The Supreme Court ruled that a special stockholders’ meeting called by an unauthorized body is invalid, and actions taken during that meeting, such as the removal of directors, are void. Subsequent ratification attempts during annual meetings cannot validate the initial, improperly called meeting. This decision reinforces the importance of adhering to corporate by-laws and statutory requirements in the removal and election of directors, ensuring that corporate governance remains transparent and legally sound.

Makati Sports Club: When Club Oversight Exceeds Legal Authority

This case revolves around a power struggle within the Makati Sports Club (MSC), a domestic corporation, concerning the removal of its directors. Alarmed by rumored financial anomalies, the MSC Oversight Committee (MSCOC), composed of past presidents, demanded the resignation of the incumbent directors, the Bernas Group. When the Bernas Group refused, the MSCOC called a special stockholders’ meeting resulting in the removal of the Bernas Group and the election of the Cinco Group. The core legal question is whether the MSCOC had the authority to call such a meeting and whether the subsequent actions were valid.

The Bernas Group challenged the validity of the special stockholders’ meeting, arguing that only the corporate secretary, the president, or the board of directors could call such a meeting according to the Corporation Code and MSC’s by-laws. The Cinco Group argued that the MSCOC’s actions were justified due to the corporate secretary’s refusal to call the meeting. Subsequently, at the annual stockholders’ meeting, the actions of the special meeting were ratified, further complicating the dispute.

The Supreme Court grounded its decision in Section 28 of the Corporation Code, which stipulates the process for removing directors or trustees:

Sec. 28. Removal of directors or trustees. – Any director or trustee of a corporation may be removed from office by a vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock… A special meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock…

The Court emphasized that the power to manage a corporation rests with the board of directors. It highlighted that the by-laws explicitly authorize only the President and the Board of Directors to call a special meeting. The MSCOC, while tasked with overseeing the affairs of the corporation, lacks the explicit authority to call special meetings or exercise other corporate powers. This underscored the principle that a corporation acts through its board of directors or duly authorized officers, ensuring accountability to shareholders.

The Court further explained the fiduciary duty of directors, stating:

The board of directors, in drawing to itself the power of the corporation, occupies a position of trusteeship in relation to the stockholders, in the sense that the board should exercise not only care and diligence, but utmost good faith in the management of the corporate affairs.

The Court also noted that illegal acts of a corporation, which contravene law, morals, or public order, are void and cannot be validated through ratification or estoppel. The Court distinguished between illegal corporate acts and ultra vires acts (those beyond the scope of the corporation’s articles of incorporation). The former are void ab initio and cannot be ratified, while the latter are merely voidable and can be ratified by the stockholders.

The Cinco Group’s reliance on the de facto officership doctrine was also dismissed by the Court. This doctrine typically applies to third parties dealing with a corporation, protecting their interests when officers, who appear to be duly authorized, act on behalf of the corporation. The Cinco Group could not claim this status, as they were not validly elected in the first place.

The Court acknowledged that, had the stockholders petitioned the Securities and Exchange Commission (SEC) directly to call a special meeting, the outcome might have been different. Section 50 of the Corporation Code grants the SEC the authority to order a meeting if there is no authorized person to call one, or if such a person refuses to do so.

Despite finding the special meeting invalid, the Court upheld the validity of subsequent annual stockholders’ meetings, as they were conducted according to the by-laws and, in one instance, under SEC supervision. Therefore, the Bernas Group could not rely on the holdover principle to remain in office, as new directors had been duly elected in the valid annual meetings.

FAQs

What was the key issue in this case?	The central issue was whether the MSCOC had the authority to call a special stockholders’ meeting to remove and replace the incumbent board of directors of Makati Sports Club. The court found that only certain parties may call a meeting and that the MSCOC had no such right.
Why was the special stockholders’ meeting declared invalid?	The special meeting was deemed invalid because it was called by the MSCOC, which lacked the authority to do so under the Corporation Code and MSC’s by-laws. Only the president, board of directors, or, under certain conditions, the corporate secretary or a petition to the SEC could call such a meeting.
What is the de facto officership doctrine, and why didn’t it apply in this case?	The de facto officership doctrine protects third parties who deal with a corporation in good faith, relying on the apparent authority of its officers. It did not apply here because the Cinco Group’s initial election was invalid, and they could not claim to be legitimate officers of the corporation.
Can an invalid corporate act be ratified?	The Court distinguished between illegal corporate acts, which are void from the beginning and cannot be ratified, and ultra vires acts, which are merely voidable and can be ratified by stockholders. Since the act of improperly calling the meeting was in violation of corporation code it was deemed an illegal act.
What is the significance of the annual stockholders’ meetings in this case?	While the special meeting was invalid, the Court upheld the annual stockholders’ meetings because they were conducted according to the MSC’s by-laws and, in one instance, under SEC supervision. This meant that valid elections could take place and the holdover principle was not applicable
What recourse did the stockholders have if the corporate secretary refused to call a meeting?	According to the Corporation Code, the stockholders could have petitioned the SEC to order the corporate secretary to call a meeting. The SEC has regulatory powers to intervene in such situations and ensure compliance with corporate governance rules.
What does this case teach us about corporate by-laws?	This case underscores the importance of adhering to corporate by-laws. The by-laws outline the rules for internal governance, and strict compliance is necessary for the validity of corporate actions. They are treated as private laws of the corporation that members must respect.
What was the final ruling on the removal of Jose A. Bernas and the sale of his shares?	The Court ruled that the expulsion of Jose A. Bernas and the public auction of his shares were void and without legal effect. This was because these actions were taken by the Cinco Group, who had no legal authority to act as directors due to the invalid special meeting.

This case serves as a reminder to corporations to adhere strictly to their by-laws and the Corporation Code when making decisions regarding the removal and election of directors. Deviating from these established procedures can render corporate actions invalid and lead to protracted legal battles. Strict adherence to the rule of law ensures corporate stability and protects the rights and interests of all stakeholders.

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: Jose A. Bernas vs. Jovencio F. Cinco, G.R. Nos. 163368-69, July 01, 2015