Key Takeaway: The Importance of Proper Representation of Deceased Shareholders in Corporate Meetings

FLORENCIO T. MALLARE, ARISTOTLE Y. MALLARE AND MELODY TRACY MALLARE, PETITIONERS, VS. A&E INDUSTRIAL CORPORATION, RESPONDENT. G.R. No. 233646, June 16, 2021

Imagine a scenario where the fate of a company hangs in the balance due to a dispute over who has the right to vote the shares of a deceased shareholder. This is not just a hypothetical situation; it’s the real-life challenge faced by A&E Industrial Corporation, a company embroiled in an intra-corporate dispute that reached the Supreme Court of the Philippines. The case of Mallare vs. A&E Industrial Corporation highlights the critical importance of understanding corporate governance rules, particularly how the death of a shareholder impacts quorum and voting rights in corporate meetings.

The central issue in this case revolved around the validity of a stockholders’ meeting held by A&E Industrial Corporation after the death of a major shareholder, Jane Mallare. The dispute was between two factions of the company: the Mallare Group and the Hwang Group, each claiming legitimate control over the corporation. The Mallare Group argued that the meeting was invalid due to improper representation of Jane’s shares, while the Hwang Group contended that they were rightfully elected based on the votes cast, including those of Jane’s shares.

Understanding the Legal Context

In the Philippines, corporate governance is governed by the Revised Corporation Code, which outlines the rules for conducting meetings, determining quorum, and electing directors. A key principle is that a quorum in meetings is based on the presence of stockholders or members entitled to vote, representing the majority of the outstanding capital stock or a majority of the members.

When a shareholder dies, the legal title to their shares and the right to vote them typically pass to the executor or administrator appointed by the court. This is crucial for maintaining the integrity of corporate governance, as it ensures that the shares are represented in a manner consistent with the legal framework. The Revised Corporation Code, under Section 54, specifically states that “Executors, administrators, receivers, and other legal representatives duly appointed by the court may attend and vote on behalf of the stockholders or members without need of any written proxy.”

This legal provision is designed to prevent unauthorized individuals from exercising voting rights over shares they do not legally control. For instance, if a family member dies holding significant shares in a company, the appointed administrator must be the one to vote those shares during corporate meetings to ensure that the deceased’s interests are properly represented.

Case Breakdown: The Journey to the Supreme Court

The dispute between the Mallare and Hwang Groups began following the death of Jane Mallare, a significant shareholder in A&E Industrial Corporation. The company, engaged in real estate management, saw tensions rise as the two factions vied for control. The Mallare Group, led by Florencio, Aristotle, and Melody Mallare, claimed to be the legitimate directors and officers based on their holdover status, as no valid election had occurred since Jane’s death.

Conversely, the Hwang Group, led by Anthony and Evelyn Hwang, held a stockholders’ meeting on February 23, 2013, where they elected themselves as the new board of directors. Anthony Hwang claimed the right to vote Jane’s shares based on an assignment of voting rights executed by Jane before her death. This meeting resulted in the Hwang Group asserting control over the company’s operations.

The Mallare Group challenged the validity of this meeting, arguing that Anthony’s representation of Jane’s shares was unauthorized, especially since Florencio had been appointed as the special administrator of Jane’s estate. The case moved through the Regional Trial Court (RTC) and the Court of Appeals (CA), with conflicting rulings on the issuance of a writ of preliminary injunction to prevent the Mallare Group from acting as directors and officers.

Ultimately, the Supreme Court ruled in favor of the Mallare Group, dissolving the writ of preliminary injunction issued by the CA. The Court emphasized that the right to vote Jane’s shares should have been exercised by the special administrator, Florencio Mallare, and not by Anthony Hwang. The Court’s decision was grounded in the principle that a clear and unmistakable right must be established before an injunction can be granted.

The Supreme Court’s reasoning was clear: “In case of death of a shareholder, the executor or administrator duly appointed by the court is vested with the legal title to the share and entitled to vote it.” This ruling underscored the importance of proper representation of deceased shareholders’ interests in corporate governance.

Practical Implications and Key Lessons

The Supreme Court’s decision in Mallare vs. A&E Industrial Corporation has significant implications for corporate governance in the Philippines. Companies must ensure that the shares of deceased shareholders are voted by the legally appointed representative, usually the executor or administrator of the estate. Failure to do so can lead to disputes over the validity of corporate meetings and elections.

For businesses, this ruling serves as a reminder to review their governance practices and ensure compliance with the Revised Corporation Code. It is advisable to consult with legal counsel to navigate the complexities of shareholder representation, especially in cases involving deceased shareholders.

Key Lessons:

• Verify the legal representative of deceased shareholders before conducting corporate meetings.
• Ensure that quorum and voting rights are based on the presence of legally entitled stockholders.
• Seek legal advice to prevent disputes over corporate control and governance.

Frequently Asked Questions

What happens to a shareholder’s voting rights when they die?
Upon a shareholder’s death, their voting rights typically pass to the executor or administrator appointed by the court to manage their estate.

Can a family member vote shares on behalf of a deceased shareholder?
No, unless they are the legally appointed executor or administrator, a family member cannot vote shares on behalf of a deceased shareholder.

How does the death of a shareholder affect a company’s quorum?
The death of a shareholder can impact quorum if their shares are not properly represented by the legal representative, potentially invalidating corporate meetings.

What steps should a company take to ensure proper representation of deceased shareholders?
A company should verify the appointment of the executor or administrator and ensure that they are the ones to vote the deceased’s shares in corporate meetings.

Can a writ of preliminary injunction be issued to prevent unauthorized control of a company?
A writ of preliminary injunction may be issued, but it requires clear evidence of a legal right to be protected and that the issuance would not prejudge the main case.

ASG Law specializes in corporate governance and intra-corporate disputes. Contact us or email hello@asglawpartners.com to schedule a consultation.