FINANCING THE CORPORATION

 Ellingwood vs. Wolf’s Head Oil Refining Co., Inc, 38 a 2d 743

 Hay vs. Hay, 230 P. 2d 791
 Garcia vs. Lim Chu Sing, 59 Phil 562
 Utah Hotel Co. vs. Madsen, 134 Pac 557
 Wallace vs. Eclipse Pocahontas Coal Company, et.al., 98 SE 293
 Bayla vs. Silang Traffic Co. m Inc. 73 Phil 557
 Datu Tagoranao Benito vs. SEC. 123 SCRA 722
 Stokes vs. Continental Trust Co., 78 NE 1090
 Thom, et.al, vs. Baltimore Trust Co., 138 A. 234
 Fuller vs. Krogh, 113 NW 2d 25
 Dunlay vs. Avenue M. Garage & Repair Co., Inc, et.al., 170 NE 917
 Ross Transport Inc., et.al., vs. Crothers et.al., 45 A. 2d 267
 Meritt-Chapman & Scott Corp. vs. New York Trust Co. 184 F. 2d 954
 John Kelley Co., vs. Commissioner of Int. Revenue 362 US 521
 Jordan Co. vs. Allen, Collector of Internal Revenue, 85 F. supp. 437
 Aladdin Hotel Co. vs. Bloom, 200 F. 2d 627
 GARCIA, petitioner
vs.
LIM CHU SING, respondent
G.R. No. L-39427             February 24, 1934

FACTS:

On June 20, 1930, the defendant-appellant Lim Chu Sing executed and
delivered to the Mercantile Bank of China promissory note for the sum of P19,605.17
with interest thereon at 6 per cent per annum, payable monthly as follows: P1,000 on
July 1, 1930; P500 on August 1, 1930; and P500 on the first of every month thereafter
until the amount of the promissory note together with the interest thereon is fully paid
(Exhibit A). One of the conditions stipulated in said promissory note is that in case of
defendant's default in the payment of any of the monthly installments, as they become
due, the entire amount or the unpaid balance thereof together with interest thereon at
6 per cent per annum, shall become due and payable on demand. The defendant had
been, making several partial payments thereon, leaving an unpaid balance of
P9,105.17. However, he defaulted in the payment of several installments by reason of
which the unpaid balance of P9,105.17 on the promissory note has ipso facto become
due and demandable.

ISSUE:

Whether or not it is proper to compensate the defendant-appellant's

indebtedness of P9,105.17, which is claimed in the complaint, with the sum of
P10,000 representing the value of his shares of stock with the plaintiff entity, the
Mercantile Bank of China.

RULING:

NO.

According to the weight of authority, a share of stock or the certificate thereof is

not indebtedness to the owner or 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, repeatedly asserted in the broadest terms, 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. Therefore, the defendant-appellant Lim Chu Sing not being a creditor of
the Mercantile Bank of China, although the latter is a creditor of the former, there is
no sufficient ground to justify compensation.
 BAYLA, et al., petitioner
vs.
SILANG TRAFFIC CO., INC., respondent
G.R. Nos. L-48195 and 48196             May 1, 1942

FACTS:

Petitioners in G.R. No. 48195 instituted this action in the Court of First
Instance of Cavite against the respondent Silang Traffic Co., Inc. (cross-petitioner in
G.R. No. 48196), to recover certain sums of money which they had paid severally to
the corporation on account of shares of stock they individually agreed to take and pay
for under certain specified terms and conditions. The agreements signed by the other
petitioners were of the same date (March 30, 1935) and in identical terms as the
foregoing except as to the number of shares and the corresponding purchase price.
The petitioners agreed to purchase a total of 46 shares and, up to April 30, 1937, had
paid the corresponding amount on account thereof.Petitioners' action for the recovery
of the sums above mentioned is based on a resolution by the board of directors of the
respondent corporation on August 1, 1937.
The respondent corporation set up the following defenses: (1) That the above-
quoted resolution is not applicable to the petitioners Sofronio T. Bayla, Josefa Naval,
and Paz Toledo because on the date thereof "their subscribed shares of stock had
already automatically reverted to the defendant, and the installments paid by them
had already been forfeited"; and (2) that said resolution of August 1, 1937, was
revoked and cancelled by a subsequent resolution of the board of directors of the
defendant corporation dated August 22, 1937.

ISSUE:

Whether or not the agreement was a contract of subscription to the capital

stock of the respondent corporation.

RULING:

NO.

Whether a particular contract is a subscription or a sale of stock is a matter of

construction and depends upon its terms and the intention of the parties. In the
Unson case just cited, this Court held that a subscription to stock in an existing
corporation is, as between the subscriber and the corporation, simply a contract of
purchase and sale.
It seems clear from the terms of the contracts in question that they are
contracts of sale and not of subscription. The lower courts erred in overlooking the
distinction between subscription and purchase "A subscription, properly speaking, is
the mutual agreement of the subscribers to take and pay for the stock of a
corporation, while a purchase is an independent agreement between the individual
and the corporation to buy shares of stock from it at stipulated price." In some
particulars the rules governing subscriptions and sales of shares are different. For
instance, the provisions of our Corporation Law regarding calls for unpaid
subscription and assessment of stock do not apply to a purchase of stock. Likewise,
the rule that corporation has no legal capacity to release an original subscriber to its
capital stock from the obligation to pay for his shares, is inapplicable to a contract of
purchase of shares.
 DATU TAGORANAO BENITO
vs.
SECURITIES AND EXCHANGE COMMISSION and JAMIATUL PHILIPPINE-AL
ISLAMIA, INC.
G.R. No. L-56655. July 25, 1983

FACTS:

On February 6, 1959, the Articles of Incorporation of respondent Jamiatul

Philippine-Al Islamia, Inc. (originally Kamilol Islam Institute, Inc.) were filed with the
Securities and Exchange Commission (SEC) and were approved on December 14,
1962. The corporation had an authorized capital stock of P200,000.00 divided into
20,000 shares at a par value of P10.00 each. Of the authorized capital stock, 8,058
shares worth P80,580.00 were subscribed and fully paid for. Petitioner Datu
Tagoranao Benito subscribed to 460 shares worth P4,600.00.
On October 28, 1975, the respondent corporation filed a certificate of increase
of its capital stock from P200,000.00 to P1,000,000.00. Thus, P110,980.00 worth of
shares were subsequently issued by the corporation from the unissued portion of the
authorized capital stock of P200,000.00. Of the increased capital stock of
P1,000,000.00, P160,000.00 worth of shares were subscribed by Mrs. Fatima A.
Ramos, Mrs. Tarhata A. Lucman and Mrs. Moki-in Alonto.
Petitioner Datu Tagoranao filed a petition alleging that the additional issue
(worth P110,980.00) of previously subscribed shares of the corporation was made in
violation of his pre-emptive right to said additional issue and that the increase in the
authorized capital stock of the corporation from P200,000.00 to P1,000,000.00 was
illegal considering that the stockholders of record were not notified of the meeting
wherein the proposed increase was in the agenda.
Respondents denied the material allegations of the petition and claimed that
petitioner has no cause of action and that the stock certificates covering the shares
alleged to have been sold to petitioner were only given to him as collateral for the loan
of Domocao Alonto and Moki-in Alonto. The SEC affirmed the sale.

ISSUE:

Whether or not the issuance of the unissued shares was subject to the pre-
emptive right of the stockholders.

RULING:

NO.

The Court held that the questioned issuance of the unsubscribed portion of the
capital stock worth P110,980.00 is not invalid even if assuming that it was made
without notice to the stockholders as claimed by petitioner. The power to issue shares
of stocks in a corporation is lodged in the board of directors and no stockholders'
meeting is necessary to consider it because additional issuance of shares of stocks
does not need approval of the stockholders.
Petitioner bewails the fact that in view of the lack of notice to him of such
subsequent issuance, he was not able to exercise his right of pre-emption over the
unissued shares. However, the general rule is that pre-emptive right is recognized only
with respect to new issue of shares, and not with respect to additional issues of
originally authorized shares. This is on the theory that when a corporation at its
inception offers its first shares, it is presumed to have offered all of those which it is
authorized to issue. An original subscriber is deemed to have taken his shares
knowing that they form a definite proportionate part of the whole number of
authorized shares. When the shares left unsubscribed are later re-offered, he cannot
therefore claim a dilution of interest.