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 oppositionsintervention 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.

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 Exchange Commission acts on the matters complained of in the instant petition.
On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a restraining
order had been issued by this Court, or on May 9, 1977, the respondent Commission
served upon petitioner copies of the following orders:
(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's motion for
reconsideration, with its supplement, of the order of the Commission denying in part
petitioner's motion for production of documents, petitioner's motion for reconsideration of
the order denying the issuance of a temporary restraining order denying the issuance of
a temporary restraining order, and petitioner's consolidated motion to declare
respondents in contempt and to nullify the stockholders' meeting;
(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run as a
director of respondent corporation but stating that he should not sit as such if elected,
until such time that the Commission has decided the validity of the bylaws in dispute, and
denying deferment of Item 6 of the Agenda for the annual stockholders' meeting; and
(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's motion for
reconsideration of the order of respondent Commission denying petitioner's motion for
summary judgment;
It is petitioner's assertions, anent the foregoing orders, (1) that respondent Commission
acted with indecent haste and without circumspection in issuing the aforesaid orders to
petitioner's irreparable damage and injury; (2) that it acted without jurisdiction and in
violation of petitioner's right to due process when it decided en banc an issue not raised

before it and still pending before one of its Commissioners, and without hearing petitioner
thereon despite petitioner's request to have the same calendared for hearing , and (3)
that the respondents acted oppressively against the petitioner in violation of his rights as
a stockholder, warranting immediate judicial intervention.
It is prayed in the supplemental petition that the SEC orders complained of be declared
null and void and that respondent Commission be ordered to allow petitioner to
undertake discovery proceedings relative to San Miguel International. Inc. and thereafter
to decide SEC Cases No. 1375 and 1423 on the merits.
On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed
their comment, alleging that the petition is without merit for the following reasons:
(1) that the petitioner the interest he represents are engaged in business competitive and
antagonistic to that of respondent San Miguel Corporation, it appearing that the owns and
controls a greater portion of his SMC stock thru the Universal Robina Corporation and
the Consolidated Foods Corporation, which corporations are engaged in business
directly and substantially competing with the allied businesses of respondent SMC and of
corporations in which SMC has substantial investments. Further, when CFC and Robina
had accumulated investments. Further, when CFC and Robina had accumulated shares
in SMC, the Board of Directors of SMC realized the clear and present danger that
competitors or antagonistic parties may be elected directors and thereby have easy and
direct access to SMC's business and trade secrets and plans;
(2) that the amended by law were adopted to preserve and protect respondent SMC from
the clear and present danger that business competitors, if allowed to become directors,
will illegally and unfairly utilize their direct access to its business secrets and plans for
their own private gain to the irreparable prejudice of respondent SMC, and, ultimately, its
stockholders. Further, it is asserted that membership of a competitor in the Board of
Directors is a blatant disregard of no less that the Constitution and pertinent laws against
combinations in restraint of trade;
(3) that by laws are valid and binding since a corporation has the inherent right and duty
to preserve and protect itself by excluding competitors and antogonistic parties, under the
law of self-preservation, and it should be allowed a wide latitude in the selection of
means to preserve itself;
(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and 1423
was due to petitioner's own acts or omissions, since he failed to have the petition to
suspend, pendente lite the amended by-laws calendared for hearing. It was emphasized
that it was only on April 29, 1977 that petitioner calendared the aforesaid petition for
suspension (preliminary injunction) for hearing on May 3, 1977. The instant petition being
dated May 4, 1977, it is apparent that respondent Commission was not given a chance to
act "with deliberate dispatch", and
(5) that, even assuming that the petition was meritorious was, it has become moot and
academic because respondent Commission has acted on the pending incidents,
complained of. It was, therefore, prayed that the petition be dismissed.
On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his comment, alleging that
the petition has become moot and academic for the reason, among others that the acts
of private respondent sought to be enjoined have reference to the annual meeting of the
stockholders of respondent San Miguel Corporation, which was held on may 10, 1977;
that in said meeting, in compliance with the order of respondent Commission, petitioner
was allowed to run and be voted for as director; and that in the same meeting, Item 6 of
the Agenda was discussed, voted upon, ratified and confirmed. Further it was averred

that the questions and issues raised by petitioner are pending in the Securities and
Exchange Commission which has acquired jurisdiction over the case, and no hearing on
the merits has been had; hence the elevation of these issues before the Supreme Court
is premature.
Petitioner filed a reply to the aforesaid comments, stating that the petition presents
justiciable questions for the determination of this Court because (1) the respondent
Commission acted without circumspection, unfairly and oppresively against petitioner,
warranting the intervention of this Court; (2) a derivative suit, such as the instant case, is
not rendered academic by the act of a majority of stockholders, such that the discussion,
ratification and confirmation of Item 6 of the Agenda of the annual stockholders' meeting
of May 10, 1977 did not render the case moot; that the amendment to the bylaws which
specifically bars petitioner from being a director is void since it deprives him of his vested
rights.
Respondent Commission, thru the Solicitor General, filed a separate comment, alleging
that after receiving a copy of the restraining order issued by this Court and noting that the
restraining order did not foreclose action by it, the Commission en banc issued Orders
Nos. 449, 450 and 451 in SEC Case No. 1375.
In answer to the allegation in the supplemental petition, it states that Order No. 450 which
denied deferment of Item 6 of the Agenda of the annual stockholders' meeting of
respondent corporation, took into consideration an urgent manifestation filed with the
Commission by petitioner on May 3, 1977 which prayed, among others, that the
discussion of Item 6 of the Agenda be deferred. The reason given for denial of deferment
was that "such action is within the authority of the corporation as well as falling within the
sphere of stockholders' right to know, deliberate upon and/or to express their wishes
regarding disposition of corporate funds considering that their investments are the ones
directly affected." It was alleged that the main petition has, therefore, become moot and
academic.
On September 29,1977, petitioner filed a second supplemental petition with prayer for
preliminary injunction, alleging that the actuations of respondent SEC tended to deprive
him of his right to due process, and "that all possible questions on the facts now pending
before the respondent Commission are now before this Honorable Court which has the
authority and the competence to act on them as it may see fit." (Reno, pp. 927-928.)
Petitioner, in his memorandum, submits the following issues for resolution;
(1) whether or not the provisions of the amended by-laws of respondent corporation,
disqualifying a competitor from nomination or election to the Board of Directors are valid
and reasonable;
(2) whether or not respondent SEC gravely abused its discretion in denying petitioner's
request for an examination of the records of San Miguel International, Inc., a fully owned
subsidiary of San Miguel Corporation; and
(3) whether or not respondent SEC committed grave abuse of discretion in allowing
discussion of Item 6 of the Agenda of the Annual Stockholders' Meeting on May 10, 1977,
and the ratification of the investment in a foreign corporation of the corporate funds,
allegedly in violation of section 17-1/2 of the Corporation Law.
I
Whether or not amended by-laws are valid is purely a legal question which public interest
requires to be resolved

It is the position of the petitioner that "it is not necessary to remand the case to
respondent SEC for an appropriate ruling on the intrinsic validity of the amended by-laws
in compliance with the principle of exhaustion of administrative remedies", considering
that: first: "whether or not the provisions of the amended by-laws are intrinsically valid ...
is purely a legal question. There is no factual dispute as to what the provisions are and
evidence is not necessary to determine whether such amended by-laws are valid as
framed and approved ... "; second: "it is for the interest and guidance of the public that an
immediate and final ruling on the question be made ... "; third: "petitioner was denied due
process by SEC" when "Commissioner de Guzman had openly shown prejudice against
petitioner ... ", and "Commissioner Sulit ... approved the amended by-laws ex-parte and
obviously found the same intrinsically valid; and finally: "to remand the case to SEC
would only entail delay rather than serve the ends of justice."
Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that this Court
resolve the legal issues raised by the parties in keeping with the "cherished rules of
procedure" that "a court should always strive to settle the entire controversy in a single
proceeding leaving no root or branch to bear the seeds of future ligiation", citingGayong
v. Gayos. 3 To the same effect is the prayer of San Miguel Corporation that this Court resolve
on the merits the validity of its amended by laws and the rights and obligations of the parties
thereunder, otherwise "the time spent and effort exerted by the parties concerned and, more
importantly, by this Honorable Court, would have been for naught because the main question
will come back to this Honorable Court for final resolution." Respondent Eduardo R. Visaya
submits a similar appeal.
It is only the Solicitor General who contends that the case should be remanded to the
SEC for hearing and decision of the issues involved, invoking the latter's primary
jurisdiction to hear and decide case involving intra-corporate controversies.
It is an accepted rule of procedure that the Supreme Court should always strive to settle
the entire controversy in a single proceeding, leaving nor root or branch to bear the
seeds of future litigation. 4 Thus, in Francisco v. City of Davao, 5 this Court resolved to decide
the case on the merits instead of remanding it to the trial court for further proceedings since
the ends of justice would not be subserved by the remand of the case. In Republic v. Security
Credit and Acceptance Corporation, et al., 6 this Court, finding that the main issue is one of
law, resolved to decide the case on the merits "because public interest demands an early
disposition of the case", and in Republic v. Central Surety and Insurance Company, 7 this
Court denied remand of the third-party complaint to the trial court for further proceedings,
citing precedent where this Court, in similar situations resolved to decide the cases on the
merits, instead of remanding them to the trial court where (a) the ends of justice would not be
subserved by the remand of the case; or (b) where public interest demand an early
disposition of the case; or (c) where the trial court had already received all the evidence
presented by both parties and the Supreme Court is now in a position, based upon said
evidence, to decide the case on its merits. 8 It is settled that the doctrine of primary jurisdiction
has no application where only a question of law is involved. 8a Because uniformity may be
secured through review by a single Supreme Court, questions of law may appropriately be
determined in the first instance by courts. 8b In the case at bar, there are facts which cannot
be denied, viz.: that the amended by-laws were adopted by the Board of Directors of the San
Miguel Corporation in the exercise of the power delegated by the stockholders ostensibly
pursuant to section 22 of the Corporation Law; that in a special meeting on February 10, 1977
held specially for that purpose, the amended by-laws were ratified by more than 80% of the
stockholders of record; that the foreign investment in the Hongkong Brewery and Distellery, a
beer manufacturing company in Hongkong, was made by the San Miguel Corporation in
1948; and that in the stockholders' annual meeting held in 1972 and 1977, all foreign
investments and operations of San Miguel Corporation were ratified by the stockholders.
II

Whether or not the amended by-laws of SMC of disqualifying a competitor from

nomination or election to the Board of Directors of SMC are valid and reasonable
The validity or reasonableness of a by-law of a corporation in purely a question of
law. 9 Whether the by-law is in conflict with the law of the land, or with the charter of the
corporation, or is in a legal sense unreasonable and therefore unlawful is a question of
law. 10 This rule is subject, however, to the limitation that where the reasonableness of a bylaw is a mere matter of judgment, and one upon which reasonable minds must necessarily
differ, a court would not be warranted in substituting its judgment instead of the judgment of
those who are authorized to make by-laws and who have exercised their authority. 11
Petitioner claims that the amended by-laws are invalid and unreasonable because they
were tailored to suppress the minority and prevent them from having representation in
the Board", at the same time depriving petitioner of his "vested right" to be voted for and
to vote for a person of his choice as director.
Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San
Miguel Corporation content that ex. conclusion of a competitor from the Board is
legitimate corporate purpose, considering that being a competitor, petitioner cannot
devote an unselfish and undivided Loyalty to the corporation; that it is essentially a
preventive measure to assure stockholders of San Miguel Corporation of reasonable
protective from the unrestrained self-interest of those charged with the promotion of the
corporate enterprise; that access to confidential information by a competitor may result
either in the promotion of the interest of the competitor at the expense of the San Miguel
Corporation, or the promotion of both the interests of petitioner and respondent San
Miguel Corporation, which may, therefore, result in a combination or agreement in
violation of Article 186 of the Revised Penal Code by destroying free competition to the
detriment of the consuming public. It is further argued that there is not vested right of any
stockholder under Philippine Law to be voted as director of a corporation. It is alleged
that petitioner, as of May 6, 1978, has exercised, personally or thru two corporations
owned or controlled by him, control over the following shareholdings in San Miguel
Corporation, vis.: (a) John Gokongwei, Jr. 6,325 shares; (b) Universal Robina
Corporation 738,647 shares; (c) CFC Corporation 658,313 shares, or a total of
1,403,285 shares. Since the outstanding capital stock of San Miguel Corporation, as of
the present date, is represented by 33,139,749 shares with a par value of P10.00, the
total shares owned or controlled by petitioner represents 4.2344% of the total outstanding
capital stock of San Miguel Corporation. It is also contended that petitioner is the
president and substantial stockholder of Universal Robina Corporation and CFC
Corporation, both of which are allegedly controlled by petitioner and members of his
family. It is also claimed that both the Universal Robina Corporation and the CFC
Corporation are engaged in businesses directly and substantially competing with the
alleged businesses of San Miguel Corporation, and of corporations in which SMC has
substantial investments.
ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S CORPORATIONS
AND SAN MIGUEL CORPORATION
According to respondent San Miguel Corporation, the areas of, competition are
enumerated in its Board the areas of competition are enumerated in its Board Resolution
dated April 28, 1978, thus:
Product Line Estimated Market Share Total
1977 SMC Robina-CFC
Table Eggs 0.6% 10.0% 10.6%
Layer Pullets 33.0% 24.0% 57.0%

Dressed Chicken 35.0% 14.0% 49.0%

Poultry & Hog Feeds 40.0% 12.0% 52.0%
Ice Cream 70.0% 13.0% 83.0%
Instant Coffee 45.0% 40.0% 85.0%
Woven Fabrics 17.5% 9.1% 26.6%
Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC
involved product sales of over P400 million or more than 20% of the P2 billion total
product sales of SMC. Significantly, the combined market shares of SMC and CFCRobina in layer pullets dressed chicken, poultry and hog feeds ice cream, instant coffee
and woven fabrics would result in a position of such dominance as to affect the prevailing
market factors.
It is further asserted that in 1977, the CFC-Robina group was in direct competition on
product lines which, for SMC, represented sales amounting to more than ?478 million. In
addition, CFC-Robina was directly competing in the sale of coffee with Filipro, a
subsidiary of SMC, which product line represented sales for SMC amounting to more
than P275 million. The CFC-Robina group (Robitex, excluding Litton Mills recently
acquired by petitioner) is purportedly also in direct competition with Ramie Textile, Inc.,
subsidiary of SMC, in product sales amounting to more than P95 million. The areas of
competition between SMC and CFC-Robina in 1977 represented, therefore, for SMC,
product sales of more than P849 million.
According to private respondents, at the Annual Stockholders' Meeting of March 18,
1976, 9,894 stockholders, in person or by proxy, owning 23,436,754 shares in SMC, or
more than 90% of the total outstanding shares of SMC, rejected petitioner's candidacy for
the Board of Directors because they "realized the grave dangers to the corporation in the
event a competitor gets a board seat in SMC." On September 18, 1978, the Board of
Directors of SMC, by "virtue of powers delegated to it by the stockholders," approved the
amendment to ' he by-laws in question. At the meeting of February 10, 1977, these
amendments were confirmed and ratified by 5,716 shareholders owning 24,283,945
shares, or more than 80% of the total outstanding shares. Only 12 shareholders,
representing 7,005 shares, opposed the confirmation and ratification. At the Annual
Stockholders' Meeting of May 10, 1977, 11,349 shareholders, owning 27,257.014 shares,
or more than 90% of the outstanding shares, rejected petitioner's candidacy, while 946
stockholders, representing 1,648,801 shares voted for him. On the May 9, 1978 Annual
Stockholders' Meeting, 12,480 shareholders, owning more than 30 million shares, or
more than 90% of the total outstanding shares. voted against petitioner.
AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS
EXPRESSLY CONFERRED BY LAW
Private respondents contend that the disputed amended by laws were adopted by the
Board of Directors of San Miguel Corporation a-, a measure of self-defense to protect the
corporation from the clear and present danger that the election of a business competitor
to the Board may cause upon the corporation and the other stockholders inseparable
prejudice. Submitted for resolution, therefore, is the issue whether or not respondent
San Miguel Corporation could, as a measure of self- protection, disqualify a competitor
from nomination and election to its Board of Directors.
It is recognized by an authorities that 'every corporation has the inherent power to adopt
by-laws 'for its internal government, and to regulate the conduct and prescribe the rights
and duties of its members towards itself and among themselves in reference to the
management of its affairs. 12 At common law, the rule was "that the power to make and adopt
by-laws was inherent in every corporation as one of its necessary and inseparable legal
incidents. And it is settled throughout the United States that in the absence of positive

legislative provisions limiting it, every private corporation has this inherent power as one of its
necessary and inseparable legal incidents, independent of any specific enabling provision in
its charter or in general law, such power of self-government being essential to enable the
corporation to accomplish the purposes of its creation. 13

In this jurisdiction, under section 21 of the Corporation Law, a corporation may prescribe
in its by-laws "the qualifications, duties and compensation of directors, officers and
employees ... " This must necessarily refer to a qualification in addition to that specified
by section 30 of the Corporation Law, which provides that "every director must own in his
right at least one share of the capital stock of the stock corporation of which he is a
director ... " InGovernment v. El Hogar, 14 the Court sustained the validity of a provision in
the corporate by-law requiring that persons elected to the Board of Directors must be holders
of shares of the paid up value of P5,000.00, which shall be held as security for their action, on
the ground that section 21 of the Corporation Law expressly gives the power to the
corporation to provide in its by-laws for the qualifications of directors and is "highly prudent
and in conformity with good practice. "
NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR
Any person "who buys stock in a corporation does so with the knowledge that its affairs
are dominated by a majorityof the stockholders and that he impliedly contracts that the
will of the majority shall govern in all matters within the limits of the act of incorporation
and lawfully enacted by-laws and not forbidden by law." 15 To this extent, therefore, the
stockholder may be considered to have "parted with his personal right or privilege to regulate
the disposition of his property which he has invested in the capital stock of the corporation,
and surrendered it to the will of the majority of his fellow incorporators. ... It cannot therefore
be justly said that the contract, express or implied, between the corporation and the
stockholders is infringed ... by any act of the former which is authorized by a majority ... ." 16
Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of
incorporation by a vote or written assent of the stockholders representing at least twothirds of the subscribed capital stock of the corporation If the amendment changes,
diminishes or restricts the rights of the existing shareholders then the disenting minority
has only one right, viz.: "to object thereto in writing and demand payment for his share."
Under section 22 of the same law, the owners of the majority of the subscribed capital
stock may amend or repeal any by-law or adopt new by-laws. It cannot be said,
therefore, that petitioner has a vested right to be elected director, in the face of the fact
that the law at the time such right as stockholder was acquired contained the prescription
that the corporate charter and the by-law shall be subject to amendment, alteration and
modification. 17
It being settled that the corporation has the power to provide for the qualifications of its
directors, the next question that must be considered is whether the disqualification of a
competitor from being elected to the Board of Directors is a reasonable exercise of
corporate authority.
A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS
SHAREHOLDERS
Although in the strict and technical sense, directors of a private corporation are not
regarded as trustees, there cannot be any doubt that their character is that of a fiduciary
insofar as the corporation and the stockholders as a body are concerned. As agents
entrusted with the management of the corporation for the collective benefit of the
stockholders, "they occupy a fiduciary relation, and in this sense the relation is one of
trust." 18 "The ordinary trust relationship of directors of a corporation and stockholders",
according to Ashaman v. Miller, 19 "is not a matter of statutory or technical law. It springs from
the fact that directors have the control and guidance of corporate affairs and property and

hence of the property interests of the stockholders. Equity recognizes that stockholders are
the proprietors of the corporate interests and are ultimately the only beneficiaries thereof * * *.

Justice Douglas, in Pepper v. Litton, 20 emphatically restated the standard of fiduciary

obligation of the directors of corporations, thus:
A director is a fiduciary. ... Their powers are powers in trust. ... He who is
in such fiduciary position cannot serve himself first and his cestuis
second. ... He cannot manipulate the affairs of his corporation to their
detriment and in disregard of the standards of common decency. He
cannot by the intervention of a corporate entity violate the ancient precept
against serving two masters ... He cannot utilize his inside information
and strategic position for his own preferment. He cannot violate rules of
fair play by doing indirectly through the corporation what he could not do
so directly. He cannot violate rules of fair play by doing indirectly though
the corporation what he could not do so directly. He cannot use his power
for his personal advantage and to the detriment of the stockholders and
creditors no matter how absolute in terms that power may be and no
matter how meticulous he is to satisfy technical requirements. For that
power is at all times subject to the equitable limitation that it may not be
exercised for the aggrandizement, preference or advantage of the
fiduciary to the exclusion or detriment of the cestuis.
And in Cross v. West Virginia Cent, & P. R. R. Co., 21 it was said:
... A person cannot serve two hostile and adverse master, without
detriment to one of them. A judge cannot be impartial if personally
interested in the cause. No more can a director. Human nature is too
weak -for this. Take whatever statute provision you please giving power to
stockholders to choose directors, and in none will you find any express
prohibition against a discretion to select directors having the company's
interest at heart, and it would simply be going far to deny by mere
implication the existence of such a salutary power
... If the by-law is to be held reasonable in disqualifying a stockholder in a competing
company from being a director, the same reasoning would apply to disqualify the wife
and immediate member of the family of such stockholder, on account of the supposed
interest of the wife in her husband's affairs, and his suppose influence over her. It is
perhaps true that such stockholders ought not to be condemned as selfish and
dangerous to the best interest of the corporation until tried and tested. So it is also true
that we cannot condemn as selfish and dangerous and unreasonable the action of the
board in passing the by-law. The strife over the matter of control in this corporation as in
many others is perhaps carried on not altogether in the spirit of brotherly love and
affection. The only test that we can apply is as to whether or not the action of the Board is
authorized and sanctioned by law. ... . 22
These principles have been applied by this Court in previous cases. 23
AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A
STOCKHOLDER INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO DIRECTOR IN A
CORPORATION WHOSE BUSINESS IS IN COMPETITION WITH THAT OF THE
OTHER CORPORATION, HAS BEEN SUSTAINED AS VALID
It is a settled state law in the United States, according to Fletcher, that corporations have
the power to make by-laws declaring a person employed in the service of a rival
company to be ineligible for the corporation's Board of Directors. ... (A)n amendment

which renders ineligible, or if elected, subjects to removal, a director if he be also a

director in a corporation whose business is in competition with or is antagonistic to the
other corporation is valid." 24This is based upon the principle that where the director is so
employed in the service of a rival company, he cannot serve both, but must betray one or the
other. Such an amendment "advances the benefit of the corporation and is good." An
exception exists in New Jersey, where the Supreme Court held that the Corporation Law in
New Jersey prescribed the only qualification, and therefore the corporation was not
empowered to add additional qualifications. 25 This is the exact opposite of the situation in the
Philippines because as stated heretofore, section 21 of the Corporation Law expressly
provides that a corporation may make by-laws for the qualifications of directors. Thus, it has
been held that an officer of a corporation cannot engage in a business in direct competition
with that of the corporation where he is a director by utilizing information he has received as
such officer, under "the established law that a director or officer of a corporation may not enter
into a competing enterprise which cripples or injures the business of the corporation of which
he is an officer or director. 26
It is also well established that corporate officers "are not permitted to use their position of
trust and confidence to further their private interests." 27 In a case where directors of a
corporation cancelled a contract of the corporation for exclusive sale of a foreign firm's
products, and after establishing a rival business, the directors entered into a new contract
themselves with the foreign firm for exclusive sale of its products, the court held that equity
would regard the new contract as an offshoot of the old contract and, therefore, for the benefit
of the corporation, as a "faultless fiduciary may not reap the fruits of his misconduct to the
exclusion of his principal. 28
The doctrine of "corporate opportunity" 29 is precisely a recognition by the courts that the
fiduciary standards could not be upheld where the fiduciary was acting for two entities with
competing interests. This doctrine rests fundamentally on the unfairness, in particular
circumstances, of an officer or director taking advantage of an opportunity for his own
personal profit when the interest of the corporation justly calls for protection. 30
It is not denied that a member of the Board of Directors of the San Miguel Corporation
has access to sensitive and highly confidential information, such as: (a) marketing
strategies and pricing structure; (b) budget for expansion and diversification; (c) research
and development; and (d) sources of funding, availability of personnel, proposals of
mergers or tie-ups with other firms.
It is obviously to prevent the creation of an opportunity for an officer or director of San
Miguel Corporation, who is also the officer or owner of a competing corporation, from
taking advantage of the information which he acquires as director to promote his
individual or corporate interests to the prejudice of San Miguel Corporation and its
stockholders, that the questioned amendment of the by-laws was made. Certainly, where
two corporations are competitive in a substantial sense, it would seem improbable, if not
impossible, for the director, if he were to discharge effectively his duty, to satisfy his
loyalty to both corporations and place the performance of his corporation duties above
his personal concerns.
Thus, in McKee & Co. v. First National Bank of San Diego, supra the court sustained as
valid and reasonable an amendment to the by-laws of a bank, requiring that its directors
should not be directors, officers, employees, agents, nominees or attorneys of any other
banking corporation, affiliate or subsidiary thereof. Chief Judge Parker,
inMcKee, explained the reasons of the court, thus:
... A bank director has access to a great deal of information concerning
the business and plans of a bank which would likely be injurious to the
bank if known to another bank, and it was reasonable and prudent to
enlarge this minimum disqualification to include any director, officer,

employee, agent, nominee, or attorney of any other bank in California.

The Ashkins case, supra, specifically recognizes protection against rivals
and others who might acquire information which might be used against
the interests of the corporation as a legitimate object of by-law protection.
With respect to attorneys or persons associated with a firm which is
attorney for another bank, in addition to the direct conflict or potential
conflict of interest, there is also the danger of inadvertent leakage of
confidential information through casual office discussions or accessibility
of files. Defendant's directors determined that its welfare was best
protected if this opportunity for conflicting loyalties and potential misuse
and leakage of confidential information was foreclosed.
In McKee the Court further listed qualificational by-laws upheld by the courts, as follows:
(1) A director shall not be directly or indirectly interested as a stockholder
in any other firm, company, or association which competes with the
subject corporation.
(2) A director shall not be the immediate member of the family of any
stockholder in any other firm, company, or association which competes
with the subject corporation,
(3) A director shall not be an officer, agent, employee, attorney, or trustee
in any other firm, company, or association which compete with the subject
corporation.
(4) A director shall be of good moral character as an essential
qualification to holding office.
(5) No person who is an attorney against the corporation in a law suit is
eligible for service on the board. (At p. 7.)
These are not based on theorical abstractions but on human experience that a person
cannot serve two hostile masters without detriment to one of them.
The offer and assurance of petitioner that to avoid any possibility of his taking unfair
advantage of his position as director of San Miguel Corporation, he would absent himself
from meetings at which confidential matters would be discussed, would not detract from
the validity and reasonableness of the by-laws here involved. Apart from the impractical
results that would ensue from such arrangement, it would be inconsistent with petitioner's
primary motive in running for board membership which is to protect his investments in
San Miguel Corporation. More important, such a proposed norm of conduct would be
against all accepted principles underlying a director's duty of fidelity to the corporation,
for the policy of the law is to encourage and enforce responsible corporate management.
As explained by Oleck: 31 "The law win not tolerate the passive attitude of directors ... without
active and conscientious participation in the managerial functions of the company. As
directors, it is their duty to control and supervise the day to day business activities of the
company or to promulgate definite policies and rules of guidance with a vigilant eye toward
seeing to it that these policies are carried out. It is only then that directors may be said to
have fulfilled their duty of fealty to the corporation."
Sound principles of corporate management counsel against sharing sensitive information
with a director whose fiduciary duty of loyalty may well require that he disclose this
information to a competitive arrival. These dangers are enhanced considerably where the
common director such as the petitioner is a controlling stockholder of two of the
competing corporations. It would seem manifest that in such situations, the director has

an economic incentive to appropriate for the benefit of his own corporation the corporate
plans and policies of the corporation where he sits as director.
Indeed, access by a competitor to confidential information regarding marketing strategies
and pricing policies of San Miguel Corporation would subject the latter to a competitive
disadvantage and unjustly enrich the competitor, for advance knowledge by the
competitor of the strategies for the development of existing or new markets of existing or
new products could enable said competitor to utilize such knowledge to his advantage. 32
There is another important consideration in determining whether or not the amended bylaws are reasonable. The Constitution and the law prohibit combinations in restraint of
trade or unfair competition. Thus, section 2 of Article XIV of the Constitution provides:
"The State shall regulate or prohibit private monopolies when the public interest so
requires. No combinations in restraint of trade or unfair competition shall be snowed."
Article 186 of the Revised Penal Code also provides:
Art. 186. Monopolies and combinations in restraint of trade. The
penalty of prision correccional in its minimum period or a fine ranging
from two hundred to six thousand pesos, or both, shall be imposed upon:
1. Any person who shall enter into any contract or agreement or shall take
part in any conspiracy or combination in the form of a trust or otherwise,
in restraint of trade or commerce or to prevent by artificial means free
competition in the market.
2. Any person who shag monopolize any merchandise or object of trade
or commerce, or shall combine with any other person or persons to
monopolize said merchandise or object in order to alter the price thereof
by spreading false rumors or making use of any other artifice to restrain
free competition in the market.
3. Any person who, being a manufacturer, producer, or processor of any
merchandise or object of commerce or an importer of any merchandise or
object of commerce from any foreign country, either as principal or agent,
wholesale or retailer, shall combine, conspire or agree in any manner with
any person likewise engaged in the manufacture, production, processing,
assembling or importation of such merchandise or object of commerce or
with any other persons not so similarly engaged for the purpose of
making transactions prejudicial to lawful commerce, or of increasing the
market price in any part of the Philippines, or any such merchandise or
object of commerce manufactured, produced, processed, assembled in or
imported into the Philippines, or of any article in the manufacture of which
such manufactured, produced, processed, or imported merchandise or
object of commerce is used.
There are other legislation in this jurisdiction, which prohibit monopolies and
combinations in restraint of trade. 33
Basically, these anti-trust laws or laws against monopolies or combinations in restraint of
trade are aimed at raising levels of competition by improving the consumers'
effectiveness as the final arbiter in free markets. These laws are designed to preserve
free and unfettered competition as the rule of trade. "It rests on the premise that the
unrestrained interaction of competitive forces will yield the best allocation of our
economic resources, the lowest prices and the highest quality ... ." 34 they operate to
forestall concentration of economic power. 35 The law against monopolies and combinations in

restraint of trade is aimed at contracts and combinations that, by reason of the inherent nature
of the contemplated acts, prejudice the public interest by unduly restraining competition or
unduly obstructing the course of trade. 36

The terms "monopoly", "combination in restraint of trade" and "unfair competition" appear
to have a well defined meaning in other jurisdictions. A "monopoly" embraces any
combination the tendency of which is to prevent competition in the broad and general
sense, or to control prices to the detriment of the public. 37 In short, it is the concentration of
business in the hands of a few. The material consideration in determining its existence is not
that prices are raised and competition actually excluded, but that power exists to raise prices
or exclude competition when desired. 38Further, it must be considered that the Idea of
monopoly is now understood to include a condition produced by the mere act of individuals.
Its dominant thought is the notion of exclusiveness or unity, or the suppression of competition
by the qualification of interest or management, or it may be thru agreement and concert of
action. It is, in brief, unified tactics with regard to prices. 39
From the foregoing definitions, it is apparent that the contentions of petitioner are not in
accord with reality. The election of petitioner to the Board of respondent Corporation can
bring about an illegal situation. This is because an express agreement is not necessary
for the existence of a combination or conspiracy in restraint of trade. 40 It is enough that a
concert of action is contemplated and that the defendants conformed to the
arrangements, 41 and what is to be considered is what the parties actually did and not the
words they used. For instance, the Clayton Act prohibits a person from serving at the same
time as a director in any two or more corporations, if such corporations are, by virtue of their
business and location of operation, competitors so that the elimination of competition between
them would constitute violation of any provision of the anti-trust laws. 42 There is here a
statutory recognition of the anti-competitive dangers which may arise when an individual
simultaneously acts as a director of two or more competing corporations. A common director
of two or more competing corporations would have access to confidential sales, pricing and
marketing information and would be in a position to coordinate policies or to aid one
corporation at the expense of another, thereby stifling competition. This situation has been
aptly explained by Travers, thus:
The argument for prohibiting competing corporations from sharing even
one director is that the interlock permits the coordination of policies
between nominally independent firms to an extent that competition
between them may be completely eliminated. Indeed, if a director, for
example, is to be faithful to both corporations, some accommodation must
result. Suppose X is a director of both Corporation A and Corporation B. X
could hardly vote for a policy by A that would injure B without violating his
duty of loyalty to B at the same time he could hardly abstain from voting
without depriving A of his best judgment. If the firms really do compete
in the sense of vying for economic advantage at the expense of the other
there can hardly be any reason for an interlock between competitors
other than the suppression of competition. 43 (Emphasis supplied.)
According to the Report of the House Judiciary Committee of the U. S. Congress on
section 9 of the Clayton Act, it was established that: "By means of the interlocking
directorates one man or group of men have been able to dominate and control a great
number of corporations ... to the detriment of the small ones dependent upon them and to
the injury of the public. 44
Shared information on cost accounting may lead to price fixing. Certainly, shared
information on production, orders, shipments, capacity and inventories may lead to
control of production for the purpose of controlling prices.

Obviously, if a competitor has access to the pricing policy and cost conditions of the
products of San Miguel Corporation, the essence of competition in a free market for the
purpose of serving the lowest priced goods to the consuming public would be frustrated,
The competitor could so manipulate the prices of his products or vary its marketing
strategies by region or by brand in order to get the most out of the consumers. Where the
two competing firms control a substantial segment of the market this could lead to
collusion and combination in restraint of trade. Reason and experience point to the
inevitable conclusion that the inherent tendency of interlocking directorates between
companies that are related to each other as competitors is to blunt the edge of rivalry
between the corporations, to seek out ways of compromising opposing interests, and
thus eliminate competition. As respondent SMC aptly observes, knowledge by CFCRobina 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 bylaws and who have expressed their authority. 45
Although it is asserted that the amended by-laws confer on the present Board powers to
perpetua themselves in power such fears appear to be misplaced. This power, but is very
nature, is subject to certain well established limitations. One of these is inherent in the
very convert and definition of the terms "competition" and "competitor". "Competition"
implies a struggle for advantage between two or more forces, each possessing, in
substantially similar if not Identical degree, certain characteristics essential to the
business sought. It means an independent endeavor of two or more persons to obtain the
business patronage of a third by offering more advantageous terms as an inducement to
secure trade. 46 The test must be whether the business does in fact compete, not whether it is
capable of an indirect and highly unsubstantial duplication of an isolated or non-

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

III
Whether or not respondent SEC gravely abused its discretion in denying petitioner's
request for an examination of the records of San Miguel International Inc., a fully owned
subsidiary of San Miguel Corporation
Respondent San Miguel Corporation stated in its memorandum that petitioner's claim
that he was denied inspection rights as stockholder of SMC "was made in the teeth of
undisputed facts that, over a specific period, petitioner had been furnished numerous
documents and information," to wit: (1) a complete list of stockholders and their
stockholdings; (2) a complete list of proxies given by the stockholders for use at the
annual stockholders' meeting of May 18, 1975; (3) a copy of the minutes of the
stockholders' meeting of March 18,1976; (4) a breakdown of SMC's P186.6 million
investment in associated companies and other companies as of December 31, 1975; (5)
a listing of the salaries, allowances, bonuses and other compensation or remunerations
received by the directors and corporate officers of SMC; (6) a copy of the US $100 million
Euro-Dollar Loan Agreement of SMC; and (7) copies of the minutes of all meetings of the
Board of Directors from January 1975 to May 1976, with deletions of sensitive data,
which deletions were not objected to by petitioner.
Further, it was averred that upon request, petitioner was informed in writing on
September 18, 1976; (1) that SMC's foreign investments are handled by San Miguel
International, Inc., incorporated in Bermuda and wholly owned by SMC; this was SMC's
first venture abroad, having started in 1948 with an initial outlay of ?500,000.00,
augmented by a loan of Hongkong $6 million from a foreign bank under the personal
guaranty of SMC's former President, the late Col. Andres Soriano; (2) that as of
December 31, 1975, the estimated value of SMI would amount to almost P400 million (3)
that the total cash dividends received by SMC from SMI since 1953 has amount to US $
9.4 million; and (4) that from 1972-1975, SMI did not declare cash or stock dividends, all
earnings having been used in line with a program for the setting up of breweries by SMI
These averments are supported by the affidavit of the Corporate Secretary, enclosing
photocopies of the afore-mentioned documents. 51
Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of
all business transactions of the corporation and minutes of any meeting shall be open to

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

hours."
The stockholder's right of inspection of the corporation's books and records is based
upon their ownership of the assets and property of the corporation. It is, therefore, an
incident of ownership of the corporate property, whether this ownership or interest be
termed an equitable ownership, a beneficial ownership, or a ownership. 52 This right is
predicated upon the necessity of self-protection. It is generally held by majority of the courts
that where the right is granted by statute to the stockholder, it is given to him as such and
must be exercised by him with respect to his interest as a stockholder and for some purpose
germane thereto or in the interest of the corporation. 53 In other words, the inspection has to
be germane to the petitioner's interest as a stockholder, and has to be proper and lawful in
character and not inimical to the interest of the corporation. 54 In Grey v. Insular Lumber, 55 this
Court held that "the right to examine the books of the corporation must be exercised in good
faith, for specific and honest purpose, and not to gratify curiosity, or for specific and honest
purpose, and not to gratify curiosity, or for speculative or vexatious purposes. The weight of
judicial opinion appears to be, that on application for mandamus to enforce the right, it is
proper for the court to inquire into and consider the stockholder's good faith and his purpose
and motives in seeking inspection. 56 Thus, it was held that "the right given by statute is not
absolute and may be refused when the information is not sought in good faith or is used to the
detriment of the corporation." 57 But the "impropriety of purpose such as will defeat
enforcement must be set up the corporation defensively if the Court is to take cognizance of it
as a qualification. In other words, the specific provisions take from the stockholder the burden
of showing propriety of purpose and place upon the corporation the burden of showing
impropriety of purpose or motive. 58 It appears to be the general rule that stockholders are
entitled to full information as to the management of the corporation and the manner of
expenditure of its funds, and to inspection to obtain such information, especially where it
appears that the company is being mismanaged or that it is being managed for the personal
benefit of officers or directors or certain of the stockholders to the exclusion of others." 59
While the right of a stockholder to examine the books and records of a corporation for a
lawful purpose is a matter of law, the right of such stockholder to examine the books and
records of a wholly-owned subsidiary of the corporation in which he is a stockholder is a
different thing.
Some state courts recognize the right under certain conditions, while others do not. Thus,
it has been held that where a corporation owns approximately no property except the
shares of stock of subsidiary corporations which are merely agents or instrumentalities of
the holding company, the legal fiction of distinct corporate entities may be disregarded
and the books, papers and documents of all the corporations may be required to be
produced for examination, 60 and that a writ of mandamus, may be granted, as the records of
the subsidiary were, to all incontents and purposes, the records of the parent even though
subsidiary was not named as a party. 61 mandamus was likewise held proper to inspect both
the subsidiary's and the parent corporation's books upon proof of sufficient control or
dominion by the parent showing the relation of principal or agent or something similar
thereto. 62
On the other hand, mandamus at the suit of a stockholder was refused where the
subsidiary corporation is a separate and distinct corporation domiciled and with its books
and records in another jurisdiction, and is not legally subject to the control of the parent
company, although it owned a vast majority of the stock of the subsidiary. 63Likewise,
inspection of the books of an allied corporation by stockholder of the parent company which
owns all the stock of the subsidiary has been refused on the ground that the stockholder was
not within the class of "persons having an interest." 64
In the Nash case, 65 The Supreme Court of New York held that the contractual right of former
stockholders to inspect books and records of the corporation included the right to inspect

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

In the Bailey case, 66 stockholders of a corporation were held entitled to inspect the records
of a controlled subsidiary corporation which used the same offices and had Identical officers
and directors.
In his "Urgent Motion for Production and Inspection of Documents" before respondent
SEC, petitioner contended that respondent corporation "had been attempting to suppress
information for the stockholders" and that petitioner, "as stockholder of respondent
corporation, is entitled to copies of some documents which for some reason or another,
respondent corporation is very reluctant in revealing to the petitioner notwithstanding the
fact that no harm would be caused thereby to the corporation." 67 There is no question that
stockholders are entitled to inspect the books and records of a corporation in order to
investigate the conduct of the management, determine the financial condition of the
corporation, and generally take an account of the stewardship of the officers and directors. 68
In the case at bar, considering that the foreign subsidiary is wholly owned by respondent
San Miguel Corporation and, therefore, under its control, it would be more in accord with
equity, good faith and fair dealing to construe the statutory right of petitioner as
stockholder to inspect the books and records of the corporation as extending to books
and records of such wholly subsidiary which are in respondent corporation's possession
and control.
IV
Whether or not respondent SEC gravely abused its discretion in allowing the
stockholders of respondent corporation to ratify the investment of corporate funds in a
foreign corporation
Petitioner reiterates his contention in SEC Case No. 1423 that respondent corporation
invested corporate funds in SMI without prior authority of the stockholders, thus violating
section 17-1/2 of the Corporation Law, and alleges that respondent SEC should have
investigated the charge, being a statutory offense, instead of allowing ratification of the
investment by the stockholders.
Respondent SEC's position is that submission of the investment to the stockholders for
ratification is a sound corporate practice and should not be thwarted but encouraged.
Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any
other corporation or business or for any purpose other than the main purpose for which it
was organized" provided that its Board of Directors has been so authorized by the
affirmative vote of stockholders holding shares entitling them to exercise at least twothirds 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. 258259).
Assuming arguendo that the Board of Directors of SMC had no authority to make the
assailed investment, there is no question that a corporation, like an individual, may ratify
and thereby render binding upon it the originally unauthorized acts of its officers or other
agents. 70 This is true because the questioned investment is neither contrary to law, morals,
public order or public policy. It is a corporate transaction or contract which is within the
corporate powers, but which is defective from a supported failure to observe in its execution
the. requirement of the law that the investment must be authorized by the affirmative vote of
the stockholders holding two-thirds of the voting power. This requirement is for the benefit of
the stockholders. The stockholders for whose benefit the requirement was enacted may,
therefore, ratify the investment and its ratification by said stockholders obliterates any defect

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

Besides, the investment was for the purchase of beer manufacturing and marketing
facilities which is apparently relevant to the corporate purpose. The mere fact that
respondent corporation submitted the assailed investment to the stockholders for
ratification at the annual meeting of May 10, 1977 cannot be construed as an admission
that respondent corporation had committed an ultra vires act, considering the common
practice of corporations of periodically submitting for the gratification of their stockholders
the acts of their directors, officers and managers.
WHEREFORE, judgment is hereby rendered as follows:
The Court voted unanimously to grant the petition insofar as it prays that petitioner be
allowed to examine the books and records of San Miguel International, Inc., as specified
by him.
On the matter of the validity of the amended by-laws of respondent San Miguel
Corporation, six (6) Justices, namely, Justices Barredo, Makasiar, Antonio, Santos, Abad
Santos and De Castro, voted to sustain the validity per se of the amended by-laws in
question and to dismiss the petition without prejudice to the question of the actual
disqualification of petitioner John Gokongwei, Jr. to run and if elected to sit as director of
respondent San Miguel Corporation being decided, after a new and proper hearing by the
Board of Directors of said corporation, whose decision shall be appealable to the
respondent Securities and Exchange Commission deliberating and acting en banc and
ultimately to this Court. Unless disqualified in the manner herein provided, the prohibition
in the afore-mentioned amended by-laws shall not apply to petitioner.
The afore-mentioned six (6) Justices, together with Justice Fernando, voted to declare
the issue on the validity of the foreign investment of respondent corporation as moot.
Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-laws,
pending hearing by this Court on the applicability of section 13(5) of the Corporation Law
to petitioner.
Justice Fernando reserved his vote on the validity of subject amendment to the by-laws
but otherwise concurs in the result.
Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez and Guerrero
filed a separate opinion, wherein they voted against the validity of the questioned
amended bylaws and that this question should properly be resolved first by the SEC as
the agency of primary jurisdiction. They concur in the result that petitioner may be
allowed to run for and sit as director of respondent SMC in the scheduled May 6, 1979
election and subsequent elections until disqualified after proper hearing by the
respondent's Board of Directors and petitioner's disqualification shall have been
sustained by respondent SEC en banc and ultimately by final judgment of this Court.
In resume, subject to the qualifications aforestated judgment is hereby rendered
GRANTING the petition by allowing petitioner to examine the books and records of San
Miguel International, Inc. as specified in the petition. The petition, insofar as it assails the
validity of the amended by- laws and the ratification of the foreign investment of
respondent corporation, for lack of necessary votes, is hereby DISMISSED. No costs.
Makasiar, Santos Abad Santos and De Castro, JJ., concur.

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

G.R. No. L-30460

March 12, 1929

C. H. STEINBERG, as Receiver of the Sibuguey Trading Company,

Incorporated, plaintiff-appellant,
vs.
GREGORIO VELASCO, ET AL., defendants-appellees.
Frank H. Young for appellant.
Pablo Lorenzo and Delfin Joven for appellees.
STATEMENT
Plaintiff is the receiver of the Sibuguey Trading Company, a domestic corporation. The
defendants are residents of the Philippine Islands.
It is alleged that the defendants, Gregorio Velasco, as president, Felix del Castillo, as
vice-president, Andres L. Navallo, as secretary-treasurer, and Rufino Manuel, as director
of Trading Company, at a meeting of the board of directors held on July 24, 1922,
approved and authorized various lawful purchases already made of a large portion of the
capital stock of the company from its various stockholders, thereby diverting its funds to
the injury, damage and in fraud of the creditors of the corporation. That pursuant to such
resolution and on March 31, 1922, the corporation purchased from the defendant S. R.
Ganzon 100 shares of its capital stock of the par value of P10, and on June 29, 1922, it
purchased from the defendant Felix D. Mendaros 100 shares of the par value of P10, and
on July 16, 1922, it purchased from the defendant Felix D. Mendaros 100 shares of the
par value of P10, each, and on April 5, 1922, it purchased from the defendant Dionisio
Saavedra 10 shares of the same par value, and on June 29, 1922, it purchased from the
defendant Valentin Matias 20 shares of like value. That the total amount of the capital
stock unlawfully purchased was P3,300. That at the time of such purchase, the
corporation had accounts payable amounting to P13,807.50, most of which were unpaid
at the time petition for the dissolution of the corporation was financial condition, in
contemplation of an insolvency and dissolution.
As a second cause of action, plaintiff alleges that on July 24, 1922, the officers and
directors of the corporation approved a resolution for the payment of P3,000 as dividends
to its stockholders, which was wrongfully done and in bad faith, and to the injury and
fraud of its creditors. That at the time the petition for the dissolution of the corporation
was presented it had accounts payable in the sum of P9,241.19, "and practically
worthless accounts receivable."
Plaintiff prays judgment for the sum of P3,300 from the defendants Gregorio Velasco,
Felix del Castillo, Andres L. Navallo and Rufino Manuel, personally as members of the
Board of Directors, or for the recovery from the defendants S. R. Ganzon, of the sum of
P1,000, from the defendant Felix D. Mendaros, P2,000, and from the defendant Dionisio
Saavedra, P100, and under his second cause of action, he prays judgment for the sum of
P3,000, with legal interest against the board of directors, and costs.
For answer the defendants Felix del Castillo, Rufino Manuel, S. R. Ganzon, Dionisio
Saavedra and Valentin Matias made a general and specific denial.

In his amended answer, the defendant Gregorio Velasco admits paragraphs, 1, 2 and 3
of each cause of action of the complaint, and that the shares mentioned in paragraph 4 of
the first cause of action were purchased, but alleges that they were purchased by virtue
of a resolution of the board of directors of the corporation "when the business of the
company was going on very well." That the defendant is one of the principal
shareholders, and that about the same time, he purchase other shares for his own
account, because he thought they would bring profits. As to the second cause of action,
he admits that the dividends described in paragraph 4 of the complaint were distributed,
but alleges that such distribution was authorized by the board of directors, "and that the
amount represented by said dividends really constitutes a surplus profit of the
corporation," and as counterclaim, he asks for judgment against the receiver for
P12,512.47 for and on account of his negligence in failing to collect the accounts.
Although duly served, the defendant Mendaros did not appear or answer. The defendant
Navallo was not served, and the case against him was dismissed.
April 30, 1928, the case was tried and submitted on a stipulation of facts, based upon
which the lower court dismissed plaintiff's complaint, and rendered judgment for the
defendants, with costs against the plaintiff, and absolved him from the cross-complaint of
the defendant Velasco, and on appeal, the plaintiff assigns the following errors:
1. In holding that the Sibuguey Trading Company, Incorporated, could legally
purchase its own stock.
2. In holding that the Board of Directors of the said Corporation could legally
declared a dividend of P3,000, July 24, 1922.
JOHNS, J.:
It is stipulated that on July 24, 1922, the directors of the corporation approved the
purchase of stocks as follows:
One hundred shares from S. R. Ganzon for P1,000;
One hundred shares from Felix D. Mendaros at the same price; which purchase was
made on June 29, 1922; another
One hundred shares from Felix D. Mendaros at the same price on July 16, 1922;
Ten shares from Dionisio Saavedra at the same price on June 29, 1922.
That during such times, the defendant Gregorio Velasco purchased 13 shares for the
corporation for P130; Felix del Castillo 42 shares for P420; Andres Navallo 15
shares for P150; and the defendant Mendaros 10 shares for P100. That during the
time these various purchases were made, the total amount of subscribed and paid up
capital stock of the corporation was P10,030, out of the authorized capital stock 2,000
shares of the par value of P10 each.
Paragraph 4 of the stipulation also recites:
Be it also admitted as a fact that the time of the said purchases there was a
surplus profit of the corporation above-named of P3,314.72.
Paragraph 5 is as follows:

That at the time of the repeatedly mentioned various purchases of the said capital
stock were made, the said corporation had Accounts Payable in the total amount
of P13,807.50 as shown by the statement of the corporation, dated June 30,
1922, and the Accounts Receivable in the sum of P19,126.02 according to the
books, and that the intention of the Board of Directors was to resell the stocks
purchased by the corporations at a sum above par for each stock, this
expectation being justified by the then satisfactory and sound financial condition
of the business of the corporation.
It is also stipulated that on September 11, 1923, when the petition for the dissolution of
the corporation was presented to the court, according to a statement made June 30,
1923, it has accounts payable aggregating P9,41.19, and accounts receivable for
P12,512.47.
Paragraph 7 of the stipulation recites:
That the same defendants, mentioned in paragraph 2 of this stipulation of facts
and in the same capacity, on the same date of July 24, 1922, and at the said
meeting of the said Board of Directors, approved and authorized by resolution the
payment of dividends to its stockholders, in the sum of three thousand pesos
(P3,000), Philippine currency, which payments were made at different dates,
between September 30, 1922, and May 12, 1923, both dates inclusive, at a time
when the corporation had accounts less in amount than the accounts receivable,
which resolution was based upon the balance sheet made as June 30, 1922, said
balance sheet showing that the corporation had a surplus of P1,069.41, and a
profit on the same date of P2,656.08, or a total surplus amount of P3,725.49, and
a reserve fund of P2,889.23 for bad and doubtful accounts and depreciation of
equipment, thereby leaving a balance of P3,314.72 of net surplus profit after
paying this dividend.
It is also stipulated at a meeting of the board of directors held on July 24, 1922, as
follows:
6. The president and manager submitted to the Board of Directors his statement
and balance sheet for the first semester ending June 30, 1922 and recommended
that P3,000 out of the surplus account be set aside for dividends payable, and
that payments be made in installments so as not to effect the financial condition
of the corporation. That stockholders having outstanding account with the
corporation should settle first their accounts before payments of their dividends
could be made. Mr. Castillo moved that the statement and balance sheet be
approved as submitted, and also the recommendations of the president.
Seconded by Mr. Manuel. Approved.
Paragraph 8 of the stipulation is as follows:
That according to the balance sheet of the corporation, dated June 30, 1923, it
had accounts receivable in the sum of P12,512.47, due from various contractor
and laborers of the National Coal Company, and also employees of the herein
corporation, which the herein receiver, after his appointment on February 28,
1924, although he made due efforts by personally visiting the location of the
corporation, and of National Coal Company, at its offices, at Malangas,
Mindanao, and by writing numerous letters of demand to the debtors of the
corporation, in order to collect these accounts receivable, he was unable to do so
as most of them were without goods or property, and he could not file any suit
against them that might have any property, for the reason that he had no funds

on hand with which to pay the filing and sheriff fees to Malangas, and other
places of their residences.
From all of which, it appears that on June 30, 1922, the board of directors of the
corporation authorized the purchase of, purchased and paid for, 330 shares of the capital
stock of the corporation at the agreed price of P3,300, and that at the time the purchase
was made, the corporation was indebted in the sum of P13,807.50, and that according to
its books, it had accounts receivable in the sum of P19,126.02. That on September 11,
1923, when the petition was filed for its dissolution upon the ground that it was insolvent,
its accounts payable amounted to P9,241.19, and its accounts receivable P12,512.47, or
an apparent asset of P3,271.28 over and above its liabilities. But it will be noted that
there is no stipulation or finding of facts as to what was the actual cash value of its
accounts receivable. Neither is there any stipulation that those accounts or any part of
them ever have been or will be collected, and it does appear that after his appointment
on February 28, 1924, the receiver made a diligent effort to collect them, and that he was
unable to do so, and it also appears from the minutes of the board of directors that the
president and manager "recommended that P3,000 out of the surplus account to be
set aside for dividends payable, and that payments be made in installments so as not to
effect the financial condition of the corporation."
If in truth and in fact the corporation had an actual bona fide surplus of P3,000 over and
above all of its debt and liabilities, the payment of the P3,000 in dividends would not in
the least impair the financial condition of the corporation or prejudice the interests of its
creditors.
It is very apparent that on June 24, 1922, the board of directors acted on assumption
that, because it appeared from the books of the corporation that it had accounts
receivable of the face value of P19,126.02, therefore it had a surplus over and above its
debts and liabilities. But as stated there is no stipulation as to the actual cash value of
those accounts, and it does appear from the stipulation that on February 28, 1924,
P12,512.47 of those accounts had but little, if any, value, and it must be conceded that, in
the purchase of its own stock to the amount of P3,300 and in declaring the dividends to
the amount of P3,000, the real assets of the corporation were diminished P6,300. It also
appears from paragraph 4 of the stipulation that the corporation had a "surplus profit" of
P3,314.72 only. It is further stipulated that the dividends should "be made in installments
so as not to effect financial condition of the corporation." In other words, that the
corporation did not then have an actual bona fide surplus from which the dividends could
be paid, and that the payment of them in full at the time would "affect the financial
condition of the corporation."
It is, indeed, peculiar that the action of the board in purchasing the stock from the
corporation and in declaring the dividends on the stock was all done at the same meeting
of the board of directors, and it appears in those minutes that the both Ganzon and
Mendaros were formerly directors and resigned before the board approved the purchase
and declared the dividends, and that out of the whole 330 shares purchased, Ganzon,
sold 100 and Mendaros 200, or a total of 300 shares out of the 330, which were
purchased by the corporation, and for which it paid P3,300. In other words, that the
directors were permitted to resign so that they could sell their stock to the corporation. As
stated, the authorized capital stock was P20,000 divided into 2,000 shares of the par
value of P10 each, which only P10,030 was subscribed and paid. Deducting the P3,300
paid for the purchase of the stock, there would be left P7,000 of paid up stock, from
which deduct P3,000 paid in dividends, there would be left P4,000 only. In this situation
and upon this state of facts, it is very apparent that the directors did not act in good faith
or that they were grossly ignorant of their duties.

Upon each of those points, the rule is well stated in Ruling Case Law, vol. 7, p. 473,
section 454 where it is said:
General Duty to Exercise Reasonable Care. The directors of a corporation are
bound to care for its property and manage its affairs in good faith, and for a
violation of these duties resulting in waste of its assets or injury to the property
they are liable to account the same as other trustees. Are there can be no doubt
that if they do acts clearly beyond their power, whereby loss ensues to the
corporation, or dispose of its property or pay away its money without authority,
they will be required to make good the loss out of their private estates. This is the
rule where the disposition made of money or property of the corporation is one
either not within the lawful power of the corporation, or, if within the authority of
the particular officer or officers.
And section 458 which says:
Want of Knowledge, Skill, or Competency. It has been said that directors are
not liable for losses resulting to the corporation from want of knowledge on their
part; or for mistake of judgment, provided they were honest, and provided they
are fairly within the scope of the powers and discretion confided to the managing
body. But the acceptance of the office of a director of a corporation implies a
competent knowledge of the duties assumed, and directors cannot excuse
imprudence on the ground of their ignorance or inexperience; and if they commit
an error of judgment through mere recklessness or want of ordinary prudence or
skill, they may be held liable for the consequences. Like a mandatory, to whom
he has been likened, a director is bound not only to exercise proper care and
diligence, but ordinary skill and judgment. As he is bound to exercise ordinary
skill and judgment, he cannot set up that he did not possess them.
Creditors of a corporation have the right to assume that so long as there are outstanding
debts and liabilities, the board of directors will not use the assets of the corporation to
purchase its own stock, and that it will not declare dividends to stockholders when the
corporation is insolvent.
The amount involved in this case is not large, but the legal principles are important, and
we have given them the consideration which they deserve.
The judgment of the lower court is reversed, and (a), as to the first cause of action, one
will be entered for the plaintiff and against the defendant S. R. Ganzon for the sum of
P1,000, with legal interest from the 10th of February, 1926, and against the defendant
Felix D. Medaros for P2,000, with like interests, and against the defendant Dionisio
Saavedra for P100, with like interest, and against each of them for costs, each on their
primary liability as purchasers of stock, and (b) against the defendants Gregorio Velasco,
Felix del Castillo and Rufino Manuel, personally, as members of the board of directors of
the Sibuguey Trading Company, Incorporated, as secondarily liable for the whole amount
of such stock sold and purchased as above stated, and on the second cause of action,
judgment will be entered (c) for the plaintiff and jointly and severally against the
defendants Gregorio Velasco, Felix del Castillo and Rufino Manuel, personally, as
members of the board of directors of the Sibuguey Trading Company, Incorporated, for
P3,000, with interest thereon from February 10, 1926, at the rate of 6 per cent per
annum, and costs. So ordered.
Johnson, Street, Malcolm, Ostrand, Romualdez and Villa-Real, JJ., concur.

G.R. No. L-22442

August 1, 1924

ANTONIO PARDO, petitioner,

vs.
THE HERCULES LUMBER CO., INC., and IGNACIO FERRER, respondents.
W.J. O'Donovan and M.H. de Joya for petitioner.
Sumulong and Lavides and Ross, Lawrence and Selph for respondents.
STREET, J.:
The petitioner, Antonio Pardo, a stockholder in the Hercules Lumber Company, Inc., one
of the respondents herein, seeks by this original proceeding in the Supreme Court to
obtain a writ of mandamus to compel the respondents to permit the plaintiff and his duly
authorized agent and representative to examine the records and business transactions of
said company. To this petition the respondents interposed an answer, in which, after
admitting certain allegations of the petition, the respondents set forth the facts upon
which they mainly rely as a defense to the petition. To this answer the petitioner in turn
interposed a demurrer, and the cause is now before us for determination of the issue thus
presented.
It is inferentially, if not directly admitted that the petitioner is in fact a stockholder in the
Hercules Lumber Company, Inc., and that the respondent, Ignacio Ferrer, as acting
secretary of the said company, has refused to permit the petitioner or his agent to inspect
the records and business transactions of the said Hercules Lumber Company, Inc., at
times desired by the petitioner. No serious question is of course made as to the right of
the petitioner, by himself or proper representative, to exercise the right of inspection
conferred by section 51 of Act No. 1459. Said provision was under the consideration of
this court in the case of Philpotts vs. Philippine Manufacturing Co., and Berry (40 Phil.,
471), where we held that the right of examination there conceded to the stockholder may
be exercised either by a stockholder in person or by any duly authorized agent or
representative.
The main ground upon which the defense appears to be rested has reference to the time,
or times, within which the right of inspection may be exercised. In this connection the
answer asserts that in article 10 of the By-laws of the respondent corporation it is
declared that "Every shareholder may examine the books of the company and other
documents pertaining to the same upon the days which the board of directors shall
annually fix." It is further averred that at the directors' meeting of the respondent
corporation held on February 16, 1924, the board passed a resolution to the following
effect:
The board also resolved to call the usual general (meeting of shareholders) for March 30
of the present year, with notice to the shareholders that the books of the company are at
their disposition from the 15th to 25th of the same month for examination, in appropriate
hours.
The contention for the respondent is that this resolution of the board constitutes a
lawful restriction on the right conferred by statute; and it is insisted that as the
petitioner has not availed himself of the permission to inspect the books and
transactions of the company within the ten days thus defined, his right to
inspection and examination is lost, at least for this year.

We are entirely unable to concur in this contention. The general right given by the statute
may not be lawfully abridged to the extent attempted in this resolution. It may be admitted
that the officials in charge of a corporation may deny inspection when sought at unusual
hours or under other improper conditions; but neither the executive officers nor the board
of directors have the power to deprive a stockholder of the right altogether. A by-law
unduly restricting the right of inspection is undoubtedly invalid. Authorities to this effect
are too numerous and direct to require extended comment. (14 C.J., 859; 7 R.C.L., 325;
4 Thompson on Corporations, 2nd ed., sec. 4517; Harkness vs. Guthrie, 27 Utah, 248;
107 Am., St. Rep., 664. 681.) Under a statute similar to our own it has been held that the
statutory right of inspection is not affected by the adoption by the board of directors of a
resolution providing for the closing of transfer books thirty days before an election.
(State vs. St. Louis Railroad Co., 29 Mo., Ap., 301.)
It will be noted that our statute declares that the right of inspection can be exercised "at
reasonable hours." This means at reasonable hours on business days throughout the
year, and not merely during some arbitrary period of a few days chosen by the directors.
In addition to relying upon the by-law, to which reference is above made, the answer of
the respondents calls in question the motive which is supposed to prompt the petitioner
to make inspection; and in this connection it is alleged that the information which the
petitioner seeks is desired for ulterior purposes in connection with a competitive firm with
which the petitioner is alleged to be connected. It is also insisted that one of the purposes
of the petitioner is to obtain evidence preparatory to the institution of an action which he
means to bring against the corporation by reason of a contract of employment which
once existed between the corporation and himself. These suggestions are entirely apart
from the issue, as, generally speaking, the motive of the shareholder exercising the right
is immaterial. (7 R.C.L., 327.)
We are of the opinion that, upon the allegations of the petition and the admissions of the
answer, the petitioner is entitled to relief. The demurrer is, therefore, sustained; and the
writ of mandamus will issue as prayed, with the costs against the respondent. So
ordered.

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

RAMON A. GONZALES, petitioner,
vs.
THE PHILIPPINE NATIONAL BANK, respondent.
Ramon A. Gonzales in his own behalf.
Juan Diaz for respondent.

VASQUEZ, J.:
Petitioner Ramon A. Gonzales instituted in the erstwhile Court of First Instance of Manila
a special civil action for mandamus against the herein respondent praying that the latter
be ordered to allow him to look into the books and records of the respondent bank in
order to satisfy himself as to the truth of the published reports that the respondent has

guaranteed the obligation of Southern Negros Development Corporation in the purchase

of a US$ 23 million sugar-mill to be financed by Japanese suppliers and financiers; that
the respondent is financing the construction of the P 21 million Cebu-Mactan Bridge to be
constructed by V.C. Ponce, Inc., and the construction of Passi Sugar Mill at Iloilo by the
Honiron Philippines, Inc., as well as to inquire into the validity of Id transactions. The
petitioner has alleged hat his written request for such examination was denied by the
respondent. The trial court having dismissed the petition for mandamus, the instant
appeal to review the said dismissal was filed.
The facts that gave rise to the subject controversy have been set forth by the trial court in
the decision herein sought to be reviewed, as follows:
Briefly stated, the following facts gathered from the stipulation of the
parties served as the backdrop of this proceeding.
Previous to the present action, the petitioner instituted several cases in
this Court questioning different transactions entered into by the Bark with
other parties. First among them is Civil Case No. 69345 filed on April 27,
1967, by petitioner as a taxpayer versus Sec. Antonio Raquiza of Public
Works and Communications, the Commissioner of Public Highways, the
Bank, Continental Ore Phil., Inc., Continental Ore, Huber Corporation,
Allis Chalmers and General Motors Corporation In the course of the
hearing of said case on August 3, 1967, the personality of herein
petitioner to sue the bank and question the letters of credit it has
extended for the importation by the Republic of the Philippines of public
works equipment intended for the massive development program of the
President was raised. In view thereof, he expressed and made known his
intention to acquire one share of stock from Congressman Justiniano
Montano which, on the following day, August 30, 1967, was transferred in
his name in the books of the Bank.
Subsequent to his aforementioned acquisition of one share of stock of the
Bank, petitioner, in his dual capacity as a taxpayer and stockholder, filed
the following cases involving the bank or the members of its Board of
Directors to wit:
l. On October l8,1967, Civil Case No. 71044 versus the Board of Directors
of the Bank; the National Investment and Development Corp., Marubeni
Iida Co., Ltd., and Agro-Inc. Dev. Co. or Saravia;
2. On May 11, 1968, Civil Case No. 72936 versus Roberto Benedicto and
other Directors of the Bank, Passi (Iloilo) Sugar Central, Inc., CalinogLambunao Sugar Mill Integrated Farming, Inc., Talog sugar Milling Co.,
Inc., Safary Central, Inc., and Batangas Sugar Central Inc.;
3. On May 8, 1969, Civil Case No. 76427 versus Alfredo Montelibano and
the Directors of both the PNB and DBP;
On January 11, 1969, however, petitioner addressed a letter to the
President of the Bank (Annex A, Pet.), requesting submission to look into
the records of its transactions covering the purchase of a sugar central by
the Southern Negros Development Corp. to be financed by Japanese
suppliers and financiers; its financing of the Cebu-Mactan Bridge to be
constructed by V.C. Ponce, Inc. and the construction of the Passi Sugar
Mills in Iloilo. On January 23, 1969, the Asst. Vice-President and Legal
Counsel of the Bank answered petitioner's letter denying his request for

being not germane to his interest as a one-share stockholder and for the
cloud of doubt as to his real intention and purpose in acquiring said
share. (Annex B, Pet.) In view of the Bank's refusal the petitioner
instituted this action.' (Rollo, pp. 16-18.)
The petitioner has adopted the above finding of facts made by the trial court in its brief
which he characterized as having been "correctly stated." (Petitioner-Appellant"s Brief,
pp. 57.)
The court a quo denied the prayer of the petitioner that he be allowed to examine and
inspect the books and records of the respondent bank regarding the transactions
mentioned on the grounds that the right of a stockholder to inspect the record of the
business transactions of a corporation granted under Section 51 of the former
Corporation Law (Act No. 1459, as amended) is not absolute, but is limited to purposes
reasonably related to the interest of the stockholder, must be asked for in good faith for a
specific and honest purpose and not gratify curiosity or for speculative or vicious
purposes; that such examination would violate the confidentiality of the records of the
respondent bank as provided in Section 16 of its charter, Republic Act No. 1300, as
amended; and that the petitioner has not exhausted his administrative remedies.
Assailing the conclusions of the lower court, the petitioner has assigned the single error
to the lower court of having ruled that his alleged improper motive in asking for an
examination of the books and records of the respondent bank disqualifies him to exercise
the right of a stockholder to such inspection under Section 51 of Act No. 1459, as
amended. Said provision reads in part as follows:
Sec. 51. ... The record of all business transactions of the corporation and
the minutes of any meeting shall be open to the inspection of any director,
member or stockholder of the corporation at reasonable hours.
Petitioner maintains that the above-quoted provision does not justify the qualification
made by the lower court that the inspection of corporate records may be denied on the
ground that it is intended for an improper motive or purpose, the law having granted such
right to a stockholder in clear and unconditional terms. He further argues that, assuming
that a proper motive or purpose for the desired examination is necessary for its exercise,
there is nothing improper in his purpose for asking for the examination and inspection
herein involved.
Petitioner may no longer insist on his interpretation of Section 51 of Act No. 1459, as
amended, regarding the right of a stockholder to inspect and examine the books and
records of a corporation. The former Corporation Law (Act No. 1459, as amended) has
been replaced by Batas Pambansa Blg. 68, otherwise known as the "Corporation Code
of the Philippines."
The right of inspection granted to a stockholder under Section 51 of Act No. 1459 has
been retained, but with some modifications. The second and third paragraphs of Section
74 of Batas Pambansa Blg. 68 provide the following:
The records of all business transactions of the corporation and the
minutes of any meeting shag be open to inspection by any director,
trustee, stockholder or member of the corporation at reasonable hours on
business days and he may demand, in writing, for a copy of excerpts from
said records or minutes, at his expense.
Any officer or agent of the corporation who shall refuse to allow any
director, trustee, stockholder or member of the corporation to examine

and copy excerpts from its records or minutes, in accordance with the
provisions of this Code, shall be liable to such director, trustee,
stockholder or member for damages, and in addition, shall be guilty of an
offense which shall be punishable under Section 144 of this Code:
Provided, That if such refusal is made pursuant to a resolution or order of
the board of directors or trustees, the liability under this section for such
action shall be imposed upon the directors or trustees who voted for such
refusal; and Provided, further, That it shall be a defense to any action
under this section that the person demanding to examine and copy
excerpts from the corporation's records and minutes has improperly used
any information secured through any prior examination of the records or
minutes of such corporation or of any other corporation, or was not acting
in good faith or for a legitimate purpose in making his demand.
As may be noted from the above-quoted provisions, among the changes introduced in
the new Code with respect to the right of inspection granted to a stockholder are the
following the records must be kept at the principal office of the corporation; the inspection
must be made on business days; the stockholder may demand a copy of the excerpts of
the records or minutes; and the refusal to allow such inspection shall subject the erring
officer or agent of the corporation to civil and criminal liabilities. However, while
seemingly enlarging the right of inspection, the new Code has prescribed limitations to
the same. It is now expressly required as a condition for such examination that the one
requesting it must not have been guilty of using improperly any information through a
prior examination, and that the person asking for such examination must be "acting in
good faith and for a legitimate purpose in making his demand."
The unqualified provision on the right of inspection previously contained in Section 51,
Act No. 1459, as amended, no longer holds true under the provisions of the present law.
The argument of the petitioner that the right granted to him under Section 51 of the
former Corporation Law should not be dependent on the propriety of his motive or
purpose in asking for the inspection of the books of the respondent bank loses whatever
validity it might have had before the amendment of the law. If there is any doubt in the
correctness of the ruling of the trial court that the right of inspection granted under
Section 51 of the old Corporation Law must be dependent on a showing of proper motive
on the part of the stockholder demanding the same, it is now dissipated by the clear
language of the pertinent provision contained in Section 74 of Batas Pambansa Blg. 68.
Although the petitioner has claimed that he has justifiable motives in seeking the
inspection of the books of the respondent bank, he has not set forth the reasons and the
purposes for which he desires such inspection, except to satisfy himself as to the truth of
published reports regarding certain transactions entered into by the respondent bank and
to inquire into their validity. The circumstances under which he acquired one share of
stock in the respondent bank purposely to exercise the right of inspection do not argue in
favor of his good faith and proper motivation. Admittedly he sought to be a stockholder in
order to pry into transactions entered into by the respondent bank even before he
became a stockholder. His obvious purpose was to arm himself with materials which he
can use against the respondent bank for acts done by the latter when the petitioner was
a total stranger to the same. He could have been impelled by a laudable sense of civic
consciousness, but it could not be said that his purpose is germane to his interest as a
stockholder.
We also find merit in the contention of the respondent bank that the inspection sought to
be exercised by the petitioner would be violative of the provisions of its charter. (Republic
Act No. 1300, as amended.) Sections 15, 16 and 30 of the said charter provide
respectively as follows:

Sec. 15. Inspection by Department of Supervision and Examination of the

Central Bank. The National Bank shall be subject to inspection by the
Department of Supervision and Examination of the Central Bank'
Sec. 16. Confidential information. The Superintendent of Banks and the
Auditor General, or other officers designated by law to inspect or
investigate the condition of the National Bank, shall not reveal to any
person other than the President of the Philippines, the Secretary of
Finance, and the Board of Directors the details of the inspection or
investigation, nor shall they give any information relative to the funds in its
custody, its current accounts or deposits belonging to private individuals,
corporations, or any other entity, except by order of a Court of competent
jurisdiction,'
Sec. 30. Penalties for violation of the provisions of this Act. Any
director, officer, employee, or agent of the Bank, who violates or permits
the violation of any of the provisions of this Act, or any person aiding or
abetting the violations of any of the provisions of this Act, shall be
punished by a fine not to exceed ten thousand pesos or by imprisonment
of not more than five years, or both such fine and imprisonment.
The Philippine National Bank is not an ordinary corporation. Having a charter of its own, it
is not governed, as a rule, by the Corporation Code of the Philippines. Section 4 of the
said Code provides:
SEC. 4. Corporations created by special laws or charters. Corporations
created by special laws or charters shall be governed primarily by the
provisions of the special law or charter creating them or applicable to
them. supplemented by the provisions of this Code, insofar as they are
applicable.
The provision of Section 74 of Batas Pambansa Blg. 68 of the new Corporation Code
with respect to the right of a stockholder to demand an inspection or examination of the
books of the corporation may not be reconciled with the abovequoted provisions of the
charter of the respondent bank. It is not correct to claim, therefore, that the right of
inspection under Section 74 of the new Corporation Code may apply in a supplementary
capacity to the charter of the respondent bank.
WHEREFORE, the petition is hereby DISMISSED, without costs.

G.R. No. L-37064

October 4, 1932

EUGENIO VERAGUTH, Director and Stockholder of the Isabela Sugar Company,

Inc., petitioner,
vs.
ISABELA SUGAR COMPANY, INC., GIL MONTILLA, Acting President, and AGUSTIN
B. MONTILLA, Secretary of the same corporation, respondents.
Jose B. Gamboa for petitioner.
Agustin P. Seva for respondents.

MALCOLM, J.:
The parties to this action are Eugenio Veraguth, a director and stockholder of the Isabela
Sugar Company, Inc., who is the petitioner, and the Isabela Sugar Company, Inc., Gil
Montilla, acting president of the company, and Agustin B. Montilla, secretary of the
company, who are the respondents. The petitioner prays: (a) That the respondents be
required within five days from receipt of notice of this petition to show cause why they
refuse to notify the petitioner, as director, of the regular and special meetings of the board
of directors, and to place at his disposal at reasonable hours, the minutes, and
documents, and books of the aforesaid corporation, for his inspection as director and
stockholder, and to issue, upon payment of the fees, certified copies of any
documentation in connection with said minutes, documents, and books of the
corporation; and (b) that, in view of the memoranda and hearing of the parties, a final and
absolute writ of mandamus be issued to each and all of the respondents to notify
immediately the petitioner within the reglamentary period, of all regular and special
meetings of the board of directors of the Isabela Sugar Central Company, Inc., and to
place at his disposal at reasonable hours the minutes, documents, and books of said
corporation for his inspection as director and stockholder, and to issue immediately, upon
payment of the fees, certified copies of any documentation in connection with said
minutes, documents, and the books of the aforesaid corporation. To the petition an
answer has been interposed by the respondent, too long to be here summarized, which
raised questions of fact and law. Following the taking of considerable before the clerk as
commissioner, the case has been submitted on memoranda.
It should first be observed that when the case was filed here, it was, in accordance with
settled practice, dismissed without prejudice to the right of the petitioner to present the
action before the Court of First Instance of Occidental Negros. Thereafter, on a motion of
reconsideration being presented, this order was set aside and the case was permitted to
continue in this court. On further reflection, we now feel that this was error, and that it
would have been the correct practice to have required the petitioner to present the action
in a court of First Instance which is better equipped for the taking of testimony and the
resolution of questions of fact than is the appellate court. Only with considerable difficulty,
therefore, can we decide the issues of fact, since none of the members of the court saw
or heard the witnesses testify.
Speaking to the first point with which the petition is concerned, relating to the alleged
failure of the secretary of the company to notify the petitioner in due time of a special
meeting of the company, we find by-laws, together with a resolution of the board of
directors, providing for the holding of ordinary and special meetings. Whether there was a
malicious attempt to keep Director Veraguth from attending a special meeting of the
board of the board of directors at which the compensation of the attorneys of the
company was fixed, or whether Director Veraguth, in a spirit of antogonism, has made
this merely a pretext to cause trouble, we are unable definitely to say. This much,
however, can appropriately be stated and is decisive, and this is that the meeting in
question is in the past and, therefore, now merely presents an academic question; that
no damage was caused to Veraguth by the action taken at the special meeting which he
did not attend, since his interests were fully protected by the Philippine National Bank;
and that as to meetings in the future it is to be presumed that the secretary of the
company will fulfill the requirements of the resolutions of the company pertaining to
regular and special meetings. It will, of course, be incumbent upon Veraguth to give
formal notice to the secretary of his post-office address if he desires notice sent to a
particular residence.
1awphil.net

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

Company and others. To this the secretary made answer by letter stating that, since the
minutes of the meeting in question had not been signed by the directors present, a
certified copy could not be furnished and that as to other proceedings of the stockholders
a request should be made to the president of the Isabela Sugar Company, Inc. It further
appears that the board of directors adopted a resolution providing for inspection of the
books and the taking of copies "by authority of the President of the corporation previously
obtained in each case."
The Corporation Law, section 51, provides that:
All business corporations shall keep and carefully preserve a record of all
business transactions, and a minute of all meetings of directors, members, or
stockholders, in which shall be set forth in detail the time and place of holding the
meeting was regular or special, if special its object, those present and absent,
and every act done or ordered done at the meeting. . . .
The record of all business transactions of the corporation and the minutes of any
meeting shall be open to the inspection of any director, member, or stockholder of
the corporation at reasonable hours.
The above puts in statutory form the general principles of Corporation Law. Directors of a
corporation have the unqualified right to inspect the books and records of the corporation
at all reasonable times. Pretexts may not be put forward by officers of corporations to
keep a director or shareholder from inspecting the books and minutes of the corporation,
and the right of inspection is not to be denied on the ground that the director or
shareholder is on unfriendly terms with the officers of the corporation whose records are
sought to be inspected. A director or stockholder can not of course make copies,
abstracts, and memoranda of documents, books, and papers as an incident to the right of
inspection, but cannot, without an order of a court, be permitted to take books from the
office of the corporation. We do not conceive, however, that a director or stockholder has
any absolute right to secure certified copies of the minutes of the corporation until these
minutes have been written up and approved by the directors. (See Fisher's Philippine
Law of Stock Corporations, sec. 153, and Fletcher Cyclopedia Corporations, vol. 4,
Chap. 45.)
Combining the facts and the law, we do not think that anything improper occurred when
the secretary declined to furnish certified copies of minutes which had not been approved
by the board of directors, and that while so much of the last resolution of the board of
directors as provides for prior approval of the president of the corporation before the
books of the corporation can be inspected puts an illegal obstacle in the way of a
stockholder or director, that resolution, so far as we are aware, has not been enforced to
the detriment of anyone. In addition, it should be said that this is a family dispute, the
petitioner and the individual respondents belonging to the same family; that a test case
between the petitioner and the respondents has not been begun in the Court of First
Instance of Occidental Negros involving hundreds of thousands of pesos, and that the
appellate court should not intrude its views to give an advantage to either party. We rule
that the petitioner has not made out a case for relief by mandamus.
Petition denied with costs.
Avancea, C.J., Villamor, Villa-Real, Hull and Imperial, JJ., concur.

May19,1950
G.R.No.L1721
JUAN D. EVANGELISTA ET AL.,plaintiffsappellants,
vs.
RAFAEL SANTOS,defendantappellee.
Antonio Gonzales for appellants.
Benjamin H. Tirol for appellee.
REYES, J.:
Thisisanactionbytheminoritystockholdersofacorporationagainstits
principalofficerfordamagesresultingfromhismismanagementofits
affairsandmisuseofitsassets.
ThecomplaintallegesthatplaintiffsareminoritystockholdersoftheVitali
LumberCompany,Inc.,aPhilippinecorporationorganizedforthe
exploitationofalumberconcessioninZamboanga,Philippines;that
defendantholdsmorethan50percentofthestocksofsaidcorporationand
alsoisandalwayshasbeenthepresident,manager,andtreasurerthereof;
andthatdefendant,insuchtriplecapacity,throughfault,neglect,and
abandonmentalloweditslumberconcessiontolapseanditspropertiesand
assets,amongthemmachineries,buildings,warehouses,trucks,etc.,to
disappear,thuscausingthecompleteruinofthecorporationandtotal
depreciationofitsstocks.Thecomplaintthereforepraysforjudgment
requiringdefendant:(1)torenderanaccountofhisadministrationofthe
corporateaffairsandassets:(2)topayplaintiffsthevalueoftheirrespective
participationinsaidassetsonthebasisofthevalueofthestocksheldby
eachofthem;and(3)topaythecostsofsuit.Plaintiffsalsoaskforsuch
otherremedyasmaybeandequitable.
Thecomplaintdoesnotgiveplaintiffs'residence,but,butpurposesof
venue,allegesthatdefendantresidesat2112DeweyBoulevard,corner
LibertadStreet,Pasay,provinceofRizal.Havingbeenservedwith
summonsatthatplace,defendantfiledamotionforthedismissalofthe

complaintonthegroundofimpropervenueandalsoonthegroundthatthe
complaintdidnotstateacauseofactioninfavorofplaintiffs.
Insupportoftheobjectiontothevenue,themotion,whichisunderoath,
statesthatdefendantisaresidentofIloiloCityandnotofPasay,andatthe
hearingofthemotiondefendantalsopresentedfurtheraffidavittotheeffect
thatwhilehehasahouseinPasay,wheremembersofhisfamilywhoare
studyinginManilaliveandwherehehimselfissojourningforthepurpose
ofattendingtohisinterestsinManila,yethehaspermanentresidenceinthe
CityofIloilowhereheisregisteredasavoterforelectionpurposesandhas
beenpayinghisresidencecertificate.Plaintiffsopposedthemotionfor
dismissalbutpresentednocounterproofandmerelycalledattentiontothe
Sheriff'sreturnshowingserviceofsummonsondefendantpersonallyathis
allegedresidenceatNo.2112DeweyBoulevard,Pasay.
Afterhearing,thelowercourtrendereditsorder,grantingthemotionfor
dismissaluponthetwogroundsallegedbydefendant,andreconsiderationof
thisorderhavingbeendenied,plaintiffshaveappealedtothisCourt.
Theappealpresentstwoquestions.Thefirstreferstovenueandthesecond,
totherightoftheplaintiffstobringthisactionfortheirbenefit.
Astothefirstquestion,itisimportanttorememberthatthelayingofthe
venueofanactionisnotlefttoplaintiff'scaprice.Thematterisregulatedby
theRulesofCourt.Andinactionslikethepresent,whichisonein
personam,theregulationapplicableisthatcontainedinsection1ofRule
5,whichprovides:
CivilactionsinCourtsofFirstInstancemaybecommencedandtriedwhere
thedefendantoranyofthedefendantresidesormaybefound,orwherethe
plaintifforanyoftheplaintiffsresides,attheelectionoftheplaintiff.
Objectiontoimpropervenuemaybeinterposedatanytimepriortothetrial.
(Moran'sCommentsontheRulesofCourt,Vol.I,2nded.,p.108.)
BelievingthatdefendantresidedintheprovinceofRizal,hereinplaintiffs
broughttheiractionintheCourtofFirstInstanceofthatprovince.Butthat

beliefprovederroneous,forthelowercourtfoundafterhearingthat
defendanthadhisresidenceinIloilo.Thefindingisbasedondefendant's
swornstatementnotrebuttedbyanyprooftothecontrary.
Thereisnothingtothecontentionthatdefendant'smotiontodismiss
necessarilypresupposesahypotheticaladmissionoftheallegationsofthe
complaint,amongthemtheavermentthatdefendantisaresidentofRizal
province,forthemotionpreciselydeniesthatavermentandallegesthathis
realresidenceisinIloiloCity.This,defendanthadtherighttodoin
objectingtothecourt'sjurisdictiononthegroundofimpropervenue.
Section1ofRule5mayseem,atfirstblush,toauthorizethelayingofthe
venueintheprovincewherethedefendant"maybefound."Butthisphrase
hasalreadybeenheldtohavealimitedapplication.Itisthesamephrase
usedinsection377ofAct 190fromwhichsection1ofRule5wastaken,
andasconstruedbythisCourtitappliesonlytocaseswheredefendanthas
noresidenceinthePhilippineIslands.Thiswastheconstructionadoptedin
thecaseofCohen vs. Benguet Commercial Co., Ltd., 34 Phil.
526,whichwasanactionbroughtinManilabyanonresidentagainsta
corporationwhichhaditsresidenceforlegalpurposesinBaguiobutwhose
PresidentwasfoundinManilaandthereservedwithsummons.ThisCourt
theresaid:
Section377providesthatactionsofthischaracter"maybebroughtinany
provincewherethedefendantsoranynecessarypartydefendantmayreside
orbefound,orinanyprovincewheretheplaintifforoneoftheplaintiffs
resides,attheelectionoftheplaintiff."Theplaintiffinthisactionhasno
residenceinthePhilippineIslands.Onlyoneofthepartiestotheaction
resideshere.Therecanbe,therefore,noelectionbyplaintiffastothetrial.It
mustbeintheprovincewherethedefendantresides.Thedefendantresides,
intheeyeofthelaw,inBaguio.Wasit"found"inthecityofManilaunder
section377,itspresidentbeinginthatcitywheretheserviceofsummons
wasmade?Wethinknot.Theword"found"asusedsection377hasa
differentmeaningthatbelongstoitasusedinsection394,whichrefers
exclusivelytotheplacewherethesummonsmaybeserved.Aswehavesaid
asummonsmaybelegallyservedonadefendantwhereverhemaybe

"found,"i.e.,whereverhemaybe,providedhebeinthePhilippineIslands;
butthevenuecannotbelaidwhereverthedefendantmaybe"found."There
isanelemententeringinsection377whichisnotpresentinsection394,
thatisaresidence.Residenceoftheplaintiffordefendantdoesnotaffect
theplacewhereasummonsmaybeserved;butresidenceisthevitalthing
whenwedealwithvenue.Thevenuemustbelaidintheprovincewhereone
ofthepartiesresides.Iftheplaintiffisanonresidentthevenuemustlaidin
theprovinceofthedefendant'sresidence.Thevenuecanbelaidinthe
provincewheredefendantis"found"onlywhendefendanthasnoresidence
inthePhilippineIslands.Adefendantcannothavearesidenceinone
provinceandbe"found"inanother.Aslongashehasaresidenceinthe
PhilippineIslandshecanbe"found,"forthepurposesofsection
377,onlyintheprovinceofhisresidence.Insuchcasethewords
"residence"and"found"aresynonymous.Ifheisanonresidentthenthe
venuemaylaidintheprovincewhereheis"found"atthetimevenuethe
actioniscommencedorintheprovinceofplaintiff'sresidence.Thisapplies
alsotoadomesticcorporation.
WhiletheserviceofthesummonswasgoodineitherBaguioorManilawe
areoftheopinionthattheobjectionofthedefendanttotheplaceoftrialwas
properinbothcasesandthatthetrialcourtshouldhaveheldthatthevenue
wasimproperlylaid.
Andelaboratingonthepointwhenthecasecameupforreconsideration,the
Courtfurthersaid:
Themovingpartycontendsthatthevenuewasproperlylaidundersection
377inthatwaslaidintheprovincewherethedefendantwasfoundatthe
timesummonswasservedonitspresident,hehavingbeenfoundandserved
withprocessinthecityofManila.forthepurposeofthediscussionwe
assumedinthemaincase,astheplaintiffclaimed,thatthedefendantwasin
factandinlawfoundinthecityofManila;andproceededtodecidethe
causeuponthetheorythat,evenifthedefendantwerefoundinthecityof
Manila,thatdidnotjustify,underthefactsofthecase,thelayingofthe
venueinthecityofManila.

Wedonotbelievethatthemovingparty'sobjectionthatourconstruction
deprivestheword"found"ofallsignificanceandresults,ineffect,in
eliminatingitfromthestatue,issound.Wedonotdepriveitofall
significanceandeffectanddonoteliminateitfromthestatue.Wegiveitthe
onlyeffectwhichcanbegivenitandstillaccordwiththeotherprovisions
ofthesectionwhichgivedefendanttherighttohavethevenuelaidinthe
provinceofhisresidence,theeffectwhichitwasintendedbythelegislature
theyshouldhave.Weheldthattheword"found"wasapplicableincertain
cases,andinsuchcasesgaveitfullsignificanceandeffect.Wedeclaredthat
itwasapplicableandeffectiveincaseswherethedefendantisanonresident.
Insuchcaseswherethedefendantisanonresident.Insuchcasesthevenue
maybelaidwhereverhemaybefoundinthePhilippineIslandsatthetime
oftheserviceoftheprocess,butwealsoheldthatwhereheisaresidentof
thePhilippineIslandstheword"found"hasnoapplicationandthevenue
mustbelaidintheprovincewhereheresides.
Theconstructionwhichthemovingpartyasksustoplaceonthatprovision
ofsection377abovequotedwouldresultinthedestructionoftheprivilege
conferredbythesectionuponaresidentdefendantwhichrequiresthevenue
tobelaidintheprovincewhereheresides.Thisisclear;for,ifthevenue
maybelaidinanyprovincewherethedefendant,althougharesidentof
someotherprovince,anybefoundatthetimeprocessisservedonhim,then
theprovisionthatitshallbelaidintheprovincewhereheresidesisnovalue
tohim.IfadefendantresidingintheprovinceofRizalishelplesswhenthe
venueislaidintheprovinceofMindoroinanactioninwhichtheplaintiffis
anonresidentorresidesinManila,whatisthevalueofaresidenceinRizal?
IfadefendantresidinginJoloiswithoutremedywhenanonresident
plaintifforaplaintiffresidinginJololaysthevenueinBontocbecausethe
defendanthappenstobefoundthere,ofwhatsignificanceisaresidencein
Jolo?Thephrases"wherethedefendant...mayreside"and"orbefound"
mustbeconstruedtogetherandinsuchmannerthatbothmaybegiven
effect.Theconstructionaskedforbythemovingpartywoulddeprivethe
phrase"wherethedefendant...mayreside"ofallsignificance,asthe
plaintiffcouldalwayselecttolaythevenueintheprovincewherethe
defendantwas"found"andnotwhereheresided;whereastheconstruction
whichweplaceuponthesephrasespermitsbothtohaveeffect.Wedeclare

that,whenthedefendantisaresidentofthePhilippineIslands,thevenue
mustbelaideitherintheprovincewheretheplaintiffresidesorinthe
provincewherethedefendantresides,andinnootherprovince.Where,
however,thedefendantisanonresidentthevenuemaybelaidwherever
defendantmaybefoundinthePhilippineIslands.Thisconstructiongives
bothphrasestheirproperandlegitimateeffectwithoutdoingviolencetothe
spiritwhichinformsalllawsrelatingtovenueandwhichinsistsalwaysthat
theactionshalltriedintheplacewherethegreaterconvenienceofthe
partieswillbeserved.Ordinarilyadefendant'switnessarefoundwherethe
defendantresides;andplaintiff'switnessesaregenerallyfoundwherehe
residesorwherethedefendantresides.Itis,therefore,generallydesirableto
havetheactiontriedwhereonoftheresides.Wheretheplaintiffisa
nonresidentandthecontractuponwhichsuitisbroughtwasmadeinthe
PhilippineIslandsitmaysafelybeassertedthattheconvenienceofthe
defendantwouldbebestservedbyatrialintheprovincewhereheresides.
ThefactthatdefendantwassojourninginPasaytthetimehewasserved
withsummonsdoesnotmakehimaresidentofthatplaceforpurposesof
venue.Residenceis"thepermanenthome,theplacetowhich,whenever
absentforbusinessorpleasure,oneintendstoreturn,..."(67C.J.,pp.123
124.)Amancanhavebutonedomicileatatime(Alcantara vs.
Secretary of Interior, 61 Phil., 459),andresidenceisanonymous
withdomicileundersection1ofRule5(Moran'sComments,supra,p.
104).
Inviewoftheforegoing,weholdthattheobjectiontothevenuewas
correctlysustainedbythelowercourt.
Astothesecondquestion,thecomplaintshowsthattheactionisfor
damagesresultingfrommismanagementoftheaffairsandassetsofthe
corporationbyitsprincipalofficer,itbeingallegedthatdefendant's
maladministrationhasbroughtabouttheruinofthecorporationandthe
consequentlossofvalueofitsstocks.Theinjurycomplainedofisthus
primarilytothecorporation,sothatthesuitforthedamagesclaimedshould
bebythecorporationratherthanbythestockholders(3Fletcher,
CyclopediaofCorporationpp.977980).Thestockholdersmaynotdirectly

claimthosedamagesforthemselvesforthatwouldresultinthe
appropriationby,andthedistributionamongthemofpartofthecorporate
assetsbeforethedissolutionofthecorporationandtheliquidationofits
debtsandliabilities,somethingwhichcannotbelegallydoneinviewof
section16oftheCorporationLaw,whichprovides:
Noshallcorporationshallmakeordeclareanystockorbonddividendor
anydividendwhatsoeverfromtheprofitsarisingfromitsbusiness,ordivide
ordistributeitscapitalstockorpropertyotherthanactualprofitsamongits
membersorstockholdersuntilafterthepaymentofitsdebtsandthe
terminationofitsexistencebylimitationorlawfuldissolution.
Butwhileitistothecorporationthattheactionshouldpertainincasesof
thisnature,however,iftheofficersofthecorporation,whoaretheones
calledupontoprotecttheirrights,refusetosue,orwhereademandupon
themtofilethenecessarysuitwouldbefutilebecausetheyaretheveryones
tobesuedorbecausetheyholdthecontrollinginterestinthecorporation,
theninthatcaseanyoneofthestockholdersisallowedtobringsuit(3
Fletcher'sCyclopediaofCorporations,pp.977980).Butinthatcaseitisthe
corporationitselfandnottheplaintiffstockholderthatistherealpropertyin
interest,sothatsuchdamagesasmayberecoveredshallpertaintothe
corporation(Pascual vs. Del Saz Orosco, 19 Phil. 82, 85).Inother
words,itisaderivativesuitbroughtbyastockholderasthenominalparty
plaintiffforthebenefitofthecorporation,whichistherealpropertyin
interest(13Fletcher,CyclopediaofCorporations,p.295).
Inthepresentcase,theplaintiffstockholdershavebroughttheactionnotfor
thebenefitofthecorporationbutfortheirownbenefit,sincetheyaskthat
thedefendantmakegoodthelossesoccasionedbyhismismanagementand
paytothemthevalueoftheirrespectiveparticipationinthecorporateassets
onthebasisoftheirrespectiveholdings.Clearly,thiscannotbedoneuntil
allcorporatedebts,iftherebeany,arepaidandtheexistenceofthe
corporationterminatedbythelimitationofitscharterorbylawful
dissolutioninviewoftheprovisionsofsection16oftheCorporationLaw.

Itresultsthatplaintiff'scomplaintshowsnocauseofactionintheirfavorso
thatthelowercourtdidnoterrindismissingthecomplaintonthatground.
Whileplaintiffsaskforremedytowhichtheyarenotentitledunlessthe
requirementofsection16oftheCorporationLawbefirstcompliedwith,we
notethattheactionstatedintheircomplaintissusceptibleofbeing
convertedintoaderivativesuitforthebenefitofthecorporationbyamere
changeintheprayer.Suchamendment,however,isnotpossiblenow,since
thecomplainthasbeenfiledinthewrongcourt,sothatthesamelasttobe
dismissed.
Theorderappealedfromisthereforeaffirmed,butwithoutprejudicetothe
filingoftheproperactioninwhichthevenueshallbelaidintheproper
province.Appellant'sshallpaycosts.Soordered.
Moran, C.J., Ozaeta, Pablo, Bengzon, Tuason, and
Montemayor, JJ., concur.

G.R. No. L-22399

March 30, 1967

REPUBLIC BANK, represented in this action by DAMASO P. PEREZ, etc., plaintiffappellant,

vs.
MIGUEL CUADERNO, BIENVENIDO DIZON, PABLO ROMAN,
THE BOARD OF DIRECTORS OF THE REPUBLIC BANK AND THE MONETARY
BOARD OF THE CENTRAL BANK OF THE PHILIPPINES, defendants-appellees.
Crispin D. Baizas and Associates and Halili, Bolinao and Associates for plaintiffappellant.
N. M. Balboa, F.E. Evangelista and S. Malvar for defendant-appellee Monetary Board.
Norberto J. Quisumbing and H.V. Quisumbing for other defendants-appellees.
REYES, J.B.L., J.:
Direct appeal from an order of the Court of First Instance of Manila, in its civil case No.
53936, dismissing the petitioner's complaint on the ground of failure to state cause of
action.
In the Court below, Damaso Perez, a stockholder of the Republic Bank, a Philippine
banking corporation domiciled in Manila, instituted a derivative suit for and in behalf of
said Bank, against Miguel Cuaderno, Bienvenido Dizon, the Board of Directors of the
Republic Bank, and the Monetary Board of the Central Bank of the Philippines.
Paragraph 6 of the Complaint (Rec. on Appeal, p. 7) expressly pleaded the following: .

6. That the relator herein filed the present derivative suit without any further
demand on the Board of Directors of the Republic Bank for the reason that such
formal demand to institute the present complaint would be a futile formality since
the members of the board are personally chosen by defendant Pablo Roman
himself.
For a cause of action plaintiff alleged, inter alia, that Damaso Perez had complained to
the Monetary Board of the Central Bank against certain frauds allegedly committed by
defendant Pablo Roman, in that being chairman of the Board of Directors of the Republic
Bank, and of its Executive Loan Committee, in 1957 to 1959, "in grave abuse of his
fiduciary duty and taking advantage of his said positions and in connivance with other
officials of the Republic Bank", Roman had fraudulently granted or caused to be granted
loans to fictitious and non-existing persons and to their close friends, relatives and/or
employees, who were in reality their dummies, on the basis of fictitious and inflated
appraised values of real estate properties; that said loans amounted to almost 4 million
pesos; that acting upon the complaint, Miguel Cuaderno (then Governor of the Central
Bank) and the Monetary Board ordered an investigation, which was carried out by Bank
Examiners; that they and the Superintendent of Banks of the Central Bank reported that
certain mortgage loans amounting to P2,303,400.00 were granted in violation of sections
77, 78 and 88 of the General Banking Act; that acting on said reports, the Monetary
Board, of which defendant Cuaderno was a member, ordered a new Board of Directors of
the Republic Bank to be elected, which was done, and subsequently approved by the
Monetary Board; that on January 5, 1960, the latter accepted the offer of Pablo Roman to
put up adequate security for the questioned loans made by the Republic Bank, and such
security was made a condition for the resumption of the Bank's normal operations; that
subsequently, the Central Bank through its Governor, Miguel Cuaderno, referred to
special prosecutors of the Department of Justice on July 22, 1960, the banking frauds
and violations of the Banking Act, reported by the Superintendent of Banks, for
investigation and prosecution, but no information was filed up to the time of the
retirement of Cuaderno in 1961; that other similar frauds were subsequently discovered;
that to neutralize the impending action against him, Pablo Roman engaged Miguel
Cuaderno as technical consultant at a compensation of P12,500.00 per month, and
selected Bienvenido Dizon as chairman of the Board of Directors of the Republic Bank;
that the Board of Directors composed of individuals personally selected and chosen by
Roman, connived and confederated in approving the appointment and selection of
Cuaderno and Dizon; that such action was motivated by bad faith and without intention to
protect the interest of the Republic Bank but were prompted to protect Pablo Roman from
criminal prosecution; that the appointment of Cuaderno and his acceptance of the
position of technical consultant are immoral, anomalous and illegal, and his
compensation highly unconscionable, because court actions involving the actuations of
Cuaderno as Governor and Member or Chairman of the Monetary Board are still pending
in court; that as member of the Monetary Board from 1961 to 1962, Bienvenido Dizon
exercised supervision over the Republic Bank; that the selection of Dizon as chairman of
the Board of the Republic Bank after he was forced to resign from the presidency of the
Philippine National Bank and from membership of the Monetary Board and within one
year thereafter is in violation of option 3, sub-paragraph (d) of the Anti-Graft and Corrupt
Practices Act; that both Cuaderno and Dizon were alter egos of Pablo Roman; that the
Monetary Board was about to approve the appointment of Cuaderno and Dizon and
would do so unless enjoined.
The complaint, therefore, prayed for a writ of preliminary injunction against the Monetary
Board to prevent its confirmation of the appointments of Dizon and Cuaderno; against the
Board of Directors of the Republic Bank from recognizing Cuaderno as technical
consultant and Dizon as Chairman of the Board; and against Pablo Roman from
appointing or selecting officers or directors of the Republic Bank, and against the
recognition of any such appointees until final determination of the action. And concluded
by praying that after due hearing, judgment be rendered,

a) making the writ of injunction permanent;

b) declaring the appointment of defendant Miguel Cuaderno as technical
consultant with monthly compensation of P12,500.00 unconscionable, immoral,
illegal and null and void;
c) declaring the selection of defendant Bienvenido Dizon as chairman of the
Board of Directors of the Republic Bank violative of Section 3, sub-paragraph (d)
of Republic Act No. 5019, otherwise known as the Anti-Graft and Corrupt
Practices Act, and therefore, illegal and null and void;
d) declaring that defendant Pablo Roman, in view of his criminal liability for the
fraudulent real estate mortgage loans in the Republic Bank amounting to P4
million, has no right to select or to be allowed to select person or persons who
are his alter egos to manage the Republic Bank, and enjoining the defendant
Board of Directors of the Republic Bank from recognizing any officers or directors
appointed or selected by defendant Pablo Roman;
e) ordering defendants Miguel Cuaderno and Bienvenido Dizon to return to the
Republic Bank all amounts they may have received either in the form of
compensation, remuneration or emolument, with an interest thereon at the rate of
6%; or to order defendant Pablo Roman to refund the amounts paid to said
defendant Miguel Cuaderno and defendant Bienvenido Dizon, and to pay such
reasonable damages to the plaintiff Republic Bank;
f) ordering all the defendants to pay the sum of P25,000.00 as attorney's fees,
including all expenses of litigation and costs of this suit.
The Monetary Board filed an answer with denials, admissions and affirmative defenses;
but the other defendants filed separate motions to dismiss on practically the same
grounds: no valid cause of action against the individual movants; lack of legal capacity of
plaintiff-relator to sue; and non-exhaustion of intra-corporate remedies. These motions
were duly opposed by plaintiff Damaso Perez.
1wph1.t

On October 24, 1963, the court, "taking into consideration the grounds alleged in the
motions to dismiss and the opposition for the issuance of a writ of preliminary injunction
and the affirmative defenses filed by the defendants and the arguments in support
thereof", and "that there are already eight cases pending in the different branches of this
court between practically the same parties", denied the petition for a writ of preliminary
injunction and dismissed the case. The court in effect suggested that the matter at issue
in the case may be presented in any of the pending eight cases by means of amended
and supplemental pleadings.
Plaintiff Damaso Perez thereupon appealed to this Court.
The issue in this appeal, then, is whether or not the Court below erred in dismissing the
complaint. In this connection, it should be remembered that the defenses of the Monetary
Board of the Central Bank, being interposed in an answer and not in a motion to dismiss,
are not here at issue. Our sole concern is with the motions to dismiss of the other
defendants, Roman, Cuaderno, Dizon, and the Board of Directors of the Republic Bank.
They mainly controvert the right of plaintiff to question the appointment and selection of
defendants Cuaderno and Dizon, which they contend to be the result of corporate acts
with which plaintiff, as stockholder, cannot interfere. Normally, this is correct, but
Philippine jurisprudence is settled that an individual stockholder is permitted to institute a
derivative or representative suit on behalf of the corporation wherein he holds stock in

order to protect or vindicate corporate rights, whenever the officials of the corporation
refuse to sue, or are the ones to be sued or hold the control of the corporation. In such
actions, the suing stockholder is regarded as a nominal party, with the corporation as the
real party in interest (Pascual vs. Del Saz Orozco, 19 Phil. 82, 85; Everett vs. Asia
Banking Corp., 45 Phil. 518; Angeles vs. Santos, 64 Phil. 697; Evangelista vs. Santos, 86
Phil. 388). Plaintiff-appellant's action here is precisely in conformity, with these principles.
He is neither alleging nor vindicating his own individual interest or prejudice, but the
interest of the Republic Bank and the damage caused to it. The action he has brought is
a derivative one, expressly manifested to be for and in behalf of the Republic Bank,
because it was futile to demand action by the corporation, since its Directors were
nominees and creatures of defendant Pablo Roman (Complaint, p. 6). The frauds
charged by plaintiff are frauds against the Bank that redounded to its prejudice.
The complaint expressly pleads that the appointment of Cuaderno as technical
consultant, and of Bienvenido Dizon to head the Board of Directors of the Republic Bank,
were made only to shield Pablo Roman from criminal prosecution and not to further the
interests of the Bank, and avers that both men are Roman's alter egos. There is no
denying that the facts thus pleaded in the complaint constitute a cause of action for the
bank: if the questioned appointments were made solely to protect Roman from criminal
prosecution, by a Board composed by Roman's creatures and nominees, then the
moneys disbursed in favor of Cuaderno and Dizon would be an unlawful wastage or
diversion of corporate funds, since the Republic Bank would have no interest in shielding
Roman, and the directors in approving the appointments would be committing a breach
of trust; the Bank, therefore, could sue to nullify the appointments, enjoin disbursement of
its funds to pay them, and recover those paid out for the purpose, as prayed for in the
complaint in this case (Angeles vs. Santos, supra.).
Facts pleaded in the complaint are to be deemed accepted by the defendants who file a
motion to dismiss the complaint for failure to state a cause of action. This is the cardinal
principle in the matter. And, it has been ruled that the test of sufficiency of the facts
alleged is whether or not the Court could render a valid judgment as prayed for,
accepting as true the exclusive facts set forth in the complaint. 1So rigid is the norm
prescribed that if the Court should doubt the truth of the facts averred it must not dismiss
the complaint but require an answer and proceed to trial on the merits. 2
Defendants urge that the action is improper because the plaintiff was not authorized by
the corporation to bring suit in its behalf. Any such authority could not be expected as the
suit is aimed to nullify the action taken by the manager and the board of directors of the
Republic Bank; and any demand for intra-corporate remedy would be futile, as expressly
pleaded in the complaint. These circumstances permit a stockholder to bring a derivative
suit (Evangelista vs. Santos, 86 Phil. 394). That no other stockholder has chosen to
make common cause with plaintiff Perez is irrelevant, since the smallness of plaintiff's
holdings is no ground for denying him relief (Ashwander vs. TVA, 80 L. Ed. 688). At any
rate, it is yet too early in the proceedings for the absence of other stockholders to be of
any significance, no issues having even been joined.
There remains the procedural question whether the corporation itself must be made party
defendant. The English practice is to make the corporation a party plaintiff, while in the
United States, the usage leans in favor of its being joined as party defendant (see
Editorial Note, 51 LRA [NS] 123). Objections can be raised against either method.
Absence of corporate authority would seem to militate against making the corporation a
party plaintiff, while joining it as defendant places the entity in the awkward position of
resisting an action instituted for its benefit. What is important is that the corporation'
should be made a party, in order to make the Court's judgment binding upon it, and thus
bar future relitigation of the issues. On what side the corporation appears loses
importance when it is considered that it lay within the power of the trial court to direct the
making of such amendments of the pleadings, by adding or dropping parties, as may be

required in the interest of justice (Revised Rule 3, sec. 11). Misjoinder of parties is not a
ground to dismiss an action. (Ibid.)
We see no reason to support the contention of defendant Bienvenido Dizon that the
action of plaintiff amounts to aquo warranto proceeding. Plaintiff Perez is not claiming title
to Dizon's position as head of the Republic Bank's board of directors. The suit is aimed at
preventing the waste or diversion of corporate funds in paying officers appointed solely to
protect Pablo Roman from criminal prosecution, and not to carry on the corporation's
bank business. Whether the complaint's allegations to such effect are true or not must be
determined after due hearing.
Independently of the grounds advanced by the defendants in their motions to dismiss, the
Court a quo gave as a further pretext for the dismissal of the action the pendency of eight
other lawsuits between practically the same parties; reasoning that the question at issue
in the present case could be incorporated in any one of the other actions by amended or
supplemental pleading. We fail to see that this justifies the dismissal of the case under
appeal. In the first place, there is no pretense that the cause of action here was already
included in any of the other pending cases. As a matter of fact, dismissal of the present
action was not sought on the ground of pendency of another action between the same
parties. Secondly, the amendment of a complaint after a responsive pleading is filed,
would rest upon the discretion of the party and the Court. Hence, this case cannot be
dismissed simply because of the possibility that the cause of action here can be
incorporated or introduced in any of those of the pending cases.
In view of the foregoing, the order dismissing the complaint is reversed and set aside.
The case is remanded to the court of origin with instructions to overrule the motions to
dismiss and require the defendants to answer the complaint. Thereafter, the case shall
be tried and decided on its merits. Costs against defendants-appellees. So ordered.
Concepcion, C.J., Dizon, Regala, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ.,
concur.
Makalintal, J., took no part.

G.R. No. 85339 August 11, 1989

SAN MIGUEL CORPORATION, represented by EDUARDO DE LOS
ANGELES, petitioners,
vs.
ERNEST KAHN, ANDRES SORIANO III, BENIGNO TODA, JR., ANTONIO ROXAS,
ANTONIO PRIETO, FRANCISCO EIZMENDI, JR., EDUARDO SORIANO, RALPH
KAHN and RAMON DEL ROSARIO, JR.,respondents.
Romulo, Mabanta, Buenaventura, Sayoc & De Los Angeles petitioner.
Roco & Bunag Law Offices for respondent Ernest Kahn.
Siguion Reyna, Montecillo and Ongsiako for other respondents.

NARVASA, J.:
On December 15, 1983, 33,133,266 shares of the outstanding capital stock of the San
Miguel Corporation were acquired 1 by fourteen (14) other corporations, 2 and were placed

under a Voting Trust Agreement in favor of the late Andres Soriano, Jr. When the latter died,
Eduardo M. Cojuangco, Jr. was elected Substitute Trustee on April 9, 1984 with power to
delegate the trusteeship in writing to Andres Soriano III. 3 Shortly after the Revolution of
February, 1986, Cojuangco left the country amid "persistent reports" that "huge and unusual
cash disbursements from the funds of SMC" had been irregularly made, and the resources of
the firm extensively used in support of the candidacy of Ferdinand Marcos during the snap
elections in February, 1986 . 4

On March 26, 1986, an "Agreement" was executed between Andres Soriano III, as
"Buyer," and the 14 corporations, as "Sellers," for the purchase by Soriano, "for himself
and as agent of several persons," of the 33,133,266 shares of stock at the price of
P100.00 per share, or "an aggregate sum of Three Billion Three Hundred Thirteen Million
Three Hundred Twenty Six Thousand Six Hundred (P3,313,326,600.00) Pesos payable
in specified installments. 5 The Agreement revoked the voting trust above mentioned, and
expressed the desire of the 14 corporations to sell the shares of stock "to pay certain
outstanding and unpaid debts," and Soriano's own wish to purchase the same "in order to
institutionalize and stabilize the management of the COMPANY in .. (himself) and the
professional officer corps, mandated by the COMPANY's By- laws, and to direct the
COMPANY towards giving the highest priority to its principal products and extensive support
to agriculture programme of' the Government ... 6 Actually, according to Soriano and the other
private respondents, the buyer of the shares was a foreign company, Neptunia Corporation
Limited (of Hongkong, a wholly owned subsidiary of San Miguel International which is, in turn,
a wholly owned subsidiary of San Miguel Corporation; 7 and it was Neptunia which on or
about April 1, 1986 had made the down payment of P500,000,000.00, "from the proceeds of
certain loans". 8
At this point the 33,133,266 SMC shares were sequestered by the Presidential
Commission on Good Government (PCGG), on the ground that the stock belonged to
Eduardo Cojuangco, Jr., allegedly a close associate and dummy of former President
Marcos, and the sale thereof was "in direct contravention of .. Executive Orders
Numbered 1 and 2 (.. dated February 28, 1986 and March 12, 1986, respectively) which
prohibit .. the transfer, conveyance, encumbrance, concealment or liquidation of assets
and properties acquired by former President Ferdinand Marcos and/or his wife, Mrs.
Imelda Romualdez Marcos, their close relatives, subordinates, business associates. 9 The
sequestration was subsequently lifted, and the sale allowed to proceed, on representations by
San Miguel Corporation x x that the shares were 'owned by 1.3 million coconut farmers;' the
seller corporations were 'fully owned' by said farmers and Cojuangco owned only 2 shares in
one of the companies, etc. However, the sequestration was soon re-imposed by Order of the
PCGG dated May 19, 1986 .. The same order forbade the SMC corporate Secretary to
register any transfer or encumbrance of any of the stock without the PCGG's prior written
authority. 10
San Miguel promptly suspended payment of the other installments of the price to the
fourteen (14) seller corporations. The latter as promptly sued for rescission and
damages. 11
On June 4,1986, the PCGG directed San Miguel Corporation"to issue qualifying shares"
in the corporation to seven (7) individuals, including Eduardo de los Angeles, "from the
sequestered shares registered as street certificates under the control of AnscorHagedorn Securities, Inc.," to "be held in trust by .. (said seven [7] persons) for the
benefit of Anscor-Hagedom Securities, Inc. and/or whoever shall finally be determined to
be the owner/owners of said shares. 12
In December, 1986, the SMC Board, by Resolution No. 86-122, "decided to assume the
loans incurred by Neptunia for the down payment ((P500M)) on the 33,133,266 shares."
The Board opined that there was "nothing illegal in this assumption (of liability for the
loans)," since Neptunia was "an indirectly wholly owned subsidiary of SMC," there "was

no additional expense or exposure for the SMC Group, and there were tax and other
benefits which would redound to the SMC group of companies. 13
However, at the meeting of the SMC Board on January 30, 1987, Eduardo de los
Angeles, one of the PCGG representatives in the SMC board, impugned said Resolution
No. 86-12-2, denying that it was ever adopted, and stating that what in truth was agreed
upon at the meeting of December 4, 1986 was merely a "further study" by Director
Ramon del Rosario of a plan presented by him for the assumption of the loan. De los
Angeles also pointed out certain "deleterious effects" thereof. He was however overruled
by private respondents. 14 When his efforts to obtain relief within the corporation and later the
PCGG proved futile, he repaired to the Securities and Exchange Commission (SEC).
lwph1.t

He filed with the SEC in April, 1987, what he describes as a derivative suit in behalf of
San Miguel Corporation, against ten (10) of the fifteen-member Board of Directors who
had "either voted to approve and/or refused to reconsider and revoke Board Resolution
No. 86-12-2." 15 His Amended Petition in the SEC recited substantially the foregoing
antecedents and the following additional facts, to wit:
a) On April 1, 1986 Soriano, Kahn and Roxas, as directors of' Neptunia
Corporation, Ltd., had met and passed a resolution authorizing the
company to borrow up to US $26,500,000.00 from the Hongkong &
Shanghai Banking Corporation, Hongkong "to enable the Soriano family
to initiate steps and sign an agreement for the purchase of some
33,133,266 shares of San ,Miguel Corporation. 16
b) The loan of $26,500,000.00 was obtained on the same day, the
corresponding loan agreement having been signed for Neptunia by Ralph
Kahn and Carl Ottiger. At the latter's request, the proceeds of the loan
were deposited in different banks 17 for the account of "Eduardo J. Soriano".
c) Three (3) days later, on April 4, 1986, Soriano III sent identical letters to
the stockholders of San Miguel Corporation, 18 inter alia soliciting their
proxies and announcing that "the Soriano family, friends and affiliates
acquired a considerable block of San Miguel Corporation shares only a few
days ago .., the transaction .. (having been) made through the facilities of the
Manila Stock Exchange, and 33,133,266 shares .. (having thereby been)
purchased for the aggregate price of' P3,313,326,600.00." The letters also
stated that the purchase was "an exercise of the Sorianos' right to buy back
the same number of shares purchased in 1983 by the .. (14 seller
corporations)."
d) In implementing the assumption of the Neptunia loan and the purchase
agreement for which said loan was obtained, which assumption
constituted an improper use of corporate funds to pay personal
obligations of Andres Soriano III, enabling him; to purchase stock of the
corporation using funds of' the corporation itself, the respondents, through
various subsequent machinations and manipulations, for interior motives
and in breach of fiduciary duty, compound the damages caused San
Miguel Corporation by, among other things: (1) agreeing to pay a higher
price for the shares than was originally covenanted in order to prevent a
rescission of the purchase agreement by the sellers; (2) urging UCPB to
accept San Miguel Corporation and Neptunia as buyers of the shares,
thereby committing the former to the purchase of its own shares for at
least 25% higher than the price at which they were fairly traded in the
stock exchanges, and shifting to said corporations the personal
obligations of Soriano III under the purchase agreement; and (3) causing

to be applied to the part payment of P1,800,000.00 on said purchase,

various assets and receivables of San Miguel Corporation.
The complaint closed with a prayer for injunction against the execution or consummation
of any agreement causing San Miguel Corporation to purchase the shares in question or
entailing the use of its corporate funds or assets for said purchase, and against Andres
Soriano III from further using or disposing of the funds or assets of the corporation for his
obligations; for the nullification of the SMC Board's resolution of April 2, 1987 making San
Miguel Corporation a party to the purchase agreement; and for damages.
Ernest Kahn moved to dismiss de los Angeles' derivative suit on two grounds, to wit:
1 De los Angeles has no legal capacity to sue because
a) having been merely imposed by the
PCGG as a director on San Miguel, he has
no standing to bring a minority derivative
suit;
b) he personally holds only 20 shares and
hence cannotfairly and adequately
represent the minority stockholders of the
corporation;
c) he has not come to court with clean
hands; and
2. The Securities & Exchange Commission has no jurisdiction over the
controversy because the matters involved are exclusively within the
business judgment of the Board of Directors. 19
Kahn's motion to dismiss was subsequently adopted by his correspondents . 20
The motion to dismiss was denied by SEC Healing Officer Josefina L. Pasay Paz, by
order dated September 4, 1987. 21 In her view
1) the fact that de los Angeles was a PCGG nominee was irrelevant
because in law, ownership of even one share only, sufficed to qualify a
person to bring a derivative suit;
2) it is indisputable that the action had been brought by de los Angeles for
the benefit of the corporation and all the other stockholders;
3) he was a stockholder at the time of the commission of the acts
complained of, the number of shares owned by him being to repeat,
immaterial;
4) there is no merit in the assertion that he had come to Court with
unclean hands, it not having been shown that he participated in the act
complained of or ratified the same; and
5) where business judgment transgresses the law, the securities and
Exchange Commission always has competence to inquire thereinto.

Kahn filed a petition for certiorari and prohibition with the Court of Appeals, seeking the
annulment of this adverse resolution of the SEC Hearing Officer and her perpetual
inhibition from proceeding with SEC Case No. 3152.
A Special Division of that Court sustained him, upon a vote of three-to-two. The
majority 22 ruled that de los Angeles had no egal capacity to institute the derivative suit, a
conclusion founded on the following propositions:
1) a party "who files a derivative suit should adequately represent the
interests of the minority stockholders;" since "De los Angeles holds 20
shares of stock out of 121,645,860 or 0.00001644% (appearing to be
undisputed), (he) cannot even be remotely said to adequately represent
the interests of the minority stockholders, (e)specially so when .. de los
Angeles was put by the PCGG to vote the majority stock," a situation
generating "a genuine conflict of interest;"
2) de los Angeles has not met this conflict-of-interest argument, i.e., that
his position as PCGG-nominated director is inconsistent with his assumed
role of representative of minority stockholders; not having been elected
by the minority, his voting would expectedly consider the interest of the
entity which placed him in the board of directors;
3) Baseco v. PCGG, May 27,1987, 23 has laid down the principle that the (a)
PCGG cannot exercise acts of dominion over sequestered property, (b) it has
only powers of administration, and (c) its voting of sequestered stock must be
done only pursuant to its power of administration; and
4) de los Angeles' suit is not a derivative suit, a derivative suit being one
brought for the benefit of the corporation.
The dissenting Justices, 24 on the other hand, were of the opinion that the suit had been
properly brought by de los Angeles because
1) the number of shares owned by him was immaterial, he being a
stockholder in his own right;
2) he had not voted in favor of the resolution authorizing the purchase of
the shares; and
3) even if PCGG was not the owner of the sequestered shares, it had the
right to seek the protection of the interest of the corporation, it having
been held that even an unregistered shareholder or an equitable owner of
shares and pledgees of shares may be deemed a shareholder for
purposes of instituting a derivative suit.
De los Angeles has appealed to this Court. He prays for reversal of the judgment of the
Court of Appeals, imputing to the latter the following errors:
1) having granted the writ of certiorari despite the fact that Kahn had not
first resorted to the plain remedy available to him, i.e., appeal to the
SEC en banc and despite the fact that no question of jurisdiction was
involved;
2) having ruled on Kahn's petition on the basis merely of his factual
allegations, although he (de los Angeles) had disputed them and there
had been no trial in the SEC; and

3) having held that he (de los Angeles) could not file a derivative suit as
stockholder and/or director of the San Miguel Corporation.
For their part, and in this Court, the respondents make the following assertions:
1) SEC has no jurisdiction over the dispute at bar which involves the
ownership of the 33,133,266 shares of SMC stock, in light of this Court's
Resolution in G.R. Nos. 74910, 5075, 75094, 76397, 79459 and 79520,
promulgated on August 10, 1988; 25
2) de los Angeles was beholden to the controlling stockholder in the
corporation (PCGG), which had "imposed" him on the corporation; since
the PCGG had a clear conflict of interest with the minority, de los Angeles,
as director of the former, had no legal capacity to sue on behalf of the
latter;
3) even assuming absence of conflict of interest, de los Angeles does not
fairly and adequately represent the interest of the minority stockholders;
4) the respondents had properly applied for certiorari with the Court of
Appeals because
a) that Court had, by law, exclusive appellate jurisdiction over officers and
agencies exercising quasi-judicial functions, and hence file competence
to issue the writ of certiorari;
b) the principle of exhaustion of administrative remedies does not apply
since the issue involved is one of law;
c) said respondents had no plain, speedy and adequate remedy within
SEC;
d) the Order of the SEC Investigating Officer denying the motion to
dismiss was issued without or in excess of jurisdiction, hence was
correctly nullified by the Court of Appeals; and
e) de los Angeles had not raised the issue of absence of a motion for
reconsideration by respondents in the SEC case; in any event, such a
motion was unnecessary in the premises.
De los Angeles' Reply seeks to make the following points:
1) since the law lays down three (3) requisites for a derivative suit, viz:
a) the party bringing suit should be a shareholder as of
the time of the act or transaction complained of,
b) he has exhausted intra-corporate remedies, i.e., has
made a demand on the board of directors for the
appropriate relief but the latter has failed or refused to
heed his plea; and
c) c)the cause of action actually devolves on the
corporation, the ,wrongdoing or harm having been caused

to the corporation and not to .the particular stockholder

bringing the suit;
and since (1) he is admittedly the owner of 20 shares of SMC stock in his own right,
having acquired those shares as early as 1977, (2) he had sought without success to
have the board of' directors remedy with wrong, and (3) that wrong was in truth a 'wrong
against the stockholders of the corporation, generally, ,and not against him individually
and it was the corporation, and not he, particularly, that would be entitled to the
appropriate' relief the propriety of his suit cannot be gainsaid;
2) Kahn had not limited himself to questions of law in the proceedings in
the Court of Appeals and hence could not claim exclusion from the scope
of the doctrine of exhaustion of remedies; moreover, Rule 65, invoked by
him, bars a resort to certiorari. where a plain, speedy and accurate
remedy was available to him in this case, to wit, a motion for
reconsideration before the Sec en banc and, contrary to the respondent's
claim, De Los Angeles had in fact asserted to this propositions before the
Appellate Tribunal; and
3) the respondent had not raised the issue of jurisdiction before the Court
of Appeals; indeed, they admit to their Comment that that
issue has not yet been resolved by the SEC," be this as it may, the
derivative suit does not fall within the BASECO doctrine since it does not
involve any question of ownership of the 33,133,266 sequestered SMC
shares but rather, the validity of the resolution of the board of directors for
the assumption by the corporation, for the benefit of certain of its officers
and stockholders, of liability for loans contracted by another corporation,
which is an intra-corporate dispute within the exclusive jurisdiction of the
SEC.
1. De los Angeles is not opposed to the asserted position of the PCGG
that the sequestered SMC shares of stock belong to Ferdinand Marcos
and/or his dummies and/or cronies. His consent to sit in the board as
nominee of PCGG unquestionably indicates his advocacy of the PCGG
position. He does not here seek, and his complaint in the SEC does not
pray for, the annulment of the purchase by SMC of the stock in question,
or even the subsequent purchase of the same stock by others 26 which
proposition was challenged by (1) one Evio, in SEC Case No. 3000; (2) by
the 14 corporations which sold the stock to SMC, in Civil Case No. 13865 of
the Manila RTC, said cases having later become subject of G.R. No. 74910
of this Court; (3) by Neptunia, SMC, and others, in G.R. No. 79520 of this
Court; and (4) by Eduardo Cojuangco and others in Civil Case No. 16371 of
the RTC, Makati, [on the theory that the sequestered stock in fact belonged to
coconut planters and oil millers], said case later having become subject of
G.R. No. 79459 of this court . 27 Neither does de los Angeles impugn,
obviously, the right of the PCGG to vote the sequestered stock thru its
nominee directors as was done by United Coconut Planters Bank and the
14 seller corporations (in SEC Case No. 3005, later consolidated with SEC
Case No. 3000 above mentioned, these two (2) cases later having become
subject of G.R.No. 76397) as well as by one Clifton Ganay, a UCPB
stockholder (in G.R. No. 75094 of this Court). 28
lwph1.t

The subject matter of his complaint in the SEC does not therefore fall within the ambit of
this Court's Resolution of August 10, 1988 on the cases just mentioned, to the effect that,
citing PCGG v. Pena, et al 29 an cases of the Commission regarding 'the funds, moneys,
assets, and properties illegally acquired or misappropriated by former President Ferdinand

Marcos, Mrs. Imelda Romualdez Marcos, their close relatives, Subordinates, Business
Associates, Dummies, Agents, or Nominees, whether civil or criminal, are lodged within the
exclusive and original jurisdiction of the Sandiganbayan,' and all incidents arising from,
incidental to, or related to, such cases necessarily fall likewise under the Sandiganbayan's
exclusive and original jurisdiction, subject to review on certiorari exclusively by the Supreme
Court." His complaint does not involve any property illegally acquired or misappropriated by
Marcos, et al., or "any incidents arising from, incidental to, or related to" any case involving
such property, but assets indisputably belonging to San Miguel Corporation which were, in his
(de los Angeles') view, being illicitly committed by a majority of its board of directors to answer
for loans assumed by a sister corporation, Neptunia Co., Ltd.

De los Angeles' complaint, in fine, is confined to the issue of the validity of the
assumption by the corporation of the indebtedness of Neptunia Co., Ltd., allegedly for the
benefit of certain of its officers and stockholders, an issue evidently distinct from, and not
even remotely requiring inquiry into the matter of whether or not the 33,133,266 SMC
shares sequestered by the PCGG belong to Marcos and his cronies or dummies (on
which- issue, as already pointed out, de los Angeles, in common with the PCGG, had in
fact espoused the affirmative). De los Angeles' dispute, as stockholder and director of
SMC, with other SMC directors, an intra-corporate one, to be sure, is of no concern to the
Sandiganbayan, having no relevance whatever to the ownership- of the sequestered
stock. The contention, therefore, that in view of this Court's ruling as regards the
sequestered SMC stock above adverted to, the SEC has no jurisdiction over the de los
Angeles complaint, cannot be sustained and must be rejected. The dispute concerns acts
of the board of directors claimed to amount to fraud and misrepresentation which may be
detrimental to the interest of the stockholders, or is one arising out of intra-corporate
relations between and among stockholders, or between any or all of them and the
corporation of which they are stockholders . 30
2. The theory that de los Angeles has no personality to bring suit in behalf
of the corporation because his stockholding is minuscule, and there is
a "conflict of interest" between him and the PCGG cannot be
sustained, either.
It is claimed that since de los Angeles 20 shares (owned by him since 1977) represent
only. 00001644% of the total number of outstanding shares (1 21,645,860), he cannot be
deemed to fairly and adequately represent the interests of the minority stockholders. The
implicit argument that a stockholder, to be considered as qualified to bring a derivative
suit, must hold a substantial or significant block of stock finds no support whatever in
the law. The requisites for a derivative suit 31 are as follows:
a) the party bringing suit should be a shareholder as of the time of the act
or transaction complained of, the number of his shares not being
material; 32
b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand
on the board of directors for the appropriate relief but the latter has failed or
refused to heed his plea; 33 and

c) the cause of action actually devolves on the corporation, the

wrongdoing or harm having been, or being caused to the corporation and
not to the particular stockholder bringing the suit. 34
The bona fide ownership by a stockholder of stock in his own right suffices to invest him
with standing to bring a derivative action for the benefit of the corporation. The number of
his shares is immaterial since he is not suing in his own behalf, or for the protection or
vindication of his own particular right, or the redress of a wrong committed against him,
individually, but in behalf and for the benefit of the corporation.

3. Neither can the "conflict-of-interest" theory be upheld. From the

conceded premise that de los Angeles now sits in the SMC Board of
Directors by the grace of the PCGG, it does not follow that he is legally
obliged to vote as the PCGG would have him do, that he cannot
legitimately take a position inconsistent with that of the PCGG, or that, not
having been elected by the minority stockholders, his vote would
necessarily never consider the latter's interests. The proposition is not
only logically indefensible, non sequitur, but also constitutes an erroneous
conception of a director's role and function, it being plainly a director's
duty to vote according to his own independent judgment and his own
conscience as to what is in the best interests of the company. Moreover, it
is undisputed that apart from the qualifying shares given to him by the
PCGG, he owns 20 shares in his own right, as regards which he cannot
from any aspect be deemed to be "beholden" to the PCGG, his ownership
of these shares being precisely what he invokes as the source of his
authority to bring the derivative suit.
4. It is also theorized, on the authority of the BASECO decision, that the
PCGG has no power to vote sequestered shares of stock as an act of
dominion but only in pursuance to its power of administration. The
inference is that the PCGG's act of voting the stock to elect de los
Angeles to the SMC Board of Directors was unauthorized and void;
hence, the latter could not bring suit in the corporation's behalf. The
argument is strained and obviously of no merit. As already more than
plainly indicated, it was not necessary for de los Angeles to be a director
in order to bring a derivative action; all he had to be was a stockholder,
and that he was owning in his own right 20 shares of stock, a fact not
disputed by the respondents.
Nor is there anything in the Baseco decision which can be interpreted as ruling that
sequestered stock may not under any circumstances be voted by the PCGG to elect a
director in the company in which such stock is held. On the contrary, that it held such act
permissible is evident from the context of its reference to the Presidential Memorandum
of June 26, 1986 authorizing the PCGG, "pending the outcome of proceedings to
determine the ownership of .. sequestered shares of stock,"'to vote such shares .. at all
stockholders' meetings called for the election of directors ..," the only caveat being that
the stock is not to be voted simply because the power to do so exists, whether it be to
oust and replace directors or to effect substantial changes in corporate policy, programs
or practice, but only "for demonstrably weighty and defensible grounds" or "when
essential to prevent disappearance or wastage of corporate property."
The issues raised here do not peremptorily call for a determination of whether or not in
voting petitioner de los Angeles to the San Miguel Board, the PCGG kept within the
parameters announced in Baseco; and absent any showing to the contrary, consistently
with the presumption that official duty is regularly performed, it must be assumed to have
done so.
WHEREFORE, the petition is GRANTED. The appealed decision of the Court of Appeals
in CA- G.R. SP No. 12857 setting aside the order of September 4, 1987 issued in SEC
Case No. 3153 and dismissing said case is REVERSED AND SET ASIDE. The further
disposition in the appealed decision for the issuance of a writ of preliminary injunction
upon the filing and approval of a bond of P500,000.00 by respondent Ernest Kahn
(petitioner in the Appellate Court) is also SET ASIDE, and any writ of injunction issued
pursuant thereto is lifted. Costs against private respondents.
SO ORDERED.

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

G.R. No. 177549

June 18, 2009

ANTHONY S. YU, ROSITA G. YU and JASON G. YU, Petitioners,

vs.
JOSEPH S. YUKAYGUAN, NANCY L. YUKAYGUAN, JERALD NERWIN L.
YUKAYGUAN, and JILL NESLIE L. YUKAYGUAN, [on their own behalf and on behalf
of] WINCHESTER INDUSTRIAL SUPPLY, INC.,Respondents.
DECISION
CHICO-NAZARIO, J.:
Before Us is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court,
which seeks to reverse and set aside the Resolutions dated 18 July 20062 and 19 April
20073 of the Court of Appeals in CA-G.R. SP No. 00185. Upon herein respondents
motion, the Court of Appeals rendered the assailed Resolution dated 18 July 2006,
reconsidering its Decision4 dated 15 February 2006; and remanding the case to the
Regional Trial Court (RTC) of Cebu City, Branch 11, for necessary proceedings, in effect,
reversing the Decision5 dated 10 November 2004 of the RTC which dismissed
respondents Complaint in SRC Case No. 022-CEB. Herein petitioners Motion for
Reconsideration of the Resolution dated 18 July 2006 was denied by the appellate court
in the other assailed Resolution dated 19 April 2007.
Herein petitioners are members of the Yu Family, particularly, the father, Anthony S. Yu
(Anthony); the wife, Rosita G. Yu (Rosita); and their son, Jason G. Yu (Jason).
Herein respondents composed the Yukayguan Family, namely, the father, Joseph S.
Yukayguan (Joseph); the wife, Nancy L. Yukayguan (Nancy); and their children Jerald
Nerwin L. Yukayguan (Jerald) and Jill Neslie Yukayguan (Jill).
Petitioner Anthony is the older half-brother of respondent Joseph.
Petitioners and the respondents were all stockholders of Winchester Industrial Supply,
Inc. (Winchester, Inc.), a domestic corporation engaged in the operation of a general
hardware and industrial supply and equipment business.
On 15 October 2002, respondents filed against petitioners a verified Complaint for
Accounting, Inspection of Corporate Books and Damages through Embezzlement and
Falsification of Corporate Records and Accounts6before the RTC of Cebu. The said
Complaint was filed by respondents, in their own behalf and as a derivative suit on behalf
of Winchester, Inc., and was docketed as SRC Case No. 022-CEB. The factual
background of the Complaint was stated in the attached Affidavit executed by respondent
Joseph.
According to respondents,7 Winchester, Inc. was established and incorporated on 12
September 1977, with petitioner Anthony as one of the incorporators, holding 1,000
shares of stock worth P100,000.00.8 Petitioner Anthony paid for the said shares of stock
with respondent Josephs money, thus, making the former a mere trustee of the shares
for the latter. On 14 November 1984, petitioner Anthony ceded 800 of his 1,000 shares of
stock in Winchester, Inc. to respondent Joseph, as well as Yu Kay Guan,9 Siao So Lan,
and John S. Yu.10 Petitioner Anthony remained as trustee for respondent Joseph of the
200 shares of stock in Winchester, Inc., still in petitioner Anthonys name.

Respondents then alleged that on 30 June 1985, Winchester, Inc. bought from its
incorporators, excluding petitioner Anthony, their accumulated 8,500 shares in the
corporation.11 Subsequently, on 7 November 1995, Winchester, Inc. sold the same 8,500
shares to other persons, who included respondents Nancy, Jerald, and Jill; and
petitioners Rosita and Jason.12
Respondents further averred that although respondent Joseph appeared as the
Secretary and Treasurer in the corporate records of Winchester, Inc., petitioners actually
controlled and ran the said corporation as if it were their own family business. Petitioner
Rosita handled the money market placements of the corporation to the exclusion of
respondent Joseph, the designated Treasurer of Winchester, Inc. Petitioners were also
misappropriating the funds and properties of Winchester, Inc. by understating the sales,
charging their personal and family expenses to the said corporation, and withdrawing
stocks for their personal use without paying for the same. Respondents attached to the
Complaint various receipts13 to prove the personal and family expenses charged by
petitioners to Winchester, Inc.
Respondents, therefore, prayed that respondent Joseph be declared the owner of the
200 shares of stock in petitioner Anthonys name. Respondents also prayed that
petitioners be ordered to: (1) deposit the corporate books and records of Winchester, Inc.
with the Branch Clerk of Court of the RTC for respondents inspection; (2) render an
accounting of all the funds of Winchester, Inc. which petitioners misappropriated; (3)
reimburse the personal and family expenses which petitioners charged to Winchester,
Inc., as well as the properties of the corporation which petitioners withheld without
payment; and (4) pay respondents attorneys fees and litigation expenses. In the
meantime, respondents sought the appointment of a Management Committee and the
freezing of all corporate funds by the trial court.
On 13 November 2002, petitioners filed an Answer with Compulsory
Counterclaim,14 attached to which was petitioner Anthonys Affidavit.15 Petitioners
vehemently denied the allegation that petitioner Anthony was a mere trustee for
respondent Joseph of the 1,000 shares of stock in Winchester, Inc. in petitioner
Anthonys name. For the incorporation of Winchester, Inc., petitioner Anthony
contributed P25,000.00 paid-up capital, representing 25% of the total par value of the
1,000 shares he subscribed to, the said amount being paid out of petitioner Anthonys
personal savings and petitioners Anthony and Rositas conjugal funds. Winchester, Inc.
was being co-managed by petitioners and respondents, and the attached receipts,
allegedly evidencing petitioners use of corporate funds for personal and family expenses,
were in fact signed and approved by respondent Joseph.
By way of special and affirmative defenses, petitioners contended in their Answer with
Compulsory Counterclaim that respondents had no cause of action against them.
Respondents Complaint was purely intended for harassment. It should be dismissed
under Section 1(j), Rule 1616 of the Rules of Court for failure to comply with conditions
precedent before its filing. First, there was no allegation in respondents Complaint that
earnest efforts were exerted to settle the dispute between the parties. Second, since
respondents Complaint purportedly constituted a derivative suit, it noticeably failed to
allege that respondents exerted effort to exhaust all available remedies in the Articles of
Incorporation and By-Laws of Winchester, Inc., as well as in the Corporation Code. And
third, given that respondents Complaint was also for inspection of corporate books, it
lacked the allegation that respondents made a previous demand upon petitioners to
inspect the corporate books but petitioners refused. Prayed for by petitioners, in addition
to the dismissal of respondents Complaint, was payment of moral and exemplary
damages, attorneys fees, litigation expenses, and cost of suit.

On 30 October 2002, the hearing on the application for the appointment of a

Management Committee was commenced. Respondent Joseph submitted therein, as his
direct testimony, the same Affidavit that he executed, which was attached to the
respondents Complaint. On 4 November 2002, respondent Joseph was cross-examined
by the counsel for petitioners. Thereafter, the continuation of the hearing was set for 29
November 2002, in order for petitioners to adduce evidence in support of their opposition
to the application for the appointment of a Management Committee.17
During the hearing on 29 November 2002, the parties manifested before the RTC that
there was an ongoing mediation between them, and so the hearing on the appointment of
a Management Committee was reset to another date.
In amicable settlement of their dispute, the petitioners and respondents agreed to a
division of the stocks in trade,18the real properties, and the other assets of Winchester,
Inc. In partial implementation of the afore-mentioned amicable settlement, the stocks in
trade and real properties in the name of Winchester, Inc. were equally distributed among
petitioners and respondents. As a result, the stockholders and members of the Board of
Directors of Winchester, Inc. passed, on 4 January 2003, a unanimous
Resolution19 dissolving the corporation as of said date.
On 22 February 2004, respondents filed their pre-trial brief.20
On 25 June 2004, petitioners filed a Manifestation21 informing the RTC of the existence of
their amicable settlement with respondents. Respondents, however, made their own
manifestation before the RTC that they were repudiating said settlement, in view of the
failure of the parties thereto to divide the remaining assets of Winchester, Inc.
Consequently, respondents moved to have SRC Case No. 022-CEB set for pre-trial.
On 23 August 2004, petitioners filed their pre-trial brief. 22
On 26 August 2004, instead of holding a formal pre-trial conference and resuming the
hearing on the application for the appointment of a Management Committee, petitioners
and respondents agreed that the RTC may already render a judgment based on the
pleadings. In accordance with the agreement of the parties, the RTC issued, on even
date, an Order23 which stated:
ORDER
During the pre-trial conference held on August 26, 2004, counsels of the parties
manifested, agreed and suggested that a judgment may be rendered by the Court in this
case based on the pleadings, affidavits, and other evidences on record, or to be
submitted by them, pursuant to the provision of Rule 4, Section 4 of the Rule on IntraCorporate Controversies. The suggestion of counsels was approved by the Court.
Accordingly, the Court hereby orders the counsels of the parties to file simultaneously
their respective memoranda within a non-extendible period of twenty (20) days from
notice hereof. Thereafter, the instant case will be deemed submitted for resolution.
xxxx
Cebu City, August 26, 2004.
(signed)
SILVESTRE A. MAAMO, JR.
Acting Presiding Judge

Petitioners and respondents duly filed their respective Memoranda, 24 discussing the
arguments already set forth in the pleadings they had previously submitted to the RTC.
Respondents, though, attached to their Memorandum a Supplemental Affidavit 25 of
respondent Joseph, containing assertions that refuted the allegations in petitioner
Anthonys Affidavit, which was earlier submitted with petitioners Answer with Compulsory
Counterclaim. Respondents also appended to their Memorandum additional
documentary evidence,26 consisting of original and duplicate cash invoices and cash
disbursement receipts issued by Winchester, Inc., to further substantiate their claim that
petitioners were understating sales and charging their personal expenses to the
corporate funds.
The RTC subsequently promulgated its Decision on 10 November 2004 dismissing SRC
Case No. 022-CEB. The dispositive portion of said Decision reads:
WHEREFORE, in view of the foregoing premises and for lack of merit, this Court hereby
renders judgment in this case DISMISSING the complaint filed by the [herein
respondents].
The Court also hereby dismisses the [herein petitioners] counterclaim because it has not
been indubitably shown that the filing by the [respondents] of the latters complaint was
done in bad faith and with malice.27
The RTC declared that respondents failed to show that they had complied with the
essential requisites for filing a derivative suit as set forth in Rule 8 of the Interim Rules of
Procedure Governing Intra-Corporate Controversies:
(1) He was a stockholder or member at the time the acts or transactions subject
of the action occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in
the complaint, to exhaust all remedies available under the articles of
incorporation, by-laws, laws or rules governing the corporation or partnership to
obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
As to respondents prayer for the inspection of corporate books and records, the RTC
adjudged that they had likewise failed to comply with the requisites entitling them to the
same. Section 2, Rule 7 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies requires that the complaint for inspection of corporate books or records
must state that:
(1) The case is for the enforcement of plaintiff's right of inspection of corporate
orders or records and/or to be furnished with financial statements under Sections
74 and 75 of the Corporation Code of the Philippines;
(2) A demand for inspection and copying of books and records and/or to be
furnished with financial statements made by the plaintiff upon defendant;
(3) The refusal of defendant to grant the demands of the plaintiff and the reasons
given for such refusals, if any; and

(4) The reasons why the refusal of defendant to grant the demands of the plaintiff
is unjustified and illegal, stating the law and jurisprudence in support thereof.
The RTC further noted that respondent Joseph was the corporate secretary of
Winchester, Inc. and, as such, he was supposed to be the custodian of the corporate
books and records; therefore, a court order for respondents inspection of the same was
no longer necessary. The RTC similarly denied respondents demand for accounting as it
was clear that Winchester, Inc. had been engaging the services of an audit firm.
Respondent Joseph himself described the audit firm as competent and independent, and
believed that the audited financial statements the said audit firm prepared were true,
faithful, and correct.
Finding the claims of the parties for damages against each other to be unsubstantiated,
the RTC thereby dismissed the same.
Respondents challenged the foregoing RTC Decision before the Court of Appeals via a
Petition for Review under Rule 43 of the Rules of Court, docketed as CA-G.R. SP No.
00185.
On 15 February 2006, the Court of Appeals rendered its Decision, affirming the 10
December 2004 Decision of the RTC. Said the appellate court:
After a careful and judicious scrutiny of the extant records of the case, together with the
applicable laws and jurisprudence, WE see no reason or justification for granting the
present appeal.
xxxx
x x x [T]his Court sees that the instant petition would still fail taking into consideration all
the pleadings and evidence of the parties except the supplemental affidavit of [herein
respondent] Joseph and its corresponding annexes appended in [respondents]
memorandum before the Court a quo. The Court a quo have (sic) outrightly dismissed
the complaint for its failure to comply with the mandatory provisions of the Interim Rules
of Procedure for Intra-Corporate Controversies particularly Rule 2, Section 4(3), Rule 8,
Section [1(2)] and Rule 7, Section 2 thereof, which reads as follows:
RULE 2
COMMENCEMENT OF ACTION AND PLEADINGS
Sec. 4. Complaint. The complaint shall state or contain:
xxxx
(3) the law, rule, or regulation relied upon, violated, or sought to be enforced;
xxxx
RULE 8
DERIVATIVE SUITS
Sec. 1. Derivative action. x x x
xxxx

(2) He exerted all reasonable efforts, and alleges the same with particularity in the
complaint, to exhaust all remedies available under the articles of incorporation, by-laws,
laws or rules governing the corporation or partnership to obtain the relief he desires.
xxxx
RULE 7
INSPECTION OF CORPORATE BOOKS AND RECORDS
Sec. 2. Complaint In addition to the requirements in section 4, Rule 2 of these Rules,
the complaint must state the following:
(1) The case is set (sic) for the enforcement of plaintiffs right of inspection of
corporate orders or records and/or to be furnished with financial statements
under Section 74 and 75 of the Corporation Code of the Philippines;
(2) A demand for inspection and copying of books [and/or] to be furnished with
financial statements made by the plaintiffs upon defendant;
(3) The refusal of the defendant to grant the demands of the plaintiff and the
reasons given for such refusal, if any; and
(4) The reasons why the refusal of defendant to grant the demands of the plaintiff
is unjustified and illegal, stating the law and jurisprudence in support thereof.
xxxx
A perusal of the extant record shows that [herein respondents] have not complied with
the above quoted provisions. [Respondents] should be mindful that in filing their
complaint which, as admitted by them, is a derivative suit, should have first exhausted all
available remedies under its (sic) Articles of Incorporation, or its by-laws, or any laws or
rules governing the corporation. The contention of [respondent Joseph] that he had
indeed made several talks to (sic) his brother [herein petitioner Anthony] to settle their
differences is not tantamount to exhaustion of remedies. What the law requires is to bring
the grievance to the Board of Directors or Stockholders for the latter to take the
opportunity to settle whatever problem in its regular meeting or special meeting called for
that purpose which [respondents] failed to do. x x x The requirements laid down by the
Interim Rules of Procedure for Intra-Corporate Controversies are mandatory which
cannot be dispensed with by any stockholder of a corporation before filing a derivative
suit.28 (Emphasis ours.)
The Court of Appeals likewise sustained the refusal by the RTC to consider respondent
Josephs Supplemental Affidavit and other additional evidence, which respondents
belatedly submitted with their Memorandum to the said trial court. The appellate court
ratiocinated that:
With regard to the claim of [herein respondents] that the supplemental affidavit of
[respondent] Joseph and its annexes appended to their memorandum should have been
taken into consideration by the Court a quo to support the reliefs prayed [for] in their
complaint. (sic) This Court rules that said supplemental affidavit and its annexes is (sic)
inadmissible.
A second hard look of (sic) the extant records show that during the pre-trial conference
conducted on August 26, 2004, the parties through their respective counsels had come
up with an agreement that the lower court would render judgment based on the pleadings

and evidence submitted. This agreement is in accordance with Rule 4, Sec. 4 of the
Interim Rules of Procedure for Intra-Corporate Controversies which explicitly states:
SECTION. 4. Judgment before pre-trial. If, after submission of the pre-trial briefs, the
court determines that, upon consideration of the pleadings, the affidavits and other
evidence submitted by the parties, a judgment may be rendered, the court may order the
parties to file simultaneously their respective memoranda within a non-extendible period
of twenty (20) days from receipt of the order. Thereafter, the court shall render judgment,
either full or otherwise, not later than ninety (90) days from the expiration of the period to
file the memoranda.
xxxx
Clearly, the supplemental affidavit and its appended documents which were submitted
only upon the filing of the memorandum for the [respondents] were not submitted in the
pre-trial briefs for the stipulation of the parties during the pre-trial, hence, it cannot be
accepted pursuant to Rule 2, Sec. 8 of the same rules which reads as follows:
SEC. 8. Affidavits, documentary and other evidence. Affidavits shall be based on
personal knowledge, shall set forth such facts as would be admissible in evidence, and
shall show affirmatively that the affiant is competent to testify on the matters stated
therein. The affidavits shall be in question and answer form, and shall comply with the
rules on admissibility of evidence.
Affidavits of witnesses as well as documentary and other evidence shall be attached to
the appropriate pleading; Provided, however, that affidavits, documentary and other
evidence not so submitted may be attached to the pre-trial brief required under these
Rules. Affidavits and other evidence not so submitted shall not be admitted in evidence,
except in the following cases:
(1) Testimony of unwilling, hostile, or adverse party witnesses. A witness is
presumed prima facie hostile if he fails or refuses to execute an affidavit after a
written request therefor;
(2) If the failure to submit the evidence is for meritorious and compelling reasons;
and
(3) Newly discovered evidence.
In case of (2) and (3) above, the affidavit and evidence must be submitted not later than
five (5) days prior to its introduction in evidence.
There is no showing in the case at bench that the supplemental affidavit and its annexes
falls (sic) within one of the exceptions of the above quoted proviso, hence, inadmissible.
It must be noted that in the case at bench, like any other civil cases, "the party making an
allegation in a civil case has the burden of proving it by preponderance of evidence."
Differently stated, upon the plaintiff in [a] civil case, the burden of proof never parts. That
is, appellants must adduce evidence that has greater weight or is more convincing that
(sic) which is offered to oppose it. In the case at bar, no one should be blamed for the
dismissal of the complaint but the [respondents] themselves for their lackadaisical
attitude in setting forth and appending their defences belatedly. To admit them would be a
denial of due process for the opposite party which this Court cannot allow.29
Ultimately, the Court of Appeals decreed:

WHEREFORE, judgment is hereby rendered DISMISSING the instant petition and the
assailed Decision of the Regional Trial Court (RTC), 7th Judicial Region, Branch II, Cebu
City, dated November 10, 2004, in SRC Case No. 022-CEB is AFFIRMED in toto. Cost
against the [herein respondents].30
Unperturbed, respondents filed before the Court of Appeals, on 23 February 2006, a
Motion for Reconsideration and Motion to Set for Oral Arguments the Motion for
Reconsideration,31 invoking the following grounds:
(1) The [herein respondents] have sufficiently exhausted all remedies before filing
the present action; and
(2) [The] Honorable Court erred in holding that the supplemental affidavit and its
annexes is (sic) inadmissible because the rules and the lower court expressly
allowed the submission of the same in its order dated August 26, 2004 x x x. 32
In a Resolution33 dated 8 March 2006, the Court of Appeals granted respondents Motion
to Set for Oral Arguments the Motion for Reconsideration.
On 4 April 2006, the Court of Appeals issued a Resolution34 setting forth the events that
transpired during the oral arguments, which took place on 30 March 2006. Counsels for
the parties manifested before the appellate court that they were submitting respondents
Motion for Reconsideration for resolution. Justice Magpale, however, still called on the
parties to talk about the possible settlement of the case considering their familial
relationship. Independent of the resolution of respondents Motion for Reconsideration,
the parties were agreeable to pursue a settlement for the dissolution of the corporation,
which they had actually already started.
In a Resolution35 dated 11 April 2006, the Court of Appeals ordered the parties to submit,
within 10 days from notice, their intended amicable settlement, since the same would
undeniably affect the resolution of respondents pending Motion for Reconsideration. If
the said period should lapse without the parties submitting an amicable settlement, then
they were directed by the appellate court to file within 10 days thereafter their position
papers instead.
On 5 May 2006, respondents submitted to the Court of Appeals their Position
Paper,36 stating that the parties did not reach an amicable settlement. Respondents
informed the appellate court that prior to the filing with the Securities and Exchange
Commission (SEC) of a petition for dissolution of Winchester, Inc., the parties already
divided the stocks in trade and the real assets of the corporation among themselves.
Respondents posited, though, that the afore-mentioned distribution of the assets of
Winchester, Inc. among the parties was null and void, as it violated the last paragraph of
Section 122 of the Corporation Code, which provides that, "[e]xcept by a decrease of
capital stock and as otherwise allowed by the Corporation Code, no corporation shall
distribute any of its assets or property except upon lawful dissolution and after payment
of all its debts and liabilities." At the same time, however, respondents brought to the
attention of the Court of Appeals that the parties did eventually file with the SEC a petition
for dissolution of Winchester, Inc., which the SEC approved. 37
Respondents no longer discussed in their Position Paper the grounds they previously
invoked in their Motion for Reconsideration of the Court of Appeals Decision dated 15
February 2006, affirming in toto the RTC Decision dated 10 November 2004. They
instead argued that the RTC Decision in question was null and void as it did not clearly
state the facts and the law on which it was based. Respondents sought the remand of the
case to the RTC for further proceedings on their derivative suit and completion of the

dissolution of Winchester, Inc., including the legalization of the prior partial distribution
among the parties of the assets of said corporation.
Petitioners filed their Position Paper38 on 23 May 2006, wherein they accused
respondents of attempting to incorporate extraneous matters into the latters Motion for
Reconsideration. Petitioners pointed out that the issue before the Court of Appeals was
not the dissolution and division of assets of Winchester, Inc., thus, a remand of the case
to the RTC was not necessary.
On 18 July 2006, the Court of Appeals rendered the assailed Resolution, granting
respondents Motion for Reconsideration. The Court of Appeals reasoned in this wise:
After a second look and appreciation of the facts of the case, vis--vis the issues raised
by the [herein respondents] motion for reconsideration and in view of the formal
dissolution of the corporation which leaves unresolved up to the present the settlement of
the properties and assets which are now in danger of dissipation due to the unending
litigation, this Court finds the need to remand the instant case to the lower court
(commercial court) as the proper forum for the adjudication, disposition, conveyance and
distribution of said properties and assets between and amongst its stockholders as final
settlement pursuant to Sec. 122 of the Corporation Code after payment of all its debts
and liabilities as provided for under the same proviso. This is in accord with the
pronouncement of the Supreme Court in the case of Clemente et. al. vs. Court of
Appeals, et. al. where the high court ruled and which WE quote, viz:
"the corporation continues to be a body corporate for three (3) years after its dissolution
for purposes of prosecuting and defending suits by and against it and for enabling it to
settle and close its affairs, culminating in the disposition and distribution of its remaining
assets. It may, during the three-year term, appoint a trustee or a receiver who may act
beyond that period. The termination of the life of a juridical entity does not by itself cause
the extinction or diminution of the rights and liabilities of such entity x x x nor those of its
owners and creditors. If the three-year extended life has expired without a trustee or
receiver having been expressly designated by the corporation within that period, the
board of directors (or trustees) xxx may be permitted to so continue as "trustees" by legal
implication to complete the corporate liquidation. Still in the absence of a board of
directors or trustees, those having any pecuniary interest in the assets, including not only
the shareholders but likewise the creditors of the corporation, acting for and in its behalf,
might make proper representation with the Securities and Exchange Commission, which
has primary and sufficiently broad jurisdiction in matters of this nature, for working out a
final settlement of the corporate concerns."
In the absence of a trustee or board of director in the case at bar for purposes above
mentioned, the lower court under Republic Act No. [8799] (otherwise known as the
Securities and Exchange Commission) as implemented by A.M. No. 00-8-10-SC
(Transfer of Cases from the Securities and Exchange Commission to the Regional Trial
Courts) which took effect on October 1, 2001, is the proper forum for working out the final
settlement of the corporate concern.39
Hence, the Court of Appeals ruled:
WHEREFORE, premises considered, the motion for reconsideration is GRANTED. The
order dated February 15, 2006 is hereby SET ASIDE and the instant case is
REMANDED to the lower court to take the necessary proceedings in resolving with
deliberate dispatch any and all corporate concerns towards final settlement. 40
Petitioners filed a Motion for Reconsideration41 of the foregoing Resolution, but it was
denied by the Court of Appeals in its other assailed Resolution dated 19 April 2007.

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

I.
WHETHER OR NOT THE ASSAILED RESOLUTIONS[,] WHICH VIOLATED THE
CONSTITUTION OF THE PHILIPPINES, JURISPRUDENCE AND THE LAW[,] ARE
NULL AND VOID[.]
II.
WHETHER OR NOT THE ASSAILED RESOLUTIONS WAS (sic) ISSUED WITHOUT
JURISDICTION[.]
III.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN
REMANDING THIS CASE TO THE LOWER COURT FOR THE REASON CITED IN THE
ASSAILED RESOLUTIONS, AND WITHOUT RESOLVING THE GROUNDS FOR THE
[RESPONDENTS] MOTION FOR RECONSIDERATION. (sic) INASMUCH AS [THE]
REASON CITED WAS A NON-ISSUE IN THE CASE.
IV.
WHETHER OR NOT REMANDING THIS CASE TO THE REGIONAL TRIAL COURT
VIOLATES THE SUMMARY PROCEDURE FOR INTRA-CORPORATE CASES.42
The crux of petitioners contention is that the Court of Appeals committed grievous error
in reconsidering its Decision dated 15 February 2006 on the basis of extraneous matters,
which had not been previously raised in respondents Complaint before the RTC, or in
their Petition for Review and Motion for Reconsideration before the appellate court; i.e.,
the adjudication, disposition, conveyance, and distribution of the properties and assets of
Winchester, Inc. among its stockholders, allegedly pursuant to the amicable settlement of
the parties. The fact that the parties were able to agree before the Court of Appeals to
submit for resolution respondents Motion for Reconsideration of the 15 February 2006
Decision of the same court, independently of any intended settlement between the
parties as regards the dissolution of the corporation and distribution of its assets, only
proves the distinction and independence of these matters from one another. Petitioners
also contend that the assailed Resolution dated 18 July 2006 of the Court of Appeals,
granting respondents Motion for Reconsideration, failed to clearly and distinctly state the
facts and the law on which it was based. Remanding the case to the RTC, petitioners
maintain, will violate the very essence of the summary nature of the Interim Rules of
Procedure Governing Intra-Corporate Controversies, as this will just entail delay, protract
litigation, and revert the case to square one.
The Court finds the instant Petition meritorious.
To recapitulate, the case at bar was initiated before the RTC by respondents as a
derivative suit, on their own behalf and on behalf of Winchester, Inc., primarily in order to
compel petitioners to account for and reimburse to the said corporation the corporate
assets and funds which the latter allegedly misappropriated for their personal benefit.
During the pendency of the proceedings before the court a quo, the parties were able to
reach an amicable settlement wherein they agreed to divide the assets of Winchester,
Inc. among themselves. This amicable settlement was already partially implemented by
the parties, when respondents repudiated the same, for which reason the RTC
proceeded with the case on its merits. On 10 November 2004, the RTC promulgated its

Decision dismissing respondents Complaint for failure to comply with essential prerequisites before they could avail themselves of the remedies under the Interim Rules of
Procedure Governing Intra-Corporate Controversies; and for inadequate substantiation of
respondents allegations in said Complaint after consideration of the pleadings and
evidence on record.
In its Decision dated 15 February 2006, the Court of Appeals affirmed, on appeal, the
findings of the RTC that respondents did not abide by the requirements for a derivative
suit, nor were they able to prove their case by a preponderance of evidence.
Respondents filed a Motion for Reconsideration of said judgment of the appellate court,
insisting that they were able to meet all the conditions for filing a derivative suit. Pending
resolution of respondents Motion for Reconsideration, the Court of Appeals urged the
parties to again strive to reach an amicable settlement of their dispute, but the parties
were unable to do so. The parties were not able to submit to the appellate court, within
the given period, any amicable settlement; and filed, instead, their Position Papers. This
effectively meant that the parties opted to submit respondents Motion for
Reconsideration of the 15 February 2006 Decision of the Court of Appeals, and
petitioners opposition to the same, for resolution by the appellate court on the merits.
It was at this point that the case took an unexpected turn.
In accordance with respondents allegation in their Position Paper that the parties
subsequently filed with the SEC, and the SEC already approved, a petition for dissolution
of Winchester, Inc., the Court of Appeals remanded the case to the RTC so that all the
corporate concerns between the parties regarding Winchester, Inc. could be resolved
towards final settlement.
In one stroke, with the use of sweeping language, which utterly lacked support, the Court
of Appeals converted the derivative suit between the parties into liquidation proceedings.
The general rule is that where a corporation is an injured party, its power to sue is lodged
with its board of directors or trustees. Nonetheless, an individual stockholder is permitted
to institute a derivative suit on behalf of the corporation wherein he holds stocks in order
to protect or vindicate corporate rights, whenever the officials of the corporation refuse to
sue, or are the ones to be sued, or hold the control of the corporation. In such actions,
the suing stockholder is regarded as a nominal party, with the corporation as the real
party in interest. A derivative action is a suit by a shareholder to enforce a corporate
cause of action. The corporation is a necessary party to the suit. And the relief which is
granted is a judgment against a third person in favor of the corporation. Similarly, if a
corporation has a defense to an action against it and is not asserting it, a stockholder
may intervene and defend on behalf of the corporation.43 By virtue of Republic Act No.
8799, otherwise known as the Securities Regulation Code, jurisdiction over intracorporate disputes, including derivative suits, is now vested in the Regional Trial Courts
designated by this Court pursuant to A.M. No. 00-11-03-SC promulgated on 21
November 2000.
In contrast, liquidation is a necessary consequence of the dissolution of a corporation. It
is specifically governed by Section 122 of the Corporation Code, which reads:
SEC. 122. Corporate liquidation. Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other
purposes is terminated in any other manner, shall nevertheless be continued as a body
corporate for three (3) years after the time when it would have been so dissolved, for the
purpose of prosecuting and defending suits by or against it and enabling it to settle and
close its affairs, to dispose of and convey its property and to distribute its assets, but not
for the purpose of continuing the business for which it was established.

At any time during said three (3) years, said corporation is authorized and empowered to
convey all of its property to trustees for the benefit of stockholders, members, creditors,
and other persons in interest. From and after any such conveyance by the corporation of
its property in trust for the benefit of its stockholders, members, creditors and others in
interest, all interest which the corporation had in the property terminates, the legal
interest vests in the trustees, and the beneficial interest in the stockholders, members,
creditors or other persons in interest.
Upon winding up of the corporate affairs, any asset distributable to any creditor or
stockholder or member who is unknown or cannot be found shall be escheated to the city
or municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no
corporation shall distribute any of its assets or property except upon lawful dissolution
and after payment of all its debts and liabilities.
Following the voluntary or involuntary dissolution of a corporation, liquidation is the
process of settling the affairs of said corporation, which consists of adjusting the debts
and claims, that is, of collecting all that is due the corporation, the settlement and
adjustment of claims against it and the payment of its just debts.44 More particularly, it
entails the following:
Winding up the affairs of the corporation means the collection of all assets, the payment
of all its creditors, and the distribution of the remaining assets, if any among the
stockholders thereof in accordance with their contracts, or if there be no special contract,
on the basis of their respective interests. The manner of liquidation or winding up may be
provided for in the corporate by-laws and this would prevail unless it is inconsistent with
law.45
It may be undertaken by the corporation itself, through its Board of Directors; or by
trustees to whom all corporate assets are conveyed for liquidation; or by a receiver
appointed by the SEC upon its decree dissolving the corporation. 46
lawphil.net

Glaringly, a derivative suit is fundamentally distinct and independent from liquidation

proceedings. They are neither part of each other nor the necessary consequence of the
other. There is totally no justification for the Court of Appeals to convert what was
supposedly a derivative suit instituted by respondents, on their own behalf and on behalf
of Winchester, Inc. against petitioners, to a proceeding for the liquidation of Winchester,
Inc.
While it may be true that the parties earlier reached an amicable settlement, in which
they agreed to already distribute the assets of Winchester, Inc., and in effect liquidate
said corporation, it must be pointed out that respondents themselves repudiated said
amicable settlement before the RTC, even after the same had been partially
implemented; and moved that their case be set for pre-trial. Attempts to again amicably
settle the dispute between the parties before the Court of Appeals were unsuccessful.
Moreover, the decree of the Court of Appeals to remand the case to the RTC for the "final
settlement of corporate concerns" was solely grounded on respondents allegation in its
Position Paper that the parties had already filed before the SEC, and the SEC approved,
the petition to dissolve Winchester, Inc. The Court notes, however, that there is absolute
lack of evidence on record to prove said allegation. Respondents failed to submit copies
of such petition for dissolution of Winchester, Inc. and the SEC Certification approving the
same. It is a basic rule in evidence that each party must prove his affirmative allegation.
Since it was respondents who alleged the voluntary dissolution of Winchester, Inc.,
respondents must, therefore, prove it.47 This respondents failed to do.

Even assuming arguendo that the parties did submit a petition for the dissolution of
Winchester, Inc. and the same was approved by the SEC, the Court of Appeals was still
without jurisdiction to order the final settlement by the RTC of the remaining corporate
concerns. It must be remembered that the Complaint filed by respondents before the
RTC essentially prayed for the accounting and reimbursement by petitioners of the
corporate funds and assets which they purportedly misappropriated for their personal
use; surrender by the petitioners of the corporate books for the inspection of
respondents; and payment by petitioners to respondents of damages. There was nothing
in respondents Complaint which sought the dissolution and liquidation of Winchester, Inc.
Hence, the supposed dissolution of Winchester, Inc. could not have resulted in the
conversion of respondents derivative suit to a proceeding for the liquidation of said
corporation, but only in the dismissal of the derivative suit based on either compromise
agreement or mootness of the issues.
Clearly, in issuing its assailed Resolutions dated 18 July 2006 and 19 April 2007, the
Court of Appeals already went beyond the issues raised in respondents Motion for
Reconsideration. Instead of focusing on whether it erred in affirming, in its 15 February
2006 Decision, the dismissal by the RTC of respondents Complaint due to respondents
failure to comply with the requirements for a derivative suit and submit evidence to
support their allegations, the Court of Appeals unduly concentrated on respondents
unsubstantiated allegation that Winchester, Inc. was already dissolved and speciously
ordered the remand of the case to the RTC for proceedings so vitally different from that
originally instituted by respondents.
Despite the foregoing, the Court still deems it appropriate to already look into the merits
of respondents Motion for Reconsideration of the 15 February 2006 Decision of the
Court of Appeals, for the sake of finally putting an end to the case at bar.
In their said Motion for Reconsideration, respondents argued that: (1) they had
sufficiently exhausted all remedies before filing the derivative suit; and (2) respondent
Josephs Supplemental Affidavit and its annexes should have been taken into
consideration, since the submission thereof was allowed by the rules of procedure, as
well as by the RTC in its Order dated 26 August 2004.
As regards the first ground of sufficient exhaustion by respondents of all remedies before
filing a derivative suit, the Court subscribes to the ruling to the contrary of the Court of
Appeals in its Decision dated 16 February 2006.
1avvphi1

The Court has recognized that a stockholders right to institute a derivative suit is not
based on any express provision of the Corporation Code, or even the Securities
Regulation Code, but is impliedly recognized when the said laws make corporate
directors or officers liable for damages suffered by the corporation and its stockholders
for violation of their fiduciary duties. Hence, a stockholder may sue for mismanagement,
waste or dissipation of corporate assets because of a special injury to him for which he is
otherwise without redress. In effect, the suit is an action for specific performance of an
obligation owed by the corporation to the stockholders to assist its rights of action when
the corporation has been put in default by the wrongful refusal of the directors or
management to make suitable measures for its protection. The basis of a stockholders
suit is always one in equity. However, it cannot prosper without first complying with the
legal requisites for its institution.48
Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies lays down the following requirements which a stockholder must comply
with in filing a derivative suit:

Sec. 1. Derivative action. A stockholder or member may bring an action in the name of
a corporation or association, as the case may be, provided, that:
(1) He was a stockholder or member at the time the acts or transactions subject
of the action occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in
the complaint, to exhaust all remedies available under the articles of
incorporation, by-laws, laws or rules governing the corporation or partnership to
obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
A perusal of respondents Complaint before the RTC would reveal that the same did not
allege with particularity that respondents exerted all reasonable efforts to exhaust all
remedies available under the articles of incorporation, by-laws, laws or rules governing
Winchester, Inc. to obtain the relief they desire.
Respondents assert that their compliance with said requirement was contained in
respondent Josephs Affidavit, which was attached to respondents Complaint.
Respondent Joseph averred in his Affidavit that he tried for a number of times to talk to
petitioner Anthony to settle their differences, but the latter would not listen. Respondents
additionally claimed that taking further remedies within the corporation would have been
idle ceremony, considering that Winchester, Inc. was a family corporation and it was
impossible to expect petitioners to take action against themselves who were the ones
accused of wrongdoing.
The Court is not persuaded.
The wordings of Section 1, Rule 8 of the Interim Rules of Procedure Governing IntraCorporate Controversies are simple and do not leave room for statutory construction. The
second paragraph thereof requires that the stockholder filing a derivative suit should
have exerted all reasonable efforts to exhaust all remedies available under the articles of
incorporation, by-laws, laws or rules governing the corporation or partnership to obtain
the relief he desires; and to allege such fact with particularity in the complaint. The
obvious intent behind the rule is to make the derivative suit the final recourse of the
stockholder, after all other remedies to obtain the relief sought had failed.
The allegation of respondent Joseph in his Affidavit of his repeated attempts to talk to
petitioner Anthony regarding their dispute hardly constitutes "all reasonable efforts to
exhaust all remedies available." Respondents did not refer to or mention at all any other
remedy under the articles of incorporation or by-laws of Winchester, Inc., available for
dispute resolution among stockholders, which respondents unsuccessfully availed
themselves of. And the Court is not prepared to conclude that the articles of incorporation
and by-laws of Winchester, Inc. absolutely failed to provide for such remedies.
Neither can this Court accept the reasons proffered by respondents to excuse
themselves from complying with the second requirement under Section 1, Rule 8 of the
Interim Rules of Procedure Governing Intra-Corporate Controversies. They are flimsy
and insufficient, compared to the seriousness of respondents accusations of fraud,
misappropriation, and falsification of corporate records against the petitioners. The fact
that Winchester, Inc. is a family corporation should not in any way exempt respondents
from complying with the clear requirements and formalities of the rules for filing a
derivative suit. There is nothing in the pertinent laws or rules supporting the distinction

between, and the difference in the requirements for, family corporations vis--vis other
types of corporations, in the institution by a stockholder of a derivative suit.
The Court further notes that, with respect to the third and fourth requirements of Section
1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies, the
respondents Complaint failed to allege, explicitly or otherwise, the fact that there were no
appraisal rights available for the acts of petitioners complained of, as well as a
categorical statement that the suit was not a nuisance or a harassment suit.
As to respondents second ground in their Motion for Reconsideration, the Court agrees
with the ruling of the Court of Appeals, in its 15 February 2006 Decision, that respondent
Josephs Supplemental Affidavit and additional evidence were inadmissible since they
were only appended by respondents to their Memorandum before the RTC. Section 8,
Rule 2 of the Interim Rules of Procedure Governing Intra-Corporate Controversies is
crystal clear that:
Sec. 8. Affidavits, documentary and other evidence. Affidavits shall be based on
personal knowledge, shall set forth such facts as would be admissible in evidence, and
shall show affirmatively that the affiant is competent to testify on the matters stated
therein. The affidavits shall be in question and answer form, and shall comply with the
rules on admissibility of evidence.
Affidavits of witnesses as well as documentary and other evidence shall be attached to
the appropriate pleading, Provided, however, that affidavits, documentary and other
evidence not so submitted may be attached to the pre-trial brief required under these
Rules. Affidavits and other evidence not so submitted shall not be admitted in evidence,
except in the following cases:
(1) Testimony of unwilling, hostile, or adverse party witnesses. A witness is
presumed prima facie hostile if he fails or refuses to execute an affidavit after a
written request therefor;
(2) If the failure to submit the evidence is for meritorious and compelling reasons;
and
(3) Newly discovered evidence.
In case of (2) and (3) above, the affidavit and evidence must be submitted not later than
five (5) days prior to its introduction in evidence. (Emphasis ours.)
According to the afore-quoted provision, the parties should attach the affidavits of
witnesses and other documentary evidence to the appropriate pleading, which generally
should mean the complaint for the plaintiff and the answer for the respondent. Affidavits
and documentary evidence not so submitted must already be attached to the respective
pre-trial briefs of the parties. That the parties should have already identified and
submitted to the trial court the affidavits of their witnesses and documentary evidence by
the time of pre-trial is strengthened by the fact that Section 1, Rule 4 of the Interim Rules
of Procedure Governing Intra-Corporate Controversies require that the following matters
should already be set forth in the parties pre-trial briefs:
Section 1. Pre-trial conference, mandatory nature. Within five (5) days after the period
for availment of, and compliance with, the modes of discovery prescribed in Rule 3
hereof, whichever comes later, the court shall issue and serve an order immediately
setting the case for pre-trial conference, and directing the parties to submit their
respective pre-trial briefs. The parties shall file with the court and furnish each other

copies of their respective pre-trial brief in such manner as to ensure its receipt by the
court and the other party at least five (5) days before the date set for the pre-trial.
The parties shall set forth in their pre-trial briefs, among other matters, the following:
xxxx
(4) Documents not specifically denied under oath by either or both parties;
xxxx
(7) Names of witnesses to be presented and the summary of their testimony as contained
in their affidavits supporting their positions on each of the issues;
(8) All other pieces of evidence, whether documentary or otherwise and their respective
purposes.
Also, according to Section 2, Rule 4 of the Interim Rules of Procedure Governing IntraCorporate Controversies,49 it is the duty of the court to ensure during the pre-trial
conference that the parties consider in detail, among other things, objections to the
admissibility of testimonial, documentary, and other evidence, as well as objections to the
form or substance of any affidavit, or part thereof.
Obviously, affidavits of witnesses and other documentary evidence are required to be
attached to a partys pre-trial brief, at the very last instance, so that the opposite party is
given the opportunity to object to the form and substance, or the admissibility thereof.
This is, of course, to prevent unfair surprises and/or to avoid the granting of any undue
advantage to the other party to the case.
True, the parties in the present case agreed to submit the case for judgment by the RTC,
even before pre-trial, in accordance with Section 4, Rule 4 of the Interim Rules of
Procedure Governing Intra-Corporate Controversies:
Sec. 4. Judgment before pre-trial. If after submission of the pre-trial briefs, the court
determines that, upon consideration of the pleadings, the affidavits and other evidence
submitted by the parties, a judgment may be rendered, the court may order the parties to
file simultaneously their respective memoranda within a non-extendible period of twenty
(20) days from receipt of the order. Thereafter, the court shall render judgment, either full
or otherwise, not later than ninety (90) days from the expiration of the period to file the
memoranda.
Even then, the afore-quoted provision still requires, before the court makes a
determination that it can render judgment before pre-trial, that the parties had submitted
their pre-trial briefs and the court took into consideration the pleadings, affidavits and
other evidence submitted by the parties. Hence, cases wherein the court can render
judgment prior to pre-trial, do not depart from or constitute an exception to the requisite
that affidavits of witnesses and documentary evidence should be submitted, at the latest,
with the parties pre-trial briefs. Taking further into account that under Section 4, Rule 4 of
the Interim Rules of Procedure Governing Intra-Corporate Controversies parties are
required to file their memoranda simultaneously, the same would mean that a party would
no longer have any opportunity to dispute or rebut any new affidavit or evidence attached
by the other party to its memorandum. To violate the above-quoted provision would, thus,
irrefragably run afoul the former partys constitutional right to due process.

In the instant case, therefore, respondent Josephs Supplemental Affidavit and the
additional documentary evidence, appended by respondents only to their Memorandum
submitted to the RTC, were correctly adjudged as inadmissible by the Court of Appeals in
its 15 February 2006 Decision for having been belatedly submitted. Respondents neither
alleged nor proved that the documents in question fall under any of the three exceptions
to the requirement that affidavits and documentary evidence should be attached to the
appropriate pleading or pre-trial brief of the party, which is particularly recognized under
Section 8, Rule 2 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies.
WHEREFORE, premises considered, the Petition for Review under Rule 45 of the Rules
of Court is hereby GRANTED. The assailed Resolutions dated 18 July 2006 and 19 April
2007 of the Court of Appeals in CA-G.R. SP No. 00185 are hereby REVERSED AND
SET ASIDE. The Decision dated 15 February 2006 of the Court of Appeals is hereby
AFFIRMED. No costs.
SO ORDERED.

G.R. No. 173463

October 13, 2010

GLOBAL BUSINESS HOLDINGS, INC. (formerly Global Business Bank,

Inc.), Petitioner,
vs.
SURECOMP SOFTWARE, B.V., Respondent.
DECISION
NACHURA, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court,
assailing the Decision1dated May 5, 2006 and the Resolution2 dated July 10, 2006 of the
Court of Appeals (CA) in CA-G.R. SP No. 75524.
The facts of the case are as follows:
On March 29, 1999, respondent Surecomp Software, B.V. (Surecomp), a foreign
corporation duly organized and existing under the laws of the Netherlands, entered into a
software license agreement with Asian Bank Corporation (ABC), a domestic corporation,
for the use of its IMEX Software System (System) in the banks computer system for a
period of twenty (20) years.3
In July 2000, ABC merged with petitioner Global Business Holdings, Inc. (Global), 4 with
Global as the surviving corporation. When Global took over the operations of ABC, it
found the System unworkable for its operations, and informed Surecomp of its decision to
discontinue with the agreement and to stop further payments thereon. Consequently, for
failure of Global to pay its obligations under the agreement despite demands, Surecomp
filed a complaint for breach of contract with damages before the Regional Trial Court
(RTC) of Makati. The case was docketed as Civil Case No. 01-1278.5
In its complaint, Surecomp alleged that it is a foreign corporation not doing business in
the Philippines and is suing on an isolated transaction. Pursuant to the agreement, it
installed the System in ABCs computers for a consideration of US$298,000.00 as license
fee. ABC also undertook to pay Surecomp professional services, which included on-site

support and development of interfaces, and annual maintenance fees for five (5)
subsequent anniversaries, and committed to purchase one (1) or two (2) Remote Access
solutions at discounted prices. In a separate transaction, ABC requested Surecomp to
purchase on its behalf a software called MF Cobol Runtime with a promise to reimburse
its cost. Notwithstanding the delivery of the product and the services provided, Global
failed to pay and comply with its obligations under the agreement. Thus, Surecomp
demanded payment of actual damages amounting to US$319,955.00 and an additional
amount of US$227,610.00 for Globals unilateral pretermination of the agreement,
exemplary damages, attorneys fees and costs of suit. 6
Instead of filing an answer, Global filed a motion to dismiss based on two grounds: (1)
that Surecomp had no capacity to sue because it was doing business in the Philippines
without a license; and (2) that the claim on which the action was founded was
unenforceable under the Intellectual Property Code of the Philippines. 7
On the first ground, Global argued that the contract entered into was not an isolated
transaction since the contract was for a period of 20 years. Furthermore, Global stressed
that it could not be held accountable for any breach as the agreement was entered into
between Surecomp and ABC. It had not, in any manner, taken part in the negotiation and
execution of the agreement but merely took over the operations of ABC as a result of the
merger. On the second ground, Global averred that the agreement, being a technology
transfer arrangement, failed to comply with Sections 87 and 88 of the Intellectual
Property Code of the Philippines.8
In the interim, Global filed a motion for leave to serve written interrogatories to Surecomp
in preparation for the hearing on the motion to dismiss, attaching thereto its written
interrogatories.
After an exchange of pleadings on the motions filed by Global, on June 18, 2002, the
RTC issued an Order,9 the pertinent portions of which read:
After a thorough and careful deliberation of the respective arguments advanced by the
parties in support of their positions in these two (2) incidents, and since it cannot be
denied that there is indeed a contract entered into between the plaintiff [Surecomp] and
the defendant [Global], the latter as a successor in interest of the merging corporation
Asian Bank, defendant [Global] is estopped from denying plaintiffs [Surecomps] capacity
to sue it for alleged breach of that contract with damages. Its argument that it was not the
one who actually contracted with the plaintiff [Surecomp] as it was the merging Asian
Bank which did, is of no moment as it does not relieve defendant Global Bank of its
contractual obligation under the Agreement on account of its undertaking under it:
"x x x shall be responsible for all the liabilities and obligations of ASIANBANK in the same
manner as if the Merged Bank had itself incurred such liabilities or obligations, and any
pending claim, action or proceeding brought by or against ASIANBANK may be
prosecuted by or against the Merged Bank. The right of creditors or liens upon the
property of ASIANBANK shall not be impaired by the merger; provided that the Merged
Bank shall have the right to exercise all defenses, rights, privileges, set-offs and counterclaims of every kind and nature which ASIANBANK may have, or with the Merged Bank
may invoke under existing laws."
It appearing however that the second ground relied upon by the defendant [Global], i.e.,
that the cause of action of the plaintiff is anchored on an unenforceable contract under
the provision of the Intellectual Property Code, will require a hearing before the motion to
dismiss can be resolved and considering the established jurisprudence in this jurisdiction,
that availment of mode of discovery by any of the parties to a litigation, shall be liberally
construed to the end that the truth of the controversy on hand, shall be ascertained at a

less expense with the concomitant facility and expeditiousness, the motion to serve
written interrogatories upon the plaintiff [Surecomp] filed by the defendant [Global] is
GRANTED insofar as the alleged unenforceability of the subject contract is concerned.
Accordingly, the latter is directed to serve the written interrogatories upon the plaintiff
[Surecomp], which is required to act on it in accordance with the pertinent rule on the
matter.
Necessarily, the resolution of the motion to dismiss is held in abeyance until after a
hearing on it is property conducted, relative to the second ground aforementioned.
SO ORDERED.10
Surecomp moved for partial reconsideration, praying for an outright denial of the motion
to dismiss, while Global filed a motion for reconsideration. 11
On November 27, 2002, the RTC issued an Order,12 the fallo of which reads:
WHEREFORE, the Order of this Court dated 18 June 2002 is modified. Defendants
[Globals] Motion to Dismiss dated 17 October 2001 is denied on the two grounds therein
alleged. Defendant [Global] is given five (5) days from receipt of this Order within which
to file its Answer.
The resolution of defendants [Globals] Motion to Serve Written Interrogatories is held in
abeyance pending the filing of the Answer.
SO ORDERED.13
In partially modifying the first assailed Order, the RTC ratiocinated, viz.:
This court sees no reason to further belabor the issue on plaintiffs capacity to sue since
there is a prima facie showing that defendant entered into a contract with defendant and
having done so, willingly, it cannot now be made to raise the issue of capacity to sue
[Merrill Lynch Futures, Inc. v. CA, 211 SCRA 824]. That defendant was not aware of
plaintiffs lack of capacity to sue or that defendant did not benefit from the transaction are
arguments that are hardly supported by the evidence already presented for the resolution
of the Motion to Dismiss.
As to the issue of unenforceability of the subject contract under the Intellectual Property
Code, this court finds justification in modifying the earlier Order allowing the further
presentation of evidence. It appearing that the subject contract between the parties is an
executed, rather than an executory, contract the statute of frauds therefore finds no
application here.
xxxx
As to defendants Motion to Serve Written Interrogatories, this court finds that resort to
such a discovery mechanism while laudable is premature as defendant has yet to file its
Answer. As the case now stands, the issues are not yet joined and the disputed facts are
not clear.14
Undaunted, Global filed a petition for certiorari with prayer for the issuance of a
temporary restraining order and/or writ of preliminary injunction under Rule 65 of the
Rules of Court before the CA, contending that the RTC abused its discretion and acted in
excess of its jurisdiction.15

On May 5, 2006, the CA rendered a Decision,16 the dispositive portion of which reads:
WHEREFORE, premises considered, the instant petition is DENIED. The assailed
Orders dated June 18, 2002 and November 27, 2002 of the Regional Trial Court of
Makati City, Branch 146, in Civil Case No. 01-1278 are hereby AFFIRMED.
SO ORDERED.17
A motion for reconsideration was filed by Global. On July 10, 2006, the CA issued a
Resolution18 denying the motion for reconsideration for lack of merit.
Hence, this petition.
Global presents the following issues for resolution: (1) whether a special civil action for
certiorari is the proper remedy for a denial of a motion to dismiss; and (2) whether Global
is estopped from questioning Surecomps capacity to sue. 19
The petition is bereft of merit.
I
An order denying a motion to dismiss is an interlocutory order which neither terminates
nor finally disposes of a case as it leaves something to be done by the court before the
case is finally decided on the merits. As such, the general rule is that the denial of a
motion to dismiss cannot be questioned in a special civil action for certiorari which is a
remedy designed to correct errors of jurisdiction and not errors of judgment. 20
To justify the grant of the extraordinary remedy of certiorari, the denial of the motion to
dismiss must have been tainted with grave abuse of discretion. By "grave abuse of
discretion" is meant such capricious and whimsical exercise of judgment that is
equivalent to lack of jurisdiction. The abuse of discretion must be grave as where the
power is exercised in an arbitrary or despotic manner by reason of passion or personal
hostility, and must be so patent and gross as to amount to an evasion of positive duty or
to a virtual refusal to perform the duty enjoined by or to act all in contemplation of law.21
In the instant case, Global did not properly substantiate its claim of arbitrariness on the
part of the trial court judge that issued the assailed orders denying the motion to dismiss.
In a petition for certiorari, absent such showing of arbitrariness, capriciousness, or ill
motive in the disposition of the trial judge in the case, we are constrained to uphold the
courts ruling, especially because its decision was upheld by the CA.
II
The determination of a corporations capacity is a factual question that requires the
elicitation of a preponderant set of facts.22 As a rule, unlicensed foreign non-resident
corporations doing business in the Philippines cannot file suits in the Philippines. 23 This is
mandated under Section 133 of the Corporation Code, which reads:
Sec. 133. Doing business without a license. - No foreign corporation transacting business
in the Philippines without a license, or its successors or assigns, shall be permitted to
maintain or intervene in any action, suit or proceeding in any court or administrative
agency of the Philippines, but such corporation may be sued or proceeded against before
Philippine courts or administrative tribunals on any valid cause of action recognized
under Philippine laws.

A corporation has a legal status only within the state or territory in which it was organized.
For this reason, a corporation organized in another country has no personality to file suits
in the Philippines. In order to subject a foreign corporation doing business in the country
to the jurisdiction of our courts, it must acquire a license from the Securities and
Exchange Commission and appoint an agent for service of process. Without such
license, it cannot institute a suit in the Philippines.24
1avvphi1

The exception to this rule is the doctrine of estoppel. Global is estopped from challenging
Surecomps capacity to sue.
A foreign corporation doing business in the Philippines without license may sue in
Philippine courts a Filipino citizen or a Philippine entity that had contracted with and
benefited from it.25 A party is estopped from challenging the personality of a corporation
after having acknowledged the same by entering into a contract with it. 26 The principle is
applied to prevent a person contracting with a foreign corporation from later taking
advantage of its noncompliance with the statutes, chiefly in cases where such person has
received the benefits of the contract. 27
Due to Globals merger with ABC and because it is the surviving corporation, it is as if it
was the one which entered into contract with Surecomp. In the merger of two existing
corporations, one of the corporations survives and continues the business, while the
other is dissolved, and all its rights, properties, and liabilities are acquired by the
surviving corporation.28 This is particularly true in this case. Based on the findings of fact
of the RTC, as affirmed by the CA, under the terms of the merger or consolidation, Global
assumed all the liabilities and obligations of ABC as if it had incurred such liabilities or
obligations itself. In the same way, Global also has the right to exercise all defenses,
rights, privileges, and counter-claims of every kind and nature which ABC may have or
invoke under the law. These findings of fact were never contested by Global in any of its
pleadings filed before this Court.
WHEREFORE, in view of the foregoing, the Decision dated May 5, 2006 and the
Resolution dated July 10, 2006 of the Court of Appeals in CA-G.R. SP No. 75524 are
hereby AFFIRMED. Costs against petitioner.
SO ORDERED.

G.R. No. L-16779

August 16, 1961

NATIONAL ABACA AND OTHER FIBERS CORPORATION, plaintiff-appellant,

vs.
APOLONIA PORE, defendant-appellee.
A. LLamas & Arsenio P. Roman for plaintiff-appellant.
Serafin Ramento for defendant-appellee.
CONCEPCION, J.:
Appeal by plaintiff National Abaca and other Fibers Corporation, from two (2) orders of
the Court of First Instance of Leyte.
On November 14, 1953, plaintiff filed with the Municipal Court of Tacloban, Leyte, a
complaint, against defendant Apolonia Pore, for the recovery of P1,213.34, allegedly
advanced to her for the purchase of hemp for the account of the former and for which she
had allegedly failed to account. In her answer, defendant alleged that she had accounted

for all cash advances received by her for the aforementioned purpose from the plaintiff. In
due course, said court rendering judgment on April 11, 1956, finding that the defendant
had not accounted for cash advances in the sum of P272.49, which she was, accordingly,
sentenced to pay to the plaintiff, with legal interest from November 18, 1953, in addition
to the costs.
Said court having subsequently denied a reconsideration of this decision, as well a new
trial prayed for the plaintiff, the latter appealed to the Court of First Instance of Leyte, in
which defendant moved to dismiss the complaint upon the ground that plaintiff has no
legal capacity to sue, it having abolished by Executive Order No. 372 of the President of
the Philippines, dated November 24,1950. Plaintiff objected thereto upon the ground that
pursuant to said executive order, plaintiff "shall nevertheless be continued as a body
corporate for a period of three (3) years from the effective date" of said executive order,
which was November 30, 1950, "for the purpose of prosecuting and defending suits by or
against it and of enabling the Board of Liquidators" thereby created "gradually to
settle and close its affairs", . . . and that this case was begun on November 14, 1953, or
before the expiration of the period aforementioned. After due hearing, the court of first
instance issued an order dated August 1, 1956, directing plaintiff to amend the complaint,
within ten (10) days from notice, by including the Board of Liquidators as co-party
plaintiff, with the admonition that otherwise the case would be dismissed.
On September 1, 1956, said court issued another order dismissing the case, without
pronouncement as to costs, it appearing that the aforementioned amended had not been
made, despite the fact that copy of said order of August 1, 1956 had been sent, by
registered mail, to plaintiff's counsel on August 6, 1956. Copy of the last order was
delivered, on September 13, 1956, to counsel for the plaintiff, which filed, on September
21, 1956, a motion alleging that, copy of the order of August 1, 1956 was received by the
plaintiff on August 17, 1956; that thereupon said counsel prepared an amended
complaint copy of which was annexed to the motion as directed by the court; that
on August 24, 1956, said counsel handed two copies of said amended complaint to Mrs.
Receda Vda. de Ocampo, the employee of the aforesaid Board of Liquidators in charge
of plaintiff's incoming and outgoing correspondence, with instructions to them mail said
copies to the Court of First Instance of Leyte and to counsel for defendant herein; that on
September 13, 1956, plaintiff's counsel received copy of the order of September 1, 1956;
that thereupon he inquired from plaintiff's mailing clerk whether or not his instructions,
concerning the mailing of copies of said amended complaint, had been complied with;
that he then found out that, although said copies of the amended complaint were entered
in the record book of plaintiff's outgoing correspondence on August 24, 1956, only the
copy addressed to defendant's counsel had actually been mailed (as evidenced by
registry receipt No. 57209 dated August 25, 1956); that the original copy of the amended
complaint, addressed to the clerk of court, could not be located, despite diligent efforts
made to find the same; that plaintiff's failure to file in court the original of said amended
complaint is imputable to the excusable negligence of the aforementioned Mrs. Ocampo,
whose affidavit was annexed, also, to the motion for reconsideration; and that, plaintiff
has a just and valid claim against the defendant. Plaintiff prayed, therefore, that said
order of September 1, 1956 be reconsidered and set aside and that its aforementioned
amended complaint be admitted.
Said motion for reconsideration was denied by an order dated October 2, 1956,
whereupon plaintiff brought the case for review, by Record on Appeal, to the Court of
Appeals which, however, forwarded the records to us, the issues raised in the appeal
being purely of law, namely;(1) whether an action, commenced within three (3) years
after the abolition of plaintiff, as a corporation, may be continued by the same after the
expiration of said period; and (2) whether, under the facts set forth above, the lower court
should have granted plaintiff's motion for reconsideration of its order of September 1,
1956.

With respect to the first question, the rule appears to be well settled that, in the absence
of statutory provision to the contrary, pending actions by or against a corporation are
abated upon expiration of the period allowed by law for the liquidation of its affairs.
It is generally held, that where a statute continues the existence of a corporation
for a certain period after its dissolution for the purpose of prosecuting and
defending suits, etc., the corporation becomes defunct upon the expiration of
such period, at least in the absence of a provision to the contrary, so that no
action can afterwards be brought by or against it, and must be dismissed. Actions
pending by or against the corporation when the period allowed by the statute
expires, ordinarily abate.
. . . This time limit does not apply unless the circumstances are such as to bring
the corporation within the provision of the statute. However, the wording of the
statutes, in some jurisdictions authorize suits after the expiration of the time limit,
where the statute provides that for the purpose of any suit brought by or against
the corporation shall continue beyond such period for a further named period
after final judgment. (Fletcher's Cyclopedia on Corporations, Vol. 16, pp. 892893.).
Our Corporation Law contains no provision authorizing a corporation, after three (3)
years from the expiration of its lifetime, to continue in its corporate name actions
instituted by it within said period of three (3) years. in fact, section 77 of said law provides
that the corporation shall "be continued as a body corporate for three (3) years after the
time when it would have been . . . dissolved, for the purposed of prosecuting and
defending suits by or against it . . .", so that, thereafter, it shall no longer enjoy corporate
existence for such purpose. For this reason, section 78 of the same law authorizes the
corporation, "at any time during said three years . . . to convey all of its property to
trustees for the benefit of members, stockholders, creditors and other interested",
evidently for the purpose, among others, of enabling said trustees to prosecute and
defend suits by or against the corporation begun before the expiration of said period.
Hence, commenting on said sections, Judge Fisher, in his work entitled Philippines Law
on Stock Corporations (1929 ed.), has the following to say:
It is to be noted that the time during which the corporation, through its own
officers, may conduct the liquidation of its assets and sue and be sued as a
corporation is limited to three years from the time the period of dissolution
commences; but that there is no time limited within the trustees must complete a
liquidation placed in their hands. It is provided only (Corp. Law, Sec. 78) that the
conveyance to the trustees must be made within the three-year period. It may be
found impossible to complete the work of liquidation within the three-year period
or to reduce disputed claims to judgment. The authorities are to the effect that
suits by or against a corporation abate when it ceased to be an entity capable of
suing or being sued (7 R.C.L. Corps., Par. 750); but trustees to whom the
corporate assets have been conveyed pursuant to the authority of section 78 may
used and be sued as such in all matters connected with the liquidation. By the
terms of the statute the effect of the conveyance is to make the trustees the legal
owners of the property conveyed, subject to the beneficial interest therein of
creditors and stockholders. (pp. 389-390; see also Sumera v. Valencia [67 Phil.
721, 726-727).
Obviously, the complete loss of plaintiff's corporate existence after the expiration of the
period of three (3) years for the settlement of its affairs is what impelled the President to
create a Board of Liquidators, to continue the management of such matters as may then
be pending. The first question must, therefore, be answered in the negative.

With respect, however, to the second question, we hold that the lower court erred in not
granting plaintiff's motion for reconsideration of September 21, 1956. To begin with, the
judgment of the municipal court of Tacloban against the defendant is a strong indication
of the validity and justice of plaintiff's claim against her. Moreover, the record satisfactorily
shows that plaintiff had prepared an amended complaint, as directed in the order of
August 1, 1956, upon receipt thereof; that copy of said amended complaint had actually
been sent by registered mail to defendant's counsel; that plaintiff's counsel had given to
its mailing clerk the proper instructions for the filing of the original of said amended
complaint with the office of the Court of First Instance of Leyte; that said mailing clerk had
endeavored to comply with the aforementioned instructions, as evidenced by the
corresponding entry in the record book of plaintiff's outgoing correspondence; and that
the failure to file in court said original of the amended complaint must have been due,
therefore, either to accident or to excusable negligence on the part of said mailing clerk.
WHEREFORE, the orders appealed from, dated September 1 and October 3, 1956 are
reversed, plaintiff's amended complaint is hereby admitted, and the record remanded to
the lower court for further proceedings, with the costs of this instance against defendantappellee, Apolonio Pore.

G.R. No. L-26001

October 29, 1968

PHILIPPINE NATIONAL BANK, petitioner,

vs.
THE COURT OF APPEALS and PHILIPPINE COMMERCIAL AND INDUSTRIAL
BANK, respondents.
Tomas Besa, Jose B. Galang and Juan C. Jimenez for petitioner.
San Juan, Africa & Benedicto for respondents.
CONCEPCION, C.J.:
The Philippine National Bank hereinafter referred to as the PNB seeks the review
by certiorari of a decision of the Court of Appeals, which affirmed that of the Court of First
Instance of Manila, dismissing plaintiff's complaint against the Philippine Commercial and
Industrial Bank hereinafter referred to as the PCIB for the recovery of P57,415.00.
A partial stipulation of facts entered into by the parties and the decision of the Court of
Appeals show that, on about January 15, 1962, one Augusto Lim deposited in his current
account with the PCIB branch at Padre Faura, Manila, GSIS Check No. 645915- B, in the
sum of P57,415.00, drawn against the PNB; that, following an established banking
practice in the Philippines, the check was, on the same date, forwarded, for clearing,
through the Central Bank, to the PNB, which did not return said check the next day, or at
any other time, but retained it and paid its amount to the PCIB, as well as debited it
against the account of the GSIS in the PNB; that, subsequently, or on January 31, 1962,
upon demand from the GSIS, said sum of P57,415.00 was re-credited to the latter's
account, for the reason that the signatures of its officers on the check were forged; and
that, thereupon, or on February 2, 1962, the PNB demanded from the PCIB the refund of
said sum, which the PCIB refused to do. Hence, the present action against the PCIB,
which was dismissed by the Court of First Instance of Manila, whose decision was, in
turn, affirmed by the Court of Appeals.
It is not disputed that the signatures of the General Manager and the Auditor of the GSIS
on the check, as drawer thereof, are forged; that the person named in the check as its
payee was one Mariano D. Pulido, who purportedly indorsed it to one Manuel Go; that
the check purports to have been indorsed by Manuel Go to Augusto Lim, who, in turn,

deposited it with the PCIB, on January 15, 1962; that, thereupon, the PCIB stamped the
following on the back of the check: "All prior indorsements and/or Lack of Endorsement
Guaranteed, Philippine Commercial and Industrial Bank," Padre Faura Branch, Manila;
that, on the same date, the PCIB sent the check to the PNB, for clearance, through the
Central Bank; and that, over two (2) months before, or on November 13, 1961, the GSIS
had notified the PNB, which acknowledged receipt of the notice, that said check had
been lost, and, accordingly, requested that its payment be stopped.
In its brief, the PNB maintains that the lower court erred: (1) in not finding the PCIB guilty
of negligence; (2) in not finding that the indorsements at the back of the check are forged;
(3) in not finding the PCIB liable to the PNB by virtue of the former's warranty on the back
of the check; (4) in not holding that "clearing" is not "acceptance", in contemplation of the
Negotiable Instruments law; (5) in not finding that, since the check had not been
accepted by the PNB, the latter is entitled to reimbursement therefor; and (6) in denying
the PNB's right to recover from the PCIB.
The first assignment of error will be discussed later, together with the last,with which it is
interrelated.
As regards the second assignment of error, the PNB argues that, since the signatures of
the drawer are forged, so must the signatures of the supposed indorsers be; but this
conclusion does not necessarily follow from said premise. Besides, there is absolutely no
evidence, and the PNB has not even tried to prove that the aforementioned indorsements
are spurious. Again, the PNB refunded the amount of the check to the GSIS, on account
of the forgery in the signatures, not of the indorsers or supposed indorsers, but of the
officers of the GSIS as drawer of the instrument. In other words, the question whether or
not the indorsements have been falsified is immaterial to the PNB's liability as a drawee,
or to its right to recover from the PCIB,1 for, as against the drawee, the indorsement of an
intermediate bank does not guarantee the signature of the drawer,2 since the forgery of
the indorsement is notthe cause of the loss.3
With respect to the warranty on the back of the check, to which the third assignment of
error refers, it should be noted that the PCIB thereby guaranteed "all prior indorsements,"
not the authenticity of the signatures of the officers of the GSIS who signed on its behalf,
because the GSIS is not an indorser of the check, but its drawer.4 Said warranty is
irrelevant, therefore, to the PNB's alleged right to recover from the PCIB. It could have
been availed of by a subsequent indorsee5 or a holder in due course6 subsequent to the
PCIB, but, the PNB is neither.7 Indeed, upon payment by the PNB, as drawee, the
check ceased to be a negotiable instrument, and became a mere voucher or proof of
payment.8
Referring to the fourth and fifth assignments of error, we must bear in mind that, in
general, "acceptance", in the sense in which this term is used in the Negotiable
Instruments Law9 is not required for checks, for the same are payable on
demand.10 Indeed, "acceptance" and "payment" are, within the purview of said Law,
essentially different things, for the former is "a promise to perform an act," whereas the
latter is the "actual performance" thereof.11 In the words of the Law,12 "the acceptance of a
bill is the signification by the drawee of his assent to the order of the drawer," which, in
the case of checks, is the payment, on demand, of a given sum of money. Upon the other
hand, actual payment of the amount of a check implies not only an assent to said order of
the drawer and a recognition of the drawer's obligation to pay the aforementioned sum,
but, also, a compliance with such obligation.
Let us now consider the first and the last assignments of error. The PNB maintains that
the lower court erred in not finding that the PCIB had been guilty of negligence in not
discovering that the check was forged. Assuming that there had been such negligence on

the part of the PCIB, it is undeniable, however, that the PNB has, also, been negligent,
with the particularity that the PNB had been guilty of a greater degree of negligence,
because it had a previous and formal notice from the GSIS that the check had been lost,
with the request that payment thereof be stopped. Just as important, if not more
important and decisive, is the fact that the PNB's negligence was the main or proximate
cause for the corresponding loss.
In this connection, it will be recalled that the PCIB did not cash the check upon its
presentation by Augusto Lim; that the latter had merely deposited it in his current account
with the PCIB; that, on the same day, the PCIB sent it, through the Central Bank, to the
PNB, for clearing; that the PNB did not return the check to the PCIB the next day or at
any other time; that said failure to return the check to the PCIB implied, under the current
banking practice, that the PNB considered the check good and would honor it; that, in
fact, the PNB honored the check and paid its amount to the PCIB; and that only then did
the PCIB allow Augusto Lim to draw said amount from his aforementioned current
account.
Thus, by not returning the check to the PCIB, by thereby indicating that the PNB had
found nothing wrong with the check and would honor the same, and by actually paying its
amount to the PCIB, the PNB induced the latter, not only to believe that the check was
genuine and good in every respect, but, also, to pay its amount to Augusto Lim. In other
words, the PNB was the primary or proximate cause of the loss, and, hence, may not
recover from the PCIB.13
It is a well-settled maxim of law and equity that when one of two (2) innocent persons
must suffer by the wrongful act of a third person, the loss must be borne by the one
whose negligence was the proximate cause of the loss or who put it into the power of the
third person to perpetrate the wrong.14
Then, again, it has, likewise, been held that, where the collecting (PCIB) and the drawee
(PNB) banks are equally at fault, the court will leave the parties where it finds them. 15
Lastly, Section 62 of Act No. 2031 provides:
The acceptor by accepting the instrument engages that he will pay it according to
the tenor of his acceptance; and admits:
(a) The existence of the drawer, the genuineness of his signature, and his
capacity and authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
The prevailing view is that the same rule applies in the case of a drawee who pays a bill
without having previously accepted it.16
WHEREFORE, the decision appealed from is hereby affirmed, with costs against the
Philippine National Bank. It is so ordered.