Sie sind auf Seite 1von 46

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-45911 April 11, 1979
JOHN GOKONGWEI, JR., petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE
M. SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO,
WALTHRODE B. CONDE, MIGUEL ORTIGAS, ANTONIO PRIETO, SAN
MIGUEL CORPORATION, EMIGDIO TANJUATCO, SR., and EDUARDO R.
VISAYA, respondents.
De Santos, Balgos & Perez for petitioner.
Angara, Abello, Concepcion, Regala, Cruz Law Offices for respondents Sorianos
Siguion Reyna, Montecillo & Ongsiako for respondent San Miguel Corporation.
R. T Capulong for respondent Eduardo R. Visaya.
NOTE: EXCLUDED SEPARATE OPINIONS KAY SUPER LONG
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 bylaws are null and void. 1
As additional causes of action, it was alleged that corporations have no
inherent power to disqualify a stockholder from being elected as a director and,
therefore, the questioned act is ultra vires and void; that Andres M. Soriano, Jr.
and/or Jose M. Soriano, while representing other corporations, entered into
contracts (specifically a management contract) with respondent corporation,
which was allowed because the questioned amendment gave the Board itself
the prerogative of determining whether they or other persons are engaged in
competitive or antagonistic business; that the portion of the amended bylaws
which states that in determining whether or not a person is engaged in
competitive business, the Board may consider such factors as business and
family relationship, is unreasonable and oppressive and, therefore, void; and
that the portion of the amended by-laws which requires that "all nominations

for election of directors ... shall be submitted in writing to the Board of Directors
at least five (5) working days before the date of the Annual Meeting" is likewise
unreasonable and oppressive.
It was, therefore, prayed that the amended by-laws be declared null and void
and the certificate of filing thereof be cancelled, and that individual
respondents be made to pay damages, in specified amounts, to petitioner.
On October 28, 1976, in connection with the same case, petitioner filed with
the Securities and Exchange Commission an "Urgent Motion for Production and
Inspection of Documents", alleging that the Secretary of respondent
corporation refused to allow him to inspect its records despite request made by
petitioner for production of certain documents enumerated in the request, and
that respondent corporation had been attempting to suppress information from
its stockholders despite a negative reply by the SEC to its query regarding their
authority to do so. Among the documents requested to be copied were (a)
minutes of the stockholder's meeting field on March 13, 1961, (b) copy of the
management contract between San Miguel Corporation and A. Soriano
Corporation (ANSCOR); (c) latest balance sheet of San Miguel International,
Inc.; (d) authority of the stockholders to invest the funds of respondent
corporation in San Miguel International, Inc.; and (e) lists of salaries,
allowances, bonuses, and other compensation, if any, received by Andres M.
Soriano, Jr. and/or its successor-in-interest.
The "Urgent Motion for Production and Inspection of Documents" was opposed
by respondents, alleging, among others that the motion has no legal basis; that
the demand is not based on good faith; that the motion is premature since the
materiality or relevance of the evidence sought cannot be determined until the
issues are joined, that it fails to show good cause and constitutes continued
harrasment, and that some of the information sought are not part of the
records of the corporation and, therefore, privileged.
During the pendency of the motion for production, respondents San Miguel
Corporation, Enrique Conde, Miguel Ortigas and Antonio Prieto filed their
answer to the petition, denying the substantial allegations therein and stating,
by way of affirmative defenses that "the action taken by the Board of Directors
on September 18, 1976 resulting in the ... amendments is valid and legal
because the power to "amend, modify, repeal or adopt new By-laws" delegated
to said Board on March 13, 1961 and long prior thereto has never been revoked
of SMC"; that contrary to petitioner's claim, "the vote requirement for a valid
delegation of the power to amend, repeal or adopt new by-laws is determined
in relation to the total subscribed capital stock at the time the delegation of
said power is made, not when the Board opts to exercise said delegated
power"; that petitioner has not availed of his intra-corporate remedy for the
nullification of the amendment, which is to secure its repeal by vote of the
stockholders representing a majority of the subscribed capital stock at any

regular or special meeting, as provided in Article VIII, section I of the by-laws


and section 22 of the Corporation law, hence the, petition is premature; that
petitioner is estopped from questioning the amendments on the ground of lack
of authority of the Board. since he failed, to object to other amendments made
on the basis of the same 1961 authorization: that the power of the corporation
to amend its by-laws is broad, subject only to the condition that the by-laws
adopted should not be respondent corporation inconsistent with any existing
law; that respondent corporation should not be precluded from adopting
protective measures to minimize or eliminate situations where its directors
might be tempted to put their personal interests over t I hat of the corporation;
that the questioned amended by-laws is a matter of internal policy and the
judgment of the board should not be interfered with: That the by-laws, as
amended, are valid and binding and are intended to prevent the possibility of
violation of criminal and civil laws prohibiting combinations in restraint of trade;
and that the petition states no cause of action. It was, therefore, prayed that
the petition be dismissed and that petitioner be ordered to pay damages and
attorney's fees to respondents. The application for writ of preliminary injunction
was likewise on various grounds.
Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to
the petition, denying the material averments thereof and stating, as part of
their affirmative defenses, that in August 1972, the Universal Robina
Corporation (Robina), a corporation engaged in business competitive to that of
respondent corporation, began acquiring shares therein. until September 1976
when its total holding amounted to 622,987 shares: that in October 1972, the
Consolidated Foods Corporation (CFC) likewise began acquiring shares in
respondent (corporation. until its total holdings amounted to P543,959.00 in
September 1976; that on January 12, 1976, petitioner, who is president and
controlling shareholder of Robina and CFC (both closed corporations) purchased
5,000 shares of stock of respondent corporation, and thereafter, in behalf of
himself, CFC and Robina, "conducted malevolent and malicious publicity
campaign against SMC" to generate support from the stockholder "in his effort
to secure for himself and in representation of Robina and CFC interests, a seat
in the Board of Directors of SMC", that in the stockholders' meeting of March
18, 1976, petitioner was rejected by the stockholders in his bid to secure a seat
in the Board of Directors on the basic issue that petitioner was engaged in a
competitive business and his securing a seat would have subjected respondent
corporation to grave disadvantages; that "petitioner nevertheless vowed to
secure a seat in the Board of Directors at the next annual meeting; that
thereafter the Board of Directors amended the by-laws as afore-stated.
As counterclaims, actual damages, moral damages, exemplary damages,
expenses of litigation and attorney's fees were presented against petitioner.
Subsequently, a Joint Omnibus Motion for the striking out of the motion for
production and inspection of documents was filed by all the respondents. This
was duly opposed by petitioner. At this juncture, respondents Emigdio

Tanjuatco, Sr. and Eduardo R. Visaya were allowed to intervene as oppositors


and they accordingly filed their oppositions-intervention to the petition.
On December 29, 1976, the Securities and Exchange Commission resolved the
motion for production and inspection of documents by issuing Order No. 26,
Series of 1977, stating, in part as follows:
Considering the evidence submitted before the Commission by
the petitioner and respondents in the above-entitled case, it is
hereby ordered:
1. That respondents produce and permit the inspection,
copying and photographing, by or on behalf of the petitionermovant, 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 Ex-change Commission
acts on the matters complained of in the instant petition.
On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a
restraining order had been issued by this Court, or on May 9, 1977, the
respondent Commission served upon petitioner copies of the following orders:
(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's
motion for reconsideration, with its supplement, of the order of the Commission
denying in part petitioner's motion for production of documents, petitioner's
motion for reconsideration of the order denying the issuance of a temporary
restraining order denying the issuance of a temporary restraining order, and
petitioner's consolidated motion to declare respondents in contempt and to
nullify the stockholders' meeting;
(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to
run as a director of respondent corporation but stating that he should not sit as
such if elected, until such time that the Commission has decided the validity of
the bylaws in dispute, and denying deferment of Item 6 of the Agenda for the
annual stockholders' meeting; and

(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's
motion for reconsideration of the order of respondent Commission denying
petitioner's motion for summary judgment;
It is petitioner's assertions, anent the foregoing orders, (1) that respondent
Commission acted with indecent haste and without circumspection in issuing
the aforesaid orders to petitioner's irreparable damage and injury; (2) that it
acted without jurisdiction and in violation of petitioner's right to due process
when it decided en banc an issue not raised before it and still pending before
one of its Commissioners, and without hearing petitioner thereon despite
petitioner's request to have the same calendared for hearing , and (3) that the
respondents acted oppressively against the petitioner in violation of his rights
as a stockholder, warranting immediate judicial intervention.
It is prayed in the supplemental petition that the SEC orders complained of be
declared null and void and that respondent Commission be ordered to allow
petitioner to undertake discovery proceedings relative to San Miguel
International. Inc. and thereafter to decide SEC Cases No. 1375 and 1423 on
the merits.
On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano
filed their comment, alleging that the petition is without merit for the following
reasons:
(1) that the petitioner the interest he represents are engaged in business
competitive and antagonistic to that of respondent San Miguel Corporation, it
appearing that the owns and controls a greater portion of his SMC stock thru
the Universal Robina Corporation and the Consolidated Foods Corporation,
which corporations are engaged in business directly and substantially
competing with the allied businesses of respondent SMC and of corporations in
which SMC has substantial investments. Further, when CFC and Robina had
accumulated investments. Further, when CFC and Robina had accumulated
shares in SMC, the Board of Directors of SMC realized the clear and present
danger that competitors or antagonistic parties may be elected directors and
thereby have easy and direct access to SMC's business and trade secrets and
plans;
(2) that the amended by law were adopted to preserve and protect respondent
SMC from the clear and present danger that business competitors, if allowed to
become directors, will illegally and unfairly utilize their direct access to its
business secrets and plans for their own private gain to the irreparable
prejudice of respondent SMC, and, ultimately, its stockholders. Further, it is
asserted that membership of a competitor in the Board of Directors is a blatant
disregard of no less that the Constitution and pertinent laws against
combinations in restraint of trade;

(3) that by laws are valid and binding since a corporation has the inherent right
and duty to preserve and protect itself by excluding competitors and
antogonistic parties, under the law of self-preservation, and it should be
allowed a wide latitude in the selection of means to preserve itself;
(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and
1423 was due to petitioner's own acts or omissions, since he failed to have the
petition to suspend, pendente lite the amended by-laws calendared for hearing.
It was emphasized that it was only on April 29, 1977 that petitioner calendared
the aforesaid petition for suspension (preliminary injunction) for hearing on May
3, 1977. The instant petition being dated May 4, 1977, it is apparent that
respondent Commission was not given a chance to act "with deliberate
dispatch", and
(5) that, even assuming that the petition was meritorious was, it has become
moot and academic because respondent Commission has acted on the pending
incidents, complained of. It was, therefore, prayed that the petition be
dismissed.
On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his comment,
alleging that the petition has become moot and academic for the reason,
among others that the acts of private respondent sought to be enjoined have
reference to the annual meeting of the stockholders of respondent San Miguel
Corporation, which was held on may 10, 1977; that in said meeting, in
compliance with the order of respondent Commission, petitioner was allowed to
run and be voted for as director; and that in the same meeting, Item 6 of the
Agenda was discussed, voted upon, ratified and confirmed. Further it was
averred that the questions and issues raised by petitioner are pending in the
Securities and Exchange Commission which has acquired jurisdiction over the
case, and no hearing on the merits has been had; hence the elevation of these
issues before the Supreme Court is premature.
Petitioner filed a reply to the aforesaid comments, stating that the petition
presents justiciable questions for the determination of this Court because (1)
the respondent Commission acted without circumspection, unfairly and
oppresively against petitioner, warranting the intervention of this Court; (2) a
derivative suit, such as the instant case, is not rendered academic by the act of
a majority of stockholders, such that the discussion, ratification and
confirmation of Item 6 of the Agenda of the annual stockholders' meeting of
May 10, 1977 did not render the case moot; that the amendment to the bylaws
which specifically bars petitioner from being a director is void since it deprives
him of his vested rights.
Respondent Commission, thru the Solicitor General, filed a separate comment,
alleging that after receiving a copy of the restraining order issued by this Court
and noting that the restraining order did not foreclose action by it, the

Commission en banc issued Orders Nos. 449, 450 and 451 in SEC Case No.
1375.
In answer to the allegation in the supplemental petition, it states that Order No.
450 which denied deferment of Item 6 of the Agenda of the annual
stockholders' meeting of respondent corporation, took into consideration an
urgent manifestation filed with the Commission by petitioner on May 3, 1977
which prayed, among others, that the discussion of Item 6 of the Agenda be
deferred. The reason given for denial of deferment was that "such action is
within the authority of the corporation as well as falling within the sphere of
stockholders' right to know, deliberate upon and/or to express their wishes
regarding disposition of corporate funds considering that their investments are
the ones directly affected." It was alleged that the main petition has, therefore,
become moot and academic.
On September 29,1977, petitioner filed a second supplemental petition with
prayer for preliminary injunction, alleging that the actuations of respondent
SEC tended to deprive him of his right to due process, and "that all possible
questions on the facts now pending before the respondent Commission are now
before this Honorable Court which has the authority and the competence to act
on them as it may see fit." (Reno, pp. 927-928.)
Petitioner, in his memorandum, submits the following issues for resolution;
(1) whether or not the provisions of the amended by-laws of respondent
corporation, disqualifying a competitor from nomination or election to the
Board of Directors are valid and reasonable;
(2) whether or not respondent SEC gravely abused its discretion in denying
petitioner's request for an examination of the records of San Miguel
International, Inc., a fully owned subsidiary of San Miguel Corporation; and
(3) whether or not respondent SEC committed grave abuse of discretion in
allowing discussion of Item 6 of the Agenda of the Annual Stockholders'
Meeting on May 10, 1977, and the ratification of the investment in a foreign
corporation of the corporate funds, allegedly in violation of section 17-1/2 of
the Corporation Law.
I
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 by-law is a mere matter of judgment, and
one upon which reasonable minds must necessarily differ, a court would not be
warranted in substituting its judgment instead of the judgment of those who
are authorized to make by-laws and who have exercised their authority. 11
Petitioner claims that the amended by-laws are invalid and unreasonable
because they were tailored to suppress the minority and prevent them from
having representation in the Board", at the same time depriving petitioner of
his "vested right" to be voted for and to vote for a person of his choice as
director.
Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and
San Miguel Corporation content that ex. conclusion of a competitor from the
Board is legitimate corporate purpose, considering that being a competitor,
petitioner cannot devote an unselfish and undivided Loyalty to the corporation;
that it is essentially a preventive measure to assure stockholders of San Miguel
Corporation of reasonable protective from the unrestrained self-interest of
those charged with the promotion of the corporate enterprise; that access to
confidential information by a competitor may result either in the promotion of
the interest of the competitor at the expense of the San Miguel Corporation, or
the promotion of both the interests of petitioner and respondent San Miguel

Corporation, which may, therefore, result in a combination or agreement in


violation of Article 186 of the Revised Penal Code by destroying free
competition to the detriment of the consuming public. It is further argued that
there is not vested right of any stockholder under Philippine Law to be voted as
director of a corporation. It is alleged that petitioner, as of May 6, 1978, has
exercised, personally or thru two corporations owned or controlled by him,
control over the following shareholdings in San Miguel Corporation, vis.: (a)
John Gokongwei, Jr. 6,325 shares; (b) Universal Robina Corporation
738,647 shares; (c) CFC Corporation 658,313 shares, or a total of 1,403,285
shares. Since the outstanding capital stock of San Miguel Corporation, as of the
present date, is represented by 33,139,749 shares with a par value of P10.00,
the total shares owned or controlled by petitioner represents 4.2344% of the
total outstanding capital stock of San Miguel Corporation. It is also contended
that petitioner is the president and substantial stockholder of Universal Robina
Corporation and CFC Corporation, both of which are allegedly controlled by
petitioner and members of his family. It is also claimed that both the Universal
Robina Corporation and the CFC Corporation are engaged in businesses directly
and substantially competing with the alleged businesses of San Miguel
Corporation, and of corporations in which SMC has substantial investments.
ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S CORPORATIONS
AND SAN MIGUEL CORPORATION
According to respondent San Miguel Corporation, the areas of, competition are
enumerated in its Board the areas of competition are enumerated in its Board
Resolution dated April 28, 1978, thus:
Product Line Estimated MARKET
1977 SMC Robina-CFC

Share Total

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 CFC-Robina 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 selfdefense 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 selfgovernment being essential to enable the corporation to accomplish the
purposes of its creation. 13
In this jurisdiction, under section 21 of the Corporation Law, a corporation may
prescribe in its by-laws "the qualifications, duties and compensation of
directors, officers and employees ... " This must necessarily refer to a
qualification in addition to that specified by section 30 of the Corporation Law,
which provides that "every director must own in his right at least one share of
the capital stock of the stock corporation of which he is a director ... "
InGovernment v. El Hogar, 14 the Court sustained the validity of a provision in
the corporate by-law requiring that persons elected to the Board of Directors
must be holders of shares of the paid up value of P5,000.00, which shall be
held as security for their action, on the ground that section 21 of the
Corporation Law expressly gives the power to the corporation to provide in its
by-laws for the qualifications of directors and is "highly prudent and in
conformity with good practice. "
NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR
Any person "who buys stock in a corporation does so with the knowledge that
its affairs are dominated by a majority of the stockholders and that he impliedly
contracts that the will of the majority shall govern in all matters within the
limits of the act of incorporation and lawfully enacted by-laws and not forbidden
by law." 15 To this extent, therefore, the stockholder may be considered to have
"parted with his personal right or privilege to regulate the disposition of his
property which he has invested in the capital stock of the corporation, and
surrendered it to the will of the majority of his fellow incorporators. ... It cannot
therefore be justly said that the contract, express or implied, between the
corporation and the stockholders is infringed ... by any act of the former which
is authorized by a majority ... ." 16
Pursuant to section 18 of the Corporation Law, any corporation may amend its
articles of incorporation by a vote or written assent of the stockholders
representing at least two-thirds of the subscribed capital stock of the
corporation If the amendment changes, diminishes or restricts the rights of the
existing shareholders then the disenting minority has only one right, viz.: "to
object thereto in writing and demand payment for his share." Under section 22
of the same law, the owners of the majority of the subscribed capital stock may
amend or repeal any by-law or adopt new by-laws. It cannot be said, therefore,
that petitioner has a vested right to be elected director, in the face of the fact
that the law at the time such right as stockholder was acquired contained the

prescription that the corporate charter and the by-law shall be subject to
amendment, alteration and modification. 17
It being settled that the corporation has the power to provide for the
qualifications of its directors, the next question that must be considered is
whether the disqualification of a competitor from being elected to the Board of
Directors is a reasonable exercise of corporate authority.
A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS
SHAREHOLDERS
Although in the strict and technical sense, directors of a private corporation are
not regarded as trustees, there cannot be any doubt that their character is that
of a fiduciary insofar as the corporation and the stockholders as a body are
concerned. As agents entrusted with the management of the corporation for
the collective benefit of the stockholders, "they occupy a fiduciary relation, and
in this sense the relation is one of trust." 18 "The ordinary trust relationship of
directors of a corporation and stockholders", according to Ashaman v.
Miller, 19 "is not a matter of statutory or technical law. It springs from the fact
that directors have the control and guidance of corporate affairs and property
and hence of the property interests of the stockholders. Equity recognizes that
stockholders are the proprietors of the corporate interests and are ultimately
the only beneficiaries thereof * * *.
Justice Douglas, in Pepper v. Litton, 20 emphatically restated the standard of
fiduciary obligation of the directors of corporations, thus:
A director is a fiduciary. ... Their powers are powers in trust. ...
He who is in such fiduciary position cannot serve himself first
and his cestuis second. ... He cannot manipulate the affairs of
his corporation to their detriment and in disregard of the
standards of common decency. He cannot by the intervention
of a corporate entity violate the ancient precept against
serving two masters ... He cannot utilize his inside information
and strategic position for his own preferment. He cannot
violate rules of fair play by doing indirectly through the
corporation what he could not do so directly. He cannot violate
rules of fair play by doing indirectly though the corporation
what he could not do so directly. He cannot use his power for
his personal advantage and to the detriment of the
stockholders and creditors no matter how absolute in terms
that power may be and no matter how meticulous he is to
satisfy technical requirements. For that power is at all times
subject to the equitable limitation that it may not be exercised
for the aggrandizement, preference or advantage of the
fiduciary to the exclusion or detriment of the cestuis.

And in Cross v. West Virginia Cent, & P. R. R. Co.,

21

it was said:

... A person cannot serve two hostile and adverse master,


without detriment to one of them. A judge cannot be impartial
if personally interested in the cause. No more can a director.
Human nature is too weak -for this. Take whatever statute
provision you 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,
onACCOUNT 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." 24 This is
based upon the principle that where the director is so employed in the service
of a rival company, he cannot serve both, but must betray one or the other.
Such an amendment "advances the benefit of the corporation and is good." An
exception exists in New Jersey, where the Supreme Court held that the
Corporation Law in New Jersey prescribed the only qualification, and therefore
the corporation was not empowered to add additional qualifications. 25 This is
the exact opposite of the situation in the Philippines because as stated
heretofore, section 21 of the Corporation Law expressly provides that a

corporation may make by-laws for the qualifications of directors. Thus, it has
been held that an officer of a corporation cannot engage in a business in direct
competition with that of the corporation where he is a director by utilizing
information he has received as such officer, under "the established law that a
director or officer of a corporation may not enter into a competing enterprise
which cripples or injures the business of the corporation of which he is an
officer or director. 26
It is also well established that corporate officers "are not permitted to use their
position of trust and confidence to further their private interests." 27 In a case
where directors of a corporation cancelled a contract of the corporation for
exclusive sale of a foreign firm's products, and after establishing a rival
business, the directors entered into a new contract themselves with the foreign
firm for exclusive sale of its products, the court held that equity would regard
the new contract as an offshoot of the old contract and, therefore, for the
benefit of the corporation, as a "faultless fiduciary may not reap the fruits of his
misconduct to the exclusion of his principal. 28
The doctrine of "corporate opportunity" 29 is precisely a recognition by the
courts that the fiduciary standards could not be upheld where the fiduciary was
acting for two entities with competing interests. This doctrine rests
fundamentally on the unfairness, in particular circumstances, of an officer or
director taking advantage of an opportunity for his own personal profit when
the interest of the corporation justly calls for protection. 30
It is not denied that a member of the Board of Directors of the San Miguel
Corporation has access to sensitive and highly confidential information, such
as: (a) marketing strategies and pricing structure; (b) budget for expansion and
diversification; (c) research and development; and (d) sources of funding,
availability of personnel, proposals of mergers or tie-ups with other firms.
It is obviously to prevent the creation of an opportunity for an officer or director
of San Miguel Corporation, who is also the officer or owner of a competing
corporation, from taking advantage of the information which he acquires as
director to promote his individual or corporate interests to the prejudice of San
Miguel Corporation and its stockholders, that the questioned amendment of the
by-laws was made. Certainly, where two corporations are competitive in a
substantial sense, it would seem improbable, if not impossible, for the director,
if he were to discharge effectively his duty, to satisfy his loyalty to both
corporations and place the performance of his corporation duties above his
personal concerns.
Thus, in McKee & Co. v. First National Bank of San Diego, supra the court
sustained as valid and reasonable an amendment to the by-laws of a bank,
requiring that its directors should not be directors, officers, employees, agents,

nominees or attorneys of any other banking corporation, affiliate or subsidiary


thereof. Chief Judge Parker, in McKee, explained the reasons of the court, thus:
... A bank director has access to a great deal of information
concerning the business and plans of a bank which would
likely be injurious to the bank if known to another bank, and it
was reasonable and prudent to enlarge this minimum
disqualification to include any director, officer, employee,
agent, nominee, or attorney of any other bank in California.
The Ashkins case, supra, specifically recognizes protection
against rivals and others who might acquire information
which might be used against the interests of the corporation
as a legitimate object of by-law protection. With respect to
attorneys or persons associated with a firm which is attorney
for another bank, in addition to the direct conflict or potential
conflict of interest, there is also the danger of inadvertent
leakage of confidential information through casual office
discussions or accessibility of files. Defendant's directors
determined that its welfare was best protected if this
opportunity for conflicting loyalties and potential misuse and
leakage of confidential information was foreclosed.
In McKee the Court further listed qualificational by-laws upheld by the courts,
as follows:
(1) A director shall not be directly or indirectly interested as a
stockholder in any other firm, company, or association which
competes with the subject corporation.
(2) A director shall not be the immediate member of the family
of any stockholder in any other firm, company, or association
which competes with the subject corporation,
(3) A director shall not be an officer, agent, employee,
attorney, or trustee in any other firm, company, or association
which compete with the subject corporation.
(4) A director shall be of good moral character as an essential
qualification to holding office.
(5) No person who is an attorney against the corporation in a
law suit is eligible for service on the board. (At p. 7.)
These are not based on theorical abstractions but on human experience that
a person cannot serve two hostile masters without detriment to one of them.

The offer and assurance of petitioner that to avoid any possibility of his taking
unfair advantage of his position as director of San Miguel Corporation, he would
absent himself from meetings at which confidential matters would be
discussed, would not detract from the validity and reasonableness of the bylaws here involved. Apart from the impractical results that would ensue from
such arrangement, it would be inconsistent with petitioner's primary motive in
running for board membership which is to protect his investments in San
Miguel Corporation. More important, such a proposed norm of conduct would be
against all accepted principles underlying a director's duty of fidelity to the
corporation, for the policy of the law is to encourage and enforce responsible
corporate management. As explained by Oleck: 31 "The law win not tolerate the
passive attitude of directors ... without active and conscientious participation in
the managerial functions of the company. As directors, it is their duty to control
and supervise the day to day business activities of the company or to
promulgate definite policies and rules of guidance with a vigilant eye toward
seeing to it that these policies are carried out. It is only then that directors may
be said to have fulfilled their duty of fealty to the corporation."
Sound principles of corporate management counsel against sharing sensitive
information with a director whose fiduciary duty of loyalty may well require that
he disclose this information to a competitive arrival. These dangers are
enhanced considerably where the common director such as the petitioner is a
controlling stockholder of two of the competing corporations. It would seem
manifest that in such situations, the director has an economic incentive to
appropriate for the benefit of his own corporation the corporate plans and
policies of the corporation where he sits as director.
Indeed, access by a competitor to confidential information regarding marketing
strategies and pricing policies of San Miguel Corporation would subject the
latter to a competitive disadvantage and unjustly enrich the competitor, for
advance knowledge by the competitor of the strategies for the development of
existing or new markets of existing or new products could enable said
competitor to utilize such knowledge to his advantage. 32
There is another important consideration in determining whether or not the
amended by-laws are reasonable. The Constitution and the law prohibit
combinations in restraint of trade or unfair competition. Thus, section 2 of
Article XIV of the Constitution provides: "The State shall regulate or prohibit
private monopolies when the public interest so requires. No combinations in
restraint of trade or unfair competition shall be snowed."
Article 186 of the Revised Penal Code also provides:
Art. 186. Monopolies and combinations in restraint of trade.
The penalty of prision correccional in its minimum period or a

fine ranging from two hundred to six thousand pesos, or both,


shall be imposed upon:
1. Any person who shall enter into any contract or agreement
or shall take part in any conspiracy or combination in the form
of a trust or otherwise, in restraint of trade or commerce or to
prevent by artificial means free competition in the market.
2. Any person who shag monopolize any merchandise or
object of trade or commerce, or shall combine with any other
person or persons to monopolize said merchandise or object in
order to alter the price thereof by spreading false rumors or
making use of any other artifice to restrain free competition in
the market.
3. Any person who, being a manufacturer, producer, or
processor of any merchandise or object of commerce or an
importer of any merchandise or object of commerce from any
foreign country, either as principal or agent, wholesale or
retailer, shall combine, conspire or agree in any manner with
any person likewise engaged in the manufacture, production,
processing, assembling or importation of such merchandise or
object of commerce or with any other persons not so similarly
engaged for the purpose of making transactions prejudicial to
lawful commerce, or of increasing the market price in any part
of the Philippines, or any such merchandise or object of
commerce manufactured, produced, processed, assembled in
or imported into the Philippines, or of any article in the
manufacture of which such manufactured, produced,
processed, or imported merchandise or object of commerce is
used.
There are other legislation in this jurisdiction, which prohibit monopolies and
combinations in restraint of trade. 33
Basically, these anti-trust laws or laws against monopolies or combinations in
restraint of trade are aimed at raising levels of competition by improving the
consumers' effectiveness as the final arbiter in free markets. These laws are
designed to preserve free and unfettered competition as the rule of trade. "It
rests on the premise that the unrestrained interaction of competitive forces will
yield the best allocation of our economic resources, the lowest prices and the
highest quality ... ." 34 they operate to forestall concentration of economic
power. 35 The law against monopolies and combinations in restraint of trade is
aimed at contracts and combinations that, by reason of the inherent nature of
the contemplated acts, prejudice the public interest by unduly restraining
competition or unduly obstructing the course of trade. 36

The terms "monopoly", "combination in restraint of trade" and "unfair


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

between competitors other than the suppression of


competition. 43 (Emphasis supplied.)
According to the Report of the House Judiciary Committee of the U. S. Congress
on section 9 of the Clayton Act, it was established that: "By means of the
interlocking directorates one man or group of men have been able to dominate
and control a great number of corporations ... to the detriment of the small
ones dependent upon them and to the injury of the public. 44
Shared information on cost accounting may lead to price fixing. Certainly,
shared information on production, orders, shipments, capacity and inventories
may lead to control of production for the purpose of controlling prices.
Obviously, if a competitor has access to the pricing policy and cost conditions
of the products of San Miguel Corporation, the essence of competition in a free
market for the purpose of serving the lowest priced goods to the consuming
public would be frustrated, The competitor could so manipulate the prices of his
products or vary its marketing strategies by region or by brand in order to get
the most out of the consumers. Where the two competing firms control a
substantial segment of the market this could lead to collusion and combination
in restraint of trade. Reason and experience point to the inevitable conclusion
that the inherent tendency of interlocking directorates between companies that
are related to each other as competitors is to blunt the edge of rivalry between
the corporations, to seek out ways of compromising opposing interests, and
thus eliminate competition. As respondent SMC aptly observes, knowledge by
CFC-Robina of SMC's costs in various industries and regions in the country win
enable the former to practice price discrimination. CFC-Robina can segment the
entire consuming population by geographical areas or income groups and
change varying prices in order to maximize profits from every market segment.
CFC-Robina could determine the most profitable volume at which it could
produce for every product line in which it competes with SMC. Access to SMC
pricing policy by CFC-Robina would in effect destroy free competition and
deprive the consuming public of opportunity to buy goods of the highest
possible quality at the lowest prices.
Finally, considering that both Robina and SMC are, to a certain extent, engaged
in agriculture, then the election of petitioner to the Board of SMC may
constitute a violation of the prohibition contained in section 13(5) of the
Corporation Law. Said section provides in part that "any stockholder of more
than one corporation organized for the purpose of engaging in agriculture may
hold his stock in such corporations solely for investment and not for the
purpose of bringing about or attempting to bring about a combination to
exercise control of incorporations ... ."
Neither are We persuaded by the claim that the by-law was Intended to prevent
the candidacy of petitioner for election to the Board. If the by-law were to be

applied in the case of one stockholder but waived in the case of another, then it
could be reasonably claimed that the by-law was being applied in a
discriminatory manner. However, the by law, by its terms, applies to all
stockholders. The equal protection clause of the Constitution requires only that
the by-law operate equally upon all persons of a class. Besides, before
petitioner can be declared ineligible to run for director, there must be hearing
and evidence must be submitted to bring his case within the ambit of the
disqualification. Sound principles of public policy and management, therefore,
support the view that a by-law which disqualifies a competition from election to
the Board of Directors of another corporation is valid and reasonable.
In the absence of any legal prohibition or overriding public policy, wide latitude
may be accorded to the corporation in adopting measures to protect legitimate
corporation interests. Thus, "where the reasonableness of a by-law is a mere
matter of judgment, and upon which reasonable minds must necessarily differ,
a court would not be warranted in substituting its judgment instead of the
judgment of those who are authorized to make by-laws and who have
expressed their authority. 45
Although it is asserted that the amended by-laws confer on the present Board
powers to perpetua themselves in power such fears appear to be misplaced.
This power, but is very nature, is subject to certain well established limitations.
One of these is inherent in the very convert and definition of the terms
"competition" and "competitor". "Competition" implies a struggle for advantage
between two or more forces, each possessing, in substantially similar if not
Identical degree, certain characteristics essential to the business sought. It
means an independent endeavor of two or more persons to obtain the business
patronage of a third by offering more advantageous terms as an inducement to
secure trade. 46 The test must be whether the business does in fact compete,
not whether it is capable of an indirect and highly unsubstantial duplication of
an isolated or non-characteristics activity. 47 It is, therefore, obvious that not
every person or entity engaged in business of the same kind is a competitor.
Such factors as quantum and place of business, Identity of products and area of
competition should be taken into consideration. It is, therefore, necessary to
show that petitioner's business covers a substantial portion of the same
markets for similar products to the extent of not less than 10% of respondent
corporation's market for competing products. While We here sustain the validity
of the amended by-laws, it does not follow as a necessary consequence that
petitioner is ipso facto disqualified. Consonant with the requirement of due
process, there must be due hearing at which the petitioner must be given the
fullest opportunity to show that he is not covered by the disqualification. As
trustees of the corporation and of the stockholders, it is the responsibility of
directors to act with fairness to the stockholders. 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 EuroDollar 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. 52This right is predicated upon the necessity of selfprotection. 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. 63 Likewise, inspection of the books of an allied
corporation by stockholder of the parent company which owns all the stock of
the subsidiary has been refused on the ground that the stockholder was not
within the class of "persons having an interest." 64
In the Nash case, 65 The Supreme Court of New York held that the contractual
right of former stockholders to inspect books and records of the corporation
included the right to inspect corporation's subsidiaries' books and records
which were in corporation's possession and control in its office in New York."
In the Bailey case, 66 stockholders of a corporation were held entitled to inspect
the records of a controlled subsidiary corporation which used the same offices
and had Identical officers and directors.
In his "Urgent Motion for Production and Inspection of Documents" before
respondent SEC, petitioner contended that respondent corporation "had been
attempting to suppress information for the stockholders" and that petitioner,
"as stockholder of respondent corporation, is entitled to copies of some
documents which for some reason or another, respondent corporation is very
reluctant in revealing to the petitioner notwithstanding the fact that no harm
would be caused thereby to the corporation." 67 There is no question that
stockholders are entitled to inspect the books and records of a corporation in
order to investigate the conduct of the management, determine the financial
condition of the corporation, and generally take an account of the stewardship
of the officers and directors. 68
In the case at bar, considering that the foreign subsidiary is wholly owned by
respondent San Miguel Corporation and, therefore, under its control, it would be
more in accord with equity, good faith and fair dealing to construe the statutory
right of petitioner as stockholder to inspect the books and records of the
corporation as extending to books and records of such wholly subsidiary which
are in respondent corporation's possession and control.
IV

Whether or not respondent SEC gravely abused its discretion in allowing the
stockholders of respondent corporation to ratify the investment of corporate
funds in a foreign corporation
Petitioner reiterates his contention in SEC Case No. 1423 that respondent
corporation invested corporate funds in SMI without prior authority of the
stockholders, thus violating section 17-1/2 of the Corporation Law, and alleges
that respondent SEC should have investigated the charge, being a statutory
offense, instead of allowing ratification of the investment by the stockholders.
Respondent SEC's position is that submission of the investment to the
stockholders for ratification is a sound corporate practice and should not be
thwarted but encouraged.
Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds
in any other corporation or business or for any purpose other than the main
purpose for which it was organized" provided that its Board of Directors has
been so authorized by the affirmative vote of stockholders holding shares
entitling them to exercise at least two-thirds of the voting power. If the
investment is made in pursuance of the corporate purpose, it does not need the
approval of the stockholders. It is only when the purchase of shares is done
solely for investment and not to accomplish the purpose of its incorporation
that the vote of approval of the stockholders holding shares entitling them to
exercise at least two-thirds of the voting power is necessary. 69
As stated by respondent corporation, the purchase of beer manufacturing
facilities by SMC was an investment in the same business stated as its main
purpose in its Articles of Incorporation, which is to manufacture and market
beer. It appears that the original investment was made in 1947-1948, when
SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong
(Hongkong Brewery & Distillery, Ltd.) for the manufacture and marketing of San
Miguel beer thereat. Restructuring of the investment was made in 1970-1971
thru the organization of SMI in Bermuda as a tax free reorganization.
Under these circumstances, the ruling in De la Rama v. Manao Sugar Central
Co., Inc., supra, appears relevant. In said case, one of the issues was the
legality of an investment made by Manao Sugar Central Co., Inc., without prior
resolution approved by the affirmative vote of 2/3 of the stockholders' voting
power, in the Philippine Fiber Processing Co., Inc., a company engaged in the
manufacture of sugar bags. The lower court said that "there is more logic in the
stand that if the investment is made in a corporation whose business is
important to the investing corporation and would aid it in its purpose, to require
authority of the stockholders would be to unduly curtail the power of the Board
of Directors." This Court affirmed the ruling of the court a quo on the matter
and, quoting Prof. Sulpicio S. Guevara, said:

"j. Power to acquire or dispose of shares or securities. A


private corporation, in order to accomplish is purpose as
stated in its articles of incorporation, and subject to the
limitations imposed by the Corporation Law, has the power to
acquire, hold, mortgage, pledge or dispose of shares, bonds,
securities, and other evidence of indebtedness of any
domestic or foreign corporation. Such an act, if done in
pursuance of the corporate purpose, does not need the
approval of stockholders; but when the purchase of shares of
another corporation is done solely for investment and not to
accomplish the purpose of its incorporation, the vote of
approval of the stockholders is necessary. In any case, the
purchase of such shares or securities must be subject to the
limitations established by the Corporations law; namely, (a)
that no agricultural or mining corporation shall be restricted to
own not more than 15% of the voting stock of nay agricultural
or mining corporation; and (c) that such holdings shall be
solely for investment and not for the purpose of bringing about
a monopoly in any line of commerce of combination in
restraint of trade." The Philippine Corporation Law by Sulpicio
S. Guevara, 1967 Ed., p. 89) (Emphasis supplied.)
40. Power to invest corporate funds. A private corporation
has the power to invest its corporate funds "in any other
corporation or business, or for any purpose other than the
main purpose for which it was organized, provide that 'its
board of directors has been so authorized in a resolution by
the affirmative vote of stockholders holding shares in the
corporation entitling them to exercise at least two-thirds of the
voting power on such a propose at a stockholders' meeting
called for that purpose,' and provided further, that no
agricultural or mining corporation shall in anywise be
interested in any other agricultural or mining
corporation. When the investment is necessary to accomplish
its purpose or purposes as stated in its articles of
incorporation the approval of the stockholders is not
necessary."" (Id., p. 108) (Emphasis ours.) (pp. 258-259).
Assuming arguendo that the Board of Directors of SMC had no authority to
make the assailed investment, there is no question that a corporation, like an
individual, may ratify and thereby render binding upon it the originally
unauthorized acts of its officers or other agents. 70 This is true because the
questioned investment is neither contrary to law, morals, public order or public
policy. It is a corporate transaction or contract which is within the corporate
powers, but which is defective from a supported failure to observe in its
execution the. requirement of the law that the investment must be authorized
by the affirmative vote of the stockholders holding two-thirds of the voting

power. This requirement is for the benefit of the stockholders. The stockholders
for whose benefit the requirement was enacted may, therefore, ratify the
investment and its ratification by said stockholders obliterates any defect which
it may have had at the outset. "Mere ultra vires acts", said this Court in
Pirovano, 71 "or those which are not illegal and void ab initio, but are not merely
within the scope of the articles of incorporation, are merely voidable and may
become binding and enforceable when ratified by the stockholders.
Besides, the investment was for the purchase of beer manufacturing
andMARKETING 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.

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.

WHEREFORE, judgment is hereby rendered as follows:

Makasiar, Santos Abad Santos and De Castro, JJ., concur.

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.

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

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.

G.R. No. 117188 August 7, 1997

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.

ROMERO, J.:

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.

LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION,


INC., petitioner,
vs.
HON. COURT OF APPEALS, HOME INSURANCE AND GUARANTY
CORPORATION, EMDEN ENCARNACION and HORATIO
AYCARDO, respondents.

May the failure of a corporation to file its by-laws within one month from the
date of its incorporation, as mandated by Section 46 of the Corporation Code,
result in its automatic dissolution?
This is the issue raised in this petition for review on certiorari of the
Decision 1 of the Court of Appeals affirming the decision of the Home Insurance
and Guaranty Corporation (HIGC). This quasi-judicial body recognized Loyola
Grand Villas Homeowners Association (LGVHA) as the sole homeowners'
association in Loyola Grand Villas, a dulyREGISTERED subdivision in Quezon

City and Marikina City that was owned and developed by Solid Homes, Inc. It
revoked the certificates ofREGISTRATION issued to Loyola Grand Villas
homeowners (North) Association Incorporated (the North Association for
brevity) and Loyola Grand Villas Homeowners (South) Association Incorporated
(the South Association).
LGVHAI was organized on February 8, 1983 as the association of homeowners
and residents of the Loyola Grand Villas. It was registered with the Home
Financing Corporation, the predecessor of herein respondent HIGC, as the sole
homeowners' organization in the said subdivision under Certificate of
Registration No. 04-197. It was organized by the developer of the subdivision
and its first president was Victorio V. Soliven, himself the owner of the
developer. For unknown reasons, however, LGVHAI did not file its corporate bylaws.
Sometime in 1988, the officers of the LGVHAI tried to register its by-laws. They
failed to do so. 2 To the officers' consternation, they discovered that there were
two other organizations within the subdivision the North Association and the
South Association. According to private respondents, a non-resident and Soliven
himself, respectively headed these associations. They also discovered that
these associations had five (5) registered homeowners each who were also the
incorporators, directors and officers thereof. None of the members of the
LGVHAI was listed as member of the North Association while three (3) members
of LGVHAI were listed as members of the South Association. 3 The North
Association was registered with the HIGC on February 13, 1989 under
Certificate of Registration No. 04-1160 covering Phases West II, East III, West III
and East IV. It submitted its by-laws on December 20, 1988.
In July, 1989, when Soliven inquired about the status of LGVHAI, Atty. Joaquin A.
Bautista, the head of the legal department of the HIGC, informed him that
LGVHAI had been automatically dissolved for two reasons. First, it did not
submit its by-laws within the period required by the Corporation Code and,
second, there was non-user of corporate charter because HIGC had not
received any report on the association's activities. Apparently, this information
resulted in theREGISTRATION of the South Association with the HIGC on July
27, 1989 covering Phases West I, East I and East II. It filed its by-laws on July
26, 1989.
These developments prompted the officers of the LGVHAI to lodge a complaint
with the HIGC. They questioned the revocation of LGVHAI's certificate of
registration without due notice and hearing and concomitantly prayed for the
cancellation of the certificates of registration of the North and South
Associations by reason of the earlier issuance of a certificate of registration in
favor of LGVHAI.

On January 26, 1993, after due notice and hearing, private respondents
obtained a favorable ruling from HIGC Hearing Officer Danilo C. Javier who
disposed of HIGC Case No. RRM-5-89 as follows:
WHEREFORE, judgment is hereby rendered recognizing the Loyola
Grand Villas Homeowners Association, Inc., under Certificate of
Registration No. 04-197 as the duly registered and existing
homeowners association for Loyola Grand Villas homeowners, and
declaring the Certificates of Registration of Loyola Grand Villas
Homeowners (North) Association, Inc. and Loyola Grand Villas
Homeowners (South) Association, Inc. as hereby revoked or cancelled;
that the receivership be terminated and the Receiver is hereby ordered
to render anACCOUNTING and turn-over to Loyola Grand Villas
Homeowners Association, Inc., all assets and records of the Association
now under his custody and possession.
The South Association appealed to the Appeals Board of the HIGC. In its
Resolution of September 8, 1993, the Board 4 dismissed the appeal for lack of
merit.
Rebuffed, the South Association in turn appealed to the Court of Appeals,
raising two issues. First, whether or not LGVHAI's failure to file its by-laws
within the period prescribed by Section 46 of the Corporation Code resulted in
the automatic dissolution of LGVHAI. Second, whether or not two homeowners'
associations may be authorized by the HIGC in one "sprawling subdivision."
However, in the Decision of August 23, 1994 being assailed here, the Court of
Appeals affirmed the Resolution of the HIGC Appeals Board.
In resolving the first issue, the Court of Appeals held that under the Corporation
Code, a private corporation commences to have corporate existence and
juridical personality from the date the Securities and Exchange Commission
(SEC) issues a certificate of incorporation under its official seal. The
requirement for the filing of by-laws under Section 46 of the Corporation Code
within one month from official notice of the issuance of the certificate of
incorporation presupposes that it is already incorporated, although it may file
its by-laws with its articles of incorporation. Elucidating on the effect of a
delayed filing of by-laws, the Court of Appeals said:
We also find nothing in the provisions cited by the petitioner, i.e.,
Section 46 and 22, Corporation Code, or in any other provision of the
Code and other laws which provide or at least imply that failure to file
the by-laws results in an automatic dissolution of the corporation.
While Section 46, in prescribing that by-laws must be adopted within
the period prescribed therein, may be interpreted as a mandatory
provision, particularly because of the use of the word "must," its

meaning cannot be stretched to support the argument that automatic


dissolution results from non-compliance.
We realize that Section 46 or other provisions of the Corporation Code
are silent on the result of the failure to adopt and file the by-laws
within the required period. Thus, Section 46 and other related
provisions of the Corporation Code are to be construed with Section 6
(1) of P.D. 902-A. This section empowers the SEC to suspend or revoke
certificates of registration on the grounds listed therein. Among the
grounds stated is the failure to file by-laws (see also II Campos: The
Corporation Code, 1990 ed., pp. 124-125). Such suspension or
revocation, the same section provides, should be made upon proper
notice and hearing. Although P.D. 902-A refers to the SEC, the same
principles and procedures apply to the public respondent HIGC as it
exercises its power to revoke or suspend the certificates of registration
or homeowners association. (Section 2 [a], E.O. 535, series 1979,
transferred the powers and authorities of the SEC over homeowners
associations to the HIGC.)
We also do not agree with the petitioner's interpretation that Section
46, Corporation Code prevails over Section 6, P.D. 902-A and that the
latter is invalid because it contravenes the former. There is no basis for
such interpretation considering that these two provisions are not
inconsistent with each other. They are, in fact, complementary to each
other so that one cannot be considered as invalidating the other.
The Court of Appeals added that, as there was no showing that the registration
of LGVHAI had been validly revoked, it continued to be the duly registered
homeowners' association in the Loyola Grand Villas. More importantly, the
South Association did not dispute the fact that LGVHAI had been organized and
that, thereafter, it transacted business within the period prescribed by law.
On the second issue, the Court of Appeals reiterated its previous ruling 5 that
the HIGC has the authority to order the holding of a referendum to determine
which of two contending associations should represent the entire community,
village or subdivision.
Undaunted, the South Association filed the instant petition for review
on certiorari. It elevates as sole issue for resolution the first issue it had raised
before the Court of Appeals, i.e., whether or not the LGVHAI's failure to file its
by-laws within the period prescribed by Section 46 of the Corporation Code had
the effect of automatically dissolving the said corporation.
Petitioner contends that, since Section 46 uses the word "must" with respect to
the filing of by-laws, noncompliance therewith would result in "self-extinction"
either due to non-occurrence of a suspensive condition or the occurrence of a

resolutory condition "under the hypothesis that (by) the issuance of the
certificate of registration alone the corporate personality is deemed already
formed." It asserts that the Corporation Code provides for a "gradation of
violations of requirements." Hence, Section 22 mandates that the corporation
must be formally organized and should commence transaction within two years
from date of incorporation. Otherwise, the corporation would be deemed
dissolved. On the other hand, if the corporation commences operations but
becomes continuously inoperative for five years, then it may be suspended or
its corporate franchise revoked.
Petitioner concedes that Section 46 and the other provisions of the Corporation
Code do not provide for sanctions for non-filing of the by-laws. However, it
insists that no sanction need be provided "because the mandatory nature of
the provision is so clear that there can be no doubt about its being an essential
attribute of corporate birth." To petitioner, its submission is buttressed by the
facts that the period for compliance is "spelled out distinctly;" that the
certification of the SEC/HIGC must show that the by-laws are not inconsistent
with the Code, and that a copy of the by-laws "has to be attached to the
articles of incorporation." Moreover, no sanction is provided for because "in the
first place, no corporate identity has been completed." Petitioner asserts that
"non-provision for remedy or sanction is itself the tacit proclamation that noncompliance is fatal and no corporate existence had yet evolved," and therefore,
there was "no need to proclaim its demise." 6 In a bid to convince the Court of
its arguments, petitioner stresses that:
. . . the word MUST is used in Sec. 46 in its universal literal meaning
and corollary human implication its compulsion is integrated in its
very essence MUST is always enforceable by the inevitable
consequence that is, "OR ELSE". The use of the word MUST in Sec.
46 is no exception it means file the by-laws within one month after
notice of issuance of certificate of registration OR ELSE. The OR ELSE,
though not specified, is inextricably a part of MUST . Do this or if you
do not you are "Kaput". The importance of the by-laws to corporate
existence compels such meaning for as decreed the by-laws is "the
government" of the corporation. Indeed, how can the corporation do
any lawful act as such without by-laws. Surely, no law is indeed to
create chaos. 7
Petitioner asserts that P.D. No. 902-A cannot exceed the scope and power of the
Corporation Code which itself does not provide sanctions for non-filing of bylaws. For the petitioner, it is "not proper to assess the true meaning of Sec. 46 .
. . on an unauthorized provision on such matter contained in the said decree."
In their comment on the petition, private respondents counter that the
requirement of adoption of by-laws is not mandatory. They point to P.D. No.
902-A as having resolved the issue of whether said requirement is mandatory

or merely directory. Citing Chung Ka Bio v. Intermediate Appellate


Court, 8 private respondents contend that Section 6(I) of that decree provides
that non-filing of by-laws is only a ground for suspension or revocation of the
certificate of registration of corporations and, therefore, it may not result in
automatic dissolution of the corporation. Moreover, the adoption and filing of
by-laws is a condition subsequent which does not affect the corporate
personality of a corporation like the LGVHAI. This is so because Section 9 of the
Corporation Code provides that the corporate existence and juridical
personality of a corporation begins from the date the SEC issues a certificate of
incorporation under its official seal. Consequently, even if the by-laws have not
yet been filed, a corporation may be considered a de facto corporation. To
emphasize the fact the LGVHAI was registered as the sole homeowners'
association in the Loyola Grand Villas, private respondents point out that
membership in the LGVHAI was an "unconditional restriction in the deeds of
sale signed by lot buyers."
In its reply to private respondents' comment on the petition, petitioner
reiterates its argument that the word " must" in Section 46 of the Corporation
Code is mandatory. It adds that, before the ruling in Chung Ka Bio
v.Intermediate Appellate Court could be applied to this case, this Court must
first resolve the issue of whether or not the provisions of P.D. No. 902-A
prescribing the rules and regulations to implement the Corporation Code can
"rise above and change" the substantive provisions of the Code.
The pertinent provision of the Corporation Code that is the focal point of
controversy in this case states:
Sec. 46. Adoption of by-laws. Every corporation formed under this
Code, must within one (1) month after receipt of official notice of the
issuance of its certificate of incorporation by the Securities and
Exchange Commission, adopt a code of by-laws for its government not
inconsistent with this Code. For the adoption of by-laws by the
corporation, the affirmative vote of the stockholders representing at
least a majority of the outstanding capital stock, or of at least a
majority of the members, in the case of non-stock corporations, shall
be necessary. The by-laws shall be signed by the stockholders or
members voting for them and shall be kept in the principal office of the
corporation, subject to the stockholders or members voting for them
and shall be kept in the principal office of the corporation, subject to
inspection of the stockholders or members during office hours; and a
copy thereof, shall be filed with the Securities and Exchange
Commission which shall be attached to the original articles of
incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws
may be adopted and filed prior to incorporation; in such case, such by-

laws shall be approved and signed by all the incorporators and


submitted to the Securities and Exchange Commission, together with
the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by the
Securities and Exchange Commission of a certification that the by-laws
are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing the
by-laws or any amendment thereto of any bank, banking institution,
building and loan association, trust company, insurance company,
public utility, educational institution or other special corporations
governed by special laws, unless accompanied by a certificate of the
appropriate government agency to the effect that such by-laws or
amendments are in accordance with law.
As correctly postulated by the petitioner, interpretation of this provision of law
begins with the determination of the meaning and import of the word "must" in
this section Ordinarily, the word "must" connotes an imperative act or operates
to impose a duty which may be enforced. 9 It is synonymous with "ought" which
connotes compulsion or mandatoriness. 10 However, the word "must" in a
statute, like "shall," is not always imperative. It may be consistent with an
exercise of discretion. In this jurisdiction, the tendency has been to interpret
"shall" as the context or a reasonable construction of the statute in which it is
used demands or requires. 11 This is equally true as regards the word "must."
Thus, if the languages of a statute considered as a whole and with due regard
to its nature and object reveals that the legislature intended to use the words
"shall" and "must" to be directory, they should be given that meaning. 12
In this respect, the following portions of the deliberations of the Batasang
Pambansa No. 68 are illuminating:
MR. FUENTEBELLA. Thank you, Mr. Speaker.
On page 34, referring to the adoption of by-laws, are we made to
understand here, Mr. Speaker, that by-laws must immediately be filed
within one month after the issuance? In other words, would this be
mandatory or directory in character?
MR. MENDOZA. This is mandatory.
MR. FUENTEBELLA. It being mandatory, Mr. Speaker, what would be the
effect of the failure of the corporation to file these by-laws within one
month?

MR. MENDOZA. There is a provision in the latter part of the Code which
identifies and describes the consequences of violations of any
provision of this Code. One such consequences is the dissolution of the
corporation for its inability, or perhaps, incurring certain penalties.
MR. FUENTEBELLA. But it will not automatically amount to a dissolution
of the corporation by merely failing to file the by-laws within one
month. Supposing the corporation was late, say, five days, what would
be the mandatory penalty?
MR. MENDOZA. I do not think it will necessarily result in the automatic
or ipso facto dissolution of the corporation. Perhaps, as in the case, as
you suggested, in the case of El Hogar Filipino where a quo
warranto action is brought, one takes into account the gravity of the
violation committed. If the by-laws were late the filing of the by-laws
were late by, perhaps, a day or two, I would suppose that might be a
tolerable delay, but if they are delayed over a period of months as is
happening now because of the absence of a clear requirement that
by-laws must be completed within a specified period of time, the
corporation must suffer certain consequences. 13
This exchange of views demonstrates clearly that automatic corporate
dissolution for failure to file the by-laws on time was never the intention of the
legislature. Moreover, even without resorting to the records of deliberations of
the Batasang Pambansa, the law itself provides the answer to the issue
propounded by petitioner.
Taken as a whole and under the principle that the best interpreter of a statute is
the statute itself (optima statuli interpretatix est ipsum statutum), 14 Section 46
aforequoted reveals the legislative intent to attach a directory, and not
mandatory, meaning for the word "must" in the first sentence thereof. Note
should be taken of the second paragraph of the law which allows the filing of
the by-laws even prior to incorporation. This provision in the same section of
the Code rules out mandatory compliance with the requirement of filing the bylaws "within one (1) month after receipt of official notice of the issuance of its
certificate of incorporation by the Securities and Exchange Commission." It
necessarily follows that failure to file the by-laws within that period does not
imply the "demise" of the corporation. By-laws may be necessary for the
"government" of the corporation but these are subordinate to the articles of
incorporation as well as to the Corporation Code and related statutes. 15 There
are in fact cases where by-laws are unnecessary to corporate existence or to
the valid exercise of corporate powers, thus:
In the absence of charter or statutory provisions to the contrary, bylaws are not necessary either to the existence of a corporation or to
the valid exercise of the powers conferred upon it, certainly in all cases

where the charter sufficiently provides for the government of the body;
and even where the governing statute in express terms confers upon
the corporation the power to adopt by-laws, the failure to exercise the
power will be ascribed to mere nonaction which will not render void
any acts of the corporation which would otherwise be
valid. 16 (Emphasis supplied.)
As Fletcher aptly puts it:
It has been said that the by-laws of a corporation are the rule of its life,
and that until by-laws have been adopted the corporation may not be
able to act for the purposes of its creation, and that the first and most
important duty of the members is to adopt them. This would seem to
follow as a matter of principle from the office and functions of by-laws.
Viewed in this light, the adoption of by-laws is a matter of practical, if
not one of legal, necessity. Moreover, the peculiar circumstances
attending the formation of a corporation may impose the obligation to
adopt certain by-laws, as in the case of a close corporation organized
for specific purposes. And the statute or general laws from which the
corporation derives its corporate existence may expressly require it to
make and adopt by-laws and specify to some extent what they shall
contain and the manner of their adoption. The mere fact, however, of
the existence of power in the corporation to adopt by-laws does not
ordinarily and of necessity make the exercise of such power essential
to its corporate life, or to the validity of any of its acts. 17
Although the Corporation Code requires the filing of by-laws, it does not
expressly provide for the consequences of the non-filing of the same within the
period provided for in Section 46. However, such omission has been rectified by
Presidential Decree No. 902-A, the pertinent provisions on the jurisdiction of the
SEC of which state:
Sec. 6. In order to effectively exercise such jurisdiction, the
Commission shall possess the following powers:
xxx xxx xxx
(1) To suspend, or revoke, after proper notice and hearing, the
franchise or certificate of registration of corporations, partnerships or
associations, upon any of the grounds provided by law, including the
following:
xxx xxx xxx
5. Failure to file by-laws within the required period;

xxx xxx xxx


In the exercise of the foregoing authority and jurisdiction of the
Commission or by a Commissioner or by such other bodies, boards,
committees and/or any officer as may be created or designated by the
Commission for the purpose. The decision, ruling or order of any such
Commissioner, bodies, boards, committees and/or officer may be
appealed to the Commission sitting en banc within thirty (30) days
after receipt by the appellant of notice of such decision, ruling or order.
The Commission shall promulgate rules of procedures to govern the
proceedings, hearings and appeals of cases falling with its jurisdiction.
The aggrieved party may appeal the order, decision or ruling of the
Commission sitting en banc to the Supreme Court by petition for
review in accordance with the pertinent provisions of the Rules of
Court.
Even under the foregoing express grant of power and authority, there can be
no automatic corporate dissolutionsimply because the incorporators failed to
abide by the required filing of by-laws embodied in Section 46 of the
Corporation Code. There is no outright "demise" of corporate existence. Proper
notice and hearing are cardinal components of due process in any democratic
institution, agency or society. In other words, the incorporators must be given
the chance to explain their neglect or omission and remedy the same.
That the failure to file by-laws is not provided for by the Corporation Code but
in another law is of no moment. P.D. No. 902-A, which took effect immediately
after its promulgation on March 11, 1976, is very much apposite to the Code.
Accordingly, the provisions abovequoted supply the law governing the situation
in the case at bar, inasmuch as the Corporation Code and P.D. No. 902-A are
statutes in pari materia. Interpretare et concordare legibus est optimus
interpretandi. Every statute must be so construed and harmonized with other
statutes as to form a uniform system of jurisprudence. 18
As the "rules and regulations or private laws enacted by the corporation to
regulate, govern and control its own actions, affairs and concerns and its
stockholders or members and directors and officers with relation thereto and
among themselves in their relation to it," 19 by-laws are indispensable to
corporations in this jurisdiction. These may not be essential to corporate birth
but certainly, these are required by law for an orderly governance and
management of corporations. Nonetheless, failure to file them within the period
required by law by no means tolls the automatic dissolution of a corporation.
In this regard, private respondents are correct in relying on the
pronouncements of this Court in Chung Ka Bio v.Intermediate Appellate
Court, 20 as follows:

. . . . Moreover, failure to file the by-laws does not automatically


operate to dissolve a corporation but is now considered only a ground
for such dissolution.
Section 19 of the Corporation Law, part of which is now Section 22 of
the Corporation Code, provided that the powers of the corporation
would cease if it did not formally organize and commence the
transaction of its business or the continuation of its works within two
years from date of its incorporation. Section 20, which has been
reproduced with some modifications in Section 46 of the Corporation
Code, expressly declared that "every corporation formed under this
Act, must within one month after the filing of the articles of
incorporation with the Securities and Exchange Commission, adopt a
code of by-laws." Whether this provision should be given mandatory or
only directory effect remained a controversial question until it became
academic with the adoption of PD 902-A. Under this decree, it is now
clear that the failure to file by-laws within the required period is only a
ground for suspension or revocation of the certificate ofREGISTRATION
of corporations.
Non-filing of the by-laws will not result in automatic dissolution of the
corporation. Under Section 6(I) of PD 902-A, the SEC is empowered to
"suspend or revoke, after proper notice and hearing, the franchise or
certificate of registration of a corporation" on the ground inter alia of
"failure to file by-laws within the required period." It is clear from this
provision that there must first of all be a hearing to determine the
existence of the ground, and secondly, assuming such finding, the
penalty is not necessarily revocation but may be only suspension of
the charter. In fact, under the rules and regulations of the SEC, failure
to file the by-laws on time may be penalized merely with the imposition
of an administrative fine without affecting the corporate existence of
the erring firm.
It should be stressed in this connection that substantial compliance
with conditions subsequent will suffice to perfect corporate personality.
Organization and commencement of transaction of corporate business
are but conditions subsequent and not prerequisites for acquisition of
corporate personality. The adoption and filing of by-laws is also a
condition subsequent. Under Section 19 of the Corporation Code, a
Corporation commences its corporate existence and juridical
personality and is deemed incorporated from the date the Securities
and Exchange Commission issues certificate of incorporation under its
official seal. This may be done even before the filing of the by-laws,
which under Section 46 of the Corporation Code, must be adopted
"within one month after receipt of official notice of the issuance of its
certificate of incorporation." 21

That the corporation involved herein is under the supervision of the HIGC does
not alter the result of this case. The HIGC has taken over the specialized
functions of the former Home Financing Corporation by virtue of Executive
Order No. 90 dated December 17, 1989. 22 With respect to homeowners
associations, the HIGC shall "exercise all the powers, authorities and
responsibilities that are vested on the Securities and Exchange Commission . . .
, the provision of Act 1459, as amended by P.D. 902-A, to the contrary
notwithstanding." 23
WHEREFORE, the instant petition for review on certiorari is hereby DENIED and
the questioned Decision of the Court of Appeals AFFIRMED. This Decision is
immediately executory. Costs against petitioner.
SO ORDERED.

On 16 September 1974, petitioner wrote VGCCI requesting that the


aforementioned pledge agreement be recorded in its books. 2
In a letter dated 27 September 1974, VGCCI replied that the deed of pledge
executed by Calapatia in petitioner's favor was duly noted in its corporate
books. 3
On 3 August 1983, Calapatia obtained a loan of P20,000.00 from petitioner,
payment of which was secured by the aforestated pledge agreement still
existing between Calapatia and petitioner. 4
Due to Calapatia's failure to pay his obligation, petitioner, on 12 April 1985,
filed a petition for extrajudicial foreclosure before Notary Public Antonio T. de
Vera of Manila, requesting the latter to conduct a public auction sale of the
pledged stock. 5

FIRST DIVISION

G.R. No. 117604 March 26, 1997


CHINA BANKING CORPORATION, petitioner,
vs.
COURT OF APPEALS, and VALLEY GOLF and COUNTRY CLUB,
INC., respondents.

KAPUNAN, J.:
Through a petition for review on certiorari under Rule 45 of the Revised Rules of
Court, petitioner China Banking Corporation seeks the reversal of the decision
of the Court of Appeals dated 15 August 1994 nullifying the Securities and
Exchange Commission's order and resolution dated 4 June 1993 and 7
December 1993, respectively, for lack of jurisdiction. Similarly impugned is the
Court of Appeals' resolution dated 4 September 1994 which denied petitioner's
motion for reconsideration.
The case unfolds thus:
On 21 August 1974, Galicano Calapatia, Jr. (Calapatia, for brevity) a stockholder
of private respondent Valley Golf & Country Club, Inc. (VGCCI, for brevity),
pledged his Stock Certificate No. 1219 to petitioner China Banking Corporation
(CBC, for brevity). 1

On 14 May 1985, petitioner informed VGCCI of the above-mentioned


foreclosure proceedings and requested that the pledged stock be transferred to
its (petitioner's) name and the same be recorded in the corporate books.
However, on 15 July 1985, VGCCI wrote petitioner expressing its inability to
accede to petitioner's request in view of Calapatia's unsettled accounts with the
club. 6
Despite the foregoing, Notary Public de Vera held a public auction on 17
September 1985 and petitioner emerged as the highest bidder at P20,000.00
for the pledged stock. Consequently, petitioner was issued the corresponding
certificate of sale. 7
On 21 November 1985, VGCCI sent Calapatia a notice demanding full payment
of his overdueACCOUNT in the amount of P18,783.24. 8 Said notice was
followed by a demand letter dated 12 December 1985 for the same
amount9 and another notice dated 22 November 1986 for P23,483.24. 10
On 4 December 1986, VGCCI caused to be published in the newspaper Daily
Express a notice of auction sale of a number of its stock certificates, to be held
on 10 December 1986 at 10:00 a.m. Included therein was Calapatia's own
share of stock (Stock Certificate No. 1219).
Through a letter dated 15 December 1986, VGCCI informed Calapatia of the
termination of his membership due to the sale of his share of stock in the 10
December 1986 auction. 11
On 5 May 1989, petitioner advised VGCCI that it is the new owner of Calapatia's
Stock Certificate No. 1219 by virtue of being the highest bidder in the 17

September 1985 auction and requested that a new certificate of stock be


issued in its name. 12

Club is ordered to issue another membership certificate in the


name of appellant-petitioner bank.

On 2 March 1990, VGCCI replied that "for reason of delinquency" Calapatia's


stock was sold at the public auction held on 10 December 1986 for
P25,000.00. 13

SO ORDERED.

On 9 March 1990, petitioner protested the sale by VGCCI of the subject share of
stock and thereafter filed a case with the Regional Trial Court of Makati for the
nullification of the 10 December 1986 auction and for the issuance of a new
stock certificate in its name. 14
On 18 June 1990, the Regional Trial Court of Makati dismissed the complaint for
lack of jurisdiction over the subject matter on the theory that it involves an
intra-corporate dispute and on 27 August 1990 denied petitioner's motion for
reconsideration.
On 20 September 1990, petitioner filed a complaint with the Securities and
Exchange Commission (SEC) for the nullification of the sale of Calapatia's stock
by VGCCI; the cancellation of any new stock certificate issued pursuant thereto;
for the issuance of a new certificate in petitioner's name; and for damages,
attorney's fees and costs of litigation.
On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered a decision in
favor of VGCCI, stating in the main that "(c)onsidering that the said share is
delinquent, (VGCCI) had valid reason not to transfer the share in the name of
the petitioner in the books of (VGCCI) until liquidation of
delinquency." 15 Consequently, the case was dismissed. 16
On 14 April 1992, Hearing Officer Perea denied petitioner's motion for
reconsideration. 17
Petitioner appealed to the SEC en banc and on 4 June 1993, the Commission
issued an order reversing the decision of its hearing officer. It declared thus:
The Commission en banc believes that appellant-petitioner has
a prior right over the pledged share and because of pledgor's
failure to pay the principal debt upon maturity, appellantpetitioner can proceed with the foreclosure of the pledged
share.
WHEREFORE, premises considered, the Orders of January 3,
1992 and April 14, 1992 are hereby SET ASIDE. The auction
sale conducted by appellee-respondent Club on December 10,
1986 is declared NULL and VOID. Finally, appellee-respondent

18

VGCCI sought reconsideration of the abovecited order. However, the SEC


denied the same in its resolution dated 7 December 1993. 19
The sudden turn of events sent VGCCI to seek redress from the Court of
Appeals. On 15 August 1994, the Court of Appeals rendered its decision
nullifying and setting aside the orders of the SEC and its hearing officer on
ground of lack of jurisdiction over the subject matter and, consequently,
dismissed petitioner's original complaint. The Court of Appeals declared that
the controversy between CBC and VGCCI is not intra-corporate. It ruled as
follows:
In order that the respondent Commission can take cognizance
of a case, the controversy must pertain to any of the following
relationships: (a) between the corporation, partnership or
association and the public; (b) between the corporation,
partnership or association and its stockholders, partners,
members, or officers; (c) between the corporation, partnership
or association and the state in so far as its franchise, permit or
license to operate is concerned, and (d) among the
stockholders, partners or associates themselves (Union Glass
and Container Corporation vs. SEC, November 28, 1983, 126
SCRA 31). The establishment of any of the relationship
mentioned will not necessarily always confer jurisdiction over
the dispute on the Securities and Exchange Commission to the
exclusion of the regular courts. The statement made in Philex
Mining Corp. vs. Reyes, 118 SCRA 602, that the rule admits of
no exceptions or distinctions is not that absolute. The better
policy in determining which body has jurisdiction over a case
would be to consider not only the status or relationship of the
parties but also the nature of the question that is the subject
of their controversy (Viray vs. Court of Appeals, November 9,
1990, 191 SCRA 308, 322-323).
Indeed, the controversy between petitioner and respondent
bank which involves ownership of the stock that used to
belong to Calapatia, Jr. is not within the competence of
respondent Commission to decide. It is not any of those
mentioned in the aforecited case.
WHEREFORE, the decision dated June 4, 1993, and order dated
December 7, 1993 of respondent Securities and Exchange

Commission (Annexes Y and BB, petition) and of its hearing


officer dated January 3, 1992 and April 14, 1992 (Annexes S
and W, petition) are all nullified and set aside for lack of
jurisdiction over the subject matter of the case. Accordingly,
the complaint of respondent China Banking Corporation
(Annex Q, petition) is DISMISSED. No pronouncement as to
costs in this instance.
SO ORDERED.

20

Petitioner moved for reconsideration but the same was denied by the Court of
Appeals in its resolution dated 5 October 1994. 21
Hence, this petition wherein the following issues were raised:
II
ISSUES
WHETHER OR NOT RESPONDENT COURT OF APPEALS (Former
Eighth Division) GRAVELY ERRED WHEN:
1. IT NULLIFIED AND SET ASIDE THE DECISION DATED JUNE 04,
1993 AND ORDER DATED DECEMBER 07, 1993 OF THE
SECURITIES AND EXCHANGE COMMISSION EN BANC, AND
WHEN IT DISMISSED THE COMPLAINT OF PETITIONER AGAINST
RESPONDENT VALLEY GOLF ALL FOR LACK OF JURISDICTION
OVER THE SUBJECT MATTER OF THE CASE;
2. IT FAILED TO AFFIRM THE DECISION OF THE SECURITIES
AND EXCHANGE COMMISSIONEN BANC DATED JUNE 04, 1993
DESPITE PREPONDERANT EVIDENCE SHOWING THAT
PETITIONER IS THE LAWFUL OWNER OF MEMBERSHIP
CERTIFICATE NO. 1219 FOR ONE SHARE OF RESPONDENT
VALLEY GOLF.
The petition is granted.
The basic issue we must first hurdle is which body has jurisdiction over the
controversy, the regular courts or the SEC.
P. D. No. 902-A conferred upon the SEC the following pertinent powers:

Sec. 3. The Commission shall have absolute jurisdiction,


supervision and control over all corporations, partnerships or
associations, who are the grantees of primary franchises
and/or a license or permit issued by the government to
operate in the Philippines, and in the exercise of its authority,
it shall have the power to enlist the aid and support of and to
deputize any and all enforcement agencies of the government,
civil or military as well as any private institution, corporation,
firm, association or person.
xxx xxx xxx
Sec. 5. In addition to the regulatory and adjudicative functions
of the Securities and Exchange Commission over corporations,
partnerships and other forms of associations registered with it
as expressly granted under existing laws and decrees, it shall
have original and exclusive jurisdiction to hear and decide
cases involving:
a) Devices or schemes employed by or any
acts of the board of directors, business
associates, its officers or partners, amounting
to fraud and misrepresentation which may be
detrimental to the interest of the public
and/or of the stockholders, partners,
members of associations or organizations
registered with the Commission.
b) Controversies arising out of intra-corporate
or partnership relations, between and among
stockholders, members, or associates;
between any or all of them and the
corporation, partnership or association of
which they are stockholders, members or
associates, respectively; and between such
corporation, partnership or association and
the State insofar as it concerns their
individual franchise or right to exist as such
entity;
c) Controversies in the election or
appointment of directors, trustees, officers, or
managers of such corporations, partnerships
or associations.

d) Petitions of corporations, partnerships or


associations to be declared in the state of
suspension of payments in cases where the
corporation, partnership or association
possesses property to cover all of its debts
but foresees the impossibility of meeting
them when they respectively fall due or in
cases where the corporation, partnership or
association has no sufficient assets to cover
its liabilities, but is under the Management
Committee created pursuant to this Decree.
The aforecited law was expounded upon in Viray v. CA 22 and in the recent
cases of Mainland Construction Co., Inc.v. Movilla 23 and Bernardo
v. CA, 24 thus:
. . . .The better policy in determining which body has
jurisdiction over a case would be to consider not only the
status or relationship of the parties but also the nature of the
question that is the subject of their controversy.
Applying the foregoing principles in the case at bar, to ascertain which tribunal
has jurisdiction we have to determine therefore whether or not petitioner is a
stockholder of VGCCI and whether or not the nature of the controversy between
petitioner and private respondent corporation is intra-corporate.
As to the first query, there is no question that the purchase of the subject share
or membership certificate at public auction by petitioner (and the issuance to it
of the corresponding Certificate of Sale) transferred ownership of the same to
the latter and thus entitled petitioner to have the said share registered in its
name as a member of VGCCI. It is readily observed that VGCCI did not assail
the transfer directly and has in fact, in its letter of 27 September 1974,
expressly recognized the pledge agreement executed by the original owner,
Calapatia, in favor of petitioner and has even noted said agreement in its
corporate books. 25 In addition, Calapatia, the original owner of the subject
share, has not contested the said transfer.
By virtue of the afore-mentioned sale, petitioner became a bona
fide stockholder of VGCCI and, therefore, the conflict that arose between
petitioner and VGCCI aptly exemplies an intra-corporate controversy between a
corporation and its stockholder under Sec. 5(b) of P.D. 902-A.
An important consideration, moreover, is the nature of the controversy between
petitioner and private respondent corporation. VGCCI claims a prior right over
the subject share anchored mainly on Sec. 3, Art VIII of its by-laws which
provides that "after a member shall have been posted as delinquent, the Board

may order his/her/its share sold to satisfy the claims of the Club. . ." 26 It is
pursuant to this provision that VGCCI also sold the subject share at public
auction, of which it was the highest bidder. VGCCI caps its argument by
asserting that its corporate by-laws should prevail. The bone of contention,
thus, is the proper interpretation and application of VGCCI's aforequoted bylaws, a subject which irrefutably calls for the special competence of the SEC.
We reiterate herein the sound policy enunciated by the Court in Abejo v. De la
Cruz 27:
6. In the fifties, the Court taking cognizance of the move to
vest jurisdiction in administrative commissions and boards the
power to resolve specialized disputes in the field of labor (as in
corporations, public transportation and public utilities) ruled
that Congress in requiring the Industrial Court's intervention in
the resolution of labor-management controversies likely to
cause strikes or lockouts meant such jurisdiction to be
exclusive, although it did not so expressly state in the law. The
Court held that under the "sense-making and expeditious
doctrine of primary jurisdiction . . . the courts cannot or will
not determine a controversy involving a question which is
within the jurisdiction of an administrative tribunal, where the
question demands the exercise of sound administrative
discretion requiring the special knowledge, experience, and
services of the administrative tribunal to determine technical
and intricate matters of fact, and a uniformity of ruling is
essential to comply with the purposes of the regulatory statute
administered.
In this era of clogged court dockets, the need for specialized
administrative boards or commissions with the special
knowledge, experience and capability to hear and determine
promptly disputes on technical matters or essentially factual
matters, subject to judicial review in case of grave abuse of
discretion, has become well nigh indispensable. Thus, in 1984,
the Court noted that "between the power lodged in an
administrative body and a court, the unmistakable trend has
been to refer it to the former. 'Increasingly, this Court has been
committed to the view that unless the law speaks clearly and
unequivocably, the choice should fall on [an administrative
agency.]'" The Court in the earlier case of Ebon v. De Guzman,
noted that the lawmaking authority, in restoring to the labor
arbiters and the NLRC their jurisdiction to award all kinds of
damages in labor cases, as against the previous P.D.
amendment splitting their jurisdiction with the regular courts,
"evidently, . . . had second thoughts about depriving the Labor
Arbiters and the NLRC of the jurisdiction to award damages in

labor cases because that setup would mean duplicity of suits,


splitting the cause of action and possible conflicting findings
and conclusions by two tribunals on one and the same claim."
In this case, the need for the SEC's technical expertise cannot be overemphasized involving as it does the meticulous analysis and correct
interpretation of a corporation's by-laws as well as the applicable provisions of
the Corporation Code in order to determine the validity of VGCCI's claims. The
SEC, therefore, took proper cognizance of the instant case.
VGCCI further contends that petitioner is estopped from denying its earlier
position, in the first complaint it filed with the RTC of Makati (Civil Case No. 901112) that there is no intra-corporate relations between itself and VGCCI.
VGCCI's contention lacks merit.
In Zamora v. Court of Appeals,
declared that:

28

this Court, through Mr. Justice Isagani A. Cruz,

It follows that as a rule the filing of a complaint with one court


which has no jurisdiction over it does not prevent the plaintiff
from filing the same complaint later with the competent court.
The plaintiff is not estopped from doing so simply because it
made a mistake before in the choice of the proper forum. . . .
We remind VGCCI that in the same proceedings before the RTC of Makati, it
categorically stated (in its motion to dismiss) that the case between itself and
petitioner is intra-corporate and insisted that it is the SEC and not the regular
courts which has jurisdiction. This is precisely the reason why the said court
dismissed petitioner's complaint and led to petitioner's recourse to the SEC.
Having resolved the issue on jurisdiction, instead of remanding the whole case
to the Court of Appeals, this Court likewise deems it procedurally sound to
proceed and rule on its merits in the same proceedings.
It must be underscored that petitioner did not confine the instant petition for
review on certiorari on the issue of jurisdiction. In its assignment of errors,
petitioner specifically raised questions on the merits of the case. In turn, in its
responsive pleadings, private respondent duly answered and countered all the
issues raised by petitioner.
Applicable to this case is the principle succinctly enunciated in the case
of Heirs of Crisanta Y. Gabriel-Almoradie v. Court of Appeals, 29 citing Escudero
v. Dulay 30 and The Roman Catholic Archbishop of Manila v. Court of Appeals. 31

In the interest of the public and for the expeditious


administration of justice the issue on infringement shall be
resolved by the court considering that this case has dragged
on for years and has gone from one forum to another.
It is a rule of procedure for the Supreme Court to strive to
settle the entire controversy in a single proceeding leaving no
root or branch to bear the seeds of future litigation. No useful
purpose will be served if a case or the determination of an
issue in a case is remanded to the trial court only to have its
decision raised again to the Court of Appeals and from there to
the Supreme Court.
We have laid down the rule that the remand of the case or of
an issue to the lower court for further reception of evidence is
not necessary where the Court is in position to resolve the
dispute based on the records before it and particularly where
the ends of justice would not be subserved by the remand
thereof. Moreover, the Supreme Court is clothed with ample
authority to review matters, even those not raised on appeal if
it finds that their consideration is necessary in arriving at a
just disposition of the case.
In the recent case of China Banking Corp., et al. v. Court of Appeals, et
al., 32 this Court, through Mr. Justice Ricardo J. Francisco, ruled in this wise:
At the outset, the Court's attention is drawn to the fact that
since the filing of this suit before the trial court, none of the
substantial issues have been resolved. To avoid and gloss over
the issues raised by the parties, as what the trial court and
respondent Court of Appeals did, would unduly prolong this
litigation involving a rather simple case of foreclosure of
mortgage. Undoubtedly, this will run counter to the avowed
purpose of the rules, i.e., to assist the parties in obtaining just,
speedy and inexpensive determination of every action or
proceeding. The Court, therefore, feels that the central issues
of the case, albeit unresolved by the courts below, should now
be settled specially as they involved pure questions of law.
Furthermore, the pleadings of the respective parties on file
have amply ventilated their various positions and arguments
on the matter necessitating prompt adjudication.
In the case at bar, since we already have the records of the case (from the
proceedings before the SEC) sufficient to enable us to render a sound judgment
and since only questions of law were raised (the proper jurisdiction for Supreme

Court review), we can, therefore, unerringly take cognizance of and rule on the
merits of the case.
The procedural niceties settled, we proceed to the merits.
VGCCI assails the validity of the pledge agreement executed by Calapatia in
petitioner's favor. It contends that the same was null and void for lack of
consideration because the pledge agreement was entered into on 21 August
1974 33 but the loan or promissory note which it secured was obtained by
Calapatia much later or only on 3 August 1983.34
VGCCI's contention is unmeritorious.
A careful perusal of the pledge agreement will readily reveal that the
contracting parties explicitly stipulated therein that the said pledge will also
stand as security for any future advancements (or renewals thereof) that
Calapatia (the pledgor) may procure from petitioner:
xxx xxx xxx
This pledge is given as security for the prompt payment when
due of all loans, overdrafts, promissory notes, drafts, bills or
exchange, discounts, and all other obligations of every kind
which have heretofore been contracted, or which may
hereafter be contracted, by the PLEDGOR(S) and/or
DEBTOR(S) or any one of them, in favor of the PLEDGEE,
including discounts of Chinese drafts, bills of exchange,
promissory notes, etc., without any further endorsement by
the PLEDGOR(S) and/or Debtor(s) up to the sum of TWENTY
THOUSAND (P20,000.00) PESOS, together with the accrued
interest thereon, as hereinafter provided, plus the costs,
losses, damages and expenses (including attorney's fees)
which PLEDGEE may incur in connection with the collection
thereof. 35 (Emphasis ours.)
The validity of the pledge agreement between petitioner and Calapatia cannot
thus be held suspect by VGCCI. As candidly explained by petitioner, the
promissory note of 3 August 1983 in the amount of P20,000.00 was but a
renewal of the first promissory note covered by the same pledge agreement.
VGCCI likewise insists that due to Calapatia's failure to settle his delinquent
accounts, it had the right to sell the share in question in accordance with the
express provision found in its by-laws.

Private respondent's insistence comes to naught. It is significant to note that


VGCCI began sending notices of delinquency to Calapatia after it was informed
by petitioner (through its letter dated 14 May 1985) of the foreclosure
proceedings initiated against Calapatia's pledged share, although Calapatia has
been delinquent in paying his monthly dues to the club since 1975. Stranger
still, petitioner, whom VGCCI had officially recognized as the pledgee of
Calapatia's share, was neither informed nor furnished copies of these letters of
overdue accounts until VGCCI itself sold the pledged share at another public
auction. By doing so, VGCCI completely disregarded petitioner's rights as
pledgee. It even failed to give petitioner notice of said auction sale. Such
actuations of VGCCI thus belie its claim of good faith.
In defending its actions, VGCCI likewise maintains that petitioner is bound by its
by-laws. It argues in this wise:
The general rule really is that third persons are not bound by
the by-laws of a corporation since they are not privy thereto
(Fleischer v. Botica Nolasco, 47 Phil. 584). The exception to
this is when third persons have actual or constructive
knowledge of the same. In the case at bar, petitioner had
actual knowledge of the by-laws of private respondent when
petitioner foreclosed the pledge made by Calapatia and when
petitioner purchased the share foreclosed on September 17,
1985. This is proven by the fact that prior thereto, i.e., on May
14, 1985 petitioner even quoted a portion of private
respondent's by-laws which is material to the issue herein in a
letter it wrote to private respondent. Because of this actual
knowledge of such by-laws then the same bound the petitioner
as of the time when petitioner purchased the share. Since the
by-laws was already binding upon petitioner when the latter
purchased the share of Calapatia on September 17, 1985 then
the petitioner purchased the said share subject to the right of
the private respondent to sell the said share for reasons of
delinquency and the right of private respondent to have a first
lien on said shares as these rights are provided for in the bylaws very very clearly. 36
VGCCI misunderstood the import of our ruling in Fleischer v. Botica Nolasco
Co.: 37
And moreover, the by-law now in question cannot have any
effect on the appellee. He had no knowledge of such by-law
when the shares were assigned to him. He obtained them in
good faith and for a valuable consideration. He was not a privy
to the contract created by said by-law between the

shareholder Manuel Gonzales and the Botica Nolasco, Inc. Said


by-law cannot operate to defeat his rights as a purchaser.
An unauthorized by-law forbidding a shareholder to sell his
shares without first offering them to the corporation for a
period of thirty days is not binding upon an assignee of the
stock as a personal contract, although his assignor knew of the
by-law and took part in its adoption. (10 Cyc., 579; Ireland vs.
Globe Milling Co., 21 R.I., 9.)
When no restriction is placed by public law on the transfer of
corporate stock, a purchaser is not affected by any contractual
restriction of which he had no notice. (Brinkerhoff-Farris Trust &
Savings Co. vs. Home Lumber Co., 118 Mo., 447.)
The assignment of shares of stock in a corporation by one who
has assented to an unauthorized by-law has only the effect of
a contract by, and enforceable against, the assignor; the
assignee is not bound by such by-law by virtue of the
assignment alone. (Ireland vs. Globe Milling Co., 21 R.I., 9.)
A by-law of a corporation which provides that transfers of
stock shall not be valid unless approved by the board of
directors, while it may be enforced as a reasonable regulation
for the protection of the corporation against worthless
stockholders, cannot be made available to defeat the rights of
third persons. (Farmers' and Merchants' Bank of Lineville vs.
Wasson, 48 Iowa, 336.) (Emphasis ours.)
In order to be bound, the third party must have acquired knowledge of the
pertinent by-laws at the time the transaction or agreement between said third
party and the shareholder was entered into, in this case, at the time the pledge
agreement was executed. VGCCI could have easily informed petitioner of its bylaws when it sent notice formally recognizing petitioner as pledgee of one of its
shares registered in Calapatia's name. Petitioner's belated notice of said bylaws at the time of foreclosure will not suffice. The ruling of the SEC en banc is
particularly instructive:
By-laws signifies the rules and regulations or private laws
enacted by the corporation to regulate, govern and control its
own actions, affairs and concerns and its stockholders or
members and directors and officers with relation thereto and
among themselves in their relation to it. In other words, bylaws are the relatively permanent and continuing rules of
action adopted by the corporation for its own government and
that of the individuals composing it and having the direction,

management and control of its affairs, in whole or in part, in


the management and control of its affairs and activities. (9
Fletcher 4166, 1982 Ed.)
The purpose of a by-law is to regulate the conduct and define
the duties of the members towards the corporation and among
themselves. They are self-imposed and, although adopted
pursuant to statutory authority, have no status as public law.
(Ibid.)
Therefore, it is the generally accepted rule that third persons
are not bound by by-laws, except when they have knowledge
of the provisions either actually or constructively. In the case
of Fleisher v.Botica Nolasco, 47 Phil. 584, the Supreme Court
held that the by-law restricting the transfer of shares cannot
have any effect on the transferee of the shares in question as
he "had no knowledge of such by-law when the shares were
assigned to him. He obtained them in good faith and for a
valuable consideration. He was not a privy to the contract
created by the by-law between the shareholder . . .and the
Botica Nolasco, Inc. Said by-law cannot operate to defeat his
right as a purchaser. (Emphasis supplied.)
By analogy of the above-cited case, the Commission en
banc is of the opinion that said case is applicable to the
present controversy. Appellant-petitioner bank as a third party
can not be bound by appellee-respondent's by-laws. It must be
recalled that when appellee-respondent communicated to
appellant-petitioner bank that the pledge agreement was duly
noted in the club's books there was no mention of the
shareholder-pledgor's unpaid accounts. The transcript of
stenographic notes of the June 25, 1991 Hearing reveals that
the pledgor became delinquent only in 1975. Thus, appellantpetitioner was in good faith when the pledge agreement was
contracted.
The Commission en banc also believes that for the exception
to the general accepted rule that third persons are not bound
by by-laws to be applicable and binding upon the pledgee,
knowledge of the provisions of the VGCI By-laws must be
acquired at the time the pledge agreement was contracted.
Knowledge of said provisions, either actual or constructive, at
the time of foreclosure will not affect pledgee's right over the
pledged share. Art. 2087 of the Civil Code provides that it is
also of the essence of these contracts that when the principal
obligation becomes due, the things in which the pledge or

mortgage consists maybe alienated for the payment to the


creditor.
In a letter dated March 10, 1976 addressed to Valley Golf Club,
Inc., the Commission issued an opinion to the effect that:

Similarly, VGCCI's contention that petitioner is duty-bound to know its by-laws


because of Art. 2099 of the Civil Code which stipulates that the creditor must
take care of the thing pledged with the diligence of a good father of a family,
fails to convince. The case of Cruz & Serrano v. Chua A. H. Lee, 39 is clearly not
applicable:
In applying this provision to the situation before us it must be
borne in mind that the ordinary pawn ticket is a document by
virtue of which the property in the thing pledged passes from
hand to hand by mere delivery of the ticket; and the contract
of the pledge is, therefore, absolvable to bearer. It results that
one who takes a pawn ticket in pledge acquires domination
over the pledge; and it is the holder who must renew the
pledge, if it is to be kept alive.

According to the weight of authority, the


pledgee's right is entitled to full protection
without surrender of the certificate, their
cancellation, and the issuance to him of new
ones, and when done, the pledgee will be
fully protected against a subsequent
purchaser who would be charged with
constructive notice that the certificate is
covered by the pledge. (12-A Fletcher 502)
The pledgee is entitled to retain possession of
the stock until the pledgor pays or tenders to
him the amount due on the debt secured. In
other words, the pledgee has the right to
resort to its collateral for the payment of the
debts. (Ibid, 502)
To cancel the pledged certificate outright and
the issuance of new certificate to a third
person who purchased the same certificate
covered by the pledge, will certainly defeat
the right of the pledgee to resort to its
collateral for the payment of the debt. The
pledgor or his representative orREGISTERED
stockholders has no right to require a return
of the pledged stock until the debt for which it
was given as security is paid and satisfied,
regardless of the length of time which have
elapsed since debt was created. (12-A
Fletcher 409)
A bona fide pledgee takes free from any latent or secret
equities or liens in favor either of the corporation or of third
persons, if he has no notice thereof, but not otherwise. He also
takes it free of liens or claims that may subsequently arise in
favor of the corporation if it has notice of the pledge, although
no demand for a transfer of the stock to the pledgee on the
corporate books has been made. (12-A Fletcher 5634, 1982
ed., citing Snyder v. Eagle Fruit Co., 75 F2d739) 38

It is quite obvious from the aforequoted case that a membership share


is quite different in character from a pawn ticket and to reiterate,
petitioner was never informed of Calapatia's unpaidACCOUNTS and
the restrictive provisions in VGCCI's by-laws.
Finally, Sec. 63 of the Corporation Code which provides that "no shares of stock
against which the corporation holds any unpaid claim shall be transferable in
the books of the corporation" cannot be utilized by VGCCI. The term "unpaid
claim" refers to "any unpaid claim arising from unpaid subscription, and not to
any indebtedness which a subscriber or stockholder may owe the corporation
arising from any other transaction." 40 In the case at bar, the subscription for
the share in question has been fully paid as evidenced by the issuance of
Membership Certificate No. 1219. 41 What Calapatia owed the corporation were
merely the monthly dues. Hence, the aforequoted provision does not apply.
WHEREFORE, premises considered, the assailed decision of the Court of
Appeals is REVERSED and the order of the SEC en banc dated 4 June 1993 is
hereby AFFIRMED.
SO ORDERED.
[G.R. No. 108905. October 23, 1997]
GRACE

CHRISTIAN HIGH SCHOOL, petitioner, vs. THE COURT OF


APPEALS, GRACE VILLAGE ASSOCIATION, INC., ALEJANDRO G.
BELTRAN, and ERNESTO L. GO, respondents.
DECISION

MENDOZA, J.:

The question for decision in this case is the right of petitioners


representative to sit in the board of directors of respondent Grace Village
Association, Inc. as a permanent member thereof. For fifteen years from 1975
until 1989 petitioners representative had been recognized as a permanent
director of the association. But on February 13, 1990, petitioner received notice
from the associations committee on election that the latter was reexamining
(actually, reconsidering) the right of petitioners representative to continue as
an unelected member of the board. As the board denied petitioners request to
be allowed representation without election, petitioner brought an action
for mandamus in the Home Insurance and Guaranty Corporation.Its action was
dismissed by the hearing officer whose decision was subsequently affirmed by
the appeals board. Petitioner appealed to the Court of Appeals, which in turn
upheld the decision of the HIGCs appeals board. Hence this petition for review
based on the following contentions:
1. The Petitioner herein has already acquired a vested right to a permanent
seat in the Board of Directors of Grace Village Association;
2. The amended By-laws of the Association drafted and promulgated by a
Committee on December 20, 1975 is valid and binding; and
3. The Practice of tolerating the automatic inclusion of petitioner as a
permanent member of the Board of Directors of the Association without the
benefit of election is allowed under the law.[1]
Briefly stated, the facts are as follows:
Petitioner Grace Christian High School is an educational institution offering
preparatory, kindergarten and secondary courses at the Grace Village in
Quezon City. Private respondent Grace Village Association, Inc., on the other
hand, is an organization of lot and/or building owners, lessees and residents at
Grace Village, while private respondents Alejandro G. Beltran and Ernesto L. Go
were its president and chairman of the committee on election, respectively, in
1990, when this suit was brought.
As adopted in 1968, the by-laws of the association provided in Article IV,
as follows:
The annual meeting of the members of the Association shall be held on the first
Sunday of January in each calendar year at the principal office of the
Association at 2:00 P.M. where they shall elect by plurality vote and by secret
balloting, the Board of Directors, composed of eleven (11) members to serve
for one (1) year until their successors are duly elected and have qualified. [2]

It appears, that on December 20, 1975, a committee of the board of


directors prepared a draft of an amendment to the by-laws, reading as follows:
[3]

VI. ANNUAL MEETING


The Annual Meeting of the members of the Association shall be held on
the second Thursday of January of each year. Each Charter or
Associate Member of the Association is entitled to vote. He shall be entitled to
as many votes as he has acquired thru his monthly membership fees
only computed on a ratio of TEN (P10.00) PESOS for one vote.
The Charter and Associate Members shall elect the Directors of the Association.
The candidates receiving the first fourteen (14) highest number of votes shall
be declared and proclaimed elected until their successors are elected and
qualified. GRACE CHRISTIAN HIGH SCHOOL representative is a permanent
Director of the ASSOCIATION.
This draft was never presented to the general membership for
approval. Nevertheless, from 1975, after it was presumably submitted to the
board, up to 1990, petitioner was given a permanent seat in the board of
directors of the association. On February 13, 1990, the associations committee
on election in a letter informed James Tan, principal of the school, that it was
the sentiment that all directors should be elected by members of the
association because to make a person or entity a permanent Director would
deprive the right of voters to vote for fifteen (15) members of the Board, and it
is undemocratic for a person or entity to hold office in perpetuity. [4] For this
reason, Tan was told that the proposal to make the Grace Christian High School
representative as a permanent director of the association, although previously
tolerated in the past elections should be reexamined. Following this advice,
notices were sent to the members of the association that the provision on
election of directors of the 1968 by-laws of the association would be observed.
Petitioner requested the chairman of the election committee to change the
notice of election by following the procedure in previous elections, claiming that
the notice issued for the 1990 elections ran counter to the practice in previous
years and was in violation of the by-laws (of 1975) and unlawfully deprive[d]
Grace Christian High School of its vested right [to] a permanent seat in the
board.[5]
As the association denied its request, the school brought suit
for mandamus in the Home Insurance and Guaranty Corporation to compel the
board of directors of the association to recognize its right to a permanent seat
in the board. Petitioner based its claim on the following portion of the proposed
amendment which, it contended, had become part of the by-laws of the
association as Article VI, paragraph 2, thereof:

The Charter and Associate Members shall elect the Directors of the
Association. The candidates receiving the first fourteen (14) highest number of
votes shall be declared and proclaimed elected until their successors are
elected and qualified. GRACE CHRISTIAN HIGH SCHOOL representative is a
permanent Director of the ASSOCIATION.

rise to a vested right and that departure from such practice was justified
because it deprived members of association of their right to elect or to be
voted in office, not to say that allowing the automatic inclusion of a member
representative of petitioner as permanent director [was] contrary to law and
the registered by-laws of respondent association.[8]

It appears that the opinion of the Securities and Exchange Commission on


the validity of this provision was sought by the association and that in reply to
the query, the SEC rendered an opinion to the effect that the practice of
allowing unelected members in the board was contrary to the existing by-laws
of the association and to 92 of the Corporation Code (B.P. Blg. 68).

The appeals board of the HIGC affirmed the decision of the hearing officer
in its resolution dated September 13, 1990. It cited the opinion of the SEC
based on 92 of the Corporation Code which reads:

Private respondent association cited the SEC opinion in its


answer. Additionally, the association contended that the basis of the petition
for mandamus was merely a proposed by-laws which has not yet been
approved by competent authority nor registered with the SEC or HIGC. It
argued that the by-laws which was registered with the SEC on January 16, 1969
should be the prevailing by-laws of the association and not the proposed
amended by-laws.[6]
In reply, petitioner maintained that the amended by-laws is valid and
binding and that the association was estopped from questioning the by-laws. [7]
A preliminary conference was held on March 29, 1990 but nothing
substantial was agreed upon. The parties merely agreed that the board of
directors of the association should meet on April 17, 1990 and April 24, 1990
for the purpose of discussing the amendment of the by-laws and a possible
amicable settlement of the case. A meeting was held on April 17, 1990, but the
parties failed to reach an agreement. Instead, the board adopted a resolution
declaring the 1975 provision null and void for lack of approval by members of
the association and the 1968 by-laws to be effective.
On June 20, 1990, the hearing officer of the HIGC rendered a decision
dismissing petitioners action. The hearing officer held that the amended bylaws, upon which petitioner based its claim, [was] merely a proposed by-laws
which, although implemented in the past, had not yet been ratified by the
members of the association nor approved by competent authority; that, on the
contrary, in the meeting held on April 17, 1990, the directors of the association
declared the proposed by-law dated December 20, 1975 prepared by the
committee on by-laws . . . null and void and the by-laws of December 17, 1968
as the prevailing by-laws under which the association is to operate until such
time that the proposed amendments to the by-laws are approved and ratified
by a majority of the members of the association and duly filed and approved by
the pertinent government agency. The hearing officer rejected petitioners
contention that it had acquired a vested right to a permanent seat in the board
of directors. He held that past practice in election of directors could not give

92. Election and term of trustees. - Unless otherwise provided in the articles of
incorporation or the by-laws, the board of trustees of non-stock corporations,
which may be more than fifteen (15) in number as may be fixed in their articles
of incorporation or by-laws, shall, as soon as organized, so classify themselves
that the term of office of one-third (1/3) of the number shall expire every year;
and subsequent elections of trustees comprising one-third (1/3) of the board of
trustees shall be held annually and trustees so elected shall have a term of
three (3) years. Trustees thereafter elected to fill vacancies occurring before the
expiration of a particular term shall hold office only for the unexpired period.
The HIGC appeals board denied claims that the school [was] being deprived of
its right to be a member of the Board of Directors of respondent association,
because the fact was that it may nominate as many representatives to the
Associations Board as it may deem appropriate. It said that what is merely
being upheld is the act of the incumbent directors of the Board of correcting a
long standing practice which is not anchored upon any legal basis. [9]
Petitioner appealed to the Court of Appeals but petitioner again lost as the
appellate court on February 9, 1993, affirmed the decision of the HIGC. The
Court of Appeals held that there was no valid amendment of the associations
by-laws because of failure to comply with the requirement of its existing bylaws, prescribing the affirmative vote of the majority of the members of the
association at a regular or special meeting called for the adoption of
amendment to the by-laws. Article XIX of the by-laws provides: [10]
The members of the Association by an affirmative vote of the majority at any
regular or special meeting called for the purpose, may alter, amend, change or
adopt any new by-laws.
This provision of the by-laws actually implements 22 of the Corporation
Law (Act No. 1459) which provides:
22. The owners of a majority of the subscribed capital stock, or a majority of
the members if there be no capital stock, may, at a regular or special meeting
duly called for the purpose, amend or repeal any by-law or adopt new bylaws. The owners of two-thirds of the subscribed capital stock, or two-thirds of

the members if there be no capital stock, may delegate to the board of


directors the power to amend or repeal any by-law or to adopt new bylaws: Provided, however, That any power delegated to the board of directors to
amend or repeal any by-law or adopt new by-laws shall be considered as
revoked whenever a majority of the stockholders or of the members of the
corporation shall so vote at a regular or special meeting. And provided, further,
That the Director of the Bureau of Commerce and Industry shall not hereafter
file an amendment to the by-laws of any bank, banking institution or building
and loan association, unless accompanied by certificate of the Bank
Commissioner to the effect that such amendments are in accordance with law.
The proposed amendment to the by-laws was never approved by the
majority of the members of the association as required by these provisions of
the law and by-laws. But petitioner contends that the members of the
committee which prepared the proposed amendment were duly authorized to
do so and that because the members of the association thereafter implemented
the provision for fifteen years, the proposed amendment for all intents and
purposes should be considered to have been ratified by them. Petitioner
contends:[11]
Considering, therefore, that the agents or committee were duly authorized to
draft the amended by-laws and the acts done by the agents were in accordance
with such authority, the acts of the agents from the very beginning were lawful
and binding on the homeowners (the principals) per se without need of any
ratification or adoption. The more has the amended by-laws become binding on
the homeowners when the homeowners followed and implemented the
provisions of the amended by-laws. This is not merely tantamount to tacit
ratification of the acts done by duly authorized agents but express approval
and confirmation of what the agents did pursuant to the authority granted to
them.
Corollarily, petitioner claims that it has acquired a vested right to a
permanent seat in the board. Says petitioner:
The right of the petitioner to an automatic membership in the board of the
Association was granted by the members of the Association themselves and
this grant has been implemented by members of the board themselves all
through the years. Outside the present membership of the board, not a single
member of the Association has registered any desire to remove the right of
herein petitioner to an automatic membership in the board. If there is anybody
who has the right to take away such right of the petitioner, it would be the
individual members of the Association through a referendum and not the
present board some of the members of which are motivated by personal
interest.

Petitioner disputes the ruling that the provision in question, giving petitioners
representative a permanent seat in the board of the association, is contrary to
law. Petitioner claims that that is not so because there is really no provision of
law
prohibiting
unelected
members
of
boards
of
directors
of
corporations. Referring to 92 of the present Corporation Code, petitioner says:
It is clear that the above provision of the Corporation Code only provides for the
manner of election of the members of the board of trustees of non-stock
corporations which may be more than fifteen in number and which manner of
election is even subject to what is provided in the articles of incorporation or
by-laws of the association thus showing that the above provisions [are] not
even mandatory.
Even a careful perusal of the above provision of the Corporation Code would
not show that it prohibits a non-stock corporation or association from granting
one of its members a permanent seat in its board of directors or trustees. If
there is no such legal prohibition then it is allowable provided it is so provided
in the Articles of Incorporation or in the by-laws as in the instant case.
....
If fact, the truth is that this is allowed and is being practiced by some
corporations duly organized and existing under the laws of the Philippines.
One example is the Pius XII Catholic Center, Inc. Under the by-laws of this
corporation, that whoever is the Archbishop of Manila is considered a member
of the board of trustees without benefit of election.And not only that. He also
automatically sits as the Chairman of the Board of Trustees, again without need
of any election.
Another concrete example is the Cardinal Santos Memorial Hospital, Inc. It is
also provided in the by-laws of this corporation that whoever is the Archbishop
of Manila is considered a member of the board of trustees year after year
without benefit of any election and he also sits automatically as the Chairman
of the Board of Trustees.
It is actually 28 and 29 of the Corporation Law not 92 of the present law or
29 of the former one which require members of the boards of directors of
corporations to be elected. These provisions read:
28. Unless otherwise provided in this Act, the corporate powers of all
corporations formed under this Act shall be exercised, all business conducted
and all property of such corporations controlled and held by a board of not less
than five nor more than eleven directors to be elected from among the holders
of stock or, where there is no stock, from the members of the

corporation: Provided, however, That in corporations, other than banks, in


which the United States has or may have a vested interest, pursuant to the
powers granted or delegated by the Trading with the Enemy Act, as amended,
and similar Acts of Congress of the United States relating to the same subject,
or by Executive Order No. 9095 of the President of the United States, as
heretofore or hereafter amended, or both, the directors need not be elected
from among the holders of the stock, or, where there is no stock from the
members of the corporation. (emphasis added)
29. At the meeting for the adoption of the original by-laws, or at such
subsequent meeting as may be then determined, directors shall be elected to
hold their offices for one year and until their successors are elected and
qualified. Thereafter the directors of the corporation shall be elected annually
by the stockholders if it be a stock corporation or by the members if it be
a nonstock corporation, and if no provision is made in the by-laws for the time
of election the same shall be held on the first Tuesday after the first Monday in
January. Unless otherwise provided in the by-laws, two weeks notice of the
election of directors must be given by publication in some newspaper of
general circulation devoted to the publication of general news at the place
where the principal office of the corporation is established or located, and by
written notice deposited in the post-office, postage pre-paid, addressed to each
stockholder, or, if there be no stockholders, then to each member, at his last
known place of residence. If there be no newspaper published at the place
where the principal office of the corporation is established or located, a notice
of the election of directors shall be posted for a period of three weeks
immediately preceding the election in at least three public places, in the place
where the principal office of the corporation is established or located.
(Emphasis added)
The present Corporation Code (B.P. Blg. 68), which took effect on May 1,
1980,[12] similarly provides:
23. The Board of Directors or Trustees. - Unless otherwise provided in this Code,
the corporate powers of all corporations formed under this Code shall be
exercised, all business conducted and all property of such corporations
controlled and held by the board of directors or trustees to be elected from
among the holders of stocks, or where there is no stock, from among the
members of the corporation, who shall hold office for one (1) year and until
their successors are elected and qualified. (Emphasis added)
These provisions of the former and present corporation law leave no room
for doubt as to their meaning: the board of directors of corporations must be
elected from among the stockholders or members. There may be corporations
in which there are unelected members in the board but it is clear that in the
examples cited by petitioner the unelected members sit asex
officio members, i.e., by virtue of and for as long as they hold a particular

office. But in the case of petitioner, there is no reason at all for its
representative to be given a seat in the board.Nor does petitioner claim a right
to such seat by virtue of an office held. In fact it was not given such seat in the
beginning. It was only in 1975 that a proposed amendment to the by-laws
sought to give it one.
Since the provision in question is contrary to law, the fact that for fifteen
years it has not been questioned or challenged but, on the contrary, appears to
have been implemented by the members of the association cannot forestall a
later challenge to its validity. Neither can it attain validity through acquiescence
because, if it is contrary to law, it is beyond the power of the members of the
association to waive its invalidity. For that matter the members of the
association may have formally adopted the provision in question, but their
action would be of no avail because no provision of the by-laws can be adopted
if it is contrary to law.[13]
It is probable that, in allowing petitioners representative to sit on the
board, the members of the association were not aware that this was contrary to
law. It should be noted that they did not actually implement the provision in
question except perhaps insofar as it increased the number of directors from 11
to 15, but certainly not the allowance of petitioners representative as an
unelected member of the board of directors. It is more accurate to say that the
members merely tolerated petitioners representative and tolerance cannot be
considered ratification.
Nor can petitioner claim a vested right to sit in the board on the basis of
practice. Practice, no matter how long continued, cannot give rise to any vested
right if it is contrary to law. Even less tenable is petitioners claim that its right is
coterminus with the existence of the association.[14]
Finally, petitioner questions the authority of the SEC to render an opinion
on the validity of the provision in question. It contends that jurisdiction over this
case is exclusively vested in the HIGC.
But this case was not decided by the SEC but by the HIGC. The HIGC
merely cited as authority for its ruling the opinion of the SEC chairman. The
HIGC could have cited any other authority for the view that under the law
members of the board of directors of a corporation must be elected and it
would be none the worse for doing so.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED.
SO ORDERED.

BARBA VS LICEO DE CASTRO


http://sc.judiciary.gov.ph/jurisprudence/2012/november2012/193857.pdf
G.R. No. L-23241

March 14, 1925

HENRY FLEISCHER, plaintiff-appellee,


vs.
BOTICA NOLASCO CO., INC., defendant-appellant.
Antonio Gonzalez for appellant.
Emilio M. Javier for appellee.
JOHNSON, J.:
This action was commenced in the Court of First Instance of the Province of
Oriental Negros on the 14th day of August, 1923, against the board of directors
of the Botica Nolasco, Inc., a corporation duly organized and existing under the
laws of the Philippine Islands. The plaintiff prayed that said board of directors
be ordered toREGISTER in the books of the corporation five shares of its stock
in the name of Henry Fleischer, the plaintiff, and to pay him the sum of P500 for
damages sustained by him resulting from the refusal of said body to register
the shares of stock in question. The defendant filed a demurrer on the ground
that the facts alleged in the complaint did not constitute sufficient cause of
action, and that the action was not brought against the proper party, which was
the Botica Nolasco, Inc. The demurrer was sustained, and the plaintiff was
granted five days to amend his complaint.
On November 15, 1923, the plaintiff filed an amended complaint against the
Botica Nolasco, Inc., alleging that he became the owner of five shares of stock
of said corporation, by purchase from their original owner, one Manuel
Gonzalez; that the said shares were fully paid; and that the defendant refused
to register said shares in his name in the books of the corporation in spite of
repeated demands to that effect made by him upon said corporation, which
refusal caused him damages amounting to P500. Plaintiff prayed for a judgment
ordering the Botica Nolasco, Inc. to register in his name in the books of the
corporation the five shares of stock recorded in said books in the name of
Manuel Gonzalez, and to indemnify him in the sum of P500 as damages, and to
pay the costs. The defendant again filed a demurrer on the ground that the
amended complaint did not state facts sufficient to constitute a cause of action,
and that said amended complaint was ambiguous, unintelligible, uncertain,
which demurrer was overruled by the court.
The defendant answered the amended complaint denying generally and
specifically each and every one of the material allegations thereof, and, as a
special defense, alleged that the defendant, pursuant to article 12 of its by-

laws, had preferential right to buy from the plaintiff said shares at the par value
of P100 a share, plus P90 as dividends corresponding to the year 1922, and
that said offer was refused by the plaintiff. The defendant prayed for a
judgment absolving it from all liability under the complaint and directing the
plaintiff to deliver to the defendant the five shares of stock in question, and to
pay damages in the sum of P500, and the costs.
Upon the issue presented by the pleadings above stated, the cause was
brought on for trial, at the conclusion of which, and on August 21, 1924, the
Honorable N. Capistrano, judge, held that, in his opinion, article 12 of the bylaws of the corporation which gives it preferential right to buy its shares from
retiring stockholders, is in conflict with Act No. 1459 (Corporation Law),
especially with section 35 thereof; and rendered a judgment ordering the
defendant corporation, through its board of directors, toREGISTER in the
books of said corporation the said five shares of stock in the name of the
plaintiff, Henry Fleischer, as the shareholder or owner thereof, instead of the
original owner, Manuel Gonzalez, with costs against the defendant.
The defendant appealed from said judgment, and now makes several
assignment of error, all of which, in substance, raise the question whether or
not article 12 of the by-laws of the corporation is in conflict with the provisions
of the Corporation Law (Act No. 1459).
There is no controversy as to the facts of the present case. They are simple and
may be stated as follows:
That Manuel Gonzalez was the original owner of the five shares of stock in
question, Nos. 16, 17, 18, 19 and 20 of the Botica Nolasco, Inc.; that on March
11, 1923, he assigned and delivered said five shares to the plaintiff, Henry
Fleischer, by accomplishing the form of endorsement provided on the back
thereof, together with other credits, in consideration of a large sum of money
owed by Gonzalez to Fleischer (Exhibits A, B, B-1, B-2, B-3, B-4); that on March
13, 1923, Dr. Eduardo Miciano, who was the secretary-treasurer of said
corporation, offered to buy from Henry Fleischer, on behalf of the corporation,
said shares of stock, at their par value of P100 a share, for P500; that by virtue
of article 12 of the by-laws of Botica Nolasco, Inc., said corporation had the
preferential right to buy from Manuel Gonzalez said shares (Exhibit 2); that the
plaintiff refused to sell them to the defendant; that the plaintiff requested
Doctor Miciano to register said shares in his name; that Doctor Miciano refused
to do so, saying that it would be in contravention of the by-laws of the
corporation.
It also appears from the record that on the 13th day of March, 1923, two days
after the assignment of the shares to the plaintiff, Manuel Gonzales made a
written statement to the Botica Nolasco, Inc., requesting that the five shares of
stock sold by him to Henry Fleischer be noted transferred to Fleischer's name.

He also acknowledged in said written statement the preferential right of the


corporation to buy said five shares (Exhibit 3). On June 14, 1923, Gonzalez
wrote a letter to the Botica Nolasco, withdrawing and cancelling his written
statement of March 13, 1923 (Exhibit C), to which letter the Botica Nolasco on
June 15, 1923, replied, declaring that his written statement was in conformity
with the by-laws of the corporation; that his letter of June 14th was of no effect,
and that the shares in question had been registered in the name of the Botica
Nolasco, Inc., (Exhibit X).
As indicated above, the important question raised in this appeal is whether or
not article 12 of the by-laws of the Botica Nolasco, Inc., is in conflict with the
provisions of the Corporation Law (Act No. 1459). Appellant invoked said article
as its ground for denying the request of the plaintiff that the shares in question
be registered in his (plaintiff's) name, and for claiming that it (Botica Nolasco,
Inc.) had the preferential right to buy said shares from Gonzalez. Appellant now
contends that article 12 of the said by-laws is in conformity with the provisions
of Act No. 1459. Said article is as follows:
ART. 12. Las acciones de la Corporacion pueden ser transferidas a otra
persona, pero para que estas transferencias tengan validez legal,
deben constar en los registros de la Corporacion con el debido endoso
del accionista a cuyo nombre se ha expedido la accion o acciones que
se transfieran, o un documento de transferencia. Entendiendose que,
ningun accionista transferira accion alguna a otra persona sin
participar antes por escrito al Secretario-Tesorero. En igualdad de
condiciones, la sociedad tendra el derecho de adquirir para si la accion
o acciones que se traten de transferir. (Exhibit 2.)
The above-quoted article constitutes a by-law or regulation adopted by the
Botica Nolasco, Inc., governing the transfer of shares of stock of said
corporation. The latter part of said article creates in favor of the Botica Nolasco,
Inc., a preferential right to buy, under the same conditions, the share or shares
of stock of a retiring shareholder. Has said corporation any power, under the
Corporation Law (Act. No. 1459), to adopt such by-law?
The particular provisions of the Corporation Law referring to transfer of shares
of stock are as follows:
SEC. 13. Every corporation has the power:
xxx

xxx

xxx

(7) To make by-laws, not inconsistent with any existing law, for the
fixing or changing of the number of its officers and directors within the
limits prescribed by law, and for the transferring of its stock, the
administration of its corporate affairs, etc.

xxx

xxx

xxx

SEC. 35. The capital stock of stock corporations shall de divided into
shares for which certificates signed by the president or the vicepresident, countersigned by the secretary or clerk and sealed with the
seal of the corporation, shall be issued in accordance with the bylaws. Shares of stock so issued are personal property and may be
transferred by delivery of the certificate indorsed by the owner or his
attorney in fact or other person legally authorized to make the
transfer. No transfer, however, shall be valid, except as between the
parties, until the transfer is entered and noted upon the books of the
corporation so as to show the names of the parties to the transaction,
that date of the transfer, the number of the certificate, and the number
of shares transferred.
No share of stock against which the corporation holds any unpaid claim
shall be transferable on the books of the corporation.
Section 13, paragraph 7, above-quoted, empowers a corporation to make bylaws, not inconsistent with any existing law, for the transferring of its stock. It
follows from said provision, that a by-law adopted by a corporation relating to
transfer of stock should be in harmony with the law on the subject of transfer of
stock. The law on this subject is found in section 35 of Act No. 1459 above
quoted. Said section specifically provides that the shares of stock "are personal
property and may be transferred by delivery of the certificate indorsed by the
owner, etc."Said section 35 defines the nature, character and transferability of
shares of stock. Under said section they are personal property and may be
transferred as therein provided. Said section contemplates no restriction as to
whom they may be transferred or sold. It does not suggest that any
discrimination may be created by the corporation in favor or against a certain
purchaser. The holder of shares, as owner of personal property, is at liberty,
under said section, to dispose of them in favor of whomsoever he pleases,
without any other limitation in this respect, than the general provisions of law.
Therefore, a stock corporation in adopting a by-law governing transfer of shares
of stock should take into consideration the specific provisions of section 35 of
Act No. 1459, and said by-law should be made to harmonize with said
provisions. It should not be inconsistent therewith.
The by-law now in question was adopted under the power conferred upon the
corporation by section 13, paragraph 7, above quoted; but in adopting said bylaw the corporation has transcended the limits fixed by law in the same section,
and has not taken into consideration the provisions of section 35 of Act No.
1459.
As a general rule, the by-laws of a corporation are valid if they are reasonable
and calculated to carry into effect the objects of the corporation, and are not

contradictory to the general policy of the laws of the land. (Supreme


Commandery of the Knights of the Golden Rule vs. Ainsworth, 71 Ala., 436; 46
Am. Rep., 332.)
On the other hand, it is equally well settled that by-laws of a corporation must
be reasonable and for a corporate purpose, and always within the charter
limits. They must always be strictly subordinate to the constitution and the
general laws of the land. They must not infringe the policy of the state, nor be
hostile to public welfare. (46 Am. Rep., 332.) They must not disturb vested
rights or impair the obligation of a contract, take away or abridge the
substantial rights of stockholder or member, affect rights of property or create
obligations unknown to the law. (People's Home Savings Bank vs. Superior
Court, 104 Cal., 649; 43 Am. St. Rep., 147; Ireland vs. Globe Milling Co., 79 Am.
St. Rep., 769.)
The validity of the by-law of a corporation is purely a question of law. (South
Florida Railroad Co. vs. Rhodes, 25 Fla., 40.)
The power to enact by-laws restraining the sale and transfer of stock
must be found in the governing statute or the charter. Restrictions
upon the traffic in stock must have their source in legislative
enactment, as the corporation itself cannot create such impediments.
By-law are intended merely for the protection of the corporation, and
prescribe regulation and not restriction; they are always subject to the
charter of the corporation. The corporation, in the absence of such a
power, cannot ordinarily inquire into or pass upon the legality of the
transaction by which its stock passes from one person to another, nor
can it question the consideration upon which a sale is based. A by-law
cannot take away or abridge the substantial rights of
stockholder. Under a statute authorizing by- laws for the transfer of
stock, a corporation can do no more than prescribe a general mode of
transfer on the corporate books and cannot justify an unreasonable
restriction upon the right of sale. (4 Thompson on Corporations, sec.
4137, p. 674.
The right of unrestrained transfer of shares inheres in the very nature
of a corporation, and courts will carefully scrutinize any attempt to
impose restrictions or limitations upon the right of stockholders to sell
and assign their stock. The right to impose any restraint in this respect
must be conferred upon the corporation either by the governing
statute or by the articles of the corporation. It cannot be done by a bylaw without statutory or charter authority. (4 Thompson on
Corporations, sec. 4334, pp. 818, 819.)
The jus disponendi, being an incident of the ownership of property, the
general rule (subject to exceptions hereafter pointed out and

discussed) is that every owner of corporate shares has the same


uncontrollable right to alien them which attaches to the ownership of
any other species of property. A shareholder is under no obligation to
refrain from selling his shares at the sacrifice of his personal interest, in
order to secure the welfare of the corporation, or to enable another
shareholder to make gains and profits. (10 Cyc., p. 577.)
It follows from the foregoing that a corporation has no power to
prevent or to restrain transfers of its shares, unless such power is
expressly conferred in its charter or governing statute. This conclusion
follows from the further consideration that by-laws or other regulations
restraining such transfers, unless derived from authority expressly
granted by the legislature, would be regarded as impositions in
restraint of trade. (10 Cyc., p. 578.)
The foregoing authorities go farther than the stand we are taking on this
question. They hold that the power of a corporation to enact by-laws restraining
the sale and transfer of shares, should not only be in harmony with the law or
charter of the corporation, but such power should be expressly granted in said
law or charter.
The only restraint imposed by the Corporation Law upon transfer of shares is
found in section 35 of Act No. 1459, quoted above, as follows: "No transfer,
however, shall be valid, except as between the parties, until the transfer is
entered and noted upon the books of the corporation so as to show the names
of the parties to the transaction, the date of the transfer, the number of the
certificate, and the number of shares transferred." This restriction is necessary
in order that the officers of the corporation may know who are the stockholders,
which is essential in conducting elections of officers, in calling meeting of
stockholders, and for other purposes. but any restriction of the nature of that
imposed in the by-law now in question, is ultra vires, violative of the property
rights of shareholders, and in restraint of trade.
And moreover, the by-laws now in question cannot have any effect on the
appellee. He had no knowledge of such by-law when the shares were assigned
to him. He obtained them in good faith and for a valuable consideration. He
was not a privy to the contract created by said by-law between the shareholder
Manuel Gonzalez and the Botica Nolasco, Inc. Said by-law cannot operate to
defeat his rights as a purchaser.
An unauthorized by-law forbidding a shareholder to sell his shares
without first offering them to the corporation for a period of thirty days
is not binding upon an assignee of the stock as a personal contract,
although his assignor knew of the by-law and took part in its adoption.
(10 Cyc., 579; Ireland vs. Globe Milling Co., 21 R.I., 9.)

When no restriction is placed by public law on the transfer of corporate


stock, a purchaser is not affected by any contractual restriction of
which he had no notice. (Brinkerhoff-Farris Trust and Savings Co. vs.
Home Lumber Co., 118 Mo., 447.)

PMI COLLEGES, petitioner,


vs.
THE NATIONAL LABOR RELATIONS COMMISSION and ALEJANDRO GA
LVA N, respondents.

The assignment of shares of stock in a corporation by one who has


assented to an unauthorized by-law has only the effect of a contract
by, and enforceable against, the assignor; the assignee is not bound by
such by-law by virtue of the assignment alone. (Ireland vs. Globe
Milling Co., 21 R.I., 9.)

ROMERO, J.:

A by-law of a corporation which provides that transfers of stock shall


not be valid unless approved by the board of directors, while it may be
enforced as a reasonable regulation for the protection of the
corporation against worthless stockholders, cannot be made available
to defeat the rights of third persons. (Farmers' and Merchants' Bank of
Lineville vs. Wasson, 48 Iowa, 336.)
Counsel for defendant incidentally argues in his brief, that the plaintiff does not
have any right of action against the defendant corporation, but against the
president and secretary thereof, inasmuch as the signing andREGISTRATION
of shares is incumbent upon said officers pursuant to section 35 of the
Corporation Law. This contention cannot be sustained now. The question should
have been raised in the lower court. It is too late to raise it now in this appeal.
Besides, as stated above, the corporation was made defendant in this action
upon the demurrer of the attorney of the original defendant in the lower court,
who contended that the Botica Nolasco, Inc., should be made the party
defendant in this action. Accordingly, upon order of the court, the complaint
was amended and the said corporation was made the party defendant.
Whenever a corporation refuses to transfer andREGISTER stock in cases like
the present, mandamus will lie to compel the officers of the corporation to
transfer said stock upon the books of the corporation. (26 Cyc. 347; Hager vs.
Bryan, 19 Phil., 138.)
In view of all the foregoing, we are of the opinion, and so hold, that the decision
of the lower court is in accordance with law and should be and is hereby
affirmed, with costs. So ordered.
Malcolm, Villamor, Ostrand, Johns, and Romualdez, JJ., concur.
G.R. No. 121466 August 15, 1997

Subject of the instant petition for certiorari under Rule 65 of the Rules of Court
is the resolution 1 of public respondent National Labor Relations
Commission 2 rendered on August 4, 1995, affirming in toto the December 7,
1994 decision 3 of Labor Arbiter Pablo C. Espiritu declaring petitioner PMI
Colleges liable to pay private respondent Alejandro Galvan P405,000.00 in
unpaid wages and P40,532.00 as attorney's fees.
A chronicle of the pertinent events on record leading to the filing of the instant
petition is as follows:
On July 7, 1991, petitioner, an educational institution offering courses on basic
seaman's training and other marine-related courses, hired private respondent
as contractual instructor with an agreement that the latter shall be paid at an
hourly rate of P30.00 to P50.00, depending on the description of load subjects
and on the schedule for teaching the same. Pursuant to this engagement,
private respondent then organized classes in marine engineering.
Initially, private respondent and other instructors were compensated for
services rendered during the first three periods of the abovementioned
contract. However, for reasons unknown to private respondent, he stopped
receiving payment for the succeeding rendition of services. This claim of nonpayment was embodied in a letter dated March 3, 1992, written by petitioner's
Acting Director, Casimiro A. Aguinaldo, addressed to its President, Atty.
Santiago Pastor, calling attention to and appealing for the early approval and
release of the salaries of its instructors including that of private respondent. It
appeared further in said letter that the salary of private respondent
corresponding to the shipyard and plant visits and the ongoing on-the-job
training of Class 41 on board MV "Sweet Glory" of Sweet Lines, Inc. was not yet
included. This request of the Acting Director apparently went unheeded.
Repeated demands having likewise failed, private respondent was soon
constrained to file a complaint 4 before the National Capital Region Arbitration
Branch on September 14, 1993 seeking payment for salaries earned from the
following: (1) basic seaman course Classes 41 and 42 for the period covering
October 1991 to September 1992; (2) shipyard and plant visits and on-the-job
training of Classes 41 and 42 for the period covering October 1991 to
September 1992 on board M/V "Sweet Glory" vessel; and (3) as Acting Director
of Seaman Training Course for 3-1/2 months.

In support of the abovementioned claims, private respondent submitted


documentary evidence which were annexed to his complaint, such as the
detailed load and schedule of classes with number of class hours and rate per
hour (Annex "A"); PMI Colleges Basic Seaman Training Course (Annex "B"); the
aforementioned letter-request for payment of salaries by the Acting Director of
PMI Colleges (Annex "C"); unpaid load of private respondent (Annex "D"); and
vouchers prepared by the accounting department of petitioner but whose
amounts indicated therein were actually never paid to private respondent
(Exhibit "E").
Private respondent's claims, as expected, were resisted by petitioner. It alleged
that classes in the courses offered which complainant claimed to have
remained unpaid were not held or conducted in the school premises of PMI
Colleges. Only private respondent, it was argued, knew whether classes were
indeed conducted. In the same vein, petitioner maintained that it exercised no
appropriate and proper supervision of the said classes which activities allegedly
violated certain rules and regulations of the Department of Education, Culture
and Sports (DECS). Furthermore, the claims, according to petitioner, were all
exaggerated and that, at any rate, private respondent abandoned his work at
the time he should have commenced the same.
In reply, private respondent belied petitioner's allegations contending, among
others, that he conducted lectures within the premises of petitioner's rented
space located at 5th Floor, Manufacturers Bldg., Sta. Cruz, Manila; that his
students duly enrolled with the Registrar's Office of petitioner; that shipyard
and plant visits were conducted at Fort San Felipe, Cavite Naval Base; that
petitioner was fully aware of said shipyard and plant visits because it even
wrote a letter for that purpose; and that basic seaman courses 41 and 42 were
sanctioned by the DECS as shown by the records of the Registrar's Office.
Later in the proceedings below, petitioner manifested that Mr. Tomas G. Cloma,
Jr., a member of the petitioner's Board of Trustees wrote a letter 5 to the
Chairman of the Board on May 23, 1994, clarifying the case of private
respondent and stating therein, inter alia, that under petitioner's by-laws only
the Chairman is authorized to sign any contract and that private respondent, in
any event, failed to submit documents on the alleged shipyard and plant visits
in Cavite Naval Base.
Attempts at amicable settlement having failed, the parties were required to
submit their respective position papers. Thereafter, on June 16, 1994, the Labor
Arbiter issued an order declaring the case submitted for decision on the basis
of the position papers which the parties filed. Petitioner, however, vigorously
opposed this order insisting that there should be a formal trial on the merits in
view of the important factual issues raised. In another order dated July 22,
1994, the Labor Arbiter impliedly denied petitioner's opposition, reiterating that
the case was already submitted for decision. Hence, a decision was

subsequently rendered by the Labor Arbiter on December 7, 1994 finding for


the private respondent. On appeal, the NLRC affirmed the same in toto in its
decision of August 4, 1995.
Aggrieved, petitioner now pleads for the Court to resolve the following issues in
its favor, to wit:
I. Whether the money claims of private respondent representing
salaries/wages as contractual instructor for class instruction, on-the-job
training and shipboard and plant visits have valid legal and factual
bases;
II. Whether claims for salaries/wages for services relative to on-the-job
training and shipboard and plant visits by instructors, assuming the
same were really conducted, have valid bases;
III. Whether the petitioner was denied its right to procedural due
process; and
IV. Whether the NLRC findings in its questioned resolution have sound
legal and factual support.
We see no compelling reason to grant petitioner's plea; the same must,
therefore, be dismissed.
At once, a mere perusal of the issues raised by petitioner already invites
dismissal for demonstrated ignorance and disregard of settled rules
on certiorari. Except perhaps for the third issue, the rest glaringly call for a reexamination, evaluation and appreciation of the weight and sufficiency of
factual evidence presented before the Labor Arbiter. This, of course, the Court
cannot do in the exercise of its certiorari jurisdiction without transgressing the
well-defined limits thereof. The corrective power of the Court in this regard is
confined only to jurisdictional issues and a determination of whether there is
such grave abuse of discretion amounting to lack or excess of jurisdiction on
the part of a tribunal or agency. So unyielding and consistent are the decisional
rules thereon that it is indeed surprising why petitioner's counsel failed to
accord them the observance they deserve.
Thus, in San Miguel Foods, Inc. Cebu B-Men Feed Plant v. Hon. Bienvenido
Laguesma, 6 we were emphatic in declaring that:
This Court is definitely not the proper venue to consider this matter for
it is not a trier of facts. . . . Certiorariis a remedy narrow in its scope
and inflexible in character. It is not a general utility tool in the legal
workshop. Factual issues are not a proper subject for certiorari, as the

power of the Supreme Court to review labor cases is limited to the


issue of jurisdiction and grave abuse of discretion. . . . (Emphasis
supplied).
Of the same tenor was our disquisition in Ilocos Sur Electric Cooperative,
Inc. v. NLRC 7 where we made plain that:
In certiorari proceedings under Rule 65 of the Rules of Court, judicial
review by this Court does not go so far as to evaluate the sufficiency of
evidence upon which the Labor Arbiter and the NLRC based their
determinations, the inquiry being limited essentially to whether or not
said public respondents had acted without or in excess of its
jurisdiction or with grave abuse of discretion. (Emphasis supplied).
To be sure, this does not mean that the Court would disregard altogether the
evidence presented. We merely declare that the extent of review of evidence
we ordinarily provide in other cases is different when it is a special civil action
of certiorari. The latter commands us to merely determine whether there is
basis established on record to support the findings of a tribunal and such
findings meet the required quantum of proof, which in this instance, is
substantial evidence. Our deference to the expertise acquired by quasi-judicial
agencies and the limited scope granted to us in the exercise
of certiorari jurisdiction restrain us from going so far as to probe into the
correctness of a tribunal's evaluation of evidence, unless there is palpable
mistake and complete disregard thereof in which case certiorari would be
proper. In plain terms, in certiorari proceedings, we are concerned with mere
"errors of jurisdiction" and not "errors of judgment." Thus:
The rule is settled that the original and exclusive jurisdiction of this
Court to review a decision of respondent NLRC (or Executive Labor
Arbiter as in this case) in a petition for certiorari under Rule 65 does
not normally include an inquiry into the correctness of its evaluation of
the evidence. Errors of judgment, as distinguished from errors of
jurisdiction, are not within the province of a special civil action for
certiorari, which is merely confined to issues of jurisdiction or grave
abuse of discretion. It is thus incumbent upon petitioner to
satisfactorily establish that respondent Commission or executive labor
arbiter acted capriciously and whimsically in total disregard of
evidence material to or even decisive of the controversy, in order that
the extraordinary writ of certiorari will lie. By grave abuse of discretion
is meant such capricious and whimsical exercise of judgment as is
equivalent to lack of jurisdiction, and it must be shown that the
discretion was exercised arbitrarily or despotically. For certiorari to lie
there must be capricious, arbitrary and whimsical exercise of power,
the very antithesis of the judicial prerogative in accordance with
centuries of both civil law and common law traditions. 8

The Court entertains no doubt that the foregoing doctrines apply with equal
force in the case at bar.
In any event, granting that we may have to delve into the facts and evidence of
the parties, we still find no puissant justification for us to adjudge both the
Labor Arbiter's and NLRC's appreciation of such evidence as indicative of any
grave abuse of discretion.
First. Petitioner places so much emphasis on its argument that private
respondent did not produce a copy of the contract pursuant to which he
rendered services. This argument is, of course, puerile. The absence of such
copy does not in any manner negate the existence of a contract of employment
since "(C)ontracts shall be obligatory, in whatever form they have
been entered into, provided all the essential requisites for their validity are
present." 9 The only exception to this rule is "when the law requires that a
contract be in some form in order that it may be valid or enforceable, or that a
contract be proved in a certain way." However, there is no requirement under
the law that the contract of employment of the kind entered into by petitioner
with private respondent should be in any particular form. While it may have
been desirable for private respondent to have produced a copy of his contract if
one really exists, but the absence thereof, in any case, does not militate
against his claims inasmuch as:
No particular form of evidence is required to prove the existence of an
employer-employee relationship. Any competent and relevant evidence
to prove the relationship may be admitted. For, if only documentary
evidence would be required to show that relationship, no scheming
employer would ever be brought before the bar of justice, as no
employer would wish to come out with any trace of the illegality he has
authored considering that it should take much weightier proof to
invalidate a written instrument. . . . 10
At any rate, the vouchers prepared by petitioner's own accounting department
and the letter-request of its Acting Director asking for payment of private
respondent's services suffice to support a reasonable conclusion that private
respondent was employed with petitioner. How else could one explain the fact
that private respondent was supposed to be paid the amounts mentioned in
those documents if he were not employed? Petitioner's evidence is wanting in
this respect while private respondent affirmatively stated that the same arose
out of his employment with petitioner. As between the two, the latter is
weightier inasmuch as we accord affirmative testimony greater value than a
negative one. For the foregoing reasons, we find it difficult to agree with
petitioner's assertion that the absence of a copy of the alleged contract should
nullify private respondent's claims.

Neither can we concede that such contract would be invalid just because the
signatory thereon was not the Chairman of the Board which allegedly violated
petitioner's by-laws. Since by-laws operate merely as internal rules among the
stockholders, they cannot affect or prejudice third persons who deal with the
corporation, unless they have knowledge of the same." 11 No proof appears on
record that private respondent ever knew anything about the provisions of said
by-laws. In fact, petitioner itself merely asserts the same without even
bothering to attach a copy or excerpt thereof to show that there is such a
provision. How can it now expect the Labor Arbiter and the NLRC to believe it?
That this allegation has never been denied by private respondent does not
necessarily signify admission of its existence because technicalities of law and
procedure and the rules obtaining in the courts of law do not strictly apply to
proceedings of this nature.
Second. Petitioner bewails the fact that both the Labor Arbiter and the NLRC
accorded due weight to the documents prepared by private respondent since
they are said to be self-serving. "Self-serving evidence" is not to be literally
taken as evidence that serves one's selfish interest. 12 The fact alone that most
of the documents submitted in evidence by private respondent were prepared
by him does not make them self-serving since they have been offered in the
proceedings before the Labor Arbiter and that ample opportunity was given to
petitioner to rebut their veracity and authenticity. Petitioner, however, opted to
merely deny them which denial, ironically, is actually what is considered selfserving evidence 13 and, therefore, deserves scant consideration. In any event,
any denial made by petitioner cannot stand against the affirmative and fairly
detailed manner by which private respondent supported his claims, such as the
places where he conducted his classes, on-the-job training and shipyard and
plant visits; the rate he applied and the duration of said rendition of services;
the fact that he was indeed engaged as a contractual instructor by petitioner;
and that part of his services was not yet remunerated. These evidence, to
reiterate, have never been effectively refuted by petitioner.
Third. As regards the amounts demanded by private respondent, we can only
rely upon the evidence presented which, in this case, consists of the
computation of private respondent, as well as the findings of both the Labor
Arbiter and the NLRC. Petitioner, it must be stressed, presented no satisfactory
proof to the contrary. Absent such proof, we are constrained to rely upon
private respondent's otherwise straightforward explanation of his claims.

Fourth. The absence of a formal hearing or trial before the Labor Arbiter is no
cause for petitioner to impute grave abuse of discretion. Whether to conduct
one or not depends on the sole discretion of the Labor Arbiter, taking into
account the position papers and supporting documents submitted by the
parties on every issue presented. If the Labor Arbiter, in his judgment, is
confident that he can rely on the documents before him, he cannot be faulted
for not conducting a formal trial anymore, unless it would appear that, in view
of the particular circumstances of a case, the documents, without more, are
really insufficient.
As applied to the instant case, we can understand why the Labor Arbiter has
opted not to proceed to trial, considering that private respondent, through
annexes to his position paper, has adequately established that, first of all, he
was an employee of petitioner; second, the nature and character of his
services, and finally, the amounts due him in consideration of his services.
Petitioner, it should be reiterated, failed to controvert them. Actually, it offered
only four documents later in the course of the proceedings. It has only itself to
blame if it did not attach its supporting evidence with its position paper. It
cannot now insist that there be a trial to give it an opportunity to ventilate what
it should have done earlier. Section 3, Rule V of the New Rules of Procedure of
the NLRC is very clear on the matter:
Sec. 3. . . .
These verified position papers . . . shall be accompanied
by all supporting documents including the affidavits of their respective
witnesses which shall take the place of the latter's direct
testimony. The parties shall thereafter not be allowed to allege facts,
or present evidence to prove facts, not referred to and any cause or
causes of action not included in the complaint or position papers,
affidavits and other documents. . . . (Emphasis supplied).
Thus, given the mandate of said rule, petitioner should have foreseen that the
Labor Arbiter, in view of the non-litigious nature of the proceedings before it,
might not proceed at all to trial. Petitioner cannot now be heard to complain of
lack of due process. The following is apropos:
The petitioners should not have assumed that after they submitted
their position papers, the Labor Arbiter would call for a formal trial or
hearing. The holding of a trial is discretionary on the Labor Arbiter, it is
not a matter of right of the parties, especially in this case, where the
private respondents had already presented their documentary
evidence.
xxx xxx xxx

The petitioners did ask in their position paper for a hearing to thresh
out some factual matters pertinent to their case. However, they had no
right or reason to assume that their request would be granted. The
petitioners should have attached to their position paper all the
documents that would prove their claim in case it was decided that no
hearing should be conducted or was necessary. In fact, the rules
require that position papers shall be accompanied by all supporting
documents, including affidavits of witnesses in lieu of their direct
testimony. 14
It must be noted that adequate opportunity was given to petitioner in the
presentation of its evidence, such as when the Labor Arbiter granted
petitioner's Manifestation and Motion 15 dated July 22, 1994 allowing it to
submit four more documents. This opportunity notwithstanding, petitioner still
failed to fully proffer all its evidence which might help the Labor Arbiter in
resolving the issues. What it desired instead, as stated in its petition, 16 was to
"require presentation of witnesses buttressed by relevant documents in support
thereof." But this is precisely the opportunity given to petitioner when the Labor
Arbiter granted its Motion and Manifestation. It should have presented the
documents it was proposing to submit. The affidavits of its witnesses would
have sufficed in lieu of their direct testimony 17 to clarify what it perceives to be
complex factual issues. We rule that the Labor Arbiter and the NLRC were not
remiss in their duty to afford petitioner due process. The essence of due
process is merely that a party be afforded a reasonable opportunity to be heard
and to submit any evidence he may have in support of his defense. 18
WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED
for lack of merit while the resolution of the National Labor Relations
Commission dated August 4, 1995 is hereby AFFIRMED.
SO ORDERED.
SAPPARI K. SAWADJAAN, petitioner, vs. THE HONORABLE COURT OF
APPEALS, THE CIVIL SERVICE COMMISSION and AL-AMANAH
INVESTMENT BANK OF THE PHILIPPINES, respondents.

Dishonesty in the Performance of Official Duties and/or Conduct Prejudicial to


the Best Interest of the Service and dismissing him from the service, and its
Resolution[2] of 15 December 1999 dismissing petitioners Motion for
Reconsideration.
The records show that petitioner Sappari K. Sawadjaan was among the
first employees of the Philippine Amanah Bank (PAB) when it was created by
virtue of Presidential Decree No. 264 on 02 August 1973. He rose through the
ranks, working his way up from his initial designation as security guard, to
settling clerk, bookkeeper, credit investigator, project analyst, appraiser/
inspector, and eventually, loans analyst. [3]
In February 1988, while still designated as appraiser/investigator,
Sawadjaan was assigned to inspect the properties offered as collaterals by
Compressed Air Machineries and Equipment Corporation (CAMEC) for a credit
line of Five Million Pesos (P5,000,000.00). The properties consisted of two
parcels of land covered by Transfer Certificates of Title (TCTs) No. N-130671 and
No. C-52576. On the basis of his Inspection and Appraisal Report, [4] the PAB
granted the loan application. When the loan matured on 17 May 1989, CAMEC
requested an extension of 180 days, but was granted only 120 days to repay
the loan.[5]
In the meantime, Sawadjaan was promoted to Loans Analyst I on 01 July
1989.[6]
In January 1990, Congress passed Republic Act 6848 creating the AIIBP
and repealing P.D. No. 264 (which created the PAB). All assets, liabilities and
capital accounts of the PAB were transferred to the AIIBP, [7] and the existing
personnel of the PAB were to continue to discharge their functions unless
discharged.[8] In the ensuing reorganization, Sawadjaan was among the
personnel retained by the AIIBP.
When CAMEC failed to pay despite the given extension, the bank, now
referred to as the AIIBP, discovered that TCT No. N-130671 was spurious, the
property described therein non-existent, and that the property covered by TCT
No. C-52576 had a prior existing mortgage in favor of one Divina Pablico.

DECISION
CHICO-NAZARIO, J.:
This is a petition for certiorari under Rule 65 of the Rules of Court of the
Decision[1] of the Court of Appeals of 30 March 1999 affirming Resolutions No.
94-4483 and No. 95-2754 of the Civil Service Commission (CSC) dated 11
August 1994 and 11 April 1995, respectively, which in turn affirmed Resolution
No. 2309 of the Board of Directors of the Al-Amanah Islamic Investment Bank of
the Philippines (AIIBP) dated 13 December 1993, finding petitioner guilty of

On 08
Investigating
the bank Six
as found and

June 1993, the Board of Directors of the AIIBP created an


Committee to look into the CAMEC transaction, which had cost
Million Pesos (P6,000,000.00) in losses. [9] The subsequent events,
decided upon by the Court of Appeals, [10] are as follows:

On 18 June 1993, petitioner received a memorandum from Islamic Bank [AIIBP]


Chairman Roberto F. De Ocampo charging him with Dishonesty in the
Performance of Official Duties and/or Conduct Prejudicial to the Best Interest of
the Service and preventively suspending him.

In his memorandum dated 8 September 1993, petitioner informed the


Investigating Committee that he could not submit himself to the jurisdiction of
the Committee because of its alleged partiality. For his failure to appear before
the hearing set on 17 September 1993, after the hearing of 13 September 1993
was postponed due to the Manifestation of even date filed by petitioner, the
Investigating Committee declared petitioner in default and the prosecution was
allowed to present its evidence ex parte.
On 08 December 1993, the Investigating Committee rendered a decision, the
pertinent portions of which reads as follows:
In view of respondent SAWADJAANS abject failure to perform his duties and
assigned tasks as appraiser/inspector, which resulted to the prejudice and
substantial damage to the Bank, respondent should be held liable therefore. At
this juncture, however, the Investigating Committee is of the considered
opinion that he could not be held liable for the administrative offense of
dishonesty considering the fact that no evidence was adduced to show that he
profited or benefited from being remiss in the performance of his duties. The
record is bereft of any evidence which would show that he received any amount
in consideration for his non-performance of his official duties.
This notwithstanding, respondent cannot escape liability. As adverted to earlier,
his failure to perform his official duties resulted to the prejudice and substantial
damage to the Islamic Bank for which he should be held liable for the
administrative offense of CONDUCT PREJUDICIAL TO THE BEST INTEREST OF
THE SERVICE.
Premises considered, the Investigating Committee recommends that
respondent SAPPARI SAWADJAAN be meted the penalty of SIX (6) MONTHS and
ONE (1) DAY SUSPENSION from office in accordance with the Civil Service
Commissions Memorandum Circular No. 30, Series of 1989.
On 13 December 1993, the Board of Directors of the Islamic Bank [AIIBP]
adopted Resolution No. 2309 finding petitioner guilty of Dishonesty in the
Performance of Official Duties and/or Conduct Prejudicial to the Best Interest of
the Service and imposing the penalty of Dismissal from the Service.
On reconsideration, the Board of Directors of the Islamic Bank [AIIBP] adopted
the Resolution No. 2332 on 20 February 1994 reducing the penalty imposed on
petitioner from dismissal to suspension for a period of six (6) months and one
(1) day.
On 29 March 1994, petitioner filed a notice of appeal to the Merit System
Protection Board (MSPB).

On 11 August 1994, the CSC adopted Resolution No. 94-4483 dismissing the
appeal for lack of merit and affirming Resolution No. 2309 dated 13 December
1993 of the Board of Directors of Islamic Bank.
On 11 April 1995, the CSC adopted Resolution No. 95-2574 denying petitioners
Motion for Reconsideration.
On 16 June 1995, the instant petition was filed with the Honorable Supreme
Court on the following assignment of errors:
I. Public respondent Al-Amanah Islamic Investment Bank of the
Philippines has committed a grave abuse of discretion amounting to excess or
lack of jurisdiction when it initiated and conducted administrative investigation
without a validly promulgated rules of procedure in the adjudication of
administrative cases at the Islamic Bank.
II. Public respondent Civil Service Commission has committed a grave
abuse of discretion amounting to lack of jurisdiction when it prematurely and
falsely assumed jurisdiction of the case not appealed to it, but to the Merit
System Protection Board.
III. Both the Islamic Bank and the Civil Service Commission erred in
finding petitioner Sawadjaan of having deliberately reporting false information
and therefore guilty of Dishonesty and Conduct Prejudicial to the Best Interest
of the Service and penalized with dismissal from the service.
On 04 July 1995, the Honorable Supreme Court En Banc referred this petition to
this Honorable Court pursuant to Revised Administrative Circular No. 1-95,
which took effect on 01 June 1995.
We do not find merit [in] the petition.
Anent the first assignment of error, a reading of the records would reveal that
petitioner raises for the first time the alleged failure of the Islamic Bank [AIIBP]
to promulgate rules of procedure governing the adjudication and disposition of
administrative cases involving its personnel. It is a rule that issues not properly
brought and ventilated below may not be raised for the first time on appeal,
save in exceptional circumstances (Casolita, Sr. v. Court of Appeals, 275 SCRA
257) none of which, however, obtain in this case. Granting arguendo that the
issue is of such exceptional character that the Court may take cognizance of
the same, still, it must fail. Section 26 of Republic Act No. 6848 (1990) provides:
Section 26. Powers of the Board. The Board of Directors shall have the broadest
powers to manage the Islamic Bank, x x x The Board shall adopt policy
guidelines necessary to carry out effectively the provisions of this Charter as

well as internal rules and regulations necessary for the conduct of its Islamic
banking business and all matters related to personnel organization, office
functions and salary administration. (Italics ours)
On the other hand, Item No. 2 of Executive Order No. 26 (1992) entitled
Prescribing Procedure and Sanctions to Ensure Speedy Disposition of
Administrative Cases directs, all administrative agencies to adopt and include
in their respective Rules of Procedure provisions designed to abbreviate
administrative proceedings.
The above two (2) provisions relied upon by petitioner does not require the
Islamic Bank [AIIBP] to promulgate rules of procedure before administrative
discipline may be imposed upon its employees. The internal rules of procedures
ordained to be adopted by the Board refers to that necessary for the conduct of
its Islamic banking business and all matters related to personnel organization,
office functions and salary administration. On the contrary, Section 26 of RA
6848 gives the Board of Directors of the Islamic Bank the broadest powers to
manage the Islamic Bank. This grant of broad powers would be an idle
ceremony if it would be powerless to discipline its employees.
The second assignment of error must likewise fail. The issue is raised for the
first time via this petition for certiorari. Petitioner submitted himself to the
jurisdiction of the CSC. Although he could have raised the alleged lack of
jurisdiction in his Motion for Reconsideration of Resolution No. 94-4483 of the
CSC, he did not do so. By filing the Motion for Reconsideration, he is estopped
from denying the CSCs jurisdiction over him, as it is settled rule that a party
who asks for an affirmative relief cannot later on impugn the action of the
tribunal as without jurisdiction after an adverse result was meted to him.
Although jurisdiction over the subject matter of a case may be objected to at
any stage of the proceedings even on appeal, this particular rule, however,
means that jurisdictional issues in a case can be raised only during the
proceedings in said case and during the appeal of said case (Aragon v. Court of
Appeals, 270 SCRA 603). The case at bar is a petition [for] certiorari and not an
appeal.
But even on the merits the argument must falter. Item No. 1 of CSC Resolution
No. 93-2387 dated 29 June 1993, provides:
Decisions in administrative cases involving officials and employees of the civil
service appealable to the Commission pursuant to Section 47 of Book V of the
Code (i.e., Administrative Code of 1987) including personnel actions such as
contested appointments shall now be appealed directly to the Commission and
not to the MSPB.
In Rubenecia v. Civil Service Commission, 244 SCRA 640, 651, it was
categorically held:

. . . The functions of the MSPB relating to the determination of administrative


disciplinary cases were, in other words, re-allocated to the Commission itself.
Be that as it may, (i)t is hornbook doctrine that in order `(t)o ascertain whether
a court (in this case, administrative agency) has jurisdiction or not, the
provisions of the law should be inquired into. Furthermore, `the jurisdiction of
the court must appear clearly from the statute law or it will not be held to exist.
(Azarcon v. Sandiganbayan, 268 SCRA 747, 757) From the provision of law
abovecited, the Civil Service Commission clearly has jurisdiction over the
Administrative Case against petitioner.
Anent the third assignment of error, we likewise do not find merit in petitioners
proposition that he should not be liable, as in the first place, he was not
qualified to perform the functions of appraiser/investigator because he lacked
the necessary training and expertise, and therefore, should not have been
found dishonest by the Board of Directors of Islamic Bank [AIIBP] and the CSC.
Petitioner himself admits that the position of appraiser/inspector is one of the
most serious [and] sensitive job in the banking operations. He should have
been aware that accepting such a designation, he is obliged to perform the task
at hand by the exercise of more than ordinary prudence. As
appraiser/investigator, he is expected, among others, to check the authenticity
of the documents presented by the borrower by comparing them with the
originals on file with the proper government office. He should have made it sure
that the technical descriptions in the location plan on file with the Bureau of
Lands of Marikina, jibe with that indicated in the TCT of the collateral offered by
CAMEC, and that the mortgage in favor of the Islamic Bank was duly annotated
at the back of the copy of the TCT kept by the Register of Deeds of Marikina.
This, petitioner failed to do, for which he must be held liable. That he did not
profit from his false report is of no moment. Neither the fact that it was not
deliberate or willful, detracts from the nature of the act as dishonest. What is
apparent is he stated something to be a fact, when he really was not sure that
it was so.
WHEREFORE, above premises considered, the instant Petition is DISMISSED,
and the assailed Resolutions of the Civil Service Commission are hereby
AFFIRMED.
On 24 March 1999, Sawadjaans counsel notified the court a quo of his
change of address,[11] but apparently neglected to notify his client of this fact.
Thus, on 23 July 1999, Sawadjaan, by himself, filed a Motion for New Trial [12] in
the Court of Appeals based on the following grounds: fraud, accident, mistake
or excusable negligence and newly discovered evidence. He claimed that he
had recently discovered that at the time his employment was terminated, the
AIIBP had not yet adopted its corporate by-laws. He attached a
Certification[13] by the Securities and Exchange Commission (SEC) that it was
only on 27 May 1992 that the AIIBP submitted its draft by-laws to the SEC, and

that its registration was being held in abeyance pending certain corrections
being made thereon. Sawadjaan argued that since the AIIBP failed to file its bylaws within 60 days from the passage of Rep. Act No. 6848, as required by Sec.
51 of the said law, the bank and its stockholders had already forfeited its
franchise or charter, including its license to exist and operate as a corporation,
[14]
and thus no longer have the legal standing and personality to initiate an
administrative case.
Sawadjaans counsel subsequently adopted his motion, but requested that
it be treated as a motion for reconsideration. [15] This motion was denied by the
court a quo in its Resolution of 15 December 1999.[16]
Still disheartened, Sawadjaan filed the present petition for certiorari under
Rule 65 of the Rules of Court challenging the above Decision and Resolution of
the Court of Appeals on the ground that the court a quo erred: i) in ignoring the
facts and evidences that the alleged Islamic Bank has no valid by-laws; ii) in
ignoring the facts and evidences that the Islamic Bank lost its juridical
personality as a corporation on 16 April 1990; iii) in ignoring the facts and
evidences that the alleged Islamic Bank and its alleged Board of Directors have
no jurisdiction to act in the manner they did in the absence of a valid by-laws;
iv) in not correcting the acts of the Civil Service Commission who erroneously
rendered the assailed Resolutions No. 94-4483 and No. 95-2754 as a result of
fraud, falsification and/or misrepresentations committed by Farouk A. Carpizo
and his group, including Roberto F. de Ocampo; v) in affirming an
unconscionably harsh and/or excessive penalty; and vi) in failing to consider
newly discovered evidence and reverse its decision accordingly.
Subsequently, petitioner Sawadjaan filed an Ex-parte Urgent Motion for
Additional Extension of Time to File a Reply (to the Comments of Respondent AlAmanah Investment Bank of the Philippines), [17] Reply (to Respondents
Consolidated Comment,)[18] and Reply (to the Alleged Comments of Respondent
Al-Amanah Islamic Bank of the Philippines). [19] On 13 October 2000, he informed
this Court that he had terminated his lawyers services, and, by himself,
prepared and filed the following: 1) Motion for New Trial; [20] 2) Motion to Declare
Respondents in Default and/or Having Waived their Rights to Interpose
Objection to Petitioners Motion for New Trial; [21] 3) Ex-Parte Urgent Motions to
Punish Attorneys Amado D. Valdez, Elpidio J. Vega, Alda G. Reyes, Dominador R.
Isidoro, Jr., and Odilon A. Diaz for Being in Contempt of Court & to Inhibit them
from Appearing in this Case Until they Can Present Valid Evidence of Legal
Authority;[22] 4) Opposition/Reply (to Respondent AIIBPs Alleged Comment);
[23]
5) Ex-Parte Urgent Motion to Punish Atty. Reynaldo A. Pineda for Contempt of
Court and the Issuance of a Commitment Order/Warrant for His Arrest; [24] 6)
Reply/Opposition (To the Formal Notice of Withdrawal of Undersigned Counsel
as Legal Counsel for the Respondent Islamic Bank with Opposition to Petitioners
Motion to Punish Undersigned Counsel for Contempt of Court for the Issuance of
a Warrant of Arrest);[25] 7) Memorandum for Petitioner; [26] 8) Opposition to
SolGens Motion for Clarification with Motion for Default and/or Waiver of

Respondents to File their Memorandum; [27] 9) Motion for Contempt of Court and
Inhibition/Disqualification with Opposition to OGCCs Motion for Extension of
Time to File Memorandum; [28] 10) Motion for Enforcement (In Defense of the
Rule of Law);[29] 11) Motion and Opposition (Motion to Punish OGCCs Attorneys
Amado D. Valdez, Efren B. Gonzales, Alda G. Reyes, Odilon A. Diaz and
Dominador R. Isidoro, Jr., for Contempt of Court and the Issuance of a Warrant
for their Arrest; and Opposition to their Alleged Manifestation and Motion Dated
February 5, 2002);[30] 12) Motion for Reconsideration of Item (a) of Resolution
dated 5 February 2002 with Supplemental Motion for Contempt of Court; [31] 13)
Motion for Reconsideration of Portion of Resolution Dated 12 March 2002; [32] 14)
Ex-Parte Urgent Motion for Extension of Time to File Reply Memorandum (To:
CSC and AIIBPs Memorandum); [33] 15) Reply Memorandum (To: CSCs
Memorandum) With Ex-Parte Urgent Motion for Additional Extension of time to
File Reply Memorandum (To: AIIBPs Memorandum); [34] and 16) Reply
Memorandum (To: OGCCs Memorandum for Respondent AIIBP). [35]
Petitioners efforts are unavailing, and we deny his petition for its
procedural and substantive flaws.
The general rule is that the remedy to obtain reversal or modification of
the judgment on the merits is appeal. This is true even if the error, or one of
the errors, ascribed to the court rendering the judgment is its lack of
jurisdiction over the subject matter, or the exercise of power in excess thereof,
or grave abuse of discretion in the findings of fact or of law set out in the
decision.[36]
The records show that petitioners counsel received the Resolution of the
Court of Appeals denying his motion for reconsideration on 27 December 1999.
The fifteen day reglamentary period to appeal under Rule 45 of the Rules of
Court therefore lapsed on 11 January 2000. On 23 February 2000, over a month
after receipt of the resolution denying his motion for reconsideration, the
petitioner filed his petition for certiorari under Rule 65.
It is settled that a special civil action for certiorari will not lie as a
substitute for the lost remedy of appeal, [37] and though there are
instances[38] where the extraordinary remedy ofcertiorari may be resorted to
despite the availability of an appeal,[39] we find no special reasons for making
out an exception in this case.
Even if we were to overlook this fact in the broader interests of justice and
treat this as a special civil action for certiorari under Rule 65,[40] the petition
would nevertheless be dismissed for failure of the petitioner to show grave
abuse of discretion. Petitioners recurrent argument, tenuous at its very best, is
premised on the fact that since respondent AIIBP failed to file its by-laws within
the designated 60 days from the effectivity of Rep. Act No. 6848, all

proceedings initiated by AIIBP and all actions resulting therefrom are a patent
nullity. Or, in his words, the AIIBP and its officers and Board of Directors,
. . . [H]ave no legal authority nor jurisdiction to manage much less operate the
Islamic Bank, file administrative charges and investigate petitioner in the
manner they did and allegedly passed Board Resolution No. 2309 on December
13, 1993 which is null and void for lack of an (sic) authorized and valid by-laws.
The CIVIL SERVICE COMMISSION was therefore affirming, erroneously, a null
and void Resolution No. 2309 dated December 13, 1993 of the Board of
Directors of Al-Amanah Islamic Investment Bank of the Philippines in CSC
Resolution No. 94-4483 dated August 11, 1994. A motion for reconsideration
thereof was denied by the CSC in its Resolution No. 95-2754 dated April 11,
1995. Both acts/resolutions of the CSC are erroneous, resulting from fraud,
falsifications and misrepresentations of the alleged Chairman and CEO Roberto
F. de Ocampo and the alleged Director Farouk A. Carpizo and his group at the
alleged Islamic Bank.[41]
Nowhere in petitioners voluminous pleadings is there a showing that the
court a quo committed grave abuse of discretion amounting to lack or excess of
jurisdiction reversible by a petition for certiorari. Petitioner already raised the
question of AIIBPs corporate existence and lack of jurisdiction in his Motion for
New Trial/Motion for Reconsideration of 27 May 1997 and was denied by the
Court of Appeals. Despite the volume of pleadings he has submitted thus far,
he has added nothing substantial to his arguments.
The AIIBP was created by Rep. Act No. 6848. It has a main office where it
conducts business, has shareholders, corporate officers, a board of directors,
assets, and personnel. It is, in fact, here represented by the Office of the
Government Corporate Counsel, the principal law office of government-owned
corporations, one of which is respondent bank. [42] At the very least, by its failure
to submit its by-laws on time, the AIIBP may be considered a de
facto corporation[43] whose right to exercise corporate powers may not be
inquired into collaterally in any private suit to which such corporations may be
a party.[44]
Moreover, a corporation which has failed to file its by-laws within the
prescribed period does not ipso facto lose its powers as such. The SEC Rules on
Suspension/Revocation of the Certificate of Registration of Corporations,
[45]
details the procedures and remedies that may be availed of before an order
of revocation can be issued. There is no showing that such a procedure has
been initiated in this case.
In any case, petitioners argument is irrelevant because this case is not a
corporate controversy, but a labor dispute; and it is an employers basic right to
freely select or discharge its employees, if only as a measure of self-protection
against acts inimical to its interest. [46] Regardless of whether AIIBP is a

corporation, a partnership, a sole proprietorship, or a sari-saristore, it is an


undisputed fact that AIIBP is the petitioners employer. AIIBP chose to retain his
services during its reorganization, controlled the means and methods by which
his work was to be performed, paid his wages, and, eventually, terminated his
services.[47]
And though he has had ample opportunity to do so, the petitioner has not
alleged that he is anything other than an employee of AIIBP. He has neither
claimed, nor shown, that he is a stockholder or an officer of the corporation.
Having accepted employment from AIIBP, and rendered his services to the said
bank, received his salary, and accepted the promotion given him, it is now too
late in the day for petitioner to question its existence and its power to
terminate his services. One who assumes an obligation to an ostensible
corporation as such, cannot resist performance thereof on the ground that
there was in fact no corporation.[48]
Even if we were to consider the facts behind petitioner Sawadjaans
dismissal from service, we would be hard pressed to find error in the decision of
the AIIBP.
As appraiser/investigator, the petitioner was expected to conduct an
ocular inspection of the properties offered by CAMEC as collaterals and check
the copies of the certificates of title against those on file with the Registry of
Deeds. Not only did he fail to conduct these routine checks, but he also
deliberately misrepresented in his appraisal report that after reviewing the
documents and conducting a site inspection, he found the CAMEC loan
application to be in order. Despite the number of pleadings he has filed, he has
failed to offer an alternative explanation for his actions.
When he was informed of the charges against him and directed to appear
and present his side on the matter, the petitioner sent instead a memorandum
questioning the fairness and impartiality of the members of the investigating
committee and refusing to recognize their jurisdiction over him. Nevertheless,
the investigating committee rescheduled the hearing to give the petitioner
another chance, but he still refused to appear before it.
Thereafter, witnesses were presented, and a decision was rendered finding
him guilty of dishonesty and dismissing him from service. He sought a
reconsideration of this decision and the same committee whose impartiality he
questioned reduced their recommended penalty to suspension for six months
and one day. The board of directors, however, opted to dismiss him from
service.
On appeal to the CSC, the Commission found that Sawadjaans failure to
perform his official duties greatly prejudiced the AIIBP, for which he should be
held accountable. It held that:

. . . (I)t is crystal clear that respondent SAPPARI SAWADJAAN was remiss in the
performance of his duties as appraiser/inspector. Had respondent performed his
duties as appraiser/inspector, he could have easily noticed that the property
located at Balintawak, Caloocan City covered by TCT No. C-52576 and which is
one of the properties offered as collateral by CAMEC is encumbered to Divina
Pablico. Had respondent reflected such fact in his appraisal/inspection report on
said property the ISLAMIC BANK would not have approved CAMECs loan of
P500,000.00 in 1987 and CAMECs P5 Million loan in 1988, respondent knowing
fully well the Banks policy of not accepting encumbered properties as collateral.
Respondent SAWADJAANs reprehensible act is further aggravated when he
failed to check and verify from the Registry of Deeds of Marikina the
authenticity of the property located at Mayamot, Antipolo, Rizal covered by TCT
No. N-130671 and which is one of the properties offered as collateral by CAMEC
for its P5 Million loan in 1988. If he only visited and verified with the Register of
Deeds of Marikina the authenticity of TCT No. N-130671 he could have easily
discovered that TCT No. N-130671 is fake and the property described therein
non-existent.
...
This notwithstanding, respondent cannot escape liability. As adverted to earlier,
his failure to perform his official duties resulted to the prejudice and substantial
damage to the ISLAMIC BANK for which he should be held liable for the

administrative offense of CONDUCT PREJUDICIAL TO THE BEST INTEREST OF


THE SERVICE.[49]
From the foregoing, we find that the CSC and the court a quo committed
no grave abuse of discretion when they sustained Sawadjaans dismissal from
service. Grave abuse of discretion implies such capricious and whimsical
exercise of judgment as equivalent to lack of jurisdiction, or, in other words,
where the power is exercised in an arbitrary or despotic manner by reason of
passion or personal hostility, and it 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 or to act at all in contemplation of law. [50] The records show that the
respondents did none of these; they acted in accordance with the law.
WHEREFORE, the petition is DISMISSED. The Decision of the Court of
Appeals of 30 March 1999 affirming Resolutions No. 94-4483 and No. 95-2754
of the Civil Service Commission, and its Resolution of 15 December 1999 are
hereby AFFIRMED. Costs against the petitioner.
SO ORDERED.