Case Digest: Majority Stockholders of Ruby v. Lim

G.R. No. 165887: June 7, 2011




Ruby Industrial Corporation (RUBY) is a domestic corporation engaged in glass manufacturing.Reeling from severe liquidity problems beginning in 1980, RUBY filed onDecember 13, 1983a petition for suspension of payments with the Securities and Exchange Commission (SEC) docketed as SEC Case No. 2556.On December 20, 1983, the SEC issued an order declaring RUBY under suspension of payments and enjoining the disposition of its properties pending hearing of the petition, except insofar as necessary in its ordinary operations, and making payments outside of the necessary or legitimate expenses of its business.

OnAugust 10, 1984, the SEC Hearing Panel created the management committee (MANCOM) for RUBY, composed of representatives from Allied Leasing and Finance Corporation (ALFC), Philippine Bank of Communications (PBCOM), China Banking Corporation (China Bank), Pilipinas Shell Petroleum Corporation (Pilipinas Shell), and RUBY represented by Mr. Yu Kim Giang.The MANCOM was tasked to perform the following functions: (1) undertake the management of RUBY; (2) take custody and control over all existing assets and liabilities of RUBY; (3) evaluate RUBYs existing assets and liabilities, earnings and operations; (4) determine the best way to salvage and protect the interest of its investors and creditors; and (5) study, review and evaluate the proposed rehabilitation plan for RUBY.

Subsequently, two (2) rehabilitation plans were submitted to the SEC: the BENHAR/RUBY Rehabilitation Plan of the majority stockholders led by Yu Kim Giang, and the Alternative Plan of the minority stockholders represented by Miguel Lim (Lim).

Both plans were endorsed by the SEC to the MANCOM for evaluation.

OnApril 26, 1991, over ninety percent (90%) of RUBYs creditors objected to the Revised BENHAR/RUBY Plan and the creation of a new management committee.Instead, they endorsed the minority stockholders Alternative Plan.At the hearing of the petition for the creation of a new management committee, three (3) members of the original management committee (Lim, ALFC and Pilipinas Shell) opposed the Revised BENHAR/RUBY Plan on grounds that:(1) it would legitimize the entry of BENHAR, a total stranger, to RUBY as BENHAR would become the biggest creditor of RUBY;(2) it would put RUBYs assets beyond the reach of the unsecured creditors and the minority stockholders; and (3) it was not approved by RUBYs stockholders in a meeting called for the purpose.

Notwithstanding the objections of 90% of RUBYs creditors and three members of the MANCOM, the SEC Hearing Panel approved on September 18, 1991the Revised BENHAR/RUBY Plan and dissolved the existing management committee.It also created a new management committee and appointed BENHAR as one of its members. In addition to the powers originally conferred to the management committee under Presidential Decree (P.D.) No. 902-A, the new management committee was tasked to oversee the implementation by the Board of Directors of the revised rehabilitation plan for RUBY.

ISSUE: Whether the minoritys pre-emptive rights were violated

HELD: Yes.

COMMERCIAL LAW: Corporation Law, Pre-emptive right

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.Upon the expiration of said period, any stockholder who has not exercised such right will be deemed to have waived it.

The validity of issuance of additional shares may be questioned if done in breach of trust by the controlling stockholders.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. In this case, the following relevant observations should have signaled greater circumspection on the part of the SEC -- upon the third and last remand to it pursuant to our January 20, 1998 decision -- to demand transparency and accountability from the majority stockholders, in view of the illegal assignments and objectionable features of the Revised BENHAR/RUBY Plan, as found by the CA and as affirmed by this Court:

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 Rubys valuable assets to the great prejudice of Ruby itself, as well as the minority stockholders and the unsecured creditors.

Certainly, the minority stockholders and the unsecured creditors are given some measure of protection by the law from the abuses and impositions of the majority, more so in this case, considering thegive-away signs of private respondents perfidy strewn all over the factual landscape.Indeed, equity cannot deprive the minority of a remedy against the abuses of the majority, and the present action has been instituted precisely for the purpose of protecting the true and legitimate interests of Ruby against the Majority Stockholders.On this score, the Supreme Court, has ruled that:

"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.x x x" (Additional emphasis supplied.)

Lamentably, the SEC refused to heed the plea of the minority stockholders and MANCOM for the SEC to order RUBY to commence liquidation proceedings, which is allowed under Sec. 4-9 of the Rules on Corporate Recovery.Under the circumstances, liquidation was the only hope of the minority stockholders for effecting an orderly and equitable settlement of RUBYs obligations, and compelling the majority stockholders to account for all funds, properties and documents in their possession, and make full disclosure on the nullified credit assignments.Oblivious to these pending incidents so crucial to the protection of the interest of the majority of creditors and minority shareholders, the SEC simply stated that in the interim, RUBYs corporate term was validly extended, as if such extension would provide the solution to RUBYs myriad problems.

Extension of corporate term requires the vote of 2/3 of the outstanding capital stock in a stockholders meeting called for the purpose.The actual percentage of shareholdings in RUBY as of September 3, 1996 -- when the majority stockholders allegedly ratified the board resolution approving the extension of RUBY's corporate life to another 25 years was seriously disputed by the minority stockholders,and we find the evidence of compliance with the notice and quorum requirements submitted by the majority stockholders insufficient and doubtful.Consequently, the SEC had no basis for its ruling denying the motion of the minority stockholders to declare as without force and effect the extension of RUBY's corporate existence.