In F & S Velasco Company, Inc. v. Madrid, the Supreme Court addressed a dispute over the control of a family corporation. The central issue revolved around the validity of a stockholders’ meeting called by Dr. Rommel L. Madrid, who claimed majority ownership of shares inherited from his deceased spouse. The Court ruled that while Madrid was indeed the heir to the shares, his failure to register the transfer of these shares in the corporation’s Stock and Transfer Book invalidated the meeting he convened. This case underscores the critical importance of formally recording stock transfers within a corporation to validate a stockholder’s rights, ensuring transparency and order in corporate governance.

Family Feud or Corporate Coup: When Inherited Shares Fail to Secure Control

The case originated from a family-owned corporation, F & S Velasco Company, Inc. (FSVCI), established in 1987. Following the death of key shareholders, Angela V. Madrid inherited a majority stake, positioning her as the controlling stockholder. Upon Angela’s subsequent death, her spouse, Dr. Rommel L. Madrid, executed an Affidavit of Self-Adjudication, claiming ownership of Angela’s shares. Believing he was now the majority shareholder, Madrid called for a Special Stockholders’ and Re-Organizational Meeting. However, this move was contested by other members of the Velasco family, leading to a legal battle over the legitimacy of the meeting and the control of FSVCI.

The core legal issue centered on whether Madrid could exercise the rights of a majority stockholder based solely on the Affidavit of Self-Adjudication, without formally registering the transfer of shares in the corporation’s books. The Supreme Court emphasized the significance of Section 63 of the Corporation Code, which governs the transfer of shares. This provision explicitly states:

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.

Building on this principle, the Court cited Batangas Laguna Tayabas Bus Co., Inc. v. Bitanga, clarifying that an owner of shares cannot exercise stockholder rights, such as calling meetings or voting, until their ownership is recorded in the Stock and Transfer Book. The purpose of this requirement is twofold: to enable the transferee to exercise all rights of a stockholder and to inform the corporation of changes in ownership. The Stock and Transfer Book, as described in Section 74 of the Corporation Code, serves as the official record of stock ownership within the corporation:

SEC. 74. Books to be kept; stock transfer agent. – x x x.

 x x x x

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.

In this case, while Madrid had inherited the shares, he had not yet registered the transfer in FSVCI’s Stock and Transfer Book at the time he called the meeting. The Court rejected the Court of Appeals’ argument that the submission of a General Information Sheet (GIS) to the Securities and Exchange Commission (SEC) sufficed as registration. While the GIS provides public information about the corporation’s officers and stockholders, it is not conclusive evidence of stock ownership.

The Supreme Court emphasized that the corporate books, particularly the Stock and Transfer Book, are the controlling documents for determining stock ownership. Jurisprudence in Lao v. Lao supports this view:

The mere inclusion as shareholder of petitioners in the General Information Sheet of PFSC is insufficient proof that they are shareholders of the company.

Petitioners bank heavily on the General Information Sheet submitted by PFSC to the SEC in which they were named as shareholders of PFSC. They claim that respondent is now estopped from contesting the General Information Sheet.

While it may be true that petitioners were named as shareholders in the General Information Sheet submitted to the SEC, that document alone does not conclusively prove that they are shareholders of PFSC. The information in the document will still have to be correlated with the corporate books of PFSC. As between the General Information Sheet and the corporate books, it is the latter that is controlling.

This ruling highlights the critical distinction between equitable ownership and registered ownership. While Madrid possessed an equitable right to the shares through inheritance, he lacked the formal registration necessary to exercise the full rights of a stockholder. Because of this, the Court nullified the November 18, 2009 Meeting, reinstating the Board of Directors that existed prior to Angela’s death. The Court also dissolved the Management Committee that the Court of Appeals had improperly established.

The appointment of a Management Committee is an extraordinary remedy, justified only when there is imminent danger of asset dissipation or business paralysis, as outlined in the Interim Rules of Procedure Governing Intra-Corporate Controversies:

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.

The Court found that the CA’s decision lacked the evidentiary basis required for such a drastic measure. The Court emphasized that allegations of conflict or embezzlement alone do not justify the appointment of a Management Committee, particularly when unsupported by concrete evidence.

FAQs

What was the key issue in this case?	The central issue was whether a stockholder could exercise the rights of ownership, such as calling a meeting, based on an Affidavit of Self-Adjudication without registering the stock transfer in the corporate books.
What is the significance of the Stock and Transfer Book?	The Stock and Transfer Book is the official record of stock ownership in a corporation. Registration in this book is necessary for a transferee to exercise the rights of a stockholder.
Does submitting a General Information Sheet (GIS) to the SEC suffice as registration of stock transfer?	No, the GIS provides public information about the corporation but does not substitute for the required registration of stock transfers in the Stock and Transfer Book.
What are the requirements for appointing a Management Committee in a corporation?	A Management Committee can only be appointed when there is imminent danger of asset dissipation or business paralysis that could prejudice minority stockholders, litigants, or the general public.
What was the court’s ruling on the appointment of a Management Committee in this case?	The Court found that the appointment of a Management Committee by the Court of Appeals was improper because there was no sufficient evidence of imminent danger to the corporation’s assets or operations.
What is the effect of inheriting shares of stock on the right to vote?	Inheriting shares grants equitable ownership, but the right to vote and exercise other stockholder rights arises only after the transfer is registered in the Stock and Transfer Book.
What corporate document is controlling in determining stock ownership?	According to the Supreme Court, the corporate books, especially the Stock and Transfer Book, are controlling in determining stock ownership.
How did the Court resolve the issue of the contested stockholders’ meeting?	The Court declared the stockholders’ meeting called by Dr. Madrid null and void because he had not yet registered the transfer of shares in the corporation’s books.

The F & S Velasco Company, Inc. v. Madrid case serves as a crucial reminder of the importance of adhering to the formal requirements of corporate law, particularly regarding the registration of stock transfers. Failing to properly record these transactions can have significant consequences, affecting the validity of corporate actions and the exercise of stockholder rights. This case emphasizes the need for meticulous record-keeping and compliance with corporate governance rules to ensure stability and prevent disputes within family-owned and other corporations.

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: F & S Velasco Company, Inc. v. Madrid, G.R. No. 208844, November 10, 2015