November 24, 2010
The spouses Turners are stockholders of Lorenzo Shipping Corp. When the Corp decided to amend its Articles to remove the stockholders’ pre-emptive rights to newly-issued shares of stock, the Turners voted against it.
Turners demanded the Corp to buy them out based on BOOK VALUE (equals total assets – liabilities / outstanding capital stock) which is P2.276 per share.
The Corp did not accept because it insisted MARKET VALUE which is P0.41 per share – the value before the action to remove the pre-emptive right was taken, and also the LISTED VALUE traded in the PSE.
There was a disagreement in the valuation of the shares. So an appraisal committee was formed pursuant to the Corp. Code. The latter favored the Turners. So the Turners demanded payment.
The Corp refused on the ground that the stockholders’ appraisal rights could only be paid when the corporation had UNRESTRICTED RETAINED EARNINGS (URE) to cover the fair value of the shares. (URE = profits from operations after deducting stockholders’ shares and capital stock distributions).
Turners filed to recover the value of their shareholdings plus damages against Lorenzo Shipping Corp.
RTC favored the Turners
CA favored Lorenzo Shipping
(1) Do the Turners have the right to demand the Fair Value of their share (i.e. right of appraisal)?
No. Because the corp has no unrestricted retained earnings at the time of the filing of Complaint.
Under Section 81 of CC, if there is a fundamental change in the AOI prejudicing the rights of stockholders, any stockholder who has voted against the proposed corp. action have the right to exercise right of appraisal. But if the fair value is not agreed, it shall be appraised by 3 disinterested persons.
Section 83 provides that payment must be sourced from the corporation’s unrestricted retained earnings.
Unrestricted Retained Earnings Ratio is the trust fund doctrine where the capital stock, corporation property and assets are held in trust preferably for the corporate creditors. The creditors can assume that the BOD will not use assets to purchase its own stock as long as a corp has outstanding debts and liabilities.
Is the petition of the Turners premature? Yes. Because the corporation has no (URE) retained earnings when the Turners commenced the case on 22 Jan 2001.
The Turners have a right of action, but no cause of action.
Essential Elements of a Cause of Action
- Existence of a legal right of the plaintiff;
- Correlative duty of the defendant to respect such right;
- An act or omission by such defendant violating the right of the plaintiff with a resulting injury or damage.
The subsequent existence of the URE will not cure the lack of cause of action. This is because the right of action can only spring from an existing cause of action.
Without a cause of action at filing, the case filed by the Turners is a groundless suit. It should be dismissed.
Ratio: The case should be dismissed because it was prematurely brought, and the public policy that there should be no needless haste in instituting actions.
What is the error of the court if it takes cognizance of a case that has no cause of action? Guilty of error of jurisdication or lack of jurisdiction (the power to hear and decide cases).
SC favored Lorenzo Shipping. Dismissed Turner’s appeal.