Proof of stock ownership

By: Raul J. Palabrica - @inquirer.net

Philippine Daily Inquirer / 11:05 PM January 17, 2016

BY THIS time, most corporations, especially those listed on the stock exchange or are
considered public corporations, are making preparations for their annual stockholders meeting.

It’s a yearly ritual required by law that gives stockholders the opportunity to touch base with
the people who manage the affairs of the corporation. All stockholders, regardless of the
number of stocks they own or registered in their name, have the right to attend the meeting.

In determining who to send the notice of meeting, the corporate secretary is guided by the
entries in the Stock and Transfer Book (STB), in the case of stock corporations, and Members
Book, for nonstock corporations.

These books show, among others, the names of the persons to whom stock or membership
certificates have been issued and the number of shares registered in their names.

As in all human activities, errors or lapses are unavoidable in the preparation and safekeeping
of these records.

Thus, there are occasions when stockholders are not issued their stock certificates even if
they’ve paid for their stocks, or deeds of transfer or donation of stocks in their favor have been
sent to the corporate secretary.

But not being in possession of or losing a stock certificate is not an excuse to deprive a
stockholder of his right to attend the stockholders meetings, or demand the benefits that
accrue to such stock ownership.

Differences

In a recent case, “Grace Borgoña, et al. vs. Abra Valley Colleges Inc., G.R. No. 204089, dated
July 29, 2015,” the Supreme Court ruled that the presentation of a stock certificate was not
required to prove one’s shareholdings in a corporation.

The case, in a nutshell, involves full- and -half blood members of a family who were fighting for
control over a school founded by their deceased father.

A full-blood member refused to open the books of the corporation to his half-blood siblings, in
spite of repeated demands, unless the latter presented stock certificates to show proof of their
ownership of stocks of the school.
All that the latter had were stock certificates endorsed in their favor by the original
stockholders and entries in the company’s STB indicating that a certain number of shares were
listed in their names.

After efforts to amicably settle their differences failed, the disgruntled siblings went to court to
resolve the dispute.

The regional trial court, and later the Court of Appeals, ruled that stock certificates had to be
presented to justify the demand to look into the school’s financial records and minutes of board
meetings.

With the rebuff, the losers went to the high court.

Membership

The justices stated that a stock certificate “is not stock in the corporation but is merely
evidence of the holder’s interest and status in the corporation, his ownership of the share
represented thereby, but is not in law the equivalent of such ownership.”

The records of the case showed that, in lieu of stock certificates, the family members concerned
had submitted to the lower court copies of official receipts of payments for their subscriptions
to the shares of the school, and letters by the corporate secretary on file with and duly certified
by the Securities and Exchange Commission (SEC) stating that certain shares have been issued
to them.

The same information was also contained in the General Information Sheet for 1989 that the
school submitted to the SEC, and the minutes of a special meeting of the board of directors
confirming and ratifying the issuance of shares to them.

What’s more, the minutes of board meetings showed that the members of the other faction
had been elected as directors and participated in the deliberations of the board.

On this point, the court stated that, in light of the requirement of the law that every director
should hold at least one share of stock, their presence or attendance in the board meetings
without any objections from the other directors was proof that they have been recognized as
legitimate stockholders.

Accordingly, the justices ruled that the half-blood siblings are stockholders of the school and
therefore entitled to examine the financial records of the corporation, including the minutes of
board meetings.
Family feud

The instant case is illustrative of intra-corporate disputes that often arise in family-controlled
corporations when their patriarch or matriarch kicks the bucket without leaving a clear
succession plan.

While the founding father or mother is alive, the children are often in good behavior among
themselves either out of respect to the old folks or for fear that any act of misconduct could
adversely affect their share in the inheritance pie.

Unless management and ownership issues are clearly resolved or agreed beforehand, it is not
uncommon for sibling rivalries, past jealousies and hurt feelings to rear their ugly heads when
the Grim Reaper decides to take away the head of the family.

Often, the failure of feuding family members to amicably settle their differences give rise to bad
blood and recriminations that go on for generations or, worse, the filing of civil and criminal
charges against each other with everyone losing, financially and emotionally, in the long run.

If the dispute plays out in the media, including the now ubiquitous social media, the family’s
dirty linens find themselves being embarrassingly washed in public.

Blood supposedly runs thicker than water, but not when lots of money and big egos are
involved.

Read more: https://business.inquirer.net/205729/proof-of-stock-ownership#ixzz5yHW3spAW

The importance of the stock and transfer book and what to

do if it’s inaccessible

With Q1 2019 drawing to a close, many corporations are gearing up for their annual
stockholders’ meeting. This yearly ritual is not just for corporate compliance, but also for
stakeholders to touch base with the people managing their investments.

Before one can hold a stockholders’ meeting, however, one must first send out an
invitation to each and every stakeholder. And the best reference for this is the stock and
transfer book (STB).

Per Section 74 of the Corporation Code of the Philippines, the STB “contains the
records of all stocks in the names of the stockholders alphabetically arranged; the
installment paid and unpaid on all stock for which subscription has been made, and the
date of payment of any installment; a statement of every alienation, sale or transfer of
stock made, the date thereof, and by and to whom made; and such other entries as the
by-laws may prescribe.”

But what should happen if the all-important STB becomes inaccessible? Below are just
two scenarios and possible steps one can take:

Determining who is a stockholder

Not having a master list of stockholders can make organizing an annual meeting quite
problematic. Such was the dilemma faced by Golden Dragon International Terminals,
Inc. (GDITI), which prompted its corporate secretary to write the Security and Exchange
Commission (SEC) for guidance.

As per the SEC, while the STB is a crucial document as far as recording stock
ownership is concerned, it is not a public record. As such, it is not the only way to
establish ownership of stock. It stated that “extrinsic records” such as certified/sworn
records of copies and even parol (verbal) testimony can be valid.

However, it does offer further guidelines. First, justifiable cause for the inaccessibility of
the STB must first be established before extrinsic records can be admitted as duly
recognized. Moreover, it advised the corporate secretary to file a court action for it to
regain access to the STB.

Proving you are a stockholder

On the flip side, there is the dilemma of proving that you are a stockholder in a
company. Without an STB to cross-check your stock ownership with, you may not be
invited to the annual stockholders’ meeting. Hence, you will not know the business’s
state of affairs or have a say in the way things are run. Lack of proof may also mean
that you can be barred from accessing board meeting minutes, financial records, and
the like.

Once again, the courts will admit extrinsic evidence to establish ownership. These could
be official receipts from your purchase of shares or letters from the corporate secretary,
duly noted by the SEC. Likewise, board meeting minutes or resolutions that recognize
you as a bona fide shareholder shall also be deemed valid.
In any business, accurate record-keeping is a matter of utmost importance. Unavoidable
scenarios such as internal squabbles or disasters can prohibit access to crucial records
such as the STB. But as you can see in the scenarios above, not all is lost.

Also, with expert legal counsel at your side, such dilemmas can be handled effectively
and efficiently. Should you need expert advice on corporate law, just reach out to Duran
& Duran-Schulze Law at (+632) 478 5826 or via email at info@duranschulze.com.