Case Summary (G.R. No. 85339)
Background and Sale of SMC Shares
On December 15, 1983, 33,133,266 SMC shares were placed under a Voting Trust Agreement favoring Andres Soriano Jr. Upon his death, Eduardo M. Cojuangco Jr. was appointed substitute trustee. Following the 1986 Revolution, allegations surfaced of irregular use of SMC funds to support Ferdinand Marcos’s snap election campaign, leading to Cojuangco’s departure from the country. On March 26, 1986, an agreement was executed for the sale of these shares to Andres Soriano III (acting for himself and others) for a total price of approximately ₱3.3 billion, paid in installments. The buyer was eventually identified as Neptunia Corporation Limited, a Hong Kong-based subsidiary linked indirectly to SMC.
Sequestration and Litigation Arising from the Sale
Shortly after the sale agreement, the PCGG sequestered the shares, alleging they belonged to Cojuangco as a Marcos associate. The PCGG contended that the sale contravened executive orders prohibiting any transfer or liquidation of assets associated with Marcos and his allies. Although sequestration was initially lifted on representations regarding the ownership status, it was reimposed, and stock transfers required prior PCGG approval. Consequently, SMC suspended further payments under the purchase agreement, prompting the 14 selling corporations to sue for rescission and damages.
PCGG’s Role and Board Resolutions
The PCGG directed SMC to issue qualifying shares to certain individuals, including petitioner Eduardo de los Angeles, to be held in trust representing the benefit of the rightful owners of the sequestered shares. In December 1986, the SMC Board passed a resolution assuming the loans incurred by Neptunia for the P500 million down payment on the shares, reasoning this assumption bore no additional cost or risk for SMC and conferred tax and other benefits. However, upon objection by de los Angeles at a January 1987 board meeting, who denied the resolution’s adoption and highlighted its detrimental effects, a corporate internal conflict ensued. His efforts to obtain redress through corporate channels and the PCGG failed, prompting him to file a derivative suit with the SEC in April 1987.
Derivative Suit and SEC Proceedings
De los Angeles’ SEC complaint alleged misuse of corporate funds in securing the purchase of the shares through complex financial arrangements benefiting certain directors and stockholders, particularly the Soriano family. The complaint detailed the improper assumption of Neptunia’s loans by SMC and the breach of fiduciary duties by majority board members. He sought injunctions against consummation of the purchase agreements, nullification of the board resolution assuming Neptunia’s loan, and damages. Respondent Ernest Kahn moved to dismiss the complaint arguing, among other grounds, de los Angeles lacked legal capacity to sue due to his nominal shareholding and potential conflict of interest as a PCGG nominee, and that the SEC lacked jurisdiction over internal corporate affairs. The SEC Hearing Officer denied the motion to dismiss, concluding that de los Angeles, as a stockholder, had the capacity to bring a derivative suit and that the SEC has jurisdiction when corporate acts allegedly transgress the law.
Court of Appeals Decision
The Court of Appeals reversed the SEC Hearing Officer’s ruling by a narrow majority, holding that de los Angeles lacked legal capacity for the derivative suit. This decision was primarily based on the following reasoning: (1) de los Angeles’ ownership of only 20 shares out of over 121 million (0.00001644%) was insufficient to adequately represent minority shareholders; (2) as a PCGG nominee representing the majority stockholder, his interests conflicted with minority shareholders; (3) precedent from the BASECO case restricted the PCGG’s powers in voting sequestered shares to administrative acts, thereby questioning the legitimacy of de los Angeles’ directorship; and (4) the suit was not genuinely derivative but was pursued for personal or factional interests.
The dissenting judges argued that the numerical insignificance of shares held was immaterial and that de los Angeles had not voted in favor of the disputed board resolution. They maintained that equitable ownership or nominee status should not disqualify a stockholder from bringing a derivative action in defense of corporate interests.
Supreme Court Ruling and Legal Analysis
The Supreme Court granted the petition and reversed the Court of Appeals decision, reinstating de los Angeles’ capacity to file a derivative suit. The ruling emphasized critical points:
Jurisdiction of the SEC: The Court rejected the claim that the SEC lacked jurisdiction over the dispute. The controversy involved intra-corporate acts—specifically, the validity of the assumption by SMC of loans incurred by Neptunia—that did not implicate the ownership of the sequestered shares. Therefore, the matter fell squarely within the SEC’s exclusive authority over corporate governance disputes, distinct from Sandiganbayan jurisdiction over sequestered assets.
Capacity to Sue and Shareholding Requirements: Ownership of even a single share qualifies a stockholder to file a derivative suit. The number or proportion of shares is immaterial because the suit is brought on behalf of the corporation, not for individual shareholder redress. De los Angeles’ bona fide ownership of 20 shares since 1977 sufficed to grant him standing.
Conflict of Interest Allegation: The Court found the contention that de los Angeles could not represent minority shareholders because he was a PCGG-nominated director to be unsound. A director’s duty is to exercise independent judgment in the corporation’s best interest, regardless of the entity that nominated or appointed him. Moreover, since he owned shares in his own right, his interests were not entirely beholden to the PCGG.
Voting of Sequestered Shares by PCGG: Referencing the BASECO decision, the Court clarified that the PCGG’s voting rights over sequestered shares are limited to acts of administration and not acts of dominion, and must be exercised prudently for significant reasons. The PCGG’s nomination of de los Angeles as director was within its administrative powers and presumed regular absent contrary evidence.
Requisites for a Derivative Suit Affirmed
The Court reiterated the well-established requisites for instituting a derivative suit under Philippine law:
- The plaintiff must be a stockholder at the time of the challenged act or transaction;
- The plaintiff must first exhaust intra-corporate remedies by demanding the board to act, and only if refused or ignored may the suit proceed;
- The cause
Case Syllabus (G.R. No. 85339)
Background and Facts of the Case
- On December 15, 1983, a total of 33,133,266 shares of San Miguel Corporation (SMC) were acquired by fourteen (14) corporations and placed under a Voting Trust Agreement for Andres Soriano, Jr.
- Following Soriano, Jr.'s death, Eduardo M. Cojuangco, Jr. was elected Substitute Trustee on April 9, 1984, with delegated powers to Andres Soriano III.
- After the February 1986 Revolution, Cojuangco left the country amid rumors of irregular cash disbursements from SMC’s funds, supposedly supporting Ferdinand Marcos' candidacy in the snap elections.
- On March 26, 1986, an "Agreement" was executed where Andres Soriano III, as "Buyer" and as agent for several persons, agreed to buy the 33,133,266 shares from the 14 corporations for P3,313,326,600.00 in installments, revoking the prior voting trust.
- According to Soriano and private respondents, the real buyer was Neptunia Corporation Limited, a Hong Kong-based subsidiary owned by San Miguel International, which is itself a subsidiary of SMC.
- Neptunia made a down payment of P500 million from loan proceeds.
- The President Commission on Good Government (PCGG) initially sequestered the shares on the ground that they belonged to Cojuangco, linked to Marcos, making the sale a violation of Executive Orders 1 and 2 barring transfer of Marcos' assets.
- The sequestration was temporarily lifted based on SMC's representations that stock ownership was in the hands of coconut farmers but was re-imposed by the PCGG on May 19, 1986, prohibiting registration of transfers without PCGG’s authority.
- SMC suspended payment of other installments; sellers sued for rescission and damages.
- On June 4, 1986, the PCGG directed issuance of qualifying shares to seven individuals, including Eduardo de los Angeles, who held shares in trust for holders to be finally determined.
- The SMC Board, in December 1986, passed Resolution No. 86-12-2 to assume Neptunia’s loans for the down payment, considering it legal as Neptunia was a wholly-owned subsidiary of SMC, with benefits for the group.
- Eduardo de los Angeles, PCGG’s representative on the Board, disputed the adoption of the resolution and its harmful effects but was overruled.
- Failing relief within SMC and the PCGG, de los Angeles filed a derivative suit with the Securities and Exchange Commission (SEC) in April 1987, against 10 directors who approved or failed to revoke the loan assumption.
- The complaint detailed unlawful use of corporate funds to cover Soriano III's personal obligations and sought injunctions, nullification of the board resolution, and damages.
Legal Issues Raised
- Whether Eduardo de los Angeles, as a minority stockholder holding only 20 shares and a PCGG nominee, had legal capacity to bring a derivative suit on behalf of SMC.
- Whether the SEC had jurisdiction over the dispute involving intra-corporate matters concerning the corporation’s assumption of loans for Neptunia.
- Whether the Court of Appeals erred in granting certiorari to annul the SEC Hearing Officer’s denial of the motion to dismiss de los Angeles’ derivative suit.
- The effect of the PCGG’s sequestered shares and its power to vote them, especially as to the validity of de los Angeles’ appointment as director.
- Whether the purported conflict of interest due to de los Angeles’ PCGG nomination barred him from representing minority shareholders.
Proceedings in the Securities and Exchange Commission
- Ernest Kahn, one of the respondents, moved to dismiss the suit on the grounds that:
- De los Angeles lacked legal capacity given his status as PCGG nominee, insufficient standing due to minimal shares, and unclean hands;
- SEC lacked jurisdiction, as the matter was internal and subject to Board’s business judgment.
- The SEC Hearing Officer denied the motion, ruling that:
- Ownership of even