Datu Tagoranao Benito vs. Jamiatul Philippine Al-Islamia, Inc., et al.

[SEC-SICD * CASE NO. 1392. July 11, 1980.] DATU TAGORANAO BENITO , petitioner , vs .JAMIATUL PHILIPPINE AL-ISLAMIA, INC.,ET AL. , respondents . * D E C I S I O N A petition was filed with this Commission on November 18, 1976 alleging, among others, that respondent corporation, originally known as Kamilol Islam Institute, is a corporation registered on December 14, 1962, with an authorized capital stock of P200,000.00 divided into 20,000 shares at a par value of P10.00 each. It was further alleged that at the time of incorporation, the total subscribed capital stock amounted to P80,580.00. On November 25, 1975, a special meeting of the stockholders was called for the purpose of increasing the capital stock of respondent corporation from P200,000.00 to P1,000,000.00 and a corresponding certificate of increase was duly issued by this Commission. This increase of capital stock was alleged by the petitioner as having been made illegally as no notice of the meeting for the proposed increase was ever sent to stockholders of record. LLjur On October 30, 1976, a special meeting of the stockholders of the corporation was held for the purpose of electing the members of the Board of Trustees and the petitioner alleged that contrary to the provisions of the Articles of Incorporation and by-laws of respondent corporation, more than five (5) directors were elected. Petitioner further pleads that he is a registered owner of 745 shares of respondent corporation and this is duly covered by corresponding stock certificates. In addition to these shares, petitioner purchased from Domocao Alonto and Moki-in Alonto, a total of 2,540 shares covered by the following stock certificates, to wit: Issued to Certificate No. No. of Shares Domocao Alonto 223 60 Domocao Alonto 216 60 Domocao Alonto 302 195 Moki-in Alonto 217 2,225 and which stock certificates were duly endorsed to the petitioner. Answer was filed on March 19, 1977 by the respondents, controverting the allegations advanced by the petitioner and raising as special defenses that the alleged petition has no cause of action and that the stock certificates numbered 223, 216, 302, and 217, all of which were alleged to have been sold to the petitioner were, in truth and in fact, only transferred to petitioner as collateral for the loan of Domocao Alonto and Moki-in Alonto in the amount of P10,000.00 from herein petitioner. Petitioner filed his answer to respondents' special defenses on February 18, 1977. Preliminary conference was held on September 19, 1978. Both parties, represented by their counsels, appeared. Despite earnest efforts made by the Commission, no amicable settlement was reached by the parties during the preliminary conference. The issues raised in this case, in accordance with the proceedings taken during the preliminary conference, are as follows: a. Was the issuance by the Corporation of its unissued shares of stock and the subsequent increase of its capital stock validly made? b. Was the election of nine (9) members to the Board of Trustees instead of five (5) as provided in the Articles of Incorporation and by-laws valid? c. Can respondent Pangalian Balindong validly refuse to cancel the certificates covering the stocks previously in the names of Domocao Alonto and Moki-in Alonto and to issue new ones in the name of the petitioner? d. Can respondent corporation refuse to render an accounting of funds to stockholders particularly the petitioner? The facts of this case as borne out by the records are as follows, in relevance to the four (4) issues submitted for resolution before this Commission: On February 6, 1959, the Articles of Incorporation of respondent corporation (originally KAMILOL ISLAM INSTITUTE) was filed with the Securities and Exchange Commission and approved on December 14, 1962. The corporation has an authorized capital stock of P200,000.00 divided into 20,000 shares at a par value of P10.00 each and 8,058 shares worth P80,580.00 were subscribed and fully paid for. Petitioner Tagoranao Benito subscribed to 460 shares worth P4,600.00. On October 28, 1975, the respondent corporation filed a certificate of increase of its capital stock from P200,000.00 to P1,000,000.00. It is indicated in said certificate that P191,560.00 worth of shares were represented in the stockholders' meeting held on November 25, 1975 during which the increase was approved. In other words, P110,980.00 worth of shares were subsequently issued by the corporation from the unissued portion of the capital stock. Of the increased capital stock, P160,000.00 worth of shares were subscribed and P40,000.00 were paid-up by three (3) individuals, namely Mrs. Fatima A. Ramos, Mrs. Tarhata A. Lucman and Mrs. Moki-in Alonto. The first issue centers on whether there was a valid issuance of the unissued shares of the corporation. Petitioner claims that the subsequent issuance of 11,098 shares worth P110,980.00 was illegal because the same was made without notice to the stockholders and, therefore, they were prevented from exercising their pre-emptive right. Petitioner further contends that even if there was notice, the issuance would still be void because there is no proof that the stockholders expressly waived their pre-emptive right. On the other hand, respondents alleged that the remaining unsubscribed capital stock were issued to stockholders, including petitioner, as payment for honoraria in their capacity as members of the Board of Trustees, and as payment for leaves of school officials and for books and office furniture. The Commission feels that the questioned issuance of the unsubscribed portion of the capital stock worth P110,980.00 is not invalid even assuming that it was made without notice to the stockholders as claimed by petitioner. The power to issue shares of stock in a corporation is lodged in the board of directors and no stockholders' meeting is necessary to consider it because additional issuance of shares of stock does not need approval of the stockholders. The by-laws of the corporation itself states that "the board of Trustees shall, in accordance with law, provide for the issue and transfer of shares of stock of the Institute and shall prescribe the form of the certificate of stock of the Institute" (Art. V, Sec. 1). Petitioner bewails the fact that in view of the lack of notice to him of such subsequent issuance, he was not able to exercise his right of pre-emption over the unissued shares However, the general rule is that pre-emptive right is recognized only with respect to new issues of shares, and not with respect to additional issues of originally authorized shares. This is on the theory that when a corporation at its inception offers its first shares, it is presumed to have offered all of those which it is authorized to issue. An original subscriber is deemed to have taken his shares knowing that they form a definite proportionate part of the whole number of authorized shares. When the shares left unsubscribed are later reoffered, he cannot therefore claim a dilution of interest. (Campos and Lopez-Campos Selected Notes and Cases on Corporation L a w, p. 855, citing Yasik V. Wachtel, 25 Del. Ch. 247, 17A. 2d 308 (1941). On the matter of the increased capital stock, petitioner claims that there was no stockholders' meeting on November 25, 1975 during which the said increase was allegedly considered and approved. Petitioner also denies that he received notice of said meeting and that he never attended the same as he was in Jeddah, Saudi Arabia to attend the Mecca pilgrimage, as shown by his documentary evidence (Exhs. "Q"-"Q1+" and "R").Respondents, on the other hand, maintain that such increase of capital stock was in fact approved during the meeting of the stockholders on November 25, 1975. This is allegedly evidenced by the minutes of said meeting (Exh. "4","4-A" and "4-B").Likewise, notices of said meeting were allegedly sent to all stockholders, a copy of the notice having been presented and marked as Exh. "1".A painstaking review of the records of this case as well as the corporate records of the Jamiatul Philippines Al-Islamia, Inc. on file with this Commission reveals the following: A stockholders' meeting, as evidenced by the minutes thereof, (Exh. "4") was held on November 25, 1975 presided over by Mr. Ahmad Domocao Alonto, chairman of the Board of Trustees. Among the many items taken up during the said meeting were the change of name of the corporation from Kamilol Islam Institute, Inc. to Jamiatul Philippines Al-Islamia, Inc. the increase of its capital stock from P200,000.00 to P1,000,000.00 and the increase of the number of its board of trustees from 5 to 9. The increase in capitalization and the change of the name were proposed through an earlier board resolution adopted in 1963 and subsequently approved by the stockholders in a meeting for the purpose in 1971. However, as explained by respondent Tocod Macaraya, the increase in capitalization and the change of the name was not effected because all the records of the school were lost when the school was burned in September, 1972. As it appears, the matter was submitted to the stockholders again on November 25, 1975 where it was again confirmed and approved. By the way, Exhs. "P" and "P-1" of petitioner himself lend evidence to the explanation of Atty. Macaraya. Said exhibits show that as early as 1968, the corporation had already proposed to change its name and increase its capitalization. However, for failure to submit the necessary supporting papers, the said increase and change of name was not effected at the time. LLjur Despite the insistence of petitioner, this Commission is inclined to believe that there was a stockholders' meeting in November 25, 1975 which approved the increase. The petitioner had not sufficiently overcome the evidence of respondents that such meeting was in fact held. What petitioner successfully proved, however, was the fact that he was not notified of said meeting and that he never attended the same as he was out of the country at the time. The documentary evidence of petitioner conclusively proved that he was attending the Mecca pilgrimage when the meeting was held on November 25, 1975. (Exhs. "Q","Q-1, "R",and "S-1").While petitioner doubts the authenticity of the alleged minutes of the proceedings (Exh. "4"),the Commission notes with significance that said minutes contain numerous details of various items taken up therein that would negate any claim that it was not authentic. Another thing that petitioner was able to disprove was the allegation in the certificate of increase (Exh. "E-1") that all stockholders who did not subscribe to the increase of capital stock have waived their pre-emptive right to do so. As far as the petitioner is concerned, he had not waived his pre-emptive right to subscribe as he could not have done so for the reason that he was not present at the meeting and had not executed a waiver, thereof. Not having waived such right and for reasons of equity, he may still be allowed to subscribe to the increased capital stock proportionate to his present shareholdings. Coming now to the second issue; was there a valid election of the 9 members of the Board of Trustees on October 30, 1976? As provided for in the Articles of Incorporation and by-laws of respondent corporation, there were only five (5) members of its Board of Trustees. While it is true that as per minutes of the stockholders' meeting of November 25, 1975, (Exh. "4"), an increase of the number from 5 to nine was confirmed by the stockholders, no certificate of such increase was ever filed with this Commission. As it is now, this Commission has not issued the corresponding certificate of increase of the members of the board of trustees of respondent corporation. The Corporation Law requires that any increase in the number of directors of a corporation should be set forth in a certificate duly signed and sworn to by the president, managing agency, secretary or clerk, or treasurer of the corporation and forthwith filed with the Securities and Exchange Commission. (Sec. 6, par. 6, Corporation Law). This provision makes the increase in the number of directors or members of the board of trustees effective only upon the filing of the certificate of "If the statute providing for a change in the number of directors by the stockholders provides that a transcript of the proceedings shall be filed in the office where the original certificate of incorporation were filed, the change does not take effect until the filing of such transcript in the proper offices, ...".(2 Fletcher, Sec. 276, pp. 40-41) Until the respondent corporation, therefore, had complied with the requirement of filing the certificate with this Commission, the increase is not legally effective and the election of the number of the board of trustees are increased is irregular. It is for this reason that this Commission hereby rules that the election of the 9 members of the board of trustees on October 30, 1976 is legally defective for which reason a new election is imperative. On the third issue of whether respondent Secretary Pangalian Balindong can legally refuse to register the 2,540 shares acquired by petitioner from Domocao Alonto and Moki-in Alonto on the contention that the said shares were only pledged to petitioner, this Commission, hereby rules that he cannot. Contrary to respondent's claim, it is evident from the stock certificates themselves (Exhs. "F", "F-1 ", "G", "G-1 ", "H", and "I" and "I-1") that the shares of stock covered by said certificates were transferred to the petitioner for consideration. These certificates were duly endorsed to the petitioner and delivered to him. The fact that the said certificates were duly endorsed and subsequently delivered to the petitioner negates any pretension that the transaction was merely a pledge and not an absolute transfer. As prescribed in Sec. 35 of the Corporation Law, shares of stock may be transferred by delivery to the transferee of the certificates properly endorsed. There is authority to the effect that title may be vested in the transferee by delivery of the certificates with a written assignment or indorsement thereof (18 C.J.S., 928). Relative to the fourth issue as to whether respondent corporation can be compelled to render an accounting of its financial condition to its stockholders, the Commission rules that it can. As a matter of fact, stock corporations are required by the pertinent rules and regulations of this Commission to submit an annual financial statement not later than April 15th of each year. Failure to file said statement will subject the erring corporation to the corresponding sanction in the form of fines. The filing of this statement is, of course, without prejudice to the right of any stockholder under the Corporation Law to examine the corporate records to see for himself the financial status of the corporation. This is aside from the duty of the president of a corporation in accordance with established corporate practice, to submit a report to the stockholders, including the financial standing of the corporation, during the annual stockholder's meeting. cdll WHEREFORE, in view of the foregoing considerations, this Commission hereby rules: (a) That the issuance by the corporation of its unissued shares was validly made and was not subject to the pre-emptive rights of stockholders, including the petitioner, herein; (b) That there is no sufficient legal basis to set aside the certificate issued by this Commission authorizing the increase in capital stock of respondent corporation from P200,000.00 to P1,000,000.00. Considering, however, that petitioner has not waived his pre-emptive right to subscribe to the increased capitalization, respondent corporation is hereby directed to allow petitioner to subscribe thereto, at par value, proportionate to his present shareholdings, adding thereto the 2,540 shares transferred to him by Mr. Domocao Alonto and Mr. Moki-in Alonto; (c) To direct as it hereby directs, the respondent corporation to immediately cancel Certificate of Stock Nos. 216, 223, 302, all in the name of Domocao Alonto, and Certificate of Stock No. 217, in the name of Moki-in Alonto, upon their presentation by the petitioner and to issue new certificates corresponding thereto in the name of petitioner herein; (d) To direct, as it hereby directs, respondent corporation to religiously comply with the requirement of filing annual financial statements under pain of a more drastic action; (e) To declare, as it hereby declares, as irregular, the election of the nine (9) members of the Board of Trustees of respondent corporation on October 30, 1976, for which reason, respondent corporation is hereby ordered to call a stockholders' meeting to elect a new set of five (5) members of the Board of Trustees, unless in the meantime the said number is accordingly increased and the requirements of the law to make such increase effective have been complied with. It is understood that the said stockholders meeting be called within thirty (30) days from the time petitioner shall have subscribed to the increased capitalization. No pronouncement as to costs. SO ORDERED. (SGD.) LEDOR E. MACALALAG Hearing Officer Footnotes * Decision affirmed by Commission sitting en banc on March 9, 1981.