SECOND DIVISION

[G.R. No. 117188. August 7, 1997]

LOYOLA

GRAND

VILLAS

HOMEOWNERS

(SOUTH)

ASSOCIATION,

INC., petitioner, vs. HON. COURT OF APPEALS, HOME INSURANCE AND

GUARANTY

CORPORATION,

EMDEN

ENCARNACION

and

HORATIO

AYCARDO, respondents.
DECISION
ROMERO, J.:
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 duly registered subdivision in Quezon City and Marikina City that was
owned and developed by Solid Homes, Inc. It revoked the certificates of registration
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 by-laws.
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 associations
activities.Apparently, this information resulted in the registration of the South Association
with the HIGC on July 27, 1989 covering Phases West I, East I and East 11. 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 LGVHAIs 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 an accounting and turnover 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 LGVHAIs 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., Sections 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 noncompliance.
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 associations. (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 petitioners 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 LGVHAIs 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 transactions 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 non-compliance 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:
x x x 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 intended 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 x x x 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 language 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 consequence 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 by-laws 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, by-laws 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] (Italics
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 xxx

(l) 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 xxx
5. Failure to file by-laws within the required period;
xxx xxx xxx xxx
In the exercise of the foregoing authority and jurisdiction of the Commissions 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 within 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 dissolution simply 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:
x x x. 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 of
registration 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, 1986.[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 x x x, 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.
Regalado, (Chairman), Puno, and Mendoza, JJ., concur.

Torres, Jr., J., on leave.

[1]

Penned by Associate Justice Antonio M. Martinez and concurred in by Associate

Justices Quirino D. Abad Santos, Jr. and Godardo A. Jacinto.

[2]

On March 4, 1993, LGVHAI filed its by-laws with the HIGC. Its filing fee was duly
receipted for under O.R. No. 6393291 (Private Respondents Comment, p.
5; Rollo, p. 72).

[3]

Private Respondents Comment, pp. 3-4.

[4]

Fernando M. Miranda, Jr., Chairman, and Wilfredo F. Hernandez, Arthur G. Tan and
Aida A. Mendoza, Members.

[5]

This was in Bagong Lipunan Community Association v. HIGC, CA-G.R. SP No.

12592, November 16, 1987.

[6]

Petition, pp. 7-10.

[7]

Ibid., p. 10-11.

[8]

G.R. No. 71837, July 26, 1988, 163 SCRA 534.

[9]

Soco v. Hon. Militante, et al., 208 Phil. 151, 154 (1983); Caltex Filipino Managers &
Supervisors Assn v. CIR, 131 Phil. 1022, 1029 (1968).

[10]

People v. Tamani, L-22160 & 22161, January 21, 1974, 55 SCRA 153, 157.

[11]

Diokno v. Rehabilitation Finance Corporation, 91 Phil. 608, 611 (1952).

[12]

27A WORDS AND PHRASES 650 citing Arkansas State Highway Commission v.
Mabry, 315 S.W.2d 900, 905, 229 Ark. 261.

[13]

Record of the Batasang Pambansa, Vol. III, November 12, 1979, p. 1303.

[14]

Lopez and Javelona v. El Hogar Filipino, 47 Phil. 249, 277 (1925) cited in AGPALO,
STATUTORY CONSTRUCTION, 3rd ed., p.197.

[15]

CAMPOS, THE CORPORATION CODE, Vol. I, 1990 ed., p. 123.

[16]

18 C.J.S. 595-596.

[17]

8 FLETCHER, CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS 640.

[18]

Corona v. Court of Appeals, G.R. No. 97356, September 30, 1992, 214 SCRA 378,
392.

[19]

8 FLETCHER, supra, at p. 633.

[20]

Supra.

[21]

Ibid., at pp. 543-544.

[22]

The capitalization of HIGC was increased to P2,500,000,000 by Rep. Act No. 7835.

[23]

No. 2 (a), Executive Order No. 535 dated May 3, 1979 (78 O.G. 6805).

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 to register 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 by-laws 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, to register 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 bylaws 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 vice-president, countersigned by
the secretary or clerk and sealed with the seal of the corporation, shall be issued
in accordance with the by-laws. 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 by-laws, 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 by-law 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 by-law 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.)
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.)
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 and registration 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 and register 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.
THE GOVERNMENT OF THE PHILIPPINE ISLANDS (on relation of the AttorneyGeneral), plaintiff,
vs.
EL HOGAR FILIPINO, defendant.

Attorney-General Jaranilla and Solicitor-General Reyes for plaintiff.

Fisher, DeWitt, Perkins and Brady; Camus, Delgado and Recto and Antonio Sanz for
defendant.
Wm. J. Rohde as amicus curiae.

STREET, J.:

This is a quo warranto proceeding instituted originally in this court by the Government of
the Philippine Islands on the relation of the Attorney-General against the building and
loan association known as El Hogar Filipino, for the purpose of depriving it of its
corporate franchise, excluding it from all corporate rights and privileges, and effecting a
final dissolution of said corporation. The complaint enumerates seventeen distinct
causes of action, to all of which the defendant has answered upon the merits, first
admitting the averments of the first paragraph in the statement of the first cause of
action, wherein it is alleged that the defendant was organized in the year 1911 as a
building and loan association under the laws of the Philippine Islands, and that, since its

organization, the corporation has been doing business in the Philippine Islands, with its
principal office in the City of Manila. Other facts alleged in the various causes of action
in the complaint are either denied in the answer or controverted in legal effect by other
facts.

After issue had been thus joined upon the merits, the attorneys entered into an
elaborate agreement as to the fact, thereby removing from the field of dispute such
matters of fact as are necessary to the solution of the controversy. It follows that we are
here confronted only with the legal questions arising upon the agreed statement.

On March 1, 1906, the Philippine Commission enacted what is known as the

Corporation Law (Act No. 1459) effective upon April 1 of the same year. Section 171 to
190, inclusive, of this Act are devoted to the subject of building and loan associations,
defining their objects making various provisions governing their organization and
administration, and providing for the supervision to be exercised over them. These
provisions appear to be adopted from American statutes governing building and loan
associations and they of course reflect the ideals and principles found in American law
relative to such associations. The respondent, El Hogar Filipino, was apparently the first
corporation organized in the Philippine Islands under the provisions cited, and the
association has been favored with extraordinary success. The articles of incorporation
bear the date of December 28, 1910, at which time capital stock in the association had
been subscribed to the amount of P150,000 of which the sum of P10,620 had been paid
in. Under the law as it then stood, the capital of the Association was not permitted to
exceed P3,000,000, but by Act No. 2092, passed December 23, 1911, the statute was
so amended as to permit the capitalization of building and loan associations to the
amount of ten millions. Soon thereafter the association took advantage of this
enactment by amending its articles so as to provide that the capital should be in an
amount not exceeding the then lawful limit. From the time of its first organization the

number of shareholders has constantly increased, with the result that on December 31,
1925, the association had 5,826 shareholders holding 125,750 shares, with a total paidup value of P8,703,602.25. During the period of its existence prior to the date last
above-mentioned the association paid to withdrawing stockholders the amount of
P7,618,257,.72; and in the same period it distributed in the form of dividends among its
stockholders the sum of P7,621,565.81.

First cause of action. The first cause of action is based upon the alleged illegal
holding by the respondent of the title to real property for a period in excess of five years
after the property had been bought in by the respondent at one of its own foreclosure
sales. The provision of law relevant to the matter is found in section 75 of Act of
Congress of July 1, 1902 (repeated in subsection 5 of section 13 of the Corporation
Law.) In both of these provisions it is in substance declared that while corporations may
loan funds upon real estate security and purchase real estate when necessary for the
collection of loans, they shall dispose of real estate so obtained within five years after
receiving the title.

In this connection it appears that in the year 1920 El Hogar Filipino was the holder of a
recorded mortgage upon a tract of land in the municipality of San Clemente, Province of
Tarlac, as security for a loan of P24,000 to the shareholders of El Hogar Filipino who
were the owners of said property. The borrowers having defaulted in their payments, El
Hogar Filipino foreclosed the mortgage and purchased the land at the foreclosure sale
for the net amount of the indebtedness, namely, the sum of P23,744.18. The auction
sale of the mortgaged property took place November 18, 1920, and the deed conveying
the property to El Hogar Filipino was executed and delivered December 22, 1920. On
December 27, 1920, the deed conveying the property to El Hogar Filipino was sent to
the register of deeds of the Province of Tarlac, with the request that the certificate of title
then standing in the name of the former owners be cancelled and that a new certificate

of title be issued in the name of El Hogar Filipino. Said deed was received in the office
of the register of deeds of Tarlac on December 28, 1920, together with the old certificate
of title, and thereupon the register made upon the said deed the following annotation:

The foregoing document was received in this office at 4.10 p. m., December 28, 1920,
according to entry 1898, page 50 of Book One of the Day Book and registered on the
back of certificate of title No. 2211 and its duplicate, folio 193 of Book A-10 of the
register of original certificate. Tarlac, Tarlac, January 12, 1921. (Sgd.) SILVINO LOPEZ
DE JESUS, Register of Deeds.

For months no reply was received by El Hogar Filipino from the register of deeds of
Tarlac, and letters were written to him by El Hogar Filipino on the subject in March and
April, 1921, requesting action. No answer having been received to these letters, a
complaint was made by El Hogar Filipino to the Chief of the General Land Registration
Office; and on May 7, 1921, the certificate of title to the San Clemente land was
received by El Hogar Filipino from the register of deeds of Tarlac.

On March 10, 1921, the board of directors of El Hogar Filipino adopted a resolution
authorizing Vicente Bengzon, an agent of the corporation, to endeavor to find a buyer
for the San Clemente land. On July 27, 1921, El Hogar Filipino authorized one Jose
Laguardia to endeavor to find a purchaser for the San Clemente land for the sum of
P23,000 undertaking to pay the said Laguardia a commission of 5 per centum of the
selling price for his services, but no offers to purchase were obtained through this agent
or through the agent Bengzon. In July, 1923, plans of the San Clemente land were sent
to Mr. Luis Gomez, Mr. J. Gonzalez and Mr. Alfonso de Castelvi, as prospective
purchasers, but no offers were received from them. In January, 1926, the agent not
having succeeded in finding a buyer, the San Clemente land was advertised for sale by

El Hogar Filipino in El Debate, La Vanguardia and Taliba, three newspapers of general

circulation in the Philippine Islands published in the City of Manila. On March 16, 1926,
the first offer for the purchase of the San Clemente land was received by El Hogar
Filipino. This offer was made to it in writing by one Alcantara, who offered to buy it for
the sum of P4,000, Philippine currency, payable P500 in cash, and the remainder within
thirty days. Alcantara's offer having been reported by the manager of El Hogar Filipino
to its board of directors, it was decided, by a resolution adopted at a meeting of the
board held on March 25, 1926, to accept the offer, and this acceptance was
communicated to the prospective buyer. Alcantara was given successive extensions of
the time, the last of which expired April 30, 1926, within which to make the payment
agreed upon; and upon his failure to do so El Hogar Filipino treated the contract with
him as rescinded, and efforts were made at once to find another buyer. Finally the land
was sold to Doa Felipa Alberto for P6,000 by a public instrument executed before a
notary public at Manila, P. I., on July 30, 1926.

Upon consideration of the facts above set forth it is evident that the strict letter of the
law was violated by the respondent; but it is equally obvious that its conduct has not
been characterized by obduracy or pertinacity in contempt of the law. Moreover, several
facts connected with the incident tend to mitigate the offense. The Attorney-General
points out that the respondent acquired title on December 22, 1920, when the deed was
executed and delivered, by which the property was conveyed to it as purchaser at its
foreclosure sale, and this title remained in it until July 30, 1926, when the property was
finally sold to Felipa Alberto. The interval between these two conveyances is thus more
than five years; and it is contended that the five year period did not begin to run against
the respondent until May 7, 1921, when the register of deeds of Tarlac delivered the
new certificate of title to the respondent pursuant to the deed by which the property was
acquired. As an equitable consideration affecting the case this contention, though not
decisive, is in our opinion more than respectable. It has been held by this court that a
purchaser of land registered under the Torrens system cannot acquire the status of an
innocent purchaser for value unless his vendor is able to place in his hands an owner's

duplicate showing the title of such land to be in the vendor (Director of Lands vs.
Addison, 49, Phil., 19; Rodriguez vs. Llorente, G. R. No. 266151). It results that prior to
May 7, 1921, El Hogar Filipino was not really in a position to pass an indefeasible title to
any purchaser. In this connection it will be noted that section 75 of the Act of Congress
of July 1, 1902, and the similar provision in section 13 of the Corporation Law, allow the
corporation "five years after receiving the title," within which to dispose of the property. A
fair interpretation of these provisions would seem to indicate that the date of the
receiving of the title in this case was the date when the respondent received the owner's
certificate, or May 7, 1921, for it was only after that date that the respondent had an
unequivocal and unquestionable power to pass a complete title. The failure of the
respondent to receive the certificate sooner was not due in any wise to its fault, but to
unexplained delay on the part of the register of deeds. For this delay the respondent
cannot be held accountable.

Again, it is urged for the respondent that the period between March 25, 1926, and April
30, 1926, should not be counted as part of the five-year period. This was the period
during which the respondent was under obligation to sell the property to Alcantara, prior
to the rescission of the contract by reason of Alcantara's failure to make the stipulated
first payment. Upon this point the contention of the respondent is, in our opinion, well
founded. The acceptance by it of Alcantara's offer obligated the respondent to
Alcantara; and if it had not been for the default of Alcantara, the effective sale of the
property would have resulted. The respondent was not at all chargeable with the
collapse of these negotiations; and hence in any equitable application of the law this
period should be deducted from the five-year period within which the respondent ought
to have made the sale. Another circumstance explanatory of the respondent's delay in
selling the property is found in the fact that it purchased the property for the full amount
of the indebtedness due to it from the former owner, which was nearly P24,000. It was
subsequently found that the property was not salable for anything like that amount and
in the end it had to be sold for P6,000, notwithstanding energetic efforts on the part of
the respondent to find a purchaser upon better terms.

The question then arises whether the failure of the respondent to get rid of the San
Clemente property within five years after it first acquired the deed thereto, even
supposing the five-year period to be properly counted from that date, is such a violation
of law as should work a forfeiture of its franchise and require a judgment to be entered
for its dissolution in this action of quo warranto. Upon this point we do not hesitate to
say that in our opinion the corporation has not been shown to have offended against the
law in a manner that should entail a forfeiture of its charter. Certainly no court with any
discretion to use in the matter would visit upon the respondent and its thousands of
shareholders the extreme penalty of the law as a consequence of the delinquency here
shown to have been committed.

The law applicable to the case is in our opinion found in section 212 of the Code of Civil
Procedure, as applied by this court in Government of the Philippine Islands vs.
Philippine Sugar Estates Development Co. (38 Phil., 15). This section (212), in
prescribing the judgment to be rendered against a corporation in an action of quo
warranto, among other things says:

. . . When it is found and adjudged that a corporation has offended in any matter or
manner which does not by law work as a surrender or forfeiture, or has misused a
franchise or exercised a power not conferred by law, but not of such a character as to
work a surrender or forfeiture of its franchise, judgment shall be rendered that it be
outset from the continuance of such offense or the exercise of such power.

This provision clearly shows that the court has a discretion with respect to the infliction
of capital punishment upon corporation and that there are certain misdemeanors and

misuses of franchises which should not be recognized as requiring their dissolution. In

Government of the Philippine Islands vs. Philippine Sugar Estates Development Co. (38
Phil., 15), it was found that the offending corporation had been largely (though
indirectly) engaged in the buying and holding or real property for speculative purposes
in contravention of its charter and contrary to the express provisions of law. Moreover, in
that case the offending corporation was found to be still interested in the properties so
purchased for speculative at the time the action was brought. Nevertheless, instead of
making an absolute and unconditional order for the dissolution of the corporation, the
judgment of ouster was made conditional upon the failure of the corporation to
discontinue its unlawful conduct within six months after final decision. In the case before
us the respondent appears to have rid itself of the San Clemente property many months
prior to the institution of this action. It is evident from this that the dissolution of the
respondent would not be an appropriate remedy in this case. We do not of course
undertake to say that a corporation might not be dissolved for offenses of this nature
perpetrated in the past, especially if its conduct had exhibited a willful obduracy and
contempt of law. We content ourselves with holding that upon the facts here before us
the penalty of dissolution would be excessively severe and fraught with consequences
altogether disproportionate to the offense committed.

The evident purpose behind the law restricting the rights of corporations with respect to
the tenure of land was to prevent the revival of the entail (mayorazgo) or other similar
institution by which land could be fettered and its alienation hampered over long periods
of time. In the case before us the respondent corporation has in good faith disposed of
the piece of property which appears to have been in its hands at the expiration of the
period fixed by law, and a fair explanation is given of its failure to dispose of it sooner.
Under these circumstances the destruction of the corporation would bring irreparable
loss upon the thousand of innocent shareholders of the corporation without any
corresponding benefit to the public. The discretion permitted to this court in the
application of the remedy of quo warranto forbids so radical a use of the remedy.

But the case for the plaintiff supposes that the discretion of this court in matters like that
now before us has been expressly taken away by the third section of Act No. 2792, and
that the dissolution of the corporation is obligatory upon the court a mere finding that the
respondent has violated the provision of the Corporation Law in any respect. This
makes necessary to examine the Act last above-mentioned with some care. Upon
referring thereto, we find that it consists of three sections under the following style:

No. 2792. An Act to amend certain sections of the Corporation Law, Act Numbered
Fourteen hundred and fifty-nine, providing for the publication of the assets and liabilities
of corporations registering in the Bureau of Commerce and Industry, determining the
liability of the officers of corporations with regard to the issuance of stock or bonus,
establishing penalties for certain things, and for other purposes.

The first two section contain amendments to the Corporation Law with respect to
matters with which we are not here concurred. The third section contains anew
enactment to be inserted as section 190 (A) in the corporation Law immediately
following section 190. This new section reads as follows:

SEC. 190. (A). Penalties. The violation of any of the provisions of this Act and its
amendments not otherwise penalized therein, shall be punished by a fine of not more
than one thousand pesos, or by imprisonment for not more than five years, or both, in
the discretion of the court. If the violation being proved, be dissolved by quo warranto
proceedings instituted by the Attorney-General or by any provincial fiscal, by order of
said Attorney-General: Provided, That nothing in this section provided shall be
construed to repeal the other causes for the dissolution of corporation prescribed by

existing law, and the remedy provided for in this section shall be considered as
additional to the remedies already existing.

The contention for the plaintiff is to the effect that the second sentence in this enactment
has entirely abrogated the discretion of this court with respect to the application of the
remedy of qou warranto, as expressed in section 212 of the Code of Civil Procedure,
and that it is now mandatory upon us to dissolved any corporation whenever we find
that it has committed any violation of the Corporation Law, however trivial. In our opinion
in this radical view of the meaning of the enactment is untenable. When the statute
says, "If the violation is committed by a corporation, the same shall, upon such violation
being proved, be dissolved by quo warranto proceedings . . .," the intention was to
indicate that the remedy against the corporation shall be by action of quo warranto.
There was no intention to define the principles governing said remedy, and it must be
understood that in applying the remedy the court is still controlled by the principles
established in immemorial jurisprudence. The interpretation placed upon this language
in the brief of the Attorney-General would be dangerous in the extreme, since it would
actually place the life of all corporate investments in the official. No corporate enterprise
of any moment can be conducted perpetually without some trivial misdemeanor against
corporate law being committed by some one or other of its numerous employees. As
illustrations of the preposterous effects of the provision, in the sense contended for by
the Attorney-General, the attorneys for the respondent have called attention to the fact
that under section 52 of the Corporation Law, a business corporation is required to keep
a stock book and a transfer book in which the names of stockholders shall kept in
alphabetical order. Again, under section 94, railroad corporations are required to cause
all employees working on passenger trains or at a station for passengers to wear a
badge on his cap or hat which will indicate his office. Can it be supposed that the
Legislature intended to penalize the violation of such provisions as these by dissolution
of the corporation involved? Evidently such could not have been the intention; and the
only way to avoid the consequence suggested is to hold, as we now hold, that the

provision now under consideration has not impaired the discretion of this court in
applying the writ of quo warranto.

Another way to put the same conclusion is to say that the expression "shall be dissolved
by quo warranto proceedings" means in effect, "may be dissolved by quo warranto
proceedings in the discretion of the court." The proposition that the word "shall" may be
construed as "may", when addressed by the Legislature to the courts, is well supported
in jurisprudence. In the case of Becker vs. Lebanon and M. St. Ry. Co., (188 Pa., 484),
the Supreme Court of Pennsylvania had under consideration a statute providing as
follows:

It shall be the duty of the court . . . to examine, inquire and ascertain whether such
corporation does in fact posses the right or franchise to do the act from which such
alleged injury to private rights or to the rights and franchises of other corporations
results; and if such rights or franchises have not been conferred upon such
corporations, such courts, it exercising equitable power, shall, by injunction, at suit of
the private parties or other corporations, restrain such injurious acts.

In an action based on this statute the plaintiff claimed injunctive relief as a matter of
right. But this was denied the court saying:

Notwithstanding, therefore, the use of the imperative "shall" the injunction is not to be
granted unless a proper case for injunction be made out, in accordance with the
principles and practice of equity. The word "shall" when used by the legislature to a
court, is usually a grant of authority and means "may", and even if it be intended to be

mandatory it must be subject to the necessary limitation that a proper case has been
made out for the exercise of the power.

Other authorities amply sustain this view (People vs. Nusebaum, 66 N. Y. Supp., 129,
133; West Wisconsin R. Co. vs. Foley, 94 U. S., 100, 103; 24 Law. Ed., 71; Clancy vs.
McElroy, 30 Wash., 567; 70 Pac., 1095; State vs. West, 3 Ohio State, 509, 511; In re
Lent, 40 N. Y. Supp., 570, 572; 16 Misc. Rep., 606; Ludlow vs. Ludlow's Executors, 4 N.
J. Law [1 Sothard], 387, 394; Whipple vs. Eddy, 161 Ill., 114;43 N. E., 789, 790;
Borkheim vs. Fireman's Fund Ins. Co., 38 Cal., 505, 506; Beasley vs. People, 89 Ill.,
571, 575; Donnelly vs. Smith, 128 Iowa, 257; 103 N. W., 776).

But section 3 of Act No. 2792 is challenged by the respondent on the ground that the
subject-matter of this section is not expressed in the title of the Act, with the result that
the section is invalid. This criticism is in our opinion well founded. Section 3 of our
organic law (Jones Bill) declares, among other things, that "No bill which may be
enacted into law shall embrace more than one subject, and that subject shall be
expressed in the title of the bill." Any law or part of a law passed by the Philippine
Legislature since this provision went into effect and offending against its requirement is
necessarily void.

Upon examining the entire Act (No. 2792), we find that it is directed to three ends which
are successively dealt with in the first three sections of the Act. But it will be noted that
these three matters all relate to the Corporation Law; and it is at once apparent that they
might properly have been embodied in a single Act if a title of sufficient unity and
generality had been prefixed thereto. Furthermore, it is obvious, even upon casual
inspection, that the subject-matter of each of the first two sections is expressed and
defined with sufficient precision in the title. With respect to the subject-matter of section

3 the only words in the title which can be taken to refer to the subject-matter of said
section are these, "An Act . . . establishing penalties for certain things, and for other
purposes." These words undoubtedly have sufficient generality to cover the subjectmatter of section 3 of the Act. But this is not enough. The Jones Law requires that the
subject-matter of the bill "shall be expressed in the title of the bill."

When reference is had to the expression "establishing penalties for certain things," it is
obvious that these words express nothing. The constitutional provision was undoubtedly
adopted in order that the public might be informed as to what the Legislature is about
while bills are in process of passage. The expression "establishing penalties for certain
things" would give no definite information to anybody as to the project of legislation
intended under this expression. An examination of the decided cases shows that courts
have always been indulgent of the practices of the Legislature with respect to the form
and generality of title, for if extreme refinements were indulged by the courts, the work
of legislation would be unnecessarily hampered. But, as has been observed by the
California court, there must be some reasonable limit to the generality of titles that will
be allowed. The measure of legality is whether the title is sufficient to give notice of the
general subject of the proposed legislation to the persons and interests likely to be
affected.

In Lewis vs. Dunne (134 Cal., 291), the court had before it a statute entitled "An Act to
revise the Code of Civil Procedure of the State of California, by amending certain
sections, repealing others, and adding certain new sections." This title was held to
embrace more than one subject, which were not sufficiently expressed in the title. In
discussing the question the court said:

* * * It is apparent that the language of the title of the act in question, in and of itself,
express no subject whatever. No one could tell from the title alone what subject of
legislation was dealt with in the body of the act; such subject so far as the title of the act
informs us, might have been entirely different from anything to be found in the act itself.

We cannot agree with the contention of some of respondent's counsel apparently to

some extent countenanced by a few authorities that the provision of the constitution
in question can be entirely avoided by the simple device of putting into the title of an act
words which denote a subject "broad" enough to cover everything. Under that view, the
title, "An act concerning the laws of the state," would be good, and the convention and
people who framed and adopted the constitution would be convicted of the folly of
elaborately constructing a grave constitutional limitation of legislative power upon a
most important subject, which the legislature could at once circumvent by a mere verbal
trick. The word "subject" is used in the constitution embrace but "one subject" it
necessarily implies what everybody knows that there are numerous subjects of
the legislation, and declares that only one of these subjects shall embraced in any one
act. All subjects cannot be conjured into one subject by the mere magic of a word in a
title.

In Rader vs. Township of Union (39 N. J. L., 509, 515), the Supreme Court of New
Jersey made the following observation:

* * * It is true, that it may be difficult to indicate, by a formula, how specialized the title of
a statute must be; but it is not difficult to conclude that it must mean something in the
way of being a notice of what is doing. Unless it does not enough that it embraces the
legislative purpose it must express it; and where the language is too general, it will
accomplish the former, but not the latter. Thus, a law entitled "An act for a certain

purpose," would embrace any subject, but would express none, and, consequently, it
would not stand the constitutional test.

The doctrine properly applicable in matters of this kind is, we think, fairly summed up in
a current repository of jurisprudence in the following language:

* * * While it may be difficult to formulate a rule by which to determine the extent to

which the title of a bill must specialize its object, it may be safely assumed that the title
must not only embrace the subject of proposed legislation, but also express it clearly
and fully enough to give notice of the legislative purpose. (25 R. C. L., p. 853.)

In dealing with the problem now before us the words "and for other purposes "found at
the end of the caption of Act No. 2792, must be laid completely out of consideration.
They express nothing, and amount to nothing as a compliance with the constitutional
requirement to which attention has been directed. This expression "(for other purposes")
is frequently found in the title of acts adopted by the Philippine Legislature; and its
presence in our laws is due to the adoption by our Legislature of the style used in
Congression allegation. But it must be remembered that the legislation of Congress is
subject to no constitutional restriction with respect to the title of bills. Consequently, in
Congressional legislation the words "and for other purposes" at least serve the purpose
of admonishing the public that the bill whose heading contains these words contains
legislation upon other subjects than that expressed in the title. Now, so long as the
Philippine Legislature was subject to no restriction with respect to the title of bills
intended for enactment into general laws, the expression "for other purposes" could be
appropriately used in titles, not precisely for the purpose of conveying information as to
the matter legislated upon, but for the purpose ad admonishing the public that any bill
containing such words in the title might contain other subjects than that expressed in the

definitive part of the title. But, when congress adopted the Jones Law, the restriction
with which we are now dealing became effective here and the words "for other
purposes" could no longer be appropriately used in the title of legislative bills.
Nevertheless, the custom of using these words has still been followed, although they
can no longer serve to cover matter not germane to the bill in the title of which they are
used. But the futility of adding these words to the style of any act is now obvious
(Cooley, Const. Lims., 8th ed., p. 302)

In the brief for the plaintiff it is intimated that the constitutional restriction which we have
been discussing is more or less of a dead letter in this jurisdiction; and it seems to be
taken for granted that no court would ever presume to hold a legislative act or part of a
legislative act invalid for non-compliance with the requirement. This is a mistake; and no
utterance of this court can be cited as giving currency to any such notion. On the
contrary the discussion contained in Central Capiz vs. Ramirez (40 Phil., 883), shows
that when a case arises where a violation of the restriction is apparent, the court has no
alternative but to declare the legislation affected thereby to be invalid.

Second cause of action. The second cause of action is based upon a charge that the
respondent is owning and holding a business lot, with the structure thereon, in the
financial district of the City of Manila is excess of its reasonable requirements and in
contravention of subsection 5 of section 13 of the corporation Law. The facts on which
this charge is based appear to be these:

On August 28, 1913, the respondent purchased 1,413 square meters of land at the
corner of Juan Luna Street and the Muelle de la Industria, in the City of Manila,
immediately adjacent to the building then occupied by the Hongkong and Shanghai
Banking Corporation. At the time the respondent acquired this lot there stood upon it a

building, then nearly fifty years old, which was occupied in part by the offices of an
importing firm and in part by warehouses of the same firm. The material used in the
construction was Guadalupe stone and hewn timber, and the building contained none of
the facilities usually found in a modern office building.

In purchase of a design which had been formed prior to the purchase of the property,
the directors of the El Hogar Filipino caused the old building to be demolished; and they
erected thereon a modern reinforced concrete office building. As at first constructed the
new building was three stories high in the main, but in 1920, in order to obtain greater
advantage from the use of the land, an additional story was added to the building,
making a structure of four stories except in one corner where an additional story was
place, making it five stories high over an area of 117.52 square meters. It is admitted in
the plaintiffs brief that this "noble and imposing structure" to use the words of the
Attorney-General "has greatly improved the aspect of the banking and commercial
district of Manila and has greatly contributed to the movement and campaign for the
Manila Beautiful." It is also admitted that the competed building is reasonably
proportionate in value and revenue producing capacity to the value of the land upon
which it stands. The total outlay of the respondent for the land and the improvements
thereon was P690,000 and at this valuation the property is carried on the books of the
company, while the assessed valuation of the land and improvements is at P786,478.

Since the new building was completed the respondent has used about 324 square
meters of floor space for its own offices and has rented the remainder of the office
space in said building, consisting of about 3,175 square meters, to other persons and
entities. In the second cause of action of the complaint it is supposed that the
acquisition of this lot, the construction of the new office building thereon, and the
subsequent renting of the same in great part to third persons, are ultra vires acts on the

part of the corporation, and that the proper penalty to be enforced against it in this
action is that if dissolution.

With this contention we are unable to agree. Under subsection 5 of section 13 of the
Corporation Law, every corporation has the power to purchase, hold and lease such
real property as the transaction of the lawful business of the corporation may
reasonably and necessarily require. When this property was acquired in 1916, the
business of El Hogar Filipino had developed to such an extent, and its prospects for the
future were such as to justify its directors in acquiring a lot in the financial district of the
City of Manila and in constructing thereon a suitable building as the site of its offices;
and it cannot be fairly said that the area of the lot 1,413 square meters was in
excess of its reasonable requirements. The law expressly declares that corporations
may acquire such real estate as is reasonably necessary to enable them to carry out the
purposes for which they were created; and we are of the opinion that the owning of a
business lot upon which to construct and maintain its offices is reasonably necessary to
a building and loan association such as the respondent was at the time this property
was acquired. A different ruling on this point would compel important enterprises to
conduct their business exclusively in leased offices a result which could serve no
useful end but would retard industrial growth and be inimical to the best interests of
society.

We are furthermore of the opinion that, inasmuch as the lot referred to was lawfully
acquired by the respondent, it is entitled to the full beneficial use thereof. No legitimate
principle can discovered which would deny to one owner the right to enjoy his (or its)
property to the same extent that is conceded to any other owner; and an intention to
discriminate between owners in this respect is not lightly to be imputed to the
Legislature. The point here involved has been the subject of consideration in many
decisions of American courts under statutes even more restrictive than that which

prevails in this jurisdiction; and the conclusion has uniformly been that a corporations
whose business may properly be conducted in a populous center may acquire an
appropriate lot and construct thereon an edifice with facilities in excess of its own
immediate requirements.

Thus in People vs. Pullman's Palace-Car Co. (175 Ill., 125; 64 L. R. A., 366), it
appeared that the respondent corporation owned and controlled a large ten-story
business block in the City of Chicago, worth $2,000,000, and that it occupied only about
one-fourth thereof for its own purposes, leasing the remainder to others at heavy
rentals. The corporate charter merely permitted the holding of such real estate by the
respondent as might be necessary for the successful prosecution of its business. An
attempt was made to obtain the dissolution of the corporation in a quo warranto
proceeding similar to that now before us, but the remedy was denied.

In Rector vs. Hartford Deposit Co., a question was raised as to the power of the Deposit
Company to erect and own a fourteen-story building containing eight storerooms,
one hundred suites of offices, and one safety deposit vault, under a statute authorizing
the corporation to possess so much real estate "as shall be necessary for the
transaction of their business." The court said:

That the appellee company possessed ample power to acquire real property and
construct a building thereon for the purpose of transacting therein the legitimate
business of the corporation is beyond the range of debate. Nor is the contrary
contended, but the insistence is that, under the guise of erecting a building for corporate
purposes, the appellee company purposely constructed a much larger building than its
business required, containing many rooms intended to be rented to others for offices
and business purposes, among them, the basement rooms contracted to be leased

to the appellant, and that in so doing it designedly exceeded its corporate powers.
The position off appellant therefore is that the appellee corporation has flagrantly
abused its general power to acquire real estate and construct a building thereon . . . It
was within the general scope of the express powers of the appellee corporation to own
and possess a building necessary for its proper corporate purposes. In planning and
constructing such a building, as was said in People vs. Pullman's Palace Car Co.,
supra, the corporation should not necessarily be restricted to a building containing the
precise number of rooms its then business might require, and no more, but that the
future probable growth and volume of its business might be considered and anticipated,
and a larger building, and one containing more rooms than the present volume of
business required be erected, and the rooms not needed might be rented by the
corporation, provided, of course, such course should be taken in good faith, and not
as a mere evasion of the public law and the policy of the state relative to the ownership
of real estate by corporations. In such state of case the question is whether the
corporation has abused or excessively and unjustifiably used the power and authority
granted it by the state to construct buildings and own real estate necessary for its
corporate purposes.

In Home savings building Association vs. Driver (129 Ky., 754), one of the questions
before the court was precisely the same as that now before us. Upon this the Supreme
Court of Kentucky said:

The third question is, has the association the right to erect, remodel, or own a building
of more than sufficient capacity to accommodate its own business and to rent out the
excess? There is nothing in the Constitution, charter of the association, or statutes
placing any limitation upon the character of a building which a corporation may erect as
a home in which to conduct its business. A corporation conducting a business of the
character of that in which appellant is engaged naturally expects its business to grow

and expand from time to time, and, in building a home it would be exercising but a
short-sighted judgment if it did not make provision for the future by building a home
large enough to take care of its expanding business, and hence, even if it should build a
house larger and roomier than its present needs or interests require, it would be acting
clearly with the exercise of its corporate right and power. The limitation which the statute
imposes is that proper conduct of its business, but it does not attempt to place any
restriction or limitation upon the right of the corporation or association as to the
character of building it shall erect on said real estate; and, while the Constitution and the
statutes provide that no corporation shall engage in any business other than that
expressly authorized by its charter, we are of opinion that, in renting out the unoccupied
and unused portions of the building so erected, the association could not be said to
engaged in any other business than that authorized by its charter. The renting of the
unused portions of the building is a mere incident in the conduct of its real business. We
would not say that a building association might embark in the business of building
houses and renting or leasing them, but there is quite a difference in building or renting
a house in which to conduct its own business and leasing the unused portion thereof for
the time being, or until such time as they may be needed by the association, and in
building houses for the purpose of renting or leasing them. The one might properly be
said to be the proper exercise of a power incident to the conduct of its legitimate
business, whereas the other would be a clear violation of that provision of the statute
which denies to any corporation the right to conduct any business other than that
authorized by its charter. To hold otherwise would be to charge most of the banking
institutions, trust companies and other corporations, such as title guaranty companies,
etc., doing with violating the law; for it is known that there are few of such institutions
that do not, at times, rent out or lease the unneeded portions of the building occupied by
them as homes. We do not think that in so doing they are violating any provisions of the
law, but that the renting out of the unused or unoccupied portions of their buildings is but
an incident in the conduct of their business.

In Wingert vs. First National Bank of Hagerstown, Md. (175 Fed., 739, 741), a
stockholder sought to enjoin the bank from building a six-story building owned by the
bank in the commercial district of Hagerstown of which only the first story was to be
used by the bank, the remaining stories to be rented out for offices and places of
business, on the theory that such action was ultra vires and in violation of the provisions
of the national banking act confining such corporations to the holding, only, of such real
estate "as shall be necessary for its immediate accommodation in the transaction of its
business."

The injunction was denied, the court adopting the opinion of the lower court in which the
following was said:

'The other ground urged by the complainant is that the proposed action is violative of
the restriction which permits a national bank to hold only such real estate as shall be
necessary for its immediate accommodation in the transaction of its business, and that,
therefore, the erection of a building which will contain offices not necessary for the
business of the bank is not permitted by the law, although that method of improving the
lot may be the most beneficial use that can be made of it. It is matter of common
knowledge that the actual practice of national banks is to the contrary. Where ground is
valuable, it may probably be truly said that the majority of national bank buildings are
built with accommodations in excess of the needs of the bank for the purpose of
lessening the bank's expense by renting out the unused portion. If that were not
allowable, many smaller banks in cities would be driven to become tenants as the great
cost of the lot would be prohibitive of using it exclusively for the banking accommodation
of a single bank. As indicative of the interpretation of the law commonly received and
acted upon, reference may be made to the reply of the Comptroller of the Currency to
the injury by the bank in this case asking whether the law forbids the bank constructing
such a building as was contemplated.

'The reply was follows: "Your letter of the 9th instant received, stating that the directors
contemplate making improvements in the bank building and inquiring if there is anything
in the national banking laws prohibiting the construction of a building which will contain
floors for offices to be rented out by the bank as well as the banking room. Your
attention is called to the case of Brown vs. Schleier, 118 Fed., 981 [55 C. C. A, 475], in
which the court held that: 'If the land which a national bank purchases or leases for the
accommodation of its business is very valuable it may exercise the same rights that
belong to other landowners of improving it in a way that will yield the largest income,
lessen its own rent, and render that part of its funds which are invested in realty most
productive.'" This seems to be the common sense interpretation of the act of Congress
and is the one which prevails.'

It would seem to be unnecessary to extend the opinion by lengthy citations upon the
point under consideration, but Brown vs. Schleier (118 Fed., 981), may be cited as
being in harmony with the foregoing authorities. In dealing with the powers of a national
bank the court, in this case, said:

When an occasion arises for an investment in real property for either of the purposes
specified in the statute the national bank act permits banking associations to act as any
prudent person would act in making an investment in real estate, and to exercise the
same measure of judgment and discretion. The act ought not to be construed in such as
way as to compel a national bank, when it acquires real property for a legitimate
purpose, to deal with it otherwise than a prudent land owner would ordinarily deal with
such property.

In the brief of the Attorney-General reliance is place almost entirely upon two Illinois
cases, namely Africani Home Purchase and Loan Association vs. Carroll (267 Ill., 380),
and First Methodist Episcopal Church of Chicago vs. Dixon (178 Ill., 260). In our opinion
these cases are either distinguishable from that now before us, or they reflect a view of
the law which is incorrect. At any rate the weight of judicial opinion is so overwhelmingly
in favor of sustaining the validity of the acts alleged in the second cause of action to
have been done by the respondent in excess of its powers that we refrain from
commenting at any length upon said cases. The ground stated in the second cause of
action is in our opinion without merit.

Third cause of action. Under the third cause of action the respondent is charged with
engaging in activities foreign to the purposes for which the corporation was created and
not reasonable necessary to its legitimate ends. The specifications under this cause of
action relate to three different sorts of activities. The first consist of the administration of
the offices in the El Hogar building not used by the respondent itself and the renting of
such offices to the public. As stated in the discussion connected with the second cause
of action, the respondent uses only about ten per cent of the office space in the El
Hogar building for its own purposes, and it leases the remainder to strangers. In the
years 1924 and 1925 the respondent received as rent for the leased portions of the
building the sums of P75,395.06 and P58,259.27, respectively. The activities here
criticized clearly fall within the legitimate powers of the respondent, as shown in what
we have said above relative to the second cause of action. This matter will therefore no
longer detain us. If the respondent had the power to acquire the lot, construct the edifice
and hold it beneficially, as there decided, the beneficial administration by it of such parts
of the building as are let to others must necessarily be lawful.

The second specification under the third cause of action has reference to the
administration and management of properties belonging to delinquent shareholders of

the association. In this connection it appears that in case of delinquency on the part of
its shareholders in the payment of interest, premium, and dues, the association has
been accustomed (pursuant to clause 8 of its standard mortgage) to take over and
manage the mortgaged property for the purpose of applying the income to the
obligations of the debtor party. For these services the respondent charges a
commission at the rate of 2 per centum on sums collected. The case for the
government supposes that the only remedy which the respondent has in case of default
on the part of its shareholders is to proceed to enforce collection of the whole loan in the
manner contemplated in section 185 of the Corporation Law. It will be noted, however,
that, according to said section, the association may treat the whole indebtedness as
due, "at the option of the board of directors," and this remedy is not made exclusive. We
see no reason to doubt the validity of the clause giving the association the right to take
over the property which constitutes the security for the delinquent debt and to manage it
with a view to the satisfaction of the obligations due to the debtor than the immediate
enforcement of the entire obligation, and the validity of the clause allowing this course to
be taken appears to us to be not open to doubt. The second specification under this
cause of action is therefore without merit, as was true of the first.

The third specification under this cause of action relates to certain activities which are
described in the following paragraphs contained in the agreed statements of facts:.

El Hogar Filipino has undertaken the management of some parcels of improved real
estate situated in Manila not under mortgage to it, but owned by shareholders, and has
held itself out by advertisement as prepared to do so. The number of properties so
managed during the years 1921 to 1925, inclusive, was as follows:

1921 eight properties

1922 six properties

1923 ten properties

1924 fourteen properties

1925 fourteen properties.

This service is limited to shareholders; but some of the persons whose properties are so
managed for them became shareholders only to enable them to take advantage thereof.

The services rendered in the management of such improved real estate by El Hogar
Filipino consist in the renting of the same, the payment of real estate taxes and
insurance for the account of the owner, causing the necessary repairs for upkeep to be
made, and collecting rents due from tenants. For the services so rendered in the
management of such properties El Hogar Filipino receives compensation in the form of
commissions upon the gross receipts from such properties at rates varying from two
and one-half per centum to five per centum of the sums so collected, according to the
location of the property and the effort involved in its management.

The work of managing real estate belonging to non-borrowing shareholders

administered by El Hogar Filipino is carried on by the same members of the staff who
attend to the details of the management of properties administered by the manager of El
Hogar Filipino under the provisions of paragraph 8 of the standard mortgage form, and
of properties bought in on foreclosure of mortgage.

The practice described in the passage above quoted from the agreed facts is in our
opinion unauthorized by law. Such was the view taken by the bank examiner of the
Treasury Bureau in his report to the Insular Treasurer on December 21, 1925, wherein
the practice in question was criticized. The administration of property in the manner
described is more befitting to the business of a real estate agent or trust company than
to the business of a building and loan association. The practice to which this criticism is
directed relates of course solely to the management and administration of properties
which are not mortgaged to the association. The circumstance that the owner of the
property may have been required to subscribe to one or more shares of the association
with a view to qualifying him to receive this service is of no significance. It is a general
rule of law that corporations possess only such express powers. The management and
administration of the property of the shareholders of the corporation is not expressly
authorized by law, and we are unable to see that, upon any fair construction of the law,
these activities are necessary to the exercise of any of the granted powers. The
corporation, upon the point now under the criticism, has clearly extended itself beyond
the legitimate range of its powers. But it does not result that the dissolution of the
corporation is in order, and it will merely be enjoined from further activities of this sort.

Fourth cause of action. It appears that among the by laws of the association there is
an article (No. 10) which reads as follows:

The board of directors of the association, by the vote of an absolute majority of its
members, is empowered to cancel shares and to return to the owner thereof the
balance resulting from the liquidation thereof whenever, by reason of their conduct, or
for any other motive, the continuation as members of the owners of such shares is not
desirable.

This by-law is of course a patent nullity, since it is in direct conflict with the latter part of
section 187 of the Corporation Law, which expressly declares that the board of directors
shall not have the power to force the surrender and withdrawal of unmatured stock
except in case of liquidation of the corporation or of forfeiture of the stock for
delinquency. It is agreed that this provision of the by-laws has never been enforced, and
in fact no attempt has ever been made by the board of directors to make use of the
power therein conferred. In November, 1923, the Acting Insular Treasurer addressed a
letter to El Hogar Filipino, calling attention to article 10 of its by-laws and expressing the
view that said article was invalid. It was therefore suggested that the article in question
should be eliminated from the by-laws. At the next meeting of the board of directors the
matter was called to their attention and it was resolved to recommend to the
shareholders that in their next annual meeting the article in question be abrogated. It
appears, however, that no annual meeting of the shareholders called since that date
has been attended by a sufficient number of shareholders to constitute a quorum, with
the result that the provision referred to has no been eliminated from the by-laws, and it
still stands among the by-laws of the association, notwithstanding its patent conflict with
the law.

It is supposed, in the fourth cause of action, that the existence of this article among the
by-laws of the association is a misdemeanor on the part of the respondent which
justifies its dissolution. In this view we are unable to concur. The obnoxious by-law, as it
stands, is a mere nullity, and could not be enforced even if the directors were to attempt

to do so. There is no provision of law making it a misdemeanor to incorporate an invalid

provision in the by-laws of a corporation; and if there were such, the hazards incident to
corporate effort would certainly be largely increased. There is no merit in this cause of
action.

Fifth cause of action. In section 31 of the Corporation Law it is declared that, "at all
elections of directors there must be present, either in person or by representative
authorized to act by written proxy, the owners of the majority of the subscribed capital
stock entitled to vote. . . ." Conformably with this requirement it is declared in article 61
of the by-laws of El Hogar Filipino that, "the attendance in person or by proxy of
shareholders owning one-half plus one of the shareholders shall be necessary to
constitute a quorum for the election of directors. At the general annual meetings of the
El Hogar Filipino held in the years 1911 and 1912, there was a quorum of shares
present or represented at the meetings and directors were duly elected accordingly. As
the corporation has grown, however, it has been fond increasingly difficult to get
together a quorum of the shareholders, or their proxies, at the annual meetings; and
with the exception of the annual meeting held in 1917, when a new directorate was
elected, the meetings have failed for lack of quorum. It has been foreseen by the
officials in charge of the respondent that this condition of affairs would lead to
embarrassment, and a special effort was made by the management to induce a
sufficient number of shareholders to attend the annual meeting for February, 1923. In
addition to the publication of notices in the newspapers, as required by the by-laws, a
letter of notification was sent to every shareholder at his last known address, together
with a blank form of proxy to be used in the event the shareholder could not personally
attend the meeting. Notwithstanding these special efforts the meeting was attended only
by shareholders, in person and by proxy, representing 3,889 shares, out of a total of
106,491 then outstanding and entitled to vote.

Owing to the failure of a quorum at most of the general meetings since the respondent
has been in existence, it has been the practice of the directors to fill vacancies in the
directorate by choosing suitable persons from among the stockholders. This custom
finds its sanction in article 71 of the by-laws, which reads as follows:

ART. 71. The directors shall elect from among the shareholders members to fill the
vacancies that may occur in the board of directors until the election at the general
meeting.

The person thus chosen to fill vacancies in the directorate have, it is admitted, uniformly
been experienced and successful business and professional men of means, enjoying
earned incomes of from P12,000 to P50,000 per annum, with an annual average of
P30,000 in addition to such income as they derive from their properties. Moreover, it
appears that several of the individuals constituting the original directorate and persons
chosen to supply vacancies therein belong to prominent Filipino families, and that they
are more or less related to each other by blood or marriage. In addition to this it appears
that it has been the policy of the directorate to keep thereon some member or another of
a single prominent American law firm in the city.

It is supposed in the statement of the fifth cause of action in the complaint that the
failure of the corporation to hold annual meetings and the filling of vacancies in the
directorate in the manner described constitute misdemeanors on the part of the
respondent which justify the resumption of the franchise by the Government and
dissolution of the corporation; and in this connection it is charge that the board of
directors of the respondent has become a permanent and self perpetuating body
composed of wealthy men instead of wage earners and persons of moderate means.
We are unable to see the slightest merit in the charge. No fault can be imputed to the

corporation on account of the failure of the shareholders to attend the annual meetings;
and their non-attendance at such meetings is doubtless to be interpreted in part as
expressing their satisfaction of the way in which things have been conducted. Upon
failure of a quorum at any annual meeting the directorate naturally holds over and
continues to function until another directorate is chosen and qualified. Unless the law or
the charter of a corporation expressly provides that an office shall become vacant at the
expiration of the term of office for which the officer was elected, the general rule is to
allow the officer to holdover until his successor is duly qualified. Mere failure of a
corporation to elect officers does not terminate the terms of existing officers nor dissolve
the corporation (Quitman Oil Company vs. Peacock, 14 Ga. App., 550; Jenkins vs.
Baxter, 160 Pa. State, 199; New York B. & E. Ry. Co. vs. Motil, 81 Conn., 466; Hatch vs.
Lucky Bill Mining Company, 71 Pac., 865; Youree vs. Home Town Matual Ins. Company,
180 Missouri, 153; Cassell vs. Lexington, H. and P. Turnpike Road Co., 10 Ky. L. R.,
486). The doctrine above stated finds expressions in article 66 of the by-laws of the
respondent which declares in so many words that directors shall hold office "for the term
of one year on until their successors shall have been elected and taken possession of
their offices."

It result that the practice of the directorate of filling vacancies by the action of the
directors themselves is valid. Nor can any exception be taken to then personality of the
individuals chosen by the directors to fill vacancies in the body. Certainly it is no fair
criticism to say that they have chosen competent businessmen of financial responsibility
instead of electing poor persons to so responsible a position. The possession of means
does not disqualify a man for filling positions of responsibility in corporate affairs.

Sixth cause of action. Under the sixth cause of action it is alleged that the directors of
El Hogar Filipino, instead of serving without pay, or receiving nominal pay or a fixed
salary, as the complaint supposes would be proper, have been receiving large

compensation, varying in amount from time to time, out of the profits of the respondent.
The facts relating to this cause of action are in substance these:

Under section 92 of the by-laws of El Hogar Filipino 5 per centum of the net profit shown
by the annual balance sheet is distributed to the directors in proportion to their
attendance at meetings of the board. The compensation paid to the directors from time
to time since the organization was organized in 1910 to the end of the year 1925,
together with the number of meetings of the board held each year, is exhibited in the
following table:

Year Compensation
paid directors
as a whole

Number of

meetings
held

Rate per

meeting
as a whole
1911 .................................. P 4,167.96

25

P 166.71

1912 ..................................10,511.87

29

362.47

1913 ..................................15,479.29

27

573.30

1914 ..................................19,164.72

27

709.80

1915 ..................................24,032.85

25

961.31

1916 ..................................27,539.50

28

983.55

1917 ..................................31,327.00

26

1,204.88

1918 ..................................32,858.35

20

1,642.91

1919 ..................................36,318.78

21

1,729.46

1920 ..................................63,517.01

28

2,268.46

1921 ..................................36,815.33

25

1,472.61

1922 ..................................43,133.73

25

1,725.34

1923 ..................................39,773.61

27

1,473.09

1924 ..................................38,651.92

26

1,486.61

1925 ..................................35,719.27

26

1,373.81

It will be note that the compensation above indicated as accruing to the directorate as a
whole has been divided among the members actually present at the different meetings.
As a result of this practice, and the liberal measure of compensation adopted, we find
that the attendance of the membership at the board meetings has been extraordinarily
good. Thus, during the years 1920 to 1925, inclusive, when the board was composed of
nine members, the attendance has regularly been eight meeting with the exception of
two years when the average attendance was seven. It is insisted in the brief for the
Attorney-General that the payment of the compensation indicated is excessive and
prejudicial to he interests of the shareholders at large. For the respondent, attention is
directed to the fact that the liberal policy adopted by the association with respect to the
compensation of the directors has had highly beneficial results, not only in securing a
constant attendance on the part of the membership, but in obtaining their intelligent
attention to the affairs of the association. Certainly, in this connection, the following

words from the report of the government examiners for 1918 to the Insular Treasurer
contain matter worthy of consideration:

The management of the association is entrusted to men of recognized ability in financial

affairs and it is believed that they have long foreseen all possible future contingencies
and that under such men the interests of the stockholders are duly protected. The steps
taken by the directorate to curtail the influx of unnecessary capital into the association's
coffers, as mentioned above, reveals how the men at grasp the situation and to apply
the necessary remedy as the circumstances were found in the same excellent condition
as in the previous examination.

In so far as this court is concerned the question here before us is not one concerning
the propriety and wisdom of the measure of compensation adopted by the respondent
but rather the question of the validity of the measure. Upon this point there can, it
seems to us, be no difference of intelligent opinion. The Corporation Law does not
undertake to prescribe the rate of compensation for the directors of corporations. The
power to fixed the compensation they shall receive, if any, is left to the corporation, to
be determined in its by-laws(Act No. 1459, sec. 21). Pursuant to this authority the
compensation for the directors of El Hogar Filipino has been fixed in section 92 of its bylaws, as already stated. The justice and property of this provision was a proper matter
for the shareholders when the by-laws were framed; and the circumstance that, with the
growth of the corporation, the amount paid as compensation to the directors has
increased beyond what would probably be necessary to secure adequate service from
them is matter that cannot be corrected in this action; nor can it properly be made a
basis for depriving the respondent of its franchise, or even for enjoining it from
compliance with the provisions of its own by-laws. If a mistake has been made, or the
rule adopted in the by-laws meeting to change the rule. The remedy, if any, seems to lie

rather in publicity and competition, rather than in a court proceeding. The sixth cause of
action is in our opinion without merit.

Seventh cause of action. It appears that the promoter and organizer of El Hogar
Filipino was Mr. Antonio Melian, and in the early stages of the organization of the
association the board of directors authorized the association to make a contract with
him with regard to the services him therefor. Pursuant to this authority the president of
the corporation, on January 11, 1911, entered into a written agreement with Mr. Melian,
which is reproduced in the agreed statement of facts and of which the important clauses
are these:

1. The corporation "El Hogar Filipino Sociedad Mutua de Construccion y Prestamos,"

and on its behalf its president, Don Antonio R. Roxas, hereby confers on Don Antonio
Melian the office of manager of said association for the period of one year from the date
of this contract.

2. Don Antonio Melian accepts said office and undertakes to render the services thereto
corresponding for the period of one year, as prescribed by the by-laws of the
corporation, without salary.

3. Don Antonio Melian furthermore undertakes to pay for his own account, all the
expenses incurred in the organization of the corporation.

4. Don Antonio Melian further undertakes to lend to the corporation, without interest the
sum of six thousand pesos (P6,000), Philippine Currency, for the purpose of meeting
the expense of rent, office supplies, etcetera, until such time as the association has
sufficient funds of its own with which to return this loan: Provided, nevertheless, That the
maximum period thereof shall not exceed three (3) years.

5. Don Antonio Melian undertakes that the capital of the association shall amount to the
sum of four hundred thousand pesos (P400,000), Philippine currency, par value, during
the first year of its duration.

6. In compensation of the studies made and services rendered by Don Antonio Melian
for its organization, the expenses incurred by him to that end, and in further
consideration of the said loan of six thousand pesos (P6,000), and of the services to be
rendered by him as manager, and of the obligation assumed by him that the nominal
value of the capital of the association shall reach the sum of four hundred thousand
pesos (P400,000) during the first year of its duration, the corporation 'El Hogar Filipino
Sociedad Mutua de Construccion y Prestamos' hereby grants him five per centum (5%)
of the net profits to be earned by it in each year during the period fixed for the duration
of the association by its articles of incorporation; Provided, that this participation in the
profits shall be transmitted to the heirs of Seor Melian in the event of his death; And
provided further, that the performance of all the obligations assumed by Seor Melian in
favor of the association, in accordance with this contract, shall and does constitute a
condition precedent to the acquisition by Seor Melian of the right to the said
participation in the profits of the association, unless the non-performance of such
obligations shall be due to a fortuitous event or force majeure.

In conformity with this agreement there was inserted in section 92 of the by-laws of the
association a provision recognizing the rights of Melian, as founder, to 5 per centum of
the net profits shown by the annual balance sheet, payment of the same to be made to
him or his heirs during the life of the association. It is declared in said article that this
portion of the earnings of the association is conceded to him in compensation for the
studies, work and contributions made by him for the organization of El Hogar Filipino
and the performance on his part of the contract of January 11, 1911, above quoted.
During the whole life of the association, thus far, it has complied with the obligations
assumed by it in the contract above- mentioned; and during the years 1911 to 1925,
inclusive, it paid to him as founder's royalty the sum of P459,011.19, in addition to
compensation received from the association by him in to remuneration of services to the
association in various official capacities.

As a seventh cause of action it is alleged in the complaint that this royalty of the founder
is "unconscionable, excessive and out of all proportion to the services rendered,
besides being contrary to and incompatible with the spirit and purpose of building and
loan associations." It is not alleged that the making of this contract was beyond the
powers of the association (ultra vires); nor it alleged that it is vitiated by fraud of any
kind in its procurement. Nevertheless, it is pretended that in making and observing said
contract the respondent committed an offense requiring its dissolution, or, as is
otherwise suggested, that the association should be enjoined from performing the
agreement.

It is our opinion that this contention is entirely without merit. Stated in its true simplicity,
the primary question here is whether the making of a (possibly) indiscreet contract is a
capital offense in a corporation, a question which answers itself. No possible doubt
exists as to the power of a corporation to contract for services rendered and to be
rendered by a promoter in connection with organizing and maintaining the corporation. It

is true that contracts with promoters must be characterized by good faith; but could it be
said with certainty, in the light of facts existing at the time this contract was made, that
the compensation therein provided was excessive? If the amount of the compensation
now appears to be a subject of legitimate criticism, this must be due to the extraordinary
development of the association in recent years.

If the Melian contract had been clearly ultra vires which is not charged and is
certainly untrue its continued performance might conceivably be enjoined in such a
proceeding as this; but if the defect from which it suffers is mere matter for an action
because Melian is not a party. It is rudimentary in law that an action to annul a contract
cannot be maintained without joining both the contracting parties as defendants.
Moreover, the proper party to bring such an action is either the corporation itself, or
some shareholder who has an interest to protect.

The mere fact that the compensation paid under this contract is in excess of what, in the
full light of history, may be considered appropriate is not a proper consideration for this
court, and supplies no ground for interfering with its performance. In the case of El
Hogar Filipino vs. Rafferty (37 Phil., 995), which was before this court nearly ten years
ago, this court held that the El Hogar Filipino is contract with Mr. Melian did not affect
the association's legal character. The inference is that the contract under consideration
was then considered binding, and it occurred to no one that it was invalid. It would be a
radical step indeed for a court to attempt to substitute its judgment for the judgment of
the contracting parties and to hold, as we are invited to hold under this cause of action,
that the making of such a contract as this removes the respondent association from the
pale of the law. The majority of the court is of the opinion that our traditional respect for
the sanctity of the contract obligation should prevail over the radical and innovating
tendencies which find acceptance with some and which, if given full rein, would go far to

sink legitimate enterprise in the Islands into the pit of populism and bolshevism. The
seventh count is not sustainable.

Eight cause of action. Under the fourth cause of action we had case where the
alleged ground for the revocation of the respondent's charter was based upon the
presence in the by-laws of article 10 that was found to be inconsistent with the express
provisions of law. Under the eight cause of action the alleged ground for putting an end
to the corporate life of the respondent is found in the presence of other articles in the
by-laws, namely, articles 70 and 76, which are alleged to be unlawful but which, as will
presently be seen, are entirely valid. Article 70 of the by-laws in effect requires that
persons elected to the board of directors must be holders of shares of the paid up value
of P5,000 which shall be held as security may be put up in the behalf of any director by
some other holder of shares in the amount stated. Article 76 of the by-laws declares that
the directors waive their right as shareholders to receive loans from the association.

It is asserted, under the eight cause of action, that article 70 is objectionable in that,
under the requirement for security, a poor member, or wage-earner, cannot serve as
director, irrespective of other qualifications and that as a matter of fact only men of
means actually sit on the board. Article 76 is criticized on the ground that the provision
requiring directors to renounce their right to loans unreasonably limits their rights and
privileges as members. There is nothing of value in either of theses suggestions.
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 the requirement of security
from them for the proper discharge of the duties of their office, in the manner prescribed
in article 70, is highly prudent and in conformity with good practice. Article 76,
prohibiting directors from making loans to themselves, is of course designed to prevent
the possibility of the looting of the corporation by unscrupulous directors. A more

discreet provision to insert in the by-laws of a building and loan association would be
hard to imagine. Clearly, the eighth cause of action cannot be sustained.

Ninth cause of action. The specification under this head is in effect that the
respondent has abused its franchise in issuing "special" shares. The issuance of these
shares is allege to be illegal and inconsistent with the plan and purposes of building and
loan associations; and in particular, it is alleged and inconsistent with the plan and
purposes of building and loan associations; and in particular, it is alleged that they are,
in the main, held by well-to-wage-earners for accumulating their modest savings for the
building of homes.

In the articles of incorporation we find the special shares described as follows:

"Special" shares shall be issued upon the payment of 80 per cent of their par value in
cash, or in monthly dues of P10. The 20 per cent remaining of the par value of such
shares shall be completed by the accumulation thereto of their proportionate part of the
profits of the corporation. At the end of each quarter the holders of special shares shall
be entitled to receive in cash such part of the net profits of the corporation
corresponding to the amount on such date paid in by the holders of special shares, on
account thereof, as shall be determined by the directors, and at the end of each year
the full amount of the net profits available for distribution corresponding to the special
shares. The directors shall apply such part as they deem advisable to the amortization
of the subscription to capital with respect to shares not fully paid up, and the remainder
of the profits, if any, corresponding to such shares, shall be delivered to the holders
thereof in accordance with the provision of the by-laws.

The ground for supposing the issuance of the "special" shares to be unlawful is that
special shares are not mentioned in the Corporation Law as one of the forms of security
which may be issued by the association. In the agreed statement of facts it is said that
special shares are issued upon two plans. By the second, the shareholder, upon
subscribing, pays in cash P10 for each share taken, and undertakes to pay P10 a
month, as dues, until the total so paid in amounts to P160 per share. On December 31,
1925, there were outstanding 20,844 special shares of a total paid value (including
accumulations ) of P3,680,162.51. The practice of El Hogar Filipino, since 1915, has
been to accumulate to each special share, at the end of the year, one-tenth of the
divident declared and to pay the remainder of the divident in cash to the holders of
shares. Since the same year dividend have been declared on the special and common
shares at the rate of 10 per centum per annum. When the amount paid in upon any
special share plus the accumulated dividends accruing to it, amounts to the par value of
the share (P200), such share matures and ceases to participate further in the earning.
The amount of the par value of the share (P200) is then returned to the shareholder and
the share cancelled. Holders of special and ordinary shares participate ratably in the
dividends declared and distributed, the part pertaining to each share being computed on
the basis of the capital paid in, plus the accumulated dividends pertaining to each share
at the end of the year. The total number of shares of El Hogar Filipino outstanding on
December 31, 1925, was 125,750, owned by 5,826 shareholders, and dividend into
classes as follows:

Preferred shares .................................. 1,503

Special shares ..................................... 20,884
Ordinary shares ..................................

103,363

The matter of the propriety of the issuance of special shares by El Hogar Filipino has
been before this court in two earlier cases, in both of which the question has received
the fullest consideration from this court. In El Hogar Filipino vs. Rafferty (37 Phil., 995),

it was insisted that the issuance of such shares constituted a departure on the part of
the association from the principle of mutuality; and it was claimed by the Collector of
Internal Revenue that this rendered the association liable for the income tax to which
other corporate entities are subject. It was held that this contention was untenable and
that El Hogar Filipino was a legitimate building and loan association notwithstanding the
issuance of said shares. In Sevireno vs. El Hogar Filipino (G. R. No. 24926),2 and the
related cases of Gervasio Miraflores and Gil Lopes against the same entity, it was
asserted by the plaintiffs that the emission of special shares deprived the herein
responded of the privileges and immunities of a building and loan association and that
as a consequence the loans that had been made to the plaintiffs in those cases were
usurious. Upon an elaborate review of the authorities, the court, though divided,
adhered to the principle announced in the earlier case and held that the issuance of the
special shares did not affect the respondent's character as a building and loan
association nor make its loans usurious. In view of the lengthy discussion contained in
the decisions above-mentioned, it would appear to be an act of supererogation on our
part to go over the same ground again. The discussion will therefore not be repeated,
and what is now to be said should be considered supplemental thereto.

Upon examination of the nature of the special shares in the light of American usage, it
will be found that said shares are precisely the same kind of shares that, in some
American jurisdictions, are generally known as advance payment shares; in if close
attention be paid to the language used in the last sentence of section 178 of the
Corporation Law, it will be found that special shares where evidently created for the
purpose of meeting the condition cause by the prepayment of dues that is there
permitted. The language of this provision is as follow "payment of dues or interest may
be made in advance, but the corporation shall not allow interest on such advance
payment at a greater rate than six per centum per annum nor for a longer period than
one year." In one sort of special shares the dues are prepaid to the extent of P160 per
share; in the other sort prepayment is made in the amount of P10 per share, and the
subscribers assume the obligation to pay P10 monthly until P160 shall have been paid.

It will escape notice that the provision quoted say that interest shall not be allowed on
the advance payments at a greater rate than six per centum per annum nor for a longer
period than one year. The word "interest " as there used must be taken in its true sense
of compensation for the used of money loaned, and it not must not be confused with the
dues upon which it is contemplated that the interest may be paid. Now, in the absence
of any showing to the contrary, we infer that no interest is ever paid by the association in
any amount for the advance payments made on these shares; and the reason is to be
found in the fact that the participation of the special shares in the earnings of the
corporation, in accordance with section 188 of the Corporation Law, sufficiently
compensates the shareholder for the advance payments made by him; and no other
incentive is necessary to induce inventors to purchase the stock.

It will be observed that the final 20 per centum of the par value of each special share is
not paid for by the shareholder with funds out of the pocket. The amount is satisfied by
applying a portion of the shareholder's participation in the annual earnings. But as the
right of every shareholder to such participation in the earnings is undeniable, the portion
thus annually applied is as much the property of the shareholder as if it were in fact
taken out of his pocket. It follows that the mission of the special shares does not involve
any violation of the principle that the shares must be sold at par.

From what has been said it will be seen that there is express authority, even in the very
letter of the law, for the emission of advance-payment or "special" shares, and the
argument that these shares are invalid is seen to be baseless. In addition to this it is
satisfactorily demonstrated in Severino vs. El Hogar Filipino, supra, that even assuming
that the statute has not expressly authorized such shares, yet the association has
implied authority to issue them. The complaint consequently fails also as regards the
stated in the ninth cause of action.

Tenth cause of action. Under this head of the complaint it is alleged that the
defendant is pursuing a policy of depreciating, at the rate of 10 per centum per annum,
the value of the real properties acquired by it at its sales; and it is alleged that this rate
is excessive. From the agreed statement it appears that since its organization in 1910 El
Hogar Filipino, prior to the end of the year 1925, had made 1,373 loans to its
shareholders secured by first mortgages on real estate as well as by the pledge of the
shares of the borrowers. In the same period the association has purchased at
foreclosure sales the real estate constituting the security for 54 of the aforesaid loans. In
making these purchases the association has always bid the full amount due to it from
the debtor, after deducting the withdrawal value of the shares pledged as collateral, with
the result that in no case has the shareholder been called upon to pay a deficiency
judgement on foreclosure.

El Hogar Filipino places real estate so purchased in its inventory at actual cost, as
determined by the amount bid on foreclosure sale; and thereafter until sold the book
value of such real estate is depreciated at the rate fixed by the directors in accordance
with their judgment as to each parcel, the annual average depreciation having varied
from nothing to a maximum of 14.138 per cent. The sales thereof, but sales are made
for the best prices obtainable, whether greater or less than the book value.

It is alleged in the complaint that depreciation is charged by the association at the rate
of 10 per centum per annum. The agreed statement of facts on this point shows that the
annual average varies from nothing to a maximum of something over 14 per centum.
We are thus left in the dark as to the precise depreciation allowed from year to year. It is
not claimed for the Government that the association is without power to allow some
depreciation; and it is quite clear that the board of directors possesses a discretion in
this matter. There is no positive provision of law prohibiting the association from writing

off a reasonable amount for depreciation on its assets for the purpose of determining its
real profits; and article 74 of its by-laws expressly authorizes the board of directors to
determine each year the amount to be written down upon the expenses of installation
and the property of the corporation. There can be no question that the power to adopt
such a by-law is embraced within the power to make by-laws for the administration of
the corporate affairs of the association and for the management of its business, as well
as the care, control and disposition of its property (Act No. 1459, sec. 13 [7]). But the
Attorney-General questions the exercise of the direction confided to the board; and it is
insisted that the excessive depreciation of the property of the association is
objectionable in several respects, but mainly because it tends to increase unduly the
reserves of the association, thereby frustrating the right of the shareholders to
participate annually and equally in the earnings of the association.

This count for the complaint proceeds, in our opinion, upon an erroneous notion as to
what a court may do in determining the internal policy of a business corporation. If the
criticism contained in the brief of the Attorney-General upon the practice of the
respondent association with respect to depreciation be well founded, the Legislature
should supply the remedy by defining the extent to which depreciation may be allowed
by building and loan associations. Certainly this court cannot undertake to control the
discretion of the board of directors of the association about an administrative matter as
to which they have legitimate power of action. The tenth cause of action is therefore not
well founded.

Eleventh and twelfth causes of action. The same comment is appropriate with
respect to the eleventh and twelfth causes of action, which are treated together in the
briefs, and will be here combined. The specification in the eleventh cause of action is
that the respondent maintains excessive reserve funds, and in the twelfth cause of
action that the board of directors has settled upon the unlawful policy of paying a

straight annual dividend of 10 per centum, regardless of losses suffered and profits
made by the corporation and in contravention of the requirements of section 188 of the
Corporation Law. The facts relating to these two counts in the complaint, as set forth in
the stipulation, are these:

In article 92 of the by-laws of El Hogar Filipino it is provided that 5 per centum of the net
profits earned each year, as shown by the annual balance sheet shall be carried to a
reserve fund. The fund so created is called the General Reserve. Article 93 of the bylaws authorizes the directors to carry funds to a special reserve, whenever in their
judgment it is advisable to do so, provided that the annual dividend in the year in which
funds are carried to special reserve exceeds 8 per centum. It appears to have been the
policy of the board of directors for several years past to place in the special reserve any
balance in the profit and loss account after the satisfaction of preferential charges and
the payment of a dividend of 10 per centum to all special and ordinary shares (with
accumulated dividends). As things stood in 1926 the general reserve contained an
amount equivalent to about 5 per centum of the paid-in value of shared. This fund has
never been drawn upon for the purpose of maintaining the regular annual dividend; but
recourse has been had to the special reserve on three different occasions to make good
the amount necessary to pay dividends. It appears that in the last five years the
reserves have declined from something over 9 per cent to something over 7.

It is insisted in the brief of the Attorney-General that the maintenance of reserve funds is
unnecessary in the case of building and loan associations, and at any rate the keeping
of reserves is inconsistent with section 188 of the Corporation Law. Moreover, it is said
that the practice of the association in declaring regularly a 10 per cent dividend is in
effect a guaranty by the association of a fixed dividend which is contrary to the intention
of the statute.

Upon careful consideration of the questions involved we find no reason to doubt the
right of the respondent to maintain these reserves. It is true that the corporation law
does not expressly grant this power, but we think it is to be implied. It is a fact of
common observation that all commercial enterprises encounter periods when earnings
fall below the average, and the prudent manager makes provision for such
contingencies. To regard all surplus as profit is to neglect one of the primary canons of
good business practice. Building and loan associations, though among the most solid of
financial institutions, are nevertheless subject to vicissitudes. Fluctuations in the
dividend rate are highly detrimental to any fiscal institutions, while uniformity in the
payments of dividends, continued over long periods, supplies the surest foundations of
public confidence.

The question now under consideration is not new in jurisprudence, for the American
courts have been called upon more than once to consider the legality of the
maintenance of reserves by institutions of this or similar character.

In Greeff vs. Equitable Life Assurance Society, the court had under consideration a
charter provision of a life insurance company, organized on the mutual plan, in its
relation to the power of the company to provide reserves. There the statute provided
that "the officers of the company, within sixty days from the expiration of the first five
years, from December 31, 1859, and within the first sixty days of every subsequent
period of five years, shall cause a balance to be struck of the affairs of the company,
which shall exhibit its assets and liabilities, both present and contingent, and also the
net surplus, after deducting a sufficient amount to cover all outstanding risks and other
obligations. Each policy holder shall be credited with an equitable share of the said
surplus."

The court said:

No prudent person would be inclined to take a policy in a company which had so

improvidently conducted its affairs that it only retained a fund barely sufficient to pay its
present liabilities, and, therefore, was in a condition where any change by the reduction
of interest upon, or depreciation in, the value of its securities, or any increase of
mortality, would render it insolvent and subject to be placed in the hands of a receiver.
The evident purpose of the provisions of the defendant's charter and policy relating to
this subject was to vest in the directors of the corporation a discretion to determine the
proportion of its surplus which should be dividend each year.

In a friendly suit tried in a circuit court of Wisconsin in 1916, entitled Boheman Bldg. and
Loan Association vs. Knolt, the court, in commenting on the nature of these reserves,
said:

The apparent function of this fund is to insure the stockholders against losses. Its
purpose is not unlike that of the various forms of insurance now in such common use.
This contribution is as legitimate an item of expense as are the premiums paid on any
insurance policy. (See Clarks and Chase, Building and Loan Association, footnote, page
344.)

In commenting on the necessity of such funds, Sundheim says:

It is optional with the association whether to maintain such a fund or not, but justice and
good business policy seem to require it. The retiring stockholder must be paid the value
of his stock in cash and leave for those remaining a large number of securities and
perhaps some real estate purchased to protect the associations interest. How much will
be realized on these securities, or real estate, no human foresight can tell. Further, the
realizing on these securities may entail considerable litigation and expense. There are
many other contingencies which might cause a shrinkage in the association's assets,
such as defective titles, undisclosed defalcations on the part of an officer, a
miscalculation of assets and liabilities, and many other errors and omissions which must
always be reckoned within the conduct of human affairs.

The contingent fund is merely insurance against possible loss. That losses may occur
from time to time seems almost inevitable and it is, therefore, inequitable that the
remaining stockholders should be compelled to accept all securities at par, so, to say
the least, the maintenance of this fund is justified. The association teaches the duty of
providing for the proverbial rainy day. Why should it not provide for the hour of
adversity? The reserve fund has protected the maturing or withdrawing member during
the period of his membership. In case of loss it has or would have reimbursed him and,
at all times, it has protected him and given strength and standing to the association.
Losses may occur, after his membership ceases, that arose from some mistake or
mismanagement committed during the period of his membership, and in fairness and
equity the remaining members should have some protection against this. (Sundheim,
Law of Building and Loan Association, sec. 53.)

The government insists, we thing, upon an interpretation of section 188 of the

Corporation Law that is altogether too strict and literal. From the fact that the statute
provides that profits and losses shall be annually apportioned among the shareholders it
is argued that all earnings should be distributed without carrying anything to the reserve.

But it will be noted that it is provided in the same section that the profits and losses shall
be determined by the board of directors: and this means that they shall exercise the
usual discretion of good businessmen in allocating a portion of the annual profits to
purposes needful to the welfare of the association. The law contemplates the
distribution of earnings and losses after other legitimate obligations have been met.

Our conclusion is that the respondent has the power to maintain the reserves criticized
in the eleventh and twelfth counts of the complaint; and at any rate, if it be supposed
that the reserves referred to have become excessive, the remedy is in the hands of the
Legislature. It is no proper function of the court to arrogate to itself the control of
administrative matters which have been confided to the discretion of the board of
directors. The causes of action under discussion must be pronounced to be without
merit.

Thirteenth cause of action. The specification under this head is, in effect, that the
respondent association has made loans which, to the knowledge of the associations
officers were intended to be used by the borrowers for other purposes than the building
of homes. In this connection it appears that, though loans have been made by the
association exclusively to its shareholders, no attempt has been made by it to control
the borrowers with respect to the use made of the borrowed funds, the association
being content to see that the security given for the loan in each case is sufficient. On
December 31, 1925, the respondent had five hundred forty-four loans outstanding
secured by mortgages upon real estate and by the pledge of the borrowers' shares in an
amount sufficient at maturity to amortize the loans. With respect to the nature of the real
estate upon which these loans were made it appears that three hundred fifty-one loans
were secured by mortgages upon city residences, seven by mortgages upon
commercial building in cities, and three mortgages upon unimproved city lots. At the
same time one hundred eighty-three of the loans were secured by mortgages upon

groves, sugar land, and rice land, with a total area of about 7,558 hectares. From
information gathered by the association from voluntary statements of borrowers given at
the time of application with respect to the use intended to be made of the borrowed
funds, it appears that the amount of P693,200 was borrowed to redeem real property
from existing mortgages or pactos de retro, P280,800 to buy real estate, P449,100 to
erect buildings, P24,000 to improve and repair buildings, P1,480,900 for agricultural
purposes, while the amount of P5,763,700 was borrowed for purposes not disclosed.

Upon these facts an elaborate argument has been constructed in behalf of the plaintiff
to the effect that in making loans for other purposes than the building of residential
houses the association has illegally departed from its character and made itself
amenable to the penalty of dissolution. Aside from being directly opposed to the
decision of this court in Lopez and Javelona vs. El Hogar Filipino and Registrar of
Deeds of Occidental Negros (47 Phil., 249), this contention finds no substantial support
in the prevailing decisions made in American courts; and our attention has not been
directed to a single case wherein the dissolution of a building and loan association has
been decreed in a quo warranto proceeding because the association allowed its
borrowers to use the loans for other purposes than the acquisition of homes.

The case principally relied upon for the Government appears to be Pfeister vs.
Wheeling Building Association (19 W. Va., 676, 716),which involved the question
whether a building and loan association could recover the full amount of a note given to
it by a member and secured by a mortgage from a stranger. At the time the case arose
there was a statute in force in the State of West Virginia expressly forbidding building
and loan associations to use or direct their funds for or to any other object or purpose
than the buying of lots or houses or in building and repairing houses, and it was
declared that in case the funds should be improperly directed to other objects, the
offending association should forfeit all rights and privileges as a corporation. Under the

statute so worded the court held that the plaintiff could only recover the amount actually
advanced by it with lawful interest and fines, without premium; and judgment was given
accordingly. The suggestion in that case that the result would have been the same even
in the absence of statute was mere dictum and is not supported by respectable
authority.

Reliance is also placed in the plaintiff's brief upon McCauley vs. Building & Saving
Association. The statute in force in the State of Tennessee at the time this action arose
provided that all loans should be made to the members of the association at open
stated meetings and that the money should be lent to the highest bidder. Inconsistently
with this provision, there was inserted in the by-laws of the association a provision to the
effect that no loan should be made at a greater premium than 30 per cent, nor at a less
premium than 29 7/8 per cent. It was held that this by-law made free and open
competition impossible and that it in effect established a fixed premium. It was
accordingly held, in the case cited, that an association could not recover such part of
the loan as had been applied by it to the satisfaction of a premium of 30 per centum.

We have no criticism to make upon the result reached in either of the two decisions
cited, but it is apparent that much of the discussion contained in the opinions in those
cases does not reflect the doctrine now prevailing in the United States; and much less
are those decisions applicable in this jurisdiction. There is no statute here expressly
declaring that loans may be made by these associations solely for the purpose of
building homes. On the contrary, the building of homes is mentioned in section 171 of
the Corporation Law as only one among several ends which building and loan
associations are designed to promote. Furthermore, section 181 of the Corporation Law
expressly authorities the Board of directors of the association from time to time to fix the
premium to be charged.

In the brief of the plaintiff a number of excerpts from textbooks and decisions have been
collated in which the idea is developed that the primary design of building and loan
associations should be to help poor people to procure homes of their own. This
beneficent end is undoubtedly served by these associations, and it is not to be denied
that they have been generally fostered with this end in view. But in this jurisdiction at
least the lawmaker has taken care not to limit the activities of building and loan
associations in an exclusive manner, and the exercise of the broader powers must in
the end approve itself to the business community. Judging from the past history of these
institutions it can be truly said that they have done more to encourage thrift, economy
and saving among the people at large than any other institution of modern times, not
excepting even the saving banks. In this connection Mr. Sundheim, in a late treatise
upon the subject of the law of building and loan associations, makes the following
comment:

They have grown to such an extent in recent years that they no longer restrict their
money to the home buyer, but loan their money to the mere investor or dealer in real
estate. They are the holder of large mortgages secured upon farms, factories and other
business properties and rows of stores and dwellings. This is not an abuse of their
powers or departure from their main purposes, but only a natural and proper expansion
along healthy and legitimate lines. (Sundheim, Building and Loan Associations, sec. 7.)

Speaking of the purpose for which loans may be made, the same author adds:

Loans are made for the purpose of purchasing a homestead, or other real estate, or for
any lawful purpose or business, but there is no duty or obligation of the association to
inquire for what purpose the loan is obtained, or to require any stipulation from the

borrower as to what use he will make of the money, or in any manner to supervise or
control its disbursement. (Sundheim, Building and Loan Association, sec. 111.)

In Lopez and Javelona vs. El Hogar Filipino and Registrar of Deeds of Occidental
Negros, this court had before it the question whether a loan made by the respondent
association upon the security of a mortgage upon agricultural land, where the loan
was doubtless used for agricultural purposes, was usurious or not; and the case
turned upon the point whether, in making such loans, the association had violated the
law and departed from its fundamental purposes. The conclusion of the court was that
the loan was valid and could be lawfully enforced by a nonjudicial foreclosure in
conformity with the terms of the contract between the association and the borrowing
member. We now find no reason to depart from the conclusion reached in that case,
and it is unnecessary to repeat what was then said. The thirteenth cause of action must
therefore be pronounced unfounded.

Fourteenth cause of action. The specification under this head is that the loans made
by the defendant for purposes other than building or acquiring homes have been
extended in extremely large amounts and to wealthy persons and large companies. In
this connection attention is directed to eight loans made at different times in the last
several years to different persons or entities, ranging in amounts from P120,000 to
P390,000 and to two large loans made to the Roxas Estate and to the Pacific
Warehouse Company in the amounts of P1,122,000 and P2,320,000, respectively. In
connection with the larger of the two after this loan was made the available funds of El
Hogar Filipino were reduced to the point that the association was compelled to take
advantage of certain provisions of its by-laws authorizing the postponement of the
payment of claims resulting from withdrawals, whereas previously the association had
always settled these claims promptly from current funds. At no time was there

apparently any delay in the payment of matured shares; but in four or five cases there
was as much as ten months delay in the payment of withdrawal applications.

There is little that can be said upon the legal aspects of this cause of action. In so far, as
it relates to the purposes for which these loans were made, the matter is covered by
what was said above with reference to the thirteenth cause of action; and in so far as it
relates to the personality of the borrowers, the question belongs more directly to the
discussion under the sixteenth cause of action, which will be found below. The point,
then, which remains for consideration here is whether it is a suicidal act on the part of a
building and loan association to make loans in large amount. If the loans which are here
the subject of criticism had been made upon inadequate security, especially in case of
the largest two, the consequences certainly would have been disastrous to the
association in the extreme; but no such fact is alleged; and it is to be assumed that
none of the ten borrowers have defaulted in their contracts.

Now, it must be admitted that two of these loans at least are of a very large size,
considering the average range of financial transaction in this country; and the making of
the largest loan was followed, as we have already see, with unpleasant consequences
to the association in dealing with current claims. Nevertheless the agreed statement of
facts shoes that all of the loan referred to are only ten out of a total of five hundred fortyfour outstanding on December 31, 1925; and the average of all the loans taken together
is modest enough. It appears that the chief examiner of banks and corporations of the
Philippine Treasury, after his examination of El Hogar Filipino at the end of the year
1925, made a report concerning this association as of January 31, 1926, in which he
criticized the Pacific Warehouse Company loan as being so large that it temporarily
crippled the lending power of the association for some time. This criticism was
apparently justified as proper comment on the activities of the association; but the
question for use here to decide is whether the making of this and the other large loans

constitutes such a misuser of the franchise as would justify us in depriving the

association of its corporate life. This question appears to us to be so simple as almost to
answer itself. The law states no limit with respect to the size of the loans to be made by
the association. That matter is confided to the discretion of the board of directors; and
this court cannot arrogate to itself a control over the discretion of the chosen officials of
the company. If it should be thought wise in the future to put a limit upon the amount of
loans to be made to a single person or entity, resort should be had to the Legislature; it
is not a matter amenable to judicial control. The fourteenth cause of action is therefore
obviously without merit.

Fifteenth cause of action. The criticism here comes back to the supposed
misdemeanor of the respondent in maintaining its reserve funds, a matter already
discussed under the eleventh and twelfth causes of action. Under the fifteenth cause of
action it is claimed that upon the expiration of the franchise of the association through
the effluxion of time, or earlier liquidation of its business, the accumulated reserves and
other properties will accrue to the founder, or his heirs, and the then directors of the
corporation and to those persons who may at that time to be holders of the ordinary and
special shares of the corporation. In this connection we note that article 95 of the bylaws reads as follows:

ART. 95. The funds obtained by the liquidation of the association shall be applied in the
first place to the repayment of shares and the balance, if any, shall be distribute in
accordance with the system established for the distribution of annual profits.

It will be noted that the cause of action with which we are now concerned is not directed
to any positive misdemeanor supposed to have been committed by the association. It
has exclusive relation to what may happen some thirty-five years hence when the
franchise expires, supposing of course that the corporation should not be reorganized
and continued after that date. There is nothing in article 95 of the by-laws which is, in
our opinion, subject to criticism. The real point of criticism is that upon the final
liquidation of the corporation years hence there may be in existence a reserve fund out
of all proportion to the requirements that may then fall upon it in the liquidation of the
company. It seems to us that this is matter that may be left to the prevision of the
directors or to legislative action if it should be deemed expedient to require the gradual
suppression of the reserve funds as the time for dissolution approaches. It is no matter
for judicial interference, and much less could the resumption of the franchise on this
ground be justified. There is no merit in the fifteenth cause of action.

Sixteenth cause of action. This part of the complaint assigns as cause of action that
various loans now outstanding have been made by the respondent to corporations and
partnerships, and that these entities have in some instances subscribed to shares in the
respondent for the sole purpose of obtaining such loans. In this connection it appears
from the stipulation of facts that of the 5,826 shareholders of El Hogar Filipino, which
composed its membership on December 31, 1925, twenty-eight are juridical entities,
comprising sixteen corporations and fourteen partnerships; while of the five hundred
forty-four loans of the association outstanding on the same date, nine had been made to
corporations an five to partnerships. It is also admitted that some of these juridical
entities became shareholders merely for the purpose of qualifying themselves to take
loans from the association, and the same is said with respect to many natural persons
who have taken shares in the association. Nothing is said in the agreed statement of
facts on the point whether the corporations and partnerships that have taken loans from
the respondent are qualified by law governing their own organization to enter into these
contracts with the respondent.

In section 173 of the Corporation Law it is declared that "any person" may become a
stockholder in building and loan associations. The word "person" appears to be here
used in its general sense, and there is nothing in the context to indicate that the
expression is used in the restricted sense of both natural and artificial persons, as
indicated in section 2 of the Administrative Code. We would not say that the word
"person" or persons," is to be taken in this broad sense in every part of the Corporation
Law. For instance, it would seem reasonable to say that the incorporators of a
corporation ought to be natural persons, although in section 6 it is said that five or more
"persons", although in section 6 it is said that five or more "persons," not exceeding
fifteen, may form a private corporation. But the context there, as well as the common
sense of the situation, suggests that natural persons are meant. When it is said,
however, in section 173, that "any person" may become a stockholder in a building and
loan association, no reason is seen why the phrase may not be taken in its proper broad
sense of either a natural or artificial person. At any rate the question whether these
loans and the attendant subscriptions were properly made involves a consideration of
the power of the subscribing corporations and partnerships to own the stock and take
the loans; and it is not alleged in the complaint that they were without power in the
premises. Of course the mere motive with which subscriptions are made, whether to
qualify the stockholders to take a loan or for some other reason, is of no moment in
determining whether the subscribers were competent to make the contracts. The result
is that we find nothing in the allegations of the sixteenth cause of action, or in the facts
developed in connection therewith, that would justify us in granting the relief.

Seventeenth cause of action. Under the seventeenth cause of action, it is charged

that in disposing of real estates purchased by it in the collection of its loans, the
defendant has no various occasions sold some of the said real estate on credit,
transferring the title thereto to the purchaser; that the properties sold are then
mortgaged to the defendant to secure the payment of the purchase price, said amount

being considered as a loan, and carried as such in the books of the defendant, and that
several such obligations are still outstanding. It is further charged that the persons and
entities to which said properties are sold under the condition charged are not members
or shareholders nor are they made members or shareholders of the defendant.

This part of the complaint is based upon a mere technicality of bookkeeping. The central
idea involved in the discussion is the provision of the Corporation Law requiring loans to
be stockholders only and on the security of real estate and shares in the corporation, or
of shares alone. It seems to be supposed that, when the respondent sells property
acquired at its own foreclosure sales and takes a mortgage to secure the deferred
payments, the obligation of the purchaser is a true loan, and hence prohibited. But in
requiring the respondent to sell real estate which it acquires in connection with the
collection of its loans within five years after receiving title to the same, the law does not
prescribe that the property must be sold for cash or that the purchaser shall be a
shareholder in the corporation. Such sales can of course be made upon terms and
conditions approved by the parties; and when the association takes a mortgage to
secure the deferred payments, the obligation of the purchaser cannot be fairly described
as arising out of a loan. Nor does the fact that it is carried as a loan on the books of the
respondent make it a loan on the books of the respondent make it a loan in law. The
contention of the Government under this head is untenable.

In conclusion, the respondent is enjoined in the future from administering real property
not owned by itself, except as may be permitted to it by contract when a borrowing
shareholder defaults in his obligation. In all other respects the complaint is dismissed,
without costs. So ordered.

Avancea, C. J., Johnson, Villamor and Vila-Real, JJ., concur.

Separate Opinions

MALCOLM, J., with whom concur OSTRAND and JOHNS, JJ., dissenting:

For the second time in the history of the court so counsel for plaintiff inform us we
must try a corporation for the violation of a law which carries with it a death warrant
so counsel for defendant intimates. That the corporation at bar is wealthy and powerful
should neither prejudice us against it nor cause us to cringe before its might. The court
has a duty to perform and should perform it with fairness to the corporation and with
justice to the public, whose interests are involved. El Hogar Filipino, deserves exactly
the same consideration as any other litigant. No more, no less.

The proceeding is one of quo warranto, begun by the Government of the Philippine
Islands under authority of section 190-A of the Corporation Law, and of sections 197216, 519 of the Code of Civil Procedure. The complaint contains seventeen causes of
action. To all of them, the defendant has made answer. The facts have been covered by
stipulation. The government asks for an order of dissolution. Defendant tenaciously
resists.

El Hogar de Filipino is a corporation organized as a mutual building and loan

association under the provisions of the Corporation Law (Act No. 1459). The law last
mentioned, it may recalled, is divided into two parts. Chapter one is entitled "General

Provisions." In chapter two is entitled "Special Provisions". In chapter two, section 171
to 190, inclusive, are found the special provisions pertaining to building and loan
corporations. Section 171 thereof is indicative of the legislative purpose. It provides:

All corporations whose capital stock is required or is permitted to be paid in by the

stockholders in regular, equal, periodical payments and whose purpose is to accumulate
the savings of its stockholders, to repay to said stockholder their accumulated savings
and profits upon surrender of their stock, to encourage industry, frugality, and home
building among its stockholders, and to loan its funds and funds borrowed for the
purpose to stockholders on the security of unencumbered real estate and the pledge of
shares of capital stock owned by the stockholders as collateral security, shall be known
as building and loan corporation, and the words mutual building and loan association
shall form part of the name of every such corporation.

The articles of incorporation of El Hogar Filipino show that the purpose of the
corporation are: (1) The accumulation of the savings of its shareholders; (2) the return
to said shareholders of their accumulated savings and profits upon the surrender and
cancellation of their shares; (3) the encouragement of industry, frugality, and home
building among its shareholders; (4) the loan of its funds and funds borrowed for the
purpose to its shareholders on the security of unencumbered real estate and the pledge
of shares of capital stock of the company owned by its shareholders as collateral
security; and (5) the borrowing of money upon the credit of the corporation and the
issuance of bonds or other documents evidencing the existence of such obligations.
The capital of the corporation is made not to exceed P10,000,000. At the end of 1925 it
had 5,826 shareholders holding 125,750 shares, the total paid up value of which was
P8,703,602.25.

El Hogar Filipino having been incorporated under Philippine law as a mutual building
and loan association, the primary inquiry should naturally be as to the nature, purposes,
and operations of mutual building and loan associations.

In the case of El Hogar Filipino vs. Rafferty ([1918] 37 Phil., 995),this court had
presented the question of whether El Hogar Filipino, as a building and loan association,
was relieved from the necessity of paying an income tax. It was held that it was. Mr.
Justice Johnson, speaking for the court, said:

A building and loan association is an organization created for the purpose of

accumulating a fund by the monthly subscription or saving of its members, to assist
them in building or purchasing for themselves dwellings or real estate, by loaning to
them the requisite money from the funds of the society. To all particular intent it may be
said to be to enable a number of associates to have and invest their savings to mutual
advantage, so that, from time to time, any individual among them may receive, out of
the accumulation of the pittances which each contributes periodically, a sum, by way of
loan, wherewith to build or pay for a home, and ultimately making it absolutely his own
by the payment of such small amounts from time to time. (Rhodes vs. Missouri Savings
& Loan Co., 173 Ill., 621; 42 L. R. A., 93.)

The same opinion quoted from Endlich on Building Associations, section 7, who was
termed a leading authority upon such associations, on the subject of the primary
designs and general operation of building associations, the following:

The idea which first gave rise to the institution of building associations, which furnished
their ostensible and legitimate raison d'etre, and which secured to them their popularity

and their, in many respects, exceptionally favored position before the law, is that of
enabling persons belonging to a class whose earning are small, and with whom the
slowness of the accumulation discourages the effort, to become by a process of gradual
and compulsory savings, either at the end of a certain period, or by anticipation of it, the
owners of homesteads. The operation of the scheme may be easily understood.

The same opinion quoted from Thornton and Blackledge in their work on Building and
Loan Associations, at page 6 the following:

Societies, known as building, loan fund, and savings association, are now recognized
as important factors in the social and economic development of this country. The
controlling idea is the massing of the separate earnings of wage-workers, and the
savings of persons of small means, in such a manner as to aid them in procuring
homes. It is the organization of thrift and self-help; a practical application of the maxim
that in "union there is strength." The effect of such a movement is to dignify the home; to
foster morality, and to make thoughtful, wise, and responsible citizens. It is for such
reason that the law and the courts, where such associations have been properly
conducted, have looked upon them with favor. Whether they shall retain the favorable
estimation of legislatures and courts will depend in large measure upon the wise
forecast and determined purpose of those who control such institutions. Those
departures from the original idea, intended to enhance the profits of investors, without in
any degree aiding those who are endeavoring to build homes, have been, and in the
future probably will be, severely censured by the courts.

In the case of Lopez and Javelona vs. El Hogar Filipino and Registrar of Deeds of
Occidental Negros ([1925], 47 Phil., 249), the principal issue had to do with the relation
of El Hogar Filipino to the Usury Law permitting it to charge a higher rate of interest than

persons or entities, charge than similarly organized mutual building and loan
associations. Mr. Justice Johns, in a vigorous dissenting opinion, said:

There must be and is valid reason for the exception made in the statute which permits
building and loan associations to charge and receive 18 per cent per annum as interest,
and which limits all other loans made by any other person, firm or corporation to interest
at 12 per cent per annum.

All building and loan associations are founded, and exceptions made in their favor as to
the rate of interest, upon the theory that they will enable a person with small means or
small income who has a family to support, to build a home in which to live and to
improve his property and develop the country. When the exception was made by the
Legislature, it was never intended that the El Hogar Filipino or any other corporation,
under the guise of a building and loan association, should make a loan upon a sugar
plantation of the nature of the one in question.

xxx

xxx

xxx

It will be noted that the exception made in the statute above quoted is for mutual
building and loan societies incorporated under the Corporation Act. The use of the word
mutual is significant and important. Under the statute, it is not sufficient that the
corporation should be a building and loan association. It must be a mutual building and
loan association.

In the same dissent, reference was made to the case of El Hogar Filipino vs. Rafferty,
supra, and the remarks of Endlich, and Thornton and Blackledge on the purposes of
mutual building and loan associations. Fletcher, Cyclopedia of Corporation, volume 1,
page 136, was also quoted from as follows:

An incorporated building and loan association is a corporation for the purpose of raising,
by periodical subscriptions of members, a stock or fund to assist members by advances
or loans, generally on mortgage security, in building or purchasing homes. Such
corporations are different from corporations formed for pecuniary profit.

The term (building and loan association) does not generally include corporations unless
their purpose is to accumulate funds and lend the same to members to assists them in
purchasing or building homes . . . (Cases cited.) It does not include a corporation . . . for
the purpose of purchasing and improving real estate and advancing money on
mortgages . . . or a corporation merely for the purpose of loaning money.

In the same dissent, reference was made to what Corpus Juris, volume 9, page 920,
contains on the subject of the object and purpose of building and loan associations,
namely:

As it is sometimes stated in the statutes relating to, and in the charters and constitutions
of, building and loan associations, the principal object of a building and loan association
is to create a loan fund for the benefit of its borrowing members, the underlying idea
being that, by means of the system of small periodical payments provided, people of
limited means will be enabled to become the owners of homes, and thrift, economy, and
good citizenship will thereby be promoted. By reason of the favorable results attending

the operation of these associations, and their beneficent purposes, they have,
especially before they attained their present tremendous growth, been favored and
granted special privileges by the various legislatures, such as permission to charge high
rates of interest and exemption from taxation. . . ." In lieu of asterisk the next
succeeding sentence from Corpus Juris could also have been appropriately used:
"However, with the growth of these organizations, evils have crept in, the privileges
granted have in many instances been abused by unscrupulous officers, and, in recent
years, the courts have been compelled to subject their transactions to closer scrutiny.

Speaking of the purposes for which loans can be made by building and loan
associations, Rosenthal, in his work on Building, Loan and Savings Associations, third
edition, page 108, says:

In our opinion, the object of building, loan and savings associations is to furnish funds
for homes rather than for mercantile or manufacturing improvements. Some of the
larger associations have granted loans of this character, and we consider it a dangerous
departure from the purposes for which these associations were created.

Thompson on Building Associations, page 5, 23, 24, 232 and 558, says:

The building association as now existing is a private corporation designed for the
accumulation, by the members, of their money, by periodical payments into its treasury,
to be invested from time to time in loans to the members upon real estate for home
purposes,

The building association is a home builder. The member by its system is enabled to
acquire a home, and to pay for it he pledges his future savings. . . . It enforces
economy, and awakens thoughts of citizenship in its better sense of offering homes.
This is the first purpose of these institutions. The language of the Supreme Court of
Georgia is timely: "The they have improved our towns by leading to the erection of a
number of new buildings, furnished many families with homes of their own, that could
not otherwise have possessed the, given a considerable impulse to mechanical
enterprise, and in many other ways promoted the prosperity and welfare of the
communities where they exist, is undoubtedly true. But whether they will continue to be
entitled to the epithet of the "poor man's exchequer," and whether they will, as they
promise to do, enable every man to become his own landlord, will depend entirely upon
the manner in which they conduct their business . . ."

These institutions are well known all over the United States to be depositories of money
savings, and investors of those savings in homes for members. The legislature has
created them in the interest of good citizenship, to enable the people to save their
money and acquire homes and become steady citizens. The ultimate legislative
purpose is home-building. If it was merely a depository of savings it would have no
strong reason for existence, because the savings banks furnish that; but it goes further,
and is designed by law to use those savings in procuring homes for its members. And
the courts should promptly curb any disposition to depart from the corporate purposes.

. . . But a building association is not an ordinary corporation; in fact, it exercises some

extraordinary privileges, particularly in not being amenable to the usury laws. It is
created for the declared purposes of accumulating money and lending the accumulation
to members to build or acquire homes for themselves. The legislature devised this plan
of cooperative accumulations for the purpose of assisting each member to become his
own landlord. The state has a selfish motive in the promotion of a building association,

as through its workings it is planting deeply the roots of citizenship. The drifting,
thriftless classes are offered a school of economy, and the earnest and economical
classes are given an opportunity. There is, then, the formation of a steady, energetic
and accumulating citizen. The cares of the state are lessened by decreasing poverty,
and its prosperity is increased by growing material wealth. We may clearly conceive,
then, that the intention of the legislature in the creation of building associations is, first,
to encourage savings; second, to secure homes for the savers.

In the case of Mandlin vs. American Savings and Loan Association ([1896],63 Minn.,
358), the court said:

So-called "building societies," operated on the plan of the defendant, have so often
become the instrument of oppression and extortion as to call down the censure of some
eminent courts. The original purpose of building societies, viz., to enable people of small
means to build or buy homes, is entirely wanting.

"Such a body" says Follet, J., in Seibel vs. Victoria Building Association (43 Ohio St.,
371, p. 373), "exists for the equal benefit of all its members, who are presumed to be
persons whose earnings are small, and who seek to use weekly savings in procuring
suitable homesteads. Every member is presumed to become after sometime a borrower
to the extent of his interest. Building associations are not intended to enable money
lenders to obtain extraordinary interest, but they are intended to help in securing homes
with the aid of small incomes." (Barry Law of Building Societies, p. 3, sec. 4.)

In case of North American Building Associaton vs. Sutton ([1860], 35 Pa., 463), the
court said:

It is well known that the original design of the legislature was to encourage the erection
of buildings. The motive for the grant of the franchise was public improvement. But the
practical working of the associations formed under the law has not been what was
anticipated. Though called "building societies," they are, in truth, only agencies by which
a greater than legal interest is obtained from the necessitous and unwary.

In the case of Continental National Building and Loan Association vs. Miller ([1902], 44
Fla., 757), the court said:

When local in their operations and prudently managed they have served a useful
purpose enabling the man of small means to build his modest homes or to make a safe
and profitable investment of his meager earnings; but when they branch out and forget
the original purposes and limitations that have given them this favored position, trouble
not infrequently arises.

In the case of St. Joseph and Kansas Loan and Building Association vs. Thompson
([1877], 19 Kansas, 321), the court said:

It was never intended that these corporations, organized as this one was for the
purpose of giving to its members through their savings an easy way to discharge
encumbrances and to build homes, should loan their funds to others than their own
members.

In case of Parker vs. Fulton Loan and Building Association ([1872],46 Ga., 166), the
court said:

Whether such a contract though legal upon its face, was, in fact, illegal, would depend
upon the object of the association. If it were, in truth, a mere devise to evade the usury
laws, then it would depend upon the object of the association. If it were, in truth, a mere
devise to evade the usury laws, then it would be illegal, if in fact more was taken for the
use of money than 7 per cent per annum. But if the organization were in fact and bona
fide a plan with the real intent and object of accumulating a fund by monthly
subscriptions or savings of the members thereof, to assist them in procuring for
themselves such real estates as they may deem proper,' then it would not be illegal.

The practical application of the resources of these institutions (building and loan
associations) to the building of homes and aiding their members to change their
conditions from rent-paying tenants to home-owning citizens has been recognized as a
work of vital importance and of the highest helpfulness to the interest of the state and
nation. (Rosenthal Cyc. of Building, Loan & Savings Association, p. 73.)

The aim and purpose of a building association is to aid and encourage its members to
learn and practice thrift by regular systematic saving, and to provide ways and means
so that every family may procure home. (Rosenthal Cyc. of Building, Loan & Savings
Association, p. 9.)

The funds of the first associations were applied to aid its members to procure homes.
This was in fact the one outstanding feature of the plan and the high purpose for which
the association was organized. The wish and desire to own their own home, was, in fact

the primary, fundamental inspiration on which the first building association was formed,
and has ever continued to be the shining pole star which has guided and directed the
progress of these building associations to the present day. The desire to own a home is
one of the primary, natural instincts of every real man or woman. An institution
organized and operated on a fair and equitable plan which has for its object the
gratifying of that desire, is sure to make a strong appeal to all humanity. The constant
appeal which building associations have always made to this deep-seated human
desire, is the real secret of their great success. (Rosenthal Cyc. of Building, Loan &
Savings Association, p. 13.)

A recent president of the United States League of Local Building and Loan Associations
said the "Our associations are serving just two classes of customers: receiving the
savings of thrifty and farseeing people, and loaning these funds to members who wish
to buy or build a home. Never was the need for building or owning a home greater than
in the past few years, and as you well know, lack of sufficient funds has been one of our
problems."

Building and Loan Associations started as neighborhood clubs in most parts of the
country. Neighbors wished to become home owners and began contributing a certain
sum monthly to a treasurer. The aggregate of these monthly payments was soon
sufficient to buy or build a home for one of the members. The fund was then loaned to
one of them, and as other funds accumulated, others could borrow. The joint purposes
of thrift and home ownership are inseparable and are of equal importance. There could
be no cooperative building and loan association without both. (Clark and Chase Building
and Loan Association, p. 4).

The Commissioner of Internal Revenue of the United States in article 515 of his new
regulations, outlines the particular associations entitled to exemption, under the Federal
Law as follows:

In general, a building and loan association entitled to exemption is one organized

pursuant to the laws of any state, territory or the District of Colulmbia, which
accumulates funds to be loaned primarily to the shareholders for the purpose of building
or acquiring homes. (Rosenthal Cyc. of Building, Loan & Savings Association, p. 94.)

The authorities could be piled up mountain high. They all disclose that mutual building
and loan associations are peculiar and special corporations. They can exercise only
such powers as are conferred by the legislative body creating them, either by express
terms or by necessary implication. Their basic and essential idea is mutuality. The
primary object is to encourage thrift and to assist in home building. "El Hogar Filipino"
or as it is in English "The Filipino Home" that is the magic thought which attracts
small investors. But when pseudo associations branch out and forget the original
purposes and limitations that have given them their favored positions, it is incumbent on
the judiciary to place them back in their rightful places. We are frank to say that it is
these elementary principles, which, in our opinion, the majority have failed to grasp,
which have led them into error in the decision of this case.

Why are mutual building and loan associations granted special privileges? Why are
mutual building and loan associations exempted from taxation, as disclosed in El Hogar
Filipino vs. Rafferty, supra? Why are building and loan associations permitted to charge
high rates of interest, as disclosed in Lopez and Javelona vs. El Hogar Filipino, and
Registrar of Deeds of Occidental Negros, supra? Why? Need answers be given. If so, it
is so that mutual building and loan associations may with one hand accept favors

rightfully theirs, and with the other hand grasp favors properly belonging to strictly
private corporations or loan societies.

El Hogar Filipino has offended against the law of its creation, and has departed from the
fundamental purposes of mutual building and loan associations in this:

A. In that it has engaged in business activities entirely foreign to and not reasonably
necessary for the purposes for which it was organized, such as the administration of
properties and the management of properties not mortgaged;

B. In that it has inserted in article 10 of its by-laws a provision giving the board of
directors, by majority vote, the unqualified right to cancel and forfeit shares by merely
returning to their owners the amount which may result from the accounting, in violation
of the Corporation Law;

C. In that its board of directors has become a permanent and self- perpetuating body,
since with the exception of the years 1911, 1912, and 1917, there has been no election
of directors and since between 1912 and 1917, and from 1917 until the present, the
membership of the board has not been changed, except to fill vacancies which have
been filled by the board itself, in violation of the Corporation Law, and of the by-laws of
the corporation;

D. In that the directors, instead of serving without pay or for nominal salaries, have been
receiving relatively large compensations out of the profits in accordance with article 92

of the by-laws, providing that 5 percent of the annual profits shall be devoted to the
compensation of the directors, according to their attendance at the meetings;

E. In that the corporation has been giving to Antonio Melian, its founder, under
provisions of article 92 of its by-laws 5 per cent of the yearly net profits, and will
continue to do so, for the full fifty-year period of life of the defendant, and under which
Mr. Melian has received a total sum of P615,834;

F. In that articles 70 and 76 of its by-laws are contrary to law, since they only permit the
election or appointment to the board of directors of persons owning P5,000 worth of
paid up shares, which is made a condition precedent to eligibility to the board of
directors;

G. In that it has issued so-called special shares, in violation both of the letter and spirit
of the Corporation Law;

H. In that it has maintained out of its profits an unnecessarily large reserve fund,
classified into general reserve fund and special reserve fund, instead of distributing its
profits among its members;

I. In that it has made large loans to persons and companies, such as a loan of
P2,320,000 to the Pacific Warehouse Company, which so depleted the funds of the
corporation that for sometime it was unable to act on applications for small loans and for
the retirement of shares;

J. In that under articles 92 and 95 of the by-laws of the corporation, upon the expiration
of its period of life or upon earlier liquidation of its business, the accumulated reserves
and other properties will be distributed among and will benefit only its directors and its
founder, together with a few other persons;

K. In that its membership is in part composed of corporations, companies, and

associations, for instance of sixteen corporations and fourteen partnerships;

L. In that it has disposed of real estate purchased by it in the collection of its loans on
credit, thereafter accepting mortgages on the property transferred, in violation of the
Corporation Law;

M. And, lastly, in the El Hogar Filipino has failed to carry our and fulfill the main purpose
for which it was created, and in consideration of which it has been granted special
privileges and exemptions.

The foregoing are not trivial or isolated infractions of the law to be brushed away with a
wave of the hand. They constitute grave abuses. They disclose El Hogar Filipino as an
octopus whose tentacles have reached out to embrace and stifle vital public interests.
The court would be entirely justified in peremptorily decreeing the dissolution of the
corporation for misuse of its powers.

Section 190-A of the Corporation Law, inserted by section 3 of Act No. 2792, makes it
the imperative duty of the court to dissolve a corporation for any violation which it has
committed. It is believed, however, that counsel for the defendant is entirely correct in
his argument to the effect that the legislature is without power to diminish the jurisdiction
of the court, and to direct a particular judgment in a particular case. Rather would we
prefer to follow the precedent in the case of the Government of the Philippine Islands
vs. Philippine Sugar Estates Development Company ([1918], 38 Phil., 15),wherein in
was ordered that the corporation be dissolved and prohibited from continuing to do
business in the Philippine Islands unless it complied with the conditions mentioned in
the decision.

In amplification of the above suggestion, it must be said that El Hogar Filipino is the
possessor of important property rights which should not be disastrously disturbed. It
must also be said that a mutual building and loan association properly conducted is an
institution which should be encourage in the community. The result should, therefore, be
to confine El Hogar Filipino to its legitimate purposes and to force it to eliminate its
illegitimate purposes and The government has made out its case, but the defendant
should be permitted a reasonable time to fulfill the conditions laid down in this decision.
G.R. No. L-45911

April 11, 1979

JOHN GOKONGWEI, JR., petitioner,

vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M.
SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE
B. CONDE, MIGUEL ORTIGAS, ANTONIO PRIETO, SAN MIGUEL CORPORATION,
EMIGDIO TANJUATCO, SR., and EDUARDO R. VISAYA, respondents.

De Santos, Balgos & Perez for petitioner.

Angara, Abello, Concepcion, Regala, Cruz Law Offices for respondents Sorianos

Siguion Reyna, Montecillo & Ongsiako for respondent San Miguel Corporation.

R. T Capulong for respondent Eduardo R. Visaya.

ANTONIO, J.:

The instant petition for certiorari, mandamus and injunction, with prayer for issuance of
writ of preliminary injunction, arose out of two cases filed by petitioner with the
Securities and Exchange Commission, as follows:

SEC CASE NO 1375

On October 22, 1976, petitioner, as stockholder of respondent San Miguel Corporation,

filed with the Securities and Exchange Commission (SEC) a petition for "declaration of
nullity of amended by-laws, cancellation of certificate of filing of amended by- laws,
injunction and damages with prayer for a preliminary injunction" against the majority of
the members of the Board of Directors and San Miguel Corporation as an unwilling
petitioner. The petition, entitled "John Gokongwei Jr. vs. Andres Soriano, Jr., Jose M.
Soriano, Enrique Zobel, Antonio Roxas, Emeterio Bunao, Walthrode B. Conde, Miguel
Ortigas, Antonio Prieto and San Miguel Corporation", was docketed as SEC Case No.
1375.

As a first cause of action, petitioner alleged that on September 18, 1976, individual
respondents amended by bylaws of the corporation, basing their authority to do so on a
resolution of the stockholders adopted on March 13, 1961, when the outstanding capital
stock of respondent corporation was only P70,139.740.00, divided into 5,513,974
common shares at P10.00 per share and 150,000 preferred shares at P100.00 per
share. At the time of the amendment, the outstanding and paid up shares totalled
30,127,047 with a total par value of P301,270,430.00. It was contended that according
to section 22 of the Corporation Law and Article VIII of the by-laws of the corporation,
the power to amend, modify, repeal or adopt new by-laws may be delegated to the
Board of Directors only by the affirmative vote of stockholders representing not less
than 2/3 of the subscribed and paid up capital stock of the corporation, which 2/3 should
have been computed on the basis of the capitalization at the time of the amendment.
Since the amendment was based on the 1961 authorization, petitioner contended that
the Board acted without authority and in usurpation of the power of the stockholders.

As a second cause of action, it was alleged that the authority granted in 1961 had
already been exercised in 1962 and 1963, after which the authority of the Board ceased
to exist.

As a third cause of action, petitioner averred that the membership of the Board of
Directors had changed since the authority was given in 1961, there being six (6) new
directors.

As a fourth cause of action, it was claimed that prior to the questioned amendment,
petitioner had all the qualifications to be a director of respondent corporation, being a
Substantial stockholder thereof; that as a stockholder, petitioner had acquired rights
inherent in stock ownership, such as the rights to vote and to be voted upon in the
election of directors; and that in amending the by-laws, respondents purposely provided
for petitioner's disqualification and deprived him of his vested right as afore-mentioned
hence the amended by-laws are null and void. 1

As additional causes of action, it was alleged that corporations have no inherent power
to disqualify a stockholder from being elected as a director and, therefore, the
questioned act is ultra vires and void; that Andres M. Soriano, Jr. and/or Jose M.
Soriano, while representing other corporations, entered into contracts (specifically a
management contract) with respondent corporation, which was allowed because the
questioned amendment gave the Board itself the prerogative of determining whether
they or other persons are engaged in competitive or antagonistic business; that the
portion of the amended bylaws which states that in determining whether or not a person
is engaged in competitive business, the Board may consider such factors as business
and family relationship, is unreasonable and oppressive and, therefore, void; and that
the portion of the amended by-laws which requires that "all nominations for election of
directors ... shall be submitted in writing to the Board of Directors at least five (5)
working days before the date of the Annual Meeting" is likewise unreasonable and
oppressive.

It was, therefore, prayed that the amended by-laws be declared null and void and the
certificate of filing thereof be cancelled, and that individual respondents be made to pay
damages, in specified amounts, to petitioner.

On October 28, 1976, in connection with the same case, petitioner filed with the
Securities and Exchange Commission an "Urgent Motion for Production and Inspection
of Documents", alleging that the Secretary of respondent corporation refused to allow
him to inspect its records despite request made by petitioner for production of certain
documents enumerated in the request, and that respondent corporation had been
attempting to suppress information from its stockholders despite a negative reply by the
SEC to its query regarding their authority to do so. Among the documents requested to
be copied were (a) minutes of the stockholder's meeting field on March 13, 1961, (b)
copy of the management contract between San Miguel Corporation and A. Soriano
Corporation (ANSCOR); (c) latest balance sheet of San Miguel International, Inc.; (d)
authority of the stockholders to invest the funds of respondent corporation in San Miguel
International, Inc.; and (e) lists of salaries, allowances, bonuses, and other
compensation, if any, received by Andres M. Soriano, Jr. and/or its successor-ininterest.

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 aforestated.

As counterclaims, actual damages, moral damages, exemplary damages, expenses of

litigation and attorney's fees were presented against petitioner.

Subsequently, a Joint Omnibus Motion for the striking out of the motion for production
and inspection of documents was filed by all the respondents. This was duly opposed
by petitioner. At this juncture, respondents Emigdio Tanjuatco, Sr. and Eduardo R.

Visaya were allowed to intervene as oppositors and they accordingly filed their
oppositions-intervention to the petition.

On December 29, 1976, the Securities and Exchange Commission resolved the motion
for production and inspection of documents by issuing Order No. 26, Series of 1977,
stating, in part as follows:

Considering the evidence submitted before the Commission by the petitioner and
respondents in the above-entitled case, it is hereby ordered:

1.

That

respondents

produce

and

permit

the

inspection,

copying

and

photographing, by or on behalf of the petitioner-movant, John Gokongwei, Jr., of the

minutes of the stockholders' meeting of the respondent San Miguel Corporation held on
March 13, 1961, which are in the possession, custody and control of the said
corporation, it appearing that the same is material and relevant to the issues involved in
the main case. Accordingly, the respondents should allow petitioner-movant entry in the
principal office of the respondent Corporation, San Miguel Corporation on January 14,
1977, at 9:30 o'clock in the morning for purposes of enforcing the rights herein granted;
it being understood that the inspection, copying and photographing of the said
documents shall be undertaken under the direct and strict supervision of this
Commission. Provided, however, that other documents and/or papers not heretofore
included are not covered by this Order and any inspection thereof shall require the prior
permission of this Commission;

2.

As to the Balance Sheet of San Miguel International, Inc. as well as the list of

salaries, allowances, bonuses, compensation and/or remuneration received by

respondent Jose M. Soriano, Jr. and Andres Soriano from San Miguel International, Inc.
and/or its successors-in- interest, the Petition to produce and inspect the same is
hereby DENIED, as petitioner-movant is not a stockholder of San Miguel International,
Inc. and has, therefore, no inherent right to inspect said documents;

3.

In view of the Manifestation of petitioner-movant dated November 29, 1976,

withdrawing his request to copy and inspect the management contract between San
Miguel Corporation and A. Soriano Corporation and the renewal and amendments
thereof for the reason that he had already obtained the same, the Commission takes
note thereof; and

4.

Finally, the Commission holds in abeyance the resolution on the matter of

production and inspection of the authority of the stockholders of San Miguel Corporation
to invest the funds of respondent corporation in San Miguel International, Inc., until after
the hearing on the merits of the principal issues in the above-entitled case.

This Order is immediately executory upon its approval. 2

Dissatisfied with the foregoing Order, petitioner moved for its reconsideration.

Meanwhile, on December 10, 1976, while the petition was yet to be heard, respondent
corporation issued a notice of special stockholders' meeting for the purpose of
"ratification and confirmation of the amendment to the By-laws", setting such meeting
for February 10, 1977. This prompted petitioner to ask respondent Commission for a

summary judgment insofar as the first cause of action is concerned, for the alleged
reason that by calling a special stockholders' meeting for the aforesaid purpose, private
respondents admitted the invalidity of the amendments of September 18, 1976. The
motion for summary judgment was opposed by private respondents. Pending action on
the motion, petitioner filed an "Urgent Motion for the Issuance of a Temporary
Restraining Order", praying that pending the determination of petitioner's application for
the issuance of a preliminary injunction and/or petitioner's motion for summary
judgment, a temporary restraining order be issued, restraining respondents from holding
the special stockholder's meeting as scheduled. This motion was duly opposed by
respondents.

On February 10, 1977, respondent Commission issued an order denying the motion for
issuance of temporary restraining order. After receipt of the order of denial, respondents
conducted the special stockholders' meeting wherein the amendments to the by-laws
were ratified. On February 14, 1977, petitioner filed a consolidated motion for contempt
and for nullification of the special stockholders' meeting.

A motion for reconsideration of the order denying petitioner's motion for summary
judgment was filed by petitioner before respondent Commission on March 10, 1977.
Petitioner alleges that up to the time of the filing of the instant petition, the said motion
had not yet been scheduled for hearing. Likewise, the motion for reconsideration of the
order granting in part and denying in part petitioner's motion for production of record had
not yet been resolved.

In view of the fact that the annul stockholders' meeting of respondent corporation had
been scheduled for May 10, 1977, petitioner filed with respondent Commission a
Manifestation stating that he intended to run for the position of director of respondent

corporation. Thereafter, respondents filed a Manifestation with respondent Commission,

submitting a Resolution of the Board of Directors of respondent corporation disqualifying
and precluding petitioner from being a candidate for director unless he could submit
evidence on May 3, 1977 that he does not come within the disqualifications specified in
the amendment to the by-laws, subject matter of SEC Case No. 1375. By reason
thereof, petitioner filed a manifestation and motion to resolve pending incidents in the
case and to issue a writ of injunction, alleging that private respondents were seeking to
nullify and render ineffectual the exercise of jurisdiction by the respondent Commission,
to petitioner's irreparable damage and prejudice, Allegedly despite a subsequent
Manifestation to prod respondent Commission to act, petitioner was not heard prior to
the date of the stockholders' meeting.

Petitioner alleges that there appears a deliberate and concerted inability on the part of
the SEC to act hence petitioner came to this Court.

SEC. CASE NO. 1423

Petitioner likewise alleges that, having discovered that respondent corporation has been
investing corporate funds in other corporations and businesses outside of the primary
purpose clause of the corporation, in violation of section 17 1/2 of the Corporation Law,
he filed with respondent Commission, on January 20, 1977, a petition seeking to have
private respondents Andres M. Soriano, Jr. and Jose M. Soriano, as well as the
respondent corporation declared guilty of such violation, and ordered to account for
such investments and to answer for damages.

On February 4, 1977, motions to dismiss were filed by private respondents, to which a

consolidated motion to strike and to declare individual respondents in default and an
opposition ad abundantiorem cautelam were filed by petitioner. Despite the fact that
said motions were filed as early as February 4, 1977, the commission acted thereon
only on April 25, 1977, when it denied respondents' motion to dismiss and gave them
two (2) days within which to file their answer, and set the case for hearing on April 29
and May 3, 1977.

Respondents issued notices of the annual stockholders' meeting, including in the

Agenda thereof, the following:

6.

Re-affirmation of the authorization to the Board of Directors by the stockholders

at the meeting on March 20, 1972 to invest corporate funds in other companies or
businesses or for purposes other than the main purpose for which the Corporation has
been organized, and ratification of the investments thereafter made pursuant thereto.

By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an urgent
motion for the issuance of a writ of preliminary injunction to restrain private respondents
from taking up Item 6 of the Agenda at the annual stockholders' meeting, requesting that
the same be set for hearing on May 3, 1977, the date set for the second hearing of the
case on the merits. Respondent Commission, however, cancelled the dates of hearing
originally scheduled and reset the same to May 16 and 17, 1977, or after the scheduled
annual stockholders' meeting. For the purpose of urging the Commission to act,
petitioner filed an urgent manifestation on May 3, 1977, but this notwithstanding, no
action has been taken up to the date of the filing of the instant petition.

With respect to the afore-mentioned SEC cases, it is petitioner's contention before this
Court that respondent Commission gravely abused its discretion when it failed to act
with deliberate dispatch on the motions of petitioner seeking to prevent illegal and/or
arbitrary impositions or limitations upon his rights as stockholder of respondent
corporation, and that respondent are acting oppressively against petitioner, in gross
derogation of petitioner's rights to property and due process. He prayed that this Court
direct respondent SEC to act on collateral incidents pending before it.

On May 6, 1977, this Court issued a temporary restraining order restraining private
respondents from disqualifying or preventing petitioner from running or from being voted
as director of respondent corporation and from submitting for ratification or confirmation
or from causing the ratification or confirmation of Item 6 of the Agenda of the annual
stockholders' meeting on May 10, 1977, or from Making effective the amended by-laws
of respondent corporation, until further orders from this Court or until the Securities and
Ex-change Commission acts on the matters complained of in the instant petition.

On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a
restraining order had been issued by this Court, or on May 9, 1977, the respondent
Commission served upon petitioner copies of the following orders:

(1)

Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's motion

for reconsideration, with its supplement, of the order of the Commission denying in part
petitioner's motion for production of documents, petitioner's motion for reconsideration
of the order denying the issuance of a temporary restraining order denying the issuance
of a temporary restraining order, and petitioner's consolidated motion to declare
respondents in contempt and to nullify the stockholders' meeting;

(2)

Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run

as a director of respondent corporation but stating that he should not sit as such if
elected, until such time that the Commission has decided the validity of the bylaws in
dispute, and denying deferment of Item 6 of the Agenda for the annual stockholders'
meeting; and

(3)

Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's motion

for reconsideration of the order of respondent Commission denying petitioner's motion

for summary judgment;

It is petitioner's assertions, anent the foregoing orders, (1) that respondent Commission
acted with indecent haste and without circumspection in issuing the aforesaid orders to
petitioner's irreparable damage and injury; (2) that it acted without jurisdiction and in
violation of petitioner's right to due process when it decided en banc an issue not raised
before it and still pending before one of its Commissioners, and without hearing
petitioner thereon despite petitioner's request to have the same calendared for hearing ,
and (3) that the respondents acted oppressively against the petitioner in violation of his
rights as a stockholder, warranting immediate judicial intervention.

It is prayed in the supplemental petition that the SEC orders complained of be declared
null and void and that respondent Commission be ordered to allow petitioner to
undertake discovery proceedings relative to San Miguel International. Inc. and
thereafter to decide SEC Cases No. 1375 and 1423 on the merits.

On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed
their comment, alleging that the petition is without merit for the following reasons:

(1)

that the petitioner the interest he represents are engaged in business competitive

and antagonistic to that of respondent San Miguel Corporation, it appearing that the
owns and controls a greater portion of his SMC stock thru the Universal Robina
Corporation and the Consolidated Foods Corporation, which corporations are engaged
in business directly and substantially competing with the allied businesses of
respondent SMC and of corporations in which SMC has substantial investments.
Further, when CFC and Robina had accumulated investments. Further, when CFC and
Robina had accumulated shares in SMC, the Board of Directors of SMC realized the
clear and present danger that competitors or antagonistic parties may be elected
directors and thereby have easy and direct access to SMC's business and trade secrets
and plans;

(2)

that the amended by law were adopted to preserve and protect respondent SMC

from the clear and present danger that business competitors, if allowed to become
directors, will illegally and unfairly utilize their direct access to its business secrets and
plans for their own private gain to the irreparable prejudice of respondent SMC, and,
ultimately, its stockholders. Further, it is asserted that membership of a competitor in the
Board of Directors is a blatant disregard of no less that the Constitution and pertinent
laws against combinations in restraint of trade;

(3)

that by laws are valid and binding since a corporation has the inherent right and

duty to preserve and protect itself by excluding competitors and antogonistic parties,
under the law of self-preservation, and it should be allowed a wide latitude in the
selection of means to preserve itself;

(4)

that the delay in the resolution and disposition of SEC Cases Nos. 1375 and

1423 was due to petitioner's own acts or omissions, since he failed to have the petition
to suspend, pendente lite the amended by-laws calendared for hearing. It was
emphasized that it was only on April 29, 1977 that petitioner calendared the aforesaid
petition for suspension (preliminary injunction) for hearing on May 3, 1977. The instant
petition being dated May 4, 1977, it is apparent that respondent Commission was not
given a chance to act "with deliberate dispatch", and

(5)

that, even assuming that the petition was meritorious was, it has become moot

and academic because respondent Commission has acted on the pending incidents,
complained of. It was, therefore, prayed that the petition be dismissed.

On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his comment, alleging that
the petition has become moot and academic for the reason, among others that the acts
of private respondent sought to be enjoined have reference to the annual meeting of the
stockholders of respondent San Miguel Corporation, which was held on may 10, 1977;
that in said meeting, in compliance with the order of respondent Commission, petitioner
was allowed to run and be voted for as director; and that in the same meeting, Item 6 of
the Agenda was discussed, voted upon, ratified and confirmed. Further it was averred
that the questions and issues raised by petitioner are pending in the Securities and
Exchange Commission which has acquired jurisdiction over the case, and no hearing on
the merits has been had; hence the elevation of these issues before the Supreme Court
is premature.

Petitioner filed a reply to the aforesaid comments, stating that the petition presents
justiciable questions for the determination of this Court because (1) the respondent
Commission acted without circumspection, unfairly and oppresively against petitioner,
warranting the intervention of this Court; (2) a derivative suit, such as the instant case,
is not rendered academic by the act of a majority of stockholders, such that the
discussion, ratification and confirmation of Item 6 of the Agenda of the annual
stockholders' meeting of May 10, 1977 did not render the case moot; that the
amendment to the bylaws which specifically bars petitioner from being a director is void
since it deprives him of his vested rights.

Respondent Commission, thru the Solicitor General, filed a separate comment, alleging
that after receiving a copy of the restraining order issued by this Court and noting that
the restraining order did not foreclose action by it, the Commission en banc issued
Orders Nos. 449, 450 and 451 in SEC Case No. 1375.

In answer to the allegation in the supplemental petition, it states that Order No. 450
which denied deferment of Item 6 of the Agenda of the annual stockholders' meeting of
respondent corporation, took into consideration an urgent manifestation filed with the
Commission by petitioner on May 3, 1977 which prayed, among others, that the
discussion of Item 6 of the Agenda be deferred. The reason given for denial of
deferment was that "such action is within the authority of the corporation as well as
falling within the sphere of stockholders' right to know, deliberate upon and/or to express
their wishes regarding disposition of corporate funds considering that their investments
are the ones directly affected." It was alleged that the main petition has, therefore,
become moot and academic.

On September 29,1977, petitioner filed a second supplemental petition with prayer for
preliminary injunction, alleging that the actuations of respondent SEC tended to deprive
him of his right to due process, and "that all possible questions on the facts now
pending before the respondent Commission are now before this Honorable Court which
has the authority and the competence to act on them as it may see fit." (Reno, pp. 927928.)

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.

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 bylaws 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 bylaws are valid as framed and approved ... "; second: "it is for the interest and guidance
of the public that an immediate and final ruling on the question be made ... "; third:
"petitioner was denied due process by SEC" when "Commissioner de Guzman had
openly shown prejudice against petitioner ... ", and "Commissioner Sulit ... approved the
amended by-laws ex-parte and obviously found the same intrinsically valid; and finally:
"to remand the case to SEC would only entail delay rather than serve the ends of
justice."

Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that this Court
resolve the legal issues raised by the parties in keeping with the "cherished rules of
procedure" that "a court should always strive to settle the entire controversy in a single
proceeding leaving no root or branch to bear the seeds of future ligiation", citing Gayong
v. Gayos. 3 To the same effect is the prayer of San Miguel Corporation that this Court
resolve on the merits the validity of its amended by laws and the rights and obligations
of the parties thereunder, otherwise "the time spent and effort exerted by the parties
concerned and, more importantly, by this Honorable Court, would have been for naught
because the main question will come back to this Honorable Court for final resolution."
Respondent Eduardo R. Visaya submits a similar appeal.

It is only the Solicitor General who contends that the case should be remanded to the
SEC for hearing and decision of the issues involved, invoking the latter's primary
jurisdiction to hear and decide case involving intra-corporate controversies.

It is an accepted rule of procedure that the Supreme Court should always strive to settle
the entire controversy in a single proceeding, leaving nor root or branch to bear the
seeds of future litigation. 4 Thus, in Francisco v. City of Davao, 5 this Court resolved to
decide the case on the merits instead of remanding it to the trial court for further
proceedings since the ends of justice would not be subserved by the remand of the
case. In Republic v. Security Credit and Acceptance Corporation, et al., 6 this Court,
finding that the main issue is one of law, resolved to decide the case on the merits
"because public interest demands an early disposition of the case", and in Republic v.
Central Surety and Insurance Company, 7 this Court denied remand of the third-party
complaint to the trial court for further proceedings, citing precedent where this Court, in
similar situations resolved to decide the cases on the merits, instead of remanding them
to the trial court where (a) the ends of justice would not be subserved by the remand of
the case; or (b) where public interest demand an early disposition of the case; or (c)
where the trial court had already received all the evidence presented by both parties
and the Supreme Court is now in a position, based upon said evidence, to decide the
case on its merits. 8 It is settled that the doctrine of primary jurisdiction has no
application where only a question of law is involved. 8a Because uniformity may be
secured through review by a single Supreme Court, questions of law may appropriately
be determined in the first instance by courts. 8b In the case at bar, there are facts which
cannot be denied, viz.: that the amended by-laws were adopted by the Board of
Directors of the San Miguel Corporation in the exercise of the power delegated by the
stockholders ostensibly pursuant to section 22 of the Corporation Law; that in a special
meeting on February 10, 1977 held specially for that purpose, the amended by-laws
were ratified by more than 80% of the stockholders of record; that the foreign
investment in the Hongkong Brewery and Distellery, a beer manufacturing company in
Hongkong, was made by the San Miguel Corporation in 1948; and that in the

stockholders' annual meeting held in 1972 and 1977, all foreign investments and
operations of San Miguel Corporation were ratified by the stockholders.

II

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

nomination or election to the Board of Directors of SMC are valid and reasonable

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 Share Total

1977 SMC Robina-CFC

Table Eggs

0.6% 10.0% 10.6%

Layer Pullets 33.0% 24.0% 57.0%

Dressed Chicken 35.0% 14.0% 49.0%
Poultry & Hog Feeds 40.0% 12.0% 52.0%
Ice Cream 70.0% 13.0% 83.0%
Instant Coffee 45.0% 40.0% 85.0%
Woven Fabrics 17.5% 9.1% 26.6%

Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC
involved product sales of over P400 million or more than 20% of the P2 billion total
product sales of SMC. Significantly, the combined market shares of SMC and CFCRobina in layer pullets dressed chicken, poultry and hog feeds ice cream, instant coffee
and woven fabrics would result in a position of such dominance as to affect the
prevailing market factors.

It is further asserted that in 1977, the CFC-Robina group was in direct competition on
product lines which, for SMC, represented sales amounting to more than ?478 million.
In addition, CFC-Robina was directly competing in the sale of coffee with Filipro, a
subsidiary of SMC, which product line represented sales for SMC amounting to more
than P275 million. The CFC-Robina group (Robitex, excluding Litton Mills recently
acquired by petitioner) is purportedly also in direct competition with Ramie Textile, Inc.,
subsidiary of SMC, in product sales amounting to more than P95 million. The areas of
competition between SMC and CFC-Robina in 1977 represented, therefore, for SMC,
product sales of more than P849 million.

According to private respondents, at the Annual Stockholders' Meeting of March 18,

1976, 9,894 stockholders, in person or by proxy, owning 23,436,754 shares in SMC, or
more than 90% of the total outstanding shares of SMC, rejected petitioner's candidacy
for the Board of Directors because they "realized the grave dangers to the corporation in
the event a competitor gets a board seat in SMC." On September 18, 1978, the Board
of Directors of SMC, by "virtue of powers delegated to it by the stockholders," approved
the amendment to ' he by-laws in question. At the meeting of February 10, 1977, these
amendments were confirmed and ratified by 5,716 shareholders owning 24,283,945
shares, or more than 80% of the total outstanding shares. Only 12 shareholders,
representing 7,005 shares, opposed the confirmation and ratification. At the Annual
Stockholders' Meeting of May 10, 1977, 11,349 shareholders, owning 27,257.014
shares, or more than 90% of the outstanding shares, rejected petitioner's candidacy,
while 946 stockholders, representing 1,648,801 shares voted for him. On the May 9,
1978 Annual Stockholders' Meeting, 12,480 shareholders, owning more than 30 million
shares, or more than 90% of the total outstanding shares. voted against petitioner.

AUTHORITY

OF

CORPORATION

TO

PRESCRIBE

DIRECTORS EXPRESSLY CONFERRED BY LAW

QUALIFICATIONS

OF

Private respondents contend that the disputed amended by laws were adopted by the
Board of Directors of San Miguel Corporation a-, a measure of self-defense to protect
the corporation from the clear and present danger that the election of a business
competitor to the Board may cause upon the corporation and the other stockholders
inseparable prejudice. Submitted for resolution, therefore, is the issue whether or not
respondent San Miguel Corporation could, as a measure of self- protection, disqualify a
competitor from nomination and election to its Board of Directors.

It is recognized by an authorities that 'every corporation has the inherent power to adopt
by-laws 'for its internal government, and to regulate the conduct and prescribe the rights
and duties of its members towards itself and among themselves in reference to the
management of its affairs. 12 At common law, the rule was "that the power to make and
adopt by-laws was inherent in every corporation as one of its necessary and
inseparable legal incidents. And it is settled throughout the United States that in the
absence of positive legislative provisions limiting it, every private corporation has this
inherent power as one of its necessary and inseparable legal incidents, independent of
any specific enabling provision in its charter or in general law, such power of 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 ... " In Government 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, on account of the supposed
interest of the wife in her husband's affairs, and his suppose influence over her. It is
perhaps true that such stockholders ought not to be condemned as selfish and
dangerous to the best interest of the corporation until tried and tested. So it is also true
that we cannot condemn as selfish and dangerous and unreasonable the action of the
board in passing the by-law. The strife over the matter of control in this corporation as in
many others is perhaps carried on not altogether in the spirit of brotherly love and
affection. The only test that we can apply is as to whether or not the action of the Board
is authorized and sanctioned by law. ... . 22

These principles have been applied by this Court in previous cases. 23

AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A

STOCKHOLDER INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO DIRECTOR IN A
CORPORATION WHOSE BUSINESS IS IN COMPETITION WITH THAT OF THE
OTHER CORPORATION, HAS BEEN SUSTAINED AS VALID

It is a settled state law in the United States, according to Fletcher, that corporations
have the power to make by-laws declaring a person employed in the service of a rival
company to be ineligible for the corporation's Board of Directors. ... (A)n amendment
which renders ineligible, or if elected, subjects to removal, a director if he be also a
director in a corporation whose business is in competition with or is antagonistic to the
other corporation is valid." 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)
office.

A director shall be of good moral character as an essential qualification to holding

(5)

No person who is an attorney against the corporation in a law suit is eligible for

service on the board. (At p. 7.)

These are not based on theorical abstractions but on human experience that a
person cannot serve two hostile masters without detriment to one of them.

The offer and assurance of petitioner that to avoid any possibility of his taking unfair
advantage of his position as director of San Miguel Corporation, he would absent
himself from meetings at which confidential matters would be discussed, would not
detract from the validity and reasonableness of the by-laws here involved. Apart from
the impractical results that would ensue from such arrangement, it would be
inconsistent with petitioner's primary motive in running for board membership which
is to protect his investments in San Miguel Corporation. More important, such a
proposed norm of conduct would be against all accepted principles underlying a
director's duty of fidelity to the corporation, for the policy of the law is to encourage and
enforce responsible corporate management. As explained by Oleck: 31 "The law win not
tolerate the passive attitude of directors ... without active and conscientious participation
in the managerial functions of the company. As directors, it is their duty to control and
supervise the day to day business activities of the company or to promulgate definite
policies and rules of guidance with a vigilant eye toward seeing to it that these policies
are carried out. It is only then that directors may be said to have fulfilled their duty of
fealty to the corporation."

Sound principles of corporate management counsel against sharing sensitive

information with a director whose fiduciary duty of loyalty may well require that he
disclose this information to a competitive arrival. These dangers are enhanced
considerably where the common director such as the petitioner is a controlling

stockholder of two of the competing corporations. It would seem manifest that in such
situations, the director has an economic incentive to appropriate for the benefit of his
own corporation the corporate plans and policies of the corporation where he sits as
director.

Indeed, access by a competitor to confidential information regarding marketing

strategies and pricing policies of San Miguel Corporation would subject the latter to a
competitive disadvantage and unjustly enrich the competitor, for advance knowledge by
the competitor of the strategies for the development of existing or new markets of
existing or new products could enable said competitor to utilize such knowledge to his
advantage. 32

There is another important consideration in determining whether or not the amended bylaws are reasonable. The Constitution and the law prohibit combinations in restraint of
trade or unfair competition. Thus, section 2 of Article XIV of the Constitution provides:
"The State shall regulate or prohibit private monopolies when the public interest so
requires. No combinations in restraint of trade or unfair competition shall be snowed."

Article 186 of the Revised Penal Code also provides:

Art. 186.

Monopolies and combinations in restraint of trade. The penalty of prision

correccional in its minimum period or a fine ranging from two hundred to six thousand
pesos, or both, shall be imposed upon:

1.

Any person who shall enter into any contract or agreement or shall take part in

any conspiracy or combination in the form of a trust or otherwise, in restraint of trade or

commerce or to prevent by artificial means free competition in the market.

2.

Any person who shag monopolize any merchandise or object of trade or

commerce, or shall combine with any other person or persons to monopolize said
merchandise or object in order to alter the price thereof by spreading false rumors or
making use of any other artifice to restrain free competition in the market.

3.

Any person who, being a manufacturer, producer, or processor of any

merchandise or object of commerce or an importer of any merchandise or object of

commerce from any foreign country, either as principal or agent, wholesale or retailer,
shall combine, conspire or agree in any manner with any person likewise engaged in
the manufacture, production, processing, assembling or importation of such
merchandise or object of commerce or with any other persons not so similarly engaged
for the purpose of making transactions prejudicial to lawful commerce, or of increasing
the market price in any part of the Philippines, or any such merchandise or object of
commerce manufactured, produced, processed, assembled in or imported into the
Philippines, or of any article in the manufacture of which such manufactured, produced,
processed, or imported merchandise or object of commerce is used.

There are other legislation in this jurisdiction, which prohibit monopolies and
combinations in restraint of trade. 33

Basically, these anti-trust laws or laws against monopolies or combinations in restraint

of trade are aimed at raising levels of competition by improving the consumers'

effectiveness as the final arbiter in free markets. These laws are designed to preserve
free and unfettered competition as the rule of trade. "It rests on the premise that the
unrestrained interaction of competitive forces will yield the best allocation of our
economic resources, the lowest prices and the highest quality ... ." 34 they operate to
forestall concentration of economic power. 35 The law against monopolies and
combinations in restraint of trade is aimed at contracts and combinations that, by reason
of the inherent nature of the contemplated acts, prejudice the public interest by unduly
restraining competition or unduly obstructing the course of trade. 36

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

appear to have a well defined meaning in other jurisdictions. A "monopoly" embraces
any combination the tendency of which is to prevent competition in the broad and
general sense, or to control prices to the detriment of the public. 37 In short, it is the
concentration of business in the hands of a few. The material consideration in
determining its existence is not that prices are raised and competition actually excluded,
but that power exists to raise prices or exclude competition when desired. 38 Further, it
must be considered that the Idea of monopoly is now understood to include a condition
produced by the mere act of individuals. Its dominant thought is the notion of
exclusiveness or unity, or the suppression of competition by the qualification of interest
or management, or it may be thru agreement and concert of action. It is, in brief, unified
tactics with regard to prices. 39

From the foregoing definitions, it is apparent that the contentions of petitioner are not in
accord with reality. The election of petitioner to the Board of respondent Corporation can
bring about an illegal situation. This is because an express agreement is not necessary
for the existence of a combination or conspiracy in restraint of trade. 40 It is enough that
a concert of action is contemplated and that the defendants conformed to the
arrangements, 41 and what is to be considered is what the parties actually did and not

the words they used. For instance, the Clayton Act prohibits a person from serving at
the same time as a director in any two or more corporations, if such corporations are, by
virtue of their business and location of operation, competitors so that the elimination of
competition between them would constitute violation of any provision of the anti-trust
laws. 42 There is here a statutory recognition of the anti-competitive dangers which may
arise when an individual simultaneously acts as a director of two or more competing
corporations. A common director of two or more competing corporations would have
access to confidential sales, pricing and marketing information and would be in a
position to coordinate policies or to aid one corporation at the expense of another,
thereby stifling competition. This situation has been aptly explained by Travers, thus:

The argument for prohibiting competing corporations from sharing even one director is
that the interlock permits the coordination of policies between nominally independent
firms to an extent that competition between them may be completely eliminated. Indeed,
if a director, for example, is to be faithful to both corporations, some accommodation
must result. Suppose X is a director of both Corporation A and Corporation B. X could
hardly vote for a policy by A that would injure B without violating his duty of loyalty to B
at the same time he could hardly abstain from voting without depriving A of his best
judgment. If the firms really do compete in the sense of vying for economic
advantage at the expense of the other there can hardly be any reason for an
interlock between competitors other than the suppression of competition. 43 (Emphasis
supplied.)

According to the Report of the House Judiciary Committee of the U. S. Congress on

section 9 of the Clayton Act, it was established that: "By means of the interlocking
directorates one man or group of men have been able to dominate and control a great
number of corporations ... to the detriment of the small ones dependent upon them and
to the injury of the public. 44

Shared information on cost accounting may lead to price fixing. Certainly, shared
information on production, orders, shipments, capacity and inventories may lead to
control of production for the purpose of controlling prices.

Obviously, if a competitor has access to the pricing policy and cost conditions of the
products of San Miguel Corporation, the essence of competition in a free market for the
purpose of serving the lowest priced goods to the consuming public would be frustrated,
The competitor could so manipulate the prices of his products or vary its marketing
strategies by region or by brand in order to get the most out of the consumers. Where
the two competing firms control a substantial segment of the market this could lead to
collusion and combination in restraint of trade. Reason and experience point to the
inevitable conclusion that the inherent tendency of interlocking directorates between
companies that are related to each other as competitors is to blunt the edge of rivalry
between the corporations, to seek out ways of compromising opposing interests, and
thus eliminate competition. As respondent SMC aptly observes, knowledge by CFCRobina of SMC's costs in various industries and regions in the country win enable the
former to practice price discrimination. CFC-Robina can segment the entire consuming
population by geographical areas or income groups and change varying prices in order
to maximize profits from every market segment. CFC-Robina could determine the most
profitable volume at which it could produce for every product line in which it competes
with SMC. Access to SMC pricing policy by CFC-Robina would in effect destroy free
competition and deprive the consuming public of opportunity to buy goods of the highest
possible quality at the lowest prices.

Finally, considering that both Robina and SMC are, to a certain extent, engaged in
agriculture, then the election of petitioner to the Board of SMC may constitute a violation
of the prohibition contained in section 13(5) of the Corporation Law. Said section

provides in part that "any stockholder of more than one corporation organized for the
purpose of engaging in agriculture may hold his stock in such corporations solely for
investment and not for the purpose of bringing about or attempting to bring about a
combination to exercise control of incorporations ... ."

Neither are We persuaded by the claim that the by-law was Intended to prevent the
candidacy of petitioner for election to the Board. If the by-law were to be applied in the
case of one stockholder but waived in the case of another, then it could be reasonably
claimed that the by-law was being applied in a discriminatory manner. However, the by
law, by its terms, applies to all stockholders. The equal protection clause of the
Constitution requires only that the by-law operate equally upon all persons of a class.
Besides, before petitioner can be declared ineligible to run for director, there must be
hearing and evidence must be submitted to bring his case within the ambit of the
disqualification. Sound principles of public policy and management, therefore, support
the view that a by-law which disqualifies a competition from election to the Board of
Directors of another corporation is valid and reasonable.

In the absence of any legal prohibition or overriding public policy, wide latitude may be
accorded to the corporation in adopting measures to protect legitimate corporation
interests. Thus, "where the reasonableness of a by-law is a mere matter of judgment,
and upon which reasonable minds must necessarily differ, a court would not be
warranted in substituting its judgment instead of the judgment of those who are
authorized to make 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 Euro-Dollar Loan Agreement of SMC; and (7) copies of the minutes of all
meetings of the Board of Directors from January 1975 to May 1976, with deletions of
sensitive data, which deletions were not objected to by petitioner.

Further, it was averred that upon request, petitioner was informed in writing on
September 18, 1976; (1) that SMC's foreign investments are handled by San Miguel
International, Inc., incorporated in Bermuda and wholly owned by SMC; this was SMC's
first venture abroad, having started in 1948 with an initial outlay of ?500,000.00,
augmented by a loan of Hongkong $6 million from a foreign bank under the personal
guaranty of SMC's former President, the late Col. Andres Soriano; (2) that as of
December 31, 1975, the estimated value of SMI would amount to almost P400 million
(3) that the total cash dividends received by SMC from SMI since 1953 has amount to
US $ 9.4 million; and (4) that from 1972-1975, SMI did not declare cash or stock

dividends, all earnings having been used in line with a program for the setting up of
breweries by SMI

These averments are supported by the affidavit of the Corporate Secretary, enclosing
photocopies of the afore-mentioned documents. 51

Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of
all business transactions of the corporation and minutes of any meeting shall be open to
the inspection of any director, member or stockholder of the corporation at reasonable
hours."

The stockholder's right of inspection of the corporation's books and records is based
upon their ownership of the assets and property of the corporation. It is, therefore, an
incident of ownership of the corporate property, whether this ownership or interest be
termed an equitable ownership, a beneficial ownership, or a ownership. 52 This right is
predicated upon the necessity of self-protection. It is generally held by majority of the
courts that where the right is granted by statute to the stockholder, it is given to him as
such and must be exercised by him with respect to his interest as a stockholder and for
some purpose germane thereto or in the interest of the corporation. 53 In other words,
the inspection has to be germane to the petitioner's interest as a stockholder, and has to
be proper and lawful in character and not inimical to the interest of the corporation. 54 In
Grey v. Insular Lumber, 55 this Court held that "the right to examine the books of the
corporation must be exercised in good faith, for specific and honest purpose, and not to
gratify curiosity, or for specific and honest purpose, and not to gratify curiosity, or for
speculative or vexatious purposes. The weight of judicial opinion appears to be, that on
application for mandamus to enforce the right, it is proper for the court to inquire into
and consider the stockholder's good faith and his purpose and motives in seeking

inspection. 56 Thus, it was held that "the right given by statute is not absolute and may
be refused when the information is not sought in good faith or is used to the detriment of
the corporation." 57 But the "impropriety of purpose such as will defeat enforcement
must be set up the corporation defensively if the Court is to take cognizance of it as a
qualification. In other words, the specific provisions take from the stockholder the
burden of showing propriety of purpose and place upon the corporation the burden of
showing impropriety of purpose or motive. 58 It appears to be the general rule that
stockholders are entitled to full information as to the management of the corporation and
the manner of expenditure of its funds, and to inspection to obtain such information,
especially where it appears that the company is being mismanaged or that it is being
managed for the personal benefit of officers or directors or certain of the stockholders to
the exclusion of others." 59

While the right of a stockholder to examine the books and records of a corporation for a
lawful purpose is a matter of law, the right of such stockholder to examine the books
and records of a wholly-owned subsidiary of the corporation in which he is a stockholder
is a different thing.

Some state courts recognize the right under certain conditions, while others do not.
Thus, it has been held that where a corporation owns approximately no property except
the shares of stock of subsidiary corporations which are merely agents or
instrumentalities of the holding company, the legal fiction of distinct corporate entities
may be disregarded and the books, papers and documents of all the corporations may
be required to be produced for examination, 60 and that a writ of mandamus, may be
granted, as the records of the subsidiary were, to all incontents and purposes, the
records of the parent even though subsidiary was not named as a party. 61 mandamus
was likewise held proper to inspect both the subsidiary's and the parent corporation's

books upon proof of sufficient control or dominion by the parent showing the relation of
principal or agent or something similar thereto. 62

On the other hand, mandamus at the suit of a stockholder was refused where the
subsidiary corporation is a separate and distinct corporation domiciled and with its
books and records in another jurisdiction, and is not legally subject to the control of the
parent company, although it owned a vast majority of the stock of the subsidiary. 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 twothirds of the voting power. If the investment is made in pursuance of the corporate
purpose, it does not need the approval of the stockholders. It is only when the purchase
of shares is done solely for investment and not to accomplish the purpose of its
incorporation that the vote of approval of the stockholders holding shares entitling them
to exercise at least two-thirds of the voting power is necessary. 69

As stated by respondent corporation, the purchase of beer manufacturing facilities by

SMC was an investment in the same business stated as its main purpose in its Articles
of Incorporation, which is to manufacture and market beer. It appears that the original
investment was made in 1947-1948, when SMC, then San Miguel Brewery, Inc.,
purchased a beer brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for the
manufacture and marketing of San Miguel beer thereat. Restructuring of the investment
was made in 1970-1971 thru the organization of SMI in Bermuda as a tax free
reorganization.

Under these circumstances, the ruling in De la Rama v. Manao Sugar Central Co., Inc.,
supra, appears relevant. In said case, one of the issues was the legality of an
investment made by Manao Sugar Central Co., Inc., without prior resolution approved
by the affirmative vote of 2/3 of the stockholders' voting power, in the Philippine Fiber
Processing Co., Inc., a company engaged in the manufacture of sugar bags. The lower

court said that "there is more logic in the stand that if the investment is made in a
corporation whose business is important to the investing corporation and would aid it in
its purpose, to require authority of the stockholders would be to unduly curtail the power
of the Board of Directors." This Court affirmed the ruling of the court a quo on the matter
and, quoting Prof. Sulpicio S. Guevara, said:

"j.

Power to acquire or dispose of shares or securities. A private corporation, in

order to accomplish is purpose as stated in its articles of incorporation, and subject to

the limitations imposed by the Corporation Law, has the power to acquire, hold,
mortgage, pledge or dispose of shares, bonds, securities, and other evidence of
indebtedness of any domestic or foreign corporation. Such an act, if done in pursuance
of the corporate purpose, does not need the approval of stockholders; but when the
purchase of shares of another corporation is done solely for investment and not to
accomplish the purpose of its incorporation, the vote of approval of the stockholders is
necessary. In any case, the purchase of such shares or securities must be subject to
the limitations established by the Corporations law; namely, (a) that no agricultural or
mining corporation shall be restricted to own not more than 15% of the voting stock of
nay agricultural or mining corporation; and (c) that such holdings shall be solely for
investment and not for the purpose of bringing about a monopoly in any line of
commerce of combination in restraint of trade." The Philippine Corporation Law by
Sulpicio S. Guevara, 1967 Ed., p. 89) (Emphasis supplied.)

40.

Power to invest corporate funds. A private corporation has the power to invest

its corporate funds "in any other corporation or business, or for any purpose other than
the main purpose for which it was organized, provide that 'its board of directors has
been so authorized in a resolution by the affirmative vote of stockholders holding shares
in the corporation entitling them to exercise at least two-thirds of the voting power on
such a propose at a stockholders' meeting called for that purpose,' and provided further,

that no agricultural or mining corporation shall in anywise be interested in any other

agricultural or mining corporation. When the investment is necessary to accomplish its
purpose or purposes as stated in its articles of incorporation the approval of the
stockholders is not necessary."" (Id., p. 108) (Emphasis ours.) (pp. 258-259).

Assuming arguendo that the Board of Directors of SMC had no authority to make the
assailed investment, there is no question that a corporation, like an individual, may ratify
and thereby render binding upon it the originally unauthorized acts of its officers or other
agents. 70 This is true because the questioned investment is neither contrary to law,
morals, public order or public policy. It is a corporate transaction or contract which is
within the corporate powers, but which is defective from a supported failure to observe
in its execution the. requirement of the law that the investment must be authorized by
the affirmative vote of the stockholders holding two-thirds of the voting power. This
requirement is for the benefit of the stockholders. The stockholders for whose benefit
the requirement was enacted may, therefore, ratify the investment and its ratification by
said stockholders obliterates any defect which it may have had at the outset. "Mere ultra
vires acts", said this Court in Pirovano, 71 "or those which are not illegal and void ab
initio, but are not merely within the scope of the articles of incorporation, are merely
voidable and may become binding and enforceable when ratified by the stockholders.

Besides, the investment was for the purchase of beer manufacturing and marketing
facilities which is apparently relevant to the corporate purpose. The mere fact that
respondent corporation submitted the assailed investment to the stockholders for
ratification at the annual meeting of May 10, 1977 cannot be construed as an admission
that respondent corporation had committed an ultra vires act, considering the common
practice of corporations of periodically submitting for the gratification of their
stockholders the acts of their directors, officers and managers.

WHEREFORE, judgment is hereby rendered as follows:

The Court voted unanimously to grant the petition insofar as it prays that petitioner be
allowed to examine the books and records of San Miguel International, Inc., as specified
by him.

On the matter of the validity of the amended by-laws of respondent San Miguel
Corporation, six (6) Justices, namely, Justices Barredo, Makasiar, Antonio, Santos,
Abad Santos and De Castro, voted to sustain the validity per se of the amended by-laws
in question and to dismiss the petition without prejudice to the question of the actual
disqualification of petitioner John Gokongwei, Jr. to run and if elected to sit as director of
respondent San Miguel Corporation being decided, after a new and proper hearing by
the Board of Directors of said corporation, whose decision shall be appealable to the
respondent Securities and Exchange Commission deliberating and acting en banc and
ultimately to this Court. Unless disqualified in the manner herein provided, the
prohibition in the afore-mentioned amended by-laws shall not apply to petitioner.

The afore-mentioned six (6) Justices, together with Justice Fernando, voted to declare
the issue on the validity of the foreign investment of respondent corporation as moot.

Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended bylaws, pending hearing by this Court on the applicability of section 13(5) of the
Corporation Law to petitioner.

Justice Fernando reserved his vote on the validity of subject amendment to the by-laws
but otherwise concurs in the result.

Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez and
Guerrero filed a separate opinion, wherein they voted against the validity of the
questioned amended bylaws and that this question should properly be resolved first by
the SEC as the agency of primary jurisdiction. They concur in the result that petitioner
may be allowed to run for and sit as director of respondent SMC in the scheduled May
6, 1979 election and subsequent elections until disqualified after proper hearing by the
respondent's Board of Directors and petitioner's disqualification shall have been
sustained by respondent SEC en banc and ultimately by final judgment of this Court.

In resume, subject to the qualifications aforestated judgment is hereby rendered

GRANTING the petition by allowing petitioner to examine the books and records of San
Miguel International, Inc. as specified in the petition. The petition, insofar as it assails
the validity of the amended by- laws and the ratification of the foreign investment of
respondent corporation, for lack of necessary votes, is hereby DISMISSED. No costs.