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Refer to Section 62
1. Necessary or proper in The property which a corporation may accept in exchange for its stock must be of a kind
carrying on the corporate which the corporation may lawfully acquire and hold in carrying out the purposes of its
business incorporation, and which is necessary or proper for it to own in carrying on its business.
It cannot lawfully issue stock for property which its charter does not authorize it to
acquire, or for property acquired for an unauthorized purpose.
(a) Thus, real property may be accepted as payment on subscription to the capital stock
only when the same can be used in the business of the corporation, as in real estate
development, subdivision, agro-industrial business, and the like, as well as for the
establishment of offices. But a corporation engaged in the import and export business
which does not need much real property, may not accept real properties located in the
Philippines in exchange for its stock except only such property that it needs for its
operation.
(b) In view of the generality of Section 36(7) on corporate acquisition of real properties,
implying that properties located anywhere may be contributed to the capital of the
corporation, properties located abroad as may be needed and necessary to pursue the
legitimate corporate objectives may be contributed. However, the place where the
property is located should be considered, specifically, as to whether a foreign
corporation may own realty in a given state.
2. Possesses ascertainable The property must be of substantial nature, having a pecuniary value capable of
pecuniary value ascertainment (at a fair valuation equal to the par or issued value of the stock issued),
and must be something real and tangible as distinguished from something constructive
or speculative.
3. Capable of being It must be of such character that it can be delivered to the corporation, instead of being
transferred and applied to merely communicated to its officers or employees, and it must be actually transferred to
payment of debts the corporation and capable of being transferred by the corporation.
It must also be such as is capable of being applied to the payment of debts and of
distribution among the stockholders.
(a) The goodwill of a business purchased by a corporation and paid for by stock is
property and is to be taken into consideration in determining the values paid for the
stock, and is to be valued on the basis of worth and never arbitrarily.
(b) Interest in a co-ownership of property (Art. 493, Civil Code.) may be exchanged for
shares of stock subject to the above conditions and Articles 1620 and 1623 of the Civil
Code. (SEC Opinion, Nov. 6,1990.) The ownership of a pro indiviso interest in land or any
other real property is a real right and, it the same time, a real property which may be
conveyed by the co-owner.
2. DO SHARES GUARANTEE SHAREHOLDERS A PROPORTIONATE PERCENTAGE OF OWNERSHIP OVER CORPORATE
ASSETS?
FACTS: Private respondent Adelaida Rodriguez Magsaysay filed an action against Subic Land Corporation (SUBIC), among
others, to annul the deed of assignment and deed of mortgage executed in favor of the latter by her late husband.
Private respondent alleged that the subject land of the two deeds was acquired through conjugal funds. Since her
consent to the disposition of the same was not obtained, she claimed that the acts of assignment and mortgage were
done to defraud the conjugal partnership. She further contended that the same were done without consideration and
hence null and void. Petitioners, sisters of the deceased husband of the private respondent, filed a motion for
intervention on the ground that their brother conveyed to them one-half of his shareholdings in SUBIC, or about 41%.
The trial court denied the motion for intervention ruling that petitioners have no legal interest because SUBIC has a
personality separate and distinct from its stockholders. The CA confirmed the denial on appeal. Hence, this petition.
ISSUE: Whether petitioners, as stockholders of SUBIC, have a legal interest in the action for annulment of the deed of
assignment and deed of mortgage in favor of the corporation.
HELD: NO. The Court noted that the interest which entitles person to intervene in a suit between other parties must be
in the matter in litigation and of such direct and immediate character that the intervenor will either gain or lose by the
direct legal operation and effect of the judgment. In the instant petition, it was said that the interest, if it exists at all, of
petitioners-movants is indirect, contingent, remote, conjectural, consequential and collateral. At the very least, their
interest is purely inchoate, or in sheer expectancy of a right in the management of the corporation and to share in the
profits thereof and in the properties and assets thereof on dissolution, after payment of the corporate debts and
obligations. While a share of stock represents a proportionate or aliquot interest in the property of the corporation, it
does not vest the owner thereof with any legal right or title to any of the property, his interest in the corporate property
being equitable or beneficial in nature. Shareholders are in no legal sense the owners of corporate property, which is
owned by the corporation as a distinct legal person.
FERNAN, C.J.:
In this petition for review on certiorari, petitioners seek to reverse and set aside [1] the decision of the Court of Appeals
dated July l3, 1981, 1 affirming that of the Court of First Instance of Zambales and Olongapo City which denied
petitioners' motion to intervene in an annulment suit filed by herein private respondent, and [2] its resolution dated
September 7, 1981, denying their motion for reconsideration.
Petitioners are raising a purely legal question; whether or not respondent Court of Appeals correctly denied their motion
for intervention.
On February 9, 1979, Adelaida Rodriguez-Magsaysay, widow and special administratix of the estate of the late Senator
Genaro Magsaysay, brought before the then Court of First Instance of Olongapo an action against Artemio Panganiban,
Subic Land Corporation (SUBIC), Filipinas Manufacturer's Bank (FILMANBANK) and the Register of Deeds of Zambales. In
her complaint, she alleged that in 1958, she and her husband acquired, thru conjugal funds, a parcel of land with
improvements, known as "Pequena Island", covered by TCT No. 3258; that after the death of her husband, she
discovered [a] an annotation at the back of TCT No. 3258 that "the land was acquired by her husband from his separate
capital;" [b] the registration of a Deed of Assignment dated June 25, 1976 purportedly executed by the late Senator in
favor of SUBIC, as a result of which TCT No. 3258 was cancelled and TCT No. 22431 issued in the name of SUBIC; and [c]
the registration of Deed of Mortgage dated April 28, 1977 in the amount of P 2,700,000.00 executed by SUBIC in favor of
FILMANBANK; that the foregoing acts were void and done in an attempt to defraud the conjugal partnership considering
that the land is conjugal, her marital consent to the annotation on TCT No. 3258 was not obtained, the change made by
the Register of Deeds of the titleholders was effected without the approval of the Commissioner of Land Registration
and that the late Senator did not execute the purported Deed of Assignment or his consent thereto, if obtained, was
secured by mistake, violence and intimidation. She further alleged that the assignment in favor of SUBIC was without
consideration and consequently null and void. She prayed that the Deed of Assignment and the Deed of Mortgage be
annulled and that the Register of Deeds be ordered to cancel TCT No. 22431 and to issue a new title in her favor.
On March 7, 1979, herein petitioners, sisters of the late senator, filed a motion for intervention on the ground that on
June 20, 1978, their brother conveyed to them one-half (1/2 ) of his shareholdings in SUBIC or a total of 416,566.6
shares and as assignees of around 41 % of the total outstanding shares of such stocks of SUBIC, they have a substantial
and legal interest in the subject matter of litigation and that they have a legal interest in the success of the suit with
respect to SUBIC.
On July 26, 1979, the court denied the motion for intervention, and ruled that petitioners have no legal interest
whatsoever in the matter in litigation and their being alleged assignees or transferees of certain shares in SUBIC cannot
legally entitle them to intervene because SUBIC has a personality separate and distinct from its stockholders.
On appeal, respondent Court of Appeals found no factual or legal justification to disturb the findings of the lower court.
The appellate court further stated that whatever claims the petitioners have against the late Senator or against SUBIC
for that matter can be ventilated in a separate proceeding, such that with the denial of the motion for intervention, they
are not left without any remedy or judicial relief under existing law.
Petitioners' motion for reconsideration was denied. Hence, the instant recourse.
Petitioners anchor their right to intervene on the purported assignment made by the late Senator of a certain portion of
his shareholdings to them as evidenced by a Deed of Sale dated June 20, 1978. 2 Such transfer, petitioners posit, clothes
them with an interest, protected by law, in the matter of litigation.
Invoking the principle enunciated in the case of PNB v. Phil. Veg. Oil Co., 49 Phil. 857,862 & 853 (1927), 3petitioners
strongly argue that their ownership of 41.66% of the entire outstanding capital stock of SUBIC entitles them to a
significant vote in the corporate affairs; that they are affected by the action of the widow of their late brother for it
concerns the only tangible asset of the corporation and that it appears that they are more vitally interested in the
outcome of the case than SUBIC.
Viewed in the light of Section 2, Rule 12 of the Revised Rules of Court, this Court affirms the respondent court's holding
that petitioners herein have no legal interest in the subject matter in litigation so as to entitle them to intervene in the
proceedings below. In the case of Batama Farmers' Cooperative Marketing Association, Inc. v. Rosal, 4 we held: "As
clearly stated in Section 2 of Rule 12 of the Rules of Court, to be permitted to intervene in a pending action, the party
must have a legal interest in the matter in litigation, or in the success of either of the parties or an interest against both,
or he must be so situated as to be adversely affected by a distribution or other disposition of the property in the custody
of the court or an officer thereof ."
To allow intervention, [a] it must be shown that the movant has legal interest in the matter in litigation, or otherwise
qualified; and [b] consideration must be given as to whether the adjudication of the rights of the original parties may be
delayed or prejudiced, or whether the intervenor's rights may be protected in a separate proceeding or not. Both
requirements must concur as the first is not more important than the second. 5
The interest which entitles a person to intervene in a suit between other parties must be in the matter in litigation and
of such direct and immediate character that the intervenor will either gain or lose by the direct legal operation and
effect of the judgment. Otherwise, if persons not parties of the action could be allowed to intervene, proceedings will
become unnecessarily complicated, expensive and interminable. And this is not the policy of the law. 6
The words "an interest in the subject" mean a direct interest in the cause of action as pleaded, and which would put the
intervenor in a legal position to litigate a fact alleged in the complaint, without the establishment of which plaintiff could
not recover. 7
Here, the interest, if it exists at all, of petitioners-movants is indirect, contingent, remote, conjectural, consequential and
collateral. At the very least, their interest is purely inchoate, or in sheer expectancy of a right in the management of the
corporation and to share in the profits thereof and in the properties and assets thereof on dissolution, after payment of
the corporate debts and obligations.
While a share of stock represents a proportionate or aliquot interest in the property of the corporation, it does not vest
the owner thereof with any legal right or title to any of the property, his interest in the corporate property being
equitable or beneficial in nature. Shareholders are in no legal sense the owners of corporate property, which is owned
by the corporation as a distinct legal person. 8
Petitioners further contend that the availability of other remedies, as declared by the Court of appeals, is totally
immaterial to the availability of the remedy of intervention.
We cannot give credit to such averment. As earlier stated, that the movant's interest may be protected in a separate
proceeding is a factor to be considered in allowing or disallowing a motion for intervention. It is significant to note at this
juncture that as per records, there are four pending cases involving the parties herein, enumerated as follows: [1]
Special Proceedings No. 122122 before the CFI of Manila, Branch XXII, entitled "Concepcion Magsaysay-Labrador, et al.
v. Subic Land Corp., et al.", involving the validity of the transfer by the late Genaro Magsaysay of one-half of his
shareholdings in Subic Land Corporation; [2] Civil Case No. 2577-0 before the CFI of Zambales, Branch III, "Adelaida
Rodriguez-Magsaysay v. Panganiban, etc.; Concepcion Labrador, et al. Intervenors", seeking to annul the purported
Deed of Assignment in favor of SUBIC and its annotation at the back of TCT No. 3258 in the name of respondent's
deceased husband; [3] SEC Case No. 001770, filed by respondent praying, among other things that she be declared in
her capacity as the surviving spouse and administratrix of the estate of Genaro Magsaysay as the sole subscriber and
stockholder of SUBIC. There, petitioners, by motion, sought to intervene. Their motion to reconsider the denial of their
motion to intervene was granted; [4] SP No. Q-26739 before the CFI of Rizal, Branch IV, petitioners herein filing a
contingent claim pursuant to Section 5, Rule 86, Revised Rules of Court. 9 Petitioners' interests are no doubt amply
protected in these cases.
Neither do we lend credence to petitioners' argument that they are more interested in the outcome of the case than the
corporation-assignee, owing to the fact that the latter is willing to compromise with widow-respondent and since a
compromise involves the giving of reciprocal concessions, the only conceivable concession the corporation may give is a
total or partial relinquishment of the corporate assets. 10
Such claim all the more bolsters the contingent nature of petitioners' interest in the subject of litigation.
The factual findings of the trial court are clear on this point. The petitioners cannot claim the right to intervene on the
strength of the transfer of shares allegedly executed by the late Senator. The corporation did not keep books and
records. 11 Perforce, no transfer was ever recorded, much less effected as to prejudice third parties. The transfer must
be registered in the books of the corporation to affect third persons. The law on corporations is explicit. Section 63 of
the Corporation Code provides, thus: "No transfer, however, shall be valid, except as between the parties, until the
transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the
transfer, the number of the certificate or certificates and the number of shares transferred."
And even assuming arguendo that there was a valid transfer, petitioners are nonetheless barred from intervening
inasmuch as their rights can be ventilated and amply protected in another proceeding.
Section 63. Certificate of stock and transfer of shares. - The capital stock of stock corporations shall be divided into
shares for which certificates signed by the president or vice president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so
issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner
or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid,
except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the
parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares
transferred.
No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the
corporation.
Section 98. Validity of restrictions on transfer of shares. - Restrictions on the right to transfer shares must appear in the
articles of incorporation and in the by-laws as well as in the certificate of stock; otherwise, the same shall not be binding
on any purchaser thereof in good faith. Said restrictions shall not be more onerous than granting the existing
stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable
terms, conditions or period stated therein. If upon the expiration of said period, the existing stockholders or the
corporation fails to exercise the option to purchase, the transferring stockholder may sell his shares to any third person.
FACTS:
Cooperative Naval Filipinas was incorporated under the Philippine laws. Mariano Rivera was one of the
incorporators. The AOI were registered in the Bureau of Commerce and Industry. In the course of time, the corporation
became insolvent and went into the hands of Phil. Trust Co., as assignee in bankruptcy. The latter instituted an action to
recover unpaid stock subscription of defendant. Defendant insists the resolution that has been made on the reduction of
the capital, the reason why he did not fully pay the entire subscription.
ISSUE:
WON the reduction of the corporate capital by releasing the subscribers from payment of their subscription is
valid and proper.
HELD:
It is established doctrine that subscription to the capital of a corporation constitute a find to which creditors
have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any
unpaid stock subscription in order to realize assets for the payment of its debts. (Velasco vs. Poizat, 37 Phil., 802.) A
corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his
shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock can
take place only in the manner an under the conditions prescribed by the statute or the charter or the articles of
incorporation. Moreover, strict compliance with the statutory regulations is necessary
In the case at bar, therefore held that the resolution relied upon the defendant was without effect and that the
defendant was still liable for the unpaid balance of his subscription.
STREET, J.:
This action was instituted on November 21, 1921, in the Court of First Instance of Manila, by the Philippine Trust
Company, as assignee in insolvency of La Cooperativa Naval Filipina, against Marciano Rivera, for the purpose of
recovering a balance of P22,500, alleged to be due upon defendant's subscription to the capital stock of said insolvent
corporation. The trial judge having given judgment in favor of the plaintiff for the amount sued for, the defendant
appealed.
It appears in evidence that in 1918 the Cooperativa Naval Filipina was duly incorporated under the laws of the Philippine
Islands, with a capital of P100,000, divided into one thousand shares of a par value of P100 each. Among the
incorporators of this company was numbered the defendant Mariano Rivera, who subscribed for 450 shares
representing a value of P45,000, the remainder of the stock being taken by other persons. The articles of incorporation
were duly registered in the Bureau of Commerce and Industry on October 30 of the same year.
In the course of time the company became insolvent and went into the hands of the Philippine Trust Company, as
assignee in bankruptcy; and by it this action was instituted to recover one-half of the stock subscription of the
defendant, which admittedly has never been paid.
The reason given for the failure of the defendant to pay the entire subscription is, that not long after the Cooperativa
Naval Filipina had been incorporated, a meeting of its stockholders occurred, at which a resolution was adopted to the
effect that the capital should be reduced by 50 per centum and the subscribers released from the obligation to pay any
unpaid balance of their subscription in excess of 50 per centum of the same. As a result of this resolution it seems to
have been supposed that the subscription of the various shareholders had been cancelled to the extent stated; and fully
paid certificate were issued to each shareholders for one-half of his subscription. It does not appear that the formalities
prescribed in section 17 of the Corporation Law (Act No. 1459), as amended, relative to the reduction of capital stock in
corporations were observed, and in particular it does not appear that any certificate was at any time filed in the Bureau
of Commerce and Industry, showing such reduction.
His Honor, the trial judge, therefore held that the resolution relied upon the defendant was without effect and that the
defendant was still liable for the unpaid balance of his subscription. In this we think his Honor was clearly right.
It is established doctrine that subscription to the capital of a corporation constitute a find to which creditors have a right
to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock
subscription in order to realize assets for the payment of its debts. (Velasco vs. Poizat, 37 Phil., 802.) A corporation has
no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a
valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in
the manner an under the conditions prescribed by the statute or the charter or the articles of incorporation. Moreover,
strict compliance with the statutory regulations is necessary (14 C. J., 498, 620).
In the case before us the resolution releasing the shareholders from their obligation to pay 50 per centum of their
respective subscriptions was an attempted withdrawal of so much capital from the fund upon which the company's
creditors were entitled ultimately to rely and, having been effected without compliance with the statutory
requirements, was wholly ineffectual.
A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the
chairman and the secretary of the stockholders' meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually
subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number
of no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the
amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the
purpose of making effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any
bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall
require prior approval of the Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with
the Securities and Exchange Commission and attached to the original articles of incorporation. From and after
approval by the Securities and Exchange Commission and the issuance by the Commission of its certificate of filing,
the capital stock shall stand increased or decreased and the incurring, creating or increasing of any bonded
indebtedness authorized, as the certificate of filing may declare:
Provided, That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital
stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the
time of the filing of the certificate, showing that at least twenty-five (25%) percent of such increased capital stock has
been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in actual
cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal
to twenty-five (25%) percent of the subscription:
Provided, further, That no decrease of the capital stock shall be approved by the Commission if its effect shall
prejudice the rights of corporate creditors. Non-stock corporations may incur or create bonded indebtedness, or
increase the same, with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the
members in a meeting duly called for the purpose. Bonds issued by a corporation shall be registered with the
Securities and Exchange Commission, which shall have the authority to determine the sufficiency of the terms
thereof.
TITLE VII - STOCKS AND STOCKHOLDERS
Section 60. Subscription contract. - Any contract for the acquisition of unissued stock in an existing corporation or a
corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the
fact that the parties refer to it as a purchase or some other contract.
(2) In a non-stock corporation, membership is acquired by contract with the corporation, the modes of entering into
which vary according to the charter and by-laws of the particular corporation.
Kinds of Subscription:
PreIncorporation
subscription one entered into before incorporation. It constitutes a binding contract among the
subscribers
Post-incorporation
subscription one entered into after the incorporation for the acquisition of unissued stock. It shall be
deemed a subscription notwithstanding the fact that the parties refer to it as a purchase or
some other contract.
Conditional Subscription
one which is subject to a condition, which may be a past event unknown to the parties or a
future, uncertain event, that is, an event which may or may not happen, (see Art. 1179,
par. 1, Civil Code.)
The subscriber does not become a stockholder until the condition is fulfilled. The
subscription is void if the condition is void
Absolute subscription
one which is not subject to any condition and, therefore, the subscriber becomes liable on
the subscription and acquires the rights of a stockholder from the time it is accepted
Subscription with a
special term one where the corporation agrees to do something, the fulfillment of which not being a
condition precedent to the accrual of liability of the subscriber or the acquisition of the
rights of a stockholder. It is an absolute subscription.
Thus, if X enters into a subscription contract with Y Corporation subject to the special term
that the corporation will transfer its principal office at another place, the non-fulfillment of
the stipulation does not entitle X to rescind the subscription, his remedy being an action
for damages against the corporation. However, if the term is intended by the parties as a
resolutory condition (see Art. 1179, ibid.), X has the right to rescind.
Stock Option
- a privilege granted to a party to subscribe to a certain portion of the unissued capital stock of a corporation within a
certain period and under the terms and conditions of the grant exercisable by the grantee at any time within the period
granted.
- Before allowing such corporation to issue option stocks, however, the Securities and Exchange Commission, as a
matter of policy, inquiries into the reason or justification therefor and approves the same only when it is satisfied that
there is valuable consideration in favor of the corporation for the grant of the right.
- At present, the policy of the Commission on the matter is to permit the grant of option shares at par for a period of
three (3) years only from the time the corporation starts commercial production after which the options are required to
pay a gradual yearly increase in price of the shares, depending on what may be considered reasonable.
Subscription is an offer to acquire a specified number of unissued shares of an existing corporation or one still to be
formed.
Subject Matter. There can be a subscription only with reference to stock which has never been issued.
The Code prohibits the distinction between the sale unissued stock or subscription of such stock; all contracts for the
subscription or sale of unissued stock shall be governed solely by the rules pertaining to subscription agreement.
However, (a) Transfer for consideration of treasury shares is a sale by the corporation; (b) A transfer of fully paid shares
by a shareholder to a third person is a sale.
Note: The purpose of removing all contracts dealing with unissued shares form the coverage of sale is to exclude
them from the operations of ordinary contract principles, such as rescission by reason of breach, waiver, condonation or
mutual withdrawal and the effects of the happening and non-happening of conditions, to ensure that subscription due
thereon will be paid for the protection of corporate creditors under the trust fund doctrine.
Nevertheless, a subscription agreement is a species of the genus sale in that it involved the transfer of ownership to a
property right (share) for a valuable consideration.
Section 61. Pre-incorporation subscription. - A subscription for shares of stock of a corporation still to be formed shall
be irrevocable for a period of at least six (6) months from the date of subscription, unless all of the other subscribers
consent to the revocation, or unless the incorporation of said corporation fails to materialize within said period or
within a longer period as may be stipulated in the contract of subscription: Provided, That no pre-incorporation
subscription may be revoked after the submission of the articles of incorporation to the Securities and Exchange
Commission.
Conditions for
Revocation Conditions for the revocation of a pre-incorporation subscription contract either by the
subscriber or the corporation.
When Irrevocable
irrevocable for a period of at least six (6) months from the date of subscription,
notwithstanding any agreement to the contrary, except in the two instances mentioned.
it cannot be revoked after the submission of the articles of incorporation to the Commission,
although beyond the six (6)-month period.
Reason for
irrevocability prevents a subscriber from speculating on the stocks of a proposed corporation.
Furthermore, it is to the interest of each subscriber that the others are bound by their
subscriptions and the new corporation should have, as operating capital, enforceable
subscriptions. Thus, the rule protects the corporation from financially irresponsible
subscribers,
a person who subscribes for a stock in a corporation to be formed and who does not consent to any change in the
subscription is not liable if the corporation which is afterwards formed, is a different corporation from that
contemplated by the subscription.
Section 62. Consideration for stocks. - Stocks shall not be issued for a consideration less than the par or issued price
thereof. Consideration for the issuance of stock may be any or a combination of any two or more of the following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its
use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares exchanged for stocks in the event of reclassification or conversion.
Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights, the
valuation thereof shall initially be determined by the incorporators or the board of directors, subject to approval by
the Securities and Exchange Commission.
Shares of stock shall not be issued in exchange for promissory notes or future service.
The same considerations provided for in this section, insofar as they may be applicable, may be used for the issuance
of bonds by the corporation.
The issued price of no-par value shares may be fixed in the articles of incorporation or by the board of directors
pursuant to authority conferred upon it by the articles of incorporation or the by-laws, or in the absence thereof, by
the stockholders representing at least a majority of the outstanding capital stock at a meeting duly called for the
purpose.
FUNDS FURNISHED BY Every corporation must issue stock, also called equity securities, to persons who want to
SHAREHOLDERS invest capital in it, for money, property, or services.
(a) Equity securities represent ownership rights which, in varying degrees, depending upon
the type of the stock, entitle the holder to a right to participate in the earnings of the
corporation and upon dissolution, those assets which remain after all corporate debts have
been paid.
(b) The capital contributed by stockholders in exchange for shares of stock is often referred to
as equity capital.
(c) The value the corporation receives for stock issued appears in the capital account section
of the corporation's balance sheet.
BORROWINGS The capital of a corporation may be derived not only from contributions of shareholders
received by it as consideration for the issuance of stock.
(a) The corporation may also raise capital to finance its business from loans or advances by
creditors (stockholders and/or third persons) in return for which the latter get debt securities
called bonds for long-term debts. A corporate bond may be defined as a written promise by a
corporation to pay a definite sum of money at some future date, at a fixed rate of interest,
given in return for money or its equivalent received by the corporation, sometimes secured
and sometimes not. Bonds issued by a corporation are generally issued for money borrowed,
which is necessary, in addition to its capital stock, to support the operations of the company.
(b) Debt securities are liabilities of the issuer. They require the issuer to pay the holders the
principal amount loaned to the corporation at a fixed maturity date and stated rate of
interest. The option given to bondholders to convert their bonds to equity is not an assurance
that they will opt for conversion. Hence, the convertibility feature of the bonds to shares of
stock does not make them equity securities. Unless actually converted into shares, bonds
cannot be classified as capital to form part of the equity portion in the balance sheet.
Furthermore, such conversion takes the nature of issuance of shares by way of offset of
liabilities which requires prior approval of the Securities and Exchange Commission.
PROFITS AND STOCK A corporation also get internal generated funds from its profits or earnings which are
DIVIDENDS reinvested in the business. Sometimes a corporation issues stock to represent the reinvested
earnings, that is, stock dividends are declared by means of which the corporation retains part
of the corporate earnings.
(2) Declaration of stock dividends involves issuance of stocks directly paid from amounts transferred from unrestricted
retained earnings to stated capital. Since the retained earnings have already been applied as payment to the issuance of
shares covering the stock dividend declaration, the same can no longer be reapplied as payment to subsequent
subscription rights.
(3) They shall not be issued in exchange for promissory notes or future services.
(4) When the consideration is other than actual cash, or consists of intangible property, the value thereof shall be
initially determined by the incorporators or the board of directors, subject to approval by the Securities and Exchange
Commission. This means that the payment of such subscription, either at the time of incorporation or thereafter, shall
be subject to approval by the Commission. The law being clear and unambiguous, no exception can be read into it.
(5) A corporation may reclassify its shares by amending its articles of incorporation and exchange outstanding shares of
stockholders for stocks reclassified or converted from one class to another.
(6) A corporation cannot issue its stock as a gratuity but it is lawful for a corporation to issue bonus stock to officers or
employees as incentives or for services actually rendered to the corporation for in such case, the stock cannot be
considered gratuitous.
(b) Financial instruments such as notes, shares of stocks and bonds may be classified as personal
property; hence, they may be legally accepted as capital contribution. Negotiable instruments
other than promissory notes such as checks can be used in payment of stocks but they "shall
produce the effect of payment only when they have been cashed, or when through the fault of
the creditor they have been impaired."
STOCK DIVIDENDS
When stock dividends are declared, amounts representing surplus assets are "transferred from
unrestricted retained earnings to stated capital." In effect, the additional stocks are paid for by
the stockholders in cash or property out of the portion of the corporate earnings so capitalized.
OUTSTANDING
SHARES A holder of preferred shares with conversion privilege may give his convertible preferred shares
as a consideration for the issuance of a certain number of common shares.
RECEIVABLES
They may be accepted as payment for shares subject to the following conditions:
(a) the SEC is able to verify the existence and collectibility of the receivables; and
(b) the shares to be issued will be held in escrow until actual payment or collection of the
receivables.
Section 65. Liability of directors for watered stocks. - Any director or officer of a corporation consenting to the
issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other than
cash, valued in excess of its fair value, or who, having knowledge thereof, does not forthwith express his objection in
writing and file the same with the corporate secretary, shall be solidarily, liable with the stockholder concerned to the
corporation and its creditors for the difference between the fair value received at the time of issuance of the stock
and the par or issued value of the same.
- A stock issued not in exchange for its equivalent value either in cash, property, share, stock dividends, or services.
- Water in the stock represents the difference between the fair market value at the time of the issuance of the stock
and the par or issued value of said stock. Both par and no par stocks can thus be watered stocks.
- It includes stocks:
a. Issued without consideration (bonus share).
b. Issued as fully paid when the corporation has received a lesser sum of money than its par or issued value
(discount share).
c. Issued for a consideration other than actual cash such as property or services, the fair valuation of which is
less than its par or issued value.
d. Issued as stock dividend when there are no sufficient retained earnings to justify it.
Consenting director
or officer The liability of the consenting director or officer for the "water" in the stock is solidary (see Arts.
1207, 1208, Civil Code.) with the participating stockholder.
The fair value of the stock is determined at the time of its issuance so that the subsequent
increase in value of property given as consideration will not eliminate the "water" in the stock
and relieve the director or officer and stockholder from liability.
Subscriber
"stocks shall not be issued for a consideration less than the par or issued price thereof," persons
to whom watered stock is issued are not only liable to be called upon to contribute, if necessary,
for the benefit of creditors to the extent of the difference between the amount paid and the par
or issued value of the shares but are also liable for the purpose of adjusting the rights of the
stockholders inter se.
The holder of watered stock cannot escape liability by transferring the same to an irresponsible
person or to a bona fide purchaser.
Subsequent
transferee A transferee of stock in a corporation occupies the same position as his transferor with respect
to the right to complain of an issue of watered stock, and is, therefore, estopped to complain if
his transferor was estopped. This is true notwithstanding the fact that he purchased the stock in
good faith and in ignorance of the fraudulent or unlawful issue.
There is a contrary view. It holds that a transferee is not liable unless he either was a party to
the transaction in the first instance or has in effect in some manner made himself a party since.
The liability of a holder of watered stock to pay to creditors the difference between the par
value and the amount actually paid is not based upon his relationship to the corporation as a
stockholder but upon a fraudulent transaction.
Transferor or party
to the fraud Purchaser without notice may maintain an action to recover damages sustained by him, either
against the transferor, if the latter knew the character of the stock, or against the directors or
other officers who issued the same, or against the corporation itself if it can be regarded as a
party to the fraud.
1. Basis or Theory of
Liability the view has been taken that one who acquires stock from a corporation in exchange for
property or services at an over-valuation or at a discount is liable to respond to creditors, upon
the principle that one giving credit to a corporation is entitled to rely upon its ostensible
capitalization as the basis for the credit given.
Where 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 a constructive
fraud upon creditors.
Hence, it is held that recovery may be had by a creditor in such case, even though the
corporation itself has no cause of action against the stockholders. Some of the earlier decisions
put the right of recovery in such a case upon the so-called "trust fund doctrine." In any view of
the matter, however, the creditors' right of action to compel the making good of the
representation as to the corporation's capital is based on fraud, and the trust fund doctrine is
only another way of expressing the same underlying idea.
When liable
subscribers for stock shall be liable to the corporation for interest from the date of
subscription, but only if so required by the by-laws or subscription contract.
Under Section 66, a subscriber is liable to pay interest only "if so required by the by-laws." A
mere resolution of the board of directors to that effect would not make the subscribers liable
unless the board is empowered by the by-laws to charge interest on unpaid subscriptions.
But even if not so required by the bylaws, a delinquent stockholder shall be liable to pay
interest from date of delinquency.
Rate of interest
If the rate of interest fixed in the bylaws, then such rate shall be paid; otherwise, such rate
shall be deemed to be the legal rate.
By virtue of Central Bank Circular No. 416 (July 29,1974.), the legal rate is now 12% per
annum, (see Sec. 3, Act No. 2655 [the Usury Law], as amended by Pres. Decree No. 116.)
Waiver of interest
The corporation may waive the right to collect interest on the unpaid subscriptions, if it so
desires, because it is a right which could be waived provided, of course, that no corporate
creditors are prejudiced by such waiver.
But if the payment of interest is required by the by-laws, waiver may only be done by
amending the by-laws.
Section 67. Payment of balance of subscription. - Subject to the provisions of the contract of subscription, the board
of directors of any stock corporation 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, in either case with accrued
interest, if any, as it may deem necessary.
Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, if any, shall be
made on the date specified in the contract of subscription 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 rate of interest is provided in the bylaws, computed from such
date until full payment. If within thirty (30) days from the said date no payment is made, all stocks covered by said
subscription shall thereupon become delinquent and shall be subject to sale as hereinafter provided, unless the board
of directors orders otherwise.
A stock becomes delinquent and shall be subject to extra-judicial sale at public auction,
unless the board of directors orders otherwise, upon failure of the stockholder to pay the
unpaid subscription or balance thereof within the grace period of 30 days from the date
specified in the contract of subscription (without need of prior call or board action
demanding payment) or in the absence of a date fixed in the contract of subscription, from
the date stated in the call made by the board of directors. The delinquency takes place
automatically after such failure
2. Judicial Action
The statutory right to sell the subscribers stock is merely a remedy in addition to that which
proceeds by action in court.
The corporation may, at its discretion, pursue either remedy (sale of the unpaid stock or
action in court), though not both.
Stock corporations are prohibited from retaining surplus profits in excess of one hundred
(100%) percent of their paid-in capital stock, except:
(1) when justified by definite corporate expansion projects or programs approved by the
board of directors; or
(2) when the corporation is prohibited under any loan agreement with any financial
institution or creditor, whether local or foreign, from declaring dividends without its/his
consent, and such consent has not yet been secured; or
(3) when it can be clearly shown that such retention is necessary under special circumstances
obtaining in the corporation, such as when there is need for special reserve for probable
contingencies.
Effect of failure
shall render the entire balance due and payable and make all the stocks covered by the said
subscription delinquent and subject to sale at public auction.
the delinquent shares shall cover not only the unpaid portion of the stockholder's
subscription but his entire subscription consistently with the doctrine that a subscription is
one, entire, indivisible, whole contract.
The stockholder shall also be liable for interest at the legal rate on such balance, unless a
different rate of interest is provided in the by-laws, computed from such date until full
payment.
CALL ASSESSMENT
declaration officially made by a corporation usually
expressed in the form of a resolution of the board of A. Paid Subscriptions
directors requiring the payment of all or a certain - it means a levy made upon the stock of a corporation,
prescribed portion of a subscriber's stock subscription. generally for the purpose of correcting an impairment of
the capital and indicates the proportionate amount
required to be paid by each stockholder.
Requisites for a Valid Call:
(1) It must be made in the manner prescribed by law; B. Unpaid Subscriptions (call/installment)
(2) It must be made by the board of directors; and - In the absence of statutory authority, a corporation does
(3) It must operate uniformly upon all the shareholders. not possess the power to assess fully paid stock. As a rule,
stockholders are not liable beyond the extent of their
unpaid subscriptions.
The call cannot operate on stock which has not been
subscribed at the time the call is made. Hence, a
subscriber is not liable for calls made prior to his
subscription.
(3) Also, no call is necessary to fix the subscriber's liability when the subscription is payable
not upon call or demand by the directors but immediately or on a specified day on or before
a specified day, or when it is payable in installments at specified times.
Necessity of notice of
call Where call is necessary, notice must be given to the stockholder concerned. A call without
notice to the subscriber is practically no call at all.