Aurbach v.

Sanitary Wares
December 15, 1989

G.R. No. 75875

Petitioners: WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM and CHARLES CHAMSAY
Respondents: SANITARY WARES MANUFACTURING CORPORATOIN, ERNESTO V. LAGDAMEO, ERNESTO R.
LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG and AVELINO
V. CRUZ

G.R. No. 75951

Petitioners: SANITARY WARES MANUFACTURING CORPORATION, ERNESTO R. LAGDAMEO, ENRIQUE B.
LAGDAMEO, GEORGE FL .EE RAUL A. BONCAN, BALDWIN YOUNG and AVELINO V. CRUX
Respondents: THE COURT OF APPEALS, WOLFGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM,
CHARLES CHAMSAY and LUCIANO SALAZAR

G.R. Nos. 75975-76

Petitioner: LUCIANO E. SALAZAR
Respondents: SANITARY WARES MANUFACTURING CORPORATION, ERNESTO V. LAGDAMEO, ERNESTO R.
LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG, AVELINO
V. CRUZ and the COURT OF APPEALS, respondents.

Ponente: Gutierrez, J.

FACTS
1. In 1961, Saniwares, a domestic corporation was incorporated for the primary purpose of manufacturing and
marketing sanitary wares
a. Mr. Young, one of incorporators went abroad to look for foreign partners, European or American who
could help in its expansion plans
2. American Standard Inc. a US corporation entered into an Agreement with Saniwares and some Filipino
investors whereby ASI and the Filipino investors agreed to participate in the ownership of an enterprise which
would engage primarily in the business of manufacturing in the Philippines and selling here and abroad
vitreous china and sanitary wares
3. parties agreed that the business operations in the Philippines shall be carried on by an incorporated enterprise
and that the name of the corporation shall initially be "Sanitary Wares Manufacturing Corporation
4. Agreement contains ff. provision
a. Articles of Incorporation: cumulative voting for directors
b. 5. Management
“The management of the Corporation shall be vested in a Board of Directors, which shall consist of nine
individuals. As long as American-Standard shall own at least 30% of the outstanding stock of the Corporation,
three of the nine directors shall be designated by American-Standard, and the other six shall be designated
by the other stockholders of the Corporation”
5. At the request of ASI, the agreement contained provisions designed to protect it as a minority group,
including the grant of veto powers over a number of corporate acts and the right to designate certain officers,
6. Later, the 30% capital stock of ASI was increased to 40%. The corporation was also registered with the Board
of Investments for availment of incentives with the condition that at least 60% of the capital stock of the
corporation shall be owned by Philippine nationals
7. Eventually harmonious relations deteriorated
8. During the 1983 annual stockholders’ meeting which was presided by Mr. Young
a. ASI group nominated 3 persons: Wolfgang Aurbach, John Griffin and David P. Whittingham
b. The Philippine investors nominated 6: Ernesto Lagdameo, Sr., Raul A. Boncan, Ernesto R.
Lagdameo, Jr., George F. Lee, and Baldwin Young
c. Mr. Eduardo R, Ceniza then nominated Mr. Luciano E. Salazar, who in turn nominated Mr. Charles
Chamsay
d. The chairman, Baldwin Young ruled the last two nominations out of order on the basis of section 5
(a) of the Agreement
e. There were protests against action of chairman. The ASI rep, appealed the order of the Chairman
f. Chairman declared them out of order and instructed the Secretary cast all the votes present and
represented by proxy equally for the 6 nominees of the Philippine Investors and the 3 nominees of
ASI, thus effectively excluding the 2 additional persons nominated, Salazar and Chamsay
g. The ASI rep, Mr. Jaqua protested the decision of the Chairman and announced that all votes accruing
to ASI shares, a total of 1,329, were being cumulatively voted for the 3 ASI nominees and Chamsay,
and instructed the Secretary to so vote
 h. Salazar and other proxies announced that all the votes owned by and or represented by them
467,197 shares were being voted cumulatively in favor of Salazar
i. Chairman still told Secretary to follow the voting he instructed earlier
j. ASI rep called for recess which was seconded
k. Motion to adjourn was also made which was accepted by chairman Young
l. Protests were ignored thus Mr. Jaqua informed everyone that the stockholders meeting would be
moved to another room
m. The ASI Group, Salazar and other stockholders, allegedly representing 53 or 54% of the shares of
Saniwares, decided to continue the meeting at the elevator lobby of the American Standard Building
n. On the basis of the cumulative votes cast earlier in the meeting, the ASI Group nominated its 4
nominees; Wolfgang Aurbach, John Griffin, David Whittingham and Charles Chamsay. Salazar voted
for himself, thus the said 5 directors were certified as elected directors by the Acting Secretary,
Andres Gatmaitan, with the explanation that there was a tie among the other 6 nominees for the 4
remaining positions of directors and that the body decided not to break the tie
9. Several petitions were filed with SEC

ISSUE: Who were the duly elected directors of Saniwares for the year 1983 during its annual stockholders' meeting
held on March 8, 1983?

To answer this question the following factors should be determined

(1) the nature of the business established by the parties whether it was a joint venture or a corporation
(2) W/N the ASI Group may vote their additional 10% equity during elections of Saniwares' board of directors
The nature of the business: joint venture
1. The rule is that whether the parties to a particular contract have thereby established among themselves a joint
venture or some other relation depends upon their actual intention which is determined in accordance
with the rules governing the interpretation and construction of contracts
2. ASI Group and Salazar: actual intention must be viewed strictly and clear that intention was to form corporation
and not joint venture
3. Lagdameo and Young Group: Agreement failed to express true intent
4. ITC, Court’s examination of important provisions of the Agreement as well as the testimonial evidence
presented by the Lagdameo and Young Group shows that the parties agreed to establish a joint venture
and not a corporation
5. The history of the organization of Saniwares and the unusual arrangements which govern its policy
making body are all consistent with a joint venture and not with an ordinary corporation
Note: the following are all reasons why they are a joint venture, not a corporation, court didn’t explain
exactly why they aren’t an ordinary corp
6. Cited the decision of SEC
a. Provisions of the Agreement requiring a 7 out of 9 votes of the board of directors for certain actions,
in effect gave ASI (which designates 3 directors under the Agreement) an effective veto power
b. The grant to ASI of the right to designate certain officers of the corporation; the super-majority voting
requirements for amendments of the articles and by-laws; and most significantly to the issues of the
case, the provision that ASI shall designate 3 out of the 9 directors and the other stockholders shall
designate the other 6, clearly indicate that there are two distinct groups in Saniwares, namely
ASI, which owns 40% of the capital stock and the Philippine National stockholders who own the
balance of 60%, and that 2) ASI is given certain protections as the minority stockholder
c. Premises considered, under the Agreement there are two groups of stockholders who established
a corporation with provisions for a special contractual relationship between the parties
7. Section 5 (a) of the agreement uses the word "designated" and not "nominated" or "elected" in the selection
of the nine directors on a six to three ratio. Each group is assured of a fixed number of directors in the
board
8. ASI in its communications referred to the enterprise as joint venture
a. The stipulation in the agreement which stated that nothing contained in the Agreement shall be
construed to constitute any of the parties hereto partners or joint venturers in respect of any
transaction hereunder was merely to obviate the possibility of the enterprise being treated as
partnership for tax purposes and liabilities to third parties
9. Quite often, Filipino entrepreneurs in their desire to develop the industrial and manufacturing capacities of a
local firm are constrained to seek the technology and marketing assistance of huge multinational corporations
of the developed world. Arrangements are formalized where a foreign group becomes a minority owner of a
firm in exchange for its manufacturing expertise, use of its brand names, and other such assistance. However,
there is always a danger from such arrangements. The foreign group may, from the start, intend to establish
its own sole or monopolistic operations and merely uses the joint venture arrangement to gain a foothold or
 test the Philippine waters, so to speak. Or the covetousness may come later. As the Philippine firm enlarges
its operations and becomes profitable, the foreign group undermines the local majority ownership and actively
tries to completely or predominantly take over the entire company. This undermining of joint ventures is not
consistent with fair dealing to say the least. To the extent that such subversive actions can be lawfully
prevented, the courts should extend protection especially in industries where constitutional and legal
requirements reserve controlling ownership to Filipino citizens.

Whether or not the ASI group may vote their additional equity during elections of Saniwares' board of directors. NO

1.As in other joint venture companies, the extent of ASI's participation in the management of the corporation is
spelled out in the Agreement. Section 5(a) hereof says that three of the nine directors shall be designated by
ASI and the remaining six by the other stockholders. This allocation of board seats is obviously in consonance
with the minority position of ASI
2. Having entered into a well-defined contractual relationship, it is imperative that the parties should honor and
adhere to their respective rights and obligations thereunder
3. Appellants: any allocation of board seats, even in joint venture corporations, are null and void to the extent
that such may interfere with the stockholder's rights to cumulative voting as provided in Section 24 of the
Corporation Code
a. SC, concurring with CA: cumulative voting rights may be voluntarily waived by stockholders who
enter into special relationships with each other to pursue and implement specific purposes, as in
joint venture relationships between foreign and local stockholders, so long as such agreements
do not adversely affect third parties
b. If the Filipino stockholders cannot agree who their six nominees will be, a vote would have to be
taken among the Filipino stockholders only. During this voting, each Filipino stockholder can
cumulate his votes. ASI, however, should not be allowed to interfere in the voting within the Filipino
group. Otherwise, ASI would be able to designate more than the three directors it is allowed to
designate under the Agreement, and may even be able to get a majority of the board seats, a result
which is clearly contrary to the contractual intent of the parties.
IMPORTANT
4. The legal concept of a joint venture is of common law origin. It has no precise legal definition but it has been
generally understood to mean an organization formed for some temporary purpose. It is in fact hardly
distinguishable from the partnership, since their elements are similar community of interest in the business,
sharing of profits and losses, and a mutual right of control. The main distinction cited by most opinions in
common law jurisdictions is that the partnership contemplates a general business with some degree of
continuity, while the joint venture is formed for the execution of a single transaction, and is thus of a temporary
nature. This observation is not entirely accurate in this jurisdiction, since under the Civil Code, a partnership
may be particular or universal, and a particular partnership may have for its object a specific
undertaking. (Art. 1783, Civil Code). It would seem therefore that under Philippine law, a joint venture
is a form of partnership and should thus be governed by the law of partnerships. The Supreme Court
has however recognized a distinction between these two business forms, and has held that although a
corporation cannot enter into a partnership contract, it may however engage in a joint venture with others.
5. Moreover, the usual rules as regards the construction and operations of contracts generally apply to a contract
of joint venture
6. Necessarily, the appellate court was correct in upholding the agreement of the parties as regards the allocation
of director seats under Section 5 (a) of the "Agreement," and the right of each group of stockholders to
cumulative voting in the process of determining who the group's nominees would be under Section 3 (a) (1)
of the "Agreement." As pointed out by SEC, Section 5 (a) of the Agreement relates to the manner of nominating
the members of the board of directors while Section 3 (a) (1) relates to the manner of voting for these
nominees.
7. This is the proper interpretation of the Agreement of the parties as regards the election of members of the
board of directors.