Bernas V Cinco
Bernas V Cinco
Bernas V Cinco
DECISION
PEREZ , J : p
Before us are two consolidated Petitions for Review on Certiorari 1 assailing the
28 April 2003 Decision and the 27 April 2004 Resolution of the Court of Appeals in CA-
G.R. SP No. 62683, 2 which declared the 17 December 1997 Special Stockholders'
Meeting of the Makati Sports Club invalid for having been improperly called but
a rmed the actions taken during the Annual Stockholders' Meeting held on 20 April
1998, 19 April 1999 and 17 April 2000. The dispositive portion of the assailed decision
reads:
WHEREFORE , foregoing considered, the instant petition for review is
hereby GRANTED . The appealed Decision dated December 12, 2000 of the SEC
en banc is SET ASIDE and the Decision dated April 20, 1998 of the Hearing
Officer is REINSTATED and AMENDED as follows:
1. The supposed Special Stockholders' Meeting of December 17, 1997 was
prematurely or invalidly called by the [Cinco Group]. It therefore
failed to produce any legal effects and did not effectively remove
[the Bernas Group] as directors of the Makati Sports Club, Inc.;
2. The expulsion of petitioner Jose A. Bernas as well as the public auction
of his share[s] is hereby declared void and without legal effect;
3. The rati cation of the removal of [the Bernas Group] as directors, the
expulsion of petitioner Bernas and the sale of his share by the
CD Technologies Asia, Inc. © 2019 cdasiaonline.com
defendants and by the stockholders held in their Regular
Stockholders' Meeting held in April of 1998, 1999 and 2000, is void
and produces no effects as they were not the proper party to cause
the ratification;
4. All other actions of the [Cinco Group] and stockholders taken during the
Regular Stockholders' Meetings held in April 1998, 1999 and 2000,
including the election of the [Cinco Group] as directors after the
expiration of the term of o ce of petitioners as directors, are hereby
declared valid;
5. No awards for damages and attorney's fees. 3
The Facts
Makati Sports Club (MSC) is a domestic corporation duly organized and existing
under Philippine laws for the primary purpose of establishing, maintaining, and
providing social, cultural, recreational and athletic activities among its members.
Petitioners in G.R. Nos. 163356-57, Jose A. Bernas (Bernas), Cecile H. Cheng,
Victor Africa, Jesus Maramara, Jose T. Frondoso, Ignacio T. Macrohon and Paulino T.
Lim (Bernas Group) were among the Members of the Board of Directors and Officers of
the corporation whose terms were to expire either in 1998 or 1999.
Petitioners in G.R. Nos. 163368-69 Jovencio Cinco, Ricardo Librea and Alex Y.
Pardo (Cinco Group) are the members and stockholders of the corporation who were
elected Members of the Board of Directors and O cers of the club during the 17
December 1997 Special Stockholders Meeting.
The antecedent events of the meeting and its results, follow:
Alarmed with the rumored anomalies in handling the corporate funds, the MSC
Oversight Committee (MSCOC), composed of the past presidents of the club,
demanded from the Bernas Group, who were then incumbent o cers of the
corporation, to resign from their respective positions to pave the way for the election of
new set of o cers. 4 Resonating this clamor were the stockholders of the corporation
representing at least 100 shares who sought the assistance of the MSCOC to call for a
special stockholders meeting for the purpose of removing the sitting o cers and
electing new ones. 5 Pursuant to such request, the MSCOC called a Special
Stockholders' Meeting and sent out notices 6 to all stockholders and members stating
therein the time, place and purpose of the meeting. For failure of the Bernas Group to
secure an injunction before the Securities Commission (SEC), the meeting proceeded
wherein Jose A. Bernas, Cecile H. Cheng, Victor Africa, Jesus Maramara, Jose T.
Frondoso, Ignacio T. Macrohon, Jr. and Paulino T. Lim were removed from o ce and, in
their place and stead, Jovencio F. Cinco, Ricardo G. Librea, Alex Y. Pardo, Roger T.
Aguiling, Rogelio G. Villarosa, Armando David, Norberto Maronilla, Regina de Leon-
Herlihy and Claudio B. Altura, were elected. 7
Aggrieved by the turn of events, the Bernas Group initiated an action before the
Securities Investigation and Clearing Department (SICD) of the SEC docketed as SEC
Case No. 5840 seeking for the nulli cation of the 17 December 1997 Special
Stockholders Meeting on the ground that it was improperly called. Citing Section 28 of
the Corporation Code, the Bernas Group argued that the authority to call a meeting lies
with the Corporate Secretary and not with the MSCOC which functions merely as an
oversight body and is not vested with the power to call corporate meetings. For being
called by the persons not authorized to do so, the Bernas Group urged the SEC to
declare the 17 December 1997 Special Stockholders' Meeting, including the removal of
CD Technologies Asia, Inc. © 2019 cdasiaonline.com
the sitting officers and the election of new ones, be nullified. CAIHTE
For their part, the Cinco Group insisted that the 17 December 1997 Special
Stockholders' Meeting is sanctioned by the Corporation Code and the MSC by-laws. In
justifying the call effected by the MSCOC, they reasoned that Section 25 8 of the MSC
by-laws merely authorized the Corporate Secretary to issue notices of meetings and
nowhere does it state that such authority solely belongs to him. It was further
asseverated by the Cinco Group that it would be useless to course the request to call a
meeting thru the Corporate Secretary because he repeatedly refused to call a special
stockholders' meeting despite demands and even led a suit to restrain the holding of
a special meeting. 9
Meanwhile, the newly elected directors initiated an investigation on the alleged
anomalies in administering the corporate affairs and after nding Bernas guilty of
irregularities, 10 the Board resolved to expel him from the club by selling his shares at
public auction. 11 After the notice 12 requirement was complied with, Bernas' shares
was accordingly sold for P902,000.00 to the highest bidder.
Prior to the resolution of SEC Case No. 5840, an Annual Stockholders' Meeting
was held on 20 April 1998 pursuant to Section 8 of the MSC bylaws. 13 During the said
meeting, which was attended by 1,017 stockholders representing 2/3 of the
outstanding shares, the majority resolved to approve, con rm and ratify, among others,
the calling and holding of 17 December 1997 Special Stockholders' Meeting, the acts
and resolutions adopted therein including the removal of Bernas Group from the Board
and the election of their replacements. 14
Due to the ling of several petitions for and against the removal of the Bernas
Group from the Board pending before the SEC resulting in the piling up of legal
controversies involving MSC, the SEC En Banc, in its Decision 15 dated 30 March 1999,
resolved to supervise the holding of the 1999 Annual Stockholders' Meeting. During the
said meeting, the stockholders once again approved, rati ed and con rmed the holding
of the 17 December 1997 Special Stockholders' Meeting.
The conduct of the 17 December 1997 Special Stockholders' Meeting was
likewise rati ed by the stockholders during the 2000 Annual Stockholders' Meeting
which was held on 17 April 2000. 16
On 9 May 2000, the SICD rendered a Decision 17 in SEC Case No. 12-97-5840
nding, among others, that the 17 December 1997 Special Stockholders' Meeting and
the Annual Stockholders' Meeting conducted on 20 April 1998 and 19 April 1999 are
invalid. The SICD likewise nulli ed the expulsion of Bernas from the corporation and the
sale of his share at the public auction. The dispositive portion of the said decision
reads:
WHEREFORE, in view of the foregoing considerations this O ce, 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 [the
Cinco Group]. It therefore failed to produce any legal effects and
did not effectively remove [the Bernas Group] as directors of the
Makati Sports Club, Inc.
(2) The April 20, 1998 meeting was not attended by a
su cient 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.
CD Technologies Asia, Inc. © 2019 cdasiaonline.com
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 [the Cinco Group] 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
rst place, by [the Cinco Group's] 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 rati cation 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 [the Cinco Group], 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
the public auction of his share is hereby declared void and without
legal effect, as prayed for. While it is true that [the Cinco Group]
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 [the Cinco Group] 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 [the Bernas
Group] 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.
(7) No awards for damages and attorney's fees. 18
On appeal, the SEC En Banc, in its 12 December 2000 Decision 19 reversed the
ndings of the SICD and validated the holding of the 17 December 1997 Special
Stockholders' Meeting as well as the Annual Stockholders' Meeting held on 20 April
1998 and 19 April 1999. DETACa
It is ineluctably clear that the duciary relation is between the stockholders and
the board of directors and who are vested with the power to manage the affairs of the
corporation. The ordinary trust relationship of directors of a corporation and
stockholders is not a matter of statutory or technical law. 26 It springs from the fact
that directors have the control and guidance of corporate affairs and property and
hence of the property interests of the stockholders. 27 Equity recognizes that
stockholders are the proprietors of the corporate interests and are ultimately the only
beneficiaries thereof. 28 Should the board fail to perform its duciary duty to safeguard
the interest of the stockholders or commit acts prejudicial to their interest, the law and
the by-laws provide mechanisms to remove and replace the erring director. 29
Relative to the powers of the Board of Directors, nowhere in the Corporation
Code or in the MSC by-laws can it be gathered that the Oversight Committee is
authorized to step in wherever there is breach of duciary duty and call a special
meeting for the purpose of removing the existing o cers and electing their
replacements even if such call was made upon the request of shareholders. Needless
to say, the MSCOC is neither empowered by law nor the MSC by-laws to call a meeting
and the subsequent rati cation made by the stockholders did not cure the substantive
in rmity, the defect having set in at the time the void act was done. The defect goes
into the very authority of the persons who made the call for the meeting. It is apt to
recall that illegal acts of a corporation which contemplate the doing of an act which is
contrary to law, morals or public order, or contravenes some rules of public policy or
public duty, are, like similar transactions between individuals, void. 30 They cannot serve
as basis for a court action, nor acquire validity by performance, rati cation or estoppel.
31 The same principle can apply in the present case. The void election of 17 December
1997 cannot be ratified by the subsequent Annual Stockholders' Meeting.
A distinction should be made between corporate acts or contracts which are
illegal and those which are merely ultra vires. The former contemplates the doing of an
act which are contrary to law, morals or public policy or public duty, and are, like similar
transactions between individuals, void. They cannot serve as basis of a court action nor
acquire validity by performance, rati cation or estoppel. Mere ultra vires acts, on the
other hand, or those which are not illegal or void ab initio, but are not merely within the
CD Technologies Asia, Inc. © 2019 cdasiaonline.com
scope of the articles of incorporation, are merely voidable and may become binding
and enforceable when rati ed by the stockholders. 32 The 17 December 1997 Meeting
belongs to the category of the latter, that is, it is void ab initio and cannot be validated.
Consequently, such Special Stockholders' Meeting called by the Oversight
Committee cannot have any legal effect. The removal of the Bernas Group, as well as
the election of the Cinco Group, effected by the assembly in that improperly called
meeting is void, and since the Cinco Group has no legal right to sit in the board, their
subsequent acts of expelling Bernas from the club and the selling of his shares at the
public auction, are likewise invalid.
The Cinco Group cannot invoke the application of de facto o cership doctrine to
justify the actions taken after the invalid election since the operation of the principle is
limited to third persons who were originally not part of the corporation but became
such by reason of voting of government-sequestered shares. 33 In Cojuangco v. Roxas ,
34 the Court deemed the directors who were elected through the voting of government
of sequestered shares who assumed office in good faith as de facto officers, viz.:
In the light of the foregoing discussion, the Court nds and so holds that
the PCGG has no right to vote the sequestered shares of petitioners
including the sequestered corporate shares . Only their owners, duly
authorized representatives or proxies may vote the said shares. Consequently,
the election of private respondents Adolfo Azcuna, Edison Coseteng and
Patricio Pineda as members of the board of directors of SMC for 1990-1991
should be set aside.
However, petitioners cannot be declared as duly elected members of the
board of directors thereby. An election for the purpose should be held where the
questioned shares may be voted by their owners and/or their proxies. Such
election may be held at the next shareholders' meeting in April 1991 or at such
date as may be set under the by-laws of SMC.
Private respondents in both cases are hereby declared to be de facto
o cers who in good faith assumed their duties and responsibilities
as duly elected members of the board of directors of the SMC. They are
thereby legally entitled to emoluments of the o ce including salary, fees and
other compensation attached to the o ce until they vacate the same.
(Emphasis supplied)
Apparently, the assumption of o ce of the Cinco Group did not bear parallelism
with the factual milieu in Cojuangco and as such they cannot be considered as de facto
o cers and thus, they are without colorable authority to authorize the removal of
Bernas and the sale of his shares at the public auction. They cannot bind the
corporation to third persons who acquired the shares of Bernas and such third persons
cannot be deemed as buyer in good faith. 35
The case would have been different if the petitioning stockholders went directly
to the SEC and sought its assistance to call a special stockholders' meeting citing the
previous refusal of the Corporate Secretary to call a meeting. Where there is an o cer
authorized to call a meeting and that o cer refuses, fails, or neglects to call a meeting,
the SEC can assume jurisdiction and issue an order to the petitioning stockholder to
call a meeting pursuant to its regulatory and administrative powers to implement the
Corporation Code. 36 This is clearly provided for by Section 50 of the Corporation Code
which we quote:
Sec. 50. Regular and special meetings of stockholders or members. — . . .
CD Technologies Asia, Inc. © 2019 cdasiaonline.com
xxx xxx xxx
Whenever, for any cause, there is no person authorized to call a meeting,
the Securities and Exchange Commission, upon petition of a stockholder or
member, and on a showing of good cause therefore, may issue an order to the
petitioning stockholder or member directing him to call a meeting of the
corporation by giving proper notice required by this Code or by the by-laws. The
petitioning stockholder or member shall preside thereat until at least majority of
the stockholders or members present have chosen one of their member[s] as
presiding officer.
As early as Ponce v. Encarnacion, etc. and Gapol , 37 the Court of First Instance
(now the SEC) 38 is empowered to call a meeting upon petition of the stockholder or
member and upon showing of good cause, thus:
On the showing of good cause therefore, the court may authorize a
stockholder to call a meeting and to preside thereat until the majority
stockholders representing a majority of the stock present and permitted to be
voted shall have chosen one among them to preside it. And this showing of
good cause therefor exists when the court is apprised of the fact that the by-
laws of the corporation require the calling of a general meeting of the
stockholders to elect the board of directors but the call for such meeting has not
been done. 39
The same jurisprudential rule resonates in Philippine National Construction
Corporation v. Pabion , 40 where the Court validated the order of the SEC to compel the
corporation to conduct a stockholders' meeting in the exercise of its regulatory and
administrative powers to implement the Corporation Code:
SEC's assumption of jurisdiction over this case is proper, as the
controversy involves the election of PNCC's directors. Petitioner does not really
contradict the nature of the question presented and agrees that there is an intra-
corporate question involved. ETHIDa
As aptly observed by the ponencia, the Cinco Group cannot invoke the de facto
o cership doctrine to justify its actions after their invalid election in the December 17,
1997 Meeting, particularly, the expulsion of Bernas from MSC and the sale of his
shares. A de facto o cer is one who acts as such under color of an election or
appointment, but fails being a de jure o cer by some irregularity or failure to qualify as
required by law. 17 Having ruled out the validity of their election either through the
December 17, 1997 Meeting or through the rati cations in the April 20, 1998 and April
19, 1999 Meetings, the Cinco Group cannot be considered as de facto directors of
MSC. As such, they could not have validly expelled Bernas from MSC and sold his
CD Technologies Asia, Inc. © 2019 cdasiaonline.com
shares of stock. More signi cantly, since the de facto doctrine rests on public policy
and justice, the o cial dealings of directors de facto with third persons being
sustained as rightful and valid on the ground of the corporation's continuous
acquiescence to the o cers holding themselves out as having such authority, it is only
available to third persons dealing with corporations. 18 No such third person invoked
the doctrine here.
ACCORDINGLY , subject to the quali cations herein made, I vote to DENY the
consolidated petitions.
Footnotes
1. Rollo (G.R. Nos. 163368-69), pp. 38-78. Rollo (G.R. Nos. 163356-57), pp. 44-99.
2. Id. at 10-35 (G.R. No. 163368-69; Penned by Associate Justice Eugenio S. Labitoria with
Associate Justices Andres B. Reyes, Jr. and Regalado E. Maambong concurring.
3. Id. at 23-24.
4. Id. at 129-130.
5. Id. at 120-127.
6. Id. at 150.
7. Id. at 175-179.
23. Valle Verde Country Club, Inc. et al. v. Africa, 614 Phil. 391, 399-400 (2009).
26. Gokongwei, Jr. v. Securities and Exchange Commission, 178 Phil. 266, 299 (1979).
27. Id.
28. Id.
29. Id.
30. Pirovano, et al. v. De la Rama Steamship Co., 96 Phil. 335, 360 (1954).
31. Id.
32. Id.
On the other hand, Presidential Decree No. 902-A (SEC Reorganization Act) on 11 March
1976, confers upon the SEC, "in addition to (its) regulatory and administrative
functions, original and exclusive jurisdiction to hear and decide cases involving
fraudulent devices or schemes, intra-corporate or partnership disputes, and
controversies in elections and appointments of directors and o cers. Thus, in Philex
Mining Corporation v. Reyes , (No. L-57707, 19 November 1982, 118 SCRA 602, 607),
the Court held "the controversy between the parties being clearly an intra-corporate
one, it is the SEC, as held by it and not respondent Court of First Instance, that has
original exclusive jurisdiction, by express mandate of law."
Pursuant to Republic Act No. 8799 (Securities Regulation Code of 2001) which took effect
on 8 August 2000, the jurisdiction of the SEC to decide cases involving intra-
corporate dispute was transferred to the courts of general jurisdiction and, in
accordance therewith, all cases of this nature, with the exception only of those
submitted for decision, were transferred to the regular courts. See Pascual v. Court of
Appeals, 393 Phil. 497 (2000).
39. Ponce v. Encarnacion, etc. and Gapol, supra note 37 at 85.
42. Gokongwei, Jr. v. Securities and Exchange Commission, supra note 26 at 296.
45. SEC. 8. Annual Meetings. — The annual meeting of stockholders shall be held at the
Clubhouse on the third Monday of April of every year unless such day be a holiday in
which case the annual meeting shall be held on the next succeeding business day. At
such meeting, the President shall render a report to the stockholders of the clubs.
(Rollo (G.R. Nos. 163368-69), p. 112).
46. SEC. 10. Special Meetings. — Special meetings of stockholders shall be held at the
clubhouse when called by the President or by the Board of Directors or upon written
request of the stockholders representing not less than one hundred (100) shares.
Only matters speci ed in the notice and call will be taken up at special meetings.
(Id.).
47. Sec. 50. Regular and special meetings of stockholders or members. — . . . Whenever, for
any cause, there is no person authorized to call a meeting, the Securities and
Exchange Commission, upon petition of a stockholder or member, and on showing of
good cause therefore, may issue an order to the petitioning stockholder or member
directing him to call a meeting of the corporation by giving proper notice required by
this Code or by the by-laws. The petitioning stockholder or member shall preside
thereat until at least majority of the stockholders or members present have chosen
one of their member[s] as presiding officer.
50. Id.
53. Id.
54. Fujitsu Computer Products, Corp. v. Court of Appeals, 494 Phil. 697, 716 (2005).
4. Metropolitan Bank & Trust Company v. Absolute Management Corporation , G.R. No.
170498, January 9, 2013, 638 SCRA 225, 232.
5. See Section 6 of PD 902-A.
8. Id. at 360.
9. Rollo (G.R. Nos. 163368-69), pp. 111-119.
13. MSC's directors each have a term of three (3) years only, expiring on a staggered basis.
See Section 14 of the MSC by-laws; rollo, (G.R. Nos. 163368-69), p. 113.
16. See Section 34 (a) of the MSC by-laws; rollo (G.R. No. 163368-69), p. 118.
17. Villanueva, Philippine Corporate Law, 2010 Edition, p. 316. See also The General Manager,
Phil. Ports Authority v. Monserate, 430 Phil. 832, 846 (2002).
18. Id.