G.R. No. 120138 – 344 Phil. 348 – 278 SCRA 793 – Mercantile Law – Corporation Law – Transfer of Shares of Stocks – Corporate Records
Judge Manuel Torres, Jr. owns about 81% of the capital stocks of Tormil Realty & Development Corporation (TRDC). TRDC is a small family owned corporation and other stockholders thereof include Judge Torres’ nieces and nephews. However, even though Judge Torres owns the majority of TRDC and was also the president thereof, he is only entitled to one vote among the 9-seat Board of Directors, hence, his vote can be easily overridden by minority stockholders. So in 1987, before the regular election of TRDC officers, Judge Torres assigned one share (qualifying share) each to 5 “outsiders” for the purpose of qualifying them to be elected as directors in the board and thereby strengthen Judge Torres’ power over other family members.
However, the said assignment of shares were not recorded by the corporate secretary, Ma. Christina Carlos (niece) in the stock and transfer book of TRDC. When the validity of said assignments were questioned, Judge Torres ratiocinated that it is impractical for him to order Carlos to make the entries because Carlos is one of his opposition. So what Judge Torres did was to make the entries himself because he was keeping the stock and transfer book. He further ratiocinated that he can do what a mere secretary can do because in the first place, he is the president.
Since the other family members were against the inclusion of the five outsiders, they refused to take part in the election. Judge Torres and his five assignees then decided to conduct the election among themselves considering that the 6 of them constitute a quorum.
ISSUE: Whether or not the inclusion of the five outsiders are valid. Whether or not the subsequent election is valid.
HELD: No. The assignment of the shares of stocks did not comply with procedural requirements. It did not comply with the by laws of TRDC nor did it comply with Section 74 of the Corporation Code. Section 74 provides that the stock and transfer book should be kept at the principal office of the corporation. Here, it was Judge Torres who was keeping it and was bringing it with him. Further, his excuse of not ordering the secretary to make the entries is flimsy. The proper procedure is to order the secretary to make the entry of said assignment in the book, and if she refuses, Judge Torres can come to court and compel her to make the entry. There are judicial remedies for this. Needless to say, the subsequent election is invalid because the assignment of shares is invalid by reason of procedural infirmity. The Supreme Court also emphasized: all corporations, big or small, must abide by the provisions of the Corporation Code. Being a simple family corporation is not an exemption. Such corporations cannot have rules and practices other than those established by law.
