").

The business of NMIC was then also being conducted and controlled by both DBP and PNB. In fact,
it was Rolando M. Zosa, then Governor of DBP, who was signing and entering into contracts with
third persons, on behalf of NMIC.

In this jurisdiction, it is well-settled that "where it appears that the business enterprises are owned,
conducted and controlled by the same parties, both law and equity will, when necessary to protect
the rights of third persons, disregard legal fiction that two (2) corporations are distinct entities, and
treat them as identical." (Phil. Veterans Investment Development Corp. vs. CA, 181 SCRA 669).

From all indications, it appears that NMIC is a mere adjunct, business conduit or alter ego of both
DBP and PNB. Thus, the DBP and PNB are jointly and severally liable with NMIC for the latter’s
unpaid obligations to plaintiff. 23

Having found DBP and PNB solidarily liable with NMIC, the dispositive portion of the Decision of the
trial court reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of the plaintiff HYDRO
RESOURCES CONTRACTORS CORPORATION and against the defendants NONOC

MINING AND INDUSTRIAL CORPORATION, DEVELOPMENT BANK OF THE PHILIPPINES and


PHILIPPINE NATIONAL BANK, ordering the aforenamed defendants, to pay the plaintiff jointly and
severally, the sum of ₱8,370,934.74 plus legal interest thereon from date of demand, and attorney’s
fees equivalent to 25% of the judgment award.

The complaint against APT is hereby dismissed. However, APT, as trustee of NONOC MINING AND
INDUSTRIAL CORPORATION is directed to ensure compliance with this Decision. 24

DBP and PNB filed their respective appeals in the Court of Appeals. Both insisted that it was wrong
for the RTC to pierce the veil of NMIC’s corporate personality and hold DBP and PNB solidarily liable
with NMIC.25

The Court of Appeals rendered the Decision dated November 30, 2004, affirmed the piercing of the
veil of the corporate personality of NMIC and held DBP, PNB, and APT solidarily liable with NMIC. In
particular, the Court of Appeals made the following findings:

In the case before Us, it is indubitable that [NMIC] was owned by appellants DBP and PNB to the
extent of 57% and 43% respectively; that said two (2) appellants are the only stockholders, with the
qualifying stockholders of five (5) consisting of its own officers and included in its charter merely to
comply with the requirement of the law as to number of incorporators; and that the directorates of
DBP, PNB and [NMIC] are interlocked.

We find it therefore correct for the lower court to have ruled that:

"From all indications, it appears that NMIC is a mere adjunct, business conduit or alter ego of both
DBP and PNB. Thus, the DBP and PNB are jointly and severally liable with NMIC for the latter’s
unpaid obligation to plaintiff."26(Citation omitted.)

The Court of Appeals then concluded that, "in keeping with the concept of justice and fair play," the
corporate veil of NMIC should be pierced, ratiocinating:

For to treat NMIC as a separate legal entity from DBP and PNB for the purpose of securing
beneficial contracts, and then using such separate entity to evade the payment of a just debt, would
be the height of injustice and iniquity. Surely that could not have been the intendment of the law with
respect to corporations. x x x.27

The dispositive portion of the Decision of the Court of Appeals reads:

WHEREFORE, premises considered, the Decision appealed from is hereby MODIFIED. The
judgment in favor of appellee Hydro Resources Contractors Corporation in the amount of
₱8,370,934.74 with legal interest from date of demand is hereby AFFIRMED, but the dismissal of the
case as against Assets Privatization Trust is REVERSED, and its successor the Privatization and
Management Office is INCLUDED as one of those jointly and severally liable for such indebtedness.
The award of attorney’s fees is DELETED.

All other claims and counter-claims are hereby DISMISSED.

Costs against appellants.28

The respective motions for reconsideration of DBP, PNB, and APT were denied. 29

Hence, these consolidated petitions. 30

All three petitioners assert that NMIC is a corporate entity with a juridical personality separate and
distinct from both PNB and DBP. They insist that the majority ownership by DBP and PNB of NMIC is
not a sufficient ground for disregarding the separate corporate personality of NMIC because NMIC
was not a mere adjunct, business conduit or alter ego of DBP and PNB. According to them, the
application of the doctrine of piercing the corporate veil is unwarranted as nothing in the records
would show that the ownership and control of the shareholdings of NMIC by DBP and PNB were
used to commit fraud, illegality or injustice. In the absence of evidence that the stock control by DBP
and PNB over NMIC was used to commit some fraud or a wrong and that said control was the
proximate cause of the injury sustained by HRCC, resort to the doctrine of "piercing the veil of
corporate entity" is misplaced. 31

DBP and PNB further argue that, assuming they may be held solidarily liable with NMIC to pay
NMIC’s exclusive and separate corporate indebtedness to HRCC, such liability of the two banks was
transferred to and assumed by the National Government through the APT, now the PMO, under the
respective deeds of transfer both dated February 27, 1997 executed by DBP and PNB pursuant to
Proclamation No. 50 dated December 8, 1986 and Administrative Order No. 14 dated February 3,
1987.32

For its part, the APT contends that, in the absence of an unqualified assumption by the National
Government of all liabilities incurred by NMIC, the National Government through the APT could not
be held liable for NMIC’s contractual liability. The APT asserts that HRCC had not sufficiently shown
that the APT is the successor-in-interest of all the liabilities of NMIC, or of DBP and PNB as
transferors, and that the adjudged liability is included among the liabilities assigned and transferred
by DBP and PNB in favor of the National Government.33

HRCC counters that both the RTC and the CA correctly applied the doctrine of "piercing the veil of
corporate fiction." It claims that NMIC was the alter ego of DBP and PNB which owned, conducted
and controlled the business of NMIC as shown by the following circumstances: NMIC was owned by
DBP and PNB, the officers of DBP and PNB were also the officers of NMIC, and DBP and PNB
financed the operations of NMIC. HRCC further argues that a parent corporation may be held liable
for the contracts or obligations of its subsidiary corporation where the latter is a mere agency,
instrumentality or adjunct of the parent corporation. 34

Moreover, HRCC asserts that the APT was properly held solidarily liable with DBP, PNB, and NMIC
because the APT assumed the obligations of DBP and PNB as the successor-in-interest of the said
banks with respect to the assets and liabilities of NMIC. 35 As trustee of the Republic of the
Philippines, the APT also assumed the responsibility of the Republic pursuant to the following
provision of Section 2.02 of the respective deeds of transfer executed by DBP and PNB in favor of
the Republic:

SECTION 2. TRANSFER OF BANK’S LIABILITIES

2.02 With respect to the Bank’s liabilities which are contingent and those liabilities where the Bank’s
creditors consent to the transfer thereof is not obtained, said liabilities shall remain in the books of
the BANK with the GOVERNMENT funding the payment thereof. 36

After a careful review of the case, this Court finds the petitions impressed with merit.
A corporation is an artificial entity created by operation of law. It possesses the right of succession
and such powers, attributes, and properties expressly authorized by law or incident to its
existence.37 It has a personality separate and distinct from that of its stockholders and from that of
other corporations to which it may be connected. 38 As a consequence of its status as a distinct legal
entity and as a result of a conscious policy decision to promote capital formation, 39 a corporation
incurs its own liabilities and is legally responsible for payment of its obligations. 40 In other words, by
virtue of the separate juridical personality of a corporation, the corporate debt or credit is not the debt
or credit of the stockholder.41 This protection from liability for shareholders is the principle of limited
liability.42

Equally well-settled is the principle that the corporate mask may be removed or the corporate veil
pierced when the corporation is just an alter ego of a person or of another corporation. For reasons
of public policy and in the interest of justice, the corporate veil will justifiably be impaled only when it
becomes a shield for fraud, illegality or inequity committed against third persons. 43

However, the rule is that a court should be careful in assessing the milieu where the doctrine of the
corporate veil may be applied. Otherwise an injustice, although unintended, may result from its
erroneous application.44 Thus, cutting through the corporate cover requires an approach
characterized by due care and caution:

Hence, any application of the doctrine of piercing the corporate veil should be done with caution. A
court should be mindful of the milieu where it is to be applied. It must be certain that the corporate
fiction was misused to such an extent that injustice, fraud, or crime was committed against another,
in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be
presumed. x x x.45 (Emphases supplied; citations omitted.)

Sarona v. National Labor Relations Commission46 has defined the scope of application of the
doctrine of piercing the corporate veil:

The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat of
public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing
obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or
defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter
ego or business conduit of a person, or where the corporation is so organized and controlled and its
affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation. (Citation omitted.)

Here, HRCC has alleged from the inception of this case that DBP and PNB (and the APT as
assignee of DBP and PNB) should be held solidarily liable for using NMIC as alter ego. 47 The RTC
sustained the allegation of HRCC and pierced the corporate veil of NMIC pursuant to the alter ego
theory when it concluded that NMIC "is a mere adjunct, business conduit or alter ego of both DBP
and PNB."48 The Court of Appeals upheld such conclusion of the trial court. 49 In other words, both the
trial and appellate courts relied on the alter ego theory when they disregarded the separate
corporate personality of NMIC.

In this connection, case law lays down a three-pronged test to determine the application of the alter
ego theory, which is also known as the instrumentality theory, namely:

(1) Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate mind, will or existence of
its own;

(2) Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act
in contravention of plaintiff’s legal right; and

(3) The aforesaid control and breach of duty must have proximately caused the injury or
unjust loss complained of.50 (Emphases omitted.)

The first prong is the "instrumentality" or "control" test. This test requires that the subsidiary be
completely under the control and domination of the parent. 51 It examines the parent corporation’s
relationship with the subsidiary.52 It inquires whether a subsidiary corporation is so organized and
controlled and its affairs are so conducted as to make it a mere instrumentality or agent of the parent
corporation such that its separate existence as a distinct corporate entity will be ignored. 53 It seeks to
establish whether the subsidiary corporation has no autonomy and the parent corporation, though
acting through the subsidiary in form and appearance, "is operating the business directly for itself." 54
The second prong is the "fraud" test. This test requires that the parent corporation’s conduct in using
the subsidiary corporation be unjust, fraudulent or wrongful. 55 It examines the relationship of the
plaintiff to the corporation.56 It recognizes that piercing is appropriate only if the parent corporation
uses the subsidiary in a way that harms the plaintiff creditor. 57 As such, it requires a showing of "an
element of injustice or fundamental unfairness."58

The third prong is the "harm" test. This test requires the plaintiff to show that the defendant’s control,
exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm suffered. 59 A
causal connection between the fraudulent conduct committed through the instrumentality of the
subsidiary and the injury suffered or the damage incurred by the plaintiff should be established. The
plaintiff must prove that, unless the corporate veil is pierced, it will have been treated unjustly by the
defendant’s exercise of control and improper use of the corporate form and, thereby, suffer
damages.60

To summarize, piercing the corporate veil based on the alter ego theory requires the concurrence of
three elements: control of the corporation by the stockholder or parent corporation, fraud or
fundamental unfairness imposed on the plaintiff, and harm or damage caused to the plaintiff by the
fraudulent or unfair act of the corporation. The absence of any of these elements prevents piercing
the corporate veil.61

This Court finds that none of the tests has been satisfactorily met in this case.

In applying the alter ego doctrine, the courts are concerned with reality and not form, with how the
corporation operated and the individual defendant’s relationship to that operation. 62 With respect to
the control element, it refers not to paper or formal control by majority or even complete stock control
but actual control which amounts to "such domination of finances, policies and practices that the
controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a
conduit for its principal."63 In addition, the control must be shown to have been exercised at the time
the acts complained of took place.64

Both the RTC and the Court of Appeals applied the alter ego theory and penetrated the corporate
cover of NMIC based on two factors: (1) the ownership by DBP and PNB of effectively all the stocks
of NMIC, and (2) the alleged interlocking directorates of DBP, PNB and NMIC. 65 Unfortunately, the
conclusion of the trial and appellate courts that the DBP and PNB fit the alter ego theory with respect
to NMIC’s transaction with HRCC on the premise of complete stock ownership and interlocking
directorates involved a quantum leap in logic and law exposing a gap in reason and fact.

While ownership by one corporation of all or a great majority of stocks of another corporation and
their interlocking directorates may serve as indicia of control, by themselves and without more,
however, these circumstances are insufficient to establish an alter ego relationship or connection
between DBP and PNB on the one hand and NMIC on the other hand, that will justify the puncturing
of the latter’s corporate cover. This Court has declared that "mere ownership by a single stockholder
or by another corporation of all or nearly all of the capital stock of a corporation is not of itself
sufficient ground for disregarding the separate corporate personality." 66

This Court has likewise ruled that the "existence of interlocking directors, corporate officers and
shareholders is not enough justification to pierce the veil of corporate fiction in the absence of fraud
or other public policy considerations."67

True, the findings of fact of the Court of Appeals are conclusive and cannot be reviewed on appeal to
this Court, provided they are borne out of the record or are based on substantial evidence. 68 It is
equally true that the question of whether one corporation is merely an alter ego of another is purely
one of fact. So is the question of whether a corporation is a paper company, a sham or subterfuge or
whether the requisite quantum of evidence has been adduced warranting the piercing of the veil of
corporate personality.69 Nevertheless, it has been held in Sarona v. National Labor Relations
Commission70 that this Court has the power to resolve a question of fact, such as whether a
corporation is a mere alter ego of another entity or whether the corporate fiction was invoked for
fraudulent or malevolent ends, if the findings in the assailed decision are either not supported by the
evidence on record or based on a misapprehension of facts.

In this case, nothing in the records shows that the corporate finances, policies and practices of NMIC
were dominated by DBP and PNB in such a way that NMIC could be considered to have no separate
mind, will or existence of its own but a mere conduit for DBP and PNB. On the contrary, the evidence
establishes that HRCC knew and acted on the knowledge that it was dealing with NMIC, not with
NMIC’s stockholders. The letter proposal of Hercon, Inc., HRCC’s predecessor-in-interest, regarding
the contract for NMIC’s mine stripping and road construction program was addressed to and
accepted by NMIC.71 The various billing reports, progress reports, statements of accounts and
communications of Hercon, Inc./HRCC regarding NMIC’s mine stripping and road construction
program in 1985 concerned NMIC and NMIC’s officers, without any indication of or reference to the
control exercised by DBP and/or PNB over NMIC’s affairs, policies and practices. 72

HRCC has presented nothing to show that DBP and PNB had a hand in the act complained of, the
alleged undue disregard by NMIC of the demands of HRCC to satisfy the unpaid claims for services
rendered by HRCC in connection with NMIC’s mine stripping and road construction program in 1985.
On the contrary, the overall picture painted by the evidence offered by HRCC is one where HRCC
was dealing with NMIC as a distinct juridical person acting through its own corporate officers. 73

Moreover, the finding that the respective boards of directors of NMIC, DBP, and PNB were
interlocking has no basis. HRCC’s Exhibit "I-5,"74 the initial General Information Sheet submitted by
NMIC to the Securities and Exchange Commission, relied upon by the trial court and the Court of
Appeals may have proven that DBP and PNB owned the stocks of NMIC to the extent of 57% and
43%, respectively. However, nothing in it supports a finding that NMIC, DBP, and PNB had
interlocking directors as it only indicates that, of the five members of NMIC’s board of directors, four
were nominees of either DBP or PNB and only one was a nominee of both DBP and PNB. 75 Only two
members of the board of directors of NMIC, Jose Tengco, Jr. and Rolando Zosa, were established to
be members of the board of governors of DBP and none was proved to be a member of the board of
directors of PNB.76 No director of NMIC was shown to be also sitting simultaneously in the board of
governors/directors of both DBP and PNB.

In reaching its conclusion of an alter ego relationship between DBP and PNB on the one hand and
NMIC on the other hand, the Court of Appeals invoked Sibagat Timber Corporation v. Garcia, 77 which
it described as "a case under a similar factual milieu." 78 However, in Sibagat Timber Corporation, this
Court took care to enumerate the circumstances which led to the piercing of the corporate veil of
Sibagat Timber Corporation for being the alter ego of Del Rosario & Sons Logging Enterprises, Inc.
Those circumstances were as follows: holding office in the same building, practical identity of the
officers and directors of the two corporations and assumption of management and control of Sibagat
Timber Corporation by the directors/officers of Del Rosario & Sons Logging Enterprises, Inc.

Here, DBP and PNB maintain an address different from that of NMIC.79 As already discussed, there
was insufficient proof of interlocking directorates. There was not even an allegation of similarity of
corporate officers. Instead of evidence that DBP and PNB assumed and controlled the management
of NMIC, HRCC’s evidence shows that NMIC operated as a distinct entity endowed with its own
legal personality. Thus, what obtains in this case is a factual backdrop different from, not similar to,
Sibagat Timber Corporation.

In relation to the second element, to disregard the separate juridical personality of a corporation, the
wrongdoing or unjust act in contravention of a plaintiff’s legal rights must be clearly and convincingly
established; it cannot be presumed. Without a demonstration that any of the evils sought to be
prevented by the doctrine is present, it does not apply. 80

In this case, the Court of Appeals declared:

We are not saying that PNB and DBP are guilty of fraud in forming NMIC, nor are we implying that
NMIC was used to conceal fraud. x x x.81

Such a declaration clearly negates the possibility that DBP and PNB exercised control over NMIC
which DBP and PNB used "to commit fraud or wrong, to perpetuate the violation of a statutory or
other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal rights." It is a
recognition that, even assuming that DBP and PNB exercised control over NMIC, there is no
evidence that the juridical personality of NMIC was used by DBP and PNB to commit a fraud or to do
a wrong against HRCC.

There being a total absence of evidence pointing to a fraudulent, illegal or unfair act committed
against HRCC by DBP and PNB under the guise of NMIC, there is no basis to hold that NMIC was a
mere alter ego of DBP and PNB. As this Court ruled in Ramoso v. Court of Appeals 82:

As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient
reason to the contrary appears. When the notion of legal entity is used to defeat public convenience,
justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of
persons. Also, the corporate entity may be disregarded in the interest of justice in such cases as
fraud that may work inequities among members of the corporation internally, involving no rights of
the public or third persons. In both instances, there must have been fraud, and proof of it. For the
separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and
convincingly established. It cannot be presumed.

As regards the third element, in the absence of both control by DBP and PNB of NMIC and fraud or
fundamental unfairness perpetuated by DBP and PNB through the corporate cover of NMIC, no
harm could be said to have been proximately caused by DBP and PNB on HRCC for which HRCC
could hold DBP and PNB solidarily liable with NMIC. 1âwphi1

Considering that, under the deeds of transfer executed by DBP and PNB, the liability of the APT as
transferee of the rights, titles and interests of DBP and PNB in NMIC will attach only if DBP and PNB
are held liable, the APT incurs no liability for the judgment indebtedness of NMIC. Even HRCC
recognizes that "as assignee of DBP and PNB 's loan receivables," the APT simply "stepped into the
shoes of DBP and PNB with respect to the latter's rights and obligations" in NMIC. 83 As such
assignee, therefore, the APT incurs no liability with respect to NMIC other than whatever liabilities
may be imputable to its assignors, DBP and PNB.

Even under Section 2.02 of the respective deeds of transfer executed by DBP and PNB which
HRCC invokes, the APT cannot be held liable. The contingent liability for which the National
Government, through the APT, may be held liable under the said provision refers to contingent
liabilities of DBP and PNB. Since DBP and PNB may not be held solidarily liable with NMIC, no
contingent liability may be imputed to the APT as well. Only NMIC as a distinct and separate legal
entity is liable to pay its corporate obligation to HRCC in the amount of ₱8,370,934.74, with legal
interest thereon from date of demand.

As trustee of the. assets of NMIC, however, the APT should ensure compliance by NMIC of the
judgment against it. The APT itself acknowledges this.84

WHEREFORE, the petitions are hereby GRANTED.

The complaint as against Development Bank of the Philippines, the Philippine National Bank, and
the Asset Privatization Trust, now the Privatization and Management Office, is DISMISSED for lack
of merit. The Asset Privatization Trust, now the Privatization and Management Office, as trustee of
Nonoc Mining and Industrial Corporation, now the Philnico Processing Corporation, is DIRECTED to
ensure compliance by the Nonoc Mining and Industrial Corporation, now the Philnico Processing
Corporation, with this Decision.

SO ORDERED.

pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above
Decision had been reached in consultation before the case was assigned to the writer of the opinion
of the Court's Division.

MARIA LOURDES P. A. SERENO


Chief Justice

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 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 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.
This Order is immediately executory upon its approval. 2

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 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 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 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;

(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.

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. To the same effect is the
3

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. Thus, in Francisco v. City of Davao, this Court resolved to decide the case on the
4 5

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., this Court, finding that the main issue is one of law, resolved to decide the
6

case on the merits "because public interest demands an early disposition of the case", and in
Republic v. Central Surety and Insurance Company, this Court denied remand of the third-party
7

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. It is settled that the doctrine of
8

primary jurisdiction has no application where only a question of law is involved. a 8

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. b In the case at bar, there are
8

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.

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. Whether


9

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. This rule is subject,
10

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 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. At 12

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, the Court sustained the validity of a provision in the corporate by-law requiring that
14

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." To this extent, therefore, the stockholder may be
15

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 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." "The ordinary trust relationship
18

of directors of a corporation and stockholders", according to Ashaman v. Miller, "is not a matter
19

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 * * *.

Justice Douglas, in Pepper v. Litton, emphatically restated the standard of fiduciary obligation
20

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.
And in Cross v. West Virginia Cent, & P. R. R. Co., it was said:
21

... 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

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." This is based
24

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." In a case where directors of a corporation
27

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" is precisely a recognition by the courts that the
29

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 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: "The law win not tolerate
31

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:

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 ... ." they operate to forestall concentration of economic power. The law against
34 35

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. In short, it is the concentration of business in the hands of a few.
37

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. Further, it must be considered that the Idea of monopoly is now understood to include a
38

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. It is enough that a concert of action is
40

contemplated and that the defendants conformed to the arrangements, and what is to be
41

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. There is here a statutory recognition of the
42

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, 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. (Emphasis supplied.)
43

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 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. The test must be whether the business does in fact compete,
46

not whether it is capable of an indirect and highly unsubstantial duplication of an isolated or non-
characteristics activity. It is, therefore, obvious that not every person or entity engaged in
47
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. Pursuant to this obligation and to remove any suspicion that this power may be
48

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. Indeed, it is a settled principle that where the action of a Board of
49

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. This right is predicated upon the necessity of self-
52

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 germane thereto or in the interest of the
corporation. In other words, the inspection has to be germane to the petitioner's interest as a
53

stockholder, and has to be proper and lawful in character and not inimical to the interest of the
corporation. In Grey v. Insular Lumber, this Court held that "the right to examine the books of
54 55

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. Thus, 56

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." But the57

"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. It appears to be the
58

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, and that a
60

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. mandamus
61

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. Likewise, inspection of the books of an
63

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, The Supreme Court of New York held that the contractual right of former
65

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, stockholders of a corporation were held entitled to inspect the records of a
66

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." There is no question that stockholders are entitled to inspect the
67

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

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).

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. This is
70

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, "or those which are not illegal and void ab
71

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.

Separate Opinions

TEEHANKEE, CONCEPCION JR., FERNANDEZ and GUERRERO, JJ., concurring:

As correctly stated in the main opinion of Mr. Justice Antonio, the Court is unanimous in its
judgment granting the petitioner as stockholder of respondent San Miguel Corporation the right
to inspect, examine and secure copies of the records of San Miguel International, inc. (SMI), a
wholly owned foreign subsidiary corporation of respondent San Miguel Corporation. Respondent
commissions en banc Order No. 449, Series of 19 7 7, denying petitioner's right of inspection for
"not being a stockholder of San Miguel International, Inc." has been accordingly set aside. It
need be only pointed out that:

a) The commission's reasoning grossly disregards the fact that the stockholders of
San Miguel Corporation are likewise the owners of San Miguel International, Inc.
as the corporation's wholly owned foreign subsidiary and therefore have every
right to have access to its books and records. otherwise, the directors and
management of any Philippine corporation by the simple device of organizing
with the corporation's funds foreign subsidiaries would be granted complete
immunity from the stockholders' scrutiny of its foreign operations and would have
a conduit for dissipating, if not misappropriating, the corporation funds and assets
by merely channeling them into foreign subsidiaries' operations; and

b) Petitioner's right of examination herein recognized refers to all books and


records of the foreign subsidiary SMI which are which are " in respondent
corporation's possession and control" , meaning to say regardless of whether or
1

not such books and records are physically within the Philippines. all such books
and records of SMI are legally within respondent corporation's "possession and
control" and if nay books or records are kept abroad, (e.g. in the foreign
subsidiary's state of domicile, as is to be expected), then the respondent
corporation's board and management are obliged under the Court's judgment to
bring and make them (or true copies thereof available within the Philippines for
petitioner's examination and inspection.

II

On the other main issue of the Validity of respondent San Miguel Corporation's amendment of its
by-laws whereby respondent corporation's board of directors under its resolution dated April 29,
2
1977 declared petitioner ineligible to be nominated or to be voted or to be elected as of the board
of directors, the Court, composed of 12 members (since Mme. Justice Ameurfina Melencio
Herrera inhibited herself from taking part herein, while Mr. Justice Ramon C. Aquino upon
submittal of the main opinion of Mr. Justice Antonio decided not to take part), failed to reach a
conclusive vote or, the required majority of 8 votes to settle the issue one way or the other.

Six members of the Court, namely, Justices Barredo, Makasiar, Antonio, Santos, Abad Santos
and De Castro, considered the issue purely legal and voted to sustain the validity per se of the
questioned amended by-laws but nevertheless voted that 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 she'll have been sustained on appeal by respondent Securities and Exchange
Commission and ultimately by this Court.

The undersigned Justices do not consider the issue as purely legal in the light of respondent
commission's Order No. 451, Series of 1977, denying petitioner's "Motion for Summary
Judgment" on the ground that "the Commission en banc finds that there (are) unresolved and
genuine issues of fact" as well as its position in this case to the Solicitor General that the case at
3

bar is "premature" and that the administrative remedies before the commission should first be
availed of and exhausted. 4

We are of the opinion that the questioned amended by-laws, as they are, (adopted after almost a
century of respondent corporation's existence as a public corporation with its shares freely
purchased and traded in the open market without restriction and disqualification) which would
bar petitioner from qualification, nomination and election as director and worse, grant 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.

We consider the questioned amended by-laws as being 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.

We further consider said amended by-laws as violating 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 (secs 21 and 30) and the right
of a minority director once elected not to be removed from office of director except for cause by
vote of the stockholders holding 2/3 of the subscribed capital stock (sec. 31). If a minority
stockholder could be disqualified by such a by-laws amendment under the guise of providing for
"qualifications," these mandates of the Corporation Law would have no meaning or purpose.

These vested and substantial rights granted stockholders under the Corporation Law may not be
diluted or defeated by the general authority granted by the Corporation Law itself to corporations
to adopt their by-laws (in section 21) which deal principally with the procedures governing their
internal business. The by-laws of any corporation must, be always within the character limits.
What the Corporation Law has granted stockholders may not be taken away by the corporation's
by-laws. The amendment is further an instrument of oppressiveness and arbitrariness in that the
incumbent directors are thereby enabled to perpetuate themselves in office by the simple
expedient of disqualifying any unwelcome candidate, no matter how many votes he may have.

However, in view of the inconclusiveness of the vote, we sustain respondent commission's stand
as expressed in its Orders Nos. 450 and 451, Series of 1977 that there are unresolved and
genuine issues of fact" and that it has yet to rule on and finally decide the validity of the disputed
by-law provision", subject to appeal by either party to this Court.

In view of prematurity of the proceedings here (as likewise expressed by Mr. Justice Fernando),
the case should as a consequence be remanded to the Securities and Exchange Commission as
the agency of primary jurisdiction for a full hearing and reception of evidence of all relevant
facts (which should property be submitted to the commission instead of the piecemeal documents
submitted as annexes to this Court which is not a trier of facts) concerning not only the petitioner
but the members of the board of directors of respondent corporation as well, so that it may
determine on the basis thereof the issue of the legality of the questioned amended by-laws, and
assuming Chat it holds the same to be valid whether the same are arbitrarily and unreasonably
applied to petitioner vis a vis other directors, who, petitioner claims, should in such event be
likewise disqualified from sitting in the board of directors by virtue of conflict of interests or
their being likewise engaged in competitive or antagonistic business" with the corporation such
as investment and finance, coconut oil mills cement, milk and hotels. 5

It should be noted that while the petition may be dismissed in view of the inconclusiveness of the
vote and the Court's failure to affair, the required 8-vote majority to resolve the issue, such as
dismissal (for lack of necessary votes) is of no doctrine value and does not in any manner resolve
the issue of the validity of the questioned amended by-laws nor foreclose the same. The same
should properly be determined in a proper case in the first instance by the Securities and
Exchange Commission as the agency of primary jurisdiction, as above indicated.

The Court is unanimous, therefore, in its judgment that petitioner Gokongwei may run for the
office of, and if elected, sit as, member of the board of directors of respondent San Miguel
Corporation as stated in the dispositive portion of the main opinion of Mr. Justice Antonio, to
wit: Until and after petitioner has been given a "new and proper hearing by the board of directors
of said corporation, whose decision shall be appealable Lo the respondent Securities and
Exchange Commission deliverating and acting en banc and ultimately to this Court" and until '
disqualified in the manner herein provided, the prohibition in the aforementioned amended by-
laws shall not apply to petitioner," In other words, until and after petitioner shall have been given
due process and proper hearing by the respondent board of directors as to the question of his
qualification or disqualification under the questioned amended by-laws (assuming that the
respondent Securities and Exchange C commission ultimately upholds the validity of said by
laws), and such disqualification shall have been sustained by respondent Securities and
Exchange Commission and ultimately by final judgment of this Court, petitioner is deemed
eligible for all legal purposes and effects to be nominated and voted and if elected to sit as a
member of the hoard of directors of respondent San Miguel Corporation.

In view of the Court's unanimous judgment on this point the portion of respondent commission's
Order No. 450, Series of 977 which imposed "the condition that he [petitioner] cannot sit as
board member if elected until after the Commission shall have finally decided the validity of the
disputed by-law provision" has been likewise accordingly set aside.

III

By way of recapitulation, so that the Court's decision and judgment may be clear and not subject
to ambiguity, we state the following.

1. With the votes of the six Justices concurring unqualifiedly in the main opinion added to our
four votes, plus the Chief Justice's vote and that of Mr. Justice Fernando, the Court has by twelve
(12) votes unanimously rendered judgment granting petitioner's right to examine and secure
copies of the books and records of San Miguel International, Inc. as a foreign subsidiary of
respondent corporation and respondent commission's Order No. 449, Series of 1977, to the
contrary is set aside:

2. With the same twelve (12) votes, the Court has also unanimously rendered judgment declaring
that until and after petitioner shall have been given due process and proper hearing by the
respondent board of directors as to the question of his disqualification under the questioned
amended by- laws (assuming that the respondent Securities and Exchange Commission
ultimately upholds the validity of said by laws), and such disqualification shall have been
sustained by respondent Securities and Exchange Commission and ultimately by final judgment
of this Court petitioner is deemed eligible for all legal purposes and effect to be nominated and
voted and if elected to sit as a member of the board of directors of respondent San Miguel
Corporation. Accordingly, respondent commission's Order No. 450, Series of 1977 to the
contrary has likewise been set aside; and

3. The Court's voting on the validity of respondent corporation's amendment of the by-laws (sec.
2, Art. 111) is inconclusive without the required majority of eight votes to settle the issue one
way or the other having been reached. No judgment is rendered by the Court thereon and the
statements of the six Justices who have signed the main opinion on the legality thereof have no
binding effect, much less doctrinal value.

The dismissal of the petition insofar as the question of the validity of the disputed by-laws
amendment is concerned is not by an judgment with the required eight votes but simply by force
of Rule 56, section II of the Rules of Court, the pertinent portion of which provides that "where
the court en banc is equally divided in opinion, or the necessary majority cannot be had, the case
shall be reheard, and if on re-hearing no decision is reached, the action shall be dismissed if
originally commenced in the court ...." The end result is that the Court has thereby dismissed the
petition which prayed that the Court bypass the commission and directly resolved the issue and
therefore the respondent commission may now proceed, as announced in its Order No. 450,
Series of 1977, to hear the case before it and receive all relevant evidence bearing on the issue as
hereinabove indicated, and resolve the "unresolved and genuine issues of fact" (as per Order No.
451, Series of 1977) and the issues of legality of the disputed by-laws amendment.

Teehankee, Concepcion, Jr., and Fernandez, JJ., concur.

Guerrero, J., concurred.

TEEHANKEE, CONCEPCION JR.,

FERNANDEZ and GUERRERO, JJ., concurring:

This supplemental opinion is issued with reference to the advance separate opinion of Mr. Justice
Barredo issued by him as to "certain misimpressions as to the import of the decision in this case"
which might be produced by our joint separate opinion of April 11, 1979 and "urgent(ly) to
clarify (his) position in respect to the rights of the parties resulting from the dismissal of the
petition herein and the outline of the procedure by which the disqualification of petitioner
Gokongwei can be made effective."

1. Mr. Justice Barredo's advances separate opinion "that as between the parties herein, the issue
of the validity of the challenged by-laws is already settled" had, of course, no binding effect. The
judgment of the Court is found on pages 59-61 of the decision of April 11, 1979, penned by Mr.
Justice Antonio, wherein on the question of the validity of the amended by-laws the Court's
inconclusive voting is set forth as follows:

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 by-laws and that this question should properly be resolved
first by the SEC as the agency of primary jurisdiction ... 1

As stated in said judgment itself, for lack of the necessary votes, the petition, insofar as it assails
the validity of the questioned by-laws, was dismissed.

2. Mr. Justice Barredo now contends contrary to the undersigned's understanding, as stated on
pages 8 and 9 of our joint separate opinion of April 11, 1979 that the legal effect of the dismissal
of the petition on the question of validity of the amended by-laws for lack of the necessary votes
simply means that "the Court has thereby dismissed the petition which prayed that the Court by-
pass the commission and directly resolve the issue and therefore the respondent commission may
now proceed, as announced in its Order No. 450, Series of 1977, to hear the case before it and
receive all relevant evidence bearing on the issue as hereinabove indicated, and resolve the
'unresolved and genuine issues of fact' (as per Order No. 451, Series of 1977) and the issue of
legality of the disputed by-laws amendment," that such dismissal "has no other legal
consequence than that it is the law of the case as far as the parties are concerned, albeit the
majority of the opinion of six against four Justices is not doctrinal in the sense that it cannot be
cited as necessarily a precedent for subsequent cases."

We hold on our part that the doctrine of the law of the case invoked by Mr. Justice Barredo has
no applicability for the following reasons:

a) Our jurisprudence is quite clear that this doctrine may be invoked only where there has been a
final and conclusive determination of an issue in the first case later invoked as the law of the
case.

Thus, in People vs. Olarte, we held that


2

"Law of the case" has been defined as the opinion delivered on a former appeal
More specifically, it means that whatever is once irrevocably established as the
controlling legal rule of decision between the same parties in the same case
continues to he the law of the case, whether correct on general principles or not,
so long as the facts on which such decision was predicated continue to be the facts
of the case before the court. ...

It need not be stated that the Supreme Court, being the court of last resort, is the
final arbiter of all legal questions properly brought before it and that its decision
in any given case constitutes the law of that particular case. Once its judgment
becomes final it is binding on all inferior courts, and hence beyond their power
and authority to alter or modify Kabigting vs. Acting Director of Prisons, G. R.
No. L-15548, October 30, 1962).

The decision of this Court on that appeal by the government from the order of
dismissal, holding that said appeal did not place the appellants, including Absalon
Bignay, in double jeopardy, signed and concurred in by six Justices as against
three dissenters headed by the Chief Justice, promulgated way back in the year
1952, has long become the law of the case. It may be erroneous, judged by the
law on double jeopardy as recently interpreted by this same Tribunal Even so, it
may not be disturbed and modified. Our recent interpretation of the law may be
applied to new cases, but certainly not to an old one finally and conclusively
determined. As already stated, the majority opinion in that appeal is now the law
of the case. (People vs. Pinuila)

The doctrine of the law of the case, therefore, has no applicability whatsoever herein insofar as
the question of the validity or invalidity of the amended by-laws is concerned. The Court's
judgment of April 11, 1979 clearly shows that the voting on this question was inconclusive with
six against four Justices and two other Justices (the Chief Justice and Mr. Justice Fernando)
expressly reserving their votes thereon, and Mr. Justice Aquino while taking no part in effect
likewise expressly reserved his vote thereon. No final and conclusive determination could be
reached on the issue and pursuant to the provisions of Rule 56, section 11, since this special civil
action originally commenced in this Court, the action was simply dismissed with the result that
no law of the case was laid down insofar as the issue of the validity or invalidity of the
questioned by-laws is concerned, and the relief sought herein by petitioner that this Court by-
pass the SEC which has yet to hear and determine the same issue pending before it below and
that this Court itself directly resolve the said issue stands denied.

b) The contention of Mr. Justice Barredo that the result of the dismiss of the case was that
"petitioner Gokongwei may not hereafter act on the assumption that he can revive the issue of
the validity whether in the Securities and Exchange Commission, in this Court or in any other
forum, unless he proceeds on the basis of a factual milieu different from the setting of this case
Not even the Securities and Exchange Commission may pass on such question anymore at the
instance of herein petitioner or anyone acting in his stead or on his behalf, " appears to us to be
untenable.

The Court through the decision of April 11, 1979, by the unanimous votes of the twelve
participating Justices headed by the Chief Justice, ruled that petitioner Gokongwei was entitled
to a "new and proper hearing" by the SMC board of directors on the matter of his disqualification
under the questioned by-laws and that the board's "decision shall be appealable to the respondent
Securities and Exchange Commission deliberating and acting en banc and ultimately to this
Court (and) unless disqualified in the manner herein provided, the prohibition in the
aforementioned amended by-laws shall not apply to petitioner."

The entire Court, therefore, recognized that petitioner had not been given procedural due process
by the SMC board on the matter of his disqualification and that he was entitled to a "new and
proper hearing". It stands to reason that in such hearing, petitioner could raise not only questions
of fact but questions of law, particularly questions of law affecting the investing public and their
right to representation on the board as provided by law — not to mention that as borne out by the
fact that no restriction whatsoever appears in the court's decision, it was never contemplated that
petitioner was to be limited to questions of fact and could not raise the fundamental questions of
law bearing on the invalidity of the questioned amended by-laws at such hearing before the SMC
board. Furthermore, it was expressly provided unanimously in the Court's decision that the SMC
board's decision on the disqualification of petitioner ("assuming the board of directors of San
Miguel Corporation should, after the proper hearing, disqualify him" as qualified in Mr. Justice
Barredo's own separate opinion, at page 2) shall be appealable to respondent Securities and
Exchange Commission "deliberating and acting en banc and "untimately to this Court." Again,
the Court's judgment as set forth in its decision of April 11, 1979 contains nothing that would
warrant the opinion now expressed that respondent Securities and Exchange Commission may
not pass anymore on the question of the invalidity of the amended by-laws. Certainly, it cannot
be contended that the Court in dismissing the petition for lack of necessary votes actually by-
passed the Securities and Exchange Commission and directly ruled itself on the invalidity of the
questioned by-laws when it itself could not reach a final and conclusive vote (a minimum of
eight votes) on the issue and three other Justices (the Chief Justice and Messrs. Justices Fernando
and Aquino) had expressly reserved their vote until after further hearings (first before the
Securities and Exchange Commission and ultimately in this Court).

Such a view espoused by Mr. Justice Barredo could conceivably result in an incongruous
situation where supposedly under the law of this case the questioned by-laws would be held valid
as against petitioner Gokongwei and yet the same may be stricken off as invalid as to all other
SMC shareholders in a proper case.

3. It need only be pointed out that Mr. Justice Barredo's advance separate opinion can in no way
affect or modify the judgment of this Court as set forth in the decision of April 11, 1979 and
discussed hereinabove. The same bears the unqualified concurrence of only three Justices out of
the six Justices who originally voted for the validity per se of the questioned by-laws, namely,
Messrs. Justices Antonio, Santos and De Castro. Messrs. Justices Fernando and Makasiar did not
concur therein but they instead concurred with the limited concurrence of the Chief Justice
touching on the law of the case which guardedly held that the Court has not found merit in the
claim that the amended bylaws in question are invalid but without in any manner foreclosing the
issue and as a matter of fact and law, without in any manner changing or modifying the above-
quoted vote of the Chief Justice as officially rendered in the decision of April 11, 1979, wherein
he precisely "reserved (his) vote on the validity of the amended by-laws."

4. A word on the separate opinion of Mr. Justice Pacifico de Castro attached to the advance
separate opinion of Mr. Justice Barredo. Mr. Justice De Castro advances his interpretation as to a
restrictive construction of section 13(5) of the Philippine Corporation Law, ignoring or
disregarding the fact that during the Court's deliberations it was brought out that this prohibitory
provision was and is not raised in issue in this case whether here or in the Securities and
Exchange Commission below (outside of a passing argument by Messrs. Angara, Abello,
Concepcion, Regala & Cruz, as counsels for respondent Sorianos in their Memorandum of June
26, 1978 that "(T)he disputed By-Laws does not prohibit petitioner from holding onto, or even
increasing his SMC investment; it only restricts any shifting on the part of petitioner from
passive investor to a director of the company." 3

As a consequence, the Court abandoned the Idea of calling for another hearing wherein the
parties could properly raise and discuss this question as a new issue and instead rendered the
decision in question, under which the question of section 13(5) could be raised at a new and
proper hearing before the SMC board and in the Securities and Exchange Commission and in
due course before this Court (but with the clear understanding that since both corporations, the
Robina and SMC are engaged in agriculture as submitted by the Sorianos' counsel in their said
memorandum, the issue could be raised likewise against SMC and its other shareholders,
directors, if not against SMC itself. As expressly stated in the Chief Justices reservation of his
vote, the matter of the question of the applicability of the said section 13(5) to petitioner would
be heard by this Court at the appropriate time after the proceedings below (and necessarily the
question of the validity of the amended by-laws would be taken up anew and the Court would at
that time be able to reach a final and conclusive vote).

Mr. Justice De Castro's personal interpretation of the decision of April 11, 1979 that petitioner
may be allowed to run for election despite adverse decision of both the SMC board and the
Securities and Exchange Commission "only if he comes to this Court and obtains an injunction
against the enforcement of the decision disqualifying him" is patently contradictory of his vote
on the matter as expressly given in the judgment in the Court's decision of April 11, 1979 (at
page 59) that petitioner could run and if elected, sit as director of the respondent SMC and could
be disqualified only 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 aforementioned amended by-laws shall not apply to
petitioner."

Teehankee, Concepcion Jr., Fernandez and Guerrero, JJ., concur.

BARREDO, J., concurring:

I reserved the filing of a separate opinion in order to state my own reasons for voting in favor of
the validity of the amended by-laws in question. Regrettably, I have not yet finished preparing
the same. In view, however, of the joint separate opinion of Justices Teehankee, Concepcion Jr.,
Fernandez and Guerrero, the full text of which has just come to my attention, and which I am
afraid might produce certain misimpressions as to the import of the decision in this case, I
consider it urgent to clarify my position in respect to the rights of the parties resulting from the
dismissal of the petition herein and the outlining of the procedure by which the disqualification
of petitioner Gokongwei can be made effective, hence this advance separate opinion.

To start with, inasmuch as petitioner Gokongwei himself placed the issue of the validity of said
amended by-laws squarely before the Court for resolution, because he feels, rightly or wrongly,
he can no longer have due process or justice from the Securities and Exchange Commission, and
the private respondents have joined with him in that respect, the six votes cast by Justices
Makasiar, Antonio, Santos, Abad Santos, de Castro and this writer in favor of validity of the
amended by-laws in question, with only four members of this Court, namely, Justices Teehankee,
Concepcion Jr., Fernandez and Guerrero opining otherwise, and with Chief Justice Castro and
Justice Fernando reserving their votes thereon, and Justices Aquino and Melencio Herrera not
voting, thereby resulting in the dismissal of the petition "insofar as it assails the validity of the
amended by- laws ... for lack of necessary votes", has no other legal consequence than that it is
the law of the case as far as the parties herein are concerned, albeit the majority opinion of six
against four Justices is not doctrinal in the sense that it cannot be cited as necessarily a precedent
for subsequent cases. This means that petitioner Gokongwei and the respondents, including the
Securities and Exchange Commission, are bound by the foregoing result, namely, that the Court
en banc has not found merit in the claim that the amended by-laws in question are invalid.
Indeed, it is one thing to say that dismissal of the case is not doctrinal and entirely another thing
to maintain that such dismissal leaves the issue unsettled. It is somewhat of a misreading and
misconstruction of Section 11 of Rule 56, contrary to the well-known established norm observed
by this Court, to state that the dismissal of a petition for lack of the necessary votes does not
amount to a decision on the merits. Unquestionably, the Court is deemed to find no merit in a
petition in two ways, namely, (1) when eight or more members vote expressly in that sense and
(2) when the required number of justices needed to sustain the same cannot be had.

I reiterate, therefore, that as between the parties herein, the issue of validity of the challenged by-
laws is already settled. From which it follows that the same are already enforceable-insofar as
they are concerned. Petitioner Gokongwei may not hereafter act on the assumption that he can
revive the issue of validity whether in the Securities and Exchange Commission, in this Court or
in any other forum, unless he proceeds on the basis of a factual milieu different from the setting
of this case. Not even the Securities and Exchange Commission may pass on such question
anymore at the instance of herein petitioner or anyone acting in his stead or on his behalf. The
vote of four justices to remand the case thereto cannot alter the situation.

It is very clear that under the decision herein, the issue of validity is a settled matter for the
parties herein as the law of the case, and it is only the actual implementation of the impugned
amended by-laws in the particular case of petitioner that remains to be passed upon by the
Securities and Exchange Commission, and on appeal therefrom to Us, assuming the board of
directors of San Miguel Corporation should, after the proper hearing, disqualify him.

To be sure, the record is replete with substantial indications, nay admissions of petitioner
himself, that he is a controlling stockholder of corporations which are competitors of San Miguel
Corporation. The very substantial areas of such competition involving hundreds of millions of
pesos worth of businesses stand uncontroverted in the records hereof. In fact, petitioner has even
offered, if he should be elected, as director, not to take part when the board takes up matters
affecting the corresponding areas of competition between his corporation and San Miguel.
Nonetheless, perhaps, it is best that such evidence be formally offered at the hearing
contemplated in Our decision.

As to whether or not petitioner may sit in the board if he wins, definitely, under the decision in
this case, even if petitioner should win, he will have to immediately leave his position or should
be ousted the moment this Court settles the issue of his actual disqualification, either in a full
blown decision or by denying the petition for review of corresponding decision of the Securities
and Exchange Commission unfavorable to him. And, of course, as a matter of principle, it is to
be expected that the matter of his disqualification should be resolved expeditiously and within
the shortest possible time, so as to avoid as much juridical injury as possible, considering that the
matter of the validity of the prohibition against competitors embodied in the amended by-laws is
already unquestionable among the parties herein and to allow him to be in the board for
sometime would create an obviously anomalous and legally incongruous situation that should not
be tolerated. Thus, all the parties concerned must act promptly and expeditiously.

Additionally, my reservation to explain my vote on the validity of the amended by-laws still
stands.

Castro, C.J., concurs in Justice Barredo's statement that the dismissal (for lack of necessary
votes) of the petition to the extent that "it assails the validity of the amended by laws," is the law
of the case at bar, which means in effect that as far and only in so far as the parties and the
Securities and Exchange Commission are concerned, the Court has not found merit in the claim
that the amended by-laws in question are invalid.

Antonio and Santos, JJ., concur.

DE CASTRO, J., concurring:

As stated in the decision penned by Justice Antonio, I voted to uphold the validity of the
amendment to the by-laws in question. What induced me to this view is the practical
consideration easily perceived in the following illustration: If a person becomes a stockholder of
a corporation and gets himself elected as a director, and while he is such a director, he forms his
own corporation competitive or antagonistic to the corporation of which he is a director, and
becomes Chairman of the Board and President of his own corporation, he may be removed from
his position as director, admittedly one of trust and confidence. If this is so, as seems
undisputably to be the case, a person already controlling, and also the Chairman of the Board and
President of, a corporation, may be barred from becoming a member of the board of directors of
a competitive corporation. This is my view, even as I am for a restrictive interpretation of Section
13(5) of the Philippine Corporation Law, under which I would limit the scope of the provision to
corporations engaged in agriculture, but only as the word agriculture" refers to its more stated
meaning as distinguished from its general and broad connotation. The term would then mean
"farming" or raising the natural products of the soil, such as by cultivation, in the manner as is
required by the Public Land Act in the acquisition of agricultural land, such as by homestead,
before the patent may be issued. It is my opinion that under the public land statute, the
development of a certain portion of the land applied for as specified in the law as a condition
precedent before the applicant may obtain a patent, is cultivation, not let us say, poultry raising
or piggery, which may be included in the term Is agriculture" in its broad sense. For under
Section 13(5) of the Philippine Corporation Law, construed not in the strict way as I believe it
should, because the provision is in derogation of property rights, the petitioner in this case would
be disqualified from becoming an officer of either the San Miguel Corporation or his own
supposedly agricultural corporations. It is thus beyond my comprehension why, feeling as though
I am the only member of the Court for a restricted interpretation of Section 13(5) of Act 1459,
doubt still seems to be in the minds of other members giving the cited provision an unrestricted
interpretation, as to the validity of the amended by-laws in question, or even holding them null
and void.

I concur with the observation of Justice Barredo that despite that less than six votes are for
upholding the validity of the by-laws, their validity is deemed upheld, as constituting the "law of
the case." It could not be otherwise, after the present petition is dismissed with the relief sought
to declare null and void the said by-laws being denied in effect. A vicious circle would be created
if, should petitioner Gokongwei be barred or disqualified from running by the Board of Directors
of San Miguel Corporation and the Securities and Exchange Commission sustain the Board,
petitioner could come again to Us, raising the same question he has raised in the present petition,
unless the principle of the "law of the case" is applied.

Clarifying therefore, my position, I am of the opinion that with the validity of the by-laws in
question standing unimpaired it is now for petitioner to show that he does not come within the
disqualification as therein provided, both to the Board and later to the Securities and Exchange
Commission, it being a foregone conclusion that, unless petitioner disposes of his stockholdings
in the so-called competitive corporations, San Miguel Corporation would apply the by-laws
against him, His right, therefore, to run depends on what, on election day, May 8, 1979, the
ruling of the Board and/or the Securities and Exchange Commission on his qualification to run
would be, certainly, not the final ruling of this Court in the event recourse thereto is made by the
party feeling aggrieved, as intimated in the "Joint Separate Opinion" of Justices Teehankee,
Concepcion, Jr., Fernandez and Guerrero, that only after petitioner's "disqualification" has
ultimately been passed upon by this Court should petitioner, not be allowed to run. Petitioner
may be allowed to run, despite an adverse decision of both the Board and the Securities and
Exchange Commission, only if he comes to this Court and obtain an injunction against the
enforcement of the decision disqualifying him. Without such injunction being required, all that
petitioner has to do is to take his time in coming to this Court, and in so doing, he would in the
meantime, be allowed to run, and if he wins, to sit. This would, however, be contrary to the
doctrine that gives binding, if not conclusive, effect of findings of facts of administrative bodies
exercising quasi-judicial functions upon appellate courts, which should, accordingly, be enforced
until reversed by this Tribunal.

Fernando and Makasiar, JJ., concurs.

Antonio and Santos, JJ., concur

DE CASTRO, J.: concurring:

As stated in the decision penned by Justice Antonio, I voted to uphold the validity of the
amendment to the by-laws in question. What induced me to this view is the practical
consideration easily perceived in the following illustration: If a person becomes a stockholder of
a corporation and gets himself elected as a director, and while he is such a director, he forms his
own corporation competitive or antagonistic to the corporation of which he is a director, and
becomes Chairman of the Board and President of his own corporation, he may be removed from
his position as director, admittedly one of trust case, a person already controlling, and also the
Chairman of the Board and President of, a corporation, may be barred from becoming a member
of the board of directors of a competitive corporation. This is my view, even as I am for
restrictive interpretation of Section 13(5) of the Philippine Corporation Law, under which I
would limit the scope of the provision to corporations engaged in agriculture, but only as the
word "agriculture" refers to its more limited meaning as distinguished from its general and broad
connotation. The term would then mean "farming" or raising the natural products of the soil,
such as by cultivation, in the manner as in required by the Public Land Act in the acquisition of
agricultural land, such as by homestead, before the patent may be issued. It is my opinion that
under the public land statute, the development of a certain portion of the land applied for as
specified in the law as a condition precedent before the applicant may obtain a patent, is
cultivation, not let us say, poultry raising or peggery, whch may be included in the term
"agriculture" in its broad sense. For under Section 13(5) of the Philippine Corporation Law,
construed not in the strict way as I believe it should, because the provision is in derogation of
property rights, the petitioner in this case would be disqualified from becoming an officer of
either the San Miguel Corporation or his own supposedly agricultural corporations. It is thus
beyond my comprehension why, feeling as though I am the only members of the Court for a
restricted interpretation of Section 13(5) of Act 1459, doubt still seems to be in the minds of
other members giving the cited provision an unrestricted interpretation, as to the validity of the
amended by-laws in question, or even holding them null and void.

I concur with the observation of Justice Barredo that despite that less than six votes are for
upholding the validity of the by-laws, their validity is deemed upheld, as constituting the "law of
the case." It could not be otherwise, after the present petition is dimissed with the relief sought to
declare null and void the said by-laws being denied in effect. A vicious circle would be created if,
should petitioner Gokongwei be barred or disqualified from running by the Board, petitioner
could come again to Us, raising the same question he has raised in the present petition, unless the
principle of the "law of the case" is applied.

Clarifying therefore, my position, I am of the opinion that with the validity of the by-laws in
question standing unimpaired, it is nowfor petitioner to show that he does not come paired, it is
now for petitioner to show that he does not come within the disqualification as therein provided,
both to the Board and later to the Securities and Exhange Commission, it being a foregone
conclusion that, unless petitioner disposes of his stockholdings in the so-called competitive
corporations, San Miguel Corporation would apply the by-laws against him. His right, therefore,
to run depends on what, on election day, May 8, 1979, the ruling of the Board and/or the
Securities and Exchange Commission on his qualification to run would be, certainly, not the final
ruling of this Court in the event recourse thereto is made by the party feeling aggrieved, as
intimated in the "Joint Separate Opinion" of Justices Teehankee, Concepcion, Jr., Fernandez and
Guerrero, that only after petitioner's "disqualification" has ultimately been passed upon by this
Court should petitioner not be allowed to run. Petitioner may be allowed to run, despite
anadverse decision of both the Board and the Securities and Exchange Commission, only if he
comes to this Court and obtain an injunction against the enforcement of the decision
disqualifying him. Without such injunction being required, all that petitioner has to do is to take
his time in coming to this Court, and in so doing, he would in the meantime, be allowed to run,
and if he wins, to sit. This would, however, be contrary to the doctrine that gives binding, if not
conclusive, effect of findings of facts of administrative bodies exercising quasi-judicial functions
upon appellate courts, which should, accordingly, be enforced until reversed by this Tribunal.

Separate Opinions

TEEHANKEE, CONCEPCION JR., FERNANDEZ and GUERRERO, JJ., concurring:

As correctly stated in the main opinion of Mr. Justice Antonio, the Court is unanimous in its
judgment granting the petitioner as stockholder of respondent San Miguel Corporation the right
to inspect, examine and secure copies of the records of San Miguel International, inc. (SMI), a
wholly owned foreign subsidiary corporation of respondent San Miguel Corporation. Respondent
commissions en banc Order No. 449, Series of 19 7 7, denying petitioner's right of inspection for
"not being a stockholder of San Miguel International, Inc." has been accordingly set aside. It
need be only pointed out that:

a) The commission's reasoning grossly disregards the fact that the stockholders of
San Miguel Corporation are likewise the owners of San Miguel International, Inc.
as the corporation's wholly owned foreign subsidiary and therefore have every
right to have access to its books and records. otherwise, the directors and
management of any Philippine corporation by the simple device of organizing
with the corporation's funds foreign subsidiaries would be granted complete
immunity from the stockholders' scrutiny of its foreign operations and would have
a conduit for dissipating, if not misappropriating, the corporation funds and assets
by merely channeling them into foreign subsidiaries' operations; and

b) Petitioner's right of examination herein recognized refers to all books and


records of the foreign subsidiary SMI which are which are " in respondent
corporation's possession and control" , meaning to say regardless of whether or
1

not such books and records are physically within the Philippines. all such books
and records of SMI are legally within respondent corporation's "possession and
control" and if nay books or records are kept abroad, (e.g. in the foreign
subsidiary's state of domicile, as is to be expected), then the respondent
corporation's board and management are obliged under the Court's judgment to
bring and make them (or true copies thereof available within the Philippines for
petitioner's examination and inspection.

II

On the other main issue of the Validity of respondent San Miguel Corporation's amendment of its
by-laws whereby respondent corporation's board of directors under its resolution dated April 29,
2

1977 declared petitioner ineligible to be nominated or to be voted or to be elected as of the board


of directors, the Court, composed of 12 members (since Mme. Justice Ameurfina Melencio
Herrera inhibited herself from taking part herein, while Mr. Justice Ramon C. Aquino upon
submittal of the main opinion of Mr. Justice Antonio decided not to take part), failed to reach a
conclusive vote or, the required majority of 8 votes to settle the issue one way or the other.

Six members of the Court, namely, Justices Barredo, Makasiar, Antonio, Santos, Abad Santos
and De Castro, considered the issue purely legal and voted to sustain the validity per se of the
questioned amended by-laws but nevertheless voted that 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 she'll have been sustained on appeal by respondent Securities and Exchange
Commission and ultimately by this Court.

The undersigned Justices do not consider the issue as purely legal in the light of respondent
commission's Order No. 451, Series of 1977, denying petitioner's "Motion for Summary
Judgment" on the ground that "the Commission en banc finds that there (are) unresolved and
genuine issues of fact" as well as its position in this case to the Solicitor General that the case at
3

bar is "premature" and that the administrative remedies before the commission should first be
availed of and exhausted. 4

We are of the opinion that the questioned amended by-laws, as they are, (adopted after almost a
century of respondent corporation's existence as a public corporation with its shares freely
purchased and traded in the open market without restriction and disqualification) which would
bar petitioner from qualification, nomination and election as director and worse, grant 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.

We consider the questioned amended by-laws as being 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. We further consider said amended
by-laws as violating 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 (secs 21 and 30) and the right of a minority director once elected not
to be removed from office of director except for cause by vote of the stockholders holding 2/3 of
the subscribed capital stock (sec. 31). If a minority stockholder could be disqualified by such a
by-laws amendment under the guise of providing for "qualifications," these mandates of the
Corporation Law would have no meaning or purpose.

These vested and substantial rights granted stockholders under the Corporation Law may not be
diluted or defeated by the general authority granted by the Corporation Law itself to corporations
to adopt their by-laws (in section 21) which deal principally with the procedures governing their
internal business. The by-laws of any corporation must, be always within the character limits.
What the Corporation Law has granted stockholders may not be taken away by the corporation's
by-laws. The amendment is further an instrument of oppressiveness and arbitrariness in that the
incumbent directors are thereby enabled to perpetuate themselves in office by the simple
expedient of disqualifying any unwelcome candidate, no matter how many votes he may have.

However, in view of the inconclusiveness of the vote, we sustain respondent commission's stand
as expressed in its Orders Nos. 450 and 451, Series of 1977 that there are unresolved and
genuine issues of fact" and that it has yet to rule on and finally decide the validity of the disputed
by-law provision", subject to appeal by either party to this Court.

In view of prematurity of the proceedings here (as likewise expressed by Mr. Justice Fernando),
the case should as a consequence be remanded to the Securities and Exchange Commission as
the agency of primary jurisdiction for a full hearing and reception of evidence of all relevant
facts (which should property be submitted to the commission instead of the piecemeal documents
submitted as annexes to this Court which is not a trier of facts) concerning not only the petitioner
but the members of the board of directors of respondent corporation as well, so that it may
determine on the basis thereof the issue of the legality of the questioned amended by-laws, and
assuming Chat it holds the same to be valid whether the same are arbitrarily and unreasonably
applied to petitioner vis a vis other directors, who, petitioner claims, should in such event be
likewise disqualified from sitting in the board of directors by virtue of conflict of interests or
their being likewise engaged in competitive or antagonistic business" with the corporation such
as investment and finance, coconut oil mills cement, milk and hotels. 5

It should be noted that while the petition may be dismissed in view of the inconclusiveness of the
vote and the Court's failure to affair, the required 8-vote majority to resolve the issue, such as
dismissal (for lack of necessary votes) is of no doctrine value and does not in any manner resolve
the issue of the validity of the questioned amended by-laws nor foreclose the same. The same
should properly be determined in a proper case in the first instance by the Securities and
Exchange Commission as the agency of primary jurisdiction, as above indicated.

The Court is unanimous, therefore, in its judgment that petitioner Gokongwei may run for the
office of, and if elected, sit as, member of the board of directors of respondent San Miguel
Corporation as stated in the dispositive portion of the main opinion of Mr. Justice Antonio, to
wit: Until and after petitioner has been given a "new and proper hearing by the board of directors
of said corporation, whose decision shall be appealable Lo the respondent Securities and
Exchange Commission deliverating and acting en banc and ultimately to this Court" and until '
disqualified in the manner herein provided, the prohibition in the aforementioned amended by-
laws shall not apply to petitioner," In other words, until and after petitioner shall have been given
due process and proper hearing by the respondent board of directors as to the question of his
qualification or disqualification under the questioned amended by-laws (assuming that the
respondent Securities and Exchange C commission ultimately upholds the validity of said by
laws), and such disqualification shall have been sustained by respondent Securities and
Exchange Commission and ultimately by final judgment of this Court, petitioner is deemed
eligible for all legal purposes and effects to be nominated and voted and if elected to sit as a
member of the hoard of directors of respondent San Miguel Corporation.

In view of the Court's unanimous judgment on this point the portion of respondent commission's
Order No. 450, Series of 977 which imposed "the condition that he [petitioner] cannot sit as
board member if elected until after the Commission shall have finally decided the validity of the
disputed by-law provision" has been likewise accordingly set aside.

III

By way of recapitulation, so that the Court's decision and judgment may be clear and not subject
to ambiguity, we state the following.

1. With the votes of the six Justices concurring unqualifiedly in the main opinion added to
our four votes, plus the Chief Justice's vote and that of Mr. Justice Fernando, the Court
has by twelve (12) votes unanimously rendered judgment granting petitioner's right to
examine and secure copies of the books and records of San Miguel International, Inc. as a
foreign subsidiary of respondent corporation and respondent commission's Order No.
449, Series of 1977, to the contrary is set aside:

2. With the same twelve (12) votes, the Court has also unanimously rendered judgment declaring
that until and after petitioner shall have been given due process and proper hearing by the
respondent board of directors as to the question of his disqualification under the questioned
amended by- laws (assuming that the respondent Securities and Exchange Commission
ultimately upholds the validity of said by laws), and such disqualification shall have been
sustained by respondent Securities and Exchange Commission and ultimately by final judgment
of this Court petitioner is deemed eligible for all legal purposes and effect to be nominated and
voted and if elected to sit as a member of the board of directors of respondent San Miguel
Corporation. Accordingly, respondent commission's Order No. 450, Series of 1977 to the
contrary has likewise been set aside; and

3. The Court's voting on the validity of respondent corporation's amendment of the by-laws (sec.
2, Art. 111) is inconclusive without the required majority of eight votes to settle the issue one
way or the other having been reached. No judgment is rendered by the Court thereon and the
statements of the six Justices who have signed the main opinion on the legality thereof have no
binding effect, much less doctrinal value.

The dismissal of the petition insofar as the question of the validity of the disputed by-laws
amendment is concerned is not by an judgment with the required eight votes but simply by force
of Rule 56, section II of the Rules of Court, the pertinent portion of which provides that "where
the court en banc is equally divided in opinion, or the necessary majority cannot be had, the case
shall be reheard, and if on re-hearing no decision is reached, the action shall be dismissed if
originally commenced in the court ...." The end result is that the Court has thereby dismissed the
petition which prayed that the Court bypass the commission and directly resolved the issue and
therefore the respondent commission may now proceed, as announced in its Order No. 450,
Series of 1977, to hear the case before it and receive all relevant evidence bearing on the issue as
hereinabove indicated, and resolve the "unresolved and genuine issues of fact" (as per Order No.
451, Series of 1977) and the issues of legality of the disputed by-laws amendment.

Teehankee, Concepcion, Jr., and Fernandez, JJ., concur.


Guerrero, J., concurred.

TEEHANKEE, CONCEPCION JR., FERNANDEZ and GUERRERO, JJ., concurring:

This supplemental opinion is issued with reference to the advance separate opinion of Mr. Justice
Barredo issued by him as to "certain misimpressions as to the import of the decision in this case"
which might be produced by our joint separate opinion of April 11, 1979 and "urgent(ly) to
clarify (his) position in respect to the rights of the parties resulting from the dismissal of the
petition herein and the outline of the procedure by which the disqualification of petitioner
Gokongwei can be made effective."

1. Mr. Justice Barredo's advances separate opinion "that as between the parties herein, the issue
of the validity of the challenged by-laws is already settled" had, of course, no binding effect. The
judgment of the Court is found on pages 59-61 of the decision of April 11, 1979, penned by Mr.
Justice Antonio, wherein on the question of the validity of the amended by-laws the Court's
inconclusive voting is set forth as follows:

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 by-laws and that this question should properly be resolved
first by the SEC as the agency of primary jurisdiction ... 1

As stated in said judgment itself, for lack of the necessary votes, the petition, insofar as it assails
the validity of the questioned by-laws, was dismissed.

2. Mr. Justice Barredo now contends contrary to the undersigned's understanding, as stated on
pages 8 and 9 of our joint separate opinion of April 11, 1979 that the legal effect of the dismissal
of the petition on the question of validity of the amended by-laws for lack of the necessary votes
simply means that "the Court has thereby dismissed the petition which prayed that the Court by-
pass the commission and directly resolve the issue and therefore the respondent commission may
now proceed, as announced in its Order No. 450, Series of 1977, to hear the case before it and
receive all relevant evidence bearing on the issue as hereinabove indicated, and resolve the
'unresolved and genuine issues of fact' (as per Order No. 451, Series of 1977) and the issue of
legality of the disputed by-laws amendment," that such dismissal "has no other legal
consequence than that it is the law of the case as far as the parties are concerned, albeit the
majority of the opinion of six against four Justices is not doctrinal in the sense that it cannot be
cited as necessarily a precedent for subsequent cases."

We hold on our part that the doctrine of the law of the case invoked by Mr. Justice Barredo has
no applicability for the following reasons:

a) Our jurisprudence is quite clear that this doctrine may be invoked only where there has been a
final and conclusive determination of an issue in the first case later invoked as the law of the
case.

Thus, in People vs. Olarte, we held that


2

"Law of the case" has been defined as the opinion delivered on a former appeal
More specifically, it means that whatever is once irrevocably established as the
controlling legal rule of decision between the same parties in the same case
continues to he the law of the case, whether correct on general principles or not,
so long as the facts on which such decision was predicated continue to be the facts
of the case before the court. ...
It need not be stated that the Supreme Court, being the court of last resort, is the
final arbiter of all legal questions properly brought before it and that its decision
in any given case constitutes the law of that particular case. Once its judgment
becomes final it is binding on all inferior courts, and hence beyond their power
and authority to alter or modify Kabigting vs. Acting Director of Prisons, G. R.
No. L-15548, October 30, 1962).

"The decision of this Court on that appeal by the government from the order of
dismissal, holding that said appeal did not place the appellants, including Absalon
Bignay, in double jeopardy, signed and concurred in by six Justices as against
three dissenters headed by the Chief Justice, promulgated way back in the year
1952, has long become the law of the case. It may be erroneous, judged by the
law on double jeopardy as recently interpreted by this same Tribunal Even so, it
may not be disturbed and modified. Our recent interpretation of the law may be
applied to new cases, but certainly not to an old one finally and conclusively
determined. As already stated, the majority opinion in that appeal is now the law
of the case." (People vs. Pinuila)

The doctrine of the law of the case, therefore, has no applicability whatsoever herein insofar as
the question of the validity or invalidity of the amended by-laws is concerned. The Court's
judgment of April 11, 1979 clearly shows that the voting on this question was inconclusive with
six against four Justices and two other Justices (the Chief Justice and Mr. Justice Fernando)
expressly reserving their votes thereon, and Mr. Justice Aquino while taking no part in effect
likewise expressly reserved his vote thereon. No final and conclusive determination could be
reached on the issue and pursuant to the provisions of Rule 56, section 11, since this special civil
action originally commenced in this Court, the action was simply dismissed with the result that
no law of the case was laid down insofar as the issue of the validity or invalidity of the
questioned by-laws is concerned, and the relief sought herein by petitioner that this Court by-
pass the SEC which has yet to hear and determine the same issue pending before it below and
that this Court itself directly resolve the said issue stands denied.

b) The contention of Mr. Justice Barredo that the result of the dismiss of the case was that
"petitioner Gokongwei may not hereafter act on the assumption that he can revive the issue of
the validity whether in the Securities and Exchange Commission, in this Court or in any other
forum, unless he proceeds on the basis of a factual milieu different from the setting of this case
Not even the Securities and Exchange Commission may pass on such question anymore at the
instance of herein petitioner or anyone acting in his stead or on his behalf, " appears to us to be
untenable.

The Court through the decision of April 11, 1979, by the unanimous votes of the twelve
participating Justices headed by the Chief Justice, ruled that petitioner Gokongwei was entitled
to a "new and proper hearing" by the SMC board of directors on the matter of his disqualification
under the questioned by-laws and that the board's "decision shall be appealable to the respondent
Securities and Exchange Commission deliberating and acting en banc and ultimately to this
Court (and) unless disqualified in the manner herein provided, the prohibition in the
aforementioned amended by-laws shall not apply to petitioner."

The entire Court, therefore, recognized that petitioner had not been given procedural due process
by the SMC board on the matter of his disqualification and that he was entitled to a "new and
proper hearing". It stands to reason that in such hearing, petitioner could raise not only questions
of fact but questions of law, particularly questions of law affecting the investing public and their
right to representation on the board as provided by law — not to mention that as borne out by the
fact that no restriction whatsoever appears in the court's decision, it was never contemplated that
petitioner was to be limited to questions of fact and could not raise the fundamental questions of
law bearing on the invalidity of the questioned amended by-laws at such hearing before the SMC
board. Furthermore, it was expressly provided unanimously in the Court's decision that the SMC
board's decision on the disqualification of petitioner ("assuming the board of directors of San
Miguel Corporation should, after the proper hearing, disqualify him" as qualified in Mr. Justice
Barredo's own separate opinion, at page 2) shall be appealable to respondent Securities and
Exchange Commission "deliberating and acting en banc and "untimately to this Court." Again,
the Court's judgment as set forth in its decision of April 11, 1979 contains nothing that would
warrant the opinion now expressed that respondent Securities and Exchange Commission may
not pass anymore on the question of the invalidity of the amended by-laws. Certainly, it cannot
be contended that the Court in dismissing the petition for lack of necessary votes actually by-
passed the Securities and Exchange Commission and directly ruled itself on the invalidity of the
questioned by-laws when it itself could not reach a final and conclusive vote (a minimum of
eight votes) on the issue and three other Justices (the Chief Justice and Messrs. Justices Fernando
and Aquino) had expressly reserved their vote until after further hearings (first before the
Securities and Exchange Commission and ultimately in this Court).

Such a view espoused by Mr. Justice Barredo could conceivably result in an incongruous
situation where supposedly under the law of this case the questioned by-laws would be held valid
as against petitioner Gokongwei and yet the same may be stricken off as invalid as to all other
SMC shareholders in a proper case.

2. It need only be pointed out that Mr. Justice Barredo's advance separate opinion can in no
way affect or modify the judgment of this Court as set forth in the decision of April 11,
1979 and discussed hereinabove. The same bears the unqualified concurrence of only
three Justices out of the six Justices who originally voted for the validity per se of the
questioned by-laws, namely, Messrs. Justices Antonio, Santos and De Castro. Messrs.
Justices Fernando and Makasiar did not concur therein but they instead concurred with
the limited concurrence of the Chief Justice touching on the law of the case which
guardedly held that the Court has not found merit in the claim that the amended bylaws in
question are invalid but without in any manner foreclosing the issue and as a matter of
fact and law, without in any manner changing or modifying the above-quoted vote of the
Chief Justice as officially rendered in the decision of April 11, 1979, wherein he precisely
"reserved (his) vote on the validity of the amended by-laws."

4. A word on the separate opinion of Mr. Justice Pacifico de Castro attached to the advance
separate opinion of Mr. Justice Barredo. Mr. Justice De Castro advances his interpretation as to a
restrictive construction of section 13(5) of the Philippine Corporation Law, ignoring or
disregarding the fact that during the Court's deliberations it was brought out that this prohibitory
provision was and is not raised in issue in this case whether here or in the Securities and
Exchange Commission below (outside of a passing argument by Messrs. Angara, Abello,
Concepcion, Regala & Cruz, as counsels for respondent Sorianos in their Memorandum of June
26, 1978 that "(T)he disputed By-Laws does not prohibit petitioner from holding onto, or even
increasing his SMC investment; it only restricts any shifting on the part of petitioner from
passive investor to a director of the company." 3

As a consequence, the Court abandoned the Idea of calling for another hearing wherein the
parties could properly raise and discuss this question as a new issue and instead rendered the
decision in question, under which the question of section 13(5) could be raised at a new and
proper hearing before the SMC board and in the Securities and Exchange Commission and in
due course before this Court (but with the clear understanding that since both corporations, the
Robina and SMC are engaged in agriculture as submitted by the Sorianos' counsel in their said
memorandum, the issue could be raised likewise against SMC and its other shareholders,
directors, if not against SMC itself. As expressly stated in the Chief Justices reservation of his
vote, the matter of the question of the applicability of the said section 13(5) to petitioner would
be heard by this Court at the appropriate time after the proceedings below (and necessarily the
question of the validity of the amended by-laws would be taken up anew and the Court would at
that time be able to reach a final and conclusive vote).

Mr. Justice De Castro's personal interpretation of the decision of April 11, 1979 that petitioner
may be allowed to run for election despite adverse decision of both the SMC board and the
Securities and Exchange Commission "only if he comes to this Court and obtains an injunction
against the enforcement of the decision disqualifying him" is patently contradictory of his vote
on the matter as expressly given in the judgment in the Court's decision of April 11, 1979 (at
page 59) that petitioner could run and if elected, sit as director of the respondent SMC and could
be disqualified only 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 aforementioned amended by-laws shall not apply to
petitioner."

Teehankee, Concepcion Jr., Fernandez and Guerrero, JJ., concur.

BARREDO, J., concurring:

I reserved the filing of a separate opinion in order to state my own reasons for voting in favor of
the validity of the amended by-laws in question. Regrettably, I have not yet finished preparing
the same. In view, however, of the joint separate opinion of Justices Teehankee, Concepcion Jr.,
Fernandez and Guerrero, the full text of which has just come to my attention, and which I am
afraid might produce certain misimpressions as to the import of the decision in this case, I
consider it urgent to clarify my position in respect to the rights of the parties resulting from the
dismissal of the petition herein and the outlining of the procedure by which the disqualification
of petitioner Gokongwei can be made effective, hence this advance separate opinion.

To start with, inasmuch as petitioner Gokongwei himself placed the issue of the validity of said
amended by-laws squarely before the Court for resolution, because he feels, rightly or wrongly,
he can no longer have due process or justice from the Securities and Exchange Commission, and
the private respondents have joined with him in that respect, the six votes cast by Justices
Makasiar, Antonio, Santos, Abad Santos, de Castro and this writer in favor of validity of the
amended by-laws in question, with only four members of this Court, namely, Justices Teehankee,
Concepcion Jr., Fernandez and Guerrero opining otherwise, and with Chief Justice Castro and
Justice Fernando reserving their votes thereon, and Justices Aquino and Melencio Herrera not
voting, thereby resulting in the dismissal of the petition "insofar as it assails the validity of the
amended by- laws ... for lack of necessary votes", has no other legal consequence than that it is
the law of the case as far as the parties herein are concerned, albeit the majority opinion of six
against four Justices is not doctrinal in the sense that it cannot be cited as necessarily a precedent
for subsequent cases.

This means that petitioner Gokongwei and the respondents, including the Securities and
Exchange Commission, are bound by the foregoing result, namely, that the Court en banc has not
found merit in the claim that the amended by-laws in question are invalid. Indeed, it is one thing
to say that dismissal of the case is not doctrinal and entirely another thing to maintain that such
dismissal leaves the issue unsettled. It is somewhat of a misreading and misconstruction of
Section 11 of Rule 56, contrary to the well-known established norm observed by this Court, to
state that the dismissal of a petition for lack of the necessary votes does not amount to a decision
on the merits. Unquestionably, the Court is deemed to find no merit in a petition in two ways,
namely, (1) when eight or more members vote expressly in that sense and (2) when the required
number of justices needed to sustain the same cannot be had.

I reiterate, therefore, that as between the parties herein, the issue of validity of the challenged by-
laws is already settled. From which it follows that the same are already enforceable-insofar as
they are concerned. Petitioner Gokongwei may not hereafter act on the assumption that he can
revive the issue of validity whether in the Securities and Exchange Commission, in this Court or
in any other forum, unless he proceeds on the basis of a factual milieu different from the setting
of this case. Not even the Securities and Exchange Commission may pass on such question
anymore at the instance of herein petitioner or anyone acting in his stead or on his behalf. The
vote of four justices to remand the case thereto cannot alter the situation.

It is very clear that under the decision herein, the issue of validity is a settled matter for the
parties herein as the law of the case, and it is only the actual implementation of the impugned
amended by-laws in the particular case of petitioner that remains to be passed upon by the
Securities and Exchange Commission, and on appeal therefrom to Us, assuming the board of
directors of San Miguel Corporation should, after the proper hearing, disqualify him.

To be sure, the record is replete with substantial indications, nay admissions of petitioner
himself, that he is a controlling stockholder of corporations which are competitors of San Miguel
Corporation. The very substantial areas of such competition involving hundreds of millions of
pesos worth of businesses stand uncontroverted in the records hereof. In fact, petitioner has even
offered, if he should be elected, as director, not to take part when the board takes up matters
affecting the corresponding areas of competition between his corporation and San Miguel.
Nonetheless, perhaps, it is best that such evidence be formally offered at the hearing
contemplated in Our decision.

As to whether or not petitioner may sit in the board if he wins, definitely, under the decision in
this case, even if petitioner should win, he will have to immediately leave his position or should
be ousted the moment this Court settles the issue of his actual disqualification, either in a full
blown decision or by denying the petition for review of corresponding decision of the Securities
and Exchange Commission unfavorable to him. And, of course, as a matter of principle, it is to
be expected that the matter of his disqualification should be resolved expeditiously and within
the shortest possible time, so as to avoid as much juridical injury as possible, considering that the
matter of the validity of the prohibition against competitors embodied in the amended by-laws is
already unquestionable among the parties herein and to allow him to be in the board for
sometime would create an obviously anomalous and legally incongruous situation that should not
be tolerated. Thus, all the parties concerned must act promptly and expeditiously.

Additionally, my reservation to explain my vote on the validity of the amended by-laws still
stands.

Castro, C.J., concurs in Justice Barredo's statement that the dismissal (for lack of necessary
votes) of the petition to the extent that "it assails the validity of the amended by laws," is the law
of the case at bar, which means in effect that as far and only in so far as the parties and the
Securities and Exchange Commission are concerned, the Court has not found merit in the claim
that the amended by-laws in question are invalid.

Antonio and Santos, JJ., concur.

DE CASTRO, J., concurring:

As stated in the decision penned by Justice Antonio, I voted to uphold the validity of the
amendment to the by-laws in question. What induced me to this view is the practical
consideration easily perceived in the following illustration: If a person becomes a stockholder of
a corporation and gets himself elected as a director, and while he is such a director, he forms his
own corporation competitive or antagonistic to the corporation of which he is a director, and
becomes Chairman of the Board and President of his own corporation, he may be removed from
his position as director, admittedly one of trust and confidence. If this is so, as seems
undisputably to be the case, a person already controlling, and also the Chairman of the Board and
President of, a corporation, may be barred from becoming a member of the board of directors of
a competitive corporation. This is my view, even as I am for a restrictive interpretation of Section
13(5) of the Philippine Corporation Law, under which I would limit the scope of the provision to
corporations engaged in agriculture, but only as the word agriculture" refers to its more stated
meaning as distinguished from its general and broad connotation. The term would then mean
"farming" or raising the natural products of the soil, such as by cultivation, in the manner as is
required by the Public Land Act in the acquisition of agricultural land, such as by homestead,
before the patent may be issued. It is my opinion that under the public land statute, the
development of a certain portion of the land applied for as specified in the law as a condition
precedent before the applicant may obtain a patent, is cultivation, not let us say, poultry raising
or piggery, which may be included in the term Is agriculture" in its broad sense. For under
Section 13(5) of the Philippine Corporation Law, construed not in the strict way as I believe it
should, because the provision is in derogation of property rights, the petitioner in this case would
be disqualified from becoming an officer of either the San Miguel Corporation or his own
supposedly agricultural corporations. It is thus beyond my comprehension why, feeling as though
I am the only member of the Court for a restricted interpretation of Section 13(5) of Act 1459,
doubt still seems to be in the minds of other members giving the cited provision an unrestricted
interpretation, as to the validity of the amended by-laws in question, or even holding them null
and void.
I concur with the observation of Justice Barredo that despite that less than six votes are for
upholding the validity of the by-laws, their validity is deemed upheld, as constituting the "law of
the case." It could not be otherwise, after the present petition is dismissed with the relief sought
to declare null and void the said by-laws being denied in effect. A vicious circle would be created
if, should petitioner Gokongwei be barred or disqualified from running by the Board of Directors
of San Miguel Corporation and the Securities and Exchange Commission sustain the Board,
petitioner could come again to Us, raising the same question he has raised in the present petition,
unless the principle of the "law of the case" is applied.

Clarifying therefore, my position, I am of the opinion that with the validity of the by-laws in
question standing unimpaired it is now for petitioner to show that he does not come within the
disqualification as therein provided, both to the Board and later to the Securities and Exchange
Commission, it being a foregone conclusion that, unless petitioner disposes of his stockholdings
in the so-called competitive corporations, San Miguel Corporation would apply the by-laws
against him, His right, therefore, to run depends on what, on election day, May 8, 1979, the
ruling of the Board and/or the Securities and Exchange Commission on his qualification to run
would be, certainly, not the final ruling of this Court in the event recourse thereto is made by the
party feeling aggrieved, as intimated in the "Joint Separate Opinion" of Justices Teehankee,
Concepcion, Jr., Fernandez and Guerrero, that only after petitioner's "disqualification" has
ultimately been passed upon by this Court should petitioner, not be allowed to run. Petitioner
may be allowed to run, despite an adverse decision of both the Board and the Securities and
Exchange Commission, only if he comes to this Court and obtain an injunction against the
enforcement of the decision disqualifying him. Without such injunction being required, all that
petitioner has to do is to take his time in coming to this Court, and in so doing, he would in the
meantime, be allowed to run, and if he wins, to sit. This would, however, be contrary to the
doctrine that gives binding, if not conclusive, effect of findings of facts of administrative bodies
exercising quasi-judicial functions upon appellate courts, which should, accordingly, be enforced
until reversed by this Tribunal.

Fernando and Makasiar, JJ., concurs.

Antonio and Santos, JJ., concur

# Separate Opinions

TEEHANKEE, CONCEPCION JR., FERNANDEZ and GUERRERO, JJ., concurring:

As correctly stated in the main opinion of Mr. Justice Antonio, the Court is unanimous in its
judgment granting the petitioner as stockholder of respondent San Miguel Corporation the right
to inspect, examine and secure copies of the records of San Miguel International, inc. (SMI), a
wholly owned foreign subsidiary corporation of respondent San Miguel Corporation. Respondent
commissions en banc Order No. 449, Series of 19 7 7, denying petitioner's right of inspection for
"not being a stockholder of San Miguel International, Inc." has been accordingly set aside. It
need be only pointed out that:

a) The commission's reasoning grossly disregards the fact that the stockholders of
San Miguel Corporation are likewise the owners of San Miguel International, Inc.
as the corporation's wholly owned foreign subsidiary and therefore have every
right to have access to its books and records. otherwise, the directors and
management of any Philippine corporation by the simple device of organizing
with the corporation's funds foreign subsidiaries would be granted complete
immunity from the stockholders' scrutiny of its foreign operations and would have
a conduit for dissipating, if not misappropriating, the corporation funds and assets
by merely channeling them into foreign subsidiaries' operations; and
b) Petitioner's right of examination herein recognized refers to all books and
records of the foreign subsidiary SMI which are which are " in respondent
corporation's possession and control" , meaning to say regardless of whether or
1

not such books and records are physically within the Philippines. all such books
and records of SMI are legally within respondent corporation's "possession and
control" and if nay books or records are kept abroad, (e.g. in the foreign
subsidiary's state of domicile, as is to be expected), then the respondent
corporation's board and management are obliged under the Court's judgment to
bring and make them (or true copies thereof available within the Philippines for
petitioner's examination and inspection.

II

On the other main issue of the Validity of respondent San Miguel Corporation's amendment of its
by-laws whereby respondent corporation's board of directors under its resolution dated April 29,
2

1977 declared petitioner ineligible to be nominated or to be voted or to be elected as of the board


of directors, the Court, composed of 12 members (since Mme. Justice Ameurfina Melencio
Herrera inhibited herself from taking part herein, while Mr. Justice Ramon C. Aquino upon
submittal of the main opinion of Mr. Justice Antonio decided not to take part), failed to reach a
conclusive vote or, the required majority of 8 votes to settle the issue one way or the other.

Six members of the Court, namely, Justices Barredo, Makasiar, Antonio, Santos, Abad Santos
and De Castro, considered the issue purely legal and voted to sustain the validity per se of the
questioned amended by-laws but nevertheless voted that 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 she'll have been sustained on appeal by respondent Securities and Exchange
Commission and ultimately by this Court.

The undersigned Justices do not consider the issue as purely legal in the light of respondent
commission's Order No. 451, Series of 1977, denying petitioner's "Motion for Summary
Judgment" on the ground that "the Commission en banc finds that there (are) unresolved and
genuine issues of fact" as well as its position in this case to the Solicitor General that the case at
3

bar is "premature" and that the administrative remedies before the commission should first be
availed of and exhausted. 4

We are of the opinion that the questioned amended by-laws, as they are, (adopted after almost a
century of respondent corporation's existence as a public corporation with its shares freely
purchased and traded in the open market without restriction and disqualification) which would
bar petitioner from qualification, nomination and election as director and worse, grant 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.

We consider the questioned amended by-laws as being 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. We further consider said amended
by-laws as violating 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 (secs 21 and 30) and the right of a minority director once elected not
to be removed from office of director except for cause by vote of the stockholders holding 2/3 of
the subscribed capital stock (sec. 31). If a minority stockholder could be disqualified by such a
by-laws amendment under the guise of providing for "qualifications," these mandates of the
Corporation Law would have no meaning or purpose.

These vested and substantial rights granted stockholders under the Corporation Law may not be
diluted or defeated by the general authority granted by the Corporation Law itself to corporations
to adopt their by-laws (in section 21) which deal principally with the procedures governing their
internal business. The by-laws of any corporation must, be always within the character limits.
What the Corporation Law has granted stockholders may not be taken away by the corporation's
by-laws. The amendment is further an instrument of oppressiveness and arbitrariness in that the
incumbent directors are thereby enabled to perpetuate themselves in office by the simple
expedient of disqualifying any unwelcome candidate, no matter how many votes he may have.

However, in view of the inconclusiveness of the vote, we sustain respondent commission's stand
as expressed in its Orders Nos. 450 and 451, Series of 1977 that there are unresolved and
genuine issues of fact" and that it has yet to rule on and finally decide the validity of the disputed
by-law provision", subject to appeal by either party to this Court.

In view of prematurity of the proceedings here (as likewise expressed by Mr. Justice Fernando),
the case should as a consequence be remanded to the Securities and Exchange Commission as
the agency of primary jurisdiction for a full hearing and reception of evidence of all relevant
facts (which should property be submitted to the commission instead of the piecemeal documents
submitted as annexes to this Court which is not a trier of facts) concerning not only the petitioner
but the members of the board of directors of respondent corporation as well, so that it may
determine on the basis thereof the issue of the legality of the questioned amended by-laws, and
assuming Chat it holds the same to be valid whether the same are arbitrarily and unreasonably
applied to petitioner vis a vis other directors, who, petitioner claims, should in such event be
likewise disqualified from sitting in the board of directors by virtue of conflict of interests or
their being likewise engaged in competitive or antagonistic business" with the corporation such
as investment and finance, coconut oil mills cement, milk and hotels. 5

It should be noted that while the petition may be dismissed in view of the inconclusiveness of the
vote and the Court's failure to affair, the required 8-vote majority to resolve the issue, such as
dismissal (for lack of necessary votes) is of no doctrine value and does not in any manner resolve
the issue of the validity of the questioned amended by-laws nor foreclose the same. The same
should properly be determined in a proper case in the first instance by the Securities and
Exchange Commission as the agency of primary jurisdiction, as above indicated.

The Court is unanimous, therefore, in its judgment that petitioner Gokongwei may run for the
office of, and if elected, sit as, member of the board of directors of respondent San Miguel
Corporation as stated in the dispositive portion of the main opinion of Mr. Justice Antonio, to
wit: Until and after petitioner has been given a "new and proper hearing by the board of directors
of said corporation, whose decision shall be appealable Lo the respondent Securities and
Exchange Commission deliverating and acting en banc and ultimately to this Court" and until '
disqualified in the manner herein provided, the prohibition in the aforementioned amended by-
laws shall not apply to petitioner," In other words, until and after petitioner shall have been given
due process and proper hearing by the respondent board of directors as to the question of his
qualification or disqualification under the questioned amended by-laws (assuming that the
respondent Securities and Exchange C commission ultimately upholds the validity of said by
laws), and such disqualification shall have been sustained by respondent Securities and
Exchange Commission and ultimately by final judgment of this Court, petitioner is deemed
eligible for all legal purposes and effects to be nominated and voted and if elected to sit as a
member of the hoard of directors of respondent San Miguel Corporation.

In view of the Court's unanimous judgment on this point the portion of respondent commission's
Order No. 450, Series of 977 which imposed "the condition that he [petitioner] cannot sit as
board member if elected until after the Commission shall have finally decided the validity of the
disputed by-law provision" has been likewise accordingly set aside.

III

By way of recapitulation, so that the Court's decision and judgment may be clear and not subject
to ambiguity, we state the following.

1. With the votes of the six Justices concurring unqualifiedly in the main opinion added to our
four votes, plus the Chief Justice's vote and that of Mr. Justice Fernando, the Court has by twelve
(12) votes unanimously rendered judgment granting petitioner's right to examine and secure
copies of the books and records of San Miguel International, Inc. as a foreign subsidiary of
respondent corporation and respondent commission's Order No. 449, Series of 1977, to the
contrary is set aside:

2. With the same twelve (12) votes, the Court has also unanimously rendered judgment declaring
that until and after petitioner shall have been given due process and proper hearing by the
respondent board of directors as to the question of his disqualification under the questioned
amended by- laws (assuming that the respondent Securities and Exchange Commission
ultimately upholds the validity of said by laws), and such disqualification shall have been
sustained by respondent Securities and Exchange Commission and ultimately by final judgment
of this Court petitioner is deemed eligible for all legal purposes and effect to be nominated and
voted and if elected to sit as a member of the board of directors of respondent San Miguel
Corporation. Accordingly, respondent commission's Order No. 450, Series of 1977 to the
contrary has likewise been set aside; and

3. The Court's voting on the validity of respondent corporation's amendment of the by-laws (sec.
2, Art. 111) is inconclusive without the required majority of eight votes to settle the issue one
way or the other having been reached. No judgment is rendered by the Court thereon and the
statements of the six Justices who have signed the main opinion on the legality thereof have no
binding effect, much less doctrinal value.

The dismissal of the petition insofar as the question of the validity of the disputed by-laws
amendment is concerned is not by an judgment with the required eight votes but simply by force
of Rule 56, section II of the Rules of Court, the pertinent portion of which provides that "where
the court en banc is equally divided in opinion, or the necessary majority cannot be had, the case
shall be reheard, and if on re-hearing no decision is reached, the action shall be dismissed if
originally commenced in the court ...." The end result is that the Court has thereby dismissed the
petition which prayed that the Court bypass the commission and directly resolved the issue and
therefore the respondent commission may now proceed, as announced in its Order No. 450,
Series of 1977, to hear the case before it and receive all relevant evidence bearing on the issue as
hereinabove indicated, and resolve the "unresolved and genuine issues of fact" (as per Order No.
451, Series of 1977) and the issues of legality of the disputed by-laws amendment.

Teehankee, Concepcion, Jr., and Fernandez, JJ., concur.

Guerrero, J., concurred.

TEEHANKEE, CONCEPCION JR., FERNANDEZ and GUERRERO, JJ., concurring:

This supplemental opinion is issued with reference to the advance separate opinion of Mr. Justice
Barredo issued by him as to "certain misimpressions as to the import of the decision in this case"
which might be produced by our joint separate opinion of April 11, 1979 and "urgent(ly) to
clarify (his) position in respect to the rights of the parties resulting from the dismissal of the
petition herein and the outline of the procedure by which the disqualification of petitioner
Gokongwei can be made effective."

1. Mr. Justice Barredo's advances separate opinion "that as between the parties herein, the issue
of the validity of the challenged by-laws is already settled" had, of course, no binding effect. The
judgment of the Court is found on pages 59-61 of the decision of April 11, 1979, penned by Mr.
Justice Antonio, wherein on the question of the validity of the amended by-laws the Court's
inconclusive voting is set forth as follows:

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 by-laws and that this question should properly be resolved
first by the SEC as the agency of primary jurisdiction ...1
As stated in said judgment itself, for lack of the necessary votes, the petition, insofar as it assails
the validity of the questioned by-laws, was dismissed.

2. Mr. Justice Barredo now contends contrary to the undersigned's understanding, as stated on
pages 8 and 9 of our joint separate opinion of April 11, 1979 that the legal effect of the dismissal
of the petition on the question of validity of the amended by-laws for lack of the necessary votes
simply means that "the Court has thereby dismissed the petition which prayed that the Court by-
pass the commission and directly resolve the issue and therefore the respondent commission may
now proceed, as announced in its Order No. 450, Series of 1977, to hear the case before it and
receive all relevant evidence bearing on the issue as hereinabove indicated, and resolve the
'unresolved and genuine issues of fact' (as per Order No. 451, Series of 1977) and the issue of
legality of the disputed by-laws amendment," that such dismissal "has no other legal
consequence than that it is the law of the case as far as the parties are concerned, albeit the
majority of the opinion of six against four Justices is not doctrinal in the sense that it cannot be
cited as necessarily a precedent for subsequent cases."

We hold on our part that the doctrine of the law of the case invoked by Mr. Justice Barredo has
no applicability for the following reasons:

a) Our jurisprudence is quite clear that this doctrine may be invoked only where there has been a
final and conclusive determination of an issue in the first case later invoked as the law of the
case.

Thus, in People vs. Olarte, we held that


2

"Law of the case" has been defined as the opinion delivered on a former appeal
More specifically, it means that whatever is once irrevocably established as the
controlling legal rule of decision between the same parties in the same case
continues to he the law of the case, whether correct on general principles or not,
so long as the facts on which such decision was predicated continue to be the facts
of the case before the court. ...

It need not be stated that the Supreme Court, being the court of last resort, is the
final arbiter of all legal questions properly brought before it and that its decision
in any given case constitutes the law of that particular case. Once its judgment
becomes final it is binding on all inferior courts, and hence beyond their power
and authority to alter or modify Kabigting vs. Acting Director of Prisons, G. R.
No. L-15548, October 30, 1962).

"The decision of this Court on that appeal by the government from the order of
dismissal, holding that said appeal did not place the appellants, including Absalon
Bignay, in double jeopardy, signed and concurred in by six Justices as against
three dissenters headed by the Chief Justice, promulgated way back in the year
1952, has long become the law of the case. It may be erroneous, judged by the
law on double jeopardy as recently interpreted by this same Tribunal Even so, it
may not be disturbed and modified. Our recent interpretation of the law may be
applied to new cases, but certainly not to an old one finally and conclusively
determined. As already stated, the majority opinion in that appeal is now the law
of the case." (People vs. Pinuila)

The doctrine of the law of the case, therefore, has no applicability whatsoever herein insofar as
the question of the validity or invalidity of the amended by-laws is concerned. The Court's
judgment of April 11, 1979 clearly shows that the voting on this question was inconclusive with
six against four Justices and two other Justices (the Chief Justice and Mr. Justice Fernando)
expressly reserving their votes thereon, and Mr. Justice Aquino while taking no part in effect
likewise expressly reserved his vote thereon. No final and conclusive determination could be
reached on the issue and pursuant to the provisions of Rule 56, section 11, since this special civil
action originally commenced in this Court, the action was simply dismissed with the result that
no law of the case was laid down insofar as the issue of the validity or invalidity of the
questioned by-laws is concerned, and the relief sought herein by petitioner that this Court by-
pass the SEC which has yet to hear and determine the same issue pending before it below and
that this Court itself directly resolve the said issue stands denied.
b) The contention of Mr. Justice Barredo that the result of the dismiss of the case was that
"petitioner Gokongwei may not hereafter act on the assumption that he can revive the issue of
the validity whether in the Securities and Exchange Commission, in this Court or in any other
forum, unless he proceeds on the basis of a factual milieu different from the setting of this case
Not even the Securities and Exchange Commission may pass on such question anymore at the
instance of herein petitioner or anyone acting in his stead or on his behalf, " appears to us to be
untenable.

The Court through the decision of April 11, 1979, by the unanimous votes of the twelve
participating Justices headed by the Chief Justice, ruled that petitioner Gokongwei was entitled
to a "new and proper hearing" by the SMC board of directors on the matter of his disqualification
under the questioned by-laws and that the board's "decision shall be appealable to the respondent
Securities and Exchange Commission deliberating and acting en banc and ultimately to this
Court (and) unless disqualified in the manner herein provided, the prohibition in the
aforementioned amended by-laws shall not apply to petitioner."

The entire Court, therefore, recognized that petitioner had not been given procedural due process
by the SMC board on the matter of his disqualification and that he was entitled to a "new and
proper hearing". It stands to reason that in such hearing, petitioner could raise not only questions
of fact but questions of law, particularly questions of law affecting the investing public and their
right to representation on the board as provided by law — not to mention that as borne out by the
fact that no restriction whatsoever appears in the court's decision, it was never contemplated that
petitioner was to be limited to questions of fact and could not raise the fundamental questions of
law bearing on the invalidity of the questioned amended by-laws at such hearing before the SMC
board. Furthermore, it was expressly provided unanimously in the Court's decision that the SMC
board's decision on the disqualification of petitioner ("assuming the board of directors of San
Miguel Corporation should, after the proper hearing, disqualify him" as qualified in Mr. Justice
Barredo's own separate opinion, at page 2) shall be appealable to respondent Securities and
Exchange Commission "deliberating and acting en banc and "untimately to this Court."

Again, the Court's judgment as set forth in its decision of April 11, 1979 contains nothing that
would warrant the opinion now expressed that respondent Securities and Exchange Commission
may not pass anymore on the question of the invalidity of the amended by-laws. Certainly, it
cannot be contended that the Court in dismissing the petition for lack of necessary votes actually
by-passed the Securities and Exchange Commission and directly ruled itself on the invalidity of
the questioned by-laws when it itself could not reach a final and conclusive vote (a minimum of
eight votes) on the issue and three other Justices (the Chief Justice and Messrs. Justices Fernando
and Aquino) had expressly reserved their vote until after further hearings (first before the
Securities and Exchange Commission and ultimately in this Court).

Such a view espoused by Mr. Justice Barredo could conceivably result in an incongruous
situation where supposedly under the law of this case the questioned by-laws would be held valid
as against petitioner Gokongwei and yet the same may be stricken off as invalid as to all other
SMC shareholders in a proper case.

3. It need only be pointed out that Mr. Justice Barredo's advance separate opinion can in no way
affect or modify the judgment of this Court as set forth in the decision of April 11, 1979 and
discussed hereinabove. The same bears the unqualified concurrence of only three Justices out of
the six Justices who originally voted for the validity per se of the questioned by-laws, namely,
Messrs. Justices Antonio, Santos and De Castro. Messrs. Justices Fernando and Makasiar did not
concur therein but they instead concurred with the limited concurrence of the Chief Justice
touching on the law of the case which guardedly held that the Court has not found merit in the
claim that the amended bylaws in question are invalid but without in any manner foreclosing the
issue and as a matter of fact and law, without in any manner changing or modifying the above-
quoted vote of the Chief Justice as officially rendered in the decision of April 11, 1979, wherein
he precisely "reserved (his) vote on the validity of the amended by-laws."

4. A word on the separate opinion of Mr. Justice Pacifico de Castro attached to the advance
separate opinion of Mr. Justice Barredo. Mr. Justice De Castro advances his interpretation as to a
restrictive construction of section 13(5) of the Philippine Corporation Law, ignoring or
disregarding the fact that during the Court's deliberations it was brought out that this prohibitory
provision was and is not raised in issue in this case whether here or in the Securities and
Exchange Commission below (outside of a passing argument by Messrs. Angara, Abello,
Concepcion, Regala & Cruz, as counsels for respondent Sorianos in their Memorandum of June
26, 1978 that "(T)he disputed By-Laws does not prohibit petitioner from holding onto, or even
increasing his SMC investment; it only restricts any shifting on the part of petitioner from
passive investor to a director of the company." 3

As a consequence, the Court abandoned the Idea of calling for another hearing wherein the
parties could properly raise and discuss this question as a new issue and instead rendered the
decision in question, under which the question of section 13(5) could be raised at a new and
proper hearing before the SMC board and in the Securities and Exchange Commission and in
due course before this Court (but with the clear understanding that since both corporations, the
Robina and SMC are engaged in agriculture as submitted by the Sorianos' counsel in their said
memorandum, the issue could be raised likewise against SMC and its other shareholders,
directors, if not against SMC itself. As expressly stated in the Chief Justices reservation of his
vote, the matter of the question of the applicability of the said section 13(5) to petitioner would
be heard by this Court at the appropriate time after the proceedings below (and necessarily the
question of the validity of the amended by-laws would be taken up anew and the Court would at
that time be able to reach a final and conclusive vote).

Mr. Justice De Castro's personal interpretation of the decision of April 11, 1979 that petitioner
may be allowed to run for election despite adverse decision of both the SMC board and the
Securities and Exchange Commission "only if he comes to this Court and obtains an injunction
against the enforcement of the decision disqualifying him" is patently contradictory of his vote
on the matter as expressly given in the judgment in the Court's decision of April 11, 1979 (at
page 59) that petitioner could run and if elected, sit as director of the respondent SMC and could
be disqualified only 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 aforementioned amended by-laws shall not apply to
petitioner."

Teehankee, Concepcion Jr., Fernandez and Guerrero, JJ., concur.

BARREDO, J., concurring:

I reserved the filing of a separate opinion in order to state my own reasons for voting in favor of
the validity of the amended by-laws in question. Regrettably, I have not yet finished preparing
the same. In view, however, of the joint separate opinion of Justices Teehankee, Concepcion Jr.,
Fernandez and Guerrero, the full text of which has just come to my attention, and which I am
afraid might produce certain misimpressions as to the import of the decision in this case, I
consider it urgent to clarify my position in respect to the rights of the parties resulting from the
dismissal of the petition herein and the outlining of the procedure by which the disqualification
of petitioner Gokongwei can be made effective, hence this advance separate opinion.

To start with, inasmuch as petitioner Gokongwei himself placed the issue of the validity of said
amended by-laws squarely before the Court for resolution, because he feels, rightly or wrongly,
he can no longer have due process or justice from the Securities and Exchange Commission, and
the private respondents have joined with him in that respect, the six votes cast by Justices
Makasiar, Antonio, Santos, Abad Santos, de Castro and this writer in favor of validity of the
amended by-laws in question, with only four members of this Court, namely, Justices Teehankee,
Concepcion Jr., Fernandez and Guerrero opining otherwise, and with Chief Justice Castro and
Justice Fernando reserving their votes thereon, and Justices Aquino and Melencio Herrera not
voting, thereby resulting in the dismissal of the petition "insofar as it assails the validity of the
amended by- laws ... for lack of necessary votes", has no other legal consequence than that it is
the law of the case as far as the parties herein are concerned, albeit the majority opinion of six
against four Justices is not doctrinal in the sense that it cannot be cited as necessarily a precedent
for subsequent cases. This means that petitioner Gokongwei and the respondents, including the
Securities and Exchange Commission, are bound by the foregoing result, namely, that the Court
en banc has not found merit in the claim that the amended by-laws in question are invalid.
Indeed, it is one thing to say that dismissal of the case is not doctrinal and entirely another thing
to maintain that such dismissal leaves the issue unsettled. It is somewhat of a misreading and
misconstruction of Section 11 of Rule 56, contrary to the well-known established norm observed
by this Court, to state that the dismissal of a petition for lack of the necessary votes does not
amount to a decision on the merits. Unquestionably, the Court is deemed to find no merit in a
petition in two ways, namely, (1) when eight or more members vote expressly in that sense and
(2) when the required number of justices needed to sustain the same cannot be had.

I reiterate, therefore, that as between the parties herein, the issue of validity of the challenged by-
laws is already settled. From which it follows that the same are already enforceable-insofar as
they are concerned. Petitioner Gokongwei may not hereafter act on the assumption that he can
revive the issue of validity whether in the Securities and Exchange Commission, in this Court or
in any other forum, unless he proceeds on the basis of a factual milieu different from the setting
of this case. Not even the Securities and Exchange Commission may pass on such question
anymore at the instance of herein petitioner or anyone acting in his stead or on his behalf. The
vote of four justices to remand the case thereto cannot alter the situation.

It is very clear that under the decision herein, the issue of validity is a settled matter for the
parties herein as the law of the case, and it is only the actual implementation of the impugned
amended by-laws in the particular case of petitioner that remains to be passed upon by the
Securities and Exchange Commission, and on appeal therefrom to Us, assuming the board of
directors of San Miguel Corporation should, after the proper hearing, disqualify him.

To be sure, the record is replete with substantial indications, nay admissions of petitioner
himself, that he is a controlling stockholder of corporations which are competitors of San Miguel
Corporation. The very substantial areas of such competition involving hundreds of millions of
pesos worth of businesses stand uncontroverted in the records hereof. In fact, petitioner has even
offered, if he should be elected, as director, not to take part when the board takes up matters
affecting the corresponding areas of competition between his corporation and San Miguel.
Nonetheless, perhaps, it is best that such evidence be formally offered at the hearing
contemplated in Our decision.

As to whether or not petitioner may sit in the board if he wins, definitely, under the decision in
this case, even if petitioner should win, he will have to immediately leave his position or should
be ousted the moment this Court settles the issue of his actual disqualification, either in a full
blown decision or by denying the petition for review of corresponding decision of the Securities
and Exchange Commission unfavorable to him. And, of course, as a matter of principle, it is to
be expected that the matter of his disqualification should be resolved expeditiously and within
the shortest possible time, so as to avoid as much juridical injury as possible, considering that the
matter of the validity of the prohibition against competitors embodied in the amended by-laws is
already unquestionable among the parties herein and to allow him to be in the board for
sometime would create an obviously anomalous and legally incongruous situation that should not
be tolerated. Thus, all the parties concerned must act promptly and expeditiously.

Additionally, my reservation to explain my vote on the validity of the amended by-laws still
stands.

Castro, C.J., concurs in Justice Barredo's statement that the dismissal (for lack of necessary
votes) of the petition to the extent that "it assails the validity of the amended by laws," is the law
of the case at bar, which means in effect that as far and only in so far as the parties and the
Securities and Exchange Commission are concerned, the Court has not found merit in the claim
that the amended by-laws in question are invalid.

Antonio and Santos, JJ., concur.

DE CASTRO, J., concurring:

As stated in the decision penned by Justice Antonio, I voted to uphold the validity of the
amendment to the by-laws in question. What induced me to this view is the practical
consideration easily perceived in the following illustration: If a person becomes a stockholder of
a corporation and gets himself elected as a director, and while he is such a director, he forms his
own corporation competitive or antagonistic to the corporation of which he is a director, and
becomes Chairman of the Board and President of his own corporation, he may be removed from
his position as director, admittedly one of trust and confidence. If this is so, as seems
undisputably to be the case, a person already controlling, and also the Chairman of the Board and
President of, a corporation, may be barred from becoming a member of the board of directors of
a competitive corporation. This is my view, even as I am for a restrictive interpretation of Section
13(5) of the Philippine Corporation Law, under which I would limit the scope of the provision to
corporations engaged in agriculture, but only as the word agriculture" refers to its more stated
meaning as distinguished from its general and broad connotation. The term would then mean
"farming" or raising the natural products of the soil, such as by cultivation, in the manner as is
required by the Public Land Act in the acquisition of agricultural land, such as by homestead,
before the patent may be issued. It is my opinion that under the public land statute, the
development of a certain portion of the land applied for as specified in the law as a condition
precedent before the applicant may obtain a patent, is cultivation, not let us say, poultry raising
or piggery, which may be included in the term Is agriculture" in its broad sense. For under
Section 13(5) of the Philippine Corporation Law, construed not in the strict way as I believe it
should, because the provision is in derogation of property rights, the petitioner in this case would
be disqualified from becoming an officer of either the San Miguel Corporation or his own
supposedly agricultural corporations. It is thus beyond my comprehension why, feeling as though
I am the only member of the Court for a restricted interpretation of Section 13(5) of Act 1459,
doubt still seems to be in the minds of other members giving the cited provision an unrestricted
interpretation, as to the validity of the amended by-laws in question, or even holding them null
and void.

I concur with the observation of Justice Barredo that despite that less than six votes are for
upholding the validity of the by-laws, their validity is deemed upheld, as constituting the "law of
the case." It could not be otherwise, after the present petition is dismissed with the relief sought
to declare null and void the said by-laws being denied in effect. A vicious circle would be created
if, should petitioner Gokongwei be barred or disqualified from running by the Board of Directors
of San Miguel Corporation and the Securities and Exchange Commission sustain the Board,
petitioner could come again to Us, raising the same question he has raised in the present petition,
unless the principle of the "law of the case" is applied.

Clarifying therefore, my position, I am of the opinion that with the validity of the by-laws in
question standing unimpaired it is now for petitioner to show that he does not come within the
disqualification as therein provided, both to the Board and later to the Securities and Exchange
Commission, it being a foregone conclusion that, unless petitioner disposes of his stockholdings
in the so-called competitive corporations, San Miguel Corporation would apply the by-laws
against him, His right, therefore, to run depends on what, on election day, May 8, 1979, the
ruling of the Board and/or the Securities and Exchange Commission on his qualification to run
would be, certainly, not the final ruling of this Court in the event recourse thereto is made by the
party feeling aggrieved, as intimated in the "Joint Separate Opinion" of Justices Teehankee,
Concepcion, Jr., Fernandez and Guerrero, that only after petitioner's "disqualification" has
ultimately been passed upon by this Court should petitioner, not be allowed to run. Petitioner
may be allowed to run, despite an adverse decision of both the Board and the Securities and
Exchange Commission, only if he comes to this Court and obtain an injunction against the
enforcement of the decision disqualifying him. Without such injunction being required, all that
petitioner has to do is to take his time in coming to this Court, and in so doing, he would in the
meantime, be allowed to run, and if he wins, to sit. This would, however, be contrary to the
doctrine that gives binding, if not conclusive, effect of findings of facts of administrative bodies
exercising quasi-judicial functions upon appellate courts, which should, accordingly, be enforced
until reversed by this Tribunal.

#Footnotes

1 The pertinent amendments reads as follows:

RESOLVED, That Section 2, Article III of the By-laws of San


Miguel Corporation, which reads as follows:

SECTION 2. Any stockholder having at least five thousand shares


registered in his name may be elected director, but he shall not be
qualified to hold office unless he pledges said five thousand shares
to the Corporation to answer for his conduct.
SECTION 2. Any stockholder having at least five thousand shares
registered in his name may be elected Director, provided, however,
that no person shall qualify or be eligible for nomination or
election to the Board of Directors if he is engaged in any business
which competes with or is antagonistic to that of the Corporation.
Without limiting the generality of the foregoing, a person shall be
deemed to be so engaged:

(a) if he is an officer, manager or controlling person of, or the


owner (either of record or beneficially) of 10% or more of any
outstanding class of shares of, any corporation (other than one in
which the corporation owns at least 30% of the capital stock)
engaged in a business which the Board, by at least three-fourths
vote, determines to be competitive or antagonistic to that of the
Corporation; or

(b) If he is an officer, manager or controlling person of, or the


owner (either of record or beneficially) or 10% or more of any
oustanding class of shares of, any other corporation or entity
engaged in any line of business of the Corporation, when in the
judgment of the Board, by at least three-fourths vote, the laws
against combinations in restraint of trade shall be violated by such
person's membership in the Board of Directors.

(c) If the Board, in the exercise of its judgment in good faith,


determines by at least three-fourths vote that he is the nominee of
any person set forth in (a) or (b).

In determining whether or not a person is a controlling person,


beneficial owner, or the nominee of another, the Board may take
into account such factors as business and family relationship.

For the proper implementation of this provision, all nominations


for election of Directors by the stockholders shall be submitted in
writing to the Board of Directors at least five working days before
the date of the Annual Meeting.' " (Rollo, pp. 462-463).

29 Schildberg Rock Products Co. v. Brooks, 140 NW 2d 132, 137. Chief Justice
Garfield quotes the doctrine as follows:

(5) The doctrine "corporate opportunity" is not new to the law and
is but one phase of the cardinal rule of undivided loyalty on the
part of the fiduciaries. 3 Flecther Cyc. Corporations, Perm. Ed.,
1965 Revised Volume, section 861.1, page 227; 19 Am. Jur. 2d.
corporations, section 1311, page 717. Our own consideration of the
quoted terms as such is mainly in Ontjes v. MacNider, supra, 232
Iowa 562, 579, 5 N.W., 2d 860, 869, which quotes at length with
approval from Guth v. Loft, Inc., 23 Del. Ch. 255, 270, 5 A 2d 503,
511, a leading case in this area of the law. The quotation cites
several precedents for this: "*** if there is presented to a corporate
officer or director a business opportunity which the corporation is
financially able to undertake, is from its nature, in the line of the
corporation's business and is of practical advantage to it, is one in
which the corporation has an interest or a reasonable expectancy,
and by embracing the opportunity, the self-interest of the officer or
director will be brought into seize the opportunity for himself. And,
if, in such circumstances, the interests of the corporation are
betrayed, the corporation may elect to claim all of the benefits of
the transaction for itself. and the law will impress a trust in favor of
the corporation upon the property. interests and profits so acquired.
30 Paulman v. Kritzer, 74 III. App. 2d 284, 291 NE 2d 541; Tower Recreation,
Inc. v. Beard, 141 Ind. App. 649, 231 NE 2d 154.

31 Oleck, Modern Corporation Law, Vol. 2, Section 960.

32 The CFC and Robina companies, which are reportedly worth more than P500
Million, are principally owned and controlled by Mr. Gokongwei and are in
substantial competition to San Miguel. As against his almost 100% ownership in
these basically family companies, Mr. Gokongwei's holding in San Miguel are
approximately 4% of the total shareholdings of your Company. As a consequence,
One Peso (P1.00) of profit resulting from a sale by CFC and Robina in the lines
competing with San Miquel, is earned almost completely by Mr. Gokongwei, his
immediate family and close associates. On the other hand, the loss of that sale to
San Miguel, resulting in a One Peso (P1.00) loss of profit to San Miquel, in the
lines competing with CFC and Robina, would result in a loss in profit of only
Four Centavos (0.04) to Mr. Gokongwei." (Letter to stockholders of SMC, dated
April 3, 1978, Annex "R", Memo for respondent San Miguel Corporation, rollo, p.
1967.

33 Article 28, Civil Code; Section 4, par. 5, of Rep. Act No. 5455; and Section 7
(g) of Rep. Act No. 6173. Cf. Section 17, paragraph 2. of the Judiciary Act.

49 Sections 3 and 5 of Presidential Decree No. 902-A provides:

SEC. 3. The Commission shall have absolute jurisdiction


supervision and control over all corporations *** who are grantees
of *** license or permit issued by the government ***

SEC. 5. In addition to the regulatory and adjudicative functions of


the Securities and Exchange Commission over corporations
partnerships and other forms of associations registered with its as
expressly granted under existing laws and decrees, it shall have
original and exclusive jurisdiction to hear and decide cases
involving.

a) Devices or schemes employed by or nay acts, of the board of


directors, business associates, its officers or partners amounting to
fraud and misrepresentation which may be detrimental to the
interest of the public and/or of the stockholders, partners, members
of associations or organizations registered with the Commission.

b) Controversies arising out of intra-corporate or partnership


relations, between and among stockholders, members or
associates; between any or all of them and the corporation,
partnership or association of which they are stockholders, members
or associates, respectively; and between such corporations their
individual francise or right to exist as such entity;

c) Controversies in the election or appointments of directors,


trustees, officers or managers of such corporations, partnership or
associations.
FIRST DIVISION

CEBU MACTAN MEMBERS G.R. No. 159624


CENTER, INC.,
Petitioner, Present:

PUNO, C.J., Chairperson,


CARPIO,
- versus - CORONA,
LEONARDO-DE CASTRO, and
BERSAMIN, JJ.
MASAHIRO TSUKAHARA, Promulgated:
Respondent. July 17, 2009
x-----------------------------------------------------------------------------------------x
DECISION
CARPIO, J.:

The Case

This is a petition for review[1] of the Court of Appeals Decision[2] dated 29


July 2003 in CA-G.R. CV No. 68321. The Court of Appeals affirmed the
Decision[3] dated 24 September 1999 of the Regional Trial Court of Cebu City,
Branch 58 (RTC).

The Antecedent Facts


In February 1994, petitioner Cebu Mactan Members Center, Inc. (CMMCI),
through Mitsumasa Sugimoto (Sugimoto), the President and Chairman of the
Board of Directors of CMMCI, obtained a loan amounting to P6,500,000 from
respondent Masahiro Tsukahara. As payment for the loan, CMMCI issued seven
postdated checks of CMMCI payable to Tsukahara, with details as follows: [4]
Check No. Date Amount

PNB Check No. 6 May 1994 P4,860,000


892657
PNB Check No. 6 September 1994 280,000
892683
PNB Check No. 25 December 1994 270,000
892684
PNB Check No. 31 March 1995 270,000
892685
PNB Check No. 30 June 1995 280,000
892686
PNB Check No. 30 September 1995 270,000
892687
PNB Check No. 25 December 1995 270,000
892688
------------------
Total P6,500,000

On 13 April 1994, CMMCI, through Sugimoto, obtained another loan amounting


to P10,000,000 from Tsukahara. Sugimoto executed and signed a promissory note
in his capacity as CMMCI President and Chairman, as well as in his personal
capacity.[5] The promissory note states:
FOR VALUE RECEIVED, the undersigned CEBU MACTAN MEMBERS CENTER, INC.,
a corporation duly organized and existing under and by virtue of the laws of the Republic
of the Philippines, through its undersigned chairman and president, MITSUMASA
SUGIMOTO, hereby promise to pay MASAHIRO TSUKAHARA or order the sum of TEN
MILLION PESOS (P10,000,000.00) on or before August 30, 1996, plus interest thereon at
the rate of EIGHTEEN PERCENT (18%) per annum computed from the date of this
instrument until fully paid.

CEBU MACTAN MEMBERS CENTER, INC.By:


(Signed)
MITSUMASA SUGIMOTO
In his capacity as Chairman and President
and in his personal capacity.
Upon maturity, the seven checks were presented for payment by Tsukahara, but
the same were dishonored by PNB, the drawee bank. After several failed attempts
to collect the loan amount totaling P16,500,000, Tsukahara filed the instant case
for collection of sum of money against CMMCI and Sugimoto.

Tsukahara alleged that the amount of P16,500,000 was used by CMMCI for the
improvement of its beach resort, which included the construction of a wave fence,
the purchase of airconditioners and curtains, and the provision of salaries of
resort employees. He also asserted that Sugimoto, as the President of CMMCI, has
the power to borrow money for said corporation by any legal means whatsoever
and to sign, endorse and deliver all checks and promissory notes on behalf of the
corporation.[6]

CMMCI, on the other hand, denied borrowing the amount from Tsukahara, and
claimed that both loans were personal loans of Sugimoto. The company also
contended that if the loans were those of CMMCI, the same should have been
supported by resolutions issued by CMMCIs Board of Directors.

On 24 September 1999, the RTC rendered a Decision, the dispositive portion of


which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff
and against the defendants by ordering the defendants to pay jointly and severally to the
plaintiff the sum of Six Millions (sic) Five Hundred Thousand Pesos (P6,500,000.00),
Philippine Currency, with interest thereon at the legal rate from the filing of the
amended complaint on September 13, 1996 until fully paid, the sum of Ten Million Pesos
(P10,000,000.00), Philippine Currency, with interest of eighteen percent (18%) per
annum from April 13, 1994 until fully paid, the sum of One Hundred Fifty Thousand
Pesos (P150,000.00), Philippine Currency, as and for attorneys fees and costs of suit.

As the defendant Mitsumasa Sugimoto, who was served with summons by publication,
was declared in default, let this decision be served upon him by publication once in a
newspaper of general circulation at the expense of the plaintiff, pursuant to Section 9,
Rule 13 of the 1997 Revised Rules of Civil Procedure.

[7]
SO ORDERED. The Court of Appeals Ruling

On appeal, the Court of Appeals rendered judgment, affirming the decision of the
RTC, thus:
WHEREFORE, the instant appeal is hereby DISMISSED and the Decision dated
September 24, 1999 AFFIRMED.

SO ORDERED.[8]

Hence, this petition.

The Issue

The sole issue for resolution in this case is: Whether the Court of Appeals erred in
holding that CMMCI is liable for the loan contracted by its President without a
resolution issued by the CMMCI Board of Directors.

The Courts Ruling

We find the petition without merit.

A corporation, being a juridical entity, may act through its board of directors,
which exercises almost all corporate powers, lays down all corporate business
policies and is responsible for the efficiency of management. [9] The general rule is
that, in the absence of authority from the board of directors, no person, not even
its officers, can validly bind a corporation.[10] Section 23 of the Corporation Code of
the Philippines provides:
SEC. 23. The Board of Directors or Trustees. Unless otherwise provided in
this Code, the corporate powers of all corporations formed under this Code shall
be exercised, all business conducted and all property of such corporations
controlled and held by the board of directors or trustees x x x.

In Peoples Aircargo and Warehousing Co., Inc. v. Court of Appeals,[11] we held that
under Section 23, the power and the responsibility to decide whether the
corporation should enter into a contract that will bind the corporation are lodged
in the board of directors, subject to the articles of incorporation, by-laws, or
relevant provisions of law. However, just as a natural person may authorize
another to do certain acts for and on his behalf, the board of directors may validly
delegate some of its functions and powers to officers, committees or agents.
[12]
The authority of such individuals to bind the corporation is generally derived
from law, corporate by-laws or authorization from the board, either expressly or
impliedly by habit, custom or acquiescence in the general course of business.
[13]
This Court has held, thus:

A corporate officer or agent may represent and bind the corporation in


transactions with third persons to the extent that [the] authority to do so has been
conferred upon him, and this includes powers which have been intentionally
conferred, and also such powers as, in the usual course of the particular business,
are incidental to, or may be implied from, the powers intentionally conferred,
powers added by custom and usage, as usually pertaining to the particular officer
or agent, and such apparent powers as the corporation has caused persons dealing
with the officer or agent to believe that it has conferred.[14]

In this case, the corporate by-laws of CMMCI provide:


ARTICLE III

Officers
2. President. The President shall be elected by the Board of Directors from their
own number. He shall have the following powers and duties:
c. Borrow money for the company by any legal means whatsoever, including the
arrangement of letters of credit and overdrafts with any and all banking
institutions;
d. Execute on behalf of the company all contracts and agreements which the said
company may enter into;
e. Sign, indorse, and deliver all checks, drafts, bill of exchange, promissory notes
and orders of payment of sum of money in the name and on behalf of the
corporation;[15]
It is clear from the foregoing that the president of CMMCI is given the power to
borrow money, execute contracts, and sign and indorse checks and promissory
notes, in the name and on behalf of CMMCI. With such powers expressly
conferred under the corporate by-laws, the CMMCI president, in exercising such
powers, need not secure a resolution from the companys board of directors. We
quote with approval the ruling of the appellate court, viz:
x x x The court a quo correctly ruled that a board resolution in this case is a
superfluity given the express provision of the corporate by-laws.
To insist that a board resolution is still required in order to bind the corporation
with respect to the obligations contracted by its president is to defeat the purpose
of the by-laws.By-laws of a corporation should be construed and given effect
according to the general rules governing the construction of contracts. They, as
the self-imposed private laws of a corporation, have, when valid, substantially the
same force and effect as laws of the corporation, as have the provisions of its
charter insofar as the corporation and the persons within it are concerned. They
are in effect written into the charter and in this sense, they become part of the
fundamental law of the corporation. And the corporation and its directors (or
trustees) and officers are bound by and must comply with them.
The corporation is now estopped from denying the authority of its president to
bind the former into contractual relations. x x x[16]

Thus, given the presidents express powers under the CMMCIs by-laws, Sugimoto,
as the president of CMMCI, was more than equipped to enter into loan transactions
on CMMCIs behalf. Accordingly, the loans obtained by Sugimoto from Tsukahara
on behalf of CMMCI are valid and binding against the latter, and CMMCI may be
held liable to pay such loans.

WHEREFORE, we DENY the petition. We AFFIRM the Court of Appeals


Decision dated 29 July 2003 in CA-G.R. CV No. 68321.

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, I certify that the
conclusions in the above Decision had been reached in consultation before the
case was assigned to the writer of the opinion of the Courts Division.