Forest Hills Golf and Country Club, Inc. v. SEC-CRMD
CLARIFICATIONFacts
1. The Antecedents: Forest Hills Golf and Country Club, Inc. (FHGCCI) is a domestic corporation registered with the Securities and Exchange Commission (SEC) in 1995. In 2013, FHGCCI applied for the approval of its Amended By-Laws, which included provisions limiting voting rights to regular members in good standing and suspending voting rights for the first five years following the developer's turnover. The SEC's Company Registration and Monitoring Department (SEC-CRMD) denied the amendments, asserting that FHGCCI is a stock corporation and, under Section 6 of the Corporation Code, cannot deprive shares of voting rights unless they are classified as preferred or redeemable. 2. Procedural History: FHGCCI appealed to the SEC En Banc, arguing it is a non-stock corporation allowed to limit voting rights under Section 89. The SEC En Banc denied the appeal, ruling that FHGCCI is a stock corporation because it issues shares and its members receive ownership interests in assets. It directed FHGCCI to amend its Articles of Incorporation (AOI) to reflect its stock nature. The Court of Appeals (CA) affirmed this, noting that FHGCCI issues transferable certificates and its assets are distributed to members upon dissolution, which the CA interpreted as profit-making activity. 3. The Petition: FHGCCI filed a Petition for Review on Certiorari under Rule 45 before the Supreme Court. Petitioner argues that it lacks the second requisite of a stock corporation—the authority to distribute dividends—because its AOI expressly prohibits such distribution. FHGCCI contends that the mere issuance of shares does not make it a stock corporation and that the distribution of assets upon dissolution is a distinct legal process permitted for non-stock corporations under Section 94.
Issue(s)
Whether Forest Hills Golf and Country Club, Inc. is a stock or non-stock corporation. Whether the proposed amendments to the By-Laws limiting the voting rights of members are valid.
Ruling
The Petition is GRANTED. The Decision of the Court of Appeals is REVERSED and SET ASIDE. Forest Hills Golf and Country Club, Inc. is DECLARED a non-stock corporation, and the case is REMANDED to the SEC En Banc to evaluate the proposed amendments accordingly.
Ratio Decidendi
On Issue 1: The Supreme Court held that Forest Hills Golf and Country Club, Inc. (FHGCCI) is a non-stock corporation. Under Section 3 of the Corporation Code and the Revised Corporation Code, a stock corporation requires two concurrent elements: capital stock divided into shares AND the authority to distribute dividends or surplus profits. The Court emphasized that the word "and" makes these requisites cumulative. While FHGCCI has capital stock, its Articles of Incorporation (AOI) explicitly state that "no dividend shall at any time be declared and/or paid." Applying the precedent in Collector of Internal Revenue v. Club Filipino, Inc. de Cebu, the Court ruled that the absence of dividend authority is determinative of non-stock status. The Court further clarified that the distribution of assets upon dissolution (liquidating dividends) is distinct from the distribution of profits by a going concern and does not satisfy the second requisite of a stock corporation. Speculative gains from the sale of shares by members do not constitute corporate profit distribution. On Issue 2: Because FHGCCI is a non-stock corporation, it is governed by Section 89 of the Corporation Code (now Section 88 of the Revised Corporation Code), which allows non-stock corporations to limit, broaden, or deny the voting rights of its members. The SEC's denial of the amendments was based on the erroneous premise that FHGCCI is a stock corporation subject to the restrictions of Section 6. Since the law explicitly permits non-stock corporations to restrict voting rights in their AOI or by-laws, there is no legal impediment to the proposed amendments. The Court noted that the nature of a corporation is determined by the applicable statutes and its AOI, not by nomenclature like "non-profit stock corporation." The case was remanded to the SEC En Banc to ensure the amendments are otherwise lawful under the non-stock classification.
Main Doctrine
The classification of a corporation as stock or non-stock is governed by the cumulative requisites set forth in Section 3 of the Corporation Code. A stock corporation must not only have capital stock divided into shares but must also be authorized to distribute dividends or surplus profits to its holders. The absence of the authority to distribute dividends—regardless of the existence of capital shares—categorizes the entity as a non-stock corporation. Consequently, such an entity is governed by the rules for non-stock corporations, including the statutory right to limit the voting rights of its members in its by-laws.