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Chapter XII – Consideration for Shares • must be of a nature that it can be delivered

instead of being merely communicated to the

Form of Consideration officers
 includes services which have already been performed as
— Under Sec 62, stocks shall not be issued for a consideration less than the long as they are capable of valuation and are fairly
par or issued price thereof, and shall not be issued in exchange for PNs valued
or future services, but only for cash actually paid, property actually  receivables may be accepted as valid payment
received and necessary to the business, or services actually rendered to • must be subject to verification by the SEC
the corporation • shares to be held in escrow until actual payment
o Whenever a corporation issues shares, it must receive a of the amount
consideration equal to or at least their par or issued value o Labor performed for or services actually rendered to the
o Such consideration need not be paid in full at the time of issuance, corporation
but the unpaid portion shall be a debt and must be paid  Must be actually rendered and value ascertainable
— Consideration may be in any two or more of the ff forms:  Must be in GF and no fraud is perpetrated
o Actual cash paid to the corporation  Future services not allowed as consideration and such
 Villanueva: it is not required that there be actual payment of agreement is VOID (62)
cash consideration in order to make the subscription • Villanueva: Corporation should not be estopped to
agreement valid and binding deny that the services constituted payment of the
 Subscription agreement is a consensual contract, which is stock subscription even though it has received
perfected and valid and binding upon meeting of the minds the benefit thereof
on the subject matter—the shares itself—and the  a corporation under a management contract may be
consideration issued shares in payment for the reasonable value of its
 Non-payment of the consideration does not render the services; but since it is not a SH of the managed
subscription contract void corporation, such shares must come from the unissued
 Only upon call by the board or when the terms of the shares of the latter’s original authorized capital stock and
subscription agreement makes payment due and not in the form of stock dividends (Nielson case)
demandable, would the SH be legally required to pay actual o Previously incurred indebtedness by the corporation
cash to the corporation  May either be accounts payable or notes payable
• Failure to do so would subject the shares to a  Valuation must have been established prior to even
delinquency declaration and suspend the rights of negotiating on the subscription agreement
the SH  Set-off of corporate indebtedness: also covered by 62
 Notes receivable vs. subscription receivable as o Amounts transferred from unrestricted retained earnings to
consideration: notes would be counted as an asset by the stated capital
corporation, subscription receivables as deductions from  Covers the declaration of stock dividends and has the
SH’s equity effect of capitalizing unrestricted retained earnings
o Property, tangible or intangible, actually received by the corporation  Consideration therefor is merely book entries
and necessary or convenient for its use and lawful purposes o Outstanding shares exchanged for stocks in the event of
 Requisites: reclassification or conversion
• must lawfully acquired and held  Changes the composition or manner of classification of
• must be necessary and proper for it to own in the capital stock and should not affect its integrity
carrying on its business
• must be of substantial nature, having pecuniary Liability on watered stocks
value capable of being ascertained
• must be real and tangible — Watered Stocks: Shares issued as fully paid when in truth no

consideration is paid, or the the consideration received is known to be recover against SHs and guilty officers
less than the par value or issued value of the shares  Prevailing view in RP
o Includes bonus shares and discount shares issued at a discount or
under an agreement to pay less than par value in money Triplex Shoe Co v Rice & Hutchins Inc.
o Shares issued as fully paid up but no consideration is actually paid in F: Triplex’ authorized capital stock totaled $150K, broken down into
form or consideration is inadequate because it is not equal to the $75000 PS (par value $100), and $75000 no par CS.
par or issued value, the SH is liable to the corporation and its
creditors for the unpaid portion Directors meeting: Albert Dillman – Pres; Solly – VP and Sec, and Louis
o Shares issued as fully paid up in consideration of property at an Dillman – Treasurer ….. agreed to receive lower compensation and in
overvaluation consideration of other services to be rendered and for managing the co.,
— Stock watering prohibited because: additional stocks were to be given as follows: A Dillman – 376 CS, L
o Corporation is deprived of needed capital and the opportunity to Dillman – 114 CS, Solly – 50 CS. (Solly transferred stock to 2 Dillmans).
market its securities to its own advantage
o Existing and future SHs who are also injured by the dilution of their An amendment was proposed, 2375 PS and 175 no-par CS. Rice and
proportionate interests in the corporation Hutchins purchased 249 shares of PS and 83 shares CS (as bonus). The
o Present and future creditors who are injured as the corporation is Dillman’s own 540 CS shares. During election of directors, the “B” ticket
of the Dillmans were elected. Rice questions the election, saying the
deprived of the assets or capital and reduces the value of the
there was no consideration for the CS at the incorporation of Triplex.
corporate assets which stand as a substitute for the SHs personal
liability to them
Issue: WON there was any CS voted for the B Ticket at the 1929 election
o Persons who deal with it or purchase its securities who are deceived
that was legally issued and outstanding at that time?
because stock watering is invariable accompanied with misleading
corporate accounts and financial statements
— Code makes directors liable for watered stocks under Sec 65
H: No, there was none. (Chancellor’s decision: No outstanding Cs and PS
o If he consents to the issuance, or…
stocks were voted).
o … having knowledge thereof, does not forthwith express his
objection in writing and file it with the corporate secretary The no par value CS issued before and after the amendment was invalid
 directors become solidarily liable because consideration was never fixed.
 liability will be to ALL directors, whether they became such
prior or subsequent to the issuance of watered stock The certificate must state the total number of shares authorized that are
 reliance of the creditors is immaterial and fraud is not an without nominal or par value. The provision in the articles that a certain
element of liability part of capital is in shares of CS no par and without stating the number of
 even no-par stocks can be watered stocks where they are shares is not authorized and is meaningless in the eyes of the law. Thus
issued for less than their issued value the CS in the original AOI was invalid stock.
— Three theories for the liability
The consideration of the shares issued to Dillman were alleged to have
o Subscription contract theory—the subscription contract is the source been for services rendered in organizing the company, and in agreeing to
and measure of the duty of a subscriber to pay for his shares; if the serve at a smaller compensation that they would get otherwise. Clearly
contract releases him from further liability, the subscriber ceases to the consideration mentioned, consisting of services, was not of such as
be liable the law contemplates. The services do not appear to be essentially
 Prohibited in RP jurisdiction different or greater than the services ordinarily rendered in the promotion
o Fraud or misrepresentation theory—holds a SH liable for watered and organization of the corporation. (also, services still to be rendered
stock on the basis of tort or misrepresentation. The wrong done to are not lawful consideration) -- Hence, no proper and lawful
the creditor is fraud or deceit in falsely representing that the par consideration was for the CS at the 1st Board Meeting.
value has been paid or agreed to be paid in full
o Trust fund doctrine—all corporate creditors would have legal basis to McCarty v Langdeau: F: Langdeau is the receiver of Estate Life

Insurance Co, and McCarty is the President of the company. Langdeau sues original SHs or incorporators of the Dock-Hop Co, seeking to collect on
McCarty for the unpaid balance of his stock subscription, iao $387,380 (he the unpaid balances on the par value of their shares. Complaint alleged
paid only $20) representing 19, 370 shares of no par stock. that only 25c on the dollar had been paid in on the par value of their
The contract between the corporation and McCarty was that he would: shares (watered stocks). Defendants deny however, that they are
-- pay a minimum of $20/month for the balance not exceeding 30 months, subscribers, or that the full value of their stock had not been paid.
evidenced by a note, payable w/o interest.
--that the company will have a lien on his shares until the note is paid. I: W/n SHs are required to make up any difference which may exist
-- He was to receive as much stock as his actual payments , but the between what was actually paid on their stock and its par value.
company would be able to vote the stock while the contract is in force (to be
voted by McCarty) Yes -- but NOT as to the transferee of the watered stocks, which are the
defendants herein. (lower court ruling is reversed)
-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 H: Court found that only 5/12 of the par value had been paid. At the
for it violates the constitution of Texas (“no corp. shall issue stock or bond lower court, it ruled for the plaintiff on the theory that it made no
except for money paid, labor done or property actually received, and all difference WON the defendants were subscribers: the mere fact that that
fictitious increase of stock or indebtedness shall be void.”) 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.
H: --the contract is enforceable
Where a person accepts the ownership of stock which purports to be
No declaration in the consti prohibition that a transaction in w/c something fully paid, it cannot be said of him that he accepts the stock and enters
other than money, labor or property shall be received in payment of the upon the relation of SH for the corporation. On the contrary, he accepts
stock is utterly void. If a security is to be accepted in payment for the stock, the ownership of the stock and enters upon the relationship of SH with
e.g. a subscriber’s note, w/c is not property for such purpose, the Consti the contrary understanding. What then is the principle upon which the
doesn’t say that it, or the stock issued for it, shall be void. The word “void” holder of watered stock is under any circumstances held obligated to
is used only once and has reference to the distinct clause w/c says that all supply substance and make good what it pretended the corporation
fictitious increase of stock or indebtedness shall be void. received by did not?

--the affairs of the corporation in this case are in the hands of a receiver who The SH is held upon the principle that one giving credit to the corporation
represents not only the SHs, but also the creditors, and the rights of is entitled to rely upon its ostensible capitalization as the basis for the
creditors have now intervened. The constitution of Texas prohibits such a credit given, and that, when the corporation issues watered stock, and
transaction and makes it unlawful thereby assumes an ostensible capitalization in excess of its real assets,
. It was aimed against his acquiring stock except upon lawful payment. It the transaction necessarily involves the misleading of subsequent
was designed for the protection of the corporation and its creditors. In such creditors, and whether done with that purpose actually in mind or not, is
a case as this where the SH has paid nothing for his stock and deceived the at least constructive fraud upon such creditors. In other words, the
public, he cannot be permitted to take shelter under the constitutional essence of the right of the creditor to brush aside the issuance of stock as
prohibition, which protects the corporation and its creditors. 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.
--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 --the transferee of watered stock who takes it in ignorance of its real
objects would be promoted by declaring a note given by a subscriber for character is not required, even at the suit of the of a creditor of the
stock subscription in the hands of a bonafide stockholder. 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
Rhode v Dock-Hop Co. F: Judgment creditors of a corporation sues the the free transferability of shares as a means of enhancing the growth of

commerce and industry. Apparently the remedy of the defrauded creditor
would be against the original owner of the watered stocks. 1. delinquency sale; requisites

How payment of Shares enforced — Under 68 the board may, by resolution, order the sale of delinquent
stock and specifically state:
— Under 66, subscribers for stock shall pay to the corporation, interest on o the amount due and all accrued interest
all unpaid subscriptions from date of the same, if so required and fixed in o date, time, place of the sale (30-60 days)
the by-laws o notice of sale with copy of resolution sent to every delinquent SH
o No rate= legal interest either personally or by registered mail
o Any unpaid balance would be a debt owed by the subscriber to the — When delinquent? Sec 67
corporation o Unpaid subscription shall be made on the date specified in the
o Lingayen Gulf v Baltazar: He may not be released from such contract or on date stated in the call
obligation to pay the unpaid balance, unless it is with the consent of o No payment within 30 days from said dates= all stocks covered
all the SHs, without prejudice to creditors, and upon adequate shall become delinquent
consideration — How do shares become delinquent?
 but a corporation may enter into a bona fide compromise o Failure to pay upon call
with a subscriber who is unable to pay his shares which he o Failure to pay on date specified in subscription agreement
has surrendered to the corproation — 69: no action to recover delinquent stock sold can be sustained on
— Under 67, board may at any time, declare due and payable to the the ground of irregularity or defect in the notice or in the sale itself
corporation unpaid subscriptions to the capital stock and may collect the — amount of subscription may be payable in installments and may
same or such percentage thereof, with accrued interest in each case and specify the date or dates when payments are to be made
subject to the provisions of the contract of subscription o if unpaid still, balance becomes automatically due and
— How payment is applied? demandable without need for a call
o Full payment for corresponding number of shares, par value covered o until such date arrives, no demand or call for payment may be
by such payment, or… validly made by the board
o … payment pro-rata to each and all the entire number of shares o Call by the board: the board may at any time declare all or any
subscribed part of the subscription due and payable where there is no date
— Under 13: 25% of total subscription must be paid, paid-up capital not fixed in the subscription contract
less than P5,000.00  Power to make a call discretionary with the board
o Balance payable on dates fixed in the subscription contract  Once made, call must operate uniformly on all SHs in
o No fixed dates, upon call by the board order to prevent favoritism or oppression (Lingayen Gulf
— Call on unpaid subscriptions v. Baltazar)
o Resolution of the board  No payment despite call, whole balance of subscription
o Notification of the resolution on the SHs becomes due and payable
o The time when subscriptions become payable o 68: If not paid within 30 days from date fixed in subscription
— When call not necessary contract or date stated in the call, ALL stocks covered by the
o The subscription contracts expressly states that it shall be payable subscription, become AUTOMATICALLY delinquent and may be
not upon call, but immediately or on a specified day or upon sold by the corporation at a delinquent sale
installments  notice of sale and copy of resolution must be given to all
o Corporation becomes insolvent, regardless of any contrary delinquent SHs
stipulation in the subscription contract  publication at least 2 weeks prior to sale
— The corporation has two (2) alternatives for the enforcement of a  lacking any of these requirements, delinquent sale would
subscription contract: be VOIDABLE at the instance of the delinquent SH within
(1) The sale of delinquent stocks 6 months from the sale and tenders payment to the
(2) Court action purchaser
 if corporation acquires delinquent shares, they become
treasury shares which may be disposed of by the corporation There are two (2) remedies for the enforcement of stock subscriptions:
at such reasonable price as the board may fix (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
2. court action 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
— Under 70: nothing in the Code prevents the corporation from collecting statute.
by action in a court the amount due on any unpaid subscription with
accrued interest, costs, and expenses Under the Insolvency Law, the assignee of the insolvent corporation
— If corporation chooses to sue in court, a valid call would still be a succeeds to all the corporate rights of action vested in the corporation
requisite to liability (Da Silva v Aboitiz)… prior to its insolvency, and the assignee therefore has the same freedom
— …unless the corporation becomes insolvent—all unpaid subscriptions with respect to suing upon a stock subscription as directors themselves
become payable and are immediately recoverable in a court action by would have had under Sec 49 above cited.
the assignee in insolvency for the benefit of the creditors (Velasco v
Poizat) Another reason: When insolvency supervenes upon a corporation and the
court assumes jurisdiction to wind it up, all unpaid stock subscriptions
Velasco v Poizat. F: Velasco is the assignee in the insolvency of Philippine become payable on demand, and are at once recoverable in an action
Chemical Product Company and is seeking to recover from Jean Poizat the instituted by the assignee in court.
unpaid subscription made by him to the stock of the corporation.
It evidently cannot be permitted that a subscriber should escape from his
Poizat, one of the incorporators and once the treasurer and manager of the lawful obligation by reason of the failure of officers to perform their duty
corporation, subscribed for 20 shares and paid in the par value of 5 shares in making the call; and when the original mode of making the call
(P500). becomes impracticable, the obligation must be treated as due upon
While in this capacity he called in and collected all subscriptions except 15
shares subscribed by him and another 15 by Jose Infante. 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
2 resolutions were adopted by the board: (1) proposal that the directors or Infante, the board overstepped its bounds and should still be liable on
SHs make good by new subscription the 15 shares w/h had been shares that were not taken up and paid for by the corporation.
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 — Poizat continued to be liable on his subscription
required to pay the amount of his subscription upon the 15 shares he owes — When insolvency supervenes and court assumes jurisdction to wind
to the corporation. Poizat, in a letter states that he was also to be relieved up, unpaid stock subscriptions become payable on demand and are
from his subscription, and that he prefers “to lose the whole of the 25% at once recoverable in an action by the assignee in insolvency
rather than continue investing more money in a… ruinous proposition.”
Soon the company became insolvent, and Velasco as assignee sues Poizat Lingayen Gulf Electric v Baltazar. F: Baltazar subscribed for 600
for his unpaid subscription. shares (P100 par value) of Lingayen Gulf and paid P15000, plus another
payment leaving a balance of P18500 unpaid.
H: Poizat is still liable on his subscription. A stock subscription is a contract In a SH meeting it was agreed to call the balance of all unpaid
between the corporation on one side, and the subscriber on the other. It is a subscribed capital stock, the first 50% payable within 60 days, remaining
rule that a subscription for shares of stock does not require an express 50% payable within 60 days hence. All unpaid subscription after due
promise to pay the amount subscribed, as the law implies a promise to pay dates of both calls would be subject to 12% interest. All remaining unpaid
on the part of the subscriber. A stock subscription is a subsisting liability shares would revert to the corporation.
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 Baltazar offered to withdraw completely from the corporation by selling
by the by-laws. out all his shares of stock. Another resolution (No. 17) was adopted
rescinding the previous resolution because the corporation was not in a
financial position to absorb the unpaid balance of the subscribed capital (held: not indivisible)
stock. Yet another resolution (No. 4) was adopted to revalue the stock and
assets of the corporation to attract outside investors. — Reason for mandatory provision that call should be strictly complied
Although Baltazar was informed of the demand for payment the call however with: to assure notice to all subscribers, and to assure equality and
was not published in a newspaper of general circulation. Another demand uniformity in the assessment on SHs
was made upon Baltazar, who ignores the same upon the grounds that 1. — A contract of subscription is at least in the sense that it creates an
action is premature because there was no valid call, and 2. granting there estoppel, a contract among the several subscribers, and thus none of
was a valid call, he was released from liability thru SH Res. Nos. 17 and 4. . the subscribers can withdraw from the contract without the consent
The corporation sues. TC rules ifo Baltazar, holding that the resolution was of the rest and thereby diminish the common fund which all have an
null and void for lack of publication. interest in
— Notice for call of payment for unpaid subscriptions must be
H: TC was correct that the law requires that notice of any call for the published, except when the corporation is insolvent—payment is
payment of unpaid subscription should be made not only personally but also immediately demandable
by publication. The publication requirement is mandatory, and the reason is — GR: A valid and binding subscription for stock of a corporation cannot
because it is not only to assure notice to all subscribers, but also to assure be cancelled so as to release the subscriber from liability thereon,
equality and uniformity in the assessment on SHs. Not only must personal without the consent of all the SHs
notice be given in one of these matters, but the notice must also be — Exceptions in Lingayen really do not constitute a gratuitous release
published once a week, for 4 consecutive weeks in some newspapers. since a valuable consideration is actually received by the corporation
such as the cancellation of corporate debt
The court reiterated the ruling in Velasco v Poizat, where the corporation
involved was insolvent, in which case all unpaid stock subscriptions become Da Silva v Aboitiz & Co Inc. F: Da Silva subscribes for 650 shares (par
payable on demand and are immediately recoverable in an action instituted value of P500) of Aboitiz. He pays only for 200 shares, as there are
by the assignee. But when the corporation is a solvent concern, the remaining 450 shares unpaid (P225,000). Thru a Res., the board
rule is that the suit demanding for payment of unpaid subscriptions must be declared and informed all subscribers and SHs that all shares unpaid by
preceded by a call or assessment against the subscribers, and only then will 31 May shall be declared delinquent and to be sold at a delinquency sale
there be a right of action. on the following June 16. Ad was published as announced in the notice.

As to claim of Baltazar that Resolution 17 released him from obligation to Da Silva sued Aboitiz Co., contending that in prescribing another method
pay, in order to effect the release, there must be unanimous consent of the for payment of subscription different from that in the by-laws, the
SHs (here, 7 SHs were absent when said Res was made) . The GR is that a corporation had exceeded its authority. He claims that in Art 46 of the by-
valid and binding subscription cannot be cancelled so as to release the laws, all shares subscribed shall be paid out of the 70% of the profit
subscriber from liability thereon without the consent of all the SHs. obtained, to be distributed among the subscribers and said Res., violates
Furthermore, a subscription cannot be cancelled by the company, even the said by-law.
under a secret or collateral agreement for cancellation made with the
subscriber at the time of the subscription, as against persons who I: W/N under the by-laws the corporation may declare the unpaid shares
subsequently suebscribed or purchased without notice of such agreement. delinquent or collect their value through another method.

Exceptions: pursuant to a bona fide compromise, or to set off a debt due H: YES> The by-law also authorizes and empowers the board to
from the corporation, a release, supported by consideration, will be effectual collect the value of the shares subscribed and unpaid by deducting from
as against dissenting SHs and subsequent and existing creditors. A release the 70%, distributable in equal parts among the SHs, to be applied on the
which might originally have been held invalid may be sustained after a payment of the shares. It also authorizes the creation of a special
considerable lapse of time. In the present case, the release claimed by the emergency fund, applying the 70% of the profit on the payment of shares
Baltazar does not fall under the exceptions referred to, because it was not not fully paid. Thus it is discretionary on the corporation to do whatever is
given pursuant to a bona fide compromise or to set off a debt due from the provided in the said article relative to the application of a part of the 70%
corporation and there was no consideration for it. of the profit distributable. It also shows that it is the board and not he

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 Campos: …Besides assuring equality among SH, the law seeks to protect
the discretion of the board to make use of such authority. corporate creditors. Making payment of subscription dependent on the
existience of profits or dividends would be contrary to the policy behind
If the board opts not the make use of such authority, it has two other the law.
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 Lumanlan v Cura. F: Lumanlan subscribed for 300 shares (par value
court. In this case the board elected to avail of the first remedy, and P50) of Dizon & Co., paying only P1500 of the P15000 par value of the
complying strictly with the requirements of law, the directors made use of shares. Creditors sued the company, and prayed for a receiver as it
the discretionary power granted by the law and declared that the payment appears that the corporation had no assets except credits against those
of the subscription to 450 unpaid shares was due and demandable, and that who had subscribed for shares of stock.
said shares were delinquent. Tayag was appointed receiver for the purpose of collecting the unpaid
subscriptions. Tayag sues Lumanlan for the unpaid shares. TC orders
— The Board has absolute discretion to choose which remedy it deems Lumanlan to pay the corporation (plus interest). Pending Lumanlan’s
proper in order to collect the unpaid subscriptions appeal, he agreed to assume the obligation of the corporation to
— Two other remedies: delinquency sale and action in court Valenzuela (P8,000), and that if he withdraws his appeal, the corporation
would collect only 50% of the amount subscribed by him. Lumanlan then
National Exchange v Dexter. F: IB Dexter subscribed to 300 shares of CS paid Valenzuela and was subrogated in place of Valenzuela (P11,840 incl.
Salmon & Co., which shall be “payable from the first dividends declared on interest).
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 Disregarding the agreement and notwithstanding payment made to
was initially paid P15,000, from a dividend declared by the company, Valenzuela, the corporation asked for the execution of the judgment in
supplemented by Dexter’s own money. the previous suit and his properties in Tarlac were levied upon. BPI as
Dexter incurs a balance of P15000 (par value of 150 shares) still unpaid on creditor of the corporation intervenes as the assignee in the insolvency
his subscription. The assignee of Salmon, National Exchange Co, sues case of the corporation.
Dexter to recover the balance. TC ruled ifo National Exchange.
H: As it is evident that there are other creditors of the corporation, the
I: w/n the subscription is payable from the first dividends declared has the corporation has a right to collect all unpaid stock subscriptions and any
effect of relieving the subscriber from personal liability in an action to other amounts due it. Subscriptions to the capital of the corporation
recover the balance constitute a fund to which creditors have a right to look for the
satisfaction of their claims and that the assignee in insolvency can
H: Of course not. A corporation has the power to accept subscriptions upon maintain an action upon any unpaid stock subscription. A stock
any special terms not prohibited or contrary to law or public policy, provided subscription is an existing liability from the time subscription is made.
it does not require the performance of corporate acts beyond the powers Thus the TC ruling is modified and that the corporation is ordered to
conferred, and do not constitute a fraud upon other subscribers, SHs, or credit Lumanlan P13840 against the judgment previous (P15109), and to
creditors. If it is unlawful to issue stock otherwise than as stated it is self- issue to Lumanlan 300 shares of its capital stock upon payment of the
evident that a stipulation in a stock subscription that obligates the difference of the amount (P1269).
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 Effect of Delinquency
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 — Effects of delinquency: (Sec 71)
subscribers or SHs by subjecting them to lighter burdens, or by giving o Cannot be vote for or be entitled to vote or to representation at
greater rights and privileges, or as a fraud upon creditors. As a general rule, any SH meeting
an agreement between a corporation and a subscriber, by which the o Holder not entitled to any rights of a SH
subscription is not he be payable, or is to be payable in part only… is illegal  Except right to dividends (restricted by law)
and void as in fraud of creditors or other SHs.  Cash dividends would first be applied to the unpaid
balance Cun’s rights consist in an equity of 500 shares and upon payment of the
 Stock dividends are withheld until payment of unpaid unpaid portion, he becomes entitled to the issuance of the certificate for
balance 500 shares in his favor.
o Not entitled to notice of any of the meetings
o Shares not included in the determination of a quorum As to the CM, the CM would not prevail over liens of third persons without
— 43: Once stocks become delinquent due to nonpayment, the holder notice; an equity in shares is of such an intangible character that is
loses all his rights as SH except only the right to dividends, which will somewhat difficult to see how it can be treated as chattel and mortgaged
not be paid to him but will be applied to the unpaid balance of his in the same manner that the recording of the same will furnish
subscription plus costs and expenses constructive notice to third parties.
o SH cannot vote at the election or at any meeting on any matter There can be no doubt that an equity in shares of stock may be assigned
o SH cannot even be counted as part of the quorum and that the assignment is valid as between the parties and as to person
o SH cannot be vote for as director 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
Rights and Obligations of holders of Unpaid, but Non-delinquent fua cun, the bank had no lien unless by virtue of the attachment, but the
Stock attachment was levied after the bank had received notice of the
assignment of Chua Soco’s interest to fua Cun and was therefore subject
— Enjoy all privileges of a SH: to the rights of the latter.
o the right to vote
o the right to receive dividends
Baltazar v Lingayen Gulf Electric. F: Baltazar and Rose were
o But liable to pay interest if in by-laws
incorporators of the Lingayen Gulf Electric Power Co. and subscribed to:
 Interest is not due unless by-laws provide so Baltazar = 600 shares (paid 535 shares – after transfers, owned 341
 By-laws provide for interest but silent as to rate: legal shares w/ cert. plus 65 shares w/o certificate)
interest applies Rose = 400 shares (paid 375 shares w/ certs)
o But SH cannot register shares transferred  leaving unpaid a certain portion thereof. It is the company practice to
 Although valid between the parties, it cannot affect the issue certificates of stock to its individual subscribers for unpaid shares of
corporation stock. Defendants Ungson et al are small SHs ( <100 shares) of the
 But corporation can allow registration, but it cannot issue a corporation, and are the majority of the board. Co-defendant Acena is the
stock certificate until it is fully paid 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
Fua Cun v Summers. F: Chua Soco subscribed for 500 shares (P100 par) of was responsible for the election of the other 2 (Baltazar Group).
China Banking Corporation, paying ½ and leaving a balance of P25,000. Ungson Group which controlled the corporation passed 3 resolutions
He issued a PN ifo Fua Cun for the balance, securing the note with a CM on which threatened to expel the plaintiffs and prevent them from exercising
the shares of stock, and endorsing the receipt of the stock purchase). Chua their voting rights: (1) declaring watered stocks issued to Acena,
Soco was also indebted to China Bank (P37,731.68), and upon default his Baltazar, Rose and Jubenville of no value and cancelled the same; (2) all
interest in the 500 shareas was attached and the receipt seized by the unpaid subscriptions to bear interest, and all payments to be credited to
sheriff. The attachment was levied after the bank knew of the fact that the interest first, capital debt second, and ; (3) all stock declared delinquent
receipt had been endorsed to Fua Cun. on the accrued interest are incapacitated to avail of voting power.
Fua Cun then sued, contending that by virtue of payment of ½ the Baltazar and Rose sought to allow them to vote their fully paid-up shares
subscription price of the shares, Chua Soco in effect became the owner of and to declare the resolutions invalid. A compromise deal was executed,
250 shares and sought to have his lien on the shares be declared to hold but enforcement by the TC was enjoined by the Ungon Group and asked
priority over the claim of the bank. China Bank argued that the interest of for amendment. TC amended but was opposed by Baltazar. The Court
Chua Soco was merely an equity which cannot be made the subject of a CM. then reversed the amending decision, ruling that all shares of the capital
TC ruled ifo Fua Cun. stock of the corporation covered by fully paid shares are entitled to vote
in all meetings.
H: TC erred in holding that Chua Soco became owner of 250 shares. Fua Baltazar claims that once a SH has subscribed to a certain number of

shares, although he has made partial payments, but is issued a certificate amount of subscription. No certificate of stock was issued.
for the paid-up shares, he is entitled to vote the whole number of shares --Po sold to Nava 20 of the shares. In the deed of sale Po represented that
subscribed, whether paid or not. The corporation counters that under the he was the absolute and registered owner of the 20 shares sold.
doctrine in the Fua Cun case, a partial payment of a subscription does not -- Nava requested the corporation to register the sale, but was denied
entitle the SH to a certificate for the total number of shares subscribed by because Po had not fully paid the amount of subscription. (was informed
him, and his right consists only in equity to a certificate of the total number that Po was delinquent in payment of his subscription and that corp had
the claim to his entire subscription ofDock-Hop:
80 shares).the transferee of watered stock who
of shares subscribed for, upon payment of the remaining portion of the Nava filed a mandamus
takes itthe in ignorance of its real character cannot
subscription price. action to compel the corporation to register shares in the books. TC
be compelled, even at a suit of the creditor, to
dismissed petition.
pay anything more upon it…
I: W/N a SH with a balance of unpaid shares subscribed is entitled to vote the --Nava contends the ruling in Fua Cun is not applicable in affirming
corporation’s refusal to register in theHolder
booksinthe GFsale to him of 20 shares.
Transferee steps in the shoes whichof the transferor as
Nava relies on the ruling in Baltazar v Lingayen Gulf Electric, held
to benefits, but not to liability
H: YES> The present case does not come under the principle in Fua Cun that the corpo law requires as a condition before a SH can vote his shares
case of clam that the but
alleged SHs have shares,
because it was the practice of the company since its inception, to issue that his full subscription be paid in the no par stock; in par
issued as fully paid, but were issued for property
certificates of stock even for unpaid shares and gave voting power to stocks 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
fully paid. The present law requires as a condition before a SH can vote that shares.
his full subscription be paid in the case of no par value shares, and with
2 contracts
to enterare involved:
respect to par value shares, the SH can vote the shares full paid, irrespective I: W/N the corporation can be compelled in its books the sale
of the unpaid delinquent shares. A corporation may now, in the absence of made by Po to Nava of 20 shares
provisions in their by-laws to the contrary, apply payments made by
transferees not liable to corporation if in GF
subscribers either as full payment for the corresponding number of stock or H: NO>> The Nava transfer is not the alienation sale or transfer of
Lingayen Gulf: I cannot dispose of any
as payment pro-rata to each and all the entire number of shares subscribed. stock contemplated in the old Law. As a rule, shares which may be
unsubscribed shares if I still have unpaid shares
In this case, corporation chose to apply payments by the SHs to definite alienated are those which are covered by certificates of stock.
There would bebe a rescission similar to Bayla…
shares of stock and had full paid-up shares certificates for the payments. Its As prescribed in the corpo law, shares of stock may transferred by
Dexter & Aboitiz: no guaranteed profits in any
call for payments of unpaid subscription and its declaration of delinquency delivery to the transferee of the certificate properly indorsed. However,
only affecting the remaining number of shares. that cannot be followed in the instant case because the 20 shares are not
name.payment of subscriptions
covered by any stock certificate in Po’s Moreover, a corporation came from
Here the corporation applied the payments made to the full par value of has a claim on the said shares for the unpaid balance of the subscription.
Aboitiz: payment of subscription came from a
shares subscribed, instead of the accrued interest. This being the case, the A stock subscription is a subsisting liability from the time the subscription
application of payments must be deemed to have been agreed upon by the is made. The subscriber is as much bound to pay his subscription as he
would be to pay any other debt. The Is thisofviolative of the principle that SHs only have
corporation and the SHs and cannot now be changed without the consent of right the corporation to demand
an inchoate rightrelease
over corporate property?
the SHs concerned. It would therefore result that a corporation may, upon payment is no less contestable. A corporation cannot an original
Cannot negate obligation of subscriber to pay for
the request of an interested SH, apply payments by them to the full par subscriber from paying for his shares without valuable consideration,
his unpaid subscription
value of subscribed capital stock. without the unanimous consent of the SHs.
It should be unconditional…
… ofunless there are unrestricted retained earnings
— Since it was the practice of the corporation to issue stock certificates to There is no clear duty here on the part the officers of Peers to register
the payment comes out of his pocket!
not fully paid subscribers, it may not take away the right to vote granted the 20 shares in Nava’s name. The court also ruled that there is no
SHs/subscriber is NOT a creditor!
by the certificate parallelism between Nava and the Baltazar case. In the latter, the SH-
GR: cannot piecemeal assign rights to the shares,
— Stock certificates may be issued for less than the number of shares incorporator was the holder of a stock certificate, and the issue was
if subscription
although not the paid in full had
subscribed for whether the said shares had voting rights incorporator
not fully paid the subscription, which SHs asthe
a whole
o Provided the par value of each represented by the certificate has is not issuebenefits
in this case. There is
Corporation and creditors also benefit…
been paid no stock certificate issued to Po, and without it—which is the evidence of
… but rights of creditor conditioned
o And it is not prohibited by the by-laws 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
Secof 43both
theunpaid subscriptions
Nava v Peers Marketing Corp. F: --Po was an incorporator of Peers certificate is essential for the protection corporation and its to be paid out
of dividends
Marketing and subscribed to 80 shares (P100 p.v.) paying 25% of the SHs.
Exceptions: delinquent shares; cannot pay out as
9 stock/property dividends
Fua Cun and Nava: indivisibility of shares
Payments applied to all shares covered by the
Fua Cun: contract of subscription is indivisible, but
o Convenient for purposes of transfer by way of collateral or
absolute sale
— Fua Cun, Lingayen Gulf and Nava cases were all decided before the Code  But SH not entitled to certificate until he has fully paid
— Fua Cun: a contract of subscription is INDIVISIBLE, unless the contrary is the subscription
provided o Certifies that the person named is a holder or owner of the stated
o Partial payment DOES NOT entitle the SH to the issuance of a number of shares in the corporation
certificate covering shares corresponding to the amount paid  Indicates the kind of shares issued to him, date of
o Payment is in effect PRO-RATED among all the shares, so that no one issuance and par value or no par value of the shares
share is fully paid  Signed by the proper officers of the corporation and bears
— Lingayen Gulf: shares may be deemed fully paid for the amount paid the corporation seal
that corresponds thereto o Should not be issued for more than the number of shares
o It was the practice of the corporation in Lingayen to issue authorized by the AOI
certificates for stocks it considered to be fully paid, although the  Any stock certificate which represents an over-issue of
subscription has not been paid shares would be void and no rights or liabilities can arise
— SEC: in interpreting the two cases, a corporation has two (2) alternatives therefrom in favor of or against holders thereof
in applying payment for subscriptions:  Bona fide purchasers would only have the right to
o Either apply the amount paid as full payment for the corresponding damages for misrepresentation against the corporate but
shares, (Lingayen) or… cannot acquire the rights of SHs
 Certificate of stock would then be issued o Not a negotiable instrument (De Los Santos v Atty General
o … as payment pro-rata on each of the entire number of shares supra)…
Money or property rights
subscribed for (Fua Cun and Nava) o … but quasi-negotiable; endorsement and delivery of certificate
 no certificate of stock may be issued until the subscription is may be for any of three purposes:
full paid Proper sale andbut
 valuation, assignment
subject toofSHshares
approval and SEC
— 64: no corporation can issue a certificate of stock until the subscriber  to
approval pursuant to awatered
eliminate trust orstock
nominee agreement
has paid his subscription in full  pledge or
Who determines encumbrance
if money of the
or property shareas
o applies to par and no-par shares Sale ofofshares,
o Default unpaideven with endorsement
subscribers? Liability ofand delivery of the
o Lingayen gulf case no longer applies certificates,
and shall notas
other subscribers bewell
valid, except as between the parties,
o Speaks of only of subscription until it is entered
Beneficiaries and noted corporation,
of subscription: in the books SHs,
and the sale is not
I pay void due: I am not a creditor/debtor
Issuance of Certificate — 63:Inevery
no way SHwill
a right
demand the issuance of a proper
certificate when requirements of 64 have been complied with
Limited liability
— Under 63: capital shall be divided into shares for which certificates — Remedies available can
Stock certificate; to a be
for wrongful non-issuance
(cf by the
signed by the Pres or VP, countersigned by the Secretary, sealed with corporation:
the seal of the corporation Suit to
o Right fordividends
specific performance
— Under 64: no certificate of stock shall be issued until the full amount + o AllAlternative
these are relief by wayby
not enjoyed of subscriber
damages NOT paid fully
interest has been paid Petition
o Partial for mandamus
payment: cannot getto compel the
any part ofissuance
o But an unpaid subscription NOT declared delinquent can be voted Delinquency sale: all of the subscriptions
upon in meetings and are entitled to collect dividends Loss orWhat shouldCertificate
Destroyed be bought? Only what is due.
— Issuance is not necessary to constitute the subscriber of shares as a SH Purchaser would appear to have bought at a discount
of the corporation Sec 73Delinquent party gets a free ride…
o But delivery is an essential element of the issuance itself (an … but in reality, it never really happens that way!
endorsement for negotiability) Inimical effects of non-paying subscriber:
— Nature of certificate: suspension of voting and economic rights
o The best evidence of the acquisition of rights and status of a SH, but Danger that he loses everything
NOT required for rights to vest No bidder: shares go back to corporation
No incentive for corporation in delinquency sale
10 Sec 73: obscure provision
Holding period
Benefits stems from issuance of stock certificate; can
assert ownership rights
Property Cash
Valuation Yes No need
Payment In full Partial; installment
Warranties Yes None
Subject to dispute Yes No
Necessary/essential to Yes No necessary
Registration of Ownership of shares
property in corporate

Delinquency sale : covers unpaid subscription; seeking for the delinquent SH

to cough up the balance.