Forest Hills Golf and Country Club, Inc. v. Company Registration and Monitoring Department

July 23, 2019 SEC EN BANC CASE NO. 06-14-334 FOREST HILLS GOLF AND COUNTRY CLUB, INC. , appellant , vs. COMPANY REGISTRATION AND MONITORING DEPARTMENT , appellee . DECISION This resolves the Memorandum on Appeal filed on 3 June 2014 by Appellant FOREST HILLS GOLF AND COUNTRY CLUB, INC. (FOREST HILLS) , praying that the En Banc reverse the Letter-Order of the Commission's COMPANY REGISTRATION AND MONITORING DEPARTMENT (CRMD) dated 2 May 2014, where the CRMD denied FOREST HILLS' proposed amendments to its articles of incorporation for being contrary to the Corporation Code, specifically as to voting rights in a stock corporation. At the heart of the controversy is whether a golf/country club should be regulated as a stock corporation or as a non-stock corporation . RELEVANT FACTS On 29 June 1995 , FOREST HILLS was registered with the Commission 1 as a "non-profit stock corporation," viz. ARTICLES OF INCORPORATION OF FOREST HILLS GOLF AND COUNTRY CLUB, INC. KNOW ALL MEN BY THESE PRESENTS: THAT WE, who are of legal age, and a majority of whom are residents of the Philippines, have this day voluntarily associated ourselves together for the purpose of forming a non-profit stock corporation under the laws of the Republic of the Philippines. (Emphasis supplied) The primary purpose of FOREST HILLS is: To promote the social, recreational and athletic activities on a non-profit basis among its members, the main objective of which will be the construction and maintenance of a golf course, tennis courts, swimming pools, and other indoor and outdoor related sports and recreational facilities. The Articles of Incorporation of FOREST HILLS specifically provide for capital stock divided into shares, viz. SEVENTH That the total authorized capital stock of the Corporation shall consist of Three Thousand Six Hundred (3,600) no par value common shares, divided into 1,652 Class "A" Common Shares, 600 Class "B" Common Shares, inclusive of eight (8) Founders' Shares, 899 Class "C" Common shares, and 449 Class "D" Common shares. (Emphasis supplied) However, the Articles of Incorporation of FOREST HILLS also specifically provide that no dividends shall be distributed to its members, viz. That the ownership of all shares of stock of this Club is subject to the following restrictive conditions: xxx xxx xxx 4. No profit shall inure to the benefit of any member. Hence, no dividend shall at any time be declared and/or paid . Members shall be entitled only to a pro-rata share of the assets of the Corporation at the time of its dissolution or liquidation. (Emphasis supplied). On 6 August 2013 , FOREST HILLS filed with the CRMD proposed amendments to its By-Laws, which would restrict the voting rights only to (A) "individual regular members," and (B) "nominees of juridical entities as defined under Article II 2 hereof," during the first five (5) years from the formal turnover of the project from the developer to FOREST HILLS. On 22 October 2013 , the CRMD met with FOREST HILLS regarding the latter's proposed amendments to its By-Laws. The CRMD denied the proposed amendments, as these run contrary to Section 6 of the Corporation Code , which pertinently provides that: "no share may be deprived of voting rights except those classified and issued as 'preferred' or 'redeemable' shares, unless otherwise provided in this Code x x x" On 5 November 2013 , FOREST HILLS wrote to CRMD for reconsideration, arguing that it may validly include the amendments because "although [FOREST HILLS] has capital stock divided into shares x x x it is actually a non-stock corporation based on law and jurisprudence." FOREST HILLS maintained that it has capital stock but does not distribute dividends, thus it should be treated as a non-stock corporation. The distinction is relevant because the Corporation Code has a separate, more liberal provision for restriction of voting rights in a non-stock corporation, Section 89, 3 viz. Section 89. Right to Vote. The right of the members of any class or classes to vote may be limited, broadened or denied to the extent specified in the articles of incorporation or the by-laws. Unless so limited, broadened or defined, each member, regardless of class, shall be entitled to one (1) vote. On 2 May 2014 , the CRMD issued the assailed Letter-Order, stating that: Essentially, said, said proposed amendments limits the voting rights of the stockholders of subject corporation, that is only regular members (registered owner of a share of stock) in good standing shall be entitled to vote. The Department, however, notes that subject corporation as a stock , non-profit corporation, is governed by Section 6 of theCorporationCodeof the Philippines which provides that no shareholder, other than those classified and issued as "preferred" or "redeemable" shares, may be deprived of voting rights. In view of this, the Department ruled that subject corporation's proposed amendments which include denial of voting rights of the stockholders is in clear violation of the aforementioned Section 6 of the Code and, thus, cannot be given due course. Subject corporation, however, seeks reconsideration of the Department's position and maintains validity of its proposed amendments. It anchors its claim on the position that while subject corporation has capital stock divided into shares, considering it is not authorized to distribute dividends under its articles or incorporation or by-laws, it is actually a non-stock corporation. xxx xxx xxx Consequently, as a non-stock corporation, subject corporation claims that it is not governed by Section 6 of the Code but by Section 89 thereof which allows denial of the voting rights or certain classes of its shares or members. Taking all this into consideration, however, the Department reaffirms its findings that subject corporation is a stock corporation . Its intention to be registered as a stock corporation cannot be clearer than what is provided under it Articles of Incorporation. Specifically, the following are controlling: KNOW ALL MEN BY THESE PRESENTS: THAT WE, who are of legal age, and a majority of whom are residents of the Philippines, have this day voluntarily associated ourselves together for the purpose of forming a non-profit stock corporation under the laws of the Republic of the Philippines. xxx xxx xxx SEVENTH That the total authorized capital stock of the Corporation shall consist of Three Thousand Six Hundred (3,600) no par value common shares, divided into 1,652 Class "A" Common Shares, 600 Class "B" Common Shares, inclusive of eight (8) Founders' Shares, 899 Class "C" Common shares, and 449 Class "D" Common shares. xxx xxx xxx Additional terms and conditions on the ownership and transfer of shares are further provided in said Seventh [article] of subject corporation's AOI. xxx xxx xxx Lastly, the nature of golf clubs being registered as stock , non-profit corporations has long been upheld by the Commission. Thus, in view of the foregoing, we reiterate that subject corporation's applied [for] amendment of by-laws constituting denial of voting rights of its stockholders cannot be given due course. On 3 June 2014 , FOREST HILLS filed its Memorandum on Appeal , praying that the En Banc reverse the CRMD and allow the proposed amendments, because: (1) the CRMD committed an error of law when it considered FOREST HILLS as a stock corporation; and (2) the CRMD committed an error of law when it applied Section 6 of the Corporation Code to FOREST HILLS, instead of Section 89. FOREST HILLS cited the Supreme Court cases of Collector of Internal Revenue v. Club Filipino , G.R. No. L-12719, 31 May 1962 (Club Filipino case) and Republic of the Philippines v. City of Paraaque , G.R. No. 191109, 18 July 2012 (City of Paraaque case), as legal basis that, in order to be considered a stock corporation, an entity must not just have capital stock, but must also distribute dividends . DISCUSSION The only genuine issue here is whether or not FOREST HILLS, which was self-described and incorporated as a " stock non-profit" may be considered as a non-stock corporation. If so, the more liberal provisions of Section 89 will apply. The Corporation Code expressly provides that corporations are either stock or non-stock , and non-stock corporations are those excluded from the definition of a stock corporation in Section 3, 4 viz. TITLE I GENERAL PROVISIONS DEFINITIONS AND CLASSIFICATIONS xxx xxx xxx Section 3. Classes of corporations . Corporations formed or organized under this Code may be stock or non-stock corporations. Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held are stock corporations. All other corporations are non-stock corporations. (Emphasis supplied) The Corporation Code further defines a non-stock corporation in Section 87 5 as one where no income is distributed as dividends to its members , viz. TITLE XI NON-STOCK CORPORATIONS Section 87. Definition . For the purposes of this Code, a non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of this Code on dissolution : Provided, That any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title. The provisions governing stock corporation, when pertinent, shall be applicable to non-stock corporations, except as may be covered by specific provisions of this Title. (Emphasis supplied) UNLESS A CORPORATION CAN BE CONSIDERED A STOCK, IT IS A NON-STOCK Prevailing jurisprudence suggests that the key to identifying a non-stock corporation is to first eliminate the possibility that it is a stock corporation. In the 1962 Club Filipino case, the Supreme Court held that: [F]or a stock corporation to exist, two requisites must be complied with, to wit: (1) a capital stock divided into shares and (2) an authority to distribute to the holders of such shares, dividends or allotments of the surplus profits on the basis of the shares held. In the case at bar, nowhere in its articles of incorporation or by-laws could be found an authority for the distribution of its dividends or surplus profits. Strictly speaking, it cannot, therefore, be considered a stock corporation, within the contemplation of the corporation law. (Emphasis supplied) In the 2012 City of Paraaque case, the Supreme Court held that: Two requisites must concur before one may be classified as a stock corporation, namely: (1) that it has capital stock divided into shares; and (2) that it is authorized to distribute dividends and allotments of surplus and profits to its stockholders. If only one requisite is present, it cannot be properly classified as a stock corporation. As for non-stock corporations, they must have members and must not distribute any part of their income to said members (Emphasis supplied) A NON-STOCK CANNOT HAVE "PROFITABLE BUSINESS" AS ITS PURPOSE The Corporation Code also mandates in Section 88 6 that a non-stock corporation must be organized for a specific "eleemosynary" purpose, 7 viz. Sec. 88. Purposes . Non-stock corporations may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof , subject to the special provisions of this Title governing particular classes of non-stock corporations. (Emphasis supplied) The articles of incorporation must not include any purpose inconsistent with the character of a non-stock corporation, viz. Sec. 14. Contents of the articles of incorporation . All corporations organized under this code shall file with the Securities and Exchange Commission articles of incorporation in any of the official languages duly signed and acknowledged by all of the incorporators, containing substantially the following matters, except as otherwise prescribed by this Code or by special law: xxx xxx xxx 2. The specific purpose or purposes for which the corporation is being incorporated. Where a corporation has more than one stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are the secondary purpose or purposes: Provided, That a non-stock corporation may not include a purpose which would change or contradict its nature as such[.] (Emphasis supplied) The meaning of "a purpose which would change or contradict its nature as such" in Section 14 (2) was clarified as "profitable business" in SEC Opinion dated 11 September 1995 addressed to Lawrence D. Feliciano , viz. [I]t is clear that non-stock corporations, as a general rule, are not empowered to venture on profitable business . A corporation organized as a non-profit concern is not permitted to engage in business with the object of making income or profits directly or indirectly . It may be allowed to engage in business activities only if it is necessary to carry out the purpose(s) for which the corporation is organized, but unlike stock corporations, any profit that may be derived from such business activities are not distributable to the directors, officers, or members , but are used for the furtherance of corporate purposes. (Emphasis supplied) Further, SEC Opinion dated 18 June 1990 addressed to Coffee Exporters Association of the Philippines, Inc. clarifies that: Even if there is a manifestation in the articles of incorporation that any profit which may be derived from the proposed business venture shall not redound to the benefit of any of the members , if the business activity would run counter to its very nature as a non-profit association, such business activity cannot be undertaken by a non-stock corporation. (Emphasis supplied) Since "profitable business" is contrary to its very character, a non-stock corporation must be not-for-profit. Hence the term, "non-stock non-profit." SOME GOLF/COUNTRY CLUBS HAVE BEEN REGISTERED AS " STOCK , NON-PROFIT" BECAUSE THEY ISSUE PROPRIETARY MEMBERSHIP CERTIFICATES The Commission does not dictate whether a golf/country club must register itself as a stock corporation or a non-stock corporation. The economic reality, however, is that membership in golf/country clubs are often coupled with the issuance of a share of stock , representing a proprietary interest in the club facilities. 8 The moment that a corporation, even a non-stock non-profit, offers for sale proprietary membership certificates to the public for the use of its facilities, it must comply with the registration requirements of the Commission. 9 The CRMD's argument that "golf clubs being registered as stock, non-profit corporations has long been upheld by the Commission" is based on SEC Opinion dated 28 April 1997 addressed to Patrick T. Lugue , viz. Unlike an ordinary corporation, the members of a " proprietary membership club corporation" have individual pecuniary interest in the club represented in terms of proprietary shares , ownership of which is evidenced by certificates of proprietary share or membership, and the corresponding market value of which can be easily determined or fixed. While it has the color of a "non-stock corporation" being a non-profit corporation, it has the character more of a stock corporation. Hence the provisions of theCorporationCode governing stock corporations, when pertinent, may be applied. (Emphasis supplied) Shares in a proprietary membership club, because they may be considered an investment which may be bought and sold at a profit, were seen as inconsistent with the "non-profit" purpose of a non-stock corporation. Recall that a non-stock corporation may not have a purpose inconsistent with its character as such. However, the term "proprietary membership club corporation," as used in this Opinion, did not create a third class of corporation. In other words, "proprietary membership club" should be read as merely describing the structure of a corporation which has to necessarily be incorporated as either stock or non-stock . Also, the term "proprietary, membership" describes the securities offered by a golf/country club to the public, consistent with Section 3.1 (f) of the Securities Regulation Code , 10 which expressly includes "proprietary membership certificates in the definition of "securities." As already pointed-out, while a "stock corporation" issues stock, it does not necessarily follow that a "non-stock corporation" does not issue stock. Thus, the fact that a non-stock issues proprietary membership certificates does not turn it into a "proprietary membership corporation. " CONCLUSION: FOREST HILLS IS A STOCK CORPORATION The unintended consequence of this SEC Opinion is that during the many years that followed its issuance, the Commission has allowed the incorporation of golf/country clubs as " stock , non-profit" corporations. However, the perpetuation of such stock , non-profits goes against legal principle and common sense. As one author succinctly put it: "A non-stock corporation is a non-profit corporation, while a stock corporation is a for-profit corporation." 11 In this case, FOREST HILLS argues that, even though it described itself and was incorporated as a " stock non-profit" corporation, it should be considered a "non-stock" and thus be entitled to the more liberal provisions of Section 89. On the contrary, we rule that FOREST HILLS is a stock corporation. We stated that unless a corporation can be considered a stock, it is a non-stock. Here, there is ample support that FOREST HILLS, by its own admission and actuations is a stock corporation. First , FOREST HILLS identified itself as a stock corporation in its Articles of Incorporation. Second , FOREST HILLS issues stock. Not just "proprietary membership" but plain and simple common shares , defined by the Commission thus: 7.5 Common shares refer to the basic class of stock whose owners are entitled to pro-rata share in the profits of the corporation and its assets upon liquidation, and in the management of its affairs without any preference or advantage whatsoever. 12 Features of common shares may be altered in the articles of incorporation, such as adding a right of first refusal, but the authority to declare dividends is inherent in a common share. Of course, the corporation may choose to stipulate that "no dividends will at any time be declared and/or paid." In other words, FOREST HILLS is authorized to distribute profit by the very existence of common shares, although it has chosen to withhold or waive the declaration of dividends. Section 3 of the Corporation Code provides: Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held are stock corporations. Third , FOREST HILLS' choice not to declare dividends is not a conclusive factor in determining whether it should be regarded as a non-stock. We assert that the determining factor is "non-profit" purpose. The Supreme Court ruled in USEAEA v. USEA , 13 the absence of dividends was not held conclusive as to "non-profit" purpose, viz. Specifically, private respondent USEA asserts that its non-profit character is discernible from the fact that there is no distribution of earnings or profits by way of dividends or otherwise and the members do not receive any interest in the net funds and assets resulting from liquidation. We find the foregoing contention of private respondent USEA untenable . A close examination of the contribution of respondent association will show that while it is true that the members of the association do not receive dividends in the form of cash, nevertheless, they do receive benefits in the form of commissary privileges x x x (Emphasis supplied) In this case, the shareholders of FOREST HILLS receive not just (1) access to the club facilities, but also (2) an ownership interest in the club's assets. Fourth , FOREST HILLS' shares are subject to market forces, they appreciate and depreciate in value. They are an investment . Such a "profitable business" purpose cannot co-exist with non-profit purposes. While the law does exempt "incidental" business activities, the investment in golf/country club shares are not incidental because it is the very means by which membership is acquired. In other words, the monetary value and property rights attached to a golf/country club share are fundamental to the existence of the corporation. Moreover, the accumulated profit from golf/country club shares that have increased in value translates to a claim over such profits via the common shares as discussed above. The shareholders of a golf/country can look forward, in most cases, to a return that far exceeds their initial investment. Fifth , FOREST HILLS' shareholders have an inchoate right to the assets of the corporation, viz. That the ownership of all shares of stock of this Club is subject to the following restrictive conditions: xxx xxx xxx 4. No profit shall inure to the benefit of any member. Hence, no dividend shall at any time be declared and/or paid. Members shall be entitled only to a pro-rata share of the assets of the Corporation at the time of its dissolution or liquidation. 14 (Emphasis supplied). Thus, FOREST HILLS' members can look forward to acquiring ownership of the club's assets. Sections 94 and 95 of the Corporation Code , 15 pertaining to the " Distribution of Assets in Non-Stock Corporations ," provide that the members' share in the assets of a non-stock, non-profit are determined either by the Articles of Incorporation (Section 94) or a Distribution Plan (Section 95). It should come as no surprise that common stock as evidence of an inchoate right to the assets of the non-stock, non-profit is not provided for. Sixth , the Supreme Court's ruling in Club Filipino does not cover a " stock , non-profit" and is not on all fours with this case. FOREST HILLS' very structure is a circumvention of law it is a stock corporation with investment value claiming the more flexible voting rights of a non-stock corporation, the best of both worlds. The easiest way to spot a counterfeit non-stock, non-profit is to compare it with a legitimate non-stock, non-profit. When the Supreme Court ruled that Club Filipino is a non-stock, non-profit, they were dealing with a corporation that declared itself as non-stock , non-profit, viz. ARTICLES OF INCORPORATION OF THE CLUB FILIPINO, INC. DE CEBU KNOW ALL MEN BY THESE PRESENTS: That we the majority of whom are residents of the Philippines have this day voluntarily associated ourselves together for the purpose of forming a non-stock and non-profit corporation under the laws of the Philippines. (Emphasis supplied) Moreover, Club Filipino does not have a provision for issuance of shares anywhere in its articles of incorporation. It does not issue common shares. CONCLUSION There is no such thing as a "stock, non-profit" corporation. FOREST HILLS is a stock corporation. It needs to amend its articles of incorporation to reflect that it is a plain and simple stock corporation to avoid further confusion. WHEREFORE , premises considered, the Memorandum on Appeal is hereby DENIED . The Letter-Order of the CRMD dated 2 May 2014 is hereby AFFIRMED. FOREST HILLS is directed to amend its Articles of Incorporation to indicate that it is a stock corporation, within a period not exceeding one (1) year from receipt of this Decision. Let a copy of this Decision be furnished the Company Registration and Monitoring Department for information and appropriate action. SO ORDERED. Pasay City, Philippines, July 23, 2019. (SGD.) EMILIO B. AQUINO Chairperson (SGD.) ANTONIETA F. IBE Commissioner (SGD.) EPHYRO LUIS B. AMATONG Commissioner (SGD.) JAVEY PAUL D. FRANCISCO Commissioner (SGD.) KELVIN LESTER K. LEE Commissioner Footnotes 1. SEC Reg. No. AS095-006190. 2. By-Laws of FOREST HILLS , Article II. CLUB MEMBERSHIP, Section 2.3. CLASSIFICATION OF MEMBERSHIP, x x x A. REGULAR MEMBERS, 2.3.1. Regular membership is open to a natural person who is a registered owner of a share of stock, and the duly designated nominee(s) of a juridical entity in whose name a stock certificate has been issued . (Emphasis supplied) 3. Reenacted as Paragraph 1 of Section 88 of the Revised Corporation Code , viz. SEC. 88. Right to Vote. The right of the members of any class or classes to vote may be limited, broadened, or denied to the extent specified in the articles of incorporation or the bylaws. Unless so limited, broadened, or denied, each member, regardless of class, shall be entitled to one vote. 4. Reenacted as Section 3 of the Revised Corporation Code , viz. SEC. 3. Classes of Corporations. Corporations formed or organized under this Code may be stock or nonstock corporations. Stock corporations are those which have capital stock divided into shares and are authorized to distribute to the holders of such shares, dividends, or allotments of the surplus profits on the basis of the shares held. All other corporations are nonstock corporations. 5. Reenacted as Section 86 of the Revised Corporation Code , viz. SEC. 86. Definition . For purposes of this Code and subject to its provisions on dissolution, a nonstock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers: Provided, That any profit which a non-stock corporation may obtain incidental to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title. The provisions governing stock corporations, when pertinent, shall be applicable to non-stock corporations, except as may be covered by specific provisions of this Title. 6. Reenacted as Section 87 of the Revised Corporation Code , viz. SEC. 87. Purposes. Nonstock corporations may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof, subject to the special provisions of this Title governing particular classes of non-stock corporations. 7. Cesar L. Villanueva and Teresa Villanueva-Tiansay, Philippine Corporate Law (2018) at 760, viz. "By definition, therefore, the essence of a non-stock non-profit corporation is not the non-existence of shares of stock to cover its capital, but that: (a) its primary purpose should be eleemosynary in nature; and (b) there is a prohibition in its articles of incorporation and by-laws that no part of the income or any form of dividend is distributable to the members, trustees and officers of the corporation, even though the corporation may incidentally earn profits from its operations." (Emphasis supplied) 8. See Timoteo B. Aquino, Philippine Corporate Law Compendium (2014) at 580, viz. "There are instances when the membership involves property rights (like membership in a club) where the purchase of a share is a [condition] sine qua non ." See also Villanueva , supra at 763, viz. " Proprietary Membership There are many instances, especially in leisure clubs, such as a golf club, that membership is granted coupled with the issuance of a share of stock representing a proprietary interest in the facilities of the club. In most cases, apart from being able to avail of the facilities of the club, the purchase of the certificate represents a form of investment in anticipation of the value of the share in the future and its disposition at a profit." 9. See Lucila M. Decasa, Handbook on Private Corporations (2009) at 565, citing SEC Opinion dated 27 June 1991 addressed to Federacion of Small and Medium Scale Enterprises, Inc. 10. Section 3. Definition of Terms. 3.1. "Securities" are shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate, contract, instruments, whether written or electronic in character. It includes: x x x (f) Proprietary or nonproprietary membership certificates in corporations ; x x x (Emphasis supplied) 11. De Leon and De Leon, Jr., The CorporationCodeof the Philippines Annotated (2013) at 664. 12. Primer on the CorporationCodeof the Philippines , published by the Securities and Exchange Commission (2010) at 5. 13. G.R. No. L-36896, 31 August 1981. 14. Articles of incorporation of FOREST HILLS. 15. Reenacted as Sections 93 and 94 of the Revised Corporation Code, respectively.