Embassy Farms, Inc. vs. Court of Appeals

A dispute arising from a memorandum of agreement between a stockholder and a prospective transferee over contractual rights and obligations is not an intra-corporate controversy under Presidential Decree No. 902-A, as amended, and falls within the jurisdiction of regular courts. Corollarily, no effective transfer of shares of stock occurs without delivery of the indorsed certificate, so the transferor remains the controlling stockholder pending rescission.

Embassy Farms, Inc. is a registered corporation operating a piggery farm, ninety percent of whose shares were owned by Eduardo B. Evangelista. On August 2, 1984, Evangelista and Alexander G. Asuncion executed a Memorandum of Agreement under which Evangelista would transfer nineteen agricultural parcels, shares, equipment, and facilities of the piggery to Asuncion, who would pay close to P8,630,000.00 and later organize a new corporation to assume his rights and liabilities. The arrangement implicated the stock-transfer provisions of the Corporation Code and the jurisdictional grant to the Securities and Exchange Commission over intra-corporate controversies under Presidential Decree No. 902-A, as amended by Presidential Decree No. 1758.

On August 2, 1984, Alexander G. Asuncion (AGA) and Eduardo B. Evangelista (EBE) executed a Memorandum of Agreement. Under the agreement, EBE obligated himself to transfer to AGA nineteen parcels of agricultural land registered in his name, with an aggregate area of 104,447 square meters, located in Loma de Gato, Marilao, Bulacan, together with the stocks, equipment, and facilities of a piggery farm owned by Embassy Farms, Inc., a registered corporation ninety percent of whose shares were owned by EBE. EBE also obligated himself to cede, transfer, and convey in a manner absolute and irrevocable all of his shares of stock in Embassy Farms, Inc. to AGA or his nominees until the total shares so transferred would constitute ninety percent of the paid-in equity of the corporation within a reasonable time from signing. He further obligated himself to turn over to AGA the effective control and management of the piggery upon signing. For his part, AGA obligated himself, upon signing, to pay EBE the total sum of close to P8,630,000.00 and, within a reasonable time, to organize and register a new corporation with an authorized capital stock of P10,000,000.00 which, upon registration, would take over all the rights and liabilities of AGA.

Pursuant to clause 8 of the Memorandum of Agreement, on August 2, 1984, EBE turned over to AGA the effective control and management of the piggery at Embassy Farms. Pursuant to clause 15, EBE served as President and Chief Executive of Embassy Farms with a monthly salary of P15,000.00. EBE also endorsed in blank all his shares of stock, including those of his wife and three nominees with minor holdings. Of the total 3,125 shares, EBE had 2,725 shares, his wife Epifania had 250 shares, while Angel Santos, Armando Martin, and Teofilo Mesina had 50 shares each, registered in their names. These shares corresponded to the paid subscription because the Articles of Incorporation reflected that EBE subscribed 10,900 shares, Epifania Evangelista 1,000 shares, and Angel Santos, Armando Martin, and Teofilo Mesina 200 shares each. Despite the indorsement, however, EBE retained possession of the shares and opted to deliver them to AGA only upon full compliance by the latter with his obligations under the Memorandum of Agreement. Notwithstanding the non-delivery, in a Deed of Transfer of Shares of Stock dated August 1984 but notarized on June 20, 1985, AGA transferred a total of 8,602 shares to several persons. For failure to comply with his obligations, EBE intimated the institution of appropriate legal action.

On April 10, 1986, AGA preempted EBE by filing an action for rescission of the Memorandum of Agreement with damages. The case was docketed as Civil Case No. 53335 and assigned to Branch CLVIII, Regional Trial Court, National Capital Judicial Region, Pasig, Metro Manila. AGA alleged, among others, EBE’s misrepresentation on the piggery business since it was actually losing and EBE’s failure to execute the deeds of conveyance of the nineteen parcels of land. On July 30, 1987, the Pasig Court granted a writ of preliminary injunction. The writ restrained AGA, his nominees, agents, security guards, employees, and all persons claiming under him from disposing of, removing, or carrying away the stocks, including rights, sucklings, equipment, and other facilities in Embassy Farms, Inc. in Loma de Gato, Marilao, Bulacan; from harassing EBE and his employees and associates; and from preventing EBE, assisted by his employees and associates, from discharging his duties and prerogatives as director, president, and chief executive of Embassy Farms, Inc. until further orders. The writ was subject to EBE’s filing of a bond in the amount of P1,750,000.00 in favor of AGA, conditioned upon EBE’s payment of all damages AGA might sustain by reason of the injunction if the court should finally decide otherwise and AGA should be adjudged entitled to such damages. On September 14, 1987, the Pasig Court, on EBE’s motion, issued an order to break open the premises of Embassy Farms to enforce the writ. On September 18, 1987, Embassy Farms, Inc. filed a petition with the Court of Appeals for prohibition with preliminary injunction, docketed as CA-G.R. 12834. On September 22, 1987, the Fifth Division of the Court of Appeals enjoined the enforcement of the Pasig Court’s order dated July 30, 1987.

Meanwhile, on July 30, 1987, Embassy Farms, Inc. instituted an action for injunction with damages against EBE. In its complaint, it alleged that on July 11, 1987, EBE forced his way inside Embassy Farms and, while inside, took cash and a check amounting to P423,275.45. The case was docketed as Civil Case No. 348-11-89 and raffled to Branch 19, Regional Trial Court, Third Judicial Region, Malolos, Bulacan. On August 10, 1987, upon EBE’s motion to dismiss, the Malolos Court denied the motion for lack of merit and issued a writ of preliminary injunction enjoining EBE, his agents, and any person claiming right under him to refrain from interfering in the management and operation of Embassy Farms, Inc. at Barangay Loma de Gato, Marilao, Bulacan, until further orders. The writ was subject to plaintiff’s filing of a bond in the amount of P150,000.00 in favor of EBE, conditioned upon payment of all damages EBE might sustain by reason of the injunction if he should be adjudged entitled thereto. On August 27, 1987, EBE filed a motion for reconsideration of the August 10, 1987 order. On September 15, 1987, without awaiting the resolution of his motion for reconsideration, EBE filed a petition for certiorari and prohibition with preliminary injunction with the Court of Appeals, docketed as CA-G.R. No. 12817.

On October 13, 1987, the Fifth Division of the Court of Appeals issued a consolidated resolution in CA-G.R. Nos. 12817 and 12834 sustaining the Pasig Court’s order dated July 30, 1987. It accordingly set aside and lifted the restraining order dated September 22, 1987 that it had issued in CA-G.R. SP No. 12834. The appellate court based its resolution on its findings at the hearing that the Board of Directors of Embassy Farms were nominees of AGA, so it considered AGA and Embassy Farms as one and the same person. It noted that EBE had not delivered the certificate of stock outstanding in his name in the books of the corporation to AGA because the latter allegedly had not complied with the terms and conditions of the Memorandum of Agreement. The appellate court also opined that no transfer of shares of stock had been made by Evangelista to Asuncion because there had been no delivery of the certificate to produce or effect the transfer. Embassy Farms filed a motion for reconsideration, but it was denied in the resolution dated November 5, 1987. Hence, this petition.

• Jurisdiction over Intra-Corporate Matter: Petitioner argued that the Pasig Court had no jurisdiction to hear and decide EBE’s application for the issuance of a writ of preliminary injunction in Civil Case No. 53335 because the ouster of EBE and his reinstatement as President and Chief Executive Officer of Embassy Farms is an intra-corporate matter within the exclusive and original jurisdiction of the Securities and Exchange Commission.
• Jurisdiction over Embassy Farms: Petitioner claimed that the Pasig Court did not acquire jurisdiction over Embassy Farms because it was not made a party in Civil Case No. 53335.
• Territorial Enforceability: Petitioner claimed that the orders of the Pasig Court could not be enforced at Loma de Gato, Marilao, Bulacan, the principal office of the corporation, because it is located outside the National Capital Judicial Region.
• Irregular Injunction Bond: Petitioner claimed that the writ of preliminary injunction issued in Civil Case No. 53335 was irregularly issued because it was issued one day ahead of the injunction bond.
• Grave Abuse of Discretion: Petitioner contended that the appellate court acted without jurisdiction or in excess of jurisdiction and/or gravely abused its discretion when it sustained the Pasig Court’s order and lifted the restraining order it had issued in CA-G.R. SP No. 12834.

• Intra-Corporate Controversy: Whether the Pasig Court had jurisdiction to hear and decide EBE’s application for a writ of preliminary injunction in Civil Case No. 53335, or whether the matter was an intra-corporate controversy within the exclusive and original jurisdiction of the Securities and Exchange Commission.
• Jurisdiction over Embassy Farms: Whether the Pasig Court acquired jurisdiction over Embassy Farms despite its not being made a party in Civil Case No. 53335.
• Territorial Enforceability of Injunction: Whether the Pasig Court’s writ of preliminary injunction could be enforced at Embassy Farms in Loma de Gato, Marilao, Bulacan, outside the National Capital Judicial Region.
• Regularity of Injunction Bond: Whether the writ of preliminary injunction was irregularly issued because it was issued one day ahead of the injunction bond.
• Status Quo and Transfer of Shares: Whether AGA or his nominees could control and manage Embassy Farms pending the rescission case despite the non-delivery of the indorsed certificates of stock.
• Reversible Error: Whether the Court of Appeals committed reversible error in sustaining the Pasig Court’s order and lifting the restraining order in CA-G.R. SP No. 12834.

• Intra-Corporate Controversy: No. The conflict was between AGA and EBE arising from a memorandum of agreement; it involved contractual rights and obligations, not the enforcement of rights under the Corporation Code or the internal affairs of the corporation, so it fell within the regular courts, not the SEC.
• Jurisdiction over Embassy Farms: No reversible error. The dispute was contractual between AGA and EBE; AGA or his nominees unduly dragged Embassy Farms into the controversy to resist the Pasig Court’s order and confuse the real issue.
• Territorial Enforceability of Injunction: Yes, enforceable under the exception. Although an injunction under Section 21 of Batas Pambansa Bilang 129 is generally enforceable only within the region, the exception in Dagupan Electric Corporation vs. Pano applies because the parties’ principal addresses and the decisions on the acts to be restrained were within the issuing court’s jurisdiction.
• Regularity of Injunction Bond: No. The Court of Appeals found the date July 31, 1987 on the bond to be a typographical error, and the injunction bond amply protected the enjoined party against loss or damage if the injunction was wrongfully granted.
• Status Quo and Transfer of Shares: No. Because the indorsed certificates were not delivered, no effective transfer of shares occurred; EBE remained the controlling stockholder, and rescission would result in mutual restitution, making it proper to allow EBE to manage the farm during the pendency of the main case.
• Reversible Error: No. The appellate court correctly sustained the Pasig Court’s order and lifted the restraining order.

• Intra-Corporate Controversy: The case was merely an offshoot of a controversy yet to be decided on the merits by the Pasig Court. The action for rescission in Civil Case No. 53335 would ultimately settle whether AGA or EBE or both parties reneged on their obligations under the Memorandum of Agreement, and the Supreme Court did not want to pre-empt the Pasig Court on the main case. Under Presidential Decree No. 902-A as amended by Presidential Decree No. 1758, an intra-corporate controversy must pertain to one of four relationships: (1) between the corporation, partnership or association and the public; (2) between the corporation, partnership or association and the state in so far as its franchise, permit or license to operate is concerned; (3) between the corporation, partnership or association and its stockholders, partners, members or officers; and (4) among the stockholders, partners or associates themselves. The conflict here was between AGA and EBE arising from a contract denominated as a memorandum of agreement. It involved contractual rights and obligations under the Memorandum of Agreement, not the enforcement of rights and obligations under the Corporation Code or the internal or intracorporate affairs of the corporation. AGA or his nominees were not even lawful stockholders because EBE, for a justifiable reason, withheld delivery of the indorsed certificates of stock, so the supposed transfer could not be properly recorded in the books of the corporation. The dispute therefore did not fall within the special jurisdiction of the Securities and Exchange Commission but with the regular courts. AGA or his nominees unduly dragged Embassy Farms into the controversy to resist the Pasig Court’s order and confuse the real and legitimate issue.
• Jurisdiction over Embassy Farms: The Court held that AGA or his nominees unduly dragged Embassy Farms into the controversy in order to resist the Pasig Court’s order and to confuse the real and legitimate issue. The controversy in reality involved the contractual rights and obligations of AGA and EBE under the Memorandum of Agreement, not the enforcement of rights and obligations under the Corporation Code or the internal or intracorporate affairs of the corporation. Embassy Farms was not a necessary party to the resolution of that contractual dispute.
• Territorial Enforceability of Injunction: Generally, an injunction under Section 21 of Batas Pambansa Bilang 129 is enforceable within the region because the trial court has no jurisdiction to issue a writ of preliminary injunction to enjoin acts being performed or about to be performed outside its territorial boundaries. However, in Dagupan Electric Corporation vs. Pano, the Court allowed the enforcement of an injunction to restrain acts committed outside the territorial jurisdiction of the issuing court where the principal business addresses of the parties and the decisions on the acts to be restrained are located and originated within the court’s jurisdiction. Here, to avoid injustice and irreparable injury, the Court applied the exception rather than the general rule. Both parties were residents of the National Capital Region: AGA at 7-A Lake Street, San Juan, Metro Manila, and EBE at 113 R. Tirona Street, BF Homes, Parañaque, Metro Manila. AGA filed the case with the Pasig Court, and the injunction, as an equitable remedy intended to preserve the status quo, was directed against AGA, his nominees, and agents. Besides, as noted by the Pasig Court, all orders to be enforced and executed at Embassy Farms in Loma de Gato, Marilao, Bulacan emanated from its main office located at the 2nd Floor, Agora Complex, Domingo Street, San Juan, Metro Manila.
• Regularity of Injunction Bond: Aside from the factual findings of the Court of Appeals that the date July 31, 1987 appearing on the bond is a typographical error, it was pointed out that with the injunction bond the party enjoined is amply protected against loss or damage in case it is finally decided that the injunction ought not to have been granted.
• Status Quo and Transfer of Shares: Although EBE had indorsed in blank the shares outstanding in his name, he had not delivered the certificates of stock to AGA because the latter had not fully complied with his obligations under the Memorandum of Agreement. There being no delivery of the indorsed shares of stock, AGA could not effectively transfer to other persons or his nominees the undelivered shares. For an effective transfer of shares of stock, the mode and manner of transfer prescribed by law must be followed. Under Section 3 of Batas Pambansa Bilang 68, shares of stock may be transferred by delivery to the transferee of the certificate properly indorsed. Title may be vested in the transferee by the delivery of the duly indorsed certificate of stock. However, no transfer shall be valid, except as between the parties, until the transfer is properly recorded in the books of the corporation. In the case at bar, the indorsed certificate of stock was not actually delivered to AGA, so EBE was still the controlling stockholder of Embassy Farms despite the execution of the Memorandum of Agreement and the turnover of control and management of Embassy Farms to AGA on August 2, 1984. When AGA filed on April 10, 1986 an action for rescission of contracts with damages, the Pasig Court merely restored and established the status quo prior to the execution of the Memorandum of Agreement by the issuance of a restraining order on July 10, 1987 and the writ of preliminary injunction on July 30, 1987. It would be unjust and unfair to allow AGA and his nominees to control and manage Embassy Farms despite the fact that AGA, who is the source of their supposed shares of stock in the corporation, was not asking for the delivery of the indorsed certificate of stock but for the rescission of the Memorandum of Agreement. Rescission would result in mutual restitution, so it was but proper to allow EBE to manage the farm. Compared to AGA or his nominees, EBE would be more interested in the preservation of the assets, equipment, and facilities of Embassy Farms during the pendency of the main case.
• Reversible Error: Based on the foregoing, the Court of Appeals did not commit reversible error in sustaining the Pasig Court’s order and lifting the restraining order. The petition was denied for lack of merit.

• Intra-corporate controversy — Under Presidential Decree No. 902-A as amended by Presidential Decree No. 1758, an intra-corporate controversy must pertain to any of the following relationships: (1) between the corporation, partnership or association and the public; (2) between the corporation, partnership or association and the state in so far as its franchise, permit or license to operate is concerned; (3) between the corporation, partnership or association and its stockholders, partners, members or officers; and (4) among the stockholders, partners or associates themselves. The Court applied this test and held that the dispute between AGA and EBE arose from a memorandum of agreement and involved contractual rights and obligations, not the enforcement of rights under the Corporation Code or the internal affairs of the corporation. Hence, it was not an intra-corporate controversy within the SEC’s exclusive jurisdiction.
• Transfer of shares of stock — Shares of stock may be transferred by delivery to the transferee of the certificate properly indorsed, and title may be vested in the transferee by delivery of the duly indorsed certificate. However, no transfer shall be valid, except as between the parties, until the transfer is properly recorded in the books of the corporation. The Court applied this rule and held that because EBE indorsed the shares in blank but never delivered the certificates to AGA, no effective transfer occurred, and EBE remained the controlling stockholder.
• Rescission and mutual restitution — Rescission results in mutual restitution. The Court applied this principle in holding that, pending the resolution of the rescission case, the Pasig Court properly restored the status quo prior to the Memorandum of Agreement and allowed EBE to manage the farm, since AGA was seeking rescission rather than delivery of the indorsed certificates.
• Territorial enforceability of injunction — Generally, an injunction under Section 21 of Batas Pambansa Bilang 129 is enforceable within the region because the trial court has no jurisdiction to issue a writ of preliminary injunction to enjoin acts being performed or about to be performed outside its territorial boundaries. However, an exception exists where the principal business addresses of the parties and the decisions on the acts to be restrained are located and originated within the court’s jurisdiction. The Court applied the exception to avoid injustice and irreparable injury, given that both parties resided in the National Capital Region and the orders to be enforced emanated from the corporation’s main office in San Juan, Metro Manila.
• Injunction bond — The injunction bond protects the party enjoined against loss or damage if it is finally decided that the injunction ought not to have been granted. The Court held that the alleged defect in the date of the bond was a typographical error and did not invalidate the writ, since the bond amply protected the enjoined party.

• "For an effective transfer of shares of stock the mode and manner of transfer as prescribed by law must be followed (Navea v. Peers Marketing Corp., 74 SCRA 65). As provided under Section 3 of Batas Pambansa Bilang 68, otherwise known as the Corporation Code of the Philippines, shares of stock may be transferred by delivery to the transferree of the certificate properly indorsed. Title may be vested in the transferree by the delivery of the duly indorsed certificate of stock (18 C.J.S. 928, cited in Rivera v. Florendo, 144 SCRA 643). However, no transfer shall be valid, except as between the parties until the transfer is properly recorded in the books of the corporation (Sec. 63, Corporation Code of the Philippines)." — This passage states the requisites for an effective transfer of shares and supports the ruling that EBE remained the controlling stockholder because the indorsed certificates were never delivered.
• "To be an intracorporate controversy it must pertain to any of the following relationships: (1) between the corporation, partnership or association and the public; (2) between the corporation, partnership or association and the state in so far as its franchise, permit or license to operate is concerned; (3) between the corporation, partnership or association and its stockholders, partners, members or officers; and (4) among the stockholders, partners or associates themselves" — This passage defines the four relationships that constitute an intra-corporate controversy, which the Court used to hold that the dispute was contractual and outside the SEC’s jurisdiction.
• "Generally, an injunction under Section 21 of Batas Pambansa Bilang 129 is enforceable within the region. The reason is that the trial court has no jurisdiction to issue a writ of preliminary injunction to enjoin acts being performed or about to be performed outside its territorial boundaries." — This passage states the general rule on territorial enforceability of injunctions, which the Court then applied with the Dagupan exception.
• "Rescission would result in mutual restitution (Magdalena Estate v. Myrick, 71 Phil. 344) so it is but proper to allow EBE to manage the farm." — This passage explains why the Pasig Court properly restored EBE to management pending rescission, because rescission entails mutual restitution.

• Navea vs. Peers Marketing Corp., 74 SCRA 65 — Cited for the rule that for an effective transfer of shares of stock, the mode and manner of transfer prescribed by law must be followed.
• Rivera vs. Florendo, 144 SCRA 643 — Cited for the rule that title may be vested in the transferee by delivery of the duly indorsed certificate of stock; also included among the cases defining an intra-corporate controversy.
• Magdalena Estate vs. Myrick, 71 Phil. 344 — Cited for the rule that rescission results in mutual restitution.
• Union Glass and Container Corp. vs. SEC, 126 SCRA 31 — Cited for the relationships that constitute an intra-corporate controversy.
• DMRC Enterprises vs. Este Del Sol Mountain Reserve Inc., 132 SCRA 293 — Cited for the relationships that constitute an intra-corporate controversy.
• Abeijo vs. De la Cruz, 149 SCRA 654 — Cited for the relationships that constitute an intra-corporate controversy.
• C.F. Tan vs. Sarmiento, L,24971, June 20, 1975 — Cited for the general rule that a trial court has no jurisdiction to issue a writ of preliminary injunction to enjoin acts being performed or about to be performed outside its territorial boundaries.
• Dagupan Electric Corporation et al. vs. Pano, 95 SCRA 693 — Cited for the exception allowing the enforcement of an injunction to restrain acts committed outside the territorial jurisdiction of the issuing court where the principal business addresses of the parties and the decisions on the acts to be restrained are located and originated within the court’s jurisdiction.

• Section 3, Batas Pambansa Bilang 68 (Corporation Code of the Philippines) — Provides that shares of stock may be transferred by delivery to the transferee of the certificate properly indorsed. The Court applied this provision in holding that no effective transfer occurred because the indorsed certificates were not delivered to AGA.
• Section 63, Corporation Code of the Philippines — Provides that no transfer shall be valid, except as between the parties, until the transfer is properly recorded in the books of the corporation. The Court applied this provision in holding that AGA or his nominees were not lawful stockholders because the transfer could not be recorded without delivery of the certificates.
• Presidential Decree No. 902-A as amended by Presidential Decree No. 1758 — Grants the Securities and Exchange Commission exclusive original jurisdiction over intra-corporate controversies. The Court held that the dispute was contractual and not intra-corporate, so the SEC did not have jurisdiction.
• Section 21, Batas Pambansa Bilang 129 — Provides that an injunction is enforceable within the region. The Court applied the general rule but recognized the exception allowing enforcement outside the territorial region under the circumstances of the case.

Melencio-Herrera (Chairman), Padilla, and Regalado, JJ., concurred. Sarmiento, J., was on leave.