Gokongwei v. Securities and Exchange Commission

G.R. No. L-45911, 11 April 1979

FACTS:

Petitioner, as stockholder of respondent San Miguel Corporation, filed with the Securities and Exchange Commission (SEC) a petition for “declaration of nullity of amendedby-laws, cancellation of certificate of filing of amended by- laws, injunction and damages withprayer for a preliminary injunction” against the majority of the members of the Board of Directorsand San Miguel Corporation as an unwilling petitioner.

Petitioners also wanted to inspect records and documents of SMC but the request was denied because the request was said to have been made in bad faith.

Respondents filed their answer to the petition, denying the substantital allegations therein and stating by way of affirmative defenses that “the action taken by the BODS resulting in the amendments is valid and legal because the power to amend, modify, repeal or adopt new By-Laws delegated to said Board and long prior thereto has never been revoked, withdrawn or otherwise nullified by the stockholders of SMC. Also said that the power of the Board to amend the by-laws are broad, subject only to existing laws.

Augsut 1972, the URC began acquiring shares. The CFC likewise began acquiring shares in respondent corporation. Petitioner who is president both in URC and CFC purchased shares of stock of respondent corporation, and thereafter, in behald of himself, CFC and URC, “conducted malevolent and malicious publicity campaign against SMC” to generate support from the stockholder “in his effort to secure for himself and in representation of URC and CFC interests, a seat in the BODs of SMC.” Petitioner was rejected by the stockholders in his bid to secure a sear in the BODs on the basic issue that petitioner was engaged in a competitive business and his securing a seat would have subjected respondent corporation to grave disadvantages.

SC issued a TRO restraining pvt respondents from disqualifying or preventing petitioner from running or from being voted as director of respondent corporation and from submitting for ratification or confirmation or from causing the ratification or confirmation of the amendment. SEC held that petitioner should be allowed to run as a director but that he should not sit as such until SEC has decided on the validity of the by-laws in dispute.

Respondents reason out that petitioner is engaged in businesses competitive and antagonistic to that of respondent SMC and that the Board realized the clear and present danger in competitors being directors because they would have easy and direct access to SMCs business and trade secrets.

ISSUE:

Whether the amended by-laws of SMC disqualifying a competitor from nomination or election to the BODs of SMC are valid and reasonable.

RULING:

The validity or reasonableness of a by-law of a corporation in purely a question of law. Whether the by-law is in conflict with the law of the land, or with the charter of the corporation, or is in alegal sense unreasonable and therefore unlawful is a question of law. This rule is subject, however, to the limitation that where the reasonableness of a by-law is a mere matter of judgment, and one upon which reasonable minds must necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment of those who are authorized tomake by-laws and who have exercised their authority.

Petitioner claims that the amended by-laws are invalid and unreasonable because they were tailored to suppress the minority and prevent them from having representation in the Board”, atthe same time depriving petitioner of his “vested right” to be voted for and to vote for a person of his choice as director.

Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of incorporation by a vote or written assent of the stockholders representing at least two-thirds of the subscribed capital stock of the corporation If the amendment changes, diminishes or restricts the rights of the existing shareholders then the disenting minority has only one right, viz.: “to object thereto in writing and demand payment for his share.”

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.

The doctrine of “corporate opportunity” is precisely a recognition by the courts that the fiduciary standards could not be upheld where the fiduciary was acting for two entities with competing interests. This doctrine rests fundamentally on the unfairness, in particular circumstances, of an officer or director taking advantage of an opportunity for his own personal profit when the interest of the corporation justly calls for protection.

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.

In the absence of any legal prohibition or overriding public policy, wide latitude may be accorded to the corporation in adopting measures to protect legitimate corporation interests. Thus, “where the reasonableness of a by-law is a mere matter of judgment, and upon which reasonable minds must necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment of those who are authorized to make by-laws and who have expressed their authority.

*Case Digest by Jhazel Zhan Jebone, JD-4, Andres Bonifacio Law School, SY 2019-2020

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