The Importance of Shareholder Rights to Corporate Records: Lessons from a Landmark Case

Benito T. Keh and Gaudencio S. Quiballo v. People of the Philippines, G.R. Nos. 217592-93, July 13, 2020

Imagine a shareholder, a part-owner of a company, seeking to understand the financial health and operational decisions of the corporation they have invested in. This shareholder’s request to inspect the company’s books is denied, leaving them in the dark about their investment. This scenario underscores the real-world impact of the legal issue at the heart of the Supreme Court case involving Benito T. Keh and Gaudencio S. Quiballo. The central question was whether the criminal information filed against them for allegedly violating the Corporation Code’s provisions on shareholders’ rights to inspect corporate records was sufficient to sustain a prosecution.

In this case, Keh and Quiballo, officers of Ferrotech Steel Corporation, were accused of refusing to allow a shareholder, Ireneo C. Quizon, to inspect the company’s records. The Supreme Court’s decision ultimately hinged on the sufficiency of the criminal information filed against them, a decision that sheds light on the critical balance between corporate governance and shareholder rights.

Legal Context: Understanding Shareholders’ Rights to Corporate Records

Under Philippine law, specifically Section 74 of the Corporation Code, corporations are required to maintain and preserve records of all business transactions and minutes of meetings. This provision ensures transparency and accountability, allowing shareholders to inspect these records upon written request. The right to inspect is not just a formality; it is a fundamental aspect of corporate governance that empowers shareholders to monitor the corporation’s activities and financial status.

The Corporation Code states: “The records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense.”

Violation of this duty can lead to criminal prosecution under Section 144 of the Corporation Code, which prescribes penalties for non-compliance. The elements of the offense include a prior written demand by a shareholder and an unjustified refusal by corporate officers to allow inspection.

Consider a scenario where a small business owner invests in a larger corporation. They rely on the corporation’s records to assess the value of their investment and make informed decisions. If denied access, they might suspect mismanagement or fraud, highlighting the importance of this legal right in maintaining trust and transparency in corporate dealings.

Case Breakdown: The Journey of Keh and Quiballo’s Case

Benito T. Keh, the chairman and president of Ferrotech Steel Corporation, and Gaudencio S. Quiballo, the corporate secretary, found themselves in legal trouble when shareholder Ireneo C. Quizon accused them of refusing to allow him to inspect the company’s books. Quizon, feeling his rights as a shareholder were being violated, filed a complaint with the Office of the City Prosecutor (OCP) of Valenzuela City.

The OCP found probable cause and filed an information against Keh and Quiballo, alleging they “willfully, unlawfully, and feloniously refuse, without showing any justifiable cause, to open to inspection to IRENEO C. QUIZON, a stockholder of said corporation, the [corporate] books and records of said corporation.”

Keh and Quiballo challenged the information’s sufficiency, arguing it lacked essential elements of the offense. Their case moved through various stages, from the Regional Trial Court (RTC) to the Court of Appeals (CA), and finally to the Supreme Court.

The RTC initially quashed the information, deeming it defective for not explicitly stating the prior written demand and the absence of a justifying circumstance. The CA upheld this dismissal but without prejudice, meaning the case could be refiled. Keh and Quiballo appealed to the Supreme Court, seeking a dismissal with prejudice to prevent double jeopardy.

The Supreme Court, in its decision, disagreed with the lower courts’ findings. The Court held that the information was sufficient to sustain a prosecution. Chief Justice Peralta wrote, “The specific employment of the phrase ‘refuse, without showing any justifiable cause[,] to open to inspection x x x the corporate books and records,’ which reasonably implies that a prior request for access to information has been made upon petitioners.”

Another critical point was the Court’s stance on the fourth element of the offense, which pertains to a justifying circumstance. The Court clarified, “The fourth element of the offense unmistakably pertains to a matter of defense – specifically, a justifying circumstance – that must be pleaded by petitioners at the trial in open court rather than at the indictment stage.”

Ultimately, the Supreme Court set aside the CA’s decision and remanded the case to the RTC for further proceedings, emphasizing the importance of a thorough trial to address all elements of the offense.

Practical Implications: Navigating Shareholder Rights and Corporate Responsibilities

This ruling reaffirms the importance of shareholders’ rights to inspect corporate records and the duty of corporate officers to comply with these requests. For businesses, it underscores the need for clear policies and procedures to handle such requests transparently and efficiently.

For shareholders, this decision empowers them to assert their rights more confidently, knowing that the legal system supports their access to corporate information. It also serves as a reminder to document their requests formally to ensure they can pursue legal action if necessary.

Key Lessons:

• Corporations must maintain and provide access to their records upon written demand by shareholders.
• Corporate officers should be aware that refusal to allow inspection can lead to criminal prosecution.
• Shareholders should always make their requests in writing to have a clear record of their demand.
• Legal proceedings may be necessary to enforce these rights, but the sufficiency of the criminal information is crucial.

Frequently Asked Questions

What is the right to inspect corporate records?

Under the Corporation Code, shareholders have the right to inspect corporate records and minutes of meetings upon written demand, ensuring transparency and accountability.

Can a corporation refuse a shareholder’s request to inspect records?

A corporation can only refuse if there is a justifiable cause, such as improper use of information or lack of good faith by the shareholder. Otherwise, refusal can lead to legal consequences.

What should a shareholder do if their request is denied?

A shareholder should document their request in writing and consider legal action if the corporation unjustifiably denies access to the records.

What are the penalties for violating the right to inspect corporate records?

Violators can face fines ranging from P1,000 to P10,000 or imprisonment for 30 days to five years, or both, as per Section 144 of the Corporation Code.

How can a corporation ensure compliance with shareholder rights?

Corporations should establish clear policies for handling inspection requests, maintain accurate records, and respond promptly to written demands from shareholders.

ASG Law specializes in corporate governance and shareholder rights. Contact us or email hello@asglawpartners.com to schedule a consultation.