FACTS
The annual stockholders' meeting of Manila Electric Company (Meralco) was scheduled for May 27, 2008. Proxies were required to be submitted by May 17, with proxy validation scheduled for May 22. Because the position of Meralco's corporate secretary became vacant following the resignation of Camilo Quiason, the Meralco Board designated retired Supreme Court Associate Justice Jose Vitug to act as corporate secretary for the annual meeting. However, when proxy validation began, the proceedings were presided over by Anthony Rosete, Meralco's assistant corporate secretary and in-house chief legal counsel.
Government Service Insurance System (GSIS), a major shareholder of Meralco, became concerned about the proxy validation proceedings and the resulting certification of proxies in favor of Meralco management. On May 23, 2008, GSIS filed a complaint with the Regional Trial Court of Pasay City seeking the declaration of certain proxies as invalid. GSIS dismissed that complaint three days later. On May 26, 2008, GSIS instead filed an Urgent Petition with the Securities and Exchange Commission (SEC) seeking, among others, the invalidation of the proxies and a Cease and Desist Order (CDO) preventing their recognition, counting, and tabulation during the upcoming annual meeting.
On the same day, the SEC issued a CDO against the respondents. The following day, during Meralco's annual meeting, Rosete announced that the meeting would proceed and expressed the view that the CDO was null and void. On May 28, 2008, the SEC issued a Show Cause Order (SCO) directing the respondents to explain why they should not be cited for contempt. The respondents subsequently filed a petition for certiorari and prohibition before the Court of Appeals seeking the annulment of the CDO and SCO.
On July 23, 2008, the Court of Appeals dismissed GSIS's SEC complaint, ruling that the SEC had no jurisdiction and that GSIS had engaged in forum shopping and splitting of causes of action. It also declared the CDO and SCO void ab initio. GSIS then filed G.R. No. 183905 before the Supreme Court. Separately, the SEC and its officers filed G.R. No. 184275 seeking the reversal of the Court of Appeals' decision and recognition of the SEC's jurisdiction. The Supreme Court consolidated the issues arising from the two petitions.
ISSUE
The first issue was whether the SEC had jurisdiction over GSIS's petition concerning the validity of the proxies used in connection with the election of Meralco's directors. The parties relied principally upon Republic Act No. 8799, or the Securities Regulation Code (SRC), Presidential Decree No. 902-A, and the Interim Rules of Procedure Governing Intra-Corporate Controversies. The question was whether the alleged violation of SEC rules on proxy solicitation placed the controversy within the SEC's jurisdiction or whether it constituted an election controversy within the exclusive jurisdiction of the regular courts.
The second issue was whether the SEC's Cease and Desist Order and Show Cause Order were valid. The Court had to examine the different statutory bases for a CDO under the SRC, particularly Sections 5.1(i), 53.3, and 64, and determine whether the SEC could issue the CDO in a controversy involving proxies solicited for the election of corporate directors.
HELD
The Supreme Court DISMISSED G.R. No. 183905 for lack of merit, except that it deleted the second and third paragraphs of the dispositive portion of the Court of Appeals' decision, including the portions imposing or directing sanctions against GSIS and its lawyers and the declaration concerning the filing of an election contest in the RTC. The Court held that the SEC did not have jurisdiction over GSIS's petition because the controversy involved the validation of proxies in connection with the election of corporate directors, which falls within the original and exclusive jurisdiction of the regular courts.
The Court explained that Section 5.2 of R.A. No. 8799, in relation to Section 5(c) of P.D. No. 902-A, transferred to the regular courts jurisdiction over controversies involving the election or appointment of directors, trustees, officers, or managers of corporations. The Court also relied upon Section 2, Rule 6 of the Interim Rules, which broadly defines an election contest to include controversies involving the validation of proxies, the manner and validity of elections, and the qualifications of candidates, among others. Thus, although the controversy ostensibly involved SEC rules governing proxy solicitation, its true nature was an election controversy.
The Court recognized that the SEC continues to possess authority to investigate violations of its rules on proxy solicitation when the proxies are obtained for matters unrelated to the election of corporate directors. However, when proxies are solicited specifically in connection with the election of corporate directors, the resulting dispute is properly treated as an election controversy within the jurisdiction of the regular courts. The Court explained that placing all related claims and controversies arising from the election of corporate directors before one body avoids fragmented adjudication of the same election dispute.
With respect to G.R. No. 184275, the Supreme Court EXPUNGED the petition. The Court held that the SEC, its Commissioner, and the Director of its Compliance and Enforcement Department were merely public respondents in the certiorari proceeding before the Court of Appeals and were not real parties-in-interest. Under Rule 65, the public respondent whose act is being challenged is not the party entitled to seek review of the adverse judgment. The real party interested in sustaining the challenged ruling must defend it. Accordingly, the SEC and its officers had no capacity to bring G.R. No. 184275.
The Court further examined the statutory bases for the SEC's authority to issue a CDO. Section 5.1(i) of the SRC authorizes the SEC to issue CDOs to prevent fraud or injury to the investing public. Section 53.3 allows the SEC, upon the required findings of a violation and reasonable likelihood of continuing, further, or future violations, to issue an ex parte CDO for a maximum of ten days. Section 64 provides another basis where an act or practice, unless restrained, will operate as a fraud on investors or is otherwise likely to cause grave or irreparable injury or prejudice to the investing public. The Court nevertheless held that these provisions did not give the SEC jurisdiction over this particular controversy because the underlying dispute was an election controversy properly cognizable by the regular courts.
Accordingly, the Supreme Court did not sustain the SEC's jurisdiction over the GSIS petition. It expunged G.R. No. 184275 for lack of capacity of the petitioners to bring the suit and dismissed G.R. No. 183905 for lack of merit, while deleting the specified portions of the Court of Appeals' dispositive portion. The Court made no pronouncement as to costs.
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