Shares held in trust

A holder or stockholder includes a person holding stocks in trust and trustees holding corporate stock are
regarded for all legal purposes as stockholders. However, the rights of a beneficial owner will of course be
recognized and protected in equity in proper cases. In other words, even where legal title to stock is vested
in a certain person, equity will treat him as a trustee holding it for the real and beneficial owners.
Article 1455 of the Civil Code provides that when any trustee uses trust funds for the purchase of property
and causes the conveyance to be made to him or to a third person, a trust can be established by operation
of law in favor of the person to whom the funds belong. Moreover, a trustee must not make investments of
funds in their own names but always indicate that they are made in trust capacities.
Sale of Shares
Section 63 of the Corporation Code affirms that the owner of a share of stock in a corporation has the
right to transfer his shares. It is the provision that outlines the fundamental requirements which must be
complied with if a stockholder in a corporation wishes to transfer his shares to another. Section 63 reads:

“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.

Between the parties to the contract of sale, registration of the transfer of shares is not required for the sale
to be valid but until it has been recorded in the books of the corporation, the transferee will not be considered
as a stockholder of the corporation
The reasons for the recordal of the alienation or sale of shares are:
1) To enable the corporation to know at all times their actual stock holders
2) To afford the corporation the opportunity to object or refuse its consent to the transfer in case it has
any claim against the stock and
3) To avoid fictitious and fraudulent transfer
Being intangible personalty, the Corporation Code requires that, before a share of capital stock is
validly sold, transferred, assigned or in any manner conveyed, it must be covered by a stock
certificate. This requirement is borne out of practical considerations. It is a fundamental principle of
contract law (be it of sale, assignment or any other conveyance) in the Philippines and probably in any
jurisdiction, that the parties to any contract must be aware of the subject matter – what is being sold,
transferred or otherwise conveyed. On the other hand, shares of stock in a corporation do not have physical
form, unlike ordinary chattel such as goods or vehicles, where a person has a clear notion of what is being
sold or conveyed.
The stock certificate is evidence of the personalty owned by the stockholder. It defines the nature and extent
of his ownership over the share/s of stock. It also outlines the regulations and limitations of ownership,
which must be considered and made known to the parties prior to any conveyance. Obviously, without the
stock certificate, these matters would be unknown to a prospective buyer or transferee of shares of stock.
Simply stated, the subject matter of the conveyance will not be clear. Therefore, only shares of stock
covered by a stock certificate can be subject of a legally demandable and binding sale or disposition.
Moreover, as between the corporation on one hand, and its shareholders and third persons on the other, the
corporation looks only to its books for the purpose of determining who its shareholders are. Thus, as
between the “real” owner of a stock certificate and the registered owner or the person actually registered in
the Stock and Transfer Book of a corporation, it is the person registered in the Stock and Transfer Book
who must sign or endorse the certificate of stock to allow its sale or transfer.
In the case of Padgett vs. Babcock & Templeton, Inc., G.R. No. 38684, 21 December 1933, held that
shares of corporate stock are regarded as personal property and may be disposed by the owner as he sees
fit, unless the corporation is dissolved, or unless the right to do so is properly restricted or the owner’s
privilege is hampered by his actions. A corporation cannot impose undue restrictions upon the owner’s right
to sell, transfer or otherwise convey his shares of stock
Allowable Restrictions on the Sale of Shares
Shares of stock are regarded as personal property of the stockholder and as a general rule, he may dispose
of them as he sees fit unless the corporation has been dissolved, or unless the right to do so has been
restricted in the articles of incorporation and in the stock certificate or the owner’s right of disposing his
shares has been hampered by his own actions.
According to the Supreme Court, a restriction imposed upon a stock certificate, which unduly prohibits the
owner from conveying his property, is null and void on the ground that it constitutes and unreasonable
limitation of the right of ownership and is in restraint of trade. It was also held that any restriction on a
stockholder’s right to dispose of his shares must be construed strictly; and any attempt to restrain a transfer
of shares is regarded as being in restraint of trade, in the absence of a valid lien upon its shares, and except
to the extent that valid restrictive regulations and agreements exist and are applicable. Subject only to such
restrictions, a stockholder cannot be controlled in or restrained from exercising his right to transfer by the
corporation or its officers or by other stockholders, even though the sale is to a competitor of the company,
or to an insolvent person, or even though a controlling interest is sold to one purchaser.
However, recognizing the right of the corporation to regulate the transfer of shares of stock in a corporation,
the Supreme Court stated that there can be restrictive regulations or agreements which can be entered into
between the corporation and the stockholder, to regulate ownership of the shares of stock. These regulations
or agreements pertain to those indicated in the certificates of stock, and also those that may be found in the
By-Laws of the corporation. The Supreme Court emphasized that these regulations are construed strictly
against the corporation, and in favor of the ownership rights of the stockholder. An absolute prohibition
from selling shares of stock was held as null and void on the ground that it constitutes and unreasonable
limitation of the right of ownership and is in restraint of trade.
The authority granted to a corporation to regulate the transfer of its stock does not empower it to restrict
the right of a stockholder to transfer his shares, but merely authorizes the adoption of regulations as to the
formalities and procedure to be followed in effecting transfer (Thomson vs. CA, G.R. No. 116631, October
28, 1998).
To be valid, restrictions on the sale/transfer of shares must be:
1. Provided in the articles of incorporation and
2. it must be printed at the back of the certificate of stock.
Note: The latter requirement is needed to bind third persons who may buy or deal with the shares of stock.
An example of a invalid restriction upon the right of a stockholder to dispose of a share of stock in a
corporation is found in the case of in the case of Fleischer vs. Botica Nolasco Co., 47 Phil 583. In this
case, the Supreme Court discussed the validity of a clause in the by-laws of a corporation which prohibited
the owner of a stock certificate from selling his shares to any person other than the corporation. The by-
laws mandated that the owner of a share of stock could not sell it to another person except to the corporation.
In deciding the legality and validity of said restriction, the Supreme Court ruled that the only restraint
imposed by the Corporation Law upon transfer of shares is that no transfer of shares of stock 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. According to the Supreme Court, this restriction is necessary in order
that the officers of the corporation may know who its stockholders are, which is essential in conducting
elections of officers, in calling meetings of stockholders, and for other purposes.
The Supreme Court declared that any restriction in the by-laws which exceeds what is provided in the
Corporation Code is ultra vires, violative of the property rights of shareholders, and in restraint of trade.
This is because the by-laws of a corporation cannot contradict the general policy of the laws of the land,
and must always be strictly subordinate to Philippine laws.
In Rural Bank of Salinas vs. Court of Appeals, G.R. No. 96674, 26 June 1992, the Supreme Court held
that a corporation, either by its board, its by-laws, or the act of its officers, cannot create restrictions in stock
transfers. The Corporation Code contemplates no restriction as to whom the stocks may be transferred. It
does not suggest that any discrimination may be created by the corporation in favor of, or against a certain
purchaser. The owner of shares, as owner of personal property, is at liberty, under said section to dispose
them in favor of whomever he pleases, without limitation in this respect, than the general provisions of law.
The only limitation imposed by Section 63 of the Corporation Code is when the corporation holds any
unpaid claim against the shares intended to be transferred, which was not present in the case.

SALE OF PARTIALLY PAID SHARES

The incomplete payment of the subscription does not preclude the subscriber from alienating his shares of
stock. Since in this case, there is still no stock certificates that can be issued the transfer may be thru a
“Share Purchase Agreement Contract.” (Section 64)
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.

SALE OF ALL SHARES NOT FULLY PAID

The sale of shares of not fully paid subscription is allowed but to bind the corporation, consent of the
corporation shall be obtained unless not allowed by Articles of Incorporation.
SALE OF A PORTION OF SHARES NOT FULLY PAID
Sale of a portion of shares not fully paid is allowed in case of delinquent shares.
The sale at public auction of delinquent share is absolute and not subject to redemption. However, an action
may be filed to question the sale, the requisites for which are
1) There should be allegation and proof of irregularity or defect in the notice of sale or in the sale
itself.

2) The party filing the action must first pay the party holding the stock the sum for which the stock
was sold with legal interest from the date of sale.

3) The action is filed within 6 months from the date of sale.

Note: The action prescribes 6 months from such sale.

SALE OF FULLY PAID SHARES
Sale of a fully paid share is allowed even without the consent of the corporation as long as the requisites
for the valid transfer of shares are complied.

REQUISITES OF A VALID TRANSFER

In the case of De los Santos, et al. vs. MacGrath, et al., G.R. No. L-4818, 28 February 1955, the
Supreme Court interpreted the provisions of Section 63 of the Corporation Code. The Supreme Court held
that any voluntary transfer of shares of stock in a corporation that is represented by a certificate of stock
must strictly comply with the following conditions:

a. There must be delivery of the certificate;

b. The share must be indorsed by the owner or his agent; and

c. To be valid to the corporation and third parties, the transfer must be recorded in the books of the
corporation.

One of the requirements to effect a valid transfer of shares of stock is that the certificate of stock must
be endorsed by the owner or his agent. Mere delivery or handing over of the stock certificate is
insufficient, and does not produce the effects of a transfer or conveyance to another. Endorsement of the
stock certificate is one of the operative acts which validates the transfer. Without the act of endorsement
by the stockholder, the sale or disposition will not be binding upon the corporation. Of course, there are
remedies under the law to compel the owner to endorse the stock certificate which he or she has already
conveyed to another. But before endorsement of the stock certificate, the corporation can refuse recognize
the transferee stockholder.

INVOLUNTARY DEALINGS

It refers to such writ, order or process issued by a court of record affecting shares of stocks which
by law should be registered to be effective, and also to such instruments which are not the willful
acts of the registered owner and which may have been executed even without his knowledge or
against his consent.

Examples of Involuntary Dealings of a Share

1. Attachment

2. Sale on execution of judgment or sales for taxes

3. Adverse claims

4. Foreclosure of mortgage of stocks

Involuntary dealings must be registered since it is the act of registration which creates a
constructive notice to the whole world of such instrument or court writ or process and is the
operative act that conveys ownership or affects the land insofar as third persons are concerned.
(Aquino, p. 185, 2007 ed)