Case Digest: Salido v. Aramaywan Metals Development Corporation, G.R. No. 233857, March 18, 2021

 Corporation Law | Classification of Shares, Treasury Shares

• This case is an intra-corporate dispute involving two different factions within Aramaywan Metals Development Corporation (Aramaywan).
• In April 2005, Cerlito San Juan, Ernesto Mangune, and Agapito Salido, along with four others, formed Aramaywan and Narra Mining Corporations.
• Agreement to Incorporate stipulated San Juan would finance Aramaywan with P2,500,000 in exchange of the ownership of 55% of the stocks of Aramaywan and 35% of the stocks of Narra Mining.
• San Juan advanced P2,500,000 for Aramaywan's paid-up subscription; a bank certificate confirmed the deposit held in trust for the corporation.
• Salido faction claimed San Juan delivered only P932,209.16, alleging breach of payment agreement. Salido proposed reducing San Juan's Aramaywan shares from 55% to 15% due to alleged payment shortfall.
• A special board meeting led by Salido faction passed resolutions reducing San Juan's shares, changing corporate address, canceling shares of San Juan's family members, halting Narra Mining registration, authorizing Salido, and appointing new corporate officers.
• Both contending parties then submitted to the Securities and Exchange Commission (SEC) conflicting General Information Sheets.
• San Juan faction filed a complaint with the Pasig RTC to invalidate the acts of the Salido faction.
• RTC: Validated agreement converting 10,000 shares of San Juan into treasury shares.
  • Directed San Juan to transfer shares to the corporation.
  • Upheld Atty. Roland E. Pay's appointment as corporate secretary.
  • Validated certain board meetings and resolutions of the Salido faction.
• CA: Affirmed RTC's validation of San Juan's share reduction and conversion to treasury shares.
  • Considered reduced shares as payment for San Juan's alleged outstanding balance to the corporation.
• CA's Amended Decision: Reversed RTC's decisions regarding San Juan's share reduction and conversion to treasury shares.
• Stated San Juan fulfilled his obligation for Aramaywan but failed regarding Narra Mining, which shouldn't merit reducing his Aramaywan shares.

WoN the CA erred in issuing the Amended Decision which held that San Juan's shares were not validly reduced. NO

San Juan's shares were not validly converted into treasury shares because Aramaywan did not have unrestricted retained earnings

The Petition asserts that, as held by the RTC, San Juan's shares were validly reduced and in tum converted into treasury shares.

The Court disagrees.

Batas Pambansa Blg. 68, or the Corporation Code, the law applicable at the time the events in this case occurred, clearly sets out the parameters when a corporation may reacquire its shares and convert them into treasury shares. According to Section 9 of the Corporation Code, "[t]reasury shares are shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means." Apart from reacquiring the shares through some lawful means, the Corporation Code is also explicit that while a corporation has the power to purchase or acquire its own shares, the corporation must have unrestricted retained earnings in its books to cover the shares to be purchased or acquired. In addition, in cases where the reason for reacquiring the shares is because of the unpaid subscription, the Corporation Code is likewise explicit that the corporation must purchase the same during a delinquency sale.

All the foregoing requirements were not met in the reduction of San Juan's shares.

At the outset, the records are bereft of any showing that Aramaywan had unrestricted retained earnings in its books at the time the reduction of shares was made. During that time, Aramaywan had just been existing for a few months, and had not in fact been able to perform mining activities yet. It is thus both highly doubtful and unsupported by the record that Aramaywan had unrestricted retained earnings to be able to purchase its own shares.

The Court has observed that: "The trust fund doctrine backstops the requirement of unrestricted retained earnings to fund the payment of the shares of stocks of the withdrawing stockholders." Under the trust fund doctrine, "the capital stock, property, and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors, who are preferred in the distribution of corporate assets." Thus, "[t]he creditors of a corporation have the right to assume that the board of directors will not use the assets of the corporation to purchase its own stock for as long as the corporation has outstanding debts and liabilities. There can be no distribution of assets among the stockholders without first paying corporate debts."

In this case, there was no showing that, at the time the reduction of San Juan's shares was made, Aramaywan had unrestricted retained earnings in its books. Neither was it shown that it did not have creditors or that they were already paid before the agreement to release San Juan was made.

Moreover, it must be emphasized that San Juan's subscriptions have already been fully paid by him, and as such, Aramaywan cannot validly reduce his shares without giving a corresponding return of his investment. As earlier stated, San Juan contributed P2,500,000.00 evidenced by a Standard Chartered Bank certificate in San Juan's name which indicates that he holds that money in trust for Aramaywan.

The RTC itself, in narrating its factual findings, noted that "the payment for the subscription of shares of all the subscribers were paid by plaintiff Cerlito San Juan as his contribution in the formation and running of the corporation. The payment for the subscribed shares, however, was under the name of plaintiff Cerlito San Juan in trust for plaintiff corporation.

It is well established that when there is a trust relationship, there is a separation of the legal title and equitable ownership of the property. In a trust relation, legal title is vested in the fiduciary or trustee, while equitable ownership is vested in the cestui que trust or beneficiary.31 Here, it is clear that San Juan's name was reflected in the bank certificate only because he is the trustee in the trust relation, but Aramaywan is nevertheless the beneficiary. This means that San Juan only had legal title over the money, but the ownership of the same ultimately remained with Aramaywan. As aptly found by the CA in its Amended Decision:

The allegation that only P932,000.00 was given in cash during the incorporation process is baseless because the funds remained in the name of Aramaywan and as such may be withdrawn anytime upon approval of the board.

The fact that the deposit was initially made in the name of San Juan as treasurer-in-trust for Aramaywan is also irrelevant. As correctly argued by San Juan and as expressly stated in the bank certificate: "x x x said deposit is clear and free from any lien, restriction, condition or hold-out and may be withdrawn in behalf of said company upon presentation of proof of due incorporation thereof."

The following finding is bolstered by the fact that Aramaywan's Articles of Incorporation states that P2,500,000.00 of its authorized capital stock has already been paid. This is in accordance with the parties' Agreement, which provides that "Cerlito G. San Juan shall advance the paid-up subscription for ARAMAYWAN METALS DEVELOPMENT CORPORATION in the sum of P2,500,000.00."34 Notably, the SEC issued a certificate of incorporation on September 9, 2005,35 which means that it found the contents of the Articles of Incorporation and the Treasurer's Affidavit  which also contains the information on how the shares are subscribed and paid to be correct.

Considering that San Juan's subscriptions have been fully paid, Aramaywan cannot thus reduce his shares without a corresponding return of his investment. It is undisputed, however, that San Juan received nothing for the reduction of his shares.

In any event, if it were true that San Juan had unpaid subscriptions, the Corporation Code has provided a procedure for the demand of such payment and the holding of a delinquency sale in case of continued non-payment. Thus, even assuming it was true that San Juan had unpaid subscriptions, simply agreeing in a meeting for their reduction, thereby releasing the stockholder from his obligation to pay the unpaid subscriptions, cannot be the mode by which said unpaid subscriptions are settled. To allow corporations to do such an act would violate the aforementioned trust fund doctrine in corporation law. As the Court explained in NTC v. CA:

The term "capital" and other terms used to describe the capital structure of a corporation are of universal acceptance, and their usages have long been established in jurisprudence. Briefly, capital refers to the value of the property or assets of a corporation. The capital subscribed is the total amount of the capital that persons (subscribers or shareholders) have agreed to take and pay for, which need not necessarily be, and can be more than, the par value of the shares. In fine, it is the amount that the corporation receives, inclusive of the premiums if any, in consideration of the original issuance of the shares. In the case of stock dividends, it is the amount that the corporation transfers from its surplus profit account to its capital account. It is the same amount that can loosely be termed as the "trust fund" of the corporation. The "Trust Fund" doctrine considers this subscribed capital as a trust fund for the payment of the debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no part of the subscribed capital may be returned or released to the stockholder (except in the redemption of redeemable shares) without violating this principle. Thus, dividends must never impair the subscribed capital; subscription commitments cannot be condoned or remitted; nor can the corporation buy its own shares using the subscribed capital as the consideration therefor.

As early as 1923, in the case of Philippine Trust Co. v. Rivera, the Court already prohibited corporations from releasing its stockholders from the payment of unpaid subscriptions without going through the formalities provided under the corporation law in effect at the time. In the aforementioned case, a board resolution was adopted to the effect that the corporation's capital should be reduced by 50%, and the subscribers released from the obligation to pay any unpaid balance of their subscription in excess of 50% of the same. In declaring the resolution ineffectual, the Court explained:

It is established doctrine that subscriptions to the capital of a corporation constitute a fund to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts. (Velasco vs. Poizat, 37 Phil., 802.) A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner and under the conditions prescribed by the statute or the charter or the articles of incorporation. Moreover, strict compliance with the statutory regulations is necessary (14 C. J., 198, 620).

In the case before us the resolution releasing the shareholder from their obligation to pay 50 per centum of their respective subscriptions was an attempted withdrawal of so much capital from the fund upon which the company's creditors were entitled ultimately to rely and, having been effected without compliance with the statutory requirements, was wholly ineffectual.

Verily, if it were true that San Juan had unpaid subscriptions, it was invalid for the Board of Directors to waive such payment, for it would amount to a decrease in the corporation's capital stock which could not be accomplished without the formalities under Section 38 of the Corporation Code (Section 37 under the Revised Corporation Code) which includes, among others, the prior approval of the SEC.

In light of the foregoing principles and findings, the Court holds that the reduction of San Juan's shares was invalid. This remains true even assuming that San Juan had consented to the said reduction.

Even assuming San Juan agreed to the reduction of his shares, such agreement is void for lack of consideration

The RTC, as affirmed initially by the CA, ruled that Aramaywan validly acquired the shares of San Juan for a consideration. The RTC explained:

On the other hand, as regards the issue of whether or not the shares of plaintiff Cerlito San Juan was validly reduced from 55% to 15%, the Court holds that the said contested reduction was valid and lawful. As can be gleaned from the same minutes of the meeting held on November 25-26, 2005 in Narra, Palawan, plaintiff Cerlito San Juan voluntarily and expressly agreed to the reduction of his shares from 55% to 15% in exchange, he will no longer be required to contribute to the corporation the remaining balance of the P2,500,000.00 of which he only gave P932,209.16 and to incorporate Narra Mining Corporation, he originally promised to undertake. x x x

x x x x

The parties' agreement for the reduction of shares of Mr. San Juan became effective and binding between and among them immediately on [the] same date that the agreement was made, i.e. November 25, 2005 although no written agreement was entered into between the parties consistent with the provisions of Article 1356 of the New Civil Code of the Philippines. The agreement partakes the nature of conversion of 40% of plaintiff Cerlito San Juan's shares into treasury shares in exchange for the termination of his obligation to make additional cash contribution to the corporation and to incorporate Narra Mining Corporation. An agreement which was approved unanimously by all the directors present during the meeting held on November 25-26, 2005.

Consequently, from the time that Mr. San Juan agreed to reduce his shares in favor of the corporation, said shares were automatically converted into treasury shares, pursuant to Section 9 of B.P 68, otherwise known as the Corporation Code of the Philippines. x x x

x x x x

The conversion of the 10,000 shares of plaintiff Cerlito San Juan into treasury shares finds basis and justification in Alfonso S. Tan vs[.] Securities and Exchange Commission, et al., G.R. No. 95696, March 3, 1992, where the Supreme Court upheld as valid and lawful the conversion of 350 shares with a par value of only P35,000.00 at P100.00 per share into treasury stocks after petitioner therein exchanged them with P2,000,000.00 worth of stocks-in-trade of the corporation, is valid and lawful. Here the converted 10,000 shares of plaintiff Cerlito San Juan have a par value of P1,000,000.00 only, which was exchanged for the termination of his obligation to pay P1,567,790.1, the remaining balance of the P2,500,000.00, of which [he] delivered to plaintiff corporation the sum of P932,209.16 only.43

The foregoing ruling is incorrect.

The RTC's ruling is hinged on the premise that San Juan still had the pending obligation (1) to release the rest of his P1,567,790.1 contribution to the corporation and (2) to incorporate Narra Mining and the extinguishment of these obligations constituted the consideration for the reduction of his shares. The Court finds this to be untenable.

As earlier illustrated, San Juan did not have any unpaid obligation as far as his subscriptions to Aramaywan's shares are concerned.

As regards the obligation to incorporate Narra Mining, while it is undisputed that San Juan has yet to fulfill this obligation, the CA notes that based on the minutes of the meeting held on November 25-26, 2005, "there was yet no demand for him to commence the incorporation of the other company, Narra [Mining]."44 As well, based on the wording of the parties' Agreement, San Juan's obligation as regards Narra Mining is only to "assure the payment of the subscription of P2,500,000.00 of the capital stock of NARRA MINING CORPORATION."45 Based on the limited records that the Court has � again, because the petitioner did not attach such relevant copies of documents as would support his case � the Court cannot find a definitive obligation on the part of San Juan to incorporate Narra Mining by a certain date. Indeed, based on the foregoing wording of the Agreement, San Juan's obligation is only to make sure that the subscriptions of Narra Mining are paid, but the duty to incorporate the said corporation is not explicitly imposed on him.

The Court notes as well Resolution No. 04-2006 that the registration of Narra Mining would no longer be pursued due to financial reverses and instead the operations of Aramaywan would be improved.

As San Juan did not have any unpaid obligations for the subscription of shares in Aramaywan, and neither was he in breach of his obligations for Narra Mining, then the Court concludes that the agreement to reduce the shares did not have a cause or consideration.

To reiterate, the Corporation Code allows corporations to reacquire its shares through some lawful means, but under the Civil Code, contracts without cause or consideration are void and produce no effect whatsoever. Thus, the agreement between the parties assuming it exists is void and cannot therefore be a basis for the corporation to reacquire its shares.

CA was correct in its rulings regarding the validity of certain Resolutions of the Board of Directors of Aramaywan

While the main issue in this intra-corporate dispute is the validity of the reduction of San Juan's shares, the validity of certain resolutions adopted by the Aramaywan's Board of Directors is also at issue since a number of resolutions was adopted by the said Board after the November 25-26, 2005 meeting where the reduction was supposedly agreed upon. On the validity of these resolutions, the Court quotes with approval the following ruling of the CA:

Anent the other board resolutions issued during the special board meeting on February 5, 2006: (1) Resolution 02-2006, transferring the place of principal place of business of Aramaywan from Taguig City to Palawan; (2) Resolution 04-2006, indicating that the incorporation of Narra shall no longer be pursued due to financial reverses and instead to improve and move forth with the operation of Aramaywan; and (3) Resolution 06-2006, reiterating the consensus made during the November 26, 2005 meeting for Atty. Roland E. Pay to act and perform the duties of the corporate secretary - we rule that except for the transfer of the principal place of business, all other resolutions were validly adopted by the board of directors of Aramaywan.

The business of the corporation is conducted by the board of directors who were elected from among the holders of stock. This means that with regard to the ordinary business and affairs of the corporation, it is enough that there be a resolution from the board of directors, in a meeting duly called for that purpose. Contrary to plaintiffs-appellants' [San Juan's] position, although the special board meeting held on February 5, 2006 was not convened by San Juan who was the Chairman of the board, the resolutions may not be invalidated on this ground alone because Section 4 of the corporation's by-laws allows such meetings called upon the request of the majority of the directors.

It was also wrong for plaintiffs-appellants to insist that there was no quorum during that special board meeting. We observe that there may have been a confusion as to the quorum needed in a stockholder's meeting vis-a-vis the quorum required in a board meeting, which deals with ordinary business concerns of the corporation.

Section 25 of the Corporation Code provides:

Section 25. Corporate officers, quorum. Immediately after their election, the directors of a corporation must formally organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time.

The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which shall require the vote of a majority of all the members of the board.

Directors or trustees cannot attend or vote by proxy at board meetings.

The Articles of Incorporation of Aramaywan named nine (9) directors, which means that the presence of five (5) members is sufficient to constitute a quorum to push through with the board meeting and in that case, a vote of three (3) directors will be enough to ratify or approve a corporate act.

In our case, the resolution of no longer proceeding with the incorporation of Narra is an ordinary business affair and it was unanimously approved by the five (5) directors present during the February 5, 2006 special board meeting. This is also true as regards the appointment of Atty. Pay as corporate secretary. We see no reason to depart from the finding of the trial court on this aspect especially since evidence shows that the appointment of Atty. Pay as corporate secretary was previously agreed upon by the board during the November 26, 2005 board meeting, where San Juan was present. In fact, San Juan did not oppose Atty. Pay's appointment as he only motioned that Ernesto Mangune be made a director even if he is no longer the corporate secretary.

However, on the transfer of the corporate place of business, this matter is not an ordinary business of the company for it would necessarily involve an amendment of the articles of incorporation. In order for the amendment to be valid, Section 16 of the Corporation Code requires that there be (1) a majority vote of the board of directors and (2) a written assent of the stockholders representing at least 2/3 of the outstanding capital stock, (3) with the corresponding approval by the Securities and Exchange Corporation. Since we already ruled that the reduction of San Juan's shares was invalid, he remains a majority stockholder and his presence and written assent to the proposed transfer of principal place of business is therefore indispensable for the corporate act to be valid. Absent these requirements, we are constrained to set aside the transfer of Aramaywan principal office from Taguig City to Palawan.48

All in all, the Court finds the ruling of the CA in its Amended Decision to be in order.

WHEREFORE, the petition is hereby DENIED. The Amended Decision dated January 31, 2017 of the Court of Appeals in CA G.R. CV No. 98934 is therefore AFFIRMED.