Outline 4 Corporation Code romero

OUTLINE 4 – Corporation Code Outline 4 BUS. ORG2 OUTLINE 4 (2016) Prof. M.I.P. Romero

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4) Subscribed Capital Stock

Mariano Rivera, an incorporator, subscribed for 450 shares representing a value of P45, 000. In the course of time, the company became insolvent and went into the hands of the Phil. Trust Co., as assignee in bankruptcy, and was instituted to recover ½ of the stock subscription of Rivera, which admittedly has never been paid. Rivera claims that he did not pay because not long after the incorporation, a stockholders’ meeting occurred at which the capital should be reduced by 50% and the subscribers released from the obligation to pay any unpaid balance of their subscription in excess of 50% of the same. As a result of the resolution, the supposed subscription of the various shareholders had been cancelled to the extent stated and fully paid certificates were issued to each shareholders for ½ of his subscription. It does not appear that the formalities prescribed in section 17 of the Corporation Law (Act No. 1459), as amended, relative to the reduction of capital stock in corporations were observed, and in particular it does not appear that any certificate was at any time filed in the Bureau of Commerce and Industry, showing such reduction.

5) Paid-in Capital

The Lower Court held the defendant was still liable for the unpaid balance of his subscription.

Vlll. CAPITAL STRUCTURE OF CORPORATIONS A. Concepts: 1) Capital vis-à-vis Capital Stock 2) Shares of Stock vis-à-vis Stock Certificate 3) Authorized Capital Stock

Issue: 6) Outstanding Capital Stock – Sec. 137

1) Whether or not the reduction of capital by 50% is valid? 2) Whether or not Rivera is released from his obligation to pay the remaining balance of his subscription?

7) Watered stock - Sec. 65

Held: The Court held:

B. Trust Fund Doctrine - vis-à-vis corporate assets - vis-à-vis subscribed capital stock

G.R. No. L-19761

Phil. Trust Co. v. Rivera 44 Phil. 469 January 29, 1923

Doctrine: A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner an under the conditions prescribed by the statute or the charter or the articles of incorporation. Facts: In 1918, the Cooperativa Naval Filipina was duly incorporated with a capital of P100, 000 divided into 1,000 shares of a par value of P100 each.

1) That the reduction is not valid. “The resolution releasing the shareholders from their obligation to pay 50 per centum of their respective subscriptions was an attempted withdrawal of so much capital from the fund upon which the company’s creditors were entitled ultimately to rely and, having been effected without compliance with the statutory requirements, was wholly ineffectual.” 2) That Rivera is not released from his obligation. “It is established doctrine that subscription to the capital of a corporation constitute a find to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts. A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors a

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OUTLINE 4 – Corporation Code

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reduction of the capital stock can take place only in the manner an seeking confirmation of their rescission of the Pre-Subscription Agreement. After under the conditions prescribed by the statute or the charter or the hearing, the SEC, through then Hearing Officer Rolando G. Andaya, Jr., issued articles of incorporation” a decision on 19 May 1997 confirming the rescission sought by the Tius. On motion of both parties, the above decision was partially reconsidered but only insofar as the Ongs' P70 million was declared not as a premium on capital stock Ong Yong v. Tiu G.R. 144476; 4/8/2003 but an advance (loan) by the Ongs to FLADC and that the imposition of interest on it was correct. Both parties appealed to the SEC en banc which rendered a G. R. No. 144478 /8 April 2003 / Trust Fund Doctrine Facts: In 1994, the construction of the Masagana Citimall in Pasay City was decision on 11 September 1998, affirming the 19 May 1997 decision of the threatened with stoppage and incompletion when its owner, the First Landlink Hearing Officer. The SEC en banc confirmed the rescission of the PreAsia Development Corporation (FLADC), which was owned by David S. Tiu, Cely Subscription Agreement but reverted to classifying the P70 million paid by the Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Ongs as premium on capital and not as a loan or advance to FLADC, hence, not Tiu (the Tius), encountered dire financial difficulties. It was heavily indebted to the entitled to Commercial Law - Corporation Law, 2005 ( 76 ) Narratives (Berne Philippine National Bank (PNB) for P190 million. To stave off foreclosure of the Guerrero) earn interest. On appeal, the Court of Appeals (CA) rendered a mortgage on the two lots where the mall was being built, the Tius invited Ong decision on 5 October 1999, modifying the SEC order of 11 September 1998. Yong, Juanita Tan Ong, Wilson T. Ong, Anna L. Ong, William T. Ong and Julia Their motions for reconsideration having been denied, both parties filed Ong Alonzo (the Ongs), to invest in FLADC. Under the Pre-Subscription separate petitions for review before the Supreme Court. On 1 February 2002, Agreement they entered into, the Ongs and the Tius agreed to maintain equal the Supreme Court promulgated its Decision, affirming the assailed decision of shareholdings in FLADC: the Ongs were to subscribe to 1,000,000 shares at a the Court of Appeals but with the modifications that the P20 million loan par value of P100.00 each while the Tius were to subscribe to an additional extended by the Ongs to the Tius shall earn interest at 12% per annum to be 549,800 shares at P100.00 each in addition to their already existing subscription computed from the time of judicial demand which is from 23 April 1996; that the of 450,200 shares. Furthermore, they agreed that the Tius were entitled to P70 million advanced by the Ongs to the FLADC shall earn interest at 10% per nominate the Vice-President and the Treasurer plus 5 directors while the Ongs annum to be computed from the date of the FLADC Board Resolution which is were entitled to nominate the President, the Secretary and 6 directors (including 19 June 1996; and that the Tius shall be credited with 49,800 shares in FLADC the chairman) to the board of directors of FLADC. Moreover, the Ongs were for their property contribution, specifically, the 151 sq. m. parcel of land. The given the right to manage and operate the mall. Accordingly, the Ongs paid P100 Court affirmed the fact that both the Ongs and the Tius violated their respective million in cash for their subscription to 1,000,000 shares of stock while the Tius obligations under the Pre-Subscription Agreement. On 15 March 2002, the Tius committed to contribute to FLADC a four-storey building and two parcels of land filed before the Court a Motion for Issuance of a Writ of Execution. Aside from respectively valued at P20 million (for 200,000 shares), P30 million (for 300,000 their opposition to the Tius' Motion for Issuance of Writ of Execution, the Ongs shares) and P49.8 million (for 49,800 shares) to cover their additional 549,800 filed their own "Motion for Reconsideration; Alternatively, Motion for Modification stock subscription therein. The Ongs paid in another P70 million 3 to FLADC and (of the February 1, 2002 Decision)" on 15 March 2002. Willie Ong filed a P20 million to the Tius over and above their P100 million investment, the total separate "Motion for Partial Reconsideration" dated 8 March 2002, pointing out sum of which (P190 million) was used to settle the P190 million mortgage that there was no violation of the Pre-Subscription Agreement on the part of the indebtedness of FLADC to PNB. The business harmony between the Ongs and Ongs, among others. On 29 January 2003, the Special Second Division of this the Tius in FLADC, however, was shortlived because the Tius, on 23 February Court held oral arguments on the respective positions of the parties. On 27 1996, rescinded the Pre-Subscription Agreement. The Tius accused the Ongs of February 2003, Dr. Willie Ong and the rest of the movants Ong filed their (1) refusing to credit to them the FLADC shares covering their real property respective memoranda. On 28 February 2003, the Tius submitted their contributions; (2) preventing David S. Tiu and Cely Y. Tiu from assuming the memorandum positions of and performing their duties as Vice-President and Treasurer, respectively, and (3) refusing to give them the office spaces agreed upon. The ISSUE: WON RECISSION IS THE PROPER REMEDY controversy finally came to a head when the case was commenced by the Tius HELD:No. first of all, a subscription contract as defined under Section 60, Title on 27 February 1996 at the Securities and Exchange Commission (SEC), VII of the Corporation Code:

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Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that theparties refer to it as a purchase or some other contract

and eventual liquidation of the corporation. Furthermore, the doctrine is articulated in Section 41 on the power of a corporation to acquire its own shares and in Section 122 on the prohibition against the distribution of corporate assets and property unless the stringent requirements therefor are complied with.

A subscription contract necessarily involves the corporation as one of the contracting parties since the subject matter of the transaction is property owned by the corporation its shares of stock. Thus, the subscription contract (denominated by the parties as a Pre-Subscription Agreement) whereby the Ongs invested P100 million for 1,000,000 shares of stock was, from the viewpoint of the law, one between the Ongs and FLADC, not between the Ongs and the Tius. Otherwise stated, the Tius did not contract in their personal capacities with the Ongs since they were not selling any of their own shares to them. It was FLADC that did.

The distribution of corporate assets and property cannot be made to depend on the whims and caprices of the stockholders, officers or directors of the corporation, or even, for that matter, on the earnest desire of the court a quo to prevent further squabbles and future litigations unless the indispensable conditions and procedures for the protection of corporate creditors are followed. Otherwise, the corporate peace laudably hoped for by the court will remain nothing but a dream because this time, it will be the creditors turn to engage in squabbles and litigations should the court order an unlawful distribution in blatant disregard of the Trust Fund Doctrine.

Considering therefore that the real contracting parties to the subscription agreement were FLADC and the Ongs alone, a civil case for rescission on the ground of breach of contract filed by the Tius in their personal capacities will not prosper. Assuming it had valid reasons to do so, only FLADC (and certainly not the Tius) had the legal personality to file suit rescinding the subscription agreement with the Ongs inasmuch as it was the real party in interest therein. Article 1311 of the Civil Code provides that contracts take effect only between the parties, their assigns and heirs Therefore, a party who has not taken part in the transaction cannot sue or be sued for performance or for cancellation thereof, unless he shows that he has a real interest affected thereby

In the instant case, the rescission of the Pre-Subscription Agreement will effectively result in the unauthorized distribution of the capital assets and property of the corporation, thereby violating the Trust Fund Doctrine and the Corporation Code, since rescission of a subscription agreement is not one of the instances when distribution of capital assets and property of the corporation is allowed.

All this notwithstanding, granting but not conceding that the Tius possess the legal standing to sue for rescission based on breach of contract, said action will nevertheless still not prosper since rescission will violate the Trust Fund Doctrine and the procedures for the valid distribution of assets and property under the Corporation Code. The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine Trust Co. vs. Rivera, provides that subscriptions to the capital stock of a corporation constitute a fund to which the creditors have a right to look for the satisfaction of their claims. This doctrine is the underlying principle in the procedure for the distribution of capital assets, embodied in the Corporation Code, which allows the distribution of corporate capital only in three instances: (1) amendment of the Articles of Incorporation to reduce the authorized capital stock, (2) purchase of redeemable shares by the corporation, regardless of the existence of unrestricted retained earnings, and (3) dissolution

Halley v. Printwell, Inc. G.R. 157549; May 30, 2011 FACTS:  BMPI (Business Media Philippines Inc.) is a corporation under the control of its stockholders, including Donnina Halley.  In the course of its business, BMPI commissioned PRINTWELL to print Philippines, Inc. (a magazine published and distributed by BMPI)  PRINTWELL extended 30-day credit accommodation in favor of BMPI and in a period of 9 mos. BMPI placed several orders amounting to 316,000.  However, only 25,000 was paid hence a balance of 291,000  PRINTWELL sued BMPI for collection of the unpaid balance and later on impleaded BMPI’s original stockholders and incorporators to recover on their unpaid subscriptions.  It appears that BMPI has an authorized capital stock of 3M divided into 300,000shares with P10 par value.  Only 75,000 shares worth P750,000 were originally subscribed of whichP187,500 were paid up capital.  Halley subscribed to 35,000 shares worth P350,000 but only paid

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OUTLINE 4 – Corporation Code P87,500. Halley contends that: 1. They all had already paid their subscriptions in full 2. BMPI had a separate and distinct personality 3. BOD and SH had resolved to dissolve BMPIRTC and CA

2013400036 to its capital stock from the obligation of paying for his shares, in whole or in part, without valuable consideration, or fraudulently, to the prejudice of the creditors. The creditor is allowed to maintain an action upon any unpaid subscriptions and thereby steps into the shoes of the corporation for the satisfaction of its debt.

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Defendant merely used the corporate fiction as a cloak/cover to create C. Doctrine of Equality of Shares – Sec. 6, par.5 an injustice (against PRINTWELL)  Rejected allegations of full payment in view of irregularity in the issuance Sec. 6, par.5 of ORs (Payment made on a later date was covered by an OR with a lower serial number than payment made on an earlier date. ISSUE: Castillo v. Balinghasay Oct. 18, 2004 [G.R. No. 150976. October 18, 2004.] WON a stockholder who was in active management of the business of the corporation and still has unpaid subscriptions should be made liable for the debts CECILIA CASTILLO, OSCAR DEL ROSARIO, ARTURO S. FLORES, XERXES of the corporation by piercing the veil of corporate fiction. NAVARRO, MARIA ANTONIA TEMPLO and MEDICAL CENTER PARAÑAQUE, HELD: INC., petitioners, vs. ANGELES BALINGHASAY, RENATO BERNABE, ALODIA YES! Such stockholder should be made liable up to the extent of her unpaid DEL ROSARIO, ROMEO FUNTILA, TERESITA GAYANILO, RUSTICO subscription. JIMENEZ, ARACELI ** JO, ESMERALDA MEDINA, CECILIA MONTALBAN, RATIO: VIRGILIO OBLEPIAS, CARMENCITA PARRENO, CESAR REYES, REYNALDO It was found that at the time the obligation was incurred, BMPI was under the SAVET, SERAPIO TACCAD, VICENTE VALDEZ, SALVACION VILLAMORA, control of its stockholders who know fully well that the corporation was not in a and HUMBERTO VILLAREAL, respondents. position to pay its account (thinly capitalized). And, that the stockholders personally benefited from the operations of the corporation even though they never paid their subscriptions in full. The stockholders cannot now claim the doctrine of corporate fiction otherwise (to DOCTRINE: deny creditors to collect from SH) it would create an injustice because creditors would be at a loss (limbo) against whom it would assert the right to collect. One of the rights of a stockholder is the right to participate in the control and On piercing the veil: management of the corporation that is exercised through his vote. The right to Although the corporation has a personality separate and distinct from its SH, vote is a right inherent in and incidental to the ownership of corporate stock, such personality is merely a legal fiction (for the convenience and to promote the and as such is a property right. The stockholder cannot be deprived of the right ends of justice) which may be disregarded by the courts if it is used as a cloak or to vote his stock nor may the right be essentially impaired, either by the cover for fraud, justification of a wrong, or an alter ego for the sole benefit of the legislature or by the corporation, without his consent, through amending the SH. charter, or the by-laws. As to the Trust Fund Doctrine: The RTC and CA correctly applied the Trust Fund Doctrine. Under which Section 6 of the Corporation Code being deemed written into Article VII of the corporate debtors might look to the unpaid subscriptions for the satisfaction of Articles of Incorporation of MCPI, it necessarily follows that unless Class "B" unpaid corporate debts shares of MCPI stocks are clearly categorized to be "preferred" or Subscriptions to the capital of a corporation constitutes a trust fund for the "redeemable" shares, the holders of said Class "B" shares may not be deprived payment of the creditors (by mere analogy) In reality, corporation is a simple of their voting rights. Note that there is nothing in the Articles of Incorporation debtor. nor an iota of evidence on record to show that Class "B" shares were Moreover, the corporation has no legal capacity to release an original subscriber categorized as either "preferred" or "redeemable" shares. The only possible

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conclusion is that Class "B" shares fall under neither category and thus, under the law, are allowed to exercise voting rights.

2013400036 Only holders of Class A shares have the right to vote and the right to be elected as directors or as corporate officers. 3 (Emphasis supplied)

The foregoing amendment was approved by the SEC on June 7, 1983. While the amendment granted the right to vote and to be elected as directors or FACTS: Petitioners and the respondents are stockholders of MCPI, with the corporate officers only to holders of Class "A" shares, holders of Class "B" former holding Class "B" shares and the latter owning Class "A" shares. stocks were granted the same rights and privileges as holders of Class "A" stocks with respect to the payment of dividends. MCPI is a domestic corporation with offices at Dr. A. Santos Avenue, Sucat, Parañaque City. It was organized sometime in September 1977. At the time of its On September 9, 1992, Article VII was again amended to provide as follows: incorporation, Act No. 1459, the old Corporation Law was still in force and effect. Article VII of MCPI's original Articles of Incorporation, as approved by the SEVENTH: That the authorized capital stock of the Securities and Exchange Commission (SEC) on October 26, 1977, reads as corporation is THIRTY TWO MILLION PESOS follows: (P32,000,000.00) divided as follows: SEVENTH. That the authorized capital stock of the corporation is TWO MILLION (P2,000,000.00) PESOS, Philippine Currency, divided into TWO THOUSAND (2,000) SHARES at a par value of P100 each share, whereby the ONE THOUSAND SHARES issued to, and subscribed by, the incorporating stockholders shall be classified as Class A shares while the other ONE THOUSAND unissued shares shall be considered as Class B shares. Only holders of Class A shares can have the right to vote and the right to be elected as directors or as corporate officers. 2 (Emphasis supplied)

CLASS NO. OF SHARES PAR VALUE "A" 1,000 P1,000.00 "B" 31,000 1,000.00 Except when otherwise provided by law, only holders of Class "A" shares have the right to vote and the right to be elected as directors or as corporate officers 4 (Stress and emphasis supplied).

The SEC approved the foregoing amendment on September 22, 1993. On July 31, 1981, Article VII of the Articles of Incorporation of MCPI was amended, to read thus: On February 9, 2001, the shareholders of MCPI held their annual stockholders' meeting and election for directors. During the course of the proceedings, SEVENTH. That the authorized capital stock of the respondent Rustico Jimenez, citing Article VII, as amended, and notwithstanding corporation is FIVE MILLION (P5,000,000.00) PESOS, MCPI's history, declared over the objections of herein petitioners, that no Class divided as follows: "B" shareholder was qualified to run or be voted upon as a director. In the past, MCPI had seen holders of Class "B" shares voted for and serve as members of the corporate board and some Class "B" share owners were in fact nominated CLASS NO. OF SHARES PAR VALUE for election as board members. Nonetheless, Jimenez went on to announce that the candidates holding Class "A" shares were the winners of all seats in the "A" 1,000 P1,000.00 corporate board. The petitioners protested, claiming that Article VII was null and void for depriving them, as Class "B" shareholders, of their right to vote and to "B" 4,000 P1,000.00 be voted upon, in violation of the Corporation Code (Batas Pambansa Blg. 68), as amended.

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RTC: On March 22, 2001, after their protest was given short shrift, herein Petitioners assert that Article VII of the Articles of Incorporation of MCPI, which petitioners filed a Complaint for Injunction, Accounting and Damages. Said denied them voting rights, is null and void for being contrary to Section 6 of the complaint was founded on two (2) principal causes of action, namely: Corporation Code. They point out that Section 6 prohibits the deprivation of voting rights except as to preferred and redeemable shares only. Hence, under the present law on corporations, all shareholders, regardless of classification, a. Annulment of the declaration of directors of the MCPI other than holders of preferred or redeemable shares, are entitled to vote and to made during the February 9, 2001 Annual Stockholders' be elected as corporate directors or officers. Since the Class "B" shareholders Meeting, and for the conduct of an election whereat all are not classified as holders of either preferred or redeemable shares, then it stockholders, irrespective of the classification of the necessarily follows that they are entitled to vote and to be voted for as directors shares they hold, should be afforded their right to vote or officers. CHEIcS and be voted for; and The respondents, in turn, maintain that the grant of exclusive voting rights to Class "A" shares is clearly provided in the Articles of Incorporation and is in accord with Section 5 9 of the Corporation Law (Act No. 1459), which was the prevailing law when MCPI was incorporated in 1977. They likewise submit that as the Articles of Incorporation of MCPI is in the nature of a contract between Subsequently, the complaint was amended to implead MCPI as party-plaintiff for the corporation and its shareholders and Section 6 of the Corporation Code purposes only of the second cause of action. could not retroactively apply to it without violating the non-impairment clause 10 of the Constitution. RTC rendered the Partial Judgment. In finding for the respondents, the trial court ruled that corporations had the power to classify their shares of stocks, such as HELD: We find merit in the petition. "voting and non-voting" shares, conformably with Section 6 7 of the Corporation Code of the Philippines. It pointed out that Article VII of both the original and amended Articles of Incorporation clearly provided that only Class "A" When Article VII of the Articles of Incorporation of MCPI was amended in shareholders could vote and be voted for to the exclusion of Class "B" 1992, the phrase "except when otherwise provided by law " was inserted in shareholders, the exception being in instances provided by law, such as those the provision governing the grant of voting powers to Class "A" enumerated in Section 6, paragraph 6 of the Corporation Code.The RTC found shareholders. This particular amendment is relevant for it speaks of a law merit in the respondents' theory that the Articles of Incorporation, which defines providing for exceptions to the exclusive grant of voting rights to Class the rights and limitations of all its shareholders, is a contract between MCPI and "A" stockholders. Which law was the amendment referring to? The its shareholders. It is thus the law between the parties and should be strictly determination of which law to apply is necessary. There are two laws being cited enforced as to them. It brushed aside the petitioners' claim that the Class "A" and relied upon by the parties in this case. In this instance, the law in force at shareholders were in estoppel, as the election of Class "B" shareholders to the the time of the 1992 amendment was the Corporation Code (B.P. Blg. 68), not corporate board may be deemed as a mere act of benevolence on the part of the the Corporation Law (Act No. 1459), which had been repealed by then. officers. Finally, the court brushed aside the "founder's shares" theory of the petitioners for lack of factual basis. We find and so hold that the law referred to in the amendment to Article VII refers to the Corporation Code and no other law. At the time of the incorporation ISSUE: Whether or not holders of Class "B" shares of the MCPI may be deprived of MCPI in 1977, the right of a corporation to classify its shares of stock was sanctioned by Section 5 of Act No. 1459. The law repealing Act No. 1459, B.P. of the right to vote and be voted for as directors in MCPI. (NO) Blg. 68, retained the same grant of right of classification of stock shares to corporations, but with a significant change. Under Section 6 of B.P. Blg. 68, the ARGUMENTS: requirements and restrictions on voting rights were explicitly provided for, such that "no share may be deprived of voting rights except those classified and b. Stockholders' derivative suit challenging the validity of a contract entered into by the Board of Directors of MCPI for the operation of the ultrasound unit. 5

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OUTLINE 4 – Corporation Code issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code" and that "there shall always be a class or series of shares which have complete voting rights." Section 6 of the Corporation Code being deemed written into Article VII of the Articles of Incorporation of MCPI, it necessarily follows that unless Class "B" shares of MCPI stocks are clearly categorized to be "preferred" or "redeemable" shares, the holders of said Class "B" shares may not be deprived of their voting rights. Note that there is nothing in the Articles of Incorporation nor an iota of evidence on record to show that Class "B" shares were categorized as either "preferred" or "redeemable" shares. The only possible conclusion is that Class "B" shares fall under neither category and thus, under the law, are allowed to exercise voting rights. One of the rights of a stockholder is the right to participate in the control and management of the corporation that is exercised through his vote. The right to vote is a right inherent in and incidental to the ownership of corporate stock, and as such is a property right. The stockholder cannot be deprived of the right to vote his stock nor may the right be essentially impaired, either by the legislature or by the corporation, without his consent, through amending the charter, or the by-laws. When Article VII of the Articles of Incorporation of MCPI were amended in 1992, the board of directors and stockholders must have been aware of Section 6 of the Corporation Code and intended that Article VII be construed in harmony with the Code, which was then already in force and effect. Since Section 6 of the Corporation Code expressly prohibits the deprivation of voting rights, except as to "preferred" and "redeemable" shares, then Article VII of the Articles of Incorporation cannot be construed as granting exclusive voting rights to Class "A" shareholders, to the prejudice of Class "B" shareholders, without running afoul of the letter and spirit of the Corporation Code.

D. Classification of Shares – Rationale - Sec. 6, 7, 8, 9 a) Par value shares b) No par value shares – Sec. 62; Delpher Trades Corp. v. IAC (1988) 157 SCRA 349

2013400036 DELPHER TRADES CORPORATION, and DELPHIN PACHECO vs. INTERMEDIATE APPELLATE COURT G.R. No. L-69259. January 26, 1988 FACTS: Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of real estate property. The said co-owners leased to Construction Components International Inc. the same property and providing that during the existence or after the term of this lease the lessor should he decide to sell the property leased shall first offer the same to the lessee and the letter has the priority to buy under similar conditions. Subsequently, lessee assigned its rights and obligations under the contract of lease in favor of Hydro Pipes Philippines, Inc. A deed of exchange was executed between Delfin and Pelagia Pacheco and defendant Delpher Trades Corporation whereby the former conveyed to the latter the leased property for 2,500 shares of stock of defendant corporation with a total value of P1,500,000.00. On the ground that it was not given the first option to buy the leased property pursuant to the proviso in the lease agreement, respondent Hydro Pipes Philippines, Inc., filed an amended complaint for reconveyance of the property in its favor under conditions similar to those whereby Delpher Trades Corporation acquired the property from Pelagia Pacheco and 7


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Delphin Pacheco. group. Respondents on the other hand stated that there was In effect, the Delpher Trades Corporation is a no transfer of ownership over the properties. business conduit of the Pachecos. What they really did was to invest their properties and change the nature of their ownership from unincorporated to incorporated form by ISSUE: organizing Delpher Trades Corporation to take control of Whether or not there was an effective transfer of their properties and at the same time save on inheritance taxes. property in this case. RULING: NO. After incorporation, one becomes a stockholder of a corporation by subscription or by purchasing stock directly from the corporation or from individual owners thereof. In the case at bar, in exchange for their properties, the Pachecos acquired 2,500 original unissued no par value shares of stocks of the Delpher Trades Corporation. Consequently, the Pachecos became stockholders of the corporation by subscription "The essence of the stock subscription is an agreement to take and pay for original unissued shares of a corporation, formed or to be formed.” It is significant that the Pachecos took no par value shares in exchange for their properties. It is to be stressed that by their ownership of the 2,500 no par shares of stock, the Pachecos have control of the corporation. Their equity capital is 55% as against 45% of the other stockholders, who also belong to the same family

The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be considered a contract of sale. There was no transfer of actual ownership interests by the Pachecos to a third party. The Pacheco family merely changed their ownership from one form to another. The ownership remained in the same hands. Hence, the private respondent has no basis for its claim of a light of first refusal under the lease contract. - issued price - “deemed fully paid and non-assessable” c) Common shares d) Preferred shares – may be voting or non-voting; other types e) Redeemable shares f) Founders’ shares g) Treasury shares e) Voting shares f) Non-voting shares E. OTHER CASES ---

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Gamboa v. Teves, et al (GR 176579; 6/28/ 2011 and 10/ 9/ 2012) Any other construction of the term "capital" in Section 11, Article XII of the HEIRS OF WILSON P. GAMBOA VS. FINANCE SECRETARY MARGARITO B. Constitution contravenes the letter and intent of the Constitution. Any other TEVES G.R. No. 176579 (Resolution), October 9, 2012 meaning of the term "capital" openly invites alien domination of economic activities reserved exclusively to Philippine nationals. Therefore, respondents' FACTS: The issue started when petitioner Wilson P. Gamboa, a stockholder of interpretation will ultimately result in handing over effective control of our Philippine Long Distance Telephone Company (PLDT) questioned the indirect national economy to foreigners in patent violation of the Constitution, making sale of shares involving almost 12 million shares of the Philippine Long Distance Filipinos second-class citizens in their own country. Telephone Company (PLDT) owned by Philippine Telecommunications Investment Corporation (PTIC) by the government of the Republic of the Relate to SEC Memo Circ. 8, s2013 (Guidelines in Fil-Foreign ownership) Philippines to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate of First Pacific Company Limited (First Pacific). Republic Planters Bank v. Agana ( GR 51765; Mar. 3, 1997) With the sale, First Pacific's common shareholdings in PLDT increased from 30.7 percent to 37 percent, thereby increasing the common shareholdings of foreigners in PLDT to about 81.47 percent. Petitioner contends that this violates Section 11, Article XII of the 1987 Philippine Constitution which limits foreign ownership of the capital of a public utility to not more than 40%. Then, in 2011, the court ruled the case in favor of the petitioner, hence this new case, resolving the motion for reconsideration for the 2011 decision filed by the respondents.

Doctrine:

On 18 September 1961, the Robes-Francisco Realty & Development Corporation (RFRDC) secured a loan from the Republic Planters Bank in the amount of P120,000.00. As part of the proceeds of the loan, preferred shares of stocks were issued to RFRDC through its officers then, Adalia F. Robes and one Carlos F. Robes. In other words, instead of giving the legal tender totaling to the ISSUE: Whether or not the Court made an erroneous interpretation of the term full amount of the loan, which is P120,000.00, the Bank lent such amount ‘capital’ in its 2011 decision. partially in the form of money and partially in the form of stock certificates HELD: No. The Constitution expressly declares as State policy the development numbered 3204 and 3205, each for 400 shares with a par value of P10.00 per share, or for P4,000.00 each, for a total of P8,000.00. Said stock certificates of an economy "effectively controlled" by Filipinos. Consistent with such State policy, the Constitution explicitly reserves the ownership and operation of public were in the name of Adalia F. Robes and Carlos F. Robes, who subsequently, utilities to Philippine nationals, who are defined in the Foreign Investments Act of however, endorsed his shares in favor of Adalia F. Robes. 1991 as Filipino citizens, or corporations or associations at least 60 percent of Said certificates of stock bear the following terms and conditions: "The Preferred whose capital with voting rights belongs to Filipinos. The FIA's implementing Stock shall have the following rights, preferences, qualifications and limitations, rules explain that "[f]or stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to meet the required to wit: 1. Of the right to receive a quarterly dividend of 1%, cumulative and participating. xxx 2. That such preferred shares may be redeemed, by the Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate system of drawing lots, at any time after 2 years from the date of issue at the voting rights is essential." In effect, the FIA clarifies, reiterates and confirms the option of the Corporation." On 31 January 1979, RFRDC and Robes proceeded interpretation that the term "capital" in Section 11, Article XII of the 1987 against the Bank and filed a complaint anchored on their alleged rights to collect Constitution refers to shares with voting rights, as well as with full beneficial ownership. This is precisely because the right to vote in the election of directors, dividends under the preferred shares in question and to have the bank redeem coupled with full beneficial ownership of stocks, translates to effective control of a the same under the terms and conditions of the stock certificates. The bank filed a Motion to Dismiss 3 private respondents' Complaint on the following grounds: corporation. Thus, "the 60-40 ownership requirement in favor of (1) that the trial court had no jurisdiction over the subject-matter of the action; (2) Filipino citizens must apply separately to each class of shares, whether common, that the action was unenforceable under substantive law; and (3) that the action preferred non-voting, preferred voting or any other class of shares." This was barred by the statute of limitations and/or laches. The bank's Motion to guarantees that the “controlling interest” in public utilities always lies in the hands Dismiss was denied by the trial court in an order dated 16 March 1979. The of Filipino citizens. bank then filed its Answer on 2 May 1979. Thereafter, the trial court gave the parties 10 days from 30 July 1979 to submit their respective memoranda after

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OUTLINE 4 – Corporation Code the submission of which the case would be deemed submitted for resolution. On 7 September 1979, the trial court rendered the decision in favor of RFRDC and Robes; ordering the bank to pay RFRDC and Robes the face value of the stock certificates as redemption price, plus 1% quarterly interest thereon until full payment. The bank filed the petition for certiorari with the Supreme Court, essentially on pure questions of law. The trial court ordered the petitioner to pay private respondents the face value of the stock certificates as redemption price, plus 1% quarterly interest. Hence this petition.

Issue:

1) Whether the bank can be compelled to redeem the preferred shares issued to RFRDC and Robes?; and 2) Whether RFRDC and Robes are entitled to the payment of certain rate of interest on the stocks as a matter of right without necessity of a prior declaration of dividend?

Held: 1) While the stock certificate does allow redemption, the option to do so was clearly vested in the bank. The redemption therefore is clearly the type known as "optional". Thus, except as otherwise provided in the stock certificate, the redemption rests entirely with the corporation and the stockholder is without right to either compel or refuse the redemption of its stock. Furthermore, the terms and conditions set forth therein use the word "may". It is a settled doctrine in statutory construction that the word "may" denotes discretion, and cannot be construed as having a mandatory effect. The redemption of said shares cannot be allowed. The Central Bank made a finding that the Bank has been suffering from chronic reserve deficiency, and that such finding resulted in a directive, issued on 31 January 1973 by then Gov. G. S. Licaros of the Central Bank, to the President and Acting Chairman of the Board of the bank prohibiting the latter from redeeming any preferred share, on the ground that said redemption would reduce the assets of the Bank to the prejudice of its depositors and creditors. Redemption of preferred shares

2013400036 was prohibited for a just and valid reason. The directive issued by the Central Bank Governor was obviously meant to preserve the status quo, and to prevent the financial ruin of a banking institution that would have resulted in adverse repercussions, not only to its depositors and creditors, but also to the banking industry as a whole. The directive, in limiting the exercise of a right granted by law to a corporate entity, may thus be considered as an exercise of police power. 2) Both Section 16 of the Corporation Law and Section 43 of the present Corporation Code prohibit the issuance of any stock dividend without the approval of stockholders, representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. These provisions underscore the fact that payment of dividends to a stockholder is not a matter of right but a matter of consensus. Furthermore, "interest bearing stocks", on which the corporation agrees absolutely to pay interest before dividends are paid to common stockholders, is legal only when construed as requiring payment of interest as dividends from net earnings or surplus only. In compelling the bank to redeem the shares and to pay the corresponding dividends, the Trial committed grave abuse of discretion amounting to lack or excess of jurisdiction in ignoring both the terms and conditions specified in the stock certificate, as well as the clear mandate of the law. COCOFED v. RP (GR Nos. 177857-58; 178193; 180705 promulgated Sept. 17, 2009) re conversion of shares F. STOCKS & STOCKHOLDERS Sec. 60 -73, 137, 90 1) Consideration for shares ----Garcia v. Lim Chu Sing 59 Phil. 562 (1934) FACTS: Lim Cuan Sy had an account with the Mercantile Bank o f C h i n a ( p l a i n t i f f b a n k ) i n t h e f o r m o f " t r u s t r e c e i p t s ” guaranteed by Lim Chu Sing (respondent) as surety & with chattel mortgage securities. Lim Cuan Sy failed to comply with his obligations. The plaintiff bank required Lim Chu Sing, as surety, to deliver a promissory note. The plaintiff bank, without the knowledge & consent of the d efendant, f o r e c l o s e d t h e c h a t t e l m o r t g a g e a n d p r i v a t e l y s o l d t h e property covered thereby. The defendant is an owner of shares

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OUTLINE 4 – Corporation Code of stock in the plaintiff bank. Meanwhile, plaintiff bank was subsequently placed u n d e r l i q u i d a t i o n . T h e d e f e n d a n t f i l e d a m o t i o n f o r t h e inclusion of the principal debtor Lim Cuan Sy as party defendant with the CFI-Manila so that he could avail himself of the benefit of the exhaustion of the property of said Lim Cuan Sy. The motion was denied. The proceeds of the sale of the mortgaged chattels together with other payments made were applied to the amount of the promissory note in question, leaving the balance which the plaintiff now seeks to collect.

2013400036 the unpaid subscription and that, accordingly, the alleged obligation is not enforceable. Labor arbiter sustained the claim of petitioner for P17,060.07 on the ground that the employer has no right to withhold payment of wages already earned under Article 103 of the Labor Code. NLRC reversed the decision of the labor arbiter and held that a stockholder who fails to pay his unpaid subscription on call becomes a debtor of the corporation and that the set-off of said obligation against the wages and others due to petitioner is not contrary to law, morals and public policy.

ISSUE: Whether or not it is proper to COMPENSATE the respondent’s indebtedness to the value of his shares of stock with the Mercantile Hence, the instant petition, which was treated as a special civil action for Bank of China. certiorari. HELD: NO. A share of stock or the certificate thereof is not indebtedness to the owner nor evidence of indebtedness and therefore, it is not a credit. Stockholders as such are not creditors of the corporation. The capital stock of a corporation is a trust fund to be used more particularly for the security of the creditors of the corporation who presumably deal with it on the credit of its capital. Apodaca v. NLRC 172 SCRA 442 APODACA v. NLRC DOCTRINE:

ISSUES: (1) Does NLRC have jurisdiction to resolve a claim for non-payment of stock subscriptions to a corporation? (2) Can an obligation arising therefrom be offset against a money claim of an employee against the employer? HELD: Petition granted. (1) No, NLRC has no jurisdiction to determine such intra-corporate dispute between the stockholder and the corporation as in the matter of unpaid subscriptions. This controversy is within the exclusive jurisdiction of the Securities and Exchange Commission.

(2) No, the unpaid subscriptions are not due and payable until a call is made by Consideration for shares – unpaid subscriptions are not due and payable until a the corporation for payment. Private respondents have not presented a call is made by the corporation for payment, subject to Art. 113 of the Labor resolution of the board of directors of respondent corporation calling for the Code. payment of the unpaid subscriptions. It does not even appear that a notice of such call has been sent to petitioner by the respondent corporation. What the FACTS: records show is that the respondent corporation deducted the amount due to Petitioner Apocada was employed in respondent corporation. On August 28, petitioner from the amount receivable from him for the unpaid subscriptions. Set1985, respondent Jose M. Mirasol persuaded petitioner to subscribe to 1,500 off was without lawful basis, if not premature. But, assuming that there was a shares of respondent corporation at P100.00 per share or a total of P150,000.00. call for payment, the answer is still in the negative. The NLRC cannot set it off He made an initial payment of P37,500.00. On September 1, 1975, petitioner against the wages and other benefits due petitioner. Article 113 of the Labor was appointed President and General Manager of the respondent corporation. Code allows such a deduction only in instances, to wit: However, on January 2, 1986, he resigned. On December 19, 1986, petitioner instituted with the NLRC a complaint against private respondents (Apocada and ART. 113. Wage Deduction. — No employer, in his own behalf or in behalf of Intrans Phils., Inc.) for the payment of his unpaid wages, his cost of living any person, shall make any deduction from the wages of his employees, except: allowance, the balance of his gasoline and representation expenses and his (a) In cases where the worker is insured with his consent by the employer, and bonus compensation for 1986. Petitioner and private respondents submitted their the deduction is to recompense the employer for the amount paid by him as position papers to the labor arbiter. Private respondents admitted that there is premium on the insurance; due to petitioner the amount of P17,060.07 but this was applied to the unpaid (b) For union dues, in cases where the right of the worker or his union to balance of Apocada’s subscription in the amount of P95,439.93. Petitioner checkoff has been recognized by the employer or authorized in writing by the questioned the set-off alleging that there was no call or notice for the payment of

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individual worker concerned; and (c) In cases where the employer is authorized by law or regulations issued by the Secretary of Labor. RULING: National Exchange vs Dexter 51 Phil. 601 (1928)

In the absence of restrictions in its character, a corporation, under its general power to contract, has the power to accept subscriptions upon any special terms not prohibited by positive law or contrary to public policy, provided they are not such as to require the performance of acts which are beyond the powers conferred upon the corporation by its character, and provided they do not constitute a fraud upon other subscribers or stockholders, or upon persons who are or may become creditors of the corporation.

This action was instituted in the Court of First Instance of Manila by the National Exchange Co., Inc., as assignee (through the Philippine National Bank) of C. S. Salmon & Co., for the purpose of recovering from I. B. Dexter a balance of P15,000, the par value of one hundred fifty shares of the capital stock of C. S. Salmon & co., with interest and costs. Upon hearing the cause the trial judge gave judgment for the plaintiff to recover the amount claimed, with lawful interest from January 1, 1920, and with costs. From this judgment the defendant A provision in the Corporation states: ". . . no corporation shall issue stock or appealed. bonds except in exchange for actual cash paid to the corporation or for property actually received by it at a fair valuation equal to the par value of the stock or FACTS: bonds so issued."

1. It appears that on August 10, 1919, the defendant, I. B. Dexter, signed a Now, if it is unlawful to issue stock otherwise than as stated it is self-evident that written subscription to the corporate stock of C. S. Salmon & Co. in the following a stipulation such as that now under consideration, in a stock subcription, is form: illegal, for this stipulation obligates the subscriber to pay nothing for the shares except as dividends may accrue upon the stock. In the contingency that I hereby subscribe for three hundred (300) shares of the capital stock of dividends are not paid, there is no liability at all. This is a discrimination in favor C. S. Salmon and Company, payable from the first dividends declared on of the particular subscriber, and hence the stipulation is unlawful. any and all shares of said company owned by me at the time dividends are declared, until the full amount of this subscription has been paid. Corpus Juris: Nor has a corporation the power to receive a subscription upon such terms as 2. Upon this subscription the sum of P15,000 was paid in January, 1920, will operate as a fraud upon the other subscribers or stockholders by subjecting from a dividend declared at about that time by the company, supplemented by the particular subcriber to lighter burdens, or by giving him greater rights and money supplied personally by the subscriber. privileges, or as a fraud upon creditors of the corporation by withdrawing or decreasing the capital. 3. Beyond this nothing has been paid on the shares and no further dividend has been declared by the corporation. as a general rule, an agreement between the corporation and a particular subscriber that the subscription is not to be payable, or is to be payable in part 4. There is therefore a balance of P15,000 still paid upon the subscription. only is illegal and void as it constitutes fraud to other stockholders or creditors, whether it is for the purpose of making the stock seem greater than it is, or for 5. The trial court held, in effect, that the stipulation mentioned is invalid. the purpose of preventing the predominance of certain stockholders, or for any other purpose thus, the agreement cannot be enforced by the subscriber or interpose it as a defense in an action on the subscription. ISSUE: whether the stipulation contained in the subscription to the effect that the "Conditions attached to subscriptions, which, lessen the capital of the company, subscription is payable from the first dividends declared on the shares has the are a fraud upon the grantor of the franchise, and upon those who may become effect of relieving the subscriber from personal liability in an action to recover the creditors of the corporation, and upon unconditional stockholders." value of the shares.

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2) Unpaid subscriptions ----Velasco vs Poizat 37 Phil. 802 (1918)

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OUTLINE 4 – Corporation Code VELASCO, petitioner vs. POIZAT, respondent G.R. No. L-11528 March 15, 1918 FACTS: From the amended complaint filed in this cause upon February 5, 1915, it appears that the plaintiff, as assignee in insolvency of "The Philippine Chemical Product Company" (Ltd.) is seeking to recover of the defendant, Jean M. Poizat, the sum of P1,500, upon a subscription made by him to the corporate stock of said company. It appears that the corporation in question was originally organized by several residents of the city of Manila, where the company had its principal place of business, with a capital of P50,000, divided into 500 shares. The defendant subscribed for 20 shares of the stock of the company, an paid in upon his subscription the sum of P500, the par value of 5 shares . The action was brought to recover the amount subscribed upon the remaining shares. It appears that the defendant was a stock holder in the company from the inception of the enterprise, and for sometime acted as its treasurer and manager. While serving in this capacity he called in and collected all subscriptions to the capital stock of the company, except the aforesaid 15 shares subscribed by himself and another 15 shares owned by Jose R. Infante.

2013400036 Upon July 13, 1914, a meeting of the board of directors of the company was held at which a majority of the stock was presented. Upon this occasion two resolutions, important to be here noted, were adopted. The first was a proposal that the directors, or shareholders, of the company should make good by new subscriptions, in proportion to their respective holdings, 15 shares which had been surrendered by Infante. ISSUE: Whether or not Poizat is liable for his unpaid subscription. RULING: YES. A stock subscription is a contract between the corporation on one side, and the subscriber on the other, and courts will enforce it for or against either. It is a rule, accepted by the Supreme Court of the United States that a subscription for shares of stock does not require an express promise to pay the amount subscribed, as the law implies a promise to pay on the part of the subscriber. Section 36 of the Corporation Law clearly recognizes that a stock subscription is subsisting liability from the time the subscription is made, since it requires the subscriber to pay interest quarterly from that date unless he is relieved from 14


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such liability by the by-laws of the corporation. The subscriber is as much bound to pay the amount of the share subscribed by him as he would be to pay any other debt, and the right of the company to demand payment is no less incontestable. The provisions of the Corporation Law (Act No. 1459) give recognition of two remedies for the enforcement of stock subscriptions. The first and most special remedy given by the statute consists in permitting the corporation to put up the unpaid stock for sale and dispose of it for the account of the delinquent subscriber. In this case the provisions of section 38 to 48, inclusive, of the Corporation Law are applicable and must be followed. It is generally accepted doctrine that the statutory right to sell the subscriber's stock is merely a remedy in addition to that which proceeds by action in court; and it has been held that the ordinary legal remedy by action exists even though no express mention thereof is made in the statute.

subscribed capital stock as of July 23, 1946, the first 50 per cent payable within 60 days beginnning August 1, 1946, and the remaining 50 per cent payable within 60 days beginning October 1, 1946. The resolution also provided, that all unpaid subscription after the due dates of both calls would be subject to 12 per cent interest per annum. Lastly, the resolution provided, that after the expiration of 60 days' grace which would be on December 1, 1946, for the first call, and on February 1, 1947, for the second call, all subscribed stocks remaining unpaid would revert to the corporation. (See Exhibit F and Exhibit I).

Lingayen Gulf Electric vs Baltazar93 Phil. 404 (1953) G.R. No. L-4824 G.R. No. L-6244 June 30, 1953 LINGAYEN GULF ELECTRIC POWER COMPANY, INC vs. IRINEO BALTAZAR,

It was admitted by the defendant that he received notice from the Secretary-, demanding. It was agreed by the parties that the call of the Board of Directors was not published in a newspaper of general circulation as required by section 40 of the Corporation Law.

FACTS: Defendant, Irineo Baltazar appears to have subscribed for 600 shares on account of which he had paid upon the organization of the corporation Lingayen Gulf the sum of P15,000. After incorporation, the defendant made further payments on account of his subscription, leaving a balance of P18,500 unpaid for, which amount, the plaintiff now claims in this action.

On September 28, 1949, the legal counsel wrote a letter to the defendant, demanding the payment of the unpaid balance of his subscription amounting to P18,500. The defendant ignored the said demand. Hence this action.

Upon a written reminder by the corporation, the defendant answered on September 25, 1946, asking the corporation that he be allowed to pay his unpaid subscription by February 1, 1947. In his answer, the defendant also agreed that if he could not pay the balance, his unpaid subscription would be reverted to the corporation. The defendant wrote another letter to the members of the Board of Directors of the plaintiff corporation, offering to withdraw completely from the corporation by selling out to the corporation all his shares of stock in the total amount of P23,000. Which was left unacted upon by the plaintiff. On April 17, 1948, the Board of Directors held a meeting, and adopted Resolution No. 17. This resolution in effect set aside the stockholders resolution approved on June 23, 1946, on the ground that it was null and void, and because the plaintiff corporation was not in a financial position to absorb the unpaid balance of the subscribed capital stock. On June 10, 1949, the stockholders held another meeting adopting resolution No. 4, whereby it was agreed to revalue the stocks and assets of the company so as to attract outside investors to put in money for the rehabilitation of the company.

The defendant disclaims liability to the plaintiff corporation on the following grounds:

On July 23, 1946, a majority of the stockholdersamong them the herein ISSUES: defendant, held a meeting and adopted stockholders' resolution No. 17. It was agreed upon by the stockholders present to call the balance of all unpaid 1. That the plaintiffs' action is premature because there was no valid call; and

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2. That granting that there was a valid call, he was released from the obligation of made and accepted, there can be no cancellation or release from the the balance of his subscription by stockholders' resolution No. 17 and No. 4. obligation without the consent of the corporation and all the stockholders; . . . . (2 Thompson on Corporation, p. 186). By way of counterclaim, the defendant also claims from the plaintiff a reasonable compensation at the rate of P700 per month as president of the company. He states the reason for the rule as follows: HELD: We agree with the lower court that the law requires that notice of any call for the payment of unpaid subscription should be made not only personally but also by publication. This is clear from the provisions of section 40 of the Corporation Law, Act No. 1459, as amended

SEC. 855. Right to withdraw as against subscribers. — A contract of subscription is, at least in the sense which creates as estoppel, a contract among the several subscribers. For this reason no one of the subscribers can withdraw from the contract without the consent of all the others, and thereby diminish, without the universal consent, the common fund in which all have It will be noted that section 40 is mandatory as regards publication, using the acquired an interest. . . . (2 Thompson on Corporations, p. 194.). word "must". As correctly stated by the trial court, the reason for the mandatory provision is not only to assure notice to all subscribers, but also to assure As already found by the trial court, the release attempted in Resolution No. 17 of equality and uniformity in the assessment on stockholders. (14 C.J. 639). 1946 was not valid for lack of a unanimous vote. If found that at least seven stockholders were absent from the meeting when said resolution was approved. We find the citation of authorities made by the plaintiff and appellant inapplicable. In the case of Velasco vs. Poizat (37 Phil. 805), the corporation involved was As regards the compensation of President claimed by defendant and insolvent, in which case all unpaid stock subscriptions become payable on appellant, it is clear that he is not entitled to the same. The by-laws of the demand and are immediately recoverable in an action instituted by the assignee. company are silent as to the salary of the President. On the other hand, other resolutions provide for per diems to be paid to the President and the But when the corporation is a solvent concern, the rule is: It is again insisted that directors of each meeting attended. This leads to the conclusions that the plaintiffs cannot recover because the suit was not proceeded by a call or President and the board of directors were expected to serve without assessment against the defendant as a subscriber, and that until this is done no salary, and that the per diems paid to them were sufficient compensation right of action accrues. for their services. Affirmed. Going to the claim of defendant and appellant that Resolution No. 17 of 1946 Lingayen Gulf Electric v. Baltazar released him from the obligation to pay for his unpaid subscription, the authorities are generally agreed that in order to effect the release, there must be unanimous Facts: consent of the stockholders of the corporation. Herein defendant subscribed to 600 shares in plaintiff corporation worth about Exceptions. In particular circumstances, as where it is given pursuant to a bona PhP60,000 at PhP100 par value. After incorporation, the defendant made further fide compromise, or to set off a debt due from the corporation, a release, payments on account of his subscription, of which PhP18,500 was left unpaid, supported by consideration, will be effectual as against dissenting stockholders and which the plaintiff corporation claims in this action. Later on, the plaintiff and subsequent and existing creditors. A release which might originally have corporation decided to call on the 50% of the unpaid subscriptions. This call on the unpaid subscriptions was received by the defendant through the Secretarybeen held invalid may be sustained after a considerable lapse of time. Treasurer. It was not published in a newspaper of general circulation as required In the present case, the release claimed by defendant and appellant does not fall by the prevailing law at that time; defendant refused this demand of the plaintiff under the exception above referred to, because it was not given pursuant to corporation, thus this case. Defendant contends that this case is premature, as a bona fide compromise, or to set off a debt due from the corporation, and there the call on the unpaid subscriptions was invalidly made. Plaintiff corporation, on was no consideration for it. the other hand, avers that authorities on the matter are to the effect that once demand is made on these unpaid subscriptions, it is immediately due and Another authority: demandable. SEC. 850. Unanimous consent of stockholders necessary to release subscriber. — … after a valid subscription to the capital stock of a corporation has been Issue:

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Whether or not the call on the unpaid subscriptions were validly made.

allotted to stockholders.

HELD: No. The cited case on which the plaintiff corporation heavily relies on to justify its contention, finds incorrect application in this case. In the case of Velasco v. Poizat, the corporation therein was insolvent, thus the unpaid subscriptions are payable on demand and are immediately recoverable in an action instituted by the assignee. Plaintiff corporation in this case is not insolvent, and the prevailing Corporation Code at the time mandatorily requires that publication, and not mere personal demand, before it can be said that any call on the payment of unpaid subscriptions could be validly made. The reason for the mandatory provision is not only to assure notice to all subscribers, but also to assure equality and uniformity in the assessment on stockholders.

ISSUE:

ADDENDUM: Release from payment of unpaid subscribed stock must be made by all the stockholders. In this case, one of the defences interposed by the defendant is that there was a resolution adopted by the stockholders releasing holders of unpaid subscribers of stock from payment thereof; making the demand of the plaintiff corporation for the remaining unpaid subscribed shares of stock to be without authority. This defence is largely ineffectual. The court held that before such a release may be made, the stockholders must agree to do so unanimously. This was not the case, as the trial court had found that there were at least 7 stockholders missing from the meeting where the aforementioned resolution was adopted. The only instances where a release from such obligation to pay are 1) a bona fide compromise, 2) a set off of debt due from the corporation, and 3) a consideration from the corporation. The defendant possesses none of these exceptions; thus he cannot be said to have been released from the payment of his unpaid subscribed shares of stock.

Settled is the rule that nothing in this act shall prevent the directors from collecting, by action in any court of proper jurisdiction, the amount due on any unpaid subscription, together with accrued interest and costs and expenses incurred.

Da Silva vs Aboitiz 44 Phil. 755 (1923) G.R. No. L-19893; March 31, 1923

FACTS: De Silva subscribed to 650 shares and paid for 200. The company notified him that his shares will be declared delinquent and sold in a public auction if he does not pay the balance. De Silva did not pay. The company advertised a notice of delinquency sale. De Silva sought an injunction because the by-laws allegedly provide that unpaid subscriptions will be paid from the dividends

WON De Silva is liable despite the provision in the by-laws regarding dividends as payment for unpaid subscriptions. HELD: YES. Although, the by-laws provide that unpaid subscriptions may be paid from such dividends The defendant corporation, through its board of directors, made use of its discretionary power, taking advantage of the first of the two remedies: delinquency sale or specific performance.

Lumanlan vs Cura 59 Phil. 746 (1934) GR No. L-39861 March 21, 1934 GODDARD, J. Summary: Lumanlan had unpaid subscriptions.  Company’s receiver sued him for the balance and won.  While the casewas on appeal, the company and petitioner entered into acompromise whereby he would directly pay a creditor of the company.  In exchange, the company would forego whatever balance remained on the unpaid subscription.  He agreed since he would be paying less than his unpaid subscription.  Afterwards, the corporation still sued him for the balance because the company still has unpaid creditors.  His defense was the compromise agreement. Is Lumanlan still liable despite the compromise agreement? YES!   The Court held that the agreement cannot prejudice creditors.  The subscriptions constitute a fund to which they have a right to look to for satisfaction of their claims.  Therefore, the corporation has a right to collect all unpaid stock

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OUTLINE 4 – Corporation Code subscriptions and any other amounts which may be due it, notwithstanding the compromise agreement. FACTS: The appellant, Dizon & co., Inc., assigns twenty-three errors as having been committed by the trial court. 4. The appellant is a corporation duly organized under the laws of the Philippine Islands with its central office in the City of Manila. 5. The plaintiff-appellee Bonifacio Lumanlan, on July 31, 1922, subscribed for 300 shares of stock of said corporation at a par value of P50 or a total of P15,000.

6. Julio Valenzuela, Pedro Santos and Francisco Escoto, creditors of this corporation, filed suit against it in the Court of First Instance of Manila, case No. 37007, praying that a receiver be appointed, as it appeared that the corporation at that time had no assets except credits against those who had subscribed for shares of stock. 7. The court named Tayag as receiver for the purpose of collecting, said subscriptions.

8. As Bonifacio Lumanlan had only paid P1,500 of the P15,000, par value of the stock for which he subscribed, the receiver on August 30, 1930, filed a suit against him in the Court of First Instance of Manila, civil case No. 37492, for the collection of P15,109 --- P13,500 of which was the amount he owed for unpaid stock and P1,609 for loans and advances by the corporation to Lumanlan. 9. In that case Lumanlan was sentenced to pay the corporation the abovementioned sum of P15,109 with legal interest thereon from August 30, 1930, and costs.

10. Lumanlan appealed from this decision. 11. Pending this appeal, with the permission of the court, the creditors, some of the directors and the majority of the stockholders held several meetings in which it was agreed in substance that subscribers for the capital stock who were in default should pay the creditors.

12. Lumanlan was designated to pay the debt of the corporation to Julio Valenzuela, one of the petitioners in case No. 37007.

2013400036 13. At that time the corporation owed Valenzuela the sum of P8,000 plus interest thereon at the rate of 12 per cent per annum from March 17, 1928. 14. Lumanlan agreed to assume this obligation. 15. And in turn the corporation agreed that if Lumanlan would dismiss his appeal in case No. 37492 the corporation would collect only 50 per cent of the amount subscribed by him for stock, provided that in case the 50 percent was insufficient to pay Valenzuela he should pay an additional amount which should not exceed the amount of the judgment against him in that case. 16. In view of this agreement Lumanlan withdrew his appeal and paid Valenzuela the sum of P11,840 including interest and thereby was subrogated in place of Valenzuela. 17. The petitioning creditors having been paid the amounts owed to them by the corporation asked that the receiver be dismissed and the court granted this. 18. Disregarding this agreement and notwithstanding the payment made by Lumanlan to Valenzuela, the corporation on May 5, 1932, asked for the execution of the sentence in case No. 37492 and by virtue of an order of execution the provincial sheriff levied upon two parcels of land belonging to Lumanlan described in certificate of title No. 901 of the Province of Tarlac.

19. Lumanlan brought this case to collect from Dizon & Co., Inc., and to prevent the sheriff from selling the two parcels of land. Pending the result of this case the sheriff was enjoined from proceeding with the sale.1ªvvphi1.ne+ 20. In the promissory note given by the corporation to Valenzuela the former obligated itself to pay Valenzuela the sum of P8,000 with interest at 12 per cent per annum and, upon failure to pay said sum and interest when due, 25 per cent of the principal as expenses of collection and judicial costs in case of litigation. 21. By virtue of these facts Lumanlan is entitled to a credit against the judgment in case No. 37492 for P11,840 and an additional sum of P2,000, which is 25 per cent on the principal debt, as he had to file this

18


22.

2013400036

suit to collect, or receive credit for the sum which he had paid Valenzuela The judgment of the trial court was modified in accordance with the above and for and in place of the corporation, or a total of P13,840. 27. Dizon & Co., Inc., is ordered to credit Bonifacio Lumanlan with the sum This leaves a balance due Dizon & co., Inc., of P1,269 on that judgment of P13,840 against the judgment for P15,109, in case No. 37492 of the with interest thereon at 6 per cent per annum from August 30, 1930. Court of First Instance of Manila;

ISSUE: WON Lumanlan is still liable despite the compromise agreement.? RULING: YES. 23. It appears from the record that during the trial of the case now under consideration, the Bank of the Philippine Islands appeared in this case as assignee in the "Involuntary Insolvency of Dizon & Co., Inc.

28. To issue to Bonifacio Lumanlan 300 shares of its capital stock upon payment by him of the sum of P1,269 with interest thereon at 6 per cent per annum from August 30, 1930. 29. The preliminary injunction issued in this case is hereby dissolved for the purpose of enabling Dizon & Co., Inc., to ask for a new order of execution in case No. 37492, Court of First Instance of Manila, for the sum of P1,269 with interest thereon as stated above. China Banking Corp. v. CA GR 117604 (Mar. 26, 1997) CHINA BANK VS CA and VALLEY GOLF

24. That bank was appointed assignee in case No. 43065 of the Court of First Instance of the City of Manila on November 28, 1932. 25. It is therefore evident that there are still other creditors of Dizon & Co., Inc.

Facts:

In 1974 Calapatia, a stockholder Valley Golf & Country Club, Inc. pledged his 26. This being the case that corporation has a right to collect all unpaid stock Stock Certificate to China Bank and was noted in its corporate books per request of China Bank. Due to Calapatia’s failure to pay his obligation,the bank subscriptions and any other amounts which may be due it. filed a petition for extrajudicial foreclosure and to conduct a public auction.The It is established doctrine that subscriptions to the capital of a corporation petitioner informed VG of the foreclosure proceedings and requested that the pledged stock be transferred to the bank’s name but was rejected due to constitute a fund to which the creditors have a right to look for Calapatia’s unsettled accounts with the club. Despite the foregoing, public satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize auction was held and petitioner emerged as the highest bidder. In 1986, VG auctioned the stock wherein VG is the new owner and informed Calapatia of the assets for the payment of its debts. (Philippine Trust Co. vs. Rivera, 44 termination of his membership VGCCI assails the validity of the pledge Phil., 469, 470.) agreement executed by Calapatia in petitioner’s favor. It contends that the same . . . the Corporation Law clearly recognizes that a stock subscription is a was null and void for lack of consideration because the pledge agreement was subsisting liability from the time the subscription is made, since it entered into on 21 August 1974 but the loan or promissory note which it secured requires the subscriber to pay interest quarterly from that date unless he was obtained by Calapatia much later or only on 3 August 1983. is relieved from such liability by the by-laws of the corporation. The subscriber is as much bound to pay the amount of the share subscribed Issue: by him as he would be to pay any other debt, and the right of the company to demand payment is no less incontestable. (Velasco vs. Whether the stock is non transferrable due the unpaid claim Poizat, 37 Phil., 802, 805.) In view of the above conclusions it is not necessary to discuss the other questions raised by the parties in this case.

Held:

19

OUTLINE 4 – Corporation Code No. The Supreme Court held that Sec. 63 of the Corporation Code which provides that "no shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation" cannot be utilized by VGCCI. The term "unpaid claim" refers to "any unpaid claim arising from unpaid subscription, and not to any indebtedness which a subscriber or stockholder may owe the corporation arising from any other transaction." In the case at bar, the subscription for the share in question has been fully paid as evidenced by the issuance of Membership Certificate No. 1219. What Calapatia owed the corporation were merely the monthly dues. Hence, the aforequoted provision does not apply. 3) Rights of Unpaid Shares ---- Indivisibility of Subscription FuaCun v. Summers, et al.44 Phil. 704(1923) Facts: Chua Soco subscribed for five hundred shares of stock of the defendant Banking Corporation at a par value of P100 per share, paying the sum of P25,000, one-half of the subscription price, in cash. Chua Soco executed a promissory note in favor of the plaintiff Fua Cun for the sum of P25,000 payable in ninety days and drawing interest at the rate of 1 per cent per month, securing the note with a chattel mortgage on the shares of stock subscribed for by Chua Soco, who also endorsed the receipt above mentioned and delivered it to the mortgage. In the meantime Chua Soco appears to have become indebted to the China Banking Corporation in the sum of P37,731.68 for dishonored acceptances of commercial paper and in an action brought against him to recover this amount, Chua Soco's interest in the five hundred shares subscribed for the attached and the receipt seized by the sheriff. The attachment was levied after the defendant bank had received notice of the fact that the receipt had been endorsed over to the plaintiff. Issue: Whether or not the petitioner is entitled to the two hundred fifty shares of stock Held: The Supreme Court ruled that in the absence of special agreement to the contrary, a subscriber for a certain number of shares of stock does not, upon payment of one-half of the subscription price, become entitled to the issuance of certificates for one-half the number of shares subscribed for; the subscriber's right consists only in an equity entitling him to a certificate for the total number of shares subscribed for by him upon payment of the remaining portion of the subscription price.

2013400036 Baltazar v. Lingayen Gulf 14 SCRA 522(1965)

FACTS: The Lingayen Gulf Electric Power Co., Inc., hereinafter referred to as Corporation, was doing business in the Philippines, with principal offices at Lingayen, Pangasinan, and with an authorized capital stock of P300.000.00 divided into 3,000 shares of voting stock at P100.00 par value, per share. Plaintiffs Baltazar and Rose were among the incorporators, having subscribed to 600 and 400 shares of the capital stock, or a total par value of P60,000.00 and P40.000.00, respectively. It is alleged that it has always been the practice and procedure of the Corporation to issue certificates of stock to its individual subscribers for unpaid shares of stock. Of the 600 shares of capital stock subscribed by Baltazar, he had fully paid 535 shares of stock, and the Corporation issued to him several fully paid up and non-assessable certificates of stock, corresponding to the 535 shares. After having made transfers to third persons and acquired new ones, Baltazar had to his credit, on the filing of the complaint 341 shares fully paid and nonassessable. The respondents Ungson, Estrada, Fernandez and Yuson were small stockholders of the Corporation, all holding a total number of fully paid-up shares of stock, of not more than 100 shares, with a par value of P10,000.00 and the defendant Acena, was likewise an incorporator and stockholder, holding 600 shares of stock, for which certificate of stock were issued to him and as such, was the largest individual stockholder thereof. Defendants Ungson, 20

OUTLINE 4 – Corporation Code Estrada, Fernandez and Yuzon, constituted the majority of the holdover seven-member Board of Directors of the Corporation, in 1955, two (2) of said defendants having been elected as members of the Board in the annual stockholders' meeting held in May 1954, largely on the vote of their codefendant Acena, while the other two (2) were elected mainly on the vote of the plaintiffs and their group of stockholders. Let the first group be called theUngson group and the second, the Baltazar group. ISSUE: Whether or not a stockholder, in a stock corporation, subscribes to a certain number of shares of stock, and he pays only partially, for which he is issued certificates of stock, is he entitled to vote the latter, notwithstanding the fact that he has not paid the balance of his subscription, which has been called for payment or declared delinquent. RULING: YES. The cases at bar do not come under the aegis of the principle enunciated in the Fua Cun v. Summers case, because it was the practice and procedure, since the inception of the corporation, to issue certificates of stock to its individual subscribers for unpaid shares of stock and gave voting power to shares of stock fully paid. And even

2013400036 though no agreement existed, the ruling in said case does not now reflect the correct view on the matter, for better than an agreement or practice, there is the law, which renders the said case of Fua Cun-Summers, obsolescent. In the cases at bar, the defendant-corporation had chosen to apply payments by its stockholders to definite shares of the capital stock of the corporation and had fully paid capital stock shares certificates for said payments; its call for payment of unpaid subscription and its declaration of delinquency for non-payment of said call affecting only the remaining number of shares of its capital stock for which no fully paid capital stock shares certificates have been issued, "and only these have been legally shorn of their voting rights by said declaration of delinquency" (amended decision). Nava v. Peers Mktg. Corp.76 SCRA 65(1976)

GR L-28120, 25 November 1976 FACTS: Teofilo Po as an incorporator subscribed to eighty shares of Peers Marketing Corporation at one hundred pesos a share or a total par value of eight thousand pesos. Po paid two thousand pesos or twenty-five percent of the amount of his subscription. No certificate of stock was issued to him or, for that matter, to any incorporator, subscriber or stockholder. On April 2, 1966 Po sold to Ricardo A. Nava for two thousand pesos twenty of his eighty shares. In the deed of

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sale Po represented that he was "the absolute and registered owner of twenty shares" of Peers Marketing Corporation. Nava requested the officers of the corporation to register the sale in the books of the corporation. The request was denied because Po has not paid fully the amount of his subscription. Nava was informed that Po was delinquent in the payment of the balance due on his subscription and that the corporation had a claim on his entire subscription of eighty shares which included the twenty shares that had been sold to Nava.

holder of the certificate desires to assume the legal rights of a shareholder to enable him to vote at corporate elections and to receive dividends, he fills up the blanks in the form by inserting his own name as transferee. Then he delivers the certificate to the secretary of the corporation so that the transfer may be entered in the corporation's books. The certificate is then surrendered and a new one issued to the transferee. That procedure cannot be followed in the instant case because, as already noted, the twenty shares in question are not covered by any certificate of stock in Po's name. Moreover, the corporation has a claim on the said shares for ISSUE: the unpaid balance of Po's subscription. A stock Whether or not Peers may be compelled by mandamus subscription is a subsisting liability from the time the subscription is made. The subscriber is as much bound to to register the stocks in Nava’s name. pay his subscription as he would be to pay any other debt. The right of the corporation to demand payment is no less RULING: incontestable. NO. There’s no certificate of stock issued in favor of Po. Shares of stock may be transferred by delivery to the transferee of the certificate properly indorsed. "Title may be vested in the transferee by delivery of the certificate with a written assignment or indorsement thereof" There should be compliance with the mode of transfer prescribed by law. The usual practice is for the stockholder to sign the form on the back of the stock certificate. The certificate may thereafter be transferred from one person to another. If the

In this case no stock certificate was issued to Po. Without the stock certificate, which is the evidence of ownership of corporate stock, the assignment of corporate shares is effective only between the parties to the transaction. ***FuaCun doctrine prevails. Baltazar abandoned.*** 4) Nature/Function of Stock Certificates ---Tan v. SEC (206 SCRA 740)

G.R. No. 95696; March 3, 1992 FACTS: Petitioner is the incorporator of the respondent corporation. Stock Certificate No. 2 was given to him as evidenced of his shares. He was elected president and thereafter in order to

22

OUTLINE 4 – Corporation Code complete the membership of the five (5) directors in the Board, he sold 50 shares out 400 shares of capital stock to his brother. Stock Certificate No. 2 was cancelled and the corresponding Certificates Nos. 6 and 8 were issued. Petitioner did not endorse and instead kept the cancelled certificate. Later on, petitioner was dislodged from the position and thereafter withdrew from the corporation. Years later, petitioner filed a case against respondent corporation before the Cebu SEC Extension Office, questioning for the first time, the cancellation of his aforesaid Stock Certificates Nos. 2 and 8. The bone of contention raised by the petitioner is that the deprivation of his shares despite the non-endorsement or surrender of his Stock Certificate Nos. 2 and 8, was without the process contrary to the provision of Section 63 of the Corporation Code. ISSUE:

Nature and function of stock certificates.

HELD: A certificate of stock is the paper representative or tangible evidence of the stock itself and of the various interests therein. The certificate is not stock in the corporation but is merely evidence of the holder's interest and status in the corporation, his ownership of the share represented thereby, but is not in law the equivalent of such ownership. It expresses the contract between the corporation and the stockholder, but is not essential to the existence of a share in stock or the nation of the relation of shareholder to the corporation. A certificate of stock is not a negotiable instrument. "Although it is sometime regarded as quasi-negotiable, in the sense that it may be transferred by endorsement, coupled with delivery, it is well-settled that it is non-negotiable, because the holder thereof takes it without prejudice to such rights or defenses as the registered owner/s or transferor’s creditor may have under the law, except insofar as such rights or defenses are subject to the limitations imposed by the principles governing estoppel." In the case at bar, a by-law which prohibits a transfer of stock without the consent or approval of all the stockholders or of the President or Board of Directors is illegal as constituting undue

2013400036 limitation on the right of ownership and in restraint of trade. While Sec. 47 (9) of the Corporation Code grants to stock corporations the authority to determine in the bylaws the "manner of issuing certificates" of shares of stock, however, the power to regulate is not the power to prohibit, or to impose unreasonable restrictions of the right of stockholders to transfer their shares. To uphold the cancellation of a stock certification as null and void for lack of delivery of the cancelled "mother" certificate whose endorsement was deliberately withheld by petitioner, is to prescribe certain restrictions on the transfer of stock in violation of the Corporation Code as the only law governing transfer of stocks. 5) Proof of Ownership of Shares ---Nautica Canning Corp. Yumul GR 164588 (Oct. 19, 2005)

G.R. No. 164588; October 19, 2005 FACTS: Yumul was appointed Chief Operating Officer/General Manager of Nautica. First Dominion Prime Holdings, Inc., Nautica’s parent company, through its Chairman Alvin Y. Dee, granted Yumul an Option to Purchase up to 15% of the total stocks it subscribed from Nautica. A Deed of Trust and Assignment was executed between First Dominion Prime Holdings, Inc. and Yumul whereby the former assigned 14,999 of its subscribed shares in Nautica to the latter. After Yumul’s resignation from Nautica, he wrote a letter to Dee requesting the latter to formalize his offer to buy Yumul’s 15% share in Nautica and demanding the issuance of the corresponding certificate of shares in his name should Dee refuse to buy the same. Dee denied the request claiming that Yumul was not a stockholder of Nautica. Yumul requested that the Deed of Trust and Assignment be recorded in the Stock and Transfer Book of Nautica, and that he, as a stockholder, be allowed to inspect its books and records. Yumul’s requests were denied. Yumul filed a petition for mandamus praying that the Deed of Trust and Assignment be recorded in the Stock and Transfer Book of Nautica and that the certificate of stocks corresponding thereto be issued in his name.

23

OUTLINE 4 – Corporation Code ISSUE:

WON Yumul is a stockholder. (Proof of Ownership of Shares)

HELD: YES. Indeed, it is possible for a business to be wholly owned by one individual. The validity of its incorporation is not affected when such individual gives nominal ownership of only one share of stock to each of the other four incorporators. This is not necessarily illegal. But, this is valid only between or among the incorporators privy to the agreement. It does bind the corporation which, at the time the agreement is made, was non-existent. Thus, incorporators continue to be stockholders of a corporation unless, subsequent to the incorporation, they have validly transferred their subscriptions to the real parties in interest. A transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent as far as the corporation is concerned. As between the corporation on one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are. It is only when the transfer has been recorded in the stock and transfer book that a corporation may rightfully regard the transferee as one of its stockholders. From this time, the consequent obligation on the part of the corporation to recognize such rights as it is mandated by law to recognize arises. Lao v. Lao GR 170585 (Oct 6, 2008) G.R. No. 170585; October 6, 2008

2013400036 Lao acquired his shares from his father and Jose Lao from respondent himself. Respondent denied petitioners' claim. He also claimed that petitioners did not acquire any shares in PFSC by any of the modes recognized by law, namely subscription, purchase, or transfer. Meanwhile, R.A. 8799, otherwise known as the Securities Regulation Code, was enacted, transferring jurisdiction over all intra-corporate disputes from the SEC to the RTC. RTC denied their petition on the ground that they have no stock certificates in their names. ISSUE:

Is the mere inclusion as shareholder in the General Information Sheet of a corporation sufficient proof that one is a shareholder in such corporation? HELD: NO. The mere inclusion as shareholder of petitioners in the General Information Sheet of PFSC is insufficient proof that they are shareholders of the company. The information in the document will still have to be correlated with the corporate books of PFSC. A certificate of stock is the evidence of a holder's interest and status in a corporation. It is a written instrument signed by the proper officer of a corporation stating or acknowledging that the person named in the document is the owner of a designated number of shares of its stock. It is prima facie evidence that the holder is a shareholder of a corporation.

FACTS: 6) Restrictions on Transfer of Shares --Fleischer v. BoticaNolasco (1925) 47 Phil. 583 Petitioners David and Jose Lao filed a petition with the SEC against respondent Dionisio Lao, president of Pacific Foundry Shop G.R. No. L-23241. March 14, 1925 Corporation (PFSC). Petitioners prayed for a declaration as stockholders and directors of PFSC, issuance of certificates of shares in their name and to be allowed to examine the corporate FACTS: books of PFSC. Petitioners claimed that they are stockholders of PFSC based On November 15, 1923, the plaintiff filed an amended on the General Information Sheet filed with the SEC, in which they are named as stockholders and directors of the corporation. David complaint against the Botica Nolasco, Inc., alleging that he

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became the owner of five shares of stock of said corporation, by purchase from their original owner, one Manuel Gonzalez; that the said shares were fully paid; and that the defendant refused to register said shares in his name in the books of the corporation in spite of repeated demands to that effect made by him upon said corporation, which refusal caused him damages amounting to P500. The defendant filed a demurrer on the ground that the amended complaint did not state facts sufficient to constitute a cause of action, and that said amended complaint was ambiguous, unintelligible, uncertain, which demurrer was overruled by the court. The defendant answered the amended complaint denying generally and specifically each and every one of the material allegations thereof, and, as a special defense, alleged that the defendant, pursuant to article 12 of its bylaws, had preferential right to buy from the plaintiff said shares at the par value of P100 a share, plus P90 as dividends corresponding to the year 1922, and that said offer was refused by the plaintiff. The defendant prayed for a judgment absolving it from all liability under the complaint and directing the plaintiff to deliver to the defendant the five shares of stock in question, and to pay damages.

RULING:

ISSUE:

The only restraint imposed by the Corporation Law upon transfer of shares is found in section 35 of Act No. 1459, quoted above, as follows: "No transfer, however, shall be valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares transferred." This restriction is necessary in order that the officers of the corporation may know who are the stockholders, which is

Whether or not article 12 of the by-laws of the corporation is in conflict with the provisions of the Corporation Law (Act No. 1459).

YES. The holder of shares, as owner of personal property, is at liberty, under said section, to dispose of them in favor of whomsoever he pleases, without any other limitation in this respect, than the general provisions of law. Therefore, a stock corporation in adopting a by-law governing transfer of shares of stock should take into consideration the specific provisions of section 35 of Act No. 1459, and said by-law should be made to harmonize with said provisions. It should not be inconsistent therewith. The by-law now in question was adopted under the power conferred upon the corporation by section 13, paragraph 7, above quoted; but in adopting said by-law the corporation has transcended the limits fixed by law in the same section, and has not taken into consideration the provisions of section 35 of Act No. 1459. As a general rule, the by-laws of a corporation are valid if they are reasonable and calculated to carry into effect the objects of the corporation, and are not contradictory to the general policy of the laws of the land

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failed to execute a document recognizing private respondent's beneficial ownership over said share. When petitioner's contract of employment was up for renewal in 1989, he notified private respondent that he Thomson v. CA(298 SCRA 280) would no longer be available as Executive Vice President MARSH THOMSON vs. after September 30, 1989. Still, the private respondent COURT OF APPEALS and THE AMERICAN CHAMPER OF asked the petitioner to stay on for another six (6) months. COMMERCE OF THE PHILIPPINES, INC. ISSUE: G.R. No. 116631, October 28, 1998

essential in conducting elections of officers, in calling meeting of stockholders, and for other purposes. but any restriction of the nature of that imposed in the by-law now in question, is ultra vires, violative of the property rights of shareholders, and in restraint of trade.

FACTS: A. Lewis Burridge, retired as AmCham's President while petitioner was still working with private respondent, his superior,. Before Burridge decided to return to his home country, he wanted to transfer his proprietary share in the Manila Polo Club (MPC) to petitioner. However, through the intercession of Burridge, private respondent paid for the share but had it listed in petitioner's name. This was made clear in an employment advice dated January 13, 1986, wherein petitioner was informed by private respondent. Burridge transferred said proprietary share to petitioner, as confirmed in a letter of notification to the Manila Polo Club. Upon his admission as a new member of the MPC, petitioner paid the transfer fee of P40,000.00 from his own funds; but private respondent subsequently reimbursed this amount. MPC issued Proprietary Membership Certificate Number 3398 in favor of petitioner. But petitioner, however,

Whether or not private respondent the beneficial owner of the disputed share. RULING: YES. In the present case, as the Executive Vice-President of AMCHAM, petitioner occupied a fiduciary position in the business of AMCHAM. It released the funds to acquire a share in the Club for the use of petitioner but obliged him to "execute such document as necessary to acknowledge beneficial ownership thereof by the Chamber". A trust relationship is, therefore, manifestly indicated. The beneficiary of a trust has beneficial interest in the trust property, while a creditor has merely a personal claim against the debtor. In trust, there is a fiduciary relation between a trustee and a beneficiary, but there is no such relation between a debtor and creditor. While a debt implies 26


2013400036

merely an obligation to pay a certain sum of money, a trust refers to a duty to deal with a specific property for the benefit of another. If a creditor-debtor relationship exists, but not a fiduciary relationship between the parties, there is no express trust. However, it is understood that when the purported trustee of funds is entitled to use them as his or her own (and commingle them with his or her own money), a debtor-creditor relationship exists, not a trust.

Moreover, petitioner failed to present evidence to support his allegation of being merely a debtor when the private respondent paid the purchase price of the MPC share. Applicable here is the rule that a trust arises in favor of one who pays the purchase money of property in the name of another, because of the presumption that he who pays for a thing intends a beneficial interest therein for himself. Rural Bank of Salinas, Inc. v. CA (210 SCRA 510)

27

OUTLINE 4 – Corporation Code RURAL BANK OF SALINAS, INC., MANUEL SALUD, LUZVIMINDA TRIAS and FRANCISCO TRIAS vs. COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION, MELANIA A. GUERRERO, LUZ ANDICO, WILHEMINA G. ROSALES, FRANCISCO M. GUERRERO, JR., and FRANCISCO GUERRERO , SR. G.R. No. 96674, June 26, 1992 FACTS: Clemente G. Guerrero, President of the Rural Bank of Salinas, Inc., executed a Special Power of Attorney in favor of his wife, private respondent Melania Guerrero, giving and granting the latter full power and authority to sell or otherwise dispose of and/or mortgage 473 shares of stock of the Bank registered in his name (represented by the Bank's stock certificates nos. 26, 49 and 65), to execute the proper documents therefor, and to receive and sign receipts for the dispositions. On February 27, 1980, and pursuant to said Special Power of Attorney, private respondent Melania Guerrero, as Attorney-in-Fact, executed a Deed of Assignment for 472 shares out of the 473 shares, in favor of private respondents Luz Andico (457 shares), Wilhelmina Rosales (10 shares) and Francisco Guerrero, Jr. (5 shares).Almost four months later, or two (2) days before the death of Clemente Guerrero on June 24, 1980, private respondent Melania Guerrero, pursuant to the same Special Power of Attorney, executed a Deed of Assignmentfor the

2013400036 remaining one (1) share of stock in favor of private respondent Francisco Guerrero, Sr. Subsequently, private respondent Melania Guerrero presented to petitioner Rural Bank of Salinas the two (2) Deeds of Assignment for registration with a request for the transfer in the Bank's stock and transfer book of the 473 shares of stock so assigned, the cancellation of stock certificates in the name of Clemente G. Guerrero, and the issuance of new stock certificates covering the transferred shares of stocks in the name of the new owners thereof. However, petitioner Bank denied the request of respondent Melania Guerrero. ISSUE: Whether or not a Mandamus lie against the Rural Bank of Salinas to register in its stock and transfer book the transfer of 473 shares of stock to private respondents. RULING: YES. Section 5 (b) of P.D. No. 902-A grants to the SEC the original and exclusive jurisdiction to hear and decide cases involving intracorporate controversies. An intra-corporate controversy has been defined as one which arises between a stockholder and the corporation. There is neither distinction, qualification, nor any exception whatsoever. The 28


2013400036

case at bar involves shares of stock, their registration, cancellation and issuances thereof by petitioner Rural Bank of Salinas. It is therefore within the power of respondent SEC to adjudicate. A corporation, either by its board, its by-laws, or the act of its officers, cannot create restrictions in stock transfers, because: Restrictions in the traffic of stock must have their source in legislative enactment, as the corporation itself cannot create such impediment. By-laws are intended merely for the protection of the corporation, and prescribe regulation, not restriction; they are always subject to the charter of the corporation. The corporation, in the absence of such power, cannot ordinarily inquire into or pass upon the legality of the transactions by which its stock passes from one person to another, nor can it question the consideration upon which a sale is based.

In his complaint filed on June 29, 1971, and amended on November 16, 1971, Vicente B. Chuidian prayed that defendants Enrique B. Razon, E. Razon, Inc., Geronimo Velasco, Francisco de Borja, Jose Francisco, Alfredo B. de Leon, Jr., Gabriel Llamas and Luis M. de Razon be ordered to deliver certificates of stocks representing the shareholdings of the deceased Juan T. Chuidian in the E. Razon, Inc. with a prayer for an order to restrain the defendants from disposing of the said shares of stock, for a writ of preliminary attachment v. properties of defendants having possession of shares of stock and for receivership of the properties of defendant corporation. In their answer filed on June 18, 1973, defendants alleged that all the shares of stock in the name of stockholders of record of the corporation were fully paid for Whenever a corporation refuses to transfer and register stock by defendant, Razon; that said shares are subject to the in cases like the present, mandamuswill lie to compel the officers of agreement between defendants and incorporators; that the the corporation to transfer said stock in the books of the shares of stock were actually owned and remained in the corporation. possession of Razon. Appellees also alleged . . . that neither the late Juan T. Chuidian nor the appellant had paid any 7) Validity of Transfers / Registration of Shares Razon v. IACGR 74306 (March 16, 1992) amount whatsoever for the 1,500 shares of stock in question ENRIQUE RAZON vs. INTERMEDIATE APPELLATE COURT and VICENTE B. ISSUE: CHUIDIAN, in his capacity as Administrator of the Estate of the Deceased JUAN T. CHUIDIAN Whether or not petitioner have right over the ownership of the 1,500 shares of stock in E. Razon, Inc. G .R. No. 74306 March 16, 1992 FACTS:

RULING: 29


NO.

2013400036 the name of the late Juan Chuidian was never indorsed to the petitioner, the inevitable conclusion is that the questioned shares of stock belong to Chuidian. The petitioner's asseveration that he did not require an indorsement of the certificate of stock in view of his intimate friendship with the late Juan Chuidian can not overcome the failure to follow the procedure required by law or the proper conduct of business even among friends. To reiterate, indorsement of the certificate of stock is a mandatory.

In the instant case, there is no dispute that the questioned 1,500 shares of stock of E. Razon, Inc. are in the name of the late Juan Chuidian in the books of the corporation. Moreover, the records show that during his lifetime Chuidian was ellected member of the Board of Directors of the corporation which clearly shows that he was a stockholder of the corporation. From the point of view of the corporation, therefore, Chuidian was the owner of the Torres v. CA (278 SCRA 793) 1,500 shares of stock. In such a case, the petitioner who MANUEL A. TORRES, JR., (Deceased), GRACIANO J. claims ownership over the questioned shares of stock must TOBIAS, RODOLFO L. JOCSON, JR., MELVIN S. show that the same were transferred to him by proving that JURISPRUDENCIA, AUGUSTUS CESAR AZURA and all the requirements for the effective transfer of shares of EDGARDO D. PABALAN stock in accordance with the corporation's by laws, if any, vs. were followedor in accordance with the provisions of law. COURT OF APPEALS, SECURITIES AND EXCHANGE The petitioner failed in both instances. The petitioner COMMISSION, TORMIL REALTY & DEVELOPMENT did not present any by-laws which could show that the 1,500 CORPORATION, ANTONIO P. TORRES, JR., MA. shares of stock were effectively transferred to him. In the CRISTINA T. CARLOS, MA. LUISA T. MORALES and absence of the corporation's by-laws or rules governing DANTE D. MORALES. effective transfer of shares of stock, the provisions of the G.R. No. 120138 September 5, 1997 Corporation Law are made applicable to the instant case. The law is clear that in order for a transfer of stock certificate to be effective, the certificate must be FACTS: properlyindorsed and that title to such certificate of stock is vested in the transferee by the delivery of the duly The late Manuel A. Torres, Jr. was the major indorsedcertificate of stock. Since the certificate of stock stockholder of Tormil Realty & Development Corporation covering the questioned 1,500 shares of stock registered in while private respondents who are the children of Judge 30

OUTLINE 4 – Corporation Code Torres' deceased brother Antonio A. Torres, constituted the minority stockholders. In particular, their respective shareholdings and positions in the corporation. In 1984, Judge Torres, in order to make substantial savings in taxes, adopted an "estate planning" scheme under which he assigned to Tormil Realty & Development Corporation (Tormil for brevity) various real properties he owned and his shares of stock in other corporations in exchange for 225,972 Tormil Realty shares. Hence, on various dates in July and August of 1984, ten (10) deeds of assignment were executed by the late Judge Torres.Consequently, the aforelisted properties were duly recorded in the inventory of assets of Tormil Realty and the revenues generated by the said properties were correspondingly entered in the corporation's books of account and financial records. Due to the insufficient number of shares of stock issued to Judge Torres and the alleged refusal of private respondents to approve the needed increase in the corporation's authorized capital stock (to cover the shortage of 972 shares due to Judge Torres under the "estate planning" scheme), on 11 September 1986, Judge Torres revoked the two (2) deeds of assignment covering the properties in Makati and Pasay City. ISSUE:

2013400036 RULING: NO. The shortage of 972 shares would not be valid ground for respondent Torres to unilaterally revoke the deeds of assignment he had executed on July 13, 1984 and July 24, 1984 wherein he voluntarily assigned to TORMIL real properties covered by TCT No. 374079 (Makati) and TCT No. 41527, 41528 and 41529 (Pasay) respectively. A comparison of the number of shares that respondent Torres received from TORMIL by virtue of the "deeds of assignment" and the stock certificates issued by the latter to the former readily shows that TORMIL had substantially performed what was expected of it. In fact, the first two issuances were in satisfaction to the properties being revoked by respondent Torres. Hence, the shortage of 972 shares would never be a valid ground for the revocation of the deeds covering Pasay and Quezon City properties. Moreover, we agree with the contention of the Solicitor General that the shortage of shares should not have affected the assignment of the Makati and Pasay City properties which were executed in 13 and 24 July 1984 and the consideration for which have been duly paid or fulfilled but should have been applied logically to the last assignment of property — Judge Torres' Ayala Fund shares — which was executed on 29 August 1984. Rural Bank of LipaGR 124535 (Sept. 28, 2001)

THE RURAL BANK OF LIPA CITY, INC., vs. HONORABLE COURT OF Whether or not the deed of assignment executed can APPEALS be revoked. [G.R. No. 124535. September 28, 2001.]

31

OUTLINE 4 – Corporation Code FACTS: Private respondent Reynaldo Villanueva, Sr., a stockholder of the Rural Bank of Lipa City, executed a Deed of Assignment, wherein he assigned his shares, as well as those of eight (8) other shareholders under his control with a total of 10,467 shares, in favor of the stockholders of the Bank represented by its directors Bernardo Bautista, Jaime Custodio and Octavio Katigbak. Sometime thereafter, Reynaldo Villanueva, Sr. and his wife, Avelina, executed an Agreement wherein they acknowledged their indebtedness to the Bank in the amount of Four Million Pesos (P4,000,000.00), and stipulated that said debt will be paid out of the proceeds of the sale of their real property described in the Agreement. At a meeting of the Board of Directors of the Bank on November 15, 1993, the Villanueva spouses assured the Board that their debt would be paid on or before December 31 of that same year; otherwise, the Bank would be entitled to liquidate their shareholdings, including those under their control. When the Villanueva spouses failed to settle their obligation to the Bank on the due date, the Board sent them a letter demanding: (1) the surrender of all the stock certificates issued to them; and (2) the delivery of sufficient collateral to secure the balance of their debt amounting to P3,346,898.54. The Villanuevas ignored the bank's demands, whereupon their shares of stock were converted into Treasury Stocks. On January 15, 1994, the stockholders of the Bank met to elect the new directors and set of officers for the year 1994. The Villanuevas were not notified of said meeting. In a letter dated January 19, 1994, Atty. Amado Ignacio, counsel for the Villanueva spouses, questioned the legality of the said stockholders' meeting and the validity of all the proceedings therein. In reply, the new set of officers of the Bank informed Atty. Ignacio that the Villanuevas were no longer entitled to notice of the said meeting since they had relinquished their rights as stockholders in favor of the Bank. Consequently, the Villanueva spouses filed with the Securities and Exchange Commission (SEC), a petition for annulment of the stockholders' meeting and election of directors and officers. The Villanuevas' main contention: they were not given due notice and they were deprived of their right to vote despite their being holders of common stock with corresponding voting rights; SEC Hearing Officer granted the Omnibus Motion by issuing a temporary restraining order preventing petitioners from holding the stockholders meeting and electing the board of directors and officers of the Bank. A petition for Certiorari and Annulment with Damages was filed by the Rural Bank, its directors and officers before the SEC en banc. The SEC en banc denied the petition for certiorari in an Order. A subsequent motion for reconsideration was likewise denied by the SEC en banc.

2013400036 A petition for review was thus filed before the Court of Appeals. CA dismissed the petition for review for lack of merit. Petitioners' motion for reconsideration was likewise denied. ISSUE: WoN there was a valid transfer of stock pursuant to the Deed of Assignment HELD: NO! Under Sec. 63 of Corporation Code, for a valid transfer of stocks, there must be strict compliance with the mode of transfer prescribed by law. The requirements are: (a) There must be delivery of the stock certificate; (b) The certificate must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to make the transfer; and (c) To be valid against third parties, the transfer must be recorded in the books of the corporation. While it may be true that there was an assignment of private respondents' shares to the petitioners, said assignment was not sufficient to effect the transfer of shares since there was no endorsement of the certificates of stock by the owners, their attorneys-in-fact or any other person legally authorized to make the transfer. Moreover, petitioners admit that the assignment of shares was not coupled with delivery, the absence of which is a fatal defect. The rule is that the delivery of the stock certificate duly endorsed by the owner is the operative act of transfer of shares from the lawful owner to the transferee. Title may be vested in the transferee only by delivery of the duly indorsed certificate of stock. It may be argued that despite non-compliance with the requisite endorsement and delivery, the assignment was valid between the parties, meaning the private respondents as assignors and the petitioners as assignees. While the assignment may be valid and binding on the petitioners and private respondents, it does not necessarily make the transfer effective. Consequently, the petitioners, as mere assignees, cannot enjoy the status of a stockholder, cannot vote nor be voted for, and will not be entitled to dividends, insofar as the assigned shares are concerned. Parenthetically, the private respondents cannot, as yet, be deprived of their rights as stockholders, until and unless the issue of ownership and transfer of the shares in question is resolved with finality. Rivera v. Florendo144 SCRA 647(1986)

AQUILINO RIVERA, ISAMU AKASAKO, FUJIYAMA HOTEL & RESTAURANT, INC. vs.

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OUTLINE 4 – Corporation Code THE HON. ALFREDO C. FLORENDO, as Judge of the Court of First Instance of Manila (Branch XXXVI), LOURDES JUREIDINI and MILAGROS TSUCHIYA G.R. No. L-57586. October 8, 1986 FACT: Petitioner corporation was organized and register under Philippine laws with a capital stock of P1,000,000.00 divided into 10,000 shares of P100.00 par value each by the herein petitioner Rivera and four (4) other incorporators. Sometime thereafter petitioner Rivera increased his subscription from the original 1,250 to a total of 4899 shares. Subsequently, Isamu Akasako, a Japanese national and co-petitioner who is allegedly the real owner of the shares of stock in the name of petitioner Aquilino Rivera, sold 2550 shares of the same to private respondent Milagros Tsuchiya for a consideration of P440,000.00 with the assurance that Milagros Tsuchiya will be made the President and Lourdes Jureidini a director after the purchase. Aquilino Rivera who was in Japan also assured private respondents by overseas call that he will sign the stock certificates because Isamu Akasako is the real owner. However, after the sale was consummated and the consideration was paid with a receipt of payment therefor shown, Aquilino Rivera refused to make the indorsement unless he is also paid. ISSUE:

2013400036

Whether or not the respondent court of first instance have no jurisdiction over the petition for mandamus and receivership "as well as in placing the corporate assets under provisional receivership in the guise of a writ of preliminary mandatory injunction.

RULING: YES. It has already been settled that an intracorporate controversy would call for the jurisdiction of the Securities and Exchange Commission. On the other hand, an intracorporate controversy has been defined as "one which arises between a stockholder and the corporate. There is no distinction, qualification, nor any exemption whatsoever." This Court has also ruled that cases of private respondents who are not shareholders of the corporation, cannot be a "controversy arising out of intracorporate 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." Lim Tay v. CA GR 126891 (Aug. 5, 1998)

LIM TAY vs. COURT OF APPEALS, GO FAY AND CO. INC., SY GUIOK, and THE ESTATE OF ALFONSO LIM 33

OUTLINE 4 – Corporation Code G.R. No. 126891, August 5, 1998 FACTS: On January 8, 1980, Respondent-Appellee Sy Guiok secured a loan from the petitioner in the amount of P40,000 payable within six (6) months. To secure the payment of the aforesaid loan and interest thereon, Respondent Guiok executed a Contract of Pledge in favor of the [p]etitioner whereby he pledged his three hundred (300) shares of stock in the Go Fay & Company Inc., Respondent Corporation, for brevity's sake. Respondent Guiok obliged himself to pay interest on said loan at the rate of 10% per annum from the date of said contract of pledge. On the same date, Alfonso Sy Lim secured a loan from the [p]etitioner in the amount of P40,000 payable in six (6) months. To secure the payment of his loan, Sy Lim executed a "Contract of Pledge" covering his three hundred (300) shares of stock in Respondent Corporation. Under said contract, Sy Lim obliged himself to pay interest on his loan at the rate of 10% per annum from the date of the execution of said contract. However, Respondent Guiok and Sy Lim failed to pay their respective loans and the accrued interests thereon to the [p]etitioner. In October, 1990, the petitioner filed a "Petition for Mandamus" against Respondent Corporation, with the SEC entitled "Lim Tay versus Go Fay & Company. Inc., SEC Case No. 03894".

2013400036 ISSUE: Whether or not there is there dacion en pago. RULING: NO. At the outset, it must be underscored that petitioner did not acquire ownership of the shares by virtue of the contracts of pledge. Article 2112 of the Civil Code states: The creditor to whom the credit has not been satisfied in due time, may proceed before a Notary Public to the sale of the thing pledged. This sale shall be made at a public auction and with notification to the debtor and the owner of the thing pledged in a proper case, stating the amount for which the public sale is to be held. If at the first auction the thing is not sold, a second one with the same formalities shall be held; and if at the second auction there is no sale either, the creditor may appropriate the thing pledged. In this case he shall be obliged to give an acquaintance for his entire claim. There is no showing that petitioner made any attempt to foreclose or sell the shares through public or private auction, as stipulated in the contracts of pledge and as required by Article 2112 of the Civil Code. Therefore, ownership of the shares could not have passed to him. The pledgor remains the owner during the pendency of the pledge and prior to foreclosure and sale, as explicitly 34


2013400036

provided by Article 2103 of the same Code: Unless the thing Issue: pledged is expropriated, the debtor continues to be the Whether or not the certificate of stocks corresponding to Gaid’s shares shall be issued to Ponce. owner thereof. Neither did petitioner acquire the shares by virtue of a novation of the contract of pledge. Novation is defined as "the extinguishment of an obligation by a subsequent one which terminates it, either by changing its object or principal conditions, by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor."Novation of a contract must not be presumed. "In the absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point.

Held: No. Under Sec. 63 of the Corporation Code, no transfer of shares of stock shall be valid, except as between the parties, until the same is recorded in the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates, and the number of shares transferred. A transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent as far as the corporation is concerned. The stock and transfer book is the basis for ascertaining the persons entitled to the rights and subject to the liabilities of a stockholder.

A mere indorsement by the supposed owners of the stock, in the absence of express instructions from them, cannot be the basis of an action for mandamus. Ponce v. Alsons Cement GR 139802 ( Dec. 10, 2002) Before a transferee may ask for the issuance of stock certificates, he must first cause the registration of the transfer and thereby enjoy the status of a Facts: Fausto Gaid was an incorporator of Victory Cement Corporation (which was later stockholder insofar as the corporation is concerned. Therefore, where a transferee is not yet recognized as a stockholder, the renamed Alsons Cement Corporation), having subscribed to and fully paid corporation is under no specific legal duty to issue stock certificates in the 239,500 shares of said corporation. On February 8, 1968, Vicente Ponce and transferees name. Gaid executed a Deed of Undertaking and Indorsement whereby the latter acknowledges that the former is the owner of said shares and he was therefore Rural Bank of Salinas, Inc. v. CA (210 SCRA 510) assigning/endorsing the same to Ponce. Despite repeated demands, respondents refused without any justifiable reason to issue to Ponce the certificates of stocks corresponding to the 239,500 shares of Gaid. Hence, Ponce filed a complaint with the SEC for mandamus and damages against Alsons Cement Corporation and its corporate secretary Francisco Giron, Jr. Respondents moved to dismiss, arguing that the alleged indorsement was not recorded in the books of the corporation, and as such, was not valid against third persons like Alsons under Section 63 of the Corporation Code. SEC Hearing officer dismissed the complaint. SEC En Banc reversed: A transfer or assignment of stocks need not be registered first before the Commission can take cognizance of the case to enforce his rights as a stockholder. On appeal, CA dismissed: In the absence of any allegation that the transfer of the shares between Fausto Gaid and Vicente C. Ponce was registered in the stock and transfer book of ALSONS, Ponce failed to state a cause of action.

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OUTLINE 4 – Corporation Code RURAL BANK OF SALINAS, INC., MANUEL SALUD, LUZVIMINDA TRIAS and FRANCISCO TRIAS vs. COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION, MELANIA A. GUERRERO, LUZ ANDICO, WILHEMINA G. ROSALES, FRANCISCO M. GUERRERO, JR., and FRANCISCO GUERRERO , SR. G.R. No. 96674, June 26, 1992 FACTS: Clemente G. Guerrero, President of the Rural Bank of Salinas, Inc., executed a Special Power of Attorney in favor of his wife, private respondent Melania Guerrero, giving and granting the latter full power and authority to sell or otherwise dispose of and/or mortgage 473 shares of stock of the Bank registered in his name (represented by the Bank's stock certificates nos. 26, 49 and 65), to execute the proper documents therefor, and to receive and sign receipts for the dispositions. On February 27, 1980, and pursuant to said Special Power of Attorney, private respondent Melania Guerrero, as Attorney-in-Fact, executed a Deed of Assignment for 472 shares out of the 473 shares, in favor of private respondents Luz Andico (457 shares), Wilhelmina Rosales (10 shares) and Francisco Guerrero, Jr. (5 shares).Almost four months later, or two (2) days before the death of Clemente Guerrero on June 24, 1980, private respondent Melania Guerrero, pursuant to the same Special Power of Attorney, executed a Deed of Assignmentfor the

2013400036 remaining one (1) share of stock in favor of private respondent Francisco Guerrero, Sr. Subsequently, private respondent Melania Guerrero presented to petitioner Rural Bank of Salinas the two (2) Deeds of Assignment for registration with a request for the transfer in the Bank's stock and transfer book of the 473 shares of stock so assigned, the cancellation of stock certificates in the name of Clemente G. Guerrero, and the issuance of new stock certificates covering the transferred shares of stocks in the name of the new owners thereof. However, petitioner Bank denied the request of respondent Melania Guerrero. ISSUE: Whether or not a Mandamus lie against the Rural Bank of Salinas to register in its stock and transfer book the transfer of 473 shares of stock to private respondents. RULING: YES. Section 5 (b) of P.D. No. 902-A grants to the SEC the original and exclusive jurisdiction to hear and decide cases involving intracorporate controversies. An intra-corporate controversy has been defined as one which arises between a stockholder and the corporation. There is neither distinction, qualification, nor any exception whatsoever. The 36

OUTLINE 4 – Corporation Code case at bar involves shares of stock, their registration, cancellation and issuances thereof by petitioner Rural Bank of Salinas. It is therefore within the power of respondent SEC to adjudicate. A corporation, either by its board, its by-laws, or the act of its officers, cannot create restrictions in stock transfers, because: Restrictions in the traffic of stock must have their source in legislative enactment, as the corporation itself cannot create such impediment. By-laws are intended merely for the protection of the corporation, and prescribe regulation, not restriction; they are always subject to the charter of the corporation. The corporation, in the absence of such power, cannot ordinarily inquire into or pass upon the legality of the transactions by which its stock passes from one person to another, nor can it question the consideration upon which a sale is based. Whenever a corporation refuses to transfer and register stock in cases like the present, mandamuswill lie to compel the officers of the corporation to transfer said stock in the books of the corporation. Hager v. Bryan 19 PHIL 138 (1911) G.R. No. 6230; January 18, 1911

2013400036 registered owner of the stock which he seeks to have transferred. His only claim as owner is based on his averment that such were “indorsed” to him on February 5 by the Bryan-Landon Company, in whose name it is registered on the books of the Visayan Electric Company. There was no allegation that the petitioner holds any power of attorney from the Bryan-Landon Company authorizing him to make demand on the secretary of the Visayan Electric Company to make the transfer which petitioner seeks to have made through the medium of the mandamus of this court. ISSUE: WON a writ of mandamus will lie under the circumstances of the case to allow the transfer of shares as being requested by the petitioner. HELD:

The Supreme Court denied the writ. Petitioner did not have the right to demand the transfer since he was not the stockholder of record. This was proven by the fact that the said shares were still registered under the name of Bryan-Landon Company. Furthermore, even the latter did not demand from the company the transfer of said shares. Neither did it give by way of a special power of attorney to petitioner the authority to effect such a transfer. Hence, there is no clear and legal obligation upon the respondent that will justify the issuance of a writ to compel the latter to perform a transfer. As a general rule, as between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are, so that a mere indorsee of a stock certificate, claiming to be the owner, will not necessarily be recognized as such by the corporation and its officers, in the absence of express instructions of the registered owner to make such transfer to the indorsee, or a power of attorney authorizing such transfer.

FACTS: Petitioner filed an original action to secure a writ of mandamus against the respondent, to compel him, as secretary of the Visayan Electric Company, to transfer upon the books of the company certain shares of stock. He based the urgency of his action on a supposed agreement to sell the said shares to a Mr. Levering. Furthermore, he also stated that the issuing company Bitong v. CA 292 SCRA 503 holds no unpaid claims against the shares of stock. However, on Ownership of Corporate Shares/ Stock Certificates: Valid Issuance the books of the company, it turns out that petitioner is not the

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OUTLINE 4 – Corporation Code Facts: Bitong was the treasurer and member of the BoD of Mr. & Mrs. Corporation. She filed a complaint with the SEC to hold respondent spouses Apostol liable for fraud, misrepresentation, disloyalty, evident bad faith, conflict of interest and mismanagement in directing the affairs of the corporation to the prejudice of the stockholders. She alleges that certain transactions entered into by the corporation were not supported by any stockholder’s resolution. The complaint sought to enjoin Apostol from further acting as president-director of the corporation and from disbursing any money or funds. Apostol contends that Bitong was merely a holder-in-trust of the JAKA shares of the corporation, hence, not entitled to the relief she prays for. SEC Hearing Panel issued a writ enjoining Apostol. After hearing the evidence, SEC Hearing Panel dissolved the writ and dismissed the complaint filed by Bitong. Bitong appealed to the SEC en banc. The latter reversed SEC Hearing Panel decision. Apostol filed petition for review with the CA. CA reversed SEC en banc ruling holding that Bitong was not the owner of any share of stock in the corporation and therefore, not a real party in interest to prosecute the complaint. Hence, this petition with the SC. Issue: Whether or not Bitong was the real party in interest. Held: Based on the evidence presented, it could be gleaned that Bitong was not a bona fide stockholder of the corporation. Several corporate documents disclose that the true party in interest was JAKA. Although her buying of the shares were recorded in the Stock and Transfer Book of the corporation, and as provided by Sec. 63 of the Corp Code that no transfer shall be valid except as between the parties until the transfer is recorded in the books of the corporation, and upon its recording the corporation is bound by it and is estopped to deny the fact of transfer of said shares, this provision is not conclusive even against the corporation but are prima facie evidence only. Parol evidence may be admitted to supply the omissions in the records, explain ambiguities, or show what transpired where no records were kept, or in some cases where such records were contradicted. Besides, the provision envisions a formal certificate of stock which can be issued only upon compliance with certain requisites: (1) certificates must be signed by the president or vice president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation, (2) delivery of the certificate; (3) the par value, as to par value shares, or the full subscription as to no par value shares, must be first fully paid; (4) the original certificate must be surrendered where the person requesting the issuance of a certificate is a transferee from a stockholder. These considerations are founded on the basic principle that stock issued without authority and in violation of the law is void and confers no rights on the person to whom it is issued and subjects him to no liabilities. Where there is an inherent lack of power in the corporation to issue the stock, neither the corporation nor the person to whom the stock is issued

2013400036 is estopped to question its validity since an estoppel cannot operate to create stock which under the law cannot have existence. Abejo v. De la Cruz 149 SCRA 654 (1987) GR No. L-63558 FACTS: These two cases, jointly heard, are jointly herein decided. They involve the question of who, between the RTC and the SEC, has original and exclusive jurisdiction over the dispute between the principal stockholders of the corporation Pocket Bell Philippines, Inc. (Pocket Bell), namely, the spouses Abejos and the purchaser, Telectronic Systems, Inc. of their 133,000 minority shareholdings (for P5 million) and of 63,000 shares registered in the name of Virginia Braga and covered by 5 stock certificates endorsed in blank by her (for P1,674,450.00), and the Bragas, erstwhile majority stockholders. With the said purchases, Telectronics would become the majority stockholder, holding 56% of the outstanding stock and voting power of the corporation Pocket Bell. With the said purchases in 1982, Telectronics requested the corporate secretary of the corporation, Norberto Braga, to register and transfer to its name, and those of its nominees the total 196,000 Pocket Bell shares in the corporation's transfer book, cancel the surrendered certificates of stock and issue the corresponding new certificates of stock in its name and those of its nominees. Norberto Braga, refused to register the aforesaid transfer of shares in the corporate books, asserting that the Bragas claim pre-emptive rights over the 133,000 Abejo shares and that Virginia Braga never transferred her 63,000 shares to Telectronics but had lost the five stock certificates representing those shares. This triggered off the series of intertwined actions between the protagonists, all centered on the question of jurisdiction over the dispute, which were to culminate in the filing of the two cases at bar.

ISSUE: WON the corporate secretary may refuse to register the transfer of shares in the corporate books. HELD: NO. As pointed out by the Abejos, Pocket Bell is not a close corporation, and no restriction over the free transferability of the shares appears in the Articles of Incorporation, as well as in the bylaws and the certificates of stock themselves,

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OUTLINE 4 – Corporation Code as required by law for the enforcement of such restriction. As the SEC maintains, "There is no requirement that a stockholder of a corporation must be a registered one in order that the Securities and Exchange Commission may take cognizance of a suit seeking to enforce his rights as such stockholder." This is because the SEC by express mandate has "absolute jurisdiction, supervision and control over all corporations" and is called upon to enforce the provisions of the Corporation Code, among which is the stock purchaser’s right to secure the corresponding certificate in his name under the provisions of Sec 65 of the code. Lee v. Trocino, et al. GR 164648 (June 19, 2009) 8) Unauthorized Transfers ---Santamaria vs. Hongkong89 Phil. 780 (1951) JOSEFA SANTAMARIA, assisted by her husband, FRANCISCO SANTAMARIA, Jr. vs.

THE HONGKONG AND SHANGHAI BANKING CORPORATION and R. W. TAPLIN. G.R. No. L-2808 August 31, 1951 FACTS: Mrs. Josefa T. Santamaria bought 10,000 shares of the Batangas Minerals, Inc., through the offices of Woo, Uy-Tioco & Naftaly, a stock brokerage firm and pay therefore the sum of P8,041.20 as shown by receipt Exh. B. The buyer received Stock Certificate No. 517 issued in the name of Woo, UyTioco & Naftaly and indorsed in bank by this firm. On March 9, 1937, Mrs. Santamaria placed an order for the purchase of 10,000 shares of the Crown Mines, Inc. with R.J. Campos & Co., a brokerage firm, and delivered Certificate No. 517 to the latter as security therefor with the understanding that said certificate would be returned to her upon payment of the 10,000 Crown Mines, Inc. shares. Exh.

2013400036 D. is the receipt of the certificate in question signed by one Mr. Cosculluela, Manager of the R.J. Campos & Co., Inc. According to certificate Exh. E, R. J. Campos & Co., Inc. bought for Mrs. Josefa Santamaria 10,000 shares of the Crown Mines, Inc. at .225 a share, or the total amount of P2,250. Two days later, on March 11, Mrs. Santamaria went to R.J. Campos & Co., Inc. to pay for her order of 10,000 Crown Mines shares and to get back Certificate No. 517. Cosculluela then informed her that R.J. Campos & Co., Inc. was no longer allowed to transact business due to a prohibition order from Securities and Exchange Commission. She was also inform that her Stock certificate was in the possession of the Hongkong and Shanghai Banking Corporation. ISSUE: Whether or not the obligation of the defendant Bank to have inquired into the ownership of the certificate when it received it from R.J. Campos & Co., Inc. and not conclude that the Bank was negligent for not having done so, contrary to the claim of the plaintiff that defendant Bank acted negligently, if not in bad faith, in accepting delivery of said certificate from RJ. Campos & Co., Inc. RULING: YES.

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Certificate No. 517 came into the possession of the defendant Bank because R.J. Campos & Co., Inc. had opened an overdraft account with said Bank and to this effect it had executed on April 16, 1946, a letter of hypothecation by the terms of which R.J. Campos & Co., Inc. pledged to the said Bank "all Stocks, Shares and Securities which I/we may hereafter come into their possession on my/our account and whether originally deposited for safe custody only or for any other purpose whatever or which may hereafter be deposited by me/us in lieu of or in addition to the Stocks, Shares, and Securities now deposited or for any other purpose whatsoever." It should be noted that the certificate of stock in question was issued in the name of the brokerage firm-Woo, Uy-Tioco & Naftaly and that it was duly indorsed in blank by said firm, and that said indorsement was guaranteed by R.J. Campos & Co., Inc., which in turn indorsed it in blank. This certificate is what it is known as street certificate. Upon its face, the holder was entitled to demand its transfer into his name from the issuing corporation. The Bank was not obligated to look beyond the certificate to ascertain the ownership of the stock at the time it received the same from R.J. Campos & Co., Inc., for it was given to the Bank pursuant to their letter of hypothecation. Even if said certificate had been in the name of the plaintiff but indorsed in blank, the Bank would still have been justified in believing that R.J. Campos & Co., Inc. had title thereto for the reason that it is a well-known practice that a certificate of stock, indorsed in blank, is deemed quasi negotiable, and as such the transferee thereof is justified in believing that it belongs to the holder and transferor. De los Santos vs. McGrath96 Phil. 577(1955)

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OUTLINE 4 – Corporation Code APOLINARIO G. DE LOS SANTOS and ISABELO ASTRAQUILLO vs. J. HOWARD MCGRATH ATTORNEY GENERAL OF THE UNITED STATES, SUCCESSOR TO THE PHILIPPINE ALIEN PROPERTY ADMINISTRATION OF THE UNITED STATES, REPUBLIC OF THE PHILIPPINES G.R. No. L-4818 February 28, 1955 FACTS: This action involves the title to 1,600,000 shares of stock of the Lepanto Consolidated Mining Co., Inc., a corporation duly organized and existing under the laws of the Philippines, hereinafter referred to, for the sake of brevity, as the Lepanto. Originally, one-half of said shares of stock were claimed by plaintiff, Apolinario de los Santos, and the other half, by his co-plaintiff Isabelo Astraquillo. During the pendency of this case, the latter has allegedly conveyed and assigned his interest in and to said half claimed by him to the former. The shares of stock in question are covered by several stock certificates issued in favor of Vicente Madrigal, who is registered in the books of the Lepanto as owner of said stocks and whose indorsement in blank appears on the back of said certificates, all of which, except certificates No. 2279 — marked Exhibit 2 — covering 55,000 shares, are in plaintiffs' possession. So was said Exhibit 2, up to sometime in 1945 or 1946 when said possession was lost under the conditions set forth in subsequent pages.

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ISSUE: Whether or not the plaintiffs had the owners of the shares of stock in question. RULING: NO. In the case at bar, neither madrigal nor the Mitsuis had alienated shares of stock in question. It is not even claimed that either had, through negligence, given — occasion for an improper or irregular disposition of the corresponding stock certificates. Plaintiffs merely argue without any evidence whatsoever thereon — that Kitajimamight have, or must have, assigned the certificates on or before December 1942, although, as above stated, this is, not only, improbable, under the conditions, then obtaining, but, also., impossible, considering that, in April 1943, Kitajima delivered the instruments to Miwa, who kept them in its possession until 1945. At any rate, such assignment by Miwa — granting for the sake of argument the accuracy of the surmise of plaintiffs herein — was unauthorized by the mitsuis, who, in the light of the precedents cited above, are not chargeable with negligence. In other words, assuming that Kitajima had been guilty of embezzlement, by negotiating the stock certificates in question for his personal benefit, as claimed by the 41

OUTLINE 4 – Corporation Code plaintiffs, the title of his assignees and successors in interest would still be subject to the rights of the registered owner, namely, Madrigal, and consequently, of the party for whose benefit and account the latter held the corresponding shares of stock, that is to say, the Mitsuis. In conclusion, when the Property Custodian issued the Vesting Order complained of, the shares of stock in question belonged to the Mitsuis, admittedly an enemy corporation, so that Vesting Order is in conformity with law and should be upheld. Wherefore, the decision appealed from is hereby reversed, and the complaint, accordingly, dismissed, with costs against the plaintiffsappellees. It is so ordered. Guy v. Guy GR 189486 (Sept. 5, 2012) 9) Collateral Transfers --Uson v. Diosomito (61 Phil. 535; 1935)

Uson vs. Diosomito G.R. No. L-42135; June 17, 1935 FACTS: Toribia Uson filed a civil action for debt against Vicente Diosomito. Upon institution of said action, an attachment was duly issued and respondent’s property was levied upon, including 75 shares of the North Electric Co., which stood in his name on the books of the company when the attachment was levied. The sheriff sold said shares at a public auction with Uson being the highest bidder. Jollye claims to be the owner of said certificate of stock issued to him by the North Electric Co. There is no dispute that Diosomito was the original owner of said shares, which he sold to Barcelon. However, Barcelon did not present these certificates to the corporation for registration until 19 months after the delivery thereof by Barcelon, and 9 months after the attachment and levy on said shares. The transfer to Jollye was made 5 months after the issuance of a certificate of stock in

2013400036 Barcelon's name. ISSUE: Is a bona fide transfer of the shares of corp., not registered or noted on the books of the corp., valid as against a subsequent lawful attachment of said shares, regardless of whether the attaching creditor had actual notice of said transfer or not? HELD: NO, it is not valid. The transfer of the 75 shares in the North Electric Co., Inc made by the defendant Diosomito as to the defendant Barcelon was not valid as to the plaintiff. Toribia Uson, on 18 Jan. 1932, the date on which she obtained her attachment lien on said shares of stock will still stood in the name of Diosomito on the books of the corp. Sec. 35 provides that “No transfer, however, is valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares transferred.” All transfers of shares not so entered are invalid as to attaching or execution creditors of the assignors, as well as to the corporation and to subsequent purchasers in good faith, and indeed, as to all persons interested, except the parties to such transfers. Chua Guan vs. SamahangMagsasaka62 Phil. 473 (1935) 62 PHIL 473 1935 Butte, J. (ponente) FACTS: On June 18, 1931, Gonzalo H. Co Toco, the owner of 5,894 shares of the capital stock of Samahang Magsasaka Inc. represented by 9 certificates having a par value of P5 per share, mortgaged said shares to Chua Chiu to guarantee the payment of a debt of P20,000 due on or before 19 June 1932. The said certificates of stock were delivered with the mortgage to the mortgagee, Chua Chiu. The said mortgage was duly registered in the office of the register of deeds of Manila on 23 June 1931, and in the office of the said corporation on 30 September 1931. On 28 November 1931, Chua Chiu assigned all his right and

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interest in said mortgage to Chua Guan.

third persons. Furthermore, any share still standing in the name of the debtor on the books of the corporation will be liable to seizure by However, Co Toco defaulted in the payment of said debt at maturity and Chua attachment or levy on execution at the instance of other creditors. Thus, Guan foreclosed said mortgage and delivered the certificates of stock and copies the game here is to have the highest or most preferred priority over any of the mortgage and assignment to the sheriff of the City of Manila in order to sell pledged or mortgaged shares. the said shares at public auction. The sheriff auctioned said shares on 22 December 1932, and the plaintiff having been the highest bidder for the sum of Chemphil Export & Import v. CA (Dec. 12, 1995) P14,390, the sheriff executed in his favor a certificate of sale of said shares. The Chemphil Export & Import vs. CA plaintiff tendered the certificates of stock standing in the name of Co Toco to the G.R. Nos. 112438-39; December 12, 1995 proper officers of the corporation for cancellation and demanded that they issue new certificates in the name of Chua Guan. The officers (the individual FACTS: defendants) refused and still refuse to issue said new shares in the name of This case involved a consortium of banks which obtained a Chua Guan. writ of preliminary attachment in a civil case ("consortium case")

over shares of stock belonging to Mr. Antonio Garcia in the

An action for writ of mandamus was filed with the CFI Nueva Ecija, praying that Chemical Industries of the Philippines ("Chemphil"). The the defendants transfer the said 5,894 shares of stock to the plaintiff by attachment, which was served on the secretary to the President of cancelling the old certificates and issuing new ones in their stead. The parties entered into a stipulation in which the defendants admitted all of the allegations of the complaint while the plaintiff admitted all of the special defenses in the answer of the defendants, and on this stipulation they submitted the case for decision. As special defense, the defendants refused to cancel said certificates (Co Toco’s) and to issue new ones in the name of Chua Guan because prior to the date of the latter’s demand (4 February 1933), 9 attachments had been issued, served and noted on the books of the corporation against Co Toco’s shares. Chua Guan objected to having these attachments noted on the new certificates which he demanded. The Supreme Court affirmed the judgment appealed from, holding that the attaching creditors are entitled to priority over the defectively registered mortgage of the appellant. ISSUE: Whether or not the said mortgage takes priority over the already noted writs of attachment.

Chemphil, was not registered in the stock and transfer book of Chemphil. A few years thereafter, Mr. Garcia sold the same shares of stock to the Ferro Chemicals, Inc. ("FCI"). FCI subsequently assigned the shares to the Chemphil Export and Import Corporation ("CEIC"). The shares were registered and recorded in the corporate books of Chemphil in CEIC’s name and the corresponding stock certificates were issued to it. The consortium case was appealed to the CA. While the appeal was pending, Mr. Garcia and the bank consortium amicably settled the case. The CA rendered a judgment by compromise. Unfortunately, Mr. Garcia failed to comply with the compromise agreement. The consortium of banks caused to be sold on execution the shares of stock (earlier attached by them), which were the same shares subsequently sold by Mr. Garcia to CEIC. A certificate of sale covering the shares was issued in the name of the bank consortium.

ISSUE: HELD: Who has priority to the shares of stock – an attaching The Supreme Court ruled that the attaching creditors are entitled to priority over the defectively registered mortgage of the appellant. The court argues creditor or the subsequent buyer? that the registration in the register of deeds must be done both at the place where the owner is domiciled and at the place where the principal office of HELD: the corporation is located. The purpose of this is to give sufficient The Supreme Court ruled that the attachment lien acquired constructive of any claim or encumbrance over the recorded shares to

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OUTLINE 4 – Corporation Code by the bank consortium is valid and effective even as against the buyer (FCI) and its assignee (CEIC), notwithstanding the fact that said attachment lien was not registered in the corporate books of Chemphil. "Both the Revised Rules of Court and the Corporation Code", according to the Court, "do not require annotation in the corporation’s stock and transfer book for the attachment of shares of stock to be valid and binding on the corporation and third party." Consequently, when FCI purchased the shares of stock from Mr. Garcia, it purchased them subject to the attachment lien of the bank consortium. In this regard, the High Court explained that a preliminary attachment is a security for the satisfaction of whatever judgment may be obtained by the attaching creditor in a court action, which continues until the judgment debt is fully satisfied. COMPARISON of the abovementioned three cases: Among the three cases mentioned, settled is the rule that the attaching creditor enjoys priority to the shares of stock as against a subsequent lawful buyer. lX. PRE-EMPTIVE RIGHT – Sec. 39 and 102

Purpose; when given; waiver Distinguish from Right of FirstRefusal. Distinguish from pre-emptive rt in a close corp Makati Sports Club, Inc. v. ChengGR 178523 (June 16, 2010) MAKATI SPORTS CLUB, INC., petitioner, vs. CECILE H. CHENG, MC FOODS, INC., and RAMON SABARRE, respondents. [G.R. No. 178523. June 16, 2010.] Pre-emptive Right FACTS: On October 20, 1994, plaintiff Makati Sports Club, Inc.’s Board of Directors adopted a resolution authorizing the sale of 19 unissued shares at a floor price of P400,000 and P450,000 per share for Class A and B, respectively. Defendant Cecile Cheng was a Treasurer and Director of Makati Sports Club in 1985. On July 7, 1995, Joseph L. Hodreal expressed his interest to buy a share, for this purpose he sent the letter in which he requested that his name be included in the waiting list.

2013400036 Sometime in November 1995, McFoods expressed interest in acquiring a share of Makati Sports Club, and one was acquired with the payment to the plaintiff by McFoods of P1,800,000 through Urban Bank. On December 15, 1995, the Deed of Absolute Sale was executed by the plaintiff and McFoods; Stock Certificate No. A 2243 was issued to McFoods on January 5, 1996. On December 27, 1995, McFoods sent a letter to the plaintiff giving advice of its offer to resell the share. It appears that while the sale between the plaintiff and McFoods was still under negotiations, there were negotiations between McFoods and Hodreal for the purchase by the latter of a share of the plaintiff. On November 24, 1995, Hodreal paid McFoods P1,400,000. Another payment of P1,400,000 was made by Hodreal to McFoods on December 27, 1995, to complete the purchase price of P2,800,000. On February 7, 1996, plaintiff was advised of the sale by McFoods to Hodreal of the share evidenced by Certificate No. 2243 for P2.8 Million. Upon request, a new certificate was issued. In 1997, an investigation was conducted and the committee held that there is prima facie evidence to show that defendant Cheng profited from the transaction because of her knowledge. xxx xxx xxx Plaintiff's evidence of fraud are — [a] letter of Hodreal dated July 7, 1995 where he expressed interest in buying one (1) share from the plaintiff with the request that he be included in the waiting list of buyers; [b] declaration of Lolita Hodreal in her Affidavit that in October 1995, she talked to Cheng who assured her that there was one (1) available share at the price of P2,800,000. The purchase to be validated by paying 50% immediately and the balance after thirty (30) days; [c] Marian Punzalan, Head, Membership Section of the plaintiff declared that she informed Cheng of the intention of Hodreal to purchase one (1) share and she gave to Cheng the contact telephone number of Hodreal; and [d] the authorization from Sabarre to claim the stock certificate. MSCI asserts that Mc Foods never intended to become a legitimate holder of its purchased Class "A" share but did so only for the purpose of realizing a profit in the amount of P1,000,000.00 at the expense of the former. MSCI further claims that Cheng confabulated with Mc Foods by providing it with an insider's information as to the status of the shares of stock of MSCI and even, allegedly with unusual interest, facilitated the transfer of ownership of the subject share of stock from Mc Foods to Hodreal, instead of an original, unissued share of stock. It is also MSCI's stance that Mc Foods violated Section 30 (e) of MSCI's Amended By-Laws on its pre-emptive rights, which provides —

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OUTLINE 4 – Corporation Code SEC. 30.. . . . — (e)Sale of Shares of Stockholder. Where the registered owner of share of stock desires to sell his share of stock, he shall first offer the same in writing to the Club at fair market value and the club shall have thirty (30) days from receipt of written offer within which to purchase such share, and only if the club has excess revenues over expenses (unrestricted retained earning) and with the approval of two-thirds (2/3) vote of the Board of Directors. If the Club fails to purchase the share, the stockholder may dispose of the same to other persons who are qualified to own and hold shares in the club. If the share is not purchased at the price quoted by the stockholder and he reduces said price, then the Club shall have the same pre-emptive right subject to the same conditions for the same period of thirty (30) days. Any transfer of share, except by hereditary succession, made in violation of these conditions shall be null and void and shall not be recorded in the books of the Club. The share of stock so acquired shall be offered and sold by the Club to those in the Waiting List in the order that their names appear in such list, or in the absence of a Waiting List, to any applicant. Thus, petitioner sought judgment that would order respondents to pay the sum of P1,000,000.00, representing the amount allegedly defrauded, together with interest and damages. The RTC rendered its decision dismissing the complaint, including all counterclaims. Aggrieved, Makati Sports Club, Inc. (MSCI) appealed to the CA. The CA promulgated its assailed Decision, affirming the decision of the RTC. Hence, this petition. ISSUE: W/N Mc Foods violated Section 30 (e) of MSCI's Amended By-Laws on its pre-emptive rights HELD: The court held that Mc Foods did not violate Section 30 (e) of MSCI’s Amended By-Laws on its pre-emptive rights. Undeniably, on December 27, 1995, when Mc Foods offered for sale one Class "A" share of stock to MSCI for the price of P2,800,000.00 for the latter to exercise its pre-emptive right as required by Section 30 (e) of MSCI's Amended By-Laws, it legally had the right to do so since it was already an owner of a Class "A" share by virtue of its payment on November 28, 1995, and the Deed of Absolute Share dated December 15, 1995, notwithstanding the fact that the stock certificate was issued only on January 5, 1996. A certificate of stock is the paper representative or tangible evidence of the stock itself and of the various interests therein. The certificate is not a stock in the corporation but is merely evidence of the holder's interest and status in the

2013400036 corporation, his ownership of the share represented thereby. It is not in law the equivalent of such ownership. It expresses the contract between the corporation and the stockholder, but is not essential to the existence of a share of stock or the nature of the relation of shareholder to the corporation. Therefore, Mc Foods properly complied with the requirement of Section 30 (e) of the Amended By-Laws on MSCI's pre-emptive rights. Without doubt, MSCI failed to repurchase Mc Foods' Class "A" share within the thirty (30) day pre-emptive period as provided by the Amended By-Laws. It was only on January 29, 1996, or 32 days after December 28, 1995, when MSCI received Mc Foods' letter of offer to sell the share, that Mc Foods and Hodreal executed the Deed of Absolute Sale over the said share of stock. While Hodreal had the right to demand the immediate execution of the Deed of Absolute Sale after his full payment of Mc Foods' Class "A" share, he did not do so. Perhaps, he wanted to wait for Mc Foods to first comply with the pre-emptive requirement as set forth in the Amended By-Laws. Neither can MSCI argue that Mc Foods was not yet a registered owner of the share of stock when the latter offered it for resale, in order to void the transfer from Mc Foods to Hodreal. The corporation's obligation to register is ministerial upon the buyer's acquisition of ownership of the share of stock. The corporation, either by its board, its by-laws, or the act of its officers, cannot create restrictions in stock transfers. Moreover, MSCI's ardent position that Cheng was in cahoots with Mc Foods in depriving it of selling an original, unissued Class "A" share of stock for P2,800,000.00 is not supported by the evidence on record. The mere fact that she performed acts upon authority of Mc Foods, i.e., receiving the payments of Hodreal in her office and claiming the stock certificate on behalf of Mc Foods, do not by themselves, individually or taken together, show badges of fraud, since Mc Foods did acts well within its rights and there is no proof that Cheng personally profited from the assailed transaction. Even the statement of MSCI that Cheng doctored the books to give a semblance of regularity to the transfers involving the share of stock covered by Certificate A 2243 remains merely a plain statement not buttressed by convincing proof. X. APPRAISAL RIGHT – Secs. 81- 86; relate to Sec. 42 and 105 Marcus v. RH Macy 74 N.E. 2D 228 (1947) Facts: Hazel Marcus is the owner of 50 common shares of stocks in R.H, Macy Co., Inc., which are stocks with voting rights. On September 28, 1945, the corporation gave a formal notice to its stockholders, including Marcus, that in its

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upcoming annual meeting, there will be a vote on a proposal to vest voting rights to holders of preferred stocks. A day before the annual meeting, Marcus sent by registered mail to the corporation its written notice of objection to the proposal and demanded to exercise her appraisal right. In the meeting, Marcus voted against the proposal, however, the proposal was approved. Marcus, thereafter, instituted a proceeding to determine the value of her stocks and be paid therefor. However, her application for the appointment of appraisers was denied on the ground that the vesting of voting rights to shares of stock previously without such right does not divest nor limit her right as a common stockholder, citing the Kenny case, and in considering that she only owns 50 shares out of 1.6 million shares of common stock. The Appellate Division affirmed the said decision.

P2,298,760.00.

Turner v. Lorenzo Shipping GR 157479 Nov. 24, 2010 (G.R. No. 157479 November 24, 2010)

In its letter to the petitioners dated January 2, 2001,[4] the respondent refused the petitioners demand, explaining that pursuant to the Corporation Code, the dissenting stockholders exercising their appraisal rights could be paid only when the corporation had unrestricted retained earnings to cover the fair value of the shares, but that it had no retained earnings at the time of the petitioners demand, as borne out by its Financial Statements for Fiscal Year 1999 showing a deficit of P72,973,114.00 as of December 31, 1999.

The respondent found the fair value of the shares demanded by the petitioners unacceptable. It insisted that the market value on the date before the action to remove the pre-emptive right was taken should be the value, or P0.41/share (or a total of P414,100.00), considering that its shares were listed in the Philippine Stock Exchange, and that the payment could be made only if the respondent had unrestricted retained earnings in its books to cover the value of the shares, which was not the case.

The disagreement on the valuation of the shares led the parties to constitute an appraisal committee pursuant to Section 82 of the Corporation Code, each of them nominating a representative, who together then nominated the third Issue: Whether or not Marcus may exercise her right of appraisal. member who would be chairman of the appraisal committee. Thus, the appraisal committee came to be made up of Reynaldo Yatco, the petitioners nominee; Held: Marcus may exercise her right of appraisal. The Kenny case is inapplicable Atty. Antonio Acyatan, the respondents nominee; and Leo Anoche of the Asian in this case as in that case, voting rights were given to newly issued stocks while Appraisal Company, Inc., the third member/chairman. in this case, voting rights were given to existing stocks and previously without voting rights. Vesting voting rights to the preferred shares, in the case of R.H. On October 27, 2000, the appraisal committee reported its valuation of Macy, resulted to the increase in aggregate number of shares with voting rights P2.54/share, for an aggregate value of P2,565,400.00 for the petitioners. which in effect diminished the potential worth of the common shares as a factor in the management of the corporation's affairs. As to Marcus owning only 50 Subsequently, the petitioners demanded payment based on the valuation of the shares, the law does not provide for a minimum percentage or value of stock appraisal committee, plus 2%/month penalty from the date of their original which must be owned by a non-consenting stockholder to qualify to invoke her demand for payment, as well as the reimbursement of the amounts advanced as appraisal right. professional fees to the appraisers.

PHILIP TURNER AND ELNORA TURNER VS LORENZO SHIPPING CORPORATION Facts: The petitioners held 1,010,000 shares of stock of the respondent, a domestic corporation engaged primarily in cargo shipping activities. In June 1999, the respondent decided to amend its articles of incorporation to remove the stockholders pre-emptive rights to newly issued shares of stock. Feeling that the corporate move would be prejudicial to their interest as stockholders, the petitioners voted against the amendment and demanded payment of their shares at the rate of P2.276/share based on the book value of the shares, or a total of

Upon the respondents refusal to pay, the petitioners sued the respondent for collection and damages in the RTC in Makati City on January 22, 2001. The case, docketed as Civil Case No. 01-086, was initially assigned to Branch 132. On June 26, 2002, the petitioners filed their motion for partial summary judgment. The respondent opposed the motion for partial summary judgment, stating that the determination of the unrestricted retained earnings should be made at the end of the fiscal year of the respondent, and that the petitioners did not have a

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cause of action against the respondent.

among the stockholders without first paying corporate debts. Thus, any disposition of corporate funds and assets to the prejudice of creditors is During the pendency of the motion for partial summary judgment, however, the null and void Presiding Judge of Branch 133 transmitted the records to the Clerk of Court for re-raffling to any of the RTCs special commercial courts in Makati City due to the case being an intra-corporate dispute. Hence, Civil Case No. 01-086 was reraffled to Branch 142. On November 12, 2002, the respondent filed a motion for reconsideration. Subsequently, on November 28, 2002, the RTC issued a writ of execution. Aggrieved, the respondent commenced a special civil action for certiorari in the CA to challenge the two aforecited orders of Judge Tipon. On the respondents petition for certiorari, however, the Court of Appeals (CA) corrected the RTC and dismissed the petitioners suit on the ground that their cause of action for collection had not yet accrued due to the lack of unrestricted retained earnings in the books of the respondent. Thus, the petitioners are now before the Court to challenge the CAs decision. Issue: WON Petitioners should have given the chance to exercise their Appraisal Right. Held: Clearly, the right of appraisal may be exercised when there is a fundamental change in the charter or articles of incorporation substantially prejudicing the rights of the stockholders. It does not vest unless objectionable corporate action is taken. It serves the purpose of enabling the dissenting stockholder to have his interests purchased and to retire from the corporation. No payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover the payment. In case the corporation has no available unrestricted retained earnings in its books, Section 83 of the Corporation Code provides that if the dissenting stockholder is not paid the value of his shares within 30 days after the award, his voting and dividend rights shall immediately be restored. The trust fund doctrine backstops the requirement of unrestricted retained earnings to fund the payment of the shares of stocks of the withdrawing stockholders. Under the doctrine, the capital stock, property, and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors, who are preferred in the distribution of corporate assets. The creditors of a corporation have the right to assume that the board of directors will not use the assets of the corporation to purchase its own stock for as long as the corporation has outstanding debts and liabilities. There can be no distribution of assets

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Outline 4 Corporation Code romero

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