Chapter XII – Consideration for Shares

Form of Consideration

Under Sec 62, stocks shall not be issued for a consideration less than the par or issued price thereof, and shall not be issued in exchange for PNs or future services, but only for cash actually paid, property actually received and necessary to the business, or services actually rendered to the corporation o Whenever a corporation issues shares, it must receive a consideration equal to or at least their par or issued value o Such consideration need not be paid in full at the time of issuance, but the unpaid portion shall be a debt and must be paid Consideration may be in any two or more of the ff forms: o Actual cash paid to the corporation  Villanueva: it is not required that there be actual payment of cash consideration in order to make the subscription agreement valid and binding  Subscription agreement is a consensual contract, which is perfected and valid and binding upon meeting of the minds on the subject matter—the shares itself—and the consideration  Non-payment of the consideration does not render the subscription contract void  Only upon call by the board or when the terms of the subscription agreement makes payment due and demandable, would the SH be legally required to pay actual cash to the corporation • Failure to do so would subject the shares to a delinquency declaration and suspend the rights of the SH  Notes receivable vs. subscription receivable as consideration: notes would be counted as an asset by the corporation, subscription receivables as deductions from SH’s equity o Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes  Requisites: • must lawfully acquired and held • must be necessary and proper for it to own in carrying on its business • must be of substantial nature, having pecuniary value capable of being ascertained • must be real and tangible

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must be of a nature that it can be delivered instead of being merely communicated to the officers  includes services which have already been performed as long as they are capable of valuation and are fairly valued  receivables may be accepted as valid payment • must be subject to verification by the SEC • shares to be held in escrow until actual payment of the amount Labor performed for or services actually rendered to the corporation  Must be actually rendered and value ascertainable  Must be in GF and no fraud is perpetrated  Future services not allowed as consideration and such agreement is VOID (62) • Villanueva: Corporation should not be estopped to deny that the services constituted payment of the stock subscription even though it has received the benefit thereof  a corporation under a management contract may be issued shares in payment for the reasonable value of its services; but since it is not a SH of the managed corporation, such shares must come from the unissued shares of the latter’s original authorized capital stock and not in the form of stock dividends (Nielson case) Previously incurred indebtedness by the corporation  May either be accounts payable or notes payable  Valuation must have been established prior to even negotiating on the subscription agreement  Set-off of corporate indebtedness: also covered by 62 Amounts transferred from unrestricted retained earnings to stated capital  Covers the declaration of stock dividends and has the effect of capitalizing unrestricted retained earnings  Consideration therefor is merely book entries Outstanding shares exchanged for stocks in the event of reclassification or conversion  Changes the composition or manner of classification of the capital stock and should not affect its integrity

Liability on watered stocks

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Watered Stocks: Shares issued as fully paid when in truth no

consideration is paid, or the the consideration received is known to be less than the par value or issued value of the shares o Includes bonus shares and discount shares issued at a discount or under an agreement to pay less than par value in money o Shares issued as fully paid up but no consideration is actually paid in form or consideration is inadequate because it is not equal to the par or issued value, the SH is liable to the corporation and its creditors for the unpaid portion o Shares issued as fully paid up in consideration of property at an overvaluation — Stock watering prohibited because: o Corporation is deprived of needed capital and the opportunity to market its securities to its own advantage o Existing and future SHs who are also injured by the dilution of their proportionate interests in the corporation o Present and future creditors who are injured as the corporation is deprived of the assets or capital and reduces the value of the corporate assets which stand as a substitute for the SHs personal liability to them o Persons who deal with it or purchase its securities who are deceived because stock watering is invariable accompanied with misleading corporate accounts and financial statements — Code makes directors liable for watered stocks under Sec 65 o If he consents to the issuance, or… o … having knowledge thereof, does not forthwith express his objection in writing and file it with the corporate secretary  directors become solidarily liable liability will be to ALL directors, whether they became such prior or subsequent to the issuance of watered stock  reliance of the creditors is immaterial and fraud is not an element of liability  even no-par stocks can be watered stocks where they are issued for less than their issued value — Three theories for the liability o Subscription contract theory—the subscription contract is the source and measure of the duty of a subscriber to pay for his shares; if the contract releases him from further liability, the subscriber ceases to be liable  Prohibited in RP jurisdiction o Fraud or misrepresentation theory—holds a SH liable for watered stock on the basis of tort or misrepresentation. The wrong done to the creditor is fraud or deceit in falsely representing that the par value has been paid or agreed to be paid in full o Trust fund doctrine—all corporate creditors would have legal basis to

recover against SHs and guilty officers  Prevailing view in RP Triplex Shoe Co v Rice & Hutchins Inc. F: Triplex’ authorized capital stock totaled $150K, broken down into $75000 PS (par value $100), and $75000 no par CS. Directors meeting: Albert Dillman – Pres; Solly – VP and Sec, and Louis Dillman – Treasurer ….. agreed to receive lower compensation and in consideration of other services to be rendered and for managing the co., additional stocks were to be given as follows: A Dillman – 376 CS, L Dillman – 114 CS, Solly – 50 CS. (Solly transferred stock to 2 Dillmans). An amendment was proposed, 2375 PS and 175 no-par CS. Rice and Hutchins purchased 249 shares of PS and 83 shares CS (as bonus). The Dillman’s own 540 CS shares. During election of directors, the “B” ticket of the Dillmans were elected. Rice questions the election, saying the there was no consideration for the CS at the incorporation of Triplex. Issue: WON there was any CS voted for the B Ticket at the 1929 election that was legally issued and outstanding at that time? H: No, there was none. (Chancellor’s decision: No outstanding Cs and PS stocks were voted). The no par value CS issued before and after the amendment was invalid because consideration was never fixed. The certificate must state the total number of shares authorized that are without nominal or par value. The provision in the articles that a certain part of capital is in shares of CS no par and without stating the number of shares is not authorized and is meaningless in the eyes of the law. Thus the CS in the original AOI was invalid stock. The consideration of the shares issued to Dillman were alleged to have been for services rendered in organizing the company, and in agreeing to serve at a smaller compensation that they would get otherwise. Clearly the consideration mentioned, consisting of services, was not of such as the law contemplates. The services do not appear to be essentially different or greater than the services ordinarily rendered in the promotion and organization of the corporation. (also, services still to be rendered are not lawful consideration) -- Hence, no proper and lawful consideration was for the CS at the 1st Board Meeting. McCarty v Langdeau: F: Langdeau is the receiver of Estate Life

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Insurance Co, and McCarty is the President of the company. Langdeau sues McCarty for the unpaid balance of his stock subscription, iao $387,380 (he paid only $20) representing 19, 370 shares of no par stock. The contract between the corporation and McCarty was that he would: -- pay a minimum of $20/month for the balance not exceeding 30 months, evidenced by a note, payable w/o interest. --that the company will have a lien on his shares until the note is paid. -- He was to receive as much stock as his actual payments , but the company would be able to vote the stock while the contract is in force (to be voted by McCarty) -Yet despite his default (only made a total payment of $8,120), the company did not elect to terminate the contract. He claims that the contract is void for it violates the constitution of Texas (“no corp. shall issue stock or bond except for money paid, labor done or property actually received, and all fictitious increase of stock or indebtedness shall be void.”) H: --the contract is enforceable No declaration in the consti prohibition that a transaction in w/c something other than money, labor or property shall be received in payment of the stock is utterly void. If a security is to be accepted in payment for the stock, e.g. a subscriber’s note, w/c is not property for such purpose, the Consti doesn’t say that it, or the stock issued for it, shall be void. The word “void” is used only once and has reference to the distinct clause w/c says that all fictitious increase of stock or indebtedness shall be void. --the affairs of the corporation in this case are in the hands of a receiver who represents not only the SHs, but also the creditors, and the rights of creditors have now intervened. The constitution of Texas prohibits such a transaction and makes it unlawful . It was aimed against his acquiring stock except upon lawful payment. It was designed for the protection of the corporation and its creditors. In such a case as this where the SH has paid nothing for his stock and deceived the public, he cannot be permitted to take shelter under the constitutional prohibition, which protects the corporation and its creditors. --Purpose is to give integrity to the corp’s capital. It is to prevent false pretense at its hands, and avoid imposition upon the public. None of these objects would be promoted by declaring a note given by a subscriber for stock subscription in the hands of a bonafide stockholder.

original SHs or incorporators of the Dock-Hop Co, seeking to collect on the unpaid balances on the par value of their shares. Complaint alleged that only 25c on the dollar had been paid in on the par value of their shares (watered stocks). Defendants deny however, that they are subscribers, or that the full value of their stock had not been paid. I: W/n SHs are required to make up any difference which may exist between what was actually paid on their stock and its par value. Yes -- but NOT as to the transferee of the watered stocks, which are the defendants herein. (lower court ruling is reversed) H: Court found that only 5/12 of the par value had been paid. At the lower court, it ruled for the plaintiff on the theory that it made no difference WON the defendants were subscribers: the mere fact that that they were SHs and the shares they held , although issued as fully paid were in fact issued for property w/c the directors didn’t believe was equal in value, were enough to warrant judgment against them. Where a person accepts the ownership of stock which purports to be fully paid, it cannot be said of him that he accepts the stock and enters upon the relation of SH for the corporation. On the contrary, he accepts the ownership of the stock and enters upon the relationship of SH with the contrary understanding. What then is the principle upon which the holder of watered stock is under any circumstances held obligated to supply substance and make good what it pretended the corporation received by did not? The SH is held upon the principle that one giving credit to the corporation is entitled to rely upon its ostensible capitalization as the basis for the credit given, and that, when the corporation issues watered stock, and thereby assumes an ostensible capitalization in excess of its real assets, the transaction necessarily involves the misleading of subsequent creditors, and whether done with that purpose actually in mind or not, is at least constructive fraud upon such creditors. In other words, the essence of the right of the creditor to brush aside the issuance of stock as fully paid, and to show that it was not such and to compel payment, is that its issuance as fully paid was as to him a fraud. --the transferee of watered stock who takes it in ignorance of its real character is not required, even at the suit of the of a creditor of the company, to pay anything more upon it. Campos: The innocent purchaser of watered stocks is thus treated like the holder in GF of nego instrument, based on the policy of encouraging the free transferability of shares as a means of enhancing the growth of

Rhode v Dock-Hop Co. F: Judgment creditors of a corporation sues the

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commerce and industry. Apparently the remedy of the defrauded creditor would be against the original owner of the watered stocks. How payment of Shares enforced — Under 66, subscribers for stock shall pay to the corporation, interest on all unpaid subscriptions from date of the same, if so required and fixed in the by-laws o No rate= legal interest o Any unpaid balance would be a debt owed by the subscriber to the corporation o Lingayen Gulf v Baltazar: He may not be released from such obligation to pay the unpaid balance, unless it is with the consent of all the SHs, without prejudice to creditors, and upon adequate consideration  but a corporation may enter into a bona fide compromise with a subscriber who is unable to pay his shares which he has surrendered to the corproation Under 67, board 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, with accrued interest in each case and subject to the provisions of the contract of subscription How payment is applied? o Full payment for corresponding number of shares, par value covered by such payment, or… o … payment pro-rata to each and all the entire number of shares subscribed Under 13: 25% of total subscription must be paid, paid-up capital not less than P5,000.00 o Balance payable on dates fixed in the subscription contract o No fixed dates, upon call by the board Call on unpaid subscriptions o Resolution of the board o Notification of the resolution on the SHs o The time when subscriptions become payable When call not necessary o The subscription contracts expressly states that it shall be payable not upon call, but immediately or on a specified day or upon installments o Corporation becomes insolvent, regardless of any contrary stipulation in the subscription contract The corporation has two (2) alternatives for the enforcement of a subscription contract: (1) The sale of delinquent stocks (2) Court action —

1. delinquency sale; requisites Under 68 the board may, by resolution, order the sale of delinquent stock and specifically state: o the amount due and all accrued interest o date, time, place of the sale (30-60 days) o notice of sale with copy of resolution sent to every delinquent SH either personally or by registered mail When delinquent? Sec 67 o Unpaid subscription shall be made on the date specified in the contract or on date stated in the call o No payment within 30 days from said dates= all stocks covered shall become delinquent How do shares become delinquent? o Failure to pay upon call o Failure to pay on date specified in subscription agreement 69: no action to recover delinquent stock sold can be sustained on the ground of irregularity or defect in the notice or in the sale itself amount of subscription may be payable in installments and may specify the date or dates when payments are to be made o if unpaid still, balance becomes automatically due and demandable without need for a call o until such date arrives, no demand or call for payment may be validly made by the board o Call by the board: the board may at any time declare all or any part of the subscription due and payable where there is no date fixed in the subscription contract  Power to make a call discretionary with the board  Once made, call must operate uniformly on all SHs in order to prevent favoritism or oppression (Lingayen Gulf v. Baltazar)  No payment despite call, whole balance of subscription becomes due and payable o 68: If not paid within 30 days from date fixed in subscription contract or date stated in the call, ALL stocks covered by the subscription, become AUTOMATICALLY delinquent and may be sold by the corporation at a delinquent sale  notice of sale and copy of resolution must be given to all delinquent SHs  publication at least 2 weeks prior to sale  lacking any of these requirements, delinquent sale would be VOIDABLE at the instance of the delinquent SH within 6 months from the sale and tenders payment to the purchaser

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if corporation acquires delinquent shares, they become treasury shares which may be disposed of by the corporation at such reasonable price as the board may fix

2. court action Under 70: nothing in the Code prevents the corporation from collecting by action in a court the amount due on any unpaid subscription with accrued interest, costs, and expenses — If corporation chooses to sue in court, a valid call would still be a requisite to liability (Da Silva v Aboitiz)… — …unless the corporation becomes insolvent—all unpaid subscriptions become payable and are immediately recoverable in a court action by the assignee in insolvency for the benefit of the creditors (Velasco v Poizat) — Velasco v Poizat. F: Velasco is the assignee in the insolvency of Philippine Chemical Product Company and is seeking to recover from Jean Poizat the unpaid subscription made by him to the stock of the corporation. Poizat, one of the incorporators and once the treasurer and manager of the corporation, subscribed for 20 shares and paid in the par value of 5 shares (P500). While in this capacity he called in and collected all subscriptions except 15 shares subscribed by him and another 15 by Jose Infante. 2 resolutions were adopted by the board: (1) proposal that the directors or SHs make good by new subscription the 15 shares w/h had been surrendered by Infante, and that the latter would be released from his obligation to the corporation; (2) as to Poizat, who was absent, he should be required to pay the amount of his subscription upon the 15 shares he owes to the corporation. Poizat, in a letter states that he was also to be relieved from his subscription, and that he prefers “to lose the whole of the 25% rather than continue investing more money in a… ruinous proposition.” Soon the company became insolvent, and Velasco as assignee sues Poizat for his unpaid subscription. H: Poizat is still liable on his subscription. A stock subscription is a contract between the corporation on one side, and the subscriber on the other. It is a rule that 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. A stock subscription is a subsisting liability from the time the subscription is made, since it requires the subscriber to pay interest quarterly from that date unless he is relieved from such liability by the by-laws.

There are two (2) remedies for the enforcement of stock subscriptions: (1) the first is a special remedy which consists in permitting the corporation to put up the unpaid stock for sale, and is merely a remedy in addition to that which proceeds by action in court; (2) the other is an action in court, which exists even though no mention thereof is made in statute. Under the Insolvency Law, the assignee of the insolvent corporation succeeds to all the corporate rights of action vested in the corporation prior to its insolvency, and the assignee therefore has the same freedom with respect to suing upon a stock subscription as directors themselves would have had under Sec 49 above cited. Another reason: When insolvency supervenes upon a corporation and the court assumes jurisdiction to wind it up, all unpaid stock subscriptions become payable on demand, and are at once recoverable in an action instituted by the assignee in court. It evidently cannot be permitted that a subscriber should escape from his lawful obligation by reason of the failure of officers to perform their duty in making the call; and when the original mode of making the call becomes impracticable, the obligation must be treated as due upon demand. As to the Infante release, it is not prejudicial to the right of the corporation or its assignee to recover from Poizat, although in releasing Infante, the board overstepped its bounds and should still be liable on shares that were not taken up and paid for by the corporation. —

Poizat continued to be liable on his subscription When insolvency supervenes and court assumes jurisdction to wind up, unpaid stock subscriptions become payable on demand and are at once recoverable in an action by the assignee in insolvency

Lingayen Gulf Electric v Baltazar. F: Baltazar subscribed for 600 shares (P100 par value) of Lingayen Gulf and paid P15000, plus another payment leaving a balance of P18500 unpaid. In a SH meeting it was agreed to call the balance of all unpaid subscribed capital stock, the first 50% payable within 60 days, remaining 50% payable within 60 days hence. All unpaid subscription after due dates of both calls would be subject to 12% interest. All remaining unpaid shares would revert to the corporation. Baltazar offered to withdraw completely from the corporation by selling out all his shares of stock. Another resolution (No. 17) was adopted

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rescinding the previous resolution because the corporation was not in a financial position to absorb the unpaid balance of the subscribed capital stock. Yet another resolution (No. 4) was adopted to revalue the stock and assets of the corporation to attract outside investors. Although Baltazar was informed of the demand for payment the call however was not published in a newspaper of general circulation. Another demand was made upon Baltazar, who ignores the same upon the grounds that 1. action is premature because there was no valid call, and 2. granting there was a valid call, he was released from liability thru SH Res. Nos. 17 and 4. . The corporation sues. TC rules ifo Baltazar, holding that the resolution was null and void for lack of publication. H: TC was correct that the law requires that notice of any call for the payment of unpaid subscription should be made not only personally but also by publication. The publication requirement is mandatory, and the reason is because it is not only to assure notice to all subscribers, but also to assure equality and uniformity in the assessment on SHs. Not only must personal notice be given in one of these matters, but the notice must also be published once a week, for 4 consecutive weeks in some newspapers. The court reiterated the ruling in Velasco v Poizat, where the corporation involved was insolvent, in which case all unpaid stock subscriptions become payable on demand and are immediately recoverable in an action instituted by the assignee. But when the corporation is a solvent concern, the rule is that the suit demanding for payment of unpaid subscriptions must be preceded by a call or assessment against the subscribers, and only then will there be a right of action. As to claim of Baltazar that Resolution 17 released him from obligation to pay, in order to effect the release, there must be unanimous consent of the SHs (here, 7 SHs were absent when said Res was made) . The GR is that a valid and binding subscription cannot be cancelled so as to release the subscriber from liability thereon without the consent of all the SHs. Furthermore, a subscription cannot be cancelled by the company, even under a secret or collateral agreement for cancellation made with the subscriber at the time of the subscription, as against persons who subsequently suebscribed or purchased without notice of such agreement. Exceptions: pursuant to a bona fide compromise, or to set off a debt due from the corporation, a release, supported by consideration, will be effectual as against dissenting SHs and subsequent and existing creditors. A release which might originally have been held invalid may be sustained after a considerable lapse of time. In the present case, the release claimed by the Baltazar does not fall under the exceptions referred to, because it was not given pursuant to a bona fide compromise or to set off a debt due from the corporation and there was no consideration for it.

(held: not indivisible) — — Reason for mandatory provision that call should be strictly complied with: to assure notice to all subscribers, and to assure equality and uniformity in the assessment on SHs A contract of subscription is at least in the sense that it creates an estoppel, a contract among the several subscribers, and thus none of the subscribers can withdraw from the contract without the consent of the rest and thereby diminish the common fund which all have an interest in Notice for call of payment for unpaid subscriptions must be published, except when the corporation is insolvent—payment is immediately demandable GR: A valid and binding subscription for stock of a corporation cannot be cancelled so as to release the subscriber from liability thereon, without the consent of all the SHs Exceptions in Lingayen really do not constitute a gratuitous release since a valuable consideration is actually received by the corporation such as the cancellation of corporate debt

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Da Silva v Aboitiz & Co Inc. F: Da Silva subscribes for 650 shares (par value of P500) of Aboitiz. He pays only for 200 shares, as there are remaining 450 shares unpaid (P225,000). Thru a Res., the board declared and informed all subscribers and SHs that all shares unpaid by 31 May shall be declared delinquent and to be sold at a delinquency sale on the following June 16. Ad was published as announced in the notice. Da Silva sued Aboitiz Co., contending that in prescribing another method for payment of subscription different from that in the by-laws, the corporation had exceeded its authority. He claims that in Art 46 of the bylaws, all shares subscribed shall be paid out of the 70% of the profit obtained, to be distributed among the subscribers and said Res., violates the said by-law. I: W/N under the by-laws the corporation may declare the unpaid shares delinquent or collect their value through another method. H: YES> The by-law also authorizes and empowers the board to collect the value of the shares subscribed and unpaid by deducting from the 70%, distributable in equal parts among the SHs, to be applied on the payment of the shares. It also authorizes the creation of a special emergency fund, applying the 70% of the profit on the payment of shares not fully paid. Thus it is discretionary on the corporation to do whatever is provided in the said article relative to the application of a part of the 70% of the profit distributable. It also shows that it is the board and not he

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delinquent subscriber that may and must judge and decide whether or not such value must be paid out of the 70% of the profit. It lies therefore, within the discretion of the board to make use of such authority. If the board opts not the make use of such authority, it has two other remedies to accomplish the same purpose, as declared by the Court in Velasco v Poizat: (1) put up the unpaid stock for sale; or (2) direct action in court. In this case the board elected to avail of the first remedy, and complying strictly with the requirements of law, the directors made use of the discretionary power granted by the law and declared that the payment of the subscription to 450 unpaid shares was due and demandable, and that said shares were delinquent. The Board has absolute discretion to choose which remedy it deems proper in order to collect the unpaid subscriptions — Two other remedies: delinquency sale and action in court — National Exchange v Dexter. F: IB Dexter subscribed to 300 shares of CS Salmon & Co., which shall be “payable from the first dividends declared on any and all shares of said company owned by me at the time dividends are declared, until full amount of subscription has been paid.” The subscription was initially paid P15,000, from a dividend declared by the company, supplemented by Dexter’s own money. Dexter incurs a balance of P15000 (par value of 150 shares) still unpaid on his subscription. The assignee of Salmon, National Exchange Co, sues Dexter to recover the balance. TC ruled ifo National Exchange. I: w/n the subscription is payable from the first dividends declared has the effect of relieving the subscriber from personal liability in an action to recover the balance H: Of course not. A corporation has the power to accept subscriptions upon any special terms not prohibited or contrary to law or public policy, provided it does not require the performance of corporate acts beyond the powers conferred, and do not constitute a fraud upon other subscribers, SHs, or creditors. If it is unlawful to issue stock otherwise than as stated it is selfevident that a stipulation in a stock subscription that obligates the subscriber to pay nothing for the shares except as dividends may accrue upon the stock is illegal. This is discriminatory ifo the subscriber, to the detriment of the others. Nor has a corporation the power to receive a subscription such terms as will operate as a fraud upon the other subscribers or SHs by subjecting them to lighter burdens, or by giving greater rights and privileges, or as a fraud upon creditors. As a general rule, an agreement between a corporation and a subscriber, by which the subscription is not he be payable, or is to be payable in part only… is illegal and void as in fraud of creditors or other SHs.

Campos: …Besides assuring equality among SH, the law seeks to protect corporate creditors. Making payment of subscription dependent on the existience of profits or dividends would be contrary to the policy behind the law. Lumanlan v Cura. F: Lumanlan subscribed for 300 shares (par value P50) of Dizon & Co., paying only P1500 of the P15000 par value of the shares. Creditors sued the company, and prayed for a receiver as it appears that the corporation had no assets except credits against those who had subscribed for shares of stock. Tayag was appointed receiver for the purpose of collecting the unpaid subscriptions. Tayag sues Lumanlan for the unpaid shares. TC orders Lumanlan to pay the corporation (plus interest). Pending Lumanlan’s appeal, he agreed to assume the obligation of the corporation to Valenzuela (P8,000), and that if he withdraws his appeal, the corporation would collect only 50% of the amount subscribed by him. Lumanlan then paid Valenzuela and was subrogated in place of Valenzuela (P11,840 incl. interest). Disregarding the agreement and notwithstanding payment made to Valenzuela, the corporation asked for the execution of the judgment in the previous suit and his properties in Tarlac were levied upon. BPI as creditor of the corporation intervenes as the assignee in the insolvency case of the corporation. H: As it is evident that there are other creditors of the corporation, the corporation has a right to collect all unpaid stock subscriptions and any other amounts due it. Subscriptions to the capital of the corporation constitute a fund to which creditors have a right to look for the satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription. A stock subscription is an existing liability from the time subscription is made. Thus the TC ruling is modified and that the corporation is ordered to credit Lumanlan P13840 against the judgment previous (P15109), and to issue to Lumanlan 300 shares of its capital stock upon payment of the difference of the amount (P1269). Effect of Delinquency — Effects of delinquency: (Sec 71) o Cannot be vote for or be entitled to vote or to representation at any SH meeting o Holder not entitled to any rights of a SH  Except right to dividends (restricted by law)  Cash dividends would first be applied to the unpaid

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balance Stock dividends are withheld until payment of unpaid balance o Not entitled to notice of any of the meetings o Shares not included in the determination of a quorum — 43: Once stocks become delinquent due to nonpayment, the holder loses all his rights as SH except only the right to dividends, which will not be paid to him but will be applied to the unpaid balance of his subscription plus costs and expenses o SH cannot vote at the election or at any meeting on any matter o SH cannot even be counted as part of the quorum o SH cannot be vote for as director  Rights and Obligations of holders of Unpaid, but Non-delinquent Stock — Enjoy all privileges of a SH: o the right to vote o the right to receive dividends o But liable to pay interest if in by-laws  Interest is not due unless by-laws provide so  By-laws provide for interest but silent as to rate: legal interest applies o But SH cannot register shares transferred  Although valid between the parties, it cannot affect the corporation  But corporation can allow registration, but it cannot issue a stock certificate until it is fully paid

Cun’s rights consist in an equity of 500 shares and upon payment of the unpaid portion, he becomes entitled to the issuance of the certificate for 500 shares in his favor. As to the CM, the CM would not prevail over liens of third persons without notice; an equity in shares is of such an intangible character that is somewhat difficult to see how it can be treated as chattel and mortgaged in the same manner that the recording of the same will furnish constructive notice to third parties. There can be no doubt that an equity in shares of stock may be assigned and that the assignment is valid as between the parties and as to person to whom notice is brought home. Such an assignment exists here, though it was made for the purpose of securing a debt. As against the rights of fua cun, the bank had no lien unless by virtue of the attachment, but the attachment was levied after the bank had received notice of the assignment of Chua Soco’s interest to fua Cun and was therefore subject to the rights of the latter. Baltazar v Lingayen Gulf Electric. F: Baltazar and Rose were incorporators of the Lingayen Gulf Electric Power Co. and subscribed to: Baltazar = 600 shares (paid 535 shares – after transfers, owned 341 shares w/ cert. plus 65 shares w/o certificate) Rose = 400 shares (paid 375 shares w/ certs)  leaving unpaid a certain portion thereof. It is the company practice to issue certificates of stock to its individual subscribers for unpaid shares of stock. Defendants Ungson et al are small SHs ( <100 shares) of the corporation, and are the majority of the board. Co-defendant Acena is the largest single SH with 600 shares and was responsible for election to the board of two of the 4 majority board members (Ungson Group). Baltazar was responsible for the election of the other 2 (Baltazar Group). Ungson Group which controlled the corporation passed 3 resolutions which threatened to expel the plaintiffs and prevent them from exercising their voting rights: (1) declaring watered stocks issued to Acena, Baltazar, Rose and Jubenville of no value and cancelled the same; (2) all unpaid subscriptions to bear interest, and all payments to be credited to interest first, capital debt second, and ; (3) all stock declared delinquent on the accrued interest are incapacitated to avail of voting power. Baltazar and Rose sought to allow them to vote their fully paid-up shares and to declare the resolutions invalid. A compromise deal was executed, but enforcement by the TC was enjoined by the Ungon Group and asked for amendment. TC amended but was opposed by Baltazar. The Court then reversed the amending decision, ruling that all shares of the capital stock of the corporation covered by fully paid shares are entitled to vote in all meetings. Baltazar claims that once a SH has subscribed to a certain number of

Fua Cun v Summers. F: Chua Soco subscribed for 500 shares (P100 par) of China Banking Corporation, paying ½ and leaving a balance of P25,000. He issued a PN ifo Fua Cun for the balance, securing the note with a CM on the shares of stock, and endorsing the receipt of the stock purchase). Chua Soco was also indebted to China Bank (P37,731.68), and upon default his interest in the 500 shareas was attached and the receipt seized by the sheriff. The attachment was levied after the bank knew of the fact that the receipt had been endorsed to Fua Cun. Fua Cun then sued, contending that by virtue of payment of ½ the subscription price of the shares, Chua Soco in effect became the owner of 250 shares and sought to have his lien on the shares be declared to hold priority over the claim of the bank. China Bank argued that the interest of Chua Soco was merely an equity which cannot be made the subject of a CM. TC ruled ifo Fua Cun. H: TC erred in holding that Chua Soco became owner of 250 shares. Fua

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shares, although he has made partial payments, but is issued a certificate for the paid-up shares, he is entitled to vote the whole number of shares subscribed, whether paid or not. The corporation counters that under the doctrine in the Fua Cun case, a partial payment of a subscription does not entitle the SH to a certificate for the total number of shares subscribed by him, and his right consists only in equity to a certificate of the total number of shares subscribed for, upon payment of the remaining portion of the subscription price. I: W/N a SH with a balance of unpaid shares subscribed is entitled to vote the latter H: YES> The present case does not come under the principle in Fua Cun because it was the practice of the company since its inception, to issue certificates of stock even for unpaid shares and gave voting power to stocks fully paid. The present law requires as a condition before a SH can vote that his full subscription be paid in the case of no par value shares, and with respect to par value shares, the SH can vote the shares full paid, irrespective of the unpaid delinquent shares. A corporation may now, in the absence of provisions in their by-laws to the contrary, apply payments made by subscribers either as full payment for the corresponding number of stock or as payment pro-rata to each and all the entire number of shares subscribed. In this case, corporation chose to apply payments by the SHs to definite shares of stock and had full paid-up shares certificates for the payments. Its call for payments of unpaid subscription and its declaration of delinquency only affecting the remaining number of shares. Here the corporation applied the payments made to the full par value of shares subscribed, instead of the accrued interest. This being the case, the application of payments must be deemed to have been agreed upon by the corporation and the SHs and cannot now be changed without the consent of the SHs concerned. It would therefore result that a corporation may, upon the request of an interested SH, apply payments by them to the full par value of subscribed capital stock. Since it was the practice of the corporation to issue stock certificates to not fully paid subscribers, it may not take away the right to vote granted by the certificate — Stock certificates may be issued for less than the number of shares subscribed for o Provided the par value of each represented by the certificate has been paid o And it is not prohibited by the by-laws — Nava v Peers Marketing Corp. F: --Po was an incorporator of Peers Marketing and subscribed to 80 shares (P100 p.v.) paying 25% of the

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amount of subscription. No certificate of stock was issued. --Po sold to Nava 20 of the shares. In the deed of sale Po represented that he was the absolute and registered owner of the 20 shares sold. -- Nava requested the corporation to register the sale, but was denied because Po had not fully paid the amount of subscription. (was informed that Po was delinquent in payment of his subscription and that corp had the claim to his entire subscription ofDock-Hop: the transfereemandamus stock who 80 shares). Nava filed a of watered takes it in shares in of its real TC action to compel the corporation to register theignorance the books.character cannot be compelled, even at a suit of the creditor, to dismissed petition. pay anything more upon it… --Nava contends the ruling in Fua Cun is not applicable in affirming Holder the corporation’s refusal to register in the booksin GFsale to him of 20 shares. Transferee steps in the which held Nava relies on the ruling in Baltazar v Lingayen Gulf Electric,shoes of the transferor as to benefits, a SH can liability that the corpo law requires as a condition before but not tovote his shares Creditors no par stock; alleged SHs that his full subscription be paid in the case of clam that the but in par have shares, issued as fully paid, but were issued for property value stocks, the SH can vote his shares fully paid by him, only, irrespective of the unpaid delinquentnot equal in value to the par value; property was shares. overvalued 2 contracts in involved: I: W/N the corporation can be compelled to enterareits books the sale corporation-transferor made by Po to Nava of 20 shares transferor-transferee transferees not liable to corporation if in GF H: NO>> The Nava transfer is not the alienation sale or transfer of Lingayen Gulf: cannot dispose stock contemplated in the old Law. As a rule, sharesI which may be of any unsubscribed shares if I still have unpaid shares alienated are those which are covered by certificates of stock. There would be a transferred by As prescribed in the corpo law, shares of stock may be rescission similar to Bayla… Dexter & Aboitiz: no guaranteed profits in any delivery to the transferee of the certificate properly indorsed. However, business! that cannot be followed in the instant case because the 20 shares are not Dexter: payment of a corporation covered by any stock certificate in Po’s name. Moreover, subscriptions came from dividends has a claim on the said shares for the unpaid balance of the subscription. Aboitiz: payment of the subscription A stock subscription is a subsisting liability from the time subscription came from a fund is made. The subscriber is as much bound to pay his subscription as he would be to pay any other debt. The Is this violative of the principle that SHs only have right of the corporation to demand an inchoate right over corporate property? payment is no less contestable. A corporation cannot release an original subscriber from paying for his sharesCannot negate obligation of subscriber to pay for without valuable consideration, his unpaid subscription without the unanimous consent of the SHs. It should be unconditional… … unless there are unrestricted retained earnings There is no clear duty here on the part of the officers of Peers to register the also ruled that there is no the 20 shares in Nava’s name. The court payment comes out of his pocket! SHs/subscriber is NOT a creditor! parallelism between Nava and the Baltazar case. In the latter, the SHGR: cannot piecemeal assign rights to the shares, incorporator was the holder of a stock certificate, and the issue was if subscription the incorporator whether the said shares had voting rights although not paid in full had not fully paid the subscription, which SHs asthe issuebenefits is not a whole in this case. There is Corporation and creditors also benefit… no stock certificate issued to Po, and without it—which is the evidence of … but rights of creditor conditioned ownership of the stock—the assignment of corporate shares is effective upon solvency of corporation only between the parties to the transaction. The delivery of the stock Sec 43 allows corporation and its certificate is essential for the protection of both theunpaid subscriptions to be paid out of dividends SHs. Exceptions: delinquent shares; cannot pay out as stock/property dividends Fua Cun and Nava: indivisibility of shares Payments applied to all shares covered by the subscription Fua Cun: contract of subscription is indivisible, but

Fua Cun, Lingayen Gulf and Nava cases were all decided before the Code Fua Cun: a contract of subscription is INDIVISIBLE, unless the contrary is provided o Partial payment DOES NOT entitle the SH to the issuance of a certificate covering shares corresponding to the amount paid o Payment is in effect PRO-RATED among all the shares, so that no one share is fully paid — Lingayen Gulf: shares may be deemed fully paid for the amount paid that corresponds thereto o It was the practice of the corporation in Lingayen to issue certificates for stocks it considered to be fully paid, although the subscription has not been paid — SEC: in interpreting the two cases, a corporation has two (2) alternatives in applying payment for subscriptions: o Either apply the amount paid as full payment for the corresponding shares, (Lingayen) or…  Certificate of stock would then be issued o … as payment pro-rata on each of the entire number of shares subscribed for (Fua Cun and Nava)  no certificate of stock may be issued until the subscription is full paid — 64: no corporation can issue a certificate of stock until the subscriber has paid his subscription in full o applies to par and no-par shares o Lingayen gulf case no longer applies o Speaks of only of subscription — — Issuance of Certificate Under 63: capital shall be divided into shares for which certificates signed by the Pres or VP, countersigned by the Secretary, sealed with the seal of the corporation — Under 64: no certificate of stock shall be issued until the full amount + interest has been paid o But an unpaid subscription NOT declared delinquent can be voted upon in meetings and are entitled to collect dividends — Issuance is not necessary to constitute the subscriber of shares as a SH of the corporation o But delivery is an essential element of the issuance itself (an endorsement for negotiability) — Nature of certificate: o The best evidence of the acquisition of rights and status of a SH, but NOT required for rights to vest —

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Convenient for purposes of transfer by way of collateral or absolute sale  But SH not entitled to certificate until he has fully paid the subscription o Certifies that the person named is a holder or owner of the stated number of shares in the corporation  Indicates the kind of shares issued to him, date of issuance and par value or no par value of the shares  Signed by the proper officers of the corporation and bears the corporation seal o Should not be issued for more than the number of shares authorized by the AOI  Any stock certificate which represents an over-issue of shares would be void and no rights or liabilities can arise therefrom in favor of or against holders thereof  Bona fide purchasers would only have the right to damages for misrepresentation against the corporate but cannot acquire the rights of SHs o Not a negotiable instrument (De Los Santos v Atty General supra)… Money or property rights o … but quasi-negotiable; endorsement and delivery of certificate Ownership/title may be for any of three purposes: Use  sale and assignment of shares Proper valuation, but subject to SH approval and SEC  pursuant to watered nominee agreement approval to eliminate a trust orstock  pledge if encumbrance of the shareas Who determines ormoney or property dividends o Default of unpaid subscribers? Liability ofand delivery of the Sale of shares, even with endorsement corporation certificates, shall not be valid, and other subscribers as well except as between the parties, until it is entered and noted in the books and creditors Beneficiaries of subscription: corporation, SHs, the sale is not absolutely void I pay subscription due: I am not a creditor/debtor — 63: every SHwill myright tobe impaired issuance of a proper In no way has a rights demand the certificate liability Limited when requirements of 64 have been complied with — Remedies available can be disposed/transferred (cf Stock certificate; to a SH for wrongful non-issuance by the corporation: Fleischer) o Right to dividends Suit for specific performance o All these are relief by wayby subscriber NOT paid fully Alternative not enjoyed of damages o Partial payment: cannot get any part ofissuance Petition for mandamus to compel the shares Delinquency sale: all of the subscriptions What should be bought? Loss or Destroyed Certificate Only what is due. Purchaser would appear to have bought at a discount Sec 73Delinquent party gets a free ride… … but in reality, it never really happens that way! Inimical effects of non-paying subscriber: suspension of voting and economic rights Danger that he loses everything No bidder: shares go back to corporation No incentive for corporation in delinquency sale Sec 73: obscure provision Holding period Benefits stems from issuance of stock certificate; can assert ownership rights o

Property Valuation Payment Warranties Subject to dispute Necessary/essential to business Yes In full Yes Yes Yes Registration of property in corporate name

Cash No need Partial; installment None No No necessary Ownership of shares

Delinquency sale : covers unpaid subscription; seeking for the delinquent SH to cough up the balance.

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