IDEALLY, when a stockholder invests in a corporation, he does so expecting management to handle corporate affairs with utmost honesty and in good faith. It is only natural, for he now owns a piece of corporate property and would, therefore, seek to reap his share of the profits from the corporation. Our Corporation Code recognizes this need, and gives the stockholder avenues through which he can ensure management’s compliance.
One such avenue is the right to inspect the corporation’s books and records. It is accorded such importance in the Corporation Code that in Sections 74 and 144 thereof, the law even penalizes the refusal to allow the inspection of a corporation’s books or records. The sanctions are severe—one may be fined or imprisoned for up to five years or, if committed by the corporation, the very life of the corporation is at stake, as it is a cause for dissolution.
The stockholders, hence, are not mere investors—they are the corporation’s guardians. In an ideal world, these guardians would use the rights provided under the law to allow the corporation to grow, and to reap in the just benefits of that growth. This is, of course, not an ideal world. Man is known to use and abuse his rights. Understanding this inherent weakness, the Corporation Code itself grants the corporation protection against abusive stockholders—Justice Biden, in Republic v. Sandiganbayan, recognized that the corporation may use as a defense “that the person demanding to examine and copy excerpts from the corporation’s records and minutes has (1) improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or (2) was not acting in good faith or for a legitimate purpose in making his demand.”
Ang-Abaya v. Ang presents us with a stockholder who used this awesome right for all the wrong purposes. Eduardo Ang, the person in question in the case, was a shareholder of two of his family’s corporations, Vibelle Manufacturing Corp. and Genato Investments Inc. His relatives previously filed a civil case against him and several other persons for allegedly conniving to wrest control of their operations. He borrowed money without intending to pay for it, demanded for increases in his monthly allowance and cash advances contrary to policies, attempted to kick out a fellow officer, and many other acts detrimental to the business. While this was going on, he sought permission to inspect the company books, but the other officers (petitioners in the present case) refused, arguing that he would use the information obtained for purposes inimical to the corporation—at the time, he was bullying the others into writing off millions of unlawful personal advances, demanding that he be given an office already occupied by an officer, usurping the corporation’s exclusive rights, and coercing the rest of the corporation to give in to his baseless demands. Unsurprisingly, the corporation refused. Unperturbed, Eduardo sued the petitioners in the case for criminal violations under the said Section 74.
The petitioners denied Eduardo’s allegations, blaming Eduardo’s lavish lifestyle as the root of all his demands. They then parried Michael’s legal assault all the way to the Department of Justice, where it was found that there was lack of probable cause to support Eduardo’s allegations of violations of Section 74 of the Corporation Code, but the Court of Appeals (CA) reversed the Department of Justice, finding otherwise.
The Supreme Court, speaking through Justice Ynares-Santiago,
reversed the CA. It held that the defense of improper use or motive is in the nature of a justifying circumstance that would exonerate those who raise and are able to prove the same, and where the corporation denies inspection on the ground of improper motive or purpose, the burden of proof is taken from the shareholder and placed on the corporation.
The corporation’s defense met that burden. They presented official and other documents, such as board resolutions, treasurer’s affidavits and Eduardo’s own words, and proved the defenses they have been alleging since the lower court. Eduardo was even silent, withholding his objections to the charges against him. Taken together, the Supreme Court found that Eduardo was not acting in good faith and for a legitimate purpose in making his demands for inspection of company books.
In fine, stockholders, as among the guardians of the corporation, have the right to inspect corporate books. This right is not absolute, for the corporation may present the defense of improper use and motive in denying such inspection. The same law that gave rise to the guardian also gave rise to that who will guard the guardians.