Principle: Disloyalty
JOHN GOKONGWEI vs. SEC, ANDRES SORIANO, et al. GR L-45911, 11 April 1979
FACTS:
Gokonwei alleged that on September 18, 1976, individual respondents amended by bylaws of San
Miguel 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 30,127,043, 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. 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.
ISSUE:
Whether or not SMC‘s BoD acted in bad faith in making the amendment which disqualified
Gokongwei from being elected as Director.
RULING:
NO.
SMC is merely protecting its interest from Gokongwei, who owns companies in direct competition
with SMC‘s business. 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. It springs from the fact that directors
have the control and guidance of corporate affairs and property; 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 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.
Principle: To Invest Corporate Funds In Another Corporation or Business
JOHN GOKONGWEI, JR. 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 G.R. No. L-45911. April 11, 1979
FACTS:
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. 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.
ISSUES:
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.
RULING: NO.
Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other
corporation or business or for any purpose other than the main purpose for which it was organized"
provided that its Board of Directors has been so authorized by the affirmative vote of stockholders
holding shares entitling them to exercise at least two-thirds of the voting power. If the investment is
made in pursuance of the corporate purpose, it does not need the approval of the stockholders. It is
only when the purchase of shares is done solely for investment and not to accomplish the purpose
of its incorporation that the vote of approval of the stockholders holding shares entitling them to
exercise at least two-thirds of the voting power is necessary. 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.
Principle: Authority to Elect Additional By-Laws Officers
JOHN GOKONGWEI, JR., petitioner vs. SECURITIES AND EXCHANGE COMMISSION, ANDRES M.
SORIANO [Link]. respondents. G.R. No. L-45911 April 11, 1979.
FACTS:
Petitioner alleged that on September 18, 1976, individual respondents amended the by-laws of the
corporation, basing their authority to do so on a resolution of the stockholders adopted on March
13, 1961. 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. 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. It was claimed that prior to the questioned March 13, 1961
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 aforementioned, hence the amended by-laws are null and void.
ISSUE:
Whether or not the disqualification of Gokongwei Jr. to run for directorship of the corporation valid,
as such was only provided in the amended by-laws of the corporation.
RULING: YES.
It is recognized by all 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.'" 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. 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."
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. It is a settled 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. ".An 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."
Principle: Inspection of Corporate Books and Records
JOHN GOKONGWEI, JR. vs. SECURITIES AND EXCHANGE COMMISSION, SAN MIGUEL CORPORATION,
ANDRES M. SORIANO, JOSE M. SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO,
WALTHRODE B. CONDE, MIGUEL ORTIGAS, EMIGDIO TANJUATCO and EDUARDO VISAYA G.R. No. L-
52129 April 21, 1980
FACTS:
Petitioner seeks to nullify and set aside the resolution en banc dated May 7, 1979 of respondent
Securities and Exchange Commission in SEC Case No. 1375, sustaining the findings of the San Miguel
Corporation's Board of Directors that petitioner is engaged in a business competitive with or
antagonistic to that of the San Miguel Corporation and, therefore, ineligible for election as director,
pursuant to Section 3, Article III of the amended by-laws. Petitioner alleges that the matter of
petitioner's disqualification should not have been heard in view of the pendency of petitioner's
motion for reconsideration with this Court; that when respondent Commission sustained the
disqualification of petitioner, it failed to consider that private respondents are precluded from
disqualifying petitioner because of the rule of pari delicto.
ISSUE:
Whether or not respondent SEC gravely abuse 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.
RULING: YES.
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. 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. 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. "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. 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." 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. 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."
