Class CORPORATION AND BASIC SECURTIES LAW

Topic Power to purchase own shares

Petitioner BOMAN ENVIRONMENTAL Respondent HON. COURT OF APPEALS and NILCAR Y.

DEVELOPMENT CORPORATION , FAJILAN

Reference 77860 Ponente Grino-Aquino

Promulgation November 22, 1988

Date
Doctrine Section 40 of the Revised Corporation Code (RCC) provides that:

“SEC. 40. Power to Acquire Own Shares. – Provided that the corporation has unrestricted retained
earnings in its books to cover the shares to be purchased or acquired, a stock corporation shall have
the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes,
including the following cases:
(a) To eliminate fractional shares arising out of stock dividends;
(b) To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription,
in a delinquency sale, and to purchase delinquent shares sold during said sale; and
(c) To pay dissenting or withdrawing stockholders entitled to payment for their shares under the
provisions of this Code”

Section 5(b) of P.D. No. 902-A, as amended, grants the SEC original and exclusive jurisdiction to
hear and decide cases involving —
"b) Controversies arising out of intra-corporate or partnership relations, between and among
stockholders, members, or associate; between any or all of them and the corporation, partnership or
association of which they are stockholders, members or associates, respectively; . . ."
Facts On May 7, 1984, respondent Nilcar Y. Fajilan offered in writing to resign as President and Member of
the Board of Directors of petitioner, Boman Environmental Development Corporation (BEDECO), and
to sell to the company all his shares, rights, and interests therein for P300,000 plus the transfer to
him of the company's Isuzu pick-up truck which he had been using.

Thereafter, the petitioner BEDECO accepted the offer and issued a promissory note stating that the
payment shall be done in installment for six (6) months.

However, upon payment of Php100,000; the petitioner was no longer able to pay the remaining
balance.

Hence, respondent filed an action to collect the balance to the RTC. However, the trial court
dismissed the complaint for lack of jurisdiction. It ruled that the controversy arose out of intra-
corporate relations, hence, the Securities and Exchange Commission has original and exclusive
jurisdiction to hear and decide it.

After the MR filed by the respondent was denied, it was appealed to the CA which reversed the
decision of the lower court.
Procedural History

RTC  Dismissed for lack of jurisdiction

CA Reversed the decision of the RTC

Issues Whether or not the action of the respondent as a withdrawing stockholder against the corporation to
enforce payment of the balance due on the consideration for the surrender of his shares and
interests in the corporation, involves an intra-corporate dispute which would determine that the
jurisdiction should fall on the Securities and Exchange Commission (SEC).

Ruling(s) Yes. The Supreme Court (SC) affirmed the decision of the RTC in dismissing the case for lack of
jurisdiction.

As correctly observed by the RTC, the perfection of the agreement to sell the respondent's
participation and interests in BEDECO and the execution of the promissory note for payment of the
price of the sale did not remove the dispute from the coverage of Section 5(b) of P.D. No. 902, as
amended, for both the said agreement and the promissory note arose from intra-corporate relations.
Indeed, all the signatories of both documents were stockholders of the corporation at the time of
signing the same. It was an intra-corporate transaction; hence, the suit is an intra-corporate
controversy.

The respondent’s suit compelling the petitioner to pay for his shareholdings is cognizable by the SEC
alone which shall determine whether such payment will not constitute a distribution of corporate
assets to a stockholder in preference over creditors of the corporation. The SEC has exclusive
supervision, control and regulatory jurisdiction to investigate whether the corporation has unrestricted
retained earnings to cover the payment for the shares, and whether the purchase is for a legitimate
corporate purpose as provided in Sections 40 and 122 of the Corporation Code (Section 41 of the
RCC).

Rationale