The Supreme Court has affirmed that a stockholder’s meeting lacking a quorum is invalid, directly impacting corporate governance and the legitimacy of decisions made during such meetings. This ruling underscores the importance of accurately determining the outstanding capital stock when assessing quorum requirements, ensuring that all corporate actions adhere to legal standards and protect the rights of stockholders.

Family Feud or Corporate Fumble? Determining Quorum Amidst Disputed Shares

This case revolves around Phil-Ville Development and Housing Corporation, a family-owned real estate business. The central issue arose when certain stockholders, Cecilia Que Yabut, Eumir Carlo Que Camara, and Ma. Corazon Que Garcia (Cecilia Que, et al.), held an annual stockholder’s meeting. Carolina Que Villongco, Ana Maria Que Tan, Angelica Que Gonzales, Elaine Victoria Que Tan and Edison Williams Que Tan (Carolina, et al.) challenged the validity of this meeting, alleging it lacked the necessary quorum. The dispute stemmed from a disagreement over the distribution of shares, particularly those originally belonging to the corporation’s founder, Geronima Gallego Que, and whether these disputed shares should be included when calculating the quorum.

The controversy began after Geronima’s death, when questions arose regarding the distribution of her 3,140 shares. Cecilia Que, acting as Geronima’s attorney-in-fact, allegedly executed a Sale of Shares of Stocks that was perceived as an inequitable distribution. This led to internal conflicts and ultimately, a challenge to the legitimacy of the annual stockholder’s meeting held on January 25, 2014. Carolina, et al. argued that the meeting was invalid due to the absence of a quorum, the improper inclusion of Geronima’s shares in the voting, and questionable proxy validations. They filed a complaint seeking to annul the meeting and invalidate the election of Cecilia Que, et al. as directors and officers of the corporation.

The Regional Trial Court (RTC) initially ruled in favor of Carolina, et al., declaring the election of Cecilia Que, et al. as directors void due to the lack of a quorum. However, the Court of Appeals (CA) reversed this decision, finding that the RTC’s ruling failed to comply with the constitutional requirement of clearly stating the facts and the law on which it was based, as mandated by Section 14, Article VIII of the Constitution. Despite this, the CA independently concluded that the annual stockholder’s meeting was indeed invalid due to the absence of a quorum and further declared all actions performed by Cecilia Que, et al. as ultra vires, lacking legal authority.

Both parties then elevated the case to the Supreme Court, leading to a review of the procedural and substantive issues. The Supreme Court addressed whether the CA was correct in finding the RTC decision unconstitutional, whether the total outstanding shares should include disputed stocks for quorum determination, and whether Cecilia et al. were improperly barred from filing an answer. The Supreme Court emphasized that a decision must clearly articulate the facts and law underpinning it, and that failing to do so undermines due process.

The Supreme Court discussed the procedural aspect regarding the motion for extension of time to file an answer. The court cited the principle that filing such a motion constitutes a voluntary appearance, curing any defects in the service of summons. The court underscored the established precedent set in Carson Realty & Management Corporation v. Red Robin Security Agency, et al., stating that,

We have, time and again, held that the filing of a motion for additional time to file answer is considered voluntary submission to the jurisdiction of the court. If the defendant knowingly does an act inconsistent with the right to object to the lack of personal jurisdiction as to him, like voluntarily appearing in the action, he is deemed to have submitted himself to the jurisdiction of the court. Seeking an affirmative relief is inconsistent with the position that no voluntary appearance had been made, and to ask for such relief, without the proper objection, necessitates submission to the Court’s jurisdiction.

On the substantive aspects, the Supreme Court agreed with the CA that the RTC decision was indeed flawed for not adhering to Section 14, Article VIII of the Constitution. The court highlighted the importance of a decision clearly stating the facts and legal bases, to ensure that parties understand the rationale behind the judgment and can properly seek appellate review if necessary. According to the Supreme Court, the lower court had merely adopted the assertions of one party without providing clear reasoning or justification, making the initial decision unconstitutionally infirm.

The court then addressed the critical issue of determining quorum. Section 52 of the Corporation Code explicitly states that:

Section 52. Quorum in meetings. – Unless otherwise provided for in this Code or in the by-laws, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of non-stock corporations.

The definition of “outstanding capital stock” is further clarified in Section 137 of the same Code, which provides that:

Section 137. Outstanding capital stock defined. – The term “outstanding capital stock”, as used in this Code, means the total shares of stock issued under binding subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury shares.

The Supreme Court clarified that the quorum should be based on the total outstanding capital stock, without distinguishing between disputed and undisputed shares. The court emphasized that the law makes no such distinction, and it is not within the judiciary’s purview to introduce such a distinction where the law does not provide for it. The court invoked the legal maxim Ubi lex non distinguit nec nos distinguere debemus – when the law does not distinguish, we should not distinguish. Thus, the court affirmed that the entire 200,000 outstanding capital stocks of Phil-Ville should be the basis for determining whether a quorum was present.

Applying this principle, the Supreme Court upheld the CA’s finding that only 98,430 shares were represented at the January 25, 2014 meeting, falling short of the required quorum of 100,001 shares. Consequently, the meeting was deemed invalid.

The Supreme Court further addressed the matter of the 3,140 shares of the late Geronima Gallego Que, which were allegedly transferred to various individuals. The court emphasized that under Section 63 of the Corporation Code, a stock transfer is only valid between the parties involved until it is recorded in the corporation’s books.

Section 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.

The Supreme Court, citing Interport Resources Corporation v. Securities Specialist, Inc., reiterated that an unrecorded transfer is non-existent as far as the corporation is concerned. The corporation looks only to its books to determine who its shareholders are. Because there was no evidence that the transfer of Geronima’s shares was recorded in the stock and transfer book of Phil-Ville, the court concluded that these shares could not be considered in determining quorum or voting rights. The court also dismissed the argument that Cecilia Que, et al. should be excused for not presenting the stock and transfer book, noting that stockholders have a legal right to inspect corporate books and have remedies under the Corporation Code if this right is denied.

FAQs

What was the key issue in this case?	The central issue was whether the annual stockholder’s meeting of Phil-Ville Development and Housing Corporation was valid given the alleged lack of quorum due to disputed shares. The court had to determine if disputed shares should be considered when calculating the quorum, and the implications for corporate governance.
What does ‘quorum’ mean in the context of a stockholder’s meeting?	A quorum refers to the minimum number of stockholders or shares that must be present at a meeting to make the proceedings and decisions valid. Without a quorum, any resolutions passed or elections held are generally considered void.
How is a quorum determined for a stock corporation in the Philippines?	According to Section 52 of the Corporation Code, a quorum consists of stockholders representing a majority of the outstanding capital stock. This means more than 50% of the total issued shares must be present or represented.
What is the significance of the stock and transfer book?	The stock and transfer book is the official record of a corporation that lists all stock issuances and transfers. Under Section 63 of the Corporation Code, a stock transfer is only valid against the corporation once it is recorded in this book.
What happens if a stockholder’s meeting is conducted without a quorum?	If a meeting is conducted without a quorum, any actions taken, such as the election of directors or approval of resolutions, are considered invalid. This can lead to legal challenges and the need to reconvene a valid meeting.
Why was the RTC’s initial decision overturned by the Court of Appeals?	The Court of Appeals overturned the RTC’s decision because it failed to comply with Section 14, Article VIII of the Constitution, which requires decisions to clearly state the facts and the law on which they are based. The RTC’s decision was deemed too brief and lacking in detailed reasoning.
What are ‘ultra vires’ acts in the context of this case?	‘Ultra vires’ acts refer to actions taken by corporate officers or directors that exceed their legal authority. In this case, since the election of Cecilia Que, et al. was deemed invalid, any actions they took as officers were considered ultra vires because they lacked the legal standing to act on behalf of the corporation.
Can stockholders inspect the books of the corporation?	Yes, Section 74 of the Corporation Code grants stockholders the right to inspect the books of the corporation at reasonable hours on business days. This right helps ensure transparency and accountability in corporate governance.
What is the effect of the Supreme Court’s decision?	The Supreme Court’s decision affirmed the Court of Appeals’ ruling, declaring the annual stockholder’s meeting invalid for lack of quorum. It also underscored the importance of adhering to constitutional requirements for judicial decisions and clarified the proper method for determining quorum based on outstanding capital stock.

In conclusion, the Supreme Court’s decision reinforces the critical importance of adhering to quorum requirements in corporate meetings and the necessity of accurate record-keeping. By clarifying that quorum should be based on total outstanding capital stock and emphasizing the significance of recording stock transfers in the corporate books, the court has provided valuable guidance for corporations and stockholders alike. This ruling ensures that corporate actions are legitimate and that the rights of all stockholders are protected.

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: CAROLINA QUE VILLONGCO, ET AL. V. CECILIA QUE YABUT, ET AL., G.R. Nos. 225022 & 225024, February 5, 2018