G.R. No. 120138, 5 September 1997

FACTS:

The late Manuel A. Torres Jr. was the majority stockholder of Tormil Realty & Development Corporation while private respondents who are the children of Judge Torres’ deceased brother Antonio A. Torres, constituted the minority stockholders. In 1984, Judge Torres, in order to make substantial savings in taxes, adopted an “estate planning” scheme under which he had assigned to Tormil Realty & Development Corporation various real properties he owned and his shares of stock in other corporations in exchange for 225,972 Tormil realty shares.

Hence, on various dates in July and August of 1984, 10 deeds of assignment were executed by the late Judge Torres.

Consequently, the aforelisted properties were duly recorded in the inventory of assets of Tormil realty and the revenues generated by the said properties were correspondingly entered in the corporation’s books of account and financial records. Likewise, all the assigned parcel of land were duly registered with the respective register of deeds in the name of Tormil realty, except for the ones located in Makati and Pasay City.

Due to the insufficient number of shares of stock issued to Judge Torres and the alleged refusal to private respondents to approved the needed increase in the corporations authorized capital stock, on September 11, 1986 Judge Torres revoked the two deeds of assignment covering the properties in Makati and Pasay City. Noting the disappearance of the Makati and Pasay City properties from the corporations inventory of assets and financial records private respondents, on March 31, 1987, were constrained to file a complaint with the Securites and Exchange Commission (SEC) docketed as SEC Case No. 3153 to compel Judge Torres to deliver to Tormil corporation the two deed of assignment covering the aforementioned Makati and Pasay City properties which had unilaterally revoked and to cause the registration of the corresponding titles in the name of Tormil.

The 1987 annual stockholders meeting and election of directors of Tormil corporation was scheduled on March 25, 1987, in compliance with the provision of its by-laws. Pursuant thereto, Judge Torres assigned from his own shares, one share each to petitioners. These assigned shares were in the nature of “qualifying shares” for the sole purpose of meeting the legal requirement to be able to elect them to the Board of directors as Torres nominees.

ISSUE:

Whether or not the inclusion of the five outsiders are valid. Whether or not the subsequent election is valid.

RULING:

No. In the absence of any provision to the contrary, the corporate secretary is the custodian of corporate records, corollarily, he keeps the stock and transfer book and makes proper and necessary entries therein.Contrary to the generally accepted corporate practice, the stock and transfer book of Tormil was not kept by Ms. Maria Christina T. Carlos, the corporate secretary but by respondent Torres, the president and chairman of the board of directors of Tormil. In contravention to the above cited provision, the stock and transfer book was not kept at the principal office of the corporation either but at the place of respondent Torres.

These being the obtaining circumstances, any entries made in the stock and transfer book on March 8, 1987 by respondent Torres of an alleged transfer of nominal shares to Pabalan and Company cannot therefore be given any valid effect. Where the entries made are not valid, Pabalan and company cannot be considered stockholders of record of Tormil. Because they are not stockholders, they cannot therefore be elected as directors of Tormil. The rule otherwise would not only encourage violation of clear mandate of Rule 74 of the corporation code that stock and transfer book shall be kept in the principal office of the corporation but would likewise open the flood gates of confusion in the corporation as to who has the proper custody of the stock and transfer book and who are the real stockholders of records of a certain corporation as any holder of the stock and transfer book, though not the corporate secretary, at pleasure would make entries therein.

Needless to say, the subsequent election is invalid because the assignment of shares is invalid by reason of procedural infirmity. The Supreme Court also emphasized: all corporations, big or small, must abide by the provisions of the Corporation Code. Being a simple family corporation is not an exemption. Such corporations cannot have rules and practices other than those established by law.

*Case Digest by Stephanie C. Castillo, JD-IV, Andres Bonifacio College, SY: 2019-2020