WOLFGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM AND CHARLES CHAMSAY, PETITIONERS, VS. SANITARY WARES MANUFACTURING CORPORATION, ERNESTO V. LAGDAMEO, ERNESTO R. LAGDAMEO, JR…

These consolidated
petitions seek the review of the amended decision of the Court of Appeals in
CA-G.R. SP Nos. 05604 and 05617 which set aside the earlier decision dated June
5, 1986, of the then Intermediate Appellate Court and directed that in all
subsequent elections for directors of Sanitary Wares Manufacturing Corporation
(Saniwares), American Standard Inc. (ASI) cannot
nominate more than three (3) directors; that the Filipino stockholders shall
not interfere in ASI’s choice of its three (3)
nominees; that, on the other hand, the Filipino stockholders can nominate only
six (6) candidates and in the event they cannot agree on the six (6) nominees,
they shall vote only among themselves to determine who the six (6) nominees
will be, with cumulative voting to be allowed but without interference from ASI.

The antecedent facts can
be summarized as follows:

In 1961, Saniwares, a domestic corporation was incorporated for the
primary purpose of manufacturing and marketing sanitary wares.  One of the incorporators, Mr. Baldwin Young
went abroad to look for foreign partners, European or American who could help
in its expansion plans.  On August 15,
1962, ASI, a foreign corporation domiciled in Delaware, United States entered
into an Agreement with Saniwares and some Filipino
investors whereby ASI and the Filipino investors agreed to participate in the
ownership of an enterprise which would engage primarily in the business of
manufacturing in the Philippines and selling here and abroad vitreous china and
sanitary wares.  The parties agreed that
the business operations in the Philippines shall be carried on by an incorporated
enterprise and that the name of the corporation shall initially be
“Sanitary Wares Manufacturing Corporation.”

The Agreement has the
following provisions relevant to the issues in these cases on the nomination
and election of the directors of the corporation:

“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:

x x
x              x
x x                 x x x

“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.  (pp. 51 & 53, Rollo
of 75875)

At the request of ASI, the agreement contained provisions
designed to protect it as a minority group, including the grant of veto powers
over a number of corporate acts and the right to designate certain officers, such
as a member of the Executive Committee whose vote was
required for important corporate transactions.

Later, the 30% capital stock of ASI was increased to 40%.  The corporation was also registered with the
Board of Investments for availment of incentives with
the condition that at least 60% of the capital stock of the corporation shall
be owned by Philippine nationals.

The joint enterprise thus entered into by the Filipino investors
and the American corporation prospered. 
Unfortunately, with the business successes, there came a deterioration
of the initially harmonious relations between the two groups.  According to the Filipino group, a basic
disagreement was due to their desire to expand the export operations of the
company to which ASI objected as it apparently had other subsidiaries or joint
venture groups in the countries where Philippine exports were
contemplated.  On March 8, 1983, the annual stockholders’ meeting
was held.  The meeting was presided by Baldwin Young. 
The minutes were taken by the Secretary, Avelino
Cruz.  After disposing of the preliminary
items in the agenda, the stockholders then proceeded to the election of the members of the board of directors.  The ASI group nominated three persons
namely; Wolfgang Aurbach, John Griffin and David P. Whittingham.  The
Philippine investors nominated six, namely; Ernesto Lagdameo,
Sr., Raul A. Boncan, Ernesto R. Lagdameo,
Jr., George F. Lee, and Baldwin Young. 
Mr. Eduardo R. Ceniza then nominated Mr. Luciano E. Salazar, who in turn nominated Mr. Charles Chamsay.  The
chairman, Baldwin Young ruled the last two nominations out of order on the
basis of section 5 (a) of the Agreement, the consistent practice of the parties
during the past annual stockholders’ meetings to nominate only nine persons as
nominees for the nine-member board of directors, and the legal advice of Saniwares‘ legal counsel. 
The following events then, transpired:

x x x.  There were protests against the action of the
Chairman and heated arguments ensued.  An
appeal was made by the ASI representative to the body of stockholders present
that a vote be taken on the ruling of the Chairman.  The Chairman, Baldwin Young, declared the
appeal out of order and no vote on the ruling was taken.  The Chairman then instructed the Corporate
Secretary to cast all the votes present and represented by proxy equally for
the 6 nominees of the Philippine Investors and the 3 nominees of ASI, thus
effectively excluding the 2 additional persons nominated, namely, Luciano E. Salazar and Charles Chamsay.  The ASI reprentative,
Mr. Jaqua, protested the decision of the Chairman and
announced that all votes accruing to ASI shares, a total of 1,329,695 (p. 27, Rollo, AC-G.R. SP No. 05617) were being cumulatively voted
for the three ASI nominees and Charles Chamsay, and
instructed the Secretary to so vote.  Luciano E. Salazar and other proxy holders announced that all the votes owned by and or
represented by them 467,197 shares (p. 27, Rollo,
AC-G.R. SP No.05617) were being voted cumulatively in favor of Luciano E. Salazar. 
The Chairman, Baldwin Young, nevertheless instructed the Secretary to
cast all votes equally in favor of the three ASI nominees, namely, Wolfgang Aurbach, John Griffin and David Whittingham,
and the six originally nominated by Rogelio Vinluan,
namely, Ernesto Lagdameo, Sr., Raul Boncan, Ernesto Lagdameo, Jr.,
Enrique Lagdameo, George F. Lee, and Baldwin
Young.  The Secretary then certified for
the election of the following — Wolfgang Aurbach,
John Griffin, David Whittingham, Ernesto Lagdameo, Sr., Ernesto Lagdameo,
Jr., Enrique Lagdameo, George F. Lee, Raul A. Boncan, Baldwin Young.  The representative of ASI then moved to
recess the meeting which was duly seconded. 
There was also a motion to adjourn (p. 28, Rollo,
Ac-G.R. SP No. 05617).  This motion to
adjourn was accepted by the Chairman, Baldwin Young, who announced that the
motion was carried and declared the meeting adjourned.  Protests against the adjournment were
registered and having been ignored, Mr. Jaqua, the
ASI representative, stated that the meeting was not adjourned but only recessed
and that the meeting would be reconvened in the next room.  The Chairman then threatened to have the
stockholders who did not agree to the decision of the Chairman on the casting
of votes bodily thrown out.  The ASI
Group, Luciano E. Salazar and other stockholders,
allegedly representing 53 or 54% of the shares of Saniwares,
decided to continue the meeting at the elevator lobby of the American
Standard Building.  The continued meeting was presided
by Luciano E. Salazar, while Andres Gatmaitan acted as Secretary.  On the basis of the cumulative votes cast
earlier in the meeting, the ASI Group nominated its four nominees:  Wolfgang Aurbach,
John Griffin, David Whittingham and Charles Chamsay.  Luciano E. Salazar voted for himself, thus
the said five directors were certified as elected directors by the Acting
Secretary, Andres Gatmaitan, with the explanation
that there was a tie among the other six (6) nominees for the four (4)
remaining positions of directors and that the body decided not to break the
tie.” (pp. 37-39, Rollo of 75975-76)

These incidents triggered
off the filing of separate
petitions by the parties with the
Securities and Exchange Commission (SEC). 
The first petition filed was for preliminary injunction by Saniwares, Ernesto V. Lagdameo,
Baldwin Young, Raul A. Boncan, Ernesto R. Lagdameo, Jr., Enrique Lagdameo
and George F. Lee against Luciano Salazar and Charles
Chamsay.  The
case was denominated as SEC Case No. 2417. 
The second petition was for quo warranto and
application for receivership by Wolfgang Aurbach,
John Griffin, David Whittingham, Luciano
E. Salazar and Charles Chamsay against the group of
Young and Lagdameo (petitioners in SEC Case No. 2417)
and Avelino F. Cruz. 
The case was docketed as SEC Case No. 2718.  Both sets of parties except for Avelino Cruz claimed to be the legitimate directors of the
corporation.

The two petitions were consolidated and tried jointly by a
hearing officer who rendered a decision upholding the election of the Lagdameo Group and dismissing the quo warranto
petition of Salazar and Chamsay.  The ASI Group and Salazar appealed the
decision to the SEC en banc which affirmed the hearing officer’s
decision.

The SEC decision led to the filing of two separate appeals with
the Intermediate Appellate Court by Wolfgang Aurbach,
John Griffin, David Whittingham and Charles Chamsay (docketed as AC-G.R. SP No. 05604) and by Luciano E. Salazar (docketed as AC-G.R. SP No.05617). The
petitions were consolidated and the appellate court in its decision ordered the
remand of the case to the Securities and Exchange Commission with the directive
that a new stockholders’ meeting of Saniwares be ordered convoked as soon as possible,
under the supervision of the Commission.

Upon a motion for reconsideration filed by the appellees (Lagdameo Group) the
appellate court (Court of Appeals) rendered the questioned amended decision.

Petitioners Wolfgang Aurbach, John
Griffin, David P. Whittingham and Charles Chamsay in G.R. No. 75875 assign the following errors:

I.   
THE COURT OF APPEALS, IN EFFECT, UPHELD THE ALLEGED ELECTION OF PRIVATE
RESPONDENTS AS MEMBERS OF THE BOARD OF DIRECTORS OF SANIWARES WHEN IN FACT
THERE WAS NO ELECTION AT ALL.

II.  
THE COURT OF APPEALS PROHIBITS THE STOCKHOLDERS FROM EXERCISING THEIR
FULL VOTING RIGHTS REPRESENTED BY THE NUMBER OF SHARES IN SANIWARES, THUS
DEPRIVING PETITIONERS AND THE CORPORATION THEY REPRESENT OF THEIR PROPERTY
RIGHTS WITHOUT DUE PROCESS OF LAW.

III.  THE COURT OF APPEALS IMPOSES
CONDITIONS AND READS PROVISIONS INTO THE AGREEMENT OF THE PARTIES WHICH WERE
NOT THERE, WHICH ACTION IT CANNOT LEGALLY DO. (p. 17, Rollo
– 75875)

Petitioner Luciano E. Salazar in G.R.
Nos.75975-76 assails the amended decision on the following grounds:

“11.1  That Amended Decision would sanction the CA’s
disregard of binding contractual agreements entered into by stockholders and
the replacement of the conditions of such agreements with terms never
contemplated by the stockholders but merely dictated by the CA.

“11.2  The Amended decision would likewise
sanction the unlawful deprivation of the property rights of stockholders
without due process of law in order that a favored group of stockholders may be
illegally benefitted and guaranteed a continuing
monopoly of the control of a corporation.” (pp. 14-15, Rollo
-75975-76)

On the other hand, the
petitioners in G.R. No. 75951 contend that:

I

“THE AMENDED DECISION OF THE RESPONDENT
COURT, WHILE RECOGNIZING THAT THE STOCKHOLDERS OF
SANIWARES ARE DIVIDED INTO TWO BLOCS, FAILS TO FULLY ENFORCE THE BASIC INTENT
OF THE AGREEMENT AND THE LAW.

II

“THE AMENDED DECISION DOES NOT
CATEGORICALLY RULE THAT PRIVATE PETITIONERS HEREIN WERE THE DULY ELECTED
DIRECTORS DURING THE 8 MARCH 1983
ANNUAL STOCKHOLDERS MEETING OF SANIWARES.” (P. 24, Rollo
– 75951)

The issues raised in the
petitions are interrelated, hence, they are discussed
Jointly.

The main issue hinges on
who were the duly elected directors of Saniwares for
the year 1983 during its annual stockholders’ meeting held on March 8, 1983.  To answer this question the
following factors should be determined: 
(1) the nature of the business established by the parties – whether it
was a joint venture or a corporation and (2) whether or not the ASI Group may
vote their additional 10% equity during elections of Saniwares‘
board of directors.

The rule is that whether
the parties to a particular contract have thereby established among themselves
a joint venture or some other relation depends upon their actual intention
which is determined in accordance with the rules governing the interpretation
and construction of contracts.  (Terminal
Shares, Inc. v. Chicago, B. and
Q.R. Co. (DC MO) 65 F Supp 678;
Universal Sales Corp. v. California Press Mfg. Co. 20 Cal. 2nd 751, 128 P 2nd 668)

The ASI Group and
petitioner Salazar (G.R. Nos. 75975-76) contend that the actual intention of
the parties should be viewed strictly on the “Agreement” dated August
15, 1962 wherein it
is clearly stated that the parties’ intention was to form a corporation and not
a joint venture.

They specifically mention
number 16 under Miscellaneous Provisions which states:

xxx                xxx                   xxx

“(c) nothing herein contained shall
be construed to constitute any of the parties hereto partners or joint venturers in respect of any transaction hereunder.”
(At p. 66, Rollo – G.R. No. 75875)

They object to the
admission of other evidence which tends to show that the parties’ agreement was
to establish a joint venture presented by the Lagdameo
and Young Group on the ground that it contravenes the parol
evidence rule under section 7, Rule 130 of the Revised Rules of Court.  According to them, the Lagdameo
and Young Group never pleaded in their pleading that the “Agreement”
failed to express the true intent of the parties.

The parol
evidence rule under Rule 130 provides:

“Evidence of written agreements – When the terms of an
agreement have been rendered to writing, it is to be considered as containing
all such terms, end therefore, there can be, between the parties and their successors
in interest, no evidence of the terms of the agreement other than the contents
of the writing, except in the following cases:

(a) Where a mistake or imperfection of the writing, or its
failure to express the true intent and agreement of the parties or the validity
of the agreement is put in issue by the pleadings.

(b) When there is an intrinsic ambiguity in the writing.

Contrary to the ASI
Group’s stand, the Lagdameo and Young Group pleaded
in their Reply and Answer to Counterclaim in SEC Case No. 2417 that the
Agreement failed to express the true intent of the parties, to wit:

xxx                xxx                   xxx

“4. 
While certain provisions of the Agreement would make it appear
that the parties thereto disclaim being partners or joint venturers such disclaimer is directed at third parties and is not
inconsistent with, and does not preclude, the existence of two distinct groups
of stockholders in Saniwares one of which (the
Philippine Investors) shall constitute the majority, and the other (ASI) shall
constitute the minority stockholder.  In
any event, the evident intention of the Philippine Investors and ASI in
entering into the Agreement is to enter into a joint venture enterprise, and if
some words in the Agreement appear to be
contrary to the evident intention of the parties, the latter shall
prevail over the former (Art. 1370, New Civil Code).  The various stipulations of a contract shall
be interpreted together attributing to the doubtful ones that sense which may
result from all of them taken jointly (Art. 1374, New Civil Code).  Moreover, in order to judge the intention of
the contracting parties, their contemporaneous and subsequent acts shall be
principally considered. (Art. 1371, New Civil Code).  (Part I, Original Records, SEC Case No. 2417)

It has been ruled:

“In an action at law, 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 by their
agreement to create a joint adventure, or to assume some other relation is a question of fact for the jury. (Binder v.
Kessler v 200 App. Div. 40, 192 N Y S 653; Pyroa
v. Brownfield (Tex. Civ. A.) 238 S W 725; Hoge v. George, 27 Wyo, 423, 200
P 96 33 C.J. p. 871)

In the instant cases, our
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 joint venture and not a
corporation.  The history of the
organization of Saniwares and the unusual arrangements
which govern its policy making body are all consistent with a joint venture and
not with an ordinary corporation.  As
stated by the SEC:

“According to the unrebutted
testimony of Mr. Baldwin Young, he negotiated the Agreement with ASI in behalf
of the Philippine nationals. He testified that ASI agreed to accept the role of
minority vis-a-vis the Philippine National group of
investors, on the condition that the Agreement should contain provisions to
protect ASI as the minority.

“An examination of the Agreement shows that certain provisions
were included to protect the interests of ASI as the minority.  For example, the vote of 7 out of 9 directors
is required in certain enumerated corporate acts [Sec. 3 (b) (ii) (a) of the Agreement].  ASI is contractually entitled to designate a
member of the Executive Committee and the vote of this member is required for
certain transactions [Sec. 3 (b) (i)].

“The Agreement also requires a 75% super-majority vote for the
amendment of the articles and by-laws of Saniwares
[Sec. 3 (a) (iv) and (b) (iii)].  ASI is also given the right to designate
the president and plant manager [Sec. 5 (6)] The Agreement further provides
that the sales policy of Saniwares shall be that
which is normally followed by ASI [Sec. 13 (a)] and that Saniwares
should not export “Standard” products otherwise than through ASI’s Export Marketing Services (Sec. 13 (6)].  Under the Agreement, ASI agreed to provide
technology and know-how to Saniwares and the latter
paid royalties for the same. (At p. 2)

xxx                xxx                   xxx

“It is pertinent to note that the provisions of the Agreement requiring a 7 out of 9 votes of the board of directors
for certain actions, in effect gave ASI (which designates 3 directors under the
Agreement) an effective veto power. 
Furthermore, the grant to ASI of the right to designate certain officers
of the corporation; the super-majority voting requirements for amendments of
the articles and by-laws; and most significantly to the issues of this case,
the provision that ASI shall designate 3 out of the 9 directors and the other
stockholders shall designate the other 6, clearly indicate that – 1) there are
two distinct groups in Saniwares, namely ASI, which
owns 40% of the capital stock and the Philippine National stockholders who own
the balance of 60%, and that 2) ASI is given certain protections as the
minority stockholder.

Premises considered, we believe that under
the Agreement there are two groups of stockholders who established a
corporation with provisions for a special contractual relationship between the
parties, i. e., ASI and the other
stockholders.”(pp. 4-5)

Section 5 (a) of the
agreement uses the word “designated” and not “nominated” or
“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.

Moreover, ASI in its
communications referred to the enterprise as joint venture.  Baldwin Young also testified that Section
16(c) of the Agreement that “Nothing herein contained shall be construed
to constitute any of the parties hereto partners or joint venturers
in respect of any transaction hereunder” was merely to obviate the
possibility of the enterprise being treated as partnership for tax purposes and
liabilities to third parties.

Quite often, Filipino
entrepreneurs in their desire to develop the industrial and manufacturing
capacities of a local firm are constrained to seek the technology and marketing
assistance of huge multinational corporations of the developed world.  Arrangements are formalized where a foreign
group becomes a minority owner of a firm in exchange for its manufacturing
expertise, use of its brand names, and other such assistance.  However, there is always a danger from such
arrangements.  The foreign group may,
from the start, intend to establish its own sole or monopolistic
operations and merely uses the joint venture arrangement to gain a foothold or
test the Philippine waters, so to speak. 
Or the covetousness may come later. 
As the Philippine firm enlarges its operations and becomes profitable,
the foreign group undermines the local majority ownership and actively tries to
completely or predominantly take over the entire company.  This undermining of joint ventures is not
consistent with fair dealing to say the
least.  To the extent that such subversive actions can be lawfully prevented,
the courts should extend protection especially in industries where
constitutional and legal requirements reserve controlling ownership to
Filipino citizens.

The Lagdameo
Group stated in their appellees‘ brief in the Court
of Appeals:

“In fact, the Philippine Corporation Code itself recognizes
the right of stockholders to enter into agreements regarding the exercise of
their voting rights.

” ‘Sec. 100.  Agreements by stockholders.
–

x x x

“’2.  An agreement between
two or more stockholders, if in writing and signed by the parties thereto, may
provide that in exercising any voting rights, the shares held by them shall be
voted as therein provided, or as they may agree, or as determined in accordance
with a procedure agreed upon by them.’

“Appellants contend that the above provision is included in
the Corporation Code’s chapter on close corporations and Saniwares
cannot be a close corporation because
it has 95 stockholders.  Firstly,
although Saniwares had 95 stockholders at the time of
the disputed stockholders meeting, these 95 stockholders are not separate from
each other but are divisible into groups representing a single identifiable
interest.  For example, ASI, its
nominees and lawyers count for 13 of the 95 stockholders.  The Young/Yutivo
family count for another 13 stockholders, the Cham
family for 8 stockholders, the Santos
family for 9 stockholders, the Dy family for 7 stockholders, etc.  If the members of one family and/or business
or interest group are considered as one (which, it is respectfully submitted,
they should be for purposes of determining how closely held Saniwares
is), there were as of 8 March 1983, practically only 17 stockholders of Saniwares.  (Please refer to discussion in pp. 5 to 6 of appellees‘
Rejoinder Memorandum dated 11 December 1984 and Annex “A” thereof).

“Secondly, even assuming that Saniwares
is technically not a close
corporation because it has more than 20 stockholders, the undeniable fact is
that it is a close-held corporation. 
Surely, appellants cannot honestly
claim that Saniwares is a public- issue or a widely held corporation.

“In the United
States, many courts have taken a realistic
approach to joint venture corporations and have not rigidly applied principles
of corporation law designed primarily
for public issue corporations.  These
courts have indicated that express
arrangements between corporate joint ventures should be construed with
less emphasis on the ordinary rules of law usually applied to corporate
entities and with more consideration given to the nature of the agreement
between the joint venturers (Please see Wabash Ry v. American
Refrigerator Transit Co., 7 F 2d 335; Chicago, M & St. P. Ry v. Des Moines Union Ry; 254 Ass’n. 247 US. 490′; Seaboard Airline Ry
v. Atlantic Coast Line Ry; 240 N.C. 495, 82 S.E. 2d
771; Deboy v. Harris, 207 Md., 212,
113 A 2d 903; Hathway v. Porter Royalty Pool, Inc.,
296 Mich. 90, 90, 295 N.W. 571; Beardsley v. Beardsley, 138 U.S. 262; “The
Legal Status of Joint Venture Corporations”, 11 Vand.
Law Rev., p. 680, 1958).  These American
cases dealt with legal questions as to the
extent to which the requirements arising from the corporate form of joint
venture corporations should control, and the courts ruled that substantial
justice lay with those litigants who relied
on the joint venture agreement rather than the litigants who relied on the
orthodox principles of corporation law.

“As correctly held by
the SEC Hearing Officer:

”
‘It is said that participants in a joint venture, in
organizing the joint venture deviate from the traditional pattern of
corporation management. A noted authority has pointed out that just as in close corporations, shareholders’ agreements
in joint venture corporations 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 (See I O’Neal, Close Corporations, 1971 ed., Section
1.06a, pp. 15–16) (Decision of SEC Hearing Officer,
p. 16)’

“Thirdly, paragraph 2 of Sec. 100 of the Corporation Code does
not necessarily imply that agreements regarding the exercise of voting rights
are allowed only in close corporations. 
As Campos and Lopez-Campos
explain:

“‘Paragraph 2 refers to
pooling and voting agreements in particular. 
Does this provision necessarily imply
that these agreements can be valid only in close corporations as defined
by the Code?  Suppose that a corporation
has twenty five stockholders, and therefore cannot qualify as a close
corporation under section 96, can some of them enter into an agreement to vote
as a unit in the election of directors? 
It is submitted that there is no reason for denying stockholders of
corporations other than close ones the right to enter into voting or pooling
agreements to protect their interests, as long as they do not intend to commit
any wrong or fraud on the other stockholders not parties to the agreement.  Of course, voting or pooling agreements are
perhaps more useful and more often resorted to in close corporations.  But they may also be found necessary even in
widely held corporations.  Moreover,
since the Code limits the legal meaning of close corporations to those which comply with the requisites laid
down by section 96, it is entirely possible that a corporation which is in fact
a close corporation will not come within the definition.  In such case, its stockholders should not be
precluded from entering into contracts like voting agreements if these are
otherwise valid.  (Campos &
Lopez-Campos, op cit, p. 405)’

“In short, even assuming that sec. 5(a) of the Agreement
relating to the designation or nomination of directors restricts the right of
the Agreement’s signatories to vote for directors, such contractual provision,
as correctly held by the SEC, is valid and binding upon the signatories
thereto, which include appellants.” (Rollo – G.
R. No. 75951, pp. 90-94)

In regard to the question
as to whether or not the ASI group may vote their additional equity during
elections of Saniwares‘ board of directors, the Court
of Appeals correctly stated:

“As in other joint venture companies, the extent of ASI’s participation in the management of the corporation is
spelled out in the Agreement.  Section
5(a) hereof says that three of the nine directors shall be designated by ASI
and the remaining six by the other stockholders, i.e., the Filipino
stockholders.  This allocation of board
seats is obviously in consonance with the minority position of ASI.

“Having entered into a well-defined contractual relationship,
it is imperative that the parties should honor and adhere to their            respective rights and  obligations thereunder.  Appellants seem to contend that any allocation of board seats, even in joint venture corporations, are null
and void to the extent that such may interfere with the stockholder’s
rights to cumulative voting as provided in Section 24 of the Corporation Code. 
This Court should not be prepared to hold that any agreement which
curtails in any way cumulative voting should be struck down, even if such agreement has been freely entered into by experienced businessmen
and do not prejudice those who are not parties thereto.  It may well be that it would be more cogent
to hold, as the Securities and Exchange Commission has held in the
decision appealed from, that cumulative voting rights may be voluntarily waived
by stockholders who enter into special relationships with each other to pursue
and implement specific purposes, as in joint venture relationships between
foreign and local stockholders, so long as such agreements do not adversely
affect third parties.

“In any event, it is believed that we are not here called upon to make a general rule
on this question.  Rather, all that needs
to be done is to give life and effect to the particular contractual rights and
obligations which the parties have assumed for themselves.

“On the one hand, the
clearly established minority position of ASI and the contractual allocation of
board seats cannot be disregarded.  On
the other hand, the rights of the stockholders to cumulative voting should also
be protected.

“In our decision sought to be reconsidered, we opted to uphold
the second over the first.  Upon further
reflection, we feel that the proper and just solution to give due consideration to both factors
suggests itself quite clearly.  This
Court should recognize and uphold the division of the
stockholders into two groups, and at the same time uphold the right of
the stockholders within each group to cumulative voting in the process of
determining who the group’s nominees would be. 
In practical terms, as suggested by appellant Luciano
E. Salazar himself, this means that if the Filipino stockholders cannot agree
who their six nominees will be, a vote would have to be taken among the
Filipino stockholders only.  During this
voting, each Filipino stockholder can cumulate his votes.  ASI, however, should not be allowed to
interfere in the voting within the Filipino group.  Otherwise, ASI would be able to designate
more than the three directors it is allowed to designate under the Agreement,
and may even be able to get a majority of the board seats, a result which is
clearly contrary to the contractual intent of the parties.

“Such a ruling will give effect to both the allocation of the board seats and the stockholders’
right to cumulative voting.  Moreover,
this ruling will also give due
consideration to the issue raised by the appellees on
possible violation or circumvention of the Anti-Dummy Law (Com. Act No. 108, as
amended) and the nationalization requirements of the Constitution and the laws
if ASI is allowed to nominate more than
three directors.” (Rollo – 75875, pp. 38-39)

The ASI Group and
petitioner Salazar, now reiterate their theory that the ASI Group has the right
to vote their additional equity pursuant to Section 24 of the Corporation Code
which gives the stockholders of a corporation the right to cumulate their votes
in electing directors. Petitioner Salazar adds that this right if granted to
the ASI Group would not necessarily mean a violation of the Anti-Dummy Act
(Commonwealth Act 108, as amended).  He
cites section 2-a thereof which provides:

“And provided finally that the election of
aliens as members of the board of directors or governing body of corporations
or associations engaging in partially nationalized activities shall be allowed
in proportion to their allowable participation or share in the capital of such
entities. (amendments introduced by
Presidential Decree 715, section 1, promulgated May 28, 1975)”

The ASI Group’s argument
is correct within the context of Section 24 of the Corporation Code.  The point of query, however, is whether or
not that provision is applicable to a joint venture with clearly defined
agreements:

“The legal concept of a joint venture is of common law
origin.  It has no precise legal
definition, but it has been generally understood to mean an organization formed
for some temporary purpose.  (Gates v. Megargel, 266 Fed. 811 [1920]) It is in fact hardly
distinguishable from the partnership, since their elements are similar –
community of interest in the business, sharing of profits and losses, and a
mutual right of control.  (Blackner v. MCDermott, 176 F. 2d.
498, [1949]; Carboneau v. Peterson, 95 P. 2d,. 1043 [1939]; Buckley v. Chadwick, 45 Cal.
2d. 183, 288 P. 2d. 12 289 P. 2d. 242 [1955]. 
The main distinction cited by most opinions in common law jurisdictions
is that the partnership contemplates a general business with some degree of
continuity, while the joint venture is formed for the execution of a single
transaction, and is thus of a temporary nature. 
(Tufts v. Mann. 116 Cal. App. 170, 2
P. 2d. 500 [1931]; Harmon v. Martin, 395 Ill. 595, 71 NE
2d. 74 [1947]; Gates v. Megargel 266 Fed. 811 [1920].  This observation is not entirely accurate in
this jurisdiction, since under the Civil Code, a partnership may be particular
or universal, and a particular partnership may have for its object a specific
undertaking.  (Art. 1783, Civil
Code).  It would seem therefore that under
Philippine law, a joint venture is a form of partnership and should thus be
governed by the law of partnerships.  The
Supreme Court has however recognized a distinction between these two business
forms, and has held that although a corporation cannot enter into a partnership
contract, it may however engage in a
joint venture with others. 
(At p. 12, Tuazon v. Bolaños,
95 Phil. 906 [1954]) (Campos and Lopez – Campos Comments, Notes and Selected
Cases, Corporation Code 1981)

Moreover, the usual rules
as regards the construction and
operations of contracts generally apply to a contract of joint venture. (O’ Hara v. Harman 14 App. Dev. (167) 43 NYS 556).

Bearing these principles in mind, the correct view would be that
the resolution of the question of whether or not the ASI Group may vote their
additional equity lies in the agreement of the parties.

Necessarily, the appellate court was correct in upholding the
agreement of the parties as regards the allocation of director seats under
Section 5 (a) of the “Agreement,” and the right of each group of stockholders to
cumulative voting in the process of determining
who the group’s nominees would be under Section 3 (a) (1) of the
“Agreement.” As pointed out by SEC, Section 5 (a) of the Agreement
relates to the manner of nominating the members of the board of directors
while Section 3 (a) (1) relates to the manner of voting for these nominees.

This is the proper interpretation of the Agreement of the parties
as regards the election of members of the board of directors.

To allow the ASI Group to vote their additional equity to help
elect even a Filipino director who would be beholden to them would obliterate
their minority status as agreed upon by the parties.  As aptly stated by the appellate court:

“x x x ASI, however, should not be
allowed to interfere in the voting within the Filipino group.  Otherwise, ASI would be able to designate more
than the three directors it is allowed to designate under the Agreement, and
may even be able to get a majority of the board
seats, a result which is clearly contrary to the contractual intent of
the parties.

“Such a ruling will give effect to both the allocation of the
board seats and the stockholder’s right to cumulative voting.  Moreover, this ruling will also give due
consideration to the issue raised by the appellees on
possible violation or circumvention of the Anti-Dummy Law (Com. Act No. 108, as
amended) and the nationalization requirements of the Constitution and the laws
if ASI is allowed to nominate more than three directors.” (At p. 39, Rollo, 75875)

Equally important as the
consideration of the contractual intent of the parties is the consideration as
regards the possible domination by the foreign investors of the enterprise in
violation of the nationalization requirements enshrined in the Constitution and
circumvention of the Anti-Dummy Act.  In
this regard, petitioner Salazar’s position is that the Anti-Dummy Act allows
the ASI group to elect board directors in proportion to their share in
the capital of the entity.  It is to be noted, however, that the same law also limits the election
of aliens as members of the board of directors in proportion to their allowance
participation of said
entity.  In the instant case, the foreign
Group (ASI) was limited to designate three directors.  This is the allowable participation of the
ASI Group.  Hence, in future dealings,
this limitation of six to three board seats should always be
maintained as long as the joint venture agreement exists considering that in limiting 3 board seats in
the 9-man board of directors there are provisions already agreed upon and
embodied in the parties’ Agreement to protect the interests arising
from the minority status of the foreign investors.

With these findings, we affirm the decisions of the SEC Hearing
Officer and SEC which were impliedly affirmed by the appellate court declaring
Messrs. Wolfgang Aurbach, John Griffin, David P. Whittingham, Ernesto
V. Lagdameo, Baldwin Young, Raul A. Boncan, Ernesto R. Lagdameo, Jr.,
Enrique Lagdameo, and George F. Lee as the duly elected directors of Saniwares
at the March 8, 1983 annual stockholders’ meeting.

On the other hand, the Lagdameo and Young Group (petitioners in G.R. No. 75951)
object to a cumulative voting during the election of the board of directors of
the enterprise as ruled by the appellate court and submits that the six (6)
directors allotted the Filipino stockholders should be selected by consensus
pursuant to section 5 (a) of the Agreement which uses the word
“designate” meaning “nominate,
delegate or appoint.”

They also stress the possibility that the ASI Group might take
control of the enterprise if the Filipino stockholders are allowed to select
their nominees separately and not as a common slot determined by the majority
of their group.

Section 5 (a) of the Agreement which uses the word designates
in the allocation of board directors should not be interpreted in isolation. This should be construed in relation
to section 3 (a) (1) of the Agreement. 
As we stated earlier, section 3(a)(1) relates
to the manner of voting for these nominees which is cumulative
voting while section 5(a) relates to the manner of nominating
the members of the board of directors. The petitioners in G. R.
No. 75951 agreed to this
procedure, hence, they cannot now impugn its legality.

The insinuation that the
ASI Group may be able to control the enterprise under the cumulative voting
procedure cannot, however, be ignored. 
The validity of the cumulative voting procedure is dependent on the
directors thus elected being genuine members of the Filipino group, not voters
whose interest is to increase the ASI share in the management of Saniwares.  The joint
venture character of the enterprise must always be taken into account, so long
as the company exists under its original agreement.  Cumulative voting may not be used as a device
to enable ASI to achieve stealthily or indirectly what they cannot accomplish
openly.  There are substantial safeguards
in the Agreement which are intended to preserve the
majority status of the Filipino investors as well as to maintain the minority
status of the foreign investors group as earlier discussed.  They should be maintained.

WHEREFORE, the petitions in G.R. Nos. 75975-76 and
G.R. No. 75875 are DISMISSED and the petition in G.R. No. 75951 is partly GRANTED.  The amended decision of the Court of Appeals is MODIFIED in that Messrs.
Wolfgang Aurbach, John Griffin, David Whittingham, Ernesto V. Lagdameo,
Baldwin Young, Raul A. Boncan, Ernesto R. Lagdameo, Jr., Enrique Lagdameo,
and George F. Lee are declared as the duly elected directors of Saniwares at the March 8, 1983 annual
stockholders’ meeting.  In all
other respects, the questioned decision is AFFIRMED.  Costs against the
petitioners in G. R. Nos. 75975-76 and G.R. No. 75875.

SO ORDERED.

Fernan, C.J., (Chairman), Bidin, and Cortes, JJ., concur.

Feliciano, J., no part.  One of parties represented
by his former firm.