Boardroom battles

Under Philippine Corporate Laws, a meeting, regardless of whether it is of stockholders, members, directors, trustees, or managers, must comply with certain requirements in order to be valid, namely: (1) the meeting must be held on a date fixed in the by-laws or in accordance with law; (2) prior notice has been sent; (3) the meeting is called by the proper party; (4) it must be held in a proper place; and (5) the quorum and voting requirements must be met.

Of these five requirements, the most essential one is the presence of a quorum, as any act or transaction made during a meeting without a valid quorum is deemed under the law to be without any force or effect. For example, if the members of the board are elected in a meeting without the presence of a valid quorum, the aggrieved party may file an election contest, assailing the validity of the meeting.

No less than Section 52 of the Revised Corporation Code provides that a quorum in stock corporations is based on the number of outstanding voting shares. But in cases where there are disputed and undisputed shares of stock, will the determination of the quorum be limited to those shares of stock that are undisputed? Moreover, will the subsequent conduct of a stockholders meeting and election render an election contest that was previously filed moot?

Answering both questions in the negative, the Supreme Court held in the case of Yabut v. Villongco (G.R. 242353 and 253530, 22 January 2024) that the total outstanding stocks, without distinction, shall be the rubric for determining the presence of a quorum and that a subsequent stockholders meeting and election shall not render moot an election contest considering that the validity of the actions of the officers and board of directors of those covered by the election contest remains to be a justiciable controversy.

In this case, ABC Corporation was founded by Geronima for the purpose of engaging in the real estate business, with 200,000 outstanding capital stock. During Geronima’s lifetime, the shares of stock intended for her six children were equally divided among them, with each child having 32,810 shares.

However, two years prior to Geronima’s death, she purportedly executed a document captioned “Sale of Shares of Stock” unevenly distributing all of Geronima’s 3,140 shares between Group A and Group B. The uneven distribution prompted Group A to file a complaint before the RTC, praying, among other things, that the sale of shares be declared void for being simulated (Nullity Case). Pending resolution of the Nullity Case, several annual meetings were conducted, which were attended only by members of Group B, who were then elected as directors and officers of ABC Corporation.

This prompted Group A to file an election contest, praying that the election of the members of Group B be declared void for the invalid inclusion of the disputed 3,140 shares in the voting. Several annual meetings were also conducted in the succeeding years which resulted in several other election contests between the parties.

Among the issues that reached the Supreme Court was the propriety of the inclusion of the disputed stocks in the determination of the presence of a quorum, as well as the effect of a subsequent annual stockholders meeting and election in a pending election contest.

Anent the issue of the inclusion of the disputed stocks, the Supreme Court emphasized that the total outstanding stocks, without distinction as to disputed or undisputed shares, shall be the rubric for determining the presence of a quorum pursuant to the principle of statutory construction of “ubi lex non distinguit nec nos distinguere debemus” — when the law does not distinguish, we should not distinguish.

Thus, the 200,000 outstanding capital stock of ABC Corporation should be the basis for determining the presence of a quorum, without any distinction.

On the other hand, the Supreme Court also held that an election contest will not be rendered moot by the conduct of a subsequent stockholders’ meetings and election. Ineluctably, an action is considered “moot” when it no longer presents a justiciable controversy because the issues involved had become academic or dead, or when the matter in dispute had already been resolved, and, hence, one was not entitled to a judicial intervention unless the issue was likely to be raised again between the parties.

Such is not the case in an election contest, considering that the validity of the actions of the officers and board of directors of those covered by the election contest remains to be a justiciable controversy.

For more of Dean Nilo Divina’s legal tidbits, please visit www.divinalaw.com. For comments and questions, please send an email to cad@divinalaw.com.