Stock Corporations and Shareholders’ Rights (To Vote)

Part 3

One of the primary rights of a stockholder is the ability to participate in the management and control of the corporation, a right exercised through voting. The right to vote is inherent in, and incidental to, the ownership of corporate stock, making it a vital property right. As such, the right to vote is considered one of the fundamental rights of a shareholder.

A person becomes a stockholder by acquiring shares, either through purchase from another stockholder or by subscribing to the corporation’s authorized and unsubscribed capital stock.

In stock corporations, stockholders with voting rights are entitled to vote the number of shares registered in their names in the corporation’s books at the time specified in the bylaws, or, where the bylaws are silent, at the time of election (Section 23, Revised Corporation Code).

Some key concepts regarding shareholders’ voting rights are:

1. Minority shareholders have the same right as others to nominate candidates to the Board of Directors.

2. All shareholders have the right to elect, remove, and replace directors, and to vote on certain corporate actions in accordance with the Corporation Code.

3. A director cannot be removed without cause if such removal would deny minority shareholders their representation on the Board.

4. Voting is a crucial mechanism in electing directors.

Since voting rights are fundamental, our corporation law provides circumstances under which the right to vote may be limited or excluded. Moreover, the Supreme Court has consistently interpreted any restrictions on the right to vote strictly, favoring shareholders in cases of doubt.

In Castillo, et al. v. Balinghasay, et al. (GR 150976, October 18, 2004), the complainants were shareholders holding Class B shares of the Medical Center Parañaque, Inc. (MCPI), a corporation incorporated under the Old Corporation Code. MCPI’s incorporation papers classified its stock into Class A and Class B shares, with only Class A shareholders granted voting rights and eligibility to be elected as directors or corporate officers.

During the 2001 annual stockholders’ meeting and elections for directors, Class B shareholders were nominated for board positions. However, another shareholder objected, citing the company’s Articles of Incorporation, which stated that Class B shareholders were ineligible to vote or be elected to the board. As a result, the corporation declared only candidates who were holders of Class A shares as the winners in the election.

The disqualified Class B shareholders filed a case with the Court, seeking to annul the election and hold a new one in which both Class A and Class B shareholders could vote and qualify for board membership. Initially, the lower courts ruled against the Class B shareholders, but the Supreme Court reversed the decision.

When MCPI was incorporated in 1977, the governing law, Act No. 1459, permitted corporations to classify shares. However, MCPI amended its Articles of Incorporation in 1992, when BP Blg. 68, which amended Act No. 1459 was already in effect. BP Blg. 68 introduced significant changes, including a provision that “no share may be deprived of voting rights except those classified and issued as ‘preferred’ or ‘redeemable’ shares, unless otherwise provided in this Code.” It also mandated that “there shall always be a class or series of shares which have complete voting rights.”

Provisions of law, including that of BP Bl. 68, are deemed to be written into contracts and, in this case the Articles of Incorporation of MCPI. As such, unless Class B shares were explicitly classified as Preferred or Redeemable, their holders could not be deprived of voting rights.

Moreover, in this case, the Supreme Court found no evidence to suggest that MCPI’s Class B shares were classified as either “preferred” or “redeemable,” thereby affirming that Class B shareholders had voting rights.

While the Revised Corporation Code has amended BP Blg. 68, it retained Currently, the provisions under BP Blg. 68 have been retained in the Revised Corporation Code (RCC). While the RCC allows for the existence of non-voting shares, it guarantees that holders of such shares retain voting rights on certain matters, including:

1. Amendments to the articles of incorporation;
2. Adoption or amendment of bylaws;
3. Sale, lease, exchange, mortgage, pledge, or disposition of all or substantially all
corporate property;
4. Incurring or increasing bonded indebtedness;
5. Increase or decrease of authorized capital stock;
6. Mergers or consolidations;
7. Investment of corporate funds in other businesses or corporations;
8. Dissolution of the corporation.

(The author, Atty. John Philip C. Siao, is a practicing lawyer and founding Partner of Tiongco Siao Bello & Associates Law Offices, an Arbitrator of the Construction Industry Arbitration Commission of the Philippines, and teaches law at the De La Salle University Tañada-Diokno School of Law. He may be contacted at [email protected]. The views expressed in
this article belong to the author alone.)