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

Aurbach versus Sanitary Wares Manufacturing Corporation

The Case

This is a consolidated petition for review of the amended decision of the Court of Appeals in the dispute between the American Standard group, led by Wolfgang Aurbach, John Griffin, David Whittingham, and Charles Chamsay, and the Filipino investor group of the Lagdameo and Young families, over who were the duly elected directors of Sanitary Wares Manufacturing Corporation at its annual stockholders' meeting held on the eighth of March, 1983. The case matters because it is the leading authority on the joint venture corporation in Philippine law: a domestic corporation formed by Filipino majority investors and a foreign minority partner, governed by a stockholders' agreement that fixes the composition of the board and protects the minority, and the question of how the courts must read that agreement against the ordinary rules of corporation law.

Procedural History

The dispute produced two consolidated cases before the Securities and Exchange Commission. The first was a petition for preliminary injunction filed by Sanitary Wares and the Lagdameo and Young group against Luciano Salazar and Charles Chamsay. The second was a petition for quo warranto with an application for receivership filed by the American Standard group and Salazar against the Lagdameo and Young group. A hearing officer tried the two jointly, upheld the election of the Lagdameo group, and dismissed the quo warranto petition. The American Standard group and Salazar appealed to the Securities and Exchange Commission en banc, which affirmed the hearing officer.

Two separate appeals were then brought to the Intermediate Appellate Court, one by the American Standard group and one by Salazar. The appellate court consolidated them and, in its first decision, set aside the election and ordered the remand of the case to the Securities and Exchange Commission, with a directive that a new stockholders' meeting be convoked under the supervision of the Commission. On motion for reconsideration by the Lagdameo group, the appellate court rendered the amended decision now under review, which directed that in all subsequent elections the American Standard group could nominate no more than three directors, that the Filipino stockholders could nominate only six, and that each side should vote only among itself, with cumulative voting allowed but without interference from the other. The losing groups came to the Supreme Court by petition for review.

Facts

In 1961, Sanitary Wares Manufacturing Corporation was incorporated in the Philippines to manufacture and market sanitary wares. One of its incorporators, Baldwin Young, went abroad to look for a foreign partner, and on the fifteenth of August, 1962, the American corporation American Standard, domiciled in Delaware, entered into an agreement with Sanitary Wares and Filipino investors to participate in an enterprise that would manufacture vitreous china and sanitary wares in the Philippines and sell them here and abroad. The agreement provided that the business would be carried on by an incorporated enterprise, and it contained a management clause: the board of directors would consist of nine individuals, and as long as American Standard owned at least thirty percent of the outstanding stock, three of the nine directors would be designated by American Standard and the other six by the other stockholders. The agreement also gave American Standard veto powers over certain corporate acts, the right to designate a member of the executive committee, supermajority voting requirements for amendments, and the right to designate the president and plant manager. American Standard's stake was later increased from thirty to forty percent, and the corporation was registered with the Board of Investments on the condition that at least sixty percent of its capital stock be owned by Philippine nationals.

The joint enterprise prospered, but relations deteriorated. The Filipino group wanted to expand exports, which American Standard opposed because it had its own subsidiaries or joint ventures in the countries where Philippine exports were contemplated. At the annual stockholders' meeting on the eighth of March, 1983, presided over by Baldwin Young, the American Standard group nominated three persons and the Philippine investors nominated six. Two further nominations were then made from the floor, those of Luciano Salazar and Charles Chamsay, and the chairman ruled them out of order based on the management clause of the agreement, the consistent practice of the parties, and the advice of counsel. Protests and heated arguments followed, and the chairman refused to put his ruling to a vote.

The chairman then instructed the corporate secretary to cast all votes equally for the three American Standard nominees and the six Filipino nominees, effectively excluding the two additional nominees. The American Standard representative protested and announced that all votes accruing to American Standard shares were being cumulatively voted for its three nominees and Charles Chamsay, while Salazar and other proxy holders announced that their shares were being cumulatively voted for Salazar. The chairman nevertheless caused the certification of the nine originally nominated directors. The American Standard group and Salazar and other stockholders claiming to represent fifty-three or fifty-four percent of the shares continued the meeting at the elevator lobby of the American Standard Building, where, on the basis of the cumulative votes cast earlier, four American Standard nominees and Salazar were certified as elected, with a tie among the other six nominees for the four remaining seats left unbroken.

Issues

• Whether or not the enterprise established by the parties was a joint venture rather than an ordinary corporation, and whether or not parol evidence was admissible to show the true intent of the parties despite the written agreement.
• Whether or not the American Standard group could cumulatively vote its additional ten percent equity, that is, its full forty percent shareholdings, in the election of the board of directors.
• Whether or not the Court of Appeals could impose on the parties conditions and terms not found in their agreement, limiting each group to nominating only its fixed number of directors.
• Whether or not the amended decision deprived the stockholders of their property rights and their full voting rights without due process of law.

Applicable Provisions

Section 5, paragraph a, of the Agreement of the parties provides:

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.

This clause is the contractual anchor of the case, because it fixes a six to three ratio on the board and uses the word designated rather than nominated or elected.

Section 7, Rule 130 of the Revised Rules of Court, the parol evidence rule, 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, and 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.

This rule governs whether the Filipino group could present evidence outside the written agreement to prove that the parties intended a joint venture.

Section 100 of the Corporation Code, on agreements by stockholders, provides:

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.

This provision recognizes the right of stockholders to bind themselves in writing on how their shares shall be voted, which supports the enforceability of the six to three arrangement.

Ruling

On the first issue, the Court held that the parties agreed to establish a joint venture and not an ordinary corporation. Whether a contract creates a joint venture or some other relation depends on the actual intention of the parties, determined under the rules on interpretation of contracts. The Court examined the important provisions of the agreement and the testimonial evidence, and found that the history of the organization of Sanitary Wares and the unusual arrangements governing its policy making body were consistent with a joint venture. The agreement gave American Standard veto power through the requirement of seven out of nine votes for certain corporate acts, the right to designate a member of the executive committee, supermajority requirements for amendments, the right to designate the president and plant manager, and control over sales and export policy. These protections showed two distinct groups of stockholders who established a corporation with a special contractual relationship between them. On the parol evidence objection, the Court held that the rule did not bar the evidence, because the Filipino group had pleaded in their reply and answer to counterclaim that the agreement failed to express the true intent of the parties, which falls squarely within the exception in the rule. The disclaimer that the parties were not partners or joint venturers was directed at third parties and at tax liability, and did not preclude the joint venture between the stockholders.

On the second issue, the Court held that the American Standard group could vote its full shareholdings. The management clause used the word designated, not nominated or elected, and each group was assured of a fixed number of directors on the board. The Court warned against foreign minority partners who use the joint venture arrangement to gain a foothold and later undermine local majority ownership, and said that to the extent 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.

On the third issue, the Court held that the Court of Appeals could not impose conditions and read provisions into the agreement that were not there. The appellate court had no authority to replace the terms freely entered into by the stockholders with terms of its own making.

On the fourth issue, the Court held that the amended decision, by prohibiting the stockholders from exercising their full voting rights represented by their shares, deprived them of property rights without due process of law.

Doctrine

A joint venture corporation is a corporation formed by two or more groups of stockholders who, by written agreement, fix the composition of the board and grant the minority protective provisions such as veto powers, supermajority voting requirements, and the right to designate officers. Whether the parties established a joint venture or some other relation depends on their actual intention, determined under the rules on the interpretation and construction of contracts. The parol evidence rule does not bar evidence of the true intent of the parties where the failure of the writing to express that intent is put in issue by the pleadings. Under Section 100 of the Corporation Code, a written agreement among stockholders on how their shares shall be voted is valid and enforceable, and the courts may not impose conditions or read into the agreement terms the stockholders never contemplated. Where a foreign minority partner uses the joint venture to undermine local majority ownership, the courts should extend protection, especially in industries reserved by the Constitution and the laws to Filipino citizens.

Disposition

The Court granted the petitions, set aside the amended decision of the Court of Appeals, and reinstated the earlier decision of the appellate court ordering a new stockholders' meeting of Sanitary Wares under the supervision of the Securities and Exchange Commission.

Remember This

Memorize this line: the six to three designation in the agreement is a joint venture arrangement that the courts must enforce as written, and the Court of Appeals cannot rewrite it. Examiners use this case on joint venture corporations, on the parol evidence rule and its exception for failure of the writing to express the true intent of the parties, and on the protection of Filipino majority ownership against foreign minority control.