Proper Treatment of Dormant or Inactive Shareholders per the SEC

A recurring issue encountered by corporate secretaries in the Philippines during annual stockholders’ or members’ meetings: some shareholders are unresponsive notwithstanding the numerous notices sent by corporate secretaries ahead of the holding of the meeting. This situation can create practical difficulties for corporations, particularly in determining the presence of a quorum and proceeding with elections.

In a recent opinion, the Securities and Exchange Commission (“SEC”) provided guidance on the proper treatment of shareholders who cannot be located or who fail to respond despite repeated notices from the corporation. In said opinion, the corporation attempted to reach out to its shareholders by publishing notices of the shareholders’ meetings in newspapers of general circulation and sending notices via registered mail to the shareholders’ last known addresses, however, some of the shareholders remained unresponsive.

According to the SEC, shareholders who can be identified but who are not responsive to the corporation’s notices may be considered dormant or inactive shareholders. The SEC clarified several important points regarding the legal status and rights of these shareholders.

The SEC opined that:

• The shares held by dormant or inactive shareholders continue to form part of the outstanding share capital of the corporation. As such, the dormant or inactive shareholders remain shareholders of record with full property rights. Accordingly, shares held by dormant or inactive shareholders must continue to be considered in determining the presence of a quorum for the holding of an election. Excluding such shareholders from the quorum count would unduly restrict the dormant or inactive shareholders’ right to vote.
• The SEC emphasized that the right to vote is an act of ownership available to the shareholder. Accordingly, the corporation or a corporate officer, acting as trustee, may not exercise the voting rights emanating from the shares unless proper authority exists, such as through a written proxy, a voting trust agreement, or a court appointment as executor, administrator, or receiver. The corporation may only act in a limited fiduciary capacity with respect to dormant or inactive shareholders. In particular, the corporation may safekeep the stock certificates of the latter, while exhausting all available means to locate the shareholders.
• Dormant or inactive shareholders remain entitled to any dividends declared by the corporation. These dividends, if any, must be credited in full to the shareholders. The mere lapse of time following a shareholder’s failure to claim dividends does not give rise to a presumption of ownership in favor of the corporation. Instead, the corporation should hold such dividends in trust for the benefit of the true owner who remains to be the dormant or inactive shareholder.

What if, as a result of factoring in the shares held by dormant or inactive shareholders, the corporation could not reach a quorum for purposes of holding an election?

The SEC recognized that the continued inclusion of the shares held by dormant or inactive shareholders in quorum computations may sometimes result in a corporation’s inability to obtain the required quorum for the election of directors or trustees. In such cases, the corporation or its shareholders may resort to the remedy provided under Section 25 of the Revised Corporation Code. Under this provision, the SEC may, upon the application of a shareholder, member, director, or trustee, and after verifying that an election has been unjustifiably not held, summarily order that an election take place. The SEC may also issue other appropriate orders, including the issuance of notice of the election, the designation of a presiding officer, and the setting the record date for determining shareholders or members entitled to vote.

Notably, Section 25 further provides that, notwithstanding any contrary provision in the articles of incorporation or bylaws, the shares of stock or membership represented at such meeting and entitled to vote shall constitute a quorum for purposes of conducting the election under said section.

The SEC’s opinion highlights that even where shareholders become unresponsive or difficult to locate, their ownership rights remain protected under the law. Corporations must therefore continue to recognize these rights while utilizing the remedies available under the Revised Corporation Code to address practical corporate governance challenges.

This article also appears here.

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