Fuller v.
Krogh The contention of the appellant that Krogh was not entitled to any
15 Wis. 2d 412 (1962)
FULLER, Appellant, v. KROGH, Respondent.
Supreme Court of Wisconsin.
November 30, 1961.
January 15, 1962.
*417 For the appellant there were briefs by Cohen & Parins of Green
Bay, and oral argument by Robert J. Parins and Steven I. Cohen.
For the respondent there was a brief by Davis, Soquet, Cherney &
Ross and Kaftan, Kaftan & Kaftan, all of Green Bay, and oral argument
by J. Robert Kaftan and Donald E. Soquet.
HALLOWS, J.
The appellant is satisfied with the trial court's findings on the
accounting issue excepting for the allowance of $4,000 for Krogh's
supervisory services which he contends was arrived at by
speculation. In making this finding, the trial court considered the
estimated 1,428 hours spent by Krogh (during part of this time he was
paid as an employee of Norcor), the nature of the work, and Fuller's
expectation that Krogh would be paid for such work. Henkelmann
testified supervisory work of this nature was worth $3.65 an hour.
Fuller testified Krogh put in a considerable amount of time in excess
of that which would have normally been put in by an owner or officer
of the corporation. True, there is no testimony of a $4,000 figure.
However, *418 the court, as trier of the facts, could have reasonably
found a substantially higher amount for Krogh's services. The
determination of $4,000 was not the result of conjecture or
speculation but a finding of reasonable value based on evidence.
compensation for his supervisory services because he was a director
and officer of Cormier is without merit. The services were not those
usually performed by a director or officer of this type of corporation,
nor was he under any duty or obligation as an officer or director to
perform them. The services were performed on the understanding
with Fuller that Krogh would be paid for them. The appellant's
contention would prevent a director or officer of a corporation from
contracting with that corporation to perform services for
compensation outside of the scope of his official duties. The cases
relied upon by the appellant are not applicable.
This disposition of the first cause of action controls the determination
of the second cause of action alleging the certificates received by
Krogh should be canceled as void because not fully paid for.
Certificates No. 17 for 84 shares and No. 23 for 50 shares were issued
to Krogh for cash and were fully paid. The fact Krogh owed Cormier
$12,500 did not prevent him from contributing to the capital of the
corporation. Fuller was in the same position. There was no
agreement Krogh and Fuller would pay their obligations to Cormier
instead of investing their money. Certificates Nos. 12, 13, and 22,
totaling 175 shares, were received in part payment of Krogh's claim
for materials, supplies, and labor he furnished the corporation. The
claim having been determined to be in excess of the amount of stock
and the amount of money received by Krogh, the consideration for
these shares was fully paid.
*419 The most-important issue on this appeal is whether Fuller had
pre-emptive rights to purchase stock previously authorized but
unissued and, if so, whether he had waived those rights. He seeks to
require Krogh, now the controlling stockholder, to cause the
corporation to offer Fuller sufficient shares of stock to equalize his
holdings with Krogh. The first argument of the appellant to attain this
result is based on a purported agreement he had with Krogh when
the corporation was organized to match Krogh dollar for dollar. The
trial court found no such contract existed. In its decision, the trial
court stated that if such an agreement existed, the plaintiff violated
and terminated it by failing to match the defendant's contributions.
Fuller admits the agreement was ambiguous but relies on the fact
that up to December, 1954, both he and Krogh had issued to
themselves 218 shares of stock, payments for which were
periodically made by each and equalized by April of 1955. However,
the equalization ends there.
After the issuance of the last of the 218 shares, Fuller and Krogh dealt
on a different basis. Circumstances had changed. When the
certificate for 84 shares was issued to Krogh for cash, only 25 shares
were issued to Fuller for cash. There was no matching of dollars. Nor
was there any matching of dollars when Krogh invested $5,000 for 50
shares. These transactions were fully known and understood by
Fuller. He was president at the time, signed the stock certificates, and
testified he did not match Krogh because he did not have the money.
The trial court's finding on this point is not against the great weight
and clear preponderance of the evidence and is sufficient to
determine the claim of Fuller, even if the existence of the agreement
were in doubt. If Fuller has any claim to equalize his stockholding with
that of Krogh, it must be found in his pre-emptive right as a
stockholder.
*420 A pre-emptive right of a shareholder in a corporation is
recognized so universally as to have become axiomatic in corporation
law. The doctrine was firmly established in this state by Luther v. C. J.
Luther Co. (1903), 118 Wis. 112, 94 N.W. 69, and Dunn v. Acme Auto
& Garage Co. (1918), 168 Wis. 128, 169 N.W. 297, and recognized at
least as early as 1876 in Dousman v. Wisconsin & Lake Superior
Mining & Smelting Co. (1876), 40 Wis. 418. Generally, the pre-
emptive right of a stockholder is his right to retain and maintain his
relative and proportionate voice and influence in the control and
management of the affairs of a corporation by purchasing an amount
of capital stock to be issued and sold by the corporation
proportionate to his then holdings before the stock can be sold to
others, whether they be outsiders or stockholders. Luther v. C. J.
Luther Co., supra; Hammer v. Cash (1920), 172 Wis. 185, 178 N.W.
465; 13 Am. Jur., Corporations, p. 309, sec. 186.
The right exists whether the stock issued represents an increase in
the authorized capitalization of the corporation or represents
previously authorized but unissued stock. Levy v. Sattler (1919), 169
Wis. 308, 172 N.W. 738; 11 Fletcher, Cyc. Corp. (perm. ed.), p. 287,
sec. 5135; Anno. 52 A. L. R. 220. On principle, the right also extends
to a reissue of stock once issued, purchased, and canceled by the
corporation so as to reduce its capitalization. See Dunn v. Acme Auto
& Garage Co., supra. In that case, it is also pointed out if the stock
purchased by the corporation had been carried upon its books as a
liability and treated as an asset, the pre-emptive right might not
attach, but the directors in disposing of such shares could only do so
in the honest exercise of their discretion and with the utmost good
faith for the benefit of all shareholders and not so as to give one
group of shareholders a benefit or advantage over another. In Dunn,
reference to treasury stock and to stock *421 treated as an asset is
misleading. Effective in 1953, our corporation laws, after extensive
study, were revised and modernized as Wisconsin Business
Corporation Law. Treasury stock is now defined by sec. 180.02 (8),
Stats.,[1] to mean shares which have been reacquired by the
corporation and have not been canceled and returned to the status
of authorized but unissued shares, and as issued shares but not
outstanding shares. Sec. 180.02 (10)[2] defines "Stated capital." It is
not contemplated that its own shares are to be carried on the
corporation's balance sheet or books as assets. For the treatment of
treasury shares from an accounting standpoint to reflect relationship
to stated capital, see Luce, The Wisconsin Business Corporation Law,
36 Marquette Law Review (1952), 1. The pre-emptive right exists
where the corporation acquires its stock and cancels or returns it to
the status of authorized but unissued shares, but does not exist as to
treasury shares which are considered issued but not outstanding. The
pre-emptive right exists only upon the issuance of shares of stock,
which is not to be confused with the certificate evidencing the
ownership of shares of stock.
*422 Dunn extends the purpose of pre-emptive rights to the
protection of the shareholder's financial interests, i.e., his
proportionate interest in the net worth of the corporation. The pre-
emptive right is regarded as inherent in the stockholder's status, is
appurtenant to the stock, belongs to the owner, and its existence is
not dependent on the articles of incorporation. Estate of Merrill
(1928), 196 Wis. 351, 220 N.W. 215; Steven v. Hale-Haas Corp. (1946),
249 Wis. 205, 23 N. W. (2d) 620, 23 N. W. (2d) 768. Thus, pre-emptive
rights exist for the purpose of protecting the shareholder's interest in
his control or proportionate voting rights and in his proportionate
investment and interest in the net worth of the corporation. For the
nature of rights and accompanying problems, see Anno. 52 A. L. R.
220; Anno. 138 A. L. R. 526; 11 Fletcher, Cyc. Corp. (perm. ed.), p. 279,
sec. 5135; Drinker, The Pre-emptive Right of Shareholders to
Subscribe to New Shares, 43 Harvard Law Review (1930), 586.
The pre-emptive right of a shareholder, however, has well-
recognized limitations. The articles of incorporation may limit or deny
the right. Sec. 180.21, Stats. No limitation or denial appears in
Cormier's articles. Pre-emptive rights are often not preserved in large
corporations whose stock is held by the public generally and are
seldom denied or restricted in small or closely held companies. The
right, it has been said, is subject to the general restriction that its
exercise must be consistent with the objective which the stock
increase is legally designed to accomplish. 11 Fletcher, Cyc. Corp.
(perm. ed.), p. 293, sec. 5136, quoted with approval in Milwaukee
Sanitarium v. Lynch (1941), 238 Wis. 628, 300 N.W. 760. When the
new stock is to be issued for money needed for corporation purposes,
the pre-emptive rights are generally recognized. However, when new
stock is to be issued for property or for services, the *423 authorities
are in disagreement. Fletcher takes the view in such cases that the
pre-emptive right commonly is not recognized or is recognized to a
limited extent only. Perhaps the leading case denying pre-emptive
right to stock exchanged for property is Stokes v. Continental Trust
Co. (1906), 186 N.Y. 285, 78 N.E. 1090. See also Morawetz, The Pre-
emptive Right of Shareholders, 42 Harvard Law Review (1928), 186,
197. For the view that pre-emptive rights should not be denied where
stock is issued in exchange for property, see Frey, Shareholders' Pre-
emptive Rights, 38 Yale Law Journal (1929), 563, 579; Drinker, 43
Harvard Law Review (1930), 586, 604.
On principle, it would seem the pre-emptive right of a shareholder
should not be denied when property is to be taken as consideration
for the stock excepting in those peculiar circumstances when the
corporation has great need for the particular property, and the
issuance of the stock, therefore, is the only practical and feasible
method by which the corporation can acquire it for the best interest
of all the stockholders. On this reasoning, the court in Milwaukee
Sanitarium v. Lynch, supra, said stock, free from pre-emptive rights,
could be sold and given in exchange for services of an assistant
medical officer of the sanitarium to procure such services upon which
its success depended. On the grounds of practical necessity only can
such exception or limitation be founded. However, in the Lynch Case,
the determining factor for the decision was the fact that the articles
had been validly amended denying the pre-emptive right to the
shareholder in such case under certain conditions which were met.
Krogh argues Milwaukee Sanitarium v. Lynch, supra, applies and
Fuller had no pre-emptive rights because the 175 shares were issued
for property and services desperately needed by Cormier. We find no
agreement to exchange *424 property or services for stock or that
Cormier could only secure such material and services for Cormier on
the basis of stock. The understanding was that Krogh would not press
for payment of his claim. Later he was willing to accept stock in lieu
of cash when Cormier was unable to pay. The reasoning of the Lynch
Case does not require the denial of pre-emptive rights here where
stock was issued in payment of a pre-existing debt. In the cases of
stock issued in payment of a pre-existing debt, we do not see any
reason why pre-emptive rights should be denied. A debt calls for
payment in money which the recognition and exercise of the pre-
emptive rights would furnish. See Hodge v. Cuba Co. (1948), 142 N. J.
Eq. 340, 60 Atl. (2d) 88. We, therefore, hold that Fuller had pre-
emptive rights not only when Krogh was issued stock for money but
also for his claim.
The question now is whether Fuller waived those rights. The
appellant argues he did not because the directors of Cormier did not
offer shares of stock to him and, therefore, he had no opportunity to
purchase his proportionate share. A shareholder having pre-emptive
rights is entitled to the opportunity to purchase his proportionate
share. In cases where the shareholders do not know or have notice
of the intended issue of stock, such opportunity must be afforded by
notice and by fixing a reasonable time within which the shareholders
may exercise such right. The cases cited by the appellant for the
proposition that directors of corporations must first offer shares of
stock to shareholders apply in principle but not in mechanics to the
facts of this case. At the time the stock was issued, Fuller and his wife
constituted the majority of the board of directors and Fuller was
president. He signed the certificates. He knew of each transaction for
the issuance of stock and the reason therefor. As a director and
president, he had as much duty as Krogh, if not more, to go through
the formality, if required, of *425 offering the stock to himself as a
stockholder. He was aware of his pre-emptive rights and of the
intended issues of stock to Krogh; and under the circumstances he
and Krogh dealt with each other and with the corporation, he had
notice and the opportunity to exercise his pre-emptive rights, which
he did not within any reasonable time. We can only conclude he
waived his rights. For cases sustaining waivers of pre-emptive rights,
see Anno. 138 A. L. R. 526, 529.
It is contended Fuller intended to equalize his stockholdings as soon
as Krogh furnished an accounting, and claims both he and Krogh
understood he need not equalize the stock until the accounting was
made. We do not find sufficient evidence in the record to
substantiate such a theory of Fuller's nonaction. Neither does it
explain why an accounting was necessary in order to exercise his
rights when Krogh invested cash.
A more-serious contention of the appellant is that Krogh gained
control of the corporation through fraud by his failure to disclose the
true amount of his claim against the corporation. The trial court
found the charge of fraud was not sustained. We have carefully
analyzed the facts in the record and the trial court's finding is not
against the great weight and clear preponderance of the evidence
nor do we believe it could reasonably come to the opposite
determination. This is not a case of Krogh's submitting or billing the
corporation for seven different amounts at various times. Krogh's
bookkeeping leaves much to be desired, but so does the arrangement
under which he worked. By agreement, he was to receive for his
materials and labor whatever he would be willing to sell them for to
others. In furnishing labor and material, he was dealing with two of
his own companies. Much of the confusion in the evidence and the
arguments predicated upon it arise from different theories or
methods of how Krogh was to figure his claim.
*426 The first statement of the amount owing Krogh was prepared
both by Fuller and Krogh to obtain the loan from the Kellogg-Citizens
National Bank. Some later statements were incomplete and did not
include his markup. Other statements, it is true, contained some
errors and mistakes. In 1956, Fuller caused an audit of the books to
be made. The auditors reported the records were incomplete with
reference to the shares of stock issued to Krogh. Krogh, then, in the
spring of 1957, presented a detailed list of materials furnished at cost
and the amount of labor paid by him. This statement included a
supervisory 15 per cent override on the entire cost of the building.
Fuller admitted at the trial that lists, corresponding in many respects
to this list, had been submitted to him in 1955 and were in his
possession, but he failed to produce them at the trial, saying he was
unable to find them. The auditors did not know of the existence of
such lists at the time of their audit. Fuller claims he submitted the
lists to the auditors. The trial court found he did not. The fact remains
Krogh did not receive stock and cash payments in excess of the
amount of his claim as determined by the trial court.
Because of the varying amounts of Krogh's claim, Fuller argues he was
deprived of a fair opportunity to equal Krogh's stock investment. We
find no merit in this assertion. When the certificates for 75 shares
were issued in January, 1955, they were on account. At that time,
nothing prevented Fuller from exercising his pre-emptive rights and
investing $7,500 in the corporation. At that time, Fuller knew
approximately the amount of Krogh's claim because he had helped
to prepare it for the bank statement as the corporation was in
financial difficulties and needed the money. For like reasons, Fuller
waived his pre-emptive rights to match Fuller's investment when he
received 100 shares. There is testimony that when Krogh received the
100 shares of stock, *427 they were issued in settlement of Krogh's
account. But even if Fuller's contention were true that the stock was
not in extinguishment of the claim, he still was not misled and should
not have signed the certificates or should have exercised his pre-
emptive right within a reasonable time. The cases cited by the
appellant on the question of fraud and deceit are not applicable to
the facts here presented.
The appellant insists he relied on Krogh's statements at first and then
became suspicious and resisted the issuance of the stock and his
failure to exercise his pre-emptive rights was caused by Krogh's false
statements and Krogh failed to act in good faith and in fairness or
make a full disclosure of all facts. We do not find support for this
contention in the record.
The appellant in his last argument insists a court of equity should aid
him in securing an equal stockholding with Krogh because Krogh's
action made his prior performance impossible. This argument is
partly based on the purported agreement to match Krogh dollar for
dollar, and partly on the ground he should now be allowed to exercise
his pre-emptive rights. When Cormier was tottering on the brink of
bankruptcy, Krogh took the financial risk by investing money and by
taking stock for his claim. Fuller had an opportunity to exercise his
pre-emptive rights but did not. Cormier is no longer a financial risk
and circumstances have changed. We find no equitable grounds in
the facts upon which a court of equity should now allow Fuller to
exercise his pre-emptive rights.
The appellant suggests Moha v. Hudson Boxing Club (1916), 164 Wis.
425, 160 N.W. 266, is closely in point. There, the plaintiff, a
professional boxer, agreed to box 10 rounds as an exhibition under
the revised Marquis of Queensberry rules as interpreted by the
referee. In the middle of the second round, in violation of the rules,
he struck *428 a blow below the belt which disabled his opponent
and thus, by his own act, made substantial performance impossible.
The court denied recovery to the plaintiff for his services. Appellant
submits Krogh's acts amount to a low blow. We do not agree. More
apropos to the facts is the childhood story of The Little Red Hen and
The Grain of Wheat.

By the Court.Judgment affirmed.

GORDON, J., took no part.

NOTES

[1] "(8) `Treasury shares' means shares of a corporation which have

been issued, have been subsequently acquired by and belong to the
corporation, and have not, either by reason of the acquisition or
otherwise, been canceled or restored to the status of authorized but
unissued shares. Treasury shares shall be deemed to be `issued'
shares, but not `outstanding' shares."

[2] "(10) `Stated capital' means, at any particular time, the sum of (a)
the par value of all shares of the corporation having a par value that
have been issued, (b) the amount of the consideration received by
the corporation for all shares of the corporation without par value
that have been issued, except such part of the consideration therefor
as may have been allocated to capital surplus in a manner permitted
by law, and (c) such amounts not included in (a) and (b) of this
subsection as have been transferred to stated capital of the
corporation, whether upon the issue of shares as a share dividend or
otherwise, minus all reductions from such sum as have been effected
in a manner permitted by law."
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-56655 July 25, 1983
DATU TAGORANAO BENITO, petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION and JAMIATUL
PHILIPPINE-AL ISLAMIA, INC., respondents.
The Solicitor General for respondent.
Tacod D. Macaraya for private respondent.
RELOVA, J.:
On February 6, 1959, the Articles of Incorporation of respondent
Jamiatul Philippine-Al Islamia, Inc. (originally Kamilol Islam
Institute, Inc.) were filed with the Securities and Exchange
Commission (SEC) and were approved on December 14, 1962.
The corporation had an authorized capital stock of P200,000.00
divided into 20,000 shares at a par value of P10.00 each. Of the
authorized capital stock, 8,058 shares worth P80,580.00 were
subscribed and fully paid for. Herein petitioner Datu Tagoranao
Benito subscribed to 460 shares worth P4,600.00.
On October 28, 1975, the respondent corporation filed a certificate
of increase of its capital stock from P200,000.00 to P1,000,000.00.
It was shown in said certificate that P191,560.00 worth of shares
were represented in the stockholders' meeting held on November
25, 1975 at which time the increase was approved. Thus,
P110,980.00 worth of shares were subsequently issued by the
corporation from the unissued portion of the authorized capital
stock of P200,000.00. Of the increased capital stock of
P1,000,000.00, P160,000.00 worth of shares were subscribed by
Mrs. Fatima A. Ramos, Mrs. Tarhata A. Lucman and Mrs. Moki-in
Alonto.
On November 18, 1976, petitioner Datu Tagoranao filed with
respondent Securities and Exchange Commission a petition
alleging that the additional issue (worth P110,980.00) of previously
subscribed shares of the corporation was made in violation of his
pre-emptive right to said additional issue and that the increase in
the authorized capital stock of the corporation from P200,000.00 to
P1,000,000.00 was illegal considering that the stockholders of
record were not notified of the meeting wherein the proposed
increase was in the agenda. Petitioner prayed that the additional
issue of shares of previously authorized capital stock as well as the
shares issued from the increase in capital stock of respondent
corporation be cancelled; that the secretary of respondent
corporation be ordered to register the 2,540 shares acquired by
him (petitioner) from Domocao Alonto and Moki-in Alonto; and that
the corporation be ordered to render an accounting of funds to the
stockholders.
In their answer, respondents denied the material allegations of the
petition and, by way of special defense, claimed that petitioner has
no cause of action and that the stock certificates covering the
shares alleged to have been sold to petitioner were only given to
him as collateral for the loan of Domocao Alonto and Moki-in
Alonto.
On July 11, 1980, Hearing Officer Ledor E. Macalalag of the
Securities and Exchange Commission, after due proceedings,
rendered a decision which was affirmed by the Commission En
Banc during its executive session held on March 9, 1981, as
follows:
RESOLVED, That the decision of the hearing
Officer in SEC Case No. 1392, dated July 11, 1980,
the dispositive portion of which reads as follows:
WHEREFORE, in view of the
foregoing considerations, this
Commission hereby rules: (a) That
the issuance by the corporation of
its unissued shares was validly
made and was not subject to the
pre-emptive rights of stockholders,
including the petitioner, herein; (b)
That there is no sufficient legal
basis to set aside the certificate
issued by this Commission
authorizing the increase in capital
stock of respondent corporation
from P200,000.00 to
Pl,000,000.00. Considering,
however, that petitioner has not
waived his pre-emptive right to
subscribe to the increased
capitalization, respondent
corporation is hereby directed to
allow petitioner to subscribe
thereto, at par value, proportionate
to his present shareholdings,
adding thereto the 2,540 shares
transferred to him by Mr. Domocao
Alonto and Mrs. Moki-in Alonto; (c)
To direct as it hereby directs, the
respondent corporation to
immediately cancel Certificates of
Stock Nos. 216, 223, 302, all in the
name of Domocao Alonto, and
Certificate of Stock No. 217, in the
name of Moki-in Alonto, upon their
presentation by the petitioner and
to issue new certificates
corresponding thereto in the name
of petitioner herein; (d) To direct, as
it hereby directs, respondent
corporation to religiously comply
with the requirement of filing
annual financial statements under
pain of a more drastic action; (e) To
declare, as it hereby declares, as
irregular, the election of the nine (9)
members of the Board of Trustees
of respondent corporation on
October 30, 1976, for which
reason, respondent corporation is
hereby ordered to call a
stockholders' meeting to elect a
new set of five (5) members of the
Board of Trustees, unless in the
meantime the said number is
accordingly increased and the
requirement of law to make such
increase effective have been
complied with. It is understood that
the said stockholders' meeting be
called within thirty (30) days from
the time petitioner shall have
subscribed to the increased
capitalization.'
be, as the same is hereby AFFIRMED, the same
being in accordance with law and the facts of the
case. (pp. 28-29, Reno)
Hence, this petition for review by way of appeal from the
aforementioned decision of the Securities and Exchange
Commission, petitioner contending that (1) the issuance of the
11,098 shares without the consent of the stockholders or of the
Board of Directors, and in the absence of consideration, is null and
void; (2) the increase in the authorized capital stock from
P200,000.00 to P1,000,000.00 without the consent or express
waiver of the stockholders, is null and void; (3) he is entitled to
attorneys' fees, damages and expenses of litigation in filing this suit
against the directors of respondent corporation.
We are not persuaded. As aptly stated by the Securities and
Exchange Commission in its decision:
xxx xxx xxx
... the questioned issuance of the unsubscribed
portion of the capital stock worth P110,980.00 is '
not invalid even if assuming that it was made
without notice to the stockholders as claimed by
petitioner. The power to issue shares of stocks in a
corporation is lodged in the board of directors and
no stockholders' meeting is necessary to consider
it because additional issuance of shares of stocks
does not need approval of the stockholders. The
by-laws of the corporation itself states that 'the
Board of Trustees shall, in accordance with law,
provide for the issue and transfer of shares of stock
of the Institute and shall prescribe the form of the
certificate of stock of the Institute. (Art. V, Sec. 1).
Petitioner bewails the fact that in view of the lack of
notice to him of such subsequent issuance, he was
not able to exercise his right of pre-emption over
the unissued shares. However, the general rule is
that pre-emptive right is recognized only with
respect to new issue of shares, and not with
respect to additional issues of originally authorized
shares. This is on the theory that when a
corporation at its inception offers its first shares, it
is presumed to have offered all of those which it is
authorized to issue. An original subscriber is
deemed to have taken his shares knowing that they
form a definite proportionate part of the whole
number of authorized shares. When the shares left
unsubscribed are later re-offered, he cannot
therefore claim a dilution of interest. (Campos and
Lopez-Campos Selected Notes and Cases on
Corporation Law, p. 855, citing Yasik V. Wachtel 25
Del. Ch. 247,17A. 2d 308 (1941). (pp. 33-34, Rollo)
With respect to the claim that the increase in the authorized capital
stock was without the consent, expressed or implied, of the
stockholders, it was the finding of the Securities and Exchange
Commission that a stockholders' meeting was held on November
25,1975, presided over by Mr. Ahmad Domocao Alonto, Chairman
of the Board of Trustees and, among the many items taken up then
were the change of name of the corporation from Kamilol Islam
Institute Inc. to Jamiatul Philippine-Al Islamia, Inc., the increase of
its capital stock from P200,000.00 to P1,000,000.00, and the
increase of the number of its Board of Trustees from five to nine.
"Despite the insistence of petitioner, this Commission is inclined to
believe that there was a stockholders' meeting on November 25,
1975 which approved the increase. The petitioner had not
sufficiently overcome the evidence of respondents that such
meeting was in fact held. What petitioner successfully proved,
however, was the fact that he was not notified of said meeting and
that he never attended the same as he was out of the country at
the time. The documentary evidence of petitioner conclusively
proved that he was attending the Mecca pilgrimage when the
meeting was held on November 25, 1975. (Exhs. 'Q', 'Q-14', 'R', 'S'
and 'S-l'). While petitioner doubts the authenticity of the alleged
minutes of the proceedings (Exh. '4'), the Commission notes with
significance that said minutes contain numerous details of various
items taken up therein that would negate any claim that it was not
authentic. Another thing that petitioner was able to disprove was
the allegation in the certificate of increase (Exh. 'E-l') that all
stockholders who did not subscribe to the increase of capital stock
have waived their pre-emptive right to do so. As far as the petitioner
is concerned, he had not waived his pre-emptive right to subscribe
as he could not have done so for the reason that he was not
present at the meeting and had not executed a waiver, thereof. Not
having waived such right and for reasons of equity, he may still be
allowed to subscribe to the increased capital stock proportionate to
his present shareholdings." (pp. 36-37, Rollo)

Well-settled is the rule that the findings of facts of administrative

bodies will not be interfered with by the courts in the absence of
grave abuse of discretion on the part of said agencies, or unless
the aforementioned findings are not supported by substantial
evidence. (Gokongwei, Jr. vs. SEC, 97 SCRA 78). In a long string
of cases, the Supreme Court has consistently adhered to the rule
that decisions of administrative officers are not to be disturbed by
the courts except when the former have acted without or in excess
of their jurisdiction or with grave abuse of discretion (Sichangco vs.
Board of Commissioners of Immigration, 94 SCRA 61). Thus, in
the case of Deluao vs. Casteel ( L-21906, Dec. 24, 1968, 26 SCRA
475, 496, citing Pajo vs. Ago, et al., L-15414, June 30, 1960)
and Genitano vs. Secretary of Agriculture and Natural Resources,
et al. (L-2ll67, March 31, 1966), the Supreme Court held that:

... Findings of fact by an administrative board or

official, following a hearing, are binding upon the
courts and win not be disturbed except where the
board or official has gone beyond his statutory
authority, exercised unconstitutional powers or
clearly acted arbitrarily and without regard to his
duty or with grave abuse of discretion. ...

ACCORDINGLY, this petition is hereby dismissed for lack of merit.

SO ORDERED.

Plana, Escolin and Gutierrez, Jr., JJ., concur.

Teehankee, J., concurs in the result.

Melencio-Herrera and Vasquez, JJ., are on leave.

Republic of the Philippines judgment of the trial court on the contempt charge against the private respondents in G.R.
No. SP-14846-R, entitled "Luciano Maggay, et al. v. Hon. Delfin Vir Sunga, et al."
SUPREME COURT
Manila
As gathered from the records, the facts of these cases are as
follows:
EN BANC
Naga Telephone Company, Inc. was organized in 1954, the
authorized capital was P100,000.00. In 1974 Naga Telephone Co.,
Inc. (Natelco for short) decided to increase its authorized capital to
G.R. No. L-60502 July 16, 1991 P3,000,000.00. As required by the Public Service Act, Natelco filed
an application for the approval of the increased authorized capital
PEDRO LOPEZ DEE, petitioner, with the then Board of Communications under BOC Case No. 74-
vs. 84. On January 8, 1975, a decision was rendered in said case,
SECURITIES AND EXCHANGE COMMISSION, HEARING approving the said application subject to certain conditions, among
OFFICER EMMANUEL SISON, NAGA TELEPHONE CO., INC., which was:
COMMUNICATION SERVICES, INC., LUCIANO MAGGAY,
AUGUSTO FEDERIS, NILDA RAMOS, FELIPA JAVALERA, 3. That the issuance of the shares of stocks will be
DESIDERIO SAAVEDRA, respondents. for a period of one year from the date hereof, "after
which no further issues will be made without
G.R. No. L-63922 July 16, 1991 previous authority from this Board."

JUSTINO DE JESUS, SR., PEDRO LOPEZ DEE, JULIO LOPEZ Pursuant to the approval given by the then Board of
DEE, and VICENTE TORDILLA, JR., petitioners, Communications, Natelco filed its Amended Articles of
vs. Incorporation with the Securities and Exchange Commission (SEC
INTERMEDIATE APPELLATE COURT, LUCIANO MAGGAY, for short). When the amended articles were filed with the SEC, the
NILDA I. RAMOS, DESIDERIO SAAVEDRA, AUGUSTO original authorized capital of P100,000.00 was already paid. Of the
FEDERIS, ERNESTO MIGUEL, COMMUNICATION SERVICES, increased capital of P2,900,000.00 the subscribers subscribed to
INC., and NAGA TELEPHONE COMPANY, INC., respondents. P580,000.00 of which P145,000 was fully paid.

The capital stock of Natelco was divided into 213,000 common

shares and 87,000 preferred shares, both at a par value of P10.00
PARAS, J.:p per shares.

These are petitions for certiorari with preliminary injunction and/or
restraining order which seek to annul and set aside in: (1) G.R. No.
60502, the order * of the hearing officer dated May 4, 1982, setting the date for the
election of the directors to be held by the stockholders on May 22, 1982, in SEC Case No.
1748 entitled "Pedro Lopez Dee v. Naga Telephone Co., Inc. et al."; and (2) G.R. No. 63922,
the decision ** of the Intermediate Appellate Court dated April 14, 1983 which annulled the
On April 12, 1977, Natelco entered into a contract with
Communication Services, Inc. (CSI for short) for the "manufacture,
supply, delivery and installation" of telephone equipment. In
accordance with this contract, Natelco issued 24,000 shares of
common stocks to CSI on the same date as part of the
downpayment. On May 5, 1979, another 12,000 shares of common
stocks were issued to CSI. In both instances, no prior authorization
from the Board of Communications, now the National
Telecommunications Commission, was secured pursuant to the
conditions imposed by the decision in BOC Case NO. 74-84
aforecited (Rollo, Vol. III, Memorandum for private respondent
Natelco, pp. 814-816).
On May 19, 1979, the stockholders of the Natelco held their annual
stockholders' meeting to elect their seven directors to their Board
of Directors, for the year 1979-1980. In this election Pedro Lopez
Dee (Dee for short) was unseated as Chairman of the Board and
President of the Corporation, but was elected as one of the
directors, together with his wife, Amelia Lopez Dee (Rollo, Vol. III,
Memorandum for private respondents, p. 985; p. 2).
In the election CSI was able to gain control of Natelco when the
latter's legal counsel, Atty. Luciano Maggay (Maggay for short) won
a seat in the Board with the help of CSI. In the reorganization Atty.
Maggay became president (Ibid., Memorandum for Private
Respondent Natelco, p. 811).
The following were elected in the May 19, 1979 election: Atty.
Luciano Maggay, Mr. Augusto Federis, Mrs. Nilda Ramos, Ms.
Felipa Javalera, Mr. Justino de Jesus, Sr., Mr. Pedro Lopez Dee
and Mrs Amelia C. Lopez Dee. The last three named directors
never attended the meetings of the Maggay Board. The members
of the Maggay Board who attended its meetings were Maggay.
Federis, Ramos and Javalera. The last two were and are CSI
representatives (Ibid., p. 812).
Petitioner Dee having been unseated in the election, filed a petition
in the SEC docketed as SEC Case No. 1748, questioning the
validity of the elections of May 19, 1979 upon the main ground that
there was no valid list of stockholders through which the right to
vote could be determined (Rollo, Vol. I, pp. 254-262-A). As prayed
for in the petition (Ibid., p. 262), a restraining order was issued by
the SEC placing petitioner and the other officers of the 1978-1979
Natelco Board in hold-over capacity (Rollo, Vol. II, Reply, p. 667).
The SEC restraining order was elevated to the Supreme Court in
G.R. No. 50885 where the enforcement of the SEC restraining
order was restrained. Private respondents therefore, replaced the
hold-over officers (Rollo, Vol. 11, p. 897).
During the tenure of the Maggay Board, from June 22, 1979 to
March 10, 1980, it did not reform the contract of April 12, 1977, and
entered into another contract with CSI for the supply and
installation of additional equipment but also issued to CSI 113,800
shares of common stock (Ibid., p. 812).
The shares of common stock issued to CSI are as follows:
NO. OF SHARES DATE ISSUED
24,000 shares April 12, 1977
12,000 shares May 5, 1979
28,000 shares October 2, 1979
28,500 shares November 5, 1979
20,000 shares November 14, 1979
20,000 shares January 7, 1980
16,500 shares January 26, 1980
149,000 shares (Ibid., pp. 816-817).
Subsequently, the Supreme Court dismissed the petition in G.R.
No. 50885 upon the ground that the same was premature and the
Commission should be allowed to conduct its hearing on the
controversy. The dismissal of the petition resulted in the unseating
of the Maggay group from the board of directors of Natelco in a
"hold-over" capacity (Rollo, Vol. II, p. 533).
In the course of the proceedings in SEC Case No. 1748,
respondent hearing officer issued an order on June 23, 1981,
declaring: (1) that CSI is a stockholder of Natelco and, therefore,
entitled to vote; (2) that unexplained 16,858 shares of Natelco
appear to have been issued in excess to CSI which should not be
allowed to vote; (3) that 82 shareholders with their corresponding
number of shares shall be allowed to vote; and (4) consequently,
ordering the holding of special stockholder' meeting to elect the
new members of the Board of Directors for Natelco based on the
findings made in the order as to who are entitled to vote (Rollo, Vol.
1, pp. 288-299).
From the foregoing order dated June 23, 1981, petitioner Dee filed
a petition for certiorari/appeal with the SEC en banc. The
petition/appeal was docketed as SEC-AC NO. 036. Thereafter, the
Commission en banc rendered a decision on April 5, 1982, the
dispositive part of which leads:
Now therefore, the Commission en banc resolves
to sustain the order of the Hearing Officer; to
dismiss the petition/appeal for lack of merit; and
order new elections as the Hearing Officer shall set
after consultations with Natelco officers. For the
protection of minority stockholders and in the
interest of fair play and justice, the Hearing Officer
shall order the formation of a special committee of
three, one from the respondents (other than
Natelco), one from petitioner, and the Hearing
Officer as Chairman to supervise the election.
It remains to state that the Commission en
banc cannot pass upon motions belatedly filed by
petitioner and respondent Natelco to introduce
newly discovered evidence any such evidence
may be introduced at hearings on the merits of
SEC Case No. 1748.
SO ORDERED. (Rollo, Vol. I, p. 24).
On April 21, 1982, petitioner filed a motion for reconsideration
(Rollo, Vol. I, pp. 25-30). Likewise, private respondent Natelco filed
its motion for reconsideration dated April 21, 1982 (Ibid., pp. 32-
51).
Pending resolution of the motions for reconsideration, on May 4,
1982, respondent healing officer without waiting for the decision of
the commission en banc to become final and executory rendered
an order stating that the election for directors would be held on May
22, 1982 (Ibid., pp. 300-301).
On May 20, 1982, the SEC en banc denied the motions for
reconsideration (Rollo, Vol. II, pp. 763-765).
Meanwhile on May 20, 1982 (G.R. No. 63922), petitioner Antonio
Villasenor (as plaintiff) filed Civil Case No. 1507 with the Court of
First Instance of Camarines Sur, Naga City, against private
respondents and co-petitioners, de Jesus, Tordilla and the Dee's
all defendants therein, which was raffled to Branch I, presided over
by Judge Delfin Vir Sunga (Rollo, G.R. No. 63922; pp. 25-30).
Villasenor claimed that he was an assignee of an option to
repurchase 36,000 shares of common stocks of Natelco under a
Deed of Assignment executed in his favor (Rollo, p. 31). The
defendants therein (now private respondents), principally the
Maggay group, allegedly refused to allow the repurchase of said
stocks when petitioner Villasenor offered to defendant CSI the
repurchase of said stocks by tendering payment of its price (Rollo,
p. 26 and p. 78). The complaint therefore, prayed for the allowance
to repurchase the aforesaid stocks and that the holding of the May
22, 1982 election of directors and officers of Natelco be enjoined
(Rollo, pp. 28-29).
A restraining order dated May 21, 1982 was issued by the lower 4. Treasurer Felipa Javalera
court commanding desistance from the scheduled election until
further orders (Rollo, p. 32). 5. Auditor Daniel Ilano

Nevertheless, on May 22, 1982, as scheduled, the controlling (Rollo, Vol. 1, pp. 302-303)
majority of the stockholders of the Natelco defied the restraining
order, and proceeded with the elections, under the supervision of Despite service of the order of May 25, 1982, the Lopez Dee group
the SEC representatives (Rollo, Vol. III, p. 985); p. 10; G.R. No. headed by Messrs. Justino De Jesus and Julio Lopez Dee kept
60502). insisting no elections were held and refused to vacate their
positions (Rollo, Vol. III, p. 985; p. 11).
On May 25, 1982, the SEC recognized the fact that elections were
duly held, and proclaimed that the following are the "duly elected On May 28, 1982, the SEC issued another order directing the hold-
directors" of the Natelco for the term 1982-1983: over directors and officers to turn over their respective posts to the
newly elected directors and officers and directing the Sheriff of
1. Felipa T. Javalera Naga City, with the assistance of PC and INP of Naga City, and
other law enforcement agencies of the City or of the Province of
2. Nilda I. Ramos Camarines Sur, to enforce the aforesaid order (Rollo, Vol. 11, pp.
577-578).
3. Luciano Maggay
On May 29, 1982, the Sheriff of Naga City, assisted by law
4. Augusto Federis enforcement agencies, installed the newly elected directors and
officers of the Natelco, and the hold-over officers peacefully
5. Daniel J. Ilano vacated their respective offices and turned-over their functions to
the new officers (Rollo, Vol. III, p. 985; pp. 12-13).
6. Nelin J. Ilano Sr.
On June 2, 1982, a charge for contempt was filed by petitioner
Villasenor alleging that private respondents have been claiming in
7. Ernesto A. Miguel
press conferences and over the radio airlanes that they actually
held and conducted elections on May 22, 1982 in the City of Naga
And, the following are the recognized officers to wit: and that they have a new set of officers, and that such acts of
herein private respondents constitute contempt of court (G.R.
1. President Luciano Maggay 63922; Rollo, pp. 35-37).

2. Vice-President Nilda I. Ramos On September 7, 1982, the lower court rendered judgment on the
contempt charge, the dispositive portion of which reads:
3. Secretary Desiderio Saavedra
WHEREFORE, judgment is hereby rendered:
 1. Declaring respondents, CSI Nilda Ramos,
Luciano Maggay, Desiderio Saavedra, Augusto
Federis and Ernesto Miguel, guilty of contempt of
court, and accordingly punished with imprisonment
of six (6) months and to pay fine of P1,000.00 each;
and
2. Ordering respondents, CSI Nilda Ramos,
Luciano Maggay, Desiderio Saavedra, Augusto
Federis and Ernesto Miguel, and those now
occupying the positions of directors and officers of
NATELCO to vacate their respective positions
therein, and ordering them to reinstate the hold-
over directors and officers of NATELCO, such as
Pedro Lopez Dee as President, Justino de Jesus,
Sr., as Vice President, Julio Lopez Dee as
Treasurer and Vicente Tordilla, Jr. as Secretary,
and others referred to as hold-over directors and
officers of NATELCO in the order dated May 28,
1982 of SEC Hearing Officer Emmanuel Sison, in
SEC Case No. 1748 (Exh. 6), by way of
RESTITUTION, and consequently, ordering said
respondents to turn over all records, property and
assets of NATELCO to said hold-over directors and
officers. (Ibid., Rollo, p. 49).
The trial judge issued an order dated September 10, 1982 directing
the respondents in the contempt charge to "comply strictly, under
pain of being subjected to imprisonment until they do so" (Ibid., p.
50). The order also commanded the Deputy Provincial Sheriff, with
the aid of the PC Provincial Commander of Camarines Sur and the
INP Station Commander of Naga City to "physically remove or oust
from the offices or positions of directors and officers of NATELCO,
the aforesaid respondents (herein private respondents) . . . and to
reinstate and maintain, the hold-over directors and officers of
NATELCO referred to in the order dated May 28, 1982 of SEC
Hearing Officer Emmanuel Sison." (Ibid.).
Private respondents filed on September 17, 1982, a petition
for certiorari and prohibition with preliminary injunction or
restraining order against the CFI Judge of Camarines Sur, Naga
City and herein petitioners, with the then Intermediate Appellate
Court which issued a resolution ordering herein petitioners to
comment on the petition, which was complied with, and at the same
time temporarily refrained from implementing and/or enforcing the
questioned judgment and order of the lower court (Rollo, p. 77),
Decision of CA, p. 2).
On April 14, 1983, the then Intermediate Appellate Court, rendered
a decision, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered as
follows:
1. Annuling the judgment dated September 7, 1982
rendered by respondent judge on the contempt
charge, and his order dated September 10, 1982,
implementing said judgment;
2. Ordering the "hold-over" directors and officers of
NATELCO to vacate their respective offices;
3. Directing respondents to restore or re-establish
petitioners (private respondents in this case) who
were ejected on May 22, 1982 to their respective
offices in the NATELCO, . . .;
4. Prohibiting whoever may be the successor of
respondent Judge from interfering with the
proceedings of the Securities and Exchange
Commission in SE-CAC No. 036;
xxx xxx xxx
(Rollo, p. 88).
The order of re-implementation was issued, and, finally, the
Maggay group has been restored as the officers of the Natelco
(Rollo, G.R. No. 60502, p. 985; p. 37).
Hence, these petitions involve the same parties and practically the
same issues. Consequently, in the resolution of the Court En
Banc dated August 23, 1983, G.R. No. 63922 was consolidated
with G.R. No. 60502.
In G.R. No. 60502 In a resolution issued by the Court En
Banc dated March 22, 1983, the Court gave due course to the
petition and required the parties to submit their respective
memoranda (Rollo, Resolution, p. 638-A; Vol. II).
In G.R. No. 60502
The main issues in this case are:
(1) Whether or not the Securities and Exchange Commission has
the power and jurisdiction to declare null and void shares of stock
issued by NATELCO to CSI for violation of Sec. 20 (h) of the Public
Service Act;
(2) Whether or not the issuance of 113,800 shares of Natelco to
CSI made during the pendency of SEC Case No. 1748 in the
Securities and Exchange Commission was valid;
(3) Whether or not Natelco stockholders have a right of preemption
to the 113,800 shares in question; and
(4) Whether or not the private respondents were duly elected to the
Board of Directors of Natelco at an election held on May 22, 1982.
In G.R. No. 63922
The crucial issue to be resolved is whether or not the trial judge
has jurisdiction to restrain the holding of an election of officers and
directors of a corporation. The petitions are devoid of merit.
In G.R. No. 60502
I
It is the contention of petitioner that the Securities and Exchange
Commission En Banc committed grave abuse of discretion when,
in its decision dated April 5, 1982, in SEC-AC No. 036, it refused
to declare void the shares of stock issued by Natelco to CSI
allegedly in violation of Sec. 20 (h) of the Public Service Act. This
section requires prior administrative approval of any transfer or
sale of shares of stock of any public service which vest in the
transferee more than forty percentum of the subscribed capital of
the said public service.
Section 5 of P.D. No. 902-A, as amended, enumerates the
jurisdiction of the Securities and Exchange Commission:
Sec. 5. In addition to the regulatory and
adjudicative functions of the Securities and
Exchange Commission over Corporations,
partnerships and other forms of associations,
registered with it as expressly granted under the
existing laws and decrees, it shall have original and
exclusive jurisdiction to hear and decide cases
involving:
a) Devices or schemes employed by or any acts, of
the board of directors, business associates, its
officers or partners, amounting to fraud and
misrepresentation which may be detrimental to the
interest of the public and/or of the stockholders,
partners, members of associations or
organizations registered with the Commission.
 (b) Controversies arising out of intra-corporate or
partnership relations, between and among
stockholders, members, or associates; between
any or all of them and the corporation, partnership
or association of which they are stockholders,
members or associates, respectively; and between
such corporation, partnership or association and
the state insofar as it concerns their individual
franchise or right to exist as such entity;
c) Controversies in the election or appointments of
directors, trustees, officers or managers of such
corporations, partnerships or associations.
d) Petitions of corporations, partnerships or
associations to be declared in the state of
suspension of payments in cases where the
corporation, partnership or association possesses
sufficient property to cover all its debts but foresees
the impossibility of meeting them when they
respectively fall due or in cases where the
corporation, partnership or association has no
sufficient assets to cover its liabilities, but is under
the management of a Rehabilitation Receiver or
Management Committee created pursuant to this
Decree, (As added by PD 1758)
In other words, in order that the SEC can take cognizance of a
case, the controversy must pertain to any of the following
relationships: (a) between corporation, partnership or association
and the public; (b) between the corporation, partnership, or
association and its stockholders, partners, members or officers; (c)
between the corporation, partnership or association and the state
insofar as its franchise, permit or license to operate is concerned;
and (d) among the stockholders, partners, or associates
themselves (Union Glass & Container Corp. vs. SEC, 126 SCRA
31 [1983]).
The jurisdiction of the SEC is limited to matters intrinsically
connected with the regulation of corporations, partnerships and
associations and those dealing with internal affairs of such entities;
P.D. 902-A does not confer jurisdiction to SEC over all matters
affecting corporations (Pereyra vs. IAC, 181 SCRA 244 [1990];
Sales vs. SEC, 169 SCRA 121 [1989]).
The jurisdiction of the SEC in SEC Case No. 1748 is limited to
deciding the controversy in the election of the directors and officers
of Natelco. Thus, the SEC was correct when it refused to rule on
whether the issuance of the shares of Natelco stocks to CSI
violated Sec. 20 (h) of the Public Service Act.
The SEC ruling as to the issue involving the Public Service Act,
Section 20 (h), asserts that the Commission En Banc is not
empowered to grant much less cancel franchise for telephone and
communications, and therefore has no authority to rule that the
issuance and sale of shares would in effect constitute a violation of
Natelco's secondary franchise. It would be in excess of jurisdiction
on our part to decide that a violation of our public service laws has
been committed. The matter is better brought to the attention of the
appropriate body for determination. Neither can the
SEC provisionally decide the issue because it is only vested with
the power to grant or revoke the primary corporate franchise. The
SEC is empowered by P.D. 902-A to decide intra-corporate
controversies and that is precisely the only issue in this case.
II
The issuance of 113,800 shares of Natelco stock to CSI made
during the pendency of SEC Case No. 1748 in the Securities and
Exchange Commission was valid. The findings of the SEC En
Banc as to the issuance of the 113,800 shares of stock was stated
as follows:
But the issuance of 113,800 shares were (sic)
pursuant to a Board Resolution and stockholders'
 approval prior to May 19, 1979 when CSI was not
yet in control of the Board or of the voting shares.
There is distinction between an order to
issue shares on or before May 19, 1979 and actual
issuance of the shares after May 19, 1979. The
actual issuance, it is true, came during the period
when CSI was in control of voting shares and the
Board (if they were in fact in control but only
pursuant to the original Board and stockholders'
orders, not on the initiative to the new Board,
elected May 19, 1979, which petitioners are
questioning. The Commission en banc finds it
difficult to see how the one who gave the orders
can turn around and impugn the implementation of
the orders lie had previously given. The
reformation of the contract is understandable for
Natelco lacked the corporate funds to purchase the
CSI equipment.
xxx xxx xxx
Appellant had raise the issue whether the issuance
of 113,800 shares of stock during the incumbency
of the Maggay Board which was allegedly CSI
controlled, and while the case was sub judice,
amounted to unfair and undue advantage. This
does not merit consideration in the absence of
additional evidence to support the proposition.
In effect, therefore, the stockholders of Natelco approved the
issuance of stock to CSI
III
While the group of Luciano Maggay was in control of Natelco by
virtue of the restraining order issued in G.R. No. 50885, the
Maggay Board issued 113,800 shares of stock to CSI Petitioner
said that the Maggay Board, in issuing said shares without notifying
Natelco stockholders, violated their right of pre-emption to the
unissued shares.
This Court in Benito vs. SEC, et al., has ruled that:
Petitioner bewails the fact that in view of the lack of
notice to him of such subsequent issuance, he was
not able to exercise his right of pre-emption over
the unissued shares. However, the general rule is
that pre-emptive right is recognized only with
respect to new issues of shares, and not with
respect to additional issues of originally authorized
shares. This is on the theory that when a
corporation at its inception offers its first shares, it
is presumed to have offered all of those which it is
authorized to issue. An original subscriber is
deemed to have taken his shares knowing that they
form a definite proportionate part of the whole
number of authorized shares. When the shares left
unsubscribed are later re-offered, he cannot
therefore (sic) claim a dilution of interest (Benito vs.
SEC, et al., 123 SCRA 722).
The questioned issuance of the 113,800 stocks is not invalid even
assuming that it was made without notice to the stockholders as
claimed by the petitioner. The power to issue shares of stocks in a
corporation is lodged in the board of directors and no stockholders
meeting is required to consider it because additional issuance of
shares of stocks does not need approval of the stockholders.
Consequently, no pre-emptive right of Natelco stockholders was
violated by the issuance of the 113,800 shares to CSI.
IV
Petitioner insists that no meeting and election were held in Naga
City on May 22, 1982 as directed by respondent Hearing Officer.
This fact is shown by the Sheriffs return of a restraining order
issued by the Court of First Instance of Camarines Sur in Case No.
1505 entitled "Antonio Villasenor v. Communications Service Inc,
et al." (Rollo, Vol. 1, p. 309).
There is evidence of the fact that the Natelco special stockholders'
meeting and election of members of the Board of Directors of the
corporation were held at its office in Naga City on May 22, 1982 as
shown when the Hearing Officer issued an order on May 25, 1982,
declaring the stockholders named therein as corporate officers
duly elected for the term 1982-1983.
More than that, private respondents were in fact charged with
contempt of court and found guilty for holding the election on May
22, 1982, in defiance of the restraining order issued by Judge
Sunga (Rollo, Vol. II, p. 750).
It is, therefore, very clear from the records that an election was held
on May 22, 1982 at the Natelco Offices in Naga City and its officers
were duly elected, thereby rendering the issue of election moot and
academic, not to mention the fact that the election of the Board of
Directors/Officers has been held annually, while this case was
dragging for almost a decade.
The contempt charge against herein private respondents was
predicated on their failure to comply with the restraining order
issued by the lower court on May 21, 1982, enjoining them from
holding the election of officers and directors of Natelco scheduled
on May 22, 1982. The SEC en banc, in its decision of April 5, 1982,
directed the holding of a new election which, through a conference
attended by the hold-over directors of Natelco accompanied by
their lawyers and presided by a SEC hearing officer, was
scheduled on May 22, 1982 (Rollo, p. 59). Contrary to the claim of
petitioners that the case is within the jurisdiction of the lower court
as it does not involve an intra-corporate matter but merely a claim
of a private party of the right to repurchase common shares of stock
of Natelco and that the restraining order was not meant to stop the
election duly called for by the SEC, it is undisputed that the main
objective of the lower court's order of May 21, 1982 was precisely
to restrain or stop the holding of said election of officers and
directors of Natelco, a matter purely within the exclusive jurisdiction
of the SEC (P.D. No. 902-A, Section 5). The said restraining order
reads in part:
. . . A temporary restraining order is hereby
issued, directing defendants (herein respondents),
their agents, attorneys as well as any and all
persons, whether public officers or private
individuals to desist from conducting and holding,
in any manner whatsoever, an election of the
directors and officers of the Naga Telephone Co.
(Natelco). . . . (Rollo, P. 32).
Indubitably, the aforesaid restraining order, aimed not only to
prevent the stockholders of Natelco from conducting the election
of its directors and officers, but it also amounted to an injunctive
relief against the SEC, since it is clear that even "public officers"
(such as the Hearing Officer of the SEC) are commanded to desist
from conducting or holding the election "under pain of punishment
of contempt of court" (Ibid.) The fact that the SEC or any of its
officers has not been cited for contempt, along with the
stockholders of Natelco, who chose to heed the lawful order of the
SEC to go on with the election as scheduled by the latter, is of no
moment, since it was precisely the acts of herein private
respondents done pursuant to an order lawfully issued by an
administrative body that have been considered as contemptuous
by the lower court prompting the latter to cite and punish them for
contempt (Rollo, p. 48).
Noteworthy is the pertinent portion of the judgment of the lower
court which states:
Certainly, this Court will not tolerate, or much less
countenance, a mere Hearing Officer of the
Securities and Exchange Commission, to render a
restraining order issued by it (said Court) within its
 jurisdiction, nugatory and ineffectual and abet PREMISES CONSIDERED, both petitioners are hereby
disobedience and even defiance by individuals and DISMISSED for lack of merit.
entities of the same. . . . (Rollo, p. 48).
SO ORDERED.
Finally, in the case of Philippine Pacific Fishing Co., Inc. vs. Luna,
12 SCRA 604, 613 [1983], this Tribunal stated clearly the following Fernan, C.J., Narvasa, Melencio-Herrera, Gutierrez, Jr., Cruz,
rule: Feliciano, Gancayco, Padilla, Bidin, Sarmiento, Grio-Aquino,
Medialdea, Regalado and Davide, Jr., JJ., concur.
Nowhere does the law (P.D. No. 902-
A) empower any Court of First Instance to interfere
with the orders of the Commission (SEC). Not even
on grounds of due process or jurisdiction. The
Commission is, conceding arguendo a possible
claim of respondents, at the very least, a co-equal
body with the Courts of First Instance. Even as
such co-equal, one would have no power to control
the other. But the truth of the matter is that only the
Supreme Court can enjoin and correct any
actuation of the Commission.

Accordingly, it is clear that since the trial judge in the lower court
(CFI of Camarines Sur) did not have jurisdiction in issuing the
questioned restraining order, disobedience thereto did not
constitute contempt, as it is necessary that the order be a valid and
legal one. It is an established rule that the court has no authority to
punish for disobedience of an order issued without authority
(Chanco v. Madrilejos, 9 Phil. 356; Angel Jose Realty Corp. v.
Galao, et al., 76 Phil. 201).

Finally, it is well-settled that the power to punish for contempt of

court should be exercised on the preservative and not on the
vindictive principle. Only occasionally should the court invoke its
inherent power in order to retain that respect without which the
administration of justice must falter or fail (Rivera v. Florendo, 144
SCRA 643, 662-663 [1986]; Lipata v. Tutaan, 124 SCRA 880
[1983]).