Reyes, Jr. v. Cruz, Jr.

[SEC-SICD * CASE NO. 3282. August 15, 1994.] BENIGNO REYES, JR.,ET AL. , petitioners , vs .RICARDO R. CRUZ, JR.,ET AL. , respondents . D E C I S I O N This is an action for the annulment of unauthorized issuance of shares, annulment of election of directors, mandamus and injunction. In support thereof, petitioners allege in their amended petition, inter alia, that they are the duly certified stockholders of record of the Southern Rizal Institute (Institute) prior to June 1981 up to the present; that as of June 28, 1981, there are 146 stockholders of record of the Institute among whom are individual petitioners herein. The Institute then had a P1 Million authorized capital stock. prLL On June 28, 1981, the annual stockholders meeting of the Institute was held at the instance of the respondents, among other trustees then; that the individual petitioners, however, among others of the 146 stockholders of record as of June 28, 1981, were wilfully and maliciously never notified of said annual meeting by the respondents and thus were involuntarily absent from the same; that on the said meeting, the authorized capital stock of P1,000,000.00 of the Institute was increased to P2,000,000.00 divided into 20,000 shares at a par value, of P100.00 per share. As early as June, 1981, however, and even before the June 28, 1981 annual meeting, the proposed P1 Million increase in capital stock was already offered and issued to new subscribers and selected stockholders of record, among whom are respondents herein; thus before the original authorized capital stock of P1 Million was increased and after the increase of P2 Million was approved, petitioners were already fraudulently and maliciously denied of their pre-emptive right to subscribe to the increase in the capital stock of the Institute in proportion of their stockholdings to their actual prejudice; that after the June 28, 1981 stockholders' meeting, the next annual stockholders meeting was held only on September 28, 1985 at the instance of the respondents; that it was in the September 28, 1985 annual stockholders meeting that petitioners came to first know of the P1 Million increase in capital stock that was approved in the June 28, 1981 stockholders meeting; that petitioners protested and demanded the exercise of their pre-emptive right, to subscribe to said P1 Million increase only to be informed that the P1 Million increase was already fully subscribed by herein respondents and some other persons that, in the same meeting, petitioners vehemently registered their protest to said illegal deprivation of their pre-emptive right which is expressly mandated by law and reserved all their rights to question this fraudulent act of respondents at the appropriate forum. The next annual stockholders' meeting of the Institute were held on December 6, 1986 at the instance of the respondents; that in this meeting the determination of the existence of the quorum was particularly based on the P2 Million capital stock; that the declared quorum was fatally defective since it was still in fraudulent disregard of petitioners' pre-emptive right to subscribe that however, despite the demand, respondents refused to grant the same. The subsequent annual stockholders' meeting of the Institute was held on October 10, 1987 at the instance of the respondents; that despite the objection of the petitioners, respondents proceeded to declare the existence of a quorum based on the P2 Million capital stock as increased; that, thereafter, respondents proceeded to call for the election of trustees which resulted in the illegal election of the respondents as new trustees. In the same October 10, 1987 stockholders' meeting, another increase in the capital stock of the Institute from P2 Million Pesos to P3 Million Pesos was unduly approved at the instance of respondents; that this latest increase further marks respondents' blatant disregard of petitioners pre-emptive right to subscribe; that upon learning about the June 28, 1981 annual stockholders meeting and continuously up to the present, petitioners have been demanding from the respondents their corporate primary right to examine and audit the corporate records and books of accounts of the Institute for the period 1981 up to the present as well as proper accounting thereof; that respondents, however, have continuously refused petitioners said right to the latters prejudice; that respondents arbitrary refusal to allow petitioners to exercise of said corporate right is fraudulent as it continuously works damage not only to the interest of petitioners but more importantly to the financial position of the Institute; that despite repeated demands, respondents refused without valid and justifiable cause to grant petitioners among others, their pre-emptive right to subscribe and their primary right to examine and audit the corporate records and book of accounts of the Institute. LLphil Respondents filed their answer with counterclaim specifically denying the material allegations of the amended petition for being merely conclusions of facts and/or law and aver that the annual stockholders' meeting held on June 28, 1981 was in accordance with the by-laws of the Institute and could not have been called at the instance of the respondents; that the increase in the capital stock were offered to the stockholders of record, including the individual petitioners, however, they neglected and/or failed to avail of their pre-emptive right to the said increase, paving the way to the entry of new subscribers. Moreover, the said increase was approved on June 28, 1981 and was also subsequently confirmed and/or ratified in another stockholders meeting called for the purpose on September 28, 1985 wherein all the stockholders of record including the individual petitioners were duly notified and/or participated thereat and that petitioner Renato Reyes was even nominated and run for the vacant position as trustee but lost in the said election and therefore, the petitioners who were present and were duly represented in the said stockholders meeting are considered to have ratified and/or confirmed the said increase in the capital stock and/or are now estopped from questioning the same and deemed to have waived their pre-emptive right to subscribe to the P1 Million increase; that nevertheless, the board of trustees and the stockholders of the Institute duly approved a resolution during a meeting called for that purpose as to the issuance of shares of stock in favor of any stockholder who failed to exercise his/her pre-emptive right corresponding to the increase of the capital stock of P1 Million to P2 Million and the same to be issued from subsequent issuance of shares of stock. Conformably, the board of trustees and stockholders of the Institute, passed a resolution during the annual stockholders' meeting held on October 10, 1987 granting stockholders of record who failed to exercise their pre-emptive right to subscribe to the shares, in the increase of the capital stock from P2 Million to P3 Million. Respondents further contend that the of P1 Million increase was duly approved on June 28, 1981 and was confirmed and ratified during the stockholders' meeting held on September 28, 1985, and the same was valid and legal for all intents and purposes; that all the stockholders of record as of the date of increase were duly notified and/or were in fact present or duly represented including the individual petitioners who were present and/or represented by petitioner Renato Reyes. Moreover, respondents assert that the stockholders' meeting held on December 6, 1986 was in accordance with the by-laws; that the P2 Million increase in capital stock was the proper basis for a quorum, since the said increase was duly approved by the Securities and Exchange Commission. Likewise, that the stockholders meeting held on October 10, 1987 was in accordance with the by-laws of the Institute and the subsequent election of the board of trustees was in accordance with law and the individual petitioners where in fact present and/or represented including petitioner Renato Reyes who was nominated and lost in the said election and therefore estopped from questioning the election and other proceedings thereon that the said stockholders meeting as well as the election of the board of trustees and/or proceedings are valid contrary to the claim of the petitioners. Besides, that no proper and/or adequate demands were made upon the respondent Institute or the respondents for the examination and audit of the corporate books of accounts and that all books of accounts and other records are available for examination and audit upon proper and adequate notice to the respondents that proper accounting and dissemination thereof are being released annually to the stockholders of record during every annual stockholders meeting. On August 31, 1990, an order was issued granting petitioners application for injunctive relief, enjoining the Corporate and Legal Department of this Commission from further taking any action concerning the approval of the second increase of the authorized capital stock of Southern Rizal Institute from P2 Million to P3 Million during the pendency of the case. In the instant case, petitioner are praying among others, that respondents be ordered to allow petitioners to exercise their pre-emptive right to subscribe to the original P1 Million increase in capital stock and to annul the said increase to the extent that respondents had prejudiced the pre-emptive right of the petitioners. It appears that the subject increase of capital stock of the Institute from P1,000,000.00 to P2,000,000.00 was approved by this Commission on August 14, 1986 (Exhibit "12"),Pursuant to the Examiner's Report (Exhibit "D") submitted by Dolores T. Osido of the Examiner's and Appraisers Department of this Commission, she reported that sometime in June 28, 1981 a Joint Annual Stockholders and Board of Trustees meeting was held for the purpose of considering among others, the proposed increase of the authorized capital stock of the Institute from P1,000,000.00 to P2,000,000.00 divided into 20,000 shares with a par value of P100.00 per share. The said increase in capital stock was unanimously adopted and approved by the stockholders present holding more than (2/3) of the outstanding capital stock and pursuant to the special stockholders meeting held on September 28, 1985 and special board of trustees meeting held on October 11, 1985, a resolution was passed and adopted granting the stockholder's of record as of August 1, 1985 who failed to subscribe to the increase of capital stock from P1,000,000.00 to P2,000,000.00 a pre-emptive right to subscribe to the unissued shares of the company's capital stock corresponding to the amount of shares to which they were entitled in the said increase in capital stock. (Exhibit "I"). It is admitted by the petitioners that they first came to know of the P1 Million increase in capital stock during the September 28, 1985 annual stockholders' meeting. The minutes of the meeting on September 28, 1985 (Exhibits "F" and "I", respectively) disclosed that the petitioners including Renato Reyes attended and participated on that meeting. Under item No. 4, of the said minutes, the stockholders confirmed and/or ratified the increase of the capital stock of the Institute from One Million (P1,000,000.00) Pesos to Two Million (P2,000,000.00) Pesos. It was also during this meeting that a special election of one director to take the place of the late Chairman of the Board Mr. Ricardo Cruz, Sr. was taken up pursuant to Section 29 of the Corporation Code. Petitioner Renato Reyes and respondent Ricardo Cruz, Jr. were the only nominees. The stockholders voted respondent Ricardo Cruz, Jr. to fill up the vacant position. In fact, under item No. 7 of said minutes, petitioner Renato Reyes moved that the next annual stockholders' meeting be held on or before December 31, 1985 or immediately after the increase of capital stock and the amended by-laws have been approved by the SEC. The minutes also show that the meeting was attended by Atty. Juanito B. Almosa, Jr. as SEC observer. A perusal of the said minutes disclosed that petitioners never questioned the subject increase of capital stock nor demanded their pre-emptive right. Petitioners are also questioning the meetings held on December 6, 1986 and October 10, 1987, alleging that the quorum based on the P2 Million increase was fatally defective since it was still in fraudulent disregard of their pre-emptive right. The meeting on December 6, 1986 was again attended by petitioners Renato Reyes and Atty. Elpidio Jamora (proxy for a portion of the shares of petitioner Renato Reyes).The Secretary Atty. Diego Untalan certified that out of the P2 Million outstanding capital stock of the corporation which is 20,000 shares, 19,656 were present, and are qualified to participate and vote in the meeting. After the meeting was called to order by the President, Atty. Elpidio Jamora, Jr. asked the Secretary the basis of the determination of the quorum. He was informed that it was based on the P2 Million outstanding capital stock as approved by the SEC. Further, under item (e) of the minutes of said meeting, he inquired whether his principal Renato Reyes was given the right of pre-emption as far as the additional P1 Million capital stock as approved by the SEC. It was explained to him that as per resolution, stockholders may avail of their pre-emptive right on subsequent issues. Likewise, under Item (G) of the said minutes petitioner Renato Reyes suggested that the matter be referred to SEC since he will question the propriety of the results of the election if it will be based on the P2 Million outstanding capital stock. On the issue of quorum, we are of the opinion and so holds that since the subject increase of capital stock from P1 Million to P2 Million pesos was approved by this Commission on August 14, 1986, it necessarily follows that, the quorum must be based on the outstanding capital stock as increased because for all legal intents and purposes the subject increase is valid until declared as null and void. prcd Anent the October 10, 1987 annual stockholders' meeting, the minutes of the said meeting (Exhibit "4") shows that petitioner Renato Reyes was nominated as candidate during the election of the board of trustees of the Institute, but he was not elected based on the certified results of the election. It was also during this meeting that the minutes of the stockholders' meetings held on September 28, 1985 with corrections on item 6; December 6, 1986 and September 26, 1987 were duly approved by the stockholders. Respondents contend that petitioners are now estopped in questioning any and all proceedings not only the meeting on October 10, 1987 but also those held on June 28, 1981 and September 28, 1985, respectively, and they have waived their pre-emptive right to subscribe to the P1 Million increase, however, despite the waiver, the board of trustees and the stockholders of the Institute passed a resolution (Exhibit "1-B") to wit: "RESOLVED, that the corporation confirm and ratify the increase of the authorized capital stock of the corporation from P1 Million to P2 Million previously approved and adopted by stockholders of the corporation in its meeting last June 28, 1981. RESOLVED, FURTHER, that the corporation grant the stockholders of record of the corporation as of August 1, 1985 who failed to subscribe to the increase of capital stock from P1 Million to P2 Million a pre-emptive right to subscribe to the unissued shares of the capital stock of Southern Rizal Institute, Inc. corresponding to the amount of shares to which they are entitled in the said increase in capital stock." The contention on waiver insofar as the petitioners' pre-emptive right is concerned have little merit. On principle, it would seem that the petitioners right to subscribe on the unissued shares can no longer be effected because at that time there were no unissued shares anymore of the Institute's capital stock. The situation of the petitioners has not been changed by the said resolution. Under the facts and circumstances obtaining in this case and so as not to dilute the interest of the petitioners by the subsequent issuance of shares, we are thus inclined to recommend the approval of the second increase from P2 Million to P3 Million pesos in order that the petitioners can exercise their pre-emptive right pertaining to the first increase of capital from P1 Million to P2 Million and their pre-emptive right to the second capital increase from P2 Million to P3 Million. LexLib As to the annulment of the increase of capital stock from P1 Million to P2 Million considering that the same had already been approved by the Commission and so as not to prejudice the rights of innocent third parties, we are constrained to uphold its validity. On the issue of mandamus to allow petitioners to examine the corporate books of the Institute, the same is impressed with merit. The right of `the stockholder to inspect the corporate books/records is provided in Section 74 of the Corporation Code which states that: "SECTION 78. n . . . The records of all business transactions of the corporation and the 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." The right of petitioners therefore to inspect the corporate records of the Institute is very broad in scope, limited only by the time and place of inspection and the purpose thereof. The law is explicit that the inspection be done "at reasonable hours on business days".Furthermore, the inspection should be made at the principal office of the corporation. The petitioners have been demanding from the respondents their right to examine the corporate records and books of account for the period 1981 up to the filing of the petition. On the other hand, respondents contend that they are not denying the required inspection, provided that the same is reasonable and not intended to harass the respondent board of trustees or officers. In Gokongwei vs. SEC, G.R. No. L-45911, April 11, 1979, it was held . . . "that a stockholder's purpose in examining the corporate records to be legitimate must be one which is germane to his interest as a stockholder and not contrary to the interest of the corporation". In the case at bar, it cannot be said that the insistence of the petitioners to inspect the corporate records are for purposes which are far removed from their interest as stockholders or at odds with the interest of the Institute. The records do not at all show that petitioners' purpose in demanding an inspection of the corporate records are not legitimate. With regard to damages being claimed by the petitioners, the Commission in the case of G.R. No. L-45911, April 11, 1979 is not empowered to award such, other than the imposition of fine and imprisonment under Section 56 of the Corporation Code of the Philippines as amended. Likewise, respondents counterclaim is hereby denied. WHEREFORE, judgment is hereby rendered as follows: 1. Declaring as valid the increase of capital stock of the Institute from P1 Million to P2 Million pesos. 2. Declaring as valid the annual stockholders' meeting of the Institute held on September 28, 1985, December 6, 1986 and October 10, 1987. 3. Declaring as valid all acts of the respondents as trustees of the Institute during the period of their assumption of the position and/or election of the new trustees on October 10, 1987. 4. Commanding the respondents to allow petitioner or their duly authorized representatives to inspect, examine and copy the corporate records requested in the petition at a reasonable hours during business days at the principal office of the Institute. 5. Lifting the writ of the preliminary injunction for the approval of the second increase from P2 Million to P3 Million pesos, and directing the respondents to allow the petitioners to exercise their pre-emptive right pertaining to the first increase of capital stock from P1 Million to P2 Million and to the second increase from P2 Million to P3 Million. LibLex NO COSTS. SO ORDERED. (SGD.) ENRIQUE L. FLORES, JR. Hearing Officer n Note from the Publisher: Copied verbatim from documents obtained directly from the Securities and Exchange Commission.