J.A. Osana and A.C. Tionko

March 21, 2003 SEC OPINION NO. 09-03 J.A. Osana and A.C. Tionko SyCip Gorres Velayo & Co. 6760 Ayala Avenue, 1226 Makati City J.A. Osana and A.C. Tionko: This refers to your letter dated March 7, 2003 wherein you stated the following: TDaAHS (1) a request for confirmation that failure of a stockholder to attend the stockholders' meeting despite due notice and publication of notice shall be considered approval or consent to the resolutions adopted during said meeting; (2) your client, X Corporation, proposes to undergo partial liquidation to return the capital of one of its major stockholders, Y Corporation, a corporate stockholder which owns 61% of the outstanding capital stock of X Corporation; (3) after partial liquidation, X Corporation will still have more than sufficient assets and retained earnings to answer for all liabilities of the corporation; and (4) all requirements for decrease in authorized capital stock, including consent of creditors, will be complied with by X Corporation. We cannot confirm your interpretation that failure of a stockholder to attend the stockholders' meeting despite due notice and publication of notice shall be considered approval or consent to the resolutions adopted during said meeting. Generally, the right to vote is a right that is inherent in and incidental to the ownership of corporate stock, and as such is a property right. It follows that the stockholder cannot be deprived of the right to vote his or her stock nor may the right be essentially impaired, either by the legislature or by the corporation, without his or her consent, through amending the charter, or by by-law. ( 5 Fletcher Cyc. Corp.,Sec 2025, p. 147 ) Hence, without proof that said right has been actually exercised, absence from a duly convened meeting cannot and should not be construed as approval or assent to what has been taken up and adopted by the majority. Stockholders who were present or those represented by proxies in the stockholders' meeting but did not exercise their right to vote, including those who received notice of the meeting but were absent ,shall be bound by all resolutions voted upon during said meeting wherein a quorum was present and regularly convened in compliance with law and the by-laws. Hence, it is erroneous to interpret mere absence of such duly notified stockholder as an approval or assent to what has been adopted during said meeting. Likewise, to interpret the absence of a notified stockholder as approval or consent precludes the stockholder from exercising rights inherent and incidental to the ownership of corporate stocks. However, if a stockholder feels he has a valid and justifiable objection on what was transacted during the meeting, he may file a formal complaint with the regular courts pursuant to Republic Act No. 8799, which has transferred the jurisdiction over intra-corporate cases from the Securities and Exchange Commission to Regional Trial Courts. With regard to your client and its proposition to undergo partial liquidation to be able to return the capital of its major stockholder, we are of the opinion that such scenario does not find support in law. The situation you have presented must be taken up in light of Section 122 of the Corporation Code on Corporate Liquidation and the Trust Fund doctrine. Liquidation refers to the winding up of the affairs of the corporation by reducing its assets in money, settling with creditors and debtors, and apportioning the amount of profit and loss (16 Fletcher Cyc. Corp.,p. 653).In most, if not all jurisdictions, in order to give effect to the equitable rule that the corporate assets, on dissolution, are a trust, or held for the benefit of creditors and stockholders, express statutory provision has been made for the winding up of corporations on their dissolution, and the distribution of their property to the stockholders, after payment of their debts, either by making the officers of the corporation trustees for such purpose, or by continuing the existence of the corporation for a certain period for such purpose or by providing for the appointment of a receiver. ( 16A Fletcher Cyc. Corp.,Sec. 8185 ) Section 122 of the Corporation Code further provides that no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities. It has been held that corporation may validly liquidate its debt prior to its dissolution under Section 40 of the Corporation Code, but it cannot distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities, under Section 122 thereof. Since the dissolution of a corporation becomes legally effective upon the issuance by the SEC of a certificate of dissolution, a corporation cannot therefore lawfully distribute its assets to its stockholders though it may lawfully liquidate its debts in anticipation of such voluntary dissolution. ( Rosario, The Corporation C od e of the Philippines, p. 1075 citing SEC Opinion dated February 6, 1964, Atty. Isidro T. Bangayan ) Moreover, it is well settled that corporate properties constitute a trust fund for the payment of debts and distribution to stockholders. Accordingly, the trust fund doctrine epitomizes the idea of equal protection to creditors and pro rata distribution in case of inadequacy of corporate assets to pay all debts. Furthermore, corollary to the rule that a corporation has no power to release a subscriber from payment of his unpaid subscription, a stockholder has no right to demand refund of his investment in a corporation. The Corporation Code does not confer upon any stockholder the right to demand refund of his investment conformably to the general rule that the subscription to the capital stock of a corporation constitutes a trust fund for the benefit of the creditors and no valid agreement can be made by which a subscriber can be released therefrom. In addition, a subscription constitutes a contract among all the subscribers to the capital stock of the corporation. For this reason, not one of the subscribers can legally withdraw from the contract without obtaining the consent of all the other subscribers. The common fund in which all the subscribers have acquired interest cannot be diminished and/or reduced. ( SEC Letter to Europhil Shipping Agency, Inc. dated June 23, 1987 and SEC Letter to Mr. Benigno Alfaro dated September 16, 1985 both citing Agbayani, Commercial Laws of the Philippines, Vol. 3, 1984 ed., pp. 455456 and Lingayen Gulf Electric Power Co. v. Baltazar, G.R. No. L-4824 ) Lastly, we are of the opinion that your representation that requirements for decrease in authorize capital stock will be complied with by X Corporation after it has undergone partial liquidation finds no basis in law. The requirements for decrease in authorize capital stock, as provided for by Section 38 of the Corporation Code, are different from the requirements for a corporation to undergo liquidation, more so partial liquidation ,which is not at all contemplated by law. Please be advised accordingly. EDISaA Very truly yours, (SGD.) VERNETTE UMALI-PACO General Counsel