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.
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