Navigating Sequestration: Understanding Corporate Voting Rights and Director Eligibility

G.R. No. 111857, December 06, 1996

Imagine a scenario where the government seizes control of a company’s shares, claiming they were illegally acquired. Who gets to vote those shares, and who is eligible to be a director? This case delves into the complex intersection of government sequestration, corporate governance, and shareholder rights, providing valuable insights into how these issues are resolved in the Philippines. It highlights the importance of understanding the scope of court orders and their impact on corporate operations.

This case involves a dispute over the right to vote sequestered shares of stock in San Miguel Corporation (SMC) and the qualifications of PCGG (Presidential Commission on Good Government) nominees to the SMC Board of Directors. The Cojuangco group questioned the PCGG’s authority to vote the shares and the eligibility of the nominees, leading to a quo warranto petition. The Supreme Court clarified that the issues in the quo warranto case were distinct from the broader sequestration cases, allowing the Sandiganbayan to proceed with the quo warranto proceedings.

The Legal Framework of Sequestration and Corporate Rights

The power of the PCGG to sequester assets is rooted in the government’s efforts to recover ill-gotten wealth. However, this power is not without limits. The 1987 Constitution sets a deadline for filing judicial actions to maintain sequestrations. Section 26, Article XVIII of the Constitution states:

“The sequestration or freeze order shall be issued only upon showing of a prima facie case. The order and the list of the sequestered or frozen properties shall be registered with the proper court. For orders issued before the ratification of this Constitution, the corresponding judicial action or proceeding shall be filed within six months from its ratification. For those issued after such ratification, the judicial action or proceeding shall be commenced within six months from the issuance thereof.

The sequestration or freeze order is deemed automatically lifted if no judicial action or proceeding is commenced as herein provided.”

This provision ensures that sequestrations are not indefinite and that those affected have an opportunity to challenge the government’s actions in court.

Furthermore, corporate governance principles dictate the qualifications for directors. These qualifications are usually found in the corporation’s by-laws. In this case, the by-laws of San Miguel Corporation required directors to own a minimum number of shares.

Hypothetical Example: Imagine a situation where the PCGG sequesters shares of a family-owned business. The family members, who were previously directors, are now replaced by PCGG nominees. If the family believes the sequestration was unlawful, they can file a petition in court to challenge the sequestration and seek the reinstatement of the original directors.

The Case Unfolds: A Battle for Corporate Control

The story begins with the PCGG issuing writs of sequestration over shares of stock in San Miguel Corporation, believing these shares were ill-gotten. Several corporations challenged these writs in the Sandiganbayan, arguing they were automatically lifted due to the PCGG’s failure to file judicial action within the constitutional timeframe. The Sandiganbayan initially agreed, leading the PCGG to appeal to the Supreme Court.

While these sequestration cases were pending, the PCGG voted the sequestered shares in SMC, leading to the election of its nominees to the Board of Directors. The Cojuangco group, whose nominees were not elected, filed a quo warranto petition in the Sandiganbayan, questioning the PCGG’s authority to vote the shares and the qualifications of its nominees.

The PCGG argued that the quo warranto case should be suspended until the Supreme Court resolved the sequestration cases. The Sandiganbayan denied this motion, finding that the issues in the quo warranto case were distinct from those in the sequestration cases.

The Supreme Court agreed with the Sandiganbayan, stating:

“The issue involved in S.B. Case No. 0150, i.e., whether or not PCGG nominees are qualified nominees to the SMC Board, is not foreclosed necessarily by the resolution of the issues in G.R. No. 104850.”

The Court further clarified that the main issue in the sequestration cases was:

“DOES INCLUSION IN THE COMPLAINTS FILED BY THE PCGG BEFORE THE SANDIGANBAYAN OF SPECIFIC ALLEGATIONS OF CORPORATIONS BEING ‘DUMMIES’ OR UNDER THE CONTROL OF ONE OR ANOTHER OF THE DEFENDANTS NAMED THEREIN AND USED AS INSTRUMENTS FOR ACQUISITION, OR AS BEING DEPOSITORIES OR PRODUCTS, OF ILL-GOTTEN WEALTH…SATISFY THE CONSTITUTIONAL REQUIREMENT…”

The Court emphasized that the qualifications of PCGG nominees and the right to vote sequestered shares were not addressed in the sequestration cases. Therefore, the Sandiganbayan could proceed with the quo warranto proceedings.

Key Procedural Steps:

• PCGG issues writs of sequestration.
• Corporations challenge the writs in the Sandiganbayan.
• PCGG votes sequestered shares, electing its nominees to the Board.
• Cojuangco group files a quo warranto petition.
• PCGG moves to suspend the quo warranto case.
• Sandiganbayan denies the motion.
• Supreme Court affirms the Sandiganbayan’s decision.

Practical Implications: Navigating Corporate Disputes During Sequestration

This case provides important guidance on how to handle corporate disputes when shares are under sequestration. It clarifies that issues related to director qualifications and voting rights can be addressed separately from the broader sequestration proceedings.

Key Lessons:

• Sequestration does not automatically resolve all corporate governance issues.
• Parties can challenge the qualifications of nominees and the right to vote sequestered shares.
• The Sandiganbayan has jurisdiction over quo warranto cases related to PCGG cases.

Practical Advice: If your company’s shares are sequestered, seek legal advice to understand your rights and options. Do not assume that all corporate governance issues are automatically resolved by the sequestration order. Be prepared to litigate separate issues, such as director qualifications and voting rights, if necessary.

Frequently Asked Questions

Q: What is a writ of sequestration?

A: A writ of sequestration is an order issued by the PCGG to take control of assets believed to be ill-gotten.

Q: What is a quo warranto petition?

A: A quo warranto petition is a legal action to challenge a person’s right to hold a public office or corporate position.

Q: Does the Sandiganbayan always have jurisdiction over quo warranto cases?

A: No, the Sandiganbayan only has jurisdiction over quo warranto cases that involve, arise from, or are related to PCGG cases over alleged ill-gotten wealth.

Q: What happens if the PCGG fails to file a judicial action within the constitutional timeframe?

A: The sequestration order is deemed automatically lifted.

Q: Can I challenge the qualifications of PCGG nominees to a company’s Board of Directors?

A: Yes, you can file a quo warranto petition to challenge their qualifications.

Q: What are the requirements for being a director of a corporation?

A: The requirements are usually found in the corporation’s by-laws and may include share ownership and other qualifications.

ASG Law specializes in corporate litigation and governance, particularly in cases involving government regulation and intervention. Contact us or email hello@asglawpartners.com to schedule a consultation.