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 by-law is in conflict with the law of the land, or with the charter of the corporation, or is in a legal sense unreasonable and therefore unlawful is a question of law. 10 This rule is subject, however, to the limitation that where the reasonableness of a by-law is a mere matter of judgment, and one upon which reasonable minds must necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment of those who are authorized to make by-laws and who have exercised their authority. 11

Petitioner claims that the amended by-laws are invalid and unreasonable because they were tailored to suppress the minority and prevent them from having representation in the Board", at the same time depriving petitioner of his "vested right" to be voted for and to vote for a person of his choice as director.

Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San Miguel Corporation content that ex. conclusion of a competitor from the Board is legitimate corporate purpose, considering that being a competitor, petitioner cannot devote an unselfish and undivided Loyalty to the corporation; that it is essentially a preventive measure to assure stockholders of San Miguel Corporation of reasonable protective from the unrestrained self-interest of those charged with the promotion of the corporate enterprise; that access to confidential information by a competitor may result either in the promotion of the interest of the competitor at the expense of the San Miguel Corporation, or the promotion of both the interests of petitioner and respondent San Miguel Corporation, which may, therefore, result in a combination or agreement in violation of Article 186 of the Revised Penal Code by destroying free competition to the detriment of the consuming public. It is further argued that there is not vested right of any stockholder under Philippine Law to be voted as director of a corporation. It is alleged that petitioner, as of May 6, 1978, has exercised, personally or thru two corporations owned or controlled by him, control over the following shareholdings in San Miguel Corporation, vis.: (a) John Gokongwei, Jr. — 6,325 shares; (b) Universal Robina Corporation — 738,647 shares; (c) CFC Corporation — 658,313 shares, or a total of 1,403,285 shares. Since the outstanding capital stock of San Miguel Corporation, as of the present date, is represented by 33,139,749 shares with a par value of P10.00, the total shares owned or controlled by petitioner represents 4.2344% of the total outstanding capital stock of San Miguel Corporation. It is also contended that petitioner is the president and substantial stockholder of Universal Robina Corporation and CFC Corporation, both of which are allegedly controlled by petitioner and members of his family. It is also claimed that both the Universal Robina Corporation and the CFC Corporation are engaged in businesses directly and substantially competing with the alleged businesses of San Miguel Corporation, and of corporations in which SMC has substantial investments.

ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S CORPORATIONS AND SAN MIGUEL CORPORATION

According to respondent San Miguel Corporation, the areas of, competition are enumerated in its Board the areas of competition are enumerated in its Board Resolution dated April 28, 1978, thus:

Product Line Estimated Market Share Total1977 SMC Robina-CFC

Table Eggs 0.6% 10.0% 10.6%Layer Pullets 33.0% 24.0% 57.0%

Dressed Chicken 35.0% 14.0% 49.0%Poultry & Hog Feeds 40.0% 12.0% 52.0%Ice Cream 70.0% 13.0% 83.0%Instant Coffee 45.0% 40.0% 85.0% Woven Fabrics 17.5% 9.1% 26.6%

Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC involved product sales of over P400 million or more than 20% of the P2 billion total product sales of SMC. Significantly, the combined market shares of SMC and CFC-Robina in layer pullets dressed chicken, poultry and hog feeds ice cream, instant coffee and woven fabrics would result in a position of such dominance as to affect the prevailing market factors.

It is further asserted that in 1977, the CFC-Robina group was in direct competition on product lines which, for SMC, represented sales amounting to more than ?478 million. In addition, CFC-Robina was directly competing in the sale of coffee with Filipro, a subsidiary of SMC, which product line represented sales for SMC amounting to more than P275 million. The CFC-Robina group (Robitex, excluding Litton Mills recently acquired by petitioner) is purportedly also in direct competition with Ramie Textile, Inc., subsidiary of SMC, in product sales amounting to more than P95 million. The areas of competition between SMC and CFC-Robina in 1977 represented, therefore, for SMC, product sales of more than P849 million.

According to private respondents, at the Annual Stockholders' Meeting of March 18, 1976, 9,894 stockholders, in person or by proxy, owning 23,436,754 shares in SMC, or more than 90% of the total outstanding shares of SMC, rejected petitioner's candidacy for the Board of Directors because they "realized the grave dangers to the corporation in the event a competitor gets a board seat in SMC." On September 18, 1978, the Board of Directors of SMC, by "virtue of powers delegated to it by the stockholders," approved the amendment to ' he by-laws in question. At the meeting of February 10, 1977, these amendments were confirmed and ratified by 5,716 shareholders owning 24,283,945 shares, or more than 80% of the total outstanding shares. Only 12 shareholders, representing 7,005 shares, opposed the confirmation and ratification. At the Annual Stockholders' Meeting of May 10, 1977, 11,349 shareholders, owning 27,257.014 shares, or more than 90% of the outstanding shares, rejected petitioner's candidacy, while 946 stockholders, representing 1,648,801 shares voted for him. On the May 9, 1978 Annual Stockholders' Meeting, 12,480 shareholders, owning more than 30 million shares, or more than 90% of the total outstanding shares. voted against petitioner.

AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS EXPRESSLY CONFERRED BY LAW

Private respondents contend that the disputed amended by laws were adopted by the Board of Directors of San Miguel Corporation a-, a measure of self-defense to protect the corporation from the clear and present danger that the election of a business competitor to the Board may cause upon the corporation and the other stockholders inseparable prejudice. Submitted for resolution, therefore, is the issue — whether or not respondent San Miguel Corporation could, as a measure of self- protection, disqualify a competitor from nomination and election to its Board of Directors.

It is recognized by an authorities that 'every corporation has the inherent power to adopt by-laws 'for its internal government, and to regulate the conduct and prescribe the rights and duties of its members towards itself and among themselves in reference to the management of its affairs. 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 majorityof 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." 24This is based upon the principle that where the director is so employed in the service of a rival company, he cannot serve both, but must betray one or the other. Such an amendment "advances the benefit of the corporation and is good." An exception exists in New Jersey, where the Supreme Court held that the Corporation Law in New Jersey prescribed the only qualification, and therefore the corporation was not empowered to add additional qualifications. 25 This is the exact opposite of the situation in the Philippines because as stated heretofore, section 21 of the Corporation Law expressly provides that a corporation may make by-laws for the qualifications of directors. Thus, it has been held that an officer of a corporation cannot engage in a business in direct competition with that of the corporation where he is a director by utilizing information he has received as such officer, under "the established law that a director or officer of a corporation may not enter into a competing enterprise which cripples or injures the business of the corporation of which he is an officer or director. 26

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

The doctrine of "corporate opportunity" 29 is precisely a recognition by the courts that the fiduciary standards could not be upheld where the fiduciary was acting for two entities with competing interests. This doctrine rests fundamentally on the unfairness, in particular circumstances, of an officer or director taking advantage of an opportunity for his own personal profit when the interest of the corporation justly calls for protection. 30

It is not denied that a member of the Board of Directors of the San Miguel Corporation has access to sensitive and highly confidential information, such as: (a) marketing strategies and pricing structure; (b) budget for expansion and diversification; (c) research and development; and (d) sources of funding, availability of personnel, proposals of mergers or tie-ups with other firms.

It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel Corporation, who is also the officer or owner of a competing corporation, from taking advantage of the information which he acquires as director to promote his individual or corporate interests to the prejudice of San Miguel Corporation and its stockholders, that the questioned amendment of the by-laws was made. Certainly, where two corporations are competitive in a substantial sense, it would seem improbable, if not impossible, for the director, if he were to discharge effectively his duty, to satisfy his loyalty to both corporations and place the performance of his corporation duties above his personal concerns.

Thus, in McKee & Co. v. First National Bank of San Diego, supra the court sustained as valid and reasonable an amendment to the by-laws of a bank, requiring that its directors should not be directors, officers, employees, agents, nominees or attorneys of any other banking corporation, affiliate or subsidiary thereof. Chief Judge Parker, inMcKee, 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 the interlock permits the coordination of policies between nominally independent firms to an extent that competition between them may be completely eliminated. Indeed, if a director, for example, is to be faithful to both corporations, some accommodation must result. Suppose X is a director of both Corporation A and Corporation B. X could hardly vote for a policy by A that would injure B without violating his duty of loyalty to B at the same time he could hardly abstain from voting without depriving A of his best judgment. If the firms really do compete — in the sense of vying for economic advantage at the expense of the other — there can hardly be any reason for an interlock between competitors other than the suppression of competition. 43 (Emphasis supplied.)

According to the Report of the House Judiciary Committee of the U. S. Congress on section 9 of the Clayton Act, it was established that: "By means of the interlocking directorates one man or group of men have been able to dominate and control a great number of corporations ... to the detriment of the small ones dependent upon them and to the injury of the public. 44

Shared information on cost accounting may lead to price fixing. Certainly, shared information on production, orders, shipments, capacity and inventories may lead to control of production for the purpose of controlling prices.

Obviously, if a competitor has access to the pricing policy and cost conditions of the products of San Miguel Corporation, the essence of competition in a free market for the purpose of serving the lowest priced goods to the consuming public would be frustrated, The competitor could so manipulate the prices of his products or vary its marketing strategies by region or by brand in order to get the most out of the consumers. Where the two competing firms control a substantial segment of the market this could lead to collusion and combination in restraint of trade. Reason and experience point to the inevitable conclusion that the inherent tendency of interlocking directorates between companies that are related to each other as competitors is to blunt the edge of rivalry between the corporations, to seek out ways of compromising opposing interests, and thus eliminate competition. As respondent SMC aptly observes, knowledge by CFC-Robina of SMC's costs in various industries and regions in the country win enable the former to practice price discrimination. CFC-Robina can segment the entire consuming population by geographical areas or income groups and change varying prices in order to maximize profits from every market segment. CFC-Robina could determine the most profitable volume at which it could produce for every product line in which it competes with SMC. Access to SMC pricing policy by CFC-Robina would in effect destroy free competition and deprive the consuming public of opportunity to buy goods of the highest possible quality at the lowest prices.

Finally, considering that both Robina and SMC are, to a certain extent, engaged in agriculture, then the election of petitioner to the Board of SMC may constitute a violation of the prohibition contained in section 13(5) of the Corporation Law. Said section provides in part that "any stockholder of more than one corporation organized for the purpose of engaging in agriculture may hold his stock in such corporations solely for investment and not for the purpose of bringing about or attempting to bring about a combination to exercise control of incorporations ... ."

Neither are We persuaded by the claim that the by-law was Intended to prevent the candidacy of petitioner for election to the Board. If the by-law were to be applied in the case of one stockholder but waived in the case of another, then it could be reasonably claimed that the by-law was being applied in a discriminatory manner. However, the by law, by its terms, applies to all stockholders. The equal protection clause of the Constitution requires only that the by-law operate equally upon all persons of a class. Besides, before petitioner can be declared ineligible to run for director, there must be hearing and evidence must be submitted to bring his case within the ambit of the disqualification. Sound principles of public policy and management, therefore, support the view that a by-law which disqualifies a competition from election to the Board of Directors of another corporation is valid and reasonable.

In the absence of any legal prohibition or overriding public policy, wide latitude may be accorded to the corporation in adopting measures to protect legitimate corporation interests. Thus, "where the reasonableness of a by-law is a mere matter of judgment, and upon which reasonable minds must necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment of those who are authorized to make by-laws and who have expressed their authority. 45

Although it is asserted that the amended by-laws confer on the present Board powers to perpetua themselves in power such fears appear to be misplaced. This power, but is very nature, is subject to certain well established limitations. One of these is inherent in the very convert and definition of the terms "competition" and "competitor". "Competition" implies a struggle for advantage between two or more forces, each possessing, in substantially similar if not Identical degree, certain characteristics essential to the business sought. It means an independent endeavor of two or more persons to obtain the business patronage of a third by offering more advantageous terms as an inducement to secure trade. 46 The test must be whether the business does in fact compete, not whether it is capable of an indirect and highly unsubstantial duplication of an isolated or non-

characteristics activity. 47 It is, therefore, obvious that not every person or entity engaged in business of the same kind is a competitor. Such factors as quantum and place of business, Identity of products and area of competition should be taken into consideration. It is, therefore, necessary to show that petitioner's business covers a substantial portion of the same markets for similar products to the extent of not less than 10% of respondent corporation's market for competing products. While We here sustain the validity of the amended by-laws, it does not follow as a necessary consequence that petitioner is ipso facto disqualified. Consonant with the requirement of due process, there must be due hearing at which the petitioner must be given the fullest opportunity to show that he is not covered by the disqualification. As trustees of the corporation and of the stockholders, it is the responsibility of directors to act with fairness to the stockholders. 48 Pursuant to this obligation and to remove any suspicion that this power may be utilized by the incumbent members of the Board to perpetuate themselves in power, any decision of the Board to disqualify a candidate for the Board of Directors should be reviewed by the Securities behind Exchange Commission en banc and its decision shall be final unless reversed by this Court on certiorari. 49 Indeed, it is a settled principle that where the action of a Board of Directors is an abuse of discretion, or forbidden by statute, or is against public policy, or is ultra vires, or is a fraud upon minority stockholders or creditors, or will result in waste, dissipation or misapplication of the corporation assets, a court of equity has the power to grant appropriate relief. 50

III

Whether or not respondent SEC gravely abused its discretion in denying petitioner's request for an examination of the records of San Miguel International Inc., a fully owned subsidiary of San Miguel Corporation —

Respondent San Miguel Corporation stated in its memorandum that petitioner's claim that he was denied inspection rights as stockholder of SMC "was made in the teeth of undisputed facts that, over a specific period, petitioner had been furnished numerous documents and information," to wit: (1) a complete list of stockholders and their stockholdings; (2) a complete list of proxies given by the stockholders for use at the annual stockholders' meeting of May 18, 1975; (3) a copy of the minutes of the stockholders' meeting of March 18,1976; (4) a breakdown of SMC's P186.6 million investment in associated companies and other companies as of December 31, 1975; (5) a listing of the salaries, allowances, bonuses and other compensation or remunerations received by the directors and corporate officers of SMC; (6) a copy of the US $100 million Euro-Dollar Loan Agreement of SMC; and (7) copies of the minutes of all meetings of the Board of Directors from January 1975 to May 1976, with deletions of sensitive data, which deletions were not objected to by petitioner.

Further, it was averred that upon request, petitioner was informed in writing on September 18, 1976; (1) that SMC's foreign investments are handled by San Miguel International, Inc., incorporated in Bermuda and wholly owned by SMC; this was SMC's first venture abroad, having started in 1948 with an initial outlay of ?500,000.00, augmented by a loan of Hongkong $6 million from a foreign bank under the personal guaranty of SMC's former President, the late Col. Andres Soriano; (2) that as of December 31, 1975, the estimated value of SMI would amount to almost P400 million (3) that the total cash dividends received by SMC from SMI since 1953 has amount to US $ 9.4 million; and (4) that from 1972-1975, SMI did not declare cash or stock dividends, all earnings having been used in line with a program for the setting up of breweries by SMI

These averments are supported by the affidavit of the Corporate Secretary, enclosing photocopies of the afore-mentioned documents. 51

Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of all business transactions of the corporation and minutes of any meeting shall be open to

the inspection of any director, member or stockholder of the corporation at reasonable hours."

The stockholder's right of inspection of the corporation's books and records is based upon their ownership of the assets and property of the corporation. It is, therefore, an incident of ownership of the corporate property, whether this ownership or interest be termed an equitable ownership, a beneficial ownership, or a ownership. 52 This right is predicated upon the necessity of self-protection. It is generally held by majority of the courts that where the right is granted by statute to the stockholder, it is given to him as such and must be exercised by him with respect to his interest as a stockholder and for some purpose germane thereto or in the interest of the corporation. 53 In other words, the inspection has to be germane to the petitioner's interest as a stockholder, and has to be proper and lawful in character and not inimical to the interest of the corporation. 54 In Grey v. Insular Lumber, 55 this Court held that "the right to examine the books of the corporation must be exercised in good faith, for specific and honest purpose, and not to gratify curiosity, or for specific and honest purpose, and not to gratify curiosity, or for speculative or vexatious purposes. The weight of judicial opinion appears to be, that on application for mandamus to enforce the right, it is proper for the court to inquire into and consider the stockholder's good faith and his purpose and motives in seeking inspection. 56 Thus, it was held that "the right given by statute is not absolute and may be refused when the information is not sought in good faith or is used to the detriment of the corporation." 57 But the "impropriety of purpose such as will defeat enforcement must be set up the corporation defensively if the Court is to take cognizance of it as a qualification. In other words, the specific provisions take from the stockholder the burden of showing propriety of purpose and place upon the corporation the burden of showing impropriety of purpose or motive. 58 It appears to be the general rule that stockholders are entitled to full information as to the management of the corporation and the manner of expenditure of its funds, and to inspection to obtain such information, especially where it appears that the company is being mismanaged or that it is being managed for the personal benefit of officers or directors or certain of the stockholders to the exclusion of others." 59

While the right of a stockholder to examine the books and records of a corporation for a lawful purpose is a matter of law, the right of such stockholder to examine the books and records of a wholly-owned subsidiary of the corporation in which he is a stockholder is a different thing.

Some state courts recognize the right under certain conditions, while others do not. Thus, it has been held that where a corporation owns approximately no property except the shares of stock of subsidiary corporations which are merely agents or instrumentalities of the holding company, the legal fiction of distinct corporate entities may be disregarded and the books, papers and documents of all the corporations may be required to be produced for examination, 60 and that a writ of mandamus, may be granted, as the records of the subsidiary were, to all incontents and purposes, the records of the parent even though subsidiary was not named as a party. 61 mandamus was likewise held proper to inspect both the subsidiary's and the parent corporation's books upon proof of sufficient control or dominion by the parent showing the relation of principal or agent or something similar thereto. 62

On the other hand, mandamus at the suit of a stockholder was refused where the subsidiary corporation is a separate and distinct corporation domiciled and with its books and records in another jurisdiction, and is not legally subject to the control of the parent company, although it owned a vast majority of the stock of the subsidiary. 63Likewise, inspection of the books of an allied corporation by stockholder of the parent company which owns all the stock of the subsidiary has been refused on the ground that the stockholder was not within the class of "persons having an interest."64

In the Nash case, 65 The Supreme Court of New York held that the contractual right of former stockholders to inspect books and records of the corporation included the right to inspect

corporation's subsidiaries' books and records which were in corporation's possession and control in its office in New York."

In the Bailey case, 66 stockholders of a corporation were held entitled to inspect the records of a controlled subsidiary corporation which used the same offices and had Identical officers and directors.

In his "Urgent Motion for Production and Inspection of Documents" before respondent SEC, petitioner contended that respondent corporation "had been attempting to suppress information for the stockholders" and that petitioner, "as stockholder of respondent corporation, is entitled to copies of some documents which for some reason or another, respondent corporation is very reluctant in revealing to the petitioner notwithstanding the fact that no harm would be caused thereby to the corporation." 67 There is no question that stockholders are entitled to inspect the books and records of a corporation in order to investigate the conduct of the management, determine the financial condition of the corporation, and generally take an account of the stewardship of the officers and directors. 68

In the case at bar, considering that the foreign subsidiary is wholly owned by respondent San Miguel Corporation and, therefore, under its control, it would be more in accord with equity, good faith and fair dealing to construe the statutory right of petitioner as stockholder to inspect the books and records of the corporation as extending to books and records of such wholly subsidiary which are in respondent corporation's possession and control.

IV

Whether or not respondent SEC gravely abused its discretion in allowing the stockholders of respondent corporation to ratify the investment of corporate funds in a foreign corporation

Petitioner reiterates his contention in SEC Case No. 1423 that respondent corporation invested corporate funds in SMI without prior authority of the stockholders, thus violating section 17-1/2 of the Corporation Law, and alleges that respondent SEC should have investigated the charge, being a statutory offense, instead of allowing ratification of the investment by the stockholders.

Respondent SEC's position is that submission of the investment to the stockholders for ratification is a sound corporate practice and should not be thwarted but encouraged.

Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other corporation or business or for any purpose other than the main purpose for which it was organized" provided that its Board of Directors has been so authorized by the affirmative vote of stockholders holding shares entitling them to exercise at least two-thirds of the voting power. If the investment is made in pursuance of the corporate purpose, it does not need the approval of the stockholders. It is only when the purchase of shares is done solely for investment and not to accomplish the purpose of its incorporation that the vote of approval of the stockholders holding shares entitling them to exercise at least two-thirds of the voting power is necessary. 69

As stated by respondent corporation, the purchase of beer manufacturing facilities by SMC was an investment in the same business stated as its main purpose in its Articles of Incorporation, which is to manufacture and market beer. It appears that the original investment was made in 1947-1948, when SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for the manufacture and marketing of San Miguel beer thereat. Restructuring of the investment

was made in 1970-1971 thru the organization of SMI in Bermuda as a tax free reorganization.

Under these circumstances, the ruling in De la Rama v. Manao Sugar Central Co., Inc., supra, appears relevant. In said case, one of the issues was the legality of an investment made by Manao Sugar Central Co., Inc., without prior resolution approved by the affirmative vote of 2/3 of the stockholders' voting power, in the Philippine Fiber Processing Co., Inc., a company engaged in the manufacture of sugar bags. The lower court said that "there is more logic in the stand that if the investment is made in a corporation whose business is important to the investing corporation and would aid it in its purpose, to require authority of the stockholders would be to unduly curtail the power of the Board of Directors." This Court affirmed the ruling of the court a quo on the matter and, quoting Prof. Sulpicio S. Guevara, said:

"j. Power to acquire or dispose of shares or securities. — A private corporation, in order to accomplish is purpose as stated in its articles of incorporation, and subject to the limitations imposed by the Corporation Law, has the power to acquire, hold, mortgage, pledge or dispose of shares, bonds, securities, and other evidence of indebtedness of any domestic or foreign corporation. Such an act, if done in pursuance of the corporate purpose, does not need the approval of stockholders; but when the purchase of shares of another corporation is done solely for investment and not to accomplish the purpose of its incorporation, the vote of approval of the stockholders is necessary. In any case, the purchase of such shares or securities must be subject to the limitations established by the Corporations law; namely, (a) that no agricultural or mining corporation shall be restricted to own not more than 15% of the voting stock of nay agricultural or mining corporation; and (c) that such holdings shall be solely for investment and not for the purpose of bringing about a monopoly in any line of commerce of combination in restraint of trade." The Philippine Corporation Law by Sulpicio S. Guevara, 1967 Ed., p. 89) (Emphasis supplied.)

40. Power to invest corporate funds. — A private corporation has the power to invest its corporate funds "in any other corporation or business, or for any purpose other than the main purpose for which it was organized, provide that 'its board of directors has been so authorized in a resolution by the affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least two-thirds of the voting power on such a propose at a stockholders' meeting called for that purpose,' and provided further, that no agricultural or mining corporation shall in anywise be interested in any other agricultural or mining corporation. When the investment is necessary to accomplish its purpose or purposes as stated in its articles of incorporation the approval of the stockholders is not necessary."" (Id., p. 108) (Emphasis ours.) (pp. 258-259).

Assuming arguendo that the Board of Directors of SMC had no authority to make the assailed investment, there is no question that a corporation, like an individual, may ratify and thereby render binding upon it the originally unauthorized acts of its officers or other agents. 70 This is true because the questioned investment is neither contrary to law, morals, public order or public policy. It is a corporate transaction or contract which is within the corporate powers, but which is defective from a supported failure to observe in its execution the. requirement of the law that the investment must be authorized by the affirmative vote of the stockholders holding two-thirds of the voting power. This requirement is for the benefit of the stockholders. The stockholders for whose benefit the requirement was enacted may, therefore, ratify the investment and its ratification by said stockholders obliterates any defect

which it may have had at the outset. "Mere ultra vires acts", said this Court in Pirovano, 71 "or those which are not illegal and void ab initio, but are not merely within the scope of the articles of incorporation, are merely voidable and may become binding and enforceable when ratified by the stockholders.

Besides, the investment was for the purchase of beer manufacturing and marketing facilities which is apparently relevant to the corporate purpose. The mere fact that respondent corporation submitted the assailed investment to the stockholders for ratification at the annual meeting of May 10, 1977 cannot be construed as an admission that respondent corporation had committed an ultra vires act, considering the common practice of corporations of periodically submitting for the gratification of their stockholders the acts of their directors, officers and managers.

WHEREFORE, judgment is hereby rendered as follows:

The Court voted unanimously to grant the petition insofar as it prays that petitioner be allowed to examine the books and records of San Miguel International, Inc., as specified by him.

On the matter of the validity of the amended by-laws of respondent San Miguel Corporation, six (6) Justices, namely, Justices Barredo, Makasiar, Antonio, Santos, Abad Santos and De Castro, voted to sustain the validity per se of the amended by-laws in question and to dismiss the petition without prejudice to the question of the actual disqualification of petitioner John Gokongwei, Jr. to run and if elected to sit as director of respondent San Miguel Corporation being decided, after a new and proper hearing by the Board of Directors of said corporation, whose decision shall be appealable to the respondent Securities and Exchange Commission deliberating and acting en banc and ultimately to this Court. Unless disqualified in the manner herein provided, the prohibition in the afore-mentioned amended by-laws shall not apply to petitioner.

The afore-mentioned six (6) Justices, together with Justice Fernando, voted to declare the issue on the validity of the foreign investment of respondent corporation as moot.

Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-laws, pending hearing by this Court on the applicability of section 13(5) of the Corporation Law to petitioner.

Justice Fernando reserved his vote on the validity of subject amendment to the by-laws but otherwise concurs in the result.

Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez and Guerrero filed a separate opinion, wherein they voted against the validity of the questioned amended bylaws and that this question should properly be resolved first by the SEC as the agency of primary jurisdiction. They concur in the result that petitioner may be allowed to run for and sit as director of respondent SMC in the scheduled May 6, 1979 election and subsequent elections until disqualified after proper hearing by the respondent's Board of Directors and petitioner's disqualification shall have been sustained by respondent SEC en banc and ultimately by final judgment of this Court.

In resume, subject to the qualifications aforestated judgment is hereby rendered GRANTING the petition by allowing petitioner to examine the books and records of San Miguel International, Inc. as specified in the petition. The petition, insofar as it assails the validity of the amended by- laws and the ratification of the foreign investment of respondent corporation, for lack of necessary votes, is hereby DISMISSED. No costs.

Makasiar, Santos Abad Santos and De Castro, JJ., concur.

Aquino, and Melencio Herrera JJ., took no part.

G.R. No. L-30460             March 12, 1929

C. H. STEINBERG, as Receiver of the Sibuguey Trading Company, Incorporated, plaintiff-appellant, vs.GREGORIO VELASCO, ET AL., defendants-appellees.

Frank H. Young for appellant.Pablo Lorenzo and Delfin Joven for appellees.

STATEMENT

Plaintiff is the receiver of the Sibuguey Trading Company, a domestic corporation. The defendants are residents of the Philippine Islands.

It is alleged that the defendants, Gregorio Velasco, as president, Felix del Castillo, as vice-president, Andres L. Navallo, as secretary-treasurer, and Rufino Manuel, as director of Trading Company, at a meeting of the board of directors held on July 24, 1922, approved and authorized various lawful purchases already made of a large portion of the capital stock of the company from its various stockholders, thereby diverting its funds to the injury, damage and in fraud of the creditors of the corporation. That pursuant to such resolution and on March 31, 1922, the corporation purchased from the defendant S. R. Ganzon 100 shares of its capital stock of the par value of P10, and on June 29, 1922, it purchased from the defendant Felix D. Mendaros 100 shares of the par value of P10, and on July 16, 1922, it purchased from the defendant Felix D. Mendaros 100 shares of the par value of P10, each, and on April 5, 1922, it purchased from the defendant Dionisio Saavedra 10 shares of the same par value, and on June 29, 1922, it purchased from the defendant Valentin Matias 20 shares of like value. That the total amount of the capital stock unlawfully purchased was P3,300. That at the time of such purchase, the corporation had accounts payable amounting to P13,807.50, most of which were unpaid at the time petition for the dissolution of the corporation was financial condition, in contemplation of an insolvency and dissolution.

As a second cause of action, plaintiff alleges that on July 24, 1922, the officers and directors of the corporation approved a resolution for the payment of P3,000 as dividends to its stockholders, which was wrongfully done and in bad faith, and to the injury and fraud of its creditors. That at the time the petition for the dissolution of the corporation was presented it had accounts payable in the sum of P9,241.19, "and practically worthless accounts receivable."

Plaintiff prays judgment for the sum of P3,300 from the defendants Gregorio Velasco, Felix del Castillo, Andres L. Navallo and Rufino Manuel, personally as members of the Board of Directors, or for the recovery from the defendants S. R. Ganzon, of the sum of P1,000, from the defendant Felix D. Mendaros, P2,000, and from the defendant Dionisio Saavedra, P100, and under his second cause of action, he prays judgment for the sum of P3,000, with legal interest against the board of directors, and costs.

For answer the defendants Felix del Castillo, Rufino Manuel, S. R. Ganzon, Dionisio Saavedra and Valentin Matias made a general and specific denial.

In his amended answer, the defendant Gregorio Velasco admits paragraphs, 1, 2 and 3 of each cause of action of the complaint, and that the shares mentioned in paragraph 4 of the first cause of action were purchased, but alleges that they were purchased by virtue of a resolution of the board of directors of the corporation "when the business of the company was going on very well." That the defendant is one of the principal shareholders, and that about the same time, he purchase other shares for his own account, because he thought they would bring profits. As to the second cause of action, he admits that the dividends described in paragraph 4 of the complaint were distributed, but alleges that such distribution was authorized by the board of directors, "and that the amount represented by said dividends really constitutes a surplus profit of the corporation," and as counterclaim, he asks for judgment against the receiver for P12,512.47 for and on account of his negligence in failing to collect the accounts.

Although duly served, the defendant Mendaros did not appear or answer. The defendant Navallo was not served, and the case against him was dismissed.

April 30, 1928, the case was tried and submitted on a stipulation of facts, based upon which the lower court dismissed plaintiff's complaint, and rendered judgment for the defendants, with costs against the plaintiff, and absolved him from the cross-complaint of the defendant Velasco, and on appeal, the plaintiff assigns the following errors:

1. In holding that the Sibuguey Trading Company, Incorporated, could legally purchase its own stock.

2. In holding that the Board of Directors of the said Corporation could legally declared a dividend of P3,000, July 24, 1922.

JOHNS, J.:

It is stipulated that on July 24, 1922, the directors of the corporation approved the purchase of stocks as follows:

One hundred shares from S. R. Ganzon for P1,000;

One hundred shares from Felix D. Mendaros at the same price; which purchase was made on June 29, 1922; another

One hundred shares from Felix D. Mendaros at the same price on July 16, 1922;

Ten shares from Dionisio Saavedra at the same price on June 29, 1922.

That during such times, the defendant Gregorio Velasco purchased 13 shares for the corporation for P130; Felix del Castillo — 42 shares for P420; Andres Navallo — 15 shares for P150; and the defendant Mendaros — 10 shares for P100. That during the time these various purchases were made, the total amount of subscribed and paid up capital stock of the corporation was P10,030, out of the authorized capital stock 2,000 shares of the par value of P10 each.

Paragraph 4 of the stipulation also recites:

Be it also admitted as a fact that the time of the said purchases there was a surplus profit of the corporation above-named of P3,314.72.

Paragraph 5 is as follows:

That at the time of the repeatedly mentioned various purchases of the said capital stock were made, the said corporation had Accounts Payable in the total amount of P13,807.50 as shown by the statement of the corporation, dated June 30, 1922, and the Accounts Receivable in the sum of P19,126.02 according to the books, and that the intention of the Board of Directors was to resell the stocks purchased by the corporations at a sum above par for each stock, this expectation being justified by the then satisfactory and sound financial condition of the business of the corporation.

It is also stipulated that on September 11, 1923, when the petition for the dissolution of the corporation was presented to the court, according to a statement made June 30, 1923, it has accounts payable aggregating P9,41.19, and accounts receivable for P12,512.47.

Paragraph 7 of the stipulation recites:

That the same defendants, mentioned in paragraph 2 of this stipulation of facts and in the same capacity, on the same date of July 24, 1922, and at the said meeting of the said Board of Directors, approved and authorized by resolution the payment of dividends to its stockholders, in the sum of three thousand pesos (P3,000), Philippine currency, which payments were made at different dates, between September 30, 1922, and May 12, 1923, both dates inclusive, at a time when the corporation had accounts less in amount than the accounts receivable, which resolution was based upon the balance sheet made as June 30, 1922, said balance sheet showing that the corporation had a surplus of P1,069.41, and a profit on the same date of P2,656.08, or a total surplus amount of P3,725.49, and a reserve fund of P2,889.23 for bad and doubtful accounts and depreciation of equipment, thereby leaving a balance of P3,314.72 of net surplus profit after paying this dividend.

It is also stipulated at a meeting of the board of directors held on July 24, 1922, as follows:

6. The president and manager submitted to the Board of Directors his statement and balance sheet for the first semester ending June 30, 1922 and recommended that P3,000 — out of the surplus account be set aside for dividends payable, and that payments be made in installments so as not to effect the financial condition of the corporation. That stockholders having outstanding account with the corporation should settle first their accounts before payments of their dividends could be made. Mr. Castillo moved that the statement and balance sheet be approved as submitted, and also the recommendations of the president. Seconded by Mr. Manuel. Approved.

Paragraph 8 of the stipulation is as follows:

That according to the balance sheet of the corporation, dated June 30, 1923, it had accounts receivable in the sum of P12,512.47, due from various contractor and laborers of the National Coal Company, and also employees of the herein corporation, which the herein receiver, after his appointment on February 28, 1924, although he made due efforts by personally visiting the location of the corporation, and of National Coal Company, at its offices, at Malangas, Mindanao, and by writing numerous letters of demand to the debtors of the corporation, in order to collect these accounts receivable, he was unable to do so as most of them were without goods or property, and he could not file any suit against them that might have any property, for the reason that he had no funds

on hand with which to pay the filing and sheriff fees to Malangas, and other places of their residences.

From all of which, it appears that on June 30, 1922, the board of directors of the corporation authorized the purchase of, purchased and paid for, 330 shares of the capital stock of the corporation at the agreed price of P3,300, and that at the time the purchase was made, the corporation was indebted in the sum of P13,807.50, and that according to its books, it had accounts receivable in the sum of P19,126.02. That on September 11, 1923, when the petition was filed for its dissolution upon the ground that it was insolvent, its accounts payable amounted to P9,241.19, and its accounts receivable P12,512.47, or an apparent asset of P3,271.28 over and above its liabilities. But it will be noted that there is no stipulation or finding of facts as to what was the actual cash value of its accounts receivable. Neither is there any stipulation that those accounts or any part of them ever have been or will be collected, and it does appear that after his appointment on February 28, 1924, the receiver made a diligent effort to collect them, and that he was unable to do so, and it also appears from the minutes of the board of directors that the president and manager "recommended that P3,000 — out of the surplus account to be set aside for dividends payable, and that payments be made in installments so as not to effect the financial condition of the corporation."

If in truth and in fact the corporation had an actual bona fide surplus of P3,000 over and above all of its debt and liabilities, the payment of the P3,000 in dividends would not in the least impair the financial condition of the corporation or prejudice the interests of its creditors.

It is very apparent that on June 24, 1922, the board of directors acted on assumption that, because it appeared from the books of the corporation that it had accounts receivable of the face value of P19,126.02, therefore it had a surplus over and above its debts and liabilities. But as stated there is no stipulation as to the actual cash value of those accounts, and it does appear from the stipulation that on February 28, 1924, P12,512.47 of those accounts had but little, if any, value, and it must be conceded that, in the purchase of its own stock to the amount of P3,300 and in declaring the dividends to the amount of P3,000, the real assets of the corporation were diminished P6,300. It also appears from paragraph 4 of the stipulation that the corporation had a "surplus profit" of P3,314.72 only. It is further stipulated that the dividends should "be made in installments so as not to effect financial condition of the corporation." In other words, that the corporation did not then have an actual bona fide surplus from which the dividends could be paid, and that the payment of them in full at the time would "affect the financial condition of the corporation."

It is, indeed, peculiar that the action of the board in purchasing the stock from the corporation and in declaring the dividends on the stock was all done at the same meeting of the board of directors, and it appears in those minutes that the both Ganzon and Mendaros were formerly directors and resigned before the board approved the purchase and declared the dividends, and that out of the whole 330 shares purchased, Ganzon, sold 100 and Mendaros 200, or a total of 300 shares out of the 330, which were purchased by the corporation, and for which it paid P3,300. In other words, that the directors were permitted to resign so that they could sell their stock to the corporation. As stated, the authorized capital stock was P20,000 divided into 2,000 shares of the par value of P10 each, which only P10,030 was subscribed and paid. Deducting the P3,300 paid for the purchase of the stock, there would be left P7,000 of paid up stock, from which deduct P3,000 paid in dividends, there would be left P4,000 only. In this situation and upon this state of facts, it is very apparent that the directors did not act in good faith or that they were grossly ignorant of their duties.

Upon each of those points, the rule is well stated in Ruling Case Law, vol. 7, p. 473, section 454 where it is said:

General Duty to Exercise Reasonable Care. — The directors of a corporation are bound to care for its property and manage its affairs in good faith, and for a violation of these duties resulting in waste of its assets or injury to the property they are liable to account the same as other trustees. Are there can be no doubt that if they do acts clearly beyond their power, whereby loss ensues to the corporation, or dispose of its property or pay away its money without authority, they will be required to make good the loss out of their private estates. This is the rule where the disposition made of money or property of the corporation is one either not within the lawful power of the corporation, or, if within the authority of the particular officer or officers.

And section 458 which says:

Want of Knowledge, Skill, or Competency. — It has been said that directors are not liable for losses resulting to the corporation from want of knowledge on their part; or for mistake of judgment, provided they were honest, and provided they are fairly within the scope of the powers and discretion confided to the managing body. But the acceptance of the office of a director of a corporation implies a competent knowledge of the duties assumed, and directors cannot excuse imprudence on the ground of their ignorance or inexperience; and if they commit an error of judgment through mere recklessness or want of ordinary prudence or skill, they may be held liable for the consequences. Like a mandatory, to whom he has been likened, a director is bound not only to exercise proper care and diligence, but ordinary skill and judgment. As he is bound to exercise ordinary skill and judgment, he cannot set up that he did not possess them.

Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities, the board of directors will not use the assets of the corporation to purchase its own stock, and that it will not declare dividends to stockholders when the corporation is insolvent.

The amount involved in this case is not large, but the legal principles are important, and we have given them the consideration which they deserve.

The judgment of the lower court is reversed, and (a), as to the first cause of action, one will be entered for the plaintiff and against the defendant S. R. Ganzon for the sum of P1,000, with legal interest from the 10th of February, 1926, and against the defendant Felix D. Medaros for P2,000, with like interests, and against the defendant Dionisio Saavedra for P100, with like interest, and against each of them for costs, each on their primary liability as purchasers of stock, and (b) against the defendants Gregorio Velasco, Felix del Castillo and Rufino Manuel, personally, as members of the board of directors of the Sibuguey Trading Company, Incorporated, as secondarily liable for the whole amount of such stock sold and purchased as above stated, and on the second cause of action, judgment will be entered (c) for the plaintiff and jointly and severally against the defendants Gregorio Velasco, Felix del Castillo and Rufino Manuel, personally, as members of the board of directors of the Sibuguey Trading Company, Incorporated, for P3,000, with interest thereon from February 10, 1926, at the rate of 6 per cent per annum, and costs. So ordered.

Johnson, Street, Malcolm, Ostrand, Romualdez and Villa-Real, JJ., concur.

G.R. No. L-22442             August 1, 1924

ANTONIO PARDO, petitioner, vs.THE HERCULES LUMBER CO., INC., and IGNACIO FERRER, respondents.

W.J. O'Donovan and M.H. de Joya for petitioner.Sumulong and Lavides and Ross, Lawrence and Selph for respondents.

STREET, J.:

The petitioner, Antonio Pardo, a stockholder in the Hercules Lumber Company, Inc., one of the respondents herein, seeks by this original proceeding in the Supreme Court to obtain a writ of mandamus to compel the respondents to permit the plaintiff and his duly authorized agent and representative to examine the records and business transactions of said company. To this petition the respondents interposed an answer, in which, after admitting certain allegations of the petition, the respondents set forth the facts upon which they mainly rely as a defense to the petition. To this answer the petitioner in turn interposed a demurrer, and the cause is now before us for determination of the issue thus presented.

It is inferentially, if not directly admitted that the petitioner is in fact a stockholder in the Hercules Lumber Company, Inc., and that the respondent, Ignacio Ferrer, as acting secretary of the said company, has refused to permit the petitioner or his agent to inspect the records and business transactions of the said Hercules Lumber Company, Inc., at times desired by the petitioner. No serious question is of course made as to the right of the petitioner, by himself or proper representative, to exercise the right of inspection conferred by section 51 of Act No. 1459. Said provision was under the consideration of this court in the case of Philpotts vs. Philippine Manufacturing Co., and Berry (40 Phil., 471), where we held that the right of examination there conceded to the stockholder may be exercised either by a stockholder in person or by any duly authorized agent or representative.

The main ground upon which the defense appears to be rested has reference to the time, or times, within which the right of inspection may be exercised. In this connection the answer asserts that in article 10 of the By-laws of the respondent corporation it is declared that "Every shareholder may examine the books of the company and other documents pertaining to the same upon the days which the board of directors shall annually fix." It is further averred that at the directors' meeting of the respondent corporation held on February 16, 1924, the board passed a resolution to the following effect:

The board also resolved to call the usual general (meeting of shareholders) for March 30 of the present year, with notice to the shareholders that the books of the company are at their disposition from the 15th to 25th of the same month for examination, in appropriate hours.

The contention for the respondent is that this resolution of the board constitutes a lawful restriction on the right conferred by statute; and it is insisted that as the petitioner has not availed himself of the permission to inspect the books and transactions of the company within the ten days thus defined, his right to inspection and examination is lost, at least for this year.

We are entirely unable to concur in this contention. The general right given by the statute may not be lawfully abridged to the extent attempted in this resolution. It may be admitted that the officials in charge of a corporation may deny inspection when sought at unusual hours or under other improper conditions; but neither the executive officers nor the board of directors have the power to deprive a stockholder of the right altogether. A by-law unduly restricting the right of inspection is undoubtedly invalid. Authorities to this effect are too numerous and direct to require extended comment. (14 C.J., 859; 7 R.C.L., 325; 4 Thompson on Corporations, 2nd ed., sec. 4517; Harkness vs. Guthrie, 27 Utah, 248; 107 Am., St. Rep., 664. 681.) Under a statute similar to our own it has been held that the statutory right of inspection is not affected by the adoption by the board of directors of a resolution providing for the closing of transfer books thirty days before an election. (State vs. St. Louis Railroad Co., 29 Mo., Ap., 301.)

It will be noted that our statute declares that the right of inspection can be exercised "at reasonable hours." This means at reasonable hours on business days throughout the year, and not merely during some arbitrary period of a few days chosen by the directors.

In addition to relying upon the by-law, to which reference is above made, the answer of the respondents calls in question the motive which is supposed to prompt the petitioner to make inspection; and in this connection it is alleged that the information which the petitioner seeks is desired for ulterior purposes in connection with a competitive firm with which the petitioner is alleged to be connected. It is also insisted that one of the purposes of the petitioner is to obtain evidence preparatory to the institution of an action which he means to bring against the corporation by reason of a contract of employment which once existed between the corporation and himself. These suggestions are entirely apart from the issue, as, generally speaking, the motive of the shareholder exercising the right is immaterial. (7 R.C.L., 327.)

We are of the opinion that, upon the allegations of the petition and the admissions of the answer, the petitioner is entitled to relief. The demurrer is, therefore, sustained; and the writ of mandamus will issue as prayed, with the costs against the respondent. So ordered.

G.R. No. L-33320 May 30, 1983

RAMON A. GONZALES, petitioner, vs.THE PHILIPPINE NATIONAL BANK, respondent.

Ramon A. Gonzales in his own behalf.

Juan Diaz for respondent.

 

VASQUEZ, J.:

Petitioner Ramon A. Gonzales instituted in the erstwhile Court of First Instance of Manila a special civil action for mandamus against the herein respondent praying that the latter be ordered to allow him to look into the books and records of the respondent bank in

order to satisfy himself as to the truth of the published reports that the respondent has guaranteed the obligation of Southern Negros Development Corporation in the purchase of a US$ 23 million sugar-mill to be financed by Japanese suppliers and financiers; that the respondent is financing the construction of the P 21 million Cebu-Mactan Bridge to be constructed by V.C. Ponce, Inc., and the construction of Passi Sugar Mill at Iloilo by the Honiron Philippines, Inc., as well as to inquire into the validity of Id transactions. The petitioner has alleged hat his written request for such examination was denied by the respondent. The trial court having dismissed the petition for mandamus, the instant appeal to review the said dismissal was filed.

The facts that gave rise to the subject controversy have been set forth by the trial court in the decision herein sought to be reviewed, as follows:

Briefly stated, the following facts gathered from the stipulation of the parties served as the backdrop of this proceeding.

Previous to the present action, the petitioner instituted several cases in this Court questioning different transactions entered into by the Bark with other parties. First among them is Civil Case No. 69345 filed on April 27, 1967, by petitioner as a taxpayer versus Sec. Antonio Raquiza of Public Works and Communications, the Commissioner of Public Highways, the Bank, Continental Ore Phil., Inc., Continental Ore, Huber Corporation, Allis Chalmers and General Motors Corporation In the course of the hearing of said case on August 3, 1967, the personality of herein petitioner to sue the bank and question the letters of credit it has extended for the importation by the Republic of the Philippines of public works equipment intended for the massive development program of the President was raised. In view thereof, he expressed and made known his intention to acquire one share of stock from Congressman Justiniano Montano which, on the following day, August 30, 1967, was transferred in his name in the books of the Bank.

Subsequent to his aforementioned acquisition of one share of stock of the Bank, petitioner, in his dual capacity as a taxpayer and stockholder, filed the following cases involving the bank or the members of its Board of Directors to wit:

l. On October l8,1967, Civil Case No. 71044 versus the Board of Directors of the Bank; the National Investment and Development Corp., Marubeni Iida Co., Ltd., and Agro-Inc. Dev. Co. or Saravia;

2. On May 11, 1968, Civil Case No. 72936 versus Roberto Benedicto and other Directors of the Bank, Passi (Iloilo) Sugar Central, Inc., Calinog-Lambunao Sugar Mill Integrated Farming, Inc., Talog sugar Milling Co., Inc., Safary Central, Inc., and Batangas Sugar Central Inc.;

3. On May 8, 1969, Civil Case No. 76427 versus Alfredo Montelibano and the Directors of both the PNB and DBP;

On January 11, 1969, however, petitioner addressed a letter to the President of the Bank (Annex A, Pet.), requesting submission to look into the records of its transactions covering the purchase of a sugar central by the Southern Negros Development Corp. to be financed by Japanese suppliers and financiers; its financing of the Cebu-Mactan Bridge to be constructed by V.C. Ponce, Inc. and the construction of the Passi Sugar Mills in Iloilo. On January 23, 1969, the Asst. Vice-President and Legal

Counsel of the Bank answered petitioner's letter denying his request for being not germane to his interest as a one-share stockholder and for the cloud of doubt as to his real intention and purpose in acquiring said share. (Annex B, Pet.) In view of the Bank's refusal the petitioner instituted this action.' (Rollo, pp. 16-18.)

The petitioner has adopted the above finding of facts made by the trial court in its brief which he characterized as having been "correctly stated." (Petitioner-Appellant"s Brief, pp. 57.)

The court a quo denied the prayer of the petitioner that he be allowed to examine and inspect the books and records of the respondent bank regarding the transactions mentioned on the grounds that the right of a stockholder to inspect the record of the business transactions of a corporation granted under Section 51 of the former Corporation Law (Act No. 1459, as amended) is not absolute, but is limited to purposes reasonably related to the interest of the stockholder, must be asked for in good faith for a specific and honest purpose and not gratify curiosity or for speculative or vicious purposes; that such examination would violate the confidentiality of the records of the respondent bank as provided in Section 16 of its charter, Republic Act No. 1300, as amended; and that the petitioner has not exhausted his administrative remedies.

Assailing the conclusions of the lower court, the petitioner has assigned the single error to the lower court of having ruled that his alleged improper motive in asking for an examination of the books and records of the respondent bank disqualifies him to exercise the right of a stockholder to such inspection under Section 51 of Act No. 1459, as amended. Said provision reads in part as follows:

Sec. 51. ... The record of all business transactions of the corporation and the minutes of any meeting shall be open to the inspection of any director, member or stockholder of the corporation at reasonable hours.

Petitioner maintains that the above-quoted provision does not justify the qualification made by the lower court that the inspection of corporate records may be denied on the ground that it is intended for an improper motive or purpose, the law having granted such right to a stockholder in clear and unconditional terms. He further argues that, assuming that a proper motive or purpose for the desired examination is necessary for its exercise, there is nothing improper in his purpose for asking for the examination and inspection herein involved.

Petitioner may no longer insist on his interpretation of Section 51 of Act No. 1459, as amended, regarding the right of a stockholder to inspect and examine the books and records of a corporation. The former Corporation Law (Act No. 1459, as amended) has been replaced by Batas Pambansa Blg. 68, otherwise known as the "Corporation Code of the Philippines."

The right of inspection granted to a stockholder under Section 51 of Act No. 1459 has been retained, but with some modifications. The second and third paragraphs of Section 74 of Batas Pambansa Blg. 68 provide the following:

The records of all business transactions of the corporation and the minutes of any meeting shag be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense.

Any officer or agent of the corporation who shall refuse to allow any director, trustee, stockholder or member of the corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal; and Provided, further, That it shall be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporation's records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand.

As may be noted from the above-quoted provisions, among the changes introduced in the new Code with respect to the right of inspection granted to a stockholder are the following the records must be kept at the principal office of the corporation; the inspection must be made on business days; the stockholder may demand a copy of the excerpts of the records or minutes; and the refusal to allow such inspection shall subject the erring officer or agent of the corporation to civil and criminal liabilities. However, while seemingly enlarging the right of inspection, the new Code has prescribed limitations to the same. It is now expressly required as a condition for such examination that the one requesting it must not have been guilty of using improperly any information through a prior examination, and that the person asking for such examination must be "acting in good faith and for a legitimate purpose in making his demand."

The unqualified provision on the right of inspection previously contained in Section 51, Act No. 1459, as amended, no longer holds true under the provisions of the present law. The argument of the petitioner that the right granted to him under Section 51 of the former Corporation Law should not be dependent on the propriety of his motive or purpose in asking for the inspection of the books of the respondent bank loses whatever validity it might have had before the amendment of the law. If there is any doubt in the correctness of the ruling of the trial court that the right of inspection granted under Section 51 of the old Corporation Law must be dependent on a showing of proper motive on the part of the stockholder demanding the same, it is now dissipated by the clear language of the pertinent provision contained in Section 74 of Batas Pambansa Blg. 68.

Although the petitioner has claimed that he has justifiable motives in seeking the inspection of the books of the respondent bank, he has not set forth the reasons and the purposes for which he desires such inspection, except to satisfy himself as to the truth of published reports regarding certain transactions entered into by the respondent bank and to inquire into their validity. The circumstances under which he acquired one share of stock in the respondent bank purposely to exercise the right of inspection do not argue in favor of his good faith and proper motivation. Admittedly he sought to be a stockholder in order to pry into transactions entered into by the respondent bank even before he became a stockholder. His obvious purpose was to arm himself with materials which he can use against the respondent bank for acts done by the latter when the petitioner was a total stranger to the same. He could have been impelled by a laudable sense of civic consciousness, but it could not be said that his purpose is germane to his interest as a stockholder.

We also find merit in the contention of the respondent bank that the inspection sought to be exercised by the petitioner would be violative of the provisions of its charter. (Republic Act No. 1300, as amended.) Sections 15, 16 and 30 of the said charter provide respectively as follows:

Sec. 15. Inspection by Department of Supervision and Examination of the Central Bank. — The National Bank shall be subject to inspection by the Department of Supervision and Examination of the Central Bank'

Sec. 16. Confidential information. —The Superintendent of Banks and the Auditor General, or other officers designated by law to inspect or investigate the condition of the National Bank, shall not reveal to any person other than the President of the Philippines, the Secretary of Finance, and the Board of Directors the details of the inspection or investigation, nor shall they give any information relative to the funds in its custody, its current accounts or deposits belonging to private individuals, corporations, or any other entity, except by order of a Court of competent jurisdiction,'

Sec. 30. Penalties for violation of the provisions of this Act.— Any director, officer, employee, or agent of the Bank, who violates or permits the violation of any of the provisions of this Act, or any person aiding or abetting the violations of any of the provisions of this Act, shall be punished by a fine not to exceed ten thousand pesos or by imprisonment of not more than five years, or both such fine and imprisonment.

The Philippine National Bank is not an ordinary corporation. Having a charter of its own, it is not governed, as a rule, by the Corporation Code of the Philippines. Section 4 of the said Code provides:

SEC. 4. Corporations created by special laws or charters. — Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them. supplemented by the provisions of this Code, insofar as they are applicable.

The provision of Section 74 of Batas Pambansa Blg. 68 of the new Corporation Code with respect to the right of a stockholder to demand an inspection or examination of the books of the corporation may not be reconciled with the abovequoted provisions of the charter of the respondent bank. It is not correct to claim, therefore, that the right of inspection under Section 74 of the new Corporation Code may apply in a supplementary capacity to the charter of the respondent bank.

WHEREFORE, the petition is hereby DISMISSED, without costs.

G.R. No. L-37064             October 4, 1932

EUGENIO VERAGUTH, Director and Stockholder of the Isabela Sugar Company, Inc., petitioner, vs.ISABELA SUGAR COMPANY, INC., GIL MONTILLA, Acting President, and AGUSTIN B. MONTILLA, Secretary of the same corporation, respondents.

Jose B. Gamboa for petitioner.Agustin P. Seva for respondents.

 

MALCOLM, J.:

The parties to this action are Eugenio Veraguth, a director and stockholder of the Isabela Sugar Company, Inc., who is the petitioner, and the Isabela Sugar Company, Inc., Gil Montilla, acting president of the company, and Agustin B. Montilla, secretary of the company, who are the respondents. The petitioner prays: (a) That the respondents be required within five days from receipt of notice of this petition to show cause why they refuse to notify the petitioner, as director, of the regular and special meetings of the board of directors, and to place at his disposal at reasonable hours, the minutes, and documents, and books of the aforesaid corporation, for his inspection as director and stockholder, and to issue, upon payment of the fees, certified copies of any documentation in connection with said minutes, documents, and books of the corporation; and (b) that, in view of the memoranda and hearing of the parties, a final and absolute writ of mandamus be issued to each and all of the respondents to notify immediately the petitioner within the reglamentary period, of all regular and special meetings of the board of directors of the Isabela Sugar Central Company, Inc., and to place at his disposal at reasonable hours the minutes, documents, and books of said corporation for his inspection as director and stockholder, and to issue immediately, upon payment of the fees, certified copies of any documentation in connection with said minutes, documents, and the books of the aforesaid corporation. To the petition an answer has been interposed by the respondent, too long to be here summarized, which raised questions of fact and law. Following the taking of considerable before the clerk as commissioner, the case has been submitted on memoranda.

It should first be observed that when the case was filed here, it was, in accordance with settled practice, dismissed without prejudice to the right of the petitioner to present the action before the Court of First Instance of Occidental Negros. Thereafter, on a motion of reconsideration being presented, this order was set aside and the case was permitted to continue in this court. On further reflection, we now feel that this was error, and that it would have been the correct practice to have required the petitioner to present the action in a court of First Instance which is better equipped for the taking of testimony and the resolution of questions of fact than is the appellate court. Only with considerable difficulty, therefore, can we decide the issues of fact, since none of the members of the court saw or heard the witnesses testify.

Speaking to the first point with which the petition is concerned, relating to the alleged failure of the secretary of the company to notify the petitioner in due time of a special meeting of the company, we find by-laws, together with a resolution of the board of directors, providing for the holding of ordinary and special meetings. Whether there was a malicious attempt to keep Director Veraguth from attending a special meeting of the board of the board of directors at which the compensation of the attorneys of the company was fixed, or whether Director Veraguth, in a spirit of antogonism, has made this merely a pretext to cause trouble, we are unable definitely to say. This much, however, can appropriately be stated and is decisive, and this is that the meeting in question is in the past and, therefore, now merely presents an academic question; that no damage was caused to Veraguth by the action taken at the special meeting which he did not attend, since his interests were fully protected by the Philippine National Bank; and that as to meetings in the future it is to be presumed that the secretary of the company will fulfill the requirements of the resolutions of the company pertaining to regular and special meetings. It will, of course, be incumbent upon Veraguth to give formal notice to the secretary of his post-office address if he desires notice sent to a particular residence. 1awphil.net

On the second question pertaining to the right of inspection of the books of the company, we find Director Veraguth telegraphing the secretary of the company, asking the latter to forward in the shortest possible time a certified copy of the resolution of the board of directors concerning the payment of attorney's fees in the case against the Isabela Sugar

Company and others. To this the secretary made answer by letter stating that, since the minutes of the meeting in question had not been signed by the directors present, a certified copy could not be furnished and that as to other proceedings of the stockholders a request should be made to the president of the Isabela Sugar Company, Inc. It further appears that the board of directors adopted a resolution providing for inspection of the books and the taking of copies "by authority of the President of the corporation previously obtained in each case."

The Corporation Law, section 51, provides that:

All business corporations shall keep and carefully preserve a record of all business transactions, and a minute of all meetings of directors, members, or stockholders, in which shall be set forth in detail the time and place of holding the meeting was regular or special, if special its object, those present and absent, and every act done or ordered done at the meeting. . . .

The record of all business transactions of the corporation and the minutes of any meeting shall be open to the inspection of any director, member, or stockholder of the corporation at reasonable hours.

The above puts in statutory form the general principles of Corporation Law. Directors of a corporation have the unqualified right to inspect the books and records of the corporation at all reasonable times. Pretexts may not be put forward by officers of corporations to keep a director or shareholder from inspecting the books and minutes of the corporation, and the right of inspection is not to be denied on the ground that the director or shareholder is on unfriendly terms with the officers of the corporation whose records are sought to be inspected. A director or stockholder can not of course make copies, abstracts, and memoranda of documents, books, and papers as an incident to the right of inspection, but cannot, without an order of a court, be permitted to take books from the office of the corporation. We do not conceive, however, that a director or stockholder has any absolute right to secure certified copies of the minutes of the corporation until these minutes have been written up and approved by the directors. (See Fisher's Philippine Law of Stock Corporations, sec. 153, and Fletcher Cyclopedia Corporations, vol. 4, Chap. 45.)

Combining the facts and the law, we do not think that anything improper occurred when the secretary declined to furnish certified copies of minutes which had not been approved by the board of directors, and that while so much of the last resolution of the board of directors as provides for prior approval of the president of the corporation before the books of the corporation can be inspected puts an illegal obstacle in the way of a stockholder or director, that resolution, so far as we are aware, has not been enforced to the detriment of anyone. In addition, it should be said that this is a family dispute, the petitioner and the individual respondents belonging to the same family; that a test case between the petitioner and the respondents has not been begun in the Court of First Instance of Occidental Negros involving hundreds of thousands of pesos, and that the appellate court should not intrude its views to give an advantage to either party. We rule that the petitioner has not made out a case for relief by mandamus.

Petition denied with costs.

Avanceña, C.J., Villamor, Villa-Real, Hull and Imperial, JJ., concur.

May 19, 1950

G.R. No. L-1721

JUAN D. EVANGELISTA ET AL., plaintiffs-appellants, 

vs.

RAFAEL SANTOS, defendant-appellee.

Antonio Gonzales for appellants.Benjamin H. Tirol for appellee.REYES, J.:

This is an action by the minority stockholders of a corporation against its

principal officer for damages resulting from his mismanagement of its

affairs and misuse of its assets.

The complaint alleges that plaintiffs are minority stockholders of the Vitali

Lumber Company, Inc., a Philippine corporation organized for the

exploitation of a lumber concession in Zamboanga, Philippines; that

defendant holds more than 50 per cent of the stocks of said corporation and

also is and always has been the president, manager, and treasurer thereof;

and that defendant, in such triple capacity, through fault, neglect, and

abandonment allowed its lumber concession to lapse and its properties and

assets, among them machineries, buildings, warehouses, trucks, etc., to

disappear, thus causing the complete ruin of the corporation and total

depreciation of its stocks. The complaint therefore prays for judgment

requiring defendant: (1) to render an account of his administration of the

corporate affairs and assets: (2) to pay plaintiffs the value of t heir respective

participation in said assets on the basis of the value of the stocks held by

each of them; and (3) to pay the costs of suit. Plaintiffs also ask for such

other remedy as may be and equitable.

The complaint does not give plaintiffs' residence, but, but purposes of

venue, alleges that defendant resides at 2112 Dewey Boulevard, corner

Libertad Street, Pasay, province of Rizal. Having been served with

summons at that place, defendant filed a motion for the dismissal of the

complaint on the ground of improper venue and also on the ground that the

complaint did not state a cause of action in favor of plaintiffs.

In support of the objection to the venue, the motion, which is under oath,

states that defendant is a resident of Iloilo City and not of Pasay, and at the

hearing of the motion defendant also presented further affidavit to the effect

that while he has a house in Pasay, where members of his family who are

studying in Manila live and where he himself is sojourning for the purpose

of attending to his interests in Manila, yet he has permanent residence in the

City of Iloilo where he is registered as a voter for election purposes and has

been paying his residence certificate. Plaintiffs opposed the motion for

dismissal but presented no counter proof and merely called attention to the

Sheriff's return showing service of summons on defendant personally at his

alleged residence at No. 2112 Dewey Boulevard, Pasay.

After hearing, the lower court rendered its order, granting the motion for

dismissal upon the two grounds alleged by defendant, and reconsideration of

this order having been denied, plaintiffs have appealed to this Court.

The appeal presents two questions. The first refers to venue and the second,

to the right of the plaintiffs to bring this action for their benefit.

As to the first question, it is important to remember that the laying of the

venue of an action is not left to plaintiff's caprice. The matter is regulated by

the Rules of Court. And in actions like the present, which is one in personam, the regulation applicable is that contained in section 1 of Rule

5, which provides:

Civil actions in Courts of First Instance may be commenced and tried where

the defendant or any of the defendant resides or may be found, or where the

plaintiff or any of the plaintiffs resides, at the election of the plaintiff.

Objection to improper venue may be interposed at any time prior to the trial.

(Moran's Comments on the Rules of Court, Vol. I, 2nd ed., p. 108.)

Believing that defendant resided in the province of Rizal, herein plaintiffs

brought their action in the Court of First Instance of that province. But that

belief proved erroneous, for the lower court found after hearing that

defendant had his residence in Iloilo. The finding is based on defendant's

sworn statement not rebutted by any proof to the contrary.

There is nothing to the contention that defendant's motion to dismiss

necessarily presupposes a hypothetical admission of the allegations of the

complaint, among them the averment that defendant is a resident of Rizal

province, for the motion precisely denies that averment and alleges that his

real residence is in Iloilo City. This, defendant had the right to do in

objecting to the court's jurisdiction on the ground of improper venue.

Section 1 of Rule 5 may seem, at first blush, to authorize the laying of the

venue in the province where the defendant "may be found." But this phrase

has already been held to have a limited application. It is the same phrase

used in section 377 of Act 190 from which section 1 of Rule 5 was taken,

and as construed by this Court it applies only to cases where defendant has

no residence in the Philippine Islands. This was the construction adopted in

the case of Cohen   vs . Benguet Commercial Co., Ltd., 34 Phil. 526, which was an action brought in Manila by a nonresident against a

corporation which had its residence for legal purposes in Baguio but whose

President was found in Manila and there served with summons. This Court

there said:

Section 377 provides that actions of this character "may be brought in any

province where the defendants or any necessary party defendant may reside

or be found, or in any province where the plaintiff or one of the plaintiffs

resides, at the election of the plaintiff." The plaintiff in this action has no

residence in the Philippine Islands. Only one of the parties to the action

resides here. There can be, therefore, no election by plaintiff as to the trial. It

must be in the province where the defendant resides. The defendant resides,

in the eye of the law, in Baguio. Was it "found" in the city of Manila under

section 377, its president being in that city where the service of summons

was made? We think not. The word "found" as used section 377 has a

different meaning that belongs to it as used in section 394, which refers

exclusively to the place where the summons may be served. As we have said

a summons may be legally served on a defendant wherever he may be

"found," i. e., wherever he may be, provided he be in the Philippine Islands;

but the venue cannot be laid wherever the defendant may be "found." There

is an element entering in section 377 which is not present in section 394,

that is a residence. Residence of the plaintiff or defendant does not affect

the place where a summons may be served; but residence is the vital thing

when we deal with venue. The venue must be laid in the province where one

of the parties resides. If the plaintiff is a nonresident the venue must laid in

the province of the defendant's residence. The venue can be laid in the

province where defendant is "found" only when defendant has no residence

in the Philippine Islands. A defendant can not have a residence in one

province and be "found" in another. As long as he has a residence in the

Philippine Islands he can be "found," for the purposes of section

377, onlyin the province of his residence. In such case the words

"residence" and "found" are synonymous. If he is a nonresident then the

venue may laid in the province where he is "found" at the time venue the

action is commenced or in the province of plaintiff's residence. This applies

also to a domestic corporation.

While the service of the summons was good in either Baguio or Manila we

are of the opinion that the objection of the defendant to the place of trial was

proper in both cases and that the trial court should have held that the venue

was improperly laid.

And elaborating on the point when the case came up for reconsideration, the

Court further said:

The moving party contends that the venue was properly laid under section

377 in that was laid in the province where the defendant was found at the

time summons was served on its president, he having been found and served

with process in the city of Manila. for the purpose of the discussion we

assumed in the main case, as the plaintiff claimed, that the defendant was in

fact and in law found in the city of Manila; and proceeded to decide the

cause upon the theory that, even if the defendant were found in the city of

Manila, that did not justify, under the facts of the case, the laying of the

venue in the city of Manila.

We do not believe that the moving party's objection that our construction

deprives the word "found" of all significance and results, in effect, in

eliminating it from the statue, is sound. We do not deprive it of all

significance and effect and do not eliminate it from the statue. We give it the

only effect which can be given it and still accord with the other provisions

of the section which give defendant the right to have the venue laid in the

province of his residence, the effect which it was intended by the legislature

they should have. We held that the word "found" was applicable in certain

cases, and in such cases gave it full significance and effect. We declared that

it was applicable and effective in cases where the defendant is a nonresident.

In such cases where the defendant is a nonresident. In such cases the venue

may be laid wherever he may be found in the Philippine Islands at the time

of the service of the process, but we also held that where he is a resident of

the Philippine Islands the word "found" has no application and the venue

must be laid in the province where he resides.

The construction which the moving party asks us to place on that provision

of section 377 above quoted would result in the destruction of the privilege

conferred by the section upon a resident defendant which requires the venue

to be laid in the province where he resides. This is clear; for, if the venue

may be laid in any province where the defendant, although a resident of

some other province, any be found at the time process is served on him, then

the provision that it shall be laid in the province where he resides is no value

to him. If a defendant residing in the province of Rizal is helpless when the

venue is laid in the province of Mindoro in an action in which the plaintiff is

a nonresident or resides in Manila, what is the value of a residence in Rizal?

If a defendant residing in Jolo is without remedy when a nonresident

plaintiff or a plaintiff residing in Jolo lays the venue in Bontoc because the

defendant happens to be found there, of what significance is a residence in

Jolo? The phrases "where the defendant ... may reside" and "or be found"

must be construed together and in such manner that both may be given

effect. The construction asked for by the moving party would deprive the

phrase "where the defendant ... may reside" of all significance, as the

plaintiff could always elect to lay the venue in the province where the

defendant was "found" and not where he resided; whereas the construction

which we place upon these phrases permits both to have effect. We declare

that, when the defendant is a resident of the Philippine Islands, the venue

must be laid either in the province where the plaintiff resides or in the

province where the defendant resides, and in no other province. Where,

however, the defendant is a nonresident the venue may be laid wherever

defendant may be found in the Philippine Islands. This construction gives

both phrases their proper and legitimate effect without doing violence to the

spirit which informs all laws relating to venue and which insists always that

the action shall tried in the place where the greater convenience of the

parties will be served. Ordinarily a defendant's witness are found where the

defendant resides; and plaintiff's witnesses are generally found where he

resides or where the defendant resides. It is, therefore, generally desirable to

have the action tried where on of the resides. Where the plaintiff is a

nonresident and the contract upon which suit is brought was made in the

Philippine Islands it may safely be asserted that the convenience of the

defendant would be best served by a trial in the province where he resides.

The fact that defendant was sojourning in Pasay t the time he was served

with summons does not make him a resident of that place for purposes of

venue. Residence is "the permanent home, the place to which, whenever

absent for business or pleasure, one intends to return, ..." (67 C.J., pp. 123-

124.) A man can have but one domicile at a time (Alcantara   vs . Secretary of Interior, 61 Phil., 459), and residence is anonymous

with domicile under section 1 of Rule 5 (Moran's Comments, supra, p.

104).

In view of the foregoing, we hold that the objection to the venue was

correctly sustained by the lower court.

As to the second question, the complaint shows that the action is for

damages resulting from mismanagement of the affairs and assets of the

corporation by its principal officer, it being alleged that defendant's

maladministration has brought about the ruin of the corporation and the

consequent loss of value of its stocks. The injury complained of is thus

primarily to the corporation, so that the suit for the damages claimed should

be by the corporation rather than by the stockholders (3 Fletcher,

Cyclopedia of Corporation pp. 977-980). The stockholders may not directly

claim those damages for themselves for that would result in the

appropriation by, and the distribution among them of part of the corporate

assets before the dissolution of the corporation and the liquidation of its

debts and liabilities, something which cannot be legally done in view of

section 16 of the Corporation Law, which provides:

No shall corporation shall make or declare any stock or bond dividend or

any dividend whatsoever from the profits arising from its business, or divide

or distribute its capital stock or property other than actual profits among its

members or stockholders until after the payment of its debts and the

termination of its existence by limitation or lawful dissolution.

But while it is to the corporation that the action should pertain in cases of

this nature, however, if the officers of the corporation, who are the ones

called upon to protect their rights, refuse to sue, or where a demand upon

them to file the necessary suit would be futile because they are the very ones

to be sued or because they hold the controlling interest in the corporation,

then in that case any one of the stockholders is allowed to bring suit (3

Fletcher's Cyclopedia of Corporations, pp. 977-980). But in that case it is the

corporation itself and not the plaintiff stockholder that is the real property in

interest, so that such damages as may be recovered shall pertain to the

corporation (Pascual   vs . Del Saz Orosco, 19 Phil. 82, 85 ). In other

words, it is a derivative suit brought by a stockholder as the nominal party

plaintiff for the benefit of the corporation, which is the real property in

interest (13 Fletcher, Cyclopedia of Corporations, p. 295).

In the present case, the plaintiff stockholders have brought the action not for

the benefit of the corporation but for their own benefit, since they ask that

the defendant make good the losses occasioned by his mismanagement and

pay to them the value of their respective participation in the corporate assets

on the basis of their respective holdings. Clearly, this cannot be done until

all corporate debts, if there be any, are paid and the existence of the

corporation terminated by the limitation of its charter or by lawful

dissolution in view of the provisions of section 16 of the Corporation Law.

It results that plaintiff's complaint shows no cause of action in their favor so

that the lower court did not err in dismissing the complaint on that ground.

While plaintiffs ask for remedy to which they are not entitled unless the

requirement of section 16 of the Corporation Law be first complied with, we

note that the action stated in their complaint is susceptible of being

converted into a derivative suit for the benefit of the corporation by a mere

change in the prayer. Such amendment, however, is not possible now, since

the complaint has been filed in the wrong court, so that the same last to be

dismissed.

The order appealed from is therefore affirmed, but without prejudice to the

filing of the proper action in which the venue shall be laid in the proper

province. Appellant's shall pay costs. So ordered.

Moran, C.J., Ozaeta, Pablo, Bengzon, Tuason, and Montemayor, JJ., concur.

G.R. No. L-22399             March 30, 1967

REPUBLIC BANK, represented in this action by DAMASO P. PEREZ, etc., plaintiff-appellant, vs.MIGUEL CUADERNO, BIENVENIDO DIZON, PABLO ROMAN, THE BOARD OF DIRECTORS OF THE REPUBLIC BANK AND THE MONETARY BOARD OF THE CENTRAL BANK OF THE PHILIPPINES, defendants-appellees. Crispin D. Baizas and Associates and Halili, Bolinao and Associates for plaintiff-appellant.

N. M. Balboa, F.E. Evangelista and S. Malvar for defendant-appellee Monetary Board.Norberto J. Quisumbing and H.V. Quisumbing for other defendants-appellees.

REYES, J.B.L., J.:

Direct appeal from an order of the Court of First Instance of Manila, in its civil case No. 53936, dismissing the petitioner's complaint on the ground of failure to state cause of action.

In the Court below, Damaso Perez, a stockholder of the Republic Bank, a Philippine banking corporation domiciled in Manila, instituted a derivative suit for and in behalf of said Bank, against Miguel Cuaderno, Bienvenido Dizon, the Board of Directors of the Republic Bank, and the Monetary Board of the Central Bank of the Philippines. Paragraph 6 of the Complaint (Rec. on Appeal, p. 7) expressly pleaded the following: .

6. That the relator herein filed the present derivative suit without any further demand on the Board of Directors of the Republic Bank for the reason that such formal demand to institute the present complaint would be a futile formality since the members of the board are personally chosen by defendant Pablo Roman himself.

For a cause of action plaintiff alleged, inter alia, that Damaso Perez had complained to the Monetary Board of the Central Bank against certain frauds allegedly committed by defendant Pablo Roman, in that being chairman of the Board of Directors of the Republic Bank, and of its Executive Loan Committee, in 1957 to 1959, "in grave abuse of his fiduciary duty and taking advantage of his said positions and in connivance with other

officials of the Republic Bank", Roman had fraudulently granted or caused to be granted loans to fictitious and non-existing persons and to their close friends, relatives and/or employees, who were in reality their dummies, on the basis of fictitious and inflated appraised values of real estate properties; that said loans amounted to almost 4 million pesos; that acting upon the complaint, Miguel Cuaderno (then Governor of the Central Bank) and the Monetary Board ordered an investigation, which was carried out by Bank Examiners; that they and the Superintendent of Banks of the Central Bank reported that certain mortgage loans amounting to P2,303,400.00 were granted in violation of sections 77, 78 and 88 of the General Banking Act; that acting on said reports, the Monetary Board, of which defendant Cuaderno was a member, ordered a new Board of Directors of the Republic Bank to be elected, which was done, and subsequently approved by the Monetary Board; that on January 5, 1960, the latter accepted the offer of Pablo Roman to put up adequate security for the questioned loans made by the Republic Bank, and such security was made a condition for the resumption of the Bank's normal operations; that subsequently, the Central Bank through its Governor, Miguel Cuaderno, referred to special prosecutors of the Department of Justice on July 22, 1960, the banking frauds and violations of the Banking Act, reported by the Superintendent of Banks, for investigation and prosecution, but no information was filed up to the time of the retirement of Cuaderno in 1961; that other similar frauds were subsequently discovered; that to neutralize the impending action against him, Pablo Roman engaged Miguel Cuaderno as technical consultant at a compensation of P12,500.00 per month, and selected Bienvenido Dizon as chairman of the Board of Directors of the Republic Bank; that the Board of Directors composed of individuals personally selected and chosen by Roman, connived and confederated in approving the appointment and selection of Cuaderno and Dizon; that such action was motivated by bad faith and without intention to protect the interest of the Republic Bank but were prompted to protect Pablo Roman from criminal prosecution; that the appointment of Cuaderno and his acceptance of the position of technical consultant are immoral, anomalous and illegal, and his compensation highly unconscionable, because court actions involving the actuations of Cuaderno as Governor and Member or Chairman of the Monetary Board are still pending in court; that as member of the Monetary Board from 1961 to 1962, Bienvenido Dizon exercised supervision over the Republic Bank; that the selection of Dizon as chairman of the Board of the Republic Bank after he was forced to resign from the presidency of the Philippine National Bank and from membership of the Monetary Board and within one year thereafter is in violation of option 3, sub-paragraph (d) of the Anti-Graft and Corrupt Practices Act; that both Cuaderno and Dizon were alter egos of Pablo Roman; that the Monetary Board was about to approve the appointment of Cuaderno and Dizon and would do so unless enjoined.

The complaint, therefore, prayed for a writ of preliminary injunction against the Monetary Board to prevent its confirmation of the appointments of Dizon and Cuaderno; against the Board of Directors of the Republic Bank from recognizing Cuaderno as technical consultant and Dizon as Chairman of the Board; and against Pablo Roman from appointing or selecting officers or directors of the Republic Bank, and against the recognition of any such appointees until final determination of the action. And concluded by praying that after due hearing, judgment be rendered, —

a) making the writ of injunction permanent;

b) declaring the appointment of defendant Miguel Cuaderno as technical consultant with monthly compensation of P12,500.00 unconscionable, immoral, illegal and null and void;

c) declaring the selection of defendant Bienvenido Dizon as chairman of the Board of Directors of the Republic Bank violative of Section 3, sub-paragraph (d) of Republic Act No. 5019, otherwise known as the Anti-Graft and Corrupt Practices Act, and therefore, illegal and null and void;

d) declaring that defendant Pablo Roman, in view of his criminal liability for the fraudulent real estate mortgage loans in the Republic Bank amounting to P4 million, has no right to select or to be allowed to select person or persons who are his alter egos to manage the Republic Bank, and enjoining the defendant Board of Directors of the Republic Bank from recognizing any officers or directors appointed or selected by defendant Pablo Roman;

e) ordering defendants Miguel Cuaderno and Bienvenido Dizon to return to the Republic Bank all amounts they may have received either in the form of compensation, remuneration or emolument, with an interest thereon at the rate of 6%; or to order defendant Pablo Roman to refund the amounts paid to said defendant Miguel Cuaderno and defendant Bienvenido Dizon, and to pay such reasonable damages to the plaintiff Republic Bank;

f) ordering all the defendants to pay the sum of P25,000.00 as attorney's fees, including all expenses of litigation and costs of this suit.

The Monetary Board filed an answer with denials, admissions and affirmative defenses; but the other defendants filed separate motions to dismiss on practically the same grounds: no valid cause of action against the individual movants; lack of legal capacity of plaintiff-relator to sue; and non-exhaustion of intra-corporate remedies. These motions were duly opposed by plaintiff Damaso Perez. 1äwphï1.ñët

On October 24, 1963, the court, "taking into consideration the grounds alleged in the motions to dismiss and the opposition for the issuance of a writ of preliminary injunction and the affirmative defenses filed by the defendants and the arguments in support thereof", and "that there are already eight cases pending in the different branches of this court between practically the same parties", denied the petition for a writ of preliminary injunction and dismissed the case. The court in effect suggested that the matter at issue in the case may be presented in any of the pending eight cases by means of amended and supplemental pleadings.

Plaintiff Damaso Perez thereupon appealed to this Court.

The issue in this appeal, then, is whether or not the Court below erred in dismissing the complaint. In this connection, it should be remembered that the defenses of the Monetary Board of the Central Bank, being interposed in an answer and not in a motion to dismiss, are not here at issue. Our sole concern is with the motions to dismiss of the other defendants, Roman, Cuaderno, Dizon, and the Board of Directors of the Republic Bank.

They mainly controvert the right of plaintiff to question the appointment and selection of defendants Cuaderno and Dizon, which they contend to be the result of corporate acts with which plaintiff, as stockholder, cannot interfere. Normally, this is correct, but Philippine jurisprudence is settled that an individual stockholder is permitted to institute a derivative or representative suit on behalf of the corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued or hold the control of the corporation. In such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party in interest (Pascual vs. Del Saz Orozco, 19 Phil. 82, 85; Everett vs. Asia Banking Corp., 45 Phil. 518; Angeles vs. Santos, 64 Phil. 697; Evangelista vs. Santos, 86 Phil. 388). Plaintiff-appellant's action here is precisely in conformity, with these principles. He is neither alleging nor vindicating his own individual interest or prejudice, but the interest of the Republic Bank and the damage caused to it. The action he has brought is a derivative one, expressly manifested to be for and in behalf of the Republic Bank, because it was futile to demand action by the corporation, since its Directors were

nominees and creatures of defendant Pablo Roman (Complaint, p. 6). The frauds charged by plaintiff are frauds against the Bank that redounded to its prejudice.

The complaint expressly pleads that the appointment of Cuaderno as technical consultant, and of Bienvenido Dizon to head the Board of Directors of the Republic Bank, were made only to shield Pablo Roman from criminal prosecution and not to further the interests of the Bank, and avers that both men are Roman's alter egos. There is no denying that the facts thus pleaded in the complaint constitute a cause of action for the bank: if the questioned appointments were made solely to protect Roman from criminal prosecution, by a Board composed by Roman's creatures and nominees, then the moneys disbursed in favor of Cuaderno and Dizon would be an unlawful wastage or diversion of corporate funds, since the Republic Bank would have no interest in shielding Roman, and the directors in approving the appointments would be committing a breach of trust; the Bank, therefore, could sue to nullify the appointments, enjoin disbursement of its funds to pay them, and recover those paid out for the purpose, as prayed for in the complaint in this case (Angeles vs. Santos, supra.).

Facts pleaded in the complaint are to be deemed accepted by the defendants who file a motion to dismiss the complaint for failure to state a cause of action. This is the cardinal principle in the matter. And, it has been ruled that the test of sufficiency of the facts alleged is whether or not the Court could render a valid judgment as prayed for, accepting as true the exclusive facts set forth in the complaint.1So rigid is the norm prescribed that if the Court should doubt the truth of the facts averred it must not dismiss the complaint but require an answer and proceed to trial on the merits.2

Defendants urge that the action is improper because the plaintiff was not authorized by the corporation to bring suit in its behalf. Any such authority could not be expected as the suit is aimed to nullify the action taken by the manager and the board of directors of the Republic Bank; and any demand for intra-corporate remedy would be futile, as expressly pleaded in the complaint. These circumstances permit a stockholder to bring a derivative suit (Evangelista vs. Santos, 86 Phil. 394). That no other stockholder has chosen to make common cause with plaintiff Perez is irrelevant, since the smallness of plaintiff's holdings is no ground for denying him relief (Ashwander vs. TVA, 80 L. Ed. 688). At any rate, it is yet too early in the proceedings for the absence of other stockholders to be of any significance, no issues having even been joined.

There remains the procedural question whether the corporation itself must be made party defendant. The English practice is to make the corporation a party plaintiff, while in the United States, the usage leans in favor of its being joined as party defendant (see Editorial Note, 51 LRA [NS] 123). Objections can be raised against either method. Absence of corporate authority would seem to militate against making the corporation a party plaintiff, while joining it as defendant places the entity in the awkward position of resisting an action instituted for its benefit. What is important is that the corporation' should be made a party, in order to make the Court's judgment binding upon it, and thus bar future relitigation of the issues. On what side the corporation appears loses importance when it is considered that it lay within the power of the trial court to direct the making of such amendments of the pleadings, by adding or dropping parties, as may be required in the interest of justice (Revised Rule 3, sec. 11). Misjoinder of parties is not a ground to dismiss an action. (Ibid.)

We see no reason to support the contention of defendant Bienvenido Dizon that the action of plaintiff amounts to aquo warranto proceeding. Plaintiff Perez is not claiming title to Dizon's position as head of the Republic Bank's board of directors. The suit is aimed at preventing the waste or diversion of corporate funds in paying officers appointed solely to protect Pablo Roman from criminal prosecution, and not to carry on the corporation's

bank business. Whether the complaint's allegations to such effect are true or not must be determined after due hearing.

Independently of the grounds advanced by the defendants in their motions to dismiss, the Court a quo gave as a further pretext for the dismissal of the action the pendency of eight other lawsuits between practically the same parties; reasoning that the question at issue in the present case could be incorporated in any one of the other actions by amended or supplemental pleading. We fail to see that this justifies the dismissal of the case under appeal. In the first place, there is no pretense that the cause of action here was already included in any of the other pending cases. As a matter of fact, dismissal of the present action was not sought on the ground of pendency of another action between the same parties. Secondly, the amendment of a complaint after a responsive pleading is filed, would rest upon the discretion of the party and the Court. Hence, this case cannot be dismissed simply because of the possibility that the cause of action here can be incorporated or introduced in any of those of the pending cases.

In view of the foregoing, the order dismissing the complaint is reversed and set aside. The case is remanded to the court of origin with instructions to overrule the motions to dismiss and require the defendants to answer the complaint. Thereafter, the case shall be tried and decided on its merits. Costs against defendants-appellees. So ordered.

Concepcion, C.J., Dizon, Regala, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ., concur.Makalintal, J., took no part.

G.R. No. 85339 August 11, 1989

SAN MIGUEL CORPORATION, represented by EDUARDO DE LOS ANGELES, petitioners, vs.ERNEST KAHN, ANDRES SORIANO III, BENIGNO TODA, JR., ANTONIO ROXAS, ANTONIO PRIETO, FRANCISCO EIZMENDI, JR., EDUARDO SORIANO, RALPH KAHN and RAMON DEL ROSARIO, JR.,respondents.

Romulo, Mabanta, Buenaventura, Sayoc & De Los Angeles petitioner.

Roco & Bunag Law Offices for respondent Ernest Kahn.

Siguion Reyna, Montecillo and Ongsiako for other respondents.

 

NARVASA, J.:

On December 15, 1983, 33,133,266 shares of the outstanding capital stock of the San Miguel Corporation were acquired 1 by fourteen (14) other corporations, 2 and were placed under a Voting Trust Agreement in favor of the late Andres Soriano, Jr. When the latter died, Eduardo M. Cojuangco, Jr. was elected Substitute Trustee on April 9, 1984 with power to delegate the trusteeship in writing to Andres Soriano III. 3 Shortly after the Revolution of February, 1986, Cojuangco left the country amid "persistent reports" that "huge and unusual cash disbursements from the funds of SMC" had been irregularly made, and the resources of the firm extensively used in support of the candidacy of Ferdinand Marcos during the snap elections in February, 1986 . 4

On March 26, 1986, an "Agreement" was executed between Andres Soriano III, as "Buyer," and the 14 corporations, as "Sellers," for the purchase by Soriano, "for himself and as agent of several persons," of the 33,133,266 shares of stock at the price of P100.00 per share, or "an aggregate sum of Three Billion Three Hundred Thirteen Million Three Hundred Twenty Six Thousand Six Hundred (P3,313,326,600.00) Pesos payable in specified installments. 5 The Agreement revoked the voting trust above mentioned, and expressed the desire of the 14 corporations to sell the shares of stock "to pay certain outstanding and unpaid debts," and Soriano's own wish to purchase the same "in order to institutionalize and stabilize the management of the COMPANY in .. (himself) and the professional officer corps, mandated by the COMPANY's By- laws, and to direct the COMPANY towards giving the highest priority to its principal products and extensive support to agriculture programme of' the Government ... 6 Actually, according to Soriano and the other private respondents, the buyer of the shares was a foreign company, Neptunia Corporation Limited (of Hongkong, a wholly owned subsidiary of San Miguel International which is, in turn, a wholly owned subsidiary of San Miguel Corporation; 7 and it was Neptunia which on or about April 1, 1986 had made the down payment of P500,000,000.00, "from the proceeds of certain loans". 8

At this point the 33,133,266 SMC shares were sequestered by the Presidential Commission on Good Government (PCGG), on the ground that the stock belonged to Eduardo Cojuangco, Jr., allegedly a close associate and dummy of former President Marcos, and the sale thereof was "in direct contravention of .. Executive Orders Numbered 1 and 2 (.. dated February 28, 1986 and March 12, 1986, respectively) which prohibit .. the transfer, conveyance, encumbrance, concealment or liquidation of assets and properties acquired by former President Ferdinand Marcos and/or his wife, Mrs. Imelda Romualdez Marcos, their close relatives, subordinates, business associates. 9 The sequestration was subsequently lifted, and the sale allowed to proceed, on representations by San Miguel Corporation x x that the shares were 'owned by 1.3 million coconut farmers;' the seller corporations were 'fully owned' by said farmers and Cojuangco owned only 2 shares in one of the companies, etc. However, the sequestration was soon re-imposed by Order of the PCGG dated May 19, 1986 .. The same order forbade the SMC corporate Secretary to register any transfer or encumbrance of any of the stock without the PCGG's prior written authority. 10

San Miguel promptly suspended payment of the other installments of the price to the fourteen (14) seller corporations. The latter as promptly sued for rescission and damages. 11

On June 4,1986, the PCGG directed San Miguel Corporation"to issue qualifying shares" in the corporation to seven (7) individuals, including Eduardo de los Angeles, "from the sequestered shares registered as street certificates under the control of Anscor- Hagedorn Securities, Inc.," to "be held in trust by .. (said seven [7] persons) for the benefit of Anscor-Hagedom Securities, Inc. and/or whoever shall finally be determined to be the owner/owners of said shares. 12

In December, 1986, the SMC Board, by Resolution No. 86-122, "decided to assume the loans incurred by Neptunia for the down payment ((P500M)) on the 33,133,266 shares." The Board opined that there was "nothing illegal in this assumption (of liability for the loans)," since Neptunia was "an indirectly wholly owned subsidiary of SMC," there "was no additional expense or exposure for the SMC Group, and there were tax and other benefits which would redound to the SMC group of companies. 13

However, at the meeting of the SMC Board on January 30, 1987, Eduardo de los Angeles, one of the PCGG representatives in the SMC board, impugned said Resolution No. 86-12-2, denying that it was ever adopted, and stating that what in truth was agreed upon at the meeting of December 4, 1986 was merely a "further study" by Director Ramon del Rosario of a plan presented by him for the assumption of the loan. De los

Angeles also pointed out certain "deleterious effects" thereof. He was however overruled by private respondents. 14 When his efforts to obtain relief within the corporation and later the PCGG proved futile, he repaired to the Securities and Exchange Commission (SEC). lâwphî1.ñèt

He filed with the SEC in April, 1987, what he describes as a derivative suit in behalf of San Miguel Corporation, against ten (10) of the fifteen-member Board of Directors who had "either voted to approve and/or refused to reconsider and revoke Board Resolution No. 86-12-2." 15 His Amended Petition in the SEC recited substantially the foregoing antecedents and the following additional facts, to wit:

a) On April 1, 1986 Soriano, Kahn and Roxas, as directors of' Neptunia Corporation, Ltd., had met and passed a resolution authorizing the company to borrow up to US $26,500,000.00 from the Hongkong & Shanghai Banking Corporation, Hongkong "to enable the Soriano family to initiate steps and sign an agreement for the purchase of some 33,133,266 shares of San ,Miguel Corporation. 16

b) The loan of $26,500,000.00 was obtained on the same day, the corresponding loan agreement having been signed for Neptunia by Ralph Kahn and Carl Ottiger. At the latter's request, the proceeds of the loan were deposited in different banks 17 for the account of "Eduardo J. Soriano".

c) Three (3) days later, on April 4, 1986, Soriano III sent identical letters to the stockholders of San Miguel Corporation, 18 inter alia soliciting their proxies and announcing that "the Soriano family, friends and affiliates acquired a considerable block of San Miguel Corporation shares only a few days ago .., the transaction .. (having been) made through the facilities of the Manila Stock Exchange, and 33,133,266 shares .. (having thereby been) purchased for the aggregate price of' P3,313,326,600.00." The letters also stated that the purchase was "an exercise of the Sorianos' right to buy back the same number of shares purchased in 1983 by the .. (14 seller corporations)."

d) In implementing the assumption of the Neptunia loan and the purchase agreement for which said loan was obtained, which assumption constituted an improper use of corporate funds to pay personal obligations of Andres Soriano III, enabling him; to purchase stock of the corporation using funds of' the corporation itself, the respondents, through various subsequent machinations and manipulations, for interior motives and in breach of fiduciary duty, compound the damages caused San Miguel Corporation by, among other things: (1) agreeing to pay a higher price for the shares than was originally covenanted in order to prevent a rescission of the purchase agreement by the sellers; (2) urging UCPB to accept San Miguel Corporation and Neptunia as buyers of the shares, thereby committing the former to the purchase of its own shares for at least 25% higher than the price at which they were fairly traded in the stock exchanges, and shifting to said corporations the personal obligations of Soriano III under the purchase agreement; and (3) causing to be applied to the part payment of P1,800,000.00 on said purchase, various assets and receivables of San Miguel Corporation.

The complaint closed with a prayer for injunction against the execution or consummation of any agreement causing San Miguel Corporation to purchase the shares in question or entailing the use of its corporate funds or assets for said purchase, and against Andres Soriano III from further using or disposing of the funds or assets of the corporation for his obligations; for the nullification of the SMC Board's resolution of April 2, 1987 making San Miguel Corporation a party to the purchase agreement; and for damages.

Ernest Kahn moved to dismiss de los Angeles' derivative suit on two grounds, to wit:

1 De los Angeles has no legal capacity to sue because —

a) having been merely imposed by the PCGG as a director on San Miguel, he has no standing to bring a minority derivative suit;

b) he personally holds only 20 shares and hence cannotfairly and adequately represent the minority stockholders of the corporation;

c) he has not come to court with clean hands; and

2. The Securities & Exchange Commission has no jurisdiction over the controversy because the matters involved are exclusively within the business judgment of the Board of Directors. 19

Kahn's motion to dismiss was subsequently adopted by his correspondents . 20

The motion to dismiss was denied by SEC Healing Officer Josefina L. Pasay Paz, by order dated September 4, 1987. 21 In her view —

1) the fact that de los Angeles was a PCGG nominee was irrelevant because in law, ownership of even one share only, sufficed to qualify a person to bring a derivative suit;

2) it is indisputable that the action had been brought by de los Angeles for the benefit of the corporation and all the other stockholders;

3) he was a stockholder at the time of the commission of the acts complained of, the number of shares owned by him being to repeat, immaterial;

4) there is no merit in the assertion that he had come to Court with unclean hands, it not having been shown that he participated in the act complained of or ratified the same; and

5) where business judgment transgresses the law, the securities and Exchange Commission always has competence to inquire thereinto.

Kahn filed a petition for certiorari and prohibition with the Court of Appeals, seeking the annulment of this adverse resolution of the SEC Hearing Officer and her perpetual inhibition from proceeding with SEC Case No. 3152.

A Special Division of that Court sustained him, upon a vote of three-to-two. The majority 22 ruled that de los Angeles had no egal capacity to institute the derivative suit, a conclusion founded on the following propositions:

1) a party "who files a derivative suit should adequately represent the interests of the minority stockholders;" since "De los Angeles holds 20 shares of stock out of 121,645,860 or 0.00001644% (appearing to be

undisputed), (he) cannot even be remotely said to adequately represent the interests of the minority stockholders, (e)specially so when .. de los Angeles was put by the PCGG to vote the majority stock," a situation generating "a genuine conflict of interest;"

2) de los Angeles has not met this conflict-of-interest argument, i.e., that his position as PCGG-nominated director is inconsistent with his assumed role of representative of minority stockholders; not having been elected by the minority, his voting would expectedly consider the interest of the entity which placed him in the board of directors;

3) Baseco v. PCGG, May 27,1987, 23 has laid down the principle that the (a) PCGG cannot exercise acts of dominion over sequestered property, (b) it has only powers of administration, and (c) its voting of sequestered stock must be done only pursuant to its power of administration; and

4) de los Angeles' suit is not a derivative suit, a derivative suit being one brought for the benefit of the corporation.

The dissenting Justices, 24 on the other hand, were of the opinion that the suit had been properly brought by de los Angeles because —

1) the number of shares owned by him was immaterial, he being a stockholder in his own right;

2) he had not voted in favor of the resolution authorizing the purchase of the shares; and

3) even if PCGG was not the owner of the sequestered shares, it had the right to seek the protection of the interest of the corporation, it having been held that even an unregistered shareholder or an equitable owner of shares and pledgees of shares may be deemed a shareholder for purposes of instituting a derivative suit.

De los Angeles has appealed to this Court. He prays for reversal of the judgment of the Court of Appeals, imputing to the latter the following errors:

1) having granted the writ of certiorari despite the fact that Kahn had not first resorted to the plain remedy available to him, i.e., appeal to the SEC en banc and despite the fact that no question of jurisdiction was involved;

2) having ruled on Kahn's petition on the basis merely of his factual allegations, although he (de los Angeles) had disputed them and there had been no trial in the SEC; and

3) having held that he (de los Angeles) could not file a derivative suit as stockholder and/or director of the San Miguel Corporation.

For their part, and in this Court, the respondents make the following assertions:

1) SEC has no jurisdiction over the dispute at bar which involves the ownership of the 33,133,266 shares of SMC stock, in light of this Court's Resolution in G.R. Nos. 74910, 5075, 75094, 76397, 79459 and 79520, promulgated on August 10, 1988; 25

2) de los Angeles was beholden to the controlling stockholder in the corporation (PCGG), which had "imposed" him on the corporation; since the PCGG had a clear conflict of interest with the minority, de los Angeles, as director of the former, had no legal capacity to sue on behalf of the latter;

3) even assuming absence of conflict of interest, de los Angeles does not fairly and adequately represent the interest of the minority stockholders;

4) the respondents had properly applied for certiorari with the Court of Appeals because —

a) that Court had, by law, exclusive appellate jurisdiction over officers and agencies exercising quasi-judicial functions, and hence file competence to issue the writ of certiorari;

b) the principle of exhaustion of administrative remedies does not apply since the issue involved is one of law;

c) said respondents had no plain, speedy and adequate remedy within SEC;

d) the Order of the SEC Investigating Officer — denying the motion to dismiss — was issued without or in excess of jurisdiction, hence was correctly nullified by the Court of Appeals; and

e) de los Angeles had not raised the issue of absence of a motion for reconsideration by respondents in the SEC case; in any event, such a motion was unnecessary in the premises.

De los Angeles' Reply seeks to make the following points:

1) since the law lays down three (3) requisites for a derivative suit, viz:

a) the party bringing suit should be a shareholder as of the time of the act or transaction complained of,

b) he has exhausted intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea; and

c) c)the cause of action actually devolves on the corporation, the ,wrongdoing or harm having been caused to the corporation and not to .the particular stockholder bringing the suit;

and since (1) he is admittedly the owner of 20 shares of SMC stock in his own right, having acquired those shares as early as 1977, (2) he had sought without success to have the board of' directors remedy with wrong, and (3) that wrong was in truth a 'wrong against the stockholders of the corporation, generally, ,and not against him individually — and it was the corporation, and not he, particularly, that would be entitled to the appropriate' relief — the propriety of his suit cannot be gainsaid;

2) Kahn had not limited himself to questions of law in the proceedings in the Court of Appeals and hence could not claim exclusion from the scope of the doctrine of exhaustion of remedies; moreover, Rule 65, invoked by him, bars a resort to certiorari. where a plain, speedy and accurate remedy was available to him in this case, to wit, a motion for reconsideration before the Sec en banc and, contrary to the respondent's claim, De Los Angeles had in fact asserted to this propositions before the Appellate Tribunal; and

3) the respondent had not raised the issue of jurisdiction before the Court of Appeals; indeed, they admit to their Comment that that

issue has not yet been resolved by the SEC," be this as it may, the derivative suit does not fall within the BASECO doctrine since it does not involve any question of ownership of the 33,133,266 sequestered SMC shares but rather, the validity of the resolution of the board of directors for the assumption by the corporation, for the benefit of certain of its officers and stockholders, of liability for loans contracted by another corporation, which is an intra-corporate dispute within the exclusive jurisdiction of the SEC.

1. De los Angeles is not opposed to the asserted position of the PCGG that the sequestered SMC shares of stock belong to Ferdinand Marcos and/or his dummies and/or cronies. His consent to sit in the board as nominee of PCGG unquestionably indicates his advocacy of the PCGG position. He does not here seek, and his complaint in the SEC does not pray for, the annulment of the purchase by SMC of the stock in question, or even the subsequent purchase of the same stock by others 26 which proposition was challenged by (1) one Evio, in SEC Case No. 3000; (2) by the 14 corporations which sold the stock to SMC, in Civil Case No. 13865 of the Manila RTC, said cases having later become subject of G.R. No. 74910 of this Court; (3) by Neptunia, SMC, and others, in G.R. No. 79520 of this Court; and (4) by Eduardo Cojuangco and others in Civil Case No. 16371 of the RTC, Makati, [on the theory that the sequestered stock in fact belonged to coconut planters and oil millers], said case later having become subject of G.R. No. 79459 of this court . 27 Neither does de los Angeles impugn, obviously, the right of the PCGG to vote the sequestered stock thru its nominee directors — as was done by United Coconut Planters Bank and the 14 seller corporations (in SEC Case No. 3005, later consolidated with SEC Case No. 3000 above mentioned, these two (2) cases later having become subject of G.R.No. 76397) as well as by one Clifton Ganay, a UCPB stockholder (in G.R. No. 75094 of this Court). lâwphî1.ñèt 

28

The subject matter of his complaint in the SEC does not therefore fall within the ambit of this Court's Resolution of August 10, 1988 on the cases just mentioned, to the effect that, citing PCGG v. Pena, et al 29 an cases of the Commission regarding 'the funds, moneys, assets, and properties illegally acquired or misappropriated by former President Ferdinand Marcos, Mrs. Imelda Romualdez Marcos, their close relatives, Subordinates, Business Associates, Dummies, Agents, or Nominees, whether civil or criminal, are lodged within the exclusive and original jurisdiction of the Sandiganbayan,' and all incidents arising from, incidental to, or related to, such cases necessarily fall likewise under the Sandiganbayan's exclusive and original jurisdiction, subject to review on certiorari exclusively by the Supreme Court." His complaint does not involve any property illegally acquired or misappropriated by Marcos, et al., or "any incidents arising from, incidental to, or related to" any case involving such property, but assets indisputably belonging to San Miguel Corporation which were, in his (de los Angeles') view, being illicitly committed by a majority of its board of directors to answer for loans assumed by a sister corporation, Neptunia Co., Ltd.

De los Angeles' complaint, in fine, is confined to the issue of the validity of the assumption by the corporation of the indebtedness of Neptunia Co., Ltd., allegedly for the benefit of certain of its officers and stockholders, an issue evidently distinct from, and not even remotely requiring inquiry into the matter of whether or not the 33,133,266 SMC shares sequestered by the PCGG belong to Marcos and his cronies or dummies (on which- issue, as already pointed out, de los Angeles, in common with the PCGG, had in fact espoused the affirmative). De los Angeles' dispute, as stockholder and director of SMC, with other SMC directors, an intra-corporate one, to be sure, is of no concern to the Sandiganbayan, having no relevance whatever to the ownership- of the sequestered stock. The contention, therefore, that in view of this Court's ruling as regards the sequestered SMC stock above adverted to, the SEC has no jurisdiction over the de los Angeles complaint, cannot be sustained and must be rejected. The dispute concerns acts of the board of directors claimed to amount to fraud and misrepresentation which may be detrimental to the interest of the stockholders, or is one arising out of intra-corporate relations between and among stockholders, or between any or all of them and the corporation of which they are stockholders . 30

2. The theory that de los Angeles has no personality to bring suit in behalf of the corporation — because his stockholding is minuscule, and there is a "conflict of interest" between him and the PCGG — cannot be sustained, either.

It is claimed that since de los Angeles 20 shares (owned by him since 1977) represent only. 00001644% of the total number of outstanding shares (1 21,645,860), he cannot be deemed to fairly and adequately represent the interests of the minority stockholders. The implicit argument — that a stockholder, to be considered as qualified to bring a derivative suit, must hold a substantial or significant block of stock — finds no support whatever in the law. The requisites for a derivative suit 31 are as follows:

a) the party bringing suit should be a shareholder as of the time of the act or transaction complained of, the number of his shares not being material; 32

b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea; 33 and

c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused to the corporation and not to the particular stockholder bringing the suit. 34

The bona fide ownership by a stockholder of stock in his own right suffices to invest him with standing to bring a derivative action for the benefit of the corporation. The number of his shares is immaterial since he is not suing in his own behalf, or for the protection or vindication of his own particular right, or the redress of a wrong committed against him, individually, but in behalf and for the benefit of the corporation.

3. Neither can the "conflict-of-interest" theory be upheld. From the conceded premise that de los Angeles now sits in the SMC Board of Directors by the grace of the PCGG, it does not follow that he is legally obliged to vote as the PCGG would have him do, that he cannot legitimately take a position inconsistent with that of the PCGG, or that, not having been elected by the minority stockholders, his vote would necessarily never consider the latter's interests. The proposition is not only logically indefensible, non sequitur, but also constitutes an erroneous conception of a director's role and function, it being plainly a director's

duty to vote according to his own independent judgment and his own conscience as to what is in the best interests of the company. Moreover, it is undisputed that apart from the qualifying shares given to him by the PCGG, he owns 20 shares in his own right, as regards which he cannot from any aspect be deemed to be "beholden" to the PCGG, his ownership of these shares being precisely what he invokes as the source of his authority to bring the derivative suit.

4. It is also theorized, on the authority of the BASECO decision, that the PCGG has no power to vote sequestered shares of stock as an act of dominion but only in pursuance — to its power of administration. The inference is that the PCGG's act of voting the stock to elect de los Angeles to the SMC Board of Directors was unauthorized and void; hence, the latter could not bring suit in the corporation's behalf. The argument is strained and obviously of no merit. As already more than plainly indicated, it was not necessary for de los Angeles to be a director in order to bring a derivative action; all he had to be was a stockholder, and that he was owning in his own right 20 shares of stock, a fact not disputed by the respondents.

Nor is there anything in the Baseco decision which can be interpreted as ruling that sequestered stock may not under any circumstances be voted by the PCGG to elect a director in the company in which such stock is held. On the contrary, that it held such act permissible is evident from the context of its reference to the Presidential Memorandum of June 26, 1986 authorizing the PCGG, "pending the outcome of proceedings to determine the ownership of .. sequestered shares of stock,"'to vote such shares .. at all stockholders' meetings called for the election of directors ..," the only caveat being that the stock is not to be voted simply because the power to do so exists, whether it be to oust and replace directors or to effect substantial changes in corporate policy, programs or practice, but only "for demonstrably weighty and defensible grounds" or "when essential to prevent disappearance or wastage of corporate property."

The issues raised here do not peremptorily call for a determination of whether or not in voting petitioner de los Angeles to the San Miguel Board, the PCGG kept within the parameters announced in Baseco; and absent any showing to the contrary, consistently with the presumption that official duty is regularly performed, it must be assumed to have done so.

WHEREFORE, the petition is GRANTED. The appealed decision of the Court of Appeals in CA- G.R. SP No. 12857 — setting aside the order of September 4, 1987 issued in SEC Case No. 3153 and dismissing said case — is REVERSED AND SET ASIDE. The further disposition in the appealed decision for the issuance of a writ of preliminary injunction upon the filing and approval of a bond of P500,000.00 by respondent Ernest Kahn (petitioner in the Appellate Court) is also SET ASIDE, and any writ of injunction issued pursuant thereto is lifted. Costs against private respondents.

SO ORDERED.

Gancayco, Griñ;o-Aquino and Medialdea, JJ., concur.

G.R. No. 177549               June 18, 2009

ANTHONY S. YU, ROSITA G. YU and JASON G. YU, Petitioners, vs.JOSEPH S. YUKAYGUAN, NANCY L. YUKAYGUAN, JERALD NERWIN L. YUKAYGUAN, and JILL NESLIE L. YUKAYGUAN, [on their own behalf and on behalf of] WINCHESTER INDUSTRIAL SUPPLY, INC.,Respondents.

D E C I S I O N

CHICO-NAZARIO, J.:

Before Us is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, which seeks to reverse and set aside the Resolutions dated 18 July 20062 and 19 April 20073 of the Court of Appeals in CA-G.R. SP No. 00185. Upon herein respondents’ motion, the Court of Appeals rendered the assailed Resolution dated 18 July 2006, reconsidering its Decision4 dated 15 February 2006; and remanding the case to the Regional Trial Court (RTC) of Cebu City, Branch 11, for necessary proceedings, in effect, reversing the Decision5 dated 10 November 2004 of the RTC which dismissed respondents’ Complaint in SRC Case No. 022-CEB. Herein petitioners’ Motion for Reconsideration of the Resolution dated 18 July 2006 was denied by the appellate court in the other assailed Resolution dated 19 April 2007.

Herein petitioners are members of the Yu Family, particularly, the father, Anthony S. Yu (Anthony); the wife, Rosita G. Yu (Rosita); and their son, Jason G. Yu (Jason).

Herein respondents composed the Yukayguan Family, namely, the father, Joseph S. Yukayguan (Joseph); the wife, Nancy L. Yukayguan (Nancy); and their children Jerald Nerwin L. Yukayguan (Jerald) and Jill Neslie Yukayguan (Jill).

Petitioner Anthony is the older half-brother of respondent Joseph.

Petitioners and the respondents were all stockholders of Winchester Industrial Supply, Inc. (Winchester, Inc.), a domestic corporation engaged in the operation of a general hardware and industrial supply and equipment business.

On 15 October 2002, respondents filed against petitioners a verified Complaint for Accounting, Inspection of Corporate Books and Damages through Embezzlement and Falsification of Corporate Records and Accounts6before the RTC of Cebu. The said Complaint was filed by respondents, in their own behalf and as a derivative suit on behalf of Winchester, Inc., and was docketed as SRC Case No. 022-CEB. The factual background of the Complaint was stated in the attached Affidavit executed by respondent Joseph.

According to respondents,7 Winchester, Inc. was established and incorporated on 12 September 1977, with petitioner Anthony as one of the incorporators, holding 1,000 shares of stock worth P100,000.00.8 Petitioner Anthony paid for the said shares of stock with respondent Joseph’s money, thus, making the former a mere trustee of the shares for the latter. On 14 November 1984, petitioner Anthony ceded 800 of his 1,000 shares of stock in Winchester, Inc. to respondent Joseph, as well as Yu Kay Guan,9 Siao So Lan, and John S. Yu.10 Petitioner Anthony remained as trustee for respondent Joseph of the 200 shares of stock in Winchester, Inc., still in petitioner Anthony’s name.

Respondents then alleged that on 30 June 1985, Winchester, Inc. bought from its incorporators, excluding petitioner Anthony, their accumulated 8,500 shares in the corporation.11 Subsequently, on 7 November 1995, Winchester, Inc. sold the same 8,500 shares to other persons, who included respondents Nancy, Jerald, and Jill; and petitioners Rosita and Jason.12

Respondents further averred that although respondent Joseph appeared as the Secretary and Treasurer in the corporate records of Winchester, Inc., petitioners actually controlled and ran the said corporation as if it were their own family business. Petitioner Rosita handled the money market placements of the corporation to the exclusion of respondent Joseph, the designated Treasurer of Winchester, Inc. Petitioners were also misappropriating the funds and properties of Winchester, Inc. by understating the sales, charging their personal and family expenses to the said corporation, and withdrawing stocks for their personal use without paying for the same. Respondents attached to the Complaint various receipts13 to prove the personal and family expenses charged by petitioners to Winchester, Inc.

Respondents, therefore, prayed that respondent Joseph be declared the owner of the 200 shares of stock in petitioner Anthony’s name. Respondents also prayed that petitioners be ordered to: (1) deposit the corporate books and records of Winchester, Inc. with the Branch Clerk of Court of the RTC for respondents’ inspection; (2) render an accounting of all the funds of Winchester, Inc. which petitioners misappropriated; (3) reimburse the personal and family expenses which petitioners charged to Winchester, Inc., as well as the properties of the corporation which petitioners withheld without payment; and (4) pay respondents’ attorney’s fees and litigation expenses. In the meantime, respondents sought the appointment of a Management Committee and the freezing of all corporate funds by the trial court.

On 13 November 2002, petitioners filed an Answer with Compulsory Counterclaim,14 attached to which was petitioner Anthony’s Affidavit.15 Petitioners vehemently denied the allegation that petitioner Anthony was a mere trustee for respondent Joseph of the 1,000 shares of stock in Winchester, Inc. in petitioner Anthony’s name. For the incorporation of Winchester, Inc., petitioner Anthony contributed P25,000.00 paid-up capital, representing 25% of the total par value of the 1,000 shares he subscribed to, the said amount being paid out of petitioner Anthony’s personal savings and petitioners Anthony and Rosita’s conjugal funds. Winchester, Inc. was being co-managed by petitioners and respondents, and the attached receipts, allegedly evidencing petitioners’ use of corporate funds for personal and family expenses, were in fact signed and approved by respondent Joseph.

By way of special and affirmative defenses, petitioners contended in their Answer with Compulsory Counterclaim that respondents had no cause of action against them. Respondents’ Complaint was purely intended for harassment. It should be dismissed under Section 1(j), Rule 1616 of the Rules of Court for failure to comply with conditions precedent before its filing. First, there was no allegation in respondents’ Complaint that earnest efforts were exerted to settle the dispute between the parties. Second, since respondents’ Complaint purportedly constituted a derivative suit, it noticeably failed to allege that respondents exerted effort to exhaust all available remedies in the Articles of Incorporation and By-Laws of Winchester, Inc., as well as in the Corporation Code. And third, given that respondents’ Complaint was also for inspection of corporate books, it lacked the allegation that respondents made a previous demand upon petitioners to inspect the corporate books but petitioners refused. Prayed for by petitioners, in addition to the dismissal of respondents’ Complaint, was payment of moral and exemplary damages, attorney’s fees, litigation expenses, and cost of suit.

On 30 October 2002, the hearing on the application for the appointment of a Management Committee was commenced. Respondent Joseph submitted therein, as his direct testimony, the same Affidavit that he executed, which was attached to the respondents’ Complaint. On 4 November 2002, respondent Joseph was cross-examined by the counsel for petitioners. Thereafter, the continuation of the hearing was set for 29 November 2002, in order for petitioners to adduce evidence in support of their opposition to the application for the appointment of a Management Committee.17

During the hearing on 29 November 2002, the parties manifested before the RTC that there was an ongoing mediation between them, and so the hearing on the appointment of a Management Committee was reset to another date.

In amicable settlement of their dispute, the petitioners and respondents agreed to a division of the stocks in trade,18the real properties, and the other assets of Winchester, Inc. In partial implementation of the afore-mentioned amicable settlement, the stocks in trade and real properties in the name of Winchester, Inc. were equally distributed among petitioners and respondents. As a result, the stockholders and members of the Board of Directors of Winchester, Inc. passed, on 4 January 2003, a unanimous Resolution19 dissolving the corporation as of said date.

On 22 February 2004, respondents filed their pre-trial brief.20

On 25 June 2004, petitioners filed a Manifestation21 informing the RTC of the existence of their amicable settlement with respondents. Respondents, however, made their own manifestation before the RTC that they were repudiating said settlement, in view of the failure of the parties thereto to divide the remaining assets of Winchester, Inc. Consequently, respondents moved to have SRC Case No. 022-CEB set for pre-trial.

On 23 August 2004, petitioners filed their pre-trial brief.22

On 26 August 2004, instead of holding a formal pre-trial conference and resuming the hearing on the application for the appointment of a Management Committee, petitioners and respondents agreed that the RTC may already render a judgment based on the pleadings. In accordance with the agreement of the parties, the RTC issued, on even date, an Order23 which stated:

O R D E R

During the pre-trial conference held on August 26, 2004, counsels of the parties manifested, agreed and suggested that a judgment may be rendered by the Court in this case based on the pleadings, affidavits, and other evidences on record, or to be submitted by them, pursuant to the provision of Rule 4, Section 4 of the Rule on Intra-Corporate Controversies. The suggestion of counsels was approved by the Court.

Accordingly, the Court hereby orders the counsels of the parties to file simultaneously their respective memoranda within a non-extendible period of twenty (20) days from notice hereof. Thereafter, the instant case will be deemed submitted for resolution.

x x x x

Cebu City, August 26, 2004.

(signed)SILVESTRE A. MAAMO, JR.Acting Presiding Judge

Petitioners and respondents duly filed their respective Memoranda,24 discussing the arguments already set forth in the pleadings they had previously submitted to the RTC. Respondents, though, attached to their Memorandum a Supplemental Affidavit25 of respondent Joseph, containing assertions that refuted the allegations in petitioner Anthony’s Affidavit, which was earlier submitted with petitioners’ Answer with Compulsory Counterclaim. Respondents also appended to their Memorandum additional documentary evidence,26 consisting of original and duplicate cash invoices and cash

disbursement receipts issued by Winchester, Inc., to further substantiate their claim that petitioners were understating sales and charging their personal expenses to the corporate funds.

The RTC subsequently promulgated its Decision on 10 November 2004 dismissing SRC Case No. 022-CEB. The dispositive portion of said Decision reads:

WHEREFORE, in view of the foregoing premises and for lack of merit, this Court hereby renders judgment in this case DISMISSING the complaint filed by the [herein respondents].

The Court also hereby dismisses the [herein petitioners’] counterclaim because it has not been indubitably shown that the filing by the [respondents] of the latter’s complaint was done in bad faith and with malice.27

The RTC declared that respondents failed to show that they had complied with the essential requisites for filing a derivative suit as set forth in Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies:

(1) He was a stockholder or member at the time the acts or transactions subject of the action occurred and at the time the action was filed;

(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires;

(3) No appraisal rights are available for the act or acts complained of; and

(4) The suit is not a nuisance or harassment suit.

As to respondents’ prayer for the inspection of corporate books and records, the RTC adjudged that they had likewise failed to comply with the requisites entitling them to the same. Section 2, Rule 7 of the Interim Rules of Procedure Governing Intra-Corporate Controversies requires that the complaint for inspection of corporate books or records must state that:

(1) The case is for the enforcement of plaintiff's right of inspection of corporate orders or records and/or to be furnished with financial statements under Sections 74 and 75 of the Corporation Code of the Philippines;

(2) A demand for inspection and copying of books and records and/or to be furnished with financial statements made by the plaintiff upon defendant;

(3) The refusal of defendant to grant the demands of the plaintiff and the reasons given for such refusals, if any; and

(4) The reasons why the refusal of defendant to grant the demands of the plaintiff is unjustified and illegal, stating the law and jurisprudence in support thereof.

The RTC further noted that respondent Joseph was the corporate secretary of Winchester, Inc. and, as such, he was supposed to be the custodian of the corporate books and records; therefore, a court order for respondents’ inspection of the same was no longer necessary. The RTC similarly denied respondents’ demand for accounting as it was clear that Winchester, Inc. had been engaging the services of an audit firm.

Respondent Joseph himself described the audit firm as competent and independent, and believed that the audited financial statements the said audit firm prepared were true, faithful, and correct.

Finding the claims of the parties for damages against each other to be unsubstantiated, the RTC thereby dismissed the same.

Respondents challenged the foregoing RTC Decision before the Court of Appeals via a Petition for Review under Rule 43 of the Rules of Court, docketed as CA-G.R. SP No. 00185.

On 15 February 2006, the Court of Appeals rendered its Decision, affirming the 10 December 2004 Decision of the RTC. Said the appellate court:

After a careful and judicious scrutiny of the extant records of the case, together with the applicable laws and jurisprudence, WE see no reason or justification for granting the present appeal.

x x x x

x x x [T]his Court sees that the instant petition would still fail taking into consideration all the pleadings and evidence of the parties except the supplemental affidavit of [herein respondent] Joseph and its corresponding annexes appended in [respondents’] memorandum before the Court a quo. The Court a quo have (sic) outrightly dismissed the complaint for its failure to comply with the mandatory provisions of the Interim Rules of Procedure for Intra-Corporate Controversies particularly Rule 2, Section 4(3), Rule 8, Section [1(2)] and Rule 7, Section 2 thereof, which reads as follows:

RULE 2COMMENCEMENT OF ACTION AND PLEADINGS

Sec. 4. Complaint. – The complaint shall state or contain:

x x x x

(3) the law, rule, or regulation relied upon, violated, or sought to be enforced;

x x x x

RULE 8DERIVATIVE SUITS

Sec. 1. Derivative action. – x x x

x x x x

(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires.

x x x x

RULE 7INSPECTION OF CORPORATE BOOKS AND RECORDS

Sec. 2. Complaint – In addition to the requirements in section 4, Rule 2 of these Rules, the complaint must state the following:

(1) The case is set (sic) for the enforcement of plaintiff’s right of inspection of corporate orders or records and/or to be furnished with financial statements under Section 74 and 75 of the Corporation Code of the Philippines;

(2) A demand for inspection and copying of books [and/or] to be furnished with financial statements made by the plaintiffs upon defendant;

(3) The refusal of the defendant to grant the demands of the plaintiff and the reasons given for such refusal, if any; and

(4) The reasons why the refusal of defendant to grant the demands of the plaintiff is unjustified and illegal, stating the law and jurisprudence in support thereof.

x x x x

A perusal of the extant record shows that [herein respondents] have not complied with the above quoted provisions. [Respondents] should be mindful that in filing their complaint which, as admitted by them, is a derivative suit, should have first exhausted all available remedies under its (sic) Articles of Incorporation, or its by-laws, or any laws or rules governing the corporation. The contention of [respondent Joseph] that he had indeed made several talks to (sic) his brother [herein petitioner Anthony] to settle their differences is not tantamount to exhaustion of remedies. What the law requires is to bring the grievance to the Board of Directors or Stockholders for the latter to take the opportunity to settle whatever problem in its regular meeting or special meeting called for that purpose which [respondents] failed to do. x x x The requirements laid down by the Interim Rules of Procedure for Intra-Corporate Controversies are mandatory which cannot be dispensed with by any stockholder of a corporation before filing a derivative suit.28 (Emphasis ours.)

The Court of Appeals likewise sustained the refusal by the RTC to consider respondent Joseph’s Supplemental Affidavit and other additional evidence, which respondents belatedly submitted with their Memorandum to the said trial court. The appellate court ratiocinated that:

With regard to the claim of [herein respondents] that the supplemental affidavit of [respondent] Joseph and its annexes appended to their memorandum should have been taken into consideration by the Court a quo to support the reliefs prayed [for] in their complaint. (sic) This Court rules that said supplemental affidavit and its annexes is (sic) inadmissible.

A second hard look of (sic) the extant records show that during the pre-trial conference conducted on August 26, 2004, the parties through their respective counsels had come up with an agreement that the lower court would render judgment based on the pleadings and evidence submitted. This agreement is in accordance with Rule 4, Sec. 4 of the Interim Rules of Procedure for Intra-Corporate Controversies which explicitly states:

SECTION. 4. Judgment before pre-trial. – If, after submission of the pre-trial briefs, the court determines that, upon consideration of the pleadings, the affidavits and other evidence submitted by the parties, a judgment may be rendered, the court may order the parties to file simultaneously their respective memoranda within a non-extendible period of twenty (20) days from receipt of the order. Thereafter, the court shall render judgment, either full or otherwise, not later than ninety (90) days from the expiration of the period to file the memoranda.

x x x x

Clearly, the supplemental affidavit and its appended documents which were submitted only upon the filing of the memorandum for the [respondents] were not submitted in the pre-trial briefs for the stipulation of the parties during the pre-trial, hence, it cannot be accepted pursuant to Rule 2, Sec. 8 of the same rules which reads as follows:

SEC. 8. Affidavits, documentary and other evidence. – Affidavits shall be based on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify on the matters stated therein. The affidavits shall be in question and answer form, and shall comply with the rules on admissibility of evidence.

Affidavits of witnesses as well as documentary and other evidence shall be attached to the appropriate pleading; Provided, however, that affidavits, documentary and other evidence not so submitted may be attached to the pre-trial brief required under these Rules. Affidavits and other evidence not so submitted shall not be admitted in evidence, except in the following cases:

(1) Testimony of unwilling, hostile, or adverse party witnesses. A witness is presumed prima facie hostile if he fails or refuses to execute an affidavit after a written request therefor;

(2) If the failure to submit the evidence is for meritorious and compelling reasons; and

(3) Newly discovered evidence.

In case of (2) and (3) above, the affidavit and evidence must be submitted not later than five (5) days prior to its introduction in evidence.

There is no showing in the case at bench that the supplemental affidavit and its annexes falls (sic) within one of the exceptions of the above quoted proviso, hence, inadmissible.

It must be noted that in the case at bench, like any other civil cases, "the party making an allegation in a civil case has the burden of proving it by preponderance of evidence." Differently stated, upon the plaintiff in [a] civil case, the burden of proof never parts. That is, appellants must adduce evidence that has greater weight or is more convincing that (sic) which is offered to oppose it. In the case at bar, no one should be blamed for the dismissal of the complaint but the [respondents] themselves for their lackadaisical attitude in setting forth and appending their defences belatedly. To admit them would be a denial of due process for the opposite party which this Court cannot allow.29

Ultimately, the Court of Appeals decreed:

WHEREFORE, judgment is hereby rendered DISMISSING the instant petition and the assailed Decision of the Regional Trial Court (RTC), 7th Judicial Region, Branch II, Cebu City, dated November 10, 2004, in SRC Case No. 022-CEB is AFFIRMED in toto. Cost against the [herein respondents].30

Unperturbed, respondents filed before the Court of Appeals, on 23 February 2006, a Motion for Reconsideration and Motion to Set for Oral Arguments the Motion for Reconsideration,31 invoking the following grounds:

(1) The [herein respondents] have sufficiently exhausted all remedies before filing the present action; and

(2) [The] Honorable Court erred in holding that the supplemental affidavit and its annexes is (sic) inadmissible because the rules and the lower court expressly allowed the submission of the same in its order dated August 26, 2004 x x x.32

In a Resolution33 dated 8 March 2006, the Court of Appeals granted respondents’ Motion to Set for Oral Arguments the Motion for Reconsideration.

On 4 April 2006, the Court of Appeals issued a Resolution34 setting forth the events that transpired during the oral arguments, which took place on 30 March 2006. Counsels for the parties manifested before the appellate court that they were submitting respondents’ Motion for Reconsideration for resolution. Justice Magpale, however, still called on the parties to talk about the possible settlement of the case considering their familial relationship. Independent of the resolution of respondents’ Motion for Reconsideration, the parties were agreeable to pursue a settlement for the dissolution of the corporation, which they had actually already started.

In a Resolution35 dated 11 April 2006, the Court of Appeals ordered the parties to submit, within 10 days from notice, their intended amicable settlement, since the same would undeniably affect the resolution of respondents’ pending Motion for Reconsideration. If the said period should lapse without the parties submitting an amicable settlement, then they were directed by the appellate court to file within 10 days thereafter their position papers instead.

On 5 May 2006, respondents submitted to the Court of Appeals their Position Paper,36 stating that the parties did not reach an amicable settlement. Respondents informed the appellate court that prior to the filing with the Securities and Exchange Commission (SEC) of a petition for dissolution of Winchester, Inc., the parties already divided the stocks in trade and the real assets of the corporation among themselves. Respondents posited, though, that the afore-mentioned distribution of the assets of Winchester, Inc. among the parties was null and void, as it violated the last paragraph of Section 122 of the Corporation Code, which provides that, "[e]xcept by a decrease of capital stock and as otherwise allowed by the Corporation Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities." At the same time, however, respondents brought to the attention of the Court of Appeals that the parties did eventually file with the SEC a petition for dissolution of Winchester, Inc., which the SEC approved.37

Respondents no longer discussed in their Position Paper the grounds they previously invoked in their Motion for Reconsideration of the Court of Appeals Decision dated 15 February 2006, affirming in toto the RTC Decision dated 10 November 2004. They instead argued that the RTC Decision in question was null and void as it did not clearly state the facts and the law on which it was based. Respondents sought the remand of the case to the RTC for further proceedings on their derivative suit and completion of the dissolution of Winchester, Inc., including the legalization of the prior partial distribution among the parties of the assets of said corporation.

Petitioners filed their Position Paper38 on 23 May 2006, wherein they accused respondents of attempting to incorporate extraneous matters into the latter’s Motion for Reconsideration. Petitioners pointed out that the issue before the Court of Appeals was not the dissolution and division of assets of Winchester, Inc., thus, a remand of the case to the RTC was not necessary.

On 18 July 2006, the Court of Appeals rendered the assailed Resolution, granting respondents’ Motion for Reconsideration. The Court of Appeals reasoned in this wise:

After a second look and appreciation of the facts of the case, vis-à-vis the issues raised by the [herein respondents’] motion for reconsideration and in view of the formal dissolution of the corporation which leaves unresolved up to the present the settlement of the properties and assets which are now in danger of dissipation due to the unending litigation, this Court finds the need to remand the instant case to the lower court (commercial court) as the proper forum for the adjudication, disposition, conveyance and distribution of said properties and assets between and amongst its stockholders as final settlement pursuant to Sec. 122 of the Corporation Code after payment of all its debts and liabilities as provided for under the same proviso. This is in accord with the pronouncement of the Supreme Court in the case of Clemente et. al. vs. Court of Appeals, et. al. where the high court ruled and which WE quote, viz:

"the corporation continues to be a body corporate for three (3) years after its dissolution for purposes of prosecuting and defending suits by and against it and for enabling it to settle and close its affairs, culminating in the disposition and distribution of its remaining assets. It may, during the three-year term, appoint a trustee or a receiver who may act beyond that period. The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the rights and liabilities of such entity x x x nor those of its owners and creditors. If the three-year extended life has expired without a trustee or receiver having been expressly designated by the corporation within that period, the board of directors (or trustees) xxx may be permitted to so continue as "trustees" by legal implication to complete the corporate liquidation. Still in the absence of a board of directors or trustees, those having any pecuniary interest in the assets, including not only the shareholders but likewise the creditors of the corporation, acting for and in its behalf, might make proper representation with the Securities and Exchange Commission, which has primary and sufficiently broad jurisdiction in matters of this nature, for working out a final settlement of the corporate concerns."

In the absence of a trustee or board of director in the case at bar for purposes above mentioned, the lower court under Republic Act No. [8799] (otherwise known as the Securities and Exchange Commission) as implemented by A.M. No. 00-8-10-SC (Transfer of Cases from the Securities and Exchange Commission to the Regional Trial Courts) which took effect on October 1, 2001, is the proper forum for working out the final settlement of the corporate concern.39

Hence, the Court of Appeals ruled:

WHEREFORE, premises considered, the motion for reconsideration is GRANTED. The order dated February 15, 2006 is hereby SET ASIDE and the instant case is REMANDED to the lower court to take the necessary proceedings in resolving with deliberate dispatch any and all corporate concerns towards final settlement.40

Petitioners filed a Motion for Reconsideration41 of the foregoing Resolution, but it was denied by the Court of Appeals in its other assailed Resolution dated 19 April 2007.

In the Petition at bar, petitioners raise the following issues:

I.

WHETHER OR NOT THE ASSAILED RESOLUTIONS[,] WHICH VIOLATED THE CONSTITUTION OF THE PHILIPPINES, JURISPRUDENCE AND THE LAW[,] ARE NULL AND VOID[.]

II.

WHETHER OR NOT THE ASSAILED RESOLUTIONS WAS (sic) ISSUED WITHOUT JURISDICTION[.]

III.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN REMANDING THIS CASE TO THE LOWER COURT FOR THE REASON CITED IN THE ASSAILED RESOLUTIONS, AND WITHOUT RESOLVING THE GROUNDS FOR THE [RESPONDENTS’] MOTION FOR RECONSIDERATION. (sic) INASMUCH AS [THE] REASON CITED WAS A NON-ISSUE IN THE CASE.

IV.

WHETHER OR NOT REMANDING THIS CASE TO THE REGIONAL TRIAL COURT VIOLATES THE SUMMARY PROCEDURE FOR INTRA-CORPORATE CASES.42

The crux of petitioners’ contention is that the Court of Appeals committed grievous error in reconsidering its Decision dated 15 February 2006 on the basis of extraneous matters, which had not been previously raised in respondents’ Complaint before the RTC, or in their Petition for Review and Motion for Reconsideration before the appellate court; i.e., the adjudication, disposition, conveyance, and distribution of the properties and assets of Winchester, Inc. among its stockholders, allegedly pursuant to the amicable settlement of the parties. The fact that the parties were able to agree before the Court of Appeals to submit for resolution respondents’ Motion for Reconsideration of the 15 February 2006 Decision of the same court, independently of any intended settlement between the parties as regards the dissolution of the corporation and distribution of its assets, only proves the distinction and independence of these matters from one another. Petitioners also contend that the assailed Resolution dated 18 July 2006 of the Court of Appeals, granting respondents’ Motion for Reconsideration, failed to clearly and distinctly state the facts and the law on which it was based. Remanding the case to the RTC, petitioners maintain, will violate the very essence of the summary nature of the Interim Rules of Procedure Governing Intra-Corporate Controversies, as this will just entail delay, protract litigation, and revert the case to square one.

The Court finds the instant Petition meritorious.

To recapitulate, the case at bar was initiated before the RTC by respondents as a derivative suit, on their own behalf and on behalf of Winchester, Inc., primarily in order to compel petitioners to account for and reimburse to the said corporation the corporate assets and funds which the latter allegedly misappropriated for their personal benefit. During the pendency of the proceedings before the court a quo, the parties were able to reach an amicable settlement wherein they agreed to divide the assets of Winchester, Inc. among themselves. This amicable settlement was already partially implemented by the parties, when respondents repudiated the same, for which reason the RTC proceeded with the case on its merits. On 10 November 2004, the RTC promulgated its Decision dismissing respondents’ Complaint for failure to comply with essential pre-requisites before they could avail themselves of the remedies under the Interim Rules of Procedure Governing Intra-Corporate Controversies; and for inadequate substantiation of respondents’ allegations in said Complaint after consideration of the pleadings and evidence on record.

In its Decision dated 15 February 2006, the Court of Appeals affirmed, on appeal, the findings of the RTC that respondents did not abide by the requirements for a derivative suit, nor were they able to prove their case by a preponderance of evidence.

Respondents filed a Motion for Reconsideration of said judgment of the appellate court, insisting that they were able to meet all the conditions for filing a derivative suit. Pending resolution of respondents’ Motion for Reconsideration, the Court of Appeals urged the parties to again strive to reach an amicable settlement of their dispute, but the parties were unable to do so. The parties were not able to submit to the appellate court, within the given period, any amicable settlement; and filed, instead, their Position Papers. This effectively meant that the parties opted to submit respondents’ Motion for Reconsideration of the 15 February 2006 Decision of the Court of Appeals, and petitioners’ opposition to the same, for resolution by the appellate court on the merits.

It was at this point that the case took an unexpected turn.

In accordance with respondents’ allegation in their Position Paper that the parties subsequently filed with the SEC, and the SEC already approved, a petition for dissolution of Winchester, Inc., the Court of Appeals remanded the case to the RTC so that all the corporate concerns between the parties regarding Winchester, Inc. could be resolved towards final settlement.

In one stroke, with the use of sweeping language, which utterly lacked support, the Court of Appeals converted the derivative suit between the parties into liquidation proceedings.

The general rule is that where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. Nonetheless, an individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stocks in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold the control of the corporation. In such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party in interest. A derivative action is a suit by a shareholder to enforce a corporate cause of action. The corporation is a necessary party to the suit. And the relief which is granted is a judgment against a third person in favor of the corporation. Similarly, if a corporation has a defense to an action against it and is not asserting it, a stockholder may intervene and defend on behalf of the corporation.43 By virtue of Republic Act No. 8799, otherwise known as the Securities Regulation Code, jurisdiction over intra-corporate disputes, including derivative suits, is now vested in the Regional Trial Courts designated by this Court pursuant to A.M. No. 00-11-03-SC promulgated on 21 November 2000.

In contrast, liquidation is a necessary consequence of the dissolution of a corporation. It is specifically governed by Section 122 of the Corporation Code, which reads:

SEC. 122. Corporate liquidation. – Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established.

At any time during said three (3) years, said corporation is authorized and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the corporation of its property in trust for the benefit of its stockholders, members, creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest.

Upon winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located.

Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities.

Following the voluntary or involuntary dissolution of a corporation, liquidation is the process of settling the affairs of said corporation, which consists of adjusting the debts and claims, that is, of collecting all that is due the corporation, the settlement and adjustment of claims against it and the payment of its just debts.44 More particularly, it entails the following:

Winding up the affairs of the corporation means the collection of all assets, the payment of all its creditors, and the distribution of the remaining assets, if any among the stockholders thereof in accordance with their contracts, or if there be no special contract, on the basis of their respective interests. The manner of liquidation or winding up may be provided for in the corporate by-laws and this would prevail unless it is inconsistent with law.45

It may be undertaken by the corporation itself, through its Board of Directors; or by trustees to whom all corporate assets are conveyed for liquidation; or by a receiver appointed by the SEC upon its decree dissolving the corporation.46

lawphil.net

Glaringly, a derivative suit is fundamentally distinct and independent from liquidation proceedings. They are neither part of each other nor the necessary consequence of the other. There is totally no justification for the Court of Appeals to convert what was supposedly a derivative suit instituted by respondents, on their own behalf and on behalf of Winchester, Inc. against petitioners, to a proceeding for the liquidation of Winchester, Inc.

While it may be true that the parties earlier reached an amicable settlement, in which they agreed to already distribute the assets of Winchester, Inc., and in effect liquidate said corporation, it must be pointed out that respondents themselves repudiated said amicable settlement before the RTC, even after the same had been partially implemented; and moved that their case be set for pre-trial. Attempts to again amicably settle the dispute between the parties before the Court of Appeals were unsuccessful.

Moreover, the decree of the Court of Appeals to remand the case to the RTC for the "final settlement of corporate concerns" was solely grounded on respondents’ allegation in its Position Paper that the parties had already filed before the SEC, and the SEC approved, the petition to dissolve Winchester, Inc. The Court notes, however, that there is absolute lack of evidence on record to prove said allegation. Respondents failed to submit copies of such petition for dissolution of Winchester, Inc. and the SEC Certification approving the same. It is a basic rule in evidence that each party must prove his affirmative allegation. Since it was respondents who alleged the voluntary dissolution of Winchester, Inc., respondents must, therefore, prove it.47 This respondents failed to do.

Even assuming arguendo that the parties did submit a petition for the dissolution of Winchester, Inc. and the same was approved by the SEC, the Court of Appeals was still without jurisdiction to order the final settlement by the RTC of the remaining corporate concerns. It must be remembered that the Complaint filed by respondents before the RTC essentially prayed for the accounting and reimbursement by petitioners of the corporate funds and assets which they purportedly misappropriated for their personal use; surrender by the petitioners of the corporate books for the inspection of

respondents; and payment by petitioners to respondents of damages. There was nothing in respondents’ Complaint which sought the dissolution and liquidation of Winchester, Inc. Hence, the supposed dissolution of Winchester, Inc. could not have resulted in the conversion of respondents’ derivative suit to a proceeding for the liquidation of said corporation, but only in the dismissal of the derivative suit based on either compromise agreement or mootness of the issues.

Clearly, in issuing its assailed Resolutions dated 18 July 2006 and 19 April 2007, the Court of Appeals already went beyond the issues raised in respondents’ Motion for Reconsideration. Instead of focusing on whether it erred in affirming, in its 15 February 2006 Decision, the dismissal by the RTC of respondents’ Complaint due to respondents’ failure to comply with the requirements for a derivative suit and submit evidence to support their allegations, the Court of Appeals unduly concentrated on respondents’ unsubstantiated allegation that Winchester, Inc. was already dissolved and speciously ordered the remand of the case to the RTC for proceedings so vitally different from that originally instituted by respondents.

Despite the foregoing, the Court still deems it appropriate to already look into the merits of respondents’ Motion for Reconsideration of the 15 February 2006 Decision of the Court of Appeals, for the sake of finally putting an end to the case at bar.

In their said Motion for Reconsideration, respondents argued that: (1) they had sufficiently exhausted all remedies before filing the derivative suit; and (2) respondent Joseph’s Supplemental Affidavit and its annexes should have been taken into consideration, since the submission thereof was allowed by the rules of procedure, as well as by the RTC in its Order dated 26 August 2004.

As regards the first ground of sufficient exhaustion by respondents of all remedies before filing a derivative suit, the Court subscribes to the ruling to the contrary of the Court of Appeals in its Decision dated 16 February 2006. 1avvphi1

The Court has recognized that a stockholder’s right to institute a derivative suit is not based on any express provision of the Corporation Code, or even the Securities Regulation Code, but is impliedly recognized when the said laws make corporate directors or officers liable for damages suffered by the corporation and its stockholders for violation of their fiduciary duties. Hence, a stockholder may sue for mismanagement, waste or dissipation of corporate assets because of a special injury to him for which he is otherwise without redress. In effect, the suit is an action for specific performance of an obligation owed by the corporation to the stockholders to assist its rights of action when the corporation has been put in default by the wrongful refusal of the directors or management to make suitable measures for its protection. The basis of a stockholder’s suit is always one in equity. However, it cannot prosper without first complying with the legal requisites for its institution.48

Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies lays down the following requirements which a stockholder must comply with in filing a derivative suit:

Sec. 1. Derivative action. – A stockholder or member may bring an action in the name of a corporation or association, as the case may be, provided, that:

(1) He was a stockholder or member at the time the acts or transactions subject of the action occurred and at the time the action was filed;

(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of

incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires;

(3) No appraisal rights are available for the act or acts complained of; and

(4) The suit is not a nuisance or harassment suit.

A perusal of respondents’ Complaint before the RTC would reveal that the same did not allege with particularity that respondents exerted all reasonable efforts to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing Winchester, Inc. to obtain the relief they desire.

Respondents assert that their compliance with said requirement was contained in respondent Joseph’s Affidavit, which was attached to respondents’ Complaint. Respondent Joseph averred in his Affidavit that he tried for a number of times to talk to petitioner Anthony to settle their differences, but the latter would not listen. Respondents additionally claimed that taking further remedies within the corporation would have been idle ceremony, considering that Winchester, Inc. was a family corporation and it was impossible to expect petitioners to take action against themselves who were the ones accused of wrongdoing.

The Court is not persuaded.

The wordings of Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies are simple and do not leave room for statutory construction. The second paragraph thereof requires that the stockholder filing a derivative suit should have exerted all reasonable efforts to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires; and to allege such fact with particularity in the complaint. The obvious intent behind the rule is to make the derivative suit the final recourse of the stockholder, after all other remedies to obtain the relief sought had failed.

The allegation of respondent Joseph in his Affidavit of his repeated attempts to talk to petitioner Anthony regarding their dispute hardly constitutes "all reasonable efforts to exhaust all remedies available." Respondents did not refer to or mention at all any other remedy under the articles of incorporation or by-laws of Winchester, Inc., available for dispute resolution among stockholders, which respondents unsuccessfully availed themselves of. And the Court is not prepared to conclude that the articles of incorporation and by-laws of Winchester, Inc. absolutely failed to provide for such remedies.

Neither can this Court accept the reasons proffered by respondents to excuse themselves from complying with the second requirement under Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies. They are flimsy and insufficient, compared to the seriousness of respondents’ accusations of fraud, misappropriation, and falsification of corporate records against the petitioners. The fact that Winchester, Inc. is a family corporation should not in any way exempt respondents from complying with the clear requirements and formalities of the rules for filing a derivative suit. There is nothing in the pertinent laws or rules supporting the distinction between, and the difference in the requirements for, family corporations vis-à-vis other types of corporations, in the institution by a stockholder of a derivative suit.

The Court further notes that, with respect to the third and fourth requirements of Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies, the respondents’ Complaint failed to allege, explicitly or otherwise, the fact that there were no appraisal rights available for the acts of petitioners complained of, as well as a categorical statement that the suit was not a nuisance or a harassment suit.

As to respondents’ second ground in their Motion for Reconsideration, the Court agrees with the ruling of the Court of Appeals, in its 15 February 2006 Decision, that respondent Joseph’s Supplemental Affidavit and additional evidence were inadmissible since they were only appended by respondents to their Memorandum before the RTC. Section 8, Rule 2 of the Interim Rules of Procedure Governing Intra-Corporate Controversies is crystal clear that:

Sec. 8. Affidavits, documentary and other evidence. – Affidavits shall be based on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify on the matters stated therein. The affidavits shall be in question and answer form, and shall comply with the rules on admissibility of evidence.

Affidavits of witnesses as well as documentary and other evidence shall be attached to the appropriate pleading, Provided, however, that affidavits, documentary and other evidence not so submitted may be attached to the pre-trial brief required under these Rules. Affidavits and other evidence not so submitted shall not be admitted in evidence, except in the following cases:

(1) Testimony of unwilling, hostile, or adverse party witnesses. A witness is presumed prima facie hostile if he fails or refuses to execute an affidavit after a written request therefor;

(2) If the failure to submit the evidence is for meritorious and compelling reasons; and

(3) Newly discovered evidence.

In case of (2) and (3) above, the affidavit and evidence must be submitted not later than five (5) days prior to its introduction in evidence. (Emphasis ours.)

According to the afore-quoted provision, the parties should attach the affidavits of witnesses and other documentary evidence to the appropriate pleading, which generally should mean the complaint for the plaintiff and the answer for the respondent. Affidavits and documentary evidence not so submitted must already be attached to the respective pre-trial briefs of the parties. That the parties should have already identified and submitted to the trial court the affidavits of their witnesses and documentary evidence by the time of pre-trial is strengthened by the fact that Section 1, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate Controversies require that the following matters should already be set forth in the parties’ pre-trial briefs:

Section 1. Pre-trial conference, mandatory nature. – Within five (5) days after the period for availment of, and compliance with, the modes of discovery prescribed in Rule 3 hereof, whichever comes later, the court shall issue and serve an order immediately setting the case for pre-trial conference, and directing the parties to submit their respective pre-trial briefs. The parties shall file with the court and furnish each other copies of their respective pre-trial brief in such manner as to ensure its receipt by the court and the other party at least five (5) days before the date set for the pre-trial.

The parties shall set forth in their pre-trial briefs, among other matters, the following:

x x x x

(4) Documents not specifically denied under oath by either or both parties;

x x x x

(7) Names of witnesses to be presented and the summary of their testimony as contained in their affidavits supporting their positions on each of the issues;

(8) All other pieces of evidence, whether documentary or otherwise and their respective purposes.

Also, according to Section 2, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate Controversies,49 it is the duty of the court to ensure during the pre-trial conference that the parties consider in detail, among other things, objections to the admissibility of testimonial, documentary, and other evidence, as well as objections to the form or substance of any affidavit, or part thereof.

Obviously, affidavits of witnesses and other documentary evidence are required to be attached to a party’s pre-trial brief, at the very last instance, so that the opposite party is given the opportunity to object to the form and substance, or the admissibility thereof. This is, of course, to prevent unfair surprises and/or to avoid the granting of any undue advantage to the other party to the case.

True, the parties in the present case agreed to submit the case for judgment by the RTC, even before pre-trial, in accordance with Section 4, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate Controversies:

Sec. 4. Judgment before pre-trial. – If after submission of the pre-trial briefs, the court determines that, upon consideration of the pleadings, the affidavits and other evidence submitted by the parties, a judgment may be rendered, the court may order the parties to file simultaneously their respective memoranda within a non-extendible period of twenty (20) days from receipt of the order. Thereafter, the court shall render judgment, either full or otherwise, not later than ninety (90) days from the expiration of the period to file the memoranda.

Even then, the afore-quoted provision still requires, before the court makes a determination that it can render judgment before pre-trial, that the parties had submitted their pre-trial briefs and the court took into consideration the pleadings, affidavits and other evidence submitted by the parties. Hence, cases wherein the court can render judgment prior to pre-trial, do not depart from or constitute an exception to the requisite that affidavits of witnesses and documentary evidence should be submitted, at the latest, with the parties’ pre-trial briefs. Taking further into account that under Section 4, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate Controversies parties are required to file their memoranda simultaneously, the same would mean that a party would no longer have any opportunity to dispute or rebut any new affidavit or evidence attached by the other party to its memorandum. To violate the above-quoted provision would, thus, irrefragably run afoul the former party’s constitutional right to due process.

In the instant case, therefore, respondent Joseph’s Supplemental Affidavit and the additional documentary evidence, appended by respondents only to their Memorandum submitted to the RTC, were correctly adjudged as inadmissible by the Court of Appeals in its 15 February 2006 Decision for having been belatedly submitted. Respondents neither alleged nor proved that the documents in question fall under any of the three exceptions to the requirement that affidavits and documentary evidence should be attached to the appropriate pleading or pre-trial brief of the party, which is particularly recognized under Section 8, Rule 2 of the Interim Rules of Procedure Governing Intra-Corporate Controversies.

WHEREFORE, premises considered, the Petition for Review under Rule 45 of the Rules of Court is hereby GRANTED. The assailed Resolutions dated 18 July 2006 and 19 April 2007 of the Court of Appeals in CA-G.R. SP No. 00185 are hereby REVERSED AND SET ASIDE. The Decision dated 15 February 2006 of the Court of Appeals is hereby AFFIRMED. No costs.

SO ORDERED.

G.R. No. 173463               October 13, 2010

GLOBAL BUSINESS HOLDINGS, INC. (formerly Global Business Bank, Inc.), Petitioner, vs.SURECOMP SOFTWARE, B.V., Respondent.

D E C I S I O N

NACHURA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court, assailing the Decision1dated May 5, 2006 and the Resolution2 dated July 10, 2006 of the Court of Appeals (CA) in CA-G.R. SP No. 75524.

The facts of the case are as follows:

On March 29, 1999, respondent Surecomp Software, B.V. (Surecomp), a foreign corporation duly organized and existing under the laws of the Netherlands, entered into a software license agreement with Asian Bank Corporation (ABC), a domestic corporation, for the use of its IMEX Software System (System) in the bank’s computer system for a period of twenty (20) years.3

In July 2000, ABC merged with petitioner Global Business Holdings, Inc. (Global),4 with Global as the surviving corporation. When Global took over the operations of ABC, it found the System unworkable for its operations, and informed Surecomp of its decision to discontinue with the agreement and to stop further payments thereon. Consequently, for failure of Global to pay its obligations under the agreement despite demands, Surecomp filed a complaint for breach of contract with damages before the Regional Trial Court (RTC) of Makati. The case was docketed as Civil Case No. 01-1278.5

In its complaint, Surecomp alleged that it is a foreign corporation not doing business in the Philippines and is suing on an isolated transaction. Pursuant to the agreement, it installed the System in ABC’s computers for a consideration of US$298,000.00 as license fee. ABC also undertook to pay Surecomp professional services, which included on-site support and development of interfaces, and annual maintenance fees for five (5) subsequent anniversaries, and committed to purchase one (1) or two (2) Remote Access solutions at discounted prices. In a separate transaction, ABC requested Surecomp to purchase on its behalf a software called MF Cobol Runtime with a promise to reimburse its cost. Notwithstanding the delivery of the product and the services provided, Global failed to pay and comply with its obligations under the agreement. Thus, Surecomp demanded payment of actual damages amounting to US$319,955.00 and an additional amount of US$227,610.00 for Global’s unilateral pretermination of the agreement, exemplary damages, attorney’s fees and costs of suit.6

Instead of filing an answer, Global filed a motion to dismiss based on two grounds: (1) that Surecomp had no capacity to sue because it was doing business in the Philippines without a license; and (2) that the claim on which the action was founded was unenforceable under the Intellectual Property Code of the Philippines.7

On the first ground, Global argued that the contract entered into was not an isolated transaction since the contract was for a period of 20 years. Furthermore, Global stressed that it could not be held accountable for any breach as the agreement was entered into between Surecomp and ABC. It had not, in any manner, taken part in the negotiation and execution of the agreement but merely took over the operations of ABC as a result of the merger. On the second ground, Global averred that the agreement, being a technology transfer arrangement, failed to comply with Sections 87 and 88 of the Intellectual Property Code of the Philippines.8

In the interim, Global filed a motion for leave to serve written interrogatories to Surecomp in preparation for the hearing on the motion to dismiss, attaching thereto its written interrogatories.

After an exchange of pleadings on the motions filed by Global, on June 18, 2002, the RTC issued an Order,9 the pertinent portions of which read:

After a thorough and careful deliberation of the respective arguments advanced by the parties in support of their positions in these two (2) incidents, and since it cannot be denied that there is indeed a contract entered into between the plaintiff [Surecomp] and the defendant [Global], the latter as a successor in interest of the merging corporation Asian Bank, defendant [Global] is estopped from denying plaintiff’s [Surecomp’s] capacity to sue it for alleged breach of that contract with damages. Its argument that it was not the one who actually contracted with the plaintiff [Surecomp] as it was the merging Asian Bank which did, is of no moment as it does not relieve defendant Global Bank of its contractual obligation under the Agreement on account of its undertaking under it:

"x x x shall be responsible for all the liabilities and obligations of ASIANBANK in the same manner as if the Merged Bank had itself incurred such liabilities or obligations, and any pending claim, action or proceeding brought by or against ASIANBANK may be prosecuted by or against the Merged Bank. The right of creditors or liens upon the property of ASIANBANK shall not be impaired by the merger; provided that the Merged Bank shall have the right to exercise all defenses, rights, privileges, set-offs and counter-claims of every kind and nature which ASIANBANK may have, or with the Merged Bank may invoke under existing laws."

It appearing however that the second ground relied upon by the defendant [Global], i.e., that the cause of action of the plaintiff is anchored on an unenforceable contract under the provision of the Intellectual Property Code, will require a hearing before the motion to dismiss can be resolved and considering the established jurisprudence in this jurisdiction, that availment of mode of discovery by any of the parties to a litigation, shall be liberally construed to the end that the truth of the controversy on hand, shall be ascertained at a less expense with the concomitant facility and expeditiousness, the motion to serve written interrogatories upon the plaintiff [Surecomp] filed by the defendant [Global] is GRANTED insofar as the alleged unenforceability of the subject contract is concerned. Accordingly, the latter is directed to serve the written interrogatories upon the plaintiff [Surecomp], which is required to act on it in accordance with the pertinent rule on the matter.

Necessarily, the resolution of the motion to dismiss is held in abeyance until after a hearing on it is property conducted, relative to the second ground aforementioned.

SO ORDERED.10

Surecomp moved for partial reconsideration, praying for an outright denial of the motion to dismiss, while Global filed a motion for reconsideration.11

On November 27, 2002, the RTC issued an Order,12 the fallo of which reads:

WHEREFORE, the Order of this Court dated 18 June 2002 is modified. Defendant’s [Global’s] Motion to Dismiss dated 17 October 2001 is denied on the two grounds therein alleged. Defendant [Global] is given five (5) days from receipt of this Order within which to file its Answer.

The resolution of defendant’s [Global’s] Motion to Serve Written Interrogatories is held in abeyance pending the filing of the Answer.

SO ORDERED.13

In partially modifying the first assailed Order, the RTC ratiocinated, viz.:

This court sees no reason to further belabor the issue on plaintiff’s capacity to sue since there is a prima facie showing that defendant entered into a contract with defendant and having done so, willingly, it cannot now be made to raise the issue of capacity to sue [Merrill Lynch Futures, Inc. v. CA, 211 SCRA 824]. That defendant was not aware of plaintiff’s lack of capacity to sue or that defendant did not benefit from the transaction are arguments that are hardly supported by the evidence already presented for the resolution of the Motion to Dismiss.

As to the issue of unenforceability of the subject contract under the Intellectual Property Code, this court finds justification in modifying the earlier Order allowing the further presentation of evidence. It appearing that the subject contract between the parties is an executed, rather than an executory, contract the statute of frauds therefore finds no application here.

x x x x

As to defendant’s Motion to Serve Written Interrogatories, this court finds that resort to such a discovery mechanism while laudable is premature as defendant has yet to file its Answer. As the case now stands, the issues are not yet joined and the disputed facts are not clear.14

Undaunted, Global filed a petition for certiorari with prayer for the issuance of a temporary restraining order and/or writ of preliminary injunction under Rule 65 of the Rules of Court before the CA, contending that the RTC abused its discretion and acted in excess of its jurisdiction.15

On May 5, 2006, the CA rendered a Decision,16 the dispositive portion of which reads:

WHEREFORE, premises considered, the instant petition is DENIED. The assailed Orders dated June 18, 2002 and November 27, 2002 of the Regional Trial Court of Makati City, Branch 146, in Civil Case No. 01-1278 are hereby AFFIRMED.

SO ORDERED.17

A motion for reconsideration was filed by Global. On July 10, 2006, the CA issued a Resolution18 denying the motion for reconsideration for lack of merit.

Hence, this petition.

Global presents the following issues for resolution: (1) whether a special civil action for certiorari is the proper remedy for a denial of a motion to dismiss; and (2) whether Global is estopped from questioning Surecomp’s capacity to sue.19

The petition is bereft of merit.

I

An order denying a motion to dismiss is an interlocutory order which neither terminates nor finally disposes of a case as it leaves something to be done by the court before the case is finally decided on the merits. As such, the general rule is that the denial of a motion to dismiss cannot be questioned in a special civil action for certiorari which is a remedy designed to correct errors of jurisdiction and not errors of judgment.20

To justify the grant of the extraordinary remedy of certiorari, the denial of the motion to dismiss must have been tainted with grave abuse of discretion. By "grave abuse of discretion" is meant such capricious and whimsical exercise of judgment that is equivalent to lack of jurisdiction. The abuse of discretion must be grave as where the power is exercised in an arbitrary or despotic manner by reason of passion or personal hostility, and must be so patent and gross as to amount to an evasion of positive duty or to a virtual refusal to perform the duty enjoined by or to act all in contemplation of law.21

In the instant case, Global did not properly substantiate its claim of arbitrariness on the part of the trial court judge that issued the assailed orders denying the motion to dismiss. In a petition for certiorari, absent such showing of arbitrariness, capriciousness, or ill motive in the disposition of the trial judge in the case, we are constrained to uphold the court’s ruling, especially because its decision was upheld by the CA.

II

The determination of a corporation’s capacity is a factual question that requires the elicitation of a preponderant set of facts.22 As a rule, unlicensed foreign non-resident corporations doing business in the Philippines cannot file suits in the Philippines.23 This is mandated under Section 133 of the Corporation Code, which reads:

Sec. 133. Doing business without a license. - No foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines, but such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws.

A corporation has a legal status only within the state or territory in which it was organized. For this reason, a corporation organized in another country has no personality to file suits in the Philippines. In order to subject a foreign corporation doing business in the country to the jurisdiction of our courts, it must acquire a license from the Securities and Exchange Commission and appoint an agent for service of process. Without such license, it cannot institute a suit in the Philippines.24

1avvphi1

The exception to this rule is the doctrine of estoppel. Global is estopped from challenging Surecomp’s capacity to sue.

A foreign corporation doing business in the Philippines without license may sue in Philippine courts a Filipino citizen or a Philippine entity that had contracted with and benefited from it.25 A party is estopped from challenging the personality of a corporation after having acknowledged the same by entering into a contract with it.26 The principle is applied to prevent a person contracting with a foreign corporation from later taking advantage of its noncompliance with the statutes, chiefly in cases where such person has received the benefits of the contract. 27

Due to Global’s merger with ABC and because it is the surviving corporation, it is as if it was the one which entered into contract with Surecomp. In the merger of two existing corporations, one of the corporations survives and continues the business, while the other is dissolved, and all its rights, properties, and liabilities are acquired by the surviving corporation.28 This is particularly true in this case. Based on the findings of fact of the RTC, as affirmed by the CA, under the terms of the merger or consolidation, Global assumed all the liabilities and obligations of ABC as if it had incurred such liabilities or obligations itself. In the same way, Global also has the right to exercise all defenses, rights, privileges, and counter-claims of every kind and nature which ABC may have or invoke under the law. These findings of fact were never contested by Global in any of its pleadings filed before this Court.

WHEREFORE, in view of the foregoing, the Decision dated May 5, 2006 and the Resolution dated July 10, 2006 of the Court of Appeals in CA-G.R. SP No. 75524 are hereby AFFIRMED. Costs against petitioner.

SO ORDERED.

G.R. No. L-16779             August 16, 1961

NATIONAL ABACA AND OTHER FIBERS CORPORATION, plaintiff-appellant, vs.APOLONIA PORE, defendant-appellee.

A. LLamas & Arsenio P. Roman for plaintiff-appellant.Serafin Ramento for defendant-appellee.

CONCEPCION, J.:

Appeal by plaintiff National Abaca and other Fibers Corporation, from two (2) orders of the Court of First Instance of Leyte.

On November 14, 1953, plaintiff filed with the Municipal Court of Tacloban, Leyte, a complaint, against defendant Apolonia Pore, for the recovery of P1,213.34, allegedly advanced to her for the purchase of hemp for the account of the former and for which she had allegedly failed to account. In her answer, defendant alleged that she had accounted for all cash advances received by her for the aforementioned purpose from the plaintiff. In due course, said court rendering judgment on April 11, 1956, finding that the defendant had not accounted for cash advances in the sum of P272.49, which she was, accordingly, sentenced to pay to the plaintiff, with legal interest from November 18, 1953, in addition to the costs.

Said court having subsequently denied a reconsideration of this decision, as well a new trial prayed for the plaintiff, the latter appealed to the Court of First Instance of Leyte, in which defendant moved to dismiss the complaint upon the ground that plaintiff has no

legal capacity to sue, it having abolished by Executive Order No. 372 of the President of the Philippines, dated November 24,1950. Plaintiff objected thereto upon the ground that pursuant to said executive order, plaintiff "shall nevertheless be continued as a body corporate for a period of three (3) years from the effective date" of said executive order, which was November 30, 1950, "for the purpose of prosecuting and defending suits by or against it and of enabling the Board of Liquidators" — thereby created — "gradually to settle and close its affairs", . . . and that this case was begun on November 14, 1953, or before the expiration of the period aforementioned. After due hearing, the court of first instance issued an order dated August 1, 1956, directing plaintiff to amend the complaint, within ten (10) days from notice, by including the Board of Liquidators as co-party plaintiff, with the admonition that otherwise the case would be dismissed.

On September 1, 1956, said court issued another order dismissing the case, without pronouncement as to costs, it appearing that the aforementioned amended had not been made, despite the fact that copy of said order of August 1, 1956 had been sent, by registered mail, to plaintiff's counsel on August 6, 1956. Copy of the last order was delivered, on September 13, 1956, to counsel for the plaintiff, which filed, on September 21, 1956, a motion alleging that, copy of the order of August 1, 1956 was received by the plaintiff on August 17, 1956; that thereupon said counsel prepared an amended complaint — copy of which was annexed to the motion — as directed by the court; that on August 24, 1956, said counsel handed two copies of said amended complaint to Mrs. Receda Vda. de Ocampo, the employee of the aforesaid Board of Liquidators in charge of plaintiff's incoming and outgoing correspondence, with instructions to them mail said copies to the Court of First Instance of Leyte and to counsel for defendant herein; that on September 13, 1956, plaintiff's counsel received copy of the order of September 1, 1956; that thereupon he inquired from plaintiff's mailing clerk whether or not his instructions, concerning the mailing of copies of said amended complaint, had been complied with; that he then found out that, although said copies of the amended complaint were entered in the record book of plaintiff's outgoing correspondence on August 24, 1956, only the copy addressed to defendant's counsel had actually been mailed (as evidenced by registry receipt No. 57209 dated August 25, 1956); that the original copy of the amended complaint, addressed to the clerk of court, could not be located, despite diligent efforts made to find the same; that plaintiff's failure to file in court the original of said amended complaint is imputable to the excusable negligence of the aforementioned Mrs. Ocampo, whose affidavit was annexed, also, to the motion for reconsideration; and that, plaintiff has a just and valid claim against the defendant. Plaintiff prayed, therefore, that said order of September 1, 1956 be reconsidered and set aside and that its aforementioned amended complaint be admitted.

Said motion for reconsideration was denied by an order dated October 2, 1956, whereupon plaintiff brought the case for review, by Record on Appeal, to the Court of Appeals which, however, forwarded the records to us, the issues raised in the appeal being purely of law, namely;(1) whether an action, commenced within three (3) years after the abolition of plaintiff, as a corporation, may be continued by the same after the expiration of said period; and (2) whether, under the facts set forth above, the lower court should have granted plaintiff's motion for reconsideration of its order of September 1, 1956.

With respect to the first question, the rule appears to be well settled that, in the absence of statutory provision to the contrary, pending actions by or against a corporation are abated upon expiration of the period allowed by law for the liquidation of its affairs.

It is generally held, that where a statute continues the existence of a corporation for a certain period after its dissolution for the purpose of prosecuting and defending suits, etc., the corporation becomes defunct upon the expiration of such period, at least in the absence of a provision to the contrary, so that no action can afterwards be brought by or against it, and must be dismissed. Actions

pending by or against the corporation when the period allowed by the statute expires, ordinarily abate.

. . . This time limit does not apply unless the circumstances are such as to bring the corporation within the provision of the statute. However, the wording of the statutes, in some jurisdictions authorize suits after the expiration of the time limit, where the statute provides that for the purpose of any suit brought by or against the corporation shall continue beyond such period for a further named period after final judgment. (Fletcher's Cyclopedia on Corporations, Vol. 16, pp. 892-893.).

Our Corporation Law contains no provision authorizing a corporation, after three (3) years from the expiration of its lifetime, to continue in its corporate name actions instituted by it within said period of three (3) years. in fact, section 77 of said law provides that the corporation shall "be continued as a body corporate for three (3) years after the time when it would have been . . . dissolved, for the purposed of prosecuting and defending suits by or against it . . .", so that, thereafter, it shall no longer enjoy corporate existence for such purpose. For this reason, section 78 of the same law authorizes the corporation, "at any time during said three years . . . to convey all of its property to trustees for the benefit of members, stockholders, creditors and other interested", evidently for the purpose, among others, of enabling said trustees to prosecute and defend suits by or against the corporation begun before the expiration of said period. Hence, commenting on said sections, Judge Fisher, in his work entitled Philippines Law on Stock Corporations (1929 ed.), has the following to say:

It is to be noted that the time during which the corporation, through its own officers, may conduct the liquidation of its assets and sue and be sued as a corporation is limited to three years from the time the period of dissolution commences; but that there is no time limited within the trustees must complete a liquidation placed in their hands. It is provided only (Corp. Law, Sec. 78) that the conveyance to the trustees must be made within the three-year period. It may be found impossible to complete the work of liquidation within the three-year period or to reduce disputed claims to judgment. The authorities are to the effect that suits by or against a corporation abate when it ceased to be an entity capable of suing or being sued (7 R.C.L. Corps., Par. 750); but trustees to whom the corporate assets have been conveyed pursuant to the authority of section 78 may used and be sued as such in all matters connected with the liquidation. By the terms of the statute the effect of the conveyance is to make the trustees the legal owners of the property conveyed, subject to the beneficial interest therein of creditors and stockholders. (pp. 389-390; see also Sumera v. Valencia [67 Phil. 721, 726-727).

Obviously, the complete loss of plaintiff's corporate existence after the expiration of the period of three (3) years for the settlement of its affairs is what impelled the President to create a Board of Liquidators, to continue the management of such matters as may then be pending. The first question must, therefore, be answered in the negative.

With respect, however, to the second question, we hold that the lower court erred in not granting plaintiff's motion for reconsideration of September 21, 1956. To begin with, the judgment of the municipal court of Tacloban against the defendant is a strong indication of the validity and justice of plaintiff's claim against her. Moreover, the record satisfactorily shows that plaintiff had prepared an amended complaint, as directed in the order of August 1, 1956, upon receipt thereof; that copy of said amended complaint had actually been sent by registered mail to defendant's counsel; that plaintiff's counsel had given to its mailing clerk the proper instructions for the filing of the original of said amended complaint with the office of the Court of First Instance of Leyte; that said

mailing clerk had endeavored to comply with the aforementioned instructions, as evidenced by the corresponding entry in the record book of plaintiff's outgoing correspondence; and that the failure to file in court said original of the amended complaint must have been due, therefore, either to accident or to excusable negligence on the part of said mailing clerk.

WHEREFORE, the orders appealed from, dated September 1 and October 3, 1956 are reversed, plaintiff's amended complaint is hereby admitted, and the record remanded to the lower court for further proceedings, with the costs of this instance against defendant-appellee, Apolonio Pore.

G.R. No. L-26001            October 29, 1968

PHILIPPINE NATIONAL BANK, petitioner, vs.THE COURT OF APPEALS and PHILIPPINE COMMERCIAL AND INDUSTRIAL BANK, respondents.

Tomas Besa, Jose B. Galang and Juan C. Jimenez for petitioner.San Juan, Africa & Benedicto for respondents.

CONCEPCION, C.J.:

The Philippine National Bank — hereinafter referred to as the PNB — seeks the review by certiorari of a decision of the Court of Appeals, which affirmed that of the Court of First Instance of Manila, dismissing plaintiff's complaint against the Philippine Commercial and Industrial Bank — hereinafter referred to as the PCIB — for the recovery of P57,415.00.

A partial stipulation of facts entered into by the parties and the decision of the Court of Appeals show that, on about January 15, 1962, one Augusto Lim deposited in his current account with the PCIB branch at Padre Faura, Manila, GSIS Check No. 645915- B, in the sum of P57,415.00, drawn against the PNB; that, following an established banking practice in the Philippines, the check was, on the same date, forwarded, for clearing, through the Central Bank, to the PNB, which did not return said check the next day, or at any other time, but retained it and paid its amount to the PCIB, as well as debited it against the account of the GSIS in the PNB; that, subsequently, or on January 31, 1962, upon demand from the GSIS, said sum of P57,415.00 was re-credited to the latter's account, for the reason that the signatures of its officers on the check were forged; and that, thereupon, or on February 2, 1962, the PNB demanded from the PCIB the refund of said sum, which the PCIB refused to do. Hence, the present action against the PCIB, which was dismissed by the Court of First Instance of Manila, whose decision was, in turn, affirmed by the Court of Appeals.

It is not disputed that the signatures of the General Manager and the Auditor of the GSIS on the check, as drawer thereof, are forged; that the person named in the check as its payee was one Mariano D. Pulido, who purportedly indorsed it to one Manuel Go; that the check purports to have been indorsed by Manuel Go to Augusto Lim, who, in turn, deposited it with the PCIB, on January 15, 1962; that, thereupon, the PCIB stamped the following on the back of the check: "All prior indorsements and/or Lack of Endorsement Guaranteed, Philippine Commercial and Industrial Bank," Padre Faura Branch, Manila; that, on the same date, the PCIB sent the check to the PNB, for clearance, through the Central Bank; and that, over two (2) months before, or on November 13, 1961, the GSIS

had notified the PNB, which acknowledged receipt of the notice, that said check had been lost, and, accordingly, requested that its payment be stopped.

In its brief, the PNB maintains that the lower court erred: (1) in not finding the PCIB guilty of negligence; (2) in not finding that the indorsements at the back of the check are forged; (3) in not finding the PCIB liable to the PNB by virtue of the former's warranty on the back of the check; (4) in not holding that "clearing" is not "acceptance", in contemplation of the Negotiable Instruments law; (5) in not finding that, since the check had not been accepted by the PNB, the latter is entitled to reimbursement therefor; and (6) in denying the PNB's right to recover from the PCIB.

The first assignment of error will be discussed later, together with the last,with which it is interrelated.

As regards the second assignment of error, the PNB argues that, since the signatures of the drawer are forged, so must the signatures of the supposed indorsers be; but this conclusion does not necessarily follow from said premise. Besides, there is absolutely no evidence, and the PNB has not even tried to prove that the aforementioned indorsements are spurious. Again, the PNB refunded the amount of the check to the GSIS, on account of the forgery in the signatures, not of the indorsers or supposed indorsers, but of the officers of the GSIS as drawer of the instrument. In other words, the question whether or not the indorsements have been falsified is immaterial to the PNB's liability as a drawee, or to its right to recover from the PCIB,1 for, as against the drawee, the indorsement of an intermediate bank does not guarantee the signature of the drawer,2 since the forgery of the indorsement is notthe cause of the loss.3

With respect to the warranty on the back of the check, to which the third assignment of error refers, it should be noted that the PCIB thereby guaranteed "all prior indorsements," not the authenticity of the signatures of the officers of the GSIS who signed on its behalf, because the GSIS is not an indorser of the check, but its drawer.4 Said warranty is irrelevant, therefore, to the PNB's alleged right to recover from the PCIB. It could have been availed of by a subsequent indorsee5 or a holder in due course6 subsequent to the PCIB, but, the PNB is neither.7 Indeed, upon payment by the PNB, as drawee, the check ceased to be a negotiable instrument, and became a mere voucher or proof of payment.8

Referring to the fourth and fifth assignments of error, we must bear in mind that, in general, "acceptance", in the sense in which this term is used in the Negotiable Instruments Law9 is not required for checks, for the same are payable on demand.10 Indeed, "acceptance" and "payment" are, within the purview of said Law, essentially different things, for the former is "a promise to perform an act," whereas the latter is the "actual performance" thereof.11 In the words of the Law,12 "the acceptance of a bill is the signification by the drawee of his assent to the order of the drawer," which, in the case of checks, is the payment, on demand, of a given sum of money. Upon the other hand, actual payment of the amount of a check implies not only an assent to said order of the drawer and a recognition of the drawer's obligation to pay the aforementioned sum, but, also, a compliance with such obligation.

Let us now consider the first and the last assignments of error. The PNB maintains that the lower court erred in not finding that the PCIB had been guilty of negligence in not discovering that the check was forged. Assuming that there had been such negligence on the part of the PCIB, it is undeniable, however, that the PNB has, also, been negligent, with the particularity that the PNB had been guilty of a greater degree of negligence, because it had a previous and formal notice from the GSIS that the check had been lost, with the request that payment thereof be stopped. Just as important, if not more

important and decisive, is the fact that the PNB's negligence was the main or proximate cause for the corresponding loss.

In this connection, it will be recalled that the PCIB did not cash the check upon its presentation by Augusto Lim; that the latter had merely deposited it in his current account with the PCIB; that, on the same day, the PCIB sent it, through the Central Bank, to the PNB, for clearing; that the PNB did not return the check to the PCIB the next day or at any other time; that said failure to return the check to the PCIB implied, under the current banking practice, that the PNB considered the check good and would honor it; that, in fact, the PNB honored the check and paid its amount to the PCIB; and that only then did the PCIB allow Augusto Lim to draw said amount from his aforementioned current account.

Thus, by not returning the check to the PCIB, by thereby indicating that the PNB had found nothing wrong with the check and would honor the same, and by actually paying its amount to the PCIB, the PNB induced the latter, not only to believe that the check was genuine and good in every respect, but, also, to pay its amount to Augusto Lim. In other words, the PNB was the primary or proximate cause of the loss, and, hence, may not recover from the PCIB.13

It is a well-settled maxim of law and equity that when one of two (2) innocent persons must suffer by the wrongful act of a third person, the loss must be borne by the one whose negligence was the proximate cause of the loss or who put it into the power of the third person to perpetrate the wrong.14

Then, again, it has, likewise, been held that, where the collecting (PCIB) and the drawee (PNB) banks are equally at fault, the court will leave the parties where it finds them.15

Lastly, Section 62 of Act No. 2031 provides:

The acceptor by accepting the instrument engages that he will pay it according to the tenor of his acceptance; and admits:

(a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and

(b) The existence of the payee and his then capacity to indorse.

The prevailing view is that the same rule applies in the case of a drawee who pays a bill without having previously accepted it.16

WHEREFORE, the decision appealed from is hereby affirmed, with costs against the Philippine National Bank. It is so ordered.