Mcgovern v. Litarose Beach Resort, Inc.

[SEC-SICD * CASE NO. 12-94-4936. May 21, 1996.] TERRENCE MCGOVERN , complainant , vs . LITAROSE BEACH RESORT, INC. WILLIAM J. POWE, and JEFF DUNCAN , respondents . D E C I S I O N Complainant Terrence M. McGovern, a British Citizen, filed the instant action seeking to compel the respondents to allow him to examine the records and book of accounts of the corporation, to return his investment in the respondent corporation plus damages. In his complaint. Mr. McGovern alleges that sometime in October 1991, he was invited and prevailed upon by respondent William J. Powe, then General Manager of respondent corporation, to invest US $40,000.00 in the company's Southern Palms Beach Resort with a promise to employ him as its Operations Manager; that after he was allegedly given the run-around he was appointed as Operations Manager in January 1992 but that he was not given any employment contract nor job description; that even as he is a stockholder, he was not allowed to examine the books of the corporation; that he thereafter resigned as Operations Manager and offered to the respondents the sale of his shares of stock which was refused by the respondents. LLjur The complainant then alleges that respondents had defrauded him by giving him only fourteen (14) shares of his US $40,000.00 investment despite the P1,000.00 par value per share stated in respondent corporation's Articles of Incorporation. In due time, respondents filed their answer to the complaint with counterclaim, denying all its material allegations and raising special and affirmative defenses. Specifically, respondents deny that they had given the complainant the run-around when he asked for his promised appointment as Operations Manager, the fact being that the business of respondent corporation's resort project was not yet then operational; that in the meantime, complainant was advised to secure an alien work permit which he failed to obtain; that contrary to the allegations in his complaint the complainant had been informed on many occasions during meetings that he is free to inspect the books and records of the corporation to satisfy himself about the true status of the corporation's business affairs; that through his letters confirming his resignation as Operations Manager of the beach resort, the complainant had expressed his desire to sell his shares in the corporation to the other stockholders and to other interested parties as he needed money to start another project; and that it was only after about two (2) years later when the complainant had been unsuccessful in selling his shares that he started badgering the respondents for the return of his investment, even as he knew it was not a matter of right. As to the complainant's allegations regarding the issuance of only fourteen (14) shares for his investment, respondents deny any irregularity, stating that the cost of the investment per share is fully disclosed in the written proposal given by respondent William J. Powe to the complainant, wherein it is clearly indicated and explained to him that shares are available at the rate of US $5,000.00 for one (1) point which the complainant accepted and agreed to; that his US $40,000.00 investment was therefore equivalent to 8 points or 8% of the 250 shares of the subscribed capital stock or twenty (20) shares; that later, however, in a meeting of all stockholders including the complainant due to a realization that the corporation lacked the funds required to complete the resort's building facilities as originally planned, it was unanimously agreed to reduce the number of shares that all stock purchasers were originally entitled to under the investment proposal, so that more of the shares subscribed by the original incorporators could be offered to interested parties whose investments would be directly infused into the corporation to finance the rest of its building program; that by virtue of said meeting and agreement, the number of shares which will be issued to the complainant would be 5.6 points at 5.6% of the 250 subscribed shares or fourteen (14) shares instead of twenty; and that accordingly when it was decided to issue the corresponding stock certificates to all stockholders in August 1993, fourteen (14) shares were issued to the complainant. The issues having been joined, pre-trial conference was conducted on June 6, 1995, in the course of which it was agreed to confine the issue on the question of whether or not complainant is entitled to demand the return of his investment plus damages or, stated otherwise, whether or not the respondents are legally obliged under the facts and the law to return the investment of the complainant as demanded. With respect to the complainant's demand to examine the books and financial status of respondent Corporation it was agreed that the respondents furnish him with copies of the audited financial reports of the corporation for the fiscal years ended 1992, 1993, and 1994, along with the pertinent pages of the stock and transfer book which the respondents did and complied with through a "Manifestation of Compliance'' dated June 19, 1995. The pre-trial having been concluded on the same date, the case was thereafter scheduled for trial on the merits. Following are the facts of the case as established during the trial and/or disclosed by the pleadings. Sometime in October 1991, complainant Terrence McGovern was invited and given a proposal by respondent William Powe to invest in a beach resort project of respondent corporation in Bauang, La Union, known as the Southern Palms Beach Resort. The complainant was apprised of the financial terms of acquiring shares in the corporation, and was verbally informed of what was involved prior to his investment (Complainant's Exhibit ''A"; T.s.n., pp. 7-8, August 9, 1995). Having carefully read the proposal and viewed the site of the beach resort, the complainant was satisfied that he was investing in a possibly good venture, in connection with which he was also to assume the job of Operations Manager (T.s.n., pp. 8-9, July 20, 1995). During; the months of November and December 1991 after putting in his investment of US $40,000.00 in the corporation, complainant demanded for his appointment as Operations Manager. He was told that this was not possible as the resort was not yet operational, being then in the construction stage. Upon his insistence, however, he was allowed to commence the job in January 1992, even as he had been unable to secure a work permit either from the Bureau of Immigration and Deportation or from the Department of Labor (T.s.n., p. 10, July 20, 1995; T.s.n., pp. 9-10, August 9, 1995). Although the investment proposal entitled the complainant to 20 shares on the basis of US $5,000.00 per point (1%) which he agreed to,' it was subsequently realized that the funds raised from the investors would be insufficient to complete the project. Whereupon a meeting was held in July 1992 among the stockholders and other investors including the complainant, during which it was unanimously agreed that the number of shares that every investor was originally entitled to will be reduced, so that the remaining subscribed shares could be sold to selected parties and raise funds to complete the project (T.s.n., p. 15-16, August 9, 1995). cdll Because of personal problems or other plans, the complainant resigned from his position of Operations Manager and offered to sell his shares in the corporation to the other stockholders (Exhibits "3" "4" and "7"). Since no existing shareholder was interested in acquiring his shares, complainant was advised in writing by respondent Jeff Duncan that he is free to sell his shares to other parties as they had previously discussed (Exhibit "8"). The complainant then went on to offer his shares to other parties from 1992 through 1993, even placing an advertisement in the Ilocos Times (Exhibit "10"; T.s.n., 18-19, July 20, 1995). Complainant contacted and negotiated with several foreign investors, among them a Chinese from Hongkong, an Arab, a Lebanese Australian, and another British National. Unfortunately, none of the prospects materialized (T.s.n., pp. 21-24, July 30, 1995). It was then that the complainant started badgering the respondents to return his investment to him. As agreed during the pre-trial conference, the issue in this case is whether or not the complainant is entitled to demand from the respondents the return of his investment plus damages. The facts clearly show that before he invested his money in the resort project of the respondent corporation, complainant was duly apprised of the terms involved and had full opportunity to weigh the prospects of the venture he was getting into. When the complainant decided to invest his money by acquiring shares in the corporation, he did so with open eyes. Not only did he carefully read the terms of the written proposal, Exhibit "A"; he even viewed the resort project of the corporation to satisfy himself. These facts are affirmed by the testimony of the complainant himself on cross-examination at the hearing of July 20, 1995 as follows: "Q When you decided to invest in Litarose Beach Resort, according to your statement here, you were provided with a written proposal by Mr. William Powe, is that correct? A Also verbal, but then followed by a written proposal. Q And you affirm that you have read carefully that proposal? A Yes. Q Having read that proposal regarding the Litarose Beach Resort and the Southern Palms Beach Resort did you also view the resort to satisfy yourself? A Yes. Q Do we understand that you were able to view the site of the resort before investing your money? A I did view the location, but I cannot remember the date. Q Having read the proposal and viewed the location we assume you were satisfied that you were investing in a possibly good venture? A At that times yes, I assumed." (T.s.n., pp. 8-9, July 20, 1995) The complainant in this case is by no means unschooled or illiterate. He had his basic high school education in Britain, spent twenty-four (24) years in the military where he gained more qualifications and according to his own words he has a bagful of qualifications (T.s.n., p. 8, July 20, 1995). prLL The fact that the complainant paid more than the par value of the shares purchased and issued to him does not necessarily amount to fraud or any irregularity. The complainant was aware that he was investing in a corporation that was already organized and existing. He was not invited by the respondents to invest as an incorporator or original subscriber which would entitle him to pay the same price per share as any other incorporator or subscriber. Not being an incorporator or an original subscriber, the complainant cannot demand that he be entitled to acquire shares in the corporation at par value, unless agreed upon or consented to by the original subscriber/transferor. Complainant's evidence itself, Exhibit "A", clearly announces that shares are available at the current rate of US $5,000.00 for one (1) point, which meant 1% of the subscribed capital stock. Complainant understood and agreed to the pricing, for he would not have invested his money if he had any questions in his mind. "A stockholder who has voluntarily paid more ,than par for his stock in discharge of his obligation on his subscription cannot recover back the excess from the corporation if the payment was not made under a mistake; nor can he recover from the other stockholders, although they may have paid less than par under an agreement between the corporation and all the stockholders". Section 5183, Fletcher Cyclopedia Corporations (Perm . Ed . ) Vol . II, p . 516 Considering, further, that the proceeds from the sale of the shares in this case were directly infused to finance the construction of the resort's building program, it is obvious that the original stockholders or subscribers can lawfully fix the price at which the shares may be sold. "In authorizing the sale of unissued shares to increase the working capital, the stockholders may fix the price at which the stock should be sold, and no stockholder can complain thereof where all shareholders are given their pro-rata shares at the price fixed." Thurmond vs . Paragon Colliery Co . , 82 w . Va . 49, 95, S . E . 816 There is no basis, therefore, to the charge and allegation of the complainant that he had been defrauded by the respondents, simply because he paid more than the par value of the shares he acquired or that he was issued shares for a lesser number than their equivalent in par value. While it is a given assumption that corporate investors are generally induced by expectation of profit, or dividends, the failure or delay in realizing such expectations does not give rise to an action by a stockholder for the return of his investment. When a person invests in the stocks of a corporation, he subjects his investment to all the risks of the business and cannot just pull out such investment should the business not come out as he expected. (SICD Decision, SEC Case No. 2782, Campos vs. Campos, August 31, 1990). True it is that the investment proposal given by respondent William Powe to the complainant anticipated the payment of dividends after a setting up an establishment period not to exceed twelve months. The prediction may have been based on the assumption that development funds could be sufficiently raised by the corporation to finance its construction program in time. In the absence, however, of any showing of bad faith or deliberate misrepresentation on the part of the proponents, miscalculations or deviations in business projections do not justify an action for damages by an investor. "As a general rule, representations as to future dividends are mere predictions or expressions of opinion, and hence are not actionable. So also a representation that a definite and regular dividend policy had been declared and decided upon cannot be classed as a misrepresentation that would justify the rescission of the contract" Section 5584, 12A Fletcher Cyclopedia Corporations, p . 87 . Notwithstanding the non-realization of immediate returns as anticipated, the facts show that the respondents have earnestly pursued and are earnestly pursuing the business of the corporation with the construction of rooms and other resort facilities to make the project completely operational (T.s.n., p. 18, August 9, 1995). As of date, even the complainant admits that insofar as he is informed by reports he had been getting, the beach resort of respondent corporation is doing quite well (T.s.n., p. 27, July 20, 1995). Thus, it can be said that the stake of the complainant in the corporation subsists, and his investment is not essentially lost. This renders his claim for damages not only bereft of legal, but likewise of factual basis. In this connection, it is significant to mention that while complainant may have paid more for his shares as an investor in respondent corporation, it is undisputed that the entire proceeds from the sale of said shares were directly infused into the capital funds of the corporation. None of it went to the personal account of the individual respondents nor of the original shareholder/transferor. The following testimony of Mr. Jeff Duncan is positive and unrefuted: .1s2 "Q Where did the proceeds of those investments go, I am referring to the proceeds of the sale those shares to subsequent investor of the corporation? A The proceeds of all the shares went directly to the corporation to finance the development of its projects . Q As of now, what is the status of the business of the beach resort that the corporation has established and managed? Q As of now it is still in an incomplete stage, 13 rooms have been completed with a bar, restaurant and a swimming pool. There is one more building of 24 rooms which we are attempting to finish and complete to make the project much more viable. One set is fully completed and we expect to realize some of the potential returns that we originally estimated." (T.s.n., pp. 17-18, August 9, 1995) (Emphasis supplied) The facts and evidence show that the acts and conduct of the respondents in this case have been legitimate. There was no showing that they were tainted or motivated by any deceit, fraud, or wrongful intent as to justify the imposition of the damages against the respondents. Likewise, for insufficiency of evidence, respondents claim for damages is hereby denied. WHEREFORE, premises considered, the above-entitled case as well as counterclaims are hereby DISMISSED. dctai SO ORDERED. (SGD.) ELPIDIO SARMEN SALGADO Hearing Officer