China Banking Corp. vs. CA (270 SCRA 503 [1997]) : Nature of By-Laws

Corp Law Topic: Nature of By-Laws

Petitioner China Banking Corporation seeks the reversal of the decision of the Court of Appeals dated 15 August 1994 nullifying the Securities and Exchange Commission's order and resolution dated 4 June 1993 and 7 December 1993, respectively, for lack of jurisdiction.

A.

On 9 March 1990, petitioner protested the sale by VGCCI of the subject share of stock and thereafter filed a case with the Regional Trial Court of Makati for the nullification of the 10 December 1986 auction and for the issuance of a new stock certificate in its name.

On 18 June 1990, the Regional Trial Court of Makati dismissed the complaint for lack of jurisdiction over the subject matter on the theory that it involves an intra-corporate dispute and on 27 August 1990 denied petitioner's motion for reconsideration.

B.

On 20 September 1990, petitioner filed a complaint with the Securities and Exchange Commission (SEC) for the nullification of the sale of Calapatia's stock by VGCCI; the cancellation of any new stock certificate issued pursuant thereto; for the issuance of a new certificate in petitioner's name; and for damages, attorney's fees and costs of litigation.

On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered a decision in favor of VGCCI, stating in the main that "(c)onsidering that the said share is delinquent, (VGCCI) had valid reason not to transfer the share in the name of the petitioner in the books of (VGCCI) until liquidation of delinquency."

Consequently, the case was dismissed.

C.

Petitioner appealed to the SEC en banc and on 4 June 1993, the Commission issued an order reversing the decision of its hearing officer. It declared thus:

The Commission en banc believes that appellant-petitioner has a prior right over the pledged share and because of pledgor's failure to pay the principal debt upon maturity, appellant-petitioner can proceed with the foreclosure of the pledged share.

WHEREFORE, premises considered, the Orders of January 3, 1992 and April 14, 1992 are hereby SET ASIDE. The auction sale conducted by appellee-respondent Club on December 10, 1986 is declared NULL and VOID. Finally, appellee-respondent Club is ordered to issue another membership certificate in the name of appellant-petitioner bank.

D.

On 15 August 1994, the Court of Appeals rendered its decision nullifying and setting aside the orders of the SEC and its hearing officer on ground of lack of jurisdiction over the subject matter and, consequently, dismissed petitioner's original complaint.

The Court of Appeals declared that the controversy between CBC and VGCCI is not intra-corporate.

In order that the respondent Commission can take cognizance of a case, the controversy must pertain to any of the following relationships:

(a) between the corporation, partnership or association and the public;
(b) between the corporation, partnership or association and its stockholders, partners, members, or officers;
(c) between the corporation, partnership or association and the state in so far as its franchise, permit or license to operate is concerned, and
(d) among the stockholders, partners or associates themselves
(Union Glass and Container Corporation vs. SEC, November 28, 1983, 126 SCRA 31).

The establishment of any of the relationship mentioned will not necessarily always confer jurisdiction over the dispute on the Securities and Exchange Commission to the exclusion of the regular courts.

The better policy in determining which body has jurisdiction over a case would be to consider not only the status or relationship of the parties but also the nature of the question that is the subject of their controversy (Viray vs. Court of Appeals, November 9, 1990, 191 SCRA 308, 322-323).

Indeed, the controversy between petitioner and respondent bank which involves ownership of the stock that used to belong to Calapatia, Jr. is not within the competence of respondent Commission to decide. It is not any of those mentioned in the aforecited case.

WHEREFORE, the decision dated June 4, 1993, and order dated December 7, 1993 of respondent Securities and Exchange Commission (Annexes Y and BB, petition) and of its hearing officer dated January 3, 1992 and April 14, 1992 (Annexes S and W, petition) are all nullified and set aside for lack of jurisdiction over the subject matter of the case. Accordingly, the complaint of respondent China Banking Corporation (Annex Q, petition) is DISMISSED.


Issue 1: Jurisdiction

Which body has jurisdiction over the controversy, the regular courts or the SEC.


Held:

To ascertain which tribunal has jurisdiction we have to determine therefore whether or not petitioner is a stockholder of VGCCI and whether or not the nature of the controversy between petitioner and private respondent corporation is intra-corporate.

There is no question that the purchase of the subject share or membership certificate at public auction by petitioner (and the issuance to it of the corresponding Certificate of Sale) transferred ownership of the same to the latter and thus entitled petitioner to have the said share registered in its name as a member of VGCCI.

It is readily observed that VGCCI did not assail the transfer directly and has in fact, in its letter of 27 September 1974, expressly recognized the pledge agreement executed by the original owner, Calapatia, in favor of petitioner and has even noted said agreement in its corporate books.

In addition, Calapatia, the original owner of the subject share, has not contested the said transfer.

By virtue of the afore-mentioned sale, petitioner became a bona fide stockholder of VGCCI and, therefore, the conflict that arose between petitioner and VGCCI aptly exemplies an intra-corporate controversy between a corporation and its stockholder under Sec. 5(b) of P.D. 902-A.

An important consideration, moreover, is the nature of the controversy between petitioner and private respondent corporation.

Abejo v. De la Cruz
The Court held that under the "sense-making and expeditious doctrine of primary jurisdiction . . . the courts cannot or will not determine a controversy involving a question which is within the jurisdiction of an administrative tribunal, where the question demands the exercise of sound administrative discretion requiring the special knowledge, experience, and services of the administrative tribunal to determine technical and intricate matters of fact, and a uniformity of ruling is essential to comply with the purposes of the regulatory statute administered.

In this era of clogged court dockets, the need for specialized administrative boards or commissions with the special knowledge, experience and capability to hear and determine promptly disputes on technical matters or essentially factual matters, subject to judicial review in case of grave abuse of discretion, has become well nigh indispensable.

In this case, the need for the SEC's technical expertise cannot be over-emphasized involving as it does the meticulous analysis and correct interpretation of a corporation's by-laws as well as the applicable provisions of the Corporation Code in order to determine the validity of VGCCI's claims. The SEC, therefore, took proper cognizance of the instant case.


Issue 2:

VGCCI assails the validity of the pledge agreement executed by Calapatia in petitioner's favor. It contends that the same was null and void for lack of consideration because the pledge agreement was entered into on 21 August 1974 but the loan or promissory note which it secured was obtained by Calapatia much later or only on 3 August 1983.

Held:

A careful perusal of the pledge agreement will readily reveal that the contracting parties explicitly stipulated therein that the said pledge will also stand as security for any future advancements (or renewals thereof) that Calapatia (the pledgor) may procure from petitioner

The validity of the pledge agreement between petitioner and Calapatia cannot thus be held suspect by VGCCI. As candidly explained by petitioner, the promissory note of 3 August 1983 in the amount of P20,000.00 was but a renewal of the first promissory note covered by the same pledge agreement.


Issue 3:

VGCCI likewise insists that due to Calapatia's failure to settle his delinquent accounts, it had the right to sell the share in question in accordance with the express provision found in its by-laws.

Held:

It is significant to note that VGCCI began sending notices of delinquency to Calapatia after it was informed by petitioner (through its letter dated 14 May 1985) of the foreclosure proceedings initiated against Calapatia's pledged share, although Calapatia has been delinquent in paying his monthly dues to the club since 1975.

Stranger still, petitioner, whom VGCCI had officially recognized as the pledgee of Calapatia's share, was neither informed nor furnished copies of these letters of overdue accounts until VGCCI itself sold the pledged share at another public auction.

By doing so, VGCCI completely disregarded petitioner's rights as pledgee. It even failed to give petitioner notice of said auction sale. Such actuations of VGCCI thus belie its claim of good faith.

In defending its actions, VGCCI likewise maintains that petitioner is bound by its by-laws. It argues in this wise:

The general rule really is that third persons are not bound by the by-laws of a corporation since they are not privy thereto (Fleischer v. Botica Nolasco, 47 Phil. 584).

The exception to this is when third persons have actual or constructive knowledge of the same.

In the case at bar, petitioner had actual knowledge of the by-laws of private respondent when petitioner foreclosed the pledge made by Calapatia and when petitioner purchased the share foreclosed on September 17, 1985.

Because of this actual knowledge of such by-laws then the same bound the petitioner as of the time when petitioner purchased the share.

Since the by-laws was already binding upon petitioner when the latter purchased the share of Calapatia on September 17, 1985 then the petitioner purchased the said share subject to the right of the private respondent to sell the said share for reasons of delinquency and the right of private respondent to have a first lien on said shares as these rights are provided for in the by-laws very very clearly.

VGCCI misunderstood the import of our ruling in Fleischer v. Botica Nolasco Co.:

And moreover, the by-law now in question cannot have any effect on the appellee. He had no knowledge of such by-law when the shares were assigned to him. He obtained them in good faith and for a valuable consideration. He was not a privy to the contract created by said by-law between the shareholder Manuel Gonzales and the Botica Nolasco, Inc. Said by-law cannot operate to defeat his rights as a purchaser.

An unauthorized by-law forbidding a shareholder to sell his shares without first offering them to the corporation for a period of thirty days is not binding upon an assignee of the stock as a personal contract, although his assignor knew of the by-law and took part in its adoption.

When no restriction is placed by public law on the transfer of corporate stock, a purchaser is not affected by any contractual restriction of which he had no notice.

The assignment of shares of stock in a corporation by one who has assented to an unauthorized by-law has only the effect of a contract by, and enforceable against, the assignor; the assignee is not bound by such by-law by virtue of the assignment alone.

A by-law of a corporation which provides that transfers of stock shall not be valid unless approved by the board of directors, while it may be enforced as a reasonable regulation for the protection of the corporation against worthless stockholders, cannot be made available to defeat the rights of third persons.

In order to be bound, the third party must have acquired knowledge of the pertinent by-laws at the time the transaction or agreement between said third party and the shareholder was entered into, in this case, at the time the pledge agreement was executed.

VGCCI could have easily informed petitioner of its by-laws when it sent notice formally recognizing petitioner as pledgee of one of its shares registered in Calapatia's name. Petitioner's belated notice of said by-laws at the time of foreclosure will not suffice.

Lanuza vs. CA (454 SCRA 54 [2005]) : Concepts of “Capital Stocks” & “Paid-Up Capital Stock”

Corp Law Topic: Concepts of “Capital Stocks” & “Paid-Up Capital Stock”

In 1952, the Philippine Merchant Marine School, Inc. (PMMSI) was incorporated, with seven hundred (700) founders’ shares and seventy-six (76) common shares as its initial capital stock subscription reflected in the articles of incorporation.

However, private respondents and their predecessors who were in control of PMMSI registered the company’s stock and transfer book for the first time in 1978, recording thirty-three (33) common shares as the only issued and outstanding shares of PMMSI.

Sometime in 1979, a special stockholders’ meeting was called and held on the basis of what was considered as a quorum of twenty-seven (27) common shares, representing more than two-thirds (2/3) of the common shares issued and outstanding.

In 1982, the heirs of one of the original incorporators, Juan Acayan, filed a petition with the Securities and Exchange Commission (SEC) for the registration of their property rights over one hundred (120) founders’ shares and twelve (12) common shares owned by their father.

The SEC hearing officer held that the heirs of Acayan were entitled to the claimed shares and called for a special stockholders’ meeting to elect a new set of officers.

The SEC En Banc affirmed the decision. As a result, the shares of Acayan were recorded in the stock and transfer book.

On 06 May 1992, a special stockholders’ meeting was held to elect a new set of directors. Private respondents thereafter filed a petition with the SEC questioning the validity of the 06 May 1992 stockholders’ meeting, alleging that the quorum for the said meeting should not be based on the 165 issued and outstanding shares as per the stock and transfer book, but on the initial subscribed capital stock of seven hundred seventy-six (776) shares, as reflected in the 1952 Articles of Incorporation.

The petition was dismissed.4 Appeal was made to the SEC En Banc, which granted said appeal, holding that the shares of the deceased incorporators should be duly represented by their respective administrators or heirs concerned.

The SEC directed the parties to call for a stockholders meeting on the basis of the stockholdings reflected in the articles of incorporation for the purpose of electing a new set of officers for the corporation.

The Court of Appeals held that for purposes of transacting business, the quorum should be based on the outstanding capital stock as found in the articles of incorporation.

In the instant petition, petitioners claim that the 1992 stockholders’ meeting was valid and legal. They submit that reliance on the 1952 articles of incorporation for determining the quorum negates the existence and validity of the stock and transfer book which private respondents themselves prepared.

In addition, they posit that private respondents cannot avail of the benefits secured by the heirs of Acayan, as private respondents must show and prove entitlement to the founders and common shares in a separate and independent action/proceeding.

If it be a stock corporation, the amount of its capital stock, in lawful money of the Philippines, and the number of shares into which it is divided, and if such stock be in whole or in part without par value then such fact shall be stated; Provided, however, That as to stock without par value the articles of incorporation need only state the number of shares into which said capital stock is divided.

If it be a stock corporation, the amount of capital stock or number of shares of no-par stock actually subscribed, the amount or number of shares of no-par stock subscribed by each and the sum paid by each on his subscription.

7. That the capital stock of the said corporation is NINETY THOUSAND PESOS (P90,000.00) divided into two classes, namely:
FOUNDERS’ STOCK - 1,000 shares at P20 par value- P 20,000.00
COMMON STOCK- 700 shares at P 100 par value – P 70,000.00
TOTAL ---------------------1,700 shares----------------------------P 90,000.00

8. That the amount of the entire capital stock which has been actually subscribed is TWENTY ONE THOUSAND SIX HUNDRED PESOS (P21,600.00) and the following persons have subscribed for the number of shares and amount of capital stock set out after their respective names: xxx

Sec. 137. Outstanding capital stock defined.— The term "outstanding capital stock" as used in this code, means the total shares of stock issued to subscribers or stockholders whether or not fully or partially paid (as long as there is binding subscription agreement) except treasury shares.

Thus, quorum is based on the totality of the shares which have been subscribed and issued, whether it be founders’ shares or common shares.

A Paid-up capital, also known as paid in capital or contributed capital represents money that is not borrowed, it is the amount of money that is actually received from its investors or shareholders in exchange for shares of stocks. Paid-up capital may be in the form of cash, real property, service, equipment or anything of value.

A Subscribed capital refers to the number of shares issued to the shareholders 

Nautica Canning Corp. vs. Yumul (473 SCRA 415 [2005])

Corp Law Topic:  When Incorporators Merely Nominee Shareholders

Nautica Canning Corporation (Nautica) was organized and incorporated on May 11, 1994 with an authorized capital stock of P40,000,000 divided into 400,000 shares with a par value of P100.00 per share. It had a subscribed capital stock of P10,000,000 with paid-in subscriptions from its incorporators.

Name No. of Shares Amount Subscribed Amount Paid
ALVIN Y. DEE 89,991 P8,999,100 P4,499,100
JONATHAN Y. DEE 2 200 200
JOANNA D. LAUREL 2 200 200
DARLENE EDSA MARIE
GONZALES 2 200 200
JENNIFER Y. DEE 2 200 200
ROBERTO C. YUMUL 1 100 100
JERRY ANGPING 10,000 1,000,000 500,000

On December 19, 1994, respondent Roberto C. Yumul was appointed Chief Operating Officer/General Manager of Nautica with a monthly compensation of P85,000 and an additional compensation equal to 5% of the company’s operating profit for the calendar year.

On the same date, First Dominion Prime Holdings, Inc., Nautica’s parent company, through its Chairman Alvin Y. Dee, granted Yumul an Option to Purchase up to 15% of the total stocks it subscribed from Nautica.

On June 22, 1995, a Deed of Trust and Assignment6 was executed between First Dominion Prime Holdings, Inc. and Yumul whereby the former assigned 14,999 of its subscribed shares in Nautica to the latter. The deed stated that the 14,999 "shares were acquired and paid for in the name of the ASSIGNOR only for convenience, but actually executed in behalf of and in trust for the ASSIGNEE."

In March 1996, Nautica declared a P35,000,000 cash dividend, P8,250,000 of which was paid to Yumul representing his 15% share.

After Yumul’s resignation from Nautica on August 5, 1996, he wrote a letter to Dee requesting the latter to formalize his offer to buy Yumul’s 15% share in Nautica on or before August 20, 1996; and demanding the issuance of the corresponding certificate of shares in his name should Dee refuse to buy the same.

Dee, through Atty. Fernando R. Arguelles, Jr., Nautica’s corporate secretary, denied the request claiming that Yumul was not a stockholder of Nautica.

Yumul requested that the Deed of Trust and Assignment be recorded in the Stock and Transfer Book of Nautica, and that he, as a stockholder, be allowed to inspect its books and records.

Yumul’s requests were denied allegedly because he neither exercised the option to purchase the shares nor paid for the acquisition price of the 14,999 shares. Atty. Arguelles maintained that the cash dividend received by Yumul is held by him only in trust for First Dominion Prime Holdings, Inc.

Thus, Yumul filed on October 3, 1996, before the SEC a petition for mandamus with damages, with prayer that the Deed of Trust and Assignment be recorded in the Stock and Transfer Book of Nautica and that the certificate of stocks corresponding thereto be issued in his name.

SEC En Banc Decision

Judgment is hereby rendered in favor of the petitioner and against the respondents.
1. Declaring petitioner as a stockholder of respondent Nautica;
2. Declaring petitioner as beneficial owner of 14,999 shares of Nautica under the Deed of Trust and Assignment dated June 22, 1995
3. Declaring petitioner to be entitled to the right of inspection of the books of the corporation pursuant to the pertinent provisions of the Corporation Code; and
4. Directing the Corporate Secretary of Nautica to recognize and register the Deed of Trust and Assignment dated June 22, 1995.

The Court of Appeals affirmed the decision of the SEC En Banc.


Issue:

Whether or not Yumul is a stockholder of Nautica.

Petitioners contend that Yumul was not a stockholder of Nautica; that he was just a nominal owner of one share as the beneficial ownership belonged to Dee who paid for said share when Nautica was incorporated.


Held:

It is possible for a business to be wholly owned by one individual. The validity of its incorporation is not affected when such individual gives nominal ownership of only one share of stock to each of the other four incorporators. This is not necessarily illegal.

But, this is valid only between or among the incorporators privy to the agreement. It does bind the corporation which, at the time the agreement is made, was non-existent. Thus, incorporators continue to be stockholders of a corporation unless, subsequent to the incorporation, they have validly transferred their subscriptions to the real parties in interest.

As between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are.

In the case at bar, the SEC and the Court of Appeals correctly found Yumul to be a stockholder of Nautica, of one share of stock recorded in Yumul’s name, although allegedly held in trust for Dee.

Nautica’s Articles of Incorporation and By-laws, as well as the General Information Sheet filed with the SEC indicated that Yumul was an incorporator and subscriber of one share. 

Even granting that there was an agreement between Yumul and Dee whereby the former is holding the share in trust for Dee, the same is binding only as between them. From the corporation’s vantage point, Yumul is its stockholder with one share, considering that there is no showing that Yumul transferred his subscription to Dee, the alleged real owner of the share, after Nautica’s incorporation.

Ponce v. Alsons Cement Corp
[A] transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent as far as the corporation is concerned. As between the corporation on one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are. It is only when the transfer has been recorded in the stock and transfer book that a corporation may rightfully regard the transferee as one of its stockholders. From this time, the consequent obligation on the part of the corporation to recognize such rights as it is mandated by law to recognize arises.
Hence, without such recording, the transferee may not be regarded by the corporation as one among its stockholders and the corporation may legally refuse the issuance of stock certificates.
Moreover, the contents of the articles of incorporation bind the corporation and its stockholders. Its contents cannot be disregarded considering that it was the basic document which legally triggered the creation of the corporation.

Besides, other than petitioners’ self-serving assertion that the beneficial ownership belongs to Dee, they failed to show that the subscription was transferred to Dee after Nautica’s incorporation.

The conduct of the parties also constitute sufficient proof of Yumul’s status as a stockholder. On April 4, 1995, Yumul was elected during the regular annual stockholders’ meeting as a Director of Nautica’s Board of Directors. Thereafter, he was elected as president of Nautica. Thus, Nautica and its stockholders knowingly held respondent out to the public as an officer and a stockholder of the corporation.

Section 23 of Batas Pambansa (BP) Blg. 68 or The Corporation Code of the Philippines requires that every director must own at least one share of the capital stock of the corporation of which he is a director. Before one may be elected president of the corporation, he must be a director.

Since Yumul was elected as Nautica’s Director and as President thereof, it follows that he must have owned at least one share of the corporation’s capital stock.

Thus, from the point of view of the corporation, Yumul was the owner of one share of stock.

NHA vs. CA (456 SCRA 17 [2005])

Corp Law Topic: Corporate Term (Secs. 11; 19)

The trial court dismissed the complaint for injunction filed by Bulacan Garden Corporation ("BGC") against the National Housing Authority ("NHA"). BGC wanted to enjoin the NHA from demolishing BGC’s facilities on a lot leased from Manila Seedling Bank Foundation, Inc. ("MSBF"). MSBF allegedly has usufructuary rights over the lot leased to BGC.

The appellate court reversed the Decision of the Trial Court.

On 24 October 1968, Proclamation No. 481 issued by then President Ferdinand Marcos set aside a 120-hectare portion of land in Quezon City owned by the NHA4 as reserved property for the site of the National Government Center ("NGC").

On 19 September 1977, President Marcos issued Proclamation No. 1670, which removed a seven-hectare portion from the coverage of the NGC. Proclamation No. 1670 gave MSBF usufructuary rights over this segregated portion.

MSBF occupied the area granted by Proclamation No. 1670. Over the years, MSBF’s occupancy exceeded the seven-hectare area subject to its usufructuary rights. By 1987, MSBF occupied approximately 16 hectares.

On 18 August 1987, MSBF leased a portion of the area it occupied to BGC and other stallholders.

On 11 November 1987, President Corazon Aquino issued Memorandum Order No. 127 ("MO 127") which revoked the reserved status of "the 50 hectares, more or less, remaining out of the 120 hectares of the NHA property reserved as site of the National Government Center." MO 127 also authorized the NHA to commercialize the area and to sell it to the public.

On 15 August 1988, acting on the power granted under MO 127, the NHA gave BGC ten days to vacate its occupied area.

The appellate court agreed with the trial court that Proclamation No. 1670 granted MSBF the right to determine the location of the seven-hectare area covered by its usufructuary rights. However, the appellate court ruled that MSBF did in fact assert this right by conducting two surveys and erecting its main structures in the area of its choice.

On 30 March 2001, the appellate court reversed the trial court’s ruling: The National Housing Authority is enjoined from demolishing the structures, facilities and improvements of the plaintiff-appellant Bulacan Garden Corporation at its leased premises located in Quezon City which premises were covered by Proclamation No. 1670, during the existence of the contract of lease it (Bulacan Garden) had entered with the plaintiff-appellant Manila Seedling Bank Foundation, Inc.


Held:

This case is REMANDED to Branch 87 of the Regional Trial Court of Quezon City, which shall order a joint survey by the National Housing Authority and Manila Seedling Bank Foundation, Inc. to determine the metes and bounds of the seven-hectare portion of Manila Seedling Bank Foundation, Inc. under Proclamation No. 1670. The seven-hectare portion shall be contiguous and shall include as much as possible all existing major improvements of Manila Seedling Bank Foundation, Inc.

Corporate Term

Article 605 of the Civil Code states:
ART. 605. Usufruct cannot be constituted in favor of a town, corporation, or association for more than fifty years. If it has been constituted, and before the expiration of such period the town is abandoned, or the corporation or association is dissolved, the usufruct shall be extinguished by reason thereof.

The law clearly limits any usufruct constituted in favor of a corporation or association to 50 years. A usufruct is meant only as a lifetime grant.

Unlike a natural person, a corporation or association’s lifetime may be extended indefinitely. The usufruct would then be perpetual.

Proclamation No. 1670 was issued 19 September 1977, or 28 years ago. Hence, under Article 605, the usufruct in favor of MSBF has 22 years left.

Hyatt Elevators vs. Goldstar Elevators, Phils. (473 SCRA 705 [2005])

Corp Law Topic: Principal Place of Business

Well established in our jurisprudence is the rule that the residence of a corporation is the place where its principal office is located, as stated in its Articles of Incorporation.

Petitioner [herein Respondent] Goldstar Elevator Philippines, Inc. (GOLDSTAR for brevity) is a domestic corporation primarily engaged in the business of marketing, distributing, selling, importing, installing, and maintaining elevators and escalators, with address at 6th Floor, Jacinta II Building, 64 EDSA, Guadalupe, Makati City.

On the other hand, private respondent [herein petitioner] Hyatt Elevators and Escalators Company (HYATT for brevity) is a domestic corporation similarly engaged in the business of selling, installing and maintaining/servicing elevators, escalators and parking equipment, with address at the 6th Floor, Dao I Condominium, Salcedo St., Legaspi Village, Makati, as stated in its Articles of Incorporation.

On February 23, 1999, HYATT filed a Complaint for unfair trade practices and damages under Articles 19, 20 and 21 of the Civil Code of the Philippines against LG Industrial Systems Co. Ltd. (LGISC) and LG International Corporation (LGIC).

Alleging among others, that: in 1988, it was appointed by LGIC and LGISC as the exclusive distributor of LG elevators and escalators in the Philippines under a ‘Distributorship Agreement’; x x x LGISC, in the latter part of 1996, made a proposal to change the exclusive distributorship agency to that of a joint venture partnership; while it looked forward to a healthy and fruitful negotiation for a joint venture, however, the various meetings it had with LGISC and LGIC, through the latter’s representatives, were conducted in utmost bad faith and with malevolent intentions; in the middle of the negotiations, in order to put pressures upon it, LGISC and LGIC terminated the Exclusive Distributorship Agreement; x x x [A]s a consequence, [HYATT] suffered P120,000,000.00 as actual damages.

On March 17, 1999, LGISC and LGIC filed a Motion to Dismiss raising the following grounds: (1) lack of jurisdiction over the persons of defendants, summons not having been served on its resident agent; (2) improper venue; and (3) failure to state a cause of action.

The [trial] court denied the said motion in an Order dated January 7, 2000.

On December 4, 2000, HYATT filed a motion for leave of court to amend the complaint, alleging that subsequent to the filing of the complaint, it learned that LGISC transferred all its organization, assets and goodwill, as a consequence of a joint venture agreement with Otis Elevator Company of the USA, to LG Otis Elevator Company (LG OTIS, for brevity). Thus, LGISC was to be substituted or changed to LG OTIS, its successor-in-interest.

Likewise, the motion averred that x x x GOLDSTAR was being utilized by LG OTIS and LGIC in perpetrating their unlawful and unjustified acts against HYATT. Consequently, in order to afford complete relief, GOLDSTAR was to be additionally impleaded as a party-defendant.

Hence, in the Amended Complaint, HYATT impleaded x x x GOLDSTAR as a party-defendant, and all references to LGISC were correspondingly replaced with LG OTIS.

On January 8, 2001, the [trial] court admitted the Amended Complaint.

On April 12, 2002, x x x GOLDSTAR filed a Motion to Dismiss the amended complaint, raising the following grounds: (1) the venue was improperly laid, as neither HYATT nor defendants reside in Mandaluyong City, where the original case was filed xxx

In the Order dated May 27, 2002, which is the main subject of the present petition, the [trial] court denied the motion to dismiss: the court resolves to rule that the complaint sufficiently states a cause of action and that the venue is properly laid.

The appellate court held that the venue was clearly improper, because none of the litigants "resided" in Mandaluyong City, where the case was filed. 

According to the appellate court, since Makati was the principal place of business of both respondent and petitioner, as stated in the latter’s Articles of Incorporation, that place was controlling for purposes of determining the proper venue. The fact that petitioner had abandoned its principal office in Makati years prior to the filing of the original case did not affect the venue where personal actions could be commenced and tried.


Issue:

Whether or not the venue was improper.


Held:

Yes, petition denied.

Section 2 of Rule 4 of the 1997 Revised Rules of Court:
"Sec. 2. Venue of personal actions. – All other actions may be commenced and tried where the plaintiff or any of the principal plaintiff resides, or where the defendant or any of the principal defendant resides, or in the case of a non-resident defendant where he may be found, at the election of the plaintiff."

Since both parties to this case are corporations, there is a need to clarify the meaning of "residence." The law recognizes two types of persons: (1) natural and (2) juridical. Corporations come under the latter in accordance with Article 44(3) of the Civil Code.

Residence is the permanent home -- the place to which, whenever absent for business or pleasure, one intends to return. Residence is vital when dealing with venue.

A corporation, however, has no residence in the same sense in which this term is applied to a natural person. This is precisely the reason why the Court in Young Auto Supply Company v. Court of Appeals ruled that "for practical purposes, a corporation is in a metaphysical sense a resident of the place where its principal office is located as stated in the articles of incorporation."

The residence of a corporation is the place where its principal office is established.

It now becomes apparent that the residence or domicile of a juridical person is fixed by "the law creating or recognizing" it. Under Section 14(3) of the Corporation Code, the place where the principal office of the corporation is to be located is one of the required contents of the articles of incorporation, which shall be filed with the Securities and Exchange Commission (SEC).

In the present case, there is no question as to the residence of respondent. What needs to be examined is that of petitioner. the latter’s principal place of business is Makati, as indicated in its Articles of Incorporation. Since the principal place of business of a corporation determines its residence or domicile, then the place indicated in petitioner’s articles of incorporation becomes controlling in determining the venue for this case.

Jurisprudence has, however, settled that the place where the principal office of a corporation is located, as stated in the articles, indeed establishes its residence. This ruling is important in determining the venue of an action by or against a corporation.

Gala vs. Ellice Agro-Industrial Corp. (418 SCRA 431 [2003])

Corp Law Topic: Purpose Clauses

On March 28, 1979, the spouses Manuel and Alicia Gala, their children Guia Domingo, Ofelia Gala, Raul Gala, and Rita Benson, and their encargados Virgilio Galeon and Julian Jader formed and organized the Ellice Agro-Industrial Corporation.

As payment for their subscriptions, the Gala spouses transferred several parcels of land located in the provinces of Quezon and Laguna to Ellice.


Issue:

Petitioners want this Court to disregard the separate juridical personalities of Ellice and Margo for the purpose of treating all property purportedly owned by said corporations as property solely owned by the Gala spouses.

Whether or not the purposes for which Ellice and Margo were organized should be declared as illegal and contrary to public policy?

They claim that the respondents never pursued exemption from land reform coverage in good faith and instead merely used the corporations as tools to circumvent land reform laws and to avoid estate taxes.

Specifically, they point out that respondents have not shown that the transfers of the land in favor of Ellice were executed in compliance with the requirements of Section 13 of R.A. 3844.


Held:

The Court holds that petitioners’ contentions impugning the legality of the purposes for which Ellice and Margo were organized, amount to collateral attacks which are prohibited in this jurisdiction.

The best proof of the purpose of a corporation is its articles of incorporation and by-laws. The articles of incorporation must state the primary and secondary purposes of the corporation, while the by-laws outline the administrative organization of the corporation, which, in turn, is supposed to insure or facilitate the accomplishment of said purpose.

In the case at bar, a perusal of the Articles of Incorporation of Ellice and Margo shows no sign of the allegedly illegal purposes that petitioners are complaining of.

If a corporation’s purpose, as stated in the Articles of Incorporation, is lawful, then the SEC has no authority to inquire whether the corporation has purposes other than those stated, and mandamus will lie to compel it to issue the certificate of incorporation.

Assuming there was even a grain of truth to the petitioners’ claims regarding the legality of what are alleged to be the corporations’ true purposes, we are still precluded from granting them relief. We cannot address here their concerns regarding circumvention of land reform laws, for the doctrine of primary jurisdiction precludes a court from arrogating unto itself the authority to resolve a controversy the jurisdiction over which is initially lodged with an administrative body of special competence.

With regard to their claim that Ellice and Margo were meant to be used as mere tools for the avoidance of estate taxes, suffice it say that the legal right of a taxpayer to reduce the amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be doubted.

Thus, even if Ellice and Margo were organized for the purpose of exempting the properties of the Gala spouses from the coverage of land reform legislation and avoiding estate taxes, we cannot disregard their separate juridical personalities.

Ang Mga Kaanib sa Iglesia ng Dios vs. Iglesia ng Dios Kay Kristo Hesus (372 SCRA 171 [2001])

Corp Law Topic: Guidelines in Use of Corporate Names

Respondent Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng Katotohanan (Church of God in Christ Jesus, the Pillar and Ground of Truth), is a non-stock religious society or corporation registered in 1936. Sometime in 1976, one Eliseo Soriano and several other members of respondent corporation disassociated themselves from the latter and succeeded in registering on March 30, 1977 a new non-stock religious society or corporation, named Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan.

On July 16, 1979, respondent corporation filed with the SEC a petition to compel the Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan to change its corporate name.

On May 4, 1988, the SEC rendered judgment in favor of respondent, ordering the Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan to change its corporate name to another name that is not similar or identical to any name already used by a corporation, partnership or association registered with the Commission.

It appears that during the pendency of SEC Case No. 1774, Soriano, et al., caused the registration on April 25, 1980 of petitioner corporation, Ang Mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus, H.S.K, sa Bansang Pilipinas. The acronym "H.S.K." stands for Haligi at Saligan ng Katotohanan.

On March 2, 1994, respondent corporation filed before the SEC a petition, praying that petitioner be compelled to change its corporate name and be barred from using the same or similar name on the ground that the same causes confusion among their members as well as the public.

Petitioner filed a motion to dismiss on the ground of lack of cause of action. The motion to dismiss was denied. Thereafter, for failure to file an answer, petitioner was declared in default and respondent was allowed to present its evidence ex parte.

On November 20, 1995, the SEC rendered a decision ordering petitioner to change its corporate name.

In a decision dated March 4, 1996, the SEC En Banc affirmed the above decision, upon a finding that petitioner's corporate name was identical or confusingly or deceptively similar to that of respondent's corporate name.

On October 7, 1997, the Court of Appeals rendered the assailed decision affirming the decision of the SEC En Banc.


Issue:

Petitioner claims that it complied with the aforecited SEC guideline by adding not only two but eight words to their registered name, to wit: "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc.," which, petitioner argues, effectively distinguished it from respondent corporation.


Held:

The additional words "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc." in petitioner's name are, as correctly observed by the SEC, merely descriptive of and also referring to the members, or kaanib, of respondent who are likewise residing in the Philippines.

These words can hardly serve as an effective differentiating medium necessary to avoid confusion or difficulty in distinguishing petitioner from respondent.

This is especially so, since both petitioner and respondent corporations are using the same acronym — H.S.K.; not to mention the fact that both are espousing religious beliefs and operating in the same place.

Then, too, the records reveal that in holding out their corporate name to the public, petitioner highlights the dominant words "IGLESIA NG DIOS KAY KRISTO HESUS, HALIGI AT SALIGAN NG KATOTOHANAN," which is strikingly similar to respondent's corporate name, thus making it even more evident that the additional words "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc.", are merely descriptive of and pertaining to the members of respondent corporation.

Significantly, the only difference between the corporate names of petitioner and respondent are the words SALIGAN and SUHAY. These words are synonymous — both mean ground, foundation or support.

Under the test of "reasonable care and observation" confusion may arise.

We agree with the Court of Appeals' conclusion that a contrary ruling would encourage other corporations to adopt verbatim and register an existing and protected corporate name, to the detriment of the public.

The fact that there are other non-stock religious societies or corporations using the names Church of the Living God, Inc., Church of God Jesus Christ the Son of God the Head, Church of God in Christ & By the Holy Spirit, and other similar names, is of no consequence. It does not authorize the use by petitioner of the essential and distinguishing feature of respondent's registered and protected corporate name.

Ordering petitioner to change its corporate name is not a violation of its constitutionally guaranteed right to religious freedom.

In so doing, the SEC merely compelled petitioner to abide by one of the SEC guidelines in the approval of partnership and corporate names, namely its undertaking to manifest its willingness to change its corporate name in the event another person, firm, or entity has acquired a prior right to the use of the said firm name or one deceptively or confusingly similar to it.


Guidelines on Corporate Names

The SEC has the authority to de-register at all times and under all circumstances corporate names which in its estimation are likely to spawn confusion. It is the duty of the SEC to prevent confusion in the use of corporate names not only for the protection of the corporations involved but more so for the protection of the public.

Section 18 of the Corporation Code provides:
Corporate Name. — No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or is contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name.

SEC Guidelines on Corporate Names states:
(d) If the proposed name contains a word similar to a word already used as part of the firm name or style of a registered company, the proposed name must contain two other words different from the name of the company already registered;

Parties organizing a corporation must choose a name at their peril; and the use of a name similar to one adopted by another corporation, whether a business or a nonprofit organization, if misleading or likely to injure in the exercise of its corporate functions, regardless of intent, may be prevented by the corporation having a prior right, by a suit for injunction against the new corporation to prevent the use of the name.

Lanuza vs. CA (454 SCRA 54 [2005])

Corp Law Topic: Nature of Articles of Incorporation

In 1952, the Philippine Merchant Marine School, Inc. (PMMSI) was incorporated, with seven hundred (700) founders’ shares and seventy-six (76) common shares as its initial capital stock subscription reflected in the articles of incorporation.

However, private respondents and their predecessors who were in control of PMMSI registered the company’s stock and transfer book for the first time in 1978, recording thirty-three (33) common shares as the only issued and outstanding shares of PMMSI.

Sometime in 1979, a special stockholders’ meeting was called and held on the basis of what was considered as a quorum of twenty-seven (27) common shares, representing more than two-thirds (2/3) of the common shares issued and outstanding.

In 1982, the heirs of one of the original incorporators, Juan Acayan, filed a petition with the Securities and Exchange Commission (SEC) for the registration of their property rights over one hundred (120) founders’ shares and twelve (12) common shares owned by their father.

The SEC hearing officer held that the heirs of Acayan were entitled to the claimed shares and called for a special stockholders’ meeting to elect a new set of officers.

The SEC En Banc affirmed the decision. As a result, the shares of Acayan were recorded in the stock and transfer book.

On 06 May 1992, a special stockholders’ meeting was held to elect a new set of directors.

Private respondents thereafter filed a petition with the SEC questioning the validity of the 06 May 1992 stockholders’ meeting, alleging that the quorum for the said meeting should not be based on the 165 issued and outstanding shares as per the stock and transfer book, but on the initial subscribed capital stock of seven hundred seventy-six (776) shares, as reflected in the 1952 Articles of Incorporation.

The petition was dismissed.

Appeal was made to the SEC En Banc, which granted said appeal, holding that the shares of the deceased incorporators should be duly represented by their respective administrators or heirs concerned.

The SEC directed the parties to call for a stockholders meeting on the basis of the stockholdings reflected in the articles of incorporation for the purpose of electing a new set of officers for the corporation.

Issue:

Whether the basis the outstanding capital stock and accordingly also for determining the quorum at stockholders’ meetings it should be the 1978 stock and transfer book or if it should be the 1952 articles of incorporation.

The Court of Appeals held that for purposes of transacting business, the quorum should be based on the outstanding capital stock as found in the articles of incorporation.

Petitioners claim that the 1992 stockholders’ meeting was valid and legal. They submit that reliance on the 1952 articles of incorporation for determining the quorum negates the existence and validity of the stock and transfer book which private respondents themselves prepared.

In addition, they posit that private respondents cannot avail of the benefits secured by the heirs of Acayan, as private respondents must show and prove entitlement to the founders and common shares in a separate and independent action/proceeding.

The crucial issue in this case is whether it is the company’s stock and transfer book, or its 1952 Articles of Incorporation, which determines stockholders’ shareholdings, and provides the basis for computing the quorum.

Held:

In the instant case, the articles of incorporation indicate that at the time of incorporation, the incorporators were bona fide stockholders of seven hundred (700) founders’ shares and seventy-six (76) common shares. Hence, at that time, the corporation had 776 issued and outstanding shares.

To base the computation of quorum solely on the obviously deficient, if not inaccurate stock and transfer book, and completely disregarding the issued and outstanding shares as indicated in the articles of incorporation would work injustice to the owners and/or successors in interest of the said shares.

This case is one instance where resort to documents other than the stock and transfer books is necessary.

The stock and transfer book of PMMSI cannot be used as the sole basis for determining the quorum as it does not reflect the totality of shares which have been subscribed, more so when the articles of incorporation show a significantly larger amount of shares issued and outstanding as compared to that listed in the stock and transfer book.

One who is actually a stockholder cannot be denied his right to vote by the corporation merely because the corporate officers failed to keep its records accurately.

A corporation’s records are not the only evidence of the ownership of stock in a corporation.

In the instant case, no less than the articles of incorporation declare the incorporators to have in their name the founders and several common shares. Thus, to disregard the contents of the articles of incorporation would be to pretend that the basic document which legally triggered the creation of the corporation does not exist and accordingly to allow great injustice to be caused to the incorporators and their heirs.


Articles of Incorporation

The articles of incorporation has been described as one that defines the charter of the corporation and the contractual relationships between the State and the corporation, the stockholders and the State, and between the corporation and its stockholders.

The contents of the articles of incorporation are binding, not only on the corporation, but also on its shareholders.

Stock and Transfer Book

On the other hand, a stock and transfer book is the book which records the names and addresses of all stockholders arranged alphabetically, the installments paid and unpaid on all stock for which subscription has been made, and the date of payment thereof; a statement of every alienation, sale or transfer of stock made, the date thereof and by and to whom made; and such other entries as may be prescribed by law.

A stock and transfer book is necessary as a measure of precaution, expediency and convenience since it provides the only certain and accurate method of establishing the various corporate acts and transactions and of showing the ownership of stock and like matters.

However, a stock and transfer book, like other corporate books and records, is not in any sense a public record, and thus is not exclusive evidence of the matters and things which ordinarily are or should be written therein.

In fact, it is generally held that the records and minutes of a corporation are not conclusive even against the corporation but are prima facie evidence only, and may be impeached or even contradicted by other competent evidence.

Thus, parol evidence may be admitted to supply omissions in the records or explain ambiguities, or to contradict such records.