AURBACH v. SANITARY WARES MANUFACTURING CORP.

(SANIWARES)*
TOPIC: A corporation is without capacity/power to enter into a
15 Dec 1989 G.R. No. 75875 Gutierrez, Jr., J.
contract of partnership because – but may enter into a JV –
SUMMARY: At the 1983 Saniwares stockholders' meeting, 2 groups (ASI group/foreign stockholders,
Lagdameo group/Filipino stockholders) could not agree on the manner of voting in the BOD elections.
Each group declared its own set of directors. Affirming the SEC, SC held that the enterprise was a JV,
not a corporation (I think, hence the rules on partnership, not the Corporation Code, apply). Filipino
investors' majority status should be maintained in view of the requirements of public policy.
NATURE: Two consolidated petitions seeking review of the amended CA decision.
*NOT SURE if I understood the case correctly. SC kept quoting the SEC/CA decisions without really explaining anything.
• Aug. 1962 - Delaware corp. American Standard Inc. (ASI), Saniwares, and Filipino investors entered into
an Agreement: ASI and investors agreed to participate in the ownership of an enterprise engaged in
manufacturing vitreous china and sanitary wares in PH, selling in PH and abroad.
o Operations in PH shall be carried on by an incorporated enterprise and the name of the
corporation shall initially be "Sanitary Wares Manufacturing Corporation".
• Relevant provisions of the Agreement (re: nomination and election of directors):
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;
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.
• At ASI's request, Agreement contained provisions protecting it as a minority group, including grant
of veto powers over a number of corporate acts and right to designate certain officers.
• ASI's 30% capital stock was increased to 40%. The corporation was registered with the BOI for
availment of incentives with condition: at least 60% of capital stock shall be owned by PH nationals.
• Business prospered but the relations between parties deteriorated. Filipino group wanted to expand
the export operations; ASI objected as it had other subsidiaries/ JV groups in the proposed countries.
• Mar. 1983 - Annual stockholders' meeting; elections were held, chaired by Baldwin Young. Nominees:
o ASI (3): Wolfgang Aurbach, John Griffin, and David Whittingham.
o Fil. investors (6): Ernesto Lagdameo Sr. & Jr., Enrique Lagdameo, Raul Boncan, George Lee, and Young.
o Eduardo Ceniza then nominated Luciano Salazar, who in turn nominated Charles Chamsay.
o Chairman Young ruled the last 2 nominations out of order based on §5(a) of the Agreement +
consistent practice of nominating only 9 persons for the 9-member BOD, + legal counsel's advice.
o Heated arguments ensued. Votes were cast for the different nominees including Salazar and
Chamsay. Chairman nevertheless instructed the Secretary to cast all votes equally in favor of the
first 9. Meeting was adjourned. Chairman threatened to have protesters bodily thrown out.
o ASI Group, Salazar, and other stockholders allegedly representing 53-54% of the shares of
Saniwares decided to continue the meeting at the elevator lobby.
§ ASI nominated Aurbach, Griffin, Whittingham, and Chamsay. Salazar voted for himself. These 5
were certified as elected directors by the Acting Secretary Andres Gatmaitan.
• These incidents triggered separate petitions filed at SEC (both sets claiming to be legitimate directors).
1. Preliminary injunction by Saniwares, Lagdameo, et al. vs. Salazar and Chamsay
2. Quo warranto and application for receivership by the Aurbach group vs. the Lagdameo group
• SEC upheld the election of the Lagdameo group; dismissed the quo warranto petition. Affirmed by
SEC en banc. (Note: cases were consolidated and jointly heard.)
• IAC remanded to SEC with directive that a new stockholders' meeting be ordered convoked ASAP.
• On MR, CA upheld the SEC and directed: In all subsequent elections, ASI cannot nominate more than
3 directors; Filipino stockholders shall not interfere in ASI's choice; Filipino stockholders can nominate
only 6 (if they cannot agree on the 5, they shall vote among themselves, with cumulative voting to be
allowed but without interference from ASI).
VILLARAMA, BIANCA DANICA S. PAGE 1 OF 3 CASE # 14
AURBACH GROUP ARGUES: The Agreement should be construed strictly. Agreement clearly shows
intent to form a corporation, not a JV. Admission of evidence showing the intention to form a JV
violates the parol evidence rule (Rule 130, §7). CA prohibited stockholders from exercising their full
voting rights represented by number of shares, amounting to a deprivation of property rights without
due process of law (basically, they should be allowed to use their cumulative voting rights in the
corporation as a whole, not just within their group as foreign stockholders).
LAGDAMEO GROUP ARGUES: Agreement failed to state parties' true intent. Parties intended to enter
into a joint venture (JV) enterprise. CA did not categorically rule that they (Lagdameo et al.) were
the duly elected directors. Also, cumulative voting should be struck down; the Agreement uses
"designate", hence the 6 directors allotted to the Fil. stockholders should be selected by consensus.

MAIN ISSUE: Who were the duly elected directors of Saniwares for 1983? To answer, we must determine:
1. Nature of the business: JV or corporation? (Note: I think this is important in order to determine what rules on voting will apply.)
2. W/N the ASI group may vote their additional 10% equity during elections of Saniwares' BOD

(1) What is the nature of the business? ⇒ JOINT VENTURE

• Rule: Type of contract depends on their actual intention, which is determined in accordance with the
rules governing the interpretation and construction of contracts.
• Re: parol evidence rule, SC cited US cases ruling that 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 to create a joint adventure/ some other relation is a question of fact for the jury.
• 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 JV
and not a corporation. History of organization of Saniwares and the unusual arrangements
governing its policymaking body are all consistent with a JV and not an ordinary corporation.
• SEC noted: Participants in a JV deviate from the traditional pattern of corporation management. A
noted authority has pointed out that just as in close corporations, shareholders' agreements in JV
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
o SEC found that (1) under the Agreement, there are two distinct groups in Saniwares: ASI (owns
40% of capital stock), and the PH National stockholders (own 60%); and (2) ASI is given certain
protections as the minority stockholder.
o §5 (a) of the uses the word "designated" and not "nominated"/"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.
• ASI in its communications referred to the enterprise as a JV.
• Young testified that §16(c) of the Agreement saying "Nothing herein contained shall be construed to
constitute any of the parties hereto partners or joint venturers" was merely to obviate the possibility
of the enterprise being treated as partnership for tax purposes and liabilities to third parties.
• Filipino entrepreneurs often need the assistance of multinational corporations. Arrangement: foreign
group becomes minority owner. Danger: foreign group merely uses JV to gain foothold/ test PH
waters. When business becomes profitable, the foreign group undermines the local majority
ownership and tries to take over the company. Courts should extend protection especially in
industries where constitutional and legal requirements reserve controlling ownership to Filipinos.

Not in the case but helpful for the next parts:

CUMULATIVE VOTING – in corporations, a system of voting for directors in which the shareholder can multiply his voting shares by
the number of candidates and vote them all for one person for director. This is intended to give minority shareholders a chance to
elect at least one director whom they favor. For example, if there are five directors to be elected, and 10,000 shares issued, a
shareholder with 1,000 shares could vote 5,000 for his candidate rather than being limited to 1,000 for each of the five candidates,
always outvoted by shareholders with 1,001 or more shares (Hill & Hill, 2005).
VILLARAMA, BIANCA DANICA S. PAGE 2 OF 3 CASE # 14
(2) W/N the ASI group may vote their additional equity during elections⇒ NO.
• CA correctly stated: Minority position of ASI and the contractual allocation of board seats cannot be
disregarded. Rights of the stockholders to cumulative voting should also be protected. Proper and just
solution to give due consideration to both factors: Court should recognize and uphold the division
of the stockholders into 2 groups, and also uphold the right of the stockholders within each
group to cumulative voting to determine who the group's nominees would be.
o e.g. If Filipino stockholders cannot agree on their 6 nominees, a vote will be taken among the
Filipino stockholders only. Here, each Filipino stockholder can cumulate his votes. ASI should not
be allowed to interfere in this voting, otherwise ASI would be able to designate more than 3
directors and may even get a majority of the board seats.
o This ruling will also give due consideration to the issue raised on the possible violation of the Anti-
Dummy Law (Comm. Act. No. 108) and the nationalization requirements of the Consti and laws.
• ASI and Salazar claim they have a right to vote their additional equity under §24 of the Corporation
Code. The question is W/N this provision applies to a JV with clearly defined agreements:
o Joint venture - common law origin. No precise legal definition but generally understood to mean
an organization formed for some temporary purpose. It is in fact hardly distinguishable from a
partnership, since their elements are similar: community of interest in the business, sharing
of profits and losses, and a mutual right of control.
o Main distinction in common law: Partnership contemplates a general business with some degree
of continuity, while JV is formed for the execution of a single transaction, thus temporary. This
distinction is not entirely accurate here because under CC Art. 1783, a partnership may be
particular/universal, and a particular partnership may have for its object a specific undertaking.
o It would seem that under PH law, a JV is a form of partnership and should thus be governed
by the law of partnerships. SC has however recognized a distinction: although a corporation
cannot enter into a partnership contract, it may however engage in a joint venture with
others (Tuazon v. Bolaños, Campos and Lopez commentary on the Corporation Code).
• To allow ASI to vote additional equity would obliterate their minority status. Equally important
consideration: Possible violation of the nationalization requirements in Consti, Anti-Dummy Act.
• We affirm the decisions of the SEC, impliedly affirmed by the CA: the duly elected directors of
Saniwares are the first 9 nominees.

Cumulative Voting
• Lagdameo group objects to cumulative voting and submits that the 6 directors allotted to the Filipino
stockholders should be selected by consensus because §5(a) uses "designate". They also stress the
possibility that ASI would take control of their enterprise if Filipino stockholders are allowed to select
their nominees separately and not as a common slot determined by the majority of their group.
o Use of "designate" should not be interpreted in isolation. CA correctly upheld the SEC: §5(a) relates
to manner of nominating; §3(a)(1) relates to manner of voting.
o Insinuation that ASI might take control cannot be ignored. Validity of cumulative voting depends
on directors being genuine members of the Filipino group (not voters whose interest is to increase
the ASI share in Saniwares). JV character of the enterprise must always be taken into account.
o Cumulative voting may not be used as a device to enable ASI to achieve indirectly what they
cannot accomplish openly. There are substantial safeguards in the Agreement intended to
preserve the majority status of Filipino investors as well as to maintain the minority status
of the foreign investors. These should be maintained.

⇒ CA decision modified in that Aurbach, Griffin, Whittingham, Ernesto Lagdameo Sr. and Jr., Enrique
Lagdameo, Boncan, Lee, and Young are declared the duly elected officers.

VILLARAMA, BIANCA DANICA S. PAGE 3 OF 3 CASE # 14