G.R. Nos. 254957-58. June 15, 2022
Lily C. Lopez, Petitioner, vs. Lolito S. Lopez, Ma. Rachel Nicolette Lopez, Barbara Villas, Benedicto Villafuerte, Ma. Luisa Paras, Ruel Villacorta, Teresita C. Fernando, and iSpecialist Development Corporation, Respondents. (and) Lolito S. Lopez, Mario S. Lopez, Andresito S. Lopez, Barbara O. Villas, Benedicto L. Villafuerte, Ma. Luisa I. Paras, Ruel S. Villacorta, Teresita C. Fernando, LC Lopez Resources, Inc., and Conqueror International, Inc., Respondents.

FACTS

The case involves two consolidated election contests filed by Lily C. Lopez (petitioner) against her husband, Lolito S. Lopez (respondent Lolito), and other respondents concerning several family corporations.
Regarding iSpecialist Development Corporation (iSpecialist), petitioner and respondent Lolito are the majority shareholders. On February 14, 2019, respondent Lolito, as president, called a special stockholders’ meeting at a restaurant in Quezon City, where a new Board of Directors was elected. Petitioner filed a case before the Quezon City RTC (Branch 93) seeking to declare the meeting and election null and void for allegedly violating the corporation’s By-Laws (venue not at principal office, date not as mandated), for preventing her daughter Christina from attending, and because 33,495 unissued shares were voted without prior Board authorization. The RTC-QC nullified the election, finding the sale of the unissued shares to respondent Lolito invalid due to the lack of a required Board resolution, and since these shares were substantial enough to affect the election results.
Separately, petitioner, along with her children Christina and John Rusty, filed an election contest before the Marikina City RTC (Branch 273) concerning LC Lopez Resources, Inc. (LC Lopez) and Conqueror International, Inc. (Conqueror). They challenged a special stockholders’ meeting held on February 11, 2019, where new boards were elected. Petitioner alleged that respondent Lolito had acquired large blocks of unissued shares in these corporations (252,125 shares in LC Lopez and 97,050 shares in Conqueror) without Board authorization and used them to vote in the elections. The RTC-Marikina also declared the meeting and elections null and void.
The Court of Appeals (CA) consolidated the petitions for review of these RTC decisions. The CA reversed both RTC rulings. It held that the election contests were actually intra-corporate controversies over the validity of the issuance of shares of stock, which under the Interim Rules of Procedure for Intra-Corporate Controversies, prescribe in two years from the date of issuance. The CA found that petitioner’s complaints, filed in March 2019, were filed beyond the two-year prescriptive period from the dates the shares were issued to respondent Lolito (allegedly in 2013 for iSpecialist and in November 2018 for LC Lopez and Conqueror). The CA also ruled that the RTC-Marikina had no jurisdiction over the case involving Russ Marketing, Inc., as no election was held for it during the contested meeting.

ISSUE

The core issue is whether the Court of Appeals correctly dismissed the election contests on the ground of prescription, re-characterizing them as actions questioning the validity of the issuance of shares of stock which prescribed in two years.

RULING

No. The Supreme Court reversed the Court of Appeals and reinstated the decisions of the Quezon City RTC and Marikina City RTC.
The Supreme Court held that the CA erred in re-characterizing the nature of the suits. The actions filed by petitioner were election contests, specifically actions for the nullification of elections of directors under Section 2(c), Rule 1 of the Interim Rules. An election contest is a proceeding to ascertain the validity of the election process itself. The petitioner’s primary objective was to nullify the stockholders’ meetings and the ensuing elections due to procedural infirmities and the use of allegedly invalidly issued shares to vote.
The Court distinguished an election contest from an action questioning the validity of the issuance of shares. The latter concerns the legitimacy of the share issuance process itself and prescribes in two years. The former concerns the validity of the electoral exercise. The use of invalidly issued shares to vote is a ground to challenge an election, but the action itself remains an election contest. The prescriptive period for filing an election contest is within fifteen (15) days from the date of the election, as stated in the Interim Rules. The petitioner’s complaints, filed in March 2019 regarding elections held in February 2019, were timely filed within this 15-day period.
Furthermore, the Court found that the RTCs correctly ruled on the merits. For iSpecialist, the sale of 33,495 unissued shares to respondent Lolito was invalid for lack of prior Board authorization as required by the Corporation Code, rendering these shares non-voting. Their use, being substantial, invalidated the election. For LC Lopez and Conqueror, the acquisition of unissued shares by respondent Lolito likewise lacked Board authorization and violated petitioner’s pre-emptive rights under Section 38 of the Corporation Code, as there was no showing that these rights were denied or that the issuance was for a corporate purpose approved by stockholders. Therefore, these shares could not be validly voted. The Supreme Court also upheld the RTC-Marikina’s finding that Christina and John Rusty were stockholders entitled to sue, despite not being in the stock and transfer books, as they presented evidence of share ownership.