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Arbitration of corporate disputes

From time to time, there are news reports of intracorporate disputes in some of the country’s prominent companies.

These reports are usually grist for rumors in the business community. And thanks to social media, they can spread like wildfire.

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Intracorporate disputes are conflicts between a stockholder and the company or among stockholders. They usually arise when the stockholders, in particular those who hold substantial shares, disagree on significant business decisions or on the way the business is being run.

The dispute is often more intense in family-owned corporations where the patriarch or matriarch who built the company has died without putting in place a clear mechanism on the devolution of corporate authority to their children.

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With personal pride and millions of pesos at stake, the contending parties sometimes file civil and criminal cases against each other and, in some cases, resort to violence to resolve their differences.

For obvious reasons, their lawyers are only too happy to give their clients all legal (and extralegal) assistance they may need to accomplish their objectives regardless of their reasonableness or lack of it.

But intracorporate disputes need not result to such extremes if stockholders draw upon the provision in the Revised Corporation Code (RCC) that encourages corporations to put an arbitration clause or agreement in their articles of incorporation or bylaws to resolve their differences on corporate issues as long as they do not involve criminal offenses and the interests of third parties.

Once adopted, the agreement becomes binding on the corporation, its directors or trustees, officers and executives.

To be enforceable, the agreement should state, among others, the number of arbitrators and the procedure for their appointment.

The common practice in the appointment of arbitrators is each side nominates its preferred arbitrator and the two nominees agree on a third (or independent) arbitrator who they believe can objectively decide on the dispute.

In the choice of independent arbitrators, it helps that the major organizations in the country representing key industry or business groups have a list of persons who can take on the role.

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Although the RCC is silent on the issue of compensation, the agreement should, for good measure and in fairness to the arbitrators, state the manner by which they shall be paid and the sharing of the expenses of arbitration.

The RCC grants the arbitration panel the power to decide on the extent of its jurisdiction and on questions relating to the validity of the arbitration agreement.

And most importantly, while the arbitration proceedings are ongoing, the panel shall have the “power to grant interim measures necessary to ensure the enforcement of the award, prevent a miscarriage of justice, or otherwise protect the rights of the parties.”

This power is essential because, as past experiences have shown, some parties in intracorporate disputes engage in acts that on their face look legitimate, but in reality are aimed at making ineffectual any decision the arbitration panel may later render.

To illustrate, if, for example, the dispute involves the determination of stock ownership, the stockholder under question may, during the arbitration proceedings, sell his or her stocks to an innocent buyer or mortgage them in a bank as security for a loan.

In case the buyer or bank is able to prove that the purchase or mortgage was done in good faith and had no prior knowledge of the ownership issue, those transactions have to be honored even if the arbitration award states otherwise.

The final ruling or award of the arbitration panel shall be enforceable or executory after the lapse of 15 days from its receipt by the parties.

But its implementation can be stayed or suspended by the filing of a bond by the adversely affected party or the issuance by an appellate court of an order suspending its enforcement.

The arbitration mechanism provided for in the RCC is still untested, but it is worth resorting to because it is more efficient and less expensive than seeking administrative or judicial relief for intracorporate disputes. INQFor comments, please send your email

to [email protected]

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