G.R. No. 85339 - San Miguel Corporation vs. Khan

Case Summary (G.R. No. 85339)

Factual Background

On December 15, 1983, thirty-three million one hundred thirty-three thousand two hundred sixty-six (33,133,266) shares of San Miguel Corporation were acquired by fourteen corporations and placed under a voting trust in favor of the late Andres Soriano, Jr. After Soriano, Jr.'s death, Eduardo M. Cojuangco, Jr. was elected substitute trustee on April 9, 1984, with authority to delegate trusteeship to Andres Soriano III. Following the Revolution of February, 1986, Cojuangco left the country amid reports of unusual disbursements from SMC funds. On March 26, 1986 an Agreement was executed by which Andres Soriano III, as "Buyer," agreed to purchase the 33,133,266 shares at P100.00 per share, aggregating P3,313,326,600.00, revoking the prior voting trust. Respondents asserted that the purchaser was actually Neptunia Corporation Limited, a Hongkong company and an indirectly wholly owned subsidiary of SMC, which made a P500,000,000.00 down payment about April 1, 1986 from loan proceeds. The Presidential Commission on Good Government (PCGG) sequestered the shares on the ground that they belonged to Eduardo Cojuangco, Jr., and that their transfer contravened Executive Orders Numbered 1 and 2 which restrained transfers of assets allegedly acquired by former President Marcos and associates.

Corporate and PCGG Actions

The PCGG temporarily lifted the sequestration on representations by SMC that the shares were owned by one million three hundred thousand coconut farmers, but re-imposed sequestration by PCGG Order of May 19, 1986 and forbade registration of any transfer without PCGG authority. On June 4, 1986 the PCGG directed SMC to issue qualifying shares to seven persons, including Eduardo de los Angeles, to be held in trust for Anscor-Hagedorn Securities, Inc. In December, 1986 the SMC Board adopted Resolution No. 86-12-2 to assume Neptunia's loans incurred for the P500,000,000.00 down payment. At the January 30, 1987 board meeting, EDUARDO DE LOS ANGELES, the PCGG nominee director, denied adoption of that resolution and asserted that the matter was only for further study. His objections were overruled.

SEC Filing and Allegations

When intra-corporate efforts and appeals to the PCGG failed, EDUARDO DE LOS ANGELES filed in April, 1987 what he characterized as a derivative suit in the SEC on behalf of San Miguel Corporation against ten directors who had approved or refused to revoke Board Resolution No. 86-12-2. The amended petition alleged, among other things, that Neptunia had borrowed US $26,500,000.00 to enable the Soriano family to purchase the SMC shares; that loan proceeds were deposited for the account of Eduardo J. Soriano; and that SMC directors improperly used corporate resources, agreed to pay a higher price to avert rescission, induced UCPB to accept SMC and Neptunia as buyers, and applied corporate assets to part payments, all to the corporation's damage. The petition sought injunctive relief, nullification of board action making SMC party to the purchase agreement, and damages.

SEC Motion to Dismiss and Hearing Officer Ruling

Respondent ERNEST KAHN moved to dismiss on two grounds: that de los Angeles lacked legal capacity because he was a PCGG-imposed director and a holder of only twenty shares, and that the SEC lacked jurisdiction because the matters were within the business judgment of the board. The other private respondents adopted the motion. SEC Hearing Officer Josefina L. Pasay‑Paz denied the motion on September 4, 1987. The Hearing Officer ruled that de los Angeles' status as a PCGG nominee was irrelevant because ownership of even one share sufficed to qualify a person to bring a derivative suit; that he had sued for the corporation's benefit; that he owned shares at the time of the complained acts; that the charge of unclean hands was not substantiated; and that where business judgment transgressed the law the SEC had competence to inquire.

Court of Appeals Review

Respondents sought certiorari and prohibition in the Court of Appeals to annul the SEC Hearing Officer's order. A Special Division of the Court of Appeals, by a three-to-two vote, sustained respondents. The majority held that de los Angeles lacked legal capacity to institute a derivative suit because he could not adequately represent minority stockholders given his ownership of twenty shares (0.00001644% of outstanding stock) and his nomination by the PCGG, thereby creating a conflict of interest. The majority also relied on the principle in BASECO v. PCGG that the PCGG could exercise only administrative powers over sequestered property and that voting sequestered stock must be pursuant to administration. The majority further characterized de los Angeles' filing as not a derivative suit. The dissenting Justices disagreed, finding the number of shares immaterial, noting that de los Angeles did not vote for the contested resolution, and observing that nominees and equitable owners may be deemed shareholders for the purpose of bringing derivative suits.

Issues Presented to the Supreme Court

On appeal to the Supreme Court, EDUARDO DE LOS ANGELES contended that the Court of Appeals erred in granting certiorari without exhaustion of SEC remedies, in deciding on disputed factual allegations without trial, and in holding that he could not bring a derivative suit as stockholder and director. Respondents countered that the SEC lacked jurisdiction in view of this Court's Resolution of August 10, 1988 concerning sequestered assets and the Sandiganbayan's exclusive jurisdiction; that de los Angeles was beholden to the PCGG and thus conflicted; that he did not fairly and adequately represent minority stockholders; and that certiorari was proper because no plain, speedy and adequate remedy existed and the SEC order was issued without or in excess of jurisdiction.

Supreme Court Ruling

The Supreme Court granted the petition. It reversed and set aside the Court of Appeals decision in CA‑G.R. SP No. 12857 which had annulled the SEC order of September 4, 1987 and dismissed SEC Case No. 3153. The Court also set aside the Court of Appeals' issuance of a writ of preliminary injunction conditioned on a P500,000.00 bond and lifted any injunction issued pursuant thereto. Costs were imposed on the private respondents. The judgment was concurred in by Justices Gancayco, Grino‑Aquino and Medialdea; Justice Cruz took no part.

Legal Basis and Reasoning — SEC Jurisdiction

The Court first rejected respondents' contention that the SEC lacked jurisdiction by virtue of this Court's August 10, 1988 Resolution concerning cases involving funds and properties allegedly acquired by former President Marcos and associates. The Court observed that de los Angeles did not challenge the ownership of the sequestered shares nor did his complaint require inquiry into who owned those shares. Instead, his complaint concerned the validity of the SMC Board's resolution to assume Neptunia's indebtedness, an intra‑corporate dispute over alleged improper use of corporate funds and breach of fiduciary duty. Such disputes involving acts of a board detrimental to stockholders fell squarely within the SEC's competence. The Court thus held that the controversy did not fall within the Sandiganbayan exclusivity announced in the cited Resolution.

Legal Basis and Reasoning — Standing to Bring a Derivative Suit

The Court articulated the established requisites for a derivative suit: (a) the plaintiff must have been a shareholder at the time of the act or transaction complained of, the number of shares being immaterial; (b) the plaintiff must have exhausted intra‑corporate remedies by making demand on the board; and (c) the cause of action must belong to the corporation and not to the individual stockholder. The Court emphasized that bona fide ownership of even a single share in one's own right sufficed to confer standing to sue derivatively. Citing pertinent authorities, the Court rejected the implicit rule that only substantial shareholders could bring derivative actions. The Court affirmed that de los Angeles had owned twenty shares since 1977 and had sought board redress without success.

Legal Basis and Reasoning — Conflict of Interest and PCGG Nomination

The Court rejected respondents' conflict‑of‑interest argument arising from de los Angeles' status

Case Syllabus (G.R. No. 85339)

Parties and Procedural Posture

San Miguel Corporation, represented by Eduardo de los Angeles filed a derivative action in the Securities and Exchange Commission alleging wrongful board action and breach of fiduciary duty.
Ernest Kahn and the other private respondents moved to dismiss the SEC case on grounds of lack of capacity and lack of SEC jurisdiction.
The SEC Hearing Officer denied the motion to dismiss by order dated September 4, 1987, thereby allowing SEC Case No. 3152 to proceed.
Ernest Kahn sought certiorari and prohibition in the Court of Appeals, which by Special Division reversed the SEC order by a three-to-two vote.
Eduardo de los Angeles appealed to the Supreme Court seeking reversal of the Court of Appeals decision and reinstatement of the SEC order.
The Supreme Court granted the petition, reversed and set aside the Court of Appeals decision, and lifted any injunctions previously issued.

Key Factual Allegations

Thirty-three million one hundred thirty-three thousand two hundred sixty-six (33,133,266) shares of San Miguel Corporation were acquired on December 15, 1983 by fourteen corporations and placed under a voting trust in favor of Andres Soriano, Jr.
After Andres Soriano, Jr.'s death, Eduardo M. Cojuangco, Jr. became Substitute Trustee and delegated trusteeship powers in writing to Andres Soriano III.
An agreement dated March 26, 1986 purportedly sold the 33,133,266 shares for P100.00 per share, aggregating P3,313,326,600.00, payable in installments.
A foreign entity, Neptunia Corporation Limited, allegedly a wholly owned subsidiary of San Miguel International, made a down payment of P500,000,000.00 to effect the purchase.
The Presidential Commission on Good Government (PCGG) sequestered the 33,133,266 shares on the ground that they belonged to Eduardo Cojuangco, Jr., and subsequently prohibited registration of transfer or encumbrance without PCGG authority.
The San Miguel Corporation Board adopted Resolution No. 86-12-2 in December 1986 to assume the Neptunia loan of P500,000,000.00, a resolution which was later disputed by de los Angeles at a January 30, 1987 board meeting.
De los Angeles exhausted intra-corporate remedies without success and filed a derivative complaint in the SEC in April 1987 alleging improper assumption of Neptunia obligations and misuse of corporate assets.

Transactional Background

The March 26, 1986 sale agreement revoked the existing voting trust and stated the sellers wished to liquidate assets to pay outstanding debts.
Neptunia allegedly authorized and obtained a US$26,500,000.00 loan from the Hongkong & Shanghai Banking Corporation on April 1, 1986 to finance the purchase.
Soriano III sent April 4, 1986 letters to SMC stockholders announcing acquisition of the 33,133,266 shares and soliciting proxies.
Following the PCGG sequestration and reimposition, San Miguel suspended further installment payments and the fourteen selling corporations sued for rescission and damages in the regional trial court.

SEC Proceedings

De los Angeles filed an Amended Petition in SEC Case No. 3152 asserting that the SMC Board breached fiduciary duty and attempted to use corporate funds to assume Neptunia's liabilities for the benefit of certain officers and stockholders.
Ernest Kahn moved to dismiss on the grounds that de los Angeles lacked capacity because he was a PCGG nominee, owned only twenty shares, and had unclean hands, and that the SEC lacked jurisdiction because the matters were within the board's business judgment.
The SEC Hearing Officer denied the motion to dismiss on September 4, 1987, holding that bona fide ownership of even one share sufficed for a derivative suit and that the SEC could inquire where business judgment transgressed law.
The SEC order was reviewed and set aside by the Court of Appeals by writ of certiorari, prompting the appeal to the Supreme Court.

Court of Appeals Ruling

The Court of Appeals Special Division sustained Kahn's petition by a vote of three-to-two and held that de los Angeles lacked legal capacity to maintain a derivative suit.
The majority reasoned that de los Angeles's ownership of 20 shares (0.00001644% of outstanding stock) precluded adequate representation of minority stockholders and that his status as a PCGG nominee generated a conflict of interest.
The Court of Appeals majority also relied on the Baseco doctrine to construe the PCGG's voting of sequestered stock as limited to administrative acts and concluded that the suit