Melecio Arranz, et al. vs. Rafael Ileto, et al.

[SEC-SICD * CASE NO. 08-97-5745. July 13, 1999.] MELECIO ARRANZ, ET AL. , petitioners , vs .RAFAEL ILETO, ET AL. , respondents . D E C I S I O N This is a petition for the declaration of nullity of Valley Golf and Country Club's Board Resolution dated 25 June 1997, with a prayer for the issuance of a Temporary Restraining Order (TRO). The petitioners are shareholders in good standing and proprietary members of Valley Golf and Country Club, Inc. (hereinafter referred as "Valley Golf"),a private domestic corporation duly organized and existing under the laws of the Philippines. Petitioners claim that, among themselves, they are the holders of approximately 800 outstanding, good and valid proxies, which entitle them to vote in all meetings during a period of five (5) years. Moreover, they alleged that these proxies were constituted and given to petitioners by other shareholders who are unable to attend in person to vote in the election of directors and. in other corporate business to be transacted in meetings of the shareholders. During the regular meeting of the Board of Directors on 25 June 1997 the Board passed and approved the following resolution: "RESOLVED, as it is hereby resolved that all outstanding proxies are hereby recalled and declared invalidated for the 1997 annual stockholders meeting effective immediately." Thereafter, the Board of Directors caused the corporate secretary to send to the shareholders Notices of the Annual Stockholders Meeting on 14 September 1997 at 4:00 P.M.,together with numbered proxies, rules and regulations applicable to the 1997 election of directors on 14 September 1997. On 20 August 1997 petitioners filed the instant petition. They contend that the resolution passed by the Board on 25 June 1997 is null and void since the directors of Valley Golf have no authority to recall and invalidate subsisting/outstanding proxies validly constituted by shareholders in good standing and entitled to vote and that it is violative of the law on agency. In support of their prayer for a TRO, petitioners alleged that the private respondents were threatening, doing or procuring to enforce the invalid resolution to the great injury and prejudice of petitioners and other shareholders similarly situated. Moreover, they claimed that grave injustice and irreparable injury will be suffered by petitioners before the matter can be heard on notice. They prayed that a temporary restraining order be issued directing respondents, their agents or representatives to cease and desist in implementing/enforcing the resolution dated 25 June 1997 which invalidates the outstanding proxies. In their answer, respondents averred that a proxy is valid only for the particular meeting indicated therein or to any subsequent adjournment thereof. In addition, respondents claimed, that Sec. 58 of the Corporation Code clearly provides: "Proxies shall be in writing, signed by the stockholder or member and filed before the scheduled meeting with the corporate secretary." Therefore, respondents maintain that it is essential for the proxy to be valid that a new official numbered proxy forms issued by the corporation should be signed by the stockholder. or member himself or herself, and not by any other person like an attorney-in-fact. On September 12, 1997, the application for a TRO was denied, the dispositive portion of said order states, to wit: llcd "WHEREFORE, it not having been sufficiently established by petitioners that the questioned Resolution of June 25, 1997 is tainted with invalidity, the prayer to restrain its enforcement/implementation should be, as it is hereby denied." On 17 September 1997, petitioners filed a Motion for Reconsideration on the ground that the Order dated September 12, 1997 is contrary to the evidence and law. They contend that the existing proxy forms are good and valid for five (5) years; that the statement in SEC Case No. 03-97-5586 that the outstanding proxies are good and valid for subsequent meetings is an obiter dictum; that the questioned Order infringes on the stockholder's right to appoint a proxy for a period of five (5) years contrary to Section 58 of the Corporation Code; that SEC Memorandum Circular No. 5, series of 1996 is not applicable to the instant case; that the By-laws of Valley Golf allows the attorney-in-fact to sign the printed proxy form on behalf of the stockholder; and lastly, that the invalidation, of the outstanding proxies, which constitute the majority, resulted in no election of directors and the hold-over of the respondents as directors, thus serving their selfish purpose in passing the resolution in question. For their part, respondents in their Opposition to the Motion for Reconsideration averred that the Board Resolution of 25 June 1997, which invalidated all outstanding proxies is a valid corporate act done pursuant to law and the rules of the Commission. On 02 December 1997, petitioners filed a Manifestation and Motion praying that respondents be ordered to observe the status quo and to desist from enforcing the Resolution dated 25 June 1997 until further orders from the Commission. In an Order dated 10 December 1997, the Motion for Reconsideration was denied for lack of merit. In the said Order, it was held that: "It can hardly be imagined that petitioners would at all suffer grave and irreparable loss by the mere fact that they will no longer be allowed to use the old proxy forms. It would have been easier if petitioners, instead of ululating over so trivial an issue, dutifully complied with what has been reasonably prescribed by the Board, as required by the applicable rules of this Commission." Petitioners then filed a verified Petition for Review on Certiorari with the SEC En Banc contending that public respondent committed grave abuse of discretion amounting to lack or excess jurisdiction by denying the motion for reconsideration and by holding that petitioners are insisting on the unbridled exercise of their right to use the outstanding proxies which is in violation of the rules and regulations promulgated by the Commission; by holding that it can hardly be imagined that petitioners would at all suffer grave and irreparable loss by the mere fact that they will no longer be allowed to use the old proxy forms; and lastly, by holding that it would be easier if petitioners dutifully complied with what has been reasonably prescribed by the Board as required by the applicable rules of the Commission. Petitioners likewise maintained that the invalidation of the outstanding proxies clearly deprived petitioners and their principals of their right to vote for the directors of their own choice pursuant to Section 23 and 58 of the Corporation Code. In addition, petitioner alleged that said invalidation allowed the respondent directors to hold office and to continue managing the corporation against the will of the stockholders of Valley Golf and Country Club, Inc. On the other hand, respondents in their Comment/Opposition averred that petitioners were not holders of 800 outstanding and valid proxies; that petitioners were not deprived of their right to vote by proxy; and that voting by proxy is subject to reasonable regulation. On 27 April 1998, petitioners filed a Reply to the Comment/Opposition filed by the respondents. They claim that they have the right to make use of their outstanding proxies pursuant to SEC Memorandum Circular No. 7 Series of 1996 ;that what petitioners are seeking to enjoin is not the holding, of the stockholders' meeting but the enforcement of the Board Resolution of 25 June 1997. On 23 June 1998, the Commission En Banc issued an Order denying the Petition for Certiorari on the ground that the Hearing Officer did not commit grave abuse of discretion amounting to lack of jurisdiction. The Commission further emphasized that as a general rule, a Petition for Certiorari is not available to assail an interlocutory order except when there is a grave abuse of discretion amounting to lack of jurisdiction. The Commission maintained that such exception does not exist in the present case. As agreed upon by the parties at the preliminary conference held last 09 September 1998, the only issue to be resolved in this case is: Whether or not the resolution of 25 June 1997 recalling and invalidating all outstanding proxies for the 1997 Annual Stockholders' Meeting of the Valley Golf and Country Club, Inc. is valid. LLjur After a careful and judicious examination of all the evidence presented, the applicable laws, precedents, authorities and jurisprudence, it is apparent that the abovementioned issue should be resolved in the affirmative. At the outset it must be emphasized that voting by proxy is not an inherent right of stock ownership, and therefore is not necessarily incident to the ownership of shares in the corporation (Commonwealth vs. Bringhurst, 103 Pa. 134, 49 Am. Rep. 119; Taylor vs. Griswold 14 N. JL. 222; 27 Am. Dec. 33) Therefore, a stockholder of a corporation cannot give a proxy or power of attorney to another to represent him and vote at a corporate meeting, unless the right to do so is given by the charter or a general constitutional or statutory provisions or by a valid law [Sternberg or American Bantam Car. Co., 76 F Supp 426, dismd 173 F2d 179 (applying Pennsylvania Law)]. Under our jurisdiction, the right to vote by proxy is provided for in SEC. 58 of the Corporation Code, to wit: "SECTION 58. Proxies . Stockholders .and members may vote in person by proxy in all meetings of stockholders or members. Proxies shall be in writing, signed by the stockholder and member and filed before the scheduled meeting with the corporate secretary. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period longer than five (5) years." (emphasis supplied) dctai The elementary rule in statutory construction is that when a statute is clear, plain and free from ambiguity, it must be given its literal meaning and applied without attempted interpretation (Agpalo, Ruben E.,Statutory Construction, 3rd ed. [1995]).Applying said rule, it is clear from the above-quoted provision, particularly the underscored portions thereof, that the proxy form should be signed by the stockholder or member himself or herself and not by another person like an attorney-in-fact. If the intention were otherwise, the law would have clearly expressed that an attorney-in-fact may do so in the stockholder's behalf. It is within the Board's power, under its plenary power granted by law to manage the affairs of the corporation and the business judgment rule, to make reasonable regulations in the form and manner of voting by proxy. It is within the Board of Directors' plenary power to do or authorize any act which falls within what may be properly regarded as the management of the ordinary business of the corporation. The general authority or power of the Board of Directors is to manage the corporate business and affairs of the stockholders who elected them. Said authority of the Board is absolute so long as they act within the bounds of law. It is well settled in Corporation Law that the power vested in the Board of Directors to manage and control the corporate business and property is absolute as long as the Board acts in accordance with its best judgment, and in the absence of dishonest purpose, bad faith, fraud or negligence, so gross as to amount to breach of trust, its discretion will not be reviewed by courts in an action questioning such conduct. The foregoing is the so called "business judgment rule". (Ballantine on Corporations, rev. ed. p. 160-161). The basis of said rule is the wide latitude that directors of a corporation are given in the management of the affairs of a corporation provided always that judgment, and that means an honest, unbiased judgment, is reasonably exercised by them. [Fletcher Cyclopedia, Vol. 3A, p. 338, citing Miller vs. American Tel. & Tel. Co., 597 F2d 759 (applying Pennsylvania Law); Evans vs. Amour & Co., 241 F Supp 705, (applying Pennsylvania Law)]. The sound business judgment rule express the unanimous decision of American courts to eschew intervention in corporate decision making if the judgment of directors and officers is uninfluenced by personal consideration and is exercised in good faith. (Miller vs. American Tel. & Tel. Co., F2d 759). cdll In this jurisdiction, it has been held that "questions of policy management are left solely to the honest decision of officers and directors of a corporation, and the court is without authority to substitute its judgment for the judgment of the board of directors. The board is the business manager of the corporation, and so long as it acts in good faith its orders are not reviewable by the courts (Board of Liquidators vs. Kalaw, G.R. No. L-18805, August 14, 1967, citing Montelibano vs. Bacolod-Murcia Milling Co., L-15092, May 18, 1962). The resolution under consideration, while recalling and invalidating all outstanding five (5) year proxies of the 1997 Annual Stockholders' meeting, did not in any way totally prohibit voting by proxy. Said resolution merely recalled the outstanding proxies to give way to the new official numbered proxy forms prescribed by the Board. It must be noted that the new form was made in compliance with the following laws (1) Sec. 58 of the Corporation Code, as abovequoted, (2) SEC Memorandum Circular No. 5 series of 1996 which provides that "A proxy shall be valid only for the meeting for which it is intended" and lastly; (3) Revised Securities Act Rule 34 (d)-4 * (b) which states that: "no proxy shall confer authority. ..to vote at any annual meeting for an adjournment thereof) to be held after the date on which the proxy statement and form of proxy are first sent or given to security holders".The subsequent issuance by the Board of the rules and regulations applicable to the 1997 election of directors was intended to correct the corporation's By-laws which erroneously allowed an attorney-in-fact to sign the corporation's proxy form on behalf of the stockholder. There is nothing invalid in requiring that in order for the proxy to be valid it should be signed by the stockholder or member himself or herself, and not by any other person like an attorney in fact. No bad faith can be imputed on the Board of Directors for passing the assailed resolution, for said resolution, at the very least, sought to standardize and organize the proxy system of the Club. "[B]ad faith does not simply connote bad judgment nor negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty thru motive or interest or ill will; it partakes of the nature of fraud." (Board of Liquidators vs. Kalaw, supra, citing Spiegel vs. Beacon Participations, 8 N.E. (2d) 895, 907, citing cases). Verily, the restrictions imposed by the Board on the stockholder's right to vote by proxy does not in any way operate unjustly, unreasonably and oppressively, neither does it work to disenfranchise the majority of the stockholders. The fact remains that the stockholders are still entitled to vote by proxy, albeit with some minor restrictions in the exercise of said right, i.e. the proxy form should be signed by the stockholder himself. And applying the business judgment rule, the act of the Board of Directors (herein respondents) of invalidating all outstanding five (5) year proxies is valid and legal, the same being done in good faith and in the exercise of its honest judgment in lawful furtherance of its corporate purpose. Suffice it to say, the 25 June 1997 Resolution of the Board of Directors merely sought to effect the mandate provided for under the above underscored portion of Section 58 of the Corporation Code. While it may be true that the By-laws of Valley Golf allows an attorney-in-fact to sign the printed form for and in behalf of the stockholder, such consensus between and among the stockholders must be subject to the pertinent provisions of the enabling statute, i.e. Section 58 of the Corporation Code. It is generally accepted principle in corporation law that by-laws must not be contrary to the general law as Section 36 (5) of the Corporation Code provides "to adopt by-laws not contrary to law." WHEREFORE, foregoing premises considered, the instant Petition for the Declaration of Nullity of Board Resolution dated 25 June 1997 is hereby dismissed for utter lack of merit. SO ORDERED (SGD.) MALTHIE G. MILITAR Hearing Officer * Copied verbatim from documents obtained directly from the Securities and Exchange Commission .