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CASE ANALYSIS V

PHILIPPINE TRUST COMPANY vs. MARCIANO RIVERA


G.R. No. L-19761 datedJanuary 29, 1923
http://www.lawphil.net/judjuris/juri1923/jan1923/gr_l-
19761_1923.html

Facts:

Cooperativa Naval Filipina was duly incorporated with a capital of


P100,000, divided into 100 shares at a par value of P100 each. Among its
incorporators was Marciano Rivera, who subscribed for 450 shares,
representing a value of P45,000. The company however became
insolvent. Philippine Trust became its assignee in bankruptcy. PhilTrust
sought to recover of the stock subscription of Rivera, which admittedly,
has never been paid. Rivera contends that he never paid because the
stockholders of Naval issued a resolution shortly after the companys
incorporation, stating that the capital shall be reduced by 50%. As a result,
Rivera contends that the subscribers were released from the obligation to
pay any unpaid balance of their subscription in excess of 50% of their
subscriptions. Rivera further contends that the subscriptions of the
subscribers were 50% cancelled, and certificates of shares of stock were
issued for the said remaining 50% of the subscriptions.

Issue:

Whether such reduction of the capital stock is valid.

Ruling:

No. SC held that the said resolution is without effect for being:
1. An attempted withdrawal of so much capital from the fund which
the companys creditors were entitled ultimately to rely, and

2. For having been effected without compliance with the statutory


requirements of Section 17 of the Corporation Law regarding reduction of
capital stock, and

3. For failure to file a certificate with the Bureau of Commerce and


Industry, showing such reduction.

Thus, stockholder is still liable for the unpaid balance of his subscription.

Ratio:

Subscriptions to the capital of a corporation constitute a fund 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. A
corporation has no power to release an original subscriber to its capital
stock from the obligation of paying for his shares, w/o a valuable
consideration for such release; and as against creditors a reduction of the
capital stock can take place only in the manner and under the conditions
prescribed by the statute or the charter or the AOI. Moreoever, strict
compliance with statutory regulations is necessary.

Discussion Questions:
(1) What is a subscription contract? Give the rule of what shall be deemed
a subscription.

Under Section 60 of the Corporation Code, Subscription contract is


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.

Section 60 lays down the rule of what shall be deemed a


subscription.
(1) Subject matter - There can be a subscription only with reference
to stock which has never been issued, i.e., to an original issue of stock,
or to an increase of capital stock. The subscription in case of the former
may be made before or after incorporation but in case of the latter, it is
always made after incorporation.

(2) Form - The law does not require that the subscription contract
be in writing although it is usual and convenient for it to be in writing.

(3) Absence of express contract - A person who accepts a certificate


of stock from a corporation or who acts as stockholder by participating
in stockholders' meetings, making payment, or otherwise, thereby
becomes a stockholder, and liable as such not only to creditors, but
also to the corporation although there may have been no express
contract of subscription. (Spielberger vs.Nelson, 72 Phil. 396 [1941];
SEC Opinion, Aug. 19, 1992.)

(4) Subscriptions under several contracts - There is no law


prohibiting a person from subscribing to the capital stock of a
corporation under several subscription agreements. On the contrary, it
is common practice for a person to enter into several subscription
contracts with the same corporation. (SEC Opinion, Oct. 24, 1963.)

(5) Subscription upon any special terms - A corporation, under its


general power to contract, has the power to accept subscriptions upon
any special terms not prohibited by law or contrary to public policy,
provided they do not require the performance of acts which are beyond
the powers of the corporation and do not constitute a fraud upon other
subscribers or stockholders, or upon persons who are or may become
creditors of the corporation. (National Exchange Co., Inc. vs. Dexter,
51 Phil. 601 [1928].)

(6) Citizenship requirement - Under R.A. No. 7353 (Sec. 4 thereof.),


subject to exception, "the capital stock of any rural bank shall be fully
owned and held directly or indirectly by citizens of the Philippines or
corporations, associations or cooperatives qualified under Philippine
laws to own and hold such capital stock." The naturalization of a
stockholder as a citizen of another country renders his subscription
contract with a rural bank automatically void by operation of law. If he
fails to dispose of his shares, the corporation may purchase/reacquire
the same. The reacquired shares shall become treasury shares. (SEC
Opinion, July 1, 1993.)
A subscription contract is to be distinguished from a share contract,
(see comments under Sec. 62.)

(2) What is the liability of stockholders on unpaid subscription to corporate


creditors? Give the reason of the rule.

Corporations trade upon the credit of the fund created by the issue
of their shares and the accretions to that fund.

(1) Persons dealing with corporations are presumed to know that


they can have recourse only to the property of the corporation and that
if the corporation is unable to meet its obligations, its shareholders
cannot be compelled to make good the deficiency. But this exemption
depends upon the full discharge of the subscription contract.

(2) In consonance with the trust fund doctrine (see Sec. 41.), stock
subscriptions are in the nature of a trust fund in the sense that they are
to be maintained unimpaired for the protection of corporate creditors.
Subscribers who have not paid in full, unless they have been validly
released from their undertaking, are the debtors of the corporation for
the balance, and if the corporation does not enforce the liability, its
creditors may do so. (see Edward A. Keller & Co., Ltd. vs. COB Group
Marketing, Inc., 141 SCRA 86 [1986]; Vda. de Salvatierra vs. Garlitos,
103 Phil. 757[1958]; 18 C.J.S. 1311-1312.) But to have a cause of
action against a stockholder for his unpaid subscription, a corporate
creditor must first exhaust his legal remedies against the corporation
except where the corporation is insolvent for in such case recourse
against the corporation would be useless and a waste of time.

(3) The liability of a subscriber for unpaid subscription cannot be


compensated or set-off with the value of his shares nor can stock
dividends declared be applied as payment for the same. The reason is
that there is no relationship of debtor and creditor between a
stockholder and the corporation with respect to his shares of stock. The
corporation, however, may apply cash dividends due on delinquent
stock to the unpaid balance on the subscription plus costs and
expenses and withhold stock dividends from the delinquent
stockholder until his stock subscription is fully paid.
(Sec. 43, par. 1.)

(3) In what instances are subscriber released from liability for unpaid
subscription?
An unpaid subscription is an asset to which corporate creditors may
look for payment and, as a rule, they are entitled to insist that it be
collected (7 R.C.L. Corp., par. 337.) since the unpaid shares are as
much a part of the capital stock as the sums which have already been
paid. (SEC Opinion, Sept. 1, 1971.)

(1) Trust fund doctrine. A subscription contract is a contract not


only between the immediate parties the subscriber and corporation
but also among all the subscribers or stockholders and the corporate
creditors by reason of the nature of a subscription contract as a trust
fund, (supra.) The doctrine considers the subscribed capital as a fund,
which is held in trust as security for satisfaction to creditors in case of
corporate liquidation.

(a) Hence, a stock corporation has no power to release an original


subscriber from paying for his shares without valuable consideration
for such release (see P.N.B. vs. Bitulok Sawmill, 23 SCRA 1366
[1968].) or without the unanimous consent of the stockholders and
except upon a showing that creditors of the corporation would not be
prejudiced (Lingayen Gulf Electric Power Co. vs. Baltazar, 93 Phil. 504
[1953].) and any agreement to do so is void and will not constitute a
defense to an action to enforce liability. (Phil.Trust Co. vs. Rivera, 44
Phil. 469 [1923].)

(b) A stock subscription is a subsisting liability from the time it is


made. The subscriber is as much bound to pay his subscription as he
would be to pay any other debt. The right of the corporation to demand
payment is no less incontestable (Nava vs. Peer Marketing Corp., 74
SCRA 65 [1976].), and this is true even in the absence of an express
promise to pay the amount subscribed. And the fact that another
subscriber fails to pay his subscription or that it is impossible to collect
from some of them is not a valid defense to discharge a subscriber from
his obligation. (Brown vs. Allebach, 166 Fed. 488.)

(c) Until the liquidation of the corporation, no part of the subscribed


capital may be returned or released to the stockholder except in the
redemption of redeemable shares (Sec.8.) without violating the trust
fund doctrine. Thus, dividends must never impair the subscribed
capital. Subscription commitments cannot be condoned or remitted nor
can the corporation buy its own shares using the subscribed capital as
the consideration therefor. (Phil. Long Distance Telephone Company
vs. National Telecommunications Commission, 539 SCRA 365 [2007].)
(d) A subscription contract necessarily involves the corporation as
one of the contracting parties since the subject matter of the transaction
is property owned by the corporation its shares of stock. An action
for rescission for alleged breach of contract is not one of the remedies
or instances allowed by the Corporation Code for the distribution of
capital assets and property of the corporation since it will violate the
Trust Fund Doctrine, (see Sec. 41.) and the procedures for the valid
distribution of assets of the corporation, (see Sec. 122.)

A contrary rule will allow just any stockholder, for just about any real
or imagined offense, to demand rescission of his subscription and call
for the distribution of some part of the corporate assets to him without
complying with the requirements of the Code. (Ong Yong vs. Tiu, 401
SCRA 1 [2003].)

(2) Release through reduction of capital stock. The release of a


subscriber from the payment of his unpaid subscription may be effected
through a reduction of the capital stock, but as against creditors, such
reduction can take place only in the manner and under the conditions
prescribed by Section 38. (Sec. 122, par. 3.)

(3) Amount of liability deducted from value of shares of stockholder


with appraisal right. A stockholder with appraisal right (see Sec. 81.)
may be relieved from liability to pay his unpaid subscription the amount
of which shall be deducted from the fair value of his shares.

(4) Consent to subscription vitiated. A subscriber who was


induced to take subscription through fraudulent misrepresentation as
to vitiate his consent thereto is entitled to annul his subscription (see
Arts. 1390-1391, Civil Code.), as where, prior to his subscription, the
authorized capital stock has been increased without notice to him for
the increase would dilute his proportionate interest and influence in the
corporation without his consent. (National Exchange Co. vs. Dexter, 51
Phil. 610 [1928]; Salmon, Dexter & Co. vs. Unson, 47 Phil. 649 [1925].)

(5) Payment to come from dividends not allowed. A subscription


agreement whereby the subscriber shall pay the shares subscribed by
him from the dividends that may be declared thereon until the full
amount of the subscription has been paid is invalid, as it is contrary to
the manner of payment prescribed by the Code (see Sec. 62.), and
because the agreement imposes no obligation on the subscriber to pay
for the shares except as dividends may accrue upon the shares and in
the contingency that no dividends are paid, there is no liability at all.
The stipulation is discriminatory in favor of the subscriber. (National
Exchange Co. vs. Dexter, supra.)

(4) Can the corporation release the subscriber from the obligation of
paying his shares? Why? Explain.

A corporation has no legal capacity to release a subscriber to its


capital stock from the obligation to pay for his shares; and any
agreement to this effect is invalid.(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; . . . . (Philippine Trust Co. vs.
Rivera, 44 Phil., 469.)

A stock subscription is a contract between the corporation and the


subscriber, and courts will enforce it for or against either. A corporation
has no legal capacity to release a subscriber to its capital stock from
the obligation to pay for his shares, and any agreement to this effect is
invalid. (Velasco vs. Poizat, 37 Phil., 802.) (Miranda vs. Tarlac Rice Mill
Co., 57 Phil., 619.

RAMON A. GONZALES vs. THE PHILIPPINE NATIONAL BANK


G.R. No. L-33320 May 30, 1983
http://www.lawphil.net/judjuris/juri1983/may1983/gr_l_33320_1983.h
tml

FACTS:

Petitioner Ramon A. Gonzales instituted in the erstwhile Court of


First Instance of Manila a special civil action for mandamus against the
herein respondent praying that the latter be ordered to allow him to look
into the books and records of the respondent bank in order to satisfy
himself as to the truth of the published reports that the respondent has
guaranteed the obligation of Southern Negros Development Corporation
in the purchase of a US$ 23 million sugar-mill to be financed by Japanese
suppliers and financiers; that the respondent is financing the construction
of the P 21 million Cebu-Mactan Bridge to be constructed by V.C. Ponce,
Inc., and the construction of Passi Sugar Mill at Iloilo by the Honiron
Philippines, Inc., as well as to inquire into the validity of Id transactions.
The petitioner has alleged hat his written request for such examination
was denied by the respondent. The trial court having dismissed the
petition for mandamus, the instant appeal to review the said dismissal was
filed.

ISSUE:

Whether or not the denial for the request of petitioner for inspection
valid.

RULING:

YES.

Although the petitioner has claimed that he has justifiable motives


in seeking the inspection of the books of the respondent bank, he has not
set forth the reasons and the purposes for which he desires such
inspection, except to satisfy himself as to the truth of published reports
regarding certain transactions entered into by the respondent bank and to
inquire into their validity. The circumstances under which he acquired one
share of stock in the respondent bank purposely to exercise the right of
inspection do not argue in favor of his good faith and proper motivation.
Admittedly he sought to be a stockholder in order to pry into transactions
entered into by the respondent bank even before he became a
stockholder. His obvious purpose was to arm himself with materials which
he can use against the respondent bank for acts done by the latter when
the petitioner was a total stranger to the same. He could have been
impelled by a laudable sense of civic consciousness, but it could not be
said that his purpose is germane to his interest as a stockholder.

We also find merit in the contention of the respondent bank that the
inspection sought to be exercised by the petitioner would be violative of
the provisions of its charter. The Superintendent of Banks and the Auditor
General, or other officers designated by law to inspect or investigate the
condition of the National Bank, shall not reveal to any person other than
the President of the Philippines, the Secretary of Finance, and the Board
of Directors the details of the inspection or investigation, nor shall they
give any information relative to the funds in its custody, its current
accounts or deposits belonging to private individuals, corporations, or any
other entity, except by order of a Court of competent jurisdiction. Any
director, officer, employee, or agent of the Bank, who violates or permits
the violation of any of the provisions of this Act, or any person aiding or
abetting the violations of any of the provisions of this Act, shall be
punished by a fine not to exceed ten thousand pesos or by imprisonment
of not more than five years, or both such fine and imprisonment.

The Philippine National Bank is not an ordinary corporation. Having


a charter of its own, it is not governed, as a rule, by the Corporation Code
of the Philippines. The provision of Section 74 of Batas Pambansa Blg. 68
of the new Corporation Code with respect to the right of a stockholder to
demand an inspection or examination of the books of the corporation may
not be reconciled with the abovequoted provisions of the charter of the
respondent bank.

Discussion Questions:
(1) Discuss the purpose of the stockholders right to inspect and examine
the books and records of a corporation.

(1) Beneficial ownership of corporate assets. - Those in charge of


the corporation are merely the stockholders' or members' agents
concerning whose good faith in discharging their duties the
stockholders or members have an interest and right to be informed.
(5 Fletcher, p. 571.)

(a) The law is based on the principle that the stockholders or


members have a right to be fully informed as to the condition of
the corporation, in the manner its affairs are conducted, and how
its capital stock to which they have contributed is employed and
managed. (SEC Opinion, April 29, 1970, citing Stone vs. Kellog,
46 N.E. 22.)

(b) The right of stockholders to inspect the books of the


corporation rests on the fact of beneficial ownership of the
corporate property and assets through ownership of shares. With
reference to his right of inspection, the relation of a stockholder
to the corporation is analogous to that of a partner to the firm. (18
Am. Jur. 2d 710; Art. 1803, Civil Code.)

(c) The right is predicated not only upon the stockholders' in


the corporation and ownership of shares of the corporation's
assets but also ownerships of the corporation's assets but also
upon the necessity of self-protection. (Gokongwei, Jr. vs.
Securities and Exchange Commission, 89 SCRA 336 [1979].)
(2) Protection of stockholders and general public from
mismanagement, fraud, and other wrongful acts. There is no question
that stockholders are entitled to inspect the books and records of a
corporation in order to investigate the conduct of the management,
determine the financial condition of the corporation, and generally take an
account of the stewardship of the officers and directors. (18 Am. Jur. 2d
718.)
(a) The evident purpose of the law in granting stockholders the
right is to protect small and minority stockholders from the power
of the majority and from mismanagement by its officers as well
as to ascertain, establish, and maintain their rights and
intelligently perform their corporate duties. (SEC Opinion, April
29,1970, citing Stone vs. Kellog, 46 N.E. 22.)
(b) It has also been stated that the purpose of the law which
requires corporations to keep books of account and gives
stockholders the right to examine the records of their corporation
is not only to protect the interests of stockholders but also to
protect the public from monopolies, unlawful combinations, and
unreasonable exactions from corporations. (Ibid., p. 710.)

In the exercise of its power of supervision and control over all


corporations, the Securities and Exchange Commission, motu
propio or upon complaint by any aggrieved party, undertake an
inspection and examination of books and records of any
corporation, (see Sec. 142.)

(2) What are the limitations in the exercise of the stockholders right of
inspection?
The right should be denied on the ground that "the person
demanding to examine or copy excerpts from the corporation's records
and minutes has improperly used information secured through any prior
examination of the records or minutes of such corporation or of any other
corporation, or was not acting in good faith or for a legitimate purpose in
making his demand" (Sec. 74, par.3.), or has an ulterior purpose or
improper ends prejudicial to the corporation (Acuna vs. Parlatone, [C.A.]
O.G. Suppl., Oct. 17, 1941, p. 28.), such as where the purpose is merely
to gratify his curiosity or for a speculative use. (Gutherie vs. Harkness,
199 U.S. 148.)
(3) Cite example when such right is denied based on the case.
The presumption is that the purpose of the stockholder or member
is legitimate or proper (i.e., related to his being a stockholder). Once
the stockholder alleges a proper purpose, the burden of proving
otherwise rests on the corporation, (see Republic vs. Sandiganbayan,
199 SCRA 39 [1991].) He may, therefore, demand an examination of
the corporate books and records without disclosing his reasons.6 (7
R.C.L. 326.)

In a criminal complaint for violation of Section 74, the defense of


improper use or motive is in the nature of a justifying circumstance that
could exonerate those who raise and are able to prove the same. (Ang-
Abaya vs. Ang, 573 SCRA 129 [2008].)

TORIBIA USON vs. VICENTE DIOSOMITO, ET AL


G.R. No. L-42135 June 17, 1935
http://www.lawphil.net/judjuris/juri1935/jun1935/gr_l-
42135_1935.html

FACTS:

Toribia Uson filed a civil action for debt against Vicente Diosomito.
Upon institution of said action, an attachment was duly issued and
respondents property was levied upon, including 75 shares of the North
Electric Co., which stood in his name on the books of the company when
the attachment was levied. The sheriff sold said shares at a public auction
with Uson being the highest bidder. Jollye claims to be the owner of said
certificate of stock issued to him by the North Electric Co.

There is no dispute that Diosomito was the original owner of said


shares, which he sold to Barcelon. However, Barcelon did not present
these certificates to the corporation for registration until 19 months after
the delivery thereof by Barcelon, and 9 months after the attachment and
levy on said shares. The transfer to Jollye was made 5 months after the
issuance of a certificate of stock in Barcelon's name.

ISSUE:

Is a bona fide transfer of the shares of corp., not registered or noted


on the books of the corp., valid as against a subsequent lawful attachment
of said shares, regardless of whether the attaching creditor had actual
notice of said transfer or not?
RULING:

NO, it is not valid.

The transfer of the 75 shares in the North Electric Co., Inc made by
the defendant Diosomito as to the defendant Barcelon was not valid as to
the plaintiff. Toribia Uson, on 18 Jan. 1932, the date on which she
obtained her attachment lien on said shares of stock will still stood in the
name of Diosomito on the books of the corp. Sec. 35 provides that No
transfer, however, is 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.

All transfers of shares not so entered are invalid as to attaching or


execution creditors of the assignors, as well as to the corporation and to
subsequent purchasers in good faith, and indeed, as to all persons
interested, except the parties to such transfers.

Discussion Questions:
(1) Is a bona fide transfer of the shares of a corporation, not registered or
noted on the books of the corporation valid as against a subsequent
lawful attachment of said shares, regardless of whether the attaching
creditor had actual notice of said transfer or not? Why?

NO, it is not valid.

The transfer of the 75 shares in the North Electric Co., Inc made by
the defendant Diosomito as to the defendant Barcelon was not valid as
to the plaintiff. Toribia Uson, on 18 Jan. 1932, the date on which she
obtained her attachment lien on said shares of stock will still stood in
the name of Diosomito on the books of the corp. Sec. 35 provides that
No transfer, however, is 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.

All transfers of shares not so entered are invalid as to attaching or


execution creditors of the assignors, as well as to the corporation and
to subsequent purchasers in good faith, and indeed, as to all persons
interested, except the parties to such transfers.
(2) What are the reasons for requiring registration of stock transfer?

The reasons for this requirement have been stated as follows:

(1) To enable the corporation to know at all times who its actual
stockholders are because mutual rights and obligations exist between
the corporation and its stockholders;

(2) To afford to the corporation an opportunity to object or refuse its


consent to the transfer in case it has any claim against the stock sought
to be transferred, or for any valid reason; and

(3) to avoid fictitious or fraudulent transfers. (Escano vs. Filipinas


Mining Corp., 74 Phil. 711 [1944].) The purpose of registration, it has
been said, is two-fold: to enable the transferee to exercise all the rights
of a stockholder, including the right to vote and be voted for, and to
inform the corporation of any change in ownership so that it can
ascertain the person entitled to the rights and subject to the liabilities
of a stockholder. (Batangas Laguna Tayabas Bus Co. vs. Bitanga, 362
SCRA 635 [2001], citing Campos, The Corporation Code Comments,
Notes, Selected Cases, 1990 ed., Vol. 2, p. 301.)

It has also been said that such a requirement is intended for the
benefit and protection of persons who may deal with the corporation
and become its creditors so that they may know who are its
stockholders, and as such liable to them. (12 Fletcher, p.
307.)

(3) What are the requirements for the transfer of shares of stock?

Section 63 expressly authorizes the transfer of the shares


represented by the certificate by its indorsement by the owner or his
agent and delivery, so indorsed, to the transferee. Such delivery is the
operative act of transfer of title to the shares from the lawful owner to
the transferee. (Rural Bank of Lipa City, Inc. vs. Court of Appeals, 366
SCRA 188 [2001]; Bitong vs. Court of Appeals, 292 SCRA 503 [1998];
Rivera vs. Florendo, 144 SCRA 643 [1986].) The failure to deliver the
stock certificates representing the shares purchased amounts to a
substantial breach of contract which gives rise to a right to rescind the
sale. (Raquel-Santos vs.Court of Appeals, 592 SCRA 169 [2009].)
(1) Where no certificate has as yet been issued or where for some
reason it is not in the possession of the stockholder, fully (or partially)
paid shares may be transferred by means of a deed of assignment duly
recorded in the books of the corporation.

(2) Any sale or transfer of shares from stockholders of a corporation


to third parties need not be reported to nor require an authority from
the Securities and Exchange Commission, (see Trueste, Sr. vs
Sandiganbayan, 145 SCRA 508 [1986].) However, to be valid against
the corporation and third parties, such transfer must be recorded in the
stock and transfer book of the corporation.

(3) The transferee must present the indorsed stock certificate to the
secretary of the corporation who shall effect the transfer in the
corporate books, issue a new stock certificate in favor of the transferee,
and cancel the former certificate. A corporation has no authority to
cancel a certificate which is not in its possession or to which it has no
right. It will be liable to a bona fide holder of the old certificate if, without
demanding of said certificate, it issues a new one.
(4) While transfer of shares ordinarily does not require prior approval
of the Commission, the issuer corporation is required to have its entire
authorized capital stock registered pursuant to Section 8 of the
Securities Regulation Code (Appendix "A.") where the outstanding
shares are to be sold to the public, that is, a number of persons
indiscriminately (SEC Opinion, Dec. 14, 1994.) unless it can be shown
that the transaction is expressly exempt under Section 10 of the Code.

(4) In what instances where a corporation can validly refuse registration of


transfer of stock?

There is no doubt that the requirement for the registration of


transfers of shares in the corporate books is intended principally for the
benefit and protection of the corporation so that it may know who are its
stockholders to whom it must accord the right granted to them by law and
against whom it can enforce any liability that may arise from ownership of
stock. The registration of transfers of shares of stock in the stock and
transfer book of the corporation is a function which usually pertains to that
of the corporation secretary or the transfer agent of the corporation. (Tim
Tay vs. Court of Appeals, 293 SCRA 634 [1998].)
(1) Validity of transferee's title. The duty of the corporation
secretary to record transfer of stock is ministerial. However, he
cannot be compelled to do so when the transferee's title to said
shares has no prima facie validity or is uncertain. More specifically,
a pledgee, prior to foreclosure and sale, does not acquire ownership
over the pledged shares and thus, cannot compel the corporation
secretary to record his alleged ownership of such shares on the
basis merely of the contract of pledge. (Ibid.)

(2) Breach of restriction on transfer. The corporation may refuse


to record any transfer if there is a clear breach of reasonable and
valid restrictions on the power to transfer shares of stock. But it
waives the requirement of registration by failure or refusal to register
a valid transfer without legal or good cause (see Salvador vs.
Mencias, [CA] 55 O.G. 6405; Lorenzo vs. Genato Commercial
Corp., [CA] 45 O.G. 2972 [1958].), such as existence of claim arising
from unpaid subscriptions, failure of transferee to present evidence
of payment of corresponding taxes or certificate of exemption
therefrom, failure of transferee to comply with registration
requirements prescribed in the articles of incorporation, and
existence of conflicting claims as to the right of the transferee in
which case the corporation may legally refuse to register until the
right has been settled by interpleader or otherwise. (SEC Opinion,
Nov. 6,1987.)

(3) Legality or propriety of transfer. Sections 35 and 52 (now


Sees. 63 and 72.) which require that all transfers to be valid as far
as the corporation is concerned must be entered and noted on the
books of the corporation, contemplate no restriction as to whom the
shares may be transferred. (C.N. Hodges vs. Lezama, 8 SCRA 717
[1963].) A corporation cannot inquire into the legality or propriety of
a transfer of its shares from one person to another. In case of
conflicting claims, the corporation, for its protection, may demand
security or require all known claimants to interplead, (see Rules of
Court, Rule 63, Sec. 1.)

CAGAYAN FISHING DEVELOPMENT CO., INC. vs TEODORO


SANDIKO
G.R. No. L-43350 December 23, 1937
http://www.lawphil.net/judjuris/juri1937/dec1937/gr_l-
43350_1937.html
FACTS:
Manuel Tabora is the registered owner of four parcels of land. The
four parcels were mortgaged for loans and indebtedness. However,
Tabora executed a public document (Exhibit A) by virtue of which the four
parcels of land owned by him was sold to the plaintiff company, which at
that time is still under the process of incorporation.

A year later, the BOD of said company adopted a resolution


authorizing its president to sell the four parcels of lands in question to
Teodoro Sandiko. Exhibits B, C and D were thereafter made and
executed. Exhibit B is a deed of sale where the plaintiff sold, ceded and
transferred to the defendant the four parcels of land. Exhibit C is a
promissory note drawn by the defendant in favor of the plaintiff. Exhibit D
is a deed of mortgage executed where the four parcels of land were given
a security for the payment of the promissory note. Defendant failed to pay
thus plaintiff filed a collection of sum of money in the Court of First
Instance in Manila. The latter rendered judgment absolving the defendant.
Plaintiff has appealed to this court and makes an assignment of various
errors.

ISSUE:

Whether or not the sale made by the plaintiff corporation is valid.

RULING:

NO. The transfer was made almost five months before the
incorporation of the company. Although, a duly organized corporation has
the power to purchase and hold such real property as the purposes for
which such corporation was formed may permit and for this purpose may
enter into such contracts as may be necessary. However before a
corporation may be said to be lawfully organized, many things have to be
done. Among other things, the law requires the filing of articles of
incorporation.

Although there is a presumption that all the requirements of law


have been complied with, in the case before us it cannot be denied that
the plaintiff was not yet incorporated when it entered into a contract of
sale. It was not even a de facto corporation at the time. Not being in legal
existence then, it did not possess juridical capacity to enter into the
contract.
Corporations are creatures of the law, and can only come into
existence in the manner prescribed by law. It should have a full and
complete organization and existence as an entity before it can enter into
any kind of a contract or transact any business.

Discussion Questions:

(1) Can a corporation yet to be incorporated enter into contract? Explain


with reasons.

No, Before a corporation may be said to be lawfully organized, many


things have to be done. Among other things, the law requires the filing
of articles of incorporation.

Although there is a presumption that all the requirements of law


have been complied with, in the case before us it cannot be denied that
the plaintiff was not yet incorporated when it entered into a contract of
sale. It was not even a de facto corporation at the time. Not being in
legal existence then, it did not possess juridical capacity to enter into
the contract.

Corporations are creatures of the law, and can only come into
existence in the manner prescribed by law. It should have a full and
complete organization and existence as an entity before it can enter
into any kind of a contract or transact any business.

(2) Are contracts entered into by promoters during pre-incorporation stage


valid and binding to the corporation? Explain.

Before incorporation and organization. Until the certificate of


incorporation has been issued by the Securities and Exchange
Commission (see Sec. 19.), a corporation has no being, franchise or
faculties. Its promoters or those engaged in bringing it into existence
are in no sense identical with the corporation; nor do they represent it
in any relation of agency or have any authority to enter into preliminary
contracts binding upon the corporation.

Therefore, since a corporation cannot, before its organization, have


agents contract for itself, or be contracted with, it is not liable upon any
contract which a promoter attempts to make for it prior to its
organization unless the contract is expressly or impliedly adopted or
ratified by it after organization is completed or liability is imposed by
statute.

In other words, a promoter's contract does not, by the incorporation of


a contemplated company, ipso facto become the contract of the
corporation.

(3) What is the liability of the corporation on promoters contract?

(1) Before incorporation and organization. Until the certificate of


incorporation has been issued by the Securities and Exchange
Commission (see Sec. 19.), a corporation has no being, franchise or
faculties. Its promoters or those engaged in bringing it into existence are
in no sense identical with the corporation; nor do they represent it in any
relation of agency or have any authority to enter into preliminary contracts
binding upon the corporation.

Therefore, since a corporation cannot, before its organization, have


agents contract for itself, or be contracted with, it is not liable upon any
contract which a promoter attempts to make for it prior to its organization
unless the contract is expressly or impliedly adopted or ratified by it after
organization is completed or liability is imposed by statute.

In other words, a promoter's contract does not, by the incorporation of


a contemplated company, ipso facto become the contract of the
corporation.

(2) After incorporation and organization. Under the general rule


permitting a corporation to assume liability on a promoter's contract, the
contract must, of course, be one such as the corporation can itself make.
A corporation as a legal entity cannot assume the obligations of an ultra
vires contract (see Sec. 45.) made by its promoters anymore than it can
legally initiate such contract. (18 Am. Jur. 2d 600-601; see Cagayan
Fishing Dev. Co., Inc. vs. Sandiko, 65 Phil. 223 [1937].)

Until such assumption of liability is made, the better rule seems to be


that contracts entered into by promoters "should at most be deemed
suspended, and enforceable only after the incorporation and organization"
of the corporation, (see C.G. Alvendia, op. cit., p. 135.)

ARNALDO F. DE SILVA vs. ABOITIZ & COMPANY, INC.


G.R. No. L-19893 March 31, 1923
http://www.chanrobles.com/scdecisions/jurisprudence1923/mar192
3/gr_l-19893_1923.php

FACTS:

De Silva subscribed to 650 shares and paid for 200. The company
notified him that his shares will be declared delinquent and sold in a public
auction if he does not pay the balance. De Silva did not pay. The
company advertised a notice of delinquency sale. De Silva sought an
injunction because the by-laws allegedly provide that unpaid subscriptions
will be paid from the dividends allotted to stockholders.

ISSUE:

Whether or not De Silva is liable despite the provision in the by-laws


regarding dividends as payment for unpaid subscriptions.

RULING:

YES. Although, the by-laws provide that unpaid subscriptions may


be paid from such dividends The defendant corporation, through its board
of directors, made use of its discretionary power, taking advantage of the
first of the two remedies: delinquency sale or specific performance.
Settled is the rule that nothing in this act shall prevent the directors
from collecting, by action in any court of proper jurisdiction, the amount
due on any unpaid subscription, together with accrued interest and costs
and expenses incurred.

Discussion Questions:

(1) What are the remedies available to a corporation to enforce liability


on unpaid subscriptions?

The remedies are:

(1) Extra-judicial sale at public auction. This is the first and most
special remedy and it consists in permitting the corporation to put
up unpaid stock for sale and dispose of it for the account of the
delinquent subscribers. In this case, the provisions of Sections
67 to 69, inclusive, are applicable and must be followed, (see
Velasco vs. Poizat, 37 Phil. 302 [1917].)
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 (Sec. 67, par. 2.); and

(2) Judicial action. This other remedy is by court action


under Section 70. The statutory right to sell the subscriber's stock is
merely a remedy in addition to that which proceeds by action in
court. (Ibid.) Sections 67 to 70 provide ample remedies for the
payment of stock subscriptions. Hence, reversion of the stock to the
corporation in case of non-payment thereof is contrary to said
provisions. (SEC Opinion, Dec. 29, 1976.) The corporation may, at
its discretion, pursue either remedy (sale of the unpaid stock or
action in court), though not both (4 Fletcher, p. 651; see De Silva vs.
Aboitiz & Co., 44 Phil. 755 [1923].); and

(3) Collection from cash dividends and withholding of stock


dividends. This is authorized by Section 43.

(2) Under the present law, can the corporation withhold the payment of
dividends on delinquent stocks? Explain.

Under Section 43 of the Corporation Code of the Philippines, the


corporation has the right to first apply cash dividends due on delinquent
stock to the unpaid balance on the subscription plus cost and expenses,
while as to stock dividends, to withhold the same from the delinquent
stockholder until his unpaid subscription is fully paid. This right may be
exercised by the corporation although it is not provided in its by-laws.