TRDC is a small family owned corporation engaged in the realty business. Tormil Realty & Development Corporation. 81% of its capital stocks were owned by Judge Manuel Torres. The other 19% thereof were owned by his nieces and nephews.
Here’s his dilemma. Even though Judge Torres owns majority of the stocks of TRDC and was also the president thereof, he is only entitled to one vote among the 9-seat Board of Directors. So do the math… his vote can be easily overridden by minority stockholders. (Geez must have been a wonderful family gathering each and every board meeting)
So here’s what the judge did. In 1987, before the regular election of the company’s officers, Judge Torres assigned one share (qualifying share) each to 5 “outsiders” for the purpose of qualifying them to be elected as directors in the board to thereby strengthen Judge Torres’ power over other family members.
However, the said assignment of shares were not recorded by the corporate secretary, Ma. Christina Carlos (niece) in the Stock and Transfer Book of TRDC. (So hinarang ng pamangkin na babae)
Lets take a close look on what the judge did, thereafter.
Here’s what happened. The validity of said assignments were of course questioned. But the judge asserted that it is impractical for him to order the CORSEC (Carlos) to make the entries because Carlos is one of his opposition.
So what Judge Torres did was he made the entries himself because HE WAS KEEPING THE STOCK AND TRANSFER BOOK. He further rationalized that he can do what a mere secretary can do because in the first place, he is the president.
Since the other family members were against the inclusion of the five outsiders, they refused to take part in the election. Judge Torres and his five assignees then decided to conduct the election among themselves considering that the 6 of them constitute a quorum.
ISSUE: Whether or not the inclusion of the five outsiders were valid. And whether or not the subsequent election is valid. In other words DOES THE ASSIGNMENT HAD A VALID EFFECT?
HELD:
No. The assignment of the shares of stocks did not comply with procedural requirements.
Stockholders who transfer shares has no authority to effect their entries in the Stock and Transfer Book even when the Corporate Secretary is at odds with such stockholder.
1. It did not comply with the by laws of TRDC
2. Nor did it comply with Section 74 of the Corporation Code.
Section 74 provides that the stock and transfer book should be KEPT AT THE PRINCIPAL OFFICE OF THE CORPORATION. Here, IT WAS JUDGE TORRES WHO WAS KEEPING IT AND WAS BRINGING IT WITH HIM. It also provides that the CORPORATE SECRETARY is the CUSTODIAN OF CORPORATE RECORDS in the absence of any provision to the contrary. (I presume there was no contrary provision in the By-laws) Hence, transfer effected were therefore VOID.
Further, his excuse of not ordering the secretary to make the entries have no weight. There are remedies in the law that the transferor-stockholder could have availed of, instead of taking the law in his hands. (Writing it himself).
The proper procedure is to order the secretary to make the entry of said assignment in the book, and if she refuses, Judge Torres can come to court and ask for specific performance to compel her to make the entry.
In other words, there are judicial remedies for this. Needless to say, the subsequent election is invalid because the assignment of shares is invalid by reason of procedural infirmity.
The Supreme Court also emphasized: all corporations, big or small, must abide by the provisions of the Corporation Code. Being a simple family corporation is not an exemption. Such corporations cannot have rules and practices other than those established by law.
