Atty. Melanio L. Zoreta

April 28, 1987 Atty. Melanio L. Zoreta 827 Aurora Blvd.,Cubao Quezon City Sir : This relates to your letter, dated February 27, 1987, requesting the opinion of this Commission on the following queries: 1. Is it within the power of the Board of Directors of Capitol Development Bank (CDB) to compel its stockholders to assign 53% of their voting shares/rights in favor of the creditor of the Bank, the Development Bank of the Philippines (DBP),to give DBP no less than 67% of the total voting shares in compliance with the provisions of an existing loan agreement; and 2. Is it within the power of the stockholders to impose corporate sanction against any stockholder who fails to assign his voting shares/rights by suspending their right to vote as recommended by the Board of Directors? LexLib The facts of the case were as stated in your basic letter. A share of stock is the interest or right which the owner has in the management of the corporation, and in its surplus profits, and on a dissolution in all of its assets remaining after the payment of its debts and the shares of stock belong to the individual stockholders and not to the company . (11 Fletcher, Cyc. Corp., 1971 Rev. Vol., sec. 5084). Shares of stock are property, having the same characteristics as any other property. (Fletcher, Supra., sec. 5096). In most jurisdictions, there is express provision to this effect made by statute. Thus, Section 63 of the Corporation Code provides: "...Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. ...." On the right to vote and persons entitled to do so, "generally speaking, the right to vote is a right which is inherent in and incidental to the ownership of corporate stock, and as such is a property right, and it follows that the stockholder cannot be deprived of it and that right cannot be essentially impaired, either by the legislature or by the corporation, without his consent." (5 Fletcher, Cyc. Corps.,1952 Replacement Volume, sec. 2025). Our Corporation Code points out in Section 24 thereof that "In stock corporations, every stockholder entitled to vote shall have the right to vote in person or by proxy the number of shares of stock standing at the time fixed in the by-laws, in his own name on the stock books of the corporation, or where the by-laws are silent, at the time of election:" Accordingly, where the statute prescribes who shall be entitled to vote for directors, the corporation cannot by a contract, limit the right of the person so designated, nor confer the right upon the persons not designated. (Fletcher, Op. Cit. p. 124).This view finds considerable support in the following prevailing U.S. decisions: "The validity of a corporate contract giving to another corporation the right to elect a certain number of directors, is a limitation upon a statutory right of the stockholders to elect the directors, and its validity will not be determined in a suit to which they are not parties." (Arkansas Valley Sugar Beet & Irrigated Land Co. v. Ft. Lyon Canal Co.,173 Fed. 601, cited in 5 Fletcher, Cyc. Corp.,p. 124)." "Where the statute gives the right to vote for directors to the stockholders, a provision in a contract made by the corporation giving the right to vote to a person to whom it issues stock in trust as security for an existing indebtedness is void." (Brewster v. Hartley, 37 Cal. 15, 99 Am. Dec. 237, cited in 5 Fletcher, p. 124). Except as restricted by public policy or legislation, it is well settled that a stockholder in a corporation has the right to vote his stock as he pleases, and no other stockholder can control his conduct or gainsay his discretion. (Fletcher, sec. 2025, pp. 124-125). Creditors of the corporation cannot be given the right to vote at corporate meetings for the election of directors, or on other questions, either by a by-law of the corporation or by contract, even with the consent of all the stockholders, where this is inconsistent with or contrary to the express provisions of the charter or statutes. (Fletcher, sec. 2043).Thus, where the general law provides that directors shall be elected by the stockholders or their proxies, creditors of the corporation who do not stand in such capacity may not so vote in meetings of stockholders. Hence, your queries are answered in the negative. Please be informed, however, that administrative opinions rendered herein shall not control judicial constructions or interpretations in the event that the issues raised are finally litigated in court. Very truly yours, (SGD.) JULIO A. SULIT, JR. Chairman