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1.

Issuance of Shares
f. Delinquency Subscription
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. (39a46a)

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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. (47a)
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. (49a)
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. (50a)
Phil. Trust Co.
Subscription)

v.

Rivera

(Delinquency

44 Phil. 469 January 29, 1923 Street, J.


FACTS: This action was instituted on November
21, 1921, in the CFI of Manila, by the Philippine
Trust Company, as assignee in insolvency of La
Cooperativa Naval Filipina, against Marciano
Rivera, to recover a balance of P22,500, alleged
to be due upon defendants subscription to the
capital stock of said insolvent corporation. Upon
judgment in favor of plaintiff, the defendant
appealed.

ISSUE: Whether or not the defendant was still


liable for the unpaid subscription.

HELD: The reason given for defendants failure to


pay the entire subscription is that after the
Cooperative Naval Filipina had been incorporated,
a meeting of its stockholders occurred, at which a
resolution was adopted to the effect that the

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capital should be reduced by 50 per centum and


the subscribers released from the obligation to
pay any unpaid balance of their subscription in
excess of 50 per centum of the same.
Consequently, the subscriptions of the various
shareholders had been cancelled to the extent
stated; and fully paid certificates were issued to
each shareholder for one half of his subscription.
It does not appear that the formalities prescribed
in Section 17 of the Corporation Law (Act No.
1459), as amended, relative to the reduction of
capital stock in corporations were observed, and
in particular it does not appear that any
certificate was at any time filed in the Bureau of
Commerce and Industry, showing such reduction.
The trial judge therefore held that the resolution
relied upon by the defendant was without effect
and that the defendant was still liable for the
unpaid balance of his subscription. In this we
think his Honor was clearly right.
It is established doctrine that subscriptions to the
capital of a corporation constitute a fund to which
creditors have a right to look for satisfaction of
their claims and that the assignee in insolvency
can maintain an action upon any unpaid stock
subscription in order to realize assets for the
payment of its debts. (Velasco vs. Poizat, 37 Phil.,
802).
A corporation has no power to release an original
subscriber to its capital stock from the obligation
of paying for his shares, without a valuable
consideration for such release; and as against
creditors, a reduction of the capital stock can take
place only in the manner and under the
conditions prescribed by the statute or the
charter or the articles of incorporation. Moreover,
strict compliance with the statutory regulations is
necessary (14 C.J., 498, 620).
In the case before us, the resolution releasing the
shareholders from their obligation to pay 50 per
centum of their respective subscriptions was an
attempted withdrawal of so much capital from the
fund upon which the companys creditors were
entitled ultimately to rely and, having been
effected without compliance with the statutory
requirements, was wholly ineffectual.
Judgment affirmed.

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2. Reduction of capital stock to camouflage


profitability to justify a purge of union members is
invalid.

MIRANDA VS. TARLAC RICE MILL


FACTS: It appears from the evidence that on June
8, 1926 Alberto Miranda executed a written
contract whereby he subscribed for 100 shares of
the capital stock of a corporation to be organized
under the laws of the Philippine Islands for the
purpose of operating a rice mill in Tarlac, said
corporation to be known as Tarlac Rice Mill
Company, Inc., that the par value of each share
was P100; and that Alberto Miranda obligated
himself to pay to the treasurer of the corporation
or its assign the sum of P10,000 as follows:
On
On
On
On
On

or
or
or
or
or

before
before
before
before
before

September 21, 1926 P1,000.00


January 21, 1927
2,000.00
January 21, 1928
2,000.00
January 21, 1929
2,500.00
January 21, 1930
2,500.00

On July 10, 1926 Alberto Miranda by means of a


public document "assigned" mortgaged, or
transferred in lieu of cash for the benefit and to
the credit of the Tarlac Rice Mill Company, Inc., a
corporation to be organized and to exist under
and by virtue of the laws of the Philippine
Islands", the parcel of land described in certificate
No. 751 in the land records of the Province of
Tarlac; and "to carry out the true intent, meaning,
and purposes thereof I have hereby further
voluntarily made, constituted, and appointed and
by these presents do make, constitute and
appoint, either jointly, Evaristo Magbag, duly
elected President and Treasurer of said Company,
Eusebio R. Cabrera and Marcos P. Puno, duly
elected Vice-Presidents of the same company, or
anyone of the three named elected officers of the
Tarlac Rice Mill Company, Inc., jointly with C. M.
Dizon to be my true and lawful attorney-in-fact,
for me and in my name, in my behalf to transfer,
mortgage, convey or confirm or in any way
convenient to them to any local or foreign bank,
firm or individual in order to obtain, secure or
solicit credit against my above described property
in an amount not to exceed ten thousand pesos
(P10,000), Philippine currency, in accordance with
the subscription contract voluntary executed by
me, for or to increase the capital of the said
Tarlac Rice Mill Company, Inc., in order to carry
out the purposes for which such firm is to be
organized.

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On February 19, 1927 the president and vicepresident of the Tarlac Rice Mill Company, Inc.,
and C. M. Dizon, acting on behalf of said
corporation and Alberto Miranda, borrowed
P10,000 from Mariano Tablante, and agreed to
repay said sum on or before February 19, 1928,
with interest at 12 per cent per annum, and to
pay a further sum of 25 per cent of the principal
for attorney's fees and expenses of collection in
case the promissory note should not be paid at
maturity. Marcos Puno, Evaristo Magbag, and
Dizon & Co., Inc., jointly and severally guaranteed
the payment of this sum; and the president and
vice-president of the Tarlac Rice Mill Company,
Inc., and C. M. Dizon as attorneys-in-fact of
Alberto Miranda mortgaged to Mariano Tablante
the aforementioned parcel of land to secure the
payment of said promissory note.
The sum of P10,000 obtained from Mariano
Tablante was retained by the corporation. When
the promissory note became due, Alberto
Miranda arranged for an extension of time in
which to pay it, and on July 19, 1929 he sold the
aforementioned parcel of land under pacto de
retro to Vicente Panlilio for P10,000, and paid
Mariano Tablante.
According to an allegation in the complaint,
Alberto Miranda died on May 24, 1930.
It is agreed that the defendant corporation
ceased to do business from the year 1928, and
that the other stockholders have not paid for their
shares in accordance with their subscription
agreement, and that no action has been taken by
the corporation to require them to do so.
The principal contention of the appellant is that
the officers of the corporation violated the terms
of the power of attorney in mortgaging the land
on February 19, 1927 for P10,000, because the
only sum then due and payable by Alberto
Miranda to the corporation was P3,000, and that
when the remaining instalments of the stock
subscription became due, Alberto Miranda was
under no obligation to pay them, because the
corporation had already ceased to do business,
and it had taken no steps to compel the other
stockholders to pay for the shares for which they
had subscribed.
No question as to the validity of subscription
agreement is raised, and no fraud on the part of
the officers of the corporation is alleged or

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proved. We shall therefore confine ourselves to


the issues raised by the pleading.
HELD: It is true that when the property was
mortgaged on February 19, 1927 the amount due
from Alberto Miranda in accordance with the
subscription agreement was only P3,000, and it is
likewise true that it does not appear from the
evidence that any call was issued by the directors
for the payment of any subscriptions.
Section 38 of the Corporation Law provides that
the board of directors of every corporation may at
any time declare due and payable to the
corporation unpaid subscriptions to the capital
stock and may collect the same with interest
accrued thereon or such percentage of said
unpaid subscriptions as it may deem necessary.
In his work, "The Philippine Law of Stock
Corporations", page 97, Justice Fisher expresses
the opinion that this power of the directors is
absolute and cannot be limited by the
subscription contract, but this does not mean that
the directors may not rely on the subscription
contract if they see fit to do so.
No call is necessary when a subscription is
payable, not upon call or demand by the
directors or stockholders, but immediately,
or on specified day, or on or before a
specified day, or when it is payable in
installments at specified times. In such
cases it is the duty of the subscriber to
pay the subscription or instalment thereof
as soon as it is due, without any call or
demand, and, if he fails to do so, an action
may be brought at any time. (Fletcher:
Cyclopedia of the Law of Private
Corporations, vol. 2, page 1509.)
When this action was filed on September 2, 1930,
the last of the instalments had already become
payable in accordance with the subscription
agreement. it must be borne in mind that this is
not an action by the corporation to recover on a
subscription agreement, but an action by the
administratrix of a stockholder to recover what
was paid in to the corporation by the stockholder.
It does not appear from the evidence whether or
not the corporation has any debts. Neither the
fact that the corporation has ceased to do
business nor the fact that the other stockholders
have not been required to pay for their shares in
accordance with their subscription agreement
justifies us in ordering the corporation to return to
the plaintiff the amount paid in by Alberto
Miranda. If the directors have failed to perform

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their duty with respect to the other stockholders,


the law provides a remedy therefor.
In the case at bar it is not contended that Alberto
Miranda cancelled his subscription agreement, or
that the corporation attempted to release him
therefrom.
For the foregoing reasons, the decision appealed
from is affirmed, with the costs against the
appellant.

ARNALDO F. DE SILVA vs. ABOITIZ &


COMPANY, INC.; G.R. No. L-19893; March 31,
1923
FACTS: The plaintiff subscribed for 650 shares of
stock of the defendant corporation of the value of
P500 each, of which he has paid only the total
value of 200 shares, there remaining 450 shares
unpaid, for which he was indebted to the
corporation in the sum of P225,000, the value
thereof.
The Corporation on April 22, 1922,
notified him of a resolution adopted by the board
of directors of the corporation on the preceding
day, declaring the unpaid subscriptions to the
capital stock of the corporation to have become
due and payable on the following May 31st at the
office thereof. Unpaid shares shall be declared
delinquent. For failure to pay, his unpaid shares
was sold by the corporation.
The plaintiff filed a preliminary injunction alleging
as the grounds of his petition: (1) That, according
to aforesaid article 46 of the by-law of the
corporation, which was inserted in the complaint,
all the shares subscribed to by the incorporation
that were not paid for at the time of the
incorporation, shall be paid out of the 70 per cent
of the profit obtained, the same to be distributed
among the subscribers, who shall not receive any
dividend until said shares were paid in full; (2)
that
in
declaring
the
plaintiff's
unpaid
subscription to the capital stock to have become
due and payable on May 31st, and in publishing
the aforesaid notice declaring his unpaid shares
delinquent, the defendant corporation has
violated the aforesaid article, which prescribes an
operative method of paying for the shares
continuously until their full amortization, thus
violating and disregarding a right of the plaintiff
vested under the said by-laws; (3) that the
aforesaid acts of the defendant corporation were
in excess of its powers and executive authority
and the plaintiff had no other plain, speedy and

Montaos Heidi Jean I.

adequate remedy in the ordinary course of law


than that prayed for in the said complaint, to
prevent the defendant from taking any further
action in connection with the sale and alienation
of the said shares.

ISSUE: Whether or not, under the provision of


article 46 of the by-laws of the defendant
corporation, the latter may declare the unpaid
shares delinquent, or collect their value by
another method different from that prescribed in
the aforecited article.

HELD: Yes. According to ART. 46. The net profit


resulting from the annual liquidation shall be
distributed as follows:
First
1) (10%) for the Board of Directors and in the
manner prescribed in article (26) of these
by-laws;
2) (10%) for the general manager;
3) (10%) for the reserve fund, and
4) (70%) for the shareholders in equal parts.
Provided, however, That from this seventy per
cent dividend the Board of Directors may deduct
such amount as it may deem fit for the payment
of the unpaid subscription to the capital stock
and not pay any dividend to the holders of the
said unpaid shares until they are fully paid; and
Provided, further, That when all the shares have
been paid in full as provided in the preceding
paragraph, the Board of Directors may also
deduct such amount as it may deem fit for the
creation of an emergency special fund, or
extraordinary reserve fund when in its judgment
the same may convenient for the development of
the business of the corporation or for meeting
any such contingencies as may arise from its
operation, whenever the distributable dividend is
found, after the foregoing deduction, to be not
less than ten per cent (10%) of the paid up
capital stock.
Second; No dividend shall be declared or paid,
except when there remains a net profit after the
payment of all the expenses incurred, or
allowances made, by the corporation to carry out
the operation of its business; so that no such

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dividend may be declared as may affect the


capital of the corporation.
In the instant case the board of directors of the
defendant corporation made use of the
discretionary power granted to it by that law and
declared that payment of plaintiff's subscription
to 450 shares which had not been paid by him
was due, and that said shares were delinquent.
The words "Provided, however, that from this
seventy per cent dividend the board of directors
may deduct such amount as it may deem fit for
the payment, etc - means that the board of
directors is also authorized to create a special
emergency fund or extraordinary reserve fund,
when, in its judgment, and in case all the shares
subscribed to have been fully paid, the same is
convenient for the development of the business
of the corporation or for meeting any such
contingencies as may arise from its operation,
applying said 70 per cent of the profit on the
payment of the shares that may have not been
fully paid, provided that the distributable dividend
remaining after the deduction to be made for the
creation of the said special emergency fund or
extraordinary reserve fund is not less than 10 per
cent of the capital actually paid.
So that it is discretionary on the part of the board
of directors to do whatever is provided in the said
article relative to the application of a part of the
70 per cent of the profit distributable in equal
parts on the payment of the shares subscribed to
and not fully paid, and to the creation of a special
emergency fund or extraordinary reserve fund. It
lies therefore, within the discretion of the board of
directors to make use of such authority.
For the foregoing, the orders appealed from are
affirmed, with the costs of both instances against
the appellant.
FUA CUN VS. SUMMERS
BANKING CORPORATION

AND

CHINA

FACTS: On August 26, 1920, one Chua Soco


subscribed for five hundred shares of stock of the
defendant Banking Corporation at a par value of
P100 per share, paying the sum of P25,000, onehalf of the subscription price, in cash. On May 18,
1921, Chua Soco executed a promissory note in
favor of the plaintiff Fua Cun for the sum of
P25,000 payable in ninety days and drawing
interest at the rate of 1 per cent per month,
securing the note with a chattel mortgage on the
shares of stock subscribed for by Chua Soco, who

Montaos Heidi Jean I.

also endorsed the receipt above mentioned and


delivered it to the mortgagee. The plaintiff
thereupon took the receipt to the manager of the
defendant Bank and informed him of the
transaction with Chua Soco, but was told to await
action upon the matter by the Board of Directors.
In the meantime Chua Soco appears to have
become indebted to the China Banking
Corporation in the sum of P37,731.68 for
dishonored acceptances of commercial paper and
in an action brought against him to recover this
amount, Chua Soco's interest in the five hundred
shares subscribed for was attached and the
receipt seized by the sheriff. The attachment was
levied after the defendant bank had received
notice of the facts that the receipt had been
endorsed over to the plaintiff. Fua Cun thereupon
brought the present action maintaining that by
virtue of the payment of the one-half of the
subscription price of five hundred shares Chua
Soco in effect became the owner of two hundred
and fifty shares and praying that his, the
plaintiff's, lien on said shares, by virtue of the
chattel mortgage, be declared to hold priority
over the claim of the defendant Banking
Corporation; that the defendants be ordered to
deliver the receipt in question to him; and that he
be awarded the sum of P5,000 in damages for
wrongful attachment.

ISSUE: Whether or not petitioner has the right


over the subject shares of stock?

RULING: Though the court below erred in holding


that Chua Soco, by paying one-half of the
subscription price of five hundred shares, in effect
became the owner of two hundred and fifty
shares, the judgment appealed from is in the
main correct. The claim of the defendant Banking
Corporation upon which it brought the action in
which the writ of attachment was issued, was for
the non-payment of drafts accepted by Chua
Soco and had no direct connection with the
shares of stock in question. There can be no
doubt that an equity in shares of stock may be
assigned and that the assignment is valid as
between the parties and as to persons to whom
notice is brought home. Such an assignment
exists here, though it was made for the purpose
of securing a debt. The endorsement to the
plaintiff of the receipt above mentioned reads:

For value received, I assign all my rights


in these shares in favor of Mr. Tua Cun.

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Manila, P. I., May 18, 1921.


(Sgd.) CHUA SOCO

This endorsement was accompanied by the


delivery of the receipt to the plaintiff and further
strengthened by the execution of the chattel
mortgage, which mortgage, at least, operated as
a conditional equitable assignment. As against
the rights of the plaintiff the defendant bank had,
as we have seen, no lien unless by virtue of the
attachment. But the attachment was levied after
the bank had received notice of the assignment
of Chua Soco's interests to the plaintiff and was
therefore subject to the rights of the latter. It
follows that as against these rights the defendant
bank holds no lien whatever. As we have already
stated, the court erred in holding the plaintiff as
the owner of two hundred and fifty shares of
stock; "the plaintiff's rights consist in an equity in
five hundred shares and upon payment of the
unpaid portion of the subscription price he
becomes entitled to the issuance of certificate for
said five hundred shares in his favor."
The judgment appealed from is modified
accordingly, and in all other respects it is
affirmed, with the costs against the appellants
Banking Corporation. So ordered.
NAVA VS. PEERS MARKETING CORPORATION
Facts: Teofilo Po as an incorporator subscribed to
80 shares of Peers Marketing Corporation at P100
a share or a total par value of P8,000. Po paid
P2,000 or 25% of the amount of his subscription.
No certificate of stock was issued to him or, for
that matter, to any incorporator, subscriber or
stockholder. On 2 April 1966 Po sold to Ricardo A.
Nava for P2,000 20 of his 80 shares. In the deed
of sale Po represented that he was "the absolute
and registered owner of twenty shares" of Peers
Marketing Corp. Nava requested the officers of
the corporation to register the sale in the books
of the corporation. The request was denied
because Po has not paid fully the amount of his
subscription. Nava was informed that Po was
delinquent in the payment of the balance due on
his subscription and that the corporation had a
claim on his entire subscription of 80 shares
which included the 20 shares that had been sold
to Nava. On 21 December 1966 Nava filed a
mandamus action in the Court of First Instance of
Negros Occidental, Bacolod City Branch to
compel the corporation and Renato R. Cusi and

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Amparo Cusi, its executive vice-president and


secretary respectively, to register the said 20
shares in Nava's name in the corporation's
transfer book. The corporation and the Cusis
pleaded the defense that no shares of stock
against which the corporation holds an unpaid
claim are transferable in the books of the
corporation. After hearing, the trial court
dismissed the petition. Nava appealed.

Issue: Whether the officers of Peers Marketing


Corporation can be compelled by mandamus to
enter in its stock and transfer book the sale made
by Po to Nava of the 20 shares forming part of
Po's subscription of 80 shares, with a total par
value of P8,000 and for which Po had paid only
P2,000, it being admitted that the corporation
has an unpaid claim of P6,000 as the balance due
on Po's subscription and that the 20 shares are
not covered by any stock certificate.

Held: The transfer made by Po to Nava is not the


"alienation, sale, or transfer of stock" that is
supposed to be recorded in the stock and transfer
book, as contemplated in section 52 of the
Corporation Law. As a rule, the shares which may
be alienated are those which are covered by
certificates of stock. The twenty shares in
question, however, are not covered by any
certificate of stock in Po's name. Moreover, the
corporation has a claim on the said shares for the
unpaid balance of Po's subscription. A stock
subscription is a subsisting liability from the time
the subscription is made. The subscriber is as
much bound to pay his subscription as he would
be to pay any other debt. The right of the
corporation to demand payment is no less
incontestable. A corporation cannot release an
original subscriber from paying for his shares
without a valuable consideration or without the
unanimous consent of the stockholders. Thus,
herein, there is no clear legal duty on the part of
the officers of the corporation to register the 20
shares in Nava's name. As no stock certificate
was issued to Po; and without the stock
certificate, which is the evidence of ownership of
corporate stock, the assignment of corporate
shares is effective only between the parties to the
transaction. The delivery of the stock certificate,
which represents the shares to be alienated, is
essential for the protection of both the
corporation and its stockholders.
g. Trust Fund Doctrine

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The subscribed capital stock of the corporation is


a trust fund for the payment of debts of the
corporation which the creditors have the right to
look up to satisfy their credits, and which the
corporation may not dissipate. The creditors may
sue the stockholders directly for the latters
unpaid subscription.
Application of the TFD:
1.

Where the corporation has distributed its


capital among the stockholders without
providing for the payment of creditors;

2.

Where it had released the subscribers to the


capital stock from their subscriptions;

3. Where it has transferred the corporate property


in fraud of its creditors; and
4. Where the corporation is insolvent.
Coverage of the TFD:
1. If the corporation is solvent, the TFD extends
to the capital stock represented by the
corporations legal capital.
2. If the corporation is insolvent, the TFD extends
to the capital stock of the corporation as well as
all of its property and assets.
Exceptions to the TFD:
1. Redemption of redeemable shares (Sec. 8)
2. In close corporation, when there should be a
deadlock and the SEC orders the payment of the
appraised value of the stockholders share. (Sec.
104)

Section 43. Power to declare dividends. - The


board of directors of a stock corporation may
declare dividends out of the unrestricted retained
earnings which shall be payable in cash, in
property, or in stock to all stockholders on the
basis of outstanding stock held by them:
Provided, That any cash dividends due on
delinquent stock shall first be applied to the
unpaid balance on the subscription plus costs and
expenses, while stock dividends shall be withheld
from the delinquent stockholder until his unpaid
subscription is fully paid: Provided, further, That
no stock dividend shall be issued without the
approval of stockholders representing not less
than two-thirds (2/3) of the outstanding capital
stock at a regular or special meeting duly called
for the purpose. (16a)

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Stock corporations are prohibited from retaining


surplus profits in excess of one hundred (100%)
percent of their paid-in capital stock, except: (1)
when justified by definite corporate expansion
projects or programs approved by the board of
directors; or (2) when the corporation is
prohibited under any loan agreement with any
financial institution or creditor, whether local or
foreign, from declaring dividends without its/his
consent, and such consent has not yet been
secured; or (3) when it can be clearly shown that
such retention is necessary under special
circumstances obtaining in the corporation, such
as when there is need for special reserve for
probable contingencies. (n)
Section 122. Corporate liquidation. - Every
corporation whose charter expires by its own
limitation or is annulled by forfeiture or
otherwise, or whose corporate existence for other
purposes is terminated in any other manner, shall
nevertheless be continued as a body corporate
for three (3) years after the time when it would
have been so dissolved, for the purpose of
prosecuting and defending suits by or against it
and enabling it to settle and close its affairs, to
dispose of and convey its property and to
distribute its assets, but not for the purpose of
continuing the business for which it was
established.
At any time during said three (3) years, the
corporation is authorized and empowered to
convey all of its property to trustees for the
benefit of stockholders, members, creditors, and
other persons in interest. From and after any such
conveyance by the corporation of its property in
trust for the benefit of its stockholders, members,
creditors and others in interest, all interest which
the corporation had in the property terminates,
the legal interest vests in the trustees, and the
beneficial interest in the stockholders, members,
creditors or other persons in interest.
Upon the winding up of the corporate affairs, any
asset distributable to any creditor or stockholder
or member who is unknown or cannot be found
shall be escheated to the city or municipality
where such assets are located.
Except by decrease of capital stock and as
otherwise allowed by this Code, no corporation
shall distribute any of its assets or property
except upon lawful dissolution and after payment
of all its debts and liabilities. (77a, 89a, 16a)
CLASSES OF SHARES

Page 7

Section 6. Classification of shares. - The shares


of stock of stock corporations may be divided into
classes or series of shares, or both, any of which
classes or series of shares may have such rights,
privileges or restrictions as may be stated in the
articles of incorporation: Provided, That no share
may be deprived of voting rights except those
classified
and
issued
as
"preferred"
or
"redeemable" shares, unless otherwise provided
in this Code: Provided, further, That there shall
always be a class or series of shares which have
complete voting rights. Any or all of the shares or
series of shares may have a par value or have no
par value as may be provided for in the articles of
incorporation: Provided, however, That banks,
trust companies, insurance companies, public
utilities, and building and loan associations shall
not be permitted to issue no-par value shares of
stock.

Where the articles of incorporation provide for


non-voting shares in the cases allowed by this
Code, the holders of such shares shall
nevertheless be entitled to vote on the following
matters:
1. Amendment
incorporation;

of

the

articles

of

2. Adoption and amendment of by-laws;


3. Sale, lease, exchange, mortgage,
pledge or other disposition of all or
substantially all of the corporate property;
4. Incurring, creating or increasing bonded
indebtedness;
5. Increase or decrease of capital stock;

Preferred shares of stock issued by any


corporation may be given preference in the
distribution of the assets of the corporation in
case of liquidation and in the distribution of
dividends, or such other preferences as may be
stated in the articles of incorporation which are
not violative of the provisions of this Code:
Provided, That preferred shares of stock may be
issued only with a stated par value. The board of
directors, where authorized in the articles of
incorporation, may fix the terms and conditions of
preferred shares of stock or any series thereof:
Provided, That such terms and conditions shall be
effective upon the filing of a certificate thereof
with the Securities and Exchange Commission.
Shares of capital stock issued without par value
shall be deemed fully paid and non-assessable
and the holder of such shares shall not be liable
to the corporation or to its creditors in respect
thereto: Provided; That shares without par value
may not be issued for a consideration less than
the value of five (P5.00) pesos per share:
Provided, further, That the entire consideration
received by the corporation for its no-par value
shares shall be treated as capital and shall not be
available for distribution as dividends.

6. Merger or consolidation of the


corporation with another corporation or
other corporations;
7. Investment of corporate funds
another corporation or business
accordance with this Code; and

in
in

8. Dissolution of the corporation.


Except as provided in the immediately preceding
paragraph, the vote necessary to approve a
particular corporate act as provided in this Code
shall be deemed to refer only to stocks with
voting rights. (5a)
CLASSIFICATION OF SHARES
1. PREFERRED SHARES
Those issued with par value, and preferences
either with respect to (a) assets after dissolution,
(b) distribution of dividends, or both, and other
preferences.
Limitations:

A corporation may, furthermore, classify its


shares for the purpose of insuring compliance
with constitutional or legal requirements.

a. If deprived of voting rights, it shall still be


entitled to vote on matters enumerated in
Section 6 paragraph 6.

Except as otherwise provided in the articles of


incorporation and stated in the certificate of
stock, each share shall be equal in all respects to
every other share.

b. Preference must not be violative of the Code.


c. May be issued only with a stated par value.
d. The board of directors may fix the terms and
conditions only when so authorized by the articles

Montaos Heidi Jean I.

Page 8

of incorporation and such terms and conditions


shall be effective upon filing a certificate thereof
with the SEC.

years subject to the approval of the Securities


and Exchange Commission. The five-year period
shall commence from the date of the aforesaid
approval by the Securities and Exchange
Commission. (n)

a. Cumulative Preferred Shares entitle


the holders thereof of payment not only of
current dividends but also of back
dividends not previously paid, when and if
dividends are declared, to the extent
agreed upon, before holders of common
shares are paid

3. REDEEMABLE SHARES
Those which permit the issuing corporation to
redeem or purchase its own shares.

b. Non Cumulative Preferred Shares


entitle the holders merely to the payment
of current dividends that are paid, to the
extent agreed upon before the holders of
common shares are paid.
c. Participating Preferred Shares entitle
the holders to participate with the holders
of common shares in the retained earnings
after the amount stipulated dividend has
been paid to the preferred shares.
d. Non-Participating Preferred Shares
entitle holders of preferred shares only to
the stipulated preferred dividends and no
more.
2. FOUNDERS' SHARE
Shares issued to organizers and promoters of a
corporation in consideration of some supposed
right or property.

Shares classified as such in the articles of


incorporation which may be given special
preference in voting rights and dividend
payments. But if an exclusive right to vote and be
voted for as director is granted, this privilege is
subject to approval by the SEC, and cannot
exceed 5 years from the date of approval.
Section 7. Founders' shares. - Founders' shares
classified as such in the articles of incorporation
may be given certain rights and privileges not
enjoyed by the owners of other stocks, provided
that where the exclusive right to vote and be
voted for in the election of directors is granted, it
must be for a limited period not to exceed five (5)

Montaos Heidi Jean I.

Limitations:
a. Redeemable shares may be issued only
when expressly provided for in the articles of
incorporation;
b. The terms and conditions affecting said
shares must be stated both in the articles of
incorporation and in the certificates of stock
representing such shares;
c. Redeemable shares may be deprived of
voting rights in the articles of incorporation,
unless otherwise provided in the Code.

Redeemable shares may be redeemed,


regardless of the existence of unrestricted
retained earnings (Sec. 8), provided that the
corporation has, after such redemption, sufficient
assets in its books to cover debts and liabilities
inclusive of capital stock.

Section 8. Redeemable shares. - Redeemable


shares may be issued by the corporation when
expressly so provided in the articles of
incorporation. They may be purchased or taken
up by the corporation upon the expiration of a
fixed period, regardless of the existence of
unrestricted retained earnings in the books of the
corporation, and upon such other terms and
conditions as may be stated in the articles of
incorporation, which terms and conditions must
also be stated in the certificate of stock
representing said shares. (n)
REPUBLIC PLANTERS BANK vs. HON. AGANA
FACTS: Private respondent Corporation secured a
loan from petitioner BANK in the amount of
P120,000. As part of the proceeds of the loan,
preferred shares of stocks were issued to private

Page 9

respondent Corporation. Instead of giving the


legal tender totaling to the full amount of the
loan, petitioner lent such amount partially in the
form of money and partially in the form of stock
certificates for 800 shares with a par value of
P10.00 per share for a total of P8,000. said stock
certificates were in the name of private
respondent Adalia and Carlos Robes.
The stock certificates bear the term and condition
- that such preferred shares may be redeemed,
by the system of drawing lots, at any time after 2
years from the date of issue at the option of the
corporation
Thereafter,
private
respondents
proceeded
against the petitioner and filed a complaint
anchored on private respondents alleged rights
to collect dividends under the preferred shares in
question and to have petitioner redeem the same
under the terms and conditions of the stock
certificates.

The trial court rendered the assailed decision in


favor of private respondents and ordered the
petitioner to pay the face value of the stock
certificates as redemption price plus interest.
ISSUE: Whether or not petitioner can be
compelled to redeem the preferred shares issued
to the private respondents.
HELD: NO, because the very wordings of the
terms and conditions in the stock certificates
clearly allows redemption of the preferred shares.
While the stock certificate does allow redemption,
the option to do so was clearly vested in the
petitioner bank. The redemption is optional
Thus, except as otherwise provided in the stock
certificate, the redemption rests entirely with the
corporation and the stockholder is without right
to either compel or refuse the redemption of its
stock.
The use of the word MAY in the terms and
conditions denotes discretion and cannot be
mandatory.

assets of the Bank to prejudice its depositors and


creditors. As pointed out by the petitioner, the
Central Bank made a finding that said petitioner
has been suffering from chronic reserve
deficiency. Thus, redemption of preferred shares
was prohibited for a just and valid reason.
4. TREASURY SHARES
Shares that have been earlier issued as fully
paid and have thereafter been acquired by the
corporation
by
purchase,
donation,
and
redemption or through some lawful means. (Sec.
9)
If purchased from stockholders: The transaction
in effect is a return to the stockholders of the
value of their investment in the company and a
reversion of the shares to the corporation. The
corporation must have surplus profits with which
to buy the shares so that the transaction will not
cause an impairment of the capital.
If acquired by donation from the stockholders:
The act would amount to a surrender of their
stock without getting back their investments that
are instead, voluntarily given to the corporation.
Treasury shares need not be sold at par or
issued value but may be sold at the best price
obtainable, provided it is reasonable. When
treasury shares are sold below its par or issued
value, there can be no watering of stock because
such watering contemplates an original issuance
of shares.

Treasury shares have no voting rights as long as


they remain in treasury (uncalled and subject to
reissue). Reason: A corporation cannot in any
proper sense be a stockholder in itself and equal
distribution of voting rights will be effectively lost.

Neither are treasury shares entitled to dividends


or assets because dividends cannot be declared
by a corporation to itself.

Furthermore, redemption of the said shares


cannot be allowed because it would reduce the

Montaos Heidi Jean I.

Page 10

Section 9. Treasury shares. - Treasury shares are


shares of stock which have been issued and fully
paid for, but subsequently reacquired by the
issuing corporation by purchase, redemption,
donation or through some other lawful means.
Such shares may again be disposed of for a
reasonable price fixed by the board of directors.
COMMISSIONER vs. MANNING
FACTS: MANTRASCO had an authorized capital
stock of P2,500 divided into 25,000 common
shares; 24,700 of these were owned by Julius S.
Reese, and the rest, at 100 shares each, by the 3
respondents.
In view of Reeses desire that upon his death
MANTRASCO and its 2 subsidiaries MANTRASCO
(Guam), Inc. and Port Motors, Inc. would continue
under the management of the respondents, a
trust agreement on his and the respondents
interests in MANTRASCO was executed by and
among Reese (OWNER), MANTRASCO (COMPANY),
the law firm of Ross, Selph, Carrascoso and Janda
(TRUSTEES) and the respondents (MANAGERS).
Reese died but the transfer could not be
immediately effected due to insufficient funds.
Subsequently, the entire purchase price of
Reeses interest in MANTRASCO was finally paid
and the trust agreement was terminated and the
trustees delivered to MANTRASCO all shares
which they were holding in trust.
Meanwhile, MANTRASCOs books were being
examined by the BIR and they found out the
respondents failed to declare stock dividends as
part of their taxable income. BIR examiners
concluded that the distribution of Reeses shares
as stock dividends was in effect a distribution of
the asset or property of the corporation as may
be gleaned from the payment of cash for the
redemption of said stock and distributing the
same as stock dividend.
ISSUE: Whether or not the distributed shares
should be considered as treasury shares.
HELD: NO. The manifest intention of the parties
to the trust agreement was to treat the 24,700
shares of Reese as absolutely outstanding shares
of Reeses estate until they were fully paid. Such
being the true nature of the 24,700 shares, their

Montaos Heidi Jean I.

declaration as treasury stock was a complete


nullity and plainly violative of public policy. A
stock dividend, being one payable in capital
stock, cannot be declared out of outstanding
corporate stock, but only from retained earnings.
Where corporate earnings are used to purchase
outstanding stock treated as treasury stock as a
technical, but prohibited device, to avoid effects
of income taxation, distribution of said corporate
earnings in the form of stock dividends will
subject stockholders receiving them to income
tax.
Treasury shares are issued shares, but
being in the treasury, they do not have the
status of outstanding shares.
WATERED STOCKS
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, having
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. (n)
QUASI-REORGANIZATION
Section 38. Power to increase or decrease
capital stock; incur, create or increase bonded
indebtedness. - No corporation shall increase or
decrease its capital stock or incur, create or
increase any bonded indebtedness unless
approved by a majority vote of the board of
directors and, at a stockholder's meeting duly
called for the purpose, two-thirds (2/3) of the
outstanding capital stock shall favor the increase
or diminution of the capital stock, or the
incurring, creating or increasing of any bonded
indebtedness. Written notice of the proposed
increase or diminution of the capital stock or of
the incurring, creating, or increasing of any
bonded indebtedness and of the time and place
of the stockholder's meeting at which the
proposed increase or diminution of the capital
stock or the incurring or increasing of any bonded
indebtedness is to be considered, must be
addressed to each stockholder at his place of

Page 11

residence as shown on the books of the


corporation and deposited to the addressee in the
post office with postage prepaid, or served
personally.
A certificate in duplicate must be signed by a
majority of the directors of the corporation and
countersigned by the chairman and the secretary
of the stockholders' meeting, setting forth:
(1) That the requirements of this section have
been complied with;
(2) The amount of the increase or diminution
of the capital stock;
(3) If an increase of the capital stock, the
amount of capital stock or number of shares
of no-par stock thereof actually subscribed,
the names, nationalities and residences of the
persons subscribing, the amount of capital
stock or number of no-par stock subscribed by
each, and the amount paid by each on his
subscription in cash or property, or the
amount of capital stock or number of shares
of no-par stock allotted to each stock-holder if
such increase is for the purpose of making
effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred,
created or increased;
(5) The actual indebtedness of the corporation
on the day of the meeting;
(6) The amount of stock represented at the
meeting; and
(7) The vote authorizing the increase or
diminution of the capital stock, or the
incurring, creating or increasing of any
bonded indebtedness.
Any increase or decrease in the capital stock or
the incurring, creating or increasing of any
bonded indebtedness shall require prior approval
of the Securities and Exchange Commission.
One of the duplicate certificates shall be kept on
file in the office of the corporation and the other
shall be filed with the Securities and Exchange
Commission and attached to the original articles
of incorporation. From and after approval by the
Securities and Exchange Commission and the
issuance by the Commission of its certificate of
filing, the capital stock shall stand increased or
decreased and the incurring, creating or

Montaos Heidi Jean I.

increasing
of
any
bonded
indebtedness
authorized, as the certificate of filing may
declare: Provided, That the Securities and
Exchange Commission shall not accept for filing
any certificate of increase of capital stock unless
accompanied by the sworn statement of the
treasurer of the corporation lawfully holding office
at the time of the filing of the certificate, showing
that at least twenty-five (25%) percent of such
increased capital stock has been subscribed and
that at least twenty-five (25%) percent of the
amount subscribed has been paid either in actual
cash to the corporation or that there has been
transferred to the corporation property the
valuation of which is equal to twenty-five (25%)
percent of the subscription: Provided, further,
That no decrease of the capital stock shall be
approved by the Commission if its effect shall
prejudice the rights of corporate creditors.
Non-stock corporations may incur or create
bonded indebtedness, or increase the same, with
the approval by a majority vote of the board of
trustees and of at least two-thirds (2/3) of the
members in a meeting duly called for the
purpose.
Bonds issued by a corporation shall be registered
with the Securities and Exchange Commission,
which shall have the authority to determine the
sufficiency of the terms thereof. (17a)
DIVIDENDS AND OTHER DISTRIBUTIONS
> Right to Dividends
Section 43. Power to declare dividends. - The
board of directors of a stock corporation may
declare dividends out of the unrestricted retained
earnings which shall be payable in cash, in
property, or in stock to all stockholders on the
basis of outstanding stock held by them:
Provided, That any cash dividends due on
delinquent stock shall first be applied to the
unpaid balance on the subscription plus costs and
expenses, while stock dividends shall be withheld
from the delinquent stockholder until his unpaid
subscription is fully paid: Provided, further, That
no stock dividend shall be issued without the
approval of stockholders representing not less
than two-thirds (2/3) of the outstanding capital
stock at a regular or special meeting duly called
for the purpose. (16a)
Stock corporations are prohibited from retaining
surplus profits in excess of one hundred (100%)
percent of their paid-in capital stock, except: (1)

Page 12

when justified by definite corporate expansion


projects or programs approved by the board of
directors; or (2) when the corporation is
prohibited under any loan agreement with any
financial institution or creditor, whether local or
foreign, from declaring dividends without its/his
consent, and such consent has not yet been
secured; or (3) when it can be clearly shown that
such retention is necessary under special
circumstances obtaining in the corporation, such
as when there is need for special reserve for
probable contingencies. (n)
1.
Types
of
Distributions

Dividends

and

Other

DIVIDENDS
Corporate profits set aside, declared, and
ordered to be paid by the directors for distribution
among shareholders at a fixed time.
Forms:
a. Cash
b. Property
c. Stock
While cash dividends due on delinquent shares
can be applied to the payment of the unpaid
balance, stock dividends cannot be applied as
payment for unpaid subscription.
The right to dividends is based on duly recorded
stockholdings; accordingly, the corporation is
prohibited from entitling thereto anyone else.
General Rule: Stock corporations are prohibited
from retaining surplus profits in excess of 100%
of their paid-in capital stock
Except:
a. When justified by definite corporate
expansion projects approved by the board of
directors
b. When the corporation is prohibited under
any loan agreement with any financial
institution or creditor from declaring
dividends without its/his consent and such
consent has not yet been secured

Montaos Heidi Jean I.

c. When it can be clearly shown that such


retention is necessary under special
circumstances obtaining in the corporation,
such as when there is a need for special
reserve for probable contingencies.
Sources of dividends:
GENERAL RULE: Dividends can only be declared
and paid out of actual and bona fide unrestricted
retained earnings.

SPECIAL RULES:
a. Where a corporation sold its real property,
which is not being used for business, at a gain,
the income derived therefrom may be availed of
for dividend distribution.
b. Increase in the value of a fixed asset as a
result of its revaluation is not retained earning.
However, increase in the value of fixed assets
as a result of revaluation (Revaluation
surplus) may be declared as cash or stock
dividends provided that the company:
(i) Has sufficient income from operations
from which the depreciation on the appraisal
increase was charged
(ii) Has no deficit at the time the depreciation
on the appraisal increase was charged to
operations; and
(iii) Such depreciation on appraisal increase
previously charged to operations has not been
impaired by losses.
c. Dividends can be declared out of the amount
received in excess of the par value of shares
(paid-in surplus) when:
(i) That they be declared only as stock
dividends and not cash;
(ii) No creditors are prejudiced; and
(iii) There is no impairment of capital.
Note that unlike par value shares, when no
par value shares are sold at a premium, the
entire consideration paid is considered
capital; hence the same cannot be declared
as dividends.

Page 13

d. Reduction surplus can be a source of


dividends. Rule on paid-in surplus is applicable.
e. No dividends can be declared out of capital
except only in two instances: 1) liquidating
dividends; and 2) dividends from investments in
wasting asset corporation.
It permits corporations solely or principally
engaged in the exploitation of wasting assets
to distribute the net proceeds derived from
exploitation of their holdings such as mines, oil
wells,
patents
and
leaseholds,
without
allowance or deduction for depletion.

f. Profits realized from sale of treasury shares are


part of capital and cannot be declared as cash
or stock dividend as purchase and sale of such
shares are regarded as contractions and
expansions of paid-in capital.

g. Money cannot be borrowed for the payment of


dividends because indebtedness is not a
retained earning of the corporation.

h. Corporate earnings which have not yet been


received even though they consist in money
which is due, cannot be included in the profits
out of which dividends may be paid.

CASH
DIVIDENDS

STOCK
DIVIDENDS

1.
Involves
a
disbursement
to
the stockholders
of
accumulated
earnings

1. Does not
involve
any
disbursement

2. When declared
and paid becomes
the
absolute
property of the
stockholder
and
cannot
be
reached
by

2. Since it is
still
part
of
corporate
property, may
be reached by
corporate
creditors

Montaos Heidi Jean I.

creditors of the
corporation in the
absence of fraud
3. Declared only
by the board of
directors at its
discretion

3. Declared by
the board with
the
concurrence of
the
stockholders
representing at
least 2/3 of the
outstanding
capital stock at
a
regular/special
meeting

4.
Does
not
increase
the
corporate capital

4.
Corporate
capital
is
increased

5. Its declaration
creates a debt
from
the
corporation
to
each
of
its
stockholders

5. No debt is
created by its
declaration

NIELSON V. LEPANTO CONSOLIDATED


FACTS: Appellant Nielson & Co. Inc. and Appellee
Lepanto Consolidated Mining Co. entered a
contract whereby appellant Nielson agreed for a
period of five years, with the right to renew for a
like period, to explore, develop and operate the
mining claims of Lepanto and to mine, or mine or
mill, such pay ore as may be found therein and to
market the metallic products recovered therefrom
which may prove to be marketable, as well as to
render for Lepanto other services specified in the
contact. It thus appear that the principal and
paramount undertaking of Nielson under the
management contract was the operation and
development of the mine and operation of the
mill. Nielson would receive 10% of any dividends
declared and paid, when and as paid, Nielson
should be paid 10% of the stock dividends
declared by Lepanto during the period of the
extension of contract.

Page 14

ISSUE:
WON the Court erred in ordering
Lepanto to issue and deliver to Nielson shares of
stock together with fruits thereof.
RULING: The term dividend both in the
technical sense and its ordinary acceptation, is
that part or portion of the profits, of the
enterprise which he corporation, by its governing
agents, sets apart for ratable division among the
holders of the capital stock. It means the fund
actually set aside, and declared by the directors
of the corporation as a dividends, and duly
ordered by the director, or by the stockholders at
a corporate meeting, to be divided or distributed
among the stockholders according to their
respective interests.
It is Our considered view, therefore, that under
Sec. 16 of the Corporation Law stock dividends
cannot be issued to a person who is not a
stockholder in payment of services rendered. And
so, in the case at bar Nielson can not be paid in
shares of stock which form part of the stock
dividends of Lepanto for services rendered under
the management contract. 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, in
the proportion of 10% of the cash value of the
stock dividends declared.
The consideration for which shares of stock may
be issued are: (1) cash; (2) property; and (3)
undistributed profits.
2. Legal Restrictions
Other Distributions

on

Dividends

and

Retention of Excess Profits


Under Section 43 of the Corporation Code, it is
now expressly provided that stock corporations
are prohibited from retaining surplus profits in
excess of 100% of their paid-in capital stock,
except in the following cases:

When justified by definite corporation


expansion projects or programs approved
by Board of Directors
When the corporation is prohibited under
any loan agreement with any financial

Montaos Heidi Jean I.

institution or creditor, whether local or


foreign declaring dividends without its/his
consent, and such consent has not yet
been secured
When it can be clearly shown that such
retention is necessary under special
circumstances
obtaining
in
the
corporation, such as when there is a need
for
special
reserve
for
probable
contingencies.

Section 43 now expressly grants a cause of


action for stockholders to compel the Board of
Directors to declare dividends; but the exceptions
expressly provided in the section actually grants
a lot of leeway for the Board of Directors to be
able to retain funds within the corporate coffers,
such as by adopting formally expansion plans for
the corporate enterprise.
SEC Rules Governing the Distribution of
Excess Profits
The SEC Amended Rules Governing the
Distribution of Excess Profits of Corporation,
provide that all domestic stock corporations
which have surplus profits in excess of necessary
requirements for capital expansion and reserves
shall declare and distribute the excess profits as
dividends to stockholders, pursuant to the
provisions of Section 43 which prohibits the
corporation from retaining surplus profits in
excess of 100% of its paid-up capital, except in
the instances enumerated therein.
The SEC Amended Rules provide that the SEC
would consider it sufficient justification for nondistribution of dividends when such is consistent
with the policy or requirement of a government
office like the Bangko Sentral, Insurance
Commission, etc including the policy of the SEC
regarding the restriction on declaration of
dividends where there are share held by a
corporation to cover the costs of said shares, until
the same are re-issued or retired.
Any appropriation of surplus profits, i.e.
restriction of retained earnings, can be done by
the corporation only upon prior approval of the
Board of Directors and such appropriation and
justification therefore shall be duly disclosed in
notes to the corporations financial statements.

Page 15

A corporation that fails or neglects to: (a) declare


dividends to its stockholders; (b) disclose any
appropriations/reserve approved by the Board of
Directors; or (c) disclose the justification for nondistribution of dividends; may be imposed a
penalty of 1/10 of 1% of the excess amount over
the paid-in capital but in no case less than P200
nor more than P10,000 for that given fiscal year,
or be punished by suspension or revocation of the
license or permit to sell securities issued to the
corporation
3. Declaration and Payment of Dividends
General rule: The declaration of dividends is
essentially within the business judgment of the
Board of Directors of a stock corporation. The fact
the profits have accrued in the prosecution of the
corporate business does not necessarily impose
upon the directors the duty to declare them as
dividends. If in their business judgment, they
reasonably determine that the profits should be
kept in the business, generally the courts have no
power to compel them to make the distribution in
the absence of bad faith or clear abuse of
discretion.
Stockholders may sue the directors to compel
them to declare and pay a dividend if they
unreasonably
accumulate
profits
of
the
corporation but they have the burden of proving
the
justification
of
declaring
dividends.
Mandamus is not a proper remedy in this case
since a stockholder has no individual interest in
the profits of a corporation until a dividend has
been declared.
COMMISSIONER OF INTERNAL REVENUE VS.
COURT OF APPEALS
Facts:
ANSCOR
started
out
with
P1,000,000.00 capitalization divided to 10,000
shares. Don Andres subscribed to 4,963 shares of
5,000 original shares issued. September 1945,
ANSCOR increased its Authorized capital stock to
P2.5M divided to 25,000 shares, and don Andres
subscribed to 10,000 shares making his shares
14,962. A month later he gave his two sons 1,250
shares each. When don Andres died he left
180,000(plus) shares. Half of which was given to
his wife and half went to his estate. Feb 1968,
NASCOR increased it capital stock to 75M divided

Montaos Heidi Jean I.

into 150,000.00 shares wherein it was divided to


common and preferred shares. The wife of Don
Andres wants to exchange her common shares to
preferred shares which was granted by ANSCOR.
ANSCOR then repurchase on two occasions
Common
shares
of
Don
Andres.
Upon
examination of books of ANSCOR the BIR sought
for recovery of income tax on the redeemed or
repurchase common shares.
Issue:
Whether ANSCOR's redemption of
stocks from its stockholder as well as the
exchange of common with preferred shares can
be considered as "essentially equivalent to the
distribution of taxable dividend" making the
proceeds thereof taxable under the provisions of
the above-quoted law.
Held: As a general rule A stock dividend
representing the transfer of surplus to capital
account shall not be subject to tax. Except in
cases of redemption or cancellation of stock
dividends which is essentially equivalent to a
distribution of taxable dividends making the
proceed thereof taxable income. If the source is
the
original
capital
subscription
upon
establishment of the corporation or from initial
capital investment in an existing enterprise, its
redemption to the concurrent value of acquisition
may not be considered as income but a mere
return of capital. On the contrary, if the redeemed
shares are from stock dividend declaration other
than as initial capital investment, the proceeds of
the redemption is ADDITIONAL WEALTH, for it is
not merely a return of capital but a gain thereon.
Applying the rule in the case, the original
common shares owned by the estate were only
25,4247.5. Since there was subsequent increased
in the capital stocks, the redeemed shares to the
extent of 80T plus by ANSCOR was made out of
corporate profits such as stock dividend.
Therefore it will be subjected to income tax.
4. Liability for Improper Dividends and
Distributions
in case dividends are wrongfully or illegally
declared and paid, the stockholders who received
them can be held liable to refund them to the
corporation or its creditors.

Page 16

if directors acted in good faith not liable; but


if found guilty of fraud and gross negligence, they
are personally liable to the creditors.
STEINBERG VS VELASCO
Facts: Steinberg is the Receiver of the Sibuguey
Trading Company, Incorporated, he seeking to
make GREGORIO VELASCO, ET AL (as officers of
the said corporation i.e board of directors) for the
amount they approved to be paid for the
acquisition of the corporations own shares that
came from their retired stockholders where in fact
there is an existing debt by the corporations to its
creditors. Gregorio et al. alleged that the
purchase of the shares was for the purpose of
increasing the recievables of the corporation.
However, there was a finding that, Gregorio et al,
approve or made a resolution for such acquisition
when they know that their recievables will not
cover the amount of debt and yet they still
continue to use the money of the corporation to
repurchase the stocks of the corporation released
to its retired stockholders.
Issue: what is the responsibility of the directors
when they know that there is an outstanding debt
existing between the corporation and its
creditors?
Held: Creditors of a corporation have the right to
assume that so long as there are outstanding
debts and liabilities, the board of directors will not
use the assets of the corporation to purchase its
own stock, and that it will not declare dividends
to stockholders when the corporation is insolvent.
Therefore Gregorio Et al is required to pay.
D. TRANSFER OF INVESTMENT SECURITIES
Under Section 63, the capital of the stock
corporation shall be divided into shares for which
certificates signed by the president or vicepresident, countersigned by the secretary or
assistant secretary, and sealed with the seal of
the corporation and 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.

a. Right to Issuance
Sec. 64. Issuance of stock certificates. - No
certificate of stock shall be issued to a
subscriber until the full amount of his
subscription together with interest and
expenses (in case of delinquent shares), if
any is due, has been paid. A subscriber must
first fully pay his subscription before a certificate
of stock covering shares subscribed and paid for
could be issued to him. But an unpaid
subscription (not declared delinquent) can b
voted upon in corporate meetings. Such
delinquent shares are also entitled to dividends,
subject to the rules set forth in Section 43 of the
Corporation Code on delinquent shares.
While in the issuance of a stock certificate is not
a condition precedent to render one a
stockholder, under section 63, every stockholder
has a right to have a proper certificate issued to
him by the corporation upon demand, as soon as
he has complied with the conditions under
Section 64 of the Corporation Code, which
required full payment of the subscription.
Baltazar Vs. Lingayen gulf
Facts: Ireneo Baltazar subscribed 600 shares from
Lingayen Gulf Electric Power Corporation (now referred
to as corporation). It has been a practice of the
corporation to issue a certificate of stock even if the
unpaid balance in subscription contract is not yet fully
paid. Irineo was able to pay 300 shares out of 600.
When the new Board of directors were elected, they
adopted a resolution, as stated in the said resolution
those subscribers which has outstanding balance, will
not be able to exercise their right to vote until they
fully pay was is due. Hence this petition.
Issue: If a stockholder who subscribed and pays only
partially, for which he was issued a certificate of stock,
is he entitled to vote?
Held: If a stockholder, in a stock corporation subscribes
to a certain number of shares of stock, and makes
partial payments for which he is issued certificates of
stock, he is entitled to vote the latter, notwithstanding
the fact that he has not paid the balance of his
subscription which has been called for payment or
declared delinquent. If the entire subscribed shares of
stock are not paid, the paid shares of stock may not be
deprived of the right to vote, until the entire subscribed
shares of stock are fully paid, including interest.

1. OWNERSHIP OF SECURITIES

Montaos Heidi Jean I.

Page 17

b. Joint Ownership
Sec. 56. Voting in case of joint ownership of stock. - In
case of shares of stock owned jointly by two or more
persons, in order to vote the same, the consent of all
the co-owners shall be necessary, unless there is a
written proxy, signed by all the co-owners, authorizing
one or some of them or any other person to vote such
share or shares: Provided, That when the shares are
owned in an "and/or" capacity by the holders thereof,
any one of the joint owners can vote said shares or
appoint a proxy therefor.
c. Pledgor, Mortgagor and Administrators
Sec. 55. Right to vote of pledgors, mortgagors,
and administrators. - In case of pledged or
mortgaged shares in stock corporations, the
pledgor or mortgagor shall have the right to
attend and vote at meetings of stockholders,
unless the pledgee or mortgagee is expressly
given by the pledgor or mortgagor such right in
writing which is recorded on the appropriate
corporate books. (n)
Executors, administrators, receivers, and other
legal representatives duly appointed by the
court may attend and vote in behalf of the
stockholders or members without need of any
written proxy.

The SEC recognizes the well-settled principle that


shares of stock in a corporation are personal
property and the owner thereof has an inherent
right, as an incident of his ownership, to transfer
the same at will, which would include the power
to encumber said shares.
The SEC has, however, as a matter of policy,
allowed reasonable restrictions on the right of
shareholders to incumber their shares if the
restrictions comply with the provisions of Article
98 of the Corp. Code, namely, that the restriction
must appear in the articles of incorporation, bylaws, and the certificates of stock, and that said
restrictions shall not be more onerous than
granting the existing stockholders or the
corporation the option to purchase the shares of
the transferring stockholder with such reasonable
terms, conditions or period stated therein.
Therefore, if the restriction on the right to pledge
or mortgage shares of stock absolutely prohibits
the stockholders from pledging or mortgaging
their shares without the consent of the Board of

Montaos Heidi Jean I.

Directors, it would be in violation of the statutory


right of the stockholders to encumber shares of
stock as allowed in Section 55 of the Corporation
Code.
However, when the restriction merely allows the
corporation or existing stockholders to accept the
offer within the option period, and thereafter, if
no one accepts the offer, the stockholder is free
to pledge or mortgage his shares in favour of any
third party, such provision is reasonable, valid
and binding.
d. Pooling Agreements
Sec. 100. Agreements by stockholders. 1. Agreements by and among stockholders
executed before the formation and organization
of a close corporation, signed by all stockholders,
shall
survive
the
incorporation
of
such
corporation and shall continue to be valid and
binding between and among such stockholders, if
such be their intent, to the extent that such
agreements are not inconsistent with the articles
of incorporation, irrespective of where the
provisions of such agreements are contained,
except those required by this Title to be
embodied in said articles of incorporation.
2. An agreement between two or more
stockholders, if in writing and signed by the
parties thereto, may provide that in exercising
any voting rights, the shares held by them shall
be voted as therein provided, or as they may
agree, or as determined in accordance with a
procedure agreed upon by them.
3. No provision in any written agreement signed
by the stockholders, relating to any phase of the
corporate affairs, shall be invalidated as between
the parties on the ground that its effect is to
make them partners among themselves.
4. A written agreement among some or all of the
stockholders in a close corporation shall not be
invalidated on the ground that it so relates to the
conduct of the business and affairs of the
corporation as to restrict or interfere with the
discretion or powers of the board of directors:
Provided, That such agreement shall impose on
the stockholders who are parties thereto the

Page 18

liabilities for managerial acts imposed by this


Code on directors.
5. To the extent that the stockholders are actively
engaged in the management or operation of the
business and affairs of a close corporation, the
stockholders shall be held to strict fiduciary
duties to each other and among themselves. Said
stockholders shall be personally liable for
corporate torts unless the corporation has
obtained reasonably adequate liability insurance.
e. Stock and Transfer of Book
Sec. 74. Books to be kept; stock transfer agent. Every corporation shall keep and carefully
preserve at its principal office a record of all
business transactions and minutes of all meetings
of stockholders or members, or of the board of
directors or trustees, in which shall be set forth in
detail the time and place of holding the meeting,
how authorized, the notice given, whether the
meeting was regular or special, if special its
object, those present and absent, and every act
done or ordered done at the meeting. Upon the
demand of any director, trustee, stockholder or
member, the time when any director, trustee,
stockholder or member entered or left the
meeting must be noted in the minutes; and on a
similar demand, the yeas and nays must be taken
on any motion or proposition, and a record
thereof carefully made. The protest of any
director, trustee, stockholder or member on any
action or proposed action must be recorded in full
on his demand.
The records of all business transactions of the
corporation and the minutes of any meetings
shall be open to inspection by any director,
trustee,
stockholder
or
member
of
the
corporation at reasonable hours on business days
and he may demand, writing, for a copy of
excerpts from said records or minutes, at his
expense.
Any officer or agent of the corporation who shall
refuse to allow any director, trustees, stockholder
or member of the corporation to examine and
copy excerpts from its records or minutes, in
accordance with the provisions of this Code, shall
be liable to such director, trustee, stockholder or
member for damages, and in addition, shall be

Montaos Heidi Jean I.

guilty of an offense which shall be punishable


under Section 144 of this Code: Provided, That if
such refusal is made pursuant to a resolution or
order of the board of directors or trustees, the
liability under this section for such action shall be
imposed upon the directors or trustees who voted
for such refusal: and Provided, further, That it
shall be a defense to any action under this
section that the person demanding to examine
and copy excerpts from the corporation's records
and minutes has improperly used any information
secured through any prior examination of the
records or minutes of such corporation or of any
other corporation, or was not acting in good faith
or for a legitimate purpose in making his demand.
Stock corporations must also keep a book to be
known as the "stock and transfer book", in which
must be kept a record of all stocks in the names
of the stockholders alphabetically arranged; the
installments paid and unpaid on all stock for
which subscription has been made, and the date
of payment of any installment; a statement of
every alienation, sale or transfer of stock made,
the date thereof, and by and to whom made; and
such other entries as the by-laws may prescribe.
The stock and transfer book shall be kept in the
principal office of the corporation or in the office
of its stock transfer agent and shall be open for
inspection by any director or stockholder of the
corporation at reasonable hours on business
days.
No stock transfer agent or one engaged
principally in the business of registering transfers
of stocks in behalf of a stock corporation shall be
allowed to operate in the Philippines unless he
secures a license from the Securities and
Exchange Commission and pays a fee as may be
fixed by the Commission, which shall be
renewable annually: Provided, That a stock
corporation is not precluded from performing or
making transfer of its own stocks, in which case
all the rules and regulations imposed on stock
transfer agents, except the payment of a license
fee herein provided, shall be applicable.
Chua Guan v. Samahang Magsasaka

Facts: Gonzalo H. Co Toco, is the owner of 5,894


shares of the capital stock of Samahang Magsasaka

Page 19

Inc. represented by 9 certificates having a par value of


P5 per share mortgaged said shares to Chua Chiu to
guarantee the payment of a debt. The said certificates
of stock were delivered with the mortgage to the
mortgagee, Chua Chiu. The said mortgage was duly
registered in the office of the registered of deeds of
Manila and in the office of the said corporation. Chua
Chiu assigned all his right and interest in said
mortgage to the Chua Guan and the assignment in the
office of the register of deeds in the City of Manila and
in the office of the said corporation.
Co Toco defaulted in the payment of said debt at
maturity and Chua Guan foreclosed said mortgage and
delivered the certificates of stock and copies of the
mortgage and assignment to the sheriff of the City of
Manila in order to sell the said shares at public auction.
The plaintiff having been the highest bidder, the sheriff
executed in his favor a certificate of sale of said shares.
The plaintiff tendered the certificates of stock standing
in the name of Co Toco to the proper officers of the
corporation for cancellation and demanded that they
issue new certificates in the name of Chua Guan but
the officers refused to issue.
An action for writ of mandamus was filed, praying that
the defendants transfer the said 5,894 shares of stock
to the plaintiff by canceling the old certificates and
issuing new ones in their stead. As special defense, the
defendants refused to cancel said certificates and to
issue new ones in the name of Chua Guan because
prior to the date of the latters demand, 9 attachments
had been issued and served and noted on the books of
the corporation against Co Tocos shares and Chua
Guan objected to having these attachments noted on
the new certificates which he demanded.
Issue: Whether or not the mortgage takes priority over
the writs of attachment?
Held: The Supreme Court affirmed the judgment
appealed from, holding that the attaching creditors are
entitled to priority over the defectively registered
mortgage of the appellant.
The registration of the said chattel mortgage in the
office of the corporation was not necessary and had no
legal effect. The practical application of the Chattel
Mortgage Law to shares of stock of a corporation
presents considerable difficulty, as an equity in shares
of stock is of such an intangible character, and the
Court has obtained little aid from the decisions of other
jurisdictions because that form of mortgage is ill suited
to the hypothecation of shares of stock and has been
rarely used elsewhere. Section 4 of Act 1508 provides
two ways for executing a valid chattel mortgage which
shall be effective against third persons. First, the
possession of the property mortgaged must be

Montaos Heidi Jean I.

delivered to and retained by the mortgagee; and,


second, without such delivery the mortgage must be
recorded in the proper office.
Domicile of corporation decisive for purposes of
execution, attachment and garnishment of
shares of stock
It is a common but not accurate generalization that the
situs of shares of stock is at the domicile of the owner.
The term situs is not one of fixed or invariable meaning
or usage. Nor should one lose sight of the difference
between the situs of the shares and the situs of the
certificate of shares. The situs of shares of stock for
some purposes may be at the domicile of the owner
and for others at the domicile of the corporation; and
even elsewhere. It is a general rule that for purposes of
execution, attachment and garnishment, it is not the
domicile of the owner of a certificate but the domicile
of the corporation which is decisive.
By analogy with the foregoing and considering the
ownership of shares in a corporation as property
distinct from the certificates which are merely the
evidence of such ownership, it seems to be a
reasonable construction of section 4 of Act 1508 to
hold that the property in the shares may be deemed to
be situated in the province in which the corporation
has its principal office or place of business. If this
province is also the province of the owner's domicile, a
single registration is sufficient. If not, the chattel
mortgage should be registered both at the owner's
domicile and in the province where the corporation has
its principal office or place of business. In this sense
the property mortgaged is not the certificate but the
participation and share of the owner in the assets of
the corporation.
Apart from the cumbersome and unusual method of
hypothecating shares of stock by chattel mortgage, it
appears that in the present state of our law, the only
safe way to accomplish the hypothecation of share of
stock of a Philippine corporation is for the creditor to
insist on the assignment and delivery of the certificate
and to obtain the transfer of the legal title to him on
the books of the corporation by the cancellation of the
certificate and the issuance of a new one to him. From
the standpoint of the debtor this may be unsatisfactory
because it leaves the creditor as the ostensible owner
of the shares and the debtor is forced to rely upon the
honesty and solvency of the creditor. Of course, the
mere possession and retention of the debtor's
certificate by the creditor gives some security to the
creditor against an attempted voluntary transfer by the
debtor, provided by- laws of the corporation expressly
enact that transfers may be made only upon the
surrender of the certificate. It is to be noted, however,
that section 35 of the Corporation Law enacts that

Page 20

shares of stock "may be transferred by delivery of the


certificate endorsed by the owner or his attorney in
fact or other person legally authorized to make the
transfer." The use of the verb "may" does not exclude
the possibility that a transfer may be made in a
different manner, thus leaving the creditor in an
insecure position even though he has the certificate in
his possession. Moreover, the shares still standing in
the name of the debtor on the books of the corporation
will be liable to seizure by attachment or levy on
execution at the instance of other creditors.
The transfer by endorsement and delivery of a
certificate with intention to pledge the shares covered
thereby should be sufficient to give legal effect to that
intention and to consummate the juristic act without
necessity for registration.
MONSERRAT
(plaintiff-appellee)
VS
CERON
(respondent-appellant) [Stock and transfer book]
FACTS:
Plaintiff-appellee as president and manager of Manila
Yellowcab Taxi Co. assigned to defendant-appellant the
usufruct to half of his shares of stock in the company.
Although he had the right to enjoy, during his lifetime,
the profits that may be derived from the shares that
was assigned to him, he was prohibited from selling,
mortgaging, encumbering, or otherwise alienating the
same, the transferor having reserved the right to vote
from the shares and to recover the ownership of the
shares at the termination of the usufruct. Defendantappellant later on mortgaged the shares of stock to
Eduardo Matute. Plaintiff questioned the validity of the
mortgage on the ground that to be valid, the mortgage
constituted on the shares must have been entered into
the books of the corporation to have force and effect
against third persons. Trial court ruled in favor of
plaintiff-appellee.
ISSUE:
Is a mortgage constituted on shares of stock a transfer
that must be recorded in the books to be valid?
RULING:
A chattel mortgage is not the transfer referred to in the
law which is required to be entered and noted n the
books of a corporation in order to be valid. The transfer
contemplated is the absolute and unconditional
conveyance of the title and ownership of the shares of
stock. A chattel mortgage is not an absolute transfer
since it is a mere security for a debt. The transfer in a
mortgage becomes null and void when the mortgage
debtor complies with his obligation to pay. A transfer
being an act which the owner of the thing delivers it to

Montaos Heidi Jean I.

another with the intent of passing all the rights that he


has in it, a chattel mortgage is not within the meaning
of the term. Therefore, the notation upon the books of
a corporation of a chattel mortgage constituted on the
shares of stock is not necessary to its validity.
f. Lost or Destroyed Certificates
Sec. 73. Lost or destroyed certificates. - The following
procedure shall be followed for the issuance by a
corporation of new certificates of stock in lieu of those
which have been lost, stolen or destroyed:
1. The registered owner of a certificate of stock in a
corporation or his legal representative shall file with
the corporation an affidavit in triplicate setting forth, if
possible, the circumstances as to how the certificate
was lost, stolen or destroyed, the number of shares
represented by such certificate, the serial number of
the certificate and the name of the corporation which
issued the same. He shall also submit such other
information and evidence which he may deem
necessary;
2. After verifying the affidavit and other information
and evidence with the books of the corporation, said
corporation shall publish a notice in a newspaper of
general circulation published in the place where the
corporation has its principal office, once a week for
three (3) consecutive weeks at the expense of the
registered owner of the certificate of stock which has
been lost, stolen or destroyed. The notice shall state
the name of said corporation, the name of the
registered owner and the serial number of said
certificate, and the number of shares represented by
such certificate, and that after the expiration of one (1)
year from the date of the last publication, if no contest
has been presented to said corporation regarding said
certificate of stock, the right to make such contest shall
be barred and said corporation shall cancel in its books
the certificate of stock which has been lost, stolen or
destroyed and issue in lieu thereof new certificate of
stock, unless the registered owner files a bond or other
security in lieu thereof as may be required, effective for
a period of one (1) year, for such amount and in such
form and with such sureties as may be satisfactory to
the board of directors, in which case a new certificate
may be issued even before the expiration of the one
(1) year period provided herein: Provided, That if a
contest has been presented to said corporation or if an
action is pending in court regarding the ownership of
said certificate of stock which has been lost, stolen or
destroyed, the issuance of the new certificate of stock
in lieu thereof shall be suspended until the final
decision by the court regarding the ownership of said
certificate of stock which has been lost, stolen or
destroyed.

Page 21

Except in case of fraud, bad faith, or negligence on the


part of the corporation and its officers, no action may
be brought against any corporation which shall have
issued certificate of stock in lieu of those lost, stolen or
destroyed pursuant to the procedure above-described.

2. TRANSFER OF SECURITIES
a. Transfer of Shareholding
Sec. 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 endorsed 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 and the number of shares transferred.
No shares of stock against which the corporation
holds any unpaid claim shall be transferable in
the books of the corporation.
Uson vs. Diosomito (Transfer of Shareholding)
61 Phil. 535 June 17, 1935 Butte, J.
FACTS:
Toribia Uson had filed a civil action for collection of a
debt in the CFI of Cavite, against Vicente Diosomito
and that upon institution of said action an attachment
was duly issued and levied upon the property of
Diosomito, including seventy-five shares of the North
Electric Company, Inc., which stood in his name of the
books of the company when the attachment was levied
on January 18, 1932.
Subsequently, on June 23, 1932, Uson obtained
judgment against the defendant Diosomito for the sum
of P2,300 with interest and costs. To satisfy said
judgment, the sheriff sold said shares at public auction
in accordance with law on March 20, 1933. Uson was
the highest bidder and said shares were adjudicated to
her.

Montaos Heidi Jean I.

In the present action, H.P.L. Jollye claims to the owner


of said 75 shares and presents a certificate of stock
issued to him by the company on February 13, 1933.
There is no dispute that Diosomito was the original
owner of said shares having a par value of P7,500, and
that on February 3, 1931, he sold said shares to
Emetrio Barcelon and delivered to the latter the
corresponding certificates Nos. 2 and 19. But Barcelon
did not present these certificates to the corporation for
registration until the 16th of September, 1932, when
they were cancelled and a new certificate, No. 29, was
issued in favor of Barcelon who transferred the same to
the defendant H.P.L. Jollye to whom a new certificate
No. 25 was issued on February 13, 1933.
ISSUE:
Whether a bona fide transfer of the shares of a
corporation, not registered or noted on the books of
the corporation, is valid as against a subsequent lawful
attachment of said shares, regardless of whether the
attaching creditor had actual notice of said transfer or
not.
HELD:
We prefer to admit the line followed by the Supreme
Courts of Massachusetts and Wisconsin.
In the latter case, the court had under consideration a
statute identical with our own section 35, Corporation
Law, and the court said:
We think the true meaning of the language is, and the
obvious intention of the legislature in using it was, that
all transfers of shares should be entered, as here
required, on the books of the corporation. And it is
equally clear to us that all transfers of shares not so
entered are invalid as to attaching or execution
creditors of the assignors, as well as to the corporation
and the subsequent purchasers in good faith, and,
indeed, as to all persons interested, except the parties
to such transfers. All transfers not so entered on the
books of the corporation are absolutely void; not
because they are made without notice or fraudulently
in law or fact, but because they are made so void by
statute.
To us the language of the legislature is plain to the
effect that the right of the owner of the shares of stock
of a Philippine corporation to transfer the same by
delivery of the certificate, whether it be regarded as
statutory or common right, is limited and restricted by
the express provision that no transfer, however, shall
be valid, except as between the parties, until the
transfer is entered and noted upon the books of the
corporation.

Page 22

Therefore, the transfer of the 75 shares in the North


Electric Company, Inc., made by the defendant
Diosomito to Barcelon was not valid as to Uson, on
January 18, 1932, the date on which she obtained her
attachment lien on said shares of stock which still
stood in the name of Diosomito on the books of the
corporation.
Judgment affirmed.
4. a) A by-law provision creating in favor of a
corporation a preferential right to buy the shares of a
retiring shareholder violates the property rights of
shareholders as provided by the Corporation Law.
ANTONIO ESCAO, plaintiff-appellee,
vs.
FILIPINAS MINING CORPORATION, ET Al.,
defendants.
STANDARD INVESTMENT OF THE PHILIPPINES,
appellant.

FACTS:

On March 8, 1937, the plaintiff-appellee obtained


judgment in the Court of First Instance of Manila
against Silverio Salvosa whereby the latter was ordered
to transfer and deliver to the former 116 active shares
and an undetermined number of shares in escrow of
the Filipinas Mining Corporation and to pay the sum of
P500 as damages, with the proviso that the escrow
shares shall be transferred and delivered to the plaintiff
only after they shall have been released by the
company. On June 25, 1937, a writ of garnishment was
served by the sheriff of Manila upon the Filipinas
Mining Corporation to satisfy the said judgment; and on
July 29, 1937, the Filipinas Mining Corporation advised
the sheriff of Manila that according to its books the
judgment debtor Silverio Salvosa was the registered
owner of 1,000 active shares and about 21,339
unissued shares held in escrow by the said corporation.
The sheriff sold the 1,000 active shares at public
auction, realizing therefrom only the sum of P10, which
was applied in partial satisfaction of the judgment for
damages in the sum of P500.
ISSUE: Whether the issuance by the Filipinas Mining
Corporation of the said 18,580 shares of its stock to the
Standard Investment of the Philippines was valid as
against the attaching judgment creditor of the original
owner, Silverio Salvosa, namely, the present plaintiffappellee Antonio Escao.

Montaos Heidi Jean I.

RULING:
Shares of stock so issued are personal property and
may be transferred by delivery of the certificate
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 entered and noted
upon the books of the corporation so as to show the
names of the parties to the transaction, the date of the
transfer, the number of the certificate, and the number
of shares transferred.
It is admitted that under this legal provision and the
decision of this Court in Uson vs. Diosomito, 61 Phil.
535, the transfer of duly issued shares of stock is not
valid as against third parties and the corporation until
it is noted upon the books of the corporation; but it is
contended that the transfer of unissued shares of stock
held in escrow is valid against the whole world
although not notified to the corporation and not noted
upon its books. Since the sale, transfer, or assignment
of unissued shares of stock held in escrow is not
specifically provided for by law, the question has to be
resolved by resorting to analogy. What is the reason of
the law for requiring the recording upon the books of
the corporation of transfers of shares of stock as a
condition precedent to their validity against the
corporation, and third parties? We imagine that it is (1)
to enable the corporation to know at all times who its
actual stockholders are, because mutual rights and
obligations exist between the corporation and its
stockholders; (2) to afford to the corporation an
opportunity to object or refuse its consent to the
transfer in case it has any claim against the stock
sought to be transferred, or for any other valid reason;
and (3) to avoid fictitious or fraudulent transfers. Do
these reasons hold as to the transfer of unissued
shares held in escrow? To sustain appellant's
contention is to declare that they do not. But we see no
valid reason for treating unissued shares held in escrow
differently from issued shares insofar as their sale and
transfer is concerned. In both cases the corporation is
entitled to know who the actual owners of the shares
are, and to object to the transfer upon any valid
ground. Likewise, in both cases the possibility of
fictitious or fraudulent transfers exists. The only reason
advanced by the appellant for exempting the transfer
of unissued shares from recording is that in case of
unissued shares there is no certificate number to be
recorded. But that is a mere detail which does not
affect the reasons behind the rule. The lack of such
detail does not make it impossible to record the
transfer upon the books of the corporation so as to
show the names of the parties to the transaction, the
date of the transfer, and the number of shares

Page 23

transferred, which are the most essential data. As a


matter of fact, the defendant Filipinas Mining
Corporation was able to take not of the transfer of the
escrow shares in question to the Standard Investment
of the Philippines on December 7, 1940, without
knowing the certificate number that would correspond
to said shares.
Moreover, it seems illogical and unreasonable to hold
that inactive or unissued shares still held by the
corporation in escrow pending receipt of authorization
from the Government to issue them, may be
negotiated or transferred unrestrictedly and more
freely than active or issued shares evidenced by
certificates of stock.
We are, therefore, of the opinion and so hold that
section 35 of the Corporation Law, which requires the
registration of transfers of shares stock upon the books
of the corporation as a condition precedent to their
validity against the corporation and third parties, is
also applicable to unissued shares held by the
corporation in escrow.
Ponce vs alsons cement
Facts: Vicente C. Ponce filed a complaint for mandamus
and damages against Alsons Cement Corporation
(Formerly named as Victory Cement Corporation and
Floro Cement Corporation) for its failure to transfer in
his name the subscription of Fausto Gaid (an
incorporator and owner of the subscribed and fully paid
239500 shares) as evidenced by the deed of
undertaking and indorsement of Mr. Gaid.
The Company ACC refused to transfer the
subscribed and paid shares of Mr. Gaid to Ponce
because it was not registered in its stock and transfer
book and from the time of VCC to present no certificate
of stock corresponding to the 239500 subscribed and
paid shares were issued in the name of Fausto Gaid.

Issue: Whether or not ACC should issue Ponce a


certificate of stock in his name?
Whether or not the complaint for Mandamus should
prevail?
Held:
Fausto Gaid was an original subscriber of
respondent corporations 239,500 shares. It is
undisputed that petitioner had not made a previous
request upon the corporate secretary of ALSONS,
respondent Francisco M. Giron Jr., to record the alleged
transfer of stocks.

Montaos Heidi Jean I.

Pursuant to Section 63 of the Corporation Code


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.
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.
the transfer is not effective until it is recorded. Unless
and until such recording is made the demand for the
issuance of stock certificates to the alleged transferee
has no legal basis. the stock and transfer book is the
basis for ascertaining the persons entitled to the rights
and subject to the liabilities of a stockholder. Where a
transferee is not yet recognized as a stockholder, the
corporation is under no specific legal duty to issue
stock certificates in the transferees name.
The deed of undertaking with indorsement
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. the mere
indorsement 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. , 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. Before a transferee may ask for the issuance
of stock certificates, he must first cause the
registration of the transfer and thereby enjoy the
status of a stockholder insofar as the corporation is
concerned. A corporate secretary may not be
compelled to register transfers of shares on the basis
merely of an indorsement of stock certificates.

Page 24

G.R. No. 95696 March 3, 1992


ALFONSO S. TAN, Petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION,
VISAYAN EDUCATIONAL SUPPLY CORP., TAN SU
CHING, ALFREDO B. UY, ANGEL S. TAN and
PATRICIA AGUILAR, Respondents.
Facts:
Petitioner was elected as President of the Visayan
Educational Supply Corp and subsequently reelected to
such position but remained in the Board of Directors as
director.
While petitioner was still the president of the
respondent corporation, two other incorporators
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-intrade.
Petitioner's certificate of stock No. 2 was cancelled by
virtue of Resolution No. 1981 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.
Accordingly, as a result of the sale by petitioner of his
fifty (50) shares of stock to Angel S. Tan, Certificate of
Stock No. 2 was cancelled and the corresponding
Certificates No. 6 in the name of Angel S. Tan and for
the remaining 350 shares, Stock Certificate No. 8 was
issued in the name of petitioner Alfonso S. Tan.
Stock No. 2 and 8 were delivered for his endorsement
and cancellation but Mr. Alfonso Tan did not make
proper endorsement of the cancelled Certificate of
Stock No. 2; instead he kept the cancelled Certificate of
Stock No. 2.
When petitioner was dislodged from his position as
president, he withdrew from the corporation on
condition that he be paid with stocks-in-trade. After the
withdrawal of the stocks, the board of the respondent
corporation held a meeting effecting the cancellation of
Stock Certificate Nos. 2 and 8 in the corporate stock
and transfer book and submitted the minutes thereof
to the SEC.

Montaos Heidi Jean I.

Five (5) years and nine (9) months after the transfer of
50 shares to Angel S. Tan, brother of petitioner Alfonso
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 (Alfonso S. Tan) in the stock
and transfer book of the corporation, the latter filed the
case before the SEC questioning for the first time, the
cancellation of his aforesaid Stock Certificates Nos. 2
and 8.
The bone of contention raised by the petitioner is that
the deprivation of his shares despite the nonendorsement or surrender of his Stock Certificate Nos.
2 and 8, was without the process contrary to the
provision of Section 63 of the Corporation Code (Batas
Pambansa Blg. 68) which requires that:
. . . No transfer, however, shall be valid, except as
between the parties, until the transfer is recorded to
the books of the corporation so as to show the names
of the parties to the transaction, the date of the
transfer, the number of the certificate or certificates
and the number of shares transferred.
Issue: Whether or not delivery of certificate of stock is
essential in order to effect the transfer thereof in the
books of the corporation
Ruling: No.
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. 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.
It was very obvious that petitioner devised the scheme
of not returning the cancelled Stock Certificate No. 2
which was returned to him for his endorsement, to
skim off the largesse of the corporation as shown by
the trading of his Stock Certificate No. 8. He also used
this scheme to renege on his indebtedness to
respondent Tan Su Ching in the amount of P1 million. It
is not remote that if petitioner could have cashed in on
Stock Certificate No. 2 with the remainder of the goods
that he padlocked, he would have done so, until the
respondent corporation was bled entirely.
2. Petitioner further claims that "(T)he cancellation and
transfer of petitioner's shares and Certificate of Stock
No. 2 as well as the issuance and cancellation of

Page 25

Certificate of Stock No. 8 was patently and palpably


unlawful, null and void, invalid and fraudulent." And,
that 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.
The word "may"is an auxilliary verb showing among
others, opportunity or possibility. Under ordinary
circumstances, the phrase "may be" implies the
possible existence of something. In this case, the
"something" is a law governing sectoral representation.
The phrase in question should, therefore, be
understood to mean as prescribed by such law that
governs the matter at the time . . . The phrase does
not and cannot, by its very wording, restrict itself to
the uncertainly of future legislation.
The Court held in Chua v. Samahang Magsasaka, that
"the word "may" indicates that the transfer may be
effected in a manner different from that provided for in
the law."
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.

stockholder, but is not essential to the existence of a


share in stock or the nation of the relation of
shareholder to the corporation.
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.
In Philippine jurisprudence, a certificate of stock is not
a negotiable instrument. "Although it is sometime
regarded as quasi-negotiable, in the sense that it may
be transferred by endorsement, coupled with delivery,
it is well-settled that it is non-negotiable, because the
holder thereof takes it without prejudice to such rights
or defenses as the registered owner/s or transferror's
creditor may have under the law, except insofar as
such rights or defenses are subject to the limitations
imposed by the principles governing estoppel."
Considering the circumstances of the case, it appearing
that petitioner is guilty of manipulation, and highhandedness, circumventing the clear provisions of law
in shielding himself from his wrongdoing contrary to
the protective mantle that the law intended for
innocent parties, the Court finds the excuses of the
petitioner as unworthy of belief.

b. Remedy if Transfer is Refused

Following the doctrine enunciated in the case of


Tuazon v. La Provisora Filipina, where this Court held,
that:

A.R. Hager vs. Bryan (1911)

1. 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 . .

Bryan London & Co. endorsed to A.R. Hager its


25 shares of the Visayan Electric Company. A.R Hager
and a certain Levering entered into an agreement
whereby the former will sell his shares in the Visayan
Electric Company including the shares endorsed to him
by Bryan London Co. to the latter. A.R. Hager then filed
an action for mandamus compelling Bryan the
secretary of the Visayan Electric Company to register
unto his name the said 25 shares endorsed to him in
order for him to sell it to levering.

2. necessary to delineate the function of the stock


itself from the actual delivery or endorsement of the
certificate of stock itself as is the question in the
instant case. 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. It expresses
the contract between the corporation and the

Montaos Heidi Jean I.

Facts:

Issue:
Whether or not a writ of mandamus may be
issue in order to compel the secretary of Visayan
Electric Company to register/transfer the 25 shares in
the name of A.R. Hager.
Held:

Page 26

The Honorable Arthur L. Sanborn, judge of the


United States district court for the western district of
Wisconsin, in his article entitled "Mandamus" (26 Cy. of
Law and Procedure (Cyc), at p. 347), said:

Issue:

By the weight of authority mandamus will not lie in


ordinary cases to compel a corporation of its officers to
transfer stock on its books and issue new certificates to
the transferee, since the writ (in such a case) is a
purely private one, and there is generally an adequate
remedy by an action against the corporation for
damages.

May the court grant the award for the alleged


unrealized income?

Section 35, Act No. 1459, provides among


other things, that:
No share of stock against which the corporation holds
any unpaid claim, shall be transferable on the books of
the corporation.
To permit the writ of mandamus to issue for the
purpose of compelling the officers of a corporation, in
cases like the present one, to transfer stock upon the
books of the corporation, might, under certain
circumstances, require such officers to transfer stock
against which the corporation holds unpaid claims.
These claims might easily arise between the time of
the issuance of the writ and the service of the same
upon such officers. If the court should issue the writ, it
might require an officer to transfer stock under
conditions where the law expressly prohibited such
transfer. The writ of mandamus will never issue to
compel a person to violate an express provision of the
law. The act required to be performed must be one
which the law specially enjoin as a duty resulting from
an office, trust, or station or unlawfully excludes the
plaintiff from the used and enjoyment of a right or
office to which he is entitled and from which he is
unlawfully precluded.
Batong Buhay
Appeals

Gold

Mines

Inc.

vs

Court

Held:
On the first issue, the lower court was right to
order the transfer of shares in the name of INCO.
On the second issue:
The petitioner alleges that the appellate court gravely
and categorically erred in awarding damages by way of
unrealized profit (or lucro cesante) to private
respondent. Petitioner company also alleges that the
claim for unrealized profit must be duly and sufficiently
established, that is, that the claimant must submit
proof that it was in fact damaged because of
petitioner's act or omission.
The stipulation of facts of the parties does not at all
show that private respondent intended to sell, or would
sell or would have sold the stocks in question on
specified dates. While it is true that shares of stock
may go up or down in value (as in fact the concerned
shares here really rose from fifteen (15) centavos to
twenty three or twenty four (23/24) centavos per share
and then fell to about two (2) centavos per share, still
whatever profits could have been made are purely
SPECULATIVE, for it was difficult to predict with any
decree of certainty the rise and fall in the value of the
shares. Thus this Court has ruled that speculative
damages cannot be recovered.
WON vs. WACK WACK

of

Facts:
Francisco Aguac and his wife Paula Aguac own
62,495 shares of batong Buhay Gold Mines Inc (BBGM).
Francisco sold the shares to Inco Mining Corporation
(INCO) without the knowledge of Paula. When INCO
sought the transfer of the shares unto its name, BBGM
refuses to do so on the fact that the share of Paula was
not given when Francisco sold the shares to INCO. INCO
filed a case in the court for the transfer of the shares
unto its name plus damages for the alleged unrealized
income covered by the said shares. BBGM on the other
hand applied for writ of injunction with TRO. the writ
was approved.

Montaos Heidi Jean I.

May the court order the transfer of share to


INCO?

FACTS: Defendant (a non-stock corporation) issued to


Iwao Teruyama Membership Certificate No. 201 which
was assigned to M. T. Reyes. Subsequently in the same
year 1944, M. T. Reyes transferred and assigned said
certificate to the plaintiff, Won. Almost 11 years after,
the plaintiff filed an action against the defendant,
alleging that shortly after the rehabilitation of the
defendant after the war, the plaintiff asked the
defendant to register in its books the assignment in
favor of the plaintiff and to issue to the latter a new
certificate, but that the defendant had refused and still
refuses to do so unlawfully; and praying that the
plaintiff be declared the owner of one share of stock of
the defendant and that the latter be ordered to issue a
correspondent new certificate. Defendant filed a
motion to dismiss, alleging that from 1944, when the

Page 27

plaintiff's right of action had accrued, 1955, when the


complaint was filed, eleven years have elapsed, and
that therefore the complaint was filed beyond the 5year period fixed in Article 1149 of the Civil Code. The
Court dismissed the complaint.

plaintiff, because it is only after registration that the


transfer would be binding against the defendant.
Order reversed.

ISSUE: Whether or not the plaintiff was bound, under


condition and By-Laws of the defendant or any
statutory rule for that matter, to present and register
the certificate assigned to him in 1944 within any
definite or fixed period.

HELD: The certificate in question contains a condition


to the effect that no assignment thereof "shall be
effective with respect to the club until such assignment
is registered in the books of the club, as provided in the
By-Laws."

The defendant has not made herein any


pretense to that effect; but it contends that from the
moment the certificate was assigned to the plaintiff,
the latter's right to have the assignment registered
commenced to exist. This contention is correct, but it
would not follow that said right should be exercised
immediately or within a definite period. The existence
of a right is one thing, and the duration of said right is
another.

On the other hand, it is stated in the appealed order of


dismissal that the plaintiff sought to register the
assignment on April 13, 1955; whereas in plaintiff's
brief it is alleged that it was only in February, 1955,
when the defendant refused to recognize the plaintiff.

If, as already observed, there is no fixed period for


registering an assignment, how can the complaint be
considered as already barred by the Statute of
Limitations when it was filed on April 26, 1955, or
barely a few days (according to the lower court) and
two months (according to the plaintiff), after the
demand for registration and its denial by the
defendant. Plaintiff's right was violated only sometime
in 1955, and it could not accordingly have asserted any
cause of action against the defendant before that.
The defendant seems to believe that the plaintiff was
compelled immediately to register his assignment. Any
such compulsion is obviously for the benefit of the

Montaos Heidi Jean I.

Page 28