G.R. No. L-45911. April 11, 1979.
John Gokongwei, Jr., petitioner, vs. Securities and Exchange Commission, Andres M. Soriano, Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio Bunao, Walthrode B. Conde, Miguel Ortigas, Antonio Prieto, San Miguel Corporation, Emigdio Tanjuatco, Sr., and Eduardo R. Visaya, respondents.

FACTS

Petitioner John Gokongwei, Jr., a substantial stockholder of San Miguel Corporation (SMC), filed a petition with the Securities and Exchange Commission (SEC) seeking to declare null and void amended corporate by-laws adopted by SMC’s Board of Directors on September 18, 1976. The amended by-laws included a provision disqualifying a candidate for director if engaged in a business competitive with or antagonistic to SMC, with the Board itself empowered to make that determination. Gokongwei, who had interests in businesses considered competitive with SMC (like beer and glass manufacturing), alleged this amendment was specifically crafted to disqualify him. He argued the Board lacked authority to amend the by-laws based on a 1961 stockholders’ resolution, as the corporate capitalization had significantly changed, and that a corporation has no inherent power to disqualify a stockholder from election.
The SEC dismissed Gokongwei’s petition. It upheld the Board’s authority to amend the by-laws based on the 1961 delegation and sustained the validity of the disqualification clause. The SEC ruled that the amendment was a valid exercise of corporate power to protect its welfare. Gokongwei elevated the case to the Supreme Court via certiorari, arguing the SEC committed grave abuse of discretion.

ISSUE

The primary issue is whether a corporation, through an amendment of its by-laws by the Board of Directors, can validly disqualify a stockholder from being elected as a director on the ground of engaging in a competitive business.

RULING

The Supreme Court, in a divided decision, ruled in favor of the validity of the amended by-laws and dismissed the petition. The Court held that a corporation has the inherent power to adopt by-laws for its internal governance, including the qualification of directors, provided they are not contrary to law, public policy, or the corporation’s charter. The Court found the disqualification of a director engaged in a competitive business to be a reasonable measure to prevent conflicts of interest, protect corporate secrets, and ensure undivided loyalty from its directors. This is grounded in the fiduciary duty of a director to act in the best interest of the corporation, a duty inherently compromised if the director also manages a rival enterprise.
The Court rejected Gokongwei’s claim that the amendment deprived him of a vested right. A stockholder’s right to run for director is not an absolute, vested property right but is subject to reasonable regulations in the corporate by-laws. The power of the Board to determine the existence of a competitive business was deemed a necessary implementation of the rule, not an invalid delegation. Furthermore, the Court sustained the SEC’s finding that the Board’s authority to amend the by-laws under the 1961 stockholders’ resolution remained valid despite changes in directorship and capitalization, as the grant of authority was to the Board as a body, not to the specific individuals composing it in 1961. The amendment was thus upheld as a legitimate corporate defense mechanism.