Lee vs. Court of Appeals

A stockholder who transfers all legal title to his shares pursuant to a voting trust agreement ceases to be a director of the corporation, as eligibility for directorship requires legal ownership of at least one share recorded in the corporation's books. Accordingly, service of summons on such a former officer is not valid service upon the corporation under the Rules of Court.

International Corporate Bank, Inc. filed a complaint for a sum of money against private respondents Sacoba Manufacturing Corp., Pablo Gonzales, Jr., and Thomas Gonzales. The private respondents subsequently filed a third-party complaint against Alfa Integrated Textile Mills (ALFA) and its alleged officers, petitioners Ramon C. Lee and Antonio DM. Lacdao. The core dispute centered on whether ALFA had been properly brought under the court's jurisdiction through valid service of summons. The petitioners contended that a 1981 voting trust agreement transferring all ALFA shares to the Development Bank of the Philippines (DBP) had removed them from their corporate positions, making them improper recipients of summons.

• Nature of Action: The case originated from a third-party complaint filed by private respondents Sacoba Manufacturing Corp., Pablo Gonzales, Jr., and Thomas Gonzales against Alfa Integrated Textile Mills (ALFA) and petitioners Ramon C. Lee and Antonio DM. Lacdao in a sum of money case.
• The Voting Trust Agreement: On March 11, 1981, all stockholders of ALFA (including petitioners) executed a voting trust agreement with the Development Bank of the Philippines (DBP). The agreement assigned and delivered all ALFA shares to DBP as trustee, granting it full voting rights and management control. The agreement was to last five years but was renewable for as long as ALFA's obligations to DBP remained outstanding.
• Effect on Petitioners' Status: By virtue of the transfer, the petitioners ceased to own any shares standing in their names on ALFA's books. A DBP certification later confirmed the petitioners were no longer included in the list of ALFA officers as of April 1982.
• Service of Summons: On August 21, 1987, summons for ALFA was served on the petitioners. The petitioners challenged this service, arguing they were no longer officers or directors of ALFA.
• Lower Court Proceedings: The RTC initially upheld the service, but later reversed itself after considering the voting trust agreement. The Court of Appeals reversed the RTC, leading to this petition.

• Effect of Voting Trust on Directorship: Petitioners argued that the execution of the voting trust agreement, which transferred all their shares to DBP, deprived them of their positions as directors of ALFA. They invoked Section 23 of the Corporation Code, which requires a director to own at least one share in the corporation.
• Invalidity of Service: Petitioners maintained that since they were no longer officers or directors authorized under Rule 14, Section 13 of the Revised Rules of Court to receive summons for a corporation, the service effected on them was invalid and ineffective.

• Continuing Officer Status: Respondents countered that the voting trust agreement did not divest the petitioners of their positions as president and executive vice-president of ALFA. They argued that service of summons upon them as corporate officers was therefore proper.
• Purpose of Voting Trusts: Respondents contended that the general object of a voting trust is to ensure the permanency of the tenure of directors, implying the petitioners retained their status.

• Effect of Voting Trust on Directorship: Whether the execution of a voting trust agreement transferring all shares to a trustee deprives the transferring stockholder of his status as a director of the corporation.
• Validity of Service of Summons: Whether service of summons on a corporation through individuals who are no longer its officers or directors, by virtue of a voting trust agreement, constitutes valid service under Rule 14, Section 13 of the Revised Rules of Court.

• Effect of Voting Trust on Directorship: The transfer of all legal title to shares pursuant to a voting trust agreement divests the transferring stockholder of his status as a director. Under Section 23 of the Corporation Code, a director must own at least one share in his name on the corporation's books. The petitioners, having transferred all their shares, ceased to meet this qualification. The omission of the phrase "in his own right" from the new Code emphasizes that legal title, not merely beneficial ownership, is material.
• Validity of Service of Summons: Service of summons on ALFA through the petitioners was invalid. Rule 14, Section 13 enumerates the corporate representatives who may receive summons. The petitioners, no longer being directors or officers, did not fall within this enumeration. The rationale of the rule requires service on a representative so integrated with the corporation that he will know how to act on the legal papers. Permitting service on the petitioners would contravene the principle that a corporation is bound only by acts within the scope of its officers' authority.

• Voting Trust Agreement — A voting trust is an arrangement where stockholders transfer their shares to a trustee, separating voting rights from other rights of ownership for a period not exceeding five years (subject to exceptions). The transfer vests legal title in the trustee, making the trustee the stockholder of record. The transferring stockholder becomes the equitable or beneficial owner.
• Qualification of a Director — Pursuant to Section 23 of the Corporation Code, a director must own at least one share of the capital stock of the corporation, which share must stand in his name on the books of the corporation. Legal ownership, not merely beneficial ownership, is the controlling requirement.
• Service of Summons on a Private Domestic Corporation — Under Rule 14, Section 13 of the Revised Rules of Court, valid service may be made only on the corporation's president, manager, secretary, cashier, agent, or any of its directors. Service on a person not holding any of these positions at the time of service is ineffective.

• "The execution of a voting trust agreement, therefore, may create a dichotomy between the equitable or beneficial ownership of the corporate shares of a stockholder, on the one hand, and the legal title thereto on the other hand."
• "Considering that the voting trust agreement between ALFA and the DBP transferred legal ownership of the stock covered by the agreement to the DBP as trustee, the latter became the stockholder of record with respect to the said shares of stocks."
• "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 (1989) — Cited to correct the Court of Appeals' erroneous entry of judgment, clarifying the procedural rule on the period for appeal from a CA decision to the Supreme Court.
• Villa Rey Transit, Inc. v. Far East Motor Corp., 81 SCRA 303 (1978) — Cited for the rationale underlying the rule on service of summons on a corporation, requiring service on a representative integrated with the corporation.
• Vicente v. Geraldez, 52 SCRA 210 (1973) — Cited for the principle that a corporation can only be bound by acts within the scope of its officers' or agents' authority.

• Section 59, Corporation Code (Batas Pambansa Blg. 68) — Governs voting trust agreements, prescribing their form, duration, effect, and requirements for filing with the corporation and the Securities and Exchange Commission.
• Section 23, Corporation Code (Batas Pambansa Blg. 68) — Sets the qualification for directors, requiring ownership of at least one share of the corporation's capital stock standing in the director's name on the books.
• Section 13, Rule 14, Revised Rules of Court — Provides for service of summons upon a private domestic corporation by serving its president, manager, secretary, cashier, agent, or any of its directors.

• Justice Florenz D. Regalado
• Justice Abraham F. Sarmiento
• Justice Ricardo J. Francisco
• Justice Carolina C. Griño-Aquino