Aurbach v. Sanitary Wares Manufacturing Corp. (G.R. No. 75875)

AGENCY,  PARTNERSHIP  AND  TRUSTS  DIGESTS  (2013  –  2014)     G.R.  No.  75875                            December  15,  1989   WOLRGANG   AURBACH,   JOHN   GRIFFIN,   DAVID   P.   WHITTINGHAM   and   CHARLES  CHAMSAY,  petitioners,     vs.   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,  respondents.     G.R.  No.  75951                            December  15,  1989   SANITARY   WARES   MANUFACTURING   CORPORATION,   ERNESTO   R.   LAGDAMEO,   ENRIQUE   B.   LAGDAMEO,   GEORGE   FL   .EE   RAUL   A.   BONCAN,  BALDWIN  YOUNG  and  AVELINO  V.  CRUX,  petitioners,     vs.   THE  COURT  OF  APPEALS,  WOLFGANG  AURBACH,  JOHN  GRIFFIN,  DAVID   P.   WHITTINGHAM,   CHARLES   CHAMSAY   and   LUCIANO   SALAZAR,   respondents.     G.R.  Nos.  75975-­‐76                          December  15,  1989   LUCIANO  E.  SALAZAR,  petitioner,   vs.   SANITARY   WARES   MANUFACTURING   CORPORATION,   ERNESTO   V.   LAGDAMEO,   ERNESTO   R.   LAGDAMEO,   JR.,   ENRIQUE   R.   LAGDAMEO,   GEORGE  F.  LEE,  RAUL  A.  BONCAN,  BALDWIN  YOUNG,  AVELINO  V.  CRUZ   and  the  COURT  OF  APPEALS,  respondents.     CASE:    Sanitary  Wares  Manufacturing  Corporation  was  established  by  an   agreement   between   American   Standard   Inc.   (ASI)   and   a   group   of   Philippine   Investors.   Section   3(a)   of   their   Agreement   provides   for   cumulative   voting   of   the   directors.   Section   5(a)   provides   that   ASI   will   designate   3   directors,   and   the   Philippine   Investors   will   designate   6   directors.  In  light  of  their  minority  status,  the  ASI  asked  for  provisions  to   protect  them  as  a  minority  group.  Later,  the  ASI  shares  increased  from   30%  to  40%.      

 

 

 

             ATTY.  JOAQUIN  OBIETA  

At   the   annual   stockholders   meeting   in   1983,   disagreement   arose   after   two   directors   nominated   for   the   Philippine   Investors   were   struck   out   since   6   were   already   voted   for.     ASI   then   claimed   that   since   they   had   40%  of  shares,  their  cumulative  voting  power  allowed  to  them  vote  for  a   4th  director,  and  thus  supported  Chamsay  who  was  one  of  the  2  names   struck  out.  This  was  denied  by  Chairman  Young  who  then  adjourned  the   meeting.  ASI,  along  with  Luciano  Salazar  and  other  Philippine  Investors   (whose  total  shares  were  equivalent  to  53-­‐54%)  voted  for  5  directors  (4   by  ASI  and  Salazar)  in  a  meeting  held  by  the  elevator  lobby.     This   consists   of   three   petitions   consolidated   and   tried   together.   Both   the   Lagdameo   group   (those   who   were   voted   DURING   the   stockholders   meeting)   and   Salazar’s   group   (those   who   were   voted   at   the   elevator   lobby   meeting).   The   Supreme   Court   ruled   that   the   Lagdameo   group   were  duly  elected  board  of  directors,  and  said  that  since  the  Agreement   clearly   states   the   manner   of   voting   for   directors,   ASI   cannot   claim   to   have  the  power  to  designate  4  directors  when  they  were  only  allowed  3.   The   ASI   cannot   claim   that   cumulative   voting   should   be   applied   due   to   their   corporate   character,   because   Saniwares   is   clearly   a   joint   venture   and  not  an  ordinary  corporation.  As  such,  the  cumulative  voting  rule  of   Section   3(a)   is   applicable   only   within   the   group   (e.g.   amongst   the   Philippine   Investors   choosing   their   6   members),   and   not   amongst   both   groups.   To   rule   otherwise   would   be   to   allow   the   ASI   to   circumvent   their   minority  status,  which  the  parties  had  agreed  on.     BACKGROUND:   !  1961  !  Saniwares,  a  domestic  corporation  was  incorporated  to   manufacture   and   market   sanitary   wares.   One   of   the   incorporators,   Mr.   Baldwin   Young,   went   abroad   in   search   of   foreign  partners  to  help  in  expansion.   ! August   15,   1962   !   American   Standard   Inc.   (ASI)   entered   an   agreement  with  Saniwares  and  some  Filipino  investors  whereby   ASI   and   the   Filipino   investors   agreed   to   participate   in   the   ownership  of  Sanitary  Wares  Manufacturing  Corporation  which   would  engage  primarily  in  the  business  of  manufacturing  in  the  

  RACHELLE  ANNE  GUTIERREZ  

AGENCY,  PARTNERSHIP  AND  TRUSTS  DIGESTS  (2013  –  2014)     Philippines   and   selling   here   and   abroad   vitreous   china   and   sanitary  wares.   o Section   3(a)   (Article   of   Incorporation)   of   their   Agreement  provides  for  cumulative  voting  for  directors.   o Section   5(a)   (Management)   provides   that   the   Board   of   Directors  will  be  composed  of  3  members  designated  by   ASI  and  6  members  designated  by  other  stockholders.   ! At   the   request   of   ASI,   the   agreement   contained   provisions   designated  to  protect  it  as  a  minority  group,  such  as:   o Veto  power  over  a  number  of  corporate  acts   o Right  to  designate  certain  officers  such  as  a  member  of   the   Executive   Committee   whose   vote   was   required   for   important  corporate  transactions.   ! Later  the  30%  shares  of  ASI  was  increased  to  40%.   “Deterioration  of  the  initially  harmonious  relations”  begins…   • March   8,   1983   !   the   annual   stockholder’s   meeting   was   held   and  presided  by  Chairman  Baldwin  Young.   o ASI   group   nominated:   Wolfgang   Aurbach,   John   Griffin   and  David  P.  Whittingham   o Philippine   investors   group   nominated:   Ernesto   Lagdameo,   Sr.,   Raul   Boncan,   Ernesto   Lagdameo,   Jr.,   Enrique  Lagdameo,  George  F.  Lee,  and  Baldwin  Young.   • THEN  Eduardo  Ceniza  nominated  Luciano  E.  Salazar,  who  in  turn   nominated   Charles   Chamsay.   These   two   were   struck   down   by   Baldwin   Young   on   the   basis   of   Section   5(a)   of   the   Agreement,   resulting  in  protests  and  heated  arguments.   • Chairman  Young  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   • ASI  representative,  Mr.  Jaqua,  protested  and  said  that  all  the  ASI   shares   were   being   cumulatively   voted   for   the   3   ASI   nominees   AND   Charles   Chamsay.   Luciano   E.   Salazar   and   other   proxy   holders  said  that  all  their  votes  (according  to  their  shares)  were   being  voted  cumulatively  in  favor  of  Luciano  E.  Salazar   • Nevertheless,  Chairman  Young  stuck  to  his  first  instruction.  

 

 

 

             ATTY.  JOAQUIN  OBIETA  

After  the  meeting  was  adjourned  under  protest,  The  ASI  group,   Luciano  E.  Salazar  and  other  stockholders  allegedly  representing   53-­‐54%   of   Saniware   shared   continued   the   meeting   at   the   elevator   lobby   where   (on   the   basis   of   the   cumulative   votes   case   in   the   earlier   meeting)   ASI   voted   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   6   nominees   for   the   4   remaining   positions   of   directors  and  that  the  body  decided  not  to  break  the  tie.   Petition  in  the  Securities  and  Exchange  Commission  (SEC)   • Two  petitions  were  filed  in  the  SEC  by  two  groups  claiming  to  be   legitimate  directors  of  the  corporation:   o Preliminary   Injunction   !   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   o Quo   warranto   and   application   for   receivership   !   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   by   a   hearing  officer  who  upheld  the  election  of  the  Lagdameo  group.   • SEC  en  banc  affirmed.   Intermediate  Appellate  Court   • Two  separate  appeals  were  filed.   • The  Court  ordered  the  case  remanded  to  SEC  with  the  directive   that   a   new   stockholders'   meeting   of   Saniwares   be   ordered   convoked   as   soon   as   possible,   under   the   supervision   of   the   Commission.   Court  of  Appeals   • Lagdameo  Group  filed  for  a  motion  of  reconsideration,   • Court   of   Appeas   upheld   the   election   of   the   respondents   (Lagdameo  group).     •

  RACHELLE  ANNE  GUTIERREZ  

AGENCY,  PARTNERSHIP  AND  TRUSTS  DIGESTS  (2013  –  2014)     •

 

Petitioners  now  question  this  decision  adding  that:   o The  CA  prohibits  the  stockholders  from  exercising  their   full   voting   rights   as   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.   o The   CA   imposes   conditions   and   reads   provisions   into   the   agreement   of   the   parties   which   were   not   there,   which  action  it  cannot  legally  do.  

  ISSUES  TO  BE  RESOLVED:   1. Whether   or   not   the   Lagdameo   group   was   duly   elected   as   directors   of   Saniwares   for   the   year   1983   during   the   March   8,   1983  annual  stockholders  meeting.   a. Whether   or   not   the   nature   of   the   business   was   a   joint   venture  or  a  corporation   b. Whether   or   not   the   ASI   Group   may   vote   their   additional   10%  equity  during  elections  of  Saniwares.     RESOLUTIONS  AND  ARGUMENTS   ISSUE   1   !   Whether   or   not   the   Lagdameo   group   was   duly   elected   as   directors   of   Saniwares   for   the   year   1983   during   the   March   8,   1983   annual   stockholders   meeting.   !   YES.   The   Court   uphold   their   election   as   board  of  directors  of  Saniwards  for  1983.     Major   Point   1:   Whether   or   not   the   nature   of   the   business   was   a   joint   venture   or   a   corporation   !   Saniwares   is   a   joint   venture   as   proven   by   the   presence   of   two   distinct   stockholder   groups,   and   as   evidenced   by   contracts  of  the  parties.   • 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.  

•

 

 

             ATTY.  JOAQUIN  OBIETA  

Personal  Note:  In  this  case,  they  held  the  acts  of  the  parties  are   indicators  of  their  intentions.   o The  provisions  of  the  Agreement  does  not  preclude  the   existence  of  two  distinct  groups  of  stockholders:  ASI  as   the   minority   and   the   Philippine   Investors   as   the   majority.   o As   the   SEC   Hearing   Officer   held:   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.   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.   o An   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.   (See   third  bullet  in  “Background)   o Moreover,   ASI   in   its   communications   referred   to   the   enterprise  as  a  joint  venture.   o Side  Note:  Baldwin  Young  testified  that  Section  16(c)1  of   the  Agreement  that  "Nothing  herein  contained  shall  be  

                                                                                                                1

 Section  16(c)  –  Miscellaneous  Provisions   x  x  x  

  RACHELLE  ANNE  GUTIERREZ  

AGENCY,  PARTNERSHIP  AND  TRUSTS  DIGESTS  (2013  –  2014)     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.     Major  Point  2:  Whether  or  not  the  ASI  Group  may  vote  their  additional   10%   equity   during   elections   of   Saniwares.   !   NO.   The   extent   of   ASI’s   participation  in  the  management  of  the  corporation  is  spelled  out  in  the   Agreement.   They   cannot   be   allowed   to   interfere   under   the   guise   of   cumulative   voting,   for   to   allow   the   ASI   Group   to   vote   their   additional   equity   to   help   elect   even   a   Filipino   director   (who   would   then   be   beholden   to   them)   would   obliterate   their   minority   status,   which   had   been  agreed  upon  by  the  parties.   • 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.     • 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  order  to  unite  the  two  in  this  case,  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.    

 

 

 

             ATTY.  JOAQUIN  OBIETA  

FINAL  VERDICT:  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.     NO  SEPARATE  OPINIONS    

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

 

RACHELLE  ANNE  GUTIERREZ