In a dispute over proxy use during Manila Electric Company’s (Meralco) annual stockholders’ meeting, the Supreme Court clarified the jurisdiction between the Securities and Exchange Commission (SEC) and Regional Trial Courts (RTC) in corporate election controversies. The Court ruled that while the SEC regulates proxy solicitation, the RTC has exclusive jurisdiction over controversies arising from the election of corporate directors, even if they involve questions of proxy validity. This means that challenges related to proxies used in director elections must be filed with the RTC, not the SEC, ensuring a unified resolution of election-related disputes and clarifying the scope of each body’s authority within corporate governance.

Navigating Corporate Power: Who Decides When Proxy Fights Escalate to Election Contests?

The case stemmed from concerns raised by the Government Service Insurance System (GSIS), a major Meralco shareholder, regarding the proxy validation process for the company’s annual meeting. GSIS initially filed a complaint with the RTC questioning the validity of certain proxies but later withdrew it to file a petition with the SEC, seeking to restrain the use of those proxies. The SEC issued a Cease and Desist Order (CDO), which Meralco contested, leading to a Court of Appeals (CA) decision dismissing the GSIS complaint due to the SEC’s lack of jurisdiction. This CA decision then became the subject of petitions before the Supreme Court, prompting a thorough examination of the jurisdictional boundaries between the SEC and the RTC.

At the heart of the matter was determining whether the SEC’s regulatory authority over proxy solicitations extends to controversies arising from the election of corporate directors. GSIS argued that the SEC’s power to investigate violations of its rules on proxy solicitation, as outlined in the Securities Regulation Code (SRC), should allow it to intervene. However, private respondents contended that under Section 5.2 of the SRC, jurisdiction over intra-corporate disputes, including election controversies, was transferred to the RTC. This point was bolstered by the Interim Rules on Intra-Corporate Controversies, which define “election contests” as encompassing the validation of proxies.

The Supreme Court acknowledged that while the SEC has the authority to regulate proxy solicitation under Section 20.1 of the SRC, this power is distinct from the RTC’s jurisdiction over election-related controversies. Proxy solicitation is the process of securing and submitting proxies, while proxy validation concerns the review of those proxies for an election. The Court emphasized that the RTC’s jurisdiction under Section 5(c) of Presidential Decree No. 902-A, in relation to the SRC, is specifically confined to “controversies in the election or appointment of directors, trustees, officers or managers of corporations, partnerships, or associations.”

Building on this principle, the Court clarified that the SEC’s investigatory power is unquestioned when proxies are obtained to vote on matters unrelated to director elections. However, when proxies are solicited in relation to the election of corporate directors, any resulting controversy, even if ostensibly raising violations of SEC rules, should be treated as an election controversy within the RTC’s jurisdiction. The aim is to ensure that all related claims and controversies arising from the election of directors are adjudicated by a single body.

The Court dismissed the SEC’s petition, stating that it lacked the capacity to file it since it was not a real party-in-interest in the dispute. Additionally, it invalidated the CDO issued by the SEC, deeming it a violation of due process. The CDO was found deficient because it did not clearly state the specific statutory basis (Section 5.1, 53.3, or 64 of the SRC) for its issuance, making it difficult for the respondents to properly respond. Moreover, the Court noted that the CDO was signed by only one SEC commissioner, violating the collegial nature of the SEC.

Finally, the Supreme Court addressed the sanction imposed by the Court of Appeals on the GSIS lawyers, deleting this aspect of the CA decision. The Court found that the GSIS charter uniquely allocates a role for its internal legal counsel that complements the Office of the Government Corporate Counsel (OGCC), allowing GSIS to assign cases to the OGCC at its discretion while maintaining its own in-house legal counsel. This differentiated GSIS from other government-owned and controlled corporations.

FAQs

What was the key issue in this case?	The key issue was determining whether the SEC or the RTC had jurisdiction over a controversy involving the validity of proxies used in the election of Meralco’s board of directors.
What did the Supreme Court decide?	The Supreme Court ruled that the RTC has exclusive jurisdiction over controversies arising from the election of corporate directors, even if they involve questions of proxy validity.
Why did the Court choose the RTC over the SEC in this case?	The Court reasoned that concentrating jurisdiction over all issues related to the election of corporate directors in one body (the RTC) prevents split jurisdiction and ensures a more coherent resolution of disputes.
What is the difference between proxy solicitation and proxy validation?	Proxy solicitation involves the process of requesting and obtaining proxies from shareholders, whereas proxy validation is the process of reviewing and confirming the validity of the submitted proxies.
Why was the Cease and Desist Order (CDO) issued by the SEC deemed invalid?	The CDO was deemed invalid because it did not specify which provision of the SRC it was based on and was signed by only one SEC commissioner, violating due process and the collegial nature of the SEC.
What is the role of the Office of the Government Corporate Counsel (OGCC) in this case?	The OGCC is the legal counsel for government-owned and controlled corporations, but the GSIS charter uniquely allows its in-house legal counsel to handle cases, giving GSIS discretion over when to assign cases to the OGCC.
What was the practical implication of the court’s ruling?	The ruling clarified that challenges related to proxies used in director elections must be filed with the RTC, not the SEC, providing clear guidance on the appropriate venue for such disputes.
What happens if proxies are solicited for matters other than the election of directors?	The SEC’s investigatory power is not questioned in such instances, allowing the SEC to investigate violations of its rules on proxy solicitation when they do not relate to director elections.

The Supreme Court’s decision provides clarity on the jurisdictional boundaries between the SEC and the RTC in corporate election controversies. By affirming the RTC’s exclusive jurisdiction over election-related disputes, the Court reinforces the integrity and efficiency of corporate governance processes.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Government Service Insurance System vs. The Hon. Court of Appeals, G.R. No. 183905 & 184275, April 16, 2009