Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-40620 May 5, 1979
RICARDO L. GAMBOA, LYDIA R. GAMBOA, HONORIO DE 1A
RAMA, EDUARDO DE LA RAMA, and the HEIRS OF MERCEDES
DE LA RAMA-BORROMEO, petitioners,
vs.
HON. OSCAR R. VICTORIANO as Presiding Judge of the Court of
First Instance of Negros Occidental, Branch II, BENJAMIN
LOPUE, SR., BENJAMIN LOPUE, JR., LEONITO LOPUE, and
LUISA U. DACLES respondents.
Exequiel T. A Alejandro for petitioners.
Acua, Lirazan & Associates for private respondents.

CONCEPCION JR., J,:

Petition for certiorari to review the order of the respondent judge,
dated January 2, 1975, denying the petitioners' motion to dismiss
the complaint filed in Civil Case No. 10257 of the Court of First
Instance of Negros Occidental, entitled, "Benjamin Lopue Sr., et al.,
plaintiffs, versus Ricardo Gamboa, et al., defendants," as well as the
order dated April 4, 1975, denying the motion for the
reconsideration of Said order.
In the aforementioned Civil Case No. 10257 of the Court of First
Instance of Negros Occidental, the herein petitioners, Ricardo L.
Gamboa, Lydia R. Gamboa, Honorio de la Rama, Eduardo de la
Rama, and the late Mercedes de la Rama-Borromeo, now
represented by her heirs, as well as Ramon de la Rama, Paz de la

Rama-Battistuzzi, and Enzo Battistuzzi, were sued by the herein

private respondents, Benjamin Lopue, Sr., Benjamin Lopue, Jr.,
Leonito Lopue, and Luisa U. Dacles to nullify the issuance of 823
shares of stock of the Inocentes de la Rama, Inc. in favor of the said
defendants. The gist of the complaint, filed on April 4, 1972, is that
the plaintiffs, with the exception of Anastacio Dacles who was joined
as a formal party, are the owners of 1,328 shares of stock of the
Inocentes de la Rama, Inc., a domestic corporation, with an
authorized capital stock of 3,000 shares, with a par value of P100.00
per share, 2,177 of which were subscribed and issued, thus leaving
823 shares unissued; that upon the plaintiffs' acquisition of the
shares of stock held by Rafael Ledesma and Jose Sicangco, Jr., then
President and Vice-President of the corporation, respectively, the
defendants Mercedes R. Borromeo, Honorio de la Rama, and Ricardo
Gamboa, remaining members of the board of directors of the
corporation, in order to forestall the takeover by the plaintiffs of the
afore-named corporation, surreptitiously met and elected Ricardo L.
Gamboa and Honorio de la Rama as president and vice-president of
the corporation, respectively, and thereafter passed a resolution
authorizing the sale of the 823 unissued shares of the corporation to
the defendants, Ricardo L. Gamboa, Lydia R. Gamboa, Honorio de la
Rama, Ramon de la Rama, Paz R. Battistuzzi Eduardo de la Rama,
and Mercedes R. Borromeo, at par value, after which the defendants
Honorio de la Rama, Lydia de la Rama-Gamboa, and Enzo
Battistuzzi were elected to the board of directors of the corporation;
that the sale of the unissued 823 shares of stock of the corporation
was in violation of the plaintiffs' and pre-emptive rights and made
without the approval of the board of directors representing 2/3 of
the outstanding capital stock, and is in disregard of the strictest
relation of trust existing between the defendants, as stockholders
thereof; and that the defendants Lydia de la Rama-Gamboa, Honorio
de la Rama, and Enzo Battistuzzi were not legally elected to the
board of directors of the said corporation and has unlawfully
usurped or intruded into said office to the prejudice of the plaintiffs.
Wherefore, they prayed that a writ of preliminary injunction be
issued restraining the defendants from committing, or continuing
the performance of an act tending to prejudice, diminish or
otherwise injure the plaintiffs' rights in the corporate properties and
funds of the corporation, and from disposing, transferring, selling,

or otherwise impairing the value of the 823 shares of stock illegally

issued by the defendants; that a receiver be appointed to preserve
and administer the property and funds of the corporation; that
defendants Lydia de la Rama-Gamboa, Honorio de la Rama, and
Enzo Battistuzzi be declared as usurpers or intruders into the office
of director in the corporation and, consequently, ousting them
therefrom and declare Luisa U. Dacles as a legally elected director of
the corporation; that the sale of 823 shares of stock of the
corporation be declared null and void; and that the defendants be
ordered to pay damages and attorney's fees, as well as the costs of
suit . 1
Acting upon the complaint, the respondent judge, after proper
hearing, directed the clerk of court "to issue the corresponding writ
of preliminary injunction restraining the defendants and/or their
representatives, agents, or persons acting in their behalf from the
commission or continuance of any act tending in any way to
prejudice, diminish or otherwise injure plaintiffs' rights in the
corporate properties and funds of the corporation Inocentes de la
Rama, Inc.' and from disposing, transferring, selling or otherwise
impairing the value of the certificates of stock allegedly issued
illegally in their names on February 11, 1972, or at any date
thereafter, and ordering them to deposit with the Clerk of Court the
corresponding certificates of stock for the 823 shares issued to said
defendants on February 11, 1972, upon plaintiffs' posting a bond in
the sum of P50,000.00, to answer for any damages and costs that
may be sustained by the defendants by reason of the issuance of the
writ, copy of the bond to be furnished to the defendants.
" 2 Pursuant thereto, the defendants deposited with the clerk of
court the corporation's certificates of stock Nos. 80 to 86, inclusive,
representing the disputed 823 shares of stock of the corporation. 3
On October 31, 1972, the plaintiffs therein, now private
respondents, entered into a compromise agreement with the
defendants Ramon de la Rama, Paz de la Rama Battistuzzi and Enzo
Battistuzzi , 4 whereby the contracting parties withdrew their
respective claims against each other and the aforenamed defendants
waived and transferred their rights and interests over the questioned
823 shares of stock in favor of the plaintiffs, as follows:

3. That the defendants Ramon L. de la Rama, Paz de

la Rama Battistuzzi and Enzo Battistuzzi will waive,
cede, transfer or other wise convey, as they hereby
waive, cede, transfer and convey, free from all liens
and encumbrances unto the plaintiffs, in such
proportion as the plaintiffs may among themselves
determine, all of the rights, interests, participations
or title that the defendants Ramon L. de la Rama, Paz
de la Rama Battistuzzi Enzo Battistuzzi now have or
may have in the eight hundred twenty-three (823)
shares in the capital stock of the corporation
INOCENTES DELA RAMA, INC.' which were issued in
the names of the defendants in the above-entitled
case on or about February 11, 1972, or at any date
thereafter and which shares are the subject-matter of
the present suit.
The compromise agreement was approved by the trial court on
December 4, 1972, 5 As a result, the defendants filed a motion to
dismiss the complaint, on November 19, 1974, upon the grounds: (1)
that the plaintiffs' cause of action had been waived or abandoned;
and (2) that they were estopped from further prosecuting the case
since they have, in effect, acknowledged the validity of the issuance
of the disputed 823 shares of stock. The motion was denied on
January 2, 1975. 6
The defendants also filed a motion to declare the defendants Ramon
L. de la Rama, Paz de la Rama Battistuzzi and Enzo Battistuzzi in
contempt of court, for having violated the writ of preliminary
injunction when they entered into the aforesaid compromise
agreement with the plaintiffs, but the respondent judge denied the
said motion for lack of merit. 7
On February 10, 1975, the defendants filed a motion for the
reconsideration of the order denying their motion to dismiss the
complaint' and subsequently, an Addendum thereto, claiming that
the respondent court has no jurisdiction to interfere with the
management of the corporation by the board of directors, and the
enactment of a resolution by the defendants, as members of the
board of directors of the corporation, allowing the sale of the 823

shares of stock to the defendants was purely a management concern

which the courts could not interfere with. When the trial court
denied said motion and its addendum, the defendants filed the
instant petition for certiorari for the review of said orders.
The petition is without merit. The questioned order denying the
petitioners' motion to dismiss the complaint is merely interlocutory
and cannot be the subject of a petition for certiorari. The proper
procedure to be followed in such a case is to continue with the trial
of the case on the merits and, if the decision is adverse, to reiterate
the issue on appeal. It would be a breach of orderly procedure to
allow a party to come before this Court every time an order is issued
with which he does not agree.
Besides, the order denying the petitioners' motion to dismiss the
complaint was not capriciously, arbitrarily, or whimsically issued, or
that the respondent court lacked jurisdiction over the cause as to
warrant the issuance of the writ prayed for. As found by the
respondent judge, the petitioners have not waived their cause of
action against the petitioners by entering into a compromise
agreement with the other defendants in view of the express provision
of the compromise agreement that the same "shall not in any way
constitute or be considered a waiver or abandonment of any claim or
cause of action against the other defendants." There is also no
estoppel because there is nothing in the agreement which could be
construed as an affirmative admission by the plaintiff of the validity
of the resolution of the defendants which is now sought to be
judicially declared null and void. The foregoing circumstances and
the fact that no consideration was mentioned in the agreement for
the transfer of rights to the said shares of stock to the plaintiffs are
sufficient to show that the agreement was merely an admission by
the defendants Ramon de la Rama, Paz de la Rama Battistuzzi and
Enzo Battistuzzi of the validity of the claim of the plaintiffs.

to which they have legitimate power of, 10 action and contractsintra

vires entered into by the board of directors are binding upon the
corporation and courts will not interfere unless such contracts are
so unconscionable and oppressive as to amount to a wanton
destruction of the rights of the minority. 11 In the instant case, the
plaintiffs aver that the defendants have concluded a transaction
among themselves as will result to serious injury to the interests of
the plaintiffs, so that the trial court has jurisdiction over the case.
The petitioners further contend that the proper remedy of the
plaintiffs would be to institute a derivative suit against the
petitioners in the name of the corporation in order to secure a
binding relief after exhausting all the possible remedies available
within the corporation.
An individual stockholder is permitted to institute a derivative 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. 12 In the case at bar, however, the plaintiffs are alleging
and vindicating their own individual interests or prejudice, and not
that of the corporation. At any rate, it is yet too early in the
proceedings since the issues have not been joined. Besides,
misjoinder of parties is not a ground to dismiss an action. 13
WHEREFORE, the petition should be, as it is hereby DISMISSED for
lack of merit. With costs against the petitioners.
SO ORDERED.

The claim of the petitioners, in their Addendum to the motion for

reconsideration of the order denying the motion to dismiss the
complaint, questioning the trial court's jurisdiction on matters
affecting the management of the corporation, is without merit. The
well-known rule is that courts cannot undertake to control the
discretion of the board of directors about administrative matters as

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-45911 April 11, 1979
JOHN GOKONGWEI, JR., petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M.
SORIANO, JOSE M. SORIANO, ENRIQUE ZOBEL, ANTONIO
ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL
ORTIGAS, ANTONIO PRIETO, SAN MIGUEL CORPORATION,
EMIGDIO TANJUATCO, SR., and EDUARDO R.
VISAYA, respondents.

De Santos, Balgos & Perez for petitioner.

Angara, Abello, Concepcion, Regala, Cruz Law Offices for respondents
Sorianos
Siguion Reyna, Montecillo & Ongsiako for respondent San Miguel
Corporation.
R. T Capulong for respondent Eduardo R. Visaya.

ANTONIO, J.:
The instant petition for certiorari, mandamus and injunction, with
prayer for issuance of writ of preliminary injunction, arose out of two
cases filed by petitioner with the Securities and Exchange
Commission, as follows:
SEC CASE NO 1375
On October 22, 1976, petitioner, as stockholder of respondent San
Miguel Corporation, filed with the Securities and Exchange
Commission (SEC) a petition for "declaration of nullity of amended
by-laws, cancellation of certificate of filing of amended by- laws,
injunction and damages with prayer for a preliminary injunction"
against the majority of the members of the Board of Directors and
San Miguel Corporation as an unwilling petitioner. The petition,
entitled "John Gokongwei Jr. vs. Andres Soriano, Jr., Jose M.
Soriano, Enrique Zobel, Antonio Roxas, Emeterio Bunao, Walthrode
B. Conde, Miguel Ortigas, Antonio Prieto and San Miguel
Corporation", was docketed as SEC Case No. 1375.
As a first cause of action, petitioner alleged that on September 18,
1976, individual respondents amended by bylaws of the corporation,
basing their authority to do so on a resolution of the stockholders
adopted on March 13, 1961, when the outstanding capital stock of
respondent corporation was only P70,139.740.00, divided into
5,513,974 common shares at P10.00 per share and 150,000
preferred shares at P100.00 per share. At the time of the

amendment, the outstanding and paid up shares totalled

30,127,047 with a total par value of P301,270,430.00. It was
contended that according to section 22 of the Corporation Law and
Article VIII of the by-laws of the corporation, the power to amend,
modify, repeal or adopt new by-laws may be delegated to the Board of
Directors only by the affirmative vote of stockholders representing
not less than 2/3 of the subscribed and paid up capital stock of the
corporation, which 2/3 should have been computed on the basis of
the capitalization at the time of the amendment. Since the
amendment was based on the 1961 authorization, petitioner
contended that the Board acted without authority and in usurpation
of the power of the stockholders.
As a second cause of action, it was alleged that the authority
granted in 1961 had already been exercised in 1962 and 1963, after
which the authority of the Board ceased to exist.
As a third cause of action, petitioner averred that the membership of
the Board of Directors had changed since the authority was given in
1961, there being six (6) new directors.
As a fourth cause of action, it was claimed that prior to the
questioned amendment, petitioner had all the qualifications to be a
director of respondent corporation, being a Substantial stockholder
thereof; that as a stockholder, petitioner had acquired rights
inherent in stock ownership, such as the rights to vote and to be
voted upon in the election of directors; and that in amending the bylaws, 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.

Considering the evidence submitted before the

Commission by the petitioner and respondents in the
above-entitled case, it is hereby ordered:

As counterclaims, actual damages, moral damages, exemplary

damages, expenses of litigation and attorney's fees were presented
against petitioner.

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;

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:

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;

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 selfpreservation, 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.

10

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

11

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

12

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 Total
1977 SMC Robina-CFC
Table Eggs 0.6% 10.0% 10.6%
Layer Pullets 33.0% 24.0% 57.0%
Dressed Chicken 35.0% 14.0% 49.0%
Poultry & Hog Feeds 40.0% 12.0% 52.0%
Ice Cream 70.0% 13.0% 83.0%
Instant Coffee 45.0% 40.0% 85.0%
Woven Fabrics 17.5% 9.1% 26.6%
Thus, according to respondent SMC, in 1976, the areas of
competition affecting SMC involved product sales of over P400
million or more than 20% of the P2 billion total product sales of
SMC. Significantly, the combined market shares of SMC and CFCRobina 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

13

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 majority of the
stockholders and that he impliedly contracts that the will of the
majority shall govern in all matters within the limits of the act of
incorporation and lawfully enacted by-laws and not forbidden by
law." 15 To this extent, therefore, the stockholder may be considered
to have "parted with his personal right or privilege to regulate the

14

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

15

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

16

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 bylaws of a bank, requiring that its directors should not be directors,
officers, employees, agents, nominees or attorneys of any other
banking corporation, affiliate or subsidiary thereof. Chief Judge
Parker, in McKee, explained the reasons of the court, thus:
... A bank director has access to a great deal of
information concerning the business and plans of a
bank which would likely be injurious to the bank if
known to another bank, and it was reasonable and
prudent to enlarge this minimum disqualification to
include any director, officer, employee, agent,
nominee, or attorney of any other bank in California.
The Ashkins case, supra, specifically recognizes
protection against rivals and others who might
acquire information which might be used against the
interests of the corporation as a legitimate object of
by-law protection. With respect to attorneys or
persons associated with a firm which is attorney for
another bank, in addition to the direct conflict or
potential conflict of interest, there is also the danger
of inadvertent leakage of confidential information
through casual office discussions or accessibility of
files. Defendant's directors determined that its welfare

was best protected if this opportunity for conflicting

loyalties and potential misuse and leakage of
confidential information was foreclosed.
In McKee the Court further listed qualificational by-laws upheld by
the courts, as follows:
(1) A director shall not be directly or indirectly
interested as a stockholder in any other firm,
company, or association which competes with the
subject corporation.
(2) A director shall not be the immediate member of
the family of any stockholder in any other firm,
company, or association which competes with the
subject corporation,
(3) A director shall not be an officer, agent, employee,
attorney, or trustee in any other firm, company, or
association which compete with the subject
corporation.
(4) A director shall be of good moral character as an
essential qualification to holding office.
(5) No person who is an attorney against the
corporation in a law suit is eligible for service on the
board. (At p. 7.)
These are not based on theorical abstractions but on human
experience that a person cannot serve two hostile masters
without detriment to one of them.
The offer and assurance of petitioner that to avoid any possibility of
his taking unfair advantage of his position as director of San Miguel
Corporation, he would absent himself from meetings at which
confidential matters would be discussed, would not detract from the
validity and reasonableness of the by-laws here involved. Apart from
the impractical results that would ensue from such arrangement, it
would be inconsistent with petitioner's primary motive in running

17

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

18

Basically, these anti-trust laws or laws against monopolies or

combinations in restraint of trade are aimed at raising levels of
competition by improving the consumers' effectiveness as the final
arbiter in free markets. These laws are designed to preserve free and
unfettered competition as the rule of trade. "It rests on the premise
that the unrestrained interaction of competitive forces will yield the
best allocation of our economic resources, the lowest prices and the
highest quality ... ." 34 they operate to forestall concentration of
economic power. 35 The law against monopolies and combinations in
restraint of trade is aimed at contracts and combinations that, by
reason of the inherent nature of the contemplated acts, prejudice
the public interest by unduly restraining competition or unduly
obstructing the course of trade. 36
The terms "monopoly", "combination in restraint of trade" and
"unfair competition" appear to have a well defined meaning in other
jurisdictions. A "monopoly" embraces any combination the tendency
of which is to prevent competition in the broad and general sense, or
to control prices to the detriment of the public. 37 In short, it is the
concentration of business in the hands of a few. The material
consideration in determining its existence is not that prices are
raised and competition actually excluded, but that power exists to
raise prices or exclude competition when desired. 38Further, it must
be considered that the Idea of monopoly is now understood to
include a condition produced by the mere act of individuals. Its
dominant thought is the notion of exclusiveness or unity, or the
suppression of competition by the qualification of interest or
management, or it may be thru agreement and concert of action. It
is, in brief, unified tactics with regard to prices. 39
From the foregoing definitions, it is apparent that the contentions of
petitioner are not in accord with reality. The election of petitioner to
the Board of respondent Corporation can bring about an illegal
situation. This is because an express agreement is not necessary for
the existence of a combination or conspiracy in restraint of
trade. 40 It is enough that a concert of action is contemplated and
that the defendants conformed to the arrangements, 41 and what is
to be considered is what the parties actually did and not the words
they used. For instance, the Clayton Act prohibits a person from
serving at the same time as a director in any two or more

corporations, if such corporations are, by virtue of their business

and location of operation, competitors so that the elimination of
competition between them would constitute violation of any
provision of the anti-trust laws. 42 There is here a statutory
recognition of the anti-competitive dangers which may arise when an
individual simultaneously acts as a director of two or more
competing corporations. A common director of two or more
competing corporations would have access to confidential sales,
pricing and marketing information and would be in a position to
coordinate policies or to aid one corporation at the expense of
another, thereby stifling competition. This situation has been aptly
explained by Travers, thus:
The argument for prohibiting competing corporations from
sharing even one director is that theinterlock permits the
coordination of policies between nominally independent firms
to an extent that competition between them may be completely
eliminated. Indeed, if a director, for example, is to be faithful
to both corporations, some accommodation must result.
Suppose X is a director of both Corporation A and
Corporation B. X could hardly vote for a policy by A that
would injure B without violating his duty of loyalty to B at
the same time he could hardly abstain from voting without
depriving A of his best judgment. If the firms really do
compete in the sense of vying for economic advantage at
the expense of the other there can hardly be any reason for
an interlock between competitors other than the suppression
of competition. 43 (Emphasis supplied.)
According to the Report of the House Judiciary Committee of the U.
S. Congress on section 9 of the Clayton Act, it was established that:
"By means of the interlocking directorates one man or group of men
have been able to dominate and control a great number of
corporations ... to the detriment of the small ones dependent upon
them and to the injury of the public. 44
Shared information on cost accounting may lead to price fixing.
Certainly, shared information on production, orders, shipments,
capacity and inventories may lead to control of production for the
purpose of controlling prices.

19

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

20

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

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.

III

These averments are supported by the affidavit of the Corporate

Secretary, enclosing photocopies of the afore-mentioned
documents. 51

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

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 19721975, 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

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

21

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 whollyowned 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,

22

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

23

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.

24

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.

Jose Moreno Lacalle for appellant Fernandez.

Sanz, Opisso & Luzuriaga for appellant "The Orientalist Co."
No appearance for appellee.

Justice Fernando reserved his vote on the validity of subject

amendment to the by-laws but otherwise concurs in the result.

STREET, J.:

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.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 11897

September 24, 1918

J. F. RAMIREZ, plaintiff-appellee,
vs.
THE ORIENTALIST CO., and RAMON J. FERNANDEZ, defendantsappellants.

The Orientalist Company is a corporation, duly organized under the

laws of the Philippine Islands, and in 1913 and 1914, the time of the
occurrences which gave rise to this lawsuit, was engaged in the
business of maintaining and conducting a theatre in the city of
Manila for the exhibition of cinematographic films. Under the
articles of incorporation the company is authorized to manufacture,
buy, or otherwise obtain all accessories necessary for conducting
such a business. The plaintiff J. F. Ramirez was, at the same time, a
resident of the city of Paris, France, and was engaged in the
business of marketing films for a manufacturer or manufacturers,
there engaged in the production or distribution of cinematographic
material. In this enterprise the plaintiff was represented in the city
of Manila by his son, Jose Ramirez.
In the month of July, 1913, certain of the directors of the Orientalist
Company, in Manila, became apprised of the fact that the plaintiff in
Paris had control of the agencies for two different marks of films,
namely, the "Eclair Films" and the "Milano Films;" and negotiations
were begun with said officials of the Orientalist Company by Jose
Ramirez, as agent of the plaintiff, for the purpose of placing the
exclusive agency of these films in the hands of the Orientalist
Company. The defendant Ramon J. Fernandez, one of the directors
of the Orientalist Company and also its treasure, was chiefly active
in this matter, being moved by the suggestions and representations
of Vicente Ocampo, manage of the Oriental Theater, to the effect that
the securing of the said films was necessary to the success of the
corporation.
Near the end of July of the year aforesaid, Jose Ramirez, as
representative of his father, placed in the hands of Ramon J.
Fernandez an offer, dated July 4, 1913, stating detail the terms
upon which the plaintiff would undertake to supply from Paris the
aforesaid films. This officer was declared to be good until the end of
July; and as only about for the Orientalist Company to act on the

25

matter speedily, if it desired to take advantage of said offer.

Accordingly, Ramon J. Fernandez, on July 30, had an informal
conference with all the members of the company's board of directors
except one, and with approval of those with whom he had
communicated, addressed a letter to Jose Ramirez, in Manila,
accepting the offer contained in the memorandum of July 4th for the
exclusive agency of the Eclair films. A few days later, on August 5, he
addressed another letter couched in the same terms, likewise
accepting the office of the exclusive agency for the Milano Films.
The memorandum offer contained a statement of the price at which
the films would be sold, the quantity which the representative of
each was required to take and information concerning the manner
and intervals of time for the respective shipments. The expenses of
packing, transportation and other incidentals were to be at the cost
of the purchaser. There was added a clause in which J. F. Ramirez
described his function in such transactions as that of a commission
agent and stated that he would see to the prompt shipment of the
films, would pay the manufacturer, and take care that the films were
insured his commission for such services being fixed at 5 per
cent.
What we consider to be the most portion of the two letters of
acceptance written by R. J. Fernandez to Jose Ramirez is in the
following terms:
We willingly accepted the officer under the terms
communicated by your father in his letter dated at Paris on
July 4th of the present year.
These communications were signed in the following form, in which it
will be noted the separate signature of R. J. Fernandez, as an
individual, is placed somewhat below and to the left of the signature
of the Orientalist Company as singed by R. J. Fernandez, in the
capacity of treasurer:

THE ORIENTALIST COMPANY,

By R. J. FERNANDEZ,
Treasurer,

R. J. FERNANDEZ.
Both of these letters also contained a request that Jose Ramirez
should at once telegraph to his father in Paris that his offer had
been accepted by the Orientalist Company and instruct him to make
a contract with the film companies, according to the tenor of the
offer, and in the capacity of attorney-in-fact for the Orientalist
Company. The idea behind the latter suggestion apparently was that
the contract for the films would have to be made directly between
the film-producing companies and the Orientalist Company; and it
seemed convenient, in order to save time, that the Orientalist
Company should clothed J. F. Ramirez with full authority as its
attorney-in-fact. This idea was never given effect; and so far as the
record shows, J. F. Ramirez himself procured the films upon his own
responsibility, as he indicated in the officer of July 4 that he would
do, with the result that the only contracting parties in this case are
J. F. Ramirez of the one part, and the Orientalist Company, with
Ramon J. Fernandez of the other.
In due time the films began to arrive in Manila, a draft for the cost
and expenses incident to each shipment being attached to the
proper bill of lading. It appears that the Orientalist Company was
without funds to meet these obligations and the first few drafts were
dealt with in the following manner: The drafts, upon presented
through the bank, were accepted in the name of the Orientalist
Company by its president B. Hernandez, and were taken up by the
latter with his own funds. As the drafts had thus been paid by B.
Hernandez, the films which had been procured by he payment of
said drafts were treated by him as his own property; and they in fact
never came into the actual possession of the Orientalist Company as
owner at all, though it is true Hernandez rented the films to the
Orientalist Company and they were exhibited by it in the Oriental

26

Theater under an arrangement which was made between him and

the theater's manager.
During the period between February 27, 1914, and April 30, 1914,
there arrived in the city of Manila several remittances of films from
Paris, and it is these shipments which have given occasion for the
present action. All of the drafts accompanying these films were
drawn, as on former occasions, upon the Orientalist Company; and
all were accepted in the name of B. Hernandez, except the last,
which was accepted by B. Hernandez individually. None of the drafts
thus accepted were taken up by the drawee or by B. Hernandez
when they fell due; and it was finally necessary for the plaintiff
himself to take them up as dishonored by non-payment.
Thereupon this action was instituted by the plaintiff on May 19,
1914, against the Orientalist Company, and Ramon J. Fernandez. As
the films which accompanied the dishonored were liable to
deteriorate, the court, upon application of the plaintiff, and
apparently without opposition on the part of the defendants,
appointed a receiver who took charge of the films and sold them. The
amount realized from this sale was applied to the satisfaction of the
plaintiff's claim and was accordingly delivered to him in part
payment thereof. At trial judgment was given for the balance due to
the plaintiff, namely P6,018.93, with interest from May 19, 1914,
the date of the institution of the action. In the judgment of the trial
court the Orientalist Company was declared to be a principal debtor
and Ramon J. Fernandez was declared to be liable subsidiarily as
guarantor. From this judgment both of the parties defendant
appealed.
In this Court neither of the parties appellant make any question
with respect to the right of the plaintiff to recover from somebody
the amount awarded by the lower court; but each of the defendants
insists the other is liable for the whole. It results that the real
contention upon this appeal is between the two defendants.
It is stated in the brief of the appellant Ramon J. Fernandez and the
statement is not challenged by the Orientalist Company that the
judgment has already been executed as against the company is
exclusively and primarily liable the entire indebtedness, the question

as to the liability of Ramon J. Fernandez would be academic. But if

the latter is liable as principal obligor for the whole or any part of
the debt, it will be necessary to modify the judgment in order to
adjust the rights of the defendants in accordance with such finding.
It will be noted that the action is primarily founded upon the liability
created by the letters dated July 30th and August 5, 1913, in
connection with the plaintiff's offer of July 4, 1913; and both of the
letters mentioned are copied into the complaint as the foundation of
the action. The action is not based upon the dishonored drafts
which were accepted by B. Hernandez in the name of the Orientalist
Company; and although these drafts, as well as the last draft, which
was accepted by B. Hernandez individually, have been introduced in
evidence, this was evidently done for the purpose of proving the
amount of damages which the plaintiff was entitled to recover.
In the discussion which is to follow we shall consider, first, the
question of the liability of the corporation upon the contracts
contained in the letters of July 30 and August 5, 1913, and,
secondly the question of the liability of Ramon J. Fernandez, based
upon his personal signature to the same documents.
As to the liability of the corporation a preliminary point of
importance arises upon the pleadings. The action, as already stated,
is based upon documents purporting to be signed by the Orientalist
Company, and copies of the documents are set out in the complaint.
It was therefore incumbent upon the corporation, if it desired to
question the authority of Fernandez to bind it, to deny the due
execution of said contracts under oath, as prescribed in section 103
of the Code of Civil procedure. Said section, in the part pertinent to
the situation now under consideration, reads as follows:
When an action is brought upon a written instrument and
the complaint contains or has annexed or has annexed a
copy of such instrument, the genuineness and due execution
of the instrument shall be deemed admitted, unless
specifically denied under oath in the answer.
No sworn answer denying the genuineness and due execution of the
contracts in question or questioning the authority of Ramon J.

27

Fernandez to bind the Orientalist Company was filed in this case;

but evidence was admitted without objection from the plaintiff,
tending to show that Ramon J. Fernandez had no such authority.
This evidence consisted of extracts from the minutes of the
proceedings of the company's board of directors and also of extracts
from the minutes of the proceedings of the company's stockholders,
showing that the making of this contract had been under
consideration in both bodies and that the authority to make the
same had been withheld by the stockholders. It therefore becomes
necessary for us to consider whether the administration resulting
from the failure of the defendant company to deny the execution of
the contracts under oath is binding upon it for all purposes of this
lawsuit, or whether such failure should be considered a mere
irregularity of procedure which was waived when the evidence
referred to was admitted without objection from the plaintiff. The
proper solution of this problem makes it necessary to consider
carefully the principle underlying the provision above quoted.
That the situation was one in which an answer under oath denying
the authority of the agent should have been interposed, supposing
that the company desired to contest this point, is not open to
question. In the case of Merchant vs. International Banking
Corporation, (6 Phil. Rep., 314), it appeared that one Brown has
signed the name of the defendant bank as guarantor of a promissory
note. The bank was sued upon this guaranty and at the hearing
attempted to prove that Brown had no authority to bind the bank by
such contract. It was held that buy failing to deny the contract
under oath, the bank had admitted the genuineness and due
execution thereof, and that this admission extended not only to the
authenticity of the signature of Brown but also to his authority. Said
Justice Willard: "The failure of the defendant to deny the
genuineness and due execution of this guaranty under oath was an
admission not only of the signature of Brown, but also his authority
to make the contract in behalf of the defendant and of the power the
contract in behalf of the defendant and of the power of the defendant
to enter into such a contract.
The rule thus stated is in entire accord with the doctrine prevailing
in the United States, as will be seen by reference to the following,
among other authorities:

The case of Barrett Mining Co. vs. Tappan (2 Colo., 124) was an
action against a mining corporation upon an appeal bond. The name
of the company had been affixed to the obligation by an agent, and
no sufficient affidavit was filed by the corporation questioning its
signature or the authority of the agent to bind the company. It was
held that the plaintiff did not have to prove the due execution of the
bond and that the corporation as to be taken as admitting the
authority of the agent to make the signature. Among other things
the court said: "But it is said that the authority of Barrett to execute
the bond is distinguishable from the signing and, although the
signature must be denied under oath, the authority of the agent
need not be. Upon this we observe that the statute manifestly refers
to the legal effect of the signature, rather than the manual act of
singing. If the name of the obligor, in a bond, is subscribed by one in
his presence, and by his direction, the effect is the same as if his
name should be signed with his own hand, and under such
circumstances we do not doubt that the obligor must deny his
signature under oath, in order to put the obligee to proof of the
fact. Quit facit per aliam facit per se, and when the name is signed by
one thereunto authorized, it is as much as the signature of the
principal as if written with his own hand. Therefore, if the principal
would deny the authority of the agent, as the validity of the
signature is thereby directly attacked, the denial must be under
oath.
In Union Dry Company vs. Reid (26 Ga., 107), an action was brought
upon a promissory note purporting to have been given by on A. B.,
as the treasurer of the defendant company. Said the court: "Under
the Judiciary Act of 1799, requiring the defendant to deny on oath
an instrument of writing, upon which he is sued, the plea in this
case should have been verified.
If the person who signed this note for the company, and upon which
they are sued, was not authorized to make it, let them say so upon
oath, and the onus is then on the plaintiff to overcome the plea."
It should be noted that the provision contained in section 103 of our
Code of Civil Procedure is embodied in some form or other in the
statutes of probably all of the American States, and it is not by any
means peculiar to the laws of California, though it appears to have

28

been taken immediately from the statutes of that State. (Secs. 447,
448, California Code of Civil Procedure.)
There is really a broader question here involved than that which
relates merely to the formality of verifying the answer with an
affidavit. This question arises from the circumstance that the
answer of the corporation does not in any was challenge the
authority of Ramon J. Fernandez to bind it by the contracts in
question and does not set forth, as a special defense, any such lack
of authority in him. Upon well-established principles of pleading
lack of authority in an officer of a corporation to bind it by a
contract executed by him in its name is a defense which should be
specially pleaded and this quite apart from the requirement,
contained in section 103, that the answer setting up such defense
should be verified by oath. But is should not here escape
observation that section 103 also requires in denial contemplated
in that section shall be specific. An attack on the instrument in
general terms is insufficient, even though the answer is under oath.
(Songco vs. Sellner, 37 Phil. Rep., 254.)
In the first edition of a well-known treatise on the laws of
corporations we find the following proposition:
If an action is brought against a corporation upon a contract
alleged to be its contract, if it desires to set up the defense
that the contract was executed by one not authorized as its
agent, it must plead non est factum. (Thompson on
Corporations, 1st ed., vol. 6, sec. 7631.)
Again, says the same author:
A corporation can not avail itself of the defense that it had no
power to enter into the obligation to enforce which the suit is
brought, unless it pleads that defense. This principle applies
equally where the defendant intends to challenge the power
of its officer or agent to execute in its behalf the contract
upon which the action brought and where it intends to
defend on the ground of total want of power in the
corporation to make such a contract. (Opus citat. sec. 7619.)

In Simon vs. Calfee (80 Ark., 65), it was said:

Though the power of the officers of a business corporation to
issue negotiable paper in its name is not presumed, such
corporation can not avail itself of a want of power in its
officers to bind it unless the defense was made on such
ground.
The rule has been applied where the question was whether corporate
officer, having admitted power to make a contract, had in the
particular instance exceeded that authority, (Merill vs. Consumers'
Coal Co., 114 N.Y., 216); and it has been held that where the answer
in a suit against a corporation on its note relies simply on the want
of power of the corporation to issue notes, the defendant can not
afterwards object that the plaintiff has not shown that the officer
executing the note were empowered to do so. (Smith vs. Eureka
Flour Mills Co., 6 Cal., 1.)
The reason for the rule enunciated in the foregoing authorities will,
we think, be readily appreciated. In dealing with corporations the
public at large is bound to rely to a large extent upon outward
appearances. If a man is found acting for a corporation with the
external indicia of authority, any person, not having notice of want of
authority, may usually rely upon those appearances; and if it be
found that the directors had permitted the agent to exercise that
authority and thereby held him out as a person competent to bind
the corporation, or had acquiesced in a contract and retained the
benefit supposed to have been conferred by it, the corporation will
be bound, notwithstanding the actual authority may never have
been granted. The public is not supposed nor required to know the
transactions which happen around the table where the corporate
board of directors or the stockholders are from time to time
convoked. Whether a particular officer actually possesses the
authority which he assumes to exercise is frequently known to very
few, and the proof of it usually is not readily accessible to the
stranger who deals with the corporation on the faith of the
ostensible authority exercised by some of the corporate officers. It is
therefore reasonable, in a case where an officer of a corporation has
made a contract in its name, that the corporation should be
required, if it denies his authority, to state such defense in its

29

answer. By this means the plaintiff is apprised of the fact that the
agent's authority is contested; and he is given an opportunity to
adduce evidence showing either that the authority existed or that
the contract was ratified and approved.

either. A party can no more succeed upon a case proved but not
alleged than upon a case alleged but nor proved. This rule of course
operates with like effect upon both parties, and applies equality to
the defendants special defense as to the plaintiffs cause of action.

We are of the opinion that the failure of the defendant corporation to

make any issue in its answer with regard to the authority of Ramon
J. Fernandez to bind it, and particularly its failure to deny
specifically under oath the genuineness and due execution of the
contracts sued upon, have the effect of elimination the question of
his authority from the case, considered as a matter of mere
pleading. The statute (sec. 103) plainly says that if a written
instrument, the foundation of the suit, is not denied upon oath, it
shall be deemed to be admitted. It is familiar doctrine that an
admission made in a pleading can not be controverted by the party
making such admission; and all proof submitted by him contrary
thereto or inconsistent therewith should simply be ignored by the
court, whether objection is interposed by the opposite party or not.
We can see no reason why a constructive admission, created by the
express words of the statute, should be considered to have less effect
than any other admission.

Of course this Court, under section 109 of the Code of Civil

Procedure, has authority even now to permit the answer of the
defendant to be amended; and if we believed that the interests of
justice so required, we would either exercise that authority or
remand the cause for a new trial in court below. As will appear
further on in this opinion, however, we think that the interests of
justice will best be promoted by deciding the case, without more ado,
upon the issues presented in the record as it now stands.

The parties to an action are required to submit their respective

contentions to the court in their complaint and answer. These
documents supply the materials which the court must use in order
to discover the points of contention between the parties; and where
the statute says that the due execution of a document which
supplies the foundation of an action is to be taken as admitted
unless denied under oath, the failure of the defendant to make such
denial must be taken to operate as a conclusive admission, so long
as the pleadings remain that form.
It is true that it is declared in section 109 of the Code of Civil
Procedure that immaterial variances between the allegations of a
pleading and the proof shall be disregarded and the facts shall be
found according to the evidence. The same section, however,
recognizes the necessity for an amendment of the pleadings. And
judgment must be in conformity with the case made in conformity
with the case made in the pleadings and established by the proof,
and relief can not be granted that is substantially inconsistent with

That we may not appear to have overlooked the matter, we will

observe that two cases are cited from California in which the
Supreme Court of the State has held that where a release is pleaded
by way of defense and evidence tending to destroy its effect is
introduced without objection, the circumstance that it was not
denied under oath is immaterial. In the earlier of these cases,
Crowley, vs. Railroad Co. (60 Cal., 628), an action was brought
against a railroad company to recover damages for the death of the
plaintiff's minor son, alleged to have been killed by the negligence of
the defendant. The defendant company pleaded by way of defense a
release purporting to be signed by the plaintiff, and in its answer
inserted a copy of the release. The execution of the release was not
denied under oath; but at the trial evidence was submitted on behalf
of the plaintiff tending to show that at the time he signed the
release, he was incompetent by reason of drunkenness to bind
himself thereby. It was held that inasmuch as this evidence had
been submitted by the plaintiff without objection, it was proper for
the court to consider it. We do not question the propriety of that
decision, especially as the issue had been passed upon by a jury;
but we believe that the decision would have been more soundly
planted if it had been said that the incapacity of the plaintiff, due to
his drunken condition, was a matter which did not involve either the
genuineness or due execution of the release. Like the defenses of
fraud, coercion, imbecility, and mistake, it was a matter which could
be proved under the general issue and did not have to be set up in a
sworn reply. (Cf. Moore vs. Copp, 119 Cal., 429, 432, 433.) A

30

somewhat similar explanation can, we think, be given of the case of

Clark vs. Child in which the rule declared in the earlier case was
followed. With respect to both decisions which we merely observe
that upon point of procedure which they are supposed to maintain,
the reasoning of the court is in our opinion unconvincing.
We shall now consider the liability of the defendant company on the
merits just as if that liability had been properly put in issue by a
specific answer under oath denying the authority of Fernandez go to
bind it. Upon this question it must at the outset be premised that
Ramon J. Fernandez, as treasurer, had no independent authority to
bind the company by signing its name to the letters in question. It is
declared by signing its name to the letters in question. It is declared
in section 28 of the Corporation Law that corporate power shall be
exercised, and all corporate business conducted by the board of
directors; and this principle is recognized in the by-laws of the
corporation in question which contain a provision declaring that the
power to make contracts shall be vested in the board of directors. It
is true that it is also declared in the same by-laws that the president
shall have the power, and it shall be his duty, to sign contract; but
this has reference rather to the formality of reducing to proper form
the contract which are authorized by the board and is not intended
to confer an independent power to make contract binding on the
corporation.
The fact that the power to make corporate contract is thus vested in
the board of directors does not signify that a formal vote of the board
must always be taken before contractual liability can be fixed upon a
corporation; for the board can create liability, like an individual, by
other means than by a formal expression of its will. In this
connection the case of Robert Gair Co. vs. Columbia Rice Packing
Co. (124 La., 194) is instructive. If there appeared that the secretary
of the defendant corporation had signed an obligation on its behalf
binding it as guarantor of the performance of an important contract
upon which the name of another corporation appeared as principal.
The defendant company set up by way of defense that is secretary
had no authority to bind it by such an engagement. The court found
that the guaranty was given with the knowledge and consent of the
president and directors, and that this consent of the president and
directors, and that this consent was given with as much observance

of formality as was customary in the transaction of the business of

the company. It was held that, so far as the authority of the
secretary was concerned, the contract was binding. In discussing
this point, the court quoted with approval the following language
form one of its prior decisions:
The authority of the subordinate agent of a corporation often
depends upon the course of dealings which the company or
its director have sanctioned. It may be established sometimes
without reference to official record of the proceedings of the
board, by proof of the usage which the company had
permitted to grow up in business, and of the acquiescence of
the board charged with the duty of supervising and
controlling the company's business.
It appears in evidence, in the case now before us, that on July 30,
the date upon which the letter accepting the offer of the Eclair films
was dispatched the board of directors of the Orientalist Company
convened in special session in the office of Ramon J. Fernandez at
the request of the latter. There were present the four members,
including the president, who had already signified their consent to
the making of the contract. At this meeting, as appears from the
minutes, Fernandez informed the board of the offer which had been
received from the plaintiff with reference to the importation of films.
The minutes add that terms of this offer were approved; but at the
suggestion of Fernandez it was decided to call a special meeting of
the stockholders to consider the matter and definite action was
postponed.
The stockholders meeting was convoked upon September 18, 1913,
upon which occasion Fernandez informed those present of the offer
in question and of the terms upon which the films could be
procured. He estimated that the company would have to make an
outlay of about P5,500 per month, if the offer for the two films
should be accepted by it.
The following extracts from the minutes of this meeting are here
pertinent:

31

Mr. Fernandez informed the stockholders that, in view of the

urgency of the matter and for the purpose of avoiding that
other importers should get ahead of the corporation in this
regard, he and Messrs. B. Hernandez, Leon Monroy, and Dr.
Papa met for the purpose of considering the acceptance of
the offer together with the responsibilities attached thereto,
made to the corporation by the film manufacturers
ofEclair and Milano of Paris and Italy respectively, inasmuch
as the first shipment of films was then expected to arrive.
At the same time he informed the said stockholders that he
had already made arrangements with respect to renting said
films after they have been once exhibited in the Cine
Oriental, and that the corporation could very well meet the
expenditure involved and net a certain profit, but that, if we
could enter into a contract with about nine cinematographs,
big gains would be obtained through such a step.
The possibility that the corporation might not see fit to authorize the
contract, or might for lack of funds be unable to make the necessary
outlay, was foreseen; and in such contingency the stockholders were
informed, that the four gentlemen above mentioned (Hernandez,
Fernandez, Monroy, and Papa) "would continue importing said films
at their own account and risk, and shall be entitled only to a
compensation of 10 per cent of their outlay in importing the films,
said payment to be made in shares of said corporation, inasmuch as
the corporation is lacking available funds for the purpose, and also
because there are 88 shares of stock remaining still unsold."
In view of this statement, the stockholders adopted a resolution to
the effect that the agencies of the Eclair and Milano films should be
accepted, if the corporation could obtain the money with which to
meet the expenditure involved, and to this end appointed a
committee to apply to the bank for a credit. The evidence shows that
an attempt was made, on behalf of the corporation, to obtain a credit
of P10,000 from the Bank of the Philippine Islands for the purpose
indicated, but the bank declined to grant his credit. Thereafter
another special meeting of the shareholders of the defendant
corporation was called at which the failure of their committee to
obtain a credit from the bank was made known. A resolution was

thereupon passed to the effect that the company should pay to

Hernandez, Fernandez, Monroy, and Papa an amount equal to 10
per cent of their outlay in importing the films, said payment to be
made in shares of the company in accordance with the suggestion
made at the previous meeting. At the time this meeting was held
three shipment of the films had already been received in Manila.
We believe it is a fair inference from the recitals of the minutes of the
stockholders meeting of September 18, and especially from the first
paragraph above quoted, that this body was then cognizant that the
officer had already been accepted in the name of the Orientalist
Company and that the films which were then expected to arrive were
being imported by virtue of such acceptance. Certainly four
members of the board of directors there present were aware of this
fact, as the letter accepting the offer had been sent with their
knowledge and consent. In view of this circumstance, a certain
doubt arises whether they meant to utilize the financial assistance
of the four so-called importers in order that the corporation might
bet the benefit of the contract for the films, just as it would have
utilized the credit of the bank if such credit had been extended. If
such was the intention of the stockholders their action amounted to
a virtual, though indirect, approval of the contract. It is not however,
necessary to found the judgment on this interpretation of the
stockholders proceedings, inasmuch as we think for reasons
presently to be stated, that the corporation is bound, and we will
here assume that in the end the contract were not approved by the
stockholders.
It will be observed that Ramon J. Fernandez was the particular
officer and member of the board of directors who was most active in
the effort to secure the films for the corporation. The negotiations
were conducted by him with the knowledge and consent of other
members of the board; and the contract was made with their prior
approval. As appears from the papers in this record, Fernandez was
the person to who keeping was confided the printed stationery
bearing the official style of the corporation, as well as rubber stencil
with which the name of the corporation could be signed to
documents bearing its name.

32

Ignoring now, for a moment, the transactions of the stockholders,

and reverting to the proceedings of the board of directors of the
Orientalist Company, we find that upon October 27, 1913, after
Fernandez had departed from the Philippine Islands, to be absent for
many months, said board adopted a resolution conferring the
following among other powers on Vicente Ocampo, the manager of
the Oriental theater, namely:
(1) To rent a box for the films in the "Kneeler Building."
(4) To be in charge of the films and of the renting of the same.
(5) To advertise in the different newspapers that we are
importing films to be exhibited in the Cine Oriental.
(6) Not to deliver any film for rent without first receiving the
rental therefor or the guaranty for the payment thereof.
(7) To buy a book and cards for indexing the names of the
films.
(10) Upon the motion of Mr. Ocampo, it was decided to give
ample powers to the Hon. R. Acua to enter into agreements
with cinematograph proprietors in the provinces for the
purpose of renting films from us.
It thus appears that the board of directors, before the financial
inability of the corporation to proceed with the project was revealed,
had already recognized the contract as being in existence and had
proceeded to take the steps necessary to utilize the films.
Particularly suggestive is the direction given at this meeting for the
publication of announcements in the newspapers to the effect that
the company was engaged in importing films. In the light of all the
circumstances of the case, we are of the opinion that the contracts
in question were thus inferentially approved by the company's board
of directors and that the company is bound unless the subsequent
failure of the stockholders to approve said contracts had the effect of
abrogating the liability thus created.

Both upon principle and authority it is clear that the action of the
stockholders, whatever its character, must be ignored. The functions
of the stockholders of a corporation are, it must be remembered, of a
limited nature. The theory of a corporation is that the stockholders
may have all the profits but shall turn over the complete
management of the enterprise to their representatives and agents,
called directors. Accordingly, there is little for the stockholders to do
beyond electing directors, making by-laws, and exercising certain
other special powers defined by-law. In conformity with this idea it is
settled that contract between a corporation and third person must
be made by the director and not by the stockholders. The
corporation, in such matters, is represented by the former and not
by the latter. (Cook on Corporations, sixth ed., secs. 708, 709.) This
conclusion is entirely accordant with the provisions of section 28 of
our Corporation Law already referred to. It results that where a
meeting of the stockholders is called for the purpose of passing on
the propriety of making a corporate contract, its resolutions are at
most advisory and not in any wise binding on the board.
In passing upon the liability of a corporation in cases of this kind it
is always well to keep in mind the situation as it presents itself to
the third party with whom the contract is made. Naturally he can
have little or no information as to what occurs in corporate
meetings; and he must necessarily rely upon the external
manifestations of corporate consent. The integrity of commercial
transactions can only be maintained by holding the corporation
strictly to the liability fixed upon it by its agents in accordance with
law, and we would be sorry to announce a doctrine which would
permit the property of a man in the city of Paris to be whisked out of
his hands and carried into a remote quarter of the earth without
recourse against the corporations whose name and authority had
been used in the manner disclosed in this case. As already observed,
it is familiar doctrine that if a corporation knowingly permits one of
its officer, or any other agent, to do acts within the scope of an
apparent authority, and thus hold him out to the public as
possessing power to do those acts, the corporation will as against
any one who has in good faith dealt with the corporation through
such agent, be estopped from denying his authority; and where it is
said "if the corporation permits" this means the same as "if the thing
is permitted by the directing power of the corporation."

33

It being determined that the corporation is bound by the contract in

question, it remains to consider the character of the liability
assumed by R. J. Fernandez, in affixing his personal signature to
said contract. The question here is whether Fernandez is liable
jointly with the Orientalists Company as a principal obligor, or
whether his liability is that of a guarantor merely.
As appears upon the face of the contracts, the signature of
Fernandez, in his individual capacity, is not in line with the
signature of the Orientalist Company, but is set off to the left of the
company's signature and somewhat who sign contracts in some
capacity other than that of principal obligor to place their signature
alone would justify a court in holding that Fernandez here took
upon himself the responsibility of a guarantor rather than that of a
principal obligor. We do, however, think, that the form in which the
contract is signed raises a doubt as to what the real intention was;
and we feel justified, in looking to the evidence to discover that
intention. In this connection it is entirely clear, from the testimony of
both Ramirez and Ramon J. Fernandez, that the responsibility of the
latter was intended to be that of guarantor. There is, to be sure, a
certain difference between these witnesses as to the nature of this
guaranty, inasmuch as Fernandez would have us believe that his
name was signed as a guaranty that the contract would be approved
by the corporation, while Ramirez says that the name was put on
the contract for the purpose of guaranteeing, not the approval of the
contract, but its performance. We are convinced that the latter was
the real intention of the contracting parties.

extent are the signatory parties to the contract liable to the plaintiff
J. F. Ramirez? No contentious issue is raised directly between the
defendants, the Orientalist Company and Ramon H. Fernandez; nor
does the present the present action involve any question as to the
undertaking of Fernandez and his three associates to effect the
importation of the films upon their own account and risk. Whether
they may be bound to hold the company harmless is a matter upon
which we express no opinion.
The judgment appealed from is affirmed, with costs equally against
the two appellant. So ordered.

We are not unmindful of the force of that rule of law which declares
that oral evidence is admissible to show the character in which the
signature was affixed. This conclusion is perhaps supported by the
language of the second paragraph of article 1281 of the Civil Code,
which declares that if the words of a contract should appear
contrary to the evident intention of the parties, the intention shall
prevail. But the conclusion reached is, we think, deducible from the
general principle that in case of ambiguity parol evidence is
admissible to show the intention of the contracting parties.
It should be stated in conclusion that as the issues in this case have
been framed, the only question presented to this court is: To what

34

for them, to cut down to a minimum, if not altogether eliminate, the

margin of middlemen, mostly aliens.4

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-18805

August 14, 1967

1

THE BOARD OF LIQUIDATORS representing THE GOVERNMENT

OF THE REPUBLIC OF THE PHILIPPINES,plaintiff-appellant,
vs.
HEIRS OF MAXIMO M. KALAW,2 JUAN BOCAR, ESTATE OF THE
DECEASED CASIMIRO GARCIA,3 and LEONOR MOLL, defendantsappellees.
Simeon M. Gopengco and Solicitor General for plaintiff-appellant.
L. H. Hernandez, Emma Quisumbing, Fernando and Quisumbing, Jr.;
Ponce Enrile, Siguion Reyna, Montecillo and Belo for defendantsappellees.
SANCHEZ, J.:
The National Coconut Corporation (NACOCO, for short) was
chartered as a non-profit governmental organization on May 7, 1940
by Commonwealth Act 518 avowedly for the protection, preservation
and development of the coconut industry in the Philippines. On
August 1, 1946, NACOCO's charter was amended [Republic Act 5] to
grant that corporation the express power "to buy, sell, barter, export,
and in any other manner deal in, coconut, copra, and dessicated
coconut, as well as their by-products, and to act as agent, broker or
commission merchant of the producers, dealers or merchants"
thereof. The charter amendment was enacted to stabilize copra
prices, to serve coconut producers by securing advantageous prices

General manager and board chairman was Maximo M. Kalaw;

defendants Juan Bocar and Casimiro Garcia were members of the
Board; defendant Leonor Moll became director only on December 22,
1947.
NACOCO, after the passage of Republic Act 5, embarked on copra
trading activities. Amongst the scores of contracts executed by
general manager Kalaw are the disputed contracts, for the delivery of
copra, viz:
(a) July 30, 1947: Alexander Adamson & Co., for 2,000 long
tons, $167.00: per ton, f. o. b., delivery: August and
September, 1947. This contract was later assigned to Louis
Dreyfus & Co. (Overseas) Ltd.
(b) August 14, 1947: Alexander Adamson & Co., for 2,000
long tons $145.00 per long ton, f.o.b., Philippine ports, to be
shipped: September-October, 1947. This contract was also
assigned to Louis Dreyfus & Co. (Overseas) Ltd.
(c) August 22, 1947: Pacific Vegetable Co., for 3,000 tons,
$137.50 per ton, delivery: September, 1947.
(d) September 5, 1947: Spencer Kellog & Sons, for 1,000 long
tons, $160.00 per ton, c.i.f., Los Angeles, California, delivery:
November, 1947.
(e) September 9, 1947: Franklin Baker Division of General
Foods Corporation, for 1,500 long tons, $164,00 per ton,
c.i.f., New York, to be shipped in November, 1947.
(f) September 12, 1947: Louis Dreyfus & Co. (Overseas) Ltd.,
for 3,000 long tons, $154.00 per ton, f.o.b., 3 Philippine
ports, delivery: November, 1947.

35

(g) September 13, 1947: Juan Cojuangco, for 2,000 tons,

$175.00 per ton, delivery: November and December, 1947.
This contract was assigned to Pacific Vegetable Co.

As was to be expected, NACOCO but partially performed the

contracts, as follows:

(h) October 27, 1947: Fairwood & Co., for 1,000 tons,
$210.00 per short ton, c.i.f., Pacific ports, delivery:
December, 1947 and January, 1948. This contract was
assigned to Pacific Vegetable Co.
(i) October 28, 1947: Fairwood & Co., for 1,000 tons, $210.00
per short ton, c.i.f., Pacific ports, delivery: January, 1948.
This contract was assigned to Pacific Vegetable Co.
An unhappy chain of events conspired to deter NACOCO from
fulfilling these contracts. Nature supervened. Four devastating
typhoons visited the Philippines: the first in October, the second and
third in November, and the fourth in December, 1947. Coconut trees
throughout the country suffered extensive damage. Copra
production decreased. Prices spiralled. Warehouses were destroyed.
Cash requirements doubled. Deprivation of export facilities
increased the time necessary to accumulate shiploads of copra.
Quick turnovers became impossible, financing a problem.
When it became clear that the contracts would be unprofitable,
Kalaw submitted them to the board for approval. It was not until
December 22, 1947 when the membership was completed.
Defendant Moll took her oath on that date. A meeting was then held.
Kalaw made a full disclosure of the situation, apprised the board of
the impending heavy losses. No action was taken on the contracts.
Neither did the board vote thereon at the meeting of January 7,
1948 following. Then, on January 11, 1948, President Roxas made a
statement that the NACOCO head did his best to avert the losses,
emphasized that government concerns faced the same risks that
confronted private companies, that NACOCO was recouping its
losses, and that Kalaw was to remain in his post. Not long thereafter,
that is, on January 30, 1948, the board met again with Kalaw,
Bocar, Garcia and Moll in attendance. They unanimously approved
the contracts hereinbefore enumerated.

Buyers

Pacific Vegetable Oil

Tons
Delivered

Undelivere

2,386.45

4,613.5

Spencer Kellog

None

1,00

Franklin Baker

1,000

50

800

2,20

Louis Dreyfus (Adamson contract of

July 30, 1947)

1,150

85

Louis Dreyfus (Adamson Contract of

August 14, 1947)

1,755

24

7,091.45

9,408.5

Louis Dreyfus

TOTALS

The buyers threatened damage suits. Some of the claims were

settled, viz: Pacific Vegetable Oil Co., in copra delivered by NACOCO,

36

P539,000.00; Franklin Baker Corporation, P78,210.00; Spencer

Kellog & Sons, P159,040.00.
But one buyer, Louis Dreyfus & Go. (Overseas) Ltd., did in fact sue
before the Court of First Instance of Manila, upon claims as follows:
For the undelivered copra under the July 30 contract (Civil Case
4459); P287,028.00; for the balance on the August 14 contract (Civil
Case 4398), P75,098.63; for that per the September 12 contract
reduced to judgment (Civil Case 4322, appealed to this Court in L2829), P447,908.40. These cases culminated in an out-of-court
amicable settlement when the Kalaw management was already out.
The corporation thereunder paid Dreyfus P567,024.52 representing
70% of the total claims. With particular reference to the Dreyfus
claims, NACOCO put up the defenses that: (1) the contracts were
void because Louis Dreyfus & Co. (Overseas) Ltd. did not have
license to do business here; and (2) failure to deliver was due to force
majeure, the typhoons. To project the utter unreasonableness of this
compromise, we reproduce in haec verba this finding below:
x x x However, in similar cases brought by the same claimant
[Louis Dreyfus & Co. (Overseas) Ltd.] against Santiago Syjuco
for non-delivery of copra also involving a claim of
P345,654.68 wherein defendant set upsame defenses as
above, plaintiff accepted a promise of P5,000.00 only (Exhs.
31 & 32 Heirs.) Following the same proportion, the claim of
Dreyfus against NACOCO should have been compromised for
only P10,000.00, if at all. Now, why should defendants be
held liable for the large sum paid as compromise by the
Board of Liquidators? This is just a sample to show how
unjust it would be to hold defendants liable for the readiness
with which the Board of Liquidators disposed of the NACOCO
funds, although there was much possibility of successfully
resisting the claims, or at least settlement for nominal sums
like what happened in the Syjuco case.5
All the settlements sum up to P1,343,274.52.
In this suit started in February, 1949, NACOCO seeks to recover the
above sum of P1,343,274.52 from general manager and board
chairman Maximo M. Kalaw, and directors Juan Bocar, Casimiro

Garcia and Leonor Moll. It charges Kalaw with negligence under

Article 1902 of the old Civil Code (now Article 2176, new Civil Code);
and defendant board members, including Kalaw, with bad faith
and/or breach of trust for having approved the contracts. The fifth
amended complaint, on which this case was tried, was filed on July
2, 1959. Defendants resisted the action upon defenses hereinafter in
this opinion to be discussed.
The lower court came out with a judgment dismissing the complaint
without costs as well as defendants' counterclaims, except that
plaintiff was ordered to pay the heirs of Maximo Kalaw the sum of
P2,601.94 for unpaid salaries and cash deposit due the deceased
Kalaw from NACOCO.
Plaintiff appealed direct to this Court.
Plaintiff's brief did not, question the judgment on Kalaw's
counterclaim for the sum of P2,601.94.
Right at the outset, two preliminary questions raised before, but
adversely decided by, the court below, arrest our attention. On
appeal, defendants renew their bid. And this, upon established
jurisprudence that an appellate court may base its decision of
affirmance of the judgment below on a point or points ignored by the
trial court or in which said court was in error.6
1. First of the threshold questions is that advanced by defendants
that plaintiff Board of Liquidators has lost its legal personality to
continue with this suit.
Accepted in this jurisdiction are three methods by which a
corporation may wind up its affairs: (1) under Section 3, Rule 104,
of the Rules of Court [which superseded Section 66 of the
Corporation Law]7 whereby, upon voluntary dissolution of a
corporation, the court may direct "such disposition of its assets as
justice requires, and may appoint a receiver to collect such assets
and pay the debts of the corporation;" (2) under Section 77 of the
Corporation Law, whereby a corporation whose corporate existence
is terminated, "shall nevertheless be continued as a body corporate
for three years after the time when it would have been so dissolved,

37

for the purpose of prosecuting and defending suits by or against it

and of enabling it gradually to settle and close its affairs, to dispose
of and convey its property and to divide its capital stock, but not for
the purpose of continuing the business for which it was
established;" and (3) under Section 78 of the Corporation Law, by
virtue of which the corporation, within the three year period just
mentioned, "is authorized and empowered to convey all of its
property to trustees for the benefit of members, stockholders,
creditors, and others interested."8
It is defendants' pose that their case comes within the coverage of
the second method. They reason out that suit was commenced in
February, 1949; that by Executive Order 372, dated November 24,
1950, NACOCO, together with other government-owned
corporations, was abolished, and the Board of Liquidators was
entrusted with the function of settling and closing its affairs; and
that, since the three year period has elapsed, the Board of
Liquidators may not now continue with, and prosecute, the present
case to its conclusion, because Executive Order 372 provides in
Section 1 thereof that
Sec.1. The National Abaca and Other Fibers Corporation, the
National Coconut Corporation, the National Tobacco
Corporation, the National Food Producer Corporation and the
former enemy-owned or controlled corporations or
associations, . . . are hereby abolished. The said corporations
shall be liquidated in accordance with law, the provisions of
this Order, and/or in such manner as the President of the
Philippines may direct; Provided, however, That each of the
said corporations shall nevertheless be continued as a body
corporate for a period of three (3) years from the effective
date of this Executive Order for the purpose of prosecuting
and defending suits by or against it and of enabling the
Board of Liquidators gradually to settle and close its affairs,
to dispose of and, convey its property in the manner
hereinafter provided.
Citing Mr. Justice Fisher, defendants proceed to argue that even
where it may be found impossible within the 3 year period to reduce
disputed claims to judgment, nonetheless, "suits by or against a

corporation abate when it ceases to be an entity capable of suing or

being sued" (Fisher, The Philippine Law of Stock Corporations, pp.
390-391). Corpus Juris Secundum likewise is authority for the
statement that "[t]he dissolution of a corporation ends its existence
so that there must be statutory authority for prolongation of its
life even for purposes of pending litigation"9 and that suit "cannot be
continued or revived; nor can a valid judgment be rendered therein,
and a judgment, if rendered, is not only erroneous, but void and
subject to collateral attack." 10 So it is, that abatement of pending
actions follows as a matter of course upon the expiration of the legal
period for liquidation, 11 unless the statute merely requires a
commencement of suit within the added time. 12 For, the court
cannot extend the time alloted by statute. 13
We, however, express the view that the executive order abolishing
NACOCO and creating the Board of Liquidators should be examined
in context. The proviso in Section 1 of Executive Order 372, whereby
the corporate existence of NACOCO was continued for a period of
three years from the effectivity of the order for "the purpose of
prosecuting and defending suits by or against it and of enabling the
Board of Liquidators gradually to settle and close its affairs, to
dispose of and convey its property in the manner hereinafter
provided", is to be read not as an isolated provision but in
conjunction with the whole. So reading, it will be readily observed
that no time limit has been tacked to the existence of the Board of
Liquidators and its function of closing the affairs of the various
government owned corporations, including NACOCO.
By Section 2 of the executive order, while the boards of directors of
the various corporations were abolished, their powers and functions
and duties under existing laws were to be assumed and exercised by
the Board of Liquidators. The President thought it best to do away
with the boards of directors of the defunct corporations; at the same
time, however, the President had chosen to see to it that the Board
of Liquidators step into the vacuum. And nowhere in the executive
order was there any mention of the lifespan of the Board of
Liquidators. A glance at the other provisions of the executive order
buttresses our conclusion. Thus, liquidation by the Board of
Liquidators may, under section 1, proceed in accordance with law,
the provisions of the executive order, "and/or in such manner as the

38

President of the Philippines may direct." By Section 4, when any

property, fund, or project is transferred to any governmental
instrumentality "for administration or continuance of any project,"
the necessary funds therefor shall be taken from the corresponding
special fund created in Section 5. Section 5, in turn, talks of special
funds established from the "net proceeds of the liquidation" of the
various corporations abolished. And by Section, 7, fifty per centum
of the fees collected from the copra standardization and inspection
service shall accrue "to the special fund created in section 5 hereof
for the rehabilitation and development of the coconut industry."
Implicit in all these, is that the term of life of the Board of
Liquidators is without time limit. Contemporary history gives us the
fact that the Board of Liquidators still exists as an office with
officials and numerous employees continuing the job of liquidation
and prosecution of several court actions.
Not that our views on the power of the Board of Liquidators to
proceed to the final determination of the present case is without
jurisprudential support. The first judicial test before this Court
is National Abaca and Other Fibers Corporation vs. Pore, L-16779,
August 16, 1961. In that case, the corporation, already dissolved,
commenced suit within the three-year extended period for
liquidation. That suit was for recovery of money advanced to
defendant for the purchase of hemp in behalf of the corporation. She
failed to account for that money. Defendant moved to dismiss,
questioned the corporation's capacity to sue. The lower court
ordered plaintiff to include as co-party plaintiff, The Board of
Liquidators, to which the corporation's liquidation was entrusted
by Executive Order 372. Plaintiff failed to effect inclusion. The lower
court dismissed the suit. Plaintiff moved to reconsider. Ground:
excusable negligence, in that its counsel prepared the amended
complaint, as directed, and instructed the board's incoming and
outgoing correspondence clerk, Mrs. Receda Vda. de Ocampo, to
mail the original thereof to the court and a copy of the same to
defendant's counsel. She mailed the copy to the latter but failed to
send the original to the court. This motion was rejected below.
Plaintiff came to this Court on appeal. We there said that "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." We there said that "[o]ur 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." 14 However, these precepts notwithstanding, we, in effect,
held in that case that the Board of Liquidators escapes from the
operation thereof for the reason that "[o]bviously, 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."15 We
accordingly directed the record of said case to be returned to the
lower court, with instructions to admit plaintiff's amended complaint
to include, as party plaintiff, the Board of Liquidators.
Defendants' position is vulnerable to attack from another direction.
By Executive Order 372, the government, the sole stockholder,
abolished NACOCO, and placed its assets in the hands of the Board
of Liquidators. The Board of Liquidators thus became the trustee on
behalf of the government. It was an express trust. The legal interest
became vested in the trustee the Board of Liquidators. The
beneficial interest remained with the sole stockholder the
government. At no time had the government withdrawn the property,
or the authority to continue the present suit, from the Board of
Liquidators. If for this reason alone, we cannot stay the hand of the
Board of Liquidators from prosecuting this case to its final
conclusion. 16 The provisions of Section 78 of the Corporation Law
the third method of winding up corporate affairs find application.
We, accordingly, rule that the Board of Liquidators has personality
to proceed as: party-plaintiff in this case.
2. Defendants' second poser is that the action is unenforceable
against the heirs of Kalaw.
Appellee heirs of Kalaw raised in their motion to dismiss, 17 which
was overruled, and in their nineteenth special defense, that
plaintiff's action is personal to the deceased Maximo M. Kalaw, and
may not be deemed to have survived after his death.18 They say that

39

the controlling statute is Section 5, Rule 87, of the 1940 Rules of

Court.19which provides that "[a]ll claims for money against the
decedent, arising from contract, express or implied", must be filed in
the estate proceedings of the deceased. We disagree.
The suit here revolves around the alleged negligent acts of Kalaw for
having entered into the questioned contracts without prior approval
of the board of directors, to the damage and prejudice of plaintiff;
and is against Kalaw and the other directors for having subsequently
approved the said contracts in bad faith and/or breach of trust."
Clearly then, the present case is not a mere action for the recovery of
money nor a claim for money arising from contract. The suit involves
alleged tortious acts. And the action is embraced in suits filed "to
recover damages for an injury to person or property, real or
personal", which survive. 20
The leading expositor of the law on this point is Aguas vs. Llemos, L18107, August 30, 1962. There, plaintiffs sought to recover damages
from defendant Llemos. The complaint averred that Llemos had
served plaintiff by registered mail with a copy of a petition for a writ
of possession in Civil Case 4824 of the Court of First Instance at
Catbalogan, Samar, with notice that the same would be submitted to
the Samar court on February 23, 1960 at 8:00 a.m.; that in view of
the copy and notice served, plaintiffs proceeded to the said court of
Samar from their residence in Manila accompanied by their lawyers,
only to discover that no such petition had been filed; and that
defendant Llemos maliciously failed to appear in court, so that
plaintiffs' expenditure and trouble turned out to be in vain, causing
them mental anguish and undue embarrassment. Defendant died
before he could answer the complaint. Upon leave of court, plaintiffs
amended their complaint to include the heirs of the deceased. The
heirs moved to dismiss. The court dismissed the complaint on the
ground that the legal representative, and not the heirs, should have
been made the party defendant; and that, anyway, the action being
for recovery of money, testate or intestate proceedings should be
initiated and the claim filed therein. This Court, thru Mr. Justice
Jose B. L. Reyes, there declared:
Plaintiffs argue with considerable cogency that contrasting
the correlated provisions of the Rules of Court, those

concerning claims that are barred if not filed in the estate

settlement proceedings (Rule 87, sec. 5) and those defining
actions that survive and may be prosecuted against the
executor or administrator (Rule 88, sec. 1), it is apparent that
actions for damages caused by tortious conduct of a
defendant (as in the case at bar) survive the death of the
latter. Under Rule 87, section 5, the actions that are abated
by death are: (1) claims for funeral expenses and those for
the last sickness of the decedent; (2) judgments for money;
and (3) "all claims for money against the decedent, arising
from contract express or implied." None of these includes that
of the plaintiffs-appellants; for it is not enough that the claim
against the deceased party be for money, but it must arise
from "contract express or implied", and these words (also
used by the Rules in connection with attachments and
derived from the common law) were construed in Leung Ben
vs. O'Brien, 38 Phil. 182, 189-194,
"to include all purely personal obligations other than
those which have their source in delict or tort."
Upon the other hand, Rule 88, section 1, enumerates actions
that survive against a decedent's executors or
administrators, and they are: (1) actions to recover real and
personal property from the estate; (2) actions to enforce a lien
thereon; and (3) actions to recover damages for an injury to
person or property. The present suit is one for damages
under the last class, it having been held that "injury to
property" is not limited to injuries to specific property, but
extends to other wrongs by which personal estate is injured
or diminished (Baker vs. Crandall, 47 Am. Rep. 126; also 171
A.L.R., 1395). To maliciously cause a party to incur
unnecessary expenses, as charged in this case, is certainly
injury to that party's property (Javier vs. Araneta, L-4369,
Aug. 31, 1953).
The ruling in the preceding case was hammered out of facts
comparable to those of the present. No cogent reason exists why we
should break away from the views just expressed. And, the

40

conclusion remains: Action against the Kalaw heirs and, for the
matter, against the Estate of Casimiro Garcia survives.
The preliminaries out of the way, we now go to the core of the
controversy.
3. Plaintiff levelled a major attack on the lower court's holding that
Kalaw justifiedly entered into the controverted contracts without the
prior approval of the corporation's directorate. Plaintiff leans heavily
on NACOCO's corporate by-laws. Article IV (b), Chapter III thereof,
recites, as amongst the duties of the general manager, the obligation:
"(b) To perform or execute on behalf of the Corporation upon prior
approval of the Board, all contracts necessary and essential to the
proper accomplishment for which the Corporation was organized."
Not of de minimis importance in a proper approach to the problem at
hand, is the nature of a general manager's position in the corporate
structure. A rule that has gained acceptance through the years is
that a corporate officer "intrusted with the general management and
control of its business, has implied authority to make any contract
or do any other act which is necessary or appropriate to the conduct
of the ordinary business of the corporation. 21As such officer, "he
may, without any special authority from the Board of Directors
perform all acts of an ordinary nature, which by usage or necessity
are incident to his office, and may bind the corporation by contracts
in matters arising in the usual course of business. 22
The problem, therefore, is whether the case at bar is to be taken out
of the general concept of the powers of a general manager, given the
cited provision of the NACOCO by-laws requiring prior directorate
approval of NACOCO contracts.
The peculiar nature of copra trading, at this point, deserves express
articulation. Ordinary in this enterprise are copra sales for future
delivery. The movement of the market requires that sales agreements
be entered into, even though the goods are not yet in the hands of
the seller. Known in business parlance as forward sales, it is
concededly the practice of the trade. A certain amount of
speculation is inherent in the undertaking. NACOCO was much
more conservative than the exporters with big capital. This short-

selling was inevitable at the time in the light of other factors such as
availability of vessels, the quantity required before being accepted for
loading, the labor needed to prepare and sack the copra for market.
To NACOCO, forward sales were a necessity. Copra could not stay
long in its hands; it would lose weight, its value decrease. Above all,
NACOCO's limited funds necessitated a quick turnover. Copra
contracts then had to be executed on short notice at times within
twenty-four hours. To be appreciated then is the difficulty of calling
a formal meeting of the board.
Such were the environmental circumstances when Kalaw went into
copra trading.
Long before the disputed contracts came into being, Kalaw
contracted by himself alone as general manager for forward
sales of copra. For the fiscal year ending June 30, 1947, Kalaw
signed some 60 such contracts for the sale of copra to divers parties.
During that period, from those copra sales, NACOCO reaped a gross
profit of P3,631,181.48. So pleased was NACOCO's board of
directors that, on December 5, 1946, in Kalaw's absence, it voted to
grant him a special bonus "in recognition of the signal achievement
rendered by him in putting the Corporation's business on a selfsufficient basis within a few months after assuming office, despite
numerous handicaps and difficulties."
These previous contract it should be stressed, were signed by
Kalaw without prior authority from the board. Said contracts were
known all along to the board members. Nothing was said by them.
The aforesaid contracts stand to prove one thing: Obviously,
NACOCO board met the difficulties attendant to forward sales by
leaving the adoption of means to end, to the sound discretion of
NACOCO's general manager Maximo M. Kalaw.
Liberally spread on the record are instances of contracts executed by
NACOCO's general manager and submitted to the board after their
consummation, not before. These agreements were not Kalaw's
alone. One at least was executed by a predecessor way back in 1940,
soon after NACOCO was chartered. It was a contract of lease
executed on November 16, 1940 by the then general manager and
board chairman, Maximo Rodriguez, and A. Soriano y Cia., for the

41

lease of a space in Soriano Building On November 14, 1946,

NACOCO, thru its general manager Kalaw, sold 3,000 tons of copra
to the Food Ministry, London, thru Sebastian Palanca. On December
22, 1947, when the controversy over the present contract cropped
up, the board voted to approve a lease contract previously executed
between Kalaw and Fidel Isberto and Ulpiana Isberto covering a
warehouse of the latter. On the same date, the board gave its nod to
a contract for renewal of the services of Dr. Manuel L. Roxas. In fact,
also on that date, the board requested Kalaw to report for action all
copra contracts signed by him "at the meeting immediately following
the signing of the contracts." This practice was observed in a later
instance when, on January 7, 1948, the board approved two
previous contracts for the sale of 1,000 tons of copra each to a
certain "SCAP" and a certain "GNAPO".
And more. On December 19, 1946, the board resolved to ratify the
brokerage commission of 2% of Smith, Bell and Co., Ltd., in the sale
of 4,300 long tons of copra to the French Government. Such
ratification was necessary because, as stated by Kalaw in that same
meeting, "under an existing resolution he is authorized to give a
brokerage fee of only 1% on sales of copra made through brokers."
On January 15, 1947, the brokerage fee agreements of 1-1/2% on
three export contracts, and 2% on three others, for the sale of copra
were approved by the board with a proviso authorizing the general
manager to pay a commission up to the amount of 1-1/2% "without
further action by the Board." On February 5, 1947, the brokerage fee
of 2% of J. Cojuangco & Co. on the sale of 2,000 tons of copra was
favorably acted upon by the board. On March 19, 1947, a 2%
brokerage commission was similarly approved by the board for
Pacific Trading Corporation on the sale of 2,000 tons of copra.
It is to be noted in the foregoing cases that only the brokerage fee
agreements were passed upon by the board,not the sales contracts
themselves. And even those fee agreements were
submitted only when the commission exceeded the ceiling fixed by
the board.
Knowledge by the board is also discernible from other recorded
instances.1wph1.t

When the board met on May 10, 1947, the directors discussed the
copra situation: There was a slow downward trend but belief was
entertained that the nadir might have already been reached and an
improvement in prices was expected. In view thereof, Kalaw informed
the board that "he intends to wait until he has signed contracts to
sell before starting to buy copra."23
In the board meeting of July 29, 1947, Kalaw reported on the copra
price conditions then current: The copra market appeared to have
become fairly steady; it was not expected that copra prices would
again rise very high as in the unprecedented boom during JanuaryApril, 1947; the prices seemed to oscillate between $140 to $150 per
ton; a radical rise or decrease was not indicated by the trends.
Kalaw continued to say that "the Corporation has been closing
contracts for the sale of copra generally with a margin of P5.00 to
P7.00 per hundred kilos." 24
We now lift the following excerpts from the minutes of that same
board meeting of July 29, 1947:
521. In connection with the buying and selling of copra the
Board inquired whether it is the practice of the management
to close contracts of sale first before buying. The General
Manager replied that this practice is generally followed but
that it is not always possible to do so for two reasons:
(1) The role of the Nacoco to stabilize the prices of copra
requires that it should not cease buying even when it does
not have actual contracts of sale since the suspension of
buying by the Nacoco will result in middlemen taking
advantage of the temporary inactivity of the Corporation to
lower the prices to the detriment of the producers.
(2) The movement of the market is such that it may not be
practical always to wait for the consummation of contracts of
sale before beginning to buy copra.
The General Manager explained that in this connection a
certain amount of speculation is unavoidable. However, he

42

said that the Nacoco is much more conservative than the

other big exporters in this respect.25
Settled jurisprudence has it that where similar acts have been
approved by the directors as a matter of general practice, custom,
and policy, the general manager may bind the company without
formal authorization of the board of directors. 26 In varying
language, existence of such authority is established, by proof of the
course of business, the usage and practices of the company and by
the knowledge which the board of directors has, or must
bepresumed to have, of acts and doings of its subordinates in and
about the affairs of the corporation. 27 So also,

Authorities, great in number, are one in the idea that "ratification by

a corporation of an unauthorized act or contract by its officers or
others relates back to the time of the act or contract ratified, and is
equivalent to original authority;" and that " [t]he corporation and the
other party to the transaction are in precisely the same position as if
the act or contract had been authorized at the time." 30 The language
of one case is expressive: "The adoption or ratification of a contract
by a corporation is nothing more or less than the making of an
original contract. The theory of corporate ratification is predicated
on the right of a corporation to contract, and any ratification or
adoption isequivalent to a grant of prior authority." 31

x x x authority to act for and bind a corporation may be

presumed from acts of recognition in other instances where
the power was in fact exercised. 28

Indeed, our law pronounces that "[r]atification cleanses the contract

from all its defects from the moment it was constituted." 32 By
corporate confirmation, the contracts executed by Kalaw are thus
purged of whatever vice or defect they may have. 33

x x x Thus, when, in the usual course of business of a

corporation, an officer has been allowed in his official
capacity to manage its affairs, his authority to represent the
corporation may be implied from the manner in which he has
been permitted by the directors to manage its business.29

In sum, a case is here presented whereunder, even in the face of an

express by-law requirement of prior approval, the law on
corporations is not to be held so rigid and inflexible as to fail to
recognize equitable considerations. And, the conclusion inevitably is
that the embattled contracts remain valid.

In the case at bar, the practice of the corporation has been to allow
its general manager to negotiate and execute contracts in its copra
trading activities for and in NACOCO's behalf without prior board
approval. If the by-laws were to be literally followed, the board
should give its stamp of prior approval on all corporate contracts.
But that board itself, by its acts and through acquiescence,
practically laid aside the by-law requirement of prior approval.
Under the given circumstances, the Kalaw contracts are valid
corporate acts.
4. But if more were required, we need but turn to the board's
ratification of the contracts in dispute on January 30, 1948, though
it is our (and the lower court's) belief that ratification here is nothing
more than a mere formality.

5. It would be difficult, even with hostile eyes, to read the record in

terms of "bad faith and/or breach of trust" in the board's ratification
of the contracts without prior approval of the board. For, in reality,
all that we have on the government's side of the scale is that the
board knew that the contracts so confirmed would cause heavy
losses.
As we have earlier expressed, Kalaw had authority to execute the
contracts without need of prior approval. Everybody, including
Kalaw himself, thought so, and for a long time. Doubts were first
thrown on the way only when the contracts turned out to be
unprofitable for NACOCO.
Rightfully had it been said that bad faith does not simply connote
bad judgment or negligence; it imports a dishonest purpose or some
moral obliquity and conscious doing of wrong; it means breach of a
known duty thru some motive or interest or ill will; it partakes of the

43

nature of fraud.34 Applying this precept to the given facts herein, we

find that there was no "dishonest purpose," or "some moral
obliquity," or "conscious doing of wrong," or "breach of a known
duty," or "Some motive or interest or ill will" that "partakes of the
nature of fraud."
Nor was it even intimated here that the NACOCO directors acted for
personal reasons, or to serve their own private interests, or to pocket
money at the expense of the corporation. 35 We have had occasion to
affirm that bad faith contemplates a "state of mind affirmatively
operating with furtive design or with some motive of self-interest or
ill will or for ulterior purposes." 36 Briggs vs. Spaulding, 141 U.S.
132, 148-149, 35 L. ed. 662, 669, quotes with approval from Judge
Sharswood (in Spering's App., 71 Pa. 11), the following: "Upon a
close examination of all the reported cases, although there are many
dicta not easily reconcilable, yet I have found no judgment or decree
which has held directors to account, except when they have
themselves been personally guilty of some fraud on the corporation,
or have known and connived at some fraud in others, or where such
fraud might have been prevented had they given ordinary attention
to their duties. . . ." Plaintiff did not even dare charge its defendantdirectors with any of these malevolent acts.
Obviously, the board thought that to jettison Kalaw's contracts
would contravene basic dictates of fairness. They did not think of
raising their voice in protest against past contracts which brought in
enormous profits to the corporation. By the same token, fair dealing
disagrees with the idea that similar contracts, when unprofitable,
should not merit the same treatment. Profit or loss resulting from
business ventures is no justification for turning one's back on
contracts entered into. The truth, then, of the matter is that in
the words of the trial court the ratification of the contracts was
"an act of simple justice and fairness to the general manager and the
best interest of the corporation whose prestige would have been
seriously impaired by a rejection by the board of those contracts
which proved disadvantageous." 37
The directors are not liable."

38

6. To what then may we trace the damage suffered by NACOCO.

The facts yield the answer. Four typhoons wreaked havoc then on
our copra-producing regions. Result: Copra production was
impaired, prices spiralled, warehouses destroyed. Quick turnovers
could not be expected. NACOCO was not alone in this misfortune.
The record discloses that private traders, old, experienced, with
bigger facilities, were not spared; also suffered tremendous losses.
Roughly estimated, eleven principal trading concerns did run losses
to about P10,300,000.00. Plaintiff's witness Sisenando Barretto,
head of the copra marketing department of NACOCO, observed that
from late 1947 to early 1948 "there were many who lost money in
the trade." 39 NACOCO was not immune from such usual business
risk.
The typhoons were known to plaintiff. In fact, NACOCO resisted the
suits filed by Louis Dreyfus & Co. by pleading in its answers force
majeure as an affirmative defense and there vehemently asserted
that "as a result of the said typhoons, extensive damage was caused
to the coconut trees in the copra producing regions of the
Philippines and according to estimates of competent authorities, it
will take about one year until the coconut producing regions will be
able to produce their normal coconut yield and it will take some time
until the price of copra will reach normal levels;" and that "it had
never been the intention of the contracting parties in entering into
the contract in question that, in the event of a sharp rise in the
price of copra in the Philippine market produce by force majeure or
by caused beyond defendant's control, the defendant should buy the
copra contracted for at exorbitant prices far beyond the buying price
of the plaintiff under the contract." 40
A high regard for formal judicial admissions made in court pleadings
would suffice to deter us from permitting plaintiff to stray away
therefrom, to charge now that the damage suffered was because of
Kalaw's negligence, or for that matter, by reason of the board's
ratification of the contracts. 41
Indeed, were it not for the typhoons, 42 NACOCO could have, with
ease, met its contractual obligations. Stock accessibility was no
problem. NACOCO had 90 buying agencies spread throughout the
islands. It could purchase 2,000 tons of copra a day. The various
contracts involved delivery of but 16,500 tons over a five-month

44

period. Despite the typhoons, NACOCO was still able to deliver a

little short of 50% of the tonnage required under the contracts.
As the trial court correctly observed, this is a case of damnum
absque injuria. Conjunction of damage and wrong is here absent.
There cannot be an actionable wrong if either one or the other is
wanting. 43
7. On top of all these, is that no assertion is made and no proof is
presented which would link Kalaw's acts ratified by the board
to a matrix for defraudation of the government. Kalaw is clear of the
stigma of bad faith. Plaintiff's corporate counsel 44 concedes that
Kalaw all along thought that he had authority to enter into the
contracts, that he did so in the best interests of the corporation;
that he entered into the contracts in pursuance of an overall policy
to stabilize prices, to free the producers from the clutches of the
middlemen. The prices for which NACOCO contracted in the
disputed agreements, were at a level calculated to produce profits
and higher than those prevailing in the local market. Plaintiff's
witness, Barretto, categorically stated that "it would be foolish to
think that one would sign (a) contract when you are going to lose
money" and that no contract was executed "at a price unsafe for the
Nacoco." 45 Really, on the basis of prices then prevailing, NACOCO
envisioned a profit of around P752,440.00. 46
Kalaw's acts were not the result of haphazard decisions either.
Kalaw invariably consulted with NACOCO's Chief Buyer, Sisenando
Barretto, or the Assistant General Manager. The dailies and
quotations from abroad were guideposts to him.

Of course, Kalaw could not have been an insurer of profits. He could

not be expected to predict the coming of unpredictable typhoons.
And even as typhoons supervened Kalaw was not remissed in his
duty. He exerted efforts to stave off losses. He asked the Philippine
National Bank to implement its commitment to extend a
P400,000.00 loan. The bank did not release the loan, not even the
sum of P200,000.00, which, in October, 1947, was approved by the
bank's board of directors. In frustration, on December 12, 1947,
Kalaw turned to the President, complained about the bank's shortsighted policy. In the end, nothing came out of the negotiations with
the bank. NACOCO eventually faltered in its contractual obligations.
That Kalaw cannot be tagged with crassa negligentia or as much as
simple negligence, would seem to be supported by the fact that even
as the contracts were being questioned in Congress and in the
NACOCO board itself, President Roxas defended the actuations of
Kalaw. On December 27, 1947, President Roxas expressed his desire
"that the Board of Directors should reelect Hon. Maximo M. Kalaw
as General Manager of the National Coconut Corporation." 47 And,
on January 7, 1948, at a time when the contracts had already been
openly disputed, the board, at its regular meeting, appointed
Maximo M. Kalaw as acting general manager of the corporation.
Well may we profit from the following passage from Montelibano vs.
Bacolod-Murcia Milling Co., Inc., L-15092, May 18, 1962:
"They (the directors) hold such office charged with the duty to act for
the corporation according to their best judgment, and in so doing
they cannot be controlled in the reasonable exercise and
performance of such duty. Whether the business of a corporation
should be operated at a loss during a business depression, or closed
down at a smaller loss, is a purely business and economic problem
to be determined by the directors of the corporation, and not by the
court. It is a well known rule of law that questions of policy of
management are left solely to the honest decision of officers and
directors of a corporation, and the court is without authority to
substitute its judgment for the judgment of the board of directors;
the board is the business manager of the corporation, and solong as
it acts in good faith its orders are not reviewable by the courts."
(Fletcher on Corporations, Vol. 2, p. 390.)48

45

Kalaw's good faith, and that of the other directors, clinch the case
for defendants. 49
Viewed in the light of the entire record, the judgment under review
must be, as it is hereby, affirmed.
Without costs. So ordered.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-20333

June 30, 1967

EMILIANO ACUA, plaintiff-appellant,

vs.
BATAC PRODUCERS COOPERATIVE MARKETING ASSOCIATION,
INC., JUSTINO GALANO, TEODORO NARCISO, PABLO BACTIN,
(DR.) EMMANUEL BUMANGLAG, VENANCIO DIRIC, MARCOS
ESQUIVEL, EVARISTO CAOILI, FIDEL BATTULAYAN, DAMIAN
ROSSINI, RAYMUNDO BATALLONES, PLACIDO QUIAOIT, and
LEON Q. VERANO defendants-appellees.
Marquez and Marquez for plaintiff-appellant.
Estanislao A. Fernandez for defendants-appellees.
MAKALINTAL, J.:

Appeal taken from the order dated September 10, 1962 of the Court
of First Instance of Rizal, Branch V (Quezon City) dismissing
plaintiff's complaint on the ground that it states no cause of action,
and discharging the writ of preliminary attachment issued therein.
On August 9, 1962, plaintiff Emiliano Acua filed a complaint,
which was later amended on August 13, against the defendant Batac
Producers Cooperative Marketing Association, Inc., hereinafter called
the Batac Procoma, Inc., or alternatively, against all the other
defendants named in the caption. The complaint alleged, inter alia,
that on or about May 5, 1962 it was tentatively agreed upon between
plaintiff and defendant Leon Q. Verano, as Manager of the defendant
Batac Procoma, Inc., that the former would seek and obtain the sum
of not less, than P20,000.00 to be advanced to the defendant Batac
Procoma, Inc., to be utilized by it as additional funds for its Virginia
tobacco buying operations during the current redrying season; that
plaintiff would be constituted as the corporation's representative in
Manila to assist in handling and facilitating its continuous
shipments of tobacco and their delivery to the redrying plants and in
speeding up the prompt payment and collection of all amounts due
to the corporation for such shipments; that for his services plaintiff
would be paid a remuneration at the rate of P0.50 per kilo of
tobacco; that said tentative agreement was favorably received by the
Board of Directors of the defendant Batac Procoma Inc., and on May
6, 1962 all the defendants named above, who constituted the entire
Board of Directors of said corporation (except Leon Q. Verano, who
was its Manager), together with defendants Justino Galano and
Teodoro Narciso, as President and Vice-President, respectively,
unanimously authorized defendant Leon Q. Verano, by a formal
resolution, "to execute any agreement with any person or entity, on
behalf of the corporation, for the purpose of securing additional
funds for the corporation, as well as to secure the services of such
person or entity, in the collection of all payments due to the
corporation from the PVTA for any tobacco sold and delivered to said
administration; giving and conferring upon the Manager, full and
complete authority to bind the corporation with such person or
entity in any agreement, and under such considerations, which the
said Manager may deem expedient and necessary for that purpose;
that plaintiff was made to understand by all of said defendants that
the original understanding between him and defendant Leon Q.

46

Verano was acceptable to the corporation, except that the

remuneration for the plaintiff's services would be P0.30 per kilo of
tobacco; that on May 10, 1962, the formal "Agreement" was executed
between plaintiff and defendant Leon Q. Verano, as Manager of the
defendant corporation, duly authorized by its Board of Directors for
such purpose, and signed by defendants Justino Galano and Dr.
Emmanuel Bumanglag as instrumental witnesses and acknowledged
by Atty. Fernando Alcantara, the Secretary and Legal Counsel of the
defendant corporation; that upon plaintiff's inquiry, he was assured
by these defendants that a formal approval of said "Agreement" by
the Board was no longer necessary, as it was a mere "formality"
appended to its authorizing resolution and as all the members of the
Board had already agreed to the same; that on the same date, May
10, 1962, plaintiff gave and turned over to the defendant
corporation, thru its treasurer, Dominador T. Cocson the sum of
P20,000.00, in the presence of defendants Leon Q. Verano, Justino
Galano, Dr. Emmanuel Bumanglag and Atty. Fernando Alcantara,
for which said treasurer issued to plaintiff its corresponding Official
Receipt No. 130852; that from then on, plaintiff diligently and
religiously kept his part of the "Agreement;" that plaintiff even
furnished the defendant corporation, upon request of its Manager
Leon Q. Verano three thousand (3,000) sacks which it utilized in the
shipment of its tobacco costing P6,000.00 and that plaintiff had
personally advanced out of his own personal funds the total sum of
P5,000.00 with the full knowledge, acquiescence and consent of all
the individual defendants; that after the defendant corporation was
enabled to replenish its funds with continuous collections from the
PVTA for tobacco delivered due to the help, assistance and
intervention of plaintiff, for which the said corporation collected
from the PVTA the total sum of P381,495.00, the "Agreement" was
disapproved by its Board of Directors on June 6, 1962. Upon the
foregoing allegations plaintiff prays: (a) that an order of attachment
be issued against the properties of defendant corporation; (b) that
after due trial, judgment be rendered condemning defendant
corporation, or alternatively, all the other individual defendants,
jointly and severally, to comply with their contractual obligations
and to pay plaintiff the sum of P300,000.00 for his services, plus
P31,000.00 for cash advances made by him and P25,000.00 for
attorney's fees.

On August 14, 1962, the lower court ordered the issuance of a writ
of preliminary attachment against the properties of the defendants
and on the following day, after the plaintiff had posted the required
bond, the writ was accordingly issued by the Clerk of
Court.1wph1.t
On August 22, 1962, the defendants filed a motion to dismiss the
complaint on the ground that it stated no cause of action and to
discharge the preliminary attachment on the ground that it was
improperly or irregularly issued. In support of the motion defendants
alleged that the contract for services was never perfected because it
was not approved or ratified but was instead disapproved by the
Board of Directors of defendant Batac Procoma, Inc., and that on the
basis of plaintiff's pleadings the contract is void and unenforceable.
Defendants further denied the fact that plaintiff had performed his
part of the contract, alleging that he had not in any manner
intervened in the delivery and payment of tobacco pertaining to the
defendant corporation.
On August 25, 1962, plaintiff filed a written opposition to the motion
to dismiss and to discharge the preliminary attachment.
On September 10, 1962, the trial court sustained defendants'
motion and issued the following order:
In resume the Court believes that the complaint states no
cause of action and that contract in question is void ab initio.
IN VIEW OF THE FOREGOING, the amended complaint filed
in this case is hereby ordered DISMISSED, without special
pronouncement as to costs. Consequently, the writ of
preliminary attachment issued herein is ordered discharged.
However, it is of record that the defendants has (sic)
deposited the Court the amount of P20,400.00 representing
the amount of money invested by the plaintiff plus the
corresponding interest thereon. Plaintiff, by virtue of this
order, may withdraw the same in due time, if he so desires,
upon proper receipt therefor.
From the foregoing order plaintiff interposed the present appeal.

47

Appellant has assigned four errors, which we shall consider

seriatim:
The first assignment reads: "As the defendants' motion to dismiss
the complaint and to discharge the preliminary attachment was
based on the specific ground that the complaint states no cause of
action (Sec. 1 [f], Rule 8, Rules of Court), the lower court should not
have gone beyond, and it should have limited itself, to the facts
alleged in the complaint in considering and resolving said motion to
dismiss.
It is a settled principle that when a motion to dismiss is based on
the ground that the complaint does not state a cause of action (Rule
8, Section 1, par. 7 of the old Rules; Rule 16, Section 1., par. [g] of
the Revised Rules) the averments in the complaint are deemed
hypothetically admitted and the inquiry is limited to whether or not
they make out a case on which relief can be granted. If said motion
assails directly or indirectly the veracity of the allegations, it is
improper to grant the motion upon the assumption that the
averments therein are true and those of the complaint are not
(Carreon vs. Prov. Board of Pampanga, 52 O.G. 6557.) The
sufficiency of the motion should be tested on the strength of the
allegations of facts contained in the complaint, and no other. If these
allegations show a cause of action, or furnish sufficient basis by
which the complaint can be maintained, the complaint should not
be dismissed regardless of the defenses that may be averred by the
defendants. (Josefa de Jesus, et al. vs. Santos Belarmino, 50 O.G.
3004-3068; Verzosa vs. Rigonan, G.R. No. L-6459, April 23, 1954;
Dimayuga vs. Dimayuga, 51 O.G. 2397-2400.)
The first ground upon which the order of dismissal issued by the
lower court is predicated is that the Board of Directors of defendant
corporation did not approve, the agreement in question in fact
disapproved it by a resolution passed on June 6, 1962 and that
as a consequence the "suspensive condition" attached to the
agreement was never fulfilled. The specific stipulation referred to by
the Court as a suspensive condition states: "provided, however that
the contract entered into by said manager to carry out the purposes
above-mentioned shall be subject to the approve by the Board."

A perusal of the complaint reveals that it contains sufficient

allegations indicating such approval or at least subsequent
ratification. On the first point we note the following averments: that
on May 9th the plaintiff met with each and all of the individual
defendants (who constituted the entire Board of Directors) and
discussed with them extensively the tentative agreement and he was
made to understand that it was acceptable to them, except as to
plaintiff's remuneration; that it was finally agreed between plaintiff
and all said Directors that his remuneration would be P0.30 per kilo
(of tobacco); and that after the agreement was formally executed he
was assured by said Directors that there would be no need of formal
approval by the Board. It should be noted in this connection that
although the contract required such approval it did not specify just
in what manner the same should be given.
On the question of ratification the complaint alleges that plaintiff
delivered to the defendant corporation the sum of P20,000.00 as
called for in the contract; that he rendered the services he was
required to do; that he furnished said defendant 3,000 sacks at a
cost of P6,000.00 and advanced to it the further sum of P5,000.00;
and that he did all of these things with the full knowledge,
acquiescence and consent of each and all of the individual
defendants who constitute the Board of Directors of the defendant
corporation. There is abundant authority in support of the
proposition that ratification may be express or implied, and that
implied ratification may take diverse forms, such as by silence or
acquiescence; by acts showing approval or adoption of the contract;
or by acceptance and retention of benefits flowing therefrom.
Significantly the very resolution of the Board of Directors relied
upon by defendants appears to militate against their contention. It
refers to plaintiff's failure to comply with certain promises he had
made, as well as to his interpretation of the contract with respect to
his remuneration which, according to the Board, was contrary to the
intention of the parties. The resolution then proceeds to "disapprove
and/or rescind" the said contract. The idea of conflicting
interpretation, or rescission on the ground that one of the parties
has failed to fulfill his obligation under the contract, is certainly
incompatible with defendants' theory here that no contract had yet
been perfected for lack of approval by the Board of Directors.

48

Appellants' second assignment of error reads: "Assuming that in

resolving the defendants' motion to dismiss the lower court could
consider the new facts alleged therein and the documents annexed
thereto it committed an error in extending such consideration
beyond ascertaining only if an issue of fact has been presented and
in actually deciding instead such fact in issue."
The assignment is well taken, and is the logical corollary of the rule
that a motion to dismiss on the ground that the complaint fails to
state a cause of action addresses itself to the averments in the
complaint and, admitting their veracity, merely questions their
sufficiency to make out a case on which the court can grant relief.
Affidavits, such as those presented by defendants in support of the
motion, can only be considered for the purpose of ascertaining
whether an issue of fact is presented, but not as a basis for deciding
the factual issue itself. This should await the trial on the merits.
The third assignment of error assails the lower court's ruling that
even assuming that a contract had been perfected no action can be
maintained thereon because its object was illegal and therefore void.
Specific reference was made by said court to an affidavit executed by
appellant on May 10, 1962 which reads:
That I, EMILIANO ACUA, the party of the Second Part in the
contract entered into with the Batac Procoma, Inc., the party
of the First Part in same contract declares that the amount
of P0.30 per kilo is referred to upgraded tobacco only as
delivered. This supplements paragraph three of the contract
referred to. Deliveries downgraded or maintained at the
redrying plant are deemed not included.

The lower court, in its order of dismissal, held that "the upgrading of
tobaccos is clearly prohibited under our laws," and hence the
contract cannot be validly ratified. Evidently the court had in mind a
fraudulent upgrading of tobacco by appellant as part of the services
called for under the contract. This conclusion, however, is squarely
traversed by appellant in another affidavit attached to his reply and
opposition to the motion to dismiss, in which he explained the
circumstances which led to the execution of the one relied upon by
the court, and the real meaning of the word "upgraded" therein. It is
therein stated:
That after the execution of the agreement (Annex "B" to the amended
complaint in said Civil Case No. Q-6547), Messrs. Verano, Galano
and Dr. Bumanglag of the defendant Corporation indicated to me
that if the price of P0.30 per kilo stipulated there to be paid to me
were to be indiscriminately applied to all deliveries of tobaccos, the
Corporation would be placed in a disadvantageous and losing
position, and they proceeded to explain to me the following,
(a) that when the farmers sell their tobaccos to the Facoma,
they do so in bunches of assorted qualities which may belong
either to Class A, B, C, D and E, and upon such purchase
they are initially given an arbitrary classification of any of
such classes as the case may be, the tendency generally
being to give them a lower classification to equalize or
average the assorted qualities as much as possible, and this
is what is termed "downgrading;"
(b) that after the tobaccos have been purchased by the
Facoma from the farmers, they are then reassorted and reclassified in accordance with their actual quality or grade as
found by the officials of the Facoma, thus in a bunch
which are purchased as Class C, D or E, upon
reclassification those found to belong to Class A are
separated from Class B, those belonging to Class B are
separated from Class C, and so on, and these bunches so
reclassified necessarily have a higher grade than the farmers,
and this is what is termed "upgrading" upon delivery original
arbitrary classification given when purchased from the which
was used in the addendum;

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(c) the Facoma, in turn, delivers these properly re-classified

tobaccos to the redrying plant, and there, a group of officials
composed of a representative of the redrying plant, the
Bureau of Internal Revenue, the General Auditing Office, the
PVTA and the Facoma representative, then examines and
grades the tobaccos, and if the classification given by the
Facoma is found correct and not changed, then and only
then would or should be entitled to collect the P0.30 per kilo,
and this they said is what is termed "grade maintained" on
the other hand, if these officials found the classification
incorrect and lowers the classification given by the Facoma,
thus class A to B, or from B to C, then the tobaccos are
considered or said to be "downgraded" and in that event I
should not receive any centavo for such deliveries, and it is in
this sense that I was made to understand the term;
Believing implicitly in the foregoing explanations of the defendants
and in the reasonableness of their proposal, I agreed readily and
Atty. Fernando Alcantara, Legal Counsel and Secretary of the
defendant Corporation forthwith prepared, drafted and typed the
"addendum" in question in their own typewriter of the Corporation;
and as I am not a lawyer and was not well versed with the usage,
customs and phraseology usually used in tobacco trading, I relied in
absolute good faith that, as explained by the defendants, there was
nothing wrong nor illegal in the use of the words "upgrading" and
"downgrading" used in said addendum, which Atty. Alcantara
unfortunately used in the same;

it is highly improbable that the representative of the redrying plant

(PTFC & RC) whose conformity to the actual grading done must
appear in the corresponding "guia" or tally sheet, would allow the
"upgrading" of tobaccos, aside from the fact that stringent measures
had been devised under the present administration to prevent the
"upgrading" of tobaccos by any party. Certainly, an impossible
condition could not have been contemplated by me and the
defendants; (Record on Appeal, pp. 171-175).
The foregoing explanation, on its face, is satisfactory and deprives
the term "upgraded" of the sinister and illegal connotation attributed
to it by the lower court. To be sure, whether the allegations in this
subsequent affidavit are true or not is a question of fact; but it is
precisely for this reason that they can neither be summarily
admitted nor rejected for purposes of a motion to dismiss. Due
process demands that they be the subject of proof and considered
only after trial on the merits.
The other errors assigned by appellant are merely incidental to those
already discussed, and require no separate treatment.
Wherefore, the order appealed from is set aside and the case is
remanded to the court a quo for further proceedings, without
prejudice to, the right of plaintiff-appellant to ask for another writ of
attachment in said court, as the circumstances may warrant. Costs
against defendants-appellees.

Apart from the above, defendants knew the physical impossibility of

"upgrading" the tobaccos at the redrying plant, because at the time
of the transaction, only the PTFC & RC was allowed to accept
tobacco for redrying and under the existing regulations and
practices the delivery area for tobaccos at the redrying plant is
enclosed by a high wire fence inaccessible to the general public and
the only ones who actually make the grading of tobaccos delivered,
are the (1) American representative of the redrying plant (PTFC &
RC), (2) the PVTA, (3) the BIR, and (4) the General Auditing Office in
the presence of the representative of the FACOMA, and since the
redrying plant is compelled to purchase 41% of all tobaccos
delivered and redried under their negotiated management contract,

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