Jose A. Bernas, et al. vs. Jovencio F. Cinco, et al.

[SEC-SICD * CASE NO. 12-97-5840. May 9, 2000.] JOSE A. BERNAS, ET AL. , complainants , vs . JOVENCIO F. CINCO, ET AL. , respondents . Corporation Code ; calling of meeting . Section 28 of the Corporation Code requires that the corporate secretary be first requested by a majority of the stockholders to call a meeting for the removal before stockholders may themselves call a meeting. Defendants can not assume that the request to call a meeting would be denied or that they constitute a majority, and a prior refusal is not in any case a justification to elect, not to comply with Section 28. EDCTIa Same ; same ; same . Further, Section 28 requires that the call for the meeting be signed by the stockholders who signed the demand to the board to call the meeting. Since there was no demand to the board to call the meeting, there could not have been a valid call or notice of the meeting for removal. Same ; same ; same . The club's by-laws mandate that the meetings shall be called by the club's secretary, . . . and presided upon by the president. The April 1999 meeting failed in this regard. Further, less than two-thirds (2/3) of the stockholders were represented at the meeting, so no corporate acts involving removal could have been transacted at the meeting in any case. Term of office of directors . . . . There is a difference between the term of a director and his tenure. The former is fixed while the latter extends until his successor is duly elected and qualified. In this case, the complainant's tenure as directors subsists despite the expiration of their terms, especially since no one has been duly elected to succeed them. D E C I S I O N Before this Commission is a complaint for Injunction filed by complainants against the holding of the 17 December 1997 stockholders' meeting which had for its purpose the removal of complainants as directors of the Makati Sports Club Inc. ("MSC" or the "Club" for brevity) Complainants subsequently filed their Supplemental Complaint for Injunction praying that defendants be restrained from assuming office and acting as directors and officers of the MSC and from undertaking acts of control and management of the Club pursuant to and as a consequence of the resolutions adopted during the 17 December 1997 special stockholders' meeting. The complainants allege that the calling and holding of the 17 December 1997 special stockholders' meeting was contrary to law because it was called by the MSC Oversight committee, an unofficial and self-appointed committee composed of the past presidents of the Club, and not the President or the Board of Directors. Complainants further allege that the proxy form used for the 17 December 1997 special stockholders' meeting did not comply with Rule 34 (a)-1 of the SEC Full Disclosure Rules which prescribe the proxy form to be used and require the submission of a proxy statement in the case of registered securities. For his part, complainant Macrohon filed a Second Supplemental Complaint dated 22 September 1998 seeking the nullification of the 20 April 1998 Annual Stockholders' Meeting. Complainant Bernas likewise filed a second supplemental petition dated 01 February 1999 questioning his expulsion from the roster of members of the MSC and the public auction of his share of stock. A supplemental complaint was also filed earlier by complainant Bernas for payment of damages. On the other hand defendants allege that the 17 December 1997 Special Stockholders' Meeting was validly called and held. They further allege that in the subsequent meetings held on April 1998 and April 1999, the stockholders of MSC ratified the acts taken in the December 17, 1997 meeting thereby rendering the complaint moot and academic. And by way of counterclaim, defendants pray that they be awarded damages. At the heart of this complaint for injunctive relief is the validity of complainant's removal as directors of the Club as well as the validity of the election of defendants as their replacements during the 17 December 1997 special stockholders' meeting. Defendants allege that the notice of the 17 December 1997 special stockholders' meeting sent out by the so called MSC Oversight committee is valid and in accordance with Section 28 of the Corporation Code. cHCIDE Under Section 28 of the Corporation Code, the call for the meeting may be addressed directly to the stockholders by any stockholder should the secretary fail or refuse to call the special meeting, or fail or refuse to give the notice . Section 28 of the Corporation code provides as follows: "Sec. 28. Removal of directors or trustees . Any director or trustee of a corporation may be removed from office by a vote, of the stockholders holding or representing two-thirds (2/3) of the outstanding capital stock, . . .. A special meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, or, if it be a non-stock corporation, on the written demand of a majority of the members entitled to vote. Should the secretary fail or refuse to call the special meeting upon such demand, or fail or refuse to give the notice, or if there is no secretary, the call for the meeting may be addressed directly to the stockholders or members by any stockholder or member of the corporation signing the demand ." For the above-quoted provision to operate: 1. the stockholders must be previously and properly notified of the intention to propose such removal at the meeting; 2. if the removal is through a special stockholders' meeting, the call for such meeting must be made by the corporate secretary on order of the president or on the written demand of the stockholders representing or holding a majority of the outstanding capital stock. 3. in cases, however, of a refusal or failure or an absence on the part of the corporate secretary to call for such meeting, any stockholder who previously signed the demand for a special stockholders' meeting may validly issue a notice to all the stockholders. In their Consolidated Answer Ad Cautelam defendants argue: that complainants; particularly the former president and secretary, had already maliciously refused to call a special stockholders' meeting on 24 November 1997 as requested by at least 100 stockholders of the Club; thus, the MSC Oversight Committee did not bother to request the board, the former president and the secretary to call such special meeting for such would have been a futile and useless act on their part; that complainant Victor Africa, who was also a director, will never call a meeting to remove him from office as a director. (pp. 38-39, Answer Ad Cautelam). Defendants' reliance on an alleged prior refusal to call a meeting is unavailing. The alleged refusal by Victor V. Africa to call a meeting upon a previous request was covered by SEC Case No. 5799 which has been decided in 1998. In the said case, this Hearing Officer observed that there was no such refusal to call a meeting, as the Board in control then manifested that a special stockholders' meeting would be called but not on short notice on the date demanded by defendants. Section 28 of the Corporation Code clearly requires that the corporate secretary be first requested by a majority of the stockholders to call a meeting for removal before stockholders may themselves call a meeting. Defendants cannot assume that the request to call a meeting would be denied or that they constitute a majority, and a prior refusal is not in any case a justification to elect not to comply with Section 28. The so called MSC Oversight Committee was not legally justified in issuing notice of the 17 December 1997 special stockholders' meeting. cCTAIE For failure of a majority to make such a request, the call for the meeting was improperly made and the December 17, 1997 meeting was void and produced no legal effect. Further, Section 28 requires that the call for the meeting be signed by the stockholders who signed the demand to the Board to call the meeting. Since there was no demand to the Board to call the meeting, there could not have been a valid call or notice of the meeting for removal. Certainly the "Oversight Committee" which issued the call and notice for the removal meeting, as a group, is not a majority of the stockholders who signed a demand to the Board contemplated by Section 28. Defendants alleged that during the December 17, 1997 meeting, complainants were removed as directors of the club and in their place and stead a new set of directors were elected, namely: defendants Ricardo G. Librea, Alex Y. Pardo, Roger T. Aguiling, Roger G. Villarosa, Armando David, Norberto Maronilla, Jovencio F. Cinco, Regina de Leon Herlihy and Claudio B. Altura. Considering that the removal of complainants as directors was illegally effected, complainants were not validly removed as directors during the December 17, 1997 meeting. It also follows that defendants Ricardo G. Librea, Alex Y. Pardo, Roger T. Aguiling, Roger G. Villarosa, Armando David, Norberto Maronilla, Jovencio F. Cinco, Regina de Leon Herlihy and Claudio B. Altura did not validly replace complainants as directors as a result of the December 17, 1997 meeting. Regarding the April 1998 and 1999 annual stockholders' meetings, defendants allege that the holding thereof rendered the instant case moot and academic because during the said meetings, the stockholders have allegedly "spoken as to who should constitute the Board of Directors". The principal theory of the Answers, that the April 1998 meeting has rendered the issue of the validity of the 17 December 1997 meeting moot, is the same argument that was exhaustively traversed in defendants' Supplemental Motion to Dismiss both in this case and in En Banc Case No. 613. In resolving the instant case, this Hearing Officer drew guidance from the Order of this Commission in En Banc Case No. 613 dated 30 March 1999. It is admitted even by the defendants themselves that the proxies used in the 17 December 1997 meeting do not conform to Rule 34(a) of the Full Disclosure Rules. Defendants were the subject of a show-cause letter dated 14 July 1998 sent by the SEC's Money Market Operations Department (MMOD) on why they should not be penalized for their failure to file proxy or information statements requirement for the annual stockholders' meeting held on April 20, 1998. The proxies were used for both the 20 April 1998 and December 17, 1997 meetings and are therefore invalid and may not be used for any purpose. The Commission En Banc has stated in its order dated 30 March 1999 in EB Case No. 613 that the proxies were in violation of Rule 34(a). Conclusively, the proxies therefore produced no legal effect and could not have contributed to any purpose, even with respect to quorum during the April 20, 1998 meeting. The proxies used for the April 1998 and December 17, 1997 meetings were executed on 17th October 1997 for an undisclosed purpose/s, even before the alleged call for the December 17, 1997 (removal for the respondents [complainants herein]), and April meetings (annual stockholders' meeting) were made. The uniform proxy form relied upon by defendants states as follows: xxx xxx xxx I, the undersigned member of Makati (sports) Club, Inc. do hereby constitute, name and appoint: xxx xxx xxx as proxy to represent me . . . during the SPECIAL STOCKHOLDERS' MEETING to be held between September-December 1997 and any adjournment continuation and/or postponement thereof. This proxy shall also apply at any regular and/or special meetings of the stockholders of the corporation and/or adjournment thereof, on any matter or business that may be brought up in said meetings, as fully to all intents and purpose which the undersigned might do if personally present. xxx xxx xxx As appearing on its form, the uniform proxy did not allow the issuer of the proxy to indicate how the given proxy should be voted as required by (d) (1-c) Rule 34, Revised Securities Act, and should only be used/good for one meeting pursuant to (4), Rule 34 [Ibid]. However, the same proxies solicited for the December 17, 1997 meeting were also subsequently used for the 20 April 1998 meeting in clear violation of the law. Defendants allege that during the 20 April 1998 Annual Stockholders' Meeting, Attys. Sergio Y. Acaban and Eliseo V. Villamor, and Mr. Alfredo T. Alvarez were elected directors of the Club to replace defendants Aguiling, Villarosa, and David, whose terms have expired in 1998. CSDcTA The alleged election of Sergio Acaban, Eliseo V. Villamor and Alfredo F. Alvarez is, to the mind of this Hearing Officer, invalid, because: (1) The April 1998 meeting was not attended by sufficiently valid proxies to constitute a quorum; (2) Even if a quorum was present, Sergio Acaban, Villamor and Alvarez could not be properly elected to replace standing directors who were validly elected. The directors that were allegedly elected as replacements were not validly elected by or during the void December 17, 1997 meeting; (3) The April 1998 meeting failed to comply with the club's by-laws as observed by the Commission En Banc in its Order dated March 30, 1999 in EB Case No. 613 as follows: The by-laws of the MSC provides that the Secretary, then Victor Africa (Sec. 5) shall notify the stockholders of the time and place of a regular or special meeting (Sec. 12), and that the president, then complainant Bernas, shall preside in/at all meetings (Sec. 22). (minutes of the regular meeting held on 20 April 1998 attached as Annex 9 to the Answer Ad Cautelam) As found by the Commission En Banc in EB Case No. 613 in its March 30, 1999 order: ". . . If the December meeting is valid, then the call for the April meeting may be valid. If, however, the December meeting is void, then the call for the April meeting cannot be valid if the then corporate secretary (prior to the controversy or before the December meeting), respondent Africa, did not issue the required notice. In fact, Exhibit "N" now raises the question on who may preside at the April 1998 meeting if the validity of the removal of officers, inclusive of the corporate secretary, during the meeting of 17th December 1997 is not yet established by concrete evidence." (4) Under the Corporation Code, while a director's term is fixed, the tenure of a director survives until a successor is duly elected and qualified. Since Messrs. Acaban, Villamor and Alvarez were not duly elected and qualified by the April 20, 1998 meeting, they could not have replaced complainants or anyone else. Defendants further allege that the Club's Annual Stockholders' Meeting for the year 1998 was held on 20 April 1998. Among those acts approved by the stockholders at the meeting was the expulsion of complainant Bernas from the roster of the Club members and the public auction sale of his share of stock of the Club to Penta Capital Management Corporation which submitted the highest bid. Since no quorum was established by the April 1998 meeting, the alleged approval of the expulsion of complainant Bernas and the auction of his share was void and produced no legal effect. CDHacE With regard to the argument that the April 1998 meeting rendered this case moot, it need not be stated that the April 1998 meeting, being void, cannot ratify the December 1997 meeting. Further, being itself void, the December 17, 1997 meeting is not ratifiable. There is no legal principle which allows for the ratification of the corporate acts performed in a void meeting. Regarding the April 1999 meeting, defendants allege that the Annual Stockholders' Meeting of the Club for that year was held and that the said meeting further confirmed the validity of the calling and holding of the 17 December 1997 meeting, as well as the 20 April 1998 Annual Stockholders' Meeting. Allegedly, more than fifty seven percent (57%) of the total number of stockholders entitled to vote attended the 19 April 1999 meeting. For the April 1999 meeting, the Club complied with Rule 34 of the SEC Full Disclosure and Proxy Rules. In SEC EB Case Bo, 613, SEC representatives, namely, Attys. Juanito B. Almosa, Jr. and Marciano S. Bacalla, Jr. were present to supervise the 19 April 1999 Annual Stockholders' Meeting. According to defendants, three (3) new directors were also elected, namely, Messrs. Roger Villarosa and Ruben Torres and Mrs. Maricris Sim, to replace the directors whose terms have expired, particularly Messrs. Ricardo G. Librea and Alex Y. Pardo and Mrs. Regina de Leon. There is nothing on record that confirms that actual supervision was conducted, so no conclusion or presumption can be made in this regard. The validity of the 19 April 1999 meeting depends on whether the meeting was called and presided upon in accordance with the club's By-laws and whether a proper quorum existed with respect to particular acts taken during the meeting. As discussed above, and as applicable to the 1998 meeting, the club's By-laws mandate that the meeting shall be called by the club's secretary, then Victor Africa, and presided upon by the president, then complainant Bernas. The April 1999 meeting failed in this regard. Further, less than two-thirds (2/3) of the stockholders were represented at the meeting, so no corporate acts involving removal could have been transacted at the meeting in any case. Finally, Messrs. Villarosa and Torres and Ms. Sim were not validly elected as they were not elected to replace validly elected directors. The 17 December 1997 stockholders' meeting is not ratified by either the 1998 or 1999 April meetings. Thus, the issue of its validity cannot be deemed moot and academic if complainants' assailment of its validity has not been abandoned. Insofar as complainants' term as MSC directors are concerned, defendants argue that the same had expired. The terms of complainants Bernas and Ching expired on 20 April 1998 in accordance with the club's By-laws. The terms of complainants Macrohon and Lim also expired on 19 April 1999. The term of Jose Frondoso who withdrew as a complainant, and complainants' Africa and Maramara also expired in April of this year, 2000. As stated earlier, there is a difference between the term of a director and his tenure. The former is fixed while the latter extends until his successor is duly elected and qualified. In this case the complainants' tenure as directors subsists despite the expiration of their terms, especially since no one has been duly elected to succeed them. Defendants argue that many or a majority of the stockholders support the removal of complainants as directors. It may be so, but the means employed for removal must be consistent with the law. This is why the maxim "the end does not justify the means" has found universal acceptance in jurisdictions that are committed to the rule of law. AIcaDC Further, in the eyes of the law, whether a majority indeed has acted may only be measured by the measurement prescribed in the law, in this case, Section 28 of the Corporation Code and Section 34 of the RSA Rules, among others. This office therefore could only adhere to the rule of law and cannot possibly conclude that the majority indeed had spoken. Otherwise, as in effect suggested by defendants, any act can be taken, even if illegal, to assume control of a corporation, and thereafter seek a meeting later under a less than clearly legal environment or premises, to ratify or legalize what was clearly an illegal act. Under such scenarios, chaos would always be imminent or present. After all the proceedings in this case which was filed in December 1997, this Hearing Officer believes it necessary to reiterate his previous finding in his Order dated June 10, 1998, as follows: "The argument of fait accompli which defendants suggest would render a case moot and academic is not one that may be summarily applied outside of the labor cases cited by them. In Patricio Tan vs. COMELEC, 242 SCRA 727, the Supreme Court held thus: "It is illogical to ask that this Tribunal be rendered blind and deaf to protests on the ground that what is already done is done. To such untenable argument the reply would be that, this so, the court, nevertheless, still has the duty and right to correct and rectify the wrong brought to its attention. xxx xxx xxx The argument of fait accompli, viz. that the railroaded plebiscite of January 3, 1996 was held and can no longer be enjoined and that the new province of Negros del Norte has been constituted, begs the issue of invalidity of the challenged act. This Court has always held that it does "not look with favor upon parties racing to beat an injunction or restraining order which they have reason to believe might be forthcoming from the Court by virtue of the filing and pendency of the appropriate petition therefor. Where the restraining order or preliminary injunction are found to have been properly issued, as in the case at bar, mandatory writs shall be issued by the court to restore matters to the status quo ante." (Banzon v. Cruz, 45 SCRA 475, 506 [1972]). Where, as in this case, there was somehow a failure to properly issue the restraining order stopping the holding of the illegal plebiscite, the Court will issue the mandatory writ or judgment to restore matters to the status quo ante . . ." In Acanto vs. Alger, SEC Case No. 3471 and 3472 (August 24, 1989) this Commission explained: "While it may be true that the acts which have already been accomplished and/or consummated can no longer be enjoined by preliminary injunction, as the acts sought to be enjoined have become fait accompli, yet this is only so, if at the time of the filing of the petition such act had already been accomplished and/or consummated. It does not apply to acts which have not been accomplished at the time when the petition is filed, like this case filed by Capague group against the Acanto group praying for the enjoining of the Acanto group from taking over the management of the corporation, when at the time of the filing, the Acanto group was not yet in management of the corporation. "Firstly, there is no law that prohibits the continuation of the hearing on the injunction incident up to its resolution even if the alleged acts sought to be enjoined had already been accomplished or consummated, which in this instant case the Commission has no knowledge of, and secondly, the acts sought to be enjoined are basically continuing i.e. in the corporate functions and powers of the YMCA of Iloilo, Inc., which to our mind, will still be within the ambit of the order dated January 12, 1989." DHcTaE WHEREFORE, in view of the foregoing considerations this Office, through the undersigned hearing Officer, hereby declares as follows: (1) The supposed Special Stockholders' Meeting of December 17, 1997 was prematurely or invalidly called by the defendants. It therefore failed to produce any legal effects and did not effectively remove complainants as directors of the Makati Sports Club, Inc. (2) The April 20, 1998 meeting was not attended by a sufficient number of valid proxies. No quorum could have been present at the said meeting. No corporate business could have been validly completed and/or transacted during the said meeting. Further, it was not called by the validly elected Corporate Secretary Victor Africa nor presided over by the validly elected president Jose A. Bernas. Even if the April 20, 1998 meeting was valid, it could not ratify the December 17, 1997 meeting because being a void meeting, the December 17, 1997 meeting may not be ratified. (3) The April 1998 meeting was null and void and therefore produced no legal effect. (4) The April 1999 meeting has not been raised as a defense in the Answer nor assailed in a supplemental complaint. However, it has been raised by defendants in a manifestation dated April 21, 1999 and in their position paper dated April 8, 2000. Its legal effects must be the subject of this Decision in order to put an end to the controversy at hand. In the first place, by defendants' own admission, the alleged attendance at the April 1999 meeting amounted to less than 2/3 of the stockholders entitled to vote, the minimum number required to effect a removal. No removal or ratification of a removal may be effected by less than 2/3 vote of the stockholders. Further, it cannot ratify the December 1997 meeting for failure to adhere to the requirement of the By-laws on notice as explained in paragraph (2) above, even if it was accompanied by valid proxies, which it was not. (5) The defendants, their agents, representatives and all persons acting for and conspiring on their behalf, are hereby permanently enjoined from carrying into effect the resolutions and actions adopted during the 17 December 1997 and April 20, 1998 meetings and of the Board of Directors and/or other stockholders' meetings resulting therefrom, and from performing acts of control and management of the club. (6) The expulsion of complainant Jose A. Bernas as well as their public auction of his share is hereby declared void and without legal effect, as prayed for. While it is true that defendants were not restrained from acting as directors during the pendency of this case, their tenure as directors prior to this Decision is in the nature of de facto directors of a de facto Board. Only the ordinary acts of administration which defendants carried out de facto in good faith are valid. Other acts, such as political acts and the expulsion or other disciplinary acts imposed on the complainants may not be appropriately taken by de facto officers because the legality of their tenure as directors is not complete and subject to the outcome of this, case. TEacSA (7) No awards for damages and attorney's fees. SO ORDERED. City of Mandaluyong, Philippines. May 9, 2000. (SGD.) MALTHIE G. MILITAR Hearing Officer