PEDRO R. PALTING V.

SAN JOSE PETROLEUM

INCORPORATED ........................................................ 2
PRIME WHITE CEMENT CORPORATION V. IAC ....... 8
STRATEGIC ALLIANCE VS. RADSTOCK ................... 12
C. H. STEINBERG V. VELASCO ................................ 54
BATES v. DRESSER ................................................... 57
SMITH V. VAN GORKOM ......................................... 60
JOHN GOKONGWEI, JR. V. SEC .............................. 84
CHARLES W. MEAD V. McCULLOUGH .................... 98
ASSOCIATED BANK V. PRONSTROLLER ...............108

PEDRO R. PALTING V. SAN JOSE PETROLEUM
INCORPORATED
BARRERA, J.:
This is a petition for review of the order of August 29, 1958,
later supplemented and amplified by another dated September
9, 1958, of the Securities and Exchange Commission denying
the opposition to, and instead, granting the registration, and
licensing the sale in the Philippines, of 5,000,000 shares of the
capital stock of the respondent-appellee San Jose Petroleum,
Inc. (hereafter referred to as SAN JOSE PETROLEUM), a
corporation organized and existing in the Republic of Panama.
On September 7, 1956, SAN JOSE PETROLEUM filed with the
Philippine Securities and Exchange Commission a sworn
registration statement, for the registration and licensing for
sale in the Philippines Voting Trust Certificates representing
2,000,000 shares of its capital stock of a par value of $0.35 a
share, at P1.00 per share. It was alleged that the entire
proceeds of the sale of said securities will be devoted or used
exclusively to finance the operations of San Jose Oil Company,
Inc. (a domestic mining corporation hereafter to be referred to
as SAN JOSE OIL) which has 14 petroleum exploration
concessions covering an area of a little less than 1,000,000
hectares, located in the provinces of Pangasinan, Tarlac, Nueva
Ecija, La Union, Iloilo, Cotabato, Davao and Agusan. It was the
express condition of the sale that every purchaser of the
securities shall not receive a stock certificate, but a registered
or bearer-voting-trust certificate from the voting trustees
named therein James L. Buckley and Austin G.E. Taylor, the
first residing in Connecticut, U.S.A., and the second in New
York City. While this application for registration was pending
consideration by the Securities and Exchange Commission,
SAN JOSE PETROLEUM filed an amended Statement on June
20, 1958, for registration of the sale in the Philippines of its
shares of capital stock, which was increased from 2,000,000 to
5,000,000, at a reduced offering price of from P1.00 to P0.70
per share. At this time the par value of the shares has also been
reduced from $.35 to $.01 per share.
1

Pedro R. Palting and others, allegedly prospective investors in
the shares of SAN JOSE PETROLEUM, filed with the Securities
and Exchange Commission an opposition to registration and
licensing of the securities on the grounds that (1) the tie-up
between the issuer, SAN JOSE PETROLEUM, a Panamanian
corporation and SAN JOSE OIL, a domestic corporation,
violates the Constitution of the Philippines, the Corporation
Law and the Petroleum Act of 1949; (2) the issuer has not been
licensed to transact business in the Philippines; (3) the sale of
the shares of the issuer is fraudulent, and works or tends to
work a fraud upon Philippine purchasers; and (4) the issuer as
an enterprise, as well as its business, is based upon unsound
business principles. Answering the foregoing opposition of
Palting, et al., the registrant SAN JOSE PETROLEUM claimed
that it was a "business enterprise" enjoying parity rights under
the Ordinance appended to the Constitution, which parity
right, with respect to mineral resources in the Philippines, may
be exercised, pursuant to the Laurel-Langley Agreement, only
through the medium of a corporation organized under the laws
of the Philippines. Thus, registrant which is allegedly qualified
to exercise rights under the Parity Amendment, had to do so
through the medium of a domestic corporation, which is the
SAN JOSE OIL. It refused the contention that the Corporation
Law was being violated, by alleging that Section 13 thereof
applies only to foreign corporations doing business in the
Philippines, and registrant was not doing business here. The
mere fact that it was a holding company of SAN JOSE OIL and
that registrant undertook the financing of and giving technical
assistance to said corporation did not constitute transaction of
business in the Philippines. Registrant also denied that the
offering for sale in the Philippines of its shares of capital stock
was fraudulent or would work or tend to work fraud on the
investors. On August 29, 1958, and on September 9, 1958 the
Securities and Exchange Commissioner issued the orders
object of the present appeal.
The issues raised by the parties in this appeal are as follows:
1. Whether or not petitioner Pedro R. Palting, as a
"prospective investor" in respondent's securities, has
personality to file the present petition for review of
the order of the Securities and Exchange Commission;
2. Whether or not the issue raised herein is already
moot and academic;
3. Whether or not the "tie-up" between the
respondent SAN JOSE PETROLEUM, a foreign
corporation, and SAN JOSE OIL COMPANY, INC., a
domestic mining corporation, is violative of the
Constitution, the Laurel-Langley Agreement, the
Petroleum Act of 1949, and the Corporation Law; and
4. Whether or not the sale of respondent's securities is
fraudulent, or would work or tend to work fraud to
purchasers of such securities in the Philippines.
1. In answer to the notice and order of the Securities and
Exchange Commissioner, published in 2 newspapers of general
circulation in the Philippines, for "any person who is opposed"
to the petition for registration and licensing of respondent's
securities, to file his opposition in 7 days, herein petitioner so
filed an opposition. And, the Commissioner, having denied his
opposition and instead, directed the registration of the
securities to be offered for sale, oppositor Palting instituted the
present proceeding for review of said order.
Respondent raises the question of the personality of petitioner
to bring this appeal, contending that as a mere "prospective
investor", he is not an "Aggrieved" or "interested" person who
may properly maintain the suit. Citing a 1931 ruling of Utah
State Supreme Court
2
it is claimed that the phrase "party
aggrieved" used in the Securities Act
3
and the Rules of
Court
4
as having the right to appeal should refer only to
issuers, dealers and salesmen of securities.
It is true that in the cited case, it was ruled that the phrase
"person aggrieved" is that party "aggrieved by the judgment or
decree where it operates on his rights of property or bears
directly upon his interest", that the word "aggrieved" refers to
"a substantial grievance, a denial of some personal property
right or the imposition upon a party of a burden or obligation."
But a careful reading of the case would show that the appeal
therein was dismissed because the court held that an order of
registration was not final and therefore not appealable. The
foregoing pronouncement relied upon by herein respondent
was made in construing the provision regarding an order of
revocation which the court held was the one appealable. And
since the law provides that in revoking the registration of any
security, only the issuer and every registered dealer of the
security are notified, excluding any person or group of persons
having no such interest in the securities, said court concluded
that the phrase "interested person" refers only to issuers,
dealers or salesmen of securities.
We cannot consider the foregoing ruling by the Utah State
Court as controlling on the issue in this case. Our Securities Act
in Section 7(c) thereof, requires the publication and notice of
the registration statement. Pursuant thereto, the Securities and
Exchange Commissioner caused the publication of an order in
part reading as follows:
. . . Any person who is opposed with this petition must
file his written opposition with this Commission
within said period (2 weeks). . . .
In other words, as construed by the administrative office
entrusted with the enforcement of the Securities Act, any
person (who may not be "aggrieved" or "interested" within the
legal acceptation of the word) is allowed or permitted to file an
opposition to the registration of securities for sale in the
Philippines. And this is in consonance with the generally
accepted principle that Blue Sky Laws are enacted to protect
investors and prospective purchasers and to prevent fraud and
preclude the sale of securities which are in fact worthless or
worth substantially less than the asking price. It is for this
purpose that herein petitioner duly filed his opposition giving
grounds therefor. Respondent SAN JOSE PETROLEUM was
required to reply to the opposition. Subsequently both the
petition and the opposition were set for hearing during which
the petitioner was allowed to actively participate and did so by
cross-examining the respondent's witnesses and filing his
memorandum in support of his opposition. He therefore to all
intents and purposes became a party to the proceedings. And
under the New Rules of Court,
5
such a party can appeal from a
final order, ruling or decision of the Securities and Exchange
Commission. This new Rule eliminating the word "aggrieved"
appearing in the old Rule, being procedural in nature,
6
and in
view of the express provision of Rule 144 that the new rules
made effective on January 1, 1964 shall govern not only cases
brought after they took effect but all further proceedings in
cases then pending, except to the extent that in the opinion of
the Court their application would not be feasible or would work
injustice, in which event the former procedure shall apply, we
hold that the present appeal is properly within the appellate
jurisdiction of this Court.
The order allowing the registration and sale of respondent's
securities is clearly a final order that is appealable. The mere
fact that such authority may be later suspended or revoked,
depending on future developments, does not give it the
character of an interlocutory or provisional ruling. And the fact
that seven days after the publication of the order, the securities
are deemed registered (Sec. 7, Com. Act 83, as amended),
points to the finality of the order. Rights and obligations
necessarily arise therefrom if not reviewed on appeal.
Our position on this procedural matter that the order is
appealable and the appeal taken here is proper is
strengthened by the intervention of the Solicitor General,
under Section 23 of Rule 3 of the Rules of Court, as the
constitutional issues herein presented affect the validity of
Section 13 of the Corporation Law, which, according to the
respondent, conflicts with the Parity Ordinance and the Laurel-
Langley Agreement recognizing, it is claimed, its right to
exploit our petroleum resources notwithstanding said
provisions of the Corporation Law.
2. Respondent likewise contends that since the order of
Registration/Licensing dated September 9, 1958 took effect 30
days from September 3, 1958, and since no stay order has been
issued by the Supreme Court, respondent's shares became
registered and licensed under the law as of October 3, 1958.
Consequently, it is asserted, the present appeal has become
academic. Frankly we are unable to follow respondent's
argumentation. First it claims that the order of August 29 and
that of September 9, 1958 are not final orders and therefor are
not appealable. Then when these orders, according to its theory
became final and were implemented, it argues that the orders
can no longer be appealed as the question of registration and
licensing became moot and academic.
But the fact is that because of the authority to sell, the
securities are, in all probabilities, still being traded in the open
market. Consequently the issue is much alive as to whether
respondent's securities should continue to be the subject of
sale. The purpose of the inquiry on this matter is not fully
served just because the securities had passed out of the hands
of the issuer and its dealers. Obviously, so long as the securities
are outstanding and are placed in the channels of trade and
commerce, members of the investing public are entitled to have
the question of the worth or legality of the securities resolved
one way or another.
But more fundamental than this consideration, we agree with
the late Senator Claro M. Recto, who appeared asamicus
curiae in this case, that while apparently the immediate issue
in this appeal is the right of respondent SAN JOSE
PETROLEUM to dispose of and sell its securities to the Filipino
public, the real and ultimate controversy here would actually
call for the construction of the constitutional provisions
governing the disposition, utilization, exploitation and
development of our natural resources. And certainly this is
neither moot nor academic.
3. We now come to the meat of the controversy the "tie-up"
between SAN JOSE OIL on the one hand, and the respondent
SAN JOSE PETROLEUM and its associates, on the other. The
relationship of these corporations involved or affected in this
case is admitted and established through the papers and
documents which are parts of the records: SAN JOSE OIL, is a
domestic mining corporation, 90% of the outstanding capital
stock of which is owned by respondent SAN JOSE
PETROLEUM, a foreign (Panamanian) corporation, the
majority interest of which is owned by OIL INVESTMENTS,
Inc., another foreign (Panamanian) company. This latter
corporation in turn is wholly (100%) owned by PANTEPEC OIL
COMPANY, C.A., and PANCOASTAL PETROLEUM
COMPANY, C.A., both organized and existing under the laws of
Venezuela. As of September 30, 1956, there were 9,976
stockholders of PANCOASTAL PETROLEUM found in 49
American states and U.S. territories, holding 3,476,988 shares
of stock; whereas, as of November 30, 1956, PANTEPEC OIL
COMPANY was said to have 3,077,916 shares held by 12,373
stockholders scattered in 49 American state. In the two lists of
stockholders, there is no indication of the citizenship of these
stockholders,
7
or of the total number of authorized stocks of
each corporation, for the purpose of determining the
corresponding percentage of these listed stockholders in
relation to the respective capital stock of said corporation.
Petitioner, as well as the amicus curiae and the Solicitor
General
8
contend that the relationship between herein
respondent SAN JOSE PETROLEUM and its subsidiary, SAN
JOSE OIL, violates the Petroleum Law of 1949, the Philippine
Constitution, and Section 13 of the Corporation Law, which
inhibits a mining corporation from acquiring an interest in
another mining corporation. It is respondent's theory, on the
other hand, that far from violating the Constitution; such
relationship between the two corporations is in accordance
with the Laurel-Langley Agreement which implemented the
Ordinance Appended to the Constitution, and that Section 13 of
the Corporation Law is not applicable because respondent is
not licensed to do business, as it is not doing business, in the
Philippines.
Article XIII, Section 1 of the Philippine Constitution provides:
SEC. 1. All agricultural, timber, and mineral lands of
the public domain, waters, minerals, coal, petroleum,
and other mineral oils, all forces of potential energy,
and other natural resources of the Philippines belong
to the State, and their disposition, exploitation,
development, or utilization shall be limited to citizens
of the Philippines, or to corporations or associations
at least sixty per centum of the capital of which is
owned by such citizens, subject to any existing right,
grant, lease or concession at the time of the
inauguration of this Government established under
this Constitution. . . . (Emphasis supplied)
In the 1946 Ordinance Appended to the Constitution, this right
(to utilize and exploit our natural resources) was extended to
citizens of the United States, thus:
Notwithstanding the provisions of section one, Article
Thirteen, and section eight, Article Fourteen, of the
foregoing Constitution, during the effectivity of the
Executive Agreement entered into by the President of
the Philippines with the President of the United States
on the fourth of July, nineteen hundred and forty-six,
pursuant to the provisions of Commonwealth Act
Numbered Seven hundred and thirty-three, but in no
case to extend beyond the third of July, nineteen
hundred and seventy-four, the disposition,
exploitation, development, and utilization of all
agricultural, timber, and mineral lands of the public
domain, waters, minerals, coal, petroleum, and other
mineral oils, all forces of potential energy, and other
natural resources of the Philippines, and the
operation of public utilities shall, if open to any
person, be open to citizens of the United States, and
to all forms of business enterprises owned or
controlled, directly or indirectly, by citizens of the
United States in the same manner as to, and under
the same conditions imposed upon, citizens of the
Philippines or corporations or associations owned or
controlled by citizens of the Philippines (Emphasis
supplied.)
In the 1954 Revised Trade Agreement concluded between the
United States and the Philippines, also known as the Laurel-
Langley Agreement, embodied in Republic Act 1355, the
following provisions appear:
ARTICLE VI
1. The disposition, exploitation, development and
utilization of all agricultural, timber, and mineral
lands of the public domain, waters, minerals, coal,
petroleum and other mineral oils, all forces and
sources of potential energy, and other natural
resources of either Party, and the operation of public
utilities, shall, if open to any person, be open to
citizens of the other Party and to all forms of business
enterprise owned or controlled, directly or indirectly,
by citizens of such other Party in the same manner as
to and under the same conditions imposed upon
citizens or corporations or associations owned or
controlled by citizens of the Party granting the right.
2. The rights provided for in Paragraph 1 may be
exercised, . . . in the case of citizens of the United
States, with respect to natural resources in the public
domain in the Philippines, only through the medium
of a corporation organized under the laws of the
Philippines and at least 60% of the capital stock of
which is owned or controlled by citizens of the United
States. . . .
3. The United States of America reserves the rights of
the several States of the United States to limit the
extent to which citizens or corporations or
associations owned or controlled by citizens of the
Philippines may engage in the activities specified in
this Article. The Republic of the Philippines reserves
the power to deny any of the rights specified in this
Article to citizens of the United States who are
citizens of States, or to corporations or associations
at least 60% of whose capital stock or capital is
owned or controlled by citizens of States, which deny
like rights to citizens of the Philippines, or to
corporations or associations which are owned or
controlled by citizens of the Philippines. . .
. (Emphasis supplied.)
Re-stated, the privilege to utilize, exploit, and develop the
natural resources of this country was granted, by Article XIII of
the Constitution, to Filipino citizens or to corporations or
associations 60% of the capital of which is owned by such
citizens. With the Parity Amendment to the Constitution, the
same right was extended to citizens of the United States and
business enterprises owned or controlled directly or
indirectly, by citizens of the United States.
There could be no serious doubt as to the meaning of the word
"citizens" used in the aforementioned provisions of the
Constitution. The right was granted to 2 types of persons:
natural persons (Filipino or American citizens) and juridical
persons (corporations 60% of which capital is owned by
Filipinos and business enterprises owned or controlled directly
or indirectly, by citizens of the United States). In American law,
"citizen" has been defined as "one who, under the constitution
and laws of the United States, has a right to vote for
representatives in congress and other public officers, and who
is qualified to fill offices in the gift of the people. (1 Bouvier's
Law Dictionary, p. 490.) A citizen is
One of the sovereign people. A constituent member of
the sovereignty, synonymous with the people." (Scott
v. Sandford, 19 Ho. [U.S.] 404, 15 L. Ed. 691.)
A member of the civil state entitled to all its privileges.
(Cooley, Const. Lim. 77. See U.S. v. Cruikshank 92
U.S. 542, 23 L. Ed. 588; Minor v. Happersett 21 Wall.
[U.S.] 162, 22 L. Ed. 627.)
These concepts clarified, is herein respondent SAN JOSE
PETROLEUM an American business enterprise entitled to
parity rights in the Philippines? The answer must be in the
negative, for the following reasons:
Firstly It is not owned or controlled directly by citizens of
the United States, because it is owned and controlled by a
corporation, the OIL INVESTMENTS, another foreign
(Panamanian) corporation.
Secondly Neither can it be said that it is indirectly owned
and controlled by American citizens through the OIL
INVESTMENTS, for this latter corporation is in turn owned
and controlled, not by citizens of the United States, but still by
two foreign (Venezuelan) corporations, the PANTEPEC OIL
COMPANY and PANCOASTAL PETROLEUM.
Thirdly Although it is claimed that these two last
corporations are owned and controlled respectively by 12,373
and 9,979 stockholders residing in the different American
states, there is no showing in the certification furnished by
respondent that the stockholders of PANCOASTAL or those of
them holding the controlling stock, are citizens of the United
States.
Fourthly Granting that these individual stockholders are
American citizens, it is yet necessary to establish that the
different states of which they are citizens, allow Filipino
citizens or corporations or associations owned or controlled by
Filipino citizens, to engage in the exploitation, etc. of the
natural resources of these states (see paragraph 3, Article VI of
the Laurel-Langley Agreement, supra). Respondent has
presented no proof to this effect.
Fifthly But even if the requirements mentioned in the two
immediately preceding paragraphs are satisfied, nevertheless
to hold that the set-up disclosed in this case, with a long chain
of intervening foreign corporations, comes within the purview
of the Parity Amendment regarding business enterprises
indirectly owned or controlled by citizens of the United States,
is to unduly stretch and strain the language and intent of the
law. For, to what extent must the word "indirectly" be carried?
Must we trace the ownership or control of these various
corporationsad infinitum for the purpose of determining
whether the American ownership-control-requirement is
satisfied? Add to this the admitted fact that the shares of stock
of the PANTEPEC and PANCOASTAL which are allegedly
owned or controlled directly by citizens of the United States,
are traded in the stock exchange in New York, and you have a
situation where it becomes a practical impossibility to
determine at any given time, the citizenship of the controlling
stock required by the law. In the circumstances, we have to
hold that the respondent SAN JOSE PETROLEUM, as
presently constituted, is not a business enterprise that is
authorized to exercise the parity privileges under the Parity
Ordinance, the Laurel-Langley Agreement and the Petroleum
Law. Its tie-up with SAN JOSE OIL is, consequently, illegal.
What, then, would be the Status of SAN JOSE OIL, about 90%
of whose stock is owned by SAN JOSE PETROLEUM? This is a
query which we need not resolve in this case as SAN JOSE OIL
is not a party and it is not necessary to do so to dispose of the
present controversy. But it is a matter that probably the
Solicitor General would want to look into.
There is another issue which has been discussed extensively by
the parties. This is whether or not an American mining
corporation may lawfully "be in anywise interested in any other
corporation (domestic or foreign) organized for the purpose of
engaging in agriculture or in mining," in the Philippines or
whether an American citizen owning stock in more than one
corporation organized for the purpose of engaging in
agriculture or in mining, may own more than 15% of the capital
stock then outstanding and entitled to vote, of each of such
corporations, in view of the express prohibition contained in
Section 13 of the Philippine Corporation Law. The petitioner in
this case contends that the provisions of the Corporation Law
must be applied to American citizens and business enterprise
otherwise entitled to exercise the parity privileges, because
both the Laurel-Langley Agreement (Art. VI, par. 1) and the
Petroleum Act of 1948 (Art. 31), specifically provide that the
enjoyment by them of the same rights and obligations granted
under the provisions of both laws shall be "in the same manner
as to, and under the same conditions imposed upon, citizens of
the Philippines or corporations or associations owned or
controlled by citizens of the Philippines." The petitioner further
contends that, as the enjoyment of the privilege of exploiting
mineral resources in the Philippines by Filipino citizens or
corporations owned or controlled by citizens of the Philippines
(which corporation must necessarily be organized under the
Corporation Law), is made subject to the limitations provided
in Section 13 of the Corporation Law, so necessarily the
exercise of the parity rights by citizens of the United States or
business enterprise owned or controlled, directly or indirectly,
by citizens of the United States, must equally be subject to the
same limitations contained in the aforesaid Section 13 of the
Corporation Law.
In view of the conclusions we have already arrived at, we deem
it not indispensable for us to pass upon this legal question,
especially taking into account the statement of the respondent
(SAN JOSE PETROLEUM) that it is essentially a holding
company, and as found by the Securities and Exchange
Commissioner, its principal activity is limited to the financing
and giving technical assistance to SAN JOSE OIL.
4. Respondent SAN JOSE PETROLEUM, whose shares of stock
were allowed registration for sale in the Philippines, was
incorporated under the laws of Panama in April, 1956 with an
authorized capital stock of $500,000.00, American currency,
divided into 50,000,000 shares at par value of $0.01 per share.
By virtue of a 3-party Agreement of June 14, 1956, respondent
was supposed to have received from OIL INVESTMENTS
8,000,000 shares of the capital stock of SAN JOSE OIL (at par
value of $0.01 per share), plus a note for $250,000.00 due in 6
months, for which respondent issued in favor of OIL
INVESTMENTS 16,000,000 shares of its capital stock, at
$0.01 per share or with a value of $160,000.00, plus a note for
$230,297.97 maturing in 2 years at 6% per annum
interest,
9
and the assumption of payment of the unpaid price of
7,500,000 (of the 8,000,000 shares of SAN JOSE OIL).
On June 27, 1956, the capitalization of SAN JOSE
PETROLEUM was increased from $500,000.00 to
$17,500,000.00 by increasing the par value of the same
50,000,000 shares, from $0.01 to $0.35. Without any
additional consideration, the 16,000,000 shares of $0.01
previously issued to OIL INVESTMENTS with a total value of
$160,000.00 were changed with 16,000,000 shares of the
recapitalized stock at $0.35 per share, or valued at
$5,600,000.00. And, to make it appear that cash was received
for these re-issued 16,000,000 shares, the board of directors of
respondent corporation placed a valuation of $5,900,000.00
on the 8,000,000 shares of SAN JOSE OIL (still having par
value of $0.10 per share) which were received from OIL
INVESTMENTS as part-consideration for the 16,000,000
shares at $0.01 per share.
In the Balance Sheet of respondent, dated July 12, 1956, from
the $5,900,000.00, supposedly the value of the 8,000,000
shares of SAN JOSE OIL, the sum of $5,100,000.00 was
deducted, corresponding to the alleged difference between the
"value" of the said shares and the subscription price thereof
which is $800,000.00 (at $0.10 per share). From this
$800,000.00, the subscription price of the SAN JOSE OIL
shares, the amount of $319,702.03 was deducted, as allegedly
unpaid subscription price, thereby giving a difference of
$480,297.97, which was placed as the amount allegedly paid in
on the subscription price of the 8,000,000 SAN JOSE OIL
shares. Then, by adding thereto the note receivable from OIL
INVESTMENTS, for $250,000.00 (part-consideration for the
16,000,000 SAN JOSE PETROLEUM shares), and the sum of
$6,516.21, as deferred expenses, SAN JOSE PETROLEUM
appeared to have assets in the sum of $736,814.18.
These figures are highly questionable. Take the item
$5,900,000.00 the valuation placed on the 8,000,000 shares
of SAN JOSE OIL. There appears no basis for such valuation
other than belief by the board of directors of respondent that
"should San Jose Oil Company be granted the bulk of the
concessions applied for upon reasonable terms, that it would
have a reasonable value of approximately
$10,000,000."
10
Then, of this amount, the subscription price
of $800,000.00 was deducted and called it "difference between
the (above) valuation and the subscription price for the
8,000,000 shares." Of this $800,000.00 subscription price,
they deducted the sum of $480,297.97 and the difference was
placed as the unpaid portion of the subscription price. In other
words, it was made to appear that they paid in $480,297.97 for
the 8,000,000 shares of SAN JOSE OIL. This amount
($480,297.97) was supposedly that $250,000.00 paid by OIL
INVESMENTS for 7,500,000 shares of SAN JOSE OIL,
embodied in the June 14 Agreement, and a sum of $230,297.97
the amount expended or advanced by OIL INVESTMENTS to
SAN JOSE OIL. And yet, there is still an item among
respondent's liabilities, for $230,297.97 appearing as note
payable to Oil Investments, maturing in two (2) years at six
percent (6%) per annum.
11
As far as it appears from the
records, for the 16,000,000 shares at $0.35 per share issued to
OIL INVESTMENTS, respondent SAN JOSE PETROLEUM
received from OIL INVESTMENTS only the note for
$250,000.00 plus the 8,000,000 shares of SAN JOSE OIL,
with par value of $0.10 per share or a total of $1,050,000.00
the only assets of the corporation. In other words, respondent
actually lost $4,550,000.00, which was received by OIL
INVESTMENTS.
But this is not all. Some of the provisions of the Articles of
Incorporation of respondent SAN JOSE PETROLEUM are
noteworthy; viz:
(1) the directors of the Company need not be
shareholders;
(2) that in the meetings of the board of directors, any
director may be represented and may vote through a
proxy who also need not be a director or stockholder;
and
(3) that no contract or transaction between the
corporation and any other association or partnership
will be affected, except in case of fraud, by the fact
that any of the directors or officers of the corporation
is interested in, or is a director or officer of, such other
association or partnership, and that no such contract
or transaction of the corporation with any other
person or persons, firm, association or partnership
shall be affected by the fact that any director or officer
of the corporation is a party to or has an interest in,
such contract or transaction, or has in anyway
connected with such other person or persons, firm,
association or partnership; and finally, that all and
any of the persons who may become director or officer
of the corporation shall be relieved from all
responsibility for which they may otherwise be liable
by reason of any contract entered into with the
corporation, whether it be for his benefit or for the
benefit of any other person, firm, association or
partnership in which he may be interested.
These provisions are in direct opposition to our corporation
law and corporate practices in this country. These provisions
alone would outlaw any corporation locally organized or doing
business in this jurisdiction. Consider the unique and unusual
provision that no contract or transaction between the company
and any other association or corporation shall be affected
except in case of fraud, by the fact that any of the directors or
officers of the company may be interested in or are directors or
officers of such other association or corporation; and that none
of such contracts or transactions of this company with any
person or persons, firms, associations or corporations shall be
affected by the fact that any director or officer of this company
is a party to or has an interest in such contract or transaction or
has any connection with such person or persons, firms
associations or corporations; and that any and all persons who
may become directors or officers of this company are hereby
relieved of all responsibility which they would otherwise incur
by reason of any contract entered into which this company
either for their own benefit, or for the benefit of any person,
firm, association or corporation in which they may be
interested.
The impact of these provisions upon the traditional judiciary
relationship between the directors and the stockholders of a
corporation is too obvious to escape notice by those who are
called upon to protect the interest of investors. The directors
and officers of the company can do anything, short of actual
fraud, with the affairs of the corporation even to benefit
themselves directly or other persons or entities in which they
are interested, and with immunity because of the advance
condonation or relief from responsibility by reason of such
acts. This and the other provision which authorizes the election
of non-stockholders as directors, completely disassociate the
stockholders from the government and management of the
business in which they have invested.
To cap it all on April 17, 1957, admittedly to assure continuity
of the management and stability of SAN JOSE PETROLEUM,
OIL INVESTMENTS, as holder of the only subscribed stock of
the former corporation and acting "on behalf of all
future holders of voting trust certificates," entered into a voting
trust agreement
12
with James L. Buckley and Austin E. Taylor,
whereby said Trustees were given authority to vote the shares
represented by the outstanding trust certificates (including
those that may henceforth be issued) in the following manner:
(a) At all elections of directors, the Trustees will
designate a suitable proxy or proxies to vote for the
election of directors designated by the Trustees in
their own discretion, having in mind the best
interests of the holders of the voting trust certificates,
it being understood that any and all of the Trustees
shall be eligible for election as directors;
(b) On any proposition for removal of a director, the
Trustees shall designate a suitable proxy or proxies to
vote for or against such proposition as the Trustees in
their own discretion may determine, having in mind
the best interest of the holders of the voting trust
certificates;
(c) With respect to all other matters arising at any
meeting of stockholders, the Trustees will instruct
such proxy or proxies attending such meetings to vote
the shares of stock held by the Trustees in accordance
with the written instructions of each holder of voting
trust certificates. (Emphasis supplied.)
It was also therein provided that the said Agreement shall be
binding upon the parties thereto, their successors, and upon all
holders of voting trust certificates.
And these are the voting trust certificates that are offered to
investors as authorized by Security and Exchange
Commissioner. It can not be doubted that the sale of
respondent's securities would, to say the least, work or tend to
work fraud to Philippine investors.
FOR ALL THE FOREGOING CONSIDERATIONS, the motion
of respondent to dismiss this appeal, is denied and the orders
of the Securities and Exchange Commissioner, allowing the
registration of Respondent's securities and licensing their sale
in the Philippines are hereby set aside. The case is remanded to
the Securities and Exchange Commission for appropriate
action in consonance with this decision. With costs. Let a copy
of this decision be furnished the Solicitor General for whatever
action he may deem advisable to take in the premises. So
ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal,
Bengzon, J.P., Zaldivar and Sanchez, JJ., concur.
Castro, J., took no part.
PRIME WHITE CEMENT CORPORATION V. IAC
De Jesus & Associates for petitioner.
Padlan, Sutton, Mendoza & Associates for private respondent.

CAMPOS, JR., J.:
Before Us is a Petition for Review on Certiorari filed by
petitioner Prime White Cement Corporation seeking the
reversal of the decision * of the then Intermediate Appellate
Court, the dispositive portion of which reads as follows:
WHEREFORE, in view of the foregoing, the
judgment appealed from is hereby
affirmed in toto.
1

The facts, as found by the trial court and as adopted by the
respondent Court are hereby quoted, to wit:
On or about the 16th day of July, 1969,
plaintiff and defendant corporation thru its
President, Mr. Zosimo Falcon and Justo C.
Trazo, as Chairman of the Board, entered
into a dealership agreement (Exhibit A)
whereby said plaintiff was obligated to act as
the exclusive dealer and/or distributor of the
said defendant corporation of its cement
products in the entire Mindanao area for a
term of five (5) years and proving (sic)
among others that:
a. The corporation shall,
commencing September,
1970, sell to and supply the
plaintiff, as dealer with
20,000 bags (94 lbs/bag)
of white cement per
month;
b. The plaintiff shall pay
the defendant corporation
P9.70, Philippine
Currency, per bag of white
cement, FOB Davao and
Cagayan de Oro ports;
c. The plaintiff shall, every
time the defendant
corporation is ready to
deliver the good, open with
any bank or banking
institution a confirmed,
unconditional, and
irrevocable letter of credit
in favor of the corporation
and that upon certification
by the boat captain on the
bill of lading that the
goods have been loaded on
board the vessel bound for
Davao the said bank or
banking institution shall
release the corresponding
amount as payment of the
goods so shipped.
Right after the plaintiff entered into the
aforesaid dealership agreement, he placed an
advertisement in a national, circulating
newspaper the fact of his being the exclusive
dealer of the defendant corporation's white
cement products in Mindanao area, more
particularly, in the Manila Chronicle dated
August 16, 1969 (Exhibits R and R-1) and
was even congratulated by his business
associates, so much so, he was asked by some
of his businessmen friends and close
associates if they can be his
sub-dealer in the Mindanao area.
Relying heavily on the dealership agreement,
plaintiff sometime in the months of
September, October, and December, 1969,
entered into a written agreement with
several hardware stores dealing in buying
and selling white cement in the Cities of
Davao and Cagayan de Oro which would thus
enable him to sell his allocation of 20,000
bags regular supply of the said commodity,
by September, 1970 (Exhibits O, O-1, O-2, P,
P-1, P-2, Q, Q-1 and Q-2). After the plaintiff
was assured by his supposed buyer that his
allocation of 20,000 bags of white cement
can be disposed of, he informed the
defendant corporation in his letter dated
August 18, 1970 that he is making the
necessary preparation for the opening of the
requisite letter of credit to cover the price of
the due initial delivery for the month of
September, 1970 (Exhibit B), looking
forward to the defendant corporation's duty
to comply with the dealership agreement. In
reply to the aforesaid letter of the plaintiff,
the defendant corporation thru its corporate
secretary, replied that the board of directors
of the said defendant decided to impose the
following conditions:
a. Delivery of white cement
shall commence at the end
of November, 1970;
b. Only 8,000 bags of
white cement per month
for only a period of three
(3) months will be
delivered;
c. The price of white
cement was priced at
P13.30 per bag;
d. The price of white
cement is subject to
readjustment unilaterally
on the part of the
defendant;
e. The place of delivery of
white cement shall be
Austurias (sic);
f. The letter of credit may
be opened only with the
Prudential Bank, Makati
Branch;
g. Payment of white
cement shall be made in
advance and which
payment shall be used by
the defendant as guaranty
in the opening of a foreign
letter of credit to cover
costs and expenses in the
procurement of materials
in the manufacture of
white cement. (Exhibit C).
xxx xxx xxx
Several demands to comply with the
dealership agreement (Exhibits D, E, G, I, R,
L, and N) were made by the plaintiff to the
defendant, however, defendant refused to
comply with the same, and plaintiff by force
of circumstances was constrained to cancel
his agreement for the supply of white cement
with third parties, which were concluded in
anticipation of, and pursuant to the said
dealership agreement.
Notwithstanding that the dealership
agreement between the plaintiff and
defendant was in force and subsisting, the
defendant corporation, in violation of, and
with evident intention not to be bound by the
terms and conditions thereof, entered into an
exclusive dealership agreement with a
certain Napoleon Co for the marketing of
white cement in Mindanao (Exhibit T) hence,
this suit. (Plaintiff's Record on Appeal, pp.
86-90).
2

After trial, the trial court adjudged the corporation liable to
Alejandro Te in the amount of P3,302,400.00 as actual
damages, P100,000.00 as moral damages, and P10,000.00 as
and for attorney's fees and costs. The appellate court affirmed
the said decision mainly on the following basis, and We quote:
There is no dispute that when Zosimo R.
Falcon and Justo B. Trazo signed the
dealership agreement Exhibit "A", they were
the President and Chairman of the Board,
respectively, of defendant-appellant
corporation. Neither is the genuineness of
the said agreement contested. As a matter of
fact, it appears on the face of the contract
itself that both officers were duly authorized
to enter into the said agreement and signed
the same for and in behalf of the corporation.
When they, therefore, entered into the said
transaction they created the impression that
they were duly clothed with the authority to
do so. It cannot now be said that the
disputed agreement which possesses all the
essential requisites of a valid contract was
never intended to bind the corporation as
this avoidance is barred by the principle of
estoppel.
3

In this petition for review, petitioner Prime White Cement
Corporation made the following assignment of errors.
4

I
THE DECISION AND RESOLUTION OF
THE INTERMEDIATE APPELLATE COURT
ARE UNPRECEDENTED DEPARTURES
FROM THE CODIFIED PRINCIPLE THAT
CORPORATE OFFICERS COULD ENTER
INTO CONTRACTS IN BEHALF OF THE
CORPORATION ONLY WITH PRIOR
APPROVAL OF THE BOARD OF
DIRECTORS.
II
THE DECISION AND RESOLUTION OF
THE INTERMEDIATE APPELLATE COURT
ARE CONTRARY TO THE ESTABLISHED
JURISPRUDENCE, PRINCIPLE AND RULE
ON FIDUCIARY DUTY OF DIRECTORS
AND OFFICERS OF THE CORPORATION.
III
THE DECISION AND RESOLUTION OF
THE INTERMEDIATE APPELLATE COURT
DISREGARDED THE PRINCIPLE AND
JURISPRUDENCE, PRINCIPLE AND RULE
ON UNENFORCEABLE CONTRACTS AS
PROVIDED IN ARTICLE 1317 OF THE NEW
CIVIL CODE.
IV
THE DECISION AND RESOLUTION OF
THE INTERMEDIATE APPELLATE COURT
DISREGARDED THE PRINCIPLE AND
JURISPRUDENCE AS TO WHEN AWARD
OF ACTUAL AND MORAL DAMAGES IS
PROPER.
V
IN NOT AWARDING PETITIONER'S
CAUSE OF ACTION AS STATED IN ITS
ANSWER WITH SPECIAL AND
AFFIRMATIVE DEFENSES WITH
COUNTERCLAIM THE INTERMEDIATE
APPELLATE COURT HAS CLEARLY
DEPARTED FROM THE ACCEPTED
USUAL, COURSE OF JUDICIAL
PROCEEDINGS.
There is only one legal issue to be resolved by this Court:
whether or not the "dealership agreement" referred by the
President and Chairman of the Board of petitioner corporation
is a valid and enforceable contract. We do not agree with the
conclusion of the respondent Court that it is.
Under the Corporation Law, which was then in force at the
time this case arose,
5
as well as under the present Corporation
Code, all corporate powers shall be exercised by the Board of
Directors, except as otherwise provided by law.
6
Although it
cannot completely abdicate its power and responsibility to act
for the juridical entity, the Board may expressly delegate
specific powers to its President or any of its officers. In the
absence of such express delegation, a contract entered into by
its President, on behalf of the corporation, may still bind the
corporation if the board should ratify the same expressly or
impliedly. Implied ratification may take various forms like
silence or acquiescence; by acts showing approval or adoption
of the contract; or by acceptance and retention of benefits
flowing therefrom.
7
Furthermore, even in the absence of
express or implied authority by ratification, the President as
such may, as a general rule, bind the corporation by a contract
in the ordinary course of business, provided the same is
reasonable under the circumstances.
8
These rules are basic,
but are all general and thus quite flexible. They apply where
the President or other officer, purportedly acting for the
corporation, is dealing with a third person, i. e., a
person outside the corporation.
The situation is quite different where a director or officer is
dealing with his own corporation. In the instant case
respondent Te was not an ordinary stockholder; he was a
member of the Board of Directors and Auditor of the
corporation as well. He was what is often referred to as a "self-
dealing" director.
A director of a corporation holds a position of trust and as
such, he owes a duty of loyalty to his corporation.
9
In case his
interests conflict with those of the corporation, he cannot
sacrifice the latter to his own advantage and benefit. As
corporate managers, directors are committed to seek the
maximum amount of profits for the corporation. This trust
relationship "is not a matter of statutory or technical law. It
springs from the fact that directors have the control and
guidance of corporate affairs and property and hence of the
property interests of the stockholders."
10
In the case
of Gokongwei v. Securities and Exchange Commission, this
Court quoted with favor from Pepper v. Litton,
11
thus:
. . . He cannot by the intervention of a
corporate entity violate the ancient precept
against serving two masters. . . . He cannot
utilize his inside information and his
strategic position for his own preferment. He
cannot violate rules of fair play by doing
indirectly through the corporation what he
could not do directly. He cannot use his
power for his personal advantage and to the
detriment of the stockholders and creditors
no matter how absolute in terms that power
may be and no matter how meticulous he is
to satisfy technical requirements. For that
power is at all times subject to the equitable
limitation that it may not be exercised for the
aggrandizement, preference, or advantage of
the fiduciary to the exclusion or detriment of
the cestuis. . . . .
On the other hand, a director's contract with his corporation is
not in all instances void or voidable. If the contract is fair and
reasonable under the circumstances, it may be ratified by the
stockholders provided a full disclosure of his adverse interest is
made. Section 32 of the Corporation Code provides, thus:
Sec. 32. Dealings of directors, trustees or
officers with the corporation. A contract of
the corporation with one or more of its
directors or trustees or officers is voidable, at
the option of such corporation, unless all the
following conditions are present:
1. That the presence of such director or
trustee in the board meeting in which the
contract was approved was not necessary to
constitute a quorum for such meeting;
2. That the vote of such director or trustee
was not necessary for the approval of the
contract;
3. That the contract is fair and reasonable
under the circumstances; and
4. That in the case of an officer, the contract
with the officer has been previously
authorized by the Board of Directors.
Where any of the first two conditions set
forth in the preceding paragraph is absent, in
the case of a contract with a director or
trustee, such contract may be ratified by the
vote of the stockholders representing at least
two-thirds (2/3) of the outstanding capital
stock or of two-thirds (2/3) of the members
in a meeting called for the purpose:
Provided, That full disclosure of the adverse
interest of the directors or trustees involved
is made at such meeting: Provided, however,
That the contract is fair and reasonable
under the circumstances.
Although the old Corporation Law which governs the instant
case did not contain a similar provision, yet the cited provision
substantially incorporates well-settled principles in corporate
law.
12

Granting arguendo that the "dealership agreement" involved
here would be valid and enforceable if entered into with a
person other than a director or officer of the corporation, the
fact that the other party to the contract was a Director and
Auditor of the petitioner corporation changes the whole
situation. First of all, We believe that the contract was neither
fair nor reasonable. The "dealership agreement" entered into in
July, 1969, was to sell and supply to respondent Te 20,000
bags of white cement per month, for five years starting
September, 1970, at thefixed price of P9.70 per bag.
Respondent Te is a businessman himself and must have
known, or at least must be presumed to know, that at that time,
prices of commodities in general, and white cement in
particular, were not stable and were expected to rise. At the
time of the contract, petitioner corporation had not even
commenced the manufacture of white cement, the reason why
delivery was not to begin until 14 months later. He must have
known that within that period of six years, there would be a
considerable rise in the price of white cement. In fact,
respondent Te's own Memorandum shows that in September,
1970, the price per bag was P14.50, and by the middle of 1975,
it was already P37.50 per bag. Despite this, no provision was
made in the "dealership agreement" to allow for an increase in
price mutually acceptable to the parties. Instead, the price was
pegged at P9.70 per bag for the whole five years of the contract.
Fairness on his part as a director of the corporation from whom
he was to buy the cement, would require such a provision. In
fact, this unfairness in the contract is also a basis which
renders a contract entered into by the President, without
authority from the Board of Directors, void or voidable,
although it may have been in the ordinary course of business.
We believe that the fixed price of P9.70 per bag for a period of
five years was not fair and reasonable. Respondent Te, himself,
when he subsequently entered into contracts to resell the
cement to his "new dealers" Henry Wee
13
and Gaudencio
Galang
14
stipulated as follows:
The price of white cement shall be mutually
determined by us but in no case shall the
same be less than P14.00 per bag (94 lbs).
The contract with Henry Wee was on September 15, 1969, and
that with Gaudencio Galang, on October 13, 1967. A similar
contract with Prudencio Lim was made on December 29,
1969.
15
All of these contracts were entered into soon after his
"dealership agreement" with petitioner corporation, and in
each one of them he protected himself from any increase in the
market price of white cement. Yet, except for the contract with
Henry Wee, the contracts were for only two years from
October, 1970. Why did he not protect the corporation in the
same manner when he entered into the "dealership
agreement"? For that matter, why did the President and the
Chairman of the Board not do so either? As director, specially
since he was the other party in interest, respondent Te's
bounden duty was to act in such manner as not to unduly
prejudice the corporation. In the light of the circumstances of
this case, it is to Us quite clear that he was guilty of disloyalty
to the corporation; he was attempting in effect, to enrich
himself at the expense of the corporation. There is no showing
that the stockholders ratified the "dealership agreement" or
that they were fully aware of its provisions. The contract was
therefore not valid and this Court cannot allow him to reap the
fruits of his disloyalty.
As a result of this action which has been proven to be without
legal basis, petitioner corporation's reputation and goodwill
have been prejudiced. However, there can be no award for
moral damages under Article 2217 and succeeding articles on
Section 1 of Chapter 3 of Title XVIII of the Civil Code in favor
of a corporation.
In view of the foregoing, the Decision and Resolution of the
Intermediate Appellate Court dated March 30, 1984 and
August 6, 1984, respectively, are hereby SET ASIDE. Private
respondent Alejandro Te is hereby ordered to pay petitioner
corporation the sum of P20,000.00 for attorney's fees, plus the
cost of suit and expenses of litigation.
SO ORDERED.
Narvasa, C.J., Padilla, Regalado and Nocon, JJ., concur.



STRATEGIC ALLIANCE VS. RADSTOCK


D E C I S I O N


CARPIO, J.:


Prologue


This case is an anatomy of a P6.185 billion
[1]
pillage of the
public coffers that ranks among one of the most brazen and
hideous in the history of this country. This case answers the
questions why our Government perennially runs out of funds
to provide basic services to our people, why the great masses of
the Filipino people wallow in poverty, and why a very select few
amass unimaginable wealth at the expense of the Filipino
people.

On 1 May 2007, the 30-year old franchise of Philippine
National Construction Corporation (PNCC) under Presidential
Decree No. 1113 (PD 1113), as amended by Presidential
Decree No. 1894 (PD 1894), expired. During the 13
th
Congress,
PNCC sought to extend its franchise. PNCC won approval from
the House of Representatives, which passed House Bill No.
5749
[2]
renewing PNCCs franchise for another 25
years. However, PNCC failed to secure approval from the
Senate, dooming the extension of PNCCs franchise. Led by
Senator Franklin M. Drilon, the Senate opposed PNCCs plea
for extension of its franchise.
[3]
Senator Drilons privilege
speech
[4]
explains why the Senate chose not to renew PNCCs
franchise:

I repeat, Mr. President. PNCC has
agreed in a compromise agreement dated 17
August 2006 to transfer to Radstock
Securities Limited P17,676,063,922, no small
money, Mr. President, my dear
colleagues, P17.6 billion.

What does it consist of? It consists of the following: 19
pieces of real estate properties with an appraised value
of P5,993,689,000. Do we know what is the bulk of this? An
almost 13-hectare property right here in the Financial
Center. As we leave the Senate, as we go out of this Hall, as we
drive thru past the GSIS, we will see on the right a vacant lot,
that is PNCC property. As we turn right on Diosdado
Macapagal, we see on our right new buildings, these are all
PNCC properties. That is 12.9 hectares of valuable asset right
in this Financial Center that is worth P5,993,689.000.

What else, Mr. President? The 20% of the outstanding
capital stock of PNCC with a par value of P2,300,000,000-- I
repeat, 20% of the outstanding capital stock of PNCC
worth P2,300 billion-- was assigned to Radstock.

In addition, Mr. President and my dear
colleagues, please hold on to your seats because part
of the agreement is 50% of PNCCs 6% share in the
gross toll revenue of the Manila North Tollways
Corporation for 27 years, from 2008 to 2035, is being
assigned to Radstock. How much is this worth? It is
worth P9,382,374,922. I repeat, P9,382,374,922.

x x x x

Mr. President, P17,676,000,000, however, was made to
appear in the agreement to be only
worth P6,196,156,488. How was this achieved? How was an
aggregate amount of P17,676,000,000 made to appear to be
only P6,196,156,488? First, the 19 pieces of real estate
worth P5,993,689,000 were only assigned a value
of P4,195,000,000 or only 70% of their appraised value.



Second, the PNCC shares of stock with a par value
of P2.3 billion were marked to market and therefore were
valued only at P713 million.

Third, the share of the toll revenue assigned was given a
net present value of only P1,287,000,000 because of a 15%
discounted rate that was applied.

In other words, Mr. President, the toll collection
of P9,382,374,922 for 27 years was given a net present value of
only P1,287,000,000 so that it is made to appear that the
compromise agreement is only worth P6,196,000,000.

Mr. President, my dear colleagues, this agreement will
substantially wipe out all the assets of PNCC. It will be left
with nothing else except, probably, the collection for the next
25 years or so from the North Luzon Expressway. This
agreement brought PNCC to the cleaners and literally cleaned
the PNCC of all its assets. They brought PNCC to the cleaners
and cleaned it to the tune of P17,676,000,000.

x x x x

Mr. President, are we not entitled, as members of the
Committee, to know who is Radstock Securities Limited?

Radstock Securities Limited was allegedly incorporated
under the laws of the British Virgin Islands. It has no known
board of directors, except for its recently appointed attorney-
in-fact, Mr. Carlos Dominguez.

Mr. President, are the members of the Committee not
entitled to know why 20 years after the account to Marubeni
Corporation, which gave rise to the compromise agreement 20
years after the obligation was allegedly incurred, PNCC
suddenly recognized this obligation in its books when in fact
this obligation was not found in its books for 20 years?

In other words, Mr. President, for 20 years, the financial
statements of PNCC did not show any obligation to Marubeni,
much less, to Radstock. Why suddenly on October 20,
2000, P10 billion in obligation was recognized? Why was it
recognized?

During the hearing on December
18, Mr. President, we asked this
question to the Asset Privatization
Trust (APT) trustee, Atty. Raymundo
Francisco, and he was asked: What is
the basis of your recommendation to
recognize this? He said: I based my
recommendation on a legal opinion of
Feria and Feria. I asked him: Who
knew of this opinion? He said: Only
me and the chairman of PNCC, Atty.
Renato Valdecantos. I asked him:
Did you share this opinion with the
members of the board who recognized
the obligation of P10 billion? He
said: No. Can you produce this
opinion now? He said: I have no
copy.



Mysteriously, Mr. President, an
obligation of P10 billion based on a
legal opinion which, even Mr. Arthur
Aguilar, the chairman of PNCC, is not
aware of, none of the members of the
PNCC board on October 20, 2000 who
recognized this obligation had seen
this opinion. It is mysterious.

Mr. President, are the members of our Committee not
entitled to know why Radstock Securities Limited is given
preference over all other creditors notwithstanding the fact
that this is an unsecured obligation? There is no mortgage to
secure this obligation.

More importantly, Mr. President, equally recognized is
the obligation of PNCC to the Philippine government to the
tune of P36 billion. PNCC owes the Philippine
government P36 billion recognized in its books, apart from P3
billion in taxes. Why in the face of all of these is Radstock
given preference? Why is it that Radstock is given preference
to claim P17.676 billion of the assets of PNCC and give it
superior status over the claim of the Philippine government, of
the Filipino people to the extent of P36 billion and taxes in the
amount of P3 billion? Why, Mr. President? Why is Radstock
given preference not only over the Philippine government
claims of P39 billion but also over other creditors including a
certain best merchant banker in Asia, which has already a final
and executory judgment against PNCC for about P300
million? Why, Mr. President? Are we not entitled to know why
the compromise agreement assigned P17.676 billion to
Radstock? Why was it executed?
[5]
(Emphasis supplied)


Aside from Senator Drilon, Senator Sergio S. Osmea III
also saw irregularities in the transactions involving the
Marubeni loans, thus:

SEN. OSMEA. Ah okay. Good.

Now, I'd like to point out to the Committee that it
seems that this was a politically driven deal like
IMPSA. Because the acceptance of the 10 billion or 13 billion
debt came in October 2000 and the Radstock assignment was
January 10, 2001. Now, why would Marubeni sell for $2
million three months after there was a recognition
that it was owed P10 billion. Can you explain that, Mr.
Dominguez?

MR. DOMINGUEZ. Your Honor, I am not aware
of the decision making process of Marubeni. But my
understanding was, the Japanese culture is not a
litigious one and they didn't want to get into a, you
know, a court situation here in the Philippines having
a lot of other interest, et cetera.



SEN. OSMEA. Well, but that is
beside the point, Mr. Dominguez. All I
am asking is does it stand to reason
that after you get an acceptance by a
debtor that he owes you 10 billion, you
sell your note for 100 million.

Now, if that had happened a year before, maybe I would
have understood why he sold for such a low amount. But right
after, it seems that this was part of an orchestrated deal
wherein with certain powerful interest would be able to say,
Yes, we will push through. We'll fix the courts. We'll fix the
board. We'll fix the APT. And we will be able to do it, just give
us 55 percent of whatever is recovered, am I correct?

MR. DOMINGUEZ. As I said, Your Honor, I am not
familiar with the decision making process of Marubeni. But my
understanding was, as I said, they didn't want to get into a

SEN. OSMEA. All right.

MR. DOMINGUEZ. ...litigious situation.
[6]


x x x x

SEN. OSMEA. All of these financial things can be
arranged. They can hire a local bank, Filipino, to be trustee for
the real estate. So ...

SEN. DRILON. Well, then, thats a dummy relationship.

SEN. OSMEA. In any case, to me the
main point here is that a third party,
Radstock, whoever owns it, bought
Marubenis right for $2 million or P100
million. Then, they are able to go through all
these legal machinations and get awarded
with the consent of PNCC of 6 billion. Thats
a 100 million to 6 billion. Now, Mr. Aguilar,
you have been in the business for such a long
time. I mean, this hedge funds whether its
Radstock or New Bridge or Texas Pacific
Group or Carlyle or Avenue Capital, they
look at their returns. So if Avenue Capital
buys something for $2 million and you give
him $4 million in one year, its a 100 percent
return. Theyll walk away and dance to their
stockholders. So here in this particular case,
if you know that Radstock only bought it for
$2 million, I would have gotten board
approval and say, Okay, lets settle this for
$4 million. And Radstock would have
jumped up and down. So what looks to me is
that this was already a scheme. Marubeni
wrote it off already. Marubeni wrote
everything off. They just got a $2 million
and they probably have no more residual
rights or maybe theres a clause there, a
secret clause, that says, I want 20 percent of
whatever youre able to eventually
collect. So $2 million. But whatever it is,
Marubeni practically wrote it off. Radstocks
liability now or exposure is only $2 million
plus all the lawyer fees, under-the-table,
etcetera. All right. Okay. So its pretty
obvious to me that if anybody were using his
brain, I would have gone up to Radstock and
say, Heres $4 million. Heres P200
million. Okay. They would have walked
away. But evidently, the ninongs of
Radstock See, I dont care who owns
Radstock. I want to know who is the ninong
here who stands to make a lot of money by
being able to get to courts, the government
agencies, OGCC, or whoever else has been
involved in this, to agree to 6 billion or
whatever it was. Thats a lot of money. And
believe me, Radstock will probably get one or
two billion and four billion will go into
somebody elses pocket. Or Radstock will
turn around, sell that claim for P4 billion and
let the new guy just collect the payments over
the years.

x x x x
[7]


SEN. OSMEA. x x x I just wanted to know is CDCP
Mining a 100 percent subsidiary of PNCC?

MR. AGUILAR. Hindi ho. Ah, no.

SEN. OSMEA. If theyre not a 100 percent, why would
they sign jointly and severally? I just want to plug the
loopholes.

MR. AGUILAR. I think it was if I may just
speculate. It was just common ownership at that time.

SEN. OSMEA. Al right. Now Also, the ...

MR. AGUILAR. Ah, 13 percent daw, Your Honor.

SEN. OSMEA. Huh?

MR. AGUILAR. Thirteen percent ho.

SEN. OSMEA. Whats 13 percent?

MR. AGUILAR. We owned ...

x x x x

SEN. OSMEA. x x x CDCP Mining, how many
percent of the equity of CDCP Mining was owned by
PNCC, formerly CDCP?

MS. PASETES. Thirteen percent.

SEN. OSMEA. Thirteen. And
as a 13 percent owner, they agreed to
sign jointly and severally?

MS. PASETES. Yes.

SEN. OSMEA. One-three? So
poor PNCC and CDCP got taken to the
cleaners here. They sign for a 100
percent and they only own 13 percent.

x x x x
[8]
(Emphasis supplied)
I.
The Case

Before this Court are the consolidated petitions for
review
[9]
filed by Strategic Alliance Development Corporation
(STRADEC) and Luis Sison (Sison), with a motion for
intervention filed by Asiavest Merchant Bankers Berhad
(Asiavest), challenging the validity of the Compromise
Agreement between PNCC and Radstock. The Court of Appeals
approved the Compromise Agreement in its Decision of 25
January 2007
[10]
in CA-G.R. CV No. 87971.

II.
The Antecedents


PNCC was incorporated in 1966 for a term of fifty years
under the Corporation Code with the name Construction
Development Corporation of the Philippines (CDCP).
[11]
PD
1113, issued on 31 March 1977, granted CDCP a 30-year
franchise to construct, operate and maintain toll facilities in
the North and South Luzon Tollways. PD 1894, issued on 22
December 1983, amended PD 1113 to include in CDCPs
franchise the Metro Manila Expressway, which would serve as
an additional artery in the transportation of trade and
commerce in the Metro Manila area.

Sometime between 1978 and 1981, Basay Mining
Corporation (Basay Mining), an affiliate of CDCP, obtained
loans from Marubeni Corporation of Japan (Marubeni)
amounting to 5,460,000,000 yen and US$5 million. A CDCP
official issued letters of guarantee for the loans, committing
CDCP to pay solidarily for the full amount of the
5,460,000,000 yen loan and to the extent of P20 million for
the US$5 million loan. However, there was no CDCP Board
Resolution authorizing the issuance of the letters of
guarantee. Later, Basay Mining changed its name to CDCP
Mining Corporation (CDCP Mining). CDCP Mining secured
the Marubeni loans when CDCP and CDCP Mining were still
privately owned and managed.

Subsequently in 1983, CDCP changed its corporate name
to PNCC to reflect the extent of the Government's equity
investment in the company, which arose when government
financial institutions converted their loans to PNCC into equity
following PNCCs inability to pay the loans.
[12]
Various
government financial institutions held a total of seventy-seven
point forty-eight percent (77.48%) of PNCCs voting equity,
most of which were later transferred to the Asset Privatization
Trust (APT) under Administrative Orders No. 14 and 64, series
of 1987 and 1988, respectively.
[13]
Also, the Presidential
Commission on Good Government holds some 13.82% of
PNCCs voting equity under a writ of sequestration and
through the voluntary surrender of certain PNCC shares. In
fine, the Government owns 90.3% of the equity of PNCC and
only 9.70% of PNCCs voting equity is under private
ownership.
[14]


Meanwhile, the Marubeni loans to CDCP Mining
remained unpaid. On 20 October 2000, during the short-lived
Estrada Administration, the PNCC Board of
Directors
[15]
(PNCC Board) passed Board Resolution No. BD-
092-2000 admitting PNCCs liability to Marubeni
for P10,743,103,388 as of 30 September 1999. PNCC Board
Resolution No. BD-092-2000 reads as follows:


RESOLUTION NO. BD-092-2000

RESOLVED, That the Board recognizes, acknowledges and
confirms PNCCs obligations as of September 30, 1999 with the
following entities, exclusive of the interests and other charges
that may subsequently accrue and still become due therein, to
wit:

a). the Government of the Republic of the Philippines
in the amount of P36,023,784,751.00; and

b). Marubeni Corporation in the amount
of P10,743,103,388.00. (Emphasis supplied)


This was the first PNCC Board Resolution admitting PNCCs
liability for the Marubeni loans. Previously, for two decades the
PNCC Board consistently refused to admit any liability for the
Marubeni loans.

Less than two months later, or on 22 November 2000, the
PNCC Board passed Board Resolution No. BD-099-2000
amending Board Resolution No. BD-092-2000. PNCC Board
Resolution No. BD-099-2000 reads as follows:

RESOLUTION NO. BD-099-2000

RESOLVED, That the Board hereby amends its Resolution No.
BD-092-2000 dated October 20, 2000 so as to read as follows:

RESOLVED, That the Board recognizes, acknowledges and
confirms its obligations as of September 30, 1999 with the
following entities, exclusive of the interests and other charges
that may subsequently accrue and still due thereon, subject to
the final determination by the Commission on Audit (COA) of
the amount of obligation involved, and subject further to the
declaration of the legality of said obligations by the Office of
the Government Corporate Counsel (OGCC), to wit:

a). the Government of the Republic of the Philippines
in the amount of P36,023,784,751.00; and

b). Marubeni Corporation in the amount
of P10,743,103,388.00. (Emphasis supplied)


In January 2001, barely three months after the PNCC
Board first admitted liability for the Marubeni loans, Marubeni
assigned its entire credit to Radstock for US$2 million or less
than P100 million. In short, Radstock paid Marubeni less than
10% of the P10.743 billion admitted amount. Radstock
immediately sent a notice and demand letter to PNCC.

On 15 January 2001, Radstock filed an action for
collection and damages against PNCC before the Regional Trial
Court of Mandaluyong City, Branch 213 (trial court). In its
order of 23 January 2001, the trial court issued a writ of
preliminary attachment against PNCC. The trial court ordered
PNCCs bank accounts garnished and several of its real
properties attached. On 14 February 2001, PNCC moved to set
aside the 23 January 2001 Order and to discharge the writ of
attachment. PNCC also filed a motion to dismiss the case. The
trial court denied both motions. PNCC filed motions for
reconsideration, which the trial court also denied. PNCC filed a
petition for certiorari before the Court of Appeals, docketed as
CA-G.R. SP No. 66654, assailing the denial of the motion to
dismiss. On 30 August 2002, the Court of Appeals denied
PNCCs petition. PNCC filed a motion for reconsideration,
which the Court of Appeals also denied in its 22 January 2003
Resolution. PNCC filed a petition for review before this Court,
docketed as G.R. No. 156887.

Meanwhile, on 19 June 2001, at the start of the Arroyo
Administration, the PNCC Board, under a new President and
Chairman, revoked Board Resolution No. BD-099-2000.

The trial court continued to hear the main case. On 10
December 2002, the trial court ruled in favor of Radstock, as
follows:



WHEREFORE, premises
considered, judgment is hereby rendered in
favor of the plaintiff and the defendant is
directed to pay the total amount of Thirteen
Billion One Hundred Fifty One Million Nine
Hundred Fifty Six thousand Five Hundred
Twenty Eight Pesos (P13,151,956,528.00)
with interest from October 15, 2001 plus Ten
Million Pesos (P10,000,000.00) as attorneys
fees.

SO ORDERED.
[16]



PNCC appealed the trial courts decision to the Court of
Appeals, docketed as CA-G.R. CV No. 87971.

On 19 March 2003, this Court issued a temporary
restraining order in G.R. No. 156887 forbidding the trial court
from implementing the writ of preliminary attachment and
ordering the suspension of the proceedings before the trial
court and the Court of Appeals. In its 3 October 2005
Decision, this Court ruled as follows:

WHEREFORE, the petition is partly
GRANTED and insofar as the Motion to Set
Aside the Order and/or Discharge the Writ of
Attachment is concerned, the Decision of the
Court of Appeals on August 30, 2002 and its
Resolution of January 22, 2003 in CA-G.R.
SP No. 66654 are REVERSED and SET
ASIDE. The attachments over the properties
by the writ of preliminary attachment are
hereby ordered LIFTED effective upon the
finality of this Decision. The Decision and
Resolution of the Court of Appeals are
AFFIRMED in all other respects. The
Temporary Restraining Order is DISSOLVED
immediately and the Court of Appeals is
directed to PROCEED forthwith with the
appeal filed by PNCC.

No costs.

SO ORDERED.
[17]



On 17 August 2006, PNCC and Radstock entered into the
Compromise Agreement where they agreed to reduce PNCCs
liability to Radstock, supposedly from P17,040,843,968,
to P6,185,000,000. PNCC and Radstock submitted the
Compromise Agreement to this Court for approval. In a
Resolution dated 4 December 2006 in G.R. No. 156887, this
Court referred the Compromise Agreement to the Commission
on Audit (COA) for comment. The COA recommended
approval of the Compromise Agreement. In a Resolution dated
22 November 2006, this Court noted the Compromise
Agreement and referred it to the Court of Appeals in CA-G.R.
CV No. 87971. In its 25 January 2007 Decision, the Court of
Appeals approved the Compromise Agreement.

STRADEC moved for reconsideration of the 25 January
2007 Decision. STRADEC alleged that it has a claim against
PNCC as a bidder of the National Governments shares,
receivables, securities and interests in PNCC. The matter is
subject of a complaint filed by STRADEC against PNCC and the
Privatization and Management Office (PMO) for the issuance
of a Notice of Award of Sale to Dong-A Consortium of which
STRADEC is a partner. The case, docketed as Civil Case No.
05-882, is pending before the Regional Trial Court of Makati,
Branch 146 (RTC Branch 146).

The Court of Appeals treated STRADECs motion for
reconsideration as a motion for intervention and denied it in its
31 May 2007 Resolution. STRADEC filed a petition for review
before this Court, docketed as G.R. No. 178158.

Rodolfo Cuenca (Cuenca), a stockholder and former PNCC
President and Board Chairman, filed an intervention before the
Court of Appeals. Cuenca alleged that PNCC had no obligation
to pay Radstock. The Court of Appeals also denied Cuencas
motion for intervention in its Resolution of 31 May
2007. Cuenca did not appeal the denial of his motion.

On 2 July 2007, this Court issued an order directing PNCC
and Radstock, their officers, agents, representatives, and other
persons under their control, to maintain the status quo ante.

Meanwhile, on 20 February 2007, Sison, also a
stockholder and former PNCC President and Board Chairman,
filed a Petition for Annulment of Judgment Approving
Compromise Agreement before the Court of Appeals. The case
was docketed as CA-G.R. SP No. 97982.

Asiavest, a judgment creditor of PNCC, filed an Urgent
Motion for Leave to Intervene and to File the Attached
Opposition and Motion-in-Intervention before the Court of
Appeals in CA-G.R. SP No. 97982.

In a Resolution dated 12 June 2007, the Court of Appeals
dismissed Sisons petition on the ground that it had no
jurisdiction to annul a final and executory judgment also
rendered by the Court of Appeals. In the same resolution, the
Court of Appeals also denied Asiavests urgent motion.

Asiavest filed its Urgent Motion for Leave to Intervene
and to File the Attached Opposition and Motion-in-
Intervention in G.R. No. 178158.
[18]


Sison filed a motion for reconsideration. In its 5
November 2007 Resolution, the Court of Appeals denied
Sisons motion.

On 26 November 2007, Sison filed a petition for review
before this Court, docketed as G.R. No. 180428.

In a Resolution dated 18 February 2008, this Court
consolidated G.R. Nos. 178158 and 180428.
On 13 January 2009, the Court held oral arguments on the
following issues:

1. Does the Compromise Agreement violate
public policy?

2. Does the subject matter involve an
assumption by the government of a
private entitys obligation in violation
of the law and/or the Constitution? Is
the PNCC Board Resolution of 20 October
2000 defective or illegal?

3. Is the Compromise Agreement
viable in the light of the non-
renewal of PNCCs franchise by
Congress and its inclusion of all or
substantially all of PNCCs assets?
4. Is the Decision of the Court of Appeals
annullable even if final and
executory on grounds of fraud and
violation of public policy and the
Constitution?


III.
Propriety of Actions

The Court of Appeals denied STRADECs motion for
intervention on the ground that the motion was filed only after
the Court of Appeals and the trial court had promulgated their
respective decisions.

Section 2, Rule 19 of the 1997 Rules of Civil Procedure
provides:

SECTION 2. Time to intervene. The
motion to intervene may be filed at any time
before rendition of judgment by the trial
court. A copy of the pleading-in-intervention
shall be attached to the motion and served
on the original parties.


The rule is not absolute. The rule on intervention, like all
other rules of procedure, is intended to make the powers of the
Court completely available for justice.
[19]
It is aimed to
facilitate a comprehensive adjudication of rival claims,
overriding technicalities on the timeliness of the filing of the
claims.
[20]
This Court has ruled:

[A]llowance or disallowance of a
motion for intervention rests on the sound
discretion of the court after consideration of
the appropriate circumstances. Rule 19 of
the Rules of Court is a rule of procedure
whose object is to make the powers of the
court fully and completely available for
justice. Its purpose is not to hinder or delay
but to facilitate and promote the
administration of justice. Thus,
interventions have been allowed even beyond
the prescribed period in the Rule in the
higher interest of justice. Interventions have
been granted to afford indispensable parties,
who have not been impleaded, the right to be
heard even after a decision has been
rendered by the trial court, when the petition
for review of the judgment was already
submitted for decision before the Supreme
Court, and even where the assailed order has
already become final and executory. In Lim
v. Pacquing (310 Phil. 722 (1995)], the
motion for intervention filed by the Republic
of the Philippines was allowed by this Court
to avoid grave injustice and injury and to
settle once and for all the substantive issues
raised by the parties.
[21]



In Collado v. Court of Appeals,
[22]
this Court reiterated
that exceptions to Section 2, Rule 12 could be made in the
interest of substantial justice. Citing Mago v. Court of
Appeals,
[23]
the Court stated:

It is quite clear and patent that the
motions for intervention filed by the
movants at this stage of the proceedings
where trial had already been concluded x x x
and on appeal x x x the same affirmed by the
Court of Appeals and the instant petition
forcertiorari to review said judgments is
already submitted for decision by the
Supreme Court, are obviously and,
manifestly late, beyond the period
prescribed under x x x Section 2, Rule 12 of
the Rules of Court.

But Rule 12 of the Rules of Court, like all other Rules
therein promulgated, is simply a rule of procedure, the whole
purpose and object of which is to make the powers of the Court
fully and completely available for justice. The purpose of
procedure is not to thwart justice. Its proper aim is to facilitate
the application of justice to the rival claims of contending
parties. It was created not to hinder and delay but to facilitate
and promote the administration of justice. It does not
constitute the thing itself which courts are always striving to
secure to litigants. It is designed as the means best adopted to
obtain that thing. In other words, it is a means to an end.
Concededly, STRADEC has no legal interest in the subject
matter of the Compromise Agreement. Section 1, Rule 19 of the
1997 Rules of Civil Procedure states:

SECTION 1. Who may intervene. - A
person who has a legal interest in the matter
in litigation, or in the success of either of the
parties, or an interest against both, or is so
situated as to be adversely affected by a
distribution or other disposition of property
in the custody of the court or of an officer
thereof may, with leave of court, be allowed
to intervene in the action. The Court shall
consider whether or not the intervention will
unduly delay or prejudice the adjudication of
the rights of the original parties, and whether
or not the intervenors rights may be fully
protected in a separate proceeding.


STRADECs interest is dependent on the outcome of Civil Case
No. 05-882. Unless STRADEC can show that RTC Branch 146
had already decided in its favor, its legal interest is simply
contingent and expectant.

However, Asiavest has a direct and material interest in the
approval or disapproval of the Compromise
Agreement. Asiavest is a judgment creditor of PNCC in
G.R. No. 110263 and a court has already issued a writ
of execution in its favor. Asiavests interest is actual
and material, direct and immediate characterized by
either gain or loss from the judgment that this Court
may render.
[24]
Considering that the Compromise
Agreement involves the disposition of all or substantially all of
the assets of PNCC, Asiavest, as PNCCs judgment creditor, will
be greatly prejudiced if the Compromise Agreement is
eventually upheld.

Sison has legal standing to challenge the Compromise
Agreement. Although there was no allegation that Sison filed
the case as a derivative suit in the name of PNCC, it could be
fairly deduced that Sison was assailing the Compromise
Agreement as a stockholder of PNCC. In such a situation, a
stockholder of PNCC can sue on behalf of PNCC to annul the
Compromise Agreement.

A derivative action is a suit by a stockholder to enforce a
corporate cause of action.
[25]
Under the Corporation Code,
where a corporation is an injured party, its power to sue is
lodged with its board of directors or trustees.
[26]
However, an
individual stockholder may file a derivative suit on behalf of
the corporation to protect or vindicate corporate rights
whenever the officials of the corporation refuse to sue, or are
the ones to be sued, or hold control of the corporation.
[27]
In
such actions, the corporation is the real party-in-interest while
the suing stockholder, on behalf of the corporation, is only a
nominal party.
[28]


In this case, the PNCC Board cannot conceivably be
expected to attack the validity of the Compromise Agreement
since the PNCC Board itself approved the Compromise
Agreement. In fact, the PNCC Board steadfastly defends the
Compromise Agreement for allegedly being advantageous to
PNCC.

Besides, the circumstances in this case are
peculiar. Sison, as former PNCC President and Chairman of
the PNCC Board, was responsible for the approval of the Board
Resolution issued on 19 June 2001 revoking the previous
Board Resolution admitting PNCCs liability for the Marubeni
loans.
[29]
Such revocation, however, came after Radstock had
filed an action for collection and damages against PNCC on 15
January 2001. Then, when the trial court rendered its decision
on 10 December 2002 in favor of Radstock, Sison was no
longer the PNCC President and Chairman, although he remains
a stockholder of PNCC.
When the case was on appeal before the Court of Appeals,
there was no need for Sison to avail of any remedy, until PNCC
and Radstock entered into the Compromise Agreement, which
disposed of all or substantially all of PNCCs assets. Sison came
to know of the Compromise Agreement only in December
2006. PNCC and Radstock submitted the Compromise
Agreement to the Court of Appeals for approval on 10 January
2007. The Court of Appeals approved the Compromise
Agreement on 25 January 2007. To require Sison at this stage
to exhaust all the remedies within the corporation will render
such remedies useless as the Compromise Agreement had
already been approved by the Court of Appeals. PNCCs assets
are in danger of being dissipated in favor of a private foreign
corporation. Thus, Sison had no recourse but to avail of an
extraordinary remedy to protect PNCCs assets.

Besides, in the interest of substantial justice and for
compelling reasons, such as the nature and importance of the
issues raised in this case,
[30]
this Court must take cognizance of
Sisons action. This Court should exercise its prerogative to set
aside technicalities in the Rules, because after all, the power of
this Court to suspend its own rules whenever the interest of
justice requires is well recognized.
[31]
In Solicitor General v.
The Metropolitan Manila Authority,
[32]
this Court held:

Unquestionably, the Court has the power to
suspend procedural rules in the exercise of
its inherent power, as expressly recognized
in the Constitution, to promulgate rules
concerning pleading, practice and procedure
in all courts. In proper cases, procedural
rules may be relaxed or
suspended in the interest of substantial justi
ce, which otherwise may be miscarried
because of a rigid and formalistic adherence
to such rules. x x x





We have made similar rulings in other cases, thus:

Be it remembered that rules of procedure are but mere tools
designed to facilitate the attainment of justice. Their strict and
rigid application, which would result in technicalities that tend
to frustrate rather than promote substantial justice, must
always be avoided. x x x Time and again, this Court has
suspended its own rules and excepted a particular case from
their operation whenever the higher interests of justice so
require.


IV.
The PNCC Board Acted in Bad Faith and with Gross
Negligence
in Directing the Affairs of PNCC


In this jurisdiction, the members of the board of directors
have a three-fold duty: duty of obedience, duty of diligence,
and duty of loyalty.
[33]
Accordingly, the members of the board
of directors (1) shall direct the affairs of the corporation only in
accordance with the purposes for which it was
organized;
[34]
(2) shall not willfully and knowingly vote
for or assent to patently unlawful acts of the
corporation or act in bad faith or with gross
negligence in directing the affairs of the
corporation;
[35]
and (3) shall not acquire any personal or
pecuniary interest in conflict with their duty as such directors
or trustees.
[36]


In the present case, the PNCC Board blatantly violated its
duty of diligence as it miserably failed to act in good faith in
handling the affairs of PNCC.

First. For almost two decades, the PNCC Board had
consistently refused to admit liability for the Marubeni loans
because of the absence of a PNCC Board resolution authorizing
the issuance of the letters of guarantee.

There is no dispute that between 1978 and 1980,
Marubeni Corporation extended two loans to Basay Mining
(later renamed CDCP Mining): (1) US$5 million to finance the
purchase of copper concentrates by Basay Mining; and
(2) Y5.46 billion to finance the completion of the expansion
project of Basay Mining including working capital.

There is also no dispute that it was only on 20 October
2000 when the PNCC Board approved a resolution expressly
admitting PNCCs liability for the Marubeni loans. This was the
first Board Resolution admitting liability for the Marubeni
loans, for PNCC never admitted liability for these debts in the
past. Even Radstock admitted that PNCCs 1994 Financial
Statements did not reflect the Marubeni loans.
[37]
Also, former
PNCC Chairman Arthur Aguilar stated during the Senate
hearings that the Marubeni claim was never in the balance
sheet x x x nor was it in a contingent account.
[38]
Miriam M.
Pasetes, SVP Finance of PNCC, and Atty. Herman R.
Cimafranca of the Office of the Government Corporate
Counsel, confirmed this fact, thus:


SEN. DRILON. x x x And so,
PNCC itself did not recognize this as
an obligation but the board suddenly
recognized it as an obligation. It was
on that basis that the case was filed, is
that correct? In fact, the case hinges
on they knew that this claim has
prescribed but because of that board
resolution which recognized the
obligation they filed their complaint, is
that correct?

MR. CIMAFRANCA. Apparently, it's like that,
Senator, because the filing of the case came after the
acknowledgement.


SEN. DRILON. Yes. In fact, the filing of the case
came three months after the acknowledgement.

MR. CIMAFRANCA. Yes. And that made it
difficult to handle on our part.

SEN. DRILON. That is
correct. So, that it was an obligation
which was not recognized in the
financial statements of PNCC but
revived in the financial statements
because it has prescribed but revived
by the board effectively. That's the
theory, at least, of the plaintiff. Is that
correct? Who can answer that?

Ms. Pasetes, yes.

MS. PASETES. It is not an
obligation of PNCC that is why it is not
reflected in the financial
statements.
[39]
(Emphasis supplied)



In short, after two decades of consistently refuting its
liability for the Marubeni loans, the PNCC Board suddenly and
inexplicably reversed itself by admitting in October 2000
liability for the Marubeni loans. Just three months after the
PNCC Board recognized the Marubeni loans, Radstock
acquired Marubeni's receivable and filed the present collection
case.

Second. The PNCC Board admitted liability for the
Marubeni loans despite PNCCs total liabilities far exceeding its
assets. There is no dispute that the Marubeni loans, once
recognized, would wipe out the assets of PNCC, virtually
emptying the coffers of the PNCC.
[40]
While PNCC insists that
it remains financially viable, the figures in the COA Audit
Reports tell otherwise.
[41]
For 2006 and 2005, the
Corporation has incurred negative gross margin
of P84.531 Million and P80.180 Million, respectively,
and net losses that had accumulated in a deficit
of P14.823 Billion as of 31 December 2006.
[42]
The COA
even opined that unless [PNCC] Management addresses
the issue on net losses in its financial rehabilitation
plan, x x x the Corporation may not be able to
continue its operations as a going concern.

Notably, during the oral arguments before this Court, the
Government Corporate Counsel admitted the
PNCCs huge negative net worth, thus:

JUSTICE CARPIO
x x x what is the net worth now of
PNCC? Negative what? Negative 6 Billion at least[?]

ATTY. AGRA
Yes, your Honor.
[43]
(Emphasis
supplied)


Clearly, the PNCC Boards admission of liability for the
Marubeni loans, given PNCCs huge negative net worth of at
least P6 billion as admitted by PNCCs counsel, or P14.823
billion based on the 2006 COA Audit Report, would leave
PNCC an empty shell, without any assets to pay its biggest
creditor, the National Government with an admitted receivable
of P36 billion from PNCC.

Third. In a debilitating self-inflicted injury, the PNCC
Board revived what appeared to have been a dead claim by
abandoning one of PNCCs strong defenses, which is the
prescription of the action to collect the Marubeni loans.

Settled is the rule that actions prescribe by the mere lapse
of time fixed by law.
[44]
Under Article 1144 of the Civil Code, an
action upon a written contract, such as a loan contract, must be
brought within ten years from the time the right of action
accrues. The prescription of such an action is interrupted when
the action is filed before the court, when there is a written
extrajudicial demand by the creditor, or when there is any
written acknowledgment of the debt by the debtor.
[45]


In this case, Basay Mining obtained the Marubeni loans
sometime between 1978 and 1981. While Radstock claims that
numerous demand letters were sent to PNCC, based on the
records, the extrajudicial demands to pay the loans appear to
have been made only in 1984 and 1986. Meanwhile, the written
acknowledgment of the debt, in the form of Board Resolution
No. BD-092-2000, was issued only on 20 October 2000.

Thus, more than ten years would have already lapsed
between Marubenis extrajudicial demands in 1984 and 1986
and the acknowledgment by the PNCC Board of the Marubeni
loans in 2000. However, the PNCC Board suddenly passed
Board Resolution No. BD-092-2000 expressly admitting
liability for the Marubeni loans. In short, the PNCC Board
admitted liability for the Marubeni loans despite the fact that
the same might no longer be judicially collectible. Although
the legal advantage was obviously on its side, the PNCC Board
threw in the towel even before the fight could begin. During
the Senate hearings, the matter of prescription was discussed,
thus:

SEN. DRILON. ... the prescription
period is 10 years and there were no
payments the last demands were made,
when? The last demands for payment?

MS. OGAN. It was made January 2001 prior to the filing
of the case.
SEN. DRILON. Yes, all right. Before that, when was the
last demand made? By the time they filed the complaint more
than 10 years already lapsed.

MS. OGAN. On record, Mr. Chairman, we have
demands starting from - - a series of demands which started
from May 23, 1984, letter from Marubeni to PNCC, demand
payment. And we also have the letter of September 3, 1986,
letter of Marubeni to then PNCC Chair Mr. Jaime. We have the
June 24, 1986 letter from Marubeni to the PNCC
Chairman. Also the March 4, 1988 letter...

SEN. DRILON. The March 4, 1988 letter is not a
demand letter.

MS. OGAN. It is exactly addressed to the Asset
Privatization Trust.

SEN. DRILON. It is not a demand letter? Okay.

MS. OGAN. And we have also...

SEN. DRILON. Anyway...

THE CHAIRMAN. Please answer when you are asked,
Ms. Ogan. We want to put it on the record whether it is yes
or no.

MS. OGAN. Yes, sir.

SEN. DRILON. So, even assuming that all of those were
demand letters, the 10 years prescription set in and it should
have prescribed in 1998, whatever is the date, or before the
case was filed in 2001.

MR. CIMAFRANCA. The 10-year period for if the
contract is written, it's 10 years and it should have prescribed
in 10 years and we did raise that in our answer, in our motion
to dismiss.

SEN. DRILON. I know. You raised this in your
motion to dismiss and you raised this in your
answer. Now, we are not saying that you were
negligent in not raising that. What we are just putting
on the record that indeed there is basis to argue that
these claims have prescribed.

Now, the reason why there was a colorable basis
on the complaint filed in 2001 was that somehow the
board of PNCC recognized the obligation in a special
board meeting on October 20, 2000. Hindi ba ganoon
'yon?

MS. OGAN. Yes, that is correct.




SEN. DRILON. Why did the PNCC recognize this
obligation in 2000 when it was very clear that at that point
more than 10 years have lapsed since the last demand letter?

MR. AGUILAR. May I volunteer an answer?

SEN. DRILON. Please.

MR. AGUILAR. I looked into that, Mr.
Chairman, Your Honor. It was as a result of and I go
to the folder letter N. In our own demand research
it was not period, Your Honor, that Punongbayan in
the big folder, sir, letter N it was the period where
PMO was selling PNCC and Punongbayan and Araullo
Law Office came out with an investment brochure that
indicated liabilities both to national government and
to Marubeni/Radstock. So, PMO said, For good
order, can you PNCC board confirm that by board
resolution? That's the tone of the letter.

SEN. DRILON. Confirm what? Confirm the liabilities
that are contained in the Punongbayan investment prospectus
both to the national government and to PNCC. That is the
reason at least from the record, Your Honor, how the PNCC
board got to deliberate on the Marubeni.

THE CHAIRMAN. What paragraph? Second to the last
paragraph?

MR. AGUILAR. Yes. Yes, Mr. Chairman. Ito po 'yong
thats to our recollection, in the records, that was the reason.

SEN. DRILON. Is that the only reason why ...

MR. AGUILAR. From just the records, Mr. Chairman,
and then interviews with people who are still around.

SEN. DRILON. You mean, you acknowledged a
prescribed obligation because of this paragraph?

MR. AGUILAR. I dont know
what legal advice we were following at
that time, Mr. Chairman.
[46]
(Emphasis
supplied)


Besides prescription, the Office of the Government
Corporate Counsel (OGCC) originally believed that PNCC had
another formidable legal weapon against Radstock, that is, the
lack of authority of Alfredo Asuncion, then Executive Vice-
President of PNCC, to sign the letter of guarantee on behalf of
CDCP. During the Senate hearings, the following exchange
reveals the OGCCs original opinion:
THE CHAIRMAN. What was the
opinion of the Office of the Government
Corporate Counsel?

MS. OGAN. The opinion of the Office of the
Government Corporate Counsel is that PNCC should exhaust
all means to resist the case using all defenses available to a
guarantee and a surety that there is a valid ground for PNCC's
refusal to honor or make good the alleged guarantee
obligation. It appearing that from the documents
submitted to the OGCC that there is no board
authority in favor or authorizing Mr. Asuncion, then
EVP, to sign or execute the letter of guarantee in
behalf of CDCP and that said letter of guarantee is not
legally binding upon or enforceable against CDCP as
principals, your Honors.
[47]


x x x x

SEN. DRILON. Now that we have read this, what was
the opinion of the Government Corporate Counsel, Mr.
Cimafranca?

MR. CIMAFRANCA. Yes, Senator, we did issue
an opinion upon the request of PNCC and our opinion
was that there was no valid obligation, no valid
guarantee. And we incorporated that in our pleadings
in court.
[48]
(Emphasis supplied)



Clearly, PNCC had strong defenses against the collection
suit filed by Radstock, as originally opined by the OGCC. It is
quite puzzling, therefore, that the PNCC Board, which had
solid grounds to refute the legitimacy of the Marubeni loans,
admitted its liability and entered into a Compromise
Agreement that is manifestly and grossly prejudicial to PNCC.

Fourth. The basis for the admission of liability for the
Marubeni loans, which was an opinion of the Feria Law Office,
was not even shown to the PNCC Board.

Atty. Raymundo Francisco, the APT trustee overseeing the
proposed privatization of PNCC at the time, was responsible
for recommending to the PNCC Board the admission of PNCCs
liability for the Marubeni loans. Atty. Francisco based his
recommendation solely on a mere alleged opinion of
the Feria Law Office. Atty. Francisco did not bother to
show this Feria opinion to the members of the PNCC
Board, except to Atty. Renato Valdecantos, who as the
then PNCC Chairman did not also show the Feria
opinion to the other PNCC Board members. During
the Senate hearings, Atty. Francisco could not produce a copy
of the Feria opinion. The Senators grilled Atty. Francisco on
his recommendation to recognize PNCCs liability for the
Marubeni loans, thus:

THE CHAIRMAN. x x x You were the
one who wrote this letter or rather this
memorandum dated 17 October 2000 to
Atty. Valdecantos. Can you tell us the
background why you wrote the letter
acknowledging a debt which is non-existent?

MR. FRANCISCO. I was appointed as the trustee in
charge of the privatization of the PNCC at that time, sir. And I
was tasked to do a study and engage the services of financial
advisors as well as legal advisors to do a legal audit and
financial study on the position of PNCC. I bidded out these
engagements, the financial advisership went to Punongbayan
and Araullo. The legal audit went to the Feria Law Offices.

THE CHAIRMAN. Spell it. Boy Feria?

MR. FRANCISCO. Feria-- Feria.

THE CHAIRMAN. Lugto?

MR. FRANCISCO. Yes. Yes, Your Honor. And this was
the findings of the Feria Law Office that the Marubeni
account was a legal obligation.

So, I presented this to our board. Based on the findings
of the legal audit conducted by the Ferial Law Offices, sir.

THE CHAIRMAN. Why did you not ask the
government corporate counsel? Why did you have to
ask for the opinion of an outside counsel?

MR. FRANCISCO. That was the that was the
mandate given to us, sir, that we have to engage the ...

THE CHAIRMAN. Mandate given by whom?

MR. FRANCISCO. That is what we usually do,
sir, in the APT.

THE CHAIRMAN. Ah, you get
outside counsel?

MR. FRANCISCO. Yes, we...

THE CHAIRMAN. Not necessarily the government
corporate counsel?

MR. FRANCISCO. No, sir.

THE CHAIRMAN. So, on the basis of the opinion of
outside counsel, private, you proceeded to, in effect, recognize
an obligation which is not even entered in the books of the
PNCC? You probably resuscitated a non-existing obligation
anymore?

MR. FRANCISCO. Sir, I just based my recommendation
on the professional findings of the law office that we engaged,
sir.

THE CHAIRMAN. Did you not ask for the
opinion of the government corporate counsel?

MR. FRANCISCO. No, sir.

THE CHAIRMAN. Why?

MR. FRANCISCO. I felt that the engagements of the law
office was sufficient, anyway we were going to raise it to the
Committee on Privatization for their approval or disapproval,
sir.

THE CHAIRMAN. The COP?

MR. FRANCISCO. Yes, sir.

THE CHAIRMAN. Thats a cabinet level?

MR. FRANCISCO. Yes, sir. And we did that, sir.

THE CHAIRMAN. Now... So you sent your memo to
Atty. Renato B. Valdecantos, who unfortunately is not here but
I think we have to get his response to this. And as part of the
minutes of special meeting with the board of directors on
October 20, 2000, the board resolved in its Board Resolution
No. 092-2000, the board resolved to recognize, acknowledge
and confirm PNCCs obligations as of September 30, 1999,
etcetera, etcetera. (A), or rather (B), Marubeni Corporation in
the amount of P10,740,000.

Now, we asked to be here because the franchise of PNCC
is hanging in a balance because of the on the questions on
this acknowledgement. So we want to be educated.

Now, the paper trail starts with your letter. So, thats it
thats my kuwan, Frank.

Yes, Senator Drilon.




SEN. DRILON. Thank you, Mr. Chairman.

Yes, Atty. Francisco, you have a copy of the minutes of
October 20, 2000?

MR. FRANCISCO. Im sorry, sir, we dont have a copy.

SEN. DRILON. May we ask the corporate secretary of
PNCC to provide us with a copy?

Okay naman andiyan siya.

(Ms. Ogan handing the document to Mr. Francisco.)

You have familiarized yourselves with the minutes, Atty.
Francisco?

MR. FRANCISCO. Yes, sir.

SEN. DRILON. Now, mention is made of a
memorandum here on line 8, page 3 of this boards minutes. It
says, Director Francisco has prepared a memorandum
requesting confirmation, acknowledgement, and ratification of
this indebtedness of PNCC to the national government which
was determined by Bureau of Treasury as of September 30,
1999 is 36,023,784,751. And with respect to PNCCs obligation
to Marubeni, this has been determined to be in the total
amount of 10,743,103,388, also as of September 30, 1999; that
there is need to ratify this because there has already been a
representation made with respect to the review of the financial
records of PNCC by Punongbayan and Araullo, which have
been included as part of the package of APTs disposition to the
national governments interest in PNCC.

You recall having made this representation as found in
the minutes, I assume, Atty. Francisco?

MR. FRANCISCO. Yes, sir. But Id like to be refreshed
on the memorandum, sir, because I dont have a copy.

SEN. DRILON. Yes, this memorandum was cited earlier
by Senator Arroyo, and maybe the secretary can give him a
copy? Give him a copy?

MS. OGAN. (Handing the document to Mr. Francisco.)

MR. FRANCISCO. Your Honor, I have here a
memorandum to the PNCC board through Atty. Valdecantos,
which says that in the last paragraph, if I may read? May we
request therefore, that a board resolution be adopted,
acknowledging and confirming the aforementioned PNCC
obligations with the national government and Marubeni as
borne out by the due diligence audit.

SEN. DRILON. This is the memorandum referred to in
these minutes. This memorandum dated 17 October 2000 is
the memorandum referred to in the minutes.

MR. FRANCISCO. I would assume, Mr. Chairman.

SEN. DRILON. Right.

Now, the Punongbayan representative who was here
yesterday, Mr...

THE CHAIRMAN. Navarro.

SEN. DRILON. ... Navarro denied that he made this
recommendation.

THE CHAIRMAN. He asked for opinion, legal opinion.

SEN. DRILON. He said that they never made this
representation and the transcript will bear us out. They said
that they never made this representation that the account of
Marubeni should be recognized.

MR. FRANCISCO. Mr. Chairman, in the memorandum,
I only mentioned here the acknowledgement and confirmation
of the PNCC obligations. I was not asking for a ratification. I
never mentioned ratification in the memorandum. I just based
my memo based on the due diligence audit of the Feria Law
Offices.

SEN. DRILON. Can you say that again? You never
asked for a ratification...

MR. FRANCISCO. No. I never mentioned in my
memorandum that I was asking for a ratification. I was just
in my memo it says, acknowledging and confirming the PNCC
obligation. This was what ...

SEN. DRILON. Isnt it the same as ratification? I mean,
whats the difference?

MR. FRANCISCO. I well, my memorandum was
meant really just to confirm the findings of the legal audit as ...

SEN. DRILON. In your mind as a lawyer, Atty.
Francisco, theres a difference between ratification and
whats your term? -- acknowledgment and confirmation?

MR. FRANCISCO. Well, I guess theres no difference,
Mr. Chairman.

SEN. DRILON. Right.

Anyway, just of record, the Punongbayan representatives
here yesterday said that they never made such representation.

In any case, now youre saying its the Feria Law Office
who rendered that opinion? Can we you know, yesterday we
were asking for a copy of this opinion but we were never
furnished one. The ... no less than the Chairman of this
Committee was asking for a copy.

THE CHAIRMAN. Well, copy of the opinion...

MS. OGAN. Yes, Mr. Chairman, we were never
furnished a copy of this opinion because its opinion
rendered for the Asset Privatization Trust which is its
client, not the PNCC, Mr. Chairman.

THE CHAIRMAN. All right. The question is whether
but you see, this is a memorandum of Atty. Francisco to the
Chairman of the Asset Privatization Trust. You say now that
you were never furnished a copy because thats supposed to be
with the Asset ...

MS. OGAN. Yes, Mr. Chairman.

THE CHAIRMAN. ... but yet the action of or rather the
opinion of the Feria Law Offices was in effect adopted by the
board of directors of PNCC in its minutes of October 20, 2000
where you are the corporate secretary, Ms. Ogan.

MS. OGAN. Yes, Mr. Chairman.

THE CHAIRMAN. So, what I am saying is that this
opinion or rather the opinion of the Feria Law Offices of which
you dont have a copy?
MS. OGAN. Yes, sir.

THE CHAIRMAN. And the reason being that, it does
not concern the PNCC because thats an opinion rendered for
APT and not for the PNCC.

MS. OGAN. Yes, Mr. Chairman, that was what we were
told although we made several requests to the APT, sir.

THE CHAIRMAN. All right. Now, since it was for the
APT and not for the PNCC, I ask the question why did PNCC
adopt it? That was not for the consumption of PNCC. It was
for the consumption of the Asset Privatization Trust. And that
is what Atty. Francisco says and its confirmed by you saying
that this was a memo you dont have a copy because this was
sought for by APT and the Feria Law Offices just provided an
opinion provided the APT with an opinion. So, as corporate
secretary, the board of directors of PNCC adopted it,
recognized the Marubeni Corporation.

You read the minutes of the October 20, 2000 meeting
of the board of directors on Item V. The resolution speaks of ..
so, go ahead.

MS. OGAN. I gave my copies. Yes, sir.

THE CHAIRMAN. In effect the Feria Law
Offices opinion was for the consumption of the APT.

MS. OGAN. That was what we were told, Mr.
Chairman.

THE CHAIRMAN. And you were not even
provided with a copy.

THE CHAIRMAN. Yet you adopted it.

MS. OGAN. Yes, sir.

SEN DRILON. Considering you were the corporate
secretary.

THE CHAIRMAN. She was the corporate secretary.

SEN. DRILON. She was just recording the minutes.

THE CHAIRMAN. Yes, she was recording.

Now, we are asking you now why it was taken up?

MS. OGAN. Yes, sir, Mr. Chairman, this was mentioned
in the memorandum of Atty. Francisco, memorandum to the
board.

SEN. DRILON. Mr. Chairman, Mr. Francisco
represented APT in the board of PNCC. And is that correct,
Mr. Francisco?

THE CHAIRMAN. Youre an ex-officio member.

SEN. DRILON. Yes.

MR. FRANCISCO. Ex-officio member only, sir, as
trustee in charge of the privatization of PNCC.

SEN. DRILON. With the permission of Mr. Chair, may I
ask a question...

THE CHAIRMAN. Oh, yes, Senator Drilon.

SEN. DRILON. Atty. Francisco, you sat in the
PNCC board as APT representative, you are a lawyer,
there was a legal opinion of Feria, Feria, Lugto, Lao
Law Offices which you cited in your
memorandum. Did you discuss first, did you give a
copy of this opinion to PNCC?

MR. FRANCISCO. I gave a copy of this opinion,
sir, to our chairman who was also a member of the
board of PNCC, Mr. Valdecantos, sir.




SEN. DRILON. And because he was...

MR. FRANCISCO. Because he was my
immediate boss in the APT.

SEN. DRILON. Apparently, [it] just ended up in
the personal possession of Mr. Valdecantos because
the corporate secretary, Glenda Ogan, who is
supposed to be the custodian of the records of the
board never saw a copy of this.

MR. FRANCISCO. Well, sir, my the copy that I
gave was to Mr. Valdecantos because he was the one
sitting in the PNCC board, sir.

SEN. DRILON. No, you sit in the board.

MR. FRANCISCO. I was just an ex-officio
member. And all my reports were coursed through
our Chairman, Mr. Valdecantos, sir.

SEN. DRILON. Now, did you ever tell the board
that there is a legal position taken or at least from the
documents it is possible that the claim has
prescribed?

MR. FRANCISCO. I took this up in the board
meeting of the PNCC at that time and I told them
about this matter, sir.

SEN. DRILON. No, you told them that the claim
could have, under the law, could have prescribed?

MR. FRANCISCO. No, sir.

SEN. DRILON. Why? You mean, you didnt tell
the board that it is possible that this liability is no
longer a valid liability because it has prescribed?

MR. FRANCISCO. I did not
dwell into the findings anymore, sir,
because I found the professional
opinion of the Feria Law Office to be
sufficient.
[49]
(Emphasis supplied)



Atty. Franciscos act of recommending to the PNCC Board
the acknowledgment of the Marubeni loans based only on an
opinion of a private law firm, without consulting the OGCC and
without showing this opinion to the members of the PNCC
Board except to Atty. Valdecantos, reflects how shockingly little
his concern was for PNCC, contrary to his claim that he only
had the interest of PNCC at heart. In fact, if what was
involved was his own money, Atty. Francisco would have
preferred not just two, but at least three different opinions on
how to deal with the matter, and he would have maintained his
non-liability.

SEN. OSMEA. x x x

All right. And lastly, just to clear our minds, there has always
been this finger-pointing, of course, whenever this is typical
Filipino. When they're caught in a bind, they always point a
finger, they pretend they don't know. And it just amazes me
that you have been appointed trustees, meaning,
representatives of the Filipino people, that's what you were at
APT, right? You were not Erap's representatives, you were
representative of the Filipino people and you were tasked to
conserve the assets that that had been confiscated from various
cronies of the previous administration. And here, you are
asked to recognize the P10 billion debt and you point only to
one law firm. If you have cancer, don't you to a second
opinion, a second doctor or a third doctor? This is just a
question. I am just asking you for your opinion if you would
take the advice of the first doctor who tells you that he's got to
open you up.

MR. FRANCISCO. I would go to three or more doctors,
sir.

SEN. OSMEA. Three or more. Yeah, that's right. And
in this case the APT did not do so.

MR. FRANCISCO. We relied on the findings of the

SEN. OSMEA. If these were your money,
would you have gone also to obtain a second, third
opinion from other law firms. Kung pera mo itong 10
billion na ito. Siguro you're not gonna give it up that
easily ano, 'di ba?

MR. FRANCISCO. Yes, sir.


SEN. OSMEA. You'll probably keep it in court for the
next 20 years.

x x x x
[50]
(Emphasis supplied)


This is a clear admission by Atty. Francisco of bad faith in
directing the affairs of PNCC - that he would not have
recognized the Marubeni loans if his own funds were involved
or if he were the owner of PNCC.

The PNCC Board admitted liability for the P10.743 billion
Marubeni loans without seeing, reading or discussing the
Feria opinion which was the sole basis for its admission of
liability. Such act surely goes against ordinary human nature,
and amounts to gross negligence and utter bad faith, even
bordering on fraud, on the part of the PNCC Board in directing
the affairs of the corporation. Owing loyalty to PNCC and its
stockholders, the PNCC Board should have exercised utmost
care and diligence in admitting a gargantuan debt of P10.743
billion that would certainly force PNCC into insolvency, a debt
that previous PNCC Boards in the last two decades consistently
refused to admit.

Instead, the PNCC Board admitted PNCCs liability for the
Marubeni loans relying solely on a mere opinion of a private
law office, which opinion the PNCC Board members never saw,
except for Atty. Valdecantos and Atty. Francisco. The PNCC
Board knew that PNCC, as a government owned and controlled
corporation (GOCC), must rely exclusively on the opinion
of the OGCC. Section 1 of Memorandum Circular No. 9 dated
27 August 1998 issued by the President states:

SECTION 1. All legal matters pertaining
to government-owned or controlled
corporations, their subsidiaries, other
corporate off-springs and government
acquired asset corporations (GOCCs) shall
be exclusively referred to and handled
by the Office of the Government
Corporate Counsel (OGCC). (Emphasis
supplied)


The PNCC Board acted in bad faith in relying on the opinion of
a private lawyer knowing that PNCC is required to
rely exclusively on the OGCCs opinion. Worse, the PNCC
Board, in admitting liability for P10.743 billion, relied on the
recommendation of a private lawyer whose opinion the PNCC
Board members have not even seen.


During the oral arguments, Atty. Sison explained to the
Court that the intention of APT was for the PNCC
Board merely to disclose the claim of Marubeni as part of
APT's full disclosure policy to prospective buyers of
PNCC. Atty. Sison stated that it was not the intention
of APT for the PNCC Board to admit liability for the
Marubeni loans, thus:

x x x It was the Asset Privatization Trust
A-P-T that was tasked to sell the
company. The A-P-T, for purposes of
disclosure statements, tasked the Feria Law
Office to handle the documentation and the
study of all legal issues that had to be
resolved or clarified for the information of
prospective bidders and or buyers. In the
performance of its assigned task the
Feria Law Office came upon the
Marubeni claim and mentioned that
the APTC and/or PNCC must disclose
that there is a claim by Marubeni
against PNCC for purposes of
satisfying the requirements of full
disclosure. This seemingly innocent
statement or requirement made by the
Feria Law Office was then taken by two
officials of the Asset Privatization
Trust and with malice aforethought
turned it into the basis for a multi-
billion peso debt by the now
government owned and/or controlled
PNCC. x x x.
[51]
(Emphasis supplied)


While the PNCC Board passed Board Resolution No. BD-
099-2000 amending Board Resolution No. BD-092-2000,
such amendment merely added conditions for the recognition
of the Marubeni loans, namely, subjecting the recognition to a
final determination by COA of the amount involved and to the
declaration by OGCC of the legality of PNCCs liability.
However, the PNCC Board reiterated and stood firm that it
recognizes, acknowledges and confirms its
obligations for the Marubeni loans. Apparently, Board
Resolution No. BD-099-2000 was a futile attempt to revoke
Board Resolution No. BD-092-2000. Atty. Alfredo Laya, Jr., a
former PNCC Director, spoke on his protests against Board
Resolution No. BD-092-2000 at the Senate hearings, thus:

MR. LAYA. Mr. Chairman, if I can

THE CHAIRMAN. Were you also at the board?

MR. LAYA. At that time, yes, sir.

THE CHAIRMAN. Okay, go ahead.

MR. LAYA. That's why if maybe this can help clarify
the sequence. There was this meeting on October 20. This
matter of the Marubeni liability or account was also
discussed. Mr. Macasaet, if I may try to refresh. And there was
some discussion, sir, and in fact, they were saying even at that
stage that there should be a COA or an OGCC audit. Now, that
was during the discussion of October 20. Later on, the minutes
came out. The practice, then, sir, was for the minutes to come
out at the start of the meeting of the subsequent. So the
minutes of October 20 came out on November 22 and then we
were going over it. And that is in the subsequent minutes of
the meeting

THE CHAIRMAN. May I interrupt. You were taking up
in your November 22 meeting the October 20 minutes?

MR. LAYA. Yes, sir.

THE CHAIRMAN. This minutes that we have?

MR. LAYA. Yes, sir.

THE CHAIRMAN. All right, go ahead.

MR. LAYA. Now, in the November 22 meeting,
we noticed this resolution already for confirmation of
the board proceedings of October 20. So
immediately we made actually, protest would be a
better term for that we protested the wording of the
resolution and that's why we came up with this
resolution amending the October 20 resolution.

SEN. DRILON. So you are saying, Mr. Laya, that
the minutes of October 20 did not accurately reflect
the decisions that you made on October 20 because
you were saying that this recognition should be
subject to OGCC and COA? You seem to imply and we
want to make it and I want to get that for the
record. You seem to imply that there was no decision
to recognize the obligation during that meeting
because you wanted it to subject it to COA and OGCC,
is that correct?

MR. LAYA. Yes, your Honor.

SEN. DRILON. So how did...

MR. LAYA. That's my understanding of the proceedings
at that time, that's why in the subsequent November 22
meeting, we raised this point about obtaining a COA and OGCC
opinion.



SEN. DRILON. Yes. But you know, the November 22
meeting repeated the wording of the resolution previously
adopted only now you are saying subject to final determination
which is completely of different import from what you are
saying was your understanding of the decision arrived at on
October 20.

MR. LAYA. Yes, sir. Because our thinking then...

SEN. DRILON. What do you mean, yes, sir?

MR. LAYA. It's just a claim under discussion but then
the way it is translated, as the minutes of October 20 were not
really verbatim.

SEN. DRILON. So, you never intended to recognize the
obligation.


MR. LAYA. I think so, sir. That was our personally,
that was my position.

SEN. DRILON. How did it happen, Corporate Secretary
Ogan, that the minutes did not reflect what the board

THE CHAIRMAN. Ms. Pasetes

MS. PASETES. Yes, Mr. Chairman.

THE CHAIRMAN. you are the chief financial officer of
PNCC.

MS. PASETES. Your Honor, before that November 22
board meeting, management headed by Mr. Rolando Macasaet,
myself and Atty. Ogan had a discussion about the recognition
of the obligations of 10 billion of Marubeni and 36 billion of the
national government on whether to recognize this as an
obligation in our books or recognize it as an obligation in the
pro forma financial statement to be used for the privatization
of PNCC because recognizing both obligations in the books of
PNCC would defeat our going concern status and that is where
the position of the president then, Mr. Macasaet, stemmed
from and he went back to the board and moved to reconsider
the position of October 20, 2000, Mr. Chair.
[52]
(Emphasis
supplied)



In other words, despite Atty. Layas objections to PNCCs
admitting liability for the Marubeni loans, the PNCC Board still
admitted the same and merely imposed additional conditions
to temper somehow the devastating effects of Board Resolution
No. BD-092-2000.

The act of the PNCC Board in issuing Board Resolution
No. BD-092-2000 expressly admitting liability for the
Marubeni loans demonstrates the PNCC Boards gross and
willful disregard of the requisite care and diligence in
managing the affairs of PNCC, amounting to bad faith and
resulting in grave and irreparable injury to PNCC and its
stockholders. This reckless and treacherous move on the part
of the PNCC Board clearly constitutes a serious breach of its
fiduciary duty to PNCC and its stockholders, rendering the
members of the PNCC Board liable under Section 31 of the
Corporation Code, which provides:

SEC. 31. Liability of directors, trustees or
officers. -- Directors or trustees who willfully
and knowingly vote for or assent to patently
unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in
directing the affairs of the corporation or
acquire any personal or pecuniary interest in
conflict with their duty as such directors or
trustees shall be liable jointly and severally
for all damages resulting therefrom suffered
by the corporation, its stockholders or
members and other persons.

When a director, trustee or officer attempts to acquire or
acquires, in violation of his duty, any interest adverse to the
corporation in respect of any matter which has been reposed in
him in confidence, as to which equity imposes a disability upon
him to deal in his own behalf, he shall be liable as a trustee for
the corporation and must account for the profits which
otherwise would have accrued to the corporation.


Soon after the short-lived Estrada Administration, the
PNCC Board revoked its previous admission of liability for the
Marubeni loans. During the oral arguments, Atty. Sison
narrated to the Court:

x x x After President Estrada was
ousted, I was appointed as President and
Chairman of PNCC in April of 2001, this
particular board resolution was brought to
my attention and I immediately put the
matter before the board. I had no problem
in convincing them to reverse the
recognition as it was illegal and had no basis
in fact. The vote to overturn that resolution
was unanimous. Strange to say that some
who voted to overturn the recognition were
part of the old board that approved it.
Stranger still, Renato Valdecantos who was
still a member of the Board voted in favor of
reversing the resolution he himself instigated
and pushed. Some of the board
members who voted to recognize the
obligation of Marubeni even came to
me privately and said pinilit lang
kami. x x x.
[53]
(Emphasis supplied)

In approving PNCC Board Resolution Nos. BD-092-2000
and BD-099-2000, the PNCC Board caused undue injury to the
Government and gave unwarranted benefits to Radstock,
through manifest partiality, evident bad faith or gross
inexcusable negligence of the PNCC Board. Such acts are
declared under Section 3(e) of RA 3019 or the Anti-Graft and
Corrupt Practices Act, as corrupt practices xxx and xxx
unlawful. Being unlawful and criminal acts, these PNCC
Board Resolutions are void ab initio and cannot be
implemented or in any way given effect by the Executive or
Judicial branch of the Government.

Not content with forcing PNCC to commit corporate
suicide with the admission of liability for the Marubeni loans
under Board Resolution Nos. BD-092-2000 and BD-099-
2000, the PNCC Board drove the last nail on PNCCs coffin
when the PNCC Board entered into the manifestly and grossly
disadvantageous Compromise Agreement with Radstock. This
time, the OGCC, headed by Agnes DST Devanadera, reversed
itself and recommended approval of the Compromise
Agreement to the PNCC Board. As Atty. Sison explained to the
Court during the oral arguments:


x x x While the case was pending in the
Court of Appeals, Radstock in a rare display
of extreme generosity, conveniently
convinced the Board of PNCC to enter into a
compromise agreement for the amount of
the judgment rendered by the RTC or P6.5
Billion Pesos. This time the OGCC,
under the leadership of now Solicitor
General Agnes Devanadera, approved
the compromise agreement
abandoning the previous OGCC
position that PNCC had a meritorious
case and would be hard press to lose
the case. What is strange is that although
the compromise agreement we seek to stop
ostensibly is for P6.5 Billion only, truth and
in fact, the agreement agrees to convey to
Radstock all or substantially all of the assets
of PNCC worth P18 Billion Pesos. There are
three items that are undervalued here, the
real estate that was turned over as a result of
the controversial agreement, the toll
revenues that were being assigned and the
value of the new shares of PNCC the
difference is about P12 Billion Pesos. x x x
(Emphasis supplied)

V.
The Compromise Agreement is Void
for Being Contrary to the Constitution,
Existing Laws, and Public Policy


For a better understanding of the present case, the
pertinent terms and conditions of the Compromise Agreement
between PNCC and Radstock are quoted below:

COMPROMISE AGREEMENT

KNOW ALL MEN BY THESE PRESENTS:

This Agreement made and entered into this 17
th
day of August
2006, in Mandaluyong City, Metro Manila, Philippines, by and
between:

PHILIPPINE NATIONAL CONSTRUCTION
CORPORATION, a government acquired asset
corporation, created and existing under the laws of the
Republic of the Philippines, with principal office address at
EDSA corner Reliance Street, Mandaluyong City, Philippines,
duly represented herein by its Chairman ARTHUR N.
AGUILAR, pursuant to a Board Resolution attached herewith
as Annex A and made an integral part hereof, hereinafter
referred to as PNCC;

- and -

RADSTOCK SECURITIES LIMITED, a private
corporation incorporated in the British Virgin
Islands, with office address at Suite 1402 1 Duddell Street,
Central Hongkong duly-represented herein by its Director,
CARLOS G. DOMINGUEZ, pursuant to a Board Resolution
attached herewith as Annex B and made an integral part
hereof, hereinafter referred to as RADSTOCK.

WITNESSETH:

WHEREAS, on January 15, 2001, RADSTOCK, as assignee of
Marubeni Corporation, filed a complaint for sum of money and
damages with application for a writ of preliminary attachment
with the Regional Trial Court (RTC), Mandaluyong City,
docketed as Civil Case No. MC-01-1398, to collect on PNCCs
guarantees on the unpaid loan obligations of CDCP Mining
Corporation as provided under an Advance Payment
Agreement and Loan Agreement;

WHEREAS, on December 10, 2002, the RTC of Mandaluyong
rendered a decision in favor of plaintiff RADSTOCK directing
PNCC to pay the total amount of Thirteen Billion One Hundred
Fifty One Million Nine Hundred Fifty-Six Thousand Five
Hundred Twenty-Eight Pesos (P13,151,956,528.00) with
interest from October 15, 2001 plus Ten Million Pesos
(P10,000,000.00) as attorney's fees.

WHEREAS, PNCC had elevated the case to the Court of
Appeals (CA-G.R. SP No. 66654) on Certiorari and thereafter,
to the Supreme Court (G.R. No. 156887) which Courts have
consistently ruled that the RTC did not commit grave abuse of
discretion when it denied PNCCs Motion to Dismiss which sets
forth similar or substantially the same grounds or defenses as
those raised in PNCC's Answer;

WHEREAS, the case has remained pending for almost six (6)
years even after the main action was appealed to the Court of
Appeals;

WHEREAS, on the basis of the RTC Decision dated December
10, 2002, the current value of the judgment debt against PNCC
stands at P17,040,843,968.00 as of July 31, 2006 (the
Judgment Debt);

WHEREAS, RADSTOCK is willing to settle the case at the
reduced Compromise Amount of Six Billion One Hundred
Ninety-Six Million Pesos (P6,196,000,000.00) which may be
paid by PNCC, either in cash or in kind to avoid the trouble and
inconvenience of further litigation as a gesture of goodwill and
cooperation;

WHEREAS, it is an established legal policy or principle that
litigants in civil cases should be encouraged to compromise or
amicably settle their claims not only to avoid litigation but also
to put an end to one already commenced (Articles 2028 and
2029, Civil Code);

WHEREAS, this Compromise Agreement has been approved
by the respective Board of Directors of both PNCC and
RADSTOCK, subject to the approval of the Honorable Court;

NOW, THEREFORE, for and in consideration of the foregoing
premises, and the mutual covenants, stipulations and
agreements herein contained, PNCC and RADSTOCK have
agreed to amicably settle the above captioned Radstock case
under the following terms and conditions:

1. RADSTOCK agrees to receive and
accept from PNCC in full and complete
settlement of the Judgment Debt, the
reduced amount of Six Billion, One
Hundred Ninety-Six Million Pesos
(P6,196,000,000.00) (the Compromise
Amount).

2. This Compromise Amount shall be paid by PNCC to
RADSTOCK in the following manner:

a. PNCC shall assign to a third party
assignee to be designated by RADSTOCK all
its rights and interests to the following real
properties provided the assignee shall be
duly qualified to own real properties in the
Philippines;
(1) PNCCs rights over
that parcel of land
located in Pasay City
with a total area of
One Hundred Twenty-
Nine Thousand Five
Hundred Forty-Eight
(129,548) square
meters, more or less,
and which is covered
by and more
particularly described
in Transfer Certificate
of Title No. T-34997
of the Registry of
Deeds for Pasay City.
The transfer value
is P3,817,779,000.00.

PNCCs rights and interests in Transfer Certificate of
Title No. T-34997 of the Registry of Deeds for Pasay City is
defined and delineated by Administrative Order No. 397, Series
of 1998, and RADSTOCK is fully aware and recognizes that
PNCC has an undertaking to cede at least 2 hectares of this
property to its creditor, the Philippine National Bank; and that
furthermore, the Government Service Insurance System has
also a current and existing claim in the nature of boundary
conflicts, which undertaking and claim will not result in the
diminution of area or value of the property. Radstock
recognizes and acknowledges the rights and interests of GSIS
over the said property.

(2) T-452587 (T-23646)
- Paraaque (5,123 sq.
m.) subject to the
clarification of the
Privatization and
Management Office
(PMO) claims
thereon. The transfer
value
is P45,000,900.00.

(3) T-49499 (529715
including T-68146-G
(S-29716) (1,9747-A)-
Paraaque (107 sq.
m.) (54 sq. m.) subject
to the clarification of
the Privatization and
Management Office
(PMO) claims
thereon. The transfer
value
is P1,409,100.00.

(4) 5-29716-Paraaque
(27,762 sq. m.) subject
to the clarification of
the Privatization and
Management Office
(PMO) claims
thereon. The transfer
value
is P242,917,500.00.

(5) P-169 - Tagaytay
(49,107 sq. m.). The
transfer value
is P13,749,400.00.

(6) P-170 - Tagaytay
(49,100 sq. m.). The
transfer value
is P13,749,400.00.

(7) N-3320 - Town and
Country Estate,
Antipolo (10,000 sq.
m.). The transfer
value
is P16,800,000.00.

(8) N-7424 - Antipolo
(840 sq. m.). The
transfer value
is P940,800.00.

(9) N-7425 - Antipolo
(850 sq. m.). The
transfer value
is P952,000.00.

(10) N-7426 -
Antipolo (958 sq. m.).
The transfer value
is P1,073,100.00.

(11) T-485276 -
Antipolo (741 sq. m.).
The transfer value
is P830,200.00.

(12) T-485277 -
Antipolo (680 sq.
m.). The transfer
value is P761,600.00.

(13) T-485278 -
Antipolo (701 sq. m.).
The transfer value
is P785,400.00.

(14) T-131500 -
Bulacan (CDCP Farms
Corp.) (4,945 sq, m.).
The transfer value
is P6,475,000.00.

(15) T-131501 -
Bulacan (678 sq. m.).
The transfer value
is P887,600.00.

(16) T-26,154 (M) -
Bocaue, Bulacan
(2,841 sq. m.). The
transfer value
is P3,779,300.00.

(17) T-29,308 (M) -
Bocaue, Bulacan (733
sq. m.). The transfer
value is P974,400.00.

(18) T-29,309 (M)
Bocaue, Bulacan
(1,141 sq. m.). The
transfer value
is P1,517,600.00.

(19) T-260578 (R. Bengzon)
Sta. Rita, Guiguinto,
Bulacan (20,000 sq. m.).
The transfer value
is P25,200,000.00.

The transfer values of the foregoing
properties are based on 70% of the
appraised value of the respective
properties.

b. PNCC shall issue to RADSTOCK or its
assignee common shares of the capital stock
of PNCC issued at par value which shall
comprise 20% of the outstanding capital
stock of PNCC after the conversion to equity
of the debt exposure of the Privatization
Management Office (PMO) and the National
Development Company (NDC) and other
government agencies and creditors such that
the total government holdings shall not fall
below 70% voting equity subject to the
approval of the Securities and Exchange
Commission (SEC) and ratification of
PNCCs stockholders, if necessary. The
assigned value of the shares issued to
RADSTOCK is P713 Million based on the
approximate last trading price of PNCC
shares in the Philippine Stock Exchange as
the date of this agreement, based further on
current generally accepted accounting
standards which stipulates the valuation of
shares to be based on the lower of cost or
market value.





Subject to the procurement of any and all necessary approvals
from the relevant governmental authorities, PNCC shall deliver
to RADSTOCK an instrument evidencing an undertaking of the
Privatization and Management Office (PMO) to give
RADSTOCK or its assignee the right to match any offer to buy
the shares of the capital stock and debts of PNCC held by PMO,
in the event the same shares and debt are offered for
privatization.

c. PNCC shall assign to RADSTOCK or its
assignee 50% of the PNCC's 6% share in
the gross toll revenue of the Manila
North Tollways Corporation (MNTC),
with a Net Present Value of P1.287
Billion computed in the manner
outlined in Annex C herein attached as
an integral part hereof, that shall be due
and owing to PNCC pursuant to the
Joint Venture Agreement between
PNCC and First Philippine
Infrastructure Development Corp. dated
August 29, 1995 and other related
existing agreements, commencing in
2008. It shall be understood that as a
result of this assignment, PNCC shall
charge and withhold the amounts, if
any, pertaining to taxes due on the
amounts assigned.



Under the Compromise Agreement, PNCC shall pay
Radstock the reduced amount of P6,185,000,000.00 in full
settlement of PNCCs guarantee of CDCP Minings debt
allegedly totaling P17,040,843,968.00 as of 31 July 2006. To
satisfy its reduced obligation, PNCC undertakes to (1)
assign to a third party assignee to be designated by Radstock
all its rights and interests to the listed real properties therein;
(2) issue to Radstock or its assignee common shares of the
capital stock of PNCC issued at par value which shall comprise
20% of the outstanding capital stock of PNCC; and (3) assign
to Radstock or its assignee 50% of PNCCs 6% share, for the
next 27 years (2008-2035), in the gross toll revenues of the
Manila North Tollways Corporation.

A. The PNCC Board has no power to compromise
the P6.185 billion amount.


Does the PNCC Board have the power to compromise
the P6.185 billion reduced amount? The answer is in the
negative.

The Dissenting Opinion asserts that PNCC has the power,
citing Section 36(2) of Presidential Decree No. 1445 (PD 1445),
otherwise known as the Government Auditing Code of the
Philippines, enacted in 1978. Section 36 states:

SECTION 36. Power to Compromise
Claims. (1) When the interest of the
government so requires, the Commission
may compromise or release in whole or in
part, any claim or settled liability to any
government agency not exceeding ten
thousand pesos and with the written
approval of the Prime Minister, it may
likewise compromise or release any similar
claim or liability not exceeding one hundred
thousand pesos, the application for relief
therefrom shall be submitted, through the
Commission and the Prime Minister, with
their recommendations, to the National
Assembly.

(2) The respective governing bodies of
government-owned or controlled
corporations, and self-governing boards,
commissions or agencies of the government
shall have the exclusive power to
compromise or release any similar claim or
liability when expressly authorized by their
charters and if in their judgment, the
interest of their respective corporations or
agencies so requires. When the charters
do not so provide, the power to
compromise shall be exercised by the
Commission in accordance with the
preceding paragraph. (Emphasis
supplied)



The Dissenting Opinion asserts that since PNCC is
incorporated under the Corporation Code, the PNCC Board has
all the powers granted to the governing boards of corporations
incorporated under the Corporation Code, which includes the
power to compromise claims or liabilities.

Section 36 of PD 1445, enacted on 11 June 1978, has
been superseded by a later law -- Section 20(1), Chapter
IV, Subtitle B, Title I, Book V of Executive Order No. 292 or
the Administrative Code of 1987, which provides:

Section 20. Power to Compromise Claims. -
(1) When the interest of the Government so
requires, the Commission may compromise
or release in whole or in part, any settled
claim or liability to any government
agency not exceeding ten thousand pesos
arising out of any matter or case before it or
within its jurisdiction, and with the written
approval of the President, it may likewise
compromise or release any similar claim or
liability not exceeding one hundred
thousand pesos. In case the claim or
liability exceeds one hundred
thousand pesos, the application for
relief therefrom shall be submitted,
through the Commission and the
President, with their
recommendations, to the Congress[.] x
x x (Emphasis supplied)



Under this provision,
[54]
the authority to compromise a
settled claim or liability exceeding P100,000.00 involving a
government agency, as in this case where the liability amounts
to P6.185 billion, is vested not in COA but exclusively in
Congress. Congress alone has the power to compromise
the P6.185 billion purported liability of PNCC. Without
congressional approval, the Compromise Agreement between
PNCC and Radstock involving P6.185 billion is void for being
contrary to Section 20(1), Chapter IV, Subtitle B, Title I, Book
V of the Administrative Code of 1987.

PNCC is a government agency because Section 2
on Introductory Provisions of the Revised Administrative Code
of 1987 provides that

Agency of the Government esef e ao s efe
aof oef s efe neiee , goil a
ieeaeiee , uoeao , sse , feoieeageo , or
government-owned or controlled
corporation , a gag leiee a
ifee oe efee . ( B gisal foeegei )

Thus, Section 20(1), Chapter IV, Subtitle B, Title I, Book V of
the Administrative Code of 1987 applies to PNCC, which
indisputably is a government owned or controlled
corporation.

In the same vein, the COAs stamp of approval on the
Compromise Agreement is void for violating Section 20(1),
Chapter IV, Subtitle B, Title I, Book V of the Administrative
Code of 1987. Clearly, the Dissenting Opinions reliance on the
COAs finding that the terms and conditions of the
Compromise Agreement are fair and above board is patently
erroneous.

Citing Benedicto v. Board of Administrators of Television
Stations RPN, BBC and IBC,
[55]
the Dissenting Opinion views
that congressional approval is not required for the validity of
the Compromise Agreement because the liability of PNCC is
not yet settled.

In Benedicto, the PCGG filed in the Sandiganbayan a
civil case to recover from the defendants (including Roberto S.
Benedicto) their ill-gotten wealth consisting of funds and other
properties. The PCGG executed a compromise agreement with
Roberto S. Benedicto ceding to the latter a substantial part of
his ill-gotten assets and the State granting him immunity from
further prosecution. The Court held that prior congressional
approval is not required for the PCGG to enter into a
compromise agreement with persons against whom it has filed
actions for recovery of ill-gotten wealth.

In Benedicto, the Court found that the governments claim
against Benedicto was not yet settled unlike here where the
PNCC Board expressly admitted the liability of PNCC for the
Marubeni loans. In Benedicto, the ownership of the
alleged ill-gotten assets was still being litigated in the
Sandiganbayan and no party ever admitted any
liability, unlike here where the PNCC Board had
already admitted through a formal Board Resolution
PNCCs liability for the Marubeni loans. PNCCs express
admission of liability for the Marubeni loans is essentially the
premise of the execution of the Compromise Agreement. In
short, Radstocks claim against PNCC is settled by
virtue of PNCCs express admission of liability for the
Marubeni loans. The Compromise Agreement merely
reduced this settled liability from P17 billion
to P6.185 billion.

The provision of the Revised Administrative Code on the
power to settle claims or liabilities was precisely enacted to
prevent government agencies from admitting liabilities against
the government, then compromising such settled
liabilities. The present case is exactly what the law
seeks to prevent, a compromise agreement on a
creditors claim settled through admission by a
government agency without the approval of Congress
for amounts exceeding P100,000.00. What makes the
application of the law even more necessary is that the PNCC
Boards twin moves are manifestly and grossly disadvantageous
to the Government. First, the PNCC admitted solidary liability
for a staggering P10.743 billion private debt incurred by a
private corporation which PNCC does not even control.
Second, the PNCC Board agreed to pay Radstock P6.185 billion
as a compromise settlement ahead of all other creditors,
including the Government which is the biggest creditor.

The Dissenting Opinion further argues that since the
PNCC is incorporated under the Corporation Code, it has the
power, through its Board of Directors, to compromise just like
any other private corporation organized under the
Corporation Code. Thus, the Dissenting Opinion states:

Not being a government corporation created
by special law, PNCC does not owe its
creation to some charter or special law, but
to the Corporation Code. Its powers are
enumerated in the Corporation Code and its
articles of incorporation. As an
autonomous entity, it undoubtedly has
the power to compromise, and to enter into a
settlement through its Board of
Directors, just like any other private
corporation organized under the
Corporation Code. To maintain otherwise is
to ignore the character of PNCC as a
corporate entity organized under the
Corporation Code, by which it was vested
with a personality and identity distinct and
separate from those of its stockholders or
members. (Boldfacing and underlining
supplied)


The Dissenting Opinion is woefully wide off the
mark. The PNCC is not just like any other private
corporation precisely because it is not a private
corporation but indisputably a government owned
corporation. Neither is PNCC an autonomous entity
considering that PNCC is under the Department of Trade and
Industry, over which the President exercises control. To claim
that PNCC is an autonomous entity is to say that it is a lost
command in the Executive branch, a concept that violates the
President's constitutional power of control over the entire
Executive branch of government.
[56]


The government nominees in the PNCC Board, who
practically compose the entire PNCC Board, are public officers
subject to the Anti-Graft and Corrupt Practices Act,
accountable to the Government and the Filipino people. To
hold that a corporation incorporated under the Corporation
Code, despite its being 90.3% owned by the Government, is
an autonomous entity that could solely through its Board
of Directors compromise, and transfer ownership of,
substantially all its assets to a private third party without the
approval required under the Administrative Code of 1987,
[57]
is
to invite the plunder of all such government owned
corporations.

THE DISSENTING OPINIONS CLAIM THAT PNCC
IS AN AUTONOMOUS ENTITY JUST LIKE ANY OTHER
PRIVATE CORPORATION IS INCONSISTENT WITH ITS
ASSERTION THAT SECTION 36(2) OF THE GOVERNMENT
AUDITING CODE IS THE GOVERNING LAW IN
DETERMINING PNCC'S POWER TO
COMPROMISE. SECTION 36(2) OF THE GOVERNMENT
AUDITING CODE EXPRESSLY STATES THAT IT APPLIES
TO THE GOVERNING BODIES OF GOVERNMENT-
OWNED OR CONTROLLED CORPORATIONS. THE
PHRASE GOVERNMENT-OWNED OR CONTROLLED
CORPORATIONS REFERS TO BOTH THOSE CREATED BY
SPECIAL CHARTER AS WELL AS THOSE INCORPORATED
UNDER THE CORPORATION CODE. SECTION 2, ARTICLE
IX-D OF THE CONSTITUTION PROVIDES:

SECTION 2. (1) The Commission on
Audit shall have the power, authority,
and duty to examine, audit, and settle
all accounts pertaining to the revenue
and receipts of, and expenditures or
uses of funds and property, owned or
held in trust by, or pertaining to, the
Government, or any of its
subdivisions, agencies, or
instrumentalities, including government-
owned or controlled corporations with
original charters, and on a post-audit basis:
(a) constitutional bodies, commissions and
offices that have been granted fiscal
autonomy under this Constitution; (b)
autonomous state colleges and universities;
(c) other government-owned or
controlled corporations and their
subsidiaries; and (d) such non-
governmental entities receiving subsidy or
equity, directly or indirectly, from or through
the Government, which are required by law
or the granting institution to submit to such
audit as a condition of subsidy or equity.
However, where the internal control system
of the audited agencies is inadequate, the
Commission may adopt such measures,
including temporary or special pre-audit, as
are necessary and appropriate to correct the
deficiencies. It shall keep the general
accounts of the Government and, for such
period as may be provided by law, preserve
the vouchers and other supporting papers
pertaining thereto.

(2) The Commission shall have exclusive
authority, subject to the limitations in this
Article, to define the scope of its audit and
examination, establish the techniques and
methods required therefor,
and promulgate accounting and
auditing rules and regulations,
including those for the prevention and
disallowance of irregular,
unnecessary, excessive, extravagant,
or unconscionable expenditures, or
uses of government funds and
properties. (Emphasis supplied)


In explaining the extent of the jurisdiction of COA
over government owned or controlled corporations, this Court
declared in Feliciano v. Commission on Audit:
[58]


The COA's audit jurisdiction extends
not only to government "agencies or
instrumentalities," but also to "government-
owned and controlled corporations with
original charters" as well as "other
government-owned or controlled
corporations" without original charters.

x x x x

Petitioner forgets that the constitutional criterion on
the exercise of COA's audit jurisdiction depends on
the government's ownership or control of a
corporation. The nature of the corporation, whether
it is private, quasi-public, or public is immaterial.

The Constitution vests in the COA
audit jurisdiction over "government-owned
and controlled corporations with original
charters," as well as "government-owned or
controlled corporations" without original
charters. GOCCs with original charters are
subject to COA pre-audit, while GOCCs
without original charters are subject to COA
post-audit. GOCCs without original charters
refer to corporations created under the
Corporation Code but are owned or
controlled by the government. The nature or
purpose of the corporation is not material in
determining COA's audit jurisdiction.
Neither is the manner of creation of a
corporation, whether under a general or
special law.

Clearly, the COAs audit jurisdiction extends to
government owned or controlled corporations incorporated
under the Corporation Code. Thus, the COA must apply the
Government Auditing Code in the audit and examination of the
accounts of such government owned or controlled
corporations even though incorporated under the
Corporation Code. This means that Section 20(1), Chapter
IV, Subtitle B, Title I, Book V of the Administrative Code of
1987 on the power to compromise, which superseded
Section 36 of the Government Auditing Code, applies to
the present case in determining PNCCs power to
compromise. In fact, the COA has been regularly auditing
PNCC on a post-audit basis in accordance with Section 2,
Article IX-D of the Constitution, the Government Auditing
Code, and COA rules and regulations.

B. PNCCs toll fees are public funds.

PD 1113 granted PNCC a 30-year franchise to construct,
operate and maintain toll facilities in the North and South
Luzon Expressways. Section 1 of PD 1113
[59]
provides:

Section 1. Any provision of law to the
contrary notwithstanding, there is
hereby granted to the Construction and
Development Corporation of the
Philippines (CDCP), a corporation duly
organized and registered under the laws of the
Philippines, hereinafter called the
GRANTEE, for a period of thirty (30)
years from May 1, 1977 the right,
privilege and authority to construct,
operate and maintain toll facilities
covering the expressways from Balintawak
(Station 9 + 563) to Carmen, Rosales,
Pangasinan and from Nichols, Pasay City
(Station 10 + 540) to Lucena, Quezon,
hereinafter referred to collectively as North
Luzon Expressway, respectively.

The franchise herein granted shall
include the right to collect toll fees at
such rates as may be fixed and/or authorized
by the Toll Regulatory Board hereinafter
referred to as the Board created under
Presidential Decree No. 1112 for the use of the
expressways above-mentioned. (Emphasis
supplied)
Section 2 of PD 1894,
[60]
which amended PD 1113 to
include in PNCCs franchise the Metro Manila expressway,
also provides:

Section 2. The term of the franchise
provided under Presidential Decree No.
1113 for the North Luzon Expressway
and the South Luzon Expressway which
is thirty (30) years from 1 May 1977
shall remain the same; provided that, the
franchise granted for the Metro Manila
Expressway and all extensions linkages,
stretches and diversions that may be
constructed after the date of approval of this
decree shall likewise have a term of thirty (30)
years commencing from the date of
completion of the project. (Emphasis
supplied)


Based on these provisions, the franchise of the PNCC expired
on 1 May 2007 or thirty years from 1 May 1977.

PNCC, however, claims that under PD 1894, the North
Luzon Expressway (NLEX) shall have a term of 30 years from
the date of its completion in 2005. PNCC argues that the
proviso in Section 2 of PD 1894 gave toll road projects
completed within the franchise period and after the approval of
PD No. 1894 on 12 December 1983 their own thirty-year term
commencing from the date of the completion of the said
project, notwithstanding the expiry of the said franchise.

This contention is untenable.

The proviso in Section 2 of PD 1894 refers to the
franchise granted for the Metro Manila Expressway and all
extensions linkages, stretches and diversions constructed after
the approval of PD 1894. It does not pertain to the NLEX
because the term of the NLEX franchise, which is 30
years from 1 May 1977, shall remain the same, as
expressly provided in the first sentence of the same
Section 2 of PD 1894. To construe that the NLEX franchise
had a new term of 30 years starting from 2005 glaringly
conflicts with the plain, clear and unequivocal language of the
first sentence of Section 2 of PD 1894. That would be clearly
absurd.

There is no dispute that Congress did not renew PNCCs
franchise after its expiry on 1 May 2007. However, PNCC
asserts that it remains a viable corporate entity even after the
expiration of its franchise under Presidential Decree No.
1113. PNCC points out that the Toll Regulatory Board (TRB)
granted PNCC a Tollway Operation Certificate (TOC) which
conferred on PNCC the authority to operate and maintain toll
facilities, which includes the power to collect toll fees. PNCC
further posits that the toll fees are private funds because they
represent the consideration given to tollway operators in
exchange for costs they incurred or will incur in constructing,
operating and maintaining the tollways.

This contention is devoid of merit.

With the expiration of PNCCs franchise, the
assets and facilities of PNCC were automatically
turned over, by operation of law, to the government at
no cost. Sections 2(e) and 9 of PD 1113 and Section 5 of PD
1894 provide:


Section 2 [of PD 1113]. In consideration of
this franchise, the GRANTEE shall:

(e) Turn over the toll facilities and all equipment directly
related thereto to the government upon expiration of the
franchise period without cost.

Section 9 [of PD 1113]. For the purposes of
this franchise, the Government, shall turn
over to the GRANTEE (PNCC) not later than
April 30, 1977 all physical assets and
facilities including all equipment and
appurtenances directly related to the
operations of the North and South Toll
Expressways: Provided, That, the extensions
of such Expressways shall also be turned
over to GRANTEE upon completion of their
construction or of functional sections
thereof: Provided, However, That upon
termination of the franchise period,
said physical assets and facilities
including improvements thereon,
together with equipment and
appurtenances directly related to
their operations, shall be turned over
to the Government without any cost or
obligation on the part of the
latter. (Emphasis supplied)

Section 5 [of PD No. 1894]. In consideration
of this franchise, the GRANTEE shall:

(a) Construct, operate and maintain at its
own expense the Expressways; and

(b) Turn over, without cost, the toll facilities and all
equipment, directly related thereto to the Government
upon expiration of the franchise period. (Emphasis
supplied)



The TRB does not have the power to give back to
PNCC the toll assets and facilities which were
automatically turned over to the Government, by
operation of law, upon the expiration of the franchise
of the PNCC on 1 May 2007. Whatever power the TRB may
have to grant authority to operate a toll facility or to issue a
Tollway Operation Certificate, such power does not obviously
include the authority to transfer back to PNCC ownership of
National Government assets, like the toll assets and facilities,
which have become National Government property upon the
expiry of PNCCs franchise. Such act by the TRB would repeal
Section 5 of PD 1894 which automatically vested in the
National Government ownership of PNCCs toll assets and
facilities upon the expiry of PNCCs franchise. The TRB
obviously has no power to repeal a law. Further, PD 1113, as
amended by PD 1894, granting the franchise to PNCC, is a
later law that must necessarily prevail over PD 1112 creating
the TRB. Hence, the provisions of PD 1113, as amended by PD
1894, are controlling.

The governments ownership of PNCC's toll assets and
facilities inevitably results in the governments ownership of
the toll fees and the net income derived from these toll assets
and facilities. Thus, the toll fees form part of the National
Governments General Fund, which includes public moneys of
every sort and other resources pertaining to any agency of the
government.
[61]
Even Radstocks counsel admits that the
toll fees are public funds, to wit:


ASSOCIATE JUSTICE CARPIO:
Okay. Now, when the franchise of
PNCC expired on May 7, 2007, under the
terms of the franchise under PD 1896, all the
assets, toll way assets, equipment, etcetera of
PNCC became owned by government at no
cost, correct, under the franchise?

DEAN AGABIN:
Yes, Your Honor.

ASSOCIATE JUSTICE CARPIO:
Okay. So this is now owned by the national
government. [A]ny income from these assets of the
national government is national government income,
correct?

DEAN AGABIN:
Yes, Your Honor.
[62]


x x x x

ASSOCIATE JUSTICE CARPIO:
x x x My question is very simple x x x Is the
income from these assets of the national government
(interrupted)

DEAN AGABIN:
Yes, Your Honor.
[63]


x x x x

ASSOCIATE JUSTICE CARPIO:
So, its the government [that] decides whether it goes to
the general fund or another fund. [W]hat is that other fund? Is
there another fund where revenues of the government go?

DEAN AGABIN:
Its the same fund, Your Honor, except that
(interrupted)

ASSOCIATE JUSTICE CARPIO:
So it goes to the general fund?

DEAN AGABIN:
Except that it can be categorized as a private fund in a
commercial sense, and it can be categorized as a public fund in
a Public Law sense.


ASSOCIATE JUSTICE CARPIO:
Okay. So we agree that, okay, it goes to the general
fund. I agree with you, but you are saying it is categorized still
as a private funds?

DEAN AGABIN:
Yes, Your Honor.

ASSOCIATE JUSTICE CARPIO:
But its part of the general fund. Now, if it is part of the
general fund, who has the authority to spend that money?

DEAN AGABIN:
Well, the National Government itself.

ASSOCIATE JUSTICE CARPIO:
Who in the National Government, the Executive,
Judiciary or Legislative?

DEAN AGABIN:
Well, the funds are usually appropriated by the
Congress.

ASSOCIATE JUSTICE CARPIO:
x x x you mean to say there are exceptions that money
from the general fund can be spent by the Executive without
going t[hrough] Congress, or xxx is [that] the absolute rule?

DEAN AGABIN:
Well, in so far as the general fund is concerned, that is
the absolute rule set aside by the National Government.

ASSOCIATE JUSTICE CARPIO:
x x x you are saying this is general fund money -
the collection from the assets[?]

DEAN AGABIN:
Yes.
[64]
(Emphasis supplied)

Forming part of the General Fund, the toll fees can only
be disposed of in accordance with
the fundamental principles governing financial transactions
and operations of any government agency, to wit: (1) no
money shall be paid out of the Treasury except in
pursuance of an appropriation made by law, as
expressly mandated by Section 29(1), Article VI of the
Constitution; and (2) government funds or property
shall be spent or used solelyfor public purposes, as
expressly mandated by Section 4(2) of PD 1445 or the
Government Auditing Code.
[65]


Section 29(1), Article VI of the Constitution provides:

Section 29(1). No money shall be paid
out of the Treasury except in pursuance of an
appropriation made by law.

The power to appropriate money from the General Funds of
the Government belongs exclusively to the Legislature. Any
act in violation of this iron-clad rule is unconstitutional.

Reinforcing this Constitutional mandate, Sections 84 and
85 of PD 1445 require that before a government agency can
enter into a contract involving the expenditure of government
funds, there must be an appropriation law for such
expenditure, thus:

Section 84. Disbursement of government
funds.

1. Revenue funds shall not be paid out
of any public treasury or
depository except in pursuance of
an appropriation law or other
specific statutory authority.
x x x x


Section 85. Appropriation before entering
into contract.

1. No contract involving the
expenditure of public funds shall
be entered into unless there is an
appropriation therefor, the
unexpended balance of which, free
of other obligations, is sufficient to
cover the proposed expenditure.

x x x x

Section 86 of PD 1445, on the other hand, requires that
the proper accounting official must certify that funds have been
appropriated for the purpose.
[66]
Section 87 of PD 1445
provides that any contract entered into contrary to the
requirements of Sections 85 and 86 shall be void,
thus:

Section 87. Void contract and liability of
officer. Any contract entered into
contrary to the requirements of the
two immediately preceding sections
shall be void, and the officer or officers
entering into the contract shall be liable to
the government or other contracting party
for any consequent damage to the same
extent as if the transaction had been wholly
between private parties. (Emphasis
supplied)


Applying Section 29(1), Article VI of the Constitution, as
implanted in Sections 84 and 85 of the Government Auditing
Code, a law must first be enacted by Congress
appropriating P6.185 billion as compromise money before
payment to Radstock can be made.
[67]
Otherwise, such payment
violates a prohibitory law and thus void under Article 5 of the
Civil Code which states that [a]cts executed against the
provisions of mandatory or prohibitory laws shall be
void, except when the law itself authorizes their validity.

Indisputably, without an appropriation law, PNCC cannot
lawfully pay P6.185 billion to Radstock. Any contract allowing
such payment, like the Compromise Agreement, shall be
void as provided in Section 87 of the Government Auditing
Code. In Comelec v. Quijano-Padilla,
[68]
this Court ruled:

Petitioners are justified in refusing to
formalize the contract with PHOTOKINA.
Prudence dictated them not to enter into a
contract not backed up by sufficient
appropriation and available funds.
Definitely, to act otherwise would be a futile
exercise for the contract would inevitably
suffer the vice of nullity. In Osmea vs.
Commission on Audit, this Court held:

The Auditing Code of the Philippines
(P.D. 1445) further provides that no
contract involving the expenditure of
public funds shall be entered into
unless there is an appropriation
therefor and the proper accounting
official of the agency concerned shall
have certified to the officer entering
into the obligation that funds have
been duly appropriated for the
purpose and the amount necessary to
cover the proposed contract for the
current fiscal year is available for
expenditure on account thereof. Any
contract entered into contrary
to the foregoing requirements
shall be VOID.

Clearly then, the contract entered into
by the former Mayor Duterte was void
from the very beginning since the
agreed cost for the project
(P,368,920.00) was way beyond the
appropriated amount (P,419,180.00)
as certified by the City Treasurer.
Hence, the contract was properly
declared void and unenforceable in
COA's 2nd Indorsement, dated
September 4, 1986. The COA declared
and we agree, that:

The prohibition contained
in Sec. 85 of PD 1445
(Government Auditing
Code) is explicit and
mandatory. Fund
availability is, as it has
always been, an
indispensable prerequisite
to the execution of any
government contract
involving the expenditure
of public funds by all
government agencies at all
levels. Such contracts are
not to be considered as
final or binding unless
such a certification as to
funds availability is issued
(Letter of Instruction No.
767, s. 1978). Antecedent
of advance appropriation
is thus essential to
government liability on
contracts (Zobel vs. City of
Manila, 47 Phil. 169). This
contract being
violative of the legal
requirements
aforequoted, the same
contravenes Sec. 85 of
PD 1445 and is null
and void by virtue of
Sec. 87.

Verily, the contract, as expressly declared by law, is inexistent
and void ab initio. This is to say that the proposed contract is
without force and effect from the very beginning or from its
incipiency, as if it had never been entered into, and hence,
cannot be validated either by lapse of time or ratification.
(Emphasis supplied)


Significantly, Radstocks counsel admits that an
appropriation law is needed before PNCC can use toll
fees to pay Radstock, thus:

ASSOCIATE JUSTICE CARPIO:
Okay, I agree with you. Now, you are saying that money
can be paid out of the general fund only through an
appropriation by Congress, correct? Thats what you are
saying.

DEAN AGABIN:
Yes, Your Honor.

ASSOCIATE JUSTICE CARPIO:
I agree with you also. Okay, now, can PNCC xxx use this
money to pay Radstock without Congressional approval?

DEAN AGABIN:
Well, I believe that that may not be necessary. Your
Honor, because earlier, the government had already decreed
that PNCC should be properly paid for the reclamation works
which it had done. And so (interrupted)

ASSOCIATE JUSTICE CARPIO:
No. I am talking of the funds.

DEAN AGABIN:
And so it is like a foreign obligation.

ASSOCIATE JUSTICE CARPIO:
Counsel, I'm talking of the general funds,
collection from the toll fees. Okay. You said, they go
to the general fund. You also said, money from the
general fund can be spent only if there is an
appropriation law by Congress.

DEAN AGABIN:
Yes, Your Honor.
There is no law.

DEAN AGABIN:
Yes, except that, Your Honor, this fund has not yet gone
to the general fund.

ASSOCIATE JUSTICE CARPIO:
No. Its being collected everyday. As of May 7, 2007,
national government owned those assets already. All those x x
x collections that would have gone to PNCC are now national
government owned. It goes to the general fund. And any body
who uses that without appropriation from Congress commits
malversation, I tell you.

DEAN AGABIN:
That is correct, Your Honor, as long as it has already
gone into the general fund.

ASSOCIATE JUSTICE CARPIO:
Oh, you mean to say that its still being held now by the
agent, PNCC. It has not been remitted to the National
Government?

DEAN AGABIN:
Well, if PNCC (interrupted)

ASSOCIATE JUSTICE CARPIO:
But if (interrupted)

DEAN AGABIN:
If this is the share that properly belongs to PNCC as a
private entity (interrupted)

ASSOCIATE JUSTICE CARPIO:
No, no. I am saying that You just agreed that all those
collections now will go to the National Government forming
part of the general fund. If, somehow, PNCC is holding this
money in the meantime, it holds xxx it in trust,
correct? Because you said, it goes to the general fund, National
Government. So it must be holding this in trust for the
National Government.

DEAN AGABIN:
Yes, Your Honor.

ASSOCIATE JUSTICE CARPIO:
Okay. Can the person holding in trust use it to
pay his private debt?



DEAN AGABIN:
No, Your Honor.

ASSOCIATE JUSTICE CARPIO:
Cannot be.

DEAN AGABIN:
But I assume that there must be some portion of the
collections which properly pertain to PNCC.

ASSOCIATE JUSTICE CARPIO:
If there is some portion that xxx may be [for] operating
expenses of PNCC. But that is not

DEAN AGABIN:
Even profit, Your Honor.

ASSOCIATE JUSTICE CARPIO:
Yeah, but that is not the six percent. Out of the six
percent, that goes now to PNCC, thats entirely national
government. But the National Government and the PNCC can
agree on service fees for collecting, to pay toll collectors.

DEAN AGABIN:
Yes, Your Honor.

ASSOCIATE JUSTICE CARPIO:
But those are expenses. We are talking of the
net income. It goes to the general fund. And its only
Congress that can authorize that expenditure. Not
even the Court of Appeals can give its stamp of
approval that it goes to Radstock, correct?

DEAN AGABIN:
Yes, Your Honor.
[69]
(Emphasis
supplied)



Without an appropriation law, the use of the toll fees
to pay Radstock would constitute malversation of public
funds. Even counsel for Radstock expressly admits
that the use of the toll fees to pay Radstock constitutes
malversation of public funds, thus:

ASSOCIATE JUSTICE CARPIO:
x x x As of May 7, 2007, [the] national government
owned those assets already. All those x x x collections that
would have gone to PNCC are now national government
owned. It goes to the general fund. And any body who uses
that without appropriation from Congress commits
malversation, I tell you.
DEAN AGABIN:
That is correct, Your Honor, as long as it has already
gone into the general fund.

ASSOCIATE JUSTICE CARPIO:
Oh, you mean to say that its still being held now by the
agent, PNCC. It has not been remitted to the National
Government?

DEAN AGABIN:
Well, if PNCC (interrupted)

ASSOCIATE JUSTICE CARPIO:
But if (interrupted)

DEAN AGABIN:
If this is the share that properly belongs to PNCC as a
private entity (interrupted)

ASSOCIATE JUSTICE CARPIO:
No, no. I am saying that You just agreed that
all those collections now will go to the National
Government forming part of the general fund. If,
somehow, PNCC is holding this money in the
meantime, it holds x x x it in trust, correct? Because
you said, it goes to the general fund, National
Government. So it must be holding this in trust for
the National Government.

DEAN AGABIN:
Yes, Your Honor.
[70]
(Emphasis
supplied)



Indisputably, funds held in trust by PNCC for the
National Government cannot be used by PNCC to pay
a private debt of CDCP Mining to Radstock, otherwise
the PNCC Board will be liable for malversation of
public funds.

In addition, to pay Radstock P6.185 billion violates
the fundamental public policy, expressly articulated in
Section 4(2) of the Government Auditing
Code,
[71]
that government funds or property shall be
spent or used solelyfor pubic purposes, thus:

Section 4. Fundamental Principles. x x x
(2) Government funds or property
shall be spent or used solely for public
purposes. (Emphasis supplied)

There is no question that the subject of the
Compromise Agreement is CDCP Minings private debt to
Marubeni, which Marubeni subsequently assigned to
Radstock. Counsel for Radstock admits that Radstock
holds aprivate debt of CDCP Mining, thus:

ASSOCIATE JUSTICE CARPIO:
So your client is holding a private debt of
CDCP Mining, correct?

DEAN AGABIN:
Correct, Your
Honor.
[72]
(Emphasis supplied)

CDCP Mining obtained the Marubeni loans when CDCP
Mining and PNCC (then CDCP) were still privately owned and
managed corporations. The Government became the majority
stockholder of PNCC only because government financial
institutions converted their loans to PNCC into equity when
PNCC failed to pay the loans. However, CDCP Mining
have always remained a majority privately owned
corporation with PNCC owning only 13% of its equity
as admitted by former PNCC Chairman Arthur N.
Aguilar and PNCC SVP Finance Miriam M. Pasetes
during the Senate hearings, thus:

SEN. OSMEA. x x x I just
wanted to know is CDCP Mining a 100
percent subsidiary of PNCC?

MR. AGUILAR. Hindi ho. Ah, no.

SEN. OSMEA. If theyre not a 100 percent, why
would they sign jointly and severally? I just want to plug the
loopholes.

MR. AGUILAR. I think it was if I may just
speculate. It was just common ownership at that time.

SEN. OSMEA. Al right. Now Also, the ...

MR. AGUILAR. Ah, 13 percent daw, your Honor.

SEN. OSMEA. Huh?

MR. AGUILAR. Thirteen percent ho.

SEN. OSMEA. Whats 13 percent?

MR. AGUILAR. We owned ...

MS. PASETES. Thirteen percent of ...

SEN. OSMEA. PNCC owned ...

MS. PASETES. (Mike off) CDCP ...

SEN. DRILON. Use the microphone, please.

MS. PASETES. Sorry. Your Honor, the
ownership of CDCP of CDCP Basay Mining ...

SEN. OSMEA. No, no, the
ownership of CDCP. CDCP Mining,
how many percent of the equity of
CDCP Mining was owned by PNCC,
formerly CDCP?

MS. PASETES. Thirteen percent.

SEN. OSMEA. Thirteen. And as a 13 percent
owner, they agreed to sign jointly and severally?

MS. PASETES. Yes.

SEN. OSMEA. One-three?

So poor PNCC and CDCP got taken to the cleaners
here. They sign for a 100 percent and they only own 13
percent.

x x x x
[73]
(Emphasis
supplied)



PNCC cannot use public funds, like toll fees that
indisputably form part of the General Fund, to pay a private
debt of CDCP Mining to Radstock. Such payment cannot
qualify as expenditure for a public purpose. The toll fees are
merely held in trust by PNCC for the National Government,
which is the owner of the toll fees.

Considering that there is no appropriation law passed by
Congress for the P6.185 billion compromise amount, the
Compromise Agreement is void for being contrary to law,
specifically Section 29(1), Article VI of the Constitution and
Section 87 of PD 1445. And since the payment of the P6.185
billion pertains to CDCP Minings private debt to Radstock, the
Compromise Agreement is also void for being contrary to the
fundamental public policy that government funds or property
shall be spent or used solely for public purposes, as provided in
Section 4(2) of the Government Auditing Code.


C. Radstock is not qualified to own land in the
Philippines.

Radstock is a private corporation incorporated in the
British Virgin Islands. Its office address is at Suite 14021
Duddell Street, Central Hongkong. As a foreign corporation,
with unknown owners whose nationalities are also unknown,
Radstock is not qualified to own land in the Philippines
pursuant to Section 7, in relation to Section 3, Article XII of the
Constitution. These provisions state:

Section. 3. Lands of the public domain
are classified into agricultural, forest or
timber, mineral lands, and national parks.
Agricultural lands of the public domain may
be further classified by law according to the
uses to which they may be
devoted. Alienable lands of the public
domain shall be limited to agricultural
lands. Private corporations or associations
may not hold such lands of the public
domain except by lease, for a period not
exceeding twenty-five years, renewable for
not more than twenty-five years, and not to
exceed one hundred thousand hectares in
area. Citizens of the Philippines may lease
not more than five hundred hectares, or
acquire not more than twelve hectares
thereof by purchase, homestead, or grant.

Taking into account the requirements of conservation,
ecology, and development, and subject to the requirements of
agrarian reform, the Congress shall determine, by law, the size
of lands of the public domain which may be acquired,
developed, held, or leased and the conditions therefor.

x x x x

Section 7. Save in cases of hereditary succession, no
private lands shall be transferred or conveyed except to
individuals, corporations, or associations qualified to acquire
or hold lands of the public domain.


The OGCC admits that Radstock cannot own lands in the
Philippines. However, the OGCC claims that Radstock can
own the rights to ownership of lands in the Philippines,
thus:

ASSOCIATE JUSTICE CARPIO:
Under the law, a foreigner cannot own land, correct?

ATTY. AGRA:
Yes, Your Honor.

ASSOCIATE JUSTICE CARPIO:
Can a foreigner who xxx cannot own land assign the
right of ownership to the land?

ATTY. AGRA:
Again, Your Honor, at that particular time, it will be
PNCC, not through Radstock, that chain of events should be,
theres a qualified nominee (interrupted)

ASSOCIATE JUSTICE CARPIO:
Yes, xxx you said, Radstock will assign the right of
ownership to the qualified assignee[.] So my question is, can a
foreigner own the right to ownership of a land when it cannot
own the land itself?

ATTY. AGRA:
The foreigner cannot own the land, Your Honor.

ASSOCIATE JUSTICE CARPIO:
But you are saying it can own the right of ownership to
the land, because you are saying, the right of ownership will be
assigned by Radstock.

ATTY. AGRA:
The rights over the properties, Your Honors, if theres a
valid assignment made to a qualified party, then the
assignment will be made.

ASSOCIATE JUSTICE CARPIO:
Who makes the assignment?

ATTY. AGRA:
It will be Radstock, Your Honor.
ASSOCIATE JUSTICE CARPIO:
So, if Radstock makes the assignment, it must own its
rights, otherwise, it cannot assign it, correct?

ATTY. AGRA:
Pursuant to the compromise agreement, once approved,
yes, Your Honors.

ASSOCIATE JUSTICE CARPIO:
So, you are saying that Radstock can own the
rights to ownership of the land?

ATTY. AGRA:
Yes, Your Honors.

ASSOCIATE JUSTICE CARPIO:
Yes?

ATTY. AGRA:
The premise, Your Honor, you mentioned a
while ago was, if this Court approves said compromise
(interrupted)

ASSOCIATE JUSTICE CARPIO:
No, no. Whether there is such a compromise agreement
- - Its an academic question I am asking you, can a foreigner
assign rights to ownership of a land in the Philippines?

ATTY. AGRA:
Under the Compromise Agreement, Your Honors, these
rights should be respected.

ASSOCIATE JUSTICE CARPIO:
So, it can?

ATTY. AGRA:
It can. Your Honor. But again, this right must, cannot
be perfected or cannot be, could not take effect.

ASSOCIATE JUSTICE CARPIO:
But if it cannot - - Its not perfected, how can it assign?

ATTY. AGRA:
Not directly, Your Honors. Again, there must be a
qualified nominee assigned by Radstock.

ASSOCIATE JUSTICE CARPIO:
Its very clear, its an indirect way of selling property that
is prohibited by law, is it not?





ATTY. AGRA:
Again, Your Honor, know, believe this is a Compromise
Agreement. This is a dacion en pago.

ASSOCIATE JUSTICE CARPIO:
So, dacion en pago is an exception to the constitutional
prohibition.

ATTY. AGRA:
No, Your Honor. PNCC, will still hold on to the
property, absent a valid assignment of properties.

ASSOCIATE JUSTICE CARPIO:
But what rights will PNCC have over that land when it
has already signed the compromise? It is just waiting for
instruction xxx from Radstock what to do with it? So, its a
trustee of somebody, because it does not, it cannot, [it] has no
dominion over it anymore? Its just holding it for
Radstock. So, PNCC becomes a dummy, at that point, of
Radstock, correct?

ATTY. AGRA:
No, Your Honor, I believe it (interrupted)

ASSOCIATE JUSTICE CARPIO:
Yeah, but it does not own the land, but it still holding the
land in favor of the other party to the Compromise Agreement

ATTY. AGRA:
Pursuant to the compromise agreement, that will
happen.

ASSOCIATE JUSTICE CARPIO:
Okay. May I (interrupted)

ATTY. AGRA:
Again, Your Honor, if the compromise agreement ended
with a statement that Radstock will be the owner of the
property (interrupted)

ASSOCIATE JUSTICE CARPIO:
Yeah. Unfortunately, it says, to a qualified assignee.

ATTY. AGRA:
Yes, Your Honor.

ASSOCIATE JUSTICE CARPIO:
And at this point, when it is signed and execut[ed] and
approved, PNCC has no dominion over that land
anymore. Who has dominion over it?

ATTY. AGRA:
Pending the assignment to a qualified party, Your
Honor, PNCC will hold on to the property.


ASSOCIATE JUSTICE CARPIO:
Hold on, but who x x x can exercise acts of dominion, to
sell it, to lease it?

ATTY. AGRA:
Again, Your Honor, without the valid assignment to a
qualified nominee, the compromise agreement in so far as the
transfer of these properties will not become effective. It is
subject to such condition. Your Honor.
[74]
(Emphasis supplied)



There is no dispute that Radstock is disqualified to own
lands in the Philippines. Consequently, Radstock is also
disqualified to own the rights to ownership of lands in the
Philippines. Contrary to the OGCCs claim, Radstock cannot
own the rights to ownership of any land in the Philippines
because Radstock cannot lawfully own the land
itself. Otherwise, there will be a blatant circumvention of the
Constitution, which prohibits a foreign private corporation
from owning land in the Philippines. In addition, Radstock
cannot transfer the rights to ownership of land in the
Philippines if it cannot own the land itself. It is basic that an
assignor or seller cannot assign or sell something he
does not own at the time the ownership, or the rights
to the ownership, are to be transferred to the assignee
or buyer.
[75]


The third party assignee under the Compromise
Agreement who will be designated by Radstock can only
acquire rights duplicating those which its assignor (Radstock)
is entitled by law to exercise.
[76]
Thus, the assignee can acquire
ownership of the land only if its assignor, Radstock, owns the
land. Clearly, the assignment by PNCC of the real properties to
a nominee to be designated by Radstock is a circumvention of
the Constitutional prohibition against a private foreign
corporation owning lands in the Philippines. Such
circumvention renders the Compromise Agreement void.


D. Public bidding is required for
the disposal of government properties.


Under Section 79 of the Government Auditing
Code,
[77]
the disposition
of government lands to private parties requires public
bidding.
[78]
COA Circular No. 89-926, issued on 27 January
1989, sets forth the guidelines on the disposal of property and
other assets of the government. Part V of the COA Circular
provides:

V. MODE OF DISPOSAL/DIVESTMENT:
-

This Commission recognizes the following modes of
disposal/divestment of assets and property of national
government agencies, local government units and government-
owned or controlled corporations and their subsidiaries, aside
from other such modes as may be provided for by law.

1. Public Auction

Conformably to existing state policy,
the divestment or disposal of
government property as contemplated
herein shall be undertaken primarily
thru public auction. Such mode of
divestment or disposal shall observe and
adhere to established mechanics and
procedures in public bidding, viz:

a. adequate publicity and notification so as
to attract the greatest number of
interested parties; (vide, Sec. 79, P.D.
1445)
b. sufficient time frame between
publication and date of auction;
c. opportunity afforded to interested parties
to inspect the property or assets to be
disposed of;
d. confidentiality of sealed proposals;
e. bond and other prequalification
requirements to guarantee
performance; and
f. fair evaluation of tenders and proper
notification of award.

It is understood that the Government reserves the right to
reject any or all of the tenders. (Emphasis supplied)


Under the Compromise Agreement, PNCC shall dispose of
substantial parcels of land, by way of dacion en pago, in favor
of Radstock. Citing Uy v. Sandiganbayan,
[79]
PNCC argues
that a dacion en pago is an exception to the requirement of a
public bidding.

PNCCs reliance on Uy is misplaced. There is nothing
in Uy declaring that public bidding is dispensed with in
a dacion en pago transaction. The Court explained the
transaction in Uy as follows:

We do not see any infirmity in either
the MOA or the SSA executed between
PIEDRAS and respondent banks. By virtue of
its shareholdings in OPMC, PIEDRAS was
entitled to subscribe to 3,749,906,250 class
"A" and 2,499,937,500 class "B" OPMC
shares. Admittedly, it was financially sound
for PIEDRAS to exercise its pre-emptive
rights as an existing shareholder of OPMC
lest its proportionate shareholdings be
diluted to its detriment. However, PIEDRAS
lacked the necessary funds to pay for the
additional subscription. Thus, it resorted to
contract loans from respondent banks to
finance the payment of its additional
subscription. The mode of payment agreed
upon by the parties was that the payment
would be made in the form of part of the
shares subscribed to by PIEDRAS. The
OPMC shares therefore were agreed upon by
the parties to be equivalent payment for the
amount advanced by respondent banks. We
see the wisdom in the conditions of the loan
transaction. In order to save PIEDRAS
and/or the government from the trouble of
selling the shares in order to raise funds to
pay off the loans, an easier and more direct
way was devised in the form of the dacion en
pago agreements.

Moreover, we agree with the
Sandiganbayan that neither PIEDRAS nor
the government sustained any loss in these
transactions. In fact, after deducting the
shares to be given to respondent banks as
payment for the shares, PIEDRAS stood to
gain about 1,540,781,554 class "A" and
710,550,000 class "B" OPMC shares virtually
for free. Indeed, the question that must be
asked is whether or not PIEDRAS, in the
exercise of its pre-emptive rights, would have
been able to acquire any of these shares at all
if it did not enter into the financing
agreements with the respondent banks.
[80]



Suffice it to state that in Uy, neither PIEDRAS
[81]
nor the
government suffered any loss in the dacion en
pago transactions, unlike here where the government stands to
lose at least P6.185 billion worth of assets.

Besides, a dacion en pago is in essence a form of sale,
which basically involves a disposition of a property.
In Filinvest Credit Corp. v. Philippine Acetylene, Co.,
Inc.,
[82]
the Court defined dacion en pago in this wise:

Dacion en pago, according to Manresa, is the
transmission of the ownership of a thing by
the debtor to the creditor as an accepted
equivalent of the performance of obligation.
In dacion en pago, as a special mode of
payment, the debtor offers another thing to
the creditor who accepts it as equivalent of
payment of an outstanding debt. The
undertaking really partakes in one
sense of the nature of sale, that is, the
creditor is really buying the thing or
property of the debtor, payment for
which is to be charged against the
debtor's debt.As such, the essential
elements of a contract of sale, namely,
consent, object certain, and cause or
consideration must be present. In its modern
concept, what actually takes place in dacion
en pago is an objective novation of the
obligation where the thing offered as an
accepted equivalent of the performance of an
obligation is considered as the object of the
contract of sale, while the debt is considered
as the purchase price. In any case, common
consent is an essential prerequisite, be it sale
or innovation to have the effect of totally
extinguishing the debt or
obligation.
[83]
(Emphasis supplied)



E. PNCC must follow rules on preference of credit.


Radstock is only one of the creditors of PNCC. Asiavest is
PNCCs judgment creditor. In its Board Resolution No. BD-
092-2000, PNCC admitted not only its debt to Marubeni but
also its debt to the National Government
[84]
in the amount
of P36 billion.
[85]
During the Senate hearings, PNCC
admitted that it owed the Government P36 billion, thus:

SEN. OSMEA. All right. Now,
second question is, the management of
PNCC also recognize the obligation to the
national government of 36 billion. It is part
of the board resolution.

MS. OGAN. Yes, sir, it is part of the October 20 board
resolution.

SEN. OSMEA. All right. So if you owe the national
government 36 billion and you owe Marubeni 10 billion, you
know, I would just declare bankruptcy and let an orderly
disposition of assets be done. What happened in this case to
the claim, the 36 billion claim of the national
government? How was that disposed of by the PNCC? Mas
malaki ang utang ninyo sa national government, 36
billion. Ang gagawin ninyo, babayaran lahat ang utang ninyo
sa Marubeni without any assets left to satisfy your obligations
to the national government. There should have been, at least, a
pari passu payment of all your obligations, 'di ba?

MS. PASETES. Mr. Chairman...

SEN. OSMEA. Yes.

MS. PASETES. PNCC still carries in its books an equity
account called equity adjustments arising from transfer of
obligations to national government - - 5.4 billion - - in addition
to shares held by government amounting to 1.2 billion.

SEN. OSMEA. What is the 36 billion?

THE CHAIRMAN. Ms. Pasetes...

SEN. OSMEA. Wait, wait, wait.

THE CHAIRMAN. Baka ampaw yun eh.

SEN. OSMEA. Teka muna. What is the 36 billion that
appear in the resolution of the board in September 2000
(sic)? This is the same resolution that recognizes,
acknowledges and confirms PNCC's obligations to
Marubeni. And subparagraph (a) says Government of the
Philippines, in the amount of 36,023,784,000 and
change. And then (b) Marubeni Corporation in the amount of
10,743,000,000. So, therefore, in the same resolution, you
acknowledged that had something like P46.7 billion in
obligations. Why did PNCC settle the 10 billion and did not
protect the national government's 36 billion? And then,
number two, why is it now in your books, the 36 billion is now
down to five? If you use that ratio, then Marubeni should be
down to one.
MS. PASETES. Sir, the amount of 36 billion is principal
plus interest and penalties.

SEN. OSMEA. And what about Marubeni? Is that just
principal only?

MS. PASETES. Principal and interest.

SEN. OSMEA. So, I mean, you know, it's equal
treatment. Ten point seven billion is principal plus penalties
plus interest, hindi ba?

MS. PASETES. Yes, sir. Yes, Your Honor.

SEN. OSMEA. All right. So now, what you are saying
is that you gonna pay Marubeni 6 billion and change and the
national government is only recognizing 5 billion. I don't think
that's protecting the interest of the national government at
all.
[86]


In giving priority and preference to Radstock, the
Compromise Agreement is certainly in fraud of PNCCs other
creditors, including the National Government, and violates the
provisions of the Civil Code on concurrence and preference of
credits.

This Court has held that while the Corporation Code
allows the transfer of all or substantially all of the assets of a
corporation, the transfer should not prejudice the creditors of
the assignor corporation.
[87]
Assuming that PNCC may
transfer all or substantially all its assets, to allow PNCC to do
so without the consent of its creditors or without
requiring Radstock to assume PNCCs debts will
defraud the other PNCC creditors
[88]
since the assignment will
place PNCCs assets beyond the reach of its other
creditors.
[89]
As this Court held in Caltex (Phil.), Inc. v. PNOC
Shipping and Transport Corporation:
[90]



While the Corporation Code allows the
transfer of all or substantially all the
properties and assets of a corporation, the
transfer should not prejudice the creditors of
the assignor. The only way the transfer
can proceed without prejudice to the
creditors is to hold the assignee liable
for the obligations of the assignor. The
acquisition by the assignee of all or
substantially all of the assets of the
assignor necessarily includes the
assumption of the assignor's
liabilities, unless the creditors who did
not consent to the transfer choose to
rescind the transfer on the ground of
fraud. To allow an assignor to transfer all its
business, properties and assets without the
consent of its creditors and without requiring
the assignee to assume the assignor's
obligations will defraud the creditors. The
assignment will place the assignor's assets
beyond the reach of its creditors. (Emphasis
supplied)

Also, the law, specifically Article 1387
[91]
of the Civil Code,
presumes that there is fraud of creditors when property is
alienated by the debtor after judgment has been rendered
against him, thus:

Alienations by onerous title are also
presumed fraudulent when made by
persons against whom some judgment
has been rendered in any instance or
some writ of attachment has been
issued. The decision or attachment need
not refer to the property alienated, and need
not have been obtained by the party seeking
rescission. (Emphasis supplied)


As stated earlier, Asiavest is a judgment creditor of PNCC
in G.R. No. 110263 and a court has already issued a writ of
execution in its favor. Thus, when PNCC entered into the
Compromise Agreement conveying several prime lots
in favor of Radstock, by way of dacion en pago, there
is a legal presumption that such conveyance is
fraudulent under Article 1387 of the Civil Code.
[92]
This
presumption is strengthened by the fact that the conveyance
has virtually left PNCCs other creditors, including the biggest
creditor the National Government - with no other asset to
garnish or levy.

Notably, the presumption of fraud or intention to defraud
creditors is not just limited to the two instances set forth in the
first and second paragraphs of Article 1387 of the Civil Code.
Under the third paragraph of the same article, the design to
defraud creditors may be proved in any other manner
recognized by the law of evidence. In Oria v.
Mcmicking,
[93]
this Court considered the following instances
as badges of fraud:

1. The fact that the consideration of the
conveyance is fictitious or is
inadequate.
2. A transfer made by a debtor after suit
has begun and while it is
pending against him.
3. A sale upon credit by an insolvent debtor.
4. Evidence of large indebtedness or complete insolvency.
5. The transfer of all or nearly all of his property by a
debtor,
especially when he is insolvent or greatly
embarrassed financially.
6. The fact that the transfer is made between father
and son, when
there are present other of the above
circumstances.
7. The failure of the vendee to take
exclusive possession of all the
property. (Emphasis supplied)



Among the circumstances indicating fraud is a transfer of
all or nearly all of the debtors assets, especially when the
debtor is greatly embarrassed financially. Accordingly, neither
a declaration of insolvency nor the institution of insolvency
proceedings is a condition sine qua non for a transfer of all or
nearly all of a debtors assets to be regarded in fraud of
creditors. It is sufficient that a debtor is greatly
embarrassed financially.

In this case, PNCCs huge negative net worth - at least P6
billion as expressly admitted by PNCCs counsel during the oral
arguments, or P14 billion based on the 2006 COA Audit Report
- necessarily translates to an extremely embarrassing financial
situation. With its huge negative net worth arising from
unpaid billions of pesos in debt, PNCC cannot claim that it is
financially stable. As a consequence, the Compromise
Agreement stipulating a transfer in favor of Radstock of
substantially all of PNCCs assets constitutes fraud. To
legitimize the Compromise Agreement just because there is still
no judicial declaration of PNCCs insolvency will work fraud on
PNCCs other creditors, the biggest creditor of which is the
National Government. To insist that PNCC is very much liquid,
given its admitted huge negative net worth, is nothing but
denial of the truth. The toll fees that PNCC collects belong to
the National Government. Obviously, PNCC cannot claim it is
liquid based on its collection of such toll fees, because PNCC
merely holds such toll fees in trust for the National
Government. PNCC does not own the toll fees, and such toll
fees do not form part of PNCCs assets.

PNCC owes the National Government P36 billion, a
substantial part of which constitutes taxes and
fees, thus:

SEN. ROXAS. Thank you, Mr. Chairman.
Mr. PNCC Chairman, could you
describe for us the composition of your debt
of about five billion there are in thousands,
so this looks like five and half
billion. Current portion of long-term debt,
about five billion. What is this made of?

MS. PASETES. The five billion
is composed of what is owed the
Bureau of Treasury and the Toll
Regulatory Board for concession fees
thats almost three billion and another
2.4 billion owed Philippine National
Bank.

SEN. ROXAS. So, how much is the Bureau of
Treasury?

MS. PASETES. Three billion.

SEN. ROXAS. Three Why do you owe the Bureau of
Treasury three billion?



MS. PASETES. That represents the concession fees
due Toll Regulatory Board principal plus interest,
Your Honor.

x x x x
[94]
(Emphasis supplied)



In addition, PNCCs 2006 Audit Report by COA states as
follows:

TAX MATTERS

The Company was assessed by the Bureau of Internal Revenue
(BIR) of its deficiencies in various taxes. However, no
provision for any liability has been made yet in the Companys
financial statements.

1980 deficiency income tax,
deficiency contractors tax
and deficiency documentary
stamp tax assessments by the
BIR totaling P212.523 Million.

x x x x

Deficiency business tax of P64
Million due the
Belgian Consortium, PNCCs
partner in its LRT Project.

1992 deficiency income tax,
deficiency value-added tax
and deficiency expanded
withholding tax of P1.04 Billion
which was reduced to P709
Million after the Companys
written protest.

x x x x

2002 deficiency internal revenue
taxes totaling P72.916 Million.

x x x x.
[95]
(Emphasis supplied)


Clearly, PNCC owes the National Government substantial taxes
and fees amounting to billions of pesos.

The P36 billion debt to the National Government was
acknowledged by the PNCC Board in the same board resolution
that recognized the Marubeni loans. Since PNCC is clearly
insolvent with a huge negative net worth, the government
enjoys preference over Radstock in the satisfaction of PNCCs
liability arising from taxes and duties, pursuant to the
provisions of the Civil Code on concurrence and preference of
credits. Articles 2241,
[96]
2242
[97]
and 2243
[98]
of the Civil Code
expressly mandate that taxes and fees due the National
Government shall be preferred and shall first be
satisfied over claims like those arising from the Marubeni
loans which shall enjoy no preference under Article
2244.
[99]



However, in flagrant violation of the Civil Code, the PNCC
Board favored Radstock over the National Government in the
order of credits. This would strip PNCC of its assets leaving
virtually nothing for the National Government. This action of
the PNCC Board is manifestly and grossly disadvantageous to
the National Government and amounts to fraud.

During the Senate hearings, Senator Osmea pointed out
that in the Board Resolution of 20 October 2000, PNCC
acknowledged its obligations to the National Government
amounting to P36,023,784,000 and to Marubeni amounting
to P10,743,000,000. Yet, Senator Osmea noted that in the
PNCC books at the time of the hearing, the P36 billion
obligation to the National Government was reduced to P5
billion. PNCCs Miriam M. Pasetes could not properly explain
this discrepancy, except by stating that the P36 billion includes
the principal plus interest and penalties, thus:

SEN. OSMEA. Teka muna. What is
the 36 billion that appear in the resolution of
the board in September 2000 (sic)? This is
the same resolution that recognizes,
acknowledges and confirms PNCC's
obligations to Marubeni. And subparagraph
(a) says Government of the Philippines, in
the amount of 36,023,784,000 and
change. And then (b) Marubeni
Corporation in the amount of
10,743,000,000. So, therefore, in the same
resolution, you acknowledged that had
something like P46.7 billion in
obligations. Why did PNCC settle the 10
billion and did not protect the national
government's 36 billion? And then, number
two, why is it now in your books, the 36
billion is now down to five? If you use that
ratio, then Marubeni should be down to one.

MS. PASETES. Sir, the amount of 36 billion is principal
plus interest and penalties.

SEN. OSMEA. And what about Marubeni? Is that just
principal only?

MS. PASETES. Principal and interest.

SEN. OSMEA. So, I mean, you know, it's equal
treatment. Ten point seven billion is principal plus penalties
plus interest, hindi ba?

MS. PASETES. Yes, sir. Yes, Your Honor.

SEN. OSMEA. All right. So now,
what you are saying is that you gonna pay
Marubeni 6 billion and change and the
national government is only recognizing 5
billion. I don't think that's protecting the
interest of the national government at
all.
[100]



PNCC failed to explain satisfactorily why in its books the
obligation to the National Government was reduced when no
payment to the National Government appeared to have been
made. PNCC failed to justify why it made it appear that
the obligation to the National Government was less
than the obligation to Marubeni. It is another obvious
ploy to justify the preferential treatment given to
Radstock to the great prejudice of the National
Government.

VI.
Supreme Court is Not Legitimizer of Violations of
Laws

During the oral arguments, counsels for Radstock and
PNCC admitted that the Compromise Agreement violates the
Constitution and existing laws. However, they rely on this
Court to approve the Compromise Agreement to shield their
clients from possible criminal acts arising from violation of the
Constitution and existing laws. In their view, once this Court
approves the Compromise Agreement, their clients are home
free from prosecution, and can enjoy theP6.185
billion loot. The following exchanges during the oral
arguments reveal this view:

ASSOCIATE JUSTICE CARPIO:
If there is no agreement, they better
remit all of that to the National
Government. They cannot just hold
that. They are holding that [in]
trust, as you said, x x x you agree,
for the National Government.

DEAN AGABIN:
Yes, thats why, they are asking the
Honorable Court to approve the
compromise agreement.

ASSOCIATE JUSTICE CARPIO:
We cannot approve that if the
power to authorize the
expenditure [belongs] to
Congress. How can we usurp x
x x the power of Congress to
authorize that
expenditure[?] Its only
Congress that can authorize
the expenditure of funds from
the general funds.

DEAN AGABIN:
But, Your Honor, if the
Honorable Court would
approve of this compromise
agreement, I believe that this
would be binding on Congress.

ASSOCIATE JUSTICE CARPIO:
Ignore the Constitutional
provision that money shall be
paid out of the National
Treasury only pursuant to an
appropriation by law. You
want us to ignore that[?]

DEAN AGABIN:
Not really, Your Honor, but I
suppose that Congress would
have no choice, because this is
a final judgment of the
Honorable Court.
[101]


x x x x
ASSOCIATE JUSTICE CARPIO:
So, if Radstock makes the assignment,
it must own its rights, otherwise, it
cannot assign it, correct?

ATTY. AGRA:
Pursuant to the compromise agreement, once
approved, yes, Your Honors.

ASSOCIATE JUSTICE CARPIO:
So, you are saying that Radstock can
own the rights to ownership of the
land?


ATTY. AGRA:
Yes, Your Honors.

ASSOCIATE JUSTICE CARPIO:
Yes?

ATTY. AGRA:
The premise, Your Honor, you mentioned a while
ago was, if this Court approves said
compromise (interrupted).
[102]
(Emphasis supplied)



This Court is not, and should never be, a rubber stamp for
litigants hankering to pocket public funds for their selfish
private gain. This Court is the ultimate guardian of the public
interest, the last bulwark against those who seek to plunder the
public coffers. This Court cannot, and must never, bring itself
down to the level of legitimizer of violations of the
Constitution, existing laws or public policy.

Conclusion

In sum, the acts of the PNCC Board in (1) issuing Board
Resolution Nos. BD-092-2000 and BD-099-2000 expressly
admitting liability for the Marubeni loans, and (2) entering
into the Compromise Agreement, constitute evident bad faith
and gross inexcusable negligence, amounting to fraud, in the
management of PNCCs affairs. Being public officers, the
government nominees in the PNCC Board must answer not
only to PNCC and its stockholders, but also to the Filipino
people for grossly mishandling PNCCs finances.

Under Article 1409 of the Civil Code, the Compromise
Agreement is inexistent and void from the beginning,
and cannot be ratified, thus:


Art. 1409. The following contracts are
inexistent and void from the
beginning:

(1) Those whose
cause, object or
purpose
is contrary to
law, morals, good
customs, public
order or public
policy;

x x x

(7) Those expressly prohibited
or declared void by law.

These contracts cannot be ratified.
x x x. (Emphasis supplied)


The Compromise Agreement is indisputably contrary to
the Constitution, existing laws and public policy. Under
Article 1409, the Compromise Agreement is expressly declared
void and cannot be ratified. No court, not even this
Court, can ratify or approve the Compromise
Agreement. This Court must perform its duty to defend and
uphold the Constitution, existing laws, and fundamental public
policy. This Court must not shirk in declaring the Compromise
Agreement inexistent and void ab initio.

WHEREFORE, we GRANT the petition in G.R. No.
180428. We SET ASIDE the Decision dated 25 January 2007
and the Resolutions dated 12 June 2007 and 5 November
2007 of the Court of Appeals. We DECLARE (1) PNCC Board
Resolution Nos. BD-092-2000 and BD-099-2000 admitting
liability for the Marubeni loans VOID AB INITIO for causing
undue injury to the Government and giving unwarranted
benefits to a private party, constituting a corrupt practice and
unlawful act under Section 3(e) of the Anti-Graft and Corrupt
Practices Act, and (2) the Compromise Agreement between the
Philippine National Construction Corporation and Radstock
Securities LimitedINEXISTENT AND VOID AB
INITIO for being contrary to Section 29(1), Article VI and
Sections 3 and 7, Article XII of the Constitution; Section 20(1),
Chapter IV, Subtitle B, Title I, Book V of the Administrative
Code of 1987; Sections 4(2), 79, 84(1), and 85 of the
Government Auditing Code; and Articles 2241, 2242, 2243 and
2244 of the Civil Code.

We GRANT the intervention of Asiavest Merchant
Bankers Berhad in G.R. No. 178158
but DECLARE that Strategic Alliance Development
Corporation has no legal standing to sue.


C. H. STEINBERG V. VELASCO
Frank H. Young for appellant.
Pablo Lorenzo and Delfin Joven for appellees.
STATEMENT
Plaintiff is the receiver of the Sibuguey Trading Company, a
domestic corporation. The defendants are residents of the
Philippine Islands.
It is alleged that the defendants, Gregorio Velasco, as
president, Felix del Castillo, as vice-president, Andres L.
Navallo, as secretary-treasurer, and Rufino Manuel, as director
of Trading Company, at a meeting of the board of directors
held on July 24, 1922, approved and authorized various lawful
purchases already made of a large portion of the capital stock
of the company from its various stockholders, thereby diverting
its funds to the injury, damage and in fraud of the creditors of
the corporation. That pursuant to such resolution and on
March 31, 1922, the corporation purchased from the defendant
S. R. Ganzon 100 shares of its capital stock of the par value of
P10, and on June 29, 1922, it purchased from the defendant
Felix D. Mendaros 100 shares of the par value of P10, and on
July 16, 1922, it purchased from the defendant Felix D.
Mendaros 100 shares of the par value of P10, each, and on
April 5, 1922, it purchased from the defendant Dionisio
Saavedra 10 shares of the same par value, and on June 29,
1922, it purchased from the defendant Valentin Matias 20
shares of like value. That the total amount of the capital stock
unlawfully purchased was P3,300. That at the time of such
purchase, the corporation had accounts payable amounting to
P13,807.50, most of which were unpaid at the time petition for
the dissolution of the corporation was financial condition, in
contemplation of an insolvency and dissolution.
As a second cause of action, plaintiff alleges that on July 24,
1922, the officers and directors of the corporation approved a
resolution for the payment of P3,000 as dividends to its
stockholders, which was wrongfully done and in bad faith, and
to the injury and fraud of its creditors. That at the time the
petition for the dissolution of the corporation was presented it
had accounts payable in the sum of P9,241.19, "and practically
worthless accounts receivable."
Plaintiff prays judgment for the sum of P3,300 from the
defendants Gregorio Velasco, Felix del Castillo, Andres L.
Navallo and Rufino Manuel, personally as members of the
Board of Directors, or for the recovery from the defendants S.
R. Ganzon, of the sum of P1,000, from the defendant Felix D.
Mendaros, P2,000, and from the defendant Dionisio Saavedra,
P100, and under his second cause of action, he prays judgment
for the sum of P3,000, with legal interest against the board of
directors, and costs.
For answer the defendants Felix del Castillo, Rufino Manuel, S.
R. Ganzon, Dionisio Saavedra and Valentin Matias made a
general and specific denial.
In his amended answer, the defendant Gregorio Velasco admits
paragraphs, 1, 2 and 3 of each cause of action of the complaint,
and that the shares mentioned in paragraph 4 of the first cause
of action were purchased, but alleges that they were purchased
by virtue of a resolution of the board of directors of the
corporation "when the business of the company was going on
very well." That the defendant is one of the principal
shareholders, and that about the same time, he purchase other
shares for his own account, because he thought they would
bring profits. As to the second cause of action, he admits that
the dividends described in paragraph 4 of the complaint were
distributed, but alleges that such distribution was authorized
by the board of directors, "and that the amount represented by
said dividends really constitutes a surplus profit of the
corporation," and as counterclaim, he asks for judgment
against the receiver for P12,512.47 for and on account of his
negligence in failing to collect the accounts.
Although duly served, the defendant Mendaros did not appear
or answer. The defendant Navallo was not served, and the case
against him was dismissed.
April 30, 1928, the case was tried and submitted on a
stipulation of facts, based upon which the lower court
dismissed plaintiff's complaint, and rendered judgment for the
defendants, with costs against the plaintiff, and absolved him
from the cross-complaint of the defendant Velasco, and on
appeal, the plaintiff assigns the following errors:
1. In holding that the Sibuguey Trading Company,
Incorporated, could legally purchase its own stock.
2. In holding that the Board of Directors of the said
Corporation could legally declared a dividend of
P3,000, July 24, 1922.
JOHNS, J.:
It is stipulated that on July 24, 1922, the directors of the
corporation approved the purchase of stocks as follows:
One hundred shares from S. R. Ganzon for P1,000;
One hundred shares from Felix D. Mendaros at the same price;
which purchase was made on June 29, 1922; another
One hundred shares from Felix D. Mendaros at the same price
on July 16, 1922;
Ten shares from Dionisio Saavedra at the same price on June
29, 1922.
That during such times, the defendant Gregorio Velasco
purchased 13 shares for the corporation for P130; Felix del
Castillo 42 shares for P420; Andres Navallo 15 shares for
P150; and the defendant Mendaros 10 shares for P100. That
during the time these various purchases were made, the total
amount of subscribed and paid up capital stock of the
corporation was P10,030, out of the authorized capital stock
2,000 shares of the par value of P10 each.
Paragraph 4 of the stipulation also recites:
Be it also admitted as a fact that the time of the said
purchases there was a surplus profit of the
corporation above-named of P3,314.72.
Paragraph 5 is as follows:
That at the time of the repeatedly mentioned various
purchases of the said capital stock were made, the said
corporation had Accounts Payable in the total amount
of P13,807.50 as shown by the statement of the
corporation, dated June 30, 1922, and the Accounts
Receivable in the sum of P19,126.02 according to the
books, and that the intention of the Board of Directors
was to resell the stocks purchased by the corporations
at a sum above par for each stock, this expectation
being justified by the then satisfactory and sound
financial condition of the business of the corporation.
It is also stipulated that on September 11, 1923, when the
petition for the dissolution of the corporation was presented to
the court, according to a statement made June 30, 1923, it has
accounts payable aggregating P9,41.19, and accounts receivable
for P12,512.47.
Paragraph 7 of the stipulation recites:
That the same defendants, mentioned in paragraph 2
of this stipulation of facts and in the same capacity, on
the same date of July 24, 1922, and at the said
meeting of the said Board of Directors, approved and
authorized by resolution the payment of dividends to
its stockholders, in the sum of three thousand pesos
(P3,000), Philippine currency, which payments were
made at different dates, between September 30, 1922,
and May 12, 1923, both dates inclusive, at a time when
the corporation had accounts less in amount than the
accounts receivable, which resolution was based upon
the balance sheet made as June 30, 1922, said balance
sheet showing that the corporation had a surplus of
P1,069.41, and a profit on the same date of P2,656.08,
or a total surplus amount of P3,725.49, and a reserve
fund of P2,889.23 for bad and doubtful accounts and
depreciation of equipment, thereby leaving a balance
of P3,314.72 of net surplus profit after paying this
dividend.
It is also stipulated at a meeting of the board of directors held
on July 24, 1922, as follows:
6. The president and manager submitted to the Board
of Directors his statement and balance sheet for the
first semester ending June 30, 1922 and
recommended that P3,000 out of the surplus
account be set aside for dividends payable, and that
payments be made in installments so as not to effect
the financial condition of the corporation. That
stockholders having outstanding account with the
corporation should settle first their accounts before
payments of their dividends could be made. Mr.
Castillo moved that the statement and balance sheet
be approved as submitted, and also the
recommendations of the president. Seconded by Mr.
Manuel. Approved.
Paragraph 8 of the stipulation is as follows:
That according to the balance sheet of the
corporation, dated June 30, 1923, it had accounts
receivable in the sum of P12,512.47, due from various
contractor and laborers of the National Coal
Company, and also employees of the herein
corporation, which the herein receiver, after his
appointment on February 28, 1924, although he made
due efforts by personally visiting the location of the
corporation, and of National Coal Company, at its
offices, at Malangas, Mindanao, and by writing
numerous letters of demand to the debtors of the
corporation, in order to collect these accounts
receivable, he was unable to do so as most of them
were without goods or property, and he could not file
any suit against them that might have any property,
for the reason that he had no funds on hand with
which to pay the filing and sheriff fees to Malangas,
and other places of their residences.
From all of which, it appears that on June 30, 1922, the board
of directors of the corporation authorized the purchase of,
purchased and paid for, 330 shares of the capital stock of the
corporation at the agreed price of P3,300, and that at the time
the purchase was made, the corporation was indebted in the
sum of P13,807.50, and that according to its books, it had
accounts receivable in the sum of P19,126.02. That on
September 11, 1923, when the petition was filed for its
dissolution upon the ground that it was insolvent, its accounts
payable amounted to P9,241.19, and its accounts receivable
P12,512.47, or an apparent asset of P3,271.28 over and above
its liabilities. But it will be noted that there is no stipulation or
finding of facts as to what was the actual cash value of its
accounts receivable. Neither is there any stipulation that those
accounts or any part of them ever have been or will be
collected, and it does appear that after his appointment on
February 28, 1924, the receiver made a diligent effort to collect
them, and that he was unable to do so, and it also appears from
the minutes of the board of directors that the president and
manager "recommended that P3,000 out of the surplus
account to be set aside for dividends payable, and that
payments be made in installments so as not to effect the
financial condition of the corporation."
If in truth and in fact the corporation had an actual bona
fide surplus of P3,000 over and above all of its debt and
liabilities, the payment of the P3,000 in dividends would not in
the least impair the financial condition of the corporation or
prejudice the interests of its creditors.
It is very apparent that on June 24, 1922, the board of directors
acted on assumption that, because it appeared from the books
of the corporation that it had accounts receivable of the face
value of P19,126.02, therefore it had a surplus over and above
its debts and liabilities. But as stated there is no stipulation as
to the actual cash value of those accounts, and it does appear
from the stipulation that on February 28, 1924, P12,512.47 of
those accounts had but little, if any, value, and it must be
conceded that, in the purchase of its own stock to the amount
of P3,300 and in declaring the dividends to the amount of
P3,000, the real assets of the corporation were diminished
P6,300. It also appears from paragraph 4 of the stipulation that
the corporation had a "surplus profit" of P3,314.72 only. It is
further stipulated that the dividends should "be made in
installments so as not to effect financial condition of the
corporation." In other words, that the corporation did not then
have an actual bona fidesurplus from which the dividends
could be paid, and that the payment of them in full at the time
would "affect the financial condition of the corporation."
It is, indeed, peculiar that the action of the board in purchasing
the stock from the corporation and in declaring the dividends
on the stock was all done at the same meeting of the board of
directors, and it appears in those minutes that the both Ganzon
and Mendaros were formerly directors and resigned before the
board approved the purchase and declared the dividends, and
that out of the whole 330 shares purchased, Ganzon, sold 100
and Mendaros 200, or a total of 300 shares out of the 330,
which were purchased by the corporation, and for which it paid
P3,300. In other words, that the directors were permitted to
resign so that they could sell their stock to the corporation. As
stated, the authorized capital stock was P20,000 divided into
2,000 shares of the par value of P10 each, which only P10,030
was subscribed and paid. Deducting the P3,300 paid for the
purchase of the stock, there would be left P7,000 of paid up
stock, from which deduct P3,000 paid in dividends, there
would be left P4,000 only. In this situation and upon this state
of facts, it is very apparent that the directors did not act in good
faith or that they were grossly ignorant of their duties.
Upon each of those points, the rule is well stated in Ruling Case
Law, vol. 7, p. 473, section 454 where it is said:
General Duty to Exercise Reasonable Care. The
directors of a corporation are bound to care for its
property and manage its affairs in good faith, and for
a violation of these duties resulting in waste of its
assets or injury to the property they are liable to
account the same as other trustees. Are there can be
no doubt that if they do acts clearly beyond their
power, whereby loss ensues to the corporation, or
dispose of its property or pay away its money without
authority, they will be required to make good the loss
out of their private estates. This is the rule where the
disposition made of money or property of the
corporation is one either not within the lawful power
of the corporation, or, if within the authority of the
particular officer or officers.
And section 458 which says:
Want of Knowledge, Skill, or Competency. It has
been said that directors are not liable for losses
resulting to the corporation from want of knowledge
on their part; or for mistake of judgment, provided
they were honest, and provided they are fairly within
the scope of the powers and discretion confided to the
managing body. But the acceptance of the office of a
director of a corporation implies a competent
knowledge of the duties assumed, and directors
cannot excuse imprudence on the ground of their
ignorance or inexperience; and if they commit an
error of judgment through mere recklessness or want
of ordinary prudence or skill, they may be held liable
for the consequences. Like a mandatory, to whom he
has been likened, a director is bound not only to
exercise proper care and diligence, but ordinary skill
and judgment. As he is bound to exercise ordinary
skill and judgment, he cannot set up that he did not
possess them.
Creditors of a corporation have the right to assume that so long
as there are outstanding debts and liabilities, the board of
directors will not use the assets of the corporation to purchase
its own stock, and that it will not declare dividends to
stockholders when the corporation is insolvent.
The amount involved in this case is not large, but the legal
principles are important, and we have given them the
consideration which they deserve.
The judgment of the lower court is reversed, and (a), as to the
first cause of action, one will be entered for the plaintiff and
against the defendant S. R. Ganzon for the sum of P1,000, with
legal interest from the 10th of February, 1926, and against the
defendant Felix D. Medaros for P2,000, with like interests, and
against the defendant Dionisio Saavedra for P100, with like
interest, and against each of them for costs, each on their
primary liability as purchasers of stock, and (b) against the
defendants Gregorio Velasco, Felix del Castillo and Rufino
Manuel, personally, as members of the board of directors of the
Sibuguey Trading Company, Incorporated, as secondarily liable
for the whole amount of such stock sold and purchased as
above stated, and on the second cause of action, judgment will
be entered (c) for the plaintiff and jointly and severally against
the defendants Gregorio Velasco, Felix del Castillo and Rufino
Manuel, personally, as members of the board of directors of the
Sibuguey Trading Company, Incorporated, for P3,000, with
interest thereon from February 10, 1926, at the rate of 6 per
cent per annum, and costs. So ordered.
BATES v. DRESSER
[251 U.S. 524, 525] Messrs. Frank N. Nay and William A.
Kneeland, both of Boston, Mass., for receiver.
Messrs. Robert G. Dodge and Robert M. Morse, both of Boston,
Mass., for Dresser.
[251 U.S. 524, 526] Messrs. Clarence Alfred Bunker and
Albert E. Pillsbury, both of Boston, Mass., for Bunker and
Hardy.
Mr. Albert E. Pillsbury, of Boston, Mass., for Dean and others.
Mr. Justice HOLMES delivered the opinion of the Court.
This is a bill in equity brought by the receiver of a national
bank to charge its former president and directors with the loss
of a great part of its assets through the thefts of an employe of
the bank while they were in power. The case was sent to a
master who found for the defendants; but the District Court
entered a decree against all of them. 229 Fed. 772. The Circuit
Court of Appeals reversed this decree, dismissed the bill as
against all except the administrator of Edwin Dresser, the
president, cut down the amount with which he was charged1
and refused to add interest from the date of the decree of the
District Court. Dresser v. Bates, 250 Fed. 525, 162 C. C. A. 541.
Dresser's administrator and the receiver both appeal, the latter
contending that the decree of the District Court should be
affirmed with interest and costs.
The bank was a little bank at Cambridge with a capital of
$100,000 and average deposits of somewhere about $300,000.
It had a cashier, a bookkeeper, a teller and a messenger. Before
and during the time of the losses Dresser was its president and
executive officer, a large stockholder, with an inactive deposit
of from $35,000 to $50,000. From July, 1903, to the end,
Frank L. Earl was cashier. Coleman, who made the trouble,
entered the service of the bank as messenger in September,
1903. In January, 1904, he was promoted to be bookkeeper,
being then not quite eighteen but having studied bookkeeping.
In the previous August an auditor employed on the retirement
of a cashier had reported that the daily balance book was very
much behind, that it was impossible to [251 U.S. 524,
527] prove the deposits, and that a competent bookkeeper
should be employed upon the work immediately. Coleman kept
the deposit ledger and this was the work that fell into his
hands. There was no cage in the bank, and in 1904 and 1905
there were some small shortages in the accounts of three
successive tellers that were not accounted for, and the last of
them, Cutting, was asked by Dresser to resign on that ground.
Before doing so he told Dresser that someone had taken the
money and that if he might be allowed to stay he would set a
trap and catch the man, but Dresser did not care to do that and
thought that there was nothing wrong. From Cutting's
resignation on October 7, 1905, Coleman acted as paying and
receiving teller, in addition to his other duty, until November,
1907. During this time there were no shortages disclosed in the
teller's accounts. In May, 1906, Coleman took $2,000 cash
from th vaults of the bank, but restored it the next morning. In
November of the same year he began the thefts that come into
question here. Perhaps in the beginning he took the money
directly. But as he ceased to have charge of the cash in
November, 1907, he invented another way. Having a small
account at the bank, he would draw checks for the amount he
wanted, exchange checks with a Boston broker, get cash for the
broker's check, and, when his own check came to the bank
through the clearing house, would abstract it from the
envelope, enter the others on his book and conceal the
difference by a charge to some other account or a false addition
in the column of drafts or deposits in the depositors' ledger. He
handed to the cashier only the slip from the clearing house that
showed the totals. The cashier paid whatever appeared to be
due and thus Coleman's checks were honored. So far as
Coleman thought it necessary, in view of the absolute trust in
him on the part of all concerned, he took care that his balances
should agree with those in the cashier's book. [251 U.S. 524,
528] By May 1, 1907, Coleman had abstracted $17,000,
concealing the fact by false additions in the column of total
checks, and false balances in the deposit ledger. Then for the
moment a safer concealment was effected by charging the
whole to Dresser's account. Coleman adopted this method
when a bank examiner was expected. Of course when the fraud
was disguised by overcharging a depositor it could not be
discovered except by calling in the passbooks, or taking all the
deposit slips and comparing them with the depositors's ledger
in detail. By November, 1907, the amount taken by Coleman
was $30,100, and the charge on Dresser's account was
$20,000. In 1908 the sum was raised from $33,000 to
$49,671. In 1909 Coleman's activity began to increase. In
January he took $6,829.26; in March, $10, 833.73; in June, his
previous stealings amounting to $83,390.94, he took $
5,152.06; in July, $18,050; in August, $6,250; in September,
$17,350; in October, $47,277.08; in November, $51,847; in
December, $46,956.44; in January, 1910, $27,395.53; in
February, $6,473.97; making a total of $310, 143.02, when the
bank closed on February 21, 1910. As a result of this the
amount of the monthly deposits seemed to decline noticeably
and the directors considered the matter in September, but
concluded that the falling off was due in part to the springing
up of rivals, whose deposits were increasing, but was parallel to
a similar decrease in New York. An examination by a bank
examiner in December, 1909, disclosed nothing wrong to him.
In this connection it should be mentioned that in the previous
semi- annual examinations by national bank examiners
nothing was discovered pointing to malfeasance. The cashier
was honest and everybody believed that they could rely upon
him, although in fact he relied too much upon Coleman, who
also was unsuspected by all. If Earl had opened the envelopes
from the clearing house, and had seen the checks, or had
examined the deposit [251 U.S. 524, 529] ledger with any care
he would have found out what was going on. The scrutiny of
anyone accustomed to such details would have discovered the
false additions and other indicia of fraud that were on the face
of the book. But it may be doubted whether anything less than
a continuous pursuit of the figures through pages would have
done so except by a lucky chance.
The question of the liability of the directors in this case is the
question whether they neglected their duty by accepting the
cashier's statement of liabilities and failing to inspect the
depositors' ledger. The statements of assets always were
correct. A bylaw that had been allowed to become obsolete or
nearly so is invoked as establishing their own standard of
conduct. By that a committee was to be appointed every six
months 'to examine into the affairs of the bank, to count its
cash, and compare its assets and liabilities with the balances on
the general ledger, for the purpose of ascertaining whether or
not the books re correctly kept, and the condition of the bank
in a sound and solvent condition.' Of course liabilities as well as
assets must be known to know the condition and, as this case
shows, peculations may be concealed as well by a false
understatement of liabilities as by a false show of assets. But
the former is not the direction in which fraud would have been
looked for, especially on the part of one who at the time of his
principal abstractions was not in contact with the funds. A
debtor hardly expects to have his liability understated. Some
animals must have given at least one exhibition of dangerous
propensities before the owner can be held. This fraud was a
novelty in the way of swindling a bank so far as the knowledge
of any experience had reached Cambridge before 1910. We are
not prepared to reverse the finding of the master and the
Circuit Court of Appeals that the directors should not be held
answerable for taking the cashier's statement of liabilities to be
as correct as the [251 U.S. 524, 530] statement of assets always
was. If he had not been negligent without their knowledge it
would have been. Their confidence seemed warranted by the
semiannual examinations by the Government examiner and
they were encouraged in their belief that all was well by the
president, whose responsibility, as executive officer; interest, as
large stockholder and depositor; and knowledge, from long
daily presence in the bank, were greater than theirs. They were
not bound by virtue of the office gratuitously assumed by them
to call in the pass books and compare them with the ledger,
and until the event showed the possibility they hardly could
have seen that their failure to look at the ledger opened a way
to fraud. See Briggs v. Spaulding, 141 U.S. 132 , 11 Sup. Ct. 924;
Warner v. Penoyer, 91 Fed. 587, 33 C. C. A. 222, 44 L. R. A. 761.
We are not laying down general principles, however, but
confine our decision to the circumstances of the particular
case.
The position of the president is different. Practically he was the
master of the situation. He was daily at the bank for hours, he
had the deposit ledger in his hands at times and might have
had it at any time. He had had hints and warnings in addition
to those that we have mentioned, warnings that should not be
magnified unduly, but still that taken with the auditor's report
of 1903, the unexplained shortages, the suggestion of the teller,
Cutting, in 1905, and the final seeming rapid decline in
deposits, would have induced scrutiny but for an invincible
repose upon the status quo. In 1908 one Fillmore learned that
a package containing $ 150 left with the bank for safe keeping
was not to be found, told Dresser of the loss, wrote to him that
he could not conclude that the package had been destroyed or
removed by someone connected with the bank, and in later
conversation said that it was evident that there was a thief in
the bank. He added that he would advise the president to look
after Coleman, that he believed he was living at a pretty fast
pace, and that he [251 U.S. 524, 531] had pretty good
authority for thinking that he was supporting a woman. In the
same year or the year before, Coleman, whose pay was never
more than twelve dollars a week, set up an automobile, as was
known to Dresser and commented on unfavorably, to him.
There was also some evidence of notice to Dresser that
Coleman was dealing in copper stocks. In 1909 came the great
and inadequately explained seeming shrinkage in the deposits.
No doubt plausible explanations of his conduct came from
Coleman and the notice as to speculations may have been
slight, but taking the whole story of the relations of the parties,
we are not ready to say that the two courts below erred in
finding that Dresser had been put upon his guard. However
little the warnings may have pointed to the specific facts, had
they been accepted they would have led to an examination of
the depositors' ledger, a discovery of past and a prevention of
future thefts.
We do not perceive any ground for applyi g to this case the
limitations of liability ex contractu adverted to in Globe
Refining Co. v. Landa Cotton Oil Co., 190 U.S. 540 , 23 Sup. Ct.
754. In accepting the presidency Dresser must be taken to have
contemplated responsibility for losses to the bank, whatever
they were, if chargeable to his fault. Those that happened were
chargeable to his fault, after he had warnings that should have
led to steps that would have made fraud impossible, even
though the precise form that the fraud would take hardly could
have been foreseen. We accept with hesitation the date of
December 1, 1908, as the beginning of Dresser's liability, but
think it reasonable that interest should be charged against his
estate upon the sum found by the Circuit Court of Appeals to be
due. It is a question of discretion, not of right, Lincoln v.
Claflin, 7 Wall. 132; Drumm-Flato Commission Co. v.
Edmission, 208 U.S. 534, 539 , 28 S. Sup. Ct. 367; but to the
extent that the decree of the District Court was affirmed,
Kneeland v. American Loan & Trust Co., 138 U.S. 509 , 11 Sup.
Ct. 426; De La Rama [251 U.S. 524, 532] v. De La Rama, 241
U.S. 154, 159 , 36 S. Sup. Ct. 518, Ann. Cas. 1917C, 411, it seems
to us just upon all the circumstances that it should run until the
receiver interposed a delay by his appeal to this Court. The
Scotland, 118 U.S. 507, 520 , 6 S. Sup. Ct. 1174. Upon this as
upon the other points our decision is confined to the specific
facts.
Decree modified by charging the estate of Dresser with interest
from February 1, 1916, to June 1, 1918, upon the sum found to
be due, and affirmed.
Mr. Justice McKENNA and Mr. Justice PITNEY dissent, upon
the ground that not only the administrator of the president of
the bank but the other directors ought to be held liable to the
extent to which they were held by the District Court. 229 Fed.
772.
Mr. Justice VAN DEVANTER and Mr. Justice BRANDEIS took
no part in the decision.

SMITH V. VAN GORKOM
This appeal from the Court of Chancery involves a class action
brought by shareholders of the defendant Trans Union
Corporation ("Trans Union" or "the Company"), originally
seeking rescission of a cash-out merger of Trans Union into the
defendant New T Company ("New T"), a wholly-owned
subsidiary of the defendant, Marmon Group, Inc. ("Marmon").
Alternate relief in the form of damages is sought against the
defendant members of the Board of Directors of Trans Union,
*864 New T, and Jay A. Pritzker and Robert A. Pritzker,
owners of Marmon.[1]
Following trial, the former Chancellor granted judgment for
the defendant directors by unreported letter opinion dated July
6, 1982.[2] Judgment was based on two findings: (1) that the
Board of Directors had acted in an informed manner so as to be
entitled to protection of the business judgment rule in
approving the cash-out merger; and (2) that the shareholder
vote approving the merger should not be set aside because the
stockholders had been "fairly informed" by the Board of
Directors before voting thereon. The plaintiffs appeal.
Speaking for the majority of the Court, we conclude that both
rulings of the Court of Chancery are clearly erroneous.
Therefore, we reverse and direct that judgment be entered in
favor of the plaintiffs and against the defendant directors for
the fair value of the plaintiffs' stockholdings in Trans Union, in
accordance with Weinberger v. UOP, Inc., Del.Supr., 457 A.2d
701 (1983).[3]
We hold: (1) that the Board's decision, reached September 20,
1980, to approve the proposed cash-out merger was not the
product of an informed business judgment; (2) that the Board's
subsequent efforts to amend the Merger Agreement and take
other curative action were ineffectual, both legally and
factually; and (3) that the Board did not deal with complete
candor with the stockholders by failing to disclose all material
facts, which they knew or should have known, before securing
the stockholders' approval of the merger.
I.
The nature of this case requires a detailed factual statement.
The following facts are essentially uncontradicted:[4]
-A-
Trans Union was a publicly-traded, diversified holding
company, the principal earnings of which were generated by its
railcar leasing business. During the period here involved, the
Company had a cash flow of hundreds of millions of dollars
annually. However, the Company had difficulty in generating
sufficient taxable income to offset increasingly large
investment tax credits (ITCs). Accelerated depreciation
deductions had decreased available taxable income against
which to offset accumulating ITCs. The Company took these
deductions, despite their effect on usable ITCs, because the
rental price in the railcar leasing market had already
impounded the purported tax savings.
In the late 1970's, together with other capital-intensive firms,
Trans Union lobbied in Congress to have ITCs refundable in
cash to firms which could not fully utilize the credit. During the
summer of 1980, defendant Jerome W. Van Gorkom, Trans
Union's Chairman and Chief Executive Officer, *865 testified
and lobbied in Congress for refundability of ITCs and against
further accelerated depreciation. By the end of August, Van
Gorkom was convinced that Congress would neither accept the
refundability concept nor curtail further accelerated
depreciation.
Beginning in the late 1960's, and continuing through the
1970's, Trans Union pursued a program of acquiring small
companies in order to increase available taxable income. In
July 1980, Trans Union Management prepared the annual
revision of the Company's Five Year Forecast. This report was
presented to the Board of Directors at its July, 1980 meeting.
The report projected an annual income growth of about 20%.
The report also concluded that Trans Union would have about
$195 million in spare cash between 1980 and 1985, "with the
surplus growing rapidly from 1982 onward." The report
referred to the ITC situation as a "nagging problem" and, given
that problem, the leasing company "would still appear to be
constrained to a tax breakeven." The report then listed four
alternative uses of the projected 1982-1985 equity surplus: (1)
stock repurchase; (2) dividend increases; (3) a major
acquisition program; and (4) combinations of the above. The
sale of Trans Union was not among the alternatives. The report
emphasized that, despite the overall surplus, the operation of
the Company would consume all available equity for the next
several years, and concluded: "As a result, we have sufficient
time to fully develop our course of action."
-B-
On August 27, 1980, Van Gorkom met with Senior
Management of Trans Union. Van Gorkom reported on his
lobbying efforts in Washington and his desire to find a solution
to the tax credit problem more permanent than a continued
program of acquisitions. Various alternatives were suggested
and discussed preliminarily, including the sale of Trans Union
to a company with a large amount of taxable income.
Donald Romans, Chief Financial Officer of Trans Union, stated
that his department had done a "very brief bit of work on the
possibility of a leveraged buy-out." This work had been
prompted by a media article which Romans had seen regarding
a leveraged buy-out by management. The work consisted of a
"preliminary study" of the cash which could be generated by
the Company if it participated in a leveraged buyout. As
Romans stated, this analysis "was very first and rough cut at
seeing whether a cash flow would support what might be
considered a high price for this type of transaction."
On September 5, at another Senior Management meeting
which Van Gorkom attended, Romans again brought up the
idea of a leveraged buy-out as a "possible strategic alternative"
to the Company's acquisition program. Romans and Bruce S.
Chelberg, President and Chief Operating Officer of Trans
Union, had been working on the matter in preparation for the
meeting. According to Romans: They did not "come up" with a
price for the Company. They merely "ran the numbers" at $50
a share and at $60 a share with the "rough form" of their cash
figures at the time. Their "figures indicated that $50 would be
very easy to do but $60 would be very difficult to do under
those figures." This work did not purport to establish a fair
price for either the Company or 100% of the stock. It was
intended to determine the cash flow needed to service the debt
that would "probably" be incurred in a leveraged buyout, based
on "rough calculations" without "any benefit of experts to
identify what the limits were to that, and so forth." These
computations were not considered extensive and no conclusion
was reached.
At this meeting, Van Gorkom stated that he would be willing to
take $55 per share for his own 75,000 shares. He vetoed the
suggestion of a leveraged buy-out by Management, however, as
involving a potential conflict of interest for Management. Van
Gorkom, a certified public accountant and lawyer, had been an
officer of Trans Union *866 for 24 years, its Chief Executive
Officer for more than 17 years, and Chairman of its Board for 2
years. It is noteworthy in this connection that he was then
approaching 65 years of age and mandatory retirement.
For several days following the September 5 meeting, Van
Gorkom pondered the idea of a sale. He had participated in
many acquisitions as a manager and director of Trans Union
and as a director of other companies. He was familiar with
acquisition procedures, valuation methods, and negotiations;
and he privately considered the pros and cons of whether Trans
Union should seek a privately or publicly-held purchaser.
Van Gorkom decided to meet with Jay A. Pritzker, a well-
known corporate takeover specialist and a social acquaintance.
However, rather than approaching Pritzker simply to
determine his interest in acquiring Trans Union, Van Gorkom
assembled a proposed per share price for sale of the Company
and a financing structure by which to accomplish the sale. Van
Gorkom did so without consulting either his Board or any
members of Senior Management except one: Carl Peterson,
Trans Union's Controller. Telling Peterson that he wanted no
other person on his staff to know what he was doing, but
without telling him why, Van Gorkom directed Peterson to
calculate the feasibility of a leveraged buy-out at an assumed
price per share of $55. Apart from the Company's historic stock
market price,[5] and Van Gorkom's long association with Trans
Union, the record is devoid of any competent evidence that $55
represented the per share intrinsic value of the Company.
Having thus chosen the $55 figure, based solely on the
availability of a leveraged buy-out, Van Gorkom multiplied the
price per share by the number of shares outstanding to reach a
total value of the Company of $690 million. Van Gorkom told
Peterson to use this $690 million figure and to assume a $200
million equity contribution by the buyer. Based on these
assumptions, Van Gorkom directed Peterson to determine
whether the debt portion of the purchase price could be paid
off in five years or less if financed by Trans Union's cash flow as
projected in the Five Year Forecast, and by the sale of certain
weaker divisions identified in a study done for Trans Union by
the Boston Consulting Group ("BCG study"). Peterson reported
that, of the purchase price, approximately $50-80 million
would remain outstanding after five years. Van Gorkom was
disappointed, but decided to meet with Pritzker nevertheless.
Van Gorkom arranged a meeting with Pritzker at the latter's
home on Saturday, September 13, 1980. Van Gorkom prefaced
his presentation by stating to Pritzker: "Now as far as you are
concerned, I can, I think, show how you can pay a substantial
premium over the present stock price and pay off most of the
loan in the first five years. * * * If you could pay $55 for this
Company, here is a way in which I think it can be financed."
Van Gorkom then reviewed with Pritzker his calculations based
upon his proposed price of $55 per share. Although Pritzker
mentioned $50 as a more attractive figure, no other price was
mentioned. However, Van Gorkom stated that to be sure that
$55 was the best price obtainable, Trans Union should be free
to accept any better offer. Pritzker demurred, stating that his
organization would serve as a "stalking horse" for an "auction
contest" only if Trans Union would permit Pritzker to buy
1,750,000 shares of Trans Union stock at market price which
Pritzker could then sell to any higher bidder. After further
discussion on this point, Pritzker told Van Gorkom that he
would give him a more definite reaction soon.
*867 On Monday, September 15, Pritzker advised Van Gorkom
that he was interested in the $55 cash-out merger proposal and
requested more information on Trans Union. Van Gorkom
agreed to meet privately with Pritzker, accompanied by
Peterson, Chelberg, and Michael Carpenter, Trans Union's
consultant from the Boston Consulting Group. The meetings
took place on September 16 and 17. Van Gorkom was
"astounded that events were moving with such amazing
rapidity."
On Thursday, September 18, Van Gorkom met again with
Pritzker. At that time, Van Gorkom knew that Pritzker
intended to make a cash-out merger offer at Van Gorkom's
proposed $55 per share. Pritzker instructed his attorney, a
merger and acquisition specialist, to begin drafting merger
documents. There was no further discussion of the $55 price.
However, the number of shares of Trans Union's treasury stock
to be offered to Pritzker was negotiated down to one million
shares; the price was set at $38-75 cents above the per share
price at the close of the market on September 19. At this point,
Pritzker insisted that the Trans Union Board act on his merger
proposal within the next three days, stating to Van Gorkom:
"We have to have a decision by no later than Sunday [evening,
September 21] before the opening of the English stock
exchange on Monday morning." Pritzker's lawyer was then
instructed to draft the merger documents, to be reviewed by
Van Gorkom's lawyer, "sometimes with discussion and
sometimes not, in the haste to get it finished."
On Friday, September 19, Van Gorkom, Chelberg, and Pritzker
consulted with Trans Union's lead bank regarding the
financing of Pritzker's purchase of Trans Union. The bank
indicated that it could form a syndicate of banks that would
finance the transaction. On the same day, Van Gorkom
retained James Brennan, Esquire, to advise Trans Union on the
legal aspects of the merger. Van Gorkom did not consult with
William Browder, a Vice-President and director of Trans Union
and former head of its legal department, or with William
Moore, then the head of Trans Union's legal staff.
On Friday, September 19, Van Gorkom called a special meeting
of the Trans Union Board for noon the following day. He also
called a meeting of the Company's Senior Management to
convene at 11:00 a.m., prior to the meeting of the Board. No
one, except Chelberg and Peterson, was told the purpose of the
meetings. Van Gorkom did not invite Trans Union's investment
banker, Salomon Brothers or its Chicago-based partner, to
attend.
Of those present at the Senior Management meeting on
September 20, only Chelberg and Peterson had prior
knowledge of Pritzker's offer. Van Gorkom disclosed the offer
and described its terms, but he furnished no copies of the
proposed Merger Agreement. Romans announced that his
department had done a second study which showed that, for a
leveraged buy-out, the price range for Trans Union stock was
between $55 and $65 per share. Van Gorkom neither saw the
study nor asked Romans to make it available for the Board
meeting.
Senior Management's reaction to the Pritzker proposal was
completely negative. No member of Management, except
Chelberg and Peterson, supported the proposal. Romans
objected to the price as being too low;[6] he was critical of the
timing and suggested that consideration should be given to the
adverse tax consequences of an all-cash deal for low-basis
shareholders; and he took the position that the agreement to
sell Pritzker one million newly-issued shares at market price
would inhibit other offers, as would the prohibitions against
soliciting bids and furnishing inside information *868 to other
bidders. Romans argued that the Pritzker proposal was a "lock
up" and amounted to "an agreed merger as opposed to an
offer." Nevertheless, Van Gorkom proceeded to the Board
meeting as scheduled without further delay.
Ten directors served on the Trans Union Board, five inside
(defendants Bonser, O'Boyle, Browder, Chelberg, and Van
Gorkom) and five outside (defendants Wallis, Johnson,
Lanterman, Morgan and Reneker). All directors were present
at the meeting, except O'Boyle who was ill. Of the outside
directors, four were corporate chief executive officers and one
was the former Dean of the University of Chicago Business
School. None was an investment banker or trained financial
analyst. All members of the Board were well informed about
the Company and its operations as a going concern. They were
familiar with the current financial condition of the Company,
as well as operating and earnings projections reported in the
recent Five Year Forecast. The Board generally received regular
and detailed reports and was kept abreast of the accumulated
investment tax credit and accelerated depreciation problem.
Van Gorkom began the Special Meeting of the Board with a
twenty-minute oral presentation. Copies of the proposed
Merger Agreement were delivered too late for study before or
during the meeting.[7] He reviewed the Company's ITC and
depreciation problems and the efforts theretofore made to
solve them. He discussed his initial meeting with Pritzker and
his motivation in arranging that meeting. Van Gorkom did not
disclose to the Board, however, the methodology by which he
alone had arrived at the $55 figure, or the fact that he first
proposed the $55 price in his negotiations with Pritzker.
Van Gorkom outlined the terms of the Pritzker offer as follows:
Pritzker would pay $55 in cash for all outstanding shares of
Trans Union stock upon completion of which Trans Union
would be merged into New T Company, a subsidiary wholly-
owned by Pritzker and formed to implement the merger; for a
period of 90 days, Trans Union could receive, but could not
actively solicit, competing offers; the offer had to be acted on
by the next evening, Sunday, September 21; Trans Union could
only furnish to competing bidders published information, and
not proprietary information; the offer was subject to Pritzker
obtaining the necessary financing by October 10, 1980; if the
financing contingency were met or waived by Pritzker, Trans
Union was required to sell to Pritzker one million newly-issued
shares of Trans Union at $38 per share.
Van Gorkom took the position that putting Trans Union "up for
auction" through a 90-day market test would validate a
decision by the Board that $55 was a fair price. He told the
Board that the "free market will have an opportunity to judge
whether $55 is a fair price." Van Gorkom framed the decision
before the Board not as whether $55 per share was the highest
price that could be obtained, but as whether the $55 price was
a fair price that the stockholders should be given the
opportunity to accept or reject.[8]
Attorney Brennan advised the members of the Board that they
might be sued if they failed to accept the offer and that a
fairness opinion was not required as a matter of law.
Romans attended the meeting as chief financial officer of the
Company. He told the Board that he had not been involved in
the negotiations with Pritzker and knew nothing about the
merger proposal until *869 the morning of the meeting; that
his studies did not indicate either a fair price for the stock or a
valuation of the Company; that he did not see his role as
directly addressing the fairness issue; and that he and his
people "were trying to search for ways to justify a price in
connection with such a [leveraged buy-out] transaction, rather
than to say what the shares are worth." Romans testified:
I told the Board that the study ran the numbers at 50 and 60,
and then the subsequent study at 55 and 65, and that was not
the same thing as saying that I have a valuation of the company
at X dollars. But it was a way a first step towards reaching that
conclusion.
Romans told the Board that, in his opinion, $55 was "in the
range of a fair price," but "at the beginning of the range."
Chelberg, Trans Union's President, supported Van Gorkom's
presentation and representations. He testified that he
"participated to make sure that the Board members collectively
were clear on the details of the agreement or offer from
Pritzker;" that he "participated in the discussion with Mr.
Brennan, inquiring of him about the necessity for valuation
opinions in spite of the way in which this particular offer was
couched;" and that he was otherwise actively involved in
supporting the positions being taken by Van Gorkom before
the Board about "the necessity to act immediately on this
offer," and about "the adequacy of the $55 and the question of
how that would be tested."
The Board meeting of September 20 lasted about two hours.
Based solely upon Van Gorkom's oral presentation, Chelberg's
supporting representations, Romans' oral statement, Brennan's
legal advice, and their knowledge of the market history of the
Company's stock,[9] the directors approved the proposed
Merger Agreement. However, the Board later claimed to have
attached two conditions to its acceptance: (1) that Trans Union
reserved the right to accept any better offer that was made
during the market test period; and (2) that Trans Union could
share its proprietary information with any other potential
bidders. While the Board now claims to have reserved the right
to accept any better offer received after the announcement of
the Pritzker agreement (even though the minutes of the
meeting do not reflect this), it is undisputed that the Board did
not reserve the right to actively solicit alternate offers.
The Merger Agreement was executed by Van Gorkom during
the evening of September 20 at a formal social event that he
hosted for the opening of the Chicago Lyric Opera. Neither he
nor any other director read the agreement prior to its signing
and delivery to Pritzker.
* * *
On Monday, September 22, the Company issued a press release
announcing that Trans Union had entered into a "definitive"
Merger Agreement with an affiliate of the Marmon Group, Inc.,
a Pritzker holding company. Within 10 days of the public
announcement, dissent among Senior Management over the
merger had become widespread. Faced with threatened
resignations of key officers, Van Gorkom met with Pritzker who
agreed to several modifications of the Agreement. Pritzker was
willing to do so provided that Van Gorkom could persuade the
dissidents to remain on the Company payroll for at least six
months after consummation of the merger.
Van Gorkom reconvened the Board on October 8 and secured
the directors' approval of the proposed amendments sight
unseen. The Board also authorized the employment of Salomon
Brothers, its investment *870 banker, to solicit other offers for
Trans Union during the proposed "market test" period.
The next day, October 9, Trans Union issued a press release
announcing: (1) that Pritzker had obtained "the financing
commitments necessary to consummate" the merger with
Trans Union; (2) that Pritzker had acquired one million shares
of Trans Union common stock at $38 per share; (3) that Trans
Union was now permitted to actively seek other offers and had
retained Salomon Brothers for that purpose; and (4) that if a
more favorable offer were not received before February 1, 1981,
Trans Union's shareholders would thereafter meet to vote on
the Pritzker proposal.
It was not until the following day, October 10, that the actual
amendments to the Merger Agreement were prepared by
Pritzker and delivered to Van Gorkom for execution. As will be
seen, the amendments were considerably at variance with Van
Gorkom's representations of the amendments to the Board on
October 8; and the amendments placed serious constraints on
Trans Union's ability to negotiate a better deal and withdraw
from the Pritzker agreement. Nevertheless, Van Gorkom
proceeded to execute what became the October 10
amendments to the Merger Agreement without conferring
further with the Board members and apparently without
comprehending the actual implications of the amendments.
* * *
Salomon Brothers' efforts over a three-month period from
October 21 to January 21 produced only one serious suitor for
Trans Union General Electric Credit Corporation ("GE Credit"),
a subsidiary of the General Electric Company. However, GE
Credit was unwilling to make an offer for Trans Union unless
Trans Union first rescinded its Merger Agreement with
Pritzker. When Pritzker refused, GE Credit terminated further
discussions with Trans Union in early January.
In the meantime, in early December, the investment firm of
Kohlberg, Kravis, Roberts & Co. ("KKR"), the only other
concern to make a firm offer for Trans Union, withdrew its
offer under circumstances hereinafter detailed.
On December 19, this litigation was commenced and, within
four weeks, the plaintiffs had deposed eight of the ten directors
of Trans Union, including Van Gorkom, Chelberg and Romans,
its Chief Financial Officer. On January 21, Management's Proxy
Statement for the February 10 shareholder meeting was mailed
to Trans Union's stockholders. On January 26, Trans Union's
Board met and, after a lengthy meeting, voted to proceed with
the Pritzker merger. The Board also approved for mailing, "on
or about January 27," a Supplement to its Proxy Statement.
The Supplement purportedly set forth all information relevant
to the Pritzker Merger Agreement, which had not been
divulged in the first Proxy Statement.
* * *
On February 10, the stockholders of Trans Union approved the
Pritzker merger proposal. Of the outstanding shares, 69.9%
were voted in favor of the merger; 7.25% were voted against the
merger; and 22.85% were not voted.
II.
We turn to the issue of the application of the business
judgment rule to the September 20 meeting of the Board.
The Court of Chancery concluded from the evidence that the
Board of Directors' approval of the Pritzker merger proposal
fell within the protection of the business judgment rule. The
Court found that the Board had given sufficient time and
attention to the transaction, since the directors had considered
the Pritzker proposal on three different occasions, on
September 20, and on October 8, 1980 and finally on January
26, 1981. On that basis, the Court reasoned that the Board had
acquired, over the four-month period, sufficient information to
reach an informed business judgment *871 on the cash-out
merger proposal. The Court ruled:
... that given the market value of Trans Union's stock, the
business acumen of the members of the board of Trans Union,
the substantial premium over market offered by the Pritzkers
and the ultimate effect on the merger price provided by the
prospect of other bids for the stock in question, that the board
of directors of Trans Union did not act recklessly or
improvidently in determining on a course of action which they
believed to be in the best interest of the stockholders of Trans
Union.
The Court of Chancery made but one finding; i.e., that the
Board's conduct over the entire period from September 20
through January 26, 1981 was not reckless or improvident, but
informed. This ultimate conclusion was premised upon three
subordinate findings, one explicit and two implied. The Court's
explicit finding was that Trans Union's Board was "free to turn
down the Pritzker proposal" not only on September 20 but also
on October 8, 1980 and on January 26, 1981. The Court's
implied, subordinate findings were: (1) that no legally binding
agreement was reached by the parties until January 26; and (2)
that if a higher offer were to be forthcoming, the market test
would have produced it,[10] and Trans Union would have been
contractually free to accept such higher offer. However, the
Court offered no factual basis or legal support for any of these
findings; and the record compels contrary conclusions.
This Court's standard of review of the findings of fact reached
by the Trial Court following full evidentiary hearing is as stated
in Levitt v. Bouvier, Del.Supr., 287 A.2d 671, 673 (1972):
[In an appeal of this nature] this court has the authority to
review the entire record and to make its own findings of fact in
a proper case. In exercising our power of review, we have the
duty to review the sufficiency of the evidence and to test the
propriety of the findings below. We do not, however, ignore the
findings made by the trial judge. If they are sufficiently
supported by the record and are the product of an orderly and
logical deductive process, in the exercise of judicial restraint we
accept them, even though independently we might have
reached opposite conclusions. It is only when the findings
below are clearly wrong and the doing of justice requires their
overturn that we are free to make contradictory findings of fact.
Applying that standard and governing principles of law to the
record and the decision of the Trial Court, we conclude that the
Court's ultimate finding that the Board's conduct was not
"reckless or imprudent" is contrary to the record and not the
product of a logical and deductive reasoning process.
The plaintiffs contend that the Court of Chancery erred as a
matter of law by exonerating the defendant directors under the
business judgment rule without first determining whether the
rule's threshold condition of "due care and prudence" was
satisfied. The plaintiffs assert that the Trial Court found the
defendant directors to have reached an informed business
judgment on the basis of "extraneous considerations and
events that occurred after September 20, 1980." The
defendants deny that the Trial Court committed legal error in
relying upon post-September 20, 1980 events and the
directors' later acquired knowledge. The defendants further
submit that their decision to accept $55 per share was
informed because: (1) they were "highly qualified;" (2) they
were "well-informed;" and (3) they deliberated over the
"proposal" not once but three times. On *872 essentially this
evidence and under our standard of review, the defendants
assert that affirmance is required. We must disagree.
Under Delaware law, the business judgment rule is the
offspring of the fundamental principle, codified in 8 Del.C.
141(a), that the business and affairs of a Delaware corporation
are managed by or under its board of directors.[11]Pogostin v.
Rice, Del.Supr., 480 A.2d 619, 624 (1984); Aronson v. Lewis,
Del.Supr., 473 A.2d 805, 811 (1984); Zapata Corp. v.
Maldonado, Del.Supr., 430 A.2d 779, 782 (1981). In carrying
out their managerial roles, directors are charged with an
unyielding fiduciary duty to the corporation and its
shareholders. Loft, Inc. v. Guth, Del.Ch., 2 A.2d 225 (1938),
aff'd, Del.Supr., 5 A.2d 503 (1939). The business judgment rule
exists to protect and promote the full and free exercise of the
managerial power granted to Delaware directors. Zapata Corp.
v. Maldonado, supra at 782. The rule itself "is a presumption
that in making a business decision, the directors of a
corporation acted on an informed basis, in good faith and in
the honest belief that the action taken was in the best interests
of the company." Aronson, supra at 812. Thus, the party
attacking a board decision as uninformed must rebut the
presumption that its business judgment was an informed one.
Id.
The determination of whether a business judgment is an
informed one turns on whether the directors have informed
themselves "prior to making a business decision, of all material
information reasonably available to them." Id.[12]
Under the business judgment rule there is no protection for
directors who have made "an unintelligent or unadvised
judgment." Mitchell v. Highland-Western Glass, Del.Ch., 167 A.
831, 833 (1933). A director's duty to inform himself in
preparation for a decision derives from the fiduciary capacity in
which he serves the corporation and its stockholders. Lutz v.
Boas, Del.Ch., 171 A.2d 381 (1961). See Weinberger v. UOP,
Inc., supra; Guth v. Loft, supra. Since a director is vested with
the responsibility for the management of the affairs of the
corporation, he must execute that duty with the recognition
that he acts on behalf of others. Such obligation does not
tolerate faithlessness or self-dealing. But fulfillment of the
fiduciary function requires more than the mere absence of bad
faith or fraud. Representation of the financial interests of
others imposes on a director an affirmative duty to protect
those interests and to proceed with a critical eye in assessing
information of the type and under the circumstances present
here. See Lutz v. Boas, supra; Guth v. Loft, supra at 510.
Compare Donovan v. Cunningham, 5th Cir., 716 F.2d 1455,
1467 (1983); Doyle v. Union Insurance Company, Neb.Supr.,
277 N.W.2d 36 (1979); Continental Securities Co. v. Belmont,
N.Y. App., 99 N.E. 138, 141 (1912).
Thus, a director's duty to exercise an informed business
judgment is in *873 the nature of a duty of care, as
distinguished from a duty of loyalty. Here, there were no
allegations of fraud, bad faith, or self-dealing, or proof thereof.
Hence, it is presumed that the directors reached their business
judgment in good faith, Allaun v. Consolidated Oil Co., Del.
Ch., 147 A. 257 (1929), and considerations of motive are
irrelevant to the issue before us.
The standard of care applicable to a director's duty of care has
also been recently restated by this Court. In Aronson, supra, we
stated:
While the Delaware cases use a variety of terms to describe the
applicable standard of care, our analysis satisfies us that under
the business judgment rule director liability is predicated upon
concepts of gross negligence. (footnote omitted)
473 A.2d at 812.
We again confirm that view. We think the concept of gross
negligence is also the proper standard for determining whether
a business judgment reached by a board of directors was an
informed one.[13]
In the specific context of a proposed merger of domestic
corporations, a director has a duty under 8 Del.C. 251(b),[14]
along with his fellow directors, to act in an informed and
deliberate manner in determining whether to approve an
agreement of merger before submitting the proposal to the
stockholders. Certainly in the merger context, a director may
not abdicate that duty by leaving to the shareholders alone the
decision to approve or disapprove the agreement. See Beard v.
Elster, Del.Supr., 160 A.2d 731, 737 (1960). Only an agreement
of merger satisfying the requirements of 8 Del.C. 251(b) may
be submitted to the shareholders under 251(c). See generally
Aronson v. Lewis, supra at 811-13; see also Pogostin v. Rice,
supra.
It is against those standards that the conduct of the directors of
Trans Union must be tested, as a matter of law and as a matter
of fact, regarding their exercise of an informed business
judgment in voting to approve the Pritzker merger proposal.
III.
The defendants argue that the determination of whether their
decision to accept $55 per share for Trans Union represented
an informed business judgment requires consideration, not
only of that which they knew and learned on September 20, but
also of that which they subsequently learned and did over the
following four-month *874 period before the shareholders met
to vote on the proposal in February, 1981. The defendants
thereby seek to reduce the significance of their action on
September 20 and to widen the time frame for determining
whether their decision to accept the Pritzker proposal was an
informed one. Thus, the defendants contend that what the
directors did and learned subsequent to September 20 and
through January 26, 1981, was properly taken into account by
the Trial Court in determining whether the Board's judgment
was an informed one. We disagree with this post hoc approach.
The issue of whether the directors reached an informed
decision to "sell" the Company on September 20, 1980 must be
determined only upon the basis of the information then
reasonably available to the directors and relevant to their
decision to accept the Pritzker merger proposal. This is not to
say that the directors were precluded from altering their
original plan of action, had they done so in an informed
manner. What we do say is that the question of whether the
directors reached an informed business judgment in agreeing
to sell the Company, pursuant to the terms of the September
20 Agreement presents, in reality, two questions: (A) whether
the directors reached an informed business judgment on
September 20, 1980; and (B) if they did not, whether the
directors' actions taken subsequent to September 20 were
adequate to cure any infirmity in their action taken on
September 20. We first consider the directors' September 20
action in terms of their reaching an informed business
judgment.
-A-
On the record before us, we must conclude that the Board of
Directors did not reach an informed business judgment on
September 20, 1980 in voting to "sell" the Company for $55 per
share pursuant to the Pritzker cash-out merger proposal. Our
reasons, in summary, are as follows:
The directors (1) did not adequately inform themselves as to
Van Gorkom's role in forcing the "sale" of the Company and in
establishing the per share purchase price; (2) were uninformed
as to the intrinsic value of the Company; and (3) given these
circumstances, at a minimum, were grossly negligent in
approving the "sale" of the Company upon two hours'
consideration, without prior notice, and without the exigency
of a crisis or emergency.
As has been noted, the Board based its September 20 decision
to approve the cash-out merger primarily on Van Gorkom's
representations. None of the directors, other than Van Gorkom
and Chelberg, had any prior knowledge that the purpose of the
meeting was to propose a cash-out merger of Trans Union. No
members of Senior Management were present, other than
Chelberg, Romans and Peterson; and the latter two had only
learned of the proposed sale an hour earlier. Both general
counsel Moore and former general counsel Browder attended
the meeting, but were equally uninformed as to the purpose of
the meeting and the documents to be acted upon.
Without any documents before them concerning the proposed
transaction, the members of the Board were required to rely
entirely upon Van Gorkom's 20-minute oral presentation of the
proposal. No written summary of the terms of the merger was
presented; the directors were given no documentation to
support the adequacy of $55 price per share for sale of the
Company; and the Board had before it nothing more than Van
Gorkom's statement of his understanding of the substance of
an agreement which he admittedly had never read, nor which
any member of the Board had ever seen.
Under 8 Del.C. 141(e),[15] "directors are fully protected in
relying in *875 good faith on reports made by officers."
Michelson v. Duncan, Del.Ch., 386 A.2d 1144, 1156 (1978); aff'd
in part and rev'd in part on other grounds, Del.Supr., 407 A.2d
211 (1979). See also Graham v. Allis-Chalmers Mfg. Co.,
Del.Supr., 188 A.2d 125, 130 (1963); Prince v. Bensinger, Del.
Ch., 244 A.2d 89, 94 (1968). The term "report" has been
liberally construed to include reports of informal personal
investigations by corporate officers, Cheff v. Mathes, Del.Supr.,
199 A.2d 548, 556 (1964). However, there is no evidence that
any "report," as defined under 141(e), concerning the Pritzker
proposal, was presented to the Board on September 20.[16]
Van Gorkom's oral presentation of his understanding of the
terms of the proposed Merger Agreement, which he had not
seen, and Romans' brief oral statement of his preliminary study
regarding the feasibility of a leveraged buy-out of Trans Union
do not qualify as 141(e) "reports" for these reasons: The
former lacked substance because Van Gorkom was basically
uninformed as to the essential provisions of the very document
about which he was talking. Romans' statement was irrelevant
to the issues before the Board since it did not purport to be a
valuation study. At a minimum for a report to enjoy the status
conferred by 141(e), it must be pertinent to the subject matter
upon which a board is called to act, and otherwise be entitled to
good faith, not blind, reliance. Considering all of the
surrounding circumstances hastily calling the meeting without
prior notice of its subject matter, the proposed sale of the
Company without any prior consideration of the issue or
necessity therefor, the urgent time constraints imposed by
Pritzker, and the total absence of any documentation
whatsoever the directors were duty bound to make reasonable
inquiry of Van Gorkom and Romans, and if they had done so,
the inadequacy of that upon which they now claim to have
relied would have been apparent.
The defendants rely on the following factors to sustain the Trial
Court's finding that the Board's decision was an informed one:
(1) the magnitude of the premium or spread between the $55
Pritzker offering price and Trans Union's current market price
of $38 per share; (2) the amendment of the Agreement as
submitted on September 20 to permit the Board to accept any
better offer during the "market test" period; (3) the collective
experience and expertise of the Board's "inside" and "outside"
directors;[17] and (4) their reliance on Brennan's legal advice
that the directors might be sued if they rejected the Pritzker
proposal. We discuss each of these grounds seriatim:
(1)
A substantial premium may provide one reason to recommend
a merger, but in the absence of other sound valuation
information, the fact of a premium alone does not provide an
adequate basis upon which to assess the fairness of an offering
price. Here, the judgment reached as to the adequacy of the
premium was based on a comparison between the historically
depressed Trans Union market price and the amount of the
Pritzker offer. Using market price as a basis for concluding that
the premium adequately reflected the true value *876 of the
Company was a clearly faulty, indeed fallacious, premise, as the
defendants' own evidence demonstrates.
The record is clear that before September 20, Van Gorkom and
other members of Trans Union's Board knew that the market
had consistently undervalued the worth of Trans Union's stock,
despite steady increases in the Company's operating income in
the seven years preceding the merger. The Board related this
occurrence in large part to Trans Union's inability to use its
ITCs as previously noted. Van Gorkom testified that he did not
believe the market price accurately reflected Trans Union's true
worth; and several of the directors testified that, as a general
rule, most chief executives think that the market undervalues
their companies' stock. Yet, on September 20, Trans Union's
Board apparently believed that the market stock price
accurately reflected the value of the Company for the purpose
of determining the adequacy of the premium for its sale.
In the Proxy Statement, however, the directors reversed their
position. There, they stated that, although the earnings
prospects for Trans Union were "excellent," they found no basis
for believing that this would be reflected in future stock prices.
With regard to past trading, the Board stated that the prices at
which the Company's common stock had traded in recent years
did not reflect the "inherent" value of the Company. But having
referred to the "inherent" value of Trans Union, the directors
ascribed no number to it. Moreover, nowhere did they disclose
that they had no basis on which to fix "inherent" worth beyond
an impressionistic reaction to the premium over market and an
unsubstantiated belief that the value of the assets was
"significantly greater" than book value. By their own admission
they could not rely on the stock price as an accurate measure of
value. Yet, also by their own admission, the Board members
assumed that Trans Union's market price was adequate to
serve as a basis upon which to assess the adequacy of the
premium for purposes of the September 20 meeting.
The parties do not dispute that a publicly-traded stock price is
solely a measure of the value of a minority position and, thus,
market price represents only the value of a single share.
Nevertheless, on September 20, the Board assessed the
adequacy of the premium over market, offered by Pritzker,
solely by comparing it with Trans Union's current and
historical stock price. (See supra note 5 at 866.)
Indeed, as of September 20, the Board had no other
information on which to base a determination of the intrinsic
value of Trans Union as a going concern. As of September 20,
the Board had made no evaluation of the Company designed to
value the entire enterprise, nor had the Board ever previously
considered selling the Company or consenting to a buy-out
merger. Thus, the adequacy of a premium is indeterminate
unless it is assessed in terms of other competent and sound
valuation information that reflects the value of the particular
business.
Despite the foregoing facts and circumstances, there was no
call by the Board, either on September 20 or thereafter, for any
valuation study or documentation of the $55 price per share as
a measure of the fair value of the Company in a cash-out
context. It is undisputed that the major asset of Trans Union
was its cash flow. Yet, at no time did the Board call for a
valuation study taking into account that highly significant
element of the Company's assets.
We do not imply that an outside valuation study is essential to
support an informed business judgment; nor do we state that
fairness opinions by independent investment bankers are
required as a matter of law. Often insiders familiar with the
business of a going concern are in a better position than are
outsiders to gather relevant information; and under
appropriate circumstances, such directors may be fully
protected in relying in good faith upon the valuation reports of
their management. *877 See 8 Del.C. 141(e). See also Cheff v.
Mathes, supra.
Here, the record establishes that the Board did not request its
Chief Financial Officer, Romans, to make any valuation study
or review of the proposal to determine the adequacy of $55 per
share for sale of the Company. On the record before us: The
Board rested on Romans' elicited response that the $55 figure
was within a "fair price range" within the context of a leveraged
buy-out. No director sought any further information from
Romans. No director asked him why he put $55 at the bottom
of his range. No director asked Romans for any details as to his
study, the reason why it had been undertaken or its depth. No
director asked to see the study; and no director asked Romans
whether Trans Union's finance department could do a fairness
study within the remaining 36-hour[18] period available under
the Pritzker offer.
Had the Board, or any member, made an inquiry of Romans,
he presumably would have responded as he testified: that his
calculations were rough and preliminary; and, that the study
was not designed to determine the fair value of the Company,
but rather to assess the feasibility of a leveraged buy-out
financed by the Company's projected cash flow, making certain
assumptions as to the purchaser's borrowing needs. Romans
would have presumably also informed the Board of his view,
and the widespread view of Senior Management, that the
timing of the offer was wrong and the offer inadequate.
The record also establishes that the Board accepted without
scrutiny Van Gorkom's representation as to the fairness of the
$55 price per share for sale of the Company a subject that the
Board had never previously considered. The Board thereby
failed to discover that Van Gorkom had suggested the $55 price
to Pritzker and, most crucially, that Van Gorkom had arrived at
the $55 figure based on calculations designed solely to
determine the feasibility of a leveraged buy-out.[19] No
questions were raised either as to the tax implications of a
cash-out merger or how the price for the one million share
option granted Pritzker was calculated.
We do not say that the Board of Directors was not entitled to
give some credence to Van Gorkom's representation that $55
was an adequate or fair price. Under 141(e), the directors
were entitled to rely upon their chairman's opinion of value
and adequacy, provided that such opinion was reached on a
sound basis. Here, the issue is whether the directors informed
themselves as to all information that was reasonably available
to them. Had they done so, they would have learned of the
source and derivation of the $55 price and could not
reasonably have relied thereupon in good faith.
None of the directors, Management or outside, were
investment bankers or financial analysts. Yet the Board did not
consider recessing the meeting until a later hour that day (or
requesting an extension of Pritzker's Sunday evening deadline)
to give it time to elicit more information as to the sufficiency of
the offer, either from *878 inside Management (in particular
Romans) or from Trans Union's own investment banker,
Salomon Brothers, whose Chicago specialist in merger and
acquisitions was known to the Board and familiar with Trans
Union's affairs.
Thus, the record compels the conclusion that on September 20
the Board lacked valuation information adequate to reach an
informed business judgment as to the fairness of $55 per share
for sale of the Company.[20]
(2)
This brings us to the post-September 20 "market test" upon
which the defendants ultimately rely to confirm the
reasonableness of their September 20 decision to accept the
Pritzker proposal. In this connection, the directors present a
two-part argument: (a) that by making a "market test" of
Pritzker's $55 per share offer a condition of their September 20
decision to accept his offer, they cannot be found to have acted
impulsively or in an uninformed manner on September 20; and
(b) that the adequacy of the $17 premium for sale of the
Company was conclusively established over the following 90 to
120 days by the most reliable evidence available the
marketplace. Thus, the defendants impliedly contend that the
"market test" eliminated the need for the Board to perform any
other form of fairness test either on September 20, or
thereafter.
Again, the facts of record do not support the defendants'
argument. There is no evidence: (a) that the Merger Agreement
was effectively amended to give the Board freedom to put
Trans Union up for auction sale to the highest bidder; or (b)
that a public auction was in fact permitted to occur. The
minutes of the Board meeting make no reference to any of this.
Indeed, the record compels the conclusion that the directors
had no rational basis for expecting that a market test was
attainable, given the terms of the Agreement as executed
during the evening of September 20. We rely upon the
following facts which are essentially uncontradicted:
The Merger Agreement, specifically identified as that originally
presented to the Board on September 20, has never been
produced by the defendants, notwithstanding the plaintiffs'
several demands for production before as well as during trial.
No acceptable explanation of this failure to produce documents
has been given to either the Trial Court or this Court.
Significantly, neither the defendants nor their counsel have
made the affirmative representation that this critical document
has been produced. Thus, the Court is deprived of the best
evidence on which to judge the merits of the defendants'
position as to the care and attention which they gave to the
terms of the Agreement on September 20.
Van Gorkom states that the Agreement as submitted
incorporated the ingredients for a market test by authorizing
Trans Union to receive competing offers over the next 90-day
period. However, he concedes that the Agreement barred Trans
Union from actively soliciting such offers and from furnishing
to interested parties any information about the Company other
than that already in the public domain. Whether the original
Agreement of September 20 went so far as to authorize Trans
Union to receive competitive proposals is arguable. The
defendants' unexplained failure to produce and identify the
original Merger Agreement permits the logical inference that
the instrument would not support their assertions in this
regard. Wilmington Trust Co. v. General Motors Corp.,
Del.Supr., 51 A.2d 584, 593 (1947); II Wigmore on Evidence
291 (3d ed. 1940). It is a well established principle that the
production of weak evidence when strong is, or should have
been, available can lead only to the conclusion that the strong
would have been adverse. Interstate Circuit v. United States,
306 U.S. *879 208, 226, 59 S.Ct. 467, 474, 83 L.Ed. 610 (1939);
Deberry v. State, Del.Supr., 457 A.2d 744, 754 (1983). Van
Gorkom, conceding that he never read the Agreement, stated
that he was relying upon his understanding that, under
corporate law, directors always have an inherent right, as well
as a fiduciary duty, to accept a better offer notwithstanding an
existing contractual commitment by the Board. (See the
discussion infra, part III B(3) at p. 55.)
The defendant directors assert that they "insisted" upon
including two amendments to the Agreement, thereby
permitting a market test: (1) to give Trans Union the right to
accept a better offer; and (2) to reserve to Trans Union the
right to distribute proprietary information on the Company to
alternative bidders. Yet, the defendants concede that they did
not seek to amend the Agreement to permit Trans Union to
solicit competing offers.
Several of Trans Union's outside directors resolutely
maintained that the Agreement as submitted was approved on
the understanding that, "if we got a better deal, we had a right
to take it." Director Johnson so testified; but he then added,
"And if they didn't put that in the agreement, then the
management did not carry out the conclusion of the Board.
And I just don't know whether they did or not." The only clause
in the Agreement as finally executed to which the defendants
can point as "keeping the door open" is the following
underlined statement found in subparagraph (a) of section
2.03 of the Merger Agreement as executed:
The Board of Directors shall recommend to the stockholders of
Trans Union that they approve and adopt the Merger
Agreement (`the stockholders' approval') and to use its best
efforts to obtain the requisite votes therefor. GL acknowledges
that Trans Union directors may have a competing fiduciary
obligation to the shareholders under certain circumstances.
Clearly, this language on its face cannot be construed as
incorporating either of the two "conditions" described above:
either the right to accept a better offer or the right to distribute
proprietary information to third parties. The logical witness for
the defendants to call to confirm their construction of this
clause of the Agreement would have been Trans Union's
outside attorney, James Brennan. The defendants' failure,
without explanation, to call this witness again permits the
logical inference that his testimony would not have been
helpful to them. The further fact that the directors adjourned,
rather than recessed, the meeting without incorporating in the
Agreement these important "conditions" further weakens the
defendants' position. As has been noted, nothing in the Board's
Minutes supports these claims. No reference to either of the so-
called "conditions" or of Trans Union's reserved right to test
the market appears in any notes of the Board meeting or in the
Board Resolution accepting the Pritzker offer or in the Minutes
of the meeting itself. That evening, in the midst of a formal
party which he hosted for the opening of the Chicago Lyric
Opera, Van Gorkom executed the Merger Agreement without
he or any other member of the Board having read the
instruments.
The defendants attempt to downplay the significance of the
prohibition against Trans Union's actively soliciting competing
offers by arguing that the directors "understood that the entire
financial community would know that Trans Union was for sale
upon the announcement of the Pritzker offer, and anyone
desiring to make a better offer was free to do so." Yet, the press
release issued on September 22, with the authorization of the
Board, stated that Trans Union had entered into "definitive
agreements" with the Pritzkers; and the press release did not
even disclose Trans Union's limited right to receive and accept
higher offers. Accompanying this press release was a further
public announcement that Pritzker had been granted an option
to purchase at any time one million shares of *880 Trans
Union's capital stock at 75 cents above the then-current price
per share.
Thus, notwithstanding what several of the outside directors
later claimed to have "thought" occurred at the meeting, the
record compels the conclusion that Trans Union's Board had
no rational basis to conclude on September 20 or in the days
immediately following, that the Board's acceptance of Pritzker's
offer was conditioned on (1) a "market test" of the offer; and (2)
the Board's right to withdraw from the Pritzker Agreement and
accept any higher offer received before the shareholder
meeting.
(3)
The directors' unfounded reliance on both the premium and
the market test as the basis for accepting the Pritzker proposal
undermines the defendants' remaining contention that the
Board's collective experience and sophistication was a
sufficient basis for finding that it reached its September 20
decision with informed, reasonable deliberation.[21]Compare
Gimbel v. Signal Companies, Inc., Del. Ch., 316 A.2d 599
(1974), aff'd per curiam, Del. Supr., 316 A.2d 619 (1974). There,
the Court of Chancery preliminary enjoined a board's sale of
stock of its wholly-owned subsidiary for an alleged grossly
inadequate price. It did so based on a finding that the business
judgment rule had been pierced for failure of management to
give its board "the opportunity to make a reasonable and
reasoned decision." 316 A.2d at 615. The Court there reached
this result notwithstanding the board's sophistication and
experience; the company's need of immediate cash; and the
board's need to act promptly due to the impact of an energy
crisis on the value of the underlying assets being sold all of its
subsidiary's oil and gas interests. The Court found those factors
denoting competence to be outweighed by evidence of gross
negligence; that management in effect sprang the deal on the
board by negotiating the asset sale without informing the
board; that the buyer intended to "force a quick decision" by
the board; that the board meeting was called on only one-and-
a-half days' notice; that its outside directors were not notified
of the meeting's purpose; that during a meeting spanning "a
couple of hours" a sale of assets worth $480 million was
approved; and that the Board failed to obtain a current
appraisal of its oil and gas interests. The analogy of Signal to
the case at bar is significant.
(4)
Part of the defense is based on a claim that the directors relied
on legal advice rendered at the September 20 meeting by
James Brennan, Esquire, who was present at Van Gorkom's
request. Unfortunately, Brennan did not appear and testify at
trial even though his firm participated in the defense of this
action. There is no contemporaneous evidence of the advice
given by Brennan on September 20, only the later deposition
and trial testimony of certain directors as to their recollections
or understanding of what was said at the meeting. Since
counsel did not testify, and the advice attributed to Brennan is
hearsay received by the Trial Court over the plaintiffs'
objections, we consider it only in the context of the directors'
present claims. In fairness to counsel, we make no findings that
the advice attributed to him was in fact given. We focus solely
on the efficacy of the *881 defendants' claims, made months
and years later, in an effort to extricate themselves from
liability.
Several defendants testified that Brennan advised them that
Delaware law did not require a fairness opinion or an outside
valuation of the Company before the Board could act on the
Pritzker proposal. If given, the advice was correct. However,
that did not end the matter. Unless the directors had before
them adequate information regarding the intrinsic value of the
Company, upon which a proper exercise of business judgment
could be made, mere advice of this type is meaningless; and,
given this record of the defendants' failures, it constitutes no
defense here.[22]
* * *
We conclude that Trans Union's Board was grossly negligent in
that it failed to act with informed reasonable deliberation in
agreeing to the Pritzker merger proposal on September 20; and
we further conclude that the Trial Court erred as a matter of
law in failing to address that question before determining
whether the directors' later conduct was sufficient to cure its
initial error.
A second claim is that counsel advised the Board it would be
subject to lawsuits if it rejected the $55 per share offer. It is, of
course, a fact of corporate life that today when faced with
difficult or sensitive issues, directors often are subject to suit,
irrespective of the decisions they make. However, counsel's
mere acknowledgement of this circumstance cannot be
rationally translated into a justification for a board permitting
itself to be stampeded into a patently unadvised act. While suit
might result from the rejection of a merger or tender offer,
Delaware law makes clear that a board acting within the ambit
of the business judgment rule faces no ultimate liability.
Pogostin v. Rice, supra. Thus, we cannot conclude that the
mere threat of litigation, acknowledged by counsel, constitutes
either legal advice or any valid basis upon which to pursue an
uninformed course.
Since we conclude that Brennan's purported advice is of no
consequence to the defense of this case, it is unnecessary for us
to invoke the adverse inferences which may be attributable to
one failing to appear at trial and testify.
-B-
We now examine the Board's post-September 20 conduct for
the purpose of determining first, whether it was informed and
not grossly negligent; and second, if informed, whether it was
sufficient to legally rectify and cure the Board's derelictions of
September 20.[23]
(1)
First, as to the Board meeting of October 8: Its purpose arose
in the aftermath of the September 20 meeting: (1) the
September 22 press release announcing that Trans Union "had
entered into definitive agreements to merge with an affiliate of
Marmon Group, Inc.;" and (2) Senior Management's ensuing
revolt.
Trans Union's press release stated:
FOR IMMEDIATE RELEASE: CHICAGO, IL Trans Union
Corporation announced today that it had entered into
definitive agreements to merge with an affiliate of The Marmon
Group, Inc. in a transaction whereby Trans Union stockholders
would receive $55 per share in cash for each Trans Union share
held. The Marmon Group, Inc. is controlled by the Pritzker
family of Chicago. The merger is subject to approval by the
stockholders of Trans Union at a special meeting expected to
be held *882 sometime during December or early January.
Until October 10, 1980, the purchaser has the right to
terminate the merger if financing that is satisfactory to the
purchaser has not been obtained, but after that date there is no
such right. In a related transaction, Trans Union has agreed to
sell to a designee of the purchaser one million newly-issued
shares of Trans Union common stock at a cash price of $38 per
share. Such shares will be issued only if the merger financing
has been committed for no later than October 10, 1980, or if
the purchaser elects to waive the merger financing condition.
In addition, the New York Stock Exchange will be asked to
approve the listing of the new shares pursuant to a listing
application which Trans Union intends to file shortly.
Completing of the transaction is also subject to the preparation
of a definitive proxy statement and making various filings and
obtaining the approvals or consents of government agencies.
The press release made no reference to provisions allegedly
reserving to the Board the rights to perform a "market test" and
to withdraw from the Pritzker Agreement if Trans Union
received a better offer before the shareholder meeting. The
defendants also concede that Trans Union never made a
subsequent public announcement stating that it had in fact
reserved the right to accept alternate offers, the Agreement
notwithstanding.
The public announcement of the Pritzker merger resulted in an
"en masse" revolt of Trans Union's Senior Management. The
head of Trans Union's tank car operations (its most profitable
division) informed Van Gorkom that unless the merger were
called off, fifteen key personnel would resign.
Instead of reconvening the Board, Van Gorkom again privately
met with Pritzker, informed him of the developments, and
sought his advice. Pritzker then made the following suggestions
for overcoming Management's dissatisfaction: (1) that the
Agreement be amended to permit Trans Union to solicit, as
well as receive, higher offers; and (2) that the shareholder
meeting be postponed from early January to February 10, 1981.
In return, Pritzker asked Van Gorkom to obtain a commitment
from Senior Management to remain at Trans Union for at least
six months after the merger was consummated.
Van Gorkom then advised Senior Management that the
Agreement would be amended to give Trans Union the right to
solicit competing offers through January, 1981, if they would
agree to remain with Trans Union. Senior Management was
temporarily mollified; and Van Gorkom then called a special
meeting of Trans Union's Board for October 8.
Thus, the primary purpose of the October 8 Board meeting was
to amend the Merger Agreement, in a manner agreeable to
Pritzker, to permit Trans Union to conduct a "market test."[24]
Van Gorkom understood that the proposed amendments were
intended to give the Company an unfettered "right to openly
solicit offers down through January 31." Van Gorkom
presumably so represented the amendments to Trans Union's
Board members on October 8. In a brief session, the directors
approved Van Gorkom's oral presentation of the substance of
the proposed amendments, *883 the terms of which were not
reduced to writing until October 10. But rather than waiting to
review the amendments, the Board again approved them sight
unseen and adjourned, giving Van Gorkom authority to execute
the papers when he received them.[25]
Thus, the Court of Chancery's finding that the October 8 Board
meeting was convened to reconsider the Pritzker "proposal" is
clearly erroneous. Further, the consequence of the Board's
faulty conduct on October 8, in approving amendments to the
Agreement which had not even been drafted, will become
apparent when the actual amendments to the Agreement are
hereafter examined.
The next day, October 9, and before the Agreement was
amended, Pritzker moved swiftly to off-set the proposed
market test amendment. First, Pritzker informed Trans Union
that he had completed arrangements for financing its
acquisition and that the parties were thereby mutually bound
to a firm purchase and sale arrangement. Second, Pritzker
announced the exercise of his option to purchase one million
shares of Trans Union's treasury stock at $38 per share 75
cents above the current market price. Trans Union's
Management responded the same day by issuing a press
release announcing: (1) that all financing arrangements for
Pritzker's acquisition of Trans Union had been completed; and
(2) Pritzker's purchase of one million shares of Trans Union's
treasury stock at $38 per share.
The next day, October 10, Pritzker delivered to Trans Union the
proposed amendments to the September 20 Merger
Agreement. Van Gorkom promptly proceeded to countersign
all the instruments on behalf of Trans Union without reviewing
the instruments to determine if they were consistent with the
authority previously granted him by the Board. The amending
documents were apparently not approved by Trans Union's
Board until a much later date, December 2. The record does
not affirmatively establish that Trans Union's directors ever
read the October 10 amendments.[26]
The October 10 amendments to the Merger Agreement did
authorize Trans Union to solicit competing offers, but the
amendments had more far-reaching effects. The most
significant change was in the definition of the third-party
"offer" available to Trans Union as a possible basis for
withdrawal from its Merger Agreement with Pritzker. Under
the October 10 amendments, a better offer was no longer
sufficient to permit Trans Union's withdrawal. Trans Union
was now permitted to terminate the Pritzker Agreement and
abandon the merger only if, prior to February 10, 1981, Trans
Union had either consummated a merger (or sale of assets)
with a third party or had entered into a "definitive" merger
agreement more favorable than Pritzker's and for a greater
consideration subject only to stockholder approval. Further,
the "extension" of the market test period to February 10, 1981
was circumscribed by other amendments which required Trans
Union to file its preliminary proxy statement on the Pritzker
merger proposal by December 5, 1980 and use its best efforts
to mail the statement to its shareholders by January 5, 1981.
Thus, the market test period was effectively reduced, not
extended. (See infra note 29 at 886.)
In our view, the record compels the conclusion that the
directors' conduct on October *884 8 exhibited the same
deficiencies as did their conduct on September 20. The Board
permitted its Merger Agreement with Pritzker to be amended
in a manner it had neither authorized nor intended. The Court
of Chancery, in its decision, over-looked the significance of the
October 8-10 events and their relevance to the sufficiency of
the directors' conduct. The Trial Court's letter opinion ignores:
the October 10 amendments; the manner of their adoption; the
effect of the October 9 press release and the October 10
amendments on the feasibility of a market test; and the
ultimate question as to the reasonableness of the directors'
reliance on a market test in recommending that the
shareholders approve the Pritzker merger.
We conclude that the Board acted in a grossly negligent
manner on October 8; and that Van Gorkom's representations
on which the Board based its actions do not constitute
"reports" under 141(e) on which the directors could
reasonably have relied. Further, the amended Merger
Agreement imposed on Trans Union's acceptance of a third
party offer conditions more onerous than those imposed on
Trans Union's acceptance of Pritzker's offer on September 20.
After October 10, Trans Union could accept from a third party a
better offer only if it were incorporated in a definitive
agreement between the parties, and not conditioned on
financing or on any other contingency.
The October 9 press release, coupled with the October 10
amendments, had the clear effect of locking Trans Union's
Board into the Pritzker Agreement. Pritzker had thereby
foreclosed Trans Union's Board from negotiating any better
"definitive" agreement over the remaining eight weeks before
Trans Union was required to clear the Proxy Statement
submitting the Pritzker proposal to its shareholders.
(2)
Next, as to the "curative" effects of the Board's post-September
20 conduct, we review in more detail the reaction of Van
Gorkom to the KKR proposal and the results of the Board-
sponsored "market test."
The KKR proposal was the first and only offer received
subsequent to the Pritzker Merger Agreement. The offer
resulted primarily from the efforts of Romans and other senior
officers to propose an alternative to Pritzker's acquisition of
Trans Union. In late September, Romans' group contacted
KKR about the possibility of a leveraged buy-out by all
members of Management, except Van Gorkom. By early
October, Henry R. Kravis of KKR gave Romans written notice
of KKR's "interest in making an offer to purchase 100%" of
Trans Union's common stock.
Thereafter, and until early December, Romans' group worked
with KKR to develop a proposal. It did so with Van Gorkom's
knowledge and apparently grudging consent. On December 2,
Kravis and Romans hand-delivered to Van Gorkom a formal
letter-offer to purchase all of Trans Union's assets and to
assume all of its liabilities for an aggregate cash consideration
equivalent to $60 per share. The offer was contingent upon
completing equity and bank financing of $650 million, which
Kravis represented as 80% complete. The KKR letter made
reference to discussions with major banks regarding the loan
portion of the buy-out cost and stated that KKR was "confident
that commitments for the bank financing * * * can be obtained
within two or three weeks." The purchasing group was to
include certain named key members of Trans Union's Senior
Management, excluding Van Gorkom, and a major Canadian
company. Kravis stated that they were willing to enter into a
"definitive agreement" under terms and conditions
"substantially the same" as those contained in Trans Union's
agreement with Pritzker. The offer was addressed to Trans
Union's Board of Directors and a meeting with the Board,
scheduled for that afternoon, was requested.
Van Gorkom's reaction to the KKR proposal was completely
negative; he did not view the offer as being firm because of its
*885 financing condition. It was pointed out, to no avail, that
Pritzker's offer had not only been similarly conditioned, but
accepted on an expedited basis. Van Gorkom refused Kravis'
request that Trans Union issue a press release announcing
KKR's offer, on the ground that it might "chill" any other
offer.[27] Romans and Kravis left with the understanding that
their proposal would be presented to Trans Union's Board that
afternoon.
Within a matter of hours and shortly before the scheduled
Board meeting, Kravis withdrew his letter-offer. He gave as his
reason a sudden decision by the Chief Officer of Trans Union's
rail car leasing operation to withdraw from the KKR
purchasing group. Van Gorkom had spoken to that officer
about his participation in the KKR proposal immediately after
his meeting with Romans and Kravis. However, Van Gorkom
denied any responsibility for the officer's change of mind.
At the Board meeting later that afternoon, Van Gorkom did not
inform the directors of the KKR proposal because he
considered it "dead." Van Gorkom did not contact KKR again
until January 20, when faced with the realities of this lawsuit,
he then attempted to reopen negotiations. KKR declined due to
the imminence of the February 10 stockholder meeting.
GE Credit Corporation's interest in Trans Union did not
develop until November; and it made no written proposal until
mid-January. Even then, its proposal was not in the form of an
offer. Had there been time to do so, GE Credit was prepared to
offer between $2 and $5 per share above the $55 per share
price which Pritzker offered. But GE Credit needed an
additional 60 to 90 days; and it was unwilling to make a formal
offer without a concession from Pritzker extending the
February 10 "deadline" for Trans Union's stockholder meeting.
As previously stated, Pritzker refused to grant such extension;
and on January 21, GE Credit terminated further negotiations
with Trans Union. Its stated reasons, among others, were its
"unwillingness to become involved in a bidding contest with
Pritzker in the absence of the willingness of [the Pritzker
interests] to terminate the proposed $55 cash merger."
* * *
In the absence of any explicit finding by the Trial Court as to
the reasonableness of Trans Union's directors' reliance on a
market test and its feasibility, we may make our own findings
based on the record. Our review of the record compels a finding
that confirmation of the appropriateness of the Pritzker offer
by an unfettered or free market test was virtually meaningless
in the face of the terms and time limitations of Trans Union's
Merger Agreement with Pritzker as amended October 10, 1980.
(3)
Finally, we turn to the Board's meeting of January 26, 1981.
The defendant directors rely upon the action there taken to
refute the contention that they did not reach an informed
business judgment in approving the Pritzker merger. The
defendants contend that the Trial Court correctly concluded
that Trans Union's directors were, in effect, as "free to turn
down the Pritzker proposal" on January 26, as they were on
September 20.
Applying the appropriate standard of review set forth in Levitt
v. Bouvier, supra, we conclude that the Trial Court's finding in
this regard is neither supported by the record nor the product
of an orderly and logical deductive process. Without
disagreeing with the principle that a business decision by an
originally uninformed board of directors may, under
appropriate circumstances, be timely cured so as to become
informed and deliberate, Muschel v. Western Union
Corporation, Del. Ch., 310 *886 A.2d 904 (1973),[28] we find
that the record does not permit the defendants to invoke that
principle in this case.
The Board's January 26 meeting was the first meeting
following the filing of the plaintiffs' suit in mid-December and
the last meeting before the previously-noticed shareholder
meeting of February 10.[29] All ten members of the Board and
three outside attorneys attended the meeting. At that meeting
the following facts, among other aspects of the Merger
Agreement, were discussed:
(a) The fact that prior to September 20, 1980, no Board
member or member of Senior Management, except Chelberg
and Peterson, knew that Van Gorkom had discussed a possible
merger with Pritzker;
(b) The fact that the price of $55 per share had been suggested
initially to Pritzker by Van Gorkom;
(c) The fact that the Board had not sought an independent
fairness opinion;
(d) The fact that, at the September 20 Senior Management
meeting, Romans and several members of Senior Management
indicated both concern that the $55 per share price was
inadequate and a belief that a higher price should and could be
obtained;
(e) The fact that Romans had advised the Board at its meeting
on September 20, that he and his department had prepared a
study which indicated that the Company had a value in the
range of $55 to $65 per share, and that he could not advise the
Board that the $55 per share offer made by Pritzker was unfair.
The defendants characterize the Board's Minutes of the
January 26 meeting as a "review" of the "entire sequence of
events" from Van Gorkom's initiation of the negotiations on
September 13 forward.[30] The defendants also rely on the
*887 testimony of several of the Board members at trial as
confirming the Minutes.[31] On the basis of this evidence, the
defendants argue that whatever information the Board lacked
to make a deliberate and informed judgment on September 20,
or on October 8, was fully divulged to the entire Board on
January 26. Hence, the argument goes, the Board's vote on
January 26 to again "approve" the Pritzker merger must be
found to have been an informed and deliberate judgment.
On the basis of this evidence, the defendants assert: (1) that the
Trial Court was legally correct in widening the time frame for
determining whether the defendants' approval of the Pritzker
merger represented an informed business judgment to include
the entire four-month period during which the Board
considered the matter from September 20 through January 26;
and (2) that, given this extensive evidence of the Board's
further review and deliberations on January 26, this Court
must affirm the Trial Court's conclusion that the Board's action
was not reckless or improvident.
We cannot agree. We find the Trial Court to have erred, both as
a matter of fact and as a matter of law, in relying on the action
on January 26 to bring the defendants' conduct within the
protection of the business judgment rule.
Johnson's testimony and the Board Minutes of January 26 are
remarkably consistent. Both clearly indicate recognition that
the question of the alternative courses of action, available to
the Board on January 26 with respect to the Pritzker merger,
was a legal question, presenting to the Board (after its review of
the full record developed through pre-trial discovery) three
options: (1) to "continue to recommend" the Pritzker merger;
(2) to "recommend that *888 the stockholders vote against" the
Pritzker merger; or (3) to take a noncommittal position on the
merger and "simply leave the decision to [the] shareholders."
We must conclude from the foregoing that the Board was
mistaken as a matter of law regarding its available courses of
action on January 26, 1981. Options (2) and (3) were not viable
or legally available to the Board under 8 Del.C. 251(b). The
Board could not remain committed to the Pritzker merger and
yet recommend that its stockholders vote it down; nor could it
take a neutral position and delegate to the stockholders the
unadvised decision as to whether to accept or reject the
merger. Under 251(b), the Board had but two options: (1) to
proceed with the merger and the stockholder meeting, with the
Board's recommendation of approval; or (2) to rescind its
agreement with Pritzker, withdraw its approval of the merger,
and notify its stockholders that the proposed shareholder
meeting was cancelled. There is no evidence that the Board
gave any consideration to these, its only legally viable
alternative courses of action.
But the second course of action would have clearly involved a
substantial risk that the Board would be faced with suit by
Pritzker for breach of contract based on its September 20
agreement as amended October 10. As previously noted, under
the terms of the October 10 amendment, the Board's only
ground for release from its agreement with Pritzker was its
entry into a more favorable definitive agreement to sell the
Company to a third party. Thus, in reality, the Board was not
"free to turn down the Pritzker proposal" as the Trial Court
found. Indeed, short of negotiating a better agreement with a
third party, the Board's only basis for release from the Pritzker
Agreement without liability would have been to establish
fundamental wrongdoing by Pritzker. Clearly, the Board was
not "free" to withdraw from its agreement with Pritzker on
January 26 by simply relying on its self-induced failure to have
reached an informed business judgment at the time of its
original agreement. See Wilmington Trust Company v. Coulter,
Del.Supr., 200 A.2d 441, 453 (1964), aff'g Pennsylvania
Company v. Wilmington Trust Company, Del.Ch., 186 A.2d 751
(1962).
Therefore, the Trial Court's conclusion that the Board reached
an informed business judgment on January 26 in determining
whether to turn down the Pritzker "proposal" on that day
cannot be sustained.[32] The Court's conclusion is not
supported by the record; it is contrary to the provisions of
251(b) and basic principles of contract law; and it is not the
product of a logical and deductive reasoning process.
* * *
Upon the basis of the foregoing, we hold that the defendants'
post-September conduct did not cure the deficiencies of their
September 20 conduct; and that, accordingly, the Trial Court
erred in according to the defendants the benefits of the
business judgment rule.
IV.
Whether the directors of Trans Union should be treated as one
or individually in terms of invoking the protection of the
business judgment rule and the applicability of 8 Del.C.
141(c) are questions which were not originally addressed by the
parties in their briefing of this case. This resulted in a
supplemental briefing and a second rehearing en banc on two
basic questions: (a) whether one or more of the directors were
deprived of the protection of the business judgment rule by
evidence of an absence of good faith; and (b) whether one or
more of the outside directors were *889 entitled to invoke the
protection of 8 Del.C. 141(e) by evidence of a reasonable,
good faith reliance on "reports," including legal advice,
rendered the Board by certain inside directors and the Board's
special counsel, Brennan.
The parties' response, including reargument, has led the
majority of the Court to conclude: (1) that since all of the
defendant directors, outside as well as inside, take a unified
position, we are required to treat all of the directors as one as
to whether they are entitled to the protection of the business
judgment rule; and (2) that considerations of good faith,
including the presumption that the directors acted in good
faith, are irrelevant in determining the threshold issue of
whether the directors as a Board exercised an informed
business judgment. For the same reason, we must reject
defense counsel's ad hominem argument for affirmance: that
reversal may result in a multi-million dollar class award
against the defendants for having made an allegedly
uninformed business judgment in a transaction not involving
any personal gain, self-dealing or claim of bad faith.
In their brief, the defendants similarly mistake the business
judgment rule's application to this case by erroneously
invoking presumptions of good faith and "wide discretion":
This is a case in which plaintiff challenged the exercise of
business judgment by an independent Board of Directors.
There were no allegations and no proof of fraud, bad faith, or
self-dealing by the directors.... The business judgment rule,
which was properly applied by the Chancellor, allows directors
wide discretion in the matter of valuation and affords room for
honest differences of opinion. In order to prevail, plaintiffs had
the heavy burden of proving that the merger price was so
grossly inadequate as to display itself as a badge of fraud. That
is a burden which plaintiffs have not met.
However, plaintiffs have not claimed, nor did the Trial Court
decide, that $55 was a grossly inadequate price per share for
sale of the Company. That being so, the presumption that a
board's judgment as to adequacy of price represents an honest
exercise of business judgment (absent proof that the sale price
was grossly inadequate) is irrelevant to the threshold question
of whether an informed judgment was reached. Compare
Sinclair Oil Corp. v. Levien, Del.Supr., 280 A.2d 717 (1971);
Kelly v. Bell, Del.Supr., 266 A.2d 878, 879 (1970); Cole v.
National Cash Credit Association, Del.Ch., 156 A. 183 (1931);
Allaun v. Consolidated Oil Co., supra; Allen Chemical & Dye
Corp. v. Steel & Tube Co. of America, Del.Ch., 120 A. 486
(1923).
V.
The defendants ultimately rely on the stockholder vote of
February 10 for exoneration. The defendants contend that the
stockholders' "overwhelming" vote approving the Pritzker
Merger Agreement had the legal effect of curing any failure of
the Board to reach an informed business judgment in its
approval of the merger.
The parties tacitly agree that a discovered failure of the Board
to reach an informed business judgment in approving the
merger constitutes a voidable, rather than a void, act. Hence,
the merger can be sustained, notwithstanding the infirmity of
the Board's action, if its approval by majority vote of the
shareholders is found to have been based on an informed
electorate. Cf. Michelson v. Duncan, Del.Supr., 407 A.2d 211
(1979), aff'g in part and rev'g in part, Del.Ch., 386 A.2d 1144
(1978). The disagreement between the parties arises over: (1)
the Board's burden of disclosing to the shareholders all
relevant and material information; and (2) the sufficiency of
the evidence as to whether the Board satisfied that burden.
On this issue the Trial Court summarily concluded "that the
stockholders of Trans Union were fairly informed as to the
pending merger...." The Court provided no *890 supportive
reasoning nor did the Court make any reference to the evidence
of record.
The plaintiffs contend that the Court committed error by
applying an erroneous disclosure standard of "adequacy"
rather than "completeness" in determining the sufficiency of
the Company's merger proxy materials. The plaintiffs also
argue that the Board's proxy statements, both its original
statement dated January 19 and its supplemental statement
dated January 26, were incomplete in various material
respects. Finally, the plaintiffs assert that Management's
supplemental statement (mailed "on or about" January 27) was
untimely either as a matter of law under 8 Del.C. 251(c), or
untimely as a matter of equity and the requirements of
complete candor and fair disclosure.
The defendants deny that the Court committed legal or
equitable error. On the question of the Board's burden of
disclosure, the defendants state that there was no dispute at
trial over the standard of disclosure required of the Board; but
the defendants concede that the Board was required to disclose
"all germane facts" which a reasonable shareholder would have
considered important in deciding whether to approve the
merger. Thus, the defendants argue that when the Trial Court
speaks of finding the Company's shareholders to have been
"fairly informed" by Management's proxy materials, the Court
is speaking in terms of "complete candor" as required under
Lynch v. Vickers Energy Corp., Del.Supr., 383 A.2d 278 (1978).
The settled rule in Delaware is that "where a majority of fully
informed stockholders ratify action of even interested
directors, an attack on the ratified transaction normally must
fail." Gerlach v. Gillam, Del.Ch., 139 A.2d 591, 593 (1958). The
question of whether shareholders have been fully informed
such that their vote can be said to ratify director action, "turns
on the fairness and completeness of the proxy materials
submitted by the management to the ... shareholders."
Michelson v. Duncan, supra at 220. As this Court stated in
Gottlieb v. Heyden Chemical Corp., Del.Supr., 91 A.2d 57, 59
(1952):
[T]he entire atmosphere is freshened and a new set of rules
invoked where a formal approval has been given by a majority
of independent, fully informed stockholders....
In Lynch v. Vickers Energy Corp., supra, this Court held that
corporate directors owe to their stockholders a fiduciary duty
to disclose all facts germane to the transaction at issue in an
atmosphere of complete candor. We defined "germane" in the
tender offer context as all "information such as a reasonable
stockholder would consider important in deciding whether to
sell or retain stock." Id. at 281. Accord Weinberger v. UOP,
Inc., supra; Michelson v. Duncan, supra; Schreiber v. Pennzoil
Corp., Del.Ch., 419 A.2d 952 (1980). In reality, "germane"
means material facts.
Applying this standard to the record before us, we find that
Trans Union's stockholders were not fully informed of all facts
material to their vote on the Pritzker Merger and that the Trial
Court's ruling to the contrary is clearly erroneous. We list the
material deficiencies in the proxy materials:
(1) The fact that the Board had no reasonably adequate
information indicative of the intrinsic value of the Company,
other than a concededly depressed market price, was without
question material to the shareholders voting on the merger. See
Weinberger, supra at 709 (insiders' report that cash-out
merger price up to $24 was good investment held material);
Michelson, supra at 224 (alleged terms and intent of stock
option plan held not germane); Schreiber, supra at 959
(management fee of $650,000 held germane).
Accordingly, the Board's lack of valuation information should
have been disclosed. Instead, the directors cloaked the absence
of such information in both the Proxy Statement and the
Supplemental *891 Proxy Statement. Through artful drafting,
noticeably absent at the September 20 meeting, both
documents create the impression that the Board knew the
intrinsic worth of the Company. In particular, the Original
Proxy Statement contained the following:
[a]lthough the Board of Directors regards the intrinsic value of
the Company's assets to be significantly greater than their book
value ..., systematic liquidation of such a large and complex
entity as Trans Union is simply not regarded as a feasible
method of realizing its inherent value. Therefore, a business
combination such as the merger would seem to be the only
practicable way in which the stockholders could realize the
value of the Company.
The Proxy stated further that "[i]n the view of the Board of
Directors ..., the prices at which the Company's common stock
has traded in recent years have not reflected the inherent value
of the Company." What the Board failed to disclose to its
stockholders was that the Board had not made any study of the
intrinsic or inherent worth of the Company; nor had the Board
even discussed the inherent value of the Company prior to
approving the merger on September 20, or at either of the
subsequent meetings on October 8 or January 26. Neither in its
Original Proxy Statement nor in its Supplemental Proxy did the
Board disclose that it had no information before it, beyond the
premium-over-market and the price/earnings ratio, on which
to determine the fair value of the Company as a whole.
(2) We find false and misleading the Board's characterization
of the Romans report in the Supplemental Proxy Statement.
The Supplemental Proxy stated:
At the September 20, 1980 meeting of the Board of Directors of
Trans Union, Mr. Romans indicated that while he could not say
that $55,00 per share was an unfair price, he had prepared a
preliminary report which reflected that the value of the
Company was in the range of $55.00 to $65.00 per share.
Nowhere does the Board disclose that Romans stated to the
Board that his calculations were made in a "search for ways to
justify a price in connection with" a leveraged buy-out
transaction, "rather than to say what the shares are worth," and
that he stated to the Board that his conclusion thus arrived at
"was not the same thing as saying that I have a valuation of the
Company at X dollars." Such information would have been
material to a reasonable shareholder because it tended to
invalidate the fairness of the merger price of $55. Furthermore,
defendants again failed to disclose the absence of valuation
information, but still made repeated reference to the
"substantial premium."
(3) We find misleading the Board's references to the
"substantial" premium offered. The Board gave as their
primary reason in support of the merger the "substantial
premium" shareholders would receive. But the Board did not
disclose its failure to assess the premium offered in terms of
other relevant valuation techniques, thereby rendering
questionable its determination as to the substantiality of the
premium over an admittedly depressed stock market price.
(4) We find the Board's recital in the Supplemental Proxy of
certain events preceding the September 20 meeting to be
incomplete and misleading. It is beyond dispute that a
reasonable stockholder would have considered material the
fact that Van Gorkom not only suggested the $55 price to
Pritzker, but also that he chose the figure because it made
feasible a leveraged buy-out. The directors disclosed that Van
Gorkom suggested the $55 price to Pritzker. But the Board
misled the shareholders when they described the basis of Van
Gorkom's suggestion as follows:
Such suggestion was based, at least in part, on Mr. Van
Gorkom's belief that loans could be obtained from institutional
lenders (together with about a $200 million *892 equity
contribution) which would justify the payment of such price, ...
Although by January 26, the directors knew the basis of the
$55 figure, they did not disclose that Van Gorkom chose the
$55 price because that figure would enable Pritzker to both
finance the purchase of Trans Union through a leveraged buy-
out and, within five years, substantially repay the loan out of
the cash flow generated by the Company's operations.
(5) The Board's Supplemental Proxy Statement, mailed on or
after January 27, added significant new matter, material to the
proposal to be voted on February 10, which was not contained
in the Original Proxy Statement. Some of this new matter was
information which had only been disclosed to the Board on
January 26; much was information known or reasonably
available before January 21 but not revealed in the Original
Proxy Statement. Yet, the stockholders were not informed of
these facts. Included in the "new" matter first disclosed in the
Supplemental Proxy Statement were the following:
(a) The fact that prior to September 20, 1980, no Board
member or member of Senior Management, except Chelberg
and Peterson, knew that Van Gorkom had discussed a possible
merger with Pritzker;
(b) The fact that the sale price of $55 per share had been
suggested initially to Pritzker by Van Gorkom;
(c) The fact that the Board had not sought an independent
fairness opinion;
(d) The fact that Romans and several members of Senior
Management had indicated concern at the September 20
Senior Management meeting that the $55 per share price was
inadequate and had stated that a higher price should and could
be obtained; and
(e) The fact that Romans had advised the Board at its meeting
on September 20 that he and his department had prepared a
study which indicated that the Company had a value in the
range of $55 to $65 per share, and that he could not advise the
Board that the $55 per share offer which Pritzker made was
unfair.
* * *
The parties differ over whether the notice requirements of 8
Del.C. 251(c) apply to the mailing date of supplemental proxy
material or that of the original proxy material.[33] The Trial
Court summarily disposed of the notice issue, stating it was
"satisfied that the proxy material furnished to Trans Union
stockholders ... fairly presented the question to be voted on at
the February 10, 1981 meeting."
The defendants argue that the notice provisions of 251(c)
must be construed as requiring only that stockholders receive
notice of the time, place, and purpose of a meeting to consider
a merger at least 20 days prior to such meeting; and since the
Original Proxy Statement was disseminated more than 20 days
before the meeting, the defendants urge affirmance of the Trial
Court's ruling as correct as a matter of statutory construction.
Apparently, the question has not been addressed by either the
Court of Chancery or this Court; and authority in other
jurisdictions is limited. See Electronic Specialty Co. v. Int'l
Controls Corp., 2d Cir., 409 F.2d 937, 944 (1969) (holding that
a tender offeror's September 16, 1968 correction of a previous
misstatement, combined with an offer of withdrawal running
for eight days until September 24, 1968, was sufficient to cure
past violations and eliminate any need for rescission);
Nicholson File Co. v. H.K. Porter Co., D.R.I., 341 F.Supp. 508,
513-14 (1972), aff'd, 1st Cir., 482 F.2d 421 (1973) *893
(permitting correction of a material misstatement by a mailing
to stockholders within seven days of a tender offer withdrawal
date). Both Electronic and Nicholson are federal security cases
not arising under 8 Del.C. 251(c) and they are otherwise
distinguishable from this case on their facts.
Since we have concluded that Management's Supplemental
Proxy Statement does not meet the Delaware disclosure
standard of "complete candor" under Lynch v. Vickers, supra, it
is unnecessary for us to address the plaintiffs' legal argument
as to the proper construction of 251(c). However, we do find
it advisable to express the view that, in an appropriate case, an
otherwise candid proxy statement may be so untimely as to
defeat its purpose of meeting the needs of a fully informed
electorate.
In this case, the Board's ultimate disclosure as contained in the
Supplemental Proxy Statement related either to information
readily accessible to all of the directors if they had asked the
right questions, or was information already at their disposal. In
short, the information disclosed by the Supplemental Proxy
Statement was information which the defendant directors
knew or should have known at the time the first Proxy
Statement was issued. The defendants simply failed in their
original duty of knowing, sharing, and disclosing information
that was material and reasonably available for their discovery.
They compounded that failure by their continued lack of
candor in the Supplemental Proxy Statement. While we need
not decide the issue here, we are satisfied that, in an
appropriate case, a completely candid but belated disclosure of
information long known or readily available to a board could
raise serious issues of inequitable conduct. Schnell v. Chris-
Craft Industries, Inc., Del.Supr., 285 A.2d 437, 439 (1971).
The burden must fall on defendants who claim ratification
based on shareholder vote to establish that the shareholder
approval resulted from a fully informed electorate. On the
record before us, it is clear that the Board failed to meet that
burden. Weinberger v. UOP, Inc., supra at 703; Michelson v.
Duncan, supra.
* * *
For the foregoing reasons, we conclude that the director
defendants breached their fiduciary duty of candor by their
failure to make true and correct disclosures of all information
they had, or should have had, material to the transaction
submitted for stockholder approval.
VI.
To summarize: we hold that the directors of Trans Union
breached their fiduciary duty to their stockholders (1) by their
failure to inform themselves of all information reasonably
available to them and relevant to their decision to recommend
the Pritzker merger; and (2) by their failure to disclose all
material information such as a reasonable stockholder would
consider important in deciding whether to approve the Pritzker
offer.
We hold, therefore, that the Trial Court committed reversible
error in applying the business judgment rule in favor of the
director defendants in this case.
On remand, the Court of Chancery shall conduct an evidentiary
hearing to determine the fair value of the shares represented by
the plaintiffs' class, based on the intrinsic value of Trans Union
on September 20, 1980. Such valuation shall be made in
accordance with Weinberger v. UOP, Inc., supra at 712-715.
Thereafter, an award of damages may be entered to the extent
that the fair value of Trans Union exceeds $55 per share.
* * *
REVERSED and REMANDED for proceedings consistent
herewith.
McNEILLY, Justice, dissenting:
The majority opinion reads like an advocate's closing address
to a hostile jury. And I say that not lightly. Throughout the
*894 opinion great emphasis is directed only to the negative,
with nothing more than lip service granted the positive aspects
of this case. In my opinion Chancellor Marvel (retired) should
have been affirmed. The Chancellor's opinion was the product
of well reasoned conclusions, based upon a sound deductive
process, clearly supported by the evidence and entitled to
deference in this appeal. Because of my diametrical opposition
to all evidentiary conclusions of the majority, I respectfully
dissent.
It would serve no useful purpose, particularly at this late date,
for me to dissent at great length. I restrain myself from doing
so, but feel compelled to at least point out what I consider to be
the most glaring deficiencies in the majority opinion. The
majority has spoken and has effectively said that Trans Union's
Directors have been the victims of a "fast shuffle" by Van
Gorkom and Pritzker. That is the beginning of the majority's
comedy of errors. The first and most important error made is
the majority's assessment of the directors' knowledge of the
affairs of Trans Union and their combined ability to act in this
situation under the protection of the business judgment rule.
Trans Union's Board of Directors consisted of ten men, five of
whom were "inside" directors and five of whom were "outside"
directors. The "inside" directors were Van Gorkom, Chelberg,
Bonser, William B. Browder, Senior Vice-President-Law, and
Thomas P. O'Boyle, Senior Vice-President-Administration. At
the time the merger was proposed the inside five directors had
collectively been employed by the Company for 116 years and
had 68 years of combined experience as directors. The
"outside" directors were A.W. Wallis, William B. Johnson,
Joseph B. Lanterman, Graham J. Morgan and Robert W.
Reneker. With the exception of Wallis, these were all chief
executive officers of Chicago based corporations that were at
least as large as Trans Union. The five "outside" directors had
78 years of combined experience as chief executive officers, and
53 years cumulative service as Trans Union directors.
The inside directors wear their badge of expertise in the
corporate affairs of Trans Union on their sleeves. But what
about the outsiders? Dr. Wallis is or was an economist and
math statistician, a professor of economics at Yale University,
dean of the graduate school of business at the University of
Chicago, and Chancellor of the University of Rochester. Dr.
Wallis had been on the Board of Trans Union since 1962. He
also was on the Board of Bausch & Lomb, Kodak, Metropolitan
Life Insurance Company, Standard Oil and others.
William B. Johnson is a University of Pennsylvania law
graduate, President of Railway Express until 1966, Chairman
and Chief Executive of I.C. Industries Holding Company, and
member of Trans Union's Board since 1968.
Joseph Lanterman, a Certified Public Accountant, is or was
President and Chief Executive of American Steel, on the Board
of International Harvester, Peoples Energy, Illinois Bell
Telephone, Harris Bank and Trust Company, Kemper
Insurance Company and a director of Trans Union for four
years.
Graham Morgan is achemist, was Chairman and Chief
Executive Officer of U.S. Gypsum, and in the 17 and 18 years
prior to the Trans Union transaction had been involved in 31 or
32 corporate takeovers.
Robert Reneker attended University of Chicago and Harvard
Business Schools. He was President and Chief Executive of
Swift and Company, director of Trans Union since 1971, and
member of the Boards of seven other corporations including
U.S. Gypsum and the Chicago Tribune.
Directors of this caliber are not ordinarily taken in by a "fast
shuffle". I submit they were not taken into this multi-million
dollar corporate transaction without being fully informed and
aware of the state of the art as it pertained to the entire
corporate panoroma of Trans Union. True, even *895 directors
such as these, with their business acumen, interest and
expertise, can go astray. I do not believe that to be the case
here. These men knew Trans Union like the back of their hands
and were more than well qualified to make on the spot
informed business judgments concerning the affairs of Trans
Union including a 100% sale of the corporation. Lest we forget,
the corporate world of then and now operates on what is so
aptly referred to as "the fast track". These men were at the time
an integral part of that world, all professional business men,
not intellectual figureheads.
The majority of this Court holds that the Board's decision,
reached on September 20, 1980, to approve the merger was not
the product of an informed business judgment, that the Board's
subsequent efforts to amend the Merger Agreement and take
other curative action were legally and factually ineffectual, and
that the Board did not deal with complete candor with the
stockholders by failing to disclose all material facts, which they
knew or should have known, before securing the stockholders'
approval of the merger. I disagree.
At the time of the September 20, 1980 meeting the Board was
acutely aware of Trans Union and its prospects. The problems
created by accumulated investment tax credits and accelerated
depreciation were discussed repeatedly at Board meetings, and
all of the directors understood the problem thoroughly.
Moreover, at the July, 1980 Board meeting the directors had
reviewed Trans Union's newly prepared five-year forecast, and
at the August, 1980 meeting Van Gorkom presented the results
of a comprehensive study of Trans Union made by The Boston
Consulting Group. This study was prepared over an 18 month
period and consisted of a detailed analysis of all Trans Union
subsidiaries, including competitiveness, profitability, cash
throw-off, cash consumption, technical competence and future
prospects for contribution to Trans Union's combined net
income.
At the September 20 meeting Van Gorkom reviewed all aspects
of the proposed transaction and repeated the explanation of the
Pritzker offer he had earlier given to senior management.
Having heard Van Gorkom's explanation of the Pritzker's offer,
and Brennan's explanation of the merger documents the
directors discussed the matter. Out of this discussion arose an
insistence on the part of the directors that two modifications to
the offer be made. First, they required that any potential
competing bidder be given access to the same information
concerning Trans Union that had been provided to the
Pritzkers. Second, the merger documents were to be modified
to reflect the fact that the directors could accept a better offer
and would not be required to recommend the Pritzker offer if a
better offer was made. The following language was inserted
into the agreement:
"Within 30 days after the execution of this Agreement, TU shall
call a meeting of its stockholders (the `Stockholder's Meeting')
for the purpose of approving and adopting the Merger
Agreement. The Board of Directors shall recommend to the
stockholders of TU that they approve and adopt the Merger
Agreement (the `Stockholders' Approval') and shall use its best
efforts to obtain the requisite vote therefor; provided, however,
that GL and NTC acknowledge that the Board of Directors of
TU may have a competing fiduciary obligation to the
Stockholders under certain circumstances." (Emphasis added)
While the language is not artfully drawn, the evidence is clear
that the intention underlying that language was to make
specific the right that the directors assumed they had, that is,
to accept any offer that they thought was better, and not to
recommend the Pritzker offer in the face of a better one. At the
conclusion of the meeting, the proposed merger was approved.
At a subsequent meeting on October 8, 1981 the directors, with
the consent of the Pritzkers, amended the Merger Agreement
so as to establish the right of Trans Union to solicit as well as to
receive higher bids, *896 although the Pritzkers insisted that
their merger proposal be presented to the stockholders at the
same time that the proposal of any third party was presented. A
second amendment, which became effective on October 10,
1981, further provided that Trans Union might unilaterally
terminate the proposed merger with the Pritzker company in
the event that prior to February 10, 1981 there existed a
definitive agreement with a third party for a merger,
consolidation, sale of assets, or purchase or exchange of Trans
Union stock which was more favorable for the stockholders of
Trans Union than the Pritzker offer and which was conditioned
upon receipt of stockholder approval and the absence of an
injunction against its consummation.
Following the October 8 board meeting of Trans Union, the
investment banking firm of Salomon Brothers was retained by
the corporation to search for better offers than that of the
Pritzkers, Salomon Brothers being charged with the
responsibility of doing "whatever possible to see if there is a
superior bid in the marketplace over a bid that is on the table
for Trans Union". In undertaking such project, it was agreed
that Salomon Brothers would be paid the amount of $500,000
to cover its expenses as well as a fee equal to 3/8ths of 1% of
the aggregate fair market value of the consideration to be
received by the company in the case of a merger or the like,
which meant that in the event Salomon Brothers should find a
buyer willing to pay a price of $56.00 a share instead of
$55.00, such firm would receive a fee of roughly $2,650,000
plus disbursements.
As the first step in proceeding to carry out its commitment,
Salomon Brothers had a brochure prepared, which set forth
Trans Union's financial history, described the company's
business in detail and set forth Trans Union's operating and
financial projections. Salomon Brothers also prepared a list of
over 150 companies which it believed might be suitable merger
partners, and while four of such companies, namely, General
Electric, Borg-Warner, Bendix, and Genstar, Ltd. showed some
interest in such a merger, none made a firm proposal to Trans
Union and only General Electric showed a sustained
interest.[1] As matters transpired, no firm offer which bettered
the Pritzker offer of $55 per share was ever made.
On January 21, 1981 a proxy statement was sent to the
shareholders of Trans Union advising them of a February 10,
1981 meeting in which the merger would be voted. On January
26, 1981 the directors held their regular meeting. At this
meeting the Board discussed the instant merger as well as all
events, including this litigation, surrounding it. At the
conclusion of the meeting the Board unanimously voted to
recommend to the stockholders that they approve the merger.
Additionally, the directors reviewed and approved a
Supplemental Proxy Statement which, among other things,
advised the stockholders of what had occurred at the instant
meeting and of the fact that General Electric had decided not to
make an offer. On February 10, 1981 *897 the stockholders of
Trans Union met pursuant to notice and voted overwhelmingly
in favor of the Pritzker merger, 89% of the votes cast being in
favor of it.
I have no quarrel with the majority's analysis of the business
judgment rule. It is the application of that rule to these facts
which is wrong. An overview of the entire record, rather than
the limited view of bits and pieces which the majority has
exploded like popcorn, convinces me that the directors made
an informed business judgment which was buttressed by their
test of the market.
At the time of the September 20 meeting the 10 members of
Trans Union's Board of Directors were highly qualified and
well informed about the affairs and prospects of Trans Union.
These directors were acutely aware of the historical problems
facing Trans Union which were caused by the tax laws. They
had discussed these problems ad nauseam. In fact, within two
months of the September 20 meeting the board had reviewed
and discussed an outside study of the company done by The
Boston Consulting Group and an internal five year forecast
prepared by management. At the September 20 meeting Van
Gorkom presented the Pritzker offer, and the board then heard
from James Brennan, the company's counsel in this matter,
who discussed the legal documents. Following this, the Board
directed that certain changes be made in the merger
documents. These changes made it clear that the Board was
free to accept a better offer than Pritzker's if one was made.
The above facts reveal that the Board did not act in a grossly
negligent manner in informing themselves of the relevant and
available facts before passing on the merger. To the contrary,
this record reveals that the directors acted with the utmost care
in informing themselves of the relevant and available facts
before passing on the merger.
The majority finds that Trans Union stockholders were not
fully informed and that the directors breached their fiduciary
duty of complete candor to the stockholders required by Lynch
v. Vickers Energy Corp., Del.Supr. 383 A.2d 278 (1978) [Lynch
I], in that the proxy materials were deficient in five areas.
Here again is exploitation of the negative by the majority
without giving credit to the positive. To respond to the
conclusions of the majority would merely be unnecessary
prolonged argument. But briefly what did the proxy materials
disclose? The proxy material informed the shareholders that
projections were furnished to potential purchasers and such
projections indicated that Trans Union's net income might
increase to approximately $153 million in 1985. That
projection, what is almost three times the net income of
$58,248,000 reported by Trans Union as its net income for
December 31, 1979 confirmed the statement in the proxy
materials that the "Board of Directors believes that, assuming
reasonably favorable economic and financial conditions, the
Company's prospects for future earnings growth are excellent."
This material was certainly sufficient to place the Company's
stockholders on notice that there was a reasonable basis to
believe that the prospects for future earnings growth were
excellent, and that the value of their stock was more than the
stock market value of their shares reflected.
Overall, my review of the record leads me to conclude that the
proxy materials adequately complied with Delaware law in
informing the shareholders about the proposed transaction and
the events surrounding it.
The majority suggests that the Supplemental Proxy Statement
did not comply with the notice requirement of 8 Del.C. 251(c)
that notice of the time, place and purpose of a meeting to
consider a merger must be sent to each shareholder of record
at least 20 days prior to the date of the meeting. In the instant
case an original proxy statement was mailed on January 18,
1981 giving notice of the time, place and purpose of the
meeting. A Supplemental Proxy Statement was mailed January
26, 1981 in an effort to advise Trans Union's *898 shareholders
as to what had occurred at the January 26, 1981 meeting, and
that General Electric had decided not to make an offer. The
shareholder meeting was held February 10, 1981 fifteen days
after the Supplemental Proxy Statement had been sent.
All 251(c) requires is that notice of the time, place and
purpose of the meeting be given at least 20 days prior to the
meeting. This was accomplished by the proxy statement mailed
January 19, 1981. Nothing in 251(c) prevents the
supplementation of proxy materials within 20 days of the
meeting. Indeed when additional information, which a
reasonable shareholder would consider important in deciding
how to vote, comes to light that information must be disclosed
to stockholders in sufficient time for the stockholders to
consider it. But nothing in 251(c) requires this additional
information to be disclosed at least 20 days prior to the
meeting. To reach a contrary result would ignore the current
practice and would discourage the supplementation of proxy
materials in order to disclose the occurrence of intervening
events. In my opinion, fifteen days in the instant case was a
sufficient amount of time for the stockholders to receive and
consider the information in the supplemental proxy statement.
CHRISTIE, Justice, dissenting:
I respectfully dissent.
Considering the standard and scope of our review under Levitt
v. Bouvier, Del. Supr., 287 A.2d 671, 673 (1972), I believe that
the record taken as a whole supports a conclusion that the
actions of the defendants are protected by the business
judgment rule. Aronson v. Lewis, Del.Supr., 473 A.2d 805, 812
(1984); Pogostin v. Rice, Del.Supr., 480 A.2d 619, 627 (1984). I
also am satisfied that the record supports a conclusion that the
defendants acted with the complete candor required by Lynch
v. Vickers Energy Corp., Del.Supr., 383 A.2d 278 (1978). Under
the circumstances I would affirm the judgment of the Court of
Chancery.
ON MOTIONS FOR REARGUMENT
Following this Court's decision, Thomas P. O'Boyle, one of the
director defendants, sought, and was granted, leave for change
of counsel. Thereafter, the individual director defendants,
other than O'Boyle, filed a motion for reargument and director
O'Boyle, through newly-appearing counsel, then filed a
separate motion for reargument. Plaintiffs have responded to
the several motions and this matter has now been duly
considered.
The Court, through its majority, finds no merit to either motion
and concludes that both motions should be denied. We are not
persuaded that any errors of law or fact have been made that
merit reargument.
However, defendant O'Boyle's motion requires comment.
Although O'Boyle continues to adopt his fellow directors'
arguments, O'Boyle now asserts in the alternative that he has
standing to take a position different from that of his fellow
directors and that legal grounds exist for finding him not liable
for the acts or omissions of his fellow directors. Specifically,
O'Boyle makes a two-part argument: (1) that his undisputed
absence due to illness from both the September 20 and the
October 8 meetings of the directors of Trans Union entitles him
to be relieved from personal liability for the failure of the other
directors to exercise due care at those meetings, see Propp v.
Sadacca, Del.Ch., 175 A.2d 33, 39 (1961), modified on other
grounds, Bennett v. Propp, Del.Supr., 187 A.2d 405 (1962); and
(2) that his attendance and participation in the January 26,
1981 Board meeting does not alter this result given this Court's
precise findings of error committed at that meeting.
We reject defendant O'Boyle's new argument as to standing
because not timely asserted. Our reasons are several. One, in
connection with the supplemental briefing of this case in
March, 1984, a special opportunity was afforded the individual
defendants, *899 including O'Boyle, to present any factual or
legal reasons why each or any of them should be individually
treated. Thereafter, at argument before the Court on June 11,
1984, the following colloquy took place between this Court and
counsel for the individual defendants at the outset of counsel's
argument:
COUNSEL: I'll make the argument on behalf of the nine
individual defendants against whom the plaintiffs seek more
than $100,000,000 in damages. That is the ultimate issue in
this case, whether or not nine honest, experienced
businessmen should be subject to damages in a case where
JUSTICE MOORE: Is there a distinction between Chelberg and
Van Gorkom vis-a-vis the other defendants? COUNSEL: No,
sir. JUSTICE MOORE: None whatsoever? COUNSEL: I think
not.
Two, in this Court's Opinion dated January 29, 1985, the Court
relied on the individual defendants as having presented a
unified defense. We stated:
The parties' response, including reargument, has led the
majority of the Court to conclude: (1) that since all of the
defendant directors, outside as well as inside, take a unified
position, we are required to treat all of the directors as one as
to whether they are entitled to the protection of the business
judgment rule...
Three, previously O'Boyle took the position that the Board's
action taken January 26, 1981 in which he fully participated
was determinative of virtually all issues. Now O'Boyle seeks to
attribute no significance to his participation in the January 26
meeting. Nor does O'Boyle seek to explain his having given
before the directors' meeting of October 8, 1980 his "consent to
the transaction of such business as may come before the
meeting."[*] It is the view of the majority of the Court that
O'Boyle's change of position following this Court's decision on
the merits comes too late to be considered. He has clearly
waived that right.
The Motions for Reargument of all defendants are denied.
McNEILLY and CHRISTIE, Justices, dissenting:
We do not disagree with the ruling as to the defendant O'Boyle,
but we would have granted reargument on the other issues
raised.

JOHN GOKONGWEI, JR. V. SEC
De Santos, Balgos & Perez for petitioner.
Angara, Abello, Concepcion, Regala, Cruz Law Offices for
respondents Sorianos
Siguion Reyna, Montecillo & Ongsiako for respondent San
Miguel Corporation.
R. T Capulong for respondent Eduardo R. Visaya.

ANTONIO, J.:
The instant petition for certiorari, mandamus and injunction,
with prayer for issuance of writ of preliminary injunction, arose
out of two cases filed by petitioner with the Securities and
Exchange Commission, as follows:
SEC CASE NO 1375
On October 22, 1976, 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. The petition, entitled "John Gokongwei
Jr. vs. Andres Soriano, Jr., Jose M. Soriano, Enrique Zobel,
Antonio Roxas, Emeterio Bunao, Walthrode B. Conde, Miguel
Ortigas, Antonio Prieto and San Miguel Corporation", was
docketed as SEC Case No. 1375.
As a first cause of action, petitioner alleged that on September
18, 1976, individual respondents amended by bylaws of the
corporation, basing their authority to do so on a resolution of
the stockholders adopted on March 13, 1961, when the
outstanding capital stock of respondent corporation was only
P70,139.740.00, divided into 5,513,974 common shares at
P10.00 per share and 150,000 preferred shares at P100.00 per
share. At the time of the amendment, the outstanding and paid
up shares totalled 30,127,047 with a total par value of
P301,270,430.00. It was contended that according to section
22 of the Corporation Law and Article VIII of the by-laws of the
corporation, the power to amend, modify, repeal or adopt new
by-laws may be delegated to the Board of Directors only by the
affirmative vote of stockholders representing not less than 2/3
of the subscribed and paid up capital stock of the corporation,
which 2/3 should have been computed on the basis of the
capitalization at the time of the amendment. Since the
amendment was based on the 1961 authorization, petitioner
contended that the Board acted without authority and in
usurpation of the power of the stockholders.
As a second cause of action, it was alleged that the authority
granted in 1961 had already been exercised in 1962 and 1963,
after which the authority of the Board ceased to exist.
As a third cause of action, petitioner averred that the
membership of the Board of Directors had changed since the
authority was given in 1961, there being six (6) new directors.
As a fourth cause of action, it was claimed 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
right as afore-mentioned hence the amended by-laws are null
and void.
1

As additional causes of action, it was alleged 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; that Andres M. Soriano, Jr. and/or Jose M.
Soriano, while representing other corporations, entered into
contracts (specifically a management contract) with
respondent corporation, which was allowed because the
questioned amendment gave the Board itself the prerogative of
determining whether they or other persons are engaged in
competitive or antagonistic business; that the portion of the
amended bylaws which states that in determining whether or
not a person is engaged in competitive business, the Board may
consider such factors as business and family relationship, is
unreasonable and oppressive and, therefore, void; and that the
portion of the amended by-laws which requires that "all
nominations for election of directors ... shall be submitted in
writing to the Board of Directors at least five (5) working days
before the date of the Annual Meeting" is likewise
unreasonable and oppressive.
It was, therefore, prayed that the amended by-laws be declared
null and void and the certificate of filing thereof be cancelled,
and that individual respondents be made to pay damages, in
specified amounts, to petitioner.
On October 28, 1976, in connection with the same case,
petitioner filed with the Securities and Exchange Commission
an "Urgent Motion for Production and Inspection of
Documents", alleging that the Secretary of respondent
corporation refused to allow him to inspect its records despite
request made by petitioner for production of certain
documents enumerated in the request, and that respondent
corporation had been attempting to suppress information from
its stockholders despite a negative reply by the SEC to its query
regarding their authority to do so. Among the documents
requested to be copied were (a) minutes of the stockholder's
meeting field on March 13, 1961, (b) copy of the management
contract between San Miguel Corporation and A. Soriano
Corporation (ANSCOR); (c) latest balance sheet of San Miguel
International, Inc.; (d) authority of the stockholders to invest
the funds of respondent corporation in San Miguel
International, Inc.; and (e) lists of salaries, allowances,
bonuses, and other compensation, if any, received by Andres
M. Soriano, Jr. and/or its successor-in-interest.
The "Urgent Motion for Production and Inspection of
Documents" was opposed by respondents, alleging, among
others that the motion has no legal basis; that the demand is
not based on good faith; that the motion is premature since the
materiality or relevance of the evidence sought cannot be
determined until the issues are joined, that it fails to show good
cause and constitutes continued harrasment, and that some of
the information sought are not part of the records of the
corporation and, therefore, privileged.
During the pendency of the motion for production,
respondents San Miguel Corporation, Enrique Conde, Miguel
Ortigas and Antonio Prieto filed their answer to the petition,
denying the substantial allegations therein and stating, by way
of affirmative defenses that "the action taken by the Board of
Directors on September 18, 1976 resulting in the ...
amendments is valid and legal because the power to "amend,
modify, repeal or adopt new By-laws" delegated to said Board
on March 13, 1961 and long prior thereto has never been
revoked of SMC"; that contrary to petitioner's claim, "the vote
requirement for a valid delegation of the power to amend,
repeal or adopt new by-laws is determined in relation to the
total subscribed capital stock at the time the delegation of said
power is made, not when the Board opts to exercise said
delegated power"; that petitioner has not availed of his intra-
corporate remedy for the nullification of the amendment,
which is to secure its repeal by vote of the stockholders
representing a majority of the subscribed capital stock at any
regular or special meeting, as provided in Article VIII, section I
of the by-laws and section 22 of the Corporation law, hence the,
petition is premature; that petitioner is estopped from
questioning the amendments on the ground of lack of authority
of the Board. since he failed, to object to other amendments
made on the basis of the same 1961 authorization: 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
respondent corporation inconsistent with any existing law; 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 t I hat of the corporation; that the questioned amended
by-laws is a matter of internal policy and the judgment of the
board should not be interfered with: That the by-laws, as
amended, are valid and binding and are intended to prevent
the possibility of violation of criminal and civil laws prohibiting
combinations in restraint of trade; and that the petition states
no cause of action. It was, therefore, prayed that the petition be
dismissed and that petitioner be ordered to pay damages and
attorney's fees to respondents. The application for writ of
preliminary injunction was likewise on various grounds.
Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed
their opposition to the petition, denying the material
averments thereof and stating, as part of their affirmative
defenses, that in August 1972, the Universal Robina
Corporation (Robina), a corporation engaged in business
competitive to that of respondent corporation, began acquiring
shares therein. until September 1976 when its total holding
amounted to 622,987 shares: that in October 1972, the
Consolidated Foods Corporation (CFC) likewise began
acquiring shares in respondent (corporation. until its total
holdings amounted to P543,959.00 in September 1976; that on
January 12, 1976, petitioner, who is president and controlling
shareholder of Robina and CFC (both closed corporations)
purchased 5,000 shares of stock of respondent corporation,
and thereafter, in behalf of himself, CFC and Robina,
"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 Robina and
CFC interests, a seat in the Board of Directors of SMC", that in
the stockholders' meeting of March 18, 1976, 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; that "petitioner nevertheless vowed to secure a
seat in the Board of Directors at the next annual meeting; that
thereafter the Board of Directors amended the by-laws as
afore-stated.
As counterclaims, actual damages, moral damages, exemplary
damages, expenses of litigation and attorney's fees were
presented against petitioner.
Subsequently, a Joint Omnibus Motion for the striking out of
the motion for production and inspection of documents was
filed by all the respondents. This was duly opposed by
petitioner. At this juncture, respondents Emigdio Tanjuatco,
Sr. and Eduardo R. Visaya were allowed to intervene as
oppositors and they accordingly filed their oppositions-
intervention to the petition.
On December 29, 1976, the Securities and Exchange
Commission resolved the motion for production and inspection
of documents by issuing Order No. 26, Series of 1977, stating,
in part as follows:
Considering the evidence submitted before
the Commission by the petitioner and
respondents in the above-entitled case, it is
hereby ordered:
1. That respondents produce and permit the
inspection, copying and photographing, by
or on behalf of the petitioner-movant, John
Gokongwei, Jr., of the minutes of the
stockholders' meeting of the respondent San
Miguel Corporation held on March 13, 1961,
which are in the possession, custody and
control of the said corporation, it appearing
that the same is material and relevant to the
issues involved in the main case.
Accordingly, the respondents should allow
petitioner-movant entry in the principal
office of the respondent Corporation, San
Miguel Corporation on January 14, 1977, at
9:30 o'clock in the morning for purposes of
enforcing the rights herein granted; it being
understood that the inspection, copying and
photographing of the said documents shall
be undertaken under the direct and strict
supervision of this Commission. Provided,
however, that other documents and/or
papers not heretofore included are not
covered by this Order and any inspection
thereof shall require the prior permission of
this Commission;
2. As to the Balance Sheet of San Miguel
International, Inc. as well as the list of
salaries, allowances, bonuses, compensation
and/or remuneration received by respondent
Jose M. Soriano, Jr. and Andres Soriano
from San Miguel International, Inc. and/or
its successors-in- interest, the Petition to
produce and inspect the same is hereby
DENIED, as petitioner-movant is not a
stockholder of San Miguel International, Inc.
and has, therefore, no inherent right to
inspect said documents;
3. In view of the Manifestation of petitioner-
movant dated November 29, 1976,
withdrawing his request to copy and inspect
the management contract between San
Miguel Corporation and A. Soriano
Corporation and the renewal and
amendments thereof for the reason that he
had already obtained the same, the
Commission takes note thereof; and
4. Finally, the Commission holds in abeyance
the resolution on the matter of production
and inspection of the authority of the
stockholders of San Miguel Corporation to
invest the funds of respondent corporation in
San Miguel International, Inc., until after the
hearing on the merits of the principal issues
in the above-entitled case.
This Order is immediately executory upon its
approval.
2

Dissatisfied with the foregoing Order, petitioner moved for its
reconsideration.
Meanwhile, on December 10, 1976, while the petition was yet to
be heard, respondent corporation issued a notice of special
stockholders' meeting for the purpose of "ratification and
confirmation of the amendment to the By-laws", setting such
meeting for February 10, 1977. This prompted petitioner to ask
respondent Commission for a summary judgment insofar as
the first cause of action is concerned, for the alleged reason
that by calling a special stockholders' meeting for the aforesaid
purpose, private respondents admitted the invalidity of the
amendments of September 18, 1976. The motion for summary
judgment was opposed by private respondents. Pending action
on the motion, petitioner filed an "Urgent Motion for the
Issuance of a Temporary Restraining Order", praying that
pending the determination of petitioner's application for the
issuance of a preliminary injunction and/or petitioner's motion
for summary judgment, a temporary restraining order be
issued, restraining respondents from holding the special
stockholder's meeting as scheduled. This motion was duly
opposed by respondents.
On February 10, 1977, respondent Commission issued an order
denying the motion for issuance of temporary restraining
order. After receipt of the order of denial, respondents
conducted the special stockholders' meeting wherein the
amendments to the by-laws were ratified. On February 14,
1977, petitioner filed a consolidated motion for contempt and
for nullification of the special stockholders' meeting.
A motion for reconsideration of the order denying petitioner's
motion for summary judgment was filed by petitioner before
respondent Commission on March 10, 1977. Petitioner alleges
that up to the time of the filing of the instant petition, the said
motion had not yet been scheduled for hearing. Likewise, the
motion for reconsideration of the order granting in part and
denying in part petitioner's motion for production of record
had not yet been resolved.
In view of the fact that the annul stockholders' meeting of
respondent corporation had been scheduled for May 10, 1977,
petitioner filed with respondent Commission a Manifestation
stating that he intended to run for the position of director of
respondent corporation. Thereafter, respondents filed a
Manifestation with respondent Commission, submitting a
Resolution of the Board of Directors of respondent corporation
disqualifying and precluding petitioner from being a candidate
for director unless he could submit evidence on May 3, 1977
that he does not come within the disqualifications specified in
the amendment to the by-laws, subject matter of SEC Case No.
1375. By reason thereof, petitioner filed a manifestation and
motion to resolve pending incidents in the case and to issue a
writ of injunction, alleging that private respondents were
seeking to nullify and render ineffectual the exercise of
jurisdiction by the respondent Commission, to petitioner's
irreparable damage and prejudice, Allegedly despite a
subsequent Manifestation to prod respondent Commission to
act, petitioner was not heard prior to the date of the
stockholders' meeting.
Petitioner alleges that there appears a deliberate and concerted
inability on the part of the SEC to act hence petitioner came to
this Court.
SEC. CASE NO. 1423
Petitioner likewise alleges that, having discovered that
respondent corporation has been investing corporate funds in
other corporations and businesses outside of the primary
purpose clause of the corporation, in violation of section 17 1/2
of the Corporation Law, he filed with respondent Commission,
on January 20, 1977, a petition seeking to have private
respondents Andres M. Soriano, Jr. and Jose M. Soriano, as
well as the respondent corporation declared guilty of such
violation, and ordered to account for such investments and to
answer for damages.
On February 4, 1977, motions to dismiss were filed by private
respondents, to which a consolidated motion to strike and to
declare individual respondents in default and an opposition ad
abundantiorem cautelam were filed by petitioner. Despite the
fact that said motions were filed as early as February 4, 1977,
the commission acted thereon only on April 25, 1977, when it
denied respondents' motion to dismiss and gave them two (2)
days within which to file their answer, and set the case for
hearing on April 29 and May 3, 1977.
Respondents issued notices of the annual stockholders'
meeting, including in the Agenda thereof, the following:
6. Re-affirmation of the authorization to the
Board of Directors by the stockholders at the
meeting on March 20, 1972 to invest
corporate funds in other companies or
businesses or for purposes other than the
main purpose for which the Corporation has
been organized, and ratification of the
investments thereafter made pursuant
thereto.
By reason of the foregoing, on April 28, 1977, petitioner filed
with the SEC an urgent motion for the issuance of a writ of
preliminary injunction to restrain private respondents from
taking up Item 6 of the Agenda at the annual stockholders'
meeting, requesting that the same be set for hearing on May 3,
1977, the date set for the second hearing of the case on the
merits. Respondent Commission, however, cancelled the dates
of hearing originally scheduled and reset the same to May 16
and 17, 1977, or after the scheduled annual stockholders'
meeting. For the purpose of urging the Commission to act,
petitioner filed an urgent manifestation on May 3, 1977, but
this notwithstanding, no action has been taken up to the date
of the filing of the instant petition.
With respect to the afore-mentioned SEC cases, it is
petitioner's contention before this Court that respondent
Commission gravely abused its discretion when it failed to act
with deliberate dispatch on the motions of petitioner seeking to
prevent illegal and/or arbitrary impositions or limitations upon
his rights as stockholder of respondent corporation, and that
respondent are acting oppressively against petitioner, in gross
derogation of petitioner's rights to property and due process.
He prayed that this Court direct respondent SEC to act on
collateral incidents pending before it.
On May 6, 1977, this Court issued a temporary restraining
order restraining private 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 Item 6 of the Agenda of the annual
stockholders' meeting on May 10, 1977, or from Making
effective the amended by-laws of respondent corporation, until
further orders from this Court or until the Securities and Ex-
change Commission acts on the matters complained of in the
instant petition.
On May 14, 1977, petitioner filed a Supplemental Petition,
alleging that after a restraining order had been issued by this
Court, or on May 9, 1977, the respondent Commission served
upon petitioner copies of the following orders:
(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying
petitioner's motion for reconsideration, with its supplement, of
the order of the Commission denying in part petitioner's
motion for production of documents, petitioner's motion for
reconsideration of the order denying the issuance of a
temporary restraining order denying the issuance of a
temporary restraining order, and petitioner's consolidated
motion to declare respondents in contempt and to nullify the
stockholders' meeting;
(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing
petitioner to run as a director of respondent corporation but
stating that he should not sit as such if elected, until such time
that the Commission has decided the validity of the bylaws in
dispute, and denying deferment of Item 6 of the Agenda for the
annual stockholders' meeting; and
(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying
petitioner's motion for reconsideration of the order of
respondent Commission denying petitioner's motion for
summary judgment;
It is petitioner's assertions, anent the foregoing orders, (1) that
respondent Commission acted with indecent haste and without
circumspection in issuing the aforesaid orders to petitioner's
irreparable damage and injury; (2) that it acted without
jurisdiction and in violation of petitioner's right to due process
when it decided en banc an issue not raised before it and still
pending before one of its Commissioners, and without hearing
petitioner thereon despite petitioner's request to have the same
calendared for hearing , and (3) that the respondents acted
oppressively against the petitioner in violation of his rights as a
stockholder, warranting immediate judicial intervention.
It is prayed in the supplemental petition that the SEC orders
complained of be declared null and void and that respondent
Commission be ordered to allow petitioner to undertake
discovery proceedings relative to San Miguel International. Inc.
and thereafter to decide SEC Cases No. 1375 and 1423 on the
merits.
On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and
Jose M. Soriano filed their comment, alleging that the petition
is without merit for the following reasons:
(1) that the petitioner the interest he represents are engaged in
business competitive and antagonistic to that of respondent
San Miguel Corporation, it appearing that the owns and
controls a greater portion of his SMC stock thru the Universal
Robina Corporation and the Consolidated Foods Corporation,
which corporations are engaged in business directly and
substantially competing with the allied businesses of
respondent SMC and of corporations in which SMC has
substantial investments. Further, when CFC and Robina had
accumulated investments. Further, when CFC and Robina had
accumulated shares in SMC, the Board of Directors of SMC
realized the clear and present danger that competitors or
antagonistic parties may be elected directors and thereby have
easy and direct access to SMC's business and trade secrets and
plans;
(2) that the amended by law were adopted to preserve and
protect respondent SMC from the clear and present danger
that business competitors, if allowed to become directors, will
illegally and unfairly utilize their direct access to its business
secrets and plans for their own private gain to the irreparable
prejudice of respondent SMC, and, ultimately, its stockholders.
Further, it is asserted that membership of a competitor in the
Board of Directors is a blatant disregard of no less that the
Constitution and pertinent laws against combinations in
restraint of trade;
(3) that by laws are valid and binding since a corporation has
the inherent right and duty to preserve and protect itself by
excluding competitors and antogonistic parties, under the law
of self-preservation, and it should be allowed a wide latitude in
the selection of means to preserve itself;
(4) that the delay in the resolution and disposition of SEC
Cases Nos. 1375 and 1423 was due to petitioner's own acts or
omissions, since he failed to have the petition to
suspend, pendente lite the amended by-laws calendared for
hearing. It was emphasized that it was only on April 29, 1977
that petitioner calendared the aforesaid petition for suspension
(preliminary injunction) for hearing on May 3, 1977. The
instant petition being dated May 4, 1977, it is apparent that
respondent Commission was not given a chance to act "with
deliberate dispatch", and
(5) that, even assuming that the petition was meritorious was,
it has become moot and academic because respondent
Commission has acted on the pending incidents, complained
of. It was, therefore, prayed that the petition be dismissed.
On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed
his comment, alleging that the petition has become moot and
academic for the reason, among others that the acts of private
respondent sought to be enjoined have reference to the annual
meeting of the stockholders of respondent San Miguel
Corporation, which was held on may 10, 1977; that in said
meeting, in compliance with the order of respondent
Commission, petitioner was allowed to run and be voted for as
director; and that in the same meeting, Item 6 of the Agenda
was discussed, voted upon, ratified and confirmed. Further it
was averred that the questions and issues raised by petitioner
are pending in the Securities and Exchange Commission which
has acquired jurisdiction over the case, and no hearing on the
merits has been had; hence the elevation of these issues before
the Supreme Court is premature.
Petitioner filed a reply to the aforesaid comments, stating that
the petition presents justiciable questions for the
determination of this Court because (1) the respondent
Commission acted without circumspection, unfairly and
oppresively against petitioner, warranting the intervention of
this Court; (2) a derivative suit, such as the instant case, is not
rendered academic by the act of a majority of stockholders,
such that the discussion, ratification and confirmation of Item
6 of the Agenda of the annual stockholders' meeting of May 10,
1977 did not render the case moot; that the amendment to the
bylaws which specifically bars petitioner from being a director
is void since it deprives him of his vested rights.
Respondent Commission, thru the Solicitor General, filed a
separate comment, alleging that after receiving a copy of the
restraining order issued by this Court and noting that the
restraining order did not foreclose action by it, the
Commission en banc issued Orders Nos. 449, 450 and 451 in
SEC Case No. 1375.
In answer to the allegation in the supplemental petition, it
states that Order No. 450 which denied deferment of Item 6 of
the Agenda of the annual stockholders' meeting of respondent
corporation, took into consideration an urgent manifestation
filed with the Commission by petitioner on May 3, 1977 which
prayed, among others, that the discussion of Item 6 of the
Agenda be deferred. The reason given for denial of deferment
was that "such action is within the authority of the corporation
as well as falling within the sphere of stockholders' right to
know, deliberate upon and/or to express their wishes regarding
disposition of corporate funds considering that their
investments are the ones directly affected." It was alleged that
the main petition has, therefore, become moot and academic.
On September 29,1977, petitioner filed a second supplemental
petition with prayer for preliminary injunction, alleging that
the actuations of respondent SEC tended to deprive him of his
right to due process, and "that all possible questions on the
facts now pending before the respondent Commission are now
before this Honorable Court which has the authority and the
competence to act on them as it may see fit." (Reno, pp. 927-
928.)
Petitioner, in his memorandum, submits the following issues
for resolution;
(1) whether or not the provisions of the amended by-laws of
respondent corporation, disqualifying a competitor from
nomination or election to the Board of Directors are valid and
reasonable;
(2) whether or not respondent SEC gravely abused its
discretion in denying petitioner's request for an examination of
the records of San Miguel International, Inc., a fully owned
subsidiary of San Miguel Corporation; and
(3) whether or not respondent SEC committed grave abuse of
discretion in allowing discussion of Item 6 of the Agenda of the
Annual Stockholders' Meeting on May 10, 1977, and the
ratification of the investment in a foreign corporation of the
corporate funds, allegedly in violation of section 17-1/2 of the
Corporation Law.
I
Whether or not amended by-laws are valid is purely a legal
question which public interest requires to be resolved
It is the position of the petitioner that "it is not necessary to
remand the case to respondent SEC for an appropriate ruling
on the intrinsic validity of the amended by-laws in compliance
with the principle of exhaustion of administrative remedies",
considering that: first: "whether or not the provisions of the
amended by-laws are intrinsically valid ... is purely a legal
question. There is no factual dispute as to what the provisions
are and evidence is not necessary to determine whether such
amended by-laws are valid as framed and approved ... ";
second: "it is for the interest and guidance of the public that an
immediate and final ruling on the question be made ... "; third:
"petitioner was denied due process by SEC" when
"Commissioner de Guzman had openly shown prejudice
against petitioner ... ", and "Commissioner Sulit ... approved
the amended by-laws ex-parte and obviously found the same
intrinsically valid; and finally: "to remand the case to SEC
would only entail delay rather than serve the ends of justice."
Respondents Andres M. Soriano, Jr. and Jose M. Soriano
similarly pray that this Court resolve the legal issues raised by
the parties in keeping with the "cherished rules of procedure"
that "a court should always strive to settle the entire
controversy in a single proceeding leaving no root or branch to
bear the seeds of future ligiation", citingGayong v. Gayos.
3
To
the same effect is the prayer of San Miguel Corporation that
this Court resolve on the merits the validity of its amended by
laws and the rights and obligations of the parties thereunder,
otherwise "the time spent and effort exerted by the parties
concerned and, more importantly, by this Honorable Court,
would have been for naught because the main question will
come back to this Honorable Court for final resolution."
Respondent Eduardo R. Visaya submits a similar appeal.
It is only the Solicitor General who contends that the case
should be remanded to the SEC for hearing and decision of the
issues involved, invoking the latter's primary jurisdiction to
hear and decide case involving intra-corporate controversies.
It is an accepted rule of procedure that the Supreme Court
should always strive to settle the entire controversy in a single
proceeding, leaving nor root or branch to bear the seeds of
future litigation.
4
Thus, in Francisco v. City of Davao,
5
this
Court resolved to decide the case on the merits instead of
remanding it to the trial court for further proceedings since the
ends of justice would not be subserved by the remand of the
case. In Republic v. Security Credit and Acceptance
Corporation, et al.,
6
this Court, finding that the main issue is
one of law, resolved to decide the case on the merits "because
public interest demands an early disposition of the case", and
in Republic v. Central Surety and Insurance Company,
7
this
Court denied remand of the third-party complaint to the trial
court for further proceedings, citing precedent where this
Court, in similar situations resolved to decide the cases on the
merits, instead of remanding them to the trial court where (a)
the ends of justice would not be subserved by the remand of the
case; or (b) where public interest demand an early disposition
of the case; or (c) where the trial court had already received all
the evidence presented by both parties and the Supreme Court
is now in a position, based upon said evidence, to decide the
case on its merits.
8
It is settled that the doctrine of primary
jurisdiction has no application where only a question of law is
involved.
8
a Because uniformity may be secured through
review by a single Supreme Court, questions of law may
appropriately be determined in the first instance by
courts.
8
b In the case at bar, there are facts which cannot be
denied, viz.: that the amended by-laws were adopted by the
Board of Directors of the San Miguel Corporation in the
exercise of the power delegated by the stockholders ostensibly
pursuant to section 22 of the Corporation Law; that in a special
meeting on February 10, 1977 held specially for that purpose,
the amended by-laws were ratified by more than 80% of the
stockholders of record; that the foreign investment in the
Hongkong Brewery and Distellery, a beer manufacturing
company in Hongkong, was made by the San Miguel
Corporation in 1948; and that in the stockholders' annual
meeting held in 1972 and 1977, all foreign investments and
operations of San Miguel Corporation were ratified by the
stockholders.
II
Whether or not the amended by-laws of SMC of disqualifying
a competitor from nomination or election to the Board of
Directors of SMC are valid and reasonable
The validity or reasonableness of a by-law of a corporation in
purely a question of law.
9
Whether the by-law is in conflict
with the law of the land, or with the charter of the corporation,
or is in a legal sense unreasonable and therefore unlawful is a
question of law.
10
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 to make by-laws and who have exercised their
authority.
11

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", at the same time depriving petitioner of his "vested
right" to be voted for and to vote for a person of his choice as
director.
Upon the other hand, respondents Andres M. Soriano, Jr., Jose
M. Soriano and San Miguel Corporation content that ex.
conclusion of a competitor from the Board is legitimate
corporate purpose, considering that being a competitor,
petitioner cannot devote an unselfish and undivided Loyalty to
the corporation; that it is essentially a preventive measure to
assure stockholders of San Miguel Corporation of reasonable
protective from the unrestrained self-interest of those charged
with the promotion of the corporate enterprise; that access to
confidential information by a competitor may result either in
the promotion of the interest of the competitor at the expense
of the San Miguel Corporation, or the promotion of both the
interests of petitioner and respondent San Miguel Corporation,
which may, therefore, result in a combination or agreement in
violation of Article 186 of the Revised Penal Code by destroying
free competition to the detriment of the consuming public. It is
further argued that there is not vested right of any stockholder
under Philippine Law to be voted as director of a corporation.
It is alleged that petitioner, as of May 6, 1978, has exercised,
personally or thru two corporations owned or controlled by
him, control over the following shareholdings in San Miguel
Corporation, vis.: (a) John Gokongwei, Jr. 6,325 shares; (b)
Universal Robina Corporation 738,647 shares; (c) CFC
Corporation 658,313 shares, or a total of 1,403,285 shares.
Since the outstanding capital stock of San Miguel Corporation,
as of the present date, is represented by 33,139,749 shares with
a par value of P10.00, the total shares owned or controlled by
petitioner represents 4.2344% of the total outstanding capital
stock of San Miguel Corporation. It is also contended that
petitioner is the president and substantial stockholder of
Universal Robina Corporation and CFC Corporation, both of
which are allegedly controlled by petitioner and members of
his family. It is also claimed that both the Universal Robina
Corporation and the CFC Corporation are engaged in
businesses directly and substantially competing with the
alleged businesses of San Miguel Corporation, and of
corporations in which SMC has substantial investments.
ALLEGED AREAS OF COMPETITION BETWEEN
PETITIONER'S CORPORATIONS AND SAN MIGUEL
CORPORATION
According to respondent San Miguel Corporation, the areas of,
competition are enumerated in its Board the areas of
competition are enumerated in its Board Resolution dated
April 28, 1978, thus:
Product Line Estimated Market Share Total
1977 SMC Robina-CFC
Table Eggs 0.6% 10.0% 10.6%
Layer Pullets 33.0% 24.0% 57.0%
Dressed Chicken 35.0% 14.0% 49.0%
Poultry & Hog Feeds 40.0% 12.0% 52.0%
Ice Cream 70.0% 13.0% 83.0%
Instant Coffee 45.0% 40.0% 85.0%
Woven Fabrics 17.5% 9.1% 26.6%
Thus, according to respondent SMC, in 1976, the areas of
competition affecting SMC involved product sales of over P400
million or more than 20% of the P2 billion total product sales
of SMC. Significantly, the combined market shares of SMC and
CFC-Robina in layer pullets dressed chicken, poultry and hog
feeds ice cream, instant coffee and woven fabrics would result
in a position of such dominance as to affect the prevailing
market factors.
It is further asserted that in 1977, the CFC-Robina group was in
direct competition on product lines which, for SMC,
represented sales amounting to more than ?478 million. In
addition, CFC-Robina was directly competing in the sale of
coffee with Filipro, a subsidiary of SMC, which product line
represented sales for SMC amounting to more than P275
million. The CFC-Robina group (Robitex, excluding Litton
Mills recently acquired by petitioner) is purportedly also in
direct competition with Ramie Textile, Inc., subsidiary of SMC,
in product sales amounting to more than P95 million. The
areas of competition between SMC and CFC-Robina in 1977
represented, therefore, for SMC, product sales of more than
P849 million.
According to private respondents, at the Annual Stockholders'
Meeting of March 18, 1976, 9,894 stockholders, in person or by
proxy, owning 23,436,754 shares in SMC, or more than 90% of
the total outstanding shares of SMC, rejected petitioner's
candidacy for the Board of Directors because they "realized the
grave dangers to the corporation in the event a competitor gets
a board seat in SMC." On September 18, 1978, the Board of
Directors of SMC, by "virtue of powers delegated to it by the
stockholders," approved the amendment to ' he by-laws in
question. At the meeting of February 10, 1977, these
amendments were confirmed and ratified by 5,716
shareholders owning 24,283,945 shares, or more than 80% of
the total outstanding shares. Only 12 shareholders,
representing 7,005 shares, opposed the confirmation and
ratification. At the Annual Stockholders' Meeting of May 10,
1977, 11,349 shareholders, owning 27,257.014 shares, or more
than 90% of the outstanding shares, rejected petitioner's
candidacy, while 946 stockholders, representing 1,648,801
shares voted for him. On the May 9, 1978 Annual Stockholders'
Meeting, 12,480 shareholders, owning more than 30 million
shares, or more than 90% of the total outstanding shares. voted
against petitioner.
AUTHORITY OF CORPORATION TO PRESCRIBE
QUALIFICATIONS OF DIRECTORS EXPRESSLY
CONFERRED BY LAW
Private respondents contend that the disputed amended by
laws were adopted by the Board of Directors of San Miguel
Corporation a-, a measure of self-defense to protect the
corporation from the clear and present danger that the election
of a business competitor to the Board may cause upon the
corporation and the other stockholders inseparable prejudice.
Submitted for resolution, therefore, is the issue whether or
not respondent San Miguel Corporation could, as a measure of
self- protection, disqualify a competitor from nomination and
election to its Board of Directors.
It is recognized by an 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.
12
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.
13

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 ... " InGovernment v. El Hogar,
14
the Court
sustained the validity of a provision in the corporate by-law
requiring that persons elected to the Board of Directors must
be holders of shares of the paid up value of P5,000.00, which
shall be held as security for their action, on the ground that
section 21 of the Corporation Law expressly gives the power to
the corporation to provide in its by-laws for the qualifications
of directors and is "highly prudent and in conformity with good
practice. "
NO VESTED RIGHT OF STOCKHOLDER 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."
15
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. ... It cannot therefore be justly said that the
contract, express or implied, between the corporation and the
stockholders is infringed ... by any act of the former which is
authorized by a majority ... ."
16

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.
17

It being settled that the corporation has the power to provide
for the qualifications of its directors, the next question that
must be considered is whether the disqualification of a
competitor from being elected to the Board of Directors is a
reasonable exercise of corporate authority.
A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE
CORPORATION AND ITS SHAREHOLDERS
Although in the strict and technical sense, directors of a private
corporation are not regarded as trustees, there cannot be any
doubt that their character is that of a fiduciary insofar as the
corporation and the stockholders as a body are concerned. As
agents entrusted with the management of the corporation for
the collective benefit of the stockholders, "they occupy a
fiduciary relation, and in this sense the relation is one of
trust."
18
"The ordinary trust relationship of directors of a
corporation and stockholders", according to Ashaman v.
Miller,
19
"is not a matter of statutory or technical law. It
springs from the fact that directors have the control and
guidance of corporate affairs and property and hence of the
property interests of the stockholders. Equity recognizes that
stockholders are the proprietors of the corporate interests and
are ultimately the only beneficiaries thereof * * *.
Justice Douglas, in Pepper v. Litton,
20
emphatically restated
the standard of fiduciary obligation of the directors of
corporations, thus:
A director is a fiduciary. ... Their powers are
powers in trust. ... He who is in such
fiduciary position cannot serve himself first
and his cestuis second. ... He cannot
manipulate the affairs of his corporation to
their detriment and in disregard of the
standards of common decency. He cannot by
the intervention of a corporate entity violate
the ancient precept against serving two
masters ... He cannot utilize his inside
information and strategic position for his
own preferment. He cannot violate rules of
fair play by doing indirectly through the
corporation what he could not do so directly.
He cannot violate rules of fair play by doing
indirectly though the corporation what he
could not do so directly. He cannot use his
power for his personal advantage and to the
detriment of the stockholders and creditors
no matter how absolute in terms that power
may be and no matter how meticulous he is
to satisfy technical requirements. For that
power is at all times subject to the equitable
limitation that it may not be exercised for the
aggrandizement, preference or advantage of
the fiduciary to the exclusion or detriment of
the cestuis.
And in Cross v. West Virginia Cent, & P. R. R. Co.,
21
it was
said:
... A person cannot serve two hostile and
adverse master, without detriment to one of
them. A judge cannot be impartial if
personally interested in the cause. No more
can a director. Human nature is too weak -
for this. Take whatever statute provision you
please giving power to stockholders to
choose directors, and in none will you find
any express prohibition against a discretion
to select directors having the company's
interest at heart, and it would simply be
going far to deny by mere implication the
existence of such a salutary power
... If the by-law is to be held reasonable in disqualifying a
stockholder in a competing company from being a director, the
same reasoning would apply to disqualify the wife and
immediate member of the family of such stockholder, on
account of the supposed interest of the wife in her husband's
affairs, and his suppose influence over her. It is perhaps true
that such stockholders ought not to be condemned as selfish
and dangerous to the best interest of the corporation until tried
and tested. So it is also true that we cannot condemn as selfish
and dangerous and unreasonable the action of the board in
passing the by-law. The strife over the matter of control in this
corporation as in many others is perhaps carried on not
altogether in the spirit of brotherly love and affection. The only
test that we can apply is as to whether or not the action of the
Board is authorized and sanctioned by law. ... .
22

These principles have been applied by this Court in previous
cases.
23

AN AMENDMENT TO THE CORPORATION 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. ... (A)n
amendment which renders ineligible, or if elected, subjects to
removal, a director if he be also a director in a corporation
whose business is in competition with or is antagonistic to the
other corporation is valid."
24
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. Such an amendment "advances the benefit of the
corporation and is good." An exception exists in New Jersey,
where the Supreme Court held that the Corporation Law in
New Jersey prescribed the only qualification, and therefore the
corporation was not empowered to add additional
qualifications.
25
This is the exact opposite of the situation in
the Philippines because as stated heretofore, 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.
26

It is also well established that corporate officers "are not
permitted to use their position of trust and confidence to
further their private interests."
27
In a case where directors of a
corporation cancelled a contract of the corporation for
exclusive sale of a foreign firm's products, and after
establishing a rival business, the directors entered into a new
contract themselves with the foreign firm for exclusive sale of
its products, the court held that equity would regard the new
contract as an offshoot of the old contract and, therefore, for
the benefit of the corporation, as a "faultless fiduciary may not
reap the fruits of his misconduct to the exclusion of his
principal.
28

The doctrine of "corporate opportunity"
29
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.
30

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.
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.
Thus, in McKee & Co. v. First National Bank of San
Diego, supra the court sustained as valid and reasonable an
amendment to the by-laws of a bank, requiring that its
directors should not be directors, officers, employees, agents,
nominees or attorneys of any other banking corporation,
affiliate or subsidiary thereof. Chief Judge Parker,
in McKee, explained the reasons of the court, thus:
... A bank director has access to a great deal
of information concerning the business and
plans of a bank which would likely be
injurious to the bank if known to another
bank, and it was reasonable and prudent to
enlarge this minimum disqualification to
include any director, officer, employee,
agent, nominee, or attorney of any other
bank in California. The Ashkins case, supra,
specifically recognizes protection against
rivals and others who might acquire
information which might be used against the
interests of the corporation as a legitimate
object of by-law protection. With respect to
attorneys or persons associated with a firm
which is attorney for another bank, in
addition to the direct conflict or potential
conflict of interest, there is also the danger of
inadvertent leakage of confidential
information through casual office
discussions or accessibility of files.
Defendant's directors determined that its
welfare was best protected if this opportunity
for conflicting loyalties and potential misuse
and leakage of confidential information was
foreclosed.
In McKee the Court further listed qualificational by-laws
upheld by the courts, as follows:
(1) A director shall not be directly or
indirectly interested as a stockholder in any
other firm, company, or association which
competes with the subject corporation.
(2) A director shall not be the immediate
member of the family of any stockholder in
any other firm, company, or association
which competes with the subject
corporation,
(3) A director shall not be an officer, agent,
employee, attorney, or trustee in any other
firm, company, or association which compete
with the subject corporation.
(4) A director shall be of good moral
character as an essential qualification to
holding office.
(5) No person who is an attorney against the
corporation in a law suit is eligible for service
on the board. (At p. 7.)
These are not based on theorical abstractions but on human
experience that a person cannot serve two hostile masters
without detriment to one of them.
The offer and assurance of petitioner that to avoid any
possibility of his taking unfair advantage of his position as
director of San Miguel Corporation, he would absent himself
from meetings at which confidential matters would be
discussed, would not detract from the validity and
reasonableness of the by-laws here involved. Apart from the
impractical results that would ensue from such arrangement, it
would be inconsistent with petitioner's primary motive in
running for board membership which is to protect his
investments in San Miguel Corporation. More important, such
a proposed norm of conduct would be against all accepted
principles underlying a director's duty of fidelity to the
corporation, for the policy of the law is to encourage and
enforce responsible corporate management. As explained by
Oleck:
31
"The law win not tolerate the passive attitude of
directors ... without active and conscientious participation in
the managerial functions of the company. As directors, it is
their duty to control and supervise the day to day business
activities of the company or to promulgate definite policies and
rules of guidance with a vigilant eye toward seeing to it that
these policies are carried out. It is only then that directors may
be said to have fulfilled their duty of fealty to the corporation."
Sound principles of corporate management counsel against
sharing sensitive information with a director whose fiduciary
duty of loyalty may well require that he disclose this
information to a competitive arrival. These dangers are
enhanced considerably where the common director such as the
petitioner is a controlling stockholder of two of the competing
corporations. It would seem manifest that in such situations,
the director has an economic incentive to appropriate for the
benefit of his own corporation the corporate plans and policies
of the corporation where he sits as director.
Indeed, access by a competitor to confidential information
regarding marketing strategies and pricing policies of San
Miguel Corporation would subject the latter 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.
32

There is another important consideration in determining
whether or not the amended by-laws are reasonable. The
Constitution and the law prohibit combinations in restraint of
trade or unfair competition. Thus, section 2 of Article XIV of
the Constitution provides: "The State shall regulate or prohibit
private monopolies when the public interest so requires. No
combinations in restraint of trade or unfair competition shall
be snowed."
Article 186 of the Revised Penal Code also provides:
Art. 186. Monopolies and combinations in
restraint of trade. The penalty of prision
correccional in its minimum period or a fine
ranging from two hundred to six thousand
pesos, or both, shall be imposed upon:
1. Any person who shall enter into any
contract or agreement or shall take part in
any conspiracy or combination in the form of
a trust or otherwise, in restraint of trade or
commerce or to prevent by artificial means
free competition in the market.
2. Any person who shag monopolize any
merchandise or object of trade or commerce,
or shall combine with any other person or
persons to monopolize said merchandise or
object in order to alter the price thereof by
spreading false rumors or making use of any
other artifice to restrain free competition in
the market.
3. Any person who, being a manufacturer,
producer, or processor of any merchandise
or object of commerce or an importer of any
merchandise or object of commerce from any
foreign country, either as principal or agent,
wholesale or retailer, shall combine, conspire
or agree in any manner with any person
likewise engaged in the manufacture,
production, processing, assembling or
importation of such merchandise or object of
commerce or with any other persons not so
similarly engaged for the purpose of making
transactions prejudicial to lawful commerce,
or of increasing the market price in any part
of the Philippines, or any such merchandise
or object of commerce manufactured,
produced, processed, assembled in or
imported into the Philippines, or of any
article in the manufacture of which such
manufactured, produced, processed, or
imported merchandise or object of
commerce is used.
There are other legislation in this jurisdiction, which prohibit
monopolies and combinations in restraint of trade.
33

Basically, these anti-trust laws or laws against monopolies or
combinations in restraint of trade are aimed at raising levels of
competition by improving the consumers' effectiveness as the
final arbiter in free markets. These laws are designed to
preserve free and unfettered competition as the rule of trade.
"It rests on the premise that the unrestrained interaction of
competitive forces will yield the best allocation of our economic
resources, the lowest prices and the highest quality ... ."
34
they
operate to forestall concentration of economic power.
35
The
law against monopolies and combinations in restraint of trade
is aimed at contracts and combinations that, by reason of the
inherent nature of the contemplated acts, prejudice the public
interest by unduly restraining competition or unduly
obstructing the course of trade.
36

The terms "monopoly", "combination in restraint of trade" and
"unfair competition" appear to have a well defined meaning in
other jurisdictions. A "monopoly" embraces any combination
the tendency of which is to prevent competition in the broad
and general sense, or to control prices to the detriment of the
public.
37
In short, it is the concentration of business in the
hands of a few. The material consideration in determining its
existence is not that prices are raised and competition actually
excluded, but that power exists to raise prices or exclude
competition when desired.
38
Further, it must be considered
that the Idea of monopoly is now understood to include a
condition produced by the mere act of individuals. Its
dominant thought is the notion of exclusiveness or unity, or the
suppression of competition by the qualification of interest or
management, or it may be thru agreement and concert of
action. It is, in brief, unified tactics with regard to prices.
39

From the foregoing definitions, it is apparent that the
contentions of petitioner are not in accord with reality. The
election of petitioner to the Board of respondent Corporation
can bring about an illegal situation. This is because an express
agreement is not necessary for the existence of a combination
or conspiracy in restraint of trade.
40
It is enough that a concert
of action is contemplated and that the defendants conformed to
the arrangements,
41
and what is to be considered is what the
parties actually did and not the words they used. For instance,
the Clayton Act prohibits a person from serving at the same
time as a director in any two or more corporations, if such
corporations are, by virtue of their business and location of
operation, competitors so that the elimination of competition
between them would constitute violation of any provision of
the anti-trust laws.
42
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. This situation
has been aptly explained by Travers, thus:
The argument for prohibiting competing
corporations from sharing even one director
is that the interlock permits the coordination
of policies between nominally independent
firms to an extent that competition between
them may be completely eliminated. Indeed,
if a director, for example, is to be faithful to
both corporations, some accommodation
must result. Suppose X is a director of both
Corporation A and Corporation B. X could
hardly vote for a policy by A that would
injure B without violating his duty of loyalty
to B at the same time he could hardly abstain
from voting without depriving A of his best
judgment. If the firms really do compete
in the sense of vying for economic advantage
at the expense of the other there can
hardly be any reason for an interlock
between competitors other than the
suppression of competition.
43
(Emphasis
supplied.)
According to the Report of the House Judiciary Committee of
the U. S. Congress on section 9 of the Clayton Act, it was
established that: "By means of the interlocking directorates one
man or group of men have been able to dominate and control a
great number of corporations ... to the detriment of the small
ones dependent upon them and to the injury of the public.
44

Shared information on cost accounting may lead to price fixing.
Certainly, shared information on production, orders,
shipments, capacity and inventories may lead to control of
production for the purpose of controlling prices.
Obviously, if a competitor has access to the pricing policy and
cost conditions of the products of San Miguel Corporation, the
essence of competition in a free market for the purpose of
serving the lowest priced goods to the consuming public would
be frustrated, The competitor could so manipulate the prices of
his products or vary its marketing strategies by region or by
brand in order to get the most out of the consumers. Where the
two competing firms control a substantial segment of the
market this could lead to collusion and combination in
restraint of trade. Reason and experience point to the
inevitable conclusion that the inherent tendency of interlocking
directorates between companies that are related to each other
as competitors is to blunt the edge of rivalry between the
corporations, to seek out ways of compromising opposing
interests, and thus eliminate competition. As respondent SMC
aptly observes, knowledge by CFC-Robina of SMC's costs in
various industries and regions in the country win enable the
former to practice price discrimination. CFC-Robina can
segment the entire consuming population by geographical
areas or income groups and change varying prices in order to
maximize profits from every market segment. CFC-Robina
could determine the most profitable volume at which it could
produce for every product line in which it competes with SMC.
Access to SMC pricing policy by CFC-Robina would in effect
destroy free competition and deprive the consuming public of
opportunity to buy goods of the highest possible quality at the
lowest prices.
Finally, considering that both Robina and SMC are, to a certain
extent, engaged in agriculture, then the election of petitioner to
the Board of SMC may constitute a violation of the prohibition
contained in section 13(5) of the Corporation Law. Said section
provides in part that "any stockholder of more than one
corporation organized for the purpose of engaging in
agriculture may hold his stock in such corporations solely for
investment and not for the purpose of bringing about or
attempting to bring about a combination to exercise control of
incorporations ... ."
Neither are We persuaded by the claim that the by-law was
Intended to prevent the candidacy of petitioner for election to
the Board. If the by-law were to be applied in the case of one
stockholder but waived in the case of another, then it could be
reasonably claimed that the by-law was being applied in a
discriminatory manner. However, the by law, by its terms,
applies to all stockholders. The equal protection clause of the
Constitution requires only that the by-law operate equally upon
all persons of a class. Besides, before petitioner can be declared
ineligible to run for director, there must be hearing and
evidence must be submitted to bring his case within the ambit
of the disqualification. Sound principles of public policy and
management, therefore, support the view that a by-law which
disqualifies a competition from election to the Board of
Directors of another corporation is valid and reasonable.
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.
45

Although it is asserted that the amended by-laws confer on the
present Board powers to perpetua themselves in power such
fears appear to be misplaced. This power, but is very nature, is
subject to certain well established limitations. One of these is
inherent in the very convert and definition of the terms
"competition" and "competitor". "Competition" implies a
struggle for advantage between two or more forces, each
possessing, in substantially similar if not Identical degree,
certain characteristics essential to the business sought. It
means an independent endeavor of two or more persons to
obtain the business patronage of a third by offering more
advantageous terms as an inducement to secure trade.
46
The
test must be whether the business does in fact compete, not
whether it is capable of an indirect and highly unsubstantial
duplication of an isolated or non-characteristics activity.
47
It
is, therefore, obvious that not every person or entity engaged in
business of the same kind is a competitor. Such factors as
quantum and place of business, Identity of products and area
of competition should be taken into consideration. It is,
therefore, necessary to show that petitioner's business covers a
substantial portion of the same markets for similar products to
the extent of not less than 10% of respondent corporation's
market for competing products. While We here sustain the
validity of the amended by-laws, it does not follow as a
necessary consequence that petitioner is ipso
facto disqualified. Consonant with the requirement of due
process, there must be due hearing at which the petitioner
must be given the fullest opportunity to show that he is not
covered by the disqualification. As trustees of the corporation
and of the stockholders, it is the responsibility of directors to
act with fairness to the stockholders.
48
Pursuant to this
obligation and to remove any suspicion that this power may be
utilized by the incumbent members of the Board to perpetuate
themselves in power, any decision of the Board to disqualify a
candidate for the Board of Directors should be reviewed by the
Securities behind Exchange Commission en banc and its
decision shall be final unless reversed by this Court on
certiorari.
49
Indeed, it is a settled principle that where the
action of a Board of Directors is an abuse of discretion, or
forbidden by statute, or is against public policy, or is ultra
vires, or is a fraud upon minority stockholders or creditors, or
will result in waste, dissipation or misapplication of the
corporation assets, a court of equity has the power to grant
appropriate relief.
50

III
Whether or not respondent SEC gravely abused its discretion
in denying petitioner's request for an examination of the
records of San Miguel International Inc., a fully owned
subsidiary of San Miguel Corporation
Respondent San Miguel Corporation stated in its
memorandum that petitioner's claim that he was denied
inspection rights as stockholder of SMC "was made in the teeth
of undisputed facts that, over a specific period, petitioner had
been furnished numerous documents and information," to wit:
(1) a complete list of stockholders and their stockholdings; (2) a
complete list of proxies given by the stockholders for use at the
annual stockholders' meeting of May 18, 1975; (3) a copy of the
minutes of the stockholders' meeting of March 18,1976; (4) a
breakdown of SMC's P186.6 million investment in associated
companies and other companies as of December 31, 1975; (5) a
listing of the salaries, allowances, bonuses and other
compensation or remunerations received by the directors and
corporate officers of SMC; (6) a copy of the US $100 million
Euro-Dollar Loan Agreement of SMC; and (7) copies of the
minutes of all meetings of the Board of Directors from January
1975 to May 1976, with deletions of sensitive data, which
deletions were not objected to by petitioner.
Further, it was averred that upon request, petitioner was
informed in writing on September 18, 1976; (1) that SMC's
foreign investments are handled by San Miguel International,
Inc., incorporated in Bermuda and wholly owned by SMC; this
was SMC's first venture abroad, having started in 1948 with an
initial outlay of ?500,000.00, augmented by a loan of
Hongkong $6 million from a foreign bank under the personal
guaranty of SMC's former President, the late Col. Andres
Soriano; (2) that as of December 31, 1975, the estimated value
of SMI would amount to almost P400 million (3) that the total
cash dividends received by SMC from SMI since 1953 has
amount to US $ 9.4 million; and (4) that from 1972-1975, SMI
did not declare cash or stock dividends, all earnings having
been used in line with a program for the setting up of breweries
by SMI
These averments are supported by the affidavit of the
Corporate Secretary, enclosing photocopies of the afore-
mentioned documents.
51

Pursuant to the second paragraph of section 51 of the
Corporation Law, "(t)he record of all business transactions of
the corporation and minutes of any meeting shall be open to
the inspection of any director, member or stockholder of the
corporation at reasonable hours."
The stockholder's right of inspection of the corporation's books
and records is based upon their ownership of the assets and
property of the corporation. It is, therefore, an incident of
ownership of the corporate property, whether this ownership
or interest be termed an equitable ownership, a beneficial
ownership, or a ownership.
52
This right is predicated upon the
necessity of self-protection. It is generally held by majority of
the courts that where the right is granted by statute to the
stockholder, it is given to him as such and must be exercised by
him with respect to his interest as a stockholder and for some
purpose germane thereto or in the interest of the
corporation.
53
In other words, the inspection has to be
germane to the petitioner's interest as a stockholder, and has to
be proper and lawful in character and not inimical to the
interest of the corporation.
54
In Grey v. Insular
Lumber,
55
this Court held that "the right to examine the books
of the corporation must be exercised in good faith, for specific
and honest purpose, and not to gratify curiosity, or for specific
and honest purpose, and not to gratify curiosity, or for
speculative or vexatious purposes. The weight of judicial
opinion appears to be, that on application for mandamus to
enforce the right, it is proper for the court to inquire into and
consider the stockholder's good faith and his purpose and
motives in seeking inspection.
56
Thus, it was held that "the
right given by statute is not absolute and may be refused when
the information is not sought in good faith or is used to the
detriment of the corporation."
57
But the "impropriety of
purpose such as will defeat enforcement must be set up the
corporation defensively if the Court is to take cognizance of it
as a qualification. In other words, the specific provisions take
from the stockholder the burden of showing propriety of
purpose and place upon the corporation the burden of showing
impropriety of purpose or motive.
58
It appears to be the
general rule that stockholders are entitled to full information as
to the management of the corporation and the manner of
expenditure of its funds, and to inspection to obtain such
information, especially where it appears that the company is
being mismanaged or that it is being managed for the personal
benefit of officers or directors or certain of the stockholders to
the exclusion of others."
59

While the right of a stockholder to examine the books and
records of a corporation for a lawful purpose is a matter of law,
the right of such stockholder to examine the books and records
of a wholly-owned subsidiary of the corporation in which he is
a stockholder is a different thing.
Some state courts recognize the right under certain conditions,
while others do not. Thus, it has been held that where a
corporation owns approximately no property except the shares
of stock of subsidiary corporations which are merely agents or
instrumentalities of the holding company, the legal fiction of
distinct corporate entities may be disregarded and the books,
papers and documents of all the corporations may be required
to be produced for examination,
60
and that a writ of
mandamus, may be granted, as the records of the subsidiary
were, to all incontents and purposes, the records of the parent
even though subsidiary was not named as a party.
61
mandamus
was likewise held proper to inspect both the subsidiary's and
the parent corporation's books upon proof of sufficient control
or dominion by the parent showing the relation of principal or
agent or something similar thereto.
62

On the other hand, mandamus at the suit of a stockholder was
refused where the subsidiary corporation is a separate and
distinct corporation domiciled and with its books and records
in another jurisdiction, and is not legally subject to the control
of the parent company, although it owned a vast majority of the
stock of the subsidiary.
63
Likewise, inspection of the books of
an allied corporation by stockholder of the parent company
which owns all the stock of the subsidiary has been refused on
the ground that the stockholder was not within the class of
"persons having an interest."
64

In the Nash case,
65
The Supreme Court of New York held that
the contractual right of former stockholders to inspect books
and records of the corporation included the right to inspect
corporation's subsidiaries' books and records which were in
corporation's possession and control in its office in New York."
In the Bailey case,
66
stockholders of a corporation were held
entitled to inspect the records of a controlled subsidiary
corporation which used the same offices and had Identical
officers and directors.
In his "Urgent Motion for Production and Inspection of
Documents" before respondent SEC, petitioner contended that
respondent corporation "had been attempting to suppress
information for the stockholders" and that petitioner, "as
stockholder of respondent corporation, is entitled to copies of
some documents which for some reason or another,
respondent corporation is very reluctant in revealing to the
petitioner notwithstanding the fact that no harm would be
caused thereby to the corporation."
67
There is no question that
stockholders are entitled to inspect the books and records of a
corporation in order to investigate the conduct of the
management, determine the financial condition of the
corporation, and generally take an account of the stewardship
of the officers and directors.
68

In the case at bar, considering that the foreign subsidiary is
wholly owned by respondent San Miguel Corporation and,
therefore, under its control, it would be more in accord with
equity, good faith and fair dealing to construe the statutory
right of petitioner as stockholder to inspect the books and
records of the corporation as extending to books and records of
such wholly subsidiary which are in respondent corporation's
possession and control.
IV
Whether or not respondent SEC gravely abused its discretion
in allowing the stockholders of respondent corporation to
ratify the investment of corporate funds in a foreign
corporation
Petitioner reiterates his contention in SEC Case No. 1423 that
respondent corporation invested corporate funds in SMI
without prior authority of the stockholders, thus violating
section 17-1/2 of the Corporation Law, and alleges that
respondent SEC should have investigated the charge, being a
statutory offense, instead of allowing ratification of the
investment by the stockholders.
Respondent SEC's position is that submission of the
investment to the stockholders for ratification is a sound
corporate practice and should not be thwarted but encouraged.
Section 17-1/2 of the Corporation Law allows a corporation to
"invest its funds in any other corporation or business or for any
purpose other than the main purpose for which it was
organized" provided that its Board of Directors has been so
authorized by the affirmative vote of stockholders holding
shares entitling them to exercise at least two-thirds of the
voting power. If the investment is made in pursuance of the
corporate purpose, it does not need the approval of the
stockholders. It is only when the purchase of shares is done
solely for investment and not to accomplish the purpose of its
incorporation that the vote of approval of the stockholders
holding shares entitling them to exercise at least two-thirds of
the voting power is necessary.
69

As stated by respondent corporation, the purchase of beer
manufacturing facilities by SMC was an investment in the same
business stated as its main purpose in its Articles of
Incorporation, which is to manufacture and market beer. It
appears that the original investment was made in 1947-1948,
when SMC, then San Miguel Brewery, Inc., purchased a beer
brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.)
for the manufacture and marketing of San Miguel beer thereat.
Restructuring of the investment was made in 1970-1971 thru
the organization of SMI in Bermuda as a tax free
reorganization.
Under these circumstances, the ruling in De la Rama v. Manao
Sugar Central Co., Inc., supra, appears relevant. In said case,
one of the issues was the legality of an investment made by
Manao Sugar Central Co., Inc., without prior resolution
approved by the affirmative vote of 2/3 of the stockholders'
voting power, in the Philippine Fiber Processing Co., Inc., a
company engaged in the manufacture of sugar bags. The lower
court said that "there is more logic in the stand that if the
investment is made in a corporation whose business is
important to the investing corporation and would aid it in its
purpose, to require authority of the stockholders would be to
unduly curtail the power of the Board of Directors." This Court
affirmed the ruling of the court a quo on the matter and,
quoting Prof. Sulpicio S. Guevara, said:
"j. Power to acquire or dispose of shares or
securities. A private corporation, in order
to accomplish is purpose as stated in its
articles of incorporation, and subject to the
limitations imposed by the Corporation Law,
has the power to acquire, hold, mortgage,
pledge or dispose of shares, bonds,
securities, and other evidence of
indebtedness of any domestic or foreign
corporation. Such an act, if done in
pursuance of the corporate purpose, does
not need the approval of stockholders; but
when the purchase of shares of another
corporation is done solely for investment
and not to accomplish the purpose of its
incorporation, the vote of approval of the
stockholders is necessary. In any case, the
purchase of such shares or securities must be
subject to the limitations established by the
Corporations law; namely, (a) that no
agricultural or mining corporation shall be
restricted to own not more than 15% of the
voting stock of nay agricultural or mining
corporation; and (c) that such holdings shall
be solely for investment and not for the
purpose of bringing about a monopoly in any
line of commerce of combination in restraint
of trade." The Philippine Corporation Law by
Sulpicio S. Guevara, 1967 Ed., p. 89)
(Emphasis supplied.)
40. Power to invest corporate funds. A
private corporation has the power to invest
its corporate funds "in any other corporation
or business, or for any purpose other than
the main purpose for which it was organized,
provide that 'its board of directors has been
so authorized in a resolution by the
affirmative vote of stockholders holding
shares in the corporation entitling them to
exercise at least two-thirds of the voting
power on such a propose at a stockholders'
meeting called for that purpose,' and
provided further, that no agricultural or
mining corporation shall in anywise be
interested in any other agricultural or mining
corporation. When the investment is
necessary to accomplish its purpose or
purposes as stated in its articles of
incorporation the approval of the
stockholders is not necessary."" (Id., p. 108)
(Emphasis ours.) (pp. 258-259).
Assuming arguendo that the Board of Directors of SMC had no
authority to make the assailed investment, there is no question
that a corporation, like an individual, may ratify and thereby
render binding upon it the originally unauthorized acts of its
officers or other agents.
70
This is true because the questioned
investment is neither contrary to law, morals, public order or
public policy. It is a corporate transaction or contract which is
within the corporate powers, but which is defective from a
supported failure to observe in its execution the. requirement
of the law that the investment must be authorized by the
affirmative vote of the stockholders holding two-thirds of the
voting power. This requirement is for the benefit of the
stockholders. The stockholders for whose benefit the
requirement was enacted may, therefore, ratify the investment
and its ratification by said stockholders obliterates any defect
which it may have had at the outset. "Mere ultra vires acts",
said this Court in Pirovano,
71
"or those which are not illegal
and void ab initio, but are not merely within the scope of the
articles of incorporation, are merely voidable and may become
binding and enforceable when ratified by the stockholders.
Besides, the investment was for the purchase of beer
manufacturing and marketing facilities which is apparently
relevant to the corporate purpose. The mere fact that
respondent corporation submitted the assailed investment to
the stockholders for ratification at the annual meeting of May
10, 1977 cannot be construed as an admission that respondent
corporation had committed an ultra vires act, considering the
common practice of corporations of periodically submitting for
the gratification of their stockholders the acts of their directors,
officers and managers.
WHEREFORE, judgment is hereby rendered as follows:
The Court voted unanimously to grant the petition insofar as it
prays that petitioner be allowed to examine the books and
records of San Miguel International, Inc., as specified by him.
On the matter of the validity of the amended by-laws of
respondent San Miguel Corporation, six (6) Justices, namely,
Justices Barredo, Makasiar, Antonio, Santos, Abad Santos and
De Castro, voted to sustain the validity per se of the amended
by-laws in question and to dismiss the petition without
prejudice to the question of the actual disqualification of
petitioner John Gokongwei, Jr. to run and if elected to sit as
director of respondent San Miguel Corporation being decided,
after a new and proper hearing by the Board of Directors of
said corporation, whose decision shall be appealable to the
respondent Securities and Exchange Commission deliberating
and acting en banc and ultimately to this Court. Unless
disqualified in the manner herein provided, the prohibition in
the afore-mentioned amended by-laws shall not apply to
petitioner.
The afore-mentioned six (6) Justices, together with Justice
Fernando, voted to declare the issue on the validity of the
foreign investment of respondent corporation as moot.
Chief Justice Fred Ruiz Castro reserved his vote on the validity
of the amended by-laws, pending hearing by this Court on the
applicability of section 13(5) of the Corporation Law to
petitioner.
Justice Fernando reserved his vote on the validity of subject
amendment to the by-laws but otherwise concurs in the result.
Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr.,
Fernandez and Guerrero filed a separate opinion, wherein they
voted against the validity of the questioned amended bylaws
and that this question should properly be resolved first by the
SEC as the agency of primary jurisdiction. They concur in the
result that petitioner may be allowed to run for and sit as
director of respondent SMC in the scheduled May 6, 1979
election and subsequent elections until disqualified after
proper hearing by the respondent's Board of Directors and
petitioner's disqualification shall have been sustained by
respondent SEC en banc and ultimately by final judgment of
this Court.
In resume, subject to the qualifications aforestated judgment is
hereby rendered GRANTING the petition by allowing
petitioner to examine the books and records of San Miguel
International, Inc. as specified in the petition. The petition,
insofar as it assails the validity of the amended by- laws and the
ratification of the foreign investment of respondent
corporation, for lack of necessary votes, is hereby DISMISSED.
No costs.
Makasiar, Santos Abad Santos and De Castro, JJ., concur.
Aquino, and Melencio Herrera JJ., took no part.

CHARLES W. MEAD V. McCULLOUGH
Haussermann, Cohn & Fisher and A. D. Gibbs for plaintiff.
James J. Peterson and O'Brien & DeWitt for defendant
McCullough.

TRENT, J.:
This action was originally brought by Charles W. Mead against
Edwin C. McCullough, Thomas L. Hartigan, Frank E. Green,
and Frederick H. Hilbert. Mead has died since the
commencement of the action and the case is now going forward
in the name of his administrator as plaintiff.
The complaint contains three causes of action, which are
substantially as follows: The first, for salary; the second, for
profits; and the third, for the value of the personal effects
alleged to have been left Mead and sold by the defendants.
A joint and several judgment was rendered by default against
each and all of the defendants for the sum of $3,450.61 gold.
The defendant McCullough alone having made application to
have this judgment set aside, the court granted this motion,
vacating the judgment as to him only, the judgment as to the
other three defendants remaining undisturbed.1awphi1.net
At the new trial, which took place some two or three years later
and after the death of Mead, the judgment was rendered upon
merits, dismissing the case as to the first and second causes of
action and for the sum of $1,200 gold in the plaintiff's favor on
the third cause of action. From this judgment both parties
appealed and have presented separate bills of exceptions. No
appeal was taken by the defendant McCullough from the ruling
of the court denying a recovery on his cross complaint.
On March 15, 1902, the plaintiff (Mead will be referred to as
the plaintiff in this opinion unless it is otherwise stated) and
the defendant organized the "Philippine Engineering and
Construction Company," the incorporators being the only
stockholders and also the directors of said company, with
general ordinary powers. Each of the stockholders paid into the
company $2,000 mexican currency in cash, with the exception
of Mead, who turned over to the company personal property in
lieu of cash.
Shortly after the organization, the directors held a meeting and
elected the plaintiff as general manager. The plaintiff held this
position with the company for nine months, when he resigned
to accept the position of engineer of the Canton and Shanghai
Railway Company. Under the organization the company began
business about April 1, 102.itc-alf
The contract and work undertaken by the company during the
management of Mead were the wrecking contract with the
Navy Department at Cavite for the raising of the Spanish ships
sunk by Admiral Dewey; the contract for the construction of
certain warehouses for the quartermaster department; the
construction of a wharf at Fort McKinley for the Government;
The supervision of the construction of the Pacific Oriental
Trading Company's warehouse; and some other odd jobs not
specifically set out in the record.
Shortly after the plaintiff left the Philippine Islands for China,
the other directors, the defendants in this case, held a meeting
on December 24, 1903, for the purpose of discussing the
condition of the company at that time and determining what
course to pursue. They did on that date enter into the following
contract with the defendant McCullough, to wit:1awphil.net
For value received, this contract and all the rights and
interests of the Philippine Engineering and
construction Company in the same are hereby
assigned to E. C. McCullough of Manila, P. I.
(Sgd.) E. C. McCULLOUGH,
President, Philippine Engineering and
Construction Company.
(Sgd.) F. E. GREEN, Treasurer.
(Sgd.) THOMAS L. HARTIGAN, Secretary.
The contract reffered to in the foregoing document was known
as the wrecking contract with the naval authorities.
On the 28th of the same month, McCullough executed and
signed the following instrumental:
For value received, and having the above assignment
from my associates in the Philippine Engineering and
Construction Company, I hereby transfer my right,
title, and interest in the within contract, with the
exception of one sixth, which I hereby retain, to R. W.
Brown, H. D. C. Jones, John T. Macleod, and T. H.
Twentyman.
The assignees of the wrecking contract, including McCullough,
formed was not known as the "Manila Salvage Association."
This association paid to McCullough $15,000 Mexican
Currency cash for the assignment of said contract. In addition
to this payment, McCullough retained a one-sixth interest in
the new company or association.
The plaintiff insists that he was received as general manager of
the first company a salary which was not to be less than $3,500
gold (which amount he was receiving as city engineer at the
time of the corporation of the company), plus 20 per cent of the
net profits which might be derived from the business; while
McCullough contends that the plaintiff was to receive only his
necessary expenses unless the company made a profit, when he
could receive $3,500 per year and 20 per cent of the profits.
The contract entered into between the board of directors and
the plaintiffs as to the latter's salary was a verbal one. The
plaintiff testified that this contract was unconditional and that
his salary, which was fixed at $3,500 gold, was not dependent
upon the success of the company, but that his share of the
profits was to necessarily depend upon the net income. On the
other hand, McCullough, Green and Hilbert testify that the
salary of the plaintiff was to be determined according to
whether or not the company was successful in its operations;
that if the company made gains, he was to receive $3,5000
gold, and a percentage, but that if the company did not make
any profits, he was to receive only his necessary living
expenses.
It is strongly urged that the plaintiff would not have accepted
the management of the company upon such conditions, as he
was receiving from the city of Manila a salary of $3,500 gold.
This argument is not only answered by the positive and direct
testimony of three of the defendants, but also by the
circumstances under which this company was organized and
principal object, which was the raising of the Spanish ships.
The plaintiff put no money into the organization, the
defendants put but little: just sufficient to get the work of
raising the wrecks under way. This venture was a risky one. All
the members of the company realized that they were
undertaking a most difficult and expensive project. If they were
successful, handsome profits would be realized; while if they
were unsuccessful, all the expenses for the hiring of machinery,
launches, and labor would be a total loss. The plaintiff was in
complete charge and control of this work and was to receive,
according to the great preponderance of the evidence, in case
the company made no profits, sufficient amount to cover his
expenses, which included his room, board, transportation, etc.
The defendants were to furnish money out of their own private
funds to meet these expenses, as the original $8,000 Mexican
currency was soon exhausted in the work thus undertaken. So
the contract entered into between the directors and the
plaintiff as to the latter's salary was a contingent one.
It is admitted that the plaintiff received $1.500 gold for his
services, and whether he is entitled to receive an additional
amount depends upon the result of the second cause of action.
The second cause of action is more difficult to determine. On
this point counsel for the plaintiff has filed a very able and
exhaustive brief, dealing principally with the facts.
It is urged that the net profits accruing to the company after
the completion of all the contracts (except the salvage contract)
made before the plaintiff resigned as manager and up to the
time the salvage contract was transferred to McCullough and
from him to the new company, amounted to $5,628.37 gold.
This conclusion is reached, according to the memorandum of
counsel for the plaintiff which appears on pages 38 and 39 of
the record, in the following manner:
Profits from the construction of warehouses for the
Government
$6,962.54
Profits from the construction of the wall at Fort McKinley 500.00
Profits from the inspection of the construction of the P. O. T.
warehouse
1,000.00
Profits obtained from the projects (according to Mead's
calculations)
1,000.00
Total

9,462.54
In this same memorandum, the expense for the operation of
the company during Mead's management, consisting of rents,
the hire of one muchacho, the publication of various notices,
the salary of an engineer for four months, and plaintiff's salary
for nine months, amounts to $3,834.17 gold. This amount,
deducted from the sum total of profits, leaves $5,628.37 gold.
Counsel for the plaintiff, in order to show conclusively as they
assert that the company, after paying all expenses and
indebtedness, had a considerable balance to its credit, calls
attention to Exhibit K. This balance reads as follows:
Abstract copy of ledger No. 3, folios 276-277.
Philippine Engineering and Construction Company.
Then follow the debits and credits, with a balance in favor of
the company of $10,728.44 Mexican currency. This account
purports to cover the period from July 1, 1902, to April 1, 1903.
Ledger No. 3, above mentioned, is that the defendant
McCullough and not one of the books of the company.
It was this exhibit that the lower court based its conclusion
when it found that on January 25, 1903, after making the
transfer of the salvage contract to McCullough, the company
was in debt $2,278.30 gold. The balance of $10,728.44
Mexican currency deducted from the $16,439.40 Mexican
currency (McCullough's losses in the Manila Salvage
Association) leaves $2,278.30 United States currency at the
then existing rate of exchange. In Exhibit K, McCullough
charged himself with the $15,000 Mexican currency which he
received from his associates in the new company, but did not
credit himself with the $16,439.40 Mexican currency, losses in
said company, for the reason that on April 1, 1903, said losses
had not occurred. It must be borne in mind that Exhibit K is an
abstract from a ledger.
The defendant McCullough, in order to show in detail his
transactions with the old company, presented Exhibits 1 and 2.
These accounts read as follows:
Detailed account of the receipts and disbursements of
E. C. McCullough and the Philippine Engineering and
Construction Company.
Then follow the debits ad credits. These two accounts cover the
period from March 5 1902, to June 9, 1905. According to
Exhibit No. 1, the old company was indebted to McCullough in
the sum of $14,918.75 Mexican currency, and according to
Exhibit No. 2 he indebtedness amounted to $6,358.15 Mexican
currency. The debits and credits in these two exhibits are
exactly the me with the following exceptions; I Exhibit No. 1,
McCullough credits himself with the $10,000 Mexican
currency (the amount borrowed from the bank and deposited
with the admiral as a guarantee for the faithful performance of
the salvage contract); while in Exhibit No. 2 he credits himself
with this $10,000 and at he same time charges himself with
this amount. In the same exhibit (No. 2) he credits himself with
$16,439.40 Mexican currency, his losses in the new company,
received from said company. Eliminating entirely from these
two exhibits the $10,000 Mexican currency, the $15,000
Mexican currency, and the $16,39.40 Mexican currency, the
balance shown in McCullough's favor is exactly the same in
both exhibits. This balance amounts to $4,918.75 Mexian
currency.
According to McCullough's accounts in Exhibits 1 and 2 the
profits derived from the construction of the Government
warehouse amounted to $4,005.02 gold, while the plaintiff
contends that these profits amounted to $6,962.54 gold. The
plaintiff, during his management of the old company, made a
contract with the Government for the construction of these are
house and commenced work. After he resigned and left for
China, McCullough took charge of and completed the said
warehouse. McCullough gives a complete, detailed statements
of express for the completion of this work, showing the dates,
to whom paid, and for what purpose. He also gives the various
amounts he received from the Government with the amounts of
the receipt of the same. On the first examination, McCullough
testified that the total amount received from the Government
for the construction of these warehouse was $1,123 gold. The
case was suspended for the purpose of examination the records
of the Auditor and the quater master, to determine the exact
amount paid for this work. As a result of this examination, the
vouchers show an additional amount of about $5,000 gold,
paid in checks. These checks show that the same were endorsed
by the plaintiff and collected by him from the Hongkong and
Shanghai Banking Corporation. This money was not handled
by McCullough and as it was collected by the plaintiff, it must
be presumed, in the absence of proof, that it was disbursed by
him. McCullough did not charge himself with the $2,5000
gold, alleged to have been profits from the construction of the
wall at Fort McKinley, the inspection of the construction of the
P. O. T. warehouse, and other projects. This work was done
under the management of the plaintiff and it is not shown that
the profits from these contracts ever reached the ands of
McCullough. McCullough was not the treasurer of the company
at that time. The other items which the plaintiff insist that
McCullough had no right to credit himself with are the
following:
Date To whom paid. Amount (Mex. currency).
Jan. 30, 1903 Green $2,000.00
Feb. 2, 1903 McCullough 1,300.00
Feb. 2, 1903 Green 1,027.92
Feb. 19, 1905 P. O. T. Co. note 2,236.80
May 23, 1905 Hilbert 1,856.02
June 9, 1905 Hartigan 1,225.00
McCullough says that these amounts represents cash borrowed
from the evidence parties to carry on the operations of the old
company while it was trying to raise the sunken vessels. There
is no proof to the contrary, and McCullough's testimony on this
point is strongly corroborated by the fact that the work done by
the company in attempting to raise theses vessels was it first
undertaking. The company had made no profits while tat work
was going on under the management of the plaintiff, but its
expenses greatly exceeded that of the original $8,000 Mexican
currency. It was necessary to borrow money to continue that
work. These amounts, having been borrowed, were outstanding
debts when McCullough took charge for the purpose of
completing the warehouses and winding up the business of the
old company. These amounts do not represent payments or
refunds of the original capital. McCullough did not credit
himself with any amount for his services for supervising the
completion of the warehouses, nor for liquidating or winding
up the company's affairs. We think that the amount of
$4,918.75 Mexican currency, balance in McCullough's favor up
to this point, represents a fair, equitable, and just settlement.
So far we have referred to the Philippine Engineering and
Construction Company as the "company," without any attempt
to define its legal status.
The plaintiff and defendants organized this company with a
capital stock of $100,000 Mexican currency, each paying in on
the organization $2,000 Mexican currency. The remainder,
$9,000, according to the articles of agreement, were to be
offered to the public in shares of $100 Mexican currency, each.
The names of all the organizers appear in the articles of
agreement, which articles were duly inscribed in the
commercial register. The purpose for which this organization
was affected were to engage in general engineering and
construction work, and operating under the name of the
"Philippine Engineering and Construction Company." during
its active existence, it engaged in the business of attempting to
rise the sunken Spanish fleet, constructing under contract
warehouses and a wharf for the United States Government,
supervising the construction of a warehouse for a private firm,
and some assay work. It was, therefore, an industrial civil
partnership, as distinguished from a commercial one; a civil
partnership in the mercantile form, an anonymous partnership
legally constituted in the city of Manila.
The articles of agreement appeared in a public document and
were duly inscribed in the commercial register. To the extent of
this inscription the corporation partook of the form of a
mercantile one and as such must e governed by articles 151 to
174 of the Code of Commerce, in so far as these provisions are
not in conflict with the Civil Code (art. 1670, Civil Code); but
the direct and principal law applicable is the Civil Code. Those
provisions of the Code of Commerce are applicable subsidiary.
This partnership or stock company (sociedad anonima) upon
the execution of the public instrument in which is articles of
agreement appear, and the contribution of funds and personal
property, became a juridicial person an artificial being,
invisible, intangible and existing only in contemplation of law
with the power to hold, buy, and ell property, and to use and
be sued a corporation not a general copartnership nor a
limited copartnership. (Arts. 37, 38,1656 of the Civil Code;
Compania Agricola de Ultimar vs. Reyes et al., 4 Phil. Rep., 2;
and Chief Justice Marshall's definition of a corporation, 17 U.
S., 518.)
The inscribing of its articles of agreement in the commercial
register was not necessary to make it a juridicial person a
corporation. Such inscription only operated to show that it
partook of the form of a commercial corporation. (Compania
Agricola de Ultimar vs. Reyes et al., supra.)
Did a majority of the stockholders, who were at the same time a
majority of the directors of this corporation, have the power
under the law and its articles of agreement, to sell or transfer to
one of its members the assets of said corporation?
In the first article of the statutes of incorporation it is stated tat
by virtue of a public document the organizers, whose names are
given in full, agreed to form a sociedad anonima. Article II
provides that the organizers should be the directors an
administrators until the second general meeting, and until
their successors were duly elected and installed. The third
provides that the sociedad should run for ninety-nine years
from the date of the execution of its articles of agreement.
Article IV sets forth the object or purpose of the organization.
Article V makes the capital $100,000 Mexican currency,
divided into one thousand shares at $100 Mexican currency
each. Article VI provides that each shareholder should be
considered as a coowner in the assets of the company and
entitled to participate in the profits in proportion to the
amount of his stock. Article VII fixed the time of holding
general meetings and the manner of calling special meetings of
the stockholders. Article VIII provides that the board of
directors shall be elected annually. Article IX provides for the
filing of vacancies in the board of directors. Article X provides
that "the board of directors shall elect the officers of
the sociedad and have under is charge the administration of
the said sociedad." Article XI: "In all the questions with
reference to the administration of the affairs of the sociedad, it
shall be necessary to secure the unanimous vote of the board of
directors, and at least three of said board must be provides that
all of the stock, except that which was divided among the
organizers should remain in the treasury subject to the
disposition of the board of directors. Article XIII reads: "In all
the meetings of the stockholders, a majority vote of the
stockholders present shall be necessary to determine any
question discussed." The fourteenth articles authorizes the
board of directors to adopt such rules and regulations for the
government of the sociedad as it should deem proper, which
were not in conflict with its statutes.
When the sale or transfer heretofore mentioned took place,
there were present four directors, all of whom gave their
consent to that sale or transfer. The plaintiff was then about
and his express consent to make this transfer or sale was not
obtained. He was, before leaving, one of the directors in this
corporation, and although he had resigned as manager, he had
not resigned as a director. He accepted the position of engineer
of the Canton and Shanghai Railway Company, knowing that
his duties as such engineer would require his whole time and
attention and prevent his returning to the Philippine Islands
for at least a year or more. The new position which he accepted
in China was incompatible with his position as director in the
Philippine Engineering and Construction Company, a
corporation whose sphere of operations was limited to the
Philippine Islands. These facts are sufficient to constitute an
abandoning or vacating of hid position as director in said
corporation. (10 Cyc., 741.) Consequently, the transfer or sale
of the corporation's assets to one of its members was made by
the unanimous consent of all the directors in the corporation at
that time.
There were only five stockholders in this corporation at any
time, four of whom were the directors who made the sale, and
the other the plaintiff, who was absent in China when the said
sale took place. The sale was, therefore, made by the
unanimous consent of four-fifths of all the stockholders. Under
the articles of incorporation, the stockholders and directors
had general ordinary powers. There is nothing in said articles
which expressly prohibits the sale or transfer of the corporate
property to one of the stockholders of said corporation.
Is there anything in the law which prohibits such a sale or
transfer? To determine this question, it is necessary to
examine, first, the provisions of the Civil Code, and second,
those provisions (art. 151 to 174) of the Code o ] Commerce.
Articles 1700 to 1708 of the Civil Code deal with the manner of
dissolving a corporation. There is nothing in these articles
which expressly or impliedly prohibits the sale of corporate
property to one of its members, nor a dissolution of a
corporation in this manner. Neither is there anything in
articles 151 to 174 of the Code of Commerce which prohibits the
dissolution of a corporation by such sale or transfer.
The articles of incorporation must include:

The submission to the vote of the majority of the
meeting of members, duly called and held, of such
matters as may properly be brought before the same.
(No. 10, art. 151, Code of Commerce.)
Article XIII of the corporation's statutes expressly provides
that "in all the meetings of the stockholders, a majority vote of
the stockholders present shall be necessary to determine any
question discussed."
The sale or transfer to one of its members was a matter which a
majority of the stockholders could very properly consider. But
it i said that if the acts and resolutions of a majority of the
stockholders in a corporation are binding in every case upon
the minority, the minority would be completely wiped out and
their rights would be wholly at the mercy of the abuses of the
majority.
Generally speaking, the voice of a majority of the stockholders
is the law of the corporation, but there are exceptions to this
rule. There must necessarily be a limit upon the power of the
majority. Without such a limit the will of the majority would be
absolute and irresistible and might easily degenerate into an
arbitrary tyranny. The reason for these limitations is that in
every contract of partnership (and a corporation can be
something fundamental and unalterable which is beyond the
power of the majority of the stockholders, and which
constitutes the rule controlling their actions. this rule which
must be observed is to be found in the essential compacts of
such partnership, which gave served as a basis upon which the
members have united, and without which it is not probable
that they would have entered not the corporation.
Notwithstanding these limitations upon the power of the
majority of the stockholders, their (the majority's) resolutions,
when passed in good faith and for a just cause, deserve careful
consideration and are generally binding upon the minority.
Eixala, in his work entitled "Instituciones del Derecho
Mercantil de Espaa," speaking of sociedades anonimas, says:
The resolutions of the boards passed by a majority
vote are valid . . . and authority for passing such
resolutions is unlimited, provided that the original
contract is not broken by them, the partnership funds
not devoted to foreign purposes, or the partnerships
transformed, or changes made which are against
public policy or which infringe upon the rights of third
persons.
The supreme court of Spain, in its decision dated June 30,
1888, said:
In order to be valid and binding upon dissenting
members, it s an indispensable requisite that
resolutions passed by a general meeting of
stockholders conform absolutely to the contracts and
conditions of the articles of the association, which are
to be strictly construed.
That resolutions passed within certain limitations by a majority
of the stockholders of a corporation are binding upon the
minority, is therefore recognized by the Spanish authorities.
Power of private corporation to alienate property.
This power of absolute alienability of corporate
property applies especially to private corporations
that are established solely for the purpose of trade or
manufacturing and in which he public has no direct
interest. While this power is spoken of as belonging to
the corporation it must be observed that the
authorities point out that the trustees or directors of a
corporation do not possess the power to dispose of the
corporate property so as to virtually end the existence
of the corporation and prevent it from carrying on the
business for which it was incorporated. (Thompson on
Corporation, second edition, sec. 2416, and cases cited
thereunder.)
Power to dispose of all property. Where there are
no creditors, and no stockholder objects, a
corporation, as against all other persons but the state,
may sell and dispose of all its property. The state in its
sovereign capacity may question the power of the
corporation to do so, but with these exceptions such
as a sale is void. A rule of general application is that a
corporation of a purely private business character, one
which owes no special duty to the public, and is not
given the right of eminent domain, where exigencies
of its business require it or when the circumstances
are such that it can no longer continue the business
with profit, may sell and dispose of all its property,
pay its debts, divide the remaining assets and wind up
the affairs of the corporation. (Id., sec. 2417.)
When directors or officers may dispose of all the
property. It is within the dominion of the managing
officers and agents of the corporation to dispose of all
the corporate property under certain circumstances;
and this may be done without reference to the assent
or authority of the stockholders. This disposition of
the property may be temporarily by lease, or
permanently by absolute conveyance. But it can only
be done in the course of the corporate business and
for the furtherance of the purposes of the
incorporation. The board of directors possess this
power when the corporation becomes involved and by
reason of its embarrassed or insolvent condition is
unable either to pay its debts or to secure capital and
funds for the further prosecution of its enterprise, and
especially where creditors are pressing their claims
and demands and are threatening to or have
instituted actions to enforce their claims. This power
of the directors to alienate the property is conceded
where it is regarded as of imperative necessity. (If.,
sec. 2418, and case cited.)
When majority stockholder may dispose of all
corporate property. Another rule that permits a
majority of the stockholders to dispose of all the
corporate property and wind up the business, is where
the corporation has became insolvent, and the
disposition of the property is necessary to pay the
debt; or where from any cause the business is a
failure, and the best interest of the corporation and all
the stockholders require it, then the majority have
clearly the power to dispose of all the property even as
against the protests of a minority. It would be a harsh
rule that could permit one stockholder, or any
minority of the stockholders, to hold the majority to
their investment where the continuation of the
business would be at a loss and where there was no
prospect or hope that the enterprise could be made
profitable. The rule as stated by some courts is that
the majority stockholders may dispose of the property
when just cause exists; and this just cause is usually
defined to be the unprofitableness of the business and
where its continuation would be ruinous to the
corporation and against the interest of stockholders.
(Id., sec. 2424, and cases cited.)
Nothing is better settled in the law of corporations
than the doctrine that a corporation has the same
capacity and power as a natural person to dispose of
the convey its property, real or personal, provided it
does not do so for a purpose which is foreign to the
objects for which it was created, and provided,
further, it violates no charter or statutory restriction,
on rule of law based upon public policy. . . .This power
need not be expressly conferred upon a corporation by
its charter. It is implied as an incident to its
ownership of property, unless there is some clear
restriction in this charter or in some statute. (Clark
and Marshall's Private Corporations, sec. 152, and
cases cited.)
A purely private business corporation, like a
manufacturing or trading company, which is not given
the right of eminent domain, and which owes no
special duties to the public, may certainly sell and
convey absolutely the whole of its property, when the
exigencies of its business require it to do so, or when
the circumstances are such that it can no longer
profitably continue its business, provided the
transaction is not in fraud of the rights of creditors, or
in violation of charter or statutory restrictions. And,
by the weight of authority, this may be done a
majority of the stockholders against the dissent of the
minority. (Id., sec. 160, and cases cited.)
The above citations are taken from the works of the most
eminent writers on corporation law. The citation of cases in
support of the rules herein announced are too numerous to
insert.
From these authorities it appears to be well settled, first, that a
private corporation, which owes no special duty to the public
and which has not been given the right of eminent domain, has
the absolute right and power as against the whole world except
the state, to sell and dispose of all of its property; second, that
the board of directors, has the power, without referrence to the
assent or authority of the stockholders, when the corporation is
in failing circumstances or insolvent or when it can no longer
continue the business with profit, and when it is regarded as an
imperative necessity; third, that a majority of the stockholders
or directors, even against the protest of the minority, have this
power where, from any cause, the business is a failure and the
best interest of the corporation and all the stockholders require
it.
May officer or directors of the corporation purchase the
corporate property? The authorities are not uniform on this
question, but on the general proposition whether a director or
an officer may deal with the corporation, we think the weight of
authority is that he may. (Merrick vs. Peru Coal Co., 61 Ill., 472;
Harts et al. vs. Brown et al., 77 Ill., 226; Twin-Lick Oil
Company vs. Marbury, 91 U.S., 587; Whitwell vs, Warner, 20
Vt., 425; Smith vs. Lansing, 22 N.Y., 520; City of St. Loius vs.
Alexander, 23 Mo., 483; Beach et al vs. Miller, 130 Ill., 162.)
While a corporation remains solvent, we can see no reason why
a director or officer, by the authority of a majority of the
stockholders or board of managers, may not deal with the
corporation, loan it money or buy property from it, in like
manner as a stranger. So long as a purely private corporation
remains solvent, its directors are agents or trustees for the
stockholders. They owe no duties or obligations to others. But
the moment such a corporation becomes insolvent, its directors
are trustees of all the creditors, whether they are members of
the corporation or not, and must manage its property and
assets with strict regard to their interest; and if they are
themselves creditors while the insolvent corporation is under
their management, they will not be permitted to secure to
themselves by purchasing the corporate property or otherwise
any personal advantage over the other creditors. Nevertheless,
a director or officer may in good faith and for an adequate
consideration purchase from a majority of the directors or
stockholders the property even of an insolvent corporation, and
a sale thus made to him is valid and binding upon the minority.
(Beach et al. vs. Miller, supra; Twin-Lick Oil Company vs.
Marbury, supra; Drury vs. Cross, 7 Wall., 299; Curran vs. State
of Arkansas, 15 How., 304; Richards vs. New Hamphshire
Insurance Company, 43 N. H., 263; Morawetz on Corporations
(first edition), sec. 579; Haywood vs. Lincoln Lumber Company
et al., 64 Wis., 639; Port vs. Russels, 36 Ind., 60; Lippincott vs.
Shaw Carriage Company, 21 Fed. Rep., 577.)
In the case of the Twin-Lick Oil Company vs. Marbury, supra,
the complaint was a corporation organized under the laws of
West Virginia, engaged in the business of raising and selling
petroleum. It became very much embarrased and a note was
given secured by a deed of trust, conveying all the property
rights, and franchise of the corporation to William Thomas to
secure the payment of said note, with the usual power of sale in
default of payment. The property was sold under the deed of
trust; was bought in by defendant's agent for his benefit, and
conveyed to him the same year. The defendant was at the time
of these transactions a stockholder and director in the
company. At the time the defendant's money became due there
was no apparent possibility of the corporation's paying it at any
time. The corporation was then insolvent. The property was
sold by the trustee and bough in by the defendant at a fair and
open sale and at a reasonable price. The sale and purchase was
the only mode left to the defendant to make his money. The
court said:
That a director of a joint-stock corporation occupies
one of those fiduciary relations where his dealings
with the subject-matter of his trust or agency, and
with the beneficiary or party whose interest is
confided to his care, is viewed with jealousy by the
courts, and may be set aside on slight grounds, is a
doctrine founded on the soundest morality, and which
has received the clearest recognition in this court and
others. (Koehler vs. Iron., 2 Black, 715; Drury vs.
Cross, 7 Wall., 299; R.R. Co. vs. Magnay, 25 Beav.,
586; Cumberland Co vs. Sherman, 30 Barb., 553;
Hoffman S. Coal Co. vs. Cumberland Co., 16 Md.,
456.) The general doctrine, however, in regard to
contracts of this class, is, not that they are absolutely
void, but that they are voidable at the election of the
party whose interest has been so represented by the
party claiming under it. We say, this is the general
rule; for there may be cases where such contracts
would be void ab initio; as when an agent to sell buys
of himself, and by his power of attorney conveys to
himself that which he was authorized to sell. but even
here, acts which amount t a ratification by the
principal may validate the sale.
The present case is not one of that class. While it is
true that the defendant, a s a director of the
corporation, was bound by all those rules of
conscientious fairness which courts of equity have
imposed as the guides for dealing in such cases, it can
not be maintained that any rule forbids one director
among several from loaning money to the corporation
when the money is needed, and the transaction is
open, and otherwise free from blame. No adjudged
case has gone so far as this. Such a doctrine, while it
would afford little protection to the corporation
against actual fraud or oppression, would deprive it of
the air of those most interested in giving aid
judiciously, and best qualified to judge of the necessity
of that aid, and of the extent to which it may safely be
given.
There are in such a transaction three distinct parties
whose interest is affected by it; namely, the lender, the
corporation, and the stockholders of the corporation.
The directors are the officers or agents of the
corporation, and represent the interests of the
abstract legal entity, and of those who own the shares
of its stock. One of the objects of creating a
corporation by law is to enable it to make contracts;
and these contracts may be made with its
stockholders as well as with others. In some classes of
corporations, as in mutual insurance companies, the
main object of the act of the incorporation is to enable
the company to make contracts which its
stockholders, or with persons who become
stockholders by the very act of making the contract of
insurance. It is very true, that as a stockholder, in
making a contract of any kind with the corporation of
which he is a member, is in some sense dealing with a
creature of which he is a part, and holds a common
interest with the other stockholders, who, with him,
constitute the whole of that artificial entity, he is
properly held to a larger measure of candor and good
faith than if he were not a stockholder. So, when the
lender is a director, charged, with others, with the
control and management of the affairs of the
corporation, representing in this regard the
aggregated interest of all the stockholders, his
obligation, if he becomes a party to a contract with the
company, to candor and fair dealing, is increased in
the precise degree that his representative character
has given him power and control derived from the
confidence reposed in him by the stockholders who
appointed him their agent. If he should be a sole
director, or one of a smaller number vested with
certain powers, this obligation would be still stronger,
and his acts subject to more severe scrutiny, and their
validity determined by more rigid principles of
morality, and freedom from motives of selfishness. All
this falls far short, however, of holding that no such
contract can be made which will be valid; . . . .
In the case of Hancock vs. Holbrook et al. (40 La. Ann., 53), the
court said:
As a strictly legal question, the right of a board of
directors of a corporation to apply it property to the
payment of its debts, and the right of the majority of
stockholders present at a meeting called for the
purpose to ratify such action and to dissolve the
corporation, can not be questioned.
But were such action is taken at the instance, and
through the influence of the president of the
corporation, and were the debt to which the property
is applied is one for which he is himself primarily
liable, and specially where he subsequently acquires,
in his personal right, the proerty thus disposed of,
such circumstances undoubtedly subject his acts to
severe scrutiny, and oblige him to establish that he
acted with the utmost candor and fair-dealing for the
interest of the corporation, and without taint of selfish
motive.
The sale or transfer of the corporate property in the case at bar
was made by three directors who were at the same time a
majority of stockholders. If a majority of the stockholders have
a clear and a better right to sell the corporate property than a
majority of the directors, then it can be said that a majority of
the stockholders made this sale or transfer to the defendant
McCullough.
What were the circumstances under which said sale was made?
The corporation had been going from bad to worse. The work
of trying to raise the sunken Spanish fleet had been for several
months abandoned. The corporation under the management of
the plaintiff had entirely failed in this undertaking. It had
broken its contract with the naval authorities and the $10,000
Mexican currency deposited had been confiscated. It had no
money. It was considerably in debt. It was a losing concern and
a financial failure. To continue its operation meant more
losses. Success was impossible. The corporation was civilly
dead and had passed into the limbo of utter insolvency. The
majority of the stockholders or directors sold the assets of this
corporation, thereby relieving themselves and the plaintiff of
all responsibility. This was only the wise and sensible thing for
them to do. They acted in perfectly good faith and for the best
interests of all the stockholders. "It would be a harsh rule that
would permit one stockholder, or any minority of stockholders
to hold a majority to their investment where a continuation of
the business would be at a loss and where there was no
prospect or hope that the enterprise would be profitable."
The above sets forth the condition of this insolvent corporation
when the defendant McCullough proposed to the majority of
stockholders to take over the assets and assume all
responsibility for the payment of the debts and the completion
of the warehouses which had been undertaken. The assets
consisted of office furniture of a value of less than P400, the
uncompleted contract for the construction of the Government
warehouses, and the wrecking contract. The liabilities
amounted to at least $19,645.74 Mexican currency. $9,645.74
Mexican currency of this amount represented borrowed
money, and $10,000 Mexican currency was the deposit with
the naval authorities which had been confiscated and which
was due the bank. McCullough's profits on the warehouse
contract amounted to almost enough to the pay the amounts
which the corporation had borrowed from its members. The
wrecking contract which had been broken was of no value to
the corporation for the reason that the naval authorities
absolutely refused to have anything further to do with the
Philippine Engineering and Construction Company. They the
naval authorities) had declined to consider the petition of the
corporation for an extension in which to raise the Spanish fleet,
and had also refused to reconsider their action in confiscating
the deposit. They did agree, however, that if the defendant
McCullough would organize a new association, that they would
give the new concern an extension of time and would
reconsider the question of forfeiture of the amount deposited.
Under these circumstances and conditions, McCullough
organized the Manila Salvage Company, sold five-sixth of this
wrecking contract to the new company for $15,000 Mexican
currency and retained one-sixth as his share of the stock in the
new concern. The Manila Salvage company paid to the bank
the $10,000 Mexican currency which had been borrowed to
deposit with the naval authorities, and began operations. All of
the $10,000 Mexican currency so deposited was refund to the
new company except P2,000. The new association failed and
McCullough, by reason of this failure, lost over $16,000
Mexican currency. These facts show that McCullough acted in
good faith in purchasing the old corporation's assets, and that
he certainly paid for the same a valuable consideration.
But cancel for the plaintiff say: "The board of directors
possessed only ordinary powers of administration (Article X of
the Articles of incorporation), which in no manner empowered
it either to transfer or to authorize the transfer of the assets of
the company to McCullough (art. 1773, Civil Code; decisions of
the supreme court of Spain of April 2, 1862, and July 8, 1903)."
Article X of the articles of incorporation above referred to
provides that the board of directors shall elect the officers of
the corporation and "have under its charge the administration
of the said corporation." Articles XI reads: "In all the questions
with reference to the administration of the affairs of the
corporation, it shall be necessary to secure the unanimous vote
of the board of directors, and at least three of said board must
be present in order to constitute a legal meeting." It will be
noted that article X statute a legal meeting." It will be noted
that Article X placed the administration of the affairs of the
corporation in the hands of the board of directors. If Article XI
had been omitted, it is clear that under the rules which govern
business of that character, and in view of the fact that before
the plaintiff left this country and abandoned his office as
director, there were only five directors in the corporation, then
three would have been sufficient to constitute a quorum and
could perform all the duties and exercise all the powers
conferred upon the board under this article. It would not have
been necessary to obtain the consent of all three of such
members which constituted the quorum in order that a
solution affecting the administration of the corporation should
be binding, as two votes a majority of the quorum would
have been sufficient for this purpose. (Buell vs. Buckingham &
Co., 16 Iowa, 284; 2 Kent. Com., 293; Cahill vs. Kalamazoo
Mutual Insurance Company, 2 Doug. (Mich.), 124; Sargent vs.
Webster, 13 Met., 497; In re Insurance Company, 22 Wend.,
591; Ex parte Wilcox, 7 Cow., 402; id., 527, note a.)
It might appear on first examination that the organizers of this
corporation when they asserted the first part of Article XI
intended that no resolution affecting the administration of the
affairs should be binding upon the corporation unless the
unanimous consent of the entire board was first obtained; but
the reading of the last part of this same article shows clearly
that the said organizers had no such intention, for they said:
"At least three of said board must be present in order to
constitute a legal meeting." Now, if three constitute a legal
meeting, three were sufficient to transact business, three
constituted the quorum, and, under the above-cited
authorities, two of the three would be sufficient to pass binding
resolutions relating to the administration of the corporation.
If the clause "have under in charge and administer the affairs of
the corporation" refers to the ordinary business transactions of
the corporation and does not include the power to sell the
corporate property and to dissolve the corporation when it
becomes insolvent a change we admit organic and
fundamental then the majority of the stockholders in whom
the ultimate and controlling power lies must surely have the
power to do so.
Article 1713 of the Civil Code reads:
An agency stated in general terms only includes acts
of administration.
In order to compromise, alienate, mortgage, or
execute any other act of strict ownership an express
commission is required.
This article appears in title 9, chapter 1 of the Civil Code, which
deals with the character, form, and kind of agency. Now, were
the positions of Hilbert, Green, Hartigan, and McCullough that
the agents within the meaning of the article above quoted when
the assets of the corporation were transferred or sold to
McCullough? If so, it would appear from said article that in
order to make the sale valid, an express commission would be
required. This provision of law is based upon the broad
principles of sound reason and public policy. There is a
manifest impropriety in allowing the same person to act as the
agent of the seller and to become himself the buyer. In such
cases, there arises so often a conflict between duty and interest.
"The wise policy of the law put the sting of a disability into the
temptation, as a defensive weapon against the strength of the
danger which lies in the situation."
Hilbert, Green, and Hartigan were not only all creditors at the
time the sale or transfer of the assets of the insolvent
corporation was made, but they were also directors and
stockholders. In addition to being a creditor, McCullough
sustained the corporation the double relation of a stockholder
and president. The plaintiff was only a stockholder. He would
have been a creditor to the extent of his unpaid salary if the
corporation had been a profitable instead of a losing concern.
But as we have said when the sale or transfer under
consideration took place, there were three directors present,
and all voted in favor of making this sale. It was not necessary
for the president, McCullough, to vote. There was a quorum
without him: a quorum of the directors, and at the same time a
majority of the stockholders.
A corporation is essential a partnership, except in form. "The
directors are the trustees or managing partners, and the
stockholders are the cestui que trust and have a joint interest in
all the property and effects of the corporation." (Per Walworth,
Ch., in Robinson vs. Smith, 3 Paige, 222, 232; 5 idem, 607; Slee
vs. Bloom, 19 Johns., 479; Hoyt vs. Thompson, 1 Seld., 320.)
The Philippine Engineering and Construction Company was an
artificial person, owning its property and necessarily acting by
its agents; and these agents were the directors. McCullough
was then an agent or a trustee, and the stockholders the
principal. Or say (as corporation was insolvent) that he was an
agent or trustee and the creditors were the beneficiaries. This
being the true relation, then the rules of the law (art. 1713 of
the Civil Code) applicable to sales and purchases by agents and
trustees would not apply to the purchase in question for the
reason that there was a quorum without McCullough, and for
the further reason that an officer or director of a corporation,
being an agent of an artificial person and having a joint interest
in the corporate property, is not such an agent as that treated
of in article 1713 of the Civil Code.
Again, McCullough did not represent the corporation in this
transaction. It was represented by a quorum of the board of
directors, who were at the same time a majority of the
stockholders. Ordinarily, McCullough's duties as president
were to preside at the meetings, rule on questions of order, vote
in case of a tie, etc. He could not have voted in this transaction
because there was no tie.
The acts of Hilbert, Green, Hartigan, and McCullough in this
transaction, in view of the relations which they bore to the
corporation, are subject to the most severe scrutiny. They are
obliged to establish that they acted with the utmost candor and
fair dealing for the interest of the corporation, and without
taint motives. We have subjected their conduct to this test, and,
under the evidence, we believe it has safely emerged from the
ordeal.
Transaction which only accomplish justice, which are
done in good faith and operate legal injury to no one,
lack the characteristics of fraud and are not to be
upset because the relations of the parties give rise to
suspicions which are fully cleared away. (Hancock vs.
Holbrook, supra.)
We therefore conclude that the sale or transfer made by the
quorum of the board of directors a majority of the
stockholders is valid and binding upon the majority-the
plaintiff. This conclusion is not in violation of the articles of
incorporation of the Philippine Engineering and Construction
Company. Nor do we here announce a doctrine contrary to that
announced by the supreme court of Spain in its decisions dated
April 2, 1862, and July 8, 1903.
As to the third cause of action, it is insisted: First, that the
court erred in holding the defendant McCullough responsible
for the personal effects of the plaintiff; and second, that the
court erred in finding that the effects left by the plaintiff were
worth P2,400.
As we have said, the plaintiff was the manager of the Philippine
Engineering Company from April 1, 1902, up to January 1,
1903. Sometimes during the previous month of December he
resigned to accept a position in China, but did not leave Manila
until about January 20. He remained in Manila about twenty
days after he severed his connection with the company. He
lived in rooms in the same building which was rented by the
company and were the company had its offices. When he
started for China he left his personal effects in those rooms,
having turned the same over to one Paulsen. Testifying on this
point the plaintiff said:
Q. To whom did you turn over these personal effects
on leaving here? A. To Mr. Paulsen.
Q. Have you demanded payment of this sum
[referring to the value of his personal effects]? A.
On leaving for China I gave Mr. Haussermann power
of attorney to represent me in this case and demand
payment.
Q. Please state whether or not you have an inventory
of these effects. A. I had an inventory which was in
my possession but it was lost when the company took
all of the books and carried them away from the office.
Q. Can you give a list or a partial list of your effect?
A. I remember some of the items. There was a
complete bedroom set, two marble tables, one glass
bookcase, chairs, all of the household effects I used
when I was living in the Botanical Garden as city
engineer, one theodolite, which I bought after
commencing work with the company.
Q. How much do you estimate to be the total
reasonable value of these effects? A. The total
would not be less than $1,200 gold.
Counsel for the plaintiff, on page 56 of their brief, say:
Mr. McCullough, in his testimony (pp. 39 and 40)
admits full knowledge of and participation in the
removal and sale of the effects and states that he took
the proceeds and considered them part of the assets of
the company. He further admits that Mr.
Haussermann made a demand for the proceeds of Mr.
Mead's personal effects (p. 44).
McCullough's testimony, referred by the counsel, is as follows:
Q. At the time Mr. Mead left for China, in the building
where the office was and in the office, there were left
some of the personal effects of Mr. Mead. What do
you know about these effects, a list of which is Exhibit
B? A. Nothing appearing in this Exhibit B was never
delivered to the Philippine Engineering and
Construction Company, according to my list.
Q. Do you know what became of these effects? A.
No, sir. I have no idea. I never saw them. I never
heard these effects talked about. I only heard
something said about certain effects which Mr. Mead
had in his living room.
Q. Do you know what became of the bed of Mr. Mead?
A. I know there were effects, such as a bed,
washstand, chairs, table, and other things, which are
used in a living room, and that they were in Mr.
Mead's room. These effects were sent to the
warehouse of the Pacific Oriental Trading Company,
together with the office furniture. We had to vacate
the building where the offices were and we had to take
out everything therein. These things were deposited in
the warehouse of the Pacific Oriental Trading
Company and were finally sold by that company and
the money turned over to me.
Q. How much? A. P49.97.
Q. What did you do with this money? A. I took it
and considered it part of the assets of the company.
All of the other effects of the office were sold at the
same time and brought P347.16.
Q. Did Mr. Mead leave anyone in charge of his effects
when he left Manila? A. I think he left Paulsen in
charge, but Paulsen did not take these effects, so when
we vacated the office we had to move them.
Q. Did Paulsen continue occupying the living room
where these effects were and did he use these effects?
A. I do not know because I was in the office for
three months before we vacated.
Q. Don't you know that it is a fact that Mr.
Haussermann, as representative of Mr. Mead,
demanded of you and the company the payment of the
salary which was due Mr. Mead and the value of his
personal effects? A. Yes, sir.
As to the value of these personal effects, Hartigan, testifying as
witness for the defendant, said:
I think the personal effects were sold for P50. His
personal effects consisted of ordinary articles, such as
a person would use who had to be going from one
place to another all the time, as Mr. Mead. I know that
all those effects were sold for less than P100, if I am
not mistaken.
The foregoing is the material testimony with reference to the
defendant McCullough's responsibility and the value of the
personal effects of the plaintiff.
McCullough was a member of the company and was
responsible as such for the rents where the offices were located.
The company had no further use for the building after the
plaintiff resigned. The vacating of the building was the proper
thing to do. The office furniture was removed and stored in a
place where it cost nothing for rents. When Hilbert, member of
the company, went to the office to remove the company's office
furniture, he found no one in charge of the plaintiff's personal
effects. He took them and stored them in the same place and
later sold them, together with the office furniture, and turned
the entire amount over to defendant McCullough.
Paulsen, in whose charge Mead left his effects, apparently took
no interest in caring for them. Was the company to leave
Mead's personal effects in that building and take the chances of
having to continue to pay rents, solely on account of the
plaintiff's property remaining there? The company had reason
to believe that it would have to continue paying these rents, as
they had rented the building and authorized the plaintiff to
occupy rooms therein.
The plaintiff knew when he left for China that he would be
away a long time. He had accepted a position of importance,
and which he knew would require his personal attention. He
did not gather up his personal effects, but left them in the room
in charge of Paulsen. Paulsen took no interest in caring for
them, but apparently left these effects to take care of them
selves. The plaintiff did not even carry with him an inventory of
these effects, but attempted on the trial to give a list of them
and did give a partial list of the things he left in his room; but it
is not shown that all this things were there when Herbert
removed the office furniture and some of the plaintiff's effects.
The fact that the plaintiff remained in Manila some twenty days
after resigning and never cared for his own effects but left them
in the possession of an irresponsible person, shows extreme
negligence on his part. He exhibited a reckless indifference to
the consequences of leaving his effects in the lease premises.
The law imposes on every person the duty of using ordinary
care against injury or damages. What constitutes ordinary care
depends upon the circumstances of each particular case and
the danger reasonably to be apprehended.
McCullough did not have anything personally to do with these
effects at any time. He only accepted the money which Herbert
turned over to him. He, personally, did not contribute in any
way whatsoever to the loss of the property, neither did he as a
member of the corporation do so.
The plaintiff gave an estimate of the value of the effects which
he left in his rooms and placed this value at P2,400. He did not
give a complete list of the effects so left, neither did he give the
value of a single item separately. The plaintiff's testimony is so
indefinite and uncertain that i t is impossible to determine with
any degree of certainty just what these personal effects
consisted of and their values, especially when we take into
consideration the significant fact that these effects were
abondoned by Paulsen. On the other hand, w have before us
the positive testimony of Hilbert as to the amount received for
the plaintiff's personal effects, the testimony of Hartigan that
the same were sold for less than P100, and the testimony of
McCullough as to the amount turned over to him by Herbert.
So we conclude that the great preponderance of evidence as to
the value of these effects is in the favor of the contention of the
defendant. Their value therefore be fixed at P49.97.
For these reasons the judgment appealed from as to the first
and second causes of action is hereby affirmed. Judgment
appealed from as to the third cause of action is reduced to
P49.97, without costs.
Arellano, C.J., Torres, Mapa, Carson and Moreland, JJ.,
concur.

ASSOCIATED BANK V. PRONSTROLLER

DECISION
NACHURA, J.:

This is a Petition for Review on Certiorari under Rule
45 of the Rules of Court filed by petitioner Associated Bank
(now United Overseas Bank [Phils.]) assailing the Court of
Appeals (CA) Decision
[1]
dated February 27, 2001, which in
turn affirmed the Regional Trial Court
[2]
(RTC)
Decision
[3]
dated November 14, 1997 in Civil Case No. 94-3298
for Specific Performance. Likewise assailed is the appellate
courts Resolution
[4]
dated May 31, 2001 denying petitioners
motion for reconsideration.

The facts of the case are as follows:

On April 21, 1988, the spouses Eduardo and Ma. Pilar
Vaca (spouses Vaca) executed a Real Estate Mortgage (REM) in
favor of the petitioner
[5]
over their parcel of residential land
with an area of 953 sq. m. and the house constructed thereon,
located at No. 18, Lovebird Street, Green Meadows Subdivision
1, Quezon City (herein referred to as the subject property). For
failure of the spouses Vaca to pay their obligation, the subject
property was sold at public auction with the petitioner as the
highest bidder. Transfer Certificate of Title (TCT) No. 254504,
in the name of spouses Vaca, was cancelled and a new one --
TCT No. 52593-- was issued in the name of the petitioner.
[6]


The spouses Vaca, however, commenced an action for
the nullification of the real estate mortgage and the foreclosure
sale. Petitioner, on the other hand, filed a petition for the
issuance of a writ of possession which was denied by the
RTC. Petitioner, thereafter, obtained a favorable judgment
when the CA granted its petition but the spouses Vaca
questioned the CA decision before this Court in the case
docketed as G.R. No. 109672.
[7]


During the pendency of the aforesaid cases, petitioner
advertised the subject property for sale to interested buyers
for P9,700,000.00.
[8]
Respondents Rafael and Monaliza
Pronstroller offered to purchase the property
forP7,500,000.00. Said offer was made through Atty. Jose
Soluta, Jr. (Atty. Soluta), petitioners Vice-President, Corporate
Secretary and a member of its Board of Directors.
[9]
Petitioner
accepted respondents offer of P7.5 million. Consequently,
respondents paid petitioner P750,000.00, or 10% of the
purchase price, as down payment.
[10]


On March 18, 1993, petitioner, through Atty. Soluta,
and respondents, executed a Letter-Agreement setting forth
therein the terms and conditions of the sale, to wit:

1. Selling price shall be at P7,500,000.00
payable as follows:

a. 10% deposit and balance
of P6,750,000.00 to be deposited under
escrow agreement. Said escrow deposit
shall be applied as payment upon
delivery of the aforesaid property to the
buyers free from occupants.

b. The deposit shall be made within ninety
(90) days from date hereof. Any interest
earned on the aforesaid investment shall
be for the buyers account. However, the
10% deposit is non-interest earning.
[11]



Prior to the expiration of the 90-day period within which
to make the escrow deposit, in view of the pendency of the case
between the spouses Vaca and petitioner involving the subject
property,
[12]
respondents requested that the balance of the
purchase price be made payable only upon service on them of a
final decision or resolution of this Court affirming petitioners
right to possess the subject property. Atty. Soluta referred
respondents proposal to petitioners Asset Recovery and
Remedial Management Committee (ARRMC) but the latter
deferred action thereon.
[13]


On July 14, 1993, a month after they made the request
and after the payment deadline had lapsed, respondents and
Atty. Soluta, acting for the petitioner, executed another Letter-
Agreement allowing the former to pay the balance of the
purchase price upon receipt of a final order from this Court (in
the Vaca case) and/or the delivery of the property to them free
from occupants.
[14]


Towards the end of 1993, or in early 1994, petitioner
reorganized its management. Atty. Braulio Dayday (Atty.
Dayday) became petitioners Assistant Vice-President and
Head of the Documentation Section, while Atty. Soluta was
relieved of his responsibilities. Atty. Dayday reviewed
petitioners records of its outstanding accounts and discovered
that respondents failed to deposit the balance of the purchase
price of the subject property. He, likewise, found that
respondents requested for an extension of time within which to
pay. The matter was then resubmitted to the ARRMC during
its meeting on March 4, 1994, and it was
disapproved. ARRMC, thus, referred the matter to petitioners
Legal Department for rescission or cancellation of the contract
due to respondents breach thereof.
[15]


On May 5, 1994, Atty. Dayday informed respondents that
their request for extension was disapproved by ARRMC and, in
view of their breach of the contract, petitioner was rescinding
the same and forfeiting their deposit. Petitioner added that if
respondents were still interested in buying the subject
property, they had to submit their new
proposal.
[16]
Respondents went to the petitioners office, talked
to Atty. Dayday and gave him the Letter-Agreement of July 14,
1993 to show that they were granted an extension. However,
Atty. Dayday claimed that the letter was a mistake and that
Atty. Soluta was not authorized to give such extension.
[17]


On June 6, 1994, respondents proposed to pay the
balance of the purchase price as follows: P3,000,000.00 upon
the approval of their proposal and the balance after six (6)
months.
[18]
However, the proposal was disapproved by the
petitioners President. In a letter dated June 9, 1994, petitioner
advised respondents that the former would accept the latters
proposal only if they would pay interest at the rate of 24.5% per
annum on the unpaid balance. Petitioner also allowed
respondents a refund of their deposit of P750,000.00 if they
would not agree to petitioners new proposal.
[19]


For failure of the parties to reach an agreement,
respondents, through their counsel, informed petitioner that
they would be enforcing their agreement dated July 14,
1993.
[20]
Petitioner countered that it was not aware of the
existence of the July 14 agreement and that Atty. Soluta was
not authorized to sign for and on behalf of the bank. It,
likewise, reiterated the rescission of their previous agreement
because of the breach committed by respondents.
[21]


On July 14, 1994, in the Vaca case, this Court upheld
petitioners right to possess the subject property.

On July 28, 1994, respondents commenced the instant
suit by filing a Complaint for Specific Performance before the
RTC of Antipolo, Rizal.
[22]
The case was raffled to Branch 72
and was docketed as Civil Case No. 94-3298. Respondents
prayed that petitioner be ordered to sell the subject property to
them in accordance with their letter-agreement of July 14,
1993. They, likewise, caused the annotation of a notice of lis
pendens at the dorsal portion of TCT No. 52593.

For its part, petitioner contended that their contract had
already been rescinded because of respondents failure to
deposit in escrow the balance of the purchase price within the
stipulated period.
[23]


During the pendency of the case, petitioner sold the
subject property to the spouses Vaca, who eventually registered
the sale; and on the basis thereof, TCT No. 52593 was cancelled
and TCT No. 158082 was issued in their names.
[24]
As new
owners, the spouses Vaca started demolishing the house on the
subject property which, however, was not completed by virtue
of the writ of preliminary injunction issued by the court.
[25]


On November 14, 1997, the trial court finally resolved the
matter in favor of respondents, disposing, as follows:

WHEREFORE, premises considered,
the Court finds defendants rescission of the
Agreement to Sell to be null and void for
being contrary to law and public policy.

ACCORDINGLY, defendant bank is
hereby ordered to accept plaintiffs payment
of the balance of the purchase price in the
amount of Six Million Seven Hundred Fifty
Thousand Pesos (P6,750,000.00) and to
deliver the title and possession to subject
property, free from all liens and
encumbrances upon receipt of said
payment. Likewise, defendant bank is
ordered to pay plaintiffs moral damages and
attorneys fees in the amount of One
Hundred Thirty Thousand Pesos
(P130,000.00) and expenses of litigation in
the amount of Twenty Thousand Pesos
(P20,000.00).

SO ORDERED.
[26]



Applying the rule of apparent authority,
[27]
the court
upheld the validity of the July 14, 1993 Letter-Agreement
where the respondents were given an extension within which to
make payment. Consequently, respondents did not incur in
delay, and thus, the court concluded that the rescission of the
contract was without basis and contrary to law.
[28]


On appeal, the CA affirmed the RTC decision and upheld
Atty. Solutas authority to represent the petitioner. It further
ruled that petitioner had no right to unilaterally rescind the
contract; otherwise, it would give the bank officers license to
continuously review and eventually rescind contracts entered
into by previous officers. As to whether respondents were
estopped from enforcing the July 14, 1993 Letter-Agreement,
the appellate court ruled in the negative. It found, instead, that
petitioners were estopped from questioning the efficacy of the
July 14 agreement because of its failure to repudiate the same
for a period of one year.
[29]
Thus, the court said in its decision:

1. The Appellant (Westmont Bank) is
hereby ordered to execute a Deed of
Absolute Sale in favor of the Appellees
over the property covered by Transfer
Certificate of Title No. 52593, including the
improvement thereon, and secure, from the
Register of Deeds, a Torrens Title over the
said property free from all liens, claims or
encumbrances upon the payment by the
Appellees of the balance of the purchase
price of the property in the amount
of P6,750,000.00;

2. The Register of Deeds is hereby
ordered to cancel Transfer Certificate of Title
No. 158082 under the names of the Spouses
Eduardo [and Ma. Pilar] Vaca and to issue
another under the names of the Appellees as
stated in the preceding paragraph;

3. The appellant is hereby ordered to
pay to the appellee Rafael Pronstroller the
amount of P100,000.00 as and by way of
moral damages and to pay to the Appellees
the amount of P30,000.00 as and by way of
attorneys fees and the amount
ofP20,000.00 for litigation expense.

4. The counterclaims of the
Appellant are dismissed.

SO ORDERED.
[30]



Petitioners motion for reconsideration was denied
on May 31, 2001. Hence, the present petition raising the
following issues:

I.

THE NARRATION OR STATEMENT OF
THE FACTS OF THE CASE BY THE
HONORABLE COURT OF APPEALS IS
TOTALLY BEREFT OF EVIDENTIARY
SUPPORT, CONTRARY TO THE EVIDENCE
ON RECORD AND PURELY BASED ON
ERRONEOUS ASSUMPTIONS,
PRESUMPTIONS, SURMISES, AND
CONJECTURES.

II.

THE HONORABLE COURT OF APPEALS
GROSSLY ERRED IN MERELY RELYING
UPON THE MANIFESTLY ERRONEOUS
FINDING OF THE HONORABLE TRIAL
COURT ON THE ALLEGED APPARENT
AUTHORITY OF ATTY. JOSE SOLUTA, JR.
IN THAT THE LATTERS FINDING IS
CONTRARY TO THE UNDISPUTED FACTS
AND THE EVIDENCE ON RECORD.

III.

THE HONORABLE COURT OF APPEALS
OWN FINDING THAT ATTY. JOSE
SOLUTA, JR. HAD AUTHORITY TO SELL
THE SUBJECT PROPERTY ON HIS OWN
(EVEN WITHOUT THE COMMITTEES
APPROVAL) IS LIKEWISE GROSSLY
ERRONEOUS, FINDS NO EVIDENTIARY
SUPPORT AND IS EVEN CONTRARY TO
THE EVIDENCE ON RECORD IN THAT

A.) AT NO TIME DID PETITIONER ADMIT
THAT ATTY. JOSE SOLUTA, JR. IS
AUTHORIZED TO SELL THE SUBJECT
PROPERTY ON HIS OWN;

B.) THE AUTHORITY OF ATTY. JOSE
SOLUTA, JR. CANNOT BE PRESUMED
FROM HIS DESIGNATIONS OR TITLES;
AND

C.) RESPONDENTS FULLY KNEW OR HAD
KNOWLEDGE OF THE LACK OF
AUTHORITY OF ATTY. JOSE SOLUTA, JR.
TO SELL THE SUBJECT PROPERTY ON
HIS OWN.

IV.

THE HONORABLE TRIAL COURT AND
THE HONORABLE COURT OF APPEALS
GROSSLY MISAPPLIED THE DOCTRINE
OF APPARENT AUTHORITY IN THE
PRESENT CASE.

V.

THE HONORABLE TRIAL COURT AND
THE HONORABLE COURT OF APPEALS
GROSSLY ERRED IN NOT HOLDING THAT
THE CONTRACT TO SELL CONTAINED IN
THE MARCH 18, 1993 LETTER WAS
VALIDLY RESCINDED BY PETITIONER.

VI.

THE HONORABLE COURT OF APPEALS
GROSSLY ERRED IN NOT HOLDING
RESPONDENTS ESTOPPED FROM
DENYING THE VALIDITY OF THE
RESCISSION OF THE CONTRACT TO SELL
AS EMBODIED IN THE MARCH 18, 1993
LETTER AND THE LACK OF AUTHORITY
OF ATTY. SOLUTA, JR. TO GRANT THE
EXTENSION AS CONTAINED IN HIS
LETTER OF JULY 14, 1993 AFTER THEY
VOLUNTARILY SUBMITTED WITH FULL
KNOWLEDGE OF ITS IMPORT AND
IMPLICATION A NEW OFFER TO
PURCHASE THE SUBJECT PROPERTY
CONTAINED IN THEIR LETTER DATED
JUNE 6, 1994.

VII.

IN ANY EVENT, THE HONORABLE COURT
OF APPEALS ERRED IN NOT HOLDING
THAT THE CONTRACT TO SELL UNDER
THE LETTER OF MARCH 18, 1993 AND
THE LETTER OF JULY 14, 1993 HAD BEEN
VACATED WHEN RESPONDENTS
VOLUNTARILY SUBMITTED WITH FULL
KNOWLEDGE OF ITS IMPORT AND
IMPLICATION THEIR NEW OFFER
CONTAINED IN THEIR LETTER OF JUNE
6, 1994 WITHOUT ANY CONDITION OR
RESERVATION WHATSOEVER.

VIII.

THE HONORABLE COURT OF APPEALS
ERRED IN HOLDING PETITIONER
ESTOPPED FROM QUESTIONING THE
VALIDITY OF THE JULY 14, 1993 LETTER
SIGNED BY ATTY. JOSE SOLUTA, JR.

IX.

THE HONORABLE COURT OF APPEALS
GROSSLY ERRED IN HOLDING THAT
PETITIONER ALLEGEDLY ACTED
FRAUDULENTLY AND IN BAD FAITH IN
ITS DEALINGS WITH RESPONDENTS.

X.

THE ORDER OF THE HONORABLE
COURT OF APPEALS TO CANCEL TCT NO.
158082 UNDER THE NAMES OF SPS.
VACA IS A COLLATERAL ATTACK
AGAINST THE SAID CERTIFICATE OF
TITLE WHICH IS PROSCRIBED BY
SECTION 48 OF P.D. 1529.

XI.

THE HONORABLE COURT OF APPEALS
ERRED IN AWARDING MORAL
DAMAGES, ATTORNEYS FEES, AND
EXPENSES OF LITIGATION IN FAVOR OF
RESPONDENTS.
[31]



Reduced to bare essentials, the decision on the instant
petition hinges on the resolution of the following specific
questions: 1) Is the petitioner bound by the July 14,
1993 Letter-Agreement signed by Atty. Soluta under the
doctrine of apparent authority? 2) Was there a valid rescission
of the March 18, 1993 and/or July 14, 1993 Letter-Agreement?
3) Are the respondents estopped from enforcing the July 14
Letter-Agreement because of their June 6, 1994 new
proposal? 4) Is the petitioner estopped from questioning the
validity of the July 14 letter because of its failure to repudiate
the same and 5) Is the instant case a collateral attack on TCT
No. 158082 in the name of the spouses Vaca?

The petition is unmeritorious.

Well-settled is the rule that the findings of the RTC, as
affirmed by the appellate court, are binding on this Court. In a
petition for review on certiorari under Rule 45 of the Rules of
Court, as in this case, this Court may not review the findings of
fact all over again. It must be stressed that this Court is not a
trier of facts, and it is not its function to re-examine and weigh
anew the respective evidence of the parties.
[32]
The findings of
the CA are conclusive on the parties and carry even more
weight when these coincide with the factual findings of the trial
court, unless the factual findings are not supported by the
evidence on record.
[33]
Petitioner failed to show why the above
doctrine should not be applied to the instant case.

Contrary to petitioners contention that the CAs factual
findings are not supported by the evidence on record, the
assailed decision clearly shows that the appellate court not only
relied on the RTCs findings but made its own analysis of the
record of the case. The CA decision contains specific details
drawn from the contents of the pleadings filed by both parties,
from the testimonies of the witnesses and from the
documentary evidence submitted. It was from all these that
the appellate court drew its own conclusion using applicable
legal principles and jurisprudential rules.

The Court notes that the March 18, 1993 Letter-
Agreement was written on a paper with petitioners
letterhead. It was signed by Atty. Soluta with the conformity of
respondents. The authority of Atty. Soluta to act for and on
behalf of petitioner was not reflected in said letter or on a
separate paper attached to it. Yet, petitioner recognized Atty.
Solutas authority to sign the same and, thus, acknowledged its
binding effect. On the other hand, the July 14, 1993 letter was
written on the same type of paper with the same letterhead and
of the same form as the earlier letter. It was also signed by the
same person with the conformity of the same
respondents. Again, nowhere in said letter did petitioner
specifically authorize Atty. Soluta to sign it for and on its
behalf. This time, however, petitioner questioned the validity
and binding effect of the agreement, arguing that Atty. Soluta
was not authorized to modify the earlier terms of the contract
and could not in any way bind the petitioner.

We beg to differ.

The general rule is that, in the absence of authority from
the board of directors, no person, not even its officers, can
validly bind a corporation. The power and responsibility to
decide whether the corporation should enter into a contract
that will bind the corporation is lodged in the board of
directors. However, just as a natural person may authorize
another to do certain acts for and on his behalf, the board may
validly delegate some of its functions and powers to officers,
committees and agents. The authority of such individuals to
bind the corporation is generally derived from law, corporate
bylaws or authorization from the board, either expressly or
impliedly, by habit, custom, or acquiescence, in the general
course of business.
[34]


The authority of a corporate officer or agent in dealing
with third persons may be actual or apparent. The doctrine of
apparent authority, with special reference to banks, had long
been recognized in this jurisdiction.
[35]
Apparent authority is
derived not merely from practice. Its existence may be
ascertained through 1) the general manner in which the
corporation holds out an officer or agent as having the power to
act, or in other words, the apparent authority to act in general,
with which it clothes him; or 2) the acquiescence in his acts of
a particular nature, with actual or constructive knowledge
thereof, within or beyond the scope of his ordinary
powers.
[36]


Accordingly, the authority to act for and to bind a
corporation may be presumed from acts of recognition in other
instances, wherein the power was exercised without any
objection from its board or shareholders. Undoubtedly,
petitioner had previously allowed Atty. Soluta to enter into the
first agreement without a board resolution expressly
authorizing him; thus, it had clothed him with apparent
authority to modify the same via the second letter-agreement.
It is not the quantity of similar acts which establishes apparent
authority, but the vesting of a corporate officer with the power
to bind the corporation.
[37]


Naturally, the third person has little or no information
as to what occurs in corporate meetings; and he must
necessarily rely upon the external manifestations of corporate
consent. The integrity of commercial transactions can only be
maintained by holding the corporation strictly to the liability
fixed upon it by its agents in accordance with law.
[38]
What
transpires in the corporate board room is entirely an internal
matter. Hence, petitioner may not impute negligence on the
part of the respondents in failing to find out the scope of Atty.
Solutas authority. Indeed, the public has the right to rely on
the trustworthiness of bank officers and their acts.
[39]


As early as June 1993, or prior to the 90-day period
within which to make the full payment, respondents already
requested a modification of the earlier agreement such that the
full payment should be made upon receipt of this Courts
decision confirming petitioners right to the subject
property. The matter was brought to the petitioners attention
and was in fact discussed by the members of the
Board. Instead of acting on said request (considering that the
90-day period was about to expire), the board deferred action
on the request. It was only after one year and after the banks
reorganization that the board rejected respondents
request. We cannot therefore blame the respondents in relying
on the July 14, 1993 Letter-Agreement. Petitioners inaction,
coupled with the apparent authority of Atty. Soluta to act on
behalf of the corporation, validates the July 14 agreement and
thus binds the corporation. All these taken together, lead to no
other conclusion than that the petitioner attempted to defraud
the respondents. This is bolstered by the fact that it forged
another contract involving the same property, with another
buyer, the spouses Vaca, notwithstanding the pendency of the
instant case.

We would like to emphasize that if a corporation
knowingly permits its officer, or any other agent, to perform
acts within the scope of an apparent authority, holding him out
to the public as possessing power to do those acts, the
corporation will, as against any person who has dealt in good
faith with the corporation through such agent, be estopped
from denying such authority.
[40]


Petitioner further insists that specific performance is not
available to respondents because the Letter-Agreements had
already been rescinded --- the March 18 agreement because of
the breach committed by the respondents; and the July 14
letter because of the new offer of the respondents which was
not approved by petitioner.

Again, the argument is misplaced.

Basic is the rule that a contract constitutes the law
between the parties. Concededly, parties may validly stipulate
the unilateral rescission of a contract.
[41]
This is usually in the
form of a stipulation granting the seller the right to forfeit
installments or deposits made by the buyer in case of the
latters failure to make full payment on the stipulated
date. While the petitioner in the instant case may have the
right, under the March 18 agreement, to unilaterally rescind
the contract in case of respondents failure to comply with the
terms of the contract,
[42]
the execution of the July 14
Agreement prevented petitioner from exercising the right to
rescind. This is so because there was in the first place, no
breach of contract, as the date of full payment had already been
modified by the later agreement.

Neither can the July 14, 1993 agreement be
considered abandoned by respondents act of making a new
offer, which was unfortunately rejected by petitioner. A careful
reading of the June 6, 1994 letter of respondents impels this
Court to believe that such offer was made only to demonstrate
their capacity to purchase the subject property.
[43]
Besides,
even if it was a valid new offer, they did so only due to the
fraudulent misrepresentation made by petitioner that their
earlier contracts had already been rescinded. Considering
respondents capacity to pay and their continuing interest in
the subject property,
[44]
to abandon their right to the contract
and to the property, absent any form of protection, is contrary
to human nature. The presumption that a person takes
ordinary care of his concerns applies and remains
unrebutted.
[45]
Obviously therefore, respondents made the new
offer without abandoning the previous contract. Since there
was never a perfected new contract, the July 14,
1993 agreement was still in effect and there was no
abandonment to speak of.

In its final attempt to prevent respondents from
attaining a favorable result, petitioner argues that the instant
case should not prosper because the cancellation of TCT No.
158082 is a collateral attack on the title which is proscribed by
law.

Such contention is baseless.

Admittedly, during the pendency of the case,
respondents timely registered a notice of lis pendens to warn
the whole world that the property was the subject of a pending
litigation.

Lis pendens, which literally means pending suit, refers
to the jurisdiction, power or control which a court acquires
over property involved in a suit, pending the continuance of the
action, and until final judgment. Founded upon public policy
and necessity, lis pendens is intended to keep the properties in
litigation within the power of the court until the litigation is
terminated, and to prevent the defeat of the judgment or
decree by subsequent alienation. Its notice is an
announcement to the whole world that a particular property is
in litigation and serves as a warning that one who acquires an
interest over said property does so at his own risk or that he
gambles on the result of the litigation over said property.
[46]


The filing of a notice of lis pendens has a twofold
effect: (1) to keep the subject matter of the litigation within the
power of the court until the entry of the final judgment to
prevent the defeat of the final judgment by successive
alienations; and (2) to bind a purchaser, bona fide or not, of
the land subject of the litigation to the judgment or decree that
the court will promulgate subsequently.
[47]


This registration, therefore, gives the court clear
authority to cancel the title of the spouses Vaca, since the sale
of the subject property was made after the notice of lis
pendens. Settled is the rule that the notice is not considered a
collateral attack on the title,
[48]
for the indefeasibility of the title
shall not be used to defraud another especially if the latter
performs acts to protect his rights such as the timely
registration of a notice of lis pendens.

As to the liability for moral damages, attorneys fees
and expenses of litigation, we affirm in toto the appellate
courts conclusion. Article 2220
[49]
of the New Civil Code
allows the recovery of moral damages in breaches of contract
where the party acted fraudulently and in bad faith. As found
by the CA, petitioner undoubtedly acted fraudulently and in
bad faith in breaching the letter-agreements. Despite the
pendency of the case in the RTC, it sold the subject property to
the spouses Vaca and allowed the demolition of the house even
if there was already a writ of preliminary injunction lawfully
issued by the court. This is apart from its act of unilaterally
rescinding the subject contract. Clearly, petitioners acts are
brazen attempts to frustrate the decision that the court may
render in favor of respondents.
[50]
It is, likewise, apparent that
because of petitioners acts, respondents were compelled to
litigate justifying the award of attorneys fees and expenses of
litigation.

WHEREFORE, premises considered, the petition
is DENIED. The Decision of the Court of Appeals
dated February 27, 2001 and its Resolution dated May 31,
2001 in CA-G.R. CV No. 60315 are AFFIRMED.

SO ORDERED.