March 21, 2003
SEC OPINION NO. 09-03
J.A. Osana and A.C. Tionko
SyCip Gorres Velayo & Co.
6760 Ayala Avenue,
1226 Makati City
J.A. Osana and A.C. Tionko:
This refers to your letter dated March 7, 2003 wherein you stated the
following: TDaAHS
(1) a request for confirmation that failure of a stockholder to attend the
stockholders' meeting despite due notice and publication of notice
shall be considered approval or consent to the resolutions adopted
during said meeting;
(2) your client, X Corporation, proposes to undergo partial liquidation
to return the capital of one of its major stockholders, Y
Corporation, a corporate stockholder which owns 61% of the
outstanding capital stock of X Corporation;
(3) after partial liquidation, X Corporation will still have more than
sufficient assets and retained earnings to answer for all liabilities
of the corporation; and
(4) all requirements for decrease in authorized capital stock, including
consent of creditors, will be complied with by X Corporation.
We cannot confirm your interpretation that failure of a stockholder to attend
the stockholders' meeting despite due notice and publication of notice shall be
considered approval or consent to the resolutions adopted during said meeting.
Generally, the right to vote is a right that is inherent in and incidental to the
ownership of corporate stock, and as such is a property right. It follows that the
stockholder cannot be deprived of the right to vote his or her stock nor may the right
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be essentially impaired, either by the legislature or by the corporation, without his or
her consent, through amending the charter, or by by-law. (5 Fletcher Cyc. Corp., Sec
2025, p. 147) Hence, without proof that said right has been actually exercised,
absence from a duly convened meeting cannot and should not be construed as
approval or assent to what has been taken up and adopted by the majority.
Stockholders who were present or those represented by proxies in the
stockholders' meeting but did not exercise their right to vote, including those who
received notice of the meeting but were absent, shall be bound by all resolutions voted
upon during said meeting wherein a quorum was present and regularly convened in
compliance with law and the by-laws.
Hence, it is erroneous to interpret mere absence of such duly notified
stockholder as an approval or assent to what has been adopted during said meeting.
Likewise, to interpret the absence of a notified stockholder as approval or consent
precludes the stockholder from exercising rights inherent and incidental to the
ownership of corporate stocks.
However, if a stockholder feels he has a valid and justifiable objection on what
was transacted during the meeting, he may file a formal complaint with the regular
courts pursuant to Republic Act No. 8799, which has transferred the jurisdiction over
intra-corporate cases from the Securities and Exchange Commission to Regional Trial
Courts.
With regard to your client and its proposition to undergo partial liquidation to
be able to return the capital of its major stockholder, we are of the opinion that such
scenario does not find support in law.
The situation you have presented must be taken up in light of Section 122 of
the Corporation Code on Corporate Liquidation and the Trust Fund doctrine.
Liquidation refers to the winding up of the affairs of the corporation by
reducing its assets in money, settling with creditors and debtors, and apportioning the
amount of profit and loss (16 Fletcher Cyc. Corp., p. 653). In most, if not all
jurisdictions, in order to give effect to the equitable rule that the corporate assets, on
dissolution, are a trust, or held for the benefit of creditors and stockholders, express
statutory provision has been made for the winding up of corporations on their
dissolution, and the distribution of their property to the stockholders, after payment of
their debts, either by making the officers of the corporation trustees for such purpose,
or by continuing the existence of the corporation for a certain period for such purpose
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or by providing for the appointment of a receiver. (16A Fletcher Cyc. Corp., Sec.
8185)
Section 122 of the Corporation Code further provides that no corporation shall
distribute any of its assets or property except upon lawful dissolution and after
payment of all its debts and liabilities. It has been held that corporation may validly
liquidate its debt prior to its dissolution under Section 40 of the Corporation Code,
but it cannot distribute any of its assets or property except upon lawful dissolution
and after payment of all its debts and liabilities, under Section 122 thereof. Since the
dissolution of a corporation becomes legally effective upon the issuance by the SEC
of a certificate of dissolution, a corporation cannot therefore lawfully distribute its
assets to its stockholders though it may lawfully liquidate its debts in anticipation of
such voluntary dissolution. (Rosario, The Corporation Code of the Philippines, p.
1075 citing SEC Opinion dated February 6, 1964, Atty. Isidro T. Bangayan)
Moreover, it is well settled that corporate properties constitute a trust fund for
the payment of debts and distribution to stockholders. Accordingly, the trust fund
doctrine epitomizes the idea of equal protection to creditors and pro rata distribution
in case of inadequacy of corporate assets to pay all debts.
Furthermore, corollary to the rule that a corporation has no power to release a
subscriber from payment of his unpaid subscription, a stockholder has no right to
demand refund of his investment in a corporation. The Corporation Code does not
confer upon any stockholder the right to demand refund of his investment
conformably to the general rule that the subscription to the capital stock of a
corporation constitutes a trust fund for the benefit of the creditors and no valid
agreement can be made by which a subscriber can be released therefrom. In addition,
a subscription constitutes a contract among all the subscribers to the capital stock of
the corporation. For this reason, not one of the subscribers can legally withdraw from
the contract without obtaining the consent of all the other subscribers. The common
fund in which all the subscribers have acquired interest cannot be diminished and/or
reduced. (SEC Letter to Europhil Shipping Agency, Inc. dated June 23, 1987 and SEC
Letter to Mr. Benigno Alfaro dated September 16, 1985 both citing Agbayani,
Commercial Laws of the Philippines, Vol. 3, 1984 ed., pp. 455–456 and Lingayen
Gulf Electric Power Co. v. Baltazar, G.R. No. L-4824)
Lastly, we are of the opinion that your representation that requirements for
decrease in authorize capital stock will be complied with by X Corporation after it has
undergone partial liquidation finds no basis in law.
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The requirements for decrease in authorize capital stock, as provided for by
Section 38 of the Corporation Code, are different from the requirements for a
corporation to undergo liquidation, more so partial liquidation, which is not at all
contemplated by law.
Please be advised accordingly. EDISaA
Very truly yours,
(SGD.) VERNETTE UMALI-PACO
General Counsel
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