The Relationship Test: License To Operate

The Securities Regulation Code (SRC) sets the rules on proxy solicitations under
Section 20. The implementing rules provide that Section 20 of the SRC applies to a

reporting company and to any person who shall solicit votes for a stockholder's
meeting of a particular corporation. In the case of SEC v
An intra-corporate controversy is one which arises between a stockholder and the
corporation or among the stockholders involving internal affairs of the corporation.
In the case of Roberto San Jose and Delfin Angcao vs. Jose Ma. Ozamiz, G.R. No.
190590, 12 July 2017, the Supreme Court discussed the two tests in determining
whether or not a case involves an intra-corporate dispute. The two tests are the
relationship test and the nature of the controversy test.
The Relationship Test

Under the relationship test, there is an intra-corporate controversy when the conflict is:
(1) between the corporation, partnership, or association and the public;
(2) between the corporation, partnership, or association and the State insofar as its
franchise, permit, or license to operate is concerned;
(3) between the corporation, partnership, or association and its stockholders, partners,
members, or officers; and (4) among the stockholders, partners, or associates
themselves.
The Nature of Controversy Test

On the other hand, in accordance with the nature of controversy test, an intra-corporate
controversy arises when the dispute is not only rooted in the existence of an intra-
corporate relationship, but also in the enforcement of the parties’ correlative rights and
obligations under the corporation code and the internal and intra-corporate regulatory
rules of the corporation.
Who has jurisdiction over intra-

corporate disputes?
The Securities and Exchange Commission is given original and exclusive jurisdiction to
hear and decide cases involving intra-corporate controversies, as provided under
Section 5 of Presidential Decree No. 902-A.
Republic Act No. 8799, or otherwise known as the Securities Regulation Code, which
took effect on 08 August 2000, transferred jurisdiction to decide intra-corporate disputes
to courts of general jurisdiction or regional trial courts. (designated as Special
Commercial Court by the Supreme Court, but this designation was merely intended as a
procedural tool to expedite the resolution of commercial cases in line with the court’s
exercise of jurisdiction)
The Interim Rules of Procedure for Intra-Corporate Controversies provide, to wit:
“Section 1. (a) Cases covered. – These Rules shall govern the procedure to be observed
in civil cases involving the following:
xxxx
(2) Controversies arising out of intra-corporate, partnership, or association relations,

between and among stockholders, members, or associates; and between, any or all of
them and the corporation, partnership, or association of which they are stockholders,
members, or associates, respectively;
(3) Controversies in the election or appointment of directors, trustees, officers, or

managers of corporations, partnerships, or associations;
(4) Derivative suits; and
(5) Inspection of corporate books.
xxxx
Under the foregoing Rules, all of the actions covered by these Rules shall be
commenced and tried in the Regional Trial Court which has jurisdiction over the principal
office of the corporation, partnership, or association concerned. Where the principal
office of the corporation, partnership or association is registered in the Securities and
Exchange Commission as Metro Manila, the action must be filed in the city or
municipality where the head office is located.
Recent Development: Now

Arbitration is Required
Section 181 of Republic Act No. 11232, otherwise known as the Revised corporation
code, which took effect on 23 February 2019, requires that intra-corporate disputes be
referred to arbitration, to wit:
“SEC. 181. Arbitration for Corporations. – An arbitration agreement may be provided in

the articles of incorporation or bylaws of an unlisted corporation. When such an
agreement is in place, disputes between the corporation, its stockholders or members,
which arise from the implementation of the articles of incorporation or bylaws, or from
intra-corporate relations, shall be referred to arbitration. A dispute shall be nonarbitrable
when it involves criminal offenses and interests of third parties.”
Apparently, the new law requires that intra-corporate disputes or disputes between the
corporation, its stockholders or members, which arise from the implementation of the
articles of incorporation or bylaws, or from intra-corporate relations, be settled through
an arbitration. However, this requirement takes place only when the corporation provided
an arbitration agreement in its articles of incorporation or bylaws, or in a separate
agreement.
Furthermore, if the controversy already involves criminal offenses and interest of third
parties, it shall be nonarbitrable, and thus dispensing with the requirement of arbitration.
On the other hand, the law also provides that when an intra-corporate dispute is filed
with a Regional Trial Court, the court shall dismiss the case before the termination of the
pretrial conference, if it determines that an arbitration agreement is written in the
corporation’s articles of incorporation, bylaws, or in a separate agreement.
Force and Effect of the Arbitration

Agreement
Accordingly, the arbitration agreement shall be binding on the corporation, its directors,
trustees, officers, and executives or managers.
To be enforceable, the arbitration agreement should indicate the number of arbitrators

and the procedure for their appointment. The power to appoint the arbitrators forming the
arbitral tribunal shall be granted to a designated independent third party. Should the third
party fail to appoint the arbitrators in the manner and within the period specified in the
arbitration agreement, the parties may request the SEC to appoint the arbitrators. In any
case, arbitrators must be accredited or must belong to organizations accredited for the
purpose of arbitration.
The arbitral tribunal shall have the power to rule on its own jurisdiction and on questions
relating to the validity of the arbitration agreement.
Additionally, the arbitral tribunal shall have the power to grant interim measures
necessary to ensure enforcement of the award, prevent a miscarriage of justice, or
otherwise protect the rights of the parties. A final arbitral award shall be executory after
the lapse of fifteen (15) days from receipt thereof by the parties and shall be stayed only
by the filing of a bond or the issuance by the appellate court of an injunctive writ.
Proxy solicitations
August 20, 2018
A proxy solicitation contains materials about the issuing entity that investors need to make
informed decisions about shareholder votes. This issuance is required for publicly-
held companies. A requirement for every publicly-held company is to conduct at least one
shareholders meeting per year. There may be a need for additional meetings, if the company
needs shareholder approval of additional items, such as a change in the articles of
incorporation or an increase in the number of directors. The circumstances of these meetings
are governed by the laws of the state in which a company is incorporated. State law may, for
example, require that meetings be conducted within a certain number of days of the
fiscal year end.
The Proxy Solicitation
Before a shareholders meeting is held, the company must issue a proxy solicitation to its
voting shareholders. This solicitation contains information about the company, and also
notes all items requiring a shareholder vote. The exact content of the proxy solicitation
document is governed by Rule 14a-3 of the Securities and Exchange Commission (SEC).
The rule defines a number of information types to include in the solicitation, including:
 Information about where and when the meeting will be held

 The date by which shareholders must submit their proposals for inclusion in the
solicitation
 The method for revoking proxies, if allowed
 Any rights of appraisal for dissenters
 Any interests that the company's directors and officers may have in items being voted
upon
 A summarization of the voting securities outstanding and who owns them
 The date of record that is used to determine which shareholders can vote
 Any relationship that directors may have with the company
 The compensation paid to officers and directors
 The amounts paid to the company's auditors for auditing and other services
 A description of any benefit, bonus, pension, or similar plan to be voted upon
 A description of any securities that will be authorized to be issued
 A description of any property that the company plans to dispose of or acquire
 A description of any proposed changes to the company's articles of incorporation
 The annual report or Form 10-K (if the solicitation is for the annual meeting)
All of the preceding information is issued to shareholders along with a proxy card. The card
is used by shareholders to vote for or against company proposals, or to abstain from them.
SEC Approval of the Proxy
If the solicitation includes voting on topics other than the election of directors or the
approval of auditors, it must first be approved by the SEC. If the SEC does not respond
within 10 days that it is planning to comment on the solicitation, then the company can issue
it to shareholders. Otherwise, the SEC has 30 days in which to comment.
Applicable Proxy Dates
An essential ingredient of the proxy solicitation is a set of dates, which are:
 Record date. The date on which the company identifies which shareholders are
eligible to vote at the shareholders meeting. It is usually not more than 60 days prior to the
date of the meeting.
 Mailing date. The date on which the proxy materials are to be mailed.
 Meeting date. The date of the shareholders meeting. This is normally limited by state
law to be at least 10 days after the mailing date. The interval is usually a number of weeks
longer, to give shareholders time to submit their proxy cards.
Vote Tallying
Completed proxy cards are normally tallied by a company's stock transfer agent, though
other parties or the company itself can do so. The stock transfer agent is a good choice, since
this entity has procedures in place for recording and aggregating the information on proxy
cards. This information is then summarized and presented at the shareholders meeting. The
summary is also included in the meeting minutes.

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The Securities Regulation Code (SRC) sets the rules on proxy solicitations under

Section 20. The implementing rules provide that Section 20 of the SRC applies to a

The Relationship Test

(1) between the corporation, partnership, or association and the public;

The Nature of Controversy Test

Who has jurisdiction over intra-

The Interim Rules of Procedure for Intra-Corporate Controversies provide, to wit:

(2) Controversies arising out of intra-corporate, partnership, or association relations,

(3) Controversies in the election or appointment of directors, trustees, officers, or

(4) Derivative suits; and

(5) Inspection of corporate books.

Recent Development: Now

“SEC. 181. Arbitration for Corporations. – An arbitration agreement may be provided in

Force and Effect of the Arbitration

To be enforceable, the arbitration agreement should indicate the number of arbitrators

The Proxy Solicitation

 Information about where and when the meeting will be held

SEC Approval of the Proxy

Applicable Proxy Dates

An essential ingredient of the proxy solicitation is a set of dates, which are:

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