Ponce vs. Encarnacion

A judge of a Court of First Instance may, ex parte and without prior notice to the board of directors, authorize a stockholder to call and preside at a stockholders' meeting under Section 26 of the Corporation Law upon a showing of good cause — which exists when the by-laws require a meeting for the election of directors but the officer authorized to call it has failed, neglected, or refused to do so.

Daguhoy Enterprises, Inc. was registered as a corporation on June 24, 1948. Its by-laws provided for a five-member board of directors elected by stockholders at a general meeting held every even year during the month of January (Article 9), with regular general meetings called every even year (Article 20), and a requirement that board members be members of the Legionarios del Trabajo (Article 7). Petitioner Domingo Ponce was a member of the board, while respondent Potenciano Gapol was the largest stockholder. A prior agreement among the stockholders for voluntary dissolution and the appointment of Gapol as receiver was reached on April 16, 1951, but Gapol abandoned that course and instead filed a civil action for accounting against the petitioners.

Daguhoy Enterprises, Inc. was registered as a corporation on June 24, 1948, with by-laws requiring the election of a five-member board of directors at a general meeting of stockholders held every even year during the month of January. Petitioner Domingo Ponce served on the board, and respondent Potenciano Gapol was the corporation's largest stockholder. On April 16, 1951, at a duly called meeting, the stockholders agreed upon the voluntary dissolution of the corporation and the appointment of Gapol as receiver, with petitioner Domingo Ponce designated to file the petition for dissolution.

Instead of pursuing the agreed dissolution, Gapol changed course and filed a complaint in the Court of First Instance of Manila (Civil No. 13753) seeking to compel the petitioners to render an accounting of corporate funds and assets, and to reimburse the corporation for sums allegedly misspent or misappropriated by Domingo Ponce — P4,500 as the purchase price of a parcel of land, P6,190 loaned to Ponce's wife, and P8,000 spent on Ponce's trip to the United States, totaling P18,690 plus interest. On May 18, 1951, Gapol filed a motion in that case seeking the removal of the petitioners from the board of directors, but the court denied the motion.

On January 3, 1952, Gapol filed a separate petition (Civil No. 15445) praying for an order directing him to call a meeting of the stockholders and to preside thereat in accordance with Section 26 of the Corporation Law. Two days later, on January 5, without notice to the petitioners or the other members of the board, and in violation of the Rules of Court requiring that adverse parties be notified of the hearing of a motion three days in advance, the respondent court issued the order as prayed for. The petitioners learned of the order only on February 27, when the Bank of America refused to recognize the new board of directors elected at the meeting called by Gapol and returned the checks drawn upon it by that board. Petitioners also alleged that one of the directors elected at the meeting, Juanito R. Tianzon, was not qualified under Article 7 of the by-laws, which required board members to be members of the Legionarios del Trabajo.

The petitioners filed a motion on March 5 to have the January 5 order set aside. The case was transferred to another branch when the respondent judge went on leave, and without setting the motion for hearing, the court denied it on May 7. The petitioners filed another motion on May 14, inviting the court's attention to the irregularity of its procedure and setting the motion for hearing on May 21, but the court denied it by its order of June 13. The petitioners then elevated the matter to the Supreme Court via certiorari, contending that the order was issued without due process and that the subsequent election was tainted by irregularity.

• Due Process: Petitioners maintained that they were deprived of their right without due process of law, because the order authorizing Gapol to call and preside at the stockholders' meeting was issued ex parte, without notice to them or the other members of the board, and in violation of the Rules of Court requiring three days' advance notice to adverse parties.
• Illegality of Election: Petitioners argued that the election of Juanito R. Tianzon as a member of the board was illegal because he was not a member of the Legionarios del Trabajo, as required by Article 7 of the by-laws, and that this illegality invalidated the order.
• Prior Agreement to Dissolve: Petitioners contended that a prior agreement among the stockholders to dissolve the corporation rendered the order illegal or improper.

• Section 26 Authority: Whether the respondent court may issue an order under Section 26 of the Corporation Law authorizing a stockholder to call and preside at a stockholders' meeting without prior notice and hearing to the board of directors.
• Due Process: Whether the ex parte issuance of the order deprived the petitioners of their right to due process of law.
• Validity of Order: Whether the alleged illegality of the election of one board member and the prior agreement to dissolve the corporation affect the validity of the order complained of.

• Section 26 Authority: Yes. The court may issue the order ex parte upon a showing of good cause, which exists when the by-laws require a meeting for the election of directors but the officer authorized to call it has failed, neglected, or refused to do so.
• Due Process: No violation. The order is analogous to ex parte provisional reliefs such as preliminary injunction or attachment, which have not been held violative of the due process clause; petitioners had no right to hold over as directors beyond the term fixed by the by-laws.
• Validity of Order: No effect. The alleged illegality of one director's election is subsequent to and separate from the order, the proper remedy being quo warranto; the prior agreement to dissolve does not render the order illegal.

• Section 26 Authority: Section 26 of the Corporation Law authorizes a CFI judge, "on the showing of good cause therefor," to issue an order directing a stockholder to call a meeting and preside thereat until the majority of stockholders present choose a presiding officer. The Court interpreted "showing of good cause" to mean that the court is apprised that the by-laws require a general meeting of stockholders to elect the board of directors but the call for such meeting has not been made. Here, Articles 9 and 20 of the by-laws required a general meeting every even year in January for the election of directors, and the chairman of the board had failed, neglected, or refused to call the meeting. This sufficed as good cause. The Court further held that the requirement of "good cause" did not necessitate a hearing with notice to the board, drawing an analogy to ex parte preliminary injunction or attachment, which are issued upon compliance with the rules and the court's satisfaction that they should issue, and which have not been deemed violative of due process. The Court noted that in several states of the Union, the remedy in such situations is mandamus to compel the officer or board to call the meeting, and that Delaware — which has a law similar to Section 26 — permits its chancellor to summarily issue such an order without notice and hearing.
• Due Process: The Court rejected the petitioners' due process claim, holding that they had no right to continue as directors unless reelected by the stockholders at a meeting called for that purpose every even year. They had no right to a hold-over brought about by the failure of one of their number to perform the duty of calling the meeting. The Court pointed out that if the petitioners were confident of reelection, they should have called the meeting themselves or sought their reelection at the meeting called pursuant to the court's order. The order, being a provisional remedy analogous to injunction or attachment, did not require prior notice and hearing to be valid.
• Validity of Order: The Court held that the alleged illegality of the election of one board member — Tianzon's alleged lack of membership in the Legionarios del Trabajo — was an event subsequent to and independent of the order complained of and could not affect its validity. The proper remedy for an aggrieved party in such a case would be quo warranto, not certiorari. Similarly, the alleged prior agreement to dissolve the corporation did not affect or render illegal the order issued by the respondent court, as the order was issued pursuant to the corporation's existing by-laws and the Corporation Law.

• Ex parte order authorizing stockholders' meeting under Section 26 of the Corporation Law — A CFI judge may issue an order, without prior notice and hearing, authorizing a stockholder to call and preside at a stockholders' meeting under Section 26 of the Corporation Law upon a showing of good cause. Good cause exists when the court is apprised that the by-laws require a general meeting of stockholders to elect the board of directors but the officer authorized to call such meeting has failed, neglected, or refused to do so. The order is analogous to ex parte provisional reliefs such as preliminary injunction or attachment and does not violate the due process clause. The Court noted that this is similar to the Delaware approach, where the chancellor may summarily issue such an order without notice and hearing.
• No right to hold-over as director beyond term fixed by by-laws — Directors have no right to continue in office beyond the term fixed by the corporate by-laws, and cannot claim a hold-over caused by the failure of the board to call the election meeting required by those by-laws. If directors are confident of reelection, they should call the meeting or seek reelection at the meeting called pursuant to a court order.

• "The requirement that 'on the showing of good cause therefor,' the court may grant to a stockholder the authority to call such meeting and to preside thereat does not mean that the petition must be set for hearing with notice served upon the board of directors." — This passage articulates the ratio decidendi: that Section 26's "good cause" requirement does not entail a noticed hearing, permitting ex parte issuance of the order.
• "They had no right to continue as directors of the corporation unless reflected by the stockholders in a meeting called for that purpose every even year. They had no right to a hold-over brought about by the failure to perform the duty incumbent upon one of them." — This defines the Court's holding on the limits of a director's tenure and the absence of any protectable interest in a hold-over caused by the board's own failure to call the required election.
• "It may be likened to a writ of preliminary injunction or of attachment which may be issued ex-parte upon compliance with the requirements of the rules and upon the court being satisfied that the same should be issue. Such provisional reliefs have not been deemed and held as violative of the due process of law clause of the Constitution." — This analogy to provisional remedies is the doctrinal basis for the Court's conclusion that ex parte issuance under Section 26 does not violate due process.

• Section 26, Act No. 1459 (Corporation Law) — Authorizes a CFI judge, upon a showing of good cause, to issue an order directing a stockholder or member to call a meeting of the corporation by giving proper notice as required by the Act or the by-laws, and to preside at such meeting until the majority of stockholders present and qualified to vote choose a presiding officer. The Court applied this provision to uphold the CFI's ex parte order, finding that the board chairman's failure to call the biennial election meeting constituted good cause.
• Article 9, By-laws of Daguhoy Enterprises, Inc. — Provides that the board of directors shall be composed of five members elected by stockholders at a general meeting held every even year during the month of January. The Court relied on this provision to establish that the by-laws required a meeting that had not been called, constituting good cause under Section 26.
• Article 20, By-laws of Daguhoy Enterprises, Inc. — Provides that regular general meetings are called every even year. The Court cited this alongside Article 9 to confirm the biennial meeting requirement.
• Article 7, By-laws of Daguhoy Enterprises, Inc. — Requires that a member of the board of directors be a member of the Legionarios del Trabajo. The Court noted that the alleged violation of this provision in the election of one director was a matter for quo warranto, not certiorari, and did not affect the validity of the order complained of.

Paras, C.J., Pablo, Bengzon, Tuason, Montemayor, Reyes, Jugo, Bautista Angelo, and Labrador, JJ., concurred.