Revised Bagtas Reviewer by Ve and Ocfe 2A XI. STOCKHOLDERS AND MEMBERS

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Shares of stock in a corporation constitute personal property of the stockholder, which he can contract with as in any other form of property. Shares of stock however do not represent proprietary rights of stockholders to the assets or properties of the corporation. Its holder do not own any part of the assets represented by the capital of the corporation; nor are the stockholders entitled to the possession of any definite portion of the corporations assets or properties. POWERS OF CORPORATION WITH RESPECT TO THE SHARES OF STOCK ALREADY ISSUED (1) Subject to any contrary stipulation in the subscription agreement, to call for the payment of the unpaid subscription, together with interest accrued, if any, on the date specified in the contract of subscription or on the date stated in the call made by the board; (2) To impose interest on the unpaid subscriptions from the date of subscription, if so required by, and at the rate of interest fixed in, the by-laws; (3) To refuse to issue to the subscriber the certificates of stock covering shares where the subscription has not been fully paid; (4) To refuse to recognize and register the sale or assignment of any share where the subscription has not been fully paid; (5) To refuse to recognize a sale or assignment of shares of stock which have not been duly registered in the stock and transfer book. 1. Shareholders Not Corporate Creditors. aGarcia v. Lim Chu Sing, 59 Phil. 562 (1934). GARCIA v. LIM CHU SING FACTS: Lim CUAN SY had an account with the Mercantile Bank of China (Plaintiff Bank) in the form of "trust receipts" guaranteed by Lim CHU SING (defendant) 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 delivered a promissory note for P19,605.17 with interest thereon at 6% per annum, payable monthly. One of the conditions stipulated in the said note is that in case of defendant's default in the payment of any of the monthly installments the entire amount, together with interest thereon at 6% per annum, shall become due & payable on demand. The defendant had been making partial payments leaving an unpaid balance of P9,105.17. However, he defaulted in the payment of several installments by reason of which the unpaid balance on the promissory note had ipso facto become due & demandable. The Mercantile Bank of China, without the knowledge & consent of the defendant, foreclosed the chattel mortgage and privately sold the property covered thereby. The POWERS WHICH CORPORATION DOES NOT HAVE (1) Demand for the repurchase of its shares of stock unless the shares are classified as redeemable shares in the articles of incorporation;

(2) Refuse to pay to the stockholders dividends declared on shares which have not been declared delinquent to apply them to the payment of the unpaid subscription, and (3) Bid delinquent shares, and thereby obtain for itself profit, for value greater than the balance due on the unpaid subscription, plus accrued interest, cost of advertisement and expenses of sale.

defendant is the owner of shares of stock of the Plaintiff Bank of China amounting to P10,000. The Plaintiff Bank was subsequently placed under liquidation. The defendant filed a motion for the 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. ISSUE: W/N it is proper to COMPENSATE the defendant-appellant's indebtedness of P9,105.17 with the sum of P10,000 representing the value of his shares of stock with the Mercantile Bank of China. HELD: NO. According to the weight of authority, a share of stock or the certificate thereof is not an indebtedness to the owner nor evidence of indebtedness and, therefore, it is not a credit. Stockholders, as such, are not creditors of the corporation. It is the prevailing doctrine of the American courts that the capital stock of a corporation is a trust fund to be used more particularly for the security of creditors of the corporation, who presumably deal with it on the credit of its capital stock. The shares of a banking corporation do not constitute an indebtedness of the corporation to the stockholder and, therefore, the latter is not a creditor of the former for such shares. The indebtedness of a shareholder to a banking corporation cannot be compensated with the amount of his shares therein, there being no relation of creditor & debtor with respect to such shares. Therefore, the defendant-appellant Lim CHU SING not being a creditor of the Plaintiff Bank, although the latter is a creditor of the former, there is no sufficient ground to justify a compensation. 2. Subscription Contract (Sec. 60 & 72; Trillana v. Quezon Colegialla, 93 Phil. 383 [1953]). Section 60. Subscription contract. - 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 the parties refer to it as a purchase or some other contract. Section 72. Rights of unpaid shares. - Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder. PURCHASE OF ISSUED SHARES (1) TRADITION/DELIVERY upon full payment of the price; sale constitutes merely a title and not a mode by which ownership of the subject matter is transferred. SUBSCRIPTION OF UNISSUED SHARES (1) UPON PERFECTION ISSUANCE of shares of stock even without full payment; upon the mere meeting of the minds, the effects of a real contract take place. Furthermore, the registration of the subscription in the stock and transfer book is not also essential to constitute subscription and issuance of the shares. (Such is meant to govern the binding effects of sale and dispositions of shares as far as third parties are concerned, but not with respect to the corporation and stockholders.) Such constitutes the very mode by which the covered shares are thereby issued and then owned by the subscriber. (2) Even in the case of breach, the subscriber cannot rescind (3) When the corporation becomes insolvent, the corporation becomes immediately liable to pay for the shares of stock subscribed to. IN RELATION TO LIMITED LIABILITY OF STOCKHOLDERS Stockholders are liable to the extent of how much they promised to subscribe this is the price the stockholder

(2) SUBSTANTIAL BREACH remedies rescission or specific performance (3) Bankruptcy or insolvency of the corporation will terminate its claim against the purchaser on the theory that it can no longer perform its side of an executory contract by delivery of a valid certificate and that the consideration has failed.

Revised Bagtas Reviewer by Ve and Ocfe 2A (4) Can be subject to a resolutory or suspensive condition non occurrence of which does not give rise to the sale pays for enjoying limited liability. (4) Can be subject to terms and conditions but such must not excuse buyer from paying. Terms and conditions and stipulations may be agreed upon in a subscription agreement. Such varying terms are valid and effective between the parties for so long as they do not undermine the ultimate obligation of the subscriber to pay the subscription in order to protect the claims of the corporate creditors. (5) The unpaid subscription is a debt of subscriber.

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(5) Purchaser is not a debtor, and according to some courts, the measure of liability of the purchaser if he defaults, is in damages for the difference between the contract price and the market value of the shares (6) The provision of the Corporation Law regarding calls for unpaid subscriptions and assessment of stock do not apply. (7) The rule that the corporation has no legal capacity to release an original subscriber to its capitals stock from the obligation to pay for his shares is inapplicable to a contract of purchase of shares.

NOTE: CONSIDERATION for subscription is always onerous for the protection of the creditors. This is another enforcement of the trust fund doctrine. ISSUANCE OF STOCK BELOW THE PAR VALUE is a violation of the trust fund doctrine. ISSUANCE OF STOCKS WITH NO PAR VALUE must be declared in the books. CLV: Subscription agreements are not covered by Statute of Frauds, and the corporation has a right to enforce and collect, and to adduce oral evidence, upon an oral subscription agreement, on the following grounds: (1) the special treatment accorded to subscription agreement under Corporate Law requires that subscription agreements, even when they have been entered into orally, should be allowed to be proved and enforced by oral evidence, in order to fully protect corporate creditors under the trust fund doctrine; and (2) even if subscription agreements are covered by the Statute of Frauds, but by their nature which upon consent would make the subscriber a stockholder and owner of the covered shares, which would constitute partial execution, they are deemed to be exempted from the prohibition against the presenting of oral evidence to prove and enforce them. CHARACTERISTICS: 1) Original issuance from authorized capital stock at the time of incorporation; 2) The opening, during the life of the corporation of the portion of the original authorized capital stock previously unissued; 3) The increase of authorized capital stock achieved through a formal amendment of the articles of incorporation and registration thereof with SEC. NOTE: Any transaction covering issued shares of stock is a not a subscription agreement, and therefore is governed by the Law on Sales. a) Purchase Agreement. aBayla v. Silang Traffic Co., Inc., 73 Phil. 557 (1942). BAYLA v SILANG TRAFFIC CO. INC. FACTS: Petitioners in G.R. No. 48195 instituted this action in the CFI of Cavite against the respondent Silang

Traffic Co., Inc. (cross-petitioner in G.R. No. 48196), to recover certain sums of money which they had paid severally to the corporation on account of shares of stock they individually agreed to take and pay for under certain specified terms and conditions: (1)That the subscriber promises to pay personally or by his duly authorized agent to the seller at the Municipality of Silang, Province of Cavite, Philippine Islands, the sum of one thousand five hundred pesos (P1,500), Philippine currency, as purchase price of FIFTEEN (15) shares of capital stock, said purchase price to be paid as follows, to wit: five (5%) per cent upon the execution of the contract, the receipt whereof is hereby acknowledged and confessed, and the remainder in installments of five per cent, payable within the first month of each and every quarter thereafter, commencing on the 1st day of July, 1935, with interest on deferred payments at the rate of SIX (6%) per cent per annum until paid. (2)That the said subscriber further agrees that if he fails to pay any of said installment when due, or to perform any of the aforesaid conditions, or if said shares shall be attached or levied upon by creditors of the said subscriber, then the said shares are to revert to the seller and the payments already made are to be forfeited in favor of said seller, and the latter may then take possession, without resorting to court proceedings. (3)The said seller upon receiving full payment, at the time and manner hereinbefore specified, agrees to execute and deliver to said subscriber, or to his heirs and assigns, the certificate of title of said shares, free and clear of all encumbrances. The petitioners agreed to purchase the following number of shares and, up to April 30, 1937, had paid the following sums on account thereof: Sofronio Bayla....... Venancio Toledo........ Josefa Naval.............. Paz Toledo................ T. 8 shares P360

8 shares

375

15 shares 15 shares

675

675

Petitioners' action for the recovery of the sums above mentioned is based on a resolution by the board of directors of the respondent corporation on August 1, 1937. The respondent corporation set up the following defenses: (1) resolution is not applicable to the petitioners Bayla, Naval, and Toledo because on the date thereof "their subscribed shares of stock had already automatically reverted to the defendant, and the installments paid by them had already been forfeited"; and (2) resolution of August 1, 1937, was revoked and cancelled by a subsequent resolution of the board of directors of the defendant corporation dated August 22, 1937. The trial court absolved the defendant from the complaint and declared forfeited in favor of the defendant the shares of stock in question. It held that the resolution of August 1, 1937, was null and void, citing Velasco vs. Poizat (37 Phil., 802), wherein this Court held that "a corporation has no legal capacity to release an original subscriber to its capital stock from the obligation to pay for shares; and any agreement to this effect is invalid" CA modified the decision of the trial court. It affirmed the dismissal of the plaintiffs complained part thereof declaring their subscription canceled is reversed. Defendant is directed to grant plaintiffs 30 days after final judgment within which to pay the arrears on their subscription. Both parties appealed to this Court by petition and cross-petition for certiorari. The parties litigant, the trial court, and the Court of Appeals have interpreted or considered the said agreement as a contract of subscription to the capital stock of the respondent corporation. It should be noted, however, that said agreement is entitled "Agreement for Installment Sale of Shares in the Silang Traffic Company, Inc.,"; that while the purchaser is designated as "subscriber," the corporation

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is described as "seller"; that the agreement was entered into on March 30, 1935, long after the incorporation and organization of the corporation, which took place in 1927; and that the price of the stock was payable in quarterly installments spread over a period of five years. It also appears that in civil case No. 3125 of the Court of First Instance of Cavite mentioned in the resolution of August 1, 1937, the right of the corporation to sell the shares of stock to the person named in said resolution (including herein petitioners) was impugned by the plaintiffs in said case, who claimed a preferred right to buy said shares. ISSUES: (1) W/N the contracts are subscriptions or sales of stock (2) W/N under the contract between the parties, the failure of the purchaser to pay any of the quarterly installments on the purchase price automatically gave rise to the forfeiture of the amounts already paid and the reversion of the shares to the corporation. HELD: (1) They are contracts of sale and not of subscription. "A subscription, properly speaking, is the mutual agreement of the subscribers to take and pay for the stock of a corporation, while a purchase is an independent agreement between the individual and the corporation to buy shares of stock from it at stipulated price." (2) No. The contract provides for interest of the rate of six per centum per annum on deferred payments. The provision regarding interest on deferred payments would not have been inserted if it had been the intention of the parties to provide for automatic forfeiture and cancellation of the contract. Moreover, the contract did not expressly provide that the failure of the purchaser to pay any installment would give rise to forfeiture and cancellation without the necessity of any demand from the seller; and under article 1100 of the Civil Code persons obliged to deliver or do something are not in default until the moment the creditor demands of them judicially or extra-judicially the fulfillment of their obligation, unless (1) the obligation or the law expressly provides that demand shall not be necessary in order that default may arise, (2) by reason of the nature and circumstances of the obligation it shall appear that the designation of the time at which that thing was to be delivered or the service rendered was the principal inducement to the creation of the obligation. Is the resolution of August 1, 1937, valid? The contract in question being one of purchase and not subscription as we have heretofore pointed out, we see no legal impediment to its rescission by agreement of the parties. According to the resolution of August 1, 1937, the recission was made for the good of the corporation and in order to terminate the then pending civil case involving the validity of the sale of the shares in question among others. To that rescission the herein petitioners apparently agreed, as shown by their demand for the refund of the amounts they had paid as provided in said resolution. It appears from the record that said civil case was subsequently dismissed, and that the purchasers of shares of stock, other than the herein petitioners, who were mentioned in said resolution were able to benefit by said resolution. It would be an unjust discrimination to deny the same benefit to the herein petitioners. (b) Pre-Incorporation Subscription (Sec. 61) Section 61. Pre-incorporation subscription. - A subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of at least six (6) months from the date of subscription, unless all of the other subscribers consent to the revocation, or unless the incorporation of said corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subscription: Provided, That no pre-incorporation subscription may be revoked after the submission of the articles of incorporation to the Securities and Exchange Commission. When properties were assigned pursuant to a pre-incorporation subscription agreement, but the corporation fails to issue the covered shares, the return of such properties to the subscriber is a direct consequence of rescission and does not amount to corporate distribution of assets prior to dissolution. aOn Yong v. Tiu, 375 SCRA 614 (2002). NOTE: The present Code recognized that the subscription agreement is a contract between the subscriber and the corporation. Although the corporation is still non-existent since it is still in the process of incorporation, it is still bound under the pre-incorporation agreement. The latter is replaced by the promoters contract although it is merely an expectancy. A subscription agreement is in a sense a contract among several subscribers, and no one of the subscribers can thus withdraw from the contract without the consent of all the others and thereby diminish, without the universal

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consent of all the others, the common fund in which all have acquired an interest. (c) Release from Subscription Obligation (aOng Yong v. Tiu, 401 SCRA 1 (2003); Velasco v. Poizat, 37 Phil. 802 [1918]; PNB v. Bitulok Sawmill, Inc., 23 SCRA 1968 [1968]; National Exchange Co. v. Dexter, 51 Phil. 601 [1928]) The accepted rule in Phil. jurisdiction is that a corporation can release a subscriber from liability on the subscription, in whole or in part, only with the express or implied consent of all the shareholders and only when there is no prejudice to corporate creditors.

Jurisprudence has allowed certain exceptions to this rule: in the case of a bona fide compromise or to set-off a debt due from the corporation, a release, supported by consideration, which will be effectual as against dissenting stockholders and subsequent and existing creditors. NOTE: There must still be valuable consideration. ONG YONG v. TIU Facts: In 1994, the construction of the Masagana Citimall in Pasay City by First Landlink Asia Development Corporation (FLADC) owned by the Tiu family was threatened by the foreclosure by the PNB for their P 190 M debt. In order to stave off the threat the Tiu family together with the Ong family agreed to restructure FLADC and created a pre-subscription agreement and each were to maintain equal shareholdings. The Ong family invested a total sum of P 190 M to the corporation while the Tiu family included several real estate properties as added capital for the restructured corporation. The Ong and Tiu families now owned 1,000,000 shares each of FLADC. After all the debts were paid, the peace between Ong and Tiu did not last. Tiu claimed rescission based on substantial breach by Ong upon the pre-subscription agreement. Ong, on the other hand maintained that it was Tiu who committed the breach because one of the properties that they were supposed to include in the agreement was in fact already in the real estate owned by FLADC. The SEC approved the rescission (both parties were return to status quo, P 190 M to the Ong family and all the remaining FLADC assets to the Tiu family, which included the now finished mall valued at more than P 1B) and the CA affirmed the decision with slight modifications. Held: 1.) Is rescission the proper remedy for an intra-corporate dispute No, the Corporation Code, SEC rules and even the Rules of Court provide for appropriate and adequate intra-corporate remedies, other than rescission, in situations like this. Rescission is certainly not one of them, specially if the party asking for it has no legal personality to do so (because it is a corporation, Tiu family is not the corporation) and the requirements of the law therefore have not been met. A contrary doctrine will tread on extremely dangerous ground because it will allow just any stockholder, for just about any real or imagined offense, to demand rescission of his subscription and call for the distribution of some part of the corporate assets to him without complying with the requirements of the Corp. Code. 2.) Granting rescission is a proper remedy, does it violate the TFD Yes it will violate the TFD and the procedures for valid distribution of assets and property under the Corp. Code. The TFD provides that subscription 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. The doctrine is the underlying principle in the procedure for the distribution of capital assets, in the Corp. Code which allows the distribution of corporate capital only in three instances: (1) amendments of the Articles of Incorporation to reduce the authorized capital stock (requires Board Resolution and stockholderss meeting) (2) purchase of redeemable shares by the corporation, regardless of the existence of unrestricted retained earnings and (3) dissolution and eventual liquidation of the corporation. 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 violation the TFD and the Corp. Code, since the rescission of a subscription agreement is not one of the instances when distribution of capital assets and property of the corporation is allowed. (d) When Condition of Payment Provided in By-laws. De Silva v. Aboitiz & Co., 44 Phil. 755 (1923). 3. Consideration (Sec. 62).

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Section 62. Consideration for stocks. - Stocks shall not be issued for a consideration less than the par or issued price thereof. Consideration for the issuance of stock may be any or a combination of any two or more of the following: 1. Actual cash paid to the corporation; 2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued; 3. Labor performed for or services actually rendered to the corporation; 4. Previously incurred indebtedness of the corporation; 5. Amounts transferred from unrestricted retained earnings to stated capital; and 6. Outstanding shares exchanged for stocks in the event of reclassification or conversion. Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights, the valuation thereof shall initially be determined by the incorporators or the board of directors, subject to approval by the Securities and Exchange Commission. Shares of stock shall not be issued in exchange for promissory notes or future service. The same considerations provided for in this section, insofar as they may be applicable, may be used for the issuance of bonds by the corporation. The issued price of no-par value shares may be fixed in the articles of incorporation or by the board of directors pursuant to authority conferred upon it by the articles of incorporation or the by-laws, or in the absence thereof, by the stockholders representing at least a majority of the outstanding capital stock at a meeting duly called for the purpose. (5 and 16) (a) Cash (b) Property (c) Service (d) Retained Earnings (d) Shares

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CASH AND PROMISSORY NOTES FOR SUBSCRIPTION WHY THE PROHIBITION Two factors (1) The underlying difference in legal consequence between notes receivable or accounts receivable and subscription receivable on the other hand. If a not receivable is accepted as payment for subscription of shares of stock, the face value of the note would appear as an addition to the assets of the corporations balance sheet, without corresponding deduction on the capital stock of the equity portion. On the other hand, subscription receivables are correctly treated not as assets and are reflected properly in the balance sheet of the corporation as deductions from stockholders equity and the difference shows the net amount of the stockholders equity which is backed up by assets actually received by the corporation (such as cash or property) which have values that do not depend on the credit standing of another person. In short, the latter informs the creditors of the actual net amount of capital stock which is truly backed-up by realizable assets. (2) TFD that the capital stock of the corporation, especially the paid-up portion thereof should be backed up by assets which have their own intrinsic value other than the promise of a person to pay in the future.

PROPERTY CONSIDERATION The property to be accepted by the corporation must be necessary or proper for it to own in carrying on its business. (It cannot lawfully issue stock for property which its charter does not authorize it to acquire, or for property acquired for an unauthorized purpose.) The property must be of substantial nature, having pecuniary value capable of being ascertained, and must be something real and tangible as distinguished from something speculative. It must be delivered to the corporation. It must be capable of being applied to the payment of debts and of distribution among the stockholders. EXAMPLE: Real property may be accepted as payment on subscription to the capital stock only

when the same can be used in the business of the corporation, as in real estate development, subdivision, agro-industrial business, and the like, as well as for the establishment of offices. SEC has ruled that property as financial instruments and receivables may be legally accepted as capital contributions subject to the following conditions: (1) actually received by the corporation (2) necessary or convenient for the corporations use and lawful purpose; and (3) at a fair valuation equal to the par value of the stock to be approved by the SEC

DEBTS AND SERVICES AS CONSIDERATION Labor performed or services actually rendered are also considered as considerations, provided that the transaction is in good faith and no fraud is perpetuated upon other stockholders. Previously-incurred debts valuation would have been established at arms-length prior to even negotiating on the subscription agreement, and they would more often represent the true value of services which the corporation received. Future services are not allowed as consideration for subscription because the value of such service to the corporation in exchange for shares of stock would again depend on the future performance of the subscriber of the services offered, and there would be tendency to shortchange the corporation.

SET-OFF OF CORPORATIONS INDEBTEDNESS Previously-incurred debts valuation would have been established at arms-length prior to even negotiating on the subscription agreement, and they would more often represent the true value of services which the corporation received. Since these exists in its books, the corporation would have had to pay the same in cash to its creditor, and in turn the same cash is paid back by such creditor to the corporation for subscription of shares.

UNRESTRICTED RETAINED EARNINGS OR EXISTING CAPITAL AS CONSIDERATION The amounts transferred from URE to stated capital covers the declaration of stock dividends, which has the net effect of capitalizing URE. Stock dividends are in the nature of shares of stock, where the consideration is the amount of URE converted into equity in the corporations books.

CONSEQUENCES OF UNLAWFUL CONSIDERATION Subscription contract is valid, but the consideration is void. It would not be in consonance with the TFD nor to the best interest of the corporation and the subscriber, to consider the contract as void. The reasonable interpretation is that the subscription contract would be valid and binding on both the corporation and the subscriber, but that the provision on such unlawful consideration is deemed void, such that the subscription agreement would be construed to be for cash and the unpaid amount be treated as part of subscription receivables. (QUESTION KO: So what do you for instance with accepted PNs reflected as assets of the corporation amend the records that contain them? Wont creditors be prejudiced because they were led to believe that the assets are up to this amount where they are not) Stock dividends are in the nature of shares of stock, the consideration for which is the amount of unrestricted retained earnings converted into equity in the corporations books. Lincoln Phil. Life v. Court of Appeals, 293 SCRA 92 (1998).1 4. Watered Stocks (Sec. 65) Section 65. Liability of directors for watered stocks. - Any director or officer of a corporation consenting to the issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value, or who, having1The basis for determining the documentary stamps due on stock dividends declared would be their book value as indicated in the latest audited financial statements of the corporation, and not the par value thereof. Commissioner of Internal Revenue v. Lincoln Phil. Life Insurance Co., 379 SCRA 423 (2002).

Revised Bagtas Reviewer by Ve and Ocfe 2A

knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary, shall be solidarily, liable with the stockholder concerned to the corporation and its creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same. NOTES: Shares issued as fully paid when in truth the consideration received is known to be less than the par value or issued value of the shares are called WATERED STOCK. This is prohibited because of the injuries caused to: (1) CORPORATION which is deprived of the needed capital and the opportunity to market its securities to its own advantage, thus hurting its business prospects and financial responsibility; (2) EXISTING AND FUTURE SHAREHOLDERS who are also injured by the dilution of the proportionate interests in the corporation and who pay full value for their shares; (3) PRESENT AND FUTURE CREDITORS who are injured as the corporation is deprived of the assets or capital required by law to be contributed by all shareholders as substitute for individual liability for corporate debts; and (4) PERSONS WHO DEAL WITH IT OR PURCHASE ITS SECURITIES WHO ARE DECEIVED because stock watering is invariable accompanied with misleading corporate accounts and financial statements, particularly by an overstatement of the value of assets received for the shares to cover up a capital deficit resulting from overvaluation and underpayment of purported capital contributions. 5. Payment of Balance of Subscription (Secs. 66 and 67; Lingayen Gulf Electric Power Co. v. Baltazar, 93 Phil. 404 [1953]). Section 66. Interest on unpaid subscriptions. - Subscribers for stock shall pay to the corporation interest on all unpaid subscriptions from the date of subscription, if so required by, and at the rate of interest fixed in the by-laws. If no rate of interest is fixed in the by-laws, such rate shall be deemed to be the legal rate. Section 67. Payment of balance of subscription. - Subject to the provisions of the contract of subscription, the board of directors of any stock corporation may at any time declare due and payable to the corporation unpaid subscriptions to the capital stock and may collect the same or such percentage thereof, in either case with accrued interest, if any, as it may deem necessary. Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, if any, shall be made on the date specified in the contract of subscription or on the date stated in the call made by the board. Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance, unless a different rate of interest is provided in the by-laws, computed from such date until full payment. If within thirty (30) days from the said date no payment is made, all stocks covered by said subscription shall thereupon become delinquent and shall be subject to sale as hereinafter provided, unless the board of directors orders otherwise. NOTES: The word call is capable of three meanings namely (1) resolution of the board of directors for the payment of unpaid subscriptions (2) notification of such resolution made on the stockholders (3) the time when the subscriptions become payable. A call is usually expressed in the form of a resolution adopted by the board of directors, specifying the proportion of the unpaid subscription which it desired to call in and the time or times when it is to be payable. The entire amount of the unpaid subscription may be called at once or it may be made payable by installments, at stated intervals or by successive calls. A call must be uniform with respect to all holders of the class of shares on which it is made, who have already paid an equal amount on their shares, and as a general rule it must not exceed the balance remaining unpaid on their shares. WHEN CALL NOT NECESSARY (1) When, under the terms of the subscription contract, subscription is payable, not upon call but immediately, or on a specified day, or when it is payable in installments at specified times; (2) If the corporation becomes insolvent which makes the liability

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on the unpaid subscription due and demandable regardless of any stipulation to the contrary in the subscription agreement. Jurisprudence provides that notice of call for payment of unpaid subscribed stock must be published, except when the corporation is insolvent. A stockholder who is employed with the company, cannot sett-off his unpaid subscription against his awarded claims for wages, where there has been no call for the payment of such subscription. Apodaca v. NLRC, 172 SCRA 442 (1989). 6. Delinquency on Subscription (Secs. 68, 69, 70 and 71; Philippine Trust Co. v. Rivera, 44 Phil. 469 [1923]; Miranda v. Tarlac Rice Mill Co., 57 Phil. 619 [1932])

Section 68. Delinquency sale. - The board of directors may, by resolution, order the sale of delinquent stock and shall specifically state the amount due on each subscription plus all accrued interest, and the date, time and place of the sale which shall not be less than thirty (30) days nor more than sixty (60) days from the date the stocks become delinquent. Notice of said sale, with a copy of the resolution, shall be sent to every delinquent stockholder either personally or by registered mail. The same shall furthermore be published once a week for two (2) consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation is located. Unless the delinquent stockholder pays to the corporation, on or before the date specified for the sale of the delinquent stock, the balance due on his subscription, plus accrued interest, costs of advertisement and expenses of sale, or unless the board of directors otherwise orders, said delinquent stock shall be sold at public auction to such bidder who shall offer to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share. The stock so purchased shall be transferred to such purchaser in the books of the corporation and a certificate for such stock shall be issued in his favor. The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares. Should there be no bidder at the public auction who offers to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share, the corporation may, subject to the provisions of this Code, bid for the same, and the total amount due shall be credited as paid in full in the books of the corporation. Title to all the shares of stock covered by the subscription shall be vested in the corporation as treasury shares and may be disposed of by said corporation in accordance with the provisions of this Code. Section 69. When sale may be questioned. - No action to recover delinquent stock sold can be sustained upon the ground of irregularity or defect in the notice of sale, or in the sale itself of the delinquent stock, unless the party seeking to maintain such action first pays or tenders to the party holding the stock the sum for which the same was sold, with interest from the date of sale at the legal rate; and no such action shall be maintained unless it is commenced by the filing of a complaint within six (6) months from the date of sale. Section 70. Court action to recover unpaid subscription. - Nothing in this Code shall prevent the corporation from collecting by action in a court of proper jurisdiction the amount due on any unpaid subscription, with accrued interest, costs and expenses. Section 71. Effect of delinquency. - No delinquent stock shall be voted for or be entitled to vote or to representation at any stockholder's meeting, nor shall the holder thereof be entitled to any of the rights of a stockholder except the right to dividends in accordance with the provisions of this Code, until and unless he pays the amount due on his subscription with accrued interest, and the costs and expenses of advertisement, if any. The prescriptive period to recover on unpaid subscription does not commence from the

Revised Bagtas Reviewer by Ve and Ocfe 2A time of subscription but from the time of demand by Board of Directors to pay the balance of subscription. Garcia v. Suarez, 67 Phil. 441 (1939). NOTES:

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The SEC has ruled that the use of the word SHALL shows that a prior call or board resolution demanding payment is not necessary if a specific date of payment is specified in the subscription contract; and neither is there a need of a formal declaration of the board for an unpaid subscription to become delinquent in the event of failure to pay the unpaid subscription within the prescribed 30 day period from the date specified in the subscription contract.

WHO IS THE HIGHEST BIDDER Such bidder who shall offer to pay the full amount of the balance on the subscription together with accrued interests, costs of advertisements and expenses of sale for the smallest number of shares or fraction of a share. If there is no bidder, the corporation may bid for the same, with such shares to be vested in the corporation as treasury shares. (DISCLAIMER: I am not sure if this is correct but this is how I understood the explanation.) For example stockholder X owes the corporation Php 3M (inclusive of costs, etc.) for 3000 shares. During the bid, what the bidders do lets say bidders A, B and C is to bid for a certain number of shares in exchange for a fixed price which will cover the balance on the subscription together with accrued interests, costs of advertisement and expenses of sale. Whoever bids for the smallest number of shares shall be considered as the highest bidder, and the remaining shares not covered by the bid is reverted to its delinquent owner. In this case, let us say for Php 3M, A expressed the intention to pay 3M for 1000 shares while B for 2000 shares and C for 3000 shares, the highest bidder is A. The 1000 shares shall be placed under the name of A, while the 2000 shares which were not covered shall be deemed as fully paid by delinquent stockholder X (who is no longer delinquent by this time). CLV tells us that during this biddings, bidders do not include the amount they wish to bid for the shares of stock, as what the corporation deems important is that the delinquent amount plus costs of the sale be paid, no more, no less. What they only include in their bid is the number of shares they wish to purchase. That is why the rule is the highest bidder shall be the one who purchases the least number of shares for a fixed price. CLV also tells us that the corporation generally does not desire to profit from this endeavor but only to discharge such delinquency. However, nothing precludes the corporation from earning profits in this case provided they structure the bid in such a way as to accommodate such endeavor. However CLV tells us that this is quite difficult.

OTHER REMEDIES AVAILABLE TO THE CORPORATION The Board of Directors has absolute discretion to choose which remedy it deems proper in order to collect on the unpaid subscriptions. If it does not know which remedy it will make use of, it may put up the unpaid stock for sale as provided in Sections 38 to 48 of the Code, or by action in court.

EFFECTS OF DELINQUENCY DELINQUENCY MAY BE ACHIEVED IN TWO WAYS: (1) failure to pay the subscription on the date mentioned in the call or (2) failure to pay the subscription on the date specified on the contract of subscription. THESE ARE ITS EFFECTS: (1) it disqualifies the stockholders to be voted for or be entitled to vote or to representation at any stockholders meeting; (2) it disqualifies the stockholder to exercise any rights of a stockholder except the right to dividends until and unless he pays the amount due on his subscription with accrued interest and the costs and expenses of

advertisement if any. They shall not be entitled to notice on meetings, and they are not included in the determination of the quorum. The only right remaining to them is the right to receive dividends but the cash dividends shall first be applied to the unpaid balance, while the stock dividend shall be withheld until payment of unpaid balance.

PRESCRIPTION ON DEMAND FOR PAYMENT OF SUBSCRIPTION The period begins to run from the time the payment becomes demandable, which in the case of subscription of shares begins to run only from the time the board of director declares that balance are due and demandable. The period does not run from the date of subscription. (a) Who May Question a Delinquency Sale (Sec. 68 and 69). Section 68. Delinquency sale. - The board of directors may, by resolution, order the sale of delinquent stock and shall specifically state the amount due on each subscription plus all accrued interest, and the date, time and place of the sale which shall not be less than thirty (30) days nor more than sixty (60) days from the date the stocks become delinquent. Notice of said sale, with a copy of the resolution, shall be sent to every delinquent stockholder either personally or by registered mail. The same shall furthermore be published once a week for two (2) consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation is located. Unless the delinquent stockholder pays to the corporation, on or before the date specified for the sale of the delinquent stock, the balance due on his subscription, plus accrued interest, costs of advertisement and expenses of sale, or unless the board of directors otherwise orders, said delinquent stock shall be sold at public auction to such bidder who shall offer to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share. The stock so purchased shall be transferred to such purchaser in the books of the corporation and a certificate for such stock shall be issued in his favor. The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares. Should there be no bidder at the public auction who offers to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share, the corporation may, subject to the provisions of this Code, bid for the same, and the total amount due shall be credited as paid in full in the books of the corporation. Title to all the shares of stock covered by the subscription shall be vested in the corporation as treasury shares and may be disposed of by said corporation in accordance with the provisions of this Code. Section 69. When sale may be questioned. - No action to recover delinquent stock sold can be sustained upon the ground of irregularity or defect in the notice of sale, or in the sale itself of the delinquent stock, unless the party seeking to maintain such action first pays or tenders to the party holding the stock the sum for which the same was sold, with interest from the date of sale at the legal rate; and no such action shall be maintained unless it is commenced by the filing of a complaint within six (6) months from the date of sale. 7. Certificate of Stock (Sec. 63) Section 63. Certificate of stock and transfer of shares. - The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates

Revised Bagtas Reviewer by Ve and Ocfe 2A and the number of shares transferred.

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No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. NOTES: Certificate shall only be issued upon full payment the rationale for this is to prevent partial disposition of a subscription which is not fully paid, because if it is permitted and the subscriber subsequently becomes delinquent in the payment of his subscription, the corporation may not be able to sell as many of his subscribed shares as would be necessary to cover the total amount due from him. In the absence of the provision of the by-laws to the contrary, a corporation may apply payments made by subscribers on account of their subscriptions either as: (1) full payment for the corresponding number of shares, the par value of which is covered by such payment; or (2) payment pro rata to each and all the entire number of shares subscribed for. The SEC may by specific rule or regulation, allow corporations to provide in their articles of incorporation and by-laws for the use of uncertified security security evidenced by electronic or similar records. (a) Nature of Certificate: aTan v. SEC, 206 SCRA 740 (1992); aDe los Santos v. Republic, 96 Phil. 577 (1955); aPonce v. Alsons Cement Corp., 393 SCRA 602 (2002); C.N. Hodges v. Lezama, 14 SCRA 1030 (1965).

TAN v. SEC FACTS: Respondent Visayan Corp. was registered on October 1, 1979. As incorporator, petitioner had four hundred (400) shares of the capital stock standing in his name at the par value of P100.00 per share, evidenced by Certificate of Stock No. 2. He was elected as President and subsequently reelected, holding the position as such until 1982 but remained in the Board of Directors until April 19, 1983 as director. On January 31, 1981, while petitioner was still the president of the respondent corporation, two other incorporators, namely, Antonia Y. Young and Teresita Y. Ong, assigned to the corporation their shares, represented by certificate of stock No. 4 and 5 after which, they were paid the corresponding 40% corporate stock-in-trade. Petitioner's certificate of stock No. 2 was cancelled by the corporate secretary and respondent Patricia Aguilar by virtue of Resolution No. 1981 (b), which was passed and approved while petitioner was still a member of the Board of Directors of the respondent corporation. Due to the withdrawal of the aforesaid incorporators and in order to complete the membership of the five (5) directors of the board, petitioner sold fifty (50) shares out of his 400 shares of capital stock to his brother Angel S. Tan. Another incorporator, Alfredo B. Uy, also sold fifty (50) of his 400 shares of capital stock to Teodora S. Tan and both new stockholders attended the special meeting, Angel Tan was elected director and on March 27, 1981, the minutes of said meeting was filed with the SEC. Accordingly, as a result of the sale by petitioner of his fifty (50) shares of stock to Angel S. Tan on April 16, 1981, Certificate of Stock No. 2 was cancelled and the corresponding Certificates Nos. 6 and 8 were issued, signed by the newly elected fifth member of the Board, Angel S. Tan as Vicepresident, upon instruction of Alfonso S. Tan who was then the president of the Corporation. Mr. Buzon, submitted an Affidavit alleging that he was personally requested by Mr. Tan Su Ching to request Mr. Alfonso Tan to make proper endorsement in the cancelled Certificate of Stock No. 2 and Certificate No. 8, but he did not endorse, instead he kept the cancelled (1981) Certificate of Stock No. 2 and returned only to me Certificate of Stock No. 8, which he delivered to Tan Su Ching. When petitioner was dislodged from his position as president, he withdrew from the corporation on February 27, 1983, on condition that he be paid with stocks-in-trade equivalent to 33.3% in lieu of the stock value of his shares in the amount of P35,000.00. After the withdrawal of the stocks, the

board of the respondent corporation held a meeting on April 19, 1983, effecting the cancellation of Stock Certificate Nos. 2 and 8 in the corporate stock and transfer book 1 and submitted the minutes thereof to the SEC on May 18, 1983. Five (5) years and nine (9) months after the transfer of 50 shares to Angel S. Tan and three (3) years and seven (7) months after effecting the transfer of Stock Certificate Nos. 2 and 8 from the original owner in the stock and transfer book of the corporation, the latter filed the case before the Cebu SEC Extension Office questioning for the first time, the cancellation of his aforesaid Stock Certificates Nos. 2 and 8. SEC Extension Office Hearing Officer ruled in favor of petitioner. Private respondent in the original complaint went to the SEC on appeal. The commission en banc unanimously overturned the Decision of the Hearing Officer. ISSUES: (1) W/N the meaning of shares of stock are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer (2) W/N Section 63 of the Corporation Code of the Philippines is "mandatory in nature", meaning that without the actual delivery and endorsement of the certificate in question, there can be no transfer, or that such transfer is null and void. HELD: (1) There is no doubt that there was delivery of Stock Certificate No. 2 made by the petitioner to the Corporation before its replacement with the Stock Certificate No. 6 for fifty (50) shares to Angel S. Tan and Stock Certificate No. 8 for 350 shares to the petitioner, on March 16, 1981. The problem arose when petitioner was given back Stock Certificate No. 2 for him to endorse and he deliberately witheld it for reasons of his own. That the Stock Certificate in question was returned to him for his purpose was attested to by Mr. Buzon in his Affidavit. The proof that Stock Certificate No. 2 was split into two (2) consisting of Stock Certificate No. 6 for fifty (50) shares and Stock Certificate No. 8 for 350 shares, is the fact that petitioner surrendered the latter stock (No. 8) in lieu of P2 million pesos worth of stocks, which the board passed in a resolution in its meeting on April 19, 1983. Thus, on February 27, 1983, petitioner indicated he was withdrawing from the corporation on condition that he be paid with stock-in-trade corresponding to 33.3%, which had only a par value of P35,000.00. In this same meeting, the transfer of Stock Certificate Nos. 2 and 8 from the original owner, Alfonso S. Tan was ordered to be recorded in the corporate stock and transfer book thereafter submitting the minutes of said meeting to the SEC on May 18, 1983. It is also doubtless that Stock Certificate No. 8 was exchanged by petitioner for stocks-in-trade since he was operating his own enterprise engaged in the same business, otherwise, why would a businessman be interested in acquiring P2,000,000.00 worth of goods which could possibly at that time, fill up warehouse? In fact, he even padlocked the warehouse of the respondent corporation, after withdrawing the thirty-three and one-third (33 1/3%) percent stocks. Accordingly, the Memorandum of Agreement prepared by the respondents' counsel, Atty. Ramirez evidencing the transaction, was also presented to petitioner for his signature, however, this document was never returned by him to the corporate officer for the signature of the other officers concerned. (2) No. To follow the argument put up by petitioner which was upheld by the Cebu SEC Extension Office Hearing Officer, Felix Chan, that the cancellation of Stock Certificate Nos. 2 and 8 was null and void for lack of delivery of the cancelled "mother" Certificate No. 2 whose endorsement was deliberately withheld by petitioner, is to prescribe certain restrictions on the transfer of stock in violation of the corporation law itself as the only law governing transfer of stocks. While Section 47(s) grants a stock corporations the authority to determine in the by-laws "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. (Emphasis supplied) Moreover, it is safe to infer from the facts deduced in the instant case that, there was already delivery of the unendorsed Stock Certificate No. 2, which is essential to the issuance of Stock Certificate Nos. 6 and 8 to angel S. Tan and petitioner Alfonso S. Tan, respectively. What led to the problem was the return of the cancelled certificate (No. 2) to Alfonso S. Tan for his endorsement and his deliberate non-endorsement.

Revised Bagtas Reviewer by Ve and Ocfe 2A

For all intents and purposes, however, since this was already cancelled which cancellation was also reported to the respondent Commission, there was no necessity for the same certificate to be endorsed by the petitioner. All the acts required for the transferee to exercise its rights over the acquired stocks were attendant and even the corporation was protected from other parties, considering that said transfer was earlier recorded or registered in the corporate stock and transfer book. Tuazon v. La Provisora Filipina: But delivery is not essential where it appears that the persons sought to be held as stockholders are officers of the corporation, and have the custody of the stock book A certificate of stock is not necessary to render one a stockholder in corporation. Nevertheless, 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. Under the instant case, the fact of the matter is, the new holder, Angel S. Tan has already exercised his rights and prerogatives as stockholder and was even elected as member of the board of directors in the respondent corporation with the full knowledge and acquiescence of petitioner. Due to the transfer of fifty (50) shares, Angel S. Tan was clothed with rights and responsibilities in the board of the respondent corporation when he was elected as officer thereof. NOTE: Petitioner even attempted to mislead the Court by erroneously quoting the ruling of the Court in C. N. Hodges v. Lezama, which has some parallelism with the instant case was the parties involved therein were also close relatives as in this case. The quoted portion appearing on p. 11 of the petition, was cut short in such a way that relevant portions thereof were purposely left out in order to impress upon the Court that the unendorsed and uncancelled stock certificate No. 17, was unconditionally declared null and void, flagrantly omitting the justifying circumstances regarding its acquisition and the reason given by the Court why it was declared so. NOTE: This case held that the lack of endorsement of a certificate of a stock which had been previously delivered to the corporation by the registered stockholder for cancellation would not prevent the corporation from canceling in the books of the corporation, such certificate and issuance of a new certificate in favor of the new owner of the shares. The statement in Tan that the certificate of stock does not represent ownership of the shares covered therein should be understood in the light than Tan essentially involved issues between intra-corporate members, namely the corporation and the stockholders. NOTE: How can Tan stand together with Bitong? Bitong provided for rules with regard to certificate of stocks, but not all applicable rules for such were provided by Bitong. Tan provides for rules in relation to certificate of stocks treated as quasi-negotiable instruments. NOTE: Why is Tan correct in this case? Why was delivery not essential? Section 63 of the Corporation Code tells us that the delivery and indorsement of a certificate of stock is just one means of disposition, as the Code uses the permissive word MAY. Other ways of constructive delivery are execution of public instrument and enjoyment of the prerogatives of ownership with full knowledge and consent of the original owner. The latter was present in this case. DELOS SANTOS v REPUBLIC NOTE: This case held that a certificate of stock is not a negotiable instrument, but is regarded as quasi-negotiable in the sense that it may be transferred by endorsement coupled with delivery, but it is not negotiable because the holder thereof takes it without prejudice to such rights or defenses as the registered owners thereof may have under the law, except insofar as such rights or defenses are subject to the limitations imposed by the principles governing estoppel. NOTE: A transferee under a forged assignment acquires no title which can be asserted against the true owner unless the true owners own negligence has been such as to create an estoppel against him. This would mean that a bona fide purchaser of shares under a forged or unauthorized transfer

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acquires no title as against the true owner does not apply where the circumstances are such as to estop the latter from asserting his title. PONCE v ALSONS CEMENT FACTS: On January 25, 1996, Vicente C. Ponce, filed a complaint with the SEC for mandamus and damages against Alsons Cement Corporation and its corporate secretary Francisco M. Giron, Jr. In his complaint, petitioner alleged, among others, that: x x x 5. The late Fausto G. Gaid was an incorporator of Victory Cement Corporation (VCC), having subscribed to and fully paid 239,500 shares of said corporation. 6. On February 8, 1968, plaintiff and Fausto Gaid executed a Deed of Undertaking and Endorsement whereby the latter acknowledges that the former is the owner of said shares and he was therefore assigning/endorsing the same to the plaintiff. A copy of the said deed/endorsement is attached as Annex A. 7. On April 10, 1968, VCC was renamed Floro Cement Corporation (FCC for brevity). 8. On October 22, 1990, FCC was renamed Alsons Cement Corporation (ACC for brevity) as shown by the Amended Articles of Incorporation of ACC, a copy of which is attached as Annex B. 9. From the time of incorporation of VCC up to the present, no certificates of stock corresponding to the 239,500 subscribed and fully paid shares of Gaid were issued in the name of Fausto G. Gaid and/or the plaintiff. 10. Despite repeated demands, the defendants refused and continue to refuse without any justifiable reason to issue to plaintiff the certificates of stocks corresponding to the 239,500 shares of Gaid, in violation of plaintiffs right to secure the corresponding certificate of stock in his name. Attached to the complaint was the Deed of Undertaking and Endorsement upon which petitioner based his petition for mandamus. DEED OF UNDERTAKING KNOW ALL MEN BY THESE PRESENTS: I, VICENTE C. PONCE, is the owner of the total subscription of Fausto Gaid with Victory Cement Corporation in the total amount of TWO HUNDRED THIRTY NINE THOUSAND FIVE HUNDRED (P239,500.00) PESOS and that Fausto Gaid does not have any liability whatsoever on the subscription agreement in favor of Victory Cement Corporation x x x ENDORSEMENT I, FAUSTO GAID is indorsing the total amount of TWO HUNDRED THIRTY NINE THOUSAND FIVE HUNDRED (239,500.00) stocks of Victory Cement Corporation to VICENTE C. PONCE. x x x With these allegations, petitioner prayed that judgment be rendered ordering respondents (a) to issue in his name certificates of stocks covering the 239,500 shares of stocks and its legal increments and (b) to pay him damages. Instead of filing an answer, respondents moved to dismiss the complaint. They argued, inter alia, that there being no allegation that the alleged ENDORSEMENT was recorded in the books of the corporation, said endorsement by Gaid to the plaintiff of the shares of stock in question assuming that the endorsement was in fact a transfer of stockswas not valid against third persons such as ALSONS under Section 63 of the Corporation Code. There was, therefore, no specific legal duty on the part of the respondents to issue the corresponding certificates of stock, and mandamus will not lie.

Revised Bagtas Reviewer by Ve and Ocfe 2A

Petitioner filed his opposition to the motion to dismiss on February 19, 1996 contending that: (1) mandamus is the proper remedy when a corporation and its corporate secretary wrongfully refuse to record a transfer of shares and issue the corresponding certificates of stocks; (2) he is the proper party in interest since he stands to be benefited or injured by a judgment in the case; (3) the statute of limitations did not begin to run until defendant refused to issue the certificates of stock in favor of the plaintiff on April 13, 1992. SEC granted the motion to dismiss saying that there is no record of any assignment or transfer in the books of the defendant corporation, and there is no instruction or authority from the transferor (Gaid) for such assignment or transfer. There is not even any endorsement of any stock certificate to speak of. What the plaintiff possesses is a document by which Gaid supposedly transferred the shares to him. Petitioner appealed the Order of dismissal. On January 6, 1997, the Commission En Banc reversed the appealed Order and directed the Hearing Officer to proceed with the case. In ruling that a transfer or assignment of stocks need not be registered first before it can take cognizance of the case to enforce the petitioners rights as a stockholder. 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. Also, the problem encountered in securing the certificates of stock made by the buyer must be expeditiously taken up through the so-called administrative mandamus proceedings with the SEC than in the regular courts. It also found that the Hearing Officer erred in holding that petitioner is not the real party in interest. Their MR having been denied, respondents appealed the decision of the SEC En Banc and the resolution denying their MR to the CA. In its decision, the CA held that 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. Thus, said the CA, the complaint for mandamus should be dismissed for failure to state a cause of action. Petitioners MR was likewise denied. Petitioner first contends that the act of recording the transfer of shares in the stock and transfer book and that of issuing a certificate of stock for the transferred shares involves only one continuous process. Thus, when a corporate secretary is presented with a document of transfer of fully paid shares, it is his duty to record the transfer in the stock and transfer book of the corporation, issue a new stock certificate in the name of the transferee, and cancel the old one. A transferee who requests for the issuance of a stock certificate need not spell out each and every act that needs to be done by the corporate secretary, as a request for issuance of stock certificates necessarily includes a request for the recording of the transfer. Ergo, the failure to record the transfer does not mean that the transferee cannot ask for the issuance of stock certificates. Secondly, according to petitioner, there is no law, rule or regulation requiring a transferor of shares of stock to first issue express instructions or execute a power of attorney for the transfer of said shares before a certificate of stock is issued in the name of the transferee and the transfer registered in the books of the corporation. He contends that Hager vs. Bryan, 19 Phil. 138 (1911), and Rivera vs. Florendo, 144 SCRA 643 (1986), cited by respondents, do not apply to this case. These cases contemplate a situation where a certificate of stock has been issued by the company whereas in this case at bar, no stock certificates have been issued even in the name of the original stockholder, Fausto Gaid. Finally, petitioner maintains that since he is under no compulsion to register the transfer or to secure stock certificates in his name, his cause of action is deemed not to have accrued until respondent ALSONS denied his request. Respondents, in their comment, maintain that the transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent insofar as the corporation is concerned and no certificate of stock can be issued in the name of the transferee. Until the recording is made, the

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transfer cannot be the basis of issuance of a certificate of stock. They add that petitioner is not the real party in interest, the real party in interest being Fausto Gaid since it is his name that appears in the records of the corporation. They conclude that petitioners cause of action is barred by prescription and laches since 24 years elapsed before he made any demand upon ALSONS.

ISSUES: (1) W/N CA erred in holding that petitioner has no cause of action for a writ of mandamus. (2) W/N the transfer of shares of stocks not recorded in the stock and transfer book of the corporation is nonexistent(3) W/N notice to a corporation of the sale of the shares and presentation of certificates for transfer is equivalent to registration HELD: No. The CA did not err in ruling that petitioner had no cause of action, and that his petition for mandamus was properly dismissed. In Rural Bank of Salinas, Inc., private respondent Melania Guerrero had a Special Power of Attorney executed in her favor by Clemente Guerrero, the registered stockholder. It gave Guerrero full authority to sell or otherwise dispose of the 473 shares of stock registered in Clementes name and to execute the proper documents therefor. Pursuant to the authority so given, Melania assigned the 473 shares of stock owned by Guerrero and presented to the Rural Bank of Salinas the deeds of assignment covering the assigned shares. Melania Guerrero prayed for the transfer of the stocks in the stock and transfer book and the issuance of stock certificates in the name of the new owners thereof. Based on those circumstances, there was a clear duty on the part of the corporate secretary to register the 473 shares in favor of the new owners, since the person who sought the transfer of shares had express instructions from and specific authority given by the registered stockholder to cause the disposition of stocks registered in his name. That cannot be said of this case. The deed of undertaking with endorsement presented by petitioner does not establish, on its face, his right to demand for the registration of the transfer and the issuance of certificates of stocks. In Hager vs. Bryan, 19 Phil. 138 (1911), this Court held that a petition for mandamus fails to state a cause of action where it appears that the petitioner is not the registered stockholder and there is no allegation that he holds any power of attorney from the registered stockholder, from whom he obtained the stocks, to make the transfer. Without discussing or deciding the respective rights of the parties which might be properly asserted in an ordinary action or an action in the nature of an equitable suit, we are all agreed that in a case such as that at bar, a mandamus should not issue to compel the secretary of a corporation to make a transfer of the stock on the books of the company, unless it affirmatively appears that he has failed or refused so to do, upon the demand either of the person in whose name the stock is registered, or of some person holding a power of attorney for that purpose from the registered owner of the stock. There is no allegation in the petition that the petitioner or anyone else holds a power of attorney from the Bryan-Landon Company authorizing a demand for the transfer of the stock, or that the Bryan-Landon Company has ever itself made such demand upon the Visayan Electric Company, and in the absence of such allegation we are not able to say that there was such a clear indisputable duty, such a clear legal obligation upon the respondent, as to justify the issuance of the writ to compel him to perform it. Under the provisions of our statute touching the transfer of stock (secs. 35 and 36 of Act No. 1459), the mere endorsement of stock certificates does not in itself give to the indorsee such a right to have a transfer of the shares of stock on the books of the company as will entitle him to the writ of mandamus to compel the company and its officers to make such transfer at his demand, because, under such circumstances the duty, the legal obligation, is not so clear and indisputable as to justify the issuance of the writ. As a general rule and

Revised Bagtas Reviewer by Ve and Ocfe 2A especially under the above-cited statute, 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.

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(2) 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 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. 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. Hence, without such recording, the transferee may not be regarded by the corporation as one among its stockholders and the corporation may legally refuse the issuance of stock certificates in the name of the transferee even when there has been compliance with the requirements of Section 64 of the Corporation Code. This is the import of Section 63 which states that No transfer, however, shall be valid, except between the parties, until the transfer is recorded in the books of the corporation showing 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. The situation would be different if the petitioner was himself the registered owner of the stock which he sought to transfer to a third party, for then he would be entitled to the remedy of mandamus. x x x until registration is accomplished, the transfer, though valid between the parties, cannot be effective as against the corporation. Thus, in the absence of any allegation that the transfer of the shares between Gaid and the private respondent [herein petitioner] was registered in the stock and transfer book of the petitioner corporation, the private respondent has failed to state a cause of action. (3) Petitioners reliance on our ruling in Abejo vs. De la Cruz, 149 SCRA 654 (1987), that notice given to the corporation of the sale of the shares and presentation of the certificates for transfer is equivalent to registration is misplaced. In the case, there is no allegation in the complaint that petitioner ever gave notice to respondents of the alleged transfer in his favor. Moreover, that case arose between and among the principal stockholders of the corporation, Pocket Bell, due to the refusal of the corporate secretary to record the transfers in favor of Telectronics of the corporations controlling 56% shares of stock which were covered by duly endorsed stock certificates. As aforesaid, the request for the recording of a transfer is different from the request for the issuance of stock certificates in the transferees name. Finally, in Abejo, the Court did not say that transfer of shares need not be recorded in the books of the corporation before the transferee may ask for the issuance of stock certificates. The Courts statement, that 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 among which is the stock purchasers right to secure the corresponding certificate in his name, was addressed to the issue of jurisdiction, which is not pertinent to the issue at hand. NOTE: That petitioner was under no obligation to request for the registration of the transfer is not in issue. It has no pertinence in this controversy. One may own shares of corporate stock without possessing a stock certificate. In Tan vs. SEC, 206 SCRA 740 (1992), we had occasion to declare that a certificate of stock is not necessary to render one a stockholder in a corporation. But a certificate of stock is the tangible evidence of the stock itself and of the various interests therein. The certificate is the evidence of the holders interest and status in the corporation, his ownership of the share represented thereby. The certificate is in law, so to speak, an equivalent of such ownership. It expresses the contract between the corporation and the stockholder, but it is not essential to the existence of a share in stock or the creation of the relation of shareholder to the corporation. In fact, it rests on the will of the stockholder whether he wants to be issued stock certificates, and a stockholder may opt not to be issued a certificate. In Won vs. Wack Wack Golf and Country Club,

Inc., 104 Phil. 466 (1958), we held that considering that the law does not prescribe a period within which the registration should be effected, the action to enforce the right does not accrue until there has been a demand and a refusal concerning the transfer. In the present case, petitioners complaint for mandamus must fail, not because of laches or estoppel, but because he had alleged no cause of action sufficient for the issuance of the writ. NOTE: Ponce teaches us that the very fact that a certificate is indorsed and delivered to a third person does not automatically entitle such person to register such certificate in his name, or compel the corporation to register the certificate in his name even. This case teaches us that an indorsed and delivered certificate does not create a clear right with respect to the possession of such certificate by the third person, as the same mode (indorsement and delivery) applies to sale, pledge and mortgage. This is where the registered owner must come in, he must inform the corporation whether the disposition was a pledge, or mortgage or sale, which would determine whether or not the third person is entitled registration. Since almost all dealings comprise of the same mode, the owner must apprise the corporation with the necessary information and instructions. A stock certificate is merely evidence of a share of stock and not the share itself. Lincoln Phil. Life v. Court of Appeals, 293 SCRA 92 (1998). A certificate of stock could not be considered issued in contemplation of law unless signed by the president or vice-president and countersigned by the secretary or assistance secretary. Bitong v. Court of Appeals, 292 SCRA 503 (1998). (b) Quasi-negotiable Character of Certificate of Stock:aBachrach Motor Co. v. Lacson Ledesma, 64 Phil. 681 (1937). BACHRACH MOTOR CO. v LACSON LEDESMA FACTS: Bachrach obtained judgment (in 1927) against Ledesma in two civil cases. The sheriff, in compliance with the writ of execution issued in favor of Bachrach, attached and sold the right of redemption of Ledesma over several properties, and attached as well all right, title to and interest that Ledesma had in Any bonus, dividend, shares of stock, money, or other property which Ledesma was entitled to receive from Talisay-Silay Milling Co. Inc. on account of being a stockholder in that corporation or which he is entitled to receive from that corporation for any other cause or pretext whatsoever. The properties and the shares Ledesma owned in Talisay were mortgaged to PNB as securities to ensure his payment of P624,000. There was another mortgage over the real properties in favor of PNB to answer for the debts of Central Talisay-Silay Milling. Central resolved to grant a bonus or compensation to the owners of the properties mortgaged for the risk incurred from being subjected to said mortgage lien. Under the resolution, Ledesma was allotted P19,911.11. This was payable only in January, 1930. PNB brought an action against Ledesma and his wife for recovery of mortgage credit (1928). In 1929, they amended the complaint to include Bachrach, because they claim to have some right to certain properties which are the subject matter of the complaint. The court ruled in favor of PNB, and ordered the sale of properties mortgaged. PNB was also granted the authority to sell the stock certificates. During the pendency of the case of PNB v. Ledesma, Bachrach filed an action against Talisay to recover P13,850 which by virtue of the resolution was bestowed upon Ledesma by Central. PNB intervened, alleging a preferred right, as said bonus being a civil fruit of the mortgaged lands, the bank became entitled to it as the mortgage had become due. Judgment was rendered in favor of Bachrach. The SC held that the bonus had no immediate relation to the lands in question but merely a remote and accidental one. It was not a civil fruit, being a mere personal right of Ledesma. In January, 1930, Stock Cert. 772 was issued in favor of Ledesma by Talisay. Ledesma ordered this to be delivered to PNB. The 6,300 shares constituted the 2,100 original shares that was given as pledge to PNB under the deed of mortgage. On Feb. 1931, the sheriff sold the whole 6,300 shares covered by 772, and not only the 2,100 original shares. PNB informed Talisay of the sale, and Talisay issued Stock Cert. 1155 representing 8,968 shares (6,300 + 2,100). ISSUES: W/N Bachrach had a preferred right by virtue of the judgment and attachment made (1927) - NO W/N the pledge was ineffective as against Bachrach because evidence of its date was not made to appear in a public instrument NO

Revised Bagtas Reviewer by Ve and Ocfe 2A W/N the pledge could not legally exist as the Cert. was not the shares themselves - NO HELD:

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Plaintiff said it had a preferred right over the 6,300 shares because the stocks were in custodia legis by virtue of the attachment/garnishment when Cert 772 was delivered to PNB, and when Talisay issued Cert 1155 in favor of PNB. This contention was unfounded as it appeared that the stocks were pledged to the bank prior to the garnishment. Cert 772 was delivered to PNB on Feb 27, 1930. The garnishment was notified to the parties and became effective on August 11, 1930, more than five months after delivery. On Feb, 1931, Talisay issued Cert 1155 in favor of PNB. According to Article 1865 of the Civil Code then, in order that a pledge may be effective as against third persons, evidence of its date must appear in a public instrument in addition to the delivery of the thing pledged to the creditor. However, Sec. 4 of the Chattel Mortgage Law implicitly modified 1865 a contract of pledge and that of chattel mortgage need not appear in public instruments to be effective against third persons, provided that delivery was made. Therefore, the pledge of the 6,300 shares was valid against Bachrach. The contention that a certificate of stock or of stock dividends can not be the subject matter of contract of pledge or chattel mortgage was untenable. Certificates of stock or of stock dividends are quasi negotiable instruments. They may be given in pledge or mortgage to secure an obligation. They are transferable, when properly indorsed, by mere delivery, and by estoppel against the corporation or against prior holders, as good a title to the transferee as if they were negotiable. It is to the public interest that such use should be simplified and facilitated by placing them as nearly as possible on the plane of commercial paper. In order for a transfer of stock certificate to be effective, it must be properly indorsed and that title to such certificate of stock is vested in the transferee by the delivery of the duly indorsed certificate of stock. Endorsement of the certificate of stock is a mandatory requirement of law for an effective transfer of a certificate of stock. aRazon v. IAC, 207 SCRA 234 (1992). RAZON v IAC FACTS: Vicente Chuidian, as administrator of the intestate estate of Juan Chuidian, prayed that defendants Enrique Razon, etc. be ordered to deliver certificates of stocks representing the shares of deceased Juan in the E. Razon Inc. The defendants alleged in turn that all the shares of stock in the name of stockholders of record of the corporation were fully paid for by defendant Razon; that said shares were subject to agreement between defendants and incorporators; that the shares were actually owned and remained in the possession of Razon; and that neither Vicente nor Juan paid any amount for the 1,500 shares of stock in question. Enrique organized E. Razon Inc in 1962 for the purpose of bidding for arrastre services in South Harbor, Manila. Some of the incorporators withdrew, so Enrique distributed the stocks in the names of the withdrawing incorporators to his friends. Among them was Juan who received 1,500 shares. The shares were registered in Juans name only as nominal stockholder, and with the agreement that the said shares were owned and held by Enrique. Juan was given the option to buy these though. Because of the agreement, Juan delivered the cert. of stocks to Razon, who from then on had possession of the cert. until he delivered it for deposit with the PBC under joint custody with Juan. ISSUE: W/N by virtue of the agreement, the shares were owned by Enrique - NO HELD: No. In the Corporation Code and in the case of Embassy Farms v. CA, for an effective transfer of shares of stock the mode and manner as prescribed by law must be followed. Shares of stock may be

transferred by delivery to the transferee of the cert properly indorsed. Title may be vested in the transferee by the delivery of the duly indorsed cert. No transfer shall be valid, except as between the parties until the transfer is properly recorded in the books of corporation. In the case at hand, the stocks were in the name of Juan in the books of the corporation. Also, he was also elected member of the Board of Directors which clearly showed that he was a stockholder of the corporation. The petitioner failed to present any bylaws which could show the effective transfer to him of the stocks. In the absence of such bylaws, the provisions of the Corporation Code governs. Also, preponderance of evidence showed that the shares were given to Juan for value Juan was the legal counsel of the corporation. The shares were given as payment for the legal services. The cash and stock dividends and all the preemptive rights are all incidents of stock ownership. The rights of stockholders are the ff: (1) to have a certificate or other evidence of his status as stockholder issued to him (2) vote at meetings of the corporation (3) receive his proportionate share of the profits of the corporation (4) participate proportionately in the distribution of the corporate assets upon dissolution or winding up.

The rule is that the endorsement of the certificate of stock by the owner or his attorney-in-fact or any other person legally authorized to make the transfer shall be sufficient to effect the transfer of shares only if the same is coupled with delivery. 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 new transferee. But to be valid against third parties, the transfer must be recorded in the books of the corporation. aBitong v. Court of Appeals, 292 SCRA 503 (1998) BITONG v CA FACTS:

Nora Bitong filed in the SEC a derivative suit for the benefit of Mr. and Ms Publishing Co, Inc. to hold spouses Apostol liable for fraud, misrepresentation, disloyalty, evident bad faith, conflict of interest and mismanagement in directing the affairs of Mr. & Ms. to the damage of the Corp and its stockholders. Nora claimed that she had been the Treasurer and a Member of the Board of Directors of Mr & Ms, and was the registered owner of 1,000 shares of stock. Eugenia Apostol was President and Chair of the Board of Mr & Ms. It was alleged that except for the sale of the name Philippine Inquirer to Philippine Daily Inquirer, all other transactions and agreements entered into by Mr & Ms with PDI were not supported by any bond and/or stockholders resolution. Several cash advances were also made to PDI amounting to P3.276M. on some of these loans, PDI paid no interest. Though the advances were booked as advances to an affiliate, no resolution or document existed which could legally authorize the creation of and support to an affiliate. It was also claimed that respondent spouses were also stockholders, directors, and officers in both Mr & Ms and PDI. The stock subscriptions were paid for by Mr & Ms and initially treated as receivables from officers and employees. Mr & Ms was actually made when Ex Libris Publishing Co., whose original stockholders were Juan Ponce Enrile and his wife through JAKA Investmen