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Case digest · Corporate opportunity; disloyalty of a director
Total Office Products and Services (TOPROS), Inc. vs. John Charles Chang, Jr., et al.
While still an officer and director of TOPROS, an office-equipment company, its President and General Manager set up three companies in the same line of business. Even the land under TOPROS’s building was registered in the name of one of them.
Facts
The company
Total Office Products and Services (TOPROS), Inc. was in the office-equipment business, with rental agreements for the lease of various kinds of office equipment. John Charles Chang, Jr. was its President and General Manager and one of its directors.
1989–1998
It was undisputed that, while still an officer and director of TOPROS, Chang established Identic in 1989, Golden Exim in 1990 and TOPGOLD in 1998, all in the same line of business. He owned 65% of Identic and 80% of Golden Exim, and, together with his son, 99.76% of TOPGOLD.
The Court’s findings
Golden Exim entered into a service contract with Linde, a TOPROS client, at the same time that TOPROS was servicing it. In 1998, TOPGOLD ran advertisements strikingly similar to TOPROS’s 1997 ads, with “now available at TOPROS” changed to “now available at TOPGOLD.” TOPGOLD used the same address as TOPROS. A 1,445-square-meter lot on which TOPROS’s building stands was registered in Golden Exim’s name in 1993.
In court
Asked why he gave the investment opportunity to Golden Exim and not to TOPROS, Chang answered that he had to make his own living. In his words: “Of course, I have to have my own living.”
Chang’s side
Chang denied the charges. He said that he alone ran TOPROS and shouldered its liabilities, that Ramon Ty, whom the Court calls TOPROS’s patriarch, encouraged him to organize and establish his own corporations, and that the Ty family knew he had organized them.
The lower courts
TOPROS filed the case before the Securities and Exchange Commission on November 17, 1998. On March 18, 2008, the Regional Trial Court ruled against Chang and ordered him, among others, to account for all the profits and properties that should have accrued to TOPROS and to refund them. On June 17, 2011, the Court of Appeals reversed and dismissed the case. As the Supreme Court summarized it, the Court of Appeals held that there were only mere innuendos of disloyalty.
Issue
Did Chang violate his fiduciary duties under the Corporation Code, and does the doctrine of corporate opportunity under Sec. 34 (now Sec. 33 of the Revised Corporation Code) apply to the companies he set up while he was an officer and director of TOPROS?
Ruling
Yes. The doctrine applies. The Court set aside the decision and resolution of the Court of Appeals and remanded the case to the trial court to determine Chang’s exact liability. It fixed no amount.
As the acts took place under B.P. Blg. 68, the Court applied Secs. 31 and 34 of the old Corporation Code. It agreed with the trial court that Chang “committed several acts showing personal or pecuniary interest that were in conflict with his duties as director and officer of TOPROS.” That he risked his own funds in running TOPROS and paying off its obligations did not absolve him of those duties. The circumstances he cited, which suggested the corporation’s knowledge, tolerance or acquiescence, did not amount to the compliance that Sec. 34 requires even if admitted, and he failed to show ratification by a vote of the stockholders representing at least two-thirds of the outstanding capital stock. The Court also set guidelines: a claim of damages arises when a corporate officer or director takes a business opportunity for his own, if the claimant sufficiently shows that (a) the corporation is financially able to exploit the opportunity; (b) the opportunity is within its line of business, which means the companies must be shown to compete; (c) the corporation has an interest or expectancy in it; and (d) by taking it, the officer or director is placed in a position contrary to his duties to the corporation. Bare acts that the claimant subjectively sees as disloyal are not enough. The Court held that TOPROS “was correct in pointing out” that the doctrine “applies in the case.” It nonetheless remanded the case for the reception of additional evidence and the reevaluation of the evidence already submitted. TOPROS, as claimant, bears the burden of proving the specific business opportunities behind its claim, and Chang may present evidence to support his claim that TOPROS was already heavily in debt, with Ramon Ty no longer interested in rehabilitating it, and that it had already closed down before certain opportunities were taken. The Supreme Court did not end the case there: it left the amount, if any, for the trial court to determine.
“Even if admitted, the circumstances cited by Chang, which suggest of knowledge, tolerance, or even acquiescence of TOPROS to his establishment of the respondent-corporations which are in the same business as TOPROS, do not amount to the compliance required of Section 34 to absolve a director of disloyalty.”
Doctrine
The decision opens: “A person cannot serve two masters without detriment to one of them.” A director who, by virtue of the office, acquires a business opportunity that should belong to the corporation must account for and refund the profits, unless the stockholders owning or representing at least two-thirds of the outstanding capital stock ratify the act. On what the framers of Sec. 31 of the old Code intended, the Court said: “Only when the corporation, after having been offered the business opportunities, and rejects them, that a director can take advantage thereof.” The claim must also be proved: “Sufficient evidence must be presented to show that the claim of damages is indeed premised on a concrete corporate opportunity falling under the parameters above-stated.” The case applied Sec. 34 of B.P. Blg. 68; today the rule is Sec. 33 of the Revised Corporation Code.
Compare: the merits never reached
In R.N. Symaco Trading Corporation, et al. vs. Santos, G.R. No. 142474, August 18, 2005, a corporate-opportunity claim over a market lease never reached the merits in the Supreme Court, because the man who sued for the association had no standing. The Court agreed with the petitioners that “as respondent Santos was not a legitimate MFBAI member, he had no standing to file a derivative suit for and in its behalf.”
Bar tip
Start with Sec. 33 of the Revised Corporation Code (formerly Sec. 34, B.P. Blg. 68), then apply TOPROS’s four parameters: financial ability, line of business (the companies compete), interest or expectancy, and a position in conflict with the director’s duties. The claimant bears the burden of proving a concrete opportunity. Knowledge or tolerance is not ratification; Sec. 33 requires a vote of the stockholders owning or representing at least two-thirds of the outstanding capital stock. And a ruling that the doctrine applies is not a money judgment: here the exact liability was left to the trial court.
Hear it explained
Corporate Opportunity, Podcast Ep. 8, at 3:17
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This digest is general legal information for education, not legal advice, and it is not a substitute for reading the decision. Quoted passages are taken word for word from the full text.