1. Palting vs. San Jose Petroleum Inc.

This is a petition for review of the Securities and Exchange Commission denying the opposition to, and instead, granting the registration, and licensing the sale in the Philippines, of 5,000,000 shares of the capital stock of the respondent-appellee San Jose Petroleum, Inc. a corporation organized and existing in the Republic of Panama.

SAN JOSE PETROLEUM filed with the Philippine SEC for the registration and licensing for sale in the Philippines Voting Trust Certificates. It was alleged that the entire proceeds of the sale of said securities will be devoted or used exclusively to finance the operations of San Jose Oil Company, Inc. (a domestic mining corporation hereafter to be referred to as SAN JOSE OIL). While this application for registration was pending consideration by the SEC, SAN JOSE PETROLEUM filed an amended Statement, for registration of the sale in the Philippines of its shares of capital stock, which was increased from 2,000,000 to 5,000,000, at a reduced offering price of from P1.00 to P0.70 per share. At this time the par value of the shares has also been reduced from $.35 to $.01 per share.

Palting and others, allegedly prospective investors in the shares of SAN JOSE PETROLEUM, filed with the SEC an opposition to registration and licensing of the securities on the grounds that:

(1) the tie-up between the issuer, SAN JOSE PETROLEUM, a Panamanian corporation and SAN JOSE OIL, a domestic corporation, violates the

Constitution of the Philippines, the Corporation Law and the Petroleum Act of 1949; (2) the issuer has not been licensed to transact business in the Philippines; (3) the sale of the shares of the issuer is fraudulent, and works or tends to work a fraud upon Philippine purchasers; and (4) the issuer as an enterprise, as well as its business, is based upon unsound business principles. Answering the foregoing opposition of Palting, et al.

SAN JOSE PETROLEUM claimed that it was a "business enterprise" enjoying parity rights under the Ordinance appended to the Constitution, which parity right, with respect to mineral resources in the Philippines, may be exercised, pursuant to the Laurel-Langley Agreement, only through the medium of a corporation organized under the laws of the Philippines. Thus, registrant which is allegedly qualified to exercise rights under the Parity Amendment, had to do so through the medium of a domestic corporation, which is the SAN JOSE OIL. It refused the contention that the Corporation Law was being violated, by alleging that Section 13 thereof applies only to foreign corporations doing business in the Philippines, and registrant was not doing business here. The mere fact that it was a holding company of SAN JOSE OIL and that registrant undertook the financing of and giving technical assistance to said corporation did not constitute transaction of business in the Philippines. Registrant also denied that the offering for sale in the Philippines of its shares of capital stock was fraudulent or would work or tend to work fraud on the investors.

Issues: 1. Whether or not petitioner Palting, as a "prospective investor" in respondent's securities, has personality to file the present petition for review of the order of the Securities and Exchange Commission

2. Whether or not the "tie-up" between the respondent SAN JOSE PETROLEUM, a foreign corporation, and SAN JOSE OIL COMPANY, INC., a domestic mining corporation, is violative of the Constitution, the Laurel-Langley Agreement, the Petroleum Act of 1949, and the Corporation Law;

3. Whether or not the sale of respondent's securities is fraudulent, or would work or tend to work fraud to purchasers of such securities in the Philippines.

Held:

1. Securities Act in Section 7(c) thereof, requires the publication and notice of the registration statement. Pursuant thereto, the Securities and Exchange Commissioner caused the publication of an order in part reading as follows:

. . . Any person who is opposed with this petition must file his written opposition with this Commission within said period (2 weeks). . . .

In other words, as construed by the administrative office entrusted with the enforcement of the Securities Act, any person (who may not be "aggrieved" or "interested" within the legal acceptation of the word) is allowed or permitted to file an opposition to the registration of

securities for sale in the Philippines.

2. The privilege to utilize, exploit, and develop the natural resources of this country was granted, by Article XIII of the Constitution, to Filipino citizens or to corporations or associations 60% of the capital of which is owned by such citizens. With the Parity Amendment to the Constitution, the same right was extended to citizens of the United States and business enterprises owned or controlled directly or indirectly, by citizens of the United States.

There could be no serious doubt as to the meaning of the word "citizens" used in the aforementioned provisions of the Constitution. The right was granted to 2 types of persons: natural persons (Filipino or American citizens) and juridical persons (corporations 60% of which capital is owned by Filipinos and business enterprises owned or controlled directly or indirectly, by citizens of the United States).

Is herein respondent SAN JOSE PETROLEUM an American business enterprise entitled to parity rights in the Philippines? The answer must be in the negative, for the following reasons:

Firstly — It is not owned or controlled directly by citizens of the United States, because it is owned and controlled by a corporation, the OIL INVESTMENTS, another foreign (Panamanian) corporation.

Secondly — Neither can it be said

that it is indirectly owned and controlled by American citizens through the OIL INVESTMENTS, for this latter corporation is in turn owned and controlled, not by citizens of the United States, but still by two foreign (Venezuelan) corporations, the PANTEPEC OIL COMPANY and PANCOASTAL PETROLEUM.

Thirdly — Although it is claimed that these two last corporations are owned and controlled respectively by 12,373 and 9,979 stockholders residing in the different American states, there is no showing in the certification furnished by respondent that the stockholders of PANCOASTAL or those of them holding the controlling stock, are citizens of the United States.

Fourthly — Granting that these individual stockholders are American citizens, it is yet necessary to establish that the different states of which they are citizens, allow Filipino citizens or corporations or associations owned or controlled by Filipino citizens, to engage in the exploitation, etc. of the natural resources of these states (see paragraph 3, Article VI of the Laurel-Langley Agreement, supra). Respondent has presented no proof to this effect.

Fifthly — But even if the requirements mentioned in the two immediately preceding paragraphs are satisfied, nevertheless to hold that the set-up disclosed in this case, with a long chain of intervening foreign corporations, comes within

the purview of the Parity Amendment regarding business enterprises indirectly owned or controlled by citizens of the United States, is to unduly stretch and strain the language and intent of the law. For, to what extent must the word "indirectly" be carried? Must we trace the ownership or control of these various corporations ad infinitum for the purpose of determining whether the American ownership-control-requirement is satisfied? Add to this the admitted fact that the shares of stock of the PANTEPEC and PANCOASTAL which are allegedly owned or controlled directly by citizens of the United States, are traded in the stock exchange in New York, and you have a situation where it becomes a practical impossibility to determine at any given time, the citizenship of the controlling stock required by the law. In the circumstances, we have to hold that the respondent SAN JOSE PETROLEUM, as presently constituted, is not a business enterprise that is authorized to exercise the parity privileges under the Parity Ordinance, the Laurel-Langley Agreement and the Petroleum Law. Its tie-up with SAN JOSE OIL is, consequently, illegal.

3. These provisions are in direct opposition to our corporation law and corporate practices in this country. These provisions alone would outlaw any corporation locally organized or doing business in this jurisdiction. Consider the unique and unusual provision that no contract or transaction between the company and any other

association or corporation shall be affected except in case of fraud, by the fact that any of the directors or officers of the company may be interested in or are directors or officers of such other association or corporation; and that none of such contracts or transactions of this company with any person or persons, firms, associations or corporations shall be affected by the fact that any director or officer of this company is a party to or has an interest in such contract or transaction or has any connection with such person or persons, firms associations or corporations; and that any and all persons who may become directors or officers of this company are hereby relieved of all responsibility which they would otherwise incur by reason of any contract entered into which this company either for their own benefit, or for the benefit of any person, firm, association or corporation in which they may be interested.

2. Strong vs. Repide

This action was brought to recover 800 shares of the capital stock of the Philippine Sugar Estates Development Company, Limited, an anonymous society formed to hold the Dominican friar lands.

The shares were the property of one of the plaintiffs, Mrs. Strong, as part of the estate of her first husband. They were purchased by the defendant through a broker who dealt with her agent, one Jones, who had the script in her possession and who had made the sale without the knowledge of the plaintiff. The defendant was a director, was the managing agent, and was in his own right the majority stockholder of the society.

The plaintiff proceeds on two theories:First. That her agent had no power to sell or deliver her stock in the Philippine Sugar Estates Development Company, Limited; andSecond. That its sale, through her agent, was procured by fraud on the part of the defendant.

Held:The director and controlling stockholder who purchased the shares of another stockholder through an agent was held to be guilty of concealing the impending purchase of the friar lands they own by the government, a significant fact which would affect the price of the shares. Although ordinarily, the relationship between directors and stockholders of a corporation is not of a fiduciary character as to oblige the director to disclose to a stockholder the general

knowledge which he may possess regarding the value of the shares of the company before he purchases any form a shareholder, there are cases when such duty and obligation upon the director is present. Being the chief negotiator for the sale of the lands, the director was the only person who knew of the advantages and the impending increase in the value of the shares such that he is precluded from acquiring stocks from other shareholders without first informing them of the pertinent facts affecting the value of the shares being bought.

It is fraudulent for a stockholder to buy from a shareholder without disclosing his identity.

3. Republic vs. Kerr

Ker & Co., Ltd., a domestic corporation, filed its income tax returns for the years 1947, 1948, 1949 and 1950. Thereafter, BIR assessed a deficiency tax for the said company.

BIR demanded payment of the aforesaid assessments together with a surcharge of 5% for late payment and interest at the rate of 1% monthly. Ker & Co., Ltd. refused to pay, instead it set up the defense of prescription of the Commissioner's right to collect the tax. Subsequently, the Republic of the Philippines filed a complaint with the CFI of Manila seeking collection of the aforesaid deficiency income tax for the years 1947, 1948, 1949 and 1950. The complaint did not allege fraud in the filing of any of the income tax returns for the years involved, nor did it pray for the payment of the corresponding 50% surcharge, but it prayed for the payment of 5% surcharge for late payment and interest of 1% per month without however specifying from what date interest started to accrue. 

Ker & Co., Ltd. moved for the dismissal on the ground that the court did not acquire jurisdiction over the person of the defendant and that plaintiff's cause of action has prescribed. This motion was denied.

Republic filed a motion for reconsideration contending that the right of the Commissioner of Internal Revenue to collect the deficiency assessment for 1947 has not prescribed by a lapse of merely five years and three months, because the taxpayer's income

tax return was fraudulent in which case prescription sets in ten years from October 31, 1951, the date of discovery of the fraud, pursuant to Section 332 (a) of the Tax Codes and that the payment of delinquency interest of 1% per month should commence from the date it fell due as indicated in the assessment notices instead of on the date the complaint was filed.

Ker & Co., Ltd. also filed a motion for reconsideration reiterating its assertion that the Court of First Instance did not acquire jurisdiction over its person, and maintaining that since the complaint was filed nine years, one month and eleven days after the deficiency assessments for 1948, 1949 and 1950 were made and since the filing of its petition for review in the Court of Tax Appeals did not stop the running of the period of limitations, the right of the Commissioner of Internal Revenue to collect the tax in question has prescribed.

Issue: Did the Court of First Instance acquire jurisdiction over the person of defendant Ker & Co., Ltd.?

Held:Ker & Co., Ltd. maintains that the court a quo did not acquire jurisdiction over its person inasmuch as summons was not served upon it but upon Messrs. Leido and Associates who do not come under any of the class of persons upon whom summons should be served as enumerated in Section 13, Rule 7 of the Rules of Court, 2 which reads:

SEC. 13. Service upon private domestic corporation or partnership.—If the

defendant is a corporation formed under the laws of the Philippines or a partnership duly registered, service may be made on the president, manager, secretary, cashier, agent, or any of its directors.

Messrs. Leido and Associates acted as counsel for Ker Co., Ltd. when this tax case was in its administrative stage. The same counsel represented Ker & Co., Ltd., when it appealed said case to the Court of Tax Appeals and later to this Court. Subsequently, when the Deputy Commissioner of Internal Revenue, by letter dated March 15, 1962, demanded the payment of the deficiency income tax in question, it was Messrs. Leido, Andrada, Perez & Associates who replied in behalf of Ker & Co., Ltd. in two letters, dated March 28, 1962 and April 10, 1962, both after the complaint in this case was filed. At least therefore on April 2, 1962 when Messrs. Leido and Associates received the summons, they were still acting for and in behalf of Ker & Co., Ltd. in connection with its tax liability involved in this case. Perforce, they were the taxpayer's agent when summons was served. Under Section 13 of Rule 7, aforequoted, service upon the agent of a corporation is sufficient.

4. Special Services Corp. vs Centro La Paz

A judgment was rendered in favor of petitioner Special Services Corporation by the CFI of Manila against Alejandro Estudillo in the amount of P94,727.52, more or less, in an action for Replevin with Sum of Money. A writ of execution was thereafter issued but which has remained unsatisfied.

By virtue of an alias writ of execution the Sheriff caused the annotation of a notice of levy on TCT, in respect of the rights, interest and participation of said Alejandro Estudillo, one of the registered owners indicated in said title. That title covers two parcels of land situated in Sampaloc, Manila. The public auction sale of Estudillo's rights and interests in said properties was scheduled.

Alejandro Estudillo later on filed a "Motion to Dissolve and/or Cancel the Notice of Levy" alleging that he and the other registered owners indicated on the title merely held in trust the properties and improvements thereon in favor of respondent Centro La Paz (Samahang Espiritista Sa Lunduyang La Paz) a Chapter of Union Espiritista Cristiana de Filipinas, Inc.

CENTRO submitted a third party claim to the Sheriff of Manila likewise averring exclusive ownership of the properties in question.

CENTRO reiterated ownership of the properties in question and emphasized that the registered owners thereof had publicly acknowledged their possession of said properties in the concept of

trustees.

The lower Court held that by a preponderance of evidence CENTRO had established that it was "really and true and lawful owner of the property in dispute, and that the persons registered therein as its owners are merely trustees of the plaintiff.

While it may be true that the declaration of Estudillo subsequent to the levy upon his interest in the aforesaid property may be self-serving, which could be for the purpose of avoiding liability, his declaration and that of his co-owners, however, taking place years before the instant controversy, could hardly be said to have been motivated by a similar purpose (to evade responsibility) since at that time, none as yet exist in favor of the defendant nor anybody elm against the Estudillo.

Issue: Whether or not Centro La Paz which is merely a Chapter of Union Espiritista de Filipinas, Inc. has a juridical personality of its own in accordance with the provisions of our laws

Held: Petition DENIED.

As found by both the Trial Court and respondent Appellate Court, the evidence sufficiently establishes that the registered owners of the parcels of land covered by TCT 51837, all of whom are members of CENTRO, hold the properties in trust for CENTRO by virtue of the indubitable documents executed even before the institution of suit.

Admittedly, the trust was not registered in accordance with section 65 of Act 496 (the former Land Registration Law). The absence of said registration, however, cannot be taken against CENTRO inasmuch as, if the public auction sale had actually been held, with petitioner as the successful buyer, petitioner could not have been considered a purchaser for value and in good faith at said sale since it had knowledge of CENTRO's claim, particularly when the latter had filed a third-party-claim with the Sheriff of Manila before the scheduled auction sale, which knowledge was equivalent to registration of the several "Acknowledgments" in the Registry of Deeds.

The conclusion follows that inasmuch as Estudillo has no interest in the properties in question, there is nothing that petitioner can levy upon. The power of a Court in the execution of its judgment extends only over properties unquestionably belonging to the judgment debtor.

4. Luneta Motor Company vs. AD Santos

To secure payment of a loan evidenced by a promissory note executed by Nicolas Concepcion and guaranteed by one Placido Esteban in favor of petitioner, Concepcion executed a chattel mortgage covering the above mentioned public service certificate in favor of petitioner.

To secure payment of a subsequent loan obtained by Concepcion from the Rehabilitation Finance Corporation (now Development Bank of the Philippines) he constituted a second mortgage on the same certificate. This second mortgage was approved by the respondent Commission, subject to the mortgage lien in favor of petitioner.

The certificate was later sold to Francisco Benitez, Jr., who resold it to Rodi Taxicab Company. Both sales were made with assumption of the mortgage in favor of the RFC, and were also approved provisionally by the Commission, subject to petitioner's lien.

Petitioner filed an action to foreclose the chattel mortgage executed in its favor by Concepcion in view of the failure of the latter and his guarantor, Placido Esteban, to pay their overdue account.

While pending, the RFC also instituted foreclosure proceedings on its second chattel mortgage, and as a result of the decision in its favor therein rendered, the certificate of public convenience was sold at public auction in favor of Amador D. Santos. Santos immediately applied

with the Commission for the approval of the sale, and the same was approved.

Accordingly, said certificate was sold at public auction to petitioner, and six days thereafter the Sheriff issued in its favor the corresponding certificate of sale. Thereupon petitioner filed the application mentioned heretofore for the approval of the sale. In the meantime and before his death, Amador D. Santos sold and transferred all his rights and interests in the certificate of public convenience in question in favor of the now respondent A.D. Santos, Inc., who opposed petitioner's application.

Respondent A. D. Santos, Inc., with leave of court, filed a motion to dismiss based on the following grounds:

a) under the petitioner's Articles of Incorporation, it was not authorized to engage in the taxicab business or operate as a common carrier;

The respondent Commission, after considering the memoranda submitted by the parties, rendered the appealed decision sustaining the first ground relied upon in support thereof, namely, that under petitioner's articles of incorporation it had no authority to engage in the taxicab business or operate as a common carrier, and that, is a result, it could not acquire by purchase the certificate of public convenience referred to above. Hence, the present appeal interposed by petitioner who claims that, in accordance with the Corporation Law and its articles of incorporation, it can acquire by purchase the certificate of public convenience in question,

maintaining inferentially that, after acquiring said certificate, it could make use of it by operating a taxicab business or operate is a common carrier by land.

There is no question that a certificate of public convenience granted to the public operator is liable to execution (Raymundo vs. Luneta Motor Co., 58 Phil. 889) and may be acquired by purchase.

Issue: 1. Whether, under the Corporation Law and petitioner's articles of incorporation, it may acquire by purchase a certificate of public convenience

Held: It is not denied that under Section 13 (5) of the Corporation Law, a corporation created thereunder may purchase, hold, etc., and otherwise deal in such real and personal property is the purpose for which the corporation was formed may permit, and the transaction of its lawful business may reasonably and necessarily require. The issue here is precisely whether the purpose for which petitioner was organized and the transaction of its lawful business reasonably and necessarily require the purchase and holding by it of a certificate of public convenience like the one in question and thus give it additional authority to operate thereunder as a common carrier by land.

The Court found nothing in the legal provision and the provisions of petitioner's articles of incorporation relied upon that could justify petitioner's contention in this case. To the contrary, they are precisely the best evidence that it has no authority at all to engage in the

business of land transportation and operate a taxicab service. That it may operate and otherwise deal in automobiles and automobile accessories; that it may engage in the transportation of persons by water does not mean that it may engage in the business of land transportation — an entirely different line of business. If it could not thus engage in the line of business, it follows that it may not acquire an certificate of public convenience to operate a taxicab service, such as the one in question, because such acquisition would be without purpose and would have no necessary connection with petitioner's legitimate business.

5. Director of Lands vs. Hermanos y Hermanas de Sta. Cruz de Mayo, Inc.

One reason for the dismissal is that such a land registration proceeding is not allowed by section 11, Article XIV of the Constitution which provides that "no private corporation or association may hold alienable lands of the public domain except by lease". A land registration proceeding presupposes that the land sought to be registered is a part of the public domain (Heirs of Pelagio Zara vs. Director of Lands, 127 Phil. 8, 12).

Another reason is that a corporation cannot invoke the Public Land Law whose provisions on judicial confirmation of imperfect or incomplete titles are available to private individuals only, not to juridical persons.

Macario inherited a land and upon his death, the land was inherited by his widow and two children who in later on sold it to Hermanos y Hermanas de Sta. Cruz de Mayo, Inc. which erected a chapel thereon.

Thereafter, the corporation filed an application for registration. It prayed that if the Land Registration Law is not applicable, then it should be given the benefit of the Public Land Law since the applicant and its predecessors-in-interest have been in possession of the land since 1900.

The trial court granted the application. The Director of Lands appealed.

Issue: Whether or not a corporation can register a land in favor of its own name

Held: The Court holds that the appeal

must be sustained because, as already shown, the matter of the disqualification of respondent corporation from registering the lands of the public domain is res judicata.

Here, the land in question is still a part of the public domain. Consequently, it is covered by the constitutional ban against juridical persons acquiring such lands. The fact that the possessory rights thereto have been owned by private persons (see section 14, Presidential Decree No. 1529, Property Registration Decree), does not make the land private land. It ceases to be a part of the public domain only after it becomes registered land.

7. Teresa Electric vs. PSC & Filipinas Cement

The Teresa Electric Light and Power Co., Inc. is a domestic corporation operating an electric plant in Teresa, Rizal, under a subsisting certificate of public convenience and necessity, while the respondent Filipinas is likewise a domestic corporation engaged in the manufacture and sale of cement.

Filipinas filed an application with the PSC for a certificate of public convenience to install, maintain and operate an electric plant in sitio Kaysapon of barrio Pamanaan, municipality of Teresa, Rizal, for the purpose of supplying electric power and light to its cement factory and its employees living within its compound.

Petitioner filed its written opposition alleging: that it is the duly authorized operator of an electric light, heat and power service in Teresa, Rizal; that Filipinas is not authorized by its articles of incorporation to operate an electric plant among others. Answering the opposition, Filipinas averred that, under paragraph 7 of its articles of incorporation, it is authorized to operate the proposed electric plant;

Issues: 1. Whether or not under its articles of incorporation Filipinas is authorized to operate and maintain an electric plant;

2. Whether or not Filipinas could be granted a certificate of public convenience and necessity to operate and maintain an electric plant

notwithstanding the existence of an electric plant operator in the same municipality

Held: In relation to the second question, it appears that the Articles of Incorporation of Filipinas (paragraph 7) provide for authority to secure from any governmental, state, municipality, or provincial, city or other authority, and to utilize and dispose of in any lawful manner, rights, powers, privileges, franchises and concessions — obviously necessary or at least related to the operation of its cement factory. Moreover, said Articles of Incorporation also provide that the corporation may generally perform any and all acts connected with the business of manufacturing portland cement or arising therefrom or incidental thereto.

It can not be denied that the operation of an electric light, heat and power plant is necessarily connected with the business of manufacturing cement. If in the modern world where we live today electricity is virtually a necessity for our daily needs, it is more so in the case of industries like the manufacture of cement.

Upon the last question, while it is true that operators of public convenience and service deserve some protection from unnecessary or unlawful competition, yet the rule is that nobody has any exclusive right to secure a franchise or a certificate of public convenience. Above any or all considerations, the grant of franchises and certificates of public convenience and service should be guided by public service and interest; the latter are the primordial

considerations to be taken into account.

8. Phil. Trust Co. vs. Rivera

Cooperativa Naval Filipina was duly incorporated under the laws of the Philippine Islands, with a capital of P100,000, divided into one thousand shares of a par value of P100 each. Among the incorporators of this company was numbered the defendant Mariano Rivera, who subscribed for 450 shares representing a value of P45,000, the remainder of the stock being taken by other persons. Later on, the company became insolvent and went into the hands of the Philippine Trust Company, as assignee in bankruptcy; and by it this action was instituted to recover one-half of the stock subscription of the defendant, which admittedly has never been paid.

The reason given for the failure of the defendant to pay the entire subscription is, that not long after the Cooperativa Naval Filipina had been incorporated, a meeting of its stockholders occurred, at which a resolution was adopted to the effect that the capital should be reduced by 50 per centum and the subscribers released from the obligation to pay any unpaid balance of their subscription in excess of 50 per centum of the same. As a result of this resolution it seems to have been supposed that the subscription of the various shareholders had been cancelled to the extent stated; and fully paid certificate were issued to each shareholders for one-half of his subscription.

It does not appear that the formalities prescribed in section 17 of the

Corporation Law (Act No. 1459), as amended, relative to the reduction of capital stock in corporations were observed,

Held: The defendant was still liable for the unpaid balance of his subscription. In this we think his Honor was clearly right.

It is established doctrine that subscription to the capital of a corporation constitute a find to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts. (Velasco vs. Poizat, 37 Phil., 802.) A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner an under the conditions prescribed by the statute or the charter or the articles of incorporation. Moreover, strict compliance with the statutory regulations is necessary.

The resolution releasing the shareholders from their obligation to pay 50 per centum of their respective subscriptions was an attempted withdrawal of so much capital from the fund upon which the company's creditors were entitled ultimately to rely and, having been effected without compliance with the statutory requirements, was wholly ineffectual.

9. Madrigal & Co. vs. Zamora

The respondent the Madrigal Central Office Employees Union, sought for the renewal of its CBA with the petitioner. Specifically, it proposed a wage increase, an allowance of P100.00 a month, and other economic benefits. The petitioner, however, requested for a deferment in the negotiations.

By an alleged resolution of its stockholders, the petitioner reduced its capital stock. This was effected through the distribution of the marketable securities owned by the petitioner to its stockholders in exchange for their shares in an equivalent amount in the corporation. By yet another alleged stockholders' action, the petitioner reduced its authorized capitalization again, through the same scheme. After the petitioner's failure to sit down with the respondent union, the latter, commenced with the NLRC on a complaint for unfair labor practice.

Pending the resolution of Case it informed the Secretary of Labor that Rizal Cement Co., Inc., "from which it derives income" General Manager or Agent" had "ceased operating temporarily." "In addition, "because of the desire of the stockholders to phase out the operations of the Madrigal & Co., Inc. due to lack of business incentives and prospects, and in order to prevent further losses," it had to reduce its capital stock on two occasions "As the situation, therefore, now stands, the Madrigal & Co., Inc. is without substantial income to speak of,

necessitating a reorganization, by way of retrenchment, of its employees and operations.

The labor arbiter rendered a decision in favor of the union. The petitioner then terminated several of its employees for its alleged retrenchment program. Thereafter, respondents went to DOLE and filed a complaint of illegal lockout. And it was ruled by the DOLE that indeed the termination was illegal. Thereafter, the petitioner filed an appeal to the Office of the President.

Meanwhile, the NLRC rendered a decision affirming the labor arbiter's judgment. The petitioner appealed to the Secretary of Labor. Secretary of Labor dismissed the appeal. Following these successive reversals, the petitioner came anew to this court.

Issue: Whether or not Cash dividends," as according to it, "are the absolute property of the stockholders and cannot be made available for disposition if only to meet the employees' economic demands.

Held: The dividends received by the company are corporate earnings arising from corporate investment." Indeed, as found by the Commission, the petitioner had entered such earnings in its financial statements as profits, which it would not have done if they were not in fact profits.

Moreover, it is incorrect to say that such profits — in the form of dividends — are beyond the reach of the petitioner's creditors since the petitioner had received them as compensation for its

management services in favor of the companies it managed as a shareholder thereof. As such shareholder, the dividends paid to it were its own money, which may then be available for wage increments. It is not a case of a corporation distributing dividends in favor of its stockholders, in which case, such dividends would be the absolute property of the stockholders and hence, out of reach by creditors of the corporation. Here, the petitioner was acting as stockholder itself, and in that case, the right to a share in such dividends, by way of salary increases, may not be denied its employees.

Accordingly, this court is convinced that the petitioner's capital reduction efforts were, to begin with, a subterfuge, a deception as it were, to camouflage the fact that it had been making profits, and consequently, to justify the mass layoff in its employee ranks, especially of union members. They were nothing but a premature and plain distribution of corporate assets to obviate a just sharing to labor of the vast profits obtained by its joint efforts with capital through the years. Surely, we can neither countenance nor condone this. It is an unfair labor practice.

10. Datu Tagaranao vs. SEC

The Articles of Incorporation of Jamiatul Philippine-Al Islamia, Inc. (originally Kamilol Islam Institute, Inc.) were filed with SEC. Datu Tagoranao Benito subscribed to 460 shares worth P4,600.00.

The respondent corporation filed a certificate of increase of its capital stock. Thus, P110,980.00 worth of shares were subsequently issued by the corporation from the unissued portion of the authorized capital stock of P200,000.00.

Datu Tagoranao filed with respondent SEC a petition alleging that the additional issue (worth P110,980.00) of previously subscribed shares of the corporation was made in violation of his pre-emptive right to said additional issue and that the increase in the authorized capital stock of the corporation from P200,000.00 to P1,000,000.00 was illegal considering that the stockholders of record were not notified of the meeting wherein the proposed increase was in the agenda. Petitioner prayed that the additional issue of shares of previously authorized capital stock as well as the shares issued from the increase in capital stock of respondent corporation be cancelled; that the secretary of respondent corporation be ordered to register the 2,540 shares acquired by him (petitioner) from Domocao Alonto and Moki-in Alonto; and that the corporation be ordered to render an accounting of funds to the stockholders.

SEC rendered a decision in favor of the respondent corporation.

Hence, this petition for review by way of appeal from the aforementioned decision of the Securities and Exchange Commission, petitioner contending that (1) the issuance of the 11,098 shares without the consent of the stockholders or of the Board of Directors, and in the absence of consideration, is null and void; (2) the increase in the authorized capital stock from P200,000.00 to P1,000,000.00 without the consent or express waiver of the stockholders, is null and void; (3) he is entitled to attorneys' fees, damages and expenses of litigation in filing this suit against the directors of respondent corporation.

Held:With respect to the claim that the increase in the authorized capital stock was without the consent, expressed or implied, of the stockholders, it was the finding of the Securities and Exchange Commission that a stockholders' meeting was held on November 25,1975, presided over by Mr. Ahmad Domocao Alonto, Chairman of the Board of Trustees and, among the many items taken up then were the change of name of the corporation from Kamilol Islam Institute Inc. to Jamiatul Philippine-Al Islamia, Inc., the increase of its capital stock from P200,000.00 to P1,000,000.00, and the increase of the number of its Board of Trustees from five to nine. "Despite the insistence of petitioner, this Commission is inclined to believe that there was a stockholders' meeting on November 25, 1975 which approved the increase. The petitioner had not sufficiently overcome the

evidence of respondents that such meeting was in fact held. What petitioner successfully proved, however, was the fact that he was not notified of said meeting and that he never attended the same as he was out of the country at the time. The documentary evidence of petitioner conclusively proved that he was attending the Mecca pilgrimage when the meeting was held on November 25, 1975.

While petitioner doubts the authenticity of the alleged minutes of the proceedings, the Commission notes with significance that said minutes contain numerous details of various items taken up therein that would negate any claim that it was not authentic. Another thing that petitioner was able to disprove was the allegation in the certificate of increase (Exh. 'E-l') that all stockholders who did not subscribe to the increase of capital stock have waived their pre-emptive right to do so. As far as the petitioner is concerned, he had not waived his pre-emptive right to subscribe as he could not have done so for the reason that he was not present at the meeting and had not executed a waiver, thereof. Not having waived such right and for reasons of equity, he may still be allowed to subscribe to the increased capital stock proportionate to his present shareholdings."

11. PCGG vs. SEC

12. EDWARD J. NELL COMPANY vs. PACIFIC FARMS, INC.

Appellant secured in Civil Case No. 58579 of the Municipal Court of Manila against Insular Farms, Inc. — hereinafter referred to as Insular Farms a judgment for the sum of P1,853.80 — representing the unpaid balance of the price of a pump sold by appellant to Insular Farms — with interest on said sum, plus P125.00 as attorney's fees and P84.00 as costs. A writ of execution, issued after the judgment had become final, returned unsatisfied, stating that Insular Farms had no leviable property.

Soon thereafter, appellant filed with said court the present action against Pacific Farms, Inc. — hereinafter referred to as appellee — for the collection of the judgment aforementioned, upon the theory that appellee is the alter ego of Insular Farms, which appellee has denied.

Upon appeal appellant posits upon the ground that the Court of Appeals had erred: in not holding the appellee liable for said unpaid obligation of the Insular Farms;

Issue: Whether or not appellee is an alter ego of Insular Farms

Held: In the case at bar, there is neither proof nor allegation that appellee had expressly or impliedly agreed to assume the debt of Insular Farms in favor of

appellant herein, or that the appellee is a continuation of Insular Farms, or that the sale of either the shares of stock or the assets of Insular Farms to the appellee has been entered into fraudulently, in order to escape liability for the debt of the Insular Farms in favor of appellant herein. In fact, these sales took place (March, 1958) not only over six (6) months before the rendition of the judgment (October 9, 1958) sought to be collected in the present action, but, also, over a month before the filing of the case (May 29, 1958) in which said judgment was rendered. Moreover, appellee purchased the shares of stock of Insular Farms as the highest bidder at an auction sale held at the instance of a bank to which said shares had been pledged as security for an obligation of Insular Farms in favor of said bank. It has, also, been established that the appellee had paid P285,126.99 for said shares of stock, apart from the sum of P10,000.00 it, likewise, paid for the other assets of Insular Farms.

Neither is it claimed that these transactions have resulted in the consolidation or merger of the Insular Farms and appellee herein. On the contrary, appellant's theory to the effect that appellee is an alter ego of the Insular Farms negates such consolidation or merger, for a corporation cannot be its own alter ego.

It is urged, however, that said P10,000.00 paid by appellee for other assets of Insular Farms is a grossly inadequate price, because, appellant now claims, said assets were worth around P285,126.99, and that, consequently, the sale must be

considered fraudulent. However, the sale was submitted to and approved by the Securities and Exchange Commission. It must be presumed, therefore, that the price paid was fair and reasonable. Moreover, the only issue raised in the court of origin was whether or not appellee is an alter ego of Insular Farms.

13. STEINBERG vs. GREGORIO VELASCO, ET AL.,

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

It is alleged that, 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, 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 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, 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.

.

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

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.

Held: 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.

14. Dela Rama vs. Ma-oa Sugar Central Sugar Sugar Central Co.

This was a representative or derivative suit commenced by four minority stockholders against the Ma-ao Sugar Central Co., Inc. and J. Amado Araneta and three other directors of the corporation.

The complaint comprising the period November, 1946 to October, 1952, stated five causes of action, to wit: (1) for alleged illegal and ultra-vires acts consisting of self-dealing irregular loans, and unauthorized investments; (2) for alleged gross mismanagement; (3) for alleged forfeiture of corporate rights warranting dissolution; (4) for alleged damages and attorney's fees; and (5) for receivership.

BY WAY OF SPECIAL DEFENSES, the defendants alleged, among other things: (1) that the complaint "is premature, improper and unjustified"; (2) that plaintiffs did not make an "earnest, not simulated effort" to exhaust first their remedies within the corporation before filing their complaint; (3) that no actual loss had been suffered by the defendant corporation on account of the transactions questioned by plaintiffs; (4) that the payments by the debtors of all amounts due to the defendant corporation constituted a full, sufficient and adequate remedy for the grievances alleged in the complaint and (5) that the dissolution and/or receivership of the defendant corporation would violate and

impair the obligation of existing contracts of said corporation.

Before taking up the errors respectively, assigned by the parties, we should state that the following findings of the Lower Court on the commission of corporate irregularities by the defendants have not been questioned by the defendants:

1. Failure to hold stockholders' meetings regularly. No stockholders' meetings were held in 1947, 1950 and 1951;

2. Irregularities in the keeping of the books. Untrue entries were made in the books which could not simply be considered as innocent errors;

3. Illegal investments in the Mabuhay Printing, P2,280,00, and the Acoje Mining, P7,000.00. The investments were made not in pursuance of the corporate purpose and without the requisite authority of two-thirds of the stockholders;

4. Unauthorized loans to J. Amado Araneta totalling P132,082.00 (which, according to the defendants, had been fully paid), in violation of the by-laws of the corporation which prohibits any director from borrowing money from the corporation;

5. Diversion of corporate funds of the Ma-ao Sugar Central Co., Inc.

The Court found that sums were taken out of the funds of the Ma-ao Sugar

Central Co., Inc. and delivered to these affiliated companies, and vice versa, without the approval of the Ma-ao Board of Directors, in violation of Sec. III, Art. 6-A of the by-laws.

Held: Regarding Assignment of Errors Nos. 2, 3 and 4 contained in the brief of the plaintiffs as appellants, it appears to us that the Lower Court was correct in its appreciation (1) that the evidence presented did not show that the defendant Ma-ao Sugar Company was insolvent (2) that the alleged discriminatory acts committed by the defendant Central against the planters were not a proper subject of derivative suit, but, at most, constituted a cause of action of the individual planters; and (3) that the acts of mismanagement complained of and proved do not justify a dissolution of the corporation.

          Whether insolvency exists is usually a question of fact, to be determined from an inventory of the assets and their value, as well as a consideration of the liabilities.... But the mere impairment of capital stock alone does not establish insolvency there being other evidence as to the corporation being a going concern with sufficient assets. Also, the excess of liabilities over assets does not establish insolvency, when other assets are available. (Fletcher Cyc. of the Law of Private Corporations, Vol. 15A, 1938 Ed pp. 34-37; Emphasis supplied).

          But relief by dissolution will be awarded in such cases only

where no other adequate remedy is available, and is not available where the rights of the stockholders can be, or are, protected in some other way.

The First Assignment of Error in the brief of the plaintiffs as appellants, contending that the investment of corporate funds by the Ma-ao Sugar Co., Inc., in another corporation (the Philippine Fiber Processing Co., Inc.) constitutes a violation of Sec. 17-½ of the Corporation Law, deserves consideration.

We therefore agree with the finding of the Lower Court that the investment in question does not fall under the purview of Sec. 17- ½ of the Corporation Law.

In the judgment, the lower court ordered the management of the Ma-ao Sugar Central Co., Inc. "to refrain from making investments in Acoje Mining, Mabuhay Printing and any other company whose purpose is not connected with the sugar central business." This portion of the decision should be reversed because, Sec. 17-½ of the Corporation Law allows a corporation to "invest its fund 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.

15. Gokongwei vs. Securities and Exchange Commission

[SEC Case 1375] On 22 October 1976, John Gokongwei Jr., as stockholder of 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. As a first cause of action, Gokongwei alleged that on 18 September 1976, Andres Soriano, Jr., Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio Buñao, Walthrode B. Conde, Miguel Ortigas, and Antonio Prieto amended by bylaws of the corporation, basing their authority to do so on a resolution of the stockholders adopted on 13 March 1961, when the outstanding capital stock of the 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 30,127,043, 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, Gokongwei 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, Gokongwei averred that the membership of the Board of Directors had changed since the authority was given in 1961, there being 6 new directors. As a fourth cause of action, it was claimed that prior to the questioned amendment, Gokogwei had all the qualifications to be a director of the corporation, being a substantial stockholder thereof; that as a stockholder, Gokongwei 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, Soriano, et. al. purposely provided for Gokongwei's disqualification and deprived him of his vested right as afore-mentioned, hence the amended by-laws are null and void. 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 the corporation, which was avowed 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 by-laws 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 Soriano, et. al. be made to pay damages, in specified amounts, to Gokongwei. On 28 October 1976, in connection with the same case, Gokongwei filed with the Securities and Exchange Commission an "Urgent Motion for Production and Inspection of Documents", alleging that the Secretary of the corporation refused to allow him to inspect its records despite request made by Gokongwei for production of certain documents enumerated in the request, and that the 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. The motion was opposed by Soriano, et. al. The Corporation, Soriano, et. al. filed their answer, and their opposition to the

petition, respectively. Meanwhile, on 10 December 1976, while the petition was yet to be heard, the 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 10 February 1977. This prompted Gokongwei to ask the SEC 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, Soriano, et. al. admitted the invalidity of the amendments of 18 September 1976. The motion for summary judgment was opposed by Soriano, et. al. Pending action on the motion, Gokongwei filed an "Urgent Motion for the Issuance of a Temporary Restraining Order", praying that pending the determination of Gokongwei's application for the issuance of a preliminary injunction and or Gokongwei's motion for summary judgment, a temporary restraining order be issued, restraining Soriano, et. al. from holding the special stockholders' meeting as scheduled. This motion was duly opposed by Soriano, et. al. On 10 February 1977, Cremation issued an order denying the motion for issuance of temporary restraining order. After receipt of the order of denial, Soriano, et. al. conducted the special stockholders' meeting wherein the amendments to the by-laws were ratified. On 14 February 1977, Gokongwei filed a consolidated motion for contempt and for nullification of the special stockholders' meeting. A motion for reconsideration of the order denying Gokongwei's motion for summary judgment was filed by

Gokongwei before the SEC on 10 March 1977.

[SEC Case 1423] Gokongwei alleged that, having discovered that the 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 SEC, on 20 January 1977, a petition seeking to have Andres M. Soriano, Jr. and Jose M. Soriano, as well as the corporation declared guilty of such violation, and ordered to account for such investments and to answer for damages. On 4 February 1977, motions to dismiss were filed by Soriano, et. al., to which a consolidated motion to strike and to declare Soriano, et. al. in default and an opposition ad abundantiorem cautelam were filed by Gokongwei. Despite the fact that said motions were filed as early as 4 February 1977, the Commission acted thereon only on 25 April 1977, when it denied Soriano, et. al.'s motions 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. Soriano, et. al. issued notices of the annual stockholders' meeting, including in the Agenda thereof, the "reaffirmation of the authorization to the Board of Directors by the stockholders at the meeting on 20 March 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 28 April 1977, Gokongwei filed with the

SEC an urgent motion for the issuance of a writ of preliminary injunction to restrain Soriano, et. al. from taking up Item 6 of the Agenda at the annual stockholders' meeting, requesting that the same be set for hearing on 3 May 1977, the date set for the second hearing of the case on the merits. The SEC, 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, Gokongwei filed an urgent manifestation on 3 May 1977, but this notwithstanding, no action has been taken up to the date of the filing of the instant petition.

Gokongwei filed a petition for petition for certiorari, mandamus and injunction, with prayer for issuance of writ of preliminary injunction, with the Supreme Court, alleging that there appears a deliberate and concerted inability on the part of the SEC to act.

Issue [1]: Whether the corporation has the power to provide for the (additional) qualifications of its directors.

Held [1]: It is recognized by all 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.'" 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." Any person "who buys stock in a corporation does so with the knowledge that its affairs are dominated by a majority of the stockholders and that he impliedly contracts that the will of the majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted by-laws and not forbidden by law." To this extent, therefore, the stockholder may be 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 can not 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." 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 dissenting 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 Gokongwei 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.

Issue [2]: Whether the disqualification of a competitor from being elected to the Board of Directors is a reasonable exercise of corporate authority.

Held[2]: Although in the strict and technical sense, directors of a private corporation are not regarded as trustees, there cannot be any doubt that their character is that of a fiduciary insofar as the corporation and the stockholders as a body are concerned. As agents entrusted with the management of the corporation for the collective benefit of the stockholders, "they occupy a fiduciary relation, and in this sense the relation is one of trust." "The ordinary trust relationship of directors of a corporation and stockholders 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." 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 through 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. The doctrine of "corporate opportunity" is precisely a recognition by the courts that the fiduciary standards could not be upheld where the fiduciary was acting for two entities with competing interests. This doctrine rests fundamentally on the unfairness, in particular circumstances, of an officer or director taking advantage of an opportunity for his own personal profit when the interest of the corporation justly calls for protection. 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. The offer and assurance of Gokongwei 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 involved. Apart from the impractical results that would ensue from such arrangement, it would be inconsistent with Gokongwei'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.

Issue [3]: Whether the SEC gravely abused its discretion in denying Gokongwei's request for an examination

of the records of San Miguel International, Inc., a fully owned subsidiary of San Miguel Corporation.

Held [3]: 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 quasi-ownership. 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. 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. 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." 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. 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. herein, considering that the foreign subsidiary is wholly owned by 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 owned subsidiary which are in the corporation's possession and control.

Issue [4]: Whether the SEC gravely abused its discretion in allowing the stockholders of San Miguel Corporation to ratify the investment of corporate funds in a foreign corporation.

Held [4]: 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. As stated by the 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. Assuming arguendo that the Board of Directors of SMC had no authority to make the assailed investment, there is no question that a corporation, like an individual, may ratify and thereby render binding upon it the originally unauthorized acts of its officers or other agents. This is 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 purported 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. 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 the corporation submitted the assailed investment to the stockholders for ratification at the annual meeting of 10 May 1977 cannot be construed as an admission that the corporation had committed an ultra vires act, considering the common practice of corporations of periodically submitting for the ratification of their stockholders the acts of their directors, officers and managers.