Corporation Law

Atty. Peralta | G01 | A.Y. 2015-2016

155 Charles Ellingwood v. Wolf’s Head Oil Refining AUTHOR: Acido

Company, et al NOTES:
38 A. 2d 743 (1944) Ellingwood – appellant
TOPIC: Kinds of stock as to voting rights Nasa dissenting opinion yung main facts. What’s new
PONENTE: Richards, J. hahaha
FACTS:
When the preferred stockholders and the common stockholders met at the annual meeting held on May 3, 1943, the
corporation was in default in respect to the declaration and payment of dividends in the amount of two years'
dividends on the preferred stock. All of said arrearages of dividends had accrued prior to 1942, and during said year
1942 the corporation declared and paid a full six per cent dividend on the preferred stock.
The holders of a majority of the common stock asserted that they possessed the sole right to vote for the election of
directors for the ensuing year, for the reason that a full year's dividend at 6% had been declared and paid to the
holders of the preferred stock during the year 1942; thus causing the right to elect the directors to revert to the
holders of the common stock under the provisions of Article V (see below)
A demurrer was interposed by the preferred stockholders to such an interpretation as asserted. Rather, they said that
as of December 12, 1942, and thereafter, the corporation was in default in respect to the declaration and payments of
dividends in the amount of two years' dividends upon the preferred stock, and, while the voting period of the
preferred stock was terminated by reason of the payment of a full year's dividend at 6%, yet, the right to an election
was not terminated but survived, and such right was subject to no further conditions than those to which it
previously was subjected, and that it may be exercised as often and as long as the corporation shall be found to be in
default of the payment of 6% dividends on the preferred stock in the amount of two years.
The appellant contends that the subsequent wording of the proviso in Article V of the certificate of incorporation,
"until the corporation shall have declared and paid for a period of a full year a 6% dividend on the preferred stock,"
restricts the above-quoted language of the article with respect to the duration of the time when the preferred
stockholders have the right to elect to exercise the sole right to vote for the election of directors and for all other
purposes.
o Basically challenging the preferred stockholders’ right to vote at the annual meeting.
This being the situation the court is called upon to determine the voting rights of the two classes of stock under the
pertinent charter provisions.
ISSUE(S):
Whether or not the preferred stockholders were entitled to vote for the election of the directors and for all other purposes
at the annual meeting.

HELD:
Yes. The decree of the Chancellor is affirmed. The persons whose names appeared on the ticket nominated and voted for
by the preferred stockholders are the legally elected directors of the corporation.
RATIO:
A certificate of incorporation may contain any provision with respect to the stock to be issued by the corporation,
and the voting rights to be exercised by said stock, that is agreed upon by the stockholders, provided that the
provision agreed to is not against public policy. The rights of stockholders are contract rights and that it is
necessary to look to the certificate of incorporation to ascertain what those rights are.
Nothing is to be presumed in favor of preferences attached to stock, and when a corporate charter attempts to
confer preferences upon any class of stock provided for by it the same should be expressed in clear language.
The instrument should be considered in its entirety, and all of the language reviewed together in order to
determine the meaning intended to be given to any portion of it.
The charter of Wolf's Head Oil Refining Company, Incorporated, evidences an intention on the part of the
incorporators to make provision for the protection of the preferred stockholders.
o Article IV – preferred stockholders shall be entitled to full payment of the par value of their shares and
all unpaid dividends accrued thereon, before any of the assets shall be distributed to the common
stockholders in case of "liquidation, dissolution or winding up of the affairs of the corporation"; also
gives to the board of directors the optional right to redeem the preferred stock in whole or in part
o Article V - guarantees to the holders of the preferred stock "cumulative dividends thereon at the rate of
six per cent for each and every fiscal year of the company."
Article V gives to the holders of the common stock exclusive "voting power for the election of directors, and for
all other purposes." This is followed by the provision that the preferred stockholders shall have no voting power.
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BUT! it also contains the proviso “that if at any time the corporation shall be in default in respect to the
declaration and payment of dividends in the amount of two years dividends on the preferred stock, then the
holders of a majority of the preferred shall have an election to exercise the sole right to vote for the election of
directors and for all other purposes, to the exclusion of any such right on the part of the holders of the common
stock until the corporation shall have declared and paid for a period of a full year a 6% dividend on the preferred
stock, when the right to vote for the election of directors, and for all other purposes, shall revert to the holders of
the common stock.”
When a six per cent dividend for a period of a full year is paid on the preferred stock, the sole right to vote for
directors and for all other purposes reverts to the common stockholders, notwithstanding the fact that dividends
in the amount of two years are due on the preferred stock. If the preferred stockholders failed to again elect to
exercise the sole right to vote, by giving notice to the corporation of their decision to exercise such right, as the
charter requires them to do, the common stockholders would be entitled to exercise the right to vote for the
election of directors and for all other purposes. But if the corporation is still in default in the declaration and
payment of dividends in the amount of two years' dividends on the preferred stock, when a six per cent dividend
is paid on preferred stock for the period of a full year, said preferred stockholders can still avail themselves of
the right to vote for the election of directors and for all other purposes, if they comply with the conditions of the
charter by giving notice to the corporation of their decision to exercise such right to vote.
The language used in the charter describing the conditions under which the preferred stockholders obtain the
right to vote has nothing to say about the time when the arrearage in dividends on said stock shall have accrued.
When a majority of the preferred stockholders first elected to exercise their right to vote for the election of
directors and for all other purposes in 1936, the dividends accrued and unpaid on the preferred stock amounted to
22½%, of that said accrued and unpaid dividends was more than two years' dividends. From 1936 to May 3,
1943, additional dividends accrued on the preferred stock amounting to 40½%, and that the dividends paid on
said stock during that period amounted to 25½%.
Therefore it clearly appears that when the annual meeting of the corporation was held on May 3, 1943, dividends
amounting to 37½% were accrued and unpaid on the preferred stock. Thus it appears that the corporation was in
default in respect to the declaration and payment of dividends in the amount of two years' dividends.
o 22 ½% + (40 ½% - 25 ½ %) = 37 ½%, so preferred stockholders had the right to vote during May 3,
1943

CASE LAW/ DOCTRINE:

DISSENTING/CONCURRING OPINION(S):

Layton, C.J.: Voting power attached to corporate stock is very generally lodged in the common shares; and here the
dominant purpose of Article V of the charter is to vest the voting power in the common shares exclusively except in
certain circumstances and then for a carefully limited time. The circumstances which gives rise to the shift of voting
power from the common to the preferred shares is a default in the payment of dividends in the amount of two years'
dividends. But this shift is not automatic. The preferred shares may, or may not, elect to exercise the right conferred on
them. If they exercise the right, the voting power shifts to the preferred shares, and remains with them until for the period
of a full year the stated dividend has been paid on the preferred shares. Upon this happening, the voting power reverts
involuntarily to the common shares.

Terry, J: The right of election that existed prior to 1942 was terminated in the year 1942, and that the voting power
shifted as of then to the holders of the common stock. the only function of the language is to make it plain that the right
of the preferred to exercise an election, and the subsequent right of the common to a reversion, when once vested would
not be forever lost, but that they become contingent, so to speak, and may be regained as rights in praesenti when
another state of events occur to satisfy the conditions upon which the exercise of those rights respectively depend.. The
holders of the common stock possessed the sole right to vote for the election of directors for the ensuing year, as of the
1943 stockholders' meeting.

156 HAY V. HAY AUTHOR: Adre

[230 P. 2D 791 (1951)] NOTES:
TOPIC: Preference upon liquidation

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PONENTE: Donworth, J.

FACTS:
The Big Lend Company was organized in 1901 to conduct a general real-estate business, to borrow and loan money,
and to buy and sell merchandise.
The capital stock consisted of $10,000 divided into 100 shares of common stock of the par value of $100 each
The capital stock was increased to $750,000 then later on it became $ 1,500,000, represented by 8500 shares of
common stock of the par value of $100 a share and provision was made for the issuance of 6500 shares of preferred
stock of the same par value.
In 1921, the capital stock of the Big Lend Company consisted entirely of common stock.
Also, Art. 6 of the AOI was amended:
"AMENDED ARTICLE VI

XXX
"(d) In the event of any liquidation, dissolution or winding up of the Corporation the holders of the
preferred stock shall be entitled to be paid in full the par value thereof, and all accrued unpaid
dividends thereon before any sum shall be paid to or any assets distributed among the holders of the
common stock, but after payment to the holders of the preferred stock of the amounts payable to them
as hereinbefore provided, the remaining assets and funds of the Corporation shall be paid to and
distributed among the holders of the common stock.(important )

In 1946, a survey of the corporate financial structure was authorized.

The board of trustees adopted a resolution providing for the reduction of all capital assets to cash as speedily as
circumstances might permit in order that, at a subsequent date, the stockholders might consider and adopt a plan of
liquidation, distribution, and dissolution of the corporation.
Such a plan was later adopted, and respondents became the liquidating trustees.
o It developed that the net assets of the corporation were sufficient to redeem the preferred stock at par
value, but if the preferred stockholders receive the promised dividends, assets instead of surplus
profits will have to be used therefor.
o The result will be that the common stockholders will get no part of such assets.
The liquidating trustees, being in doubt as to who was entitled to receive the assets upon liquidation after the
redemption of the preferred stock, brought this action to secure a declaratory judgment.
Arguments of the parties regarding Art. 6 of AOI:
o Appellant: "all accrued unpaid dividends" means that before there can be a dividend there must be
surplus profits, and that, since none ever existed, the right to such dividends never accrued and
therefore none are payable.
o Respondents: subdivisions (a), (b), and (c) of Amended Article VI of the articles of incorporation
relate to the payment of dividends to preferred stockholders out of surplus profits while the
corporation is a going concern, but that subdivision (d) authorizes the payment of accumulated and
unpaid dividends out of assets upon liquidation of the corporation, even though there be no surplus
profits available. They argue that, the corporation being in the process of liquidation, there can be no
impairment of its capital and, therefore, there is no longer any purpose in restricting the payment of
dividends to surplus profits.
Trial court entered a judgment declaring that the amended articles of incorporation required that the holders of the
cumulative preferred stock receive from the assets of the corporation, so far as they might reach, an amount equal to
six per cent per annum computed on the par value of each share from the date of issuance thereof to date of
liquidation (January 18, 1947), and that the holders of the common stock were not entitled to receive any distribution
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of assets until payment of the six per cent per annum accrued dividend to the preferred stockholders had been fully
made.
ISSUE(S): whether the holders of cumulative preferred stock upon liquidation of the corporation are entitled to be paid
accrued dividends from the corporate assets before the common stockholders become entitled to participate in the
distribution thereof (the corporation having no earned surplus or net profits).

HELD: YES. Respondents are entitled under the provisions of subparagraph (d) to receive a sum equal to all accrued
unpaid dividends as well as the par value of their cumulative preferred stock in the liquidation of this corporation before
appellants shall be entitled to participate therein. JUDGMENT OF TRIAL COURT IS AFFIREMED.
RATIO:
The two classes of stockholders contracted between themselves with respect to the division of the assets in case of
liquidation. Their agreement was that the preferred stockholders should receive the par value of their stock plus an amount
equal to "all accrued unpaid dividends thereon" before any assets should be distributed to the common stockholders.

It should be noted that the articles contain no condition to the effect that the surplus profits must be equal to, or greater
than, the total of all accrued unpaid dividends before such distribution could be made. The parties were contracting with
reference to a possible future liquidation, a situation where the statutory prohibition (Rem. Rev. Stat., § 3823) against
declaration of dividends out of capital had no application.

Therefore, the liquidating trustees have preference regardless of any consideration of profits or surplus.

CASE LAW/ DOCTRINE:

The holders of the preferred stock are entitled both to the par value of their stock and to the dividends which have not been
declared or paid but which would have been declared or paid if there had been surplus or net profits of the corporation
wisely applicable to such dividends during the periods when no dividends have been paid.
DISSENTING OPINION: GRADY, J.
From the time preferred stock was issued in 1921 until liquidation in 1949, the corporation earned no net profits and could
declare no dividends. It would be a gross injustice to the holders of common stock to now take their property from them
and give it to the preferred stockholders to satisfy a fictional claim that accrued dividends had accumulated and were
owing and unpaid.

We should not be led astray by any imposing array of decisions from other states. Those courts were dealing with
contractual provisions in the form of an article of incorporation and held the parties intended deficit payments should be
made to preferred stockholders out of assets on liquidation of the corporation. The articles of incorporation under
consideration were not promulgated in the light of any statute like ours, and the courts were not furnished with such a
guide. I have no doubt if such statutes had existed the courts would have interpreted the articles of incorporation before
them as did the New York court.

I think the judgment should be reversed and a declaratory judgment entered to the effect that, after the redemption of the
preferred stock, the remaining assets should be divided among the common stockholders.

157 Agusta Trust Co., plaintiff v. Agusta, Hollowell & AUTHOR: BONDOC
Gardiner Railroad Co et. al, defendant
Read it from the book
TOPIC: Preference stockholder is not a creditor
PONENTE: Strugis J.

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FACTS:

The defendant railroad company had an outstanding bond secured by mortgage. These bonds gave the holders right to
convert into preferred stocks of the company.

This action was brought to foreclose the mortgage and the question was raised as to the right of the holders of these
preferred shares to share in the proceeds on the sale of the mortgage property.

ISSUE(S):

WON the holders of the certificate of preferred shares are creditors of the railroad.

WON the certificate of preferred stocks issued in exchange for bonds were certificate of indebtedness and not stocks

HELD:
RATIO:

No.

It is within the powers if the legislature, by charter or statute, to prescribe that corporation may issue certificates in the
form of certificate of preferred stocks, thereby making the holders creditors of the corporation as well as stockholders. And
such preferred stocks is not ordinary preferred stock nor is it preferred stocks at all. It is a sui generis, governed by the
provisions of the statute by which is its authorized. In this case, the preference given to the holders of the preferred stocks
in the conversion agreement here were not authorized by the statute when made. The stock was not a statutory preferred
stocks of kind just described here. Therefore, the holders are not creditors of the corporation.

No, they are stocks.

In this case all facts and circumstances convincingly characterized the preferred stocks issued by the street railway
companies as preferred stocks. In each instance, the stockholders voted increases in the capital stocks by the creation of the
preferred stocks. The certificate delivered to the bond holders designated the stocks as preferred stocks. The holders of this
stocks had the right to vote in the election of directors and were entitled to receive dividends at the time specified therein.
The certificate contains essential features of a certificate of preferred stocks and none of the contract creating relationship
of creditor of the corporation.

Therefore, by surrendering their bonds and taking in lieu thereof preferred stocks, the bondholders of these street railway
companies ceased to be a creditors and became a stockholder. The preferred stockholders are not entitled to share in the
assets of the companies until all creditors have been paid.

CASE LAW/ DOCTRINE:

Although a preferred stockholder may enjoy preference preferences over other stockholder, he is not a creditor of the
corporation
DISSENTING/CONCURRING OPINION(S):

158 GARCIA v LIM CHU SHING AUTHOR: Castro

[59, Phil. 962. February 24, 1934]
TOPIC: Nature of Subscription Contract
PONENTE: Villa-real, J.
NOTES: Appeal was taken by Lim Chu Sing from the CFI
Manila’s decision that his debt may not be compensated by
his shares with the plaintiff bank.
Garcia – receiver of Mercantile Bank of China, which is
undergoing liquidation
Lim Chu Sing – defendant and surety of Lim Cuan Sy
(surety – liable if principal does not pay)

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Note: shares of stock – P10,000; debt – P9,105.17

FACTS:

Lim Chu Sing is the owner of shares of stock of the Mercantile Bank of China amounting to P10,000. The bank is
now under liquidation.

Lim Chu Sing is a surety of Lim Cuan Sy. The principal Lim Cuan Sy had an account with the bank in the form of
trust receipts, which were guaranteed by Lim Chu Sing as surety and with chattel mortgage securities.

Since Lim Cuan Sy failed to comply with his obligations with the bank, Lim Chu Sing, as a surety, was required to
sign a promissory note.

On June 20, 1930, Lim Chu Sing executed a promissory note in the amount of P19,605.17, with interest at 6 per
cent per annum, in favor of Mercantile Bank of China.

Lim Chu Sing made several partial payments, but left an unpaid balance of P9,105.17.

The bank foreclosed the chattel mortgages and privately sold the property without Lim Chu Sing’s knowledge and
consent. The proceeds of the sale of the mortgaged chattels together with other payments were applied to the
amount of the promissory note, leaving the balance which the plaintiff now seeks to collect.

Lim Chu Sing is alleging that the debt of P9,106.17 may be compensated with his credit amounting to P10,000
with the Mercantile Bank of China.

ISSUE:
Whether the P10,000, representing Lim Chu Sing’s value of the shares of stock with the bank may be used to compensate
the debt of P9,105.17

HELD: No. The shares of stock may not be used to compensate for the debt since there is no creditor-debtor relationship
with respect to the shares.
RATIO:
The shares of a banking corporation do not constitute an indebtedness of the corporation to the stockholder and,
therefore, the stockholder is not a creditor of the bank for such shares.

The indebtedness of a shareholder to a banking corporation cannot be compensated with the amount of his shares,
there being no relation of creditor and debtor with respect to such shares.

A share of stock is not an indebtedness to the owner nor evidence of indebtedness, therefore, it is not a credit.

Stockholders, as such, are not creditors of the corporation. It is the prevailing doctrine of the American courts, repeatedly
asserted in the broadest terms, that the capital stock of a corporation is a trust fund to be used more particularly for the
security of creditors of the corporation, who presumably deal with it on the credit of its capital stock.

Therefore, the defendant-appellant Lim Chu Sing not being a creditor of the Mercantile Bank of China, although the latter
is a creditor of the former, there is no sufficient ground to justify a compensation. It is only Lim Chu Sing who is the
debtor of the bank, not the other way around.
Other rulings:

1) The failure to file an exception to a ruling rendered in open court denying a motion for the inclusion of a party as
defendant deprives the petitioner, upon appeal, of the right to raise the question whether such denial was proper or
improper.

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2) The percentage stipulated in a contract, for costs and attorney's fees for the collection of an indebtedness, includes
judicial costs.

CASE LAW/ DOCTRINE:

The shares of a banking corporation do not constitute an indebtedness of the corporation to the stockholder and, therefore,
the stockholder is not a creditor of the bank for such shares. The indebtedness of a shareholder to a banking corporation
cannot be compensated with the amount of his shares, there being no relation of creditor and debtor with respect to such
shares.

159 Utah Hotel Co. v. Madsen AUTHOR: Miguel M. Consing

[134 Pac. 557 (1913)] NOTES:
TOPIC: Nature of Subscription Contract; Pre-incorporation Guys, it wasn’t explicitly stated who the private petitioner
subscription was. Kulang sa facts.
PONENTE: Frick, J.
I think that the private petitioner is an incorporator or
director, because the facts show that he questioned the
validity of the contract after he refused to pay. Everyone
else paid but him.
FACTS:
Prior to Utah Hotel Co.’s incorporation, Petitioner entered into a subscription agreement with its subscribers,
including the respondent Madsen.

The agreement provided, among other things, that the payment of the subscription shall be payable in sums not to
exceed 10% of the amount subscribed by the subscribers in any one month.

After Utah Hotel Co. was incorporated, the petitioner filed an action questioning the validity of the above agreement.
It argued that in order to enforce the subscription, all the subscribers must have signed the AOI. If it was a separate
agreement, it must have been incorporated into the AOI.
ISSUE(S):
Is the above subscription agreement valid?

HELD/RATIO:
Yes. The Court held that the agreement, being valid contract, bound the parties by its terms. There was nothing in the law
that prohibited the means by which the subscription agreement was entered into, in this case, by explicit contract. The
Court held that in the absence of an explicit prohibition in the law against this kind of contract, and provided that it does
not go against public policy and morals, then it is a valid subscription agreement.

[COROLLARY ISSUES]
With regard to the issue of the Corporation’s acceptance of the agreement, the Court found that the corporation itself sent
notices demanding payment of the installments of the subscription. This was held to be sufficient acceptance of the
agreement.
CASE LAW/ DOCTRINE:
In the absence of an explicit prohibition in the law against a pre-incorporation subscription agreement, then such an
agreement in valid and binding upon the stockholders.

160 Wallace vs Eclipse Pocahontas Coal Co. AUTHOR: DAYOS

93 S.E. 293 (1919) NOTES:
TOPIC: Pre-incorporation subscription
PONENTE:
FACTS:
The promoters (Perkins and Griffith) of Eclipse Pocahontas coal co. entered into a contract of lease with Wallace,
owner of the land.
The company was organized for the purpose of taking over and operating a tract of about 600 acres of Coal in
McDowell County.
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The contract stipulates that in consideration that the plaintiff would transfer, assign or cause said lease to be assigned
or transfer first to Griffith, transferee, for himself and associates, and by him to the corporation when formed, the
promoters would advance and supply necessary money to pay the purchase price for said lease (2500 dollars), and
when the coal plant becomes operational, Wallace would receive 1/5 interest in the property fully paid up, represented
by stocks equivalent tone-fifth.
It was alleged that Wallace only received 5 shares of the (allegedly) 25 shares he was entitled to get. Thus, the
defendant corporation refuses to comply with its contractual corporation.
BOD and SH Stover denied the authority of the promoters, thus, it does not bind the company for lack of notice of the
plaintiff’s rights.
Perkins, Weller, Griffith and O’Keeffe were ordered to pay $4,300 – value of the 43 shares of stock of which Wallace
has been deprived. (1/5 of the shares issued less 5 shares delivered to him and 2 shares Wallace contributed to other
stockholder)
Wallace appealed contending that he was erroneously limited to money decrees against defendants for sums
aggregating the par value of 43 shares of the 250 shares issued, instead of a decree against the corporation.

ISSUE(S): W/n plaintiff Wallace is entitled to other reliefs against the corporation.

HELD: YES

RATIO:
Defendant corporation cannot claim ignorance in the case at bar. Not only did the corporation have notice of the
plaintiff’s right through its corporators and agents, but all the stockholders of the corporation participating in the
first meeting, including Stover had notice of the plaintiff’s interest. Hence, the defendant corporation is liable
jointly and severally along with its promoters either by issuance of shares of stocks or money decree.
To determine plaintiff’s rights it becomes necessary to specify the plaintiff’s relationship to the corporation under
his contract.
Wallace’s status in relation to the corporation was a subscriber to the capital stock of a corporation. His
contract was to sell and convey the land to the corporation in exchange of shares of stock in the corporation.
Being entitled to this amount of stock when the land becomes fully equipped for mining and coal
production, he is entitled to such and he can compel the issuance of stock certificates having been paid his
subscription to the capital stock.

CASE LAW/ DOCTRINE:

DISSENTING/CONCURRING OPINION(S):

161 BAYLA v SILANG TRAFFIC CO. INC. AUTHOR: De Leon

[G.R. No. DATE] G.R. Nos. L-48195 and 48196 May 1,
1942
TOPIC: Post-incorporation subscription
PONENTE: OZAETA, J.
FACTS:
Petitioners in instituted this action in the CFI of Cavite against the respondent Silang
Traffic Co., Inc., to recover certain sums of money which they had paid severally to the corporation on account of shares of
stock they individually agreed to take and pay for under certain specified terms and conditions:

purchase price to be paid 5% upon the execution of the contract and the remainder in installments of 5%, payable
within the 1st month of each and every quarter startingJuly 1, 1935, w/ interest on deferred payments at 6%/annum
until paid
They also agreed to forfeit in favor of seller in case of default w/o court proceedings

The petitioners agreed to purchase the following number of shares and, up to April 30, 1937, had paid the following sums
on account thereof:

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Sofronio T. Bayla.......8 shares P360

Venancio Toledo........8 shares 375
Josefa Naval..............15 shares 675
Paz Toledo................15 shares 675

BOD resolution Aug 1, 1937: rescinding the agreement

Petitioners' action for the recovery of the sums above mentioned is based on a resolution by the board of
directors of the respondent corporation on August 1, 1937.

The respondent corporation set up the following defenses:

(1) Resolution is not applicable to the petitioners Bayla, Naval, and Toledo because on the date thereof "their subscribed
shares of stock had already automatically reverted to the defendant, and the installments paid by them had already been
forfeited"; and
(2) Resolution of August 1, 1937, was revoked and cancelled by a subsequent resolution of the board of directors of the
defendant corporation dated August 22, 1937.

The trial court absolved the defendant from the complaint and declared forfeited in favor of the defendant the
shares of stock in question. It held that the resolution of August 1, 1937, was null and void
CA modified the decision of the trial court. It affirmed the dismissal of the plaintiff’s complained part thereof declaring
their subscription canceled is reversed. Defendant is directed to grant plaintiffs 30 days after final judgment within which
to pay the arrears on their subscription.
Both parties appealed to this Court by petition and cross-petition for certiorari.

ISSUE(S):
(1) W/N the contracts are subscriptions or sales of stock
(2) W/N under the contract between
the parties, the failure of the purchaser to pay any of the quarterly installments on the purchase price
automatically gave rise to the forfeiture of the amounts already paid and the reversion of the shares to the corporation.

HELD:

RATIO:
The parties’ litigant, the trial court, and the Court of Appeals have interpreted or considered the said agreement as
a contract of subscription to the capital stock of the respondent corporation. It should be noted, however, that said
agreement is entitled "Agreement for Installment Sale of Shares in the Silang Traffic Company, Inc.,"; that while
the purchaser is designated as "subscriber," the corporation is described as "seller"; that the agreement was
entered into on March 30, 1935, long after the incorporation and organization of the corporation, which took place
in 1927; and that the price of the stock was payable in quarterly installments spread over a period of five years.

(1) They are contracts of sale and not of subscription. "A subscription, properly speaking, is the mutual
agreement of the subscribers to take and pay for the stock of a corporation, while a purchase is an independent
agreement between the individual and the corporation to buy shares of stock from it at stipulated price." In some
particulars the rules governing subscriptions and sales of shares are different. For instance, the provisions of our
Corporation Law regarding calls for unpaid subscription and assessment of stock (sections 37-50) do not apply to a
purchase of stock. Likewise the rule that corporation has no legal capacity to release an original subscriber to its
capital stock from the obligation to pay for his shares, is inapplicable to a contract of purchase of shares.

(2) No. The contract provides for interest of the rate of six per centum per annum on deferred payments. The
provision regarding interest on deferred payments would not have been inserted if it
had been the intention of the parties to provide for automatic forfeiture and cancellation of the contract.
Moreover, the contract did not expressly provide that the failure of the purchaser to pay any installment would give rise to

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forfeiture and cancellation without the necessity of any demand from the seller; and under article 1100 of the Civil Code
persons obliged to deliver or do something are not in default until the moment the creditor demands of them
judicially or extra-judicially the fulfillment of their obligation, unless (1) the obligation or the law expressly
provides that demand shall not be necessary in order that default may arise, (2) by reason of the nature and circumstances
of the obligation it shall appear that the designation of the time at which that thing was to be delivered or the
service rendered was the principal inducement to the creation of the obligation.

Is the resolution of August 1, 1937, valid? The contract in question being one of purchase and not
subscription as we have pointed out, we see no legal impediment to its rescission by agreement of the parties. To
that rescission the petitioners apparently agreed, as shown by their demand for the refund of the amounts they had
paid as provided in said resolution. The attempted revocation of said rescission by the resolution of August 22, 1937,
was invalid, it not having been agreed to by the petitioners.

CASE LAW/ DOCTRINE:

DISSENTING/CONCURRING OPINION(S):

162. CASE: DATU TAGORANAO V SEC AUTHOR: DELFIN, K.

NOTES:
TOPIC: THE PREEMPTIVE RIGHT TO SHARES Guys, mejo magkakadikit yung issues. Pero all relating to the
PONENTE: RELOVA, J. pre-emptive rights:
1. On the original shares, may natirang unsubscribed.
When the shares was increased to 1M, inoffer tong
mga unsubscribed shares na to, Datu opposed coz he
said may pre-emptive rights daw sha and to nullify
this ang argument nya wala daw consent ng
shareholders yung pag offer. Sabi ng court, no kc no
need ng authorization to offer existing stock- part ng
function nila yun as BOD and pre-emptive rights is
not applicable for unsubscribed orig stock (asa ratio).
2. Yung new stocks nman, pinapa nullify nya by
assailing na walang valid meeting n notice. Based on
record, merong valid meeting n notice except for him
kc hes out of the country kaya di nya na exercise pre-
emptive rights nya. So sabi ng court, he can still
exercise it for the increased one since he has not
waived it.

EMERGENCY RECIT:

FACTS:
In 1969, the Articles of Incorporation of respondent Jamiatul Philippine-Al Islamia, Inc. (originally Kamilol Islam
Institute, Inc.) were filed with the Securities and Exchange Commission (SEC) and were approved on December
14, 1962.
o Their authorized capital stock was P200,000.00 divided into 20,000 shares at a par value of P10.00 each.
o Of the authorized capital stock, 8,058 shares worth P80,580.00 were subscribed and fully paid for.
Herein petitioner Datu Tagoranao Benito subscribed to 460 shares worth P4,600.00
In 1975, the respondent corporation filed a certificate of increase of its capital stock from P200,000.00 to
P1,000,000.00. It was shown in said certificate that P191,560.00 worth of shares were represented in the
stockholders' meeting held on November 25, 1975 at which time the increase was approved.
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P110,980.00 worth of shares were subsequently issued by the corporation from the unissued portion of the
authorized capital stock of P200,000.00.
Of the increased capital stock of P1,000,000.00, P160,000.00 worth of shares were subscribed by Mrs. Fatima A.
Ramos, Mrs. Tarhata A. Lucman and Mrs. Moki-in Alonto.
In 1976, petitioner Datu Tagoranao filed with SEC a petition alleging that the additional issue (worth
P110,980.00) of previously subscribed shares of the corporation was made in violation of his pre-emptive
right and the increase in the authorized capital stock of the corporation from P200,000.00 to P1,000,000.00 was
illegal because the stockholders of record were not notified of the meeting wherein the proposed increase was in
the agenda. For this reason, he wants the additional issue of shares and increase in capital stock be cancelled.
The SEC after due hearing ruled that:
1. That the issuance by the corporation of its unissued shares was validly made and was not subject to
the pre-emptive rights of stockholders, including the petitioner,
2. That there is no sufficient legal basis to set aside the certificate issued by this Commission authorizing the
increase in capital stock of respondent corporation from P200,000.00 to Pl,000,000.00.
3. That since the petitioner has not waived his pre-emptive right to subscribe to the increased capitalization,
he should be allowed to subscribe to the stocks, at par value, proportionate to his present shareholdings.
4. To immediately cancel Certificates of Stock in the name of Domocao Alonto, and Moki-in Alonto, upon
their and to issue new certificates in the name of petitioner.

ISSUE:
Whether or not the issuance of the 11,098 shares without the consent of the stockholders or of the Board of
Directors, and in the absence of consideration, is null and void?
Whether a shareholder can still exercise his pre-emptive rights to shares if he has not yet waived the same? Which
shares can it be exercised?

HELD:
No, it is not invalid even if it was made without the notice to the shareholders.
Yes, a shareholder is entitled to exercise his pre-emptive rights until it has been waived? It may only be exercised
to new shares not unsubscribed original shares.

RATIO:
The power to issue shares of stocks in a corporation is lodged in the board of directors and no stockholders'
meeting is necessary to consider it because additional issuance of shares of stocks does not need approval of the
stockholders. The by-laws of the corporation itself states that 'the Board of Trustees shall, in accordance with law,
provide for the issue and transfer of shares of stock of the Institute and shall prescribe the form of the certificate of
stock of the Institute. (Art. V, Sec. 1).
The general rule is that pre-emptive right is recognized only with respect to new issue of shares, and not with
respect to additional issues of originally authorized shares. This is on the theory that when a corporation at its
inception offers its first shares, it is presumed to have offered all of those which it is authorized to issue. An
original subscriber is deemed to have taken his shares knowing that they form a definite proportionate part of the
whole number of authorized shares. When the shares left unsubscribed are later re-offered, he cannot therefore
claim a dilution of interest.
For the subscription of the new shares, the petitioner had not waived his pre-emptive right to subscribe as he could
not have done so for the reason that he was not present at the meeting and had not executed a waiver, thereof. Not
having waived such right and for reasons of equity, he may still be allowed to subscribe to the increased capital
stock proportionate to his present shareholdings.

CASE LAW/DOCTRINE:
The general rule is that pre-emptive right is recognized only with respect to new issue of shares, and not with
respect to additional issues of originally authorized shares.

DISSENTING/CONCURRING OPINION(S):

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163 Stokes vs Continental Trust Company AUTHOR: Enriquez

186 N.Y. 285 (1906) NOTES:
TOPIC: The Pre-emptive Right to Shares
PONENTE: Vann, J.
FACTS:
Petitioner Stokes was an original stockholder of Respondent Continental which is a banking corporation in New York.
He holds 221 shares.
The market value of the shares was $550, but the par value was $100.
Blair & Company, a strong and influential firm of private bankers in New York, offered to buy 500,000 newly issued
shares of Respondent Continental on the condition that if those shares were issued at $450 and that they be allowed to
nominate 10 out of 21 trustees.
Stokes protested against the proposed sale because he wanted to retain his proportionate share in the Respondent
Continental and keep the same percentage of stock ownership. He also demanded that it be sold to him at par value
($100). However, both demands were denied by the Respondent.
This prompted Petitioner Stokes to file a complaint seeking to compel Respondent to issue to him at par such a
proportion of an increase made in its capital stocks as the number of shares held by him before such increase
The lower court ruled in favor of Petitioner Stokes. It stated that he had the right to subscribe for such proportion of
the increase, as his holdings bore to all the stock the increase was made; that the stockholders, directors and officers of
the Respondent cannot deprive Petitioner of the right.
The Appellate Court reversed the lower court. (The ratio behind the appellate court’s reversal was never mentioned.)
Hence, this appeal.
ISSUE(S): Whether Respondent Continental should allow Stokes (a stockholder) the opportunity to purchase newly
issued stocks at the fixed price so that he may retain his proportionate share

HELD: Yes.
RATIO:
Corporations must allow shareholders to purchase newly issued stocks at the fixed price so that they may keep the
share they currently have.
A vote to increase the capital stock was in its nature an agreement among the stockholders to enlarge their shares
in the amount or in the number of the extent required to effect that increase.
Stockholders have this option as a matter of right. He cannot be deprived of it by the joint action of the other
stockholders and of all the directors and officers of the corporation.
In this case, the new stock came into existence through the exercise of a right belonging wholly to the
stockholders. As the right to increase the stock belonged to them, the stock when increased belonged to them also,
as it was issued for money and not for property or for some purpose other than the sale thereof for money. By the
increase of stock, the voting power of the Petitioner Stokes was reduced one-half, and while he consented to the
increase he did not consent to the disposition of the new stock by a sale thereof to Blair Company at less than its
market value, nor by sale to any person in any way except by an allotment to the stockholders.
The increase and sale involved the transfer of rights belonging to the stockholders as part of their investment. The
issue of new stock and the sale thereof to Blair Company was not only a transfer to them of one-half the voting
power of the old stockholders, but also of an equitable right to one-half the surplus which belonged to them. In
other words, it was a partial division of the property of the old stockholders.
While the corporation could not compel the Petitioner Stokes to take new shares at any price, since they were
issued for money and not for property, it could not lawfully dispose of those shares without giving him a chance to
get his proportion at the same price that outsiders got theirs. He had an inchoate right to one share of the new stock
for each share owned by him of the old stock, provided he was ready to pay the price fixed by the stockholders.
The Petitioner Stokes had the power, before the increase of stock, to vote on 221 shares of stock, out of a total of
5,000, at any meeting held by the stockholders for any purpose. By the action of the majority, taken against his
will and protest, he now has only one-half the voting power that he had before, because the number of shares has
been doubled while he still owns but 221. Blair Company acquired virtual control, while he and the other
stockholders lost it. The other stockholders could give their property to Blair Company, but they could not give
his.
CASE LAW/ DOCTRINE:

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A stockholder has an inherent right to proportionate share of new stock issued for money. He cannot be deprived of such
right without his consent.

164 Thom v. Baltimore Trust Co. AUTHOR: Garcia

[158 Md. 352 January 15, 1930] NOTES:
TOPIC: Preemptive Right to Shares
PONENTE:
FACTS:
Stockholders meeting of the Baltimore Trust Company – approval was given by the holders of more than 2/3 of its
outstanding shares, to a plan recommended by its directors to merge its interests with those of the National Union
Bank of Maryland.
The trust company would issue 15,000 shares of its stock, at a valuation of $112/share, for the purpose of acquiring
the 10,000 shares of the National Union Bank stock at a valuation of $168/share.
Charter: Upon any increased issue of stock, the stockholders shall have the pro rata preferential right to
subscribe therefor at such price and on such term as the board of directors may in each instance fix. In the
event of the issue of any additional stock of the company for the purpose of accomplishing the merger with or
of acquiring any other bank of trust company or other property, the directors may issue said stock without
preferential subscription rights to stockholders or with preferential subscription rights to such extent and on
such terms as the board may in each instance deem proper.
Thom et. al., as the owner of 6,416 of the 70,000 shares of the trust company’s capital stock, voted and protested
against the merger agreement, and the use of the proposed new issue of stock for the exchange purposes contemplate,
which involved a disregard of the privilege of proportional purchase upon which the plaintiffs insisted.
It was held by the lower court that such a pre-emptive right would exist if the new shares had been intended to be sold
for cash, but that, as they were to be issued in payment for property (stocks), the asserted right was not enforceable.
ISSUE(S):
Whether Thom et. al. were entitled to exercise the right to purchase a due proportion of a supplemental
issue of its capital stock.
HELD:
No. it would not be feasible to consummate a transfer if the pre-emptive right asserted in this suit were to be held
enforceable with respect to every new issue of stock regardless of the object of its disposition.
RATIO:
A corporation may receive in payment for its shares of stock any property which it may lawfully purchase. The
general Code provisions relating to banks and trust companies include in the grant of all such powers as shall be
usual in carrying on the business of banking, an authorization to purchase stocks and other securities.
There is no charter or statutory restriction upon its right to pay for such stock with its own shares, and its expressly
authorized to amend its charter, by vote of its stockholders, “any manner not inconsistent with the provisions of
law.”
Charter: “Unless the required surplus will permit, no increase of capital shall be valid until the amount thereof has
been subscribed and actually paid in.” – the record shows that the surplus of the trust company is largely in excess
of the amount by which its stock would be augmented by the new issue for which the recent amendment of its
charter provides, and hence no resulting impairment of its capital is involved.
CASE LAW/ DOCTRINE:
Not really the main doctrine in this case but these are mentioned:
o Stockholders of a corporation have a preferential right to purchase a new issues of its shares, to the
proportional extent of their respective interest in the capital stock then outstanding, when the privilege can
be exercised consistently with the object which the disposition of the additional stock is legally designed
to accomplish.
o The right inheres in stock ownership as an essential means of enabling a stockholder to maintain the
existing ratio of his proprietary interest and voting power in the corporation.
DISSENTING/CONCURRING OPINION(S):

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165 Fuller v. Krogh AUTHOR: Magsino

[113 N.W. 2d 25 (1962)] NOTES:
TOPIC: Pre-emptive Right to Shares The Pre-emptive right is basically a right given to
PONENTE: Hallows, J. stockholders of a corporation to have first dibs on newly
issued shares before the general public has a chance to
purchase them. It is used by a stockholder to maintain his
proportional control of the corporation.
FACTS:
Fuller and Krogh were stockholders of a corporation. Fuller alleged that he had an agreement with Krogh to match
him dollar for dollar when the corporation was organized.

In 1954, both Fuller and Krogh had issued to themselves 218 shares of stock, payments for which were periodically
made by each and equalized by April of 1955. However, the equalization ends there.

After the issuance of the last of the 218 shares, Fuller and Krogh dealt on a different basis. When the certificate for 84
shares was issued to Krogh for cash, only 25 shares were issued to Fuller for cash. There was no matching of dollars.
Nor was there any matching of dollars when Krogh invested $5,000 for 50 shares.

These transactions were fully known and understood by Fuller. He was president at the time, signed the stock
certificates, and testified he did not match Krogh because he did not have the money.

Fuller now seeks to require Krogh, now the controlling stockholder, to cause the corporation to offer him sufficient
shares of stock to equalize his holdings with Krogh.

The Trial Court found that no such contract existed. And that if it had existed, Fuller violated and terminated it by
failing to match the Krogh's contributions. If Fuller has any claim to equalize his stockholding with that of Krogh, it
must be found in his pre-emptive right as a stockholder.
ISSUE(S):
Did Fuller have a pre-emptive right to purchase stock previously authorized but unissued and, if so, did he waive such
right?

HELD/RATIO:
Yes Fuller had such a pre-emptive right. The pre-emptive right is regarded as inherent in the stockholder's status, is
appurtenant to the stock, belongs to the owner, and its existence is not dependent on the articles of incorporation. But the
articles of incorporation may limit or deny the right.

Generally, the pre-emptive right of a stockholder is his right to retain and maintain his relative and proportionate voice and
influence in the control and management of the affairs of a corporation by purchasing an amount of capital stock to be
issued and sold by the corporation proportionate to his then holdings before the stock can be sold to others, whether they
be outsiders or stockholders.

In simpler terms, it is the right of the stockholder to purchase additional shares in the company before the general public
has the opportunity in the event there is a seasoned offering. It essentially allows the stockholder to maintain his
proportionate control of the corporation when new shares are issued.

With regard to the issue of whether Fuller waived such right, the Court ruled that he did waive it. Fuller did not conform to
the alleged agreement that he was to match Krogh dollar per dollar. When the corporation was tottering on the brink of
bankruptcy, Krogh took the financial risk by investing money and by taking stock for his claim. Fuller had an opportunity
to exercise his pre-emptive rights but did not. There are no equitable grounds in the facts upon which a court of equity
should now allow Fuller to exercise his pre-emptive rights.
CASE LAW/ DOCTRINE:
The Pre-emptive right is inherent in the stockholder’s status and it must be exercised at the right time.

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166 Dunlay v. Avenue M. Garage & Repair Co, Inc., AUTHOR: Mendoza
et.al NOTES: Decision by the New York Court of Appeals
[G.R. No. DATE] 253 N.Y. 274, 1930
TOPIC: Preemptive Rights to Shares
PONENTE: J. Pound
FACTS:
Background: 1.This cases arises out of a struggle between two factions of stockholders of a small corporation for the
control of the directorate. Wherein Dunlay (plaintiff), who is the holder of 20 shares in the defendant-
corporation, filed an action to compel defendants Ageno and Montalbine to return to the corporation
76 shares of its capital stock.
2.Dunlay alleges that the 76 shares have been issued improperly, and to restrain them from voting.
3.That the authorized capital sotck of the corporation consists of 800 shares of the par value of $50 per
share. Prior to March 14,1927, all the capital sotck had been issued except 76 shares which consisted
of unissussed authorized capital stock.

Defendant Ageno was the President of the corporation and a member of the BOD. His sister, defendant Montalbine,
was also a member of the BOD.
A resolution was adopted that 50 shares of such unissued stock be issued to R.C. Graham, at par, in satisfaction of a
debt owing to Graham from the corporation services rendered to it as a salesman.
Graham subsequently transferred it to Guinan and he afterwards transferrred the same to one of the defendants,
Montalbine. Also, the Board of Directors authorized the issue of 26 shares of such unissued stock to defendant Ageno,
at par, for cash to meet other outstanding indebtedness of the corporation.
The resolution authorizing the issue of stock to Ageno was adopted, over protest, by their votes.
The lower court ruled in favor of the defendants stating that:
1. The result of this issue of 26 shares of stock to Ageno was not to give his faction a majority of the stock
over the faction represented by Dunlay.
2. Becaue prior its issuance, Dunlay's faction owned 378 shares of the total 724 shares. With the 26
shares so issued, the Ageno faction was still short of a majority.
3. Even though Ageno's faction subsequently acquired such control through Ageno's purchase of shares
from Mr.May, another stockholder, and the Graham shares by Montalbine, the 76 shares of stock were
not a new issue, nor treasury stock, but were merely unissued authorized capital stock.
5. The directors had the right to sell them to any one at par, unless they were conspiring to injure
the corporation or another stockholder.
Dunlay's contention: He invokes the rule that neither officers nor directors of a corporation may purchase inissued
capital stpock which results in giving them control of the corporation without first affording to existing stockholders
the right to participate pro rata in the purchase of such remaining unissued capital stock.
Hence, this appeal to the New York C.A.
ISSUE(S):
Whether the sale of the stock acquired by Ageno was primarily for a reasonably necessary purpose and beneficial
to the corporation or for the purpose of serving the personal ends of the directors in obtaining control of the
corporation.
HELD:
The New York CA affirmed the decision of the lower court ruling in favor of the defendants.
RATIO:
That the shares in question were issued for full value and in good faith to discharge a debt to Graham, to raise
money to meet corporate obligations and to enable the corporation to carry on its business and that no contest for
corporate control was then afoot.
And such shares as were issued to Ageno did not give his cation the control of the corporation which was obtained
only when the additional shares were legitimately purchased from Graham and May.
Directors must always be free from fraud in their relation with their shareholders. Fair dealing is required. One
formula of fair dealing is universally recognized, i.e.,:
Directors may not authorize the issue of unissued stock to themselves for the primary
purpose of converting them from minority to majority stockholders. Such conduct is
inequitable in the highest degree.
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CASE LAW/ DOCTRINE:

If the issue of the unissued original shares, whenever authorized, is reasonably necessary to raise money to be used
in the business of the corporation rather than the expansion of such business beyond the original limits, the original
stockholders have no right to count on obtaining and keeping their proportional part of the original stock.

The issued may be related to the unissued stock as stock for future expansion. In such case, the pre-emptive right might not
be denied. It has been loosely stated that "a corporation may use its unissued authorized capital stock for any legitimate or
lawful purpose it sees fit.
DISSENTING/CONCURRING OPINION(S):

167 ROSS TRANSPORT, INC. V CROTHERS AUTHOR: PAGCALIWAGAN

182 Md. 573, 575 (Md. 1946) NOTES:
TOPIC: Preemptive Right to Shares This is a derivative suit.
PONENTE: Marbury, C.J. The purpose of the suit is to set aside the issuance of 40
shares of stock to Elizabeth Williams, 100 shares to Corrine
Williams, 100 shares to Lois Williams Young and 125
shares of stock to William Ross.

This Court affirmed the decision granting the relief prayed,

and directing the stockholders to repay to the corporation
the dividends received by them on the stock declared to be
illegally issued, and ordered cancelled.
FACTS:
Ross Transport, Inc. (ROSS) was organized on January 19, 1942 to operate a fleet of buses to transport employees of
Triumph Explosives, Inc., to and from its plant at Elkton, Maryland.
Incorporators were Wallace Williams, William B. Ross and Gervase R. Sinclair who later died.
3 Incorporators and F. DuPont Thomson and James Hughes were the directors.
Williams was named as president and Ross as General Manager.
Authorized stock was 5,000 shares of no par value
At the organization meeting a resolution was passed authorizing the sale of this stock at $20 a share, and providing that
stock to the value of $30,000 be offered for sale. This limited the stock to be issued at 1,500 shares.
The stock records showed the original subscriptions to stock, as follows:
March 25 – To Wallace Williams – 50 shares
March 25 – To Wallace Williams, Jr. – 100 shares
March 25 – To Elizabeth Williams – 200 shares
March 25 – To Edmund Crothers – 100 shares
March 25 – James Hughes – 150 shares
March 25 – William Ross – 25 shares
April 2 – F. DuPont Thomson – 150 shares
April 2 – Bessie Whitelaw – 10 shares
April 20 – Gervase Sinclair – 50 shares
April 27 – Gervase Sinclair – 50 shares
April 27 – Jean Sinclair – 150 shares
Total = 1,035 shares
After the death of Mr. Sinclair, Charles Crothers purchased the Sinclair stock, 200 shares.
The stock complained of was issued to the wife and daughters of Wallace Williams and to William Ross, totaling 365
shares in all, and increasing the outstanding stock to 1,400 shares.
Williams and Ross had the controlling interest in the company. Mr. Williams testified that all of the stock in the
company was sold by him personally under the directors’ resolution. He said that all the stock in dispute was definitely
promised in the beginning, except 40 shares to Mrs. Williams. He never called any other directors meeting to authorize
any of the sales made after the original subscriptions and none of the other stockholders were given an opportunity to
buy. He told Mr. Ross and Mr. Hughes how he was going to divide it.
The sale of this additional stock to a director and to the family of the president and director without any further
authority than the original resolution, and without opportunity to buy given to other stockholders, is sought to be
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justified on the ground that it was originally planned, and that the money was needed to purchase additional buses at a
cost of about $16,000

ISSUE(S): WON the sale and issuance of stocks made after the original subscriptions is illegal and should be cancelled.

HELD: YES.

RATIO:
The doctrine known as the pre-emptive right of shareholders is a judicial interpretation of general principles of corporation
law.
Existing stockholders are the owners of the business, and are entitled to have that ownership continued in the same
proportion. Therefore, when additional stock is issued, those already having shares, are held to have the first right
to buy the new stock in proportion to their holdings.

The doctrine of pre-emptive right is not affected by the identity of the purchasers of the issued stock. What is concerned
with is who did not get it. But when officers and directors sell to themselves, and thereby gain an advantage, both in value
and in voting power, another situation arises, which it does not require the assertion of a pre-emptive right to deal with. It
has long been the law that trustees cannot purchase at their own sale, and trustees, in this sense, include, directors of
corporations.

The affairs of corporations are generally intrusted to the exclusive management and control of the BOD; and there is an
inherent obligation, implied in the acceptance of such trust, not only that they will use their best efforts to promote the
interest of the shareholders, but that they will in no manner use their positions to advance their own individual interest as
distinguished from that of the corporation, or acquire interests that may conflict with the fair and proper discharge of their
duty. The transaction may not be ispo facto void, but it is not necessary to establish that there has been actual fraud or
imposition practiced by the party holding the confidential or fiduciary relation; - the onus proof being upon him to
establish the perfect fairness, adequacy, and equity of the transaction; and that too by proof entirely independent of the
instrument under which he may claim. Such a transaction is not absolutely voided at the option of the interested parties, but
shifts the burden of proof upon the directors to establish its fairness.

It is not necessary for us to determine in this case whether the sale of stock to the Williams family and Ross is voidable
merely upon the application of some of the other stockholders, or whether proof of such sale merely makes it necessary for
these appellants to show the complete equity of the transaction. If we take the latter view, which is that most favorable to
these appellants, we must hold that the burden placed upon the two directors has not been met. They have not shown
that the company needed the money so badly and was in such a financial condition that the sale of the additional stock to
themselves was the only way the money could be obtained. On the contrary, the corporation appears to have been in a very
good financial condition. It is probable that any necessary financing of any buses could easily have been arranged through
some financial institution, and Williams and Ross benefited greatly by their action in selling the stock to themselves. Nor
is there any corroboration of Williams' statement that it was all arranged in the beginning, who was to get this additional
stock. None of the other incorporators or directors were called to testify about this, and Ross himself, as we have noted, did
not testify at all. We conclude, therefore, that the sale must be set aside as a constructive fraud upon the other stockholders.
CASE LAW/ DOCTRINE:
DISSENTING/CONCURRING OPINION(S):

168 Merritt-Chapman & Scott Corp. v. New York AUTHOR: Reyes

Trust Co., 184 F.2d 954 (2d Cir. 1950) NOTES: Appeal from a summary judgment in a declaratory
TOPIC: Debt Securities judgment action.
PONENTE: Swan, Circuit Judge Merritt-Chapman – corporation
New York Trust – trustee
FACTS:
This litigation involves the rights of holders of stock purchase warrants issued by Merritt-Chapman & Scott
Corporation pursuant to a trust deed made with The New York Trust Company as trustee under date of December 1,
1928, with respect to a stock dividend declared by the corporation on July 12, 1950.
The warrants were issued in 1928 in bearer form.
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o Each warrant certifies that subject to the provisions of the trust deed "and subject to the provisions
hereof, for value received, the bearer hereof is entitled to purchase * * * full-paid and non-assessable
shares of common stock of the Corporation, without par value, as it may exist at the time of such
purchase, at any time or from time to time hereafter at the price of Thirty dollars ($30.) per share,
upon surrender of this Warrant," at the office of The New York Trust Company, "accompanied by
payment of the purchase price."
o Upon certain contingencies specified in the trust deed the so-called "basic purchase price" of $30 per
share was subject to downward revision.
o To insure that stock purchasable under the warrants would be available, the trust deed required that
stock certificates for an aggregate amount of 40,000 shares be delivered to the trustee and made the
Trust Company the agent of the corporation to receive the purchase price and to deliver the stock
certificates upon exercise of the warrants.
o The deed further provided that stock certificates deposited with the trustee "shall not be deemed
legally issued or outstanding until so delivered by the Trustee. The Corporation will, however, at all
times during the life of such Warrants, retain a number of authorized, but unissued, shares of the
common stock of the Corporation represented by the stock certificates and stock scrip certificates (if
any) then on deposit with the Trustee, and/or which the Corporation may be required to deposit with
the Trustee as hereinafter provided." (Section 7, Article III clause)
On July 12, 1950, by resolution of its directors, the corporation declared a stock dividend in the amount of 40% per
share of no par common stock "on each legally issued and outstanding share of said common stock in the hands of the
public," such dividend "to be payable on October 16, 1950 from authorized but unissued shares to holders of such
common stock as of the close of business on September 15, 1950." The resolution fixed the price for the shares of
stock issued as a dividend at $20.00 per share, and directed the treasurer of the corporation upon the issuance of the
certificates representing such dividend shares to transfer from the Earned Surplus Account to the Common Capital
Stock Account the sum of $20.00 for each dividend share
Following the declaration of the stock dividend a controversy arose between the corporation and the trustee with
respect to the rights of warrant holders.
o The corporation contends that a warrant holder must exercise his warrant before September 15, 1950
in order to share in the dividend.
o The trustee contends that the corporation must deposit with the trustee stock certificates in an amount
equal to 40% of the certificates now on deposit with the trustee, and that whenever a warrant holder
may elect to exercise his warrant, he will be entitled to receive 1.4 shares upon paying the "basic
purchase price" for one share.
District court: Ruled in favor of plaintiff corporation.
ISSUE(S):
Whether or not the trial court erred in not accepting the trustee’s interpretation of the warrant holder’s contract.

HELD:
Yes. Judgment reversed.
RATIO:
The warrants gave the holders thereof the privilege, unlimited in time, to purchase an aggregate of 40,000
authorized but unissued shares. In 1928 when the warrants were issued, a definite number of the company's
common shares were then outstanding. Had the warrant holders forthwith exercised their option to purchase, they
would have acquired a definite percentage of the common stock.
A stock dividend does not change the proportional interest of each shareholder in the corporate enterprise; it
changes only the evidence which represents that interest. It is a mere "watering" of outstanding shares.
If the corporation were at liberty to declare stock dividends without making provision for warrant holders, the
percentage of interest in the common-stock capital of the corporate enterprise which the warrant holders would
acquire, if they thereafter purchased the shares subject to warrants, could be reduced practically to the point of
extinction.
Section 7 is a covenant by the corporation to protect the privilege of the warrant holders. By this covenant the
corporation recognized the possibility that a stock dividend might be declared and paid on outstanding shares
before the warrants had been exercised, and promised in that event to deposit with the trustee stock certificates
representing that proportion of the dividend shares which the shares subject to the warrants bore to all the common
shares, and that the trustee would deliver such dividend shares "without additional consideration," together with
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the purchasable shares, when the warrant holder pays for the latter.
There is no suggestion in the language of section 7 to set any limit on the time when the warrant holders must
exercise their unlimited option to purchase common shares.
CASE LAW/ DOCTRINE:

If the corporation is allowed to declare stock dividends without taking account of the warrant holders (who have not yet
exercised their warrant), the percentage of interest in the common stock capital of the corporation which the warrant
holders would acquire, should they choose to do so, could be substantially reduced/diluted. Thus, the corporation is wrong
in contending that a warrant holder must first exercise his warrant before they may be issued stock dividend.
DISSENTING/CONCURRING OPINION(S):

169. JOHN KELLEY CO. v. COMMISIONER OF
INTERNAL REVENUE
Together with No. 47, Talbot Mills v. Commissioner of
Internal Revenue, on certiorari to the Circuit Court of
Appeals for the First Circuit.
TOPIC: Hybrid Securities
AUTHOR: S A Y O
NOTES:
Taxpayer- Corporations
Debenture- is a type of debt instrument that is not secured
by physical assets or collateral. Debentures are backed only
by the general creditworthiness and reputation of the issuer

FACTS:

Two tax cases turned upon the question whether payments made under certain corporate obligations were interest
or dividends.

In the Kelley case, a corporation, all of whose common and preferred stock was owned directly or as trustee by
members of a family group, was reorganized by authorizing the issue of $250,000 income debenture bearer bonds
calling for 8% interest, noncumulative.

The debenture bonds were:

o offered only to shareholders of the taxpayer but were assignable

o payable in twenty years with payment of general interest conditioned upon the sufficiency of the net
income to meet the obligation.
o redeemable at the taxpayer's option and carried the usual acceleration provisions for specific defaults
o

The debenture holders had priority of payment over stockholders but were subordinated to all other creditors but
has no right to participate in the management.
Debentures were issued to the amount of $150,000 face value.

In the Talbot Mills case the taxpayer was a corporation (capital stock=$500,000 at 100 par value).

All of the stock with the exception of some qualifying shares was held by members, through blood or marriage, of
the Talbot family.

The company adjusted the capital structure by recapitalized where each stockholder surrendered 4/5 of his stock
and taking in lieu thereof registered notes equal to the aggregate par value of the stock retired.

This amounted to an issue of$400,000 in notes to the then stockholders and were payable to a specific payee or his
assignees on December 1,1964. (annual interest rate shall not exceed 10% but shall not be less than 2%)
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The notes were transferable only by the owner's endorsement and the notation of the transfer by the company. The
interest was cumulative and payment might be deferred until the note's maturity when "necessary by reason of the
condition of the corporation."

Dividends could not be paid until all then due interest on the notes was satisfied. The notes limited the
corporation’s right to mortgage its real assets.

The payments in question on corporate obligations were for the years in the Kelley case, 1937, 1938 and 1939; in
the Talbot Mills case for the year 1940. Both corporations deducted the payments as interest from their reports of
gross income under statutory sections and regulations. The Commissioner asserted deficiencies because the
payments were considered dividends and not interest.

ISSUE(S):
a. WON the Kelley debentures are interest- YES
b. WON the Talbot Mills notes are interest- NO, dividends
HELD:

RATIO:

In the Kelley case there were sales of the debentures as well as exchanges of preferred stock for debentures, a
promise to pay a certain annual amount, if earned, a priority for the debentures over common stock, the debentures
were assignable without regard to any transfer of stock, and a definite maturity date in the reasonable future. These
indicia of indebtedness support the Tax Court conclusion that the annual payments were interest on indebtedness.

On the other hand, in the Talbot Mills case, the Tax Court found factors there present of fluctuating annual
payments with a two per cent minimum, the limitation of the issue of notes to stockholders in exchange only of
stock, to be characteristics which distinguish the Talbot Mills notes from the Kelley Company debentures. Upon
appraisal of all the facts, the Tax Court reached the conclusion that the annual payment by Talbot Mills were in
reality dividends not interest.

We think these conclusions should be accepted by the Circuit Courts of Appeals and by ourselves. Judicial review
of Tax Court decisions depends upon the Internal Revenue Code, § 1141(c) Powers (1). It reads:

"To affirm, modify, or reverse. — Upon such review, such courts shall have power to affirm or, if the decision of
the Board is not in accordance with law, to modify or to reverse the decision of the Board, with or without
remanding the case for a rehearing, as justice may require."

"Dividend"and"interest,""stock"and"bond,""debenture"or"note,"are correlative and clearly identifiable conceptions

in their simpler and more traditional exemplifications. But their distinguishing features vanish when astute
manipulation of the broad permissions of modern incorporation acts results in a "security device" which is in truth
neither stock nor bond, but the half-breed offspring of both. At times only the label enables one to ascertain what
the manipulator intended to bring forth. But intention clarified by label alone is not always legally effective for the
purpose in mind. And there is scarcely any limit to the extent or variety to which this kind of intermingling of the
traditional features of stock and bonds or other forms of debt may go, as the books abundantly testify. The
taxpayer should show more than a label or a hybrid security to escape his liability. He should show at the least a
substantial preponderance of facts pointing to "interest" rather than "dividends."
CASE LAW/ DOCTRINE:

The taxpayer should show more than a label or a hybrid security to escape his liability. He should show at the least a
substantial preponderance of facts pointing to "interest" rather than "dividends."

DISSENTING/CONCURRING OPINION(S):

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170 JORDAN vs. ALLEN AUTHOR: SOLIS

[85 F. Supp. 437 (1949)] NOTES: I tried.
TOPIC: Debt Securities
PONENTE:
FACTS:
JORDAN COMPANY was incorporated under the laws of the State of Georgia in 1903 and was organized for the
purpose of engaging in real estate business.
18 June 1940: The first meeting of stockholders was held. At this meeting the shareholders authorized the directors to
issue $40,000 of debenture stock by a resolution which referred to said stock as a “form of obligation in the nature of
certificates of indebtedness.”
Immediately thereafter, the shareholders adopted by-laws containing provisions for the issuance of debenture stock,
similar to those indicated in the charter, with one very significant exception. Whereas the charter provided that the
holders of debenture stock should rank pari passu with general creditors upon dissolution, the certificate as set out in
the by-laws provided that upon dissolution the holders of debenture stock should rank after the general, creditors,
equally with each other and prior to the holders of common stock. The by-laws further provided that the debenture
stock should conform to charter requirements and the certificate itself stated that it was subject to such restrictions as
might be imposed by the Company’s charter and by-laws.
16 January 1925: The issuance of debenture stock was authorized at a meeting of the stockholders. The Directors had
recommended the issuance of $100,000 of debenture stock. Thereafter, the full amount of debenture stock authorized
by the charter was sold.
The Company paid the “interest” on the debenture stock regularly. Prior to 1940 a portion of this issue was retied and
during the years 1940, 1941, 1942, 1943 and 1944 the debenture stock remaining outstanding amounted to $97,100.
During each of the taxable years each of the above mentioned years, the company paid to the holders of said
debenture stock amounts aggregating $5,826. The Company deducted the sum of $5,826 as interest paid on
outstanding obligations for said taxable years. These deductions were disallowed by the Commissioner on the grounds
that they were payments of dividends rather than payments of interest and the deficiency assessments resulting from
such disallowance were made.
27 December 1946: The Company filed its claim for refund which was ignored by the Commissioner. The Company
then filed this suit.

ISSUE(S): Whether the payments made to the holders of the Debenture Stock of the Jordan Company in 1940, 1941,
1942, 1943 and 1944 were in fact payments of interest on outstanding obligations as contended by the taxpayer or
dividends paid on invested capital as determined by the Commissioner. If the payments were actually interest, they are
deductible. On the other hand, if they were in fact dividends, they are not deductible.

HELD: There is no doubt as to the true nature of the securities here involved. They were STOCK and the payments made
to the holders thereof were DIVIDENDS and thus not deductible.

RATIO:
The factors to be considered significant in arriving at the nature of the securities involved:
(1) treatment by the parties
(2) maturity date and right to enforce collection
(3) rank on dissolution
(4) uniform rate of interest payable or income payable out of profits
(5) participation in management and the right to vote
In this case:
(1) the company treated the debenture stocks as obligation and the payments as interest;
(2) holders if such stocks ranked ahead of the shareholders but inferior to general creditors—These provisions with
respect to the payment of interest, when so considered, are those usually include in preferred stock certificates and
are rarely incidents of true obligations;
(3) the debenture stocks have no maturity date—There was no time set forth in the certificate or prescribed in the
charter or by laws at which the holders could demand payment of the principal sum; and
(4) payment of premiums upon retirement more consistent with retirement of stock than with payment of past due
obligations.
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In conclusion, the absence of maturity date and the right to enforce payment of the principal sum by legal action,
when considered in connection with the other factors, leads the court to the conclusion that the securities here
involved were stocks and not obligations.
CASE LAW/ DOCTRINE:

DISSENTING/CONCURRING OPINION(S):

171. Aladdin Hotel Co. vs Bloom AUTHOR: The Taliño

[200 F. 2d 627; 01/02/1953]
NOTES: This was originally a class action brought by
TOPIC: Financing the Corporation; Capital Structure – Josephine Loeb Bloom as plaintiff seeking equitable relief
Debt Securities – The Trust Indenture for herself and other minority bondholders of the Aladdin
Hotel Co. (AHC) against defendants AHC, Charles O.
PONENTE: Gardner, C.J. Jones, Inez M. Jones, Charles R. Jones, Kathryn Dorothea
Jones, Barbara Ann Jones, and Mississippi Valley Trust
Company (Mississippi).
FACTS:

She alleged that she represents a class which consisted of approximately 130 members who were the owners of a
minority in value of certain bonds issued by AHC, and that the object of the action was to obtain an adjudication of
claims which affected specific property and the rights of the parties constituting the class.

On September 1, 1938, AHC executed and delivered a series of 647 bonds aggregating in principal amount the
sum of $250,000.00. The bonds on their face were made payable September 1, 1948, with interest to that date at
5% per annum payable only out of net earnings and with interest at the rate of 8% per annum from maturity until
paid.

AHC, to secure payment of the bond, executed its deed of trust by which it mortgaged certain real estate owned by
it in Kansas City, Missouri. The mortgage also covered furnishings and fixtures in the hotel property owned by
AHC.

Mississippi was named as trustee in the deed of trust. The bonds and deed of trust contained provision empowering
the bondholders of not less than 2/3 of the principal amount of the bonds, by agreement with AHC to modify and
extend the date of payment of the bonds provided such extension affected all bonds alike.

She then alleged that she was the owner of some of the bonds of the total principal amount of $3500, and that the
other defendants were all members of the Jones family, and during the period from May 1, 1948 to the time of the
commencement of this action, they were the owners of a majority of the stock of AHC and controlling members of
its BOD. They were also the owners and holders of more than 2/3 of the principal amount of the bonds, being the
owners of more than 72% thereof.

The defendants entered into an agreement with AHC on June 1, 1948 to extend the maturity date of said bonds
from September 1, 1948 to September 1, 1958. It was also alleged that other changes were similarly made, on
various dates, in the provisions of the trust deed. Mississippi certified the modifications as provided in the trust
deed. The purported changes were made on application of AHC and with the consent of the holders of 2/3 in
principal value of the outstanding bonds.

No notice of said application for change in the due date of the bonds was given to the mortgage bondholders and
that plaintiff did not consent nor agree to the modification. She then alleged that the modifications were invalid
because they were not made in good faith and were not for the equal benefit of all bondholders, but were made
corruptly for the benefit of the defendants and such modification deprived the plaintiff and the other mortgage
bondholders of their rights and property. The modification extended, for 10 additional years, the powers and
compensation of Mississippi as trustee.

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LOWER COURT: Dismissed as to all individual defendants, including the Mississippi Valley Trust Company.
No judgment was entered against any of the defendants except AHC. The judgment was a money judgment for the
amount due on plaintiff's bonds. (All bondholders are entitled to notice)

AHC appealed and contends that:

o the modification of the provisions of the trust deed extending the time of maturity of the bonds was
effected in strict compliance with the provisions of the contract of the parties and hence was binding on all
the bondholders;
o if the acts of the parties to the contract in effecting such modification were not, in the first instance
authorized, they were subsequently ratified by the plaintiff and her assignors;

[JUST IN CASE HE ASKS WHAT WERE WRITTEN IN THE TRUST DEED AND IN THE BONDS]

The trust deed contained provision that,

"In the event the Company shall propose any change, modification, alteration or extension of the bonds issued
hereunder or of this Indenture, such change, if approved by the holders of not less than two-thirds in face amount
of the bonds at the time outstanding, shall be binding and effective upon all of the holders of the then outstanding
bonds, provided, however, that such modification, change, alteration or extension shall affect all of the outstanding
bonds similarly."

The bonds, including those held by plaintiff, contained the following:

"The terms of this bond or of the Indenture securing the same may be modified, extended, changed or altered by
agreement between the Company and the holders of two-thirds or more in face amount of bonds of this issue at the
time outstanding. Any default under the Indenture may be waived by the holders of two-thirds or more in face
amount of the bonds at the time outstanding."

"For a more particular description of the covenants of the Company as well as a description of the mortgaged
property, of the nature and extent of the security, of the rights of the holders of the bonds and of the terms and
conditions upon which the bonds are issued and secured, reference is made to said General Mortgage Deed of
Trust."
ISSUE(S): WON the Joneses acted in bad faith.

HELD: No, they did not.

RATIO:
The contract made no provision for notice. It required that such application have the approval of those holding 2/3
or more in face value of the bonds. The only other limitation contained in the contract with reference to the power
to modify its terms was to the effect that "such modification, change, alteration or extension shall affect all of the
outstanding bonds similarly.

It is urged that because the Joneses were acting in a dual capacity, they became trustees for the other
bondholders, and as such, it was incumbent upon them to do no act detrimental to the rights of the
bondholders. The rights of the bondholders, however, are to be determined by their contract and courts will
not make or remake a contract merely because one of the parties thereto may become dissatisfied with its
provisions, but if legal will interpret and enforce it.

It remains to consider the contention that plaintiff, in her individual capacity, could not maintain this action. The
deed of trust provides that,

"No holder of any bond hereby secured shall have any right to institute any suit or other action hereunder
unless the Trustee shall refuse to proceed within thirty (30) days after written request thereto of the holders
of not less than twenty per cent (20%) in face value of the bonds then outstanding and after tender to it of
indemnity satisfactory to the Trustee."

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More than 20% of the bonds were in the hands of the minority bondholders but no written request was made upon
the trustee to bring this suit. The court has held that the trustee at all times acted in good faith and no reason
appears why he was not requested to bring this suit. Plaintiff is the owner of only $3500 face value of a bond issue
of $250,000. According to her complaint there are 130 other minority bondholders and if she can maintain this
action individually, then the defendant may be subjected to 130 other similar lawsuits. We think plaintiff could not
maintain this action in her individual capacity without first having complied with the provisions of the deed of
trust which vests in the trustee the right to maintain such an action.
CASE LAW/ DOCTRINE:
DISSENTING/CONCURRING OPINION(S):

172 PALTING v. SAN JOSE PETROLEUM, INC. AUTHOR: TAN

No. L-14441. December 17, 1966 NOTES:

PEDRO R. PALTING, petitioner, vs. SAN JOSE Parity Rights is an amendment to the 1935 Constitution
PETROLEUM INCORPORATED, respondent. which granted to Americans equal rights with Filipino
citizens to develop and exploit natural resources of the
TOPIC: Registration of Securities Philippines and to operate public utilities in the country.
PONENTE: Barrera, J.
FACTS:
San Jose Petroleum (Panamanian corporation), filed with the SEC a sworn statement for the registration and licensing
for sale in the Philippines of Voting Trust Certificates representing 2M (later amended to 5M) shares of fits capital
stock.
The entire proceeds of the sale of said securities will be devoted or used exclusively to finance the operations of San
Jose Oil (a domestic mining corporation). It was the express condition of the sale that every purchaser of the securities
shall not receive a stock certificate, but a registered or bearer-voting-trust certificate.
Palting, et al., (prospective investors in the shares of San Jose Petroleum) filed with the SEC an opposition to
registration and licensing of securities on the grounds that:
1) the tie-up between the issuer, SAN JOSE PETROLEUM, a Panamanian corporation, and SAN JOSE OIL, a
domestic corporation, violates the Constitution of the Philippines, the -Corporation Law and the Petroleum
Act of 1949;
2) the issuer has not been licensed to transact business in the Philippines;
3) the sale of the shares of the issuer is fraudulent, and works or tends to work a fraud upon Philippine
purchasers; and
4) the issuer as an enterprise, as well as its business, is based upon unsound business .principles.
Respondent corporation, however, claimed that it was a business enterprise enjoying parity rights, which, with respect
to mineral resources in the Philippines, may be exercised, pursuant to the Laurel-Langley Agreement, only through
the medium domestic corporation.
SEC granted the registration and licensed the sale of the Voting Trust Certificates. This prompted Palting to appeal to
the SC.
ISSUE(S):
1) Whether Palting, as a perspective investor in respondent's securities, has personality to file present petition for
review of the order of the SEC. YES
2) Whether San Jose Petroleum is entitled to parity rights in the Philippines. NO
3) Whether the sale of respondent's securities is fraudulent, or would work or tend to work fraud to purchasers. YES

RATIO:
1) Palting has legal standing. A "prospective investor" may oppose the registration and licensing of the shares
of stock of a corporation engaged in oil exploration. The statement in the notice published by the Securities and
Exchange Commission, that "any person" opposed to the petition for registration and licensing of securities may
file his written opposition, is in consonance with the generally accepted principle that Blue Sky Laws are enacted
to protect investors and prospective purchasers and to prevent fraud and preclude the sale of securities which are
in fact worthless or worth substantially less than the asking price.

When he took part in the hearing of the petition, he became a party and he may appeal to the Supreme
Court from the order granting the petition.
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2) A foreign corporation, which is not owned or controlled directly by American citizens but is owned and
controlled by a Panamanian corporation, which in turn is owned and controlled by two Venezuelan
corporations, is not entitled to enjoy parity rights in the Philippines for these reasons:
i. It is not owned or controlled directly by citizens of the United States, because it is owned and controlled
by a corporation, the OIL INVESTMENTS, another foreign (Panamanian)corporation.
ii. Neither can it be said that it is indirectly owned and controlled by American citizens through the OIL
INVESTMENTS, for this latter corporation is in turn owned and controlled, not by citizens of the United
States, but still by two foreign (Venezuelan) corporations, the PANTEPEC OIL COMPANY and
PANCOASTAL PETROLEUM.
iii. Although it is claimed that these two last corporations are owned and controlled respectively by 12,373
and 9,979 stockholders residing in the different American states, there is no showing in the certification
furnished by respondent that the stockholders of PANCOASTAL or those of them holding the controlling
stock, are citizens of the United States.
iv. Granting that these individual stockholders are American citizens, it is yet necessary to establish that the
different states of which they are citizens, allow Filipino citizens or corporations or associations owned or
controlled by Filipino citizens, to engage in the exploitation, etc. of the natural resources of these states
(see paragraph 3, Article VI of the Laurel-Langley Agreement, supra). Respondent has presented no proof
to this effect.
v. But even if the requirements mentioned in the two immediately preceding paragraphs are satisfied,
nevertheless to hold that the set-up disclosed in this case, with a long chain of intervening foreign
corporations, comes within the purview of the Parity Amendment regarding business enterprises
indirectly owned or controlled by citizens of the United States, is to unduly stretch and strain the language
and intent of the law.
3) It can not be doubted that the sale of respondent's securities would, to say the least, work or tend to work fraud to
Philippine investors. Some of the provisions of the Articles of Incorporation of respondent SAN JOSE
PETROLEUM are noteworthy; viz:
i. the directors of the Company need not be shareholders;
ii. that in the meetings of the board of directors, any director may be represented and may vote through a
proxy who also need not be a director or stockholder; and
iii. that no contract or transaction between the corporation and any other association or partnership will be
affected, except in case of fraud, by the fact that any of the directors or officers of the corporation is
interested in, or is a director or officer of, such other association or partnership, and that no such contract
or transaction of the corporation with any other person or persons, firm, association or partnership shall be
affected by the fact that any director or officer of the corporation is a party to or has an interest in, such
contract or transaction, or has in anyway connected with such other person or persons, firm, association or
partnership; and finally, that all and any of the persons who may become director or officer of the
corporation shall be relieved from all responsibility for which they may otherwise be liable by reason of
any contract entered into with the corporation, whether it be for his benefit or for the benefit of any other
person, firm, association or partnership in which he may be interested.

These provisions are in direct opposition to our corporation law and corporate practices in this country.
These provisions alone would outlaw any corporation locally organized or doing business in this
jurisdiction. Consider the unique and unusual provision that no contract or transaction between the company and
any other association or corporation shall be affected except in case of fraud, by the fact that any of the directors or
officers of the company may be interested in or are directors or officers of such other association or corporation;
and that none of such contracts or transactions of this company with any person or persons, firms, associations or
corporations shall be affected by the fact that any director or officer of this company is a party to or has an interest
in such contract or transaction or has any connection with such person or persons, firms associations or
corporations; and that any and all persons who may become directors or officers of this company are hereby
relieved of all responsibility which they would otherwise incur by reason of any contract entered into which this
company either for their own benefit, or for the benefit of any person, firm, association or corporation in which
they may be interested.

The impact of these provisions upon the traditional judiciary relationship between the directors and the

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stockholders of a corporation is too obvious to escape notice by those who are called upon to protect the interest of
investors. The directors and officers of the company can do anything, short of actual fraud, with the affairs of the
corporation even to benefit themselves directly or other persons or entities in which they are interested, and with
immunity because of the advance condonation or relief from responsibility by reason of such acts. This and the
other provision which authorizes the election of non-stockholders as directors, completely disassociate the
stockholders from the government and management of the business in which they have invested.
CASE LAW/ DOCTRINE:
DISSENTING/CONCURRING OPINION(S):

173 Triplex Shoe Co. v. Rice AUTHOR: Tiglao

[17 Del.Ch. 356 (1930)] NOTES: Read the emergency recit first to understand the
TOPIC: Liability on Watered Stocks difference between the common and preferred shares and
PONENTE: C.J. Pennewill how they actually affect the validity of the board elections.
Emergency Recit:
NO PAR VALUE STOCK CANNOT BE REGARDED AS VALID AND OUTSTANDING UNLESS THE
CONSIDERATION THEREFOR WAS FIXED AS REQUIRED BY LAW.
The stocks issued to the Dillman faction were no-par value shares, the consideration for which were never fixed as
required by law. Hence, its issuance was void. The certificate of incorporation did not confer upon the Board of
Directors authority to fix the consideration for no par value stock, and therefore, the consideration could be fixed
only by the stockholders as provided by the statute. The stockholders never fixed the consideration for any of the
no par value stock issued by the corporation after its organization, and there is no escape from the conclusion that
all such stock was invalid at the tine of the election I question and not entitled to be voted.

FUTURE SERVICES ARE NOT LAWFUL CONSIDERATION FOR THE ISSUANCE OF STOCK.
Moreover, the stocks were issued to the Dillmans in consideration for services rendered in organizing the company
and in agreeing to serve the company at a much smaller compensation. Clearly, the stocks were issued not for
services rendered but for services yet to be rendered, and are therefore, invalid for having no valid consideration.
The Dillman faction, therefore, cannot vote the invalid stocks they hold and the directors they elected into office
cannot be held to be validly elected.
The Hutchison faction, on the other hand, who holds preferred stock but the preference of which was not stated ,
was held to be validly elected into office although the amended certificate of incorporation provided that “ The
sole voting power shall reside in the holders of the common stock.”
The court interpreted the provision to mean that if there is any common stock legally issued and outstanding, that
is entitled to vote, the preferred stock cannot vote, but if there is no such common stock, the situation is the same
as would be if no common stock had been issued at all.

FACTS:
Triplex Shoes Company was incorporated in 1919. Its certificate of incorporation provided that its total authorized
capital stock should be 150,000 USD, divided into 750 preferred shares, of the par value of $100 each. The remaining
75,000 in shares of common stock without any par value.
During the first meeting, Albert Dillman was elected President, Elmer Solly as Vice President and secretary, and
Louis Dillman as Treasurer. In one set of minutes, these indviduals composed the board of directors. In another set of
minutes, Robinson and Emery had also been elected to the board.
In the same meeting, the directors adopted a resolution giving 376 shares of the common stock to Mr. Dillman, 114
common stock shares to Louis Dillman and 50 common stock shares to Elmer Solly.
Thereafter, Solly transferred his fifty shares to the two Dillmans, so that Albert Dillman would have 401 shares and
Louis would have 139 shares, both of the common stock.
Before February 28, 1921, other common shares amounting to 121 were distributed to various persons
On February 28, 1921 during a special meeting of stockholders, a resolution authorizing an amendment to the
certificate of incorporation was adopted but not filed until a later. It stated that all of the outstanding common and
preferred shares voted for the said amendment. The amendment would reflect that the total authorized capital stock of
this corporation consists of 2375 preferred stock with a par value of $100 each, amounting to $237,500 and 1075
shares of common stock, which shall be without nominal or par value. It also indicated that the sole voting power

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shall reside in the holders of the common stock.

Rice and Hutchins, Inc. (petitioner of this case) purchased 249 shares of preferred stock and was given 83 shares of
common stock as a bonus on the basis of one share of common for three shares of preferred.
During the stockholders annual meeting in 1922 they voted to pay for services rendered by Albert Dillman and Elmer
Solly in the form of common stocks.
In 1922, Rice Company purchased 250 preferred stock, with an additional 50 common shares.
In May 1922, Rice again purchased 400 preferred stock, with an additional 80 shares of common.
In 1925, Rice finally purchased 250 preferred stock, with an additional 50 common shared. Hence, the total holdings
of Rice Company was at 1149 preferred stock and 263 common shares.
Due to the number of shares which Rice Company had, they were able to elect one director the board until 1928.
However, in 1929 there was an election contest over the directors for there were two tickets presented, one of Rice
Company and one of the Dillmans. The latter was declared to have been elected.
The question lies as to the validity of the election of the Dillman faction and the existence of the common stock they
claim to have.
ISSUE(S): Did the Dillman faction actually have any common stock in order to perform the vote?

HELD:
No, they did not have any common stock allowing them to vote.
RATIO:
The original certificate of incorporation created two classes of stock: a preferred with par value and a common
with no par value. The preferred, however, was such only on name, no preference being stated, as required by law.
The stocks issued to the Dillman faction were no-par value shares, the consideration for which were never fixed as
required by law. Hence, its issuance was void. The certificate of incorporation did not confer upon the Board of
Directors authority to fix the consideration for no par value stock, and therefore, the consideration could be fixed
only by the stockholders as provided by the statute. The stockholders never fixed the consideration for any of the
no par value stock issued by the corporation after its organization, and there is no escape from the conclusion that
all such stock was invalid at the tine of the election I question and not entitled to be voted.
Moreover, the stocks were issued to the Dillmans in consideration for services rendered in organizing the company
and in agreeing to serve the company at a much smaller compensation. Clearly, the stocks were issued not for
services rendered but for services yet to be rendered, and are therefore, invalid for having no valid consideration.
The Dillman faction, therefore, cannot vote the invalid stocks they hold and the directors they elected into office
cannot be held to be validly elected.
The Hutchison faction, on the other hand, who holds preferred stock but the preference of which was not stated ,
was held to be validly elected into office although the amended certificate of incorporation provided that “ The
sole voting power shall reside in the holders of the common stock.”
The court interpreted the provision to mean that if there is any common stock legally issued and outstanding, that
is entitled to vote, the preferred stock cannot vote, but if there is no such common stock, the situation is the same
as would be if no common stock had been issued at all.

CASE LAW/ DOCTRINE:

DISSENTING/CONCURRING OPINION(S):

174 Mccarty vs. Langdeau AUTHOR: Valera

7 S.W.2d 407 (1960) NOTE:
Liability on Watered Down Stocks
CARPIO
FACTS:
Langdeau, The Receiver of the Estate Life Insurance Company filed a suit against McCarty for a sum of money, the
based from a written agreement executed by McCarty wherein he agreed to purchase 19370 shares of its no par stock
at $20 which amounts to $387,380, which until the date Estate life was placed under permanent receiver ship there
was still a balance of $379,280.
The contract stipulates the ff:
Agreement to purchase 19,370 shares of no par stock of Estate Life at $20per share
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20$ down payment and the balance is to be paid in equal monthly installments
That until said stock is paid in full, Estate Life shall have the right to retain the stock certificates, and McCarty
is granted power and authority to vote on such stock as has been paid for.
If there should be a default in the payment of any monthly installment as herein provided for as long as 30
days then at the option of Estate Life this contact shall be null and void. And in the event that it is cancelled,
McCarty shall be entitled to receive a certificate for the number of shares fully paid.
That when the balance s paid in full then McCarty will be entitled to a certificate for the number of shares
purchased.
McCarty’s assailed that the contract is void since it violates Art 12, Sec 6 of the Vernon St. Ann’s Texas Constitution
which states that “no corporation shall issue stock or bonds except for money pad , labor done or property actually
received, and all fictitious increase of stock or indebtedness shall be void.
The lower Court, by way of summary judgement decided in favor of Langdeau, and was awarded judgement against
McCarty for the sum of 379,280 with 6%interest.

ISSUE(S):
WON The agreement between McCarty and Estate Life valid thus making McCarty Liable.

HELD:
YES-

RATIO:
Is unnecessary that the court determine at this point between the constructs that this contract may be construed
either as a contract for the present issuance of shares of stock which are to be held as security for the promissory
note referred o t it might be construed as the issuance of shares of stock periodically as the note is to be paid.
Under either construction the contract is enforceable.
McCarty’s second contention is that judgement should have not been based on the contract since the note referred
to n it is the true evidence of the indebtedness, and that judgment on the contact would not preclude duplicatd
liability on the note. The court held that the rights of a creditor of a corporation against those owing the
corporation for unpaid stock subscriptions are measured by the original stock subscription contract and not by the
terms of the subscription notes which are as to the creditor but evidence of the liability of the subscriber. If
McCarty had desired the surrender of the notes, he should have established their existence. In any event the court
holds that his liability on the contract is not affected by the non production of the notes.
Mccarty 3rd point is that the contract declared upon had never been accepted by the corporation or a fact issue was
presented as to its acceptance. The contact considered as an offer does not show a signed acceptance upon its face.
This may be shown by performance and acceptance of benefits by the person to him the offer is made
It was shown that McCarty paid Estate life on 6 different occasions. And Estate Life issued corresponding
shares for each payment McCarty Made the courts held that the transactions, standing alone, require the
conclusion that the contract was accepted by Estate Life.
McCarty’s 4th contention that the contract had been terminated. Pleading to the effect that a certain number of
shares of stock had been fully paid for and issued to him, termination of the contract was shown as a matter of law.
The court stated that the course of dealings between the parties refutes the contention that the contact was
terminated by Estate Life. Clearly Estate life was given the option of terminating its contract upon the
conditions stated. Such termination would result in forfeiture of McCarty’s future rights to purchase the stock
as provided in the contract. Forfeitures are not favored in law and may be waived by conduct inconsistent with
an intent to insist upon it.
It will be noted that all departures from the terms of the contract were for the benefit of McCarty. Acceptance
of payments less than contracted for and premature issuance of stock certificates were acts of leniency on the
part of Estate life. They cannot in reason be deemed the acts of one bent on exercising the usually cruel act of
forfeiture. To test the soundness of McCarty’s position it is only necessary to reverse the situation and have
Estate Life claiming forfeiture, based on those acts alone, in a suit by appellant to enforce his rights under the
contract. We are confident that forfeiture would be denied in that case and that self imposed forfeiture should
be deniand.

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CASE LAW/ DOCTRINE:

DISSENTING/CONCURRING OPINION(S):

175 C.D. Rhode v. Dock-Hop Co. et al AUTHOR: Acido

184 Cal. 367 (1920) NOTES:
TOPIC: Liability on Watered Stocks DIGEST TO BE EDITED PAAAA
PONENTE: Olney, J. Plaintiff – creditors of the corporation
Defendant – stockholders
Please read the underlined parts first
FACTS:
This is an action by the judgment creditor of a corporation against certain of its stockholders, seeking to collect from
them what are claimed to be unpaid balances on the par value of their shares.
The complaint alleged simply that the defendants were subscribers and stockholders of the corporation in amounts
specified, and that only twenty-five cents on the dollar had been paid in on the par value of their shares. The shares
which the defendants held, although issued as fully paid, were in fact issued for property which the directors did not
believe was equal in value to the par value of the shares.
o AKA kulang pa raw yung bayad.
The answers of the defendants, in addition to some other defenses, denied that they were either subscribers or
stockholders, or that the full par value of their stock had not been paid. Further, they said that parties from whom they
bought had represented to them that the stock was fully paid, and that the corporation had itself so represented to them
by issuing them certificates which contained no notation that the shares evidenced by them were not fully paid.
o AKA they are innocent transferees.
The court found in effect that only five-twelfths of the par value had been paid.
The stock had a par value of a dollar a share, and the shares which it was claimed the defendants owned, and which in
fact they did own, were part of a lot of 599,995 shares issued as fully paid up, but in consideration for the transfer to
the company of certain unpatented mining claims with the improvements upon them.
These claims had been previously worked and abandoned by another company, and then relocated by one Knapp, who
had been interested in the former company and was one of the promoters of the present debtor company.
SUMMARY OF FINDINGS
o that the defendants were not subscribers
o that they did not directly or indirectly participate in the transaction whereby their stock was issued for
a consideration less than its par value
o that it does not appear that the defendants knew when they accepted their stock that it had been so
issued
o that the defendants acquired their stock merely as the transferees of one of the parties to the original
transaction by which it was issued.
Judgment favored the plaintiff. The defendants appealed.
ISSUE(S):
Whether or not the defendant stockholders are required to make up any difference/deficiency which may exist between
what was actually paid in on their stock and its par value.

HELD:
No. Judgment reversed.
RATIO:
When the capital of a corporation is paid in in something other than money, the thing accepted in lieu of money
must be reasonably near its equivalent, and while the hopes or prospects for a property affect its immediate cash
value, it is that cash value, and not the future value of the property if the hopes or prospects are realized, which
must be taken as the basis of capitalization.
At most, the finding is one that Knapp, and through Knapp the defendants, purchased stock from the company in
consideration of the transfer of the claims. It is to be noted, however, that such a finding would not make either
Knapp or the defendants subscribers to the stock.
The difference between subscribing for stock and then paying the subscription either in money or property and a
direct purchase of stock without any antecedent obligation, a purchase of treasury stock in other words, is

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manifest. The case is not one where the defendants are liable as subscribers, but one where, if they are liable at
all, it is as stockholders.
It is also to be noted that unless the defendants are to be held liable merely because they were stockholders, and
upon the theory that nothing more was necessary to establish their liability, the finding under discussion is not
supported by any allegation in the complaint. The complaint alleges only that the defendants were subscribers and
stockholders. That they were not subscribers and liable as such is plain. As to their being liable as stockholders,
there is no allegation in the complaint other than that they were such.
If the transferor genuinely believes that his property is fully worth the par value of the stock which he is receiving
in return for it, it is difficult to see any reason why the transaction should not stand as it is as to him, no matter
what the directors may believe, or why he should be compelled at the suit of creditors of the corporation or
otherwise to pay more on account of his stock than he agreed to pay.
It makes no difference whether any particular stockholder against whom a recovery is sought was a party to the
original transaction whereby the stock was issued or is only a transferee of some such party. He is liable simply as
the owner of the stock and because of the relationship with the corporation which he voluntarily assumed when he
accepted such ownership.
Such, however, is not the situation of the stockholder owning shares ostensibly fully paid but not so in fact. He
owes the corporation no duty to make good the difference, and there is no obligation on his part which is an asset
of the corporation or which the corporation may enforce.
He is liable only because of the original transaction whereby the stock was issued for a fictitious consideration, and
then only to those who were defrauded thereby. His liability, in other words, is not based upon his relationship to
the corporation as a stockholder but upon a fraudulent transaction. Upon the plainest principles, therefore, he
cannot be held liable unless he was either a party to the transaction in the first instance or has in effect in some
manner made himself a party since. It is not sufficient to justify a recovery against him that it be pleaded, proven,
and found only that he be a stockholder owning watered stock.
One who is only a transferee of watered stock, and did not participate in the transaction whereby it was originally
issued and who took his stock unaware of the character of that transaction, cannot be compelled to make good the
false representation as to the capital of the company which he had no part in making and the responsibility for
which he has done nothing to assume.

CASE LAW/ DOCTRINE:

Innocent transferees of watered stock cannot be held to answer for the deficiency of the stocks even at the suit of the
creditor of the company. The creditor’s remedy is against the original owner of the watered stock.
DISSENTING/CONCURRING OPINION(S):

176 BING CROSBY MINUTE MAID CORP. V. AUTHOR: ADRE

EATON
[46 CAL 2D 484 (1956)]
TOPIC: LIABILITY ON WATERED STOCKS
PONENTE: SHENK, J.
NOTES: escrow: (according to google) An escrow is
a financial instrument held by a third party on behalf of the
other two parties in a transaction. The funds are held by the
escrow service until it receives the appropriate written or
oral instructions or until obligations have been fulfilled.
Securities, funds and other assets can be held in escrow.

Watered stock: Shares in a corporation which is stated to be,

or issued as fully paid but which in fact, has not been paid
for.
FACTS:
Wallazz B. Eaton, Sr. (Eaton) formed a corporation (name not disclosed in the case) to acquire his going frozen food
business.
The Commissioner of Corporations issued a permit authorizing the corporation to sell and issue not more than 4,500
shares of $10 par value stock to the Eaton and other individuals (not mentioned in the case) in consideration of the
transfer of the business.
The corporation placed 1, 022 shares in escrow in Eaton’s name (this is allowed in the permit). Although, the 1, 022
shares were listed on the corporate records as held by Eaton, they were never released from escrow.
The (unnamed) corporation had financial difficulties and executed an assignment of its assets for the benefit of
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creditors to a credit association.

Bing Crosby, a creditor, recovered a judgment against the corporation for $21,246.42.
An action was filed by Bing Crosby against Eaton because he was a holder of watered-down stock in the corporation.
The amount to be recovered from Eaton was $15,000 since this remained unpaid from the $21,246.42 judgment.
Trial Court found that:
o Value to the corporation of the consideration from Eaton was $34,780.83
o The 4,500 shares of stock having a par value of $10 each was issued to Eaton and he became the
owner of the shares
o Subsequent to the issue of the shares, the corporation purchased merchandise from Bing Crosby and
has not paid for all of it.
Judgment of the trial court was for Bing Crosby ($10,219.17). The trial court’s conclusion was that Eaton was liable
for the difference between the par value of the 4,500 shares and the value of the consideration the defendant paid for
them.
An order for new trial was granted to Eaton. Hence, the case.
ISSUE(S): WON there could be a basis for the liability of Eaton, a holder of a watered-down stock, to the creditor, Bing
Cosby.

HELD: Yes. The Court granted the order for new trial to further consider Eaton’s appeal from the judgment of the trial
court.
RATIO: (the Court gave a discussion of the liability of a holder of watered stock)
There a two theories on the liability of a holder of watered stock: misrepresentation theory and statutory obligation theory.

A subscriber to shares who pays only part of what he agreed to pay is liable to creditors for the balance.

Holders of watered stock are generally held liable to the corporation’s creditors for the difference between the par value of
the stock and the amount paid in. The courts view the issue of watered stock as a misrepresentation of the corporation’s
capital.

Under the misrepresentation theory, the creditors who rely on the misrepresentation of the corporation’s capital stock are
entitled to recover the “water” from holders of the watered stock. Reliance of creditors on the misrepresentation is
material. However, under the statutory obligation theory, reliance of creditors on the capital stock of the corporation is
irrelevant. (here in the Philippines, it is the statutory obligation theory which is prevailing according to the reviewer)
CASE LAW/ DOCTRINE: Creditors who rely on the misrepresentation are entitled to recover the “water” from the
holders of the watered shares.

177 G.R. No. L-11528 March 15, 1918 AUTHOR: BONDOC

MIGUEL VELASCO, assignee of The Philippine

Chemical Product Co. (Ltd.), plaintiff-appellant,
vs.
JEAN M. POIZAT, defendant-appellee.

TOPIC: How payment of shares enforced

PONENTE: Street J.
FACTS:

Plaintiff, as assignee in insolvency of "The Philippine Chemical Product Company" (Ltd.) is seeking to recover of the
defendant, Jean Poizat the sum of P1,500, upon a subscription made by him to the corporate stock of said company. The
corporation in question has a capital of P50,000, divided into 500 shares. The defendant subscribed for 20 shares of the
stock of the company, and paid in upon his subscription P500.

Defendant Poizat was a stockholder in the company, and for sometime acted as its treasurer and manager. While serving in
this capacity he collected all subscriptions to the capital stock of the company, except the aforesaid 15 shares subscribed by
himself and another 15 shares owned by Jose Infante.
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On July 1914, a meeting of the board of directors was held and 2 resolutions, were adopted. The first was that the directors,
or shareholders, of the company should make good by new subscriptions, 15 shares which had been surrendered by
Infante. Accordingly, the directors present at this meeting subscribed P1,200, leaving a deficiency of P300 to be recovered
by voluntary subscriptions from stockholders not present at the meeting.

The other proposition was that Juan [Jean] Poizat, who was absent, should be required to pay the amount of his
subscription upon the 15 shares for which he was still indebted to the company and in case he refuse to make payment, the
management should file a case against him. When notification of this resolution Poizat wrote a letter to Velasco, as
treasurer and administrator. Stating that as he understood he is relieved by the board of directors from his subscription
upon the terms agreed to Infante.

When the company became insolvent, Velasco was named as assignee by the clerk in pursuance of Act No. 1956.

The principal contention of defendant Poizat is that the call made by the board of directors was not made pursuant to the
requirements of Corporation Law

CFI judgment was rendered a judgment in favor of the defendant, and the complaint was dismissed.

ISSUE(S):

WON the assignee may sue in court for an action to recover the unpaid subscription of a stockholder of insolvent
corporation.

HELD: Yes.
RATIO:

The provisions of the Corporation Law gave 2 remedies for the enforcement of stock subscriptions. The first consists in
permitting the corporation to put up the unpaid stock for sale and dispose of it for the account of the delinquent subscriber.
The other remedy is by action in court which is embodied in Section 49 of the Corporation Law –

“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.”

SC said that the Corporation Law does not prescribe conditions under which an action may be maintained upon a stock
subscription, and where a matured stock subscription is unpaid, none of the provisions in Corporation Law can be
permitted to obstruct the action to recover thereon. By virtue of section 36 of the Insolvency Law the assignee of the
insolvent corporation succeeds to all the corporate rights of action vested in the corporation prior to its insolvency; and the
assignee therefore has the same freedom to sue upon the stock subscription as the directors themselves would have.

Also SC said that plaintiff must prevail in this action even if there is a failure of the directors to comply with the
requirements of sections 38 to 48 of the Corporation Law. Because when a corporation becomes insolvent and the court
assumes jurisdiction to wind up, all unpaid stock subscriptions become payable on demand, and are at once recoverable in
an action instituted by the assignee or receiver appointed by the court.

The judgment of the lower court is therefore reversed, and judgment will be rendered in favor of the plaintiff and against
the defendant for the sum of P1,500, with interest from July 13, 1014, and costs of both instances. So ordered.
CASE LAW/ DOCTRINE:

When a corporation becomes insolvent and the court assumes jurisdiction to wind up, all unpaid stock subscriptions
become payable on demand, and are at once recoverable in an action instituted by the assignee or receiver appointed by the
court.
DISSENTING/CONCURRING OPINION(S):

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178 LINGAYEN GULF ELECTRIC POWER, INC. v AUTHOR: Castro

BALTAZAR NOTES:
[No. L-4824. June 30, 1953] The corporation filed an action against Baltazar to collect
TOPIC: Court action (How payment of shares enforced) his unpaid subscription.
PONENTE: Montemayor, J. (sorry sobrang detailed talaga)
FACTS:
Lingayen Gulf Electric Power Company is a domestic corporation with an authorized capital stock of P300,000
divided into 3,000 shares with a par value of P100 per share.

Irineo Baltazar (defendant) appears to have subscribed for 600 shares. [Upon organization of the corporation, he
paid P15,000, and after the incorporation, he made further payments.]

The corporation now seeks to collect from Baltazar the balance of the unpaid subscription in the amount of
P18,500.

On July 23, 1946, a majority of the stockholders, among them was Baltazar, adopted Resolution No. 17, which
provided the following: a) it was agreed upon to call the balance of all unpaid subscribed capital stock as of July
23, 1946, the first 50 per cent payable within 60 days beginning August 1, 1946, and the remaining 50 per cent
payable within 60 days beginning October 1, 1946; b) all unpaid subscription after the due dates of both calls
would be subject to 12 per cent interest per annum; c) after the expiration of 60 days' grace which would be on
December 1, 1946 for the first call, and on February 1, 1947 for the second call, all subscribed stocks remaining
unpaid would revert to the corporation.

The corporation wrote to Baltazar reminding him that the first 50% of his unpaid subscription will be due on Oct.
1, 1946.

Baltazar wrote 2 letters: first, asking the corporation that he be allowed to pay his unpaid subscription by February
1, 1947, and that if he could not pay by that time, his unpaid subscription would be reverted to the corporation;
second, offering to withdraw completely from the corporation by selling out to the corporation all his shares of
stock in the total amount of P23,000. The offer of the defendant was left unacted upon by the corporation.

On April 17, 1948, the Board of Directors held a meeting and adopted Resolution No. 17.
Contents of the resolution:
a) The Board set aside the stockholders’ resolution approved on July 23, on the ground that said stockholders'
resolution was null and void; and because the plaintiff corporation was not in a financial position to absorb
the unpaid balance of the subscribed capital stock.
b) The directors decided to call 50 per cent of the unpaid subscription within 30 days from April 17, 1948, the
call payable within 60 days from receipt of notice from the Secretary-Treasurer. (Call for Unpaid
subscriptions)
c) The resolution authorized the legal counsel of the company to take all the necessary legal steps for the
collection of the payment of the call.

The call for the payment of unpaid subscriptions was not published in a newspaper of general circulation as
required by section 40 of the Corporation Law.

On June 10, 1949, the stockholders of the corporation held another meeting in which all stockholders were present
and adopted Resolution No. 4, where it was agreed to revalue the stocks and assets of the company so as to
attract outside investors to put in money for the rehabilitation of the company. The president was authorized to
make all arrangement for such appraisal and the Secretary to call a meeting upon completion of the reassessment.

On September 28, 1949, the legal counsel of the corporation wrote to Baltazar, demanding the payment of the
unpaid balance of his subscription amounting to P18,500.

Baltazar ignored the demand, hence this action.

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Lower Court: the call for payment was null and void for lack of publication and the resolution was null and void in so far
as it tried to relieve the defendant from liability on his unpaid subscription, on the ground that the resolution was not
approved by all the stockholders of the corporation.

ISSUES:
1. Whether call of the Board of the Directors for payment was valid?
2. Is Baltazar released from the obligation of the unpaid balance of his subscription by virtue of stockholders’
resolutions No. 17 and 4?
HELD:
1. No. The call for payment is void for lack of publication.
2. No. The release claimed by Baltazar does not fall under the exception to the rule that a subscription may not be
cancelled so as to release a subscriber from liability.

RATIO:
1st issue (Whether the call for payment was valid - No)

The Court agrees with the lower court that the law requires that notice of any call for the payment of unpaid
subscription should be made not only personally but also by publication. Section 40 of the Corporation Law, Act No.
1459, as amended, provides:
"Notice of call for unpaid subscriptions must be either personally served upon each stockholder or deposited in the post-
office, postage prepaid, addressed to him at his place of residence, if known, and if not known, addressed to the place
where the principal office of the corporation is situated. The notice must also be published once a week for four successive
weeks hi some newspaper of general circulation devoted to the publication of general news published at the place where
the principal office of the corporation is established or located, and posted in some prominent place at the works of the
corporation if any such there he if there be no newspaper published at the place where the principal office of the
corporation is established or located, then such notice may be published in any newspaper of general news in the
Philippines."

Publication is mandatory not only to assure notice to all subscribers, but also to assure equality and uniformity in the
assessment on stock-holders.This rule is supported by the different authorities on Corporation law.

The case of Velasco v. Poizat does not apply. In the case of Velasco vs. Poizat, the corporation involved was insolvent, in
which case all unpaid stock subscriptions become payable on demand and are immediately recoverable in an action
instituted by the assignee. In this case, the corporation was solvent.

2nd issue (Whether Baltazar was released from the obligation to pay for his unpaid subscription - No)

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In order to effect the release, there must be unanimous consent of the stockholders of the corporation.

General rule: A valid and binding subscription for stock of a corporation cannot be cancelled so as to release the
subscriber from liability without the consent of all the stockholders or subscribers. Furthermore, a subscription cannot be
cancelled by the company, even under a secret or collateral agreement for cancellation made with the subscriber at the time
of the subscription, as against persons who subsequently subscribed or purchased without notice of such agreement.

Exception: Where it is given pursuant to a bona fide compromise, or to set off a debt due from the corporation, a release,
supported by consideration, will be effectual as against dissenting stockholders and subsequent and existing creditors. A
release which might originally have been held invalid may be sustained after a considerable lapse of time.

In the present case, the release claimed by Baltazar does not fall under the exception because it was not given pursuant to a
bona fide compromise, or to set off a debt due from the corporation, and there was no consideration for it.

In addition, the release attempted in Resolution No. 17 of 1946 was not valid for lack of a unanimous vote. It found that at
least seven stockholders were absent from the meeting when the resolution was approved.

CASE LAW/ DOCTRINE:

Payment of an unpaid subscription may be enforced through a court action. As a general rule, there must be unanimous
consent of the stockholders of the corporation to release a stockholder from his stock subscription. The exception is if the
release was given pursuant to a bona fide compromise, or to set off a debt due from the corporation.

179 Miranda v. Tarlac Rice Mill Co. Inc. AUTHOR: Miguel M. Consing
[G.R. No. 35961; December 2, 1932] NOTES:
TOPIC: How Payment of Shares are Enforced; Court Alberto Miranda died before this action was instituted. The
Action petitioner is his daughter acting as the administratrix of his
PONENTE: Vickers, J. estate.
FACTS:
On June 8, 1926 Alberto Miranda executed a written contract whereby he subscribed for 100 shares of the capital
stock of a corporation to be known as Tarlac Rice Mill Co. Inc. (Tarlac)

The par value of each share was P100. Alberto Miranda obligated himself to pay the sum of P10,000 as follows:
On or before September 21, 1926 P1,000.00
On or before January 21, 1927 2,000.00
On or before January 21, 1928 2,000.00
On or before January 21, 1929 2,500.00
On or before January 21, 1930 2,500.00

On July 10, 1926, Alberto Miranda assigned a parcel of land instead of cash for the benefit and to the credit of Tarlac.

He appointed the officers of Tarlac as his attorneys-in-fact and explicitly gave them the power to transfer, mortgage,
or convey the land for a sum not to exceed P10,000.

Tarlac then borrowed P10,000 from Mariano Tablante evidenced by a promissory note. As a security for the loan, the
said land was mortgaged to Tablante.

When the note became due, the land was sold pacto de retro to Vicente Panlilio for P10,000, and the proceeds were
used to pay Mariano Tablante.

Tarlac ceased to do business from the year 1928. Alberto Miranda died in 1930.

The Petitioner now contends that the officers of the corporation violated the terms of the power of attorney in
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mortgaging the land on February 19, 1927 for P10,000, because the only sum then due and payable by Alberto
Miranda to the corporation was P3,000. And that when the remaining instalments of the stock subscription became
due, Alberto Miranda was under no obligation to pay them, because the corporation had already ceased to do
business; it had also taken no steps to compel the other stockholders to pay for the shares for which they had
subscribed.

ISSUE(S):
1. Did the officers of the corporation violate the terms of the power of attorney when they mortgaged the land for
P10,000 when only P3,000 was due?
2. Is it necessary for the directors or stockholders to make a demand for the payment of subscriptions of stock?
3. Was Alberto Miranda still liable to pay for his subscriptions even after Tarlac ceased to operate?
HELD/RATIO:
1. No. The fact that Alberto Miranda agreed on June 8, 1926 to pay the amount of his subscription installments on
certain fixed dates did not prevent him from authorizing the officers of the corporation as his attorneys-in-fact to
pay his subscription prior to the dates fixed in the subscription agreement. It must be noted that the power of
attorney explicitly provided that the power to convey and mortgage the property was for the payment of the
subscriptions or for the purpose of raising the capital of the corporation.

Hence, the Court held that it was the intention of the parties that the property should be mortgaged immediately for
a sum not to exceed P10,000, not only for the purpose of paying the subscription agreement of Alberto Miranda,
but also for the purpose, as stated in the power of attorney, of increasing the capital of the corporation.

2. No. There is no need for a demand from the directors or stockholders to demand for payment of subscriptions. It is
the duty of the subscribers to pay the subscription as soon as it becomes due.

3. Yes. The facts have clearly shown that Alberto Miranda did not cancel his subscription agreement, or that the
corporation attempted to release him. Thus Alberto Miranda was deemed to have acquiesced to the actions of the
corporation following their agreement with one another as to the subscriptions.

180 Da Silva vs. Aboitiz AUTHOR: Dayos

44 PHIL. 755 (1923) NOTES:
TOPIC: How payment of shares enforced
PONENTE: Araullo, C.J.
FACTS:
Arnaldo Da Silva, plaintiff, subscribed for 650 shares (php500 each) of stock with Aboitiz, of which he has only paid
200, for which he was indebted in the sum of php225,000.
Thereafter, he was notified by the corporate secretary of a resolution by the board of directors declaring that unpaid
subscriptions to the capital stock to have become due on May 31 st, will be declared delinquent, advertised for public
sale for auction, and sold on the following June 16th, for the purpose of paying up the amount of the subscription.
After failing to tender his payment, and upon advertisement of the stock, Da Silva filed a complaint in the CFI of
Cebu asking for a writ of injunction to the following acts of the corporation:
1. Corporation prescribing another method of payment different from that provided in article 46 of its by-laws
according to aforesaid article 46 of the by-law of the corporation, which was inserted in the complaint, all
the shares subscribed to by the incorporation that were not paid for at the time of the incorporation, shall
be paid out of the 70 per cent of the profit obtained, the same to be distributed among the subscribers, who
shall not receive any dividend until said shares were paid in full

2. Declaring the aforesaid 450 shares delinquent

defendant corporation has violated the aforesaid article, which prescribes an operative method of paying
for the shares continuously until their full amortization, thus violating and disregarding a right of the
plaintiff vested under the said by-laws;

3. In directing the sale thereof, as advertised, the corporation exceeded its executive authority

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acts of the defendant corporation were in excess of its powers and executive authority and the plaintiff had
no other plain, speedy and adequate remedy in the ordinary course of law than that prayed for in the said
complaint, to prevent the defendant from taking any further action in connection with the sale and
alienation of the said shares
CFI: issued a preliminary injunction
Defendant then files for a demurrer on evidence contending that the facts alleged did not constitute a cause of action
CFI: sustained the demurrer, plaintiff having failed to amend his complaint; ordered dissolution of the injunction
Da Silva asked for a new trial but was subsequently denied by the lower court. Hence, appeal

ISSUE(S): Whether or not, under the provision of article 46 of the by-laws of the defendant corporation, the latter may
declare the unpaid shares delinquent, or collect their value by another method different from that prescribed in the
aforecited article.

HELD: YES

RATIO:

Sec 46 (summary): net profit resulting from the annual liquidation shall be distributed as follows: 10% BOD, 10% GM,
10% reserve fund, 70% shareholders in equal parts – from this 70%, BOD may deduct such amount of unpaid subscription
as payment to the capital stock. When all shares have been paid in full, BOD may deduct such amount for the creation of
an emergency special fund, or extraordinary reserve fund when in its judgment the same may convenient for the
development of the business of the corporation. Whenever the distributable dividend is found, after the foregoing
deduction, it should not be less than ten per cent (10%) of the paid up capital stock.

It is discretionary on the part of the board of directors to do whatever is provided in the said article relative to the
application of a part of the 70 per cent of the profit distributable in equal parts on the payment of the shares subscribed to
and not fully paid, and to the creation of a special emergency fund or extraordinary reserve fund.

The fact that special fund may not be created when distributable dividend, after deducting from 70% the amount to be
applied for payment or for emergency fund, is less than 10% of the capital actually paid, shows that the discretion whether
or not such value must be paid out of a part of the 70% of the profit lies with the BOD.

If the board of directors does not wish to make, or does not make, use of said authority it has two other remedies for
accomplishing the same purpose.

1. Special remedy of permitting the corporation to put the unpaid stock for sale and dispose of it for the account of the
delinquent subscriber.(Secs 38-40 of Corp. Law)

2. Court Action (Sec 49)

In this case, Abotiz made use of the first remedy. Aboitiz’s BOD made use of the discretionary power granted to it by that
law. No rights are vested with the stockholders of the corporation. It is upon the discretionary powers of the Board of
Directors, as conferred to them by the Corporation Law.

CASE LAW/ DOCTRINE:

DISSENTING/CONCURRING OPINION(S):

181 National Exchange vs. Dexter AUTHOR: De Leon

[G.R. No. DATE] G.R. No. L-27872 February 25, 1928
TOPIC: How Payment of Shares Enforced
PONENTE: STREET, J.
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FACTS:
Dexter subscribed to 300 shares. The subscription contract provided that the shares will be paid solely from the
dividends.

Upon this subscription the sum of P15, 000 was paid in January, 1920, from a dividend declared at about that time
by the company, supplemented by money supplied personally by the subscriber. Beyond this nothing has been paid on the
shares and no further dividend has been declared by the corporation. There is therefore a balance of P15, 000 still paid
upon the subscription.

Company became insolvent. Assignee in insolvency sued Dexter for the balance. Dexter's defense was that under the
contract, payment would come from the dividends. Without dividends, he cannot be obligated to pay.

ISSUE(S): WON the stipulation contained in the subscription to the effect that the subscription is payable from the first
dividends declared on the shares has the effect of relieving the subscriber from personal liability in an action to recover the
value of the shares.

HELD: No

RATIO:
The Court held that the subscription contract was void since it works a fraud on creditors who rely on the
theoretical capital of the company (subscribed shares). Under the contract, this theoretical value will never be realized
since if there are no dividends, stockholders will not be compelled to pay the balance of their subscriptions.

A corporation has no power to receive a subscription upon such terms as will operate as a fraud upon the other
subscribers or stockholders by subjecting the particular subscriber to lighter burdens, or by giving him greater
rights and privileges, or as a fraud upon creditors of the corporation by withdrawing or decreasing the capital.

Philippine Commission inserted in the Corporation Law, enacted March 1, 1906, the following provision: ". . . no
corporation shall issue stock or bonds except in exchange for actual cash paid to the corporation or for property actually
received by it at a fair valuation equal to the par value of the stock or bonds so issued."

The prohibition against the issuance of shares by corporations except for actual cash to the par value of the stock to its full
equivalent in property is thus enshrined in both the organic and statutory law of the Philippine; Islands. Now, if it is
unlawful to issue stock otherwise than as stated it is self-evident that a stipulation such as that now under consideration, in
a stock subscription, is illegal, for this stipulation obligates the subscriber to pay nothing for the shares except as dividends
may accrue upon the stock. In the contingency that dividends are not paid, there is no liability at all. This is a
discrimination in favor of the particular subscriber, and hence the stipulation is unlawful.

The law in force in this jurisdiction makes no distinction, in respect to the liability of the subscriber, between shares
subscribed before incorporation is effected and shares subscribed thereafter. All like are bound to pay full value in cash or
its equivalent, and any attempt to discriminate in favor of one subscriber by relieving him of this liability wholly or in part
is forbidden. This is in reference primarily to subscriptions to shares that have not been previously issued. The power of
the corporation to make terms with the purchaser would be greater where the shares which are the subject of the
transaction have been acquired by the corporation in course of commerce, after they have already been once issued. But the
shares in this case are not of this sort.
CASE LAW/ DOCTRINE:

DISSENTING/CONCURRING OPINION(S):

182. CASE: LUMANLAN V CURA AUTHOR: DELFIN, K.

NOTES:
TOPIC: HOW PAYMENT OF SHARES ENFORCED Short case pero mejo magulo na madali lang.
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PONENTE: GODDARD, J. Nag go under yung corporation where Lumanlan has stocks,
di nya pa bayad in full yung subscribed stocks nya so when it
was under receivership, the receiver filed a case for
collection which they won. After that, may agreement na
yung shareholders na lang magbabayad sa mga creditors nila
and the payment will be credited against sa balance on the
unpaid shares. Yung company still excecuted the judgment
for the whole amount. Sabi ng court, bawal and the amount
Lumanlan paid to the creditor Valenzuela should be credited.

EMERGENCY RECIT:

FACTS:
This is an appeal from a decision of the Court of First Instance of Tarlac, The appellant is corporation duly
organized under the laws of the Philippine Islands with its central office in the City of Manila. The plaintiff-
appellee Bonifacio Lumanlan, subscribed for 300 shares of stock of said corporation at a par value of P50 or a
total of P15,000.
Valenzuela, Pedro Santos and Francisco Escoto, creditors of this corporation, filed suit against the corporation
praying that a receiver be appointed, however at that time the corporation had no assets except credits against
those who had subscribed for shares of stock.
Since Bonifacio Lumanlan had only paid P1,500 of the P15,000, par value of the stock for which he subscribed,
the receiver on August 30, 1930, filed a suit against him for the collection of P15,109, P13,500 of which was the
amount he owed for unpaid stock and P1,609 for loans and advances by the corporation to Lumanlan.
CFI Manila sentenced Lumanlan to pay the corporation.
Lumanlan appealed from this decision. Pending this appeal, with the permission of the court, the creditors, some
of the directors and the majority of the stockholders held several meetings whey they agreed that subscribers for
the capital stock who were in default should pay the creditors.
Lumanlan was designated to pay the debt of the corporation to Julio Valenzuela, P8000 which is what it owed plus
the interest (12% per annum). Lumanlan agreed to assume this obligation and in turn the corporation agreed that if
Lumanlan would dismiss his appeal and the corporation would collect only 50 per cent of the amount subscribed
by him for stock, and if it was insufficient to pay Valenzuela he should pay an additional amount which should not
exceed the amount of the judgment against him in that case.
Lumanlan withdrew his appeal and paid Valenzuela the sum of P11,840 including interest and thereby was
subrogated in place of Valenzuela. The petitioning creditors having been paid the amounts owed to them by the
corporation asked that the receiver be dismissed and the court granted this.
Disregarding this agreement and notwithstanding the payment made by Lumanlan to Valenzuela, the corporation
on asked for the execution of the sentence in the first case and by virtue of an order of execution the provincial
sheriff levied upon two parcels of land belonging to Lumanlan.
Lumanlan brought the present action against the corporation, Dizon & Co., to prevent the sheriff from selling the
two parcel of lands.

ISSUE:
Whether or not the agreement entitles Lumanlan to credit from the judgment in the first case for having paid the
creditor of the company of its obligation?

HELD:
Yes, the payment of Lumanlan of the obligation of the company to its creditor Valenzuela is considered
fulfillment of his payment of the unpaid shares and should be credited from the judgment on the first case.

RATIO:
It is established doctrine that subscriptions to the capital of a corporation constitute a fund to which the 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.

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Corporation Law clearly recognizes that a stock subscription is a subsisting liability from the time the subscription
is made, since it requires the subscriber to pay interest quarterly from that date unless he is relieved from such
liability by the by-laws of the corporation. The subscriber is as much bound to pay the amount of the share
subscribed by him as he would be to pay any other debt, and the right of the company to demand payment is no
less incontestable.
By virtue of these facts Lumanlan is entitled to a credit against the judgment in case No. 37492 for P11,840 and an
additional sum of P2,000, which is 25 per cent on the principal debt, as he had to file this suit to collect, or receive
credit for the sum which he had paid Valenzuela for and in place of the corporation, or a total of P13,840. This
leaves a balance due Dizon & co., Inc., of P1,269 on that judgment with interest thereon at 6 per cent per annum
from August 30, 1930. Upon payment of such balance, Lumanlan should be issues 300 shares of its capital stock.

CASE LAW/DOCTRINE:
The Corporation Law clearly recognizes that a stock subscription is a subsisting liability from the time the
subscription is made, since it requires the subscriber to pay interest quarterly from that date unless he is relieved
from such liability by the by-laws of the corporation. The subscriber is as much bound to pay the amount of the
share subscribed by him as he would be to pay any other debt, and the right of the company to demand payment is
no less incontestable.

DISSENTING/CONCURRING OPINION(S):

183 Fua Cun vs Summers (as Sheriff) and China AUTHOR: Enriquez
Banking Corporation (CBC) NOTES:
March 27, 1923
TOPIC: Rights and Obligations of Holders of Unpaid but
Non-delinquent Stock
PONENTE:
FACTS:
Chua Soco subscribed to 500 shares of stock in China Banking Corporation (CBC), at par value of P100, and paying
P25,000 which is equal to half of the subscription price.
To secure a promissory note for the sum of P25,000, Chua Soco mortgaged the said shares in favor of Petitioner Fua
Cun
For dishonored acceptances of commercial paper, Chua Soco also became indebted to the CBC
Hence, Chua Soco's interest in the 500 shares were attached and levied upon to satisfy his debt with CBC
This prompted Petitioner Fua Cun to file an action on the ground that he was owner of 250 shares by virtue of Chua
Soco's payment of half of the subscription price:
o To have himself declared to hold priority over the claim of CBC,
o To have the receipt for the shares delivered to him, and
o To be awarded damages for wrongful attachment
Lower court held that by virtue of the payment of half of the purchase price, Chua Soco owned and subsequently
transferred 250 shares to Petitioner Fua Cun.
ISSUE(S): Whether partial payment of the subscription price makes the stockholder owner of the subscribed shares

HELD: No.

RATIO:
The SC held that payment of half the subscription price does not make the holder of stock the owner of half the
subscribed shares.
Petitioner Fua Cun’s rights consist in an equity in 500 shares and only upon payment of the unpaid portion of the
subscription price he becomes entitled to the issuance of certificate for the said 500 shares in his favor.
CASE LAW/ DOCTRINE:

Partial payment does not entitle the stockholder to the issuance of a certificate for the number of shares to which the
amount paid may correspond.

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DISSENTING/CONCURRING OPINION(S):

184 Baltazar vs. Lingayen Gulf Electic Power Co., Inc. AUTHOR: Garcia
[G.R. No. L-16236 June 30, 1965] NOTES: Chainsmokers
TOPIC: Rights and Obligations of Holders of Unpaid but
Non-delinquent Stock
PONENTE: Paredes, J.
FACTS:
Irineo S. Baltazar filed the complaint against Lingayen Gulf Electric Power Co., Inc. (Corporation).
The Corporation has an authorized capital stock of P300,00.00 divided into 3,000 shares of voting stock at P100.00
par value, per share.
Baltazar is among the incorporators taking it slow like it so typical and subscribed to 600 shares of the capital stocks.
He said that “we can be beautiful.”
It is alleged that it has always been the practice and procedure of the Corporation to issue certificates of stock to its
individual subscribers for unpaid shares of stock (Tuntununun) (tanan tanan) say you’ll never let me go.
Of the 600 shares of capital stock subscribed by Baltazar, he had fully paid 535 shares of stock, and the Corporation
issued to him several fully paid-up and non-assessable certificates of stock, corresponding to the 535 shares. After
having made transfers to third persons and acquired new ones, Baltazard had 341 shares fully paid and non-
assessable.
4 members of the Board of Directors were elected – 2 representing the Ungson Group (majority stockholders) 2
representing the Baltazar group.
The Ungson group in order to continue retaining such control, over the objection of three majority members of the
Board, passed 3 resolutions. On the authority of these resolutions, the Ungson group was threatening and procuring to
‘expel and oust the plaintiffs and their companion stockholders, for the ultimate purpose of depriving them of their
right to vote in the annual stockholders’ meeting.
“Any and all shares of stock of the Corporation issued as fully paid-up to stockholders whose subscription to
a number of shares has been declared delinquent with the accrued interest on the unpaid thereof per
Resolution No. 42 S. 1954, of the Board of Directors…, are hereby incapacitated to utilize or avail of the
voting power until such delinquency with the accrued interest is fully paid-up…”
There are a lot of cases and motions for reconsideration filed by Baltazar. Ultimately, he filed a petition for immediate
execution and for preliminary injunction and/or mandamus, praying that a writ be issued, ordering the defendants, as
controlling majority of hold-over board of directors, to hold immediately the long delayed stockholders’ meeting, and
to allow the plaintiffs and all the stockholders, with still unpaid subscriptions, to vote all their stocks and
subscriptions at said stockholders’ meeting, as directed in the decision.
Court: Regarding the right to vote, agrees with the corporation that the facts considered during the negotiations for
settlement do not warrant repeal of the declaration of delinquency and complete restoration of voting rights until full
payment of the unpaid stock subscriptions and interest.
ISSUE(S):
Are the plaintiffs and all the stockholders, with still unpaid subscriptions, allowed to vote all their stocks
and subscription at a stockholders’ meeting
HELD:
No.
RATIO:
The cases at bar do not come under the aegis of the principle enunciated in the Fua Cun v. Summers case, because
it was the practice and procedure, since the inception of the corporation, to issue certificates of stock to its
individual subscribers for unpaid shares of stocks and gave voting power to shares of stock fully paid.
Section 37 of the Corporation Law:
No certificate of stock shall be issued to a subscriber as fully paid up until the full par value thereof, or the full
subscription in the case of no par stock, has been paid by him to the corporation. Subscribed shares not fully paid
up may be voted provided no subscription is unpaid and delinquent.
The present law requires as a condition before a shareholder can vote his shares, that his full subscription be paid
in the case of no par value stock; and in the case of stock corporation with par value, the stockholder can vote the
shares fully paid by him only, irrespective of the unpaid delinquent shares.

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In the present case, the defendant-corporation had applied the payments made by the stockholders to the
full par value of the shares of stock subscribed by them, instead of the accrued interest, as shown by the
capital stock shares certificate issued for the payments made, and the stockholders had accepted such
certificates issued for such payments. The Corporation Law and the by-laws of the Corporation do not contain
any provision, prohibiting the applicant of stockholders’ payments to the full par value of a corporation’s capital
stock, ahead of the payment of accrued interest for unpaid subscription.
A corporation may, upon request of an interested stockholder, as his option, apply payments by them to the
full par value of shares of capital stock subscribed, leaving its collection later of the accrued interest on
unpaid subscriptions, and that once such option has been exercised and the corresponding stock certificates
have been issued, the corporation cannot, by a unilateral act, legally nullify and cancel the capital stock
certificates so issued.
CASE LAW/ DOCTRINE:
DISSENTING/CONCURRING OPINION(S):

185 Nava v. Peers Marketing Corp AUTHOR: Magsino

[G.R. No. L-28120 November 25, 1976] NOTES:
TOPIC: Rights and Obligations of Holders of Unpaid but Please check the full text for Nava’s argument on the basis
Non-delinquent Stock of the Balthazar case and why the Court found that it didn’t
PONENTE: Aquino, J. apply.
FACTS:
Teofilo Po, as an incorporator, subscribed to 80 shares of Peers Marketing Corporation (Peers) at P100 a share for a
total par value of P8000. Po paid P2000 (25%) of the amount of his subscription. No certificate of stock was issued to
him.

Po sold 20 of his eighty shares to Nava for P2000. In the deed of sale, Po stated that he was "the absolute and
registered owner of twenty shares" of Peers.

Nava requested the officers of the corporation to register the sale in their books. This was denied because Po has not
paid fully the amount of his subscription.

Nava was informed that Po was delinquent in the payment of the balance due on his subscription and that the
corporation had a claim on his entire subscription of 80 shares which included the 20 that had been sold to Nava.

Nava then filed a petition for mandamus to compel the corporation to register the 20 shares he bought from Po in their
books.
ISSUE(S):
Can the officers of Peers be compelled by mandamus to register the 20 shares Nava bought from Po?
HELD/RATIO:
No. The Court held that the transfer made by Po to Nava is not the "alienation, sale, or transfer of stock" that is supposed to
be recorded in the stock and transfer book, as contemplated in section 52 of the Corporation Law. As a rule, the shares
which may be alienated are those which are covered by certificates of stock, as shown in the Corporation Law and ruled on
in previous cases.

As prescribed in Section 35, shares of stock may be transferred by delivery to the transferee of the certificate properly
indorsed. There should be compliance with the mode of transfer prescribed by law. The usual practice is for the
stockholder to sign the form on the back of the stock certificate. The certificate may then be transferred from one person to
another. Then he delivers the certificate to the secretary of the corporation so that the transfer may be entered in the
corporation's books. The certificate is then surrendered and a new one issued to the transferee.

That procedure cannot be followed in this case because the 20 shares in question are not covered by any certificate of stock
in Po's name. Moreover, the corporation has a claim on the said shares for the unpaid balance of Po's subscription.

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In this case no stock certificate was issued to Po. Without stock certificate, which is the evidence of ownership of corporate
stock, the assignment of corporate shares is effective only between the parties to the transaction.

CASE LAW/ DOCTRINE:

The delivery of the stock certificate, which represents the shares to be alienated, is essential for the protection of both the
corporation and its stockholders.

186 Nielson & Company, Inc. v. Lepanto Consolidated AUTHOR: Mendoza

Mining Company NOTES: 1.This is an MR filed by Nielson to the SC when
[G.R. No. DATE]L-21601, December 28, 1968 the latter denied his petition in the December 17 case.
TOPIC: Form of Dividends and Stock Dividends 2. Lepanto 9 grounds in his MR but only
PONENTE: J.Zaldivar the '7th' grounds is relevant.

FACTS:
1.The suit involves an operating agreement executed before World War II between the Nielson and the Lepanto
Consolidated whereby the former operated and managed the mining properties owned by the latter for a management
fee of P2,500.00 a month and a 10% participation in the net profits resulting from the operation of the mining
properties. The contract in question was made by the parties on January 30, 1937 for a period
of 5 years. In the latter part of 1941, the parties agreed to renew the contract for another period of five (5) years, but in
the meantime, the Pacific War broke out in December, 1941.
2.In January, 1942 operation of the mining properties was disrupted on account of the war. In February of 1942, the
mill, power plant, supplies on hand, equipment, concentrates on hand and mines, were destroyed upon orders of the
United States Army, to prevent their utilization by the invading Japanese Army. The Japanese forces thereafter
occupied the mining properties, operated the mines during the continuance of the war, and who were ousted from the
mining properties only in August of 1945.

After the mining properties were liberated from the Japanese forces, Lepanto took possession and embarked in
rebuilding and reconstructing the mines and mill; setting up new organization; clearing the mill site; repairing the
mines; erecting staff quarters and bodegas and repairing existing structures; installing new machinery and equipment;
repairing roads and maintaining the same; salvaging equipment and storing the same within the bodegas; doing police
work necessary to take care of the materials and equipment recovered; repairing and renewing the water system; and
remembering. On June 26, 1948 the mines resumed operation under the exclusive management of Lepanto.

3.Shortly after the mines were liberated from the Japanese invaders in 1945, a disagreement arose between NIELSON
and LEPANTO over the status of the operating contract in question which as renewed expired in 1947. Under the
terms thereof, the management contract shall remain in suspense in case fortuitous event or force majeure, such as war
or civil commotion, adversely affects the work of mining and milling.

Nielson held the view that, on account of the war, the contract was suspended during the war; hence the life of the
contract should be considered extended for such time of the period of suspension. On the other hand, Lepanto
contended that the contract should expire in 1947 as originally agreed upon because the period of suspension accorded
by virtue of the war did not operate to extend further the life of the contract.No understanding appeared from the
record to have been bad by the parties to resolve the disagreement. In the meantime, Lepanto rebuilt and reconstructed
the mines and was able to bring the property into operation only in June of 1948,..
When the SC ruled against Nielson in the December 17 case, he filed this MR citing 9 grounds: 1. The court failed to
apply the proper law to the contract; 2.the court erred in holding that the contract was suspended; 3. that it erred when
ruled that the management contract was only but not extended; 4. That Petiioner Nielson's action has prescribed; 5. it
erred in holding that the period of suspension of contract lasted from Feb 1942- June 26 1948 because of World War
II; 6. it erred on amount of awarded damages; 7. Assuming Nielson is entitled to any relief,the court erred in
ordering Lepanto to issue and deliver to Nielson shares of stock together with fruits thereof; 8. it erred in
awarding Nielson and undetermined amount of shares of stock; and 9.erred in rendering judgment for attorney's fees.
In its motion for reconsideration, Lepanto contends that the payment to Nielson of stock dividends as compensation
for its services under the management contract is a violation of the Corporation Law, and that it was not, and it could

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not be, the intention of Lepanto and Nielson — as contracting parties — that the services of Nielson should be paid in
shares of stock taken out of stock dividends declared by Lepanto.

ISSUE(S):
WON Lepanto is under the obligation to issue and deliver shares of stock to Nielson as the latters compensation.
HELD:
SC sustained Lepanto's contention that Nielson enttiled to P300,000 in cash (not stocks) as payment for its services,
which is equivalent to 10% of the money value of the stock dividends worth P3,000,000 which were declared on
November 28,1949 and August 20,1950, with interest at the rate of 6% from Feb 6,1958.

RATIO:
That under Section 16 of the Corporation Law stock dividends can not be issued to a person who is not a
stockholder in payment of services rendered. That Nielson can not be paid in shares of stock which form part of
the stock dividends of Lepanto for services it rendered under the management contract.
That the understanding between Lepanto and Nielson was simply to make the cash of the value of the stock
dividends declared as the basis for determining the amount of compensation that should be paid to Nielson which
amounted to 10% percent of the cash value of the stock dividends declared.

3.According to their contract as included in one of their sentence that,

"The Chairman stated that he believed that it would be better to tie the computation of the
10% participation of Nielson & Company, Inc., to the dividend, because Nielson will
then be able to definitely compute its net participation by the amount of the dividends
declared" The idea is conveyed that the intention of Lepanto, as expressed by its Chairman
C. A. DeWitt, was to make the value of the dividends declared — whether the dividends were in cash or in
stock — as the basis for determining the amount of compensation that should be paid to Nielson, in the
proportion of 10% of the cash value of the dividends so declared.
It does not mean, however, that the compensation of Nielson would be taken from the amount actually
declared as cash dividend to be distributed to the stockholder, nor from the shares of stocks to be issued to
the stockholders as stock dividends, but from the other assets or funds of the corporation which are not
burdened by the dividends thus declared.
CASE LAW/ DOCTRINE:
1.Section 16 of the Corporation Law, the consideration for which shares of stock may be issued are: (1) cash; (2) property;
and (3) undistributed profits. Shares of stock are given the special name "stock dividends" only if they are issued in lieu of
undistributed profits. If shares of stocks are issued in exchange of cash or property then those shares do not fall under the
category of "stock dividends". A corporation may legally issue shares of stock in consideration of services rendered to it by
a person not a stockholder, or in payment of its indebtedness. A share of stock issued to pay for services rendered is
equivalent to a stock issued in exchange of property, because services is equivalent to property.
Likewise a share of stock issued in payment of indebtedness is equivalent
to issuing a stock in exchange for cash. But a share of stock thus issued should be part of the original capital stock of the
corporation upon its organization, or part of the stocks issued when the increase of the capitalization of a corporation is
properly authorized. Those shares of stock may be issued to a person who is not a stockholder, or to a person already
a stockholder in exchange for services rendered or for cash or property. But a share of stock coming from stock
dividends declared cannot be issued to one who is not a stockholder of a corporation.

2.A "stock dividend" is any dividend payable in shares of stock of the corporation declaring or authorizing such dividend.
It is, what the term itself implies, a distribution of the shares of stock of the corporation among the stockholders as
dividends. A stock dividend of a corporation is a dividend paid in shares of stock instead of cash, and is properly
payable only out of surplus profits. So, a (stock dividend is actually two things: 1) a dividend, and (2) the enforced use
of the dividend money to purchase additional shares of stock at par. When a corporation issues stock dividends, it shows
that the corporation's accumulated profits have been capitalized instead of distributed to the stockholders or retained as
surplus available for distribution, in money or kind, should opportunity offer.

3.Thus, it is apparent that stock dividends are issued only to stockholders. This is so because only stockholders are entitled
to dividends. They are the only ones who have a right to a proportional share in that part of the surplus which is declared as
dividends.

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DISSENTING/CONCURRING OPINION(S):

187 BERKS BROADCASTING CO. V CRAUMER ET AUTHOR: PAGCALIWAGAN

AL NOTES: The corporation, now under the control of the new
356 Pa. 620 (Pa. 1947) shareholders, brought the present action to recover for its
TOPIC: Source of Dividends treasury the $13,000 which it alleged defendants had
PONENTE: Justice Horace Stern unlawfully declared and paid out as dividends.
FACTS:
1931 – 3 defendants, together with one Landis, incorporated and organized plaintiff company, Berks Broadcasting
Company, under the Corporation Act of 1874, for the purpose of constructing and operating a radio broadcasting
station in Reading.
The authorized capital stock was $100,000 consisting of 1,000 shares, each of a par value of $100, and stock in that
amount was issued to the 4 incorporators, who thereupon became the directors of the company.
According to the book entries of the corporation the stock was fully paid for by the receipt from each of the
shareholders $5,000 and by the fixing of a value of $80,000 upon an asset denominated “Franchise and Promotion
Expense.”
A year later, this (Franchise and Promotion Expense) was written off the books and in its place were substituted
entries:
1. $50K as an amount “Due on Unpaid Stock Subscriptions” – (each shareholder paid $4.2K reducing the item to
$23,300, then it was cancelled altogether and was replaced with the entry “Goodwill and Promo Expense”) and
2. Following “write-ups” or increases in the valuation of fixed assets of the company over and above the cost of
those assets less depreciation, totaling $30K
As of December 31, 1943 the balance sheet of the company showed assets in excess of the liabilities and the issued
capital stock in the amount of $2,545.94. However, the existence of that alleged surplus depended on the inclusion in
the assets of the “write-ups” of $26K which still remain on the balance sheet, for, if that amount were eliminated so
far from being a surplus there would then have been a deficiency to the extent of $23,545.06.
Directors sold their stock, and declared a series of dividends totaling $13K based on the earnings of the company of
$12K+ plus the “surplus.”
The corporation, now under the control of the new shareholders, sued the directors to recover the $13K which was
allegedly unlawfully declared and paid out as dividends

ISSUE(S): WON the declaration of dividends of the directors is unlawful.

HELD: YES.

RATIO:
One of the basic principles of corporation law is that the capital of a corporation must not be impaired in any manner,
except, of course, as such an impairment may involuntarily occur through losses resulting from the operation of the
company's business. It is illegal to declare and pay dividends from other than a surplus consisting of an excess in the value
of the assets over the aggregate of the liabilities and the issued capital stock. The object of this prohibition is to afford a
margin of protection for creditors in view of the limited liability of the shareholders, and also to protect the interest of the
shareholders themselves by preserving the capital so that the purposes for which the corporation was formed may be
carried out.

Surplus must be a bona fide and not an artificial or fictitious one; it must be founded upon actual earnings or profits and
not be dependent for its existence upon a theoretical estimate of an appreciation in the value of the company's assets. The
reason why a purely conjectural increase in valuations cannot be considered for the purpose of dividends is because such
re-appraisals, however apparently justified and accurate for the time being, are subject to market fluctuations, are merely
anticipatory of future profit, and may never be actually realized as an asset of the company.

"If any dividend shall be paid, or if any withdrawal or distribution of the corporate assets shall be made, except as provided

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in this act, the directors under whose administration the same were made, . . . [with an exception not here relevant] shall be
jointly and severally liable to the corporation in an amount equal to the amount of the unlawful dividend or the unlawful
withdrawal or distribution of assets." It is clear, therefore, from these express provisions that since the "write-ups" of
$26,000 represented an unrealized appreciation in value of the plaintiff company's fixed assets, their inclusion in
determining the existence of a surplus from which dividends might be declared was unlawful, and since, when eliminated,
there would be, not a surplus, but a revealed deficiency in capital, it would follow that the corporation is now entitled to
recover from these defendants the amount improperly distributed by them as dividends.

It is thus clear that since the “write-ups” of $26,000 represented an unrealized appreciation in the value of the fixed assets,
their inclusion in determining the existence of a surplus from which dividends might be declared was unlawful, and since
when eliminated there would be not a surplus, but a deficiency in capital.
CASE LAW/ DOCTRINE:
DISSENTING/CONCURRING OPINION(S):

188 Lich V United States Rubber Co. AUTHOR: REYES

[G.R. No. DATE] NOTES: I apologize in advance, long and meaty case,
TOPIC: refer to the original text for additional explanation of
PONENTE: the ruling.
FACTS:
US Rubber Company is a New Jersey organized corporation, it was originally incorporated in 1892 under
a particular act concerning corporations. Sophia Lich a holder of 300 shares of non-cumulative preferred
stock of the corporation.

YEAR ANNUAL NET EARNING DEFICIT

1935 $2, 231, 377.69 $25, 870, 402.67

1936 $10, 172, 484.46 $17, 204, 158.52

1937 $8, 607, 902.92 $10, 471, 626.89

The deficit, representing the accrued losses of prior years, existed in 1934 and was carried over into the
succeeding years, varying in each year only as to amount.

In each of the said years the annual net earnings were applied to the deficit, thereby effecting substantial
reductions.

There were no dividends declared on either the preferred or the common stock during the said fiscal

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years

In 1938, US rubber Co. in accordance with existing statutes, reconstructed its capital structure.

There was issued, in lieu of the outstanding common stock of no par value, common stock of the par
value of $10.

This reconstruction reduced the capital liability and created a capital surplus, which was applied to the
then existing deficit, resulting in its cancelation.

From 1938-1940, deficit having been cancelled, the annual net earnings for each of the said years were
productive of net profits and were available for the declaration and lawful payment of dividends; in each
of the said years dividends on the non-cumulative preferred stock were declared and paid in full. No
dividends, however, were declared on the common stock.

On March 5 1941, US Rubber declared a divided, which was payable on April 30 of the same year on
both the preferred and common stock.

The controversial declaration specifically contemplates payment from the net profits of the current and
year and from no other source of funds.

Plaintiff Sophia Lich sought to enjoin the dividends on the grounds that the established preference as to
dividends, to wit, priority of payment, extends not only to the current year, but to the prior years of 1935,
1936, and 1937, to the extent of the annual net earnings of the said years; and, that dividends may not be
paid on the common stock at this time until the dividends are paid on the preferred stock for the years in
question, either in full or in proportion to the annual net earnings of those years.

ISSUE(S): whether or not the right of the holders of non-cumulative preferred stock to share in the
undistributed net profits was lost on the passing of the fiscal year in which the net profits were earned.

HELD: Judgment in favor of the corporation, plaintiff’s motion to enjoin is dissolved.

RATIO:
The doctrine of the Cast Iron Pipe cases must be viewed in the light of the particular facts of those cases;
when so viewed it is apparent that it is limited in its application. The doctrine, based upon sound
equitable principles, is a departure from the general rule that the holders of non-cumulative preferred
stock lose with the close of the fiscal year all right in the undistributed net profits of that year.
It preserves to the holders of the non-cumulative preferred stock their right in the undivided net profits
withheld from them and retained in the business, but otherwise available for the payment of dividends.
The right to earned dividends is not extinguished upon the mere passing of the fiscal year. The doctrine,
however, cannot be extended by implication beyond its clear intendment.
It may be generally stated that as to the payment of dividends the holders of preferred stock are in no
better position than the holders of common stock except as to priority of payment.
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The payment of dividends on the preferred stock, both cumulative and non-cumulative, is subject to the
same statutory restrictions as the payment of dividends on the common stock. It is well established that
dividends on preferred stock are not payable absolutely and unconditionally, but only out of the sources
designated by the statute, to wit, "surplus" or "net profits."
When the doctrine is considered in the light of the statute and the foregoing principles, it is evident that
the right of the non-cumulative preferred stockholders is conditional upon: First, the accrual of net
profits, and, second, their retention in the business. It presupposes a source, to wit, net profits, from
which the dividends on the non-cumulative preferred stock may be lawfully paid, if the directors in their
discretion elect so to do. The doctrine presupposes the accrual of net profits, as distinguished from annual
net earnings, to which the non-cumulative preferred stockholders' inchoate right to earned dividends
attaches; this inchoate right continues beyond the fiscal year in which the net profits are actually earned,
and, upon distribution of the accrued net profits in a succeeding year, the inchoate right becomes
consummate and must be recognized.
CASE LAW/ DOCTRINE:
Dividends on non-cumulative preferred stock are payable only out of net profits and for the years in which said
net profits are actually earned.

The right to dividends is conditioned upon

1.accrual of net profits
2. retention in the business.

If the annual net earnings of a corporation are justifiably applied to legitimate corporation purposes, such as
payment of debts, reduction of deficits and restoration of impaired capital, the right of non-cumulative preferred
stockholders to the payments of dividends lost.

If they are applied against prior losses and thereby completely absorbed, there are no profits from which
dividends may be lawfully paid.
DISSENTING/CONCURRING OPINION(S):

189. KEOUGH v. ST. PAUL MILK Co. AUTHOR: S A Y O

NOTES:
TOPIC: Dividend Declaration
SOBRANG HIRAP. NAGFOCUS LANG AKO SA
DIVIDENDS

FACTS:

The business, assets, and liabilities of the partnership were exchanged for 597 shares of the St. Paul Milk
Company of $100 par value.
The 597 shares represent the only stock issued until the stock dividend in 1936.
In November 1930, the outstanding capital stock was reduced to $41,200 when the corporation purchased from PJ
Keough 185 of his shares.

The stockholders of St. Paul Milk Company instituted a suit against the corporation. The suit was brought for the
purpose of compelling the declaration of stock dividend.

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Petitioners argue that those in charge of corporate affairs are wrongfully and needlessly withholding profits
available and conspiring to retain them for their benefit and to the prejudice of the majority.

The surplus of the company for the year 1936 amounted to $ 435, 491.73.

ISSUE(S): WON the court may compel distribution of dividends

HELD: Generally NO (SEE DOCTRINE FOR QUALIFICATION)

RATIO:

The determination whether or not dividends should be declared is essentially a matter of internal management. It is
primarily for the corporate directors in their sound discretion to decide. But their powers are not unlimited and
judicial review should be secured when abuses contravening shareholder rights manifest themselves.
Ordinarily, courts will not compel a dividend unless the directors act fraudulently, unjustly, or unreasonably so as
to impair the rights of complaining stockholders to their just proportion of corporate profit. The mere fact that a
large corporate surplus exist is not enough to warrant equitable intervention. Ultimately, the test resolves itself into
an examination of the good faith and reasonableness of the policy of retaining that which otherwise is available for
dividends.
CASE LAW/ DOCTRINE:

The mere fact that a large corporate surplus exists is not enough to warrant equitable intervention; the test is good faith and
reasonableness of the policy of retaining the profits. However, where dividends are withheld for an unlawful purpose – to
deprive a SH of his right to a just proportion of the corporation's profit, the court may compel the corporation to declare
dividends.
DISSENTING/CONCURRING OPINION(S):

190 DODGE vs. FORD MOTOR CO. AUTHOR: SOLIS

[2004 Mich. 459, 170 N.W. 668 (1919)] NOTES:
TOPIC: Dividend Declaration
PONENTE:
FACTS:
Stockholders led by DODGE were seeking to compel the declaration of dividends by FORD MOTOR COMPANY.
It turns out that FORD MOTOR COMPANY has operated successfully and profitably. However, the management of
the company has shifted its focus from seeking profitability to one that has more emphasis on charitable purposes.
Specifically is sought to provide more cars for the public at the lowest price possible. To effect this, it was argued by
management that the corporate profits earned must be set aside for the expansion of its production facilities so that it
will have a more streamlined and cost efficient system.
In 1916, Ford’s president and majority shareholder, Henry Ford, announced that there would be no more special
dividends, and that all future profits would be invested in lowering the price of the product and growing the company.
The board quickly ratified his decision.
The DODGE brothers, who owned their own motor company, were minority shareholders in Ford, and sued to
reinstate the special dividends and stop the building of Ford’s proposed smelting plant.
The lower court ordered the payment of a special dividend and enjoined Ford from building the smelting plant.
Ford appealed.

ISSUE(S): Whether or not such a change in corporate policy is a valid reason for not declaring dividends.

HELD: The SC ruled that the stockholders must be issued such dividends. The change in corporate policy is prejudicial to
the interests of the stockholders.

RATIO:

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The company has accumulated a very large amount of profit and that the costs of expansions are still feasible even
if dividends will be declared. The financing of such are spread over a significant span of time. Therefore, not all of
the retained earnings will be restricted especially for the current year. It is worth mentioning though that the
change in policy by the company’s board of directors was not prejudicial to the interests of the stockholders. Yet,
equity still demands that because of the large profits, dividends which are affordable must still be paid since the
receipt of such is a right of a stockholder in the first place.

CASE LAW/ DOCTRINE:

DISSENTING/CONCURRING OPINION(S):

191. Wabash Railway Co. vs Barclay AUTHOR: The Taliño

[280 U.S. 197; 01/06/1930]
NOTES:
TOPIC: Dividends and Purchase by Corporation of its
Own Shares – Preference as to Dividends

PONENTE: Holmes, J.
FACTS:

The railway company was organized in 1915 under the laws of Indiana with three classes of capital stock: Shares
of the par value of $100, of 5% Profit Sharing Preferred Stock A; shares of the same par value of 5% Convertible
Preferred Stock B; and shares of the same par value of Common Stock.

At the date of the bill, there were 693,330.50 STOCK A, 24,211.42 STOCK B, and 666,977.75 COMMON
STOCK. From 1915 to 1926 there were net earnings on most of the years, but for a number of years no dividend,
or 5% was paid on Class A, while $16,000,000 net earnings that could have been used for the payment were spent
upon improvements and additions to the property and equipment of the road.

The company does not deny that the latter expenditures were proper and were made in good faith, or that the
money could not have been applied to dividends consistently with the duties of the road. The company now is
more prosperous and proposes to pay dividends not only upon STOCK A, but also on STOCK B and the
COMMON STOCKS. However, the respondents say that it is not entitled to do so until it has paid to them unpaid
preferential dividends for prior fiscal years in which it had net earnings that might have been applied to them but
were not.

The obligations assumed by the company appear in its instrument of incorporation and in the certificates of
Preferred Stock A, which states that

“The holders of the 5% Profit Sharing Preferred Stock A of the Company shall be entitled to receive
preferential dividends in each fiscal year up to the amount of 5%, before any dividends shall be paid upon
any other stock of the Company, but such preferential dividends shall be non-cumulative. In the event of a
liquidation, the holders shall be entitled to be paid in full out of the assets of the Company, the par amount
of their stock, and all dividends thereon declared and unpaid before any amount shall be paid out of said
assets to the holders of any other stock of the Company.”

By the plain meaning of the words, the holders are not entitled to dividends payable out of the net profits accruing
in any particular year, unless the directors of the Company formally declare, or ought to declare, a dividend
payable out of such profits. (In the first instance, it is at least a matter for the directors to determine.)

Respondents, as holders of the first preferred stock (called Class A) of the company, filed this bill to have it
declared that holders of such stock are entitled to receive preferential dividends up to 5% for each fiscal year from
1915 to 1926, inclusive to the extent that such dividends were earned in such fiscal years but were unpaid, before
any dividends are paid upon other stock. And that the Company may be enjoined from paying dividends upon
preferred stock B or common stock, unless it shall first have paid such preferential dividends of 5% to the extent
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that the Company has had net earnings available for the payment and that such dividends remain unpaid.

DISTRICT COURT: DISMISSED (No Explanation)

CIRCUIT COURT OF APPEALS: REVERSED (No Explanation)

ISSUE(S): WON the respondents are entitled to receive preferential dividends.

HELD: No, they are not.

RATIO:
We believe that it has been the common understanding of lawyers and business men that in the case of non-
cumulative stock entitled only to a dividend if declared out of annual profits, if those profits are justifiably applied
by the directors to capital improvements and no dividend is declared within the year, the claim for that year is gone
and cannot be asserted at a later date.

But recently, doubts have been raised that seem to have affected the minds of the majority below. We suppose the
ground for the doubts is the probability that the directors will be tempted to abuse their power, in the usual case of
a corporation controlled by the holders of the common stock. Their interest would lead them to apply earnings to
improvement of the capital rather than to make avoidable payments of dividends, which they do not share. But
whether the remedies available in case of such a breach of duty are adequate or not, and apart from the fact that the
control of the Wabash seems to have been in Class A, the class to which the respondents belong, the law 'has long
advised them that their rights depend upon the judgment of men subject to just that possible bias.'

When a man buys stock instead of bonds, he takes a greater risk in the business. No one suggests that he has
a right to dividends if there are no net earnings. But the investment presupposes that the business is to go
on, and therefore, even if there are net earnings, the holder of stock, preferred as well as common, is entitled
to have a dividend declared only out of such part of them as can be applied to dividends consistently with a
wise administration of a going concern.

When, as was the case here, the dividends in each fiscal year were declared to be non-cumulative and no net
income could be so applied within the fiscal year referred to in the certificate, the right for that year was
gone. If the right is extended further upon some conception of policy, it is enlarged beyond the meaning of
the contract and the common and reasonable understanding of men.
CASE LAW/ DOCTRINE:
DISSENTING/CONCURRING OPINION(S):

192 Burk v. Ottawa Gas Electric Co. AUTHOR: TAN

123 Pac 879 (1912) NOTES:
TOPIC: Preference as to Dividends
PONENTE: Smith, J.
FACTS:
Ottawa Gas & Electric Co. was involved in a franchise to construct and maintain a natural gas plant in the city of
Ottawa for the term of 25 years.
Burk is the holder of eight shares of 6% non-cumulative preferred shares of the said company. He along with other
preferred stockholders filed an action against the Board of Directors seeking:
1) an accounting of all assets;
2) a declaration of dividends; and
3) a restraining order against the officers of the company from paying out any of the money or disposing of the
assets except such amounts as would be necessary to conduct the business of the corporation.
Ottawa maintained that it was unable to declare a dividend because its funds were exhausted by expenditures that it
was obliged to make. The principal expenditure was for extensions of the company’s plant.
The lower court ruled for the defendant corporation and its officers on the ground that the extensions of the
company’s properties “were necessary and for the betterment of the plant and accommodation of the patrons.”
Hence, this appeal.

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ISSUE(S): Whether or not the preferred stockholder has a right to a declaration and payment of dividends under the
circumstances of the case.

HELD: Yes. However, the case was remanded for more determinative proceedings because the manner and nature of the
expenditures for the extensions or expansions of the company’s plant was not clearly illustrated

RATIO:

If the word “necessary” is interpreted to mean that the extensions were such as the corporation was REQUIRED to
make by its obligation to the public, then the trial court was right in holding that the plaintiff could not look for
dividends to any part of the funds so expended.

However, the trial court seemed to have used the term “necessary” as meaning merely that the extensions were
advisable as a matter of good judgment, for the BENEFIT of the business. Under such an interpretation, the
Supreme Court is of the opinion that the funds so employed were wrongfully diverted from the payment of
dividends to the plaintiffs. The directors of the corporation owed a positive duty to pay a dividend to the
preferred stockholders whenever in any year there were net profits available. The funds that might be used
for that purpose could not rightfully be expended for extensions merely for the benefit of the business, nor could
they be withheld to meet the expenses of the next year.

The fair interpretation of the contract between Ottawa and its stockholders is that if in any year net profits are
earned, a dividend is to be declared. To hold otherwise, meaning if the Board of Directors had absolute discretion
when to declare dividends and when not to, when the corporation has funds for such dividends, would result in
temptation to unfair dealing, giving one party the option to pay the other or not. In the case at bar, the accumulated
profits would be lost forever since the dividends were non-cumulative.

Preferred stockholders, however, are not generally creditors until dividends are declared. In the case at bar, if
dividends should have been declared to such stockholders, they are considered creditors from that time.
CASE LAW/ DOCTRINE:

When Right to Dividends Vests

General Rule: The right of the stockholders to be paid dividends vests as soon as the same have been lawfully declared
by the Board of Directors. From that time, it becomes a debt owing by the corporation to each stockholder and no
revocation of the dividends can be made.

The reason for this rule is based on reasons of policy which is to prevent the misleading of investors and the probable
effect which a revocation may have on the stability of transactions involving shares of stock.

Exception: It does not apply where the declaration of dividends was:

(1) Not yet announced or communicated to the public, or,
(2) When stock dividends are declared since these are not distributions but merely represent changes in the capital
structure.

Rights of Transferee

Since the right to dividends vests upon its declaration, the RULE is: Whoever owns the stock at that time also owns the
dividends. A subsequent transfer of such stock would not carry with it the right to the dividends which have been declared
but not yet paid.

DISSENTING/CONCURRING OPINION(S):

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193 McClaran v. Crescent Planning Mill AUTHOR: Keith Meridores

[117 Mo. App. 40 (1906)] NOTES:
TOPIC: When Right to Dividends; Right of Transferee
PONENTE: J. Sale
FACTS:
Crescent Planning Mill, a manufacturing corporation in Missouri, through its board of directors, declared a cash
dividend. They declared such because they had an ample surplus of funds.
The cash dividend was to be divided into 4 equal installments.
No other board resolution followed. The funds for the dividends weren’t set aside.
The corporation paid 1 of 4 installments.
When April came which was the month where the 2 nd installment should have been paid, the board held a meeting and
resolved that they had overestimated their surplus funds. Hence, they are revoking and rescinding the 3 remaining
installments indefinitely. In short, they took back what they initially stated.
The stockholder requested from the corporation to pay its 2 nd installment. Obviously, this was refused by the
corporation.
The stockholder filed an action for recovery of the alleged amount.
Crescent Planning Mill sets up the following defenses: (1) no funds were set aside for the payment of the dividends,
and (2) their resolution superseded the dividend declaration.
The lower court ruled in favor of the stockholder.
Corporation then assailed the decision to the CA of Missouri.
Stockholder died. McClaran, his counsel, was then appointed as administrator.
Crescent Planning Mill’s counsel contends that: “the phrase set aside is included in the definition of dividends”.
Hence, the BOD needs to set aside funds for the dividends. He cited Ford v. East Hampton which states that the BOD
in that case validly rescinded its declaration of dividends. Why shouldn’t they be allowed to do the same?
ISSUE(S):
Whether the mere declaration of distribution of dividends by the corporation creates a debt in favor of the
stockholders despite the corporation not setting aside of funds for it?
Whether or not the corporation can rescind its declaration that it will distribute dividends and thus not pay the
installments not yet paid?

HELD:
YES.
NO.
RATIO:
The stockholder has the right to demand from the company its dividends. As soon as the BOD declares the
dividends, the corporation becomes indebted to the stockholder for what it declared as dividends. Hence, the action
of recovery instituted by a stockholder can prosper.
CASE LAW/ DOCTRINE:
DISSENTING/CONCURRING OPINION(S):

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