CASE DIGEST : Ramon C. Lee and Antonio D.M. Lacdao v. Court of Appeals, Sacoba Manufacturing Corp., Pablo Gonzales, Jr., and Thomas Gonzales G.R. No. 93695, February 4, 1992 Third Division — Gutierrez, Jr., J.

 

FACTS

On November 15, 1985, International Corporate Bank, Inc. filed a complaint for a sum of money against private respondents. On March 17, 1986, the private respondents filed a third-party complaint against Alfa Integrated Textile Mills, Inc. (ALFA) and petitioners Ramon C. Lee and Antonio D.M. Lacdao. The petitioners were then associated with ALFA as its president and executive vice-president. They eventually filed a motion to dismiss the third-party complaint, which the Regional Trial Court of Makati denied.

The controversy arose when the trial court attempted to serve alias summons on ALFA. The petitioners informed the court that summons had been erroneously served upon them because the management of ALFA had already been transferred to the Development Bank of the Philippines (DBP). DBP, however, manifested that it was not authorized to receive summons for ALFA because it had not actually taken over the corporation, which remained a separate and distinct juridical entity. The trial court initially declared service through the petitioners proper, but later reversed itself and ruled that the service was invalid because the petitioners were no longer corporate officers of ALFA.

The petitioners relied on a Voting Trust Agreement dated March 11, 1981, executed by the ALFA stockholders, including the petitioners, in favor of DBP. Under the agreement, the stockholders assigned and delivered their shares to DBP as trustee, and DBP was given the right to vote the shares and exercise the rights pertaining to them. The agreement further authorized the trustee to transfer one share to a person for the purpose of qualifying that person as a director. The petitioners argued that because their shares had been transferred to DBP, they were no longer directors or officers of ALFA and consequently could not receive summons on behalf of the corporation.

The Court of Appeals nevertheless reversed the RTC and ruled that service of summons upon the petitioners was proper. It held that although the petitioners may have ceased to be president and vice-president, they were still directors of ALFA. The petitioners then filed a petition for certiorari before the Supreme Court, arguing that the execution of the voting trust agreement had terminated their status as directors and that service of summons upon them was therefore invalid.

ISSUE

The principal issue was whether the execution of the voting trust agreement transferred the legal ownership of the ALFA shares to DBP and consequently caused the petitioners to cease being directors of ALFA. This required the Court to determine the legal nature and effect of a voting trust agreement under Section 59 of the Corporation Code.

Under Section 59, one or more stockholders of a stock corporation may create a voting trust for the purpose of conferring upon a trustee the right to vote and other rights pertaining to the shares for a period not exceeding five years at any one time. If the voting trust is specifically required as a condition of a loan agreement, it may exceed five years but automatically expires upon full payment of the loan. The agreement must also be in writing, notarized, and filed with the corporation and the SEC; otherwise, it is ineffective and unenforceable.

The Court also had to determine the effect of the transfer upon the petitioners' qualification as directors under Section 23 of the Corporation Code. That provision requires every director to own at least one share of the corporation's capital stock, with such share standing in the director's name on the corporation's books. A director who ceases to be the owner of at least one share standing in his name thereby ceases to be a director.

Finally, the Court had to determine whether service of summons upon the petitioners constituted valid service upon ALFA. Under Section 13, Rule 14 of the Revised Rules of Court, service upon a domestic corporation may be made on its president, manager, secretary, cashier, agent, or any of its directors. Since the petitioners claimed that they had already ceased to be directors and officers, the validity of the service depended upon whether they still occupied any of the positions authorized by the Rule to receive summons for ALFA.

HELD

The Supreme Court GRANTED the petition. It held that the voting trust agreement transferred the legal ownership of the shares covered by the agreement to DBP as trustee. Although the original stockholders retained equitable or beneficial ownership, the legal title to the shares was vested in DBP. The Court explained that a voting trust agreement creates a separation between the equitable or beneficial ownership of the shares and the legal title to them. The trustee becomes the stockholder of record with respect to the shares covered by the agreement.

The Court held that the petitioners consequently ceased to be directors of ALFA. Section 23 of the Corporation Code makes legal title to at least one share, as appearing on the corporation's books, material to a person's qualification as director. The Court emphasized that what is material under the present Corporation Code is legal title, not beneficial ownership. Because the petitioners had transferred all their shares to DBP, they no longer had even one share standing in their names on ALFA's books. The transfer therefore created vacancies in their respective positions as directors.

The Court also rejected the argument that the voting trust agreement had already expired after five years. Although Section 59 generally limits a voting trust to five years, the agreement in this case was connected with ALFA's obligations to DBP. Its terms expressly provided that the agreement would last for five years and would be renewable for as long as ALFA's obligations to DBP, or any portion thereof, remained outstanding. The Court found evidence that the voting trust had not yet terminated when summons was served on the petitioners in 1987. DBP had also taken over full control and management of ALFA. Thus, at the time of service, legal title to the shares still belonged to DBP.

The Court therefore held that service of summons upon the petitioners was invalid. Under Section 13, Rule 14, summons must be served upon a representative sufficiently integrated with the corporation to make it reasonable to expect that the representative would understand the responsibility of receiving legal process. Because the petitioners were no longer directors or officers of ALFA, they did not fall within the persons authorized to receive summons on behalf of the corporation. The Court emphasized that a corporation has a personality separate and distinct from its officers and stockholders, and it can be bound only by acts performed within the authority of its officers or agents. Accordingly, the Supreme Court set aside the Court of Appeals' Decision and Resolution and reinstated the RTC Orders dated April 25, 1989 and October 17, 1989