Arcco Corporation vs. Florencio B. Santos

[SEC-SICD * CASE NO. 3936. September 3, 1992.] ARCCO CORPORATION , complainant , vs .FLORENCIO B. SANTOS , respondent . D E C I S I O N This is a complaint filed on January 25, 1991 by ARCCO Corporation against Florencio B. Santos for violations of Section 31 and 34 of Batas Pambansa Blg. 68, otherwise known as "The Corporation Code of the Philippines." prLL In support thereof, complainant alleged, among other things, that it is a corporation duly organized and existing under and by virtue of Philippine laws with office address at Mantrade Building, EDSA corner Pasong Tamo, Makati, Metro Manila; that respondent is of legal age, married and a resident of 113-A Mejia St., Santolan, Pasig, Metro Manila; that respondent was one of the incorporators of the complainant owning twenty percent (20%) of the complainant's initial capital and occupying the positions of Chairman of the Board and Technical and Marketing Director; that while the respondent was holding the aforestated positions, he established surreptitiously a company named Research and Technology Sales Development Corporation (RESTECH for brevity) to engage in the same line of business as the complainant; that after the formation of the competing company RESTECH and his diversion of business opportunities to RESTECH, the respondent deliberately neglected his duties in the complainant; that realizing that the respondent was wrecking complainant's business by the former's prolonged absences and tardiness, and general indifference to his job, the latter formally declared the vacancy of the positions held by the respondent; that investigations conducted by the complainant led to its discovery of the respondent's participation in RESTECH, and his active promotion of RESTECH business, and the loss of business opportunities to the complainant that were given to RESTECH; that when respondent was confronted and asked by complainant to render an accounting of his share in RESTECH's income that are due, by law, to the complainant, the respondent chose to pick a fight by demanding that the complainant expose its books of accounts and other company papers to him so that he can determine the price at which he will sell his shares; that complainant told the respondent that he was obliged by Law (Section 31 and 34, Corporation Code) to make restitution and compensation to the complainant for his disloyalty, perfidy and damage; that it also informed the respondent that it had no right to gain access to the company as it would only further the evil design that it has embarked upon, and that due to respondent's refusal to make amends for his misdeeds, and instead declares his malevolent intentions towards the complainant, the latter was constrained to engage the services of counsel. Although the respondent has filed his answer, preliminary conference brief, and attended the preliminary conference and several hearings for the reception of the complainant's evidence, he did not present any evidence in support of his claims or defenses despite ample opportunity given him to do so. As culled from the records, evidence adduced by the complainant disclosed that complainant, ARCCO Corporation, is a stock corporation existing and duly registered with this Commission on July 1, 1982 with the primary purpose of "To carry on a general merchandising or commercial business, either as a wholesaler and/or retailer, and deal in all kinds of goods, products, wares, commodities of all kinds or natures, particularly but not limited to ARCCO Chemicals and its allied lines and other chemicals used in industries. And for this purpose, perform commercial and industrial services, require, construct, operate and maintain plants, mills, works, which may be used in the manufacture of desirable products." and RESTECH is a stock corporation, existing and duly registered with this Commission on October 3, 1988 with the primary purpose of "To engage in the business of import, export and domestic trade of industrial chemical, general merchandise, industrial and agricultural goods of all kinds, types and nature for all markets, foreign or domestic; to act as commercial brokers, commission agents, factors and agents for manufacturers, buyers, sellers both foreign and domestic dealing in all kinds of chemicals, general merchandise, industrial and agricultural goods for all markets, foreign and domestic. Respondent Florencio B. Santos is a stockholder of both Corporations having subscribed 5,000 shares in ARCCO Corporation and 67,000 shares in RESTECH Corporation. While respondent was still the Chairman of the Board and Technical and Marketing Director of ARCCO Corporation in 1988, he was also an incorporator, director and President of RESTECH when it was incorporated in 1988. From December 15, 1988 up to May 15, 1989, the respondent went on continued absence without leave. On January 11, 1989, the respondent, together with his friends, came to the complainant's office and retrieved his desk and other personal things. On May 15, 1989, the respondent wrote the complainant's Board of Directors confirming his resignation as Technical and Marketing Director of the complainant and demanded that he be furnished of Minutes of all Board of Meetings in 1988, Annual Stockholders Meeting and election of Officers on April 28, 1989 and Audited Financial Statement from January to April, 1989. Further, respondent had demanded to allow him to conduct an audit of the books of the corporation but which demand was denied for he was already considered as a "secret competitor" of the complainant. The witnesses presented by the complainants have testified that ARCCO corporation was primarily engaged in the manufacture and sale of metal preparation chemicals with respondent as the Technical and Marketing Director in charged of Product Development and Development of New Accounts. Basically, metal preparation chemicals are composed of four (4) products namely: degreaser, deruster, sinc phosphate, and chromic or acid rinse. These products were also produce and sold by RESTECH, the newly-formed corporation of the respondent. Immediately after the incorporation of RESTECH in 1988, the respondent, as its President, wrote several clients of the complainant offering the same products as those produced or manufactured by the complainant (Exhibits U to U-29).Consequently, some of the complainant's customers stopped transacting businesses with it and instead got their orders from RESTECH in the total amount of PPH=132,436.57 (Exhibits P, O, Q-1 to Q-29).As a result of the manipulations by the respondent, complainant sustained unrealized net profits equivalent to twenty percent (20%) of every sale of chemical made by RESTECH, (pp. 27, TSN, July 17, 1992) and complainant was constrained to hire the services of counsel in order to file and prosecute the above-entitled case at an agreed attorney's fees in the sum of P50,000.00. Section 31, B.P. Blg. 68 (The Corporation Code of the Philippines) provides: "SECTION 31. Liability of directors, trustees or officers . Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members or other persons. When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued the corporation." and Section 34, B.P. Blg. 68 provides, "SECTION 34. Disloyalty of a director . Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all such profits by refunding the same, unless his acts has been ratified by a vote of the stockholders owning or representing at least two-thirds of the outstanding capital stock. This provision shall be applicable, notwithstanding the fact that the directors risked his own funds in the venture. From the foregoing evidence adduced by the complainant, this Hearing Officer finds and so holds that respondent Florencio B. Santos has indeed violated the aforestated provisions of Batas Pambansa Blg. 68 (The Corporation Code of the Philippines). The respondent, being the Chairman of the Board and Technical and Marketing Director in-charge of product development of new accounts of the complainant, occupies a fiduciary relation to the corporation. In the performance of his duty, he is under obligation of trust and confidence to the corporation and its stockholders and must act in good faith and for the interest of the corporation. The standard of fiduciary obligation of the directors of corporations has been emphatically restated, thus: "A director is a fiduciary ... Their powers are powers in trust, ....He who is in such fiduciary position cannot serve himself first and his cestuis second. ..He cannot manipulate the affairs of his corporation to their detriment and in disregard of the standards of common decency. He cannot by the intervention of a corporate entity violate the ancient precept against serving two masters ....He cannot utilize his inside information and strategic position for his own preferment. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do so directly. He cannot use his power for his personal advantage and to the detriment of the stockholders and creditors no matter how meticulous he is to satisfy technical requirements. For that power is at all times subject to the equitable limitation that it may not be exercised for the aggrandizement, preference or advantage of the fiduciary to the exclusion or detriment of the cestuis." (Gokongwei vs. Securities and Exchange Commission, et al.,G.R. No. L-45911, April 11, 1979, citing Pepper vs. Litton, 308, U.S. 309, 84 L. ed. 281, 289-291). When respondent Florencio B. Santos became an incorporator, director and President of RESTECH on October 3, 1988, he was still the Chairman of the Board and Technical and Marketing Director of the Complainant up to May 15, 1989. Worse, he was not only remiss on his obligations as Chairman of the Board and officer of the complainant but he had succeeded in diverting the orders or purchases of the complainant's customers to the competitor, RESTECH. Surely, this actuation of the respondent is a breach of trust and confidence reposed on him by the complainant and its stockholders which the law abhors. Considering that the respondent was able to acquire or diver for himself, through RESTECH, a business opportunity or clients which should belong to the complainant, thereby obtaining profits to the prejudice of the complainant, he must account to the latter for all such profits by refunding the same, for his acts were not ratified by the complainant's stockholders. The complainant having been represented in the entire proceedings of this case by counsel, reasonable attorney's fees should be awarded. WHEREFORE, premises considered, decision is hereby rendered ordering respondent Florencio B. Santos to pay complainant the sum equivalent to twenty percent (20%) of the P132,436.57 sales of RESTECH by way of reimbursement of the unrealized profit of the complainant, and attorney's fees in the amount of fifty thousand pesos (P50,000.00). LexLib NO COSTS. SO ORDERED. (SGD.) ELPIDIO S. SALGADO Hearing Officer