QUESTIONING CORPORATE TAKEOVERS THROUGH QUO WARRANTO - Nicolas and De Vega Law Offices Image Article

This article discusses the legal remedy of quo warranto, as a remedy in corporate takeovers or where the eligibility of a person who occupies the position of director, trustee, or officer of a corporation is being questioned.

An Overview of Corporate Takeovers

Like cat fights, corporate take-overs can get really messy. There are litigations left and right, suits and countersuits. In the end, one has to give way as the loser. The victor, on the other hand, takes the crown.

Even under such circumstances where the victor has already taken the crown and implemented a full corporate takeover, there are a myriad of ways to question him who has taken and now wears the corporate crown. After all, wielding of corporate power is not just about winning a corporate takeover. The victor who assumes a certain corporate post must be eligible, based on existing laws, and at the very least, the corporation’s by-laws.

By-Laws Govern the Corporation’s Life and Existence

The corporation’s by-laws govern all aspects of the corporation’s existence. In the case of Loyola Grand Villas Homeowners (South) Association, Inc. vs. Court of Appeals, G.R. No. 117188 August 7, 1997, the Philippine Supreme Court, discussing Fletcher on the Law of Private Corporations, stated:

It has been said that the by-laws of a corporation are the rule of its life, and that until by-laws have been adopted the corporation may not be able to act for the purposes of its creation, and that the first and most important duty of the members is to adopt them. This would seem to follow as a matter of principle from the office and functions of by-laws. Viewed in this light, the adoption of by-laws is a matter of practical, if not one of legal, necessity. Moreover, the peculiar circumstances attending the formation of a corporation may impose the obligation to adopt certain by-laws, as in the case of a close corporation organized for specific purposes. And the statute or general laws from which the corporation derives its corporate existence may expressly require it to make and adopt by-laws and specify to some extent what they shall contain and the manner of their adoption. The mere fact, however, of the existence of power in the corporation to adopt by-laws does not ordinarily and of necessity make the exercise of such power essential to its corporate life, or to the validity of any of its acts.

The Victor in a Corporate Takeover Must be Qualified to Hold the Position

Indeed, under Section 46 (f) of Republic Act No. 11232 of the Revised Corporation Code of the Philippines, the By-Laws of the Corporation must contain “[t]he directors’ or trustees’ qualifications, duties and responsibilities, the guidelines for setting the compensation of directors or trustees and officers, and the maximum number of other board representations that an independent director or trustee may have which shall, in no case, be more than the number prescribed by the Commission.

When the victor in a corporate takeover does not comply with the qualifications indicated in the by-laws, various remedies may be exercised to oust the usurper. One of them is the remedy of Quo Warranto.

The Legal Remedy of Quo Warranto to Question the Qualifications of the Usurper

An action for Quo Warranto may be utilized as a legal remedy to question the qualifications of a person who is holding a corporate office. This conclusion finds support under Rule 66 (Quo Warranto), Rules of Court, which states:

“Section 5. When an individual may commence such an action. — A person claiming to be entitled to a public office or position usurped or unlawfully held or exercised by another may bring an action therefor in his own name.

Section 6. Parties and contents of petition against usurpation. — When the action is against a person for usurping a public office, position or franchise, the petition shall set forth the name of the person who claim to be entitled thereto, if any, with an averment of his right to the same and that the respondent is unlawfully in possession thereof. All persons who claim to be entitled to the public office, position or franchise may be made parties, and their respective rights to such public office, position or franchise determined, in the same action. x x x”

Clearly, the above-cited provisions partake of a remedy which is purely civil in nature. However, this provision, when read together with Section 2, Rule 1, A.M. No. 01-2-04-SC. March 13, 2001 otherwise known as the Interim Rules of Procedure for Intra-Corporate Controversies, will reveal that Quo Warranto is a formidable remedy, and when used correctly, can be utilized as a legal remedy to oust a usurper of a corporate post, when the usurper is not authorized to hold the corporate position. Section 2, Rule 1 of  the Interim Rules of Procedure for Intra-Corporate Controversies provides:

“SEC. 2. Suppletory application of the Rules of Court. – The Rules of Court, in so far as they may be applicable and are not inconsistent with these Rules, are hereby adopted to form an integral part of these Rules.”

Where do you file a Corporate Action for Quo Warranto?

Corporate Actions for Quo Warranto are under the exclusive jurisdiction of the Regional Trial Courts, designated as commercial courts.

Prior to the enactment of Republic Act No. 8799 also known as The Securities Regulation Code, the Supreme Court, adopting the view of Justice Jose Y. Feria, declared in Unilongo v. Court of Appeals that Section 1, Rule 66 of the 1997 Rules of Civil Procedure is “limited to actions of quo warranto against persons who usurp a public office, position or franchise; public officers who forfeit their office; and associations which act as corporations without being legally incorporated,” while “[a]ctions of quo warranto against corporations, or against persons who usurp an office in a corporation, fall under the jurisdiction of the Securities and Exchange Commission and are governed by its rules. (P.D. No. 902-A as amended).

It should be noted that allegations in a complaint for quo warranto that certain persons usurped the offices, powers and functions of duly elected members of the board, trustees and/or officers make out a case for an intra-corporate controversy.

When Republic Act No. 8799 was passed, Section 5.2 of the law took effect, removing the venue of such cases from the Securities and Exchange Commission, and transferring them to the Regional Trial Court branches designated by the Supreme Court to act as commercial courts, to wit:

“The Commission’s jurisdiction over all cases enumerated under Section 5 of Presidential Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court: Provided, That the Supreme Court in the exercise of its authority may designate the Regional Trial Court branches that shall exercise jurisdiction over these cases. xxx”

Therefore, actions of quo warranto against persons who usurp an office in a corporation, which were formerly cognizable by the Securities and Exchange Commission under PD 902-A, have been transferred to the courts of general jurisdiction.

A Corporate Action for Quo Warranto is an Intra-Corporate Controversy

The Interim Rules of Procedure Governing Intra-Corporate Controversies expressly define what cases are considered as intra-corporate controversies:

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

x x x

(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;

Since questioning the qualifications of a director, trustee or corporate officer directly affects the person’s appointment into the corporate office, quite clearly, a corporate action for quo warranto is an intra-corporate controversy.

When and Where Can you File a Corporate Action for Quo Warranto?

Like the civil remedy, the corporate action for quo warranto is only available once there is actual usurpation of corporate power or position. Thus, the person must already be holding the questioned corporate post when the quo warranto suit is lodged.

This conclusion is explicit from the very wordings of Section 5 and Section 6 of Rule 66 of the Rules of Court, which references the act of the respondent in the past tense, and requires that the “respondent is unlawfully in possession thereof”. 

Being in the nature of an intra-controversy, Section 5 of the Interim Rules of Procedure Governing Intra-Corporate Controversies, concerning venue of such cases, also applies:

SEC. 5. Venue. – All 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. x x x” [Emphasis and underscoring supplied.]

About Nicolas and De Vega Law Offices

If you need assistance in registration with the Securities and Exchange Commission, or have issues in corporate law, commercial law, corporate or commercial litigation, 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 info@ndvlaw.com. Visit our website https://ndvlaw.com.

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