83. Fleischer v. Botica Nolasco Co., Inc.

GR No. 23241 | 14 March 1925 | Johnson, J.

Apolinario | Topic: By-Laws
Doctrine: By-laws must be reasonable and for a corporate purpose, and always within the charter limits.
They must always be strictly subordinate to the constitution and the general laws of the land. They must not
disturb vested rights or impair the obligation of a contract, take away or abridge the substantial rights of a
stockholder/member, affect rights of property or create obligations unknown to the law.
Facts:
1. Manuel Gonzalez was the original owner of the 5 shares of stock of Botica Nolasco Inc., a
corporation duly organized and existing under Philippine laws.
a. He assigned and delivered the 5 shares to plaintiff Henry Fleischer by accomplishing
the form of endorsement provided in the back thereof.
b. The Secretary-Treasurer of the Botica Nolasco offered to buy the shares from
Fleischer, on the ground that the corporation had a preferential right to buy the
shares from Gonzalez, pursuant to Art. 12 of its by-laws.
c. Fleischer refused to sell the shares and requested the Secretary-Treasurer to register
the shares in his name in the books of the corporation.
d. The Secretary-Treasurer refused to do so, still maintaining that such would be in
contravention of the corporation’s by-laws.
2. Fleischer commenced an action in the CFI against Botica Nolasco praying for a judgment
ordering the corporation to register the shares in his name, and to indemnify him P500 for
damages.
3. In its Answer, Botica Nolasco raised the special defense that pursuant to Art. 12 of its by-
laws, it had a preferential right to buy from Fleischer the said shares. It prayed for a
judgment absolving it from all liability and directing Fleischer to deliver the 5 shares and to pay
damages.
4. CFI held that Art. 12 of Botica Nolasco’s by-laws was in conflict with the Corporation
Law (Act No. 1459), especially with sec. 34 thereof; and ordered the corporation to register in
its books the 5 shares in the name of Fleischer.

Issue/s and Holding:

W/N Art. 12 of Botica Nolasco’s by-laws is in conflict with the Corporation Law? – YES
● Art. 12 of Botica Nolasco’s by-laws creates in favor of the corporation a preferential right to
buy, under the same conditions, the share or shares of stock of a retiring shareholder.
● The by-law was adopted under the power conferred upon corporations under Sec. 13(7) of the
Corporation Law:
○ Sec. 13(7). Every corporation has the power: “To make by-laws not inconsistent with
any existing law, for the fixing or changing of the number of its officers and directors
within the limits prescribed by law, of its corporate affairs, etc.”
● HOWEVER, in adopting the said by-law, Botica Nolasco transcended the limits fixed by
law and has NOT taken into consideration the provisions of Sec. 35 of the Corporation Law:
○ Sec 35. “xxx Share of stock so issued are personal property and may be transferred by
delivery of the certificate indorsed by the owner or his attorney in fact or other person
legally authorized to make transfer. No transfer, however, shall be valid, except as
between the parties, until the transfer is entered and noted upon the books of the
corporation so as to show the names of the parties to the transaction, the date of the
transfer, the number of the certificate, and the number of shares transferred. xxx”
○ Sec. 35 defines the nature, character, and transferability of shares of stock––they are
personal property and may be transferred as therein provided.
 ■ The provision contemplates NO restriction as to whom they may be transferred
or sold. It does not suggest that any discrimination may be created by the
corporation in favor or against a certain purchaser.
■ The holders of shares, as owner of personal property, is at liberty to dispose of
them in favor of whomsoever he pleases, without any other limitation than the
general provisions of law.
● [DOCTRINE] As a general rule, the by-laws of a corporation are valid if they are
reasonable and calculated to carry into effect the objects of the corporation, and are
NOT contradictory to the general policy of the laws of the land.
○ OTOH, it is equally settled that by-laws must be reasonable and for a corporate
purpose, and always within the charter limits.
○ They must:
■ Always be strictly subordinate to the constitution and the general laws of the land
■ Not disturb vested rights or impair the obligation of a contract, take away or
abridge the substantial rights of a stockholder/member, affect rights of property
or create obligations unknown to the law.
● Thompson: The power to enact by-laws restraining the sale and transfer of stock must be
found in the governing statute. Restrictions upon the traffic in stock must have their source in
legislative enactment, as the corporation itself cannot create such impediments.
○ By-laws are intended merely for the protection of the corporation, and prescribed
regulation and not restriction; they are ALWAYS subject to the corporation’s charter.
○ Under a statute authorizing by-laws for the transfer of stock, a corporation can do
no more than prescribe the general mode of transfer on the corporate books and
cannot justify an unreasonable restriction upon the right of sale. Otherwise, these
regulations restraining such transfers will be regarded as impositions in restraint
of trade.
○ The right of unrestrained transfer of shares inheres in the very nature of a corporation,
and courts will carefully scrutinize any attempt to impose restrictions or limitations upon
the right of stockholders to sell and assign their stock.
● SC noted that the authorities go farther than the stand that the court is taking. The authorities
hold that the power to enact by-laws must not only be in harmony with the law or charter of the
corporation, but such power should be expressly granted in said law or charter.
● ITCAB, the only restraint under Sec. 35 is that the transfer must be recorded and noted upon
the corporation books. [See Sec. 35 above]
○ The restriction is necessary in order that the corporation’s officers may know who the
stockholders are, which is essential in conducting elections of officers, in calling
meetings, and for other purposes.
● Finally, SC noted that the by-law in question cannot have any effect on Fleischer because he
had no knowledge of such when the shares were assigned to him. He obtained them in good
faith and for a valuable consideration. He was not privy to the contract created by Gonzalez
and Botica Nolasco. Said by-law CANNOT operate to defeat his rights as a purchaser.
○ Brinkerhoff-Farris Trust & Savings Co. vs. Home Lumber Co.: When no restriction
is placed by public law on the transfer of corporate stock, a purchaser is not affected by
any contractual restriction of which he had no notice." (, 118 Mo., 447.)

Ruling: Lower court is AFFIRMED.