J. Romero and Associates Inc., et al. vs. Jose Ma. Santamaria

[SEC-SICD * CASE NO. 3619. March 31, 1992.] J. ROMERO AND ASSOCIATES INC.,ET AL. , plaintiffs , vs .JOSE MA. SANTAMARIA , respondent . D E C I S I O N This is an action to declare the sale of one (1) share of stock of the Manila Golf and Country Club by and between J. Romero & Associates, Inc., and Jose Ma. Santamaria as violative of Sec. 32 of the Corporation Code. LexLib In support thereof, petitioners J. Romero & Associates, Inc. (hereinafter referred as JRAI),Antonio Ortigas, Iaki Ortigas, Iciar Ortigas, Mikel Ortigas and F. Ortigas Securities, Inc.,averred, inter alia, that JRAI is the owner of one (1) share of stock of Manila Golf and Country Club (MGCC, for brevity);that respondent Jose Ma. Santamaria (respondent Santamaria, henceforth),as president of JRAI, took undue advantage of his control of the majority interest therein and cause to be sold unto himself the MGCC share for the amount of P500,000.00, on installment basis, the first payment of P250,000.00 on 9 August 1988 and the balance on 30 September 1988; and that the sale was executed unfairly and at a giveaway price when at the time of the sale the commanding price was P1 million per share. Respondent Santamaria, in his responsive pleading contended that the petition states no cause of action in that (a) petitioners did not allege with particularity why the sale of the shares was not fair and reasonable, and that (b) petitioners did not exhaust all intra-corporate remedies prior to the filing of the action; that petitioners are guilty of laches and or in estoppel; that petitioners have no cause of action; that respondent acted in good faith observed honesty at all times material to this petition; that his purchase of the MGCC share of JRAI is fair and reasonable, duly approved by the regular Board Meeting held on 29 April 1988, which shares of the MGCC were being sold at approximately the same price; that as president he is principally responsible for JRAI's growth and development; that respondent has complied with all legal requirements in respect of the sale of the share; and that petitioners have come to court with unclean hands. The sole issue and basis of contention between the parties, as borne out during the Preliminary Conference of 29 September 1989, revolves on whether or not the sale of the MGCC share between JRAI and respondent Santamaria is fair and reasonable. After a review and perusal of the evidence presented before US, as well as, the allegations and arguments of the respective parties in all their pleadings filed before this Commission, and upon due and mature deliberation, this Hearing Panel is of the opinion and so holds that the petitioners are entitled to relief. It is by no means entrenched in jurisprudence that directors of a stock or a non-stock corporation in relation to the corporation is spoken of, and is essentially, that of trustees and cestui que trust. In the broadest application of law, directors are held to be agents of the corporation. In running the affairs or in the operation of the business and the management thereof, officers and directors stand in a fiduciary relation to the shareholders and the corporation, thus, must exercise not only care and diligence but owe undivided loyalty and a standard of behavior above the ordinary (Legarda vs. La Previsora, G.R. No. 44451, December 16, 1938, 66 Phil. 723) In application of the preceding paragraph, we find the respondent wanting of such capacity as shall be discussed hereunder. Petitioner JRAI owned one (1) share of stock of the MGCC, whose main purpose for the acquisition of the same is for the sole use of any incumbent president of JRAI, in furtherance of the corporation's business concerns. As the corporation's president, respondent Santamaria availed of the use and amenities provided by the company share with the apprehension that as soon as his term of presidency shall be over and with an eye on the chairmanship of the board, his privilege and use of the MGCC share shall likewise be ended (TSN, 19 October 1989, page 11 and 10).Respondent's aspiration in owning a share of stock of MGCC leads him to the acquisition of JRAI's share of MGCC. When presented as witness, respondent Santamaria's credentials as a businessman with impeccable record and of repute, possessing a keen business acumen in the field of advertising, was brought to bear. It is certainly not in keeping with the intelligence and business sense of the respondent, who read too many newspaper including the newspaper which runs both the JRAI advertisements and the Francisco V. del Rosario's ads of the buying and selling rates of different country club shares, to inquire only with the Club (MGCC) and its members and disregard other information. We tend to believe otherwise. As a businessman, logically, the respondent would certainly cover all aspects in buying a MGCC share, its current buying and selling prices (TSN, 19 October 1989, pages, 57, 91 and 92),the cash payment involve, and or whether buying a share would be profitable or not. Most decidedly, respondent did not plunge into the transaction for the sole purpose that the corporation is gaining profit therefrom or by reason of his enjoyment in playing golf alone. We viewed respondent's acquisition of the company's share motivated not only by personal profit, in achieving a low price for the share but also by paying for it in installment basis which he cannot accomplish to do if he would buy it from the club or from any member thereof. Withal, we are persuaded by the practicality of things, respondent being composite of the majority block of stockholders, that even if he does become the Chairman of the Board and his intention is only to continue enjoying his golf, he need not buy the JRAI's club share to pursue his pleasures of the game. Respondent's ascendancy and power over its officers as Chairman need not be overemphasized, and he can very well avail of the use/privilege of the company share allotted to the use of the president anytime he so desires. We perceive no predicament arising from such arrangement at present or in the future. In addition, respondent Santamaria testified that he bought the MGCC share on August 1988 at P500,000.00 at a time when the selling of the same ranged from P350,000.00 to P550,000.00 (TSN, 19 October 1989, p. 66).Why he paid less than the price ranges of P550,000.00 or did not exceed the quoted price range if the profit to the corporation is the intention behind the purchase of club share is a subject of inquiry which respondent never satisfactorily laid to rest. A fortiori, a rebuttal of the above testimony by the representative of Francisco del Rosario, a firm engaged in brokering different country club shares, that in the month of April 1988 (or 4 months before the purchase of club share by respondent),there were interested buyers of MGCC shares for P800,000.00 per share, yet no one was willing to sell at such prices; and that in June 1988 (or 2 months before the contested sale) a MGCC share was sold for P1 million (TSN, 20 October 1989, pp. 17, 18, 19 & 20),clearly evince the correct price quotation in the market which respondent was not able to defeat with a superior proof. prcd On the above basis alone, we could safely conclude that the consideration of the sale was below what JRAI could have gotten if it had sold its share to a third person instead of the respondent, and derived profit thereby. It is noteworthy to mention that the Board of Directors that approved the sale of MGCC share to respondent Santamaria, consisted of nine (9) members, and the six (6) members therein consisted of the respondent himself, his wife, his 2 sisters and children or other close relatives. From all human consideration and by proximity of relationship, it is patent that respondent has the control of the majority interest in the corporation, hence could persuade and influence the approval of the sale by the Board, notwithstanding his non-participation in the voting therein (TSN, 19 October 1989, pages 89, 90 and 91). Apart from all the foregoing discussion, respondent offered no tangible evidence for this Hearing Panel to appreciate his position that fairness and reasonableness had governed the Contract of Sale of the MGCC share; and that he did not exert his influence and control of majority interest of the Board to obtain the required approval of the contract, considering that the burden of proof in proving fairness in the transaction now being disputed lies with the respondent. The due importance and weight of authorities prevailing, which this Commission takes cognizance of, the mere presence of a director (the respondent herein) at a board meeting at which the approval of the transaction with him is to be voted upon will not affect the validity of that transaction, provided the rest of the Board, constituting a sufficient majority, acted in good faith in the interest of the corporation, with a full knowledge of his interest and free from his control or influence (Steven 684, as cited in Agbayani Comments and Jurisprudence on the Commercial laws of the Philippines, page 279). Respondent is obliged to show Us that he had acted candidly, with fairness in dealing with the corporation and "without taint of selfish motives" (Mead v. McCullough, G.R. No. 6217, December 26, 1911, 21 Phil., 95) or personal gain. It is extent in this Forum that a corporate officer acts in a fiduciary capacity and cannot profit at the expense of the corporation (Legarda vs. La Previsora, supra ;Smith vs. Robinson, 343 F2d 793; 3 Fletcher 156),and respondent who is both the president and director occupies fiduciary position and is bound to act in utmost good faith. (Kahle vs. Stephen, 214 Cal 89, 4 P2d 145; 3 Fletcher 157). From this vantage view, the application of the foregoing jurisprudence to the case at bar leaves no room for doubt in the minds of this Hearing Panel that the contract is in contravention to the provisions of Section 32 of the Corporation Code. PREMISES CONSIDERED, judgment is hereby rendered in favor of the petitioners and against the respondent, Jose Ma. Santamaria, a) Declaring the transaction entered into by and between Petitioner J. Romero and Associates, Inc. and Respondent Santamaria, VOID, it being a direct contravention of Sec. 32 of the Corporation Code; and b) Ordering respondent to pay Petitioners the sum of P100,000.00 as attorney's fees. NO PRONOUNCEMENT AS TO COSTS. SO ORDERED. (SGD.) YSOBEL S. YASAY-MURILLO Hearing Officer (Retired as of 27 March 1992) FELIPE S. TONGCO Hearing Officer