Forest Hills Golf and Country Club, Inc. vs. SEC-CRMD

A corporation is classified as a stock corporation only when both requisites concur cumulatively: it has capital stock divided into shares and it is authorized to distribute to the holders of such shares dividends or allotments of surplus profits on the basis of the shares held; the absence of either requisite renders the corporation non-stock. The nature of a corporation as stock or non-stock is determined not by the nomenclature used by its incorporators but by the applicable statutes vis-à-vis all the provisions in its Articles of Incorporation and By-Laws, as well as evidence of its actual practice.

FHGCCI is a domestic corporation registered with the SEC on June 29, 1995, operating as a golf and country club. Its Articles of Incorporation describe it as a "non-profit stock corporation" and provide that no profit shall inure to the benefit of any member, that no dividend shall at any time be declared or paid, and that members shall be entitled only to a pro-rata share of the assets of the corporation upon dissolution or liquidation. The corporation's primary purpose is to promote social, recreational, and athletic activities on a non-profit basis among its members, including the construction and maintenance of a golf course, tennis courts, swimming pools, and other related sports and recreational facilities. The dispute arose when FHGCCI sought SEC approval of amendments to its By-Laws that would limit voting rights to bona fide individual Regular Members in good standing, prompting the SEC to rule on whether FHGCCI was a stock or non-stock corporation—a classification that determines whether such voting restrictions are permissible.

FHGCCI is a domestic corporation registered with the SEC on June 29, 1995, operating as a golf and country club. Its Articles of Incorporation describe it as a "non-profit stock corporation" and state that its primary purpose is to promote social, recreational, and athletic activities on a non-profit basis among its members, with the main objective of constructing and maintaining a golf course, tennis courts, swimming pools, and other related sports and recreational facilities. The Articles further provide that no profit shall inure to the benefit of any member, that no dividend shall at any time be declared or paid, and that members shall be entitled only to a pro-rata share of the assets of the corporation upon its dissolution or liquidation.

On August 6, 2013, FHGCCI filed an application with the SEC's Company Registration and Monitoring Department (SEC-CRMD) for approval of its Amended By-Laws. Among the pertinent amendments were provisions limiting the right to vote at any meeting of the members to bona fide individual Regular Members and the duly designated and accepted nominees of juridical entities in good standing (Article VI, Section 6.7); requiring the presence of at least a majority of Regular Members in good standing to constitute a quorum (Article VI, Section 6.9); and providing that the By-Laws may be amended or repealed by a majority vote of the Board of Directors and of all Regular Members in good standing (Article XVI, Section 16.3).

In a meeting with FHGCCI on October 22, 2013, the SEC-CRMD denied the proposed amendments for being contrary to Section 6 of Batas Pambansa Blg. 68, the Corporation Code, which provides that no share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares. FHGCCI sought reconsideration by letter dated November 5, 2013, arguing that it is a non-stock corporation and is allowed to limit the voting rights of its members under Section 89 of the Corporation Code. The SEC-CRMD issued a Letter-Order dated May 2, 2014, maintaining that FHGCCI is a stock corporation and is prohibited from restricting the voting rights of its shareholders. FHGCCI then filed a Memorandum Appeal with the SEC En Banc.

The SEC En Banc denied the appeal on July 23, 2019, declaring FHGCCI a stock corporation on several grounds: its Articles of Incorporation described it as a "non-profit stock corporation," which the SEC found contradictory; it issues shares of stock and is therefore authorized to distribute profits; the prohibition on dividend distribution is not determinative of classification; its shareholders receive ownership interest over its assets and have an inchoate right to the corporation's assets; its shares are investments that appreciate or depreciate in value; and its structure is a circumvention of the law. The SEC En Banc directed FHGCCI to amend its Articles of Incorporation to indicate that it is a stock corporation within one year. FHGCCI elevated the matter to the Court of Appeals via a Petition for Review under Rule 43 of the Rules of Court.

The CA affirmed the SEC En Banc ruling with modification on May 25, 2021. The CA held that the issue of whether FHGCCI is a stock or non-stock corporation had not been squarely raised in previous proceedings, rendering prior statements on the matter obiter dictum. It agreed with the SEC En Banc that FHGCCI declared in its Articles of Incorporation that it is a stock corporation, that it issues transferable certificates of stock, and that its shares increase or decrease in value depending on market forces. The CA concluded that FHGCCI is engaged in profit-making because the shares were issued not merely to set up the management and control of the corporation. The CA modified the directive by requiring FHGCCI to delete provisions in its Articles of Incorporation inconsistent with its nature as a stock corporation, rather than merely amending to indicate stock corporation status. FHGCCI filed the instant Petition for Review on Certiorari before the Supreme Court.

• Stock Corporation Requisites: Petitioner argued that a stock corporation must have both capital stock divided into shares and authority to distribute dividends or allotments of surplus profits to shareholders; since its Articles of Incorporation expressly prohibit dividend distribution, it cannot be classified as a stock corporation. The mere fact that it has shares of stock is insufficient, as neither the Corporation Code nor the Revised Corporation Code prohibits a non-stock corporation from issuing shares to its members.
• Profit Characterization: Petitioner maintained that the mere presence of profit does not destroy the character of a non-stock corporation; that members' access to facilities is consistent with its primary purpose; that any increase in the value of shares is not tantamount to dividends, which are declared out of unrestricted retained earnings and not through the sale of shares; and that the distribution of assets upon dissolution is expressly allowed under the Corporation Code.
• Conversion and Constitutional Concerns: Petitioner submitted that a non-stock corporation cannot be converted into a stock corporation by merely amending its Articles of Incorporation and By-Laws; that the CA failed to identify the specific provisions in its Articles of Incorporation that are supposedly inconsistent with stock corporations; and that the CA's directive would violate the right of its members to form associations under Article III, Section 8 of the 1987 Constitution and impair the obligation of petitioner to its members under its Articles of Incorporation and By-Laws.

• Appellate Jurisdiction: Respondent argued that the Petition failed to show special and important reasons warranting the exercise of the Court's discretionary appellate jurisdiction, and that the factual findings of the SEC En Banc, as affirmed by the CA, are entitled to great respect and finality given the SEC's special knowledge and expertise over matters within its jurisdiction.
• Stock Corporation Classification: Respondent maintained that the CA correctly ruled that petitioner is a stock corporation because its own Articles of Incorporation so provide, it has capital stock divided into shares, the authority to declare dividends is inherent in a common share even if corporations stipulate that no dividends will be declared, and it has a Board of Directors instead of a Board of Trustees.
• Profit-Making Activity: Respondent argued that although petitioner's Articles of Incorporation prohibit dividend distribution, it is engaged in a business for profit because the sale of its proprietary certificates together with the issuance of common shares entitles the investor to profit from it.
• SEC Mandate: Respondent claimed that the directive to amend petitioner's Articles of Incorporation is consistent with the SEC's legal mandate under Republic Act No. 8799, the Securities Regulation Code, to regulate corporations and ensure compliance with pertinent laws.

• Classification of Corporation: Whether the CA is correct in ruling that petitioner is a stock corporation.

• Classification of Corporation: No. FHGCCI is a non-stock corporation because, while it has capital stock divided into shares, its Articles of Incorporation expressly prohibit the distribution of dividends to its members, failing the second cumulative requisite under Section 3 of the Corporation Code and the Revised Corporation Code. The case was remanded to the SEC En Banc to evaluate the proposed By-Laws amendments in light of FHGCCI's proper non-stock classification.

• Classification of Corporation: Under Section 3 of the Corporation Code, as retained in Section 3 of the Revised Corporation Code, two requisites must concur for a corporation to be classified as a stock corporation: first, it has capital stock divided into shares, and second, it is authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held. The use of the word "and" indicates that the requisites are cumulative, not alternative; if only one is present, the corporation cannot be classified as stock. It was undisputed that FHGCCI has capital stock divided into shares, satisfying the first requisite. However, FHGCCI's Articles of Incorporation expressly state that no profit shall inure to the benefit of any member and that no dividend shall at any time be declared or paid. This clear prohibition against dividend distribution means the second requisite is absent. The SEC En Banc and the CA erred in ruling that FHGCCI operates for profit based on the potential appreciation of share value and the distribution of assets upon dissolution. The potential profit from the sale of shares is too speculative to serve as a basis for classifying the corporation as profit-making, as there is no guarantee that shares will increase in value and no evidence that FHGCCI has actively pursued a profit-making scheme. The distribution of assets upon dissolution is expressly allowed under Sections 94 and 93 of the Corporation Code and Revised Corporation Code, respectively, and is distinguishable from dividends, which are declared by a going concern corporation out of corporate profits. As explained in Wise & Co., Inc. vs. Meer, a distribution in liquidation is a return to stockholders of the value of their stock upon surrender of their interest, whereas a dividend is a recurrent return upon stock paid by a going concern. The nature of a corporation as stock or non-stock is not determined by the nomenclature used by its incorporators but by the applicable statutes vis-à-vis all the provisions in its Articles of Incorporation and By-Laws, as well as evidence of its actual practice. A corporation is presumed to have acted within the powers granted to it, and it was respondent's burden to establish that FHGCCI was operating for profit contrary to its declared non-profit purpose—a burden that was not discharged. Since FHGCCI is a non-stock corporation, it is permitted under Section 88 of the Revised Corporation Code (substantially the same as Section 89 of the Corporation Code) to limit the voting rights of its members. However, because the proposed amendments to the By-Laws were not limited to voting rights and the SEC had disapproved all amendments solely on the basis of the erroneous stock corporation classification, the Court remanded the case to the SEC En Banc for proper evaluation of all proposed amendments in light of FHGCCI's non-stock classification.

• Two-Requisite Test for Stock Corporation Classification — Under Section 3 of the Corporation Code and the Revised Corporation Code, a stock corporation must satisfy two cumulative requisites: (1) it has capital stock divided into shares, and (2) it is authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held. The use of "and" in the provision indicates that both requisites must concur; the absence of either renders the corporation non-stock. The Court applied this test to FHGCCI, finding that while it had capital stock divided into shares, its Articles of Incorporation expressly prohibited dividend distribution, thus failing the second requisite and rendering it a non-stock corporation.

• Determination of Corporate Nature by Statute and Practice, Not Nomenclature — The classification of a corporation as stock or non-stock is not determined by the nomenclature or term used by its incorporators in characterizing it, but by the applicable statutes vis-à-vis all the provisions in its Articles of Incorporation and By-Laws, as well as evidence of its actual practice. The Court applied this principle to reject the SEC En Banc and CA's reliance on FHGCCI's self-description as a "non-profit stock corporation," instead examining its primary purpose, its express prohibition on dividends, and the absence of evidence of profit-making operations.

• Distinction Between Dividends and Liquidating Distributions — Dividends are declared by a going concern corporation to its stockholders out of corporate profits, representing a recurrent return upon stock; stockholders do not lose their shares and may look to future returns. In contrast, a distribution of assets upon dissolution is a return to stockholders of the value of their stock upon surrender of their interest, necessarily terminating or wiping out stockholdings. The Court relied on Wise & Co., Inc. vs. Meer to clarify that the SEC En Banc and CA erroneously equated FHGCCI's distribution of assets upon dissolution with dividend distribution, when the two pertain to different matters treated as discrete transactions under the Corporation Code.

• Voting Rights of Non-Stock Corporations — Under Section 88 of the Revised Corporation Code (substantially the same as Section 89 of the Corporation Code), the right of members of any class or classes of a non-stock corporation to vote may be limited, broadened, or denied to the extent specified in the articles of incorporation or the by-laws. The Court applied this provision to hold that FHGCCI, as a non-stock corporation, is permitted to limit the voting rights of its members through its proposed By-Laws amendments.

• "Under Section 3 of the Corporation Code and the Revised Corporation Code, two requisites must concur before a corporation can be classified as a stock corporation, i.e., first, it has capital stock divided into shares, and second, it is authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held." — This passage articulates the controlling two-requisite test for stock corporation classification, the central ratio decidendi of the case.

• "The use of the word 'and' in Section 3 suggests that the two requisites are cumulative, rather than alternative. If only one requisite is present, the corporation cannot be properly classified as a stock corporation." — This passage clarifies the conjunctive reading of Section 3, establishing that both requisites must concur and that the presence of only one is insufficient for stock corporation status.

• "The nature of petitioner as a stock or non-stock corporation is not determined by the nomenclature or term used by its incorporators in characterizing it, but by the applicable statutes vis-à-vis all the provisions in its Articles of Incorporation and By-Laws, as well as evidence of its actual practice." — This passage states the doctrine that corporate classification depends on statutory requisites and actual practice rather than self-designation, a principle frequently cited in subsequent corporation law jurisprudence.

• "Section 87 of the Corporation Code and Section 86 of the Revised Corporation Code prohibit a non-stock corporation from distributing its income as dividends to its members, trustees, or officers, not the distribution of its remaining assets to its members upon dissolution. The two cannot be lumped together as they pertain to different matters and were clearly treated as discrete and distinct transactions under the foregoing laws." — This passage draws the critical distinction between prohibited dividend distributions and permissible asset distributions upon dissolution, refuting the lower tribunals' basis for classifying FHGCCI as a stock corporation.

• Collector of Internal Revenue vs. Club Filipino, Inc. de Cebu, 115 Phil. 310 (1962) — Controlling precedent followed. The Court cited this case for the proposition that a corporation with capital stock divided into shares but without authority to distribute dividends in its Articles of Incorporation or By-Laws cannot be considered a stock corporation. The Court applied the same reasoning to FHGCCI.

• Wise & Co., Inc. vs. Meer, 78 Phil. 655 (1947) — Followed for the distinction between dividends paid by a going concern and distributions in liquidation upon dissolution. The Court relied on this case to refute the SEC En Banc and CA's conflation of asset distribution upon dissolution with dividend distribution.

• Republic vs. City of Parañaque, 691 Phil. 476 (2012) — Cited for the two-requisite test for stock corporation classification and the rule that failure to satisfy both requisites renders a corporation non-stock.

• Valley Golf & Country Club, Inc. vs. Vda. de Caram, 603 Phil. 219 (2009) — Cited in a footnote as an example of a golf club recognized as a non-stock corporation despite having shares of stock with assigned value, supporting the proposition that non-stock corporations may issue shares.

• Calatagan Golf Club, Inc. vs. Clemente, Jr., 603 Phil. 295 (2009) — Cited in a footnote as another example of a non-stock golf club corporation, reinforcing that non-stock corporations are not exempt from obligations to treat members honestly and in good faith.

• Section 3, Batas Pambansa Blg. 68 (Corporation Code of the Philippines) — Defines stock and non-stock corporations. Stock corporations have capital stock divided into shares and are authorized to distribute dividends or allotments of surplus profits to shareholders; all other private corporations are non-stock. The Court applied this provision to hold that both requisites must concur for stock corporation classification, and that FHGCCI, lacking the second requisite, is non-stock.

• Section 3, Republic Act No. 11232 (Revised Corporation Code of the Philippines) — Retained the definition of stock and non-stock corporations from the Corporation Code. The Court applied the same two-requisite test, noting that the Revised Corporation Code took effect on February 23, 2019.

• Section 87, Corporation Code / Section 86, Revised Corporation Code — Defines a non-stock corporation as one where no part of its income is distributable as dividends to its members, trustees, or officers, subject to provisions on dissolution. The Court applied this provision to distinguish prohibited dividend distributions from permissible asset distributions upon dissolution.

• Section 88, Corporation Code / Section 87, Revised Corporation Code — Enumerates the permissible purposes of non-stock corporations, including social, civic service, or similar purposes. The Court found FHGCCI's primary purpose of promoting social, recreational, and athletic activities on a non-profit basis consistent with this provision.

• Section 94, Corporation Code / Section 93, Revised Corporation Code — Governs the rules of distribution of assets upon dissolution of a non-stock corporation, allowing distribution in accordance with the Articles of Incorporation or By-Laws. The Court applied this provision to hold that FHGCCI's distribution of assets to members upon dissolution is expressly allowed and cannot be used to justify classifying it as a stock corporation.

• Section 89, Corporation Code / Section 88, Revised Corporation Code — Provides that the right of members of non-stock corporations to vote may be limited, broadened, or denied to the extent specified in the articles of incorporation or by-laws. The Court applied this provision to hold that FHGCCI, as a non-stock corporation, is permitted to limit voting rights through its proposed By-Laws amendments.

• Article III, Section 8, 1987 Constitution — Provides that the right of the people to form unions, associations, or societies for purposes not contrary to law shall not be abridged. Petitioner invoked this provision to argue that the CA's directive to amend its Articles of Incorporation would violate its members' constitutional right to form associations.

Gesmundo, C.J., Leonen, SAJ., Hernando, Zalameda, Gaerlan, Rosario, J. Lopez, Marquez, Kho, Jr., and Villanueva, JJ., concur.

Caguioa, J., on official business but left a concurring opinion. Justice Caguioa concurred with the result but expressed reservations regarding the classification of FHGCCI as a non-stock corporation. He opined that Section 3 of the Corporation Code should be interpreted such that a non-stock corporation cannot possess either of the two concurrent requisites of a stock corporation—meaning a non-stock corporation cannot issue stocks at all, not merely lack the authority to distribute dividends. He further submitted that the conceptual contradiction of a "non-profit stock corporation" was not created by the Corporation Code itself but resulted from a flawed application and interpretation of its provisions, and therefore the Court need not defer to the legislature to resolve the issue but should clarify and correct the confusion itself. He argued that FHGCCI, as a non-stock corporation, must fully align its corporate attributes to that of a non-stock corporation, including the removal of any feature that would confuse its classification, such as the existence of capital stock and the issuance of stocks to shareholders.

Lazaro-Javier, J., on official business. Dimaampao, J., on leave. Singh, J., on leave.