DERIVATIVE SUIT WHEN BALANCE IS PAID
Payment of unpaid subscription (balance) shall be
PRAYER IN A DERIVATIVE SUIT IN CASES OF
WATERED STOCKS
To compel the Director and the Stockholder (subscriber)
to pay the difference
Note: It cannot compel to return the issued stocks
because as far as the issuance is concerned, it is
VALID. However, it is the deficient consideration that
is ILLEGAL.
Important: If they are given the option to return, the
stocks being transferrable, it could have already been
transferred to another person already.
If the issuance will not be considered valid, the
transferee might be holding something which is not valid
even if he has already paid fully. The transferee may
even have paid more because at the time the shares
were transferred, the value might have already
increased.
CANNOT COMPEL THE TRANSEREE TO PAY THE
UNPAID PORTION
Can the transferee be compelled to pay the unpaid
portion?
No. The stocks are not anymore “virgin” stocks when the
transferee bought it since it has been previously issued
by the Corporation to the subscriber. Watered stock
only applies to “virgin” shares. If we allow the
transferee to pay, it defeats the transferability.
We will have to keep asking if it is a watered stock or
not. Thus, insofar as issuance is concerned, it is
valid. What is not valid is with regard to the
deficient consideration – wherein you paid less for
more.
SECTION 66 – PAYMENT OF BALANCE OF
SUBSCRIPTION
SECTION 66. Payment of Balance of Subscription. —
Subject to the provisions of the subscription contract, the
board of directors may, at any time, declare due and payable
to the corporation unpaid subscriptions and may collect the
same or such percentage thereof, in either case, with
accrued interest, if any, as it may deem necessary.
Payment of unpaid subscription or any percentage thereof,
together with any interest accrued, shall be made on the
date specified in the subscription contract or on the date
stated in the call made by the board. Failure to pay on such
date shall render the entire balance due and payable and
shall make the stockholder liable for interest at the legal rate
on such balance, unless a different interest rate is provided
in the subscription contract. The interest shall be computed
from the date specified, until full payment of the
subscription. If no payment is made within thirty (30) days
from the said date, all stocks covered by the subscription
shall thereupon become delinquent and shall be subject to
sale as hereinafter provided, unless the board of directors
orders otherwise.
made on:
(a) The date specified in the subscription
contract; or
(b) On the date stated in the call made by the
Board
EFFECT OF FAILURE TO PAY BALANCE
Effects:
(1) Failure to pay on such date shall render the
ENTIRE balance as DUE AND DEMANDABLE;
and
(2) If there is still no payment, it shall render ALL
STOCKS covered by the subscription as
DELINQUENT STOCKS; and
(3) Once declared delinquent, it shall be subject to
a DELINQUENT SALE
SECTION 67 – DELINQUENCY SALE
SECTION 67. Delinquency Sale. — The board of directors
may, by resolution, order the sale of delinquent stock and
shall specifically state the amount due on each subscription
plus all accrued interest, and the date, time and place of the
sale which shall not be less than thirty (30) days nor more
than sixty (60) days from the date the stocks become
delinquent.
SDHTEC
Notice of the sale, with a copy of the resolution, shall be
sent to every delinquent stockholder either personally, by
registered mail, or through other means provided in the
bylaws. The same shall be published once a week for two
(2) consecutive weeks in a newspaper of general circulation
in the province or city where the principal office of the
corporation is located.
Unless the delinquent stockholder pays to the corporation,
on or before the date specified for the sale of the delinquent
stock, the balance due on the former's subscription, plus
accrued interest, costs of advertisement and expenses of
sale, or unless the board of directors otherwise orders, said
delinquent stock shall be sold at a public auction to such
bidder who shall offer to pay the full amount of the balance
on the subscription together with accrued interest, costs of
advertisement and expenses of sale, for the smallest number
of shares or fraction of a share. The stock so purchased shall
be transferred to such purchaser in the books of the
corporation and a certificate for such stock shall be issued in
the purchaser's favor. The remaining shares, if any, shall be
credited in favor of the delinquent stockholder who shall
likewise be entitled to the issuance of a certificate of stock
covering such shares.
Should there be no bidder at the public auction who offers to
pay the full amount of the balance on the subscription
together with accrued interest, costs of advertisement, and
expenses of sale, for the smallest number of shares or
fraction of a share, the corporation may, subject to the
provisions of this Code, bid for the same, and the total
amount due shall be credited as fully paid in the books of
the corporation. Title to all the shares of stock covered by
the subscription shall be vested in the corporation as
treasury shares and may be disposed of by said corporation
in accordance with the provisions of this Code.
PROCEDURE FOR DELINQUENCY SALE
(1) Resolution by the BOD for the order of sale of
delinquent stocks, specifying the following:
(a) Amount due on each subscription
(b) Accrued interest
(c) Date, time, and place of sale which shall
not be less than 30 days nor more than 60
days from the date the stocks become
delinquent
(2) Notice of Sale with a copy of the Resolution
shall be sent to every delinquent stockholder
either:
(a) Personally
(b) By registered mail, or
(c) Through other means provided in the bylaws
(3) Publication of Notice of Sale
(a) once a week for two (2) consecutive
weeks
(b) in a newspaper of general circulation in
the province or city where the principal
office of the corporation is located
(4) Sale at a public auction to the bidder who
shall offer to pay the full amount of the
balance on the subscription together with accrued
interest, costs of advertisements and expenses of
sale for the smallest number of shares or
fraction of a share
DATE OF SALE AT PUBLIC AUCTION
The sale must be held not less than 30 days nor
more than 60 days FROM the date the stocks become
delinquent.
EFFECT OF PAYMENT BY THE SUBSCRIBER
BEFORE THE PERIOD OF SALE (before 30 days)
When the delinquent stockholder pays to the
corporation on or before the date specified for the sale
of the delinquent stock the balance due on the
stockholder’s subscription, the stocks shall be
RETAINED by the stockholder. In which case, he may
be issued the certificate of stock in his favor.
SECTION 70 – EFFECT OF DELINQUENCY
SECTION 70. Effect of Delinquency. — No delinquent
stock shall be voted for, be entitled to vote, or be
represented at any stockholder's meeting, nor shall the
holder thereof be entitled to any of the rights of a
stockholder except the right to dividends in accordance with
the provisions of this Code, until and unless payment is
made by the holder of such delinquent stock for the amount
due on the subscription with accrued interest, and the costs
and expenses of advertisement, if any.
EFFECTS DELINQUENCY
As to the stockholder, he will no longer enjoy the
following rights:
(1) Right to vote
(2) Right to be voted for;
(3) Right of representation at any stockholder's
meeting;
(4) Not entitled to any of the rights of a
stockholder
EXCEPT the right to dividends in accordance
with the provisions of this Code
(5) Stocks will be considered delinquent and shall
be subject to delinquency sale
UPON DECLARATION OF DELINQUENCY, A
STOCKHOLDER CANNOT RETURN SHARES
ALREADY BOUGHT
Note: After being declared delinquent, the
stockholder cannot return the shares already
bought.
Reason: He cannot return the shares already bought
because as between the corporation and the
subscriber, there is a debtor-creditor relationship.
Thus, the stockholder is obliged to pay the balance. He
cannot just simply return the shares he bought.
SUBSCRIBER CANNOT USE FUTURE DIVIDENDS
AS PAYMENT FOR THE BALANCE
Situation. Stockholder
This coming December, the stockholder is sure that there
will be cash dividends. So, the stockholder says: “By the
time the cash dividends are issued on December, these
dividends will be used to pay the unpaid subscribed
shares.”
He further says, “I am already sure that the corporation
will issue the dividends since the profits have increased
beyond 100% of the paid-in capital and it is still March.
Thus, by December, I am sure that the corporation is
required to declare dividends.”
Is that allowed?
Answer: No, it is not allowed.
Three Justifications [Summary of answers]
Note: This is based on the answers during the recitation
(1) Declaration of dividends when profits exceed the
100% paid-in capital is subject to exceptions
(2) Corporation may still incur losses in the
future – no assurance that dividends will be
declared
(3) Corporation NEVER PROMISES that a
stockholder will be given dividends and only
the Board can determine as to what type of
dividend will be issued (not always cash
dividends)
Elaboration:
Since it is still not certain that there will be cash
dividends that will be declared since it is subject to
exceptions, namely:
(1) Expansion projects
(2) Loan agreement that contains a condition that
the corporation cannot declare dividends
UNLESS there is consent by the creditor
(3) Emergency purposes
Assuming that none of the 3 exceptions are present, the
future cash dividends (dividends on December) still
cannot be used as payment for the shares because the
corporation may still incur losses in the future.
There is still no assurance that dividends will be
declared.
Moreover, assuming that it does not fall under the
exceptions and sure that there are no losses to be
incurred, it is still not allowed because when you
subscribe, you become a debtor to the corporation
because you paid partially. However, for the balance, you
are a debtor to the corporation because you undertook
to pay when it is due and demandable.
On the other hand, the Corporation NEVER
PROMISES that a stockholder will be given
dividends. What was agreed upon is that the
subscriber will invest, and in the meantime, he
shall wait WON the Board will distribute
dividends.
Even if the corporation has already reached the
100% of its paid-in capital, assuming it is not
falling under the exception and sure that no loss
shall be incurred, the subscriber is not sure if he
will be given cash since the Corporation can either
declare cash, stock, or property dividends. Not
even the Internal Revenue Code can dictate
declaration of cash dividends. Only the Board can
determine this.
The Internal Revenue Code may ONLY DICTATE
TO DECLARE DIVIDENDS but not as to what kind
of dividends to be issued since this is the SOLE
prerogative of the Board.
SALE AT PUBLIC AUCTION
To whom should the sale be sold in that public
auction?
General Rule: It shall be sold to the bidder who
willingly offers to pay the full amount due and
willing to pay for the smallest number of shares.
Exception: If no one is willing to pay the full amount
due, or in the absence of any bidder, the corporation
may purchase the delinquent shares.
Situation. Delinquent shares – 12;
Total amount due – 12M
The number of delinquent shares were 12. Total amount
due (value of shares, expenses) also amount to 12 M.
Bidder 1 – Offers to pay 12M for 8 shares
Bidder 2 – Offers to pay 12M for 12 shares
Who is the highest bidder?
Bidder 1 is the highest bidder since he is willing to pay
the amount due and willing to acquire the smallest
number of shares.
The remaining 4 shares goes back to the delinquent
shareholder.
Situation 2. Bidders are not willing to pay the full
amount
Bidder 1 – offers to pay 10M for 10 shares
Bidder 2 – offers to pay 10M for 12 shares
Atty. Espedido: Some authors say Bidder 1 won. Some
authors say nobody won since nobody paid the full
amount.
The definition of a highest bidder is a person willing to
pay the AMOUNT DUE and willing to acquire the
SMALLEST NUMBER OF SHARES.
In this scenario, the more practical side is to allow Bidder
1 (but this does not comply with the definition of the
Code).
HOWEVER, if nobody is willing to pay the amount,
the Corporation may purchase.
Note: The Board may decline any bidder.
SECTION 72 – LOST OR DESTROYED
CERTIFICATES
SECTION 72. Lost or Destroyed Certificates. — The
following procedure shall be followed by a corporation in
issuing new certificates of stock in lieu of those which have
been lost, stolen or destroyed:
(a) The registered owner of a certificate of stock in a
corporation or such person's legal representative shall �le
with the corporation an affidavit in triplicate setting forth, if
possible, the circumstances as to how the certificate was
lost, stolen or destroyed, the number of shares represented
by such certificate, the serial number of the certificate and
the name of the corporation which issued the same. The
owner of such certificate of stock shall also submit such
other information and evidence as may be deemed
necessary; and
(b) After verifying the a�davit and other information and
evidence with the books of the corporation, the corporation
shall publish a notice in a newspaper of general circulation in
the place where the corporation has its principal office, once
a week for three (3) consecutive weeks at the expense of
the registered owner of the certificate of stock which has
been lost, stolen or destroyed. The notice shall state the
name of the corporation, the name of the registered owner,
the serial number of the certificate, the number of shares
represented by such certificate, and shall state that after the
expiration of one (1) year from the date of the last
publication, if no contest has been presented to the
corporation regarding the certificate of stock, the right to
make such contest shall be barred and the corporation shall
cancel the lost, destroyed or stolen certificate of stock in its
books. In lieu thereof, the corporation shall issue a new
certificate of stock, unless the registered owner �les a bond
or other security as may be required, effective for a period
of one (1) year, for such amount and in such form and with
such sureties as may be satisfactory to the board of
directors, in which case a new certificate may be issued even
before the expiration of the one (1) year period provided
herein. If a contest has been presented to the corporation or
if an action is pending in court regarding the ownership of
the certificate of stock which has been lost, stolen or
destroyed, the issuance of the new certificate of stock in lieu
thereof shall be suspended until the court renders a final
decision regarding the ownership of the certificate of stock
which has been lost, stolen or destroyed.
Except in case of fraud, bad faith, or negligence on the part
of the corporation and its officers, no action may be brought
against any corporation which shall have issued certificate of
stock in lieu of those lost, stolen or destroyed pursuant to
the procedure above-described.
LOST CERTIFICATE
Being transferrable, is there any danger or risk of
loss?
Yes. Since it is transferrable, the finder might just try to
copy the signature and might be able to transfer it to
someone. The transferee, once he goes to the Corporate
Secretary might recognize that it was a fraudulent
signature and may decline – IOW, the buyer is
prejudiced.
Remedy: File an Affidavit of Loss to the corporation
Illustration. Stockholder mistakenly used the
Certificate of Stock after a “toilet situation” :)
Situation. The stockholder rushed to the nearest toilet.
However, after that, he was looking for a tissue paper
but there was none. So he pulled out a white paper from
his wallet and used it to clean himself.
When he went home, he discovered that he wrongfully
used the Certificate of Stock and hurriedly went back to
the toilet. However, it was already closed. When he went
back the next morning, the trashcan was already empty.
The stockholder exerted many efforts to find the janitor,
only to discover that the janitor has already resigned.
He engaged the services of the NBI to locate the janitor
but his address was unknown. He made efforts to
retrieve it but became futile.
Thus, he executed an Affidavit of loss detailing the
circumstances as to how the certificate was lost. It was
signed and notarized.
PROCEDURE IN ISSUING NEW CERTIFICATES OF
STOCK IN LIEU OF THOSE STOLEN, LOST OR
DESTROYED
(1) Filing of an Affidavit of Loss to the corporation
CONTENTS:
1. Circumstances as to how the certificate
was lost, stolen, or destroyed
2. Number of shares represented by such
certificate
3. Serial number of the certificate
4. Name of the corporation which issued the
same
5. Other information and evidence as may be
deemed necessary
(2) Submission of a Verified Affidavit and other
information and evidence with the books of the
corporation
(3) Publication of a Notice by the corporation in a
newspaper of general circulation in the place where the
corporation has its principal office, once a week for 3
consecutive weeks at the expense of the registered
owner of the certificate of stock which has been lost,
stolen, or destroyed
CONTENTS:
1. Name of the corporation
2. Name of the registered owner
3. Serial number of the certificate
4. Number of shares represented by such
certificate
5. State that AFTER the expiration of 1 year
from the date of the last publication, if no
contest has been presented to the corporation
regarding the certificate of stock, the right to
make such contest shall be barred and the
corporation shall:
(a) Cancel the lost, destroyed or stolen
COS in its books.
(b) In lieu thereof, the corporation shall
issue a new certificate of stock
WHEN A NEW CERTIFICATE OF STOCK IS ISSUED
(A) AFTER expiration of 1 year from the date
of the last publication – if no contest has
been presented to the corporation regarding
the certificate of stock
(B) BEFORE the 1 year period provided – if the
registered owner files a bond or other
security as may be required, effective for a
period of 1 year, for such amount and in such
form and with such sureties as may be
satisfactory to the BOD
TITLE VIII
Corporate Books and Records
SECTION 73 – BOOKS TO BE KEPT; STOCK
TRANSFER AGENT
[See codals. Too long to include.]
REASON FOR THE CORPORATION TO KEEP THE
BOOKS AND RECORDS
It is the best evidence used in cases where conflicts
need to be resolved in a corporation. It is a proof of the
corporation’s transactions. Also, it is considered as a
prima facie official evidence of the corporation.
BOOKS TO BE KEPT
What are these books and records?
Every corporation shall keep and carefully preserve at its
principal office all information relating to the corporation
including, but not limited to:
(a) The articles of incorporation and bylaws of the
corporation and all their amendments;
(b) The current ownership structure and voting
rights of the corporation, including:
i. lists of stockholders or members
ii. group structures
iii. intra-group relations
iv. ownership data, and
v. beneficial ownership;
(i) The names and addresses of all the members
of the board of directors or trustees and the
executive officers;
(j) A record of all business transactions;
(k) A record of the resolutions of the board of
directors or trustees and of the stockholders or
members;
(l) Copies of the latest reportorial requirements
submitted to the Commission; and
(m) The minutes of all meetings of stockholders or
members, or of the board of directors or
trustees.
 CONTENTS OF THE MINUTES OF THE
MEETING
Such minutes shall set forth in detail, among
others:
(1) time and place of the meeting held
(2) how it was authorized
(3) the notice given
(4) the agenda therefor, whether the meeting was
regular or special, its object if special
(5) those present and absent, and every act done
or ordered done at the meeting
Atty. Espedido: You also have the record of the
STOCK CERTIFICATES. SEC will mark it as received.
You will also show your stock certificates – there is a
book where there is a perforated portion. Once you
issue this certificate, secretary removes this
perforated portion, but there’s a remaining portion.
STOCK TRANSFER AGENT
Atty. Espedido: If there are hundreds and thousands of
shareholders, you will need a STOCK TRANSFER
AGENT to record all the transactions and transfers of the
corporation.
 Stock transfer agents are duly licenses and are
supposed to register with the SEC.
 The stock transfer agent does nothing except
record all transactions and transfers. Most of
these stock transfer agents are banks.
Note: A stock transfer agent or one engaged
principally in the business of registering transfers
of stocks in behalf of a stock corporation shall be
allowed to operate in the Philippines upon
securing a license from the Commission and the
payment of a fee to be fixed by the Commission,
which shall be renewable annually.
REQUISITES TO BE ALLOWED TO OPERATE AS A
STOCK TRANSFER AGENT
(1) Secures a license from the Commission (which is
renewable annually)
(2) Payment of a fee to be fixed by the Commission
Atty. Espedido: It is good now because we now have
computers. Before, it is done manually.
Other than these books, we have the:
(1) The MINUTES OF THE STOCKHOLDERS’
MEETING and
(2) The MINUTES OF THE BOARD’S MEETING
CONFIDENTIAL MATTERS ARE NOT INCLUDED IN
THE MINUTES
There are reports in the meeting that are confidential
that you do not have to include in the minutes. There are
confidential matters that you need not have to record –
but you must make a reference: meaning, you report it
to the account (which is not part of the minutes).
RIGHT TO INSPECT BOOKS AND RECORDS
What are your rights as a stockholder?
A stockholder has the right to inspect such books
and records at reasonable hours on business days.
Can you also just request to have a copy?
Yes, but the stockholder shoulders the expenses.
Important: The right as provided in the Code refers
only to the right to inspect but not the right to copy. If
you want to have a copy, you have to pay for the copy.
Otherwise, can you ask to just bring it to your
house?
No. This cannot be done and is also dangerous because
there may be delicate matters contained in the books or
records.
Take note:
The right to inspect DOES NOT INCLUDE
the RIGHT TO TAKE IT OUT even for a few hours.
SECTION 74 – RIGHT TO FINANCIAL STATEMENTS
SECTION 74. Right to Financial Statements. — A
corporation shall furnish a stockholder or member, within ten
(10) days from receipt of their written request, its most
recent financial statement, in the form and substance of the
financial reporting required by the Commission.
At the regular meeting of stockholders or members, the
board of directors or trustees shall present to such
stockholders or members a financial report of the operations
of the corporation for the preceding year, which shall include
financial statements, duly signed and certified in accordance
with this Code, and the rules the Commission may prescribe.
However, if the total assets or total liabilities of the
corporation are less than Six hundred thousand pesos
(P600,000.00), or such other amount as may be determined
appropriate by the Department of Finance, the financial
statements may be certified under oath by the treasurer and
the president.
Should it be signed by a certified public
accountant?
It depends, generally, yes. But the law allows the
financial statement to be certified under oath by the
treasurer and the president if the total assets or total
liabilities of the corporation is:
(a) LESS THAN 600K;
(b) Other amount as
Note: In this case, there is no need to let the CPA
sign.
COVERAGE FOR NEXT MEETING:
TITLE IX on MERGERS