In the Matter of Paragon Vertical Corporation

July 9, 2014 SEC CRMD CASE NO. 14-559 IN THE MATTER OF PARAGON VERTICAL CORPORATION SEC Registration No. CS200260800 , petitioner . FOR : Correction, Replacement and Admission of Documents ORDER This refers to the Petition of PARAGON VERTICAL CORPORATION, represented by its President, Mr. Ross Raymond B. Ravelo, dated April 28, 2014, praying for the withdrawal and concomitant replacement of the following documents which were submitted in support of its application for increase of its capital stock, approved by the Commission on July 20, 2011: 1. Certificate of Increase of Capital Stock dated November 12, 2010; 2. Treasurer's Affidavit dated on July 15, 2011; and 3. Deed of Assignment with e-MERALCO VENTURES, INC. dated November 12, 2010. Petitioner is a domestic stock corporation registered with the Commission on November 25, 2002. At the time of its incorporation, its authorized capital stock was One Million Pesos (P1,000,000.00) divided into ten thousand (10,000) shares with a par value of One Hundred Pesos (P100.00) each. DTCAES On July 13, 2011, it filed an application for the increase of its capital stock to Five Hundred Million Pesos (P500,000,000.00) divided into five million (5,000,000) shares with the same par value. As stated in its Certificate of Increase of Capital Stock dated November 12, 2010, petitioner represented that, out of the increase in its capital stock of Four Hundred Ninety Nine Million Pesos (P499,000,000.00),Four Hundred Forty-One Million Eight Hundred Forty-Three Thousand Pesos (P441,843,000.00) worth of shares has been subscribed and fully paid in the form of equipment by its lone subscribing stockholder, e-MERALCO VENTURES, INC.,as hereunder stated: Stockholder Nationality No. of Shares Amount Paid Subscribed e-MERALCO VENTURES, INC. Filipino 4,418,430 P441,843,000.00 Petitioner's representation was supported by the notarized affidavit of its treasurer, Ms. Roselita G. Orlino, and the notarized Deed of Assignment, executed by and between e-MERALCO VENTURES, INC.,as assignor, and petitioner, as assignee, the pertinent portions of which read as follows: "WHEREAS, the ASSIGNORS are the legal and absolute owner of Equipment, with face value of FOUR HUNDRED FORTY ONE MILLION EIGHT HUNDRED FORTY THREE THOUSAND PESOS (Php441,843,000.00) and more particularly described in the Inventory of Appraisal Report dated May 26, 2011 and the summary shown below: ...Rounded to P441,843,000.00. WHEREAS, THE ASSIGNOR is willing to assign and transfer, and the ASSIGNEE Corporation is willing to receive the aforesaid Equipment, in exchange of the Four Million Four Hundred Eighteen Thousand Four Hundred Thirty (4,418,430) shares of stock in favor of the ASSIGNOR;" In addition to the foregoing, petitioner likewise submitted the following supporting documents: 1. List of stockholders of record as of November 12, 2010; 2. Audited Financial Statements as of December 31, 2010, certified by Ryan R. Gabinete, CPA with SEC Accreditation; 3. Appraisal Report dated May 26, 2011, rendered by Filipina L. Tuazon, Executive Vice President of Asian Appraisal Company Inc.; 4. Affidavit, executed under oath by Martine L. Lopez, President of e-MERALCO VENTURES, INC. on July 14, 2011, stating that the materials and equipment, hardware and cables are existing and are in good condition; and 5. Audited Financial Statements as of December 31, 2010 of e-MERALCO VENTURES, INC. certified by Ryan R. Gabinete, CPA with SEC Accreditation. aCcADT Petitioner's application for increase in capital stock, together with its supporting documents, was evaluated by the Financial Analysis and Audit Division (FAAD) of Company Registration and Monitoring Department (CRMD). After a thorough evaluation of the documents submitted, FAAD recommended for approval the application for increase in capital stock insofar as the subscription of Four Hundred Forty-One Million Eight Hundred Forty-Three Thousand Pesos (P441,843,000.00) and full payment thereon in the form of equipment are concerned. The recommendation was based on the information stated in the appraisal report that the appraised value of the equipment of Four Hundred Forty-One Million Eight Hundred Forty-Three Thousand Pesos (P441,843,000.00) as of May 26, 2011, is equivalent to the transfer value and, therefore, fair and reasonable. IDTHcA On July 20, 2011, the Commission approved the increase of capital stock of petitioner. Petitioner now seeks the withdrawal and replacement of the subject documents, namely, (1) the Certificate of Increase of Capital Stock dated November 12, 2010, (2) Treasurer's Affidavit dated on July 15, 2011, and (3) Deed of Assignment with e-MERALCO VENTURES, INC. dated November 12, 2010 for allegedly being erroneous. According to petitioner, the subject documents should have stated the following information to coincide with the entries in its 2011 Audited Financial Statements, thus: Document Information Stated As Entry in 2011 Audited Financial Statements Certificate of Increase Worth of shares actually P441,843,000.00 P124,750,000.00 of Capital Stock subscribed and paid thru equipment by e-MERALCO VENTURES, INC. Number of shares 4,418,843 shares 1,247,500 shares subscribed by e-MERALCO VENTURES, INC. Amount of stocks P441,843,000.00 P430,143,340.00 subscribed and paid in equipment Treasurer's Affidavit Shares of stocks 4,418,843 shares 1,247,500 shares subscribed and paid in equipment Deed of Assignment Depreciated fair value of P441,843,000.00 P430,143,340.00 between petitioner equipment described in the and e-MERALCO Inventory of Appraisal VENTURES, INC. Report dated May 26, 2011 (1st Whereas Clause) Consideration for the 4,418,843 shares 1,247,500 shares assignment and transfer of equipment (2nd Whereas Clause) This Commission, however, does not agree that withdrawal and replacement of subject documents should take place. Section 38 of the Corporation Code laid down the formal and procedural requirements for increase in capital stock, to wit: "No corporation shall increase ...its capital stock ...unless approved by a majority vote of the board of directors and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase .... A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockholders' meeting, setting forth: (1) That the requirements of this section have been complied with; (2) The amount of the increase or diminution of the capital stock; (3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the purpose of making effective stock dividend therefor authorized; (4) Any bonded indebtedness to be incurred, created or increased; (5) The actual indebtedness of the corporation on the day of the meeting; (6) The amount of stock represented at the meeting; and (7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall require prior approval of the Securities and Exchange Commission. ... From and after approval by the Securities and Exchange Commission and the issuance by the Commission of its certificate of filing, the capital stock shall stand increased ...,as the certificate of filing may declare :Provided, That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five (25%) percent of such increased capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to twenty-five (25%) percent of the subscription: ..." CacTIE The Certificate of Increase of Capital Stock dated November 12, 2010, Treasurer's Affidavit dated on July 15, 2011 and Deed of Assignment with e-MERALCO VENTURES, INC. dated November 12, 2010, explicitly stated the increase in capital stock, the number and worth of shares actually subscribed, and the amount paid by the subscribing stockholder in the form of property. The subject documents, accomplished in observance of all the legal requisites, are representations made under oath by the responsible officers of petitioner and the concerned parties therein. The information contained therein was given full faith and credit as established facts at the time of the application, thus, was relied upon by this Commission. Having been submitted in support of the approved application for increase in capital stock, they now integrally form part of the records of petitioner on file with this Commission and, thus, are considered public records. It is worth stressing further that the information contained in the subject documents are consistent with information stated in the appraisal report rendered by a qualified and accredited appraiser engaged by petitioner itself. Finding the valuation estimated by the appraiser fair and reasonable and taking into consideration the representations of petitioner as stated in the subject documents, the Commission granted its approval to petitioner's application for increase in capital stock. This Commission finds no sound reason why its approval of the increase in capital stock supported by subject documents, approved on July 20, 2011 should bend to adjust with the information stated in the 2011 Audited Financial Statements of petitioner, covering its fiscal period ending on December 31, 2011 and approved only on February 23, 2012. It bears stressing that, from and after the approval by the Commission, the capital stock shall stand increased as the certificate of filing may declare. Once approved, the increase in capital stock becomes effective. Be it noted that the articles of incorporation is a basic contract document defining the charter of the corporation, which is a contract between the corporation and the state. The state and the grantee of a charter are equally bound by its provisions. The binding effect of the provisions of the articles of incorporation on the parties thereto is such that amendments, for instance increase in capital stock, can be made by one party only with the consent of the other under the strict provisions of the Corporation Code, but also, the contents thereof as mandated by law are treated with strictness (Philippine Corporate Law, Villanueva, page 155) . To allow any change of material information of an already-approved application at the mere choosing of a corporation will, unfortunately, translate to a mockery of the procedure, processes and, most importantly, the authority to approve of the Commission. HSCATc Verily, the request of petitioner is not simply to seek the correction of a manifestly clerical error but constitutes a retraction of material facts proffered at the time of its application. Withdrawal and replacement of notarized documents may not be the proper recourse wherein reformation thereof in accordance with rules of court may be more apposite under the present circumstances. Article 1359 of the Civil Code provides, as follows: "When, there having been a meeting of the minds of the parties to a contract, their true intention is not expressed in the instrument purporting to embody the agreement, by reason of mistake, fraud, inequitable conduct or accident, one of the parties may ask for the reformation of the instrument to the end that such true intention may be expressed." WHEREFORE, premises considered, the Petition of PARAGON VERTICAL CORPORATION for the withdrawal and replacement of the Certificate of Increase of Capital Stock dated November 12, 2010, Treasurer's Affidavit dated on July 15, 2011 and Deed of Assignment with e-MERALCO VENTURES, INC. dated November 12, 2010, is hereby DENIED. Let a copy of this Order be attached by the Corporate Filing and Records Division (CFRD) of this Department to the records of petitioner on file with this Commission. Further, the Information and Communications Technology Department (ICTD) of this Commission is likewise requested to encode this Order in the SEC online database. SO ORDERED. Mandaluyong City, Philippines. July 9, 2014. (SGD.) FERDINAND B. SALES Director