Metroplex Berhad v. Sinophil Corporation [G.R. No. 208281 · 28 June 2021] (STUDY NOTES)

Case Digest · Commercial Law · Corporations

Metroplex Berhad v. Sinophil Corporation

G.R. No. 208281 · June 28, 2021 · THIRD DIVISION · Ponente: Associate Justice Ramon Paul L. Hernando

CASE DOCTRINE. Once a corporation faithfully complies with the requirements of Section 38 of the Corporation Code for a decrease of capital stock, the SEC has nothing more to do than approve it. Its function is purely administrative — confined to checking whether the requisite authentic documents were filed. The SEC has no power to interpret contracts or adjudicate rights among stockholders, and both the SEC and the courts are barred from intruding into business judgments made in good faith.

Why this case matters. It draws the line between what a regulator checks and what a regulator decides. Minority and foreign shareholders regularly ask the SEC to referee a corporate action they dislike; this case says the SEC is not a referee. For an examination it is a clean vehicle for three linked doctrines — the Section 38 requisites, the ministerial character of SEC approval, and the business judgment rule.

Two foreign investors put shares into a Philippine listed company, took 3.87 billion shares in exchange, then agreed to unwind the whole arrangement. When they could not give the shares back, the company simply reduced its capital stock — and those shares ceased to exist. The investors went to the SEC, the Court of Appeals and the Supreme Court. All three said the same thing.

208281

G.R. No.

3^rd DIV.

28 June 2021

Hernando

Ponente

DENIED

Petition of
Metroplex & Paxell

I. The parties

Party	Who they are
Metroplex Berhad	A Malaysian corporation, in liquidation, with offices in Kuala Lumpur. Petitioner.
Paxell Investment Ltd.	A Western Samoa corporation, also based in Kuala Lumpur. Petitioner.
Sinophil Corporation Belle Corporation	Philippine publicly listed corporations based in Pasig City. Respondents.
SEC officials	The heads of the Company Registration and Monitoring Department (CRMD) and the Corporation Finance Department (CFD), among others.

II. The facts

Date	What happened
1998 (1997 per respondents)	Share Swap Agreement. Metroplex and Paxell transfer their 40% shareholdings in Legend International Resorts Limited — 46.38 million Legend shares — to Sinophil. In exchange Sinophil issues 2.41 billion shares to Metroplex and 1.45 billion to Paxell: 3.87 billion in all.
Thereafter	Metroplex pledges two billion of its Sinophil shares to Union Bank and Asian Bank to secure Legend's loans.
23 Aug. 2001	Unwinding Agreement. Sinophil and Belle execute a Memorandum of Agreement rescinding the swap. But Metroplex and Paxell cannot return 1.87 billion shares, and two billion remain pledged with International Exchange Bank and Asian Bank.
18 Feb. 2002 3 June 2005	Sinophil's stockholders vote to reduce its authorized capital stock.
28 Mar. 2006	The CRMD and CFD approve the first amendment — a reduction of 1.87 billion shares. Disclosed to the PSE the next day.
21 June 2007	Stockholders approve a further reduction of one billion shares.
24 June 2008	The CRMD and CFD approve the second amendment. Disclosed to the PSE on 30 June 2008.

III. The road up

Stage	Result
21 July 2008	Metroplex, Paxell and Yaw Chee Cheow file a Petition for Review Ad Cautelam Ex Abundanti with the SEC, with a prayer for a cease and desist order.
SEC En Banc 26 Feb. 2009	Denied. The CRMD and CFD approvals stand.
Court of Appeals 29 Jan. 2013	Affirmed in toto. Reconsideration denied 17 July 2013.
Supreme Court 28 June 2021	Petition DENIED.

IV. What the petitioners argued

1. The reduction was "selective." It targeted their 3.87 billion shares, cancelling and delisting them over their objection.
2. No notice, no hearing. They said the approvals were given without either.
3. Unanimity was required. Every stockholder, they said, had to consent.
4. The Trust Fund Doctrine and Section 13 of the Securities Regulation Code barred the reduction.
5. The SEC should have reviewed what its own operating departments had approved.

V. The ruling

A · What Section 38 actually requires

No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors, and at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock...— Section 38, Corporation Code (now Sec. 37, Revised Corporation Code)

The Court set out the requisites in full:

#	Requirement
1	Approval by a majority vote of the board of directors.
2	Written notice of the proposed diminution, and of the time and place of the stockholders' meeting called for the purpose, addressed to each stockholder at his place of residence.
3	Two-thirds of the outstanding capital stock voting favourably at that meeting.
4	A certificate in duplicate, signed by a majority of the directors and countersigned by the chairman and secretary of the stockholders' meeting, stating that the legal requirements have been complied with.
5	Prior approval of the SEC.
6	The effects must not prejudice the rights of corporate creditors.

Note what is absent. Unanimity is not on the list. As the Court of Appeals put it, and the Supreme Court adopted: "There is likewise no validity nor legal basis to the allegation that prior approval of all the stockholders is required for the reduction in capital stock." A majority of the board and two-thirds of the outstanding stock is the whole of it.

B · The SEC's function is ministerial

After a corporation faithfully complies with the requirements laid down in Section 38, the SEC has nothing more to do other than approve the same. Pursuant to Section 38, the scope of the SEC's determination of the legality of the decrease in authorized capital stock is confined only to the determination of whether the corporation submitted the requisite authentic documents to support the diminution. Simply, the SEC's function here is purely administrative in nature.

This is the sentence to carry out of the case. The SEC is not weighing the merits of the reduction, its fairness, or its effect on any particular shareholder. It is checking a file.

C · What the SEC may not do

[T]he SEC is not vested by law with any power to interpret contracts and interfere in the determination of the rights between and among a corporation's stockholders. Neither can the SEC adjudicate on the contractual relations among these same stockholders... the SEC's only function here was to determine the corporation's compliance with the formal requirements under Section 38 of the Corporation Code.

The petitioners' real complaint was about the Share Swap and the Unwinding Agreement — contracts. That dispute belongs somewhere, but not in a capital-reduction approval.

D · The business judgment rule

[T]he SEC and the courts are barred from intruding into business judgments of corporations, when the same are made in good faith.

Citing Ong Yong v. Tiu, the Court held that decreasing authorized capital stock — being an amendment of the articles of incorporation — is "a decision that only the stockholders and the directors can make." Courts will not interfere with intra vires contracts of the board "unless such contracts are so unconscionable and oppressive as to amount to wanton destruction to the rights of the minority."

E · Notice, hearing, and the other arguments

We reject petitioners' contentions as they do not even cite any particular rule wherein notice and hearing is required before approval for the increase or decrease in the capital stock is granted or denied.

As for the Trust Fund Doctrine and Section 13 of the Securities Regulation Code, the Court disposed of them briefly: those provisions "do not apply to the case at bar."

VI. The disposition

WHEREFORE, the Petition for Review on Certiorari with Application for the Issuance of a Temporary Restraining Order and/or Writ of Preliminary Injunction is DENIED. SO ORDERED.

Leonen (Chairperson), Inting, Delos Santos and J. Lopez, JJ., concur. The SEC order of 26 February 2009 and the Court of Appeals decision of 29 January 2013 both stand.

VII. Likely exam angles

Q1What are the requisites for a valid decrease of capital stock?

AMajority vote of the board; written notice of the proposed diminution and of the meeting to each stockholder at his residence; two-thirds of the outstanding capital stock voting in favour; a certificate in duplicate signed by a majority of the directors and countersigned by the chairman and secretary; prior SEC approval; and no prejudice to corporate creditors.

Q2A minority stockholder asks the SEC to disapprove a reduction of capital stock because it is unfair to him. What should the SEC do?

ACheck compliance with Section 38 and, if the requisite authentic documents are in order, approve it. The SEC's function is purely administrative; it has no power to interpret the contracts among stockholders or adjudicate their rights.

Q3Is the consent of all stockholders required?

ANo. A majority of the board and two-thirds of the outstanding capital stock at a meeting duly called for the purpose is what Section 38 demands.

Q4Must the SEC give notice and hold a hearing before approving a decrease?

ANo rule prescribes it. The Court rejected the contention precisely because the petitioners could cite no such rule. (Notice to stockholders under Section 38 is a separate matter, and that is a corporate obligation, not an SEC one.)

Q5State the business judgment rule as applied here.

AThe SEC and the courts are barred from intruding into corporate business judgments made in good faith. Amending the articles to decrease capital stock is a decision only the directors and stockholders may make, and courts will not interfere unless the act is so unconscionable and oppressive as to amount to wanton destruction of minority rights.

VIII. Bar takeaways

1. Memorise the six requisites. They are an enumeration question waiting to happen.
2. Board majority + 2/3 of outstanding stock. Never unanimity.
3. SEC approval is ministerial. "Nothing more to do other than approve the same."
4. Documents, not merits. The SEC checks whether the requisite authentic documents were submitted.
5. The SEC is not a contract court. It cannot interpret agreements or settle rights among stockholders.
6. Business judgment rule. Good faith closes the door on both the SEC and the courts.
7. No notice-and-hearing before the SEC is prescribed for approving an increase or decrease.
8. Creditors are the one external limit. Requisite six — the decrease must not prejudice them.

IX. Authorities

Authority	Point taken
Corporation Code, Sec. 38 (now Sec. 37, RCC)	The requisites for increasing or decreasing capital stock; the source of the SEC's limited role.
Ong Yong v. Tiu	Decreasing authorized capital stock is a decision only the stockholders and directors can make; courts will not interfere with intra vires board contracts absent unconscionable oppression of the minority.
Securities Regulation Code, Sec. 13	Invoked by petitioners; held inapplicable.
Trust Fund Doctrine	Invoked by petitioners; held inapplicable to this case.

THE SEC COUNTS DOCUMENTS. IT DOES NOT SECOND-GUESS.

Comply with Section 38 and approval follows. The fairness of the decision, and any quarrel among the stockholders about the contracts behind it, belong somewhere else.

Careful in the comments. This is not a ruling that minority or foreign shareholders have no remedy — it is a ruling about which forum and which question. A dispute over the Share Swap or the Unwinding Agreement is a contractual action; an oppressive act may still be attacked as such. What cannot be done is to ask the SEC, in a capital-reduction approval, to decide any of that. Note too that the Court did not explain at length why the Trust Fund Doctrine was inapplicable; it simply held that it was.

Source. Prepared from the full text of the decision as published by The LawPhil Project — lawphil.net/judjuris/juri2021/jun2021/gr_208281_2021.html — and the Supreme Court E-Library. All quoted passages are taken from that text.

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