CASE DIGEST : Republic of the Philippines (Presidential Commission on Good Government) v. Sandiganbayan and Victor Africa G.R. Nos. 107789 & 147214, April 30, 2003 Supreme Court En Banc — Carpio Morales, J.

 

FACTS

The consolidated cases arose from a controversy involving Eastern Telecommunications Philippines, Inc. (ETPI) and the PCGG's sequestration of certain ETPI shares. On August 7, 1991, the Presidential Commission on Good Government (PCGG) conducted an ETPI stockholders' meeting during which a PCGG-controlled Board of Directors was elected. A subsequent special stockholders' meeting was convened by the registered ETPI stockholders, during which another set of directors was elected. Thus, two sets of directors and officers claimed authority over ETPI. Victor Africa, an ETPI stockholder, alleged that the PCGG had been illegally exercising stockholder rights over ETPI, particularly in the election of directors.

Africa later asked the Sandiganbayan to order the calling and holding of ETPI's 1992 annual stockholders' meeting under its control and supervision. The Sandiganbayan granted the request and ordered that the meeting be held under its supervision. It directed that only duly registered stockholders, their authorized representatives, or proxies could vote. It also prescribed safeguards for ETPI while the ownership of the sequestered shares remained unresolved, including representation of the PCGG in the Board, access to corporate books and records, and restrictions on substantial corporate transactions.

The PCGG questioned the Sandiganbayan's resolution before the Supreme Court in G.R. No. 107789. Meanwhile, Africa separately questioned the PCGG's authority to vote certain ETPI Class "A" shares, including shares that Africa claimed were not sequestered. In G.R. No. 147214, Africa sought to nullify votes cast by the PCGG in a later ETPI stockholders' meeting. The two cases were eventually consolidated because both involved the authority of the PCGG to exercise voting rights over sequestered ETPI shares and the proper manner of conducting ETPI's stockholders' meetings.

The Court examined the extent of the PCGG's powers over sequestered shares under its governing issuances and previous decisions, particularly Bataan Shipyard & Engineering Co., Inc. v. PCGG (BASECO) and Cojuangco v. Calpo. The Court emphasized that sequestration is a provisional remedy and does not, by itself, transfer ownership of the property to the government. The PCGG's authority must therefore be exercised only to the extent necessary to preserve the property and prevent its dissipation while ownership is being judicially determined.

ISSUE

The principal issue was whether the PCGG could vote the sequestered ETPI shares in stockholders' meetings, particularly for the election of directors. The Court had to determine whether sequestration by itself gave the PCGG unrestricted authority to exercise the voting rights attached to the shares, or whether such authority was subject to limitations arising from the provisional nature and purpose of sequestration.

The Court applied Executive Order No. 1, particularly Section 3(b), which authorized the PCGG to provisionally take over business enterprises and properties in the public interest or to prevent their disposal or dissipation. The Court explained that this authority did not amount to an unrestricted power of ownership. In BASECO, the Court had already ruled that the PCGG could not exercise acts of dominion over sequestered, frozen, or provisionally taken-over property. Any interference with management had to be kept to the minimum degree necessary to accomplish the purpose of sequestration.

The Court also considered the June 26, 1986 Memorandum of the President, which authorized the PCGG, pending determination of ownership, to vote sequestered shares in stockholders' meetings for purposes including the election of directors, declaration of dividends, and amendment of articles of incorporation. The Court held that this authority had to be construed consistently with the Executive Orders governing sequestration. Therefore, the PCGG could not exercise voting rights merely because the shares had been sequestered or because the shares represented a controlling or substantial portion of the corporation's voting power.

Another issue concerned shares allegedly transferred to the Republic under the Benedicto compromise agreement, shares represented by stock certificates found in Malacañang, and shares allegedly belonging to former President Ferdinand Marcos. The Court had to determine whether the PCGG could vote those shares before their ownership or transfer had been properly established and recorded in ETPI's Stock and Transfer Book. The Court also considered the applicable provision of Section 63 of the Corporation Code, governing the transfer and registration of shares of stock.

HELD

The Supreme Court held that the PCGG may vote sequestered shares only under limited circumstances. It reiterated the rule in BASECO that the PCGG cannot exercise acts of ownership or dominion over sequestered property. The PCGG may exercise the voting rights attached to sequestered shares only when there are "demonstrably weighty and defensible grounds" for doing so or when voting is essential to prevent the disappearance or wastage of corporate property. The fact that shares are sequestered, or that they constitute a controlling or substantial portion of the corporation's voting power, is by itself insufficient.

The Court explained that the PCGG's intervention in the corporation must remain consistent with the purpose of sequestration. The objective is to prevent the disposal or dissipation of assets while the question of ownership is pending. Consequently, the PCGG should not ordinarily replace directors, alter the corporation's articles or by-laws, or make substantial changes in corporate policy merely because it possesses voting power over sequestered shares. Any intervention in management must be limited to what is necessary to preserve the property subject to sequestration.

With respect to the shares transferred to the Republic under the Benedicto compromise agreement, the Court held that the PCGG could vote those shares only after the compromise agreement had become final and executory and the transfer of the shares to the State had been entered in ETPI's Stock and Transfer Book. The Court applied Section 63 of the Corporation Code, which provides that shares of stock are personal property and may be transferred by delivery of an endorsed certificate, but that a transfer is not valid against the corporation until properly recorded in its books. The same principle applied to the stock certificates found in Malacañang and the shares allegedly belonging to Marcos: possession of stock certificates endorsed in blank did not, by itself, establish ownership or authorize the PCGG to vote them.

The Court further held that, to enable the PCGG to perform its conservatorship functions while ownership remained unresolved, it should have representation in the corporation and access to corporate records so that it could monitor possible dissipation or concealment of assets. Where the circumstances justified stronger safeguards, the Court approved measures such as an independent comptroller, a corporate secretary acceptable to the conservator, independent external auditors, PCGG representation on the Board and relevant committees, and prior approval for certain substantial disbursements, debts, and dispositions of assets. However, the Court held that these safeguards did not have to be incorporated into ETPI's articles and by-laws before the stockholders' meeting. The election of the Board had to occur first, after which the necessary amendments could be made in accordance with Section 16 of the Corporation Code, which requires the required Board and stockholder approval for amendments to the articles.

Accordingly, the Court recognized the limited authority of the PCGG to vote sequestered shares, subject to the requirements and limitations stated in the decision. It also held that the Sandiganbayan did not commit grave abuse of discretion in requiring the registration of the transferred shares in ETPI's Stock and Transfer Book before they could be voted. The Court's ruling preserved the distinction between sequestration and ownership and required the PCGG to exercise its powers only for the preservation of assets pending the final determination of ownership.