Re: Proxy Requirements

March 27, 2008 SEC-OGC OPINION NO. 09-08 Re: Proxy Requirements Bernad & Associates 94 Road 1, Project 6, Quezon City, Metro Manila, Philippines Attention: Atty. Ana Celeste P. Bernad Madam : This refers to your letter of 29 January 2008 requesting opinion on the interpretation of the word "acknowledged" used in, and relative to the proxy requirements of, the by-laws of the Rural Bank of Rizal (K.A.),Inc. ("corporation",for brevity),of which your clients are stockholders. You mentioned that your clients' representatives were not allowed to attend, much less observe, the corporation's 2005 stockholders' meeting and election of board of directors on the ground that their proxies were not "notarized" as is meant by the word "acknowledged" in the corporation's by-laws. Your clients maintain, however, that "acknowledged" is used in its ordinary or dictionary sense, i.e. "to make known the receipt of" ; 1 therefore, the proxies should only be shown to have been received by the Corporate Secretary. Section 58 of the Corporation Code ("the Code") reads: AaIDCS "Section 58. Proxies. Stockholders and members may vote in person or by proxy in all meetings of stockholders or members. Proxies shall be in writing, signed by the stockholder or member and filed before the scheduled meeting with the corporate secretary. ...." Hence, in the absence of a provision in the articles of incorporation or by-laws requiring a particular form for proxy, the board of directors cannot prescribe any other form; otherwise, the imposition thereof would be void, making it perfectly valid for any stockholder to use other forms of proxy as long as it is compliant with the minimum requirements of Section 58. 2 From the foregoing, the corporation's articles of incorporation and by-laws must be consulted. The former has no pertinent provision but the latter has, 3 to wit: "Sec. 6. Right to Vote by Proxies. Every stockholder entitled to vote shall have the right to vote in person or by proxy. A proxy may be entitled to vote provided he is authorized by the stockholder in writing, properly witnessed, acknowledged, and filed with the records of the corporation." The problem, however, is the afore-mentioned differing interpretations of the word "acknowledged". SDIaHE Please be informed that Section 5 of SEC Memorandum Circular No. 5, Series of 2003 ("Memo No. 5"), provides that: "5. As a matter of policy, the Commission shall refrain from rendering opinion on the following: xxx xxx xxx; 5.2 Matters which involve the substantive and contractual rights of private parties who would, in all probability, contest the same in court if the opinion turns out to be adverse to their interest; 5.3 Matters which would necessarily require a review and interpretation of contracts or an opinion on the validity of contracts since interpretation of contract is justiciable in nature and contract review calls for legal examination of contract on a general basis and not on specific legal issues ; xxx xxx xxx." Considering that your query affects substantive and contractual rights of private parties, i.e. voting rights of stockholders vis-a-vis proxy requirements of your corporation, and entails interpretation and ascertaining the intent of the framers of your By-Laws 4 in using the word "acknowledged", we refrain from categorically answering your query. However, for purposes of information, the following are imparted: DTSIEc As in statutory construction, there are certain rules for interpretation of contracts, of which the entire by-laws is one. These rules are set forth in Chapter 5 of the New Civil Code ("NCC"), specifically Articles 1370 to 1379. Pursuant to Article 1370 of the NCC, valid and enforceable contracts, which are the private laws of the contracting parties, should be fulfilled according to the literal sense of their stipulations as they appear on the face of the contract. The words used therein should be given their natural and ordinary meaning unless a technical meaning was intended. 5 The above-mentioned rule is reiterated by Section 14, Rule 130 of the Rules of Court on Interpretation of Documents, which, pursuant to Article 1379 of the NCC, shall likewise be observed in the construction of contracts. Further, it would not be amiss to add that the right to vote is a stockholder's most basic and fundamental right. It is a right inherent in and incidental to the ownership of corporate shares of stocks. This right should not be denied on tenuous and shallow grounds. 6 That said, we invite your attention to Article 1373 of the NCC, which reads: "Art. 1373. If some stipulation of any contract should admit of several meanings, it shall be understood as bearing that import which is most adequate to render it effectual." CSIDEc The foregoing is based solely on the facts disclosed in the query and relevant solely to the particular issue raised therein. More importantly, it is merely advisory and shall not be used in the nature of a standing rule binding upon the courts, or the Commission in other cases. 7 Please be guided accordingly. (SGD.) VERNETTE G. UMALI-PACO General Counsel Footnotes 1. Random House Webster's Modern Office Dictionary, 1999. ACEIac 2. SEC Opinion, 14 June 1995, XXIX SEC Quarterly Bulletin 36 (No. 4, Dec. 1995);SEC Opinion, 4 October 1987. 3. Article III, Section 6, By-Laws. 4. Essentially, By-Laws are in themselves contracts in that they are rules of action adopted by the corporation for its own government and for the government of its members and those having the direction, management and control of its affairs. (Agbayani, Commercial Laws of the Philippines p. 1470). Their function is "[t]o regulate the conduct and define the duties of the members towards the corporation and among themselves" (8 Fletcher, 634). 5. De Leon and De Leon, Jr.,Comments and Cases on Obligations and Contracts. 6. Rizalino L. Mendoza, et al., vs. Isidro Rodriguez. Jr., et al., SEC Case No. 05-95-5066, December 4, 1996. 7. Paragraph 7, SEC Memorandum Circular No. 15, Series of 2003.