Bernas vs. Cinco

A special stockholders' meeting called for the removal of directors under Section 28 of the Corporation Code must be called strictly by the corporate secretary upon order of the president or written demand of stockholders representing at least a majority of the outstanding capital stock; a call by an unauthorized body (such as an Oversight Committee) renders the meeting void ab initio, incapable of ratification by subsequent corporate acts, and directors elected therein cannot invoke the de facto officership doctrine to validate internal disciplinary actions such as the expulsion of members and the sale of their shares.

The case involves a corporate governance dispute within Makati Sports Club, Inc. (MSC), a domestic corporation organized for social, cultural, recreational and athletic purposes. Allegations of anomalies in the handling of corporate funds by the incumbent directors (the Bernas Group) led to a power struggle between the incumbent board and a group of stockholders (the Cinco Group). The dispute centered on the validity of a special stockholders' meeting called by an ad hoc Oversight Committee to remove the sitting directors, and the subsequent ratification of such removal in annual stockholders' meetings, raising fundamental issues regarding statutory authority to call corporate meetings, the distinction between void and ultra vires acts, and the limits of the de facto officership doctrine.

• Makati Sports Club, Inc. (MSC) is a domestic corporation organized for the purpose of establishing, maintaining, and providing social, cultural, recreational and athletic activities among its members.
• Petitioners in G.R. Nos. 163356-57 (the Bernas Group) consisted of Jose A. Bernas, Cecile H. Cheng, Victor Africa, Jesus B. Maramara, Jose T. Frondoso, Ignacio T. Macrohon, Jr., and Paulino T. Lim, who were incumbent Members of the Board of Directors and Officers of MSC whose terms were to expire in 1998 or 1999.
• Petitioners in G.R. Nos. 163368-69 (the Cinco Group) consisted of Jovencio F. Cinco, Ricardo G. Librea, and Alex Y. Pardo, who were elected as directors during the December 17, 1997 Special Stockholders' Meeting.
• Alarmed by rumored anomalies in handling corporate funds, the MSC Oversight Committee (MSCOC), composed of past presidents of the club, demanded that the Bernas Group resign to pave the way for the election of new officers.
• Stockholders representing at least 100 shares sought the assistance of the MSCOC to call for a special stockholders' meeting for the purpose of removing the sitting officers and electing new ones.
• The MSCOC called a Special Stockholders' Meeting on December 17, 1997, sending notices to all stockholders stating the time, place, and purpose of the meeting.
• The Bernas Group failed to secure an injunction from the Securities and Exchange Commission (SEC) to restrain the holding of the meeting.
• During the December 17, 1997 meeting, the Bernas Group was removed from office, and the Cinco Group (including Jovencio F. Cinco, Ricardo G. Librea, Alex Y. Pardo, Roger T. Aguiling, Rogelio G. Villarosa, Armando David, Norberto Maronilla, Regina de Leon-Herlihy, and Claudio B. Altura) was elected as the new board.
• The newly elected directors investigated Bernas for alleged irregularities, found him guilty, and resolved to expel him from the club by selling his shares at public auction; his shares were subsequently sold for P902,000.00 to the highest bidder after compliance with notice requirements.
• An Annual Stockholders' Meeting was held on April 20, 1998, pursuant to Section 8 of the MSC by-laws, attended by 1,017 stockholders representing two-thirds of the outstanding shares, where the majority resolved to ratify the December 17, 1997 Special Stockholders' Meeting, the removal of the Bernas Group, and the election of their replacements.
• The SEC En Banc supervised the April 19, 1999 Annual Stockholders' Meeting, during which stockholders again ratified the December 17, 1997 meeting.
• The April 17, 2000 Annual Stockholders' Meeting likewise ratified the December 17, 1997 meeting.
• The MSC by-laws provided that special meetings shall be called by the President or Board of Directors, or upon written request of stockholders representing not less than 100 shares (Section 10), and that the Secretary shall give notices of meetings (Section 25).
• The Corporation Code provides that a special meeting for removal of directors must be called by the secretary on order of the president or on written demand of stockholders representing at least a majority of the outstanding capital stock (Section 28).

• The Bernas Group argued that the December 17, 1997 Special Stockholders' Meeting was improperly called because the MSCOC had no authority under Section 28 of the Corporation Code to call such a meeting, as the authority lies exclusively with the Corporate Secretary upon order of the President or written demand of the majority of stockholders.
• They contended that the subsequent Annual Stockholders' Meetings held on April 20, 1998, April 19, 1999, and April 17, 2000 were also invalid because they were not called by the validly elected Corporate Secretary nor presided over by the validly elected President, and because the ratification of a void meeting is itself void.
• They invoked the holdover principle, asserting that they remained the valid directors entitled to hold over their positions until validly removed in accordance with law, and that the Cinco Group could not be considered de jure or even de facto officers capable of exercising corporate powers.
• The Cinco Group argued that the December 17, 1997 Special Stockholders' Meeting was valid and binding, emphasizing that the Corporate Secretary had repeatedly refused to call a special meeting despite demands, and that the MSC by-laws did not exclusively vest the power to call meetings in the Corporate Secretary.
• They contended that the overwhelming ratification by stockholders during the subsequent Annual Stockholders' Meetings (1998, 1999, and 2000) cured any procedural defect in the calling of the December 1997 meeting, and that they had acted as de facto officers entitled to the emoluments of office and capable of exercising corporate powers in good faith.

• The Bernas Group (respondents in G.R. Nos. 163368-69) maintained that the December 17, 1997 meeting was void ab initio and could not be ratified, and that the subsequent annual meetings were invalid because they were conducted by persons who were not validly elected corporate officers.
• They argued that the Cinco Group could not invoke the de facto officership doctrine because this doctrine applies only to protect third persons dealing with the corporation, not to justify internal disciplinary actions such as the expulsion of a member and the sale of his shares.
• They asserted that the holdover principle applied to them, allowing them to remain in office until validly removed, and that the Cinco Group's assumption of office did not parallel the factual milieu in Cojuangco v. Roxas (which involved government-sequestered shares) necessary for de facto officership.
• The Cinco Group (respondents in G.R. Nos. 163356-57) argued that the Court of Appeals correctly upheld the validity of the Annual Stockholders' Meetings of 1998, 1999, and 2000, and that the ratification of the December 1997 meeting during these annual meetings was valid and binding on the corporation.

• Procedural Issues:
  • Whether the Court of Appeals committed reversible error in its appreciation of facts and evidence regarding the validity of the corporate meetings held from 1997 to 2000.
  • Whether the petitions for review on certiorari were proper vehicles to assail the factual findings of the Court of Appeals and the SEC.
• Substantive Issues:
  • Whether the December 17, 1997 Special Stockholders' Meeting was validly called by the MSC Oversight Committee despite the provisions of Section 28 of the Corporation Code and the MSC by-laws.
  • Whether the removal of the Bernas Group as directors and the election of the Cinco Group during the December 1997 meeting was valid.
  • Whether the expulsion of Jose Bernas and the public auction of his shares by the Cinco Group were valid acts.
  • Whether the ratification of the December 1997 meeting and the removal of the Bernas Group during the subsequent Annual Stockholders' Meetings (April 1998, 1999, and 2000) cured the procedural defect and validated the removal.
  • Whether the Cinco Group were entitled to invoke the holdover principle or the de facto officership doctrine to justify their actions and retain their positions.

• Procedural:
  • The Supreme Court held that while factual findings of quasi-judicial agencies like the SEC are generally accorded great respect and finality, the Court may review such findings when administrative bodies grossly misappreciated evidence of such nature as to compel a contrary conclusion.
  • The Court found that the Court of Appeals correctly appreciated the facts vis-à-vis the standing statutory and jurisprudential principles, and that the petitions for review on certiorari were properly filed to resolve questions of law regarding the interpretation of the Corporation Code and corporate by-laws.
  • The Court denied both petitions and affirmed the Court of Appeals' Decision dated April 28, 2003 and Resolution dated April 27, 2004.
• Substantive:
  • The December 17, 1997 Special Stockholders' Meeting was declared void ab initio because it was called by the MSC Oversight Committee, which was neither the President, the Board of Directors, nor the Corporate Secretary authorized under Section 28 of the Corporation Code and Section 10 of the MSC by-laws to call a special meeting for the removal of directors.
  • The removal of the Bernas Group as directors and the election of the Cinco Group during the void December 1997 meeting produced no legal effects; the Cinco Group had no colorable authority to sit on the board.
  • The expulsion of Jose Bernas and the sale of his shares at public auction were declared void and without legal effect because the Cinco Group, not being validly elected directors, had no authority to take such disciplinary actions, and the de facto officership doctrine could not be invoked to validate internal corporate acts against members.
  • The ratification of the removal of the Bernas Group and the sale of Bernas' shares during the Annual Stockholders' Meetings of April 1998, 1999, and 2000 was declared void and producing no effects, as void acts cannot be ratified; however, all other actions taken during these annual meetings, including the election of the Cinco Group as directors after the expiration of the Bernas Group's terms, were declared valid.
  • The holdover principle was held inapplicable to the Bernas Group because they were not validly reelected in the 1998 and 1999 Annual Stockholders' Meetings, and they had no right to perpetuate themselves in office by refusing to call meetings.
  • The Cinco Group were considered de jure officers by virtue of their valid election in the 1998 and 1999 Annual Stockholders' Meetings, but their ratification of the void December 1997 acts was ineffective.

• Void vs. Ultra Vires Acts — A distinction exists between corporate acts that are illegal (contrary to law, morals, or public policy) and those merely ultra vires (beyond corporate powers but not illegal). Illegal acts are void ab initio and cannot serve as the basis of a court action nor acquire validity by performance, ratification, or estoppel; ultra vires acts are merely voidable and may become binding when ratified by stockholders. The December 17, 1997 meeting fell under the former category.
• Authority to Call Special Meetings for Removal of Directors — Section 28 of the Corporation Code provides a specific procedure for calling special meetings to remove directors: the secretary must call the meeting upon order of the president or written demand of stockholders representing at least a majority of the outstanding capital stock. If the secretary fails or refuses, the SEC may issue an order upon petition of a stockholder. A call by any other body (such as an Oversight Committee) renders the meeting void.
• De Facto Officer Doctrine — This doctrine applies only to protect third persons who deal with the corporation in good faith, and is limited to situations involving government-sequestered shares as held in Cojuangco v. Roxas. It cannot be invoked by usurpers to validate internal disciplinary actions against corporate members, such as expulsion and the sale of shares.
• Holdover Principle — Directors cannot invoke the holdover principle to remain in office when they have been validly replaced by newly elected directors in subsequent annual meetings, or when they have failed to secure reelection. The principle does not apply to perpetuate the tenure of directors who were not validly elected in the first place.
• Specific vs. General Provisions — Specific provisions of law (such as Section 28 regarding removal of directors) prevail over general provisions (such as Section 50 regarding meetings generally or by-law provisions on special meetings).

• "The defect goes into the very authority of the persons who made the call for the meeting."
• "Illegal acts of a corporation which contemplate the doing of an act which is contrary to law, morals or public order, or contravenes some rules of public policy or public duty, are, like similar transactions between individuals, void. They cannot serve as basis for a court action, nor acquire validity by performance, ratification or estoppel."
• "The void election of 17 December 1997 cannot be ratified by the subsequent Annual Stockholders’ Meeting."
• "The Cinco Group cannot invoke the application of de facto officership doctrine to justify the actions taken after the invalid election since the operation of the principle is limited to third persons who were originally not part of the corporation but became such by reason of voting of government-sequestered shares."
• "Considering that a new set of officers were already duly elected in 1998 and 1999 Annual Stockholders Meetings, the Bernas Group cannot be permitted to use the holdover principle as a shield to perpetuate in office."
• "A corporation’s board of directors is understood to be that body which (1) exercises all powers provided for under the Corporation Code; (2) conducts all business of the corporation; and (3) controls and holds all the property of the corporation."

• Pirovano v. De la Rama Steamship Co. — Cited for the distinction between void and ultra vires acts, establishing that void acts cannot be ratified while ultra vires acts may be ratified by stockholders.
• Cojuangco, Jr. v. Roxas — Cited to limit the application of the de facto officership doctrine to situations involving third persons dealing with the corporation, specifically in the context of government-sequestered shares, and to hold that the doctrine does not apply to validate the internal acts of usurpers against corporate members.
• Ponce v. Encarnacion, etc. and Gapol — Cited for the principle that the SEC (formerly Court of First Instance) may authorize a stockholder to call a meeting upon showing of good cause when the officer authorized refuses to call a meeting.
• Philippine National Construction Corporation v. Pabion — Cited to affirm the SEC's regulatory and administrative powers to compel a corporation to hold stockholders' meetings for election purposes under Section 50 of the Corporation Code.
• Valle Verde Country Club, Inc. v. Africa — Cited for the fiduciary nature of the relationship between directors and stockholders, and the principle that directors derive their power to control corporate affairs from the stockholders.
• Gokongwei, Jr. v. Securities and Exchange Commission — Cited for the principle that the fiduciary relation between directors and stockholders springs from the directors' control of corporate affairs, and that corporate by-laws are the fundamental law of the corporation.
• Metropolitan Bank & Trust Company v. Absolute Management Corporation — Cited in the concurring opinion for the principle that specific provisions prevail over general ones.

• Section 28, Corporation Code (Batas Pambansa Bilang 68) — Governs the removal of directors or trustees, specifically the procedure for calling special meetings for such purpose (by the secretary on order of the president or written demand of majority stockholders) and the requirement of previous notice.
• Section 50, Corporation Code — Provides for regular and special meetings of stockholders, and grants the SEC authority to issue an order directing a petitioning stockholder to call a meeting when there is no person authorized to call a meeting.
• Section 23, Corporation Code — States that corporate powers are exercised by the board of directors.
• Section 6(c), Presidential Decree No. 902-A — Grants the SEC the power to compel officers of a corporation to call meetings of stockholders under its supervision.
• Section 8, MSC By-Laws — Provides that annual meetings shall be held at the Clubhouse on the third Monday of April of every year, establishing the mandatory time and place for annual stockholders' meetings.
• Section 10, MSC By-Laws — Provides that special meetings shall be called by the President or Board of Directors or upon written request of stockholders representing not less than 100 shares.
• Section 25, MSC By-Laws — Defines the duties of the Corporate Secretary, including the giving of notices of meetings of the board and stockholders.
• Section 51, Corporation Code — Mentioned in the concurring opinion regarding the validity of meetings where all stockholders are present or represented.

• Justice Perlas-Bernabe — Agreed that the December 17, 1997 Special Stockholders' Meeting was void but emphasized that Section 28 (not Section 50) of the Corporation Code was the applicable specific provision governing removal of directors. She distinguished between void and ultra vires acts, agreeing that the December 1997 meeting was void ab initio and could not be ratified. She noted that the SEC, being a regulatory body, cannot lend validity to otherwise invalid acts, and that the presumption of regularity cannot validate internal corporate actions. She further observed that while the issue of directorship had become moot due to the lapse of the three-year staggered terms, the expulsion of Bernas and sale of his shares remained void because the Cinco Group were not de facto directors entitled to exercise such disciplinary authority.