Castillo vs. BalinghasayOctober 18, 2004Quisumbing, J.Digest by Clark Uytico

Topic and Relevant Provision: Voting shares

FACTSPetitioners and Respondents are stockholders of Medical Center Parañaque, Inc. (MCPI for brevity), Castillo and the other petitioners holding “Class B” shares, and Balinghasay and respondents holding “Class A” shares. MCPI was organized sometime in September 1977 under the Corporation Law (Act 1459), and under Article VII of MCPI’s original Articles of Incorporation, only holders of “Class A” shares can have the right to vote and the right to be elected as directors or as corporate officers.

MCPI’s AoI was amended on 1981 to increase its capital stock to FIVE MILLION PESOS and retained “Class A” privileges. However, on 1992, Article VII was again amended to increase the authorized capital stock to THIRTY-TWO MILLION PESOS, and also provided that “Except when otherwise provided by law, only holders of Class “A” shares have the right to vote and the right to be elected as directors or as corporate officers.”

On the annual stockholders’ meeting and election of directors come February 2001, and despite citing Article VII as amended, and MCPI’s history, respondent Rustico Jimenez declared over the objections of petitioners, that no “Class B” shareholder was qualified to run or be voted upon as director of MCPI. In the past, MCPI has seen holders of “Class B” shares voted for and serve as members of the corporate board. Nonetheless, Jimenez declared that the candidates holding “Class A” shares were the winners of all the seats in the corporate board. Petitioners protested claiming that Article VII was null and void for being violative of the Corporation Code (BP 68), as amended. They further claimed that the privilege granted to the “Class A” shareholders was more in the nature of a right granted to founder’s shares.

Respondents averred however that the provisions of Article VII clearly and categorically state that only “Class A” shareholders have the exclusive right to vote and be elected as directors and officers of the corporation. They denied that the exclusivity was intended only as a privilege granted to founder’s shares, as no such proviso is found in the AoI; claiming further that the exclusivity of the Right granted to “Class A” holders canot be defeated or impaired by any subsequent legislative enactment, e.g. the New Corporation Code, as the AoI is an intra-corporate contract between the corporations and its members; between the corporation and its stockholders; and among the stockholders.

They further contend that to allow “Class B” shareholders to vote and be elected as directors would constitute a violation of MCPI’s franchise or charter. Lastly, maintain that the grant of exclusive voting rights to Class “A” shares is clearly provided in the Articles of Incorporation and is in accord with Section 5[9] of the Corporation Law (Act No. 1459), which was the prevailing law when MCPI was incorporated in 1977. They likewise submit that as the Articles of Incorporation of MCPI is in the nature of a contract between the corporation and its shareholders and Section 6 of the Corporation Code could not retroactively apply to it without violating the non-impairment clause of the Constitution.

ISSUEWON CLASS B shareholders should be given the right to vote.

HELDYES.

Dispositive: WHEREFORE, the petition is GRANTED. The Partial Judgment dated November 26, 2001 of the Regional Trial Court of Parañaque City, Branch 258, in Civil Case No. 01-0140 is REVERSED AND SET ASIDE. No pronouncement as to costs.

RATIOSection 6 prohibits the deprivation of voting rights except as to preferred and redeemable shares only. Hence, under the present law on corporations, all shareholders, regardless of classification, other than holders of preferred or redeemable shares, are entitled to vote and to be elected as corporate directors or officers. Since the Class “B” shareholders are not classified as holders of either preferred or redeemable shares, then it necessarily follows that they are entitled to vote and to be voted for as directors or officers.

The law referred to in the amendment to Article VII refers to the Corporation Code and no other law. At the time of the incorporation of MCPI in 1977, the right of a corporation to classify its shares of stock was sanctioned by Section 5 of Act

No. 1459. The law repealing Act No. 1459, B.P. Blg. 68, retained the same grant of right of classification of stock shares to corporations, but with a significant change. Under Section 6 of B.P. Blg. 68, the requirements and restrictions on voting rights were explicitly provided for, such that “no share may be deprived of voting rights except those classified and issued as “preferred” or “redeemable” shares, unless otherwise provided in this Code” and that “there shall always be a class or series of shares which have complete voting rights.”

Section 6 of the Corporation Code being deemed written into Article VII of the Articles of Incorporation of MCPI, it necessarily follows that unless Class “B” shares of MCPI stocks are clearly categorized to be “preferred” or “redeemable” shares, the holders of said Class “B” shares may not be deprived of their voting rights. Note that there is nothing in the Articles of Incorporation nor an iota of evidence on record to show that Class “B” shares were categorized as either “preferred” or “redeemable” shares. The only possible conclusion is that Class “B” shares fall under neither category and thus, under the law, are allowed to exercise voting rights.

When Article VII of the Articles of Incorporation of MCPI were amended in 1992, the board of directors and stockholders must have been aware of Section 6 of the Corporation Code and intended that Article VII be construed in harmony with the Code, which was then already in force and effect. Since Section 6 of the Corporation Code expressly prohibits the deprivation of voting rights, except as to “preferred” and “redeemable” shares, then Article VII of the Articles of Incorporation cannot be construed as granting exclusive voting rights to Class “A” shareholders, to the prejudice of Class “B” shareholders, without running afoul of the letter and spirit of the Corporation Code.