Resolution of corporate feuds

The ongoing boardroom intramurals at The Medical City (TMC) brings to light a contentious provision in the rules on the resolution of corporate disputes.

Last July, Dr. Alfredo Bengzon, then president and CEO of TMC, filed a complaint with the Securities and Exchange Commission (SEC) calling for the indefinite suspension of TMC’s annual stockholders’ meeting as well as an investigation of the agreement between his nephew and TMC treasurer Jose Xavier Gonzales with foreign investors that would give them majority control of TMC.

The SEC granted Bengzon’s petition to suspend the stockholders’ meeting until a special panel has resolved the stock ownership issue.

Despite the SEC order, Gonzales and some stockholders held a special stockholders’ meeting that elected him and Dr. Eugenio Ramos as chair and president, respectively.

When Bengzon ordered the preventive suspension of Gonzales and Ramos, the latter went to court and were able to secure a restraining order stopping their suspension. Later, the court upheld the validity of the special stockholders’ meeting and the election of Gonzales and Ramos.

The crux of the corporate dispute between Bengzon and Gonzales is the validity of the acquisition by foreign investors of TMC shares that, in tandem with Gonzales, would give them majority ownership of TMC.

Under the Securities Regulation Code (SRC), that issue is within the SEC’s jurisdiction and, in line with that authority, it can order the contending parties to desist from doing any act related to the issue pending its resolution under pain of contempt.

Prior to the enactment of the SRC in 2000, the SEC had exclusive power to hear and resolve intra-corporate disputes, or controversies arising out of corporate matters between and among stockholders (or members, in the case of nonstock corporations), or between any of them and the corporation.

This grant of authority was justified because, as primary corporate regulator, the SEC has the expertise to pass upon issues that involve the interpretation and application of corporate and securities regulations.

For some convoluted reason, however, lawmakers divested the SEC of that authority and gave it to the regular courts. The already clogged court dockets were additionally saddled with cases that require more than elementary knowledge of law.

Thus, Gonzales and company cannot (legally) be faulted for taking the judicial route to secure majority control of TMC despite the SEC’s order to hold things in abeyance until its special panel decides on Bengzon’s complaint.

On its face, the court order upholding the conduct of the special stockholders’ meeting is valid because the dispute between the two factions in TMC is clearly intra-corporate.

As things stand at present, there is an overlap between the SEC and the regular courts on the authority to resolve corporate disputes. This “gray area” has played into the hands of the lawyers—with unpleasant results.

Suppose the SEC rules in favor of Bengzon and nullifies the acquisition by the foreign investors of the shares voted in the special stockholders’ meeting, whose decision will prevail? The court’s or the SEC’s?

If the SEC decides to nullify the results of the special stockholders’ meeting and recognizes Bengzon’s group as the legitimate TMC officials, can the court countermand that decision and order the SEC to honor its earlier order upholding the legitimacy of Gonzales’ and Ramos’ election?

If the SEC cites Gonzales in contempt for disobeying its order to suspend the conduct of the stockholder’ meeting, can he invoke the court order to justify his defiance?

Unless the contending TMC parties are able to settle their differences amicably, the hospital’s stakeholders may have to brace themselves for a long legal battle.

For obvious reasons, that’s something the lawyers will not mind and may even look forward to.