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.
I
Whether or not amended by-laws are valid is purely a legal question which public interest requires to be
resolved
It is the position of the petitioner that "it is not necessary to remand the case to respondent SEC for an
appropriate ruling on the intrinsic validity of the amended by-laws in compliance with the principle of
exhaustion of administrative remedies", considering that: first: "whether or not the provisions of the
amended by-laws are intrinsically valid ... is purely a legal question. There is no factual dispute as to
what the provisions are and evidence is not necessary to determine whether such amended by-laws are
valid as framed and approved ... "; second: "it is for the interest and guidance of the public that an
immediate and final ruling on the question be made ... "; third: "petitioner was denied due process by
SEC" when "Commissioner de Guzman had openly shown prejudice against petitioner ... ", and
"Commissioner Sulit ... approved the amended by-laws ex-parte and obviously found the same
intrinsically valid; and finally: "to remand the case to SEC would only entail delay rather than serve the
ends of justice."
Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that this Court resolve the legal
issues raised by the parties in keeping with the "cherished rules of procedure" that "a court should
always strive to settle the entire controversy in a single proceeding leaving no root or branch to bear the
seeds of future ligiation", citingGayong v. Gayos. 3 To the same effect is the prayer of San Miguel
Corporation that this Court resolve on the merits the validity of its amended by laws and the rights and
obligations of the parties thereunder, otherwise "the time spent and effort exerted by the parties
concerned and, more importantly, by this Honorable Court, would have been for naught because the
main question will come back to this Honorable Court for final resolution." Respondent Eduardo R.
Visaya submits a similar appeal.

It is only the Solicitor General who contends that the case should be remanded to the SEC for hearing
and decision of the issues involved, invoking the latter's primary jurisdiction to hear and decide case
involving intra-corporate controversies.
It is an accepted rule of procedure that the Supreme Court should always strive to settle the entire
controversy in a single proceeding, leaving nor root or branch to bear the seeds of future
litigation. 4 Thus, in Francisco v. City of Davao, 5 this Court resolved to decide the case on the merits
instead of remanding it to the trial court for further proceedings since the ends of justice would not be
subserved by the remand of the case. In Republic v. Security Credit and Acceptance Corporation, et
al., 6 this Court, finding that the main issue is one of law, resolved to decide the case on the merits
"because public interest demands an early disposition of the case", and in Republic v. Central Surety
and Insurance Company, 7 this Court denied remand of the third-party complaint to the trial court for
further proceedings, citing precedent where this Court, in similar situations resolved to decide the cases
on the merits, instead of remanding them to the trial court where (a) the ends of justice would not be
subserved by the remand of the case; or (b) where public interest demand an early disposition of the
case; or (c) where the trial court had already received all the evidence presented by both parties and
the Supreme Court is now in a position, based upon said evidence, to decide the case on its merits. 8 It
is settled that the doctrine of primary jurisdiction has no application where only a question of law is
involved. 8a Because uniformity may be secured through review by a single Supreme Court, questions
of law may appropriately be determined in the first instance by courts. 8b In the case at bar, there are
facts which cannot be denied, viz.: that the amended by-laws were adopted by the Board of Directors of
the San Miguel Corporation in the exercise of the power delegated by the stockholders ostensibly
pursuant to section 22 of the Corporation Law; that in a special meeting on February 10, 1977 held
specially for that purpose, the amended by-laws were ratified by more than 80% of the stockholders of
record; that the foreign investment in the Hongkong Brewery and Distellery, a beer manufacturing
company in Hongkong, was made by the San Miguel Corporation in 1948; and that in the stockholders'
annual meeting held in 1972 and 1977, all foreign investments and operations of San Miguel
Corporation were ratified by the stockholders.
II
Whether or not the amended by-laws of SMC of disqualifying a competitor from nomination or election
to the Board of Directors of SMC are valid and reasonable
The validity or reasonableness of a by-law of a corporation in purely a question of law. 9 Whether the bylaw is in conflict with the law of the land, or with the charter of the corporation, or is in a legal sense
unreasonable and therefore unlawful is a question of law. 10 This rule is subject, however, to the
limitation that where the reasonableness of a by-law is a mere matter of judgment, and one upon which
reasonable minds must necessarily differ, a court would not be warranted in substituting its judgment
instead of the judgment of those who are authorized to make by-laws and who have exercised their
authority. 11
Petitioner claims that the amended by-laws are invalid and unreasonable because they were tailored to
suppress the minority and prevent them from having representation in the Board", at the same time
depriving petitioner of his "vested right" to be voted for and to vote for a person of his choice as director.
Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San Miguel Corporation
content that ex. conclusion of a competitor from the Board is legitimate corporate purpose, considering
that being a competitor, petitioner cannot devote an unselfish and undivided Loyalty to the corporation;
that it is essentially a preventive measure to assure stockholders of San Miguel Corporation of

reasonable protective from the unrestrained self-interest of those charged with the promotion of the
corporate enterprise; that access to confidential information by a competitor may result either in the
promotion of the interest of the competitor at the expense of the San Miguel Corporation, or the
promotion of both the interests of petitioner and respondent San Miguel Corporation, which may,
therefore, result in a combination or agreement in violation of Article 186 of the Revised Penal Code by
destroying free competition to the detriment of the consuming public. It is further argued that there is not
vested right of any stockholder under Philippine Law to be voted as director of a corporation. It is
alleged that petitioner, as of May 6, 1978, has exercised, personally or thru two corporations owned or
controlled by him, control over the following shareholdings in San Miguel Corporation, vis.: (a) John
Gokongwei, Jr. 6,325 shares; (b) Universal Robina Corporation 738,647 shares; (c) CFC
Corporation 658,313 shares, or a total of 1,403,285 shares. Since the outstanding capital stock of
San Miguel Corporation, as of the present date, is represented by 33,139,749 shares with a par value of
P10.00, the total shares owned or controlled by petitioner represents 4.2344% of the total outstanding
capital stock of San Miguel Corporation. It is also contended that petitioner is the president and
substantial stockholder of Universal Robina Corporation and CFC Corporation, both of which are
allegedly controlled by petitioner and members of his family. It is also claimed that both the Universal
Robina Corporation and the CFC Corporation are engaged in businesses directly and substantially
competing with the alleged businesses of San Miguel Corporation, and of corporations in which SMC
has substantial investments.
ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S CORPORATIONS AND SAN
MIGUEL CORPORATION
According to respondent San Miguel Corporation, the areas of, competition are enumerated in its Board
the areas of competition are enumerated in its Board Resolution dated April 28, 1978, thus:
Product
Line
1977 SMC Robina-CFC

Estimated

Table
Eggs
0.6%
Layer
Pullets
33.0%
Dressed
Chicken
35.0%
Poultry
&
Hog
Feeds
Ice
Cream
70.0%
Instant
Coffee
45.0%
Woven Fabrics 17.5% 9.1% 26.6%

Market

Share

10.0%
24.0%
14.0%
40.0%
12.0%
13.0%
40.0%

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.

Total

10.6%
57.0%
49.0%
52.0%
83.0%
85.0%

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

It is recognized by an authorities that 'every corporation has the inherent power to adopt by-laws 'for its
internal government, and to regulate the conduct and prescribe the rights and duties of its members
towards itself and among themselves in reference to the management of its affairs. 12 At common law,
the rule was "that the power to make and adopt by-laws was inherent in every corporation as one of its
necessary and inseparable legal incidents. And it is settled throughout the United States that in the
absence of positive legislative provisions limiting it, every private corporation has this inherent power as
one of its necessary and inseparable legal incidents, independent of any specific enabling provision in
its charter or in general law, such power of self-government being essential to enable the corporation to
accomplish the purposes of its creation. 13
In this jurisdiction, under section 21 of the Corporation Law, a corporation may prescribe in its by-laws
"the qualifications, duties and compensation of directors, officers and employees ... " This must
necessarily refer to a qualification in addition to that specified by section 30 of the Corporation Law,
which provides that "every director must own in his right at least one share of the capital stock of the
stock corporation of which he is a director ... " InGovernment v. El Hogar, 14 the Court sustained the
validity of a provision in the corporate by-law requiring that persons elected to the Board of Directors
must be holders of shares of the paid up value of P5,000.00, which shall be held as security for their
action, on the ground that section 21 of the Corporation Law expressly gives the power to the
corporation to provide in its by-laws for the qualifications of directors and is "highly prudent and in
conformity with good practice. "
NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR

Any person "who buys stock in a corporation does so with the knowledge that its affairs are dominated
by a majority of the stockholders and that he impliedly contracts that the will of the majority shall govern
in all matters within the limits of the act of incorporation and lawfully enacted by-laws and not forbidden
by law." 15 To this extent, therefore, the stockholder may be considered to have "parted with his personal
right or privilege to regulate the disposition of his property which he has invested in the capital stock of
the corporation, and surrendered it to the will of the majority of his fellow incorporators. ... It cannot
therefore be justly said that the contract, express or implied, between the corporation and the
stockholders is infringed ... by any act of the former which is authorized by a majority ... ." 16
Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of incorporation
by a vote or written assent of the stockholders representing at least two-thirds of the subscribed capital
stock of the corporation If the amendment changes, diminishes or restricts the rights of the existing
shareholders then the disenting minority has only one right, viz.: "to object thereto in writing and
demand payment for his share." Under section 22 of the same law, the owners of the majority of the
subscribed capital stock may amend or repeal any by-law or adopt new by-laws. It cannot be said,
therefore, that petitioner has a vested right to be elected director, in the face of the fact that the law at
the time such right as stockholder was acquired contained the prescription that the corporate charter
and the by-law shall be subject to amendment, alteration and modification. 17
It being settled that the corporation has the power to provide for the qualifications of its directors, the
next question that must be considered is whether the disqualification of a competitor from being elected
to the Board of Directors is a reasonable exercise of corporate authority.
A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS
SHAREHOLDERS
Although in the strict and technical sense, directors of a private corporation are not regarded as
trustees, there cannot be any doubt that their character is that of a fiduciary insofar as the corporation
and the stockholders as a body are concerned. As agents entrusted with the management of the
corporation for the collective benefit of the stockholders, "they occupy a fiduciary relation, and in this
sense the relation is one of trust." 18 "The ordinary trust relationship of directors of a corporation and
stockholders", according to Ashaman v. Miller, 19 "is not a matter of statutory or technical law. It springs
from the fact that directors have the control and guidance of corporate affairs and property and hence of
the property interests of the stockholders. Equity recognizes that stockholders are the proprietors of the
corporate interests and are ultimately the only beneficiaries thereof * * *.
Justice Douglas, in Pepper v. Litton, 20 emphatically restated the standard of fiduciary obligation of the
directors of corporations, thus:
A director is a fiduciary. ... Their powers are powers in trust. ... He who is in such
fiduciary position cannot serve himself first and his cestuis second. ... He cannot
manipulate the affairs of his corporation to their detriment and in disregard of the
standards of common decency. He cannot by the intervention of a corporate entity
violate the ancient precept against serving two masters ... He cannot utilize his inside
information and strategic position for his own preferment. He cannot violate rules of
fair play by doing indirectly through the corporation what he could not do so directly.
He cannot violate rules of fair play by doing indirectly though the corporation what he
could not do so directly. He cannot use his power for his personal advantage and to
the detriment of the stockholders and creditors no matter how absolute in terms that
power may be and no matter how meticulous he is to satisfy technical requirements.

For that power is at all times subject to the equitable limitation that it may not be
exercised for the aggrandizement, preference or advantage of the fiduciary to the
exclusion or detriment of the cestuis.
And in Cross v. West Virginia Cent, & P. R. R. Co., 21 it was said:
... A person cannot serve two hostile and adverse master, without detriment to one of
them. A judge cannot be impartial if personally interested in the cause. No more can a
director. Human nature is too weak -for this. Take whatever statute provision you
please giving power to stockholders to choose directors, and in none will you find any
express prohibition against a discretion to select directors having the company's
interest at heart, and it would simply be going far to deny by mere implication the
existence of such a salutary power
... If the by-law is to be held reasonable in disqualifying a stockholder in a competing company from
being a director, the same reasoning would apply to disqualify the wife and immediate member of the
family of such stockholder, on account of the supposed interest of the wife in her husband's affairs, and
his suppose influence over her. It is perhaps true that such stockholders ought not to be condemned as
selfish and dangerous to the best interest of the corporation until tried and tested. So it is also true that
we cannot condemn as selfish and dangerous and unreasonable the action of the board in passing the
by-law. The strife over the matter of control in this corporation as in many others is perhaps carried on
not altogether in the spirit of brotherly love and affection. The only test that we can apply is as to
whether or not the action of the Board is authorized and sanctioned by law. ... . 22
These principles have been applied by this Court in previous cases. 23
AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A STOCKHOLDER
INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO DIRECTOR IN A CORPORATION WHOSE
BUSINESS IS IN COMPETITION WITH THAT OF THE OTHER CORPORATION, HAS BEEN
SUSTAINED AS VALID
It is a settled state law in the United States, according to Fletcher, that corporations have the power to
make by-laws declaring a person employed in the service of a rival company to be ineligible for the
corporation's Board of Directors. ... (A)n amendment which renders ineligible, or if elected, subjects to
removal, a director if he be also a director in a corporation whose business is in competition with or is
antagonistic to the other corporation is valid."24 This is based upon the principle that where the director
is so employed in the service of a rival company, he cannot serve both, but must betray one or the
other. Such an amendment "advances the benefit of the corporation and is good." An exception exists in
New Jersey, where the Supreme Court held that the Corporation Law in New Jersey prescribed the only
qualification, and therefore the corporation was not empowered to add additional qualifications. 25 This
is the exact opposite of the situation in the Philippines because as stated heretofore, section 21 of the
Corporation Law expressly provides that a corporation may make by-laws for the qualifications of
directors. Thus, it has been held that an officer of a corporation cannot engage in a business in direct
competition with that of the corporation where he is a director by utilizing information he has received as
such officer, under "the established law that a director or officer of a corporation may not enter into a
competing enterprise which cripples or injures the business of the corporation of which he is an officer
or director. 26

It is also well established that corporate officers "are not permitted to use their position of trust and
confidence to further their private interests." 27 In a case where directors of a corporation cancelled a
contract of the corporation for exclusive sale of a foreign firm's products, and after establishing a rival
business, the directors entered into a new contract themselves with the foreign firm for exclusive sale of
its products, the court held that equity would regard the new contract as an offshoot of the old contract
and, therefore, for the benefit of the corporation, as a "faultless fiduciary may not reap the fruits of his
misconduct to the exclusion of his principal. 28
29

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.
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 bylaws 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: 31 "The law win not tolerate the passive attitude of directors ... without active and conscientious
participation in the managerial functions of the company. As directors, it is their duty to control and
supervise the day to day business activities of the company or to promulgate definite policies and rules
of guidance with a vigilant eye toward seeing to it that these policies are carried out. It is only then that
directors may be said to have fulfilled their duty of fealty to the corporation."
Sound principles of corporate management counsel against sharing sensitive information with a director
whose fiduciary duty of loyalty may well require that he disclose this information to a competitive arrival.
These dangers are enhanced considerably where the common director such as the petitioner is a
controlling stockholder of two of the competing corporations. It would seem manifest that in such
situations, the director has an economic incentive to appropriate for the benefit of his own corporation
the corporate plans and policies of the corporation where he sits as director.
Indeed, access by a competitor to confidential information regarding marketing strategies and pricing
policies of San Miguel Corporation would subject the latter to a competitive disadvantage and unjustly
enrich the competitor, for advance knowledge by the competitor of the strategies for the development of
existing or new markets of existing or new products could enable said competitor to utilize such
knowledge to his advantage. 32
There is another important consideration in determining whether or not the amended by-laws are
reasonable. The Constitution and the law prohibit combinations in restraint of trade or unfair
competition. Thus, section 2 of Article XIV of the Constitution provides: "The State shall regulate or

prohibit private monopolies when the public interest so requires. No combinations in restraint of trade or
unfair competition shall be snowed."
Article 186 of the Revised Penal Code also provides:
Art. 186. Monopolies and combinations in restraint of trade. The penalty of prision
correccional in its minimum period or a fine ranging from two hundred to six thousand
pesos, or both, shall be imposed upon:
1. Any person who shall enter into any contract or agreement or shall take part in any
conspiracy or combination in the form of a trust or otherwise, in restraint of trade or
commerce or to prevent by artificial means free competition in the market.
2. Any person who shag monopolize any merchandise or object of trade or
commerce, or shall combine with any other person or persons to monopolize said
merchandise or object in order to alter the price thereof by spreading false rumors or
making use of any other artifice to restrain free competition in the market.
3. Any person who, being a manufacturer, producer, or processor of any merchandise
or object of commerce or an importer of any merchandise or object of commerce from
any foreign country, either as principal or agent, wholesale or retailer, shall combine,
conspire or agree in any manner with any person likewise engaged in the
manufacture, production, processing, assembling or importation of such merchandise
or object of commerce or with any other persons not so similarly engaged for the
purpose of making transactions prejudicial to lawful commerce, or of increasing the
market price in any part of the Philippines, or any such merchandise or object of
commerce manufactured, produced, processed, assembled in or imported into the
Philippines, or of any article in the manufacture of which such manufactured,
produced, processed, or imported merchandise or object of commerce is used.
There are other legislation in this jurisdiction, which prohibit monopolies and combinations in restraint of
trade. 33
Basically, these anti-trust laws or laws against monopolies or combinations in restraint of trade are
aimed at raising levels of competition by improving the consumers' effectiveness as the final arbiter in
free markets. These laws are designed to preserve free and unfettered competition as the rule of trade.
"It rests on the premise that the unrestrained interaction of competitive forces will yield the best
allocation of our economic resources, the lowest prices and the highest quality ... ." 34 they operate to
forestall concentration of economic power. 35 The law against monopolies and combinations in restraint
of trade is aimed at contracts and combinations that, by reason of the inherent nature of the
contemplated acts, prejudice the public interest by unduly restraining competition or unduly obstructing
the course of trade. 36
The terms "monopoly", "combination in restraint of trade" and "unfair competition" appear to have a well
defined meaning in other jurisdictions. A "monopoly" embraces any combination the tendency of which
is to prevent competition in the broad and general sense, or to control prices to the detriment of the
public. 37 In short, it is the concentration of business in the hands of a few. The material consideration in
determining its existence is not that prices are raised and competition actually excluded, but
that power exists to raise prices or exclude competition when desired. 38Further, it must be considered

that the Idea of monopoly is now understood to include a condition produced by the mere act of
individuals. Its dominant thought is the notion of exclusiveness or unity, or the suppression of
competition by the qualification of interest or management, or it may be thru agreement and concert of
action. It is, in brief, unified tactics with regard to prices. 39
From the foregoing definitions, it is apparent that the contentions of petitioner are not in accord with
reality. The election of petitioner to the Board of respondent Corporation can bring about an illegal
situation. This is because an express agreement is not necessary for the existence of a combination or
conspiracy in restraint of trade. 40 It is enough that a concert of action is contemplated and that the
defendants conformed to the arrangements, 41 and what is to be considered is what the parties actually
did and not the words they used. For instance, the Clayton Act prohibits a person from serving at the
same time as a director in any two or more corporations, if such corporations are, by virtue of their
business and location of operation, competitors so that the elimination of competition between them
would constitute violation of any provision of the anti-trust laws. 42 There is here a statutory recognition
of the anti-competitive dangers which may arise when an individual simultaneously acts as a director of
two or more competing corporations. A common director of two or more competing corporations would
have access to confidential sales, pricing and marketing information and would be in a position to
coordinate policies or to aid one corporation at the expense of another, thereby stifling competition. This
situation has been aptly explained by Travers, thus:
The argument for prohibiting competing corporations from sharing even one director
is that theinterlock 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. 43 (Emphasis supplied.)
According to the Report of the House Judiciary Committee of the U. S. Congress on section 9 of the
Clayton Act, it was established that: "By means of the interlocking directorates one man or group of men
have been able to dominate and control a great number of corporations ... to the detriment of the small
ones dependent upon them and to the injury of the public. 44
Shared information on cost accounting may lead to price fixing. Certainly, shared information on
production, orders, shipments, capacity and inventories may lead to control of production for the
purpose of controlling prices.
Obviously, if a competitor has access to the pricing policy and cost conditions of the products of San
Miguel Corporation, the essence of competition in a free market for the purpose of serving the lowest
priced goods to the consuming public would be frustrated, The competitor could so manipulate the
prices of his products or vary its marketing strategies by region or by brand in order to get the most out
of the consumers. Where the two competing firms control a substantial segment of the market this could
lead to collusion and combination in restraint of trade. Reason and experience point to the inevitable
conclusion that the inherent tendency of interlocking directorates between companies that are related to
each other as competitors is to blunt the edge of rivalry between the corporations, to seek out ways of
compromising opposing interests, and thus eliminate competition. As respondent SMC aptly observes,

knowledge by CFC-Robina of SMC's costs in various industries and regions in the country win enable
the former to practice price discrimination. CFC-Robina can segment the entire consuming population
by geographical areas or income groups and change varying prices in order to maximize profits from
every market segment. CFC-Robina could determine the most profitable volume at which it could
produce for every product line in which it competes with SMC. Access to SMC pricing policy by CFCRobina 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.

may be utilized by the incumbent members of the Board to perpetuate themselves in power, any
decision of the Board to disqualify a candidate for the Board of Directors should be reviewed by the
Securities behind Exchange Commission en banc and its decision shall be final unless reversed by this
Court on certiorari. 49 Indeed, it is a settled principle that where the action of a Board of Directors is an
abuse of discretion, or forbidden by statute, or is against public policy, or is ultra vires, or is a fraud upon
minority stockholders or creditors, or will result in waste, dissipation or misapplication of the corporation
assets, a court of equity has the power to grant appropriate relief. 50

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 ... ."

III

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. 46 The test must be whether the business does in fact compete, not whether it is capable of an
indirect and highly unsubstantial duplication of an isolated or non-characteristics activity. 47 It is,
therefore, obvious that not every person or entity engaged in business of the same kind is a competitor.
Such factors as quantum and place of business, Identity of products and area of competition should be
taken into consideration. It is, therefore, necessary to show that petitioner's business covers a
substantial portion of the same markets for similar products to the extent of not less than 10% of
respondent corporation's market for competing products. While We here sustain the validity of the
amended by-laws, it does not follow as a necessary consequence that petitioner is ipso
facto disqualified. Consonant with the requirement of due process, there must be due hearing at which
the petitioner must be given the fullest opportunity to show that he is not covered by the disqualification.
As trustees of the corporation and of the stockholders, it is the responsibility of directors to act with
fairness to the stockholders. 48 Pursuant to this obligation and to remove any suspicion that this power

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. 52This right is predicated upon the necessity of self-protection. It is generally
held by majority of the courts that where the right is granted by statute to the stockholder, it is given to
him as such and must be exercised by him with respect to his interest as a stockholder and for some

purpose germane thereto or in the interest of the corporation. 53 In other words, the inspection has to be
germane to the petitioner's interest as a stockholder, and has to be proper and lawful in character and
not inimical to the interest of the corporation. 54 In Grey v. Insular Lumber, 55 this Court held that "the
right to examine the books of the corporation must be exercised in good faith, for specific and honest
purpose, and not to gratify curiosity, or for specific and honest purpose, and not to gratify curiosity, or for
speculative or vexatious purposes. The weight of judicial opinion appears to be, that on application for
mandamus to enforce the right, it is proper for the court to inquire into and consider the stockholder's
good faith and his purpose and motives in seeking inspection. 56 Thus, it was held that "the right given
by statute is not absolute and may be refused when the information is not sought in good faith or is
used to the detriment of the corporation." 57 But the "impropriety of purpose such as will defeat
enforcement must be set up the corporation defensively if the Court is to take cognizance of it as a
qualification. In other words, the specific provisions take from the stockholder the burden of showing
propriety of purpose and place upon the corporation the burden of showing impropriety of purpose or
motive. 58 It appears to be the general rule that stockholders are entitled to full information as to the
management of the corporation and the manner of expenditure of its funds, and to inspection to obtain
such information, especially where it appears that the company is being mismanaged or that it is being
managed for the personal benefit of officers or directors or certain of the stockholders to the exclusion
of others." 59

stockholders" and that petitioner, "as stockholder of respondent corporation, is entitled to copies of
some documents which for some reason or another, respondent corporation is very reluctant in
revealing to the petitioner notwithstanding the fact that no harm would be caused thereby to the
corporation." 67 There is no question that stockholders are entitled to inspect the books and records of a
corporation in order to investigate the conduct of the management, determine the financial condition of
the corporation, and generally take an account of the stewardship of the officers and directors. 68

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.

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.

Some state courts recognize the right under certain conditions, while others do not. Thus, it has been
held that where a corporation owns approximately no property except the shares of stock of subsidiary
corporations which are merely agents or instrumentalities of the holding company, the legal fiction of
distinct corporate entities may be disregarded and the books, papers and documents of all the
corporations may be required to be produced for examination, 60 and that a writ of mandamus, may be
granted, as the records of the subsidiary were, to all incontents and purposes, the records of the parent
even though subsidiary was not named as a party. 61 mandamus was likewise held proper to inspect
both the subsidiary's and the parent corporation's books upon proof of sufficient control or dominion by
the parent showing the relation of principal or agent or something similar thereto. 62
On the other hand, mandamus at the suit of a stockholder was refused where the subsidiary corporation
is a separate and distinct corporation domiciled and with its books and records in another jurisdiction,
and is not legally subject to the control of the parent company, although it owned a vast majority of the
stock of the subsidiary. 63 Likewise, inspection of the books of an allied corporation by stockholder of the
parent company which owns all the stock of the subsidiary has been refused on the ground that the
stockholder was not within the class of "persons having an interest." 64
In the Nash case, 65 The Supreme Court of New York held that the contractual right of former
stockholders to inspect books and records of the corporation included the right to inspect corporation's
subsidiaries' books and records which were in corporation's possession and control in its office in New
York."
In the Bailey case, 66 stockholders of a corporation were held entitled to inspect the records of a
controlled subsidiary corporation which used the same offices and had Identical officers and directors.
In his "Urgent Motion for Production and Inspection of Documents" before respondent SEC, petitioner
contended that respondent corporation "had been attempting to suppress information for the

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

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:

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:

"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. 70 This is true because the
questioned investment is neither contrary to law, morals, public order or public policy. It is a corporate
transaction or contract which is within the corporate powers, but which is defective from a supported
failure to observe in its execution the. requirement of the law that the investment must be authorized by
the affirmative vote of the stockholders holding two-thirds of the voting power. This requirement is for
the benefit of the stockholders. The stockholders for whose benefit the requirement was enacted may,
therefore, ratify the investment and its ratification by said stockholders obliterates any defect which it
may have had at the outset. "Mere ultra vires acts", said this Court in Pirovano, 71 "or those which are
not illegal and void ab initio, but are not merely within the scope of the articles of incorporation, are
merely voidable and may become binding and enforceable when ratified by the stockholders.
Besides, the investment was for the purchase of beer manufacturing and marketing facilities which is
apparently relevant to the corporate purpose. The mere fact that respondent corporation submitted the
assailed investment to the stockholders for ratification at the annual meeting of May 10, 1977 cannot be
construed as an admission that respondent corporation had committed an ultra vires act, considering

The 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.

Sycip, Salazar, Hernandez & Gatmaitan for Luciano E. Salazar.

GUTIERREZ, JR., J.:

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

These consolidated petitions seek the review of the amended decision of the Court of Appeals in CAG.R. SP Nos. 05604 and 05617 which set aside the earlier decision dated June 5, 1986, of the then
Intermediate Appellate Court and directed that in all subsequent elections for directors of Sanitary
Wares Manufacturing Corporation (Saniwares), American Standard Inc. (ASI) cannot nominate more
than three (3) directors; that the Filipino stockholders shall not interfere in ASI's choice of its three (3)
nominees; that, on the other hand, the Filipino stockholders can nominate only six (6) candidates and in
the event they cannot agree on the six (6) nominees, they shall vote only among themselves to
determine who the six (6) nominees will be, with cumulative voting to be allowed but without
interference from ASI.

G.R. No. 75875 December 15, 1989

The antecedent facts can be summarized as follows:

WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM and CHARLES

CHAMSAY, petitioners,
vs.
SANITARY WARES MANUFACTURING CORPORATOIN, ERNESTO V. LAGDAMEO, ERNESTO R.
LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN
YOUNG and AVELINO V. CRUZ, respondents.

In 1961, Saniwares, a domestic corporation was incorporated for the primary purpose of manufacturing
and marketing sanitary wares. One of the incorporators, Mr. Baldwin Young went abroad to look for
foreign partners, European or American who could help in its expansion plans. On August 15, 1962,
ASI, a foreign corporation domiciled in Delaware, United States entered into an Agreement with
Saniwares and some Filipino investors whereby ASI and the Filipino investors agreed to participate in
the ownership of an enterprise which would engage primarily in the business of manufacturing in the
Philippines and selling here and abroad vitreous china and sanitary wares. The parties agreed that the
business operations in the Philippines shall be carried on by an incorporated enterprise and that the
name of the corporation shall initially be "Sanitary Wares Manufacturing Corporation."

G.R. No. 75951 December 15, 1989

SANITARY WARES MANUFACTURING CORPORATION, ERNESTO R. LAGDAMEO, ENRIQUE B.
LAGDAMEO, GEORGE FL .EE RAUL A. BONCAN, BALDWIN YOUNG and AVELINO V.
CRUX, petitioners,
vs.
THE COURT OF APPEALS, WOLFGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM,
CHARLES CHAMSAY and LUCIANO SALAZAR, respondents.

The Agreement has the following provisions relevant to the issues in these cases on the nomination and
election of the directors of the corporation:
3. Articles of Incorporation
(a) The Articles of Incorporation of the Corporation shall be substantially in the form
annexed hereto as Exhibit A and, insofar as permitted under Philippine law, shall
specifically provide for

G.R. Nos. 75975-76 December 15, 1989

LUCIANO E. SALAZAR, petitioner,
vs.
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO V. LAGDAMEO, ERNESTO R.
LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN
YOUNG, AVELINO V. CRUZ and the COURT OF APPEALS, respondents.

(1) Cumulative voting for directors:

xxx xxx xxx
5. Management

Belo, Abiera & Associates for petitioners in 75875.

(a) The management of the Corporation shall be vested in a Board of Directors, which
shall consist of nine individuals. As long as American-Standard shall own at least 30%
of the outstanding stock of the Corporation, three of the nine directors shall be
designated by American-Standard, and the other six shall be designated by the other
stockholders of the Corporation. (pp. 51 & 53, Rollo of 75875)
At the request of ASI, the agreement contained provisions designed to protect it as a minority group,
including the grant of veto powers over a number of corporate acts and the right to designate certain
officers, such as a member of the Executive Committee whose vote was required for important
corporate transactions.
Later, the 30% capital stock of ASI was increased to 40%. The corporation was also registered with the
Board of Investments for availment of incentives with the condition that at least 60% of the capital stock
of the corporation shall be owned by Philippine nationals.
The joint enterprise thus entered into by the Filipino investors and the American corporation prospered.
Unfortunately, with the business successes, there came a deterioration of the initially harmonious
relations between the two groups. According to the Filipino group, a basic disagreement was due to
their desire to expand the export operations of the company to which ASI objected as it apparently had
other subsidiaries of joint joint venture groups in the countries where Philippine exports were
contemplated. On March 8, 1983, the annual stockholders' meeting was held. The meeting was
presided by Baldwin Young. The minutes were taken by the Secretary, Avelino Cruz. After disposing of
the preliminary items in the agenda, the stockholders then proceeded to the election of the members of
the board of directors. The ASI group nominated three persons namely; Wolfgang Aurbach, John Griffin
and David P. Whittingham. The Philippine investors nominated six, namely; Ernesto Lagdameo, Sr.,
Raul A. Boncan, Ernesto R. Lagdameo, Jr., George F. Lee, and Baldwin Young. Mr. Eduardo R, Ceniza
then nominated Mr. Luciano E. Salazar, who in turn nominated Mr. Charles Chamsay. The chairman,
Baldwin Young ruled the last two nominations out of order on the basis of section 5 (a) of the
Agreement, the consistent practice of the parties during the past annual stockholders' meetings to
nominate only nine persons as nominees for the nine-member board of directors, and the legal advice
of Saniwares' legal counsel. The following events then, transpired:
... There were protests against the action of the Chairman and heated arguments
ensued. An appeal was made by the ASI representative to the body of stockholders
present that a vote be taken on the ruling of the Chairman. The Chairman, Baldwin
Young, declared the appeal out of order and no vote on the ruling was taken. The
Chairman then instructed the Corporate Secretary to cast all the votes present and
represented by proxy equally for the 6 nominees of the Philippine Investors and the 3
nominees of ASI, thus effectively excluding the 2 additional persons nominated,
namely, Luciano E. Salazar and Charles Chamsay. The ASI representative, Mr. Jaqua
protested the decision of the Chairman and announced that all votes accruing to ASI
shares, a total of 1,329,695 (p. 27, Rollo, AC-G.R. SP No. 05617) were being
cumulatively voted for the three ASI nominees and Charles Chamsay, and instructed
the Secretary to so vote. Luciano E. Salazar and other proxy holders announced that

all the votes owned by and or represented by them 467,197 shares (p. 27, Rollo, ACG.R. SP No. 05617) were being voted cumulatively in favor of Luciano E. Salazar.
The Chairman, Baldwin Young, nevertheless instructed the Secretary to cast all votes
equally in favor of the three ASI nominees, namely, Wolfgang Aurbach, John Griffin
and David Whittingham and the six originally nominated by Rogelio Vinluan, namely,
Ernesto Lagdameo, Sr., Raul Boncan, Ernesto Lagdameo, Jr., Enrique Lagdameo,
George F. Lee, and Baldwin Young. The Secretary then certified for the election of the
following Wolfgang Aurbach, John Griffin, David Whittingham Ernesto Lagdameo, Sr.,
Ernesto Lagdameo, Jr., Enrique Lagdameo, George F. Lee, Raul A. Boncan, Baldwin
Young. The representative of ASI then moved to recess the meeting which was duly
seconded. There was also a motion to adjourn (p. 28, Rollo, AC-G.R. SP No. 05617).
This motion to adjourn was accepted by the Chairman, Baldwin Young, who
announced that the motion was carried and declared the meeting adjourned. Protests
against the adjournment were registered and having been ignored, Mr. Jaqua the ASI
representative, stated that the meeting was not adjourned but only recessed and that
the meeting would be reconvened in the next room. The Chairman then threatened to
have the stockholders who did not agree to the decision of the Chairman on the
casting of votes bodily thrown out. The ASI Group, Luciano E. Salazar and other
stockholders, allegedly representing 53 or 54% of the shares of Saniwares, decided
to continue the meeting at the elevator lobby of the American Standard Building. The
continued meeting was presided by Luciano E. Salazar, while Andres Gatmaitan
acted as Secretary. On the basis of the cumulative votes cast earlier in the meeting,
the ASI Group nominated its four nominees; Wolfgang Aurbach, John Griffin, David
Whittingham and Charles Chamsay. Luciano E. Salazar voted for himself, thus the
said five directors were certified as elected directors by the Acting Secretary, Andres
Gatmaitan, with the explanation that there was a tie among the other six (6) nominees
for the four (4) remaining positions of directors and that the body decided not to break
the tie. (pp. 37-39, Rollo of 75975-76)
These incidents triggered off the filing of separate petitions by the parties with the Securities and
Exchange Commission (SEC). The first petition filed was for preliminary injunction by Saniwares,
Emesto V. Lagdameo, Baldwin Young, Raul A. Bonean Ernesto R. Lagdameo, Jr., Enrique Lagdameo
and George F. Lee against Luciano Salazar and Charles Chamsay. The case was denominated as SEC
Case No. 2417. The second petition was for quo warranto and application for receivership by Wolfgang
Aurbach, John Griffin, David Whittingham, Luciano E. Salazar and Charles Chamsay against the group
of Young and Lagdameo (petitioners in SEC Case No. 2417) and Avelino F. Cruz. The case was
docketed as SEC Case No. 2718. Both sets of parties except for Avelino Cruz claimed to be the
legitimate directors of the corporation.
The two petitions were consolidated and tried jointly by a hearing officer who rendered a decision
upholding the election of the Lagdameo Group and dismissing the quo warranto petition of Salazar and
Chamsay. The ASI Group and Salazar appealed the decision to the SEC en banc which affirmed the
hearing officer's decision.

The SEC decision led to the filing of two separate appeals with the Intermediate Appellate Court by
Wolfgang Aurbach, John Griffin, David Whittingham and Charles Chamsay (docketed as AC-G.R. SP
No. 05604) and by Luciano E. Salazar (docketed as AC-G.R. SP No. 05617). The petitions were
consolidated and the appellate court in its decision ordered the remand of the case to the Securities and
Exchange Commission with the directive that a new stockholders' meeting of Saniwares be ordered
convoked as soon as possible, under the supervision of the Commission.

THE AMENDED DECISION OF THE RESPONDENT COURT, WHILE

RECOGNIZING THAT THE STOCKHOLDERS OF SANIWARES ARE DIVIDED INTO
TWO BLOCKS, FAILS TO FULLY ENFORCE THE BASIC INTENT OF THE
AGREEMENT AND THE LAW.

Upon a motion for reconsideration filed by the appellees Lagdameo Group) the appellate court (Court of
Appeals) rendered the questioned amended decision. Petitioners Wolfgang Aurbach, John Griffin, David
P. Whittingham and Charles Chamsay in G.R. No. 75875 assign the following errors:

THE AMENDED DECISION DOES NOT CATEGORICALLY RULE THAT PRIVATE

PETITIONERS HEREIN WERE THE DULY ELECTED DIRECTORS DURING THE 8
MARCH 1983 ANNUAL STOCKHOLDERS MEETING OF SANTWARES. (P. 24,
Rollo-75951)

I. THE COURT OF APPEALS, IN EFFECT, UPHELD THE ALLEGED ELECTION OF

PRIVATE RESPONDENTS AS MEMBERS OF THE BOARD OF DIRECTORS OF
SANIWARES WHEN IN FACT THERE WAS NO ELECTION AT ALL.
II. THE COURT OF APPEALS PROHIBITS THE STOCKHOLDERS FROM
EXERCISING THEIR FULL VOTING RIGHTS REPRESENTED BY THE NUMBER
OF SHARES IN SANIWARES, THUS DEPRIVING PETITIONERS AND THE
CORPORATION THEY REPRESENT OF THEIR PROPERTY RIGHTS WITHOUT
DUE PROCESS OF LAW.
III. THE COURT OF APPEALS IMPOSES CONDITIONS AND READS PROVISIONS
INTO THE AGREEMENT OF THE PARTIES WHICH WERE NOT THERE, WHICH
ACTION IT CANNOT LEGALLY DO. (p. 17, Rollo-75875)
Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails the amended decision on the following
grounds:
11.1. ThatAmendedDecisionwouldsanctiontheCA'sdisregard of binding contractual
agreements entered into by stockholders and the replacement of the conditions of
such agreements with terms never contemplated by the stockholders but merely
dictated by the CA .
11.2. The Amended decision would likewise sanction the deprivation of the property
rights of stockholders without due process of law in order that a favored group of
stockholders may be illegally benefitted and guaranteed a continuing monopoly of the
control of a corporation. (pp. 14-15, Rollo-75975-76)
On the other hand, the petitioners in G.R. No. 75951 contend that:
I

II

The issues raised in the petitions are interrelated, hence, they are discussed jointly.
The main issue hinges on who were the duly elected directors of Saniwares for the year 1983 during its
annual stockholders' meeting held on March 8, 1983. To answer this question the following factors
should be determined: (1) the nature of the business established by the parties whether it was a joint
venture or a corporation and (2) whether or not the ASI Group may vote their additional 10% equity
during elections of Saniwares' board of directors.
The rule is that whether the parties to a particular contract have thereby established among themselves
a joint venture or some other relation depends upon their actual intention which is determined in
accordance with the rules governing the interpretation and construction of contracts. (Terminal Shares,
Inc. v. Chicago, B. and Q.R. Co. (DC MO) 65 F Supp 678; Universal Sales Corp. v. California Press
Mfg. Co. 20 Cal. 2nd 751, 128 P 2nd 668)
The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the actual intention of the
parties should be viewed strictly on the "Agreement" dated August 15,1962 wherein it is clearly stated
that the parties' intention was to form a corporation and not a joint venture.
They specifically mention number 16 under Miscellaneous Provisions which states:
xxx xxx xxx
c) nothing herein contained shall be construed to constitute any of the parties hereto
partners or joint venturers in respect of any transaction hereunder. (At P. 66, Rollo-GR
No. 75875)
They object to the admission of other evidence which tends to show that the parties' agreement was to
establish a joint venture presented by the Lagdameo and Young Group on the ground that it
contravenes the parol evidence rule under section 7, Rule 130 of the Revised Rules of Court. According
to them, the Lagdameo and Young Group never pleaded in their pleading that the "Agreement" failed to
express the true intent of the parties.

The parol evidence Rule under Rule 130 provides:

Evidence of written agreements-When the terms of an agreement have been reduced
to writing, it is to be considered as containing all such terms, and therefore, there can
be, between the parties and their successors in interest, no evidence of the terms of
the agreement other than the contents of the writing, except in the following cases:
(a) Where a mistake or imperfection of the writing, or its failure to express the true
intent and agreement of the parties or the validity of the agreement is put in issue by
the pleadings.
(b) When there is an intrinsic ambiguity in the writing.
Contrary to ASI Group's stand, the Lagdameo and Young Group pleaded in their Reply and Answer to
Counterclaim in SEC Case No. 2417 that the Agreement failed to express the true intent of the parties,
to wit:
xxx xxx xxx
4. While certain provisions of the Agreement would make it appear that the parties
thereto disclaim being partners or joint venturers such disclaimer is directed at third
parties and is not inconsistent with, and does not preclude, the existence of two
distinct groups of stockholders in Saniwares one of which (the Philippine Investors)
shall constitute the majority, and the other ASI shall constitute the minority
stockholder. In any event, the evident intention of the Philippine Investors and ASI in
entering into the Agreement is to enter into ajoint venture enterprise, and if some
words in the Agreement appear to be contrary to the evident intention of the parties,
the latter shall prevail over the former (Art. 1370, New Civil Code). The various
stipulations of a contract shall be interpreted together attributing to the doubtful ones
that sense which may result from all of them taken jointly (Art. 1374, New Civil Code).
Moreover, in order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered. (Art. 1371,
New Civil Code). (Part I, Original Records, SEC Case No. 2417)
It has been ruled:
In an action at law, where there is evidence tending to prove that the parties joined
their efforts in furtherance of an enterprise for their joint profit, the question whether
they intended by their agreement to create a joint adventure, or to assume some
other relation is a question of fact for the jury. (Binder v. Kessler v 200 App. Div.
40,192 N Y S 653; Pyroa v. Brownfield (Tex. Civ. A.) 238 SW 725; Hoge v. George, 27
Wyo, 423, 200 P 96 33 C.J. p. 871)

In the instant cases, our examination of important provisions of the Agreement as well as the testimonial
evidence presented by the Lagdameo and Young Group shows that the parties agreed to establish a
joint venture and not a corporation. The history of the organization of Saniwares and the unusual
arrangements which govern its policy making body are all consistent with a joint venture and not with an
ordinary corporation. As stated by the SEC:
According to the unrebutted testimony of Mr. Baldwin Young, he negotiated the
Agreement with ASI in behalf of the Philippine nationals. He testified that ASI agreed
to accept the role of minority vis-a-vis the Philippine National group of investors, on
the condition that the Agreement should contain provisions to protect ASI as the
minority.
An examination of the Agreement shows that certain provisions were included to
protect the interests of ASI as the minority. For example, the vote of 7 out of 9
directors is required in certain enumerated corporate acts [Sec. 3 (b) (ii) (a) of the
Agreement]. ASI is contractually entitled to designate a member of the Executive
Committee and the vote of this member is required for certain transactions [Sec. 3 (b)
(i)].
The Agreement also requires a 75% super-majority vote for the amendment of the
articles and by-laws of Saniwares [Sec. 3 (a) (iv) and (b) (iii)]. ASI is also given the
right to designate the president and plant manager [Sec. 5 (6)]. The Agreement
further provides that the sales policy of Saniwares shall be that which is normally
followed by ASI [Sec. 13 (a)] and that Saniwares should not export "Standard"
products otherwise than through ASI's Export Marketing Services [Sec. 13 (6)]. Under
the Agreement, ASI agreed to provide technology and know-how to Saniwares and
the latter paid royalties for the same. (At p. 2).
xxx xxx xxx
It is pertinent to note that the provisions of the Agreement requiring a 7 out of 9 votes
of the board of directors for certain actions, in effect gave ASI (which designates 3
directors under the Agreement) an effective veto power. Furthermore, the grant to ASI
of the right to designate certain officers of the corporation; the super-majority voting
requirements for amendments of the articles and by-laws; and most significantly to
the issues of tms case, the provision that ASI shall designate 3 out of the 9 directors
and the other stockholders shall designate the other 6, clearly indicate that there are
two distinct groups in Saniwares, namely ASI, which owns 40% of the capital stock
and the Philippine National stockholders who own the balance of 60%, and that 2)
ASI is given certain protections as the minority stockholder.
Premises considered, we believe that under the Agreement there are two groups of
stockholders who established a corporation with provisions for a special contractual
relationship between the parties, i.e., ASI and the other stockholders. (pp. 4-5)

Section 5 (a) of the agreement uses the word "designated" and not "nominated" or "elected" in the
selection of the nine directors on a six to three ratio. Each group is assured of a fixed number of
directors in the board.
Moreover, ASI in its communications referred to the enterprise as joint venture. Baldwin Young also
testified that Section 16(c) of the Agreement that "Nothing herein contained shall be construed to
constitute any of the parties hereto partners or joint venturers in respect of any transaction hereunder"
was merely to obviate the possibility of the enterprise being treated as partnership for tax purposes and
liabilities to third parties.
Quite often, Filipino entrepreneurs in their desire to develop the industrial and manufacturing capacities
of a local firm are constrained to seek the technology and marketing assistance of huge multinational
corporations of the developed world. Arrangements are formalized where a foreign group becomes a
minority owner of a firm in exchange for its manufacturing expertise, use of its brand names, and other
such assistance. However, there is always a danger from such arrangements. The foreign group may,
from the start, intend to establish its own sole or monopolistic operations and merely uses the joint
venture arrangement to gain a foothold or test the Philippine waters, so to speak. Or the covetousness
may come later. As the Philippine firm enlarges its operations and becomes profitable, the foreign group
undermines the local majority ownership and actively tries to completely or predominantly take over the
entire company. This undermining of joint ventures is not consistent with fair dealing to say the least. To
the extent that such subversive actions can be lawfully prevented, the courts should extend protection
especially in industries where constitutional and legal requirements reserve controlling ownership to
Filipino citizens.
The Lagdameo Group stated in their appellees' brief in the Court of Appeal
In fact, the Philippine Corporation Code itself recognizes the right of stockholders to
enter into agreements regarding the exercise of their voting rights.
Sec. 100. Agreements by stockholders.xxx xxx xxx
2. An agreement between two or more stockholders, if in writing and signed by the
parties thereto, may provide that in exercising any voting rights, the shares held by
them shall be voted as therein provided, or as they may agree, or as determined in
accordance with a procedure agreed upon by them.
Appellants contend that the above provision is included in the Corporation Code's
chapter on close corporations and Saniwares cannot be a close corporation because
it has 95 stockholders. Firstly, although Saniwares had 95 stockholders at the time of
the disputed stockholders meeting, these 95 stockholders are not separate from each
other but are divisible into groups representing a single Identifiable interest. For
example, ASI, its nominees and lawyers count for 13 of the 95 stockholders. The

YoungYutivo family count for another 13 stockholders, the Chamsay family for 8
stockholders, the Santos family for 9 stockholders, the Dy family for 7 stockholders,
etc. If the members of one family and/or business or interest group are considered as
one (which, it is respectfully submitted, they should be for purposes of determining
how closely held Saniwares is there were as of 8 March 1983, practically only 17
stockholders of Saniwares. (Please refer to discussion in pp. 5 to 6 of appellees'
Rejoinder Memorandum dated 11 December 1984 and Annex "A" thereof).
Secondly, even assuming that Saniwares is technically not a close corporation
because it has more than 20 stockholders, the undeniable fact is that it is a closeheld corporation. Surely, appellants cannot honestly claim that Saniwares is a public
issue or a widely held corporation.
In the United States, many courts have taken a realistic approach to joint venture
corporations and have not rigidly applied principles of corporation law designed
primarily for public issue corporations. These courts have indicated that express
arrangements between corporate joint ventures should be construed with less
emphasis on the ordinary rules of law usually applied to corporate entities and with
more consideration given to the nature of the agreement between the joint venturers
(Please see Wabash Ry v. American Refrigerator Transit Co., 7 F 2d 335; Chicago, M
& St. P. Ry v. Des Moines Union Ry; 254 Ass'n. 247 US. 490'; Seaboard Airline Ry v.
Atlantic Coast Line Ry; 240 N.C. 495,.82 S.E. 2d 771; Deboy v. Harris, 207 Md.,
212,113 A 2d 903; Hathway v. Porter Royalty Pool, Inc., 296 Mich. 90, 90, 295 N.W.
571; Beardsley v. Beardsley, 138 U.S. 262; "The Legal Status of Joint Venture
Corporations", 11 Vand Law Rev. p. 680,1958). These American cases dealt with
legal questions as to the extent to which the requirements arising from the corporate
form of joint venture corporations should control, and the courts ruled that substantial
justice lay with those litigants who relied on the joint venture agreement rather than
the litigants who relied on the orthodox principles of corporation law.
As correctly held by the SEC Hearing Officer:
It is said that participants in a joint venture, in organizing the joint venture deviate
from the traditional pattern of corporation management. A noted authority has pointed
out that just as in close corporations, shareholders' agreements in joint venture
corporations often contain provisions which do one or more of the following: (1)
require greater than majority vote for shareholder and director action; (2) give certain
shareholders or groups of shareholders power to select a specified number of
directors; (3) give to the shareholders control over the selection and retention of
employees; and (4) set up a procedure for the settlement of disputes by arbitration
(See I O' Neal, Close Corporations, 1971 ed., Section 1.06a, pp. 15-16) (Decision of
SEC Hearing Officer, P. 16)

Thirdly paragraph 2 of Sec. 100 of the Corporation Code does not necessarily imply
that agreements regarding the exercise of voting rights are allowed only in close
corporations. As Campos and Lopez-Campos explain:
Paragraph 2 refers to pooling and voting agreements in particular. Does this provision
necessarily imply that these agreements can be valid only in close corporations as
defined by the Code? Suppose that a corporation has twenty five stockholders, and
therefore cannot qualify as a close corporation under section 96, can some of them
enter into an agreement to vote as a unit in the election of directors? It is submitted
that there is no reason for denying stockholders of corporations other than close ones
the right to enter into not voting or pooling agreements to protect their interests, as
long as they do not intend to commit any wrong, or fraud on the other stockholders
not parties to the agreement. Of course, voting or pooling agreements are perhaps
more useful and more often resorted to in close corporations. But they may also be
found necessary even in widely held corporations. Moreover, since the Code limits
the legal meaning of close corporations to those which comply with the requisites laid
down by section 96, it is entirely possible that a corporation which is in fact a close
corporation will not come within the definition. In such case, its stockholders should
not be precluded from entering into contracts like voting agreements if these are
otherwise valid. (Campos & Lopez-Campos, op cit, p. 405)
In short, even assuming that sec. 5(a) of the Agreement relating to the designation or
nomination of directors restricts the right of the Agreement's signatories to vote for
directors, such contractual provision, as correctly held by the SEC, is valid and
binding upon the signatories thereto, which include appellants. (Rollo No. 75951, pp.
90-94)
In regard to the question as to whether or not the ASI group may vote their additional equity during
elections of Saniwares' board of directors, the Court of Appeals correctly stated:
As in other joint venture companies, the extent of ASI's participation in the
management of the corporation is spelled out in the Agreement. Section 5(a) hereof
says that three of the nine directors shall be designated by ASI and the remaining six
by the other stockholders, i.e., the Filipino stockholders. This allocation of board seats
is obviously in consonance with the minority position of ASI.
Having entered into a well-defined contractual relationship, it is imperative that the
parties should honor and adhere to their respective rights and obligations thereunder.
Appellants seem to contend that any allocation of board seats, even in joint venture
corporations, are null and void to the extent that such may interfere with the
stockholder's rights to cumulative voting as provided in Section 24 of the Corporation
Code. This Court should not be prepared to hold that any agreement which curtails in
any way cumulative voting should be struck down, even if such agreement has been
freely entered into by experienced businessmen and do not prejudice those who are

not parties thereto. It may well be that it would be more cogent to hold, as the
Securities and Exchange Commission has held in the decision appealed from, that
cumulative voting rights may be voluntarily waived by stockholders who enter into
special relationships with each other to pursue and implement specific purposes, as
in joint venture relationships between foreign and local stockholders, so long as such
agreements do not adversely affect third parties.
In any event, it is believed that we are not here called upon to make a general rule on
this question. Rather, all that needs to be done is to give life and effect to the
particular contractual rights and obligations which the parties have assumed for
themselves.
On the one hand, the clearly established minority position of ASI and the contractual
allocation of board seats Cannot be disregarded. On the other hand, the rights of the
stockholders to cumulative voting should also be protected.
In our decision sought to be reconsidered, we opted to uphold the second over the
first. Upon further reflection, we feel that the proper and just solution to give due
consideration to both factors suggests itself quite clearly. This Court should recognize
and uphold the division of the stockholders into two groups, and at the same time
uphold the right of the stockholders within each group to cumulative voting in the
process of determining who the group's nominees would be. In practical terms, as
suggested by appellant Luciano E. Salazar himself, this means that if the Filipino
stockholders cannot agree who their six nominees will be, a vote would have to be
taken among the Filipino stockholders only. During this voting, each Filipino
stockholder can cumulate his votes. ASI, however, should not be allowed to interfere
in the voting within the Filipino group. Otherwise, ASI would be able to designate
more than the three directors it is allowed to designate under the Agreement, and
may even be able to get a majority of the board seats, a result which is clearly
contrary to the contractual intent of the parties.
Such a ruling will give effect to both the allocation of the board seats and the
stockholder's right to cumulative voting. Moreover, this ruling will also give due
consideration to the issue raised by the appellees on possible violation or
circumvention of the Anti-Dummy Law (Com. Act No. 108, as amended) and the
nationalization requirements of the Constitution and the laws if ASI is allowed to
nominate more than three directors. (Rollo-75875, pp. 38-39)
The ASI Group and petitioner Salazar, now reiterate their theory that the ASI Group has the right to vote
their additional equity pursuant to Section 24 of the Corporation Code which gives the stockholders of a
corporation the right to cumulate their votes in electing directors. Petitioner Salazar adds that this right if
granted to the ASI Group would not necessarily mean a violation of the Anti-Dummy Act
(Commonwealth Act 108, as amended). He cites section 2-a thereof which provides:

And provided finally that the election of aliens as members of the board of directors or
governing body of corporations or associations engaging in partially nationalized
activities shall be allowed in proportion to their allowable participation or share in the
capital of such entities. (amendments introduced by Presidential Decree 715, section
1, promulgated May 28, 1975)

relates to the manner of nominating the members of the board of directors while Section 3 (a) (1) relates
to the manner of voting for these nominees.

The ASI Group's argument is correct within the context of Section 24 of the Corporation Code. The point
of query, however, is whether or not that provision is applicable to a joint venture with clearly defined
agreements:

To allow the ASI Group to vote their additional equity to help elect even a Filipino director who would be
beholden to them would obliterate their minority status as agreed upon by the parties. As aptly stated by
the appellate court:

The legal concept of ajoint venture is of common law origin. It has no precise legal
definition but it has been generally understood to mean an organization formed for
some temporary purpose. (Gates v. Megargel, 266 Fed. 811 [1920]) It is in fact hardly
distinguishable from the partnership, since their elements are similar community of
interest in the business, sharing of profits and losses, and a mutual right of control.
Blackner v. Mc Dermott, 176 F. 2d. 498, [1949]; Carboneau v. Peterson, 95 P. 2d.,
1043 [1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P. 2d. 12 289 P. 2d. 242
[1955]). The main distinction cited by most opinions in common law jurisdictions is
that the partnership contemplates a general business with some degree of continuity,
while the joint venture is formed for the execution of a single transaction, and is thus
of a temporary nature. (Tufts v. Mann 116 Cal. App. 170, 2 P. 2d. 500 [1931]; Harmon
v. Martin, 395 111. 595, 71 NE 2d. 74 [1947]; Gates v. Megargel 266 Fed. 811 [1920]).
This observation is not entirely accurate in this jurisdiction, since under the Civil
Code, a partnership may be particular or universal, and a particular partnership may
have for its object a specific undertaking. (Art. 1783, Civil Code). It would seem
therefore that under Philippine law, a joint venture is a form of partnership and should
thus be governed by the law of partnerships. The Supreme Court has however
recognized a distinction between these two business forms, and has held that
although a corporation cannot enter into a partnership contract, it may however
engage in a joint venture with others. (At p. 12, Tuazon v. Bolanos, 95 Phil. 906
[1954]) (Campos and Lopez-Campos Comments, Notes and Selected Cases,
Corporation Code 1981)

... ASI, however, should not be allowed to interfere in the voting within the Filipino
group. Otherwise, ASI would be able to designate more than the three directors it is
allowed to designate under the Agreement, and may even be able to get a majority of
the board seats, a result which is clearly contrary to the contractual intent of the
parties.

Moreover, the usual rules as regards the construction and operations of contracts generally apply to a
contract of joint venture. (O' Hara v. Harman 14 App. Dev. (167) 43 NYS 556).
Bearing these principles in mind, the correct view would be that the resolution of the question of
whether or not the ASI Group may vote their additional equity lies in the agreement of the parties.
Necessarily, the appellate court was correct in upholding the agreement of the parties as regards the
allocation of director seats under Section 5 (a) of the "Agreement," and the right of each group of
stockholders to cumulative voting in the process of determining who the group's nominees would be
under Section 3 (a) (1) of the "Agreement." As pointed out by SEC, Section 5 (a) of the Agreement

This is the proper interpretation of the Agreement of the parties as regards the election of members of
the board of directors.

Such a ruling will give effect to both the allocation of the board seats and the
stockholder's right to cumulative voting. Moreover, this ruling will also give due
consideration to the issue raised by the appellees on possible violation or
circumvention of the Anti-Dummy Law (Com. Act No. 108, as amended) and the
nationalization requirements of the Constitution and the laws if ASI is allowed to
nominate more than three directors. (At p. 39, Rollo, 75875)
Equally important as the consideration of the contractual intent of the parties is the consideration as
regards the possible domination by the foreign investors of the enterprise in violation of the
nationalization requirements enshrined in the Constitution and circumvention of the Anti-Dummy Act. In
this regard, petitioner Salazar's position is that the Anti-Dummy Act allows the ASI group to elect board
directors in proportion to their share in the capital of the entity. It is to be noted, however, that the same
law also limits the election of aliens as members of the board of directors in proportion to their
allowance participation of said entity. In the instant case, the foreign Group ASI was limited to designate
three directors. This is the allowable participation of the ASI Group. Hence, in future dealings, this
limitation of six to three board seats should always be maintained as long as the joint venture
agreement exists considering that in limiting 3 board seats in the 9-man board of directors there are
provisions already agreed upon and embodied in the parties' Agreement to protect the interests arising
from the minority status of the foreign investors.
With these findings, we the decisions of the SEC Hearing Officer and SEC which were impliedly
affirmed by the appellate court declaring Messrs. Wolfgang Aurbach, John Griffin, David P Whittingham,
Emesto V. Lagdameo, Baldwin young, Raul A. Boncan, Emesto V. Lagdameo, Jr., Enrique Lagdameo,
and George F. Lee as the duly elected directors of Saniwares at the March 8,1983 annual stockholders'
meeting.
On the other hand, the Lagdameo and Young Group (petitioners in G.R. No. 75951) object to a
cumulative voting during the election of the board of directors of the enterprise as ruled by the appellate

court and submits that the six (6) directors allotted the Filipino stockholders should be selected by
consensus pursuant to section 5 (a) of the Agreement which uses the word "designate" meaning
"nominate, delegate or appoint."
They also stress the possibility that the ASI Group might take control of the enterprise if the Filipino
stockholders are allowed to select their nominees separately and not as a common slot determined by
the majority of their group.
Section 5 (a) of the Agreement which uses the word designates in the allocation of board directors
should not be interpreted in isolation. This should be construed in relation to section 3 (a) (1) of the
Agreement. As we stated earlier, section 3(a) (1) relates to the manner of voting for these nominees
which is cumulative voting while section 5(a) relates to the manner of nominating the members of the
board of directors. The petitioners in G.R. No. 75951 agreed to this procedure, hence, they cannot now
impugn its legality.
The insinuation that the ASI Group may be able to control the enterprise under the cumulative voting
procedure cannot, however, be ignored. The validity of the cumulative voting procedure is dependent on
the directors thus elected being genuine members of the Filipino group, not voters whose interest is to
increase the ASI share in the management of Saniwares. The joint venture character of the enterprise
must always be taken into account, so long as the company exists under its original agreement.
Cumulative voting may not be used as a device to enable ASI to achieve stealthily or indirectly what
they cannot accomplish openly. There are substantial safeguards in the Agreement which are intended
to preserve the majority status of the Filipino investors as well as to maintain the minority status of the
foreign investors group as earlier discussed. They should be maintained.
WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No. 75875 are DISMISSED and the
petition in G.R. No. 75951 is partly GRANTED. The amended decision of the Court of Appeals is
MODIFIED in that Messrs. Wolfgang Aurbach John Griffin, David Whittingham Emesto V. Lagdameo,
Baldwin Young, Raul A. Boncan, Ernesto R. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee are
declared as the duly elected directors of Saniwares at the March 8,1983 annual stockholders' meeting.
In all other respects, the questioned decision is AFFIRMED. Costs against the petitioners in G.R. Nos.
75975-76 and G.R. No. 75875.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 117847 October 7, 1998

PEOPLE'S AIRCARGO AND WAREHOUSING CO. INC., petitioner,
vs.
COURT OF APPEALS and STEFANI SAO, respondents.

Project Feasibility Study consisting of

PANGANIBAN, J.:

Market Study

Contracts entered into by a corporate president without express prior board approval bind the
corporation, when such officer's apparent authority is estabished and when these contracts are ratified
by the corporation.

Technical Study

The Case

Preparation of pertinent documentation requirements for the application

This principle is stressed by the Court in rejecting the Petition for Review of the February 28, 1994
Decision and the October 28, 1994 Resolution of the Court of Appeals in CA-GR CV No. 30670.

_____________________________________________

In a collection case 1 filed by Stefani Sao against People's Aircargo and Warehousing Co., Inc., the
Regional Trial Court (RTC) of Pasay City, Branch 110, rendered a Decision 2 dated October 26, 1990,
the dispositive portion of which reads: 3
WHEREFORE, in light of all the foregoing, Judgment is hereby rendered, ordering [petitioner] to pay
[private respondent] the amount of sixty thousand (P60,000.00) pesos representing payment of [private
respondents] services in preparing the manual of operations and in the conduct of a seminar for
[petitioner]. The Counterclaim is hereby dismissed.
Aggrieved by what he considered a minuscule award of P60,000, private respondent appealed to the
Court of Appeals 4 (CA) which, in its Decision promulgated February 28, 1994, granted his prayer for
P400,000, as follows: 5
WHEREFORE, PREMISES CONSIDERED, the appealed judgment is hereby MODIFIED in that
[petitioner] is ordered to pay [private respondent] the amount of four hundred thousand pesos
(P400,000.00) representing payment of [private respondent's] services in preparing the manual of
operations and in the conduct of a seminar for [petitioner].

Financial Feasibility Study

The above services will be provided for a fee of [p]esos 350,000.00 payable according to the following
schedule:
=====================================================
Fifty percent (50%) upon confirmation of the agreement
Twenty-five percent (25%) 15 days after the confirmation of the agreement
Twenty-five percent (25%) upon submission of the specified outputs
The outputs will be completed and submitted within 30 days upon confirmation of the agreement and
receipt by us of the first fifty percent payment.
--------------------------------------------------------------------------------Thank you.
Yours truly, CONFORME:

As no new ground was raised by petitioner, reconsideration of the above-mentioned Decision was
denied in the Resolution promulgated on October 28, 1994.

(S)STEFANI C. SAO (S)ANTONIO C. PUNSALAN, JR.

The Facts

(T)STEFANI C. SAO (T)ANTONIO C. PUNSALAN, JR.

Petitioner is a domestic corporation, which was organized in the middle of 1986 to operate a customs
bonded warehouse at the old Manila International Airport in Pasay City. 6

Consultant for President, PAIRCARGO

To obtain a license for the corporation from the Bureau of Customs, Antonio Punsalan Jr., the
corporation president, solicited a proposal from private respondent for the preparation of a feasibility
study. 7 Private respondent submitted a letter-proposal dated October 17, 1986 ("First Contract"
hereafter) to Punsalan, which is reproduced hereunder: 8
Dear Mr. Punsalan:
With reference to your request for professional engineering consultancy services for your proposed MIA
Warehousing Project may we offer the following outputs and the corresponding rate and terms of
agreement:
=======================================

Industrial Engineering
Initially, Cheng Yong, the majority stockholder of petitioner, objected to private respondent's offer, as
another company priced a similar proposal at only P15,000. 9 However, Punsalan preferred private
respondent's service because of the latter's membership in the task force, which was supervising the
transition of the Bureau of Customs from the Marcos government to the Aquino administration. 10
On October 17, 1986, pertitioner, through Punsalan, sent private respondent a letter, confirming their
agreement as follows:
Dear Mr. Sao:
With regard to the services offered by your company in your letter dated 13 October 1986, for the
preparation of the necessary study and documentations to support our Application for Authority to

Operate a public Customs Bonded Warehouse located at the old MIA Compound in Pasay City, please
be informed that our company is willing to hire your services and will pay the amount of THREE
HUNDRED FIFTY THOUSAND PESOS (P350,000.00) as follows:

The total service you have decided to avail . . . would be available upon signing of the conforme below
and would come [in] the amount of FOUR HUNDRED THOUSAND PESOS (P400,000.00) payable at
the schedule defined as follows (with the balance covered by post-dated cheques):

P100,000.00 uppon signing of the agreement;

Downpayment upon signing conforme P80,000.00

150,000.00 on or before October 31, 1986, with the favorable Recommendation of the CBW on our
application.

15 January 1987 53,333.00

100,000.00 upon receipt of the study in final form.

Very truly yours,
(S)ANTONIO C. PUNSALAN
(T)ANTONIO C. PUNSALAN
President

30 January 1987 53,333.00

15 February 1987 53,333.00
28 February 1987 53,333.00
15 March1987 53,333.00
30 March 1987 53,333.00

CONFORME & RECEIVED from PAIRCARGO, the

With is package, you are assured of the highest service quality as our performance record shows we
always deliver no less.

amount of ONE HUNDRED THOUSAND PESOS

Thank you very much.

(P100,000.00), this 17th day of October, 1986

Yours truly,

as 1st Installment payment of the service agreement

(S)STEFANI C. SAO

dated October 13, 1986.

(T)STEFANI C. SAO

(S)STEFANI C. SAO

Industrial Engineering Consultant

(T)STEFANI C. SAO

CONFORME:

Accordingly, private respondent prepared a feasibility study for petitioner which eventually paid him the
balance of the contract price, although not according to the schedule agreed upon. 11

(S)ANTONIO C. PUNSALAN JR.

On December 4, 1986, upon Punsalan's request, private respondent sent petitioner another letterproposal ("Second Contract" hereafter), which reads:
People's Air Cargo & Warehousing Co., Inc.
Old MIA Compound, Metro Manila
Attention: Mr. ANTONIO PUN[S]ALAN, JR.
President
Dear Mr. Pun[s]alan:
This is to formalize our proposal for consultancy services to your company the scope of which is defined
in the attached service description.

(T)PAIRCARGO CO. INC.

During the trial, the lower court observed that the Second Contract bore, at the lower right portion of the
letter, the following notations in pencil:
1. Operations Manual
2. Seminar/workshop for your employees
P400,000 package deal
50% upon completion of seminar/workshop
50% upon approval by the Commissioner
The Manual has already been approved by the Commissioner but payment has not yet been made.

The lower left corner of the letter also contained the following notations:
1st letter 4 Dec. 1986

through acquiescence, practically laid aside the normal requirement of prior express approval. The
Second Contract was declared valid and binding on the petitioner, which was held liable to private
respondent in the full amount of P400,000.

2nd letter 15 June 1987 with

Disagreeing with the CA, petitioner lodged this petition before us. 19

"Hinanakit".

The Issues

On January 10, 1987, Andy Villaceren, vice president of petitioner, received the operations manual
prepared by private respondent. 12 Petitioner submitted said operations manual to the Bureau of
Customs is connection with the former's application to operate a bonded warehouse; thereafter, in May
1987, the Bureau issued to it a license to operate, enabling it to become one of the three public bonded
warehouses at the international airport. 13 Private respondent also conducted, in the third week of
January 1987 in the warehouse of petitioner, a three-day training seminar for the latter's employees. 14

Instead of alleging reversible errors, petitioner imputes "grave abuse of discretion" to the Court of
Appeals, viz.: 20

On March 25, 1987, private respondent joined the Bureau of Customs as special assistant to then
Commissioner Alex Padilla, a position he held until he became technical assitant to then Commissioner
Miriam Defensor-Santiago on March 7, 1988. 15 Meanwhile, Punsalan sold his shares in petitionercorporation and resigned as its president in 1987. 16
On February 9, 1988, private respondent filed a collection suit against petitioner. He allege that he had
prepared an operations manual for petitioner, conducted a seminar-workshop for its employees and
delivered to it a computer program; but that, despite demand, petitioner refused to pay him for his
services.
Petitioner, in its answer, denied that private respondent had prepared an operations manual and a
computer program or conducted a seminar-workshop for its employees. It further alleged that the letteragreement was signed by Punsalan without authority, "in collusion with [private respondent] in order to
unlawfully get some money from [petitioner]," and despite his knowledge that a group of employees of
the company had been commissioned by the board of directors to prepare an operations manual. 17
The trial court declared the Second Contract unenforceable or simulated. However, since private
respondent had actually prepared the operations manual and conducted a training seminar for petitioner
and its employees, the trial court awarded P60,000 to the former, on the ground that no one should be
unjustly enriched at the expense of another (Article 2142, Civil Code). The trial court determined the
amount "in light of the evidence presented by defendant on the usual charges made by a leading
consultancy firm on similar services." 18

I. . . . [I]n ruling that the subject letter-agreement for services was binding on the corporation simply
because it was entered into by its president[;]
II. . . . [I]n ruling that the subject letter-agreement for services was binding on the corporation
notwithstanding the lack of any board authority since it was the purported "practice" to allow the
president to enter into contracts of said nature (citing one previous instance of a similar contract)[;] and
III. . . . [I]n ruling that the subject letter-agreement for services was a valid contract and not merely
simulated.
The Court will overlook the lapse of petitioner in alleging grave abuse of discretion as its ground for
seeking reversal of the assailed Decision. Although the Rules of Court specify "reversible errors" as
grounds for a petition for review under Rule 45, the Court will lay aside for the nonce this procedural
lapse and consider the allegations of "grave abuse" as statements of reversible errors of law.
Petitioner does not contest its liability; it merely disputes the amount of such accountability. Hence, the
resolution of this petition rests on the sole issue of the enforceability and validity of the Second
Contract, more specifically: (1) whether the president of the petitioner-corporation had apparent
authority to bind petitioner to the Second Contract; and (2) whether the said contract was valid and not
merely simulated.
The Court's Ruling
The petition is not meritorious.
First Issue:

The Ruling of the Court of Appeals

Apparent Authority of a Corporate President

To Respondent Court, the pivotal issue of private respondent's appeal was the enforceability of the
Second Contract. It noted that petitioner did not appeal the Decision of the trial court, implying that it
had agreed to pay the P60,000 award. If the contract was valid and enforceable, then petitioner should
be held liable for the full amount stated therein, not P60,000 as held by the lower court.

Petitioner argues that the disputed contract is unenforceable, because Punsalan, its president, was not
authorized by its board of directors to enter into said contract.

Rejecting the finding of the trial court that the December 4, 1986 contract was simulated or
unenforceable, the CA ruled in favor of its validity and enforceability. According to the Court of Appeals,
the evidence on record shows that the president of petititoner-corporation had entered into the First
Contract, which was similar to the Second Contract. Thus, petitioner had clothed its president with
apparent authority to enter into the disputed agreement. As it had also become the practice of the
petitioner-corporation to allow its president to negotiate and execute contracts necessary to secure its
license as a customs bonded warehouse without prior board approval, the board itself, by its acts and

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. 21 A corporation is a juridical person, separate and distinct from
its stockholders and members, "having . . . powers, attributes and properties expressly authorized by
law or incident to its existence." 22
Being a juridical entity, a corporation may board of directors, which exercises almost all corporate
powers, lays down all corporate business policies and is responsible for the efficiency of
management, 23 as provided in Section 23 of the Corporation Code of the Philippines:

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 . . . .

Q: And so did the company eventually pay this P350,000.00 to Mr. Sao?

Under this provision, the power and the responsibility to decide whether the corporation should enter
into a contract that will bind the corporation is lodged in the board, subject to the articles of
incorporaration, bylaws, or relevant provisions of law. 24 Howeever, just as a natural person may
authorize another to do certain acts for and on his behalf, the board of directors may validly delegate
some of its functions and powers to officers, committees or agents. The authority of such individuals to
bind the corporation is generally derived from law, corporate bylaws or authorization from the board,
either expressly or impliedly by habit, custom or acquiescence in the general course of business, viz.: 25

The First Contract was consummated, implemented and paid without a hitch.

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.
Accordingly, the appellate court ruled in this case that the authority to act for and to bind a corporation
may be presumed from acts of recognition in other instances, wherein the power was in fact exercised
without any objection from its board or shareholders. Petitioner had previously allowed its president to
enter into the First Contract with private respondent without a board resolution expressly authorizing
him; thus, it had clothed its president with apparent authority to execute the subject contract.
Petitioner rebuts, arguing that a single isolated agreement prior to the subject contract does not
constitute corporate practice, which Webster defines as "frequent or custmary action." It cites Board of
Liquidators v. Kalaw,26 in which the practice of NACOCO allowing its general manager to negotiate and
execute contract in its copra trading activities for and on its behalf, without prior board approval, was
inferred from sixty contract not one, as in present case previously entered into by the corporation
without such board resolution.
Petitioner's argument is not persuasive. Apparent authority is derived not merely from practice. Its
existence may be ascertained through (1) the general manner in which the corporation holds out an
officer or agent as having the power to act or, in other words, the apparent authority to act in general,
with which it clothes him; or (2) the acquiescence in his acts of a particular nature, with actual or
constructive knowledge thereof, whether within or beyond the scope of his ordinary powers. 27 It requires
presentation of evidence of similar act(s) executed either in its favor or in favor of other parties. 28 It is
not the quantity of similar acts which establishes apparent authority, but the vesting of a corporale
officer with the power to bind the corporation.
In the case at bar, petitioner, through its president Antonio Punsalan Jr., entered into the First Contract
without first securing board approval. Despite such lack of board approval, petitioner did not object to or
repudiate said contract, thus "clothing" its president with the power to bind the corporation. The grant of
apparent authority to Punsalan is evident in the testimony of Yong senior vice president, treasurer
and major stockholder of petitioner. Testifying on the First Contract, he said: 29
A: Mr. [Punsalan] told me that he prefer[s] Mr. Sao because Mr. Sao is very influential with the
Collector of Customs[s]. Because the Collector of Custom[s] will be the one to approve our project study
and I objected to that, sir. And I said it [was an exorbitant] price. And Mr. Punsalan he is the [p]resident,
so he [gets] his way.

A: Yes, sir.

Hence, private respondent should not be faulted for believing that Punsalan's conformity to the contract
in dispute was also binding on petitioner. It is familiar doctrine that if a corporation knowingly permits
one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to
the public as possessing the power to do those acts; and thus, the corporation will, as against anyone
who has in good faith dealt with it through such agent, be estopped from denying the agent's
authority. 30
Furthermore, private respondent prepared an operations manual and conducted a seminar for the
employees of petitioner in accordance with their contract. Petitioner accepted the operations manual,
submitted it to the Bureau of Customs and allowed the seminar for its employees. As a result of its
aforementioned actions, petitioner was given by the Bureau of Customs a license to operate a bonded
warehouse. Granting arguendo then that the Second Contract was outside the usual powers of the
president, petitioner's ratification of said contract and acceptance of benefits have made it binding,
nonetheless. The enforceability of contracts under Article 1403(2) is ratified "by the acceptance of
benefits under them" under Article 1405.
Inasmuch as a corporate president is often given general supervision and control over corporate
operations, the strict rule that said officer has no inherent power to act for the corporation is slowly
giving way to the realization that such officer has certain limited powers in the transaction of the usual
and ordinary business of the corporation. 31 In the absence of a charter or bylaw provision to the
contrary, the president is presumed to have the authority to act within the domain of the general
objectives of its business and within the scope of his or her usual duties. 32
Hence, it has been held in other jurisdictions that the president of a corporation possesses the power to
enter into a contract for the corporation, when the "conduct on the part of both the president and the
corporation [shows] that he had been in the habit of acting in similar matters on behalf of the company
and that the company had authorized him so to act and had recognized, approved and ratified his
former and similar actions." 33 Furthermore, a party dealing with the president of a corporation is entitled
to assume that he has the authority to enter, on behalf of the corporation, into contracts that are within
the scope of the powers of said corporation and that do not violate any statute or rule on public policy. 34
Second
Alleged Simulation of the First Contract

Issue:

As an alternative position, petitioner seeks to pare down its liabilities by limiting its exposure from
P400,000 to only P60,000, the amount awarded by the RTC. Petitioner capitalizes on the "badges of
fraud" cited by the trial court in declaring said contract either simulated or unenforceable, viz.:
. . . The October 1986 transaction with [private respondent] involved P350,000. The same was
embodied in a letter which bore therein not only the conformity of [petitioner's] then President Punsalan
but also drew a letter-confirmation from the latter for, indeed, he was clothed with authority to enter into
the contract after the same was brought to the attention and consideration of [petitioner]. Not only that,
a [down payment] was made. In the alleged agreement of December 4, 1986 subject of the present
case, the amount is even bigger - P400,000.00. Yet, the alleged letter-agreement drew no letter of
confirmation. And no [down payment] and postdated checks were given. Until the filing of the present
case in February 1988, no written demand for payment was sent to [petitioner]. [Private respondent's]

claim that he sent one in writing, and one was sent by his counsel who manifested that "[h]e was
looking for a copy in [his] files" fails in light of his failure to present any such copy. These and the
following considerations, to wit:
1) Despite the fact that no [down payment] and/or postdated checks [partial payments] (as purportedly
stipulated in the alleged contract) [was given, private respondent] went ahead with the services[;]
2) [There was a delay in the filing of the present suit, more than a year after [private respondent]
allegedly completed his services or eight months after the alleged last verbal demand for payment
made on Punsalan in June 1987;
3) Does not Punsalan's writing allegedly in June 1987 on the alleged letter-agreement of "your
employees[,]" when it should have been "our employees", as he was then still connected with
[petitioner], indicate that the letter-agreement was signed by Punsalan when he was no longer
connected with [petitioner] or, as claimed by [petitioner], that Punsalan signed it without [petitioner's]
authority and must have been done "in collusion with plaintiff in order to unlawfully get some money
from [petitioner]?
4) If, as [private respondent] claims, the letter was returned by Punsalan after affixing thereon his
conformity, how come . . . when Punsalan allegedly visited [private respondent] in his office at the
Bureau of Customs, in June 1987, Punsalan "brought" (again?) the letter (with the pencil [notation] at
the left bottom portion allegedly already written)?

A fictitious and simulated agreement lacks consent which is essential to a valid and enforceable
contract. 39 A contract is simulated if the parties do not intend to be bound at all (absolutely
simulated), 40 or if the parties conceal their true agreement (relatively simulated). 41 In the case at bar,
petitioner received from private respondent a letter-offer containing the terms of the former, including a
stipulation of the consideration for the latter's services. Punsalan's conformity, as well as the receipt and
use of the operations manual, shows petitioner's consent to or, at the very least, ratification of the
contract. To repeat, petitioner even submitted the manual to the Bureau of Customs and allowed private
respondent to conduct the seminar for its employees. Private respondent heard no objection from the
petitioner, until he claimed payment for the services he had rendered.
Contemporaneous and subsequent acts are also principal factors in the determination of the will of the
contracting parties. 42 The circumstances outlined above do not establish any intention to simulate the
contract in dispute. On the contrary, the legal presumption is always on the validity of contracts. A
corporation, by accepting benefits of a transaction entered into without authority, has ratified the
agreement and is, therefore, bound by it. 43
WHEREFORE, the petition is hereby DENIED and the assailed Decision AFFIRMED. Costs against
petitioner.
SO ORDERED.

5) How come . . . [private respondent] did not even keep a copy of the alleged service contract allegedly
attached to the letter-agreement?
6) Was not the letter-agreement a mere draft, it bearing the corrections made by Punsalan of his name
(the letter "n" is inserted before the last letter "o" in Antonio) and of the spelling of his family name
(Punsalan, not Punzalan)?
7) Why was not Punsalan impleaded in the case?
The issue of whether the contract is simulated or real is factual in nature, and the Court eschews factual
examinanon in a petition for review under Rule 45 of the Rules of Court. 35 This rule, however, admits of
exceptions, one of which is a conflict between the factual findings of the lower and of the appellate
courts 36 as in the case at bar.
After judicious deliberation, the Court agrees with the appellate court that the alleged "badges of fraud"
mentioned earlier have not affected in any manner the perfection thereof. First, the lack of payment
(whether down, partial or full payment), even after completion of private respondent's obligations,
imports only a defect in the performance of the contract on the part of petitioner. Second, the delay in
the filing of action was not fatal to private respondent's cause. Despite the lapse of one year after
private respondent completed his services or eight months after the alleged last demand for payment in
June 1987, the action was still filed within the allowable period, considering that an action based on a
written contract prescribes only after ten years from the time the right of action accrues. 37 Third, a
misspelling in the contract does not establish vitiation of consent, cause or object of the
contract. Fourth, a confirmation letter is not an essential element of a contract, neither is it necessary to
perfect one.Fifth, private respondent's failure to implead the corporate president does not establish
collusion between them. Petitioner could have easily filed a third-party claim against Punsalan if it
believed that it had recourse against the latter. Lastly, the mere fact that the contract price was six times
the alleged going rate does not invalidate it. 38 In short, these "badges" do not establish simulation of
said contract.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 119858

April 29, 2003

EDWARD C. ONG, petitioner,

vs.
THE COURT OF APPEALS AND THE PEOPLE OF THE PHILIPPINES, respondents.
CARPIO, J.:
The Case
Petitioner Edward C. Ong ("petitioner") filed this petition for review on certiorari 1 to nullify the
Decision2 dated 27 October 1994 of the Court of Appeals in CA-G.R. C.R. No. 14031, and its
Resolution3 dated 18 April 1995, denying petitioner's motion for reconsideration. The assailed Decision
affirmed in toto petitioner's conviction4 by the Regional Trial Court of Manila, Branch 35, 5 on two counts
of estafa for violation of the Trust Receipts Law,6as follows:
WHEREFORE, judgment is rendered: (1) pronouncing accused EDWARD C. ONG guilty beyond
reasonable doubt on two counts, as principal on both counts, of ESTAFA defined under No. 1 (b) of
Article 315 of the Revised Penal Code in relation to Section 13 of Presidential Decree No. 115, and
penalized under the 1st paragraph of the same Article 315, and sentenced said accused in each count
to TEN (10) YEARS of prision mayor, as minimum, to TWENTY (20) YEARS of reclusion temporal, as
maximum;
(2) ACQUITTING accused BENITO ONG of the crime charged against him, his guilt thereof not having
been established by the People beyond reasonable doubt;
(3) Ordering accused Edward C. Ong to pay private complainant Solid Bank Corporation the aggregate
sum of P2,976,576.37 as reparation for the damages said accused caused to the private complainant,
plus the interest thereon at the legal rate and the penalty of 1% per month, both interest and penalty
computed from July 15, 1991, until the principal obligation is fully paid;
(4) Ordering Benito Ong to pay, jointly and severally with Edward C. Ong, the private complainant the
legal interest and the penalty of 1% per month due and accruing on the unpaid amount of
P1,449,395.71, still owing to the private offended under the trust receipt Exhibit C, computed from July
15, 1991, until the said unpaid obligation is fully paid;
(5) Ordering accused Edward C. Ong to pay the costs of these two actions.
SO ORDERED.7
The Charge
Assistant City Prosecutor Dina P. Teves of the City of Manila charged petitioner and Benito Ong with two
counts ofestafa under separate Informations dated 11 October 1991.
In Criminal Case No. 92-101989, the Information indicts petitioner and Benito Ong of the crime
of estafacommitted as follows:
That on or about July 23, 1990, in the City of Manila, Philippines, the said accused, representing
ARMAGRI International Corporation, conspiring and confederating together did then and there willfully,
unlawfully and feloniously defraud the SOLIDBANK Corporation represented by its Accountant,
DEMETRIO LAZARO, a corporation duly organized and existing under the laws of the Philippines
located at Juan Luna Street, Binondo, this City, in the following manner, to wit: the said accused
received in trust from said SOLIDBANK Corporation the following, to wit:

10,000 bags of urea

valued at P2,050,000.00 specified in a Trust Receipt Agreement and covered by a Letter of Credit No.
DOM GD 90-009 in favor of the Fertiphil Corporation; under the express obligation on the part of the
said accused to account for said goods to Solidbank Corporation and/or remit the proceeds of the sale
thereof within the period specified in the Agreement or return the goods, if unsold immediately or upon
demand; but said accused, once in possession of said goods, far from complying with the aforesaid
obligation failed and refused and still fails and refuses to do so despite repeated demands made upon
him to that effect and with intent to defraud, willfully, unlawfully and feloniously misapplied,
misappropriated and converted the same or the value thereof to his own personal use and benefit, to
the damage and prejudice of the said Solidbank Corporation in the aforesaid amount of P2,050,000.00
Philippine Currency.
Contrary to law.
In Criminal Case No. 92-101990, the Information likewise charges petitioner of the crime
of estafa committed as follows:
That on or about July 6, 1990, in the City of Manila, Philippines, the said accused, representing
ARMAGRI International Corporation, did then and there willfully, unlawfully and feloniously defraud the
SOLIDBANK Corporation represented by its Accountant, DEMETRIO LAZARO, a corporation duly
organized and existing under the laws of the Philippines located at Juan Luna Street, Binondo, this City,
in the following manner, to wit: the said accused received in trust from said SOLIDBANK Corporation
the following goods, to wit:
125 pcs. Rear diff. assy RNZO 49"
50 pcs. Front & Rear diff assy. Isuzu Elof
85 units 1-Beam assy. Isuzu Spz
all valued at P2,532,500.00 specified in a Trust Receipt Agreement and covered by a Domestic Letter of
Credit No. DOM GD 90-006 in favor of the Metropole Industrial Sales with address at P.O. Box AC 219,
Quezon City; under the express obligation on the part of the said accused to account for said goods to
Solidbank Corporation and/or remit the proceeds of the sale thereof within the period specified in the
Agreement or return the goods, if unsold immediately or upon demand; but said accused, once in
possession of said goods, far from complying with the aforesaid obligation failed and refused and still
fails and refuses to do so despite repeated demands made upon him to that effect and with intent to
defraud, willfully, unlawfully and feloniously misapplied, misappropriated and converted the same or the
value thereof to his own personal use and benefit, to the damage and prejudice of the said Solidbank
Corporation in the aforesaid amount of P2,532,500.00 Philippine Currency.
Contrary to law.
Arraignment and Plea
With the assistance of counsel, petitioner and Benito Ong both pleaded not guilty when arraigned.
Thereafter, trial ensued.
Version of the Prosecution

The prosecution's evidence disclosed that on 22 June 1990, petitioner, representing ARMAGRI
International Corporation8 ("ARMAGRI"), applied for a letter of credit for P2,532,500.00 with
SOLIDBANK Corporation ("Bank") to finance the purchase of differential assemblies from Metropole
Industrial Sales. On 6 July 1990, petitioner, representing ARMAGRI, executed a trust
receipt9 acknowledging receipt from the Bank of the goods valued at P2,532,500.00.
On 12 July 1990, petitioner and Benito Ong, representing ARMAGRI, applied for another letter of credit
for P2,050,000.00 to finance the purchase of merchandise from Fertiphil Corporation. The Bank
approved the application, opened the letter of credit and paid to Fertiphil Corporation the amount of
P2,050,000.00. On 23 July 1990, petitioner, signing for ARMAGRI, executed another trust receipt 10 in
favor of the Bank acknowledging receipt of the merchandise.
Both trust receipts contained the same stipulations. Under the trust receipts, ARMAGRI undertook to
account for the goods held in trust for the Bank, or if the goods are sold, to turn over the proceeds to the
Bank. ARMAGRI also undertook the obligation to keep the proceeds in the form of money, bills or
receivables as the separate property of the Bank or to return the goods upon demand by the Bank, if
not sold. In addition, petitioner executed the following additional undertaking stamped on the dorsal
portion of both trust receipts:
I/We jointly and severally agreed to any increase or decrease in the interest rate which may occur after
July 1, 1981, when the Central Bank floated the interest rates, and to pay additionally the penalty of 1%
per month until the amount/s or installment/s due and unpaid under the trust receipt on the reverse side
hereof is/are fully paid.11
Petitioner signed alone the foregoing additional undertaking in the Trust Receipt for P2,253,500.00,
while both petitioner and Benito Ong signed the additional undertaking in the Trust Receipt for
P2,050,000.00.
When the trust receipts became due and demandable, ARMAGRI failed to pay or deliver the goods to
the Bank despite several demand letters. 12 Consequently, as of 31 May 1991, the unpaid account under
the first trust receipt amounted to P1,527,180.66, 13 while the unpaid account under the second trust
receipt amounted to P1,449,395.71.14

acting on its behalf. In the fulfillment of its purpose, the corporation by necessity has to employ persons
to act on its behalf.
Being a mere artificial person, the law (Section 13, P.D. 115) recognizes the impossibility of imposing
the penalty of imprisonment on the corporation itself. For this reason, it is the officers or employees or
other persons whom the law holds responsible.16
The Court of Appeals ruled that what made petitioner liable was his failure to account to the entruster
Bank what he undertook to perform under the trust receipts. The Court of Appeals held that ARMAGRI,
which petitioner represented, could not itself negotiate the execution of the trust receipts, go to the Bank
to receive, return or account for the entrusted goods. Based on the representations of petitioner, the
Bank accepted the trust receipts and, consequently, expected petitioner to return or account for the
goods entrusted.17
The Court of Appeals also ruled that the prosecution need not prove that petitioner is occupying a
position in ARMAGRI in the nature of an officer or similar position to hold him the "person(s) therein
responsible for the offense." The Court of Appeals held that petitioner's admission that his participation
was merely incidental still makes him fall within the purview of the law as one of the corporation's
"employees or other officials or persons therein responsible for the offense." Incidental or not, petitioner
was then acting on behalf of ARMAGRI, carrying out the corporation's decision when he signed the trust
receipts.
The Court of Appeals further ruled that the prosecution need not prove that petitioner personally
received and misappropriated the goods subject of the trust receipts. Evidence of misappropriation is
not required under the Trust Receipts Law. To establish the crime of estafa, it is sufficient to show failure
by the entrustee to turn over the goods or the proceeds of the sale of the goods covered by a trust
receipt. Moreover, the bank is not obliged to determine if the goods came into the actual possession of
the entrustee. Trust receipts are issued to facilitate the purchase of merchandise. To obligate the bank
to examine the fact of actual possession by the entrustee of the goods subject of every trust receipt will
greatly impede commercial transactions.
Hence, this petition.

Version of the Defense

The Issues

After the prosecution rested its case, petitioner and Benito Ong, through counsel, manifested in open
court that they were waiving their right to present evidence. The trial court then considered the case
submitted for decision.15

Petitioner seeks to reverse his conviction by contending that the Court of Appeals erred:

The Ruling of the Court of Appeals

1. IN RULING THAT, BY THE MERE CIRCUMSTANCE THAT PETITIONER ACTED AS AGENT AND
SIGNED FOR THE ENTRUSTEE CORPORATION, PETITIONER WAS NECESSARILY THE ONE
RESPONSIBLE FOR THE OFFENSE; AND

Petitioner appealed his conviction to the Court of Appeals. On 27 October 1994, the Court of Appeals
affirmed the trial court's decision in toto. Petitioner filed a motion for reconsideration but the same was
denied by the Court of Appeals in the Resolution dated 18 April 1995.

2. IN CONVICTING PETITIONER UNDER SPECIFICATIONS NOT ALLEGED IN THE INFORMATION.

The Court of Appeals held that although petitioner is neither a director nor an officer of ARMAGRI, he
certainly comes within the term "employees or other x x x persons therein responsible for the offense" in
Section 13 of the Trust Receipts Law. The Court of Appeals explained as follows:

The Court sustains the conviction of petitioner.

It is not disputed that appellant transacted with the Solid Bank on behalf of ARMAGRI. This is because
the Corporation cannot by itself transact business or sign documents it being an artificial person. It has
to accomplish these through its agents. A corporation has a personality distinct and separate from those

The Ruling of the Court

First Assigned Error: Petitioner comes

within the purview of Section 13 of the Trust Receipts Law.
Petitioner contends that the Court of Appeals erred in finding him liable for the default of ARMAGRI,
arguing that in signing the trust receipts, he merely acted as an agent of ARMAGRI. Petitioner asserts

that nowhere in the trust receipts did he assume personal responsibility for the undertakings of
ARMAGRI which was the entrustee.
Petitioner's arguments fail to persuade us.
The pivotal issue for resolution is whether petitioner comes within the purview of Section 13 of the Trust
Receipts Law which provides:
x x x . If the violation is committed by a corporation, partnership, association or other juridical entities,
the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other
officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising
from the offense. (Emphasis supplied)
We hold that petitioner is a person responsible for violation of the Trust Receipts Law.
The relevant penal provision of the Trust Receipts Law reads:

It is a well-settled doctrine long before the enactment of the Trust Receipts Law, that the failure to
account, upon demand, for funds or property held in trust is evidence of conversion or
misappropriation.21 Under the law, mere failure by the entrustee to account for the goods received in
trust constitutes estafa. The Trust Receipts Law punishes dishonesty and abuse of confidence in the
handling of money or goods to the prejudice of public order.22 The mere failure to deliver the proceeds
of the sale or the goods if not sold constitutes a criminal offense that causes prejudice not only to the
creditor, but also to the public interest. 23 Evidently, the Bank suffered prejudice for neither money nor the
goods were turned over to the Bank.
The Trust Receipts Law expressly makes the corporation's officers or employees or other persons
therein responsible for the offense liable to suffer the penalty of imprisonment. In the instant case,
petitioner signed the two trust receipts on behalf of ARMAGRI 24 as the latter could only act through its
agents. When petitioner signed the trust receipts, he acknowledged receipt of the goods covered by the
trust receipts. In addition, petitioner was fully aware of the terms and conditions stated in the trust
receipts, including the obligation to turn over the proceeds of the sale or return the goods to the Bank, to
wit:

SEC. 13. Penalty Clause. - The failure of the entrustee to turn over the proceeds of the sale of the
goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the
entruster or as appears in the trust receipt or to return said goods, documents or instruments if they
were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime
of estafa, punishable under the provisions of Article Three Hundred and Fifteen, Paragraph One (b), of
Act Numbered Three Thousand Eight Hundred and Fifteen, as amended, otherwise known as the
Revised Penal Code. If the violation or offense is committed by a corporation, partnership, association
or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors,
officers, employees or other officials or persons therein responsible for the offense, without prejudice to
the civil liabilities arising from the criminal offense. (Emphasis supplied)

Received, upon the TRUST hereinafter mentioned from SOLIDBANK CORPORATION (hereafter
referred to as the BANK), the following goods and merchandise, the property of said BANK specified in
the bill of lading as follows: x x x and in consideration thereof, I/we hereby agree to hold said goods in
Trust for the said BANK and as its property with liberty to sell the same for its account but without
authority to make any other disposition whatsoever of the said goods or any part thereof (or the
proceeds thereof) either by way of conditional sale, pledge, or otherwise.

The Trust Receipts Law is violated whenever the entrustee fails to: (1) turn over the proceeds of the
sale of the goods, or (2) return the goods covered by the trust receipts if the goods are not sold. 18 The
mere failure to account or return gives rise to the crime which is malum prohibitum. 19 There is no
requirement to prove intent to defraud.20

xxx

The Trust Receipts Law recognizes the impossibility of imposing the penalty of imprisonment on a
corporation. Hence, if the entrustee is a corporation, the law makes the officers or employees or other
persons responsible for the offense liable to suffer the penalty of imprisonment. The reason is obvious:
corporations, partnerships, associations and other juridical entities cannot be put to jail. Hence, the
criminal liability falls on the human agent responsible for the violation of the Trust Receipts Law.
In the instant case, the Bank was the entruster while ARMAGRI was the entrustee. Being the entrustee,
ARMAGRI was the one responsible to account for the goods or its proceeds in case of sale. However,
the criminal liability for violation of the Trust Receipts Law falls on the human agent responsible for the
violation. Petitioner, who admits being the agent of ARMAGRI, is the person responsible for the offense
for two reasons. First, petitioner is the signatory to the trust receipts, the loan applications and the
letters of credit. Second, despite being the signatory to the trust receipts and the other documents,
petitioner did not explain or show why he is not responsible for the failure to turn over the proceeds of
the sale or account for the goods covered by the trust receipts.
The Bank released the goods to ARMAGRI upon execution of the trust receipts and as part of the loan
transactions of ARMAGRI. The Bank had a right to demand from ARMAGRI payment or at least a return
of the goods. ARMAGRI failed to pay or return the goods despite repeated demands by the Bank.

In case of sale I/we agree to hand the proceeds as soon as received to the BANK to apply against the
relative acceptance (as described above) and for the payment of any other indebtedness of mine/ours
to SOLIDBANK CORPORATION.
xxx

xxx.

I/we agree to keep said goods, manufactured products, or proceeds thereof, whether in the form of
money or bills, receivables, or accounts, separate and capable of identification as the property of the
BANK.
I/we further agree to return the goods, documents, or instruments in the event of their non-sale, upon
demand or within ____ days, at the option of the BANK.
xxx

xxx

xxx. (Emphasis supplied)25

True, petitioner acted on behalf of ARMAGRI. However, it is a well-settled rule that the law of agency
governing civil cases has no application in criminal cases. When a person participates in the
commission of a crime, he cannot escape punishment on the ground that he simply acted as an agent
of another party.26 In the instant case, the Bank accepted the trust receipts signed by petitioner based
on petitioner's representations. It is the fact of being the signatory to the two trust receipts, and thus a
direct participant to the crime, which makes petitioner a person responsible for the offense.
Petitioner could have raised the defense that he had nothing to do with the failure to account for the
proceeds or to return the goods. Petitioner could have shown that he had severed his relationship with
ARMAGRI prior to the loss of the proceeds or the disappearance of the goods. Petitioner, however,
waived his right to present any evidence, and thus failed to show that he is not responsible for the
violation of the Trust Receipts Law.

There is no dispute that on 6 July 1990 and on 23 July 1990, petitioner signed the two trust receipts 27 on
behalf of ARMAGRI. Petitioner, acting on behalf of ARMAGRI, expressly acknowledged receipt of the
goods in trust for the Bank. ARMAGRI failed to comply with its undertakings under the trust receipts. On
the other hand, petitioner failed to explain and communicate to the Bank what happened to the goods
despite repeated demands from the Bank. As of 13 May 1991, the unpaid account under the first and
second trust receipts amounted to P1,527,180.60 and P1,449,395.71, respectively.28
Second Assigned Error: Petitioner's conviction under the
allegations in the two Informations for Estafa.
Petitioner argues that he cannot be convicted on a new set of facts not alleged in the Informations.
Petitioner claims that the trial court's decision found that it was ARMAGRI that transacted with the Bank,
acting through petitioner as its agent. Petitioner asserts that this contradicts the specific allegation in the
Informations that it was petitioner who was constituted as the entrustee and was thus obligated to
account for the goods or its proceeds if sold. Petitioner maintains that this absolves him from criminal
liability.
We find no merit in petitioner's arguments.
Contrary to petitioner's assertions, the Informations explicitly allege that petitioner, representing
ARMAGRI, defrauded the Bank by failing to remit the proceeds of the sale or to return the goods
despite demands by the Bank, to the latter's prejudice. As an essential element of estafa with abuse of
confidence, it is sufficient that the Informations specifically allege that the entrustee received the goods.
The Informations expressly state that ARMAGRI, represented by petitioner, received the goods in trust
for the Bank under the express obligation to remit the proceeds of the sale or to return the goods upon
demand by the Bank. There is no need to allege in the Informations in what capacity petitioner
participated to hold him responsible for the offense. Under the Trust Receipts Law, it is sufficient to
allege and establish the failure of ARMAGRI, whom petitioner represented, to remit the proceeds or to
return the goods to the Bank.
When petitioner signed the trust receipts, he claimed he was representing ARMAGRI. The corporation
obviously acts only through its human agents and it is the conduct of such agents which the law must
deter.29 The existence of the corporate entity does not shield from prosecution the agent who knowingly
and intentionally commits a crime at the instance of a corporation.30
Penalty for the crime of Estafa.
The penalty for the crime of estafa is prescribed in Article 315 of the Revised Penal Code, as follows:
1st. The penalty of prision correccional in its maximum period to prision mayor in its minimum period, if
the amount of the fraud is over 12,000 pesos but does not exceed 22,000 pesos; and if such amount
exceeds the latter sum, the penalty provided in this paragraph shall be imposed in its maximum period,
adding one year for each additional 10,000 pesos; but the total penalty which may be imposed should
not exceed twenty years. x x x .
In the instant case, the amount of the fraud in Criminal Case No. 92-101989 is P1,527,180.66. In
Criminal Case No. 92-101990, the amount of the fraud is P1,449,395.71. Since the amounts of the
fraud in each estafa exceeds P22,000.00, the penalty of prision correccional maximum to prision
mayor minimum should be imposed in its maximum period as prescribed in Article 315 of the Revised
Penal Code. The maximum indeterminate sentence should be taken from this maximum period which
has a duration of 6 years, 8 months and 21 days to 8 years. One year is then added for each additional

P10,000.00, but the total penalty should not exceed 20 years. Thus, the maximum penalty for each
count of estafa in this case should be 20 years.
Under the Indeterminate Sentence Law, the minimum indeterminate sentence can be anywhere within
the range of the penalty next lower in degree to the penalty prescribed by the Code for the offense. The
minimum range of the penalty is determined without first considering any modifying circumstance
attendant to the commission of the crime and without reference to the periods into which it may be
subdivided.31 The modifying circumstances are considered only in the imposition of the maximum term
of the indeterminate sentence.32 Since the penalty prescribed in Article 315 is prision
correccional maximum to prision mayor minimum, the penalty next lower in degree would be prision
correccional minimum to medium. Thus, the minimum term of the indeterminate penalty should be
anywhere within 6 months and 1 day to 4 years and 2 months.33
Accordingly, the Court finds a need to modify in part the penalties imposed by the trial court. The
minimum penalty for each count of estafa should be reduced to four (4) years and two (2) months
of prision correccional.
As for the civil liability arising from the criminal offense, the question is whether as the signatory for
ARMAGRI, petitioner is personally liable pursuant to the provision of Section 13 of the Trust Receipts
Law.
In Prudential Bank v. Intermediate Appellate Court,34 the Court discussed the imposition of civil liability
for violation of the Trust Receipts Law in this wise:
It is clear that if the violation or offense is committed by a corporation, partnership, association or other
juridical entities, the penalty shall be imposed upon the directors, officers, employees or other officials
or persons responsible for the offense. The penalty referred to is imprisonment, the duration of which
would depend on the amount of the fraud as provided for in Article 315 of the Revised Penal Code. The
reason for this is obvious: corporation, partnership, association or other juridical entities cannot be put in
jail.However, it is these entities which are made liable for the civil liabilities arising from the criminal
offense. This is the import of the clause 'without prejudice to the civil liabilities arising from the criminal
offense'. (Emphasis supplied)
In Prudential Bank, the Court ruled that the person signing the trust receipt for the corporation is not
solidarily liable with the entrustee-corporation for the civil liability arising from the criminal offense. He
may, however, be personally liable if he bound himself to pay the debt of the corporation under a
separate contract of surety or guaranty.
In the instant case, petitioner did not sign in his personal capacity the solidary guarantee clause 35
found on the dorsal portion of the trust receipts. Petitioner placed his signature after the typewritten
words "ARMCO INDUSTRIAL CORPORATION" found at the end of the solidary guarantee clause.
Evidently, petitioner did not undertake to guaranty personally the payment of the principal and interest of
ARMAGRI's debt under the two trust receipts.
In contrast, petitioner signed the stamped additional undertaking without any indication he was signing
for ARMAGRI. Petitioner merely placed his signature after the additional undertaking. Clearly, what
petitioner signed in his personal capacity was the stamped additional undertaking to pay a monthly
penalty of 1% of the total obligation in case of ARMAGRI's default.
In the additional undertaking, petitioner bound himself to pay "jointly and severally" a monthly penalty of
1% in case of ARMAGRI's default. 35 Thus, petitioner is liable to the Bank for the stipulated monthly

penalty of 1% on the outstanding amount of each trust receipt. The penalty shall be computed from 15
July 1991, when petitioner received the demand letter, 36 until the debt is fully paid.
WHEREFORE, the assailed Decision is AFFIRMED with MODIFICATION. In Criminal Case No. 92101989 and in Criminal Case No. 92-101990, for each count of estafa, petitioner EDWARD C. ONG is
sentenced to an indeterminate penalty of imprisonment from four (4) years and two (2) months
of prision correctional as MINIMUM, to twenty (20) years of reclusion temporal as MAXIMUM. Petitioner
is ordered to pay SOLIDBANK CORPORATION the stipulated penalty of 1% per month on the
outstanding balance of the two trust receipts to be computed from 15 July 1991 until the debt is fully
paid.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 144661 and 144797

June 15, 2005

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,

vs.
SPOUSES FRANCISCO ONG and LETICIA ONG, respondents.

The foregoing offer was duly "NOTED" by petitioners branch head at its Cagayan de Oro City Branch,
Jose Z. Lagrito (Lagrito, for brevity), and Official Receipt No. 3081947 was issued for the amount
of P14,000.00 as respondents deposit.

DECISION
GARCIA, J.:
Appealed to this Court by way of a petition for review on certiorari are the D E C I S I O N1 dated March
5, 1999and Resolution dated July 19, 2000 of the Court of Appeals in CA-G.R. CV No. 54919,
affirming in toto an earlier decision of the Regional Trial Court at Cagayan de Oro City, Branch 23,
which ruled in favor of herein respondents, the Spouses Francisco Ong and Leticia Ong, in a suit for
breach of contract and/or specific performance with prayer for writ of preliminary injunction and
damages thereat commenced by them against petitioner Development Bank of the Philippines
(DBP).
Petitioner filed by registered mail a motion for extension time to submit petition, paying the
corresponding docket fees therefor by money order. Upon receipt of the motion, the Court docketed the
case as G.R. No. 144797. Before actual receipt of said motion, however, petitioner personally filed its
petition, which was docketed with a lower number as G.R. No. 144661. What then appears to be two (2)
cases before us are actually just one, now the subject of this decision.
The facts are simple and undisputed:
Petitioners foreclosed asset, formerly owned by one Enrique Abada under TCT No. T-4786 and located
at Corrales Extension, Cagayan de Oro City is the subject of this controversy. On May 25, 1988,
respondent Francisco Ong with the conformity of his wife Leticia Ong, addressed a written offer to
petitioner thru its branch manager at Cagayan de Oro City to buy the subject property on a negotiated
sale basis and submitted his "best and last offer" to purchase2 under the following terms:
PURCHASE PRICE

P136,000.00

DOWNPAYMENT ..

14,000.00

BALANCE

P122,000.00

TERM: C A S H MODE OF PAYMENT: Payable upon ejection of occupants on the property subject of
my offer.
I/We am/are depositing the amount of P14,000.00 in cash/check to accompany my/our offer, it being
expressly understood, however, that the same does not bind the DBP to the offer until after my/our
receipt of its approval by the higher authorities of the bank. Should the bank receive an offer from a
third-party buyer higher by more than 5% or at more advantageous term accompanied by a deposit of at
least 10% of the offered price, or a higher offer from the former-owner for at least the updated Total
Claim of the Bank accompanied by a minimum deposit of 20% of the purchase price, the Bank may
favorably consider the higher offer and thereafter refund my/our deposit within three (3) working days
after the determination of the most advantageous offer.

In a letter dated October 21, 1988 3, sent to respondents via registered mail, Lagrito informed the
spouses that the bank recently received an offer from another interested third-party-buyer of the same
property at the same price and term, "but better and more advantageous to the Bank considering that
the buyer will assume the responsibility at her expense for the ejectment of present occupants in the
said property". Nonetheless, respondents were given in the same letter three (3) days within which "to
match the said offer", failing in which the Bank "will immediately award the said property to the other
buyer", in which event respondents deposit ofP14,000.00 shall be refunded to them upon surrender of
O.R. No. 3081947.
In yet another written offer dated October 28, 1988 4, respondents matched the said offer of the second
interested buyer by assuming the responsibility "at my/our own expense for the ejection of
squatters/occupants, if any, on the property".
On April 7, 1989, there was a conference between respondents, together with their counsel, and the
bank whereat respondents were informed why the sale could not be awarded to them. Thereafter, in a
letter dated September 6, 1990 5, respondents were notified that the property would instead be offered
for public bidding on September 24, 1990 at ten 10:00 oclock in the morning.
Feeling aggrieved by such turn of events, respondents filed with the Regional Trial Court at Cagayan de
Oro City a complaint for breach of contract and/or specific performance against petitioner. Thereat, the
complaint was docketed as Civil Case No. 90-422 which was raffled to Branch 23 of the court.
After pre-trial, the parties agreed to submit the case for judgment based on the pleadings. Accordingly,
the trial court required them to submit simultaneously their respective memoranda within thirty (30)
days. Only petitioner filed its memorandum.
In a decision6 dated April 25, 1995, the trial court dismissed the complaint finding that there was "no
perfected contract of sale" between the parties, hence, "there is no breach to speak of since there was
no contract from the very beginning". However, upon respondents motion for reconsideration, the trial
court vacated its judgment and set the case for the reception of evidence. This time, only the
respondents adduced their evidence consisting of the lone testimony of respondent Francisco Ong and
the documents identified by him in the course thereof.
In his testimony, Ong gave the respondents version of what supposedly transpired in their transaction
with petitioner. According to him, he and his wife went to the bank branch at Cabayan de Oro City and
looked for Roy Palasan, a bank clerk thereat and told the latter that they were interested to buy two (2)
lots. Palasan went to talk to Lagrito, the branch manager. Palasan returned to the spouses and
informed them that the branch manager agreed to sell the property to them. Palasan further told them
that they will be required to pay ten (10%) percent of the purchase price as downpayment, adding that if
they were to pay the purchase price in cash, they would be entitled to a ten (10%) percent discount.
After some computations, respondents rounded up the purchase price atP136,000.00 and pegged the
downpayment therefor at P14,000.00. They were then required by Palasan to sign a bank form
supposedly to express their firm offer to purchase the subject property. But since the form signed by
them contains the statement that the approval of higher authorities of the bank is required to close the
deal, respondents queried Palasan about it. Palasan, however, told them that the documents were only
for formality purposes, and further assured them that the branch manager has already agreed to sell the
subject property to them.

Having completed the presentation of their evidence, respondents rested their case. For its part,
petitioner no longer adduced any evidence but merely opted to formally offer its documentary exhibits.
Thereafter, the case was submitted for resolution.
On September 26, 1996, the trial court came out with a new decision, 7 this time rendering judgment for
the respondents, as follows:
WHEREFORE, by reason of preponderance of evidence, the Court hereby finds in favor of the plaintiffs
as against the defendant and hereby orders the defendant:
1. To execute a final sale of the lot subject matter of the contract of sale at the original agreed price
ofP136,000.00;
2. Defendant to accept the balance of the purchase price from the plaintiffs;
3. Defendant to pay moral damages in the amount of P30,000.00;

NON-OBJECTION ON THE PART OF HEREIN PETITIONER DURING THE INTRODUCTION OF

THAT "PAROL EVIDENCE"; THE ADMISSIBILITY OF PETITIONERS (sic.) PAROL EVIDENCE DOES
NOT AUTOMATICALLY RIPEN THE TESTIMONY AS A TRUTH RESPECTING A MATTER OF FACT
AS ITS CREDIBILITY AND TRUSTWORTHINESS AND WEIGHT ARE STILL SUBJECT TO JUDICIAL
SCRUTINY AND APPRECIATION.
D. THAT THERE WAS ACTUALLY OPPOSITION ON THE PART OF THE PETITIONER TO THE
CONTENTS OF THE ORAL TESTIMONY OF THE RESPONDENT REGARDING THE ALLEGED
PERFECTION OF CONTRACT OF SALE BECAUSE THE PETITIONER HAD ALREADY
INTERPOSED THEIR DEFENSES WHEN IT FILED A MEMORANDUM ATTACHING THEREIN THE
DOCUMENTARY AS WELL AS DECLARATIONS IN ITS PLEADINGS ON THE NON-PERFECTION OF
SUCH CONTRACT WHEN THE CASE WAS THEN SUBMITTED FOR JUDGMENT ON THE
PLEADINGS, AS AGREED BY THE PARTIES DURING THE PRE-TRIAL, AND SUCH EVIDENCES
WERE ALREADY PASSED UPON BY THE COURT WHEN IT RENDERED A JUDGMENT DATED
APRIL 25, 1995.
We GRANT the petition.

4. Defendant to refund the amount of P10,000.00 actual litigation expenses; and to pay attorneys fees
in the amount of P20,000.00.
SO ORDERED.
Therefrom, petitioner went on appeal to the Court of Appeals in CA-G.R. CV No. 54919, and, on March
5, 1999, the appellate court rendered the herein assailed decision 8 affirming in toto that of the trial court,
thus:
ACCORDINGLY, the foregoing premises considered, the appealed decision is hereby AFFIRMED in
toto.
SO ORDERED.
With its motion for reconsideration of the same decision having been denied by the Court of Appeals in
its equally challenged resolution of July 19, 2000,9 petitioner is now with us thru the present recourse on
the following grounds:
A.
THAT THE RESPONDENTS INTRODUCTION OF PAROL EVIDENCE TO PROVE THE ALLEGED
MEETING OF MINDS BETWEEN THE PARTIES WAS NOT SANCTIONED BY RULE 130, SEC. 9,
RULES OF COURT, CONTRARY TO THE FINDINGS OF THE LOWER COURTS, CONSIDERING
THAT THERE WAS NO WRITTEN CONTRACT THAT WAS EVER EXECUTED BY THE PARTIES IN
THIS CASE, BUT MERELY UNILATERAL WRITTEN COMMUNICATIONS, AT BEST CONSTITUTING
OFFERS AND COUNTER-OFFERS.
B.
THAT THE QUANTUM OF PROOF IS WANTING TO PROVE THE ALLEGED PERFECTION OF
CONTRACT OF SALE BETWEEN THE PARTIES BASED ON THE SOLE, UNCORROBORATED,
ORAL TESTIMONY THUS FAR PRESENTED BY THE RESPONDENTS.
C. THAT THE BURDEN OF PROOF THAT THERE WAS PERFECTION OF THE CONTRACT OF SALE
BETWEEN THE PARTIES BASICALLY REST WITH THE RESPONDENTS, NOTWITHSTANDING THE

At the very core of the controversy is the question of whether or not there actually was a perfected contract of sale
between petitioner and respondents, for which the Court may compel petitioner to issue a board resolution approving
the sale and to execute the final deed of sale in respondents favor, and/or hold petitioner liable for a breach thereof.
Needless to state, without a perfected contract of sale, there could be no cause of action for specific performance or
breach thereof.
The trial court went on one direction by ruling in its earlier decision of April 25, 1995 that there was no perfected
contract, but upon respondents motion for reconsideration, went exactly the opposite path by completely reversing
itself in its herein challenged decision of September 26, 1996.
Apparently, the trial courts ruling that there was already a perfected contract of sale was premised on its following
factual findings:
1. That plaintiff [respondents] made a downpayment in a check that was subsequently encashed by the defendant
[petitioner] bank;
2. That the sister-in-law of plaintiff [respondents] entered into the same arrangement and was able to buy the
property she wanted to buy from defendant [petitioner] bank;
3. That defendant [petitioner] never presented any witness to rebut the positive and clear testimony of plaintiff
[respondents] that it was a perfected contract of sale entered into by the former with the defendant [petitioner] bank. 10
Sustaining the foregoing factual findings of the trial court, the appellate court wrote in its assailed decision of March
5, 1999:
This positive and clear testimony of [respondent] Ong was not objected to nor rebutted by the [petiotioner]. Notably,
the bank personnel involved in the transaction, namely, Roy Palasan and the Branch Manager of the [petitioners]
Cagayan de Oro Branch, Joe Lagrito, were never presented to refute the testimony of the [respondents] that the
bank has agreed to sell the property to the [respondents]. Suffice it to state that [respondents] were entitled to rely on
the representation of Lagrito who, after all, is the banks manager. Under the premise that a bank is bound by the
obligation contracted by its officers, the contract of sale between [petitioner] and the [respondents] was perfected
when Palasan and Lagrito communicated the approval of the sale of the lot to the [respondents].
Significantly, the unrebutted testimony of Francisco Ong reveals that Norma Silfavan, [respondents] sister, made a
similar offer to the [petitioner] under the same terms and conditions as to that of the [respondents], and was likewise
assured by the same bank personnel that her offer, along with the [respondents] offer was already approved.
Eventually, the transaction resulted in a consummated sale between Silfavan and DBP. Under these premises, We

can not see any reason why the [petitioner] did not accord the same treatment to the [respondents] who were
similarly situated.
Evidently, the two (2) courts below were convinced that the actuation of Palasan, a mere bank clerk, upon which
respondents relied in believing that their offer to purchase was already approved by the bank manager, would bind
the bank to a perfected contract of sale between the parties in this case. The Court of Appeals further added that the
acceptance of the offer to purchase was sufficiently established from the parol evidence adduced by respondents
during the trial.
We do not agree.
Concededly, in petitions for review on certiorari, our task is not to review once again the factual findings of the Court
of Appeals and the trial court, but to determine if, on the basis of the facts thus found, the conclusions of law reached
are correct or not.
Judging from the findings of the two (2) courts below and the testimony of respondent Francisco Ong himself, it
appears clear to us that the transaction between the respondents and the petitioner was limited to Palasan, one of
the clerks of petitioners branch in Cagayan de Oro City. Lagrito, the branch manager, had no personal or direct
communication with respondents to express his alleged consent to the sale transaction. Thus, the undisputed
evidence showed that it was Palasan, a mere bank clerk, and not the branch manager himself who assured
respondents that theirs was a closed deal.
We are very much aware of our pronouncement in Rural Bank of Milaor vs. Ocfemia,11 involving a mandamus suit
where the supposed buyer of a foreclosed property from a bank sought a court order to compel the bank to issue the
required board resolution confirming the sale between the parties therein. There, this Court, speaking thru Mr. Justice
Artemio Panganiban, stated:
Notwithstanding the putative authority of the manager to bind the bank in the Deed of Sale, petitioner has failed to
file an answer to the Petition below within the reglementary period, let alone present evidence controverting such
authority. Indeed, when one of herein respondents, Marife S. Nio, went to the bank to ask for the board resolution,
she was merely told to bring the receipts. The bank failed to categorically declare that Tena had no authority. This
Court stresses the following:
". . . Corporate transactions would speedily come to a standstill were every person dealing with a corporation held
duty-bound to disbelieve every act of its responsible officers, no matter how regular they should appear on their face.
This Court has observed in Ramirez vs. Orientalist Co., 38 Phil. 634, 654-655, that
In passing upon the liability of a corporation in cases of this kind it is always well to keep in mind the situation as it
presents itself to the third party with whom the contract is made. Naturally he can have little or no information as to
what occurs in corporate meetings; and he must necessarily rely upon the external manifestation of corporate
consent. The integrity of commercial transactions can only be maintained by holding the corporation strictly to the
liability fixed upon it by its agents in accordance with law; and we would be sorry to announce a doctrine which would
permit the property of man in the city of Paris to be whisked out of his hands and carried into a remote quarter of the
earth without recourse against the corporation whose name and authority had been used in the manner disclosed in
this case. As already observed, it is familiar doctrine that if a corporation knowingly permits one of its officers, or any
other agent, to do acts within the scope of an apparent authority, and thus holds him out to the public as possessing
power to do those acts, the corporation will, as against any one who has in good faith dealt with the corporation
through such agent, be estopped from denying his authority; and where it is said 'if the corporation permits this
means the same as 'if the thing is permitted by the directing power of the corporation."12
In this light, the bank is estopped from questioning the authority of the bank manager to enter into the contract of
sale. If a corporation knowingly permits one of its officers or any other agent to act within the scope of an apparent
authority, it holds the agent out to the public as possessing the power to do those acts; thus, the corporation will, as
against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent's
authority.13

Unquestionably, petitioner has authorized Tena to enter into the Deed of Sale. Accordingly, it has a clear legal duty to
issue the board resolution sought by respondents. Having authorized her to sell the property, it behooves the bank to
confirm the Deed of Sale so that the buyers may enjoy its full use.
There is, however, a striking and very material difference between the aforecited case and the one at bar. For, unlike
in Milaor where it was the branch manager who approved the sale for and in behalf of the bank, here, there is
absolutely no approval whatsoever by any responsible bank officer of the petitioner. True it is that the signature of
branch manager Lagrito appears below the typewritten word "NOTED" at the bottom of respondents offer to
purchase dated May 25, 1988. 14 By no stretch of imagination, however, can the mere "NOTING" of such an offer be
taken to mean an approval of the supposed sale. Quite the contrary, the very circumstance that the offer to purchase
was merely "NOTED" by the branch manager and not "approved", is a clear indication that there is no perfected
contract of sale to speak of.
The representation of Roy Palasan, a mere clerk at petitioners Cagayan de Oro City branch, that the manager had
already approved the sale, even if true, cannot bind the petitioner bank to a contract of sale with respondents, it
being obvious to us that such a clerk is not among the bank officers upon whom such putative authority may be
reposed by a third party. There is, thus, no legal basis to bind petitioner into any valid contract of sale with the
respondents, given the absolute absence of any approval or consent by any responsible officer of petitioner bank.
And because there is here no perfected contract of sale between the parties, respondents action for breach of
contract and/or specific performance is simply without any leg to stand on and must therefore fall.
We also disagree with the Court of Appeals that the encashment of the check representing the P14,000.00 deposit in
relation to respondents offer to purchase is an indication or proof of perfection of a contract of sale. It must be noted
that the very documents15 signed by the respondents as their offer to purchase unmistakably state that the deposit
shall only form part of the purchase price if the offer to purchase is approved, "it being expressly understood xxx that
the same (i.e., the deposit) does not bind DBP to the offer until my/our receipt of its approval by higher authorities of
the bank". It may be so that the official receipt issued therefor by the petitioner termed such deposit as a
"downpayment". But the very written offers of the respondents unequivocably and invariably speak of such amount
as "deposit", "above deposit", "we are depositing the amount of P14,000.00". Since there never was any approval or
acceptance by the higher authorities of petitioner of respondents offer to purchase, the encashment of the check can
not in any way represent partial payment of any purchase price.
With the hard reality that no approval or acceptance of respondents offer to buy exists in this case, any independent
transaction between petitioner and another third-party, like the one involving respondents sister, would be irrelevant
and immaterial insofar as respondents own transaction with the petitioner is concerned. Besides, apart from saying
that respondents sister "made a similar offer to the [petitioner] under the same terms and conditions as to that of the
[respondents], and was likewise assured by the same bank personnel that her offer xxx was already approved",
which eventually resulted into a "consummated sale between (the sister) and DBP", the Court of Appeals made no
finding that the sisters transaction with the petitioner was made exactly under the same circumstances obtaining in
the present case. In any event, petitioners favorable action on the offer of respondents sister is hardly, if ever,
relevant and determinative in the resolution of the legal issue presented in this case.
In sum, we cannot, in law, sustain the herein challenged issuances of the Court of Appeals.
WHEREFORE, the instant petition is GRANTED and the assailed decision and resolution of the Court of Appeals
REVERSED and SET ASIDE. The complaint filed in this case is accordingly DISMISSED.
No pronouncement as to costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 160273

January 18, 2008

CEBU COUNTRY CLUB, INC., SABINO R. DAPAT, RUBEN D. ALMENDRAS, JULIUS Z. NERI,
DOUGLAS L. LUYM, CESAR T. LIBI, RAMONTITO* E. GARCIA and JOSE B. SALA, petitioners,
vs.
RICARDO F. ELIZAGAQUE, respondent.
DECISION
SANDOVAL-GUTIERREZ, J.:
For our resolution is the instant Petition for Review on Certiorari under Rule 45 of the 1997 Rules of
Civil Procedure, as amended, assailing the Decision1 dated January 31, 2003 and Resolution dated
October 2, 2003 of the Court of Appeals in CA-G.R. CV No. 71506.
The facts are:
Cebu Country Club, Inc. (CCCI), petitioner, is a domestic corporation operating as a non-profit and nonstock private membership club, having its principal place of business in Banilad, Cebu City. Petitioners
herein are members of its Board of Directors.
Sometime in 1987, San Miguel Corporation, a special company proprietary member of CCCI,
designated respondent Ricardo F. Elizagaque, its Senior Vice President and Operations Manager for
the Visayas and Mindanao, as a special non-proprietary member. The designation was thereafter
approved by the CCCIs Board of Directors.
In 1996, respondent filed with CCCI an application for proprietary membership. The application was
indorsed by CCCIs two (2) proprietary members, namely: Edmundo T. Misa and Silvano Ludo.
As the price of a proprietary share was around the P5 million range, Benito Unchuan, then president of
CCCI, offered to sell respondent a share for only P3.5 million. Respondent, however, purchased the
share of a certain Dr. Butalid for only P3 million. Consequently, on September 6, 1996, CCCI issued
Proprietary Ownership Certificate No. 1446 to respondent.

1. Ordering defendants to pay, jointly and severally, plaintiff the amount of P2,340,000.00 as actual or
compensatory damages.
2. Ordering defendants to pay, jointly and severally, plaintiff the amount of P5,000,000.00 as moral
damages.
3. Ordering defendants to pay, jointly and severally, plaintiff the amount of P1,000,000.00 as exemplary
damages.
4. Ordering defendants to pay, jointly and severally, plaintiff the amount of P1,000,000.00 as and by way
of attorneys fees and P80,000.00 as litigation expenses.
5. Costs of suit.
Counterclaims are hereby DISMISSED for lack of merit.
SO ORDERED.2
On appeal by petitioners, the Court of Appeals, in its Decision dated January 31, 2003, affirmed the trial
courts Decision with modification, thus:
WHEREFORE, premises considered, the assailed Decision dated February 14, 2001 of the Regional
Trial Court, Branch 71, Pasig City in Civil Case No. 67190 is hereby AFFIRMED with MODIFICATION
as follows:
1. Ordering defendants-appellants to pay, jointly and severally, plaintiff-appellee the amount
ofP2,000,000.00 as moral damages;
2. Ordering defendants-appellants to pay, jointly and severally, plaintiff-appellee the amount
ofP1,000,000.00 as exemplary damages;
3. Ordering defendants-appellants to pay, jointly and severally, plaintiff-appellee the mount
of P500,000.00 as attorneys fees and P50,000.00 as litigation expenses; and

During the meetings dated April 4, 1997 and May 30, 1997 of the CCCI Board of Directors, action on
respondents application for proprietary membership was deferred. In another Board meeting held on
July 30, 1997, respondents application was voted upon. Subsequently, or on August 1, 1997,
respondent received a letter from Julius Z. Neri, CCCIs corporate secretary, informing him that the
Board disapproved his application for proprietary membership.

4. Costs of the suit.

On August 6, 1997, Edmundo T. Misa, on behalf of respondent, wrote CCCI a letter of reconsideration.
As CCCI did not answer, respondent, on October 7, 1997, wrote another letter of reconsideration. Still,
CCCI kept silent. On November 5, 1997, respondent again sent CCCI a letter inquiring whether any
member of the Board objected to his application. Again, CCCI did not reply.

On March 3, 2003, petitioners filed a motion for reconsideration and motion for leave to set the motion
for oral arguments. In its Resolution4 dated October 2, 2003, the appellate court denied the motions for
lack of merit.

Consequently, on December 23, 1998, respondent filed with the Regional Trial Court (RTC), Branch 71,
Pasig City a complaint for damages against petitioners, docketed as Civil Case No. 67190.
After trial, the RTC rendered its Decision dated February 14, 2001 in favor of respondent, thus:
WHEREFORE, judgment is hereby rendered in favor of plaintiff:

The counterclaims are DISMISSED for lack of merit.

SO ORDERED.3

Hence, the present petition.

The issue for our resolution is whether in disapproving respondents application for proprietary
membership with CCCI, petitioners are liable to respondent for damages, and if so, whether their liability
is joint and several.

Petitioners contend, inter alia, that the Court of Appeals erred in awarding exorbitant damages to
respondent despite the lack of evidence that they acted in bad faith in disapproving the latters
application; and in disregarding their defense of damnum absque injuria.
For his part, respondent maintains that the petition lacks merit, hence, should be denied.
CCCIs Articles of Incorporation provide in part:
SEVENTH: That this is a non-stock corporation and membership therein as well as the right of
participation in its assets shall be limited to qualified persons who are duly accredited owners of
Proprietary Ownership Certificates issued by the corporation in accordance with its By-Laws.
Corollary, Section 3, Article 1 of CCCIs Amended By-Laws provides:
SECTION 3. HOW MEMBERS ARE ELECTED The procedure for the admission of new members of
the Club shall be as follows:
(a) Any proprietary member, seconded by another voting proprietary member, shall submit to the
Secretary a written proposal for the admission of a candidate to the "Eligible-for-Membership List";
(b) Such proposal shall be posted by the Secretary for a period of thirty (30) days on the Club bulletin
board during which time any member may interpose objections to the admission of the applicant by
communicating the same to the Board of Directors;
(c) After the expiration of the aforesaid thirty (30) days, if no objections have been filed or if there are,
the Board considers the objections unmeritorious, the candidate shall be qualified for inclusion in the
"Eligible-for-Membership List";
(d) Once included in the "Eligible-for-Membership List" and after the candidate shall have acquired in
his name a valid POC duly recorded in the books of the corporation as his own, he shall become a
Proprietary Member, upon a non-refundable admission fee of P1,000.00, provided that admission fees
will only be collected once from any person.
On March 1, 1978, Section 3(c) was amended to read as follows:
(c) After the expiration of the aforesaid thirty (30) days, the Board may, by unanimous vote of all
directors present at a regular or special meeting, approve the inclusion of the candidate in the
"Eligible-for-Membership List".
As shown by the records, the Board adopted a secret balloting known as the "black ball system" of
voting wherein each member will drop a ball in the ballot box. A white ball represents conformity to the
admission of an applicant, while a black ball means disapproval. Pursuant to Section 3(c), as amended,
cited above, a unanimous vote of the directors is required. When respondents application for
proprietary membership was voted upon during the Board meeting on July 30, 1997, the ballot box
contained one (1) black ball. Thus, for lack of unanimity, his application was disapproved.
Obviously, the CCCI Board of Directors, under its Articles of Incorporation, has the right to approve or
disapprove an application for proprietary membership. But such right should not be exercised arbitrarily.
Articles 19 and 21 of the Civil Code on the Chapter on Human Relations provide restrictions, thus:
Article 19. Every person must, in the exercise of his rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and good faith.

Article 21. Any person who willfully causes loss or injury to another in a manner that is contrary to
morals, good customs or public policy shall compensate the latter for the damage.
In GF Equity, Inc. v. Valenzona,5 we expounded Article 19 and correlated it with Article 21, thus:
This article, known to contain what is commonly referred to as the principle of abuse of rights, sets
certain standards which must be observed not only in the exercise of one's rights but also in the
performance of one's duties. These standards are the following: to act with justice; to give everyone his
due; and to observe honesty and good faith. The law, therefore, recognizes a primordial limitation on all
rights; that in their exercise, the norms of human conduct set forth in Article 19 must be observed. A
right, though by itself legal because recognized or granted by law as such, may nevertheless
become the source of some illegality. When a right is exercised in a manner which does not
conform with the norms enshrined in Article 19 and results in damage to another, a legal wrong
is thereby committed for which the wrongdoer must be held responsible. But while Article 19 lays
down a rule of conduct for the government of human relations and for the maintenance of social order, it
does not provide a remedy for its violation. Generally, an action for damages under either Article 20 or
Article 21 would be proper. (Emphasis in the original)
In rejecting respondents application for proprietary membership, we find that petitioners violated the
rules governing human relations, the basic principles to be observed for the rightful relationship
between human beings and for the stability of social order. The trial court and the Court of Appeals aptly
held that petitioners committed fraud and evident bad faith in disapproving respondents applications.
This is contrary to morals, good custom or public policy. Hence, petitioners are liable for damages
pursuant to Article 19 in relation to Article 21 of the same Code.
It bears stressing that the amendment to Section 3(c) of CCCIs Amended By-Laws requiring the
unanimous vote of the directors present at a special or regular meeting was not printed on the
application form respondent filled and submitted to CCCI. What was printed thereon was the original
provision of Section 3(c) which was silent on the required number of votes needed for admission of an
applicant as a proprietary member.
Petitioners explained that the amendment was not printed on the application form due to economic
reasons. We find this excuse flimsy and unconvincing. Such amendment, aside from being extremely
significant, was introduced way back in 1978 or almost twenty (20) years before respondent filed his
application. We cannot fathom why such a prestigious and exclusive golf country club, like the CCCI,
whose members are all affluent, did not have enough money to cause the printing of an updated
application form.
It is thus clear that respondent was left groping in the dark wondering why his application was
disapproved. He was not even informed that a unanimous vote of the Board members was required.
When he sent a letter for reconsideration and an inquiry whether there was an objection to his
application, petitioners apparently ignored him. Certainly, respondent did not deserve this kind of
treatment. Having been designated by San Miguel Corporation as a special non-proprietary member of
CCCI, he should have been treated by petitioners with courtesy and civility. At the very least, they
should have informed him why his application was disapproved.
The exercise of a right, though legal by itself, must nonetheless be in accordance with the proper norm.
When the right is exercised arbitrarily, unjustly or excessively and results in damage to another, a legal
wrong is committed for which the wrongdoer must be held responsible. 6 It bears reiterating that the trial
court and the Court of Appeals held that petitioners disapproval of respondents application is
characterized by bad faith.

As to petitioners reliance on the principle of damnum absque injuria or damage without injury, suffice it
to state that the same is misplaced. In Amonoy v. Gutierrez,7 we held that this principle does not apply
when there is an abuse of a persons right, as in this case.
As to the appellate courts award to respondent of moral damages, we find the same in order. Under
Article 2219 of the New Civil Code, moral damages may be recovered, among others, in acts and
actions referred to in Article 21. We believe respondents testimony that he suffered mental anguish,
social humiliation and wounded feelings as a result of the arbitrary denial of his application. However,
the amount of P2,000,000.00 is excessive. While there is no hard-and-fast rule in determining what
would be a fair and reasonable amount of moral damages, the same should not be palpably and
scandalously excessive. Moral damages are not intended to impose a penalty to the wrongdoer, neither
to enrich the claimant at the expense of the defendant. 8 Taking into consideration the attending
circumstances here, we hold that an award to respondent of P50,000.00, instead of P2,000,000.00, as
moral damages is reasonable.
Anent the award of exemplary damages, Article 2229 allows it by way of example or correction for the
public good. Nonetheless, since exemplary damages are imposed not to enrich one party or impoverish
another but to serve as a deterrent against or as a negative incentive to curb socially deleterious
actions,9 we reduce the amount from P1,000,000.00 to P25,000.00 only.
On the matter of attorneys fees and litigation expenses, Article 2208 of the same Code provides,
among others, that attorneys fees and expenses of litigation may be recovered in cases when
exemplary damages are awarded and where the court deems it just and equitable that attorneys fees
and expenses of litigation should be recovered, as in this case. In any event, however, such award must
be reasonable, just and equitable. Thus, we reduce the amount of attorneys fees (P500,000.00) and
litigation expenses (P50,000.00) to P50,000.00 andP25,000.00, respectively.
Lastly, petitioners argument that they could not be held jointly and severally liable for damages because
only one (1) voted for the disapproval of respondents application lacks merit.
Section 31 of the Corporation Code provides:
SEC. 31. Liability of directors, trustees or officers. Directors or trustees who willfully and knowingly
vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence
or bad faithin 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. (Emphasis ours)
WHEREFORE, we DENY the petition. The challenged Decision and Resolution of the Court of Appeals
in CA-G.R. CV No. 71506 are AFFIRMED with modification in the sense that (a) the award of moral
damages is reduced fromP2,000,000.00 to P50,000.00; (b) the award of exemplary damages is
reduced from P1,000,000.00 toP25,000.00; and (c) the award of attorneys fees and litigation expenses
is reduced from P500,000.00 andP50,000.00 to P50,000.00 and P25,000.00, respectively.
Costs against petitioners.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 157802

October 13, 2010

MATLING INDUSTRIAL AND COMMERCIAL CORPORATION, RICHARD K. SPENCER, CATHERINE

SPENCER, AND ALEX MANCILLA, Petitioners,
vs.
RICARDO R. COROS, Respondent.

The respondent appealed to the NLRC,7 urging that:

I

DECISION

THE HONORABLE LABOR ARBITER COMMITTED GRAVE ABUSE OF DISCRETION GRANTING

APPELLEES MOTION TO DISMISS WITHOUT GIVING THE APPELLANT AN OPPORTUNITY TO
FILE HIS OPPOSITION THERETO THEREBY VIOLATING THE BASIC PRINCIPLE OF DUE
PROCESS.

BERSAMIN, J.:

II

This case reprises the jurisdictional conundrum of whether a complaint for illegal dismissal is cognizable
by the Labor Arbiter (LA) or by the Regional Trial Court (RTC). The determination of whether the
dismissed officer was a regular employee or a corporate officer unravels the conundrum. In the case of
the regular employee, the LA has jurisdiction; otherwise, the RTC exercises the legal authority to
adjudicate.

THE HONORABLE LABOR ARBITER COMMITTED AN ERROR IN DISMISSING THE CASE FOR
LACK OF JURISDICTION.

In this appeal via petition for review on certiorari, the petitioners challenge the decision dated
September 13, 20021 and the resolution dated April 2, 2003, 2 both promulgated in C.A.-G.R. SP No.
65714 entitled Matling Industrial and Commercial Corporation, et al. v. Ricardo R. Coros and National
Labor Relations Commission, whereby by the Court of Appeals (CA) sustained the ruling of the National
Labor Relations Commission (NLRC) to the effect that the LA had jurisdiction because the respondent
was not a corporate officer of petitioner Matling Industrial and Commercial Corporation (Matling).
Antecedents
After his dismissal by Matling as its Vice President for Finance and Administration, the respondent filed
on August 10, 2000 a complaint for illegal suspension and illegal dismissal against Matling and some of
its corporate officers (petitioners) in the NLRC, Sub-Regional Arbitration Branch XII, Iligan City.3

On March 13, 2001, the NLRC set aside the dismissal, concluding that the respondents complaint for
illegal dismissal was properly cognizable by the LA, not by the SEC, because he was not a corporate
officer by virtue of his position in Matling, albeit high ranking and managerial, not being among the
positions listed in Matlings Constitution and By-Laws.8 The NLRC disposed thuswise:
WHEREFORE, the Order appealed from is SET ASIDE. A new one is entered declaring and holding that
the case at bench does not involve any intracorporate matter. Hence, jurisdiction to hear and act on said
case is vested with the Labor Arbiter, not the SEC, considering that the position of Vice-President for
Finance and Administration being held by complainant-appellant is not listed as among respondent's
corporate officers.
Accordingly, let the records of this case be REMANDED to the Arbitration Branch of origin in order that
the Labor Arbiter below could act on the case at bench, hear both parties, receive their respective
evidence and position papers fully observing the requirements of due process, and resolve the same
with reasonable dispatch.

The petitioners moved to dismiss the complaint, 4 raising the ground, among others, that the complaint
pertained to the jurisdiction of the Securities and Exchange Commission (SEC) due to the controversy
being intra-corporate inasmuch as the respondent was a member of Matlings Board of Directors aside
from being its Vice-President for Finance and Administration prior to his termination.

SO ORDERED.

The respondent opposed the petitioners motion to dismiss,5 insisting that his status as a member of
Matlings Board of Directors was doubtful, considering that he had not been formally elected as such;
that he did not own a single share of stock in Matling, considering that he had been made to sign in
blank an undated indorsement of the certificate of stock he had been given in 1992; that Matling had
taken back and retained the certificate of stock in its custody; and that even assuming that he had been
a Director of Matling, he had been removed as the Vice President for Finance and Administration, not
as a Director, a fact that the notice of his termination dated April 10, 2000 showed.

The petitioners later submitted to the NLRC in support of the motion for reconsideration the certified
machine copies of Matlings Amended Articles of Incorporation and By Laws to prove that the President
of Matling was thereby granted "full power to create new offices and appoint the officers thereto, and the
minutes of special meeting held on June 7, 1999 by Matlings Board of Directors to prove that the
respondent was, indeed, a Member of the Board of Directors.10

On October 16, 2000, the LA granted the petitioners motion to dismiss, 6 ruling that the respondent was
a corporate officer because he was occupying the position of Vice President for Finance and
Administration and at the same time was a Member of the Board of Directors of Matling; and that,
consequently, his removal was a corporate act of Matling and the controversy resulting from such
removal was under the jurisdiction of the SEC, pursuant to Section 5, paragraph (c) of Presidential
Decree No. 902.

Ruling of the CA

Ruling of the NLRC

The petitioners sought reconsideration,9 reiterating that the respondent, being a member of the Board of
Directors, was a corporate officer whose removal was not within the LAs jurisdiction.

Nonetheless, on April 30, 2001, the NLRC denied the petitioners motion for reconsideration.11

The petitioners elevated the issue to the CA by petition for certiorari, docketed as C.A.-G.R. No. SP
65714, contending that the NLRC committed grave abuse of discretion amounting to lack of jurisdiction
in reversing the correct decision of the LA.
In its assailed decision promulgated on September 13, 2002, 12 the CA dismissed the petition for
certiorari, explaining:

For a position to be considered as a corporate office, or, for that matter, for one to be considered as a
corporate officer, the position must, if not listed in the by-laws, have been created by the corporation's
board of directors, and the occupant thereof appointed or elected by the same board of directors or
stockholders. This is the implication of the ruling in Tabang v. National Labor Relations Commission,
which reads:
"The president, vice president, secretary and treasurer are commonly regarded as the principal or
executive officers of a corporation, and modern corporation statutes usually designate them as the
officers of the corporation. However, other offices are sometimes created by the charter or by-laws of a
corporation, or the board of directors may be empowered under the by-laws of a corporation to create
additional offices as may be necessary.

As a rule, the illegal dismissal of an officer or other employee of a private employer is properly
cognizable by the LA. This is pursuant to Article 217 (a) 2 of the Labor Code, as amended, which
provides as follows:
Article 217. Jurisdiction of the Labor Arbiters and the Commission. - (a) Except as otherwise provided
under this Code, the Labor Arbiters shall have original and exclusive jurisdiction to hear and decide,
within thirty (30) calendar days after the submission of the case by the parties for decision without
extension, even in the absence of stenographic notes, the following cases involving all workers, whether
agricultural or non-agricultural:
1. Unfair labor practice cases;

It has been held that an 'office' is created by the charter of the corporation and the officer is elected by
the directors or stockholders. On the other hand, an 'employee' usually occupies no office and generally
is employed not by action of the directors or stockholders but by the managing officer of the corporation
who also determines the compensation to be paid to such employee."

2. Termination disputes;

This ruling was reiterated in the subsequent cases of Ongkingco v. National Labor Relations
Commission and De Rossi v. National Labor Relations Commission.

4. Claims for actual, moral, exemplary and other forms of damages arising from the employer-employee
relations;

The position of vice-president for administration and finance, which Coros used to hold in the
corporation, was not created by the corporations board of directors but only by its president or
executive vice-president pursuant to the by-laws of the corporation. Moreover, Coros appointment to
said position was not made through any act of the board of directors or stockholders of the corporation.
Consequently, the position to which Coros was appointed and later on removed from, is not a corporate
office despite its nomenclature, but an ordinary office in the corporation.

5. Cases arising from any violation of Article 264 of this Code, including questions involving the legality
of strikes and lockouts; and

Coros alleged illegal dismissal therefrom is, therefore, within the jurisdiction of the labor arbiter.
WHEREFORE, the petition for certiorari is hereby DISMISSED.
SO ORDERED.
The CA denied the petitioners motion for reconsideration on April 2, 2003.13
Issue
Thus, the petitioners are now before the Court for a review on certiorari, positing that the respondent
was a stockholder/member of the Matlings Board of Directors as well as its Vice President for Finance
and Administration; and that the CA consequently erred in holding that the LA had jurisdiction.
The decisive issue is whether the respondent was a corporate officer of Matling or not. The resolution of
the issue determines whether the LA or the RTC had jurisdiction over his complaint for illegal dismissal.
Ruling
The appeal fails.
I
The Law on Jurisdiction in Dismissal Cases

3. If accompanied with a claim for reinstatement, those cases that workers may file involving wages,
rates of pay, hours of work and other terms and conditions of employment;

6. Except claims for Employees Compensation, Social Security, Medicare and maternity benefits, all
other claims arising from employer-employee relations, including those of persons in domestic or
household service, involving an amount exceeding five thousand pesos (P5,000.00) regardless of
whether accompanied with a claim for reinstatement.
(b) The Commission shall have exclusive appellate jurisdiction over all cases decided by Labor Arbiters.
(c) Cases arising from the interpretation or implementation of collective bargaining agreements and
those arising from the interpretation or enforcement of company personnel policies shall be disposed of
by the Labor Arbiter by referring the same to the grievance machinery and voluntary arbitration as may
be provided in said agreements. (As amended by Section 9, Republic Act No. 6715, March 21, 1989).
Where the complaint for illegal dismissal concerns a corporate officer, however, the controversy falls
under the jurisdiction of the Securities and Exchange Commission (SEC), because the controversy
arises out of intra-corporate or partnership relations between and among stockholders, members, or
associates, or between any or all of them and the corporation, partnership, or association of which they
are stockholders, members, or associates, respectively; and between such corporation, partnership, or
association and the State insofar as the controversy concerns their individual franchise or right to exist
as such entity; or because the controversy involves the election or appointment of a director, trustee,
officer, or manager of such corporation, partnership, or association.14 Such controversy, among others,
is known as an intra-corporate dispute.
Effective on August 8, 2000, upon the passage of Republic Act No. 8799,15 otherwise known as The
Securities Regulation Code, the SECs jurisdiction over all intra-corporate disputes was transferred to
the RTC, pursuant to Section 5.2 of RA No. 8799, to wit:
5.2. The Commissions jurisdiction over all cases enumerated under Section 5 of Presidential Decree
No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial
Court: Provided, that the Supreme Court in the exercise of its authority may designate the Regional Trial

Court branches that shall exercise jurisdiction over these cases. The Commission shall retain
jurisdiction over pending cases involving intra-corporate disputes submitted for final resolution which
should be resolved within one (1) year from the enactment of this Code. The Commission shall retain
jurisdiction over pending suspension of payments/rehabilitation cases filed as of 30 June 2000 until
finally disposed.
Considering that the respondents complaint for illegal dismissal was commenced on August 10, 2000, it
might come under the coverage of Section 5.2 of RA No. 8799, supra, should it turn out that the
respondent was a corporate, not a regular, officer of Matling.
II
Was
the
Respondents
Position
for Administration and Finance a Corporate Office?

of

Vice

President

We must first resolve whether or not the respondents position as Vice President for Finance and
Administration was a corporate office. If it was, his dismissal by the Board of Directors rendered the
matter an intra-corporate dispute cognizable by the RTC pursuant to RA No. 8799.
The petitioners contend that the position of Vice President for Finance and Administration was a
corporate office, having been created by Matlings President pursuant to By-Law No. V, as
amended,16 to wit:
BY
Officers

LAW

NO.

The President shall be the executive head of the corporation; shall preside over the meetings of the
stockholders and directors; shall countersign all certificates, contracts and other instruments of the
corporation as authorized by the Board of Directors; shall have full power to hire and discharge any or
all employees of the corporation; shall have full power to create new offices and to appoint the officers
thereto as he may deem proper and necessary in the operations of the corporation and as the progress
of the business and welfare of the corporation may demand; shall make reports to the directors and
stockholders and perform all such other duties and functions as are incident to his office or are properly
required of him by the Board of Directors. In case of the absence or disability of the President, the
Executive Vice President shall have the power to exercise his functions.
The petitioners argue that the power to create corporate offices and to appoint the individuals to
assume the offices was delegated by Matlings Board of Directors to its President through By-Law No.
V, as amended; and that any office the President created, like the position of the respondent, was as
valid and effective a creation as that made by the Board of Directors, making the office a corporate
office. In justification, they cite Tabang v. National Labor Relations Commission,17 which held that "other
offices are sometimes created by the charter or by-laws of a corporation, or the board of directors may
be empowered under the by-laws of a corporation to create additional officers as may be necessary."
The respondent counters that Matlings By-Laws did not list his position as Vice President for Finance
and Administration as one of the corporate offices; that Matlings By-Law No. III listed only four
corporate officers, namely: President, Executive Vice President, Secretary, and Treasurer; 18 that the
corporate offices contemplated in the phrase "and such other officers as may be provided for in the bylaws" found in Section 25 of the Corporation Code should be clearly and expressly stated in the ByLaws; that the fact that Matlings By-Law No. III dealt with Directors & Officers while its By-Law No. V
dealt with Officers proved that there was a differentiation between the officers mentioned in the two
provisions, with those classified under By-Law No. V being ordinary or non-corporate officers; and that

the officer, to be considered as a corporate officer, must be elected by the Board of Directors or the
stockholders, for the President could only appoint an employee to a position pursuant to By-Law No. V.
We agree with respondent.
Section 25 of the Corporation Code provides:
Section 25. Corporate officers, quorum.--Immediately after their election, the directors of a corporation
must formally organize by the election of a president, who shall be a director, a treasurer who may or
may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such
other officers as may be provided for in the by-laws. Any two (2) or more positions may be held
concurrently by the same person, except that no one shall act as president and secretary or as
president and treasurer at the same time.
The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and
the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater
majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall
constitute a quorum for the transaction of corporate business, and every decision of at least a majority
of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate
act, except for the election of officers which shall require the vote of a majority of all the members of the
board.
Directors or trustees cannot attend or vote by proxy at board meetings.
Conformably with Section 25, a position must be expressly mentioned in the By-Laws in order to be
considered as a corporate office. Thus, the creation of an office pursuant to or under a By-Law enabling
provision is not enough to make a position a corporate office. Guerrea v. Lezama,19 the first ruling on the
matter, held that the only officers of a corporation were those given that character either by the
Corporation Code or by the By-Laws; the rest of the corporate officers could be considered only as
employees or subordinate officials. Thus, it was held inEasycall Communications Phils., Inc. v. King:20
An "office" is created by the charter of the corporation and the officer is elected by the directors or
stockholders. On the other hand, an employee occupies no office and generally is employed not by the
action of the directors or stockholders but by the managing officer of the corporation who also
determines the compensation to be paid to such employee.
In this case, respondent was appointed vice president for nationwide expansion by Malonzo,
petitioner's general manager, not by the board of directors of petitioner. It was also Malonzo who
determined the compensation package of respondent. Thus, respondent was an employee, not a
"corporate officer." The CA was therefore correct in ruling that jurisdiction over the case was properly
with the NLRC, not the SEC (now the RTC).
This interpretation is the correct application of Section 25 of the Corporation Code, which plainly states
that the corporate officers are the President, Secretary, Treasurer and such other officers as may be
provided for in the By-Laws. Accordingly, the corporate officers in the context of PD No. 902-A are
exclusively those who are given that character either by the Corporation Code or by the corporations
By-Laws.
A different interpretation can easily leave the way open for the Board of Directors to circumvent the
constitutionally guaranteed security of tenure of the employee by the expedient inclusion in the By-Laws
of an enabling clause on the creation of just any corporate officer position.

It is relevant to state in this connection that the SEC, the primary agency administering the Corporation
Code, adopted a similar interpretation of Section 25 of the Corporation Code in its Opinion dated
November 25, 1993,21to wit:
Thus, pursuant to the above provision (Section 25 of the Corporation Code), whoever are the corporate
officers enumerated in the by-laws are the exclusive Officers of the corporation and the Board has no
power to create other Offices without amending first the corporate By-laws. However, the Board may
create appointive positions other than the positions of corporate Officers, but the persons
occupying such positions are not considered as corporate officers within the meaning of
Section 25 of the Corporation Code and are not empowered to exercise the functions of the corporate
Officers, except those functions lawfully delegated to them. Their functions and duties are to be
determined by the Board of Directors/Trustees.
Moreover, the Board of Directors of Matling could not validly delegate the power to create a corporate
office to the President, in light of Section 25 of the Corporation Code requiring the Board of Directors
itself to elect the corporate officers. Verily, the power to elect the corporate officers was a discretionary
power that the law exclusively vested in the Board of Directors, and could not be delegated to
subordinate officers or agents.22 The office of Vice President for Finance and Administration created by
Matlings President pursuant to By Law No. V was an ordinary, not a corporate, office.
To emphasize, the power to create new offices and the power to appoint the officers to occupy them
vested by By-Law No. V merely allowed Matlings President to create non-corporate offices to be
occupied by ordinary employees of Matling. Such powers were incidental to the Presidents duties as
the executive head of Matling to assist him in the daily operations of the business.
The petitioners reliance on Tabang, supra, is misplaced. The statement in Tabang, to the effect that
offices not expressly mentioned in the By-Laws but were created pursuant to a By-Law enabling
provision were also considered corporate offices, was plainly obiter dictum due to the position subject of
the controversy being mentioned in the By-Laws. Thus, the Court held therein that the position was a
corporate office, and that the determination of the rights and liabilities arising from the ouster from the
position was an intra-corporate controversy within the SECs jurisdiction.
In Nacpil v. Intercontinental Broadcasting Corporation,23 which may be the more appropriate ruling, the
position subject of the controversy was not expressly mentioned in the By-Laws, but was created
pursuant to a By-Law enabling provision authorizing the Board of Directors to create other offices that
the Board of Directors might see fit to create. The Court held there that the position was a corporate
office, relying on the obiter dictum in Tabang.
Considering that the observations earlier made herein show that the soundness of their dicta is not
unassailable,Tabang and Nacpil should no longer be controlling.
III
Did
Respondents
Stockholder
Automatically
into an Intra-Corporate Dispute?

Status

as
Convert

Director
his

and
Dismissal

Yet, the petitioners insist that because the respondent was a Director/stockholder of Matling, and relying
onPaguio v. National Labor Relations Commission24 and Ongkingko v. National Labor Relations
Commission,25 the NLRC had no jurisdiction over his complaint, considering that any case for illegal
dismissal brought by a stockholder/officer against the corporation was an intra-corporate matter that
must fall under the jurisdiction of the SEC conformably with the context of PD No. 902-A.

The petitioners insistence is bereft of basis.

To begin with, the reliance on Paguio and Ongkingko is misplaced. In both rulings, the complainants
were undeniably corporate officers due to their positions being expressly mentioned in the By-Laws,
aside from the fact that both of them had been duly elected by the respective Boards of Directors. But
the herein respondents position of Vice President for Finance and Administration was not expressly
mentioned in the By-Laws; neither was the position of Vice President for Finance and Administration
created by Matlings Board of Directors. Lastly, the President, not the Board of Directors, appointed him.
True it is that the Court pronounced in Tabang as follows:
Also, an intra-corporate controversy is one which arises between a stockholder and the corporation.
There is no distinction, qualification or any exemption whatsoever. The provision is broad and covers all
kinds of controversies between stockholders and corporations.26
However, the Tabang pronouncement is not controlling because it is too sweeping and does not accord
with reason, justice, and fair play. In order to determine whether a dispute constitutes an intra-corporate
controversy or not, the Court considers two elements instead, namely: (a) the status or relationship of
the parties; and (b) the nature of the question that is the subject of their controversy. This was our thrust
in Viray v. Court of Appeals:27
The establishment of any of the relationships mentioned above will not necessarily always confer
jurisdiction over the dispute on the SEC to the exclusion of regular courts. The statement made in one
case that the rule admits of no exceptions or distinctions is not that absolute. The better policy in
determining which body has jurisdiction over a case would be to consider not only the status or
relationship of the parties but also the nature of the question that is the subject of their controversy.
Not every conflict between a corporation and its stockholders involves corporate matters that only the
SEC can resolve in the exercise of its adjudicatory or quasi-judicial powers. If, for example, a person
leases an apartment owned by a corporation of which he is a stockholder, there should be no question
that a complaint for his ejectment for non-payment of rentals would still come under the jurisdiction of
the regular courts and not of the SEC. By the same token, if one person injures another in a vehicular
accident, the complaint for damages filed by the victim will not come under the jurisdiction of the SEC
simply because of the happenstance that both parties are stockholders of the same corporation. A
contrary interpretation would dissipate the powers of the regular courts and distort the meaning and
intent of PD No. 902-A.
In another case, Mainland Construction Co., Inc. v. Movilla,28 the Court reiterated these determinants
thuswise:
In order that the SEC (now the regular courts) can take cognizance of a case, the controversy must
pertain to any of the following relationships:
a) between the corporation, partnership or association and the public;
b) between the corporation, partnership or association and its stockholders, partners, members or
officers;
c) between the corporation, partnership or association and the State as far as its franchise, permit or
license to operate is concerned; and
d) among the stockholders, partners or associates themselves.

The fact that the parties involved in the controversy are all stockholders or that the parties involved are
the stockholders and the corporation does not necessarily place the dispute within the ambit of the
jurisdiction of SEC. The better policy to be followed in determining jurisdiction over a case should be to
consider concurrent factors such as the status or relationship of the parties or the nature of the question
that is the subject of their controversy. In the absence of any one of these factors, the SEC will not have
jurisdiction. Furthermore, it does not necessarily follow that every conflict between the corporation and
its stockholders would involve such corporate matters as only the SEC can resolve in the exercise of its
adjudicatory or quasi-judicial powers.29

1987 to April 17, 2000 Vice President for Finance and Administration

The criteria for distinguishing between corporate officers who may be ousted from office at will, on one
hand, and ordinary corporate employees who may only be terminated for just cause, on the other hand,
do not depend on the nature of the services performed, but on the manner of creation of the office. In
the respondents case, he was supposedly at once an employee, a stockholder, and a Director of
Matling. The circumstances surrounding his appointment to office must be fully considered to determine
whether the dismissal constituted an intra-corporate controversy or a labor termination dispute. We
must also consider whether his status as Director and stockholder had any relation at all to his
appointment and subsequent dismissal as Vice President for Finance and Administration.

In Prudential Bank and Trust Company v. Reyes,30 a case involving a lady bank manager who had risen
from the ranks but was dismissed, the Court held that her complaint for illegal dismissal was correctly
brought to the NLRC, because she was deemed a regular employee of the bank. The Court observed
thus:

Obviously enough, the respondent was not appointed as Vice President for Finance and Administration
because of his being a stockholder or Director of Matling. He had started working for Matling on
September 8, 1966, and had been employed continuously for 33 years until his termination on April 17,
2000, first as a bookkeeper, and his climb in 1987 to his last position as Vice President for Finance and
Administration had been gradual but steady, as the following sequence indicates:
1966 Bookkeeper
1968 Senior Accountant
1969 Chief Accountant
1972 Office Supervisor
1973 Assistant Treasurer
1978 Special Assistant for Finance
1980 Assistant Comptroller
1983 Finance and Administrative Manager
1985 Asst. Vice President for Finance and Administration

Even though he might have become a stockholder of Matling in 1992, his promotion to the position of
Vice President for Finance and Administration in 1987 was by virtue of the length of quality service he
had rendered as an employee of Matling. His subsequent acquisition of the status of
Director/stockholder had no relation to his promotion. Besides, his status of Director/stockholder was
unaffected by his dismissal from employment as Vice President for Finance and
Administration.1avvphi1

It appears that private respondent was appointed Accounting Clerk by the Bank on July 14, 1963. From
that position she rose to become supervisor. Then in 1982, she was appointed Assistant Vice-President
which she occupied until her illegal dismissal on July 19, 1991. The banks contention that she
merely holds an elective position and that in effect she is not a regular employee is belied by the
nature of her work and her length of service with the Bank. As earlier stated, she rose from the
ranks and has been employed with the Bank since 1963 until the termination of her employment in
1991. As Assistant Vice President of the Foreign Department of the Bank, she is tasked, among others,
to collect checks drawn against overseas banks payable in foreign currency and to ensure the collection
of foreign bills or checks purchased, including the signing of transmittal letters covering the same. It has
been stated that "the primary standard of determining regular employment is the reasonable connection
between the particular activity performed by the employee in relation to the usual trade or business of
the employer. Additionally, "an employee is regular because of the nature of work and the length of
service, not because of the mode or even the reason for hiring them." As Assistant Vice-President of the
Foreign Department of the Bank she performs tasks integral to the operations of the bank and her
length of service with the bank totaling 28 years speaks volumes of her status as a regular employee of
the bank. In fine, as a regular employee, she is entitled to security of tenure; that is, her services may
be terminated only for a just or authorized cause. This being in truth a case of illegal dismissal, it is no
wonder then that the Bank endeavored to the very end to establish loss of trust and confidence and
serious misconduct on the part of private respondent but, as will be discussed later, to no avail.
WHEREFORE, we deny the petition for review on certiorari, and affirm the decision of the Court of
Appeals.
Costs of suit to be paid by the petitioners.
SO ORDERED.