Atty. Victor Africa

November 24, 1992 Atty. Victor Africa Telecoms Plaza 316 Gil J. Puyat Avenue Salcedo Village, Makati Metro Manila S i r : This refers to your letter of November 17, 1992 requesting opinion on the following queries: 1. Whether a stock corporation can validly provide in its by-laws and bind thereto the stockholders thereof a provision that in case of intra-corporate conflicts/disputes, a stockholder must resort to the arbitration procedure described therein, instead of going to the SEC; 2. Whether such a provision if it exists, together with a provision that the non-compliance therewith can be a ground for dismissal of any case filed at the SEC, would be binding on the stockholders thereof as well as on the SEC; cdlex 3. Whether there would be a difference in opinions on the above situations should the corporation involved be a non-stock corporation. By-laws are the private laws of the corporation. Such self-imposed private laws, when valid, have substantially the same force and effect as laws of the corporation as have the provisions of its charter insofar as the corporation and persons within it are concerned. They are in effect written into the charter and in the sense, they become part of the fundamental law of the corporation. Accordingly, the corporation, its directors, officers and members are bound by and must comply with the same. (8 Fletcher Cyc. Corp. Sec. 4197) However, it has to be emphasized that the first requisite of validity of by-laws is that they must be consonant with and not repugnant to or in contravention of the law of the land. (8 Fletcher sec. 4185) Thus, while under Section 47 of the Corporation Code, a corporation is allowed to provide in its by-laws "other matters as may be necessary for the proper or convenient transaction of its corporate business or affairs", such authority is subject to Section 36 of the same Code which provides that every corporation has the power and capacity to "adopt by-laws not contrary to law, morals or public policy . . .". By-laws, therefore, are subordinate to the Corporation Code or other pertinent laws, and hence, should not be inconsistent with any provision of the latter. Otherwise, they would have no binding effect. Accordingly, a by-law provision that "in case of intra-corporate conflicts/disputes, a stockholder must resort to the arbitration procedure described therein", may be considered valid, provided in settling the dispute no law will be violated. However, any decision made by the corporation pursuant thereto shall not deprive the Commission from exercising its jurisdiction to hear and decide the same the moment it is questioned thru formal complaint filed with it in accordance with P.D. 902-A, as amended which provides: "SECTION 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving: a) Devices or schemes employed by or any acts of the board of directors, business associates, its officers or partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of the stockholders, partners, members of associations or organizations registered with the Commission. b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members, or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the state insofar as it concerns their individual franchise or right to exist as such entity; c) Controversies in the election or appointments of directors, trustees, officers or managers of such corporations, partnerships or associations. d) Petitions of corporations, partnerships or association to be declared in the state of suspension of payments in cases where the corporation, partnership or association possesses sufficient property to cover all its debts but foresees the impossibility of meeting them when they respectively fall due or in cases where the corporation, partnership or association has no sufficient assets to cover its liabilities, but is under the management of Rehabilitation Receiver or Management Committee created pursuant to this Decree." (Emphasis supplied) The foregoing view is applicable to both stock and non-stock corporations. Please be advised accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman