Horacio Q. Alvarez vs. Salome A. Madamba

[SEC-SICD * CASE NO. 3250. March 24, 1988.] HORACIO Q. ALVAREZ , petitioner , vs . SALOME A. MADAMBA, in her capacity as General Manager of Executive Care Services, Inc. , respondent . DECISION This is a petition which prays for an Order to the respondent to bring to this Commission all the corporate books of accounts of the Executive Care Services, Inc. (ECSI, for brevity) covering the period 1978 to the present for inspection and examination of the duly authorized representative of this Commission and of herein petitioner; to pay herein petitioner of the dividends due him for each and every fiscal year, in the event the examination of the books of accounts show earnings for the Company; and for such other reliefs and remedies deemed just and equitable under the premises. LexLib Petitioner, in his petition, alleges inter alia, that he is a stockholder of ECSI having subscribed 500 shares of its authorized capital stock, and having paid the par value of 125 shares of stock; that herein respondent represented herself as the General Manager and duly authorized representative of ECSI; that on August 11, 1987, he, as stockholder, formally requested the President of ECSI to allow him (petitioner), through his group of accountant and bookkeepers, to see and inspect the books of accounts of the company, such as, but not limited to the sales books, cash receipts, cash disbursements, Journals, ledgers and the bank statements of ECSI depository banks from the start of the operation in 1978 up to the present; that on September 10, 1987, he received the report of his accountant, Ma. Corazon A. Malaluan, to the effect that there is really no intention on the part of the management of ECSI, thru herein respondent, to let them examine their books of accounts; and that the refusal of herein respondent to allow herein petitioner, through the latter's accountant and bookkeepers, to see and inspect ECSI's books of accounts is unjustified and unreasonable to the damage and prejudice of petitioner's right, as a stockholder, to know the financial transactions and standing of the company, as well as his right to receive dividends out of the profit/earnings of the company. On October 26, 1987, summons was issued to the respondent, who received the same on even date, requiring the said respondent to file her answer within fifteen (15) days from receipt thereof. On November 11, 1987, respondent filed an Ex-parte Motion for Extension of Time To File Responsive Pleading, requesting for an extension of fifteen (15) days from November 12, 1987, within which to file her responsive pleading, which was granted by the Commission in its Order of November 13, 1987. On December 8, 1987, counsel for the petitioner filed an Ex-parte Motion to Declare respondent in default for her failure to file an answer within the extended period. On December 14, 1987, the Commission, after finding the fact that no answer has been filed by the respondent within the extended period, declared the respondent in default and set the Petitioner's ex-parte presentation of evidence on January 22, 1987 at 2:00 o'clock in the afternoon. During the January 22, 1987 hearing, petitioner Horacio Q. Alvarez testified and presented documentary evidence (Exhibits "A", "A-1", "A-2", "B", "B-1", "B-2", "C", and "C-1"). Based on the evidence presented, the following facts are undisputed: Horacio Q. Alvarez is one of the stockholders of ECSI with a subscription of Fifty Thousand (P50,000.00) Pesos representing Five Hundred (500) shares with the paid-up capital amount of Twelve Thousand Five Hundred (P12,500.00) Pesos. (Exhibits "A", "A-1" and "A-2"). On August 11, 1987, petitioner Alvarez requested through a letter of even date, from the President of ECSI that he be allowed to see and inspect the books of accounts of the Company, such as sales book, cash receipts, cash disbursements, Journal, ledgers and bank statement of ECSI depository banks from the start of the operation in 1978 up to the present. He also asked for a Copy of the Minutes of the stockholders' and directors' meetings for which he was not notified from January, 1986 up to the present (Exhibits "B" & "B-1"). After the president of respondent corporation received the demand letter, petitioner Alvarez sent his accountant and bookkeepers to the said corporation for the inspection of the requested documents. However, his accountants and bookkeepers were refused examination and inspection of the said documents (Exhibit "C"). Hence, this petition. The issues to be resolved in this petition are the following: 1. Whether or not petitioner has the right to inspect and examine the book of accounts and other corporate documents of ECSI; and 2. Corollary thereto, whether or not petitioner is entitled to dividend for each and every fiscal year in the event the examination of the book of accounts show earning for the Company. LLpr On the first issue, the answer is in the affirmative. Under the law, a stockholder has a right to inspect and examine the records of all business transactions and copy excerpts of the minutes of stockholders' and directors' meetings of the Corporation. Thus, Section 74 of the Corporation Code of the Philippines provides: "SECTION 74. Books to be kept; stock transfer agent . Every corporation shall, at its principal office, keep and carefully preserve a record of all business transactions, and minutes of all meetings of stockholders or members, or of the board of directors or trustees, in which shall be set forth in detail the time and place of holding the meeting, how authorized, the notice given, whether the meeting was regular or special, if special its object, those present and absent, and every act done or ordered done at the meeting. Upon the demand of any director, trustee, stockholder or member, the time when any director, trustee, stockholder or member entered or left the meeting must be noted in the minutes; and on a similar demand, the yeas and nays must be taken on any motion or proposition, and a record thereof carefully made. The protest of any director, trustee, stockholder or member on any action or proposed action must be recorded in full on his demand. The records of all business transactions of the corporation and minutes of any meeting shall be open to the inspection of any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense . Any officer or agent of the corporation who shall refuse to allow any director, trustee, stockholder or member of the corporation to examine and copy excerpts from its record or minutes, in accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code : Provided that if such refusal is pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal, and Provided, further, That it shall be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporation's records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand. Stock corporations must also keep a book to be known as the "stock and transfer book", in which must be kept a record of all stocks in the names of the stockholders alphabetically arranged, the installments paid and unpaid on all stock for which subscription has been made, and the date of payment of any installment; a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom made; and such other entries as the by-laws may prescribe. The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent and shall be open for inspection of any director or stockholder of the corporation at reasonable hours on business days. No stock transfer agent or one engaged principally in the business of registering transfer of stocks in behalf of a stock corporation shall be allowed to operate in the Philippines unless he secures a license from the Securities and Exchange Commission and pays a fee as may be fixed by the Commission, which shall be renewed annually: Provided, That a stock corporation is not precluded from performing or making transfer of its own stocks, in which case all the rules and regulations imposed on stock transfer agents, except the payment of a license fee herein provided, shall be applicable." (51 and 32a; P.B. No. 268) (Emphasis supplied) prcd Corporate books and records are-subject to inspection or examination by members or stockholders during reasonable hours on business days. This right of inspection cannot be denied on the mere pretext that the shareholder is at loggerheads with the officers of the Corporation (Veraguth vs. Isabela Sugar Co., Inc., G.R. No. 37064, October 4, 1932, 52 Phil 266). Likewise, a stockholder has also the right to be furnished with yearly financial statements, which shall include a balance sheet as of the end of the last taxable year and a profit or loss statement for said taxable year. "SECTION 75. Right to financial statements . Within ten (10) days from receipt of a written request of any stockholder or member, the corporation shall furnish to him its most recent financial statement, which shall include a balance sheet as of the end of the last taxable year, showing in reasonable detail its assets and liabilities and the result of its operations. At the regular meeting of stockholders or members, the board of directors or trustees shall present to such stockholders or members a financial report of the operations of the corporation for the preceding year, which shall include financial statements, duly signed and certified by an independent certified public accountant. However, if the paid-up capital of the corporation is less than P50,000.00, the financial statements may be certified under oath by the treasurer or any responsible officer of the corporation." (n) The right to financial statement provided for above supplements the time-honored right to examine the books of the corporation at reasonable hours. The fact is the financial statement may be further verified by examination of books of accounts of the corporation. As regards the second issue, the same is not yet justiciable at the moment, because the answer is contingent on the presence of unrestricted retained earnings of subject corporation. If after examination of the books of accounts of each fiscal year will show surplus profits, then petitioner and the other stockholders may be entitled to dividends, if the Board of Directors will declare such dividends on the said surplus profits. Such dividends shall be payable in cash, in property or in stock to all stockholders on the basis of the outstanding stock held by them. Provided, however, that if stock dividends are being issued, such issuance shall also need the approval of the stockholders representing at least two thirds (2/3) of the outstanding capital stock. If, however, after the examination of the books of accounts will show retained surplus profits in excess of one hundred (100%) percent of the paid-in capital stock of the corporation, then the said corporation is compulsorily mandated to declare dividends to petitioner and the other stockholders, except if the non-declaration of dividends is based on the following grounds: 1. When justified by definite corporate expansion projects or programs approved by the board of directors; or 2. When the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not been secured; or 3. When it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is a need for special reserve for probable contingencies. The rule on the declaration of dividends is laid down under Section 43, Corporation Code of the Philippines: "SECTION 43. Power to declare dividends . The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them : Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is a need for special reserve for probable contingencies ." (n) (Emphasis ours) prLL WHEREFORE, premises considered, judgment is hereby rendered directing and/or ordering the respondent to allow the petitioner and/or his duly authorized representatives to inspect and examine all the corporate books of accounts of ECSI covering the period 1978 up to the present during reasonable hours on any business day at the principal office of the Corporation pursuant to Sec. 74 of the Corporation Code of the Philippines. SO ORDERED. (SGD.) JUANITO B. ALMOSA, JR. Hearing Officer