Lopez Dee vs. Securities and Exchange Commission

A Court of First Instance has no jurisdiction to restrain an SEC-ordered election of corporate directors and officers, and disobedience to such void order is not punishable as contempt, because exclusive jurisdiction over election controversies and other intra-corporate disputes lies with the SEC pursuant to Section 5 of P.D. No. 902-A, as amended, and only the Supreme Court may enjoin or correct SEC actuations.

Naga Telephone Co., Inc., organized in 1954 as a telephone public service, increased its authorized capital from P100,000.00 to P3,000,000.00 in 1974 with approval of the then Board of Communications subject to a one-year limit on share issuance without further authority. Communication Services, Inc. was its supplier of telephone equipment under an April 12, 1977 contract for manufacture, supply, delivery and installation, paid partly in Natelco common shares. Pedro Lopez Dee was the pre-1979 chairman-president later unseated, while Atty. Luciano Maggay, Augusto Federis, Nilda Ramos and Felipa Javalera constituted the rival board supported by CSI voting shares.

Naga Telephone Co., Inc. was organized in 1954 with authorized capital of P100,000.00. In 1974 it decided to increase authorized capital to P3,000,000.00 and, as required by the Public Service Act, applied to the then Board of Communications in BOC Case No. 74-84. On January 8, 1975, approval was granted subject to the condition that issuance of shares would be for one year, after which no further issues would be made without previous Board authority. Pursuant thereto Natelco filed amended articles with the SEC; the original P100,000.00 was already paid, and of the P2,900,000.00 increase, P580,000.00 was subscribed with P145,000.00 paid. Its stock was divided into 213,000 common shares and 87,000 preferred shares at P10.00 par.

On April 12, 1977, Natelco contracted with Communication Services, Inc. for manufacture, supply, delivery and installation of telephone equipment, issuing 24,000 common shares to CSI that day as downpayment and another 12,000 shares on May 5, 1979, in both instances without prior Board of Communications authorization. On May 19, 1979, stockholders elected seven directors for 1979-1980: Luciano Maggay, Augusto Federis, Nilda Ramos, Felipa Javalera, Justino de Jesus, Sr., Pedro Lopez Dee and Amelia Lopez Dee. Dee was unseated as chairman-president but retained as director with his wife; with CSI support, Maggay won a seat and became president in the reorganization. The last three never attended Maggay board meetings, which were attended by Maggay, Federis, Ramos and Javalera, the last two being CSI representatives.

Dee filed SEC Case No. 1748 questioning the May 19, 1979 election for lack of a valid stockholders' list, obtaining an SEC restraining order placing the 1978-1979 officers in hold-over capacity. That order was taken to the Supreme Court in G.R. No. 50885 where enforcement was restrained, allowing the Maggay group to assume office, until dismissal of that petition as premature restored hold-over status. During Maggay tenure from June 22, 1979 to March 10, 1980, without reforming the 1977 contract, the board contracted for additional equipment and issued to CSI 28,000 shares on October 2, 1979, 28,500 shares on November 5, 1979, 20,000 shares on November 14, 1979, 20,000 shares on January 7, 1980, and 16,500 shares on January 26, 1980, totaling with the earlier issues 149,000 shares.

Thereafter the SEC hearing officer on June 23, 1981 found CSI a stockholder entitled to vote except for 16,858 unexplained excess shares, listed 82 voting shareholders, and ordered a special meeting; the SEC en banc on April 5, 1982 sustained that order and directed new elections, denying reconsideration on May 20, 1982, while the hearing officer on May 4, 1982 had already set the election for May 22, 1982 after consultation with hold-over officers and counsel. Meanwhile on May 20, 1982 Antonio Villasenor, claiming as assignee of an option to repurchase 36,000 Natelco common shares, sued in Civil Case No. 1507 to allow repurchase and enjoin the election, obtaining a May 21, 1982 restraining order commanding all persons including public officers to desist from the Natelco election. According to the SEC record, the controlling majority nevertheless proceeded with the election on May 22, 1982 at Natelco offices in Naga City under SEC supervision, which the SEC on May 25, 1982 recognized as electing Javalera, Ramos, Maggay, Federis, Daniel Ilano, Nelin Ilano, Sr. and Ernesto Miguel as directors for 1982-1983 with Maggay as president, Ramos as vice-president, Saavedra as secretary, Javalera as treasurer and Ilano as auditor. Petitioner contended no election was held, citing the sheriff's return, while private respondents were charged with contempt on June 2, 1982 for publicly claiming an election was held.

The trial court found private respondents guilty of defying its restraining order, imposing imprisonment and restitution in favor of the Dee hold-over officers, and ordered their physical ouster; the Intermediate Appellate Court enjoined enforcement and ultimately annulled the contempt judgment, restoring the Maggay group.

• SEC Jurisdiction over Public Service Violation: Petitioner argued that the SEC en banc committed grave abuse of discretion in refusing to declare void the Natelco shares issued to CSI for alleged violation of Section 20(h) of the Public Service Act requiring prior administrative approval of transfers vesting more than forty percent of subscribed capital.
• Validity of 113,800 Shares Issued Sub Judice: Petitioner maintained that the 113,800 shares issued to CSI during the incumbency of the allegedly CSI-controlled Maggay board and while SEC Case No. 1748 was pending gave unfair and undue advantage and were invalid.
• Pre-emptive Rights: Petitioner argued that issuance of said shares without notifying Natelco stockholders violated their right of pre-emption to unissued shares.
• Non-Holding of May 22, 1982 Election: Petitioner insisted that no meeting and election were held in Naga City on May 22, 1982 as shown by the sheriff's return of the Camarines Sur restraining order.
• Trial Court Jurisdiction in Repurchase Suit: Petitioner maintained in G.R. No. 63922 that the lower court had jurisdiction because the case involved merely a private claim to repurchase common shares and the restraining order was not meant to stop the SEC-called election.

• SEC Power over Public Service Act Violation: Whether the Securities and Exchange Commission has the power and jurisdiction to declare null and void shares issued by Natelco to CSI for violation of Section 20(h) of the Public Service Act.
• Validity of Shares Issued During Pendency: Whether the issuance of 113,800 Natelco shares to CSI made during the pendency of SEC Case No. 1748 was valid.
• Pre-emptive Rights: Whether Natelco stockholders have a right of pre-emption to the 113,800 shares in question.
• Validity of May 22, 1982 Election: Whether private respondents were duly elected to the Natelco board at the election held on May 22, 1982.
• Jurisdiction to Restrain Corporate Election: Whether the trial judge has jurisdiction to restrain the holding of an election of officers and directors of a corporation.

• SEC Power over Public Service Act Violation: No. SEC jurisdiction under P.D. No. 902-A is limited to intra-corporate controversies and corporate regulation, not to violations of secondary public-service franchise under Section 20(h).
• Validity of Shares Issued During Pendency: Yes. The 113,800 shares were valid, having been issued pursuant to board resolution and stockholders' approval prior to May 19, 1979, before CSI control.
• Pre-emptive Rights: No. No pre-emptive right was violated because the shares were additional issues of originally authorized stock, issuable by the board without stockholders' meeting.
• Validity of May 22, 1982 Election: Yes. An election was in fact held on May 22, 1982 at Natelco offices and duly recognized by SEC order of May 25, 1982, rendering the challenge moot.
• Jurisdiction to Restrain Corporate Election: No. The CFI had no jurisdiction to enjoin the SEC-ordered election, an exclusively SEC matter; disobedience to its void restraining order was not contempt.

• SEC Power over Public Service Act Violation: Cognizance requires a controversy pertaining to relations between corporation and public, corporation and stockholders/officers, corporation and State as to franchise to exist, or among stockholders themselves. P.D. No. 902-A confers only matters intrinsically connected with corporate regulation and internal affairs, not all matters affecting corporations. SEC Case No. 1748 being limited to the election controversy, refusal to rule on Section 20(h), a secondary telephone franchise matter for the appropriate telecommunications body, was correct, since the SEC grants or revokes only the primary corporate franchise.
• Validity of Shares Issued During Pendency: A distinction was drawn between order to issue shares on or before May 19, 1979 and actual issuance after that date. Actual issuance during CSI voting and board control merely implemented prior board and stockholders' orders, not the initiative of the questioned May 19, 1979 board, which the party who gave the orders could not impugn. Reformation was understandable for lack of corporate funds to purchase CSI equipment, and unfair advantage was unsupported by additional evidence.
• Pre-emptive Rights: Under the cited rule, pre-emptive right is recognized only for new issues of shares, not additional issues of originally authorized shares, on the theory the original subscriber took shares knowing their definite proportion of authorized stock and cannot claim dilution upon re-offer of unsubscribed shares. Power to issue such shares is lodged in the board of directors, requiring no stockholders' meeting. Hence even assumed lack of notice did not invalidate the 113,800-share issuance.
• Validity of May 22, 1982 Election: The May 25, 1982 hearing-officer order declaring named stockholders duly elected for 1982-1983 evidenced the holding of the special meeting at Naga City. The contempt prosecution itself for holding the election in defiance of Judge Sunga's order confirmed the fact of holding. With annual elections continuing during nearly a decade of litigation, the issue was moot and academic.
• Jurisdiction to Restrain Corporate Election: The May 21, 1982 order expressly directed defendants, agents, and all public officers to desist from conducting the Natelco directors' election, amounting to injunctive relief against the SEC and its hearing officer under pain of contempt. Election controversies fall under Section 5 of P.D. No. 902-A within exclusive SEC jurisdiction. As a co-equal body at best, a Court of First Instance cannot interfere with SEC orders even on due process or jurisdictional grounds; only the Supreme Court may enjoin and correct the Commission. A court has no authority to punish disobedience of an order issued without authority, and contempt power is preservative, not vindictive.

• SEC jurisdiction under P.D. No. 902-A — The SEC has original and exclusive jurisdiction over (a) fraudulent devices or acts of directors/officers detrimental to public or stockholders, (b) intra-corporate controversies among stockholders/members and the corporation and between corporation and State as to franchise to exist, (c) election/appointment controversies of directors/trustees/officers/managers, and (d) suspension-of-payments/rehabilitation petitions. Applied to limit SEC Case No. 1748 to the Natelco election dispute and to sustain refusal to adjudicate alleged violation of Section 20(h) of the Public Service Act, cognizable by the telecommunications regulator.
• Limitation to corporate regulation and internal affairs — SEC jurisdiction extends only to matters intrinsically connected with regulation of corporations, partnerships and associations and their internal affairs, not to all matters affecting corporations. Applied to hold that secondary franchise violations were in excess of SEC jurisdiction, following Union Glass and Container Corp. vs. SEC, Pereyra vs. IAC, and Sales vs. SEC.
• Pre-emptive rights for originally authorized shares — Pre-emptive right is recognized only with respect to new issues of shares, not additional issues of originally authorized shares, since an original subscriber is deemed to have taken shares knowing their proportionate part of authorized stock and cannot claim dilution upon later re-offer; issuance power is lodged in the board without need of stockholders' meeting. Applied to validate the 113,800-share issuance to CSI despite claimed lack of notice, following Benito vs. SEC, et al..
• Exclusivity and non-interference with SEC orders — Nowhere does P.D. No. 902-A empower any Court of First Instance to interfere with SEC orders, not even on due process or jurisdictional grounds; the Commission is at least a co-equal body with such courts, and only the Supreme Court can enjoin and correct its actuations. Applied to void the CFI restraining order against the SEC-ordered May 22, 1982 Natelco election, following Philippine Pacific Fishing Co., Inc. vs. Luna.
• Void order and contempt — A court has no authority to punish for disobedience of an order issued without authority or jurisdiction; contempt power is to be exercised on the preservative and not vindictive principle. Applied to annul the contempt conviction for defying the void CFI restraining order.

• "Nowhere does the law (P.D. No. 902-A) empower any Court of First Instance to interfere with the orders of the Commission (SEC). Not even on grounds of due process or jurisdiction." — States the non-interference rule that voided the CFI restraining order against the SEC-ordered Natelco election and underpinned annulment of the contempt judgment.
• "The Commission is, conceding arguendo a possible claim of respondents, at the very least, a co-equal body with the Courts of First Instance. Even as such co-equal, one would have no power to control the other. But the truth of the matter is that only the Supreme Court can enjoin and correct any actuation of the Commission." — Defines the hierarchical relation barring trial-court injunctions against SEC proceedings.
• "It is an established rule that the court has no authority to punish for disobedience of an order issued without authority (Chanco v. Madrilejos, 9 Phil. 356; Angel Jose Realty Corp. v. Galao, et al., 76 Phil. 201)." — Provides the basis for holding that defiance of the jurisdiction-less restraining order did not constitute contempt.
• "Finally, it is well-settled that the power to punish for contempt of court should be exercised on the preservative and not on the vindictive principle." — Articulates the restraint on contempt power invoked to reinforce annulment of the six-month imprisonment and fine.

• Union Glass and Container Corp. vs. SEC, 126 SCRA 31 [1983] — Cited as authority for the four relationships that delimit SEC cognizance under Section 5 of P.D. No. 902-A.
• Pereyra vs. IAC, 181 SCRA 244 [1990] — Cited to show SEC jurisdiction is limited to matters intrinsically connected with corporate regulation and internal affairs.
• Sales vs. SEC, 169 SCRA 121 [1989] — Cited to the same effect that P.D. No. 902-A does not confer jurisdiction over all matters affecting corporations.
• Benito vs. SEC, et al., 123 SCRA 722 — Controlling precedent that pre-emptive right applies only to new issues, not additional issues of originally authorized shares, validating the CSI issuance.
• Philippine Pacific Fishing Co., Inc. vs. Luna, 12 SCRA 604, 613 [1983] — Controlling precedent that Courts of First Instance cannot interfere with SEC orders and only the Supreme Court may enjoin the Commission.
• Chanco vs. Madrilejos, 9 Phil. 356 — Cited for the rule that disobedience of an order issued without authority is not punishable.
• Angel Jose Realty Corp. vs. Galao, et al., 76 Phil. 201 — Cited to the same void-order contempt rule.
• Rivera vs. Florendo, 144 SCRA 643, 662-663 [1986] — Cited for the preservative, not vindictive, exercise of contempt power.
• Lipata vs. Tutaan, 124 SCRA 880 [1983] — Cited to the same contempt principle.

• Section 20(h), Public Service Act — Requires prior administrative approval of any transfer or sale of public-service shares vesting more than forty percent of subscribed capital; petitioner sought SEC nullification thereunder, but application was held outside SEC jurisdiction and better brought to the appropriate telecommunications body.
• Section 5, P.D. No. 902-A, as amended — Grants SEC original and exclusive jurisdiction over fraud devices, intra-corporate controversies, election controversies, and suspension/rehabilitation; applied to confine SEC Case No. 1748 to the Natelco election dispute and to establish exclusive SEC authority over the May 22, 1982 election to the exclusion of the CFI.

Fernan, C.J., Narvasa, Melencio-Herrera, Gutierrez, Jr., Cruz, Feliciano, Gancayco, Padilla, Bidin, Sarmiento, Griño-Aquino, Medialdea, Regalado and Davide, Jr., JJ., concur.