AGAD vs MABATO
Plaintiff: Wolrgang Aurbach, John Griffin, David P.
Plaintiff: Mauricio Agad
Defendant: Severino Mabato and
Mabato & Agad Company
Citation: 23 SCRA 1223
Date of Promulgation: June 28, 1968
Ponente: Concepcion, CJ.
FACTS:
• Mauricio Agad alleged the he and Severino
Mabato executed a contract in a public
instrument to become partners in a fishpond
business.
• Agad contributed P1000 with right to receive
50% of the profits. Mabato on the other hand
managed the operations of the fishpond.
• For the years 1957-1963, Mabato, however,
failed to render accounts of the operations.
• Agad is now praying for the dissolution of the
partnership with payment of the profits and
attorney’s fees.
• Mabato denies the existence of said
partnership and claims that the contract was
not perfected because agad failed to give his
capital contribution.
Lower Court: dismissed the complaint for failure to
state a cause of action. It based its resolution on the
theory that the contract of partnership is null and void
pursuant to Art 1773 of the Civil Code because the
inventory of the fishpond had not been attached on
the complaint.
ISSUES: Whether Art 1773 of the Civil Code, which
involves contributed immovable and real property
rights, is applicable in the case at bar
HELD: NO
ART 1773 states that:
Art. 1773. A contract of partnership is
void, whenever immovable property
is contributed thereto, if inventory of
said property is not made, signed by
the parties; and attached to the public
instrument.
Based on the facts, non of the partners contributed
a fishpond or a real right to any fishpond. Their
contributions were limited to P1,000 each based on
their contract.
The operation of the fishpond was the purpose of the
partnership. Neither said fishpond nor a real right
thereto was contributed.
Thus, Art 1773 is not applicable in the case at bar.
The Court ruled to remand the case to the lower
court for further proceeding.
AURBACH vs SANITARY WARES
Whittingham And Charles Chamsay
Defendant: Sanitary Wares Manufacturing
Corporatoin, Ernesto V. Lagdameo, Ernesto R.
Lagdameo, Jr., Enrique R. Lagdameo, George F.
Lee, Raul A. Boncan, Baldwin Young And Avelino V.
Cruz
Citation: 180 SCRA 350
Date of Promulgation: December 15, 1989
Ponente: Gutierrez, JR, J.
FACTS:
• Aug. 1962 - Delaware corp. American
Standard Inc. (ASI), Saniwares, and Filipino
investors entered into an Agreement: ASI and
investors agreed to participate in the
ownership of an enterprise engaged in
manufacturing vitreous china and sanitary
wares in PH, selling in PH and abroad.
• Operations in PH shall be carried on by an
incorporated enterprise and the name of the
corporation shall initially be "Sanitary Wares
Manufacturing Corporation".
• Relevant provisions of the Agreement (re:
nomination and election of directors):
3. Articles of Incorporation.
(a) The Articles of Incorporation of the
Corporation shall be substantially in the
form annexed hereto as Exhibit A and,
insofar as permitted under Philippine law,
shall specifically provide for: (1)
Cumulative voting for directors;
5. Management.
(a) The management of the Corporation
shall be vested in a Board of Directors,
which shall consist of nine individuals. As
long as American-Standard shall own at
least 30% of the outstanding stock of
the Corporation, three of the nine directors
shall be designated by American-
Standard, and the other six shall be
designated by the other stockholders of
the Corporation.
• At ASI's request, Agreement contained
provisions protecting it as a minority group,
including grant of veto powers over a number
of corporate acts and right to designate certain
officers.
• ASI's 30% capital stock was increased to 40%.
The corporation was registered with the BOI
for availment of incentives with condition: at
least 60% of capital stock shall be owned by
PH nationals.
• Business prospered but the relations between
parties deteriorated. Filipino group wanted to
expand the export operations; ASI objected as
it had other subsidiaries/ JV groups in the
proposed countries.
 • Mar. 1983 - Annual stockholders' meeting;
elections were held. ASI insisted on adding
officers to be one of the board of directors
instead of the usual ratio of 3 (foreign) officers
is to 6 (filipino) officers.
• CA upheld the SEC and directed: In all
subsequent elections, ASI cannot nominate
more than 3 directors; Filipino stockholders
shall not interfere in ASI's choice; Filipino
stockholders can nominate only 6 (if they
cannot agree on the 5, they shall vote among
themselves, with cumulative voting to be
allowed but without interference from ASI).
FOREIGN GROUP ARGUES: The Agreement
should be construed strictly. Agreement clearly
shows intent to form a corporation, not a JV.
Admission of evidence showing the intention to form
a JV violates the parol evidence rule (Rule 130, §7).
CA prohibited stockholders from exercising their full
voting rights represented by number of shares,
amounting to a deprivation of property rights without
due process of law (basically, they should be
allowed to use their cumulative voting rights in the
corporation as a whole, not just within their group as
foreign stockholders).
FILIPINO GROUP ARGUES: Agreement failed to
state parties' true intent. Parties intended to enter
into a joint venture (JV) enterprise. CA did not
categorically rule that they (Lagdameo et al.) were
the duly elected directors. Also, cumulative voting
should be struck down; the Agreement uses
"designate", hence the 6 directors allotted to the Fil.
stockholders should be selected by consensus.
MAIN ISSUE:
Who were the duly elected directors of Saniwares for
1983? To answer, we must determine:
1. Nature of the business: JV or
corporation? (Note: I think this is important in order
to determine what rules on voting will apply.)
2. W/N the ASI group may vote their
additional 10% equity during elections of Saniwares'
BOD
HELD:
(1) What is the nature of the business? ⇒ JOINT
VENTURE
Rule: Type of contract depends on their actual
intention, which is determined in accordance with
the rules governing the interpretation and
construction of contracts.
Re: parol evidence rule, SC cited US cases ruling
that where there is evidence tending to prove that
the parties joined their efforts in furtherance of an
enterprise for their joint profit, the question whether
they intended to create a joint adventure/ some other
relation is a question of fact for the jury.
Examination of important provisions of the
Agreement as well as the testimonial evidence
presented by the Lagdameo and Young Group
shows that the parties agreed to establish a JV and
not a corporation. History of organization of
Saniwares and the unusual arrangements governing
its policymaking body are all consistent with a JV
and not an ordinary corporation.
Participants in a JV deviate from the traditional
pattern of corporation management. A noted
authority has pointed out that just as in close
corporations, shareholders' agreements in JV often
contain provisions which do one or more of the
following: (1) require greater than majority vote for
shareholder and director action; (2) give certain
shareholders or groups of shareholders power to
select a specified number of directors; (3) give to the
shareholders control over the selection and retention
of employees; and (4) set up a procedure for the
settlement of disputes by arbitration
o SEC found that (1) under the Agreement, there are
two distinct groups in Saniwares: ASI (owns 40% of
capital stock), and the PH National stockholders
(own 60%); and (2) ASI is given certain protections
as the minority stockholder.
§5 (a) of the uses the word "designated" and not
"nominated"/"elected" in the selection of the nine
directors on a six to three ratio. Each group is
assured of a fixed number of directors in the board.
ASI in its communications referred to the enterprise
as a JV.
Young testified that §16(c) of the Agreement saying
"Nothing herein contained shall be construed to
constitute any of the parties hereto partners or joint
venturers" was merely to obviate the possibility
of the enterprise being treated as partnership for tax
purposes and liabilities to third parties.
Filipino entrepreneurs often need the assistance of
multinational corporations. Arrangement: foreign
group becomes minority owner. Danger: foreign
group merely uses JV to gain foothold/ test PH
waters. When business becomes profitable, the
foreign group undermines the local majority
ownership and tries to take over the company.
Courts should extend protection especially in
industries where constitutional and legal
requirements reserve controlling ownership to
Filipinos.
Not in the case but helpful for the next parts:
CUMULATIVE VOTING – in corporations, a system
of voting for directors in which the shareholder can
multiply his voting shares by the number of
candidates and vote them all for one person for
director. This is intended to give minority
shareholders a chance to elect at least one director
whom they favor. For example, if there are five
directors to be elected, and 10,000 shares issued, a
shareholder with 1,000 shares could vote 5,000 for
his candidate rather than being limited to 1,000 for
each of the five candidates, always outvoted by
shareholders with 1,001 or more shares (Hill & Hill,
2005).
Court affirms the decisions of the SEC, impliedly
affirmed by the CA: the duly elected directors of
Saniwares are the first 9 nominees (Aurbach, Griffin,
Whittingham, Ernesto Lagdameo Sr. and Jr.,
Enrique Lagdameo, Boncan, Lee, and Young are
declared the duly elected officers.)

(2) W/N the ASI group may vote their additional

equity during elections? NO.
CA correctly stated: Minority position of ASI and the
contractual allocation of board seats cannot be
disregarded. Rights of the stockholders to
cumulative voting should also be protected. Proper
and just solution to give due consideration to both
factors: Court should recognize and uphold the
division of the stockholders into 2 groups, and also
uphold the right of the stockholders within each
group to cumulative voting to determine who the
group's nominees would be.

This ruling will also give due consideration to the

issue raised on the possible violation of the Anti-
Dummy Law (Comm. Act. No. 108) and the
nationalization requirements of the Consti and laws.

ASI and Salazar claim they have a right to vote their

additional equity under §24 of the Corporation Code.
The question is W/N this provision applies to a JV
with clearly defined agreements:

- Joint venture - common law origin. No precise legal

definition but generally understood to mean
an organization formed for some temporary
purpose. It is in fact hardly distinguishable from a
partnership, since their elements are similar:
community of interest in the business, sharing of
profits and losses, and a mutual right of control.

- Main distinction in common law: Partnership

contemplates a general business with some degree
of continuity, while JV is formed for the execution of
a single transaction, thus temporary. This distinction
is not entirely accurate here because under CC Art.
1783, a partnership may be particular/universal, and
a particular partnership may have for its object a
specific undertaking.

- It would seem that under PH law, a JV is a form of

partnership and should thus be governed by the law
of partnerships. SC has however recognized a
distinction: although a corporation cannot enter into
a partnership contract, it may however engage in a
joint venture with others (Tuazon v. Bolaños,
Campos and Lopez commentary on the Corporation
Code).

To allow ASI to vote additional equity would

obliterate their minority status. Equally important
consideration: Possible violation of the
nationalization requirements in Consti, Anti-Dummy
Act.