1) Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-45911 April 11, 1979
JOHN GOKONGWEI, JR., petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M.
SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE
B. CONDE, MIGUEL ORTIGAS, ANTONIO PRIETO, SAN MIGUEL CORPORATION,
EMIGDIO TANJUATCO, SR., and EDUARDO R. VISAYA, respondents.
De Santos, Balgos & Perez for petitioner.
Angara, Abello, Concepcion, Regala, Cruz Law Offices for respondents Sorianos
Siguion Reyna, Montecillo & Ongsiako for respondent San Miguel Corporation.
R. T Capulong for respondent Eduardo R. Visaya.
ANTONIO, J.:
The instant petition for certiorari, mandamus and injunction, with prayer for issuance of
writ of preliminary injunction, arose out of two cases filed by petitioner with the Securities
and Exchange Commission, as follows:
SEC CASE NO 1375
On October 22, 1976, petitioner, as stockholder of respondent San Miguel Corporation,
filed with the Securities and Exchange Commission (SEC) a petition for "declaration of
nullity of amended by-laws, cancellation of certificate of filing of amended by- laws,
injunction and damages with prayer for a preliminary injunction" against the majority of
the members of the Board of Directors and San Miguel Corporation as an unwilling
petitioner. The petition, entitled "John Gokongwei Jr. vs. Andres Soriano, Jr., Jose M.
Soriano, Enrique Zobel, Antonio Roxas, Emeterio Bunao, Walthrode B. Conde, Miguel
Ortigas, Antonio Prieto and San Miguel Corporation", was docketed as SEC Case No.
1375.
As a first cause of action, petitioner alleged that on September 18, 1976, individual
respondents amended by bylaws of the corporation, basing their authority to do so on a
resolution of the stockholders adopted on March 13, 1961, when the outstanding capital
stock of respondent corporation was only P70,139.740.00, divided into 5,513,974
common shares at P10.00 per share and 150,000 preferred shares at P100.00 per share.
At the time of the amendment, the outstanding and paid up shares totalled 30,127,047
with a total par value of P301,270,430.00. It was contended that according to section 22
of the Corporation Law and Article VIII of the by-laws of the corporation, the power to
amend, modify, repeal or adopt new by-laws may be delegated to the Board of Directors
only by the affirmative vote of stockholders representing not less than 2/3 of the
subscribed and paid up capital stock of the corporation, which 2/3 should have been
computed on the basis of the capitalization at the time of the amendment. Since the
amendment was based on the 1961 authorization, petitioner contended that the Board
acted without authority and in usurpation of the power of the stockholders.
As a second cause of action, it was alleged that the authority granted in 1961 had already
been exercised in 1962 and 1963, after which the authority of the Board ceased to exist.
As a third cause of action, petitioner averred that the membership of the Board of
Directors had changed since the authority was given in 1961, there being six (6) new
directors.
As a fourth cause of action, it was claimed that prior to the questioned amendment,
petitioner had all the qualifications to be a director of respondent corporation, being a
Substantial stockholder thereof; that as a stockholder, petitioner had acquired rights
inherent in stock ownership, such as the rights to vote and to be voted upon in the
election of directors; and that in amending the by-laws, respondents purposely provided
for petitioner's disqualification and deprived him of his vested right as afore-mentioned
hence the amended by-laws are null and void. 1
As additional causes of action, it was alleged that corporations have no inherent power to
disqualify a stockholder from being elected as a director and, therefore, the questioned
act is ultra vires and void; that Andres M. Soriano, Jr. and/or Jose M. Soriano, while
representing other corporations, entered into contracts (specifically a management
contract) with respondent corporation, which was allowed because the questioned
amendment gave the Board itself the prerogative of determining whether they or other
persons are engaged in competitive or antagonistic business; that the portion of the
amended bylaws which states that in determining whether or not a person is engaged in
competitive business, the Board may consider such factors as business and family
relationship, is unreasonable and oppressive and, therefore, void; and that the portion of
the amended by-laws which requires that "all nominations for election of directors ... shall
be submitted in writing to the Board of Directors at least five (5) working days before the
date of the Annual Meeting" is likewise unreasonable and oppressive.
It was, therefore, prayed that the amended by-laws be declared null and void and the
certificate of filing thereof be cancelled, and that individual respondents be made to pay
damages, in specified amounts, to petitioner.
On October 28, 1976, in connection with the same case, petitioner filed with the
Securities and Exchange Commission an "Urgent Motion for Production and Inspection of
Documents", alleging that the Secretary of respondent corporation refused to allow him
to inspect its records despite request made by petitioner for production of certain
documents enumerated in the request, and that respondent corporation had been
attempting to suppress information from its stockholders despite a negative reply by the
SEC to its query regarding their authority to do so. Among the documents requested to
be copied were (a) minutes of the stockholder's meeting field on March 13, 1961, (b)
copy of the management contract between San Miguel Corporation and A. Soriano
Corporation (ANSCOR); (c) latest balance sheet of San Miguel International, Inc.; (d)
authority of the stockholders to invest the funds of respondent corporation in San Miguel
International, Inc.; and (e) lists of salaries, allowances, bonuses, and other
compensation, if any, received by Andres M. Soriano, Jr. and/or its successor-in-interest.
The "Urgent Motion for Production and Inspection of Documents" was opposed by
respondents, alleging, among others that the motion has no legal basis; that the demand
is not based on good faith; that the motion is premature since the materiality or
relevance of the evidence sought cannot be determined until the issues are joined, that it
fails to show good cause and constitutes continued harrasment, and that some of the
information sought are not part of the records of the corporation and, therefore,
privileged.
During the pendency of the motion for production, respondents San Miguel Corporation,
Enrique Conde, Miguel Ortigas and Antonio Prieto filed their answer to the petition,
denying the substantial allegations therein and stating, by way of affirmative defenses
that "the action taken by the Board of Directors on September 18, 1976 resulting in the
... amendments is valid and legal because the power to "amend, modify, repeal or adopt
new By-laws" delegated to said Board on March 13, 1961 and long prior thereto has
never been revoked of SMC"; that contrary to petitioner's claim, "the vote requirement
for a valid delegation of the power to amend, repeal or adopt new by-laws is determined
in relation to the total subscribed capital stock at the time the delegation of said power is
made, not when the Board opts to exercise said delegated power"; that petitioner has not
availed of his intra-corporate remedy for the nullification of the amendment, which is to
secure its repeal by vote of the stockholders representing a majority of the subscribed
capital stock at any regular or special meeting, as provided in Article VIII, section I of the
by-laws and section 22 of the Corporation law, hence the, petition is premature; that
petitioner is estopped from questioning the amendments on the ground of lack of
authority of the Board. since he failed, to object to other amendments made on the basis
of the same 1961 authorization: that the power of the corporation to amend its by-laws is
broad, subject only to the condition that the by-laws adopted should not be respondent
corporation inconsistent with any existing law; that respondent corporation should not be
precluded from adopting protective measures to minimize or eliminate situations where
its directors might be tempted to put their personal interests over t I hat of the
corporation; that the questioned amended by-laws is a matter of internal policy and the
judgment of the board should not be interfered with: That the by-laws, as amended, are
valid and binding and are intended to prevent the possibility of violation of criminal and
civil laws prohibiting combinations in restraint of trade; and that the petition states no
cause of action. It was, therefore, prayed that the petition be dismissed and that
petitioner be ordered to pay damages and attorney's fees to respondents. The application
for writ of preliminary injunction was likewise on various grounds.
Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to the
petition, denying the material averments thereof and stating, as part of their affirmative
defenses, that in August 1972, the Universal Robina Corporation (Robina), a corporation
engaged in business competitive to that of respondent corporation, began acquiring
shares therein. until September 1976 when its total holding amounted to 622,987 shares:
that in October 1972, the Consolidated Foods Corporation (CFC) likewise began acquiring
shares in respondent (corporation. until its total holdings amounted to P543,959.00 in
September 1976; that on January 12, 1976, petitioner, who is president and controlling
shareholder of Robina and CFC (both closed corporations) purchased 5,000 shares of
stock of respondent corporation, and thereafter, in behalf of himself, CFC and Robina,
"conducted malevolent and malicious publicity campaign against SMC" to generate
support from the stockholder "in his effort to secure for himself and in representation of
Robina and CFC interests, a seat in the Board of Directors of SMC", that in the
stockholders' meeting of March 18, 1976, petitioner was rejected by the stockholders in
his bid to secure a seat in the Board of Directors on the basic issue that petitioner was
engaged in a competitive business and his securing a seat would have subjected
respondent corporation to grave disadvantages; that "petitioner nevertheless vowed to
secure a seat in the Board of Directors at the next annual meeting; that thereafter the
Board of Directors amended the by-laws as afore-stated.
As counterclaims, actual damages, moral damages, exemplary damages, expenses of
litigation and attorney's fees were presented against petitioner.
Subsequently, a Joint Omnibus Motion for the striking out of the motion for production
and inspection of documents was filed by all the respondents. This was duly opposed by
petitioner. At this juncture, respondents Emigdio Tanjuatco, Sr. and Eduardo R. Visaya
were allowed to intervene as oppositors and they accordingly filed their oppositions-
intervention to the petition.
On December 29, 1976, the Securities and Exchange Commission resolved the motion for
production and inspection of documents by issuing Order No. 26, Series of 1977, stating,
in part as follows:
Considering the evidence submitted before the Commission by the petitioner and
respondents in the above-entitled case, it is hereby ordered:
1. That respondents produce and permit the inspection, copying and photographing, by or
on behalf of the petitioner-movant, John Gokongwei, Jr., of the minutes of the
stockholders' meeting of the respondent San Miguel Corporation held on March 13, 1961,
which are in the possession, custody and control of the said corporation, it appearing that
the same is material and relevant to the issues involved in the main case. Accordingly,
the respondents should allow petitioner-movant entry in the principal office of the
respondent Corporation, San Miguel Corporation on January 14, 1977, at 9:30 o'clock in
the morning for purposes of enforcing the rights herein granted; it being understood that
the inspection, copying and photographing of the said documents shall be undertaken
under the direct and strict supervision of this Commission. Provided, however, that other
documents and/or papers not heretofore included are not covered by this Order and any
inspection thereof shall require the prior permission of this Commission;
2. As to the Balance Sheet of San Miguel International, Inc. as well as the list of salaries,
allowances, bonuses, compensation and/or remuneration received by respondent Jose M.
Soriano, Jr. and Andres Soriano from San Miguel International, Inc. and/or its successors-
in- interest, the Petition to produce and inspect the same is hereby DENIED, as
petitioner-movant is not a stockholder of San Miguel International, Inc. and has,
therefore, no inherent right to inspect said documents;
3. In view of the Manifestation of petitioner-movant dated November 29, 1976,
withdrawing his request to copy and inspect the management contract between San
Miguel Corporation and A. Soriano Corporation and the renewal and amendments thereof
for the reason that he had already obtained the same, the Commission takes note
thereof; and
4. Finally, the Commission holds in abeyance the resolution on the matter of production
and inspection of the authority of the stockholders of San Miguel Corporation to invest the
funds of respondent corporation in San Miguel International, Inc., until after the hearing
on the merits of the principal issues in the above-entitled case.
This Order is immediately executory upon its approval. 2
Dissatisfied with the foregoing Order, petitioner moved for its reconsideration.
Meanwhile, on December 10, 1976, while the petition was yet to be heard, respondent
corporation issued a notice of special stockholders' meeting for the purpose of "ratification
and confirmation of the amendment to the By-laws", setting such meeting for February
10, 1977. This prompted petitioner to ask respondent Commission for a summary
judgment insofar as the first cause of action is concerned, for the alleged reason that by
calling a special stockholders' meeting for the aforesaid purpose, private respondents
admitted the invalidity of the amendments of September 18, 1976. The motion for
summary judgment was opposed by private respondents. Pending action on the motion,
petitioner filed an "Urgent Motion for the Issuance of a Temporary Restraining Order",
praying that pending the determination of petitioner's application for the issuance of a
preliminary injunction and/or petitioner's motion for summary judgment, a temporary
restraining order be issued, restraining respondents from holding the special stockholder's
meeting as scheduled. This motion was duly opposed by respondents.
On February 10, 1977, respondent Commission issued an order denying the motion for
issuance of temporary restraining order. After receipt of the order of denial, respondents
conducted the special stockholders' meeting wherein the amendments to the by-laws
were ratified. On February 14, 1977, petitioner filed a consolidated motion for contempt
and for nullification of the special stockholders' meeting.
A motion for reconsideration of the order denying petitioner's motion for summary
judgment was filed by petitioner before respondent Commission on March 10, 1977.
Petitioner alleges that up to the time of the filing of the instant petition, the said motion
had not yet been scheduled for hearing. Likewise, the motion for reconsideration of the
order granting in part and denying in part petitioner's motion for production of record had
not yet been resolved.
In view of the fact that the annul stockholders' meeting of respondent corporation had
been scheduled for May 10, 1977, petitioner filed with respondent Commission a
Manifestation stating that he intended to run for the position of director of respondent
corporation. Thereafter, respondents filed a Manifestation with respondent Commission,
submitting a Resolution of the Board of Directors of respondent corporation disqualifying
and precluding petitioner from being a candidate for director unless he could submit
evidence on May 3, 1977 that he does not come within the disqualifications specified in
the amendment to the by-laws, subject matter of SEC Case No. 1375. By reason thereof,
petitioner filed a manifestation and motion to resolve pending incidents in the case and to
issue a writ of injunction, alleging that private respondents were seeking to nullify and
render ineffectual the exercise of jurisdiction by the respondent Commission, to
petitioner's irreparable damage and prejudice, Allegedly despite a subsequent
Manifestation to prod respondent Commission to act, petitioner was not heard prior to the
date of the stockholders' meeting.
Petitioner alleges that there appears a deliberate and concerted inability on the part of
the SEC to act hence petitioner came to this Court.
SEC. CASE NO. 1423
Petitioner likewise alleges that, having discovered that respondent corporation has been
investing corporate funds in other corporations and businesses outside of the primary
purpose clause of the corporation, in violation of section 17 1/2 of the Corporation Law,
he filed with respondent Commission, on January 20, 1977, a petition seeking to have
private respondents Andres M. Soriano, Jr. and Jose M. Soriano, as well as the
respondent corporation declared guilty of such violation, and ordered to account for such
investments and to answer for damages.
On February 4, 1977, motions to dismiss were filed by private respondents, to which a
consolidated motion to strike and to declare individual respondents in default and an
opposition ad abundantiorem cautelam were filed by petitioner. Despite the fact that said
motions were filed as early as February 4, 1977, the commission acted thereon only on
April 25, 1977, when it denied respondents' motion to dismiss and gave them two (2)
days within which to file their answer, and set the case for hearing on April 29 and May 3,
1977.
Respondents issued notices of the annual stockholders' meeting, including in the Agenda
thereof, the following:
6. Re-affirmation of the authorization to the Board of Directors by the stockholders at the
meeting on March 20, 1972 to invest corporate funds in other companies or businesses or
for purposes other than the main purpose for which the Corporation has been organized,
and ratification of the investments thereafter made pursuant thereto.
By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an urgent
motion for the issuance of a writ of preliminary injunction to restrain private respondents
from taking up Item 6 of the Agenda at the annual stockholders' meeting, requesting that
the same be set for hearing on May 3, 1977, the date set for the second hearing of the
case on the merits. Respondent Commission, however, cancelled the dates of hearing
originally scheduled and reset the same to May 16 and 17, 1977, or after the scheduled
annual stockholders' meeting. For the purpose of urging the Commission to act, petitioner
filed an urgent manifestation on May 3, 1977, but this notwithstanding, no action has
been taken up to the date of the filing of the instant petition.
With respect to the afore-mentioned SEC cases, it is petitioner's contention before this
Court that respondent Commission gravely abused its discretion when it failed to act with
deliberate dispatch on the motions of petitioner seeking to prevent illegal and/or arbitrary
impositions or limitations upon his rights as stockholder of respondent corporation, and
that respondent are acting oppressively against petitioner, in gross derogation of
petitioner's rights to property and due process. He prayed that this Court direct
respondent SEC to act on collateral incidents pending before it.
On May 6, 1977, this Court issued a temporary restraining order restraining private
respondents from disqualifying or preventing petitioner from running or from being voted
as director of respondent corporation and from submitting for ratification or confirmation
or from causing the ratification or confirmation of Item 6 of the Agenda of the annual
stockholders' meeting on May 10, 1977, or from Making effective the amended by-laws of
respondent corporation, until further orders from this Court or until the Securities and Ex-
change Commission acts on the matters complained of in the instant petition.
On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a restraining
order had been issued by this Court, or on May 9, 1977, the respondent Commission
served upon petitioner copies of the following orders:
(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's motion for
reconsideration, with its supplement, of the order of the Commission denying in part
petitioner's motion for production of documents, petitioner's motion for reconsideration of
the order denying the issuance of a temporary restraining order denying the issuance of a
temporary restraining order, and petitioner's consolidated motion to declare respondents
in contempt and to nullify the stockholders' meeting;
(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run as a
director of respondent corporation but stating that he should not sit as such if elected,
until such time that the Commission has decided the validity of the bylaws in dispute, and
denying deferment of Item 6 of the Agenda for the annual stockholders' meeting; and
(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's motion for
reconsideration of the order of respondent Commission denying petitioner's motion for
summary judgment;
It is petitioner's assertions, anent the foregoing orders, (1) that respondent Commission
acted with indecent haste and without circumspection in issuing the aforesaid orders to
petitioner's irreparable damage and injury; (2) that it acted without jurisdiction and in
violation of petitioner's right to due process when it decided en banc an issue not raised
before it and still pending before one of its Commissioners, and without hearing petitioner
thereon despite petitioner's request to have the same calendared for hearing , and (3)
that the respondents acted oppressively against the petitioner in violation of his rights as
a stockholder, warranting immediate judicial intervention.
It is prayed in the supplemental petition that the SEC orders complained of be declared
null and void and that respondent Commission be ordered to allow petitioner to undertake
discovery proceedings relative to San Miguel International. Inc. and thereafter to decide
SEC Cases No. 1375 and 1423 on the merits.
On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed their
comment, alleging that the petition is without merit for the following reasons:
(1) that the petitioner the interest he represents are engaged in business competitive and
antagonistic to that of respondent San Miguel Corporation, it appearing that the owns and
controls a greater portion of his SMC stock thru the Universal Robina Corporation and the
Consolidated Foods Corporation, which corporations are engaged in business directly and
substantially competing with the allied businesses of respondent SMC and of corporations
in which SMC has substantial investments. Further, when CFC and Robina had
accumulated investments. Further, when CFC and Robina had accumulated shares in
SMC, the Board of Directors of SMC realized the clear and present danger that
competitors or antagonistic parties may be elected directors and thereby have easy and
direct access to SMC's business and trade secrets and plans;
(2) that the amended by law were adopted to preserve and protect respondent SMC from
the clear and present danger that business competitors, if allowed to become directors,
will illegally and unfairly utilize their direct access to its business secrets and plans for
their own private gain to the irreparable prejudice of respondent SMC, and, ultimately, its
stockholders. Further, it is asserted that membership of a competitor in the Board of
Directors is a blatant disregard of no less that the Constitution and pertinent laws against
combinations in restraint of trade;
(3) that by laws are valid and binding since a corporation has the inherent right and duty
to preserve and protect itself by excluding competitors and antogonistic parties, under
the law of self-preservation, and it should be allowed a wide latitude in the selection of
means to preserve itself;
(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and 1423 was
due to petitioner's own acts or omissions, since he failed to have the petition to
suspend, pendente lite the amended by-laws calendared for hearing. It was emphasized
that it was only on April 29, 1977 that petitioner calendared the aforesaid petition for
suspension (preliminary injunction) for hearing on May 3, 1977. The instant petition being
dated May 4, 1977, it is apparent that respondent Commission was not given a chance to
act "with deliberate dispatch", and
(5) that, even assuming that the petition was meritorious was, it has become moot and
academic because respondent Commission has acted on the pending incidents,
complained of. It was, therefore, prayed that the petition be dismissed.
On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his comment, alleging that
the petition has become moot and academic for the reason, among others that the acts of
private respondent sought to be enjoined have reference to the annual meeting of the
stockholders of respondent San Miguel Corporation, which was held on may 10, 1977;
that in said meeting, in compliance with the order of respondent Commission, petitioner
was allowed to run and be voted for as director; and that in the same meeting, Item 6 of
the Agenda was discussed, voted upon, ratified and confirmed. Further it was averred
that the questions and issues raised by petitioner are pending in the Securities and
Exchange Commission which has acquired jurisdiction over the case, and no hearing on
the merits has been had; hence the elevation of these issues before the Supreme Court is
premature.
Petitioner filed a reply to the aforesaid comments, stating that the petition presents
justiciable questions for the determination of this Court because (1) the respondent
Commission acted without circumspection, unfairly and oppresively against petitioner,
warranting the intervention of this Court; (2) a derivative suit, such as the instant case, is
not rendered academic by the act of a majority of stockholders, such that the discussion,
ratification and confirmation of Item 6 of the Agenda of the annual stockholders' meeting
of May 10, 1977 did not render the case moot; that the amendment to the bylaws which
specifically bars petitioner from being a director is void since it deprives him of his vested
rights.
Respondent Commission, thru the Solicitor General, filed a separate comment, alleging
that after receiving a copy of the restraining order issued by this Court and noting that
the restraining order did not foreclose action by it, the Commission en banc issued Orders
Nos. 449, 450 and 451 in SEC Case No. 1375.
In answer to the allegation in the supplemental petition, it states that Order No. 450
which denied deferment of Item 6 of the Agenda of the annual stockholders' meeting of
respondent corporation, took into consideration an urgent manifestation filed with the
Commission by petitioner on May 3, 1977 which prayed, among others, that the
discussion of Item 6 of the Agenda be deferred. The reason given for denial of deferment
was that "such action is within the authority of the corporation as well as falling within the
sphere of stockholders' right to know, deliberate upon and/or to express their wishes
regarding disposition of corporate funds considering that their investments are the ones
directly affected." It was alleged that the main petition has, therefore, become moot and
academic.
On September 29,1977, petitioner filed a second supplemental petition with prayer for
preliminary injunction, alleging that the actuations of respondent SEC tended to deprive
him of his right to due process, and "that all possible questions on the facts now pending
before the respondent Commission are now before this Honorable Court which has the
authority and the competence to act on them as it may see fit." (Reno, pp. 927-928.)
Petitioner, in his memorandum, submits the following issues for resolution;
(1) whether or not the provisions of the amended by-laws of respondent corporation,
disqualifying a competitor from nomination or election to the Board of Directors are valid
and reasonable;
(2) whether or not respondent SEC gravely abused its discretion in denying petitioner's
request for an examination of the records of San Miguel International, Inc., a fully owned
subsidiary of San Miguel Corporation; and
(3) whether or not respondent SEC committed grave abuse of discretion in allowing
discussion of Item 6 of the Agenda of the Annual Stockholders' Meeting on May 10, 1977,
and the ratification of the investment in a foreign corporation of the corporate funds,
allegedly in violation of section 17-1/2 of the Corporation Law.
I The validity or reasonableness of a by-law of a corporation in purely a question of
Whether or not amended by-laws are valid is purely a legal question which public interest
requires to be resolved
It is the position of the petitioner that "it is not necessary to remand the case to
respondent SEC for an appropriate ruling on the intrinsic validity of the amended by-laws
in compliance with the principle of exhaustion of administrative remedies", considering
that: first: "whether or not the provisions of the amended by-laws are intrinsically valid
... is purely a legal question. There is no factual dispute as to what the provisions are and
evidence is not necessary to determine whether such amended by-laws are valid as
framed and approved ... "; second: "it is for the interest and guidance of the public that
an immediate and final ruling on the question be made ... "; third: "petitioner was denied
due process by SEC" when "Commissioner de Guzman had openly shown prejudice
against petitioner ... ", and "Commissioner Sulit ... approved the amended by-laws ex-
parte and obviously found the same intrinsically valid; and finally: "to remand the case to
SEC would only entail delay rather than serve the ends of justice."
Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that this Court
resolve the legal issues raised by the parties in keeping with the "cherished rules of
procedure" that "a court should always strive to settle the entire controversy in a single
proceeding leaving no root or branch to bear the seeds of future ligiation", citing Gayong
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
law. 9 Whether the by-law is in conflict with the law of the land, or with the charter of the
corporation, or is in a legal sense unreasonable and therefore unlawful is a question of
law. 10 This rule is subject, however, to the limitation that where the reasonableness of a
by-law is a mere matter of judgment, and one upon which reasonable minds must
necessarily differ, a court would not be warranted in substituting its judgment instead of
the judgment of those who are authorized to make by-laws and who have exercised their
authority. 11
Petitioner claims that the amended by-laws are invalid and unreasonable because they
were tailored to suppress the minority and prevent them from having representation in
the Board", at the same time depriving petitioner of his "vested right" to be voted for and
to vote for a person of his choice as director.
Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San Miguel
Corporation content that ex. conclusion of a competitor from the Board is legitimate
corporate purpose, considering that being a competitor, petitioner cannot devote an
unselfish and undivided Loyalty to the corporation; that it is essentially a preventive
measure to assure stockholders of San Miguel Corporation of reasonable protective from
the unrestrained self-interest of those charged with the promotion of the corporate
enterprise; that access to confidential information by a competitor may result either in
the promotion of the interest of the competitor at the expense of the San Miguel
Corporation, or the promotion of both the interests of petitioner and respondent San
Miguel Corporation, which may, therefore, result in a combination or agreement in
violation of Article 186 of the Revised Penal Code by destroying free competition to the
detriment of the consuming public. It is further argued that there is not vested right of
any stockholder under Philippine Law to be voted as director of a corporation. It is alleged
that petitioner, as of May 6, 1978, has exercised, personally or thru two corporations
owned or controlled by him, control over the following shareholdings in San Miguel
Corporation, vis.: (a) John Gokongwei, Jr. 6,325 shares; (b) Universal Robina
Corporation 738,647 shares; (c) CFC Corporation 658,313 shares, or a total of
1,403,285 shares. Since the outstanding capital stock of San Miguel Corporation, as of
the present date, is represented by 33,139,749 shares with a par value of P10.00, the
total shares owned or controlled by petitioner represents 4.2344% of the total
outstanding capital stock of San Miguel Corporation. It is also contended that petitioner is
the president and substantial stockholder of Universal Robina Corporation and CFC
Corporation, both of which are allegedly controlled by petitioner and members of his
family. It is also claimed that both the Universal Robina Corporation and the CFC
Corporation are engaged in businesses directly and substantially competing with the
alleged businesses of San Miguel Corporation, and of corporations in which SMC has adopt by-laws was inherent in every corporation as one of its necessary and inseparable
substantial investments. legal incidents. And it is settled throughout the United States that in the absence of
ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S CORPORATIONS AND SAN positive legislative provisions limiting it, every private corporation has this inherent power
MIGUEL CORPORATION as one of its necessary and inseparable legal incidents, independent of any specific
According to respondent San Miguel Corporation, the areas of, competition are enabling provision in its charter or in general law, such power of self-government being
enumerated in its Board the areas of competition are enumerated in its Board Resolution essential to enable the corporation to accomplish the purposes of its creation. 13
dated April 28, 1978, thus: In this jurisdiction, under section 21 of the Corporation Law, a corporation may prescribe
Product Line Estimated Market Share Total in its by-laws "the qualifications, duties and compensation of directors, officers and
1977 SMC Robina-CFC employees ... " This must necessarily refer to a qualification in addition to that specified
Table Eggs 0.6% 10.0% 10.6% by section 30 of the Corporation Law, which provides that "every director must own in his
Layer Pullets 33.0% 24.0% 57.0% right at least one share of the capital stock of the stock corporation of which he is a
Dressed Chicken 35.0% 14.0% 49.0% director ... " In Government v. El Hogar, 14 the Court sustained the validity of a provision
Poultry & Hog Feeds 40.0% 12.0% 52.0% in the corporate by-law requiring that persons elected to the Board of Directors must be
Ice Cream 70.0% 13.0% 83.0% holders of shares of the paid up value of P5,000.00, which shall be held as security for
Instant Coffee 45.0% 40.0% 85.0% their action, on the ground that section 21 of the Corporation Law expressly gives the
Woven Fabrics 17.5% 9.1% 26.6% power to the corporation to provide in its by-laws for the qualifications of directors and is
Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC "highly prudent and in conformity with good practice. "
involved product sales of over P400 million or more than 20% of the P2 billion total NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR
product sales of SMC. Significantly, the combined market shares of SMC and CFC-Robina Any person "who buys stock in a corporation does so with the knowledge that its affairs
in layer pullets dressed chicken, poultry and hog feeds ice cream, instant coffee and are dominated by a majorityof the stockholders and that he impliedly contracts that the
woven fabrics would result in a position of such dominance as to affect the prevailing will of the majority shall govern in all matters within the limits of the act of incorporation
market factors. and lawfully enacted by-laws and not forbidden by law." 15 To this extent, therefore, the
It is further asserted that in 1977, the CFC-Robina group was in direct competition on stockholder may be considered to have "parted with his personal right or privilege to
product lines which, for SMC, represented sales amounting to more than ?478 million. In regulate the disposition of his property which he has invested in the capital stock of the
addition, CFC-Robina was directly competing in the sale of coffee with Filipro, a subsidiary corporation, and surrendered it to the will of the majority of his fellow incorporators. ... It
of SMC, which product line represented sales for SMC amounting to more than P275 cannot therefore be justly said that the contract, express or implied, between the
million. The CFC-Robina group (Robitex, excluding Litton Mills recently acquired by corporation and the stockholders is infringed ... by any act of the former which is
petitioner) is purportedly also in direct competition with Ramie Textile, Inc., subsidiary of authorized by a majority ... ." 16
SMC, in product sales amounting to more than P95 million. The areas of competition Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of
between SMC and CFC-Robina in 1977 represented, therefore, for SMC, product sales of incorporation by a vote or written assent of the stockholders representing at least two-
more than P849 million. thirds of the subscribed capital stock of the corporation If the amendment changes,
According to private respondents, at the Annual Stockholders' Meeting of March 18, 1976, diminishes or restricts the rights of the existing shareholders then the disenting minority
9,894 stockholders, in person or by proxy, owning 23,436,754 shares in SMC, or more has only one right, viz.: "to object thereto in writing and demand payment for his share."
than 90% of the total outstanding shares of SMC, rejected petitioner's candidacy for the Under section 22 of the same law, the owners of the majority of the subscribed capital
Board of Directors because they "realized the grave dangers to the corporation in the stock may amend or repeal any by-law or adopt new by-laws. It cannot be said,
event a competitor gets a board seat in SMC." On September 18, 1978, the Board of therefore, that petitioner has a vested right to be elected director, in the face of the fact
Directors of SMC, by "virtue of powers delegated to it by the stockholders," approved the that the law at the time such right as stockholder was acquired contained the prescription
amendment to ' he by-laws in question. At the meeting of February 10, 1977, these that the corporate charter and the by-law shall be subject to amendment, alteration and
amendments were confirmed and ratified by 5,716 shareholders owning 24,283,945 modification. 17
shares, or more than 80% of the total outstanding shares. Only 12 shareholders, It being settled that the corporation has the power to provide for the qualifications of its
representing 7,005 shares, opposed the confirmation and ratification. At the Annual directors, the next question that must be considered is whether the disqualification of a
Stockholders' Meeting of May 10, 1977, 11,349 shareholders, owning 27,257.014 shares, competitor from being elected to the Board of Directors is a reasonable exercise of
or more than 90% of the outstanding shares, rejected petitioner's candidacy, while 946 corporate authority.
stockholders, representing 1,648,801 shares voted for him. On the May 9, 1978 Annual A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS
Stockholders' Meeting, 12,480 shareholders, owning more than 30 million shares, or SHAREHOLDERS
more than 90% of the total outstanding shares. voted against petitioner. Although in the strict and technical sense, directors of a private corporation are not
AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS regarded as trustees, there cannot be any doubt that their character is that of a fiduciary
EXPRESSLY CONFERRED BY LAW insofar as the corporation and the stockholders as a body are concerned. As agents
Private respondents contend that the disputed amended by laws were adopted by the entrusted with the management of the corporation for the collective benefit of the
Board of Directors of San Miguel Corporation a-, a measure of self-defense to protect the stockholders, "they occupy a fiduciary relation, and in this sense the relation is one of
corporation from the clear and present danger that the election of a business competitor trust." 18 "The ordinary trust relationship of directors of a corporation and stockholders",
to the Board may cause upon the corporation and the other stockholders inseparable according to Ashaman v. Miller, 19 "is not a matter of statutory or technical law. It springs
prejudice. Submitted for resolution, therefore, is the issue whether or not respondent from the fact that directors have the control and guidance of corporate affairs and
San Miguel Corporation could, as a measure of self- protection, disqualify a competitor property and hence of the property interests of the stockholders. Equity recognizes that
from nomination and election to its Board of Directors. stockholders are the proprietors of the corporate interests and are ultimately the only
It is recognized by an authorities that 'every corporation has the inherent power to adopt beneficiaries thereof * * *.
by-laws 'for its internal government, and to regulate the conduct and prescribe the rights Justice Douglas, in Pepper v. Litton, 20 emphatically restated the standard of fiduciary
and duties of its members towards itself and among themselves in reference to the obligation of the directors of corporations, thus:
management of its affairs. 12 At common law, the rule was "that the power to make and
A director is a fiduciary. ... Their powers are powers in trust. ... He who is in such
fiduciary position cannot serve himself first and his cestuis second. ... He cannot
manipulate the affairs of his corporation to their detriment and in disregard of the
standards of common decency. He cannot by the intervention of a corporate entity violate
the ancient precept against serving two masters ... He cannot utilize his inside
information and strategic position for his own preferment. He cannot violate rules of fair
play by doing indirectly through the corporation what he could not do so directly. He
cannot violate rules of fair play by doing indirectly though the corporation what he could
not do so directly. He cannot use his power for his personal advantage and to the
detriment of the stockholders and creditors no matter how absolute in terms that power
may be and no matter how meticulous he is to satisfy technical requirements. For that
power is at all times subject to the equitable limitation that it may not be exercised for
the aggrandizement, preference or advantage of the fiduciary to the exclusion or
detriment of the cestuis.
And in Cross v. West Virginia Cent, & P. R. R. Co., 21 it was said:
... A person cannot serve two hostile and adverse master, without detriment to one of
them. A judge cannot be impartial if personally interested in the cause. No more can a
director. Human nature is too weak -for this. Take whatever statute provision you please
giving power to stockholders to choose directors, and in none will you find any express
prohibition against a discretion to select directors having the company's interest at heart,
and it would simply be going far to deny by mere implication the existence of such a
salutary power
... If the by-law is to be held reasonable in disqualifying a stockholder in a competing
company from being a director, the same reasoning would apply to disqualify the wife and
immediate member of the family of such stockholder, on account of the supposed interest
of the wife in her husband's affairs, and his suppose influence over her. It is perhaps true
that such stockholders ought not to be condemned as selfish and dangerous to the best
interest of the corporation until tried and tested. So it is also true that we cannot
condemn as selfish and dangerous and unreasonable the action of the board in passing
the by-law. The strife over the matter of control in this corporation as in many others is
perhaps carried on not altogether in the spirit of brotherly love and affection. The only
test that we can apply is as to whether or not the action of the Board is authorized and
sanctioned by law. ... . 22
These principles have been applied by this Court in previous cases.23
AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A STOCKHOLDER
INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO DIRECTOR IN A CORPORATION WHOSE
BUSINESS IS IN COMPETITION WITH THAT OF THE OTHER CORPORATION, HAS BEEN
SUSTAINED AS VALID
It is a settled state law in the United States, according to Fletcher, that corporations have
the power to make by-laws declaring a person employed in the service of a rival company
to be ineligible for the corporation's Board of Directors. ... (A)n amendment which renders
ineligible, or if elected, subjects to removal, a director if he be also a director in a
corporation whose business is in competition with or is antagonistic to the other
corporation is valid." 24This is based upon the principle that where the director is so
employed in the service of a rival company, he cannot serve both, but must betray one or
the other. Such an amendment "advances the benefit of the corporation and is good." An
exception exists in New Jersey, where the Supreme Court held that the Corporation Law
in New Jersey prescribed the only qualification, and therefore the corporation was not
empowered to add additional qualifications. 25 This is the exact opposite of the situation in
the Philippines because as stated heretofore, section 21 of the Corporation Law expressly
provides that a corporation may make by-laws for the qualifications of directors. Thus, it
has been held that an officer of a corporation cannot engage in a business in direct
competition with that of the corporation where he is a director by utilizing information he
has received as such officer, under "the established law that a director or officer of a
corporation may not enter into a competing enterprise which cripples or injures the
business of the corporation of which he is an officer or director. 26
It is also well established that corporate officers "are not permitted to use their position of
trust and confidence to further their private interests." 27 In a case where directors of a
corporation cancelled a contract of the corporation for exclusive sale of a foreign firm's
products, and after establishing a rival business, the directors entered into a new contract
themselves with the foreign firm for exclusive sale of its products, the court held that
equity would regard the new contract as an offshoot of the old contract and, therefore,
for the benefit of the corporation, as a "faultless fiduciary may not reap the fruits of his
misconduct to the exclusion of his principal. 28
The doctrine of "corporate opportunity" 29 is precisely a recognition by the courts that the
fiduciary standards could not be upheld where the fiduciary was acting for two entities
with competing interests. This doctrine rests fundamentally on the unfairness, in
particular circumstances, of an officer or director taking advantage of an opportunity for
his own personal profit when the interest of the corporation justly calls for protection. 30
It is not denied that a member of the Board of Directors of the San Miguel Corporation
has access to sensitive and highly confidential information, such as: (a) marketing
strategies and pricing structure; (b) budget for expansion and diversification; (c) research
and development; and (d) sources of funding, availability of personnel, proposals of
mergers or tie-ups with other firms.
It is obviously to prevent the creation of an opportunity for an officer or director of San
Miguel Corporation, who is also the officer or owner of a competing corporation, from
taking advantage of the information which he acquires as director to promote his
individual or corporate interests to the prejudice of San Miguel Corporation and its
stockholders, that the questioned amendment of the by-laws was made. Certainly, where
two corporations are competitive in a substantial sense, it would seem improbable, if not
impossible, for the director, if he were to discharge effectively his duty, to satisfy his
loyalty to both corporations and place the performance of his corporation duties above his
personal concerns.
Thus, in McKee & Co. v. First National Bank of San Diego, supra the court sustained as
valid and reasonable an amendment to the by-laws of a bank, requiring that its directors
should not be directors, officers, employees, agents, nominees or attorneys of any other
banking corporation, affiliate or subsidiary thereof. Chief Judge Parker,
in McKee, explained the reasons of the court, thus:
... A bank director has access to a great deal of information concerning the business and
plans of a bank which would likely be injurious to the bank if known to another bank, and
it was reasonable and prudent to enlarge this minimum disqualification to include any
director, officer, employee, agent, nominee, or attorney of any other bank in California.
The Ashkins case, supra, specifically recognizes protection against rivals and others who
might acquire information which might be used against the interests of the corporation as
a legitimate object of by-law protection. With respect to attorneys or persons associated
with a firm which is attorney for another bank, in addition to the direct conflict or
potential conflict of interest, there is also the danger of inadvertent leakage of
confidential information through casual office discussions or accessibility of files.
Defendant's directors determined that its welfare was best protected if this opportunity
for conflicting loyalties and potential misuse and leakage of confidential information was
foreclosed.
In McKee the Court further listed qualificational by-laws upheld by the courts, as follows:
(1) A director shall not be directly or indirectly interested as a stockholder in any other
firm, company, or association which competes with the subject corporation.
(2) A director shall not be the immediate member of the family of any stockholder in any
other firm, company, or association which competes with the subject corporation,
(3) A director shall not be an officer, agent, employee, attorney, or trustee in any other
firm, company, or association which compete with the subject corporation.
(4) A director shall be of good moral character as an essential qualification to holding
office.
(5) No person who is an attorney against the corporation in a law suit is eligible for
service on the board. (At p. 7.)
These are not based on theorical abstractions but on human experience that a person
cannot serve two hostile masters without detriment to one of them.
The offer and assurance of petitioner that to avoid any possibility of his taking unfair
advantage of his position as director of San Miguel Corporation, he would absent himself
from meetings at which confidential matters would be discussed, would not detract from
the validity and reasonableness of the by-laws here involved. Apart from the impractical
results that would ensue from such arrangement, it would be inconsistent with
petitioner's primary motive in running for board membership which is to protect his
investments in San Miguel Corporation. More important, such a proposed norm of conduct
would be against all accepted principles underlying a director's duty of fidelity to the
corporation, for the policy of the law is to encourage and enforce responsible corporate
management. As explained by Oleck: 31 "The law win not tolerate the passive attitude of
directors ... without active and conscientious participation in the managerial functions of
the company. As directors, it is their duty to control and supervise the day to day
business activities of the company or to promulgate definite policies and rules of guidance
with a vigilant eye toward seeing to it that these policies are carried out. It is only then
that directors may be said to have fulfilled their duty of fealty to the corporation."
Sound principles of corporate management counsel against sharing sensitive information
with a director whose fiduciary duty of loyalty may well require that he disclose this
information to a competitive arrival. These dangers are enhanced considerably where the
common director such as the petitioner is a controlling stockholder of two of the
competing corporations. It would seem manifest that in such situations, the director has
an economic incentive to appropriate for the benefit of his own corporation the corporate
plans and policies of the corporation where he sits as director.
Indeed, access by a competitor to confidential information regarding marketing strategies
and pricing policies of San Miguel Corporation would subject the latter to a competitive
disadvantage and unjustly enrich the competitor, for advance knowledge by the
competitor of the strategies for the development of existing or new markets of existing or
new products could enable said competitor to utilize such knowledge to his advantage. 32
There is another important consideration in determining whether or not the amended by-
laws are reasonable. The Constitution and the law prohibit combinations in restraint of
trade or unfair competition. Thus, section 2 of Article XIV of the Constitution provides:
"The State shall regulate or prohibit private monopolies when the public interest so
requires. No combinations in restraint of trade or unfair competition shall be snowed."
Article 186 of the Revised Penal Code also provides:
Art. 186. Monopolies and combinations in restraint of trade. The penalty of prision
correccional in its minimum period or a fine ranging from two hundred to six thousand
pesos, or both, shall be imposed upon:
1. Any person who shall enter into any contract or agreement or shall take part in any
conspiracy or combination in the form of a trust or otherwise, in restraint of trade or
commerce or to prevent by artificial means free competition in the market.
2. Any person who shag monopolize any merchandise or object of trade or commerce, or
shall combine with any other person or persons to monopolize said merchandise or object
in order to alter the price thereof by spreading false rumors or making use of any other
artifice to restrain free competition in the market.
3. Any person who, being a manufacturer, producer, or processor of any merchandise or
object of commerce or an importer of any merchandise or object of commerce from any
foreign country, either as principal or agent, wholesale or retailer, shall combine, conspire
or agree in any manner with any person likewise engaged in the manufacture, production,
processing, assembling or importation of such merchandise or object of commerce or with
any other persons not so similarly engaged for the purpose of making transactions
prejudicial to lawful commerce, or of increasing the market price in any part of the
Philippines, or any such merchandise or object of commerce manufactured, produced,
processed, assembled in or imported into the Philippines, or of any article in the
manufacture of which such manufactured, produced, processed, or imported merchandise
or object of commerce is used.
There are other legislation in this jurisdiction, which prohibit monopolies and
combinations in restraint of trade. 33
Basically, these anti-trust laws or laws against monopolies or combinations in restraint of
trade are aimed at raising levels of competition by improving the consumers'
effectiveness as the final arbiter in free markets. These laws are designed to preserve
free and unfettered competition as the rule of trade. "It rests on the premise that the
unrestrained interaction of competitive forces will yield the best allocation of our
economic resources, the lowest prices and the highest quality ... ." 34 they operate to
forestall concentration of economic power. 35 The law against monopolies and
combinations in restraint of trade is aimed at contracts and combinations that, by reason
of the inherent nature of the contemplated acts, prejudice the public interest by unduly
restraining competition or unduly obstructing the course of trade. 36
The terms "monopoly", "combination in restraint of trade" and "unfair competition"
appear to have a well defined meaning in other jurisdictions. A "monopoly" embraces any
combination the tendency of which is to prevent competition in the broad and general
sense, or to control prices to the detriment of the public. 37 In short, it is the
concentration of business in the hands of a few. The material consideration in determining
its existence is not that prices are raised and competition actually excluded, but
that power exists to raise prices or exclude competition when desired. 38 Further, it must
be considered that the Idea of monopoly is now understood to include a condition
produced by the mere act of individuals. Its dominant thought is the notion of
exclusiveness or unity, or the suppression of competition by the qualification of interest or
management, or it may be thru agreement and concert of action. It is, in brief, unified
tactics with regard to prices. 39
From the foregoing definitions, it is apparent that the contentions of petitioner are not in
accord with reality. The election of petitioner to the Board of respondent Corporation can
bring about an illegal situation. This is because an express agreement is not necessary for
the existence of a combination or conspiracy in restraint of trade. 40 It is enough that a
concert of action is contemplated and that the defendants conformed to the
arrangements, 41 and what is to be considered is what the parties actually did and not the
words they used. For instance, the Clayton Act prohibits a person from serving at the
same time as a director in any two or more corporations, if such corporations are, by
virtue of their business and location of operation, competitors so that the elimination of
competition between them would constitute violation of any provision of the anti-trust
laws. 42 There is here a statutory recognition of the anti-competitive dangers which may
arise when an individual simultaneously acts as a director of two or more competing
corporations. A common director of two or more competing corporations would have
access to confidential sales, pricing and marketing information and would be in a position
to coordinate policies or to aid one corporation at the expense of another, thereby stifling
competition. This situation has been aptly explained by Travers, thus:
The argument for prohibiting competing corporations from sharing even one director is
that the interlock permits the coordination of policies between nominally independent
firms to an extent that competition between them may be completely eliminated. Indeed,
if a director, for example, is to be faithful to both corporations, some accommodation
must result. Suppose X is a director of both Corporation A and Corporation B. X could
hardly vote for a policy by A that would injure B without violating his duty of loyalty to B
at the same time he could hardly abstain from voting without depriving A of his best
judgment. If the firms really do compete in the sense of vying for economic advantage
at the expense of the other there can hardly be any reason for an interlock between
competitors other than the suppression of competition. 43 (Emphasis supplied.)
According to the Report of the House Judiciary Committee of the U. S. Congress on
section 9 of the Clayton Act, it was established that: "By means of the interlocking
directorates one man or group of men have been able to dominate and control a great
number of corporations ... to the detriment of the small ones dependent upon them and
to the injury of the public. 44
Shared information on cost accounting may lead to price fixing. Certainly, shared
information on production, orders, shipments, capacity and inventories may lead to
control of production for the purpose of controlling prices.
Obviously, if a competitor has access to the pricing policy and cost conditions of the
products of San Miguel Corporation, the essence of competition in a free market for the
purpose of serving the lowest priced goods to the consuming public would be frustrated,
The competitor could so manipulate the prices of his products or vary its marketing
strategies by region or by brand in order to get the most out of the consumers. Where
the two competing firms control a substantial segment of the market this could lead to
collusion and combination in restraint of trade. Reason and experience point to the
inevitable conclusion that the inherent tendency of interlocking directorates between
companies that are related to each other as competitors is to blunt the edge of rivalry
between the corporations, to seek out ways of compromising opposing interests, and thus
eliminate competition. As respondent SMC aptly observes, knowledge by CFC-Robina of
SMC's costs in various industries and regions in the country win enable the former to
practice price discrimination. CFC-Robina can segment the entire consuming population
by geographical areas or income groups and change varying prices in order to maximize
profits from every market segment. CFC-Robina could determine the most profitable
volume at which it could produce for every product line in which it competes with SMC.
Access to SMC pricing policy by CFC-Robina would in effect destroy free competition and
deprive the consuming public of opportunity to buy goods of the highest possible quality
at the lowest prices.
Finally, considering that both Robina and SMC are, to a certain extent, engaged in
agriculture, then the election of petitioner to the Board of SMC may constitute a violation
of the prohibition contained in section 13(5) of the Corporation Law. Said section provides
in part that "any stockholder of more than one corporation organized for the purpose of
engaging in agriculture may hold his stock in such corporations solely for investment and
not for the purpose of bringing about or attempting to bring about a combination to
exercise control of incorporations ... ."
Neither are We persuaded by the claim that the by-law was Intended to prevent the
candidacy of petitioner for election to the Board. If the by-law were to be applied in the
case of one stockholder but waived in the case of another, then it could be reasonably
claimed that the by-law was being applied in a discriminatory manner. However, the by
law, by its terms, applies to all stockholders. The equal protection clause of the
Constitution requires only that the by-law operate equally upon all persons of a class.
Besides, before petitioner can be declared ineligible to run for director, there must be
hearing and evidence must be submitted to bring his case within the ambit of the
disqualification. Sound principles of public policy and management, therefore, support the
view that a by-law which disqualifies a competition from election to the Board of Directors
of another corporation is valid and reasonable.
In the absence of any legal prohibition or overriding public policy, wide latitude may be
accorded to the corporation in adopting measures to protect legitimate corporation
interests. Thus, "where the reasonableness of a by-law is a mere matter of judgment, and
upon which reasonable minds must necessarily differ, a court would not be warranted in
substituting its judgment instead of the judgment of those who are authorized to make
by-laws and who have expressed their authority. 45
Although it is asserted that the amended by-laws confer on the present Board powers to
perpetua themselves in power such fears appear to be misplaced. This power, but is very
nature, is subject to certain well established limitations. One of these is inherent in the
very convert and definition of the terms "competition" and "competitor". "Competition"
implies a struggle for advantage between two or more forces, each possessing, in
substantially similar if not Identical degree, certain characteristics essential to the
business sought. It means an independent endeavor of two or more persons to obtain the
business patronage of a third by offering more advantageous terms as an inducement to
secure trade. 46 The test must be whether the business does in fact compete, not whether
it is capable of an indirect and highly unsubstantial duplication of an isolated or non-
characteristics activity. 47 It is, therefore, obvious that not every person or entity engaged
in business of the same kind is a competitor. Such factors as quantum and place of
business, Identity of products and area of competition should be taken into consideration.
It is, therefore, necessary to show that petitioner's business covers a substantial portion
of the same markets for similar products to the extent of not less than 10% of
respondent corporation's market for competing products. While We here sustain the
validity of the amended by-laws, it does not follow as a necessary consequence that
petitioner is ipso facto disqualified. Consonant with the requirement of due process, there
must be due hearing at which the petitioner must be given the fullest opportunity to show
that he is not covered by the disqualification. As trustees of the corporation and of the
stockholders, it is the responsibility of directors to act with fairness to the
stockholders.48Pursuant to this obligation and to remove any suspicion that this power
may be utilized by the incumbent members of the Board to perpetuate themselves in
power, any decision of the Board to disqualify a candidate for the Board of Directors
should be reviewed by the Securities behind Exchange Commission en banc and its
decision shall be final unless reversed by this Court on certiorari. 49 Indeed, it is a settled
principle that where the action of a Board of Directors is an abuse of discretion, or
forbidden by statute, or is against public policy, or is ultra vires, or is a fraud upon
minority stockholders or creditors, or will result in waste, dissipation or misapplication of
the corporation assets, a court of equity has the power to grant appropriate relief. 50
III
Whether or not respondent SEC gravely abused its discretion in denying petitioner's
request for an examination of the records of San Miguel International Inc., a fully owned
subsidiary of San Miguel Corporation
Respondent San Miguel Corporation stated in its memorandum that petitioner's claim that
he was denied inspection rights as stockholder of SMC "was made in the teeth of
undisputed facts that, over a specific period, petitioner had been furnished numerous
documents and information," to wit: (1) a complete list of stockholders and their
stockholdings; (2) a complete list of proxies given by the stockholders for use at the
annual stockholders' meeting of May 18, 1975; (3) a copy of the minutes of the
stockholders' meeting of March 18,1976; (4) a breakdown of SMC's P186.6 million
investment in associated companies and other companies as of December 31, 1975; (5) a
listing of the salaries, allowances, bonuses and other compensation or remunerations
received by the directors and corporate officers of SMC; (6) a copy of the US $100 million
Euro-Dollar Loan Agreement of SMC; and (7) copies of the minutes of all meetings of the
Board of Directors from January 1975 to May 1976, with deletions of sensitive data,
which deletions were not objected to by petitioner.
Further, it was averred that upon request, petitioner was informed in writing on
September 18, 1976; (1) that SMC's foreign investments are handled by San Miguel
International, Inc., incorporated in Bermuda and wholly owned by SMC; this was SMC's
first venture abroad, having started in 1948 with an initial outlay of ?500,000.00,
augmented by a loan of Hongkong $6 million from a foreign bank under the personal
guaranty of SMC's former President, the late Col. Andres Soriano; (2) that as of
December 31, 1975, the estimated value of SMI would amount to almost P400 million (3)
that the total cash dividends received by SMC from SMI since 1953 has amount to US $
9.4 million; and (4) that from 1972-1975, SMI did not declare cash or stock dividends, all
earnings having been used in line with a program for the setting up of breweries by SMI
These averments are supported by the affidavit of the Corporate Secretary, enclosing
photocopies of the afore-mentioned documents. 51
Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of
all business transactions of the corporation and minutes of any meeting shall be open to
the inspection of any director, member or stockholder of the corporation at reasonable
hours."
The stockholder's right of inspection of the corporation's books and records is based upon
their ownership of the assets and property of the corporation. It is, therefore, an incident
of ownership of the corporate property, whether this ownership or interest be termed an
equitable ownership, a beneficial ownership, or a ownership. 52 This right is predicated
upon the necessity of self-protection. It is generally held by majority of the courts that
where the right is granted by statute to the stockholder, it is given to him as such and
must be exercised by him with respect to his interest as a stockholder and for some
purpose germane thereto or in the interest of the corporation. 53 In other words, the
inspection has to be germane to the petitioner's interest as a stockholder, and has to be
proper and lawful in character and not inimical to the interest of the
corporation. 54 In Grey v. Insular Lumber, 55 this Court held that "the right to examine the
books of the corporation must be exercised in good faith, for specific and honest purpose,
and not to gratify curiosity, or for specific and honest purpose, and not to gratify
curiosity, or for speculative or vexatious purposes. The weight of judicial opinion appears
to be, that on application for mandamus to enforce the right, it is proper for the court to
inquire into and consider the stockholder's good faith and his purpose and motives in
seeking inspection. 56 Thus, it was held that "the right given by statute is not absolute
and may be refused when the information is not sought in good faith or is used to the
detriment of the corporation." 57 But the "impropriety of purpose such as will defeat
enforcement must be set up the corporation defensively if the Court is to take cognizance
of it as a qualification. In other words, the specific provisions take from the stockholder
the burden of showing propriety of purpose and place upon the corporation the burden of
showing impropriety of purpose or motive. 58 It appears to be the general rule that
stockholders are entitled to full information as to the management of the corporation and
the manner of expenditure of its funds, and to inspection to obtain such information,
especially where it appears that the company is being mismanaged or that it is being
managed for the personal benefit of officers or directors or certain of the stockholders to
the exclusion of others." 59
While the right of a stockholder to examine the books and records of a corporation for a
lawful purpose is a matter of law, the right of such stockholder to examine the books and
records of a wholly-owned subsidiary of the corporation in which he is a stockholder is a
different thing.
Some state courts recognize the right under certain conditions, while others do not. Thus,
it has been held that where a corporation owns approximately no property except the
shares of stock of subsidiary corporations which are merely agents or instrumentalities of
the holding company, the legal fiction of distinct corporate entities may be disregarded
and the books, papers and documents of all the corporations may be required to be
produced for examination, 60 and that a writ of mandamus, may be granted, as the
records of the subsidiary were, to all incontents and purposes, the records of the parent
even though subsidiary was not named as a party. 61 mandamus was likewise held proper
to inspect both the subsidiary's and the parent corporation's books upon proof of
sufficient control or dominion by the parent showing the relation of principal or agent or
something similar thereto. 62
On the other hand, mandamus at the suit of a stockholder was refused where the
subsidiary corporation is a separate and distinct corporation domiciled and with its books
and records in another jurisdiction, and is not legally subject to the control of the parent
company, although it owned a vast majority of the stock of the subsidiary. 63Likewise,
inspection of the books of an allied corporation by stockholder of the parent company
which owns all the stock of the subsidiary has been refused on the ground that the
stockholder was not within the class of "persons having an interest." 64
In the Nash case, 65 The Supreme Court of New York held that the contractual right of
former stockholders to inspect books and records of the corporation included the right to
inspect corporation's subsidiaries' books and records which were in corporation's
possession and control in its office in New York."
In the Bailey case, 66 stockholders of a corporation were held entitled to inspect the
records of a controlled subsidiary corporation which used the same offices and had
Identical officers and directors.
In his "Urgent Motion for Production and Inspection of Documents" before respondent
SEC, petitioner contended that respondent corporation "had been attempting to suppress
information for the stockholders" and that petitioner, "as stockholder of respondent
corporation, is entitled to copies of some documents which for some reason or another,
respondent corporation is very reluctant in revealing to the petitioner notwithstanding the
fact that no harm would be caused thereby to the corporation." 67 There is no question
that stockholders are entitled to inspect the books and records of a corporation in order to
investigate the conduct of the management, determine the financial condition of the
corporation, and generally take an account of the stewardship of the officers and
directors. 68
In the case at bar, considering that the foreign subsidiary is wholly owned by respondent
San Miguel Corporation and, therefore, under its control, it would be more in accord with
equity, good faith and fair dealing to construe the statutory right of petitioner as
stockholder to inspect the books and records of the corporation as extending to books
and records of such wholly subsidiary which are in respondent corporation's possession
and control.
IV
Whether or not respondent SEC gravely abused its discretion in allowing the stockholders
of respondent corporation to ratify the investment of corporate funds in a foreign
corporation
Petitioner reiterates his contention in SEC Case No. 1423 that respondent corporation
invested corporate funds in SMI without prior authority of the stockholders, thus violating
section 17-1/2 of the Corporation Law, and alleges that respondent SEC should have
investigated the charge, being a statutory offense, instead of allowing ratification of the
investment by the stockholders.
Respondent SEC's position is that submission of the investment to the stockholders for
ratification is a sound corporate practice and should not be thwarted but encouraged.
Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any
other corporation or business or for any purpose other than the main purpose for which it
was organized" provided that its Board of Directors has been so authorized by the
affirmative vote of stockholders holding shares entitling them to exercise at least two-
thirds of the voting power. If the investment is made in pursuance of the corporate
purpose, it does not need the approval of the stockholders. It is only when the purchase
of shares is done solely for investment and not to accomplish the purpose of its
incorporation that the vote of approval of the stockholders holding shares entitling them
to exercise at least two-thirds of the voting power is necessary. 69
As stated by respondent corporation, the purchase of beer manufacturing facilities by
SMC was an investment in the same business stated as its main purpose in its Articles of
Incorporation, which is to manufacture and market beer. It appears that the original
investment was made in 1947-1948, when SMC, then San Miguel Brewery, Inc.,
purchased a beer brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for the
manufacture and marketing of San Miguel beer thereat. Restructuring of the investment
was made in 1970-1971 thru the organization of SMI in Bermuda as a tax free
reorganization.
Under these circumstances, the ruling in De la Rama v. Manao Sugar Central Co., Inc.,
supra, appears relevant. In said case, one of the issues was the legality of an investment
made by Manao Sugar Central Co., Inc., without prior resolution approved by the
affirmative vote of 2/3 of the stockholders' voting power, in the Philippine Fiber
Processing Co., Inc., a company engaged in the manufacture of sugar bags. The lower
court said that "there is more logic in the stand that if the investment is made in a
corporation whose business is important to the investing corporation and would aid it in
its purpose, to require authority of the stockholders would be to unduly curtail the power
of the Board of Directors." This Court affirmed the ruling of the court a quo on the matter
and, quoting Prof. Sulpicio S. Guevara, said:
"j. Power to acquire or dispose of shares or securities. A private corporation, in order to
accomplish is purpose as stated in its articles of incorporation, and subject to the
limitations imposed by the Corporation Law, has the power to acquire, hold, mortgage,
pledge or dispose of shares, bonds, securities, and other evidence of indebtedness of any
domestic or foreign corporation. Such an act, if done in pursuance of the corporate
purpose, does not need the approval of stockholders; but when the purchase of shares of
another corporation is done solely for investment and not to accomplish the purpose of its
incorporation, the vote of approval of the stockholders is necessary. In any case, the
purchase of such shares or securities must be subject to the limitations established by the
Corporations law; namely, (a) that no agricultural or mining corporation shall be
restricted to own not more than 15% of the voting stock of nay agricultural or mining
corporation; and (c) that such holdings shall be solely for investment and not for the
purpose of bringing about a monopoly in any line of commerce of combination in restraint
of trade." The Philippine Corporation Law by Sulpicio S. Guevara, 1967 Ed., p. 89)
(Emphasis supplied.)
40. Power to invest corporate funds. A private corporation has the power to invest its
corporate funds "in any other corporation or business, or for any purpose other than the
main purpose for which it was organized, provide that 'its board of directors has been so
authorized in a resolution by the affirmative vote of stockholders holding shares in the
corporation entitling them to exercise at least two-thirds of the voting power on such a
propose at a stockholders' meeting called for that purpose,' and provided further, that no
agricultural or mining corporation shall in anywise be interested in any other agricultural
or mining corporation. When the investment is necessary to accomplish its purpose or
purposes as stated in its articles of incorporation the approval of the stockholders is not
necessary."" (Id., p. 108) (Emphasis ours.) (pp. 258-259).
Assuming arguendo that the Board of Directors of SMC had no authority to make the
assailed investment, there is no question that a corporation, like an individual, may ratify
and thereby render binding upon it the originally unauthorized acts of its officers or other
agents. 70 This is true because the questioned investment is neither contrary to law,
morals, public order or public policy. It is a corporate transaction or contract which is
within the corporate powers, but which is defective from a supported failure to observe in
its execution the. requirement of the law that the investment must be authorized by the
affirmative vote of the stockholders holding two-thirds of the voting power. This
requirement is for the benefit of the stockholders. The stockholders for whose benefit the
requirement was enacted may, therefore, ratify the investment and its ratification by said
stockholders obliterates any defect which it may have had at the outset. "Mere ultra
vires acts", said this Court in Pirovano, 71 "or those which are not illegal and void ab
initio, but are not merely within the scope of the articles of incorporation, are merely
voidable and may become binding and enforceable when ratified by the stockholders.
Besides, the investment was for the purchase of beer manufacturing and marketing
facilities which is apparently relevant to the corporate purpose. The mere fact that
respondent corporation submitted the assailed investment to the stockholders for
ratification at the annual meeting of May 10, 1977 cannot be construed as an admission
that respondent corporation had committed an ultra vires act, considering the common
practice of corporations of periodically submitting for the gratification of their stockholders
the acts of their directors, officers and managers.
WHEREFORE, judgment is hereby rendered as follows:
The Court voted unanimously to grant the petition insofar as it prays that petitioner be
allowed to examine the books and records of San Miguel International, Inc., as specified
by him.
On the matter of the validity of the amended by-laws of respondent San Miguel
Corporation, six (6) Justices, namely, Justices Barredo, Makasiar, Antonio, Santos, Abad
Santos and De Castro, voted to sustain the validity per se of the amended by-laws in
question and to dismiss the petition without prejudice to the question of the actual
disqualification of petitioner John Gokongwei, Jr. to run and if elected to sit as director of
respondent San Miguel Corporation being decided, after a new and proper hearing by the
Board of Directors of said corporation, whose decision shall be appealable to the
respondent Securities and Exchange Commission deliberating and acting en banc and
ultimately to this Court. Unless disqualified in the manner herein provided, the prohibition
in the afore-mentioned amended by-laws shall not apply to petitioner.
The afore-mentioned six (6) Justices, together with Justice Fernando, voted to declare the
issue on the validity of the foreign investment of respondent corporation as moot.
Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-laws,
pending hearing by this Court on the applicability of section 13(5) of the Corporation Law
to petitioner.
Justice Fernando reserved his vote on the validity of subject amendment to the by-laws
but otherwise concurs in the result.
Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez and Guerrero
filed a separate opinion, wherein they voted against the validity of the questioned
amended bylaws and that this question should properly be resolved first by the SEC as
the agency of primary jurisdiction. They concur in the result that petitioner may be
allowed to run for and sit as director of respondent SMC in the scheduled May 6, 1979
election and subsequent elections until disqualified after proper hearing by the
respondent's Board of Directors and petitioner's disqualification shall have been sustained
by respondent SEC en banc and ultimately by final judgment of this Court.
In resume, subject to the qualifications aforestated judgment is hereby rendered
GRANTING the petition by allowing petitioner to examine the books and records of San
Miguel International, Inc. as specified in the petition. The petition, insofar as it assails the
validity of the amended by- laws and the ratification of the foreign investment of
respondent corporation, for lack of necessary votes, is hereby DISMISSED. No costs.
Makasiar, Santos Abad Santos and De Castro, JJ., concur.
Aquino, and Melencio Herrera JJ., took no part.
2) SECOND DIVISION
[G.R. NO. 151969 : September 4, 2009]
VALLE VERDE COUNTRY CLUB, INC., ERNESTO VILLALUNA, RAY GAMBOA,
AMADO M. SANTIAGO, JR., FORTUNATO DEE, AUGUSTO SUNICO, VICTOR SALTA,
FRANCISCO ORTIGAS III, ERIC ROXAS, in their capacities as members of the
Board of Directors of Valle Verde Country Club, Inc., and JOSE
RAMIREZ, Petitioners, v. VICTOR AFRICA, Respondent.
DECISION
BRION, J.:
In this Petition for Review on Certiorari, 1 the parties raise a legal question on corporate
governance: Can the members of a corporation's board of directors elect another director
to fill in a vacancy caused by the resignation of a hold-over director?
THE FACTUAL ANTECEDENTS
On February 27, 1996, during the Annual Stockholders' Meeting of petitioner Valle Verde
Country Club, Inc. (VVCC), the following were elected as members of the VVCC Board of
Directors: Ernesto Villaluna, Jaime C. Dinglasan (Dinglasan), Eduardo Makalintal
(Makalintal), Francisco Ortigas III, Victor Salta, Amado M. Santiago, Jr., Fortunato Dee,
Augusto Sunico, and Ray Gamboa.2 In the years 1997, 1998, 1999, 2000, and 2001,
however, the requisite quorum for the holding of the stockholders' meeting could not be
obtained. Consequently, the above-named directors continued to serve in the VVCC Board
in a hold-over capacity.
On September 1, 1998, Dinglasan resigned from his position as member of the VVCC
Board. In a meeting held on October 6, 1998, the remaining directors, still constituting a
quorum of VVCC's nine-member board, elected Eric Roxas (Roxas) to fill in the vacancy
created by the resignation of Dinglasan.
A year later, or on November 10, 1998, Makalintal also resigned as member of the VVCC
Board. He was replaced by Jose Ramirez (Ramirez), who was elected by the remaining
members of the VVCC Board on March 6, 2001.
Respondent Africa (Africa), a member of VVCC, questioned the election of Roxas and
Ramirez as members of the VVCC Board with the Securities and Exchange Commission
(SEC) and the Regional Trial Court (RTC), respectively. The SEC case questioning the
validity of Roxas' appointment was docketed as SEC Case No. 01-99-6177. The RTC case
questioning the validity of Ramirez' appointment was docketed as Civil Case No. 68726.
In his nullification complaint3 before the RTC, Africa alleged that the election of Roxas was
contrary to Section 29, in relation to Section 23, of the Corporation Code of the
Philippines (Corporation Code). These provisions read:
Sec. 23. The board of directors or trustees. - Unless otherwise provided in this Code,
the corporate powers of all corporations formed under this Code shall be exercised, all
business conducted and all property of such corporations controlled and held by the board
of directors or trustees to be elected from among the holders of stocks, or where there is
no stock, from among the members of the corporation, who shall hold office for one (1)
year until their successors are elected and qualified.
x x x
Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring in
the board of directors or trustees other than by removal by the stockholders or members
or by expiration of term, may be filled by the vote of at least a majority of the remaining
directors or trustees, if still constituting a quorum; otherwise, said vacancies must be
filled by the stockholders in a regular or special meeting called for that purpose. A
director or trustee so elected to fill a vacancy shall be elected only for the unexpired term
of his predecessor in office. xxx. [Emphasis supplied.]
Africa claimed that a year after Makalintal's election as member of the VVCC Board in
1996, his [Makalintal's] term - as well as those of the other members of the VVCC Board -
should be considered to have already expired. Thus, according to Africa, the resulting
vacancy should have been filled by the stockholders in a regular or special meeting called
for that purpose, and not by the remaining members of the VVCC Board, as was done in
this case.
Africa additionally contends that for the members to exercise the authority to fill in
vacancies in the board of directors, Section 29 requires, among others, that there should
be an unexpired term during which the successor-member shall serve. Since Makalintal's
term had already expired with the lapse of the one-year term provided in Section 23,
there is no more "unexpired term" during which Ramirez could serve.
Through a partial decision4 promulgated on January 23, 2002, the RTC ruled in favor of
Africa and declared the election of Ramirez, as Makalintal's replacement, to the VVCC
Board as null and void.
Incidentally, the SEC issued a similar ruling on June 3, 2003, nullifying the election of
Roxas as member of the VVCC Board, vice hold-over director Dinglasan. While VVCC
manifested its intent to appeal from the SEC's ruling, no petition was actually filed with
the Court of Appeals; thus, the appellate court considered the case closed and terminated
and the SEC's ruling final and executory.5
THE PETITION
VVCC now appeals to the Court to assail the RTC's January 23, 2002 partial decision for
being contrary to law and jurisprudence. VVCC made a direct resort to the Court via a
Petition for Review on certiorari, claiming that the sole issue in the present case involves
a purely legal question.
As framed by VVCC, the issue for resolution is whether the remaining directors of the
corporation's Board, still constituting a quorum, can elect another director to fill in a
vacancy caused by the resignation of a hold-over director.
Citing law and jurisprudence, VVCC posits that the power to fill in a vacancy created by
the resignation of a hold-over director is expressly granted to the remaining members of
the corporation's board of directors.
Under the above-quoted Section 29 of the Corporation Code, a vacancy occurring in the
board of directors caused by the expiration of a member's term shall be filled by the
corporation's stockholders. Correlating Section 29 with Section 23 of the same law, VVCC
alleges that a member's term shall be for one year and until his successor is
elected and qualified; otherwise stated,a member's term expires only when his
successor to the Board is elected and qualified. Thus, "until such time as [a successor is]
elected or qualified in an annual election where a quorum is present," VVCC contends that
"the term of [a member] of the board of directors has yet not expired."
As the vacancy in this case was caused by Makalintal's resignation, not by the expiration
of his term, VVCC insists that the board rightfully appointed Ramirez to fill in the vacancy.
In support of its arguments, VVCC cites the Court's ruling in the 1927 El Hogar6 case
which states:
Owing to the failure of a quorum at most of the general meetings since the respondent
has been in existence, it has been the practice of the directors to fill in vacancies in the
directorate by choosing suitable persons from among the stockholders. This custom finds
its sanction in Article 71 of the By-Laws, which reads as follows:
Art. 71. The directors shall elect from among the shareholders members to fill the
vacancies that may occur in the board of directors until the election at the general
meeting.
x x x
Upon failure of a quorum at any annual meeting the directorate naturally holds over and
continues to function until another directorate is chosen and qualified. Unless the law or
the charter of a corporation expressly provides that an office shall become vacant at the
expiration of the term of office for which the officer was elected, the general rule is to
allow the officer to hold over until his successor is duly qualified. Mere failure of a
corporation to elect officers does not terminate the terms of existing officers nor dissolve
the corporation. The doctrine above stated finds expression in article 66 of the by-laws of
the respondent which declares in so many words that directors shall hold office "for the
term of one year or until their successors shall have been elected and taken possession of
their offices." xxx. crvll
It results that the practice of the directorate of filling vacancies by the action of
the directors themselves is valid. Nor can any exception be taken to the personality of
the individuals chosen by the directors to fill vacancies in the body. [Emphasis supplied.]
Africa, in opposing VVCC's contentions, raises the same arguments that he did before the
trial court.
THE COURT'S RULING
We are not persuaded by VVCC's arguments and, thus, find its petition unmeritorious.
To repeat, the issue for the Court to resolve is whether the remaining directors of a
corporation's Board, still constituting a quorum, can elect another director to fill in a
vacancy caused by the resignation of a hold-over director. The resolution of this legal
issue is significantly hinged on the determination of what constitutes a director's term of
office.
The holdover period is not part of the term of office of a member of the board of directors
The word "term" has acquired a definite meaning in jurisprudence. In several cases, we
have defined "term" as the time during which the officer may claim to hold the office as of
right, and fixes the interval after which the several incumbents shall succeed one
another.7 The term of office is not affected by the holdover.8 The term is fixed by statute
and it does not change simply because the office may have become vacant, nor because
the incumbent holds over in office beyond the end of the term due to the fact that a
successor has not been elected and has failed to qualify.
Term is distinguished from tenure in that an officer's "tenure" represents the term during
which the incumbent actually holds office. The tenure may be shorter (or, in case of
holdover, longer) than the term for reasons within or beyond the power of the incumbent.
Based on the above discussion, when Section 239 of the Corporation Code declares that
"the board of directors'shall hold office for one (1) year until their successors are elected
and qualified," we construe the provision to mean that the term of the members of the
board of directors shall be only for one year; their term expires one year after election to
the office. The holdover period - that time from the lapse of one year from a member's
election to the Board and until his successor's election and qualification - is not part of the
director's original term of office, nor is it a new term; the holdover period, however,
constitutes part of his tenure. Corollary, when an incumbent member of the board of
directors continues to serve in a holdover capacity, it implies that the office has a fixed
term, which has expired, and the incumbent is holding the succeeding term.10
After the lapse of one year from his election as member of the VVCC Board in 1996,
Makalintal's term of office is deemed to have already expired. That he continued to serve
in the VVCC Board in a holdover capacity cannot be considered as extending his term. To
be precise, Makalintal's term of office began in 1996 and expired in 1997, but, by virtue
of the holdover doctrine in Section 23 of the Corporation Code, he continued to hold office
until his resignation on November 10, 1998. This holdover period, however, is not to be
considered as part of his term, which, as declared, had already expired.
With the expiration of Makalintal's term of office, a vacancy resulted which, by the terms
of Section 2911 of the Corporation Code, must be filled by the stockholders of VVCC in a
regular or special meeting called for the purpose. To assume - as VVCC does - that the
vacancy is caused by Makalintal's resignation in 1998, not by the expiration of his term in
1997, is both illogical and unreasonable. His resignation as a holdover director did not
change the nature of the vacancy; the vacancy due to the expiration of Makalintal's term
had been created long before his resignation.
The powers of the corporation's board of directors emanate from its stockholders
VVCC's construction of Section 29 of the Corporation Code on the authority to fill up
vacancies in the board of directors, in relation to Section 23 thereof, effectively weakens
the stockholders' power to participate in the corporate governance by electing their
representatives to the board of directors. The board of directors is the directing and
controlling body of the corporation. It is a creation of the stockholders and derives its
power to control and direct the affairs of the corporation from them. The board of
directors, in drawing to themselves the powers of the corporation, occupies a position of
trusteeship in relation to the stockholders, in the sense that the board should exercise not
only care and diligence, but utmost good faith in the management of corporate affairs.12
The underlying policy of the Corporation Code is that the business and affairs of a
corporation must be governed by a board of directors whose members have stood for
election, and who have actually been elected by the stockholders, on an annual basis.
Only in that way can the directors' continued accountability to shareholders, and the
legitimacy of their decisions that bind the corporation's stockholders, be assured. The
shareholder vote is critical to the theory that legitimizes the exercise of power by the
directors or officers over properties that they do not own.13
This theory of delegated power of the board of directors similarly explains why, under
Section 29 of the Corporation Code, in cases where the vacancy in the corporation's
board of directors is caused not by the expiration of a member's term, the successor "so
elected to fill in a vacancy shall be elected only for the unexpired term of the his
predecessor in office." The law has authorized the remaining members of the board to fill
in a vacancy only in specified instances, so as not to retard or impair the corporation's
operations; yet, in recognition of the stockholders' right to elect the members of the
board, it limited the period during which the successor shall serve only to the "unexpired
term of his predecessor in office."
While the Court in El Hogar approved of the practice of the directors to fill vacancies in
the directorate, we point out that this ruling was made before the present Corporation
Code was enacted14 and before its Section 29 limited the instances when the remaining
directors can fill in vacancies in the board, i.e., when the remaining directors still
constitute a quorum and when the vacancy is caused for reasons other than by removal
by the stockholders or by expiration of the
term.rbl r l l lbrr the complaint. Suk Kyoo Kim also alleged, however, that the corporation had no written
It also bears noting that the vacancy referred to in Section 29 contemplates a vacancy
occurring within the director's term of office. When a vacancy is created by the expiration
of a term, logically, there is no more unexpired term to speak of. Hence, Section 29
declares that it shall be the corporation's stockholders who shall possess the authority to
fill in a vacancy caused by the expiration of a member's term.
As correctly pointed out by the RTC, when remaining members of the VVCC Board elected
Ramirez to replace Makalintal, there was no more unexpired term to speak of, as
Makalintal's one-year term had already expired. Pursuant to law, the authority to fill in
the vacancy caused by Makalintal's leaving lies with the VVCC's stockholders, not the
remaining members of its board of directors.
WHEREFORE, we DENY the petitioners' Petition for Review on Certiorari, and AFFIRM the
partial decision of the Regional Trial Court, Branch 152, Manila, promulgated on January
23, 2002, in Civil Case No. 68726. Costs against the petitioners.
SO ORDERED.
3) G.R. No. 152392 May 26, 2005
EXPERTRAVEL & TOURS, INC., petitioner,
vs.
COURT OF APPEALS and KOREAN AIRLINES, respondent.
DECISION
CALLEJO, SR., J.:
Before us is a petition for review on certiorari of the Decision1 of the Court of Appeals
(CA) in CA-G.R. SP No. 61000 dismissing the petition for certiorari and mandamus filed
by Expertravel and Tours, Inc. (ETI).
The Antecedents
Korean Airlines (KAL) is a corporation established and registered in the Republic of South
Korea and licensed to do business in the Philippines. Its general manager in the
Philippines is Suk Kyoo Kim, while its appointed counsel was Atty. Mario Aguinaldo and
his law firm.
On September 6, 1999, KAL, through Atty. Aguinaldo, filed a Complaint2 against ETI with
the Regional Trial Court (RTC) of Manila, for the collection of the principal amount
of P260,150.00, plus attorneys fees and exemplary damages. The verification and
certification against forum shopping was signed by Atty. Aguinaldo, who indicated therein
that he was the resident agent and legal counsel of KAL and had caused the preparation
of the complaint.
ETI filed a motion to dismiss the complaint on the ground that Atty. Aguinaldo was not
authorized to execute the verification and certificate of non-forum shopping as required
by Section 5, Rule 7 of the Rules of Court. KAL opposed the motion, contending that Atty.
Aguinaldo was its resident agent and was registered as such with the Securities and
Exchange Commission (SEC) as required by the Corporation Code of the Philippines. It
was further alleged that Atty. Aguinaldo was also the corporate secretary of KAL.
Appended to the said opposition was the identification card of Atty. Aguinaldo, showing
that he was the lawyer of KAL.
During the hearing of January 28, 2000, Atty. Aguinaldo claimed that he had been
authorized to file the complaint through a resolution of the KAL Board of Directors
approved during a special meeting held on June 25, 1999. Upon his motion, KAL was
given a period of 10 days within which to submit a copy of the said resolution. The trial
court granted the motion. Atty. Aguinaldo subsequently filed other similar motions, which
the trial court granted.
Finally, KAL submitted on March 6, 2000 an Affidavit3 of even date, executed by its
general manager Suk Kyoo Kim, alleging that the board of directors conducted a special
teleconference on June 25, 1999, which he and Atty. Aguinaldo attended. It was also
averred that in that same teleconference, the board of directors approved a resolution
authorizing Atty. Aguinaldo to execute the certificate of non-forum shopping and to file
copy of the aforesaid resolution.
On April 12, 2000, the trial court issued an Order4 denying the motion to dismiss, giving
credence to the claims of Atty. Aguinaldo and Suk Kyoo Kim that the KAL Board of
Directors indeed conducted a teleconference on June 25, 1999, during which it approved
a resolution as quoted in the submitted affidavit.
ETI filed a motion for the reconsideration of the Order, contending that it was
inappropriate for the court to take judicial notice of the said teleconference without any
prior hearing. The trial court denied the motion in its Order5dated August 8, 2000.
ETI then filed a petition for certiorari and mandamus, assailing the orders of the RTC. In
its comment on the petition, KAL appended a certificate signed by Atty. Aguinaldo dated
January 10, 2000, worded as follows:
SECRETARYS/RESIDENT AGENTS CERTIFICATE
KNOW ALL MEN BY THESE PRESENTS:
I, Mario A. Aguinaldo, of legal age, Filipino, and duly elected and appointed Corporate
Secretary and Resident Agent of KOREAN AIRLINES, a foreign corporation duly organized
and existing under and by virtue of the laws of the Republic of Korea and also duly
registered and authorized to do business in the Philippines, with office address at Ground
Floor, LPL Plaza Building, 124 Alfaro St., Salcedo Village, Makati City, HEREBY CERTIFY
that during a special meeting of the Board of Directors of the Corporation held on June
25, 1999 at which a quorum was present, the said Board unanimously passed, voted
upon and approved the following resolution which is now in full force and effect, to wit:
RESOLVED, that Mario A. Aguinaldo and his law firm M.A. Aguinaldo & Associates or any
of its lawyers are hereby appointed and authorized to take with whatever legal action
necessary to effect the collection of the unpaid account of Expert Travel & Tours. They are
hereby specifically authorized to prosecute, litigate, defend, sign and execute any
document or paper necessary to the filing and prosecution of said claim in Court, attend
the Pre-Trial Proceedings and enter into a compromise agreement relative to the above-
mentioned claim.
IN WITNESS WHEREOF, I have hereunto affixed my signature this 10th day of January,
1999, in the City of Manila, Philippines.
(Sgd.)
MARIO A. AGUINALDO
Resident Agent
SUBSCRIBED AND SWORN to before me this 10th day of January, 1999, Atty. Mario A.
Aguinaldo exhibiting to me his Community Tax Certificate No. 14914545, issued on
January 7, 2000 at Manila, Philippines.
Doc. No. 119; (Sgd.)
Page No. 25; ATTY. HENRY D. ADASA
Book No. XXIV Notary Public
Series of 2000. Until December 31, 2000
PTR #889583/MLA 1/3/20006
On December 18, 2001, the CA rendered judgment dismissing the petition, ruling that the
verification and certificate of non-forum shopping executed by Atty. Aguinaldo was
sufficient compliance with the Rules of Court. According to the appellate court, Atty.
Aguinaldo had been duly authorized by the board resolution approved on June 25, 1999,
and was the resident agent of KAL. As such, the RTC could not be faulted for taking
judicial notice of the said teleconference of the KAL Board of Directors.
ETI filed a motion for reconsideration of the said decision, which the CA denied. Thus,
ETI, now the petitioner, comes to the Court by way of petition for review on certiorari and
raises the following issue:
DID PUBLIC RESPONDENT COURT OF APPEALS DEPART FROM THE ACCEPTED AND
USUAL COURSE OF JUDICIAL PROCEEDINGS WHEN IT RENDERED ITS QUESTIONED
DECISION AND WHEN IT ISSUED ITS QUESTIONED RESOLUTION, ANNEXES A AND B OF
THE INSTANT PETITION?7
The petitioner asserts that compliance with Section 5, Rule 7, of the Rules of Court can be
determined only from the contents of the complaint and not by documents or pleadings
outside thereof. Hence, the trial court committed grave abuse of discretion amounting to
excess of jurisdiction, and the CA erred in considering the affidavit of the respondents
general manager, as well as the Secretarys/Resident Agents Certification and the
resolution of the board of directors contained therein, as proof of compliance with the
requirements of Section 5, Rule 7 of the Rules of Court. The petitioner also maintains that
the RTC cannot take judicial notice of the said teleconference without prior hearing, nor
any motion therefor. The petitioner reiterates its submission that the teleconference and
the resolution adverted to by the respondent was a mere fabrication.
The respondent, for its part, avers that the issue of whether modern technology is used in
the field of business is a factual issue; hence, cannot be raised in a petition for review
on certiorari under Rule 45 of the Rules of Court. On the merits of the petition, it insists
that Atty. Aguinaldo, as the resident agent and corporate secretary, is authorized to sign
and execute the certificate of non-forum shopping required by Section 5, Rule 7 of the
Rules of Court, on top of the board resolution approved during the teleconference of June
25, 1999. The respondent insists that "technological advances in this time and age are as
commonplace as daybreak." Hence, the courts may take judicial notice that the Philippine
Long Distance Telephone Company, Inc. had provided a record of corporate conferences
and meetings through FiberNet using fiber-optic transmission technology, and that such
technology facilitates voice and image transmission with ease; this makes constant
communication between a foreign-based office and its Philippine-based branches faster
and easier, allowing for cost-cutting in terms of travel concerns. It points out that even
the E-Commerce Law has recognized this modern technology. The respondent posits that
the courts are aware of this development in technology; hence, may take judicial notice
thereof without need of hearings. Even if such hearing is required, the requirement is
nevertheless satisfied if a party is allowed to file pleadings by way of comment or
opposition thereto.
In its reply, the petitioner pointed out that there are no rulings on the matter of
teleconferencing as a means of conducting meetings of board of directors for purposes of
passing a resolution; until and after teleconferencing is recognized as a legitimate means
of gathering a quorum of board of directors, such cannot be taken judicial notice of by the
court. It asserts that safeguards must first be set up to prevent any mischief on the public
or to protect the general public from any possible fraud. It further proposes possible
amendments to the Corporation Code to give recognition to such manner of board
meetings to transact business for the corporation, or other related corporate matters;
until then, the petitioner asserts, teleconferencing cannot be the subject of judicial notice.
The petitioner further avers that the supposed holding of a special meeting on June 25,
1999 through teleconferencing where Atty. Aguinaldo was supposedly given such an
authority is a farce, considering that there was no mention of where it was held, whether
in this country or elsewhere. It insists that the Corporation Code requires board
resolutions of corporations to be submitted to the SEC. Even assuming that there was
such a teleconference, it would be against the provisions of the Corporation Code not to
have any record thereof.
The petitioner insists that the teleconference and resolution adverted to by the
respondent in its pleadings were mere fabrications foisted by the respondent and its
counsel on the RTC, the CA and this Court.
The petition is meritorious.
Section 5, Rule 7 of the Rules of Court provides:
SEC. 5. Certification against forum shopping. The plaintiff or principal party shall certify
under oath in the complaint or other initiatory pleading asserting a claim for relief, or in a
sworn certification annexed thereto and simultaneously filed therewith: (a) that he has
not theretofore commenced any action or filed any claim involving the same issues in any
court, tribunal or quasi-judicial agency and, to the best of his knowledge, no such other
action or claim is pending therein; (b) if there is such other pending action or claim, a
complete statement of the present status thereof; and (c) if he should thereafter learn
that the same or similar action or claim has been filed or is pending, he shall report that
fact within five (5) days therefrom to the court wherein his aforesaid complaint or
initiatory pleading has been filed.
Failure to comply with the foregoing requirements shall not be curable by mere
amendment of the complaint or other initiatory pleading but shall be cause for the
dismissal of the case without prejudice, unless otherwise provided, upon motion and after
hearing. The submission of a false certification or non-compliance with any of the
undertakings therein shall constitute indirect contempt of court, without prejudice to the
corresponding administrative and criminal actions. If the acts of the party or his counsel
clearly constitute willful and deliberate forum shopping, the same shall be ground for
summary dismissal with prejudice and shall constitute direct contempt, as well as a cause
for administrative sanctions.
It is settled that the requirement to file a certificate of non-forum shopping is
mandatory8 and that the failure to comply with this requirement cannot be excused. The
certification is a peculiar and personal responsibility of the party, an assurance given to
the court or other tribunal that there are no other pending cases involving basically the
same parties, issues and causes of action. Hence, the certification must be accomplished
by the party himself because he has actual knowledge of whether or not he has initiated
similar actions or proceedings in different courts or tribunals. Even his counsel may be
unaware of such facts.9 Hence, the requisite certification executed by the plaintiffs
counsel will not suffice.10
In a case where the plaintiff is a private corporation, the certification may be signed, for
and on behalf of the said corporation, by a specifically authorized person, including its
retained counsel, who has personal knowledge of the facts required to be established by
the documents. The reason was explained by the Court in National Steel Corporation v.
Court of Appeals,11 as follows:
Unlike natural persons, corporations may perform physical actions only through properly
delegated individuals; namely, its officers and/or agents.
The corporation, such as the petitioner, has no powers except those expressly conferred
on it by the Corporation Code and those that are implied by or are incidental to its
existence. In turn, a corporation exercises said powers through its board of directors
and/or its duly-authorized officers and agents. Physical acts, like the signing of
documents, can be performed only by natural persons duly-authorized for the purpose by
corporate by-laws or by specific act of the board of directors. "All acts within the powers
of a corporation may be performed by agents of its selection; and except so far as
limitations or restrictions which may be imposed by special charter, by-law, or statutory
provisions, the same general principles of law which govern the relation of agency for a
natural person govern the officer or agent of a corporation, of whatever status or rank, in
respect to his power to act for the corporation; and agents once appointed, or members
acting in their stead, are subject to the same rules, liabilities and incapacities as are
agents of individuals and private persons."
For who else knows of the circumstances required in the Certificate but its own retained
counsel. Its regular officers, like its board chairman and president, may not even know
the details required therein.
Indeed, the certificate of non-forum shopping may be incorporated in the complaint or
appended thereto as an integral part of the complaint. The rule is that compliance with
the rule after the filing of the complaint, or the dismissal of a complaint based on its non-
compliance with the rule, is impermissible. However, in exceptional circumstances, the
court may allow subsequent compliance with the rule.12 If the authority of a partys
counsel to execute a certificate of non-forum shopping is disputed by the adverse party,
the former is required to show proof of such authority or representation.
In this case, the petitioner, as the defendant in the RTC, assailed the authority of Atty.
Aguinaldo to execute the requisite verification and certificate of non-forum shopping as
the resident agent and counsel of the respondent. It was, thus, incumbent upon the
respondent, as the plaintiff, to allege and establish that Atty. Aguinaldo had such
authority to execute the requisite verification and certification for and in its behalf. The
respondent, however, failed to do so.
The verification and certificate of non-forum shopping which was incorporated in the
complaint and signed by Atty. Aguinaldo reads:
I, Mario A. Aguinaldo of legal age, Filipino, with office address at Suite 210 Gedisco
Centre, 1564 A. Mabini cor. P. Gil Sts., Ermita, Manila, after having sworn to in
accordance with law hereby deposes and say: THAT -
1. I am the Resident Agent and Legal Counsel of the plaintiff in the above entitled case
and have caused the preparation of the above complaint;
2. I have read the complaint and that all the allegations contained therein are true and
correct based on the records on files;
3. I hereby further certify that I have not commenced any other action or proceeding
involving the same issues in the Supreme Court, the Court of Appeals, or different
divisions thereof, or any other tribunal or agency. If I subsequently learned that a similar
action or proceeding has been filed or is pending before the Supreme Court, the Court of
Appeals, or different divisions thereof, or any tribunal or agency, I will notify the court,
tribunal or agency within five (5) days from such notice/knowledge.
(Sgd.)
MARIO A. AGUINALDO
Affiant
CITY OF MANILA
SUBSCRIBED AND SWORN TO before me this 30th day of August, 1999, affiant exhibiting
to me his Community Tax Certificate No. 00671047 issued on January 7, 1999 at Manila,
Philippines.
Doc. No. 1005; (Sgd.)
Page No. 198; ATTY. HENRY D. ADASA
Book No. XXI Notary Public
Series of 1999. Until December 31, 2000
PTR No. 320501 Mla. 1/4/9913
As gleaned from the aforequoted certification, there was no allegation that Atty.
Aguinaldo had been authorized to execute the certificate of non-forum shopping by the
respondents Board of Directors; moreover, no such board resolution was appended
thereto or incorporated therein.
While Atty. Aguinaldo is the resident agent of the respondent in the Philippines, this does
not mean that he is authorized to execute the requisite certification against forum
shopping. Under Section 127, in relation to Section 128 of the Corporation Code, the
authority of the resident agent of a foreign corporation with license to do business in the
Philippines is to receive, for and in behalf of the foreign corporation, services and other
legal processes in all actions and other legal proceedings against such corporation, thus:
SEC. 127. Who may be a resident agent. A resident agent may either be an individual
residing in the Philippines or a domestic corporation lawfully transacting business in the
Philippines: Provided, That in the case of an individual, he must be of good moral
character and of sound financial standing.
SEC. 128. Resident agent; service of process. The Securities and Exchange Commission
shall require as a condition precedent to the issuance of the license to transact business
in the Philippines by any foreign corporation that such corporation file with the Securities
and Exchange Commission a written power of attorney designating some persons who
must be a resident of the Philippines, on whom any summons and other legal processes
may be served in all actions or other legal proceedings against such corporation, and
consenting that service upon such resident agent shall be admitted and held as valid as if
served upon the duly-authorized officers of the foreign corporation as its home office.14
Under the law, Atty. Aguinaldo was not specifically authorized to execute a certificate of
non-forum shopping as required by Section 5, Rule 7 of the Rules of Court. This is
because while a resident agent may be aware of actions filed against his principal (a
foreign corporation doing business in the Philippines), such resident may not be aware of
actions initiated by its principal, whether in the Philippines against a domestic corporation
or private individual, or in the country where such corporation was organized and
registered, against a Philippine registered corporation or a Filipino citizen.
The respondent knew that its counsel, Atty. Aguinaldo, as its resident agent, was not
specifically authorized to execute the said certification. It attempted to show its
compliance with the rule subsequent to the filing of its complaint by submitting, on March
6, 2000, a resolution purporting to have been approved by its Board of Directors during a
teleconference held on June 25, 1999, allegedly with Atty. Aguinaldo and Suk Kyoo Kim in
attendance. However, such attempt of the respondent casts veritable doubt not only on
its claim that such a teleconference was held, but also on the approval by the Board of
Directors of the resolution authorizing Atty. Aguinaldo to execute the certificate of non-
forum shopping.
In its April 12, 2000 Order, the RTC took judicial notice that because of the onset of
modern technology, persons in one location may confer with other persons in other
places, and, based on the said premise, concluded that Suk Kyoo Kim and Atty. Aguinaldo
had a teleconference with the respondents Board of Directors in South Korea on June 25,
1999. The CA, likewise, gave credence to the respondents claim that such a
teleconference took place, as contained in the affidavit of Suk Kyoo Kim, as well as Atty.
Aguinaldos certification.
Generally speaking, matters of judicial notice have three material requisites: (1) the
matter must be one of common and general knowledge; (2) it must be well and
authoritatively settled and not doubtful or uncertain; and (3) it must be known to be
within the limits of the jurisdiction of the court. The principal guide in determining what
facts may be assumed to be judicially known is that of notoriety. Hence, it can be said
that judicial notice is limited to facts evidenced by public records and facts of general
notoriety.[15] Moreover, a judicially noticed fact must be one not subject to a reasonable
dispute in that it is either: (1) generally known within the territorial jurisdiction of the trial
court; or (2) capable of accurate and ready determination by resorting to sources whose
accuracy cannot reasonably be questionable.16
Things of "common knowledge," of which courts take judicial matters coming to the
knowledge of men generally in the course of the ordinary experiences of life, or they may
be matters which are generally accepted by mankind as true and are capable of ready
and unquestioned demonstration. Thus, facts which are universally known, and which
may be found in encyclopedias, dictionaries or other publications, are judicially noticed,
provided, they are of such universal notoriety and so generally understood that they may
be regarded as forming part of the common knowledge of every person. As the common
knowledge of man ranges far and wide, a wide variety of particular facts have been
judicially noticed as being matters of common knowledge. But a court cannot take judicial
notice of any fact which, in part, is dependent on the existence or non-existence of a fact
of which the court has no constructive knowledge.17
In this age of modern technology, the courts may take judicial notice that business
transactions may be made by individuals through teleconferencing. Teleconferencing is
interactive group communication (three or more people in two or more locations) through
an electronic medium. In general terms, teleconferencing can bring people together under
one roof even though they are separated by hundreds of miles.18 This type of group
communication may be used in a number of ways, and have three basic types: (1) video
conferencing - television-like communication augmented with sound; (2) computer
conferencing - printed communication through keyboard terminals, and (3) audio-
conferencing-verbal communication via the telephone with optional capacity for
telewriting or telecopying.19
A teleconference represents a unique alternative to face-to-face (FTF) meetings. It was
first introduced in the 1960s with American Telephone and Telegraphs Picturephone. At
that time, however, no demand existed for the new technology. Travel costs were
reasonable and consumers were unwilling to pay the monthly service charge for using the
picturephone, which was regarded as more of a novelty than as an actual means for
everyday communication.20In time, people found it advantageous to hold teleconferencing
in the course of business and corporate governance, because of the money saved, among
other advantages include:
1. People (including outside guest speakers) who wouldnt normally attend a distant FTF
meeting can participate.
2. Follow-up to earlier meetings can be done with relative ease and little expense.
3. Socializing is minimal compared to an FTF meeting; therefore, meetings are shorter
and more oriented to the primary purpose of the meeting.
4. Some routine meetings are more effective since one can audio-conference from any
location equipped with a telephone.
5. Communication between the home office and field staffs is maximized.
6. Severe climate and/or unreliable transportation may necessitate teleconferencing.
7. Participants are generally better prepared than for FTF meetings.
8. It is particularly satisfactory for simple problem-solving, information exchange, and
procedural tasks.
9. Group members participate more equally in well-moderated teleconferences than an
FTF meeting.21
On the other hand, other private corporations opt not to hold teleconferences because of
the following disadvantages:
1. Technical failures with equipment, including connections that arent made.
2. Unsatisfactory for complex interpersonal communication, such as negotiation or
bargaining.
3. Impersonal, less easy to create an atmosphere of group rapport.
4. Lack of participant familiarity with the equipment, the medium itself, and meeting
skills.
5. Acoustical problems within the teleconferencing rooms.
6. Difficulty in determining participant speaking order; frequently one person monopolizes
the meeting.
7. Greater participant preparation time needed.
8. Informal, one-to-one, social interaction not possible.22
Indeed, teleconferencing can only facilitate the linking of people; it does not alter the
complexity of group communication. Although it may be easier to
communicate via teleconferencing, it may also be easier to miscommunicate.
Teleconferencing cannot satisfy the individual needs of every type of meeting.23
In the Philippines, teleconferencing and videoconferencing of members of board of
directors of private corporations is a reality, in light of Republic Act No. 8792. The
Securities and Exchange Commission issued SEC Memorandum Circular No. 15, on
November 30, 2001, providing the guidelines to be complied with related to such
conferences.24Thus, the Court agrees with the RTC that persons in the Philippines may
have a teleconference with a group of persons in South Korea relating to business
transactions or corporate governance.
Even given the possibility that Atty. Aguinaldo and Suk Kyoo Kim participated in a
teleconference along with the respondents Board of Directors, the Court is not convinced
that one was conducted; even if there had been one, the Court is not inclined to believe
that a board resolution was duly passed specifically authorizing Atty. Aguinaldo to file the
complaint and execute the required certification against forum shopping.
The records show that the petitioner filed a motion to dismiss the complaint on the
ground that the respondent failed to comply with Section 5, Rule 7 of the Rules of Court.
The respondent opposed the motion on December 1, 1999, on its contention that Atty.
Aguinaldo, its resident agent, was duly authorized to sue in its behalf. The respondent,
however, failed to establish its claim that Atty. Aguinaldo was its resident agent in the
Philippines. Even the identification card25 of Atty. Aguinaldo which the respondent
appended to its pleading merely showed that he is the company lawyer of the
respondents Manila Regional Office.
The respondent, through Atty. Aguinaldo, announced the holding of the teleconference
only during the hearing of January 28, 2000; Atty. Aguinaldo then prayed for ten days, or
until February 8, 2000, within which to submit the board resolution purportedly
authorizing him to file the complaint and execute the required certification against forum
shopping. The court granted the motion.26 The respondent, however, failed to comply,
and instead prayed for 15 more days to submit the said resolution, contending that it was
with its main office in Korea. The court granted the motion per its Order 27 dated February
11, 2000. The respondent again prayed for an extension within which to submit the said
resolution, until March 6, 2000.28 It was on the said date that the respondent submitted
an affidavit of its general manager Suk Kyoo Kim, stating, inter alia, that he and Atty.
Aguinaldo attended the said teleconference on June 25, 1999, where the Board of
Directors supposedly approved the following resolution:
RESOLVED, that Mario A. Aguinaldo and his law firm M.A. Aguinaldo & Associates or any
of its lawyers are hereby appointed and authorized to take with whatever legal action
necessary to effect the collection of the unpaid account of Expert Travel & Tours. They are
hereby specifically authorized to prosecute, litigate, defend, sign and execute any
document or paper necessary to the filing and prosecution of said claim in Court, attend
the Pre-trial Proceedings and enter into a compromise agreement relative to the above-
mentioned claim.29
But then, in the same affidavit, Suk Kyoo Kim declared that the respondent "do[es] not
keep a written copy of the aforesaid Resolution" because no records of board resolutions
approved during teleconferences were kept. This belied the respondents earlier allegation
in its February 10, 2000 motion for extension of time to submit the questioned resolution
that it was in the custody of its main office in Korea. The respondent gave the trial court
the impression that it needed time to secure a copy of the resolution kept in Korea, only
to allege later (via the affidavit of Suk Kyoo Kim) that it had no such written copy.
Moreover, Suk Kyoo Kim stated in his affidavit that the resolution was embodied in the
Secretarys/Resident Agents Certificate signed by Atty. Aguinaldo. However, no such
resolution was appended to the said certificate.
The respondents allegation that its board of directors conducted a teleconference on June
25, 1999 and approved the said resolution (with Atty. Aguinaldo in attendance) is
incredible, given the additional fact that no such allegation was made in the complaint. If
the resolution had indeed been approved on June 25, 1999, long before the complaint
was filed, the respondent should have incorporated it in its complaint, or at least
appended a copy thereof. The respondent failed to do so. It was only on January 28,
2000 that the respondent claimed, for the first time, that there was such a meeting of the
Board of Directors held on June 25, 1999; it even represented to the Court that a copy of
its resolution was with its main office in Korea, only to allege later that no written copy
existed. It was only on March 6, 2000 that the respondent alleged, for the first time, that
the meeting of the Board of Directors where the resolution was approved was
held via teleconference.
Worse still, it appears that as early as January 10, 1999, Atty. Aguinaldo had signed a
Secretarys/Resident Agents Certificate alleging that the board of directors held a
teleconference on June 25, 1999. No such certificate was appended to the complaint,
which was filed on September 6, 1999. More importantly, the respondent did not explain
why the said certificate was signed by Atty. Aguinaldo as early as January 9, 1999, and
yet was notarized one year later (on January 10, 2000); it also did not explain its failure
to append the said certificate to the complaint, as well as to its Compliance dated March
6, 2000. It was only on January 26, 2001 when the respondent filed its comment in the
CA that it submitted the Secretarys/Resident Agents Certificate30 dated January 10,
2000.
The Court is, thus, more inclined to believe that the alleged teleconference on June 25,
1999 never took place, and that the resolution allegedly approved by the respondents
Board of Directors during the said teleconference was a mere concoction purposefully
foisted on the RTC, the CA and this Court, to avert the dismissal of its complaint against
the petitioner.
IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The Decision of the Court of
Appeals in CA-G.R. SP No. 61000 is REVERSED and SET ASIDE. The Regional Trial Court
of Manila is hereby ORDERED to dismiss, without prejudice, the complaint of the
respondent.
SO ORDERED.
4) THIRD DIVISION
[G.R. NO. 153413 : March 1, 2007]
NECTARINA S. RANIEL and MA. VICTORIA R. PAG-ONG, Petitioners, v. PAUL
JOCHICO, JOHN STEFFENS and SURYA VIRIYA,Respondents.
DECISION
AUSTRIA-MARTINEZ, J.:
Assailed in the present Petition for Review on Certiorari is the Decision1 of the Court of
Appeals (CA) dated April 30, 2002, affirming with modification the Decision dated October
27, 2000 rendered by the Securities and Exchange Commission (SEC) which held as valid
the removal of petitioners Ma. Victoria R. Pag-ong (Pag-ong) as director and Nectarina S.
Raniel (Raniel) as director and corporate officer of Nephro Systems Dialysis Center
(Nephro).
Petitioners first questioned their removal in SEC Case No. 02-98-5902 for Declaration of
Nullity of the Illegal Acts of Respondents, Damages and Injunction. Petitioners, together
with respondents Paul Jochico (Jochico), John Steffens and Surya Viriya, were
incorporators and directors of Nephro, with Raniel acting as Corporate Secretary and
Administrator. The conflict started when petitioners questioned respondents' plan to enter
into a joint venture with the Butuan Doctors' Hospital and College, Inc. sometime in
December 1997. Because of this, petitioners claim that respondents tried to compel them
to waive and assign their shares with Nephro but they refused. Thereafter, Raniel sought
an indefinite leave of absence due to stress, but this was denied by Jochico, as Nephro
President. Raniel, nevertheless, did not report for work, causing Jochico to demand an
explanation from her why she should not be removed as Administrator and Corporate
Secretary. Raniel replied, expressing her sentiments over the disapproval of her request
for leave and respondents' decision with regard to the Butuan venture.
On January 30, 1998, Jochico issued a Notice of Special Board Meeting on February 2,
1998. Despite receipt of the notice, petitioners did not attend the board meeting. In said
meeting, the Board passed several resolutions ratifying the disapproval of Raniel's
request for leave, dismissing her as Administrator of Nephro, declaring the position of
Corporate Secretary vacant, appointing Otelio Jochico as the new Corporate Secretary
and authorizing the call of a Special Stockholders' Meeting on February 16, 1998 for the
purpose of the removal of petitioners as directors of Nephro.
Otelio Jochico issued the corresponding notices for the Special Stockholders' Meeting to
be held on February 16, 1998 which were received by petitioners on February 2, 1998.
Again, they did not attend the meeting. The stockholders who were present removed the
petitioners as directors of Nephro. Thus, petitioners filed SEC Case No. 02-98-5902.
On October 27, 2000, the SEC rendered its Decision, the dispositive portion of which
reads:
WHEREFORE, the Commission so holds that complainants cannot be awarded the reliefs
prayed for in reinstating Nectarina S. Raniel as secretary and administrator.
The corporation acting thru its Board of Directors can validly remove its corporate
officers, particularly complainant Nectarina S. Raniel as corporate secretary, treasurer
and administrator of the Dialysis Clinic.
Also, the Commission cannot grant the relief prayed for by complainants in restraining the
respondents from interfering in the administration of the Dialysis Clinic owned by the
corporation and the use of corporate funds.
The administration of the Dialysis Clinic of the corporation and the use of corporate funds,
rightfully belong to the officers of the corporation, which in this case are the respondents.
The counterclaim of respondents to return or assign back the complainants' shares in
favor of respondent Paul Jochico or his nominee is hereby denied for lack of merit.
The respondents failed to show any clear and convincing evidence to rebut the
presumption of the validity and truthfulness of documents submitted to the Commission
in the grant of corporate license.
The claim for attorney's fees and damages of both parties are likewise denied for lack of
merit, as neither party should be punished for vindicating a right, which he/she believes
should be protected or enforced.
SO ORDERED.2
Dissatisfied, petitioners filed a Petition for Review with the CA.
On April 30, 2002, the CA rendered the assailed Decision, with the following dispositive
portion:
WHEREFORE, in light of the foregoing discussions, the appealed decision of the Securities
and Exchange Commission is hereby AFFIRMED with the MODIFICATION that the renewal
of petitioners as directors of Nephro is declared valid.
SO ORDERED.3
Respondents filed a Manifestation and Motion to Correct Typographical Error, stating that
the term "renewal" as provided in the CA Decision should be "removal."4 Petitioners, on
the other hand, filed the present Petition for Review on Certiorari .
On November 20, 2002, the CA issued a Resolution resolving to refrain from acting on all
pending incidents before it in view of the filing of the petition with the Court.5
In the present petition, petitioners raised basically the same argument they had before
the SEC and the CA, i.e., their removal from Nephro was not valid.
Both the SEC and the CA held that Pag-ong's removal as director and Raniel's removal as
director and officer of Nephro were valid. For its part, the SEC ruled that the Board of
Directors had sufficient ground to remove Raniel as officer due to loss of trust and
confidence, as her abrupt and unauthorized leave of absence exhibited her disregard of
her responsibilities as an officer of the corporation and disrupted the operations of
Nephro. The SEC also held that the Special Board Meeting held on February 2, 1998 was
valid and the resolutions adopted therein are binding on petitioners.6
The CA upheld the SEC's conclusions, adding further that the special stockholders'
meeting on February 16, 1998 was likewise validly held. The CA also ruled that Pag-ong's
removal as director of Nephro was justified as it was due to her "undenied delay in the
release of Nephro's medical supplies from the warehouse of the Fly-High Brokerage where
she was an officer, on top of her and her co-petitioner Raniel's absence from the
aforementioned directors' and stockholders' meetings of Nephro despite due notice."7
It is well to stress the settled rule that the findings of fact of administrative bodies, such
as the SEC, will not be interfered with by the courts in the absence of grave abuse of
discretion on the part of said agencies, or unless the aforementioned findings are not
supported by substantial evidence. They carry even more weight when affirmed by the
CA.8 Such findings are accorded not only great respect but even finality, and are binding
upon this Court, unless it is shown that it had arbitrarily disregarded or misapprehended
evidence before it to such an extent as to compel a contrary conclusion had such
evidence been properly appreciated.9 This rule is rooted in the doctrine that this Court is
not a trier of facts, as well as in the respect to be accorded the determinations made by
administrative bodies in general on matters falling within their respective fields of
specialization or expertise.10
A review of the petition failed to demonstrate any reversible error committed by the two
tribunals, hence, the petition must be denied. It does not present any argument which
convinces the Court that the SEC and the CA made any misappreciation of the facts and
the applicable laws such that their decisions should be overturned.
A corporation exercises its powers through its board of directors and/or its duly
authorized officers and agents, except in instances where the Corporation Code requires
stockholders' approval for certain specific acts.11
Based on Section 23 of the Corporation Code which provides:
SEC. 23. The Board of Directors or Trustees. Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all
business conducted and all property of such corporations controlled and held by the board
of directors or trustees x x x.
a corporation's board of directors is understood to be that body which (1) exercises all
powers provided for under the Corporation Code; (2) conducts all business of the
corporation; and (3) controls and holds all property of the corporation. Its members have
been characterized as trustees or directors clothed with a fiduciary character.12 Moreover,
the directors may appoint officers and agents and as incident to this power of
appointment, they may discharge those appointed.13
In this case, petitioner Raniel was removed as a corporate officer through the resolution
of Nephro's Board of Directors adopted in a special meeting on February 2, 1998. As
correctly ruled by the SEC, petitioners' removal was a valid exercise of the powers of
Nephro's Board of Directors, viz.:
In the instant complaint, do respondents have sufficient grounds to cause the removal of
Raniel from her positions as Corporate Secretary, Treasurer and Administrator of the
Dialysis Clinic? Based on the facts proven during the hearing of this case, the answer is in
the affirmative.
Raniel's letter of January 26, 1998 speaks for itself. Her request for an indefinite leave,
immediately effective yet without prior notice, reveals a disregard of the critical
responsibilities pertaining to the sensitive positions she held in the corporation. Prior to
her hasty departure, Raniel did not make a proper turn-over of her duties and had to be
expressly requested to hand over documents and records, including keys to the office and
the cabinets (Exh. 15).
x x x
Since Raniel occupied all three positions in Nephro, it is not difficult to foresee the
disruption that her immediate and indefinite absence can inflict on the operations of the
company. By leaving abruptly, Raniel abandoned the positions she is now trying to
reclaim. Raniel's actuation has been sufficiently proven to warrant loss of the Board's
confidence.14
The SEC also correctly concluded that petitioner Raniel was removed as an officer of
Nephro in compliance with established procedure, thus:
The resolutions of the Board dismissing complainant Raniel from her various positions in
Nephro are valid. Notwithstanding the absence of complainants from the meeting, a
quorum was validly constituted. x x x.
x x x
Based on its articles of incorporation, Nephro has five directors - two of the positions
were occupied by complainants and the remaining three are held by respondents. This
being the case, the presence of all three respondents in the Special Meeting of the Board
on February 2, 1998 established a quorum for the conduct of business. The unanimous
resolutions carried by the Board during such meeting are therefore valid and binding
against complainants.
It bears emphasis that Raniel was given sufficient opportunity to be heard. Jochico's
letters of January 26, 1998 and January 27, 1998, albeit adversarial, recognized her right
to explain herself and gave her the chance to do so. In fact, Raniel did respond to
Jochico's letter on January 28, 1998 and took the occasion to voice her opinions about
Jochico's alleged "practice of using others for your own benefit, without cost." (Exh. 14).
Moreover, the Special Meeting of the Board could have been the appropriate venue for
Raniel to air her side. Had Raniel decided to grace the meeting with her presence, she
could have explained herself before the board and tried to convince them to allow her to
keep her posts.15
Petitioners Raniel and Pag-ong's removal as members of Nephro's Board of Directors was
likewise valid.
Only stockholders or members have the power to remove the directors or trustees elected
by them, as laid down in Section 28 of the Corporation Code,16 which provides in part:
SEC. 28. Removal of directors or trustees. - - Any director or trustee of a corporation
may be removed from office by a vote of the stockholders holding or
representing at least two-thirds (2/3) of the outstanding capital stock, or if the
corporation be a non-stock corporation, by a vote of at least two-thirds (2/3) of the
members entitled to vote: Provided, that such removal shall take place either at a regular
meeting of the corporation or at a special meeting called for the purpose, and in either
case, after previous notice to stockholders or members of the corporation of the intention
to propose such removal at the meeting. A special meeting of the stockholders or
members of a corporation for the purpose of removal of directors or trustees or any of
them, must be called by the secretary on order of the president or on the written demand
of the stockholders representing or holding at least a majority of the outstanding capital
stock, or if it be a non-stock corporation, on the written demand of a majority of the
members entitled to vote. x x x Notice of the time and place of such meeting, as well as
of the intention to propose such removal, must be given by publication or by written
notice as prescribed in this Code. x x x Removal may be with or without
cause: Provided, That removal without cause may not be used to deprive minority
stockholders or members of the right of representation to which they may be entitled
under Section 24 of this Code. (Emphasis supplied)cralawlibrary
Petitioners do not dispute that the stockholders' meeting was held in accordance with
Nephro's By-Laws. The ownership of Nephro's outstanding capital stock is distributed as
follows: Jochico - 200 shares; Steffens - 100 shares; Viriya - 100 shares; Raniel - 75
shares; and Pag-ong - 25 shares,17 or a total of 500 shares. A two-thirds vote of Nephro's
outstanding capital stock would be 333.33 shares, and during the Stockholders' Special
Meeting held on February 16, 1998, 400 shares voted for petitioners' removal. Said
number of votes is more than enough to oust petitioners from their respective positions
as members of the board, with or without cause.
Verily therefore, there is no cogent reason to grant the present petition.
WHEREFORE, the petition is DENIED for lack of merit.
SO ORDERED.
5) FIRST DIVISION
[G.R. NO. 161886 : March 16, 2007]
FILIPINAS PORT SERVICES, INC., represented by stockholders, ELIODORO C.
CRUZ and MINDANAO TERMINAL AND BROKERAGE SERVICES,
INC., Petitioners, v. VICTORIANO S. GO, ARSENIO LOPEZ CHUA, EDGAR C.
TRINIDAD, HERMENEGILDO M. TRINIDAD, JESUS SYBICO, MARY JEAN D. CO,
HENRY CHUA, JOSELITO S. JAYME, ERNESTO S. JAYME, and ELIEZER B. DE
JESUS, Respondents.
DECISION
GARCIA, J.:
Assailed and sought to be set aside in this Petition for Review on Certiorari is the
Decision1 dated 19 January 2004 of the Court of Appeals (CA) in CA-G.R. CV No. 73827,
reversing an earlier decision of the Regional Trial Court (RTC) of Davao City and
accordingly dismissing the derivative suit instituted by petitioner Eliodoro C. Cruz for and
in behalf of the stockholders of co-petitioner Filipinas Port Services, Inc. (Filport,
hereafter).
The case is actually an intra-corporate dispute involving Filport, a domestic corporation
engaged in stevedoring services with principal office in Davao City. It was initially
instituted with the Securities and Exchange Commission (SEC) where the case hibernated
and remained unresolved for several years until it was overtaken by the enactment into
law, on 19 July 2000, of Republic Act (R.A.) No. 8799, otherwise known as the Securities
Regulation Code. From the SEC and consistent with R.A. No. 8799, the case was
transferred to the RTC of Manila, Branch 14, sitting as a corporate court. Subsequently,
upon respondents' motion, the case eventually landed at the RTC of Davao City where it
was docketed as Civil Case No. 28,552-2001. RTC-Davao City, Branch 10, ruled in favor
of the petitioners prompting respondents to go to the CA in CA-G.R. CV No. 73827. This
time, the respondents prevailed, hence, this Petition for Review by the petitioners.
The relevant facts:
On 4 September 1992, petitioner Eliodoro C. Cruz, Filport's president from 1968 until he
lost his bid for reelection as Filport's president during the general stockholders' meeting in
1991, wrote a letter2 to the corporation's Board of Directors questioning the board's
creation of the following positions with a monthly remuneration of P13,050.00 each, and
the election thereto of certain members of the board, to wit:
Asst. Vice-President for Corporate Planning - Edgar C. Trinidad (Director)
Asst. Vice-President for Operations - Eliezer B. de Jesus (Director)
Asst. Vice-President for Finance - Mary Jean D. Co (Director)
Asst. Vice-President for Administration - Henry Chua (Director)
Special Asst. to the Chairman - Arsenio Lopez Chua (Director)
Special Asst. to the President - Fortunato V. de Castro
In his aforesaid letter, Cruz requested the board to take necessary action/actions to
recover from those elected to the aforementioned positions the salaries they have
received.
On 15 September 1992, the board met and took up Cruz's letter. The records do not
show what specific action/actions the board had taken on the letter. Evidently, whatever
action/actions the board took did not sit well with Cruz.
On 14 June 1993, Cruz, purportedly in representation of Filport and its stockholders,
among which is herein co-petitioner Mindanao Terminal and Brokerage Services, Inc.
(Minterbro), filed with the SEC a petition3 which he describes as a derivative suit against
the herein respondents who were then the incumbent members of Filport's Board of
Directors, for alleged acts of mismanagement detrimental to the interest of the
corporation and its shareholders at large, namely:
1. creation of an executive committee in 1991 composed of seven (7) members of the
board with compensation of P500.00 for each member per meeting, an office which, to
Cruz, is not provided for in the by-laws of the corporation and whose function merely
duplicates those of the President and General Manager;
2. increase in the emoluments of the Chairman, Vice-President, Treasurer and Assistant
General Manager which increases are greatly disproportionate to the volume and
character of the work of the directors holding said positions;
3. re-creation of the positions of Assistant Vice-Presidents (AVPs) for Corporate Planning,
Operations, Finance and Administration, and the election thereto of board members Edgar
C. Trinidad, Eliezer de Jesus, Mary Jean D. Co and Henry Chua, respectively;
andcralawlibrary
4. creation of the additional positions of Special Assistants to the President and the Board
Chairman, with Fortunato V. de Castro and Arsenio Lopez Chua elected to the same, the
directors elected/appointed thereto not doing any work to deserve the monthly
remuneration of P13,050.00 each.
In the same petition, docketed as SEC Case No. 06-93-4491, Cruz alleged that despite
demands made upon the respondent members of the board of directors to desist from
creating the positions in question and to account for the amounts incurred in creating the
same, the demands were unheeded. Cruz thus prayed that the respondent members of
the board of directors be made to pay Filport, jointly and severally, the sums of money
variedly representing the damages incurred as a result of the creation of the
offices/positions complained of and the aggregate amount of the questioned increased
salaries.
In their common Answer with Counterclaim,4 the respondents denied the allegations of
mismanagement and materially averred as follows:
1. the creation of the executive committee and the grant of per diems for the attendance
of each member are allowed under the by-laws of the corporation;
2. the increases in the salaries/emoluments of the Chairman, Vice-President, Treasurer
and Assistant General Manager were well within the financial capacity of the corporation
and well-deserved by the officers elected thereto; andcralawlibrary
3. the positions of AVPs for Corporate Planning, Operations, Finance and Administration
were already in existence during the tenure of Cruz as president of the corporation, and
were merely recreated by the Board, adding that all those appointed to said positions of
Assistant Vice Presidents, as well as the additional position of Special Assistants to the
Chairman and the President, rendered services to deserve their compensation.
In the same Answer, respondents further averred that Cruz and his co-petitioner
Minterbro, while admittedly stockholders of Filport, have no authority nor standing to
bring the so-called "derivative suit" for and in behalf of the corporation; that respondent
Mary Jean D. Co has already ceased to be a corporate director and so with Fortunato V.
de Castro, one of those holding an assailed position; and that no demand to cease and
desist from further committing the acts complained of was made upon the board. By way
of affirmative defenses, respondents asserted that (1) the petition is not duly verified by
petitioner Filport which is the real party-in-interest; (2) Filport, as represented by Cruz
and Minterbro, failed to exhaust remedies for redress within the corporation before
bringing the suit; and (3) the petition does not show that the stockholders bringing the
suit are joined as nominal parties. In support of their counterclaim, respondents averred
that Cruz filed the alleged derivative suit in bad faith and purely for harassment purposes
on account of his non-reelection to the board in the 1991 general stockholders' meeting.
As earlier narrated, the derivative suit (SEC Case No. 06-93-4491) hibernated with the
SEC for a long period of time. With the enactment of R.A. No. 8799, the case was first
turned over to the RTC of Manila, Branch 14, sitting as a corporate court. Thereafter, on
respondents' motion, it was eventually transferred to the RTC of Davao City whereat it
was docketed as Civil Case No. 28,552-2001 and raffled to Branch 10 thereof.
On 10 December 2001, RTC-Davao City rendered its decision5 in the case. Even as it
found that (1) Filport's Board of Directors has the power to create positions not provided
for in the by-laws of the corporation since the board is the governing body; and (2) the
increases in the salaries of the board chairman, vice-president, treasurer and assistant
general manager are reasonable, the trial court nonetheless rendered judgment against
the respondents by ordering the directors holding the positions of Assistant Vice President
for Corporate Planning, Special Assistant to the President and Special Assistant to the
Board Chairman to refund to the corporation the salaries they have received as such
officers "considering that Filipinas Port Services is not a big corporation requiring multiple
executive positions" and that said positions "were just created for accommodation." We
quote the fallo of the trial court's decision.
WHEREFORE, judgment is rendered ordering:
Edgar C. Trinidad under the third and fourth causes of action to restore to the corporation
the total amount of salaries he received as assistant vice president for corporate
planning; and likewise ordering Fortunato V. de Castro and Arsenio Lopez Chua under the
fourth cause of action to restore to the corporation the salaries they each received as
special assistants respectively to the president and board chairman. In case of insolvency
of any or all of them, the members of the board who created their positions are
subsidiarily liable.
The counter claim is dismissed.
From the adverse decision of the trial court, herein respondents went on appeal to the CA
in CA-G.R. CV No. 73827.
In its decision6 of 19 January 2004, the CA, taking exceptions to the findings of the trial
court that the creation of the positions of Assistant Vice President for Corporate Planning,
Special Assistant to the President and Special Assistant to the Board Chairman was
merely for accommodation purposes, granted the respondents' appeal, reversed and set
aside the appealed decision of the trial court and accordingly dismissed the so-called
derivative suit filed by Cruz, et al., thus:
IN VIEW OF ALL THE FOREGOING, the instant appeal is GRANTED, the challenged
decision is REVERSED and SET ASIDE, and a new one entered DISMISSING Civil Case No.
28,552-2001 with no pronouncement as to costs.
SO ORDERED.
Intrigued, and quite understandably, by the fact that, in its decision, the CA, before
proceeding to address the merits of the appeal, prefaced its disposition with the
statement reading "[T]he appeal is bereft of merit,"7 thereby contradicting the very fallo
of its own decision and the discussions made in the body thereof, respondents filed with
the appellate court a Motion For Nunc Pro Tunc Order,8 thereunder praying that the
phrase "[T]he appeal is bereft of merit," be corrected to read "[T]he appeal is impressed
with merit." In its resolution9 of 23 April 2004, the CA granted the respondents' motion
and accordingly effected the desired correction.
Hence, petitioners' present recourse.
Petitioners assigned four (4) errors allegedly committed by the CA. For clarity, we shall
formulate the issues as follows:
1. Whether the CA erred in holding that Filport's Board of Directors acted within its
powers in creating the executive committee and the positions of AVPs for Corporate
Planning, Operations, Finance and Administration, and those of the Special Assistants to
the President and the Board Chairman, each with corresponding remuneration, and in
increasing the salaries of the positions of Board Chairman, Vice-President, Treasurer and
Assistant General Manager; andcralawlibrary
2. Whether the CA erred in finding that no evidence exists to prove that (a) the positions
of AVP for Corporate Planning, Special Assistant to the President and Special Assistant to
the Board Chairman were created merely for accommodation, and (b) the
salaries/emoluments corresponding to said positions were actually paid to and received
by the directors appointed thereto.
For their part, respondents, aside from questioning the propriety of the instant petition as
the same allegedly raises only questions of fact and not of law, also put in issue the
purported derivative nature of the main suit initiated by petitioner Eliodoro C. Cruz
allegedly in representation of and in behalf of Filport and its stockholders.
The petition is bereft of merit.
It is axiomatic that in Petitions for Review on Certiorari under Rule 45 of the Rules of
Court, only questions of law may be raised and passed upon by the Court. Factual
findings of the CA are binding and conclusive and will not be reviewed or disturbed on
appeal.10 Of course, the rule is not cast in stone; it admits of certain exceptions, such as
when the findings of fact of the appellate court are at variance with those of the trial
court,11 as here. For this reason, and for a proper and complete resolution of the case, we
shall delve into the records and reexamine the same.
The governing body of a corporation is its board of directors. Section 23 of the
Corporation Code12 explicitly provides that unless otherwise provided therein, the
corporate powers of all corporations formed under the Code shall be exercised, all
business conducted and all property of the corporation shall be controlled and held by a
board of directors. Thus, with the exception only of some powers expressly granted by
law to stockholders (or members, in case of non-stock corporations), the board of
directors (or trustees, in case of non-stock corporations) has the sole authority to
determine policies, enter into contracts, and conduct the ordinary business of the
corporation within the scope of its charter, i.e., its articles of incorporation, by-laws and
relevant provisions of law. Verily, the authority of the board of directors is restricted to
the management of the regular business affairs of the corporation, unless more extensive
power is expressly conferred.
The raison d etre behind the conferment of corporate powers on the board of directors is
not lost on the Court. Indeed, the concentration in the board of the powers of control of
corporate business and of appointment of corporate officers and managers is necessary
for efficiency in any large organization. Stockholders are too numerous, scattered and
unfamiliar with the business of a corporation to conduct its business directly. And so the
plan of corporate organization is for the stockholders to choose the directors who shall
control and supervise the conduct of corporate business.13
In the present case, the board's creation of the positions of Assistant Vice Presidents for
Corporate Planning, Operations, Finance and Administration, and those of the Special
Assistants to the President and the Board Chairman, was in accordance with the regular
business operations of Filport as it is authorized to do so by the corporation's by-laws,
pursuant to the Corporation Code.
The election of officers of a corporation is provided for under Section 25 of the Code
which reads:
Sec. 25. Corporate officers, quorum. - Immediately after their election, the directors of a
corporation must formally organize by the election of a president, who shall be a director,
a treasurer who may or may not be a director, a secretary who shall be a resident and
citizen of the Philippines, and such other officers as may be provided for in the by-laws.
(Emphasis supplied.)
In turn, the amended Bylaws of Filport14 provides the following:
Officers of the corporation, as provided for by the by-laws, shall be elected by the board
of directors at their first meeting after the election of Directors. xxx
The officers of the corporation shall be a Chairman of the Board, President, a Vice-
President, a Secretary, a Treasurer, a General Manager and such other officers as the
Board of Directors may from time to time provide, and these officers shall be elected to
hold office until their successors are elected and qualified. (Emphasis supplied.)
Likewise, the fixing of the corresponding remuneration for the positions in question is
provided for in the same by-laws of the corporation, viz:
xxx The Board of Directors shall fix the compensation of the officers and agents of the
corporation. (Emphasis supplied.)
Unfortunately, the bylaws of the corporation are silent as to the creation by its board of
directors of an executive committee. Under Section 3515of the Corporation Code, the
creation of an executive committee must be provided for in the bylaws of the corporation.
Notwithstanding the silence of Filport's bylaws on the matter, we cannot rule that the
creation of the executive committee by the board of directors is illegal or unlawful. One
reason is the absence of a showing as to the true nature and functions of said executive
committee considering that the "executive committee," referred to in Section 35 of the
Corporation Code which is as powerful as the board of directors and in effect acting for
the board itself, should be distinguished from other committees which are within the
competency of the board to create at anytime and whose actions require ratification and
confirmation by the board.16 Another reason is that, ratiocinated by both the two (2)
courts below, the Board of Directors has the power to create positions not provided for in
Filport's bylaws since the board is the corporation's governing body, clearly upholding the
power of its board to exercise its prerogatives in managing the business affairs of the
corporation.
As well, it may not be amiss to point out that, as testified to and admitted by petitioner
Cruz himself, it was during his incumbency as Filport president that the executive
committee in question was created, and that he was even the one who moved for the
creation of the positions of the AVPs for Operations, Finance and Administration. By his
acquiescence and/or ratification of the creation of the aforesaid offices, Cruz is virtually
precluded from suing to declare such acts of the board as invalid or illegal. And it makes
no difference that he sues in behalf of himself and of the other stockholders. Indeed, as
his voice was not heard in protest when he was still Filport's president, raising a hue and
cry only now leads to the inevitable conclusion that he did so out of spite and resentment
for his non-reelection as president of the corporation.
With regard to the increased emoluments of the Board Chairman, Vice-President,
Treasurer and Assistant General Manager which are supposedly disproportionate to the
volume and nature of their work, the Court, after a judicious scrutiny of the increase vis -
-vis the value of the services rendered to the corporation by the officers concerned,
agrees with the findings of both the trial and appellate courts as to the reasonableness
and fairness thereof.
Continuing, petitioners contend that the CA did not appreciate their evidence as to the
alleged acts of mismanagement by the then incumbent board. A perusal of the records,
however, reveals that petitioners merely relied on the testimony of Cruz in support of
their bold claim of mismanagement. To the mind of the Court, Cruz' testimony on the
matter of mismanagement is bereft of any foundation. As it were, his testimony consists
merely of insinuations of alleged wrongdoings on the part of the board. Without more,
petitioners' posture of mismanagement must fall and with it goes their prayer to hold the
respondents liable therefor.
But even assuming, in gratia argumenti, that there was mismanagement resulting to
corporate damages and/or business losses, still the respondents may not be held liable in
the absence, as here, of a showing of bad faith in doing the acts complained of.
If the cause of the losses is merely error in business judgment, not amounting to bad
faith or negligence, directors and/or officers are not liable.17For them to be held
accountable, the mismanagement and the resulting losses on account thereof are not the
only matters to be proven; it is likewise necessary to show that the directors and/or
officers acted in bad faith and with malice in doing the assailed acts. Bad faith does not
simply connote bad judgment or negligence; it imports a dishonest purpose or some
moral obliquity and conscious doing of a wrong, a breach of a known duty through some
motive or interest or ill-will partaking of the nature of fraud.18 We have searched the
records and nowhere do we find a "dishonest purpose" or "some moral obliquity," or
"conscious doing of a wrong" on the part of the respondents that "partakes of the nature
of fraud."
We thus extend concurrence to the following findings of the CA, affirmatory of those of
the trial court:
xxx As a matter of fact, it was during the term of appellee Cruz, as president and
director, that the executive committee was created. What is more, it was appellee himself
who moved for the creation of the positions of assistant vice presidents for operations, for
finance, and for administration. He should not be heard to complain thereafter for similar
corporate acts.
The increase in the salaries of the board chairman, president, treasurer, and assistant
general manager are indeed reasonable enough in view of the responsibilities assigned to
them, and the special knowledge required, to be able to effectively discharge their
respective functions and duties.
Surely, factual findings of trial courts, especially when affirmed by the CA, are binding
and conclusive on this Court.
There is, however, a factual matter over which the CA and the trial court parted ways. We
refer to the accommodation angle.
The trial court was with petitioner Cruz in saying that the creation of the positions of the
three (3) AVPs for Corporate Planning, Special Assistant to the President and Special
Assistant to the Board Chairman, each with a salary of P13,050.00 a month, was merely
for accommodation purposes considering that Filport is not a big corporation requiring
multiple executive positions. Hence, the trial court's order for said officers to return the
amounts they received as compensation.
On the other hand, the CA took issue with the trial court and ruled that Cruz's
accommodation theory is not based on facts and without any evidentiary substantiation.
We concur with the line of the appellate court. For truly, aside from Cruz's bare and self-
serving testimony, no other evidence was presented to show the fact of
"accommodation." By itself, the testimony of Cruz is not enough to support his claim that
accommodation was the underlying factor behind the creation of the aforementioned
three (3) positions.
It is elementary in procedural law that bare allegations do not constitute evidence
adequate to support a conclusion. It is basic in the rule of evidence that he who alleges a
fact bears the burden of proving it by the quantum of proof required. Bare allegations,
unsubstantiated by evidence, are not equivalent to proof under the Rules of Court.19 The
party having the burden of proof must establish his case by a preponderance of
evidence.20
Besides, the determination of the necessity for additional offices and/or positions in a
corporation is a management prerogative which courts are not wont to review in the
absence of any proof that such prerogative was exercised in bad faith or with
malice.rbl r l l lbrr complained of, the number of his shares not being material;
Indeed, it would be an improper judicial intrusion into the internal affairs of Filport were
the Court to determine the propriety or impropriety of the creation of offices therein and
the grant of salary increases to officers thereof. Such are corporate and/or business
decisions which only the corporation's Board of Directors can determine.
So it is that in Philippine Stock Exchange, Inc. v. CA,21 the Court unequivocally held:
Questions of policy or of management are left solely to the honest decision of the board
as the business manager of the corporation, and the court is without authority to
substitute its judgment for that of the board, and as long as it acts in good faith and in
the exercise of honest judgment in the interest of the corporation, its orders are not
reviewable by the courts.
In a last-ditch attempt to salvage their cause, petitioners assert that the CA went beyond
the issues raised in the court of origin when it ruled on the absence of receipt of actual
payment of the salaries/emoluments pertaining to the positions of Assistant Vice-
President for Corporate Planning, Special Assistant to the Board Chairman and Special
Assistant to the President. Petitioners insist that the issue of nonpayment was never
raised by the respondents before the trial court, as in fact, the latter allegedly admitted
the same in their Answer With Counterclaim.
We are not persuaded.
By claiming that Filport suffered damages because the directors appointed to the assailed
positions are not doing anything to deserve their compensation, petitioners are saddled
with the burden of proving that salaries were actually paid. Since the trial court, in effect,
found that the petitioners successfully proved payment of the salaries when it directed
the reimbursements of the same, respondents necessarily have to raise the issue on
appeal. And the CA rightly resolved the issue when it found that no evidence of actual
payment of the salaries in question was actually adduced. Respondents' alleged admission
of the fact of payment cannot be inferred from a reading of the pertinent portions of the
parties' respective initiatory pleadings. Respondents' allegations in their Answer With
Counterclaim that the officers corresponding to the positions created "performed the work
called for in their positions" or "deserve their compensation," cannot be interpreted to
mean that they were "actually paid" such compensation. Directly put, the averment that
"one deserves one's compensation" does not necessarily carry the implication that "such
compensation was actually remitted or received." And because payment was not duly
proven, there is no evidentiary or factual basis for the trial court to direct respondents to
make reimbursements thereof to the corporation.
This brings us to the respondents' claim that the case filed by the petitioners before the
SEC, which eventually landed in RTC-Davao City as Civil Case No. 28,552-2001, is not a
derivative suit, as maintained by the petitioners.
We sustain the petitioners.
Under the Corporation Code, where a corporation is an injured party, its power to sue is
lodged with its board of directors or trustees. But an individual stockholder may be
permitted to institute a derivative suit in behalf of the corporation in order to protect or
vindicate corporate rights whenever the officials of the corporation refuse to sue, or when
a demand upon them to file the necessary action would be futile because they are the
ones to be sued, or because they hold control of the corporation.22 In such actions, the
corporation is the real party-in-interest while the suing stockholder, in behalf of the
corporation, is only a nominal party.23
Here, the action below is principally for damages resulting from alleged mismanagement
of the affairs of Filport by its directors/officers, it being alleged that the acts of
mismanagement are detrimental to the interests of Filport. Thus, the injury complained of
primarily pertains to the corporation so that the suit for relief should be by the
corporation. However, since the ones to be sued are the directors/officers of the
corporation itself, a stockholder, like petitioner Cruz, may validly institute a "derivative
suit" to vindicate the alleged corporate injury, in which case Cruz is only a nominal party
while Filport is the real party-in-interest. For sure, in the prayer portion of petitioners'
petition before the SEC, the reliefs prayed were asked to be made in favor of Filport.
Besides, the requisites before a derivative suit can be filed by a stockholder are present in
this case, to wit:
a) the party bringing suit should be a shareholder as of the time of the act or transaction
b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the
board of directors for the appropriate relief but the latter has failed or refused to heed his
plea; andcralawlibrary
c) the cause of action actually devolves on the corporation, the wrongdoing or harm
having been, or being caused to the corporation and not to the particular stockholder
bringing the suit.24
Indisputably, petitioner Cruz (1) is a stockholder of Filport; (2) he sought without success
to have its board of directors remedy what he perceived as wrong when he wrote a letter
requesting the board to do the necessary action in his complaint; and (3) the alleged
wrong was in truth a wrong against the stockholders of the corporation generally, and not
against Cruz or Minterbro, in particular. In the end, it is Filport, not Cruz which directly
stands to benefit from the suit. And while it is true that the complaining stockholder must
show to the satisfaction of the court that he has exhausted all the means within his reach
to attain within the corporation itself the redress for his grievances, or actions in
conformity to his wishes, nonetheless, where the corporation is under the complete
control of the principal defendants, as here, there is no necessity of making a demand
upon the directors. The reason is obvious: a demand upon the board to institute an action
and prosecute the same effectively would have been useless and an exercise in futility. In
fine, we rule and so hold that the petition filed with the SEC at the instance of Cruz,
which ultimately found its way to the RTC of Davao City as Civil Case No. 28,552-2001, is
a derivative suit of which Cruz has the necessary legal standing to institute.
WHEREFORE, the petition is DENIED and the challenged decision of the CA is AFFIRMED
in all respects.
No pronouncement as to costs.
SO ORDERED.
6) SECOND DIVISION The Annual Meeting of the members of the Association shall be held on the second
Thursday of January of each year. Each Charter or Associate Member of the Association is
[G.R. No. 108905. October 23, 1997.] entitled to vote. He shall be entitled to as many votes as he has acquired thru his
monthly membership fees only computed on a ratio of TEN (P10.00) PESOS for one vote.
GRACE CHRISTIAN HIGH SCHOOL, Petitioner, v. THE COURT OF APPEALS, GRACE
VILLAGE ASSOCIATION, INC., ALEJANDRO G. BELTRAN, and ERNESTO L. The Charter and Associate Members shall elect the Directors of the Association. The
GO, Respondents. candidates receiving the first fourteen (14) highest number of votes shall be declared and
proclaimed elected until their successors are elected and qualified. GRACE CHRISTIAN
HIGH SCHOOL representative is a permanent Director of the ASSOCIATION.
DECISION
This draft was never presented to the general membership for approval. Nevertheless,
MENDOZA, J.: from 1975, after it was presumably submitted to the board, up to 1990, petitioner was
given a permanent seat in the board of directors of the association. On February 13,
The question for decision in this case is the right of petitioners representative to sit in the 1990, the associations committee on election in a letter informed James Tan, principal of
board of directors of respondent Grace Village Association, Inc. as a permanent member the school, that "it was the sentiment that all directors should be elected by members of
thereof. For fifteen years from 1975 until 1989 petitioners representative had been the association" because "to make a person or entity a permanent Director would deprive
recognized as a "permanent director" of the association. But on February 13, 1990, the right of voters to vote for fifteen (15) members of the Board," and "it is undemocratic
petitioner received notice from the associations committee on election that the latter was for a person or entity to hold office in perpetuity." 4 For this reason, Tan was told that
"reexamining" (actually, reconsidering) the right of petitioners representative to continue "the proposal to make the Grace Christian High School representative as a permanent
as an unelected member of the board. As the board denied petitioners request to be director of the association, although previously tolerated in the past elections should be
allowed representation without election, petitioner brought an action for mandamus in the reexamined." Following this advice, notices were sent to the members of the association
Home Insurance and Guaranty Corporation. Its action was dismissed by the hearing that the provision on election of directors of the 1968 by-laws of the association would be
officer whose decision was subsequently affirmed by the appeals board. Petitioner observed.
appealed to the Court of Appeals, which in turn upheld the decision of the HIGCs appeals
board. Hence this petition for review based on the following contentions:chanrob1es Petitioner requested the chairman of the election committee to change the notice of
virtualw library election by following the procedure in previous elections, claiming that the notice issued
1. The Petitioner herein has already acquired a vested right to a permanent seat in the for the 1990 elections ran "counter to the practice in previous years" and was "in violation
Board of Directors of Grace Village Association; of the by-laws (of 1975)" and "unlawfully deprive[d] Grace Christian High School of its
vested right [to] a permanent seat in the board." 5
2. The amended By-laws of the Association drafted and promulgated by a Committee on
December 20, 1975 is valid and binding; and As the association denied its request, the school brought suit for mandamus in the Home
Insurance and Guaranty Corporation to compel the board of directors of the association to
3. The Practice of tolerating the automatic inclusion of petitioner as a permanent member recognize its right to a permanent seat in the board. Petitioner based its claim on the
of the Board of Directors of the Association without the benefit of election is allowed following portion of the proposed amendment which, it contended, had become part of
under the law. 1 the by-laws of the association as Article VI, paragraph 2, thereof:chanrob1es virtual 1aw
library
Briefly stated, the facts are as follows:chanrob1es virtual 1aw library
The Charter and Associate Members shall elect the Directors of the Association. The
Petitioner Grace Christian High School is an educational institution offering preparatory, candidates receiving the first fourteen (14) highest number of votes shall be declared and
kindergarten and secondary courses at the Grace Village in Quezon City. Private proclaimed elected until their successors are elected and qualified. GRACE CHRISTIAN
respondent Grace Village Association, Inc., on the other hand, is an organization of lot HIGH SCHOOL representative is a permanent Director of the ASSOCIATION.
and/or building owners, lessees and residents at Grace Village, while private respondents
Alejandro G. Beltran and Ernesto L. Go were its president and chairman of the committee It appears that the opinion of the Securities and Exchange Commission on the validity of
on election, respectively, in 1990, when this suit was brought. this provision was sought by the association and that in reply to the query, the SEC
rendered an opinion to the effect that the practice of allowing unelected members in the
As adopted in 1968, the by-laws of the association provided in Article IV, as board was contrary to the existing by-laws of the association and to 92 of the
follows:chanrob1es virtual 1aw library Corporation Code (B.P. Blg. 68).

The annual meeting of the members of the Association shall be held on the first Sunday Private respondent association cited the SEC opinion in its answer. Additionally, the
of January in each calendar year at the principal office of the Association at 2:00 P.M. association contended that the basis of the petition for mandamus was merely "a
where they shall elect by plurality vote and by secret balloting, the Board of Directors, proposed by-laws which has not yet been approved by competent authority nor registered
composed of eleven (11) members to serve for one year until their successors are duly with the SEC or HIGC." It argued that "the by-laws which was registered with the SEC on
elected and have qualified. 2 January 16, 1969 should be the prevailing by-laws of the association and not the
proposed amended by-laws." 6
It appears, that on December 20, 1975, a committee of the board of directors prepared a
draft of an amendment to the by-laws, reading as follows: 3 In reply, petitioner maintained that the "amended by-laws is valid and binding" and that
the association was estopped from questioning the by-laws. 7
VI. ANNUAL MEETING
A preliminary conference was held on March 29, 1990 but nothing substantial was agreed
upon. The parties merely agreed that the board of directors of the association should
meet on April 17, 1990 and April 24, 1990 for the purpose of discussing the amendment
of the by-laws and a possible amicable settlement of the case. A meeting was held on
April 17, 1990, but the parties failed to reach an agreement. Instead, the board adopted
a resolution declaring the 1975 provision null and void for lack of approval by members of
the association and the 1968 by-laws to be effective.chanroblesvirtuallawlibrary
On June 20, 1990, the hearing officer of the HIGC rendered a decision dismissing
petitioners action. The hearing officer held that the amended by-laws, upon which
petitioner based its claim," [was] merely a proposed by-laws which, although
implemented in the past, had not yet been ratified by the members of the association nor
approved by competent authority" ; that, on the contrary, in the meeting held on April
17, 1990, the directors of the association declared the proposed by-law dated December
20, 1975 prepared by the committee on by-laws . . . null and void" and the by-laws of
December 17, 1968 as the "prevailing by-laws under which the association is to operate
until such time that the proposed amendments to the by-laws are approved and ratified
by a majority of the members of the association and duly filed and approved by the
pertinent government agency." The hearing officer rejected petitioners contention that it
had acquired a vested right to a permanent seat in the board of directors. He held that
past practice in election of directors could not give rise to a vested right and that
departure from such practice was justified because it deprived members of association of
their right to elect or to be voted in office, not to say that "allowing the automatic
inclusion of a member representative of petitioner as permanent director [was] contrary
to law and the registered by-laws of respondent association." 8 Considering, therefore, that the "agents" or committee were duly authorized to draft the
The appeals board of the HIGC affirmed the decision of the hearing officer in its resolution
dated September 13, 1990. It cited the opinion of the SEC based on 92 of the
Corporation Code which reads:chanrob1es virtual 1aw library
92. Election and term of trustees. Unless otherwise provided in the articles of
incorporation or the by-laws, the board of trustees of non-stock corporations, which may
be more than fifteen (15) in number as may be fixed in their articles of incorporation or
by-laws, shall, as soon as organized, so classify themselves that the term of office of one-
third (1/3) of the number shall expire every year; and subsequent elections of trustees
comprising one-third (1/3) of the board of trustees shall be held annually and trustees so
elected shall have a term of three (3) years. Trustees thereafter elected to fill vacancies
occurring before the expiration of a particular term shall hold office only for the unexpired
period.
The HIGC appeals board denied claims that the school" [was] being deprived of its right
to be a member of the Board of Directors of respondent association," because the fact
was that "it may nominate as many representatives to the Associations Board as it may
deem appropriate." It said that "what is merely being upheld is the act of the incumbent
directors of the Board of correcting a long standing practice which is not anchored upon
any legal basis." 9
Petitioner appealed to the Court of Appeals but petitioner again lost as the appellate court
on February 9, 1993, affirmed the decision of the HIGC. The Court of Appeals held that
there was no valid amendment of the associations by-laws because of failure to comply
with the requirement of its existing by-laws, prescribing the affirmative vote of the
majority of the members of the association at a regular or special meeting called for the
adoption of amendment to the by-laws. Article XIX of the by-laws provides: 10
The members of the Association by an affirmative vote of the majority at any regular or
special meeting called for the purpose, may alter, amend, change or adopt any new by-
laws.
This provision of the by-laws actually implements 22 of the Corporation Law (Act No.
1459) which provides:chanrob1es virtual 1aw library
22. The owners of a majority of the subscribed capital stock, or a majority of the
members if there be no capital stock, may, at a regular or special meeting duly called for
the purpose, amend or repeal any by-law or adopt new by-laws. The owners of two-thirds
of the subscribed capital stock, or two-thirds of the members if there be no capital stock,
may delegate to the board of directors the power to amend or repeal any by-law or to
adopt new by-laws: Provided, however, That any power delegated to the board of
directors to amend or repeal any by-law or adopt new by-laws shall be considered as
revoked whenever a majority of the stockholders or of the members of the corporation
shall so vote at a regular or special meeting. And provided, further, That the Director of
the Bureau of Commerce and Industry shall not hereafter file an amendment to the by-
laws of any bank, banking institution or building and loan association, unless
accompanied by certificate of the Bank Commissioner to the effect that such amendments
are in accordance with law.
The proposed amendment to the by-laws was never approved by the majority of the
members of the association as required by these provisions of the law and by-laws. But
petitioner contends that the members of the committee which prepared the proposed
amendment were duly authorized to do so and that because the members of the
association thereafter implemented the provision for fifteen years, the proposed
amendment for all intents and purposes should be considered to have been ratified by
them. Petitioner contends: 11
amended by-laws and the acts done by the "agents" were in accordance with such
authority, the acts of the "agents" from the very beginning were lawful and binding on
the homeowners (the principals) per se without need of any ratification or adoption. The
more has the amended by-laws become binding on the homeowners when the
homeowners followed and implemented the provisions of the amended by-laws. This is
not merely tantamount to tacit ratification of the acts done by duly authorized "agents"
but express approval and confirmation of what the "agents" did pursuant to the authority
granted to them.
Corollarily, petitioner claims that it has acquired a vested right to a permanent seat in the
board. Says petitioner:chanrob1es virtual 1aw library
The right of the petitioner to an automatic membership in the board of the Association
was granted by the members of the Association themselves and this grant has been
implemented by members of the board themselves all through the years. Outside the
present membership of the board, not a single member of the Association has registered
any desire to remove the right of herein petitioner to an automatic membership in the
board. If there is anybody who has the right to take away such right of the petitioner, it
would be the individual members of the Association through a referendum and not the
present board some of the members of which are motivated by personal interest.
Petitioner disputes the ruling that the provision in question, giving petitioners
representative a permanent seat in the board of the association, is contrary to law.
Petitioner claims that that is not so because there is really no provision of law prohibiting
unelected members of boards of directors of corporations. Referring to 92 of the present
Corporation Code, petitioner says:chanrob1es virtual 1aw library
It is clear that the above provision of the Corporation Code only provides for the manner
of election of the members of the board of trustees of non-stock corporations which may
be more than fifteen in number and which manner of election is even subject to what is
provided in the articles of incorporation or by-laws of the association thus showing that
the above provisions [are] not even mandatory.
Even a careful perusal of the above provision of the Corporation Code would not show
that it prohibits a non-stock corporation or association from granting one of its members
a permanent seat in its board of directors or trustees. If there is no such legal prohibition of directors or trustees to be elected from among the holders of stocks, or where there is
then it is allowable provided it is so provided in the Articles of Incorporation or in the by- no stock, from among the members of the corporation, who shall hold office for one (1)
laws as in the instant case. year and until their successors are elected and qualified. (Emphasis added)
x x x
These provisions of the former and present corporation law leave no room for doubt as to
their meaning: the board of directors of corporations must be elected from among the
If fact, the truth is that this is allowed and is being practiced by some corporations duly stockholders or members. There may be corporations in which there are unelected
organized and existing under the laws of the Philippines. members in the board but it is clear that in the examples cited by petitioner the unelected
members sit as ex officio members, i.e., by virtue of and for as long as they hold a
One example is the Pius XII Catholic Center, Inc. Under the by-laws of this corporation, particular office. But in the case of petitioner, there is no reason at all for its
that whoever is the Archbishop of Manila is considered a member of the board of trustees representative to be given a seat in the board. Nor does petitioner claim a right to such
without benefit of election. And not only that. He also automatically sits as the Chairman seat by virtue of an office held. In fact it was not given such seat in the beginning. It was
of the Board of Trustees, again without need of any election. only in 1975 that a proposed amendment to the by-laws sought to give it one.

Another concrete example is the Cardinal Santos Memorial Hospital, Inc. It is also Since the provision in question is contrary to law, the fact that for fifteen years it has not
provided in the by-laws of this corporation that whoever is the Archbishop of Manila is been questioned or challenged but, on the contrary, appears to have been implemented
considered a member of the board of trustees year after year without benefit of any by the members of the association cannot forestall a later challenge to its validity. Neither
election and he also sits automatically as the Chairman of the Board of Trustees. can it attain validity through acquiescence because, if it is contrary to law, it is beyond
the power of the members of the association to waive its invalidity. For that matter the
It is actually 28 and 29 of the Corporation Law not 92 of the present law or 29 of members of the association may have formally adopted the provision in question, but
the former one which require members of the boards of directors of corporations to be their action would be of no avail because no provision of the by-laws can be adopted if it
elected. These provisions read:chanrob1es virtual 1aw library is contrary to law. 13

28. Unless otherwise provided in this Act, the corporate powers of all corporations It is probable that, in allowing petitioners representative to sit on the board, the
formed under this Act shall be exercised, all business conducted and all property of such members of the association were not aware that this was contrary to law. It should be
corporations controlled and held by a board of not less than five nor more than eleven noted that they did not actually implement the provision in question except perhaps
directors to be elected from among the holders of stock or, where there is no stock, from insofar as it increased the number of directors from 11 to 15, but certainly not the
the members of the corporation: Provided, however, That in corporations, other than allowance of petitioners representative as an unelected member of the board of directors.
banks, in which the United States has or may have a vested interest, pursuant to the It is more accurate to say that the members merely tolerated petitioners representative
powers granted or delegated by the Trading with the Enemy Act, as amended, and similar and tolerance cannot be considered ratification.chanroblesvirtual|awlibrary
Acts of Congress of the United States relating to the same subject, or by Executive Order
No. 9095 of the President of the United States, as heretofore or hereafter amended, or Nor can petitioner claim a vested right to sit in the board on the basis of "practice."
both, the directors need not be elected from among the holders of the stock, or, where Practice, no matter how long continued, cannot give rise to any vested right if it is
there is no stock from the members of the corporation. (emphasis added) contrary to law. Even less tenable is petitioners claim that its right is "coterminus with
the existence of the association." 14
29. At the meeting for the adoption of the original by-laws, or at such subsequent
meeting as may be then determined, directors shall be elected to hold their offices for Finally, petitioner questions the authority of the SEC to render an opinion on the validity
one year and until their successors are elected and qualified. Thereafter the directors of of the provision in question. It contends that jurisdiction over this case is exclusively
the corporation shall be elected annually by the stockholders if it be a stock corporation vested in the HIGC.
or by the members if it be a nonstock corporation, and if no provision is made in the by-
laws for the time of election the same shall be held on the first Tuesday after the first But this case was not decided by the SEC but by the HIGC. The HIGC merely cited as
Monday in January. Unless otherwise provided in the by-laws, two weeks notice of the authority for its ruling the opinion of the SEC chairman. The HIGC could have cited any
election of directors must be given by publication in some newspaper of general other authority for the view that under the law members of the board of directors of a
circulation devoted to the publication of general news at the place where the principal corporation must be elected and it would be none the worse for doing so.
office of the corporation is established or located, and by written notice deposited in the
post-office, postage pre-paid, addressed to each stockholder, or, if there be no WHEREFORE, the decision of the Court of Appeals is AFFIRMED.
stockholders, then to each member, at his last known place of residence. If there be no
newspaper published at the place where the principal office of the corporation is SO ORDERED.
established or located, a notice of the election of directors shall be posted for a period of
three weeks immediately preceding the election in at least three public places, in the
place where the principal office of the corporation is established or located. (Emphasis
added)

The present Corporation Code (B.P. Blg. 68), which took effect on May 1, 1980, 12
similarly provides:chanrob1es virtual 1aw library

23. The Board of Directors or Trustees. Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all
business conducted and all property of such corporations controlled and held by the board
7) Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 117847 October 7, 1998
PEOPLE'S AIRCARGO AND WAREHOUSING CO. INC., petitioner,
vs.
COURT OF APPEALS and STEFANI SAO, respondents. (S)STEFANI C. SAO (S)ANTONIO C. PUNSALAN, JR.
PANGANIBAN, J.:
Contracts entered into by a corporate president without express prior board approval bind
the corporation, when such officer's apparent authority is established and when these
contracts are ratified by the corporation.
The Case
This principle is stressed by the Court in rejecting the Petition for Review of the February
28, 1994 Decision and the October 28, 1994 Resolution of the Court of Appeals in CA-GR
CV No. 30670.
In a collection case1 filed by Stefani Sao against People's Aircargo and Warehousing Co., Dear Mr. Sao:
Inc., the Regional Trial Court (RTC) of Pasay City, Branch 110, rendered a Decision2 dated
October 26, 1990, the dispositive portion of which reads: 3
WHEREFORE, in light of all the foregoing, Judgment is hereby rendered, ordering
[petitioner] to pay [private respondent] the amount of sixty thousand (P60,000.00) pesos
representing payment of [private respondents] services in preparing the manual of
operations and in the conduct of a seminar for [petitioner]. The Counterclaim is hereby
dismissed.
Aggrieved by what he considered a minuscule award of P60,000, private respondent
appealed to the Court of Appeals4 (CA) which, in its Decision promulgated February 28,
1994, granted his prayer for P400,000, as follows: 5
WHEREFORE, PREMISES CONSIDERED, the appealed judgment is hereby MODIFIED in
that [petitioner] is ordered to pay [private respondent] the amount of four hundred
thousand pesos (P400,000.00) representing payment of [private respondent's] services in
preparing the manual of operations and in the conduct of a seminar for [petitioner].
As no new ground was raised by petitioner, reconsideration of the above-mentioned
Decision was denied in the Resolution promulgated on October 28, 1994.
The Facts
Petitioner is a domestic corporation, which was organized in the middle of 1986 to
operate a customs bonded warehouse at the old Manila International Airport in Pasay
City.6
To obtain a license for the corporation from the Bureau of Customs, Antonio Punsalan Jr.,
the corporation president, solicited a proposal from private respondent for the preparation
of a feasibility study.7 Private respondent submitted a letter-proposal dated October 17,
1986 ("First Contract" hereafter) to Punsalan, which is reproduced hereunder: 8
Dear Mr. Punsalan:
With reference to your request for professional engineering consultancy services for your
proposed MIA Warehousing Project may we offer the following outputs and the
corresponding rate and terms of agreement:
=======================================
Project Feasibility Study consisting of
Market Study
Technical Study
Financial Feasibility Study
Preparation of pertinent documentation requirements for the application
_____________________________________________
The above services will be provided for a fee of [p]esos 350,000.00 payable according to
the following schedule:
=====================================================
Fifty percent (50%) upon confirmation of the agreement
Twenty-five percent (25%) 15 days after the confirmation of the agreement
Twenty-five percent (25%) upon submission of the specified outputs
The outputs will be completed and submitted within 30 days upon confirmation of the
agreement and receipt by us of the first fifty percent payment.
---------------------------------------------------------------------------------
Thank you.
Yours truly, CONFORME:
(T)STEFANI C. SAO (T)ANTONIO C. PUNSALAN, JR.
Consultant for President, PAIRCARGO
Industrial Engineering
Initially, Cheng Yong, the majority stockholder of petitioner, objected to private
respondent's offer, as another company priced a similar proposal at only
P15,000.9 However, Punsalan preferred private respondent's service because of the
latter's membership in the task force, which was supervising the transition of the Bureau
of Customs from the Marcos government to the Aquino administration. 10
On October 17, 1986, pertitioner, through Punsalan, sent private respondent a letter,
confirming their agreement as follows:
With regard to the services offered by your company in your letter dated 13 October
1986, for the preparation of the necessary study and documentations to support our
Application for Authority to Operate a public Customs Bonded Warehouse located at the
old MIA Compound in Pasay City, please be informed that our company is willing to hire
your services and will pay the amount of THREE HUNDRED FIFTY THOUSAND PESOS
(P350,000.00) as follows:
P100,000.00 uppon signing of the agreement;
150,000.00 on or before October 31, 1986, with the favorable Recommendation of the
CBW on our application.
100,000.00 upon receipt of the study in final form.
Very truly yours,
(S)ANTONIO C. PUNSALAN
(T)ANTONIO C. PUNSALAN
President
CONFORME & RECEIVED from PAIRCARGO, the
amount of ONE HUNDRED THOUSAND PESOS
(P100,000.00), this 17th day of October, 1986
as 1st Installment payment of the service agreement
dated October 13, 1986.
(S)STEFANI C. SAO
(T)STEFANI C. SAO
Accordingly, private respondent prepared a feasibility study for petitioner which
eventually paid him the balance of the contract price, although not according to the
schedule agreed upon. 11
On December 4, 1986, upon Punsalan's request, private respondent sent petitioner
another letter-proposal ("Second Contract" hereafter), which reads:
People's Air Cargo & Warehousing Co., Inc.
Old MIA Compound, Metro Manila
Attention: Mr. ANTONIO PUN[S]ALAN, JR.
President
Dear Mr. Pun[s]alan:
This is to formalize our proposal for consultancy services to your company the scope of
which is defined in the attached service description.
The total service you have decided to avail . . . would be available upon signing of the
conforme below and would come [in] the amount of FOUR HUNDRED THOUSAND PESOS
(P400,000.00) payable at the schedule defined as follows (with the balance covered by
post-dated cheques):
Downpayment upon signing conforme P80,000.00
15 January 1987 53,333.00
30 January 1987 53,333.00
15 February 1987 53,333.00
28 February 1987 53,333.00
15 March1987 53,333.00
30 March 1987 53,333.00
With is package, you are assured of the highest service quality as our performance record
shows we always deliver no less.
Thank you very much.
Yours truly,
(S)STEFANI C. SAO
(T)STEFANI C. SAO
Industrial Engineering Consultant
CONFORME:
(S)ANTONIO C. PUNSALAN JR.
(T)PAIRCARGO CO. INC.
During the trial, the lower court observed that the Second Contract bore, at the lower
right portion of the letter, the following notations in pencil:
1. Operations Manual
2. Seminar/workshop for your employees
P400,000 package deal
50% upon completion of seminar/workshop
50% upon approval by the Commissioner
The Manual has already been approved by the Commissioner but payment has not yet
been made.
The lower left corner of the letter also contained the following notations:
1st letter 4 Dec. 1986
2nd letter 15 June 1987 with
"Hinanakit".
On January 10, 1987, Andy Villaceren, vice president of petitioner, received the
operations manual prepared by private respondent. 12 Petitioner submitted said
operations manual to the Bureau of Customs is connection with the former's application
to operate a bonded warehouse; thereafter, in May 1987, the Bureau issued to it a license
to operate, enabling it to become one of the three public bonded warehouses at the
international airport. 13 Private respondent also conducted, in the third week of January
1987 in the warehouse of petitioner, a three-day training seminar for the latter's
employees. 14
On March 25, 1987, private respondent joined the Bureau of Customs as special assistant
to then Commissioner Alex Padilla, a position he held until he became technical assitant
to then Commissioner Miriam Defensor-Santiago on March 7, 1988. 15 Meanwhile,
Punsalan sold his shares in petitioner-corporation and resigned as its president in 1987. 16
On February 9, 1988, private respondent filed a collection suit against petitioner. He
allege that he had prepared an operations manual for petitioner, conducted a seminar-
workshop for its employees and delivered to it a computer program; but that, despite
demand, petitioner refused to pay him for his services.
Petitioner, in its answer, denied that private respondent had prepared an operations
manual and a computer program or conducted a seminar-workshop for its employees. It
further alleged that the letter-agreement was signed by Punsalan without authority, "in
collusion with [private respondent] in order to unlawfully get some money from
[petitioner]," and despite his knowledge that a group of employees of the company had
been commissioned by the board of directors to prepare an operations manual. 17
The trial court declared the Second Contract unenforceable or simulated. However, since
private respondent had actually prepared the operations manual and conducted a training
seminar for petitioner and its employees, the trial court awarded P60,000 to the former,
on the ground that no one should be unjustly enriched at the expense of another (Article
2142, Civil Code). The trial court determined the amount "in light of the evidence
presented by defendant on the usual charges made by a leading consultancy firm on
similar services." 18
The Ruling of the Court of Appeals
To Respondent Court, the pivotal issue of private respondent's appeal was the
enforceability of the Second Contract. It noted that petitioner did not appeal the Decision
of the trial court, implying that it had agreed to pay the P60,000 award. If the contract
was valid and enforceable, then petitioner should be held liable for the full amount stated
therein, not P60,000 as held by the lower court.
Rejecting the finding of the trial court that the December 4, 1986 contract was simulated
or unenforceable, the CA ruled in favor of its validity and enforceability. According to the
Court of Appeals, the evidence on record shows that the president of petititoner-
corporation had entered into the First Contract, which was similar to the Second Contract.
Thus, petitioner had clothed its president with apparent authority to enter into the
disputed agreement. As it had also become the practice of the petitioner-corporation to
allow its president to negotiate and execute contracts necessary to secure its license as a
customs bonded warehouse without prior board approval, the board itself, by its acts and
through acquiescence, practically laid aside the normal requirement of prior express
approval. The Second Contract was declared valid and binding on the petitioner, which
was held liable to private respondent in the full amount of P400,000.
Disagreeing with the CA, petitioner lodged this petition before us. 19
The Issues
Instead of alleging reversible errors, petitioner imputes "grave abuse of discretion" to the
Court of Appeals, viz.: 20
I. . . . [I]n ruling that the subject letter-agreement for services was binding on the
corporation simply because it was entered into by its president[;]
II. . . . [I]n ruling that the subject letter-agreement for services was binding on the
corporation notwithstanding the lack of any board authority since it was the purported
"practice" to allow the president to enter into contracts of said nature (citing one previous
instance of a similar contract)[;] and
III. . . . [I]n ruling that the subject letter-agreement for services was a valid contract and
not merely simulated.
The Court will overlook the lapse of petitioner in alleging grave abuse of discretion as its
ground for seeking reversal of the assailed Decision. Although the Rules of Court specify
"reversible errors" as grounds for a petition for review under Rule 45, the Court will lay
aside for the nonce this procedural lapse and consider the allegations of "grave abuse" as
statements of reversible errors of law.
Petitioner does not contest its liability; it merely disputes the amount of such
accountability. Hence, the resolution of this petition rests on the sole issue of the
enforceability and validity of the Second Contract, more specifically: (1) whether the
president of the petitioner-corporation had apparent authority to bind petitioner to the
Second Contract; and (2) whether the said contract was valid and not merely simulated.
The Court's Ruling
The petition is not meritorious.
First Issue:
Apparent Authority of a Corporate President
Petitioner argues that the disputed contract is unenforceable, because Punsalan, its
president, was not authorized by its board of directors to enter into said contract.
The general rule is that, in the absence of authority from the board of directors, no
person, not even its officers, can validly bind a corporation. 21 A corporation is a juridical
person, separate and distinct from its stockholders and members, "having . . . powers,
attributes and properties expressly authorized by law or incident to its existence." 22
Being a juridical entity, a corporation may board of directors, which exercises almost all
corporate powers, lays down all corporate business policies and is responsible for the
efficiency of management, 23 as provided in Section 23 of the Corporation Code of the
Philippines:
Sec. 23. The Board of Directors or Trustees. Unless otherwise provided in this Code,
the corporate powers of all corporations formed under this Code shall be exercised, all
business conducted and all property of such corporations controlled and held by the board
of directors or trustees . . . .
Under this provision, the power and the responsibility to decide whether the corporation
should enter into a contract that will bind the corporation is lodged in the board, subject
to the articles of incorporaration, bylaws, or relevant provisions of law. 24 However, just
as a natural person may authorize another to do certain acts for and on his behalf, the
board of directors may validly delegate some of its functions and powers to officers,
committees or agents. The authority of such individuals to bind the corporation is
generally derived from law, corporate bylaws or authorization from the board, either
expressly or impliedly by habit, custom or acquiescence in the general course of
business, viz.: 25
A corporate officer or agent may represent and bind the corporation in transactions with
third persons to the extent that [the] authority to do so has been conferred upon him,
and this includes powers which have been intentionally conferred, and also such powers
as, in the usual course of the particular business, are incidental to, or may be implied
from, the powers intentionally conferred, powers added by custom and usage, as usually
pertaining to the particular officer or agent, and such apparent powers as the corporation
has caused persons dealing with the officer or agent to believe that it has conferred.
Accordingly, the appellate court ruled in this case that the authority to act for and to bind
a corporation may be presumed from acts of recognition in other instances, wherein the
power was in fact exercised without any objection from its board or shareholders.
Petitioner had previously allowed its president to enter into the First Contract with private
respondent without a board resolution expressly authorizing him; thus, it had clothed its
president with apparent authority to execute the subject contract.
Petitioner rebuts, arguing that a single isolated agreement prior to the subject contract
does not constitute corporate practice, which Webster defines as "frequent or custmary
action." It cites Board of Liquidators v. Kalaw, 26 in which the practice of NACOCO
allowing its general manager to negotiate and execute contract in its copra trading
activities for and on its behalf, without prior board approval, was inferred from sixty
contract not one, as in present case previously entered into by the corporation
without such board resolution.
Petitioner's argument is not persuasive. Apparent authority is derived not merely from
practice. Its existence may be ascertained through (1) the general manner in which the
corporation holds out an officer or agent as having the power to act or, in other words,
the apparent authority to act in general, with which it clothes him; or (2) the
acquiescence in his acts of a particular nature, with actual or constructive knowledge
thereof, whether within or beyond the scope of his ordinary powers. 27 It requires
presentation of evidence of similar act(s) executed either in its favor or in favor of other
parties. 28 It is not the quantity of similar acts which establishes apparent authority, but
the vesting of a corporale officer with the power to bind the corporation.
In the case at bar, petitioner, through its president Antonio Punsalan Jr., entered into the
First Contract without first securing board approval. Despite such lack of board approval,
petitioner did not object to or repudiate said contract, thus "clothing" its president with
the power to bind the corporation. The grant of apparent authority to Punsalan is evident
in the testimony of Yong senior vice president, treasurer and major stockholder of
petitioner. Testifying on the First Contract, he said: 29
A: Mr. [Punsalan] told me that he prefer[s] Mr. Sao because Mr. Sao is very influential
with the Collector of Customs[s]. Because the Collector of Custom[s] will be the one to
approve our project study and I objected to that, sir. And I said it [was an exorbitant]
price. And Mr. Punsalan he is the [p]resident, so he [gets] his way.
Q: And so did the company eventually pay this P350,000.00 to Mr. Sao?
A: Yes, sir.
The First Contract was consummated, implemented and paid without a hitch.
Hence, private respondent should not be faulted for believing that Punsalan's conformity
to the contract in dispute was also binding on petitioner. It is familiar doctrine that if a
corporation knowingly permits one of its officers, or any other agent, to act within the
scope of an apparent authority, it holds him out to the public as possessing the power to
do those acts; and thus, the corporation will, as against anyone who has in good faith
dealt with it through such agent, be estopped from denying the agent's authority. 30
Furthermore, private respondent prepared an operations manual and conducted a
seminar for the employees of petitioner in accordance with their contract. Petitioner
accepted the operations manual, submitted it to the Bureau of Customs and allowed the
seminar for its employees. As a result of its aforementioned actions, petitioner was given
by the Bureau of Customs a license to operate a bonded warehouse. Granting arguendo
then that the Second Contract was outside the usual powers of the president, petitioner's
ratification of said contract and acceptance of benefits have made it binding, nonetheless.
The enforceability of contracts under Article 1403(2) is ratified "by the acceptance of
benefits under them" under Article 1405.
Inasmuch as a corporate president is often given general supervision and control over
corporate operations, the strict rule that said officer has no inherent power to act for the
corporation is slowly giving way to the realization that such officer has certain limited
powers in the transaction of the usual and ordinary business of the corporation. 31 In the
absence of a charter or bylaw provision to the contrary, the president is presumed to
have the authority to act within the domain of the general objectives of its business and
within the scope of his or her usual duties. 32
Hence, it has been held in other jurisdictions that the president of a corporation
possesses the power to enter into a contract for the corporation, when the "conduct on
the part of both the president and the corporation [shows] that he had been in the habit
of acting in similar matters on behalf of the company and that the company had
authorized him so to act and had recognized, approved and ratified his former and similar
actions." 33 Furthermore, a party dealing with the president of a corporation is entitled to
assume that he has the authority to enter, on behalf of the corporation, into contracts
that are within the scope of the powers of said corporation and that do not violate any
statute or rule on public policy. 34
Second Issue:
Alleged Simulation of the First Contract
As an alternative position, petitioner seeks to pare down its liabilities by limiting its
exposure from P400,000 to only P60,000, the amount awarded by the RTC. Petitioner
capitalizes on the "badges of fraud" cited by the trial court in declaring said contract
either simulated or unenforceable, viz.:
. . . The October 1986 transaction with [private respondent] involved P350,000. The
same was embodied in a letter which bore therein not only the conformity of [petitioner's]
then President Punsalan but also drew a letter-confirmation from the latter for, indeed, he
was clothed with authority to enter into the contract after the same was brought to the
attention and consideration of [petitioner]. Not only that, a [down payment] was made.
In the alleged agreement of December 4, 1986 subject of the present case, the amount is
even bigger - P400,000.00. Yet, the alleged letter-agreement drew no letter of
confirmation. And no [down payment] and postdated checks were given. Until the filing of
the present case in February 1988, no written demand for payment was sent to
[petitioner]. [Private respondent's] claim that he sent one in writing, and one was sent by
his counsel who manifested that "[h]e was looking for a copy in [his] files" fails in light of
his failure to present any such copy. These and the following considerations, to wit:
1) Despite the fact that no [down payment] and/or postdated checks [partial payments]
(as purportedly stipulated in the alleged contract) [was given, private respondent] went
ahead with the services[;]
2) [There was a delay in the filing of the present suit, more than a year after [private
respondent] allegedly completed his services or eight months after the alleged last verbal
demand for payment made on Punsalan in June 1987;
3) Does not Punsalan's writing allegedly in June 1987 on the alleged letter-agreement of
"your employees[,]" when it should have been "our employees", as he was then still
connected with [petitioner], indicate that the letter-agreement was signed by Punsalan
when he was no longer connected with [petitioner] or, as claimed by [petitioner], that
Punsalan signed it without [petitioner's] authority and must have been done "in collusion
with plaintiff in order to unlawfully get some money from [petitioner]?
4) If, as [private respondent] claims, the letter was returned by Punsalan after affixing
thereon his conformity, how come . . . when Punsalan allegedly visited [private
respondent] in his office at the Bureau of Customs, in June 1987, Punsalan "brought"
(again?) the letter (with the pencil [notation] at the left bottom portion allegedly already
written)?
5) How come . . . [private respondent] did not even keep a copy of the alleged service
contract allegedly attached to the letter-agreement?
6) Was not the letter-agreement a mere draft, it bearing the corrections made by
Punsalan of his name (the letter "n" is inserted before the last letter "o" in Antonio) and
of the spelling of his family name (Punsalan, not Punzalan)?
7) Why was not Punsalan impleaded in the case?
The issue of whether the contract is simulated or real is factual in nature, and the Court
eschews factual examinanon in a petition for review under Rule 45 of the Rules of
Court. 35 This rule, however, admits of exceptions, one of which is a conflict between the
factual findings of the lower and of the appellate courts 36as in the case at bar.
After judicious deliberation, the Court agrees with the appellate court that the alleged
"badges of fraud" mentioned earlier have not affected in any manner the perfection
thereof. First, the lack of payment (whether down, partial or full payment), even after
completion of private respondent's obligations, imports only a defect in the performance
of the contract on the part of petitioner. Second, the delay in the filing of action was not
fatal to private respondent's cause. Despite the lapse of one year after private respondent
completed his services or eight months after the alleged last demand for payment in June
1987, the action was still filed within the allowable period, considering that an action
based on a written contract prescribes only after ten years from the time the right of
action accrues. 37 Third, a misspelling in the contract does not establish vitiation of
consent, cause or object of the contract. Fourth, a confirmation letter is not an essential
element of a contract, neither is it necessary to perfect one. Fifth, private respondent's
failure to implead the corporate president does not establish collusion between them.
Petitioner could have easily filed a third-party claim against Punsalan if it believed that it
had recourse against the latter. Lastly, the mere fact that the contract price was six times
the alleged going rate does not invalidate it. 38 In short, these "badges" do not establish
simulation of said contract.
A fictitious and simulated agreement lacks consent which is essential to a valid and
enforceable contract. 39A contract is simulated if the parties do not intend to be bound at
all (absolutely simulated), 40 or if the parties conceal their true agreement (relatively
simulated).41 In the case at bar, petitioner received from private respondent a letter-offer
containing the terms of the former, including a stipulation of the consideration for the
latter's services. Punsalan's conformity, as well as the receipt and use of the operations
manual, shows petitioner's consent to or, at the very least, ratification of the contract. To
repeat, petitioner even submitted the manual to the Bureau of Customs and allowed
private respondent to conduct the seminar for its employees. Private respondent heard no
objection from the petitioner, until he claimed payment for the services he had rendered.
Contemporaneous and subsequent acts are also principal factors in the determination of
the will of the contracting parties. 42 The circumstances outlined above do not establish
any intention to simulate the contract in dispute. On the contrary, the legal presumption
is always on the validity of contracts. A corporation, by accepting benefits of a transaction
entered into without authority, has ratified the agreement and is, therefore, bound by
it. 43
WHEREFORE, the petition is hereby DENIED and the assailed Decision
AFFIRMED. Costs against petitioner.
SO ORDERED.
8) Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 121466 August 15, 1997
PMI COLLEGES, petitioner,
vs.
THE NATIONAL LABOR RELATIONS COMMISSION and ALEJANDRO GA LVA
N, respondents.
ROMERO, J.:
Subject of the instant petition for certiorari under Rule 65 of the Rules of Court is the
resolution 1 of public respondent National Labor Relations Commission 2 rendered on
August 4, 1995, affirming in toto the December 7, 1994 decision 3 of Labor Arbiter Pablo
C. Espiritu declaring petitioner PMI Colleges liable to pay private respondent Alejandro
Galvan P405,000.00 in unpaid wages and P40,532.00 as attorney's fees.
A chronicle of the pertinent events on record leading to the filing of the instant petition is
as follows:
On July 7, 1991, petitioner, an educational institution offering courses on basic seaman's
training and other marine-related courses, hired private respondent as contractual
instructor with an agreement that the latter shall be paid at an hourly rate of P30.00 to
P50.00, depending on the description of load subjects and on the schedule for teaching
the same. Pursuant to this engagement, private respondent then organized classes in
marine engineering.
Initially, private respondent and other instructors were compensated for services
rendered during the first three periods of the abovementioned contract. However, for
reasons unknown to private respondent, he stopped receiving payment for the succeeding
rendition of services. This claim of non-payment was embodied in a letter dated March 3,
1992, written by petitioner's Acting Director, Casimiro A. Aguinaldo, addressed to its
President, Atty. Santiago Pastor, calling attention to and appealing for the early approval
and release of the salaries of its instructors including that of private respondent. It
appeared further in said letter that the salary of private respondent corresponding to the
shipyard and plant visits and the ongoing on-the-job training of Class 41 on board MV
"Sweet Glory" of Sweet Lines, Inc. was not yet included. This request of the Acting
Director apparently went unheeded. Repeated demands having likewise failed, private
respondent was soon constrained to file a complaint 4 before the National Capital Region
Arbitration Branch on September 14, 1993 seeking payment for salaries earned from the
following: (1) basic seaman course Classes 41 and 42 for the period covering October
1991 to September 1992; (2) shipyard and plant visits and on-the-job training of Classes
41 and 42 for the period covering October 1991 to September 1992 on board M/V "Sweet
Glory" vessel; and (3) as Acting Director of Seaman Training Course for 3-1/2 months.
In support of the abovementioned claims, private respondent submitted documentary
evidence which were annexed to his complaint, such as the detailed load and schedule of
classes with number of class hours and rate per hour (Annex "A"); PMI Colleges Basic
Seaman Training Course (Annex "B"); the aforementioned letter-request for payment of
salaries by the Acting Director of PMI Colleges (Annex "C"); unpaid load of private
respondent (Annex "D"); and vouchers prepared by the accounting department of
petitioner but whose amounts indicated therein were actually never paid to private
respondent (Exhibit "E").
Private respondent's claims, as expected, were resisted by petitioner. It alleged that
classes in the courses offered which complainant claimed to have remained unpaid were
not held or conducted in the school premises of PMI Colleges. Only private respondent, it
was argued, knew whether classes were indeed conducted. In the same vein, petitioner
maintained that it exercised no appropriate and proper supervision of the said classes
which activities allegedly violated certain rules and regulations of the Department of
Education, Culture and Sports (DECS). Furthermore, the claims, according to petitioner,
were all exaggerated and that, at any rate, private respondent abandoned his work at the
time he should have commenced the same.
In reply, private respondent belied petitioner's allegations contending, among others, that
he conducted lectures within the premises of petitioner's rented space located at 5th
Floor, Manufacturers Bldg., Sta. Cruz, Manila; that his students duly enrolled with the
Registrar's Office of petitioner; that shipyard and plant visits were conducted at Fort San
Felipe, Cavite Naval Base; that petitioner was fully aware of said shipyard and plant visits
because it even wrote a letter for that purpose; and that basic seaman courses 41 and 42
were sanctioned by the DECS as shown by the records of the Registrar's Office.
Later in the proceedings below, petitioner manifested that Mr. Tomas G. Cloma, Jr., a
member of the petitioner's Board of Trustees wrote a letter 5 to the Chairman of the
Board on May 23, 1994, clarifying the case of private respondent and stating
therein, inter alia, that under petitioner's by-laws only the Chairman is authorized to sign
any contract and that private respondent, in any event, failed to submit documents on
the alleged shipyard and plant visits in Cavite Naval Base.
Attempts at amicable settlement having failed, the parties were required to submit their
respective position papers. Thereafter, on June 16, 1994, the Labor Arbiter issued an
order declaring the case submitted for decision on the basis of the position papers which
the parties filed. Petitioner, however, vigorously opposed this order insisting that there
should be a formal trial on the merits in view of the important factual issues raised. In
another order dated July 22, 1994, the Labor Arbiter impliedly denied petitioner's
opposition, reiterating that the case was already submitted for decision. Hence, a decision
was subsequently rendered by the Labor Arbiter on December 7, 1994 finding for the
private respondent. On appeal, the NLRC affirmed the same in toto in its decision of
August 4, 1995.
Aggrieved, petitioner now pleads for the Court to resolve the following issues in its favor,
to wit:
I. Whether the money claims of private respondent representing salaries/wages as
contractual instructor for class instruction, on-the-job training and shipboard and plant
visits have valid legal and factual bases;
II. Whether claims for salaries/wages for services relative to on-the-job training and
shipboard and plant visits by instructors, assuming the same were really conducted, have
valid bases;
III. Whether the petitioner was denied its right to procedural due process; and
IV. Whether the NLRC findings in its questioned resolution have sound legal and factual
support.
We see no compelling reason to grant petitioner's plea; the same must, therefore, be
dismissed.
At once, a mere perusal of the issues raised by petitioner already invites dismissal for
demonstrated ignorance and disregard of settled rules on certiorari. Except perhaps for
the third issue, the rest glaringly call for a re-examination, evaluation and appreciation of
the weight and sufficiency of factual evidence presented before the Labor Arbiter. This, of
course, the Court cannot do in the exercise of its certiorari jurisdiction without
transgressing the well-defined limits thereof. The corrective power of the Court in this
regard is confined only to jurisdictional issues and a determination of whether there is
such grave abuse of discretion amounting to lack or excess of jurisdiction on the part of a
tribunal or agency. So unyielding and consistent are the decisional rules thereon that it is
indeed surprising why petitioner's counsel failed to accord them the observance they
deserve.
Thus, in San Miguel Foods, Inc. Cebu B-Men Feed Plant v. Hon. Bienvenido
Laguesma, 6 we were emphatic in declaring that:
This Court is definitely not the proper venue to consider this matter for it is not a trier of
facts. . . . Certiorari is a remedy narrow in its scope and inflexible in character. It is not a
general utility tool in the legal workshop. Factual issues are not a proper subject for
certiorari, as the power of the Supreme Court to review labor cases is limited to the issue
of jurisdiction and grave abuse of discretion. . . . (Emphasis supplied).
Of the same tenor was our disquisition in Ilocos Sur Electric Cooperative,
Inc. v. NLRC 7 where we made plain that:
In certiorari proceedings under Rule 65 of the Rules of Court, judicial review by this
Court does not go so far as to evaluate the sufficiency of evidence upon which the Labor
Arbiter and the NLRC based their determinations, the inquiry being limited essentially to
whether or not said public respondents had acted without or in excess of its jurisdiction or
with grave abuse of discretion. (Emphasis supplied).
To be sure, this does not mean that the Court would disregard altogether the evidence
presented. We merely declare that the extent of review of evidence we ordinarily provide
in other cases is different when it is a special civil action of certiorari. The latter
commands us to merely determine whether there is basis established on record to
support the findings of a tribunal and such findings meet the required quantum of proof,
which in this instance, is substantial evidence. Our deference to the expertise acquired by
quasi-judicial agencies and the limited scope granted to us in the exercise
of certiorari jurisdiction restrain us from going so far as to probe into the correctness of a
tribunal's evaluation of evidence, unless there is palpable mistake and complete disregard
thereof in which case certiorari would be proper. In plain terms, in certiorari proceedings,
we are concerned with mere "errors of jurisdiction" and not "errors of judgment." Thus:
The rule is settled that the original and exclusive jurisdiction of this Court to review a
decision of respondent NLRC (or Executive Labor Arbiter as in this case) in a petition
for certiorari under Rule 65 does not normally include an inquiry into the correctness of
its evaluation of the evidence. Errors of judgment, as distinguished from errors of
jurisdiction, are not within the province of a special civil action for certiorari, which is
merely confined to issues of jurisdiction or grave abuse of discretion. It is thus incumbent
upon petitioner to satisfactorily establish that respondent Commission or executive labor
arbiter acted capriciously and whimsically in total disregard of evidence material to or
even decisive of the controversy, in order that the extraordinary writ of certiorari will lie.
By grave abuse of discretion is meant such capricious and whimsical exercise of judgment
as is equivalent to lack of jurisdiction, and it must be shown that the discretion was
exercised arbitrarily or despotically. For certiorari to lie there must be capricious, arbitrary
and whimsical exercise of power, the very antithesis of the judicial prerogative in
accordance with centuries of both civil law and common law traditions. 8
The Court entertains no doubt that the foregoing doctrines apply with equal force in the
case at bar.
In any event, granting that we may have to delve into the facts and evidence of the
parties, we still find no puissant justification for us to adjudge both the Labor Arbiter's
and NLRC's appreciation of such evidence as indicative of any grave abuse of discretion.
First. Petitioner places so much emphasis on its argument that private respondent did not
produce a copy of the contract pursuant to which he rendered services. This argument is,
of course, puerile. The absence of such copy does not in any manner negate the existence
of a contract of employment since "(C)ontracts shall be obligatory, in whatever form they
have
been entered into, provided all the essential requisites for their validity are
present." 9 The only exception to this rule is "when the law requires that a contract be in
some form in order that it may be valid or enforceable, or that a contract be proved in a
certain way." However, there is no requirement under the law that the contract of
employment of the kind entered into by petitioner with private respondent should be in
any particular form. While it may have been desirable for private respondent to have
produced a copy of his contract if one really exists, but the absence thereof, in any case,
does not militate against his claims inasmuch as:
No particular form of evidence is required to prove the existence of an employer-
employee relationship. Any competent and relevant evidence to prove the relationship
may be admitted. For, if only documentary evidence would be required to show that
relationship, no scheming employer would ever be brought before the bar of justice, as
no employer would wish to come out with any trace of the illegality he has authored
considering that it should take much weightier proof to invalidate a written instrument. . .
. 10
At any rate, the vouchers prepared by petitioner's own accounting department and the
letter-request of its Acting Director asking for payment of private respondent's services
suffice to support a reasonable conclusion that private respondent was employed with
petitioner. How else could one explain the fact that private respondent was supposed to
be paid the amounts mentioned in those documents if he were not employed? Petitioner's
evidence is wanting in this respect while private respondent affirmatively stated that the
same arose out of his employment with petitioner. As between the two, the latter is
weightier inasmuch as we accord affirmative testimony greater value than a negative
one. For the foregoing reasons, we find it difficult to agree with petitioner's assertion that
the absence of a copy of the alleged contract should nullify private respondent's claims.
Neither can we concede that such contract would be invalid just because the signatory
thereon was not the Chairman of the Board which allegedly violated petitioner's by-laws.
Since by-laws operate merely as internal rules among the stockholders, they cannot
affect or prejudice third persons who deal with the corporation, unless they have
knowledge of the same." 11 No proof appears on record that private respondent ever
knew anything about the provisions of said by-laws. In fact, petitioner itself merely
asserts the same without even bothering to attach a copy or excerpt thereof to show that
there is such a provision. How can it now expect the Labor Arbiter and the NLRC to
believe it? That this allegation has never been denied by private respondent does not
necessarily signify admission of its existence because technicalities of law and procedure
and the rules obtaining in the courts of law do not strictly apply to proceedings of this
nature.
Second. Petitioner bewails the fact that both the Labor Arbiter and the NLRC accorded
due weight to the documents prepared by private respondent since they are said to be
self-serving. "Self-serving evidence" is not to be literally taken as evidence that serves
one's selfish interest. 12 The fact alone that most of the documents submitted in evidence
by private respondent were prepared by him does not make them self-serving since they
have been offered in the proceedings before the Labor Arbiter and that ample opportunity
was given to petitioner to rebut their veracity and authenticity. Petitioner, however, opted
to merely deny them which denial, ironically, is actually what is considered self-serving
evidence 13 and, therefore, deserves scant consideration. In any event, any denial made
by petitioner cannot stand against the affirmative and fairly detailed manner by which
private respondent supported his claims, such as the places where he conducted his
classes, on-the-job training and shipyard and plant visits; the rate he applied and the
duration of said rendition of services; the fact that he was indeed engaged as a
contractual instructor by petitioner; and that part of his services was not yet
remunerated. These evidence, to reiterate, have never been effectively refuted by
petitioner.
Third. As regards the amounts demanded by private respondent, we can only rely upon
the evidence presented which, in this case, consists of the computation of private
respondent, as well as the findings of both the Labor Arbiter and the NLRC. Petitioner, it
must be stressed, presented no satisfactory proof to the contrary. Absent such proof, we
are constrained to rely upon private respondent's otherwise straightforward explanation
of his claims.
Fourth. The absence of a formal hearing or trial before the Labor Arbiter is no cause for
petitioner to impute grave abuse of discretion. Whether to conduct one or not depends on
the sole discretion of the Labor Arbiter, taking into account the position papers and
supporting documents submitted by the parties on every issue presented. If the Labor
Arbiter, in his judgment, is confident that he can rely on the documents before him, he
cannot be faulted for not conducting a formal trial anymore, unless it would appear that,
in view of the particular circumstances of a case, the documents, without more, are really
insufficient.
As applied to the instant case, we can understand why the Labor Arbiter has opted not to
proceed to trial, considering that private respondent, through annexes to his position
paper, has adequately established that, first of all, he was an employee of petitioner;
second, the nature and character of his services, and finally, the amounts due him in
consideration of his services. Petitioner, it should be reiterated, failed to controvert them.
Actually, it offered only four documents later in the course of the proceedings. It has only
itself to blame if it did not attach its supporting evidence with its position paper. It cannot
now insist that there be a trial to give it an opportunity to ventilate what it should have
done earlier. Section 3, Rule V of the New Rules of Procedure of the NLRC is very clear on
the matter:
Sec. 3. . . .
These verified position papers . . . shall be accompanied by all supporting documents
including the affidavits of their respective witnesses which shall take the place of the
latter's direct testimony. The parties shall thereafter not be allowed to allege facts, or
present evidence to prove facts, not referred to and any cause or causes of action not
included in the complaint or position papers, affidavits and other documents. . . .
(Emphasis supplied).
Thus, given the mandate of said rule, petitioner should have foreseen that the Labor
Arbiter, in view of the non-litigious nature of the proceedings before it, might not proceed
at all to trial. Petitioner cannot now be heard to complain of lack of due process. The
following is apropos:
The petitioners should not have assumed that after they submitted their position papers,
the Labor Arbiter would call for a formal trial or hearing. The holding of a trial is
discretionary on the Labor Arbiter, it is not a matter of right of the parties, especially in
this case, where the private respondents had already presented their documentary
evidence.
xxx xxx xxx
The petitioners did ask in their position paper for a hearing to thresh out some factual
matters pertinent to their case. However, they had no right or reason to assume that
their request would be granted. The petitioners should have attached to their position
paper all the documents that would prove their claim in case it was decided that no
hearing should be conducted or was necessary. In fact, the rules require that position
papers shall be accompanied by all supporting documents, including affidavits of
witnesses in lieu of their direct testimony. 14
It must be noted that adequate opportunity was given to petitioner in the presentation of
its evidence, such as when the Labor Arbiter granted petitioner's Manifestation and
Motion 15 dated July 22, 1994 allowing it to submit four more documents. This
opportunity notwithstanding, petitioner still failed to fully proffer all its evidence which
might help the Labor Arbiter in resolving the issues. What it desired instead, as stated in
its petition, 16 was to "require presentation of witnesses buttressed by relevant
documents in support thereof." But this is precisely the opportunity given to petitioner
when the Labor Arbiter granted its Motion and Manifestation. It should have presented
the documents it was proposing to submit. The affidavits of its witnesses would have
sufficed in lieu of their direct testimony 17 to clarify what it perceives to be complex
factual issues. We rule that the Labor Arbiter and the NLRC were not remiss in their duty
to afford petitioner due process. The essence of due process is merely that a party be
afforded a reasonable opportunity to be heard and to submit any evidence he may have
in support of his defense. 18
WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED for lack
of merit while the resolution of the National Labor Relations Commission dated August 4,
1995 is hereby AFFIRMED.
SO ORDERED.