G.R. No. 165887, 6 June 2011

FACTS:

Ruby Industrial Corporation (RUBY) is a domestic corporation engaged in glass manufacturing. The SEC issued an order declaring RUBY under suspension of payments and enjoining the disposition of its properties pending hearing of the petition, except insofar as necessary in its ordinary operations, and making payments outside of the necessary or legitimate expenses of its business.

The MANCOM was created and tasked to 1) undertake the management of RUBY; (2) take custody and control over all existing assets and liabilities of RUBY; (3) evaluate RUBYs existing assets and liabilities, earnings and operations; (4) determine the best way to salvage and protect the interest of its investors and creditors; and (5) study, review and evaluate the proposed rehabilitation plan for RUBY. Over ninety percent (90%) of RUBYs creditors objected to the Revised BENHAR/RUBY Plan and the creation of a new management committee.

At the hearing of the petition for the creation of a new management committee, three (3) members of the original management committee opposed the Revised BENHAR/RUBY Plan on grounds that:(1) it would legitimize the entry of BENHAR, a total stranger, to RUBY as BENHAR would become the biggest creditor of RUBY;(2) it would put RUBYs assets beyond the reach of the unsecured creditors and the minority stockholders; and (3) it was not approved by RUBYs stockholders in a meeting called for the purpose. The SEC Panel approved the Revised BENHAR/RUBY Plan and dissolved the existing management committee. It also created a new management committee and appointed BENHAR as one of its members.

In addition to the powers originally conferred to the management committee under Presidential Decree (P.D.) No. 902-A, the new management committee was tasked to oversee the implementation by the Board of Directors of the revised rehabilitation plan for RUBY.

ISSUE:

Whether the minority’s pre-emptive rights were violated.

RULING:

Yes. Pre-emptive right under Sec. 39 of the Corporation Code refers to the right of a stockholder of a stock corporation to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings. The right may be restricted or denied under the articles of incorporation, and subject to certain exceptions and limitations. The stockholder must be given a reasonable time within which to exercise their preemptive rights. Upon the expiration of said period, any stockholder who has not exercised such right will be deemed to have waived it.

The validity of issuance of additional shares may be questioned if done in breach of trust by the controlling stockholders. Thus, even if the pre-emptive right does not exist, either because the issue comes within the exceptions in Section 39 or because it is denied or limited in the articles of incorporation, an issue of shares may still be objectionable if the directors acted in breach of trust and their primary purpose is to perpetuate or shift control of the corporation, or to “freeze out” the minority interest.

There can be no gainsaying the well-established rule in corporate practice and procedure that the will of the majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted by-laws not proscribed by law. It is, however, equally true that other stockholders are afforded the right to intervene especially during critical periods in the life of a corporation like reorganization, or in this case, suspension of payments, more so, when the majority seek to impose their will and through fraudulent means, attempt to siphon off Ruby’s valuable assets to the great prejudice of Ruby itself, as well as the minority stockholders and the unsecured creditors.

Certainly, the minority stockholders and the unsecured creditors are given some measure of protection by the law from the abuses and impositions of the majority, more so in this case, considering the give-away signs of private respondents perfidy strewn all over the factual landscape. Indeed, equity cannot deprive the minority of a remedy against the abuses of the majority, and the present action has been instituted precisely for the purpose of protecting the true and legitimate interests of Ruby against the Majority Stockholders.

*Case Digest by Lowel Dave D. Manuel, JD-4, Andres Bonifacio Law School, S.Y. 2019-2020