The Supreme Court ruled that a special stockholders’ meeting and subsequent corporate actions, including the election of a new board of directors, were invalid due to procedural and substantive violations of corporate law. This decision underscores the importance of adhering to corporate by-laws, the necessity of board authorization for issuing shares, and the protection of stockholders’ preemptive rights. It reinforces that corporate governance requires strict compliance with legal and procedural requirements to ensure fairness and legitimacy in corporate decision-making.

Family Feud or Corporate Foul Play? The Battle for Control Over Lopez Corporations

This case revolves around a bitter dispute within the Lopez family concerning the control of several family-owned corporations, namely iSpecialist Development Corporation (iSpecialist), LC Lopez Resources, Inc. (LC Lopez), and Conqueror International, Inc. (Conqueror). Lily C. Lopez (petitioner) challenged the validity of special stockholders’ meetings and elections orchestrated by her husband, Lolito S. Lopez (respondent Lolito), alleging violations of corporate by-laws, unauthorized issuance of shares, and denial of her and her children’s rights as stockholders. The central legal question is whether these meetings and subsequent elections were valid, considering the alleged breaches of corporate governance principles.

The dispute began when respondent Lolito, acting as president of iSpecialist, called a special stockholders’ meeting where new board members were elected, excluding Lily and her children. Lily contested this, arguing that the meeting was not held at the principal office as required by the corporation’s by-laws and that unissued shares were improperly used to influence the election. Similarly, in LC Lopez and Conqueror, Lily challenged the validity of a stockholders’ meeting where her children were allegedly denied their rights as stockholders and a new board was elected based on shares acquired by Lolito without proper authorization. These actions, according to Lily, were designed to wrest control of the corporations from her and her children.

The Regional Trial Court (RTC) in Quezon City initially ruled in favor of Lily, declaring the iSpecialist elections null and void, finding that the unissued shares used by Lolito were not properly authorized by the board. The RTC emphasized that, according to Section 23 of the Corporation Code, all corporate business must be conducted by the Board of Directors, and no individual officer can exercise corporate power without board authority. This underscored the importance of collective decision-making in corporate governance.

Section 23. The board of directors or trustees – Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property or such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year and until their successors are elected and qualified. x x x

Similarly, the RTC in Marikina City ruled in favor of Lily and her children regarding LC Lopez and Conqueror, declaring the special stockholders’ meeting invalid. The court found that Christina and John Rusty, Lily’s children, were indeed stockholders despite not being listed in the Stock and Transfer Book (STB), citing confirmations from Lolito and other corporate officers. The court also noted irregularities in the issuance of stock certificates to Lolito and his allies, deeming them an afterthought to manipulate the board elections.

These rulings were appealed to the Court of Appeals (CA), which consolidated the cases and reversed the RTC decisions, declaring the stockholders’ meetings in all three corporations valid. The CA reasoned that the petition in the iSpecialist case was filed late and that Christina was not a valid stockholder since her name was not in the STB. The CA also justified Lolito’s purchase of unissued shares as necessary for infusing capital and deemed it an ultra vires act that could be ratified. This decision hinged on a strict interpretation of corporate records and a more lenient view of unauthorized actions.

The Supreme Court (SC), however, sided with Lily, reversing the CA’s decision. The SC addressed the procedural issue in the iSpecialist case, finding that the CA erred in disregarding the presumption of regularity in the RTC’s certification of the decision’s receipt. The High Court emphasized that the burden of proof was on the respondents to disprove the certification, which they failed to do adequately. This highlighted the importance of timely filing and the presumption of regularity in court proceedings.

The presumption of regularity in the performance of official duties is an aid to the effective and unhampered administration of government functions. Without such benefit, every official action could be negated with minimal effort from litigants, irrespective of merit or sufficiency of evidence to support such challenge. To this end, our body of jurisprudence has been consistent in requiring nothing short of clear and convincing evidence to the contrary to overthrow such presumption.

On the substantive issues, the SC agreed with the RTC in Marikina that Christina was indeed a stockholder of LC Lopez and Conqueror, despite her name not appearing in the STB. The SC distinguished this case from previous rulings, noting that Christina presented additional evidence, including testimonies from corporate officers confirming her stockholder status. The High Court also held that Lolito was estopped from denying Christina’s status, as he had previously recognized her as a stockholder in corporate dealings.

Regarding the unissued shares, the SC agreed with the lower courts that Lolito’s purchase was invalid because it lacked board authorization and violated Lily’s preemptive rights. The SC cited Section 39 of the Corporation Code, which grants stockholders the preemptive right to subscribe to new share issues to maintain their proportional ownership. This right was clearly violated when Lolito acquired the shares without offering them to Lily first.

Section 38. Power to Deny Preemptive Right. – All stockholders of a stock corporation shall enjoy preemptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles or incorporation or an amendment thereto: Provided, That such preemptive right shall not extend to shares issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock in exchange for property needed for corporate purposes or in payment of previously contracted debt.

The SC also found the special stockholders’ meeting to be void for lack of quorum. The High Court referred to the General Information Sheets (GIS) of the corporations, rather than the STB, to determine the actual stockholdings, given the doubts about the STB’s veracity. Based on the GIS, Lolito’s shares alone did not constitute a quorum, rendering the meeting and all its outcomes invalid. This decision underscores the critical importance of maintaining accurate and reliable corporate records.

FAQs

What was the key issue in this case?	The key issue was the validity of special stockholders’ meetings and subsequent elections in iSpecialist, LC Lopez, and Conqueror, focusing on compliance with corporate by-laws, authorization of share issuances, and protection of stockholders’ rights.
Why did the Supreme Court reverse the Court of Appeals’ decision?	The Supreme Court reversed the CA’s decision due to procedural errors regarding the timeliness of the petition in the iSpecialist case and substantive errors in recognizing Christina as a stockholder and validating Lolito’s purchase of unissued shares.
What is the significance of the Stock and Transfer Book (STB) in determining stockholder status?	Generally, the STB is the primary evidence of stockholder status. However, the Court recognized Christina as a stockholder based on additional evidence, including testimonies and corporate conduct, despite her name not appearing in the STB.
What is a preemptive right, and how was it violated in this case?	A preemptive right is a stockholder’s right to subscribe to new share issuances to maintain their proportional ownership. It was violated when Lolito acquired unissued shares without offering them to Lily, thereby diluting her ownership.
Why was the lack of a board resolution authorizing the share issuance significant?	The lack of a board resolution meant that Lolito’s purchase of unissued shares was unauthorized and invalid, as corporate powers are vested in the board of directors, not individual officers.
How did the Court determine whether a quorum was present at the stockholders’ meeting?	The Court relied on the General Information Sheets (GIS) to determine the actual stockholdings, finding that Lolito’s shares alone did not constitute a quorum, making the meeting invalid.
What is the practical implication of this ruling for corporate governance?	The ruling reinforces the importance of adhering to corporate by-laws, obtaining board authorization for issuing shares, protecting stockholders’ preemptive rights, and maintaining accurate corporate records to ensure fairness and legitimacy in corporate decision-making.
What recourse do minority stockholders have if their rights are violated?	Minority stockholders can file legal challenges to question the validity of corporate actions that violate their rights, such as unauthorized share issuances or denial of preemptive rights.

In conclusion, the Supreme Court’s decision underscores the critical importance of adhering to corporate governance principles, protecting stockholders’ rights, and ensuring that corporate actions are properly authorized and compliant with the law. This case serves as a reminder that corporate control cannot be achieved through procedural shortcuts or disregard for legal requirements.

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: Lily C. Lopez vs. Lolito S. Lopez, G.R. Nos. 254957-58, June 15, 2022