Gokongwei vs. SECRevised Bagtas Reviewer by Ve and Ocfe 2A VIII.

BY-LAWS See relevant portions of V ILLANUEVA ," Corporate Contract Law, " 38 A TENEO L.J. 1 (No. 2, June 1994). 1. Nature and Functions ( a Gokongwei v. SEC , 89 SCRA 337 *1979+; a Pea v. CA , 193 SCRA717 *1991+)FACTS:In 1972, Universal Robina Corp acquired 622,987 share in San Miguel Corp. In 1972 also,Consolidated Foods Corp. acquired SMC shares amounting to P543,959. John Gokongwei, thepresidne tand controlling stockholder of URC & CFC purchased 5,000 SMC shares. Gokongwei triedto get a seat in the SMC BoD but was rejected by the SHs n the grounds that he was engaged in acompetitive business and his securing a seat in the BoD would subject SMC to great disadvantages.On September 18, 1976 repondent SHs amended the by-laws of SMC, Gokongwei contendsthat: 1.the BoD acted without authority & in usurpation of the power of the SHs since thecomputation of 2/3 vote was based on the authorized capital stock as of 1961 & not as of 1976 2.The authority granted in 1961 was also extended in 1962 & 1963 when said authority wassupposed to cease to exist 3.Prior to said amendment, petitioner had all the qualifications as Director & that as asubstitute SH he has the right to vote & be voted as director & that in amending the by-laws, the corp. purposely provided for Gokongweis disqualification& deprived him of hisvested right.

4.Gokongwei further alleges that the corp. has no inherent power to disqualify a SH & thatprovision allowing the BoD to consider such factors as business & family relations is81 unreasonable & oppressive, thus void. Gokongwei prays that the amended by laws be declared null & void. He also wanted to inspect and get a copy of certain documents pertaining to the corp. The SEC allowed him to see the minutes of the meeting only. So he filed an MR & a petition with the SC due to the alleged deliberate inability of the SCE to action on his petition. The SEC had earlier ruled in denying the MR, allowing Gokongwei to run as director but he should not sit as such if elected until there is a decision on the validity of the by-laws. The SMC answered by saying that he is engaged in a business antagonistic to SMC & that in allowing him to sit in the BoD, he would have access to SMC trade secrets and plans. It says that the amended by laws were adopted to preserve & protect SMC from danger which was based in its right for self-preservation. ISSUE: Whether or not the amended by-laws of SMC disqualifying a competitor from nomination or election to the BoD of SMC are valid and reasonable? HELD: 1.Every corp. has the inherent right to adopt by-laws for its internal government & to regulate the conduct & prescribe the rights and duties of its members towards itself &among themselves in reference to the management of its affairs. This is expressly recognized by Sec. 21 of the Corp. Code & has been enunciated in Govt vs. El Hogar. 2.Any person who buys stocks in a corp. does so with the knowledge that its affairs are dominated by a majority of the stockholders & that he impliedly contracts that the will of the majority shall govern in all matters within the limits of the AoI & By-laws. A stockholder is said to have parted with his right to regulate the disposition of his property which he invested in the corporation. Thus, no contract between the SHs and corp. was infringed. 3.Pursuant to Sec. 18 of the Corp. Law, any corp. may amend its AoI by a vote or written as sent of the Shs representing at least t 2/3 of the subscribed capital stock. If it changes, diminishes or restricts the rights of SHs, the dissenting minority has only the right to object in writing & demand payment of their share. Petitioner has no vested right to be elected director. 4.A director stands in a fiduciary relation to the corp. & its SHs. He has control & guidance of corporate affairs & property & hence, of the property interests of SHs. Equity recognizes that SHs are properties of corporate interest & are ultimately the only beneficiaries thereof. Thus, he cannot serve 2 adverse masters without detriment to one of them He cannot utilize his inside information & strategic position to his own preferment. 5.An amendment to the by-laws which renders a SH ineligible to be a director, if he be also a director in a competitor corp. has been sustained valid. This is based on the principle that where the director is employed in the service of a rival corp he cannot serve both but must betray one or the other. Such an enactment merely advances the benefit of the corp & for its own good. Corporate officers are not permitted to use their position of trust &confidence to further their private interests. 6.DOCTRINE OF CORPORATE OPORTUNITY rests on the unfairness of an officer or director taking advantage of an opportunity for his own personal profit where the interest of the corporation calls for protection. Here BoD members have access to marketing strategies, pricing structure, budget for expansion, R&D sources of funding, availability of personnel, mergers & tie-ups, etc. The questioned

amendment of the y-laws was done to prevent the creation or an oppositor for an officer or director of SMC, also an officer of a competing corp. from taking advantage of the information which he as director to promote his individual corporate interests to the detriment of SMC, it would be hard to avoid any possibility of Gokongweis taking advantage of his position as SMC director.7.The SC grants the petition regarding Gokongweis petition to examine the book and records of SMC

Pe?a vs. CA Revised Bagtas Reviewer by Ve and Ocfe 2A8.However, it sustained the validity of the amendment to the by-laws without prejudice to the question of actual disqualification of Gokongwei to run if elected to sit as SMC director being decided, after proper hearing by the SMC BoD, whose decisions shall be appeal able to the SEC & to the SC, unless disqualified, the prohibit on in the said by-laws will not apply to Gokongwei

FACTS:PAMBUSCO original owners of the lots in question, mortgaged the same to DBP inconsideration of P935,000. This mortgage was foreclosed and said properties were awarded to Rosita Pea as highest bidder in the foreclosure sale. The Board of PAMBUSCO, through three of its members resolved to assign its to one of its members, Atty. Joaquin Briones, to execute and sign adeed of assignment for and in behalf of PAMBUSCO in favor of any interested party. Thus, Briones executed a deed of Assignment of PAMBUSCOs redemption right over the subject lots in favor of Marelino Enriquez. The latter then redeemed the said properties and a certificate of redemption dated Aug. 15, 1975 was issued. Enriquez executed a deed of absolute sale of the subject properties in favor of plaintiff-appellants, the spouses Rising T. Yap and Catalina Lugue. Pea wrote the sheriff notifying him that the redemption was not valid as it was made under avoid deed of assignment. She then requested the recall of the said redemption and a restraint on any registration or transaction regarding the lots. Defendant Pea through counsel wrote the sheriff asking for execution of a deed of final sale in her favor on the ground that the one year period of redemption has long elapsed without any valid redemption having been exercised. Plaintiff Yap wrote defendant Pea asking for payment for back rentals in the amount of P42,750.00 for the use and occupancy of the land and house. Later, the spouses Yap were prompted to file the instant case on the ground that being registered owners, they have the right to enforce their right to possession against defendant who has been allegedly in unlawful possession thereof. It was contended that plaintiffs could not have acquired ownership over the subject properties under a deed of absolute sale executed in their favor by one Marcelino Enriquez who likewise could not have become the owner of the properties in question by redeeming the same under a void deed of assignment. The defense was that since the deed of assignment executed by PAMBUSCO in favour of Enriquez was void ab initio for being an ultra vires act of its board of directors and for being without any valuable consideration, it could not have had any legal effect. TC found for petitioner.CA reversed.HELD:In order that the SEC can take cognizance of a case, the controversy must pertain to any of the following relationships: a. between corp., partnership or assoc. and the public b .between the corp. and its SH, members, officers c. between corp. and the state in so far as its franchise, permit or license to operate is concerned

d. among the stockholders, partners or associates themselves. Neither petitioner nor respondents Yap spouses are stockholders or officers of PAMBUSCO. Consequently, the issue of the validity of the series of transactions may be resolved only by the regular courts. The by-laws of a corporation are its own private laws which substantially have the same effect as the laws of the corporation. They are in effect written into the charter. In this sense, they become art of the fundamental law of the corporation which the corporation and its directors and officers must comply with. Only three out of five directors of PAMBUSCO convened on November 19, 1974 by virtue of a prior notice of a special meeting. There was no quorum to validly transact business since, under Section 4 of the amended by-laws hereinabove reproduced, at least 4 members must be present to constitute a quorum in a special meeting of the BoD. The AoI or by-laws of the corp. may fix a greater number than the majority than the majority of the number of board members to constitute the quorum necessary for the valid transaction f business. Being a dormant corp. for several years, it was highly irregular, if not anomalous, for a group of three individuals representing themselves to be the directors of respondent PAMBUSCO to pass a resolution disposing of the only remaining asset of the corporation in favor of a former corporate officer. The latest list of SH of respondent PAMBUSCO on file with the SEC does not show that the said alleged directors were among the SHs of respondent PAMBUSCO. Since the disposition of said redemption right of PAMBUSCO by virtue of the questioned resolution was not approved by the required number of SHs under the law, the said resolution, as well as the subsequent assignment executed assigning to respondent Enriquez the said right of redemption should be struck down as null and void .As the rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it, by-laws are indispensable to corporations. These may not be essential to corporate birth but certainly, these are required by law for an orderly governance and management of corporations. Loyola Grand Villas Homeowners v. CA, 276 SCRA 681 (1997).

Q. Distinguish by-laws from AoI A. The AoI is not an internal document that binds the parties to a corporate setting. It is also a document that binds the State. The BL is an intramural document, its supposed to bind the inner workings of a corp. Q. Are the AoI and BL public documents? A. Yes, both are public documents because they are not valid and binding without the approval of the SEC Q. Does the BL have to be approved by the SEC?

A. Yes, prior to the approval of the SEC, the by-laws are not binding since the code expressly requires the approval of the SEC to be binding upon the SHs and members. Absent the codal provision, it is binding because of a corp.s inherent power to adopt its own by-laws. Q. Do BL bind the public? A. As a general rule, BL provisions do not bind the public, except if the third person has knowledge of the BL provision

(a) Common Law Limitations on By-Laws (i) By-Laws Cannot Be Contrary to Law and Charter A by-law provision granting to a stockholder permanent seat in the Board of Directors is contrary to the provision in Corporation Code requiring all members of the Board to be elected by the stockholders. Even when the members of the association may have formally adopted the provision, their action would be of no avail because no provision of the by-laws can be adopted if it is contrary to law. Grace Christian HighSchool v. Court of Appeals, 281 SCRA 133 (1997). (ii) By-Law Provisions Cannot Be Unreasonable or Be Contrary to the Nature of By-laws. Government of P.I. v. El Hogar Filipino , 50 Phil. 399 (1927).Authority granted to a corporation to regulate the transfer of its stock does not empower the corporation to restrict the right of a stockholder to transfer his shares ,but merely authorizes the adoption of regulations as to the formalities and procedure to be followed in effecting transfer. Thomson v. Court of Appeals, 298 SCRA 280 1998).By-laws are intended merely for the protection of the corporation, and prescribe regulation, not restriction; they are always subject to the charter of the corporation. Rural Bank of Salinas, Inc. v. CA , 210 SCRA 510 (1992). (iii) By-Law provisions cannot discriminate(b) Binding Effects on By-laws:

a China Banking Corp. v. Court of Appeals, 270 SCRA 503(1997).

FACTS: Calapatia, a stockholder of PR Valley Golf and Country Club pledged his Stock Certificate to petitioner China Banking. Petitioner wrote VGCCI requesting that the a fore mentioned pledge agreement be recorded in its books. Later, Calapatia obtained a loan of P20,000 from petitioner, payment of which was secured by the a forestated pledge agreement still existing between Calapatia and petitioner. Due to Calapatias failure to pay his obligation, petitioner filed a petition for extra-judicial foreclosure. Petitioner informed VGCCI of the above-mentioned foreclosure proceedings and requested that the pledged stock be transferred to its name. However, VGCCI wrote petitioner expressing its inability to accede to petitioners request due to Calapatias unsettled accounts with the club. Despite the foregoing, Notary Public de Vera held a public auction and petitioner emerged as the highest bidder, VGCCI sent Calapatia a notice demanding full payment of his overdue account in the amount of P18,783.24. VGCCI caused to be published in the newspaper Daily Express a notice of auction sale by VGCCI of its subject share of stock and thereafter filed a case with the RTC of Makati for the nullification. The RTC dismissed the case for lack of jurisdiction over the subject matter on the theory that it involves an intra-corporate dispute. Petitioner filed a complaint with the SEC. The Commission en banc believed that appellant-petitioner had a prior right over the pledged share and because of pledgors failure to pay the principal debt upon maturity, appellant-petitioner could proceed with the foreclosure sale of the pledged share. The auction sale conducted by appellee-respondent Club was declared null and void. The CA rendered its decision nullifying and setting aside the orders of the SEC and its hearing officers on the ground of lack of jurisdiction over the subject. The CA declared that the controversy between CBC and VGCCI is not intracorporate HELD:VGCCI claims a prior right over the subject share anchored mainly on Sec. 3, Art. VIII of its by-laws which provides that after a member shall have been posted as delinquent, the Board may order his/her/its share sold to satisfy the claims of the club. It is pursuant to this provision that VGCCI also sold the subject share at public auction, of which it was the highest bidder. VGCCI caps its argument by asserting that its corporate by-laws could prevail. The SEC therefore took proper cognizance of the instant case. Moreover, VGCCI completely disregarded petitioners right as pledgee. It even failed to give petitioner notice of said auction sale. Such actuations of VGCCI thus belie its claim of good faith. In defending its actions, VGCCI likewise maintains that petitioner is bound by its by-laws. It argues that the G.R. is that third persons are not bound by the by-laws of a corporation since they are not privy to thereto. The exception to this is when 3rdpersons have actual or constructive knowledge of the same. In the case at bar, petitioner had actual knowledge of the by-laws of private respondent when petitioner foreclosed the pledge made by Calapatia and when petitioner purchased the share foreclosed. Thus, the petitioner purchased the said share subject to the right of the PR to sell the said shares for reasons of delinquency and the right of PR to have a first lien on said shares as these rights are provided for in the by-laws very clearly. In order to be bound, the 3rd party must have acquired knowledge of the pertinent by-laws at the time the transaction or agreement between said 3rd party and the shareholder was entered into, in this case, at the time the pledge agreement was executed. Petitioners belated notice of said by-laws at the time of the foreclosure will not suffice. By-laws signify the rules and regulations of