G.R. No. 201306, 9 August 2017

FACTS:

PSI was organized in 1970 with an authorized capital stock of P2,000,000.00, divided into 20,000 shares with a par value of P100 per share. Out of this authorized capital stock, 4,600 shares were subscribed and paid up.

Ong Y. Seng, King’s father, had the most number of subscribed shares, holding 1,200 shares. Before his death in 1994, he sought, and was granted, the approval of the PSI board of directors to transfer his shares to King. Since then, King had been consistently elected as a member of the PSI board of directors.

During the special stockholders’ meeting on May 23, 1998, a new set of directors and officers was elected. Yao Bio Lim was elected President and King was Vice President.

Lao, the former president, refused to acknowledge the newly elected directors and officers as well as King’s ownership of 1,200 PSI shares. On August 15, 1998, Lao issued a Secretary’s Certificate stating that a board meeting was held on the same date wherein the board of directors resolved to nullify the transfer to King of the shares owned by his father.

In April 1999, King discovered that a stockholders’ meeting was conducted on March 19, 1999, wherein Lao, William Chua Lian (Chua Lian), Jeffrey Ong (Ong), and Henry Sy were elected as new members of the board of directors.
King filed a petition before the Securities and Exchange Commission “to enjoin [Lao, Chua Lian, Ong, and Henry Sy] from representing themselves as officers and members of the board of directors of the Philadelphia School, Inc. and to nullify all acts done and resolutions passed by them. The petition was docketed as SEC Case No. 05-99-6297 which was granted.

Meanwhile, 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, with Chua Lian as chairman of the board.

On March 26, 2002, Yao Bio Lim and King filed a petition before Branch 90, Regional Trial Court, Quezon City against petitioners, the newly elected board of directors. They sought, among others, to annul: (1) “the elections held on March 15, 2002 and all corporate acts of the supposedly new board of directors and officers of [PSI],” (2) the “issuance of stock dividends,” and (3) the “illegal transfer of shares of stock.”[22] They also prayed that petitioners, together with Chua Lian, be ordered to account for damages and for the funds and assets of the corporation since August 1998.

Yao Bio Lim and King averred that on March 10, 2002, they received the Notice of meeting informing them about the general stockholders’ meeting to be held on March 15, 2002 at 9:00 a.m. at the PSI’s board room. “The notice, however, did not state the agenda or the purpose of the meeting.”[24] Moreover, they alleged that the Notice sent to King was still in the name of his father, Ong Y. Seng, while that sent to Yao Bio Lim included the name of his deceased father, Yao Chek.

Yao Bio Lim claimed that he acquired his PSI shares from his father, who owned 300 PSI shares during his lifetime. Specifically, in 1995, Yao Chek transferred one (1) share to him and 100 shares to his brother, Yao Tok Lim. After Yao Chek’s death in 1999, his remaining shares were divided among his five (5) children. Yao Bio Lim’s brothers, in turn, agreed to assign their corresponding shares to Yao Bio Lim and Yao Juan Lim.[26]

During the meeting, “Philip King and a certain Atty. Garaygay were asked to leave the board room because they were allegedly not stockholders.”[27] On the other hand, Yao Bio Lim was allowed to vote for only one (1) share during the elections despite the proxies he held for his brothers, Yao Tok Lim and Yao Juan Lim.[28]

Yao Bio Lim and King further attested that the Securities and Exchange Commission and the Regional Trial Court had previously ordered that the stockholders listed in the 1997 General Information Sheet be used as basis for the 2000 and 2001 elections of PSI board of directors. Lao, Chua Lian, Ong, and Henry Sy allegedly violated these orders when they used a different list of stockholders during the elections held on March 15, 2002. Moreover, they had purportedly previously issued 300% stock dividends to some stockholders without the required approval of stockholders representing two-thirds (2/3) of the outstanding capital stock of PSI.[29]

Finally, Yao Bio Lim and King assailed the transfer of the following shares of stocks without the required prior notice to all stockholders, which allegedly deprived them of “the opportunity to exercise their option to buy the shares”[30]:

SELLER                                TRANSFEREE                           NUMBER OF SHARES

David Lio                               Betty Lao/Lydia Lao                             200 shares
Ong Giok King                       Lydia Lao/Sy Tian Tin                          99 shares
William Chua Lian                 Paul Chua                                            1 shares [sic][31]

On March 20, 2007, the trial court rendered its decision in favor of Yao Bio Lim and King. The dispositive portion of this decision read:

IN VIEW OF THE FOREGOING, judgment is rendered in favor of [respondents] and against [petitioners] as follows:

(a) Declaring the March 15, 2002 general stockholders’ meeting and elections null and void and the results thereof invalid;
(b) Declaring the issuance of 300% stock dividend[s] by [petitioners]/Philadelphia School, Inc. in 199[7][33] null and void;
(c) Declaring the sale/transfer of shares of stocks of David Lao, Ong Giok King and William Chua Lian illegal and void;
(d) Ordering [petitioners] to pay [respondents]: (i) PhP100,000.00 as temperate damages, (ii) PhP50,000.00 as moral damages, (iii) PhP100,000 as reasonable attorney’s fees and expenses of litigation plus costs of suit.
All other claims are dismissed fort (sic) lack of factual/legal basis.

The Court of Appeals affirmed the Regional Trial Court Decision. It held that there were valid grounds to nullify the March 15, 2002 stockholders’ meeting. First, the Notice of meeting did not state the purpose of the stockholders’ meeting as required by Article VIII (5) of PSI’s by-laws.[35] Additionally, it was not sent to the stockholders at least two (2) weeks prior to the meeting as required under Section 50 of the Corporation Code.[36]

Finally, petitioners used a schedule of stockholders different from the list contained in the 1997 General Information Sheet, contrary to previous orders of the Securities and Exchange Commission and of the Regional Trial Court.[37]

The Court of Appeals further found that the issuance of 300% stock dividends was not approved by stockholders representing two-thirds (2/3) of the outstanding capital stock in violation of Section 43 of the Corporation Code.[38]

ISSUE:

I. Whether or not Section 50 of the Corporation Code was complied with before conducting the March 15, 2002 general stockholders’ meeting.
II. Whether or not the CA is correct in affirming the RTC’s decision declaring the March 15, 2002 general stockholders meeting as null and void, and the results thereof invalid.
III. Whether or not the issuance of 300% stock dividends by (petitioners)/Philadelphia School, Inc. in 1997 null and void.
IV. Whether or not the transfer of shares of stocks of David Lao, Ong Giok King and William Chua Lian illegal and void.

RULING:

I. Section 50 of Batas Pambansa Blg. 68 or the Corporation Code prescribes that “regular meetings of stockholders or members shall be held annually on a date fixed in the by-laws.” Respondents do not dispute that Article VIII (3) of the PSI’s by-laws fixed the annual meeting of stockholders on the third Friday of March of every year. This Court takes judicial notice that March 15, 2002 was the third Friday of March 2002.

Thus, this Court holds that the March 15, 2002 annual stockholders’ meeting was a regular meeting. Hence, the requirement to state the object and purpose in case of a special meeting as provided for in Article VIII (5) of the PSI’s by-laws does not apply to the Notice for the March 15, 2002 annual stockholders’ meeting.

Regarding the time for serving notice of the meeting to all the stockholders, 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.

II. Despite the foregoing circumstances, there were other grounds to nullify the March 15, 2002 annual stockholders’ meeting. As found by the Court of Appeals, petitioners did not recognize respondents’ rights as stockholders, making the proceedings and elections during the March 15, 2002 meeting void. The Court of Appeals discussed:

During the same meeting, [petitioners] made use of a schedule of stockholders which was different from the list contained in the 1997 [General Information Sheet]. Obviously, [petitioners] defied the previously issued Order of both the SEC and the RTC requiring the use of the 1997 [General Information Sheet], it being the last, official and recorded submission by the Philadelphia School in keeping with its reportorial requirement with the SEC. As disclosed in the records, the 1997 [General Information Sheet] specified the stockholders of Philadelphia School and their respective shareholdings. Since the composition in 1997 [General Information Sheet] was not changed up to the time the March 15, 2002 meeting was called, the same should have been used as the basis for the schedule of stockholders and their respective shareholdings relative to the election of its board of directors. By so defying the Order of both the SEC and the RTC as regards the use of the 1997 [General Information Sheet], [petitioners], in effect, refused to recognize [respondents’] shareholdings and their right to vote, thus, rendering void all the acts done during the meeting, particularly the holding of the election of the officers and the declaration and issuance of the 300% stock dividend.

III. On the issue of the validity of the 300% stock dividends declaration, petitioners insist that the 300% stock dividends were validly declared by the PSI board of directors. They claim that these were ratified by the stockholders owning two-thirds (2/3) of the outstanding capital stock in the meeting held on March 22, 1997, although its distribution was implemented only on February 28, 2002.[59]

The Court of Appeals rejected this stance. It held that the handwritten minutes of the March 22, 1997 meeting offered by petitioners as proof that the declaration and issuance of stock dividends were valid was questionable because “it [did] not even indicate the number of stock dividends to be declared.”[60]

This Court agrees with the Court of Appeals.

Clearly, the foregoing minutes alone would be insufficient to prove petitioners’ claim that the 300% stock dividends were approved by the board of directors and ratified by the stockholders in the March 22, 1997 meeting. The minutes did not provide any other detail that would convincingly show that the 300% stock, dividends distributed in 2002 were the same stock dividends that were ratified by the stockholders in 1997.

This Court finds no reversible error on the part of the Court of Appeals in nullifying the 300% stock dividends, a declaration on the basis of the following findings of the Regional Trial Court:

[O]n the declaration, issuance and distribution of a three hundred percent (300%) stock dividend by [petitioners] in favor of certain stockholders, the evidence shows that the action or actions of the [petitioners] with respect to the 300% stock dividends was or were done without the approval of. . . Yao Bio Lim, . . . Philip King and Lucia Cheng who own and/or are entitled to vote one thousand nine hundred fifty (1,950) shares of stocks of the outstanding capital stock of the School of 4,600 shares, or approximately forty-two percent (42%) of the outstanding capital stock of the School. The act/s of the [petitioners] violated Section 43 of the Corporation Code which provides that “. . . no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the capital stock[.]”[62]

WHEREFORE, the petition is DENIED.

SO ORDERED.

*Case Digest by Jelyn C. Ondong, Refresher, Andres Bonifacio College, SY: 2019-2020