G.R. No. L-16236, L-16237, L-16238 June 30, 1965
IRINEO S. BALTAZAR, plaintiff-appellee, vs. LINGAYEN GULF ELECTRIC POWER, CO., INC., DOMINADOR C. UNGSON, BRIGIDO G. ESTRADA, MANUEL L. FERNANDEZ, BENEDICTO C. YUSON and BERNARDO ACENA, defendants-appellants. / MARVIN O. ROSE, plaintiff-appellee, vs. LINGAYEN GULF ELECTRIC CO., INC., DOMINADOR, C. UNGSON, BRIGIDO G. ESTRADA, MANUEL L. FERNANDEZ, BENEDICTO C. YUSON and BERNARDO C. ACENA, defendants-appellants. / IRINEO S. BALTAZAR and MARVIN O. ROSE, plaintiffs-appellees, vs. BERNARDO ACENA, defendant-appellant.

FACTS

Three consolidated cases were filed by stockholders Irineo S. Baltazar and Marvin O. Rose against Lingayen Gulf Electric Power Co., Inc. and its directors (the Ungson group, including Bernardo Acena). The corporation’s annual stockholders’ meeting for electing new directors was scheduled for May 1, 1955. A close fight for control existed between the Ungson group and the Baltazar group. On January 30, 1955, the Ungson group, controlling the Board of Directors, passed three resolutions: Resolution No. 2 declared all “watered stocks” issued to Acena, Baltazar, Rose, and another as valueless and cancelled; Resolution No. 3 mandated that payments on unpaid subscriptions be applied first to interest (at 6% per annum compounded quarterly) before the principal, and shares issued without full interest payment were to be cancelled; Resolution No. 4 declared shares issued as fully paid-up to delinquent subscribers incapacitated from voting until all delinquency and interest were paid. The plaintiffs, who held fully paid-up stock certificates for most of their subscriptions (Baltazar 341 fully paid shares out of 600, Rose 375 fully paid out of 400), sought to enjoin the enforcement of these resolutions, which threatened to disenfranchise them in the upcoming election. The trial court issued a preliminary injunction. The parties later entered into a tentative amicable settlement, which the trial court approved in a decision on February 20, 1959. However, upon motion for reconsideration by the plaintiffs, the court, on July 16, 1959, set aside its approval of the compromise agreement, declared it contrary to law and public policy, and ruled on the merits in favor of the plaintiffs. The defendants appealed.

ISSUE

The primary issue is the validity of the three Board resolutions (Nos. 2, 3, and 4) which sought to cancel fully paid stock certificates and deprive holders of their voting rights based on a re-computation and re-application of payments to interest first.

RULING

The Supreme Court affirmed the trial court’s order of July 16, 1959. The resolutions were declared null and void insofar as they were inconsistent with the ruling that all shares covered by fully paid capital stock certificates are entitled to vote. The Court held:
1. A corporation cannot unilaterally cancel certificates of stock already issued as fully paid and non-assessable. Once a corporation accepts payment for shares and issues the corresponding stock certificates, it is estopped from denying that the shares are fully paid. The cancellation of these certificates via Resolution No. 2 was invalid.
2. The corporation and its stockholders had agreed, through the issuance of fully paid stock certificates for payments made, that such payments were applied to the capital stock. Resolution No. 3, which sought to retroactively re-apply those payments to interest first, constituted a unilateral change of this agreement and was invalid. Neither the Corporation Law nor the company’s by-laws prohibited applying payments to the capital ahead of interest.
3. Consequently, Resolution No. 4, which disenfranchised holders of these fully paid certificates, was also invalid. Stockholders holding fully paid stock certificates cannot be deprived of their voting rights.
4. The compromise agreement was correctly set aside as contrary to law and public policy because it sought to validate the illegal cancellation of stock and deprivation of voting rights. Estoppel cannot be based on acts prohibited by law.