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JOSE A. BERNAS v. JOVENCIO F. CINCO

FACTS:

The case involves a dispute between the Bernas Group and the Cinco Group over the Board of Directors of the Makati Sports Club, Inc. (MSC). The Bernas Group, led by Jose A. Bernas, was originally elected as the Board of Directors of MSC. However, the Cinco Group, claiming to have the majority of shares, called for a Special Stockholders' Meeting on December 17, 1997, wherein they purportedly removed the Bernas Group from the Board and elected their replacements. The Cinco Group also conducted subsequent Annual Stockholders' Meetings in 1998, 1999, and 2000, during which they ratified the actions taken during the December 17, 1997 meeting.

Legal controversies arising from these events resulted in the Securities and Exchange Commission (SEC) supervising the 1999 Annual Stockholders' Meeting. The SEC's subsequent decision declared the December 17, 1997 Special Stockholders' Meeting and the Annual Stockholders' Meetings in 1998 and 1999 as invalid, nullified the expulsion of Bernas from the corporation, and declared the sale of his shares at a public auction void. The SEC ruled that the December 17, 1997 meeting was prematurely called and did not effectively remove the Bernas Group as directors, the April 20, 1998 meeting lacked a quorum and could not ratify the December 17, 1997 meeting, and the April 1999 meeting was also invalid.

The decision of the SEC was appealed to the SEC En Banc, which reversed the findings and validated the holding of the December 17, 1997 Special Stockholders' Meeting and the subsequent Annual Stockholders' Meetings.

Further appeals were made to the Court of Appeals, which declared the December 17, 1997 Special Stockholders' Meeting invalid for improper calling but affirmed the validity of the actions taken during the subsequent Annual Stockholders' Meetings. The Court of Appeals refused to reconsider its decision in a later resolution.

Both parties, the Bernas Group and the Cinco Group, filed separate Petitions for Review on Certiorari before the Supreme Court, disputing the decision of the Court of Appeals. The Bernas Group agrees with the invalidity of the December 17, 1997 Special Stockholders' Meeting but argues for the invalidation of the subsequent Annual Stockholders' Meetings as well.

The case involves the validity of the 17 December 1997 Special Stockholders' Meeting and subsequent Annual Stockholders' Meetings of the Metropolitan Sports Club (MSC). The petitioners argue that the 17 December 1997 meeting is invalid because the meeting was not properly called by the Corporate Secretary and the required notice was not given to the stockholders. They also argue that the subsequent Annual Stockholders' Meetings are invalid because they rely on the holdover principle, which the petitioners contend should be invalidated. On the other hand, the Cinco Group argues that the 17 December 1997 meeting is valid and binding because it was overwhelmingly ratified by the stockholders in subsequent annual meetings and the Corporate Secretary had previously refused to call a special stockholders' meeting despite demand. The main issues for the Court to resolve are the validity of the 17 December 1997 Special Stockholders' Meeting and the subsequent Annual Stockholders' Meetings. The relevant provisions of the Corporation Code and MSC's by-laws regarding the removal of directors, calling and sending of notices for stockholders' meetings, and the role of the Corporate Secretary are cited.

ISSUES:

  1. Whether the MSCOC has the authority to call a special stockholders' meeting.

  2. Whether the MSCOC can exercise corporate powers solely vested in the President or the Board of Directors.

  3. Whether or not the Oversight Committee is authorized to call a special meeting for the purpose of removing the existing officers and electing their replacements.

  4. Whether or not the subsequent ratification made by the stockholders cured the substantive infirmity of the void act.

  5. Whether or not the actions taken by the Cinco Group, including the expulsion of Bernas and the sale of his shares, are valid.

  6. Whether or not the Cinco Group can be considered as de facto officers.

  7. Whether the SEC has the power to compel a corporation to conduct a stockholders' meeting for the purpose of electing members of the board of directors.

  8. Whether a corporation's by-laws regarding the call of meetings should be complied with.

  9. Whether the SEC or the Court of Appeals correctly appreciated the facts and applied the relevant statutory and jurisprudential principles.

  10. Whether the Special Stockholders’ Meeting held on December 17, 1997, and the actions taken therein, were valid.

  11. Whether the expulsion of the Bernas Group and the sale of Bernas’ shares were valid and binding.

  12. Whether the ratification of the removal of the Bernas Group and the sale of Bernas’ shares at the subsequent Annual Stockholders’ Meetings were valid and binding.

RULING:

  1. No, the MSCOC does not have the authority to call a special stockholders' meeting. Only the President or the Board of Directors, as provided in the MSC by-laws, are authorized to call such meetings.

  2. No, the MSCOC cannot exercise corporate powers solely vested in the President or the Board of Directors. The board of directors is the directing and controlling body of the corporation and has the power to control and direct the affairs of the corporation. The Corporation Code provides that a corporation exercises its powers through its board of directors or authorized officers and agents.

  3. The Oversight Committee is not authorized to call a special meeting for the purpose of removing the existing officers and electing their replacements, even upon the request of shareholders.

  4. The subsequent ratification made by the stockholders did not cure the substantive infirmity of the void act.

  5. The actions taken by the Cinco Group, including the expulsion of Bernas and the sale of his shares, are invalid.

  6. The Cinco Group cannot be considered as de facto officers.

  7. Yes, the SEC has the power to compel a corporation to hold a stockholders' meeting for the purpose of electing board members. The SEC's assumption of jurisdiction over the case is proper as it involves an intra-corporate question. Furthermore, the SEC's action is justified by its regulatory and administrative powers to implement the Corporation Code.

  8. Yes, a corporation's by-laws regarding the call of meetings should be complied with. The by-laws of a corporation are its own private laws that substantially have the same effect as the laws of the corporation. Directors must act as a body in a meeting called pursuant to the by-laws, otherwise, any action taken therein may be questioned by an objecting director or shareholder.

  9. The Court affirmed the ruling of the Court of Appeals, declaring the Special Stockholders’ Meeting held on December 17, 1997, as invalid and its actions as void and without legal effect. The Court also nullified the expulsion of the Bernas Group and the sale of Bernas’ shares at the public auction. The subsequent Annual Stockholders’ Meetings, except for the ratification of the removal of the Bernas Group and the sale of Bernas’ shares, were declared valid and binding.

PRINCIPLES:

  • The board of directors is the directing and controlling body of the corporation and exercises the powers provided for under the Corporation Code.

  • The fiduciary relationship between the stockholders and the board of directors is based on the fact that directors have the control and guidance of corporate affairs and property, and are trustees or directors clothed with fiduciary character.

  • The stockholders are the proprietors of the corporate interests and are the ultimate beneficiaries thereof. The board of directors has a duty to safeguard the interests of the stockholders.

  • Illegal acts of a corporation, which contemplate the doing of an act contrary to law, morals, public order, or rules of public policy or public duty, are void. They cannot be validated by performance, ratification, or estoppel.

  • Mere ultra vires acts, or those which are not illegal or void ab initio but are not within the scope of the articles of incorporation, are merely voidable and may become binding when ratified by the stockholders.

  • The de facto officership doctrine applies only to third persons who were initially not part of the corporation but became such by voting government-sequestered shares.

  • The Securities and Exchange Commission (SEC) can assume jurisdiction and issue an order to a stockholder to call a meeting if there is no person authorized to do so, upon a showing of good cause. The petitioning stockholder or member shall preside until a majority of the stockholders or members have chosen one of their members as presiding officer.

  • The SEC has the power to compel a corporation to conduct a stockholders' meeting for the purpose of electing members of the board of directors.

  • A corporation's by-laws regarding the call of meetings should be complied with, as they are the fundamental laws of the corporation.

  • Administrative decisions, especially those of quasi-judicial agencies like the SEC, are generally accorded great respect and finality, unless it is shown that they arbitrarily disregarded evidence or misapprehended evidence to such an extent that a contrary conclusion would be compelled.

  • The court's jurisdiction is limited to reviewing and revising errors of law, and it cannot analyze or weigh the evidence and credibility of witnesses presented before the lower court or administrative agency, as it is not the trier of facts.

  • When administrative bodies grossly misappreciate evidence to compel a contrary conclusion, the court will reverse their factual findings.

  • A void act cannot be the subject of ratification.