Lee vs. Court of Appeals

A stockholder who enters into a voting trust agreement and transfers legal title to his shares to a trustee ceases to qualify as a director under Section 23 of the Corporation Code because he no longer owns at least one share standing in his name on the corporate books; therefore, service of summons on such former director is not valid service on the corporation.

The dispute arose from a collection suit filed by International Corporate Bank, Inc. against private respondents, who subsequently impleaded Alfa Integrated Textile Mills (ALFA) and its alleged officers as third-party defendants. The central controversy involved the proper service of summons on ALFA after its stockholders, including the petitioners, had executed a voting trust agreement with the Development Bank of the Philippines (DBP) in 1981, transferring all shares to DBP as trustee to secure loans and allow DBP to assume management and control.

• On March 11, 1981, the stockholders of Alfa Integrated Textile Mills (ALFA), including petitioners Ramon C. Lee and Antonio Dm. Lacdao, executed a voting trust agreement with the Development Bank of the Philippines (DBP) as trustee.
• Under the agreement, the stockholders assigned and delivered all their shares to DBP, which issued trust certificates to them; DBP was authorized to vote the shares and take over management and control of the company.
• The agreement stipulated that the trustee (DBP) could cause one share to be transferred to any person to qualify such person as a director, and that the trust would last for five years renewable for as long as ALFA's obligations to DBP remained outstanding.
• Pursuant to the agreement, new stock certificates were issued in DBP's name, and DBP took over full control and management of ALFA; a DBP certification dated January 24, 1989 confirmed that petitioners were no longer officers of ALFA as of April 1982.
• On August 21, 1987, summons for ALFA was served on petitioners at their private addresses.
• On July 12, 1988, the trial court initially ordered alias summons to be served on ALFA through DBP based on petitioners' letter informing the court that management had been transferred to DBP.
• DBP refused to accept service, claiming it had not taken over the company; subsequently, private respondents moved to declare service on petitioners proper, which the trial court initially granted but later reversed upon learning of the voting trust agreement's effect.

• The execution of the voting trust agreement transferred legal title to all shares to DBP, thereby divesting petitioners of their status as directors under Section 23 of the Corporation Code, which requires a director to own at least one share standing in his name on the corporate books.
• As they ceased to be president and vice-president of ALFA upon the transfer of shares in 1981, they were no longer among the officers enumerated in Rule 14, Section 13 of the Revised Rules of Court authorized to receive service of summons for the corporation.
• To rule that they remained directors despite the transfer of legal title would violate Section 23 of the Corporation Code and contravene the principle that a corporation can only be bound by acts within the scope of its officers' authority.

• The voting trust agreement did not divest petitioners of their positions as directors because the general object of a voting trust is to ensure permanency of tenure of directors; petitioners remained beneficial or equitable owners of the shares.
• Citing Aguedo Agbayani's commentaries, respondents argued that the "depositing stockholder" holding voting trust certificates remains a stockholder for certain purposes and thus remains eligible as a director.
• The five-year period of the voting trust had allegedly lapsed in 1986, causing the legal title to revert to petitioners automatically, thereby validating the service of summons upon them in 1987.

• Procedural Issues:
  • Whether the Court of Appeals committed grave abuse of discretion amounting to lack of jurisdiction in reversing the trial court orders that declared service of summons on petitioners improper.
• Substantive Issues:
  • Whether a voting trust agreement transferring legal title to shares automatically divests the transferring stockholders of their positions as directors under Section 23 of the Corporation Code.
  • Whether service of summons on a corporation through former directors who had transferred their shares to a voting trustee is valid under Rule 14, Section 13 of the Revised Rules of Court.

• Procedural:
  • The Court of Appeals committed reversible error in reversing the trial court orders; the Supreme Court granted the petition for certiorari and set aside the Court of Appeals decision dated March 19, 1990 and its Resolution dated May 10, 1990.
• Substantive:
  • The voting trust agreement transferred legal title to the shares to DBP, causing petitioners to cease owning shares standing in their names on the corporate books; consequently, they ceased to be directors under Section 23 of the Corporation Code, which requires legal title (not merely beneficial ownership) for qualification.
  • The duration of the voting trust was contingent upon the fulfillment of ALFA's obligations to DBP, and evidence showed DBP still held legal title at the time of service (August 1987), having transferred its interest to the Asset Privatization Trust only in 1986 under a management agreement.
  • Service of summons on ALFA through petitioners was improper because Rule 14, Section 13 requires service to be made upon current presidents, managers, secretaries, cashiers, agents, or directors actually holding such positions and integrated with the corporation; service on former officers who no longer have authority does not bind the corporation.

• Voting Trust Agreements — Defined as agreements whereby stockholders transfer legal title to shares to a trustee for a period not exceeding five years (or longer if required by a loan agreement), separating voting rights from other ownership rights; the trustee becomes the stockholder of record while the transferor retains beneficial ownership.
• Director Qualifications (Legal Title Requirement) — Under Section 23 of the Corporation Code, a director must own at least one share of capital stock standing in his name on the corporate books; the deletion of the phrase "in his own right" (present in the old Code) signifies that legal title (not merely equitable or beneficial ownership) is the material requirement for qualification.
• Service of Summons on Corporations — Under Rule 14, Section 13 of the Revised Rules of Court, service must be made upon representatives so integrated with the corporation (president, manager, secretary, cashier, agent, or director) as to make it supposable that they will realize their responsibilities regarding legal papers; service on persons no longer holding such offices is ineffective.

• "By its very nature, a voting trust agreement results in the separation of the voting rights of a stockholder from his other rights such as the right to receive dividends, the right to inspect the books of the corporation, the right to sell certain interests in the assets of the corporation and other rights to which a stockholder may be entitled until the liquidation of the corporation."
• "With the omission of the phrase 'in his own right' the election of trustees and other persons who in fact are not beneficial owners of the shares registered in their names on the books of the corporation becomes formally legalized... Hence, this is a clear indication that in order to be eligible as a director, what is material is the legal title to, not beneficial ownership of, the stock as appearing on the books of the corporation."
• "Consequently, the petitioners ceased to own at least one share standing in their names on the books of ALFA as required under Section 23 of the new Corporation Code. They also ceased to have anything to do with the management of the enterprise. The petitioners ceased to be directors."
• "The rationale of the aforecited rule is that service must be made on a representative so integrated with the corporation sued as to make it a priori supposable that he will realize his responsibilities and know what he should do with any legal papers served on him."

• Refractories Corporation of the Philippines v. Intermediate Appellate Court (176 SCRA 539) — Cited for the rule that the period during which a motion for reconsideration is pending is not deducted from the 15-day period to appeal from the Court of Appeals to the Supreme Court.
• Sulo ng Bayan Inc. v. Araneta, Inc. (72 SCRA 347) — Cited for the principle that a corporation has a personality separate and distinct from its officers or members.
• Osias Academy v. Department of Labor and Employment (G.R. Nos. 83257-58, December 21, 1990) — Cited for the principle of separate corporate personality.
• Far Corporation v. Francisco (146 SCRA 197) — Cited for the rationale that service of summons must be made on a representative so integrated with the corporation as to ensure realization of responsibilities.
• Villa Rey Transit, Inc. v. Far East Motor Corp. (81 SCRA 303) — Cited in support of the rationale for specific service requirements on corporate representatives.
• Vicente v. Geraldez (52 SCRA 210) — Cited for the principle that a corporation can only be bound by acts within the scope of its officers' or agents' authority.
• Tankersly v. Albright (374 F. Supp. 538) — Cited for the three criteria distinguishing voting trusts from proxies: separation of voting rights, irrevocability for a definite period, and purpose to acquire voting control.
• People v. Lihme (269 Ill. 351, 109 N.E. 1051) — Cited for the proposition that legal title to stock is required for directorship.

• Section 23, Corporation Code (B.P. Blg. 68) — Provides that every director must own at least one share of capital stock standing in his name on the books of the corporation, and that cessation of such ownership automatically results in cessation of directorship.
• Section 59, Corporation Code (B.P. Blg. 68) — Governs voting trust agreements, including their creation, formal requirements (writing, notarization, filing), duration (not exceeding five years unless required by loan agreement), and effects (cancellation of old certificates, issuance of new ones to trustees).
• Rule 14, Section 13, Revised Rules of Court — Enumerates the officers of a private domestic corporation (president, manager, secretary, cashier, agent, or any of its directors) upon whom service of summons may be made.