Case Citation: Gokongwei Jr. v.

SEC
G.R. No. L-45911 | 86 SCRA 336

Date: April 11, 197

Petitioners: John Gokongwei, Jr.

Respondents: Securities And Exchange Commission, Andres M. Soriano, Jose M. Soriano,

Enrique Zobel, Antonio Roxas, Emeterio Buñao, Walthrode B. Conde, Miguel
Ortigas, Antonio Prieto, San Miguel Corporation, Emigdio Tanjuatco, Sr., And
Eduardo R. Visaya

Doctrine: At common law, the rule was "that the power to make and adopt by-laws was
inherent in every corporation as one of its necessary and inseparable legal incidents.
And it is settled throughout the United States that in the absence of positive
legislative provisions limiting it, every private corporation has this inherent power
as one of its necessary and inseparable legal incidents, independent of any specific
enabling provision in its charter or in general law,
such power of self-government being essential to enable the corporation to
accomplish the purposes of its creation.

It is a settled state law in the United States, according to Fletcher, that corporations
have the power to make by-laws declaring a person employed in the service of a
rival company to be ineligible for the corporation's Board of Directors. This is
based upon the principle that where the director is so
employed in the service of a rival company, he cannot serve both, but must betray
one or the other.

Antecedent Facts: Petitioner, as stockholder of respondent San Miguel Corporation, filed with the
Securities and Exchange Commission (SEC) a petition for "declaration of nullity of
amended by-laws, cancellation of certificate of filing of amended by-laws,
injunction and damages with prayer for a preliminary injunction" against the
majority of the members of the Board of Directors and San Miguel Corporation as
an unwilling petitioner.

Petitioner’s Contention: 1. that prior to the questioned amendment, petitioner had all the qualifications
to be a director of respondent corporation, being a substantial stockholder
thereof; that as a stockholder, petitioner had acquired rights inherent in
stock ownership, such as the rights to vote and to be voted upon in the
election of directors; and that in amending the by-laws, respondents
purposely provided for petitioner's disqualification and deprived him of his
vested rights as afore-mentioned, hence the amended bylaws are null and
void.
2. that corporations have no inherent power to disqualify a stockholder from
being elected as a director and, therefore, the questioned act is ultra vires
and void;

Respondent’s Contention: 1. that the power of the corporation to amend its by-laws is broad, subject
only to the condition that the by-laws adopted should not be inconsistent
with any existing law;
2. that respondent corporation should not be precluded from adopting
protective measures to minimize or eliminate situations where its directors
might be tempted to put their personal interests over that of the corporation;
3. that petitioner was rejected by the stockholders in his bid to secure a seat in
the Board of Directors 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

MTC/RTC Ruling: -

CA Ruling: -

Issue: WON respondent San Miguel Corporation could, as a measure of self-protection,

disqualify a competitor from nomination and election to its Board of Directors.
(YES)

SC Ruling: It is recognized by all authorities that "every corporation has the inherent power to
adopt by-laws 'for its internal government, and to regulate the conduct and prescribe
the rights and duties of its members towards itself and among themselves in
reference to the management of its affairs.

At common law, the rule was "that the power to make and adopt by-laws was
inherent in every corporation as one of its necessary and inseparable legal
incidents. And it is settled throughout the United States that in the absence of
positive legislative provisions limiting it, every private corporation has this inherent
power as one of its necessary and inseparable legal incidents, independent of any
specific enabling provision in its charter or in general law, such power of self-
government being essential to enable the corporation to accomplish the purposes of
its creation.

In this jurisdiction, under section 21 of the Corporation Law, a corporation may

prescribe in its by-laws "the qualifications, duties and compensation of directors,
officers and employees * * *." This must necessarily refer to a qualification in
addition to that specified by section 30 of the Corporation Law, which provides that
"every director must own in his right at least one share of the capital stock of the
stock corporation of which he is a director

A stockholder has no vested right to be elected director.

Any person "who buys stock in a corporation does so with the knowledge that its
affairs are dominated by a majority of the stockholders and that he impliedly
contracts that the will of the majority shall govern in all matters within the limits of
the act of incorporation and lawfully enacted by-laws and not forbidden by law. To
this extent, therefore, the stockholder may be considered to have "parted with his
personal right or privilege to regulate the disposition of his property which he has
invested in the capital stock of the
corporation, and surrendered it to the will of the majority of his fellow
incorporators.

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. 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.

An amendment to the corporate by-law which renders a stockholder ineligible

to be director, if he be also director in a corporation whose business is in
competition with that of the other corporation, has been sustained as valid.

It is a settled state law in the United States, according to Fletcher, that corporations
have the power to make by-laws declaring a person employed in the service of a
rival company to be ineligible for the corporation's Board of Directors. This is
 based upon the principle that where the director is so
employed in the service of a rival company, he cannot serve both, but must betray
one or the other.

Section 21 of the Corporation Law expressly provides that a corporation may make
by-laws for the qualifications of directors. Thus, it has been held that
an officer of a corporation cannot engage in a business in direct competition with
that of the corporation where he is a director by utilizing information he has
received as such officer, under "the established law that a director or officer of a
corporation may not enter into a competing enterprise which cripples or injures the
business of the corporation of which he is an officer or director."

Others It is not denied that a member of the Board of Directors of the San Miguel
Corporation has access to sensitive and highly confidential information, such as: (a)
marketing strategies and pricing structure; (b) budget for expansion and
diversification; (c) research and development; and (d) sources of funding,
availability of personnel, proposals of mergers or tie-ups with other firms.

Such would subject the SMC to a competitive disadvantage and unjustly enrich the
competitor, for advance knowledge by the competitor of the strategies for the
development of existing or new markets of existing or new products could enable
said competitor to utilize such knowledge to his advantage.

Furthermore, there is here a statutory recognition of the anti-competitive dangers

which may arise when an individual simultaneously acts as a director of two or
more competing corporations. A common director of two or more competing
corporations would have access to confidential sales, pricing and
marketing information and would be in a position to coordinate policies or to aid
one corporation at the expense of another, thereby stifling competition.