JESUS V. LANUZA, MAGADYA REYES, BAYANI REYES AND ARIEL REYES, PETITIONERS, VS. COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION, DOLORES ONRUBIA, ELENITA NOLASCO, JUAN O. NO…

Lanuza versus Court of Appeals

The Case

This is a petition for review on certiorari brought by stockholders of the Philippine Merchant Marine School, Incorporated against the Court of Appeals, the Securities and Exchange Commission, and the private respondents who controlled the corporation. The petitioners ask the Supreme Court to nullify the appellate court's decision affirming an order of the Securities and Exchange Commission that fixed the quorum for a stockholders' meeting on the basis of the shares reflected in the corporation's articles of incorporation rather than the shares recorded in its stock and transfer book. The case matters because it settles a question every corporation lawyer must answer: when the stock and transfer book and the articles of incorporation disagree, which record controls the computation of quorum and the determination of who may vote?

Procedural History

The dispute began before the Securities and Exchange Commission, where the private respondents questioned the validity of a special stockholders' meeting held in May 1992. The hearing officer dismissed their petition, but on appeal the Commission en banc reversed, holding that the shares of the deceased incorporators should be represented by their administrators or heirs, and directing that a stockholders' meeting be called on the basis of the stockholdings reflected in the articles of incorporation for the purpose of electing a new set of officers.

The petitioners then filed a petition for review with the Court of Appeals. A separate petition for review of the same Commission orders was filed by other stockholders and directors, and the two petitions were consolidated. The Court of Appeals affirmed the Commission's order and later denied the petitioners' motion for reconsideration. Hence, this petition for review on certiorari before the Supreme Court.

Facts

In 1952, the Philippine Merchant Marine School, Incorporated was incorporated. Its articles of incorporation reflected seven hundred founders' shares and seventy-six common shares as the initial subscribed capital stock, for a total of seven hundred seventy-six issued and outstanding shares. In 1978, the private respondents and their predecessors, who were in control of the corporation, registered the stock and transfer book for the first time, recording only thirty-three common shares as the issued and outstanding shares. In 1979, a special stockholders' meeting was held on the basis of a quorum of twenty-seven common shares, representing more than two-thirds of the shares recorded in that book.

In 1982, the heirs of one of the original incorporators, Juan Acayan, petitioned the Securities and Exchange Commission for registration of their property rights over one hundred twenty founders' shares and twelve common shares owned by their father. The Commission held that the heirs were entitled to the claimed shares and directed the holding of a special stockholders' meeting to elect a new set of officers. As a result, the Acayan shares were recorded in the stock and transfer book.

In May 1992, a special stockholders' meeting was held to elect a new set of directors. The private respondents then questioned the validity of that meeting before the Commission, arguing that the quorum should not be based on the one hundred sixty-five shares recorded in the stock and transfer book but on the seven hundred seventy-six shares reflected in the 1952 articles of incorporation. That question traveled through the Commission and the Court of Appeals and reached the Supreme Court.

Issues

• Whether or not the quorum for a stockholders' meeting should be computed on the basis of the outstanding capital stock as reflected in the articles of incorporation rather than the shares recorded in the stock and transfer book.
• Whether or not the Court of Appeals gravely erred in applying the ruling recognizing the shares of the original incorporators to the benefit of the private respondents.
• Whether or not the petition should be dismissed on the ground of res judicata in view of the earlier denial of a related petition.
• Whether or not the petitioners and their counsel should be cited for contempt for violating the rule against forum shopping.

Applicable Provisions

Section 52 of the Corporation Code provides:

Quorum in meetings. Unless otherwise provided for in this Code or in the by-laws, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock or majority of the members in the case of non-stock corporation.

This is the provision that fixes quorum by reference to the outstanding capital stock, which the Court then had to locate in the corporate records.

Section 137 of the Corporation Code provides:

Outstanding capital stock defined. The term outstanding capital stock as used in this code, means the total shares of stock issued to subscribers or stockholders whether or not fully or partially paid (as long as there is binding subscription agreement) except treasury shares.

This definition tells us that quorum rests on the totality of shares subscribed and issued, whether founders' shares or common shares.

Section 24 of the Corporation Code provides:

Election of directors or trustees. At all elections of directors or trustees, there must be present, either in person or by representative authorized to act by written proxy, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote.

This governs the presence required for the election of directors, the very act whose validity was in dispute.

Ruling

On the first issue, the Court upheld the Court of Appeals. The articles of incorporation define the charter of the corporation and the contractual relationships among the State, the corporation, and its stockholders, and their contents bind both the corporation and its shareholders. The stock and transfer book, by contrast, is not a public record and is not exclusive evidence of the matters written in it; it is prima facie evidence only and may be impeached or contradicted by other competent evidence. Since the articles of incorporation showed seven hundred seventy-six issued and outstanding shares while the stock and transfer book reflected a significantly smaller number, the book could not be the sole basis for computing quorum. One who is actually a stockholder cannot be denied the right to vote merely because corporate officers failed to keep accurate records.

On the second issue, the Court held that the Court of Appeals did not err. Its decision merely recognized that a separate judicial declaration to recognize the shares of the original incorporators would entail unnecessary delay and expense, since ownership was already shown in the articles of incorporation. It made no declaration of who the individual owners of those shares were; that question was left to proper judicial or extrajudicial proceedings.

On the third issue, the Court held that res judicata did not apply, because there was no identity of parties between the two petitions, each party asserting its own distinct rights and interests. On the fourth issue, the Court found no forum shopping, since the petitioners had disclosed the pendency of the related petition in their verification and certification and in a manifestation filed with the Court.

Doctrine

Quorum for a stockholders' meeting is based on the outstanding capital stock, meaning the total shares issued to subscribers or stockholders, whether founders' shares or common shares. The articles of incorporation are the primary evidence of the shares subscribed and issued, and their contents bind the corporation and its stockholders. A stock and transfer book is not a public record and is only prima facie evidence of the matters recorded in it; it may be contradicted by other competent evidence, and it cannot be used as the sole basis for determining quorum when it fails to reflect the totality of shares subscribed. A person who is actually a stockholder cannot be denied the right to vote merely because the corporate officers failed to keep the records accurately.

Disposition

The petition was denied and the assailed decision of the Court of Appeals was affirmed, with costs against the petitioners.

Remember This

The line worth memorizing is that quorum is measured by the outstanding capital stock as shown in the articles of incorporation, not by a deficient stock and transfer book, because a real stockholder cannot be deprived of his vote by the corporation's own poor record keeping. Examiners use this case to test the hierarchy between the articles of incorporation and the stock and transfer book, and the computation of quorum under Section 52 in relation to Section 137 of the Corporation Code.