Aurbach v. Sanitary Wares Manufacturing Corp., G.R. Nos. 75875, 75951 & 75975-76, December 15, 1989

Summary: American Standard Inc (ASI), a foreign corporation in US 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.

ASI agreed to accept the role of minority vis-a-vis the Filipino investors, on the condition that the Agreement should contain provisions to protect ASI as the minority. One such provision is: 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. (Section 5(a) of the Agreement).

The 30% capital stock of ASI was later increased to 40%.

On Mar 8, 1983, the election of the members of the board of directors was held.

- The ASI group nominated 3 persons namely: Wolfgang Aurbach, John Griffin and David P. Whittingham.

- The Philippine investors nominated 6, 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 ruled the last two nominations out of order. ASI protested the decision, but the election proceeded.

- Wolfgang Aurbach, John Griffin, David Whittingham, Ernesto Lagdameo, Sr., Ernesto Lagdameo, Jr., Enrique Lagdameo, George F. Lee, Raul A. Boncan, and Baldwin Young were elected and certified as elected directors.

ASI group, however, conducted a separate election.

- Wolfgang Aurbach, John Griffin, David Whittingham , Charles Chamsay, and Luciano E. Salazar were certified as elected directors, with the explanation that there was a tie among the other 6 nominees for the 4 remaining positions of directors and that the body decided not to break the tie.

SEC uphold the election of the Lagdameo Group.

CA affirmed the decision w/ modification -  It directed that in all subsequent elections for directors of Saniwares, ASI cannot nominate more than 3 directors; that the Filipino stockholders shall not interfere in ASI's choice of its 3 nominees; that, on the other hand, the Filipino stockholders can nominate only 6 candidates and in the event they cannot agree on the 6 nominees, they shall vote only among themselves to determine who the 6 nominees will be, with cumulative voting[1] (pursuant to Section 3(a)(1) of the Agreement) to be allowed but without interference from ASI.

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ASI's Main Contention: The business established by the parties is a corporation, and pursuant to Section 24 of the Corporation Code, ASI has the right to vote its additional 10% equity during the election of Saniwares' board of directors.

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SC affirmed the CA decision.

- The Agreement as well as the testimonial evidence presented shows that the parties agreed to establish a joint venture and not a corporation. Section 24, therefore, is not applicable. 

- Under Philippine law, a joint venture is a form of partnership and should thus be governed by the law of partnerships. A distinction between the two business forms, however, is that although a corporation cannot enter into a partnership contract, it may however engage in a joint venture with others.

- Also,  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.

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Ponente: GUTIERREZ, JR., J.

Facts:

Aug 15, 1962, American Standard Inc (ASI), a foreign corporation in US 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:

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:

xxx

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.

Later, the 30% capital stock of ASI was increased to 40%.

Mar 8, 1983, the annual stockholders' meeting was held. The meeting was presided by Baldwin Young. AGENDA: election of the members of the board of directors.

- The ASI group nominated 3 persons namely; Wolfgang Aurbach, John Griffin and David P. Whittingham.

- The Philippine investors nominated 6, 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.

ASI representative appealed 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 ASI representative, Mr. Jaqua protested the decision of the Chairman and announced that all votes accruing to ASI shares, a total of 1,329,695 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 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. 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. 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, with the explanation that there was a tie among the other 6 nominees for the 4 remaining positions of directors and that the body decided not to break the tie.

These incidents triggered off the filing of separate petitions by the parties with SEC.

- The first petition filed was for preliminary injunction by Saniwares, Emesto V. Lagdameo, Baldwin Young, Raul A. Bonean Ernesto R. Lagdameo, Jr., Enrique Lagdameo and George F. Lee against Luciano Salazar and Charles Chamsay.

- 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 and Avelino F. Cruz.

The two petitions were consolidated and tried jointly.

SEC uphold the election of the Lagdameo Group and dismissed the quo warranto petition of the ASI Group and Salazar.

CA amended the decision. It directed that in all subsequent elections for directors of Saniwares, ASI cannot nominate more than 3 directors; that the Filipino stockholders shall not interfere in ASI's choice of its 3 nominees; that, on the other hand, the Filipino stockholders can nominate only 6 candidates and in the event they cannot agree on the 6 nominees, they shall vote only among themselves to determine who the 6 nominees will be, with cumulative voting to be allowed but without interference from ASI.

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The ASI Group and Luciano Salazar's Contention:

- 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. Number 16 under the Agreement's Miscellaneous Provisions states:

c)            nothing herein contained shall be construed to constitute any of the parties hereto partners or joint venturers in respect of any transaction hereunder.

-Also, ASI Group has the right to vote their additional 10% 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.

Lagdameo and Young Group's Contention:

- 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 (A1370, NCC). 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 (A1374).

- Moreover, in order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. (A1371).

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Issue 1 of 2: Who were the duly elected directors of Saniwares for the year 1983 during its annual stockholders' meeting held on March 8, 1983.

Held:  the Lagdameo Group

(1) What is the nature of the business established by the parties - a joint venture or a corporation

Held: Joint Venture

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.

The Agreement as well as the testimonial evidence presented 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, 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.

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.

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.

Issue 2 of 2:  WON the ASI Group may vote their additional 10% equity during elections of Saniwares' board of directors.

Held:  No.

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 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. 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. 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. (A1783, NCC). 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.

Moreover, the usual rules as regards the construction and operations of contracts generally apply to a contract of joint venture.

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:

... 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.

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.

 

 

 

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[1]. Cumulative voting is a type of voting system that helps strengthen the ability of minority shareholders to elect a director. This method allows shareholders to cast all of their votes for a single nominee for the board of directors when the company has multiple openings on its board. In contrast, in "regular" or "statutory" voting, shareholders may not give more than one vote per share to any single nominee. For example, if the election is for four directors and you hold 500 shares (with one vote per share), under the regular method you could vote a maximum of 500 shares for each one candidate (giving you 2,000 votes total—500 votes per each of the four candidates). With cumulative voting, you are afforded the 2,000 votes from the start and could choose to vote all 2,000 votes for one candidate, 1,000 each to two candidates, or otherwise divide your votes whichever way you wanted