In The Matter of Ayala Corp.

[In the Matter of Ayala Corporation. September 1, 1989.] R E S O L U T I O N Pending consideration by this Commission en banc are the Amended Articles of Incorporation and By-Laws of Ayala Corporation. Said amendments consist of the reduction of the number of the Board of Directors from eleven (11) to five (5) and that of the membership in the Executive Committee from five (5) to three (3),respectively. LLphil Facts on record show that on June 7, 1989, Ayala Corporation filed its amended articles of incorporation and by-laws proposing to reduce the number of the board of directors from eleven (11) to five (5) and that of the membership in Executive Committee from five (5) to three (3) members, respectively. On June 16, 1989, Ayala Corporation, in a letter, manifested that the amended articles and by-laws are "legitimate and valid exercise of the company's corporate powers as vested in the stockholders".It was further shown therein that the proposed amendments were approved on May 18, 1989, wherein a total of P916,326,945.00 worth of shares were voted by proxies which allegedly represent an attendance percentage of 93.09%. On June 20, 1989, Ayala Corporation, through counsel, further manifested in a letter that the proposed amendment was approved by the stockholders representing 87.3% of the total outstanding shares, which included all significant majority groups, except one who, duly notified of the meeting, sent a representative without proxy. No stockholder objected to or voted against the amendment. It was further alleged that Ayala Corporation being now a holding company, its corporate affairs could better be served with a lesser number of directors; that even with the right to cumulate, such does not vest a stockholder with the right to actually elect a director to office or even assure such stockholder representation in the board; that though the amendment diminishes the right of the minority stockholder, the diminution of the right does not make the amendment one for illegitimate purpose; that the amendment must be presumed legitimate; that the amendment does not violate the constitution, any statute, rule or regulation or morals; that to disapprove the amendment would deny Ayala Corporation the right to equal protection under the Constitution; and that the Commission can only disapprove said amendments in accordance with a previously promulgated and uniform rule that requires all other listed companies to fix their board to a particular size which it may consider to be most favorable to the minority stockholders. On June 20, 1989, the Commission received the letter dated June 19, 1989 of Tony O. King, President and General Manager of Armstrong Securities, expressing the objection to the above amendments on the ground that these amendments will prejudice and disenfranchise the minority stockholders' right to participate in the management of the company and that the approval of the same would set a discouraging precedent that might affect the future stock trading in the country. On June 21, 1989, the Commission issued a letter directing Ayala Corporation to submit within 10 days its answer/comment to the above letter-complaint. On June 27, 1989, another letter from Stella Abreu of Lanao Commodities was received by the Commission requesting for the disapproval of the proposed amendments considering that the same can be treated as a clear move of the Ayala Corporation management to reduce the participation of small and minority stockholders in the affairs of the company by preventing the election of "independent" directors. On the same date, Ayala Corporation replied to Mr. King's letter of June 20, 1989, alleging therein that the said complaint is frivolous and baseless and must be dismissed on the following grounds: 1. That Armstrong waived its right to object to the amendment by its absence at the stockholders' meeting notwithstanding due notice. Its right as stockholder does not entitle it to overturn what has been approved by the overwhelming majority; 2. That the amendment is valid since the stockholders have the right to vote their shares and to cumulate their votes for the purpose; That cumulative voting was never designed to give the minority stockholders some assurance of representation in the board; 3. That to strike down the amendment as immoral would require proof of some norm of conduct inconsistent with the amendment and social acceptance of such norm; 4. That the delegation authorized is revocable and will not deprive the stockholders the right to amend the by-laws; and 5. That the amendments are entitled to a presumption of regularity in the absence of any dissenting stockholder. Under the "business judgment rule" directors are presumed to have acted properly and in good faith and are called upon to account for their action only when they are shown to have engaged in self-dealing a fraud or to have acted in bad faith. And the Commission cannot look beyond the "interest reasonableness" of the amendment reducing the number of directors. prLL The issue here is whether or not the proposed amendments to the Articles of Incorporation and By-laws may be given due course. Anent thereto, the pertinent provision on the matter, Section 16 of the Corporation Code provides, thus: "SECTION 16. Amendment of articles of incorporation . Unless prescribed by this Code or by special law, and for legitimate purposes , any provision or matter stated in the articles of incorporation may be amended by a majority vote of the board of directors or trustees and the vote or written assent of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code, or the vote or written assent of two-thirds (2/3) of the members, if it be a non-stock corporation. xxx xxx xxx (emphasis supplied) It is evident from the quoted provision that ruling on the proposed amendment is not merely an exercise of ministerial function. Given board approval and stockholders' ratification (the required 2/3 votes), the Commission must be satisfied that the proposed amendments of the Articles of Incorporation are for "legitimate purposes" and that they do not violate the provisions of the Corporation Code or special laws, Section 17 of the Corporation Code enumerates other grounds for disapproval, among which being when: "The purpose or purposes of the corporation are patently unconstitutional, illegal, immoral or contrary to government rules and regulations;" To the extent that the Commission is, by duty, required to pass upon the legitimacy of purpose, or that the amendment does not fall under any of the grounds for disallowance enumerated in Section 17, other provisions of this Code or any special law, the matter of amendment required the exercise of discretionary power (Lamb v. Phipps, G.R. No. 7806, July 12, 1912, 22 Phil. 480) which the Commission must exercise (Pineta v. Hon Lantin, G.R. No. L-15350, November 30, 1962, 116 Phil. 1084). It can not be left entirely to the judgment of the Board even where it bears the ratification of at least two-thirds (2/3) vote of the stockholders' or members. To do otherwise would amount to abdication of duty, which this Commission is not disposed to do. To understand fully the implication of the proposed amendment requires a recital of some controlling facts: The Ayala Corporation is a corporation listed in the Stock Exchanges where its share are publicly traded. It is a publicly held corporation. By its very nature it is invested with public interest. As such, the requirements for public disclosure is far more stringent. Public listing is commenced with the filing of registration statement which, in so far as relevant in this case, requires the disclosure of vital information about the business, its officers and directors. The registration statement of Ayala Corporation shows that it will be governed by an 11-man board. This is a significant representation to the public. What business the corporation is engaged in, is as important as disclosure of opportunities open for minority representation in the board. With an 11-man board, as described in the registration statement, one needs only the support of a group holding TEN (10%) PERCENT of the stocks to be elected in the board, by cumulative voting. Supporting document shows that at the time the proposed amendment was approved, the following are the stockholders of the corporation, showing the percentage of ownership as reported by the corporation: LibLex AYALA CORPORATION PERCENTAGE OF OWNERSHIP BY STOCKHOLDERS' GROUP AS OF 08 MAY 1989 I. AYALA GROUP/FAMILY MEMBERS % TO TOTAL NO. OF OUTSTANDING NAME SHARES OF 985,244,368 TOTAL 1. Mermac, Inc. 579,268,020 58.7943 2. Consuelo Zobel Alger 49,639,330 5.0383 3. Jaime Zobel de Ayala 20,463,818 2.0770 4. Alejandro Zobel de 2,614,332 .2653 Padilla 5. Georgina Z. Padilla 3,689,347 .3745 de Macrohon 6. Enjay, Inc. 3,168,000 .3215 7. Consuelo Zobel Alger 49,639,330 5.0383 8. Beatriz M. de Zobel 11,812 .0012 9. Children of Jaime Zobel de Ayala & Beatriz M. de Zobel 82,684 .0084 10. Alfredo Melian 29,455 .0030 11. Sachiko M. de Zobel 1,384 .0001 12. J.R. McMicking 60 - 13. J.J. Nepomuceno 60 - 14. Ayala Employees Welfare & Retirement Fund 2,980,013 .0030 71.9249 II. MITSUBISHI GROUP 1. Mitsubishi Corp. 99,892,580 10.1389 2. Mitsubishi Estate Co. 59,935,467 6.0833 3. Mitsubishi Trust & Banking Corp. 9,989,661 1.0139 4. Mitsubishi Bank Ltd. 29,980,013 3.0416 20.2777 III. HENRY SY GROUP 1. Henry Sy 6,988,376 .7093 2. Shoemart, Inc. 56,177,270 5.7019 3. SM Investment Corp. 33,631 .0034 4. Hans Sy 31,440 .0032 6.4178 IV. OTHER GROUPS/INDIVIDUALS 1.3798 TOTAL 100.0000 It must be conceded that Mermac, Inc. owing 579,268,028 shares, representing 58.79% of the total outstanding shares is the majority stockholder of the corporation. Together with the rest of the Ayala / Zobel family, they represent 71.9249%.As against them, all the rest of the power groups hold only minority interest in the corporation. The amendment applied for has far-reaching implications. It will affect the rights not only of the present but also the future stockholders of the corporation. It may be argued that one controlling group may lose it to the present minority in the future who may also introduce amendments to restore the number to 11 directors by the same process of amendments. But this is better said than done since the overwhelming majority, at present, sees to it that the present minority will never have that chance. We must not overlook the interest of the minority no matter how miniscule the interest in the corporation might be. To the extent that such right is threatened the Commission must step in to thwart any attempt to undermine it. We view the proposed reduction as a rescission of the registration statement insofar as it virtually rules out minority representation in the proposed 5-man Board. There can be no doubt that the reduction of the number of the board of directors from eleven (11) to five (5) members would result in the "freezing out" of the minority: " . . . . the Code provides that the amendment be for a legitimate purpose, and certainly the purpose of "freezing out" the minority cannot be legitimate." (Campos and Lopez-Campos, Corporation Code, Comments, Notes and Selected Cases, p. 811). It has been generally recognized that there are equitable limitations on the exercise of the amendment power even when an amendment is adopted by the requisite statutory majority of shares, together with any required class vote. (Ballantine & Sterling, California Corporation Laws (p. 11-8). Even when an amendment has been regularly approved by the board of directors and by a majority shareholder or holders the relatively unlimited "contractual" right to amend the articles becomes subject to overriding equitable considerations if the majority has used its position without due regard to the interests of the minority stockholders. (Supra p. 11-9). This is in consonance with the fundamental principle in corporate law that the reserved power of a corporation to amend its charter must be so exercised that the result will tend to benefit the corporation as a whole, and to distribute equitably the benefit or the sacrifice, as the case may be, between all groups in the corporation as their interests may appear. prLL Equitable limitations apply to virtually all types of corporate actions. ...the majority stockholders have a fiduciary responsibility to the minority and to the corporation to use their ability to control the corporation in a fair, just and equitable manner, that majority stockholders may not use their power to control corporate activities to benefit themselves or in a manner detrimental to the minority, and that any use to which they put the corporation or their power to control the corporation must benefit all shareholders proportionately and not conflict with the proper conduct of the corporation's business. The Court also held that in transactions covered by its decisions, the burden is on the majority not only to prove the good faith of the transaction but to show its inherent fairness from the viewpoint of the corporation and those interested therein. (Supra pp. 11-13). It is sometimes provided that the power of amendment or repeal must not be exercised in such manner as to work injustice. (Fletcher's Cyc. Corp. Vol. 7A, Sec. 3683) Mr. Justice Swayne, after giving expression to the view that the power of amendment or alteration was subject to limitations continued: "The alteration must be reasonable; they must be in good faith, and consistent with the scope and object of incorporation. Sheer oppression and wrong cannot be inflicted under the guise of amendment or alteration. ....." The subject amendment may also be considered immoral; we can very well deduce 'res ipsa loquitur' that the same is subterfuge or manipulated device to eliminate minority representation in the board. It matters not what form these rights are invaded; it is the business of equity to penetrate through subterfuges and discover the actual transaction stripped of its disguises." (Mumford v. Ecuador Development Co.,111 F639 cited in Fletchers, Vol. 12 B, p. 115.) It is a breach of duty to manipulate the business of the company in their own interests to the injury of minority stockholders. (Meeker v. Winthrop Iron Co. 12F48 cited in Fletchers, Vol. 12 B, p. 149.) The action of majority shareholders having as its primary purpose the "freezing out" of minority interest is actionable ...Bennet v. Brevil Petroleum Corp.,34 Del Ch 6, 99 A2d 236. The fact that the amendments have been approved by majority of the members of the Board and more than 2/3 of the outstanding capital stock is of no moment: It is no longer seriously debated that majority shareholders owe a duty to at least act fairly to the minority interest, and the majority cannot avoid that duty merely because the action taken thereon is legally authorized. (Burt v. Burt Broiler, Works, Inc. (Ala) 360 2d 327 cited in Fletchers, Vol. 12, p. 159) But this does not mean that the directors or the majority shareholders should be permitted to exercise their powers arbitrarily or without regard to the legitimate expectations of the minority shareholders and many of the older decisions and practically all of recent ones indicate that controlling shareholders, in some circumstances at least, owe fiduciary duties to minority shareholders and that the courts will require them (whether they act in their capacity as shareholders or through directors or officers whom their control) to observe accepted standards of business ethics in transactions affecting rights of minority shareholders. (Fletchers, Vol. 12B, p. 161) A basic ground for judicial interference with corporate decisions on the complaint of a minority shareholders is an advantage obtained by the majority or dominant group to the disadvantage of the minority owners. (Swanson v. American Consumer Ind.,Inc. 328 F Supp. 797 (SD 111) cited in Supra, p. 176) LexLib In the light of the foregoing, can this Commission look into the validity of the amendments? The SEC is authorized and mandated by Presidential Decree No. 902-A, as amended, "in line with the government's policy of encouraging investments, both domestic and foreign, and more active public participation in the affairs of private corporations and enterprises through which desirable activities may be pursued for the promotion of economic development; and, to promote a wiser and more meaningful equitable distribution of wealth, there is a need for an agency of the government to be invested with ample powers to protect such investment and the public." Furthermore, Section 143 of the Corporation Code provides and we quote: "The Securities and Exchange Commission shall have the power and authority to implement the provisions of this Code, and to promulgate rules and regulations reasonably necessary to enable it to perform its duties hereunder, particularly in the prevention of fraud and abuses on the part of the controlling stockholders, members, directors, trustees or officers." While the reserved right is in the interest of the state to modify or repeal its own contract with the corporation, it is in reality a continuing power of regulation and control in the interest of the public. Here the exercise of the power of amendment becomes closely allied to the exercise of the police power, whereby corporations as well as individuals are subject to regulations for the promotion of the public welfare. (Vol. 7A, Fletchers, p. 367) This Commission, in its avowed objective of protecting the investing public to create a better investment climate thus enhancing greater economic opportunities, must disapprove the subject amendments inasmuch as the same constitutes oppressive conduct towards the minority stockholders who by said amendments are deprived of a sporting chance to be represented in the board. It is only fair and just that "he who has less in life should have more in law" to quote the late President Ramon Magsaysay. It is true that the minority stockholder does not have any assurance or vested right in law or in equity to be represented in the board. But in this instance, the amendment reducing the number of the directors would work an injustice to the minority stockholders who comprise the lifeblood of the corporation and to whom the corporation draws the money to finance its various projects. Surely, they deserve to have a chance to be represented in the board although they do not have, as mentioned above, the assurance to be elected thereto. As this is a fight between two unequals, on one hand, the faceless, nameless minority stockholders ranged against a monolith, it is only fair and equitable under the circumstances to disapprove the amendments. Ayala Corporation further advances the argument that the reduction of the number of directors and members of the executive committee is pursuant to the corporate decision to convert the company into a holding company. Ayala Corporation has however, not taken any steps to amend its primary purpose to that of a holding company. Neither was the matter discussed during the stockholders' meeting. If it were a holding company and did not inform this Commission relative to the same, such non-disclosure of a material fact is a violation of Section 1 of the terms and conditions of the Permit to Sell Securities to the Public, which is the subject of SEC Circular No. 6 (a) and (b),Series of 1984 ,quoted hereunder: "1. That before or at the time Registrant makes a public offering of its securities, it shall publish at least once in a newspaper of general circulation in the Philippines, the important material facts which investors should know about it and its securities, such as the status of the company, its industry and principal personnel composing its technical and operational staffs, total cash assets, operation and management contract, if any and similar informative matters. A true copy of the publication shall be furnished this Commission within ten (10) days from the commencement of the public offering of the securities;" WHEREFORE, premises considered, the instant application of Ayala Corporation for the approval of its amendments to its articles of incorporation consisting of the reduction of the number of the Board of Directors from eleven (11) to five (5) and that of the membership in the Executive Committee from five (5) to three (3) respectively, is hereby DENIED. SO ORDERED. (SGD.) ROSARIO N. LOPEZ Chairman (SGD.) ARMANDO Z. GONZALES Associate Commissioner CONCURRING OPINION I concur with the conclusion of my colleagues in denying the application of Ayala Corporation for the approval of its amendments to its articles of incorporation consisting of the reduction of the number of the Board of Directors from eleven (11) to five (5) and that of the membership in the Executive Committee from five (5) to three (3) respectively. Section 28 of the Corporation Code authorizes the removal of a director, with or without cause, by a vote of the stockholders holding or representing two-thirds (2/3) of the outstanding capital stock. The last paragraph of said section, however, provides: "That removal without cause may not be used to deprive minority stockholders or members of the right of representation to which they may be entitled under Section 24 of this Code." Under Section 24 of the Corporation Code, the stockholders are entitled to cumulative voting, and as such, the minority stockholders are afforded the opportunity to be represented in the board of directors. Approval or denial of the proposed amendments ultimately depends on the question of whether or not said proposed amendments would deprive the minority stockholders of their opportunity to be represented in the board of directors as granted under Section 24 of the Corporation Code. The formula for the determination of the number of shares/votes to elect a director can be summarized as follows: 1. A x B + 1 = D C + 1 2. D x C = E WHERE: A - total number of outstanding shares entitled to vote (at the meeting); B - number of directors desired to be elected; C - total number of directors to be elected; D - number of shares to elect the desired number of directors; and E - number of votes required to elect desired number of directors. The percentage of ownership by stockholders groups in Ayala Corporation, at present is as follows: Ayala Group 71.92% Mitsubishi Group 20.27% Henry Sy 6.41% Others 1.37% Applying the above figures to the given formula, the representation in the reduced board of five would be as follows: 1. Jaime Zobel de Ayala 2. Javier S. Nepomuceno 3. Ariston Estrada 4. Shinj Suzuki 5. Jaime A. Zobel de Ayala III As a result, the following directors would now be eased out of the board: 1) Renato dela Fuente elected by the Ayala 2) Renato G. Buhain Group who represents 3) Ma. Socorro H. Cruz the majority, therefore 4) Francisco Jose Elizalde not covered by Sec. 28 5) Cezar H. Buenaventura 6) Ishiburo Kuzumi elected as certified by Ayala, by the Mitsubishi group which owns only 20.27% of the entire holding (minority interest) Since 1981, Mitsubishi was represented by two directors when the number of directors was 11, the effect of the proposed amendment would be to remove, without cause, a member of the board. dctai It has, however, been argued that the Mitsubishi group, which holds a minority interest of 20.27%,has in fact voted with the majority in approving the amendments. Our decision in this matter however will have far reaching consequences, not only insofar as Ayala Corporation is concerned but of all other corporations that may in the future be inclined to reduce its number of directors to ease out minority representation. Further, the waiver of the incumbent minority director who would be eased out as a result of the reduction will not cure the defect. We are concerned not only with the fate of a particular minority director but more importantly, in insuring opportunity for minority representation not only now but in the future. I therefore concur with the conclusion of my colleagues in DENYING the application of Ayala Corporation for the approval of its amendments to its articles of incorporation consisting of the reduction of the number of the Board of Directors from eleven (11) to five (5) and that of the membership in the Executive Committee from five (5) to three (3). (SGD.) MERLE O. MANUEL Associate Commissioner DISSENTING OPINION I dissent from the majority opinion and vote to approve the amendment in the charter and by-laws of Ayala Corporation (the "Corporation" in brevity) reducing its directors from its present number of eleven (11) to five (5). The following facts appear to be undisputed: The composition of the Corporation's stockholders appear to be as follows: Ayala Group 71.92% Mitsubishi 20.27% Henry Sy 6.41% Other investors 1.37% The corporation has a Board of Directors composed of eleven (11) directors. The Executive Committee is composed of five (5) directors. The Corporation filed with the Securities and Exchange Commission an application to amend its articles and by-laws to reduce the number of members on its Board of Directors from eleven (11) to five (5), and the membership in the Executive Committee from five (5) to three (3). The amendment to the articles of the Corporation was approved by a majority of the present 11-man Board of Directors and ratified and approved by stockholders representing at least 93.9% of the capital stock of the Corporation. Not one of the stockholders present or represented at the meeting called for the purpose, registered his objection to the amendment. The Corporation's corporate counsel, Atty. Alexander J. Poblador, submitted a secretary's certificate attesting to the fact that the six (6) of the eleven (11) board members affected by the reduction were all nominees of management or of the Mitsubishi group and that the five (5) remaining directors represent the same block of stockholders previously represented by the eleven (11) directors. prcd To date, not one of the Corporation's stockholders have registered any objection or opposition to the Corporation's move. The position of the majority of the Commissioners is that the questioned amendments would constitute "oppressive conduct toward the minority shareholders who by said amendments are deprived of a sporting chance to be represented in the board." They anchor their stand on the assertion that the motive of the corporation in reducing the number of directors is "illegal and immoral." I disagree. The power to amend its articles of incorporation is one of the powers granted by law to the Corporation. The power is granted to the owners of two-thirds of the capital stock, allowing them to alter the terms of the basic agreement between the corporation and its stockholders. "SECTION 36. Corporate powers and capacity . Every corporation incorporated under this Code has the power and capacity: xxx xxx xxx 4. To amend its articles of incorporation in accordance with the provisions of this Code." This power underlies all subscriptions to or purchases of stock, such that all subscribers or purchasers are deemed to have accepted this power as part of their contract with the corporation, and a stockholder may not assail an amendment approved by the required vote as an impairment of his contract. There is, therefore, no vested right to be impaired by the amendment. In a corporate setting, an amendment of the articles (by 2/3 vote of the outstanding capital stock) and amendment of the by-laws (by majority vote) may not be prevented where the prescribed number of votes approve it and no fraud or bad faith is involved. This is so because " [a]ny person " who buys stock in a corporation does so with the knowledge that its affairs are dominated by a majority of the stockholders and that he impliedly contracts that the will of the majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted by-laws and not forbidden by laws ." To this extent, therefore, the stockholder may be considered to have "parted with his personal right or privilege to regulate the disposition of his property which he has invested in the capital stock of the corporation, and surrendered it to the will of the majority of his fellow incorporators .... It can not therefore be justly said that the contract, express, or implied, between the corporation and the stockholders is infringed ... by any act of the former which is authorized by a majority ...." Pursuant to Section 18 of the Corporation Law, any corporation may amend its articles of incorporation by a vote or written assent of the stockholders representing at least two-thirds of the subscribed capital stock of the corporation. If the amendment changes, diminishes or restricts the rights of the existing shareholders, then the dissenting minority has only one right, viz: "to object thereto in writing and demand payment for his share." Under Section 22 of the same law, the owners of the majority of the subscribed capital stock may amend or repeal any by-law or adopt new by-laws" (Gokongwei vs. SEC, et al., G.R. L-45911, April 11, 1979; emphasis supplied). In this connection, the right of stockholders to amend the provisions of the articles of incorporation is subject to certain limitations. The equitable limitation is that the right to amend must be exercised in good faith. However, bad faith is not presumed, and whoever alleges it must prove the same. "The prevailing view is that the discretion of the Board and the majority of the stockholders is subject to the duty of exercising good faith. Courts [or administrative tribunals] have not undertaken to review the question of unfairness of amendments even in case of substantial prejudice short of fraud. The burden is on the dissenter who attacks an amendment to prove fraud, bad faith or gross unfairness " (Ballantine, Ballantine on Corporations 1946, p. 649 passim). In this case, there has been no showing that the majority stockholders have acted fraudulently or in bad faith. The general rule on non-interference in the internal affairs of the corporation should, therefore, apply. Furthermore, a stockholder who has dissented and voted against a proposed amendment may opt to avail of his appraisal right or sell his shares in the corporation to a willing buyer. As the will of the owners of two-thirds of the outstanding capital stock prevails over the will of the dissenting stockholder, Section 81 of the Code grants the dissenting stockholder the appraisal right so that the latter may divest himself of ownership of the stocks without his having to await the dissolution of the Corporation. An amendment to the articles of incorporation to effect a reduction in the number of directors is deemed one of those instances when the stockholder could exercise his appraisal right. The stockholders of the Corporation are presumed to have been aware of their appraisal right, and of their options in the event of their disagreement with the majority decision. To date, none of the stockholders of the Corporation have exercised their appraisal right. This leads us to conclude that there was, in fact, no dissent and that the particular corporate act was unchallenged. If the motives of the majority of the stockholders were "illegal and immoral",the minority stockholders would certainly have dissented, and would have filed their opposition to the amendment. It is not illogical to conclude that this lack of objection indicates that the stockholders who are authorized to object to the corporate action have, in fact, voted in favor thereof and have expressed their assent thereto. I see nothing immoral in the amendment at issue. What is immoral, perhaps, is for this Commission under the guise of protecting the minority, interdict the decision of the overwhelming majority. In the absence of any controversy brought about by a dissenting stockholder, the Commission, without any clear and convincing proof of bad faith, may not motu proprio block the corporate action and substitute its judgment for that of the stockholders. It may not be amiss to point out that: "There is little judicial authority touching the question of the power of a specified majority to reduce the number of directors by by-law or charter amendment thereby diluting the voting power of the minority under a mandatory cumulative voting provision. One case has permitted the reduction even though the avowed purpose was the elimination of the minority voice in the board, despite a cumulative voting clause in the charter, and that in the absence of statutory authority or charter protection, there is probably no defense to this move" (5 Fletcher, Chapters 13-21 sec. 2048.3 citing Stone vs. Auslander, 28 Misc. 2d 384, 212 NYS 2d 727; Madlock vs. Vorclone Corp. 17 Del. Ch. 39, 147 A 255; Odman vs. Olsen 319 Mass. 24, 64 NE 2d 439). It is true that it is a principle that where the action of the board of directors and/or stockholders is an abuse of discretion, or forbidden by statute, or against public policy, or is ultra vires , or is a fraud upon minority stockholders or creditors, or will result in a misapplication of corporate assets, the Commission would have the power to review the corporate action. Admittedly, the Commission has broad powers of regulation over all corporations (Section 3, P.D. 902-A). Its powers of supervision and control, however, should be exercised within the accepted bonds of the term "regulation". They cannot be construed as synonymous with the term "suppress" or "prohibit". If the Commission's exercise of its power of supervision is to be rational, it must be founded upon knowledge of actual facts and conditions, careful investigation and impartial deliberation; not speculation or mere conjecture. The right to reduce the number of directors via amendment of the corporate charter and by-laws is a right conferred by statute. Consequently, a derogation of this right must be strictly construed. In the absence of any clear showing of bad faith or fraud on the part of the majority stockholders, such right cannot be curtailed. The best judge of the propriety or wisdom of the corporate act are the stockholders themselves, and the stockholders have approved the amendment. (SGD.) RODOLFO L. SAMARISTA Associate Commissioner DISSENTING OPINION The filing by Ayala Corporation of its articles of incorporation and of its by-laws embodying amendments for the reduction of the number of its directors from eleven to five and the membership of its executive committee from five to three should be given due course. Several reasons may be advanced for this position. 1. The function of the Securities and Exchange Commission in processing articles of incorporation or their amendments and by-laws or their amendments, is merely ministerial and not discretionary. A distinguished authority on Corporation Law has pointed out that in some jurisdictions the Secretary of State has no discretionary power to look beyond the fact of the incorporation papers, and to determine from matters outside of such papers whether or not to file the papers. The Secretary of State is not clothed with equitable powers, and therefore cannot decide whether the proposed corporation, the articles of which he has refused to file, will be in unfair competition with another company. Nor is the officer required to make inquiry outside the articles of incorporation filed, to determine whether the matters stated are in fact true, or whether all conditions precedent have in fact, been performed. This does not mean that the officer must file anything presented, but only those papers regular in form, examining the papers to see that the organization has been within and in conformity to law; and may be compelled to do so leaving to the courts all judicial questions of validity and propriety under the statutes. (1A Fletchers Cyc Corp. Secs. 156-159, pages 270-271) If the rule were otherwise so that the function is considered as discretionary, regulatory officials could possibly offer any number of reasons to refuse the filing or approval of articles of incorporation or their amendments. The purpose for the enactment of general incorporation laws would then be defeated because the corporations, stockholders or members could be left to the consequences of the exercise of judgment of government officials and employees. 2. Under the due process clause of the Constitution (Sec. 1, Article III, 1987 Constitution), the word "liberty" covers not only political but also economic liberty. Jurisprudence in the United States, as well as in the Philippines, supports this proposition. The consequence is that under this constitutional provision, an individual or entity can do anything he or it pleases in the economic field, subject as a matter of course to the exercise by government of its inherent, constitutional, and statutory powers. Undeniably, economic liberty is one of the foundations for a free market economy. In the case at bar, economic liberty allows the corporation and its stockholders to amend the articles of incorporation for purposes not contrary to law and in accordance with the provisions of the Corporation Code. The purpose for the amendment by the applicant herein does not violate any provisions of the Corporation Code (B.P. 68) or the Revised Securities Act (B.P. 178). Consequently, the same should be allowed. 3. The history of corporate legislation in the United States indicates that the pattern of development is to make it easier for investors to establish corporations so that they can engage in economic activities. The same objective can be said to apply to the making of fundamental changes in the corporate structure, such as amendments to the articles of incorporation. It is perhaps pertinent to recall that the colonial legislatures in the new world granted corporate franchises through special law. The practice persisted after 1776, so that state legislatures continues to confer the privilege by special legislation. With the passage of time, public opinion developed against the concept of corporate franchises being given by special law, and so it came to pass that many states decided that, with certain exceptions, private corporations could be created only through general incorporation law. The reason was that the old procedure had resulted in log-rolling. To do away with the undesirable practice, different states changed the mode by which corporations could be established. The later mode was applied in the Philippines when the Corporation Law, Act 1459, was enacted. The rule that has prevailed since then is that the moment any group of individuals succeeds in complying with the statutory requirements, then the request of that group must be granted. LLphil There is no reason why that rule should not apply to the instant case. 4. While it is true that both Act 1459 and Batas Pambansa 68 recognize the right of stockholders to vote, neither the Corporation Law nor the Corporation Code guarantees that the result of the vote of each stockholder will be as desired. In other words, while there is a right to vote, there is no certainty that the consequence of the exercise of the right will be a success for the stockholder making the vote. For that reason, minority stockholders can vote during elections for directors but the law gives no assurance that they will be able to elect a director to represent their interests, even with the use of cumulative voting. (See Section 24, Corporation Code). 5. Corporate decisions on matters such as increasing or decreasing of the number of directors, or amending of articles of incorporation or by-laws, require the exercise of business judgment. The statute itself provides the procedure for corporate changes as well as the number or percentage of votes necessary for the approval of particular acts. Once the required number of votes is obtained then the corporate act is considered as approved by the corporation. Such approval through the stockholders and/or the board of directors (in cases where the statute requires both stockholder and board actions, is part of the exercise of business judgment. In the absence of clear constitutional or statutory provision granting them the power to do so, government functionaries should not frustrate that business judgment on the part of the corporation. 6. Section 17 of the Corporation Code enumerates four (4) grounds for rejection of articles of incorporation or their amendments, to wit: "1. That the articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed herein; 2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations; 3. That the Treasurer's Affidavit concerning the amount of capital stock subscribed and/or paid is false; 4. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution." Section 16, on the other hand, imposes mechanical requirements for the amendment of articles of incorporation, as follows: "SECTION 16. Amendment of articles of incorporation . Unless otherwise prescribed by this Code or by special law, and for legitimate purposes, any provision or matter stated in the articles of incorporation may be amended by a majority vote of the board of directors or trustees and the vote or written assent of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code, or the vote or written assent of at least two-thirds (2/3) of the members if it be a non-stock corporation. LLjur xxx xxx xxx." In view of the foregoing statutory provisions, the articles of incorporation or their amendments must be approved by the Commission, unless one of the grounds enumerated in Section 17 applies. No such ground exists in this case. 7. The issue of morality of the act of reducing the number of the directors from eleven to five could be raised. Nevertheless, the question of morality or immorality cannot be posited with respect to each and every act of the corporation, or of its stockholders and directors. The word "immoral" is embraced in the provision furnishing the second ground for rejection of the articles of incorporation or their amendments under Section 17 of the Corporation Code, as follows: "That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations." It is to be noted from the foregoing that the word "immoral" refers only to the purpose or purposes for which the corporation is organized. Obviously, the term "immoral" cannot be applied as a standard for each and every purpose of each and every act (or even omission) of the corporation, or of its component members or stockholders. In the instant case, the purpose for the reduction of the number of directors cannot be considered as immoral under the aforequoted Section 17 of the Code. 8. Section 16 of the Code requires that the amendment of any matter or provision in the articles of incorporation must be for legitimate purposes." The proper interpretation, it seems, of the term "legitimate purposes" is that the same must be "legal". If an act is not violative of the Corporation Code or any other law, then it is "legitimate." In other words, legitimacy is to be determined by concepts of legality and by the rules on whether an act is ultra vires or intra vires. Surely, standards of morality according to religious precepts should not prevail over legal standards in the interpretation of a legal provision dealing with economic activities. 9. When there is an incumbent director representing the minority and the effect of an amendment is to remove that director, then the result could be a "freezing out". If the procedure for removal prescribed in the Code is not followed by the corporation, (see Section 28) there would then be a violation of the law. In the case at bar, there is no showing that this is the situation. dctai "Freezing out" is a concept that is fluid, broad and indefinite. In a situation where a stockholder is unable to influence management decision or get approval of what he proposes during a stockholders meeting, he may be compelled in the proper cases and in accordance with the prescribed procedure to ask the corporation to give value to his shares in the exercise of his appraisal right. This kind of "freezing out", however, is specifically covered by provisions of the Corporation Code (Section 81 to 86). Interference by the Commission can only be justified when the "freezing" out is effected in violation of some provisions of law. And there is none in the present case. It is a truism that the majority must act fairly in dealing with the minority. After all, the principle of fair dealing is embodied in the Code with respect to the transactions of directors, trustees and officers. (See sections 31-34). This concept, however, must be understood to refer to the action of the majority with respect to arms-length transactions which are financial or business in character. In any event, the notion of fair dealing does not, and should not, prevent the majority from exercising their statutory rights (such as amending the articles of incorporation).To prevent the majority from exercising rights expressly and specifically granted by the law just so they could give way to presumed or perceived rights of the minority would not only be unjust; that would result in thwarting the operation of specific provisions of the law and bring about injustice and inequity just as well. 11. Part of the problem in the case at bar arises from the failure to distinguish the normative from the descriptive approach. Obviously, in legal drafting and in statutory construction, there is a need to distinguish between "what ought to be" and "what is". A perception can be inferred from the deliberations of the Commission that there is a need to protect the "minority" in a corporation in the light of the strength of the "majority" stockholders, especially in the election of directors. Because of that perception, the thinking is that there is a need to restrict the right of the majority stockholders to amend the articles of incorporation. While it is difficult to deny, however, that the law grants the right to amend the articles of incorporation to the stockholders representing at least two-thirds of the outstanding capital stock. Understandably, that is the present state of the law. Dura lex, sed lex . If there is a perceived policy to assure representation of the minority in the Board of any corporation, especially of those whose shares are listed in the stock exchanges, then the law should be amended to that effect. Amendment of the law, however, is a function of the legislative body. An administrative agency, such as the Securities and Exchange Commission, can not arrogate unto itself a power that properly belongs to the legislature. And it is no consolation to argue that it can exercise quasi-legislative powers, for such are merely delegated powers which must be exercised within constitutional bounds and in accordance with some standard and/or policy fixed in the statute itself by the legislative power. Certainly, a perceived policy to assure representation of the minority in the Board of Directors of a listed company cannot, with more reason, be adopted and implemented by the Commission in the performance of its administrative functions. Neither does it help to argue that it can do so in the exercise of quasi-judicial power, since neither original legislation nor amendment of the law can be effected through judicial interpretation. Be that as it may, by no stretch of the imagination can it be assumed or argued that the Commission possesses legislative or judicial powers. cdll In the case at bar, what ought to be the law cannot prevail over what is the law. The amendments must be allowed. (SGD.) GONZALO T. SANTOS, JR. Associate Commissioner