Lanuza v. Court of Appeals- G.R. No. 131394, March 28, 2005 (Tinga, J.) (CASE DIGEST)

Facts

The Philippine Merchant Marine School, Inc. (PMMSI) was incorporated in 1952. Its Articles of Incorporation (AOI) reflected an initial capital stock subscription of seven hundred seventy-six (776) issued and outstanding shares (700 founders’ shares and 76 common shares). In contrast, the company’s Stock and Transfer Book (STB), first registered in 1978, recorded only thirty-three (33) common shares as issued and outstanding. A subsequent special stockholders’ meeting held on 06 May 1992 was questioned by private respondents, who alleged that the quorum should be based on the 776 shares found in the 1952 AOI, not the much smaller number listed in the STB. The Securities and Exchange Commission (SEC) and the Court of Appeals (CA) ruled that the quorum should be based on the outstanding capital stock reflected in the AOI. Petitioners (Lanuza, et al.) challenged this ruling, arguing that reliance on the 1952 AOI negates the existence and validity of the STB.

Issues

1. What should be the basis for determining the outstanding capital stock and, accordingly, the quorum at stockholders’ meetings: the entries contained in the company’s stock and transfer book or the initial subscription recorded in the articles of incorporation?.
2. Whether private respondents (heirs of original incorporators) could avail of the benefit of the earlier ruling (the Acayan decision) and have their shares recognized without a separate judicial declaration.

Ruling

“WHEREFORE, the petition is DENIED and the assailed Decision is AFFIRMED. Costs against petitioners.”.

(The Supreme Court affirmed the CA decision, holding that the quorum must be based on the outstanding capital stock indicated in the Articles of Incorporation when the Stock and Transfer Book is found to be deficient or inaccurate).

Essential Elements of Jurisprudence

The following legal principles regarding corporate stock ownership and quorum determination were established or affirmed:

1. Articles of Incorporation as Binding Charter: The AOI defines the charter of the corporation and the contractual relationships between the State and the corporation, and between the corporation and its stockholders. Its contents are binding on the corporation and its shareholders.
2. Basis of Quorum: Quorum, under the Corporation Code (BP Blg. 68), is based on the totality of the shares which have been subscribed and issued, whether founders’ shares or common shares (the outstanding capital stock).
3. Nature of Stock and Transfer Book (STB): An STB is a measure of precaution and convenience but is not a public record. It is not exclusive evidence of the ownership of stock. Corporate records, including the STB, are generally considered prima facie evidence only and may be impeached or contradicted by other competent evidence (such as the AOI).
4. Disregard of Deficient STB: When the STB is obviously deficient, inaccurate, or fails to reflect the totality of subscribed shares, it cannot be used as the sole basis for determining quorum, especially when the AOI shows a significantly larger amount of shares issued and outstanding. To rely solely on a deficient STB while disregarding the AOI would work injustice to the owners or successors in interest of those shares.
5. Right to Vote: A genuine stockholder cannot be denied the right to vote merely because corporate officers failed to keep accurate records.

Sample Q&A

Question: A corporation’s Articles of Incorporation (AOI) filed in 1952 recorded 776 shares as subscribed and issued. However, the company’s Stock and Transfer Book (STB), first prepared decades later, reflects only 33 shares as outstanding. When stockholders subsequently dispute the results of an election of directors, arguing that the quorum was improperly computed, which document should the court rely upon to determine the Outstanding Capital Stock and calculate the required quorum under the Corporation Code (BP Blg. 68)?

Answer: The court should rely upon the Articles of Incorporation (AOI).

Section 52 of the Corporation Code (BP Blg. 68) mandates that a quorum shall consist of the stockholders representing a majority of the outstanding capital stock. Section 137 defines “outstanding capital stock” as the total shares of stock issued to subscribers or stockholders. When there is a glaring deficiency or inaccuracy in the Stock and Transfer Book, such that it does not reflect the totality of shares subscribed as recorded in the fundamental charter document—the AOI—the STB cannot be the sole basis for determining the quorum. The AOI, which is binding on the corporation and its shareholders, serves as stronger evidence of the initial issued and outstanding shares. One who is actually a stockholder cannot be denied their right to vote merely because corporate officers failed to maintain accurate records. Therefore, the quorum must be computed based on the 776 shares listed in the AOI.

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