PEDRO LOPEZ DEE, PETITIONER, VS. SECURITIES AND EXCHANGE COMMISSION, HEARING OFFICER EMMANUEL SISON, NAGA TELEPHONE CO., INC., COMMUNICATION SERVICES, INC., LUCIANO MAGGAY, AUGU…

Dee versus Securities and Exchange Commission

The Case

This is a consolidated set of petitions for certiorari, with prayers for preliminary injunction and restraining order, brought by Pedro Lopez Dee and his co-petitioners against the Securities and Exchange Commission, its hearing officer, Naga Telephone Company, Communication Services, Incorporated, and the group of Luciano Maggay. The petitions ask the Supreme Court to annul two things: the hearing officer's order setting a stockholders' election for May 22, 1982, and the decision of the Intermediate Appellate Court that annulled a contempt judgment of the trial court. The case matters because it draws the boundary of the Securities and Exchange Commission's jurisdiction — it decides intra-corporate controversies, but it does not decide violations of the Public Service Act — and because it treats the right of pre-emption and the validity of share issuances made while a case is pending.

Procedural History

Pedro Lopez Dee filed a petition with the Securities and Exchange Commission, docketed as SEC Case Number 1748, questioning the validity of the May 19, 1979 election of directors. The hearing officer issued an order on June 23, 1981 declaring Communication Services, Incorporated a stockholder entitled to vote, disallowing a portion of its shares, and ordering a special stockholders' meeting to elect new directors. Dee appealed to the Commission en banc, which sustained the hearing officer on April 5, 1982 and ordered new elections under a special committee. Both sides moved for reconsideration. While those motions were pending, the hearing officer issued the May 4, 1982 order setting the election for May 22, 1982. The Commission en banc denied reconsideration on May 20, 1982.

Separately, Antonio Villasenor filed a civil case with the Court of First Instance of Camarines Sur, Naga City, presided over by Judge Delfin Vir Sunga, seeking to enforce an option to repurchase shares and to enjoin the May 22, 1982 election. The trial court issued a restraining order, but the election proceeded anyway. The trial court then cited the Maggay group for contempt on September 7, 1982, punished them, and ordered restitution of the hold-over directors. On September 17, 1982 the private respondents filed a petition for certiorari and prohibition with the then Intermediate Appellate Court, which on April 14, 1983 annulled the contempt judgment and restored the May 22, 1982 directors to office. Both petitions reached the Supreme Court, which consolidated them and gave due course to the first.

Facts

Naga Telephone Company, Incorporated was organized in 1954 with an authorized capital of 100,000 pesos. In 1974 it decided to increase its authorized capital to 3,000,000 pesos and applied to the then Board of Communications, which approved the increase on January 8, 1975 subject to conditions, among them that the issuance of shares would be for one year from the date of the decision, after which no further issues would be made without previous authority from the Board. Natelco filed its amended articles with the Securities and Exchange Commission. Its capital stock was divided into 213,000 common shares and 87,000 preferred shares, both at a par value of 10 pesos per share.

On April 12, 1977 Natelco contracted with Communication Services, Incorporated for the manufacture, supply, delivery and installation of telephone equipment, and issued 24,000 common shares to CSI as part of the down-payment. On May 5, 1979 it issued another 12,000 common shares to CSI. In both instances no prior authorization from the Board of Communications, by then the National Telecommunications Commission, was secured. At the annual stockholders' meeting of May 19, 1979, Pedro Lopez Dee was unseated as Chairman and President but elected a director, together with his wife. CSI gained control of the board, and its lawyer, Luciano Maggay, became president. The Maggay board later issued further shares to CSI, totaling 113,800 shares during its tenure.

Dee questioned the May 19, 1979 election before the Securities and Exchange Commission on the ground that there was no valid list of stockholders. A restraining order placed the prior officers in hold-over capacity, but the Supreme Court restrained its enforcement, and later dismissed the related petition as premature. In the main case the hearing officer and the Commission en banc upheld CSI's right to vote and ordered new elections. The May 22, 1982 election pushed through despite a trial court restraining order, and the Commission recognized the elected directors. The trial court held the Maggay group in contempt and ordered restitution, but the Intermediate Appellate Court annulled that judgment and restored the May 22, 1982 officers.

Issues

• Whether or not the Securities and Exchange Commission has the power and jurisdiction to declare null and void shares of stock issued by Natelco to CSI for violation of Section 20, paragraph h, of the Public Service Act.
• Whether or not the issuance of 113,800 shares of Natelco to CSI, made during the pendency of SEC Case Number 1748, was valid.
• Whether or not the Natelco stockholders have a right of pre-emption to the 113,800 shares in question.
• Whether or not the private respondents were duly elected to the Board of Directors of Natelco at the election held on May 22, 1982.
• Whether or not the trial judge has jurisdiction to restrain the holding of an election of officers and directors of a corporation.

Applicable Provisions

Section 5 of Presidential Decree Number 902-A, as amended, enumerates the jurisdiction of the Securities and Exchange Commission:

Section 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations, registered with it as expressly granted under the existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving: a) Devices or schemes employed by or any acts, of the board of directors, business associates, its officers or partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of the stockholders, partners, members of associations or organizations registered with the Commission. b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members, or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the state insofar as it concerns their individual franchise or right to exist as such entity; c) Controversies in the election or appointments of directors, trustees, officers or managers of such corporations, partnerships or associations. d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in cases where the corporation, partnership or association possesses sufficient property to cover all its debts but foresees the impossibility of meeting them when they respectively fall due or in cases where the corporation, partnership or association has no sufficient assets to cover its liabilities, but is under the management of a Rehabilitation Receiver or Management Committee created pursuant to this Decree.

This provision fixes the outer limit of the Commission's authority, which the Court reads as confined to intra-corporate matters and not extending to violations of the Public Service Act.

Ruling

On the first issue, the Court held that the Commission correctly refused to rule on whether the issuance of shares to CSI violated Section 20, paragraph h, of the Public Service Act. The Commission's jurisdiction under Presidential Decree Number 902-A is limited to matters intrinsically connected with the regulation of corporations and their internal affairs. The Court explained that in order for the Commission to take cognizance of a case, the controversy must pertain to one of four relationships: between the corporation and the public; between the corporation and its stockholders, members or officers; between the corporation and the state insofar as its franchise, permit or license to operate is concerned; and among the stockholders, partners or associates themselves. The Commission is not empowered to grant or cancel a franchise, so the matter belonged to the appropriate body.

On the second issue, the Court held that the issuance of the 113,800 shares was valid. The Commission found that the issuance was pursuant to a board resolution and stockholders' approval given before May 19, 1979, when CSI was not yet in control, and drew a distinction between the order to issue shares and their actual issuance after that date. The Court accepted that the one who gave the orders could not turn around and impugn their implementation.

On the third issue, the Court held that the stockholders had no right of pre-emption over these shares, quoting its ruling in Benito versus Securities and Exchange Commission:

However, the general rule is that pre-emptive right is recognized only with respect to new issues of shares, and not with respect to additional issues of originally authorized shares.

On the fourth issue, the Court upheld the validity of the May 22, 1982 election, which the Commission had recognized and which its representatives had supervised. On the fifth issue, the Court held that the trial judge had no jurisdiction to restrain the holding of an election of directors and officers, that being a matter committed to the Commission's intra-corporate jurisdiction. The petitions were therefore dismissed.

Doctrine

First, the Securities and Exchange Commission's jurisdiction under Section 5 of Presidential Decree Number 902-A is limited to intra-corporate controversies and matters intrinsically connected with the regulation of corporations; it does not extend to every matter affecting a corporation, and it cannot declare shares void for violation of the Public Service Act, which lies with the appropriate administrative body. Second, shares issued pursuant to a board resolution and stockholders' approval given before a change of control are validly issued even if the actual issuance occurs later, while the case is pending. Third, the right of pre-emption applies only to new issues of shares, not to additional issues of originally authorized shares. Fourth, a trial court has no jurisdiction to restrain the election of a corporation's directors and officers, because that controversy falls within the Commission's exclusive original jurisdiction.

Disposition

The Supreme Court dismissed the petitions, sustained the Commission's refusal to rule on the Public Service Act issue, upheld the validity of the questioned share issuances and of the May 22, 1982 election, and left the Intermediate Appellate Court's annulment of the contempt judgment standing.

Remember This

The single line to memorize: the Securities and Exchange Commission decides intra-corporate controversies, including election contests, but it cannot rule on violations of the Public Service Act, and pre-emption covers only new issues, not additional issues of originally authorized shares. Examiners use this case to test the limits of the Commission's jurisdiction and the distinction between new and originally authorized share issuances.