The Supreme Court ruled that a corporation cannot file an injunction to prevent a stockholder from exercising their right to inspect corporate records. The Court emphasized that the corporation must raise any objections to the inspection as a defense in a legal action initiated by the stockholder, such as a petition for mandamus. This decision reinforces the importance of transparency and accountability in corporate governance, ensuring that stockholders have access to vital information about the company’s operations.

PASAR’s Attempt to Block Stockholder Access: Who Bears the Burden of Proof?

Philippine Associated Smelting and Refining Corporation (PASAR) sought to prevent three of its stockholders, Pablito O. Lim, Manuel A. Agcaoili, and Consuelo M. Padilla, from inspecting its records, citing concerns about confidentiality and the legitimacy of the stockholders’ motives. PASAR filed a Petition for Injunction and Damages with prayer for Preliminary Injunction and/or Temporary Restraining Order, essentially trying to preemptively block the stockholders’ right to inspect. The core legal question revolved around whether a corporation could use an injunction to prevent stockholders from exercising their statutory right to inspect corporate books and records, or whether objections to such inspection must be raised defensively in an action brought by the stockholders.

The Regional Trial Court (RTC) initially granted PASAR’s request for a preliminary injunction, restricting the stockholders’ access to records classified as confidential or inexistent. However, the Court of Appeals (CA) reversed the RTC’s decision, holding that PASAR’s action was an unjustified attempt to impede the stockholders’ rights. The CA emphasized that the proper remedy for enforcing the right of inspection is a writ of mandamus, which stockholders could file if the corporation denies their request. This ruling underscored the principle that corporations cannot preemptively restrict stockholders’ rights but must instead defend their denial of access in court if challenged.

The Supreme Court upheld the Court of Appeals’ decision, reinforcing the statutory right of stockholders to inspect corporate records as enshrined in Section 74 of the Corporation Code. This provision mandates that corporations keep records of all business transactions and minutes of meetings open for inspection by stockholders at reasonable hours on business days. Furthermore, stockholders have the right to demand written copies of excerpts from these records at their expense.

The Court clarified that while the right to inspect is not absolute and is subject to certain limitations, these limitations must be raised as defenses by the corporation in an action brought by the stockholder. Section 74 explicitly provides that it is a defense if the person demanding inspection has improperly used information from prior examinations or is not acting in good faith or for a legitimate purpose. Building on this principle, the Court emphasized that the burden of proving these defenses lies with the corporation, not the stockholder.

In essence, the Supreme Court’s decision underscores the importance of transparency and accountability in corporate governance. By preventing corporations from preemptively blocking stockholders’ access to information, the Court safeguards the stockholders’ right to monitor the management and financial health of the company. This ensures that stockholders can make informed decisions and hold corporate officers accountable for their actions. The corporation bears the burden of proof, it must affirmatively demonstrate that the stockholder’s motives are improper or that the information sought would be used to the detriment of the company.

The Court referred to earlier jurisprudence to stress that the impropriety of purpose must be set up by the corporation defensively. In Gokongwei, Jr. v. Securities and Exchange Commission, the Supreme Court articulated that:

The stockholder’s right of inspection of the corporation’s books and records is based upon their ownership of the assets and property of the corporation. It is, therefore, an incident of ownership of the corporate property, whether this ownership or interest be termed an equitable ownership, a beneficial ownership, or a quasi-ownership… But the “impropriety of purpose such as will defeat enforcement must be set up the corporation defensively if the Court is to take cognizance of it as a qualification. In other words, the specific provisions take from the stockholder the burden of showing propriety of purpose and place upon the corporation the burden of showing impropriety of purpose or motive.”

The Court also acknowledged that corporations have legitimate interests in protecting confidential information, trade secrets, and other intellectual property rights. However, it clarified that the mere assertion of confidentiality is not sufficient to justify denying a stockholder’s right to inspect. Instead, the corporation must present concrete evidence demonstrating that the stockholder’s request for inspection would violate the corporation’s legal rights.

The Supreme Court further emphasized that the discomfort or vexation experienced by corporate management due to a request for inspection is not, in itself, a sufficient basis to deny access. The Court recognized that ensuring good governance entails enduring such inconveniences. Courts must be convinced that the scope or manner of the request and the conditions under which it was made are so frivolous that the huge cost to the business will, in equity, be unfair to the other stockholders. The decision reinforces the principle that stockholders are entitled to full information as to the management of the corporation and the manner of expenditure of its funds.

FAQs

What was the central issue in this case?	The key issue was whether a corporation could obtain an injunction to prevent a stockholder from exercising their right to inspect corporate records, or if the corporation must raise its objections defensively in a legal action brought by the stockholder.
What did the Court decide?	The Supreme Court ruled that a corporation cannot preemptively block a stockholder’s right to inspect corporate records through an injunction. The corporation must raise any objections as a defense if the stockholder initiates legal action to enforce their right.
What is the basis of a stockholder’s right to inspect corporate records?	Section 74 of the Corporation Code grants stockholders the right to inspect corporate records at reasonable hours on business days. This right is an incident of ownership and is intended to protect the stockholder’s interest in the corporation.
Are there any limitations to a stockholder’s right to inspect?	Yes, the right to inspect is not absolute. The Corporation Code provides defenses for the corporation if the stockholder has improperly used information from prior inspections or is not acting in good faith or for a legitimate purpose.
Who bears the burden of proving the limitations to the right to inspect?	The corporation bears the burden of proving that the stockholder has acted improperly or is not acting in good faith. Good faith and a legitimate purpose are presumed, and the corporation must present evidence to overcome this presumption.
Can a corporation deny inspection based on confidentiality concerns?	The mere assertion of confidentiality is not sufficient to deny inspection. The corporation must present concrete evidence demonstrating that the stockholder’s request for inspection would violate the corporation’s legal rights, such as revealing trade secrets.
What remedies are available to a stockholder if their right to inspect is denied?	A stockholder can file an action for specific performance, damages, a petition for mandamus, or for violation of Section 74, in relation to Section 144 of the Corporation Code.
What is the significance of this ruling?	The ruling reinforces transparency and accountability in corporate governance by ensuring that stockholders have access to vital information about the company’s operations. It prevents corporations from using injunctions to stifle stockholders’ rights and underscores the importance of good faith and legitimate purpose in corporate actions.

In conclusion, this case clarifies the boundaries of corporate power and stockholder rights. It establishes a clear framework for resolving disputes related to corporate record inspection. The decision serves as a reminder that corporations must prioritize transparency and respect the rights of their stockholders.

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: PHILIPPINE ASSOCIATED SMELTING AND REFINING CORPORATION vs. PABLITO O. LIM, ET AL., G.R. No. 172948, October 05, 2016