JOSE G. RICAFORT, CONRADO T. CALA­LANG, NATIONWIDE DEVELOPMENT CORPORATION AND AGUINALDO DEVE­LOPMENT CORPORATION, PETITIONERS, VS. HON. FELIX L. MOYA, JUDGE, CFI, DAVAO, BR. II…

Ricafort versus Moya

The Case

This is a petition for certiorari filed with the Supreme Court by Jose Ricafort, Conrado Calalang, Nationwide Development Corporation, and Aguinaldo Development Corporation against Judge Felix Moya of the Court of First Instance of Davao, Branch Two, and against the consortium of Black Mountain, Incorporated, Tetra Management Corporation, and Energy Corporation. The petitioners ask the Court to annul three orders of Judge Moya arising from a complaint that sought to stop them from interfering with the consortium's possession of the Kingking mining claims of Nationwide Development Corporation. The case matters because it is the Supreme Court's occasion to apply the stockholder-approval requirement of the Corporation Code to operating agreements over substantially all of a corporation's business, and because it shows how a single commercial dispute can spawn a maze of litigation across trial courts, the Securities and Exchange Commission, and the Supreme Court itself.

Procedural History

The controversy began in the Court of First Instance of Rizal, where Ricafort and Calalang sued Daniel Aguinaldo for breach of the deed of sale, and in the Court of First Instance of Manila, where they sought to stop the auction of their pledged shares. The Manila case, docketed as Civil Case Number 135262, absorbed the Rizal case and produced a series of injunctive orders against Aguinaldo and his group, including orders stopping the auction, restraining Aguinaldo from holding himself out as controlling stockholder of Nationwide Development Corporation, and nullifying an operating agreement over the Kingking claims. Meanwhile, the consortium of Black Mountain, Energy Corporation, and Tetra Management Corporation filed a complaint in the Court of First Instance of Davao, docketed as Civil Case Number 143, against Benguet Corporation, Nationwide Development Corporation, and its directors including Ricafort and Calalang, seeking to enjoin interference with the consortium's possession of the Kingking mines and to recover damages. The Davao court issued a temporary restraining order, denied the motion to dismiss, and later denied a motion to quash contempt charges. Ricafort and his co-petitioners came to the Supreme Court by petition for certiorari, which was later amended, and the Court gave the petition due course. The petition was consolidated with related petitions and, after the consortium moved to dismiss on the ground of mootness arising from a letter of instructions, the Kingking claims cases lay fallow for some three years before judgment.

Facts

On April 18, 1978, Daniel Aguinaldo and D. R. Aguinaldo Corporation sold to Jose Ricafort and Conrado Calalang all their shares and subscriptions in three corporations: Aguinaldo Development Corporation, Philippine Marble Corporation, and Nationwide Development Corporation. Aguinaldo bound himself to convey nine parcels of rice land in Saug, Davao del Norte, held in trust by him, to Aguinaldo Development Corporation as the beneficial owner. As security for the balance of the price, Ricafort and Calalang pledged the purchased shares and agreed to mortgage the nine Saug lots to Aguinaldo. The pledge was effected on the same day.

On September 26, 1980, Aguinaldo executed the deed of reconveyance of the Saug lots in favor of Aguinaldo Development Corporation. Ricafort and Calalang, however, refused to cause the mortgage of those lots in Aguinaldo's favor, insisting that the reconveyance was fatally defective because it did not bear the signature of Aguinaldo's wife, Helen Leontovich. Aguinaldo then instructed a notary public to conduct an auction sale of the pledged stock, and litigation erupted in several courts.

In the meantime, control of Nationwide Development Corporation became the prize. At a stockholders' meeting held on August 17, 1981, after Aguinaldo and Aytona walked out, the stockholders elected Calalang, Ricafort, and five others as directors, rejected the operating agreement with the Black Mountain consortium, and approved instead a proposed operating agreement with Benguet Corporation. The new officers then entered into that operating agreement with Benguet Corporation for the operation of the Kingking mines. The Black Mountain consortium thereupon sued in Davao to protect its own claimed possession of the Kingking claims, and it was from the orders in that Davao case that the present petition arose.

Issues

• Whether or not the complaint of the Black Mountain consortium stated a cause of action, considering that the operating agreement it invoked had never been approved by the stockholders owning a majority of the capital stock of Nationwide Development Corporation.
• Whether or not the trial court acted with grave abuse of discretion in issuing the temporary restraining order and in denying the motion to dismiss and the motion to quash the contempt charges.

Applicable Provisions

Section 44 of the Corporation Code provides:

Section 44. Approval by the stockholders of all corporate acts. The following corporate acts shall require the approval by the stockholders representing at least two-thirds of the outstanding capital stock at a regular or special meeting duly called for the purpose: x x x. (3) The sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the property and assets of the corporation. x x x. (5) A contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise.

This provision bears on the case because the petitioners argued that the operating agreement with the Black Mountain consortium, which covered ninety-three and five-tenths percent of the total number and area of the mining claims of Nationwide Development Corporation, required stockholder approval that it never received.

Ruling

On the first issue, the Court held that the complaint failed to state a cause of action. The operating agreement with the Black Mountain consortium embraced ninety-three and five-tenths percent of the total number and area of the mining claims of Nationwide Development Corporation, and that corporation had no other mining properties or business. Such a contract fell squarely within the coverage of Section 44 of the Corporation Code, which requires the approval of stockholders representing at least two-thirds of the outstanding capital stock for a contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise. Since the complaint contained no averment that the agreement had been so approved, and it was in fact uncontroverted that it had not been approved, the complaint stated no cause of action and the motion to dismiss should have been granted.

On the second issue, the Court held that the trial court gravely abused its discretion in issuing the temporary restraining order and in denying the motion to dismiss and the motion to quash the contempt charges, because those orders rested on a complaint that stated no cause of action and on a contract that was void for want of the required stockholder approval.

Doctrine

A contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether called a service contract, an operating agreement, or otherwise, requires the approval of stockholders representing at least two-thirds of the outstanding capital stock of the corporation at a regular or special meeting duly called for the purpose. Absent such approval, the contract is void and cannot be the basis of a cause of action. A complaint founded on such an unapproved contract fails to state a cause of action, and a trial court that issues injunctive relief and denies a motion to dismiss on the strength of such a complaint acts with grave abuse of discretion correctible by certiorari.

Disposition

The Supreme Court granted the petition, annulled the challenged orders of the Davao court, and ordered the dismissal of the complaint in Civil Case Number 143.

Remember This

Memorize the rule that an operating agreement covering all or substantially all of the business of another corporation needs the approval of stockholders holding at least two-thirds of the outstanding capital stock, and that without it the contract is void and cannot sustain a complaint. Examiners use this case to test Section 44 of the Corporation Code and the remedy of certiorari against injunctive orders resting on a complaint that states no cause of action.