Story behind SMC v Kahn: According to the book Boss Danding (2003) who are the key players

e the key players in the sale. He announced that no money

from any corporation which involved a coconut farmers share was
San Miguel was founded by Don Enrique Ma. Barreta Ycaza which was
used. Also, he told Marcos what theyve agreed upon which was the
renamed at the start of the American occupation as San Miguel
latter would sell to UCPB 33.1M shares at P50/share (more than
Brewery. He expanded his business since their beer sales had risen
double the market price) for a total of 1.656B. The bloc made up
to other investors and one of those were Andres Soriano Sr. and
about 31% of the total shares while 10M+ shares which was about
Zobel De Ayala family. Danding Conjuanco was a small town
10% would be retained by the Soriano family. So having 16% share
politician at a crossroads in his life. He wanted to go up the political
by Zobel and Danding would amount to controlling 47% share of
ladder in Tarlac(province) but could not because of a feud in his clan.
SMC. There was an voting trust agreement agreed which gave
He decided to focus more on his plywood, veneer and cement
Soriano, Jr. the right to vote and other rights pertaining to the shares
businesses but Marcos tempted him to go back to politics which he
ensuring the continuity in managerial and business policy of SMC.
did and achieved power. When martial law was declared, Danding
As a result, Sorianos group invested P500M in UCPB preferred
was in a secure position which increased his influence and wealth
shares and P1.15B in time deposits and other placements which was
several times. Also, he expanded his landholdings and gained
guaranteed that the investments would earn 15%/year or P250M.
control of the coconut industry. In the early 1983, Enrique Zobel
It was said that the agreement would prevent the depletion of the
offered Danding 17M shares in San Miguel. Months after, the talk
coconut levy funds. The ACCRA lawyers planned a scheme that
of the town was about Zobel and his cousin Andres Soriano, Jr. Zobel
place layers of corporate veil over the transaction. The case here
has 16% of the total outstanding shares while Soriano, Jr. held about
started with 14 corporations which acquired 1.3M share of the
the same number. San Miguel was founded by Don Enrique Ma.
outstanding capital stock of SMC. 8 of these companies were made
Barreta Ycaza which was renamed at the start of the American
to appear to belong to Soriano group and the remaining belongs to
occupation as San Miguel Brewery. He expanded his business since
Dandings group. The process of negotiations took about 9 months
their beer sales had risen to other investors and one of those were
from the time Zobel called up Danding to sell his shares and so the
Andres Soriano Sr. and Zobel De Ayala family. Danding was said to
deal was set. Andres Soriano Jr. was chairman of the board and chief
informed Marcos about the said offer. SMC shares at that time was
executive officer of SMC while Danding was elected vice chairman.
P22/share in the stock exchange and Zobel was not negotiating for
However, the former died and Danding took over SMC. He
a premium so they needed P374M for the whole bloc of shares.
appointed the 14 CIIF holding companies as the substitute trustee
Also, the country was on the verge of a foreign debt crisis. There
in the voting trust agreement which gave him the power to delegate
was a World Bank report stating that the government was spending
trusteeship in writing to Andres III.
much budget on inefficient government owned and controlled
corporations (GOCCs) which pushed the government to strip out After the Marcoses left the palace, Cory Aquino instructed Joker
public monopolies to leave the businesses to the private sectors.
Arroyo to inspect the place and found certificates of stock in
Marcos and Danding wanted to get SMCs controlling interest.
Soriano Sr. headed SMC until his death in 1964. The negotiation Primavera Farms Inc., Meadow-Lark Plantation Inc. and Silver-Leaf
between Danding and the respondents group which held 43.1M Plantation Inc., all duly endorsed in blank; several sheets of
shares was said to be a secret. Danding tried to hide from the public accounting computations of the amount of the coconut levy and its
 disbursements, including a sheet showing the funding scheme for
the acquisition of 50 million San Miguel shares; the Voting Trust
Agreement executed by different stockholders in favor of Eduardo
Cojuangco Jr.; and a blank Deed of Assignment executed by
stockholders of Primavera Farms Inc., Meadow-Lark Plantation Inc.
and Silver-Leaf Plantation Inc
Agreement Anticipating perhaps that the government, with all the
documents it had discovered in Malacaang, could build a strong case in
favor of its order to seize the SMC shares acquired by the 14 CIIF holding
companies, Dandings associates moved fast to shield these from the
governments reach. In late March of 1986, when the Aquino administration
was yet in shambles, the new SMC management led by Andres Soriano III and
the UCPB appealed to the PCGG, the agency created to recover the ill-gotten
wealth of the Marcoses and their cronies, to lift the sequestration order on
the 33.1 million SMC shares, saying that these belonged to the coconut
farmers. When the appeal was granted, the UCPB, as the administrator of the
14 CIIF holding companies, decided in April 1, 1986, to sell the whole block of
shares. For a time, the identity of the buyer remained a mystery, except that
it was represented by Andres III, who was then the acting chairman of the
SMC board and chief executive officer. The shares were to be sold at P100
per share, or four times the then prevailing market price of P22.50. In fact,
the buyer had already made a down payment of P500 million which the UCPB
had accepted.
The identity of the buyer became public, however, when a Hong Kong-based
company called Neptunia Holdings Ltd. offered to sell its entire holdings in
San Miguel Brewery-Hong Kong (SMC-HK). Neptunia owned 75 percent of
SMC-HK and its board of directors included Danding and his associates Danilo
Ursua and Jose C. Concepcion. The proceeds of the sale were reportedly to
be used by Andres III to pay for the 33.1 million SMC shares. Further
investigation revealed that Neptunia was wholly owned by San Miguel
International (SMI), which was based in the Bahamas. In turn, SMI was 100-
percent owned by SMC.
Thus, it became clear that an SMC holding company was buying SMC shares.
If the sale had been allowed to push through, Neptunia would be the holder
of the 33.1 million SMC shares. Hence, the shares would be deemed as having
been reacquired by the company and considered as treasury shares. Treasury
shares are previously outstanding shares bought back by the issuing company
and are retired or taken out of circulation.
Upon this discovery, the PCGG re-issued its sequestration order and
prohibited the sale of the 33.1 million SMC shares until such time that the
issue of its ownership was resolved. It booted out Danding and his associates
from the Neptunia board. However, it allowed Andres III to hold on to his
position in SMC, which he assumed until he was replaced by Danding in July
1998.
After lengthy negotiations, the PCGG and the SMC board also agreed to
consider the P500-million downpayment made by Neptunia as a
consummated transaction for the equivalent number of shares, which was
computed to be about four percent of the 31-percent share controlled by the
14 CIIF holding companies. Thus, the percentage share of the holding
companies in SMC went down to 26.6 percent.
By end-1997, a few months before Danding regained control of SMC, the
26.6-percent share of the 14 CIIF holding firms had reached 599,361,806
shares due to stock dividends and stock splits declared by the company since
1987. This is roughly worth P33 billion at the prevailing market price.
Notes:
Incorporation papers of all 14 companies were the same except for
some common names of incorporators that appeared in some
documents but not in others
Same date of incorporation Aug 9 1983, same address c/o UCPB,
same treasurer Jose Antonio Garcia who deposited on the same
date Aug 9 1983 23% Paid In Capital to meet the SEC requirement
The incorporation papers revealed that all the holding companies
were at least 99.9% owned by the 5 CIIF mills. Purpose: to acquire
SMC shares
The SEC ruled in favor of De los Angeles and stated, among others, that the
SEC always has competence to inquire into situations where business
judgment transgresses the law. However, the Court of Appeals overturned
the SECs ruling. The Court of Appeals ruled that De los Angeles had no legal
capacity to institute the derivative suit because (1) De los Angeles ownership
in his name of 20 shares out of 121,645,680 outstanding shares of SMC does
not adequately represent the interest of the minority stockholders; (2) De los
Angeles position as PCGG-nominated director is inconsistent with his desire
to represent minority stockholders; (3)the PCGG can only exercise powers of
administration over sequestered property; and (4) De los Angeles suit is not
brought for the benefit of SMC.

Very short digest We ruled in favor of De los Angeles in his appeal before this Court. We found
that De los Angeles ownership of SMC shares in his name was sufficient to
In San Miguel, Eduardo De los Angeles (De los Angeles) was one of the PCGG
authorize him to bring suit. De los Angeles act was also not contrary to PCGGs
representatives in the Board of Directors of San Miguel Corporation
position. Moreover, De los Angeles complaint was confined to the validity of
(SMC). De los Angeles owned 20 shares in his name and was elected to the
SMCs assumption of the indebtedness of Neptunia and did not even inquire
SMC Board by the 33,133,266 SMC shares sequestered by PCGG. De los
about the ownership of the SMC shares sequestered by PCGG. We then
Angeles questioned the SMC Boards resolution to assume the loans of
stated that the acts of the board of directors which are claimed to amount to
Neptunia Co., Ltd. (Neptunia), SMCs indirectly wholly owned
fraud and to be detrimental to the interest of the sequestered corporation
subsidiary. When De los Angeles efforts to obtain relief from SMC and PCGG
constitute an intracorporate dispute within the jurisdiction of the SEC even
proved futile, he filed a derivative suit with the SEC. Ernest Kahn moved to
though a PCGG representative filed the case.
dismiss De los Angeles derivative suit on two grounds, one of which stated
that the SEC had no jurisdiction over the controversy because the matters
involved are strictly within the business judgment of SMCs Board of Directors.