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SECTION 41.

POWER TO ACQUIRE OWN SHARES
STEINBERG VS. VELASCO
FACTS
 Plaintiff, C.H. STEINBERG is the receiver of
the Sibuguey Trading Company, a domestic
corporation. The defendants are residents of
the Philippine Islands.
 On June 30, 1922, the board of directors of the
corporation authorized the purchase of,
purchased and paid for, 330 shares of the
capital stock of the corporation at the agreed
price of P3,300.
 That at the time the purchase was made, the
corporation was indebted in the sum of
P13,807.50.
 That according to its books, it had accounts
receivable in the sum of P19,126.02.
 That on September 11, 1923, when the petition
was filed for its dissolution upon the ground
that it was insolvent, its account payable
amounted to P9,241.19 and its account
receivable P12,512.47 or an apparent asset of
P3,271.28 over and above its liabilities.
 There is no stipulation or finding of facts as to
what was the actual cash value of its accounts
receivable. Neither is there any stipulation that
those accounts or any part of them ever have
been or will be collected, and it does not
appear that after his appointment on February
24, 1924, the receiver made a diligent effort to
collect them and that he was unable to do so.
 It also appears from the minutes of the board
of directors that the president and manager
recommended that P3000 – out of the surplus
account to be set aside for dividends payable,
and that payments be made in installments so
as not to effect the financial condition of the
corporation.

ISSUES

RULING

Whether or not the corporation has a
right to acquire own shares

Creditors of a corporation have the right
to assume that so long as there are
outstanding debts and liabilities, the BOD
will not use the assets of the corporation to
buy its own stock, and will not declare
dividends to stockholders when the
corporation is insolvent. In this case, it was
found that the corporation did not have an
actual bona fide surplus from which
dividends could be paid. Moreover, the
Court noted that the Board of Directors
purchased the stock from the corporation
and declared the dividends on the stock
at the same Board meeting, and that the
directors were permitted to resign so that
they could sell their stock to the
corporation.

90 in payment of the judgment against them in the civil case no. and did not discharge their obligation to the defendant. but Mr.395. 52786 with legal interest from the date of the institution of that action.  After trial. & Mrs.  In the civil case no. They insisted that that the certificates of stock which included shares belonging to other customers be entrusted to them for safekeeping. The defendant is also ordered to deliver unto the plaintiffs their shares of stock. Rustia to pay unto plaintiff P3.50 found by Judge Locsin and such additional dividends as said shares are just and legal upon the same principle that the plaintiffs are made to pay interest on the debt from that date.SEC 42. he sentenced the defendants.100. Power to invest corporate funds in another corporation or business or for any other purposes *other than the primary purpose) RUSTIA VS.  The court said that the consignation has completely relieved the plaintiffs from any liability arising out of the judgment.100. the amount which they were sentenced to pay in Civil Case No.  A new hitch developed after the termination of that case by reason of Aguinaldo and Aguinaldo’s inability to surrender to Mr. the Court holds that the plaintiffs have substantially complied with the requirements of the law when they consigned with the Court of First Instance the sum of P4. & Mrs.  Aguinaldo & Aguinaldo offered to guarantee with proper security the delivery of those shares when conditions became normal. Rustia their Suyoc and Antamok shares because there were covered by bigger lots which could not be split on account of the mining companies’ offices being closed due to the current war. The defendant should deliver to the plaintiffs the shares of stock listed in the decision on appeal plus dividends on said shares in the sum of P387. & Mrs.40 with 6 percent interest per annum and the plaintiff to surrender unto defendants the shares of stock which they had purchased through Aguinaldo and Aguinaldo. 52786 decided by Judge Arsenio Locsin. Rustia were not agreeable to that. or that either Aguinaldo & Aguinaldo buy their shares or sell to them That the plaintiffs were condemned to pay the defendant the sum of P3. Whether the tender and consignation by the plaintiffs of the amount with the Court will discharge their obligation to the defendant The Supreme Court held that the so-called tender and consignation by the plaintiffs were not tender and consignation at all within the purview of the applicable provision of the old Civil Code. Mr. 52786. AGUINALDO FACTS ISSUES RULING  An action was commenced in the Court of First Instance of Manila by Juan Rustia and Filomena Rustia against Aguinaldo & Aguinaldo. .40.

in which besides consigning P4.90 in Japanese war notes. for accounting. among other things. & Mrs.  Following this impasse. and damages.395. Rustia brought this action at bar.others’ shares. they filed cross-claims for dividends on their shares. . Mr.

.  SECOND: it was alleged that the authority granted in 1961 had already been exercised in 1962 and 1963. injunction and damages with prayer for a preliminary injunction against the majority of the members of the Board of Directors and San Miguel Corporation as an unwilling petitioner. which 2/3 should have been computed on the basis of the capitalization at the time of the amendment. if he were to discharge effectively his duty. he had all the qualifications to be a director of respondent corporation. it has been held than an officer of a corporation cannot engage in a business in direct competition with that of the corporation where he is a director by utilizing information he has received as such officer.” It is not denied that a member of the Board of Directors of the San Miguel Corporation has access to sensitive and highly confidential information.  Since the amendment was based on the 1961 authorization. being a Substantial stockholder thereof. petitioner contended that the Board acted without authority and in usurpation of the power of the stockholders. Section 21 of the Corporation Law expressly provides that a corporation may make by laws for the qualifications of directors. that the questioned amendment of the by-laws was made. individual respondents amended the bylaws of the corporation basing their authority to do so on a resolution of the stockholders adopted on March 13. repeal or adopt new by-laws may be delegated to the Board of Directors only by the affirmative vote of stockholders. SEC FACTS ISSUES  Petitioner.  It was contended that according to Section 22 of the Corporation Law and Article VIII of the by-laws of the corporation. there being six new directors. proposals of mergers or tie-ups with other firms. such as: (a) marketing strategies and pricing structure (b) budget for expansion and diversification (c) research and development (d) sources of funding. after which the authority of the Board ceased to exist. availability of personnel. the power to amend. under “the established law that a director or officer of a corporation may not enter into a competing enterprise which cripples or injures the business of the corporation of which he is an officer or director. modify. where two corporations are competitive in a substantial sense. if not impossible for the director. 1976. John Gokongwei.  FOURTH.GOKONGWEI VS. Thus. it would seem improbable. RULING YES. cancellation of certificate of filing of amended by-laws. It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel Corporation. Whether or not the amended by-laws of SMC of disqualifying a competitor from nomination or election to the Board of Directors of SMC are valid and reasonable  FiRST CAUSE OF ACTION: Petitioner alleged that on September 18. Certainly. to satisfy his loyalty to both corporations and place the performance of his corporation duties above his personal concerns. from taking advantage of the information which he acquires as director to promote his individual or corporate interests to the prejudice of San Miguel Corporation and its stockholders. petitioner claimed that prior to the questioned amendment. 1961. as stockholder of respondent San Miguel Corporation filed with the Securities and Exchange Commission a petition for declaration of nullity of amended by-laws. representing not less than 2/3 of the subscribed and paid up capital stock of the corporation.  THIRD: petitioner averred that the membership of the Board of Directors had changed since the authority was given in 1961. It is also well established that corporate officers “are not permitted to use their position of trust and confidence to further their private interests. who is also the officer or owner of a competing corporation.

considering that the foreign subsidiary is wholly owned by respondent San Miguel Corporation and. allowances. under its control. and has to be proper and lawful in character and not inimical to the interest of the corporation. such as the rights to vote and to be voted upon in the election of directors. an incident of ownership or interest be termed an equitable ownership. A . it would be inconsistent with petitioner’s primary motive in running for board membership – which is to protect his investments in San Miguel Corporation. This right is predicated upon the necessity of self-protection. The offer and assurance of petitioner that to avoid any possibility of his taking unfair advantage of his position as director of San Miguel Corporation. Jr and/or its successor-in-interest. e) lists of salaries.  Whether or not the corporation has the power to invest corporate funds in another corporation or business or YES. Soriano Corporation (ANSCOR) c) latest balance sheet of San Miguel International. 1961. he would absent himself from meetings at which confidential matters would be discussed. therefore. the questioned act is ultra vires and void. Inc. bonuses and other compensation. received by Andres M. b) copy of the management contract between San Miguel Corporation and A. member or stockholder of the corporation at reasonable hours. Inc. d) authority of the stockholders to invest the funds of respondent corporation in San Miguel International. That as a stockholder. would not detract from the validity and reasonableness of the by-laws here involved. or a ownership. a beneficial ownership. In the case at bar. The stockholder’s right of inspection of the corporation’s books and records is based upon their ownership of the assets and property of the corporation. petitioner filed with the SEC an “Urgent Motion for Production and Inspection of Documents” alleging that the Secretary of respondent Corporation refused to allow him to inspect its records despite request made by petitioner for production of certain documents enumerated in the request and that respondent corporation had been attempting to suppress information from its stockholders despite a negative reply by the SEC to its query regarding their authority to do so. “the record of all business transactions of the corporation and minutes of any meeting shall be open to the inspection of any director. a fully owned subsidiary of San Miguel Corporation Pursuant to the second paragraph of Section 51 of the Corporation Law. 40. It is. therefore. it was alleged that corporations have no inherent power to disqualify a stockholder from being elected as a director and. Power to invest corporate funds. 1971. Whether or not respondent SEC gravely abused its discretion in denying petitioner’s request for an examination of the records of San Miguel International.  The documents requested to be copied were: a) minutes of the stockholder’s meeting field on March 13. Soriano. if any. Apart from the impractical results that would ensue from such arrangement. petitioner acquired s rights inherent in stock ownership. good faith and fair dealing to construe the statutory right of petitioner as stockholder to inspect the books and records of the corporation as extending to books and records of such wholly subsidiary which are in respondent corporation’s possession and control.  On October 28. and that amending the bylaws. therefore. . Inc. respondent purposely provided for petitioner’s disqualification and deprived him of his vested rights as aforementioned hence the amended by-laws are null and void. The inspection has to be germane to the petitioner’s interest as a stockholder.  As additional cause of action. it would be more in accord with equity.

The Court held that the purchase of beer manufacturing facilities by SMC was an investment in the same business stated as its main purpose in its Articles of Incorporation. . shall in anywise be interested in any other agricultural or mining corporation. therefore it does not need the approval of the stockholders. which is to manufacture and market beer. or for any purpose other than the main purpose for which it was organized. When the investment is necessary to accomplish its purpose or purposes as stated in its articles of incorporation the approval of the stockholders is not necessary.‟ and provided further that no agricultural or mining corporation. provide that “its board of directors has been so authorized in a resolution by the affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least two-thirds of the voting power on such a propose at a stockholders‟ meeting called for that purpose.for any other purpose private corporation has the power to invest its corporate funds “in any other corporation or business.

The order of the respondent Commission was based principally on the affidavits of Nazario Avendano. and that the resolution of disqualification of the respondent Board of Directors intended to perpetuate themselves in power. pursuant to Section 3. and petitioner has not submitted any evidence in support of his contention. Jose Picornell and Mabini Antonio and documentary evidence showing that petitioner is engaged in agricultural and poultry business competitive with that of San Miguel Corporation. Article III of the amended by-laws. Fernando Constantino. therefore. that when respondent Commission sustained the disqualification of petitioner. Whether or not the resolution of SEC sustaining the findings of the San Miguel Corporation Board of Directors that petitioner is engaged in a business competitive with or antagonistic to that of the San Miguel Corporation should be annulled. The Chief Justice and six justices of the Supreme Court had already promulgated their opinions that the validity of the amended by-laws insofar and only insofar as the parties herein are concerned. can no longer be relitigated on the basis of the “law of the case” doctrine and. The alleged disqualification of some members of the Board was never in issue during the hearing of the disqualification case. the enforcement of the amended by-laws could not have been ipso factor stayed by the motion for reconsideration.  Petitioner alleges that the matter of petitioner’s disqualification should not have been heard in view of the pendency of petitioner’s motion for reconsideration with the court . ineligible for election as director.GOKONGWEI VS. . Ruperto Sarandi. Petitioner did not adduce any evidence to rebut the evidence of his disqualification. SEC FACTS ISSUES RULING  Petitioner.. John Gokongwei seeks to nullify and set aside the resolution en banc of respondent Securities and Exchange Commission sustaining the findings of the San Miguel Corporation Board of Directors that petitioner is engaged in a business competitive with or antagonistic to that of the San Miguel Corporation and therefore. Jr. it failed to consider that private respondents are precluded from disqualifying petitioner because of the rule of pari delicto.

“ provided that its board of directors has been so authorized by the affirmative vote of stockholders holding shares etitling them to exerciseat least two-thirds of the voting power. provided that „its board of directors has been so authorized in a resolution by the affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least two-thirds of the voting power on such a proposal at a stockholder‟s meeting called for that purpose. For alleged illegal and ultra-vires acts consisting of self-dealing irregular loans. the court reiterates the preliminary injunction restraining the Ma-ao Sugar Central Co. For alleged forfeiture of corporate rights warranting dissolution 4.. Mabuhay Printing and any other company whose purpose is not connected with the sugar central business. and J. costs of plaintiffs to be borne by the Corporation and J. plus the costs. For alleged damages and attorney’s fees 5. that n agricultural or mining corporation shall in anywise be interested in any other agricultural or mining corporation. management to give any loans or advances to its officers and orders it to refrain from making investments in Acoje Mining. 1. and unauthorized investments 2. 1953 in the First Instance of Manila by four minority stockholders against the Ma-ao Sugar Central Co. Inc. Whether or not a corporation has the power to invest its fund in any other corporation or business. 40. INC.Amado Araneta. FACTS ISSUES  This was a representative or derivative suit commenced on October 20. the approval of the stockholders is not necessary. Amado Araneta and three other directors of the corporation. or for any purpose other than the main purpose for which it was organized. Inc.DE LA RAMA VS. Power to Invest corporate funds.270.00 with 8% interest from the date of the filing of this complaint. – A private corporation has the power to invest its corporate funds in any other corporation or business. or for any purpose other than the main purpose for which it was organized  The complaint stated five causes of action. For receivership  The Lower Court dismisses the petition for dissolution but condemns J.. or for any purpose other than the main purpose for which it was organized..  Both parties appealed directly to the Supreme Court.Amado Araneta to pay unto Ma-ao Sugar Central Co.” This portion of the decision should be reversed because “Sec 17½ of the Corporation Law allows a corporation to “invest its fund in any other corporation or business. When the investment is necessary to accomplish its purpose or purposes as stated in its articles of incorporation. Inc. MA-AO SUGAR CENTRAL CO.. Mabuhay Printing. . “to refrain from making investments in Acoje Mining.” and provided further.. RULING YES. For alleged gross mismanagement 3. and any other company whose purpose is not connected with the Sugar Central business. Inc. The Supreme Court reversed the decision of the Lower Court when it ordered the management of the Ma-ao Sugar Central Co. the amount of P46.

LEPANTO took possession thereof and embarked in rebuilding and reconstructing the mines and mill.14 Likewise a share of stock issued in payment of indebtedness is equivalent to issuing a stock in exchange for cash. the parties renewed their contract for another 5 years but the Pacific War broke out in December 1941. erecting staff quarters and bodegas and repairing existing structures. equipment. by its governing agents. clearing the mill site. LEPANTO CONSOLIDATED MINING COMPANY ISSUES FACTS  On January 30. power plant. or in payment of its indebtedness. the consideration for which shares of stock may be issued are: (1) cash. sets apart for ratable division among the holders of the capital . it is the shares of stock that are originally issued by the corporation and forming part of the capital that can be exchanged for cash or services rendered. supplies on hand. is that part or portion of the profits of the enterprise which the corporation. that is. Nielson & Co. repairing roads and maintaining the same. The term "dividend" both in the technical sense and its ordinary acceptation. VS. If shares of stocks are issued in exchange of cash or property then those shares do not fall under the category of "stock dividends". The Japanese forces thereafter occupied the mining properties. 1940 such that Nielson shall receive: a) 10% of the dividends paid during the contract period and every end of the year. A corporation may legally issue shares of stock in consideration of services rendered to it by a person not a stockholder. operated the mines during the continuance of the war. Those shares of stock may be issued to a person who is not a stockholder.  In 1940. or part of the stocks issued when the increase of the capitalization of a corporation is properly authorized. c) 10% of any amount expended during the year out of surplus earnings for capital account. the 10% share was disputed. b) 10% of any depletion reserve that may be set up. setting up new organization. the mill.NIELSON & CO. In other words. installing new machinery and equipment. concentrates on hand and mines. the operation of the mining properties was disrupted on account of the war. RULING Section 16 of the Corporation Law.  In January 1942. repairing the mines. or property. Whether or not the corporation has a power to declare dividends  Lepanto owned the mining properties.A. and who were ousted from the mining properties only in August of 1945  After the mining properties were liberated from the Japanese forces. A share of stock issued to pay for services rendered is equivalent to a stock issued in exchange of property.500. 1937. Nielson operated and maintained the said properties for Php 2. to prevent their utilization by the invading Japanese Army.00/month as management fee plus 10% participation in the net profits for 5 years. Shares of stock are given the special name "stock dividends" only if they are issued in lieu of undistributed profits. were destroyed upon orders of the United States Army. But a share of stock coming from stock dividends declared cannot be issued to one who is not a stockholder of a corporation. (2) property. INC. because services is equivalent to property. executed an agreement with Lepanto Consolidated Mining Co. either coming from the original capitalization or from the increased capitalization. Lepanto’s Board of Directors authorized C. if the corporation has original shares of stock unsold or unsubscribed. But a share of stock thus issued should be part of the original capital stock of the corporation upon its organization.  In February 1942. president to enter with an agreement with Nielson modifying same provisions effective January 1.  In 1941. and (3) undistributed profits. De Witt. or to a person already a stockholder in exchange for services rendered or for cash or property.

Lepanto denied the allegations and set up certain defenses.00. adversely affects the work of mining and milling. It means the fund actually set aside.  In its answer. Under Section 16 of the Corporation Law stock dividends cannot be issued to a person who is not a stockholder in payment of services rendered. and on August 22. repairing and renewing the water system.  The rehabilitation and reconstruction of the mine was not completed until 1948.000. it declared stock dividends worth P2. or by the stockholders at a corporate meeting. during the period of extension Lepanto had declared stock dividends worth P3. the management contract shall remain in suspense in case fortuitous event or force majeure. 1948. In other words.  On February 6. Under the terms thereof. 1949.000.  Shortly after the mines were liberated from the Japanese invaders in 1945. the mines resumed operation under the exclusive management of LEPANTO. and remembering. Lepanto declared stock dividends worth P1.  On June 26. doing police work necessary to take care of the materials and equipment recovered. We sustain the contention of Lepanto that the understanding between Lepanto and Nielson was simply to make the cash value of the stock dividends declared as the basis for determining the amount of compensation that should be paid to Nielson. . such as war or civil commotion. to be divided or distributed among the stockholders according to their respective interests. Nielson brought an action against Lepanto before the Court of First Instance (CFI) of Manila to recover damages suffered in view of the refusal of Lepanto to comply with the terms of a management contract entered into between them on January 30.000. prescription and laches as bars against the institution of the action. 1950. in the proportion of 10% of the cash value of the stock dividends declared.000. And so. in the case at bar Nielson cannot be paid in shares of stock which form part of the stock dividends of Lepanto for services it rendered under the management contract.  On November 28. and declared by the directors of the corporation as dividends and duly ordered by the director.000.salvaging equipment and storing the same within the bodegas. 1937.00.00).000. 1958. a disagreement arose between NIELSON and LEPANTO over the status of the operating contract in question which as renewed expired in 1947. stock.

the inventory of the property of the corporation. or assets of the corporation. P889. upon demand of the appellee paid under protest.  Thereafter. The definition follows: The term “dividend” as used in this Law shall be held to mean any distribution made or ordered to be made by a corporation. the same cannot be taxes under that provision of Act No.… Stock dividend shall be considered income. and payable to its shareholders. joint companies. The stock dividend for that amount was issued to the appellant. for a particular period. When the assets of a corporation have increased so as to justify the issuance of a stock dividend.  For the recovery of that sum. 2833 which provides for a tax upon income.91. Sec. . the present case was instituted. property which is not an income cannot be taxed.… out of its earnings or profits accrued since March first. and voluntarily. Under the guise of an income tax. the Philippine American Drug Company was a corporation duly organized and existing under the laws of the Philippine Islands. 25 of said Act attempts to define the application of the income tax. unto the appellee the sum of P889. stock dividends represent undistributed increase in the capital of corporations or firms.  As a result of the business for that year. nineteen hundred and thirteen. the appellant. They are used to show the increased interest or proportional shares in the capital of each stockholder.  The appellant was a stockholder in said corporation. the said corporation declared a stock dividend to which the proportionate share of appellant was P24. the increase of the assets should be taken account of the Government in the ordinary tax duplicates for the purposes of assessment and collection of an additional tax. so that the stock theretofore issued does not show the real value of the stockholder’s interest. etc.FISHER VS. In other words. and additional stock is issued showing the increase in the actual capital. for particular period shows an increase in its capital. Generally speaking. 2833 of the Philippine Legislature is an Act establishing “an income tax”. etc. whether in cash or in stock of the corporation. The Court held that stock dividends are not income. doing business in the City of Manila. 2833 RULING Act No. to the amount of the earnings or profits distributed. or property. ISSUES Whether the stock dividends in the present case is an “income” and taxable as such under the provisions of Section 25 of Act No.800.91 as income tax on said stock dividend. etc. TRINIDAD FACTS  During the year 1919.