Intra-corporate Disputes and Arbitration Under the Revised Corporation Code

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An intra-corporate controversy is one which arises between a stockholder and the corporation or among the stockholders involving internal affairs of the corporation.

In the case of Roberto San Jose and Delfin Angcao vs. Jose Ma. Ozamiz, G.R. No. 190590, 12 July 2017, the Supreme Court discussed the two tests in determining whether or not a case involves an intra-corporate dispute. The two tests are the relationship test and the nature of the controversy test.

The Relationship Test

Under the relationship test, there is an intra-corporate controversy when the conflict is:

(1) between the corporation, partnership, or association and the public;

(2) between the corporation, partnership, or association and the State insofar as its franchise, permit, or license to operate is concerned;

(3) between the corporation, partnership, or association and its stockholders, partners, members, or officers; and (4) among the stockholders, partners, or associates themselves.

The Nature of Controversy Test

On the other hand, in accordance with the nature of controversy test, an intra-corporate controversy arises when the dispute is not only rooted in the existence of an intra-corporate relationship, but also in the enforcement of the parties’ correlative rights and obligations under the corporation code and the internal and intra-corporate regulatory rules of the corporation.

Who has jurisdiction over intra-corporate disputes?

The Securities and Exchange Commission is given original and exclusive jurisdiction to hear and decide cases involving intra-corporate controversies, as provided under Section 5 of Presidential Decree No. 902-A.

Republic Act No. 8799, or otherwise known as the Securities Regulation Code, which took effect on 08 August 2000, transferred jurisdiction to decide intra-corporate disputes to courts of general jurisdiction or regional trial courts. (designated as Special Commercial Court by the Supreme Court, but this designation was merely intended as a procedural tool to expedite the resolution of commercial cases in line with the court’s exercise of jurisdiction)

The Interim Rules of Procedure for Intra-Corporate Controversies provide, to wit:

“Section 1. (a) Cases covered. – These Rules shall govern the procedure to be observed in civil cases involving the following:

xxxx

(2) Controversies arising out of intra-corporate, partnership, or association relations, between and among stockholders, members, or associates; and between, any or all of them and the corporation, partnership, or association of which they are stockholders, members, or associates, respectively;

(3) Controversies in the election or appointment of directors, trustees, officers, or managers of corporations, partnerships, or associations;

(4) Derivative suits; and

(5) Inspection of corporate books.

x x x x

Under the foregoing Rules, all of the actions covered by these Rules shall be commenced and tried in the Regional Trial Court which has jurisdiction over the principal office of the corporation, partnership, or association concerned. Where the principal office of the corporation, partnership or association is registered in the Securities and Exchange Commission as Metro Manila, the action must be filed in the city or municipality where the head office is located.

Recent Development: Now Arbitration is Required

Section 181 of Republic Act No. 11232, otherwise known as the Revised corporation code, which took effect on 23 February 2019, requires that intra-corporate disputes be referred to arbitration, to wit:

“SEC. 181. Arbitration for Corporations. – An arbitration agreement may be provided in the articles of incorporation or bylaws of an unlisted corporation. When such an agreement is in place, disputes between the corporation, its stockholders or members, which arise from the implementation of the articles of incorporation or bylaws, or from intra-corporate relations, shall be referred to arbitration. A dispute shall be nonarbitrable when it involves criminal offenses and interests of third parties.”

Apparently, the new law requires that intra-corporate disputes or disputes between the corporation, its stockholders or members, which arise from the implementation of the articles of incorporation or bylaws, or from intra-corporate relations, be settled through an arbitration. However, this requirement takes place only when the corporation provided an arbitration agreement in its articles of incorporation or bylaws, or in a separate agreement.

Furthermore, if the controversy already involves criminal offenses and interest of third parties, it shall be nonarbitrable, and thus dispensing with the requirement of arbitration. On the other hand, the law also provides that when an intra-corporate dispute is filed with a Regional Trial Court, the court shall dismiss the case before the termination of the pretrial conference, if it determines that an arbitration agreement is written in the corporation’s articles of incorporation, bylaws, or in a separate agreement.

Force and Effect of the Arbitration Agreement

Accordingly, the arbitration agreement shall be binding on the corporation, its directors, trustees, officers, and executives or managers.

To be enforceable, the arbitration agreement should indicate the number of arbitrators and the procedure for their appointment. The power to appoint the arbitrators forming the arbitral tribunal shall be granted to a designated independent third party. Should the third party fail to appoint the arbitrators in the manner and within the period specified in the arbitration agreement, the parties may request the SEC to appoint the arbitrators. In any case, arbitrators must be accredited or must belong to organizations accredited for the purpose of arbitration.

The arbitral tribunal shall have the power to rule on its own jurisdiction and on questions relating to the validity of the arbitration agreement.

Additionally, the arbitral tribunal shall have the power to grant interim measures necessary to ensure enforcement of the award, prevent a miscarriage of justice, or otherwise protect the rights of the parties. A final arbitral award shall be executory after the lapse of fifteen (15) days from receipt thereof by the parties and shall be stayed only by the filing of a bond or the issuance by the appellate court of an injunctive writ.

About Nicolas and De Vega Law Offices

If you need assistance in corporate law, commercial law, corporate or commercial litigation including One Person Corporations, or civil or other criminal law-related issues,  we can help you. Nicolas and de Vega Law Offices is a full-service law firm in the Philippines.  You may visit us at the 16th Flr., Suite 1607 AIC Burgundy Empire Tower, ADB Ave., Ortigas Center, 1605 Pasig City, Metro Manila, Philippines.  You may also call us at +632 84706126, +632 84706130, +632 84016392 or e-mail us at [email protected]. Visit our website https://ndvlaw.com.

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