The Supreme Court has definitively ruled that Regional Trial Courts (RTCs), not the Securities and Exchange Commission (SEC), have jurisdiction over disputes concerning the validity of proxies in corporate elections. This decision clarifies the delineation of authority between these bodies, ensuring that election-related controversies are resolved within the judicial system. The ruling underscores the judiciary’s role in safeguarding the integrity of corporate governance and shareholder rights during the election of directors. This division of power aims to streamline the resolution of intra-corporate conflicts, promoting efficiency and fairness in the corporate landscape.

Proxy Wars: Who Decides the Validity of Votes in Corporate Director Elections?

Omico Corporation, a publicly traded company, scheduled its annual stockholders’ meeting. Astra Securities Corporation, holding a significant portion of Omico’s shares, challenged the validity of proxies issued in favor of Tommy Kin Hing Tia, alleging violations of the Securities Regulation Code (SRC). Astra argued that the brokers issuing the proxies lacked the necessary written authorization from their clients and that Tia’s proxy solicitations exceeded the allowable limit without proper disclosure. Despite Astra’s objections, Omico proceeded with the meeting, validating Tia’s proxies. Astra then filed a complaint with the SEC, seeking invalidation of the proxies and a cease-and-desist order to halt the stockholders’ meeting. The SEC issued the order, but it was not served in time, and the meeting proceeded.

The central issue before the Supreme Court was whether the SEC had jurisdiction over controversies arising from the validation of proxies for the election of corporate directors. The Court referenced its prior ruling in GSIS v. CA, emphasizing that while the SEC initially held the power to validate proxies under Presidential Decree No. 902-A, this power was ancillary to its broader regulatory functions. With the enactment of the SRC, jurisdiction over intra-corporate controversies, including election-related disputes, was transferred to the regular courts. This transfer includes the adjudication of all related claims arising from the election of directors.

Under Section 5(c) of Presidential Decree No. 902-A, in relation to the SRC, the jurisdiction of the regular trial courts with respect to election-related controversies is specifically confined to “controversies in the election or appointment of directors, trustees, officers or managers of corporations, partnerships, or associations.”

The Court clarified that the SEC’s regulatory power over proxies remains intact for matters unrelated to director elections. The determining factor is whether the proxy dispute is intrinsically linked to the election of directors; if so, the regular courts have jurisdiction. This delineation ensures that all aspects of director elections, including proxy validation, fall under the purview of the judiciary, preventing jurisdictional overlap and promoting consistent adjudication.

Astra argued that because the proxy validation related to determining the existence of a quorum and that the directors were elected by motion rather than formal voting, the case fell outside the scope of GSIS v. CA. The Supreme Court rejected this argument, stating that the quorum was specifically for the election of directors. The absence of formal voting did not negate the fact that an election occurred. The court also dismissed Astra’s proposed “two-remedy” approach, which suggested SEC jurisdiction before the meeting and court jurisdiction after, as it would lead to jurisdictional conflicts.

The Court addressed potential conflicts between the SRC Rules and the Interim Rules of Procedure Governing Intra-Corporate Disputes. SRC Rule 20(11)(b)(xxi) initially appeared to grant the SEC authority over proxy validation disputes. However, Section 2, Rule 6 of the Interim Rules defines an election contest as any dispute involving proxy validation, thereby placing it under the jurisdiction of regular courts. The Supreme Court harmonized these rules by clarifying that the SEC’s power to regulate proxies is confined to instances when stockholders vote on matters other than the election of directors.

Furthermore, the Court emphasized that quasi-judicial agencies like the SEC do not have the right to seek review of appellate court decisions reversing their rulings. This principle stems from the fact that these agencies are not considered real parties-in-interest. Therefore, the Court expunged the petition filed by the SEC due to its lack of capacity to file the suit, reinforcing the principle that administrative bodies must adhere to judicial determinations without independently challenging them in appellate courts.

FAQs

What was the key issue in this case?	The central issue was whether the Securities and Exchange Commission (SEC) or the regular courts have jurisdiction over disputes concerning the validity of proxies used in the election of corporate directors.
What did the Supreme Court rule?	The Supreme Court ruled that regular courts, specifically Regional Trial Courts (RTCs), have exclusive jurisdiction over controversies involving the validation of proxies in the election of corporate directors.
Why did the Supreme Court give jurisdiction to the regular courts?	The Court reasoned that the Securities Regulation Code (SRC) transferred jurisdiction over intra-corporate disputes, including election-related controversies, from the SEC to the regular courts. This ensures a unified adjudication of all claims arising from director elections.
Does the SEC still have any power over proxies?	Yes, the SEC retains its regulatory power over proxies in matters unrelated to the election of directors. Its authority extends to proxy solicitations and validations for other corporate decisions.
What was Astra Securities’ main argument?	Astra argued that the proxy validation was related to determining the existence of a quorum and that the directors were elected by motion, thus placing the case outside the jurisdiction of regular courts.
How did the Court address Astra’s argument about the quorum?	The Court stated that the quorum was specifically for the election of directors, reinforcing the regular courts’ jurisdiction. It clarified that whether directors were elected by voting or motion is irrelevant.
What is the significance of the GSIS v. CA case?	The GSIS v. CA case established that the power to validate proxies was ancillary to the SEC’s broader regulatory functions, and this power was effectively transferred to the regular courts with the enactment of the SRC.
Can the SEC appeal a court decision that reverses its own rulings?	No, the Supreme Court held that quasi-judicial agencies like the SEC do not have the right to seek review of appellate court decisions reversing their rulings, as they are not real parties-in-interest.

This ruling provides clarity on the jurisdictional boundaries between the SEC and regular courts in matters of corporate governance. The Supreme Court’s emphasis on judicial oversight in director elections underscores the importance of protecting shareholder rights and ensuring fair corporate practices. This decision serves as a guide for corporations and shareholders alike, ensuring that disputes are resolved in the appropriate legal forum.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: SEC vs. CA, G.R. Nos. 187702 & 189014, October 22, 2014