Board of Directors and Election Committee of SMB Workers Savings and Loan Association, Inc. vs. Tan

A court of equity may appoint a committee or master to conduct and supervise an election of corporate directors when it appears that a fair election cannot otherwise be held, particularly where the election committee that conducted the annulled election, if allowed to act again, may jeopardize the rights of the prevailing party.

The SMB Workers Savings and Loan Association, Inc. is a corporation governed by a constitution and by-laws providing for the election of its board of directors. Section 3, Article III of the by-laws requires at least five days' notice before any annual or special meeting of members, and Section 5, Article III governs voting by proxy. The election committee provided for under Section 7 of the by-laws is tasked with conducting and supervising elections. The dispute arose from a contested election of the association's board of directors and the trial court's subsequent intervention to ensure a fair re-election.

On January 17, 1957, John Castillo and others commenced a suit in the Court of First Instance of Manila (Civil Case No. 31584) against the board of directors and election committee of the SMB Workers Savings and Loan Association, Inc., seeking to declare null and void the election of the board members held on January 11 and 12, 1957. The plaintiffs asked the court to order a new election in accordance with the association's constitution and by-laws and the Corporation Law, to restrain the defendants from exercising the functions of their office, and to award attorney's fees and costs. The defendants filed an answer, and after joinder of issues, the case was set for trial.

On the day set for trial, neither the defendants nor their attorney appeared. The court proceeded to receive the plaintiffs' evidence ex parte and, on February 11, 1957, rendered judgment declaring the election null and void, ordering the defendants to call and hold another election, and sentencing them to pay ₱1,500 as attorney's fees plus costs. The defendants filed a petition for relief from judgment on February 19 on the ground of excusable neglect, which was denied on February 23. Their appeal to the Supreme Court was dismissed on June 21, 1957 for failure to pay the docket fee and to deposit the estimated cost of printing the record on appeal.

On February 15, before the expiration of the time to appeal, the plaintiffs moved for immediate execution of the judgment, which the court granted on March 4. The defendants moved for a stay of execution on March 9, offering to file a supersedeas bond, but the court denied the motion on March 23. In compliance with the judgment, the election committee — composed of Quintin Tesalona, Manuel Dumaup, and Jose Capinio Santos — set a meeting of the members for March 28 at 5:30 p.m. to elect new board members, posting and sending out notices on March 26.

On March 27, the plaintiffs filed an ex parte motion alleging that the same election committee that had conducted the annulled election would supervise the new election, which would be inequitable; that the five-day notice requirement under Section 3, Article III of the by-laws was not satisfied, as notice was given only two days before the election; that the notice allowing members to secure ballots and proxies from the association office violated the by-laws; and that no arrangements had been made to guarantee compliance with the constitution and by-laws. They prayed that the court appoint its own representatives to supervise the election. On the same day, the court cancelled the March 28 election and appointed a three-member committee, with Candido C. Viernes as chairman and court representative and one representative each from the plaintiffs and defendants, vested with sole and exclusive authority to call, conduct, and supervise the election. The defendants moved for reconsideration on March 28, which was denied on March 30.

Petitioners then filed the present petition for certiorari, contending that the trial court acted without or in excess of jurisdiction or with grave abuse of discretion in issuing the March 27 order and denying reconsideration. On May 14, 1957, after petitioners filed a ₱200 bond, the Supreme Court issued a writ of preliminary injunction.

• Jurisdiction and Grave Abuse of Discretion: Petitioners contended that the respondent court acted without or in excess of jurisdiction, or with grave abuse of discretion, in issuing the March 27, 1957 order cancelling the scheduled election and appointing a three-member committee to conduct and supervise the new election.
• Lack of Adequate Remedy: Petitioners asserted that there was no appeal or any plain, speedy, and adequate remedy in the ordinary course of law, warranting the issuance of a writ of certiorari to annul the assailed order.
• Five-Day Notice Requirement: Petitioners invoked Section 3, Article III of the constitution and by-laws, arguing that the five-day previous notice requirement for special meetings would not be complied with under the election committee's planned schedule.

• Inequity of Reusing the Annulled Election Committee: Respondents argued that the election committee that conducted and supervised the election declared null and void was composed of the same members who would supervise the forthcoming election, making it inequitable to allow them to act again, as this might jeopardize respondents' rights.
• Violation of By-Laws on Notice: Respondents contended that the notice posted on March 26 for an election on March 28 violated the five-day notice requirement under Section 3, Article III of the by-laws.
• Violation of By-Laws on Proxy Voting: Respondents alleged that the notice allowing members to secure ballots and proxies from the association office violated Section 5, Article III of the by-laws, which they claimed prohibited voting by proxy in the election of board members.
• Need for Court Supervision: Respondents prayed that the court appoint its own representatives to supervise and conduct the election to guarantee compliance with the constitution and by-laws.

• Equity Jurisdiction to Appoint Election Committee: Whether the trial court, in the exercise of its equity jurisdiction, may appoint a committee to call, conduct, and supervise the election of the board of directors of a corporation.
• Validity of the March 27 Order: Whether the trial court acted without or in excess of jurisdiction or with grave abuse of discretion in issuing the March 27, 1957 order cancelling the scheduled election and appointing a new committee.

• Equity Jurisdiction to Appoint Election Committee: Yes. A court of equity may appoint a committee or master to conduct and supervise an election of directors when it appears that a fair election cannot otherwise be held, particularly where the existing election committee's continued involvement may jeopardize the prevailing party's rights.
• Validity of the March 27 Order: No, the trial court did not act without or in excess of jurisdiction or with grave abuse of discretion. The order was a proper exercise of equity jurisdiction, the election committee that conducted the annulled election having been shown to potentially jeopardize respondents' rights if allowed to act again.

• Equity Jurisdiction to Appoint Election Committee: The Court relied on established equitable principles permitting courts to direct the holding of stockholders' meetings under the control of a special master. Citing 18 C.J.S. 1270, the Court noted that in a proper proceeding, a court of equity may direct the holding of a stockholders' meeting under the control of a special master, and actions taken at such a meeting will not be set aside because of a wrongful use of the court's interlocutory decree where not brought to the court's attention prior to the meeting. Citing further 19 C.J.S. 41, the Court stated that a court of equity may, on a showing of good reason, appoint a master to conduct and supervise an election of directors when it appears that a fair election cannot be held. Applying these principles, the Court found that the election committee provided for under Section 7 of the by-laws — the same committee that conducted the election annulled by the trial court — if allowed to act again, might jeopardize the rights of the respondents. The trial court therefore properly exercised its equity jurisdiction in creating a new committee.

• Validity of the March 27 Order: As to the five-day notice requirement, the Court acknowledged that Section 3, Article III of the by-laws requires at least five days' notice before a special meeting, and that the five-day requirement would not be complied with under the election committee's original schedule. This deficiency supported the trial court's decision to cancel the March 28 election. Regarding the proxy voting issue, the Court noted in a footnote that the respondents' statement was incorrect, because voting by proxy is in fact allowed by Section 5, Article III of the by-laws. Nonetheless, the overall showing that the existing election committee's continued supervision might jeopardize respondents' rights was sufficient to sustain the trial court's exercise of equity jurisdiction in appointing a new committee.

• Equity Jurisdiction Over Corporate Elections — A court of equity may, in a proper proceeding, direct the holding of a stockholders' or members' meeting under the control of a special master or committee, and may appoint a master to conduct and supervise an election of directors when it appears that a fair election cannot otherwise be held. The Court applied this doctrine by affirming the trial court's appointment of a three-member committee to supervise the new election, finding that the existing election committee's continued involvement might jeopardize the prevailing party's rights.

• "As regards the creation of a committee of three vested with the authority to call, conduct and supervise the election, and the appointment thereto of Candido C. Viernes as chairman and the representative of the court and one representative each from the parties, the Court in the exercise of its equity jurisdiction may appointment such committee, it having been shown that the Election Committee provided for in section 7 of the by-laws of the association that conducted the election annulled by the respondent court if allowed to act as such may jeopardise the rights of the respondents." — This passage states the ratio decidendi: the Court's basis for sustaining the trial court's appointment of a new election committee under its equity jurisdiction.

• "A court of equity may, on showing of good reason, appoint a master to conduct and supervise an election of directors when it appears that a fair election cannot make directions contrary to statute and public policy with respect to the conduct of such election." — This is the doctrinal formulation drawn from 19 C.J.S. 41, articulating the equitable power to supervise corporate elections.

• 18 C.J.S. 1270 — Cited as supporting authority for the proposition that a court of equity may direct the holding of a stockholders' meeting under the control of a special master, and that actions taken at such a meeting will not be set aside for wrongful use of an interlocutory decree if not brought to the court's attention before the meeting.
• 19 C.J.S. 41 — Cited as supporting authority for the doctrine that a court of equity may appoint a master to conduct and supervise an election of directors when it appears that a fair election cannot be held.

• Section 3, Article III, Constitution and By-Laws of the SMB Workers Savings and Loan Association, Inc. — Requires at least five days' notice before any annual or special meeting of members, either by mailing, personal delivery, or posting at the different departments and plants of San Miguel Brewery Inc. The Court found this provision was not satisfied by the election committee's schedule, supporting the trial court's cancellation of the March 28 election.
• Section 5, Article III, Constitution and By-Laws of the SMB Workers Savings and Loan Association, Inc. — Governs voting by proxy in the election of board members. The Court noted in a footnote that respondents' claim that this provision prohibited proxy voting was incorrect, as the by-laws in fact allow voting by proxy.
• Section 7, By-Laws of the Association — Provides for the election committee tasked with conducting and supervising elections. The Court found that this committee, having conducted the annulled election, might jeopardize respondents' rights if allowed to supervise the new election, justifying the trial court's appointment of a replacement committee.

Paras, C.J., Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., and Endencia, JJ., concurred.