CASE DIGEST : John Gokongwei, Jr. v. Securities and Exchange Commission, et al. G.R. No. L-45911, April 11, 1979

 

FACTS

John Gokongwei, Jr. was a stockholder of San Miguel Corporation (SMC). He also had substantial interests in other corporations, including Universal Robina Corporation and CFC Corporation, which were engaged in businesses that could compete with SMC. In 1977, SMC's Board of Directors amended the corporation's by-laws to disqualify from nomination or election to the Board of Directors any person who was engaged in a business that was competitive or antagonistic to SMC, or who was a nominee of such a person. The amended by-laws also authorized the Board to determine whether a person was engaged in a competitive or antagonistic business.

Gokongwei challenged the amended by-laws before the Securities and Exchange Commission (SEC). He alleged, among other things, that the Board had no authority to amend the by-laws because the authority previously delegated by the stockholders had already been exercised, that the membership of the Board had changed since the delegation, and that the amendment deprived him of his rights as a stockholder to vote and to be voted for as director. He also alleged that the provision was unreasonable and oppressive and was specifically intended to disqualify him.

Gokongwei likewise sought access to the books and records of San Miguel International, Inc. (SMI), a foreign subsidiary of SMC. The SEC denied his request. He therefore filed a petition before the Supreme Court questioning the SEC's actions and asking the Court, among other things, to prevent the enforcement of the amended by-laws and to allow him to examine SMI's books and records. The Supreme Court issued a temporary restraining order preventing SMC from disqualifying or preventing Gokongwei from running for or being voted upon as director.

The case reached the Supreme Court with several issues concerning the validity of the amended by-laws, Gokongwei's right to inspect SMI's books and records, and the validity of SMC's foreign investments. The Court noted that certain facts were undisputed, including that the amended by-laws had been adopted by the Board pursuant to authority purportedly delegated under Section 22 of the Corporation Law, and that the amendment was subsequently ratified by more than 80% of SMC stockholders.

ISSUE

The principal issue was whether SMC could validly amend its by-laws to disqualify a competitor from being nominated for or elected to its Board of Directors. Gokongwei argued that the amendment deprived him of rights inherent in stock ownership, particularly his right to vote and to be voted for as director. He further argued that corporations had no inherent power to disqualify a stockholder from election as director and that the amendment was therefore ultra vires and void.

The Court also considered the authority of a corporation to prescribe qualifications of directors. Under Section 21 of the Corporation Law, a corporation could prescribe in its by-laws the qualifications, duties, and compensation of its directors, officers, and employees. The Court considered whether this statutory authority permitted SMC to impose a qualification that excluded persons engaged in businesses competitive or antagonistic to the corporation.

Another issue concerned Gokongwei's right to inspect the books and records of SMI. The Court considered whether the records of the foreign subsidiary were within the possession and control of SMC and whether Gokongwei, as a stockholder, could examine them. The Court also considered the SEC's action denying his request.

The Court further dealt with the SEC proceedings and the doctrine of primary jurisdiction, particularly because the validity of the amended by-laws involved issues pending before the SEC. The Court noted that the doctrine of primary jurisdiction does not apply where only a question of law is involved. However, the Court ultimately did not reach a binding determination on the validity of the amended by-laws because the required majority of the Court could not be obtained.

HELD

The Supreme Court GRANTED the petition insofar as Gokongwei sought to examine the books and records of San Miguel International, Inc. The Court held unanimously that Gokongwei was entitled to examine and obtain copies of the specified books and records of SMI. The Court further held that the records were within SMC's "possession and control," and if the records were kept abroad, SMC's Board and management were obliged to bring them, or true copies of them, to the Philippines for Gokongwei's examination and inspection. The SEC order denying this right was therefore set aside.

With respect to the amended by-laws, however, the Court did not render a binding judgment declaring them either valid or invalid. Six Justices voted to sustain the validity per se of the amended by-laws, while four Justices voted against their validity and believed that the matter should first be resolved by the SEC as the agency of primary jurisdiction. Other Justices reserved their votes. Because the required majority could not be obtained, the Court dismissed the petition insofar as it challenged the validity of the amended by-laws, pursuant to Rule 56, Section 11 of the Rules of Court. The Court therefore did not establish a binding doctrine that the challenged by-laws were valid.

The Court nevertheless unanimously held that Gokongwei could not be disqualified from running for or sitting as an SMC director without due process and a proper hearing. The Board was required to give him a new and proper hearing regarding his alleged disqualification under the amended by-laws. Any decision of the Board was appealable to the SEC acting en banc and ultimately to the Supreme Court. Until he was disqualified through that procedure, the prohibition in the amended by-laws could not be applied against him. The Court also stated that the validity of SMC's foreign investment had become moot because the investments and operations had been ratified by SMC's stockholders.

The Court thus GRANTED the petition insofar as it protected Gokongwei's right to inspect SMI's books and records and his right to due process concerning his possible disqualification as director. The Court DISMISSED the petition insofar as it directly challenged the validity of the amended by-laws, because the necessary votes to resolve that issue were not obtained. The Court expressly recognized that the statements of the six Justices who voted to sustain the validity of the by-laws had no binding effect or doctrinal value on that issue. No costs were imposed.