G.R. No.

L-43350 December 23, 1937

CAGAYAN FISHING DEVELOPMENT CO., INC., plaintiff-appellant,
vs.
TEODORO SANDIKO, defendant-appellee.
Arsenio P. Dizon for appellant.
Sumulong, Lavides and Sumulong for appellee.
LAUREL, J.:

A CORPORATION SHOULD HAVE A FULL AND COMPLETE ORGANIZATION

AND EXISTENCE AS AN ENTITY BEFORE IT CAN ENTER INTO ANY KIND OF A
CONTRACT OR TRANSACT ANY BUSINESS.

FACTS: Manuel Tabora is the registered owner of four parcels of land situated in the barrio of
Linao, town of Aparri, Province of Cagayan. To guarantee the payments of his loans, he
executed in favor of the Philippine National Bank a mortgage over the said lands and for another
creditor. Later, he executed a public document entitled "Escritura de Transpaso de Propiedad
Inmueble" (Exhibit A) by virtue of which the four parcels of land owned by him was sold to the
plaintiff CAGAYAN FISHING, which was at that time, still in the process of incorporation, in
consideration of one peso (P1) subject to the mortgages in favor of the Philippine National Bank
and Severina Buzon and, to the condition that the certificate of title to said lands shall not be
transferred to the name of the plaintiff company until the latter has fully and completely paid
Tabora's indebtedness to the Philippine National Bank.

The plaintiff company filed its article incorporation with the Bureau of Commerce and Industry
on October 22, 1930 (Exhibit 2). A year later, on October 28, 1931, the board of directors of
said company adopted a resolution (Exhibit G) authorizing its president, Jose Ventura, to sell the
four parcels of lands in question to Teodoro Sandiko for P42,000. Exhibits B, C and D were
thereafter made and executed. Exhibit B is a deed of sale executed before a notary public by the
terms of which the plaintiff sold ceded and transferred to the defendant all its right, titles, and
interest in and to the four parcels of land described in transfer certificate in turn obligated himself
to shoulder the three mortgages hereinbefore referred to. Exhibit C is a promisory note for
P25,300. drawn by the defendant in favor of the plaintiff, payable after one year from the date
thereof. Exhibit D is a deed of mortgage executed before a notary public in accordance with
which the four parcels of land were given a security for the payment of the promissory note,
Exhibit C. All these three instrument were dated February 15, 1932.

The defendant having failed to pay the sum stated in the promissory note, plaintiff, on January
25, 1934, brought this action in the Court of First Instance of Manila praying that judgment be
rendered against the defendant for the sum of P25,300, with interest at legal rate from the date of
the filing of the complaint, and the costs of the suits.

ISSUE: Whether the transfer by Manuel Tabora to the Cagayan Fishing Development Company,
Inc. was valid? NO, the transfer was null because at the time it was affected the corporation was
non-existent.
RULING: The transfer made by Tabora to the Cagayan fishing Development Co., Inc., plaintiff
herein, was affected on May 31, 1930 and the actual incorporation of said company was affected
later on October 22, 1930. In other words, the transfer was made almost five months before the
incorporation of the company. Unquestionably, a duly organized corporation has the power to
purchase and hold such real property as the purposes for which such corporation was formed
may permit and for this purpose may enter into such contracts as may be necessary (sec. 13, pars.
5 and 9, and sec. 14, Act No. 1459). But before a corporation may be said to be lawfully
organized, many things have to be done. Among other things, the law requires the filing of
articles of incorporation (secs. 6 et seq., Act. No. 1459). Although there is a presumption that all
the requirements of law have been complied with (sec. 334, par. 31 Code of Civil Procedure), in
the case before us it can not be denied that the plaintiff was not yet incorporated when it entered
into a contract of sale, Exhibit A. The contract itself referred to the plaintiff as "una sociedad en
vias de incorporacion." It was not even a de facto corporation at the time. Not being in legal
existence then, it did not possess juridical capacity to enter into the contract.

Corporations are creatures of the law, and can only come into existence in the manner
prescribed by law. As has already been stated, general law authorizing the formation of
corporations are general offers to any persons who may bring themselves within their
provisions; and if conditions precedent are prescribed in the statute, or certain acts are
required to be done, they are terms of the offer, and must be complied with substantially
before legal corporate existence can be acquired. (14 C. J., sec. 111, p. 118.)

That a corporation should have a full and complete organization and existence as an
entity before it can enter into any kind of a contract or transact any business, would seem
to be self evident. . . . A corporation, until organized, has no being, franchises or
faculties. Nor do those engaged in bringing it into being have any power to bind it by
contract, unless so authorized by the charter there is not a corporation nor does it possess
franchise or faculties for it or others to exercise, until it acquires a complete existence.
(Gent vs. Manufacturers and Merchant's Mutual Insurance Company, 107 Ill., 652, 658.)

Boiled down to its naked reality, the contract here (Exhibit A) was entered into not between
Manuel Tabora and a non-existent corporation but between the Manuel Tabora as owner of the
four parcels of lands on the one hand and the same Manuel Tabora, his wife and others, as mere
promoters of a corporations on the other hand. For reasons that are self-evident, these promoters
could not have acted as agent for a projected corporation since that which no legal existence
could have no agent. A corporation, until organized, has no life and therefore no faculties. It is,
as it were, a child in ventre sa mere. This is not saying that under no circumstances may the acts
of promoters of a corporation be ratified by the corporation if and when subsequently organized.
There are, of course, exceptions (Fletcher Cyc. of Corps., permanent edition, 1931, vol. I, secs.
207 et seq.), but under the peculiar facts and circumstances of the present case we decline to
extend the doctrine of ratification which would result in the commission of injustice or fraud to
the candid and unwary.

If the plaintiff corporation could not and did not acquire the four parcels of land here involved, it
follows that it did not possess any resultant right to dispose of them by sale to the defendant,
Teodoro Sandiko.
 RIZAL LIGHT & ICE CO., INC.
vs.
THE MUNICIPALITY OF MORONG, RIZAL and THE PUBLIC SERVICE
COMMISSION
G.R. No. L-20993; September 28, 1968
En Banc; Zaldivar, J

ACTS OF PROMOTERS OF A CORPORATION BE RATIFIED OR ACCEPTED BY

THE CORPORATION IF AND WHEN SUBSEQUENTLY ORGANIZED

FACTS: The certificate of incorporation of the Morong Electric was issued by the SEC on
October 17, 1962, so only from that date, not before, did it acquire juridical personality and legal
existence. Petitioner thus contends that the franchise granted to Morong Electric on May 6, 1962
when it was not yet in esse is null and void and cannot be the subject of the Commission's
consideration.

Morong Electric argues, and to which argument the Commission agrees, that it was a de
facto corporation at the time the franchise was granted and, as such, it was not incapacitated to
enter into any contract or to apply for and accept a franchise. Not having been incapacitated,
Morong Electric maintains that the franchise granted to it is valid and the approval or
disapproval thereof can be properly determined by the Commission.

ISSUE: Whether the franchise granted to Morong Electric is valid. YES.

RULING: Rizal Light's contention that Morong Electric did not yet have a legal personality on
May 6, 1962 when a municipal franchise was granted to it is correct. The juridical personality
and legal existence of Morong Electric began only on October 17, 1962 when its certificate of
incorporation was issued by the SEC. Before that date, or pending the issuance of said certificate
of incorporation, the incorporators cannot be considered as de facto corporation. But the fact
that Morong Electric had no corporate existence on the day the franchise was granted in its name
does not render the franchise invalid, because later Morong Electric obtained its certificate of
incorporation and then accepted the franchise in accordance with the terms and conditions
thereof. This view is sustained by eminent American authorities. Thus, McQuiuin says:

The fact that a company is not completely incorporated at the time the grant is made to it by a
municipality to use the streets does not, in most jurisdictions, affect the validity of the grant. But
such grant cannot take effect until the corporation is organized. And in Illinois it has been
decided that the ordinance granting the franchise may be presented before the corporation
grantee is fully organized, where the organization is completed before the passage and
acceptance. (McQuillin, Municipal Corporations, 3rd Ed., Vol. 12, Chap. 34, Sec. 34.21)
 
Fletcher says:
While a franchise cannot take effect until the grantee corporation is organized, the franchise may,
nevertheless, be applied for before the company is fully organized.
 
A grant of a street franchise is valid although the corporation is not created until afterwards.
(Fletcher, Cyclopedia Corp. Permanent Edition, Rev. Vol. 6-A, Sec. 2881)
 
And Thompson gives the reason for the rule:
(I)n the matter of the secondary franchise the authorities are numerous in support of the
proposition that an ordinance granting a privilege to a corporation is not void because the
beneficiary of the ordinance is not fully organized at the time of the introduction of the
ordinance. It is enough that organization is complete prior to the passage and acceptance of the
ordinance. The reason is that a privilege of this character is a mere license to the corporation
until it accepts the grant and complies with its terms and conditions. (Thompson on
Corporations, Vol. 4, 3rd Ed., Sec. 2929)
 
The incorporation of Morong Electric on October 17, 1962 and its acceptance of the franchise as
shown by its action in prosecuting the application filed with the Commission for the approval of
said franchise, not only perfected a contract between the respondent municipality and Morong
Electric but also cured the deficiency pointed out by the petitioner in the application of Morong
EIectric. Thus, the Commission did not err in denying petitioner's motion to dismiss said
application and in proceeding to hear the same. The efficacy of the franchise, however, arose
only upon its approval by the Commission on March 13, 1963. The reason is that —
Under Act No. 667, as amended by Act No. 1022, a municipal council has the power to grant
electric franchises, subject to the approval of the provincial board and the President. However,
under Section 16(b) of Commonwealth Act No. 146, as amended, the Public Service
Commission is empowered "to approve, subject to constitutional limitations any franchise or
privilege granted under the provisions of Act No. 667, as amended by Act No. 1022, by any
political subdivision of the Philippines when, in the judgment of the Commission, such franchise
or privilege will properly conserve the public interests and the Commission shall in so approving
impose such conditions as to construction, equipment, maintenance, service, or operation as the
public interests and convenience may reasonably require, and to issue certificates of public
convenience and necessity when such is required or provided by any law or franchise." Thus, the
efficacy of a municipal electric franchise arises, therefore, only after the approval of the Public
Service Commission. (Almendras vs. Ramos, 90 Phil. 231) .
 
The conclusion herein reached regarding the validity of the franchise granted to Morong Electric
is not incompatible with the holding of this Court in Cagayan Fishing Development Co., Inc.
vs. Teodoro Sandiko  upon which Rizal Light leans heavily in support of its position. In said case
this Court held that a corporation should have a full and complete organization and existence as
an entity before it can enter into any kind of a contract or transact any business. It should be
pointed out, however, that this Court did not say in that case that the rule is absolute or that under
no circumstances may the acts of promoters of a corporation be ratified or accepted by the
corporation if and when subsequently organized. Of course, there are exceptions. It will be noted
that American courts generally hold that a contract made by the promoters of a corporation on its
behalf may be adopted, accepted or ratified by the corporation when organized.

Hall v. Piccio 86 Phil 603 (1950) En Banc

THE CORPORATION CLAIMING TO BE A DE FACTO CORPORATION SHOULD
AT LEAST HAVE A CERTIFICATE OF INCORPORATION

FACTS: Respondents Piccio signed the Articles of Incorporation for the creation of the Far
Eastern Lumber and Commercial Co., Inc. After the execution thereof, Far Eastern proceeded to
conduct their business with the adoption of the by-laws and the election of the officers.
Eventually, the AOI was submitted before the SEC. However, pending the issuance of the
Certificate of Incorporation, respondents filed a case before the Court, alleging that Far Eastern
should be dissolved brought about by the bitter dissension among the members, mismanagement
and fraud by the managers and heavy financial losses.

Petitioners argue that the Court does not have jurisdiction to dissolve Far Eastern because it is a
de facto corporation and that a de facto corporation can only be dissolved via a quo warranto
proceeding.

ISSUE: Whether Far Eastern is a De Facto Corporation which can only be dissolved in a de
facto proceeding.

RULING: NO. Section 19 of the RCC, providing for the de facto corporation doctrine is not
applicable in this case. This is because in this case, all the parties are informed that the Securities
and Exchange Commission has not, so far, issued the corresponding certificate of incorporation.
All of them know, or ought to know, that the personality of a corporation begins to exist only
from the moment such certificate is issued — not before (sec. 11, Corporation Law). The
complaining associates have not represented to the others that they were incorporated any more
than the latter had made similar representations to them. And as nobody was led to believe
anything to his prejudice and damage, the principle of estoppel does not apply. Obviously this is
not an instance requiring the enforcement of contracts with the corporation through the rule of
estoppel.

There are least two reasons why section 19 does not govern the situation. Not having obtained
the certificate of incorporation, the Far Eastern Lumber and Commercial Co. — even its
stockholders — may not probably claim "in good faith" to be a corporation.

Second, this is not a suit in which the corporation is a party. This is a litigation between
stockholders of the alleged corporation, for the purpose of obtaining its dissolution. Even the
existence of a de jure corporation may be terminated in a private suit for its dissolution between
stockholders, without the intervention of the state.
 SAPPARI K. SAWADJAAN, Petitioner, v. THE HONORABLE COURT OF APPEALS,
THE CIVIL SERVICE COMMISSION and AL-AMANAH INVESTMENT BANK OF
THE PHILIPPINES, Respondents.

ISSUE: W/N the failure of AIIBP to file its by-laws within the period prescribed results in a
nullity of all its actions.

RULING: NO.

The AIIBP was created by Rep. Act No. 6848. It has a main office where it conducts business,
has shareholders, corporate officers, a board of directors, assets, and personnel. It is, in fact, here
represented by the Office of the Government Corporate Counsel, "the principal law office of
government-owned corporations, one of which is respondent bank." At the very least, by its
failure to submit its by-laws on time, the AIIBP may be considered a de facto corporation whose
right to exercise corporate powers may not be inquired into collaterally in any private suit to
which such corporations may be a party.

Moreover, a corporation which has failed to file its by-laws within the prescribed period does not
ipso facto lose its powers as such. The SEC Rules on Suspension/Revocation of the Certificate of
Registration of Corporations, details the procedures and remedies that may be availed of before
an order of revocation can be issued. There is no showing that such a procedure has been
initiated in this case.

Asia Banking Corporation vs Standard Products, Co., Inc

GR No. 22106
September 11, 1924

FACTS: Standard Products, through its President obtained a loan from Asia Banking as
evidenced by a promissory note. This action is brought to recover the balance due on the said
promissory note.

The RTC rendered judgment in favor of the Asia Banking for the sum demanded in the
complaint. From this judgment Standard Products appealed because at the trial of the case
allegedly, Asia Banking failed to prove the corporate existence of the parties. Standard Products
further insists that under these circumstances, the court erred in finding that the parties were
corporations with juridical personality.

ISSUE: Whether Standard Products is estopped from denying its own and Asia Banking’s
corporate existence?

RULING: YES. The general rule is that in the absence of fraud a person who has contracted or
otherwise dealt with an association in such a way as to recognize and in effect admit its legal
existence as a corporate body is thereby estopped to deny its corporate existence in any action
leading out of or involving such contract or dealing, unless its existence is attacked for cause
which have arisen since making the contract or other dealing relied on as an estoppel and this
applies to foreign as well as to domestic corporations.

The defendant having recognized the corporate existence of the plaintiff by making a promissory
note in its favor and making partial payments on the same is therefore estopped to deny said
plaintiff's corporate existence. It is, of course, also estopped from denying its own corporate
existence. Under these circumstances it was unnecessary for the plaintiff to present other
evidence of the corporate existence of either of the parties. It may be noted that there is no
evidence showing circumstances taking the case out of the rules stated.

[ G.R. No. 203993, April 20, 2015 ]

PRISCILO B. PAZ,* PETITIONER, VS. NEW INTERNATIONAL ENVIRONMENTAL
UNIVERSALITY, INC., RESPONDENT.

FACTS: Priscilo Paz, as the officer-in-charge of the Aircraft Hangar at the Davao International
Airport, entered into a Memorandum of Agreement with Captain Clarke the President of the
International Environmental University (IEU). Under the MOA, the IEU shall be allowed to use
Davao International Airport’s aircraft hangar space for a period of 4 years, unless pre-terminated
by both parties with 6 months advance notice. It is specified that the space shall be used
exclusively for company aircraft/helicopter.

Paz later complained in a letter addressed to Capt. Clarke that the hangar space was being used
for trucks and equipment, vehicles maintenance and fabrication, instead of for company
helicopter/aircraft only. Under the letter, Paz threatened to cancel the MOA if the welding,
grinding and fabrication jobs were not stopped immediately.

On Sept. 4, 2002, New IEU filed a complaint against Paz for breach of contract before the RTC,
alleging that Paz violated the terms of the MOA when he took over the hangar space without
giving NIEU the requisite 6-month advance notice of termination. In his defense, Paz alleged
that respondent had no cause of action against him as the MOA was executed between him and
Capt. Clarke, in his personal capacity.

ISSUE: Whether or not Paz is bound by his obligation under the MOA by estoppel. YES

RULING: Paz is bound by his obligation under the MOA.

Paz cannot deny that he contracted with IEU, since it is evident from the very language itself of
the MOA, whereby he obligated himself to allow the use of the hangar space for COMPANY
aircraft/helicopter. Also, in his final letter, Paz reiterated and strongly demanded the former to
immediately vacate the hangar space that the COMPANY is occupying/utilizing.
Section 20 of the Corporation Code explicitly provides that one who assumes an obligation to an
ostensible corporation, as such, cannot resist performance thereof on the ground that there was in
fact no corporation. Clearly, petitioner is bound by his obligation under the MOA not only on
estoppel but by express provision of law. The lower courts, therefore, did not err in finding
petitioner liable for breach of contract for effectively evicting respondent from the leased
premises even before the expiration of the term of the lease.

G.R. No. 154973 June 21, 2005

THE PRESIDENT OF PHILIPPINE DEPOSIT INSURANCE CORPORATION AS

LIQUIDATOR OF PACIFIC BANKING CORPORATION, petitioner,
vs.
HON. WILFREDO D. REYES, Pairing Judge, RTC Manila, Branch 31; ANG ENG JOO;
ANG KEONG LAN; and E.J. ANG INTERNATIONAL, LTD., represented by FORNIER
& FORNIER LAW, respondents.

FACTS: Pacific Banking Corporation (PaBC) was placed under receivership on the ground of
insolvency. Subsequently, it was placed under liquidation. The Central Bank of the Philippines,
through the OSG, filed a petition for assistance in the liquidation of PaBC.

Private respondents Ang Eng Joo, Ang Keong Lan, and E.J. Ang International Ltd. (hereafter
Singaporeans) filed their claim before the liquidating court. Citing Investment Incentive Act,
they claimed to be preferred creditors and prayed for the return of their equity investment in the
amount of US $2,531,632.18 with interest until the closure of the PaBC. The Liquidation Court
issued an order that the claimant who are foreign investors should already be paid. The doubt
should be resolved in favor of claimants since it is of judicial notice that government adopted the
policy to entice foreign investors to help boost the economy.

Claimants who are foreign investors should be treated with liberality such that they should be
categorized among preferred creditors. The Liquidator of PaBC is ordered to pay the
Singaporeans their total investment of US $2,531,632.18 as preferred creditors. Dividends and/or
interest that accrued in favor of claimants is hereby deferred pending study by the Liquidator.

The Liquidation Court’s order became final and executory. Liquidating Court, through Reyes,
issued an Order directing the President of the Land Bank of the Philippines (LBP) to release the
garnished amount of US $2,531,632.18 or its peso equivalent computed to be paid to the
Singaporeans. Liquidating Court, Judge Reyes, ordered the payment of accrued legal interest on
the Singaporeans equity investment of US $2,531,632.18 at the rate of 12% per annum computed
from the date the outward remittance and the investment were actually made until its full
payment, at the exchange rate prevailing at the time of payment.
The liquidator contends that the (1) CA Order of Judge Reyes as amounting to an unlawful grant
of undeclared dividends; and (2) only fruits that can arise from an equity investment are
dividends declared from unrestricted retained earnings by the Board of Directors in accordance
with the Corporation Code. Absent a declaration in this case, the interest awarded has no legal
basis.

RULING:

An investment is an expenditure to acquire property or other assets in order to produce revenue.

It is the placing of capital or laying out of money in a way intended to secure income or profit
from its employment. To invest is to purchase securities of a more or less permanent nature, or to
place money or property in business ventures or real estate, or otherwise lay it out, so that it may
produce a revenue or income. Thus, unlike a deposit of money or a loan that earns interest, the
investment of the Singaporeans cannot be assured of a dividend or an interest on the amount
invested. For, interests or dividends are granted only after profits or gains are generated.

Resultantly, Guidelines in Eastern Shipping Case in relation to Interest is Not Applicable

We therefore agree with the Court of Appeals in holding that the amount of US $2,531,632.18
remitted by the Singaporeans to PaBC was not a loan or forbearance of money in favor of PaBC.
Hence, the guidelines in Eastern Shipping Lines does not come into play. Neither can we apply
Central Bank Circular No. 416, which imposes the rate of 12% per annum on loans and
forbearance of money. Nor can guidelines be invoked because, as correctly pointed out by the
Liquidator, the closure of the PaBC did not constitute a breach of obligation.

Article 2209 of the Civil Code, which was relied upon by the Court of Appeals does not find
application either. That Article, which provides for 6% interest per annum, governs when there is
a delay in the payment of a sum of money. Such is not the case here. Thus, the Court of Appeals
award of 6% interest on the Singaporeans equity investment as actual or compensatory damages
from the date of its remittance until the closure of PaBC has no leg to stand on.

PLDT vs NTC
539 SCRA 365 | December 04, 2007

What do we mean by capital?

FACTS:

Section 40 (e) of the Public Service Act (PSA) authorized the NTC to collect from public
telecommunications companies Supervision and Regulation Fees (SRF) of PhP 0.50 for every
PhP 100 or a fraction of the capital and stock subscribed or paid for of a stock corporation,
partnership or single proprietorship of the capital invested, or of the property and equipment,
whichever is higher.

NTC sent SRF assessments to Philippine Long Distance Telephone Company (PLDT). The SRF
assessments were based on the market value of the outstanding capital stock, including stock
dividends, of PLDT.

PLDT protested the assessments contending that the SRF must be based on the par value of its
outstanding capital stock. When the case reached the SC, it held that SRF should be based
neither on the par value nor the market value of the outstanding capital stock but on the value of
the stocks subscribed or paid including the premiums paid therefor, if any, in consideration of the
original issuance of the shares.

To comply with such decision, NTC sent the assailed assessments to PLDT which included the
value of stock dividends issued by PLDT. PLDT now contends that the disposition in the
previous case excluded stock dividends from the SRF coverage. It further argues that stock
dividends are not similarly situated as the subscribed capital stock because the subscribers or
shareholders do not pay for their issuances as no amount was received by the corporation in
consideration of such issuances since these are effected as a mere book entry.

ISSUE: Are stock dividends included in “capital stock subscribed and paid for”?

RULING: Yes.

In deciding the case, the court cited the case of National Telecommunications Commission v.
Honorable Court of Appeals wherein it held that:

The term "capital" refers to the value of the property or assets of a corporation . The capital
subscribed is the total amount of the capital that persons (subscribers or shareholders) have
agreed to take and pay for, which need not necessarily by, and can be more than, the par value of
the shares. In fine, it is the amount that the corporation receives, inclusive of the premiums if
any, in consideration of the original issuance of the shares.

In the case of stock dividends, it is the amount that the corporation transfers from its surplus
profit account to its capital account. It is the same amount that can be loosely termed as the "trust
fund" of the corporation. The "Trust Fund" doctrine considers this subscribed capital as a trust
fund for the payment of the debts of the corporation, to which the creditors may look for
satisfaction.

Until the liquidation of the corporation, no part of the subscribed capital may be returned or
released to the stockholder (except in the redemption of redeemable shares) without violating
this principle. Thus, dividends must never impair the subscribed capital; subscription
commitments cannot be condoned or remitted; nor can the corporation buy its own shares using
the subscribed capital as the considerations therefor.

PLDT's contention, that stock dividends are not similarly situated as the subscribed capital stock
because the subscribers or shareholders do not pay for their issuances as no amount was received
by the corporation in consideration of such issuances since these are effected as a mere book
entry, is erroneous.

Dividends, regardless of the form these are declared, whether in cash, property or stocks, are
valued at the amount of the declared dividend taken from the unrestricted retained earnings of a
corporation. Thus, the value of the declaration in the case of a stock dividend is the actual value
of the original issuance of said stocks.

Thus, it cannot be said that no consideration is involved in the issuance of stock dividends. In
fact, the declaration of stock dividends is akin to a forced purchase of stocks. By declaring stock
dividends, a corporation ploughs back a portion or its entire unrestricted retained earnings either
to its working capital or for capital asset acquisition or investments. It is simplistic to say that the
corporation did not receive any actual payment for these. When the dividend is distributed, it
ceases to be a property of the corporation as the entire or portion of its unrestricted retained
earnings is distributed pro rata to corporate shareholders.

In essence, therefore, the stockholders by receiving stock dividends are forced to exchange the
monetary value of their dividend for capital stock, and the monetary value they forego is
considered the actual payment for the original issuance of the stocks given as dividends.
Therefore, stock dividends acquired by shareholders for the monetary value they forego are
under the coverage of the SRF and the basis for the latter is such monetary value as declared by
the board of directors.

MSCI-NACUSIP vs. NWPC

269 SCRA 173 (1997)

FACTS: Asturias Sugar Central, Inc. (ASCI), executed a Memorandum of Agreement with
Monomer Trading Industries, Inc. (MTII), whereby MTII shall acquire the assets of ASCI by
way of a Deed of Assignment provided that an entirely new organization in place of MTII shall
be organized, which new corporation shall be the assignee of the assets of ASCI.

This created MSCI (Monomer Sugar Central, Inc), which applied for exemption from the
coverage of Wage Order No. RO VI-01 issued by the Board on the ground that it is a distressed
employer. MSCI-NACUSIP Local Chapter (Union), maintained that MSCI is not distressed and
that MSCI has not complied with the requirements for exemption.
But the Board held that the paid-up capital of MSCI on was actually P64,688,528.00 and not
P5,000,000 and, thus, the established losses constitute an impairment of only 5.25% of the true
paid-up capital of P64 million plus, which losses are not enough to meet the required 25%
impairment requirement. This conclusion is anchored on the belief of the Board that the value of
the assets of ASCI, party to the Memorandum of Agreement, transferred to MSCI on March 28,
1990 should be taken into consideration in computing the paid-up capital of MSCI to reflect its
true financial structure.

ISSUE: What is the correct paid up capital of MSCI?

RULING: MSCI’s paid-up capital is P5,000,000.

By express provision of Section 13, paid-up capital is that portion of the authorized capital
stock which has been both subscribed and paid.

To illustrate, where the authorized capital stock of a corporation is worth P1,000,000 and the
total subscription amounts to P250,000.00, at least 25% of this amount, namely, P62,500.00 must
be paid up per Section 13. The latter, P62,500.00, is the paid-up capital or what should more
accurately be termed as "paid-up capital stock."

MSCI was incorporated with an authorized capital stock of P60M.

Authorized Capital Stock - 60,000,000

Subscribed Capital Stock - 20,000,000 (more than 25% of the authorized capital stock)
Paid-up Capital - 5,000,000 (25% of the subscribed capital stock that has been paid)

Not all funds or assets received by the corporation can be considered paid-up capital, for this
term has a technical signification in Corporation. Such must form part of the authorized capital
stock of the corporation, subscribed and then actually paid.

CIR v CA
G.R. No. 108576. January 20, 1999

FACTS:
Don Andres Soriano, a citizen and resident of the USA formed in the 1930's the corporation "A
Soriano Y Cia," predecessor of ANSCOR. On December 30, 1964 Don Andres died.
A day after Don Andres died, ANSCOR increased its capital stock to P20M and in 1966 further
increased it to P30M. In the same year, stock dividends worth 46,290 and 46,287 shares were
respectively received by the Don Andres estate and Doña Carmen from ANSCOR. Hence,
increasing their accumulated shareholdings to 138,867 and 138,864 common shares each.

On June 30, 1968, pursuant to a Board Resolution, ANSCOR redeemed 28,000 common shares
from Don Andres' estate. By November 1968, the Board further increased ANSCOR's capital
stock to P75M divided into 150,000 preferred shares and 600,000 common shares. About a year
later ANSCOR again redeemed 80,000 common shares from Don Andres' estate, further
reducing the latter's common shareholdings.

ANSCOR's business purpose for both redemptions of stock is to partially retire said stocks as
treasury shares in order to reduce the company's foreign exchange remittances in case cash
dividends are declared. In 1973, after examining ANSCOR's books of account and records
Revenue Examiners issued a report proposing that ANSCOR be assessed for deficiency
withholding tax-at-source, pursuant to Secs 53 and 54 of the 1939 Revenue Code for the year
1968 and the second quarter of 1969 based on the transactions of exchange and redemption of
stocks.

Subsequently, ANSCOR filed a petition for review with the CTA assailing the tax assessments
on the redemptions and exchange of stocks. In its decision, the CTA reversed the BIR's ruling
after finding sufficient evidence to overcome the prima facie correctness of the questioned
assessments. In a petition for review, the CA affirmed the ruling of the CTA.

ISSUE: WON ANSCOR's exchange of common shares with preferred shares can be considered
as taxable exchange?

RULING: No. Exchange of common with preferred shares is not a taxable exchange.

There was no change in their proportional interest after the exchange. There was no cash flow.
Both stocks had the same par value. Under the facts herein, any difference in their market value
would be immaterial at the time of exchange because no income is yet realized — it was a mere
corporate paper transaction. It would have been different, if the exchange transaction resulted
into a flow of wealth, in which case income tax may be imposed.

Reclassification of shares does not always bring any substantial alteration in the subscriber's
proportional interest. But the exchange is different — there would be a shifting of the balance of
stock features, like priority in dividend declarations or absence of voting rights. Yet neither the
reclassification nor exchange per se, yields realize income for tax purposes.

A common stock represents the residual ownership interest in the corporation. It is a basic class
of stock ordinarily and usually issued without extraordinary rights or privileges and entitles the
shareholder to a pro rata division of profits.

Preferred stocks are those which entitle the shareholder to some priority on dividends and asset
distribution.

Both shares are part of the corporation's capital stock. Both stockholders are no different from
ordinary investors who take on the same investment risks.
Preferred and common shareholders participate in the same venture, willing to share in the
profits and losses of the enterprise. Moreover, under the doctrine of equality of shares — all
stocks issued by the corporation are presumed equal with the same privileges and liabilities,
provided that the Articles of Incorporation is silent on such differences. In this case, the
exchange of shares, without more, produces no realized income to the subscriber.

There is only a modification of the subscriber's rights and privileges — which is not a flow of
wealth for tax purposes. The issue of taxable dividend may arise only once a subscriber disposes
of his entire interest and not when there is still maintenance of proprietary interest.

Thus, the exchange of common shares with preferred shares cannot be taxed.

Republic Planters v. Agana

G.R. No. 51765, March 3, 1997

FACTS:
ROBES-FRANCISCO REALTY & DEVELOPMENT CORPORATION secured a loan from
Republic Planter’s Bank (RPB). RPB lent partially in money and partially in the form of two
stock certificates: Each for 400 preferred shares of stock with par value of P10 each, a total of
P8,000.

The stock certificates indicated that the preferred stocks in the hands of Robes-Francisco shall
have the right to receive quarterly dividends of 1%, cumulative and participating and that such
preferred shares may be redeemed by RPB at the option of ROBES-FRANCISCO at any time
after two (2) years from the date of issue at the option of the Corporation.

ROBES-FRANCISCO filed a complaint against RPB anchored on its alleged rights to collect
dividends under the preferred shares in question and to have RPB redeem said shares under the
terms and conditions of the stock certificate.

ISSUE: Does ROBES-FRANCISCO have the right to collect dividends pursuant to the stock
certificate? NO.

RULING: In spite of the specific preferences granted to preferred shares there is no guaranty,
however, that the share will receive any dividends. There has to be unrestricted retained
earnings.

A preferred share of stock, is one which entitles the holder thereof to certain preferences over the
holders of common stock. The preferences are designed to induce persons to subscribe for shares
of a corporation. Preferred shares take a multiplicity of forms. The most common forms may be
classified into two:
1. Preferred shares as to assets; and
2. Preferred shares as to dividends.
The former is a share which gives the holder thereof preference in the distribution of the assets of
the corporation in case of liquidation;

The latter is a share the holder of which is entitled to receive dividends on said share to the
extent agreed upon before any dividends at all are paid to the holders of common stock.

The Supreme Court first discussed the nature of preferred shares and redeemable shares.

There is no guaranty, however, that the share will receive any dividends.

Under the old Corporation Law in force at the time the contract between the petitioner and the
private respondents was entered into, it was provided that "no corporation shall make or declare
any dividend except from the surplus profits arising from its business, or distribute its capital
stock or property other than actual profits among its members or stockholders until after the
payment of its debts and the termination of its existence by limitation or lawful dissolution."
Similarly, the present Corporation Code provides that the board of directors of a stock
corporation may declare dividends only out of unrestricted retained earnings.

The Code, in Section 43, adopting the change made in accounting terminology, substituted the
phrase "unrestricted retained earnings," which may be a more precise term, in place of "surplus
profits arising from its business" in the former law. Thus, the declaration of dividends is
dependent upon the availability of surplus profit or unrestricted retained earnings, as the case
may be.

Preferences granted to preferred stockholders, moreover, do not give them a lien upon the
property of the corporation nor make them creditors of the corporation, the right of the former
being always subordinate to the latter.

Dividends are thus payable only when there are profits earned by the corporation and as a
general rule, even if there are existing profits, the board of directors has the discretion to
determine whether or not dividends are to be declared. 15

Shareholders, both common and preferred, are considered risk takers who invest capital in the
business and who can look only to what is left after corporate debts and liabilities are fully paid.

ISSUE: Can RPB be compelled to redeem? NO.

RULING:
More so, the bank is declared by the CB to be suffering from chronic reserve deficiency.

Redeemable shares, on the other hand, are shares usually preferred, which by their terms are
redeemable at a fixed date, or at the option of either issuing corporation, or the stockholder, or
both at a certain redemption price. A redemption by the corporation of its stock is, in a sense, a
repurchase of it for cancellation.

The present Code allows redemption of shares even if there are no unrestricted retained earnings
on the books of the corporation.

This is a new provision which in effect qualifies the general rule that the corporation cannot
purchase its own shares except out of current retained earnings. However, while redeemable
shares may be redeemed regardless of the existence of unrestricted retained earnings, this is
subject to the condition that the corporation has, after such redemption, assets in its books to
cover debts and liabilities inclusive of capital stock. Redemption, therefore, may not be made
where the corporation is insolvent or if such redemption will cause insolvency or inability of the
corporation to meet its debts as they mature.

The redemption of shares cannot be allowed. As pointed out by the petitioner, the Central Bank
made a finding that said petitioner has been suffering from chronic reserve deficiency and that
such finding resulted in a directive, prohibiting the latter from redeeming any preferred share, on
the ground that said redemption would reduce the assets of the Bank to the prejudice of its
depositors and creditors. 24 Redemption of preferred shares was prohibited for a just and valid
reason.

Considering that the terms and conditions set forth in the stock certificate clearly indicate that
redemption of the preferred shares may be made at any time after the lapse of two years from the
date of issue, private respondents should have taken it upon themselves, after the lapse of the
said period, to inquire from the petitioner the reason why the said shares have not been
redeemed. As it is, not only two years had lapsed, as agreed upon, but an additional sixteen years
passed before the private respondents saw it fit to demand their right.
 Delpher Trades Corp vs IAC
G.R. No. L-69259 January 26, 1988
FACTS:
Pacheco sisters and Construction Component International Inc. (CCI) entered into a lease
agreement. The former grants to the latter a right of first refusal. Subsequently, with the
conformity of the sisters, CCI assigned its rights and obligations under the contract in favor of
Hydro Pipes Philippines, Inc. (Hydro Pipes).

On January 3, 1976, a deed of exchange was executed between the sisters and Delpher Trades
Corporation (Delpher). The sisters conveyed the leased property to Delpher for 2500 original
unissued no par value shares of stocks.

With this, Hydro Pipes filed a complaint against both the sisters and Delpher.

Delpher countered that there was no transfer of ownership, since the beneficial ownership and
control over the land remains in the hand of the original owners.

ISSUE:

Won there are transfer of ownership over the subject leased property from Pacheco Sisters to
Delpher which violated the right of first refusal of Hydro Pipes?.

RULING:
No. There was no sale and transfer of ownership.

It must be noted that what was exchanged here is no par value shares of stocks of Delpher. A no-
par value share does not purport to represent any stated proportionate interest in the capital
stock measured by value, but only an aliquot part of the whole number of such shares of the
issuing corporation. The holder of no-par shares may see from the certificate itself that he is only
an aliquot sharer in the assets of the corporation. But this character of proportionate interest is
not hidden beneath a false appearance of a given sum in money, as in the case of par value
shares.

The capital stock of a corporation issuing only no-par value shares is not set forth by a stated
amount of money, but instead is expressed to be divided into a stated number of shares, such as,
1,000 shares. This indicates that a shareholder of 100 such shares is an aliquot sharer in the
assets of the corporation, no matter what value they may have, to the extent of 100/1,000 or 1/10.
Thus, by removing the par value of shares, the attention of persons interested in the financial
condition of a corporation is focused upon the value of assets and the amount of its debts.

Also, it is to be stressed that by the sisters’ ownership of the 2,500 no par shares of stock, they
have control of the corporation. Their equity capital is 55% as against 45% of the other
stockholders, who also belong to the same family group.

Thus, the "Deed of Exchange" of property between the sisters and Delpher cannot be considered
a contract of sale. There was no transfer of actual ownership interests by the sisters to a third
party. The Pacheco family merely changed their ownership from one form to another. The
ownership remained in the same hands. Hence, the Hyrdo Pipes has no basis for its claim of a
right of first refusal under the lease contract.

Philippine Coconut Producers (COCOFED) v. Republic

G.R. Nos. 177857-58 (2009)

FACTS: For consideration is the Urgent Motion to Approve the Conversion of the SMC
Common Shares into SMC Series 1 Preferred Shares dated interposed by petitioners Philippine
Coconut Producers Federation, Inc., et al. (collectively, COCOFED).

SMC’s conversion or stock exchange offer is embodied in its Information Statement and yields
the following relevant features:

Instrument - Peso denominated, perpetual, cumulative, non-voting preferred shares with a par
value of Php 5.00 per share and Issue Price of Php 75 per share.

Dividend Rate - The SMC Board of Directors shall have the sole discretion to declare dividends
on the Series 1 Preferred Shares as redeemed by SMC, the dividend rate shall be at a fixed rate of
8% per annum, payable quarterly and calculated by reference to the issue price.

Dividend Rate Step Up - Unless the Series 1 Preferred Shares are redeemed by SMC, the
Dividend Rate shall be adjusted at the end of the fifth year to the higher of (a) the Dividend Rate
or (b) the prevailing 10-year PDSTF rate plus a spread of 300 bps.

Optional Redemption and Purchase - SMC has the option, but not the obligation, to redeem all or
part of the Series 1 Preferred Shares on the third anniversary from the Issue Date or on any
Dividend Date thereafter at a redemption price equal to the Issue price of the Preferred Shares
plus all cumulated and unpaid cash dividends.

Preference in the event of the liquidation of SMC - The Series 1 Preferred Shares shall have
preference over the common shares.

Selling costs - All selling costs pertaining to the Common Shares shall be borne by the common
shareholders. x x x

The shares in this case was sequestered by the PCGG. One of the standards here is there must be
prior approval of the court for the conversion of the sequestered common shares to preferred
shares. The SMC shares to be exchange.

COCOFED proposes to constitute a trust fund to be known as the "Coconut Industry Trust Fund
(CITF) for the Benefit of the Coconut Farmers," with respondent Republic, acting through the
Philippine Coconut Authority (PCA), as trustee. As proposed, the constitution of the CITF shall
be subject to terms and conditions which, for the most part, reiterate the features of SMC’s
conversion offer, albeit specific reference is made to the shares of the 14 CIIF companies

Standard 1. There must be a prior approval by this Honorable Court in this instant case G.R. No.
177857-58 entitled "COCOFED, et. al. vs. Republic of the Philippines", of the conversion of the
sequestered SMC Common Shares, Both Class "A" and Class "B", registered in the respective
names of the 14 CIIF Holding Companies, into SMC Series 1 Preferred Shares.

Standard 2. The SMC shares to be exchanged are all the shares of stock of SMC that are
presently sequestered and registered in the respective names of the 14 CIIF Holding Companies
in the total number of 753,848,312, both Class "A" and Class "B" shares x x x (hereinafter,
collectively referred to as the "SMC Common Shares").

The issue arose because Salonga and others filed a comment asserting that the government bears
that the conversion is indubitably advantageous to the public interest or will result in clear and
material benefit.

They further postulate that "even assuming that the proposal to convert the SMC shares is
beneficial to the government, it cannot pursue the exchange offer because it is without power to
exercise acts of strict dominion over the sequestered shares." Lastly, they argue that "the
proposed conversion x x x is not only not advantageous to the public interest but is in fact
positively disadvantageous."

The more important consideration in the exercise at hand is the preservation and conservation of
the preferred shares and the innumerable benefits and substantial financial gains that will
redound to the owner of these shares.

ISSUE: Whether the conversion will result in the loss of voting rights of PCGG in SMC and
enable Cojuangco, Jr. to acquire the sequestered shares, without encumbrances, using SMC
funds.

RULING: NO.
The common shares after conversion and release from sequestration become treasury stocks or
shares. Treasury shares under Sec. 9 of the Corporation Code (Batas Pambansa Blg. 68) are
"shares of stock which have been issued and fully paid for, but subsequently reacquired by the
issuing corporation by purchase, redemption, donation or through some other lawful means.
Such shares may again be disposed of for a reasonable price fixed by the board of directors."

A treasury share or stock, which may be common or preferred, may be used for a variety of
corporate purposes, such as for a stock bonus plan for management and employees or for
acquiring another company. It may be held indefinitely, resold or retired.
While held in the company’s treasury, the stock earns no dividends and has no vote in company
affairs. Thus, the CIIF common shares that would become treasury shares are not entitled to
voting rights. And should conversion push through, SMC, not Cojuangco, Jr., becomes the
owner of the reacquired sequestered CIIF SMC common shares. Should SMC opt, however, to
sell said shares in the future, prospective buyers, including possibly Cojuangco, Jr., have to put
up their own money to acquire said common shares. Thus, it is erroneous for intervenors to say
that Cojuangco, Jr., with the use of SMC funds, will be acquiring the CIIF SMC common shares.

Turner v. Lorenzo Shipping Corp

G.R. No. 157479 : November 24, 2010

FACTS:
The petitioners Philip and Elnora Turner held 1,010,000 shares of stock of the respondent
Lorenzo Shipping Corporation, a domestic corporation engaged primarily in cargo shipping
activities.

In June 1999, the respondent decided to amend its articles of incorporation to remove the
stockholders’ pre-emptive rights to newly issued shares of stock. Feeling that the corporate move
would be prejudicial to their interest as stockholders, the petitioners voted against the
amendment and demanded payment of their shares at the rate of ₱2.276/share based on the book
value of the shares, or a total of ₱2,298,760.00.

The respondent found the fair value of the shares demanded by the petitioners unacceptable. It
insisted that the market value on the date before the action to remove the pre-emptive right was
taken should be the value, or ₱0.41/share (or a total of ₱414,100.00).

The disagreement on the valuation of the shares led the parties to constitute an appraisal
committee.

the appraisal committee reported its valuation of ₱2.54/share, for an aggregate value of
₱2,565,400.00 for the petitioners.

Subsequently, the petitioners demanded payment based on the valuation of the appraisal
committee.

The respondent refused the petitioners’ demand, explaining that pursuant to the Corporation
Code, the dissenting stockholders exercising their appraisal rights could be paid only when the
corporation had unrestricted retained earnings to cover the fair value of the shares, but that it had
no retained earnings at the time of the petitioners’ demand, as could be seen in its Financial
Statements for Fiscal Year 1999 showing a deficit of ₱72,973,114.00 as of December 31, 1999.
Upon the respondent’s refusal to pay, the petitioners sued the respondent for collection and
damages.

ISSUE:
Whether or not the petitioners-stockholders can recover the value of their shareholding. – NO.

RULING:
A stockholder who dissents from certain corporate actions has the right to demand payment of
the fair value of his or her shares. This right, known as the right of appraisal, is expressly
recognized in Section 81 of the Corporation Code, to wit:

Section 81. Instances of appraisal right. – Any stockholder of a corporation shall have the right to
dissent and demand payment of the fair value of his shares in the following instances:

1. In case any amendment to the articles of incorporation has the effect of changing or
restricting the rights of any stockholder or class of shares, or of authorizing
preferences in any respect superior to those of outstanding shares of any class, or of
extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all
or substantially all of the corporate property and assets as provided in the Code; and
3. In case of merger or consolidation. (n)

Clearly, the right of appraisal may be exercised when there is a fundamental change in the
charter or articles of incorporation substantially prejudicing the rights of the stockholders.

Notwithstanding the foregoing, no payment shall be made to any dissenting stockholder unless
the corporation has unrestricted retained earnings in its books to cover the payment. In case the
corporation has no available unrestricted retained earnings in its books, Section 83 of the
Corporation Code provides that if the dissenting stockholder is not paid the value of his shares
within 30 days after the award, his voting and dividend rights shall immediately be restored.

[Unrestricted retained earnings refer to profits a business has accumulated since its creation that
it has not distributed to stockholders as dividends.]

The trust fund doctrine backstops the requirement of unrestricted retained earnings to fund the
payment of the shares of stocks of the withdrawing stockholders. Under the doctrine, the capital
stock, property, and other assets of a corporation are regarded as equity in trust for the payment
of corporate creditors, who are preferred in the distribution of corporate assets.

The creditors of a corporation have the right to assume that the board of directors will not use the
assets of the corporation to purchase its own stock for as long as the corporation has outstanding
debts and liabilities.
There can be no distribution of assets among the stockholders without first paying corporate
debts. Thus, any disposition of corporate funds and assets to the prejudice of creditors is null and
void.