Case Summary (G.R. No. L-45911)
Allegations of Ultra Vires Acts and Vested-Rights Deprivation
First, petitioner alleged the board lacked power to amend by-laws absent 2/3 vote of subscribed and paid-up stock at amendment date, relying instead on a 1961 authorization. Second, prior exercises in 1962–63 extinguished board authority. Third, membership changes negated original delegation. Fourth, the by-law targeted Gokongwei’s qualifications, stripping his vested right to be voted upon. Additional claims included ultra vires disqualification of stockholders, unreasonable delegation of competitive determinations to the board, and oppressive nomination notice requirements.
SEC’s Order on Document Production and Inspection
In Order No. 26 (Dec. 29, 1976), the SEC granted inspection of SMC’s minutes of the March 13, 1961 stockholder meeting under its Materiality Rule, denied inspection of San Miguel International, Inc. (SMI) records (non-SMC stockholder), noted withdrawal of management-contract request, and deferred ruling on shareholder authority documents until merits hearing.
Challenges to Collateral Motions and Special Meetings
Petitioner’s motions for reconsideration of document-inspection ruling, summary judgment on board usurpation, temporary restraining orders and contempt charges were denied by the SEC. In parallel, SMC’s February 10 special meeting ratified the challenged amendments; its May 10 annual meeting ratified foreign investments. Petitioner intervened at each step, claiming SEC inaction and due-process violation.
Supreme Court’s Interim Injunctive Relief
On May 6, 1977, the Supreme Court en banc issued a TRO restraining respondents from enforcing the amended by-laws, holding special or annual meetings on contested items, and disqualifying Gokongwei pending SEC resolution of his petitions.
Jurisdictional and Procedural Analysis
The Court applied the pre-1987 Constitution and the SEC’s primary jurisdiction over intra-corporate disputes (Presidential Decree No. 902-A, secs. 3–5). It surveyed precedents on remand versus final disposition, concluding that issues of law may be resolved without remand, but factual disputes and matters properly within the SEC’s domain warranted deference to administrative process.
Standards for By-Law Validity and Director Fiduciary Duties
Under Corp. Law sec. 21, by-laws may prescribe director qualifications. Judicial review of by-laws focuses on legality, conflict with statutes or charter, and reasonableness. Directors owe undivided loyalty to the corporation; they stand in a fiduciary relation and may not serve competing interests, per Pepper v. Litton and cross-jurisdictional precedents on corporate opportunity and self-preservation.
Validity of Excluding Competitors from Board Membership
Jurisdictions uniformly uphold by-laws disqualifying those with substantial competitive interests. SMC’s amendment barring stockholders or nominees owning ≥10% of a competitive corporation, or deemed a nominee by a three-fourths board vote, is a reasonable self-protective measure. Common director interference may enable unfair use of confidential strategies, degrade competition, and violate anti-monopoly laws.
Constitutional and Statutory Anti-Trust Considerations
Philippine Constitution Article XIV, sec. 2 and RPC Art. 186 prohibit monopolies and combinations in restraint of trade. Interlocking directorates among competitors facilitate concerted action, price fixing and market control. The Clayton Act’s prohibition on interlocking directorates underscores the risk: a director serving rival corporations cannot impartially further both enterprises.
Stockholder Inspection Rights Extended to Wholly-Owned Subsidiaries
Corp. Law sec. 51 grants any stockholder the right to inspect corporate books. Courts recognize that where a parent owns and controls a wholly owned subsidiary, its stockholders may demand inspection of subsidiary records in the parent’s possession or control. The SEC’s denial of SMI records was reverse
...continue readingCase Syllabus (G.R. No. L-45911)
Facts of the Case
- Two related petitions filed by John Gokongwei, Jr. before the SEC:
• SEC Case No. 1375 (filed October 22, 1976) challenging amended by-laws of San Miguel Corporation (SMC) and seeking nullity, cancellation of certificate of filing, injunction and damages.
• SEC Case No. 1423 (filed January 20, 1977) challenging investments of SMC outside its primary purpose under Section 17½ of the Corporation Law. - The challenged by-laws amendment (September 18, 1976) introduced a disqualification clause barring any “competitor or antagonistic” stockholder from nomination or election to SMC’s Board, to be determined by a ¾ vote of the Board.
- Petitioner sought:
• Declaration that the Board acted without authority (1961 resolution did not cover current paid-up capital).
• Cancellation of the new by-laws, damages, and injunctive relief.
• Inspection and copying of SMC and its wholly owned subsidiary San Miguel International, Inc. (SMI) records. - Respondents included SMC, majority directors, and the Soriano brothers among others.
Issues Presented
- Authority of the SMC Board to amend by-laws under prior stockholders’ resolution and Section 22 of the Corporation Law.
- Validity and reasonableness of a by-laws provision disqualifying “competitors” from election to the Board.
- Whether the 1961 delegation of by-laws-amendment power survived capital increases, prior exercises, and changes in Board membership.
- Legality of provisions allowing the Board to judge competitive status and to impose nomination timing requirements.
- Rights of a stockholder to inspect corporate and subsidiary records (SMC and SMI).
- SEC’s exercise of jurisdiction: alleged delay, refusal to act promptly, and partial compliance on document production.
- Ratification of by-laws amendments and foreign investments by SMC stockholders in special and annual meetings.
- Validity of SMC’s investments in foreign subsidiaries and need for stockholders’ authorization under Section 17½.
Petitioner’s Contentions (SEC Case No. 1375)
- The Board lacked authority because the 1961 stockholders’ resolution was based on a paid-up capital of P70 million, not the P301 million existing in 1976.
- Authority granted in 1961 had been exercised in 1962 and 1963 and thus lapsed.
- Board composition changed; new directors never authorized to amend by-laws.
- Amendment targeted petitioner by disqualifying substantial stockholders engaged in “competitive” businesses, depriving him of voting and elective rights.
- By-laws purport to disqualify stockholders, an ultra vires act; portions are unreasonable and oppressive (e.g., submission of nominations five days in advance).
- Sought preliminary and permanent injunctions, damages against individual directors.
Respondents’ Defenses (SEC Case No. 1375)
- Delegation of by-laws amendment power by 1961 stockholders was never revoked and remains valid regardless of subsequent capital increases.
- Vote requirement for delegation is determined at time of delegation, not exercise.
- Petitioner failed to use intra-corporate remedies (stockholders’ vote for repeal).
- Petitioner is estopped from challenging the same authorization used in earlier amendments.
- Corporate power to amend by-laws is broad; by-laws need not be interfered with unless inconsistent with law.
- Disqualification clause is a reasonable protective measure to prevent conflict of interest, combinations in restraint of trade, and safeguard corporate secrets.
- Petition states no cause of action and was premature.
SEC Proceedings on Production of Documents
- Petitioner’s “Urgent Motion” sought inspection of:
(a) Minutes of March 13, 1961 stockholders’ meeting
(b) SMC–ANSCOR management contract
(c) SMI balance sheets
(d) Stockholders’ authority for SMC investments in SMI
(e) Compensation records of the Soriano brothers at SMI - SEC Order No. 26 (D