Chapter VIII Duties of Directors and Controlling Stockholders

The law makes directors fiduciaries of the corporation Directors are expected to serve the corporation with reasonable diligence and skill and with utmost loyalty Obligation of directors to act within their corporate powers Cannot act alone where SHs have the power of final approval Personal liability would still arise if due diligence has not been observed or there is disloyalty Three-fold duties of directors, trustees, and officers: o Duty of obedience o Duty of diligence o Duty of loyalty Governed by 31, 32, 33, 34 Duties and obligations of directors, trustees, and officers have their bases in common law, derived from the nature and relationship created in the corporate setting and the fiduciary nature of the positions held by such persons Attempt of the Corpo Code to codify the nature od duties and obligations to cover most of such situations, but cannot be considered as to exclude other forms of violations of such duties GR: members of the board and corporate officers who purport to act for and in behalf of the corporation, keep within the lawful scope of their authority in so acting, and act in GF, do not become liable for the consequences of their acts o These acts would be attributable to the corporation alone and no personal liability is incurred by such officers and board members (Benguet Electric v NLRC) o Although a director may have been voted into office by a block of SHs, it is the directors duty to vote according to his own independent judgment and his own conscience as to what is in the best interets of the corporation. (SMC v Kahn)

matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation. (n)

Business Judgment Rule Corporate principle recognizing corporate power and competence to be lodged primarily with the board of directors A resolution or transaction pursued within the corporate powers and business operations of the corporation, and passed in GF by the board is valid and binding, and generally courts have no authority to review the same or substitute their own judgment Business judgment rule has two (2) applications: (1) resolutions and transactions entered into by the board within the powers of the corporation cannot be reversed by the courts (2) GR: directors and officers acting within such business judgment cannot be personally liable for the consequences of such acts Exceptions: i. When the director willfully and knowingly vote for patently unlawful acts of the corporation ii. When he is guilty of gross negligence or BF iii. When he acquires any personal or pecuniary interest in conflict with his duty as such directors business judgment rule is not only a substantial rule of law, but also a rule on evidence once entered into by the board in the exercise of its judgment, it will be presumed to be valid

Duty of Diligence

Section 31. Liability of directors, trustees or officers. - Directors or trustees who wilfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any

31: Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or BF in the directing the affairs of the corporation shall be solidarily liable for all damages o available to SHs, the corporation, and to creditors o mere assent would make director liable o it is not enough that he abstains from voting; he should cast a negative vote o but mere ownership of majority of shares or mere holding of officership position does not make one personally liable (Board of Liquidators v Kalaw) Directors are expected to manage the corporation with reasonable diligence, care and prudence o Can be held liable for willful dishonesty and negligence

Should keep themselves sufficiently informed about the general condition of their business and to some extent the manner in which its is conducted; if due to their fault or negligence, the corporate assets are wasted or lost, each of them may be held responsible for any loss proximately caused by the wrongful acts or omissions. o But they cannot be held liable for mistakes or errors in the exercise of their business judgment, provided the act in GF and with due care and prudence (Barnes v Andrews infra) o Degree of care and diligence: that which is usually required of men prompted by self-interest in the exercise of their own affairs that which is demanded by the particular circumstances nature of business director of a bank is held to a higher degree of diligence than an ordinary commercial transaction (Litwin v Allen) remedy of SHs: where directors have become grossly negligent or fraudulently mismanaged the corporation, they can be removed by the SHs in accordance with Sec 28, + damages o

honest business judgment do not subject the officers and directors to liability for negligence in the discharge of their appointed duties. Directors are entrusted with the management of the affairs of the corporation. If in the course of management they arrive at a decision for which there is a reasonable basis, and they acted in GF as the result of their independent judgment, and uninfluenced by any other consideration than what they honestly felt was in the best interests of the corporation. In the present case, the SC found that the officers and directors of the corporations acted honestly in GF and sought to exercise their best judgment for the best interests of their corporation. No fraud was present, but only a faint suggestion of BF. The directors had the right to negotiate privately with Kuhn and Loeb. In contracting with the latter, the directors were not contracting with another firm in which they were interested, nor did the directorship or officership positions interlock. There is no contention that fraud existed and fraudulent acts will not be presumed.

Otis & Co. v Pennsylvania Railroad Co. F: Otis & Co is a SH in and among the wholly-owned subsidiaries of the Pennsylvania Railroad Co (PRR), which included Pennsylvania Ohio 7 Detroit Railroads (POD). One of its subsidiaries had an outstanding bond issuance of $28.4M. The parent then negotiated with a third party, Kuhn, Loeb and Co, to refinance the bonds. The directors of POD approved a resolution authorizing the sale of the new Series D bonds at a best obtainable price. Bonds were then sold to Kuhn and Loeb. Another buyer was willing to purchase the bonds at a better price but the directors declined. The Interstate Commerce Commission found that the corporation was not able to get the best price for the sale and that other options were not explored, that negotiations were only with one investment house and were at arms-length dealing, and that it was possible to have greater savings. I: W/N the directors are liable for failing to exercise ordinary care and judgment in the issuance and sale of $28M in bonds, which resulted in alleged losses suffered by the corporation. H: Business judgment rule: courts will not interfere in matters of business judgment, in which it is presumed that judgmentreasonable diligencehas in fact been exercised. A director cannot close his eyes to what is going on about him in the conduct of business judgment. Courts have given directors wide latitude in the management of the affairs of the corporation provided that the judgment is unbiased, honest and reasonably exercised. Negligence must be determined as of the time of transaction. Mistakes or errors in the exercise of

Montelibano et al v. Bacolod-Murcia Milling Co Inc. Montelibano et al are sugar planters adhered to the Milling Companys sugar central mill under identical contracts. The contracts would be in force for 30 years and provide that the resulting product should be divided in the ratio of 45% for the mill and 55% for the planters. It was proposed to execute the milling contracts, increasing the planters shares to 60% of the manufactured sugar and molasses and extending the period from 30 to 45 years. The Board of the Milling company then adopted a resolution granting further concessions to the planters over and above the amended contract. 17 years later, Montelibano sues the Milling company, contending that the 3 sugar centrals with a total annual production exceeding 1/3 of the production of all sugar millis in Negros, had already granted 62.5% participation to their planters, and in accordance with Para 9 of the resolution, it had become obligated to grant similar concessions to them. H: When a resolution is passed in GF by the board, it is valid and binding, and whether or not it will cause losses or decrease the profits of the central, the court has no authority to review them. Questions of policy or management are left solely to the honest decision of officers and directors of a corporation, and the court is without authority to substitute its judgment for that of the board; the board is the business manager of the corporation and so long as it acts in GF its orders are not reviewable by the courts

Litwin v Allen et al. H: The officers are liable for the transaction because the entire arrangement was so improvident, risky, and unusual and contrary to fundamental concepts of prudent banking practice. A bank director when appointed takes oath that he will diligently and honestly administer the affairs of the bank or trust company. Honesty alone would not suffice; there must be more than honestythere must

be diligence, and that means care and prudence as well. What sound reason is there for a bank, desiring to make an investment, to buy securities under an arrangement whereby any appreciation will insure to the benefit of the seller and any loss will be borne by the bank. There is here more than a question of business judgment. The directors plainly failed to bestow the care which the situation demanded. A director, proximately directors in transaction expired. however, is not liable for loss or damage other than what was caused by his own acts or omissions in breach of his duty. The this case are liable only for the loss attributable to the improper itself, and not after the option on the improper transaction had

Barnes v Andrews. F: Corporation manufactures starters for Ford motor vehicles and airplanes. Director Andrews, the largest SH, who was induced by the President to become director, held only 2 board meetings. During his term, the company business was mismanaged. Barnes was then appointed receiver after the corporation had gone under, and was found that the company had no funds. He alleged that Andrews failed to give adequate attention to the affairs of the company, which had been conducted incompetently and without regard to the wastage in salaries. Work had languished from incompetence and extravagance and quarrels between the factory manager and the other personnel affected production. H: First liability must rest upon the directors general inattention to his duties. He cannot be charged with neglect in attending director meetings, since there had been only 2. But his liability must depend upon his failure in general to keep advised of the conduct of the corporate affairs. While directors are collectively managers of the company, they are not expected to interfere individually in the actual conduct of its affairs. To do so would disturb the authority of the officers and destroy their individual responsibility, without which no proper discipline is possible. Having accepted a post of confidence, Andrews was charged with an active duty to learn whether the company was moving to production, and why it was not, and to consider what could be done to avoid the conflicts among personnel or correct their incompetence, which was slowly bleeding the business to death. He must go further to show that he should have been more active, as the cause of action against him by the receiver rests upon a tort of omission as though it had rested on a positive act on his part. When a business fails from general mismanagement or business incapacity, could the blame be placed upon a single director and could he have saved the company if he had tried? A director could have least fulfilled his duties to the company and to the SHs to have made the company prosper, or at least to show that he had done his duty enough to have broken the fall of the company. This Andrews failed to do. x True, Andrews was not well-suited by experience for the job he had undertaken. Directors are not specialists, but they must have good sense, and must have acquainted themselves with the corporate affairs, but they need not have any technical talent. They are the general advisers of the business, and if they faithfully give such ability as they have, it would not be lawful to hold them liable. Must a director guarantee that his judgment is good? Can SHs call him to account for deficiencies which their votes assured him did not disqualify him for office?

Walker v Man et al. F/H: Corporation was engaged in real estate and advanced a loan to a third person taking as security his PN. The loan was not authorized by the board and was not for the benefit of the corporation nor was it in aid of its business. No effort was done to collect on the loan, which became due and demandable. The corporation went bankrupt, and the receiver sues the directors to collect on the amount due the insolvent corporation and for damages. Court held that the director was negligent.

Steinberg v Velasco. F: The board of the corporation authorized the purchase of 330 shares of capital stock of the corporation and the declaration of dividends at a time when the corporation was indebted and in such a bad financial condition. The directors relied on the face value on the books of its A/R, which had little or no value. Furthermore it appears that two of the directors were permitted to resign so that they could sell their stock to the corporation. The corporation became insolvent, and the receiver Steinberg sues the directors. H: The corporation did not have a bona fide surplus with which dividends could be declared and paid out. The directors did not act in GF and were grossly ignorant of their duties. Directors were held personally liable for causing the corporation to purchase their own shares and declaring dividends, which because of such failure to take into consideration of worthless receivables, worked to the detriment of the creditors. The directors did not act with diligence in taking the word of their chairman and not making an informed decision based on the facts then available to them and on not relying on other documents available to them. Creditors have the right to assume that so long as there are outstanding debts and liabilities, the board will not use the corporate assets to purchase its own stock, and that it will not declare dividends to SHs when the corporation is insolvent

Bates v Dresser. F: Bank employee was able to embezzle cash from the branch operations for a considerable period of time, unbeknown to the bank officers, who relied to heavily and trusted the employee. He was able to swindle money by concealing his withdrawals through entries in the records of the bank, and matched it with the correct statements which were relied upon by the cashier. H: Under the circumstances of this case, the directors did not neglect their duty in accepting the statement of the cashier and failing to inspect the depositors ledger. They should not be held answerable for taking the cashiers statement to be as correct as the statement of assets always was. The statement of assets were always correct. A committee was appointed to examine the operations of the bank. The bank itself was in sound financial condition. Their confidence seemed warranted by the semi-annual examinations by the government examiner and they were encouraged in their belief that all was well by the president. They were not bound by virtue of the office gratuitously assumed by them to call in the passbooks and compare them with the ledger, and until the event showed the possibility they hardly could have seen that their failure to look at the ledger opened a way to fraud. The position of the president, however, is different. Practically he was the master of the situation. He was at the bank daily for hours, had the ledger in his hands at time. He had hints and warnings of the unexplained shortages and rapid decline in deposits. He knew the errant employee had been living at a fast pace and had been dabbling in stocks. He had been put on his guard, and had they been heeded by the President, it would have led to an examination of the ledgers and would have prevented future thefts. In accepting the presidency Dresser must be taken to have contemplated responsibility for losses to the bank.

When a director attempts to acquire or acquires any interest adverse to the corporation, equity imposes a liability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation director is a fiduciary of the corporation in case of conflict of interest, he cannot sacrifice the interests of the corporation without incurring liability for his disloyal act Code sets up standards but ultimately must be decided on the merits of each case o 1. the self-dealing director

a director who enters into a contract with the corporation of which he is a SH or member since he participates in the decision as to whether or not the contract is to be accepted, he will be exposed to the temptation of putting his interest above those of the corporation and could exert influence to obtain board approval of his contract with the corporation but not all dealings of the director with his own corporation when itll be beneficial or have the best interest in its welfare the rule thus absolutely disqualifying a fiduciary from dealing with his cestui que trust has not been strictly applied to directors

Duty of Obedience Board is bound to observe the duty of obediencethey will direct the affairs of the corporation only in accordance with the purposes for which its was organized 26: Directors and officers to be elected shall perform the duties enjoined on them by law and by the BLs of the corporation.

Sec 35: A contract of the corporation with one or more of its directors or trustees or officers is voidable at the option of such corporation, unless all the following conditions are present that: (a) the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum (b) the vote of such director or trustee was not necessary for the approval of the contract (c) the contract is fair and reasonable under the circumstances (d) the contract with the officer has been previously authorized by the board where any of the first two (2) conditions is absent, in the case of a contract with a director or trustee, such contract may be ratified by a vote of 2/3 OCS but full disclosure of the adverse interest must be made not all conditions must be present also applies to corporate officers contract of a self-dealing director is VOIDABLE at the option of the corporation, w/n there has been damages self-dealing contract is presumed unfair until the self-dealing director proves otherwise to validate the contract of a self-dealing director:

Duty of Loyalty; Fiduciary Duties; Conflict of Interests Under 31: Directors or trustees who acquire any personal or pecuniary interest in conflict with their duty as directors shall be liable solidarily for all damages resulting therefrom

o o

ratification by the SHs thru a vote of at least 2/3 OCS (including the shares of the self-dealing director) although he may not have voted, if the other members of the board are under his dominating influence, he will still be considered a self-dealing director covered by the provision (Globe Woolen Co v Utica Gas & Electric) even when the director resigns in order to consummate the contract, but after he has laid the foundation for the successful completion of the same, he can still be held liable to account for the profits he may have reaped (Steinberg v Velasco) full disclosure of the adverse interest contract must be fair and reasonable

Where a director in a corporation accepts a position in which his duties are incompatible with those as such director it is presumed that he has abandoned his office as director of the corporation.

2.

Fixing compensation of directors and officers

Palting v San Jose Petroleum Inc. F: Case involves provisions in the by-laws of a corporation seeking to have its securities registered and distributed in the Philippines. H: Considering the questioned 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 associations or corporation, the impact of these provisions upon the traditional fiduciary relationship between the directors and SHs of a corporation is too obvious to escape notice. The directors and officers of the corporation can do anything, short of actual fraud, with the affairs of the corporation, even to benefit themselves, with immunity. This and other provisions which authorized the election of non-SHs as directors, completely disassociate the SHs from the government and management of the business in which they have invested.

Typical situation of self-dealing Takes various forms: per diems, salaries and profit-sharing arrangements like bonuses, stock options plans, pension plans, etc GR: directors are NOT entitled to compensation for performing services ordinarily attached to their office; they are presumed to serve without pay Exception: unless the AOI or BLs expressly provide or a contract is made in advance (Lingayen gulf v Baltazar infra) Only the SHs and NOT the directors themselves may fix the amount of compensation o A SHs resolution to grant such compensation can only refer to future and NOT to PAST services (Barretto v La Previsora infra) Principles also applicable to non-stock corporations but NOT applicable to an officer who is not a director also not applicable to directors who render service outside his usual duties

Sec. 30. Compensation of directors. In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors, except for reasonable pre diems: Provided, however, That any such compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders' meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year. Sec. 87. Definition. For the purposes of this Code, a non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of this Code on dissolution: Provided, That any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title. The provisions governing stock corporation, when pertinent, shall be applicable to non-stock corporations, except as may be covered by specific provisions of this Title. Directors can receive compensation other than per diems only if the by-laws fix the same or in the absence thereof, approval of majority of SHs

Mead v EC McCullough. H: While a corporation remains solvent, there is no reason why a director or officer, by authority of a majority of the SHs or board may not deal with the corporation, loan it money or buy property from it. So long as a purely private corporation remains solvent, its director are agents or trustees for the SHs. They owe no duties or obligations to others. But the moment such a corporation becomes insolvent, its directors are trustees of all the creditors, whether they are members of the corporation or not, and must manage its property and assets with strict regard to their interest. A director or officer may in GF and for an adequate consideration purchase from a majority of the directors or SHs the property even of an insolvent corporation, and a sale thus made to him is valid and binding upon the minority.

Sec 30 allows directors to fix the amount of their own per diems; technically is self-dealing but allowed by express provision of law o But the per diems must be REASONABLE o Total amount of compensationincluding per diemsmust not exceed 10% of the corporations net income before taxes As to corporate officers and employees not directors: may consist not only of salaries but also bonuses, stock options, and other profit-sharing schemes As to the president: Code is silent, but SC held that he is expected to serve without salary, and that the per diems paid were sufficient compensation for services (Lingayen Gulf v Baltazar) SEC: stock option plans of widely-held corporations o must be subject to full disclosure before they can publicly sell their securities o must be approved by SHs representing 2/3 of SUBSCRIBED capital stock o amount set aside must not be more than 20% of the subscribed capital stock

Contracts between a corporation and third persons must be made by or under authority of its board and not by the SHs. The action of the SHs is only advisory and is not binding on the corporation.

Kerbs v California Eastern Airways. F: The stock option plan of the company provides that 250,000 shares of the corporations unissued stock be subject to options to purchase at $1/share, exercisable at any time within a period of 5 years. The profit sharing plan provides that when quarterly earning exceeded $30,000 before taxes, 10% shall be distributed among the name officers and executive personnel. If a loss is incurred, cumulative deficiency plus operating losses shall be carried forward to succeeding quarterly periods. Both plans were adopted at a board meeting, but only the stock options plan was ratified by the SH. H: The SH ratification cures any voidable defect in the action of the board on the stock options plan. Ratification by SHs of voidable acts of directors is effective for all purposes unless the action of the directors constituted a gift of corporate assets to themselves or was ultra vires, illegal, or fraudulent. The validity of a stock option plan depends directly upon the existence of consideration to the corporation. Sufficient consideration to the corporation may be inter alia, the retention of the services of an employee, or the gaining of services of a new employee, provided there is a reasonable relationship between the value of the services rendered and the value of options granted. In this case, the stock option plan is deficient because it is not reasonably calculated to insure that the corporation will receive the contemplated benefits. No rule of thumb can be devised to test the sufficiency of the condition which are urged as insurance that the corporation will receive the contemplated benefit. The most that can be said is that in each case there must be some element which, within reason, can be expected to lead to the desired end. The plan and options issued do not of themselves insure that benefit of retaining the services of the employee to whom the option is granted will inure to the corporation. They are too insecure in nature to be regarded as a condition of the stock option plan designed to insure that the corporation will receive the contemplated benefit.

Govt of PI vs. El Hogar Filipino. (supra)

Barretto v La Previsora Filipina. F: Suit by the resigned directors of a building and loan association to recover 1% of the profits to each complainant in accordance with an amendment to the bylaws, which stipulate that they are entitled to a lifetime annuity from the profits of the corporation. H: The amended by-laws does create any obligation to pay to the persons name therein such a life gratuity or pension out of the profits. A by-law of this nature must be clearly regarded as beyond the lawful powers of a mutual building and loan association and is thus ultra vires. As it were, the by-law cannot be held to establish a contractual relation between the parties. The authority conferred upon corporations in the code refers to providing compensation for future services of directors, officers, and employees after the adoption of the by-law and cannot in any sense be held to authorize the giving of continuous compensation to particular directors after their employment has terminated for past services rendered gratuitously by the them to the corporation. To permit the transaction would be to create an obligation unknown to the law, and to countenance a misapplication of funds of the building and loan association to the prejudice of SHs.

3.

Using inside information

Directors and corporate officers are insiders having access to confidential information relating to the business of the corporation Fiduciary position prohibits them from using any information to benefit themselves or any competitor corporation Liability of guilty and disloyal director can be based on Sec 31 RSA (now SRC) contains express provisions regarding use of inside information

Sec 36 RSA Sec 30 RSA Sec 53 RSA

(which was not traded in the exchange). They also concealed their identity and purpose in purchasing the stock from Taylor. I: W/n the directors and officers of a corporation owe any duty to all SHs in relation to transactions whereby officers and directors buy for themselves shares of stock from the SHs H: Three (3) rules are recognized as applying to the case. The Majority ruledirectors and officers owe no fiduciary duty at all to SHs, but may deal with them at arms length. A director is a fiduciary with respect to the corporation as an entity, and not to the SHs as individuals. In dealings with or for the corporation, the director is exercising a corporate function, and is subject to the usual fiduciary duty to disclose all material facts; but that in personal dealings with SHs he is not exercising a corporate function, and is free to deal with them at arms length. It is based on the theory that the corporationthe collective SHsis a separate and distinct legal entity, an artificial personality, to whom the director owes his duty. The Minority Rulerecognizes the directors obligation to the SHs individually as well as collectively, and refuses to permit him to profit at the latters expense by the use of information obtained as a result of his official position and duties. Such a duty exists because the SHs have placed the directors in a strategic position where they can make it appear the shares are much less valuable than they really are. The Special Facts rulean exception to the Majority rule; where special circumstances are present which make it inequitable for the director to withhold information from the SH, the duty to disclose arises, and concealment is fraud.

Strong v Repide. F: Erica Strong is the owner of 800 shares of the Phil Sugar Estates Devt Company, which owned of the value of friar lands in the Philippines. Repide is director and majority SH. The government made an offer to purchase the lands owned by the corporation and from the other owners. The offer was rejected by Repide, without consulting the other SHs, and held out for a better deal. He was aware that the value of the lands and the shares would be of no value if the sale were not consummated, since the company had not paid dividends, was living on credit, and could not even paid taxes. The land was the only valuable asset of the corporation. Repide than took steps to purchase 800 shares of stock owner by Strong. He employed Kaufmann, who then employed Sloan the broker, to purchase the stock for him. Negotiations ensued. Strong through Jones agreed to sell Strongs shares to Repide. He thus obtained the 800 shares for 1/10 th the amount they were worth by the eventual sale of the lands two months after he bought the shares. The probable value of the shares was unknown to anyone except Repide, while the agent of Strong had no idea that it was Repide who wanted to purchase the shares. I: W/n it was the duty of Repide, in GF, to disclose to the agent of Strong the facts which would affect the value of the stock he purchased from the latter. H: In this case, Repide was the chief negotiator for the sale of the lands, acting for all the other SHs. Only he knew the state-of-play in the proposed sale. He owned of the shares of the corporation. Under these circumstances, and before the negotiations for the sale were completed, he employs agents to purchase shares of his company from another SH and conceals his own identity and knowledge of the state of the negotiations on the sale of the lands and their probable effect on the value of the shares to be purchased. A director may be accountable directly to the SH where the special facts surrounding the transaction give rise to the obligation to disclose his identity or the inside information he possesses. This is known as the special facts doctrine.

Assuming the Special Facts rule to be applicable, there is no doubt that the Wrights owed Taylor a duty and violated that duty to her damage. The stock was not sold or traded in any exchange. They concealed their position as directors, and had full knowledge of the real value of the stock, but kept that knowledge to themselves. They had full control over the corporation. Under such circumstances the findings that the Wrights are guilty of fraud within the meaning of the Special Facts rule are supported by the evidence.

4. Taylor v Wright et al. F: Mrs Wright and Allen Wright, majority SH and both director respectively, employed an agent to purchase from Emma Taylor 3750 shares in the corporation to which they are directors in. Said shares were pledged as security for a loan by Taylor which the Wrights knew. The Wrights also knew that the company was operating at a loss, and they knew the true value of the shares

Seizing corporate opportunity

Significant aspect of fiduciary obligation is the duty to refrain from usurping a business opportunity rightly belonging to the corporation

Sec 34: Where a director acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits which should belong to the corporate corporation, he must account to the latter for all such profits by

refunding the same, unless his act has been ratified by vote of the SHs owning 2/3 OCS Applicable only to directors and NOT to officers Allows ratification of a transaction by vote of 2/3 OCS Sec 31: Directors or trustees who acquire any personal or pecuniary interest in conflict with their duty as directors shall be liable solidarily for all damages resulting therefrom Applicable to directors, trustees, and officers Does NOT allow ratification of a self-dealing transaction If the transaction is one which the corporation has the right to appropriate, then the director has a positive duty not to seize it for himself Should he do so, he must account for all profits he obtains, even if he used personal funds Ratification by SHs representing 2/3 OCS cures the transaction Sec 34 covers only directors and not officers but an officer may still be held liable under Sec 31, para 2 o officer is a full time corporate agent and is paid a salary for his services, and thus there would be stronger reasons to make an officer liable o director not an officer spends only a part of is business time and efforts for the corporation, for which he is not entitled to compensation unless expressly granted when is a corporate opportunity belonging to the corporation?

H: United and NY United were also engaged in underwriting as do the defendant banks. It was the duty of their directors and officers to make every effort consonant with good, honest judgment to obtain for those corporations as much of the underwriting business as possible, and to make this business as profitable as possible. This does not mean, however, that the directors and controlling SHs of United and NY United were required to do anything detrimental to the affairs of other corporations of which they were officers and directors, and to the affairs of United and NY United. One in control of a majority of the stock and of the board of a corporation occupies a fiduciary relation towards the minority, and is charged with the duty of exercising a high degree of GF, care, and diligence for the protection of the same. Every act in its own interest to the detriment of the minority interests becomes a breach of duty and of trust, and entitled them to plenary relied. So strict is the rule of undivided loyalty to the beneficiary that the mere fact that a trustee has an interest inconsistent with the interest of his cestui, casts upon him that burden of justification. Where this duty exists, the duty of the trustee is to manage the property and affairs of the corporation with an eye single to the advantage of the corporation itself. It is not proper for the fiduciary to take those opportunities unto itself, while at the same time it stayed the processes of its subsidiary directed towards the same business ends. It is not only a case of a fiduciary seizing business opportunities of the cestui. The trustee at the same time kept its dominant hand over the cestui, suppressing any attempt by the cestui to go out and compete with the trustee. Where a fiduciary is engaged in a business in competition with his corporation, he cannot actively use his position and power over his corporation so as to prevent the corporation from seeking certain businesses in competition with himself. It is charged that the directors here not only failed and refused any attempt to obtain certain business for their own corporation, but that they affirmatively prevent the corporation from competing with them for that business. This they may not do. Directorship in two competing corporation does not in and of itself constitute a wrong. It is only when a business opportunity arises which places the director in a position of serving two masters, and when dominated by one, he neglects his duty to the other, that a wrong has been done.

Singer et al v Carlisle. F: Singer et al are SHs of the United Corporation which owns all capital stock of its subsidiary, NY United Corp, both of which are engaged in the business of underwriting securities. Carlisle et al are directors of the two corporations. Other defendants are investment houses JP Morgan, Drexel & Co, and Morgan Stanley. United Corp acquired substantial voting stock of various holding and operating companies/utilities, which were all publicly listed and obtained their funds through the public sale of their securities. JP Morgan et al were able to obtain large profits from the underwriting of such securities to the exclusion of United and NY United. Plaintiff Singer charge that the defendant bankers and investment houses and the directors of the two corporations fraudulently caused the latter corporations to use their influence and control over the subsidiaries in order to induce them to award the underwriting business to the defendant bankers. Having eliminated United Corp and NY United as their competitors for the underwriting business of the subsidiaries, the defendants allegedly proceeded to utilize their control and influence to obtain the business for themselves. Singer et al also claimed that the directors of the corporation, as fiduciaries, eliminated their cestui as a competitor in the underwriting profits.

Irving Trust Co v Deutsch et al. F: Irving is the trustee of the insolvent company Sonora Acoustic. Acoustic desired the patents of the De Forest company and wanted gain at least minority stake to have a voice in the management of its patents and products, which goes to Acoustics corporate purpose. Reynolds & Co, receiver of the insolvent De Forest, offered to give Acoustic 1/3 participation in the purchase of 600,000 shares of De Forest stock. It also stipulated that Acoustics nominees should hold 4 of 9 seats in the board and that it should have the right to enter into a contract to handle the managing and selling of De Forest products. This offer was presented to the board of Acoustic and a resolution was passed authorizing

its president, Deutsch, to obtain sufficient funds to enable Acoustic to carry out its obligations in case it accepts the offer. No funds were obtained but Biddle and Deutsch et al, agreed to put up the money and accept the certificates of De Forest stock issued when date of payment came under the offer. Reynolds agreed and issued the certificates. The deal was consummated on the purchase of De Forest stock. It was then traded in the exchange and Biddle, Deutsch et al were able to reap huge profits in selling their shares. Acoustic declares bankruptcy and sues the Biddle group, three of whom were directors of De Forest, appropriated to themselves Acoustics right under its contract, when as fiduciaries they were obligated to preserve those rights for Acoustic and were forbidden to take position where personal interest would conflict with the interest of their principal. H: The theory of the suit is that a fiduciary may make no profit for himself out of a violation of duty of the cestui, even though he risked his own funds in the venture, and that any one who assists in the fiduciarys dereliction is likewise liable to account for the profit so made. It is clear that there is no contract between Acoustic and Reynolds because the offer did not run to Acoustic but to the Biddle group as individuals. The management contract, once entered into, would enable access to the patents, stock ownership in De Forest as a going concern after receivership was lifted, and were all concededly legitimate corporate purposes. Thus the proposed purchase is not ultra vires. The facts of the present case militate strongly against the directors since in this case, they absolutely bound Acoustic by contract to make payments to Reynolds and exposing it to risk of a suit for damages for nonperformance, without committing themselves to it to relieve it of this obligation if necessary when time for payment arrives. Directors of a solvent corporation are forbidden to take over for their own profit a corporate contract on the plea of the corporations financial inability to perform. If the directors are uncertain whether the corporation can make the necessary outlays, they need not embark upon the venture. If they do, they cannot substitute themselves for the corporation any place along the line and divert possible benefits into their own pockets.

it comes because he has taken a position adverse to or in conflict with the best interests of the corporation. The fiduciary relationship imposes a duty to act in accordance with the highest standard. There is thus no basis for holding that in acquiring stock through JP Morgan at $20, any of the defendants were guilty of a breach of fiduciary duty. The CS purchased did not represent in any case a business opportunity for the Guaranty Corporation. Having fulfilled their duty to the corporation in accordance to their best judgment, the directors were not precluded from a transaction for their own account and risk. In order to constitute a corporate opportunity that was deprived by the directors, it was necessary to prove the ff: The shares purchase were in contemplation of equity offered to the cestui That the cestui had some legitimate right or expectancy in these shares The question to ask is, have the directors profited at the expense of their corporation; have they gained because of disloyalty to its interest and welfare? In this case, the opportunity was a routine piece of business wholly lacking in the unique and special quality which distinguished other corporate opportunity cases. The interest of the directors in the stock was purely speculative, and they even incurred a definite risk which at the time was totally eliminated from the cestuis position in the same stock. In other words, the profit of the cestui was assured; that of the directors were still at hazard. 5. Interlocking directors

One who occupies a positioning two (2) corporations dealing with each other Sometimes presented definite advantages to the corporation

Litwin v Allen et al. F: JP Morgan, in disposing of 1,250,000 shares of CS of Alleghany corporation, offered 500,000 to Guaranty Corporation to be sold on a commission at $24/share. Before the public offering, Morgan also offered the other 750,000 to friends at $20. Among those receiving the shares were some directors of Guaranty Corp, who received 40,000 shares. The market opened at a premium and the directors were able to dispose of their stock at a substantial profit. H: A director of a corporation is in a position of fiduciary. He will not be permitted to improperly profit at the expense of the corporation. Undivided loyalty will ever be insisted upon. Personal gain will be denied to a director when

Sec 33: GR: A contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone Exceptions: o Cases of fraud o if the contract is not fair and reasonable under the circumstances o if merely nominal interest, interlocking director shall still be subject to the same ratificatory vote required in cases of dealings of directors, trustees, and officers interests exceeding 20% of OCS is considered substantial The burden is on the corporation which seeks to uphold the contract to prove the fairness or unfairness of the transaction Interlocking director may actually be a self-dealing director where his interest in one corporation is merely nominal, but his interest in the other corporation is greater than 20% of its OCS:

Globe Woolen Co v Utica Gas & Electric. F: Globe Woolen needed electric power to run its mills. Its president and majority SH, Maynard, was able to get a contract with the electric company Utica Gas which was ratified by the executive committee of Globes board. Maynard was a nominal SH in the electric company also, and did not vote in the meeting. Globe desires to enforce the contract. H: Contracts are voidable at the instance of Utica Gas. Globe argues that by refusing to vote, Maynard shifted responsibility to his associates, and may reap a profit from their errors. One does not divest oneself so readily of ones duties as trustee. The refusal to vote, has indeed this importance: it gives to the transaction the form and presumption of propriety, and requires one who would invalidate it to prove beneath the surface. The trustee or director holds a duty of constant and unqualified fidelity. He cannot rid himself of the duty to warn and to denounce, if there is improvidence or oppression, either apparent on the surface, or lurking beneath it. There was an influence in this case which was exerted by Mr Maynard the president of Globe Woolen. From beginning to end he dealt with a subordinate, who was alert to serve at his pleasure. The unfairness in the contract is startling and the consequences could be disastrous. No matter how large the business, or how great the increase in prices of labor or fuel, or there be extensions to the plant, the electric company had pledged that for 10 years there will be saving of $600/month, $300 for each mill, $7200/year. As a result of that pledge it has supplied the plaintiff with electric current for practically nothing, and even owes it some money thereafter. Mr Maynard knew the unfairness of the contract, and he cannot have failed to know that he held a one-sided contract which left the defendant at his mercy. Thus his refusal to vote does not nullify, as of course an influence and predominance exerted without a vote. A constant duty rests on a trustee to seek no harsh advantage to the detriment of his trust, but rather to protect and renounce he gains what is unfair. Close corporation SHs of a close corporation can choose to manage the corporation themselves, instead of having a board, and thus the law treats them as directors with all the powers, duties, and liabilities attached thereto

2. For a classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular class of stock; and 3. For a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code.

Sec. 100. Agreements by stockholders. xxx 5. To the extent that the stockholders are actively engaged in the management or operation of the business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each other and among themselves. Said stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance. 100: SHs can be made personally liable for corporate torts o in other corporations: liable only if there is negligence in his duties o SHs are solidarily liable with the corporation

Jack: not limited to the board; it also has to be assumed by the SHs who own the majority; all boils down to control!

Duty of controlling interest A SH who is able to control a corporation by owning a majority of voting shares or otherwise, owes a duty as well of GF to the corporation and to the minority Majority SH is subject to the duty of GF when he acts by voting at a SH meeting persons enjoying management control hold it in behalf of the SHs, and not as their personal property GR: controlling SH may dispose of his stock at any time and at any price o But they cannot abuse by transferring office to persons who re known as intending to raid the corporate treasury or improperly benefit or enrich themselves (Insuranshares Corp case)

Sec. 97. Articles of incorporation. The articles of incorporation of a close corporation may provide: 1. For a classification of shares or rights and the qualifications for owning or holding the same and restrictions on their transfers as may be stated therein, subject to the provisions of the following section;

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Insuranshares Corporation v Northern Fiscal Corp. F: The Management group (composed of Philadelphia banks) transferred control over the Insuranshares Corporation, an investment trust specializing in shares of small life insurance companies, to the Boston Group, none of whom ever had any interest of any in it. With the control went plenary power under the by-laws to sell or transfer all the securities in the companys portfolio. Such acquisition of control was the first step of a grand scheme, planned by the Boston Group with the connivance of brokers, to strip the corporation of its valuable assets, leaving a mere shell to the remaining SHs. H: This case involves more than just a question of liability in the sale of corporate stock: it is the sale of control by a minoritybut controllinginterest. Those who control a corporation either by the majority or minority stock ownership owe some duty to the corporation in respect of the transfer of the control to outsiders. Owners of control in a corporation are under a duty not to transfer ownership to outsiders if the circumstances surrounding the proposed transfer are such as to awaken suspicion and put a prudent man on his guard. In this case the evidence shows that the Boston group were acquiring control over the corporation by improper means and for an improper purpose.

Fiduciary obligation: Commences at the time director assumes office Remission can be action, inaction, gross negligence Liability not the SHs but to the corporation One word: fiduciary Trust imposed by SH collectively Directors collectively mandated to make full use of corporate property Fiduciary obligation owed to corporation, not the SH 2 types of responsibilities: As a Board, collectively As a director, individually Degree of responsibility is greater as an individual director 31: repository of duties of directors collectively and individually distinguish if director is an interlocking director directors transaction with corporation can prove to be beneficial prohibition against self-dealing is not absolute threshold: fraud burden of proof: corporation fixing compensation directors sit on board, can do anything and everything with the corporate assets success or downfall is borne by directors board can only recommend compensation! Subj to SH approval Determination: did they discharge their duties mandated by the statute? was there liability arising from their actions and to whom?

Jack: a systematic, orchestrated move to transfer mgt/control to an irresponsible group; duty to inform SHs applied to situations where there is a clear-cut majority

Duty to creditors No express duty in Corpo Code; based on contract law GR: directors cannot be personally liable to corporate creditors for general inefficient management of a solvent corporation o Remedy of creditors is against the corporation itself

Exception: when corporation is insolvent, the directors will be DEEMED trustees of the creditors and should manage its assets with strict regard to the creditors interest (Mead v McCullough) Upon insolvency of the corporation, the board is duty bound to hold the assets of the corporation primarily first for the payment of liabilities 31: should they willfully and knowingly assent to patently unlawful acts of the corporation or are guilty of gross negligence or BF in directing the affairs of the corporation, they become solidarily liable with for damages to the corporation + damages to third persons including creditors 65: director who fails to object in writing to the issuance of stock for less than par or issued value is solidarily liable with the guilty SH to the corporation as well as to its creditors for the difference

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Chapter IX Inspection
Basis of right SHs do not directly participate in the management of the business and have little knowledge, if at all, of how the corporate affairs are being run by the directors and officers As beneficial owners, SHs have the right to know only the financial condition but also how the corporate affairs are being run by their elected directors and the appointed officers Law grants them the right to inspect the records of the corporation to obtain information they need Significant for minority SHs

demanding to examine and copy excerpts from the corporation's records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand. Stock corporations must also keep a book to be known as the "stock and transfer book", in which must be kept a record of all stocks in the names of the stockholders alphabetically arranged; the installments paid and unpaid on all stock for which subscription has been made, and the date of payment of any installment; a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom made; and such other entries as the by-laws may prescribe. The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent and shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days. No stock transfer agent or one engaged principally in the business of registering transfers of stocks in behalf of a stock corporation shall be allowed to operate in the Philippines unless he secures a license from the Securities and Exchange Commission and pays a fee as may be fixed by the Commission, which shall be renewable annually: Provided, That a stock corporation is not precluded from performing or making transfer of its own stocks, in which case all the rules and regulations imposed on stock transfer agents, except the payment of a license fee herein provided, shall be applicable. (51a and 32a; P.B. No. 268.)

What records covered Sec. 74. Books to be kept; stock transfer agent. Every corporation shall keep and carefully preserve at its principal office a record of all business transactions and minutes of all meetings of stockholders or members, or of the board of directors or trustees, in which shall be set forth in detail the time and place of holding the meeting, how authorized, the notice given, whether the meeting was regular or special, if special its object, those present and absent, and every act done or ordered done at the meeting. Upon the demand of any director, trustee, stockholder or member, the time when any director, trustee, stockholder or member entered or left the meeting must be noted in the minutes; and on a similar demand, the yeas and nays must be taken on any motion or proposition, and a record thereof carefully made. The protest of any director, trustee, stockholder or member on any action or proposed action must be recorded in full on his demand. The records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, writing, for a copy of excerpts from said records or minutes, at his expense. Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of the corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal: and Provided, further, That it shall be a defense to any action under this section that the person

Books and records legally required to be prepared, maintained, and kept by the corporation: Books that record all business transactions o records of all business transactions broad enough to include those which the Code of Commerce requires all merchants including corporations: book of inventories and balances journal ledger book for copies of letters and telegrams financial statements income tax returns vouchers and receipts contracts and all papers pertaining to the contracts voting trust agreements o records of business transactions SH need not blindly accept figures in the financial report given by management

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Records are voluminous and may be difficult to interpretthus SC held that a SH may make copies, extracts, and memoranda of such records (Veraguth v Isabela Sugar) Minutes book for meeting of SHs Minutes book for meetings of the board o Informs the SHs of the policies of the board o SC: until minutes are approved, no SH has the right to make a copy thereof Stock and transfer book o Contains the names of all SHs o Code does not require the corporation to furnish a SH with the list of names of other SHs o SEC: SH cannot demand that he be furnished with such a list; he should instead directly examine the books of the corporation Annual financial statements o Most recent financial statements: Granted by Sec 75 o 75: Within 10 days from receipt of written request, corporation must furnish most recent financial statement: Balance sheet as end of last taxable year Profit and loss statement showing in detail the assets and liabilities Annual report to the SEC o 141: every corporation domestic or foreign, lawfully doing business in the Philippines Report of election of directors, trustees and officers within 30 days after election by-laws o required by law to be open to inspection, but curiously not the AOI o but since the AOI are filed with the SEC, these are open to inspection by persons with legitimate interests and during reasonable hours on business days

However, if the paid-up capital of the corporation is less than P50,000.00, the financial statements may be certified under oath by the treasurer or any responsible officer of the corporation. Effect of and limitations on the Right Unbridled exercise of the right to inspect could be harassing to the corporation and would impair its efficient operations Balance must be sought between the interests of the individual SH and the interests of the corporation A corporation may regulate the time and manner of the inspection its books, but it cannot make a by-law which gives the directors absolute discretion to allow or disallow inspection o By-law provisions limiting inspection must be reasonable and not inconsistent with law 74: right to inspect subject to three (3) limitations: (1) must be exercised at reasonable hours on business days (2) person demanding right has not improperly used any information secured through any previous examination of the records (3) demand is made in GF and for a legitimate purpose 1. Limitations as to time and place Time of inspection o Only at reasonable hours on business days, throughout the year o By-laws cannot limit inspection to merely a few days during the year chosen by the directors o By-laws cannot provide for inspection only upon authority of the president o Business hours are reasonable hours; but inspection should not impede efficient operations of the business Place of inspection o 74: enjoins the corporation to keep all its records and stock and transfer books at its principal office, and inspection should be at such office o Veraguth case: SH cannot demand that he be allowed to take the corporate books out of the principal office for the purpose of inspecting them, but may make copies thereof

Sec. 75. Right to financial statements. Within ten (10) days from receipt of a written request of any stockholder or member, the corporation shall furnish to him its most recent financial statement, which shall include a balance sheet as of the end of the last taxable year and a profit or loss statement for said taxable year, showing in reasonable detail its assets and liabilities and the result of its operations. At the regular meeting of stockholders or members, the board of directors or trustees shall present to such stockholders or members a financial report of the operations of the corporation for the preceding year, which shall include financial statements, duly signed and certified by an independent certified public accountant.

2.

Purpose

Is purpose material? o 74 implies that the purpose of the SH in exercising his right to inspect is material; must not act in BF and must be for a legitimate purpose

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purpose is presumed to be a proper one and the corporation cannot refuse to grant him the right on a mere belief that the motive is improper o burden of proof that the motive is improper is on the corporation and its officers what is a legitimate purpose? o One which is germane to the interests of the SHs as such and not contrary to the interests of the corporation (Gokongwei v SEC) Access to stock and transfer book (contains names of all SHs) may be upheld provided the purpose in inspecting it is reasonably related to a SHs interest as such o Gonzales v PNB (supra): Where a person acquired one share of a corporation just so he can exercise his right to inspect a transaction entered into before he became a SH, his purpose is not germane to his interest as such and is thus not legitimate. Right is denied. Proper purposes: o To ascertain whether the corporation is being mismanaged o To ascertain financial condition of the corporation o To ascertain the value of shares o To obtain a mailing list of SHs to solicit proxies or influence voting, in anticipation of SH meetings Improper purposes: o To obtain information as to business secrets or to reveal business secrets o To secure business prospects or investment of advertising lists o To find technical defects in corporate transactions to bring nuisance or strike suits for blackmail o To obtain information to be published to embarrass the corporation, depress the value of its assets, and cause loss to SHs, or to demoralize and cause dissension among SHs

If not, i.e. both are one and the same and under the control of the parent: right to inspect available to subsidiary and the parent (Gokongwei)

Who may be held liable Corporate officer who has custody of the books and papers sought to be inspected who refuses to allow inspection Directors or trustees who voted for refusal if stated in a board resolution

Defenses available to persons held liable Person demanding has improperly used any information secured through any prior examination One requesting was not in GF or does not have a legitimate purpose

Remedies available if inspection refused

Mandamus (Gokongwei case) o Directed to the corporation o Secretary may be joined as party-defendant If mandamus is inadequate: injunction Action for damages against the officer or agent who refused inspection o Corporation itself may not be necessarily liable o 74: damages shall be imposed instead on the erring officers and directors if refusal is pursuant to a board resolution Criminal suit o Against the offending officers o Wrongful denial of the right to inspect a criminal offense punishable under Sec 144 of the Corpo Code.

Who may exercise the right Directors, trustees, SHs, or members o Either personally or through an agent o Limitations on a SH operate equally to directors and trustees Voting trust agreement: both voting trustee and the transferor have the right of inspection o Transferor is STILL the beneficial owner of the shares and should have as much right to seek information to protect his investment as any SH Parent-subsidiary o If legally separate and independent entities: no right of inspection to subsidiary

Pardo v Hercules Lumber. F: Corporate secretary of Hercules Lumber refused to permit Pardo, a SH, or his agent to inspect the records and business transactions of the company at the times desired by Pardo. Basis of the refusal was the provision in the companys by-laws which stipulated that every SH may examine the books of the company and other documents upon the days which the board annually fixes. H: The resolution of the board limiting the rights of SHs to inspect its records to a period of 10 days prior to the annual SH meeting is an unreasonable restriction in accordance with the Corpo Code, which provides that the right to inspect can be exercised at reasonable hours. The right of inspection was interpreted to mean that the right may be exercised at reasonable hours on business days

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throughout the year, and not merely during an arbitrary period of a few days chosen by the directors.

be set up by the corporation defensively if the Court is to take cognizance of it as a qualification. In other words, the specific provisions take from the SH the burden of showing the propriety of purpose and place upon the corporation the burden of showing impropriety of purpose or motive. The foreign subsidiary is wholly-owned by SMC and therefore under its control, and would be more in accord with equity, GF, and fair dealing to construe the statutory right of Gokongwei as SH to inspect the books of the parent as extending to the books of the subsidiary in its control.

Gonzales v PNB. H: The Code has prescribed limitations to the right of inspection, requiring as a condition for examination that the person requesting must not have been guilty of using improperly any information secured through a prior examination, and that the person asking for such must be acting in GF and for a legitimate purpose. It is the SH seeking to exercise the right of inspection to set forth the reasons and purposes for which he desires such inspection. SC held that the purpose of Gonzales, which was to arm himself with evidence which he can use against the bank for acts done by the latter when he was still a total stranger (i.e. not a SH), were not deemed proper motives and his request was denied.

Veraguth v Isabela Sugar Co. F: Directors have the unqualified right to inspect the books and records of a corporation at all reasonable times. Pretexts may not be put forward by the officers to keep a director or SH from inspecting the books and minutes of the corporation, and the right to inspect cannot be denied on the grounds that the director or SHs are on unfriendly terms with the officers. A director or SH has no absolute right to secure certified copies of the minutes until these minutes have been written up and approved by the directors.

Gokongwei v. SEC. F: Gokongwei, a major SH of San Miguel Corporation, sought to exercise his right to inspect the books and records of SMC Intl, a foreign subsidiary wholly-owned and controlled by SMC. Since he was not a SH of the subsidiary, SMC denied his request to inspect its books. H: Where the right to inspect is granted by statute to the SH, it is given to him as such and must be exercised by him with respect to his interest as a SH and for some purpose germane thereto or in the interest of the corporation. The inspection has to be germane to the petitioners interest as a SH and has to be proper and lawful in character and not inimical to the interest of the corporation. The SHs right to inspect is based on his ownership of the assets and property of the corporation. It is therefore an incident of ownership of the corporate property, whether this ownership or interest be termed an equitable ownership, beneficial ownership, or quasi-ownership, and is predicated upon the necessity of self-protection. On application for mandamus to enforce the right, it is proper for the court to inquire into and consider the SHs GF and his purpose and motives in seeking inspection. But the impropriety of purpose such as will defeat enforcement must

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Chapter X Derivative Suits

Defn: one instituted by a SH or a member for and in behalf of the corporation for its protection from acts committed by directors, trustees, corporate officers, and even third persons Common law recognized the right of a SH to sue in behalf of the corporation through the derivative suit SH files a derivative suit in behalf of the corporation in order to protect or vindicate corporate rights, whenever corporate officers refuse to sue or are the ones to be sued or hold control of the corporation

In cases of mismanagement where wrongful acts are done by directors/trustees, the directors would never be willing to sue themselves The suing SH is regarded as the nominal party, with the corporation as the party-in-interest

Nature and basis of derivative suit: distinguished from individual and representative suit Suits by SHs or members of a corporation based on wrongful or fraudulent acts of directors or officers may be classified into: o Individual suitsex. Where right of inspection is denied because wrong is done to SH who avails of the right o Class/representative suitswhere the wrong is doe to a group of SHs ex. PS holders rights are violated Derivative suitswhere the acts constitute a wrong to the corporation itself, cause of action belongs to the corporation and not to the individual SH o Each SH is necessarily affected by such a wrong to the corporation because the value of his interest would be impaired o Decision to sue or not to sue based on a wrong committed against the corporation primarily rests within the discretion and exercise of sound business judgment by the board of directors Primary duty of the directors is to increase net asset value of the corporation by deriving profits but remedies such as derivative suits against wrongful, negligent, or illegal acts which causes losses or injury to the corporation may even be more costly in terms of future profits when the board exercises its business judgment in GF that it will not pursue remedies in behalf of the corporation, then the use of the derivative suit will not prosper when the cause of action is against third parties, or against some members of the board, and there remains enough disinterested members to validly act as a body, the determination whether to take corporate action still lies within the business judgment of the board o It is only when the board itself has been the author of the wrong being done or having been done to the corporation, where business judgment is inapplicable and not even an intra-corporate remedy would be successful

Basis: Angeles v Santos o Board is a creation of the SHs and controls the corporate affairs by delegation of the SHs o Board occupies a position of trusteeship: Must exercise GF, care and diligence in their administration of the corporate affairs Must protect the interests of the majority and also of the minority o Where the board or directors wastes the corporate funds, fraudulently disposes of its assets or performs ultra vires acts, the courts, upon showing that an intra-corporate remedy is unavailable, will entertain a suit of the minority members of the board (or any SH), for an in behalf of the corporation, to prevent waste, stop the commission of illegal acts, and redress the injuries of the minority against the majority

Requirements relating to derivative suit Corpo Code contains no provision at all relating to derivative suits, but ff rules apply: (SMC v Kahn) Proper forum for derivative suit: o SRC: all intra-corporate disputes under Sec 5 of PD 902-A are transferred to the RTC

1.

Exhaustion of intra-corporate remedies:

GR: Suing SH must have exhausted his remedies within the corporation o Made a demand on directors to sue o Directors refuse or fail to sue Exception: demand not necessary where it would be futile to make it, as where the majority of the board are the very ones guilty of the wrong complained of (Everett v Asia Banking Corp.) Not only a procedural rule but also a substantive one Do the remedies within the corporation include removal of the errant directors, or ratification of the transaction? A SH can also ask for the appointment of a receiver to take management away from the board and place in the hands of a receiver

2. 16

Standing to institute a derivative suit as a SH in behalf of the corporation.

GR: SH must have been a SH at the time of the transaction or act complained of took place, or the shares devolved upon him o SMC v Kahn: bona fide ownership by a SH in his own right suffices to invest him with standing to bring a derivative action for the benefit of the corporation o Rep. v. Cuaderno: Number of shares is immaterial since the SH is not suing in his own behalf Exception: Even if the SH was not a SH at the time the questioned transactions took place, but the covered transactions continue and are injurious to the SH or affect him in some other way, he may bring a derivative suit (Pascual v Orozco) Exceptions to the exception: o If a SH transferred his shares after he had a chance to institute the derivative suit but failed to do so before the transfer, the transferee cannot institute the derivative suit himself o If a transferor is estopped, the transferee is also estopped from suing o If the transferor is himself party to the fraud or wrongful act against the corporation 3. The action must be brought for the benefit and in behalf of the corporation

by the limitation of its charter or by lawful dissolution. Since it is the corporation which is the real party-in-interest, then the reliefs prayed for must be for the benefit or interest of the corporation. When the reliefs prayed for do not pertain to the corporation, then it is an improper derivative suit.

Republic Bank v Cuaderno. F: A derivative suit was brought against the officers and the board. Complaint alleged that the directors approved a resolution granting excessive compensation to the corporate officers. Suit was filed in order to prevent dissipation of the corporate funds for the payment of salaries of the said officers. Board claims the action cannot prosper for failure to compel the board to file the suit for and in behalf of the corporation. H: Such a suit need not be authorized by the corporation where its objective is to nullify the action taken by its manager and the board, in which case any demand for intra-corporate remedy would be futile, and thus necessitating the court to intervene by granting the petition for a derivative suit. A SH in a banking corporation has a right to maintain a suit for an in behalf of the corporation, but the extent of such right depends upon when and for what purpose he acquired the shares of stock of which he is the owner. On the issue that the relators controverted the right to question the appointment and selection of Cuaderno and Dizon, which they contend to be the resilt of corporate acts with which the plaintiff as SH, cannot intervere, the SC held that an individual SH is permitted to institute a derivative suit in behalf of the corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever the official of the corporation refuses to sue, or are to ones to be sued.

See Evangelista v Santos infra GR: Corporation should be made a party-defendant o Exception: Everett case, Angeles v Santos 4. 5. Any benefit recovered by the SH as a result of the derivative suit must be accounted for to the corporation as the real party-in-interest Plaintiff SH is entitled to reimbursement from the corporation for the reasonable expenses of litigation

Evangelista et al v Santos. F: Plaintiffs are minority SHs who brought a derivative suit against the principal officer for damages resulting from the mismanagement of corporate affairs and misuse of corporate assets. The complaint prayed for judgment requiring defendant, among others, to pay plaintiffs the value of their respective participation in said assets on the basis of the value of the shares held by them. H: Suit would not prosper. SHs brought the action not for the benefit of the corporation but for their own benefit since they asked that the defendant make good the losses occasioned by his mismanagement and pay them the value of their respective participation in the corporate assets on the basis of their respective holdings. The relief sought could not be done until all the corporate debts, if there are any, are paid and the existence of the corporation terminated

San Miguel Corporation v Kahn. H: Requisites for a proper derivative suit: (a) party bringing suit should be a SH as of the time of the act or transaction complained of and at the time of filing of the suit. Number of shareholdings immaterial. A bona fide ownership by a SH in his own right suffices to invest him with standing to bring a derivative action in behalf of the corporation (b) party has tried to exhausted intra-corporate remedies (made demand on the board to sue in behalf of the corporation, but the latter failed or refused) (c) cause of action actually devolves on the corporation, the wrongdoing or harm having been or being caused to the corporation itself and not to the suing SH

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Chapter XI Financing the Corporation; Capital Structure

Sources of financing Three main sources: Equity investments; Contributions of SHs o Investor making equity investments expects that his returns shall be tied up with the success or loss of the operations of the corporation Return of equity investor is intricately woven into the business affairs of the corporation and participates in the income Investor/SH is given a say in the managementhe is entitled to participate in the election of the board and cast votes on corporate matters where SHs are required to give ratificatory action Absence of carrying cost since corporation is not bound to pay any return on investment unless there are profits and subject to business judgment of the board in declaring dividends o Equity investment generally non-withdrawable for so long as the corporation has not been dissolved o Investors of equity can only receive a return of their investment only from the remaining assets after payment of creditors Debt contracts: Loans/advances by creditors o Person extending a loan or debt looks at the financial condition and operations of the corporations as a means of gauging capacity to pay Creditor puts no stake on the operations of the business; his relationship to the corporation is based on contract Contractual obligation of corporation to pay the stipulated return (in the form of interest) remains even when losses are incurred o Expected return: creditor can only demand the stipulated fixed return/interest o Legal preference in payment from corporate propertiesonce insolvent, the corporation shall devote and prefer all corporate assets towards the payment of creditors Profits of the corporation

Senior securities: those which have a prior but limited claim upon corporate earnings (such as debt and typical PS) o Equity securities: those which have the residual interest in corporate earnings (such as CS and participating PS) Important characteristics of securities as forms of investments: o Right to any early claim on the income before other security holders o Right to residual income o Right to vote Only 25% of authorized capital stock need be subscribed initially o Promoters are not bound to limit the starting capital needed by the business o Other sources of capital may be tapped, at the initial stages or when the corporation is already a going concern Two questions to consider: o What should be the relation between basic equity interests and senior securities? o What type of senior securities should be issued? o

Capital and Capital Stock Distinguished 137: total shares of stock issued to subscribers or SHs, whether or not fully or partially paid, provided there is a binding subscription agreement; composed of (2) items: o portion paid by the SHs (paid-up capital) o portion which is to be paid on the subscriptions (subscription receivables) Capital stock: the amount fixed by the AOI to be subscribed and paid in or secured to be paid in by the SHs, either in money, property, or services o Represents the legal and proportional standing of the SHs with respect to the corporation and corporate matters o Represents the financial and proprietary claim of the SHs to the net assets of the corporation upon dissolution o Totality of the portion of the corporations assets and receivables covered by the trust fund doctrine and are deemed protected for the benefit of corporate creditors o The corporation does not have to issue all shares at one time o Remains the same unless the AOI are amended to either increase or decrease o Cannot be used to declare dividends Capital: actual property of the corporation, including cash, real and personal property o Includes all corporate assetscontributions of SHs, loans by creditors, earnings less losses

Capital structure Refers to the aggregate of the securities issued by the corporation Two classes of securities: o Shares of stock o Debt securities

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Fluctuates depending on current profits or losses of the business Corporation does NOT have the power to: a) demand for the repurchase of shares unless classified as redeemable in the AOI (Sec 8) b) refuse to pay dividends to SHs as declared and not been declared delinquent in order to apply to the unpaid subscription (Sec 71) c) bid delinquent shares and obtain greater profit for itself (68) Power to issue shares: Power to issue shares or sell them inherent and express in the corporation, lodged with the board o SH meeting not required on the issuance of unissued authorized capital stock (first issuance from corporation to SH) Limitations on power to issue shares: o 62: Cannot be issued for a consideration less than the par or issued value Sec 9: except treasury shares so long as the price is reasonable o 62: Cannot be issued in exchange for PNs or future services o 59: if consideration not in caSH: value shall be determined by the incorporators or the board subject to SEC approval Power to classify shares Sec 6: shares may be divided into classes or series or both, any of which may have rights, privileges, or restrictions stated in the AOI o No share may be deprived of voting rights except those classified and issued as preferred and redeemable shares o Any or all shares or series of shares may have par or no par value Code adopts presumption of equality of the rights and features of shares when nothing is expressly provided to the contrary in the AOI or when AOI is silent o In the absence of restrictions in the AOI, PS shall would be voting shares having the same rights as CS Code provides for voting rights for all types of shares on matters of fundamental importance; Sec 6: non-voting shares shall be entitled to vote on: o Amendment to the AOI o Adoption and amendment of by-laws o Sale, lease, exchange, mortgage, pledge or any disposition of all or substantially all corporate property o Incurring, creating or increasing bonded indebtedness o Increase or decrease of capital stock o Merger or consolidation o Investment in another corporation or another business

Shares of Stock; Kinds Sec 6

Defn: Share of stock: a unit or several units of interest acquired when a person contributes capital to a corporation by way of equity o Units into which the capital stock is divided o Represents the interest of the holder: to participate in the management of the corporation, to share proportionally in the profits, and upon liquidation, to obtain an aliquot part of the corporate assets after creditors are paid o GR: SH cannot get back his investment until dissolution or liquidation of the corporation o Ownership of shares do not make the SH the owner of any specific property of the corporation, but the shares owned are his own personal property which he may transfer, mortgage, pledge, or otherwise dispose of o Not to be confused with certificate of stockevidence of the interest of the SH in the corporation

Nature of shares of stock Constitute personal property of the SH which he can contract with as in any other form of property Represent aliquot parts of the corporations capital or the right to share in the proceeds; holder is not the owner of any part of the capital of the corporation nor is he entitled to any definite portion of the property and cannot be treated as a co-owner or tenant-in-common (SHs of Guanzon v. RoD) Holders do not own any part of the assets nor are they entitled to possession Do not represent proprietary rights of SHs to the corporate assets or properties Rights of the corporation with respect to shares: a) To call for payment of unpaid subscriptions subject to contrary stipulation in the subscription agreement (67) b) To impose interest on unpaid subscriptions (66) c) To refuse to issue certificates covering shares where subscription has not been fully paid (64) d) To refuse to recognize and register the sale or assignment of any share where subscription is not fully paid (63) e) To refuse to recognize a sale or assignment which has not been duly registered in the stock and transfer book (63)

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o Dissolution of the corporation All other corporate acts: non-voting shares not entitled to vote Minimum restrictions on classification, provided that there be a class with complete voting rights NOTE: rights of PS and bondholders are a matter of contract

Trust relations on shares of stock A trust relationship may be created involving shares of stock of a corporation Sec 10: each incorporator must own or be a subscriber to at least one (1) share Sec 23: every director must own at least one (1) share of stock, which shall stand in his name on the books of the corporation of which he is a director Nominal ownership in shares is all that is required under Sec 23 even when it is shown that the registered SH is only a nominee or trustee of another person Nominee and trustee arrangements do not violate public policy but such nominees and trustees must still comply with the applicable legal restrictions and formalities

Under 43, stock dividends cannot be issued without approval of 2/3 OCS at a meeting called for the purpose Underscores the principle that payment of dividends to SHs is not a matter of right but a matter of consensus There is no guarantee that the PS will receive any dividends Declaration of dividends is dependent upon the availability of surplus profit or unrestricted retained earnings Preferences do not give PS holders a lien upon the corporate property

Two limitations: o Can only be issued with a stated par value;

Preferences must be stated in both the AOI and the stock certificate; otherwise, each share shall be equal to every other share (1) Preference as to dividends Dividends are payable only when there are profits earned GR: even if there are existing profits, the board has the discretion to determine WON to declare dividends Gives the holder the right to receive dividends on said shares to the extent agreed upon before any dividends at all are paid to the holders of CS Types: i. Participating and non-participatingshares in which after getting their fixed dividend preference, they share with the CS the rest of the dividends; unless otherwise stipulated, PS are NON-participating shares ii. Cumulative and non-cumulative

Kinds of shares

1.

Common stocksone which entitles the owner to an equal pro rata division of profits; one SH having no advantage, priority or preference over any other SH in the same class Most common classification Do not have special contract rights or preferences Represents the greatest proportion of the corporations capital structure and bears the greatest risk of loss in the event of failure Represents the residual ownership interest in the corporation

2.

Preferred Stocksentitles holder to some preference either in the dividends or in distribution of assets upon liquidation, or both, or to other preferences not inconsistent with the code Designed to induce persons to subscribe for shares of a corporation No more a debt than CS, and until a dividend is declared the holder of PS is not a creditor of the corporation Rights of PS holder are subordinate to the rights of creditors

Entitlement to preferences: o Cannot be deemed absolute and must be interpreted in accordance with the Code and jurisprudence

Cumulative PS: entitle the holders to payment not only of current dividends but also of back dividends not previously paid, when and if dividends are declared, to the extent agreed before CS are paid If PS dividends are not paid in full in a given year, whether or not earned, the deficiency must be made up before any dividend may be paid on the CS PS are deemed to be cumulative In any given year(s) where no dividends declared, the arrears for such year have to be made up in subsequent years before dividends are paid to CS Non-cumulative PS: entitle the holder to payment of current dividends that are paid, to the extent agreed, before CS holders are paid

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iii.

Discretionary dividend typeright of SH to get dividends would depend on the discretion of the board, even if the corporation earns profits Mandatory dividend typeimposes a positive duty on directors to declare preferred dividends every year that profits are earned, and failure to declare would not deprive holders of his dividend rights for a particular year (Burk v Ottawa Gas) Earned cumulative or dividend credit typegives a right to arrears in dividends where there were profits earned during the years when dividends were not declared 1. SH may not compel payment of dividends and must wait until the board decides to declare

iv.

(3) Preferences upon liquidation (preferences as to assets) GR: PS holders participates pro rata with the CS holders, since each share is presumed to be equal Exception: PS holder may be given preference in the distribution of corporate assets Gives the holder preference in the distribution of assets of the corporation in case of liquidation

v.

(2) Preference as to voting rights GR: PS are denied by contract the right to vote Exception: if the right is not clearly withheld in the certificate or AOI, since voting is incidental to ownership

Ellingwood v. Wolfs Head Oil Refining Co. F: Ellingwood is a preferred SH of the Wolfs Head Oil Co. At a SH meeting, the corporation was in default in the declaration and payment of dividends for 2 years on the PS. The AOI provides that PS holders are entitled to cumulative dividends, and gives exclusive voting power to holders of CS. PS holders have no voting rights, but is the corporation is in default in the payment of dividends, the majority PS holders shall have an election to exercise the sole right to vote for the election of directors and all other purposes, to the exclusion of the CS holders, until the corporation declares and pays dividends for a full year on the PS. Thereafter the right to vote shall revert to the CS holders. Ellingwood contends that the clause until the corporation pays for a one year period dividends on the PS restricts the above provision in the AOI as to the duration of time when PS holders shall have the right to vote. TC ruled that PS were entitled to vote at the SH meeting. H: The AOI of the company evidences an intention to make provision for the protection of PS holders. When a dividend for a full year is paid on PS, the sole right to vote reverts to the CS holders, notwithstanding that dividends for 2 years are still due on PS. It clearly appears therefore that when the annual meeting of the corporation was held, dividends were accrued and unpaid on the PS, thus the company was in default, and therefore the PS holders were entitled to vote for the election of directors and all other purposes as stipulated in the AOI.

Hay v Hay. F: The Big Bend Co. is a real estate business concern. It amended its articles, stipulating that holders of PS are entitled to receive cumulative dividends, such that if in any year dividends shall not have been paid, the deficiency shall be paid before dividends are declared or paid upon the CS. It also provides: that out of any surplus profit remaining after payment of full dividends on PS for all dividend periods and after full dividends have been paid in full, then dividends may be paid to CS; and in the event of any liquidation of the corporation the holders of PS shall be entitled to be paid in the full the par value thereof, and all accrued unpaid dividends thereon before any sum shall be paid to any assets distributed among the holders of CS. No creditors are involved. No dividends on cumulative PS have been declared or paid. No surplus profits are available with which to pay dividends. A plan of liquidation, distribution, and dissolution of the corporation was adopted. It appears that the net assets were sufficient to redeem the PS at par, but if the PS holders received the promised dividends per the amended AOI, assets instead of surplus profits would be used. The result will be that the CS holders 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 redemption of the PS, sought a declaratory judgment from the court. It is contended that the phrase 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 the dividends never accrued and therefore none are payable. A counterargument is raised that the provisions of the amended AOI relate to the payment of dividends to PS holders out of surplus profits while the corporation is a going concern, but that it authorizes payment of accumulated and unpaid dividends out of assets upon liquidation of the corporation, even though there is no surplus profits available. I: WON holders of cumulative PS upon liquidation of the corporation are entitled to be paid accrued dividends from corporate assets before the common SHs become entitled to participate in the distribution thereof, the corporation having earned no surplus or net profits.

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H: The contract stating the rights of the PS has a double aspect. The provision on annual dividends payable out of the surplus profits was founded on the hope and prospect of a profitable business. Such dividends could be paid by a corporation financially successful. There can be no dividends declared by a corporation in financial distress. But if there were provision for the rights of PS holders even in the event of a business disaster resulting in voluntary winding up or dissolution of the corporation, they would be entitled to receive in full both the amount of their shares and the unpaid dividends accrued. In this case the words of preference were designed to be operative even under conditions of adversity. The advantages of holders of PS are not restricted to conditions of prosperity, but general in scope and intended to be operative in all the hazards of business. In the present case, the holders of PS are entitled to both the par value of their stock and to dividends which have not been declared or paid but which would have been so, had the company experience surplus profits. An investor places his money in cumulative PS because it has a guaranteed dividend and certain preferences, as set forth in the stock agreement. If this agreement gives preferences as to dividends in the liquidation proceedings, the stock would normally be considered as a better business risk. The clause unpaid dividends accrued would thus mean that it gives preference to holders regardless of any consideration of profits or surplus. Dissent: Differences of opinion usually arise when on liquidation, PS holders sought to have a preference in the distribution of assets to reimburse them, because the corporation may not have earned any net profits out of which dividends can be paid. Two schools of thought: (1) a dividend can come into being and exist only by affirmative declaration of the corporation, and only if there is surplus profits. No surplus profits, no right to the dividends accrues, and thus cannot be demanded in liquidation; (2) dividends, if not regularly paid out of available earnings, may be amassed, whether earned or not, at regular dividend rates, and may be paid out of assets when the corporation is liquidated if the AOI so provide.

I: WON the rights of the holders of preferred shares to share in the proceeds on the sale of mortgaged property H: It is within the power of the legislature to prescribe that corporations may issue certificates in the form of certificates of PS, making the holders creditors of the corporation as well as SHs, and giving them a lien upon the corporate property with a priority over other creditors. This is not ordinary PS, nor technically PS at all. It is sui generis, not governed by the ordinary rules. The preferences given the holders of the PS in this case were not authorized by statute when made. The stock was not statutory PS of the kind described. PS may be issued in such a way as to make the certificates thereof merely evidence of indebtedness and the holders creditors and not SHs. Here all facts and circumstances characterize the PS issued by the corporation as PS, and not bonds. SHs voted increases in capital stock by the creation of PS. The certificates delivered to the holders of the bonds exchanged for it designated the stock as PS. The holders had the right to vote. The certificates contain every essential feature of a certificate of PS and none of a contract of indebtedness. By surrendering their bonds, and taking in lieu thereof PS, the bondholders ceased to become creditors and became mere SHs. Those who have no made the exchange are entitled to the security of the mortgages, excluding the illegal conversion agreements. The PS are not entitled to share in the assets of the corporation until all creditors are paid in full.

3.

Par and no-par shares Par value: the minimum issue price of a share o Must be stated in stock certificate, which cannot be issued until paid in full by subscriber o Shares cannot be sold at less than par; otherwise they would be watered stock and SH would still be liable for the difference No par value: issued price is not stated in the stock certificate, but may be fixed in the AOI or by the board or in the by-laws, or by the SHs themselves o Sec 6: no par value shares shall be deemed fully paid and nonassessable and the holder thereof shall not be liable to the corporation or to its creditors o Subscriber must pay its full consideration o Such consideration shall be treated as capital and is not available for distribution as dividends o Delpher case: no par value share does not represent any stated proportionate interest in the capital stock, but only an aliquot part of the whole number of such shares issued

(4) Preferred stockholder is not a creditor PS holder is an equity holder and not a creditor Investment is still subject to all risks of ownership

Augusta Trust Co. v. Augusta, Hallowell & Gardiner Railroad Co et al. F: Augusta Railroad had outstanding bonds secured by mortgage. These bonds gave the holders the right to convert into preferred stock of the company. The corporation contends that the certificates of PS issued in exchange for bonds were in fact certificates of indebtedness and not stock.

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Capital stock of a corporation issuing no par shares is not set forth by a stated sum of money, but is expressed to be divided into a stated number of shares By removing the par value, the attention of persons interested in the financial condition of the corporation is focused upon the value of the assets and debts Limitations on the issuance of no-par value shares: a) Once issued, are deemed fully paid and therefore nonassessable b) Consideration cannot be less than P5.00 c) Entire consideration for the issuance constitutes capital d) Cannot be issued as PS e) Cannot be issued by banks, trust companies, etc f) AOI must state the fact that no-par shares were issued

May be redeemed regardless of whether or not there are unrestricted retained earnings, provided the corporation has sufficient assets in its books to cover debts and liabilities SEC Rules: in issuing redeemable shares, corporations must set up and maintain a sinking fund If the option to redeem is clearly vested in the corporation, the redemption is an optional one and the SH is without right to either compel or refuse the redemption Amount of unrestricted retained earnings equivalent to the cost of treasury shares held shall be restricted from being declared and issued as dividends

6.

Founders shares Sec 7: founders shares classified as such in the AOI may be given certain rights and privileges not enjoyed by owners of other shares If it involves the exclusive right to vote and be vote for in the election of directors, it shall not exceed 5 years

4.

Treasury shares

Sec 9: shares issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation, or through other lawful means No voting rights nor preemptive rights Not entitled to dividends May be sold for any amount the board may fix SEC: treasury shares have no effect on the stated capital of the corporation until and unless they are cancelled or retired Acquisition of treasury shares does not reduce the number of issued shares nor the amount of stated capital and their sale does not increase the number of issued shares or amount of stated capital 5. Redeemable shares Sec 8: may be issued by the corporation when expressly so provided in the AOI Redeeming shares: shares issued by a corporation which the corporation can purchase or take up from holders as expressly provided for in the AOI and stock certificates Redemption: repurchase, reacquisition of stock by a corporation which issued it in exchange for property, whether or not the stock is canceled, retired, or held in the treasury o Corporation gets back some of its stock, distributes cash or property as payment, and continues its business as before May be purchased or taken up by the corporation upon the expiration of a fixed period, regardless of unrestricted retained earnings

Nature of Subscription Contract Underpins the relationship between the SH and the corporation 72: holders of subscribed shares not fully paid which are not delinquent shall have ALL the rights of a SH o it is the subscription to shares, and not the payment, that create the legal relationship between the SH and the corporation (Fua Cun case infra) o full payment of the subscription value and/or issuance of the covering certificates are not important ingredients for transfer of ownership (72) o registration of the subscription is also not essential to constitute subscription and issuance of shares; it is merely meant to govern the binding effects of sale and dispositions of shares as to third persons (63) two ways to become a SH: o by subscription to shares before or after incorporation o by acquisition of already issued shares from an existing SH Defn of subscription: a contract for the acquisition of unissued stock of a corporation whether existing or still to be formed o subscription price need not be paid in full at the time of the contract o once perfected, SH becomes a debtor to the corporation and may be liable to pay any unpaid portion upon call by the board no interest unless by-laws provide SH personally liable for the financial obligations of the corporation to the extent of his unpaid portion When shares deemed subscribed

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60: any contract for the acquisition of unissued stock in an existing corporation or one still to be formed shall be deemed a subscription agreement even if the parties refer to it as some other contract o The entering into any contract for the acquisition of UNISSUED stock, which shall be deemed as a subscription agreement, would itself constitute the tradition by which the subscriber becomes a SH of the corporation and through which he becomes the owner of the shares and thus exercise acts of ownership A subscription agreement constitutes the very mode by which shares are thereby issued and then owned It exists upon the meeting of the minds of the corporation and the subscriber as to the number and value of the subscription of shares The covered shares would then be deemed issued by the corporation at that point in time The sale of unissued shares of stock may be treated wholly as a sale of shares governed by the law on sales (Bayla) The entire shareholdings of a SH, even when not fully paid for, belong in ownership to him with legal authority to sell or mortgage the same (Fua Cun) Is a valid subscription agreement enforceable even when it is not reduced in writing? o Villaneuva: yes! Corporation can adduce oral evidence on a verbal agreement o

o o o Sec 66

Affects the ability or liability of the subscription agreement Agreement will not be treated as a sale of shares; falls under Sec 60 It is only when delinquency is declared that would deprive the subscriber the rights of a SH

Garcia v. Lim Chu Sing. F: Lim Cuan Sy is the debtor of the Mercantile Bank of China, by virtue of a trust account with the bank, in the form of trust receipts guaranteed by CMs and by Defendant Lim Chu Sing as the surety of Lim Cuan. Lim Chu is also a SH of the bank iao P10000. When the obligation became due, the bank foreclosed the CMs without the knowledge of the surety Lim Chu. The bank also required Lim Chu as surety to execute a PN, where in the event of Lims default in payment of any installment as they become due, the entire amount or unpaid balance becomes due and demandable. Lim leaves a balance of P9,105.17. The bank is under liquidation at the time of the action. I: WON it is proper to compensate Lims indebtedness with the sum of P10000 in shares of stock with the Mercantile Bank of China. H: A share of stock or the certificate thereof is not an indebtedness to the owner nor evidence of indebtedness, and is thus not a credit. SHs are not creditors of the corporation. The capital stock of a corporation is a trust funds to be used for the security of the creditors of the corporation, who deal with it on the credit of the capital stock. SC ruled that Lim Chu not being a creditor of the Bank, although the latter is a creditor of the former, there is no sufficient ground to justify a compensation.

Characteristics of Subscription agreements There can be a subscription only with reference to UNISSUED shares of stock o Original issuance from authorized stock at the time of incorporation o Opening of a portion of the original but unissued authorized capital stock to subscription o Increase of authorized capital stock through formal amendment of the AOI and approval of the SEC On ISSUED shares: any transaction thereon is NOT a subscription agreement, and is therefore governed by the Law on Sales 60: agreements for the acquisition of unissued shares shall be deemed a subscription agreement o affords protection to corporate creditors so that any and all transactions relating to the issuance of shares of stock is a subscription agreement o in case of insolvency, corporate creditors may enforce even against one denominated as a purchaser Stipulations in subscription agreements of unissued shares that the subscribers right to be treated as a SH and enjoy the rights thereof would commence upon full payment of the subscription would be VOID

1.

Pre-incorporation subscription

Theories on the binding effect of pre-incorporation subscriptions: o Offer theory: such subscriptions are only continuing offers to the proposed corporation which do not ripen into contracts until accepted by the corporation when organized Thus subscribers are allowed to withdraw their subscription at any time before the corporation comes into existence and accepts the offer o Contract theory: becomes a binding contract and is irrevocable from the time of subscription unless cancelled by all parties before acceptance by the corporation Prevents subscribers from withdrawing unless consented to by all subscribers

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Sec 61: Corpo Code adopts the view that when a group of persons sign a subscription contract, they are deemed not only to make a continuing offer to the corporation but also to have contracted with each other as well 61: GR: a pre-incorporation subscription shall be IRREVOCABLE for a period of at least 6 months from date of subscription o Exceptions: When all the other subscribers consent to the revocation Incorporation fails to materialize within 6 months or longer as may be stipulated in the subscription agreement o Fusion of the best features of the offer and contract theories Contract between subscriber and the to-be-formed corporation Contract between and among the subscribers; thus it is beyond the powers of the board to release the subscribers since the consent of all is necessary (Velasco v Poizat infra) o Consistent with 25% minimum requirement o After 6 month period, a pre-incorporation subscriber may revoke his subscription agreement without the consent of the other subscribers o But if AOI have already been submitted to SEC, there can be no more revocation even if other subscribers consent and even after 6 month period o Once perfected, each subscriber has to comply with his contract and pay his subscription; not even the corporation can release him

value of 43 shares which he had been deprived, being 1/5 of the shares issued less 5 shares delivered to him. The corporation was not held liable. Wallace contends that he was erroneously limited to money decrees against the promoters and seeks a judgment against the entire property and plant of the corporation as a trust therein his 1/5 undivided interest or a judgment to order the issuance and delivery of 43 additional shares, or a judgment for the actual, not par value of the shares. H: Promoters are indeed solidarily liable to Wallace for the stock to which he is entitled, and so is the corporation. The corporation and the other subscribing SHs accepted and benefited from the contract with Wallace. Thus, not only did the corporation have notice of Wallaces right but all the SHs of the corporation participating in the 1st SH meeting of the corporation had notice that Wallace had at least some interest or claims based on his contract. Wallace is definitely a subscriber to the stock of the corporation. His contract was to sell or convey to the corporation the leasehold and accept payment in fully paid up stock to the value of the property leased when fully equipped for the business purposes of the corporation. Being entitled to this amount of stock easily ascertainable when the equipment was completed, he became entitled to the stock, and a court of equity can compel specific performance to deliver the shares to him. One who has paid for his subscription may sue in court to compel the issuance of proper certificates therefor. The TC was therefore wrong in limiting Wallace to a money decree severally against the promoters and not including the corporation.

60-60: pre-incorp contracts are valid & enforceable; are types of promoters contracts GR: a promoters contract is not necessarily binding on the corporation; EXC: when the corp received benefits at the time of its creation 60: any contract for the acquisition of unissued stock in an existing or to be formed corp shall be deemed a subscription, notwithstanding reference by the parties as a purchase or some other contract Sec 13 Sec 61

2.

Post-incorporation subscription

Distinction between purchase and subscription of shares erased by Sec 60 Since anyone who acquires unissued shares is a subscriber, then he enjoys all rights of a SH regardless of WON he has fully paid for his subscription (unless he becomes delinquent) Since he is a debtor to the corporation, the subscriber remains liable to pay the balance of his subscription price

Wallace v. Eclipse Pocahontas Coal Co. F: Case involves a contract entered into by Wallace and the promoters of the Eclipse Pocahontas Coal Co. Wallace was to transfer and assign an option for a lease to the promoters and from the promoters to the corporation, in exchange for money to pay for the purchase price for the lease, and once the corporation is up and running, Wallace was to have a 1/5 interest in the property fully-paid up, and a 1/5 interest in the corporation fully paid up. Wallace was also to be entitled to 50 shares of the corporation, but only 5 shares were issued to him. Wallace alleged that the corporation and its promoters failed to perform their part of the contract. TC ruled that Wallace was to recover a little over $1000 from each of the defendants, or a total of $4300, which the court found to be the

Bayla et al v Silang Traffic Co Inc. F: Bayla et al are SHs who file an action to recover certain sums of money which they had paid to the corporation on account of shares of stock they individually agreed to take and pay for under certain specified conditions. The action is based on a resolution by the board of Silang Traffic Inc. The resolution revokes the rescission of the agreement. Silang argues that the resolution does not apply to Bayla because on the date thereof the subscribed shares had already automatically reverted to the corporation, and the installments paid had already been forfeited, without need for demand, and that the resolution itself had been

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revoked. TC ruled ifo Silang Traffic, invoking the ruling in Velasco v Poizat that a corporation has no legal capacity to release an original subscriber to its capital stock from the obligation to pay for its shares, and any agreement to this effect is invalid. CA affirms. The parties, TC and CA treated the agreement as a contract of subscription to the capital stock of Silang Traffic. It should be noted that the agreement is entitled, Agreement for Installment Sale of Shares in the Silang Traffic Co. Inc, and that while the purchaser is designated as a subscriber, the corporation is described as seller. The agreement took effect long after incorporation of the company. I: WON the contract in question is a subscription or a contract of sale. H: Whether a particular contract is a subscription or a sale of stock is a matter of construction and depends upon its terms and intention of the parties. A subscription to a stock in an existing corporation is, as between the subscriber and the corporation, simply a contract of purchase and sale. Thus the terms of the contract indicate that they are contracts of sale and not of subscription. A subscription 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 at a stipulated price. Likewise, the rule that the 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. The contract being one of purchase and not subscription there is no legal impediment to its rescission by agreement of the parties. The rescission was made for the good of the corporation and in order to terminate the pending civil case. Since the civil case was eventually dismissed, and that the purchasers of stock would be able to benefit by the resolution. It would be an unjust discrimination to deny the same benefit to Bayla. There is also no intimation that the corporation is insolvent, or that the right of any creditor was prejudiced by the rescission. I: WON under the contract, the failure of the purchaser to pay any of the installments automatically gave rise to the forfeiture of the paid installments. H: the contract did not expressly provide for automatic forfeiture and cancellation without necessity of demand. Under the CC persons obliged to deliver or do something are not in default until the amount the creditor judicially demands the same, unless the obligation or the law expressly provides that demand shall not be necessary or that by reason of the nature and circumstances of the obligation it shall appear that the designation of the time when the thing is to be delivered or service rendered was the principal inducement to the creation of the obligation. The nature of a contract covering unissued shares after incorporation was either a subscription contract or a purchase of shares of stock, depending on the terms of the agreement and intent of the parties

Subscription agreements are mutual agreements among subscribers to take and pay for the stock of a corporation, and it is not possible for SHs to withdraw from such an agreement without the consent of the other subscribers Purchase agreements are independent agreements between the individual and the corporation to buy shares at a stipulated price

Preemptive Right to Shares 1. Basis of right; common law rule Preemptive right: option privilege of an existing SH to subscribe to a proportionate part of shares subsequently issued by the corporation before the same can be disposed in favor of others o Common-law right granted to SHs of a corporation to be granted the first option to subscribe to any opening of the unissued capital stock, or to any increase from the authorized capital stock Economic aspect: right to invest capitalthe right becomes valuable when the enterprise has demonstrated that it will earn a higher rate of return on the capital than the SH could get were he to invest it in the open market Limited to shares issued in pursuance of an increase in the authorized capital stock; does not apply to additional issues of originally authorized shares forming part of the existing capital stock 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 unsubscribed shares are later reoffered, the SH cannot claim that his interest would be diluted Preemptive rights are not statutory rights, but common law rights Preemptive rights are personal rights of the SH o Need not be stipulated in the AOI or by-laws o May be removed, denied, or altered only through specific provisions in the AOI or amendment thereto o SEC: vote by majority of SHs to waive the right is NULL and VOID; such waiver must be given individually by the SHs concerned But unanimous vote of all will bind them Extent and limitations of preemptive right under Code

2.

Sec 39: all SHs of a stock corporation shall enjoy pre-emptive rights to subscribe to all issues and dispositions of shares of any class, in proportion to their respective shareholdings Exceptions: o If denied by the AOI or an amendment thereto

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o o o

On shares issued in compliance with laws requiring stock offerings or minimum stock ownership by the public On shares to be issued in GF, approved by at least 2/3 OCS in exchange for property for corporate purposes On shares to be issued in GF, approved by at least 2/3 OCS, in payment of a previously contracted debt

4.

Waiver of preemptive right GR: Any prior waiver or denial should appear in the AOI o Ordinary waiver agreement is not sufficient Exception: If all existing SHs unanimously agree to a waiver, although not in the AOI, they will be bound by such agreement

Coverage of preemptive right All issues or disposition of shares of any class Includes issues from the existing unsubscribed portion of authorized capital stock Includes not only new shares but also previously unissued shares which form part of the existing authorized capital stock Includes reissuance and sale treasury shares SEC: does not include subscription deposits; these are payments received for the future issuance of stock which may or may not materialize except When shares are issued in exchange for property needed for corporate purposes, or for a debt previously contracted, the SH cannot demand his preemptive right Where all shares are issued by a corporation in exchange for shares in another corporation (merger), the preemptive right does not exist, provided the issue is made with approval of 2/3 SHs (Thom case) In widely held corporations, where future financing plans may be seriously hindered by the existence of the preemptive right Code allows waiver or denial provided it is in the AOI, either as an original provision or as an amendment Effects of exercise and waiver of preemptive right Exercising SHs still retain their relative and proportionate voting strength, which will not be affected thereby Waiving SHs shares may be offered to non-SHs of record on a firstcome-first-served basis o Not necessary that the shares will again be offered on a pro-rata basis to SHs who availed of the right 3. In close corporations Balance of power in close corporations may be disturbed by an indiscriminate issuance of new shares without regard to preemptive right of SHs In a close corp, exceptions in Sec 39 are not applicable

Datu Tagoranao Benito v. SEC. F: Benito subscribed to 460 shares of the Jamiatul Philippine-Al Islamis Inc. The corporation increase its capital stock, with an additional issuance of worth P110,980.00. Benito files a complaint with the SEC alleging that the issuance was made in violation of his pre-emptive right to the additional issue and that the SHs of record were not notified of the meeting. SEC ruled that the issuance was valid, and that his preemptive rights are inapplicable. H: Issuance is not invalid even without notice to the SHs. The power to issue shares of stocks is lodged in the board and no SH meeting is necessary to consider it because additional issuance of shares does not need SH approval. GR: preemptive right is recognized only with respect to new issue of shares, and not with respect to additional issues of originally authorized shares. The theory is that when a corporation at its inception offers it first shares, it is presumed to have offered all of those which it is authorized to issue. The 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 reoffered, he cannot therefore claim a dilution of interest.

5.

When the issue is in breach of trust SHs can still object even if preemptive right does not exist or comes within exceptions in Sec 39 if the directors acted in breach of trust or to freeze out the minority (Ross Transport case) Remedies when right violated Aggrieved SH can obtain an injunction or mandamus Derivate suit proper, not only in the violation of preemptive right but also where the violation resulted in waste and mismanagement of corporate assets

6.

Sec 102

Stokes v. Continental Trust Co.

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F: Stokes is one of the original SHs of Continental Trust Co, owning 221 shares at the time of the controversy. Blair & Co. proposed that if the company decides to increase the capital stock, they would purchase the new shares at a higher price, and acquire the right to nominate their people to the board of trustees. The SH were informed of the Blair offer, and Stokes made his demand to exercise his preemptive right. Stokes at the SH meeting for the purpose of increasing the capital stock, demanded the right to subscribe for 221 shares of the new stock at par, but was refused. As a result, he now has only voting power that he had before, because the number of shares had been doubled while he still owns 221. After the sale to Blair, Stokes renewed his demand but was again refused. At this time the stock rose in value, from 450 to 550 to 750. Stokes sued. TC ruled that Stokes had the right to subscribe, and was entitled to recover the difference between the market value at the time of increase and its par value. CA reversed. I: WON Stokes had the legal right to subscribe and take the same number of new stock he held of the old. H: A vote to increase the capital stock, if it was not the creation of new and disjointed capital, was in its nature an agreement among the SH to enlarge their shares in the amount or in the number of the extent required to effect that increase. If the right claimed by Stokes was a right of property belonging to him as SH, he could not be deprived of it by the joint action of the other SHs and of all directors and officers of the corporation. He has an inherent right to his proportional share of any dividend declared, or of any surplus arising upon dissolution, and he can prevent waste or misappropriation of the property of the corporation by those in control. Hence the power of the individual SH to vote in proportion to the number of his shares is vital and cannot be cut off or curtailed by the action of all other SHs even with the cooperation of the other directors and officers. The ownership of stock is in the nature of an inherent but indirect power to control the corporation. The stock, when issued ready for delivery, does not belong to the corporation, but is held by it with not power of alienation, and in trust for the SHs, who are the beneficial owners and become the legal owner upon paying therefor. The new stock issued by the corporation did not belong to it, but was held in trust for the SHs. In this case, the new stock came into existence through the exercise of a right belonging wholly to the SHs. As the right to increase belonged to them, the stock when increased belonged to them also, as it was issued for money and not for property or for some other purpose other than the sale for money. By the increase in stock the voting power of Stokes was reduced , and while he consented to the increase he did not consent to the disposition of new stock which belonged to them. In other words, it was a partial division of property of the old SHs.

The corporation cannot dispose of the shares to strangers against the protest of any SH who insists that he has a right to his proportion. Otherwise the majority could deprive the minority of their proportionate power in the election of directors and of their proportionate right to share in the surplus, each of which is an inherent, preemptive, and vested right of property. It is inviolable and can neither be taken away nor lessened without consent or a waiver implying consent. A share of stock is a share in the power to increase stock, and belongs to the SHs the same as the stock itself. When that power is exercise, the new stock belongs to the old SHs in proportion to their holding of old stock, subject to compliance with the lawful terms upon which it is based. A SH has an inherent right to a proportionate share of a new stock issued for money only and not to purchase property for the purposes of the corporation or to effect a consolidation, and while he can waive that right, he cannot be deprived of it without his consent except when the stock is issued at a fixed price not less than par and he is given the right to take at that price in proportion to his holding, or in some other equitable way that will enable him to protect his interest by acting on his own judgment and using his own resources. After the price was fixed it was the duty of the corporation to offer him his proportion at that price, for it had notice that Stokes had not acquiesced in the proposed sale of his share, but wanted it for himself. The directors were under the legal obligation to give him an opportunity to purchase at the price fixed before they could sell his property to a third party, even with the approval of a large majority of the SHs. By selling to strangers without thus offering to sell him, the corporation wrongfully deprived him of his property and is liable for such damages.

Thom v Baltimore Trust Co. F: Thom, owner of 6416 of 70000 shares, is a SH of the Baltimore Trust Co who wants to exercise his preemptive right to purchase a due proportion of a supplemental issue of its capital stock. The Baltimore Trust Co wanted to merge with the National Union Bank of Maryland, and that the company would issue 150000 shares at $112 to acquire the 10000 shares of National Union Bank at $168/share, and would require delivery of 70% of the stock. A resolution was passed to increase the capital stock of Baltimore, which also stipulated that the SH shall have the pro rata preferential right to subscribe at such price and terms as the board may fix. In any additional issuance, the directors may issue without preferential subscription rights and on such terms as the board may deem proper. Thom protested and voted against the merger, alleging the corporation disregarded the proportional purchase right of SHs.

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H: The preemptive right of SHs are said to be inherent in their stock ownership. The SHs of a corporation have a preferential right to purchase new issues of its shares, to the proportional extent of their respective interests in the capital stock then outstanding. The right adheres in stock ownership as an essential means of enabling a SH to maintain the existing ration of his proprietary interest and voting power in the corporation. In transactions involving the acquisition of property by corporations in exchange for shares of stock, the determining consideration to the owners of the property may be the advantage of sharing as SHs in the profits of the corporation with which they are contracting. In this case, the preemptive rights of Thom et al are recognized and protect by the amendment to its AOI. In declaring the right as to sales of stock for cash, and in restricting it as to issues of stock for accomplishing merger or acquisition of property, the amendment is valid.

interested. The transaction may not be ipso facto void, but it is necessary to establish that there had been actual fraud or imposition practiced by the party holding the confidential or fiduciary relation. In this case, the directors have not shown the company needed the money so badly and was such in a financial condition that the sale of additional stock to themselves was the only way the money could be obtained. On the contrary, the corporation appears to be in a very good financial condition. The sale must be set aside as a constructive fraud upon the other SHs. At the time of the supposed ratification, the principal must have been fully aware of every material aspect of the transaction, the real value of the subject of the contract, and his act of ratification must have been an independent and substantive act founded on complete information and of perfect freedom of volition.

Ross Transport Inc v Crothers. F: Derivative suit by SH Crothers to set aside the issuance of stock dividends to 4 SHs and ordering them to repay Ross Transport Inc the dividends received on stock declared to be illegally issued. The corporations business is to operate a fleet of buses to service the transport needs of employees of the Triumph Explosives Inc. The company was an immediate financial success. It was engaged in a special business, of which it had a monopoly. The company then issued new stock to the family of the directors and the president, and had the effect of increasing the outstanding stock. There was no meeting, no notice, and no offer to the other SHs. The company declared dividends 3 times, and authorized salary payments to the officers. The benefit of the dividends would not only increase the value of the stock, but the first two declared dividends would pay back all the subscribers had invested, leaving any future earnings and distributions pure profit. Under these circumstances, they took the opportunity they thought they had to increase their investment. Crothers et al contend that changed conditions make it unnecessary to use the remaining unsold stock to obtain capital. H: Existing SHs are the owners of the business, and are entitled to have the 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. This is the preemptive right. An exception would be where the stock about the be issued is part of the original issue. This is based on the fact that the original subscribers took their stock on the implied understanding that the incorporators could complete the sale of the remaining stock to obtain the capital necessary to start the business. The exception to the exception would be where conditions have changed since the original issue. Trustees and directors of corporations cannot purchase, directly or indirectly, at their own sale. Such a transaction is entirely voidable at the option of the party

Debt securities Debt contracts one of the two basic sources by which a corporation is able to finance its operations Debt securities (bonds): do not represent an ownership interest but creates a debtor-creditor relationship between the corporation and the bondholder o A person who extends a loan or debt looks at the financial condition and operations of the corporation as a means of gauging the ability to pay back the loan o Creditor (or bondholder) puts no stake on the operations of the corporate enterprise, and thus the contractual obligation of the corporation to pay the stipulated return remains even when operations are incurring losses or there are no unrestricted retained earnings o Returns in a loan placement in a corporation: bondholder would only be able to demand the stipulated fixed returns even if corporation is hugely profitable because of the loan o Creditors are legally preferred in payment from a corporation in a state of insolvency; such corporation must devote and prefer all corporate assets towards the payment of creditors o Interest paid on debt securities are deductible to the corporation for income tax purposes, but generally taxable to the holder thereof

1. 2. 3.

Form of borrowings Bonds and debentures Convertible securities; stock options

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Warrants: a type of security which entitles the holder the right to subscribe to the unissued capital stock of a corporation or to purchase issued shares in the future, evidenced by a warrant certificate which may be sold or offered for sale to the public o Who may issue? Two (2) types of issuers recognized by SEC a domestic corporation duly registered a person or group of persons who issues or proposes to issue warrants o Two types of warrants: Subscription warrant-- entitles the holder the right to subscribe to the unissued capital stock of a corporation Covered warrant-- entitles the holder the right to purchase issued shares in the future Stock options: a privilege granted to a party to subscribe to a certain portion of the unissued capital stock of the corporation within a specified period and under terms and conditions of the grant, exercisable by the grantee at any time within the period granted o No corporation shall grant any stock option unless approved by the SEC o Formal board resolution + detailed statement of the stock options plan o No exercise shall be valid unless accompanied by payment of not less than 40% of the total price of shares issued 25% for employees/officers not directors initial payment not required for services already rendered o guidelines on stock options (SEC) may be granted on the basis of proportionate interests of SHs in the capital stock those granted to employees/officers not directors/board members allowed after review of the stock options scheme those granted to non-SHs allowed upon showing that the board is duly authorized to grant the same by its AOI or resolution of SHs 2/3 OCS granted to directors/mgt groups/corporate officers must be approved in a SH meeting, vote of at least 2/3 OCS exercisable within a period of 3 years from SEC approval no transfer without SEC approval

each legally issued and outstanding share of CS. The resolution fixed the price at $20/share, and directed the warrant holders outstanding and to the trust company the 60-day notice required incase the corporation shall pay any stock dividend upon the outstanding CS. The corporation contends that the warrant holder must exercise his warrant before a certain date in order to share in the dividend. The trustee contends that the corporation must first deposit with the trustee, stock certificates in the amount equal to 40% of the certificates now on deposit with the trustee, and that the holder who wishes to exercise the warrant must pay the basic purchase price before he will be entitled to receive 1.4 share. H: The warrants gave the holders the privilege, unlimited in time, to purchase 40,000 authorized but unissued shares. Had the warrant holders exercise their option, they would have acquired a definite percentage of the CS. A stock dividend does not change the proportional interest of each SH 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 CS capital of the corporate enterprise which the warrant holders would acquire could be reduced to practically the point of extinction. The privilege the warrant holders originally had of acquiring a definite proportional interest in the CS would be lost without recourse unless their contract with the corporation contained some provision to protect it. 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 dividend shares which the shares subject to the warrants bore to all the CS, and that the trustee would deliver such dividend shares without additional consideration.

4.

Hybrid securities Equity securities: represent an ownership interest in the corporation and includes both CS and PS

Merritt-Chapman & Scott Corp v. New York Trust Co. F: Stock purchase (option) warrants were issued by Merritt-Chapman (MC) in bearer form. The bearer would be entitled to purchase fully-paid and nonassessable shares of CS, no par value, at $30/share. To insure that the stock to be purchased under the warrants would be available, the trust deed requires that stock certificates for an aggregate amount of 40,000 shares be delivered to the trustee and made the Trust co the agent of the corporation to receive the purchase price and deliver the stock certificates. The board of the corporation issued a resolution declaring a stock dividend iao 40%/shares of no par CS on

Jordan & Co. v. Allen F: The Jordan Company issues Debenture Stock. The company believes that the pay-outs made on the debentures were actually interest, and thus entitling them to deductions from their taxable income. The IRS claims the pay-outs were dividends to the holders. I: WON payments made to the holders of Debenture stock of the Jordan Company were payments of interest on outstanding obligations or dividends paid on invested capital.

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H: The answer rests on what the payments actually are, and not what the payments are called. Although there is no precise formula, the usual factors considered are the fF: (1) treatment by the parties; (2) maturity date and right to enforce collection; (3) rank/preference during dissolution; (4) uniform rate of interest or income payable; (5) participation in the management and right to vote.

5.

Trust indenture

(1)

voting rights: if security holders had such rights, this would strongly indicate that the securities were stocks; the absence or extremely limited rights is of little probative value, because it is common both to bonds and preferred stock treatment by the parties: in this case the company itself treated the debenture stocks as an obligation and the payments as interest. No evidence as to how the holders treated the same. Preference/rank in dissolution: GR holders of obligations are secured or general creditors of the corporation and rank as such on dissolution. Here the holders ranked ahead of the other SHs but inferior to general creditors. One of the most important considerations is whether the right to share in the assets of the corporation in case of dissolution is subject to the rights of creditors. If subject to such rights, there is a strong presumption that the interest in question is that of a SH Payment out of profits: the debentures provide for payment of interest at a prescribed rate to paid out of the profits only. This fact loses significance when considered in conjunction with the provision that holders should rank inferior to general creditors Maturity date and right to enforce payment. Of utmost significance. The existence of a fixed maturity date for the principal sum, together with the right to enforce payment as debt in case of default, is the most essential feature of a debtor and a creditor as opposed to a SH relationship. One of the most fundamental characteristics of a debt is a definite determinable date on which the principal falls due. The obligation in the debenture stock clearly had no maturity date. There was no time when the holders could demand their money; they were at the mercy of the companys fortunes and payment was merely a way of distributing profit. Although the officers considered the debenture stock as matured after 20 years, mere opinion of corporate officers cannot override the provisions of the certificates themselves and the charter and by-laws. It is to be noted that when the issue was retired, after officers considered it matured, they retired it at a premium. Payment of premiums is certainly more consistent with the retirement of stock than with payment of past due obligations. The contention of the officers that the term of the debenture matures upon termination of corporate existence is also untenable. Termination of corporate existence cannot be considered the maturity of the debenture stock as it would not be a fixed or determinable date set in advance, but could be constantly moved forward simply by corporate action.

(2) (3)

(4)

Alladin Hotel Co v Bloom F: Bloom is a minority bondholder of bonds issued by the Alladin Hotel Co. The bonds are secured by a deed of trust by which was mortgaged certain real estate, with the Mississippi Valley Trust Co as trustee. The deed of trust contained provisions empowering bondholders of not less than 2/3 to modify and extend the date of payment of the bonds. The Joneses are majority bondholders as well as the majority SHs of the company who entered into an agreement with the company to extend the maturity date of the bonds. The changes were certified by the trust company and has the consent of holders of 2/3 the principal amount of the bonds. Bloom objects to the change, contending that these were invalid for not being made in GF and that it was not for the benefit of the minority bondholders and deprived them of their rights and property. She added that the Joneses acted in a dual capacity as trustees for the other bondholders, being the majority, and therefore must not act detrimental to the rights of the other holders. She also added that the modifications are void for not giving notice to the other bondholders. TC held that the changes did not benefit the minority bondholders and that the bondholders were entitled to notice. But it held that the decree should be limited to a money judgment only. The hotel appeals. H: the modifications were made in strict compliance with the provisions of the trust deed, which did not provide for notice to the bondholders. The changes were approved by 2/3 of the bondholders. The rights of the bondholders are to be determined by their contract and courts will not make or remake a contract merely because one of the parties may become dissatisfied with the provisions. There is no question that the provisions in the trust deed and the bonds were legal provisions which violated no principle of public policy or private right. No notice was required so far as the parties to the contract were concerned. Their rights must be determined by their contract and not by any equitable doctrine, and notice to the other bondholders could have served no possible purpose. There is no substantial evidence warranting BF, fraud, or corruption on the part of the Joneses. The changes made in the provisions of the trust deed were made before Bloom acquired her bonds, and were in fact past due when she purchased them. Bloom, with notice of the changes made, and with knowledge that she had no notice of the application for the changes, made no effort to repudiate it until she brought the suit, but accepted interest payable under the provisions of the contract.

(5)

Trust Fund doctrine A corporate theory which seeks to protect the interest of corporate creditors

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Capital stock of the corporation, especially its unpaid subscription, is a trust fund for the benefit of the general creditors of the corporation o When a corporation is solvent, the theory that its capital stock is a trust fund upon which there is any lien for the payment of its debts has in fact, very little foundation. o No general creditor has any lien upon the fund under such circumstances, and the right of the corporation to deal with its property is absolute so long as it does not violate its charter or the applicable law. Proper scope of the doctrine is that capital stock of a corporation (insolvent), as well as all its other property and assets are generally regarded in equity as a trust fund for the payment of corporate debts In RP jurisdiction trust fund doctrine applies in four cases: a) Where the corporation has distributed its capital among the SHs, without providing for the payment of creditors b) Where it had released the subscribers to the capital stock from their subscriptions c) Where it has transferred the corporate property in fraud of creditors d) Where the corporation is insolvent The doctrine as applied to a corporation not insolvent, would only be up to the extent of the capital stock of the corporation o Retained earnings not covered since it does not constitute capital stock o Thus corporations are at liberty to declare and pay out its assets by way of dividends up to the extent of its unrestricted retained earnings o Phil Trust v Rivera (infra): subscriptions to the capital of the 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 payment of its debts

Can never create preferences where SHs would have attributes of creditors over other SHs Debtor-creditor= SH-corp? yes as to unpaid subscription Preemptive right: benefits orig subscriber Pay up, or lose whole subscription (min 25%) Once paid, rights accrue If business is profitable, orig subscribers should have 1st crack at additional issuances Dilution: noone can exercise preemptive right Consequences: shift in control/management Usually denied in listed corporations Immediate opportunity to raise funds Otherwise deprive corporation of opportunity 89: contractual arrangements public offering opportunity to corporation for financing denial would also benefit SHs! Might enhance value of subscription Merger Bigger business, more clients Read dissent in Hay: more reasonable Merritt Chapman: consideration for warrant is separate and distinct from the shares Holders of stock options are not owners of the stock; no stock has been issued or purchased by them, thus not entitled to dividends paid Prior to exercise of warrant, there is not SH-corporation relation!

Requirements under the Revised Securities Act 1. 2. 3. 4. 5. 6. Purpose and History of Revised Securities Act Registration of securities Exempt securities and exempt transactions Registration of brokers, dealers, and salesmen Registration of stock exchange Remedies of investor; SEC powers

Underwriting Securities

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Whether equity or loans, these funds end up ultimately as assets of the corporation Investment and credit are two separate and distinct sources of funds Loans/debt: Creditors have a lien on corporate assets Revenues that ff will be earmarked for payment of obligations SHs do not have any definite right over the amount loaned or assets earmarked An indebted corporation is not barred from declaring dividends Creditor has fixed return based on interest due Lien on corporate assets WON corporation is healthy, I still get paid I get paid 1st before everyone else Secured/unsecured= preference is undistinguished as to SHs Equity: Expectancy/inchoate: no guarantee to SHs Risk involved; be prepared to lose Recoverability of investment depends on viability of business But SHs can get dividends resulting from revenues SHs: not fixed return, so long as company is healthy Depends on profitability= unrestricted retained earnings Dividends, but more onerous risk Preferences: control (board seats, voting), or economic benefits (depends on extent of contribution and unrestricted retained earnings) Givens: No guarantee on investment Cannot be same stature among them Consideration Proprietary rights Money SH prerogative of paying in full or hope that the business will be good and pay dividends to take care of business Min paid up: 25% If I dont pay and business is bad (i.e. no dividends), I am suspended, I cannot exercise my rights as SH Sec 7: founders shares: mayayabang lahat Market price may be higher than issued value For those who want control, economic benefits, and bragging rights Sec 6: classifications CS: control through common shares Voting for BOD and corporate acts Same or different par values Same voting rights regardless of value PS: Preference on dividends Coupon returns/year 10-redeemable convertibleright to convert at a certain time preferred to convertible (changes the control structure significantly)

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Chapter XII Consideration for Shares

Form of Consideration Under Sec 62, stocks shall not be issued for a consideration less than the par or issued price thereof, and shall not be issued in exchange for PNs or future services, but only for cash actually paid, property actually received and necessary to the business, or services actually rendered to the corporation o Whenever a corporation issues shares, it must receive a consideration equal to or at least their par or issued value o Such consideration need not be paid in full at the time of issuance, but the unpaid portion shall be a debt and must be paid Consideration may be in any two or more of the ff forms: o Actual cash paid to the corporation Villanueva: it is not required that there be actual payment of cash consideration in order to make the subscription agreement valid and binding Subscription agreement is a consensual contract, which is perfected and valid and binding upon meeting of the minds on the subject matterthe shares itselfand the consideration Non-payment of the consideration does not render the subscription contract void Only upon call by the board or when the terms of the subscription agreement makes payment due and demandable, would the SH be legally required to pay actual cash to the corporation Failure to do so would subject the shares to a delinquency declaration and suspend the rights of the SH Notes receivable vs. subscription receivable as consideration: notes would be counted as an asset by the corporation, subscription receivables as deductions from SHs equity o Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes Requisites: must lawfully acquired and held must be necessary and proper for it to own in carrying on its business must be of substantial nature, having pecuniary value capable of being ascertained must be real and tangible must be of a nature that it can be delivered instead of being merely communicated to the officers includes services which have already been performed as long as they are capable of valuation and are fairly valued o

receivables may be accepted as valid payment must be subject to verification by the SEC shares to be held in escrow until actual payment of the amount Labor performed for or services actually rendered to the corporation Must be actually rendered and value ascertainable Must be in GF and no fraud is perpetrated Future services not allowed as consideration and such agreement is VOID (62) Villanueva: Corporation should not be estopped to deny that the services constituted payment of the stock subscription even though it has received the benefit thereof a corporation under a management contract may be issued shares in payment for the reasonable value of its services; but since it is not a SH of the managed corporation, such shares must come from the unissued shares of the latters original authorized capital stock and not in the form of stock dividends (Nielson case) Previously incurred indebtedness by the corporation May either be accounts payable or notes payable Valuation must have been established prior to even negotiating on the subscription agreement Set-off of corporate indebtedness: also covered by 62 Amounts transferred from unrestricted retained earnings to stated capital Covers the declaration of stock dividends and has the effect of capitalizing unrestricted retained earnings Consideration therefor is merely book entries Outstanding shares exchanged for stocks in the event of reclassification or conversion Changes the composition or manner of classification of the capital stock and should not affect its integrity

Liability on watered stocks Watered Stocks: Shares issued as fully paid when in truth no consideration is paid, or the the consideration received is known to be less than the par value or issued value of the shares o Includes bonus shares and discount shares issued at a discount or under an agreement to pay less than par value in money o Shares issued as fully paid up but no consideration is actually paid in form or consideration is inadequate because it is not equal to the par or issued value, the SH is liable to the corporation and its creditors for the unpaid portion

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Shares issued as fully paid up in consideration of property at an overvaluation Stock watering prohibited because: o Corporation is deprived of needed capital and the opportunity to market its securities to its own advantage o Existing and future SHs who are also injured by the dilution of their proportionate interests in the corporation o Present and future creditors who are injured as the corporation is deprived of the assets or capital and reduces the value of the corporate assets which stand as a substitute for the SHs personal liability to them o Persons who deal with it or purchase its securities who are deceived because stock watering is invariable accompanied with misleading corporate accounts and financial statements Code makes directors liable for watered stocks under Sec 65 o If he consents to the issuance, or o having knowledge thereof, does not forthwith express his objection in writing and file it with the corporate secretary directors become solidarily liable liability will be to ALL directors, whether they became such prior or subsequent to the issuance of watered stock reliance of the creditors is immaterial and fraud is not an element of liability even no-par stocks can be watered stocks where they are issued for less than their issued value Three theories for the liability o Subscription contract theorythe subscription contract is the source and measure of the duty of a subscriber to pay for his shares; if the contract releases him from further liability, the subscriber ceases to be liable Prohibited in RP jurisdiction o Fraud or misrepresentation theoryholds a SH liable for watered stock on the basis of tort or misrepresentation. The wrong done to the creditor is fraud or deceit in falsely representing that the par value has been paid or agreed to be paid in full o Trust fund doctrineall corporate creditors would have legal basis to recover against SHs and guilty officers Prevailing view in RP o

to be given as follows: A Dillman 376 CS, L Dillman 114 CS, Solly 50 CS. (Solly transferred stock to 2 Dillmans). An amendment was proposed, 2375 PS and 175 no-par CS. Rice and Hutchins purchased 249 shares of PS and 83 shares CS (as bonus). The Dillmans own 540 CS shares. During election of directors, the B ticket of the Dillmans were elected. Rice questions the election, saying the there was no consideration for the CS at the incorporation of Triplex. I: WON there was any CS voted for the B Ticket at the 1929 election that was legally issued and outstanding at that time? H: No, there was none. (Chancellors decision: No outstanding Cs and PS stocks were voted). The no par value CS issued before and after the amendment was invalid because consideration was never fixed. The certificate must state the total number of shares authorized that are without nominal or par value. The provision in the articles that a certain part of capital is in shares of CS no par and without stating the number of shares is not authorized and is meaningless in the eyes of the law. Thus the CS in the original AOI was invalid stock. The consideration of the shares issued to Dillman were alleged to have been for services rendered in organizing the company, and in agreeing to serve at a smaller compensation that they would get otherwise. Clearly the consideration mentioned, consisting of services, was not of such as the law contemplates. The services do not appear to be essentially different or greater than the services ordinarily rendered in the promotion and organization of the corporation. (also, services still to be rendered are not lawful consideration) -- Hence, no proper and lawful consideration was for the CS at the 1st Board Meeting.

Triplex Shoe Co v Rice & Hutchins Inc. F: Triplex authorized capital stock totaled $150K, broken down into $75000 PS (par value $100), and $75000 no par CS. Directors meeting: Albert Dillman Pres; Solly VP and Sec, and Louis Dillman Treasurer .. agreed to receive lower compensation and in consideration of other services to be rendered and for managing the co., additional stocks were

McCarty v Langdeau F: Langdeau is the receiver of Estate Life Insurance Co, and McCarty is the President of the company. Langdeau sues McCarty for the unpaid balance of his stock subscription, iao $387,380 (he paid only $20) representing 19, 370 shares of no par stock. The contract between the corporation and McCarty was that he would: -- pay a minimum of $20/month for the balance not exceeding 30 months, evidenced by a note, payable w/o interest. --that the company will have a lien on his shares until the note is paid. -- He was to receive as much stock as his actual payments , but the company would be able to vote the stock while the contract is in force (to be voted by McCarty) -Yet despite his default (only made a total payment of $8,120), the company did not elect to terminate the contract. He claims that the contract is void for it violates the constitution of Texas (no corp. shall issue stock or bond except for

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money paid, labor done or property actually received, and all fictitious increase of stock or indebtedness shall be void.) H: --the contract is enforceable No declaration in the consti prohibition that a transaction in w/c something other than money, labor or property shall be received in payment of the stock is utterly void. If a security is to be accepted in payment for the stock, e.g. a subscribers note, w/c is not property for such purpose, the Consti doesnt say that it, or the stock issued for it, shall be void. The word void is used only once and has reference to the distinct clause w/c says that all fictitious increase of stock or indebtedness shall be void. --the affairs of the corporation in this case are in the hands of a receiver who represents not only the SHs, but also the creditors, and the rights of creditors have now intervened. The constitution of Texas prohibits such a transaction and makes it unlawful. It was aimed against his acquiring stock except upon lawful payment. It was designed for the protection of the corporation and its creditors. In such a case as this where the SH has paid nothing for his stock and deceived the public, he cannot be permitted to take shelter under the constitutional prohibition, which protects the corporation and its creditors. --Purpose is to give integrity to the corps capital. It is to prevent false pretense at its hands, and avoid imposition upon the public. None of these objects would be promoted by declaring a note given by a subscriber for stock subscription in the hands of a bonafide stockholder.

SH for the corporation. On the contrary, he accepts the ownership of the stock and enters upon the relationship of SH with the contrary understanding. What then is the principle upon which the holder of watered stock is under any circumstances held obligated to supply substance and make good what it pretended the corporation received by did not? The SH is held upon the principle that one giving credit to the corporation is entitled to rely upon its ostensible capitalization as the basis for the credit given, and that, when the corporation issues watered stock, and thereby assumes an ostensible capitalization in excess of its real assets, the transaction necessarily involves the misleading of subsequent creditors, and whether done with that purpose actually in mind or not, is at least constructive fraud upon such creditors. In other words, the essence of the right of the creditor to brush aside the issuance of stock as fully paid, and to show that it was not such and to compel payment, is that its issuance as fully paid was as to him a fraud. --the transferee of watered stock who takes it in ignorance of its real character is not required, even at the suit of the of a creditor of the company, to pay anything more upon it. Campos: The innocent purchaser of watered stocks is thus treated like the holder in GF of nego instrument, based on the policy of encouraging the free transferability of shares as a means of enhancing the growth of commerce and industry. Apparently the remedy of the defrauded creditor would be against the original owner of the watered stocks.

Rhode v Dock-Hop Co. F: Judgment creditors of a corporation sues the original SHs or incorporators of the Dock-Hop Co, seeking to collect on the unpaid balances on the par value of their shares. Complaint alleged that only 25c on the dollar had been paid in on the par value of their shares (watered stocks). Defendants deny however, that they are subscribers, or that the full value of their stock had not been paid. I: WON SHs are required to make up any difference which may exist between what was actually paid on their stock and its par value. Yes -- but NOT as to the transferee of the watered stocks, which are the defendants herein. (lower court ruling is reversed) H: Court found that only 5/12 of the par value had been paid. At the lower court, it ruled for the plaintiff on the theory that it made no difference WON the defendants were subscribers: the mere fact that that they were SHs and the shares they held , although issued as fully paid were in fact issued for property w/c the directors didnt believe was equal in value, were enough to warrant judgment against them. Where a person accepts the ownership of stock which purports to be fully paid, it cannot be said of him that he accepts the stock and enters upon the relation of

How payment of Shares enforced Under 66, subscribers for stock shall pay to the corporation, interest on all unpaid subscriptions from date of the same, if so required and fixed in the by-laws o No rate= legal interest o Any unpaid balance would be a debt owed by the subscriber to the corporation o Lingayen Gulf v Baltazar: He may not be released from such obligation to pay the unpaid balance, unless it is with the consent of all the SHs, without prejudice to creditors, and upon adequate consideration but a corporation may enter into a bona fide compromise with a subscriber who is unable to pay his shares which he has surrendered to the corproation Under 67, board may at any time, declare due and payable to the corporation unpaid subscriptions to the capital stock and may collect the same or such percentage thereof, with accrued interest in each case and subject to the provisions of the contract of subscription

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How payment is applied? o Full payment for corresponding number of shares, par value covered by such payment, or o payment pro-rata to each and all the entire number of shares subscribed Under 13: 25% of total subscription must be paid, paid-up capital not less than P5,000.00 o Balance payable on dates fixed in the subscription contract o No fixed dates, upon call by the board Call on unpaid subscriptions o Resolution of the board o Notification of the resolution on the SHs o The time when subscriptions become payable When call not necessary o The subscription contracts expressly states that it shall be payable not upon call, but immediately or on a specified day or upon installments o Corporation becomes insolvent, regardless of any contrary stipulation in the subscription contract The corporation has two (2) alternatives for the enforcement of a subscription contract: (1) The sale of delinquent stocks (2) Court action 1. delinquency sale; requisites

o o

until such date arrives, no demand or call for payment may be validly made by the board Call by the board: the board may at any time declare all or any part of the subscription due and payable where there is no date fixed in the subscription contract Power to make a call discretionary with the board Once made, call must operate uniformly on all SHs in order to prevent favoritism or oppression (Lingayen Gulf v. Baltazar) No payment despite call, whole balance of subscription becomes due and payable 68: If not paid within 30 days from date fixed in subscription contract or date stated in the call, ALL stocks covered by the subscription, become AUTOMATICALLY delinquent and may be sold by the corporation at a delinquent sale notice of sale and copy of resolution must be given to all delinquent SHs publication at least 2 weeks prior to sale lacking any of these requirements, delinquent sale would be VOIDABLE at the instance of the delinquent SH within 6 months from the sale and tenders payment to the purchaser if corporation acquires delinquent shares, they become treasury shares which may be disposed of by the corporation at such reasonable price as the board may fix court action

2.

Under 68 the board may, by resolution, order the sale of delinquent stock and specifically state: o the amount due and all accrued interest o date, time, place of the sale (30-60 days) o notice of sale with copy of resolution sent to every delinquent SH either personally or by registered mail When delinquent? Sec 67 o Unpaid subscription shall be made on the date specified in the contract or on date stated in the call o No payment within 30 days from said dates= all stocks covered shall become delinquent How do shares become delinquent? o Failure to pay upon call o Failure to pay on date specified in subscription agreement 69: no action to recover delinquent stock sold can be sustained on the ground of irregularity or defect in the notice or in the sale itself amount of subscription may be payable in installments and may specify the date or dates when payments are to be made o if unpaid still, balance becomes automatically due and demandable without need for a call

Under 70: nothing in the Code prevents the corporation from collecting by action in a court the amount due on any unpaid subscription with accrued interest, costs, and expenses If corporation chooses to sue in court, a valid call would still be a requisite to liability (Da Silva v Aboitiz) unless the corporation becomes insolventall unpaid subscriptions become payable and are immediately recoverable in a court action by the assignee in insolvency for the benefit of the creditors (Velasco v Poizat)

Velasco v Poizat F: Velasco is the assignee in the insolvency of Philippine Chemical Product Company and is seeking to recover from Jean Poizat the unpaid subscription made by him to the stock of the corporation. Poizat, one of the incorporators and once the treasurer and manager of the corporation, subscribed for 20 shares and paid in the par value of 5 shares (P500).

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While in this capacity he called in and collected all subscriptions except 15 shares subscribed by him and another 15 by Jose Infante. 2 resolutions were adopted by the board: (1) proposal that the directors or SHs make good by new subscription the 15 shares w/h had been surrendered by Infante, and that the latter would be released from his obligation to the corporation; (2) as to Poizat, who was absent, he should be required to pay the amount of his subscription upon the 15 shares he owes to the corporation. Poizat, in a letter states that he was also to be relieved from his subscription, and that he prefers to lose the whole of the 25% rather than continue investing more money in a ruinous proposition. Soon the company became insolvent, and Velasco as assignee sues Poizat for his unpaid subscription. H: Poizat is still liable on his subscription. A stock subscription is a contract between the corporation on one side, and the subscriber on the other. It is a rule that a subscription for shares of stock does not require an express promise to pay the amount subscribed, as the law implies a promise to pay on the part of the subscriber. 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. There are two (2) remedies for the enforcement of stock subscriptions: (1) the first is a special remedy which consists in permitting the corporation to put up the unpaid stock for sale, and is merely a remedy in addition to that which proceeds by action in court; (2) the other is an action in court, which exists even though no mention thereof is made in statute. Under 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 with respect to suing upon a stock subscription as directors themselves would have had under Sec 49 above cited. Another reason: When insolvency supervenes upon a corporation and the court assumes jurisdiction to wind it up, all unpaid stock subscriptions become payable on demand, and are at once recoverable in an action instituted by the assignee in court. It evidently cannot be permitted that a subscriber should escape from his lawful obligation by reason of the failure of officers to perform their duty in making the call; and when the original mode of making the call becomes impracticable, the obligation must be treated as due upon demand. As to the Infante release, it is not prejudicial to the right of the corporation or its assignee to recover from Poizat, although in releasing Infante, the board

overstepped its bounds and should still be liable on shares that were not taken up and paid for by the corporation. Poizat continued to be liable on his subscription When insolvency supervenes and court assumes jurisdction to wind up, unpaid stock subscriptions become payable on demand and are at once recoverable in an action by the assignee in insolvency

Lingayen Gulf Electric v Baltazar F: Baltazar subscribed for 600 shares (P100 par value) of Lingayen Gulf and paid P15000, plus another payment leaving a balance of P18500 unpaid. In a SH meeting it was agreed to call the balance of all unpaid subscribed capital stock, the first 50% payable within 60 days, remaining 50% payable within 60 days hence. All unpaid subscription after due dates of both calls would be subject to 12% interest. All remaining unpaid shares would revert to the corporation. Baltazar offered to withdraw completely from the corporation by selling out all his shares of stock. Another resolution (No. 17) was adopted rescinding the previous resolution because the corporation was not in a financial position to absorb the unpaid balance of the subscribed capital stock. Yet another resolution (No. 4) was adopted to revalue the stock and assets of the corporation to attract outside investors. Although Baltazar was informed of the demand for payment the call however was not published in a newspaper of general circulation. Another demand was made upon Baltazar, who ignores the same upon the grounds that 1. action is premature because there was no valid call, and 2. granting there was a valid call, he was released from liability thru SH Res. Nos. 17 and 4. . The corporation sues. TC rules ifo Baltazar, holding that the resolution was null and void for lack of publication. H: TC was correct 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. The publication requirement is mandatory, and the reason is because it is not only to assure notice to all subscribers, but also to assure equality and uniformity in the assessment on SHs. Not only must personal notice be given in one of these matters, but the notice must also be published once a week, for 4 consecutive weeks in some newspapers. The court reiterated the ruling in Velasco v Poizat, where 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. But when the corporation is a solvent concern, the rule is that the suit demanding for payment of unpaid subscriptions must be preceded

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by a call or assessment against the subscribers, and only then will there be a right of action. As to claim of Baltazar that Resolution 17 released him from obligation to pay, in order to effect the release, there must be unanimous consent of the SHs (here, 7 SHs were absent when said Res was made) . The GR is that a valid and binding subscription cannot be cancelled so as to release the subscriber from liability thereon without the consent of all the SHs. 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 suebscribed or purchased without notice of such agreement. Exceptions: 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 SHs 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 the Baltazar does not fall under the exceptions referred to, 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. (H: not indivisible)

shares unpaid by 31 May shall be declared delinquent and to be sold at a delinquency sale on the following June 16. Ad was published as announced in the notice. Da Silva sued Aboitiz Co., contending that in prescribing another method for payment of subscription different from that in the by-laws, the corporation had exceeded its authority. He claims that in Art 46 of the by-laws, all shares subscribed shall be paid out of the 70% of the profit obtained, to be distributed among the subscribers and said Res., violates the said by-law. I: WON under the by-laws the corporation may declare the unpaid shares delinquent or collect their value through another method. H: YES. The by-law also authorizes and empowers the board to collect the value of the shares subscribed and unpaid by deducting from the 70%, distributable in equal parts among the SHs, to be applied on the payment of the shares. It also authorizes the creation of a special emergency fund, applying the 70% of the profit on the payment of shares not fully paid. Thus it is discretionary on the corporation to do whatever is provided in the said article relative to the application of a part of the 70% of the profit distributable. It also shows that it is the board and not he delinquent subscriber that may and must judge and decide whether or not such value must be paid out of the 70% of the profit. It lies therefore, within the discretion of the board to make use of such authority. If the board opts not the make use of such authority, it has two other remedies to accomplish the same purpose, as declared by the Court in Velasco v Poizat: (1) put up the unpaid stock for sale; or (2) direct action in court. In this case the board elected to avail of the first remedy, and complying strictly with the requirements of law, the directors made use of the discretionary power granted by the law and declared that the payment of the subscription to 450 unpaid shares was due and demandable, and that said shares were delinquent. The Board has absolute discretion to choose which remedy it deems proper in order to collect the unpaid subscriptions Two other remedies: delinquency sale and action in court

Reason for mandatory provision that call should be strictly complied witH: to assure notice to all subscribers, and to assure equality and uniformity in the assessment on SHs A contract of subscription is at least in the sense that it creates an estoppel, a contract among the several subscribers, and thus none of the subscribers can withdraw from the contract without the consent of the rest and thereby diminish the common fund which all have an interest in Notice for call of payment for unpaid subscriptions must be published, except when the corporation is insolventpayment is immediately demandable GR: A valid and binding subscription for stock of a corporation cannot be cancelled so as to release the subscriber from liability thereon, without the consent of all the SHs Exceptions in Lingayen really do not constitute a gratuitous release since a valuable consideration is actually received by the corporation such as the cancellation of corporate debt

Da Silva v Aboitiz & Co Inc. F: Da Silva subscribes for 650 shares (par value of P500) of Aboitiz. He pays only for 200 shares, as there are remaining 450 shares unpaid (P225,000). Thru a Res., the board declared and informed all subscribers and SHs that all

National Exchange v Dexter F: IB Dexter subscribed to 300 shares of CS Salmon & Co., which shall be payable from the first dividends declared on any and all shares of said company owned by me at the time dividends are declared, until full amount of subscription has been paid. The subscription was initially paid P15,000, from a dividend declared by the company, supplemented by Dexters own money. Dexter incurs a balance of P15000 (par value of 150 shares) still unpaid on his subscription. The assignee of Salmon, National Exchange Co, sues Dexter to recover the balance. TC ruled ifo National Exchange.

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I: WON the subscription is payable from the first dividends declared has the effect of relieving the subscriber from personal liability in an action to recover the balance H: Of course not. A corporation has the power to accept subscriptions upon any special terms not prohibited or contrary to law or public policy, provided it does not require the performance of corporate acts beyond the powers conferred, and do not constitute a fraud upon other subscribers, SHs, or creditors. If it is unlawful to issue stock otherwise than as stated it is self-evident that a stipulation in a stock subscription that obligates the subscriber to pay nothing for the shares except as dividends may accrue upon the stock is illegal. This is discriminatory ifo the subscriber, to the detriment of the others. Nor has a corporation the power to receive a subscription such terms as will operate as a fraud upon the other subscribers or SHs by subjecting them to lighter burdens, or by giving greater rights and privileges, or as a fraud upon creditors. As a general rule, an agreement between a corporation and a subscriber, by which the subscription is not he be payable, or is to be payable in part only is illegal and void as in fraud of creditors or other SHs. Campos: Besides assuring equality among SH, the law seeks to protect corporate creditors. Making payment of subscription dependent on the existience of profits or dividends would be contrary to the policy behind the law.

to which creditors have a right to look for the satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription. A stock subscription is an existing liability from the time subscription is made. Thus the TC ruling is modified and that the corporation is ordered to credit Lumanlan P13840 against the judgment previous (P15109), and to issue to Lumanlan 300 shares of its capital stock upon payment of the difference of the amount (P1269).

Effect of Delinquency Effects of delinquency: (Sec 71) o Cannot be vote for or be entitled to vote or to representation at any SH meeting o Holder not entitled to any rights of a SH Except right to dividends (restricted by law) Cash dividends would first be applied to the unpaid balance Stock dividends are withheld until payment of unpaid balance o Not entitled to notice of any of the meetings o Shares not included in the determination of a quorum 43: Once stocks become delinquent due to nonpayment, the holder loses all his rights as SH except only the right to dividends, which will not be paid to him but will be applied to the unpaid balance of his subscription plus costs and expenses o SH cannot vote at the election or at any meeting on any matter o SH cannot even be counted as part of the quorum o SH cannot be vote for as director

Lumanlan v Cura F: Lumanlan subscribed for 300 shares (par value P50) of Dizon & Co., paying only P1500 of the P15000 par value of the shares. Creditors sued the company, and prayed for a receiver as it appears that the corporation had no assets except credits against those who had subscribed for shares of stock. Tayag was appointed receiver for the purpose of collecting the unpaid subscriptions. Tayag sues Lumanlan for the unpaid shares. TC orders Lumanlan to pay the corporation (plus interest). Pending Lumanlans appeal, he agreed to assume the obligation of the corporation to Valenzuela (P8,000), and that if he withdraws his appeal, the corporation would collect only 50% of the amount subscribed by him. Lumanlan then paid Valenzuela and was subrogated in place of Valenzuela (P11,840 incl. interest). Disregarding the agreement and notwithstanding payment made to Valenzuela, the corporation asked for the execution of the judgment in the previous suit and his properties in Tarlac were levied upon. BPI as creditor of the corporation intervenes as the assignee in the insolvency case of the corporation. H: As it is evident that there are other creditors of the corporation, the corporation has a right to collect all unpaid stock subscriptions and any other amounts due it. Subscriptions to the capital of the corporation constitute a fund

Rights and Obligations of holders of Unpaid, but Non-delinquent Stock Enjoy all privileges of a SH: o the right to vote o the right to receive dividends o But liable to pay interest if in by-laws Interest is not due unless by-laws provide so By-laws provide for interest but silent as to rate: legal interest applies o But SH cannot register shares transferred Although valid between the parties, it cannot affect the corporation But corporation can allow registration, but it cannot issue a stock certificate until it is fully paid

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Fua Cun v Summers F: Chua Soco subscribed for 500 shares (P100 par) of China Banking Corporation, paying and leaving a balance of P25,000. He issued a PN ifo Fua Cun for the balance, securing the note with a CM on the shares of stock, and endorsing the receipt of the stock purchase). Chua Soco was also indebted to China Bank (P37,731.68), and upon default his interest in the 500 shareas was attached and the receipt seized by the sheriff. The attachment was levied after the bank knew of the fact that the receipt had been endorsed to Fua Cun. Fua Cun then sued, contending that by virtue of payment of the subscription price of the shares, Chua Soco in effect became the owner of 250 shares and sought to have his lien on the shares be declared to hold priority over the claim of the bank. China Bank argued that the interest of Chua Soco was merely an equity which cannot be made the subject of a CM. TC ruled ifo Fua Cun. H: TC erred in holding that Chua Soco became owner of 250 shares. Fua Cuns rights consist in an equity of 500 shares and upon payment of the unpaid portion, he becomes entitled to the issuance of the certificate for 500 shares in his favor. As to the CM, the CM would not prevail over liens of third persons without notice; an equity in shares is of such an intangible character that is somewhat difficult to see how it can be treated as chattel and mortgaged in the same manner that the recording of the same will furnish constructive notice to third parties. There can be no doubt that an equity in shares of stock may be assigned and that the assignment is valid as between the parties and as to person to whom notice is brought home. Such an assignment exists here, though it was made for the purpose of securing a debt. As against the rights of fua cun, the bank had no lien unless by virtue of the attachment, but the attachment was levied after the bank had received notice of the assignment of Chua Socos interest to fua Cun and was therefore subject to the rights of the latter.

board members (Ungson Group). Baltazar was responsible for the election of the other 2 (Baltazar Group). Ungson Group which controlled the corporation passed 3 resolutions which threatened to expel the plaintiffs and prevent them from exercising their voting rights: (1) declaring watered stocks issued to Acena, Baltazar, Rose and Jubenville of no value and cancelled the same; (2) all unpaid subscriptions to bear interest, and all payments to be credited to interest first, capital debt second, and ; (3) all stock declared delinquent on the accrued interest are incapacitated to avail of voting power. Baltazar and Rose sought to allow them to vote their fully paid-up shares and to declare the resolutions invalid. A compromise deal was executed, but enforcement by the TC was enjoined by the Ungon Group and asked for amendment. TC amended but was opposed by Baltazar. The Court then reversed the amending decision, ruling that all shares of the capital stock of the corporation covered by fully paid shares are entitled to vote in all meetings. Baltazar claims that once a SH has subscribed to a certain number of shares, although he has made partial payments, but is issued a certificate for the paidup shares, he is entitled to vote the whole number of shares subscribed, whether paid or not. The corporation counters that under the doctrine in the Fua Cun case, a partial payment of a subscription does not entitle the SH to a certificate for the total number of shares subscribed by him, and his right consists only in equity to a certificate of the total number of shares subscribed for, upon payment of the remaining portion of the subscription price. I: WON a SH with a balance of unpaid shares subscribed is entitled to vote the latter H: YES> The present case does not come under the principle in Fua Cun because it was the practice of the company since its inception, to issue certificates of stock even for unpaid shares and gave voting power to stocks fully paid. The present law requires as a condition before a SH can vote that his full subscription be paid in the case of no par value shares, and with respect to par value shares, the SH can vote the shares full paid, irrespective of the unpaid delinquent shares. A corporation may now, in the absence of provisions in their by-laws to the contrary, apply payments made by subscribers either as full payment for the corresponding number of stock or as payment pro-rata to each and all the entire number of shares subscribed. In this case, corporation chose to apply payments by the SHs to definite shares of stock and had full paid-up shares certificates for the payments. Its call for payments of unpaid subscription and its declaration of delinquency only affecting the remaining number of shares. Here the corporation applied the payments made to the full par value of shares subscribed, instead of the accrued interest. This being the case, the application of payments must be deemed to have been agreed upon by the corporation and the SHs and cannot now be changed without the consent of the SHs concerned. It would therefore result that a corporation may, upon the request of an

Baltazar v Lingayen Gulf Electric F: Baltazar and Rose were incorporators of the Lingayen Gulf Electric Power Co. and subscribed to: Baltazar = 600 shares (paid 535 shares after transfers, owned 341 shares w/ cert. plus 65 shares w/o certificate) Rose = 400 shares (paid 375 shares w/ certs) leaving unpaid a certain portion thereof. It is the company practice to issue certificates of stock to its individual subscribers for unpaid shares of stock. Defendants Ungson et al are small SHs ( <100 shares) of the corporation, and are the majority of the board. Co-defendant Acena is the largest single SH with 600 shares and was responsible for election to the board of two of the 4 majority

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interested SH, apply payments by them to the full par value of subscribed capital stock. Since it was the practice of the corporation to issue stock certificates to not fully paid subscribers, it may not take away the right to vote granted by the certificate Stock certificates may be issued for less than the number of shares subscribed for o Provided the par value of each represented by the certificate has been paid o And it is not prohibited by the by-laws

for his shares without valuable consideration, without the unanimous consent of the SHs. There is no clear duty here on the part of the officers of Peers to register the 20 shares in Navas name. The court also ruled that there is no parallelism between Nava and the Baltazar case. In the latter, the SH-incorporator was the holder of a stock certificate, and the issue was whether the said shares had voting rights although the incorporator had not fully paid the subscription, which is not the issue in this case. There is no stock certificate issued to Po, and without it which is the evidence of ownership of the stockthe assignment of corporate shares is effective only between the parties to the transaction. The delivery of the stock certificate is essential for the protection of both the corporation and its SHs.

Nava v Peers Marketing Corp F: --Po was an incorporator of Peers Marketing and subscribed to 80 shares (P100 p.v.) paying 25% of the amount of subscription. No certificate of stock was issued. --Po sold to Nava 20 of the shares. In the deed of sale Po represented that he was the absolute and registered owner of the 20 shares sold. -- Nava requested the corporation to register the sale, but was denied because Po had not fully paid the amount of subscription. (was informed that Po was delinquent in payment of his subscription and that corp had the claim to his entire subscription of 80 shares). Nava filed a mandamus action to compel the corporation to register the shares in the books. TC dismissed petition. --Nava contends the ruling in Fua Cun is not applicable in affirming corporations refusal to register in the books the sale to him of 20 shares. Nava relies on the ruling in Baltazar v Lingayen Gulf Electric, which held that the corpo law requires as a condition before a SH can vote his shares that his full subscription be paid in the case of no par stock; but in par value stocks, the SH can vote his shares fully paid by him, only, irrespective of the unpaid delinquent shares. I: WON the corporation can be compelled to enter in its books the sale made by Po to Nava of 20 shares H: NO> The Nava transfer is not the alienation sale or transfer of stock contemplated in the old Law. As a rule, shares which may be alienated are those which are covered by certificates of stock. As prescribed in the corpo law, shares of stock may be transferred by delivery to the transferee of the certificate properly indorsed. However, that cannot be followed in the instant case because the 20 shares are not covered by any stock certificate in Pos name. Moreover, a corporation has a claim on the said shares for the unpaid balance of the subscription. A stock subscription is a subsisting liability from the time the subscription is made. The subscriber is as much bound to pay his subscription as he would be to pay any other debt. The right of the corporation to demand payment is no less contestable. A corporation cannot release an original subscriber from paying

Fua Cun, Lingayen Gulf and Nava cases were all decided before the Code Fua Cun: a contract of subscription is INDIVISIBLE, unless the contrary is provided o Partial payment DOES NOT entitle the SH to the issuance of a certificate covering shares corresponding to the amount paid o Payment is in effect PRO-RATED among all the shares, so that no one share is fully paid Lingayen GulF: shares may be deemed fully paid for the amount paid that corresponds thereto o It was the practice of the corporation in Lingayen to issue certificates for stocks it considered to be fully paid, although the subscription has not been paid SEC: in interpreting the two cases, a corporation has two (2) alternatives in applying payment for subscriptions: o Either apply the amount paid as full payment for the corresponding shares, (Lingayen) or Certificate of stock would then be issued o as payment pro-rata on each of the entire number of shares subscribed for (Fua Cun and Nava) no certificate of stock may be issued until the subscription is full paid 64: no corporation can issue a certificate of stock until the subscriber has paid his subscription in full o applies to par and no-par shares o Lingayen gulf case no longer applies o Speaks of only of subscription

Issuance of Certificate

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Under 63: capital shall be divided into shares for which certificates signed by the Pres or VP, countersigned by the Secretary, sealed with the seal of the corporation Under 64: no certificate of stock shall be issued until the full amount + interest has been paid o But an unpaid subscription NOT declared delinquent can be voted upon in meetings and are entitled to collect dividends Issuance is not necessary to constitute the subscriber of shares as a SH of the corporation o But delivery is an essential element of the issuance itself (an endorsement for negotiability) Nature of certificate: o The best evidence of the acquisition of rights and status of a SH, but NOT required for rights to vest o Convenient for purposes of transfer by way of collateral or absolute sale But SH not entitled to certificate until he has fully paid the subscription o Certifies that the person named is a holder or owner of the stated number of shares in the corporation Indicates the kind of shares issued to him, date of issuance and par value or no par value of the shares Signed by the proper officers of the corporation and bears the corporation seal o Should not be issued for more than the number of shares authorized by the AOI Any stock certificate which represents an over-issue of shares would be void and no rights or liabilities can arise therefrom in favor of or against holders thereof Bona fide purchasers would only have the right to damages for misrepresentation against the corporate but cannot acquire the rights of SHs o Not a negotiable instrument (De Los Santos v Atty General supra) o but quasi-negotiable; endorsement and delivery of certificate may be for any of three purposes: sale and assignment of shares pursuant to a trust or nominee agreement pledge or encumbrance of the shareas o Sale of shares, even with endorsement and delivery of the certificates, shall not be valid, except as between the parties, until it is entered and noted in the books and the sale is not absolutely void 63: every SH has a right to demand the issuance of a proper certificate when requirements of 64 have been complied with Remedies available to a SH for wrongful non-issuance by the corporation: o Suit for specific performance o Alternative relief by way of damages o Petition for mandamus to compel the issuance

Loss or Destroyed Certificate Sec 73

Money or property rights Ownership/title Use Proper valuation, but subject to SH approval and SEC approval to eliminate watered stock Who determines if money or property dividends Default of unpaid subscribers? Liability of corporation and other subscribers as well Beneficiaries of subscription: corporation, SHs, creditors I pay subscription due: I am not a creditor/debtor In no way will my rights be impaired Limited liability Stock certificate; can be disposed/transferred (cf Fleischer) Right to dividends All these are not enjoyed by subscriber NOT paid fully Partial payment: cannot get any part of shares Delinquency sale: all of the subscriptions What should be bought? Only what is due. Purchaser would appear to have bought at a discount Delinquent party gets a free ride but in reality, it never really happens that way! Inimical effects of non-paying subscriber: suspension of voting and economic rights Danger that he loses everything No bidder: shares go back to corporation No incentive for corporation in delinquency sale Sec 73: obscure provision Holding period Benefits stems from issuance of stock certificate; can assert ownership rights Negotiable instruments rules apply

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Delinquency sale : covers unpaid subscription; seeking for the delinquent SH to cough up the balance.
Property Yes In full Yes Yes Yes Registration of property in corporate name Cash No need Partial; installment None No No necessary Ownership of shares

Valuation Payment Warranties Subject to dispute Necessary/essential business

to

Dock-Hop: the transferee of watered stock who takes it in ignorance of its real character cannot be compelled, even at a suit of the creditor, to pay anything more upon it Holder in GF Transferee steps in the shoes of the transferor as to benefits, but not to liability Creditors clam that the alleged SHs have shares, issued as fully paid, but were issued for property not equal in value to the par value; property was overvalued 2 contracts are involved: corporation-transferor transferor-transferee transferees not liable to corporation if in GF Lingayen GulF: I cannot dispose of any unsubscribed shares if I still have unpaid shares There would be a rescission similar to Bayla Dexter & Aboitiz: no guaranteed profits in any business! Dexter: payment of subscriptions came from dividends Aboitiz: payment of subscription came from a fund Is this violative of the principle that SHs only have an inchoate right over corporate property? Cannot negate obligation of subscriber to pay for his unpaid subscription It should be unconditional unless there are unrestricted retained earnings the payment comes out of his pocket! SHs/subscriber is NOT a creditor! GR: cannot piecemeal assign rights to the shares, if subscription not paid in full SHs as a whole benefits Corporation and creditors also benefit but rights of creditor conditioned upon solvency of corporation Sec 43 allows unpaid subscriptions to be paid out of dividends Exceptions: delinquent shares; cannot pay out as stock/property dividends Fua Cun and Nava: indivisibility of shares Payments applied to all shares covered by the subscription Fua Cun: contract of subscription is indivisible, but partial payment doe not entitle SH to issuance of certificate Payment is pro-rated among all the shares Lingayen: exception chopped up shares payment would be applied to the corresponding shares

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Chapter XIII Corporations of Shares

Sec 43

Dividends/Purchase

by

Sec 43: power of the corporation to declare dividends-only the board may declare dividends and only out of unrestricted retained earnings, payable in cash, property, or stock to SHs of OCS Most important rights of a SH: o Right to vote o Right to proportional share of the corporate assets upon liquidation o Right to share in the corporate profits Concept of Dividend o A dividend is that portion of the profits of a corporation set aside, declared and ordered by the directors to be paid ratably to the SHs on demand or at fixed time. o It is payment to the SHs as a return upon their investment o All SHs of the same class share in it is proportion to the respective amounts of stock which they hold Defn of Dividend: portion of corporate profits which is set aside for distribution to the SHs in proportion to their subscription to the capital stock of the corporation Power of the corporation to declare a dividend only out of unrestricted retained earnings on the basis of outstanding capital stock held by SHs

Revocable before the announcement to the SHs of the declaration of dividends; as soon as cash dividends are publicly declared, SHs have the right to their pro rata shares No par shares: must be fully paid to be considered as issued Thus holders of no par shares not fully paid are not entitled to dividends

Property: SEC rules Stock: distribution to the SHs of the companys own stock o Stock dividends are in the nature of shares of stock, the consideration for which is the amount of unrestricted retained earnings converted into equity in the corporations books o It is actually two (2) things: A dividend, and the enforced use of dividend money to purchase additional shares of stock at par o stock dividends require: board resolution ratification of SHs representing 2/3 OCS o Villanueva: stock dividends, unlike cash or property dividends, may be declared out of premium surplus or paid-in capital o Corporate profits are transferred to capital stock and shares representing the increase in capitalization are distributed o Stock dividends cannot be declared without first increasing the capital stock, unless there are still unissued shares o Although number of shares increase, their investment and proportional interest remain the same o Cannot be issued ifo persons not SHs Liquidating dividends: form part of the capital, and cannot be declared from the unrestricted retained earnings

Form of Dividends Cash, property, or stock dividend

CaSH: most common form o May be declared by the board under a formal resolution and does not require the approval or ratification of the SHs o Amount to be received by SH as his share of the dividends would depend on the amount of stock held by him, regardless of whether or not he has paid his full subscription But if shares become delinquent, any cash dividends due will first be applied to the amount of the delinquency (if stock dividends, he cannot get them until he has fully paid his subscription) Cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses

Nielson & Co v Lepanto Consolidated Mining Co. F: MR filed by Lepanto Corp which involves an agreement subsequently extended, as to the compensation of Nielson (a promoter?) which provides that he is entitled to receive 10% of any dividends declared and paid by Lepanto. Nielson is not a SH of the corporation. During the extension period the corporation declared dividends worth P3M. SC ruled that Nielson was entitled to the 10% of the dividends paid and declared and Lepanto was ordered to issue and deliver to Nielson shares of stocks as well as fruits or dividends accruing to the same. Lepanto contends that payment to Nielson of stock dividends as compensation violates the Corporation Law. I: WON the corporation can be compelled to issue and deliver to Nielson shares of stock and the fruits thereof

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H: Under the Code stock dividends cannot be issued to a person who is not a SH in payment of services rendered. Nielson cannot be paid in shares of stock which form part of the stock dividends of Lepanto. The understanding between Lepanto and Nielson was simply to make the cash value of the stock dividends as the basis for determining the amount of compensation that should be paid to Nielson. R: Consideration for shares of stock: (1) cash; (2) property; (3) undistributed profits. A corporation may legally issue shares of stock in consideration of services rendered by a person not a SH, or in payment of indebtedness, which 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, or part of the stocks issued when the increase in capitalization was properly authorized. In other words, it is the shares that are originally issued by the corporation and forming the part of capital that can be exchanged for cash or services rendered, or propertyif the corporation has original shares of stock unsold or unsubscribed, either coming from the original capitalization or from the increased capitalizationthese may be issued to a person already a SH. But a share of stock coming from stock dividends cannot be issued to one who is not a SH of a corporation. A stock dividend is any dividend payable in shares of stock of the corporation declaring or authorizing ita distribution of shares among SHs, as dividends. It is actually 2 things: (1) a dividend; (2) the enforced use of dividend money to purchase additional shares at par. When a corporation issues stock dividends, it shows that the corporations accumulated profits have been capitalized instead of distributed to the SHS or retained as surplus. Far from being a realization of profits, it tends rather to postpone said realization, in that the fund represented by the new stock has been transferred from the surplus to the assets and are thus no longer available for actual distribution. It really adds nothing to the interest of each SH; the proportional interest remains the same. It is the civil fruits of the original investment, and to the owners of the shares go the fruits. Although Lepanto says that the value of the dividends declared should be the basis for determining the amount of compensation due to Nielson, it does not mean that the compensation should be taken from the amount actually declared as cash dividends to be distributed to the SHs. Otherwise there would be a dilution of the dividend that corresponds to each share of stock held by the SHs. Decision modified.Nielson to get P300,000 in cash, as equivalent to 10% of thew value of the 3M stock dividend.

Source: unrestricted retained earnings Defn of unrestricted retained earnings: the undistributed earnings of the corporation which have not been allocated for any managerial, contractual, or legal purposes and which are free for distribution to the SHs as dividends (property or cash) Any and all items included in retained earningsincome of all types, prior period adjustments, net income, special distribution to SHscan be declared as dividends, unless restricted All other items not falling within the term retained earnings are necessarily included in capital and are unavailable for dividend declarationdonated assets or funds, paid-in surplus arising from issuance of no-par stock, premium paid on par value shares, revaluation surplus created to write-ups of assets, etc o Difference between the total present value of its assets after deducting losses and liabilities and the amount of its capital stock o Balance of net worth or net assets after deducting the value of the corporations outstanding stock o Refer to the undistributed earnings or profits realized by the corporation from its business o If not reserved or not set aside by the board for some corporate purpose or for some other legal or contractual purpose, such retained earnings are unrestricted o There must be an actual bona fide surplus to justify declaration of dividends Defn of retained earnings: the net accumulated earnings of the corporation out of transactions with individuals or firms outside of the corporation; sometimes referred to as earned surplus. Includes: o earnings from sales of goods and services of the corporation in the ordinary course of business o earnings from sale of corporate property other than stock trade o does not include premium on par value stock where par value shares are issued and SHs pay a premium therefor over par, a paid-in surplus results. RP law does not allow paid-in surplus to be declared as dividends either as cash or property, because 43 requires dividends be paid out of unrestricted retained earnings Paid-in surplus is considered paid-in capital o does not include treasury stockconsidered as contractions or expansions of paid-up capital o does not include donations Sec 6: consideration for no-par value stock must be treated as capital and is not available for distribution as dividends

Source of Dividends

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This is because SHs intended that the consideration for no par value shares shall constitute the basic business fund of the corporation to be permanently devoted to the corporate business o Retained earnings = Assets (Liabilities + Legal capital) If subscribed shares have not been fully paid, the unpaid portion is a receivable and is an asset of the corporation o Any excess would be surplus or earnings for dividend declarations o Net assets(+unpaid portion of subscribed shares) total par value of subscribed shares = earnings =dividends If watered stock exists, subscriber would be liable for the difference between what he paid and the par value o This liability of the SH is a receivable of the corporation o Net assets (+receivable from SH) - total par value of subscribed shares = earnings = dividends o Board has discretion to appropriate retained earnings for designated purposes Agreements with creditors may also provide for restrictions on dividends distributions o

the liabilities and the capital stock. The object of this prohibition is to afford a margin of protection for creditors in view of the limited liability of the SHs, and to protect the interest of the SHs themselves by preserving the capital so that the purposes of the corporation will be carried out. The 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 companys assets. Such appraisals and conjectural valuations cannot be considered for the purpose of dividends because are subject to market fluctuations, and are merely anticipatory of future profits, and may never be actually realized as an asset of the company. 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. ---Sir: so long as the assets (even if they appreciate in value) are not yet disposed, dividends cannot be declared based on the appreciated value (because it is still an expectancy). CAMPOS: Since our Corpo Code allows dividends only out of unrestricted retained earnings, an increase in the value of existing assets cannot be a source of even a stock dividend.

Berks Broadcasting v Craumer F: Craumer et al together with one Landis (4 people), are the incorporators and directors of the Berks Broadcasting Company. The books indicate that the stock is fully paid (auth. Capital stock = $100K) , through cash ($5K each) and the fixing of a value of $80K upon an asset denominated Franchise and Promotion Expense. A year later, this was written off and in its place were substituted 1) $50K as an amount Due on Unpaid Stock Subscriptions -- (each SH paid $4.2K reducing the item to $23,300. Then it was cancelled altogether and was replaced w/ the entry Goodwill and Promo Expense) and 2) write-ups or increases in the valuation of fixed assets over and above depreciation costs, totaling $30K. Balance sheet showed assets in excess (surplus) of liabilities iao $2,545.94. However, the existence of that alleged surplus depended on the inclusion of the assets of the write-ups of $26K; otherwise, there would be a deficiency to the extent of almost $24K. 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 new SHs, sued the directors to recover the $13K which was allegedly unlawfully declared and paid out as dividends. H: GR: Capital of a corporation must not be impaired in any manner Exception: impairments involuntarily made through losses resulting from business operations. 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

Lich v US Rubber F: Lich is a holder of 300 non-cumulative PS of United States Rubber Company. She seeks to enjoin payment of a dividend on common stock declared. During 3 fiscal years (1935-37), the corporation experienced a deficit of close to $24M, $17M and $10M for each of the 3 years, and a corresponding impairment of capital. In each of these years, the annual net earnings were applied to the deficit, and no dividends were declared. The company underwent a reconstruction of its capital structure. It issued, in lieu of no-par value CS, CS of par value $10. In the next 3 years the deficit was reduced and cancelled and net profts were made available for dividends for noncumulative PS, but not common shares. The company then declared a dividend, from the net profits for the current year and from no other fund, on both PS and CS. In the deficit years, the company maintained adequate reserves, which remain intact even when dividends were declared. Lich contends that the preference of PS holders as to dividends extends not only to the current year, but to the prior deficit years, and dividends cannot be paid out to CS holders until dividends are paid to PS on the years in question and the arrearages must be paid in full.

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H: the doctrine of the Cast Iron Pipe Cases, based on sound equitable principles, is a departure from the GR that holders of non-cumulative preferred stock lose with the close of the fiscal year all rights in the undistributed net profits of that year. It preserves to the holders of the non-cumulative PS 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 PS are in no better position than the holders of CS except as to priority of payment. Dividends on PS are not payable absolutely and unconditionally, but only out of the sources designated by law. The payment of dividends on non-cumulative PS is further circumscribed by the certificate of incorporation and stock certificate; dividends on such stock are payable only out of net profits and for the years in which the same were earned. Thus the right of non-cumulative PS is conditional upon: (1) accrual of net profits (2) retention of the same in the business. If there are no net profits, the deficiency is not chargeable against the net profits of succeeding years. The test of applicability is WON there were in the years in which dividends were not declared, net profits available for the lawful declaration and payment of dividends, but withheld from non-cumulative PS and retained in the business. Net profits connotes clear pecuniary gain remaining after deducting from gross earnings the expenses incurred. It is not synonymous with annual net earnings, which may be productive of net profits, or reductive of the deficit. In this case there were in 1935-37 no net profits to which the inchoate right to dividends could have attached. There was a substantial deficit in each of the three years which greatly exceeded the annual net earnings of the corresponding year. It is manifest therefore that the annual net earnings of each year resulted, not in a profit, but in a reduction of the deficit. There was no source from which dividends could be paid out lawfully; the payment of dividends under such circumstance would have been unlawful. The corporation is charged with the duty of maintaining the integrity of the capital, on the faith of which credit was extended, as a trust fund for the security of creditors. 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 the 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 is entitled to have a dividend declared only out of such part of them as can be applied to the dividends consistently with a wise administration of a going concern. If the annual net earnings of a corporation are justifiable applied to legitimate corporate purposes, such as payment of debts, reduction of deficits, and restoration of impaired capital, the right of non-cumulative preferred SHs to the payments of dividends is lost. The payment of dividends from annual net earnings, when the liabilities of a corporation exceed the assets, would be in derogation of the rights of creditors. The payment of dividends under such

circumstances, while debts accrue, would be contrary to sound business practice.

Dividend Declaration discretionary with Board GR: The decision to declare dividends are matters addressed to the business judgment of the board o The fact that profits have accrued does not necessarily impose upon the directors the duty to declare them as dividends o Courts have no power to compel them to make the distribution of dividends in the absence of BF or fraud or clear abuse of discretion o Unless tainted with BF, fraud, or gross negligence, courts will not interfere, and SHs will be bound If for expansion of business, SH cannot complain If board capitalizes profits instead of distributing them (i.e. issues stock dividends), requires approval of at least 2/3 OCS o But the board cannot abuse their discretion and accumulate profits unreasonably o Remedy of SH: file an action in court to compel payment of dividends Burden of proof lies with the SH Mandamus is not a proper remedy since the SH has no individual interest in the profits of a corporation until and unless a dividend is declared Retention of excess profits 43: stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock Exceptions: o When justified by corporation expansion projects approved by the board o When corporation is prohibited under any loan agreement with any financial institution or creditor and without the latters consent o When such retention is necessary under special circumstances

Keough v St Paul Milk F: Action to compel corporation to declare a cash dividend, on the ground that those in charge of the corporate affairs (the Ryans) are wrongfully and needlessly withholding profits available for cash dividends and conspiring to retain them for their benefit and to the prejudice of the majority. The business, assets, liabilities of the partnership were exchanged for 597 shares of the St Paul Milk Co. The 597 shares represent the only stock issued until the stock dividend. By amendment, the authorized capital was increased to $300K. A 6-to-1 stock dividend was declared and the amount necessary to cover the issued shares was transferred from the surplus account to the capital account. When the corporation paid out its first dividend, a total of $169,470 was distributed to SHs or about a 335% return. There were no mortgages or liens or any other

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substantial indebtedness. Sales are predominantly cash basis. Fixed assets were in good condition. Wages were paid. The corporation had investments in bonds, CS in a wholly-owned subsidiary, but the merchandise inventory was small. TC held that a liberal and reasonable capitalization and surplus was the sum equal to the original outstanding stock plus 2/3 of the accumulated surplus, and that all sums in excess were unreasonable and constituted a violation of the fiduciary relation. Keough et al claims that the capitalization in 1936 by the Ryans of a large percentage of the accumulated surplus without reason or necessity other than to keep it within the corporation under the dominating control of the Ryans. The Ryans contend that the capitalization was for avoiding possible federal taxes upon undistributed surplus. TC found that the capitalization was to strengthen control of the Ryans over the corporation and surplus to prevent a distribution of earnings. I: WON corp can be compelled to declare dividends. H: In this case, YES> The determination of WON to declare a dividend is essentially a matter of internal management. It is primarily for the corporate directors in their sound discretion to decide, and judicial review may be secured when abuses contravening the SHs rights manifest themselves. A court will not compel a dividend unless the directors act fraudulently, unjustly, or unreasonably so as to impair the rights of the complaining SHs to their just proportion of the corporate profit. Generally the mere fact that a large corporate surplus exists is not enough to warrant equitable intervention. Ultimately the test is an examination of the GF and reasonableness of the policy of retaining that which is otherwise available for dividends. The corporation did not have a reasonable need for the large surplus accumulated and held as bonds or other easily liquidated assets. Inventory was small, cash turnover was liquid, no substantial obligations, no expansion program, accounts for depreciation were set upin short, the surplus was easily available for dividends, if the directors so elected to do so. The large surplus existed at the time the Ryans were receiving salaries in excess of their worth and draining from the corporation money otherwise available for dividends. The capitalization of the surplus did not serve a corporate need; it was referable only to the desires and purposes of those in control to keep it under their control and subject to their machinations. Furthermore, fraudulent expense items and other anomalies point to the intent of the directors. Generally directors are proper parties to determine whether a divided shall be in cash of stock, and a court will not interfere with the exercise of their discretion; but where it appears that the object was to primarily benefit those in whom the discretion rests, equitable powers can be called into operation. Directors and officers of the corporation owe SHs the active duty of honesty and GF in the transaction of the business and in their dealings. While it is true that the court cannot ordinarily compel a corporation to declare a dividend at the suit of a minority SH, yet where dividends are withheld for an

unlawful purposeto deprive a SH of his rightshe may have the aid of equity for adequate protection. A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interest of the SHs. Its property is not diminished, and their interests are not increased. Where profits clearly warrant payment would be proper, the SHs cannot be cut off by a stock dividend when it purpose is wrongfully to keep the profits of the business with the control of those dominating the affairs so as to be available to them. Such action is oppressive and evinces BF sufficient to justify equitable intervention.

Dodge v Ford Motor Co. F: Action by John Dodge, a minority SH, against the Ford Motor Company to compel the declarations of dividends. --TC granted motion and ordered the payment of dividends. -- At this time, Ford Motor Co had just concluded its most prosperous year of operations. Demand for Ford cars continued. It could make and market 500,000 cars. Sales of parts and repairs increase. It had assets of more than $132M, COH $54M, surplus of $112M. -- Liabilities continue the corporation as a semi-eleemosynary institution, and not as a business concern. Henry Ford himself testified that the company he built had made too much money, had too large profits, and that a sharing of profits with the public, by reducing the prices. It expected a profit upwards of $60M. Fords defense was that its policy was to reduce the selling price of Ford cars while improving their quality, with the goal of producing 1M cars per year. There was a general plan for expansion of the productive capacity of the business. Management decided not to reduce in the meantime the price, but to maintain the same and accumulate a large enough surplus to pay for the proposed expansion of plant and equipment. There was a large daily, weekly, monthly, receipt of cash. The output was practically continuous and within a few days, turned into cash. -- Dodge et al contend that the plan was to the selling price of cars should be attained. Ford argues that although a manufacturing corporation cannot engage in humanitarian works as its principal business, the fact that it is organized for profit does not prevent the existence of implied powers to carry on with humanitarian motives such as charity as are incidental to the main business of the corporation. H: the plan does not call for and is not intended to produce immediately a more profitable business but a less profitable one, with the apparent immediate effect to diminish the value of shares and return to SHs. There is no doubt that certain sentiments, philantrophic and altruistic, creditable to Ford, had largely influenced the policy to be pursued by the company. There is an obvious difference between an incidental humanitarian expenditure of corporate funds for the employees, and a general purpose and plan to benefit all mankind at the

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expense of others. There should be no confusion of the duties Mr Ford conceives as owed to the general public and the duties which in law he and his directors owe to the protesting minority SHs. A business corporation is organized for the benefit and profit of the SHs. The powers of directors are to be exercise to that end. Discretion of directors is to be exercised in the means to attain that end, and does not include the end itself, through the reduction of profits or nondistribution thereof. It is not within the lawful powers of the board to shape and conduct the affairs of a corporation for the incidental benefit of SHs and for the primary purpose of benefiting others. The Court however did not interfere in the proposed expansion of the business of Ford Motor. It is recognized that plans must often be made for a long future, for expected competition, for continuing as well as an immediately profitable venture. The experience of FMC is evidence of capable management of its affairs. But it noted that the company took from the public money required for its plan but that the considerable salaries of Mr Ford were not diminished. --It is true that a considerable cash balance must be at all times carried by such a concern. But, cash is coming in and output immediately converted into cash So, it would appear that, accepting and approving the plan of the directors, it was their duty to distribute a very large sum of money to stockholders.

The fair interpretation of the contract between the corporation and the PS holder is that if in any year net profits are earned, a dividend is to be declared. To hold that the board has a discretion to declare or not a dividend when it has funds it can use is to hold that one of the parties to a contract has the option to pay something to the other or not, at its own election since, if the dividend is not declare, the benefits of accumulated profits are practically lost to these SHs. Such a construction should be avoided. The directors owe a positive duty to pay a dividend to the PS whenever in any year there were net profits available. Inasmuch as the only possible source of profit to the preferred SH from his investment is the distribution of earnings in the year in which they accrue, he has the right to insist that an accounting be taken annually, and that the surplus of one year, available for a dividend, shall not be carried over to meet a possible deficiency of the next. The holder of PS, is however not generally a creditor until a dividend is declared, but if a dividend ought to have been declared in a certain year to such SHs, they should be regarded as creditors to such extent from such time or times. The companys contract with the PS is not to pay him at all events the amount of 6% of the net profits, but to declare a dividend on that basis. The obligation of the corporation to pay dividends on the PS out of the yearly net profits is subordinate to whatever obligation it owes to the public. Therefore if it was necessary for the corporation to use the surplus in any year to make extension to which patrons were entitled, a dividend for that year would have been excused.

Preference as to Dividends (SEE CHAP XIFINANCING) AOI may provide for stocks with preferences in the distribution of dividends o Voting o Non-voting Cumulative Non-cumulative

When Right to Dividends Vests; Rights of Transferee Right vests as soon as the dividends have been lawfully declared by the board; from that time on, it becomes a debt owing by the corporation to each SH and no revocation can be made Whenever such dividend is declared, or the declaration of dividends is made, the corporation becomes a debtor and the right of the SH to distribution, unless a record date is specified, becomes fixed by the declaration. o The amount due to a SH belongs to him and it cannot without his consent be reverted to the surplus account of the corporation Whoever owns or is the SH-of-record of the stocks at the time of declaration also own the dividends o GR: Subsequent transfer would not carry with it the right to dividends

Burk v Ottawa Gas & Electric Co. F: Suit by preferred SHs of Ottawa Gas, demanding an accounting of all property and assets and declare and payment of dividends. Burk claims that earnings of the business were such that the directors owed them an imperative duty to declare a dividend. --Ottawa Gas maintain that the corporate has been unable to declare a dividend because its funds were exhausted by expenditures which it was obliged to make, which was for the extensions of the companys plant. TC ruled the extensions necessary and for the betterment of the plant and its patrons. H: Reversed and remanded to TC. Under the certificate of PS, the conditions which the holder may demand a dividend depend on the precise terms of the contract upon which it is issued.

McLaran v. Crescent Planning Mill Co. F: McLaran is the administrator of the estate of Humber, owner of 57 paid-up shares of stock of the Crescent Planning Mill Co. and director of the company as well as President. The company declared a dividend of 6%, divided into 4

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payments of 1/1/2% each. No other action taken to set apart a fund out of which to pay the dividend although the company was solvent and had adequate surplus. Nonetheless the officers proceeded to pay Humber and other SHs the 1st installment of the dividend. The next installment was not paid, the board having discovered an error in the financial statements of the company such that its assets were overstated by $6000. The board then voted to rescind and recall the order paying out the dividends and defer the payment indefinitely. The company was still perfectly solvent and had amply funds to pay the dividend. Humber demanded payment of his dividend but was refused on account of the recent action by the board. The corporation contends that there was no declaration because the board failed to set aside funds for the purpose, and that by virtue of the resolution its former action was rescinded and the payouts were recalled and put on hold. I: WON the mere declaration of a dividend by a solvent corporation creates a debt in favor of the SH I: WON the corporation, having declared a dividend and paid one installment, turn around and rescind installments yet unpaid H: Case concerns the declaration of a cash dividend by a solvent corporation possessed of ample undivided profits and surplus. The corporation contends that a resolution declaring a dividend is not sufficient to create a dividend or create a debt from the corporation in the absence of further action in setting apart a fund for the purpose. The court held that if the declaration of the dividend is fairly and properly made, out of profits existing at the time it was declared, the relation of debtor and creditor is thereby established between the corporation and the SHs for the payment of the dividend to the SH. The declaration of dividends operates as a severance thereof from the stock in the general mass of the corporate property, and raises an implied promise on the part of the corporation to pay the SH the amount of the dividend. Action on the part of the corporation in setting aside the fund for the specific purpose constitutes such moneys as a trust fund in the hands of the corporation for the use of the SHs and in the event of bankruptcy of the corporation, the SHs are not required to go in pro rata with the general creditors for such unpaid dividends, but may proceed as against a trustee on account of such trust fund. Mere declaration of the dividend, without more, by competent authority under proper circumstances, creates a debt against the corporation ifo the SHs the same way as any other general creditor of the concern. The setting apart of a fund thereafter, passes one step further toward securing the payment of the debt to the SH. Thus the mere declaration of the dividend itself, without the setting aside of the fund, creates a debt, and the act of declaring a dividend from the stock and corpus of the corporate property is ipso facto, in and of itself, the setting apart, setting aside and segregating such dividends and it creates an immediate right of the SH to demand and recover the same when due.

Liability for Illegal Dividends 1. Directors GR: not liable personally Exception: BF, negligence, willful violation of the law If liable: liable to corporation and creditors upon insolvency

Sec 31 2. SHs GR: in the absence of an express provision of law, an innocent SH is not liable to return the dividends received by him out of capital, unless the corporation was insolvent at the time of payment SHs who received wrongfully or illegally declared dividends can be held liable to refund them to the corporation or its creditors o Why? In receiving the dividends, they do not act in a corporate capacity and is not a ratificatory act of the SHs

Steinberg v Velasco: In determining the legality of declared dividends, the existence of unrestricted retained earnings alone cannot be the test. The existence of surplus profits alone does not suffice; the corporation should have an actual bona fide surplus from which the dividends could be paid, and the payment in full at the time would not affect the financial condition of the corporation Remedy in case of illegal distribution of dividends: directors in BF may be held solidarily liable for the reimbursement of the amount declared as dividend Purchase by corporation of its own shares Sec 41: expressly empowers the corporation to acquire its own shares for a legitimate corporate purpose, provided it has unrestricted retained earnings to cover the shares to be purchased. o So long as the acquisition of shares does not exceed the unrestricted retained earnings, the corporate creditors are deemed protected o Equivalent to subjecting dividend declaration to the extent of unrestricted retained earnings o Acquired shares by the corporation become treasury shares Corporate purposes: To eliminate fractional shares

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To collect or compromise an indebtedness to the corporation arising out of an unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold To pay dissenting or withdrawing SHs entitled to payment (appraisal right) 1. Limitations on power: proper purposes and existence of surplus A corporation has the power to purchase its own stocks, provided o that payment is made out of surplus profits, i.e. unrestricted retained earnings, and o it is for a legitimate purpose o subject to appraisal right of SH under 81 shares reacquired by the corporation become treasury shares, which may be declared as property dividends to be issued out of retained earnings previously used to support their acquisition, provided that the amount of the retained earnings has not be impaired by losses reasons for purchase of own shares: o deadlocks in close corporations (no need for unrestricted retained earnings) o SHs may want to keep the corporation close and prevent unwelcome strangers o Corporation may want to exercise contractual right to redeem PS or bonds, regardless of URE (Sec 8)

Sec 41 2. Remedies in case of improper purchase

As to creditors: those prejudiced by the repurchase by an insolvent corporation can recover against the selling SHs by recovering the consideration paid o Directors can be personally liable for approving the repurchase in BF or with negligence (Sec 31) As o o o to SHs: it reduces what is due them as dividends Repurchase can be discriminatory to the other SHs Shift in voting control Remedy: right of action against the directors under Sec 31

Dividends: cashdirectors approval if any retained earnings form part of the Prior to declaration, verify sufficient; stock/property 2/3 approval OCS the corporation assets of GR: only thosedisposition of corporate assets= dividends; the board GR: who contributed are entitled to authority of contributions become part of corporate assets; no declaration ofto declare Reasonable exercise of judgment= board may opt not dividends,Remedy of SH:property still corporate mandamus GR: dividend declaration discretionary with the board (23) need it Burden of prooF: SH to prove corporate does not Why? Unrestricted retained earnings SH owned by Declaration of dividends: once declared, are does not obtain shares the corporation of ordinary creditor Cash v stock/property dividend; willing to risk a stock dividend CaSH: results in recovery of investment (more often than not, stock prices drop when stock dividends are SH need not wait for dissolution declared) but does not guarantee that it will be paid Unrestricted retained earnings represent fruits of must be secured non-caSH: SH conformity the investment money; corporation doesnt need the money. why? Deferring payment of cash prolongs exposure to As an investor, I am entitled to return! risk of SHs dividends Services rendered can be used as consideration back into corporation stock dividends: plowed for subscription If 100% paid up capital, declare dividends! But it does not mean that the capital stock is fully-paid up (could only be 25%) 43: limitationsneeds of company, contractual obligation (ex IPO) but need not comply w/ 43; other ways to do it but corporation has to contend with an opposing SH caSH: just board approval required stock: deferring dividends; plowed back as corporate funds; cannot yet be enjoyed and possibility that it can never be realized property: same as stock divs; risk that it could be 0% book value Berks: relate to Strong v Repide; psychic return? Must be realized first! Mandatorily declare dividends when unrestricted retained earnings are 10% of paid-in capital stock; does not include unpaid and outstanding stocks St Paul Milk: earmarking for benefit of directors: illegal St Paul-Dodge-Burk: comparable cases involving declaration of dividends and right to compel declaration by the SHs; expansion, nondeclaration, board discretion After declaration: debtor-creditor relationship created but conditions in 43 must still be satisfied!

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Chapter XIV Amendments to Charter

Amendment by Legislature Charter of a private corporation: o AOI o Corpo Code o Special laws (ex General Banking Act, Insurance Code, etc) Corporate charter is a contract between SHs and also between the State and the corporation The legislature has the power to make changes in existing corporations through an amendment to the Corpo Code o Subject to the limitation that no accrued rights or liabilities be impaired (AMS: and non-impairment of contracts in Consti) 4. Sec 17 5. Sec 81 (4) (5) (6) (7) (8)

authorizes preferences superior to those of outstanding shares or extends or shortens corporate term Extension of corporate term cannot exceed 50 years in any one instance Certified copy of amended articles be filed with the SEC Original and amended AOI should contain all matters required by law Amendment to increase/decrease capital stock or extend/shorten corporate term cannot be made under Sec 16, but under Sec 38 and 37requires a meeting Amendment must be in the prescribed form

Sec 16 in relation to Sec 42 implies power to add a purpose entirely different from the original one o Amendment to AOI + approval of SHs required

Sec 145 Amendment by Stockholders Power expressly granted by law to all corporations Grant of power to 2/3 of capital stock to change the basic agreement between the corporation and its SHs o Including those who vote against it subject to right of appraisal where proper o Subscribers are deemed to have accepted this power to amend as part of their contract

Grounds for rejection of amendment

Amendment changing SHs rights

Sec 36 Sec 16 Sec 16 clearly implies that SH meeting is not necessary to effect an amendment of AOI; mere referendum sufficient In all other corporate matters where ultimate decision rests with the SHs, a meeting is required 2/3 vote is on outstanding capital stock which INCLUDES non-voting stock 3. Limitations on power (1) (2) (3) Must be for a legitimate purpose Must be with vote or written assent of 2/3 of capital stock or members. No meeting is required Appraisal right must be recognized if amendment changes rights of SHs or class of shares or

Power of self-amendment is quite extensive and has been held to include the power of changing, restricting, or abrogating preemptive rights as well as voting rights o must be exercised in GF and not merely to defraud or prejudice the minority o must be for a legitimate purpose o burden of proving BF on the dissenting SH No vested rights of SHs are impaired by the power of self-amendment: one who becomes a SH is presumed to have accepted his contract with the corporation subject to the power of self-amendment Remedy: exercise appraisal right

Marcus v. RH Macy & Co Inc. F: Marcus is registered owner of 50 shares of common stock of RH Macy. --Resp had auth capitalization of 500K shares of cumulative PS ($100 pv) and 2.5M CS no par. Issued: 165K PS and 1.656M CS --PS had no voting rights except for specified contingencies. --A proposal was approved during the SHs meeting that the articles be amended as to add voting rightsequal share for shareas enjoyed by holders of the common stock, to the rights of preferred SHs.

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--Marcus objected to the proposed amendment and notified the corporation. She also demanded payment for the common stock then owned by her. During the said meeting, her common stock was voted against such amendment. --She then sues to determine the value of her stock as a basis of the enforcement of payment therefor. Her application for the appointment of appraisers having denied, and affirmed by the Appellate court. I: WON Marcus can invoke her appraisal right and to enforce payment of the value of her stock. H: YES. --The amendment granted to the PS additional rights which increased their voting privileges from a right to vote only in specified contingencies to voting rights equal share for share to those which CS are entitled. The result was that the aggregate number of shares having voting rights equal to those of the CS was substantially increased and thereby the voting power of each common share outstanding was altered or limited by the resulting prorata diminution of its potential worth as a factor in the management of the corporation. --Such alteration or limitation in the voting power of the CS held by Marcus, considering that she objected to the amendment, notified the company, and the corporation caused her shares to be voted against the proposal to amend, was sufficient to qualify her to invoke the statutory procedure which is the basis for her present action. -- By thus limiting the voting power of Marcus common shares to a proportionate extent, the corporate action to which she objected was of such a character as to afford her a legal basis to invoke the procedure as a means to accomplish the appraisal of her stock and payment therefor. --Even if she owns only 50 shares, which the corporation argues as de minimis compared to the entire universe of shares of the corporation, and even if it is claimed that she is not in GF, as argued that if she did have a bona fide desire to sell her CS she could have done so during the said meeting for 3X the amount of her investment, the court ruled that since the law does not mention a minimum percentage or value of stock which must be owned by a non-consenting SH to qualify him to invoke the statutory procedure, it should be applied as is.

7.

Special amendments (four kinds)

Meeting is required in all these cases SEC approval is required Grounds for rejection applicable (1) Increase of capital stock

Corporation may be organized with an authorized capital stock in excess of what may be intended to cover shares presently issued (Sec 97[2]) o Board may dispose of unissued shares to obtain more capital o But amendment needed if authorized capital stock is fully subscribed and corporation needs to issue shares for more capital o Overissuance or issuance of shares beyond authorized limit is void Power to increase capital stock must be substantially in accordance with the grant of power in the Code

Sec 38 Increase/decrease cannot retroact to the date of SH approval but takes effect only upon issuance of certificate o Subscription to the increase does not vest subscriber with right to vote Certificate of increase or decrease + Treasurers affidavit must be attached to original AOI; no need to file copy of amended AOI o At least 25% of increased capital stock subscribed o At least 25% of subscription to increased capital stock paid in SH meeting required: 2/3 OCS o Includes transfer of profits to capital stock for distribution as stock dividends Consideration in this case must be in cash or property No increase allowed on the basis of mere revaluation of corporate assets Three ways to effect the increase in capital stock: o Increase in par value of each share, but no increase in number of shares o Increase in number of shares, but no increase in par value o Increase in both par value and number of each share GR: No appraisal right in any of the three o Except: where preferences were subsequently created superior to the existing shares, SHs have appraisal right Covers special amendments under Sec 38, and general amendment to create new classes of shares in Sec 16 Requirements in both must be met SH meeting indispensable Existing SHs have pre-emptive right to the new shares issued

6.

Effectivity of amendment

GR: Amendment takes effect only upon approval by the SEC o Made within 6 months from filing of amendment o Exception: beyond 6 months, it takes effect even without approval, on the date of filing Exception to exception: delay is due to some cause attributable to the corporation

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(2) Reduction of capital stock No reduction will be approved by the SEC if it will prejudice the rights of corporate creditors Can an over-reduction of capital, resulting in a capital surplus, be declared and distributed as dividends? o No. a distribution of corporate assets other than actual profits, is prohibited until after dissolution of the corporation. o Exception: decrease of capital stock Reasons for decreasing capital stock: o Prevent or arrest a capital deficit o Creation of a capital surplus, against which declines in the value of fixed assets may be charged o Retire of eliminate treasury shares instead of reissuing them o When the corporation does not need any more additional capital Appraisal right is available if the reduction has the effect of altering the rights of any SH/SHs

the fund which the companys creditors are entitled to rely and, having been effected without statutory compliance, was wholly ineffective. CAMPOS: As a practical matter, even if requirements to reduce capitalization are complied with, if creditors would be prejudiced by the reduction, it is most unlikely that the SEC will approve it. Resolution releasing the SHs from their obligation to pay the 50% of their subscriptions was an attempted withdrawal of so much capital from the fund upon which the companys creditors were entitled ultimately to rely on and having been effected without compliance with the statutory requirements, was wholly ineffectual. The subscription to the capital of a corporation constitute a fund to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payments of its debts Subscriptions payable can be cancelled if there is a reduction in capital stock: o Which is possible if done with the consent of the creditors, or o If they will not prejudiced by such move, in which case their consent is not necessary (3) Change in corporate term Shortening of term: o When corporation desires to dissolve itself before expiration of term o as soon as shortened term expires, corporation is ipso facto dissolved Extension of term: o When business is prosperous Procedural requirements: Sec 37 Conditions required: Sec 11

Philippine Trust Co. v. Rivera. F: PhilTrust is the assignee in the insolvency case of La Cooperativa Naval Filipina. It sues Marciano Rivera, an incorporator who subscribed for 450 shares of the insolvent, to recover the balance of P22,500, alleged to have been due on his subscription to the stock of the insolvent. (Orig capitalization of Naval = P100,000, at P100 par or 1,000 shares. Rivera subscribed to 450 shares ((P45K) --Rivera claims that during a SHs mtg, it was agreed that the capital of the company be reduced by 50% and the subscribers released from the obligation to pay any unpaid balance of their subscription in excess of 50% of the total subscribed shares. --There was no compliance with the formalities of the statute relative to the reduction of capital stock. TC ruled that the resolution was without effect and that Rivera was still liable for his unpaid subscription. H: Resolution invalid. subscriptions to the capital of a corporation constitute a fund to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of debts. A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his unpaid shares without a valuable consideration for such a release. Strict compliance with the requirements of law is necessary. The resolution releasing the SHs from their obligation to pay 50% of their respective subscriptions was an attempted withdrawal of so much capital from

Sec 37 Sec 11 Any change in corporate term must be approved at SH meeting Dissenting SH has appraisal right Sec 37: appraisal right in extension of term Sec 81: appraisal right both in extension and shortening When does change take effect? o Must be governed by general provisions on amendment in Sec 16 Certified copy of amended AOI filed with SEC, etc Takes effect upon SEC approval Does not act within 6 mos: approved as of date of filing o Amendment to extend must be approved and filed prior to expiration of original term

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 8.

But cannot be made earlier than 5 mos prior to expiration

Amendments in close corporations

Look at Sec 6 vis--vis Sec 81 If the change is under 81, it becomes mandatory for the corporation to grant/recognize SHs appraisal right Appraisal right: my investment covered by a contract, thus any change would affect SHs rights, giving rise to appraisal rights or pre-emptive rights If amendment impairs SHs rights, 81 grants a remedy 81 also includes corporate acts not covering amendments to charter if SH dissents, 81 provides an exit but note which rights are affected does the change affect SH rights? appraisal rights in: changing primary purpose? Yes decreasing no. of directors? yes. Affects cumulative voting; changing classification of shares? Yes. Economic rights increasing no of directors? Yes. Control and management increase/decrease in capital stock? Yes!

Secs 16, 17, 37, 38 also apply to close corporations Sec 103: applies only to close corporations

Sec 103 Provisions required to be in the AOI of a close corp: o All issued stock of all classes held by not more than 20 persons o All issued stock subject to one or more specific restrictions on transfer o Corporation shall not be listed in stock exchange or make any public offering If any of the above are deleted, it will cease to be a close corp and will lose special privileges in Title XII Non-voting stocks are given a voice in the decision 2/3 OCS vote is required deadlocks, such that business can no longer be conducted to the advantage of SHs generally: SEC may arbitrate the dispute and order cancellation or alteration of AOI or by-laws if necessary
Appraisal Right (81) Nature of right o Refers to a SHs right to demand payment of the fair value of his shares, after dissenting from a proposed corporate action involving a fundamental change in the corporate setting o Granted where there is a radical change in the contractual relationship presumably agreed upon bet the SH and corp Entitled to exercise o A prejudiced SH is one who dissented in the meeting where the proposal or proposed amendment was approved; mere absentation or silence, does not entitle such SH to exercise the right 37, 42, 81: instances when aprraisal right may be exercised: o any amendment to the AOI that changes/restricts rights of SHs o any authorization of preferences superior to outstanding shares of any class o extending/shortening of corporate term o sale, lease, exchange, transfer, mortgage, pledge, disposition of all or substantially all corporate assets o investment of funds in another corp or business outside its primary purpose o merger or consolidation how exercised o written demand within 30 days after date of vote o failure to make demand is deemed waiver o surrender stock certificate for notation as dissenting stock; otherwise, corporation may terminate appraisal right Effect of demand o All rights of dissenting SH suspended o 83: If not paid fair value within 30 days after award, voting and dividend rights must be immediately restored 58

Existence of unrestricted retained earnings o 81: no payment shall be made to a dissenting SH unless corp has unrestricted retained earnings; if not paid, 83 would then apply when right to payment ceases: o GR: dissenting SH cannot withdraw demand for payment Exceptions: Corporation consented to withdrawal Proposed corporate action is abandoned or rescinded Proposed corporate action is disapproved by SEC SEC rules that SH is not entitled to the right Who bears cost? Corporation Denial/waiver of right o GR: corporation cannot deny/deprive appraisal right of SH in AOI or by-laws o Exception: SH can waive, but individually and in some cases for consideration Exercise of appraisal right has the direct effect of diverting resources from corporate coffers and may have serious financial implications

Chapter XV Transfer of Shares

Free transferability of units of ownership in a corporate setting is one of the attractive features of the corporation Shares of stock in a corporation are personal property and the owner thereof has an inherent right, as an incident of his ownership, to transfer the same at will SEC has allowed reasonable restrictions on transfer of shares in the AOI if the restrictions comply with Section 93: o that the restriction must appear in the AOI, by-laws and certificates of stock o restrictions must not be more onerous than granting the existing SHs or the corporation the option to purchase the shares under reasonable terms

Nature of stock certificate De los santos: stock certificate is not a negotiable instrument, but is considered quasi-negotiable: o it may be transferred by endorsement + delivery but o is not negotiable because the holder take it without prejudice to such rights or defenses as registered owners or transferors creditor may have under the law, subject to limitations imposed by law on estoppel SEC: evidence of ownership of shares and that a person may own shares without possessing a stock certificate, provided as he is duly recorded in the books as a subscriber and owner, he is entitled to all the rights of a SH Probative value The stock certificate, once issued, is a continuing affirmation or representation that the stock described is valid and genuine and is at least prima facie evidence of ownership of stock o as long as the subscriber is duly recorded in the books as the owner of the shares, he is considered a SH of record and entitled to all rights of a SH Issuance of the stock certificate Issuance of shares must have the signature of the president or VP, countersigned by the corporate secretary or assistant secretary, and sealed with the corporate seal Issuance is NOT necessary to constitute the subscriber a SH of the corporation but delivery of the certificate is an essential element of the issuance 63: Every SH has the right to have a proper certificate issued to him upon demand: o provided he complies with the requirements/conditions in 64 i.e. FULL payment of subscription SEC: remedies available to a SH if a corporation wrongfully refuses to issue a certificate: o File a suit for specific performance o File for alternative relief by way of damages o File a petition for mandamus to compel the issuance o Rescind the contract of subscription and sue to recover payment Negotiation of the certificate of stock Endorsement + delivery = quasi-negotiability o Endorsement: essential requisite o SEC: AOI cannot do away with the endorsement requisite for a valid negotiation o 63 is mandatory Three (3) purposes:

Manner and effectivity of transfer Shares of stock, though intangible, are personal property, and are freely transferable by the owner thereof

Sec 63 Endorsement and delivery of the certificate and the registration of the transfer in the book of the corporation is only one of the modes recognized by law by which to legally and effectively sale and assign shares that would be binding not only on the parties but also to the corporation and to third parties who will deal with the covered shares Magsaysay-Labrador case: the sale or assignment must be registered in the stock and transfer book of the corporation in order to be binding on third parties. A transferee cannot claim a right to intervene as SH in corporate issues on the strength of the transfer of shares allegedly executed by a registered SH

The Stock Certificate 63: capital shall be divided into shares for which certificates signed by the president or VP, countersigned by secretary, sealed with the corporate seal shall be issued in accordance with the by-laws 64: no certificate shall be issued until the full amount of his subscription + interest + expenses shall be paid o therefore a subscriber must pay his subscription totally before a certificate can be issued to him o but an unpaid and not declared delinquent subscription can be vote for and upon in corporate meetings o delinquent shares, however, are entitled to dividends subject to the rules in Sec 43

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o o o 1.

Sale and assignment Pursuant to a trust or nominee arrangement Pledge or other encumbrance of the shares Indorsement of stock certificate; registration in corporate books

I: WON a bona fide transfer of shares of a corporation, not registered or noted on the books, is valid as against a subsequent lawful attachment of said shares, regardless of whether the attaching creditor had actual notice of the transfer or not . H: GR: NO> No transfer is valid except as between the parties unless it is duly registered. All transfers of shares must be entered on the books of the corporation. All transfers not so validly entered are invalid as to attaching or execution creditors of the assignors, of the corporation, and as to all subsequent purchasers in GF, and even to all parties interested. All transfers not so entered on the books are absolutely void, not because they are without notice or fraudulent in law, but because they are made void by the statute. Courts in the Phils adhere to the principle that the right of the owner of the shares to transfer to same by delivery of the certificate, whether it be regarded as statutory or common law right, is limited and restricted by the express provision that no transfer shall be valid except as between the parties, until the transfer is entered and noted upon the books of the corporation. The right of the owner of the shares of a corporation to transfer the same by delivery of the certificate, whether it be regarded by the express provision that no transfer however shall be valid except as between the parties, until the transfer is entered and noted upon the books of the corporation. --The transfer of 75 shares in the NEC, made by Diosomito to Barcelon was not valid as to Uson, on Jan 18, 1932, the date on w/c they still stood in the name of Diosomito on the books of the corp.

At the back of ever stock certificate is a transfer form with blank spaces for the transferees name When a SH wants to transfer his shares, all he has to do is to sign the form. He need not fill the blanks as this may be done by the transferee Sec 74: The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent and shall be open for inspection to any director or SH at reasonable hours on business days 2. Effect of lack of registration

Until registration is accomplished, the transfer, though valid between the parties, cannot be effective as against the corporation Unrecorded transferees cannot enjoy the status of a SHhe cannot vote or be voted for and will not be entitled to dividends Until challenged in a proper proceeding, a SH of record has the right to participate in any meeting In order to be recognized as SH for voting purposes, his transfer must be recorded on the books If refused, he can go to court to prove his right Until transfer is registered, transferee is not a SH but an outsider, and any action he may wish to bring against the corporation must be brought before the regular courts and not the SEC An unregistered transfer, not being effective against persons other than the parties thereto, cannot prevail over the rights of a subsequent attaching creditor

Uson v Diosomoto F: Unson is the creditor of Diosomoto, who is original owner of 75 shares of North Electric which were levied by a writ of attachment to satisfy the judgment creditor. Uson obtained judgment against Diosomoto and the shares were sold at public auction to the judgment creditor Uson. --Diosomoto sold the shares attached to Barcelon and delivered the corresponding certificates. The transfer to Barcelon was not registered and noted on the books of the corporation until after 9 months after the attachment was levied and later (9 months after) transferred to HPE Jollye. HPL Jollye claims to be owner of the 75 shares and presents a certificate of stock issued by North Electric.

Nautica Canning Corp v Yumul F: Roberto C. Yumul was appointed COO/General Manager of Nautica. On the same date, First Dominion Prime Holdings, Inc., Nauticas parent company, through its Chairman Alvin Y. Dee, granted Yumul an Option to Purchase up to 15% of the total stocks it subscribed from Nautica. A Deed of Trust and Assignment was executed between First Dominion Prime Holdings, Inc. and Yumul whereby the former assigned 14,999 of its subscribed shares in Nautica to the latter. The deed stated that the 14,999 shares were acquired and paid for in the name of the ASSIGNOR only for convenience, but actually executed in behalf of and in trust for the ASSIGNEE. After Yumuls resignation from Nautica on August 5, 1996, he wrote a letter to Dee requesting the latter to formalize his offer to buy Yumuls 15% share in Nautica on or before August 20, 1996; and demanding the issuance of the corresponding certificate of shares in his name should Dee refuse to buy the same. Dee, through Atty. Fernando R. Arguelles, Jr., Nauticas corporate secretary, denied the request claiming that Yumul was not a stockholder of Nautica. Yumul requested that the Deed of Trust and Assignment be recorded in the Stock and Transfer Book of Nautica, and that he, as a stockholder, be allowed to inspect its books and records. Yumuls requests were denied allegedly because he neither exercised the option to purchase the

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shares nor paid for the acquisition price of the 14,999 shares. Atty. Arguelles maintained that the cash dividend received by Yumul is held by him only in trust for First Dominion Prime Holdings, Inc. Nautica et al contend that Yumul was not a stockholder of Nautica; that he was just a nominal owner of one share as the beneficial ownership belonged to Dee who paid for said share when Nautica was incorporated. They also allege that Yumul was given the option to purchase shares of stocks in Nautica under the Option to Purchase, and since he failed to exercise the option, there was thus no cause or consideration for the Deed of Trust and Assignment, which makes it void for being simulated or fictitious. H: The SEC and CA correctly found Yumul to be a stockholder of Nautica, of one share of stock recorded in Yumuls name, although allegedly held in trust for Dee. Nauticas Articles of Incorporation and By-laws, as well as the General Information Sheet filed with the SEC indicated that Yumul was an incorporator and subscriber of one share. Even granting that there was an agreement between Yumul and Dee whereby the former is holding the share in trust for Dee, the same is binding only as between them. From the corporations vantage point, Yumul is its stockholder with one share, considering that there is no showing that Yumul transferred his subscription to Dee, the alleged real owner of the share, after Nauticas incorporation. Other than petitioners self-serving assertion that the beneficial ownership belongs to Dee, they failed to show that the subscription was transferred to Dee after Nauticas incorporation. The conduct of the parties also constitute sufficient proof of Yumuls status as a stockholder. On April 4, 1995, Yumul was elected during the regular annual stockholders meeting as a Director of Nauticas Board of Directors. Thereafter, he was elected as president of Nautica. Thus, Nautica and its stockholders knowingly held respondent out to the public as an officer and a stockholder of the corporation. The SC refrained from ruling on whether or not Yumul can compel the corporate secretary to register said deed. It held it to be a question which is civil in nature and thus beyond the ambit of the SEC, the court of origin of the current action. It is only after an appropriate case is filed and decision rendered thereon by the proper forum can the issue be resolved.

shares cancelled. The certificate of stock was in the possession of defendant Razon who refused to deliver said shares to the plaintiff, until the same was surrendered by defendant Razon and deposited in a safety box in Philippine Bank of Commerce. 1,500 shares of stook under Stock Certificate No. 003 were delivered by the late Chuidian to Enrique because it was the latter who paid for all the subscription on the shares of stock in the defendant corporation and the understanding was that he (defendant Razon) was the owner of the said shares of stock and was to have possession thereof until such time as he was paid therefor by the other nominal incorporators/ stockholders. Since then, Enrique Razon was in possession of said stock certificate even during the lifetime of the late Chuidian, from the time the late Chuidian delivered the said stock certificate to Razon. By agreement of the parties delivered it for deposit with the bank under the joint custody of the parties. TC ruled Razon owns the shares, IAC reverses. Razon claims that the shares of stock were registered in the name of Chuidian only as nominal stockholder and with the agreement that the said shares of stock were owned and held by the petitioner but Chuidian was given the option to buy the same. Vicente B. Chuidian insists that the appellate court's decision declaring his deceased father Juan T. Chuidian as owner of the 1,500 shares of stock of E. Razon, Inc. should have included all cash and stock dividends and all the pre-emptive rights accruing to the said 1,500 shares of stock. I: Who owns the shares? Does ownership of the said shares include all cash and dividends? H: (1) Chuidian owns the shares. For an effective, transfer of shares of stock the mode and manner of transfer as prescribed by law must be followed. As provided under the Corporation Code of the Philippines, shares of stock may be transferred by delivery to the transferee of the certificate properly indorsed. Title may be vested in the transferee by the delivery of the duly indorsed certificate of stock. However, no transfer shall be valid, except as between the parties until the transfer is properly recorded in the books of the corporation. In the instant case, there is no dispute that the questioned 1,500 shares of stock of E. Razon, Inc. are in the name of the late Juan Chuidian in the books of the corporation. Moreover, the records show that during his lifetime Chuidian was elected member of the Board of Directors of the corporation which clearly shows that he was a stockholder of the corporation. From the point of view of the corporation, therefore, Chuidian was the owner of the 1,500 shares of stock. In such a case, the petitioner who claims ownership over the questioned shares of stock must show that the same were transferred to him by proving that all the requirements for the effective transfer of shares of stock in accordance with the corporation's by laws, if any, were followed or in accordance with the provisions of law. Razon however did not present any by-laws which could show that the 1,500 shares of stock were effectively transferred to him. In the absence of the corporation's bylaws or rules governing effective transfer of shares of stock, the provisions of the Corporation Law are made applicable to the instant case.

Razon v IAC F: Enrique Razon organized the E. Razon, Inc. for the purpose of bidding for the arrastre services in South Harbor. Vicente Chuidian is the administrator of the intestate estate of Juan Telesforo Chuidian. A stock certificate for 1,500 shares of stock of E Razon Inc was issued in the name of Juan T. Chuidian. On the basis of the 1,500 shares of stock, the late Juan T. Chuidian and after him, Vicente Chuidian, were elected as directors of E. Razon, Inc. Enrique Razon had not questioned the ownership by Juan T. Chuidian of the shares of stock in question and had not brought any action to have the certificate of stock over the said

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The law is clear that in order for a transfer of stock certificate to be effective, the certificate must be properly indorsed and that title to such certificate of stock is vested in the transferee by the delivery of the duly indorsed certificate of stock. (Section 35, Corporation Code) Since the certificate of stock covering the questioned 1,500 shares of stock registered in the name of the late Juan Chuidian was never indorsed to the petitioner, the inevitable conclusion is that the questioned shares of stock belong to Chuidian. The petitioner's asseveration that he did not require an indorsement of the certificate of stock in view of his intimate friendship with the late Juan Chuidian can not overcome the failure to follow the procedure required by law or the proper conduct of business even among friends. To reiterate, indorsement of the certificate of stock is a mandatory requirement of law for an effective transfer of a certificate of stock. The preponderance of evidence also supports the findings that the shares of stock were given to Juan T. Chuidian for value. Juan T. Chuidian was the legal counsel who handled the legal affairs of the corporation. We give credence to the testimony of the private respondent that the shares of stock were given to Juan T. Chuidian in payment of his legal services to the corporation. Razon failed to overcome this testimony. (2) The cash and stock dividends and all the pre-emptive rights are all incidents of stock ownership. The rights of stockholders are generally enumerated as follows: [F]irst, to have a certificate or other evidence of his status as stockholder issued to him; second, to vote at meetings of the corporation; third, to receive his proportionate share of the profits of the corporation; and lastly, to participate proportionately in the distribution of the corporate assets upon the dissolution or winding up. Oral testimony to show that one is the principal or beneficial owner of shares for which he has allowed a certificate of stock to be issued in the name of his alleged nominee will not be sufficient basis to claim rightful ownership over the shares of stock. The law is clear that in order for a transfer of stock certificate to be effective, the certificate must be properly indorsed and that title to such certificate of stock is vested in the transferee by delivery of the duly indorsed stock certificate.

3.

No registration of transfer of unpaid shares

Any unpaid balance on the subscriptionthere can be no stock certificate on which an indorsement may be made. Shares are thus not transferable on the books The words unpaid claim in Sec 63 does not necessarily mean that there should have been a previous call by the board o As long as any portion remains unpaid, a corporation has a claim on the shares, and may demand for the same

Corporation may agree to record a transfer even if there is still an unpaid balance, provided the transferee assumes the obligation to pay the balance Under 63 no shares of stock against which the corporation hold any unpaid claim shall be transferable in the books of the corporation o A corporation may refuse to register a sale or assignment of shares not fully paid o China Banking Corp case: principle of non-registration of unpaid shares not applicable in pledged shares sold at public auction o Unpaid claims refers to any unpaid claims arising from unpaid subscription, and not to any indebtedness which a subscriber may owe a corporation from other transactions Baltazar: since it was the practice and procedure of the corporation to issue certificates of stock to its individual subscribers, it may not take away the right to vote granted by the certificates o 64: provides a legal basis for the corporation through its board to refuse any claim by a subscriber to issue stock certificates covering the extent of share as that have been paid-up while leaving the remaining balance unpaid o 64 does not prohibit the corporation from dividing the subscription of a subscriber by considering the portion thereof as fully paid and issuing a corresponding certificate over the paid-up shares; such option is only granted to the corporation o Thus a corporation may apply payments made by subscribers on their subscriptions either as: Full payment for the corresponding number of shares, the par value of which is covered by such payment, (Baltazar) or Payment pro-rata to each and all the entire number of shares subscribed for (Nava and Fua Cun) Sale of portion of not fully paid shares o SH cannot transfer part of his subscriptionindivisibility of subscription of contract (Nava and Fua Cun) o Difficult to determine whether or not partial payments made should be applied as full payment Sale of entire not fully paid shares o Entire subscription not fully paid may be transferred to a single transferee Must secure the consent of the corporation since the transfer contemplates a novation of contract But cannot be forced upon the corporation When shares fully paid o Shares of stock issued with stock certificates become personal property and may be transferred by deliver of the certificate endorsed by the owner

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4.

Remedy if registration refused

Transferee may petition the court for a writ of mandamus to compel registration or the issuance of a new certificate o There must be no other plain, speedy and adequate remedy o There are no unpaid claims against stocks whose transfer sought to be recorded Right to have transfer registered exists from the time of the transfer and it is to the transferees benefit that the right be exercised early Mere blank indorsement of the certificate of stock by itself does not clearly and unequivocally indicate that the registered owners wish to have the certificate cancelled and a new one issued in the name of the holder.

Rural Bank of Salinas v. CA F: Clemente G. Guerrero, President of the Rural Bank of Salinas, Inc., executed a Special Power of Attorney in favor of his wife, private respondent Melania Guerrero, giving and granting the latter full power and authority to sell or otherwise dispose of and/or mortgage 473 shares of stock of the Bank registered in his name. Pursuant to said Special Power of Attorney, private respondent Melania Guerrero, as Attorney-in-Fact, executed a Deed of Assignment for 472 shares out of the 473 shares, in favor of private respondents, and executed a Deed of Assignment for the remaining one (1) share of stock in favor of private respondent Francisco Guerrero, Sr. Melania Guerrero presented to petitioner Rural Bank of Salinas the two (2) Deeds of Assignment for registration with a request for the transfer in the Bank's stock and transfer book of the 473 shares of stock so assigned, the cancellation of stock certificates in the name of Clemente G. Guerrero, and the issuance of new stock certificates covering the transferred shares of stocks in the name of the new owners thereof. However, petitioner Bank denied the request of respondent Melania Guerrero. I: WON the courts can compel by Mandamus the Rural Bank of Salinas to register in its stock and transfer book the transfer of 473 shares of stock to private respondents. H: Section 5 (b) of P.D. No. 902-A grants to the SEC the original and exclusive jurisdiction to hear and decide cases involving intracorporate controversies. An intracorporate controversy has been defined as one which arises between a stockholder and the corporation. There is no distinction, qualification, nor any exception whatsoever. The case at bar involves shares of stock, their registration, cancellation and issuances thereof by petitioner Rural Bank of Salinas. It is therefore within the power of respondent SEC to adjudicate. Said Section (Sec. 35 of Act 1459 [now Sec. 63 of the Corporation Code]) contemplates no restriction as to whom the stocks may be transferred. It does not suggest that any discrimination may be created by the corporation in favor of, or against a certain purchaser. The owner of shares, as owner of personal

property, is at liberty, under said section to dispose them in favor of whomever he pleases, without limitation in this respect, than the general provisions of law, the only limitation imposed by Section 63 of the Corporation Code being any unpaid claim held by the corporation against the shares intended to be transferred, which is absent in this case. The right of a transferee/assignee to have stocks transferred to his name is an inherent right flowing from his ownership of the stocks. Whenever a corporation refuses to transfer and register stock in cases like the present, mandamus will lie to compel the officers of the corporation to transfer said stock in the books of the corporation" (Fleisher vs. Botica Nolasco). The corporation's obligation to register is ministerial. In transferring stock, the secretary of a corporation acts in purely ministerial capacity, and does not try to decide the question of ownership. The duty of the corporation to transfer is a ministerial one and if it refuses to make such transaction without good cause, it may be compelled to do so by mandamus. For the petitioner Rural Bank of Salinas to refuse registration of the transferred shares in its stock and transfer book, which duty is ministerial on its part, is to render nugatory and ineffectual the spirit and intent of Section 63 of the Corporation Code.

Restrictions on transfer; close corporations Underlying doctrine on transfer restrictions Public policy against restraint of trade; shares of stock are considered species of trade and occupation through the participation in the business enterprise of the corporate entity o A contract in restraint of trade is valid provided there is a limitation upon either time or place; restraint must be reasonable necessary for the protection of the contracting parties (Villa Rey v Ferrer) o Reasonable restrictions recognized by the SEC: Not more onerous than granting existing SHs or the corporation the option to purchase the shares Not valid if absolute prohibition against sale or transfer of shares without consent of the existing SHs Reasonable option period: 30-60 days After expiration, SH should be free to dispose his shares to anyone Non-competition clause o SEC: valid stipulation in the AOI or BLs as a condition for being a SH Based on the inherent right of the corporation to preserve and protect itself by excluding competitors or hostile interests 1. general rule: free transferability of shares

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free transferability: one of the most important advantages of the corporation over a partnership o furnishes a SH a convenient means of raising funds whenever the need arises (i.e. can sell or use shares as collateral) o when SH is dissatisfied with management, he can get out of the business by selling his share subject to no restriction 2. exception: in close corporations

reason: ownership and management are vested in the same peoplem and there is wariness about any stranger coming in restrictions on transfer a means for SHs of close corporations to protect themselves from future conflicts so that outsiders cannot come in

Sec 96-99 can a corporation not closed place restrictions on the transfer of its stocks? o Campos: transfer restrictions are exceptions to the general rule of free transferability; thus would only apply to closed corporations because of their peculiar nature 3. intrinsic validity of various kinds of restrictions dual nature of the share of stock as both a contract and property o as property: stock transfer restrictions invalid since alienation of property cannot be subjected to any restriction o as contract: parties should have freedom to impose such terms and conditions deemed fit Fleischer v Botica Nolasco: SC held a by-law giving the corporation an option to buy such shares which a SH wished to transfer as ultra vires because it is violative and in restraint of property rights of SHs Restrictions on transfer must be reasonable under the circumstances to justify their exception to the rule of free transferability An absolute prohibition to transfer shares, even when contained in the AOI, would be void since it would violate 63 (1) consent restriction or right of prior consent defn: restriction which requires consent of the directors or of other SHs before any transfer may be made would not be valid under the Corpo Code because it is more onerous than the option restriction allowed by the Code (2) option restriction or right of first refusal; valid if reasonable

right of first refusal: provides that a SH who may wish to sell or assign his shares must first offer the shares to the corporation or to the other existing SHs of the corporation under reasonable terms and conditions o when corporation or the other SHs fail to exercise can the offering SH dispose of his shares to third parties defn: restriction which requires a SH who wishes to sell or transfer his shares to first offer the same to the corporation or to the other SHs and give the latter an opportunity to acquire the same should they wish to do so basis: share of stock are not mere property, but contracts which create personal relations between the parties thereto may be ifo the corporation (right of first option), or of the other SHs or of both successively o Campos: must be ifo corporation and SHs successively to be more effective o Option ifo corporation cannot be enforced if it has no unrestricted retained earnings (Sec 41) allowed under Sec 98 may also apply to non-voting stocks length of time during which option may be exercised must be reasonable must justifiable and reasonable under the circumstances o SEC policy: option period limited to one (1) month o When its terms are ambiguous or not specific or vague, construction should be ifo free transferability Not limited to transfer for value under Sec 99 o May include donation Transfer price: may be fixed by the transfer stipulation (3) prescribing qualifications of SHs, a transfer restriction

AOI of a close corp may provide that only persons meeting specified qualifications may become SHs o Would prevent a transfer of stocks to anyone who does not qualify under its articles o Subject to the provisions of the ff section in Sec 97(1) should be interpreted to qualify only restrictions on their transfers and not qualifications for owning or holding the same buy-back agreements: shares are given or assigned to officers or employees under the condition that should they resign or be terminated from employment, the corporation shall be granted the right to buy-back the shares; these are valid provided the terms and consideration therefor are reasonable (4) redeemable common stock

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gives the corporation the power to redeem common stock allowed under Section 8 of the Code (5) formal validity of restrictions

1.

certificates indorsed in blank; when quasi-negotiable stock certificate possess certain attributes of quasi-negotiability based on the policy to give stability to transactions to encourage their commercial use if certificate indorsed in blank and places it in the hands of another for purposes other than transfer, such possessor may transfer good title to a bona fide purchaser who relied on the indorsement and believed him the be the real owner real owner is estopped from claiming shares as against such bona fide purchasers which he has clothed the possessor with apparent authority (Santamaria case) negotiable character is limited to the situation where the owner is guilty of estoppel in making other persons believe that the possessor has the right to transfer the same o if not entrusted to anyone: not guilty of estoppel o ex finder or thief forged transfers GR: stock certificates, since they are only quasi-negotiable, do not afford the same protection to a holder in GF and for value who receives them in the course of their being negotiated, and that the true owner will be preferred Exception: when the true owner was guilty of negligence in causing the loss if corporation issues a new certificate in pursuance of a forged transfer: no liability incurred o if it comes into the hands of a bona fide purchaser for value: corporation will be estopped from denying validity thereof o but corporation will have right of action against the person who made false representations and in whose favor it issued a new certificate duty of purchaser to determine that indorsement of the owner is genuine

Code requires restrictions on transfer to appear in the fF: o AOI o By-laws o Stock certificate Fleischer v Botica Nolasco: If only in AOI or only in by-laws: binding only on the corporation and the SH o SC voided the by-law provision which granted to SHs an RFR over shares sought to be disposed by other SHs o RFR in by-laws not void per se, but that it is not the function of by-laws to take away or abridge the substantial rights of SHs o By-laws are essentially intramural documents not binding upon the public Salinas case: the only limitation imposed by Sec 63 is when the corporation holds any unpaid claim against the shares to be transferred, and that the corporation through its board, by-laws, or officers, cannot create restrictions in stock transfers, because restrictions must have their source in legislative enactments o By-laws are merely for the protection of the corporation, and prescribe relation, not restriction, and are always subject to the AOI or charter of the corporation If certificate of stock conspicuously shows restriction and is in AOI: transferee is presumed to have notice If it does not conspicuously appear in stock certificate: transferee may be presumed to have notice of the restriction o Where presumption of notice arises: corporation may refuse to register the transfer, unless all SHs consent thereto or AOI is amended o In any case, transferee has the right to rescind the transfer to him If restriction is not in AOI or in by-laws but appears in a private agreement between the SHs: should be binding among them but not anyone not a party to the agreement Restriction may be done away with by amendment to the AOI and the by-laws: 2/3 vote of OCS SH agreement will be binding on all parties to it and cannot be changed against the objection of even only one of them

2.

Unauthorized transfers

J Santamaria v HSBC F: Josefa Santamaria is the owner of 10000 shares of Batangas Minerals Inc thru the offices of the Woo stockbrokerage firm. She then placed an order for 10000 shares of Crown Mines thru RJ Campos & Co stockbrokerage firm and delivered the certificate of stock of her shares in Batangas Minerals as security. Her name was penciled on the certificate she delivered. The certificate then came into the possession of HSBC by virtue of a document of hypothecation, wherein Campos pledged all shares and securities in its possession to HSBC because of an overdraft account it had with the bank. The certificate was indorsed by Campos

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to HSBC. HSBC then requested the Batangas Minerals to cancel the same and a new certificate was issued in the name of HSBCs nominee Robert Taplin. Mrs Santamaria then tendered payment for the Crown Mine shares with Campos, but the latter was now prohibited from transacting business due to its insolvency proceedings. She demanded that HSBC return her certificate, but Taplin replied that the bank did not know anything about her transaction with Campos. She sues HSBC. I: WON Santamaria could be charged with negligence for failing to take necessary precautions in negotiating her stock certificate. H: In making deposit of her certificate, Santamaria did not take any precaution to protect herself against the possible misuse of shares. She could have asked Batangas Minerals to cancel it and issue another in her name to apprise the holder that she was the owner of the certificate. This she failed to do so, and instead she delivered the certificate to Campos and clothing the latter with apparent title to the shares represented by said certificate, including apparent authority to negotiate it by delivering it to HSBC. HSBC had no knowledge of the circumstances under which the certificate of stock was delivered to Campos and had the perfect right to assume that Campos was in lawful possession, in view of the fact that it was a street certificate, which is transferable by mere delivery. Santamaria made the negotiation of the certificate to other parties possible and the confidence she placed in Campos made the wrong done possible. This was the proximate cause of the damage suffered by her. She is thus estopped from claiming further title to or interest therein as against a bona fide pledgee or transferee thereof. The certificate was delivered by Campos to HSBC in the ordinary course of business, together with many other securities, and at the time of delivery, HSBC had no knowledge that the shares belonged to Santamaria. She was thus chargeable with negligence in failing to take the necessary precautions upon delivering the certificate to her broker. I: WON HSBC was obligated to inquire who was the real owner of the shares, and WON it could be charged with negligence for failure to do so. H: Upon its face, the holder of the certificate was entitled to demand its transfer into his name from the issuing corporation. HSBC was not obligated to look beyond the certificate to ascertain the ownership of the stock because it was given pursuant to its contract of hypothecation. A stock certificate, indorsed in blank, is deemed quasi-negotiable, and as such the transferee thereof is justified in believing that it belongs to the holder and transferor. The fact that her name was penciled on the certificate cannot be considered sufficient reason to indicate that she was the owner, considering that certificate was indorsed in blank by her brokers and guaranteed by indorsement in blank by Campos. a bona fide pledgee or transferee of a stock from the apparent owner is not chargeable with knowledge of the limitations placed on said certificates by the real owner, or of any secret agreement relating to the use which might be made of stock by the holder.

When a stock certificate is endorsed in blank, it constitutes what is termed as a street certificate so that upon its face, the holder is entitled to demand its transfer into his name from the issuing corporation. Such certificate is quasi-negotiable. Santamaria could not recover the certificates since she could have asked that the corporation that issued it to cancel and issue another. Her negligence was the immediate cause of the damage, since the certificate was endorsed be her to constitute as a street certificate.

A De Los Santos v. JH McGrath, Atty General of the US F: Involves the true ownership of 1,600,000 shares of Lepanto Mining. The original owner was the Mitsui Co, a Japanese corporation, and was held in trust by Vicente Madrigal, in whose name the shares were registered in the books of Lepanto. Madrigal delivered the certificates to the Mitsui office in the RP, which kept the same until the liberation of Manila by the US. The Mitsuis nor Madrigal had never sold or disposed of the shares, which was alleged to have been looted or stolen during the liberation. By virtue of vesting order P-12, title in the shares was ordered vested in the Alien Property Custodian of the US, which was succeeded in this action by the US Atty General. De Los Santos and Astraquillo however claim to be owners of 1,600,000 shares of Lepanto Mining, alleging that they bought 1,100,000 from Carl Hess and 500,000 from Juan Campos. All evidence and persons who could testify as to their ownership of the shares no longer existed. Hess was executed by the Japanese and Campos killed during the liberation. A receipt made in a purported sale by Astraquillo of the shares was curiously destroyed by fire. I: Who owns the certificates? H: Under the Code, a share of stock may be transferred by endorsement of the certificate coupled with delivery. The transfer is not valid except as between the transferring parties, unless it is entered and noted upon the books of the corporation. No such entry in the name of de los Santos and Astraquillo having been made, it follows that the transfer allegedly effected by Hess and Campos is not valid, except as between themselves. It does not bind the Madrigals or the Mitsuis who are not parties to the alleged transaction. Although a stock certificate is sometimes regarded as quasi-negotiable, in the sense that it may be transferred by endorsement, coupled with delivery, it is well-settled that the instrument is non-negotiable, because the holder thereof takes it without prejudice to such rights or defense as the registered owner or credit may have under the law. If the owner of the certificate has endorsed it in blank, and it is stolen from him, no title is acquired by an innocent purchaser for value. The doctrine that a bona fide purchaser of shares under a forged or unauthorized transfer acquires no title as against the true owner does not apply where the circumstances are such as to estop the latter from asserting his title. Where one

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of two innocent parties must suffer by reason of a wrongful or unauthorized act, the loss must fall on the one who first trusted the wrongdoer and put in his hands the means of inflicting such loss. But negligence which will work an estoppel of this kind must be the proximate cause of the damage and must be in or immediately connected with the transfer itself. Moreover, delos Santos and Astraquillo were aware of sufficient facts to put them on notice of the need of inquiring into the regularity of the transactions and the title of supposed vendors. The certificates were in the name of Madrigal. Obviously therefore, the alleged sellers were not the registered owners of the certificates and shares of stock. They must have been conscious of the infirmities in title. The purported sales were also admittedly hostile to the Japanese, who had prohibited it, and plaintiffs had actual knowledge of these facts and of the risks attendant. In other words, they assumed those risks and cannot validly claim against the registered SH, the status of purchasers in GF.

A stock certificate is not a negotiable instrument, but it is regarded as quasinegotiable in the sense that it may be transferred by endorsement coupled with delivery A transferee under a forged assignment acquires no title which can be asserted against the true owner, unless the true owners own negligence has been such as to create an estoppel against him The doctrine that a bona fide purchaser of shares under a forged or unauthorized transfer acquires no title as against the true owner does not apply where the circumstances are such as to estop the latter from asserting his title It is not negotiable because the holder takes it without prejudice to such rights or defenses as registered owners or transferors creditor may have under the law, except insofar as such rights or defenses are subject to the limitations imposed by the principles governing estoppel

Chua Gan v Samahang Magsasaka Inc. F: Chua Gan is the assignee of all rights and interests of mortgagee Chua Chiu, in whose favor a mortgage upon shares of corporation Samahang Magsasaka Inc owned by debtor Cotoco was entered into, delivered, and registered in the RoDs. Cotoco defaults, Chua Gan forecloses mortgage and after public auction, certificate of shares were entered in his favor. Chua Gan then tendered the certificates to the corporation for cancellation and the issuance of new certificates in his name. Officers of Samahang Magsasaka refused, contending that 9 attachments had been issued and served against the shares of Cotoco in the books. 8 of the writs were served and noted in the books before the corporation knew of the mortgage of Chua Chiu. Chua Gan sues. (The registered owner mortgaged the shares and the mortgagee not only registered the mortgage with the registry of deeds, but also in the books of the corporation. When the mortgagee foreclosed on the mortgage, the officers of the corporation refused to issue the new certificates in the name of the mortgagee as the winning bidder thereof in the auction sale, on the ground that before the mortgagee made his demand upon the corporation, writs of attachments had been served upon and registered in the books of the corporation against the mortgagor, which the mortgagee refused to have annotated in the new certificate to be issued to him) I: WON the registration of the CMs in the ROD is constructive notice to the attaching creditors (WON the mortgage took priority over the writs of attachment) H: GR: for purposes of execution, attachment, and garnishment, it is not the domicile of the owner of the certificate but the domicile of the corporation which is decisive. By analogy, and considering that the ownership of shares in a corporation as property distinct from the certificates which are merely the evidence of such ownership, the property in the shares may be deemed to be situated in the province in which the corporation has its principal office or place of business. If this province is also the province of the owners domicile, a single registration is sufficient. If not, the CM must be registered both at the owners domicile and in the province where the corporation has its principal office or place of business. In this sense the property mortgaged is not the certificate but the participation and share of the owner in the assets of the corporation. The transfer by endorsement and delivery of a certificate with intention to pledge the shares covered thereby should be sufficient to give legal effect to that intention and to consummate the juristic act without necessity for registration. Thus the attaching creditors are entitled to priority over the defectively registered mortgage of Chua Gan. Considering the ownership of shares in a corporation as property distinct from the certificates which merely evidence the ownership, then the property in the shares may be deemed to be situated in the province which the corporation has its principal office or place of business. In this sense

Collateral transfers As personal property, shares may be the subject matter of pledge and chattel mortgage (CM) o Collateral transfers are not covered by the registration requirement in Sec 63 (applies only to absolute transfers per SC in Monserrat v Ceron) o If certificate is delivered as security for the performance of an obligation, it is a pledge and governed by CC o If not delivered, transaction must be registered in the CM registry of the province o If SHs domicile is in a different province, registration must also be made in such province

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property mortgaged is not the certificate but the participation and share of the owner in the assets of the corporation. Although under 63 the surrender of the certificate is necessary to effect the transfer of shares, it does not exclude the possibility that a transfer may be made in a different manner; meaning that the execution of a deed of assignment can be a valid mode of transferring title covering shares of stock.

1 2

Transfer or conveyance Payment or consideration Delivery of stock certificate (indorsedmanner of indorsement) Presentation of document of conveyance

Remitting of transfer Presentation of original certificate Recording of transfer Cancellation Issuance of certificate

stock

Non-transferability corporations

and

termination

of

membership

in

non-stock 3 4

GR: shares are freely transferable Exception: in close corporations

S90-91 Special rules on registered or listed shares Under Sec 43.1 of the SRC: a corporation whose shares are listed in the PSE or registered pursuant to the Corpo Code may: Issue shares to or record the transfer of some or all its shares in the form of uncertificated securities, to investors or securities intermediaries, upon resolution of the board and agreed by a SH Use of said uncertificated securities shall be without prejudice to the rights of the securities intermediary to subsequently require the issuance of the certificate Issue all of the shares of a particular class in the form of uncertificated securities, subject to the condition that the investors may not require the corporation to issue a certificate
See table above One without the other: short of ownership of transferred shares Short of having transfer recorded: kulang pa rin! Cases show that it is NOT sufficient that you have the stock certificate Problems arise when: Not all requirements for valid transfer are met Considerable delay in satisfying requirements of the Code Parties not original owner/transferor could assert proprietary rights Stock certificate: evidence of ownership of shares Whoever owns/holds the certificate is only presumed to be the owner Can be used to confirm conveyances made Similar to a check/negotiable instrument; all you do is endorse, even in blank: mere signature of endorser Without this certificate: NO voting rights, NO economic rights; these would not materialize until all requirements are satisfied Ideally, transfer and recording are done on the same date Both should happen one after the other Books recognize only one owner Code ensures that corporation recognizes only one SH of record (see Portland case) Transferee has way out if transfer or conveyance is imperfect If you do not comply, you expose yourself to risk! Unless transferee does not intend to be a SH of record (Chuidian: he has to be a SH because he wants to be director!) Corporation is not a party at the time of the transfer; becomes party only when recorded (see Abejo: recording is a ministerial duty)

Under 43.3 of the SRC: transfers of securities, including uncertificated ones, may be validly made and consummated in any of the ff ways, which would have the effect of delivery of a security in bearer form or duly indorsed in blank, representing the unrestricted negotiability of such delivery: By appropriate book entries in the securities accounts maintained by securities intermediaries In the stock and transfer book held by the corporation or stock transfer agent *The transfer shall only be validas to the corporationwhen it is recorded in the books of the corporation

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Chapter XVI Dissolution

Why was there a dissolution? Does dissolution result in application of 81? Key: who initiates the proceedings? 3 parties: State, creditor, SHs creditors rights: satisfied during winding up period of 3 years when board undertakes action only one purpose during liquidation: to wind up

Nature of dissolution Signifies the extinguishment of its franchise and the termination of its corporate existence or business purpose. May be either de jure or de facto o De jure: one adjudged and determined by administrative or judicial sentence or brought about by an act of the sovereign power o De facto: one which takes place in substance and in fact when the corporation by reason of insolvency, cessation of business, or suspension of all its operations, goes into liquidation, still retaining its primary franchise to be a corporation

dissolved by such expiration without need for further action on the part of the corporation or the State In Sec 11: corporate term may be extended by an amendment of the AOI but cannot be made earlier than 5 years prior to the original or subsequent expiry date o cannot even be considered a de facto corporation o original term cannot be more than 50 years o each extension= 50 years o number of extensions= unlimited o extension may be accomplished by amending the AOI before expiration of term o attempted extension after term has expired: renewal of charter which is clearly beyond corporate powers corporation can amend its AOI to shorten its term o should follow procedure in Sec 37 and 16 notice to each SH or member holding of meeting vote of 2/3 OCS filing certified copy of amended AOI with SEC approval of amendment within 6 mos by SEC

Sec 120 120: corporation automatically dissolved upon the happening of either of two events: o approval of amended AOI or o expiration of shortened term no need of further proceedings o expiration before SEC approval: no automatic dissolution o expiration after SEC approval: dissolution can take effect only upon the expiration of sich shortened term SH has appraisal right if he dissents to either the extension or shortening of term voluntary dissolution when no creditors affected

Cause of dissolution

Defn of dissolution: the corporation ceases to be a juridical person and consequently can no longer continue transacting its business, but may continue its corporate existence for a period of 3 years from such dissolution for the purpose of winding up and liquidation Defn of winding up: collection of all assets, payment of all creditors, distribution of all remaining assets (if any) among the SHs Defn of liquidation: the settlement of the affairs of the corporation which consists of adjusting the debts and claims, that is, of collecting all that is due the corporation, the settlement and adjustment of claims against it and the payment of its just debts (China Bank v M Michelin) Ways in which a corporation is dissolved: 1. expiration of original, extended or shortened term life of corporation= not exceed 50 years once the period in the AOI expires, the corporation is automatically dissolved without any further proceeding; corporation is deemed

2. Sec 118

voluntary dissolution requires an act of state to be effective a corporation can be dissolved voluntarily where no creditors are affected, through an administrative application for dissolution filed with the SEC o process is equivalent to an application for amendment of the AOI, except that dissolution should be published Summary of procedural requirements

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Majority vote of the board adopting a resolution Sending of notices to each SH By registered mail or special delivery Time, place, object of meeting At least 30 days prior to meeting o Publication of notice of meeting for 3 consecutive weeks Newspaper published where the principal office is located Newspaper of general circulation o Resolution duly approved by vote of 2/3 OCS o Certified copy of the resolution filed with SEC o SEC issues certificate of dissolution SEC will generally not deny an application for dissolution where no creditors are involved Sec 130 on the other hand does not require publication for the shortening of the corporate term Certificate of dissolution issued by SEC is the act of State which will legally effect the dissolution o Mere resolution not sufficient without the certificate o Except: expiration of term (no need for certificate) o o voluntary dissolution where creditors affected basis: creditors must be given the opportunity to present their claims and objections to protect their interests and rights

SEC hears petition and try any issue upon 5 days notice If no objections and material allegations are true SEC renders judgment dissolving the corporation and directing disposition of its assets may appoint a receiver to collect assets and pay the debts SEC may direct the manner in which liquidation of corporate assets should be made by assigning the task to the corporation itself or to a receiver o SEC retains supervision in either case Vote of 2/3 OCS is required to signify corporations intent to dissolve o GR: No member may prevent such dissolution o Exception: majority SH acted in BF or for the purpose of freezing out the minority o

Sec 122 4. dissolution by minority in close corporations Code requires vote of 2/3 OCS Two special rules on dissolution of close corporations: o Deadlocks; in its exercise of power to arbitrate, SEC is authorized to order dissolution o Sec 105:

3. Sec 119

Sec 105 Can the minority group in a non-close corporation petition for dissolution under the grounds in 105? o Campos: express grant of such right of the minority in close corporations should not be interpreted to preclude the right to the minority in non-close corporations

a corporation can be dissolved voluntarily where creditors are affect, through a petition for dissolution filed with the SEC, with due notice and hearing o quasi-judicial in nature o SEC is not mandated to dissolve Summary of procedural requirements: o File petition for dissolution: Signed by majority of the board or corporate officers Verified by president or corporate secretary or a director Set forth all claims and demands against it Resolved upon by vote of 2/3 OCS at a meeting o SEC determines whether the petition is sufficient in form and substance o If satisfied, SEC shall issue an order fixing the date on or before objections may be filed by any person 30 days<date<60 days o order published in a newspaper of general circulation at least once a week for 3 consecutive weeks

Financing Corporation v Teodoro F: Lizares et al, minority SHs of the Financing Corp of the Phils, sued the corporation and J Amado Araneta, its president and GM, alleging gross mismanagement and fraudulent conduct of the corporate affairs by Araneta and asking that the corporation be dissolved and Araneta be declared personally accountable for the unauthorized and fraudulent disbursements of the corporate assets. Judge Teodoro granted petition for appointment of a receiver (Yulo). The corporation contends that the appointment is merely an auxiliary remedy; that the principal remedy was the dissolution of the corporation, and that the minority SHs have nor right and personality to maintain an action for dissolution, that right belonging only to the State.

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H: GR: minority SHs of a corporation cannot sue and demand dissolution. Exception: if they are unable to obtain redress and protection of their rights within the corporation (Hall v Piccio). Even the existence of a de jure corporation may be terminated in a private suit for its dissolution by SHs without the intervention of the State. The question of the right of minority SHs to ask for dissolution in Hall was held not to affect the courts jurisdiction over the case, and that the remedy by the party dissatisfied was to appeal. GR: minority SHs cannot ask for dissolution in a private suit, and that action should be brought by the government through its legal officer. Exception: cases wherein the intervention of the State cannot be obtained because the complaint is a matter strictly between the SH and the corporation and does not involve issues which involve acts/omissions warranting a quo warranto. When such action is brought, the TC has jurisdiction and has discretion to grant the prayer or not. Having such jurisdiction, the appointment of e receiver pendent elite is left to the sound discretion of the TC. In Angeles v Santos, it was held that it is within the power of the court upon proper showing to appoint a receiver pendente lite once the action is properly brought and court acquires jurisdiction. The appointment of a receiver upon petition by the minority SH is a power that must be exercised with great caution, and should be exercised when necessary to protect their rights, especially when they cannot obtain redress through or within the corporation. SC ruled that the TC had jurisdiction and properly entertained the original case and had jurisdiction to appoint a receiver pendente lite.

by-laws must be adopted within one month of receipt of notice of the issuance of the certificate of incorporation, otherwise the certificate may be suspended or revoked corporate business must be commenced within 2 years, otherwise corporation deemed dissolved and corporate powers will cease o corporation would neither be a de jure or de facto corporation transacting business implies a continuity of acts or dealings in the accomplishment of the purpose for which the corporation was formed (Mentholatum case infra) o even a single act would be sufficient if it is intended to be a series of acts in pursuance of the corporate business o but must take place within the 2-year period Art 3 of Code of Commerce: presumption of habituality o Rebuttable Sec 22: corporate powers will cease, and corporation will be deemed dissolved if not complied with the 2-year requirement If corporation commenced its business within 2 years but discontinues for at least 5 continuous years, certificate of incorporation may be revoked by SEC o No automatic dissolution o SEC proceeding necessary o Notice must be given to the corporation and opportunity to be heard If the corporation fails to commence operation within the 2 year period but does so only after the 2-year period lapses: o Doctrine of corporation by estoppel may apply o Innocent third persons cannot be prejudiced by such dissolution involuntary dissolution

5.

failure to organize business for 5 years

and

commence

business;

cessation

of

6. Sec 121

organize: involves the election of officers, providing for subscription and payment of capital stock, adoption of by-laws, and other such steps as necessary to endow the legal entity with the capacity to transact the legitimate business for which it was created organization: the systematization and orderly arrangement of the internal and managerial affairs and organs of the corporation commence business: perform preparatory acts geared towards the fulfillment of the purposes for which it was established such as but not limited to: o entering into contracts or negotiations for lease or sale of properties o making plans for and the construction of the factory o taking steps to expedite construction

Sec 22

a corporation may be dissolved by the SEC upon a filing of a verified complaint and after notice and hearing Grounds for involuntary dissolution: a. Does not formally organize and commence business within 2 years from date of incorporationcorporate power ceases and corporation is deemed dissolved b. Subsequently becomes continuously inoperative after commencing business for at least 5 years c. Failure to adopt by-laws d. Offended against a provision of law for its creation or renewal e. Commission/omission of an act tantamount to a surrender of corporate rights and privileges f. Misuse of a right, privilege, franchise conferred by law or the exercise of the same in contravention of law

71

g.

h. i. j. k. (1)

Continuance of business would not be feasible or profitable nor work to the best interests of SHs, parties, creditors, general public i. Based on findings and recommendations of a management committee or receiver Guilty of fraud in procuring certificate of registration Guilty of serious misrepresentation Refusal to comply or defiance to a lawful order of the SEC Failure to file required reports revocation of certificate of registration by SEC

certificate of registration refers to certificate of incorporation other grounds for suspending or revoking certificate are recognized. Examples: o violation by the corporation of any provision in the Corpo Code o deadlock in a close corporation o grounds for quo warranto o Sec 3 Rule 66 of ROC o Non-compliance with 25% minimum requirement for subscription and/or paid-up capital o Continuous inoperation for 5 years o Non-adoption or non-filing of by-laws within 1 month o Failure to submit annual report of financial statements of assets and liabilities (2) quo warranto proceedings

proceed with the liquidation of its assets. It contended that the pendency of the quo warranto petition had prejudiced the corporation and its business, and that immediate relied be given the corporation. It also alleged that the majority of the board and 2/3 SHs acceded to the request to dissolve as the most feasible remedy to its problems. Republic moves that the matter of implementation of the dissolution be submitted to the TC for judgment. Cuenco concurs but urges the appointment of a receiver. Directors not Cuenco filed a motion to withdraw its previous motion for judgment on consent on the ground that the conditions to which motion was subject had not been accepted. Cuenco opposes withdrawal and pressed for appointment of receiver. TC denied motion to withdraw. Corporation appeals. SolGen Barredo moved to dismiss quo warranto proceedings, to which Cuenco opposed. TC grants Republics motion but denies Cuencos crossclaim. I: WON the TC should have ordered dissolution upon its motion and not the Republics, as it amounted to a confession of judgment. H: A motion for judgment on consent is not to be equated with judgment by confession. There must be an unqualified agreement among the parties to the action entered in the record with leave of court. A judgment by confession is not a plea but an affirmative and voluntary act of the defendant himself. In this case, there was no meeting of the minds among the parties with respect to the motion for judgment on consent. Corporation wanted its liquidation to be effected by its Board. Cuenco wanted the appointment of a receiver in agreeing to dissolution, and after his cross-claims were considered. Before the parties could come to an unqualified agreement, the corporation moves to withdraw its motion for judgment on consent. It is clear that the parties could not agree as to the terms of dissolution, and the TC correctly rendered judgment dissolving the corporation. I: WON TC was wrong in not granting quo warranto because the evidence presented fails to constitute grounds for quo warranto H: TC found that the alleged misuse of funds were committed more particularly by Dr Manuel Cuenco with the cooperation of Velez, for which they are personally liable. The alleged illegal corporate acts had not resulted in substantial injury to the public, nor were they willful and clearly obdurate. It found that the controversy between the parties was more personal than anything else and did not at all affect public interest. Such private controversies can be ventilated in appropriate SHs suit which do not have to occupy the time and attention of government officials. The SolGen himself admits that his reason for the MTD is to take the State out of an unnecessary court litigation. Relief by dissolution would only be awarded where no adequate relief is available, and is not available where the rights of SHs can be or are protected in some other way. I: WON the SolGen, as the lawyer for the Republic, was vested with full power to manage and control the States litigation.

PD 902-A grants exclusive jurisdiction to the SEC over any controversy between the corporation and the State

Republic v Bisaya Land Trans Co F: Government files petition for quo warranto against the Bisaya Land Tranpo Co and its board, and asks for the appointment of a receiver pendente lite, alleging that the corporation, through the board, violated the provisions of the Corporation Law as outlined in 9 causes of action. Miguel Cuenco, a member of the Board, sets up a cross-claim against the other members to recover P4M arising for illegal acts of the corporation of which damage was caused him, and asks for the appointment of a receiver. The other directors argue that the petition should be dismissed as to Cuenco because his claims did not arise out of the transactions the subject matter of the quo warranto, which did not assert any claim against any of the directors. TC denies MTD the quo warranto. Corporation then filed a motion for judgment on consent, manifesting its consent to the ordering of the dissolution of the corporation, and ordered the board to

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H: GR: the SolGen may do so with the approval of the court, subject to welldefined exceptions. If it is discovered that the action commenced was brought for the purpose of enforcing a right, the advisability or necessity of which he later discovers no longer exists, then he should be permitted to withdraw his action. Courts should not require parties to litigate whey they no longer desire to do so. Thus the SolGen was within his power to move to dismiss the petition for quo warranto, and the TC was correct in dismissing Cuencos cross-claim, and receivership is ordered terminated. Dissolution is a serious remedy granted to the courts against offending corporations. Courts, as a general rule, should not resort to dissolution when the prejudice is not against the public or not an outright abuse or violation of the corporate charter. Even if the prejudice is public in nature, the remedy is to enjoin or rectify the mistake. Only when it cannot be remedied anymore then that dissolution can come in.

H: Executive Order No. 18, promulgated on 28 May 1986, abolished the Philsucom, created the SRA and authorized the transfer of assets from Philsucom to SRA. Although the Philsucom is hereby abolished, it shall nevertheless continue as a juridical entity for three years after the time when it would have been so abolished, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the functions for which it was established, under the supervision of the Sugar Regulatory Administration. (Emphasis supplied). We note that Executive Order No. 18 did not provide for universal succession, as it were, of SRA to Philsucom, or more specifically to the assets and liabilities of Philsucom. The SRA has been authorized to determine which of the assets and records of Philsucom are required for the carrying out of the activities which the SRA is to carry on or undertake. The succession of the SRA to the assets and records of the Philsucom is thus limited in nature; the extent of such succession is left to the discretionary determination of the SRA itself. More importantly, Executive Order No. 18 is silent as to the liabilities of Philsucom; it does not speak of assumption of such liabilities by the SRA. The Philsucom, it will be seen, succeeded as a matter of course to all the assets, liabilities and records of the Philippine Sugar Institute and the Sugar Quota Administration. The SRA did not, quite possibly because the Government wanted the opportunity to examine the assets, liabilities and records carefully and to determine the compatibility of (asserted) liabilities of the Philsucom with applicable law and relevant requirements of public policy and the public interest. That the assets of the Philsucom must respond for payment of lawful obligations of Philsucom, does not appear to require demonstration. The assets which, in accordance with the second paragraph of Section 13 of Executive Order No. 18, may be taken over by the SRA can thus be only net or residual assets, assets remaining after payment of the valid and enforceable liabilities of Philsucom has been made or been adequately provided for. We believe, in other words, that Section 13 of Executive Order No. 18 is not to be interpreted as authorizing respondent SRA to disable Philsucom from paying Philsucom's demandable obligations by simply taking over Philsucom's assets and immunizing them from legitimate claims against Philsucom. The right of those who have previously contracted with, or otherwise acquired lawful claims against, Philsucom, to have the assets of Philsucom applied to the satisfaction of those claims, is a substantive right and not merely a procedural remedy. Section 13 cannot be read as permitting the SRA to destroy that substantive right. We think that such an interpretation would result in Section 13 of Executive Order No. 18 colliding with the non-impairment of contracts clause of the Constitution insofar as contractual claims are concerned, and with the due process clause insofar as the non-contractual claims are concerned. 5 To avoid such a result, we believe and so hold that should the assets of Philsucom remaining in Philsucom at the time of its abolition not be adequate to pay for all lawful claims against Philsucom,

Gonzales v Sugar Regulatory Administration F: Spouses Gonzales obtained a loan from the RPBank in the amount of P 176,000.00 secured by a real estate mortgage. The proceeds of the loan were released on a staggered basis and the loan was "payable from [the] 1980-1981 sugar crop, " the amortization payments to be remitted by the Philsucom to the RPBank. The RPBank is owned and controlled by the Philsucom. Gonzales received a statement of account from the RPBank setting forth that they had an outstanding loan balance due to the bank of P 652,446.38. It appeared that the Gonzaleses had received the total amount of P l,041,610.55 in loan funds from the RPBank and that they had re-paid thereon the total amount of P 1,051,296.77; in other words, they had already more than fully repaid their loan. The Gonzales further averred that Philsucom had deducted from the export sugar proceeds of petitioners the amount of P 421,517.32 without their authority and consent with the result that the spouses had overpaid the RPBank by P 289,260.88. the spouses prayed that the real estate mortgage be cancelled, and that Philsucom and SRA be required jointly and severally to reimburse the petitioners the amount of P 289,260.88 + damages. The RPBank, Philsucom and herein respondent SRA moved to dismiss the complaint upon the ground of lack of cause of action. Philsucom and respondent SRA through the Solicitor General, denied any obligation on the part of the Philsucom to return any amount to petitioners on account of allegedly unauthorized deductions from the proceeds of petitioners' sugar sold by the Philsucom. For its part, the SRA also noted that while the deductions complained of were made by the Philsucom during the period from 1980 to 1984, the SRA itself had been created by Executive Order No. 18 only on 18 May 1986 and that it was not a party to the real estate mortgage between petitioners and the RPBank.

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respondent SRA must be held liable for such claims against Philsucom to the extent of the fair value of assets actually taken over by the SRA from Philsucom, if any. To this extent, claimants against Philsucom do have a right to follow Philsucom's assets in the hands of SRA or any other agency for that matter. This result appears no more than a dictate of elementary fairness, particularly when one takes into account that under Section 11 of Executive Order No. 18, the SRA will continue, "until otherwise provided, as directed and ordered by the President of the Philippines," to collect and receive the proceeds of "levies, charges and other impositions as [then] granted by law, decree and/or executive order, to the [Philsucom]." Whether the deductions here assailed by petitioners are included among the "levies, charges and other impositions" then made by Philsucom and now continued by SRA must be determined by the trial court. Petitioners have noted in this connection that the three (3) year period provided for in the third paragraph of Section 13 of Executive Order No. 18 is about to expire. There is nothing to prevent Philsucom from appointing a trustee SRA for instance and conveying all its properties to such trustee, for the benefit of the Government, creditors and other persons in interest, following at least by analogy the provisions of the second paragraph of Section 122 of the Corporation Code. Should Philsucom decline to so appoint SRA as trustee, the principles set forth above would of course apply, mutatis mutandis, in respect of whichever public agency may find itself actually holding the assets and records of Philsucom. We conclude that dismissal of petitioners' complaint against respondent SRA was clearly premature. Petitioners have a cause of action against SRA to the extent that they are able to prove lawful claims against Philsucom, which claims Philsucom is or may be unable to satisfy, and to the extent respondent SRA did, or does, in fact take over all or some of the assets of Philsucom. At the very least, the motion to dismiss was not shown to rest upon indubitable grounds and should, therefore, have been denied not only in respect of Philsucom but also in respect of respondent SRA. H: The termination of the life of a juridical entity does not by itself imply the diminution of extinction of rights demandable against such juridical entity among which would be the priority claims of corporate creditors against corporate assets. Since the assets must respond for payment of lawful obligations of a dissolved corporation, then it is required that the succeeding corporation would be liable for all such lawful claims to the extent of the fair value of assets actually taken over. No person who assets a claim against a juridical entity can claim any constitutional right to the perpetual existence of such entity. Juridical persons, whether incorporated or not, whether owned by the government or the private sector, may come to any end at one time or another for a variety of reasons, ex the fulfillment or abandonment of the business purposes for which a corporation

was set up. Thus the Code provides for termination of corporate life, the dissolution of the corporation, the winding up of its operations, the liquidation of its assets, the payment of its obligations and distribution of any residual assets to its SHs. Termination of life of a juridical entity does not by itself imply the diminution or extinction of rights demandable against a juridical entity. Consequently, when the assets of a dissolved entity are taken over by another entity, the successor entity must be held liable for the obligations of the dissolved entity pertaining to the assets so assumed, to the extent of the fair value of assets actually taken over.

Effects of dissolution; winding up and liquidation GR: no personality after dissolution Exception: liquidation and liquidation only Termination itself of personality does not cause extinction or diminution of rights and liabilities of the dissolved entity nor of its creditors (Gonzales) During the 3-year liquidation period, the dissolved corporation is authorized and empowered to convey all of its property to trustees for the benefit of SHs, creditors, and other persons in interest o If expired without a trustee or receiver, board may be permitted to continue as trustees o In the absence of the board or trustees, those having pecuniary interest in the assets may make proper representations with the SEC for working out a final settlement of corporate concerns All interests which the corporation has in the corporate property terminates, and legal interest vests in the trustees, and beneficial interest in the SHs, creditors or other persons in interest Any asset undistributable to any creditor or SH shall be escheated to the city or municipality where such assets are located A corporation in process of liquidation has no legal authority to engage in any new business, even if consistent with its primary purpose

Sec 122 1. loss of juridical personality except for the purpose of winding up its affairs cannot even be a de facto corporation existence cannot be subject to collateral attack cannot enter into new contracts

74

during 3 year period, corporation must collect all debts owing to it and pay all its creditors it may sue and be sued all pending actions by or against the dissolved corporation abate

creditor or stockholder or member, who is unknown or cannot be found, shall be escheated to the city or municipality where such assets are located. Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities. The termination of the life of a corporate entity does not by itself cause the extinction or diminution of the rights and liabilities of such entity. If the threeyear extended life has expired without a trustee or receiver having been expressly designated by the corporation, within that period, the board of directors (or trustees) itself, may be permitted to so continue as "trustees" by legal implication to complete the corporate liquidation.

Pepsi-Cola Products Phils. v CA F: Pepsi-Cola Products Philippines, Inc. Employees and Workers Union (PCEWU), a duly- registered labor union of the employees of the Pepsi-Cola Distributors of the Philippines (PCDP) filed a Complaint against PCDP for payment of overtime services rendered by fifty-three (53) of its members, for work done during 8 Muslim Holidays. LA held that workers in Region 12 were entitled, but workers in Region 9 were not. Pepsi Distributors appeals to NLRC, which affirms. Pending resolution of its MR, ownership of various Pepsi-Cola bottling plants was transferred to petitioner Pepsi-Cola Products Philippines, Inc. (PCPPI). The PCDP alleged that it had ceased to exist as a corporation on July 24, 1989 and that it has winded up its corporate affairs in accordance with law. It also averred that it was now owned by PCPPI. NLRC dismisses complaint, holding that with the cessation and dissolution of the corporate existence of the PCDP, rendering any judgment against it is incapable of execution and satisfaction. The CA reverses, and declared that the PCDP was still in existence when the complaint was filed, and that the supervening dissolution of the corporation did not warrant the dismissal of the complaint against it. After all, the appellate court ratiocinated, every corporation is given three (3) years to wind up its affairs. Hence, in case any litigation is filed by or against the corporation within the three (3)-year period which could not be terminated within the expiration of the same, such period must necessarily be prolonged until the final determination of the case. H: Under Section 122 of the Corporation Code, a corporation whose corporate existence is terminated in any manner continues to be a body corporate for three (3) years after its dissolution for purposes of prosecuting and defending suits by and against it and to enable it to settle and close its affairs, culminating in the disposition and distribution of its remaining assets. It may, during the three-year term, appoint a trustee or a receiver who may act beyond that period. At any time during the said three (3) years, the corporation is authorized and empowered to convey all of its properties to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the corporation of its properties in trust for the benefit of its stockholders, members, creditors and others in interest, all interest which the corporation had in the properties terminates the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest. Upon the winding up of the corporate affairs, any asset distributable to any

National Abaca v Pore F: National Abaca Corp sued Apolonia Pore to recover money advanced for the purchase of hemp for the account of the corporation for which she failed to account therefor. Pore in defense, contends that she made an accounting of the advances received by her. TC held her accountable and ordered to her to pay the corporation. Pore moved to dismiss on the ground that the corporation had no legal capacity to sue, it having been abolished by EO 372. Corporation contends that the EO also stipulates that it shall continue as a body corporate for 3 years from date of effectivity of the EO, for the purpose of defending and prosecuting suits and enabling the Board of Liquidators to settle and close all its affairs. TC ordered corporation to amend the complaint by including the Board of Liquidators as co-party plaintiff, otherwise case shall be dismissed. The corporation fails to submit amended complaint, and the TC dismisses case. Corporation in seeking reconsideration, said that it was not able to submit the amended complaint on time because of the negligence of the filing clerk, Ms Ocampo, and that it was lost despite diligent efforts to look for it. TC denies motion. I: WON an action, commenced within 3 years after the abolition of the corporation, may be continued by the same after expiration of the period. NO WON the TC was correct in dismissing motion. NO. should have granted the motion H: GR: pending actions by or against a corporation are abated upon the expiration of the period allowed by law for liquidation. The old corpo law contains no provision authorizing a corporation after 3 years from expiration of its lifetime, to continue in its corporate name actions instituted by it within a period of 3 years. It provides that it will continue as a body corporate for 3 years after

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the time when it would have been dissolved, for purposes of prosecuting and defending suit by or against it. During the time which the corporation, through its officers, may conduct the liquidation of assets and sue and be sued as a corporation is limited to 3 years from the time period of dissolution commences, but that there is no time limit within which trustees must complete a liquidation placed in their hands. The conveyance to the trustees must be made within the 3 year period. It may be found impossible to complete the work of liquidation within the 3 year period or to reduce dispute claims to judgment. Suits by or against a corporate abate when it ceased to be an entity capable of suing or being sued; but trustees to whom the corporate assets have been conveyed pursuant to the authority of the code may sue and be sued as such in all matters connected with the liquidation. The effect of conveyance is to make the trustees legal owners of the property conveyed, subject to the beneficial interest therein of creditors and SHs. The complete loss of Abacas corporate existence after the expiration of 3 year period is what impelled the creation of the Board of Liquidators, to continue the management of pending matters. GR: in the absence of statutory rules to the contrary, pending actions by or against a corporation are abated upon the expiration of the 3-year period allowed by law for liquidation

2.

executory contracts executory contracts are not extinguished by dissolution all rights and obligations in an executory contract pass on to a liquidating trustee or receiver

Sec 145 3. 122 manner of liquidation or winding up may be stipulated in the bylaws three methods of liquidation: methods of liquidation

authority of the board to manage the corporate affairs includes the power to undertake the liquidation of corporate affairs ii. 3-years to liquidate b. conveying all corporate assets to trustees who will take charge of liquidation i. 3-year limitation does not apply ii. but trusteeship may be limited in duration by the deed of trust iii. trustee may sue even beyond the 3 year period c. liquidation conducted by a receiver appointed by the SEC upon decree of dissolution i. 3-year limitation does not apply ii. mere appointment of receiver does not result in dissolution receiver in liquidation stands on a different legal basis from a trustee in liquidation o trusteeship: basically a contractual relationship, governed by the Law on Trust, such that the trustee assumes naked title to the property placed in trust it is a relationship created by a corporation through its board without need of judicial authorization trustee in liquidation is not appointed by any court, but he is actually a transferee who holds legal title to the corporate assets and is accountable under the trust agreement o receivership: created by means of judicial or quasi-judicial appointment of a receiver receiver is actually an officer of the court and is accountable to the court SEC is empowered to create or appoint a management committee, board or body to undertake the management of a corporation if three year period expires, a creditor may still sue the trustee or follow the corporate assets in the hands of SHs who may have received the same as liquidating dividends

i.

a.

liquidation by the corporation itself through the Board the normal procedure is for directors and officers to have charge of the winding up operations, though there is the alternative method of assigning the property to the trustees for the benefit of creditors and SHs. While the appointment of a receiver rests with the sound discretion of the court, such discretion must be exercised with caution and governed by legal and equitable principles (China Bank v Michelin)

4.

distribution of assets after payments of debts remaining assets, if any, must be distributed to the SHs in proportion to their interest liquidating dividend: share of each SH in the assets upon liquidation o not a partition of corporate assets among co-owners but a transfer or conveyance by the corporation to its SHs and therefore exempt from doc stamps (SHs of Guanzon case)

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director or liquidator may be liable for negligence or fraud to a creditor prejudiced by distribution of dividends o may follow the assets in the hands of SHs who received them as dividends (Tan Tiong Bio case) GR: corporation cannot distribute any of its assets or property Exception: lawful dissolution and after payment of debts and liabilities o GR: SH cannot get back any part of his invested capital until dissolution and liquidation o Exceptions: Decrease of capital stock: results in a surplus which can be distributed to SHs provided no creditors are prejudiced Otherwise allowed by the Code: Appraisal right under 81 and 42 Deadlock in a close corporation (104) SH of close corp can compel the corp to buy his shares at fair value for any reason (105) Corporation repurchases shares of any SH for legitimate corporate purpose (41) Corporation validly distributes dividends (43) Directors/trustees/liquidators must still act with due diligence and GF in settling corporate affairs Duty of the liquidator to look for creditors with reasonable diligence o Notice by publication sufficient o SEC should not order dissolution without giving creditors opportunity to be heard o Creditors prejudiced by distribution of assets can attack its validity for lack of due process

intervened and moved that Michelins claim be allowed as an ordinary one under the Insolvency Law and sought the nullification of the TC orders. H: Claims against a corporation in the hands of a receiver should not be approved and paid without some formal and regular proceeding after a reasonable opportunity is given to all parties in interest. The SC held that the provisions of the Insolvency Law should operate. There is no reason for the corporation to resort to the court for a decree of voluntary dissolution. If the corporation was under such a financial condition as alleged, and did not desire to continue doing business, there is no necessity for judicial intervention in the winding up of affairs coupled with the appointment for a receiver to deal with creditors as though they were creditors of an insolvent corporation. Under the old corpo law, with respect to decrees of dissolution upon voluntary application, the court may appoint receivers to collect and take charge of the assets. It is permissive and not mandatory, because in cases of voluntary dissolution there is no occasion for the appointment of a receiver except under special circumstances. Such discretion on the part of the court to appoint must be exercised with caution. IT does not empower the court to hear and pass upon the claims of creditors of the corporation at first hand. In such cases, the receiver does not act as a receiver of an insolvent corporation. Since liquidation consists of collecting all that is due the corporation, all claims must be presented for allowance to the receiver or trustees during winding up, within 3 years as provided in Corpo Law. The rulings of the receiver are subject to judicial review by the court which appointed him. The normal method is for directors/officers to have charge of the winding up, though there is the alternative method of assigning property of the corporation to trustees. The law authorizing voluntary dissolutions are generally held to apply only to dissolutions brought about by the SHs themselves. China Banks motion was filed 13 months after the decree of dissolution was entered, thus the motion was flied on time to have its claim reviewed by the court. The appointment of Gaston as the receiver, who was also the principal promoter of the corporation and at one time the majority SH, president, and GM, lends itself to serious suspicion. His administration of the business left much to be desired and that he alone ought to be blamed for the shortage claimed by Michelin, but to save himself he made the corporation shoulder the burden of obligations in exchange for a simulated conveyance of his house and shares to the corporation. Once delinquent, Gaston resorted to a judicial proceeding of voluntary dissolution in an attempt to settle Michelin claim and to free himself from any liability, and allowed the claim to be a preferred claim without informing or notifying interested parties, such as China Bank, which also had a claim. Michelins claim cannot be allowed as a preferred claim, because the merchandise was no longer in the corporations possession. The rubber tires

China Banking Corporation v. Michelin & Co. F: George OFarrel & Cie Inc is a domestic corporation acting as agent and representative of the M Michelin & Cie, a foreign corporation engaged in the sale and distribution of Michelin tires. Michelin decided to discontinue their business relations, and it was discovered that O Farrel failed to account for an amount representing the price of tires sold by the latter. Michelin claims the money was disposed by O Farrel for its own use and benefit and without the authority or consent of Michelin. Gaston OFarrel (the person) and Sanchez executed a mortgage on the house of OFarrel and shares owned by both to guarantee payment of the amount to the Michelin, but left a balance which the latter seeks to recover. The board of OFarrel filed a petition for its dissolution and sought the appointment of Gaston as receiver and liquidator, which was granted by TC. Michelin filed its claim against OFarrel Corp with a prayer that its claim be allowed as a preferred one against the latter. TC grants motion of Michelin. Nobody except Michelin and Gaston was notified of the order. China Bank

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consigned were to be sold on order, and the claim for the advance seems to be in the nature of a current account between the two companies more than anything else.

But there is nothing in the provision which bars an action for recovery of debts of the corporation against the liquidator himself, after the lapse of the 3-year period

Republic v Marsman Devt Co. F: Marsman is a lumber company. An investigation was conducted and certain taxes due from logs produced from its timber concession granted by the government. CIR demanded payment representing three assessments made on forest charges, deficiency sales tax and other surcharges and penalties. Counsel for the corporation requested for reinvestigation, but was denied unless the legal requirements for such a request were complied with and payment of of total assessments were made, and to furnish a bond to guarantee payment of the balance. The corporation repeated failed to comply with the conditions set by the CIR, which was constrained to make extrajudicial demand for the tax liabilities. Marsman was then extrajudicially dissolved. BIR files a complaint for its demands after more than 3 years following the corporations dissolution, and the TC sentenced the corporation to pay the amount demanded by CIR. H: TC did not err in holding that the period to question the tax assessments had already expired. By its own omission, the corporation made it possible for the BIR to act on its own MR. Mere filing of a motion does not suspend the running of the period for collection of the tax, which implies that any assessment made by the BIR is supposed to be final and executory as to the taxpayer concerned. I: WON present action is barred by prescription, in light of the fact that the corporation law allows corporations to continue only for 3 years after its dissolution, for the purpose of presenting or defending suits by or against it, and to settle its affairs. no H: Stress given by Marsman on the extinction of corporate personality by virtue of its extra0judicial dissolution is misplaced. The assessments against the corporation were made before its dissolution and not later than 6 months after dissolution. Thus the government became the creditor of the corporation before the completion of its dissolution. Burgess the liquidator became in law the trustee of all its assets for the benefit of all person interested, including the government. It is immaterial that the present action was filed after expiration of the 3 year period, because the assessment definitely established the government as a creditor of the corporation for whom the liquidator is supposed to hold corporate assets. Code provides for a 3-year period for continuation of the corporate existence for purposes of liquidation

Tan Tiong Bio v CIR F: Tan Tiong Bio et al are incorporators and directors (some are officers President and treasurer) of the Central Syndicate. The company realized a net profit of close to P300K, and sale of goods was the only transaction undertaken by it. BIR sues the Tan Tiong et al for deficiency sales taxes and surcharges on surplus goods purchased by the corporation from the Foreign Liquidation Commission. Corporation was dissolved, and Tan Tiong and company substituted themselves as parties, thereby becoming successors-in-interests in the corporate assets after liquidation. TC rules ifo BIR, and Tan Tiong et al appeals, claiming that they cannot be held liable for tax liability there being no law authorizing the government to proceed against SHs of a defunct corporation as transferees of the corporate assets upon liquidation. If they were liable, it is only to the extent of the benefits derived by them, and that the action is barred by prescription due to the 3-year limit in the corpo Law. I: WON the sales tax can be enforced against the corporations successors-ininterest, even if corporation has been dissolved by expiration of corporate existence. --YES H: Tan Tiong, as substitute parties-in-interest, cannot now be heard to complain that they were being held liable for the tax due from the corporation whose representation they assumed and whose assets are distributed to them. The creditor of a dissolved corporation may follow its assets once they passed into the hands of a SH. The dissolution of a corporation does not extinguish debts due or owing to it. A creditor of a dissolved corporation may follow its assets, as in the nature of a trust fund, into the hands of the SHs. The hands of government cannot collect taxes from a defunct corporation, it loses thereby none of its rights to assess taxes due, and to collect the taxes due from the corporation from persons who by reason of transactions with the corporation, hold property against which the tex may be enforced. Court ruled that the net profit remained intact and was distributed among the SHs immediately after sale of surplus. Tan Tiong et al are thus the beneficiaries of the defunct corporation and should be held liable to pay the taxes, but only in proportion to their respective shares in the distribution of assets. Even after the 3 year period of liquidation, corporate creditors can still pursue their claims against corporate assets against the officers or SHs who have taken over the properties of the corporation

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SC held that the State cannot insist on making tax assessments against a corporation that no longer exists and then turn around and oppose the appeal questioning the legality of the assessment precisely on the same ground that the corporation is non-existent The remedy of corporate creditors after the 3-year period is to race where the corporate assets have gone, wherever they rested, be he a SH or a nonSH. Cause of action is to file an action against that person who has control over the corporate assets.
SHs do not have unconditional right to determine whether a dissolution should happen, neither can they enjoin the State to dissolve Is dissolution sought to enforce obligations, or satisfy liabilities? Can creditors sue for dissolution to enforce obligations? GR: No! Exceptions: insufficiency of assets; inability to pay obligations Trust fund doctrine continues until every obligation is satisfied Result of dissolution: mandatory institution of actions to enforce obligations Is dissolution limited to distressed corporations? Apparently yes. Dissolution is a step-by-step process Omit one, you dont proceed! Sale of substantially all assets does not mean dissolution Liquidating dividends: assumes these are properties remaining for distribution among SHs as dividends May even be the assets themselves! Distribution still based on shares/aliquot ownership In Teodoro: minority wanted out, but did not have representation on the board! Personal action sought to be enforced. (compare with Republic and Cease) Should a derivative suit be filed in Teodoro? No. its purpose is to seek redress for a wrong done to the corporation, by the SHs in behalf of the corporation; Teodoro was a personal action In Bisaya: dissolution is also a remedy for intra-corporate squabbles between SHs Pore, Chinabank, Marsman: involve enforcement of obligations by and against the corporation Tan Tiong was a short-cut; involves the BIR going after SHs for unpaid taxes

Distribution of assets of non-stock corporations Sec 94 Dissolution Method Voluntary Initiating party SHs Action to be taken Amendment of AOI (shorten term) Petition for dissolution with creditors consent Petition for dissolution Quo warranto Petition for dissolution Revocation of certificate of registration

Involuntary

Inaction

Minority/majority SHs State Creditors SEC

Board

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Winding Up

3-yr period Board of Trustees

limited corporate existence 1. 2. 3. collation of property/assets enforcement of contractual rights settlement of obligations

Chapter XVII Corporate Combinations

Purposes of Combinations; Methods Merger and Consolidation Parties to a merger or consolidation are called constituent corporations o No liquidation of assets of dissolved corporations o Surviving or consolidated corporation acquires all their properties, rights, and franchises o The SHs of the dissolved corporation become SHs of the consolidated corporation Consolidation is the union of two or more existing corporations to form a new corporation called the consolidated corporation. o A combination by agreement between two or more corporations by which their rights, franchises, privileges, and properties are united and become those of a single new corporation o All constituents are dissolved and absorbed by the new consolidated enterprise Merger is a union whereby one or more existing corporations are absorbed by another corporation which survives and continues the combined business o All constituent corporations are dissolved, except the surviving corporation o May be horizontal (competing firms), vertical (corporation acquired is a user of products of the absorbing corporation), or conglomerate In both cases, there is no liquidation of the assets of the dissolved corporations The surviving or consolidated corporation assumes ipso jure the liabilities of dissolved corporations 1. Nature; distinction 2. The power to merge or consolidate is not among the inherent powers of corporations and must be expressly granted by law 3.

Old law contained no express provision on merger or consolidation Reyes v Blouse paved the way for de facto mergers/consolidations o Even without express provisions authorizing mergers or consolidations, the effects of such could be obtained by the fF: Sale of all corporate assets of the absorbed to the absorbing Subsequent dissolution of the selling corporation by shortening its corporate term Amendment of the AOI of the absorbing o No automatic assumption by the absorbing corporation of the liabilities of the absorbed o Creditor consent is indispensable

Express authority to merge granted by Code; requirements

Secs 76-80 Procedures in Merger or Consolidation: Plan of Merger or Consolidation o Under Sec 76, the board is expressly empowered to approve a plan of merger or consolidation which shall set forth the fF: Names of constituent corporations Terms of the merger and mode of carrying it into effect A statement of changes in the AOI of the surviving corporation in case of merger; all statements required to be set forth in the AOI in the case of consolidation Such other provisions as are deemed necessary o Approval by majority vote of the board SHs approval o at separate corporate meetings of SHs of each corporation o notice given to all SHs at least 2 weeks prior to the meetings o vote of 2/3 of OCS Appraisal right o Available to dissenting SHs (of the absorbing or absorbed corporations or both?) o Extinguished when the board decides to abandon its merger plans Amendment of Plan o Amendment must be approved by majority vote of the board o Ratified by at least 2/3 OCS Articles of Merger (AOM) o Executed by each of the constituent corporations o Signed by president or VP o Certified by secretary

Only de facto merger under corporation law

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(1) (2) (3) (4) (5) (6)

Sets fortH: Merger plan Number of shares outstanding or number of members Number of shares or members voting for and against the plan o AOM must be filed not more than 120 days from date of long form audit report of each corporation Submission of financial statements Approval by SEC o SEC issues a certificate of merger or consolidation o Date of issuance makes merger effective o Merger does not become effective upon the mere agreement of the constituent corporations Once all requirements in 76-80 are complied with, combination gains legal recognition Apply to stock and non-stock Steps to accomplish a merger/consolidation: board draws up plan of merger or consolidation a. includes any amendment to the AOI or statements required therein submission of plan to SHs of each corporation for approval, at a meeting (2 weeks notice) a. vote of 2/3 representing 2/3 OCS execution of formal agreementArticles of Merger or Consolidation submission of AOM to Sec for approval SEC sets hearing Issuance of certificate of merger or consolidation a. Only upon issuance of certificate would the merger become effective Effects of merger: o All constituent corporations, except the surviving corporation in case of merger, shall be dissolved o There is no winding up or liquidation of assets of the absorbed absorbing automatically acquires rights, privileges, powers and liabilities o Creditors rights are not impaired Remedies of creditors and dissenting SHs; appraisal right Creditors cannot prevent the merger or consolidation, even if the new entity is unacceptable a debtor as the old corporation o Remedy: enforce claims against the surviving or consolidated corporation

Fraudulent conveyance: follow the assets of the dissolved constituents in the hands of the surviving or consolidated corporation SHs who dissent cannot prevent the merger or consolidation o Remedy: exercise their appraisal right o Fraud or gross unfairness: can enjoin the merger If merger already executed: sue for the value of their interests Rescission not granted, generally o Only a derivative suit in behalf of the corporation is proper Exception: personal action may be allowed o If new stock as are issued by the absorbing to SHs of the absorbed, SHs of the absorbing cannot exercise preemptive right Why? Consideration is for property. No preemptive right o

Sale of substantially all corporate assets Other ways to effect a merger or combination (other than in code) Sale of all its assets to the other in exchange for stock o Acquiring corporation assumes selling corporations liabilities o Selling corporation shortens its term, dissolves, and liquidates and distributes stock received form the acquiring o Consideration must be stocks if the intent is to combine No intent to combine: consideration for the sale would be in cash or other properties and selling corporation may still continue in existence or remain in suspended animation

Sec 40 1. legal requirements sale of all or substantially all assets: one which will render the corporation incapable of continuing the business or accomplishing the purpose= SH action required short of substantially all= no SH action required

2.

no assumption of liabilities; exceptions GR: purchasing corporation will not be liable for the debts of the selling corporation if it acted in GF and paid adequate consideration Exceptions: o Purchasing corp impliedly agreed to assume such debts o Transaction amounts to a consolidation or merger o Purchasing corp is merely a continuation of the selling o Transaction entered into fraudulently

4.

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3.

remedies of dissenting SHs: appraisal right minority SH cannot prevent sale if approved by the required vote o remedy: appraisal right only if there is unrestricted retained earnings if sale is fraudulent and entered into to freeze out the minority o remedy: sue in court to enjoin the sale if sale already executed: o remedy: sue for value of proportionate interest in the new corporation majority SHs do not have appraisal right o GR: corporation can purchase assets of another corporation by mere resolution and no need for SH approval o Exceptions: where amendment to AOI would be necessary to effect it or Where investment in the selling corporations business is not reasonable necessary for the accomplishment of the purpose

I: WON the real purpose of the resolution is merger or consolidation, and if so, whether it can be carried out under the old Corpo Law. H: The questioned resolution charges the board of Laguna to consolidate properties and franchises thereof with that of Batangas Transport. Both corporations have passed similar resolutions to take steps to effect the consolidation. It is apparent that the purpose of the resolution is not to dissolve but to merely transfer its assets to a new corporation in exchange for its shares. This comes within the purview of the old corporation law, which provides that a corporation may sell, exchange, lease or otherwise dispose of all its property and assets when authorized by affirmative vote of 2/3 of SHs. The phrase otherwise dispose of covers mergers and consolidations. The transaction in this case cannot be considered, strictly speaking, as a merger or consolidation because a merger implies the termination or cessation of the merged corporations and not merely a merger of assets and properties. The two companies will not lose their corporate existence but will continue to exist after consolidation. What is intended to be managed and operated by a new corporation, and not a merger. The court added that the merger/consolidation (if any) would still be carried out under the Public Service Law. It does not impose any qualification other that it shall be done with the approval of the PSC.

4.

compared with merger and consolidation merger v sale of all corporate assets: o merger: short cut to the accomplishment of various transactions avoid difficulty of dissolution constitutes a transfer of property and business of one corporation to another in exchange for securities issued by the absorbing corp to the absorbed automatic assumption of liabilities o sale: there must be sufficient funds reserved by the absorbed to pay its liabilities chance that sale may be attacked by creditors alleging fraud lesser problems in securing SH approval and recognizing appraisal rights

Edward Nell Company v Pacific Farms Inc. F: The Edward Nell Co secured a judgment representing the unpaid balance of the price of a pump sold to Insular Farms. Pacific Farms then purchased all or substantially all of shares of stock as well as real and personal property of Insular, selling the shares to certain individuals who reorganized Insular. The board of the reorganized Insular then sold its assets to be sold to Pacific for P10000. The writ of execution was returned, stating that Insular had no leviable property. Nell Co sued Pacific Farms, on the ground as a result of the purchase of all or substantially all assets of Insular, Pacific became the alter ego of Insular Farms. H: GR: where the corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the former. Exception: (1) purchaser expressly or impliedly assumes such debts; (2) transaction amounts to a consolidation or merger; (3) purchasing corporation is merely a continuation of the selling corp; (4) there is fraud to escape liability for the debts In the present case, no proof was submitted that Pacific expressly agreed to assume the debts of Insular or that it is a continuation of Insular, or that the transaction was tainted in fraud of creditors, or that the two parties merged or consolidated. In fact, the sales took place, not only over 6 months before

Reyes v. Blouse et al. F: Minority SHs of the Laguna Tayabas Bus Co file an action to enjoin Blouse et al from executing its resolution approved by 99 % of SHs to consolidate the properties and franchises of Laguna Tayabas with Batangas Transport. Blouse believes it is merely an exchange of properties and not a consolidation.

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judgment, but also over a month before the filing of the case. Pacific also purchased the shares as the highest bidder at an auction sale held at the instance of a bank to which shares have been pledged as security by Insular. Nell Cos theory that Pacific is the alter ego of Insular negates the fact of consolidation/merger, because a corporation cannot be its own alter ego. As to the allegation that the selling price of the assets of P10K was grossly inadequate and thus tainted with fraud, the SC held that the sale was approved by the SEC and that it should be presumed that the price was fair and reasonable, and should be a matter litigated in another venue. SC: since there is neither proof nor allegation that the transferee-corporation expressly or impliedly agreed to assume the debt of the corporation, or that the sale of either the shares or the assets to the appellee has been entered into fraudulently, in order to escape liability for the debt of the subject corporation, there was no basis to hold the transferee liable for the debts and liabilities of the subject corporation Rules on enforceability of liabilities of the transferor against the transferee after the transfer 1. pure assets-only transfer: transferee not liable 2. transfer of business enterprise: transferee liable 3. transfer of equity: not liable except where transferee expressly or impliedly agrees to assume the same

Exchange of stocks yet another method of corporate combination acquisition of all or substantially all stock of one corporation from SHs in exchange for stock of another corporation o SHs of the acquiring become SHs of the acquired o Once completed, acquired corp becomes a subsidiary of the acquiring (parent) Right of dissenting SHs: depends on whether the mother decides to retain the acquired corporation as a subsidiary, merges with it, or buys all its assets o If parent retains as subsidiary: No appraisal right No express provision in the Code, but Campos: SH can sell his stocks to another corporation, but may be liable for damages if in BF or if it damages the corporation o If parent merges or purchases: provisions of the Code Same rights as dissenting SHs in a merger or sale appraisal right

You have to comply with the provisions of the Code to legally effect mergers/consolidations; short of that, no merger, no consolidation! Parties to a merger/consolidation are the corporations, not the SHs! Merger: marriage of assets and assumption of liabilities SHs of absorbing become SHs of the absorbed Isa lang ang patay; or maraming patay pero buhay and kumain! Consolidation: lahat ng sumali, patay! Why? Objective is to put up a new one, which shall own all combined assets and is the successor-in-interest to all obligations Combinations can happen to distressed corporations Blouse was NOT a merger/consolidation! Each corporation still had personality They shared assets, business operations; neither absorbed the other There was no new corporation formed All of the elements below must be present! Merger/Consolidation dissolution/organization and establishment of new corporation consolidation of equity ownership transfer/conveyance of assets + unconditional assumption of liabilities

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Chapter XVIII Foreign Corporations

Definition, status Sec 123: a foreign corporation is one formed, organized, or existing under any laws other than those of the Phils and whose laws allow Filipino citizens and corporations to do business in its own country or state no need for license need license to sue and be sued

I: WON the obtaining of the license to do business is a condition precedent to maintaining any kind of action in RP courts. H: The object of the statute was to subject the foreign corporation doing businesss in the Philippines to the jurisdiction of its courts. Its object was not to prevent the foreign corporation from performing single acts, but to prevent it from acquiring a domicile for the purpose of business without taking the steps necessary to render it amenable to suit in the local courts. The effect of the statute preventing foreign corporations from doing business and bringing action in the courts except on compliance with elaborate requirements must not be unduly extended or improperly applied. Thus confronted with the option of construing the law to mean that any corporation in the US, which might ant to sell to a person in the Phils must sent some representative here before the sale and go through the complicated formulae provided by the corporation law with regard to obtaining of the license, before the sale was made in order to avoid being swindled by Filipinos, there can be no other construction. The law simply means that no foreign corporation shall be permitted to transact business in the Phils unless it shall have the license required by law, and until it complies with the law, shall not be permitted to maintain any suit in the local courts. The non-compliance of a foreign corporation with the requirements of the statute may be pleaded as an affirmative defense. Thereafter it must appear from the evidence, firstthat the plaintiff is a foreign corporation, and secondthat it is doing business in the Phils, and thirdthat it has not obtained the proper license. To subject foreign corporations doing business in the RP to the jurisdiction of the courts; and to prevent it from acquiring domicile without taking steps to make it amenable to suits Requirement to obtain license applies only to foreign corporations doing business in RP

Not doing business Doing business

Jack: doing business is extending the business of the foreign entity to the RP, on a continuing and permanent basis, in order to make profits! Thats all it is! Call cases (except Merrill Lynch and TopWeld, are exceptions to doing business! Compare with Agilent. Compare Wells and Mentholatum. Set aside cases of foreign corporation enforcing IPRs from the other cases (Le Chemise, Gelhaar, Columbia, Puritan) Methods of investment Permitted areas of investment 1. 2. 3. partially nationalized areas preferred areas; incentives for investment non-preferred areas of investment

Legal Requirements prior to transaction of business 1. 2. 3. BOI Certificate SEC license to do business Certificate from appropriate government agency

Marshall Wells + Metholatum = isolated txns NOT doing business

Effect of failure to secure SEC license Columbia Pictures v CA F: Columbia Pictures et al lodged a formal complaint with the NBI for violation of PD No. 49, as amended, and sought its assistance in their anti-film piracy drive. Agents of the NBI and private researchers made discreet surveillance on various video establishments in Metro Manila including Sunshine Home Video Inc. NBI Senior Agent Lauro C. Reyes applied for a search warrant with the court a quo against Sunshine seeking the seizure, among others, of pirated video tapes of copyrighted films all of which were enumerated in a list attached to the application; and, television sets, video cassettes and/or laser disc recordings

Marshall Wells v Elser F: Marshall Wells Co. (foreign) sued Henry Elser Co (local) for the unpaid balance on the sale of goods. Elser Co files a demurrer, contending that Marshall has no legal capacity to sue, not having complied with the laws required of foreign corporations doing business in the RP and not authorized to do business in RP. TC sustains demurrer.

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equipment and other machines and paraphernalia used or intended to be used in the unlawful exhibition, showing, reproduction, sale, lease or disposition of videograms tapes in the premises above described. TC granted and issued the SW. The search warrant was served to Sunshine and/or their representatives. In the course of the search of the premises indicated in the search warrant, the NBI Agents found and seized various video tapes of duly copyrighted motion pictures/films owned or exclusively distributed by private complainants, and machines, equipment, television sets, paraphernalia, materials, accessories all of which were included in the receipt for properties accomplished by the raiding team. Sunshine filed a motion to lift warrant but was denied by the TC. Sunshine contended that being foreign corporations, Columbia Pictures et al should have such license to be able to maintain an action in Philippine courts. In so challenging petitioners personality to sue, Sunshine pointed to the fact that petitioners are the copyright owners or owners of exclusive rights of distribution in the Philippines of copyrighted motion pictures or films, and also to the appointment of Atty. Rico V. Domingo as their attorney-in-fact, as being constitutive of doing business in the Philippines under BOI Rules. As foreign corporations doing business in the Philippines, Section 133 of the Corporation Code denies them the right to maintain a suit in Philippine courts in the absence of a license to do business, and thus have no right to ask for the issuance of a search warrant. Upon MR, the TC granted the same, holding that the master tapes of the copyrighted films from which the pirated films were allegedly copies, were never presented in the proceedings for the issuance of the search warrants in question. The orders of the Court granting the search warrants and denying the urgent motion to lift order of search warrants were, therefore, issued in error and was set aside. Petitioners appealed. H: The obtainment of a license prescribed by Section 125 of the Corporation Code is not a condition precedent to the maintenance of any kind of action in Philippine courts by a foreign corporation. However, under the aforequoted provision, no foreign corporation shall be permitted to transact business in the Philippines, as this phrase is understood under the Corporation Code, unless it shall have the license required by law, and until it complies with the law in transacting business here, it shall not be permitted to maintain any suit in local courts. As thus interpreted, any foreign corporation not doing business in the Philippines may maintain an action in our courts upon any cause of action, provided that the subject matter and the defendant are within the jurisdiction of the court. It is not the absence of the prescribed license but doing business in the Philippines without such license which debars the foreign corporation from access to our courts. In other words, although a foreign corporation is without license to transact business in the Philippines, it does not follow that it has no capacity to bring an action. Such license is not necessary if it is not engaged in business in the Philippines. it is recognized that a foreign corporation is doing, transacting, engaging in, or carrying on business in the State when, and ordinarily only when, it has entered the State by its agents and is there engaged in carrying on and transacting through them some substantial part of its ordinary

or customary business, usually continuous in the sense that it may be distinguished from merely casual, sporadic, or occasional transactions and isolated acts. Jurisprudence has, however, held that the term implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to or in progressive prosecution of the purpose and subject of its organization. Based on Article 133 of the Corporation Code and gauged by such statutory standards, petitioners are not barred from maintaining the present action. There is no showing that, under our statutory or case law, petitioners are doing, transacting, engaging in or carrying on business in the Philippines as would require obtention of a license before they can seek redress from our courts. No evidence has been offered to show that petitioners have performed any of the enumerated acts or any other specific act indicative of an intention to conduct or transact business in the Philippines. Accordingly, the certification issued by the SEC stating that its records do not show the registration of petitioner film companies either as corporations or partnerships or that they have been licensed to transact business in the Philippines, while undeniably true, is of no consequence to petitioners right to bring action in the Philippines. Verily, no record of such registration by petitioners can be expected to be found for, as aforestated, said foreign film corporations do not transact or do business in the Philippines and, therefore, do not need to be licensed in order to take recourse to our courts. As a general rule, a foreign corporation will not be regarded as doing business in the State simply because it enters into contracts with residents of the State, where such contracts are consummated outside the State. In fact, a view is taken that a foreign corporation is not doing business in the state merely because sales of its product are made there or other business furthering its interests is transacted there by an alleged agent, whether a corporation or a natural person, where such activities are not under the direction and control of the foreign corporation but are engaged in by the alleged agent as an independent business. In accordance with the rule that doing business imports only acts in furtherance of the purposes for which a foreign corporation was organized, it is held that the mere institution and prosecution or defense of a suit, particularly if the transaction which is the basis of the suit took place out of the State, do not amount to the doing of business in the State. The institution of a suit or the removal thereof is neither the making of a contract nor the doing of business within a constitutional provision placing foreign corporations licensed to do business in the State under the same regulations, limitations and liabilities with respect to such acts as domestic corporations. Merely engaging in litigation has been considered as not a sufficient minimum contact to warrant the exercise of jurisdiction over a foreign corporation. As to Sunshines contention that petitioners have no legal personality to sue,

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among the grounds for a motion to dismiss under the Rules of Court are lack of legal capacity to sue and that the complaint states no cause of action. Lack of legal capacity to sue means that the plaintiff is not in the exercise of his civil rights, or does not have the necessary qualification to appear in the case, or does not have the character or representation he claims. On the other hand, a case is dismissible for lack of personality to sue upon proof that the plaintiff is not the real party-in-interest, hence grounded on failure to state a cause of action. The term lack of capacity to sue should not be confused with the term lack of personality to sue. While the former refers to a plaintiffs general disability to sue, such as on account of minority, insanity, incompetence, lack of juridical personality or any other general disqualifications of a party, the latter refers to the fact that the plaintiff is not the real party- in-interest. Correspondingly, the first can be a ground for a motion to dismiss based on the ground of lack of legal capacity to sue; whereas the second can be used as a ground for a motion to dismiss based on the fact that the complaint, on the face thereof, evidently states no cause of action. Applying the above discussion to the instant petition, the ground available for barring recourse to our courts by an unlicensed foreign corporation doing or transacting business in the Philippines should properly be lack of capacity to sue, not lack of personality to sue. Certainly, a corporation whose legal rights have been violated is undeniably such, if not the only, real party-in-interest to bring suit thereon although, for failure to comply with the licensing requirement, it is not capacitated to maintain any suit before our courts. Columbia: ownership of copyright or distribution rights and enforcement of IPR doing business Entering into contracts with residents in the RP doing business

person. An exception to the license requirement is where a foreign corporation sues on an isolated transaction. It cites the Marshall Wells case (supra) It should be pointed out that Puritan is not suing in the courts to recover a debt claim or demandwhich would require a licensebut filed a petition to cancel the trademark registered by General Garments. A foreign corporation which has never done business in the Phils and which is unlicensed and unregistered to do so, but is widely and favorable known in the Phils through the use therein of its products bearing its corporate name has a legal right to maintain an action. The purpose of such a suit is to protect its reputation, corporate name, and goodwill, which has been established through the natural development of its trade, in the doing of which it does not seek to enforce any legal or contract rights arising from, or growing out of any business transacted in the Phils. The lawful entry into the Phils of goods bearing the trademark since 1949 should entitle the owner to the right to use the same to the exclusion of others. The law is not only for the protection of the owner of the trademark but also for the protection of purchasers from confusion or deception. General Garments invokes the Mentholatum ruling in support of his case, but the SC held that Congress, in seeking to purposely counteract the effects of the case, enacted RP 638 and inserted Sec 21-A in the Trademark Law, to allow foreign corporations to bring an action in RP courts for infringement of a mark or trade name, or unfair competition, or false designation of origin and false description, whether or not it has been licensed to do business in the RP.

General Garments Corp v Director of Patents. F: General Garments Corp is the owner of the trademark Puritan for assorted mens wear and underwear. The Puritan Sportswear Corporation of Pennsylvania, filed a petition for cancellation of the trademark registered in the name of General Garments Corporation, alleging ownership and prior use of the name. General Garments contends that Puritan being a foreign corporation which is not licensed to do and is not doing business in the RP, is not considered a person under RP laws and consequently not comprehended within the term any person under the Trademark Law then in force. MTD was denied by the Director of Patents. I: WON Puritan Sportswear Corp, not licensed to do business and not doing business in the RP, has legal capacity to maintain a suit in the Phil. Patent Office. H: The fact that it may not transact business in the Phils unless it obtains a license or maintains a suit does not make the respondent any less a juridical

Le Chemise Lacoste v Fernandez F: La Chemise Lacoste is a French corporation and not doing business in the RP, and is also the actual owner of the trademarks Lacoste and Crocodile Device. Hemandas & Co secured a registration of the trademarks in its name from the Phil Patent Office of the trademarks owned by Le Chemise. Hemandas then assigned all its rights title and interest in the trademark to Gobindram Hemandas. Le Chemise filed its own application for registration of the trademarks Crocodile Device and Lacoste, and the Patent Office approved the former was but rejected the latter. Le Chemise then filed a letter-complaint with the NBI alleging acts of unfair competition committed by Hemandas and requesting their apprehension and prosecution. The NBI secured search warrants, but Hemandas files a MTQ the warrant alleging that his trademarks is different from Le Chemise. Search warrants were recalled and items seized returned to Hemandas. Le Chemise questions the quashal. I: WON petitioner has no legal capacity to sue because it is not doing business in the Philippines and is not licensed to do so, and that it failed to allege certain facts in its petition relative to its capacity to sue.

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H: In Leviton case, which is relied on by Hemandas, it was ruled that it is not enough for a foreign corporation to merely allege that it is a foreign corporation. Compliance with the requirements under the law or statute from which it seeks relief and upon which the grounds of the illegal act are alleged, is necessary. It is therefore necessary for the foreign corporation to comply with these requirements or aver why it should be exempted from them. The foreign corporation may have the right to sue before RP courts, but our rules on pleadings require that the qualifying circumstances necessary for the assertion of that right be affirmatively pleaded. Since the present case involves a criminal offense, the Leviton case is inapplicable. Le Chemise may still sue even if it failed to allege material facts. A foreign corporation not doing business needs no license to sue before RP courts for infringement of trademark and unfair competition. A foreign corporation favorably known in the Philippines through the use of its products bearing its corporate name has a legal right to maintain action in the Philippines to restrain the formation in BF of a corporation bearing the same name as the foreign corporation; the sole purpose of its suit is to protect its reputation, corporate name, goodwill whenever the same has established themselves. A corporate and trade name are property rights, rights in rem, which the owner may assert and protect against the whole world, in any courts of the worldeven in jurisdictions where it does not transact business. Since it is the trademark and not the mark that is to be protected, a trademark acknowledges no territorial boundaries or municipalities or states or nations, but extends to every market where the traders goods have become known and identified. The letter-complaint that preceded the petition was filed with the NBI. If prosecution would follow after the PI then the information shall be in the name of the People of the RP and no longer the petitioner which is only an aggrieved party, since a criminal act is an act against the State. Le Chemise capacity to sue, would then be of no significance. The Mentholatum case relied upon by Hemandas is also not on all fours with the present case. The foreign corporation in Mentholatum is in fact doing business in the RP but without the requisite license. In the present case, Le Chemise is a foreign corporation not doing business in the RP. It has an exclusive distributor, Rustans Commercial, which is an independent entity which buys and sells the products of Le Chemise, and is in other words not a mere agent or conduit of Le Chemise. BOI rules also support a finding that Le Chemise is not doing business. Rustans is a middleman acting and transacting business in its own name and account. In upholding the rights of Le Chemise, SC held that we are recognizing our duties and rights of foreign states to which the Philippines and France are parties. We are simply interpreting and enforcing a solemn international commitment of the Philippines embodied in a multilateral treaty, the Paris Convention for the Protection of Industrial Property to which we are a party. The convention has extraterritorial application, and is essentially a compact between

the member countries to accord to member-countries citizens the same rights comparable to those accorded their own citizens by domestic law. The underlying principle is that foreign nationals should be given the same treatment in each of the member-countries as that country makes available to its own citizens. It is not premised upon the idea that the trademark and related laws shall be given extra-territorial application, but on exactly the converse that each nations law shall have only territorial application. A treaty or convention is not a mere moral obligation to be enforced but creates a legally binding obligation on the parties founded on the generally accepted principles of international law of pacta sunt servanda, which has been adopted as the law of the law. Foreign corporation not doing business has personality to commence criminal proceedings for violation of RPC Mentholatum does not apply! Le Chemises exclusive distributor buys and then sells it shirts for its own account and for its own profit and is not an agent or conduit of Le Chemise Not every sale to an exclusive agent in RP constitutes doing business! The agent must sell or transact in the foreign corporations name and for the foreign entitys own account to constitute doing business Villanueva: but buying the products to be resold in the RP from foreign entities involve the foreign entity as direct parties!

What constitutes doing business Isolated transaction: set apart from common business; no intention to engage in a progressive pursuit of the business or corporate purpose

Litton Mills v CA F: Petitioner Litton Mills, Inc. (Litton) entered into an agreement with Empire Sales Philippines Corporation (Empire), as local agent of Gelhaar Uniform Company (Gelhaar), an American corporation, whereby Litton agreed to supply Gelhaar 7,770 dozens of soccer jerseys. The agreement stipulated that before it could collect from the bank on the letter of credit, Litton must present an inspection certificate issued by Gelhaars agent in the Philippines, Empire Sales, that the goods were in satisfactory condition. Litton then sent four shipments totaling 4,770 dozens of the soccer jerseys. A fifth shipment of 2,110 dozens of the jerseys, was inspected by Empire, but Empire refused to issue the required certificate of inspection. Alleging that Empires refusal to issue a certificate was without valid reason, Litton filed a complaint for specific performance to compel Empire to issue the inspection certificate covering the 2,110 dozen jerseys plus damages. The trial court issued the writ and the next day, Empire issued the inspection certificate, so that the cargo was shipped on time. The law firm of Sycip, Salazar, Feliciano and Hernandez entered a special appearance for the purpose of objecting to the jurisdiction of the court over Gelhaar, and moved to

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dismiss the case and to quash the summons on the ground that Gelhaar was a foreign corporation not doing business in the Philippines, and as such, was beyond the reach of the local courts. It contended that Litton failed to allege and prove that Gelhaar was doing business in the Philippines. H: We sustain petitioners contention based on the first ground, namely, that the trial court acquired jurisdiction over Gelhaar by service of summons upon its agent as required by of Rule 14, 14. But, it should be noted, in order that service may be effected in the manner above stated, said section also requires that the foreign corporation be one which is doing business in the Philippines. This is a sine qua non requirement. This fact must first be established in order that summons can be made and jurisdiction acquired. The fact of doing business must then, in the first place, be established by appropriate allegations in the complaint. Hence, a court need not go beyond the allegations in the complaint to determine whether or not a defendant foreign corporation is doing business for the purpose of Rule 14, 14. In the case at bar, the allegation that Empire, for and in behalf of Gelhaar, ordered 7,770 dozens of soccer jerseys from Litton and for this purpose Gelhaar caused the opening of an irrevocable letter of credit in favor of Litton is a sufficient allegation that Gelhaar was doing business in the Philippines. Gelhaar contends that the contract with Litton was a single, isolated transaction and that it did not constitute doing business. where a single act or transaction of a foreign corporation is not merely incidental or casual but is of such character as distinctly to indicate a purpose on the part of the foreign corporation to do other business in the state, such act will be considered as constituting doing business. This Court referred to acts which were in the ordinary course of business of the foreign corporation. In the case at bar, the trial court was certainly correct in holding that Gelhaars act in purchasing soccer jerseys to be within the ordinary course of business of the company considering that it was engaged in the manufacture of uniforms. The acts noted above are of such a character as to indicate a purpose to do business. In accordance with Rule 14, 14, service upon Gelhaar could be made in three ways: (1) by serving upon the agent designated in accordance with law to accept service of summons; (2) if there is no resident agent, by service on the government official designated by law to that effect; and (3) by serving on any officer or agent of said corporation within the Philippines.6 Here, service was made through Gelhaars agent, the Empire Sales Philippines Corp. There was, therefore, a valid service of summons on Gelhaar, sufficient to confer on the trial court jurisdiction over the person of Gelhaar. Single transaction most not simply be casual or incidental to constitute doing business it must be in the ordinary course of the business of the foreign corporation

Mentholatum v Mangaliman F: Mentholatum Co Inc, a Kansas corporation which manfactures Mentholatum (a medicament and salve adapted for the treatment of colds, nasal irritations etc) and its distributing agent Philam Drug Co filed an action against Mangaliman et al for infringement of trademark and unfair competition. They allege that the Mangaliman et al prepared a medicament and salve named Mentoliman which they sold in a container of the same size, color, shape as Mentholatum, and allege damages and diminutions of sales and loss of goodwill and reputation. TC ruled ifo Mentholatum Co. CA reverses, holding that the activities of Mentholatum were business transactions in the Philippines through its agent PhilAm Drug, and that under the Corpo Law they cannot maintain their suit. Mentholatum claims that they have not personally sold any of their products in the RP and that the Philam Drug Co was merely an importer of the products, their sales not being for the account of Mentholatum but for their own. Mangaliman countered that PhilAm Drug is the exclusive distributor of Mentholatum and that because of this arrangement, the acts of the former became acts of the latter, and thus Mentholatum is engaged in doing business in the RP and would require a license before it can sue. I: WON Mentholatum is doing business in the RP; WON Mentholatum Inc could prosecute their action without having secured the license; WON the PhilAm Drug co could by itself maintain the suit. H: There is no general rule regarding what constitutes doing business in the Phils. The true test is whether the foreign corporation is continuing the body or substance of the business or enterprise for which it was organized or whether it has substantially retired from it and turned it over to another, thus implying a continuity of dealings and arrangements, and contemplates the performance of acts and exercise of functions normally incident to the purpose and object of its organization. In this case, as stipulated in their respective pleadings, whatever transactions of PhilAm Drug had executed in view of the law, the Mentholatum Co. being a foreign corporation doing business without the license, may not prosecute the action. Neither may the PhilAm Drug maintain the action for the reason that the distinguishing features of the agent being his representative character and derivative authority, it cannot, to the advantage of its principal, claim an independent standing in court. Sale of products of a foreign entity through a local distributor is equivalent to doing business; isolated transaction is not doing business Mentholatum tests: (1) substance test: continuing the substance of the business and purpose for which it was organized (2) continuity test: continuity of dealings and arrangements, or acts normally incidental to the purpose and object

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Agilent Technologies Singapore v. Integrated Silicon Technology Phils. F: Petitioner Agilent Technologies Singapore (Pte.), Ltd. (Agilent) is a foreign corporation, which, by its own admission, is not licensed to do business in the Philippines. Respondent Integrated Silicon Technology Philippines Corporation (Integrated Silicon) is a private domestic corporation, 100% foreign owned, which is engaged in the business of manufacturing and assembling electronics components. A 5-year Value Added Assembly Services Agreement (VAASA), was entered into on April 2, 1996 between Integrated Silicon and the HewlettPackard Singapore (Pte.) Ltd., Singapore Components Operation (HPSingapore). Under the terms of the VAASA, Integrated Silicon was to locally manufacture and assemble fiber optics for export to HP-Singapore. HPSingapore, for its part, was to consign raw materials to Integrated Silicon; transport machinery to the plant of Integrated Silicon; and pay Integrated Silicon the purchase price of the finished products. HP-Singapore assigned all its rights and obligations in the VAASA to Agilent. Integrated Silicon sues Agilent and its officers for specific performance, alleging that Agilent breached the parties oral agreement to extend the VAASA. Integrated Silicon thus prayed that defendant be ordered to execute a written extension of the VAASA for a period of five years as earlier assured and promised. Agilent then filed a separate complaint for specific performance against Integrated Silicon, Teoh Kang Seng, Teoh Kiang Gong, Anthony Choo, Joanne Kate M. dela Cruz, Jean Kay M. dela Cruz and Rolando T. Nacilla, and prayed for the immediate return and delivery to plaintiff its equipment, machineries and the materials to be used for fiber-optic components which were left in the plant of Integrated Silicon. TC denied MTD of Silicon. CA reverses. Integrated Silicon et al argue that since Agilent is an unlicensed foreign corporation doing business in the Philippines, it lacks the legal capacity to file suit, assailing various acts of Agilent, purportedly in the nature of doing business in the Philippines. H: A foreign corporation without a license is not ipso facto incapacitated from bringing an action in Philippine courts. A license is necessary only if a foreign corporation is transacting or doing business in the country. The Corporation Code provides: Sec. 133. Doing business without a license. No foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines; but such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws. The aforementioned provision prevents an unlicensed foreign corporation doing business in the Philippines from accessing our courts. In a number of cases,

however, we have held that an unlicensed foreign corporation doing business in the Philippines may bring suit in Philippine courts against a Philippine citizen or entity who had contracted with and benefited from said corporation. Such a suit is premised on the doctrine of estoppel. A party is estopped from challenging the personality of a corporation after having acknowledged the same by entering into a contract with it. This doctrine of estoppel to deny corporate existence and capacity applies to foreign as well as domestic corporations. The application of this principle prevents a person contracting with a foreign corporation from later taking advantage of its noncompliance with the statutes chiefly in cases where such person has received the benefits of the contract. The principles regarding the right of a foreign corporation to bring suit in Philippine courts may thus be condensed in four statements: (1) if a foreign corporation does business in the Philippines without a license, it cannot sue before the Philippine courts; (2) if a foreign corporation is not doing business in the Philippines, it needs no license to sue before Philippine courts on an isolated transaction or on a cause of action entirely independent of any business transaction; (3) if a foreign corporation does business in the Philippines without a license, a Philippine citizen or entity which has contracted with said corporation may be estopped from challenging the foreign corporations corporate personality in a suit brought before Philippine courts; and (4) if a foreign corporation does business in the Philippines with the required license, it can sue before Philippine courts on any transaction. In Mentholatum, the Court discoursed on the two general tests to determine whether or not a foreign corporation can be considered as doing business in the Philippines. The first of these is the substance test, thus: The true test [for doing business], however, seems to be whether the foreign corporation is continuing the body of the business or enterprise for which it was organized or whether it has substantially retired from it and turned it over to another. The second test is the continuity test, expressed thus: The term [doing business] implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in the progressive prosecution of, the purpose and object of its organization. Although each case must be judged in light of its attendant circumstances, jurisprudence has evolved several guiding principles for the application of these tests. For instance, considering that it transacted with its Philippine counterpart for seven years, engaging in futures contracts, this Court concluded that the foreign corporation in Merrill Lynch Futures, Inc. v. Court of Appeals and Spouses Lara, was doing business in the Philippines. In Top-Weld Manufacturing v. ECED, IRTI, et al. both involved the License and Technical Agreement and Distributor Agreement of foreign corporations with their respective local counterparts that were the primary bases for the Courts ruling that the foreign

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corporations were doing business in the Philippines. In particular, the Court cited the highly restrictive nature of certain provisions in the agreements involved, such that the Philippine entity is reduced to a mere extension or instrument of the foreign corporation. The case law definition has evolved into a statutory definition, having been adopted with some qualifications in various pieces of legislation. The Foreign Investments Act of 1991 (the FIA; Republic Act No. 7042, as amended), Sec 3 (d) defines doing business as those which include soliciting orders, service contracts, opening offices, whether called liaison offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity, or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in the progressive prosecution of, commercial gain or of the purpose and object of the business organization. An analysis of the relevant case law, in conjunction with Section 1 of the Implementing Rules and Regulations of the FIA (as amended by Republic Act No. 8179), would demonstrate that the acts enumerated in the VAASA do not constitute doing business in the Philippines. The IRR of the FIA (as amended by Republic Act No. 8179) provides that the following shall not be deemed doing business: a. Mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; b. Having a nominee director or officer to represent its interest in such corporation; c. Appointing a representative or distributor domiciled in the Philippines which transacts business in the representatives or distributors own name and account; d. The publication of a general advertisement through any print or broadcast media; e. Maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the Philippines; f. Consignment by a foreign entity of equipment with a local company to be used in the processing of products for export; g. Collecting information in the Philippines; and h. Performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis, such as installing in the Philippines machinery it has manufactured or exported to the Philippines, servicing the same, training domestic workers to operate it, and similar incidental services.

By and large, to constitute doing business, the activity to be undertaken in the Philippines is one that is for profit-making. By the clear terms of the VAASA, Agilents activities in the Philippines were confined to (1) maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by Integrated Silicon; and (2) consignment of equipment with Integrated Silicon to be used in the processing of products for export. As such, we hold that, based on the evidence presented thus far, Agilent cannot be deemed to be doing business in the Philippines. Respondents contention that Agilent lacks the legal capacity to file suit is therefore devoid of merit. As a foreign corporation not doing business in the Philippines, it needed no license before it can sue before our courts. Jqck: Agilent sums up everything; its the controlling doctrine now

Merrill Lynch Futures v CA F: Merrill Lynch Futures, Inc. a non-resident foreign corporation not doing business in the Philippines, sued the Spouses Pedro M. Lara and Elisa G. Lara for the recovery of a debt and interest thereon. Merrill Lynch is a "futures commission merchant" duly licensed to act as such in the futures markets and exchanges in the United States, and essentially functioning as a broker (executing) orders to buy and sell futures contracts received from its customers on U.S. futures exchanges. It also defined a "futures contract" as a "contractual commitment to buy and sell a standardized quantity of a particular item at a specified future settlement date and at a price agreed upon, with the purchase or sale being executed on a regulated futures exchange." It entered into a Futures Customer Agreement with the defendant spouses, in virtue of which it agreed to act as the latter's broker for the purchase and sale of futures contracts in the U.S. and that pursuant to the contract, orders to buy and sell futures contracts were transmitted to ML FUTURES by the Lara Spouses "through the facilities of Merrill Lynch Philippines, Inc., a Philippine corporation and a company servicing plaintiffs customers. Later, the Laras would reaffirm their lack of awareness that Merrill Lynch Philippines, Inc. (formerly registered as Merrill Lynch, Pierce, Fenner & Smith Philippines, Inc.) did not have a license, claiming that they learned of this only from inquiries with the Securities and Exchange Commission which elicited the information that it had denied said corporation's application to operate as a commodity futures trading advisor. Lara Spouses actively traded in futures contracts, including "stock index futures" for four years or so, i.e., from 1983 to October, 1987. A loss amounting to US$160,749.69 was incurred in respect of three (3) transactions involving "index futures," and after setting this off against an amount of US$75,913.42 then owing by ML FUTURES to the Lara Spouses, said spouses became indebted to ML FUTURES for the ensuing balance of

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US$84,836.27. Lara Spouses however refused to pay this balance, "alleging that the transactions were null and void because Merrill Lynch Philippines, Inc., the Philippine company servicing accounts of plaintiff had no license to operate as a 'commodity and/or financial futures broker. Lara files a MTD, and TC sustains the motion. CA affirms, holding that the Trial Court had seen "through the charade in the representation of MLPI and the plaintiff that MLPI is only a trading advisor and in fact it is a conduit in the plaintiff's business transactions in the Philippines, citing the ruling in Mentholatum v Mangaliman. I: WON (a) ML FUTURES is prohibited from suing in Philippine Courts because doing business in the country without a license, and that (b) it is not a real party in interest since the Lara Spouses had not been doing business with it, but with another corporation, Merrill Lynch, Pierce, Fenner & Smith, Inc. H: The round that the plaintiff has no legal capacity to sue may be understood in two senses: one, that the plaintiff is prohibited or otherwise incapacitated by law to institute suit in Philippine Courts; or two, although not otherwise incapacitated in the sense just stated, that it is not a real party in interest. Now, the Lara Spouses contend that ML Futures has no capacity to sue them because the transactions subject of the complaint were had by them, not with the plaintiff ML FUTURES, but with Merrill Lynch Pierce Fenner & Smith, Inc. The facts on record adequately establish that ML FUTURES, operating in the United States, had indeed done business with the Lara Spouses in the Philippines over several years, had done so at all times through Merrill Lynch Philippines, Inc. (MLPI), a corporation organized in this country, and had executed all these transactions without ML FUTURES being licensed to so transact business here, and without MLPI being authorized to operate as a commodity futures trading advisor. The Laras did transact business with ML FUTURES through its agent corporation organized in the Philippines, it being unnecessary to determine whether this domestic firm was MLPI (Merrill Lynch Philippines, Inc.) or Merrill Lynch Pierce Fenner & Smith (MLPI's alleged predecessor). The fact is that ML FUTURES did deal with futures contracts in exchanges in the United States in behalf and for the account of the Lara Spouses, and that on several occasions the latter received account documents and money in connection with those transactions. I: WON ML FUTURES may sue in Philippine Courts to establish and enforce its rights against said spouses, in light of the undeniable fact that it had transacted business in this country without being licensed to do so. WON the Lara Spouses are now estopped to impugn ML FUTURES' capacity to sue them in the courts of the forum. H: The rule is that a party is estopped to challenge the personality of a corporation after having acknowledged the same by entering into a contract with

it. And the "doctrine of estoppel to deny corporate existence applies to foreign as well as to domestic corporations; "one who has dealt with a corporation of foreign origin as a corporate entity is estopped to deny its corporate existence and capacity." The principle "will be applied to prevent a person contracting with a foreign corporation from later taking advantage of its noncompliance with the statutes, chiefly in cases where such person has received the benefits of the contract where such person has acted as agent for the corporation and has violated his fiduciary obligations as such, and where the statute does not provide that the contract shall be void, but merely fixes a special penalty for violation of the statute " There would seem to be no question that the Laras received benefits generated by their business relations with ML FUTURES. Those business relations, according to the Laras themselves, spanned a period of seven (7) years; and they evidently found those relations to be of such profitability as warranted their maintaining them for that not insignificant period of time; otherwise, it is reasonably certain that they would have terminated their dealings with ML FUTURES much, much earlier. In fact, even as regards their last transaction, in which the Laras allegedly suffered a loss in the sum of US$160,749.69, the Laras nonetheless still received some monetary advantage, for ML FUTURES credited them with the amount of US$75,913.42 then due to them, thus reducing their debt to US$84,836.27. Given these facts, and assuming that the Lara Spouses were aware from the outset that ML FUTURES had no license to do business in this country and MLPI, no authority to act as broker for it, it would appear quite inequitable for the Laras to evade payment of an otherwise legitimate indebtedness due and owing to ML FUTURES upon the plea that it should not have done business in this country in the first place, or that its agent in this country, MLPI, had no license either to operate as a "commodity and/or financial futures broker." Estoppel doctrine: if local parties knew that the foreign entity does not have a license, yet it is doing business, and they still transacted with them estopped from invoking lack of license! Villanueva: Merrill Lynch lacks an element of estoppel action/representation by the local which induces the foreign to believe that he would be entitled to relief the simple act of entering into a contract with a foreign entity does not of itself give rise to estoppel.

Top-weld Manufacturing v ECED F: TopWeld, a domestic corporation engaged in manufacturing and selling welding supplies and equipment, entered into separate contracts with 2 different foreign entities. The first contract is a License and Technical Assistance Agreement with the IRTI, a Swiss corporation, which constituted TopWeld a licensee of IRTI to manufacture welding products under certain specifications with raw materials to be purchased by TopWeld from suppliers designated by

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IRTI. The second contract is a Distributor Agreement with the ECED SA, a Panamanian corporation, which designated TopWeld as ECEDs distributor in the RP of its welding products and equipment. Upon learning that the two foreign corporations were negotiating with another group to replace TopWeld, the latter sued IRTI, ECED and an American corporation, EUTECTIC, and also Victor Gaerlan, the alleged representative of the three corporations. TopWeld sought to restrain the corporations from negotiating with third parties and from terminating its contract. TC grants petition and issues TRO. IRTI and ECED writes TopWeld to inform it of their intent to sever their agreement. TopWeld amended its complaint to ask the court to compel the ECED to deliver items covered by the agreement and to prohibit them from importing into the RP any EUTECTIC products. TC granted the amended prayer. CA reverses, holding that IRTI and ECED, by entering into licensing and distributing agreements with TopWeld, were doing business in the RP and thus should have required a certificate from the BOI. It held that having not obtained the requisite certificate, the provisions of RA 5455 prohibiting alien firms from terminating their franchise or licensing agreements with domestic firms without payment of compensation and reimbursement of expenses cannot be applied to them. They are not bound by the requirement on termination and thus TopWeld cannot invoke the same. To impose a requirement would perpetuate or condone an unlawful business operation. The CA finally held that TopWeld ought to know whether or not IRTI and ECED were properly authorized to engage in business in the RP. TopWeld appeals to SC. I: WON IRTI and ECED can be considered as doing business and thus subject to the requirements of RA 5455. H: IRTI and ECED are foreign corporations not licensed to do business in the Phils. SC reverted to the lack of a general rule as to what exactly constitutes doing or engaging in business in the RP, and acknowledged that each case must be judged in light of its peculiar circumstances. Acts of corporations should be distinguished from single or isolate business transactions or occasional, incidental, or casual transactions. Where a single act or transaction is not merely incidental or casual but indicates the foreign corporations intention to do other business in the Phils, said single act constitutes doing or engaging in business in the RP. The SC concurs with the CA that the IRTI and ECED were doing business in the RP. When they entered into the dispute contracts with TopWeld, they were carrying out the purposes for which they were createdto manufacture and market welding products and equipment. The terms and conditions of the contracts indicate that they established within the RP, a continuous business, and not merely one of a temporary character. This is buttressed by the admission that they were negotiating with another domestic company. Their acts enable them to enter into the mainstream of our economic life in competition with local business interests, bringing them under the provisions of RA 5455. IRTI and ECED contends exemption from RA 5455 because TopWeld maintained

an independent status during the existence of the contracts. But a perusal of the agreements shows that they are highly restrictive, and in assuming TopWeld to have an independent status, in essence it merely extends to the Islands the business of IRTI and ECED. As between the parties, RA 5455 does not declare void or invalid the contracts entered without the license being secured. What is created is an illegal situation between the parties having entered into agreements without the license or certificate. In this case, TopWeld had actual knowledge of the applicability of RA 5455 at the time of execution of the contract. It was incumbent upon TopWeld to know whether or not IRTI and ECED were properly authorized to engage in the RP. The very purpose of the law was circumvented when they etered into the licensing and distributorship agreements, and the parties being equally guilty and are in pari delicto, it follows that TopWeld is not entitled to the relief prayed for. TopWeld: pari delicto rulelocal company knew that the law it alleges to have been violated by the foreign corporation is in force at the time of the questioned contracts were consummated; while foreign corporation is doing business without a license! The contracts cannot be voided! Highly restrictive agreements which has the effect of reducing the local corporation to mere conduits or extensions of the foreign corporation

Antam Consolidated v CA F: Stokely (parent) and Capital City (subsidiary) companies are foreign corporations not engaged and not licensed to do business in the RP. Capital City and Comphil acting through broker Rothschild entered into a contract wherein Comphil undertook to sell and deliver and Capital City agreed to buy 500 long tons of crude coconut oil. Comphil failed to deliver the coconut oil so that Capital decided to cover its oil needs in the open market, resulting in a loss of $103,600. The parties entered into a second contractdesignated as a wash out of the first contractwherein Comphil undertook to buy back the 500 long tons of coconut oil at a higher price, the difference in price offsetting the loss sustained in the first contract. Comphil failed to pay. A third contract was entered into, wherein Comphil was to sell the same quantity of coconut oil at a discounted price from the market value thereof, again offsetting the loss of $103,600 sustained by Capital City. Again Comphil failed to deliver, and despite repeated demands Comphil refused to settle its obligations to Capital City under the agreements. The Tambuntings, former directors of Comphil, left the company and were replaced by 5 employees of their pawnshop business, and caused the name of Comphil to be changed to Banahaw Milling. The new directors also authorized Tambunting to sell the oil mill of Comphil/Banahaw, which is the only substantial asset of Banahaw and would thus leave it with no assets to satisfy claims of creditors. Unicom also took over the assets and capital

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stock of Banahaw. Capital City alleged that all petitioners evaded their obligation thereto through the devious scheme of using Tambunting employees to replace the Tambuntings in the management of Banahaw and disposing part of the assets and entire interests in Comphil/Banahaw to Unicom. TC ordered the writ of attachment. Petitioners Antam et al file MTD on the ground that petitioners are foreign corporations no licensed to do business in the RP and has no personality to maintain the instant suit. TC denies MTD, and Antam et al appeals. Antam claims Stokely and Capital city are doing business in the RP, because it entered into three transactions/contracts with them either as seller or buyer, and which are in the pursuit of the purpose and object for which they are organized. They are thus required to obtain a license first before maintaining any legal action against them. H: the transactions are not a series of commercial dealings which signify an intent on the part of Stokely and Capital City to do business in the RP, but constitute an isolated one which does not fall under the category of doing business. The records show that the only reason why the second and third contracts were entered into was to recover the loss sustained from the failure of Antam et al to deliver the crude coconut oil under the first contract. Instead of outright demand, the foreign company even tried to push through with the transaction to recover the amount lost. And again petitioners failed to make good. It can be deduced therefore, that in reality there was only one agreement to deliver 500 long tons of coconut oiland the 3 different transactions were entered into in an effort to fulfill the basic agreement and in no way indicate an intent to engage in a continuity of transactions with the petitioners which would categorize it as a foreign corporation doing business in the RP. It is a common ploy of defaulting companies sued by unlicensed foreign companies not engaged in business in the RP to invoke lack of capacity to sue. The doctrine of lack of capacity to sue based on failure to acquire a local license is based on considerations of sound public policy. It was never intended to favor domestic corporations who enter into solitary obligations simply because the latter are not licensed to do business in the country. Antam: auxiliary ruleperformance of services auxiliary to an existing contract is not doing business!

How courts acquire jurisdiction over foreign corporations Laws governing licensed foreign corporations Merger of licensed foreign corporation Withdrawal of foreign corporation Revocation and suspension of license Existing Licensed Foreign Corporations

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