Gokongwei vs. SEC

A corporation possesses the inherent power under Section 21 of the Corporation Law to prescribe qualifications for directors, including the disqualification of competitors engaged in antagonistic business, provided such by-law is reasonable, non-discriminatory, and applied with due process; however, the actual disqualification of a specific stockholder requires a proper hearing before the Board of Directors with right of appeal to the SEC en banc and the Supreme Court.

Petitioner John Gokongwei, Jr., a substantial stockholder of San Miguel Corporation (SMC) and controlling stockholder of competing corporations (Universal Robina Corporation and Consolidated Foods Corporation), sought representation on SMC's Board of Directors. To prevent his election and protect against potential conflicts of interest and disclosure of confidential information, SMC's Board amended its by-laws to disqualify persons engaged in businesses competitive with or antagonistic to SMC from being nominated or elected as directors.

• Petitioner John Gokongwei, Jr. owned approximately 4.23% of SMC's outstanding capital stock (1,403,285 shares) through personal holdings and corporations he controlled, namely Universal Robina Corporation (Robina) and Consolidated Foods Corporation (CFC).
• Robina and CFC engaged in businesses directly competing with SMC in various product lines including table eggs, layer pullets, dressed chicken, poultry and hog feeds, ice cream, instant coffee, and woven fabrics, representing sales of over P849 million for SMC in 1977.
• On September 18, 1976, the SMC Board amended Section 2, Article III of the by-laws to disqualify from nomination or election any person engaged in business competing with or antagonistic to SMC, including officers or controlling persons of competing corporations, or nominees of such persons.
• The amendment was based on a resolution of the stockholders adopted on March 13, 1961, which delegated to the Board the power to amend by-laws.
• The amended by-laws were ratified by 5,716 shareholders owning 24,283,945 shares (over 80% of outstanding shares) at a special meeting on February 10, 1977.
• Petitioner had previously been rejected by stockholders in his bid for a board seat at the March 18, 1976 annual meeting.
• San Miguel International, Inc. (SMI) was a wholly-owned foreign subsidiary of SMC organized in Bermuda, handling SMC's foreign investments including a beer brewery in Hongkong acquired in 1948.
• Petitioner sought access to SMI's books and records to investigate corporate affairs, which the SEC denied on the ground that petitioner was not a stockholder of SMI.

• The Board lacked authority to amend the by-laws in 1976 based on the 1961 resolution because the required two-thirds vote should be computed on the capitalization at the time of amendment, not at the time of delegation.
• The authority granted in 1961 had already been exercised in 1962-1963 and therefore ceased to exist.
• The amended by-laws were specifically tailored to suppress minority representation and deprive petitioner of his vested right as a stockholder to vote and be voted upon in the election of directors.
• Corporations have no inherent power to disqualify stockholders from being elected as directors; such power is not granted by the Corporation Law and is ultra vires.
• The disqualification provision is unreasonable, oppressive, and discriminatory, violating the equal protection clause.
• The amendment violates the Corporation Law provisions on cumulative voting (Sections 21 and 30) and removal of directors only for cause (Section 31).
• The foreign investments in SMI violated Section 17 1/2 of the Corporation Law for lack of prior stockholder approval.
• As a stockholder of SMC, petitioner has the right to inspect the books and records of SMI, being a wholly-owned subsidiary whose records are in SMC's possession and control.

• The Board acted pursuant to valid delegated authority from the March 13, 1961 stockholders' meeting, and the vote requirement is determined at the time of delegation, not exercise.
• The corporation has the inherent power and duty to protect itself by adopting reasonable measures to prevent competitors from gaining access to confidential business information and trade secrets.
• The disqualification of competitors is a valid exercise of corporate self-preservation to prevent violations of anti-trust laws and combinations in restraint of trade under Article 186 of the Revised Penal Code and the Constitution.
• There is no vested right of any stockholder to be elected as director; the stockholder impliedly contracts that the will of the majority shall govern in matters of corporate governance.
• The amended by-laws were ratified by over 80% of stockholders, evidencing broad acceptance of the protective measure.
• The disqualification applies to all stockholders equally and is not discriminatory.
• Petitioner represents a "clear and present danger" to SMC as a competitor who could utilize confidential information for the benefit of his own corporations.
• The foreign investments were made in pursuance of SMC's primary purpose (manufacture and marketing of beer) and were subsequently ratified by stockholders, curing any defect if there was any.

• Procedural:
  • Whether the Supreme Court should resolve the validity of the amended by-laws or remand the case to the SEC for hearing and reception of evidence.
  • Whether the petition has become moot and academic due to the ratification of the amendments and the annual stockholders' meeting.
  • Whether the Court may decide questions of law without prior factual determination by the administrative agency.
• Substantive:
  • Whether the amended by-laws of SMC disqualifying competitors from nomination or election to the Board of Directors are valid and reasonable.
  • Whether the SEC gravely abused its discretion in denying petitioner's request to examine the books and records of San Miguel International, Inc.
  • Whether the SEC gravely abused its discretion in allowing stockholders to ratify foreign investments allegedly made in violation of Section 17 1/2 of the Corporation Law.

• Procedural:
  • The Court held that it could decide the legal issues presented rather than remand to the SEC, as the validity of by-laws is a question of law and public interest demands an early disposition; however, due to the inconclusive voting (six votes for validity, four against, with two reservations), the petition was dismissed for lack of necessary votes to invalidate the by-laws.
  • The Court ruled that the case was not moot despite the ratification of the amendments, as the issue of validity affects future elections and the rights of the parties.
• Substantive:
  • Validity of By-Laws: Six justices voted to sustain the validity per se of the amended by-laws as a reasonable exercise of corporate power under Section 21 of the Corporation Law to prescribe qualifications for directors and to protect the corporation from conflicts of interest and anti-trust violations. However, the prohibition was held not to apply to petitioner until after a "new and proper hearing" by the Board of Directors on his actual disqualification, with appeal to the SEC en banc and ultimately to the Supreme Court.
  • Right of Inspection: The Court unanimously granted the petition, holding that a stockholder's right to inspect extends to the books and records of a wholly-owned foreign subsidiary which are in the possession and control of the parent corporation, as the stockholders are the ultimate owners of the subsidiary's assets.
  • Foreign Investment: The Court declared the issue moot, holding that even if the investment was originally unauthorized, it was validly ratified by the stockholders, and the investment was made in pursuance of the corporate purpose (manufacture of beer).

• Duty of Undivided Loyalty (Fiduciary Duty of Directors): Directors occupy a fiduciary relationship toward the corporation and stockholders; they cannot serve two hostile masters or utilize inside information for personal advantage or the benefit of competing interests.
• Corporate Opportunity Doctrine: A director or officer may not take advantage of a business opportunity that rightfully belongs to the corporation for his own personal profit when the interest of the corporation calls for protection.
• Power to Prescribe Qualifications: Under Section 21 of the Corporation Law, a corporation may prescribe in its by-laws qualifications for directors in addition to the statutory requirement of owning at least one share (Section 30), provided such qualifications are reasonable and not contrary to law.
• No Vested Right to Directorship: A stockholder buys shares with the knowledge that corporate affairs are dominated by the majority and impliedly contracts that the will of the majority shall govern; there is no vested right to be elected director.
• Stockholder's Right of Inspection: The statutory right of a stockholder to inspect books and records extends to wholly-owned subsidiaries whose books are in the possession and control of the parent corporation, as the stockholders are the equitable owners of the subsidiary's assets.
• Law of the Case: The doctrine invoked by concurring justices Barredo and De Castro that the dismissal of the petition for lack of votes constitutes the law of the case binding upon the parties, preventing relitigation of the validity issue.

• "A director is a fiduciary... He who is in such fiduciary position cannot serve himself first and his cestuis second... He cannot serve two masters."
• "The ordinary trust relationship of directors of a corporation and stockholders... 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."
• "A person cannot serve two hostile masters without detriment to one of them."
• "Competition implies a struggle for advantage between two or more forces... 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."

• Government v. El Hogar (50 Phil. 399): Sustained the validity of a by-law requiring directors to hold shares of paid-up value of P5,000.00 as security, establishing that Section 21 of the Corporation Law expressly gives corporations power to provide qualifications for directors.
• Pepper v. Litton (308 U.S. 309): Cited for the principle that directors are fiduciaries who cannot serve themselves first and their cestuis second, and cannot manipulate corporate affairs for personal advantage.
• McKee & Co. v. First National Bank of San Diego (265 F. Supp. 1): Sustained the validity of a by-law disqualifying directors who are officers or directors of competing banks, recognizing the danger of conflicting loyalties and leakage of confidential information.
• De la Rama v. Ma-ao Sugar Central Co., Inc. (27 SCRA 247): Held that when investment is necessary to accomplish the corporate purpose, stockholder approval under Section 17 1/2 is not necessary; also recognized the power of ratification for unauthorized acts.
• Grey v. Insular Lumber (40 O.G. 1st Suppl. 1): Established that the right to examine corporate books must be exercised in good faith for specific and honest purposes germane to the stockholder's interest.

• Section 21, Corporation Law (Act 1459): Grants corporations the power to prescribe in by-laws the qualifications, duties, and compensation of directors, officers, and employees.
• Section 22, Corporation Law: Provides for the amendment of by-laws by the Board when power is delegated by stockholders representing at least two-thirds of the subscribed capital stock.
• Section 30, Corporation Law: Requires every director to own at least one share of the capital stock of the corporation.
• Section 13(5), Corporation Law: Prohibits stockholders of agricultural corporations from holding stock for purposes of combination to exercise control.
• Section 17 1/2, Corporation Law: Requires approval of stockholders holding two-thirds of voting power for investment of corporate funds in other corporations or businesses outside the main purpose.
• Section 51, Corporation Law: Grants stockholders the right to inspect corporate records and business transactions at reasonable hours.
• Article 186, Revised Penal Code: Penalizes monopolies and combinations in restraint of trade.
• Section 2, Article XIV, 1973 Constitution: Prohibits combinations in restraint of trade or unfair competition (now Article XII, Section 19, 1987 Constitution).

• Barredo, J.: Clarified that the dismissal of the petition for lack of necessary votes constitutes the "law of the case" binding upon the parties, meaning the validity of the by-laws is settled as between the parties herein, though not doctrinal for future cases. He emphasized that petitioner may run only if he obtains an injunction against enforcement of disqualification.
• De Castro, J.: Concurred in the validity of the by-laws but advocated for a restrictive interpretation of Section 13(5) of the Corporation Law (agricultural corporations), limiting "agriculture" to farming or cultivation rather than broad agribusiness activities.
• Teehankee, Concepcion Jr., Fernandez, and Guerrero, JJ.: Voted against the validity of the amended by-laws, considering them discriminatory, oppressive, and violative of the Corporation Law's provisions on cumulative voting and removal of directors only for cause. They argued the issue should be resolved first by the SEC as the agency of primary jurisdiction.