Nautica Canning Corporation vs. Yumul

A corporation looks only to its books and records to determine who its stockholders are, and a private trust agreement among incorporators that one holds a share for another is binding only between them and does not bind the corporation; however, the determination of whether a contract is simulated or fictitious is a civil matter cognizable by courts of general jurisdiction, not by the SEC.

Nautica Canning Corporation was organized and incorporated on May 11, 1994 with an authorized capital stock of ₱40,000,000 divided into 400,000 shares at ₱100.00 par value, and a subscribed capital stock of ₱10,000,000. Roberto C. Yumul was one of its seven incorporators, subscribing to one share. First Dominion Prime Holdings, Inc. was Nautica's parent company, chaired by Alvin Y. Dee, who was also Nautica's principal subscriber with 89,991 shares. On December 19, 1994, Yumul was appointed Chief Operating Officer/General Manager of Nautica, and on the same date, First Dominion granted Yumul an Option to Purchase up to 15% of its subscribed shares in Nautica.

Nautica Canning Corporation was incorporated on May 11, 1994 with an authorized capital stock of ₱40,000,000 divided into 400,000 shares with a par value of ₱100.00 per share. Its subscribed capital stock was ₱10,000,000, with paid-in subscriptions from seven incorporators. Alvin Y. Dee was the principal subscriber with 89,991 shares, while Roberto C. Yumul subscribed to one share. On December 19, 1994, Yumul was appointed Chief Operating Officer/General Manager of Nautica with a monthly salary of ₱85,000 plus 5% of the company's annual operating profit. On the same date, First Dominion Prime Holdings, Inc., Nautica's parent company, through its Chairman Alvin Y. Dee, granted Yumul an Option to Purchase up to 15% of the total stocks it subscribed from Nautica.

On June 22, 1995, a Deed of Trust and Assignment was executed between First Dominion and Yumul, whereby First Dominion assigned 14,999 of its subscribed shares in Nautica to Yumul. The deed stated that the shares "were acquired and paid for in the name of the ASSIGNOR only for convenience, but actually executed in behalf of and in trust for the ASSIGNEE." In March 1996, Nautica declared a ₱35,000,000 cash dividend, ₱8,250,000 of which was paid to Yumul representing his 15% share.

After Yumul resigned from Nautica on August 5, 1996, he wrote to Dee requesting that the latter formalize his offer to buy Yumul's 15% share on or before August 20, 1996, and demanding the issuance of corresponding stock certificates in his name should Dee refuse. Dee, through Atty. Fernando R. Arguelles, Jr., Nautica's corporate secretary, denied the request, claiming Yumul was not a stockholder. On September 6 and 9, 1996, Yumul requested that the Deed of Trust and Assignment be recorded in Nautica's Stock and Transfer Book and that he be allowed to inspect corporate books as a stockholder. These requests were denied, petitioners asserting that Yumul neither exercised the option to purchase nor paid the acquisition price for the 14,999 shares, and that the cash dividend he received was held in trust for First Dominion.

Petitioners presented evidence purporting to show that Yumul's single share was held in trust for Dee: China Banking Corporation and Citibank checks allegedly issued by Dee as payment, a letter from Dee dated July 15, 1994 requesting the corporate secretary to issue a stock certificate in Yumul's name "ITF Alvin Y. Dee," and Stock Certificate No. 6 annotated with the same "ITF" notation. The SEC and the Court of Appeals found this evidence insufficient, noting that Dee did not testify and that Atty. Arguelles lacked first-hand knowledge of the alleged trust relationship. Both tribunals found Yumul to be a stockholder and beneficial owner of the 14,999 shares, but neither made a categorical finding on whether Yumul exercised his option to purchase or on the validity of the Deed of Trust and Assignment.

• Nominal Stockholder: Petitioners contended that Yumul was not a stockholder of Nautica but merely a nominal owner of one share, with beneficial ownership belonging to Dee who paid for said share at incorporation. They presented bank checks, a letter from Dee, and an annotated stock certificate as proof of the trust arrangement.
• Simulated Contract: Petitioners alleged that Yumul failed to exercise the option to purchase shares under the Option to Purchase dated December 19, 1994, thus there was no cause or consideration for the Deed of Trust and Assignment, rendering it void for being simulated or fictitious.

• Stockholder Status: Whether Yumul is a stockholder of Nautica Canning Corporation.
• Right to Inspect Books: Whether Yumul, as a stockholder, is entitled to inspect the books and records of Nautica.
• Beneficial Ownership of 14,999 Shares: Whether Yumul is the beneficial owner of the 14,999 shares under the Deed of Trust and Assignment and may compel registration of the deed in the Stock and Transfer Book.
• Jurisdiction Over Validity of the Deed: Whether the SEC had jurisdiction to determine the validity or simulation of the Deed of Trust and Assignment.

• Stockholder Status: Yes. Yumul is a stockholder of Nautica holding one share, as recorded in the Articles of Incorporation, By-laws, and General Information Sheet filed with the SEC. Any private trust agreement with Dee is binding only between them and does not bind the corporation.
• Right to Inspect Books: Yes. As a stockholder of record, Yumul is entitled to inspect the books and records of Nautica pursuant to Section 74 of the Corporation Code.
• Beneficial Ownership of 14,999 Shares: Not determined. The Court refrained from ruling on whether Yumul can compel registration of the Deed of Trust and Assignment, as the SEC and Court of Appeals failed to make a determinative finding on its validity.
• Jurisdiction Over Validity of the Deed: No. The determination of whether a contract is simulated or fictitious is a civil matter requiring application of the Civil Code provisions on obligations and contracts, cognizable by courts of general jurisdiction, not the SEC.

• Stockholder Status: The Articles of Incorporation and By-laws, as well as the General Information Sheet filed with the SEC, indicated Yumul as an incorporator and subscriber of one share. The contents of the Articles of Incorporation bind the corporation and its stockholders and cannot be disregarded, as it was the basic document that legally triggered the creation of the corporation. While it is possible for a business to be wholly owned by one individual who gives nominal ownership of one share each to other incorporators, such an agreement is valid only among the incorporators privy to it and does not bind the corporation, which was non-existent at the time the agreement was made. Incorporators continue to be stockholders unless they have validly transferred their subscriptions to the real parties in interest after incorporation. There was no showing that Yumul transferred his subscription to Dee. The evidence of trust — bank checks, a letter, and an annotated stock certificate — was found palpably incompetent, consisting mainly of self-serving allegations, with Dee not having testified and Atty. Arguelles lacking first-hand knowledge. Furthermore, Yumul's conduct confirmed his status: he was elected Director on April 4, 1995, and thereafter elected President of Nautica. Section 23 of the Corporation Code requires every director to own at least one share, and one must be a director before being elected president. Nautica and its stockholders knowingly held Yumul out to the public as an officer and stockholder.

• Right to Inspect Books: Since Yumul was a stockholder of record owning one share, the SEC correctly ruled that he has the right to inspect the books and records of Nautica pursuant to Section 74 of BP Blg. 68, which provides that records of all business transactions and minutes of meetings shall be open to inspection by any stockholder at reasonable hours on business days.

• Beneficial Ownership of 14,999 Shares: The SEC did not make a categorical finding on whether Yumul exercised his option to purchase or on the validity of the Deed of Trust and Assignment. The Court of Appeals defined the requisites of simulation but likewise did not determine whether the SEC had jurisdiction to resolve the issue or whether the deed was fictitious. Because the issue of the deed's validity is civil in nature and the lower tribunals failed to make a determinative finding, the Court was constrained to refrain from ruling on whether Yumul could compel registration of the deed.

• Jurisdiction Over Validity of the Deed: Citing Intestate Estate of Alexander T. Ty vs. Court of Appeals, the Court held that the determination of whether a contract is simulated is an issue resolved by applying Civil Code provisions on obligations and contracts, which is properly cognizable by courts of general jurisdiction. No special corporate skill is necessary that would require the technical expertise of the SEC. When the controversy involves matters purely civil in character, it is beyond the ambit of the SEC's limited jurisdiction. This jurisdictional question became moot with respect to the SEC due to the passage of Republic Act No. 8799 (The Securities Regulation Code), which transferred jurisdiction over intra-corporate disputes from the SEC to the regional trial courts. Accordingly, the proper forum for resolving the validity of the deed is the regular courts.

• Corporation's Reliance on Its Books — A corporation looks only to its books and records for the purpose of determining who its shareholders are. A transfer of shares not recorded in the stock and transfer book is non-existent as far as the corporation is concerned. It is only when the transfer has been recorded that the corporation may rightfully regard the transferee as one of its stockholders. Applied in this case to confirm Yumul as a stockholder of one share, since his name appeared in the corporate books and no transfer to Dee was recorded.

• Incorporators' Private Agreements vs. Corporate Recognition — An agreement among incorporators that one holds a share in trust for another is valid only between or among the incorporators privy to the agreement. It does not bind the corporation, which was non-existent at the time the agreement was made. Incorporators remain stockholders unless they validly transfer their subscriptions after incorporation. Applied here to reject petitioners' claim that Yumul's one share was held in trust for Dee.

• Factual Findings of Quasi-Judicial Agencies — Findings of fact of quasi-judicial agencies like the SEC are generally accorded respect and even finality by the Supreme Court if supported by substantial evidence, in recognition of their expertise, more so when upheld by the appellate court. Applied to sustain the SEC's and CA's finding that Yumul was a stockholder.

• Requisites of Simulation — Simulation is the declaration of a fictitious will, deliberately made by agreement of the parties, to produce the appearance of a juridical act that does not exist or is different from what was really executed. The requisites are: (a) an outward declaration of will different from the will of the parties; (b) the false appearance must have been intended by mutual agreement; and (c) the purpose is to deceive third persons. The Court noted these requisites were not proven in this case, but declined to rule on the deed's validity for jurisdictional reasons.

• Jurisdiction Over Civil vs. Corporate Disputes — The determination of whether a contract is simulated or fictitious is resolved by applying Civil Code provisions on obligations and contracts and is properly cognizable by courts of general jurisdiction. No special corporate skill is necessary that would require the SEC's technical expertise. When the controversy involves matters purely civil in character, it is beyond the SEC's limited jurisdiction. The passage of RA 8799 transferred jurisdiction over intra-corporate disputes from the SEC to the regional trial courts.

• "As between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are." — This passage articulates the foundational principle that corporate recognition of stockholder status depends solely on the stock and transfer book, not on private arrangements among incorporators.

• "[A] transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent as far as the corporation is concerned." — Quoted from Ponce vs. Alsons Cement Corp., this formulation is the canonical statement of the rule governing when a corporation must recognize a transferee as a stockholder.

• "The determination whether a contract is simulated or not is an issue that could be resolved by applying pertinent provisions of the Civil Code, particularly those relative to obligations and contracts. Disputes concerning the application of the Civil Code are properly cognizable by courts of general jurisdiction. No special skill is necessary that would require the technical expertise of the SEC." — Quoted from Intestate Estate of Alexander T. Ty vs. Court of Appeals, this passage defines the jurisdictional boundary between civil courts and the SEC in determining contract validity.

• Ponce vs. Alsons Cement Corporation, 442 Phil. 98 (2002) — Controlling precedent on the rule that a corporation looks only to its stock and transfer book to determine stockholders, and that unrecorded transfers are non-existent as far as the corporation is concerned. Followed and applied to confirm Yumul's stockholder status.

• Intestate Estate of Alexander T. Ty vs. Court of Appeals, G.R. Nos. 112872 & 114672, April 19, 2001, 356 SCRA 661 — Controlling precedent holding that the determination of whether a contract is simulated is a civil matter cognizable by regular courts, not the SEC. Followed to reverse the lower tribunals' rulings on the Deed of Trust and Assignment.

• Viray vs. Court of Appeals, G.R. No. 92481, November 9, 1990, 191 SCRA 308 — Cited for the principle that jurisdiction should be determined by considering not only the status or relationship of the parties but also the nature of the question that is the subject of their controversy.

• Lanuza vs. Court of Appeals, G.R. No. 131394, March 28, 2005 — Cited for the proposition that the contents of the Articles of Incorporation bind the corporation and its stockholders and cannot be disregarded.

• Quiambao vs. Court of Appeals, G.R. No. 128305, March 28, 2005 — Cited for the doctrine that findings of fact of quasi-judicial agencies are accorded respect and finality if supported by substantial evidence.

• Mercado vs. Court of Appeals, G.R. No. 150241, November 4, 2004, 441 SCRA 463 — Cited to distinguish between a petition for review under Rule 45 and a petition for certiorari under Rule 65.

• Section 23, Batas Pambansa Blg. 68 (The Corporation Code of the Philippines) — Requires that every director must own at least one share of the capital stock of the corporation of which he is a director. Applied to corroborate Yumul's stockholder status, since he was elected Director and then President of Nautica, positions that presuppose ownership of at least one share.

• Section 25, Batas Pambansa Blg. 68 — Provides that before one may be elected president of a corporation, he must be a director. Applied to further confirm that Yumul must have owned at least one share, having served as Nautica's president.

• Section 74, Batas Pambansa Blg. 68 — Provides that records of all business transactions of the corporation and minutes of meetings shall be open to inspection by any director, trustee, stockholder, or member at reasonable hours on business days. Applied to uphold Yumul's right to inspect Nautica's books and records as a stockholder.

• Republic Act No. 8799 (The Securities Regulation Code) — Took effect on August 8, 2000, transferring jurisdiction over cases involving intra-corporate disputes from the SEC to the regional trial courts. Noted as rendering moot the question of SEC jurisdiction over intra-corporate controversies, as such cases are now cognizable by the RTC.

Chief Justice Hilario G. Davide, Jr., and Associate Justices Leonardo A. Quisumbing, Antonio T. Carpio, and Adolfo S. Azcuna concurred. No separate concurring opinions were written.