PAUL LEE TAN, ANDREW LIUSON, ESTHER WONG, STEPHEN CO, JAMES TAN, JUDITH TAN, ERNESTO TANCHI JR., EDWIN NGO, VIRGINIA KHOO, SABINO PADILLA JR., EDUARDO P. LIZARES AND GRACE CHRIS…

Grace Christian High School versus Tan

The Case

This is a petition for review on certiorari brought by the members and trustees of Grace Christian High School, a nonstock, nonprofit educational corporation, against the rulings of the Securities and Exchange Commission and the Court of Appeals. The dispute began as an intra-corporate controversy over the validity of an annual members' meeting at which four new trustees were elected to replace four who had died. The case matters because the Supreme Court settles a question that recurs in corporation law examinations: for purposes of quorum, do you count dead members of a nonstock corporation? The Court also clarifies the distinction between acts of the board and acts of the members, and how vacancies in a board of trustees may be filled.

Procedural History

The controversy was first brought before the Securities and Exchange Commission. The SEC hearing officer declared the annual members' meeting null and void for lack of quorum, holding that the basis for quorum should be the number of members fixed in the articles of incorporation, not merely the number of living members. The SEC en banc denied the appeal of the petitioners and affirmed the hearing officer in toto.

The petitioners then went up to the Court of Appeals on a petition for review. The Court of Appeals dismissed the appeal on a technical ground: the verification and certification of non-forum shopping had been signed by only one petitioner, Atty. Sabino Padilla Jr., without proof of authority to sign for the others. The Court of Appeals denied reconsideration. Hence the petition for review on certiorari under Rule 45 reached the Supreme Court.

Facts

Grace Christian High School is a nonstock, nonprofit educational corporation with fifteen regular members, who also constitute the board of trustees. By the time of the annual members' meeting on April 6, 1998, only eleven member-trustees were living, because four had already died. Of the eleven, seven attended the meeting through their respective proxies. Atty. Sabino Padilla Jr. convened and chaired the meeting over the objection of Atty. Antonio Pacis, who argued that there was no quorum.

At that meeting, four persons were voted to replace the four deceased member-trustees. The petitioners maintained that the deceased member-trustees should not be counted in computing quorum, because upon death a member automatically loses all rights and interests in the corporation, including the right to vote.

The SEC hearing officer and the SEC en banc ruled against them, and the Court of Appeals dismissed their appeal on the verification defect. The Supreme Court took up the case and resolved both the procedural and the substantive questions.

Issues

• Whether or not the Court of Appeals erred in dismissing the petition below on the basis of a defective verification and certification of non-forum shopping.
• Whether or not dead members should still be counted in determining the quorum for conducting the annual members' meeting of a nonstock corporation.
• Whether or not the four new trustees were validly elected to fill the vacancies in the board of trustees.

Applicable Provisions

Section 52 of the Corporation Code provides:

Section 52. 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 a majority of the members in the case of non-stock corporations.

This is the central provision construed by the Court, and the whole case turns on what the word members means in it.

Section 137 of the Corporation Code provides:

Section 137. Outstanding capital stock defined. The term outstanding capital stock as used in this Code, means the total shares of stock issued under binding subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury shares.

This definition shows that, in stock corporations, quorum is counted on the basis of issued and outstanding voting stock, not on a fixed number in the articles of incorporation.

Section 91 of the Corporation Code, as applied by the Court, provides that termination extinguishes all the rights of a member of the corporation, unless otherwise provided in the articles of incorporation or the bylaws. This is the basis for excluding dead members from the quorum count.

Section 29 of the Corporation Code provides:

Section 29. Vacancies in the office of director or trustee. Any vacancy occurring in the board of directors or trustees other than by removal by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in office.

This governs how the four vacancies should have been filled, and it shows that filling vacancies by the remaining trustees is permissive, not mandatory.

Ruling

On the first issue, the Court held that the petition before the Court of Appeals was initially flawed, because the verification and certification were signed by only one petitioner and no proof of authority was attached. However, a special power of attorney was subsequently submitted. In the interest of substantial justice, the Court excused the procedural lapse, finding no intention to circumvent the requirements, and noting that the substantial merits and the purely legal question involved were special circumstances justifying an exception to strict compliance.

On the second issue, the Court ruled that dead members are not counted in determining quorum. For stock corporations, quorum is based on the number of outstanding voting stocks. For nonstock corporations, only actual, living members with voting rights are counted. The Court reasoned that the right to vote attaches to membership, and membership in a nonstock corporation is personal and non-transferable unless the articles or bylaws provide otherwise. Under the bylaws of the school, membership is terminated by death, and termination extinguishes all rights of a member. With eleven remaining members, the quorum should be six. Since six members were present, there was a quorum, and the annual members' meeting was valid.

On the third issue, the Court held that the election of the four trustees could not be upheld. While a majority of the remaining members were present, the election was held in an annual meeting of the members, not of the board of trustees. The bylaws specifically prescribe that vacancies in the board must be filled by the remaining trustees, who must sit as a board to validly elect the new ones. The Court stressed the well-defined distinction between a corporate act done by the board and one done by the constituent members.

Doctrine

For stock corporations, quorum under Section 52 of the Corporation Code is based on the number of outstanding voting stocks. For nonstock corporations, only actual, living members with voting rights are counted in determining quorum. Dead members whose membership has been terminated under the bylaws are excluded from the count.

The right to vote in a nonstock corporation attaches to membership, which is personal and non-transferable unless the articles or bylaws provide otherwise. Termination of membership extinguishes all rights of the member, including the right to vote.

Under Section 29, the filling of board vacancies by the remaining directors or trustees is permissive, not mandatory. But where the bylaws prescribe a specific mode, that mode must be followed. Vacancies in the board must be filled by the remaining trustees sitting as a board, not by the members in an annual meeting.

Disposition

The petition was partly granted. The resolutions of the Court of Appeals were reversed and set aside, and the remaining members of the board of trustees of Grace Christian High School were allowed to convene and fill up the vacancies in the board in accordance with the decision.

Remember This

Memorize this line: for nonstock corporations, only actual, living members with voting rights are counted in determining quorum, because membership is personal and non-transferable and is extinguished by death. Examiners use this case to test quorum computation in nonstock corporations and the distinction between acts of the board and acts of the members in filling board vacancies.