Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page

Gokongwei Jr. v. SEC

April 11, 1979
Antonio, J.
Gabe Ruaro

SUMMARY:
Gokongwei acquired a substantial amount of the capital
stock of San Miguel Corporation. SMC amended their
bylaws, inter alia, preventing competitors from being
nominated and elected as directors, which the SC upheld,
because
DOCTRINE:
A corporation is authorized to prescribe the qualifications of
its directors. A provision in the by-laws of the corporation
that no person shall qualify or be eligible for nomination for
elections to the board of directors if he is engaged in any
business which competes with that of the Corporation is
valid, provided, however, that before such nominee is
disqualified, he should be given due process to show that
he is not covered by the disqualification. A director stands
in fiduciary relation to the corporation and its stockholders.
The disqualification of a competition from being elected to
the board of directors is a reasonable exercise of corporate
authority. Sound principles of corporate management
counsel against sharing sensitive information with a
director whose fiduciary duty to loyalty may well require
that he discloses this information to a competitive rival.
FACTS:
John Gokongwei Jr. filed a petition with the SEC for declaration of
nullity of amended by-laws, injunction and damages, alleging
that the bylaws of San Miguel corporation, by which stockholders
who own substantial interests in corporations who are
competitors of San Miguel were prohibited from being elected as
directors.

Even before the SEC had ruled on the case, Gokongwei

filed this petition for certiorari.
ISSUES/HELD:
1. WON the provisions of the amended by-laws, disqualifying
a competitor from nominiation or election to the Board of
Diretors are valid and reasonable. (Yes)
RATIO:
Every corporaton has the inherent power to adopt by-laws for its
internal government, and to regulate the conduct and prescribe
the rights and duties of its members towards itself and among
themselves in reference to the management of its affairs. The
power to make and adopt by-laws is inherent in every corporation
as one of its necessary and inseparable legal incidents. In the
absence of positive legislative provisions limiting it, the power to
adopt by-laws is inherent in the corporation.
Sec. 21 of the Corporation Law provides that a corporation
may prescribe in its by-laws the qualifications, duties and
compensation of directors, officers, and employees, provided that
directors must own at least one share of stock.
Contrary to Gokongweis position, there is no vested right
to be elected a director. Any person who buys stock in a
corporation does so with the knowledge that its affairs are
dominated by a majority of the stockhodlers and that he
impliedly contracts that the will fo the majority shall govern in all
matters withint he limits of the act of incorporation and lawfully
enacted by0laws and not forbidden by law.
Although directors of a corporation are not technically
trustees, they have a fiduciary relationship with the corporation.
Thus, he cannot utilize inside information and strategic position
for his own preferment. Thus, a by-law disqualifying a competitor
from being a director is valid.
Where a director is so employed in the service of a rival
company, he cannot serve both, but must betray one or the
other. This by-law provision advances the benefit of the
corporation.
Further, corporate officers are not permitted to use their
positions of trust and confidence to further their private interests.

Commercial Law Review | Divina | 2nd Sem AY 2014-2015 |Page

This doctrine of corporate opportunit is a recognition of the
fiduciary nature of corporate directorship.
Here, a member of the board of San Miguel has access to
sensitive and highly confidential information. Obviously, to
prevent the creation of an opportunity of an officer or director

from taking advantage of that information, a director may not be

a competitor.
CA affirmed.