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On Period for Service of Notice of Stockholders’ Meeting

Chamcham
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On Period for Service of Notice of Stockholders’ Meeting

Lydia Lao, Jeffrey Ong, Henry Sy, Sy Tian Tin, Sy Tian Tin, Jr., and Paul Chua, Petitioners, vs. Yao Bio Lim and Philip King, Respondents; G.R. No. 201306; 09 August 2017

Facts:

On March 15, 2002, a general stockholders’ meeting was held wherein Lao, Ong, Henry- Sy, Sy Tian Tin, Sy Tian Tin, Jr. and Paul Chua (PETITIONERS) were elected as members of the board of directors of Philadelphia School, Inc. (PSI), with Chua Lian as chairman of the board.

On March 26, 2002, Yao Bio Lim and Philip King (RESPONDENTS), both stockholders of PSI, filed a Petition before Branch 90, Regional Trial Court, Quezon City against PETITIONERS.

On March 20, 2007, the trial court rendered its decision in favor of RESPONDENTS.

The Court of Appeals affirmed the Regional Trial Court Decision. The CA nullified the meeting, in part, on the ground that the notice thereof was not sent to the stockholders at least two (2) weeks prior to the meeting as required under Section 50 of the Corporation Code.

Issue: Whether  or not the notice was irregularly served.

Ruling: No.

By its express terms, the Corporation Code allows the shortening or lengthening of the period within which to send the notice to call a special or regular meeting.

Section 50 of Batas Pambansa Blg. 68 reads in part:

Section 50. Regular and Special Meetings of Stockholders or Members. — Regular meetings of stockholders or members shall be held annually on a date fixed in the by-laws, or if not so fixed, on any date in April of every year as determined by the board of directors or trustees: Provided, That written notice of regular meetings shall be sent to all stockholders or members of record at least two (2) weeks prior to the meeting, unless a different period is required by the by-laws.

Under PSI’s by-laws, notice of every regular or special meeting must be mailed or personally delivered to each stockholder not less than five (5) days prior to the date set for the meeting.

Thus, the mailing of the Notice to respondents on March 5, 2002 calling for the annual stockholders’ meeting to be held on March 15, 2002 is not irregular, since it complies with what was stated in PSI’s by-laws.

On Appointment of Receiver or Management Committee (Villamor v. Umale)

Chamcham
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On Appointment of Receiver or Management Committee (Villamor v. Umale)

In the case of of Villamor v. Umale, the Supreme Court passed upon the issue whether the Court of Appeals properly placed the corporation, Pasig Printing Corporation, under receivership and created a receiver or management committee.

A corporation may be placed under receivership, or management committees may be created, to preserve properties involved in a suit and to protect the rights of of the parties under the control and supervision of the court.

ALFREDO L. VILLAMOR, JR., Petitioner, v. JOHN S. UMALE, IN SUBSTITUTION OF HERNANDO F. BALMORES, Respondent; G.R. No. 172843; 24 September 2014

Reversing the Court of Appeals, the Supreme Court said:

A corporation may be placed under receivership, or management committees may be created to preserve properties involved in a suit and to protect the rights of the parties under the control and supervision of the court. Management committees and receivers are appointed when the corporation is in imminent danger of “(1) [d]issipation, loss, wastage or destruction of assets or other properties; and (2) [p]aralysation of its business operations that may be prejudicial to the interest of the minority stockholders, parties-litigants, or the general public.”

Applicants for the appointment of a receiver or management committee need to establish the confluence of these two requisites. This is because appointed receivers and management committees will immediately take over the management of the corporation and will have the management powers specified in law. This may have a negative effect on the operations and affairs of the corporation with third parties, as persons who are more familiar with its operations are necessarily dislodged from their positions in favor of appointees who are strangers to the corporation’s operations and affairs.

Thus, in Sy Chim v. Sy Sly Ho & Sons, Inc., this court said:

. . . the creation and appointment of a management committee and a receiver is an extraordinary and drastic remedy to be exercised with care and caution; and only when the requirements under the Interim Rules are shown. It is a drastic course for the benefit of the minority stockholders, the parties-litigants or the general public are allowed only under pressing circumstances and, when there is inadequacy, ineffectual or exhaustion of legal or other remedies . . . The power of the court to continue a business of a corporation . . . must be exercised with the greatest care and caution. There should be a full consideration of all the attendant facts, including the interest of all the parties concerned.

PPC waived its rights, without any consideration in favor of Villamor. The checks were already in Villamor’s possession. Some of the checks may have already been encashed. This court takes judicial notice that the goodwill money of ₱18,000,000.00 and the rental payments of ₱4,500,000.00 every month are not meager amounts only to be waived without any consideration. It is, therefore, enough to constitute loss or dissipation of assets under the Interim Rules.

Respondent Balmores, however, failed to show that there was an imminent danger of paralysis of PPC’s business operations. Apparently, PPC was earning substantial amounts from its other sub-lessees. Respondent Balmores did not prove otherwise. He, therefore, failed to show at least one of the requisites for appointment of a receiver or management committee.

On Sufficiency of Ground to Examine Corporate Books and Records

Chamcham
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On Sufficiency of Ground to Examine Corporate Books and Records

It is well-settled that the ownership of shares of stock gives stockholders the right under the law to be protected from possible mismanagement by its officers. This right is predicated upon self­-preservation.

Terelay Investment and Development Corporation vs. Cecilia Teresita Yulo (G.R. No. 160924)

Another issue resolved by the Supreme Court in Terelay Investment and Development Corporation vs. Cecilia Teresita Yulo was whether Yulo had sufficient and valid ground to inspect and examine the corporate books and records of Terelay Investment and Development Corporation.

The Supreme Court sustained the pronouncement of the Court of Appeals, thus:

Verily, petitioner-appellee has presented enough evidence that she is a stockholder of TERELAY. The corporate documents presented support her claim that she is a registered stockholder in TERELAY’s stock and transfer book thus giving her the right, under Section 74 par. 2 and Section 75 of the Philippine Corporation Law, to inspect TERELAY’s books, records, and financial statements.

Accordingly, Cecilia Yulo has the right to be fully informed of TERELAY’s corporate condition and the manner its affairs are being managed. It is well-settled that the ownership of shares of stock gives stockholders the right under the law to be protected from possible mismanagement by its officers. This right is predicated upon self­-preservation. In any case, TERELAY did not adduce sufficient proof that Cecilia Yulo was in bad faith or had an ulterior motive in demanding her right under the law.

Terelay Investment and Development Corporation vs. Cecilia Teresita Yulo

Chamcham
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Terelay Investment and Development Corporation vs. Cecilia Teresita Yulo

Interest Required to Exercise Right to Inspect Corporate Books and Records

“The Corporation Code has granted to all stockholders the right to inspect the corporate books and records, and in so doing has not required any specific amount of interest for the exercise of the right to inspect.”

Terelay Investment v. Yulo (G.R. No. 160924; 05 August 2015)

Facts:

Asserting her right as a stockholder, Cecilia Teresita Yulo (YULO) wrote a letter, dated September 14, 1999, addressed to Terelay Investment and Development Corporation (TERELAY) requesting that she be allowed to examine its books and records on September 17, 1999 at 1:30 o’clock in the afternoon at the latter’s office on the 25th floor, Citibank Tower, Makati City. In its reply-letter, dated September 15, 1999, TERELAY denied the request for inspection and instead demanded that she show proof that she was a bona fide stockholder.

On September 16, 1999, Cecilia Yulo again sent another letter clarifying that her request for examination of the corporate records was for the purpose of inquiring into the financial condition of TERELAY and the conduct of its affairs by the principal officers. The following day, Cecilia Yulo received a faxed letter from TERELAY’s counsel advising her not to continue with the inspection in order to avoid trouble.

On October 11, 1999, Cecilia Yulo filed with the Securities and Exchange Commission (SEC), a Petition for Issuance of a Writ of Mandamus with prayer for Damages against TERELAY, docketed as SEC Case No. 10-99-6433.

Following the enactment of Republic Act No. 8799 (The Securities Regulation Code), the case was transferred from the Securities and Exchange Commission to the Regional Trial Court, Branch 142, in Makati City (RTC).

On March 22, 2002, the RTC rendered its judgment granting the application of YULO for inspection of the corporate records of TERELAY.

On appeal, the Court of Appeals (CA) affirmed the RTC. TERELAY sought reconsideration but the CA denied the same.

Issue:

Whether YULO has the right to inspect and examine the corporate books and records despite her shareholding being a measly .001% interest.

Ruling:

Yes.

TERELAY’s submission that the respondent’s “insignificant holding” of only .001% of the petitioner’s stockholding did not justify the granting of her application for inspection of the corporate books and records is unwarranted.

The Corporation Code has granted to all stockholders the right to inspect the corporate books and records, and in so doing has not required any specific amount of interest for the exercise of the right to inspect. Ubi lex non distinguit nee nos distinguere debemos. When the law has made no distinction, we ought not to recognize any distinction.

On Ultra Vires Acts (Ombudsman v. De Guzman)

Chamcham
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On Ultra Vires Acts (Ombudsman v. De Guzman)

On Ultra Vires Acts

Considering that the Board of Directors remained silent and the Postmaster Generals continued to approve the payments to Aboitiz One, they are presumed to have substantially ratified respondent’s unauthorized acts.

Office of the Ombudsman v. De Guzman (G.R. No. 197886; 04 October 2017)

Facts:

Sometime in 2001, the Philippine Postal Corporation entered into a contract with Aboitiz Air Transport Corporation (Aboitiz Air) for the carriage of mail at a rate of ₱5.00 per kilogram.This contract would expire on December 31, 2002.

Sometime in October 2003, or after the expiry of its contract with Aboitiz Air, the Philippine Postal Corporation purchased 40 vehicles for mail deliveries in Luzon. It also hired 25 drivers for these vehicles on a contractual basis. All of these drivers’ contracts would expire on March 31, 2004, except that of a certain Oliver A. Cruz.

The Central Mail Exchange Center of the Philippine Postal Corporation conducted a post study of the delivery system and found that the expenses for the salaries and maintenance of its vehicles for Luzon deliveries were higher than its previous system of outsourcing deliveries to Aboitiz Air. On April 15, 2004, it submitted a recommendation that the Philippine Postal Corporation would save ₱6,110,152.44 per annum if deliveries were outsourced instead at the cost of ₱8.00 per kilogram.

On April 29, 2004, the Board of Directors of the Philippine Postal Corporation held a Special Board Meeting where De Guzman,the Officer-in-Charge, endorsed for approval the Central Mail Exchange Center’s recommendation to outsource mail delivery in Luzon.

On May 7, 2004, De Guzman sent a letter to Aboitiz Air, now Aboitiz One, Inc. (Aboitiz One), through its Chief Operating Officer, Efren E. Uy, stating:

“Pending finalization of the renewal of our contract, you may now re-assume to undertake the carriage of mail from and to Regions 1, 2, 5, & CAR starting 11 May 2004 until further notice. The terms and conditions shall be the same as stipulated in the previous contract except for the schedule and the rate. The attached revised schedule shall be followed and the rate shall be P8.00 per Kilogram.”

Aboitiz One accepted the proposal and commenced its delivery operations in Luzon on May 20, 2004. When Postmaster General Diomedo P. Villanueva (Postmaster General Villanueva) resumed work, the Aboitiz One contract had already been fully implemented. Thus, the Postmaster General approved payments made to Aboitiz One for services rendered.

On October 20, 2005, Atty. Sim Oresca Mata, Jr. filed an administrative complaint with the Office of the Ombudsman against De Guzman. He alleged that the Aboitiz One contract renewal was done without public bidding and that the rate per kilogram was unilaterally increased without the Philippine Postal Corporation Board of Directors’ approval.

Issue:

Whether or not the act of respondent of procuring Aboitiz One’s services in outsourcing mail deliveries in Luzon was ultra vires.

Ruling:

No.

Authority of Respondent

Respondent was designated Officer-in-Charge when the contract between the Philippine Postal Corporation and Aboitiz One was effected, since the Postmaster General had taken a leave of absence. Thus, he is considered to have been exercising the functions of the Postmaster General during this period. Under Republic Act No. 7354, the powers of the Philippine Postal Corporation are exercised by the Board of Directors, with the President appointing all seven (7) members and “with the Postmaster General as one of the members to represent the government shareholdings. “

The Postmaster General manages the Philippine Postal Corporationn and has the power to sign contracts on behalf of the corporation as “authorized and approved by the Board [of Directors].” Valid corporate acts are those that have “the vote of at least a majority of the members present at a meeting at which there is a quorum.”

Lack of Board Approval

The Board of Directors never actually took a vote on whether or not it should renew its contract with Aboitiz One for the outsourcing of its mail deliveries. There was also no board resolution issued after approving it. As there was no majority vote or a board resolution, respondent was not authorized to enter into the contract dated May 7, 2004.

Ratification

There was no evidence presented that the Board of Directors repudiated the contract dated May 7, 2004 with Aboitiz One. The contract remained effective until January 31, 2006. While the transcript of the April 29, 2004 Special Board Meeting does not mention the proposal to increase the cost of delivery from ₱5.00 to ₱8.00 per kilogram, the Central Mail Exchange Center’s cost-benefit analysis and recommendation for price increase was sent to the Board of Directors on April 20, 2004. This memorandum was the reason for the April 29, 2004 Special Board Meeting. Therefore, the Board of Directors was informed that the renewal of the Aboitiz One contract would include an increase in costs.

Postmaster General Villanueva approved the payments when he resumed work. Subsequent Postmaster General Rama, upon his assumption to office, also approved the payments to Aboitiz One. The Corporate Auditor Commission on Audit likewise certified that it did not issue any notice of disallowance on the Aboitiz One contract.

Conclusion

Considering that the Board of Directors remained silent and the Postmaster Generals continued to approve the payments to Aboitiz One, they are presumed to have substantially ratified respondent’s unauthorized acts. Therefore, respondent’s action is not considered ultra vires.

On Derivative Suit (Villamor v. Umale)

Chamcham
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On Derivative Suit (Villamor v. Umale)

Villamor v. Umale (G.R. No. 172843)

Individual stockholders may be allowed to sue on behalf of the corporation whenever the directors or officers of the corporation refuse to sue to vindicate the rights of the corporation or are the ones to be sued and are in control of the corporation.

On Derivative Suits

Facts:

On March 1, 2004, Pasig Printing Corporation (PPC) obtained an option to lease portions of Mid-Pasig Development Corporation’s (MID-PASIG) property, including a prime property (ROCKLAND) occupied by MC Home Depot (MCHD).

On November 11, 2004, PPC’s board of directors issued a resolution waiving all its rights, interests, and participation in the option to lease contract in favor of the law firm of Atty. Alfredo Villamor, Jr. (VILLAMOR). PPC received no consideration for this waiver in favor of Villamor’s law firm.

On November 22, 2004, PPC, represented by Villamor, entered into a memorandum of agreement (MOA) with MCHD. Under the MOA, MCHD would continue to occupy the area as PPC’s sublessee for four (4) years, renewable for another four (4) years, at a monthly rental of ₱4,500,000.00 plus goodwill of ₱18,000,000.00

In compliance with the terms of the MOA, MCHD issued 20 post-dated checks representing rental payments for one year and the goodwill money. The checks were given to Villamor who did not turn these or the equivalent amount over to PPC, upon encashment.

Hernando Balmores (RESPONDENT) , a stockholder and director of PPC, wrote a letter addressed to PPC’s directors (PETITIONERS) , informing them that Villamor should be made to deliver to PPC and account for MCHD’s checks or their equivalent value.

Due to the alleged inaction of PETITIONERS, RESPONDENT filed with the Regional Trial Court an intra-corporate controversy complaint under Rule 1, Section 1(a)(1) of the Interim Rules for Intra-Corporate Controversies (Interim Rules) against PETITIONERS for their alleged devices or schemes amounting to fraud or misrepresentation “detrimental to the interest of the corporation and its stockholders.”

RESPONDENT alleged in his complaint that because of petitioners’ actions, PPC’s assets were “. . . not only in imminent danger, but have actually been dissipated,lost, wasted and destroyed.” He also prayed that a receiver be appointed from his list of nominees. He also prayed for PETITIONERS’ prohibition from “selling, encumbering, transferring or disposing in any manner any of PPC’s properties, including the MCHD checks and/or their proceeds.” He further prayed for the accounting and remittance to PPC of the MCHD checks or their proceeds and for the annulment of the board’s resolution waiving PPC’s rights in favor of VILLAMOR’s law firm.

Ruling of the RTC

In a resolution dated 15 June 2005, the RTC denied RESPONDENT’s prayer for the appointment of a receiver or the creation of a management committee.

According to the trial court, PPC’s entitlement to the checks was doubtful. The resolution issued by PPC’s board of directors, waiving its rights to the option to lease contract in favor of Villamor’s law firm, must be accorded prima facie validity.

The trial court also found that there was “no clear and positive showing of dissipation, loss, wastage, or destruction of [PPC’s] assets . . . [that was] prejudicial to the interestof the minority stockholders, partieslitigants or the general public.” The board’s failure to recover the disputed amounts was not an indication of mismanagement resulting in the dissipation of assets.

The trial court noted that PPC was earning substantial rental income from its other sub-lessees.

The trial court added that the failure to implead PPCwas fatal. PPC should have been impleaded as an indispensable party, without which, there would be no final determination of the action.

Ruling of the CA

The Court of Appeals (CA) reversed the trial court’s decision, and issued a new order placing PPC under receivership and creating an interim management committee.

The Court of Appeals also ruled that the case filed by respondent Balmores with the trial court “[was] a derivative suit because there were allegations of fraud or ultra vires acts . . . by [PPC’s directors].

Issue:

Whether the CA correctly characterized RESPONDENT’s action as a derivative suit.

Ruling:

No.

A derivative suit is an action filed by stockholders to enforce a corporate action. It is an exception to the general rule that the corporation’s power to sue is exercised only by the board of directors or trustees.

Individual stockholders may be allowed to sue on behalf of the corporation whenever the directors or officers of the corporation refuse to sue to vindicate the rights of the corporation or are the ones to be sued and are in control of the corporation. It is allowed when the “directors [or officers] are guilty of breach of . . . trust, [and] not of mere error of judgment.”

In derivative suits, the real party in interest is the corporation, and the suing stockholder is a mere nominal party.

RESPONDENT’s action in the trial court failed to satisfy all the requisites of a derivative suit.

RESPONDENT failed to exhaust all available remedies to obtain the reliefs he prayed for. Though he tried to communicate with PPC’s directors about the checks in Villamor’s possession before he filed an action with the trial court, RESPONDENT was not able to show that this comprised all the remedies available under the articles of incorporation, by-laws, laws, or rules governing PPC.

Granting that (a) RESPONDENT’s attempt to communicate with the other PPC directors already comprised all the available remedies that he could have exhausted and (b) the corporation was under full control of PETITIONERS that exhaustion of remedies became impossible or futile, RESPONDENT failed to allege that appraisal rights were not available for the acts complained of here.

Neither did RESPONDENT implead PPC as party in the case nor did he allege that he was filing on behalf of the corporation.

The non-derivative character of RESPONDENT’s action may also be gleaned from his allegations in the trial court complaint. In the complaint, he described the nature of his action as an action under Rule 1, Section 1(a)(1) of the Interim Rules, and not an action under Rule 1, Section 1(a)(4) of the Interim Rules, which refers to derivative suits.

RESPONDENT’s intent to file an individual suit removes it from the coverage of derivative suits.

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