TITLE VII - STOCKS AND STOCKHOLDERS

Section 60. Subscription contract. - Any contract for the acquisition of unissued stock in
an existing corporation or a corporation still to be formed shall be deemed a subscription
within the meaning of this Title, notwithstanding the fact that the parties refer to it as a
purchase or some other contract. (n)
A person may become a stockholder in a corporation in either of three ways:
1. By a contract of subscription with the corporation;
2. By purchase of treasury shares from the corporation; and
3. By purchase or acquisition of shares from existing stockholders.

A. SUBSCRIPTION CONTRACT
A “subscription”, properly speaking, is the mutual agreement of the subscribers to take and pay
for the stocks of the corporation. A “subscription contract”, on the other hand is specifically defined
in Sec. 60:
SUBSCRIPTION VS . PURCHASE : In the latter, the buyer becomes a shareholder only upon full
payment of the price. UNISSUED shares cannot be the subject of a “purchase”.
“We may add that the law in force in this jurisdiction makes no distinction, in respect to the liability
of the subscriber, between shares subscribed before incorporation is effected and shares
subscribed thereafter. All like are bound to pay full value in cash or its equivalent, and any attempt
to discriminate in favor of one subscriber by relieving him of this liability wholly or in part is
forbidden. In what is here said we have reference of course primarily to subscriptions to shares
that have not been previously issued. It is conceivable that the power of the corporation to make
terms with the purchaser would be greater where the shares which are the subject of the
transaction have been acquired by the corporation in course of commerce, after they have already
been once issued. But the shares with which are here concerned are not of this sort.” (National
Exchange Co., Inc. vs. Dexter)
EXAMPLE : If X corporation had P1M authorized capital divided into 1M shares with a par value
of P1. 500,000 has already been subscribed: 1. Z “purchased” 100,000 of the UNISSUED shares
paying 50% down payment and the balance payable after 6 months, with a condition that he will
not be considered a shareholder until full payment. – He is still liable for the balance because this
will be considered a subscription no matter how the parties refer to it and accordingly, Z is liable
as a shareholder therein. 2. Z was declared a delinquent shareholder and X Co. was declared as
the winning bidder by paying P100,000 and acquired the delinquent shares. Later on, 20,000 of
the shares were sold to Y – here, the shares being from treasury and not from unissued shares,
may be the proper subject of a “purchase” and thus, a condition that Y would not became a
shareholder until full payment may be valid.
FORM : A subscription contract need not be in writing such that an oral contract of subscription
is valid and enforceable under the Statute of Frauds. Thus, it was ruled by the SC that such an
agreement does not seem to fall within the definition of a sale under our substantive law, and is
therefore believed that an oral subscription agreement as distinguished from sale of stock is valid
and enforceable.
CONDITION: Subscriptions may be made upon a condition precedent or upon special terms
(condition subsequent). A conditional subscription, or one made upon a condition precedent, does
not make the subscriber a stockholder, or render him to pay the amount of his subscription, until
performance of the condition. A subscription upon special terms, on the other hand, is an absolute
subscription, making the subscriber a stockholder, and rendering him liable as such, as soon as
the subscription is accepted, the special term being an independent stipulation.
In case of doubt in the intention of the parties, a subscription should be considered as an absolute
subscription upon special terms, rather than conditional. The policy of giving protection to
creditors and other subscribers has led to the adoption of this rule of construction favoring the
immediate liability of the subscriber.
Conditional Subscriptions are valid provided:
(1) there is nothing in the charter or enabling act prohibiting the same; and
(2) provided the conditions are not such as to render their performance beyond the powers of the
corporation or in violation of law or contrary to public policy.

NAZARIO TRILLANA, administrator-appellee, vs. QUEZON COLLEGE, INC., claimant-

appellant (GR No. L - 5003; June 27, 1953)
FACTS: Damasa Crisostomo sent the following letter to the Board of Trustees of the Quezon
College:
June 1, 1948 The BOARD OF TRUSTEES Quezon College Manila
Gentlemen: Please enter my subscription to dalawang daan (200) shares of your capital stock
with a par value of P100 each. Enclosed you will find (Babayaran kong lahat pagkatapos na ako
ay makapag-pahuli ng isda) pesos as my initial payment and the balance payable in accordance
with law and the rules and regulations of the Quezon College. I hereby agree to shoulder the
expenses connected with said shares of stock. I further submit myself to all lawful demands,
decisions or directives of the Board of Trustees of the Quezon College and all its duly constituted
officers or authorities (ang nasa itaas ay binasa at ipinaliwanag sa akin sa wikang tagalog na
aking nalalaman). Very respectfully, (Sgd.) DAMASA CRISOSTOMO Signature of subscriber
Nilagdaan sa aming harapan: JOSE CRISOSTOMO EDUARDO CRISOSTOMO
On Oct. 26, 1948, Crisostomo died. As no payment on the subscriptions appear to have been
made, herein appellant filed a claim in her testate proceedings for P20,000 which was opposed
by the administrator, and dismissed by the CFI.
ISSUE: WON the subscription is valid and enfroceable?
HELD: No. It appears that the application sent by Damasa Crisostomo to the Quezon College,
Inc. was written on a general form indicating that an applicant will enclose an amount as initial
payment and will pay the balance in accordance with law and the regulations of the College. On
the other hand, in the letter actually sent by Damasa Crisostomo, the latter (who requested that
her subscription for 200 shares be entered) not only did not enclose any initial payment but stated
that "babayaran kong lahat pagkatapos na ako ay makapagpahuli ng isda." There is nothing in
the record to show that the Quezon College, Inc. accepted the term of payment suggested by
Damasa Crisostomo, or that if there was any acceptance the same came to her knowledge during
her lifetime. As the application of Damasa Crisostomo is obviously at variance with the terms
evidenced in the form letter issued by the Quezon College, Inc., there was absolute necessity on
the part of the College to express its agreement to Damasa's offer in order to bind the latter.
Conversely, said acceptance was essential, because it would be unfair to immediately obligate
the Quezon College, Inc. under Damasa's promise to pay the price of the subscription after she
had caused fish to be caught. In other words, the relation between Damasa Crisostomo and the
Quezon College, Inc. had only thus reached the preliminary stage whereby the latter offered its
stock for subscription on the terms stated in the form letter, and Damasa applied for subscription
fixing her own plan of payment, — a relation, in the absence as in the present case of acceptance
by the Quezon College, Inc. of the counter offer of Damasa Crisostomo, that had not ripened into
an enforceable contract.
Indeed, the need for express acceptance on the part of the Quezon College, Inc. becomes the
more imperative, in view of the proposal of Damasa Crisostomo to pay the value of the
subscription after she has harvested fish, a condition obviously dependent upon her sole will and,
therefore, facultative in nature, rendering the obligation void, under article 1115 of the old Civil
Code which provides as follows: "If the fulfillment of the condition should depend upon the
exclusive will of the debtor, the conditional obligation shall be void. If it should depend upon
chance, or upon the will of a third person, the obligation shall produce all its effects in accordance
with the provisions of this code." It cannot be argued that the condition solely is void, because it
would have served to create the obligation to pay, unlike a case, exemplified by Osmeña vs.
Rama (14 Phil., 99), wherein only the potestative condition was held void because it referred
merely to the fulfillment of an already existing indebtedness.
In the case of Taylor vs. Uy Tieng Piao, et al . (43 Phil., 873, 879), this Court already held that "a
condition, facultative as to the debtor, is obnoxious to the first sentence contained in article 1115
and renders the whole obligation void."
B. PRE-INCORPORATION SUBSCRIPTION
Pre-incorporation subscriptions make reference to subscriptions for shares of stock of a
corporation still to be formed while post-incorporation subscriptions are those made or executed
after the formation or organization of the corporation.
Section 61. Pre-incorporation subscription. - A subscription for shares of stock of a
corporation still to be formed shall be irrevocable for a period of at least six (6) months
from the date of subscription, unless all of the other subscribers consent to the revocation,
or unless the incorporation of said corporation fails to materialize within said period or
within a longer period as may be stipulated in the contract of subscription: Provided, That
no pre-incorporation subscription may be revoked after the submission of the articles of
incorporation to the Securities and Exchange Commission. (n)
IMMEDIATE BINDING EFFECT : This new provision gives an immediate binding effect on pre-
incorporation subscriptions as against the subscribers of the capital stock of a corporation still to
be formed. Pre-incorporation subscriptions are, in fact, mandatory as may be culled from the
provisions of Sec. 13 and 14 of the Code which mandates that a corporation may be registered
as such only if at least 25% of its authorized capital stock has been subscribed and that at least
25% of the subscribed capital has been paid.
IRREVOCABLE: Pre-incorporation subscriptions are irrevocable:
1. For a period of at least 6 months from the date of subscription unless
(a) all the subscribers consent to the revocation; or
(b) the incorporation fails to materialize within said period or within a longer period as may
stipulated in the contract of subscription; and

2. After submission of the AOI to the SEC.

C. STOCK ISSUANCE
Stock issuance is generally the initial and primary source of corporate capital. Other sources may
include corporate borrowings, loans and advances from creditors or stockholders. Corporate
earnings may also be a source of corporate funds if it is reinvested or ploughed back to the
company.
Section 62. Consideration for stocks. - Stocks shall not be issued for a consideration less
than the par or issued price thereof. Consideration for the issuance of stock may be any
or a combination of any two or more of the following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and necessary or
convenient for its use and lawful purposes at a fair valuation equal to the par or issued
value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares exchanged for stocks in the event of reclassification or conversion.
Where the consideration is other than actual cash, or consists of intangible property such
as patents of copyrights, the valuation thereof shall initially be determined by the
incorporators or the board of directors, subject to approval by the Securities and
Exchange Commission.
Shares of stock shall not be issued in exchange for promissory notes or future service.
The same considerations provided for in this section, insofar as they may be applicable,
may be used for the issuance of bonds by the corporation.
The issued price of no-par value shares may be fixed in the articles of incorporation or by
the board of directors pursuant to authority conferred upon it by the articles of
incorporation or the by-laws, or in the absence thereof, by the stockholders representing
at least a majority of the outstanding capital stock at a meeting duly called for the purpose.
(5 and 16)
“ISSUE”: is generally employed to indicate the making of a share contract or contract of
subscription, that is, transaction by which a person becomes the owner of shares and by which
new share contracts are created. It is often associated with the execution and delivery of a share
certificate but the issuance of the shares is not dependent on the delivery of a certificate of stock.
“PAR” or “ISSUED PRICE”: while it may not reflect the true value of the shares which constantly
fluctuates, merely indicates the amount which the original subscribers are supposed to contribute
to the corporate capital as the basis of the privilege of profit sharing with limited liability.
PROPERTY: If shares are issued in exchange for property, the value of such should at least be
equal to the par or issued value of the stocks. Such value, may be determined with reference to
a. REAL PROPERTY –
(1) independent appraiser’s appraisal report;
(2) BIR Zonal Valuation; or
(3) Market Value indicated in the Real Estate Tax Declaration.

b. INTANGIBLE PROPERTY – as determined by the incorporators or the BOD subject to the

approval of the SEC.
TRUE VALUE RULE : the motives and intent of those making the valuation are disregarded and
the sole and decisive factor or question is whether or not the property or services are in fact worth
the value placed on them.
GOOD FAITH RULE : is based on the proposition that the value of the property or services is a
matter about which there can be an honest difference of opinion. Therefore, if the parties have
acted in good faith without fraud or intentional over-valuation, the transaction cannot be
overturned even if it later becomes evident that the property or services were in fact worth much
less than the value fixed on them initially.
Most jurisdiction follow the GOOD FAITH rule.
STOCK DIVIDENDS : Sec. 62(5) which states that “amounts transferred from unrestricted
retained earnings to stated capital” refer to stock dividends where corporate earnings are
capitalized rather than being distributed as cash dividend. It merely converts income into capital,
the consideration being the retained earnings itself which would have accrued to the stockholders
in proportion to their respective stockholdings.
NO CONSIDERATION: stocks may not be issued without consideration for the following reasons:
(1) it is discriminatory against other stockholders; and
2) it prejudices the rights of creditors under the Trust Fund Doctrine.

RECLASSIFICATION: Sec. 62(6) which provides that “outstanding shares exchanged for stocks
in the event of reclassification or conversion” speaks of shares of stock surrendered to the
corporation in exchange for new or different type of shares. Example: Found Shares which, after
5 years, may be converted to common stocks.
PROHIBITED CONSIDERATIONS: Shares of stock may not be issued in exchange for (1)
promissory notes; or (2) future services – as their realization are not certain.

THE NATIONAL EXCHANGE CO., INC., plaintiff-appellee, vs. I. B. DEXTER, defendant-

appellant (GR No. L - 27872; Feb. 25, 1928)
FACTS: On August 10, 1919, the defendant, I. B. Dexter, signed a written subscription to the
corporate stock of C. S. Salmon & Co. in the following form:
I hereby subscribe for three hundred (300) shares of the capital stock of C. S. Salmon and
Company, payable from the first dividends declared on any and all shares of said company owned
by me at the time dividends are declared, until the full amount of this subscription has been paid

Upon subscription, defendant Dexter paid P15,000 from the dividends declared by the company
and supplemented by money supplied personally by the subscriber. No other payment was made.

ISSUE: WON the subscription to be paid out of the dividends declared on the shares has the
effect of relieving the subscriber from personal liability in an action to recover the value of the
shares?

HELD: No. Under the American regime corporate franchises in the Philippine Islands are granted
subject to the provisions of section 74 of the Organic Act of July 1, 1902, which, in the part here
material, is substantially reproduced in section 28 of the Autonomy Act of August 29, 1916. In the
Organic Act it is among other things, declared: "That all franchises, privileges, or concessions
granted under this Act shall forbid the issue of stock or bonds except in exchange for actual cash
or for property at a fair valuation equal to the par value of the stock or bonds so issued; . . . ." (Act
of Congress of July 1, 1902, sec. 74.)
Pursuant to this provision we find that the Philippine Commission inserted in the Corporation Law,
enacted March 1, 1906, the following provision: ". . . no corporation shall issue stock or bonds
except in exchange for actual cash paid to the corporation or for property actually received by it
at a fair valuation equal to the par value of the stock or bonds so issued." (Act No. 1459, sec. 16
as amended by Act No. 2792, sec. 2.)
The prohibition against the issuance of shares by corporations except for actual cash to the par
value of the stock to its full equivalent in property is thus enshrined in both the organic and
statutory law of the Philippine Islands; and it would seem that our lawmakers could scarcely have
chosen language more directly suited to secure absolute equality stockholders with respect to
their liability upon stock subscriptions. Now, if it is unlawful to issue stock otherwise than as stated
it is self-evident that a stipulation such as that now under consideration, in a stock subscription,
is illegal, for this stipulation obligates the subscriber to pay nothing for the shares except as
dividends may accrue upon the stock. In the contingency that dividends are not paid, there is no
liability at all. This is a discrimination in favor of the particular subscriber, and hence the stipulation
is unlawful.

The general doctrine of corporation law is in conformity with this conclusion, as may be seen from
the following proposition taken from the standard encyclopedia treatise, Corpus Juris:
Nor has a corporation the power to receive a subscription upon such terms as will operate as a
fraud upon the other subscribers or stockholders by subjecting the particular subcriber to lighter
burdens, or by giving him greater rights and privileges, or as a fraud upon creditors of the
corporation by withdrawing or decreasing the capital. It is well settled therefore, as a general rule,
that an agreement between a corporation and a particular subscriber, by which the subscription
is not to be payable, or is to be payable in part only, whether it is for the purpose of pretending
that the stock is really greater than it is, or for the purpose of preventing the predominance of
certain stockholders, or for any other purpose, is illegal and void as in fraud of other stockholders
or creditors, or both, and cannot be either enforced by the subscriber or interposed as a defense
in an action on the subscription. (14 C. J., p. 570.)
The rule thus stated is supported by a long line of decisions from numerous courts, with little or
no diversity of opinion. As stated in the headnote to the opinion of the Supreme Court of United
States in the case of Putnan vs. New Albany, etc. Railroad Co. as reported in 21 Law. ed., 361,
the rule is that "Conditions attached to subscriptions, which, if valid, lessen the capital of the
company, are a fraud upon the grantor of the franchise, and upon those who may become
creditors of the corporation, and upon unconditional stockholders."
In the appellant's brief attention is called to the third headnote to Bank vs. Cook (125 Iowa, 111),
where it is stated that a collateral agreement with a subscriber to stock that his subscription shall
not be collectible except from dividends on the stock, is valid as between the parties and a
complete defense to a suit on notes given for the amount of the subscription. A careful perusal of
the decision will show that the rule thus broadly stated in the headnote is not justified by anything
in the reported decision; for what the court really held was that the making of such promise by the
agent of the corporation who sold the stock is admissible in evidence in support of the defense of
fraud and failure of consideration. Moreover, even if the decision had been to the effect supposed,
the rule announced in the headnote, could have no weight in a jurisdiction like this where there is
a statutory provision prohibiting such agreements.

D. CERTIFICATE OF STOCK AND THEIR TRANSFER

Share of Stock : may rightfully be described as a profit sharing contract, a series of units of interest
and participation in a corporation in consideration of a proportionate right to participate in dividend
and other distributions. They are personal properties and the owners thereof have the unbridled
right to transfer the same to anyone they please subject only to reasonable charter provisions.

Certificate of Stock: is the piece of paper or document which evidences the ownership of shares
and a convenient instrument in the transfer of the title.

Section 63. Certificate of stock and transfer of shares. - The capital stock of stock
corporations shall be divided into shares for which certificates signed by the president or
vice president, countersigned by the secretary or assistant secretary, and sealed with the
seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so
issued are personal property and may be transferred by delivery of the certificate or
certificates indorsed by the owner or his attorney-in-fact or other person legally authorized
to make the transfer. No transfer, however, shall be valid, except as between the parties,
until the transfer is recorded in the books of the corporation showing the names of the
parties to the transaction, the date of the transfer, the number of the certificate or
certificates and the number of shares transferred.
No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation. (35)
REQUISITES FOR THE ISSUANCE OF CERTIFICATE OF STOCK:
1. It must be signed by the president or vice-president and countersigned by the secretary or
assistant secretary;
2. It must be sealed with the corporate seal, and
3. The entire value thereof (together with the interest or expenses, if any) should have been paid.
RIGHTS OF SUBSCRIBERS: While it appears, that a subscriber to shares of stock cannot be
entitled to the issuance of a certificate of stock until the full amount of his subscription together
with interest and expenses (in case of delinquent shares) if any is due, has been paid, a
subscriber, even if not yet fully paid, is entitled to exercise all the rights of a stockholder and the
corresponding liability that attach thereunder:
Sec. 72. Rights of unpaid shares. - Holders of subscribed shares not fully paid which are not
delinquent shall have all the rights of a stockholder.
In essence, the issuance of a certificate of stock is not a condition sine qua non to consider a
subscriber a stockholder. To all intents and purposes, a subscriber is a shareholder upon
subscription and entitled to the all the rights as such, except: 1. For the issuance of a certificate
of stock; 2. If his shares are declared delinquent; or 3. When he exercises appraisal right under
Sec. 83.
NEGOTIABILITY: A certificate of stock is not regarded as “negotiable” in the sense same sense
as a bill or a not, even if its endorsed in blank. Thus, while it may be transferred by endorsement
coupled with delivery thereof, it is nonetheless non-negotiable in that the transferee takes it
without prejudice to all the rights and defenses which the true and lawful owner may have except
in so far as the principles governing estoppel may apply.
NON - REGISTRATION : of shares disposed of by the holder will not affect the validity of the
transfer at least in so far as the contracting parties are concerned. As regards, the corporation,
the transferee will not be recognized as such stockholder and could not exercise the rights until
the transfer has been duly recorded in the stock and transfer book. As such, “he cannot vote or
be vote for, and he will not be entitled to dividends. The corporation may be protected when it
pays dividends to the registered owner despite a previous transfer of which it had no knowledge.
The purpose of registration therefore is two-fold: (1) to enable the transferee to exercise all the
rights of stockholder, and (2) to inform the corporation of any change in share ownership so that
it can ascertain the person entitled to the rights and subject to the liabilities of a corporation” (De
Erquiga vs. CA)
REGISTRATION : is necessary to: 1. Enable the corporation to know who its stockholders are; 2.
Enable the transferee to exercise his rights as a stockholder; 3. Afford the corporation an
opportunity to object or refuse registration of the transfer in cases allowed by law (as when it has
unpaid claims on the shares transferred); 4. Avoid fictitious and fraudulent transfers; and 5.
Protect creditors who have the right to look upon stockholders, in case of non-payment or watered
shares, for the satisfaction of their claims.
MANDAMUS: If the corporate secretary refuses to registered or record the transfer, mandamus
will lie to compel the registration. This is because such duty is ministerial. HOWEVER, he cannot
be compelled to do so when the transferee’s title to said shares has no prima facie validity or is
uncertain.
TWO MODES OF TRANSFERRING STOCKS:
1. Endorsement and delivery of certificate of stock;
2. Notarized deed.
The SEC has, however, ruled that when a corporation has already issued stock certificates, any
transfer of the shares can only be effectively made by endorsement and delivery of the stock
certificate. A deed of transfer, sale or assignment alone would not suffice (as affirmed by the SC
in Rural Bank of Lipa City, Inc. vs. CA) for to rule otherwise would open the door to fraudulent or
fictitious transfer which the SEC seeks to avoid. In effect, while a formal contract of sale in a
notarized document is equivalent to actual delivery of the certificate itself, this mode of transfer is
available only if no certificate of stock has been issued.
RIGHT TO TRANSFER SHARES OF STOCK : may not be unreasonably restricted or prohibited.
Thus, in Padgett vs. Bobcock & Templeton and Fleischer vs. Botica Nolasco, the SC held that
every owner of corporate shares has the same uncontrollable right to alienate them and is under
no obligation from selling them at his sacrifice and for the welfare and benefit of the corporation
and other stockholders. But while unreasonable restrictions may not be allowed, the right to
transfer may be “regulated” to give the corporation protection against colorable or fraudulent
transfer or to enable it to know who its stockholders are. Also, as a matter of policy, the SEC
allows the grant of “preferential rights” to existing stockholders and/or the corporation, giving them
the first option to purchase the shares of a selling stockholder within a reasonable period not
exceeding thirty days provided that the same is contained in the AOI and in all the stock
certificates to be issued. This is considered “reasonable” since it merely suspends the right to
transfer within the period specified.
OTHER RESTRICTIONS:
1. It is not valid, except as between the parties, until recorded in the books of the corporation;
2. Shares of stock against which the corporation holds any unpaid claim shall not be transferrable
in the books of the corporation. Unpaid claims, refer to claims arising from unpaid subscription
and not to any indebtedness which a stockholder may owe the corporation such as monthly dues;
3. Restrictions required to be indicated in the AOI, bylaws and stock certificates of a close
corporation;
4. Restrictions imposed by special law, such as the Public Service Act requiring the approval of
the government agency concerned if it will vest unto the transferee 40% of the capital of the public
service company;
5. Sale to aliens in violation of maximum ownership of shares under the Nationalization Laws;
and
6. Those covered by reasonable agreement of the parties.

TRANSFER: as used in the Corporation Code, refers to absolute and unconditional transfer to
warrant registration in the books of the corporation in order to bind the latter and other third
persons.
ENRIQUE MONSERRAT, plaintiff-appellee, vs. CARLOS G. CERON, ET AL., defendants.
ERMA, INC., and, THE SHERIFF OF MANILA, respondents ( G.R. No. 37078; September 27,
1933)
FACTS: Enrique Monserrat, president and manager of the Manila Yellow Taxicab Co., Inc.
(MYTC), assigned to Carlos G. Ceron the usufruct of his 1,200 shares in consideration of the
interest shown and the financial aid extended him (Monserrat) in the organization of the
corporation. This assignment allowed Ceron to derive the right to enjoy the profits (during his
lifetim) that may be derived from the shares but prohibited him from acts of absolute ownership,
such acts and the right to vote, reserved to Monserrat and his heirs. Such assignment was
recorded in the books of the corporation and the corresponding shares certificate was issued to
Ceron.
Later on, Ceron mortgaged the shares to herein defendant Eduardo Matute, the latter without
knowledge of the existence of the assignment. Due to nonpayment, Matute foreclosed the
mortgage and the shares were sold at a public auction.
Monserrat claims ownership over the shares and the lower court rendered judgment in his favor,
holding that the mortgage on the shares was null and void, but the mortgage on the usufruct is
valid.
ISSUE: WON it is necessary to enter upon the books of the corporation a mortgage constituted
on shares of stock in order that such mortgage may be valid and may have force and effect as
against third persons?
HELD: No. Section 35 of the Corporation Law provides the following:
SEC. 35. The capital stock of stock corporations shall be divided into shares for which certificates
signed by the president or the vice-president, counter signed by the secretary or clerk and sealed
with the seal of the corporation, shall be issued in accordance with the by-laws. Shares of stock
so issued are personal property and may be transferred by delivery of the certificate indorsed by
the owner or his attorney in fact or other person legally authorized to make the transfer. No
transfer, however, shall be valid, except as between the parties, until the transfer is entered and
noted upon the books of the corporation so as to show the names of the parties to the transaction,
the date of the transfer the number of the certificate, and the number of shares transferred.
No share of stock against which the corporation hold, any unpaid claim shall be transferable on
the books of the corporation.
The legal provision just quoted does not require any entry except of transfers of shares of stock
in order that such transfers may be valid as against third persons. Now, what did the Legislature
mean in using the word "transfer"?
Inasmuch as it does not appear from the text of the Corporation Law that an attempt was made
to give a special signification to the word "transfer", we shall construe it according to its accepted
meaning in ordinary parlance.
The word "transferencia" (transfer) is defined by the "Diccionario de la Academia de la Lengua
Castellana" as "accion y efecto de transferir" (the act and effect of transferring); and the verb
"transferir", as "ceder o renunciar en otro el derecho o dominio que se tiene sobre una cosa,
haciendole dueno de ella" (to assign or waive the right in, or absolute ownership of, a thing in
favor of another, making him the owner thereof).
In the Law Dictionary of "Words and Phrases", third series, volume 7, p. 589, the word "transfer"
is defined as follows:
"Transfer" means any act by which property of one person is vested in another, and "transfer of
shares", as used in Uniform Stock Transfer Act (Comp. St. Supp., 690), implies any means
whereby one may be divested of and another acquire ownership of stock. (Wallach vs . Stein
[N.J.], 136 A., 209, 210.)"
In view of the definitions cited above, the question arises as to whether or not a mortgage
constituted on certain shares of stock in accordance with Act No. 1508, as amended by Act No.
2496, is a transfer of such shares in the abovementioned sense.
Section 3 of the aforesaid Act No. 1508, as amended by Act No. 2496, defines the phrase
"hipoteca mobiliaria" (chattel mortgage) as follows:
SEC. 3. A chattel mortgage is a conditional sale of personal property as security for the payment
of a debt, or the performance of some other obligation specified therein, the condition being that
the sale shall be avoided upon the seller paying to the purchaser a sum of money or doing some
other act named. If the condition is performed according to its terms the mortgage and sale
immediately become void, and the mortgage is hereby divested of his title.
According to the legal provision just quoted, although a chattel mortgage, accompanied by
delivery of the mortgaged thing, transfers the title and ownership thereof to the mortgage creditor,
such transfer is not absolute but constitutes a mere security for the payment of the mortgage debt,
the transfer in question becoming null and void from the time the mortgage debtor complies with
his obligation to pay his debt.
In the case of Noble vs . Ft. Smith Wholesale Grocery Co. (127 Pac., 14, 17; 34 Okl., 662; 46 L.
R. A. [N.S.], 455), cited in Words and Phrases, second series, vol. 4, p. 978, the following appears:
A "transfer" is the act by which owner of a thing delivers it to another with the intent of passing
the rights which he has in it to the latter, and a chattel mortgage is not within the meaning of such
term.
Therefore, the chattel mortgage is not the transfer referred to in section 35 of Act No. 1459
commonly known as the Corporation law, which transfer should be entered and noted upon the
books of a corporation in order to be valid, and which, as has already been said, means the
absolute and unconditional conveyance of the title and ownership of a share of stock.
If, in accordance with said section 35 of the Corporation Law, only the transfer or absolute
conveyance of the ownership of the title to a share need be entered and noted upon the books of
the corporation in order that such transfer may be valid, therefore, inasmuch as a chattel mortgage
of the aforesaid title is not a complete and absolute alienation of the dominion and ownership
thereof, its entry and notation upon the books of the corporation is not necessary requisite to its
validity.
It is obvious, therefore, that the defendant entity Erma, Inc., as a conditional purchaser of the
shares of stock in question given as security for the payment of his credit, acquired in good faith
Carlos G. Ceron's right and title to the 600 common shares of stock evidenced by certificate No.
7 of the MYTC, and as such conditional purchaser in good faith, it is entitled to the protection of
the law.
In view of the foregoing considerations, we are of the opinion and so hold that, inasmuch as
section 35 of the Corporation Law does not require the notation upon the books of a corporation
of transactions relating to its shares, except the transfer of possession and ownership thereof, as
a necessary requisite to the validity of such transfer, the notation upon the aforesaid books of the
corporation, of a chattel mortgage constituted on the shares of stock in question is not necessary
to its validity.
GONZALO CHUA GUAN, plaintiff-appellant, vs. SAMAHANG MAGSASAKA, INC., and
SIMPLICIO OCAMPO, ADRIANO G. SOTTO, and EMILIO VERGARA, as president, secretary
and treasurer respectively of the same, defendants-appellees (G.R. No. L - 42091;
November 2, 1935)
FACTS: To secure the payment of a debt, Gonzalo H. Co Toco mortgage his shares to Chua
Chiu, such assignment recorded in the Office of the Register of Deeds and the books of the
corporation. For non-payment, the mortgage was foreclosed and the shares were sold at a public
auction with plaintiff Chua Guan as the highest bidder.
The Company refused to cancel the certificates of stock and issue new ones to herein plaintiff
alleging that prior to the date of plaintiff’s demand, nine attachments had been issued and served
and noted on the books of the corporation. Thus, a prayer for a writ of mandamus.
The validity of the assignments and the mortgage is not in question.
ISSUE: WON the registration of the mortgage in the registry of chattel mortgage in the office of
the register of deeds give constructive notice to the said attaching creditors and thus gave
preference to the mortgage over the other debts?
HELD: No. In passing, let it be noted that the registration of the said chattel mortgage in the office
of the corporation was not necessary and had no legal effect. (Monserrat vs. Ceron, 58 Phil., 469.)
The long mooted question as to whether or not shares of a corporation could be hypothecated by
placing a chattel mortgage on the certificate representing such shares we now regard as settled
by the case of Monserrat vs. Ceron, supra . But that case did not deal with any question relating
to the registration of such a mortgage or the effect of such registration. Nothing appears in the
record of that case even tending to show that the chattel mortgage there involved was ever
registered anywhere except in the office of the corporation, and there was no question involved
there as to the right of priority among conflicting claims of creditors of the owner of the shares
Section 4 of Act No. 1508 provides two ways for executing a valid chattel mortgage which shall
be effective against third persons. First, the possession of the property mortgage must be
delivered to and retained by the mortgagee; and, second, without such delivery the mortgage
must be recorded in the proper office or offices of the register or registers of deeds. If a chattel
mortgage of shares of stock of a corporation may validly be made without the delivery of
possession of the property to the mortgagee and the mere registration of the mortgage is sufficient
to constructive notice to third parties, we are confronted with the question as to the proper place
of registration of such a mortgage. Section 4 provides that in such a case the mortgage resides
at the time of making the same or, if he is a non-resident, in the province in which the property is
situated; and it also provides that if the property is situated in a different province from that in
which the mortgagor resides the mortgage shall be recorded both in the province of the
mortgagor's residence and in the province where the property is situated.
If with respect to a chattel mortgage of shares of stock of a corporation, registration in the province
of the owner's domicile should be sufficient, those who lend on such security would be confronted
with the practical difficulty of being compelled not only to search the records of every province in
which the mortgagor might have been domiciled but also every province in which a chattel
mortgage by any former owner of such shares might be registered. We cannot think that it was
the intention of the legislature to put this almost prohibitive impediment upon the hypothecation
of shares of stock in view of the great volume of business that is done on the faith of the pledge
of shares of stock as collateral.
It is a common but not accurate generalization that the situs of shares of stock is at the domicile
of the owner. The term situs is not one of fixed of invariable meaning or usage. Nor should we
lose sight of the difference between the situs of the shares and the situs of the certificates of
shares. The situs of shares of stock for some purposes may be at the domicile of the owner and
for others at the domicile of the corporation; and even elsewhere. (Cf. Vidal vs. South American
Securities Co., 276 Fed., 855; Black Eagle Min. Co. vs. Conroy, 94 Okla., 199; 221 Pac,, 425
Norrie vs. Kansas City Southern Ry. Co., 7 Fed. [2d]. 158.) It is a general rule that for purposes
of execution, attachment and garnishment, it is not the domicile of the owner of a certificate but
the domicile of the corporation which is decisive. (Fletcher, Cyclopedia of the Law of Private
Corporations, vol. 11, paragraph 5106. Cf. sections 430 and 450, Code of Civil Procedure.)
By analogy with the foregoing and considering the ownership of shares in a corporation as
property distinct from the certificates which are merely the evidence of such ownership, it seems
to us a reasonable construction of section 4 of Act No. 1508 to hold that the property in the shares
may be deemed to be situated in the province in which the corporation has its principal office or
place of business. If this province is also the province of the owner's domicile, a single registration
sufficient. If not, the chattel mortgage should be registered both at the owner's domicile and in the
province where the corporation has its principal office or place of business. In this sense the
property mortgaged is not the certificate but the participation and share of the owner in the assets
of the corporation.
In view of the premises, the attaching creditors are entitled to priority over the defectively
registered mortgage of the appellant and the judgment appealed from must be affirmed without
special pronouncement as to costs in this instance.
TORIBIA USON, plaintiff-appellee, vs. VICENTE DIOSOMITO, ET AL., defendants.
VICENTE DIOSOMITO, EMETERIO BARCELON, H.P.L. JOLLYE and NORTH ELECTRIC
COMPANY, INC., appellants. (G.R. No. L - 42135; June 17, 1935)
FACTS: In a civil action filed by herein plaintiff-appellee Uson, an attachment was levied on Jan.
18, 1932 upon the property of defendant Vicente Diosmomito including the question 75 shares of
North Electric Company, Inc.. On March 20, 1933, the said shares were sold at a public auction
to satisfy the claim of Uson.
In the present action, appellant HPL Jollye claims ownership of said shares. Apparently, these
shares were sold by Diosomito to Emetertio Barcelon on Feb. 3, 1931 but the certificates were
cancelled and a new one issued only on Sep. 16, 1932. Later on, the same shares were sold to
Jollye and registered in the books on Feb. 13, 1933.
ISSUE: WON a b o n a fid e transfer of the shares of a corporation, not registered or noted on the
books of the corporation, is valid as against a subsequent lawful attachment of said shares,
regardless of whether the attaching creditor had actual notice of said transfer or not?
HELD: Section 35 of the Corporation Law is as follows:
SEC. 35. The capital stock of stock corporations shall be divided into shares for which certificates
signed by the president or the vice-president, countersigned by the secretary or clerk and sealed
with the by-laws. Shares of stock so issued are personal property and may be transferred by
delivery of the certificate indorsed by the owner or his attorney in fact or other person legally
authorized to make the transfer. No transfer, however, shall be valid, except as between the
parties, until the transfer is entered and noted upon the books of the corporation so as to show
the names of the parties to the transaction, the date of the transfer, the number of the certificate,
and the number of shares transferred
We prefer to adopt the line followed by the Supreme Courts of Massachusetts and of Wisconsin.
( See Clews vs . Friedman, 182 Mass., 555; 66 N.E. 201, and In re Murphy, 51 Wis., 519; 8 N.W.,
419.) In this case the court had under consideration a statute identical with our own section 35,
supra , and the court said:
We think the true meaning of the language is, and the obvious intention of the legislature in using
it was, that all transfers of shares should be entered, as here required, on the books of the
corporation. And it is equally clear to us that all transfers of shares not so entered are invalid as
to attaching or execution creditors of the assignors, as well as to the corporation and to
subsequent purchasers in good faith, and indeed, as to all persons interested, except the parties
to such transfers. All transfers not so entered on the books of the corporation are absolutely void;
not because they are without notice or fraudulent in law or fact, but because they are made so
void by statute.
To us the language of the legislature is plain to the effect that the right of the owner of the shares
of stock of a Philippine corporation to transfer the same by delivery of the certificate, whether it
be regarded as statutory on common law right, is limited and restricted by the express provision
that "no transfer, however, shall be valid, except as between the parties, until the transfer is
entered and noted upon the books of the corporation." Therefore, the transfer of the 75 shares in
the North Electric Company, Inc., made by the defendant Diosomito to the defendant Barcelon
was not valid as to the plaintiff-appellee, Toribia Uson, on January 18, 1932, the date on which
she obtained her attachment lien on said shares of stock which still stood in the name of Diosomito
on the books of the corporation.
CYRUS PADGETT, plaintiff-appellee, vs. BABCOCK & TEMPLETON, INC., and W. R.
BABCOCK, defendantsappellants (G.R. No. L - 38684; December 21, 1933)
FACTS: The appellee was an employee of the appellant corporation and rendered services as
such from January 1, 1923, to April 15, 1929. During that period he bought 35 shares thereof at
P100 a share at the suggestion of the president of said corporation. He was also the recipient of
9 shares by way of bonus during Christmas seasons. In this way the said appellee became the
owner of 44 shares for which the 12 certificates, Exhibits F to F11, were issued in his favor. The
word "nontransferable" appears on each and every one of these certificates. Before severing his
connections with the said corporation, the appellee proposed to the president that the said
corporation buy his 44 shares at par value plus the interest thereon, or that he be authorized to
sell them to other persons. The corporation bought similar shares belonging to other employees,
at par value. Sometime later, the said president offered to buy the appellee's shares first at P85
each and then at P80. The appellee did not agree thereto.
ISSUE: WON the restriction imposed on the right to transfer the shares is valid?
HELD: No. The opinion seems to be unanimous that a restriction imposed upon a certificate of
shares, similar to the ones under consideration, is null and void on the ground that it constitutes
and unreasonable limitation of the right of ownership and is in restraint of trade.
Shares of corporate stock being regarded as property, the owner of such shares may, as a general
rule, dispose of them as he sees fit, unless the corporation has been dissolved, or unless the right
to do so is properly restricted, or the owner's privilege of disposing of his shares has been
hampered by his own action. (14 C. J., sec. 1033, pp. 663, 664.)
Any restriction on a stockholder's right to dispose of his shares must be construed strictly; and
any attempt to restrain a transfer of shares is regarded as being in restraint of trade, in the
absence of a valid lien upon its shares, and except to the extent that valid restrictive regulations
and agreements exist and are applicable. Subject only to such restrictions, a stockholder cannot
be controlled in or restrained from exercising his right to transfer by the corporation or its officers
or by other stockholders, even though the sale is to a competitor of the company, or to an insolvent
person, or even though a controlling interest is sold to one purchaser. ( Ibid ., sec. 1035, pp. 665,
666.)
In the case of Fleischer vs . Botica Nolasco Co. (47 Phil., 583), we have discussed the validity of
a clause in the by-laws of the defendant corporation, which provided that, under the same
conditions, the owner of a share of stock could not sell it to another person except to the defendant
corporation. In deciding the legality and validity of said restriction, we held:
The only restraint imposed by the Corporation Law upon transfer of shares is found in section 35
of Act No. 1459. This restriction is necessary in order that the officers of the corporation may know
who are the stockholders, which is essential in conducting elections of officers, in calling meetings
of stockholders, and for other purposes. But any restriction of the nature of that imposed in the
by-law now in question, is u l t r a v i r e s , violative of the property rights of shareholders, and in
restraint of trade. ( Id ., p. 592.)
It is obvious, therefore, that the restriction consisting in the word "nontransferable", appearing on
the 12 certificates, Exhibits F to F-11, is illegal and should be eliminated.
ISSUE2: WON the corporation may be compelled to buy the shares of a selling stockholder?
HELD: No. There is no existing law nor authority in support of the plaintiff's claim to the effect that
the defendants are obliged to buy his shares of stock value at par value, plus the interest
demanded thereon. In this respect, we hold that there has been no such contract, either express
or implied, between the plaintiff and the defendants. In the absence of a similar contractual
obligation and of a legal provision applicable thereto, it is logical to conclude that it would be unjust
and unreasonable to compel the said defendants to comply with a non-existent or imaginary
obligation. Whereupon, we are likewise compelled to conclude that the judgment originally
rendered to that effect is untenable and should be set aside
LEON J. LAMBERT, plaintiff-appellant, vs. T. J. FOX, defendant-appellee (G.R. No. L - 7991;
January 29, 1914)
FACTS: Defendant and plaintiff, became two of the largest shareholders of John R. Edgar & Co.,
Inc. was incorporated. They were former creditors who agreed to aid the financially distressed
predecessor John R. Edgar & Co.. They entered into an agreement a few days after incorporation
as follows:
Whereas the undersigned are, respectively, owners of large amounts of stock in John R. Edgar
and Co, Inc; and,
Whereas it is recognized that the success of said corporation depends, now and for at least one
year next following, in the larger stockholders retaining their respective interests in the business
of said corporation: Therefore, the undersigned mutually and reciprocally agree not to sell,
transfer, or otherwise dispose of any part of their present holdings of stock in said John R. Edgar
& Co. Inc., till after one year from the date hereof. Either party violating this agreement shall pay
to the other the sum of one thousand (P1,000) pesos as liquidated damages, unless previous
consent in writing to such sale, transfer, or other disposition be obtained.
Notwithstanding this contract the defendant Fox on October 19, 1911, sold his stock in the said
corporation to E. C. McCullough of the firm of E. C. McCullough & Co. of Manila, a strong
competitor of the said John R. Edgar & Co., Inc.
A complaint was filed and the trial court decided in favor of defendant.
ISSUE: WON the stipulation in the contract is valid?
HELD: Yes. It is urged by the appellee in this case that the stipulation in the contract suspending
the power to sell the stock referred to therein is an illegal stipulation, is in restraint of trade and,
therefore, offends public policy. We do not so regard it. The suspension of the power to sell has
a beneficial purpose, results in the protection of the corporation as well as of the individual parties
to the contract, and is reasonable as to the length of time of the suspension. We do not here
undertake to discuss the limitations to the power to suspend the right of alienation of stock, limiting
ourselves to the statement that the suspension in this particular case is legal and valid.
EMBASSY FARMS, INC., petitioner, vs. HON. COURT OF APPEALS (INTERMEDIATE
APPELLATE COURT), HON. ZENAIDA S. BALTAZAR, Judge of the Regional Trial Court,
Branch CLVIII, (158), Pasig, Metro Manila, VOLTAIRE B. CRUZ, Deputy Sheriff, Branch
CLVIII, Regional Trial Court, Pasig, Metro Manila and EDUARDO B. EVANGELISTA,
respondents (G.R. No. 80682 August 13, 1990)
FACTS: Alexander G. Asuncion and Eduardo B. Evangelista entered into a Memorandum of
Agreement (MOA) with the following obligations:
EVANGELISTA: 1. To transfer to Asuncion 19 parcels of agricultural land registered in his
name, together with the stocks, equipment and facilities of Embassy Farms, Inc. wherein 90% of
the shares of stock is owned by Evangelista; 2. To cede, transfer and convey “in a manner
absolute and irrevocable any and all of his shares of stocks” in Embassy Farms, Inc. to Asuncion
or his nominees “until the total of said shares of stock so transferred shall constitute 90% of the
paid-in equity of said corporation” within a reasonable time from signing the document.
ASUNCION: 1. To pay Evangelista P8,630,999; 2. To organize and register a new corporation
with an authorized capital stock of P10M which upon registration will take over all the rights and
liabilities of Asuncion.
Effective control and management of the piggery at Embassy Farms, Inc. was transferred by
Evangelista to Asuncion pursuant to clause 8 of the MOA. In accordance with clause 15,
Evangelista served as President and Chief Executive of Embassy Farms.
Evangelista also endorsed in blank all his shares of stock including that of his wife and three
nominees with minor holdings but retained possession of said shares and opted to deliver to
Asuncion only upon full compliance of the latter of his obligations under the MOA.
For failure to comply with his obligations, Evangelista intimated the institution of the appropriate
legal action. But Asuncion eventually filed for the rescission of the MOA.
ISSUE: WON Evangelista has a better right to the shares and control of the corporate affairs?
HELD: Yes. From the pleadings submitted by the parties it is clear that although Evangelista has
indorsed in blank the shares outstanding in his name he has not delivered the certificate of stocks
to Asuncion because the latter has not fully complied with his obligations under the MOA. There
being no delivery of the indorsed shares of stock Asuncion cannot therefore effectively transfer to
other person or his nominees the undelivered shares of stock. For an effective transfer of shares
of stock the mode and manner of transfer as prescribed by law must be followed (Navea v. Peers
Marketing Corp., 74 SCRA 65). As provided under Section 3 of Batas Pambansa Bilang 68,
otherwise known as the Corporation Code of the Philippines, shares of stock may be transferred
by delivery to the transferree of the certificate properly indorsed. Title may be vested in the
transferree by the delivery of the duly indorsed certificate of stock (18 C.J.S. 928, cited in Rivera
v. Florendo, 144 SCRA 643). However, no transfer shall be valid, except as between the parties
until the transfer is properly recorded in the books of the corporation (Sec. 63, Corporation Code
of the Philippines).
In the case at bar the indorsed certificate of stock was not actually delivered to Asuncion so that
Evangelista is still the controlling stockholder of Embassy Farms despite the execution of the
memorandum of agreement and the turnover of control and management of the Embassy Farms
to Asuncion on August 2, 1984.
When Asuncion filed on April 10, 1986 an action for the rescission of contracts with damages, the
Pasig Court merely restored and established the status quo prior to the execution of the MOA by
the issuance of a restraining order on July 10, 1987 and the writ of preliminary injunction on July
30, 1987. It would be unjust and unfair to allow Asuncion and his nominees to control and manage
the Embassy Farms despite the fact that Asuncion, who is the source of their supposed shares
of stock in the corporation, is not asking for the delivery of the indorsed certificate of stock but for
the rescission of the MOA. Rescission would result in mutual restitution (Magdalena Estate v.
Myrick, 71 Phil. 344) so it is but proper to allow Evangelista to manage the farm. Compared to
Asuncion or his nominees Evangelista would be more interested in the preservation of the assets,
equipment and facilities of Embassy Farms during the pendency of the main case.
ENRIQUE RAZON, petitioner, vs. INTERMEDIATE APPELLATE COURT and VICENTE B.
CHUIDIAN, in his capacity as Administrator of the Estate of the Deceased JUAN T.
CHUIDIAN, respondents. (G.R. No. 74306 March 16, 1992)
VICENTE B. CHUIDIAN, petitioner, vs. INTERMEDIATE APPELLATE COURT, ENRIQUE
RAZ0N, and E. RAZON, INC., respondents ( G.R. No. 74315 March 16, 1992)
FACTS: E. Razon, Inc. was organized by petitioner Enrique Razon in 1962. However, it began
operations only in 1966 since the other incorporators withdrew from the said corporation. The
petitioner then distributed the stocks previously placed in the names of the withdrawing nominal
incorporators to some friends, among them the late Juan T. Chuidian to whom he gave 1,500
shares.
The shares of stocks were registered in the name of Chuidian only as nominal stockholder and
with the agreement that the said shares of stock were owned and held by the petitioner but
Chuidian was given the option to buy the same
Chuidian delivered to petitioner the stock certificate in 1966, and since then petitioner had in his
possession such certificate, until the time, he delivered it for deposit with PBCom under the
parties’ joint custody pursuant to their agreement embodied in the trial court’s order.
ISSUE: WON petitioner Razon is the rightful owner of the shares?
HELD: No. In the case of Embassy Farms, Inc. v. Court of Appeals (188 SCRA 492 [1990]) we
ruled: . . . For an effective, transfer of shares of stock the mode and manner of transfer as
prescribed by law must be followed (Navea v. Peers Marketing Corp., 74 SCRA 65). As provided
under Section 3 of Batas Pambansa Bilang, 68 otherwise known as the Corporation Code of the
Philippines, shares of stock may be transferred by delivery to the transferee of the certificate
properly indorsed. Title may be vested in the transferee by the delivery of the duly indorsed
certificate of stock (18 C.J.S. 928, cited in Rivera v. Florendo, 144 SCRA 643). However, no
transfer shall be valid, except as between the parties until the transfer is properly recorded in the
books of the corporation (Sec. 63, Corporation Code of the Philippines; Section 35 of the
Corporation Law)
In the instant case, there is no dispute that the questioned 1,500 shares of stock of E. Razon, Inc.
are in the name of the late Juan Chuidian in the books of the corporation. Moreover, the records
show that during his lifetime Chuidian was elected member of the Board of Directors of the
corporation which clearly shows that he was a stockholder of the corporation. (See Section 30,
Corporation Code) From the point of view of the corporation, therefore, Chuidian was the owner
of the 1,500 shares of stock. In such a case, the petitioner who claims ownership over the
questioned shares of stock must show that the same were transferred to him by proving that all
the requirements for the effective transfer of shares of stock in accordance with the corporation's
by laws, if any, were followed (See Nava v. Peers Marketing Corporation, 74 SCRA 65 [1976]) or
in accordance with the provisions of law. The petitioner failed in both instances. The petitioner did
not present any bylaws which could show that the 1,500 shares of stock were effectively
transferred to him. In the absence of the corporation's by-laws or rules governing effective transfer
of shares of stock, the provisions of the Corporation Law are made applicable to the instant case.
The law is clear that in order for a transfer of stock certificate to be effective, the certificate must
be properly indorsed and that title to such certificate of stock is vested in the transferee by the
delivery of the duly indorsed certificate of stock. (Section 35, Corporation Code) Since the
certificate of stock covering the questioned 1,500 shares of stock registered in the name of the
late Juan Chuidian was never indorsed to the petitioner, the inevitable conclusion is that the
questioned shares of stock belong to Chuidian. The petitioner's asseveration that he did not
require an indorsement of the certificate of stock in view of his intimate friendship with the late
Juan Chuidian cannot overcome the failure to follow the procedure required by law or the proper
conduct of business even among friends. To reiterate, indorsement of the certificate of stock is a
mandatory requirement of law for an effective transfer of a certificate of stock.
Moreover, the preponderance of evidence supports the appellate court's factual findings that the
shares of stock were given to Juan T. Chuidian for value. Juan T. Chuidian was the legal counsel
who handled the legal affairs of the corporation. We give credence to the testimony of the private
respondent that the shares of stock were given to Juan T. Chuidian in payment of his legal
services to the corporation. Petitioner Razon failed to overcome this testimony.
RURAL BANK OF SALINAS, INC., MANUEL SALUD, LUZVIMINDA TRIAS and FRANCISCO
TRIAS, petitioners, vs. COURT OF APPEALS, SECURITIES AND EXCHANGE
COMMISSION, MELANIA A. GUERRERO, LUZ ANDICO, WILHEMINA G. ROSALES,
FRANCISCO M. GUERRERO, JR., and FRANCISCO GUERRERO , SR., respondents (G.R.
No. 96674 June 26, 1992)
FACTS: On June 10, 1979, Clemente G. Guerrero, President of the Rural Bank of Salinas, Inc.,
executed a Special Power of Attorney in favor of his
wife, private respondent Melania Guerrero, giving and granting the latter full power and authority
to sell or otherwise dispose of and/or mortgage 473 shares of stock of the Bank registered in his
name (represented by the Bank's stock certificates nos. 26, 49 and 65), to execute the proper
documents therefor, and to receive and sign receipts for the dispositions.
Pursuant to said SPA, private respondent Melania Guerrero, as Attorney-inFact, executed the
following assignments of shares of stocks: Luz Andico (457 shares); Wilhelmina Rosales (10
shares); Francisco Guerrero, Jr. (5 shares); and Francisco Guerrero, Sr. (1 share). The last share
was transferred 2 months before the death of Clemente.
Subsequently, Melania Guerrero presented the Deeds of Assignments and requested for the
cancellation of the certificates of stock and new ones to be issued in the name of transferees.
However, petitioner Bank refused.
Melania Guerrero filed for an action for mandamus with the SEC. Maripol Guerrero, a legally
adopted daughter of Melania and Clemente filed for intervention claiming that two weeks before
filing the action for mandamus, a petition for the administration of the estate of Celemente has
been filed and that the deeds of assignment were fictitious and antedated. SEC denied the motion
for intervention.
Maripol filed a complaint before the CFI for the annulment of the Deeds of Assignment.
Later on, the SEC rendered a decision granting the action for mandamus which was affirmed by
the SEC en banc and still later, by the CA.
ISSUE: WON the mandamus was properly granted for the registration of the transfer of the 473
shares in question?
HELD: Yes. Respondent SEC correctly ruled in favor of the registering of the shares of stock in
question in private respondent's names. Such ruling finds support under Section 63 of the
Corporation Code, to wit:
Sec. 63. . . . Shares of stock so issued are personal property and may be transferred by delivery
of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally
authorized to make the transfer. No transfer, however, shall be valid, except as between the
parties, until the transfe is recorded in the books of the corporation . . . In the case of Fleisher v
s . Botica Nolasc o , 47 Phil. 583, the Court interpreted Sec. 63 in his wise:
Said Section (Sec. 35 of Act 1459 [now Sec. 63 of the Corporation Code]) contemplates no
restriction as to whom the stocks may be transferred. It does not suggest that any discrimination
may be created by the corporation in favor of, or against a certain purchaser. The owner of shares,
as owner of personal property, is at liberty, under said section to dispose them in favor of
whomever he pleases, without limitation in this respect, than the general provisions of law. . . .
The only limitation imposed by Section 63 of the Corporation Code is when the corporation holds
any unpaid claim against the shares intended to be transferred, which is absent here.
A corporation, either by its board, its by-laws, or the act of its officers, cannot create restrictions
in stock transfers, because:
. . . Restrictions in the traffic of stock must have their source in legislative enactment, as the
corporation itself cannot create such impediment. By-laws are intended merely for the protection
of the corporation, and prescribe regulation, not restriction; they are always subject to the charter
of the corporation. The corporation, in the absence of such power, cannot ordinarily inquire into
or pass upon the legality of the transactions by which its stock passes from one person to another,
nor can it question the consideration upon which a sale is based. . . . (Tomson on Corporation
Sec. 4137, cited in Fleisher vs. Nolasco, Supra ).
The right of a transferee/assignee to have stocks transferred to his name is an inherent right
flowing from his ownership of the stocks. Thus:
Whenever a corporation refuses to transfer and register stock in cases like the present,
mandamus will lie to compel the officers of the corporation to transfer said stock in the books of
the corporation" (26, Cyc. 347, Hyer vs. Bryan, 19 Phil. 138; Fleisher vs. Botica Nolasco, 47 Phil.
583, 594).
The corporation's obligation to register is ministerial. In transferring stock, the secretary of a
corporation acts in purely ministerial capacity, and does not try to decide the question of
ownership. (Fletcher, Sec. 5528, page 434).
The duty of the corporation to transfer is a ministerial one and if it refuses to make such transaction
without good cause, it may be compelled to do so by mandamus . ( See . 5518, 12 Fletcher 394)
For the petitioner Rural Bank of Salinas to refuse registration of the transferred shares in its stock
and transfer book, which duty is ministerial on its part, is to render nugatory and ineffectual the
spirit and intent of Section 63 of the Corporation Code. Thus, respondent Court of Appeals did
not err in upholding the Decision of respondent SEC affirming the Decision of its Hearing Officer
directing the registration of the 473 shares in the stock and transfer book in the names of private
respondents. At all events, the registration is without prejudice to the proceedings in court to
determine the validity of the Deeds of Assignment of the shares of stock in question.
LIM TAY, petitioner, vs. COURT OF APPEALS, GO FAY AND CO. INC., SY GUIOK, and THE
ESTATE OF ALFONSO LIM, respondents (G.R. No. 126891; August 5, 1998)
FACTS: To secure their separate loans, respondent Sy Guiok and Alfonso Lim, each executed a
contract of pledge covering their respective 300 shares in favor of petitioner Lim Tay where they
indorsed in blank and delivered their shares of stock to Tay.
For non-payment, Lim Tay filed a Petition for Mandamus in the SEC against Go Fay & Compny,
Inc. to cancel the old certificates and issue a new one in his name, which was granted by the SEC
but reversed by the CA.
ISSUE: WON the rulings in the Abejo case and the Rural Bank of Salinas case will apply?
HELD: No. Petitioner's reliance on the doctrines set forth in Abejo v. De la Cruz and Rural Bank
of Salinas, Inc. v. Court of Appeals is misplaced.
ABEJO: the Abejo spouses sold to Telectronic Systems, Inc. shares of stock in Pocket Bell
Philippines, Inc. Subsequent to such contract of sale, the corporate secretary, Norberto Braga,
refused to record the transfer of the shares in the corporate books and instead asked for the
annulment of the sale, claiming that he and his wife had a pre-emptive right over some of the
shares, and that his wife's shares were sold without consideration or consent.
At the time the Bragas questioned the validity of the sale, the contract had already been perfected,
thereby demonstrating that Telectronic Systems, Inc. was already the p rim a f a cie owner of the
shares and, consequently, a stockholder of Pocket Bell Philippines, Inc. Even if the sale were to
be annulled later on, Telectronic Systems, Inc. had, in the meantime, title over the shares from
the time the sale was perfected until the time such sale was annulled. The effects of an annulment
operate prospectively and do not, as a rule, retroact to the time the sale was made. Therefore, at
the time the Bragas questioned the validity of the tranfers made by the Abejos, Telectronic
Systems, Inc. was already a p rim a f a cie shareholder of the corporation, thus making the dispute
between the Bragas and the Abejos "intra-corporate" in nature. Hence, the Court held that "the
issue is not on ownership of shares but rather the non-performance by the corporate secretary of
the ministerial duty of recording transfers of shares of stock of the corporation of which he is
secretary."
Unlike
Abejo , however, petitioner's ownership over the shares in this case was not yet perfected when
the Complaint was filed. The contract of pledge certainly does not make him the owner of the
shares pledged. Further, whether prescription effectively transferred ownership of the shares,
whether there was a novation of the contracts of pledge, and whether laches had set in were
difficult legal issues, which were unpleaded and unresolved when herein petitioner asked the
corporate secretary of Go Fay to effect the transfer, in his favor, of the shares pledged to him.
In Rural Bank of Salinas : Melenia Guerrero executed deeds of assignment for the shares in favor
of the respondents in that case. When the corporate secretary refused to register the transfer, an
action for mandamus was instituted. Subsequently, a motion for intervention was filed, seeking
the annulment of the deeds of assignment on the grounds that the same were fictitious and
antedated, and that they were in fact donations because the considerations therefor were below
the book value of the shares.
Like the Abejo spouses, the respondents in Rural Bank of Salinas were already prima facie
shareholders when the deeds of assignment were questioned. If the said deeds were to be
annulled later on, respondents would still be considered shareholders of the corporation from the
time of the assignment until the annulment of such contracts.
ISSUE2: WON petitioner is entitled to the relief of mandamus as against the company?
HELD: No. Petitioner prays for the issuance of a writ of mandamus, directing the corporate
secretary of respondent corporation to have the shares transferred to his name in the corporate
books, to issue new certificates of stock and to deliver the corresponding dividends to him.
In order that a writ of mandamus may issue, it is essential that the person petitioning for the same
has a clear legal right to the thing demanded and that it is the imperative duty of the respondent
to perform the act required. It neither confers powers nor imposes duties and is never issued in
doubtful cases. It is simply a command to exercise a power already possessed and to perform a
duty already imposed.
In the present case, petitioner has failed to establish a clear legal right. Petitioner's contention
that he is the owner of the said shares is completely without merit. Quite the contrary and as
already shown, he does not have any ownership rights at all. At the time petitioner instituted his
suit at the SEC, his ownership claim had no prima facie leg to stand on. At best, his contention
was disputable and uncertain Mandamus will not issue to establish a legal right, but only to
enforce one that is already clearly established.
ISSUE3: WON by Guiok and Lim’s failure to pay, the ownership of the shares automatically
passed to Lim Tay?
HELD: No. On appeal, petitioner claimed that ownership over the shares had passed to him, not
via the contracts of pledge, but by virtue of prescription and by respondents' subsequent acts
which amounted to a novation of the contracts of pledge. We do not agree.
At the outset, it must be underscored that petitioner did not acquire ownership of the shares by
virtue of the contracts of pledge. Article 2112 of the Civil Code states:
“The creditor to whom the credit has not been satisfied in due time, may proceed before a Notary
Public to the sale of the thing pledged. This sale shall be made at a public auction, and with
notification to the debtor and the owner of the thing pledged in a proper case, stating the amount
for which the public sale is to be held. If at the first auction the thing is not sold, a second one with
the same formalities shall be held; and if at the second auction there is no sale either, the creditor
may appropriate the thing pledged. In this case he shall be obliged to give an acquittance for his
entire claim.”
Furthermore, the contracts of pledge contained a common proviso, which we quote again for the
sake of clarity:
“3. In the event of the failure of the PLEDGOR to pay the amount within a period of six (6) months
from the date hereof, the PLEDGEE is hereby authorized to foreclose the pledge upon the said
shares of stock hereby created by selling the same at public or private sale with or without notice
to the PLEDGOR, at which sale the PLEDGEE may be the purchaser at his option; and "the
PLEDGEE is hereby authorized and empowered at his option to transfer the said shares of stock
on the books of the corporation to his own name, and to hold the certificate issued in lieu thereof
under the terms of this pledge, and to sell the said shares to issue to him and to apply the proceeds
of the sale to the payment of the said sum and interest, in the manner hereinabove provided;”
There is no showing that petitioner made any attempt to foreclose or sell the shares through public
or private auction, as stipulated in the contracts of pledge and as required by Article 2112 of the
Civil Code. Therefore, ownership of the shares could not have passed to him. The pledgor
remains the owner during the pendency of the pledge and prior to foreclosure and sale, as
explicitly provided by Article 2103 of the same Code:
“Unless the thing pledged is expropriated, the debtor continues to be the owner thereof.”
RICARDO A. NAVA, petitioner-appellant. vs. PEERS MARKETING CORPORATION,
RENATO R. CUSI and AMPARO CUSI, respondents-appellees (G.R. No. L - 28120;
November 25, 1976)
FACTS: Teofilo Po was an incorporator who subscribed to 80 shares and paid 25% of the
subscription. No certificate of stock was issued to him.
Later on, Po sold to herein petitioner Nava 20 of the 80 shares at par value of P100, or P2,000.
Nava requested herein private respondents, officers of Peers Marketing Corporation, to register
him as owner of the shares, but they refused, Po being delinquent in the payment of the balance
due his subscription.
Po filed an action for mandamus in the CFI of Negros but it was dismissed.
Po claims that the trial court erred in applying the ruling in Fua Cun vs. Summers and China
Banking Corporation wherein it was ruled that the payment of one-half of the subscription does
not entitle the subscriber to a certificate for one-half of the number of shares subscribed.
ISSUE: WON Peers Marketing Corporation may be compelled by mandamus to enter in its stock
and transfer book the sale made by Po to Nava of the 20 shares forming part of Po’s subscription
of 80 shares, it being admitted that the corporation has an unpaid claim of P6,000 as the balance
on said subscription?
HELD: No. We hold that the transfer made by Po to Nava is not the "alienation, sale, or transfer
of stock" that is supposed to be recorded in the stock and transfer book, as contemplated in
section 52 of the Corporation Law.
As a rule, the shares which may be alienated are those which are covered by certificates of stock,
as shown in the following provisions of the Corporation Law and as intimated in H a g e r v s . B r
y a n , 19 Phil. 138 (overruling the decision in Hager vs. Bryan, 21 Phil. 523. See 19 Phil. 616,
notes, and Hodges vs. Lezama, 14 SCRA 1030).
SEC. 35. The capital stock of stock corporations shall be divided into shares for which certificates
signed by the president or the vice-president, countersigned by the secretary or clerk and sealed
with the seal of the corporation, shall be issued in accordance with the by-laws. Shares of stock
so issued are personal property and may be transferred by delivery of the cert ificate indorsed by
the owner or his attorney in fact or other person legally authorized to make the transfer. No
transfer, however, shall be valid, except as between the, parties, until the transfer is entered and
noted upon the books of the corporation so as to show the names of the parties to the transaction,
the date of the transfer, the number of the certificate , and the number of shares transferred.
No share of stock against which the corporation holds any unpaid claim shall be transferable on
the books of the corporation.
SEC. 36. (re voting trust agreement) ...
The certificates of stock so transferred shall be surrendered and cancelled, and new certificates
therefor issued to such person or persons, or corporation, as such trustee or trustees, in which
new certificates it shall appear that they are issued pursuant to said agreement. xxx xxx xxx
As prescribed in section 35, shares of stock may be transferred by delivery to the transferee of
the certificate properly indorsed. "Title may be vested in the transferee by delivery of the certificate
with a written assignment or indorsement thereof" (18 C.J.S. 928). There should be compliance
with the mode of transfer prescribed by law (18 C.J.S. 930).
The usual practice is for the stockholder to sign the form on the back of the stock certificate. The
certificate may thereafter be transferred from one person to another. If the holder of the certificate
desires to assume the legal rights of a shareholder to enable him to vote at corporate elections
and to receive dividends, he fills up the blanks in the form by inserting his own name as transferee.
Then he delivers the certificate to the secretary of the corporation so that the transfer may be
entered in the corporation's books. The certificate is then surrendered and a new one issued to
the transferee. ( Hager vs. Bryan , 19 Phil. 138, 143-4).
That procedure cannot be followed in the instant case because, as already noted, the twenty
shares in question are not covered by any certificate of stock in Po's name. Moreover, the
corporation has a claim on the said shares for the unpaid balance of Po's subscription. 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. (Velasco vs. Poizat, 37 Phil. 802;
Lumanlan vs. Cura, 59 Phil. 746).
A corporation cannot release an original subscriber from paying for his shares without a valuable
consideration (Philippine National Bank vs. Bitulok Sawmill, Inc., L-24177-85, June 29, 1968, 23
SCRA 1366) or without the unanimous consent of the stockholders (Lingayen Gulf Electric Power
Co., Inc. vs. Baltazar, 93 Phil 404).
Under the facts of this case, there is no clear legal duty on the part of the officers of the corporation
to register the twenty shares in Nava's name, Hence, there is no cause of action for mandamus
As already stressed, in this case no stock certificate was issued to Po. Without stock certificate,
which is the evidence of ownership of corporate stock, the assignment of corporate shares is
effective only between the parties to the transaction (Davis vs. Wachter, 140 So. 361).
The delivery of the stock certificate, which represents the shares to be alienated , is essential for
the protection of both the corporation and its stockholders (Smallwood vs. Moretti, 128 So. 2d
628).
THE RURAL BANK OF LIPA CITY, INC., THE OFFICERS AND DIRECTORS, BERNARDO
BAUTISTA, JAIME CUSTODIO, OCTAVIO KATIGBAK, FRANCISCO CUSTODIO, and
JUANITA BAUTISTA OF THE RURAL BANK OF LIPA CITY, INC., petitioners, vs.
HONORABLE COURT OF APPEALS, HONORABLE COMMISSION EN BANC, SECURITIES
AND EXCHANGE COMMISSION, HONORABLE ENRIQUE L. FLORES, JR., in his capacity
as Hearing Officer, REYNALDO VILLANUEVA, SR, AVELINA M. VILLANUEVA, CATALINO
VILLANUEVA, ANDRES GONZALES,
AURORA LACERNA, CELSO LAYGO, EDGARDO REYES, ALEJANDRA TONOGAN and
ELENA USI, respondents (G.R. No. 124535; September 28, 2001)
FACTS: Private respondent Reynaldo Villanueva Sr., a stockholder of Rural Bank of Lipa City,
Inc. executed a Deed of Assignment wherein he assigned his shares, as well as those of eight
stockholders under his control with a total of 10,457 shares, in favor of stockholders of the Bank
represented by its BOD. At the same time, He and his wife executed an agreement wherein he
acknowledge their indebtedness of P4M and stipulated that the said debt will be paid out of the
proceeds of the sale of their real property described in the agreement.
The Villanueva spouses failed to settle their obligation on the due date, and the BOD sent a
demand letter for the surrender of the said shares and for the delivery of sufficient collateral to
cover the balance of the debt, which the Villanueva spouses ignored. Their shares were converted
into Treasury shares.
The Villanueva spouses questioned the legality of the such conversion and filed with the SEC a
petition for annulment of the stockholders’ meeting and election of directors and officers because
they were not notified of such meeting.
The SEC hearing officer dismissed the application for issuance of a preliminary injunction, but
was granted on reconsideration. The decision was affirmed by the SEC en banc and later by the
CA.
ISSUE: WON the transfer of the shares is ineffective for non-indorsement and non-delivery of the
certificate of stocks?
HELD: Yes. The Corporation Code specifically provides:
SECTION 63.
Certificate of stock and transfer of shares . — The capital stock of stock corporations shall be
divided into shares for which certificates signed by the president or vice president, countersigned
by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued
in accordance with the by-laws. S h a r e s o f stocks so issued are personal property and may be
transferred by delivery of the certificate or certificates indorsed by the owner or his attorney - in
fact or other person legally authorized to make the transfer. No transfer, however, shall be valid,
except as between the parties, until the transfer is recorded in the books of the corporation so as
to show the names of the parties to the transaction, the date of the transfer, the number of the
certificate or certificates and the number of shares transferred .
No shares of stock against which the corporation holds any unpaid claim shall be transferable in
the books of the corporation. (Emphasis ours)
Petitioners argue that by virtue of the Deed of Assignment, private respondents had relinquished
to them any and all rights they may have had as stockholders of the Bank. While it may be true
that there was an assignment of private respondents' shares to the petitioners, said assignment
was not sufficient to effect the transfer of shares since there was no endorsement of the
certificates of stock by the owners, their attorneys-in-fact or any other person legally authorized
to make the transfer. Moreover, petitioners admit that the assignment of shares was not coupled
with delivery, the absence of which is a fatal defect. The rule is that the delivery of the stock
certificate duly endorsed by the owner is the operative act of transfer of shares from the lawful
owner to the transferee. Thus, title may be vested in the transferee only by delivery of the duly
indorsed certificate of stock.
We have uniformly held that for a valid transfer of stocks, there must be strict compliance with the
mode of transfer prescribed by law. The requirements are :
(a) There must be delivery of the stock certificate:
(b) The certificate must be endorsed by the owner or his attorney-in-fact or other persons legally
authorized to make the transfer; and
c) To be valid against third parties, the transfer must be recorded in the books of the corporation.
As it is, compliance with any of these requisites has not been clearly and sufficiently shown.

It may be argued that despite non-compliance with the requisite endorsement and delivery, the
assignment was valid between the parties, meaning the private respondents as assignors and
the petitioners as assignees. While the assignment may be valid and binding on the petitioners
and private respondents, it does not necessarily make the transfer effective. Consequently, the
petitioners, as mere assignees, cannot enjoy the status of a stockholder, cannot vote nor be voted
for, and will not be entitled to dividends, insofar as the assigned shares are concerned.
Parenthetically, the private respondents cannot, as yet, be deprived of their rights as stockholders,
until and unless the issue of ownership and transfer of the shares in question is resolved with
finality.
There being no showing that any of the requisites mandated by law was complied with, the SEC
Hearing Officer did not abuse his discretion in granting the issuance of the preliminary injunction
prayed for by petitioners in SEC Case No. 02-94-4683 (herein private respondents). Accordingly,
the order of the SEC en banc affirming the ruling of the SEC Hearing Officer, and the Court of
Appeals decision upholding the SEC en banc order, are valid and in accordance with law and
jurisprudence, thus warranting the denial of the instant petition for review.
ALFONSO S. TAN, Petitioner, vs. SECURITIES AND EXCHANGE COMMISSION, VISAYAN
EDUCATIONAL SUPPLY CORP., TAN SU CHING, ALFREDO B. UY, ANGEL S. TAN and
PATRICIA AGUILAR, Respondents (G.R. No. 95696; March 3, 1992)
FACTS: With the withdrawal of two of the original incorporators, petitioner Alfonso Tan assigned
50 of his 400 shares (covered by Stock Certificate No. 2) to his brother Angel S. Tan, private
respondent.
Petitioner’s stock certificate was cancelled by the corporate secretary, Patricia Aguilar, by virtue
of Resolution No. 1981(b), while petitioner was still the president and member of the board.
With the cancellation of Certificate of stock No. 2 and the subsequent issuance of Stock Certificate
No. 6 in the name of Angel S. Tan and for the remaining 350 shares, Stock Certificate No. 8 was
issued in the name of petitioner Alfonso S. Tan, Mr. Buzon, submitted an Affidavit (Exh. 29),
alleging that:
9. That in view of his having taken 33 1/3 interest, I was personally requested by Mr. Tan Su
Ching to request Mr. Alfonso Tan to make proper endorsement in the cancelled Certificate of
Stock No. 2 and Certificate No. 8, but he did not endorse, instead he kept the cancelled (1981)
Certificate of Stock No. 2 and returned only to me Certificate of Stock No. 8, which I delivered to
Tan Su Ching.
10. That the cancellation of his stock (Stock No. 2) was known by him in 1981; that it was Stock
No. 8 that was delivered in March 1983 for his endorsement and cancellation.
Petitioner filed with the SEC a case questioning the cancellation of the aforesaid Stock Nos. 2
and 8.
ISSUE: WON the cancellation and transfer of stock certificate no. 2 was valid?
HELD: Yes. Petitioner claims that "(T)he cancellation and transfer of petitioner's shares and
Certificate of Stock No. 2 (Exh. A) as well as the issuance and cancellation of Certificate of Stock
No. 8 (Exh. M) was patently and palpably unlawful, null and void, invalid and fraudulent." ( Rollo
, p. 9) And, that Section 63 of the Corporation Code of the Philippines is "mandatory in nature",
meaning that without the actual delivery and endorsement of the certificate in question, there can
be no transfer, or that such transfer is null and void.
Contrary to the understanding of the petitioner with respect to the use of the word "may", in the
case of Shauf v. Court of Appeals , (191 SCRA 713, 27 November 1990), this Court held, that
"Remedial law statues are to be construed liberally." The term 'may' as used in adjective rules, is
only permissive and not mandatory.
This Court held in Chua v . Samahang Magsasaka , that "the word "may" indicates that the transfer
may be effected in a manner different from that provided for in the law." (62 Phil. 472)
Moreover, it is safe to infer from the facts deduced in the instant case that, there was already
delivery of the unendorsed Stock Certificate No. 2, which is essential to the issuance of Stock
Certificate Nos. 6 and 8 to angel S. Tan and petitioner Alfonso S. Tan, respectively. What led to
the problem was the return of the cancelled certificate (No. 2) to Alfonso S. Tan for his
endorsement and his deliberate non-endorsement.
For all intents and purposes, however, since this was already cancelled which cancellation was
also reported to the respondent Commission, there was no necessity for the same certificate to
be endorsed by the petitioner. All the acts required for the transferee to exercise its rights over
the acquired stocks were attendant and even the corporation was protected from other parties,
considering that said transfer was earlier recorded or registered in the corporate stock and
transfer book.
Following the doctrine enunciated in the case of Tuazon v . La Provisora Filipina , where this
Court held, that:
But delivery is not essential where it appears that the persons sought to be held as stockholders
are officers of the corporation, and have the custody of the stock book . . . (67 Phi. 36).
Furthermore, there is a necessity to delineate the function of the stock itself from the actual
delivery or endorsement of the certificate of stock itself as is the question in the instant case. A
certificate of stock is not necessary to render one a stockholder in corporation.
Nevertheless, 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 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, but is not in law the equivalent of such ownership. It expresses the contract
between the corporation and the stockholder, but is not essential to the existence of a share in
stock or the nation of the relation of shareholder to the corporation. (13 Am. Jur. 2d, 769)
Under the instant case, the fact of the matter is, the new holder, Angel S. Tan has already
exercised his rights and prerogatives as stockholder and was even elected as member of the
board of directors in the respondent corporation with the full knowledge and acquiescence of
petitioner. Due to the transfer of fifty (50) shares, Angel S. Tan was clothed with rights and
responsibilities in the board of the respondent corporation when he was elected as officer thereof.
Besides, in Philippine jurisprudence, a certificate of stock is not a negotiable instrument. "Although
it is sometime regarded as quasi negotiable , in the sense that it may be transferred by
endorsement, coupled with delivery, it is well-settled that it is non-negotiable, because the holder
thereof takes it without prejudice to such rights or defenses as the registered owner/s or
transferror's creditor may have under the law, except insofar as such rights or defenses are
subject to the limitations imposed by the principles governing estoppel." (De los Santos vs.
McGrath, 96 Phil. 577)
To follow the argument put up by petitioner which was upheld by the Cebu SEC Extension Office
Hearing Officer, Felix Chan, that the cancellation of Stock Certificate Nos. 2 and 8 was null and
void for lack of delivery of the cancelled "mother" Certificate No. 2 whose endorsement was
deliberately withheld by petitioner, is to prescribe certain restrictions on the transfer of stock in
violation of the corporation law itself as the only law governing transfer of stocks. While Section
47(s) grants a stock corporation the authority to determine in the by-laws "the manner of issuing
certificates" of shares of stock, however, the power to regulate is not the power to prohibit , or to
impose unreasonable restrictions of the right of stockholders to transfer their shares. (Emphasis
supplied)

In Fleisher v . Botica Nolasco Co ., Inc ., it was held that a by-law which prohibits a transfer of
stock without the consent or approval of all the stockholders or of the president or board of
directors is illegal as constituting undue limitation on the right of ownership and in restraint of
trade. (47 Phil. 583)
LEE E. WON alias RAMON LEE, plaintiff-appellant, vs. WACK WACK GOLF and COUNTRY
CLUB, INC., defendant-appellee (G.R. No. L - 10122; August 30, 1958)
FACTS: The defendant corporation issued membership certificate no. 201 to Iwao Teruyama
which on April 1944, was assigned to MT Reyes and on the same year assigned to herein plaintiff-
appellant. On April 26, 1955, the plaintiff filed an action against the defendant alleging that shortly
after its rehabilitation after the war, plaintiff asked that the assignment be registered in the books
of the defendant and that the latter refused and still refuses to do so unlawfully.
Defendant filed a motion to dismiss on the ground that 11 years have elapsed from the time of
the assignment up to the time of the filing of the complaint, beyond the 5 year period provided
under Art. 1149 of the Civil Code. The trial court dismissed the action and denied reconsideration.
ISSUE: WON plaintiff was bound to present and register the certificate assigned to him within any
definite or fixed period?
HELD: No. The defendant has not made herein any pretense to that effect; but it contends that
from the moment the certificate was assigned to the plaintiff, the latter's right to have the
assignment registered commenced to exist. This contention is correct, but it would not follow that
said right should be exercised immediately or within a definite period. The existence of a right is
one thing, and the duration of said right is another .
On the other hand, it is stated in the appealed order of dismissal that the plaintiff sought to register
the assignment on April 13, 1955; whereas in plaintiff's brief it is alleged that it was only in
February, 1955, when the defendant refused to recognize the plaintiff. If, as already observed,
there is no fixed period for registering an assignment, how can the complaint be considered as
already barred by the Statute of Limitations when it was filed on April 26, 1955, or barely a few
days (according to the lower court) and two months (according to the plaintiff), after the demand
for registration and its denial by the defendant. Plaintiff's right was violated only sometime in 1955,
and it could not accordingly have asserted any cause of action against the defendant before that.
The defendant seems to believe that the plaintiff was compelled immediately to register his
assignment. Any such compulsion is obviously for the benefit of the plaintiff, because it is only
after registration that the transfer would be binding against the defendant. But we are not here
concerned with a situation where the plaintiff claims anything against the defendant allegedly
accruing under the outstanding certificate in question between the date of the assignment to the
plaintiff and the date of the latter’s demand for registration and issuance of a new certificate.
APOLINARIO G. DE LOS SANTOS and ISABELO ASTRAQUILLO, plaintiffsappellees, vs.
J. HOWARD MCGRATH ATTORNEY GENERAL OF THE UNITED STATES, SUCCESSOR TO
THE PHILIPPINE ALIEN PROPERTY ADMINISTRATION OF THE UNITED STATES,
defendant-appellant. REPUBLIC OF THE PHILIPPINES, intervenor-appellant ( G.R. No. L -
4818; February 28, 1955)
FACTS: Plaintiff delos Santos alleges that he purchased 55,000 shares of Lepanto Consolidated
Mining Co., Inc. from Juan Campos, and later 200,000 shares from Carl Hess and much later
800,000 still from Hess (for the account and benefit of Astraquillo). Both of the supposed vendors,
now deceased.
By virtue of vesting order P-12, title to the 1,600,000 shares in dispute was, however, vested in
the Alien Property Custodian of the US. In due course, the Vested Property Claims Committee of
the Philippine Alien Property Administration made a “determination” allowing said claims, which
were considered and hear jointly. But upon personal review of the Philippine Alien Property
Administrator, the “determination” was reversed and decreed that “title to the shares in question
shall remain in the name of the Philippine Alien Property Administrator”.
Consequently, plaintiffs instituted the present action to establish title to the aforementioned shares
of stock.
Defendant Attorney General of the US contends that the shares were bought by Vicente Madrigal,
in trust and for the benefit, of the Mistsui Bussan, abranch office of a Japanese company; and
that Madrigal endorsed in blank and delivered the shares to Mistsui for safe keeping; that Mitsui
never sold or otherwise disposed of the said shares; and that the stock certificates must have
been stolen or looted during the emergency from the liberation.
ISSUE: WON plaintiffs are the rightful owners of the shares?
HELD: No. Even, however, if Juan Campos and Carl Hess had sold the shares of stock in
question, as testified to by De los Santos, the result, insofar as plaintiffs are concerned, would be
the same. It is not disputed that said shares of stock were registered, in the records of the Lepanto,
in the name of Vicente Madrigal. Neither is it denied that the latter was, as regards said shares of
stock, a mere trustee for the benefit of the Mitsuis. The record shows — and there is no evidence
to the contrary — that Madrigal had never disposed of said shares of stock in any manner
whatsoever, except by turning over the corresponding stock certificates, late in 1941, to the
Mitsuis, the beneficial and true owners thereof. It has, moreover, been established, by the
uncontradicted testimony of Kitajima and Miwa, the managers of the Mitsuis in the Philippines,
from 1941 to 1945, that the Mitsuis had neither sold, conveyed, or alienated said shares of stock,
nor delivered the aforementioned stock certificates, to anybody during said period. Section 35 of
the Corporation Law reads:
The capital stock corporations shall be divided into shares for which certificates signed by the
president or the vice-president, countersigned by the secretary or clerk and sealed with the seal
of the corporation, shall be issued in accordance with the by-laws. Shares of stock so issued are
personal property and may be transferred by delivery of the certificate endorsed by the owner or
his attorney in fact or other person legally authorized to make the transfer. No transfer, however,
shall be valid, except as between the parties, until the transfer is entered and noted upon the
books of the corporation so as to show the names of the parties to the transaction, the date of the
transfer, the number of the certificate, and the number of shares transferred.
Pursuant to this provision, a share of stock may be transferred by endorsement of the
corresponding stock certificate, coupled with its delivery. However, the transfer shall " not be valid,
except as between the parties," until it is "entered and noted upon the books of the corporation."
no such entry in the name of the plaintiffs herein having been made, it follows that the transfer
allegedly effected by Juan Campos and Carl Hess in their favor is "not valid, except as between"
themselves. It does not bind either Madrigal or the Mitsuis, who are not parties to said alleged
transaction. What is more, the same is "not valid," or, in the words of the Supreme Court of
Wisconsin (Re Murphy, 51 Wisc. 519, 8 N. W. 419) — which were quoted approval in Uson vs.
Diosomito (61 Phil., 535) — "absolutely void" and, hence, as good as non-existent, insofar as
Madrigal and the Mitsuis are concerned. For this reason, although a stock certificate is sometimes
regarded as quasi-negotiable, in the sense that it may be transferred by endorsement, coupled
with delivery, it is well settled that the instrument is non-negotiable, because the holder thereof
takes it without prejudice to such rights or defenses as the registered owner or creditor may have
under the law, except insofar as such rights or defenses are subject to the limitations imposed by
the principles governing estoppel.
Certificates of stock are not negotiable instruments (post, Par. 102), consequently, a transferee
under a forged assignment acquires no title which can be asserted against the true owner, unless
his own negligence has been such as to create an estoppel against him (Clarke on Corporations,
Sec. Ed. p. 415). If the owner of the certificate has endorsed it in blank, and it is stolen from him,
no title is acquired by an innocent purchaser for value (East Birmingham Land Co. vs. Dennis, 85
Ala. 565, 2 L.R.A. 836; Sherwood vs. mining co., 50 Calif. 412).
In the case at bar, neither madrigal nor the Mitsuis had alienated shares of stock in question. It is
not even claimed that either had, through negligence, given — occasion for an improper or
irregular disposition of the corresponding stock certificates.
E. FORGED AND UNAUTHORIZED TRANSFERS
FORGED AND UNAUTHORIZED TRANSFERS V S . UNAUTHORIZED ISSUANCE OF STOCK
CERTIFICATES: In the former, what is forged or unauthorized is the transfer of the certificate
from the true and lawful owner to another person. While the latter refers to the act of the
corporation in issuing the certificate, either fraudulently or by mistake.
In forged or unauthorized transfer: 1. The purchaser or purchasers, no matter how innocent they
may have been, will acquire no title as against the lawful owner by virtue of the doctrine of non-
negotiability of certificates of stock; 2. The purchaser will have no right or remedy against the
corporation because he took the shares not by virtue of a misrepresentation made by the
corporation but on the faith of a forged endorsement or unauthorized transfer; 3. The corporation
incurs no liability to the person in whose favor the certificate is endorsed or issued. 4. If the old
certificate is cancelled and new one is issued by the corporation, the holder thereof may be
required to return the same for its cancellation; 5. However, if new certificates are issued and
passes into the hands of a subsequent bona fide purchaser, the latter may rightfully acquire title
thereto since the corporation will be estopped to deny the validity thereof; 6. The subsequent
purchaser in good faith took the shares, not by virtue of a forged or unauthorized transfer but on
reliance to the genuineness of the certificate issued by the corporation or by virtue of the
representation made by the corporation that the same is valid and therefore, compel the
corporation to recognize him as a stockholder or claim reimbursement and damages against the
latter.
Example: A owns 100 shares of X Co., B stole the stock certificate and forged A’s signature: a. If
B indorsed and sold it to C: 1. C will not acquire title to the shares whether he is innocent or not;
2. C cannot compel the corporation to register him as stockholder; 3. X Co. does not incur any
liability in favor of C b. If X Co. cancelled the certificate and issued a new one to C: 1. If A later on
finds out that his certificate was stolen, C may still be required to return the new certificate; 2. If
C sold it to D, an innocent purchaser, D may rightfully acquire thereto since X Co. is estopped to
deny the validity of the certificate; 3. If A later on finds out that his certificate was stole, X Co. may
be compelled to recognize both A and D as stockholders.*
*This is so because the A cannot be deprived of his rights as owner by virtue of a forged transfer,
and B, because of X Co.’s representation that the person named therein is the owner of shares
in the corporation.
c. If (b3) above would result in over-issuance of shares 1. Only A, the rightful owner may be
recognized and A will have a right to compel X Co. to issue him a new certificate; 2. D will be
entitled to damages from the X Co.; 3. X Co. will have a right of action against the who made false
representation and in whose favor a new certificate is issued.**
**In this sense, if D sues X Co., the latter will have no valid defense, but he may institute a third
party complaint against C. If C is an innocent purchaser, X Co., may file a fourth party complaint
against B.
ISSUANCE OF STOCK CERTIFICATION
Subscriptions to shares of stock are indivisible such that a subscriber to such shares will not be
entitled to the issuance of a stock certificate until he has paid the full amount of his subscription.
Section 64. Issuance of stock certificates. - No certificate of stock shall be issued to a
subscriber until the full amount of his subscription together with interest and expenses (in
case of delinquent shares), if any is due, has been paid. (37)
INDIVISIBILITY: As the law stands now, subscription to shares of stock are deemed indivisible
and no certificate of stock can be issued unless and until the full amount of his subscription
including interest and expenses, if any is paid.
The ruling, therefore, in Baltazar vs. Lingayen Gulf Electronic Power Co where a subscriber may
opt to apply his partial payment to a corresponding number of shares, will not hold true. Thus,
even if under the old law, where a corporation may, under a by-law provision or by custom,
practice or tradition, issue stock certificates covering the number of shares that might have been
correspondingly paid, this authority or practice is valid only two years after the effectivity of the
Corporation Code and after which corporations, registered under the said law should comply with
the mandatory requirement of Sec. 64. The Corporation Code thus provides:
Sec. 148.
ApplIcability to existing corporations . - All corporations lawfully existing and doing business in the
Philippines on the date of the effectivity of this Code and heretofore authorized, licensed or
registered by the Securities and Exchange Commission, shall be deemed to have been
authorized, licensed or registered under the provisions of this Code, subject to the terms and
conditions of its license, and shall be governed by the provisions hereof: Provided, That if any
such corporation is affected by the new requirements of this Code, said corporation shall, unless
otherwise herein provided, be given a period of not more than two (2) years from the effectivity of
this Code within which to comply with the same.
MANDAMUS: Once a subscriber has paid his subscription in full, he becomes entitled to be issued
a stock certificate and in the event that the corporation refuses to do so, the stockholder may
institute a case for mandamus with damages, such issuance being ministerial.
FUA CUN ( alias Tua Cun), plaintiff-appellee, vs. RICARDO SUMMERS, in his capacity as
Sheriff ex-oficio of the City of Manila, and the CHINA BANKING CORPORATION,
defendants-appellants (G.R. No. L - 19441; March 27, 1923)
FACTS: Chua Soco subscribed to 500 shares of defendant Bank paying 50% of the subscription
price and a corresponding receipt being issued therefor. Such shares were mortgaged to plaintiff
Fua Cun to secure a loan evidenced by a promissory note, together with the receipt, which was
endorsed and delivered to plaintiff mortgagee. Plaintiff informed the manager of the Bank about
the transaction but was told to await action by the BOD.
In the meantime, Chua Soco became indebted to the bank, and in the action for recovery of
money, his 500 shares were attached.
Fua Cun thereupon instituted the present action maintaining that the payment of 50% of the
subscription entitled Chua Soco to 250 shares and prayed that his lien on the shares by virtue of
the chattel mortgage be declared to have priority over the claim of defendant Bank.
The trial court rendered judgment in favor of plaintiff.
ISSUE: (1) WON Chua Soco became entitled to 250 shares or the proportionate share to his
partial payment?
(2) WON plaintiff had a superior claim over that of the Bank?
HELD: (1) No. (2) Yes.
Though the court below erred in holding that Chua Soco, by paying one-half of the subscription
price of five hundred shares, in effect became the owner of two hundred and fifty shares, the
judgment appealed from is in the main correct.
The claim of the defendant Banking Corporation upon which it brought the action in which the writ
of attachment was issued, was for the non-payment of drafts accepted by Chua Soco and had no
direct connection with the shares of stock in question. At common law a corporation has no lien
upon the shares of stockholders for any indebtedness to the corporation (Jones on Liens, 3d ed.,
sec. 375) and our attention has not been called to any statute creating such lien here. On the
contrary, section 120 of the Corporation Act provides that "no bank organized under this Act shall
make any loan or discount on the security of the shares of its own capital stock, nor be the
purchaser or holder of any such shares, unless such security or purchase shall be necessary to
prevent loss upon a debt previously contracted in good faith, and stock so purchased or acquired
shall, within six months from the time of its purchase, be sold or disposed of at public or private
sale, or, in default thereof, a receiver may be appointed to close up the business of the bank in
accordance with law."
There can be no doubt that an equity in shares of stock may be assigned and that the assignment
is valid as between the parties and as to persons to whom notice is brought home. Such an
assignment exists here, though it was made for the purpose of securing a debt. The endorsement
to the plaintiff of the receipt above mentioned reads:
For value received, I assign all my rights in these shares in favor of Mr. Tua Cun.
Manila, P. I., May 18, 1921.
(Sgd.) CHUA SOCO
This endorsement was accompanied by the delivery of the receipt to the plaintiff and further
strengthened by the execution of the chattel mortgage, which mortgage, at least, operated as a
conditional equitable assignment.
As against the rights of the plaintiff the defendant bank had, as we have seen, no lien unless by
virtue of the attachment. But the attachment was levied after the bank had received notice of the
assignment of Chua Soco's interests to the plaintiff and was therefore subject to the rights of the
latter. It follows that as against these rights the defendant bank holds no lien whatever.
As we have already stated, the court erred in holding the plaintiff as the owner of two hundred
and fifty shares of stock; "the plaintiff's rights consist in an equity in five hundred shares and upon
payment of the unpaid portion of the subscription price he becomes entitled to the issuance of
certificate for said five hundred shares in his favor."
The judgment appealed from is modified accordingly, and in all other respects it is affirmed, with
the costs against the appellants Banking Corporation. So ordered.
F. WATERED STOCKS
DEFINITION: Watered stocks may be defined as one which is issued by the corporation as fully
paid-up shares, when in fact the whole amount of the value thereof has not been paid. If the
shares have thus been issued by the corporation as fully paid, when in fact it has intentionally and
knowingly received or agreed to receive nothing at all for them, or less than their par value, either
in money, property or services, the shares are said to be “watered” or “fictitiously paid-up” to the
extent to which they have not been issued or are not to be paid for”
Section 65. Liability of directors for watered stocks. - Any director or officer of a
corporation consenting to the issuance of stocks for a consideration less than its par or
issued value or for a consideration in any form other than cash, valued in excess of its fair
value, or who, having knowledge thereof, does not forthwith express his objection in
writing and file the same with the corporate secretary, shall be solidarily, liable with the
stockholder concerned to the corporation and its creditors for the difference between the
fair value received at the time of issuance of the stock and the par or issued value of the
same. (n)
RIGHT OF CORPORATION AND CREDITORS: The law does not make any distinction as to the
right of the corporation and its creditors to enforce payment of the water in the stocks issued,
thus, it applies to all creditors whether prior or subsequent to the issuance of the watered stock.
SOLIDARY LIABILITY: All consenting directors and officers are solidarily liable for the “water” in
the stock.
NON - CONSENTING DIRECTORS : may be absolved of liability by their written dissent.
Otherwise, if they did not issue such written dissent or are passive, they may be held liable for
not objecting thereto.
ISSUANCE OF WATERED STOCKS: may be effected in the following ways:
1. For a monetary consideration less than its par or issue value;
2. For a consideration in property, tangible or intangible, valued in excess of its market value;
3. Gratuitously or under an agreement that nothing shall be paid at all; or
4. In the guise of stock dividends when there are no surplus profits of the corporation.

ILLUSTRATION: X Co. has P10M Authorized Capital Stock divided into: (1) 5M shares at P1.00
par value; and (2) 1M no par value shares with issued value at P5.00. A acquired 1M of the par
value shares for P.80 and 100,000 no par value shares at P4.00: 1. WATERED STOCK: There
is stock watering for both shares. Sec. 65 speaks of issuance of shares at “less than its par or
issued value”; 2. LIABILITY FOR PAR VALUE SHARES: The directors who consented to the
issuance or were passive about it, without written dissent, are solidarily liable with A for the
difference of P.20; 3. LIABILITY FOR NO PAR VALUE SHARES: A cannot be held liable because
the no par value shares are “deemed fully paid and non-assessable” (Sec. 6). Accordingly, only
the directors or officers consenting to the issuance are liable.
ILLUSTRATION2: X Co. has P100M Authorized Capital Stock divided into 100M shares at P1.00
par value, there is a provision in the by-laws denying the pre-emptive right of the shareholders.
The Board of Directors subscribed to 1M of the unissued shares at P2.00 each when the fair
market value of the shares was P12.00. 1. WATERED STOCK: No stock watering, since the
shares were subscribed for more than the par value, notwithstanding if it less than the fair market
value; 2. If 3 days later, the members of the Board sold those purchased shares at P12.00 per
share, making a profit of P10.00 per share, they cannot be held liable for stock watering but they
can be question on their duty of loyalty. Since the whole P12.00 per share could’ve gone to the
coffers of the corporation instead of them reaping the profits for themselves.
EFFECTS OF ISSUANCE OF WATERED STOCKS:
1. The corporation is deprived of its capital thereby hurting its business prospects, financial
capability and responsibility; 2. Stockholder who paid their subscriptions in full, or promised to pay
the same, are injured and prejudiced by the reduction of their proportionate interest in the
corporation; and
3. Present and future creditors are deprived of the corporate assets for the protections of their
interest.
BASIS OF LIABILITY:
1. “Trust Fund Doctrine” – the capital stock of the corporation is treated as inclusive of the unpaid
portion of subscriptions to said capital, as a “trust fund” which the creditors have a right to look up
to for the satisfaction of their claims. Stockholders, therefore, are mandated to pay the full value
of their shares.
2. “Fraud or Misrepresentation Theory” – liability is based on the false representation made by
the corporation and the stockholder concerned to the creditors that the true par value or issued
price of the shares has been paid or promised to be paid in full.
CONSEQUENCES OF ISSUANCE OF WATERED STOCKS (FLETCHER):
1. As to the corporation – when a corporation is guilty of ultra-vires or illegal acts which constitute
an injury to or fraud upon the public, or which will tend to injure or defraud the public, the State
may institute a quo-warranto proceeding to forfeit its charter for the misuse or abuse of its
franchise;
2. As between the corporation and the subscriber – the subscription is void. Such being the case,
the subscriber is liable to pay the full or par or issued value thereof, to render it valid and effective;
3. As to the consenting stockholders – they are estopped from raising any objection thereto;
4. As to dissenting stockholders – in view of the dilution of their proportionate interest in the
corporation, they may compel the payment of the “water” in the stock solidarily against the
responsible and consenting directors and officers inclusive of the holder of the watered stock;
5. As to creditors – they may enforce payment of the difference in the price, or the water in the
stock, solidarily against the responsible directors/officers and the stockholders concerned; and
6. As against the transferees of the watered stocks – his right is the same as that of his transferor.
If, however, a certificate of stock has been issued and duly indorsed to a bona fide purchaser,
without knowledge, actual or constructive, the latter cannot be held liable, at least as against the
corporation, since he took the shares on reliance of the misrepresentation made by the
corporation that the stock certificate is valid and subsisting. This is because a corporation is
prohibited from issuing certificates of stock until the full value of the subscriptions have been paid
and could not, therefore, deny the validity of the stock certificate it issued as against a purchaser
in good faith. Thus, Ballantine states that whether there is any liability on the part of the transferee
of watered stock is made to depend upon whether he acquired the same wit h o u t n o tic e ,
either as purchaser or donee. If he had knowledge thereof, he is subject to the same liability as
his transferor.

LIABILITY FOR INTEREST : Aside from the value of their subscription, subscribers may likewise
be required to pay interest on all unpaid subscriptions if so imposed in the contract or in the
corporate by-laws at such rate as may be indicated thereat or the legal rate if so not fixed. Unless
so required or provided, however, the subscribers to shares of stock, not fully paid, are not liable
to pay interest on their unpaid subscriptions.

Section 66. Interest on unpaid subscriptions. - Subscribers for stock shall pay to the
corporation interest on all unpaid subscriptions from the date of subscription, if so
required by, and at the rate of interest fixed in the by-laws. If no rate of interest is fixed in
the by-laws, such rate shall be deemed to be the legal rate. (37)
G. ENFORCEMENT OF PAYMENT OF SUBSCRIPTIONS
TIME OF PAYMENT :
Unpaid subscription or any percentage thereof, together with interest if required by the by-laws or
the contract of subscription, shall be paid either:
1. On the date or dates fixed in the contract or subscription;
2. On the date or dates that may be specified by the BOD pursuant to a “call” declaring any or all
unpaid portion thereof to be so payable.

REMEDIES TO ENFORCE PAYMENT ON UNPAID SUBSCRIPTION:

1. By board action in accordance with the procedure laid down in Sec. 67 to 69 of the Code; and
2. By a collection case in court as provided for in section 70.

CREDITOR/RECEIVER: Failure or refusal of the BOD to enforce or collect payment of unpaid

subscription will not prevent the creditors or the receiver of the corporation to institute a court
action to collect the unpaid portion thereof. This is because the capital of the corporation is the
basis of the credit of and financial responsibility of the corporation. Persons dealing with a
corporation and extending credit to it have a right to insist that the unpaid subscription shall be
paid in when this becomes necessary for the satisfaction of their claims. This is otherwise known
as the Trust Fund Doctrine which states that subscriptions to the capital of a corporation constitute
a fund to which creditors have the right to look up to for the satisfaction of their claims.
Section 67. Payment of balance of subscription. - Subject to the provisions of the contract
of subscription, the board of directors of any stock corporation may at any time declare
due and payable to the corporation unpaid subscriptions to the capital stock and may
collect the same or such percentage thereof, in either case with accrued interest, if any, as
it may deem necessary.
Payment of any unpaid subscription or any percentage thereof, together with the interest
accrued, if any, shall be made on the date specified in the contract of subscription 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 rate of interest is provided in the bylaws,
computed from such date until full payment. If within thirty (30) days from the said date no
payment is made, all stocks covered by said subscription shall thereupon become
delinquent and shall be subject to sale as hereinafter provided, unless the board of
directors orders otherwise. (38)
Section 68. Delinquency sale. - The board of directors may, by resolution, order the sale of
delinquent stock and shall specifically state the amount due on each subscription plus all
accrued interest, and the date, time and place of the sale which shall not be less than thirty
(30) days nor more than sixty (60) days from the date the stocks become delinquent.
Notice of said sale, with a copy of the resolution, shall be sent to every delinquent
stockholder either personally or by registered mail. The same shall furthermore be
published once a week for two (2) consecutive weeks in a newspaper of general circulation
in the province or city where the principal office of the corporation is located.
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 his subscription, plus accrued
interest, costs of advertisement and expenses of sale, or unless the board of directors
otherwise orders, said delinquent stock shall be sold at public auction to such bidder who
shall offer 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 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 his 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 paid in full 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. (39a-46a)
PROCEDURE:
1. The BOD, by a formal Resolution, declares the whole or any percentage unpaid subscriptions
to be due and payable on a specified date. However, if the contract of subscription provides the
date or dates when payment is due, no ”call” or declaration by the board is necessary;
2. The stockholders concerned are given notice of the board resolution by the corporation either
personally or by registered mail. Publication of the notice of call is not required unless the by-laws
provide otherwise. Notice is not likewise necessary if the contract of the subscription stipulates a
specific date when any unpaid portion is due and payable;
3. Payment shall be made on the date specified in the call or on the date provided for in the
contract of subscription;
4. Failure to pay on the date required in the call or as specified in the contract of subscription will
render the entire balance due and payable and making the stockholder liable for the interest;
5. If within 30 days from the date, no payment is made, all the stock covered by the subscription
shall become delinquent and shall be subject to a delinquency sale;
6. The board, by resolution, orders the sale of the delinquent stock stating the amount due and
the date, time and place of the sale;
7. The sale shall be made not less than 30 days nor more than 60 days from the date the stocks
become delinquent;
8. Publication of the notice of sale must be made once a week for 2 consecutive weeks in the
newspaper of general circulation in the province or city where the principal office is located;
9. Sale at public auction, if no payment is made by the delinquent stockholder, in favor of the
bidder who offered to pay the full amount of the balance in the subscription, inclusive of interest,
cost of advertisement and expenses for the smallest number of shares;
10. Registration or transfer of the shares of stock in the name of the bidder and corresponding
issuance of the stock certificate covering the shares successfully bidded;
11. If there be any remaining shares, the same shall be credited in favor of the delinquent
stockholder who shall be entitled to the issuance of a certificate of stock covering such shares;
12. If there is no bidder at the public auction, the corporation may, subject to the provisions of the
Code, bid for the same and the total amount due shall be credited or paid in full in the corporate
books; and
13. The shares so purchased by the corporation shall be vested in the latter as treasury shares.

HIGHEST BIDDER: in the case of sale of delinquent stock, and as indicated in number 10 above,
is such bidder who shall offer to pay the full amount of the balance on the subscription together
with accrued interest, cost of advertisement and expenses of sale, for the smallest number of
shares or fraction of a share. It should be properly termed “Lowest” Bidder because the bidders
are offering to pay the same amount, and their bids are based on the number of shares they are
willing to receive, the lowest of which is the winning bid.
Ex. A subscribed to 100 shares of stock for P100.00 each and paid only 50% and later on declared
to be delinquent. For the full amount of P5,000 (unpaid balance) and the interests, costs, and
expenses, the following bidders are willing to accept - X: 70 shares; Y: 80 shares; Z: 90 shares.
In this case, X would be the highest bidder. The remaining 30 shares would be credited to A.
*NO BIDDER: If there was no bidder, the company has to have unrestricted retained earnings in
order to acquire the shares as thus provided under Sec. 41 of the Corporation Code (Power to
Acquire Own Shares). Accordingly, if the company has no unrestricted retained earnings, it cannot
acquire the said shares by virtue of a delinquency sale, however, it may institute an action for the
recovery of the subscription price under Sec. 70.
MAY A DIRECTOR DECLARED TO BE DELINQUENT ON HIS SUBSCRIPTION BE ALLOWED
TO CARRY OUT HIS FUNCTIONS AS SUCH DIRECTOR? Yes. He is still a shareholder entitled
to all the rights as such, and pending the sale, the shares still stand in his name. Even after the
sale, he may still be credited to some of the shares and he only needs 1 to qualify as a director.
Section 69. When sale may be questioned. - No action to recover delinquent stock sold can
be sustained upon the ground of irregularity or defect in the notice of sale, or in the sale
itself of the delinquent stock, unless the party seeking to maintain such action first pays
or tenders to the party holding the stock the sum for which the same was sold, with interest
from the date of sale at the legal rate; and no such action shall be maintained unless it is
commenced by the filing of a complaint within six (6) months from the date of sale. (47a)
TWO CONDITIONS:
1. The party seeking to maintain such action first pays or tenders to the party holding the stock
the sum for which the same was sold, with interest from the date of the sale at the legal rate; and
2. The action shall be commenced by the filing of a complaint within 6 months from the date of
sale.

ACTION BY THE CORPORATION:

Notwithstanding the provisions of Sec. 67 to 69, the corporation may enforce payment of unpaid
subscriptions by court action.
Section 70. Court action to recover unpaid subscription. - Nothing in this Code shall
prevent the corporation from collecting by action in a court of proper jurisdiction the
amount due on any unpaid subscription, with accrued interest, costs and expenses. (49a)
CALL: Consistent with Art. 1169 of the Civil Code, a “call” is a condition precedent before the right
of action to institute a recovery suit accrues. This is because a demand is required before a debtor
may incur a delay in the performance of his obligation. As earlier said however, a call is not
necessary if the contract of subscription provides for a date or dates when payment is due, or
when the corporation has become insolvent.
MIGUEL VELASCO, assignee of The Philippine Chemical Product Co. (Ltd.), plaintiff-
appellant, vs. JEAN M. POIZAT, defendant-appellee ( G.R. No. L - 11528; March 15, 1918)
FACTS: Defendant Jean M. Poizat subscribed to 20 shares of stock of The Philippine Chemical
Product Co., of which 5 were paid. In an action instituted by Miguel Velasco as assignee of the
company, he seeks to recover the balance of the subscription. The CFI rendered a judgment
dismissing the complaint. Hence, this appeal.
ISSUE: WON defendant is liable for the balance?
HELD: Yes. We think that Poizat is liable upon this subscription. A stock subscription is a contract
between the corporation on one side, and the subscriber on the other, and courts will enforce it
for or against either. It is a rule, accepted by the Supreme Court of the United States, that a
subscription for shares of stock does not require an express promise to pay the amount
subscribed, as the law implies a promise to pay on the part of the subscriber. (7 Ruling Case Law,
sec. 191.) Section 36 of the Corporation Law clearly recognizes that a stock subscription is
subsisting liability from the time the subscription is made, since it requires the subscriber to pay
interest quarterly from that date unless he is relieved from such liability by the by-laws of the
corporation. The subscriber is as much bound to pay the amount of the share subscribed by him
as he would be to pay any other debt, and the right of the company to demand payment is no less
incontestable.
The provisions of the Corporation Law (Act No. 1459) has given recognition of two remedies for
the enforcement of stock subscriptions. The first and most special remedy given by the statute
consists in permitting the corporation to put up the unpaid stock for sale and dispose of it for the
account of the delinquent subscriber. In this case the provisions of section 38 to 48, inclusive of
the Corporation Law are applicable and must be followed. The other remedy is by action in court,
concerning which we find in section 49 the following provision:
“Nothing in this Act shall prevent the directors from collecting, by action in any court of proper
jurisdiction, the amount due on any unpaid subscription, together with accrued interest and costs
and expenses incurred.”
ARNALDO F. DE SILVA, plaintiff-appellant, vs. ABOITIZ & COMPANY, INC., defendant-
appellee (G.R. No. L - 19893; March 31, 1923)
FACTS: Plaintiff de Silva subscribed to 650 shares of defendant company and paid 200 of such
subscription leaving a balance of P225,000. On April 22, 1922, he was informed by the corporate
secretary that he has been declared delinquent by the BOD and that he should pay the unpaid
subscription otherwise such shares shall be sold at a public auction.
De Silva filed a complaint in the CFI of Cebu, contending among others that the resolution adopted
was violative of Art. 46 of the by-laws stating that all shares subscribed and were not paid at the
time of the incorporation shall be paid out of the 70% of the profit obtained until such shares are
paid in full. De Silva contends that such article provides for the operative method of payment of
the shares, and by declaring the unpaid subscription to have become due and payable on May
31st and in publishing the notice declaring his shares to be delinquent, the company has
exceeded its executive authority.
ISSUE: WON the BOD may declare the unpaid shares delinquent or collect or enforce payment
of the same despite the provision of the by-laws?
HELD: Yes. It is discretionary on the part of the board of directors to do whatever is provided in
the said article relative to the application of a part of the 70 percent of the profit distributable in
equal parts on the payment of the shares subscribed to and not fully paid.
If the board of directors does not wish to make, or does not make, use of said authority it has two
other remedies for accomplishing the same purpose. As was said by this court in the case of
Velasco vs. Poizat (37 Phil., 802):
“The first and most special remedy given by the statute consists in permitting the corporation to
put the unpaid stock for sale and dispose of it for the account of the delinquent subscriber. In this
case the provisions of sections 38 to 48, inclusive, of the Corporation Law are applicable and
must be followed. The other remedy is by action in court.”
Admitting that the provision of article 46 of the said by-laws maybe regarded as a contract
between the defendant corporation and its stockholders , yet as it is only to the board of directors
of the corporation that said articles gives the authority or right to apply on the payment of unpaid
subscriptions such amount of the 70 percent of the profit distributable among the shareholders in
equal parts as may be deemed fit, it cannot be maintained that the said article has prescribe an
operative method for the payment of said subscription continuously until their full amortization.
In the instant case, the defendant corporation, through its board of directors, made use of its
discretionary power, taking advantage of the first of the two remedies provided by the aforesaid
law. On the other hand, the plaintiff has no right whatsoever under the provision of the above cited
article 46 of the said by-laws to prevent the board of directors from following, for that purpose,
any other method than that mentioned in the said article, for the very reason that the same does
not give the stockholders any right in connection with the determination of the question whether
or not there should be deducted from the 70 percent of the profit distributable among the
stockholders such amount as may be deemed fit for the payment of subscriptions due and unpaid.
Therefore, it is evident that the defendant corporation has not violated, nor disregarded any right
of the plaintiff recognized by the said by-laws, nor exceeded its authority in the discharge of its
executive functions, nor abused its discretion when it performed the acts mentioned in the
complaint as grounds thereof, and, consequently, the facts therein alleged do not constitute a
cause of action.
LINGAYEN GULF ELECTRIC POWER COMPANY, INC., plaintiffappellant, vs. IRINEO
BALTAZAR, defendant-appellee. (G.R. No. L - 4824; June 30, 1953)
LINGAYEN GULF ELECTRIC POWER COMPANY, INC., plaintiff-appellee, vs. IRINEO
BALTAZAR, defendant and appellant (G.R. No. L - 6244; June 30, 1953)
FACTS: Herein defendant Irineo Baltazar subscribed to 600 shares, at P100.000 par value per
share, of the plaintiff corporation paying P15,000 and making further payments leaving a balance
of P18,500.
On July 23, 1946, the stockholders, including herein defendant, approved Resolution No. 17
agreeing: (1) to “call” of the balance of the unpaid subscription to be paid: 50% within 60 days
beginning Aug. 1, 1946; the remaining 50% 60 days beginning October 1, 1946; (2) that all unpaid
subscriptions after the due dates of both calls to be subject to 12% interest per annum; (3) that
after the expiration of a grace period of 60 days, all unpaid subscribed shares would revert to the
corporation.
A demand was made against defendant, but was ignored. Hence this action.
ISSUE: WON Baltazar is liable to pay the unpaid portion of his subscription
HELD: No. We agree with the lower court that the law requires that notice of any call for the
payment of unpaid subscription should be made not only personally but also by publication. This
is clear from the provisions of section 40 of the Corporation Law, Act No. 1459, as amended.
It will be noted that section 40 is mandatory as regards publication, using the word "must". As
correctly stated by the trial court, the reason for the mandatory provision is not only to assure
notice to all subscribers, but also to assure equality and uniformity in the assessment on
stockholders. (14 C.J. 639).
We find the citation of authorities made by the plaintiff and appellant inapplicable. In the case of
Velasco vs. Poizat (37 Phil. 805), the corporation involved was insolvent, in which case all unpaid
stock subscriptions become payable on demand and are immediately recoverable in an action
instituted by the assignee. Said the court in that case:
“. . . . it is now quite well settled that when the corporation becomes insolvent, with proceedings
instituted by creditors to wind up and distribute its assets, no call or assessment is necessary
before the institution of suits to collect unpaid balance on subscription.”
But when the corporation is a solvent concern, the rule is:
“It is again insisted that plaintiffs cannot recover because the suit was not proceeded by a call or
assessment against the defendant as a subscriber, and that until this is done no right of action
accrues. In a suit by a solvent going corporation to collect a subscription, and in certain suits
provided by statute this would be true;. . . . . ( Id .)”
ISSUE 2: WON the Baltazar is correct in claiming that Resolution No. 17 of 1946 of the BOD
released him from the obligation to pay for his unpaid subscription?
HELD: No. There must be unanimous consent of the stockholders of the corporation. We quote
some authorities:
Subject to certain exceptions, considered in subdivision (3) of this section, the general rule is that
a valid and binding subscription for stock of a corporation cannot be cancelled so as to release
the subscriber from liability thereon without the consent of all the stockholders or subscribers.
Furthermore, a subscription cannot be cancelled by the company, even under a secret or
collateral agreement for cancellation made with the subscriber at the time of the subscription, as
against persons who subsequently subscribed or purchased without notice of such agreement.
(18 C.J.S. 874).
“(3) Exceptions.
In particular circumstances, as where it is given pursuant to a bona fide compromise, or to set off
a debt due from the corporation, a release, supported by consideration, will be effectual as against
dissenting stockholders and subsequent and existing creditors. A release which might originally
have been held invalid may be sustained after a considerable lapse of time. (18 C.J.S. 874).”
In the present case, the release claimed by defendant and appellant does not fall under the
exception above referred to, because it was not given pursuant to a bona fide compromise, or to
set off a debt due from the corporation, and there was no consideration for it.
In conclusion we hold that under the Corporation Law, notice of call for payment for unpaid
subscribed stock must be published, except when the corporation is insolvent, in which case,
payment is immediately demandable. We also rule that release from such payment must be made
by all the stockholders.
ERNESTO M. APOCADA, petitioner, vs. NATIONAL LABOR RELATIONS COMMISSION,
JOSE M. MIRASOL and INTRANS PHILS., INC., respondents (G.R. No. 80039; April 18, 1989)
FACTS: Petitioner, an employee of respondent company, subscribed to 1,500 shares at P100 per
share. He paid an initial payment P37,500. On Sept. 1, 1975, he was appointed President and
General Manager of the company but on Jan. 2, 1986, he resigned.
He filed a complaint with the NLRC claiming unpaid wages, cost of living allowance, the balance
of his gasoline and representation expenses and his bonus compensation for 1986. Respondent
admitted that petitioner was entitled to P17,060.07 but the same was already set-off against his
unpaid subscription. Petitioner questioned such set-off claiming that no call or notice was made.
The Labor Arbiter decided in favor of petitioner. On appeal, such decision was reversed by the
NLRC.
ISSUE: WON the set-off was properly made?
HELD: No. Firstly, the NLRC has no jurisdiction to determine such intracorporate dispute between
the stockholder and the corporation as in the matter of unpaid subscriptions. This controversy is
within the exclusive jurisdiction of the Securities and Exchange Commission.
Secondly, assuming arguendo that the NLRC may exercise jurisdiction over the said subject
matter under the circumstances of this case, the unpaid subscriptions are not due and payable
until a call is made by the corporation for payment. Private respondents have not presented a
resolution of the board of directors of respondent corporation calling for the payment of the unpaid
subscriptions. It does not even appear that a notice of such call has been sent to petitioner by the
respondent corporation.
What the records show is that the respondent corporation deducted the amount due to petitioner
from the amount receivable from him for the unpaid subscriptions. No doubt such set-off was
without lawful basis, if not premature. As there was no notice or call for the payment of unpaid
subscriptions, the same is not yet due and payable.
BONIFACIO LUMANLAN, plaintiff-appellee, vs. JACINTO R. CURA, ET AL., defendants.
DIZON & CO., INC., ETC., appellant. (G.R. No. L - 39861; March 21, 1934)
FACTS: Lumanlan subscribed to 300 shares of stock of appellant company at a par value of P50.
Layag was appointed the receiver of said company, at the instance of its creditors Julio
Valenzuela, Pedro Santos and Francisco Escoto, to collect the unpaid subscriptions, there
appearing that the company had no assets except the credits against those who had subscribed
for shares of stock.
The CFI rendered a decision in favor of Julio Valenzuela and held Lumanlan liable for the unpaid
subscription and loans and advances together with interests.
Pending appeal, the parties entered into an agreement where Lumanlan would dismiss the appeal
and the corporation would collect only 50% of the amount subscribed by him for stock, provided
that in case the 50% was inufficient to pay Valenzuela he should pay an additional amount not to
exceed the judgment against him in that case. Lumanlan paid Valenzuela the sum of P11,840
including interest.
Disregarding the agreement, appellant company asked for and order of execution of the CFI
decision which was granted and the provincial sheriff levied upon two parcels of land of Lumanlan.
ISSUE: WON Lumanlan is still liable to the corporation?
HELD: Yes. In the promissory note given by the corporation to Valenzuela the former obligated
itself to pay Valenzuela the sum of P8,000 with interest at 12 per cent per annum and, upon failure
to pay said sum and interest when due, 25 per cent of the principal as expenses of collection and
judicial costs in case of litigation.
By virtue of these facts Lumanlan is entitled to a credit against the judgment in case No. 37492
for P11,840 and an additional sum of P2,000, which is 25 per cent on the principal debt, as he
had to file this suit to collect, or receive credit for the sum which he had paid Valenzuela for and
in place of the corporation, or a total of P13,840. This leaves a balance due Dizon & co., Inc., of
P1,269 on that judgment with interest thereon at 6 per cent per annum from August 30, 1930.
It appears from the record that during the trial of the case now under consideration, the Bank of
the Philippine Islands appeared in this case as assignee in the "Involuntary Insolvency of Dizon
& Co., Inc. That bank was appointed assignee in case No. 43065 of the Court of First Instance of
the City of Manila on November 28, 1932. It is therefore evident that there are still other creditors
of Dizon & Co., Inc. This being the case that corporation has a right to collect all unpaid stock
subscriptions and any other amounts which may be due it.
It is established doctrine that subscriptions to the capital of a corporation constitute a fund to which
the creditors have a right to look for satisfaction of their claims and that the assignee in insolvency
can maintain an action upon any unpaid stock subscription in order to realize assets for the
payment of its debts. (Philippine Trust Co. vs . Rivera, 44 Phil., 469, 470.)
PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs. BITULOK SAWMILL, INC., DINGALAN
LUMBER CO., INC., SIERRA MADRE LUMBER CO., INC., NASIPIT LUMBER CO., INC.,
WOODWORKS, INC., GONZALO PUYAT, TOMAS B. MORATO, FINDLAY MILLAR LUMBER
CO., INC., ET AL., INSULAR LUMBER CO., ANAKAN LUMBER CO., AND CANTILAN
LUMBER CO., INC., defendants-appellees. (G.R. Nos. L - 24177 - 85; June 29, 1968)
FACTS: In various suits decided jointly, PNB as creditor, and therefore the real party in interest,
was allowed by the lower court to substitute the receiver of the Philippine Lumber Distributing
Agency in these respective actions for the recovery from the defendant lumber producers the
balance of their stock subscriptions.
The defendant lumber producers were convinced by the late President Manuel Roxas to form a
cooperative and ensure the stable supply of lumber in the country and to eliminate alien
middlemen. To induce them, the president promised and agreed to invest P9.00 for every P1.00
that the members would invest therein.
There was no appropriation made by congress for the P9.00 investment. The President then
instructed Hon. Emilio Abello, then Executive Secretary and chairman of the BOD of PNB to grant
an overdraft of P250,000 (later increased to P350,000) which was approved by the BOD of PNB
with interest at 6%.
The Philippines did not invest the P9.00 for every peso coming from defendant lumber producers.
The loan extended by PNB was not paid. Hence, these suits which the trial court dismissed.
ISSUE: WON the lumber producers are liable for the full value of their subscriptions?
HELD: Yes. In Philippine Trust Co . v . Rivera , citing the leading case of Velasco v. Poizat , this
Court held: "It is established doctrine that subscriptions to the capital of a corporation constitute
a fund to which creditors have a right to look for satisfaction of their claims and that the assignee
in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets
for the payment of its debt.... A corporation has no power to release an original subscriber to its
capital stock from the obligation of paying for his shares, without a valuable consideration for such
release; and as against creditors a reduction of the capital stock can take place only in the manner
and under the conditions prescribed by the statute or the charter or the articles of incorporation.
Moreover, strict compliance with the statutory regulations is necessary...." The Poizat doctrine
found acceptance in later cases. One of the latest cases, Lin g a y e n G ulf Ele c t ric P o w e r v
. B alt a z a r , Speaks to this effect: "In the case of V ela s c o v . P oiz a t , the corporation
involved was insolvent, in which case all unpaid stock subscriptions become payable on demand
and are immediately recoverable in an action instituted by the assignee."
It would be unwarranted to ascribe to the late President Roxas the view that the payment of the
stock subscriptions, as thus required by law, could be condoned in the event that the counterpart
fund to be invested by the Government would not be available. Even if such were the case,
however, and such a promise were in fact made, to further the laudable purpose to which the
proposed corporation would be devoted and the possibility that the lumber producers would lose
money in the process, still the plain and specific wording of the applicable legal provision as
interpreted by this Court must be controlling. It is a well-settled principle that with all the vast
powers lodged in the Executive, he is still devoid of the prerogative of suspending the operation
of any statute or any of its terms.
EDWARD A. KELLER & CO., LTD., petitioner-appellant, vs. COB GROUP MARKETING,
INC., JOSE E. BAX, FRANCISCO C. DE CASTRO, JOHNNY DE LA FUENTE, SERGIO C.
ORDOÑEZ, TRINIDAD C. ORDOÑEZ, MAGNO C. ORDOÑEZ, ADORACION C. ORDOÑEZ,
TOMAS C. LORENZO, JR., LUIZ M. AGUILA-ADAO, MOISES P. ADAO, ASUNCION
MANAHAN and INTERMEDIATE APPELLATE COURT, respondents-appellees. (G.R. No. L
- 68097; January 16, 1986)
FACTS: Petitioner-appellant appointed defendant COB Group Marketing, Inc. as exclusive
distributor of its household products in Panay and Negros. Under its sales agreement, Keller sold
on credit its products to COB Group Marketing.
The BOD of COB Group Marketing were apprised by Jose E. Bax that the firm owed Keller about
P179,000.
Keller sued COB Marketing and its stockholders.
ISSUE: WON Keller can collect the unpaid subscriptions of the stockholders?
HELD: Yes. It is settled that a stockholder is personally liable for the financial obligations of a
corporation to the extent of his unpaid subscription (Vda. de Salvatierra vs. Garlitos 103 Phil. 757,
763; 18 CJs 1311-2).
GERARDO GARCIA, plaintiff-appellee, vs. ANGEL SUAREZ, defendant-appellant (G.R. No.
L - 45493; April 21, 1939)
FACTS: Appellant Suarez subscribed to 16 shares of Compania HispanoFilipina, Inc. and paid
the value of 4 shares, at P100 par value each, or P400.
Plaintiff-appellee Garcia was appointed by the court as receiver of the company, to collect the
unpaid subscription, among others. On June 18, 1931, Garcia brought an action to recover from
Suarez and other shareholders the balance of their subscriptions, but the complaint was
dismissed for lack of prosecution.
On Oct. 10, 1935, a similar action was instituted which was granted by the CFI holding defendant
liable for the balance of his unpaid subscription and interest. On appeal, the defendant raises the
issue of prescription.
ISSUE: WON defendant Suarez is liable?
HELD: Yes. The premise of the argument is wrong because it confuses two distinct obligations:
the obligation to pay interest and that to pay the amount of the subscription. The said section 37
of the Corporation Law provides when the obligation to pay interest arises and when payment
should be made, but it is absolutely silent as to when the subscription to a stock should be paid.
Of course, the obligation to pay arises from the date of the subscription, but the coming into being
of an obligation should not be confused with the time when it becomes demandable. In a loan for
example, the obligation to pay arises from the time the loan is taken; but the maturity of that
obligation, the date when the debtor can be compelled to pay, is not the date itself of the loan,
because this would be absurd. The date when payment can be demanded is necessarily distinct
from and subsequent to that the obligation is contracted.
By the same token, the subscription to the capital stock of the corporation, unless otherwise
stipulation, is not payable at the moment of the subscription but on a subsequent date which may
be fixed by the corporation. Hence, section 38 of the Corporation Law, amended by Act No. 3518,
provides that:
“The board of directors or trustees of any stock corporation formed, organized, or existing under
this Act may at any time declare due and payable to the corporation unpaid subscriptions to the
capital stock . . . .”
The board of directors of the Compañia Hispano-Filipino, Inc., not having declared due and
payable the stock subscribed by the appellant, the prescriptive period of the action for the
collection thereof only commenced to run from June 18, 1931 when the plaintiff, in his capacity
as receiver and in the exercise of the power conferred upon him by the said section 38 of the
Corporation Law, demanded of the appellant to pay the balance of his subscription. The present
action having been filed on October 10, 1935, the defense of prescription is entirely without basis.

DELINQUENT: Shares of stock become delinquent when no payment is made on the balance of
all or any portion of the subscription on the date or dates fixed in the contract of subscription
without need of call, or on the date specified by the BOD pursuant to a call made by it in
accordance with the provisions of Sec. 67.
EFFECT OF DELINQUENCY: The stockholder thereof immediately loses the right to vote and be
voted upon or represented in any stockholders meeting as well as all the rights pertaining to a
stockholder except the right to receive dividends in accordance with the Code.
Section 71. Effect of delinquency. - No delinquent stock shall be voted for or be entitled to
vote or to representation 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 he pays the amount due on his
subscription with accrued interest, and the costs and expenses of advertisement, if any.
(50a)
RIGHT TO RECEIVE DIVIDENDS : Sec. 43 provides that “any cash dividend due on delinquent
stockholders shall first be applied to the unpaid balance on his subscription plus cost and
expenses, while stock dividends shall be withheld until his unpaid subscription is paid in full”
RIGHTS OF UNPAID SHARES: If the shares are not delinquent, however, subscribers to the
capital stock of a corporation though not fully paid, are entitled to all the rights of a stockholder
(Sec. 72) EXCEPT the issuance of certificate of stocks (Sec. 64). They can vote and be voted
upon and entitled to receive all dividends due their shares.

Section 72. Rights of unpaid shares. - Holders of subscribed shares not fully paid which
are not delinquent shall have all the rights of a stockholder. (n)
Sec. 72. Rights of unpaid shares. - Holders of subscribed shares not fully paid which are not
delinquent shall have all the rights of a stockholder.
NON - STOCK CORPORATIONS : The rules on delinquent shareholders applies to non-stock
corporations, such as when members are delinquent in paying membership dues.
RIGHT TO SECURE THE ISSUANCE OF A NEW STOCK CERTIFICATE:
Section 73. Lost or destroyed certificates. - The following procedure shall be followed for
the issuance by a corporation of new certificates of stock in lieu of those which have been
lost, stolen or destroyed:
1. The registered owner of a certificate of stock in a corporation or his legal representative
shall file with the corporation an affidavit in triplicate setting forth, if possible, the
circumstances as to how the certificate was lost, stolen or destroyed, the number of shares
represented by such certificate, the serial number of the certificate and the name of the
corporation which issued the same. He shall also submit such other information and
evidence which he may deem necessary;
2. After verifying the affidavit and other information and evidence with the books of the
corporation, said corporation shall publish a notice in a newspaper of general circulation
published in the place where the corporation has its principal office, once a week for three
(3) consecutive weeks at the expense of the registered owner of the certificate of stock
which has been lost, stolen or destroyed. The notice shall state the name of said
corporation, the name of the registered owner and the serial number of said certificate,
and the number of shares represented by such certificate, and that after the expiration of
one (1) year from the date of the last publication, if no contest has been presented to said
corporation regarding said certificate of stock, the right to make such contest shall be
barred and said corporation shall cancel in its books the certificate of stock which has
been lost, stolen or destroyed and issue in lieu thereof new certificate of stock, unless the
registered owner files a bond or other security in lieu thereof as may be required, effective
for a 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: Provided, That if a
contest has been presented to said corporation or if an action is pending in court regarding
the ownership of said 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 which has been
lost, stolen or destroyed.
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
RATIONALE:
1. To avoid duplication of certificates of stock;
2. To avoid fictitious and fraudulent transfers; and
3. To protect the corporation against damage from whatever source arising from the issuance of
the duplicate certificate including liability to the holder of the original certificate or to innocent
holders of certificate based on the duplicate.

Thus, the BOD has the authority to decide the amount and the kind of surety bond that may be
required for the issuance of a certificate of stock, in lieu of the lost or destroyed one, if the same
is to be issued prior to the expiration of the 1 year period provided by Sec. 73.

ISSUANCE OF NEW CERTIFICATES:

1. After the above procedures have been complied with, the new certificate will be issued 1 year
from the date of the last publication;
2. Nevertheless, the stockholder may file a bond or other security to have the shares issued before
the 1 year prescribed. 3. If a contest has been presented to the corporation or an action is pending
in court, the issuance of the new certificate shall be suspended until final decision.

H. RIGHTS AND LIABILITIES OF STOCKHOLDERS

RIGHTS OF A STOCKHOLDER:
1. Participation in the management of the corporate affairs by exercising their right to vote and be
voted upon either personally or by proxy as provided for under Sec. 50 and 58 of the Code;
2. To enter into a voting trust agreement subject to the procedure, requirements and limitations
imposed under Sec. 50; 3. To receive dividends and to compel their declaration if warranted under
Sec. 43;
4. To transfer shares of stock subject only to reasonable restrictions such as the options and
preferences as may be allowed by law inclusive of the right of the transferee to compel the
registration of the transfer in the books of the corporation as provided for in Sec. 63;
5. To be issued a certificate of stock for fully paid-up shares in accordance with Sec. 64;
6. To exercise pre-emptive rights as provided for in Sec. 39; 7. To exercise their appraisal right in
accordance with the provision of Sec. 81 and in those instance allowed by law such as Sec. 42
and 105;
8. To institute and file a derivative suit;
9. To recover shares of stock unlawfully sold for delinquency as may be allowed under Sec. 69;
10. To inspect the books of the corporation subject only to the limitations imposed by Sec. 75;
11. To be furnished by the most recent financial statement of the corporation as by Sec. 75;
12. To be issued a new stock certificate in lieu of the lost or destroyed one subject to the procedure
laid down in Sec. 73; 13. To have the corporation dissolved under Sec. 118 to 121, and Sec. 105
in a close corporation;
14. To participate in the distribution of assets of the corporation upon dissolution under Sec. 122;
15. In the case of a close corporation, to petition the SEC to arbitrate in the event of a deadlock
as allowed under Sec. 104; and
16. Also in the case of a close corporation, to withdraw therefrom, for any reason, and compel the
corporation to purchase his shares as provided for in Sec. 105.

OBLIGATIONS AND LIABILITIES:

1. To pay the corporation the balance of his unpaid subscriptions subject to the provision of Sec.
67-70;
2. To pay interest on his unpaid subscription, if required by the bylaws or by the contract of
subscription in accordance with Sec. 66;
3. To answer to the creditor for the unpaid portion of his subscription under the Trust Fund
Doctrine;
4. To answer the “water” in his stocks as provided for in Sec. 65;
5. To be liable, as general partners, for all debts, liabilities and damages of determinable
corporation as envisioned under Sec. 21 (corporation by estoppel); and
6. To be personally liable for torts, in the event that a stockholder in a close corporation actively
participates in the management of corporate affairs.

LADIA NOTES:
STOCKS AND STOCKHOLDERS
 3 modes

1. By a contract of subscription with the corporation;

2. By purchase of treasury shares from the corporation; and,

3. By purchase or acquisition of shares from existing stockholders.

 Section 60 subscription

- Any contract

- Whether existing or still to be formed

Section 60. Subscription contract. - Any contract for the acquisition of unissued stock in
an existing corporation or a corporation still to be formed shall be deemed a subscription within
the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or
some other contract. (n)

 Under the old law the 4th mode is PURCHASE

 Purchase

- Reciprocal in nature

- Purchaser can neither require the issuance

Xco. Inc.

Authorized capital 1M
500 SUBSCRIBED
500 UNISSUED STOCKS (AS LONG AS GALING DITO)
Z wants to acquire 100K
Entered in June 50% shall be down payment remainder December 08
o he will not be considered a stockholder unless he has paid in full

August 08 property is ravaged by fire all are turned into shares

 Is Z liable to pay the balance of his acquisitions?

- YES, no matter how the party refer to it, it is considered subscription

 - Once you subscribe, you become a stockholder which is entitled to all the liabilities of a
stockholder

Z- subscribed to 100T/S of XCo.

Amount he paid 50k
Z did not pay on the date called and was declared a delinquent share
 Corporation paid 100T/S therefore the corporation reacquired the shares again, what are
they called?

- Treasury shares

Y- 80T/S DECEMBER 08
40 % (AUGUST) WAS DESTROYED BY FIRE, IS HE STILL LIABLE TO PAY THE UNPAID
PORTION?
 IT WAS AGREED THAT IT WAS A PURCHASE AND WILL BE A STOCKHOLDER ONLY
IF PAID IN FULL IS HE LIABLE?

- NO, because that was a purchase

- First example galing sa unissued stock

- 2nd example galling sa treasury shares hindi sa unissued share

 NO such thing as purchase of unissued stocks

 A subscription contract can be conditional provided there is nothing in the charter or

statute prohibiting it and not against public order, law, etc.

 Must it be in writing?

- NO, it may be oral

 5M should it be in writing to be valid and binding as a subscription?

- NO, statutes of frauds only applies to SALES

Trillana vs. Quezon College

- Counter proposal, therefore there was a need for an acceptance

- Facultative because it is in his own free will, it is void

 What may be used as a consideration and how much should be the consideration?

- Section 62 provides:
 Section 62. Consideration for stocks. - Stocks shall not be issued for a
consideration less than the par or issued price thereof. Consideration for the issuance of
stock may be any or a combination of any two or more of the following:

1. Actual cash paid to the corporation;

2. Property, tangible or intangible, actually received by the corporation and necessary or

convenient for its use and lawful purposes at a fair valuation equal to the par or issued
value of the stock issued;

3. Labor performed for or services actually rendered to the corporation;

4. Previously incurred indebtedness of the corporation;

5. Amounts transferred from unrestricted retained earnings to stated capital; and

6. Outstanding shares exchanged for stocks in the event of reclassification or conversion.

Where the consideration is other than actual cash, or consists of intangible

property such as patents of copyrights, the valuation thereof shall initially be determined
by the incorporators or the board of directors, subject to approval by the Securities and
Exchange Commission.

Shares of stock shall not be issued in exchange for promissory notes or future
service.

The same considerations provided for in this section, insofar as they may be
applicable, may be used for the issuance of bonds by the corporation.

The issued price of no-par value shares may be fixed in the articles of incorporation
or by the board of directors pursuant to authority conferred upon it by the articles of
incorporation or the by-laws, or in the absence thereof, by the stockholders representing
at least a majority of the outstanding capital stock at a meeting duly called for the purpose.
(5 and 16)

 “Amounts transferred from unrestricted retained earnings to stated capital” what does it
mean?

- Stock dividends will in effect capitalize the unrestricted retained earnings

 After 5 years the founders shares may be converted into common shares or other kinds
of shares

 May shares of stocks be issued without consideration? Why?

- NO, two reasons by the SC, discriminatory against other stockholders and second
unlawful, it prejudices the right of the creditors “Trust Fund Doctrine”

 If issued without a consideration

- Section 65, they will be considered as watered stocks

Section 65. Liability of directors for watered stocks. - Any director or officer of a
corporation consenting to the issuance of stocks for a consideration less than its par or
issued value or for a consideration in any form other than cash, valued in excess of its fair
value, or who, having knowledge thereof, does not forthwith express his objection in
writing and file the same with the corporate secretary, shall be solidarily, liable with the
stockholder concerned to the corporation and its creditors for the difference between the
fair value received at the time of issuance of the stock and the par or issued value of the
same. (n)

- Subscribers may be compelled to pay the value

 Issuance of a certificate of stock is another thing

 What are the requisites for the issuance of a valid certificate of stock?

1. It must be signed by the president or vice-president and countersigned by the secretary

or assistant secretary;

2. It must be sealed with the corporate seal; and the entire value thereof (together with
interest or expenses, if any) should have been paid.

While it appears, that a subscriber to shares of stock cannot be entitled to the issuance of
a certificate of stock until the full amount of his subscription together with interest and
expenses (in case of delinquent shares) if any is due, has been paid, a subscriber to
shares of stock, even if not yet fully paid, is entitled to exercise all the rights of a
stockholder and the corresponding liability that attach thereunder. Thus, the Code
provides:
Section 72. Rights of unpaid shares. - Holders of subscribed shares not fully paid
which are not delinquent shall have all the rights of a stockholder. (n)
 Is the issuance of a certificate of stock necessary to consider the subscriber a stockholder?

- NO, shall be considered a stockholder even without a certificate of stock

 Instances when he may not be able to exercise his rights as such stockholder

- Declared delinquent

- When he exercises his appraisal right

 Are certificate of stocks transferrable?

- YES

 Are certificate of stocks considered negotiable?

- Quasi-negotiable
  Why are they considered quasi-negotiable when it may be transferred through
endorsement and delivery?

100t/s 001 10/s

Abc co.

B stole and forged the signature

C is purchaser in good faith and for value will C acquire title

Endorsement from
When issued by owner
Endorsed by owner- strict compliance

ANSWER: a certificate of stock is not regarded as negotiable in the same sense that a bill or note
is negotiable, even if it is endorsed in blank. Thus, while it may be transferred by endorsement
coupled with delivery thereof, and therefore merely quasi-negotiable, it is nonetheless non-
negotiable in that the transferees takes it without prejudice to all the rights and defenses which
the true and lawful owner may have except in so far as the principles governing estoppels may
apply.
He acquired it by virtue of a forged instrument; no matter how innocent the purchaser is because
it is subject to all the rights and defenses
 What if A endorsed it?

- He is estopped, unless there are other available defenses

 Transfer is required to be recorded in the books of the corporation, however even if not
recorded, it will be valid between the parties. Non-registration will not however, affect the
validity thereof at least in so far as the contracting parties are concerned.

Section 63. Certificate of stock and transfer of shares. - The capital stock of stock
corporations shall be divided into shares for which certificates signed by the president or
vice president, countersigned by the secretary or assistant secretary, and sealed with the
seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so
issued are personal property and may be transferred by delivery of the certificate or
certificates indorsed by the owner or his attorney-in-fact or other person legally authorized
to make the transfer. No transfer, however, shall be valid, except as between the parties,
until the transfer is recorded in the books of the corporation showing the names of the
 parties to the transaction, the date of the transfer, the number of the certificate or
certificates and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation. (35)

 “Until registration is accomplished, the transfer, though valid between the parties, cannot
be effective as against the corporation. Thus the, unrecorded transfer cannot enjoy the
status of a stockholder; he cannot vote nor be voted for, and he will not be entitled to
dividends. The corporation will be protected when it pays dividend to the registered owner
despite a previous transfer of which it had no knowledge. The purpose of registration
therefore is twofold: to enable the transferee to exercise all the rights of a stockholder and
to inform the corporation of any change in shares ownership so that it can ascertain the
persons entitled to the rights and subject to the liabilities of a stockholder.”

Thus, it was also ruled by the High Court in Nautica Canning Corp. vs. Yumul that
“A transfer of shares not recorded in the stock and transfer book of the corporation
is non-existent in so far as the corporation is concerned.” This is so because “the
corporation looks only through its books for the purpose of determining who its
stockholders are.”
 Registration is necessary for the following:

1. To enable the corporation to know who its stockholders are;

2. To enable the transferee to exercise his rights a s stockholders;

3. To afford the corporation an opportunity to object or refuse registration of the transfer in

case allowed by law;

4. To avoid fictitious and fraudulent transfers; and,

5. To protect creditors who have the right to look upon stockholders, in case of no-payment
or watered shares, for the satisfaction of their claims.

 Duty of the secretary is ministerial, hence mandamus will lie if the secretary refuses to
record the transfer, but he cannot be compelled when the transferee’s title to the said
shares has no prima facie validity or uncertain

 Transfer- absolute and unconditional transfer to warrant registration in the books of the
corporation in order to bind the latter and other third persons.

 Other restrictions on the right to transfer shares would include:

1. It is not valid, except as between the parties, until recorded in the books of the corporation;

2. Shares of stock against which the corporation holds any unpaid claim shall not be
transferable in the books of the corporation; unpaid claims, refer to claims arising from
 unpaid subscription and not to any indebtedness which a stockholder may owe the
corporation such as monthly dues;

3. Restrictions required to be indicated in the articles of incorporation, by-laws and stock

certificates of a close corporation;

4. Restrictions imposed by special law, such as the Public Service Act requiring the approval
of the government agency concerned if it will vest unto the transferee 40% of the capital
of the public service company;

5. Sale to aliens in violation of maximum ownership of shares under the Nationalization

Laws;

6. Those covered by reasonable agreement of the parties.

Monserat vs. Ceron

- Does it include mortgage?

- NO, it is not an absolute transfer

- Will not affect the transfer through mortgage

- Absolute and unconditional transfer

- Only the transfer or absolute conveyance of the ownership of the title to a share need be
entered and noted upon the books of the corporation in order that such transfer may be
valid, therefore, inasmuch as a chattel mortgage of the aforesaid title is not a complete
and absolute alienation of the dominion and ownership thereof, its entry and notation upon
the books of the corporation is not necessary requisite to its validity

 Chua guan vs. Magsasaka

- Was the mortgage valid and effective as against subsequent third parties

- Register of deeds where the corporation resides and if different in the register of deeds of
owner’s domicile

 Unson vs. Dinamito

- All transferred not register will not have a valid force and effect

 Right to transfer may be regulated

 May not be unreasonably restricted

 Violation of nationalization law- Central Bank

Lambert vs. Fox

- Valid , may be reasonably regulated, restricted by agreement of parties

- Reasonable agreement by the parties

- Reasonable as to length of time

Padgett vs. Babcock

- Any attempt to restrain transfer

- SC, in the absence of a valid lien upon its shares

- Valid restrictions shares are applicable

- Any restriction on a stockholder’s right to dispose of his shares must be construed strictly;
and any attempt to restrain a transfer of shares is regarded as being in restraint of trade,
in the absence of a valid lien upon its shares, and except to the extent that valid restrictive
regulations and agreements exist and are applicable. Subject only to such restrictions, a
stockholder cannot be controlled in or restrained from exercising his right to transfer by
the corporation or its officers or by other stockholders, even though the sale is to a
competitor of the company, or to an insolvent person, or even though a controlling interest
is sold to one purchaser.

 Certificate of stocks are transferrable

- By endorsement and delivery of the stock certificate to the transferee

 In order to be valid, must be registered in the books. If not, will only be binding among
parties

 How may shares of stock be transferred?

- Endorsement of stock certificate by owner or attorney-in-fact with delivery

Embassy farms vs. CA

- Must be endorsed by owner or attorney-in-fact coupled with delivery

- Endorsed not delivered

- Proper mode and manner must be complied with

Razon vs. IAC

- Delivered not endorsed

- Reverse of Embassy Farms

- Endorsement alone is not sufficient nor delivery without endorsement is not allowed

- Endorsement plus delivery is mandatory

 Is there any other mode of transferring stock?

- Notarized deed

- Deed of assignment

Rural bank of Salinas vs. CA

- If denied or refused without good cause, mandamus will lie

Tay vs. CA

- Mandamus may issue if petition has a clear legal right

- Never issued in doubtful cases

- Petitioner failed to establish a clear legal right and alleged ownership is without merit

- Did not acquire ownership by virtue of the contract of pledge

- In a contract of pledge there must be foreclosure

- In the case there was no attempt to foreclose

- Petitioner must have a prima facie right

Nava vs. Peers Marketing

- 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

- No stock certificate was issued. Without stock certificate, which is the evidence of
ownership of corporate stock, the assignment of corporate shares is effective only
between the parties to the transaction

 Exception to the general rule

Rural Bank of Lipa vs. CA

- By notarized deed

- Certificate of stocks already issued must be coupled with delivery, exception (TAN vs.
SEC)

 Stock certificate has already been issued it must be coupled with the delivery

 After certificate of stock is issued, may it be effectively transferred even without

endorsement or delivery of the stock certificate?
- Person sought to be a stockholder is an officer and has custody

 Endorsement and delivery is not necessary (TAN vs. SEC)

Tan vs. SEC (FULL KNOWLEDGE, HE IS ESTOPPED)

- Persons sought to be stockholder is officer and has custody of the book (estopped)

 General Rule for valid transfer

- Certificate of stock must be endorsed by owner or attorney-in-fact coupled with delivery

 Exceptions

- Section 63 uses the word “may”

- Showing that there may be other modes of transferring shares

 Is there a time frame or fixed period as when transfer can be made?

- NO, (WON vs. WACK WACK)

Won vs. Wack Wack

- Valid between contracting parties even if not recorded in corporation books

- Right accrues only if refused

- Statute of limitations does not apply in registration of shares of stock

- Must determined from the time of refusal

 Why are they non-negotiable when they may be transferred?

- Transferees pays it without prejudice to all the rights and defenses as the true and lawful
owner may have under the law except insofar as such rights and defenses are subject to
the limitations imposed by the principles governing estoppels

De los Santos vs. Republic

- Why is he, not considered as the owner of shares? When it has been said that when
endorsed by the owner it is considered as strict certificate? Because certificate of stocks
are non-negotiable

- Although a stock-certificate is sometimes regarded as quasi-negotiable, in the sense that

it may be transferred by endorsement, coupled with delivery, it is well settled that the
instrument is non-negotiable, because the holder thereof takes it without prejudice to such
rights or defenses as the registered owner or creditor may have under the law, except
insofar as such rights or defenses are subject to the limitations imposes by the principles
governing estoppels.
  Unauthorized issuance of stock certificates

100/s 100

XYZCo

100 pesos per share

Stolen by B and forged the signature of A
B sells to C will C acquire title? NO

ENDORSEMENT FORM
 C armed with the endorsement form certificate, sold to D (innocent purchaser for value),
will D acquire title?

- NO, subject to such rights and defenses as the true and lawful owner may have

 What if C now goes to the corporation and presents the form?

- Then the corporation shall cancel the old certificate and issues a new one, now in the name
of C, now registered in the name of C, will C acquire title?

 A found out what happened and goes to the corporation who has a better title C or A?

- A, A cannot be deprived of his right by virtue of an unauthorized transfer

 Corporation can compel C to deliver the new stock certificate because he made a
representation that the certificate where good.
 Armed with the new certificate issued to C, C delivers to D a purchaser in good faith and
for value will D acquire title?

- D will acquire title took the shares not by virtue of a forged or unauthorized transfer, but on
the reliance that the stock certificate is valid and owned by C

 Stock certificate now in possession of D. A knew of what happened and went to the
corporation and complains. Who will have a better title?

- the corporation may be compelled to recognize both, A as stockholder (non-negotiable) D,

reliance that the stock certificate is valid and existing and owned by C

 Forged transfers
- If the corporation should issue a new certificate in pursuance of a forged transfer, the
corporation incurs no liability to the person in whose favor it is issued and it may demand
its return for cancellation. The corporation in such case has been guilty of no
misrepresentation. On the other hand, it is the duty of the purchaser to determine that the
indorsement of the owner is genuine. However, if the new certificate issued to the
purchaser comes into the hands of a bona fide purchaser for value, the corporation will be
stopped from denying validity thereof, since by issuing such new certificate it represents
that the person named therein is a stockholder of the corporation. The corporation is thus
forced to recognize both the original certificate and new certificate-the original, because
the true owner could not be deprived of his title by a forged transfer, and the new, because
of its representation that the person named therein is the owner of shares in the
corporation. But if the recognition of both stockholders would result in an over issue of
shares, then only the original and true owner can be recognized as a stockholder. The
bona fide purchaser of the new certificate will however have a right of damages against
the corporation. The corporation, in turn, would have a right of action against the person
who made false representations and in whose favor it issued a new certificate. The true
owner of the shares which were wrongfully transferred would of course have a right to
compel the corporation to issue him a certificate in lieu of the original one which was
wrongfully cancelled.

 Authorized capital stock 1M shares

 All are subscribed who will the corporation recognize as rightful owner A or D? if both will
be recognized there will be over issuance

- only A citing citizens national bank vs. state (but if recognition of both stockholders would
result in an over issue of shares, then only the original and true owner can be recognized
as a stockholder)

- by virtue of the doctrine of non-negotiability of certificate of stocks

 The true and lawful owner will never be deprived of his rights
 What happens to D?

- D will have a cause of action against the corporation for the value of his acquisition cost
inclusive of damages, attorney’s fees and cost of suit

 D sues the corporation for the value of his acquisition cost, inclusive of damages,
attorney’s fees and cost of suit. What may the corporation do?

- NO defense, no valid defense, because it was represented to other parties that the
certificate of stocks is valid, subsisting, etc.

 2nd situation, what cause of action may the corporation have? Remedy?

- Third party complaint against C, but what if he is a purchaser for value? 4th party claim
against B
 When may certificate of stocks be issued?

- Section 64 provides:

Section 64. Issuance of stock certificates. - No certificate of stock shall be issued

to a subscriber until the full amount of his subscription together with interest and expenses
(in case of delinquent shares), if any is due, has been paid. (37)

 A certificate of stock cannot be issued unless he fully paid the amount subscribed
 Subscription to the capital stocks of the corporation are indivisible
 Clear mandate of section 148 of the code is that the ruling of the court in Baltazar vs.
Lingayen Gulf, no longer holds true

Section 148. Applicability to existing corporations. - All corporations lawfully

existing and doing business in the Philippines on the date of the effectivity of this Code
and heretofore authorized, licensed or registered by the Securities and Exchange
Commission, shall be deemed to have been authorized, licensed or registered under the
provisions of this Code, subject to the terms and conditions of its license, and shall be
governed by the provisions hereof: Provided, That if any such corporation is affected by
the new requirements of this Code, said corporation shall, unless otherwise herein
provided, be given a period of not more than two (2) years from the effectivity of this Code
within which to comply with the same. (n)

 Subscription to shares of stocks are indivisible

 Also apparent is that once a subscriber has paid his subscription in full, he becomes
entitled to be issued a stock certificate and in the event that the corporation refuses to do
so, the stockholder my institute a case for mandamus with damages. Thus, it has been
said that the duty of the corporate officers to issue stock certificates to those entitled
thereto is a ministerial duty enforceable by mandamus.
Fua Cun vs. Summers and China Banking Corp.
- The court erred in holding the plaintiff as the owner of 250 shares of stock; “the plaintiff’s
rights consist in equity in 500 shares and upon payment of the unpaid portion of the
subscription price he becomes entitled to the issuance of certificate for said 500 shares in
his favor.”
- No certificate of stock until the full amount has been paid.
 Watered stock
- One which is issued by the corporation as fully paid-up shares, when in fact the whole
amount of the value thereof has not been paid.
- Basis is par value and not the fair market value
 Section 62 states that stocks shall not be issued for a consideration less than par or issued
price thereof, while section 13 states that in no case shall be paid-up capital be less than
five thousand [P5000] pesos.
 If issued below par, issued value considered as water
 How may watered stocks be issued?
1. For a monetary consideration less than its par or issued value;
2. For a consideration in property, tangible or intangible, valued in excess of its fair market
value;
3. Gratuitously or under an agreement that nothing shall be paid at all; or
4. In the guise of stock dividends when there are no surplus profits of the corporation.
 Why is stock watering illegal?
1. The corporation is deprived of its capital thereby hurting its business prospects, financial
capability and responsibility;
2. Stockholders who paid their subscriptions in full, or promised to pay the same, are injured
and prejudiced by the reduction of their proportionate interest in the corporation; and,
3. Present and future creditors are deprived of the corporate assets for the protection of their
interest.
- Corporation is prejudiced
- Stockholders, dilution of interest
- Creditors are prejudiced, virtue of right to look upon corporations properties for the
satisfaction of their claims
 What is the effect of issuance of watered stocks
1. As to the corporation - when a corporation is guilty of ultra-vires or illegal acts which
constitute an injury to or fraud upon the public, or which will tend to injure or defraud the
public, the State may institute a quo-warranto proceeding to forfeit its charter for the
misuse or abuse of its franchise.
2. As between the corporation and the subscriber- The subscription is void. Such being the
case, the subscriber is liable to pay the full par or issued value thereof, to render it valid
and effective.
3. As to the consenting stockholders - They are stopped from raising any objection thereto;
4. As to dissenting stockholders - In view of the dilution of their proportionate interest in the
corporation, they may compel the payment of the “water” in the stock solidarily against the
responsible and consenting directors and officers inclusive of the holder of the watered
stocks;
5. As to creditors - They may enforce payment of the difference in the price, or the water in
the stock, solidarily against the responsible directors/officers and the stockholders
concerned; and’
6. As against transferees of the watered stock – His right is the same as that of his transferor.
If, however, a certificate of stock has been issued and duly indorsed to a bona fide
purchaser, without knowledge, actual or constructive, the latter cannot be held liable, at
least as against the corporation, since he took the shares on reliance of the
misrepresentation made by the corporation that the stock certificate is valid and subsisting.
This is because a corporation is prohibited from issuing certificates of stock until the full
value of the subscriptions have been paid and could not, therefore, deny the validity of the
stock certificate it issued as against a purchaser in good faith. Thus, Ballentine states that
whether there is any liability on the part of the transferee of watered stock is made to
depend upon whether he acquired the same without notice, either as purchaser or donee.
If he had knowledge thereof, he is subject to the same liability as his transferor.
 What is the nature of the liability of the corporate directors consenting to the issuance of
watered stocks and the extent of their liabilities?
- Solidarily liable with the holder of the watered stocks to the extent of the water from said
shares of stocks
 Will all the directors be liable? What if you objected will you also be liable?
- If you do not issue a written objection, you are still liable
- Even passive directors may be liable
- Those having knowledge thereof, but did not interpose their objection shall be liable

- Section 65 provides:

Section 65. Liability of directors for watered stocks. - Any director or officer of a
corporation consenting to the issuance of stocks for a consideration less than its par or
issued value or for a consideration in any form other than cash, valued in excess of its fair
value, or who, having knowledge thereof, does not forthwith express his objection in
writing and file the same with the corporate secretary, shall be solidarily, liable with the
stockholder concerned to the corporation and its creditors for the difference between the
fair value received at the time of issuance of the stock and the par or issued value of the
same. (n)

 ACS-100M 100M/S PAR VALUE-1.00

SUBSCRIBED-50M FAIR MARKET VALUE-12.00/S
UNSUBSCRIBED-50M
A
B
C
D
E

There is a denial of pre-emptive rights and directors A,B,C,D,E decided to issue the remaining
50M and subscribed for 10M each at 2 per share.
 Is there stock watering if the fair market value is 12.00?
- No stock watering
- The basis is the par value
- The shares where in fact paid more than the par value indicated in the articles of
incorporation

3 days later they sold their 10M share for P11.00 each, therefore making a profit.
 Can you question there actuations? What would be the cause of action?
- It may be questioned.
- Duty of loyalty or fiduciary duty as such directors
- They cannot advance their own motives to the damage prejudice of the corporation which
they represents and stockholders as a whole instead of it being sold outside
- 500M would have gone to the coffers of the corporation, 500M should be there for the
protection of creditors
- They are placed in a fiduciary relationship
- Sila lang ba ang kikita, pano naman yung corporation, opportunity na yun para kumita
 When are unpaid subscriptions due and payable?
- Section 67. Payment of balance of subscription. - Subject to the provisions of the contract
of subscription, the board of directors of any stock corporation may at any time declare
due and payable to the corporation unpaid subscriptions to the capital stock and may
collect the same or such percentage thereof, in either case with accrued interest, if any,
as it may deem necessary.

Payment of any unpaid subscription or any percentage thereof, together with the interest
accrued, if any, shall be made on the date specified in the contract of subscription 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 rate of interest is provided in the by-laws,
computed from such date until full payment. If within thirty (30) days from the said date no
payment is made, all stocks covered by said subscription shall thereupon become
delinquent and shall be subject to sale as hereinafter provided, unless the board of
directors orders otherwise. (38)

 Remedies of the corporation to enforce payment of unpaid subscription

1. By board action in accordance with the procedure laid down in sections 67 to 69 of the
code
2. By a collection case in court as provided for in section 70

 Are subscribers of shares of stocks not fully paid, liable to pay interest?

- General rule is they are not liable to pay interest because the code says unless requires
in the by-laws
- Aside from the mandate of the law that subscribers to shares of stock must pay the full
value of their subscription, they may likewise be required to pay interest on all unpaid
subscriptions if so imposed in the contract or in the corporate by-laws at such rate as may
be indicated thereat or the legal rate if not so fixed. Unless so required or provided,
however, subscribers to shares of stock, not fully paid, are not liable to pay interest on
their unpaid subscriptions. The code thus provides:

Section 66. Interest on unpaid subscriptions. - Subscribers for stock shall pay to
the corporation interest on all unpaid subscriptions from the date of subscription, if so
required by, and at the rate of interest fixed in the by-laws. If no rate of interest is fixed in
the by-laws, such rate shall be deemed to be the legal rate. (37)

 Until a call is made, they are not due and payable, but still subject to the provisions of the
contracts
 Procedures in case of sale of delinquent stocks

- Section 68. Delinquency sale. - The board of directors may, by resolution, order the sale
of delinquent stock and shall specifically state the amount due on each subscription plus
all accrued interest, and the date, time and place of the sale which shall not be less than
thirty (30) days nor more than sixty (60) days from the date the stocks become delinquent.
 Notice of said sale, with a copy of the resolution, shall be sent to every delinquent
stockholder either personally or by registered mail. The same shall furthermore be
published once a week for two (2) consecutive weeks in a newspaper of general circulation
in the province or city where the principal office of the corporation is located.

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 his subscription, plus
accrued interest, costs of advertisement and expenses of sale, or unless the board of
directors otherwise orders, said delinquent stock shall be sold at public auction to such
bidder who shall offer 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 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 his 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 paid in full 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. (39a-46a)

 Who is the winning bidder in a delinquency sale?

- Bidder who shall “offer to pay the full amount of the balance on the subscription together
with accrued interest, cost of advertisement and expenses of sale, for the smallest number
of shares or fraction of a share.”

X Co. has 1M authorized capital stock

500 thousand is already subscribed

A subscribed to 100 thousand shares, 50 thousand is already paid leaving 50 thousand

unpaid

The corporation is at a loss of 250 thousand, the board decides to make a call for the
payment of the unpaid subscriptions, however A could not paid, hence declared delinquent
and decides to sell his share at a public auction

55 thousand is to be paid, remaining balance plus cost and expenses

BIDDERS:

X-55K FOR 99,900 shares

 Y-55K FOR 99,500 shares

Z-55K FOR 99,000 shares (winning bidder)

 Assume there is no bidder, may the corporation bid?

- NO. It cannot bid because the law says, subject to the provisions of this CODE. Section
68 and 41 should be reconciled. Section 68 states that:

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 paid in full 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. (39a-46a)

- There was no unrestricted retained earnings in the example given therefore the
corporation cannot bid , section 41, it states that:

Section 41. Power to acquire own shares. - A stock corporation shall have the
power to purchase or acquire its own shares for a legitimate corporate purpose or
purposes, including but not limited to the following cases: Provided, That the corporation
has unrestricted retained earnings in its books to cover the shares to be purchased or
acquired:

1. To eliminate fractional shares arising out of stock dividends;

2. To collect or compromise an indebtedness to the corporation, arising out of unpaid

subscription, in a delinquency sale, and to purchase delinquent shares sold during said
sale; and

3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under
the provisions of this Code. (a)

 What if the shares of A were sold without compliance of the requirements? May A question
the sale?

- The law prescribes two conditions before an action to recover delinquent stocks irregularly
sold may be allowed. These are:

1. The party seeking to maintain such action first pays or tenders to the party holding the
stock the sum for which the same was sold, with interest from the date of the sale at the
legal rate; and,
2. The action shall be commenced by the filing of a complaint within six months from the date
of the sale.
- The reason for such is the stability of transactions of the shares of stock

 Suppose in the example, since there are no unrestricted retained earnings, hence the
corporation cannot bid, is the corporation left without any recourse?

- Section 70. Court action to recover unpaid subscription. - Nothing in this Code shall
prevent the corporation from collecting by action in a court of proper jurisdiction the amount
due on any unpaid subscription, with accrued interest, costs and expenses. (49a)

Velasco vs. Poizat

- The subscriber is as much bound to pay the amount of the share subscribed by him as he
would be to pay any other debt, and the right of the company to demand payment is no
less incontestable.
- Two available remedies: the first and most special remedy given by the statute consist in
permitting the corporation to put up the unpaid stock and dispose of it for the account of
the delinquent subscriber. The other remedy is by action in court.

De Silva vs. Aboitiz and Co.

- Discretionary on the part of the board of directors to do whatever is provided in the said
article relative to the application of the part of the 70 percent of the profit distributable in
equal parts on the payment of the shares subscribed to and fully paid

Lingayen Gulf vs. Baltazar

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

Apocada vs. NLRC

- Set-off is without any legal basis

- It was premature
- Unpaid subscriptions will become due and payable only upon certain instance
- Call or if there is a stipulation in contract
- If no call and no stipulation in contract then it will not be demandable or payable at all

Lumanlan vs. Cura

- Trust Fund Doctrine- subscription to the capital of a corporation constitute a fund to which
the creditors have a right to look for satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid stock subscription in order to realize
assets for the payment of its debts.

PNB vs. Bitulak

- Where it not for the promise, the defendants would have not subscribed
- Trust Fund Doctrine, it is established doctrine that subscriptions to the capital of a
corporation constitute a fund to which creditors have a right to look for satisfaction of their
claims and that the assignee in insolvency can maintain an action upon any unpaid stock
subscription in order to realize assets for the payment of its debts.
- A corporation has no power to release an original subscriber to its capital stock from the
obligation of paying for his shares, without a valuable consideration for such release; and
as against creditors a reduction of the capital stock can take place only in the manner and
under the conditions prescribed by the statute or the charter or the articles of incorporation.

Edward Keller and Co. vs. COB

- May the stockholder be held liable for the debts of the corporation? YES. To the extent of
their unpaid subscription
- As to the liability of the stockholders, it is settled that a stockholder is personally liable for
the financial obligations of a corporation to the extent of his unpaid subscriptions

 Is there a prescriptive period wherein a demand for unpaid subscription should be made?

- NO. Garcia vs. Suarez case

Garcia vs. Suarez

- Never became due and payable until there is a call made

- Prescription will not run until and unless there is demand
- Prescription should be determined from the time demand has been made and not from
the time of subscription

 If declared delinquent, what would be the effect as to the owner of said shares?

- Section 71. Effect of delinquency. - No delinquent stock shall be voted for or be entitled
to vote or to representation 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 he pays the amount due on his
subscription with accrued interest, and the costs and expenses of advertisement, if any.
(50a)
- However if the shares are not delinquent, subscribers to the capital of a corporation,
though not fully paid, are entitled to all the rights of a stockholder, according to section 72

Section 72. Rights of unpaid shares. - Holders of subscribed shares not fully paid
which are not delinquent shall have all the rights of a stockholder. (n)

 May the rules governing delinquency sale apply to a non-stock corporation? Are there
unpaid shares in a non-stock corporation?

- Rules governing stock corporations, when applicable, also applies to a non-stock

corporation
- There are delinquent shareholders also in a non-stock corporation. Example is
membership dues
 A corporation paid 50% of subscription and was later on declared delinquent when he
could not pay upon call; A is also a director of the corporation. Will A, upon declaration of
delinquency , still be able to exercise his right as a director?

- Yes, he loses all his right as a stockholder except his right to receive dividends
- He remains to be a director, only qualification to be a director is he must own at least 1
share and since it still stands in his name pending the sale, he remains to be and act as a
director
- Even if there is sale, he may still be director because the winning bidder may not bid or
pay for all the shares or there might be remaining shares, which would be credited in favor
of the delinquent stockholder
- Section 43 provides:

Section 43. Power to declare dividends. - The board of directors of a stock

corporation may declare dividends out of the unrestricted retained earnings which shall be
payable in cash, in property, or in stock to all stockholders on the basis of outstanding
stock held by them: Provided, That any cash dividends due on delinquent stock shall first
be applied to the unpaid balance on the subscription plus costs and expenses, while stock
dividends shall be withheld from the delinquent stockholder until his unpaid subscription
is fully paid: Provided, further, That no stock dividend shall be issued without the approval
of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock
at a regular or special meeting duly called for the purpose. (16a)

Stock corporations are prohibited from retaining surplus profits in excess of one
hundred (100%) percent of their paid-in capital stock, except: (1) when justified by definite
corporate expansion projects or programs approved by the board of directors; or (2) when
the corporation is prohibited under any loan agreement with any financial institution or
creditor, whether local or foreign, from declaring dividends without its/his consent, and
such consent has not yet been secured; or (3) when it can be clearly shown that such
retention is necessary under special circumstances obtaining in the corporation, such as
when there is need for special reserve for probable contingencies. (n)

 When a certificate of stock is loss or destroyed, what must be done by the owner thereof?

- Section 73. Lost or destroyed certificates. - The following procedure shall be followed for
the issuance by a corporation of new certificates of stock in lieu of those which have been
lost, stolen or destroyed:

1. The registered owner of a certificate of stock in a corporation or his legal

representative shall file with the corporation an affidavit in triplicate setting forth, if
possible, the circumstances as to how the certificate was lost, stolen or destroyed, the
number of shares represented by such certificate, the serial number of the certificate and
the name of the corporation which issued the same. He shall also submit such other
information and evidence which he may deem necessary;

2. After verifying the affidavit and other information and evidence with the books of
the corporation, said corporation shall publish a notice in a newspaper of general
circulation published in the place where the corporation has its principal office, once a
week for three (3) consecutive weeks at the expense of the registered owner of the
certificate of stock which has been lost, stolen or destroyed. The notice shall state the
 name of said corporation, the name of the registered owner and the serial number of said
certificate, and the number of shares represented by such certificate, and that after the
expiration of one (1) year from the date of the last publication, if no contest has been
presented to said corporation regarding said certificate of stock, the right to make such
contest shall be barred and said corporation shall cancel in its books the certificate of
stock which has been lost, stolen or destroyed and issue in lieu thereof new certificate of
stock, unless the registered owner files a bond or other security in lieu thereof as may be
required, effective for a 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: Provided, That if a contest has been presented to said corporation or if an action
is pending in court regarding the ownership of said 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 which has been lost, stolen or destroyed.

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. (R.A. 201a)

- The rationale of the above-quoted law is to avoid duplication of certificates of stock and
the avoidance of fictitious and fraudulent transfers.

 When will the replacement certificate be issued?

- The code provides that:

after the expiration of one (1) year from the date of the last publication, if no
contest has been presented to said corporation regarding said certificate of stock, the right
to make such contest shall be barred and said corporation shall cancel in its books the
certificate of stock which has been lost, stolen or destroyed and issue in lieu thereof new
certificate of stock,

 Could it be issued earlier than 1 year?

- Yes it can be, the code states that:

unless the registered owner files a bond or other security in lieu thereof as may be
required, effective for a 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: Provided, That if a contest has been presented to said corporation or if
an action is pending in court regarding the ownership of said 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 which has been lost, stolen or destroyed.

 May corporate officers be held liable for the unauthorized issuance?

- YES, the code provides that:

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. (R.A. 201a)

 Assuming the last paragraph is not there; would it be not the same, that they should be
held liable due to fraud, bad faith or negligence?

- YES. Section 31 provides that:

Section 31. Liability of directors, trustees or officers. - Directors or trustees who

willfully and knowingly vote for or assent to patently unlawful acts of the corporation or
who are guilty of gross negligence or bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in conflict with their duty as such directors or
trustees shall be liable jointly and severally for all damages resulting there from suffered
by the corporation, its stockholders or members and other persons.

When a director, trustee or officer attempts to acquire or acquires, in violation of

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

 Certificate of stock was lost, the owner transfers his shares by way of a notarized deed
will it be valid?

- He cannot do so, if a certificate of stock is issued by a corporation, a mere notarized deed

will not suffice
- Deed of assignment was not sufficient since there was no endorsement (Rural Bank of
Lipa vs. CA)