Case Summary (G.R. No. 208281)
Antecedent Transactions: Share Swap and Unwinding
In 1997–1998 Sinophil entered into a Share Swap Agreement with Metroplex and Paxell under which Metroplex and Paxell transferred 40% of their shareholdings in Legend International Resorts Limited in exchange for a combined 35.5% stake in Sinophil. Sinophil issued 2.41 billion shares to Metroplex and 1.45 billion shares to Paxell (3.87 billion total) in exchange for 46.38 million Legend shares. Metroplex pledged two billion of its Sinophil shares to Union Bank and Asian Bank to secure Legend’s loans. On August 23, 2001, Sinophil and Belle executed an Unwinding Agreement rescinding the Swap Agreement. After unwinding, Metroplex and Paxell could not return 1.87 billion Sinophil shares and two billion remained pledged.
Corporate Actions to Reduce Authorized Capital Stock
Sinophil’s stockholders approved proposals to reduce the company’s authorized capital stock on February 18, 2002; June 3, 2005; and June 21, 2007. The SEC’s Company Registration and Monitoring Department (CRMD) and Corporation Finance Department (CFD) approved reductions in authorized capital stock on March 28, 2006 (a reduction of 1.87 billion shares) and on June 24, 2008 (a further reduction of one billion shares). The reductions were disclosed to the Philippine Stock Exchange on March 29, 2006 and June 30, 2008 respectively.
Petition for Review Before the SEC and Allegations
On July 21, 2008, petitioners (Yaw, Metroplex, Paxell) filed a Petition for Review Ad Cautelam Ex Abundanti before the SEC contesting the CRMD and CFD approvals. Petitioners alleged: (1) they opposed the decrease; (2) they were denied opportunity to be heard by the CFD; (3) required two‑thirds shareholder approval was lacking; (4) the reduction violated the rule that a corporation cannot reduce issued capital unless it has unrestricted retained earnings; (5) the reduction was “selective,” diminishing petitioners’ shareholdings and returning investments of Metroplex and Paxell ahead of other shareholders; and (6) the selective reduction entailed assumption and payment of loans secured by Metroplex and Paxell’s Sinophil shares to the prejudice of Sinophil and its shareholders.
Issues Raised by Petitioners
Petitioners formulated three central issues: (1) whether the CRMD and CFD’s actions authorized a “selective” reduction of issued capital; (2) whether the alleged “selective” reduction complied with legal and procedural requirements and could lawfully cancel and delist the 3.87 billion Sinophil shares of Metroplex and Paxell over petitioners’ objection; and (3) whether the Operating Departments’ actions constituted grave reversible errors or abuse of discretion amounting to lack or excess of jurisdiction warranting nullification.
SEC’s Determination and Order
On February 26, 2009 the SEC denied petitioners’ petition and affirmed the Operating Departments’ approvals. The SEC found that Sinophil’s decrease in authorized capital complied with Section 38 of the Corporation Code and that the equal or unequal reduction of capital stock is a matter among stockholders not subject to court or creditor interference absent grounds. The SEC also denied petitioners’ request for a cease and desist order, concluding petitioners failed to show grave and irreparable danger to the investing public.
Court of Appeals Review and Ruling
The Court of Appeals, in a January 29, 2013 Decision, affirmed the SEC’s Order in toto and denied petitioners’ motion for reconsideration on July 17, 2013, finding no merit in rehashed arguments. The CA held the SEC and its Operating Departments acted within their authority and that the relevant legal standards were satisfied.
Supreme Court’s Central Holding and Disposition
The Supreme Court denied the petition for review on certiorari and application for injunctive relief. The Court held the decrease in Sinophil’s capital stock was legal and SEC approval was proper. The Court applied Section 38 of the Corporation Code as the governing statutory framework, concluding petitioners’ alternative legal grounds (citing Section 13 of RA 8799, SEC opinions, and the Trust Fund Doctrine) did not apply.
Statutory Requirements Under Section 38 and Compliance
Section 38 sets specific prerequisites for any decrease in capital stock: majority board approval, written notice of the proposed diminution and meeting addressed to each stockholder, a two‑thirds (2/3) favorable vote of outstanding capital stock at a duly called meeting, a duplicate certificate signed by a majority of directors and countersigned by the meeting’s chairman and secretary confirming compliance, prior approval of the SEC, and that the decrease not prejudice corporate creditors. The record showed Sinophil submitted a Certificate of Decrease of Capital Stock, Director’s Certificate, Amended Articles of Incorporation, audited financial statements and long form audit reports, lists of creditors with written consents, notice of decrease and affidavits of publication, and held the three stockholders’ meetings where reductions were approved. The SEC’s role was characterized as ministerial: to determine whether the formal requirements of Section 38 were complied with.
Business Judgment Rule and Limits of SEC/Court Intervention
The Court reiterated the business judgment rule: decisions to amend articles (such as decreasing authorized capital) are corporate actions for directors and stockholders, and courts or the SEC should not intrude absent evidence the decisions are unconscionable, oppressive, or so harmful as to destroy minority rights. The SEC lacks power to interpret private contracts among stockholders (e.g., Swap Agreement, Unwinding Agreement, proxies) or adjudicate contractual rights; its function in this context is limit
...continue readingCase Syllabus (G.R. No. 208281)
Parties and their Status
- Petitioners:
- Metroplex Berhad — a corporation in liquidation, organized under the laws of Malaysia, principal office at Kuala Lumpur, Malaysia.
- Paxell Investment Limited — a corporation organized under the laws of Western Samoa, principal office at Kuala Lumpur, Malaysia.
- Individual petitioner Yaw Chee Cheow (Yaw) is identified as a petitioner associated with Metroplex and Paxell.
- Private respondents:
- Sinophil Corporation — a publicly-listed Philippine corporation with principal office at Pasig City.
- Belle Corporation — another publicly-listed Philippine corporation with principal office at Pasig City.
- Public respondents:
- SEC officials named: Director Benito A. Cataran (Head, Company Registration and Monitoring Department — CRMD); Director Justina F. Callangan (Head, Corporation Finance Department — CFD); Asst. Director Ferdinand B. Sales (Head, Corporate and Partnership Registration Division — CPRD); Asst. Director Yolanda L. Tapales (Head, Financial Analysis and Audit Division — FAAD); and other SEC officers (John Does).
- Roles:
- The named SEC officers are alleged to have caused, facilitated, implemented, and approved the actions of the SEC Operating Departments relevant to the case.
Factual Background — Share Swap, Issuance and Pledging of Shares
- In August 1998, Sinophil entered into a Share Swap Agreement with Metroplex and Paxell under which Metroplex and Paxell would transfer 40% of their shareholdings in Legend International Resorts Limited (Legend) for a combined 35.5% stake in Sinophil.
- In their Comment/Opposition, Sinophil and Belle alleged the Swap Agreement was entered into in March 1997 (discrepancy in claimed date).
- Under the Swap Agreement, Sinophil issued:
- 2.41 billion shares to Metroplex; and
- 1.45 billion shares to Paxell;
- totaling 3.87 billion shares issued to the Metroplex Group in exchange for 46.38 million Legend shares transferred to Sinophil’s name.
- Interim pledges:
- Metroplex pledged two billion of its Sinophil shares with Union Bank and Asian Bank to secure Legend’s loans.
Unwinding of Swap and Resulting Share Shortfalls
- On August 23, 2001, Sinophil and Belle executed a Memorandum of Agreement (Unwinding Agreement) with Metroplex and Paxell rescinding the 1998 Swap Agreement.
- After the Unwinding Agreement:
- Metroplex and Paxell were unable to return 1.87 billion Sinophil shares.
- An additional two billion Sinophil shares remained pledged by Metroplex in favor of International Exchange Bank and Asian Bank.
Corporate Actions to Reduce Authorized Capital Stock
- Shareholder approvals:
- February 18, 2002 — shareholders voted to reduce Sinophil’s authorized capital stock.
- June 3, 2005 — another shareholder vote reducing authorized capital stock.
- June 21, 2007 — shareholders again approved a proposal to reduce authorized capital stock by another one billion shares.
- SEC Operating Departments’ approvals and disclosures:
- March 28, 2006 — CRMD and CFD approved the first amendment of Sinophil’s Articles of Incorporation, reducing authorized capital stock by 1.87 billion shares.
- March 29, 2006 — disclosure of the reduction to the Philippine Stock Exchange (PSE).
- June 24, 2008 — CRMD and CFD approved a second amendment further reducing authorized capital stock by one billion shares.
- June 30, 2008 — disclosure of the second reduction to the PSE.
Petition for Review Ad Cautelam Ex Abundanti — Petitioners’ Claims
- Filing:
- July 21, 2008 — Yaw, Metroplex, and Paxell filed the Petition for Review Ad Cautelam Ex Abundanti before the SEC, assailing the approvals by CRMD and CFD.
- Petitioners’ specific allegations:
- They opposed the decrease of the authorized capital stock.
- They were not given the opportunity to be heard by the CFD.
- The reduction was approved despite lacking more than two-thirds (2/3) approval of Sinophil shareholders.
- The decrease violated the legal requirement that a corporation cannot reduce its issued capital unless it has unrestricted retained earnings.
- The decreases involved a “selective reduction” that diminished Yaw’s and other shareholders’ shareholdings and returned Metroplex and Paxell’s investments ahead of Yaw and other shareholders.
- The selective reduction entailed the assumption and payment of loans secured by Metroplex and Paxell’s Sinophil shares, to the prejudice of Sinophil and its shareholders (including Yaw).
- Issues framed by petitioners for resolution:
- Whether CRMD and CFD actions authorized a “selective” reduction of issued capital.
- Whether such “selective” reduction complied with legal and procedural requirements and could lawfully cancel and delist the 3.87 billion Sinophil shares of Metroplex and Paxell over petitioners’ objection.
- Whether CRMD and CFD committed grave reversible errors or abuse of discretion amounting to lack or excess of jurisdiction.
Respondents’ Contentions Before the SEC
- Sinophil and Belle, and certain SEC officers, contended:
- There was full compliance with Section 38 of the Corporation Code by submitting all requirements.
- There is a presumption of regularity in the performance of the public respondents’ duties.
- The SEC operating departments acted within their functions and approvals were procedurally proper.
SEC Proceedings — Issues for Resolution by the SEC
- Two central issues confronted the SEC:
- Whether the decrease of Sinophil’s capital stock was validly allowed by CRMD and CFD.
- Whether the issuance of a cease and desist order (i.e., injunctive relief) was warranted.
SEC Decision (February 26, 2009) — Findings and Disposition
- Disposition:
- The SEC denied the Petition for Review Ad Cautelam Ex Abundanti and essentially affirmed CRMD’s and CFD’s actions approving the decrease in Sinophil’s capital stock.
- Dispositive language: “WHEREFORE, premises considered, the Petition for Review with Prayer for the Issuance of a Cease and Desist Order is DENIED. SO ORDERED.”
- Findings:
- The decrease in capital stock complied with requirements imposed by the Corporation Code, particularly Section 38.
- The equal or unequal reduction of capital stock is a matter solely between stockholders and cannot be enjoined by courts or creditors.
- No basis existed to grant a cease and desist order; petitioners failed to raise valid grounds.
- The grave and irreparable danger to the investing public alleged by petitioners was not present; thus a cease and desist order was inappropriate.
Appeal to the Court of Appeals — Contentions and Ruling
- Petitioners’ alleged errors on appeal:
- SEC committed manifest errors in affirming Operating Departments’ approval of the selective reduction.
- SEC erred in ruling selective reduction complied with legal and procedural requirements.
- SEC erred in denying petitioners’ application for a cease and desist order.
- Court of Appeals’ Decision (January 29, 2013):
- The CA affirmed the SEC’s February 26, 2009 Order in toto and denied petitioners’ appeal: “the petition is DENIED. The assailed Order dated February 26, 2009 of the Securities and Exchange Commission in Case No. EB 07-08-137 is hereby AFFIRMED in toto. SO ORDERED.”
- CA Resolution (July 17, 2013):
- The CA denied petitioners’ motion for reconsideration for lack of merit, noting the motion merely rehashed previously considered arguments.
Petition for Review on Certiorari to the Supreme Court — Issues Raised
- Petitioners’ arguments on review:
- The CA Decision and Resolution should be reversed for being contrary to law and jurisprudence, asserting the CA was not proscribed from reviewing the Operating Departments’ findings and that such findings lack substantial evi