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In 1976, Petitioner John Gokongwei, Jr.

, as a stockholder of Respondent San Miguel Corporation filed with the


Securities and Exchange Commission a petition to declare the respondent corporation’s new By-Laws
(adopted by its Board of Director on Sept. 18, 1976) null and void.
The 1961 By-Law of the Corporation authorizes the Board of Directors to amend, modify, repeal or
adopt new by-laws by obtaining an affirmative vote of stockholders representing not less than 2/3 of
the subscribed and paid up capital.
In 1976, board members exercised this by amending its By-Laws during its stockholders’ meeting.
During that stockholders’ meeting, Gokongwei’s bid to secure a seat in the Board was rejected on the
basic issue that he was engaged in a competitive business.
Gokongwei, in this petition, claimed that (his causes of action):
1. the 2/3 votes should have been computed on the basis of the capitalization at the time of the
amendment, which was 30, 127, 047 outstanding and paid up shares. (and not based on the 1961
shares, which was 5, 513, 974 common shares and 150, 000 preferred shares).
2. The authority granted in 1961 had already been exercised in 1962 and 1963. After which, the
authority of the Board ceased to exist.
3. The membership of the Board had changed since the authority was given in 1961.
4. He had all the qualifications to be director (he was a Substantial stockholder) and that in amending
the by-laws, the board members purposely provided for his (Gokongwei’s) disqualification.
SMC, in its answer, contended that the power conferred upon the Board by its 1961 By-Laws has never been
revoked. Also, it avers that the 2/3 vote must be based on the total subscribed capital stock at the time the
delegation of said power was made (1961), not when the Board opted to exercise said delegated power
(1976).
Respondent also denied Gokongwei’s claims saying that Universal Robina Corporation (Robina) and
Consolidated Foods Corporation (CFC) – closed corporations where Gokongwei was the president and
controlling shareholder – began acquiring shares in SMC in 1972.
It was 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 SMC:
(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 – 4.2344% of the total outstanding capital stock of San Miguel
Corporation.
SMC also claimed that in 1976, Gokongwei conducted a 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.
The SEC held in abeyance its decision regarding the main issue. This is because Gokongwei’s request to
inspect and copy the minutes of the stockholders’ meeting was granted.
Meanwhile, while the case was pending, SMC held a special stockholders’ meeting for the "ratification and
confirmation of the amendment to the By-laws."
This led Gokongweit to ask SEC for a summary judgment insofar as the first cause of action is
concern. He subsequently filed for an Urgent Motion for the issuance of a TRO.
Gokongwei’s petitions were denied. The Board pushed through with its special stockholders’
meeting. The Amendments to the By-Laws were ratified.
SMC issued notices of the annual stockholders’ meeting, which was happening on May 10, 1977. Included in
the agenda was:
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.
This prompted Gokongwei to file an urgent motion for the issuance of a writ of preliminary injunction to
restrain SMC from taking up Agenda No. 6 in its annual stockholders’ meeting. The date on which the SEC
originally set to hear this current petition of Gokongwei was moved to May 16-17, 1977 – which was after the
scheduled stockholders’ meeting.
Hence, Gokongwei filed this case before the SC, saying the SEC gravely abused its discretion for not urgently
acting on his petitions.
The SC then issued a TRO against SMC, restraining it from disqualifying Gokongwei from running or from
being voted as director. It also restrained SMC Board from ratifying or conforming Agenda No. 6 during its
annual stockholders’ meeting.

ISSUE:
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 – Yes.

The law expressly confers upon corporations the authority to prescribe qualifications of its directors.
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.
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 ... "
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."
A director stands in a fiduciary relation to the corporation and its shareholders
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."
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
This is based upon the principle that where the director is so employed in the service of a rival
company, he cannot serve both, but must betray one or the other. Such an amendment "advances the
benefit of the corporation and is good."
The doctrine of "corporate opportunity” is precisely a recognition by the courts that the fiduciary
standards could not be upheld where the fiduciary was acting for two entities with competing
interests.
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.
The Constitution (Art XIV, Sec 2) and the Revised Penal Code (Art. 186) prohibit combinations in restraint of
trade or unfair competition.
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.
In the case at bar, the election of Gokongwei to the Board of SMC would result to an illegal situation.
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.
Election of Gokonwei to the Board of SMC may also be in violation of Sec 13(5) of the Corporation Law, which
states 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 ... ."
The amended By-Law is not discriminatory. It does not disqualify Gokongwei alone. It disqualifies all other
shareholders who are in a similar situation as Gokongwei.
Furthermore, SEC did not gravely abuse its discretion in denying Gokongwei’s request for an examination of
the records of San Miguel International Inc., a fully owned subsidiary of San Miguel Corporation
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.