Castillo vs. Balinghasay

A corporation cannot deprive holders of common shares of voting rights and the right to be elected as directors unless such shares are classified and issued as "preferred" or "redeemable" shares pursuant to Section 6 of the Corporation Code. The right to vote is a property right inherent in stock ownership that cannot be impaired by charter amendment without the stockholder's consent, and the Corporation Code applies to corporations organized under prior laws by virtue of Section 148.

Medical Center Parañaque, Inc. (MCPI) was incorporated in September 1977 under Act No. 1459, the Old Corporation Law. Its original Articles of Incorporation classified shares into Class A (with exclusive voting rights) and Class B (without voting rights). When the Corporation Code (B.P. Blg. 68) took effect in 1980, it repealed Act No. 1459 and introduced Section 6, which restricted the deprivation of voting rights exclusively to preferred or redeemable shares. Despite this legislative change, MCPI amended its Articles of Incorporation in 1992 to maintain the voting restrictions on Class B shares, but inserted the qualifying phrase "except when otherwise provided by law," which became the focal point of the dispute regarding the applicable legal regime.

• Medical Center Parañaque, Inc. (MCPI) was organized in September 1977 under Act No. 1459, the Old Corporation Law.
• The original Articles of Incorporation (approved October 26, 1977) authorized capital stock of ₱2,000,000 divided into 2,000 shares with a par value of ₱100 each, whereby 1,000 Class A shares issued to incorporating stockholders carried voting rights, while 1,000 Class B shares (unissued) were denied voting rights and the right to be elected as directors.
• On July 31, 1981, Article VII was amended (approved June 7, 1983) to increase authorized capital to ₱5,000,000: Class A (1,000 shares, ₱1,000 par value) and Class B (4,000 shares, ₱1,000 par value), maintaining exclusive voting rights for Class A shareholders only.
• On September 9, 1992, Article VII was amended again (approved September 22, 1993) to increase capital to ₱32,000,000: Class A (1,000 shares) and Class B (31,000 shares), with the provision: "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 February 9, 2001, during the annual stockholders' meeting, respondent Rustico Jimenez declared that no Class B shareholder was qualified to vote or be voted upon as director, citing Article VII. The Class A candidates were declared winners of all board seats.
• Petitioners (Cecilia Castillo, Oscar Del Rosario, et al.), holders of Class B shares, protested the election, claiming Article VII was null and void for depriving them of voting rights in violation of the Corporation Code.
• Prior to the 2001 meeting, Class B shareholders had been allowed in past elections to vote and serve as board members, despite the Articles of Incorporation.

• Article VII of the Articles of Incorporation, which denied Class B shareholders voting rights, is null and void for being contrary to Section 6 of the Corporation Code.
• Section 6 of the Corporation Code prohibits the deprivation of voting rights except as to preferred and redeemable shares only; since Class B shares are not classified as either, they are entitled to vote and be voted for as directors.
• Respondents are in estoppel because in the past, Class B shareholders were permitted to vote and be elected to the board, constituting a waiver of the restriction.
• The privilege granted to Class A shareholders was merely a temporary right attached to founder's shares that should have been extinguished under the new Corporation Code.

• 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 of Act No. 1459 (the Old Corporation Law), which was the prevailing law when MCPI was incorporated in 1977.
• The Articles of Incorporation constitute an intra-corporate contract between the corporation and its stockholders, and among stockholders themselves; Section 6 of the Corporation Code cannot retroactively apply without violating the non-impairment clause of the Constitution.
• Allowing Class B shareholders to vote would constitute a violation of MCPI's franchise or charter as granted by the State.
• The phrase "except when otherwise provided by law" in the 1992 amendment was merely a handwritten insertion made without proper board resolution authorizing such amendment.

• Procedural Issues:
  • Whether the issue regarding the handwritten insertion of the phrase "except when otherwise provided by law" in the 1992 amendment is proper for determination in a petition for review on certiorari.
• Substantive Issues:
  • Whether holders of Class B shares may be deprived of the right to vote and be voted for as directors in MCPI.
  • Whether Section 6 of the Corporation Code applies to MCPI notwithstanding the non-impairment clause of the Constitution.
  • Whether the 1992 amendment to Article VII of the Articles of Incorporation incorporated the limitations of Section 6 of the Corporation Code regarding voting rights.

• Procedural:
  • The Court declined to rule on the respondents' contention that the phrase "except when otherwise provided by law" was a handwritten insertion made without board resolution, as this involves a factual question not proper in a petition for review on certiorari where only questions of law may be reviewed.
  • The presumption that official duty has been regularly performed by the Securities and Exchange Commission in approving the amendment applies, pursuant to Rule 131, Sections 3(m) and 3(q) of the Revised Rules of Court.
• Substantive:
  • The Court held that the 1992 amendment to Article VII, which included the phrase "except when otherwise provided by law," must be construed as referring to the Corporation Code (B.P. Blg. 68), which was already in force at that time, rather than to the repealed Act No. 1459.
  • Section 6 of the Corporation Code explicitly prohibits the deprivation of voting rights except for shares classified and issued as "preferred" or "redeemable." Since Class B shares were not categorized as either preferred or redeemable in the Articles of Incorporation, the deprivation of voting rights is void.
  • The right to vote is a property right inherent in stock ownership that cannot be deprived or essentially impaired without the stockholder's consent.
  • Section 148 of the Corporation Code expressly provides that the Code applies to corporations in existence at the time of its effectivity, rendering the constitutional non-impairment clause inapplicable to the application of Section 6 to MCPI.
  • The election held on February 9, 2001, which excluded Class B shareholders from voting, was declared invalid.

• Classification of Shares and Limitations on Voting Rights — Under Section 6 of the Corporation Code, while corporations may classify shares into different classes with varying rights, no share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares. Any provision in the Articles of Incorporation depriving common shares of voting rights is void.
• Voting Rights as Property Rights — The right to vote is inherent in and incidental to the ownership of corporate stock, constituting a property right that cannot be deprived or essentially impaired by the legislature or the corporation without the stockholder's consent, whether through charter amendment or by-laws.
• Applicability of the Corporation Code to Existing Corporations — Section 148 of the Corporation Code provides that the Code applies to all corporations lawfully existing at the time of its effectivity, subject to a compliance period for new requirements, thereby negating the application of the constitutional non-impairment clause to corporate charters in this context.
• Articles of Incorporation as Subscription Contract — The Articles of Incorporation constitute an intra-corporate contract binding between the corporation and its stockholders, and among the stockholders themselves; however, such contract must conform to the mandatory provisions of the Corporation Code.
• Presumption of Regularity in Official Acts — Official duty is presumed to have been performed regularly, and the ordinary course of business is presumed to have been followed in the amendment and approval of articles of incorporation by the Securities and Exchange Commission.

• "The right to vote is a right inherent in and incidental to the ownership of corporate stock, and as such is a property right. The stockholder cannot be deprived of the right to vote his stock nor may the right be essentially impaired, either by the legislature or by the corporation, without his consent, through amending the charter, or the by-laws."
• "Section 148 of the Corporation Code expressly provides that it shall apply to corporations in existence at the time of the effectivity of the Code. Hence, the non-impairment clause is inapplicable in this instance."
• "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."

• Bangko Sentral ng Pilipinas v. Santamaria, G.R. No. 139885, January 13, 2003 — Cited for the established rule that in a petition for review on certiorari under Rule 45, only questions of law may be reviewed, not questions of fact.

• Section 6 of the Corporation Code (Batas Pambansa Blg. 68) — Central provision prohibiting the deprivation of voting rights except for preferred or redeemable shares, and mandating that there shall always be a class or series of shares with complete voting rights.
• Section 148 of the Corporation Code — Provides for the applicability of the Corporation Code to existing corporations at the time of its effectivity, negating the respondents' non-impairment clause argument.
• Section 5 of Act No. 1459 (The Corporation Law) — The provision under which MCPI was originally incorporated, which allowed classification of shares with different voting rights without the restrictions later imposed by the Corporation Code.
• Article III, Section 10 of the 1987 Constitution (Non-impairment Clause) — Respondents argued that applying Section 6 of the Corporation Code would violate this provision, but the Court held it inapplicable due to Section 148 of the Corporation Code.
• Rule 131, Sections 3(m) and 3(q) of the Revised Rules of Court — Presumptions that official duty has been regularly performed and that the ordinary course of business has been followed, applied to the SEC's approval of the amended Articles.