TITLE VII — stocks AND STOCKHOLDERS et PROBLEMS: 1 @ Sue ree of “xX” Corporation, assigns his shares of stock to 'B for a valuable consideration, ‘Tho certificate of atock was thereupon delivered to “B.” A few days later, “A” died. The heirs of “A” in a Deed of Extrajudicial Partition adjudicated his shares of stock to his son “C.” In the meantime, “X” Corporation declared cash dividends and sent the corresponding notice to ‘A’s” address, “A,” being the registered owner of the shares of stocks in the books of the corporation. “C” received the notice and by virtue of the aforestated Deed of Partition claimed payment of the dividend. “BY likewise claimed payment, asserting ownership of the shares by virtue of the assignment made by “A.” Who has the better right? A: “C” has the better right. A transfer of shares is not binding on the corporation if the same is not registered in the books of the corporation. Thus, the transfer must first be registered in the name of the transferee in the books of the corporation before he can maintain an action for dividends. (See Section 62, RCCP, previously Section 63, Corporation Code) However, as between “C” and “B,” the transfer is already valid because the transfer is binding on the parties and their successors in interest. Thus, “B” can file an action against “C” to recover the dividends. (1981 Bar) 2 @: Mr. Cruz purchased from Mr. Guzman shares of stock of a mining corporation, which shares were covered by several certificates indorsed in blank by Mr. Virgilio Malic in whose name the same was registered in the books of the corporation. It was later discovered that the said shares have not been sold or otherwise disposed of by Mr. Virgilio Malic, but had been stolen from where they were kept. Who is entitled to said shares, Mr. Cruz or Mr. Malic? Reason. A: Mr. Malic is entitled to the shares. The transfer to Mr, Cruz is not valid because it was not sanctioned by Mr. Malic. Transfer by Mr, Guzman of the shares to Mr. Cruz confers no title because the former has no title to the shares. In addition, the Corporation Code, now the RCCP, provides that no transfer of the shares of stock shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation. The transfer was not registered in the name of Mr. Crug; it follows that the transfer allegedly effected by Mr, Guzman to Mr. Cruz, is not valid even against the corporation, (Section 63, n Code, now Section 62, RCCP; De Los Santos vs, Forperntil ary 28, 1956). (1982 Bar) McGrath, L-4818, Febru Scanned with CamScanner638 ICE ON, AND JURISPRUDEN( NATED CORPORATION CODE ee OF THE PHILIPPINES f the cap; i has i ame 1,000 shares of a Ricci hae, in Metion as evidenced by a stock cor ty CORPO Hu lode certificate to Erica, who TOW claims SB tear the shares, having paid for Ricci's guy, ety, real 0 PO i i d regiate, tin, tion refused to recognize and regiser Coen: ie refusal justified? Explain. Bee ownership. 0 to recognize and Tegister p.. The refusal Pratea. For a transfer to be valid and yt othe corporation the share must be indorsed by the" eat i ent and the transfer must be recorded in the boda the Paeeadlant The stock certificate for the 1,000 shane question is in the name of Ricci and it does not appear th same was duly endorsed by Ricci at the time it was delivagit Erica. (1996 Bar) “A” is the registered owner of Stock Certificate No. 00001), sional the possession of said certificate to his best fe “B” who borrowed the said endorsed certificate to support fy application for passport (or for a purpose other than tranef But “B” sold the certificate to “X,” a bona fide purchaser wis relied on the endorsed certificates and believed him to be the owner thereof. a) Can “A” claim the shares of stocks from “K"? Explain. b) Would your answer be the same if “A” lost the stock certiiae in question or if it was stolen from him? No, A may not claim the shares from “X". A estopped fon questioning the transfer. “A” placed “B” in such a position tht it appeared to third parties that he (" ”) is the owner of the shares. The certificate of stock covering said shares was dif endorsed by “A” and entrusted by him to“B." Co ths answer Would not be the samé, Article 659 ofthe Ni Civil Code provides that one who has lost any movable ot een unlawfully deprived thereof, may recover it from the Pe of assession of the same, In the Present case, if the cert! ceniek 88 lost oF stolen from "arm sae heen ant to di haw aitte Of tock from the thief or he sienna’ #5 no right or title to the same, (2001 Bar) reap 2, 1994, tho Board ot Directors of MSC ata floor paclition authorizing the ealence ao anissued 2 Class A aunt pr °*,2400,000.00 und: Pago.000 00 pet his interest to parP’*tively. On July 7, 1996, Mr. H ‘am included in the t,t #hare nd requosted that bis wort "hewise expr ink 8 November 1805, M COE terest in acquiring a share of MS° scanned with CamScannerTITLE Sol Vil — STOCKS AND STOCKHOLDERS CJ one Class “A” wa: i Bank, The cortigeas tted for P1,800,000.00 through Urban ‘te was actually issued onl; is6e! ued only on January 5, ceotiton be Se 16, 1995, the Deed of “Absolute Sale was 27, 1995, M Corpo eng M Corp: for such purpose, On December offer to resell the mation sent a letter to MSC giving notice of its oferta tesa 3p share and for MSC to exercise its pre-emptive | MSC and Mt 7 sy-Laws, It appears that while the sale between | negotiations bearP, was Still under negotiations, there were Pee tecanions between M Corp. and Mr. H for the purchase by e latter of a share. On November 24, 1995, Mr. H paid M Corp. | P1,400,000.00. Another payment of P1,400,000.00 was made | by Mr. H to M Corp. on December 27, 1995, to complete the | purchase price of P2,800,000.00. On February 7, 1996, MSC was advised of the sale by M Corp. to Mr. H. MSC thereafter filed an action for damages alleging that M Corp. should be made to pay the sum of P1,000,000.00 to MSC, representing the amount MSC had been allegedly defrauded, together with interest and damages. Will the action prosper? No, the action will not prosper. Undeniably, on December 27, 1995, when M Corporation offered for sale one Class “A” share of stock to MSC for the price of P2,800,000.00 for the latter to exercise its pre-emptive right it legally had the right to do so since it was already an owner of a Class “A” share by virtue of its payment on November 28, 1995, and the Deed of Absolute Share dated December 15, 1995, notwithstanding the fact that the stock certificate was issued only on January 5, 1996. A certificate of stock is the paper representative or tangible evidence of the stock itself and of the various interests therein. The certificate is not a stock in the corporation but is merely evidence of the holder's interest and status in the corporation, his ownership of the share represented thereby. It is not equivalent to ownership under the law. It expresses the contract between the corporation Jnolder, but is not essential to the existence of a ance ce or the nature of the relation of shareholder to the corporation. M Corp. properly complied with the requirement of the By-Laws on MSC’s pre-emptive rights, MSC failed to repurchase the Class “A” share from M Corp. ” that M Corp. was not yet a Neither can ise aire of stock when the latter offered ' f the a registered owner ‘er to void the transfor from M Corp, to Mr. it for resale, orn obligation to register i ministerial upon ae ship of the share of stock. The the buyer's acquisition of Roderic Laws, or the act of its ‘ AF its be 4 exroration either by ds atrictions in stock transfers, (Makati ricer ca tnc. v. Cecile H. Cheng, ot ly OR: No- 178638 June 16, 2010) ‘Scanned with CamScannerAND JURISPRUDENCE ON am CONN EAT CORPORATION CODE THE Ree pHE PHILIPPINE’ ce of Stock Certificates, _ 0 | be Issued to a subscriber nti, scription together with Inte f delinquent shares), if any Ip SEC. 63. /ssuan certificate of stock ancl the full amount ofthe ps and expenses (In case due, has been pald. NOTES . Stock, Certificate. Stock Certificate is defined us writen instrument signed by the proper ofr of 8 corportin stating or acknowledging that the person named in the docune je the owner of a designated number of shares of its stock," certificate of stock is the paper representation or tangible evidens, of the share but it is not the share itself.'’ The certificate is not thy stock in the corporation but is merely evidence of the holder's interey, and status in the corporation. It is the evidence of the shareholder, ownership of the share represented thereby but it is not in the lay equivalent of that ownership. It expresses the contract between the corporation and the stockholder, but it is not essential to the existence of a share or the creation of the relation of shareholder to the corporation.'“* a, A certificate of stock is the evidence of a holder's interes and status in a corporation. It is prima facie evidence that the holder is a sharcholder of a corporation.” However, evidene can be presented to determine the real owner of the shares.” It should also be noted that possession of the stock certificate not the sole determining factor of one’s stock ownership. Othe Pieces of evidence may also be accepted to prove that a persons “Teng v. Securit 17, 2016. “es and Exchange Commission, GR, No. 184982, Fo" mu ‘i wen oe ee Uife . Court of Appoals, 298 SCRA 92 (1998) {'La0v. Lao, Gt No, yom MEH 3, 1992, 208 SCRA 740, 149. Securities and Exchange Commis, 85, October ¢, 2008, 667 SCRA 658 cited in TO ra, ™Bitong v. Court of A; supra, wo (1806), “Peale. G.R, No, 129668, July 19, 1998, 29280" Borgofia v, Abra Col ‘ lege "Donnina C. Haley. preset? OR. No, 264086, July 26, 2018. Tne, Vv. Printy well, Ine., G.R, No, 157649, May 30, 201 scanned with CamsScannerTITLE VII — stocKs AND STOCKHOLDERS bide and unissued capital stock in favor of the person who claims to be a shareholder, secretary's certificate, Minutes of Meetings and other aoa Information Sheet, b, It is also an evidence that the shi ic areholder named therein have fully paid the subscription price considering that the cortifiente will not be issued until the same price is fully paid. 1.01, Requirements for Issuance, “Tho man: i of certificates of stock is generally regulated by Te cane by-laws. ws The stock certificate is not validly issued if it does not comply with the prescribed: form and other conditions imposed by Sections 62 and 63 of the RCOP, Thus, a certificate of atock can be issued only upon compliance with these requisites:!° (1) The certificate must be signed by the president or vice-president, countersigned by the secretary or assistant secretary; (2) The certificate must be sealed with the seal of the corporation; (3) The certificate must be delivered: (4) The full amount of the subscription (together with interest and expenses for delinquent shares) must first be fully paid; and (5) The original certificate must be surrendered where the person requesting the issuance of a certificate is a transferee from a stockholder. a. In connection with the first requirement, it has been observed that a mere typewritten statement advising a stockholder of the extent of his ownership in a corporation without qualification and/or authentication cannot be considered as a formal stock certificate,157 b. There is no issuance of a stock certificate where it was never detached from the stock books although blanks therein were **Borgofia v, Abra Colleges, Inc., supra. : Doni ley v, Printwell, Ine., supra, tone sagen va Exchange Commission, O.R. No, 184992, February 17, 2016, 7 *°Bitong v, Court of Appeals, supra, "Dia. aad Scanned with CamScannerISPRUDENCE ON IES AND ORATION CODE ENTART p CORPORA’ 642 CONE ne PHILIPPINES whose name is inserted th. if the person . The elem ein properly filed uni ook of the company ent that ws er 168 no control Over "sent. | . must be delivery’ of stock may be issued with the con; or A certificate he names of the parties who are Congye tt and/or” placed between ierstood that the shares covereg Me, of sid shores and it sferred upon the endorsement of . be trans 7 cniate may ders andthe right © vote the share ay! ft egiclied by both or any of them" e The stock certificate must beissued toa named Subseib d. nsidered quasi-negotiable, it cannot be issued t Althoud Gatienes must be issued only t0 registered oyna, earer. ; stock in a corporation.’ e. The stock certificate itself once issued is a Continuing affirmation or representation that the stock described there is yal and genuine and is at least prima facie evidence Bhat it was legelly issued in the absence of evidence to the contrary." f. In connection with fifth requirement — surrender of the original certificate — it was explained that the same is necessary that the old certificate may be cancelled. “A corporation is not bound and cannot be required to issue a new certificate unless the original certificate is produced and surrendered. Surrender and cancellation of the old certificates serve to protect not only the corporation bit the legitimate shareholder and the public as well, as it ensures that there is only one document covering a particular share of stock.” 2. Authority to Issue. It is also an implicit requirement ft Piauanes otis certificate that the corporation must be authorized certificate if ihe ee instance, the corporation cannot issue a st ere are no unissued shares in the company. It is bss" without authority and in violation hts on the person to whom it is iss ties. Where there is an inherent la Principle that a stock j law is voi ek issued and subj id and confers no ri A 10 rig jects him to no liabiti ebro Scanned with CamScannerTy eat TELE VII — STOCKS AND STOCKHOLDERS ss power in the corporation to iss; nor the person to whom the st; its validity is being question create a stock which under ¢ ‘ue the shares, neither the corporation ‘ock is issued can invoke estoppel when led since an estoppel cannot operate to he law cannot have existence. 3, Stockholder’s Rj, issuance of a stock certificat, one a stockholder, every stockholder has a. The stock certificates may be issued in the name of the owner or even directly to his nominee,1® The shares may also be placed in the name of a trustee in accordance with a trust agreement entered into by the parties,2°7 4, Principle of Indivisibility of Subscription. Section 63 implicitly sets forth the doctrine that a subscription is one, entire and indivisible whole contract." It cannot be divided into portions, so that the stockholder shall not be entitled to a certificate of stock until he has remitted the full payment of his subscription together With any interests and expenses, if any is due. All partial payments on one subscription shall be deemed applied proportionately among the number of shares. To permit the issuance of stock certificate for Payment of a subscription that does not cover the entire number and value of the shares subscribed would be in violation of Section 64 of the Corporation Code (now Section 63 of the RCCP)." If the indivisibility of the subscription is not upheld and “the subscriber becomes delinquent in the payment of subscription, the corporation may not be able to sell as many as his subscribed shares as would be necessary to cover the total amount due from him, which is authorized under Section 68 [now Section 67, RCCP].”"” 'Bitong v. Court of Appeals, supra. “SEC Opinion dated January 6, 1999. **SEC Opinion dated January 14, 1994, “"Bitong v. Court of Appeals, supra. 'SEC-OGC No, 10-16 dated April mA. NSE ion dated November 12, 1993. = *SEC-006 Onin ‘No, 16-06 dated March 31, 2016, scanned with CamScannerENCE ON JURISPRUD! ES AND ION CODE COMMEND CORPORATES 44 THE * THE PHILIPPI the Supreme Court all th tT paymantfor'the corres a ji ld Ce Pong mamber of onan Gulf Blecric P the legislative delibes’®8 ar v. Lin ol 3 Tati SC pointed out that 8 PorCode (now Section 63 of the R; ct Section 64 of the Corporation OTF abandoning such rug otet It should be ee eas ive inten' shows the legislative re ffect of partial payment on the right to trang b. The effe is wise: “If the stockholdey hale ‘ SEC in this wise: 8 ra ee al enmant of his subscription, he cannot transfe, pai ee art iin vi indivisible nature of subscription Contract, 1, See eee eat af tho stnle aubooription (hats stack can transfer the same to several transferees. However, the entire subscription, although not yet fully paid, may be transferred a single transferee, who as a result must assume the unpaid balance, It is necessary, however, to secure the consent of the Corporation since the transfer of subscription right contemplates a Novation of contract which under Article 1293 of the Civil Code of the Philippine, cannot be made without the consent of the creditor.”172 ° c. Likewise because of the principle of indivisibility of subscription, a. stockholder may not assign the. balance of the subscription to third persons in sul 5. Remedies fc shareholder if hove’, F Non-Issuance, The remedies of the Cory i are as follows: Poration unduly refuses te issue actertificate 1 ‘ , : Action for Specific Performance: 2) Action for dai Performance lathes Mages if Specific y ml SCRA 529, April 10, 2010; si P. 2342, vy, 3 } SEC Opinion’ Match 14, MMgn¢, Pinion dated Nov 1980; gE, ae gate! April 11, Te5oce OPinion No, rotamer 12, eee Opinion No. 10-16 lated - SPC-08C OFinon ng fa Psil23, 2010, citing SEC Opinion “°505 dateg j March 31, 2016, all Scanned with CamScanner atedTn - ‘LE VIL STOCKS AND STOCKHOLDERS oe (3) Petition f eri nee thd ‘OF mandamus for the issuance of the (4) Rescission of the subscriptior { consequent mutual restituti ‘ption agreement with the on, 8 Forged or Spurious jsa void certificate. If the officers PROBLEM: Q@: Mr. Balimbing signed a written subscription for 100 shares of stock of Laban and Co., paying 25% of the amount thereof. The corporation subsequently became insolvent due to a series of financial reverses, Mr. Balimbing demanded from the Corporate Secretary the stock certificates corresponding to 26 shares which he claimed was already paid. Since the corporation was insolvent, Mr. Balimbing refused to pay for his remaining unpaid subscription. a. Can the Corporate Secretary validly refuse to issue stock certificates in the name of Mr, Balimbing for 25 shares despite the payment of 25% of the subscription of 100 shares? Reasons. b. Is Mr. Balimbing correct in refusing to pay for the remaining shares, the Company being already insolvent? Reasons. A: a. Yes. The Corporate Secretary validly refused to issue the stock certificate. No certificate of stock shall be issued unless the full amount of the subscription is paid. Since Mr. Balimbing paid only 25% of the subscription price, he cannot demand the issuance of the certificates. b. No. Mr. Balimbing has no right to refuse to pay the balance of the subscription price. The subscribed capital is deemed to be held in trust for the creditors of the corporation, While as a rule, a call is necessary to make the obligation to pay due and demandable, the same is not necessary if the corporation becomes insolvent, ‘The obligation to pay arises when the corporation becomes insolvent because tho trust fund is now necessary to discharge corporate liabilities, (1988 Bar) "“SEC Opinion dated October 9, 1992. Scanned with CamScannerPine eve SN 5g AND JURY DE sysnTaRlls, conPORAT ON CO COMME REV HE PHILIPPIN 646 ol ba enn a tayeceet 6.64. Lr of COT Ore ideration less gi {director OF OF stocks for a on the ‘SS tha, i jssuance ol jue consents ie Issuance tot! oF ued val ideration other than cash, vaiye, its pa ra cons! (c) having knowledge ot fol ; OF ‘of stocks of its fair value; on, does not file a Written one iderati tid insufficient Te corporate secretary, shall be ie objection tion or its creditors, solidarily with the to the corp encerned for the difference between the stockholee at the time of issuance of the stock Pi N aoa or issued value of the same. NOTES ks. Watered stocks are stocks that a, Jess than the par or issued price therestm Strictly speaking watered stocks should be distinguished from bonus stocks. Bonus stocks are stocks that are issued without any valuable consideration. However, bonus stocks are also covered by the prohibition under the first sentence of Section 61 of the RCCP (previously Section 62 of the Corporation Code). 2, Rationale. The prohibition against watered stocks is consistent with the general rule that an agreement between the corporation and a particular subscriber by which the subscription is not to be payable or is to be payable in part only cannot be either enforced by the subscriber or interposed as a defense in an acti on the subscription.’” The rule applies whether the purpose eeapeatient is to pretend that the stock is really greater tht stockhalde purpose of preventing the predominance of certs! s, or for any other purpose that is illegal and void, 0" fraud of other stockholders i ine or creditors or both.)”8 SEC. 65, 1. ‘Watered stoc! issued for a consideration F Interest on U, sation’. < Subs: Inpaid Subscription: for Wheat Stocks shall be liable to the Corporation Subscription, e} unpaid Subscriptions from the date ° fixed in the cubes duited by and at the rate of interest ubscription contract. If no rate of interes Section 6 5, Corporati Nati oration Co ; epi ‘| Now Section 64, RCCP. ange 8 Company v. Dexter, 51 Phil. 601, Februaty 2% Scanned with CamScannerTITLE vit — is fixed in the subscri rate shall apply, SEC. 66. Payment of Balance of Su - Subject to the provisions of the subuctintgn. ‘conedet the board of directors may, at any time, declare due and payable to the corporation unpaid subscriptions and may collect the same or such percentage thereof, in either case, with accrued interest, if any, as it may deem necessary. STOCKS AND STOCKHOLDERS hi | tion contract, the prevailing legal | | Payment of unpaid subscription or any percentage thereof, together with any interest accrued, shall be made on the date specified in the subscription contract or on the date stated in the call made by the board. Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance, unless a different interest rate is provided in the subscription contract. The interest shall be computed from the date specified, until full payment of the subscription. If no payment is made within thirty (30) days from the said date, all stocks covered by the subscription shall thereupon become delinquent and shall be subject to sale as hereinafter provided, unless the board of directors orders otherwise. NOTES 1. Liability. 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 incontestable.” a, Since stock subscriptions are considered a debt of a shareholder to the corporation, the shareholder who has not fully paid the subscription price may be subject to garnishment or may be sued for the recovery of the indebtedness to the corporation under Rule 39 of the Rules of Court." Nava v, Peers Marketing Corporation, G.R, No, 128120, November 26, 1876, 75 SCRA 66; Velasco v. Poizat, G.R. No. 11628, March 16, 1918, }atitano II v. Hon, Judge Tibing A. Asaali, G.R. No. 174982, September 10, 2, 201 Scanned with CamScannerISPRUDENCE ON ENTARIES ANT SATION CODE com cor! 7 a THE Sa PHILIPPINES CCP provides that the 1 ay at any time declarg aw ¢ f Soction 66 o n Seay a id subscriptions to the Capitals ay Directors of any 8t0°! unpa thereof, in gig, Ma, corporation ercontage AN ithe, Pa et the same or sus Pt ay deom necessary, ty, and ma} , if any, : d intoreat, © the resolution or peel desena, hat the unpaid Ta able without eet of the Board that ¢ tion is not due and payé 4 Ut the o4 The unpaid eubscrip' file an action to recover the unpaig Brigg i ion cannot ; until a call is made, eee Bat preceded by a call; until a ¢ 70 cause ion accrues.!*" acti b. ‘The Board's call can be for the payment Ms ihe total Unga subscription price or it can be payment on instal ment bei However, this presupposes that there is no SE a asto the time of payment in the subscription contract. Ifa Period is specified in the subscription contract, then the Board cannot disregard the Derio agreed upon.'8 with accrue a, A call ia therefor c. _ Acall cannot be made on only some of the subscribers, [t cannot likewise make some of the subscriber pay a higher rate than others because calls must operate uniformly upon all subscribers and cannot be oppressive and discriminatory, 1% 2.01. When Not Necessary. A call is not necessary in two cases: (1) when the date of Payment is specified in the subscription alien and (2) aan oe corporation becomes insolvent. ‘No essary when a sul scription is payable, not upon call or demand by the ides a stockholders, but immediately, or on @ Spe 7 Defore a specified da hen it is payable in installment, i 7 Ys or when it is p 7 tay nat times, In such Cases, it is the duty of the as it is due, without at, ae or installment thereof as 00 e] action may be brought at any imate” and, if he fails to do s0, & Lingo. Lingayen Gute 20,08, iM Hectic Powey Company v, Baltazar G.R) No, L-4824, Just Section 66, Rog : SS ESCOS a P; 8) ¥ MeIpig, EC-0G¢ Opinion No, 16-05 dated March 81, 2016 “OCC Opinio, ul No, 16, Vela cv. Polat, supra Ss daa Moreh iranda v 1982 citing Mletchon ¢° Tae Ri * Cyclopedia o°° Compan, f the Law a? of 81, 2016, by bet ies GR, No. L-95961, Deceit, ‘orporations. Vol, 2. P: 10)" Scanhed with CamScannerTITLE vin EVI — stocks anp STOCKHOLDERS mo a. Anexceptio unpaid eubscrindes ae pene that cal is necessary to make the When insolvency superye, Payable is in case of insolvency. solvency Nes upon a corporation N snes and the court assumes jurisdiction to wind it up, all unpaid stock subscripti become payable on demand and einan action beco : are at once recoverable in an action instituted by the assignee or Teceiver appointed by the ae or 3. NoSet-Off. A corporatio, due to an employee the latter’s uy edu tantbe rio det-bE? if tet 4 npaid subscription of shares. There subscription. In the absence of a notice or call for payment, the subscription price is not demandable.\* a: a. The corporation cannot withhold cash dividends from the subscribers who have not fully paid their subscription unless the subscribers are delinquent or if the stockholders give their consent thereto. Additionally, a stockholder’s indebtedness to a corporation for unpaid subscriptions cannot be compensated with the amount of his shares in the corporation (even those issued as stock dividends), there being no relation of creditor and debtor with respect to the shares. This rule against non-application applies even if the shares are delinquent because the rulé is that stock dividends are only withheld from the delinquent stockholder until the unpaid subscription is fully paid.!* “To allow the stocks issued pursuant to the declaration of stock dividends as payment to unpaid subscription would be, in effect, re-acquiring its own shares, which is not allowed under Section 41 of the Corporation Code (now Section 40 of the RCCP) which enumerates instances and conditions wherein acorporation can legally purchase or acquire its own shares.”!% 4. When the Shares are Delinquent. Section 66 of the RCCP provides that if within 30 days from the date fixed in the subscription contract or in the call, no payment is made, all stocks covered by said subscription shall thereupon become delinquent. No further action is therefore necessary as the shares automatically “Velasco v, Poizat, supra. FE " 188A pocada v. National Labor Relations Commission, G.R, No. 80089, April 18, 1989, 172 SCRA 442, 445, ¥8§SEC.OGC Opinion No. 16-06 dated March 31, 2016, Ibid. ™'Section 42 (par. 1), RCCP. ™SB0-0GC Opinion No. 16-05 dated March 31, 2016. Scanned with CamScanner3g AND JURISPRUDENCE ON COMMENTARIES AO pOItATION CODE 650 THE RE THE PHILIPPINES er the 80-day period. The Phragg , ors otherwise” in Section 6g (rele n Code) means that the Boarg mary, t status of unpaid subscription Yor, 3 there is an order from the Boat Le i ft + delinquent al vet poart of directors a or jon 67 of the Corpo fhe removal of the dating the delinquency remains PROBLEM employed in MAIA Corporation. He subscribed, @ Victor wir corporation at P100.00 per share or a total of Pisq?,\i% share a itial down payment of P37,600.00. He was 9% President and General Manager. Because of his disagreement yi" rectors, he resigned and demanded Payment of hig Ee Era of living allowance, his bonus, and reinborngt his gasoline and representation expenses. MAIA Corporation a4 that it owed Victor P40,000.00 but told him that this will be applied, the unpaid balance of his subscription in the amount of P109, There was no call or notice for the payment of the unpaid Subscript, Victor questioned the set-off. a. May MAIA set-off the unpaid subscription with Victor cig for salaries? b. Would your answer be the same if indeed there had been aca] for the unpaid subscription? A a No, MAIA cannot set-off the unpaid subscription with Vietors claim for salaries, A call is still necessary to make the unpaii subscription due and demandable. No such call was made inthe Present case. b. Yes. The reason is that Victor i i 4 a ‘or is entitled to the payment of his salaries which MAIA has no right to withhold in payment will be withheld for the i : payment of the unpaid subscript ocada v. NLRC, 172 SCRA 442) (1994 Bar) SEC, EC. 67, Delinquency Sale. - The board of directors may, b and. shalt spuition, Order the sale of delinquent stock Pecifically state the amount due on each st accrued Interest, and the date, time havtlch shall not be tess than thirty 6 the avert (60) days from the date | Scanned with CamScannerTITLE VII — stocks AND STOCKHOLDERS 651 Notice of the sale, with a Copy of the resolution, shall be sent to eve, delinquent stockholder either personally, by registered mall, or through other means provided in the bylaws. Tie Same shall be published once a week for two (2) Consecutive weeks ina newspaper of general ci ulation in the province or city Unless the delinquent Stockholder pays to the corporation, on or before the date specified for the sale of the delinquent Stock, the balance due on the former's subscription, Plus accrued interest, costs of advertisement and expenses of sale, or unless the the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share. The stock’so Purchased shall be transferred to such purchaser ‘in the books of the corporation and a certificate for such stock shall be issued in the purchaser’s favor. The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares. : Should there be no bidder at the public auction who offers to pay the full amount of the balance on the Subscription together with accrued interest, costs of advertisement, and expenses of sale, for the smallest number of shares or fraction of a share, the corporation may, subject to the provisions of this Code, bid for the Same, and the total amount due shall be credited as fully paid in the books of the corporation. Title to all the Shares of stock covered by the subscription shall be Vested in the corporation as treasury shares and may be disposed of by said corporation in accordance with the provisions of this Code. SEC. 68. When Sale May be Questioned. —No action to recover delinquent stock sold can be sustained upon Scanned with CamScanners/t TIN CODE iE RATI NTARIES AYO COME RET PHILIPPINES 652 | . a of irregularity of defor at tock, wai re, ind o! the i ie the: or Sin such action first pays i or in seeking t0 Iding the stock the sum for whi pal : date of tothe pa terest from the date of saig tenders sod, with ton shall be maintained Unless the same was act the legal rate. Med within six (6) months from the dat, a complaint is of sale. R i je ver Un, urt Action to Recor Dai ; : natin in this Code shall Prevent the Sa Tee llecting through court action, the 0! J A oe ais Saag unpaid subscription, with accrueq amou! interest, costs and expenses. NOTES SEC. 6 1. Available Remedies. The first and most special remedy given by the statute if a shareholder is in default in paying the subscription consists of permitting the corporation to put up the unpaid shares for sale and dispose of it in a delinquency sale for the account of the delinquent subscriber. The second remedy isa court action as recognized under Section 69. It is generally accepted doctrine that the statutory right to sell the subscriber's stock is merely a remedy in addition to that which proceeds by action in court and it has been held that the ordinary legal remedy exists even though no express mention thereof is made in the statute.” a. The offsetting of the debt of a stockholder against his a aeatligs i, not Permissible. While the corporation may or to the Stockholder, a stockholder’s indebtedness to # corporation cannot be compensated wi asa’ Shia es 0 the same institution, there hej a ae preunt ob biel tor with regard to such shares ne ne %° elation of creditor and deb 2 Deli Procedure for thedetne, Sale. Secti complied with in a delingne? oe” quency sale on 67 prescribes a mandaioy The steps that must be str) may be outlined in this wis? "Velasco v, Poi “Did, citing trae No. 1165 Wears Me Inston 28, March 1: (Garcia v, Lim hug, Fra Ot Bridge Gay 1918, ampe# 'SEC-0G¢ Opinion noe 59 Phi, 862; SRC Bibb tae be 5. aoe 108 : ion dated Janu: ©. 16-05 dat, - 31, 2016, Scanned with CamScanner‘TITLE VII — STOCKS AND stocKHOLDERS oy @ Resolution, The Board of Directors shall issue a resolution ordering the sale of delinquent stock; (2) Notice. Notice of said sale, with a copy of the resolution, shall be Sent to every delinquent stockholder either personally or by registered mail or through other means provided in the By-Laws; @) Publication. The notice shall furthermore be published. once a week for two consecutive weeks in a newspaper of general circulation in the Province or city where the principal office of the corporation is located; (4) Sale. The delinquent stock shall be sold at public auction to be held not less than 30 days nor more than 60 days from the date the stocks become delinquent; (6) Transfer. The stock so purchased shall be transferred | to the purchaser in the books of the corporation and a certificate for such stock shall be issued in his favor; and (6) Credit of Remainder. The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering the same. 2.01. Contents of Resolution. It is required that the Board resolution shall state the following: (a), the amount due on each subscription, (b) all accrued interest, and (c) the date, time, and Place of the sale. The delinquent shareholder is entitled to a copy of this resolution. 2.02.Winning Bidder. The winning bidder is such bidder who shall: (1) offer to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement, and expenses of sale, (2) for the smallest number of shares or fraction of a share. The winning bidder would then be entitled to the issuance of stock certificates corresponding to the shares that is covered by his or her bid."** 2.03. Cancellation of Sale. The delinquent shareholder may Sctually stop the delinquent sale if he pays to the corporation, on ty before the date specified for the sale of the delinquent stock, the balance due on his subscription, plus accrued interest, costs “*'SEC-OGC Opinion No. 16-09 dated April 26, 2016, Scanned with CamScannerpS AN! MMBNTARIBS “0 PORATION CODE comme REV PHILIPPINES ses of sale. Payment ma - coment, and tically stops the sale, you° by of advertisemen” yey automati er oWeVey delinquent sharehoved upon the order of the Board of Digg 2 . sale may als tion to Recover. After the delinaueney le e , 8 acti holder may fea ena eo venta cei delinquent 5 - od if the following requirements arg const stocks that We! Pligg with: ID JURISPRUDENCE ON 01 654 expen! Jed on the ground of inreputg, ion is fi (1) The action or in the sale itself of the Aetingy Men defect in the notice of sale, stock; intain auch ing to maintain such action f, The party seeking inst or os to the party holding the stock the sum for whigh same was sold, with interest from the date of sale at the lo rate; and (@). The complaint is filed within six months from jy date of sale. SEC. 70. Effect of Delinquency. - No delinquent stock shall be voted for, be entitled to vote, or be represented at any stockholder’s meeting, nor shall the holder thereof be entitled to any of the rights of a stockholder except the right to dividends in accordance with the provisions of this Code, until and unless payment is made by the holder of such d for the amount due on the subscription interest, and the costs and expenses of advertisement, if any. NOTES 1, Unavailable Rights of Delinquents. The delinqet stockholder is not entitled to any right of a stockholder. Ths Section 70 provides that he cannot vote and he is not entitled representation during meetings. The delinquent shareholder cant pe costed asa director and he eannot continue serving as i is onl fal Hehe ar payment that the stockholder will be restore weSEC Opinion dated August 26, 1992. ‘SEC Opinion dated September 30, 1991. scanned with CamscannirTITLE VII — STOCKS AND STOCKHOLDERS 656 The onl ion is the right to ai a. ne ony exception is the right to divi i shareholder is still entitled to dividends Hye on A delinquent nti lends. However, if cash dividends are declared, me ereenas shall be applied to the subscription rice that is due to the corporation. 0; ee dividends, the same n the other hand, as to » the shall be withheld from the delinquent shareholder until his unpaid subscription is fully paid 2. Not Included in Quorum. Delinquent stockholders shall not be cluded in. determining the existence of the required quorum. With respect to election of directors, it is clear from Section 23 that the required quorum is the majority of those entitled to vote, Thus, stockholders who are not entitled to vote because of delinquency should not be included in the determination of the quorum.” 3. Assignment of Rights Not Allowed. Delinquent stockholders (and delinquent members) are not entitled to vote. Hence, voting rights cannot be delegated. Assignment of voting rights is therefore not permitted.2° PROBLEM: @ The Board of Directors of a corporation, by a vote of ten in favor and one against, declared due and payable all unpaid subscription to the capital stock. The lone dissenting director failed to pay on due date, fe, 19 September 1997, his unpaid subscription. Other than the shares wherein he was unable to complete payment, he did not own any share in the corporation, On September 23, 1997, he was informed by the Board of Directors that, unless due payment is meanwhile received, he could no longer serve as a director of the corporation forthwith; would not be entitled to the cash and stock dividends which were declared and payable on September 24, 1997; and could not vote in the stockholders’ meeting scheduled to take place on September 26, 1997. Was the action of the Board of Directors on each of the foregoing matters valid? 4: No. The period of 30 days (reckoned from the date fixed by the Board oF specified in the subscription agreement for payment of the unpaid subscription — 19 September 1997 in this case) within which the stockholder can pay the unpaid subscription had not yet expired. With Tespect to dividends, the delinquent shareholder is not deprived under the law of his right to receive dividends declared. However, the cash dividend declared may be applied by the corporation to the unpaid subscription, (1997 Bar) "Section 42, RCCP. *"SEC Opinion dated February 23, 1999. *SEC Opinion No, 06-12 dated February 16, 2006, Scanned with CamScannerSPRUDENCE ON Se TION CODE [ENTARIES TC oRPORATI Id Shares, Nondetingy, ts of Unpa" ent sec. 71- Right ed shares not fully pald Which arg Holders of site have all the rights of a Stockholde, = al i not delinquen' NOTES holders. A pre-in, ights of Share! COM ora 1, Accrual * Tiareholdet from the moment the Cen 1 ae 4, He is a shareholder fom the incentnn of Incorporation Daiees certain terms and conditions are »,, the corporation. | tion subscriber becomes a shareholder f,, Nt perfection t he holds the shares by virtue of a subscription Contract, moment subscription is pre-incorporation oy ei 7 Be erential the subscriber is entitled to all the a it tfa shareholder from the time he becomes such shareholder. not necessary that the subscription price has been fully paid, Its also not necessary that a certificate of stock is issued, subscriber beco) b. One right which is not available if the shares are nq fully paid, is the right to secure a stock certificate or subsequent transfer registered in the books of the In one case, it was even said that there is no cause of action for mandamus to compel the corporation to register the transfer ifthe corporation has an unpaid claim on the share and no certificate has been issued. The transfer is effective only between the parties 2. - Basie Rights, It was has interest to have any corporation, noted earlier that a shareholder 3 tof the cor i sh the election f or _ ‘poration through the walacte es eat directly Approving specific corporate acts # the following righte osc temedial rights. The alreholder Bi 8 rights even if he has Not yet fully paid his shares: qQ Voting rights (Sec tion 6); Q Ri \ 2 to remove director ection 27); Nava v, Pee . 1976, 7. 8 Marketi . % mah iM Corporation, G.R. No, Lage120, Novem See Notos to Sect "Gamboa v, Teyes Scanned with CamScannerTITLE Vit — STOCKS AND STOCKHOLDERS ool (3) Right to dividends (Section 42), (@) Appraisal right (Section 80); (6) Right to i i same arith ey suance of stock certificate for fully paid (6) _Proportionate wants. articipation i ee assets in liquidation (Bock icipation in the distribution of tion 139); ; (7) Right to transfer stocks in corporate books (Section 5 (8) Pre-emptive right (Section 38); (@) Right to inspect books and records (Section 73); (10) Right to be furnished of the most recent financial statement/financial report (Section 74); (11) Rightto recover stocks unlawfully sold for delinquent payment of subscription (Section 68); and (12) Right to file individual suit, representative suit, and derivative suits. 3. Obligations. Being a shareholder has, concomitant obligations to the corporation, to the other subscribers as well as to third persons in proper cases. The obligations of a stockholder include the following: (1) Liability to the corporation for unpaid subscription (Sections 66-69); (2) Liability to the corporation for interest on unpaid subscription if so required in the subscription contract (Section 65); (3) Liability to the creditors of the corporation for unpaid subscription under the Limited Liability Rule; (4) Liability for watered stock (Section 64); and (6) Liability for dividends unlawfully paid (Section 42). ‘i ii has the right 4. Right to File an Action. A shareholder rig to file three types of actions: (1) Derivative Actions; (2) Individual Actions; and (3) Representative Actions.” Theso actions are meant en *Guy, et al, v. Guy, G.R. Nos. 189486 and 189699, September 5, 2012 Scanned with CamScannergies AND JUtieriON CODE ENT! CORPO! COME REVS ‘PHILIPPINES lder’s interest the stockholde but tly proteet A quse of action need not eye, My, ; {a derivative action, "Pr? 658 dire only to interest ofthe COrPTT, the case ® tothe stockhol oe ‘Actions. These are suits brough, Derivative Acre rs in the name and on behaip',% olders/me! es committed against it, or to py, ! th ron ‘i corporation to seine whenever the officials of the corp.) tt vindicate corporate TA ones to be sued, or have contro) refuse to sue, OF ‘tions are not expressly Provided fo, Ye corporation. Derive OCP although the right to file such a Corporation Com ner rights of shareholders. implicit from impli The general rule is that where a corporation j, i pied party, its power to sue is lodged with its Board of p; inj less, by way of exception, an indivi oF eet ned to institute a derivative suit ie stockholder Mion wherein he holds stocks in order to pote o ndieate corporate rights, whenever the officials of the corportg refuse to sue, or are the ones to be sued, or hold the Control of the corporation. In such actions, the suing stockholder is regarded as, nominal party, with the corporation as the real party in interest, 4 derivative action is a suit by a shareholder to enforce a corporte cause of action. The corporation is a necessary party to the suit ‘And the relief that is granted is a judgment against a third persm in favor of the corporation. Similarly, if a corporation has a defene to an action against it and is not asserting it, a stockholder my intervene and defend on behalf of the corporation.” ctiong i 5.01.Requisites under the Rules. Derivative actions # recognized under the Interim Rules of Procedure Governing Init Corporate Controversies under Republic Act No. 8799 that w# Promulgated by the Supreme Court on March 13, 2001.2” a. Section 1 of Rule 8 of the Interi ides fe i Interim Rules provides the requisites for the filing of derivative action, A stockholdet® member may bring an action i % a the following are present, ‘ion in the name of a corporation P™ () He was a stock! or transactions subj action was filed; holder or member at the time th® ect of the action occurred and the tim” —____ Yu y, Yul of Ruby Industral Cee" Rs No. 177549, June , Majority yl poration v. Lem 18, 2009; Majority St "AM. No. 01-2.04.80, G.R, Nos. 165887 and 165929, Jum Scanned with CamScanner659 ie Articles of In tion, By- Laws, laws or rules governiy corporation, By- Pes ing th ‘i ; to obtain the relief he dedease e corporation or partnership (3) No i i i colapeias ee eeaieal rights are available for the acts or acts (4) The suit is not a nuisance or harassment suit; and (5) The action is filed in the name of the corporation.*” b. ; The rules likewise provide that the court shall dismiss the case if it is a nuisance or harassment suit.*”* Section 2 of Rule 8 provides that “a derivative action shall not be discontinued, compromised or settled without. approval of the court. During the pendency of the action, the court shall approve any sale of shares of the complaining stockholders. If the court. determines that the interest of the stockholders or members will be substantially affected by the discontinuance, compromise or settlement, the court may direct that notice, by publication or otherwise, be given to the stockholders or members whose interest it determines will be so affected.” c. The stockholder is only a nominal party in a derivative action. The real party in interest is the corporation.’ Consequently, the corporation is an indispensable party who must be impleaded in the derivative action.2° The Supreme Court explained that it is the corporation that is the indispensable party, while the suing stockholder is just a nominal party. With the corporation as the real party-in-interest and the indispensable party, the filing of two separate derivative actions is not allowed: Any ruling in one of the derivative suits should already bind the corporation as res judicata 300, Inc. v. Muer, G.R. No. 170783, June 18, 2012; Regional Trial Court of Makati, Branch 142, 561 Sl 5 iis Enterprises, Inc. v. Banco De Oro Unibank, Ii Cc. GR. No. Mst6n positna. ous (Tbe Supreme ‘Court concluded that all the requisites for a derivative suit iy alleged in the Complaint), eevee dew Umale, GR. Nos. 172849 and 172881, September 24, 2014. 29S ecti \M. No, (01-2-04-SC. as a emanrer Inc. v. Go, GIR, No. 161886, March 16, 2007; Gamboa : "RA 40, V. Vietoriano, GR. No. L-40620, May 5, 1979, 90 SC! sass aa eatod ‘Mrust v, Court of Appeals, G.R. No. 121171, December 29, 1998, 300 SCRA 579, 616. 211Cjted in Legaspi Towers 3 Yu v. Yukayguan, supra; Reyes v, Scanned with CamScannerENCE ON, JURISPRUD. i connssXtARteconPORATION CO 660 THE aE THE PHILIPPIN) he sai : lowed to file t same deri, ould be @ les again: Naty, in the other. Nobo e violation of the a) ay it mgt thes’ 4 . ' suit twice, rest) srum-shopping: because it is to look beyon, te of suits and ever inci), a soparate-corporatt eeognition to the silterent identitig “ie pee ivative sults. ca cing casas MT si There is no requirement regarding the number of han a. ere ho will file the i stockholders w! Case, Py Se a meee the solders who own one share each eny i example, the derivative action.” gigoe / can initiate a derivative action only it, i Sct aE ca of the transaction in question and the time of the filing of the action. A transferee who was Not yet g stockholder at the time of the transaction cannot initiate the action, on the theory that a transferee ought to take things as he foun them when he acquired his shares. If the party himself who is the victim of fraud chooses to waive his remedy, the remedy does not belong to the subsequent purchaser.”"* (1) The exception to the rule that the person who will file the case must be a shareholder at the time the transaction was entered into, is a situation where the transactions continue and are injurious to the stockholder or affect him especially and specifically in some other way.2® f, Although the fifth requisite is not included in the Interim Rules, it is a settled jurisprudence that the action brought by the stockholders must be in the name of the corporation, It is a condition tis qua non that the corporation is impleaded or made a party to 8. A stockh 4 older may s : te ot dissipation of corpo 'y sue for mismanagement, wast rate assets because of a special injury to him for Cua, Jr, "Chi, ing v. Subj 10, 2014 (where the petiti icy ee Nos, 181455 and 182008, December 4,200 toners alloys gonY Clu, Ine, G.R, No, 174863, Senta 1 OR. No sient nly .24% of the outstanding sh : pretat ¥. Orozco, supra, fy ee ieee inp iaVilamor, de. v. Uinaie 9 ot peat easy, Tees Nit 172849 and 172681, September cnt Wes tae 4200) hg bl OS Ps 250 any CC Bank v. Cuaderno, 195 pp 1076 4 1967, as oh wien on , 1967), t Scanned with CamScannerTITLE VI — stooxs anp STOCKHOLDERS Son which a salle mithout redress. In effect, the suit is an action for specific performance of an obligation owat i ° of an ol yy the corporation to the stockholders to assist its Tights of action when the corporation has been put in default by the Wrongful refusal of the directors or management to make suitable measures for its protection. The basis of a stockholder’s suit is always one in equity.21 h. A derivative action is Thus, the injury complained of primaril p i y pertains to the corporation so that the suit for relief should be by t she corporation.22 i. A derivative action is also proper when the action is based on the devices and schemes employed by the Board of Directors that amount to mismanagement, misrepresentation, fraud, and bad faith. j. A derivative suit is improper if the complainants, who were former members of the Board of Directors of a corporation, filed the case to question the election of the new set of directors and to protect and enforce their individual right to vote. The case was filed against the new directors who allegedly pushed through with the election even if the complainants had adjourned the meeting allegedly due to lack of quorum. The Supreme Court ruled that the derivative action was improper because the case involved injury to the rights of the complainants.24 5.02.Reason Why Individual Suits Are Improper. An individual action is improper in cases where derivative suits can be filed considering that the catise of action pertains to the corporation. In addition, the Supreme Court adopted the following reasons for not allowing direct individual suit: (1) “the universally recognized rine that a stockholder in a corporation has no title legal or equitable right to the corporate property; that both of these are in the corporation itself for the benefit of the stockholders. In other Words, to allow shareholders to sue separately would conflict with 1Yy vy, Yukayguan, supra; Filipinas Port Services v. Go, supra, “Filipinas Port Services v. Go, supra. *Cua, Jr. v. Ocampo Tan, supra. ™Legaspi Towers 300, Ine. v. Muer, G.R. No, 170783, June 18, 2012, Scanned with CamScannerPRUDENCE ON 8 ANY oR IN CODE MENTARLT CORPORATION “ nn REVIST PHILIPPINES ; inciple; (2) x x x that the Priog ate entity Pr? the Supreme Tigh, the separate Gate e prejudiced. dene ae soaking a , of the creditors ™ Sia ‘Santos, tha stock rant 4 : the case of Buange rs ges for themselves for that would , a directly claim ee gy, and the distribution among them of, tt in the appropriation ro the dissolution of the corporation andy 4 the corporate assets Di Or 4 liabilities, something which canny * liquidation of its del the filing of such suits would conflict with be legally done’ x x x; (8) TT tedtion at it ee duty of the management to 81 eee erat ful multiplicity of suit . (4) it would produce waste! i and (5) it wou involve confusion in a ascertaining the effect of partial recoy, an individual on the damages rect overable by the corporation for the ma same act. ; 5.03.Distinguished from Liquidation. A derivatiy, suit is fundamentally distinct and independent from liquidatio, proceedings. They are neither part of each other nor the necessary consequence of the other. There is totally no justification for a court to convert a derivative suit instituted by stockholders in behalf of a corporation to\a proceeding for the liquidation of the same corporation.” 5.04. Rationale. The Supreme Court explained the basis of the right of a shareholder to file a derivative action in Nora A. Bitong, Court of Appeals, et al.,2** as follows: “It is well-settled in this jurisdiction that where corporate directors are guilty of a breach of trust, not of mere error of judgment or abuse of discretion, and intra-corporate remedy is futile or useless, a stockholder may institute a suit in behalf of himself andother stockholders and forthe benefit of the corporation, to bring about a redress of the wrong inflicted directly upon the corporation and indirectly upon the stockholders. The stockholder's right to institute a derivative suit is not based on any express Be nsian of The Corporation Code but is impliedly recognized when comporating arporate ditectors or officers liable for damages suffered by t# poration and its stockholders for violation of their fiduciary duties. *G.R. No L-1721, May 19, 1950, pss Peel 29, 1998, tiling jaaea ‘rust v. Court of Appeals, G.R. No, 121171, Dé Ballantine, pp, 366.367,” "*7*lal Law of the Philippines, Vol. Ill, p: 686 27Yu v, Yukayeuan, eupra, 'G.R. No. 123553, July 19 Re No, 201676, June 19, 2919 uly 18, 1998; See also Juanito ‘Ang v. Spouses Ané: © jecember citing - Scanned with CamScannerTl ITLE VII — stooKs anp STOCKHOLDERS sd Hence, a stockholder m, a ‘ay ste for mismanagement, waste or Se marae Sespts because ofa special injury to him for which e is redress, In ef p i pelfordinnte of an oblige effect, the suit is an action for specific nee o ‘on owed by the corporation to the " : stockholders to assist its rights of action when the Corporation has been put in default by the wrongful refusal of the direct e measures for its protection, ‘tors or management to make suitable 5.05. Exhaustion of Intra-Corporate Remedies. In order that a stockholder may sue on behalf of the corporation, he must allege with some particularity in his complaint that he has exhausted his remedies within the corporation by making a sufficient demand upon the directors or other officers for appropriate relief with the expressed intent to sue if relief is denied.2 A general allegation in the complaint that intra-corporate remedies were exhausted is not sufficient.2° a. The intent behind the rule is to make the derivative suit the final recourse of the stockholders, after all other remedies to obtain the relief sought have failed." For example, a derivative action will be deemed prematurely filed if the action of the Board of Directors (for the transfer of substantially all of its assets) sought to be annulled has not yet been submitted to the stockholders for their rejection or approval. b. At any rate, equity does not require a useless act.2% While it is true that the complaining stockholder must show to the satisfaction of the court that he has exhausted all the means within his reach to attain within the corporation itself the redress for his stievances, or actions in conformity to his wishes, nonetheless, ee : Reyes y, RTC, G.R. No, 166744, August 11, 2008; See also Ching v, Subic Bay Golf and Country Club, Inc., G.R. No. 174353, September 10, 2014, *Reyes v. RTC, ibid. Cun Je, v. Gesape, ‘Tan, G.R. Nos. 181456-56, December 4, 2009, bid. é 1 1909 *3Heineman v. Datapoint Corporation, 611 A.2d 950 (Del. 1992). Scanned with CamScannerUDENCE ON AND JURISPR! COMMENTARET CORPORATION CODE ces THE RET THB PHILIPPINES 3 complete control of the g jon is under the comP A where the corpora wrongdoer: there is eA necessity of mals who are the allege jrector®. ‘The reason is ol ian a deman, ak emand upon the de gion and prosecute the same eft the Bo aioe useless and an exercise 2 ility. 4 wroaii hay «om of intra-corporate remedy is typically q En of the directors have participated or ap ery c. ne otherwise financially interested ing futile when @ majorit the alleged wrongdoing 0 challenged transaction. (1) There is al exhausting intra-corP n opinion to the effect that futility orate remedy does not ane that thay exhaustint vod whatsoever that the Board will agree 4, Sti ihe shareholder who filed the derivative ae Rether, demand is futile where a reasonable doubt es, that the Board has the ability to exercise its managers power, in relation to the decision to prosecute, within jy Pictures of its fiduciary duty. If the Board’s disability ig, particular transaction is attributable to self-interest or lack independence, then pre-suit demand is not required.* 6. Individual Actions. These are actions brought by the shareholder in his own name against the corporation when a wrong is directly inflicted against him personally and to determine his individual right.” The cause of action pertains to the shareholde and the action is meant directly to protect his interest. a. Astockholder may file an individual action or suit againt another stockholder or even against the corporation itself if he bis sufficient: cause of action. For instance, a denial of the right * inspection and denial of dividends to a stockholder are appropt# causes of action for individual actions.2%° tre vie dt, St, Jv. Ocampo Tan, the Supreme Court cit e rule in American jurisprudence to the effect that 0 derivat* ailipinas Port Services v. Go, se hamen v. Kemper Financial sy tleineman v. Datapoint Cor Guy, et al. v, Guy, 287bi¢, , G.R, No, 161886, March 16, 2007. Services, Inc., 908 F 2d 1338 (1990). ‘poration, supra, G.R. Nos, 189486 and 189699, September 6, 2012 oy) o ' "Gua, de Coca GAR. Nos, 172843 and 172881, Septembe 2598 siting Oakland Raiders v: Netonas Noe: 181485 and 182008, Decemb® 5 gh 62 lational ptr, 84 266, Cal. App. 6 Dist. 2006, 26 fed tesgus, 181 Cal. App: 4 Scanned with CamScannerTITLE Vit — STOCKS AND STOCKHOLDERS (3 suit, on one hand, and individual and class suits, on the other, are mutually exclusive, viz; “As the Supreme Court hag explained: “A shareholder's derivative suit seeks to recover for the benefit of the ‘orporation and its whole body of shareholders when injury ig caused to the corporation that may not otherwise be redressed because of failure of the corporation to act, Thus, ‘the action is derivative, ; tion is der “én in the corporate right, if the gravamen of the complaint is injury to the corporation, or to the whole body of its stock and property without any Severance or distribution among individual holders, or it seeks to recover assets for the corporation or to prevent the dissipation of its assets,’ (Citations)” (Jones, supra, 1 Cal.3d 93, 106, 81 Cal. Rptr. 692, 460 P.2g 464.) In contrast, “a direct action. [is one] filed by the shareholder individually (or on behalf of 4 class of shareholders to which he or she belongs) for injury to his or her interest as a shareholder. ... [T]he two actions are mutually exclusive: ie., the right of action and recovery belongs to either the shareholders (direct action) . or the corporation (derivative action).” (Friedman, Cal. Practice Guic Corporations, supra, 6:598, p, 6-127.) Thus, in Nelson v, Anderson (1999) 72 Cal.App.4th 111, 84 Cal. Rptr.2d 753, the ... minority shareholder alleged that the other shareholder negligently managed the business, resulting in its total late court concluded “[s]hareholders n,” any damages 7. Representative Actions, by the stockholder in behalf of himecl similarly situated when a Wrong is committed against a group of Stockholders, The Supreme Court adopted the following explanation ‘om learned legal writers in Cua, Jr, v. Ocampo Tan,2 These are actions brought f and all other stockholders a Scanned with CamScanner Min‘AND JURISPRUDENCE ON COMMENTAR I CORPORATION CODE 0 :D a RE THe PHILIPPINES mabers ofa corporation based, guitsby stockholders or mee" Oe sons may be classified int. on fraudulent acts of dite ive suits. Where a stockholder op pM suits, class suits, fi inspection, his suit would be individua) Deeg denied the 7, ‘hi m personally and not to the other stockholder ty wrong is a the wrong is done to a group of stockholders, asm corporation. Wher’ rg’ rights are violated, a class or re reves preferred stockholde™" io protection of all stockholders belonging seit CE But “rnere the acts complained of constitute a wrong fo same group. But Wier’ guse of action belongs to the corporation aay corporation itself, ber. Although in most every ae %y indivi ‘holder or member. Al ; to the individual sion, each stockholder is necessarily affected ja wrong est therein would be impaired, this fact of. itselgig bret! ome iin ‘an individual cause of action since the eo je a person distinct and separate from him, and can and should itse the wrongdoer. Otherwise, not only would the theory of separate ‘ap te jolated, but there would be multiplicity of suits as well as a vila, ditors. Furthermore, there is the difficuyy of the priority rights of cret e Setermining the amount of damages that should be paid to each indian stockholder. However, in cases of mismanagement where the wrongful acts az committed by the directors or trustees themselves, a stockholder or menb may find that he has no redress because the former are vested by law wih the right to decide whether or not the corporation should sue, and they wil never be willing to sue themselves. The corporation would thus be helis to seek remedy. Because of the frequent occurrence of such a situatia the common law gradually recognized the right of a stockholder to suea behalf of a corporation in what eventually became known as a ‘derivatite suit. It has been proven to be an effective remedy of the minority agait* the abuses of management. Thus, an individual stockholder is permittd to institute a derivative suit on behalf of the corporation wherein he! stock in order to protect or vindicate corporate rights, whenever ee See side to sue or are the ones to be sued or hold the oo goer Ms ion. In such actions, the suing stockholder is regarded 85 party, with the corporation as the party in interest.” 666 8. Code of Corporate Governance. Stockholder! Ti, ang Zrotection of the minority shareholders are given enti Code of Co ‘009 Code of Corporate Governance. Thus, the said the rights erate Governance provides that the Board shall Mis Code ( the stockholders as provided for in the Com ues (now the RCCP),22 Protection of the minority # bol Cua, Jt Article G Meee Ta Cupra, citing I Campos and CamPo® aug ’ Memorandum Circular No. 6, Series of 2009; See APP" scanned with CamScannerTITLE Vir — STOCKS AND STOCKHOLDERS 667 is also provided for in the 20: Publicly Listed Compania 2 © 4° f Corporate Governance for PROBLEMS: L Q aaa to 1,000 shares of stock. of Rosario Corporatio cof said subscription. During the stockholders meeting, can M 7 i anawene “rey vote all her subscribed shares? Explain your entitled to all the rights of a stockholder upon the perfection of the subscription agreement, which rights include the right to vote during the stockholders’ meeting. (1990 Bar) 2. Q: Asmall stockholder of'a Bank filed a suit praying for injunction to prevent the approval of the appointments of two persons whom he claimed were being appointed to their positions only for the purpose of shielding from criminal prosecution the controlling stockholder, alleged to be committing fraud in the bank affairs, Defendants were the Board of Directors of the Bank, the two persons, whose appointments were being questioned, and the controlling stockholder of the bank. These defendants moved to dismiss the suit on the, ground that a:mere stockholder is not allowed to question the appointments because they were corporate acts. Should the case be dismissed? A: No. A stockholder has the right to file a derivative suit to question the appointments. The directors cannot be expected to nullify the appointments; hence, a stockholder can bring a derivative suit on behalf of the corporation. It would be futile for the stockholder to ask the Board to bring the suit because said Board was the one responsible for the questioned appointments. (1975 Bar) . @ ders of Sesame Corporation filed a court suit % A group osteo Bond of Dror fo ale god ta the shareholders, in proportion to their shareholdings, the losses incurred by the corporation because of the defendant Board of Directors’ management. Will the action prosper? Reasons, i y ders have no right e ion will not prosper, The sharehol sl ~iyfomorandum Circular No. 19, Series of 2019 dated November 22, 2016, Scanned with CamScannerSPRUDENCE ON commEnTARIES AND ORATION CODE co THE rE SE PHILIPPINES «due to the corporation. Moreoye, , er is due to th i Ve for shares 0 whatev' eto against the directors, the 4 if there is & © use OF e corporation. The shareholde, if party to fil the e286 Phe reliefs should be in favor of” jvative st (1988 Bar) ecame stockholder of Prime Real Estate Comoran “a” becam' 1, when he was given one share ae 2 oul him as director. “A” was ng another reece jn duly 1, 1992 annual meeting but he continue elected director Wr Sharcholder of PREC. When he was sti to be a reer ijscovered that on January 5, 1991, PREC issye4 aircon go 10,000 shares to “X,” a lawyer who assisted ing court case involving PREC. “sn i ction in.the name of the corporation Can A euanoo ofthe shares to "X" without receiving any payment? Can “X" question the right of “A” to sue him in behalf of the corporation on the ground that “A” has only one share in his name? Can the shares issued to “X” be considered as watered stock? a, No, It is required for the filing of a derivative suit that the person who initiates the suit was a stockholder at the time of the transaction in question. The transaction’ in question was entered into before Mr. A became a shareholder. However, ifthe act complained of is a continuing one, A may file the derivative suit It does not appear that the act is a continuing one in this No, The right to file a derivatiy i ii Jlders. Bven'a charchelder Wve suit pertains to all sharehol owning one share is entitled to such right. eens shares are those sold by the corporation for less poe Pais honk value. In the instant case, there must be the total par value, of the services rendered by “X” is less tha” such shares ty yu of the shares issued in his name in ordet considered as watered stocks. (1993 Bat) The Boa * ; authoring 1 reetrs of P Corporation approved a resolutio® of J Corporation, 4.3428 Of Up to 100% of the eommon st Directors, Mr. 8, to ary eo" specifically appointed one of 1 Vote all the shaves ee 88 attomney-in-fact and proxy who ©! by Virtue of such pomge, Co*POration in J Corporation. Me Corporation, ‘Ty Boat Was able to constitute the Bot that the payment, Corporation likewise aPP™ 7.) Ment of t} rporation likewise aPP) transferring the real saatyn of J Corporation shall be mae ‘**ty of P Corporation to J Corpor Scanned with CamScannerThe property to be transferred constitutes substantially all of Le ree td P Corporation. The decision of the Board was later ratif ed if e stockholders representing 74% of the outstanding capital. However, before the stockholders’ meeting where such ratification was made, the minority stockholders filed a derivative suit asking the Court to declare null and void the resolution of the Board. Will the action prosper? | TITLE VII — STOCKS AND STOCKHOLDERS CS | | A: No, the action will not prosper. The action of the minority | shareholders should be dismissed for being moot and academic. | Where the issues have become moot and academic, there is | no justiciable controversy, thereby rendering the resolution | of the same of no practical use or value. Since the resolution | of the Board was ratified by the stockholders, the acquisition | by P Corporation of J Corporation is no longer just the act of the Board but also of the stockholders, By ratification, even an iI unauthorized act of an agent becomes the authorized act of the il principal. To declare the resolution null and void will serve no practical use or value or affect any of the rights of the parties because the approval of the stockholders will still remain valid and binding. (Cua, Jr. v. Ocampo, G.R. Nos. 181455 and 182008, December 4, 2009) | SEC. 72. Lost or Destroyed Certificates. - The following procedure shall be followed by a corporation | in issuing new certificates of stock in lieu of those which | have been lost, stolen or destroyed: | (a) The registered owner of a certificate of stock | in a corporation or such person’s legal representative i shall file with the corporation an affidavit in triplicate i setting forth, if possible, the circumstances as to how 1 the certificate was lost, stolen or destroyed, the number HI of shares represented by such certificate, the serial i number of the certificate and the name of the corporation which issued the same. The owner of such certificate of stock shall also submit such other information and evidence as may be deemed necessary; and her information b) After verifying the affidavit and ot and eerie with the books of the corporation, the corporation shall publish a notice in a newspaper of general circulation in the place where the corporation once a week for three (3) has it ipal office, Bel Ts at the expense of the registered Scanned with CamScanner1p JURISPRUDENCE ON COMMENTARIES ANTE ORATION CODE 670 ‘THE NESE PHILIPPINES stock which has been jo, tice shall state the name ¢ oration, to er ret 2 the Corpor raf the certificate the number of shares bel certificate, and shall state tha year from the date of test has been present, the last publi the certificate of ee tion regarding the fant to the corpora ®* jich contest shall be barred and the i mal Oe ton shall cancel the lost, Cen OF Stolen certificate of stock in its books. In lieu hereof, the corporation shall issue anew certificate of stock, unless the registered owner files a bond or other security as may be required, effective fora period of one (1) year, for such amount and in such form and with such sureties as may be satisfactory to the board of directors, in which case a new certificate may be issued even before the expiration of the one (1) year period provided herein. If acontest has been presented to the corporation or if an action is pending in court regarding the ownership of the certificate of stock which has been lost, stolen or destroyed, the issuance of the new certificate of stock in lieu thereof shall be suspended until the court renders a inal decision regarding the ownership of the certificate of stock which has been lost, stolen or destroyed. ificate of ication, Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be brought against any corporation which shall have issued certificate of stock in lieu of those lost stolen or destroyed pursuant to the procedure above" described, NOTES . A ony te ational. The provision is designed & proted only the eal owner but the corporation as wel. The re own Brotected against improvident issuance of another cePtfft', cers to prevent t ing mat? i. hem from being negligene: U i iM e aie 72, except in case of fraud, bad ia Part of the corporation and its officers: "° scanned with CamscanAerTT ‘LE VII — STOcKs AND STOCKHOLDERS Ce may be brought against any corporation which shall have issued a certificate of stock in lieu of that which is lost, stol de d pursuant to the procedure provided in the law. ny ne 2, When Applicable, certificates are lost, stolen or available but are just worn out, up to the corporation to decide if i Section 72 applies only if the destroyed. If the certificates are Section ‘72 does not apply and it is 0 the co c will replace the certificates.” The provision is not also applicable if the certificate was never issued to the shareholder because it was not delivered by the corporation. Section 72 does not apply if it is the corporation i Section 72 ee uot uty poration itself that loses the 3. Outline of Procedure. The procedure under Section 72 may be summarized in this wise: (1) Affidavit. The registered owner shall execute and file an affidavit providing details about the shares represented by the lost certificate and the circumstances regarding its loss/ destruction; (2) Verification. The corporation shall verify the affidavit and other information and evidence with the books of the corporation; (8) Publication. The corporation shall publish a notice in a newspaper of general circulation in the place where the corporation has its principal office, once a week for three consecutive weeks at the expense of the registered owner of the certificate of stock that has been lost, stolen or destroyed; (4) One-Year Waiting Period. There shall be a waiting period of one year from the date of the last publication during which a contest can be interposed; (5) Contest. If a contest has been presented to the corporation or if an action is pending in court regarding the ownership of the certificate of stock which has been lost, stolen or destroyed, the issuance of the new certificate of stock in lieu thereof shall be suspended until the final decision by the court regarding the ownership of said certificate of stock; and — 45SEC Opinion dated July 13, 1993, *6SEC Opinion dated December 4, 1986. Scanned with CamScannerURISPRUDENCE ON 155 AND JON ATION CODE MMENTAR Ty CORPORA’ on CONTE REVISE pHTLIPPINES is no contest within th, ment. If there °e One, (6), Replaorporation shall then rpiace be Certifcan year period, thr vr the certificate can only be made beret The replace the one-year period if aa é Paid, Sect expiration © nat in case the registered owner files bop e 72 provides vi feu thereof as may be eared, eects for te ee beet for such amount and in such form and wih perpen ‘as may be satisfactory it the Boat Of Directoy, i y , ; new certificate in lieu of one lost, stolen or destroyed may by issued even before the expiration of the one-year period, 4, Contents of Notice. The notice shall state (1) the nang of the corporation, (2) the name of the registered owner of the certificate, (3) the serial number of the certificate, (4) the number f shares represented by the certificate, and (5) that after the expiration of one year from the date of the last publication, if no contest has been presented to the corporation regarding the certificate of stock, the right to make such contest shall be barred and the corporation shall cancel in its books the certificate of stock which has been lost, stolen or destroyed and issue in lieu thereof a new certificate of stock, a. __ The requirements of Section 72 are mandatory in nature. For instance, all the facts indicated in Section 72 should be stated in the notice." However, substantial compliance is also acceptable."* 'SEC Opi suapig, PM Aated July 9 1999, Scanned with CamScanner