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Chapter IX and X - Inspection and Derivative Suits(2)

Chapter IX and X - Inspection and Derivative Suits(2)

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Published by: Sui on Aug 10, 2008
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Chapter IX – Inspection
Basis of right
 — 
SHs do not directly participate in the management of the business andhave little knowledge, if at all, of how the corporate affairs are being runby the directors and officers
 — 
As beneficial owners, SHs have the right to know only the financialcondition but also how the corporate affairs are being run by theirelected directors and the appointed officers
 — 
Law grants them the right to inspect the records of the corporation toobtain information they need
 — 
Significant for minority SHs
What records covered
S74Books and records legally required to be prepared, maintained, and kept bythe corporation:
 — 
Books that record all business transactions
o
records of all business transactions
” broad enough to includethose which the Code of Commerce requires all merchants includingcorporations:
book of inventories and balances
 journal
ledger
book for copies of letters and telegrams
financial statements
income tax returns
vouchers and receipts
contracts and all papers pertaining to the contracts
voting trust agreements
o
records of business transactions
SH need not blindly accept figures in the financial reportgiven by management
Records are voluminous and may be difficult to interpret—thus SC held that a SH may make copies, extracts, andmemoranda of such records (
Veraguth v Isabela Sugar
)
 — 
Minutes book for meeting of SHs
 — 
Minutes book for meetings of the board
o
Informs the SHs of the policies of the board
o
SC: until minutes are approved, no SH has the right to make a copythereof 
 — 
Stock and transfer book
o
Contains the names of all SHs
o
Code does not require the corporation to furnish a SH with the listof names of other SHs
o
SEC: SH cannot demand that he be furnished with such a list; heshould instead directly examine the books of the corporation
 — 
Annual financial statements
o
Most recent financial statements: Granted by Sec 75
o
75: Within 10 days from receipt of written request, corporationmust furnish most recent financial statement:
Balance sheet as end of last taxable year
Profit and loss statement showing in detail the assets andliabilities
 — 
Annual report to the SEC
o
141: every corporation domestic or foreign, lawfully doingbusiness in the Philippines
 — 
Report of election of directors, trustees and officers within 30 daysafter election
 — 
by-laws
o
required by law to be open to inspection, but curiously not theAOI
o
but since the AOI are filed with the SEC, these are open toinspection by persons with legitimate interests and duringreasonable hours on business daysS75
Effect of and limitations on the Right
 — 
Unbridled exercise of the right to inspect could be harassing to thecorporation and would impair its efficient operations
 — 
Balance must be sought between the interests of the individual SHand the interests of the corporation
 — 
A corporation may regulate the time and manner of the inspection itsbooks, but it cannot make a by-law which gives the directors absolutediscretion to allow or disallow inspection
o
By-law provisions limiting inspection must be reasonable and notinconsistent with law
 — 
74: right to inspect subject to three (3) limitations:(1)must be exercised at reasonable hours on business days(2)person demanding right has not improperly used any informationsecured through any previous examination of the records(3)demand is made in GF and for a legitimate purpose
1
 
1.Limitations as to time and place
 — 
 Time of inspection
o
Only at reasonable hours on business days, throughout theyear
o
By-laws cannot limit inspection to merely a few days duringthe year chosen by the directors
o
By-laws cannot provide for inspection only upon authority of the president
o
Business hours are reasonable hours; but inspection shouldnot impede efficient operations of the business
 — 
Place of inspection
o
74: enjoins the corporation to keep all its records and stockand transfer books at its principal office, and inspectionshould be at such office
o
Veraguth case: SH cannot demand that he be allowed totake the corporate books out of the principal office for thepurpose of inspecting them, but may make copies thereof 2.Purpose
 — 
Is purpose material?
o
74 implies that the purpose of the SH in exercising his right toinspect is material; must not act in BF and must be for a legitimatepurpose
o
purpose is presumed to be a proper one and the corporation cannotrefuse to grant him the right on a mere belief that the motive isimproper
o
burden of proof that the motive is improper is on the corporation andits officers
 — 
what is a legitimate purpose?
o
One which is
germane to the interests of the SHs as such
and
not contrary to the interests of the corporation
(Gokongwei vSEC)
Access to stock and transfer book (contains names of allSHs) may be upheld provided the purpose in inspecting it isreasonably related to a SHs interest as such
Gonzales v PNB
(supra): Where a person acquired oneshare of a corporation just so he can exercise his right toinspect a transaction entered into before he became a SH,his purpose is not germane to his interest as such and isthus not legitimate. Right is denied.
 — 
Proper purposes:
o
 To ascertain whether the corporation is being mismanaged
o
 To ascertain financial condition of the corporation
o
 To ascertain the value of shares
o
 To obtain a mailing list of SHs to solicit proxies or influencevoting, in anticipation of SH meetings
 — 
Improper purposes:
o
 To obtain information as to business secrets or to reveal businesssecrets
o
 To secure business prospects or investment of advertising lists
o
 To find technical defects in corporate transactions to bringnuisance or “strike suits” for blackmail
o
 To obtain information to be published to embarrass thecorporation, depress the value of its assets, and cause loss toSHs, or to demoralize and cause dissension among SHs
Who may exercise the right
 — 
Directors, trustees, SHs, or members
o
Either personally or through an agent
o
Limitations on a SH operate equally to directors and trustees
 — 
Voting trust agreement: both voting trustee and the transferor havethe right of inspection
o
 Transferor is STILL the beneficial owner of the shares and shouldhave as much right to seek information to protect his investmentas any SH
 — 
Parent-subsidiary
o
If legally separate and independent entities: no right of inspectionto subsidiary
o
If not, i.e. both are one and the same and under the control of theparent: right to inspect available to subsidiary and the parent(Gokongwei)
Who may be held liable
 — 
Corporate officer who has custody of the books and papers sought tobe inspected who refuses to allow inspection
 — 
Directors or trustees who voted for refusal if stated in a boardresolution
Defenses available to persons held liable
 — 
Person demanding has improperly used any information securedthrough any prior examination
 — 
One requesting was not in GF or does not have a legitimate purpose
Remedies available if inspection refused
2
 
 — 
Mandamus
(Gokongwei case)
o
Directed to the corporation
o
Secretary may be joined as party-defendant
 — 
If mandamus is inadequate:
injunction
 — 
Action for
damages
against the officer or agent who refused inspection
o
Corporation itself may not be necessarily liable
o
74: damages shall be imposed instead on the erring officers anddirectors if refusal is pursuant to a board resolution
 — 
Criminal suit
o
Against the offending officers
o
Wrongful denial of the right to inspect a criminal offense punishableunder Sec 144 of the Corpo Code.
Pardo v Hercules Lumber
. F: Corporate secretary of Hercules Lumberrefused to permit Pardo, a SH, or his agent to inspect the records andbusiness transactions of the company at the times desired by Pardo. Basis of the refusal was the provision in the company’s by-laws which stipulated thatevery SH may examine the books of the company and other documentsupon the days which the board annually fixes.H: The resolution of the board limiting the rights of SHs to inspect its recordsto a period of 10 days prior to the annual SH meeting is an unreasonablerestriction in accordance with the Corpo Code, which provides that the rightto inspect can be exercised at reasonable hours. The right of inspection wasinterpreted to mean that the right may be exercised at reasonable hours onbusiness days throughout the year, and not merely during an arbitraryperiod of a few days chosen by the directors.
Gonzales v PNB
. H: The Code has prescribed limitations to the right of inspection, requiring as a condition for examination that the personrequesting must not have been guilty of using improperly any informationsecured through a prior examination, and that the person asking for suchmust be acting in GF and for a legitimate purpose. It is the SH seeking toexercise the right of inspection to set forth the reasons and purposes forwhich he desires such inspection. SC held that the purpose of Gonzales,which was to arm himself with evidence which he can use against the bankfor acts done by the latter when he was still a total stranger (i.e. not a SH),were not deemed proper motives and his request was denied.
Veraguth v Isabela Sugar Co
. F: Directors have the unqualified right toinspect the books and records of a corporation at all reasonable times.Pretexts may not be put forward by the officers to keep a director or SH frominspecting the books and minutes of the corporation, and the right to inspectcannot be denied on the grounds that the director or SHs are on unfriendlyterms with the officers. A director or SH has no absolute right to securecertified copies of the minutes until these minutes have been written upand approved by the directors.
Gokongwei v. SEC
. F: Gokongwei, a major SH of San Miguel Corporation,sought to exercise his right to inspect the books and records of SMC Int’l,a foreign subsidiary wholly-owned and controlled by SMC. Since he wasnot a SH of the subsidiary, SMC denied his request to inspect its books.H: Where the right to inspect is granted by statute to the SH, it is given tohim as such and must be exercised by him with respect to his interest asa SH and for some purpose germane thereto or in the interest of thecorporation. The inspection has to be germane to the petitioner’s interestas a SH and has to be proper and lawful in character and not inimical tothe interest of the corporation. The SH’s right to inspect is based on his ownership of the assets andproperty of the corporation. It is therefore an incident of ownership of thecorporate property, whether this ownership or interest be termed anequitable ownership, beneficial ownership, or quasi-ownership, and ispredicated upon the necessity of self-protection.On application for mandamus to enforce the right, it is proper for thecourt to inquire into and consider the SH’s GF and his purpose andmotives in seeking inspection. But the impropriety of purpose such as willdefeat enforcement must be set up by the corporation defensively if theCourt is to take cognizance of it as a qualification. In other words, thespecific provisions take from the SH the burden of showing the proprietyof purpose and place upon the corporation the burden of showingimpropriety of purpose or motive. The foreign subsidiary is wholly-owned by SMC and therefore under itscontrol, and would be more in accord with equity, GF, and fair dealing toconstrue the statutory right of Gokongwei as SH to inspect the books of the parent as extending to the books of the subsidiary in its control.
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