GRACE BORGOÑA INSIGNE, DIOSDADO BORGOÑA, OSBOURNE BORGOÑA, IMELDA BORGOÑA RIVERA, AND ARISTOTLE BORGOÑA PETITIONERS, VS. ABRA VALLEY COLLEGES, INC. AND FRANCIS BORGOÑA, RESPONDE…

Insigne versus Abra Valley Colleges

The Case

This is a petition for review brought by five siblings, Grace Borgoña Insigne, Diosdado Borgoña, Osbourne Borgoña, Imelda Borgoña Rivera, and Aristotle Borgoña, against Abra Valley Colleges, Incorporated and their older half brother Francis Borgoña. The petitioners sued to be recognized as stockholders and to enforce the corporate rights that flow from that status, namely inspection of corporate books and records, delivery of financial statements, and the holding of the annual stockholders meeting. The trial court dismissed their complaint because they did not present stock certificates in their own names, and the Court of Appeals affirmed. The case matters because the Supreme Court uses it to settle a question every corporation lawyer must answer: is the presentation of a stock certificate a condition sine qua non, that is, an indispensable condition, for proving one's shareholding in a corporation?

Procedural History

The petitioners, together with two other companions, first filed a complaint with an application for preliminary injunction and damages in the Regional Trial Court of Bangued, Abra, sitting in Branch 1. Because Abra Valley failed to file its responsive pleading within the period fixed by the Interim Rules of Procedure Governing Intra-Corporate Controversies, the trial court rendered judgment in favor of the petitioners, ordering inspection of corporate books and records, furnishing of financial statements, and payment of attorney's fees. The trial court denied reconsideration, so Abra Valley appealed to the Court of Appeals. The Court of Appeals, in a decision promulgated in December 2006, ordered the trial court to admit Abra Valley's belated answer and remanded the case for further proceedings.

On remand, the petitioners amended their complaint to substitute a deceased plaintiff's wife, to implead Francis both personally and as president of Abra Valley, and to add as a second cause of action the immediate holding of the annual stockholders meeting. The respondents filed their answers, raising as affirmative defenses that the petitioners were not stockholders of record. The respondents then moved for a preliminary hearing of those affirmative defenses. At the hearing, the trial court ordered the petitioners to present the stock certificates issued in their names. The petitioners instead submitted a compliance and manifestation attaching official receipts, Securities and Exchange Commission certified copies of corporate issuances, a secretary's certificate, a general information sheet, and minutes of the annual meeting. The trial court found these were not stock certificates and dismissed the case under Section 3, Rule 17 of the Rules of Court. The Court of Appeals affirmed the dismissal, and denied reconsideration. The petitioners then came to the Supreme Court on review.

Facts

Pedro Borgoña was the founder, president, and majority stockholder of Abra Valley Colleges, Incorporated. He had a son, Francis, by his first wife, and five children by his second wife, Teresita Valeros, namely the petitioners. After Pedro died, Francis succeeded him as president of the corporation.

In March 2002, the petitioners and two companions filed a complaint to compel Abra Valley to allow them to inspect its corporate books and records and the minutes of meetings, and to furnish them financial statements. After the case was remanded and the complaint amended, the petitioners alleged they were bona fide stockholders, attaching copies of stock certificates indorsed in their favor by the original holders. The respondents countered that the certificates remained in the names of the original owners and that the petitioners were not stockholders of record.

The trial court ordered the petitioners to present stock certificates issued in their names. Instead, the petitioners submitted a certification from the corporate secretary stating their shareholdings per the stock and transfer book, a certified copy of a board resolution making a private offering of unissued shares to them, official receipts showing their payments for shares, a letter and secretary's certificate informing the Securities and Exchange Commission of the issuance of shares to them, a general information sheet showing some of them as board members, and minutes of the annual meeting showing they attended as stockholders and that some were elected directors. The trial court still dismissed the case for failure to present stock certificates, and the Court of Appeals agreed.

Issues

• Whether or not the trial court properly dismissed the complaint on the ground of the petitioners' failure to comply with the order to produce stock certificates.
• Whether or not the petitioners were bona fide stockholders of Abra Valley Colleges, Incorporated.
• Whether or not the petitioners were entitled to demand the production of the stock and transfer book of Abra Valley.

Applicable Provisions

Section 74 of the Corporation Code provides:

Section 74. Books to be kept; stock transfer agent. The records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense.

This is the source of the right to inspect that the petitioners sought to enforce, and it presupposes that the person demanding inspection is a stockholder.

Section 75 of the Corporation Code provides:

Section 75. Right to financial statements. Within ten (10) days from receipt of a written request of any stockholder or member, the corporation shall furnish to him its most recent financial statement, which shall include a balance sheet as of the end of the last taxable year and a profit or loss statement for said taxable year, showing in reasonable detail its assets and liabilities and the result of its operations.

This is the source of the right to be furnished financial statements, again available only to a stockholder or member.

Section 63 of the Corporation Code provides:

Section 63. Certificate of stock and transfer of shares. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred.

This governs the transfer of shares by indorsement and explains why recording in the stock and transfer book matters as between the corporation and third persons.

Ruling

On the first issue, the Court held that the dismissal was unwarranted. The respondents, having filed the motion for preliminary hearing of affirmative defenses, bore the burden of proving that the petitioners were not stockholders, and the Court of Appeals erred in laying that burden on the petitioners. Even assuming the petitioners bore the burden, they discharged it. A stock certificate is only prima facie evidence of shareholding; it is not the sole determinant of ownership. The Court described the certificate as the paper representative or tangible evidence of the stock, not stock itself, and not in law the equivalent of ownership. The petitioners' official receipts, certified corporate issuances, secretary's certificate, and general information sheet sufficiently established their shares. Moreover, the minutes of the annual meeting showed the petitioners attended as stockholders and that some were elected directors. Since the law requires every director to hold at least one share, the respondents were estopped from denying the petitioners' stock ownership. The Court also stressed that the power to dismiss under Section 3, Rule 17 is not to be wielded indiscriminately, but only for a willful violation of an order of consequence to the action.

On the second issue, the Court held that the petitioners were stockholders, having acquired shares both by subscription to unissued capital stock and by purchase through indorsement of certificates. On the third issue, the Court held that the petitioners were entitled to demand production of the stock and transfer book. Since that book was in the respondents' possession, the petitioners could not be compelled to prove that their transfers were recorded in it. The Court quoted its earlier ruling that a stock and transfer book is not exclusive evidence, and that parol evidence may be admitted to supply omissions, explain ambiguities, or contradict such records.

Doctrine

A stock certificate is not indispensable proof of shareholding. It is merely prima facie evidence of the holder's interest, and ownership of shares may be established by other competent evidence, such as official receipts of payment, certified corporate records, and minutes of stockholders meetings. The burden of proving that a plaintiff is not a stockholder rests on the defendant who raises that affirmative defense. A corporation that has treated a person as a stockholder, as by electing that person to its board of directors, is estopped from later denying that status. Finally, the power to dismiss a complaint for non-compliance with a court order must be exercised only where the violation is willful and the order is of consequence to the action.

Disposition

The Supreme Court granted the petition, reversed the Court of Appeals, and set aside the dismissal, recognizing the petitioners as stockholders and remanding the case to the trial court for further proceedings.

Remember This

Memorize this line: a stock certificate is not stock itself but merely evidence of ownership, so its absence does not defeat a claim of shareholding. Examiners use this case to test the burden of proof on affirmative defenses, the doctrine of estoppel against a corporation, and the limits of dismissal under Section 3, Rule 17.