F & S Velasco Company, Inc. vs. Madrid

A transferee of shares, even if ownership is acquired by inheritance or self-adjudication, cannot exercise the rights of a stockholder—including the right to call meetings, vote, or be voted for—until the transfer is duly recorded in the corporation's Stock and Transfer Book in accordance with Section 63 of the Corporation Code; the General Information Sheet filed with the SEC is not conclusive evidence of share ownership and cannot substitute for proper registration in the corporate books.

F & S Velasco Company, Inc. (FSVCI) was organized in 1987 with five incorporators including Angela V. Madrid and her spouse, Dr. Rommel L. Madrid. After the death of her parents, Angela inherited their shares, acquiring 70.82% of the corporate stock and becoming the controlling stockholder. Upon Angela's intestate death on September 20, 2009, Dr. Madrid executed an Affidavit of Self-Adjudication claiming her entire estate, including her FSVCI shares. This led to a corporate control dispute between Dr. Madrid (Madrid Group) and the remaining original stockholders led by Saturnino O. Velasco (Saturnino Group), with both factions conducting competing meetings on November 6 and November 18, 2009, respectively, each electing a different set of corporate officers and claiming legitimate control of the corporation.

• FSVCI was organized on June 8, 1987 with incorporators Francisco O. Velasco, Simona J. Velasco, Angela V. Madrid, Dr. Rommel L. Madrid, and Saturnino O. Velasco.
• After the deaths of Simona (June 12, 1998) and Francisco (June 22, 1999), their daughter Angela inherited their shares, giving her control of 70.82% of FSVCI's total shares (16,998 out of 24,000 shares).
• As of May 11, 2009, the share distribution was: Angela (16,998 shares), Madrid (1,000 shares), Rosina B. Velasco-Scribner (6,000 shares), Irwin J. Seva (1 share), and Mercedez Sunico (1 share).
• Angela died intestate and without issue on September 20, 2009 while serving as Chairman of the Board of Directors; the other members were Madrid, Scribner, Seva, and Sunico.
• On October 8, 2009, Madrid executed an Affidavit of Self-Adjudication covering Angela's estate, including her 70.82% ownership of FSVCI shares, claiming to be the sole heir.
• On November 10, 2009, Madrid executed deeds of assignment transferring one share each to Vitaliano B. Ricafort, Peter Paul L. Danao, Maureen R. Labalan, and Manuel L. Arimado in preparation for the November 18 meeting.
• On November 6, 2009, Seva (as corporate secretary) called an Emergency Meeting attended by Saturnino, Seva, and Sunico, where Saturnino was recognized as a Board member and elected President, and Scribner was elected Vice-President.
• On November 18, 2009, the Madrid Group held their Special Stockholders' and Re-Organizational Meeting, ousting the current Board members (except Madrid) and electing Madrid as President, Danao as Vice-President, Arimado as Corporate Secretary, and Labalan as Treasurer.
• Madrid subsequently filed a petition for letters of administration for Angela's estate (S.P. No. M-7025) before RTC-Makati, where he was recognized as sole heir and appointed Special Administrator through Orders dated December 29, 2010 and March 29, 2011.
• The claim of Angela's purported biological sister, Lourdita J. Estevez, was dismissed by the CA and subsequently by the Supreme Court, attaining finality on June 16, 2014.
• At the time of the November 18, 2009 meeting, the transfer of Angela's shares to Madrid had not been registered in FSVCI's Stock and Transfer Book, though a General Information Sheet dated November 18, 2009 was filed with the SEC.

• The November 18, 2009 meeting called by Madrid was illegal and invalid because Madrid was not the registered owner of Angela's 70.82% shares at the time he called the meeting; mere inheritance does not confer the right to vote or call meetings without registration in the Stock and Transfer Book.
• The filing of the General Information Sheet with the SEC does not constitute valid registration of share transfer under Section 63 of the Corporation Code; the Stock and Transfer Book is the controlling document.
• The November 6, 2009 meeting was the valid corporate meeting conducted by the legitimate corporate secretary.
• There was no basis for the appointment of a Management Committee as there was no showing of imminent danger of dissipation of assets or paralyzation of business required by Section 1, Rule 9 of the Interim Rules.

• Madrid validly acquired ownership of Angela's shares by virtue of the Affidavit of Self-Adjudication and as her sole heir, giving him 74.98% ownership (including his original 4.16%).
• The registration requirement under Section 63 was satisfied by the filing of the General Information Sheet dated November 18, 2009 with the SEC, which listed Madrid as the majority stockholder.
• As the majority stockholder, Madrid had the right to call the November 18, 2009 meeting and the elections held therein were valid and binding on the corporation.
• A Management Committee was necessary due to the persisting conflict between the parties, allegations of embezzlement of corporate funds, and uncertainty in corporate leadership creating imminent danger of asset dissipation, loss, wastage, and paralyzation of business operations prejudicial to minority stockholders.

• Procedural Issues:
  • N/A
• Substantive Issues:
  • Whether the Court of Appeals correctly ruled that the November 18, 2009 Special Stockholders' and Re-Organizational Meeting called by Madrid was legal and valid despite the lack of registration of the inherited shares in the Stock and Transfer Book.
  • Whether the Court of Appeals correctly ordered the appointment or constitution of a Management Committee to take over the corporate and business affairs of FSVCI.

• Procedural:
  • N/A
• Substantive:
  • The November 18, 2009 meeting is declared NULL and VOID. While Madrid validly inherited Angela's shares (ownership transferring upon her death under Article 777 of the Civil Code), Section 63 of the Corporation Code requires that transfers of shares be registered in the corporate books (Stock and Transfer Book) to be valid against the corporation and to enable the transferee to exercise rights of a stockholder, including the right to call meetings and vote. Until such registration, the transferee is considered an outsider. The filing of the General Information Sheet with the SEC is insufficient to satisfy this requirement; the Stock and Transfer Book is the controlling document.
  • The Management Committee constituted pursuant to the CA Decision is hereby DISSOLVED. The creation of a Management Committee is an extraordinary and drastic remedy under Section 1, Rule 9 of the Interim Rules of Procedure Governing Intra-Corporate Controversies, which requires proof of: (1) imminent danger of dissipation, loss, wastage or destruction of assets; and (2) paralyzation of business operations prejudicial to minority stockholders or the public. The CA's order was based merely on allegations of conflict and embezzlement without actual evidence from the records showing such imminent danger.
  • The Board of Directors prior to Angela's death (consisting of Madrid, Scribner, Seva, and Sunico) is ordered reconstituted to fill the vacancy left by Angela in accordance with Section 29 of the Corporation Code, and to act in a hold-over capacity until successors are elected and qualified pursuant to Section 23 of the Corporation Code.

• Registration of Share Transfers (Section 63, Corporation Code) — Shares of stock are personal property that may be transferred by delivery of the certificate, but no transfer shall be valid, except as between the parties, until recorded in the books of the corporation. Registration enables the transferee to exercise all rights of a stockholder and informs the corporation of changes in ownership; until registration, the transferee is an outsider.
• Stock and Transfer Book as Controlling Document — While the General Information Sheet (GIS) filed with the SEC provides public information about the corporation, it is not conclusive as to the identities of stockholders and their ownership; the Stock and Transfer Book is the controlling document for determining share ownership and validity of transfers against the corporation.
• Management Committee as Extraordinary Remedy — The creation of a Management Committee is a drastic measure allowed only under pressing circumstances when there is inadequacy or exhaustion of other remedies. It requires strict compliance with statutory requisites: imminent danger of dissipation, loss, wastage or destruction of assets and paralyzation of business operations, supported by actual evidence and not mere allegations.
• Effect of Inheritance on Share Ownership (Article 777, Civil Code) — Ownership of property, including shares of stock, passes to the heir upon the death of the decedent. However, the right to exercise corporate incidents of ownership (such as voting and calling meetings) is subject to compliance with corporate formalities regarding registration of transfers in the Stock and Transfer Book.

• "No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred."
• "Until the transfer is registered, the transferee is not a stockholder but an outsider."
• "The mere inclusion as shareholder of petitioners in the General Information Sheet of PFSC is insufficient proof that they are shareholders of the company... As between the General Information Sheet and the corporate books, it is the latter that is controlling."
• "The creation and appointment of a management committee... is an extraordinary and drastic remedy to be exercised with care and caution; and only when the requirements under the Interim Rules... are shown. It is a drastic course for the benefit of the minority stockholders, the parties-litigants or the general public [and is] allowed only under pressing circumstances and when there is inadequacy, ineffectual or exhaustion of legal or other remedies."

• Batangas Laguna Tayabas Bus Co., Inc. v. Bitanga (415 Phil. 43, 2001) — Cited for the principle that until registration of share transfer is accomplished in the Stock and Transfer Book, the transferee cannot exercise rights of a stockholder, including the right to vote and be voted for; the unrecorded transferee is considered an outsider.
• Lao v. Lao (588 Phil. 844, 2008) — Cited to establish that the General Information Sheet is insufficient proof of stock ownership and that corporate books, specifically the Stock and Transfer Book, are controlling in determining shareholder status against the corporation.
• Monfort Hermanos Agricultural Dev't. Corp. v. Monfort III (478 Phil. 34, 2004) — Cited regarding the purpose of Section 26 of the Corporation Code (filing of GIS), which is to give the public information about the corporation's financial condition and operational status.
• Villamor, Jr. v. Umale (G.R. Nos. 172843 and 172881, September 24, 2014) — Cited for the requirements and extraordinary nature of creating a Management Committee under the Interim Rules on Intra-Corporate Controversies.
• Sy Chim v. Sy Siy Ho & Sons, Inc. (516 Phil. 256, 2006) — Cited for the principle that the power of the court to continue a business through a Management Committee must be exercised with the greatest care and caution.

• Section 63, Corporation Code (B.P. Blg. 68) — Governs the certificate of stock and transfer of shares, specifically the requirement of registration in the corporate books for validity against the corporation.
• Section 74, Corporation Code — Mandates the keeping of a Stock and Transfer Book as a record of all stocks and transfers.
• Section 23, Corporation Code — Provides that directors shall hold office for one year and until their successors are elected and qualified (hold-over capacity).
• Section 26, Corporation Code — Requires the submission of a General Information Sheet to the SEC regarding elected directors and officers.
• Section 29, Corporation Code — Governs the filling of vacancies in the board of directors, allowing the remaining directors to fill vacancies (if constituting a quorum) for the unexpired term.
• Article 777, Civil Code of the Philippines — Provides that ownership of property passes to the heir upon the death of the decedent.
• Section 1, Rule 9 of the Interim Rules of Procedure Governing Intra-Corporate Controversies (A.M. No. 01-2-04-SC) — Sets the requirements for the creation of a Management Committee: imminent danger of dissipation of assets and paralyzation of business operations.