Benigno Reyes, et al. vs. Ricardo R. Cruz, et al.

[SEC-AC NO. 491. August 21, 1996.] BENIGNO REYES, ET AL., appellants-petitioners , vs. RICARDO R. CRUZ, ET AL., appellees-respondents . O R D E R Before this Commission en banc is an appeal from the decision of the Hearing Officer in SEC Case No. 3282 dated August 15, 1994 the dispositive portion of which reads as follows: "WHEREFORE, judgment is hereby rendered as follows: 1. Declaring as valid the increase of capital stock of the Institute from P1 Million to P2 Million pesos. 2. Declaring as valid the annual stockholders' meeting of the Institute held on September 28, 1995, December 6, 1986 and October 10, 1987. 3. Declaring as valid all acts of the respondents as trustees of the Institute during the period of their assumption of the position and/or election of the new trustees on October 10, 1987. 4. Commanding the respondents to allow petitioner or their duly authorized representative to inspect, examine and copy the corporation records requested in the petition at a reasonable hours during business days at the principal office of the Institute. 5. Lifting the writ of preliminary injunction for the approval of the second increase from P2 million to P3 million pesos, and directing the respondents to allow petitioners to exercise their pre-emptive rights pertaining to the first increase of capital stock from P1 million to P2 million and to the second increase from P2 million to P3 million." On June 20, 1995, a conference between and among the parties including their respective counsels was called by this Commission in order to find an acceptable compromise agreement considering that the opposing parties are related by blood or consanguinity. It is to be noted from both proposals that they are willing to restore the interest of the appellants-petitioners in accordance with the June 28, 1981 list of stockholders. However, they differ, among others, on the right to inspect corporate records by the minority stockholders. Finding the amicable settlement unsuccessful, the appellants-petitioner filed their first and second Urgent ex-parte motion to resolve the case on February 9 and May 27, 1996 respectively. Appellants-petitioners on their notice of appeal, assigned several errors of the decision as follows: 1) Insofar as it erroneously failed to categorically find that petitioners-appellants were indeed maliciously deprived and denied by the respondents of their pre-emptive right to subscribe to the first P1 million increase in capital stock in proportion to their respective original shareholdings; 2) Insofar as it stated and adopted in pages 8-12 thereof, erroneous findings of facts to obviously favor respondents against the evidence on record and in deducing therefrom distorted conclusions of facts; 3) Insofar as it made further erroneous conclusions of facts and of law on page 13 thereof; 4) Insofar as it failed to find respondents guilty of bad faith contrary to the overwhelming evidence on record; 5) Insofar as it erroneously failed to declare as null and void the first P1 million increase to the extent that petitioners' pre-emptive right to subscribe to it had been maliciously prejudiced by respondents 6) Insofar as it erroneously failed to order respondents, who cannot be considered as innocent third parties, to return the number of shares that they have deprived petitioners out of the first P1 million increase; 7) Insofar as it erroneously failed to declare as null and void the annual and special stockholders' meeting of the institute held on September 28, 1985, December 6, 1986, and October 10, 1987 to the extent that petitioners were prejudiced thereby; 8) Insofar as it erroneously failed to declare as null and void acts of the respondents as trustees to the extent that petitioners are prejudiced thereby; 9) Insofar as it erroneously failed to declare as null and void acts of the respondents as trustees of the Institute on October 10, 1987 to the extent that petitioners were prejudiced thereby; 10) Insofar as it erroneously failed to order respondents as the present trustees of the Institute to immediately allow petitioners within a given period to exercise their pre-emptive right to subscribe and to call for a new election of trustees; 11) Insofar as it erroneously failed to further enjoin the approval of the second P1 million increase pending the actual return by respondents to petitioners the number of shares that they have deprived petitioners out of the first P1 million increase; and 12) Insofar as it erroneously failed to order respondents to pay petitioner damages they suffered by reason of respondents bad faith in dealing with petitioners. The facts of the case are as follows: On June 28, 1981, in accordance with the By-laws of Southern Rizal Institute (SRI, for brevity) and at the instance of the appellees-respondents, SRI conducted the stockholder's meeting. During the said meeting the proposed increase in capital stock from P1 million to P2 million was approved. The appellants-petitioners were not present as they were not notified of the meeting. The appellants-petitioners were among the 146 certified stockholders of record. The said increase in capital was subscribed by 10 stockholders of record and 4 new subscribers. Four years later, on September 28, 1985, the annual stockholders' meeting was conducted The proposed increase in capital was then presented for ratification The appellants-petitioners objected to the ratification due to the denial of their pre-emptive rights to subscribed to the said increase. However, the same was approved by the appellees-respondents, who were the majority stockholders. In processing the application for increase of capital stock, the Examiner on her report called the attention of the Corporate and Legal Department on the written waiver of the pre-emptive right of the non-subscribing stockholders (including the appellants-petitioners). However, in lieu thereof, SRI submitted a board resolution giving preference to the non-subscribing stockholders on the succeeding issuance of shares. This practice is considered as substantial compliance of the law. Hence, the aforesaid increase in capital stock was approved or affirmed by the Commission on August 14, 1986 by virtue of that undertaking. On December 6, 1986, at the instance of the appellees-respondents the annual stockholders' meeting was held. The determination of the existence of the quorum was particularly based on the P2 million capital stock. The appellants-petitioners alleged that the declared quorum was fatally defective since it was in fraudulent disregard of petitioners' pre-emptive rights to subscribe. However, despite the demand, respondents refused to grant the same. The subsequent annual stockholders' meeting of SRI was held on October 10, 1987 at the instance of the appellees-respondents. Again the quorum was based on the P2 million capital stock as increased. During this meeting the election of trustees was conducted and the proposed increase in capital from P2 million to P3 million was approved. The appellants-petitioners again questioned the validity of the said meeting and demanded their right to inspect and examine the corporate records prior to the ratification of all acts and resolutions of the board of trustees. The same was denied by the appellees-respondents. On August 31, 1990, an order was issued granting appellants-petitioners application for injunctive relief, enjoining the Corporate and Legal Department of this Commission from further taking any action concerning the approval of the second increase of the authorized capital stock of SRI from P2 million to P3 million during the pendency of the case. In their reply memorandum, the appellees-respondents did not rebut or refute the allegation that the appellants-petitioners were not notified on the June 28, 1981 stockholders' meeting. On the issue of the pre-emptive rights, appellees-respondents alleged that the appellants-petitioners do not have any pre-emptive rights to subscribe to the increase in capital stock from P1 million to P2 million, and P2 million to P3 million during the pendency of the case. In their reply memorandum, the appellees-respondents did not rebut or refute the allegation that the appellants-petitioners were not notified on the June 28, 1981 stockholders' meeting. On the issue of the pre-emptive rights, appellees-respondents alleged that the appellants-petitioners do not have any pre-emptive rights to subscribe to the increase in capital stock from P1 million to P2 million, and P2 million to P3 million, and assuming that they have rights; the same have been waived, when they actually participated in the proceedings and even voted therein using as basis thereof, the capital stock as increased. On the issue of the appellants-petitioners right to inspect corporate records, the appellees-respondents alleged that the formers' right to inspect, examine and copy the corporate books is restricted and is not unqualified, and there is evidence showing that the purpose was in bad faith, or to "fish for evidence" in order to prosecute them as officers of the corporation. The issues of the case are as follows: 1) Whether or not the first increase in capital stock from P1 million to P2 million is valid; 2) Whether or not the right to inspect and examine corporate records of minority stockholders can be denied; and 3) Whether or not the Securities and Exchange Commission can grant damages as prayed for by the appellants-petitioners. We find for the appellants-petitioners. The failure to notify other minority stockholders, including the appellants-petitioners, of the stockholders' meeting increasing the SRI capital stock from P1 million to P2 million on June 28, 1981, is fatal. The said notice is mandatory under Sec. 38 of the Corporation Code that is quoted hereunder, as follows: "SECTION 38. . . . Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating or increasing of any bonded indebtedness and of the time and place of the stockholders ' meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his place or residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally . . . ." The above provision is mandatory and is designed to protect the minority stockholders. The want of notice leads to the denial of the pre-emptive rights of the stockholders to subscribe to the new issues arising from the increase in capital stock. Again the denial of pre-emptive rights is also in gross violation of the law. Sec. 39 of the Corporation Code so provides as follows: "SECTION 39. Power to deny pre-emptive right . All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to the respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: . . ." Anent to the above provision of the Corporation Code, the Corporate and Legal Department requires an explicit written waiver of the right of preemption from the non-subscribing stockholders every time it processes an application for an increase in capital stock. The desire of the appellants-petitioners to exercise their pre-emptive right has been communicated since September 28, 1985 during the ratification of the said increase in capital stock. However, the same was denied for the reason that the increase had been fully subscribed as early as 1981 or four years ago. Thereby the interest of the appellants-petitioners was effectively reduce from 55.2% to 6. 5% compared to the holdings of the appellees-respondents. This diminution of interest effectively denies the minority's representation in the management of the corporation. In fact, the appellants-petitioners are supposedly entitled to one seat in the board of trustees. The allegation of the appellees-respondents that appellants-petitioners' pre emptive rights had been waived when they participated in the election, does not hold water. The right to vote and be voted upon is a distinct and separate right of a stockholder. The continuous demand for the pre-emptive right since notice, will never place the appellants-petitioners in estoppel in pais . The resolution of the board of trustees supposedly made on September 27, 1985 giving preference to those who failed to subscribe to the increase in capital on the subsequent issuance of share is an undertaking before the Commission. However, the same was never complied with. As correctly observed by the Hearing Officer the said undertaking is not capable of compliance because the authorized capital stock of SRI has been fully subscribed. An application for increase in the authorized capital stock of a corporation requires the approval of the Commission before it becomes effective. Corollarily, the Commission can revoke duly approved increases in authorized capital stock on grounds enumerated by law, such as: serious misrepresentation, fraud, bad faith, when the increase is prejudicial to other stockholders, and non-compliance with the procedural requirements of law. [P.D. 902-A, Sec. 6 (1) * ] On the issue of the right to inspect and examine corporate records, Sec. 74 of the Corporation Code is very clear on the matter: "SECTION 74. . . . . The records of all business transactions of the corporation and the minutes of any meeting shall be open to the inspection of any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense . . . ." The allegation of the appellees-respondents that such right is not absolute and that there is evidence showing that the purpose was in bad faith, or to ''fish for evidence" in order to prosecute appellees-respondents as officers of the corporation is not tenable. It is in contravention of the legislative intent of the law. The Hearing Officer is upheld in his ruling on the matter. Among those prayed for by appellants-petitioners in their complaint are: 1) to order the respondents to pay all damages including attorney's fees, sustained, suffered and incurred, and continuously suffered by petitioners in such amount which could not be less than P300,000.00; and 2) to order respondents to pay the costs of suit. The Hearing Officer denied appellants-petitioners' prayer for damages by citing the Tan vs. SEC, G.R. No. 95696, March 3, 1992, case. However, the recent case of Andaya vs. Abadia (G.R. No. 104033, December 27, 1993) decided by the Supreme Court in December, 1993, now grants SEC the authority or power to award damages. Nevertheless, in the instant case, appellants-petitioners failed to specify the damages they are praying for. With regard to the prayer for attorney's fees, Article 2208 of the Civil Code provides: "ARTICLE 2208. In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial costs, cannot be recovered, except : xxx xxx xxx 5. Where the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff's plainly valid, just and demandable claim; xxx xxx xxx 11. In any other case where the court deems it just and equitable that attorney's fees and expenses of litigation should be recovered. In all cases, the attorney's fees and expenses of litigation must be reasonable." In this case, appellees-respondents acted in gross and evident bad faith in refusing to allow appellants-petitioners to exercise their pre-emptive right to subscribe to the increase in capital stock and instead allowed a few stockholders and non-stockholders to subscribe to the increase. WHEREFORE, premises considered, the questioned decision is hereby modified as follows: 1. The increase in the authorized capital stock from P 1 million to P2 million is hereby declared null and void. The certificates issued by the Commission relative thereto are hereby revoked. The corresponding paid-up capital shall be temporarily lodged under "deposit for subscription" account in the books of the corporation; 2. The corporation is hereby directed to file their proposed increase in capital stock from P1 million to P3 million allowing the appellants-respondents to exercise their pre-emptive rights based on the list of stockholders as of June 28, 1981 marked as exhibit "C" in the SEC Case No. 3282; 3. The corporation is hereby directed to conduct immediately the election of the board of trustees based on the list of stockholders as of June 28, 1981; 4. The respondents are directed to allow petitioners or their duly authorized representatives to inspect, examine and copy the corporation records requested in the petition at reasonable hours during business days at the principal office of the corporation; 5. The writ of injunction issued by the Hearing Officer is hereby lifted; and 6. The appellees-respondents are hereby directed to pay jointly and severally the appellants-petitioners the amount of P50,000.00 as attorney's fees and cost of suit. Let a copy of this order be attached to the corporate file of Southern Rizal Institute, Inc. SO ORDERED. (SGD.) PERFECTO R. YASAY, JR. Chairman (SGD.) FE ELOISA C. GLORIA (SGD.) EDIJER A. MARTINEZ Associate Commissioner Associate Commissioner (SGD.) ROSALINDA U. CASIGURAN Associate Commissioner * Copied verbatim from documents obtained directly from the Securities and Exchange Commission .