Lao vs. King

Corporate by-laws may shorten the statutory notice period for regular stockholders' meetings below the two weeks prescribed by Section 50 of the Corporation Code, the statute expressly allowing a different period set by the by-laws; however, a stockholders' meeting and the elections conducted thereat are void where the corporation defies prior judicial and administrative orders mandating use of a specific stockholders' list, and stock dividends issued without the approval of stockholders representing at least two-thirds of the outstanding capital stock are invalid under Section 43 of the Corporation Code.

Philadelphia School, Inc. (PSI) was organized in 1970 with an authorized capital stock of ₱2,000,000 divided into 20,000 shares at ₱100 par value, of which 4,600 shares were subscribed and paid up. Two groups of stockholders — one led by Lydia Lao and the other by Philip King — had been contesting control and management of PSI since the late 1990s. King's father, Ong Y. Seng, had been the largest shareholder with 1,200 shares, which he transferred to King before his death in 1994. Lao refused to recognize King's ownership and the validity of the transfer, issuing a Secretary's Certificate on August 15, 1998 purporting to nullify the transfer. The dispute had already reached the Supreme Court in G.R. No. 160358 (Lao vs. King), where the Court on August 31, 2006 sustained the trial court's decision nullifying Lao's group's acts and ordering new elections based on valid shareholdings. During the pendency of that earlier case, the SEC and the RTC had issued orders requiring the use of the 1997 General Information Sheet as the basis for the schedule of stockholders and their respective shareholdings in any stockholders' meeting.

Philadelphia School, Inc. (PSI) was organized in 1970 with an authorized capital stock of ₱2,000,000 divided into 20,000 shares at ₱100 par value, of which 4,600 shares were subscribed and paid up. Ong Y. Seng, father of Philip King, held the most subscribed shares at 1,200. Before his death in 1994, Ong Y. Seng obtained board approval to transfer his shares to King, who was thereafter consistently elected to the PSI board. Lydia Lao, the former president, refused to acknowledge King's ownership of the 1,200 shares. On August 15, 1998, Lao issued a Secretary's Certificate purporting to nullify the transfer of shares to King. A special stockholders' meeting on May 23, 1998 had elected Yao Bio Lim as president and King as vice president, but Lao refused to recognize the new directors and officers.

In April 1999, King discovered that a stockholders' meeting had been conducted on March 19, 1999, electing Lao, William Chua Lian, Jeffrey Ong, and Henry Sy as new board members. King filed a petition before the SEC to enjoin them from representing themselves as officers and directors and to nullify their acts. The case was eventually transferred to RTC Branch 93 (Civil Case No. Q-01-42972), where Judge Bruselas rendered a decision on September 25, 2002 granting King's petition, nullifying the August 15, 1998 meetings and elections, restoring King's 1,200 shares, and ordering new elections based on valid shareholdings. During the pendency of that case, the SEC issued an Order on March 13, 2000 and the RTC issued an Order on March 23, 2001, both requiring the use of the 1997 General Information Sheet as the basis for the schedule of stockholders and their respective shareholdings in any stockholders' meeting.

Meanwhile, on March 15, 2002, a general stockholders' meeting was held at which Lao, Ong, Henry Sy, Sy Tian Tin, Sy Tian Tin, Jr., and Paul Chua were elected as board members, with Chua Lian as chairman. The Notice dated March 4, 2002, sent to stockholders on March 5, 2002, stated that the "annual Meeting of the Stockholders" was scheduled on March 15, 2002 at 9:00 a.m. at the school board room, but did not state the agenda or purpose. The notice sent to King was still in the name of his deceased father, Ong Y. Seng, while that sent to Yao Bio Lim included the name of his deceased father, Yao Chek. During the meeting, King and Atty. Garaygay (proxy of stockholder Lucia Cheng) were asked to leave because they were allegedly not stockholders. Yao Bio Lim was allowed to vote for only one share despite holding proxies for his brothers. Petitioners used a schedule of stockholders different from the 1997 General Information Sheet, in defiance of the prior SEC and RTC orders. They also purportedly issued 300% stock dividends to some stockholders and caused the transfer of 200 shares from David Lio to Betty Lao/Lydia Lao, 99 shares from Ong Giok King to Lydia Lao/Sy Tian Tin, and 1 share from William Chua Lian to Paul Chua, all without prior notice to all stockholders.

On March 26, 2002, Yao Bio Lim and King filed a petition before RTC Branch 90 seeking to annul the March 15, 2002 elections, the issuance of stock dividends, and the illegal transfer of shares. The trial court rendered its decision on March 20, 2007 in favor of respondents, nullifying the meeting and elections, the 300% stock dividends, and the share transfers, and awarding ₱100,000 as temperate damages, ₱50,000 as moral damages, and ₱100,000 as attorney's fees and litigation expenses. The Court of Appeals affirmed this decision on August 3, 2011 and denied reconsideration on March 21, 2012. Petitioners then elevated the case to the Supreme Court.

• Nature of the Meeting: Petitioner argued that the Court of Appeals erred in treating the March 15, 2002 meeting as a special meeting; it was a regular annual meeting that did not require the notice to state its object and purpose under the by-laws.
• Notice Period: Petitioner maintained that the by-laws of PSI specifically provide for a five-day prior notice for regular meetings, which should prevail over the two-week period under Section 50 of the Corporation Code, and that the notice mailed on March 5, 2002 complied with the by-laws.
• Adequacy of Notice to Yao Bio Lim: Petitioner contended that Yao Bio Lim was properly notified because he actually received the notice and personally attended the meeting, notwithstanding that the notice included the name of his deceased father.
• King's Stockholder Status: Petitioner argued that King could not be considered a legitimate stockholder of PSI in 2002 because the determination of the true ownership of the shares left by Ong Y. Seng was still pending before the RTC (Civil Case No. Q-01-42972) and was resolved only on April 28, 2011.
• Validity of Stock Dividends: Petitioner insisted that the 300% stock dividends were validly declared by the PSI board and ratified by stockholders owning two-thirds of the outstanding capital stock in a meeting held on March 22, 1997, with distribution implemented only on February 28, 2002.
• Alleged Defiance of SEC Orders: Petitioner faulted the Court of Appeals for not specifying which orders of the SEC and RTC they allegedly violated, and harped on the self-serving nature of the 1997 General Information Sheet, which they asserted was prepared by Yao Bio Lim.
• Award of Damages: Petitioner contested the award of moral and temperate damages, attorney's fees, and litigation expenses, arguing that respondents had not even prayed for temperate damages.

• Factual Issue Barred in Rule 45: Respondent countered that the issue of whether the March 15, 2002 meeting was a special meeting is a factual issue not proper in a Rule 45 petition, and that petitioners are estopped from raising this issue for the first time on appeal.
• Violation of Prior Orders: Respondent argued that petitioners defied the March 13, 2000 Order of the SEC and the March 23, 2001 Order of the RTC, both requiring the use of the 1997 General Information Sheet as the basis for the schedule of stockholders and their respective shareholdings.
• Invalidity of Stock Dividends: Respondent maintained that the 300% stock dividends were issued without the required approval of stockholders representing two-thirds of the outstanding capital stock, in violation of Section 43 of the Corporation Code.
• Entitlement to Damages: Respondent argued that the award of damages was proper given that petitioners' wrongful acts caused mental anguish, serious anxiety, and social humiliation, and compelled respondents to litigate to protect their stockholders' rights.

• Nature of the Meeting: Whether the March 15, 2002 stockholders' meeting was a regular or special meeting, and consequently whether the notice was required to state the object and purpose of the meeting.
• Notice Period: Whether the five-day notice period under PSI's by-laws prevails over the two-week notice period prescribed by Section 50 of the Corporation Code for regular stockholders' meetings.
• Validity of the Meeting and Elections: Whether the March 15, 2002 stockholders' meeting and the elections conducted thereat were valid despite petitioners' use of a stockholders' list different from the 1997 General Information Sheet in alleged defiance of prior SEC and RTC orders.
• Validity of Stock Dividends: Whether the 300% stock dividends were validly declared and issued in compliance with Section 43 of the Corporation Code.
• Award of Damages: Whether the awards of moral damages, temperate damages, and attorney's fees were properly granted.

• Nature of the Meeting: Yes. The March 15, 2002 meeting was a regular annual meeting, not a special meeting, because it was held on the third Friday of March as fixed by the by-laws and its agenda covered the standard order of business for annual meetings. The requirement to state the object and purpose in the notice applies only to special meetings.
• Notice Period: Yes. The five-day notice period under PSI's by-laws prevails over the two-week period in Section 50 of the Corporation Code, the statute expressly allowing a different period to be required by the by-laws. The notice mailed on March 5, 2002 for the March 15, 2002 meeting was therefore not irregular.
• Validity of the Meeting and Elections: No. The meeting and elections were void because petitioners defied prior orders of the SEC and RTC requiring use of the 1997 General Information Sheet as the basis for the stockholders' list, effectively refusing to recognize respondents' shareholdings and right to vote.
• Validity of Stock Dividends: No. The 300% stock dividends were invalid because the handwritten minutes of the March 22, 1997 meeting were insufficient to prove ratification, and respondents together with Lucia Cheng held approximately 42% of the outstanding capital stock, making the required two-thirds approval impossible.
• Award of Damages: Yes. The awards of moral damages, temperate damages, and attorney's fees were proper, petitioners having willfully deprived respondents of their property rights as stockholders despite prior judicial and administrative orders.

• Nature of the Meeting: Section 50 of the Corporation Code provides that regular meetings of stockholders shall be held annually on a date fixed in the by-laws. Article VIII(3) of PSI's by-laws fixed the annual meeting on the third Friday of March of every year. The Court took judicial notice that March 15, 2002 was the third Friday of March 2002. The Notice dated March 4, 2002 expressly referred to the "annual Meeting of the Stockholders." The agenda, which included elections of a new board and ratification of acts of the incumbent board, was the standard order of business in a regular annual meeting. The Court of Appeals had "sweepingly considered" the meeting a special meeting without discussing the factual bases for its conclusion. Because the meeting was regular, the requirement under Article VIII(5) of the by-laws that the notice state the object and purpose — applicable only to special meetings — did not apply. The Court also held that the issue could be passed upon despite being raised for the first time on appeal, applying the exception recognized in Lianga Lumber Co. vs. Lianga Timber Co., Inc. that a party may change legal theory on appeal when the factual bases would not require presentation of further evidence by the adverse party.

• Notice Period: Section 50 of the Corporation Code provides that written notice of regular meetings shall be sent at least two weeks prior to the meeting "unless a different period is required by the by-laws." Article VIII(5) of PSI's by-laws required notice to be mailed or personally delivered not less than five days prior to the meeting. The Court held that the by-laws' five-day period must prevail over the Corporation Code's two-week period, as the statute expressly allows the shortening or lengthening of the notice period. The notice mailed on March 5, 2002 for the March 15, 2002 meeting thus complied with the by-laws.

• Validity of the Meeting and Elections: Despite the meeting being regular and the notice being sufficient, the Court found other grounds to nullify it. Petitioners used a schedule of stockholders different from the 1997 General Information Sheet, in defiance of the March 13, 2000 SEC Order and the March 23, 2001 RTC Order, both of which required the use of the 1997 General Information Sheet as the basis for the stockholders' list. The Court rejected petitioners' contention that King was not a legitimate stockholder in 2002 because his ownership was resolved only on April 28, 2011; the prior orders were issued before the March 15, 2002 meeting and remained binding until modified or reversed. Citing Republic Commodities Corporation vs. Oca, the Court emphasized that no party may unilaterally disobey or disregard court or quasi-judicial orders based on its own view of their correctness. Orders must be faithfully complied with even if susceptible to well-founded doubts, and a dissatisfied party's recourse is to seek reconsideration or appeal — not to disregard them. By defying the orders, petitioners effectively refused to recognize respondents' shareholdings and right to vote, rendering void all acts during the meeting, including the election of officers and the declaration of stock dividends.

• Validity of Stock Dividends: Section 43 of the Corporation Code requires that no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds of the outstanding capital stock at a regular or special meeting duly called for the purpose. The handwritten minutes of the March 22, 1997 meeting — offered by petitioners as proof of ratification — merely listed "Declaration of stock dividends" without indicating the number or percentage of stock dividends, the shares held by each stockholder present, or how many shares were represented and voted. The minutes were insufficient to prove that the 300% stock dividends distributed in 2002 were the same as those ratified in 1997. The RTC found that respondents and Lucia Cheng collectively held 1,950 shares, or approximately 42% of the outstanding capital stock of 4,600 shares, and that the stock dividends were issued without their approval. Without their approval, the required two-thirds or 67% vote could not have been met.

• Award of Damages: The award of moral damages found legal basis in Articles 2217 and 2220 of the Civil Code, which allow recovery of moral damages in case of willful injury to property. A stockholder's right to vote is inherent in and incidental to ownership of capital stock. Petitioners unjustifiably and obstinately refused to recognize respondents' shareholdings and to allow them to participate in the 2002 meeting, despite prior orders of the SEC and RTC, thus depriving respondents of their property rights. The Court of Appeals found that petitioners' acts caused mental anguish, serious anxiety, and social humiliation to respondents. The award of attorney's fees and litigation expenses was proper under Article 2208 of the Civil Code because respondents were compelled to litigate to protect their stockholders' rights. The award of temperate damages was likewise proper under Article 2224 of the Civil Code, which allows recovery when some pecuniary loss has been suffered but its amount cannot be proven with certainty. Although respondents had not specifically prayed for temperate damages, they had prayed for actual damages, and courts may award temperate damages in lieu of actual damages when the amount of actual damages is not sufficiently proven. The amount of ₱100,000 was found fair and reasonable.

• Primacy of Corporate By-Laws Over Statutory Default Periods — Section 50 of the Corporation Code expressly allows a different notice period to be set by the corporate by-laws. Where the by-laws provide for a shorter notice period than the statute's default two-week requirement, the by-laws prevail. The statute's default period is suppletory and yields to the parties' own corporate charter rules.

• Obligation to Comply with Judicial and Quasi-Judicial Orders Pending Appeal — A party may not unilaterally disregard or disobey orders of courts or quasi-judicial agencies based on its own belief that the orders are erroneous or beyond authority. As long as orders stand unmodified, they must be faithfully complied with, even if susceptible to well-founded doubts on jurisdictional grounds. Recourse for a dissatisfied party is to seek reconsideration or elevate to a higher tribunal, not to take the law into one's own hands.

• Stockholder's Right to Vote as a Property Right — The right to vote is inherent in and incidental to the ownership of capital stock. Willful deprivation of this right through refusal to recognize a stockholder's shareholdings, despite prior judicial and administrative orders, constitutes willful injury to property warranting moral damages under Articles 2217 and 2220 of the Civil Code.

• Temperate Damages in Lieu of Actual Damages — Under Article 2224 of the Civil Code, courts may award temperate or moderate damages when some pecuniary loss has been suffered but its amount cannot from the nature of the case be proven with certainty. This applies even if the plaintiff prayed for actual damages but failed to prove the exact amount, and even if temperate damages were not specifically prayed for.

• Exception to the Rule Against Changing Theory on Appeal — A party may change legal theory on appeal when the factual bases thereof would not require presentation of any further evidence by the adverse party, as recognized in Lianga Lumber Co. vs. Lianga Timber Co., Inc.

• "The theory espoused by appellants that a party may, at his own choice, directly disobey a court order which said party believes to be erroneous or beyond the court's authority is fraught with serious consequences." — This passage, quoted from Republic Commodities Corporation vs. Oca, articulates the foundational principle that judicial and quasi-judicial orders must be obeyed pending modification or reversal, and that parties may not unilaterally disregard them based on their own assessment of validity.

• "Under PSI's by-laws, notice of every regular or special meeting must be mailed or personally delivered to each stockholder not less than five (5) days prior to the date set for the meeting." — This quotation of Article VIII(5) of PSI's by-laws is central to the ruling that the five-day notice period in the by-laws prevails over the two-week default period in Section 50 of the Corporation Code, the statute expressly allowing a different period.

• "Clearly, the foregoing minutes alone would be insufficient to prove petitioners' claim that the 300% stock dividends were approved by the board of directors and ratified by the stockholders in the March 22, 1997 meeting." — This passage states the ratio decidendi for invalidating the 300% stock dividends, emphasizing that bare minutes lacking detail on the number of dividends, shares held by each stockholder, and votes cast cannot establish compliance with the two-thirds approval requirement under Section 43 of the Corporation Code.

• Lao vs. King, 532 Phil. 305 (2006) — The earlier related case involving the same parties, where the Court sustained the trial court's decision nullifying Lao's group's acts and ordering new elections based on valid shareholdings. The present case is a continuation of that dispute.
• Lianga Lumber Co. vs. Lianga Timber Co., Inc., 166 Phil. 661 (1977) — Cited for the exception to the rule against changing legal theory on appeal, allowing a party to raise a new theory when the factual bases would not require presentation of further evidence by the adverse party.
• Republic Commodities Corporation vs. Oca, 144 Phil. 26 (1970) — Cited for the principle that parties may not unilaterally disobey court orders they believe to be erroneous; orders must be faithfully complied with until modified or reversed.
• Tan vs. Sycip, 530 Phil. 609 (2006) — Cited for the proposition that a stockholder's right to vote is inherent in and incidental to the ownership of capital stock.
• Guy vs. Guy, G.R. No. 184068, April 19, 2016 — Cited for the principle that the Corporation Code allows the shortening or lengthening of the notice period by the corporate by-laws.

• Section 50, Batas Pambansa Blg. 68 (Corporation Code) — Governs regular and special meetings of stockholders or members, requiring written notice of regular meetings at least two weeks prior to the meeting "unless a different period is required by the by-laws." Applied to hold that PSI's by-laws providing a five-day notice period prevailed over the statutory default.
• Section 43, Batas Pambansa Blg. 68 (Corporation Code) — Governs the power to declare dividends, requiring that no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds of the outstanding capital stock at a regular or special meeting duly called for the purpose. Applied to invalidate the 300% stock dividends for lack of the requisite approval.
• Article VIII(5), PSI By-Laws — Provides that notice of every regular or special meeting shall be mailed or personally delivered not less than five days prior to the meeting, and that in case of a special meeting the notice shall state the object and purpose. Applied to determine that the five-day notice was sufficient for a regular meeting and that the purpose-statement requirement applied only to special meetings.
• Article 2217, Civil Code — Defines moral damages to include mental anguish, serious anxiety, social humiliation, and similar injury, recoverable as the proximate result of the defendant's wrongful act. Applied to sustain the award of moral damages.
• Article 2220, Civil Code — Provides that willful injury to property may be a legal ground for awarding moral damages. Applied to sustain the award of moral damages for petitioners' willful deprivation of respondents' stockholder rights.
• Article 2208, Civil Code — Enumerates the instances when attorney's fees and litigation expenses may be recovered, including when the defendant's act or omission has compelled the plaintiff to litigate to protect his interest. Applied to sustain the award of attorney's fees.
• Article 2224, Civil Code — Authorizes temperate or moderate damages when some pecuniary loss has been suffered but its amount cannot be proven with certainty. Applied to sustain the award of ₱100,000 as temperate damages in lieu of unproven actual damages.

Carpio (Chairperson), Peralta, Mendoza, and Martires, JJ., concurred.