II.

FINANCIAL STRUCTURE
RESIDUAL ASSETS: absent in a debt security; (to pay the principal and the interest)no
A. DEBT SECURITIES participation on the part of the creditor, that will remain from the dissolution
GENERALLY – LIRAG TEXTILE MILLS, INC. V. SSS (G.R. NO. In investment/equity: when there’s a property of 70% that
remains: a creditor may still have a share on that remaining asset. (if the corp does not
L-33205, 1987) perform: investor gets nothing)

M. NOTES

Debt Securities LIRAG TEXTILE V SSS

***it was denominate as purchase agreement: purchase of issued shares
***it was said that the document is equity instrument but in fact upon looking at the
document itself: it is a debt instrument
***entire doc looks like iequity, but on substance it is debt
● there was an agreement for the purchase of redeemable share; denominated
as purchase agreement (purchase of issued shares)
● it was a debt instrument: does not depend on the financial standing of the corp
○ There was an absolute obligation to redeem; makes it a debt instrument
■ Redeem period is absolute:
***contract shall be looked upon
Difference:
Investment (equity instrument) Debt(debt instrument)
There is a risk; to lose if business fails in debt there is an absolute obligation to pay
● Profit
* profit
● Control (is a matter of percentage)
*control
Dividends
Interest
**you sink or swim with the business If the corp does not profit, no dividends
Interest is not dependent on performance

***Bank usually give out loan but on the basis of being a part of the BOD to gain control and
to find out how the corp would use the money:
***in investment: part of the business is getting assets/dividends: at the end of the
business life, assets will be divided (investor’s capital will be given back)

1
 LIRAG TEXTILE MILLS, INC. VS. SSS o This absolute obligation on the part of the Petitioner corporation is made manifest by the
fact that a surety was required to see to it that the obligation is fulfilled in the event the
153 SCRA 338 principal debtor’s inability to do so.
o It cannot be said that SSS is a preferred stockholder. The rights given by the Purchase
Facts: Agreement to SSS are not rights enjoyed by ordinary stockholders. Since there was a
condition that failure to repurchase the stocks on the scheduled dates renders the entire
obligation due and demandable with interest. These features clearly show that intent of the
 SSS (respondent) and Lirag Textile Mills (Petitioner) entered into a Purchased Agreement which parties to be bound therein as debtor and creditor and not as a corporation and
Respondent agreed to purchase preferred stocks of Petitioner worth P1 million subject to stockholder.
conditions:
o For Petitioner to repurchase the shares of stocks at a regular interval of one year
and to pay dividends.
2) YES, Basilio is liable as surety. Thus it follows that he cannot deny liability for Lirag’s default. As
o Failure to redeem and pay the dividend, the entire obligation shall become due
surety, he is bound immediately to pay SSS the amount then outstanding.
and demandable and it shall be liable for an amount equivalent to 12% of the
amount then outstanding as liquidated damages.
o
 Basilio Lirag (Basilio) as President of Lirag Textile Mills signed the Agreement as a surety to 3) The award of liquidated damages represented by 12% of the amount then outstanding is
guarantee the redemption of the stocks, the payment of dividends and other obligations. correct, considering that the petitioners in the stipulation of facts admitted having failed to fulfill
 Pursuant to the Agreement, Respondent paid Petitioner P500,000 on two occasions and the their obligations under the Agreement. The grant of liquidated damages is expressly provided
latter issued 5,000 preferred stocks with a par value of P100 as evidenced by Stock Certificate for the Purchase Agreement in case of contractual breach.
Nos. 128 and 139.
 After sending Respondent sent demand letters, Petitioner and Basilio still made no redemption
nor made dividend payments. Since Lirag did not deny its failure to redeem the preferred shares and the non-payment of
 Respondent filed an action for specific performance and damages against Petitioner: dividends which are overdue, they are bound to earn legal interest from the time of demand, in
 Petitioner contends that there is no obligation on their part to redeem the stock certificates since this case, judicial i.e. the time of filing the action.
Respondent is still a preferred stock holder of the company and such redemption is dependent
upon the financial ability of the company.
 On the part of Basilio, he contends that his liability only arises only if the company is liable and
does not perform its obligations under the Agreement.

Issue:

1) Whether or not the Purchase Agreement entered into by the Parties is a debt instrument?
2) If so, Is Basilio liable as surety?
3) Whether or not Lirag is liable for the interest as liquidated damages?

Held:

1) YES, the Purchase Agreement is a debt instrument. The terms and conditions of the Agreement
show that parties intended the repurchase of preferred shares on the respective scheduled
dates to be an absolute obligation, which does not depend on the financial ability of the
corporation.

2
 1. AUTHORITY TO ISSUE DEBT SECURITIES
- POWER TO INCUR, CREATE OR INCREASE BONDED
INDEBTEDNESS, SECTION 38 OF THE
CORPORATION CODE
2. TYPES OF DEBT SECURITIES
- UNSECURED BONDS
- SECURED BONDS
- INCOME BONDS
- CONVERTIBLE BONDS
- CALLABLE BONDS
B. EQUITY SECURITIES
Sec. 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 stockholders’
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 and 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 stockholders’ 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 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 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 shares 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 stockholder 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 the stock represented at the meeting.
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 certificate 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 increasing of any bonded indebtedness authorized,
as the certificate of filing may declare: Provided, That the Securities and
3
 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 percent (25%) of
such increased capital stock has been subscribed and that at least
twenty-five percent (25%) 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
percent (25%) of the subscription: Provided, further, That no decrease of
the capital stock shall be approved by the Commission, if its effect shall
prejudice the rise 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.
Bonds – Bonds are in form and effect similar to promissory notes, secured
by mortgage or trust deed upon specified property of the debtor corporation.
Mortgage bond
A mortgage bond is one secured by a mortgage on corporate property.
Debenture bonds
Debenture bonds are not secured by specific corporate property but rather
solely on the issuer’s ability to pay the indebtedness.
Convertible bonds
Convertible bonds are those which includes a provision which permits the
holder of the bond to convert the bond into a specified number of shares
of stock of the corporation at his option within a period fixed therein.
Participating bonds
The owners or holders of participating bonds entitle them to participate in
earnings of the corporation above the specified rates of interest fixed.
Collateral trust bonds
Collateral trust bonds are secured by a lien on securities deposited with a
named trustee constituting the collateral.

Properties to a bond Guaranteed bonds

Every bond issue usually involve three parties: (1) the debtor – corporation; Guaranteed bonds are guaranteed or secured by another corporation other than
(2) the creditor – bondholder; and (3) the trustee. the issuing corporation.

Bonds classified
Bonds are classified into: coupon or registered bonds, mortgage bonds,
debentures, convertible bonds, participating bonds, collateral trust
bands, and guaranteed bonds.

Coupon or registered bonds

Coupon bonds are payable to bearer or to the order of a person, and have
attached to them coupon notes for each instalment of interest as it falls
due.

4
GENERALLY – GARCIA V. LIM CHU SING, 59 PHIL 562 WON it is proper to COMPENSATE the respondents indebtedness to the value of his
shares of stock with the Mercantile Bank of China.
M. NOTES

GARCIA v
HELD:
***shares of stock is not a debt; therefore it cannot be compensated.
NO. A share of stock or the certificate thereof is not indebtedness to the owner nor
evidence of indebtedness and therefore, it is not a credit. Stockholders as such are not creditors of
In Investment/equity instrument; it is booked as capital
the corporation.
If debt: may be compensated
The capital stock of a corporation is a trust fund to be used more particularly for the
security of the creditors of the corporation who presumably deal with it on the credit of its capital.
Shareholders Not Corporate Creditors. aGarcia v. Lim Chu Sing, 59
Phil. 562 (1934). GARCIA v. LIM CHU SING

STOCKS & STOCKHOLDERS

1.) CONSIDERATION FOR SHARES

G.R. No. L-39427; February 24, 1934

FACTS:

Lim Cuan Sy had an account with the Mercantile Bank of China (plaintiff bank) in the form
of "trust receipts" guaranteed by Lim Chu Sing (respondent) as surety & with chattel mortgage
securities. Lim Cuan Sy failed to comply with his obligations. The plaintiff bank required Lim Chu
Sing, as surety, to deliver a promissory note. The plaintiff bank, without the knowledge & consent of
the defendant, foreclosed the chattel mortgage and privately sold the property covered thereby. The
defendant is an owner of shares of stock in the plaintiff bank.

Meanwhile, plaintiff bank was subsequently placed under liquidation. The defendant filed a
motion for the inclusion of the principal debtor Lim Cuan Sy as party defendant with the CFI-Manila
so that he could avail himself of the benefit of the exhaustion of the property of said Lim Cuan Sy.
The motion was denied. The proceeds of the sale of the mortgaged chattels together with other
payments made were applied to the amount of the promissory note in question, leaving the balance
which the plaintiff now seeks to collect.

ISSUE:

5
 Garcia vs. Lim Chu Sing a compensation

FACTS:
Lim CUAN SY had an account with the Mercantile Bank of China (Plaintiff Bank) in the
form of "trust receipts" guaranteed by Lim CHU SING (defendant) as surety & with
chattel mortgage securities. Lim CUAN SY failed to comply with his obligations. The
Plaintiff Bank required Lim CHU SING, as surety, to delivered a promissory note for
P19,605.17 with interest thereon at 6% per annum, payable monthly. One of the
conditions stipulated in the said note is that in case of defendant's default in the payment
of any of the monthly installments the entire amount, together with interest thereon
at 6% per annum, shall become due & payable on demand. The defendant had been
making partial payments leaving an unpaid balance of P9,105.17. However, he
defaulted in the payment of several installments by reason of which the unpaid
balance on the promissory note had ipso facto become due & demandable. The
Mercantile Bank of China, without the knowledge & consent of the defendant,
foreclosed the chattel mortgage and privately sold the property covered thereby. The
defendant is the owner of shares of stock of the Plaintiff Bank of China amounting to
P10,000. The Plaintiff Bank was subsequently placed under liquidation. The
defendant filed a motion for the inclusion of the principal debtor Lim Cuan Sy as party
defendant with the CFI-Manila so that he could avail himself of the benefit of the
exhaustion of the property of said Lim Cuan Sy. The motion was denied. The
proceeds of the sale of the mortgaged chattels together with other payments made were
applied to the amount of the promissory note in question, leaving the balance which the
plaintiff now seeks to collect.

ISSUE: W/N it is proper to COMPENSATE the defendant-appellant's indebtedness of

P9,105.17 with the sum of P10,000 representing the value of his shares of stock with the
Mercantile Bank of China.

HELD: NO. According to the weight of authority, a share of stock or the certificate
thereof is not an indebtedness to the owner nor evidence of indebtedness and,
therefore, it is not a credit.
Stockholders, as such, are not creditors of the corporation. It is the prevailing doctrine of
the American courts that the capital stock of a corporation is a trust fund to be used more
particularly for the security of creditors of the corporation, who presumably deal with it
on the credit of its capital stock.

The shares of a banking corporation do not constitute an indebtedness of the

corporation to the stockholder and, therefore, the latter is not a creditor of the
former for such shares. The indebtedness of a shareholder to a banking corporation
cannot be compensated with the amount of his shares therein, there being no relation of
creditor & debtor with respect to such shares.
Therefore, the defendant-appellant Lim CHU SING not being a creditor of the Plaintiff
Bank, although the latter is a creditor of the former, there is no sufficient ground to justify

6
 1. ISSUANCE OF SHARES
A. CERTIFICATE OF STOCK (SECTION 63 OF THE
CORPORATION CODE)
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.
SEC. 63 The capital stock of stock corporation shall be divided into
shares Certificate of stock shall be issued for said shares.
Nature of a certificate of stock
1. It is a written instrument signed by the proper officer of a
corporation stating or acknowledging that the person named
therein is the owner of a designated number of shares of stock.
2. It indicates the name of the holder, the number, kind and class of
shares represented, and the date of issuance.
3. It i merely the evidence of the holder's interest in the corporation,
his ownership of the share represented thereby.
4. It is not essential to make one a stockholder in a corporation.
 Every stockholder has a right to have proper certificate issued
to him as soon as he has complied with the conditions which
entitle him to one.
 A corporation cannot issue shares in excess of the maximum
authorized in its AOI.
 An over issued stock is absolutely void even if possessor is in
good faith.
 Shares can be transferred represented by the certificate by its
endorsement by the owner or his agent and delivery to the
transferee.
Restrictions on transfer of stock
A by-law prohibits a transfer of stock without the consent or approval of all
stockholders or of the president or board of directors is ILLEGAL.
1. A provision in the certificate that is transferable only to some
person first approved by the board of directors unlawfully restricts
the right of the stockholder.
2. The condition “non-transferable” appearing on certificates of stock is
VOID.
3. corporations which will engage in any business reserved for Filipino
citizens are required to indicate in AOI and all certificates.
Two requirements to effect transfer of stocks
Endorsement and delivery of stock certificate
-the usual practice is for the stockholder to sign the form on the back of
the stock certificate.
-if the holder of the certificate desires to assume the legal right of the
stockholder he fills up the blank in the form inserting his name as
transferee.
-then he delivers the certificate to the secretary of the corporation so that
the transfer may be entered in the books.
Other modes of transfer
1. Assignment thru a separate instrument.
2. Judicial or extra-judicial settlement of the estate.
Validity of stock transfer
1. As between parties
7
 -merely the delivery of the certificate indorsed by the owner or his
attorney- in-fact or other person legally authorized to make the
transfer.
2. As against third persons
-the transfer of shares must be entered and noted upon the books of
the corporation
-only absolute transfer are recorded
Effects of unregistered shares
1. It is valid and binding as between the transferor and transferee.
2. It is invalid insofar as the corporation is concerned except when
notice is given to the corporation for purposes of registration.
the transferor has the right to vote and to be voted for,
and has the right to participate in any meeting the transferor
has the right to dividends as against the corporation but
the transferor, as the nominal owner of the share, is the
trustee for the benefit of the real owner.
3. It is invalid as against corporate creditors, and the transferor
is still liable to the corporation. The transfer of stock by a
shareholder does not relieve him from the liability to creditors
of the corporation for unpaid subscription until the transfer is
consummated by being registered in the books.
4. It is invalid as against creditors of the transferor without notice
of the transfer.
his subscribed shares as would be necessary to cover the total
amount due from him.
▪ In the absence of the provision of the by-laws to the contrary, a
corporation may apply payments made by subscribers on
account of their subscriptions either as: (1) full payment for
the corresponding number of shares, the par value of which is
covered by such payment; or (2) payment pro rata to each and all
the entire number of shares subscribed for.
▪ The SEC may by specific rule or regulation, allow corporations
to provide in their articles of incorporation and by-laws for the
use of uncertified security – security evidenced by electronic or
similar records.
(a) Nature of Certificate: aTan v. SEC, 206 SCRA 740
(1992); a De los Santos v. Republic, 96 Phil. 577
(1955); a Ponce v. Alsons Cement Corp., 393 SCRA
602 (2002); C.N. Hodges v. Lezama, 14 SCRA 1030
(1965).

Shares of stock against which the corporation holds any unpaid claim
shall not be transferable in the books – no unpaid claims against the
stock.
a) no unpaid subscriptions due and payable.

Other notes:

▪ Certificate shall only be issued upon full payment – the rationale

for this is to prevent partial disposition of a subscription which is
not fully paid, because if it is permitted and the subscriber
subsequently becomes delinquent in the payment of his
subscription, the corporation may not be able to sell as many of

8
 B. PRE-EMTIVE RIGHTS (SECTION 39 OF THE
CORPORATION CODE)
Sec. 39. Power to deny pre-emptive right. – All stockholders of a stock
corporation shall enjoy pre-emptive right to subscribe to all issues or
disposition of shares of any class, in proportion to their respective
shareholdings, unless such right is denied by the articles of incorporation or an
amendment thereto: Provided, That such pre-emptive right shall not extend to
shares to be issued in compliance with laws requiring stock offerings or
minimum stock ownership by the public; or to shares to be issued in good faith
with the approval of the stockholders representing two-thirds (2/3) of the
outstanding capital stock, in exchange for property needed for corporate
purposes or in payment of a previously contracted debt.
Pre-emptive right – It means literally to establish a prior right. A stockholder’s
pre- emptive right is his right to subscribe to new shares of stock in proportion
to his existing stockholdings, before the new shares are issued to others.
Other notes:
NOTE: Distinction between right of first refusal – The right of first refusal
arises only by virtue of contractual stipulations, in which case the right is
construed strictly against the right of persons to dispose or deal with their
property. Pre-emptive right on the other hand is a common law right and
pertains to unissued stocks and to re-issuance of treasury shares, while the former
to issued stocks.
NOTE: Pre-emptive right refers to the common law right granted to the
stockholder of a corporation to be granted the first option to subscribe the
opening of the unissued capital stock or to any increase, so as to protect his
proportionate interest in the corporation.
C. CONSIDERATION (SECTION 62 OF THE
CORPORATION CODE)
Sec. 62. Considering for stocks. – Stocks shall not be issued for a
consideration less than the par or issued price thereof. Consideration for
the issuance of stock may be any or a combination of any two or more of
the following:
1. Actual cash paid to the corporation.
2. Property, tangible or intangible, actually received by the corporation
and necessary or convenient for its use and lawful purposes at a
fair valuation equal to the par or issued value of the stock issued.
3. Labor performed for or services actually rendered to the corporation.
4. Previously incurred indebtedness of the corporation.
5. Amounts transferred from unrestricted retained earnings to stated
capital.
6. Outstanding shares exchanged for stocks in the event of
reclassification or conversion.
Where the consideration is other than actual cash, or consists of
intangible property such as patents of copyrights, the valuation thereof
shall initially be determined by the incorporators or the board of
directors, subject to approval by the Securities and Exchange
Commission.
Shares of stock shall not be issued in exchange for promissory notes
or future service. The same considerations provided for in this section,
insofar as they may be applicable, may be used for the issuance of
bonds by the corporation. The issued price of no-par value shares may
be fixed in the articles of incorporation or by the board of directors
pursuant to authority conferred upon it by the articles of incorporation or
the by-laws, or in the absence thereof, by the stockholders representing
at least a majority of the outstanding capital stock at a meeting duly
called for the purpose.
Consideration for issuance of stock may be any or any combination
of any two or more of the ff:
9
 1. Cash
2. Property – tangible or intangible
3. Labor performed or services actually rendered
4. Previously incurred indebtedness by the corporation
5. Amounts transferred from unrestricted retained earnings to stated
capital
6. Outstanding shares exchanged for stock in the event of
reclassification or conversion
Sources of corporate capital
1. Funds furnished by shareholders
2. Borrowings
3. Profits and stock dividends
Different modes by which a corporation may issue shares of stock
1. By subscription before and after incorporation, to original, unissued
stocks.
2. By sale of treasury stock after incorporation for money property, or
service.
3. By subscription to new stocks, when all the original stocks have been
issued and the amount of the capital stock increased.
4. By making a stock dividend.
Limitations in the issuance of stocks
1. Shall not be issued for a consideration less than the par or issued
price thereof except treasury shares so long as the price is
reasonable.
2. Shall not be issued in exchange of promissory notes or future
services.
3. When the consideration is other than actual cash or consists of
intangible property, the value thereof shall be initially determined by
the incorporators or the board of directors, subject to the approval of
the SEC.
4. The issued price of no par value shares must be fixed as provided in
Sec. 62.
- issued price may vary from time to time but value may not be
less than P5.
NATIONAL EXCHANGE V. DEXTER, 51 PHIL 501
M. NOTES
NATIONAL EXCHANGE v
***in a SUBSCRIPTION CONTRACT: the corp may absolve a shareholder if its not against
public policy or against the law; but if it will defraud other shareholders by giving a lesser
burden to another, then the contract of subscription is void:
IT IS VOID: because the term used id “payable from the dividend”
TO MAKE IT VALID: it may be payable from the dividend (giving another option/nit absolute)
maybe paid in cash
National Exchange vs. Dexter
G.R. No. L-27872; February 25, 1928
FACTS:
Dexter subscribed to 300 shares. The subscription contract provided that the shares will
be paid solely from the dividends. Company became insolvent. Assignee in insolvency sued Dexter
for the balance. Dexter's defense was that under the contract, payment would come from the
dividends. Without dividends, he cannot be obligated to pay.
ISSUE:
WON the stipulation contained in the subscription to the effect that the subscription is
payable from the first dividends declared on the shares has the effect of relieving the subscriber from
personal liability in an action to recover the value of the shares.
HELD:
The Court held that the subscription contract was void since it works a fraud on creditors
who rely on the theoretical capital of the company (subscribed shares). Under the contract, this
theoretical value will never be realized since if there are no dividends, stockholders will not be
compelled to pay the balance of their subscriptions.
10
THE NATIONAL EXCHANGE CO., INC. vs. I. B. DEXTER,
This action was instituted in the Court of First Instance of Manila by the National Exchange Co., Inc.,
as assignee (through the Philippine National Bank) of C. S. Salmon & Co., for the purpose of
recovering from I. B. Dexter a balance of P15,000, the par value of one hundred fifty shares of the
capital stock of C. S. Salmon & co., with interest and costs. Upon hearing the cause the trial judge
gave judgment for the plaintiff to recover the amount claimed, with lawful interest from January 1,
1920, and with costs. From this judgment the defendant appealed.
FACTS:
1. It appears that on August 10, 1919, the defendant, I. B. Dexter, signed a written
subscription to the corporate stock of C. S. Salmon & Co. in the following form:
I hereby subscribe for three hundred (300) shares of the capital stock of C. S. Salmon
and Company, payable from the first dividends declared on any and all shares of said company
owned by me at the time dividends are declared, until the full amount of this subscription has been
paid.
2. Upon this subscription the sum of P15,000 was paid in January, 1920, from a dividend
declared at about that time by the company, supplemented by money supplied personally by the
subscriber.
3. Beyond this nothing has been paid on the shares and no further dividend has been
declared by the corporation.
4. There is therefore a balance of P15,000 still paid upon the subscription.
5. The trial court held, in effect, that the stipulation mentioned is invalid.
ISSUE:
whether the stipulation contained in the subscription to the effect that the subscription is
payable from the first dividends declared on the shares has the effect of relieving the subscriber from
personal liability in an action to recover the value of the shares.
RULING:
In the absence of restrictions in its character, a corporation, under its general power to
contract, has the power to accept subscriptions upon any special terms not prohibited by positive law
or contrary to public policy, provided they are not such as to require the performance of acts which
are beyond the powers conferred upon the corporation by its character, and provided they do not
constitute a fraud upon other subscribers or stockholders, or upon persons who are or may become
creditors of the corporation.
A provision in the Corporation states: ". . . no corporation shall issue stock or bonds except in
exchange for actual cash paid to the corporation or for property actually received by it at a fair
valuation equal to the par value of the stock or bonds so issued."
Now, if it is unlawful to issue stock otherwise than as stated it is self-evident that a stipulation such as
that now under consideration, in a stock subcription, is illegal, for this stipulation obligates the
subscriber to pay nothing for the shares except as dividends may accrue upon the stock. In the
contingency that dividends are not paid, there is no liability at all. This is a discrimination in favor of
the particular subscriber, and hence the stipulation is unlawful.
Corpus Juris:
Nor has a corporation the power to receive a subscription upon such terms as will operate as a fraud
upon the other subscribers or stockholders by subjecting the particular subcriber to lighter burdens,
or by giving him greater rights and privileges, or as a fraud upon creditors of the corporation by
withdrawing or decreasing the capital.
as a general rule, an agreement between the corporation and a particular subscriber that the
subscription is not to be payable, or is to be payable in part only is illegal and void as it constitutes
fraud to other stockholders or creditors, whether it is for the purpose of making the stock seem
greater than it is, or for the purpose of preventing the predominance of certain stockholders, or for
any other purpose thus, the agreement cannot be enforced by the subscriber or interpose it as a
defense in an action on the subscription.
"Conditions attached to subscriptions, which, lessen the capital of the company, are a fraud upon the
grantor of the franchise, and upon those who may become creditors of the corporation, and upon
unconditional stockholders."
11
 I. PAR VALUE
II. NO PAR VALUE
– 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 creditor in respect
thereto.
NO PAR VALUE may not be issued for consideration less than the value of
P5.00 per share and that the entire consideration received by the corporation
for its no- par value shares be treated as capital and shall not be available
for distribution of dividends.
A NO PAR VALUE share does not purport to represent any stated
proportionate interest in the capital stock measured by value, but only an
aliquot part of the whole number of such shares of the issuing corporation. The
holder of no-par shares may see from the certificate itself that he is only an
aliquot sharer in the assets of the corporation. But this character of proportionate
interest is not hidden beneath a false appearance of a given sum of money, as
in the case of par value shares. The capital stock of a corporation issuing only
no-par value shares is not set forth by a stated amount of money but instead
is expressed to be divided into a stated number of shares, such as 1,000
shares. This indicates that a shareholder of 100 shares is an aliquot sharer in
the assets of the corporation, no matter what value they may have, to the
extent of 100/1000 or 1/10. Thus, by removing the par value of shares, the
attention of persons interested in the financial condition of a corporation is
focused upon the value of the assets and the amount of its debts.
Judicial action by court action (provided under Section 70)
D. PAYMENT OF THE BALANCE OF THE SUBSCRIPTION
(SECTION 66 AND 67 OF THE CORPORATION CODE)
Sec. 66. Interest on unpaid subscriptions. – Subscribers for stock shall pay to
the corporation interest on all unpaid subscriptions from the date of
subscription, if so required by, and at the rate of interest fixed in the by-
laws. If no rate of interest is fixed in the by-laws, such rate shall be
deemed to be the legal rate.
Sec. 67. Payment of balance of subscription. – Subject to the provisions of
the contract of subscription, the board of directors of any stock
corporation may at any time declare due and payable to the corporation
unpaid subscriptions to the capital stock and may collect the same or such
percentage thereof, in either case with accrued interest, if any, as it may
deem necessary.
Payment of any unpaid subscription or any percentage thereof, together
with the interest accrued, if any, shall be made on the date specified in
the contract of subscription or on the date stated in the call made by the
board. Failure to pay on such date shall render the entire balance due and
payable and shall make the stockholder liable for interest at the legal rate
on such balance, unless a different rate of interest is provided in the by-
laws, computed from such date until full payment. If within thirty
(30) days from the said date no payment is made, all stocks covered by
said subscription shall thereupon become delinquent and shall be subject
to sale as hereinafter provided, unless the board of directors orders
otherwise.
Remedies to enforce payment of stock subscription
1. Extra-judicial sale at public auction – Permits the corporation to put
up unpaid stock for sale and dispose of it for the account of the
delinquent subscribers (governed by sections 67-69 of the
Corporation Code of the Philippines).
2. Denying a stockholder delinquent for unpaid subscription the right
to vote (under section 71)
3. Collection from cash dividends and withholding stock dividends
12
 (under Section 43) LINGAYEN GULF V. BALTAZAR, 93 PHIL 404

Sanctions on stock delinquent

1. Rights denied to stockholder shall not be voted or be entitled to
vote or representation at any stockholders' meeting, nor entitled
the holder thereof to any of the rights of a stockholder except the
right to dividends.
2. Right given to the corporation.
3. The corporation has the right to apply cash dividends due on
delinquent stock to the unpaid balance on the subscription plus cost
and expenses.
M. NOTES
LIGAYEN GULF v
(CALL: DEMAND is a declaration from the board requiring to pay for an unpaid
subscription) if a call/demand is made and no payment is given: EFFECT: shares covered
by the subscription become DELINQUENT

***Demand is necessary for a subscriber to become delinquent.

While stock dividends, corporation to withhold the same from the
delinquent stockholder until his unpaid subscription is fully paid. ***Demand is mandatory unless there is an agreement that such is not necessary.

When is the balance of subscription payable?
1. On the date specified in the contract of subscription.
2. In the absence of any specified date in the contract of
subscription, on the date stated in the call made by the board of
directors.
When does the stock become delinquent? A stock becomes delinquent upon
failure of the holder to pay the unpaid subscription or balance thereof
within 30 days from the date specified in the contract
of subscription or on the date stated in the call.
When does a subscriber become delinquent without demand?
DEMAND IS NOT NECESSARY when:
● Stipulated in the contract
● Obligation to pay is absolute
● Obligation to pay may be suspended when stated in the contract for installments:
when period comes and the subscriber did not pay-he becomes obligated to pay

Call – a declaration officially made by a corporation usually expressed in

the form of a resolution of the board of directors requiring payment of all
or a certain prescribed portion of a subscriber's stock subscription.

Requisites for a valid call

1. It must be made in the manner prescribed by law.
2. It must be made by the board of directors.
3. It must operate uniformly upon all shares.

13
 LINGAYEN GULF ELECTRIC POWER COMPANY, INC. Lingayen Gulf Electric vs. Baltazar
vs.
IRINEO BALTAZAR G.R. No. L-4824; June 30, 1953
G.R. No. L-4824, June 30, 1953

FACTS:
FACTS:
The respondent subscribed stocks of the petitioner. After paying several amount, the
respondent failed to pay its outstanding balance, even after a demand made by the corporation. The Company’s president subscribed to shares and paid partially. The Board made a call for
latter hence opted to collect the unpaid balance of the subscription made. However, the respondent payment through a resolution. However, the president refused to pay, prompting the corporation to
refused to pay on the contention that he has been released from his liability under Resolution No. 17. sue. The defense was that the call was invalid for lack of publication.
Furthermore, he countered that, as the President of the corporation, he was entitled to
compensation. ISSUE:
The trial court rendered judgment in favor of respondent.
WON the petitioner company is liable for unpaid subscription despite the lack of publication
ISSUE:
HELD:
Whether or not the respondent is entitled to compensation.
NO. Notice of any call for the payment of unpaid subscription should be made not only
RULING:
personally but also by publication once a week, for four consecutive weeks in some newspapers.
NO.
In a solvent corporation, there must be a published call for the payment of unpaid
It is clear that he is not entitled to the same. The by-laws of the company are silent as to subscriptions before payment could be demanded. The ruling in Poizat does not apply since the
the salary of the President. And, while resolutions of the incorporators and stockholders provide company here is solvent. No cancellation or release from obligation can be valid without the consent
salaries for the general manager, secretary-treasurer and other employees, there was no provision of the stockholder.
for the salary of the President. On the other hand, other resolutions provide for per diems to be paid
to the President and the directors of each meeting attended, P10 for the President and P8 for each
director, which were later increased to P25 and P15, respectively. This leads to the conclusions that
the President and the board of directors were expected to serve without salary, and that the per
diems paid to them were sufficient compensation for their services. Furthermore, for defendant's
several years of service as President and up to the filing of the action against him, he never filed a
claim for salary.

14
 E. LIABILITY FOR UNPAID SUBSCRIPTIONS EDWARD KELLER & Co., Ltd., petitioner
vs.
KELLER V. COB GROUP, 141 SCRA 86 COB GROUP MARKETING, respondent
G.R. No. L-68097 January 16, 1986
M. NOTES
FACTS:
KELLER v
Edward A. Keller & Co., Ltd. appointed COB Group Marketing, Inc. as exclusive distributor
Why does a subscriber even in a bankrupt corporation is obligated to pay the balance of its
of its household products, Brite and Nuvan in Panay and Negros, as shown in the sales agreement
subscription contract? dated March 14, 1970 . Under that agreement Keller sold on credit its products to COB Group
- TRUST FUND DOCTRINE: Marketing.
As security for COB Group Marketing's credit purchases up to the amount of P35,000, one
Asuncion Manahan mortgaged her land to Keller. Manahan assumed solidarily with COB Group
SEC 68…. For the smallest no. of shares or fraction…. Marketing the faithful performance of all the terms and conditions of the sales agreement.
In July, 1970 the parties executed a second sales agreement whereby COB Group
Marketing's territory was extended to Northern and Southern Luzon. As security for the credit
100k shares: par value 100: 10,000 (unpaid purchases up to P25,000 of COB Group Marketing for that area, Tomas C. Lorenzo, Jr. and his
father Tomas, Sr. (now deceased) executed a mortgage on their land in Nueva Ecija. Like Manahan,
)---covered by the TFD
the Lorenzos were solidarily liable with COB Group Marketing for its obligations under the sales
agreement.
The credit purchases of COB Group Marketing, which started on October 15, 1969, limited
WHAT IS THE PROCEDURE TO DECLARE A SHARE DELINQUENT? If the
up to January 22, 1971. On May 8, the board of directors of COB Group Marketing were apprised by
Jose E. Bax the firm's president and general manager, that the firm owed Keller about
share becomes delinquent what happens? P179,000. Bax was authorized to negotiate with Keller for the settlement of his firm's liability. On the
same day, May 8, Bax and R. Oefeli of Keller signed the conditions for the settlement of COB Group
The corp. May do: Marketing's liability. Twelve days later, or on May 20, COB Group Marketing, through Bax executed
- PUBLIC AUCTION: **will incur loss (advertisement, and other cost): thus may add to two second chattel mortgages over its 12 trucks (already mortgaged to Northern Motors, Inc.) as
the value of the unpaid share security for its obligation to Keller amounting to P179,185.16 as of April 30, 1971.
Cost 1,000
ISSUE:
Unpaid share 10,000
= 11,000 full value *including the smalles fraction of Whether or not the lower courts erred in nullifying the admissions of liability made in 1971
share by Bax as president and general manager of COB Group Marketing and in giving credence to the
alleged overpayment computed by Bax.

- JUDICIAL ACTION RULING:

YES.

The lower courts not only allowed Bax to nullify his admissions as to the liability of COB
Group Marketing but they also erroneously rendered judgment in its favor in the amount of its
supposed overpayment in the sum of P100,596.72, in spite of the fact that COB Group Marketing
was declared in default and did not file any counterclaim for the supposed overpayment. The lower
courts harped on Keller's alleged failure to thresh out with representatives of COB Group Marketing
their "diverse statements of credits and payments". This contention has no factual basis. That means

15
that there was a conference on the COB Group Marketing's liability. Bax in that discussion did not
present his reconciliation statements to show overpayment.
Bax admitted that Keller sent his company monthly statements of accounts but he could
not produce any formal protest against the supposed inaccuracy of the said statements. He lamely
explained that he would have to dig up his company's records for the formal protest. He did not make
any written demand for reconciliation of accounts.
As to the liability of the stockholders, it is settled that a stockholder is personally liable for
the financial obligations of a corporation to the extent of his unpaid subscription.
F. DELIQUENCY SUBSCRIPTION
(SECTION 68 AND 71 OF THE CORPORATION CODE)
Sec. 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

16
be disposed of by said corporation in accordance with the provisions of this
Code.
Procedure:
1. The board of directors passes a resolution declaring payable the
whole or certain percentage of the unpaid subscription stating the
date fixed for payment. If the date of payment is specified in the
contract of subscription, no call is necessary.
2. The stockholders are given notice of the resolution by the secretary
of the corporation. If the stockholders fails to pay within 30 days
from date specified, the stocks becomes delinquent.
3. the board of directors, by resolution, orders the sale of delinquent
stocks, stating the amount due and the date, time, and place of
sale with notice to the delinquent stockholders which notice shall
be published.
4. On the date of sale, will be sold at public auction to higher
bidder for cash.
Highest bidder – the person offering at the sale to pay the full amount of
the balance on the subscription together with accrued interest, cost of
advertisement and expenses of sale, for the smallest number of shares.
In the absence of bidders or highest bidder, the corporation may purchase for
itself the delinquent stock.
Sec. 71. Effect of delinquency. – No delinquent stock shall be voted for 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.
SEC. 71 Stock delinquency does not deprive the holder of all his rights as
a stockholder except the right to be voted for or be entitled to
representation at any stockholders' meeting. He shall still receive dividends.
But delinquent stocks shall be subject to delinquency sale.
Effects of Stocks declared delinquent:
1. Cannot be voted for or be entitled to vote in corporate meetings or
be represented by proxy at any stockholders’ meeting.
2. The holder of delinquent stock is not entitled to exercise the rights
of a stockholder (i.e. to inspect books and records, etc.).
The holder of delinquent stocks is entitled to dividends. Section 43 provides
however, that “ any cash dividends due on delinquent stock shall first be
applied to the unpaid balance on the subscription plus costs and expense,
while stock dividends shall be withheld from the delinquent stockholder until
his unpaid subscription is fully paid”.

Sec. 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.

As a general rule, a corporation may not maintain a suit for the

enforcement of unpaid subscription without first making a call.

Judicial remedy is limited to the amount due on any unpaid subscription with
accrued interest, costs and expenses

17
 PHIL TRUST V. RIVERA, 44 PHIL 496 charter or the articles of incorporation

1. Resolution was wholly ineffectual

M. NOTES  an attempted withdrawal of so much capital from the fund upon which the
company's creditors were entitled ultimately to rely
PHILTRUST v RIVERA  effected without compliance with the statutory requirements

Can a subscriber get away from his obligation under a subscription

contract?
- If it be consented by ⅔ of the sh
- And consent of all the creditors

PHILIPPINE TRUST COMPANY vs MARCIANO RIVERA

Mariano Rivera = one of the incorporators of Cooperativa Naval Filipina

The corporation became insolvent = Phil Trust became the ASSIGNEE during bankruptcy

Phil Trust instituted to recover one-half of the stock subscription of the defendant ( w/c was NOT
PAID by Mariano )

Reason for non-payment = resolution was made

1. capital should be reduced by 50 per centum
2. subscribers released from the obligation to pay any unpaid balance of their subscription in
excess of 50 per centum of the same

Trial judge ruled resolution relied upon was without effect and was still liable for the unpaid balance.

Hence appeal.

Held: YES
1. subscription to the capital of a corporation constitute a find to which creditors have a right to
look for satisfaction of their claims and that the assignee in insolvency can maintain an
action upon any unpaid stock subscription in order to realize assets for the payment of its
debts

2. Gen RULE: A corporation has no power to release an original subscriber to its capital
stock from the obligation of paying for his share
Exception: 1. valuable consideration for such release
2. as against creditors a reduction of the capital stock can take place only in
the manner an under the conditions prescribed by the statute or the

18
PHILIPPINE TRUST COMPANY, vs .MARCIANO RIVERA MIRANDA V. TARLAC RICE MILL, 57 SCRA 619
G.R. No. L-19761 January 29, 1923

Facts: Cooperativa Naval Filipina was duly incorporated with a capital of P100,000, divided into 100
shares at a par value of P100 each. Among its incorporators was Marciano Rivera, who subscribed
M. NOTES
for 450 shares, representing a value of P45,000. The company however became insolvent. Philippine
Trust became its assignee in bankruptcy. PhilTrust sought to recover ½ of the stock subscription of
May a call/demand be made only to a specific person or specific subscriber? No, only a
Rivera, which admittedly, has never been paid. Rivera contends that he never paid because the
stockholders of Naval issued a resolution shortly after the company’s incorporation, stating that the GENERAL CALL
capital shall be reduced by 50%. As a result, Rivera contends that the subscribers were released
from the obligation to pay any unpaid balance of their subscription in excess of 50% of their
subscriptions. Rivera further contends that the subscriptions of the subscribers were 50% cancelled, If the subscriber do not comply, the corporation has an option to enforce the claim by
and certificates of shares of stock were issued for the said remaining 50% of the subscriptions. PUBLIC AUCTION or JUDICIAL ACTION
Issue: Whether such reduction of the capital stock is valid.

Held: No. SC held that the said resolution is without effect for being:
1. An attempted withdrawal of so much capital from the fund which the company’s creditors
were entitled ultimately to rely, and
2. For having been effected without compliance with the statutory requirements of § 17 of the
Corporation Law regarding reduction of capital stock, and
3. For failure to file a certificate with the Bureau of Commerce and Industry, showing such
reduction.
Thus, stockholder is still liable for the unpaid balance of his subscription.
*** Upon a GENERAL CALL (a call MUST be a GENERAL CALL: not to specific
person);but upon non compliance:a corporation at its discretion may opt to do a
PARTICULAR REMEDY.
:because cost between the two remedies (public auction and judicial)
varies; the cost that may be spent by the corporation in a judicial action is bigger that a
public auction, in which the corporation must decide what should be the remedy that may be
executed first to be able to compensate for the loss. (may affect and impair the TFD)

Ratio: 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. A corporation
has no power to release an original subscriber to its capital stock from the obligation of
paying for his shares, w/o 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 AOI. Moreoever, strict compliance with statutory
regulations is necessary.

Note: that for reasons 2 and 3, Campos says that § 17 has been replaced by § 38, and now, even if
all the requirements are complied with, if creditors are prejudiced by such reduction, it is most
unlikely that the SEC will approve it.

19
 Miranda vs Tarlac Rice Mill Co
From P.Concepcion Reviewer:
FACTS:
Miranda subscribed to 100 shares (par value of P100 per share) of the company. He obligated
himself to pay certain sums of money at certain specified dates. He later executed a document
assigning, mortgaging or transferring to the credit of the company a parcel of land. The company
borrowed P10,000 from a certain Tablante. Miranda sold his land under pacto de retro to another
person and used the proceeds to pay Tablante. Miranda died.
The principal contention of the appellant is that the officers of the company violated the terms of the
power of attorney given by Miranda in mortgaging the land for the P10,000 because the only sum
due and payable by Miranda was only P3,000.
ISSUE: Is the contention correct?
HELD:
NO. It does not appear that Miranda sought to evade the satisfaction of the mortgage. On the
contrary, he repaid to Tablante the sum owed the company. The phrase “in accordance with the
subscription contract” found in the power of attorney probably was intended to mean “in pursuance of
the subscription agreement”, that is, referred to the obligation and had no particular reference to the
dates when the installments were to be paid.
Under the law, 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. Justice
Fischer expresses the opinion that this power of 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 a 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 installment 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.
ROMANA MIRANDA vs TARLAC RICE MILL CO., INC.
Alberto Miranda subscribed for 100 shares of Tarlac Rice Mill Company TO BE PAID IN
INSTALLMENTS
He transferred in lieu of cash for the benefit and to the credit of the Tarlac Rice Mill Company, Inc =
a parcel of land
Tarlac loaned from Mariano Tablante and mortgaged the said land to him
Became due on 1929 = Not Paid = Sold the Land for payment
Miranda questioned the sale should have not be made because:
1. violated the terms of the contract in mortgaging the land = because the only sum then due
is 3000
2. that when the remaining installments of the stock subscription became due = no obligation
to pay because the corporation had already ceased to do business
Issue:
WON the mortgage and subsequent sale of the land is valid?
Held: YES
a) BOD may at any time declare due and payable to the corporation unpaid subscriptions
 this power of the directors is absolute and cannot be limited by the subscription
contract
b) No call is necessary when a subscription is payable = when it is payable in
installments at specified times
 RULE = duty of the subscriber to pay AS SOON AS IT IS DUE = without any
call or demand
 Failure = action may be brought at any time
 When this action was filed on September 2, 1930, the last of the instalments had
already become payable in accordance with the subscription agreement.
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.
20
 DE SILVA V. ABOITIZ, 44 PHIL 755
M. NOTES
DE SILVA v
It is discretionary upon the board to determine how the unpaid subscription (delinquent) will
be collected: even if the by law states “all delinquent subscription shall be collected
through judicial action; that does not prevent the board to exercise its option to undertake
public auction.
***Delinquent shares of a shareholder affects its voting right. In determing voting quorum:
delinquent shares are not included
Ex 10M shares: 2.5 M delinquent: VOTING SHARE will be 7.5M
Delinquent shares may still get dividends;
but such dividends will be applied to the delinquent shares.
DE SILVA v ABOITIZ & CO., INC. (1923)
FACTS:
 DE SILVA subscribed for 650 shares of stock (at P500/stock) of ABOITIZ. He only paid for
200 shares
 The BOD of ABOITIZ adopted a resolution declaring that
o the unpaid subscriptions to the capital stock due and demandable
o those subscriptions which will remain unpaid after a month will be declared
delinquent, advertised for sale at public auction, and sold
 DE SILVA filed a complaint with the CFI disputing the validity of the resolution and alleging
that it was against Article 461 of the BY-LAWS.
1“ART. 46. The net profit resulting from the annual liquidation shall be distributed as follows: … x x
x … 70% for the shareholders in equal parts; Provided, however, that from this 70% dividend the
BOD may deduct such amount as it may deem fit for the payment of the unpaid subscriptions to the
capital stock and not pay any dividend to the holders of the said unpaid shares until they are fully
paid; Provided, further, that when all the shares have been paid in full as provided in the preceding
ISSUE: WON, UNDER THE PROVISION OF ART. 46 OF THE BY-LAWS, ABOITIZ MAY
DECLARE THE UNPAID SHARES DELINQUENT, OR COLLECT THEIR VALUE BY ANOTHER
METHOD DIFFERENT FROM THAT PRESCRIBED IN THE SAID ARTICLE.
HELD:
NO
 ART. 46 authorizes the BOD to collect the value of the shares subscribed to and not fully
paid by deducting from the 70% such amount as may be deemed convenient, to be applied
on the payment of the said shares, and not pay to the subscriber until the same are fully
paid up.
 It is discretionary on the part of the BOD to do whatever is provided in the said article
relative to the application of a part of the 70% of the profit distributable in equal parts on
the payment of the shares subscribed to and not fully paid
 It is the BOD and not the delinquent subscriber that may and must judge and decide WON
such value must be paid out a part of the 70% of the profit distributable in equal parts
among the shareholders
 If the BOD does not wish to make use of said authority, it has 2 other remedies (Velasco v
Poizat)
o SEC. 38 to 48 permits the corp. to put up the unpaid stock for sale and dispose
of if for the account of the delinquent subscriber
o SEC. 49 allows the corp. to file an action in court for the collection of unpaid
subscription, with accrued interest and costs and expenses incurred
 In the instant case, the BOD elected to avail itself of the first 2 remedies, and, complying
strictly with the provisions of SEC. 37 to 49
 DE SILVA has no right whatsoever under the ART. 46 of the BY-LAWS to prevent the BOD
from following any other method than that mentioned in said article.
paragraph, the BOD may also deduct such amount as it may deem fit for the creation of an
emergency special fund …”
21
DE SILVA vs ABOITIZ & COMPANY, INC.
De Silva subscribed for 650 shares of stock of Aboitiz = Paid 200 shares only
he was notified of a resolution = declaring the unpaid subscriptions to the capital stock of the
corporation to have become due and payable ( was published )
Did not pay = Declared Delinquent
Filed a complaint Resolution was invalid = Grounds:
1. prescribing another method of paying the subscription to the capital stock different from
that provided in its by-laws
2. all the shares subscribed and not paid = shall be paid out of the 70% of the profit obtained
Trial Court dismissed the complaint. Hence appeal.
Issue:
WON collect subscription by another method different from that prescribed in the by-laws?
Held: YES
1. 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
2. If the board of directors does not wish to make use of said authority it has two other
remedies for accomplishing the same purpose
 special remedy given by the statute = permitting the corporation to put the
unpaid stock for sale and dispose of it for the account of the delinquent
subscriber
 PROVIDED 4 in Corporation Law = which is binding upon it and its
stockholders
 artificial entity created by virtue of that same law = made use of the discretionary
power granted to it by that law
3. the plaintiff has no right whatsoever under the provision of the above cited article 46 of the
said by-laws to prevent the board of directors from applying any other method than that
mentioned in the said article
G. TRUST FUND DOCTRINE (SECTIONS 43 AND 122 OF
THE CORPORATION CODE)
Sec. 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
purposes.
Stock corporation are prohibited from retaining surplus profits in
excess of one hundred percent (100%) of their paid-in capital stock,
except: (1) when justified 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 circumstance obtaining in
the corporation, such as when there is a need for special reserve
for probable contingencies.
Concept of dividends
A dividend is a corporate profit set aside, declared and ordered by the
directors to be paid to the stockholders on demand or at a fixed time.
Dividends distinguished from profits “Dividends” means the profits or that
portion of the profits of the corporation which its board of directors,
by proper resolution, sets apart for rotable distribution among the
stockholders. It is distinguished from “profits” for the profits in the hands
22
 of a corporation do not become dividends until they have been set
apart, or at least declared, as dividends and transferred to the separate
property of the individual stockholders.
Surplus profits – Surplus or net profits of a corporation is the difference
between the total present value of its assets, after deducting losses and
liabilities, and the amount of its capital stock. (11 Fletcher, Sec. 5335)
Basis of dividend declaration
The board of directors of a stock corporation may declare dividends on
the basis of outstanding stock held by the stockholders. The basis
therefore is the stockholder’s total subscription and not on the amount paid
by him on the subscription. This is for the reason that his entire
subscription represents his holding in the corporation for which he pays
interests on any unpaid portion. (SEC Opinion, Dec. 17, 1973)
Classes of dividends
Dividends which a corporation may declare and distribute to its stockholders
may be classified into: cash dividend, stock dividend, property dividend,
scrip dividend, and liquidating dividend.
Cash dividend
Cash dividend is one payable in money.
Stock dividend
Stock dividend is a dividend payable in stock instead of cash or property.
Property dividend
The directors in their discretion may authorize distributions in bonds or in
property, such as warehouse receipts for whiskey or shares of stock of a
subsidiary corporation.
Scrip dividend
Scrip dividend is a writing or a certificate issued to a stockholder
entitling him to the payment of money or the like at some future time
inasmuch as the company, at the time the scrip dividends are
declared, has profits not in cash.
Liquidating dividend
Liquidating dividend involves the distribution of assets by a corporation to its
stockholders upon dissolution.
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.
Methods of Liquidation
1. Liquidation by the directors themselves.
23
 2. Liquidation by a duly appointed receiver.
3. Liquidation by trustees to whom the board of directors had conveyed Liquidation Rehabilitation
the corporate assets. - Connotes a winding - Connotes a
up or setting with reopening of
creditors and reorganization
Rules of corporate recovery debtors. .
The SEC approved the Rules of Procedure on Corporate recovery
effective on January 15, 2000. - It is a winding up of - Contemplates
1. It governs the rules on definition of terms
a corporation so a continuance
2. Common provisions
that assets are of corporate
3. Suspension of payments
4. Rehabilitation distributed to those life and
entitled to receive activities in an
5. Dissolution and liquidation
them. effort to
restore and
A corporation that has a pending action and which cannot be - It is the process of reinstate the
terminated within the three-year period after dissolution is authorized reducing assets to corporation in
to convey all its property to trustees to enable it to prosecute and cash, discharging its former
defend suits by or against the corporation beyond the three-year liabilities and position of
period. dividing surplus or successful
loss. operation and
solvency.
Distribution of Assets
Distribution among the shareholders of the assets in winding up,
formal or informal may be made only to the prior claim of creditors
and after all debts have been paid or provided for. This is sometimes
expressed in terms of the trust fund doctrine.

24
 2. CLASSES OF SHARES
a) CLASSIFICATION OF SHARES (SECTION 6 OF THE A corporation may, furthermore, classify its shares for the purpose of
insuring compliance with constitutional or legal requirements.
CORPORATION CODE)
Sec. 6. Classification of shares. – The shares of stock of stock
Except as otherwise provided in the articles of incorporation and stated in
corporations may be divided into classes or series of shares, the certificate of stock, each share shall be equal in all respects to every
or both, any of which classes or series of shares may have other share.
such rights, privileges or restrictions as may be stated in the Where the articles of incorporation provide for non-voting shares in the
articles of incorporation: Provided, That no share may be cases allowed by this Code, the holders of such shares shall nevertheless
deprived of voting rights except those classified and issued as be entitled to vote on the following matters:
“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 1. Amendment of the articles of incorporation.
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,
2. Adoption and amendment of by-laws.
insurance companies, public utilities, and building and loan
associations shall not be permitted to issue no-par value shares
of stock.
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property.
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 4. Incurring, creating or increasing bonded indebtedness.
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 5. Increase or decrease of capital stock.
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 6. Merger or consolidation of the corporation with another corporation
certificate thereof with the Securities and Exchange Commission. or other corporations.

Shares of capital stock issued without par value shall be deemed fully 7. Investment of corporate funds in another corporation or business in
paid and non- assessable and the holder of such shares shall not be liable accordance with this Code.
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 8. Dissolution of the corporation.
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.

25
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.
Definition
A “stock” or share of stock is one of the units into which the capital
stock has been divided. It represents the interest or right that the holder
of the stock or stockholder has in the corporation.
A stock certificate certifies that one is a holder or owner of a certain
number of shares of stock in the corporation. It is a mere documentary
evidence of the holder’s ownership of shares and a convenient instrument
for the transfer of title.
Classes or series of shares of stock subject to restrictions
1. Shares shall not be deprived of voting rights except preferred or
redeemable shares but non-voting shares must still be entitles to
vote on matters specified in the last paragraph of Section 6 like
matters relating to amendment of the articles of incorporation and
dissolution of the corporation.
2. Where non-voting shares are provided for there must always be a
class or series of shares with complete voting rights.
3. Banks, trust companies, insurance companies, public utilities, and
building and loan associations shall not be permitted to issue no-
par value shares of stock.
4. Preferred shares of stock which may be given preference in the
distribution of assets in case of liquidation and distribution of
dividends or other preferences may be issued only with stated par
value.
5. The terms and conditions of preferred shares or series thereof
may be fixed by the board of directors only when authorized by
the articles of incorporation the effectivity thereof shall be
reckoned from the filing of certificate with the SEC.
6. Shares without par value may not be issued for a consideration less
than the value of five (P5.00) pesos per share.
7. Unless otherwise provided by law the rights, privileges or
restrictions on classes or series of shares must be stated in the
articles of incorporation and in the stock certificates.
Classes or series of shares
1. Voting and Non-Voting Shares;
General rule: Every member of a non- stock corporation and every
legal owner of shares in a stock corporation, has a right to be
present and vote at all corporate meetings.
Exception to the rule: Unless there is a stipulation in contrary.
2. Par Value and No-Par Value Shares
Par value is the given fixed or definite value of a share in the
articles of incorporation.
3. Common and Preferred Shares. Preferred shares of stock may be:
(a) preferred as to assets; (b) preferred as to dividends. Preferred
as to dividends may either be cumulative or non- cumulative, or
participating or non- participating
4. Promotion Shares – are such stocks issued to those who may
originally own the mining ground or valuable rights connected
therewith, in consideration of their deeding the same to the mining
company when the company is incorporated, or it may mean such
stock as is issued to promoters.
5. Shares of Escrow – are shares subject to an escrow agreement, that
is, an agreement under which the shares are deposited by the
grantor or his agent with a third person, to be delivered by the
depositary to the vendee or subscriber only upon the happening of
certain conditions.
6. Founder’s Shares;
7. Redeemable “Callable” Shares;
8. Treasury Shares;
9. Other shares classified to comply with constitutional or legal
requirements.
Instances when non-voting shares may vote
1. Amendment of the articles of incorporation;
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;
6. Merger or consolidation of the corporation with another corporation
or other corporations;
7. Investment of corporate funds in another corporation of business in
26
 accordance with the Corporation Code; and
8. Dissolution of the corporation.
1. PREFERRED SHARES
- PARTICPATING AND NON-PARTICIPATING
Participating and Non-participating – PARTICIPATING entitle the
shareholders to participate with the holders of common shares in the retained
earnings after the amount of stipulated divided has been paid to the preferred
shares. NON-PARTICIPATING are those that entitle holders of preferred
shares only to the stipulated preferred dividends and no more.
- CUMULATIVE AND NON-CUMULATIVE
Cumulative and Non-cumulative – CUMULATIVE entitle the holders thereof
to the payment not only of current dividends but also of back dividends not
previously paid, when and if the dividends are declared to the extent agreed
upon before holders of common shares are paid. Its fundamental characteristic
is that if the preferred dividend is not paid in full in any year, whether or not
earned, the deficiency must be made up before any dividend may be paid on
the common stock. NON- CUMULATIVE 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.
Founders’ shares, generally common stock, are given to the
founders or promoters of a corporation in payment of money
expended or services rendered in the promotion of it.
3. REDEEMABLE SHARES (SECTION 8 OF THE
CORPORATION CODE)
Sec. 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.
Definition
Redeem able (“ Callable” ) shares o f sto ck which are usually
preferred are frequently issued subject to redemption at the
option of either the corporation, the stockholder, or both, at
a definite price representing premium above the amount
originally paid.

Sinking fund refers to a fund set-up by the corporation where

2. FOUNDER’S SHARES (SECTION 7 OF THE cash is gradually set aside in order to accumulate the amount
CORPORATION CODE) necessary to meet the redemption price of redeemable shares
of specified dates in the future.
Sec. 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) 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.
Definition

27
M. NOTES 0
1.5M
2 MOTIVATIONS FOR INVESTMENT 125k
● To gain CONTROL 375k
● To recover PROFITS 6.25%
92.75%
NOTE: remember when a corp invests in another corp: whhc is not within the primary purpose
as stated in the articles: and the motivation is to gain CONTROL: ⅔ sh’s consent is needed: ● NON PARTICIPATING: no share in the balance
BUT if the investment is only for PROFIT no need for consent. ● CUMULATIVE: preferred shares should be paid even there is no profit gained;
contractually obligated to give the preference from the year where the corp gained
SEC 6:
profits
COMMON SHARE: (have a voting right) it is after to “exercise control”
Ex: CS: 1M Pref shares 25%(250k DIVIDENDS/year) **if preference is 1:1 100%
- Represents majority of the corp
- Ex when a sh owns 75% ; such sh can practically do anything because he is
YR 1 2
majority: more than ⅔
3 4
0 0
PREFERRED SHARE: its main purpose is to achieve dividends/ profits:return of investment 0 2M
● PARTICIPATING: entitled to further dividend after payment of preference
Preferred participating: still has a right with the balance even after payment of their preference
PREF 250k 250k 250k 250k
COMMON
***payment of 250k from year
25% PREFERRED
4
100% Preference ***leaving a balance of 1M If at the same time
PARTICIPATING:
ratio: 1:1 if value 100php= 100php/yr If: 2M Profits : 500k(preferred) 750k COMMON 250k
1.5M PREFERRED
(preference) *subject to 75% and 25% distribution
BECAUSE PARTICIPATING and
COMMON SHARES PREFERRED SHARES CUMULATIVE: SH will receive 1.25M=62.5%
0
500k: original preference 1,125k
375k: addt’l if participating 56.25% 1M CUMULATIVE and 250k PARTICIPATING
43.75%

NON CUMULATIVE
If 75% preferred: 25% common

28
 ***AS A RULE shares are PARTICIPATING and CUMULATIVE if the right is not denied or
silent in the articles of incorp.

DIVIDENDS are dependent on unrestricted retained earnings

If no unrestricted retained earnings= no dividends

***Preferrence is an OBLIGATION SEC 7:

FOUNDER’s SHARE: shares granted to
organizers and promoters not granted to other SH
- Right to vote: exclusive: only ones who can vote in the voting of BOD
- and be voted upon: founders who are the only ones who can be candidates in the
election
Can only be exercised only for 5 years

Can there be an incorporator’s share?YEs Giving them the exclusive right to vote and be
voted upon: for 25 years (made under sec 6; not sec 7)
- NO for 25 years; Sec. 7 is a specific law or of application; as oppose to Sec. 6, a
general application. Under statutory construction, a specific provision of law
should be followed over the general provision

29
REPUBLIC PLANTERS BANK V. HON. AGANA, G.R. NO. 51765, REPUBLIC PLANTERS BANK v AGANA

1997) ▪ The SC has held that although the certificates of stock granted
the stockholder the right to receive quarterly dividends of 1%
M. NOTES cumulative and participating, the stockholders did not become
entitled to the payment thereof as a matter of right without
REDEEDMABLE SHARE necessity of a prior declaration of dividends.
Sec 8:
▪ Both Sec. 16 and 43 of the present Corporation Code prohibit the
issuance of any stock dividend without the approval of
stockholders, representing not less than 2/3 of the outstanding
REPUBLIC PLANTER’s BANK v HON AGANA capital stock at a regular or special meeting duly called for the
- Redeemable shares purpose. These provisions underscore the fact that payment of
- When a corp is in financial distress, as held in this case: the corp may not be dividends to a stockholder is not a matter of right but a matter of
compleed to redeem the shares. consensus. Furthermore, interest bearing stock on which the
corporation agrees absolutely to pay interest before dividends are
What if the corp. Is not in financial distress? paid to the common stockholders, is legal only when construed as
- If assets can cover debts and liabilities: what is left is capital stock requiring payment of interest as dividends from net earnings or
- Can the capital stock be used to redeem? surplus only.
- No, it will violate the TFD ▪ In spite of specific preferences granted to preferred shares, there
- Gives an option to the sh to redeem. is no guaranty, that the share will receive any dividends, or that
the preferred shareholders will have preference to corporate
assets greater than corporate creditors, thus, similarly the
SEC 6: corp may purchase their own stocks only if there are unrestricted retained earnings; present Corporation Code provides that the board of directors of
a stock corporation may declare dividends only out of unrestricted
if redeemables shares; not sujbect to this condition
retained earnings. The Code in Sec. 43, adopting the change
- Even there is no unrestricted retained earnings; the corm may still redeem the made in accounting terminology,
shares substituted the phrase “unrestricted retained earnings” which may be a more
BUT (LIRAG case) obligation to redeem is absolute: even if the corp is insolvent: the corp still precise term in
has the obligation to redeem the shares. place of “surplus arising from its business” in the former law. Thus, the
declaration of dividends is dependent upon the availability of surplus profit
or unrestricted retained earnings, as the case may be. Preferences granted
to preferred stockholders, moreover, do not give them a lien upon the
property of the corporation nor make them creditors of the corporation,
the right of the former being always subordinate to the latter. Dividend thus
payable only when there are profits earned by the corporation and as a
general rule, even if there are existing profits, the board of directors has the
discretion to determine whether or not dividends are to be declared.
Shareholders both common and preferred are considered risk takers who
invest capital in the business and who can look only to what is left after
corporate debts and liabilities are fully paid.

Participating and Non-participating – PARTICIPATING entitle the

shareholders to participate with the holders of common shares in the retained

30
 earnings after the amount of stipulated divided has been paid to the preferred
shares. NON-PARTICIPATING are those that entitle holders of preferred EXAMPLES:
shares only to the stipulated preferred dividends and no more. 1.) 1000 common voting and 500 preferred non-voting do the 5
2.) 1000 common non-voting shares VOID, the
only shares that may be restricted as to voting are preferred and redeemable
Cumulative and Non-cumulative – CUMULATIVE entitle the holders thereof shares.
to the payment not only of current dividends but also of back dividends not 3.) 12% preferred non-voting This is a gray area in
previously paid, when and if the dividends are declared to the extent agreed corporation law. The general school of thought with regard to this, is that it
upon before holders of common shares are paid. Its fundamental characteristic enjoys preference as to dividends because the provision of the figure seemingly
is that if the preferred dividend is not paid in full in any year, whether or not guarantees a certain amount of return.
earned, the deficiency must be made up before any dividend may be paid on
the common stock. NON- CUMULATIVE 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.

Par Value and No Par Value – 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 creditor in respect thereto. NO PAR VALUE may not be
issued for consideration less than the value of P5.00 per share and that the
entire consideration received by the corporation for its no- par value shares be
treated as capital and shall not be available for distribution of dividends. A
NO PAR VALUE share does not purport to represent any stated
proportionate interest in the capital stock measured by value, but only an
aliquot part of the whole number of such shares of the issuing corporation. The
holder of no-par shares may see from the certificate itself that he is only an
aliquot sharer in the assets of the corporation. But this character of proportionate
interest is not hidden beneath a false appearance of a given sum of money, as
in the case of par value shares. The capital stock of a corporation issuing only
no-par value shares is not set forth by a stated amount of money but instead
is expressed to be divided into a stated number of shares, such as 1,000
shares. This indicates that a shareholder of 100 shares is an aliquot sharer in
the assets of the corporation, no matter what value they may have, to the
extent of 100/1000 or 1/10. Thus, by removing the par value of shares, the
attention of persons interested in the financial condition of a corporation is
focused upon the value of the assets and the amount of its debts.
NOTE: In the absence of stipulation as to stocks which are non-cumulative or
cumulative, or non- participating or participating, the presumption is in favor of
the one which provides for lower rights
i.e. non-cumulative and non-participating.
“Preferredstocksarethosewhichentitletheshareholdertosomepriorityon
dividends and asset distribution.” Commissioner of Internal Revenue v.
Court of Appeals, 301 SCRA 152 (1999).

31
 REPUBLIC PLANTERS BANK both at a certain redemption price.A redemption by the corporation of its stock is, in a sense, a
vs. repurchase of it for cancellation.The present Code allows redemption of shares even if there are no
HON. ENRIQUE A. AGANA, SR., as Presiding Judge, Court of First Instance of Rizal, Branch unrestricted retained earnings on the books of the corporation.
XXVIII, Pasay City, ROBES-FRANCISCO REALTY & DEVELOPMENT CORPORATION and However, while redeemable shares may be redeemed regardless of the existence of
ADALIA F. ROBES unrestricted retained earnings, this is subject to the condition that the corporation has, after such
G.R. No. 51765. March 3, 1997 redemption, assets in its books to cover debts and liabilities inclusive of capital stock. Redemption,
therefore, may not be made where the corporation is insolvent or if such redemption will cause
FACTS: insolvency or inability of the corporation to meet its debts as they mature.

On September 18, 1961, private respondent Corporation secured a loan from petitioner in
the amount of P120,000.00. Instead of giving the legal tender totaling to the full amount of the loan,
which is P120,000.00, petitioner lent such amount partially in the form of money and partially in the
form of stock certificates numbered 3204 and 3205, each for 400 shares with a par value of P10.00
per share, or for P4,000.00 each, for a total of P8,000.00. Said stock certificates were in the name of
private respondent Adalia F. Robes and Carlos F. Robes, who subsequently, however, endorsed his
shares in favor of Adalia F. Robes.
On January 31, 1979, private respondents proceeded against 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 herein assailed decision in favor of private respondents
ordering petitioner to pay private respondents the face value of the stock certificates as redemption
price, plus 1% quarterly interest thereon until full payment.

ISSUES:

Whether or not the corporation can declare dividends.

RULING:

YES.

Under the old Corporation Law in force at the time the contract between the petitioner and
the private respondents was entered into, it was provided that "no corporation shall make or declare
any dividend except from the surplus profits arising from its business, or distribute its capital stock or
property other than actual profits among its members or stockholders until after the payment of its
debts and the termination of its existence by limitation or lawful dissolution."Similarly, the present
Corporation Codeprovides that the board of directors of a stock corporation may declare dividends
only out of unrestricted retained earnings.
Thus, the declaration of dividends is dependent upon the availability of surplus profit or
unrestricted retained earnings, as the case may be. Dividends are thus payable only when there are
profits earned by the corporation and as a general rule, even if there are existing profits, the board of
directors has the discretion to determine whether or not dividends are to be declared.
Redeemable shares, on the other hand, are shares usually preferred, which by their terms
are redeemable at a fixed date, or at the option of either issuing corporation, or the stockholder, or
32
Republic Planters Bank vs. Agana
Robes Realty secured a loan P120000 from the Republic Planters Bank
** Partially in the form Money and Partially in the form ofpreferred shares of stocks
Stocks bear the following terms and conditions:
1. right to receive a quarterly dividend of 1% (cumulative and participating )
2. such preferred shares may be redeemed
Robes Realty filed a complaint = Failure of the bank to give dividends and redeem the shares
Trial court ordered the bank to:
1. pay Robes Realty the face value of the stock certificates as redemption price
2. 1% quarterly interest thereon until full payment
Hence Appeal.
Issue:
WON the bank can be compelled to redeem the preferred shares issued to RFRDC and Robes?
WON entitled to the payment of certain rate of interest on the stocks as a matter of right without
necessity of a prior declaration of dividend?
Held: NO and NO
1. option to redeem was clearly vested in the bank
 GR: the redemption rests entirely with the corporation and the stockholder
is without right to either compel or refuse the redemption of its stock
Exception: otherwise provided in the stock certificate
 the terms and conditions set forth therein use the word "may" = HENCE
OPTIONAL
 The Central Bank also made a finding that the Bank has been suffering from
chronic reserve deficiency = ORDERED not to redeem any preferred shares Since
redemption would reduce the assets of the Bank to the prejudice of its depositors
and creditors
 The directive, in limiting the exercise of a right granted by law to a corporate entity,
may thus be considered as an exercise of police power.
2. Payment of dividends to a stockholder is not a matter of right but a matter of consensus
 RULE = stockholders do not become entitled to the payment thereof as a
matter of right without necessity of a prior declaration of dividends
3. ”Interest bearing stocks” = on which the corporation agrees absolutely to pay interest before
dividends are paid to common stockholders is legal only when construed as requiring
payment of interest as dividends from net earnings or surplus only
 Thus, the declaration of dividends is dependent upon the availability of surplus
profit or unrestricted retained earnings, as the case may be.
 even if there are existing profits, the board of directors has the discretion to
determine whether or not dividends are to be declared
Supplementary Notes
 preferred share of stock = one which entitles the holder thereof to certain preferences over the
holders of common stock
 preferences are designed to induce persons to subscribe for shares of a corporation
 The most common forms may be classified into two:
1. preferred shares as to assets = preference in the distribution of the assets of the
corporation in case of liquidation
2. preferred as to dividends = entitled to receive dividends on said share to the extent
agreed upon before any dividends at all are paid to the holders of common stock
 RULE = There is no guarantee, however, that the share will receive any dividends.
 Preferences (X) Includes:
a) lien upon the property of the corporation
b) being creditors of the corporation
*** Rule = Right of SH is subordinate to the Creditors
 Shareholders, both common and preferred are considered = risk takers who invest capital in
the business arid who can look only to what is left after corporate debts and liabilities are fully
paid.
 Redeemable shares
 usually preferred
 When = by their terms are redeemable at a fixed date, / at the option of either
corporation or stockholder or both at certain redemption price
RULE = redemption may not be made where the corporation is insolvent or if such
redemption will cause insolvency or inability of the corporation to meet its debts as they
mature.
33
4. TREASURY SHARES (SECTION 9 OF THE
CORPORATION CODE) M. NOTES
Sec. 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. (n)
Definition
Treasury shares are owned by the corporation having been
reacquired by the issuing corporation by “purchase, redemption,
donation or through some other lawful means.” It has no voting
rights or rights as to dividends or distributions.
TITLE II - INCORPORATION AND ORGANIZATION OF
PRIVATE CORPORATIONS
Definition
Incorporation is the act of creating a corporation.
COMMISSIONER V. MANNING, 66 SCRA 14
COMMISSIONER v MANNING
● Treas shares: those are fully paid, and reacquired by purchase, donation and
redemption
Ex: 100 shares (out)
25 shares (in; treasury shares) laving 75shares (out)
***but issued and outstanding shares only 75%
***when voting (ratificatory vote): basis is 75%
***right of pre emption 75%
Dividends: unrestricted retained earnings:how distributed
100k dividends: 750k (75%) 250k (treas shares(in)surplus profit and unrestricted
RE)
***treas share has no right to dividend: and also to right of pre emption
34
COMMISSIONER OF INTERNAL REVENUE vs. MANNING
A Trust agreement was entered into because: Reese’s desire that Mantrasco and Mantrasoc’s 2
subsidiaries to continue under the management of Manning et al upon his [Reese] death
Supplementary Notes
 Nature of a stock dividend = always involves a transfer of surplus (or profit) to capital stock
= a conversion of surplus or undivided profits into capital stock which is
distributed to stockholders in lieu of a cash dividend

Reese died = Mantrasco paid Reese’s estate the value of his shares
= This shares was cancelled and a new certificate was issued in the name of Mantrasco

When said purchase price has been fully paid = shares which were declared as dividends

BIR issued assessments = failed to declare the said stock dividends as part of their taxable income
** concluded that the distribution of Reese's shares as stock dividends was in effect a distribution
of the "asset or property of the corporation

They appealed to the CTA = Absolved their liability = Grounds: their respective 1/3 interest in
Mantrasco remained the same

Issue:
WON the shares are treasury shares?

Held: NO
1. Treasury shares = are stocks issued and fully paid for and re-acquired by the corporation
either by purchase, donation forfeiture or other means
 They do not have the status of outstanding shares
 ALTHOUGH not retired = Corporation has the option of reissuance or selling
it again

2. so long as it remains a treasury share = it does not participate in dividends NOR vote in
stockholders’ meeting
 (X) Dividends = dividends cannot be declared by the corporation to itself
 (X) Voting Power = otherwise equal distribution of voting powers among
stockholders will be effectively lost and the directors will be able to
perpetuate their control of the corporation
 It still represents a paid-for interest in the property of the corporation

3. Manifest Intentions of the Party to the Trust agreement

 Treat the Shares of Reese AS ABSOLUTELY OUTSTANDING until fully paid
 RULE = A stock dividend being one payable in capital stock cannot be
declared out of the outstanding corporate stock BUT ONLY from Retained
Earnings
 Hence declaration of Stock Dividend is NULL AND VOID ( Violative of public
Policy )

35
 COMMISSIONER OF INTERNAL REVENUE corporate holdings with the use of the very earnings of the companies. Such package device,
vs. obviously not designed to carry out the usual stock dividend purpose of corporate expansion
MANNING, MCDONALD, SIMMONS reinvestment, e.g. the acquisition of additional facilities and other capital budget items, but
AUGUST 06, 1975 exclusively for expanding the capital base of the respondents in MANTRASCO, cannot be allowed to
deflect the respondents' responsibilities toward our income tax laws. The conclusion is thus
FACTS: ineluctable that whenever the companies involved herein parted with a portion of their earnings "to
buy" the corporate holdings of Reese, they were in ultimate effect and result making a distribution of
In 1952 the MANTRASCO had an authorized capital stock of P2,500,000 divided into such earnings to the respondents.
25,000 common shares; 24,700 of these were owned by Julius S. Reese, and the rest, at 100 shares All these amounts are consequently subject to income tax as being, in truth and in fact, a
each, by the three respondents. flow of cash benefits to the respondents.
In view of Reese's desire that upon his death MANTRASCO and its two subsidiaries,
MANTRASCO (Guam), Inc. and the Port Motors, Inc., would continue under the management of the
respondents, a trust agreement was executed by and among Reese, MANTRASCO ,the law firm of
Ross, Selph, Carrascoso and Jand ,and the respondents .
On October 19, 1954 Reese died. In 1955, after MANTRASCO made a partial payment of
Reese's shares, the certificate for the 24,700 shares in Reese's name was cancelled and a new
certificate was issued in the name of MANTRASCO, which was endorsed to the law firm of Ross,
Selph, Carrascoso and Janda, as trustees for and in behalf of MANTRASCO.
In 1963 the entire purchase price of Reese's interest in MANTRASCO was finally paid in
full by the latter, In 1964 the trust agreement was terminated and the trustees delivered to
MANTRASCO all the shares which they were holding in trust.

ISSUE:

Whether or not the issuance of the notices of assessment for deficiency income taxes to
the respondents for the year 1958 was proper.

RULING:

YES.

“A stock dividend always involves a transfer of surplus (or profit) to capital stock. A stock
dividend is a conversion of surplus or undivided profits into capital stock, which is distributed to
stockholders in lieu of a cash dividend.' Congress itself has defined the term 'dividend' in No. 115(a)
of the Act as meaning any distribution made by a corporation to its shareholders, whether in money
or in other property, out of its earnings or profits.
The declaration by the respondents and Reese's trustees of MANTRASCO's alleged
treasury stock dividends in favor of the former, brings the ultimate purpose which the parties to the
trust instrument aimed to realize: to make the respondents the sole owners of Reese's interest in
MANTRASCO by utilizing the periodic earnings of that company and its subsidiaries to directly
subsidize their purchase of the said interests, and by making it appear outwardly, through the formal
declaration of non-existent stock dividends in the treasury, that they have not received any income
from those firms when, in fact, by that declaration they secured to themselves the means to turn
around as full owners of Reese's shares. In other words, the respondents, using the trust instrument
as a convenient technical device, bestowed unto themselves the full worth and value of Reese's
36
 b) WATERED STOCKS (SECTION 65 OF THE
CORPORATION CODE)
Sec. 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.
SEC. 65 watered stocks – stock issued for no value at all or for a value
less than its equivalent either in cash, property, shares, stock dividends,
or services the law prohibits the issuance of watered stocks (only refers to
original issue)
1. To protect persons who may acquire stock and those who may
become the creditors of the corporation on the faith of its
outstanding capital stock being fully paid.
2. To secure equality among subscribers and prevents discrimination
against those who have paid in full the par or issued value.
Who are liable for watered stocks?
Both consenting director or officer and the stockholder concerned for the whole
amount of difference.
c) QUASI-REORGANIZATION (SECTION 38 OF THE
CORPORATION CODE)
Sec. 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 stockholders’
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 and 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 stockholders’ 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 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 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 shares 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 stockholder if
such increase is for the purpose of making effective stock dividend
therefor authorized.
37
 duly called for the purpose.

4. Any bonded indebtedness to be incurred, created, or increased.

Bonds issued by a corporation shall be registered with the Securities and
Exchange Commission, which shall have the authority to determine the
5. The actual indebtedness of the corporation on the day of the meeting. sufficiency of the terms thereof.

6. The amount of the stock represented at the meeting. Bonds – Bonds are in form and effect similar to promissory notes, secured
by mortgage or trust deed upon specified property of the debtor
corporation.
7. The vote authorizing the increase or diminution of the capital stock,
or the incurring, creating or increasing of any bonded indebtedness.
Properties to a bond
Every bond issue usually involve three parties: (1) the debtor – corporation;
Any increase or decrease in the capital stock or the incurring, creating or (2) the creditor – bondholder; and (3) the trustee.
increasing of any bonded indebtedness shall require prior approval of the
Securities and Exchange Commission.
Bonds classified
Bonds are classified into: coupon or registered bonds, mortgage bonds,
One of the duplicate certificate shall be kept on file in the office of the debentures, convertible bonds, participating bonds, collateral trust
corporation and the other shall be filed with the Securities and Exchange bands, and guaranteed bonds.
Commission and attached to the original articles of
incorporation. From and after approval by the Securities and Exchange Coupon or registered bonds
Commission and the issuance by the Commission of its certificate of Coupon bonds are payable to bearer or to the order of a person, and have
filing, the capital stock shall stand increased or decreased and the attached to them coupon notes for each instalment of interest as it falls
incurring, creating or increasing of any bonded indebtedness authorized, due.
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
Mortgage bond
the Treasurer of the corporation lawfully holding office at the time of the
A mortgage bond is one secured by a mortgage on corporate property.
filing of the certificate, showing that at least twenty-five percent (25%) of
such increased capital stock has been subscribed and that at least
twenty-five percent (25%) of the amount subscribed has been paid either
Debenture bonds
in actual cash to the corporation or that there has been transferred to
Debenture bonds are not secured by specific corporate property but rather
the corporation property the valuation of which is equal to twenty-five
solely on the issuer’s ability to pay the indebtedness.
percent (25%) of the subscription: Provided, further, That no decrease of
the capital stock shall be approved by the Commission, if its effect shall
prejudice the rise of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness, or Convertible bonds
increase the same, with the approval by a majority vote of the board of Convertible bonds are those which includes a provision which permits the
trustees and of at least two- thirds (2/3) of the members in a meeting holder of the bond to convert the bond into a specified number of shares
38
 of stock of the corporation at his option within a period fixed therein.
Participating bonds
The owners or holders of participating bonds entitle them to participate in
earnings of the corporation above the specified rates of interest fixed.
Collateral trust bonds
Collateral trust bonds are secured by a lien on securities deposited with a
named trustee constituting the collateral.
Guaranteed bonds
Guaranteed bonds are guaranteed or secured by another corporation other than
the issuing corporation.
- REDUCTION OF CAPITOL STOCK
Reduction of capital stock cannot be employed to avoid the corporation’s
obligations under the Labor Code. xMadrigal & Co. v. Zamora, 151 SCRA 355
(1987).
- STOCK SPLITS
Stock Splits – each of the issued and outstanding shares is simply broken
up into a greater number of shares, each representing a proportionately
smaller interest in the corporation. The usual purpose of a stock split us to
lower the price per share to a more marketable price and thus increase the
number of the potential shareholders. They encourage investment.
C. DIVIDENDS AND OTHER DISTRIBUTIONS
RIGHT TO DIVIDENDS (SECTION 43 OF THE
CORPORATION CODE)
Sec. 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 purposes.
Stock corporation are prohibited from retaining surplus profits in excess of
one hundred percent (100%) of their paid-in capital stock, except: (1)
when justified 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 circumstance obtaining in the corporation, such as when there is
a need for special reserve for probable contingencies.
Concept of dividends
A dividend is a corporate profit set aside, declared and ordered by the
directors to be paid to the stockholders on demand or at a fixed time.
Dividends distinguished from profits “Dividends” means the profits or that
portion of the profits of the corporation which its board of directors,
by proper resolution, sets apart for rotable distribution among the
stockholders. It is distinguished from “profits” for the profits in the hands
of a corporation do not become dividends until they have been set
apart, or at least declared, as dividends and transferred to the separate
property of the individual stockholders.
Surplus profits – Surplus or net profits of a corporation is the difference
between the total present value of its assets, after deducting losses and
liabilities, and the amount of its capital stock. (11 Fletcher, Sec. 5335)
Basis of dividend declaration
The board of directors of a stock corporation may declare dividends on
39
 the basis of outstanding stock held by the stockholders. The basis 1. TYPES OF DIVIDENDS AND OTHER DISTRIBUTIONS
therefore is the stockholder’s total subscription and not on the amount paid
by him on the subscription. This is for the reason that his entire M. NOTES
subscription represents his holding in the corporation for which he pays
interests on any unpaid portion. (SEC Opinion, Dec. 17, 1973) Sec. 65
WATERED STOCKS
***are stocks sold for less than valuable consideration
Classes of dividends
Dividends which a corporation may declare and distribute to its stockholders - It affects the TFD
may be classified into: cash dividend, stock dividend, property dividend, - Balance will paid by the sh/s and also the person who sold the shares
scrip dividend, and liquidating dividend.

STOCK SPLITS and STOCK COMBINATIONS

Cash dividend - Allow the corps to address to what they want to do with their stocks
Cash dividend is one payable in money. - They may combine for a higher price (to retain the stocks) or split to lower the price

SEC 43 DIVIDENDS
Stock dividend
Stock dividend is a dividend payable in stock instead of cash or property.
Kinds of Dividends
Property dividend 1. Stock : stocks authorized to be issued as dividends from the shares of stock of the
The directors in their discretion may authorize distributions in bonds or in corp
property, such as warehouse receipts for whiskey or shares of stock of a ex. SMC corp:issuing SMC stocks as well
subsidiary corporation. ***Shares of stocks are personal property
2. Cash/ Property
Scrip dividend ex. SMC corp issuing Jollibee stocks: property dividends
Scrip dividend is a writing or a certificate issued to a stockholder
entitling him to the payment of money or the like at some future time
inasmuch as the company, at the time the scrip dividends are declared,
CASH/ PROPERTY
has profits not in cash.
STOCK

May be issued to a non stock holder only limited to stock holders

Liquidating dividend
Issued for consideration for cash/property may be used to purchase addtl shares
Liquidating dividend involves the distribution of assets by a corporation to its
stockholders upon dissolution.
***check NIELSEN v LEPANTO

How are Cash/Property as opposed to Stock?

40
 - STOCKS; needs ⅔ consent of majority NIELSON & COMPANY, INC.
- Sh sinks and swims with the corporation vs.
LEPANTO CONSOLIDATED MINING COMPANY
G.R. NO. L-21601 DECEMBER 28, 1968

FACTS:
NIELSEN & CO. V. LEPANTO CONSOLIDATED, 26 SCRA 540, 1968
Lepanto entered into a contract with Nielson wherein the latter was to manage and operate
the mining properties of the former claiming to be a contract of agency. However, Nielson claims that
M. NOTES
the agreement is not one of agency.The phrase "Both parties to this agreement fully recognize that
the terms of this agreement are made possible only because of the faith and confidence of the
officials of each company have in the other" in paragraph XI of the management contract does not
qualify the relation between Lepanto and Nielson as that of principal and agent based on trust and
Nielson & Co. Inc. vs. Lepanto Consolidated Mining Co.
confidence, such that the contractual relation may be terminated by the principal at any time that the
principal loses trust and confidence in the agent. Rather, that phrase simply implies the circumstance
that brought about the execution of the management contract. In the annual report for 1936,
Nielson entered into a management contract with Lepanto
submitted by Mr. C. A. Dewit, President of Lepanto, to its stockholders, under date of March 15,
** Nielson was given the right for 5 years to develop and operate the mining claims of Lepanto
1937, it states that instead of giving a monthly compensation to Nielson such was modified by giving
the amount of P2,500 plus 10% of cash value of the dividends declared and paid by Lepanto.
Contract was modified = which grants Nielson as compensation for its services “10% of any
The Court ruled that from the foregoing statements in the annual report for 1936, and from
dividends declared and paid.”
the provision of paragraph XI of the Management contract, that the employment by Lepanto of
Nielson to operate and manage its mines was principally in consideration of the know-how and
The SC ruled before that the import of this provision is that Nielson will be given 10% of what is
technical services that Nielson offered Lepanto. The contract thus entered into pursuant to the offer
actually going to be declared and distributed as dividends by Lepanto
made by Nielson and accepted by Lepanto was a "detailed operating contract".
** Since Lepanto declared a total of P3M of dividends during the period of extension of the
contract, the SC ordered Lepanto to grant P300,000 worth of its stocks to Nielson
ISSUE:
Lepanto contests this judgment =Such provision is contrary to the Corporation Code
Whether or not Nielson is entitled to receive shares of stock forming part of the stock
dividend of Lepanto in lieu of the cash value of the dividends declared by Lepanto during the
Issue:
Japanese occupation.
WON a corporation can issue stock dividends to a person who is not a stockholder in payment of
services rendered?
RULING:

NO.

Shares of stock are given the special name "stock dividends" only if they are issued in lieu
of undistributed profits. If shares of stocks are issued in exchange of cash or property then those
shares do not fall under the category of "stock dividends".
A corporation may legally issue shares of stock in consideration of services rendered to it by a
person not a stockholder, or in payment of its indebtedness. A share of stock issued to pay for
services rendered is equivalent to a stock issued in exchange of property, because services are
equivalent to property.Likewise a share of stock issued in payment of indebtedness is equivalent to
issuing a stock in exchange for cash.
In other words, it is the shares of stock that are originally issued by the corporation and
forming part of the capital that can be exchanged for cash or services rendered, or property; that is, if
41
the corporation has original shares of stock unsold or unsubscribed, either coming from the original 2. LEGAL RESTRICTIONS ON DIVIDENDS AND OTHER
capitalization or from the increased capitalization. Those shares of stock may be issued to a person
who is not a stockholder, or to a person already a stockholder in exchange for services rendered or DISTRIBUTIONS
for cash or property. But a share of stock coming from stock dividends declared cannot be issued to
one who is not a stockholder of a corporation.
Thus, stock dividends cannot be issued to a person who is not a stockholder in payment of
3. DECLARATION AND PAYMENT OF DIVIDENDS
services rendered. And so, in the case at bar, Nielson cannot be paid in shares of stock which form
part of the stock dividends of Lepanto for services it rendered under the management contract.

42
 CIR V. COURT OF APPEALS, G.R. NO. 108576, JAN. 20, ASC made a board resolution = for the redemption of shares from Soriano’s estate
= Purpose: for the planned “Filipinization” of ASC
1999)
Shares were redeemed = tax audit was conducted
M. NOTES
CIR issued an assessment against ASC for deficiency withholding tax-at-source = Grounds:
CIR v CA 1. when the redemption was made =the estate profited (because ASC would have to pay the
estate to redeem)
Where do dividends come from?
2. ASC would have withheld tax payments from the Soriano Estate yet it remitted no such
- Unrestricted retained earnings (profiits) withheld tax to the government
- profit=income
***if profits are made as stock dividends, ist income? CAPITAL (non-taxable) ASC’s Defense:
** not duty bound to withhold tax from the estate FOR the purpose = “Filipinization” of ASC and also
***when capital is given back (redeemed) ist income? NO (non-taxable)
to reduce its remittance abroad
-depending on the time and manner of redemption of capital stock; maybe
taxable ISSUE:
WON ASC’s arguments are tenable?

Held: NO
1. The proceeds from a redemption is taxable and ASC is duty bound to withhold the tax
at source
 total of 108,000 shares redeemed composing of Original Issuance and Stock
Dividend
 Sale of stock dividends is taxable

2. Tax Code presumes that every distribution of corporate property, in whole or in part, is
made out of corporate profits such as stock dividends.
 108,000 shares were distributed from the capital of ASC
 capital cannot be distributed in the form of redemption of stock dividends without
violating the trust fund doctrine
RULE = Once capital, it is always capital

COMMISSIONER OF INTERNAL REVENUE vs COURT OF APPEALS

4. LIABILITY FOR IMPROPER DIVIDENDS AND
Don Andres Soriano (American) = founder of Soriano Corp had a total shareholdings of 185,000 DISTRIBUTIONS
shares

When he died = half of the shares he held went to his wife as her conjugal share and half to his
estate

Even after his death = the estate still continued to receive stock dividends from ASC until it grew to
total of 108,000 shares

43
 STEINBERG V. VELASCO, 52 PHIL 953, 1929 payable amounted to P9,241.19, and its accounts receivable P12,512.47, or an apparent asset of
P3,271.28 over and above its liabilities.
M. NOTES ISSUE:
STEINBERG v VELASCO Whether or not the Petition Corporation can acquire its own shares.
***dividends from accounts receivable
RULING:
***are accounts receivables (dividends), profits? Are not profits
***DIVIDENDS may be declared from URE, not from accounts receivable (not money in ones NO.
hands)
It is, indeed, peculiar that the action of the board in purchasing the stock from the
Unrestricted Retained Earnings: are SURPLUS PROFITS corporation and in declaring the dividends on the stock was all done at the same meeting of the
PROFITS ARE DIVIDED INTO: board of directors, and it appears in those minutes that the both Ganzon and Mendaros were
formerly directors and resigned before the board approved the purchase and declared the dividends,
RESTRICTED RETAINED EARNINGS UNRESTRICTED RETAINED
and that out of the whole 330 shares purchased, Ganzon, sold 100 and Mendaros 200, or a total of
EARNINGS 300 shares out of the 330, which were purchased by the corporation, and for which it paid P3,300.
In other words, the directors were permitted to resign so that they could sell their stock to
For certain corp financial activities PROFIT: can be declared as the corporation. As stated, the authorized capital stock was P20,000 divided into 2,000 shares of the
DIVIDENDS par value of P10 each, which only P10,030 was subscribed and paid. Deducting the P3,300 paid for
***excess from it, is PROFIT the purchase of the stock, there would be left P7,000 of paid up stock, from which deduct P3,000
paid in dividends, there would be left P4,000 only. In this situation and upon this state of facts, it is
very apparent that the directors did not act in good faith or that they were grossly ignorant of their
NIMBLE EARNINGS: once the property earns; it can be declared as dividends duties.
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.
C. H. STEINBERG, as Receiver of the Sibuguey Trading Company, Incorporated
vs.
GREGORIO VELASCO, ET AL.
G.R. No. L-30460. March 12, 1929

FACTS:

Plaintiff is the receiver of the Sibuguey Trading Company, a domestic corporation. The
defendants are residents of the Philippine Islands. It is alleged that the defendants, Gregorio
Velasco, as president, Felix del Castillo, as vice-president, Andres L. Navallo, as secretary-treasurer,
and Rufino Manuel, as director of Trading Company, at a meeting of the board of directors, approved
and authorized various lawful purchases already made of a large portion of the capital stock of the
company from its various stockholders with total amount of the capital stock unlawfully purchased
was P3,300. At the time of such purchase, the corporation had accounts payable amounting to
P13,807.50, most of which were unpaid at the time petition for the dissolution of the corporation was
its financial condition, in contemplation of an insolvency and dissolution. That on September 11,
1923, when the petition was filed for its dissolution upon the ground that it was insolvent, its accounts

44
 Steinberg v. Velasco Exception: If the directors of a corporation do acts clearly beyond their power, by
reason of which a loss ensued, or dispose of its property without
authority = LIABLE for the loss out of their private estate
Steinberg is the receiver of the Sibuguey Trading Company

It is alleged that the Officers of Sibuguey

1. approved and authorized various unlawful purchases already made of a large portion of
the capital stock
** diverting its funds = in fraud of the creditors of the corporation
2. BOD of Sibuguey Trading Company authorized the purchase of 330 shares of stock of the
corporation
** when they had accounts payable to about Php 14K
3. declared payment of P3000 as dividends to stockholders
** when they had accounts payable of about Php 9K

Steinberg prayed that the Officers be liable for the amount of the capital stock purchased and the
amount of the dividends paid

The lower court dismissed the complained and rendered judgment in favor of the defendants.

Hence appeal. In their defense = Grounds:

1. the amount represented by said dividends really constitutes a surplus profit of the corporation
2. Since they have Accounts Receivable amounting to 12K

Issue:
WON Board of Directors of Sibuguey could legally declare a dividend?

Held: NO
1. there was no stipulation as to the actual cash value of those accounts.
 Hence the purchase of its own stock and in declaring dividends = the real assets
of the corporation were diminished by Php 6,300 ( Payment = affect the financial
condition of the corporation )
 the corporation did not have then an actual bona fide surplus from which
dividends could be paid

- RULE = The creditors of a corporation have the right to assume that so long as there are
debts and liabilities, the board of directors of the corporation will not use its assets to
purchase its own stock or to declare dividends to its stockholders when the corporation
is insolvent.

- GR: It has been said that directors are not liable for losses resulting to the corporation from
want of knowledge on their part; or for mistakes of judgment, provided they were honest,
and provided they are fairly within the scope of the powers and discretion confided to the
managing body.
45
 D. TRANSFER OF INVESTMENT SECURITIES
1. OWNERSHIP OF SECURITIES
A. RIGHT TO ISSUANCE (SECTION 64 OF THE
CORPORATION CODE)
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.
SEC. 64 It is prohibited to issue certificates of stock to a
subscriber who has not paid the full amount of his subscription
together with interest and expenses.
Derivative suit – one brought by one or more stockholders or
members in the name and in behalf of the corporation to
redress wrongs committed against it or to protect or vindicate
corporate rights.
Individual suit – one brought by a stockholder in his own name
against the corporation for direct violation of his contractual
rights such as right to vote, to dividends etc.
Representative suit – a group of stockholders may bring a direct
suit against the corporation. This is when a wrong is
committed against a group of stockholders.
Certificate of Stock – a written instrument signed by the proper
corporate officers, and evidencing the fact that the person therein
Right to Transfer shares of stock
named is the registered owner of the share or shares therein
described.
Nature and Functions of Certificates
It represents the number of shares which the corporation acknowledges
that the holder of the certificate is entitled to and is a solemn and continuing
affirmation by the corporation that the person to whom it was issued is
entitled to all the rights and subject to all the liabilities of a stockholder in
the company in respect of the number of shares named, and that the
company will respect his rights and the rights of anyone to whim he may
transfer such shares, by refusing to admit any new transferee to the rights
of a stockholder except upon the surrender of the certificate.
Issuance of Stock Certificate. It requires:
1. sign by the president or vice-president, countersigned by the
secretary or assistant secretary, and sealed with the seal of the
corporation, and issued in accordance with the law.
2. The certificate must be delivered or mailed to the subscriber, with
the documentary stamps required by law affirmed thereon.
3. The par value with respect to shares with par value, or the full
subscriptions, as to no-par value shares must be fully paid.
4. Where it involves transfer of outstanding shares, the original
certificate must be retained.
Purpose of Registration of Transfer
1. To enable the corporation to know at all times who its actual
shareholders 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.
3. To avoid fraudulent or fictitious transfer.
4. It is intended also for the benefit and protection of persons who
may deal with the corporation and become creditors, so that they
know who are the stockholders, and as such liable to its creditors.
1. By delivering the certificate, duly indorsed on the back.
2. By delivering the certificate accompanied by a separate assignment.
3. Where stock is levied on in execution of judgment, by delivering the
certificate coupled with an assignment by the sheriff who
conducted the levy.
4. Transfer by sale of delinquent shares.
46
 Liabilities of a stockholders
1. Liability to the corporation for unpaid subscription
2. Liability to the corporation for interest on unpaid subscription
3. Liability to creditors of the corporation on unpaid subscription
4. Liability for watered stock
5. Liability for dividends unlawfully paid
6. Liability for failure to create a corporation
BALTAZAR V. LINGAYEN GULF, 14 SCRA 522
M. NOTES
TRANSFER OF INVESTMENT SECURITIES
RIGHT OF ISSUANCE BALTAZAR v LINGAYEN GULF
- Consent must be given by the sh
and bod
- A sh is entitled to cert of stocks= upon full payment
Stock and Transfer Book Sec 74
BALTAZAR vs LINGAYEN GULF ELECTRIC POWER
Lingayen Gulf = is alleged that it has always been the practice and procedure of the Corporation to
issue certificates of stock to its individual subscribers for unpaid shares of stock
Baltazar subscribed but failed to pay for the full subscription = corporation issued certificates of stock
for his paid share
Annual stockholders' meeting was held = Resolution
1. cancelling some stocks for delinquency
2. all unpaid subscription should bear interest annually from the year of subscription
3. declaring all shares having been declared delinquent are incapacitated to vote.
Trial court ruled that all shares covered by fully paid capital stock shares = entitled to vote in all
meetings of SH
Issues :
WON SH who has not fully paid his subscription be divested of his voting rights?
Held: NO
If a stockholder in a stock corporation subscribes to a certain number of shares and makes partial
payment 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
The Fua vs Cun (equity on vote) principle does not come in this case
sec 37 (64) states that “No certificate of stock shall be issued to a subscriber as fully paid
up until the full par value thereof, or the full subscription in the case of no par stock, has been paid by
him to the corporation. Subscribed shares not fully paid up may be voted provided no subscription is
unpaid and delinquent.”
it modified sec 36 of the old corporation law by making payment of “par value”as prerequisite for the
issuance of certificates of par value stocks and makes payment of full subscription as prerequisite for
issuance of certificates of no-par value stocks. Stated in another way, the present law requires as a
condition before a share holder can vote his shares, that his full subscription be paid in the
case of no par value stock; and in case of stock corporation with par value, the stockholder
can vote the shares fully paid by him only, irrespective of the unpaid delinquent shares.
47
 BALTAZAR, plaintiff the law, which renders the said case of Fua Cun-Summers, obsolescent.
vs. In the cases at bar, the defendant-corporation had chosen to apply payments by its
LINGAYEN GULF ELECTRIC POWER CO., INC., respondent stockholders to definite shares of the capital stock of the corporation and had fully paid capital stock
G.R. No. L-16236 June 30, 1965 shares certificates for said payments; its call for payment of unpaid subscription and its declaration of
delinquency for non-payment of said call affecting only the remaining number of shares of its capital
FACTS:
stock for which no fully paid capital stock shares certificates have been issued, "and only these have
The Lingayen Gulf Electric Power Co., Inc., hereinafter referred to as Corporation, was been legally shorn of their voting rights by said declaration of delinquency" (amended decision).
doing business in the Philippines, with principal offices at Lingayen, Pangasinan, and with an
authorized capital stock of P300.000.00 divided into 3,000 shares of voting stock at P100.00 par
value, per share. Plaintiffs Baltazar and Rose were among the incorporators, having subscribed to
600 and 400 shares of the capital stock, or a total par value of P60,000.00 and P40.000.00,
respectively. It is alleged that it has always been the practice and procedure of the Corporation to
issue certificates of stock to its individual subscribers for unpaid shares of stock. Of the 600 shares of
capital stock subscribed by Baltazar, he had fully paid 535 shares of stock, and the Corporation
issued to him several fully paid up and non-assessable certificates of stock, corresponding to the 535
shares. After having made transfers to third persons and acquired new ones, Baltazar had to his
credit, on the filing of the complaint 341 shares fully paid and non-assessable.
The respondents Ungson, Estrada, Fernandez and Yuson were small stockholders of the
Corporation, all holding a total number of fully paid-up shares of stock, of not more than 100 shares,
with a par value of P10,000.00 and the defendant Acena, was likewise an incorporator and
stockholder, holding 600 shares of stock, for which certificate of stock were issued to him and as
such, was the largest individual stockholder thereof. Defendants Ungson, Estrada, Fernandez and
Yuzon, constituted the majority of the holdover seven-member Board of Directors of the Corporation,
in 1955, two (2) of said defendants having been elected as members of the Board in the annual
stockholders' meeting held in May 1954, largely on the vote of their co-defendant Acena, while the
other two (2) were elected mainly on the vote of the plaintiffs and their group of stockholders. Let the
first group be called theUngson group and the second, the Baltazar group.

ISSUE:

Whether or not a stockholder, in a stock corporation, subscribes to a certain number of

shares of stock, and he pays only partially, for which he is issued certificates of stock, is he entitled to
vote the latter, notwithstanding the fact that he has not paid the balance of his subscription, which
has been called for payment or declared delinquent.

RULING:

YES.

The cases at bar do not come under the aegis of the principle enunciated in the Fua Cun v.
Summers case, because it was the practice and procedure, since the inception of the corporation, to
issue certificates of stock to its individual subscribers for unpaid shares of stock and gave voting
power to shares of stock fully paid. And even though no agreement existed, the ruling in said case
does not now reflect the correct view on the matter, for better than an agreement or practice, there is
48
 B. JOINT OWNERSHIP (SECTION 56 OF THE
CORPORATION CODE)
Sec. 56. Voting in case of joint ownership of stock. – In case of share of stock
owned jointly by 2 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 capacity by the holders therof, any one of the joint owner
can vote said shares or appoint a proxy therfor.
If share are owned by 2 or more persons jointly, the right to vote is in them
jointly, and , in order that the shares may be voted, they must agree upon the
vote. This rule of joint action applies to shares held by several executors or
trustees, in the absence of provision for a majority vote if the fiduciaries
disagree.
C. PLEDGOR, MORTGAGOR AND ADMINISTRATORS
(SECTION 55 OF THE CORPORATION CODE)
Sec. 55. Right to vote of pledgors, mortgagors and administrators. – In case
of pledged or mortgaged share in stock corporations, the pledgor or
mortgagor shall have the right to attend and vote at meetings of
stockholders, unless the pledge or mortgagee is expressly given such right
in writing which is recorded on the appropriate corporate books by the
pledgor or mortgagor.
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 pledgor or mortgagor of shatem in the absence of agreement to the
contrary, if the shate remain in his name on the books of the corporation has
the right to attend and vote at meetings of stockholders.
A person who appears on the books of a corporation or otherwise as the
absolute owner of stock clearly has the right to vote, although in face he may
hold it as trustee.
Executor and administrator has the right, to vote shares belonging to the estate
of his decedent, and it can make no difference that the share stand on the
books of the corporation in the name of the decedent.
D. POOLING AGREEMENTS
- CONTROL AND BOARD DISCRETION (SECTION 100
OF THE CORPORATION CODE)
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
49
 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 liabilities for managerial
acts imposed by this Code on directors.
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.
5. Effect of the Stockholders’ agreement before and after formation
of corporation Stockholders’ agreements before and after formation
and organization of the corporation
survive incorporation and shall be valid and binding for as long as they
are not inconsistent with the articles of
incorporation. Agreements made prior to incorporation require
fairly literal performance. There must be an actual
contractual relation. Given such relation, the pre-incorporators are
promoters and may arrange agreements to form and manage the
corporation.
E. STOCK AND TRANSFER BOOK (SECTION 74 OF THE
CORPORATION CODE)
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 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
50
 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.
Books and records to be kept by Corporation
1. Record of all business transactions
2. Minutes of all meetings of stockholders or members, or of board of
directors or trustees
3. Stock and transfer books
4. Optional records and supplementary books as many be necessary or
required by special laws
SEC Rules requiring filing of documents. The SEC requires all corporations
whose securities are listed in any stock exchange or with permits to sell
shares to the public or with twenty or more stockholders shall hereafter
submit to this Commission within thirty (30) days after approval of the
corporate action, certified true copies of the following documents
evidencing the same, to wit:
a. Minute of meetings
1. Calling for payment of unpaid subscriptions
2. Increasing or decreasing the capital stock
3. Changing the nomenclature of shares of stock or certificates of
indebtedness
4. Authorizing the borrowing of material sums of money
b. Other documents, such as:
1. Certificated changing the composition of the board
of directors and officers
2. Certificates changing the ownership of the controlling interest
in the corporation
Management contracts duly approved by the stockholders.
CHUA GUAN V. SAMAHANG MAGSASAKA, 62 PHIL
472
M. NOTES
CHUA GUAN v SAMAHAN
- Chattel Mortgage v attaching creditors
- Corp denied the recording to the stock and transfer book
Registration must be done both at the province or city where the domicile of the
owner (sh) is located and of the corporation
??? Stock and Transfer Book: where the affairs of the Corp must be recorded;including the
names of the sh’s
Transfers that shall be recorded in the stock and transfer book shall be the ownership of the
said stocks; NOT the mortgage in which the double registration is not complied
CHUA GUAN vs SAMAHANG MAGSASAKA
Gonzalo Toco mortgaged his shares to Chua Chiu to guarantee the payment of debt
Chua Chiu assigned all his right and interest in said mortgage to Chua Guan was registered in the
1. office of the register of deeds in the City of Manila
2. the office of the said corporation
Toco defaulted = HENCE Chua Guan foreclosed said mortgage
Chua Guan = Highest bidder
= Sheriff executed in his favor a certificate of sale of said shares
tendered the certificates of stock standing in the name of Toco = wants to:
1. have it canceled
2. Issue new ones in his name
Officers REFUSED = Reason: prior to the date when the Chua made demands = 9 attachments were
made on the stocks
: Chua Refused to have these attachments noted on the new
certificates
Issue:
51
WON registration of said chattel mortgage give constructive notice to the said attaching creditors?
Held: NO it was invalid
The registration of the chattel mortgage in the office of the corporation was not necessary
and had no legal effect.
two ways for executing a valid chattel mortgage which shall be effective against third persons.
a) the possession of the property mortgage must be delivered to and retained by the
mortgagee
b) without such delivery the mortgage must be recorded in the proper office or offices of the
register or registers of deeds
the proper place of registration of such a mortgage
 the chattel mortgage should be registered both at owner's domicile and principal office of
the Corporation
 the property mortgaged is not the certificate but the participation and share of the
owner in the assets of the corporation
THEREFORE = Registration of chattel mortgage in the office of corporation not necessary and had
no legal effect.
GONZALO CHUA GUAN
vs.
SAMAHANG MAGSASAKA, INC., and SIMPLICIO OCAMPO, ADRIANO G. SOTTO, and EMILIO
VERGARA, as president, secretary and treasurer respectively of the same
G.R. No. L-42091 November 2, 1935
FACTS:
Samahang Magsasaka, Inc., is a corporation duly organized under the laws of the
Philippine Islands with principal office in Cabanatuan, Nueva Ecija, and that the individual defendants
are the president, secretary and treasurer respectively of the same; that on June 18, 1931, Gonzalo
H. Co Toco was the owner of 5,894 shares of the capital stock of the said corporation represented by
nine certificates having a par value of P5 per share; that on said date Gonzalo H. Co Toco, a resident
of Manila, mortgaged said 5,894 shares to Chua Chiu to guarantee the payment of a debt of P20,000
due on or before June 19, 1932. The said certificates of stock were delivered with the mortgage to
the mortgagee, Chua Chiu. The said mortgage was duly registered in the office of the register of
deeds of Manila on June 23, 1931, and in the office of the said corporation on September 30,
1931. On November 28, 1931, Chua Chiu assigned all his right and interest in the said mortgage to
the plaintiff and the assignment was registered in the office of the register of deeds in the City of
Manila on December 28, 1931, and in the office of the said corporation on January 4, 1932.
The debtor, Gonzalo H. Co Toco, having defaulted in the payment of said debt at maturity,
the plaintiff 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 sheriff auctioned said 5,894 shares of stock on December 22, 1932, and the plaintiff
having been the highest bidder for the sum of P14,390, 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 Gonzalo
H. Co Toco to the proper officers of the corporation for cancellation and demanded that they issue
new certificates in the name of the plaintiff. The said officers (the individual defendants) refused and
still refuse to issue said new shares in the name of the plaintiff.
ISSUE:
Whether or not the mortgage registered considered the certificate of registration in the
corporation.
RULING:
YES.
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
us a reasonable construction of section 4 of Act No. 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 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.
MONSERAT V. CERAN, 58 PHIL 469
M. NOTES
MONSERAT v CERAN
- Chattel mortgage is not the transfer contemplated under the law, which is
required to be noted in the stock and transfer book:
- Hence, the transfer contemplated under the law is an ABSOLUTE
CONVEYANCE to be
registered in the books.
Mortgage shall be registered; must be done both at the province or city where the domicile of
the owner (property) is located and of the corporation
52
ENRIQUE MONSERRAT vs CERON

Enrique Monserrat assigned the usufruct of half of his common shares of stock to Ceron

Condition = prohibiting Ceron from selling, mortgaging, encumbering, or exercising any act implying
absolute ownership

Ceron = mortgaged and endorsed the shares of stock including Monserrat’s shares to Eduardo
Matute
= as payment of his debt

Matute was not informed of the condition

Trial court ruled in favor of Monserrat and declared the mortgage null and void

Hence Matute appealed.

Issue:
WON it is necessary to enter upon the books of the corporation a mortgage constituted on common
shares of stock in order that such mortgage may be valid and effective against 3rd persons?

Held:
Section 35 of the Corporation Law does not require any entry except of transfers of shares of
stock in order that such transfers may be valid as against third persons
 Transfer = to assign or waive the right in, or absolute ownership of, a thing in favor of
another, making him the owner thereof ( absolute and unconditional conveyance of the
title and ownership of a share of stock )
 chattel mortgage is not the transfer referred to in Corporation law
THEREFORE notation upon the books of the corporation is not necessary requisite to its validity

53
 FUA CUNV. SUMMERS, 44 PHIL 705
Held: NO
A subscriber does not become the owner of a particular number of shares corresponding to
the amount he already paid but merely holds a right of equity in the total number of shares
subscribed.
M. NOTES
Complete ownership over the total number of shares subscribed will only vest with the stockholder
FUA CUN v SUMMERS upon payment of the whole subscription price.

Is the corporate secretary bound to recognize the notice of mortgage of shares of stocks Supplementary Notes:
presented to him?  A banking corporation has no lien upon its own stock for the indebtedness of the stockholders
- GR: yes, if it is double registered; and no prior claim even when the by-laws provide that the shares shall be transferable only upon the books of
- XPN: not bound when: the corporation and that no such transfer shall be made if the holder of the shares is indebted
- If it involves an unpaid subscription which lies a claim from the to the corporation.
corporation; because it violates the TFD, then the corp has prior claim.
 In the absence of special agreement to the contrary, a subscriber for a certain number of
When is there double registration?
shares of stock does not upon payment of one-half of the subscription price, become entitled to
- Registration must be done both at the province or city where the domicile of the the issuance of certificates for one-half the number of shares subscribed for.
owner (sh) is located and of the corporation
*** that gives notice to third parties
An equity in shares of stock may be assigned, the assignment becoming effective as between the
FUA CUN vs RICARDO SUMMERS parties and as to third parties with notice

Chua Soco subscribed 500 shares of China Banking Corporation = paid half of the subscription price

Condition = failure to pay = 500 shares specified in this receipt is subject to sale by the China
Banking Corporation for the payment of any unpaid subscriptions

Chua Soco executed a promissory note in favor of the plaintiff Fua Cun = chattel mortgage on the
shares

500 shares were attached and levied upon to satisfy his debt with China Banking Corp

Fua Cun thereupon brought the present action = Grounds:

1. by virtue of the payment of the one-half of the subscription price
2. in effect became the owner of 250 shares
3. By virtue of Chattle Mortgage = hold priority over the claim

Trial court ruled in favor of Fua Cun = ORDER the return of the shares. Hence appeal

Issue:
WON by paying one-half of the subscription in effect became the owner of 250 shares?
54
 FUA CUN, petitioner Corporation Act provides that "no bank organized under this Act shall make any loan or discount on
vs. the security of the shares of its own capital stock, nor be the purchaser or holder of any such shares,
SUMMERS, respondent unless such security or purchase shall be necessary to prevent loss upon a debt previously
G.R. No. L-19441 March 27, 1923 contracted in good faith, and stock so purchased or acquired shall, within six months from the time of
its purchase, be sold or disposed of at public or private sale, or, in default thereof, a receiver may be
FACTS: appointed to close up the business of the bank in accordance with law."
The reasons for this doctrine are obvious; if banking corporations were given a lien on their
It appears from the evidence that on August 26, 1920, one Chua Soco subscribed for five own stock for the indebtedness of the stockholders, the prohibition against granting loans or
hundred shares of stock of the defendant Banking Corporation at a par value of P100 per share, discounts upon the security of the stock would become largely ineffective.
paying the sum of P25,000, one-half of the subscription price, in cash, for which a receipt was
issued.
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 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 the trial court erred in declaring that Chua Soco, through the payment of the
P25,000, acquired the right to two hundred and fifty shares fully paid up, upon which shares the
plaintiff holds a lien superior to that of the defendant Banking Corporation and ordering that the
receipt be returned to said plaintiff.

RULING:

YES.

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. At common law a corporation has no
lien upon the shares of stockholders for any indebtedness to the corporation and our attention has
not been called to any statute creating such lien here. On the contrary, section 120 of the
55
 NAVA V. PEERS MARKETING, 74 SCRA 65 Held: YES
1. The corporation may include in its by-laws rules not inconsistent with law governing the
transfer of its shares of stock
M. NOTES  The twenty shares in question, however, are not covered by any certificate of
stock in Po's name.
NAVA v PEERS  As no stock certificate was issued to Po; and without the stock certificate,
- If it is a TRANSFER, it is recorded in the stock and transfer book; which is the evidence of ownership of corporate stock, the assignment of
- if it's a MORTGAGE, it is not required to be recorded to the book but it has to be corporate shares is effective only between the parties to the transaction.
registered following double registration  HENCE no clear legal duty on the part of the officers of the corporation to
register the 20 shares in Nava's name.

2. A stock subscription is a subsisting liability from the time the subscription is

***anytime that there is an alienation of the share; for the transfer to be valid, it must be made.
recorded to the stock and transfer book.---if it is not recorder; the corp is not bound.  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.
Would a mortgage be a transfer?
NO, because it is a mere security transaction., not a transfer.

RICARDO A. NAVA vs PEERS MARKETING CORPORATION, RENATO R. CUSI and AMPARO

CUSI

Teofilo Po subscribed to 80 shares of Peers Marketing Corporation = 25% of the amount of his
subscription was paid

Po sold to Nava his shares = Po represented that he was "the absolute and registered owner of
twenty shares"

Nava requested to register the sale in the books of the corporation

Denied because not fully paid

Po was delinquent in the payment and corporation had a claim on his entire subscription

Nava filed a petition for mandamus to order the PEERS Marketing to register the sale

Peers marketing’s defense their by-law provides that = no shares of stock against which the
corporation holds an unpaid claim are transferable in the books of the corporation.

Issue:
WON the provision in the by-laws is valid?

56
 F. LOST OR DESTROYED CERTIFICATES (SEC. 73 OF
THE CORPORATION CODE
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:
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.
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.

1. The registered owner of a certificate of stock in a corporation or his

legal representative shall file with the corporation an affidavit in SEC. 73 The registered owner of certificates of stock in a corporation or his
triplicate setting forth, if possible, the circumstances as to how the legal representative shall file with the corporation an affidavit setting forth
certificate was lost, stolen or destroyed, the number of shares how certificate were lost, stolen or destroyed, the number of shares
represented by such certificate, the serial number of the certificate represented by each certificate, the serial numbers of the certificate and
and the name of the corporation which issued the same. He shall name of the corporation which issued the same.
also submit such other information and evidence which he may
deem necessary.
The affidavit shall be verified
Corporation shall publish a notice in a newspaper in general circulation
After verifying the affidavit and other information and evidence with published in the place where the corporation has its principal office for 3
the books of the corporation, said corporation shall publish a notice consecutive weeks.
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 1. After 1 year from the date of the last publication, if no contest
certificate of stock which has been lost, stolen or destroyed. The presented to the corporation, corporation shall cancel in the books
notice shall state the name of said corporation, the name of the
the lost certificates and issue new certificates.
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 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
57
 2. TRANSFER F SECURITIES
A. TRANSFER OF SHAREHOLDING (SECTION 63 OF
THE CORPORATION CODE)
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.
SEC. 63 The capital stock of stock corporation shall be divided into
shares Certificate of stock shall be issued for said shares.
Nature of a certificate of stock
1. It is a written instrument signed by the proper officer of a
corporation stating or acknowledging that the person named
therein is the owner of a designated number of shares of stock.
2. It indicates the name of the holder, the number, kind and class of
shares represented, and the date of issuance.
3. It i merely the evidence of the holder's interest in the corporation,
his ownership of the share represented thereby.
4. It is not essential to make one a stockholder in a corporation.
 Every stockholder has a right to have proper certificate issued
to him as soon as he has complied with the conditions which
entitle him to one.
 A corporation cannot issue shares in excess of the maximum
authorized in its AOI.
 An over issued stock is absolutely void even if possessor is in
good faith.
 Shares can be transferred represented by the certificate by its
endorsement by the owner or his agent and delivery to the
transferee.
Restrictions on transfer of stock
1. A by-law prohibits a transfer of stock without the consent or approval of all
stockholders or of the president or board of directors is ILLEGAL.
4. A provision in the certificate that is transferable only to some
person first approved by the board of directors unlawfully restricts
the right of the stockholder.
5. The condition “non-transferable” appearing on certificates of stock is
VOID.
6. corporations which will engage in any business reserved for Filipino
citizens are required to indicate in AOI and all certificates.
Two requirements to effect transfer of stocks
Endorsement and delivery of stock certificate
-the usual practice is for the stockholder to sign the form on the back of
the stock certificate.
-if the holder of the certificate desires to assume the legal right of the
stockholder he fills up the blank in the form inserting his name as
transferee.
-then he delivers the certificate to the secretary of the corporation so that
the transfer may be entered in the books.
Other modes of transfer
3. Assignment thru a separate instrument.
4. Judicial or extra-judicial settlement of the estate.
Validity of stock transfer
3. As between parties
58
 -merely the delivery of the certificate indorsed by the owner or his USON V. DIOSOMITO, 61 PHIL 535
attorney- in-fact or other person legally authorized to make the
transfer. M. NOTES
4. As against third persons
-the transfer of shares must be entered and noted upon the books of USON v
the corporation
- No transfer is valid unless it is not recorded in the stock and transfer book
-only absolute transfer are recorded
including the details of the transferee.

Effects of unregistered shares

USON vs DIOSOMITO
1. It is valid and binding as between the transferor and transferee.
2. It is invalid insofar as the corporation is concerned except when
notice is given to the corporation for purposes of registration. Diosomito sold and delivered his North Electric shares to Barcelon
a) the transferor has the right to vote and to be voted for,
and has the right to participate in any meeting Uson sued Diosomito for a debt and attached the said shares ( w/c was still in Diosomito name on
b) the transferor has the right to dividends as against the the books of the Corp )
corporation but the transferor, as the nominal owner of the
share, is the trustee for the benefit of the real owner. Then Barcelon presented the certificates for registration = 9 months after the attachment had been
3. It is invalid as against corporate creditors, and the transferor levied 3
is still liable to the corporation. The transfer of stock by a
shareholder does not relieve him from the liability to creditors Trial Court ruled in favor of Uson = Hence the Shares were foreclosed
of the corporation for unpaid subscription until the transfer is
consummated by being registered in the books. Uson was the highest bidder
4. It is invalid as against creditors of the transferor without notice
Barcelon sold the same to H.P.L. Jollye = files and action in court
of the transfer.
The lower court ruled for Uson.

Shares of stock against which the corporation holds any unpaid claim Issue:
shall not be transferable in the books – no unpaid claims against the WON a bona fide transfer of the shares of a corporation, not registered or noted on the books of the
stock. no unpaid subscriptions due and payable. 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: NO
“no transfer, however, shall be valid except as between the parties, until the transfer is
entered and noted upon the books of the corporation.”
 right of the owner of the shares of stock to transfer the same by delivery = limited and
restricted by the law
 Therefore, the transfer from Diosomito to Barcelon was not valid as to Uson
 Reason = since at the time it was attached, the shares still stood in the name of
Diosomito on the books of the corporation

RULE = an attachment lien prevails over a prior unregistered bona fide stock transfer.

59
 ESCANO V. FILIPINAS MINING, 74 PHIL 711 RULE = There is no valid reason to treat unissued shares held in escrow differently from the
issued shares insofar as their sale and transfer are concerned.
M. NOTES
Supplementary Notes
ESCANO v  No Registration of Transfer of Unpaid Shares
Reason why the transfer should be recorded: o The shares are thus not transferable on the corporate books
1. To enable the corp to know at all times who the sh’s are o there is nothing to prevent the stockholder from transferring his interest in the
- Because mutual rights and obligs exist; right to vote, obligation to pay corporation by way of a deed of assignment
o “unpaid claim” of section 63 = does not necessarily mean that there should have
unpaid subscription; corp oblig to notify (all shs)
been a previous call by the board of directors
2. To enable the corp, to refuse or object with regards to the stocks o As long as portion remains unpaid
To avoid fictitious or fraudulent transfer
 Remedy if Registration Refused
o action to enforce the right does not accrue until there has been a demand and a
refusal to record the transfer
ESCAÑO vs FILIPINAS MINING CORPORATION wrongfully refuse = Petition for Mandamus

The CFI of Manila ordered Salvosa to transfer and deliver to Escano shares of the Filipinas Mining
Corp.

The escrow however was only to be transferred upon its release by the said Company.

Despite the said order = Salvosa was able to sell the shares to Bengzon

Bengzon thereafter sold the shares to Standard Investment

Filipinas Mining thereafter issued certificates of shares of stock to Standard Investment

** despite the fact that the sales and transfers from Salvosa to Bengzon, Bengzon to Standard,
were not recorded in the corporate books until 3 years after the said shares were attached by
garnishment.

Issue: Whether the issuance of the certificate of shares of stock by Filipinas Mining to Standard
Investment was valid as against the attaching creditor of the said shares?

Held: No.
1. transfer needs to be recorded in the corporate books to be effective as against 3rd
persons This recording is required
 reasons:
1) to know who the real owner of the shares
2) gives the corporation a chance to object to such transfer = against any claims it
may have on the stock
3) to avoid fictitious and fraudulent transfers

60
 PONCE V. ALSONS CEMENT, G.R. NO. 139802, 2002  UPON RECORD = rightfully regard the transferee as one of its stockholders
 without such recording = may legally refuse the issuance of stock certificates
in the name of the transferee
M. NOTES
2. mere indorsement of stock certificates does not in itself give to the indorsee such a right to
PONCE v have a transfer of the shares of stock on the books of the company
- A corp cannot be mandated to record in the stock and transfer book unless there  GR: mandamus should not issue to compel the secretary of a corporation to make
is an apparent right a transfer of the stock on the books of the company
If a person’s name does not appear in the stock and transfer book; the corporation has no Exception: it affirmatively appears that he has failed or refused so to do, upon
the demand either of the person in whose name the stock is
obligation to recognize any person whose name does not appear
registered, or of some person holding a power of attorney for that
purpose from the registered owner of the stock.

mandamus - proper remedy to make him the rightful owner and holder of a stock certificate to be
PONCE vs ALSONS CEMENT CORPORATION
issued in his name

Ponce and Gaid executed a “Deed of Undertaking” = endorsing the shares of Victory Cement
Corporation to Ponce

VCC was renamed Floro Cement Corporation (FCC) and then to Alsons Cement Corporation (ACC)

Until Now = no stock issued in the name of Gaid

Ponce Filed a Petition for Mandamus = Grounds:

** Despite repeated demands = the ACC refused without any justifiable reason to issue the stocks

ACC moved to dismiss.

SEC dismissed the case. SEC En Banc reversed the decision.

ACC appeal to CA. Reversed the decision = Grounds:

1. The transfer of the shares between Gaid and Ponce was NOT registered in the stock and
transfer book of ACC
2. Ponce has no cause of action.

ISSUE:
WON the cert. of stocks of Gaid can be transferred to Ponce

Held: NO
1. Ponce had not made a previous request upon to record the alleged transfer of stocks.
 RULE = a transfer of shares of stock not recorded in the stock and transfer
book of the corporation is non-existent as far as the corporation is concerned.
 the corporation looks only to its books for the purpose of determining who its
shareholders are

61
TAN V. SEC, G.R. NO. 95696, 1992 Held: YES
Section 63 of the Corporation Code of the Philippines is NOT "mandatory in nature"
 Facts = there was already delivery of the unendorsed Stock Certificate No. 2
M. NOTES = return of the cancelled certificate and Deliberate non-indorsement
 But delivery is not essential where it appears that the persons sought to be held as
TAN v SEC stockholders are officers of the corporation, and have the custody of the stock book
***an exception to the preceding:
- When a person even his name does not appear in the stock and transfer book; The certificate is not stock in the corporation but is merely evidence of the holder's interest
but becomes a director of the corporation; still has the right and status in the corporation
 Only representation of his equity = but is not in law the equivalent of such ownership
 expresses the contract = but is not essential to the existence of a share in stock
USON, ESCANO, PONCE case:
a certificate of stock is not a negotiable instrument
- The reason that sh should appear to the stock and transfer book, is to enable the  sometime regarded as quasi-negotiable = transferred by endorsement, coupled with
corporation at all times who their shs are; since there is a mutual right and delivery
obligjation between the corp and the sh non-negotiable = holder thereof takes it without prejudice to such rights or defenses as the
Sending of notices and declarations of stock dividends: the book is the medium for the corp to registered owner/s or transferror's creditor may have under the law, except insofar as such
be able to send notices to the shs; for the sh to exercise right to vote rights or defenses are subject to the limitations imposed by the principles governing
estoppels
TAN v. SEC

Alfonso = owner of 400 shares of the capital stock ( evidenced by certificate number 2 )
= elected as President

Young and Ong ( incorporators ) = withdrew by assigning to the corp. their shares

Tan's certificate of stock was cancelled by virtue of a resolution = made new stocks certificate for
Alfonso and Angel

Tan sold (50) shares out of his capital stock to Angel = in order to complete the Directors

Alfonso S. Tan was given back Stock Certificate = for him to endorse and he
deliberately withheld it for reasons of his own
** so as if no delivery

Tan was dislodged from his position as president = WITHDREW

BOD had a meeting = effecting the cancellation of Stock Certificate of Alfonso

Alfonso S. Tan filed the SEC case questioning the cancellation of his stocks

ISSUE:
WON transfer is valid w/o delivery?

62
 B. REMEDY IF TRANSFER IS REFUSED 2. Writ will not ordinarily issue if the plaintiff has other remedies
 corporation improperly refuses to transfer = clearly liable for the damages
HAGER V. BRYAN, 19 PHIL 138
M. NOTES

HAGER v BRYAN
- A pet for mandamus will lie; if there is no unpaid subscription; and a direct auth
from the original stockholder or SPA
- MINISTERIAL: mandatory; there is no discretion; to do what is needed
- MANDAMUS is to compel a ministerial act

In effecting a registration in the stock and transfer book there should be:
- Deed of sale/deed of assignment:
TRANSFER

- an express authority from the original sh (authorizing cancellation

and issuance of new cert): AUTHORITY

HAGER vs BRYAN

Hager filed a writ of mandamus against the Bryan ( Corp Sec ) = to compel him to transfer upon the
books of the company certain shares of stock SOLD TO HIM BY LEVERING

certificates were issued in the name of Bryan-London & Co. and by them indorsed to your petitioner

Bryan refused to transfer stocks and filed a demurrer

Issue:
WON a writ of mandamus is proper in this case?

Held: NO
1. No share of stock against which the corporation holds any unpaid claim, shall be
transferable on the books of the corporation.
 To issue the writ = 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

63
 BATONG BUHAY V. CA, 147 SCRA 4
M. NOTES

BATONGBUHAY v
- Value of shares of stocks are speculative; cannot prove damages
- XPN: where a transaction has been proven at a certain value

Batong Buhay vs. CA

Batong Buhay issued Stocks to Francisco Aguac

Francisco Aguac sold his shares to of the Incoporated Mining Corporation w/o knowledge of his wife
Paula

Paula requested Batong Buhay to withhold the transfer of the shares = BEING A CONJUGAL
PROPERTY proceeds were not given to her

A criminal case was filed against Aguac

Incoporated Mining's counsel presented the certificate for registration for transfer to his name

Batong buhay refused to transfer = Reason = that they might he held liable for damages

Petitioner prayed for preliminary mandatory injunction = Granted

BUT = appealed because lower court's alleged failure to award damages for the wrongful refusal of
petitioner to transfer

Not Granted. Hence Appeal.

Issue:
WON Court of Appeals award damages by way of unrealized profits despite the absence of
supporting evidence?

Held: NO
Stipulation of facts of the parties = (X) show intent to sell on specific dates
 True that stocks may rise and fall
 whatever profits could have been made are purely SPECULATIVE
RULE = speculative damages cannot be recovered

64
 WON V. WACK WACK GOLF CLUB, 104 PHIL 466
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,
M. NOTES as provided in the By-Laws." The decisive question that arises is whether the plaintiff was bound,
under said condition and By-Laws of the defendant or any statutory rule for that matter, to present
WON v WACK WACK and register the certificate assigned to him in 1944 within any definite or fixed period. The defendant
- Can prescription arise? In a transfer has not made herein any pretense to that effect; but it contends that from the moment the certificate
- NO, because there is no written doc for whic it is 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
based.
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
LEE E. WON alias RAMON LEE barred by the Statute of Limitations when it was filed on April 26, 1955, or barely a few days
vs. (according to the lower court) and two months (according to the plaintiff), after the demand for
WACK WACK GOLF and COUNTRY CLUB, INC. registration and its denial by the defendant. Plaintiff's right was violated only sometime in 1955, and it
G.R. No. L-10122 August 30, 1958 could not accordingly have asserted any cause of action against the defendant before that.

Facts:

The defendant (a non-stock corporation) issued to Iwao Teruyama Membership Certificate

No. 201 which was assigned to M. T. Reyes on April 22, 1944. Subsequently in the same year 1944,
M. T. Reyes transferred and assigned said certificate to the plaintiff. On April 26, 1955, the plaintiff
filed an action in the Court of First Instance of Manila 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. On June 6, 1955, the defendant filed a motion to dismiss, alleging that
from 1944, when the plaintiff's right of action had accrued, to April 26, 1955, when the complaint was
filed, eleven years have elapsed, and that therefore the complaint was filed beyond the 5-year period
fixed in Article 1149 of the Civil Code. On July 30, 1955, the Court of First Instance of Manila issued
an order dismissing the complaint. As plaintiff's motion for reconsideration filed on August 27, 1955
and second motion for reconsideration filed on September 13, 1955, were both denied, the plaintiff
has taken the present appeal.

Issue:

Whether or not the plaintiff is entitled to the registration of the transferred share of stock.

RULING:

NO.
65
 WON v WACK WACK instead of diminish litigations, which is one of the purposes of an interpleader suit, with the possibility
that the benefits of the final judgment in the said civil case might eventually be taken away from him;
Facts: Wack Wack Golf and Country Club filed a complaint for interpleader against Won and Tan and because the Corporation allowed itself to be sued to final judgment in the said case, its action of
who both claim ownership over membership fee certificate 201. Won claims its ownership stemming interpleader was filed inexcusably late, for which reason it is barred by laches or unreasonable
from a decision rendered in Civil Case 26044 entitled "Lee E. Won alias Ramon Lee vs. Wack Wack delay. (Wack-Wack Golf and Country Club vs. Won, G.R. No. L-23851, March 26, 1976)
Golf & Country Club, Inc." Meanwhile, Tan claims ownership from the assignment made by the
alleged true owner of the same certificate. The trial court dismissed the complaint on the ground of
res judicata by reason of the previous civil case that issued Won the right to the certificate. Hence,
the appeal.

Issue: Was the remedy of interpleader proper and timely?

Held: There is no question that the subject matter of the present controversy, i.e., the membership
fee certificate 201, is proper for an interpleader suit. However, the Corporation may not properly
invoke the remedy of interpleader.

It is the general rule that before a person will be deemed to be in a position to ask for an order of
intrepleader, he must be prepared to show, among other prerequisites, that he has not become
independently liable to any of the claimants. Indeed, if a stakeholder defends a suit filed by one of the
adverse claimants and allows said suit to proceed to final judgment against him, he cannot later on
have that part of the litigation repeated in an interpleader suit.

In the case at hand, the Corporation allowed civil case 26044 to proceed to final judgment. It was
aware of the conflicting claims of the appellees with respect to the membership fee certificate 201
long before it filed the present interpleader suit. Yet it did not interplead Tan. It preferred to proceed
with the litigation and to defend itself therein. As a matter of fact, final judgment was rendered against
it and said judgment has already been executed. It is therefore too late for it to invoke the remedy of
interpleader

To now permit the Corporation to bring Won to court after the latter's successful establishment of his
rights in civil case 26044 to the membership fee certificate 201, is to increase instead of to diminish
the number of suits, which is one of the purposes of an action of interpleader, with the possibility that
the latter would lose the benefits of the favorable judgment. This cannot be done because having
elected to take its chances of success in said civil case 26044, with full knowledge of all the fact, the
Corporation must submit to the consequences of defeat.

Besides, a successful litigant cannot later be impleaded by his defeated adversary in an interpleader
suit and compelled to prove his claim anew against other adverse claimants, as that would in effect
be a collateral attack upon the judgment.

In fine, the instant interpleader suit cannot prosper because the Corporation had already been made
independently liable in civil case 26044 and, therefore, its present application for interpleader would
in effect be a collateral attack upon the final judgment in the said civil case; the appellee Lee had
already established his rights to membership fee certificate 201 in the aforesaid civil case and,
therefore, this interpleader suit would compel him to establish his rights anew, and thereby increase
66