Majority Stockholders of Ruby Industrial Corporation vs. Lim

A corporation's power to increase capital stock by issuing unissued shares from its authorized capital stock, while generally vested in the board of directors, is subject to the pre-emptive rights of existing stockholders under Section 39 of the Corporation Code and may be restricted or denied only under the articles of incorporation. Even where pre-emptive rights are denied under the articles, an issuance of shares may still be declared invalid if the controlling stockholders act in breach of trust and the primary purpose is to perpetuate control or "freeze out" the minority interest. During rehabilitation proceedings under SEC supervision, any capital increase must be coordinated with the Management Committee, and issuances made to implement a void rehabilitation plan are invalid.

Ruby Industrial Corporation (RUBY) was a domestic corporation engaged in glass manufacturing that faced severe liquidity problems beginning in 1980. In 1983, it filed for suspension of payments with the Securities and Exchange Commission (SEC), leading to the creation of a Management Committee (MANCOM) in 1984 to oversee rehabilitation. The case involves a protracted battle between majority stockholders (the Yu family) allied with Benhar International, Inc. (BENHAR), and minority stockholders led by Miguel Lim. The majority proposed rehabilitation plans involving capital infusion and credit facilities through BENHAR, which were opposed by minority stockholders and unsecured creditors as giving undue preference to BENHAR and prejudicing other creditors. After the Supreme Court nullified the Revised BENHAR/RUBY Plan in 1998, the majority stockholders attempted to enforce a capital stock increase and corporate term extension that had been approved in 1991 in anticipation of the void rehabilitation plan.

• Ruby Industrial Corporation (RUBY) filed a petition for suspension of payments with the SEC on December 13, 1983 due to severe liquidity problems, and the SEC declared RUBY under suspension of payments on December 20, 1983, enjoining disposition of its properties.
• On August 10, 1984, the SEC created a Management Committee (MANCOM) composed of representatives from RUBY's creditors to undertake management of RUBY and evaluate rehabilitation plans.
• Two rehabilitation plans were submitted: the BENHAR/RUBY Plan by majority stockholders (Yu family) and the Alternative Plan by minority stockholders led by Miguel Lim; the BENHAR/RUBY Plan involved BENHAR International, Inc. (owned by the Yu family) lending its credit line to RUBY and receiving management fees.
• On October 28, 1988, the SEC Hearing Panel approved the BENHAR/RUBY Plan, but the SEC En Banc enjoined its implementation on November 15, 1988, which the Supreme Court upheld in 1990 (G.R. No. L-88311).
• Meanwhile, BENHAR paid off RUBY's secured creditors and obtained deeds of assignment despite the suspension order; these were nullified by the SEC and affirmed by the Supreme Court in G.R. No. 96675 (1991).
• On September 18, 1991, the SEC Hearing Panel approved the Revised BENHAR/RUBY Plan which proposed an additional subscription of P30 Million and called for subscription of unissued shares worth P11.814 Million.
• On October 2, 1991, RUBY's Board of Directors (controlled by majority stockholders) resolved to issue 118,140 shares from the unissued portion of authorized capital stock to be subscribed by present stockholders in proportion to their holdings, with a provision allowing other stockholders to buy shares not taken up by those entitled.
• Minority directors objected to the October 2, 1991 meeting, requesting deferment until the SEC September 18, 1991 Order became final.
• On September 3, 1996, majority stockholders held a stockholders' meeting claiming 74.75% ownership (increased from 59.828%) and approved extension of RUBY's corporate term for another 25 years; the Amended Articles of Incorporation was filed with the SEC on September 24, 1996.
• Minority stockholders questioned the validity of the capital infusion, arguing it was made to implement the BENHAR/RUBY Plan which was under injunction and later nullified, and that it diluted their pre-emptive rights.
• On September 18, 2002, the SEC dismissed the petition for suspension of payments and dissolved the MANCOM, ruling that the 180-day period under the Rules of Procedure on Corporate Recovery had lapsed and that the capital infusion and corporate term extension were valid based on presumption of regularity.
• The Court of Appeals reversed the SEC on May 26, 2004, declaring the capital infusion and corporate term extension null and void, restoring the original 59.828%-40.172% shareholding ratio, and ordering liquidation.

• The Majority Stockholders and RUBY argued that the Court of Appeals erred in giving due course to a formally and substantially defective petition for review filed by Lim.
• They contended that the CA acted contrary to law by reversing the SEC's order of dismissal and substituting its judgment for that of the SEC on matters within the latter's expertise.
• They claimed that the CA erred in sustaining collateral attacks on final adjudications of the SEC, particularly regarding the approval of the amended articles of incorporation extending corporate term.
• They asserted that the capital infusion was validly approved by the Board of Directors on October 2, 1991, and that stockholders' approval was not required for the issuance of shares from unissued capital stock.
• They argued that the delay in the proceedings was caused by the minority stockholders' numerous appeals, and that the application of the 180-day period under the Rules on Corporate Recovery was mandatory.
• They maintained that the presumption of regularity attached to the SEC's approval of the amended articles of incorporation should not be disturbed.
• China Banking Corporation argued that the principle of stare decisis should not apply as it would result in manifest injustice, and that the nullification of deeds of assignment pronounced more than a decade ago had become legally inefficacious.
• China Bank contended that the CA overstretched the import of the Supreme Court's 1998 decision when it ordered the unwinding of illegal assignments, and that rehabilitation was not dependent on such unwinding.

• Miguel Lim and the minority stockholders argued that the capital infusion was illegal because it was implemented to carry out the Revised BENHAR/RUBY Plan which was under injunction and subsequently nullified by the Supreme Court.
• They contended that the issuance of additional shares violated their pre-emptive rights under Section 39 of the Corporation Code, as they were not given reasonable time to exercise their rights and the issuance was designed to dilute their 40.172% shareholding to 25.25%.
• They maintained that the MANCOM was neither informed nor consulted about the capital infusion in violation of the SEC's December 20, 1983 order and the powers of the MANCOM under P.D. No. 902-A.
• They argued that the extension of corporate term was invalid because it was approved by stockholders representing only 60% (not the required 2/3) of outstanding capital stock, given that the alleged increase to 74.75% was fraudulent.
• They asserted that the SEC erred in applying the 180-day period retroactively as it would impair vested rights and cause injustice, considering the delay was caused by the majority stockholders' refusal to account for funds and properties.
• They maintained that liquidation was the proper remedy given the expiration of corporate term, the divisiveness between stockholders, and the bleak prospects for rehabilitation.
• They argued that the unwinding of illegal assignments was necessary to prevent the majority from claiming to be secured creditors and foreclosing on RUBY's prime properties to the prejudice of unsecured creditors.

• Procedural Issues:
  • Whether private respondents MANCOM and Lim engaged in forum shopping when they filed separate petitions before the CA assailing the September 18, 2002 SEC Order.
  • Whether the defects in the certification of non-forum shopping submitted by Lim warrant the dismissal of his petition before the CA.
  • Whether the CA erred in reversing the SEC's order of dismissal which was based on the lapse of the 180-day period under the Rules of Procedure on Corporate Recovery.
• Substantive Issues:
  • Whether the capital stock increase implemented by the majority stockholders in October 1991 was valid considering it was done to implement a rehabilitation plan subsequently declared void.
  • Whether the issuance of additional shares violated the pre-emptive rights of minority stockholders under Section 39 of the Corporation Code or constituted a breach of trust to "freeze out" the minority.
  • Whether the extension of RUBY's corporate term for another 25 years was valid given the disputed shareholding percentages.
  • Whether the SEC or the Regional Trial Court has jurisdiction over the liquidation proceedings.
  • Whether the deeds of assignment executed by creditors in favor of BENHAR and its conduits should be unwound and declared void.

• Procedural:
  • The Supreme Court held that there was no forum shopping because MANCOM and Lim represented different groups with different interests—the minority stockholders and the management committee—each having distinct rights to protect, citing Ramos, Sr. v. Court of Appeals.
  • The Court ruled that the belated submission of special power of attorney by minority stockholders to Lim did not warrant dismissal, as a derivative suit may be filed by a minority stockholder on behalf of the corporation which is the real party in interest.
  • The Court found that the SEC erred in automatically applying the 180-day dismissal provision under Section 4-9 of the Rules on Corporate Recovery, as the delay was not due to the minority stockholders' fault but to the majority's refusal to account for transactions and the pendency of appeals caused by the majority's insistence on void rehabilitation plans.
• Substantive:
  • The Court affirmed that the capital infusion of P11.814 Million implemented through the October 2, 1991 board resolution was null and void because it was done to implement the Revised BENHAR/RUBY Plan which was subsequently nullified by the Court in G.R. Nos. 124185-87, and because it was done without consulting the MANCOM which had stepped into the shoes of the board during rehabilitation.
  • The Court ruled that the issuance of shares violated the pre-emptive rights of minority stockholders under Section 39 of the Corporation Code, as they were not given reasonable time to exercise their rights, and constituted a breach of trust where the primary purpose was to dilute minority interests from 40.172% to 25.25% and perpetuate control.
  • The Court declared the extension of RUBY's corporate term null and void because it was based on the fraudulent capital infusion and there was insufficient proof that stockholders representing 2/3 of the actual outstanding capital stock approved the extension.
  • The Court ordered the restoration of the original capital structure (majority 59.828%, minority 40.172%) and the unwinding of all illegal assignments of credit executed during the suspension of payments.
  • The Court ruled that while the SEC has jurisdiction to order dissolution, jurisdiction over liquidation proceedings pertains to the Regional Trial Court, and ordered the SEC to transfer the case to the appropriate RTC for supervised liquidation under R.A. No. 10142 (FRIA).

• Pre-emptive Rights under Section 39 of the Corporation Code — Defined as the right of stockholders to subscribe to all issues or disposition of shares in proportion to their shareholdings; may be restricted or denied under the articles of incorporation but requires reasonable time for exercise. The Court applied this to hold that the issuance without notice and opportunity to exercise rights, intended to dilute minority interests, was invalid.
• Breach of Trust in Share Issuance (Freeze-out Doctrine) — Even where pre-emptive rights are denied under the articles, an issuance of shares may be objectionable if directors act in breach of trust with the primary purpose of perpetuating control or "freezing out" minority interests. The Court found the majority stockholders breached this duty by issuing shares to implement a void plan and dilute the minority.
• Derivative Suit — A suit by a shareholder to enforce a corporate cause of action where the corporation is the real party in interest and the suing stockholder is the nominal party. The Court applied this to allow Lim to file the action despite owning only 1.4% of shares, as he sued on behalf of RUBY to protect it from majority abuses.
• Law of the Case — Whatever is once irrevocably established as the controlling legal rule between the same parties continues to be the law of the case. The Court applied this to bar China Bank from relitigating the validity of the suspension order and deeds of assignment already declared void in prior decisions.
• Power to Issue Shares vs. Pre-emptive Rights — While the power to issue shares from unissued capital stock is vested in the board under Section 36 of the Corporation Code and does not require stockholder approval, it is subject to pre-emptive rights and the strictures against breach of fiduciary duties, particularly during rehabilitation when the MANCOM assumes control.

• "Pre-emptive right under Sec. 39 of the Corporation Code refers to the right of a stockholder of a stock corporation to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings. The right may be restricted or denied under the articles of incorporation, and subject to certain exceptions and limitations. The stockholder must be given a reasonable time within which to exercise their preemptive rights."
• "Thus, even if the pre-emptive right does not exist, either because the issue comes within the exceptions in Section 39 or because it is denied or limited in the articles of incorporation, an issue of shares may still be objectionable if the directors acted in breach of trust and their primary purpose is to perpetuate or shift control of the corporation, or to 'freeze out' the minority interest."
• "There can be no gainsaying the well-established rule in corporate practice and procedure that the will of the majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted by-laws not proscribed by law. It is, however, equally true that other stockholders are afforded the right to intervene especially during critical periods in the life of a corporation like reorganization, or in this case, suspension of payments, more so, when the majority seek to impose their will and through fraudulent means, attempt to siphon off Ruby's valuable assets to the great prejudice of Ruby itself, as well as the minority stockholders and the unsecured creditors."
• "Generally speaking, the voice of the majority of the stockholders is the law of the corporation, but there are exceptions to this rule. There must necessarily be a limit upon the power of the majority. Without such a limit the will of the majority will be absolute and irresistible and might easily degenerate into absolute tyranny."
• "Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and solvency... All assets of a corporation under rehabilitation receivership are held in trust for the equal benefit of all creditors to preclude one from obtaining an advantage or preference over another by the expediency of attachment, execution or otherwise."

• Ruby Industrial Corporation v. Court of Appeals (G.R. Nos. 124185-87, January 20, 1998) — Controlling precedent where the Supreme Court previously nullified the Revised BENHAR/RUBY Plan and the deeds of assignment executed in favor of BENHAR; the Court affirmed the CA's reliance on this prior ruling.
• Ramos, Sr. v. Court of Appeals (G.R. Nos. 80908 & 80909, May 24, 1989) — Cited for the rule that forum shopping requires identity of parties or interests represented; applied to hold that MANCOM and Lim, representing different interests, did not engage in forum shopping.
• Consuelo Metal Corporation v. Planters Development Bank (G.R. No. 152580, June 26, 2008) — Controlling precedent on jurisdiction; established that while SEC has jurisdiction to order dissolution, jurisdiction over liquidation proceedings pertains to Regional Trial Courts.
• Union Bank of the Philippines v. Concepcion (G.R. No. 160727, June 26, 2007) — Cited for the rule that SEC has jurisdiction over suspension of payments but liquidation falls under regular courts.
• Dee v. Securities and Exchange Commission (G.R. Nos. 60502 and 63922, July 16, 1991) — Cited for the rule that the power to issue shares is lodged in the board of directors and no stockholders' meeting is required for additional issuances.
• Western Institute of Technology, Inc. v. Salas (G.R. No. 113032, August 21, 1997) — Cited regarding derivative suits as the principal defense of minority shareholders against abuses by the majority.

• Section 36, Paragraph 6 of the Corporation Code (B.P. Blg. 68) — Grants stock corporations the power to issue or sell stocks; cited to acknowledge the board's general power to issue shares from unissued capital stock.
• Section 39 of the Corporation Code — Defines pre-emptive rights of stockholders to subscribe to additional shares in proportion to their holdings; central to the ruling that the issuance violated minority rights.
• Section 37 of the Corporation Code — Requires vote of 2/3 of outstanding capital stock for extension or reduction of corporate term; cited to invalidate the corporate term extension.
• Section 122 of the Corporation Code — Governs corporate liquidation; provides that a corporation continues for 3 years after dissolution for purposes of liquidation.
• Section 5(d) of Presidential Decree No. 902-A — Grants SEC jurisdiction over petitions for suspension of payments and rehabilitation; cited regarding SEC's power to create management committees.
• Section 4-9 of the SEC Rules of Procedure on Corporate Recovery — Provides for the 180-day period for approval of rehabilitation plans; the Court ruled that retroactive application would cause injustice in this case.
• Section 146 of Republic Act No. 10142 (Financial Rehabilitation and Insolvency Act of 2010) — Governs application of FRIA to pending cases; cited to direct RTC to supervise liquidation under FRIA.