Case Summary (G.R. No. 26743)
Relevant Dates and Procedural History
Key events: MSCOC-called Special Stockholders’ Meeting on 17 December 1997 (resulting in the removal of the Bernas Group and election of the Cinco Group); public auction and sale of Bernas’s shares (early 1998); Annual Stockholders’ Meetings on 20 April 1998, 19 April 1999 (SEC-supervised) and 17 April 2000 (each containing various ratifications); SICD decision of 9 May 2000 nullifying the December 1997 meeting and subsequent acts; SEC En Banc decision of 12 December 2000 reversing the SICD; Court of Appeals decision of 28 April 2003 holding the December 1997 special meeting invalid but validating most acts taken at the annual meetings; Court of Appeals resolution of 27 April 2004 denying reconsideration; consolidated petitions for review filed in the Supreme Court, which rendered the final disposition affirmed by the appellate court.
Applicable Law and Authority
Primary statutory provisions and rules applied: Section 28 (Removal of directors) and Section 50 (Regular and special meetings) of the Corporation Code; Section 23 (board powers) and Section 51 (validity of meetings when all stockholders present) are doctrinally relevant. MSC bylaws invoked: Section 8 (Annual Meetings), Section 10 (Special Meetings), Section 25 (Secretary), Section 14 (staggered terms), Section 34(a) (discipline/expulsion). Administrative authority referenced: Section 6 of PD No. 902-A (SEC power to compel officers to call meetings). The Supreme Court applied the law in the context of the 1987 Philippine Constitution (decision date post-1990).
Central Facts
Stockholders representing at least 100 shares requested the MSCOC to call a special meeting to remove the incumbent Bernas Group amid alleged mismanagement. The MSCOC issued the notice and held a special meeting on 17 December 1997; the Bernas Group was removed and the Cinco Group elected. The newly installed board investigated and expelled Jose A. Bernas and sold his shares at public auction. The Bernas Group filed administrative/investigatory proceedings with the SEC alleging the special meeting was improperly called because only the corporate secretary, on order of the president or on written demand of stockholders holding a majority of outstanding capital stock, may call a special meeting for removal under Section 28 of the Corporation Code. Subsequent annual meetings (1998, 1999, 2000) ratified the December 1997 meeting and its consequences, though the 1999 meeting was held under SEC supervision.
Issues Presented
- Whether the Court of Appeals erred in ruling that the 17 December 1997 Special Stockholders’ Meeting was invalid. 2. Whether the Court of Appeals erred in declining to nullify the Annual Stockholders’ Meetings of 20 April 1998, 19 April 1999, and 17 April 2000.
Court’s Legal Analysis — Authority to Call Meetings and Fiduciary Structure
The Court emphasized that corporate powers are exercised through the board and duly authorized officers, and corporate by-laws are the corporation’s internal law. Section 28 of the Corporation Code prescribes the specific procedure for special meetings to remove directors: a special meeting for removal “must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock,” with alternative procedures only if the secretary fails or refuses. The MSC by-laws restrict special meeting calls to the President, the Board, or upon written request of stockholders holding not less than 100 shares. The MSCOC was not vested by law or by MSC bylaws with authority to call such a meeting. Because the special meeting was called by persons lacking authority, the call was a substantive defect affecting the meeting’s legality.
Court’s Legal Analysis — Void vs. Voidable Acts and Ratification
The Court applied the legal distinction between illegal acts (void ab initio) and ultra vires acts (voidable but ratifiable). An act contrary to law or the by-laws that goes to the authority to perform it is treated as void. The December 1997 meeting was held by persons not authorized to call it; that defect struck at the authority of those who made the call and rendered the meeting legally ineffective. Accordingly, the resulting removal, election, expulsion, and auction were void and could not be validated by later ratification. The Court rejected the argument that subsequent shareholder ratification could cure the substantive infirmity of an initially void act.
Court’s Analysis — SEC Supervision, Annual Meetings, and De Jure/De Facto Status
The Court found the 20 April 1998 annual meeting valid under MSC bylaws (Section 8), and the 19 April 1999 meeting valid and supervised by the SEC pursuant to its regulatory powers, which gave those meetings and their acts (except ratifications of the void December 1997 incidents) validity. The SEC-supervised meeting created a presumption that officers elected therein were de jure officers, able to exercise ordinary corporate functions. The Court distinguished the circumstances here from cases where de facto officership validated acts vis-à-vis third parties (for example, elections effected by the voting of sequestered government shares); the Cinco Group could not justify the void expulsions and sale of shares by invoking de facto officership. The Court noted Section 50/PD 902-A provide means to seek SEC intervention when the proper officer refuses to call a meeting, but the MSCOC did not follow that remedy.
Holding and Disposition
The Supreme Court affirmed the Court of Appeals. The December 17, 1997 Special Stockholders’ Meeting was declared null and void for having been improperly called by the MSCOC; the expulsion of Jose A. Bernas and the public auction and sale of his shares were void ab initio. Ratifications of those specific acts at the annual meetings of April 1998, April 1999, and April 2000 are likewise void. All other actions taken by the Cinco Group and by stockholders during the 1998, 1999, and 2000 annual meetings, including the election of directors after the Bernas Group’s term had expired, were declared valid. The consolidated petitions were denied and the Court of Appeals’ decision and resolution were affirmed.
Separate Concurring Opinion (Perlas-Bernabe, J.)
Justice Perlas-Bernabe concurred in the result that the December 1997 m
Case Syllabus (G.R. No. 26743)
Case Caption, Report and Dates
- Reported at 762 Phil. 386, First Division, G.R. Nos. 163356-57 and 163368-69.
- Decision penned by Justice Perez; date of Supreme Court decision: July 01, 2015.
- Case arises from consolidated petitions for review on certiorari from Court of Appeals decision dated 28 April 2003 and resolution dated 27 April 2004 in CA-G.R. SP No. 62683.
Parties and Roles
- Petitioners in G.R. Nos. 163356-57 (the "Bernas Group"): Jose A. Bernas, Cecile H. Cheng, Victor Africa, Jesus Maramara, Jose T. Frondoso, Ignacio T. Macrohon, Jr., and Paulino T. Lim — serving as individual directors and on behalf of the Board of Directors of Makati Sports Club, Inc. (MSC).
- Petitioners in G.R. Nos. 163368-69 (the "Cinco Group"): Jovencio F. Cinco, Ricardo G. Librea and Alex Y. Pardo — members/stockholders elected as directors during the 17 December 1997 Special Stockholders' Meeting.
- Respondents include numerous MSC stockholders and officers listed in the caption; MSC is the domestic corporation at issue.
Factual Background
- Nature of MSC:
- Domestic corporation organized under Philippine law for social, cultural, recreational and athletic activities among members.
- Circumstances leading to the contested meeting:
- Allegations and rumors of anomalies in corporate fund handling prompted the Makati Sports Club Oversight Committee (MSCOC), composed of past presidents, to demand resignation by the Bernas Group.
- Stockholders representing at least 100 shares requested MSCOC's assistance to call a special stockholders' meeting to remove incumbent officers and elect new ones.
- Calling and conduct of 17 December 1997 Special Stockholders' Meeting:
- MSCOC called the Special Stockholders' Meeting and sent notices to stockholders stating time, place and purpose.
- The Bernas Group failed to secure an injunction before the SEC; the meeting proceeded.
- Result: Removal of Bernas Group from office; election of the Cinco Group and others as directors and officers.
- Post-meeting corporate actions:
- The newly seated Board (Cinco Group) conducted an investigation, found Bernas guilty of alleged irregularities, resolved to expel him, and ordered public auction of his shares.
- Notice requirements were complied with; Bernas's shares were sold for P902,000.00 to the highest bidder.
- Subsequent annual meetings:
- Annual Stockholders' Meeting held on 20 April 1998 pursuant to MSC By-laws (SEC. 8) attended by 1,017 stockholders representing 2/3 of outstanding shares; majority approved, confirmed and ratified acts of 17 December 1997 meeting including removals and elections.
- SEC en banc supervised the 1999 Annual Stockholders' Meeting (held 19 April 1999); stockholders again approved, ratified and confirmed holding of the 17 December 1997 meeting.
- 2000 Annual Stockholders' Meeting (17 April 2000) likewise ratified conduct of the 17 December 1997 meeting.
Procedural History in the Administrative and Appellate Fora
- SICD (Hearing Officer) Decision dated 9 May 2000 in SEC Case No. 12-97-5840:
- Declared the 17 December 1997 Special Stockholders' Meeting and April 1998 and April 1999 Annual Meetings invalid.
- Declared expulsion of Bernas and auction of his shares void.
- Permanently enjoined the Cinco Group and their agents from carrying into effect resolutions adopted during 17 December 1997 and April 20, 1998 meetings and from performing acts of control and management of the club.
- SEC En Banc Decision dated 12 December 2000:
- Reversed the SICD findings and validated the holding of 17 December 1997 Special Stockholders' Meeting and the Annual Meetings of 20 April 1998 and 19 April 1999.
- Court of Appeals Decision dated 28 April 2003 (CA-G.R. SP No. 62683):
- Declared 17 December 1997 Special Stockholders' Meeting invalid for being improperly called.
- Affirmed validity of actions taken during Annual Stockholders' Meetings of 20 April 1998, 19 April 1999 and 17 April 2000, but invalidated ratifications of removals and sale of Bernas's shares.
- Court of Appeals Resolution dated 27 April 2004:
- Denied motion for reconsideration.
- Consolidated Petitions for Review on Certiorari filed with the Supreme Court by both Bernas Group and Cinco Group.
Issues Presented to the Supreme Court
- Whether the Court of Appeals erred in ruling that the 17 December 1997 Special Stockholders' Meeting is invalid.
- Whether the Court of Appeals erred in failing to nullify the holding of the Annual Stockholders' Meetings on 20 April 1998, 19 April 1999 and 17 April 2000.
Governing Statutory and By-law Provisions Relied Upon
- Corporation Code:
- Section 28 — Removal of directors or trustees: sets vote requirement (2/3 of outstanding capital stock), where removal may occur (regular or special meeting called for the purpose), and who must call a special meeting for removal (secretary on order of president or on written demand of stockholders representing at least a majority of outstanding capital stock); provides procedure where secretary refuses or no secretary exists; notice requirements.
- Section 23 — Board of Directors: corporate powers generally exercised by board; board conducts business and controls property.
- Section 50 — Regular and special meetings: SEC may, upon petition of a stockholder and showing good cause, order a petitioning stockholder to call a meeting when there is no person authorized to call it.
- MSC By-laws (Amended):
- SEC. 8 — Annual Meetings: annual meeting held third Monday of April at the Clubhouse; President to render report.
- SEC. 10 — Special Meetings: special meetings called by the President, by the Board of Directors, or upon written request of stockholders representing not less than 100 shares; only matters specified in notice will be taken up.
- SEC. 25 — Secretary: duties include giving notices required by law and by-laws of meetings of the Board and stockholders, certifying quorum, keeping minutes and records, and acting as President in certain absences.
Court's Legal Analysis and Reasoning
- Authority to call meetings:
- By-laws and Corporation Code textually limit authority to call special meetings for removal to President, Board, Secretary acting on order of President, or stockholders representing a majority of outstanding capi