CORPORATION LAW

STOCK and STOCKHOLDERS

TITLE VII
STOCKS AND STOCKHOLDERS
SEC. 59. Subscription Contract. – Any contract for the acquisition of unissued stock in an
existing corporation or a corporation still to be formed shall be deemed a subscription
within the meaning of this Title, notwithstanding the fact that the parties refer to it as a
purchase or some other contract.

SEC. 60. Pre-incorporation Subscription. – A subscription of shares in a corporation still to

be formed shall be irrevocable for a period of at least six (6) months from the date of
subscription, unless all of the other subscribers consent to the revocation, or the
corporation fails to incorporate within the same period or within a longer period stipulated
in the contract of subscription. No pre-incorporation subscription may be revoked after the
articles of incorporation is submitted to the Commission.

SEC. 61. Consideration 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:
(a) Actual cash paid to the corporation; (b) 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;
(c) Labor performed for or services actually rendered to the corporation;
(d) Previously incurred indebtedness of the corporation;
(e) Amounts transferred from unrestricted retained earnings to stated capital;
(f) Outstanding shares exchanged for stocks in the event of reclassification or conversion;
(g) Shares of stock in another corporation; and/or
(h) Other generally accepted form of consideration.
Where the consideration is other than actual cash, or consists of intangible property such
as patents or copyrights, the valuation thereof shall initially be determined by the
stockholders or the board of directors, subject to the approval of the Commission.
Shares of stock shall not be issued in exchange for promissory notes or future service. The
same considerations provided in this section, insofar as 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 by the articles of incorporation or
the bylaws, or if not so fixed, by the stockholders representing at least a majority of the
outstanding capital stock at a meeting duly called for the purpose.

SEC. 62. Certificate of Stock and Transfer of Shares. – The capital stock of 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 bylaws. Shares of stock so issued
are personal property and may be transferred by delivery of the certificate or certificates
indorsed by the owner, his attorney-in-fact, or any 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. The Commission may require corporations whose
securities are traded in trading markets and which can reasonably demonstrate their
capability to do so to issue their securities or shares of stocks in uncertificated or scripless
form in accordance with the rules of the Commission.
No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation.

SEC. 63. Issuance of Stock Certificates. – No certificate of stock shall be issued to a

subscriber until the full amount of the subscription together with interest and expenses (in
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case of delinquent shares), if any is due, has been paid.

SEC. 64. Liability of Directors for Watered Stocks. – A director or officer of a corporation
who: (a) consents to the issuance of stocks for a consideration less than its par or issued
value; (b) consents to the issuance of stocks for a consideration other than cash, valued in
excess of its fair value; or (c) having knowledge of the insufficient consideration, does not
file a written objection with the corporate secretary, shall be liable to the corporation or its
creditors, solidarily with the stockholder concerned for the difference between the value
received at the time of issuance of the stock and the par or issued value of the same.

SEC. 65. Interest on Unpaid Subscriptions. – Subscribers to stocks shall be liable to the
corporation for interest on all unpaid subscriptions from the date of subscription, if so
required by and at the rate of interest fixed in the subscription contract. If no rate of
interest is fixed in the subscription contract, the prevailing legal rate shall apply.

SEC. 66. Payment of Balance of Subscription. – Subject to the provisions of the

subscription contract, the board of directors may, at any time, declare due and payable to
the corporation unpaid subscriptions and may collect the same or such percentage
thereof, in either case, with accrued interest, if any, as it may deem necessary.
Payment of unpaid subscription or any percentage thereof, together with any interest
accrued shall be made on the date specified in the subscription contract 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 interest rate is provided in the subscription
contract. The interest shall be computed from the date specified, until full payment of the
subscription. If no payment is made within thirty (30) days from the said date, all stocks
covered by the subscription shall thereupon become delinquent and shall be subject to
sale as hereinafter provided, unless the board of directors orders otherwise.

SEC. 67. 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 the sale, with a copy of the resolution, shall be sent to every delinquent
stockholder either personally, by registered mail, or through other means provided in the
bylaws. The same shall 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 the former’s 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 a 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 the purchaser’s 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
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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 fully paid in the books of the corporation. Title to all the shares of
stock covered by the subscription shall be vested in the corporation as treasury shares
and may be disposed of by said corporation in accordance with the provisions of this
Code.

SEC. 68. When Sale may be Questioned. – No action to recover delinquent stock sold can
be sustained upon the ground of irregularity or defect in the notice of sale, or in the sale
itself of the delinquent stock, unless the party seeking to maintain such action first pays or
tenders to the party holding the stock the sum for which the same was sold, with interest
from the date of sale at the legal rate. No such action shall be maintained unless a
complaint is filed within six (6) months from the date of sale.

SEC. 69. Court Action to Recover Unpaid Subscription. – Nothing in this Code shall prevent
the corporation from collecting through court action, the amount due on any unpaid
subscription, with accrued interest, costs and expenses.

SEC. 70. Effect of Delinquency. – No delinquent stock shall be voted for, be entitled to
vote, or be represented 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 payment is made by the holder such
delinquent stock for the amount due on the subscription with accrued interest, and the
costs and expenses of advertisement, if any.

SEC. 71. Rights of Unpaid Shares, Nondelinquent. – Holders of subscribed shares not fully
paid which are not delinquent shall have all the rights of a stockholder.

SEC. 72. Lost or Destroyed Certificates. – The following procedure shall be followed by a
corporation in issuing new certificates of stock in lieu of those which have been lost,
stolen or destroyed:
(a) The registered owner of a certificate of stock in a corporation or such person’s legal
representative shall file with the corporation an affidavit in triplicate setting forth, if
possible, the circumstances as to how the certificate was lost, stolen or destroyed, the
number of shares represented by such certificate, the serial number of the certificate and
the name of the corporation which issued the same. The owner of such certificate of stock
shall also submit such other information and evidence as may be deemed necessary;
(b) After verifying the affidavit and other information and evidence with the books of the
corporation, the corporation shall publish a notice in a newspaper of general circulation in
the place where the corporation has its principal office, once a week for three (3)
consecutive weeks at the expense of the registered owner of the certificate of stock which
has been lost, stolen or destroyed. The notice shall state the name of the corporation, the
name of the registered owner, the serial number of the certificate, the number of shares
represented by such certificate, and shall state that after the expiration of one (1) year
from the date of the last publication, if no contest has been presented to the corporation
regarding the certificate of stock, the right to make such contest shall be barred and the
corporation shall cancel the lost, destroyed or stolen certificate of stock in its books. In
lieu thereof, the corporation shall issue a new certificate of stock, unless the registered
owner files a bond or other security as may be required, effective for a period of one (1)
year, for such amount and in such form and with such sureties as may be satisfactory to
the board of directors, in which case a new certificate may be issued even before the
expiration of the one (1) year period provided herein. If a contest has been presented to
the corporation or if an action is pending in court regarding the ownership of the
certificate of stock which has been lost, stolen or destroyed, the issuance of the new
certificate of stock in lieu thereof shall be suspended until the court renders a final
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decision regarding the ownership of the 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.

Subscription Contract
 Any contract for the acquisition of unissued stock in an existing corporation or a
corporation still to be formed, notwithstanding the fact that the parties refer to it as a
purchase or some other contract.
SUBSCRIPTION
- Mutual agreement of the subscribers to take and pay for the stocks of a corporation.

 A subscription contract is not required to be written; an oral contract for subscription

is valid and enforceable. The statutes of fraud do not apply to a subscription contract
because such subscription does not fall under the statutory definition of a sale.
 Conditional subscription – one made upon a condition precedent, does not
make the subscriber a stockholder, or render him to pay the amount of his
subscription, until the performance or fulfillment of the condition.
 Subscription upon special terms – an absolute subscription, making the
subscriber a stockholder, and rendering him liable as such, as soon as the
subscription is accepted, the special term being an independent stipulation.
In case of doubt, a subscription shall be considered one upon special terms in order
to protect the creditors and other subscribers.
GENERAL RULE: Conditional subscriptions are valid.
EXCEPTIONS: (Trillana vs. Quezon College Inc.)
1. The charter or enabling act prohibits the same; or
2. The conditions are such as to render their performance beyond the powers of the
corporation or in violation of law or contrary to public policy.
An application for subscription which is at variance with the terms evidenced in a general
form of subscription must be accepted by the corporation to create a binding contract. A
condition facultative as to the debtor renders the whole obligation void.

Trillana vs Quezon College (93 Phil 383)

HELD: If it should depend upon chance, or upon the will of a third person, the
obligation shall produce all its effects in accordance with the provisions of this code."
It cannot be argued that the condition solely is void, because it would have served to
create the obligation to pay, unlike a case, exemplified by Osmeña vs. Rama (14
Phil., 99), wherein only the potestative condition was held void because it referred
merely to the fulfillment of an already existing indebtedness.

SEC Memorandum Circular No. 11, Series of 2016 Subscription Contracts

Pre-incorporation Subscription

Types of subscriptions as to time of execution:

1. Pre-incorporation subscriptions – subscriptions for shares of stock of a corporation
still to be formed; and
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2. Post-incorporation subscriptions – those made or executed after the formation or

organization of the corporation.
General rule: A subscription for shares of stock of a corporation still to be formed is
irrevocable.
Exceptions:
1. Lapse of a period of 6 months from the date of subscription;
2. All the subscribers consent to the revocation; or
3. The incorporation of said corporation fails to materialize within 6 months or within
a longer period as may be stipulated in the contract of subscription.
Exception to the exceptions: No pre-incorporation subscription may be revoked after the
submission of the articles on incorporation to the SEC.
Pre-incorporation subscriptions are mandatory in view of Secs. 13 and 14 which mandates
that a corporation may be registered as such only if at least 25% of its authorized capital
stock has been subscribed and that at least 25% of the total subscription has been paid.
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 ff:
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 or services actually rendered to the corporation;
4. Previously incurred indebtedness by the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares in exchange for stocks in the event of reclassification or
conversion.
Stocks shall not be issued in exchange of promissory notes or future services. Their
realization is uncertain.
Issue – the making of a share contract or contract of subscription; transaction by which a
person becomes the owner of shares and by which new share contracts are created.
The issuance of shares is not dependent on the delivery of a certificate of stock.

Par or issue price – indicates the amount which the original subscribers are supposed to
contribute to the corporate capital as the basis of the privilege of profit sharing with limited
liability.
Valuation of properties given as a consideration for issuance of stock:
1. Tangible properties (particularly real properties):
a. Appraisal report of an independent appraiser;
b. Zonal valuation as certified by the BIR; or
c. Market value indicated in the Real Estate Tax Declaration.
2. Intangible properties (such as patents or copyrights):
a. Initial determination by the incorporators or the board of directors subject
to the approval of the SEC; or
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b. Appraisal report of an independent appraiser.

Labor performed or services actually rendered to the corporation must be capable of
valuation and in fact fairly valued.
Two theories in the valuation of property or services:
1. True value rule – the motives or intent of those making the valuation are
disregarded and the sole and decisive factor or question is whether or not the
property or services are in fact worth the value placed on them.
2. Good faith rule – the value of the property or services is a matter about which
there can be an honest difference of opinion. Therefore, if the parties have acted in
good faith without fraud or intentional over-valuation, the transaction cannot be
overturned even if the later becomes evident that the property or services were in
fact worth much less than the value fixed on them initially.

The set-off or satisfaction of a debt due from the corporation is a lawful and valid
consideration for the issuance of stock.
Amounts transferred from unrestricted retained earnings to stated capital – refers to the
declaration and distribution of stock dividends where corporate earnings are capitalized.
Outstanding shares exchanged for stocks in the event of reclassification or conversion –
refers to stocks surrendered to the corporation in exchange for a new or different type of
shares. (Ex. conversion of founder’s shares to common shares.)

National Exchange vs. Dexter (51 Phil 601)

HELD: The prohibition against the issuance of shares by corporations except for
actual cash or property at its fair valuation secures absolute equality among
stockholders with respect to their liability upon stock subscriptions. A stipulation is a
stock subscription which obligates the subscriber to pay nothing for the shares
except as dividends may accrue upon the stock is a discrimination in favor of the
particular subscriber, and hence, illegal.
A corporation has no power to receive a subscription upon such terms as will operate
as a fraud upon the other subscribers as stockholders by subjecting the particular
subscribers to lighter burden, or by giving his greater rights and privileges, or as
fraud upon creditors of the corporation by withdrawing or decreasing capital.
Therefore, an agreement between a corporation and a particular subscriber, by which
the subscription is not to be payable, or is to be payable in part only, is illegal and
void.

Certificates of Stock and their Transfer

Certificate of stock – the piece of paper or document which evidences the ownership of
shares and a convenient instrument for the transfer of the title.

Requisites for the issuance of a certificate of stock:

1. It must be signed by the president or vice-president and countersigned by the
secretary or assistant secretary;
2. It must be sealed with the corporate seal; and
3. The full amount of subscription together with interest and expenses (in case of
delinquent shares) if any is due, has been paid.
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General rule: Holders of subscribed shares not fully paid are entitled to all the rights of a
stockholder.
Exceptions:
1. The shares have been declared delinquent; or
2. The stockholder exercises his appraisal right.
The issuance of a stock certificate is not a condition sine qua non to consider a subscriber as
a stockholder.
Two modes of transferring shares of stock:
1. When the corporation has already issued stock certificates – only by delivery of
the certificate or certificates of stock indorsed by the owner or his
attorney-in-fact or other person legally authorized to make the transfer.
2. When the corporation has not yet issued certificates of stock – by a duly
notarized deed.
 No transfer shall be valid, except as between the parties, until the transfer is
recorded in the books of the corporation.
 Until registration is accomplished, the transfer of stock, though valid between the
parties, cannot be effective as against the corporation. The corporation looks only
though its books for the purpose of determining who its stockholders are.
 Non-registration of a transfer of stock will not, however, affect the validity thereof at
least in so far as the contracting parties are concerned.
Reasons for the necessity of the registration of transfers of stock:
1. To enable the corporation to know who its stockholders are;
2. To enable the transferee to exercise his rights as a stockholder;
3. To afford the corporation an opportunity to object or refuse registration of the
transfer in cases allowed by law (as when it has unpaid claims on the shares
transferred);
4. To avoid fictitious and fraudulent transfers; and
5. To protect creditors who have the right to look upon stockholders, in case of non-
payment or watered shares, for the satisfaction of their claims.
CORPORATE SECRETARY’S DUTY TO RECORD A VALID TRANSFER OF SHARE OF STOCKS
MINISTERIAL. Thus, he may be compelled by mandamus.
General rule: A certificate of stock is not a negotiable instrument. A bona-fide
purchaser of a certificate of stock will acquire no better title to the shares than his
transferor had and will be subject to all rights, remedies and defenses which the true
and lawful owner may have.
Exception: When the general principles of estoppel apply. Thus, if the legal owner
thereof, by his act or negligence, is estopped from claiming ownership, (as when he
clothes another with apparent title or authority to dispose of the same) a purchaser
in good faith and without notice will acquire a better title as against the owner so
estopped.
Shares of stock are personal properties and the owners thereof have the unbridled right
to transfer the same to anyone they please subject only to reasonable charter
provisions.
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RURAL BANK OF SALINAS vs. CA: The duty of the corporate secretary to register a valid
transfer of shares is ministerial. Therefore, mandamus will lie to compel registration in case
the corporation or the corporate secretary refuses registration.
TAY vs. CA: However, the transferee has no such right when his title to said shares has no
prima facie validity of is uncertain.

PADGETT vs. BOBCOCK and TEMPLETON: The right to transfer shares of stock may not
be unreasonably restricted or prohibited. Every owner of corporate shares has the same
uncontrollable right to alienate them and is under no obligation from selling them at his
sacrifice and for the welfare and benefit of the corporation and other stockholders.
However, the right to transfer may be “regulated” to give the corporation protection against
colorable or fraudulent transfer or to enable it to know who its stockholders are. Also, as a
matter of policy, the SEC allows the grant of “preferential rights” to existing stockholders
and/or the corporation, giving them the first option to purchase the shares of a selling
stockholder within a reasonable period not exceeding 30 days provided that the same is
contained in the articles of incorporation and in all of the stock certificates to be issued by
the corporation. This is considered “reasonable” since it merely suspends the right to
transfer within the period specified.
GO SOC and SONS vs IAC: A corporation may classify its shares and grant such “rights,
privileges or restrictions” provided that such are made in the articles of incorporation and
subject to reasonable terms, conditions or period.
OTHER RESTRICTIONS ON THE TRANSFER OF SHARES OF STOCK:
1. It is not valid, except as between the parties, until recorded in the books of the
corporation;
2. Share of stock against which the corporation holds any unpaid claim shall not be
transferable in the books of the corporation; unpaid claims, refer to claims arising
from unpaid subscription and not to any indebtedness which a stockholder may owe
the corporation such as monthly dues;
3. Restrictions required to be indicated in the articles of incorporation, by-laws and
stock certificates of a close corporation;
4. Restrictions imposed by special law, such as the Public Service Act requiring the
approval of the government agency concerned if it will vest unto the transferee 40%
of the capital of the public service company;
5. Sale to aliens in violation of maximum ownership of shares under the
Nationalization Laws; and
6. Those covered by reasonable agreement of the parties.
TRANSFER
- Refers to absolute and unconditional conveyance of the title and
ownership of a share of stock to warrant registration in the books of the
corporation in order to bind the latter and other third persons. (Monserrat
vs. Ceron)
 Only the transfer or absolute conveyance of the ownership of the title to a share
need be entered and noted upon the books of the corporation in order that such
transfer may be valid, therefore, inasmuch as a chattel mortgage of the aforesaid
title is not a complete and absolute alienation of the dominion and ownership thereof,
its entry and notation upon the books of the corporation is not a necessary requisite
to its validity. (Monserrat vs. Ceron)
 Chattel mortgages over shares of stock should be registered both at the owner’s
domicile and in the province where the corporation has its principal office or place of
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business in order to bind third persons. The ownership of shares in a corporation is

property distinct from the certificates which are merely the evidence of such
ownership. The property in the shares are deemed to be situated in the province in
which the corporation has its principal office or place of business. (Chua Guan vs.
Samahang Magsasaka, Inc.)
 All transfers of shares should be entered in the books of the corporation. Transfers
not so entered are invalid as to attaching or execution creditors of the assignors as
well as to the corporation and to subsequent purchasers in good faith, and indeed, as
to all persons interested, except the parties to such transfer. (Uson vs. Diosomito)
 A clause contained in the by-laws of a corporation which provides that the owner of a
share of stock cannot sell it to another person except to the defendant corporation is
ultra-vires, violative of the property rights of shareholders, and in restraint of trade.
(Fleischer vs. Botica Nolasco Co.)
 Shares of stock being regarded as property, the owner of such shares may, as a
general rule, dispose of them as they see fit, unless the corporation has been
dissolved, or unless the right to do so is properly restricted, or the owner’s privilege
of disposing of his shares has been hampered by his own action.
 Any restriction on a stockholder’s right to dispose of his shares must be construed
strictly; and any attempt to restrain a transfer of shares is regarded as being in
restraint of trade, in the absence of a valid lien upon its shares, and except to the
extent that valid restrictive regulations and agreements exist and are applicable.
Subject only to such restrictions, a stockholder cannot be controlled in or restrained
from exercising his right to transfer by the corporation or its officers or by other
stockholders, even though the sale is to a competitor or the company, or to an
insolvent person, or even though a controlling interest is sold to one purchaser.
Therefore, restrictions consisting in the word “non-transferable” is illegal. (Padgett
vs. Babcock & Templeton)
 The suspension of the power to sell shares of stock which has a beneficial purpose,
results in the protection of the corporation as well as of the individual parties to the
contract, and is reasonable as to the length of time of suspension is valid. (Lambert
vs. Fox)
 An indorsee of an undelivered certificate of stock has no power to effectively transfer
the shares to other persons or his nominees. For an effective transfer of shares of
stock the mode and manner of transfer prescribed by law must be followed.
(Embassy Farms, Inc. vs. CA)
 Indorsement of the certificate of stock is a mandatory requirement of law for an
effective transfer of a certificate of stock. (Razon vs. IAC)
 The right of a transferee/assignee to have stocks transferred to his name is an
inherent right flowing from his ownership of the stocks. The corporation’s obligation
to register is ministerial. (Rural Bank of Salinas vs. CA)
 The pledge of shares of stock does not vest ownership of such shares to the pledgee.
The pledgor remains the owner during the pendency of the pledge and prior to
foreclosure and sale. Therefore, the pledgee has no right to demand the registration
of the pledged shares in his name. In order that a writ of mandamus may issue, it is
essential that the person petitioning for the same has a clear legal right to the thing
demanded and that is it the imperative duty of the respondent to perform the act
required. (Tay vs. CA)
 Without a stock certificate, which is the evidence of ownership of corporate stock, the
assignment of corporate shares is effective only between the parties to the
transaction. (Nava vs. Peers Marketing)
MODE OF TRANSFER (TO BE VALID)
1. There must be delivery of the stock certificate;
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2. The certificate must be endorsed by the owner or his attorney-in-fact or other

persons legally authorized to make the transfer; and
3. To be valid against third parties, the transfer must be recorded in the books of the
corporation.
An assignment, without endorsement and delivery, while valid as among the parties,
does not necessarily make the transfer effective. The assignees cannot enjoy the
status of a stockholder, cannot vote nor be voted for, and will not be entitled to
dividends, insofar as the assigned shares are concerned. (Rural Bank of Lipa City,
Inc. vs. CA)
Delivery is not essential where it appears that the person sought to be held as stockholders
are officers of the corporation, and have custody of the stock books. (Tan vs. SEC)
After a valid transfer of share, the right to have such registered commences to exist.
However, it would not follow that said right should be exercised immediately or within a
definite period. (Won vs. Wack Wack Golf & Country Club, Inc.)
Certificates of stock are not negotiable instruments. Consequently, a transferee under a
forged assignment acquires no title which can be asserted against the true owner, unless his
own negligence has been such as to create an estoppel against him. If the owner of the
certificate has endorsed it in blank, and it is stolen from him, no title is acquired by an
innocent purchaser for value. (De Los Santos vs. Republic)

Vicente Ponce vs. Alsons Cement Corporation (GR No. 139802; 10 December
2002)
ISSUE: Whether Ponce can require the corporate secretary, Giron, to register Gaid’s shares
in his name. 

HELD: As between the corporation on the one hand, and its shareholders and third persons
on the other, the corporation looks only to its books for the purpose of determining who its
shareholders are. It is only when the transfer has been recorded in the stock and transfer
book that a corporation may rightfully regard the transferee as one of its stockholders. From
this time, the consequent obligation on the part of the corporation to recognize such rights
as it is mandated by law to recognize arises. Hence, without such recording, the transferee
may not be regarded by the corporation as one among its stockholders and the corporation
may legally refuse the issuance of stock certificates in the name of the transferee even
when there has been compliance with the requirements of Section 64 of the Corporation
Code. The stock and transfer book is the basis for ascertaining the persons entitled to the
rights and subject to the liabilities of a stockholder. Where a transferee is not yet recognized
as a stockholder, the corporation is under no specific legal duty to issue stock certificates in
the transferee's name. A petition for mandamus fails to state a cause of action where it
appears that the petitioner is not the registered stockholder and there is no allegation that
he holds any power of attorney from the registered stockholder, from whom he obtained the
stocks, to make the transfer.

The deed of undertaking with indorsement presented by Ponce does not establish, on its
face, his right to demand for the registration of the transfer and the issuance of certificates
of stocks. Under the provisions of our statute touching the transfer of stock, the mere
indorsement of stock certificates does not in itself give to the indorsee such a right to have a
transfer of the shares of stock on the books of the company as will entitle him to the writ of
mandamus to compel the company and its officers to make such transfer at his demand,
because, under such circumstances the duty, the legal obligation, is not so clear and
indisputable as to justify the issuance of the writ.

As a general rule, as between the corporation on the one hand, and its
shareholders and third persons on the other, the corporation looks only to its
books for the purpose of determining who its shareholders are, so that a mere
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indorsee of a stock certificate, claiming to be the owner, will not necessarily be

recognized as such by the corporation and its officers, in the absence of express
instructions of the registered owner to make such transfer to the indorsee, or a
power of attorney authorizing such transfer. Thus, absent an allegation that the
transfer of shares is recorded in the stock and transfer book of ACC, there appears no basis
for a clear and indisputable duty or clear legal obligation that can be imposed upon the
corporate secretary, so as to justify the issuance of the writ of mandamus to compel him to
perform the transfer of the shares to Ponce.

Forged and Unauthorized Transfers

- What is forged or unauthorized is the transfer of the certificate from the true and
lawful owner to another person.
UNAUTHORIZED ISSUANCE OF CERTIFICATE OF STOCK
- The act of the corporation in issuing a certificate, either fraudulently or by mistake.
RULE: In forged or unauthorized transfer of stock the purchaser acquires no title as against
the lawful owner and will have no right or remedy against the corporation (non-
negotiability of stock certificates).
EXCEPTIONS: If after such forged or unauthorized transfer, the corporation issues a new
certificate and such certificate passes into the hands of subsequent bona fide purchaser, the
latter may rightfully acquire title thereto since the corporation will be estopped to deny the
validity thereof. The subsequent purchaser in good faith took the shares by virtue of the
genuineness of the certificates issued by the corporation or of the representation made by
the corporation that the same is valid and subsisting and that the person named therein is a
stockholder of the corporation. He may therefore, compel the corporation to recognize him
as a stockholder or claim reimbursement and damages against the latter.
Issuance of Stock Certificates
SEC. 63. Issuance of Stock Certificates. – No certificate of stock shall be issued to a
subscriber until the full amount of the subscription together with interest and expenses (in
case of delinquent shares), if any is due, has been paid.

Subscriptions to shares of stock are indivisible. Thus, 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.
Once a subscriber has paid his subscription in full, he becomes entitled to be issued a stock
certificate.
The duty of the corporate officers to issue stock certificates to those entitled is a ministerial
duty enforceable by mandamus.
A stockholder whose subscription is not fully paid may not be issued a stock certificate for
that portion already paid. (Fua Cun vs. Summers and China Banking Corporation)

Watered Stocks

SEC. 64. Liability of Directors for Watered Stocks. – A director or officer of a corporation
who: (a) consents to the issuance of stocks for a consideration less than its par or issued
value; (b) consents to the issuance of stocks for a consideration other than cash, valued in
excess of its fair value; or (c) having knowledge of the insufficient consideration, does not
file a written objection with the corporate secretary, shall be liable to the corporation or its
creditors, solidarily with the stockholder concerned for the difference between the value
received at the time of issuance of the stock and the par or issued value of the same.
 CORPORATION LAW

- One which is issued by the corporation as fully paid-up shares when in fact the whole
amount of the value thereof has not been paid.
Directors or officers shall be solidarily liable with the stockholder concerned to the
corporation and its creditors for the difference between the fair values received at the time
of issuance of the stock and the par or issued value of the same for the following acts:
1. Consenting to the issuance of watered stocks; or
2. Having knowledge thereof, failing to forthwith express his objection in writing and
file the same with the corporate secretary.
All creditors, whether prior or subsequent to the issuance of watered stock may enforce
payment of such water.
Ways in which watered stocks may be issued:
1. For a monetary consideration less than its par or issued value;
2. For a consideration in property, tangible or intangible, valued in excess of its fair
market value;
3. Gratuitously or under an agreement that nothing shall be paid at all; or
4. In the guise of stock dividends when there are no surplus profits of the
corporation.

Evil effects of stock watering:

1. The corporation is deprived of its capital thereby hurting its business prospects,
financial capability and responsibility;
2. Stockholders who paid their subscriptions in full, or promised to pay the same, are
injured and prejudiced by the reduction of their proportionate interest in the
corporation; and
3. Present and future creditors are deprived of corporate assets for the protection of
their interest.
Two theories advanced as the basis for the liability on water stocks:
1. Trust fund doctrine – treating the capital of the corporation, inclusive of the unpaid
portion of subscriptions to said capital, as a “trust fund” which the creditors have a
right to look up to for the satisfaction of their claims.
2. Fraud or misrepresentation theory – liability is based on the false representation
made by the corporation and the stockholder concerned to the creditors that the true
par value or issued price of the shared has been paid or promised to be paid full.
Effects of issuance of watered stock:
1. As to the corporation – when a corporation is guilty of ultra-vires acts which
constitute an injury to or fraud upon the public, or which will tend to injure or defraud
the public, the State may institute a quo-warranto proceeding to forfeit its charter for
the misuse or abuse of its franchise.
2. As between the corporation and the subscriber – the subscription is void; the
subscriber is liable to pay the full par or issued value thereof, to render it valid and
effective.
3. As to the consenting stockholders – they are estopped from raising any objection
thereto.
4. As to dissenting stockholder – in view of the dilution of their proportionate interest
in the corporation, they may compel the payment of the “water” in the stock
 CORPORATION LAW

solidarily against the responsible and consenting directors and officers inclusive of
the holder of the watered stock.
5. As to creditors – they may enforce payment of the difference in the price, or the
water in the stock, solidary against the responsible directors/officers and the
stockholders concerned.
6. As against transferees of the watered stock – his right is the same as that of his
transferor. If however, a certificate of stock has been issued and duly indorsed to a
bona fide purchaser, without knowledge, actual or constructive, the latter cannot be
held liable, at least as against the corporation, since he took the shares on reliance of
the misrepresentation made by the corporation that the stock certificate is valid and
subsisting. This is because a corporation is prohibited from issuing certificates of
stock until the full value of the subscriptions have been paid and could not, therefore,
deny the validity of the stock certificate it issued as against a purchaser in good faith.
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.

Enforcement and Payment of Unpaid Subscriptions

When unpaid subscription or any percentage thereof, together with interest if required, shall
be paid:
1. On the date or dates fixed in the contract of subscription; or
2. On the date or dates that may be specified by the board of directors pursuant to a
“call” declaring any or all unpaid portion thereof to be so payable.
Two possible remedies available to the corporation to enforce payment of unpaid
subscription:
1. By board action (delinquency sale);
2. By a collection case in court.

Failure or refusal of the corporation, through its board of directors to enforce or collect
payment of unpaid subscription will not prevent the creditors or the receiver of the
corporation to institute a court action to collect the unpaid portion thereof (trust fund
doctrine).
Procedure for the enforcement of payment through board action:
1. The board of directors, by a formal resolution, declares the whole or any
percentage of unpaid subscriptions to be due and payable on a specific date.
However, if the contract of subscription provides the date or dates when payment is
due, no “call” declaration of the board is necessary;
2. The stockholders concerned are given notice of the board resolution by the
corporation either personally or by registered mail. Publication of the notice of call is
not required unless the by-laws provide otherwise. Notice is not likewise necessary if
the contract of the subscription stipulates a specific date when any unpaid portion is
due and payable;
3. Payment shall be made in the date specified in the call or on the date provided for
in the contract of subscription;
4. Failure to pay on the date required in the call or as specified in the contract of
subscription will render the entire balance due and payable and making the
stockholder liable for the interest;
 CORPORATION LAW

5. If within 30 days from the date stated in the call or as may be provided in the
contract of subscription no payment is made, all the stock covered by the
subscription shall become delinquent and shall be subject to a delinquency sale;
6. The board, by resolution, orders the sale of the delinquent stock stating the
amount due and the date, time and place of the sale;
7. The sale shall be made not less than 30 days nor more than 60 days from the date
the stocks became delinquent;
8. Notice of the sale, with the copy of the board resolution should be sent to every
delinquent stockholder either personally or by registered mail;
9. Publication of the notice of sale must be made once a week for two consecutive
weeks in the newspaper of general circulation in the province or city where the
principal officer is located;
10. Sale at public auction if no payment is made by the delinquent stockholder in
favor of the bidder who offered to pay the full amount of the balance in the
subscription, inclusive of interest, cost of advertisement and expenses for the
smallest number of shares;
11. Registration or transfer of the shares of stock in the name of the bidder and
corresponding issuance of the stock certificate covering the shares successfully
bidded;
12. If there be any remaining shares, the same shall be credited in favor of the
delinquent stockholder who shall be entitled to the issuance of a certificate of stock
covering such shares;
13. If there is no bidder at the public auction who offers to pay the total amount due
plus interest, cost and expenses, the corporation may, subject to the provisions of
the Code, bid for the same and the total amount due shall be credited or paid in full
in the corporate books; and
14. The shares so purchased by the corporation shall be vested in the latter as
treasury shares.
Highest bidder – is such bidder who shall offer 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 or fraction of a share.
Grounds to question the delinquency sale:
1. Irregularity or defect in the notice of sale; or
2. Irregularity or defect in the sale itself.

Two conditions before an action to recover delinquent stocks irregularly sold may be
allowed:
1. The party seeking to maintain such action first pays or tenders to the party holding
the stock the sum for which the same was sold, with interest from the date of the
sale at the legal rate; and
2. The action shall be commenced by the filing of a complaint within six months from
the date of the sale.
A “call” is a condition precedent before the right of action to institute a recovery suit
accrues. A demand is required before a debtor may incur a delay in the performance of his
obligation.
Instances when a “call” is not necessary:
 CORPORATION LAW

1. The contract of subscription provides for a date or dates when payment is due; or
2. The corporation has become insolvent.
 A subscription for shares of stock does not require an express promise to pay the
amount subscribed, as the law implies a promise to pay on the part of the subscriber.
The subscriber is as much bound to pay the amount of the share subscribed by him
as he would be to pay any other debt, and the right of the company to demand
payment is no less incontestable. (Velasco vs. Poizat)
 Notwithstanding the fact that the by-laws of the corporation provides for a method
for the collection of the unpaid portion of stock subscriptions, the corporation may
still make use of the methods provided by the Code. (De Silva vs. Aboitiz & Co.)
RULE: A valid and binding subscription for stock of a corporation cannot be cancelled so as
to release the subscriber from liability thereon.
Exception: Consent of all the stockholders is given.
Exceptions to the exception:
1. Bona fide compromise;
2. Set-off of a debt due from the corporation; or
3. Release supported by consideration. (Lingayen Gulf vs. Baltazar)
 The NLRC has no jurisdiction to determine intra-corporate disputes between the
stockholder and the corporation as in the matter of unpaid subscriptions. Unpaid
subscriptions are not due and payable until a call is made by the corporation for
payment. (Apocada vs. NLRC)
 Subscription to the capital of a corporation constitutes a fund to which the 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 debt. (Lumanlan vs. Cura)
 The President of the Philippines is devoid of the prerogative of suspending the
operation of any stature or any of its items. Thus the President cannot condone the
payment of stock subscriptions in the event that the counterpart fund to be invested
by the government would not be available. (PNB vs. Bitulok Sawmill, Inc.)
 A stockholder is personally liable for the financial obligations of a corporation to the
extent of his unpaid subscription. (Edward Keller & Co., Ltd. vs. Cob Group
Marketing, Inc.)
 The subscription to capital stock of the corporation, unless otherwise stipulated, is
not payable at the moment of the subscriptions but on a subsequent date which may
be fixed by the corporation. (Garcia vs. Suarez)
 Shares of stock become delinquent when no payment is made on the balance of all or
any portion of the subscription on the date or dates fixed in the contract of
subscription without need of call, or on the date specified by the board of directors
pursuant to a call made by it.

RULE: No delinquent stock shall not be entitled to:

1. Be voted for or to vote;
2. Representation at any stockholder's meeting; or
3. Any of the rights of a stockholder.
 CORPORATION LAW

Exception: Delinquent stocks are entitled to the right to dividends (any cash dividends due
on delinquent stockholders shall first be applied to the unpaid balance on his subscription
plus cost and expenses, while stock dividends shall be withheld until his unpaid subscription
is paid in full).

RULE: Holders of subscribed shares not fully paid which are not delinquent shall have all the
rights of a stockholder.
Exception: Shares of stock not fully paid are not entitled to be issued a certificate of stock.

Requirements and procedure for issuance of new certificates of stock in lieu of those lost,
stolen or destroyed:

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

representative shall file with the corporation an affidavit in triplicate setting forth:
a. The circumstances as to how the certificate was lost, stolen or destroyed;
b. The number of shares represented by such certificate;
c. The serial number of the certificate; and
d. The name of the corporation which issued the same.
2. He shall also submit such other information and evidence which he may deem
necessary.
3. Publication of a notice in a newspaper of general circulation published in the place
where the corporation has its principal office, once a week for 3 consecutive weeks at
the expense of the registered owner of such certificate of stock.
4. If no contest has been presented within 1 year from the date of the last
publication, 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. However, the registered owner may
file a bond or other security, effective for a period of 1 year, for such amount and in
such form and with such sureties as may be satisfactory to the board of directors, in
which case a new certificate may be issued even before the expiration of the one 1
year period.
5. 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, the issuance of the new
certificate of stock shall be suspended until the final decision by the court regarding
the ownership of said certificate of stock.

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.
Effects of Delinquency

SEC. 70. Effect of Delinquency. – No delinquent stock shall be voted for, be entitled to
vote, or be represented 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 payment is made by the holder such
delinquent stock for the amount due on the subscription with accrued interest, and the
costs and expenses of advertisement, if any.
 CORPORATION LAW

Effects of stock delinquency

1. Upon the stockholder
a. Accelerates the entire amount of the unpaid subscription
b. Subjects the shares to interest expenses and costs
c. Disenfranchises the shares from any right that inheres to a stockholder, except the
right to dividends.

NOTE: Dividends shall be applied to any amount due on said shares, or, in the case of stock
dividends, to be withheld by the corporation until full payment of the delinquent shares.

2. Upon the director owning delinquent shares

a. If the delinquent stockholder is a director, the director shall continue to be a
director but he cannot run for re-election.
b. A delinquent stockholder seeking to be elected as director may not be a candidate
for, not be duly elected to, the board.
Rights of Unpaid Shares
SEC. 71. Rights of Unpaid Shares, Nondelinquent. – Holders of subscribed shares not fully
paid which are not delinquent shall have all the rights of a stockholder.

Unpaid shares - if not delinquent, are entitled to all the rights of a stockholder including the
right to vote.

Lost or Destroyed Certificates

SEC. 72. Lost or Destroyed Certificates. – The following procedure shall be followed by a
corporation in issuing new certificates of stock in lieu of those which have been lost,
stolen or destroyed:

(a) The registered owner of a certificate of stock in a corporation or such person’s legal
representative shall file with the corporation an affidavit in triplicate setting forth, if
possible, the circumstances as to how the certificate was lost, stolen or destroyed, the
number of shares represented by such certificate, the serial number of the certificate and
the name of the corporation which issued the same. The owner of such certificate of stock
shall also submit such other information and evidence as may be deemed necessary;

(b) After verifying the affidavit and other information and evidence with the books of the
corporation, the corporation shall publish a notice in a newspaper of general circulation in
the place where the corporation has its principal office, once a week for three (3)
consecutive weeks at the expense of the registered owner of the certificate of stock which
has been lost, stolen or destroyed. The notice shall state the name of the corporation, the
name of the registered owner, the serial number of the certificate, the number of shares
represented by such certificate, and shall state that after the expiration of one (1) year
from the date of the last publication, if no contest has been presented to the corporation
regarding the certificate of stock, the right to make such contest shall be barred and the
corporation shall cancel the lost, destroyed or stolen certificate of stock in its books. In
lieu thereof, the corporation shall issue a new certificate of stock, unless the registered
owner files a bond or other security as may be required, effective for a period of one (1)
year, for such amount and in such form and with such sureties as may be satisfactory to
the board of directors, in which case a new certificate may be issued even before the
expiration of the one (1) year period provided herein. If a contest has been presented to
the corporation or if an action is pending in court regarding the ownership of the
certificate of stock which has been lost, stolen or destroyed, the issuance of the new
certificate of stock in lieu thereof shall be suspended until the court renders a final
decision regarding the ownership of the certificate of stock which has been lost, stolen or
 CORPORATION LAW

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.

Procedure for the issuance of a new stock certificate in lieu of those which have
been lost, stolen or destroyed
1. The registered owner of a certificate of stock in a corporation or his legal representative
shall file with the corporation an affidavit in triplicate setting forth:

a. If possible, the circumstances as to how the certificate was lost, stolen or

destroyed;
b. The number of shares represented by such certificate;
c. The serial number of the certificate and the name of the corporation which issued
the same.

He shall also submit such other information and evidence which he may deem necessary.

2. After verifying the affidavit and other information and evidence with the books of the
corporation, the latter shall publish a notice in a newspaper of general circulation published
in the place where the corporation has its principal office, once a week for three (3)
consecutive weeks at the expense of the registered owner of the Certificate of Stock.
Contents of notice:
a. Name of the corporation;
b. Name of the registered owner;
c. Serial number of the certificate of stock; and
d. Number of share represented by the certificate of stock.

3. 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 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.

After the expiration of the 1 year period to contest, such right shall be barred unless the
registered owner files a bond or other security in lieu thereof as may be required, effective
for a period of 1 year, for such amount and in such form and with such sureties as may be
satisfactory to the BOD, in which case, a new certificate may be issued even before the
expiration of the 1 year period provided herein.
4. Provided that if a contest has been presented to said corporation or if an action is pending
in court regarding the ownership of said certificate of stock which has been lost, stolen or
destroyed, the issuance of the new certificate of stock in lieu thereof shall be suspended
until the final decision by the court regarding the ownership of said certificate of stock which
has been lost, stolen or destroyed.

Oppositions on the issuance of new certificates

If there are oppositions on the issuance of new certificates, the corporation may file an
interpleader proceeding to compel the parties to litigate among themselves.

Liability of the corporation for the issuance of new certificates of stock in case of
lost or destroyed certificate
 CORPORATION LAW

RULE: 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
(safe harbor provision).
XPN: Where there is fraud, bad faith, or negligence on the part of the corporation and its
officers.

Rights and Liabilities of Stockholders

1. Participation in the management of the corporate affairs by exercising their right

to vote and be voted upon either personally or by proxy;
2. To enter into a voting trust agreement;
3. To receive dividends and to compel their declaration if warranted;
4. To transfer shares of stock subject only to reasonable restrictions inclusive of the
right of the transferee to compel the registration of the transfer in the books of
the corporation;
5. To be issued a certificate of stock for fully paid-up shares;
6. To exercise pre-emptive rights;
7. To exercise their appraisal right;
8. To institute and file a derivative suit;
9. To recover shares of stock unlawfully sold for delinquency;
10. To inspect the books of the corporation;
11. To be furnished the most recent financial statements of the corporation;
12. To be issued a new stock certificate in lieu of the lost or destroyed one;
13. To have the corporation dissolved;
14. To participate in the distribution of the assets of the corporation upon dissolution;
15. In the case of a close corporation, to petition the SEC to arbitrate a deadlock; and
16. In the case of a close corporation, to withdraw therefrom, for any reason, and to
compel the purchase of his shares.
Certain obligations and liabilities of stockholders:
1. To pay the corporation the balance of his unpaid subscriptions;
2. To pay interest on his unpaid subscription if required by the by-laws or by the
contract of subscription;
3. To answer to creditors for the unpaid portion of their subscription;
4. To answer the “water” in their stocks;
5. To be liable, as general partners, for all debts, liabilities and damages of ostensible
corporations; and
6. In case of a close corporation, to be personally liable for corporate torts when they
actively participate in the management of the corporation.