F & S VELASCO COMPANY, INC., IRWIN J. SEVA, ROSINA B. VELASCO-SCRIBNER, MERCEDEZ SUNICO, AND JOSE SATURNINO O. VELASCO, PETITIONERS, VS. DR. ROMMEL L. MADRID, PETER PAUL L. DANA…

Velasco versus Madrid

The Case

This is a corporate law case about who may lawfully call a stockholders' meeting and vote shares of stock. The petitioners are F and S Velasco Company, Incorporated, together with Irwin Seva, Rosina Velasco-Scribner, Mercedez Sunico, and Jose Saturnino Velasco, whom we shall call the Saturnino Group. The respondents are Doctor Rommel Madrid and the persons he brought in, whom we shall call the Madrid Group. The Saturnino Group asked the Supreme Court to reverse the Court of Appeals, which had upheld the special stockholders' and re-organizational meeting that Madrid called and held, and which had ordered the creation of a management committee for the corporation. The case matters because it draws a hard line between owning shares and being a stockholder of record, and because it treats the management committee as an extraordinary remedy that demands actual proof.

Procedural History

The Saturnino Group filed before the Regional Trial Court of Legazpi City, sitting as a Special Commercial Court, a petition for declaration of nullity of corporate election with preliminary injunction and temporary restraining order. The trial court denied the temporary restraining order. The Madrid Group answered and asked that the rival meeting of the Saturnino Group be declared void, and also applied for the appointment of a management committee, which the trial court denied. In its decision of March 3, 2010, the trial court declared both the November 6, 2009 meeting and the November 18, 2009 meeting null and void. The Madrid Group appealed to the Court of Appeals, which in its decision of March 1, 2013 modified the trial court, declaring the November 18, 2009 meeting valid and directing the trial court to constitute a management committee. The Saturnino Group moved for reconsideration, which was denied in a resolution of August 7, 2013. The Saturnino Group then came to the Supreme Court by petition for review on certiorari.

Facts

F and S Velasco Company was organized and registered in June 1987, with Francisco Velasco, Simona Velasco, Angela Madrid, Doctor Rommel Madrid, and Saturnino Velasco as incorporators. When Francisco and Simona died, their daughter Angela inherited their shares, giving her control of 70.82 percent of the corporation's total shares. Of the 24,000 total shares, Angela held 16,998, Rosina Velasco-Scribner held 6,000, Madrid held 1,000, and Irwin Seva and Mercedez Sunico held one share each.

On September 20, 2009, Angela died intestate and without issue, while serving as Chairman of the Board. The other directors were Madrid, Scribner, Seva, and Sunico. On October 8, 2009, Madrid executed an affidavit of self-adjudication over Angela's estate, including her shares. Believing himself the controlling stockholder, he called a special stockholders' and re-organizational meeting for November 18, 2009, and beforehand executed deeds of assignment transferring one share each to Peter Paul Danao, Maureen Labalan, Manuel Arimado, and Vitaliano Ricafort.

Meanwhile, Seva, as corporate secretary, sent notice of an emergency meeting, which was held on November 6, 2009, attended by Saturnino, Seva, and Sunico. There, Saturnino was recognized as a director and elected president, and Scribner was elected vice-president. The Madrid Group nonetheless proceeded with the November 18, 2009 meeting, ousting the sitting directors except Madrid and electing Madrid, Danao, Arimado, and Labalan as president, vice-president, corporate secretary, and treasurer. The Saturnino Group then sued.

Issues

• Whether or not the Court of Appeals correctly ruled that the November 18, 2009 meeting organized by Madrid is legal and valid.
• Whether or not a management committee should be appointed or constituted to take over the corporate and business affairs of the corporation.

Applicable Provisions

Section 63 of the Corporation Code governs transfers of shares of stock:

SEC. 63. Certificate of stock and transfer of shares. - The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. 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. No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation.

This is the provision that defeats Madrid, because his inheritance was never recorded in the corporate books.

Section 74 of the same Code describes the stock and transfer book:

SEC. 74. Books to be kept; stock transfer agent. - Stock corporations must also keep a book to be known as the "stock and transfer book", in which must be kept a record of all stocks in the names of the stockholders alphabetically arranged; the installments paid and unpaid on all stock for which subscription has been made, and the date of payment of any installment; a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom made; and such other entries as the by-laws may prescribe. The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent and shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days.

This identifies the controlling record against which a claimed transfer must be measured.

Section 1 of Rule 9 of the Interim Rules of Procedure Governing Intra-Corporate Controversies sets the requisites for a management committee:

SEC. 1. Creation of a management committee. - As an incident to any of the cases filed under these Rules or the Interim Rules on Corporate Rehabilitation, a party may apply for the appointment of a management committee for the corporation, partnership or association, when there is imminent danger of: (1) Dissipation, loss, wastage or destruction of assets or other properties; and (2) Paralyzation of its business operations which may be prejudicial to the interest of the minority stockholders, parties-litigants or the general public.

Both requisites must concur, and the Court found no evidence of either.

Ruling

On the first issue, the Court held that the Court of Appeals erred. Madrid was indeed Angela's sole heir, as settled by the proceedings over her estate, and her death transferred her shares to him. But inheritance alone does not confer stockholder rights. Under Section 63, a transfer binds the corporation only when recorded in its books, and the controlling book is the stock and transfer book, not the general information sheet filed with the Securities and Exchange Commission. The Court quoted its earlier ruling that until registration is accomplished, the transfer, though valid between the parties, cannot be effective against the corporation, and that until the transfer is registered, the transferee is not a stockholder but an outsider. Since Angela's shares were never recorded in Madrid's name, his registered holdings remained 4.16 percent, and he could not validly call the November 18, 2009 meeting. That meeting and all its resolutions were void.

On the second issue, the Court held that a management committee is an extraordinary and drastic remedy, allowed only upon proof of imminent danger of dissipation of assets and paralysis of business operations. The Court of Appeals relied on general findings of conflict and alleged embezzlement, but the records showed no actual evidence of such danger. The order creating the committee therefore had no basis, and any committee already constituted must be dissolved.

Doctrine

First, a transfer of shares is valid between the parties upon delivery, but it binds the corporation only when recorded in the stock and transfer book. Until then, the transferee cannot vote, be voted for, or call meetings; he is an outsider. Second, the general information sheet filed with the Securities and Exchange Commission is not conclusive proof of stock ownership; as between it and the corporate books, the books control. Third, the management committee under the Interim Rules requires the concurrence of imminent danger of dissipation of assets and paralysis of business operations, proven by actual evidence, because it is a drastic remedy. Fourth, where rival meetings are both void, the board existing before the vacancy is reconstituted, fills the vacancy under Section 29, and acts in a hold-over capacity under Section 23.

Disposition

The petition was partly granted: the Court of Appeals decision and resolution were reversed and set aside, the November 18, 2009 meeting was declared null and void, the management committee was dissolved, and the prior board was ordered reconstituted to fill the vacancy left by Angela and to act in a hold-over capacity.

Remember This

Memorize the line that until the transfer is registered, the transferee is not a stockholder but an outsider. Examiners use this case to test the stock and transfer book against the general information sheet, and the strict requisites for appointing a management committee.