Salido v. Aramaywan Metals Development Corporation
REITERATIONFacts
The Antecedents: This case involves an intra-corporate dispute between two factions within Aramaywan Metals Development Corporation (Aramaywan). Agapito A. Salido, Jr. (Salido) and Cerlito San Juan (San Juan), along with others, agreed to form Aramaywan and Narra Mining Corporation (Narra Mining). San Juan was to finance the initial operations of Aramaywan by advancing P2,500,000.00 for its paid-up subscription, and in return, he would own 55% of Aramaywan's stocks. The Agreement to Incorporate stipulated the capital stock, subscription distribution, and San Juan's obligation to advance the paid-up subscription for Aramaywan and assure the payment of Narra Mining's subscription. San Juan advanced P2,500,000.00, evidenced by a bank certificate held in trust for the corporation. Aramaywan was incorporated with nine directors, including San Juan, his wife Corazon San Juan, and daughter Cristina Marie San Juan (San Juan faction), and Salido and others (Salido faction). Procedural History: During the first Board Meeting on November 25-26, 2005, the Salido faction claimed San Juan only delivered P932,209.16 and remained in breach of his undertaking. Salido proposed reducing San Juan's shares from 55% to 15%. Subsequently, on February 5, 2006, the Salido faction passed resolutions, including the reduction of San Juan's shares to 15% (Resolution No. 01-2006), cancellation of Corazon and Cristina Marie's shares (Resolution No. 03-2006), and ceasing the registration of Narra Mining (Resolution No. 04-2006). The San Juan faction filed a complaint with the RTC seeking to invalidate these acts. The RTC dismissed the complaint, upholding the validity of the Salido faction's resolutions and the reduction of San Juan's shares, deeming it a valid corporate act in exchange for San Juan's release from further contribution and the incorporation of Narra Mining. The CA, in its Amended Decision, reversed its earlier ruling, finding that San Juan did not consent to the reduction of his shares and that his obligation under the Agreement was fulfilled as evidenced by the bank certificate. The CA held that San Juan was entitled to 55% of the shares and that the reduction was invalid due to lack of consideration and the corporation's lack of unrestricted retained earnings. The CA also affirmed the validity of Atty. Pay's appointment as corporate secretary and Resolution No. 04-2006, but declared Resolution No. 02-2006 (transfer of corporate address) invalid for non-compliance with requirements for amending articles of incorporation. Salido filed a Petition for Review on Certiorari with the Supreme Court. The Petition: Salido assails the CA's Amended Decision, arguing that the CA erred in holding that San Juan's shares were not validly reduced. The Supreme Court is asked to resolve whether the CA erred in its Amended Decision.
Issue(s)
Whether the Court of Appeals erred in issuing the Amended Decision which held that San Juan's shares were not validly reduced, and whether the reduction of San Juan's shares and their conversion into treasury shares were valid corporate acts. Whether the resolutions passed by the Salido faction were valid, specifically concerning Resolution No. 04-2006 (ceasing Narra Mining incorporation), the appointment of Atty. Roland E. Pay as corporate secretary, and Resolution No. 02-2006 (transferring principal place of business).
Ruling
The Supreme Court denied the petition and affirmed the Amended Decision of the Court of Appeals. The Court held that the reduction of San Juan's shares was invalid because Aramaywan lacked unrestricted retained earnings to reacquire its own shares, and there was no valid consideration for the reduction. The Court also found that the transfer of the principal place of business was invalid for failing to comply with the requirements for amending the articles of incorporation.
Ratio Decidendi
On the validity of the reduction of San Juan's shares: The Court held that the reduction of San Juan's shares and their conversion into treasury shares were invalid. Under Section 41 of the Corporation Code, a corporation can only reacquire its shares if it has unrestricted retained earnings. The records showed that Aramaywan had just been incorporated and had not yet performed mining activities, making it highly doubtful that it possessed unrestricted retained earnings. Furthermore, the trust fund doctrine mandates that corporate assets are held in trust for creditors, and thus, cannot be used to purchase the corporation's own stock if there are outstanding debts or liabilities. The Court found no showing that Aramaywan had unrestricted retained earnings or that it had no creditors or that they were paid. Moreover, San Juan's subscription was fully paid, and Aramaywan could not reduce his shares without a corresponding return of his investment, which was not given. The Court also noted that even if San Juan had unpaid subscriptions, the Corporation Code provides specific procedures for demand and delinquency sales, which were not followed. The alleged agreement to reduce shares without a valid consideration was void under Article 1352 of the Civil Code. The Court found the purported consideration for the reduction of San Juan's shares to be untenable. The RTC and the initial CA ruling were based on the premise that San Juan had pending obligations to release the rest of his P1,567,790.1 contribution and to incorporate Narra Mining. However, the Court reiterated that San Juan's subscription to Aramaywan was fully paid. Regarding Narra Mining, the Court noted that there was no demand for its incorporation at the time, and San Juan's obligation under the Agreement was to "assure the payment of the subscription" for Narra Mining, not necessarily to incorporate it himself by a certain date. Therefore, the Court concluded that the agreement to reduce shares lacked cause or consideration, rendering it void. On the validity of certain Board Resolutions: The Court affirmed the CA's ruling on the validity of certain resolutions. Resolution No. 04-2006, ceasing the incorporation of Narra Mining, was deemed a valid ordinary business affair unanimously approved by the five directors present during the February 5, 2006 special board meeting. Similarly, the appointment of Atty. Roland E. Pay as corporate secretary was valid, as it was previously agreed upon and San Juan did not oppose it. However, Resolution No. 02-2006, transferring the principal place of business from Taguig to Palawan, was declared invalid. This action constitutes an amendment to the articles of incorporation, requiring not only a majority vote of the board but also the written assent of stockholders representing at least two-thirds of the outstanding capital stock, with SEC approval. Since San Juan remained a majority stockholder due to the invalidity of the share reduction, his assent was indispensable, and its absence rendered the resolution void.
Main Doctrine
A corporation cannot validly reacquire its own shares to convert them into treasury shares without having unrestricted retained earnings. Furthermore, any agreement to reduce a stockholder's shares without a valid consideration, such as the extinguishment of a genuine obligation, is void. Amendments to the articles of incorporation, such as the transfer of the principal place of business, require not only a majority vote of the board of directors but also the written assent of stockholders representing at least two-thirds of the outstanding capital stock, with SEC approval.