Castillo vs.

Balinghasay
October 18, 2004
Quisumbing, J.
Digest by Clark Uytico
Topic and Relevant Provision: Voting shares
FACTS
Petitioners and Respondents are stockholders of Medical Center Paraaque, Inc. (MCPI for brevity),
Castillo and the other petitioners holding Class B shares, and Balinghasay and respondents holding
Class A shares. MCPI was organized sometime in September 1977 under the Corporation Law (Act
1459), and under Article VII of MCPIs original Articles of Incorporation, only holders of Class A shares
can have the right to vote and the right to be elected as directors or as corporate officers.
MCPIs AoI was amended on 1981 to increase its capital stock to FIVE MILLION PESOS and retained
Class A privileges. However, on 1992, Article VII was again amended to increase the authorized
capital stock to THIRTY-TWO MILLION PESOS, and also provided that Except when otherwise
provided by law, only holders of Class A shares have the right to vote and the right to be
elected as directors or as corporate officers.
On the annual stockholders meeting and election of directors come February 2001, and despite citing
Article VII as amended, and MCPIs history, respondent Rustico Jimenez declared over the objections of
petitioners, that no Class B shareholder was qualified to run or be voted upon as director of MCPI. In
the past, MCPI has seen holders of Class B shares voted for and serve as members of the corporate
board. Nonetheless, Jimenez declared that the candidates holding Class A shares were the winners of
all the seats in the corporate board. Petitioners protested claiming that Article VII was null and void for
being violative of the Corporation Code (BP 68), as amended. They further claimed that the privilege
granted to the Class A shareholders was more in the nature of a right granted to founders shares.
Respondents averred however that the provisions of Article VII clearly and categorically state that only
Class A shareholders have the exclusive right to vote and be elected as directors and officers of the
corporation. They denied that the exclusivity was intended only as a privilege granted to founders
shares, as no such proviso is found in the AoI; claiming further that the exclusivity of the Right granted
to Class A holders canot be defeated or impaired by any subsequent legislative enactment, e.g. the
New Corporation Code, as the AoI is an intra-corporate contract between the corporations and its
members; between the corporation and its stockholders; and among the stockholders.
They further contend that to allow Class B shareholders to vote and be elected as directors would
constitute a violation of MCPIs franchise or charter. Lastly, maintain that the grant of exclusive voting
rights to Class A shares is clearly provided in the Articles of Incorporation and is in accord with
Section 5[9] of the Corporation Law (Act No. 1459), which was the prevailing law when MCPI was
incorporated in 1977. They likewise submit that as the Articles of Incorporation of MCPI is in the nature
of a contract between the corporation and its shareholders and Section 6 of the Corporation Code
could not retroactively apply to it without violating the non-impairment clause of the Constitution.
ISSUE
WON CLASS B shareholders should be given the right to vote.
HELD
YES.
Dispositive: WHEREFORE, the petition is GRANTED. The Partial Judgment dated November 26, 2001 of
the Regional Trial Court of Paraaque City, Branch 258, in Civil Case No. 01-0140 is REVERSED AND
SET ASIDE. No pronouncement as to costs.
RATIO
Section 6 prohibits the deprivation of voting rights except as to preferred and redeemable shares only.
Hence, under the present law on corporations, all shareholders, regardless of classification, other than
holders of preferred or redeemable shares, are entitled to vote and to be elected as corporate directors
or officers. Since the Class B shareholders are not classified as holders of either preferred or

redeemable shares, then it necessarily follows that they are entitled to vote and to be voted for as
directors or officers.
The law referred to in the amendment to Article VII refers to the Corporation Code and no other law. At
the time of the incorporation of MCPI in 1977, the right of a corporation to classify its shares of stock
was sanctioned by Section 5 of Act No. 1459. The law repealing Act No. 1459, B.P. Blg. 68, retained the
same grant of right of classification of stock shares to corporations, but with a significant change.
Under Section 6 of B.P. Blg. 68, the requirements and restrictions on voting rights were
explicitly provided for, such that no share may be deprived of voting rights except those
classified and issued as preferred or redeemable shares, unless otherwise provided in
this Code and that there shall always be a class or series of shares which have complete
voting rights.
Section 6 of the Corporation Code being deemed written into Article VII of the Articles of Incorporation
of MCPI, it necessarily follows that unless Class B shares of MCPI stocks are clearly categorized to be
preferred or redeemable shares, the holders of said Class B shares may not be deprived of their
voting rights. Note that there is nothing in the Articles of Incorporation nor an iota of evidence on
record to show that Class B shares were categorized as either preferred or redeemable shares.
The only possible conclusion is that Class B shares fall under neither category and thus, under the
law, are allowed to exercise voting rights.
When Article VII of the Articles of Incorporation of MCPI were amended in 1992, the board of directors
and stockholders must have been aware of Section 6 of the Corporation Code and intended that Article
VII be construed in harmony with the Code, which was then already in force and effect. Since Section 6
of the Corporation Code expressly prohibits the deprivation of voting rights, except as to preferred
and redeemable shares, then Article VII of the Articles of Incorporation cannot be construed as
granting exclusive voting rights to Class A shareholders, to the prejudice of Class B shareholders,
without running afoul of the letter and spirit of the Corporation Code.