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Mediation of corporate disputes

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Corporate Securities Info

Mediation of corporate disputes

INTRA-CORPORATE disputes, or controversies among stockholders or between stockholders and the corporation, are like quarrels between siblings or family members.

With personal pride or amor propio often getting into the picture, the contending parties tend to adopt an “all or nothing” or zero-sum attitude in the resolution of their differences.

Under existing regulations, the authority to hear and decide intra-corporate issues is vested in the regular courts, no longer with the Securities and Exchange Commission (SEC).

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Although the intention behind the transfer is laudable, the move has put additional burden to the already clogged dockets of our courts.

Thus, it is not unusual for these disputes—many of which arise from miscommunication or skewed interpretation of corporate rules—to take years and entail huge litigation expenses before they are resolved.

In an effort to expedite the settlement of intra-corporate disputes and other issues that affect ordinary corporations, the SEC recently drafted a Mediation Policy and has invited the public, in particular the business sector, to give their comments or suggestions to the program.

Coverage

The objective of the proposed policy is to mediate, not arbitrate, disputes on matters that are within the SEC’s areas of supervision and regulation, including intra-corporate issues that have not been filed in court.

The SEC will provide a venue for the amicable or peaceful settlement of conflicts that, if left unresolved, will eventually find their way in the courts for resolution.

The mediation process will be conducted by SEC lawyers who are proficient in the Corporation Code, Securities Regulation Code and other laws that the SEC is mandated to implement, and who have undergone training (and accreditation) on mediation by the Philippine Judicial Academy.

For the first 18 months after the proposed rules take effect, the mediation shall be limited to the following cases:

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Petition to call stockholders/members annual meeting;

Petition for change of corporate and partnership names, and

Petitions for voluntary dissolution

These issues are the usual subject of requests for assistance or intervention that the SEC receives from the public and which the requesting parties prefer to resolve out of court.

Since the program is novel, the SEC will limit, for the time being, the kinds of cases it can mediate to enable its staff to, so to speak, learn the ropes and fine tune the system.

Complaints

The calling or holding of stockholders or members annual meeting often becomes contentious when there are two groups of stockholders or members vying for control of the board of directors or trustees.

The group that has the majority in the board (and wants to maintain its hold on the corporation) sometimes engages in not-so-clean tricks, e.g., withhold information about the stockholders or members, or repeatedly postpone the conduct of the annual meeting, to prevent the members of the other group from being voted into the board.

Through mediation, the stockholders or members can be persuaded “for the greater good of the corporation” to agree to an arrangement that will address the grievances of the parties.

In the case of change of corporate and partnership names, the dispute usually stems from the question on which party has a better right to the use of a business name.

This issue is critical to, for example, family corporations whose trade names have acquired some degree of recognition and the family members-stockholders have gone their separate business ways and want to appropriate the name for their exclusive use.

By bringing the quarreling stockholders together to thresh out their differences through mediation, the parties can be persuaded into either conceding to one group the use of the name in question, or adding additional words to differentiate an already registered name to a new one being applied for.

Creditors

In petitions for voluntary dissolution, the thorniest issue is the settlement of the claims of creditors who want to be paid before they agree to the shuttering of the corporation or otherwise demand stern conditions on the liquidation of its assets.

Creditors cannot be blamed if they take hardline positions when the corporations to which they lent money or sold products or services in good faith suddenly decide to close shop for one reason or another.

There is also the lingering suspicion that the corporation is up to something nasty or is not being forthright when it files for voluntary dissolution. More so if the corporation has been in the business for some time or there were no red flags that indicate it is silently hemorrhaging.

In a court room, the creditors’ lawyers tend to grandstand or take adamant positions to impress their clients and, in the process, delay the speedy resolution of the cases.

Not so in the privacy of a mediation room where the mediators can quietly impress in the minds of the creditors, through audited financial statements and other pieces of evidence, the need to be reasonable in their demands to expedite the dissolution of an ailing corporation.

What’s the point in demanding a big share of the corporation’s remaining assets and getting them after five years of litigation (assuming it only takes that long and the assets are still there) when a small share can be had immediately while the assets are available?

The mediation policy is still a work in progress. Although the proposed rules are comprehensive, the SEC can use some inputs from the public to make them responsive and attuned to the realities on the ground.

The country’s business, commercial and trade organizations should take a close look at the proposed mediation policy at the SEC website and give their two cents worth because, who knows, they may avail of it in the future.

For comments, please send your e-mail to “rpalabrica@inquirer.com.ph”.

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