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BUSINESS ORGANIZATION II- BY LAWS CASE NO. 19 GOKONGWEI VS.

SEC Facts: Petitioner, as of May 6, 1978, has exercised, personally or thru two corporations owned or controlled by him, control over the following shareholdings in an Miguel !orporation, vis"# $a% &ohn 'o(ongwei, &r" ) 6,*+, shares- $b% .niversal /obina !orporation ) 7*8,607 shares- $c% !1! !orporation ) 6,8,*1* shares, or a total of 1,02*,+8, shares" ince the outstanding capital stoc( of an Miguel !orporation, as of the present date, is represented by **,1*9,709 shares with a par value of P12"22, the total shares owned or controlled by petitioner represents 0"+*003 of the total outstanding capital stoc( of an Miguel !orporation" Petitioner is the president and substantial stoc(holder of .niversal /obina !orporation and !1! !orporation, both of which are allegedly controlled by petitioner and members of his family" 4oth the .niversal /obina !orporation and the !1! !orporation are engaged in businesses directly and substantially competing with the alleged businesses of an Miguel !orporation, and of corporations in which M! has substantial investments" Petitioner sought to be a director of an Miguel !orporation, but he was prohibited to do so because the 4oard of 5irectors adopted an amendment of the corporation6s by7law dis8ualifying a competitor from nomination and election to its 4oard of 5irectors as a measure of protection" Issue: 9hether the amendment prohibiting a competitor from nomination and election to its 4oard of 5irectors as a measure of protection is valid: /uling# ;es, AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A STOCKHOLDER INELIGIBLE TO BE

DIRECTOR, IF HE BE ALSO DIRECTOR IN A CORPORATION WHOSE BUSINESS IS IN COMPETITION WITH THAT OF THE OTHER CORPORATION, HAS BEEN SUSTAINED AS VALID <t is a settled state law in the .nited tates, according to 1letcher, that corporations have the power to ma(e by7laws declaring a person employed in the service of a rival company to be ineligible for the corporation=s 4oard of 5irectors" """ $>%n amendment which renders ineligible, or if elected, sub?ects to removal, a director if he be also a director in a corporation whose business is in competition with or is antagonistic to the other corporation is valid"@24 Ahis is based upon the principle that where the director is so employed in the service of a rival company, he cannot serve both, but must betray one or the other" uch an amendment @advances the benefit of the corporation and is good"@ >n exception exists in Bew &ersey, where the upreme !ourt held that the !orporation Caw in Bew &ersey prescribed the only 8ualification, and therefore the corporation was not empowered to add additional 8ualifications" 25 Ahis is the exact opposite of the situation in the Philippines because as stated heretofore, section +1 of the !orporation Caw expressly provides that a corporation may ma(e by7laws for the 8ualifications of directors" Ahus, it has been held that an officer of a corporation cannot engage in a business in direct competition with that of the corporation where he is a director by utiliDing information he has received as such officer, under @the established law that a director or officer of a corporation may not enter into a competing enterprise which cripples or in?ures the business of the corporation of which he is an officer or director" 26 <t is also well established that corporate officers @are not permitted to use their position of trust and confidence to further their private interests"@ 27 <n a case where directors of a corporation cancelled a contract of the corporation for exclusive sale of a foreign firm=s products, and after establishing a rival business, the directors entered into a new contract themselves with the foreign firm for exclusive sale of its products, the court held that e8uity would regard the new contract as an offshoot of the old contract and, therefore, for the benefit of the corporation, as a @faultless fiduciary may not reap the fruits of his misconduct to the exclusion of his principal" 28 Ahe doctrine of @corporate opportunity@ 29 is precisely a recognition by the courts that the fiduciary standards could not be upheld where the fiduciary was acting for two entities with competing interests" Ahis doctrine rests fundamentally on the unfairness, in particular circumstances, of an officer or director ta(ing advantage of an opportunity for his own personal profit when the interest of the corporation ?ustly calls for protection" 30

<t is not denied that a member of the 4oard of 5irectors of the an Miguel !orporation has access to sensitive and highly confidential information, such as# $a% mar(eting strategies and pricing structure- $b% budget for expansion and diversification- $c% research and development- and $d% sources of funding, availability of personnel, proposals of mergers or tie7ups with other firms" <t is obviously to prevent the creation of an opportunity for an officer or director of an Miguel !orporation, who is also the officer or owner of a competing corporation, from ta(ing advantage of the information which he ac8uires as director to promote his individual or corporate interests to the pre?udice of an Miguel !orporation and its stoc(holders, that the 8uestioned amendment of the by7laws was made" !ertainly, where two corporations are competitive in a substantial sense, it would seem improbable, if not impossible, for the director, if he were to discharge effectively his duty, to satisfy his loyalty to both corporations and place the performance of his corporation duties above his personal concerns" E<n McKee the !ourt further listed 8ualificational by7laws upheld by the courts, as follows# $1% > director shall not be directly or indirectly interested as a stoc(holder in any other firm, company, or association which competes with the sub?ect corporation" $+% > director shall not be the immediate member of the family of any stoc(holder in any other firm, company, or association which competes with the sub?ect corporation, $*% > director shall not be an officer, agent, employee, attorney, or trustee in any other firm, company, or association which compete with the sub?ect corporation" $0% > director shall be of good moral character as an essential 8ualification to holding office" $,% Bo person who is an attorney against the corporation in a law suit is eligible for service on the board" $>t p" 7"%

Ahese are not based on theorical abstractions but on human experience ) that a person cannot serve two hostile masters without detriment to one of them" Ahe offer and assurance of petitioner that to avoid any possibility of his ta(ing unfair advantage of his position as director of an Miguel !orporation, he would absent himself from meetings at which confidential matters would be discussed, would not detract from the validity and reasonableness of the by7laws here involved" >part from the impractical results that would ensue from such arrangement, it would be inconsistent with petitioner=s primary motive in running for board membership ) which is to protect his investments in an Miguel !orporation" More important, such a proposed norm of conduct would be against all accepted principles underlying a director=s duty of fidelity to the corporation, for the policy of the law is to encourage and enforce responsible corporate management" >s explained by Flec(# 31 @Ahe law win not tolerate the passive attitude of directors """ without active and conscientious participation in the managerial functions of the company" >s directors, it is their duty to control and supervise the day to day business activities of the company or to promulgate definite policies and rules of guidance with a vigilant eye toward seeing to it that these policies are carried out" <t is only then that directors may be said to have fulfilled their duty of fealty to the corporation"@ ound principles of corporate management counsel against sharing sensitive information with a director whose fiduciary duty of loyalty may well re8uire that he disclose this information to a competitive arrival" Ahese dangers are enhanced considerably where the common director such as the petitioner is a controlling stoc(holder of two of the competing corporations" <t would seem manifest that in such situations, the director has an economic incentive to appropriate for the benefit of his own corporation the corporate plans and policies of the corporation where he sits as director" <ndeed, access by a competitor to confidential information regarding mar(eting strategies and pricing policies of an Miguel !orporation would sub?ect the latter to a competitive disadvantage and un?ustly enrich the competitor, for advance (nowledge by the competitor of the strategies for the development of existing or new mar(ets of existing or new products could enable said competitor to utiliDe such (nowledge to his advantage" 32 EAhere is a!"t#e$ %&'"$ta!t c"!s%(e$at%"! in determining whether or not the amended by7laws are reasonable" Ahe !onstitution and the law prohibit combinations in restraint of trade or unfair competition" Ahus, section + of

>rticle G<H of the !onstitution provides# @Ahe tate shall regulate or prohibit private monopolies when the public interest so re8uires" Bo combinations in restraint of trade or unfair competition shall be snowed"@ E4asically, these anti7trust laws or laws against monopolies or combinations in restraint of trade are aimed at raising levels of competition by improving the consumers= effectiveness as the final arbiter in free mar(ets" Ahese laws are designed to preserve free and unfettered competition as the rule of trade"I E> common director of two or more competing corporations would have access to confidential sales, pricing and mar(eting information and would be in a position to coordinate policies or to aid one corporation at the expense of another, thereby stifling competition" Ahis situation has been aptly explained by Aravers, thus# Ahe argument for prohibiting competing corporations from sharing even one director is that the interlock permit t!e coor"in#tion o$ policie %et&een nomin#ll' in"epen"ent $irm to #n e(tent t!#t competition %et&een t!em m#' %e completel' elimin#te"" x x xI !onsonant with the re8uirement of due process, there must be due hearing at which the petitioner must be given the fullest opportunity to show that he is not covered by the dis8ualification" 9JK/K1F/K, ?udgment is hereby rendered as follows# Ahe !ourt voted unanimously to grant the petition insofar as it prays that petitioner be allowed to examine the boo(s and records of an Miguel <nternational, <nc", as specified by him" Fn the matter of the validity of the amended by7laws of respondent an Miguel !orporation, six $6% &ustices, namely, &ustices 4arredo, Ma(asiar, >ntonio, antos, >bad antos and 5e !astro, voted to sustain the validity per se of the amended by7laws in 8uestion and to dismiss the petition without pre?udice to the 8uestion of the actual dis8ualification of petitioner &ohn 'o(ongwei, &r" to run and if elected to sit as director of respondent an Miguel !orporation being decided, after a new and proper hearing by the 4oard of 5irectors of said corporation, whose decision shall be appealable to the respondent ecurities and Kxchange !ommission deliberating and acting en %#nc and ultimately to this !ourt" .nless dis8ualified in the manner

herein provided, the prohibition in the afore7mentioned amended by7laws shall not apply to petitioner"

O)*E+ ,OC)+INES AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS EXPRESSLY CONFERRED BY LAW <t is recogniDed by an authorities that =every corporation has the inherent power to adopt by7laws =for its internal government, and to regulate the conduct and prescribe the rights and duties of its members towards itself and among themselves in reference to the management of its affairs" <n this ?urisdiction, under section +1 of the !orporation Caw, a corporation may prescribe in its by7laws @the 8ualifications, duties and compensation of directors, officers and employees """ @ Ahis must necessarily refer to a 8ualification in addition to that specified by section *2 of the !orporation Caw, which provides that @every director must own in his right at least one share of the capital stoc( of the stoc( corporation of which he is a director NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR >ny person @who buys stoc( in a corporation does so with the (nowledge that its affairs are "omin#te" %' # m#)orit' of the stoc(holders and that !e implie"l' contr#ct t!#t t!e &ill of the ma?ority shall govern in all matters within the limits of the act of incorporation and lawfully enacted by7laws and not forbidden by law"@ 15 Ao this extent, therefore, the stoc(holder may be considered to have @parted with his personal right or privilege to regulate the disposition of his property which he has invested in the capital stoc( of the corporation, and surrendered it to the will of the ma?ority of his fellow incorporators" """ <t cannot therefore be ?ustly said that the contract, express or implied, between the corporation and the stoc(holders is infringed """ by any act of the former which is authoriDed by a ma?ority """ "@ 16 *+r +#nt to ection ,- o$ t!e .orpor#tion L#&/ #n' corpor#tion m#' #men" it #rticle o$ incorpor#tion %' # 0ote or &ritten # ent o$ t!e tock!ol"er repre enting #t le# t t&o-t!ir" o$ t!e +% cri%e" c#pit#l tock o$ t!e

corpor#tion I$ t!e #men"ment c!#nge / "imini !e or re trict t!e rig!t o$ t!e e(i ting !#re!ol"er t!en t!e "i enting minorit' !# onl' one rig!t/ 0i123 @to ob?ect thereto in writing and demand payment for his share"@ .nder section ++ of the same law, the owners of the ma?ority of the subscribed capital stoc( may amend or repeal any by7law or adopt new by7laws" <t cannot be said, therefore, that petitioner has a vested right to be elected director, in the face of the fact that the law at the time such right as stoc(holder was ac8uired contained the prescription that the corporate charter and the by7law shall be sub?ect to amendment, alteration and modification" A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS SHAREHOLDERS >lthough in the strict and technical sense, directors of a private corporation are not regarded as trustees, there cannot be any doubt that their character is that of a fiduciary insofar as the corporation and the stoc(holders as a body are concerned" >s agents entrusted with the management of the corporation for the collective benefit of the stoc(holders, @they occupy a fiduciary relation, and in this sense the relation is one of trust"@ 18 @Ahe ordinary trust relationship of directors of a corporation and stoc(holders@, according to A !#m#n 02 Miller/ 19 @is not a matter of statutory or technical law" <t springs from the fact that directors have the control and guidance of corporate affairs and property and hence of the property interests of the stoc(holders" K8uity recogniDes that stoc(holders are the proprietors of the corporate interests and are ultimately the only beneficiaries thereof

<nc", on the other hand, is an organiDation of lot andMor building owners, lessees and residents at 'race Hillage" >s adopted in 1968, the by7laws of the association provided in >rticle <H, as follows# Ahe annual meeting of the members of the >ssociation shall be held on the first unday of &anuary in each calendar year at the principal office of the >ssociation at +#22 P"M" where they shall elect by plurality vote and by secret balloting, the 4oard of 5irectors, composed of eleven $11% members to serve for one $1% year until their successors are duly elected and have 8ualified" Fn 5ecember +2, 197,, a committee of the board of directors prepared a draft of an amendment to the by7laws, reading as follows# 4I" ANNUAL MEETING Ahe >nnual Meeting of the members of the >ssociation shall be held on the econ" T!+r "#' of &anuary of each year" Kach .!#rter or A oci#te Member of the >ssociation is entitled to vote" Je shall be entitled to as many votes as he has ac8uired thru his monthly membership $ee onl' computed on a ratio of TEN 5*,6"667 *ESOS for one vote" Ahe .!#rter #n" A oci#te Mem%er shall elect the 5irectors of the >ssociation" Ahe candidates receiving the $ir t $o+rteen 5,87 highest number of votes shall be declared and proclaimed elected until their successors are elected and 8ualified" GRA.E .9RISTIAN 9IG9 S.9OOL repre ent#ti0e i # perm#nent :irector o$ t!e ASSO.IATION" Ahis draft was never presented to the general membership for approval" Bevertheless, from 197, to 1992, petitioner was given a permanent seat in the board of directors of the association" Fn 1ebruary 1*, 1992, the association=s committee on election informed &ames Aan, principal of the school, that @it was the sentiment that all directors should be elected by members of the association@ because @to ma(e a person or entity a permanent 5irector would deprive the right of voters to vote for 1, members of the 4oard,@ and @it is undemocratic for a person or entity to hold office in perpetuity"@ Ahus, Aan was told that @the proposal to ma(e the 'race

CASE NO. 20 G+ACE C*+IS)IAN *IG* SC*OO- vs" )*E CO.+) OF A//EA-S0 G+ACE VI--AGE ASSOCIA)ION0 INC.0 A-E1AN,+O G. 2E-)+AN0 a!( E+NES)O -. GO G.+. N". 108905 Oct"3e$ 230 1997 4EN,O5A0 J.: Petitioner 'race !hristian Jigh chool is an educational institution at the 'race Hillage in LueDon !ity" Private respondent 'race Hillage >ssociation,

!hristian Jigh chool representative as a permanent director of the associationN should be reexamined"@ Botices were sent to the members of the association that the provision on election of directors of the 1968 by7laws of the association would be observed" Petitioner re8uested the chairman of the election committee to change the notice, claiming that it ran @counter to the practice in previous years@ and was @in violation of the by7laws $of 197,%@ and @unlawfully depriveOdP OpetitionerP of its vested right OtoP a permanent seat in the board"@ >s the association denied its re8uest, the school brought suit for m#n"#m+ in the Jome <nsurance and 'uaranty !orporation $J<'!% to compel the board to recogniDe its right to a permanent seat, citing paragraph + of the proposed amendment which, it contended, had become part of the by7laws" Ahe association sought the opinion of the ecurities and Kxchange !ommission which rendered an opinion to the effect that the practice of allowing unelected members in the board was contrary to the existing by7 laws of the association and to Q9+ of the !orporation !ode $4"P" 4lg" 68%" Private respondent association cited the K! opinion in its answer" <t also contended that the basis of the petition for m#n"#m+ was merely @a proposed by7laws which has not yet been approved by competent authority nor registered with the K! or J<'!"@ <t argued that @the by7laws which was registered with the K! on &anuary 16, 1969 should be the prevailing by7 laws"I Fn &une +2, 1992, the J<'! hearing officer dismissed petitioner6s action, holding that the amended by7laws @OwasP merely a proposed by7laws which, although implemented in the past, had not yet been ratified by the members of the association nor approved by competent authority@- that, on the contrary, in the meeting held on >pril 17, 1992, the directors of the association declared @the proposed by7law" " " null and void@ and the by7laws of 5ecember 17, 1968 as the @prevailing by7laws under which the association is to operate until such time that the proposed amendments to the by7laws are approved and ratified by a ma?ority of the members of the association and duly filed and approved by the pertinent government agency"@ Ahe appeals board of the J<'! affirmed the decision of the hearing officer" Petitioner appealed to the !ourt of >ppeals which also affirmed the decision of the J<'!"

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9FB the proposed amendment is valid and binding as part of the by7laws" JKC5# BF" Ahe provisions of the former $ ections ++, +8 and +9% and present corporation law $ ection +*% leave no room for doubt as to their meaning# the board of directors of corporations must be elected from among the stoc(holders or members" Ahere may be corporations in which there are unelected members in the board but it is clear that in the examples cited by petitioner the unelected members sit as e( o$$icio members, i"e", by virtue of and for as long as they hold a particular office" 4ut in the case of petitioner, there is no reason at all for its representative to be given a seat in the board" Bor does petitioner claim a right to such seat by virtue of an office held" <n fact it was not given such seat in the beginning" <t was only in 197, that a proposed amendment to the by7laws sought to give it one" ince the provision in 8uestion is contrary to law, the fact that for fifteen years it has not been 8uestioned or challenged but, on the contrary, appears to have been implemented by the members of the association cannot forestall a later challenge to its validity" Beither can it attain validity through ac8uiescence because, if it is contrary to law, it is beyond the power of the members of the association to waive its invalidity" 1or that matter the members of the association may have formally adopted the provision in 8uestion, but their action would be of no avail because no provision of the by7laws can be adopted if it is contrary to law" 13 <t is probable that, in allowing petitioner=s representative to sit on the board, the members of the association were not aware that this was contrary to law" <t should be noted that they did not actually implement the provision in 8uestion except perhaps insofar as it increased the number of directors from 11 to 1,, but certainly not the allowance of petitioner=s representative as an unelected member of the board of directors" <t is more accurate to say that the members merely tolerated petitioner=s representative and tolerance cannot be considered ratification" Bor can petitioner claim a vested right to sit in the board on the basis of @practice"@ Practice, no matter how long continued, cannot give rise to any

vested right if it is contrary to law" Kven less tenable is petitioner=s claim that its right is @coterminus with the existence of the association"@ ,"ct$%!e# > by7law provision granting to a stoc(holder a permanent representation in the board of directors is contrary to the !orporation !ode re8uiring that the board of directors be elected from among the stoc(holders or members" ince the provision in 8uestion is contrary to law, the fact that for fifteen years it has not been 8uestioned or challenged but, on the contrary, appears to have been implemented by the members of the association cannot forestall a later challenge to its validity" Beither can it attain validity through ac8uiescence because, if it is contrary to law, it is beyond the power of the members of the association to waive its invalidity"

1ollowing >m!ham6s policy practice, there was a yearly renewal of employment contract between petitioner and private respondent" eparate letters of employment advice mentioned the MP! share but petitioner never ac(nowledged that private respondent is the beneficial owner of the share as re8uested in follow7up re8uests" 9hen petitioner6s contract of employment was up for renewal, he notified private respondent that he would no longer be available as Kxecutive Hice President but still private respondent as(ed the petitioner to stay on for another six months" Petitioner indicated his acceptance of the consultancy agreement with counter proposal for the E/etention of the Polo !lub share, sub?ect to my reimbursing the purchase price to the !hamber, or one hundred ten thousand pesos $P112,222"22% but private respondent re?ected petitioner6s counter7proposal" Pending the negotiation for the consultancy arrangement, private respondent executed a /elease and Luitclaim discharging Ahomson from any and all existing claims that >m!ham, its directors, officers and assigns, employees andMor representatives may have against Ahomson" Ahe 8uitclaim did not mention the MP! share" Private respondent, through counsel sent letter to the petitioner demanding the return and delivery of the MP! share which >m!ham owns and placed in Ahomson6s name" 1ailing to get favourable response, private respondent filed a complaint against petitioner praying that the Ma(ati /A! render ?udgment ordering Ahomson to return the MP! share to the plaintiff and transfer said share to the nominee of plaintiff" Ahe trial court awarded the MP! share to defendant Ahomson on the ground that the >rticles of <ncorporation and 4y7laws of Manila Polo !lub prohibit artificial persons, such as corporations, to be club members" Ahe !ourt of >ppeals reversed the trial court6s ?udgment and ordered petitioner Ahomson to transfer the MP! share to the nominee of private respondent reasoning that >m!ham is the beneficial owner of the said share" Issues:

CASE NO. 21 )#"&s"! 6s. CA 7298 SC+A 28080 Oct"3e$ 280 1998 Facts: Petitioner Marsh Ahomson was the Kxecutive Hice7President and later on, the Management !onsultant of private respondent, the >merican !hamber of !ommerce of the Philippines, <nc" $>m!ham% for over ten years" Cewis 4urridge, >m!ham6s retired president, wanted to transfer his proprietary share in the Manila Polo !lub $MP!% to petitioner" Ahrough the intercession of 4urridge, private respondent paid for the share but had it listed in petitioner6s name and this was made clear in an employment advice wherein petitioner was informed by private respondent" 4urridge transferred said proprietary share to petitioner and upon petitioner6s admission as a new member of the MP!, he paid the transfer fee of P02,222"22 from his own funds but private respondent subse8uently reimbursed this amount" Cater on, MP! issued Proprietary Membership !ertificate Bumber **98 in favor of petitioner but petitioner failed to execute a document recogniDing private respondent6s beneficial ownership over said share"

1" 9hether or not private respondent is the beneficial owner of the disputed share" +" 9hether or not the petitioner should be ordered to transfer said share to private respondent6s nominees" *e9(: 1" ;es" Ahe upreme !ourt find no reversible error in the respondent !ourt6s holding that private respondent, >m!ham, is the beneficial owner of the share in dispute" Ao resolve the first issue, debt should be distinguished from a trust" R Ahe beneficiary of a trust has beneficial interest in the trust property, while a creditor has merely a personal claim against the debtor" <n trust, there is a fiduciary relation between a trustee and a beneficiary, but there is no such relation between a debtor and creditor" 9hile a debt implies merely an obligation to pay certain sum of money, a trust refers to a duty to deal with a specific property for the benefit of another" <f a creditor7debtor relationship exists, but not a fiduciary relationship between the parties, there is no express trust" Jowever, it is understood that when the purported trustee of funds is entitled use them as his or her own, and commingled them with his or her own money, a debtor7creditor relationship exist, not a trust" <n the case, petitioner, as the Kxecutive Hice7President of >m!ham, occupied a fiduciary position in the business of >m!ham" >m!ham released the funds to ac8uire a share in the !lub for the use of petitioner but obliged him to Eexecute such document as necessary to ac(nowledge beneficial ownership thereof by the !hamber"I > trust relationship is, therefore, manifestly indicated" Moreover, petitioner failed to present evidence to support his allegation of being merely a debtor when the private respondent paid the purchase price of the MP! share" >pplicable here is the rule that trust arises in favor of one who pays the purchase money of property in the name of another, because of the presumption that he who pays for a thing intends a beneficial interest therein for himself" +" ;es" >s properly ruled by the !ourt of >ppeals, the matter prayed for does not involve the transfer of said share to the appellant, an artificial person" Ahe transfer sought is to the appellant6s nominee" Kven if the MP! 4y7laws and >rticles prohibit corporate membership, there would be no violation of said

prohibition for the appellant6s nominee to whom the said share is sought to be transferred would certainly be a natural person" <n the case, the petitioner was the nominee of the private respondent to hold the share and en?oy the privileges of the club" 4ut upon the expiration of petitioner6s employment officer and consultant of >m!ham, the incentives that go with the position, including use of the MP! share, also ceased to exist" <t now behoves petitioner to surrender said share to private respondent6s next nominee, another natural person" Boteworthy in the case, there was no declare or explicit repudiation of the trust between the parties" uch repudiation could only be inferred as evident when petitioner showed his intent to appropriate the MP! share for himself, a re8uest denied promptly by private respondent" Kventually, petitioner refused to surrender the share despite the written demand of private respondent" ince private respondent filed the necessary action on time and the defense of good faith is not available to the petitioner, there is no basis for any purported claim of prescription, after repudiation of the trust, which will entitle petitioner to ownership of the disputed share" Jence, petitioner has the obligation to transfer the said share to the nominee of private respondent"

CASE NO. 22 G.+. N". 121791 ,ece&3e$ 230 1998 EN+I:.E SA-AF+ANCA0 petitioner, vs" /*I-A4-IFE 7/A4/-ONA8 VI--AGE *O4EOWNE+S ASSOCIA)ION0 INC.0 2ONIFACIO ,A5O a!( )*E SECON, ,IVISION0 NA)IONA- -A2O+ +E-A)IONS CO44ISSION 7N-+C80 respondents"

+O4E+O0 J.: Petitioner Knri8ue alafranca started wor(ing with the private respondent Philamlife Hillage Jomeowners >ssociation on May 1, 1981 as

administrative officer for a period of six months" 1rom this date until 5ecember *1, 198*, petitioner was reappointed to his position three more times" 1 >s administrative officer, petitioner was generally responsible for the management of the village=s day to day activities" 2 >fter petitioner=s term of employment expired on 5ecember *1, 198*, he still continued to wor( in the same capacity, albeit, without the benefit of a renewed contract" ometime in 1987, private respondent decided to amend its by7laws" <ncluded therein was a provision regarding officers, specifically, the position of administrative officer under which said officer shall hold office at the pleasure of the 4oard of 5irectors" <n view of this development, private respondent, on &uly *, 1987, informed the petitioner that his term of office shall be coterminus with the 4oard of 5irectors which appointed him to his position" 1urthermore, until he submits a medical certificate showing his state of health, his employment shall be on a month7to7month basis" 3 Fddly, notwithstanding the failure of herein petitioner to submit his medical certificate, he continued wor(ing until his termination in 5ecember 199+" 4 !laiming that his services had been unlawfully and unceremoniously dispensed with, petitioner filed a complaint for illegal dismissal with money claims and for damages" 5 >fter the submission by the parties of their respective position papers and other pleadings, the Cabor >rbiter rendered a decision 6 ordering private respondent to pay the petitioner the amount of P+,7,8**"** representing his bac(wages, separation pay and 1*th month pay" <n ?ustifying the award, the Cabor >rbiter elucidated# /espondents= contention that complainant=s term of employment was co7terminus with the term of Fffice of the 4oard of 5irectors, is wanting in merit" /ecords show that complainant had been hired in 1981 while the >mendment of the respondents= 4y7Caws ma(ing the position of an >dministrative Ffficer co7terminus with the term of the 4oard of 5irectors was made in 1987" Kvidently, the said >mendment would not be applicable to the case of complainant who had become a regular employee long time before the >mendment too( place" Moreover, the >mendment should be applied prospectively and not retroactively" Fn appeal by the private respondent, the BC/! reversed the decision of the Cabor >rbiter and rendered a new one 7 reducing petitioner=s monetary award

to only one7half $1M+% month pay for every year of service representing his retirement pay" <n other words, the BC/! viewed the dismissal of the petitioner as a valid act by the private respondent" Ahe fact that he continued to perform the function of the office of administrative officer without extension or re7 appointment thereafter, to our mind, did not in any way ma(e his employment permanent as in fact, he was even reminded of the nature of his position by then president of the association &aime ;" Cadao in a letter of * &uly 1987" Jis reply to the aforesaid letter, claiming his employment regular, and 0i1 # 0i1, referring to submit his medical certificate, notwithstanding, to our mind, merely underscored the need to define his position as, in fact, the >ssociation=s /ules and /egulations were amended if but to put to rest the tenural $ ic% limit of the office of the >dministrative Ffficer in accordance with its earlier intention, that it is co7terminus with that of the members of the 4oard of 5irectors" 9JK/K1F/K, the decision appealed from is hereby set aside" /espondents are hereby ordered to pay herein appellee one half $1M+% month pay for every year of service representing his retirement pay" <n view of the sudden turn of events, petitioner has elevated the case to this !ourt assigning the following errors# 8 1" Ahe BC/! gravely abused its discretion when it ruled that the employment of the Petitioner is not purely based on considerations of Kmployer7Kmployee relationship" +" Petitioner was illegally dismissed by private respondents" >s to the first assigned error by the petitioner, we need not dwell on this at length" 9e agree with the olicitor 'eneral=s observation that an employer7 employee relationship exists between the petitioner and the private respondent" 9 xxx xxx xxx

Ahe first element is present in this case" Petitioner was hired as >dministrative Ffficer by respondents" <n fact, he was extended successive appointments by respondents" Ahe second element is also present since it is not denied that respondent PHJ> paid petitioner a fixed salary for his services" >s to the third element, it can be seen from the /ecords that respondents had the power of dismissal over petitioner" <n their letter dated 5ecember 7, 199+, respondents informed petitioner that they had decided to discontinue his services" <n their Position Paper submitted to the Cabor >rbiter, respondents stated that petitioner @was dismissed for cause"@ $p" 17, /ecord%" 9ith respect to the fourth and most important element, respondents controlled the wor( of petitioner not only with respect to the ends to be achieved but also the means used in reaching such ends" /elative to the second assigned error of the petitioner, both the olicitor 'eneral and the private respondent ta(e the stance that petitioner was not illegally dismissed" 10 Fn this aspect, we disagree with their contentions" Fn the outset, there is no dispute that petitioner had already attained the status of a regular employee, as evidenced by his eleven years of service with the private respondent" >ccordingly, petitioner en?oys the right to security of tenure 11 and his services may be terminated only for causes provided by law"
12

latter=s termination illegal" >t the ris( of being redundant, it must be stressed that these re8uirements are mandatory and non7compliance therewith renders any ?udgment reached by the management void and inexistent" 17 9hile private respondent imputes @gross negligence,@ and @serious misconduct@ as the causes of petitioner=s dismissal, 18 not a shred of evidence was offered in support thereof, other than bare and uncorroborated allegations" Ahe facts and circumstances regarding such alleged infractions were never explained, 9hile it is true that private respondent, through its president 4onifacio 5aDo, executed an affidavit narrating the alleged violations of the petitioner, 19 these were never corroborated by concrete or competent evidence" <t is settled that no undue importance should be given to a sworn statement or affidavit as a piece of evidence because, being ta(en e(p#rte, an affidavit is almost always incomplete and inaccurate" 20 1urthermore, it must be noted that when petitioner was terminated in 199+, these alleged infractions were never raised nor communicated to him" <n fact, these were only revealed after the complaint was filed by the petitioner in 199*" 9hy there was a delay was never ade8uately explained by private respondent" Ci(ewise, we note that 5aDo himself was not presented as a witness to give the petitioner an opportunity to cross7examine him and propound clarificatory 8uestions regarding matters averred in his affidavit" >ll told, the foregoing lapses and the belated submission of the affidavit, cast doubt as to the credibility of the allegations" <n sum, the dismissal of the petitioner had no factual basis whatsoever" Ahe rule is that unsubstantiated accusations without more, are not tantamount to guilt" 21 >s regards the issue of procedural due process, private respondent ?ustifies its non7compliance therewith in this wise# Ahe >ssociation Ffficers, being his peers and friends had a problem however in terminating his services" Je had been found to have committed infractions as previously enumerated" PHJ> could have proceeded with a full7blown investigation to hear these charges, but the ordeal might brea( the old man=s heart as this will surely affect his standing in the community" o they decided to ma(e their move as discreetly $but legally% as possible to save the petitioner=s reputation" Aerminating him in accordance with the provision of the by7laws of the >ssociation without pointing out his numerous faults and malfeasance in office

Hiewed in this light, while private respondent has the right to terminate the services of petitioner, this is sub?ect to both substantive and procedural grounds" 13 Ahe substantive causes for dismissal are those provided in >rticles +8+ and +8* of the, Cabor !ode, 14 while the procedural grounds refer to the observance of the re8uirement of due process" 15 <n all these instances, it is the private respondent, being the employer, who must prove the validity of the dismissal" 16 Javing reviewed the records of this case carefully, we conclude that private respondent utterly failed to substantiate petitioner=s dismissal, rendering the

and with one7half month pay for every year of service in accordance with the /etirement Caw was the best and only alternative" 9e are not impressed" Ahe reasoning advanced by the private respondent is as puerile as it is preposterous" Ahe essence of due process is to afford the party an opportunity to be heard and defend himself, to cleanse his name and reputation from any taint" <t includes the twin re8uirements of notice and hearing" 22 Ahis concept evolved from the basic tenet that one=s employment or profession is a property right protected by the constitutional guaranty of due process of law" 23 Jence, an individual=s separation from wor( must be founded on clearly7established facts, not on mere con?ectures and suspicions" 24 <n light of the foregoing, private respondent=s arguments are clearly baseless and without merit" <n truth, instead of protecting petitioner=s reputation, private respondent succeeded in doing exactly the opposite ) it condemned the petitioner without even hearing his side" <t is stating the obvious that dismissal, being the ultimate penalty that can be meted out to an employee, should be based on a clear or convincing ground" 25 >s such, a decision to terminate an employee without fully apprising him of the facts, on the pretext that the twin re8uirements of notice and hearing are unnecessary or useless, is an invalid and obnoxious exercise of management prerogative" 1urthermore, private respondent, in an effort to validate the dismissal of the petitioner, posits the theory that the latter=s position is coterminus with that of the Hillage=s 4oard of 5irectors, as provided for in its amended by7laws" 26 >dmittedly, the right to amend the by7laws lies solely in the discretion of the employer, this being in the exercise of management prerogative or business ?udgment" Jowever this right, extensive as it may be, cannot impair the obligation of existing contracts or rights" Prescinding from these premises, private respondent=s insistence that it can legally dismiss petitioner on the ground that his tenure has expired is untenable" Ao reiterate, petitioner, being a regular employee, is entitled to security of tenure, hence, his services may only be terminated for causes provided by law" 27 > contrary interpretation would not find ?ustification in the laws or the !onstitution" <f we were to rule otherwise, it would enable an employer to remove any employee from his employment by the simple

expediency of amending its by7laws and providing that hisMher position shall cease to exist upon the occurrence of a specified event" <f private respondent wanted to ma(e the petitioner=s position co7terminus with that of the 4oard of 5irectors, then the amendment must be effective after petitioner=s stay with the private respondent, not during his term" Fbviously, the measure ta(en by the private respondent in amending its by7 laws is nothing but a devious, but crude, attempt to circumvent petitioner=s right to security of tenure as a regular employee guaranteed under the Cabor !ode" 28 <nterestingly, the olicitor 'eneral is of the view that what actually transpired was that petitioner was retired from his employment, considering the fact that in 199+ he was already 72 years old and not terminated" 29 9hile there seems to be a semblance of plausibility in this contention for the matter of extension of service of such employee or official is addressed to the sound discretion of the employer, still we have no doubt that this was ?ust a mere after7thought ) a dismissal disguised as retirement" <n the proceedings before the Cabor >rbiter, it is noteworthy that private respondent never raised the issue of compulsory retirement, 30 as a cause for terminating petitioner=s service" <n its appeal before the BC/!, this ground was never discussed" <n fact, private respondent, in ?ustifying the termination of the petitioner, still anchored its claim on the applicability of the amended by7laws" Ahis omission is fatal to private respondent=s cause, for the rule is well7settled that matters, theories or arguments not brought out in the proceedings below will ordinarily not be considered by a reviewing court, as they cannot be raised for the first time on appeal" 31 .ndaunted, private respondent now asserts that the instant petition was filed out of time, 32 considering that the assailed BC/! decision was received on &une +8, 199, while this petition was filed on eptember +2, 199," >t this ?uncture, we ta(e this opportunity to state that under the 1997 /ules of !ivil Procedure, a petition for certior#ri must now be instituted within sixty days of receipt of the assailed ?udgment, order or resolution" 33 Jowever, since this case arose in 199, and the aforementioned rule only too( effect on &uly 1, 1997 then the old rule is applicable" ince prior to the effectivity of the new rule, a special civil action of certior#ri should be instituted within a period of three months, 34 the instant petition which was filed on eptember +2, 199, or two months and twenty7two days thereafter, was still within the reglementary period"

9ith respect to the issue of the monetary award to be given to the petitioner, private respondent argues that he deserves only retirement pay and nothing more" Ahis position would have been tenable had petitioner not been illegally dismissed" Jowever, since we have already ruled petitioner=s dismissal as without ?ust cause and lac(ing due process, the award of bac(wages and reinstatement is proper" 35 <n this particular case, reinstatement is no longer feasible since petitioner was already 72 years old at the time he was removed from his employment" >s a substitute thereof, separation pay is generally awarded, 36 the amount of which must be e8uivalent to one7month salary for every year of service" 37 9ith respect to the amount of bac(wages which, incidentally is different from separation pay, 38 it now settled that an illegally dismissed employee is entitled to its full payment as long as the cause of action accrued after M#rc! ;,/ ,<-<" 39 !onsidering that petitioner was terminated from the service on 5ecember 9, 199+, which is after March +1, 1989, he is entitled to full bac(wages from the time of the illegal dismissal without any, 8ualification or deduction" 40 >s regards the issue of retirement pay, private respondent asserts that the correct amount should be one7half $1M+% month salary for every year of service" Ahis time we agree with private respondent=s contention" Ahe pertinent law is >rticle +87 of the Cabor !ode, as amended by /epublic >ct Bo" 7601, which reads# >rt" +87" Retirement" ) >ny employee may be retired upon reaching the retirement age established in the collective bargaining agreement or other applicable employment contract" <n case of retirement, the employee shall he entitled to receive such retirement benefits as he may have earned under existing laws and any collective bargaining agreement and other agreements# *ro0i"e", !o&e0er, Ahat an employee=s retirement benefits under any collective bargaining and other agreements shall not be less than those provided herein" <n the absence of a retirement plan or agreement providing for retirement benefits of employees in the establishment, an employee upon reaching the age of sixty $62% years or more,

but not beyond sixty7five $6,% years which is hereby declared the compulsory retirement age, who has served at least five $,% years in the said establishment, may retire and shall be entitled to retirement pay e8uivalent to at least one7 half $1M+% month salary for every year of service, a fraction of al least six $6% months being considered as one whole year" xxx xxx xxx 9ith respect to the issue that petitioner, being a managerial employee, is not entitled to thirteenth month pay, Memorandum Frder Bo" +8, as implemented by the /evised 'uidelines on the <mplementation of the 1*th Month Pay Caw dated Bovember 16, 1987, provides# ec" 1 of Presidential 5ecree Bo" 8,1 is hereby modified to the extent that all employers are hereby re8uired to pay all their r#nk #n" $ile emplo'ee a 1*th month pay not later than 5ecember +0 of every year" !learly, therefore, the foregoing exempts managerial employees from this benefit" Ff course, this does not preclude an employer from granting other bonuses, in lieu of the 1*th month pay, to managerial employees in its discretion" 1inally, we cannot simply ignore private respondent=s malicious scheme to remove petitioner from his position which is contrary to good customs and effected in an oppressive manner, thus warranting an award of moral and exemplary damages to the petitioner" 41 Moreover, since petitioner was forced to litigate and incur expenses to protect his right and interests, he is entitled to attorney=s fees" 42 9JK/K1F/K, in view of the foregoing, the instant petition is '/>BAK5" Ahe BC/! decision dated &une 1,, 199, is hereby /KHK/ K5 and KA > <5K" Private respondent Philamlife Hillage Jomeowners >ssociation is F/5K/K5# $1% to pay petitioner Knri8ue alafranca separation pay e8uivalent to one month salary for every year of service- $+% to pay his full bac(wages in accordance with our ruling in B+ t#m#nte 02 NLR.- 43 $*% to pay his retirement pay in accordance with >rticle +87 of the Cabor !ode, as amended by /epublic >ct Bo" 7601, $0% to pay moral and exemplary damages in the amount of twenty thousand $P+2,222"22% pesos and ten thousand $P12,222"22% pesos, respectively- 44 and $,% to pay ten $123%

percent of the total amount due to petitioner, as attorney=s fees" !onse8uently, the respondent BC/! is F/5K/K5 to !FMP.AK the total monetary benefits awarded in accordance with this decision and to submit its compliance thereon within thirty $*2% days from notice of this decision" F F/5K/K5"

CASE NO. 23 C*INA 2ANKING CO+/O+A)ION0 'et%t%"!e$0 6s. CO.+) OF A//EA-S0 a!( VA--E; GO-F a!( CO.N)+; C-.20 INC.0 $es'"!(e!ts. 1acts# 'alicano !alapatia, &r" $!alapatia, for brevity% a stoc(holder of private respondent Halley 'olf S !ountry !lub, <nc" $H'!!<, for brevity%, pledged his toc( !ertificate Bo" 1+19 to petitioner !hina 4an(ing !orporation $!4!, for brevity%" !alapatia obtained a loan of P+2,222"22 from petitioner, payment of which was secured by the aforestated pledge agreement still existing between !alapatia and petitioner" 5ue to !alapatia=s failure to pay his obligation, petitioner, foreclosed the pledged stoc(" H'!!< informed !alaptia demanding full payment" ubse8uently H'!!< informed !alapatia of the termination of his membership due to the sale of his share of stoc(" !4! re8uested that a new certificate of stoc( be issued in its name however H'!!< replied that @for reason of delin8uency@ !alapatia=s stoc( was sold at the public auction held on 12 5ecember 1986 for P+,,222"22"H'!!< li(ewise insists that due to !alapatia=s failure to settle his delin8uent accounts, it had the right to sell the share in 8uestion in accordance with the express provision found in its by7laws" <ssue# 9hether or not petitioner is bound by the by7 laws of H'!!<" held# Bo, Ahe general rule really is that third persons are not bound by the by7laws

of a corporation since they are not privy thereto Ahe exception to this is when third persons have actual or constructive (nowledge of the same"<n order to be bound, the third party must have ac8uired (nowledge of the pertinent by7 laws at the time the transaction or agreement between said third party and the shareholder was entered into, in this case, at the time the pledge agreement was executed" H'!!< could have easily informed petitioner of its by7laws when it sent notice formally recogniDing petitioner as pledgee of one of its shares registered in !alapatia=s name" Petitioner=s belated notice of said by7 laws at the time of foreclosure will not suffice" STOCKS AND SHAREHOLDERS CASE NO. 24 +e'u39%c /9a!te$s 2a!< 6s. A=a!a O'/ ,176,, * March 1997P 1acts# Fn 18 eptember 1961, the /obes71rancisco /ealty S 5evelopment !orporation $/1/5!% secured a loan from the /epublic Planters 4an( in the amount of P1+2,222"22" >s part of the proceeds of the loan, preferred shares of stoc(s were issued to /1/5! through its officers then, >dalia 1" /obes and one !arlos 1" /obes" <n other words, instead of giving the legal tender totaling to the full amount of the loan, which is P1+2,222"22, the 4an( lent such amount partially in the form of money and partially in the form of stoc( certificates numbered *+20 and *+2,, each for 022 shares with a par value of P12"22 per share, or for P0,222"22 each, for a total of P8,222"22" aid stoc( certificates were in the name of >dalia 1" /obes and !arlos 1" /obes, who subse8uently, however, endorsed his shares in favor of >dalia 1" /obes" aid certificates of stoc( bear the following terms and conditions# @Ahe Preferred toc( shall have the following rights, preferences, 8ualifications and limitations, to wit# 1" Ff the right to receive a 8uarterly dividend of 13, cumulative and participating" xxx +" Ahat such preferred shares may be redeemed, by the system of drawing lots, at any time after + years from the date of issue at the option of the !orporation"@ Fn *1 &anuary 1979, /1/5! and /obes proceeded against the 4an( and filed a complaint anchored on their alleged rights to collect dividends under the preferred shares in 8uestion and to have the ban( redeem the same under the terms and conditions of the

stoc( certificates" Ahe ban( filed a Motion to 5ismiss * private respondents= !omplaint on the following grounds# $1% that the trial court had no ?urisdiction over the sub?ect7matter of the action- $+% that the action was unenforceable under substantive law- and $*% that the action was barred by the statute of limitations andMor laches" Ahe ban(=s Motion to 5ismiss was denied by the trial court in an order dated 16 March 1979" Ahe ban( then filed its >nswer on + May 1979" Ahereafter, the trial court gave the parties 12 days from *2 &uly 1979 to submit their respective memoranda after the submission of which the case would be deemed submitted for resolution" Fn 7 eptember 1979, the trial court rendered the decision in favor of /1/5! and /obes- ordering the ban( to pay /1/5! and /obes the face value of the stoc( certificates as redemption price, plus 13 8uarterly interest thereon until full payment" Ahe ban( filed the petition for certiorari with the upreme !ourt, essentially on pure 8uestions of law" <ssue# 1" 9hether the ban( can be compelled to redeem the preferred shares issued to /1/5! and /obes" +" 9hether /1/5! and /obes are entitled to the payment of certain rate of interest on the stoc(s as a matter of right without necessity of a prior declaration of dividend" Jeld# 1" 9hile the stoc( certificate does allow redemption, the option to do so was clearly vested in the ban(" Ahe redemption therefore is clearly the type (nown as @optional@" Ahus, except as otherwise provided in the stoc( certificate, the redemption rests entirely with the corporation and the stoc(holder is without right to either compel or refuse the redemption of its stoc(" 1urthermore, the terms and conditions set forth therein use the word @may@" <t is a settled doctrine in statutory construction that the word @may@ denotes discretion, and cannot be construed as having a mandatory effect" Ahe redemption of said shares cannot be allowed" Ahe !entral 4an( made a finding that the 4an( has been suffering from chronic reserve deficiency, and that such finding resulted in a directive, issued on *1 &anuary 197* by then 'ov" '" " Cicaros of the !entral 4an(, to the President and >cting !hairman of the 4oard of the ban( prohibiting the latter from redeeming any preferred share, on the ground that said redemption would reduce the assets

of the 4an( to the pre?udice of its depositors and creditors" /edemption of preferred shares was prohibited for a ?ust and valid reason" Ahe directive issued by the !entral 4an( 'overnor was obviously meant to preserve the status 8uo, and to prevent the financial ruin of a ban(ing institution that would have resulted in adverse repercussions, not only to its depositors and creditors, but also to the ban(ing industry as a whole" Ahe directive, in limiting the exercise of a right granted by law to a corporate entity, may thus be considered as an exercise of police power" +" 4oth ection 16 of the !orporation Caw and ection 0* of the present !orporation !ode prohibit the issuance of any stoc( dividend without the approval of stoc(holders, representing not less than two7thirds $+M*% of the outstanding capital stoc( at a regular or special meeting duly called for the purpose" Ahese provisions underscore the fact that payment of dividends to a stoc(holder is not a matter of right but a matter of consensus" 1urthermore, @interest bearing stoc(s@, on which the corporation agrees absolutely to pay interest before dividends are paid to common stoc(holders, is legal only when construed as re8uiring payment of interest as dividends from net earnings or surplus only" <n compelling the ban( to redeem the shares and to pay the corresponding dividends, the Arial committed grave abuse of discretion amounting to lac( or excess of ?urisdiction in ignoring both the terms and conditions specified in the stoc( certificate, as well as the clear mandate of the law"

CASE NO. 25 /#%9 C"c"!ut /$"(uce$s Fe(e$at%"! 7COCOFE,8 6s +e'u39%c 'r Bos" 1778,77,8, 17819*, 18272,

1acts# <n the eptember 17, +229 /esolution of the consolidated cases '"/" Bos" 1778,77,8, '"/" Bo" 17819* and '"/" Bo" 18272, which has long become final and executory, the !ourt granted the conversion of 7,*,808,*1+ !lass

@>@ and !lass @4@ M! common shares registered in the name of the !oconut <ndustry <nvestment 1und $!<<1% companies to M! eries 1 Preferred hares of 7,*,808,*1+, sub?ect to certain terms and conditions" <t was also held that the preferred shares shall remain in custodia legis and their ownership shall be sub?ect to the final ownership determination of the !ourt" .ntil the ownership issue has been resolved, the preferred shares in the name of the !<<1 companies shall be placed under se8uestration and P!'' management" Ahe net dividend earnings andMor redemption proceeds from the eries 1 Preferred hares shall be deposited in an escrow account with the Cand 4an( of the Philippines or the 5evelopment 4an( of the Philippines" Fnce the conversion is accomplished, the M! !ommon hares previously registered in the names of the !<<1 companies shall be released from se8uestration"

closely to the speculative PhP 122 per share price indicated by movants7 intervenors Moreover, the conversion may be viewed as a sound business strategy to preserve and conserve the value of the government6s interests in !<<1 M! shares" Preservation is attained by fixing the value today at a significant premium over the mar(et price and ensuring that such value is not going to decline despite negative mar(et conditions" !onservation is realiDed thru an improvement in the earnings value via the 83 per annum dividends versus the uncertain and most li(ely lower dividends on common shares" <ssue +# 9hether or not the P!'' and the F ', on their own, have authority to alter the nature of the se8uestered shares" Jeld# +" Ahe !ourt to be sure agrees with the thesis that, under present state of things, the P!'' and the Fffice of the olicitor 'eneral have no power, by themselves, to convert the se8uestered shares of stoc(" Ahat portion, however, about the reference to the separation of powers being gratuitous does not commend itself for concurrence" >s may be noted, the reference to the separation of powers concept was made in the context that the ownership of the sub?ect se8uestered shares is the sub?ect of a case before this !ourthence, the need of the !ourt6s approval for the desired conversion is effected" <ssue 1 $as brought up by Movants7<ntervenors Aanada et al% 1" 9hether or not the the conversion of the M! shares would destroy the character of the shares, because there is no right to vote" Jeld 1" Bo" >gain, by their very nature, shares of common stoc(, while giving the stoc(holder the right to vote, do not guarantee that the vote of the stoc(holder will prevail" Ahat is non se8uitur" Ahis we explained in the /esolution sub?ect of reconsideration# Ahe mere presence of four $0% P!'' nominated directors in the M! 4oard does not mean it can prevent board actions that are viewed to fritter away the

<ssue 1 $as raised by Fppositors alonga et al% 1" 9hether or not the conversion of the shares is patently disadvantageous to the government and the coconut farmers, given that M!6s option to redeem ensures that the shares will be bought at less than their mar(et value" Jeld# 1" Bo" Ahe !ourt need not delve into policy decisions of government agencies because of their expertise and special (nowledge of these matters" uffice it to say that all indications show that M! will redeem said preferred shares in the third year and not later because the dividend rate of 83 it has to pay on said shares is higher than the interest it will pay to the ban(s in case it simply obtains a loan" 9hen mar(et prices of shares are low, it is possible that interest rate on loans will li(ewise be low" Fn the other hand, if M! has available cash, it would be prudent for it to use such cash to redeem the shares than place it in a regular ban( deposit which will earn lower interests" <t is plainly expensive and costly for M! to (eep on paying the 83 dividend rate annually in the hope that the mar(et value of the shares will go up before it redeems the shares" Ci(ewise, the conclusion that respondent /epublic will suffer a loss corresponding to the difference between a high mar(et value and the issue price does not ta(e into account the dividends to be earned by the preferred shares for the three years prior to redemption" Ahe guaranteed PhP 6 per share dividend multiplied by three years will amount to PhP 18" <f one adds PhP 18 to the issue price of PhP 7,, then the holders of the preferred shares will have actually attained a price of PhP 9* which hews

company assets" Kven under the status 8uo, P!'' has no controlling sway in the M! 4oard, let alone a veto power at +03 of the stoc(holdings" <n relin8uishing the voting rights, the government, through the P!'', is not in reality ceding control" Moreover, P!'' has ample powers to address alleged strategies to thwart recovery of ill7gotten wealth" Ahus, the loss of voting rights has no significant effect on P!''6s function to recover ill7gotten wealth or prevent dissipation of se8uestered assets"

Fne of the conditions stipulated in said promissory note is that in case of defendant=s default in the payment of any of the monthly installments, as they become due, the entire amount or the unpaid balance thereof together with interest thereon at 6 per cent per annum, shall become due and payable on demand" Ahe defendant had been, ma(ing several partial payments thereon, leaving an unpaid balance of P9,12,"17" Jowever, he defaulted in the payment of several installments by reason of which the unpaid balance of P9,12,"17 on the promissory note has ip o $#cto become due and demandable" Ahe debt which is the sub?ect matter of the complaint was not really an indebtedness of the defendant but of Cim !uan y, who had an account with the plaintiff ban( in the form of @trust receipts@ guaranteed by the defendant as surety and with chattel mortgage securities" Ahe defendant had been paying the corresponding installments until the debt was reduced to the sum of P9,12,"17 claimed in the complaint" Ahe defendant is the owner of shares of stoc( of the plaintiff Mercantile 4an( of !hina amounting to P12,222" Ahe plaintiff ban( is now under li8uidation" < .K#

<ssue + 9hether or not the conversion of shares needs the ac8uiescence of the 10 !<<1 companies" Jeld +" Bo" <t should be remembered that the M! shares allegedly owned by the !<<1 companies are se8uestered assets under the control and supervision of the P!'' pursuant to Kxecutive Frder Bo" 1, eries of 1986" 4e that as it may, it is the duty of the P!'' to preserve the se8uestered assets and prevent their dissipation" <n the exercise of its powers, the P!'' need not see( or obtain the consent or even the ac8uiescence of the se8uestered assets owner with respect to any of its acts intended to preserve such assets"

9hether or not it is proper to compensate the defendant7appellant=s indebtedness of P9,12,"17, which is claimed in the complaint, with the sum of P12,222 representing the value of his shares of stoc( with the plaintiff entity, the Mercantile 4an( of !hina JKC5#

CASE NO. 26 G.+. N". ->39427 Fe3$ua$? 240 1934

)I+SO GA+CIA0 %! #%s ca'ac%t? as $ece%6e$ "@ t#e 4e$ca!t%9e 2a!< "@ C#%!a0 plaintiff7appellee, vs" -I4 C*. SING0 defendant7appellant" 1>!A # Fn &une +2, 19*2, the defendant7appellant Cim !hu ing executed and delivered to the Mercantile 4an( of !hina promissory note for the sum of P19,62,"17 with interest thereon at 6 per cent per annum, payable monthly"

>ccording to the weight of authority, a share of stoc( or the certificate thereof is not an indebtedness to the owner nor evidence of indebtedness and, therefore, it is not a credit" toc(holders, as such, are not creditors of the corporation" <t is the prevailing doctrine of the >merican courts, repeatedly asserted in the broadest terms, that the capital stoc( of a corporation is a trust fund to be used more particularly for the security of creditors of the corporation, who presumably deal with it on the credit of its capital stoc(" Aherefore, the defendant7appellant Cim !hu ing not being a creditor of the Mercantile 4an( of !hina, although the latter is a creditor of the former, there is no sufficient ground to ?ustify a compensation" CASE NO. 27

G.+. N". 80039 A'$%9 180 1989 E+NES)O 4. A/O,ACA0 petitioner, vs" NA)IONA- -A2O+ +E-A)IONS CO44ISSION0 1OSE 4. 4I+ASO- a!( IN)+ANS /*I-S.0 INC.0 respondents" CASE ,OC)+INE: Ahe 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" <t does not even appear that a notice of such call has been sent to petitioner by the respondent corporation" FAC)S: Petitioner was employed in respondent corporation" Fn >ugust +8, 198,, respondent &ose M" Mirasol persuaded petitioner to subscribe to P1,,22 shares of respondent corporation it P122"22 per share or a total of P1,2,222"22" Je made an initial payment of P*7,,22"22" Fn eptember 1, 197,, petitioner was appointed President and 'eneral Manager of the respondent corporation" Jowever, on &anuary +, 1986, he resigned" Fn 5ecember 19, 1986, petitioner instituted with the BC/! a complaint against private respondents for the payment of his unpaid wages, his cost of living allowance, the balance of his gasoline and representation expenses and his bonus compensation for 1986" Petitioner and private respondents submitted their position papers to the labor arbiter" Private respondents admitted that there is due to petitioner the amount of P17,262"27 but this was applied to the unpaid balance of his subscription in the amount of P9,,0*9"9*" Petitioner 8uestioned the set7off alleging that there was no call or notice for the payment of unpaid subscription and that, accordingly, the alleged obligation is not enforceable" <n a decision dated >pril +8, 1987, the labor arbiter sustained the claim of petitioner for P17,262"27 on the ground that the employer has no right to withhold payment of wages already earned under >rticle 12* of the Cabor !ode" .pon the appeal of the private respondents to public respondent BC/!, the decision of the labor arbiter was reversed in a decision dated eptember 18, 1987" Ahe BC/! held that a stoc(holder who fails to pay his unpaid subscription on call becomes a debtor of the corporation and that the set off of said obligation against the wages and others due to petitioner is not

contrary to law, morals and public policy" Jence, this petition which is treated as a special civil action for certiorari" ISS.ES: $1% 5oes the Bational Cabor /elations !ommission $BC/!% have ?urisdiction to resolve a claim for non7payment of stoc( subscriptions to a corporation: $+% >ssuming that it has, can an obligation arising therefrom be offset against a money claim of an employee against the employer: *E-,: $1% 1irstly, the BC/! has no ?urisdiction to determine such intra7 corporate dispute between the stoc(holder and the corporation as in the matter of unpaid subscriptions" Ahis controversy is within the exclusive ?urisdiction of the ecurities and Kxchange !ommission" $+% econdly, assuming arguendo that the BC/! may exercise ?urisdiction over the said sub?ect 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" <t does not even appear that a notice of such call has been sent to petitioner by the respondent corporation" 9hat the records show is that the respondent corporation deducted the amount due to petitioner from the amount receivable from him for the unpaid subscriptions" Bo doubt such set7off was without lawful basis, if not premature" >s there was no notice or call for the payment of unpaid subscriptions, the same is not yet due and payable" Castly, assuming further that there was a call for payment of the unpaid subscription, the BC/! cannot validly set it off against the wages and other benefits due petitioner" >rticle 11* of the Cabor !ode allows such a deduction from the wages of the employees by the employer, only in three instances, to @>/A" 11*" 9age 5eduction" ) Bo employer, in his own behalf or in behalf of any person, shall ma(e any deduction from the wages of his employees, except#

$a% <n cases where the wor(er is insured with his consent by the employer, and the deduction is to recompense the employer for the amount paid by him as premium on the insurance$b% 1or union dues, in cases where the right of the wor(er or his union to chec(off has been recogniDed by the employer or authoriDed in writing by the individual wor(er concerned- and $c% <n cases where the employer is authoriDed by law or regulations issued by the ecretary of Cabor"@ CASE NO. 28 '"/" Bo" C7+787+ 1ebruary +,, 19+8 )*E NA)IONA- EAC*ANGE CO.0 INC.0 '9a%!t%@@>a''e99ee0 6s. I. 2. ,EA)E+0 (e@e!(a!t>a''e99a!t. 1>!A # Ahis action was instituted in the !ourt of 1irst <nstance of Manila by the Bational Kxchange !o", <nc", as assignee $through the Philippine Bational 4an(% of !" " almon S !o", for the purpose of recovering from <" 4" 5exter a balance of P1,,222, the par value of one hundred fifty shares of the capital stoc( of !" " almon S co", with interest and costs" <t appears that on >ugust 12, 1919, the defendant, <" 4" 5exter, signed a written subscription to the corporate stoc( of !" " almon S !o" in the following form# < hereby subscribe for three hundred $*22% shares of the capital stoc( of !" " almon and !ompany, 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" .pon this subscription the sum of P1,,222 was paid in &anuary, 19+2, from a dividend declared at about that time by the company, supplemented by money supplied personally by the subscriber" 4eyond this nothing has been

paid on the shares and no further dividend has been declared by the corporation" Ahere is therefore a balance of P1,,222 still paid upon the subscription" < .K# whether the stipulation contained in the subscription to the effect that the subscription is payable from the first dividends declared on the shares has the effect of relieving the subscriber from personal liability in an action to recover the value of the shares" JKC5# Ahe stipulation mentioned is invalid" Ahe Philippine !ommission inserted in the !orporation Caw, enacted March 1, 1926, the following provision# @" " " no corporation shall issue stoc( or bonds except in exchange for actual cash paid to the corporation or for property actually received by it at a fair valuation e8ual to the par value of the stoc( or bonds so issued"@ $>ct Bo" 10,9, sec" 16 as amended by >ct Bo" +79+, sec" +"% Ahe prohibition against the issuance of shares by corporations except for actual cash to the par value of the stoc( to its full e8uivalent in property is thus enshrined in both the organic and statutory law of the Philippine<slands- and it would seem that our lawma(ers could scarely have chosen language more directly suited to secure absolute e8uality stoc(holders with respect to their liability upon stoc( subscriptions" Bow, if it is unlawful to issue stoc( otherwise than as stated it is self7evident that a stipulation such as that now under consideration, in a stoc( subcription, is illegal, for this stipulation obligates the subcriber to pay nothing for the shares except as dividends may accrue upon the stoc(" <n the contingency that dividends are not paid, there is no liability at all" Ahis is a discrimination in favor of the particular subcriber, and hence the stipulation is unlawful" Ahe general doctrine of corporation law is in conformity with this conclusion, as may be seen from the following proposition ta(en from the standard encyclopedia treatise, !orpus &uris# Bor has a corporation the power to receive a subscription upon such terms as will operate as a fraud upon the other subscribers or stoc(holders by

sub?ecting 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" <t 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 stoc( is really greater than it is, or for the purpose of preventing the predominance of certain stoc(holders, or for any other purpose, is illegal and void as in fraud of other stoc(holders or creditors, or both, and cannot be either enforced by the subcriber or interposed as a defense in an action on the subcription" $10 !" &", p" ,72"% <n the case of Putnan vs"Bew >lbany, etc" /ailroad !o" as reported in +1 Caw" ed", *61, the rule is that @!onditions attached to subcriptions, 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 stoc(holders"@ &urisdiction ma(es no distinction, in respect to the liability of the subcriber, between shares subscribed before incorporation is effected and shares subscribed thereafter" >ll li(e are bound to pay full value in cash or its e8uivalent, and any attempt to discriminate in favor of one subscriber by relieving him of this liability wholly or in part is forbidden" <n what is here said we have reference of course primarily to subcriptions to shares that have not been previously issued" <t is conceivable that the power of the corporation to ma(e terms with the purchaser would be greater where the shares which are the sub?ect of the transaction have been ac8uired by the corporation in course of commerce, after they have already been once issued" 4ut the shares with which are here concerned are not of this sort"

vs" 1EAN 4. /OI5A)0 defendant7appellee" 1acts# 5efendant was a stoc( holder in the company from the inception of the enterprise, and for sometime acted as its treasurer and manager" 9hile serving in this capacity he called in and collected all subscriptions to the capital stoc( of the company, except the aforesaid 1, shares subscribed by himself and another 1, shares owned by &ose /" <nfante" .pon &uly 1*, 1910, a meeting of the board of directors of the company was held at which a ma?ority of the stoc( was presented" .pon this occasion two resolutions, important to be here noted, were adopted" Ahe first was a proposal that the directors, or shareholders, of the company should ma(e good by new subscriptions, in proportion to their respective holdings, 1, shares which had been surrendered by <nfante" <t seems that this shareholder had already paid +, per cent of his subscription upon +2 shares, leaving 1, shares unpaid for, and an understanding had been reached by him and the management by which he was to be released from the obligation of his subscription, it being understood that what he had already paid should not be refunded" >ccordingly the directors present at this meeting subscribed P1,+22 toward ta(ing up his shares, leaving a deficiency of P*22 to be recovered by voluntary subscriptions from stoc(holders not present at the meeting" 9ithin a short while the unfavorable opinion entertained by PoiDat as to the prospect of the company was found to be fully ?ustified, as the company soon went into voluntary insolvency, Helasco being named as the assignee" Je 8ualified at once by giving bond, and was duly inducted into the office of assignee upon Bovember +,, 1910, by virtue of a formal transfer executed by the cler( in pursuance of section *+ of >ct Bo" 19,6" Ahe principal contention of the defendant is that the call made by the board of directors of the company on &uly 1*, 1910 , was not made pursuant to the re8uirements of sections *7 and *8 of the !orporation Caw $>ct Bo" 10,9%, and in particular that the action was instituted before the expiration of the *2 days specified in section *8"

CASE NO. 29 G.+. N". ->11528 4a$c# 150 1918

4IG.E- VE-ASCO0 ass%=!ee "@ )#e /#%9%''%!e C#e&%ca9 /$"(uct C". 7-t(.80 plaintiff7appellant,

<ssue# 9hether defendant PoiDat is liable for his subscription" Jeld# 9e thin( that PoiDat is liable upon this subscription" > stoc( 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" <t is a rule, accepted by the upreme !ourt of the .nited tates, that a subscription for shares of stoc( does not re8uire an express promise to pay the amount subscribed, as the law implies a promise to pay on the part of the subscriber" $7 /uling !ase Caw, sec" 191"% ection *6 of the !orporation Caw clearly recogniDes that a stoc( subscription is subsisting liability from the time the subscription is made, since it re8uires the subscriber to pay interest 8uarterly from that date unless he is relieved from such liability by the by7laws of the corporation" Ahe 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" >nother reason why the present plaintiff must prevail in this case, even supposing that the failure of the directors to comply with the re8uirements of the provisions of sections *8 to 08, inclusive, of >ct Bo" 10,9 might have been an obstacle to a recovery by the corporation itself" Ahat reason is this# 9hen insolvency supervenes upon a corporation and the court assumes ?urisdiction to wind up, all unpaid stoc( subscriptions become payable on demand, and are at once recoverable in an action instituted by the assignee or receiver appointed by the court"

+%<t is alleged that it has always been the practice and procedure of the !orporation, to issue certificates of stoc( to its individual subscribers for unpaidshares of stoc("*%Ff the 622 shares of capital stoc( subscribed by 4altaDar, he had fully paid ,*, shares of stoc(, and the !orporation issued to him several fully paid7up and non7assessable certificates of stoc(, corresponding to the ,*, shares 0%>fter having made transfers to third persons and ac8uired new ones, 4altaDar had to his credit, on the filing of the complaint, *01 shares fully paid and non7assessable" Je had also 6, shares with a par value of P6,,22"22, for which no certificate was issued to him" ,%Ff the 022 shares of stoc( subscribed by /ose, he had *7, shares of fully paid stoc(, duly covered by certificates of stoc( issued to him" 6%Ahe .ngson group $specially defendant >cena%, which had been incomplete control of the management and property of the !orporation since &anuary 1, 19,,, in order to continue retaining such control, over the ob?ection of three ma?ority members of the 4oard, in the regular meeting of the 4oard of 5irectors, held on &anuary *2, 19,,, passed three $*% /esolutions $Kxhs" >, 4,!%" a%/esolution Bo" + $Kxh" >%, declared all watered stoc(s issued to >cena, 4altaDar, /ose and &ubenville, @of no value and conse8uently cancelled from the boo(s of the !orporation"@ b%/esolution Bo" * $Kxh" 4% resolved that @" " " all unpaid subscriptions should bear interest annually from the year of subscription on the basis of 8uarterly payments and any or all payments already made on said unpaid subscriptions should be credited to pay interest first, then the capital debt after all interest is fully paid" >ll shares of stoc( issued to and in favor of any stoc(holder or stoc(holders of the Cingayen 'ulf Klectric Power !o", <nc",on accounts of payments on unpaid subscriptions without the interest thereon 7 accrued and collectible having been fully paid from the date of subscription as re8uired by the !orporation Caw, shall be declared of no value and cancelled from its boo(s, and if the payments already made exceeded the interest accrued and collectible by virtue of the provision of law and the previous resolution of its board of directors, the excess should be applied to the payment of the unpaid

CASE NO. 30 2a9taBa$ 6. -INGA;EN G.-F E-EC)+IC /OWE+ 719658 FAC)S 1%Plaintiffs 4altaDar and /ose, were among the incorporators, having subscribed to 622 and 022 shares of the capital stoc(, or a total par value of P62,222"22 and P02,222, respectively"

subscription" 1or this purpose, the accountant of the corporation is directed to ma(e and report theproper computation of the interest"@ c%/esolution Bo" 0 $Kxh" !% resolved that @any and all shares of stoc( of the Cingayen 'uf Klectric Power !o", <nc", issued as fully paid7up to stoc(holders whose subscription to a number of shares has been declared delin8uent with the accrued interest on the unpaid thereof per /esolution Bo" 0+, " 19,0, of the 4oard of 5irectors which has been duly published in the TManila !hronicle,= are hereby incapacitated to utiliDe or avail of the voting power until such delin8uency with the accrued interest is fully paid7up as indicated in /esolution Bo" *, " 19,," 7%<n their complaint, 4altaDar and /ose prayed that a writ of preliminary in?unction be issued against the defendants, en?oining them to desist and refrain from carrying out the ob?ects and purposes of the three resolutions aforestated, and commanding them to allow plaintiffs and companions to vote in the stoc(holders= meeting on May 1, 19,,, their fully paid7up shares of stoc(s, as evidence by stoc( certificates issued to them and outstanding on the stoc( boo(of the defendant !orporation, on or before &anuary *2, 19,,, to declare saidthree resolutions illegal and invalid, and to pay plaintiffs the sum of P12,222"22each, as damages" 8%5efense# a% 5efendants7appellants claim that resolution Bo" 0 $Kxh" !7 +%,withdrawing or nullifying the voting power of all the aforesaid sharesof stoc( is valid, notwithstanding the existence of partial payments,evidenced by certificates duly issued therefor" Ahey invo(e theruling laid down by the !ourt in the 1ua !un vs" ummers !ase" b%if 4altaDar subscribed to 622 shares of stoc( in a singlesubscription, and he merely paid for *22 shares, for which he wasgiven fully paid certificates for *22 shares, he cannot vote said *22shares, in any meeting of the !orporation, until he shall have paidthe remaining *22 shares of stoc( ISS.E# <f a stoc(holder, in a stoc( corporation, subscribes to a certain number of shares of stoc(, and he pays only partially, for which he is issued certificates of stoc(, he is entitled to vote the latter, notwithstanding the fact that the has

not paid the balance of his subscription, which has been called for payment or declared delin8uent: *E-,# Ahe cases at bar do not come under the aegis of the principle enunciated in the 1ua !un vs" ummers case, because it was the practice and procedure, since the inception of the corporation, to issue certificates of stoc( to its individual subscribers for unpaid shares of stoc( and gave voting power to shares of stoc( fully paid" >nd even though no agreement existed, the ruling in said case, does not now reflect the correct view on the matter, for better than an agreement or practice, there is the law, which renders the said case of 1ua !un7 ummers, obsolescent"$Bote# does not agree with ec" 60 of current !ode%" Ahen the decision discussed how the principle applies differently for par and no par stoc(s" <n this case, the stoc(holder, an incorporator, was the holder of a certificate of stoc( for the shares the par value of which had been paid by him Ahe issue was whether the said shares had voting rights although the incorporator had not paid fully the total amount of his subscription" Ahat is not the issue in this case" 9here a stoc(holder subscribed to a certain number of shares with par value and he made a partial payment and was issued a certificate for the shares covered by his partial payment, he is entitled to vote the said shares, although he has not paid the balance of his subscription and a call or demand had been made for the payment of the par value of the delin8uent shares" CASE NO. 31 ,e S%96a 6 A3"%t%B G.+. N". ->9893 Facts: 5e ilva subscribed for 6,2 shares of stoc( of >boitiD of the value of P,22 each" Je only paid for the value of +22 shares, for which he became indebted to the corporation in the amount of P+,,,222, representing the unpaid value of his subscription" Fn >pril ++, 19++, the secretary of the corporation notified him of the resolution passed by its 4oard, declaring the unpaid subscriptions to have become due and demandable" Ahe resolution also stated that all such shares which remain unpaid will be declared delin8uent, and would be advertised for sale at public auction and sold on the

following &une 16th for the purpose of paying up the amount of the subscription and accrued interest, with the expenses of the advertisement and sale, unless said payment was made before" Ahe proper advertisement having been published, as announced in the aforesaid notice, the plaintiff filed a complaint in the !ourt of 1irst <nstance of !ebu on May ,th of the same year against the said corporation, wherein, after relating the above7mentioned facts, he prayed for a ?udgment in his favor, decreeing that, in prescribing another method of paying the subscription to the capital stoc( different from that provided in article 06 of its by7laws, in declaring the aforesaid 0,2 shares delin8uent, and in directing the sale thereof, as advertised, the corporation had exceeded its executive authority, and as a conse8uence thereof he as(ed that a writ of in?unction be issued against the said defendant, en?oining it from ta(ing any further action of whatever nature in connection with the acts complained of and that it pay the costs of this suit" aid article reads thus# >/A" 06" Ahe net profit resulting from the annual li8uidation shall be distributed as follows# Aen per cent $123% for the 4oard of 5irectors and in the manner prescribed in article twenty7six $+6% of these by7laws- ten per cent $123% for the general manager- ten per cent $123% for the reserve fund, and seventy per cent $723% for the shareholders in e8ual parts- *ro0i"e"/ !o&e0er/Ahat from this seventy per cent dividend the 4oard of 5irectors m#' "e"+ctsuch amount as it may deem fit for the payment of the unpaid subscription to the capital stoc( and not pay any dividend to the holders of the said unpaid shares until they are fully paid- *ro0i"e"/ $+rt!er/ Ahat when all the shares have been paid in full # pro0i"e" in t!e prece"ing p#r#gr#p!, the 4oard of 5irectors m#' #l o "e"+ct such amount as it may deem fit for the creation of an emergency special fund, or extraordinary reserve fund when in its ?udgment the same may convenient for the development of the business of the corporation or for meeting any such contingencies as may arise from its operation, whenever the distributable dividend is found, after the foregoing deduction, to be not less than ten per cent $123% of the paid up capital stoc(" Bo dividend shall be declared or paid, except when there remains a net profit after the payment of all the expenses incurred, or allowances made, by the corporation to carry out the operation of its business- so that no such dividend may be declared as may affect the capital of the corporation" Ahe plaintiff alleged as the grounds of his petition# $1% Ahat, according to aforesaid article 06 of the by7law of the corporation, which was inserted in the complaint, all the shares subscribed to by the incorporation that were not

paid for at the time of the incorporation, shall be paid out of the 72 per cent of the profit obtained, the same to be distributed among the subscribers, who shall not receive any dividend until said shares were paid in full- $+% that in declaring the plaintiff=s unpaid subscription to the capital stoc( to have become due and payable on May *1st, and in publishing the aforesaid notice declaring his unpaid shares delin8uent, the defendant corporation has violated the aforesaid article, which prescribes an operative method of paying for the shares continuously until their full amortiDation, thus violating and disregarding a right of the plaintiff vested under the said by7laws- $*% that the aforesaid acts of the defendant corporation were in excess of its powers and executive authority and the plaintiff had no other plain, speedy and ade8uate remedy in the ordinary course of law than that prayed for in the said complaint, to prevent the defendant from ta(ing any further action in connection with the sale and alienation of the said shares" 5e ilva thus filed a complaint in the !1< against the corporation, as(ing the court to en?oin the corporation from holding such sale" Je said that the corporation exceeded its authority, as he said that its 4y7laws stated that the unpaid shares shall be paid out of the 723 of the profit obtained, which shall be distributed among the subscribers, who shall not receive any dividend until the shares are paid in full" 1urther, he contends that the 4y7laws provide an operative way of paying for the shares continuously until their full amortiDation" Ahe !1< dismissed the case" Issue: 9hether the corporation may declare the unpaid shares delin8uent and, or collect their value by another method different from that prescribed in the 4y7laws" *e9(: Ahe may be raid provision may be resorted to at the discretion of the 4oard of 5irectors" aid by7law provision does not give the shareholder the right" <n the 4y7laws, it is stated that the directors are authoriDed to create a special emergency fund or extraordinary reserve fund, when, in its ?udgment, and in case all the shares subscribed to have been fully paid" Ahe directors are given the discretion to do whatever is stated in the 4y7laws relative to the application of the 723 profit" Ahey may decide whether or not such profit shall be used to pay for the unpaid subscriptions" <f the 4oard of 5irectors do not wish to ma(e use of such authority, it has + other remedies for accomplishing the purpose, as enunciated in Helasco v PoiDat# # 1% to sell the stoc( for the account of the delin8uent subscriber, and +% to bring a legal action against him for the amount due" <n this case, 4o5s elected to avail

themselves of the first remedy granted to it by law, and declared that payment of 5e ilva6s subscription to 0,2 shares which had not been fully paid by him was due, and that said shares were delin8uent, and performed all the other acts subse8uent to said declaration, as it deemed it disadvantageous to the corporation to apply a part of the profit realiDed or to be realiDed to the payment of his subscription" 5e ilva has no right to prevent the 4oard from following, any other method than that mentioned in the law, for the very reason that the law does not give stoc(holders any right in connection with the determination of the 8uestion whether or not there should be deducted from the 723 of the profit distributable among the stoc(holders such amount as may be deemed fit for the payment of subscriptions due and unpaid"

Pending the appeal, the creditors, some of the directors and the ma?ority of the stoc(holders held several meetings in which it was agreed in substance that subscribers for the capital stoc( who were in default should pay the creditors- Cumanlan was designated to pay the debt of the corporation to &ulio HalenDuela, one of the petitioners in case Bo" *7227 Cumanlan agreed to assume this obligation and in turn the corporation agreed that if Cumanlan would dismiss his appeal in case Bo" *709+ the corporation would collect only ,2 per cent of the amount subscribed by him for stoc(, provided that in case the ,2 percent was insufficient to pay HalenDuela he should pay an additional amount which should not exceed the amount of the ?udgment against him in that case" <n view of this agreement, Cumanlan withdrew his appeal and paid HalenDuela the sum of P11,802 including interest and thereby was subrogated in place of HalenDuela" 5isregarding this agreement and notwithstanding the payment made by Cumanlan to HalenDuela, the corporation as(ed for the execution of the ?udgment" Issue: 9hether or not the plaintiff is still liable despite the compromise agreement" *e9(: ;es" > corporation has a right to collect all unpaid stoc( subscriptions and any other amounts which may be due it" <t is established doctrine that subscriptions to the capital of a corporation constitute a fund to which the creditors have a right to loo( for satisfaction of their claims" Ahe !orporation Caw clearly recogniDes that a stoc( subscription is a subsisting liability from the time the subscription is made, since it re8uires the subscriber to pay interest 8uarterly from that date unless he is relieved from such liability by the by7laws of the corporation" Ahe 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"

CASE NO. 32 -u&a!9a! 6 Cu$a0 C ,I5ON C CO.0 INC", $appellant% '"/" Bo" C7*9861 Go""#r"/ =23 Facts: Fn &uly *1, 19++, the plaintiff7appellee, subscribed for *22 shares of stoc( of ,I5ON C CO.0 INC.0 $appellant% at a par value of P,2 or a total of P1,,222" &ulio HalenDuela, Pedro antos and 1rancisco Kscoto, creditors of this corporation, filed suit against it in the !1< of Manila, case Bo" *7227, praying that a receiver be appointed, as it appeared that the corporation at that time had no assets except credits against those who had subscribed for shares of stoc(" Ahe court named Aayag as receiver for the purpose of collecting said subscriptions" >s 4onifacio Cumanlan had only paid P1,,22 of the P1,,222, par value of the stoc( for which he subscribed, the receiver on >ugust *2, 19*2, filed a suit against him in the !1< of Manila, civil case Bo" *709+, for the collection of P1,,129, P1*,,22 of which was the amount he owed for unpaid stoc( and P1,629 for loans and advances by the corporation to Cumanlan" <n that case, Cumanlan was sentenced to pay the corporation the above7mentioned sum of P1,,129 with legal interest thereon from >ugust *2, 19*2, and costs" Cumanlan appealed from the decision" March +1, 19*0

CASE NO. 33 C#%!a 2a!<%!= C"$'"$at%"! 6s. C"u$t "@ A''ea9s DG+ 1176040 26 4a$c# 1997E

Facts: Fn +1 >ugust 1970, 'alicano !alapatia, &r", a stoc(holder of Halle y 'olf S !ountr y !lub, <nc" $H'!!<%, pledged his toc( !ertificate 1+19 to !hina 4an(ing !orporation $!4!%" Fn 16 eptember 1970, !4! wrote H'!!< re8uesting that the pledge agree me nt be recorded in its boo(s" <n a letter dated +7 eptember 1970, H'!!< replied that the deed of pledge executed by !alapatia in !4!=s favor was duly noted in its corporate boo(s" Fn * >ugust 198*, !alapatia obtained a loan of P+2,222"22 from !4!, payment of which was secured b y the pledge agree ment still existing between !alapatia and !4!" 5ue to !alapatia=s failure to pa y his obligation, !4!, on 1+ >pril 198,, filed a petition for extra?udicial foreclosure before Botar y Public >ntonio A" de Hera of Manila, re8uesting the latter to conduct a public auction sale of the pledged stoc(" Fn 10 May 198,, !4! informed H'!!< of the foreclosure proceedings and re8uested that the pledged stoc( be transferred to its name and the same be recorded in the corporate boo(s" Jowever, on 1, &ul y 198,, H'!!< wrote !4! expressing its inabilit y to accede to !4!=s re8uest in view of !alapatia=s unsettled accounts with the club" 5espite the foregoing, Botary Public de Hera held a public auction on 17 eptember 198, and !4! emerged as the highest bidder at P+2,222"22 for the pledged stoc(" !onse8uently, !4! was issued the corresponding certificate of sale" Fn +1 Bovember 198,, H'!!< sent !alapatia a notice demanding full payment of his overdue account in the amount of P18,78*"+0" aid notice was followed by a demand letter dated 1+ 5ecember 198, for the same amount and another notice dated ++ Bovember 1986 for P+*,08*"+0" Fn 0 5ecember 1986, H'!!< caused to be published in the newspaper 5aily Kxpress a notice of auction sale of a number of its stoc( certificates, to be held on 12 5ece mber 1986 at 12#22 a" m" <ncluded therein was !alapatia=s own share of stoc( $ toc( !ertificate 1+19%" Ahrough a letter dated 1, 5ece mber 1986, H'!!< informed !alapatia of the termination of his membership due to the sale of his share of stoc( in the 12 5ecember 1986 auction" Fn , May 1989, !4! advised H'!!< that it is the new owner of !alapatia=s toc( !ertificate 1+19 by virtue of being the highest bidder in the 17 eptember 198, auction and re8uested that a new certificate of stoc( be issued in its

na me" Fn + March 1992, H'!!< replied that @for reason of delin8uency@ !alapatia=s stoc( was sold at the public auction held on 12 5ecember 1986 for P+,,222"22" Fn 9 March 1992, !4! protested the sale by H'!!< of the sub?ect share of stoc( and hereafter filed a case with the /egional Arial !ourt of Ma(ati for the nullification of the 12 5ecember 1986 auction and for the issuance of a new stoc( certificate in its na me" Fn 18 &une 1992, the /egional Arial !ourt of Ma(ati dis missed the complaint for lac( of ?urisdiction over the sub?ect ma tter on the theor y that it involves an intra7corporate dispute and on +7 >ugust 1992 denied !4!=s motion for reconsideration" Fn +2 eptember 1992, !4! filed a complaint with the ecurities and Kxchange !ommission $ K!% for the nullification of the sale of !alapatia=s stoc( by H'!!<- the cancellation of any new stoc( certificate issued pursuant thereto- for the issuance of a new certificate in petitioner=s na me- and for da mages, attorne y=s fees and costs of litigation" Fn * &anuar y 199+, K! Jearing Ffficer Manuel P" Perea rendered a decision in favor of H'!!<, stating in the main that considering that the said share is delin8uent, H'!!< had valid reason not to transfer the share in the name of !4! in the boo(s of H'!!< until li8uidation of delin8uency" !onse8uently, the case was dismissed" Fn 10 >pril 199+, Jearing Ffficer Perea denied !4!=s motion for reconsideration" !4! appealed to the K! en banc and on 0 &une 199*, the !o mmi ssion issued an order reversing the decision of its hearing officer- holding that !4! has a prior right over the pledged share and because of pledgor=s failure to pay the principal debt upon maturity, !4! can proceed with the foreclosure of the pledged share- declaring that the auction sale conducted b y H'!!< on 12 5ece mber 1986 is declared B.CC and HF<5- and ordering H'!!< to issue another membership certificate in the name of !4!" H'!!< sought reconsideration of the order" Jowever, the K! denied the same in its resolution dated 7 5ecember 199*" Ahe sudden turn of events sent H'!!< to see( redress from the !ourt of >ppeals" Fn 1, >ugust 1990, the !ourt of >ppeals rendered its decision nullifying and setting aside the orders of the K! and its hearing officer on ground of lac( of ?urisdiction over the sub?ect matter and, conse8uently, dismissed !4!=s original complaint" Ahe !ourt of >ppeals declared that the controversy between !4! and H'!!< is not intra7corporate- nullifying the K! orders and dismissing !4!6s complaint" !4! moved for reconsideration but the same was denied by the

!ourt of >ppeals in its resolution dated , Fctober 1990" !4! filed the petition for review on certiorari

Issue: 9hether !4! is bound by H'!!<=s by7laws:

*e9(: <n order to be bound, the third party must have ac8uired (nowledge of the pertinent by7laws at the time the transaction or agreement between said third party and the shareholder was entered into" Jerein, at the time the pledge agree ment was executed" H'!!< could have easil y infor med !4! of its b y7 laws when it sent notice formally recogniDing !4! as pledgee of one of its shares registered in !alapatia=s name" C2CFs 3e9ate( !"t%ce "@ sa%( 3?>9aGs at t#e t%&e "@ @"$ec9"su$e G%99 !"t su@@%ce. 2?>9aGs s%=!%@%es t#e $u9es a!( $e=u9at%"!s "$ '$%6ate 9aGs e!acte( 3? t#e c"$'"$at%"! t" $e=u9ate0 ="6e$! a!( c"!t$"9 %ts "G! act%"!s0 a@@a%$s a!( c"!ce$!s a!( %ts st"c <#"9(e$s "$ &e &3e$s a!( (%$ect"$s a!( "@@%ce$s G%t# $e9at%"! t#e$et" a!( a&"!= t#e &se96es %! t#e%$ $e9at%"! t" %t. I! "t#e$ G"$(s0 3?>9aGs a$e t#e $e9at%6e9? 'e$&a!e!t a!( c"!t%!u%!= $u9es "@ act%"! a("'te( 3? t#e c"$'"$at%"! @"$ %ts "G! ="6e$!&e!t a!( t#at "@ t#e %!(%6%(ua9s c"&'"s%!= %t a!( #a6%!= t#e (%$ect%"!0 &a!a=e&e!t a!( c"!t$"9 "@ %ts a@@a%$s0 %! G#"9e "$ %! 'a$t0 %! t#e &a!a=e&e!t a!( c"!t$"9 "@ %ts a@@a%$s a!( act%6%t%es. )#e 'u$'"se "@ a 3?>9aG %s t" $e=u9ate t#e c"!(uct a!( (e@%!e t#e (ut%es "@ t#e &e&3e$s t"Ga$(s t#e c"$'"$at%"! a!( a&"!= t#e&se96es. )#e? a$e se9@> % &'"se( a!(0 a9t#"u=# a("'te( 'u$sua!t t" statut"$? aut#"$%t?0 #a6e !" status as 'u39%c 9aG. )#e$e@"$e0 %t %s t#e =e!e$a99? acce'te( $u9e t#at t#%$( 'e$s"!s a$e !"t3"u!( 3? 3?>9aGs0 eHce't G#e! t#e? #a6e <!"G9e(=e "@ t#e '$"6%s%"!s e%t#e$ actua99? "$ c"!st$uct%6e9?. F"$ t#e eHce't%"! t" t#e =e!e$a9 acce'te( $u9e t#at t#%$( 'e$s"!s a$e !"t 3"u!( 3? 3?>9aGs t" 3e a''9%ca39e a!( 3%!(%!= u'"! t#e '9e(=ee0 <!"G9e(=e "@ t#e '$"6%s%"!s "@ t#e VGCCI 2?>9aGs &ust 3e acIu%$e( at t#e t%&e t#e '9e(=e a=$ee&e!t Gas c"!t$acte(. K!"G9e(=e "@ sa%( '$"6%s%"!s0 e%t#e$ actua9 "$ c"!st$uct%6e0 at t#e t%&e "@ @"$ec9"su$e G%99

!"t a@@ect '9e(=eeFs $%=#t "6e$ t#e '9e(=e( s#a$e. >rticle +287 of the !ivil !ode provides that it is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists maybe alienated for the payment to the creditor" 1urther, H'!!<=s contention that !4! is dut y7 bound to (now its b y7 laws because of >rticle +299 of the !ivil !ode which stipulates that the creditor must ta(e care of the thing pledged with the diligence of a good father of a family, fails to convince" !4! was never informed of !alapatia=s unpaid accounts and the restrictive provisions in H'!!<=s by7laws" 1urthermore, ection 6* of the !orporation !ode which provides that @no shares of stoc( against which the corporation holds any unpaid claim shall be transferable in the boo(s of the corporation@ cannot be utiliDed b y H'!!<" Ahe ter m @unpaid clai m@ refers to @an y unpaid clai m arising fro m unpaid subscription, and not to any indebtedness which a subscriber or stoc(holder may owe the corporation arising f r o m a n y o t h e r t r a n s a c t i o n " @ Jerein, the subscription for the share in 8uestion has b e e n f u l l y p a i d a s evidenced by the issuance of Membership !ertificate 1+19" 9hat !alapatia owed the corporation were merely the monthly dues" Jence, ection 6* does not apply"

CASE NO. 34 G.+. N". ->19441 4a$c# 270 1923 F.A C.N 7 a !a" )ua Cu!80 *l#inti$$-Appellee, vs" +ICA+,O S.44E+S0 %! #%s ca'ac%t? as S#e$%@@ eH>"@%c%" "@ t#e C%t? "@ 4a!%9a0 a!( t#e C*INA 2ANKING CO+/O+A)ION0:e$en"#nt -Appell#nt " FAC)S: <t appears from the evidence that on >ugust +6, 19+2, one !hua oco subscribed for five hundred shares of stoc( of the defendant 4an(ing !orporation at a par value of P122 per share, paying the sum of P+,,222, one7half of the subscription price, in cash, for which a receipt was issued" Fn May 18, 19+1, !hua oco executed a promissory note in favor of the plaintiff 1ua !un for the sum of P+,,222 payable in 92 days and drawing

interest at the rate of 1 per cent per month, securing the note with a chattel mortgage on the shares of stoc( subscribed" <n the meantime !hua oco appears to have become indebted to the !hina 4an(ing !orporation in the sum of P*7,7*1"68 for dishonored acceptances of commercial paper" Ahus, !hua oco=s interest in the ,22 hundred shares subscribed for was attached and the receipt seiDed by the sheriff" Ahe attachment was levied after the defendant ban( had received notice of the facts that the receipt had been endorsed over to the plaintiff" 1ua !un thereupon brought the present action maintaining that by virtue of the payment of the one7half of the subscription price of ,22 hundred shares, !hua oco in effect became the owner of two hundred and fifty shares and praying that his, the plaintiff=s, lien on said shares, by virtue of the chattel mortgage, be declared to hold priority over the claim of the defendant 4an(ing !orporation- that the defendants be ordered to deliver the receipt in 8uestion to him- and that he be awarded the sum of P,,222 in damages for wrongful attachment" Ahe trial court rendered ?udgment in favor of the plaintiff declaring that !hua oco, through the payment of the P+,,222, ac8uired the right to +,2 shares fully paid up, upon which shares the plaintiff holds a lien superior to that of the defendant 4an(ing !orporation and ordering that the receipt be returned to said plaintiff" 1rom this ?udgment the defendants appeal" law library ISS.E: 9oB the court below erred in holding that !hua oco, by paying one7half of the subscription price of ,22 shares, in effect became the owner of +,2 shares" +.-ING: Ahe ?udgement, in the main, is correct" Ahe claim of the defendant 4an(ing !orporation upon which it brought the action in which the writ of attachment was issued, was for the non7payment of drafts accepted by !hua oco and had no direct connection with the shares of stoc( in 8uestion" >t common law a corporation has no lien upon the shares of stoc(holders for any indebtedness to the corporation $&ones on Ciens, *d ed", sec" *7,% and our attention has not been called to any statute creating such lien here" Fn the contrary, section 1+2 of the !orporation >ct provides that @no ban( organiDed under this >ct shall ma(e any loan or discount on the security of the shares of its own capital stoc(, 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 stoc( so purchased or ac8uired 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 ban( in accordance with law"@ law library ection *, of the .nited tates Bational 4an(ing >ct of 1860 contains a similar provision and it has been held in various decisions of the .nited tates upreme !ourt that a ban( organiDed under that >ct can have no lien on its own stoc( for the indebtedness of the stoc(holders even when the by7 laws provide that the shares shall be transferable only on the boo(s of the corporation and that no such transfer shall be made if the holder of the shares is indebted to the corporation" $&ones on Ciens, *d ed", sec" *80- 1irst Bational 4an( of outh 4end 0 2 Canier and Jandy, 11 9all", *694ullard 0 2Bational Kagle 4an(, 18 9all", ,89- 1irst Bational 4an( of Genia 0 2 tewart and McMillan, 127 ." ", 676"% Ahe reasons for this doctrine are obvious- if ban(ing corporations were given a lien on their own stoc( for the indebtedness of the stoc(holders, the prohibition against granting loans or discounts upon the security of the stoc( would become largely ineffective" Aurning now to the rights of the plaintiff in the stoc( in 8uestion, it is argued that the interest held by !hua oco was merely an e8uity which could not be made the sub?ect of a chattel mortgage" Ahe chattel mortgage here in 8uestion would not prevail over liens of third parties without notice- an e8uity in shares of stoc( is of such an intangible character that it is somewhat difficult to see how it can be treated as a chattel and mortgaged in such a manner that the recording of the mortgage will furnish constructive notice to third parties" Ahere can be no doubt that an e8uity in shares of stoc( may be assigned and that the assignment is valid as between the parties and as to persons to whom notice is brought home" uch an assignment exists here, though it was made for the purpose of securing a debt" >s we have already stated, the court erred in holding the plaintiff as the owner of two hundred and fifty shares of stoc(- @the plaintiff=s rights consist in an e8uity 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"@ law library

CASE NO. 35 G.+. N". ->16236 1u!e 300 1965

I+INEO S. 2A-)A5A+0 plaintiff7appellee, vs" -INGA;EN G.-F E-EC)+IC /OWE+0 CO.0 INC.0 ,O4INA,O+ C. .NGSON0 2+IGI,O G. ES)+A,A0 4AN.E- -. FE+NAN,E50 2ENE,IC)O C. ;.SON a!( 2E+NA+,O ACENA0 defendants7appellants"

Ahe Cingayen 'ulf Klectric Power !o", <nc",was doing business in the Philippines with an authoriDed capital stoc( of P*22"222"22 divided into *,222 shares of voting stoc( at P122"22 par value, per share" Plaintiffs 4altaDar and /ose were among the incorporators, having subscribed to 622 and 022 shares of the capital stoc(, or a total par value of P62,222"22 and P02"222"22, respectively" <t is alleged that it has always been the practice and procedure of the !orporation to issue certificates of stoc( to its individual subscribers for unpaid shares of stoc(" Ff the 622 shares of capital stoc( subscribed by 4altaDar, he had fully paid ,*, shares of stoc(, and the !orporation issued to him several fully paid up and non7assessable certificates of stoc(, corresponding to the ,*, shares" >fter having made transfers to third persons and ac8uired new ones, 4altaDar had to his credit, on the filing of the complaint *01 shares fully paid and non7assessable" Je had also 6, shares with par value of P6,,22"22, for which no certificate was issued to him" Ff the 022 shares of stoc( subscribed by /ose, he had *7, shares of fully paid stoc(, duly covered by certificates of stoc( issued to him" <n a regular meeting of the 4oard of 5irectors, the .ngson 'roup which controlled the corporation since 19,, passed * resolutions /esolution Bo" + $Kxh" >%, declared all watered stoc(s issued to >cena, 4altaDar, /ose and &ubenville, @of no value and conse8uently cancelled from the boo(s of the !orporation" /esolution Bo" * $Kxh" 4% resolved that @""" all unpaid subscriptions should bear interest annually from the year of subscription on the basis of 8uarterly payment, and any or all payments already made on said unpaid subscriptions should be credited to pay interest first, then the capital debt after all interest is fully paid" /esolution Bo" 0 $Kxh" !% resolved that @any and all shares of stoc( of the

Cingayen 'ulf Klectric Power !o", <nc", issued as fully paid7up to stoc(holders whose subscription to a number of shares have been declared delin8uent with the accrued interest on the unpaid thereof per /esolution Bo" 0+, " 19,0, of the 4oard of 5irectors which has been duly published in the @Manila !hronicle,@ are hereby incapacitated to utiliDe or avail of the voting power until such delin8uency with the accrued interest is fully paid up as indicated in /esolution Bo" *, " 19,," Fn the authority of these resolutions, the .ngson group was threatening and procuring to expel and oust the plaintiffs and their companion stoc(holders, for the ultimate purpose of depriving them of their right to vote in the said annual stoc(holders= meeting scheduled for May 1, 19,,"

< .K# 9hether or not# 1" <f a stoc(holder, in a stoc( corporation, subscribes to a certain number of shares of stoc(, and he pays only partially, for which he is issued certificates of stoc(, is he entitled to vote the latter, notwithstanding the fact that he has not paid the balance of his subscription, which has been called for payment or declared delin8uent: +" <f a stoc(holder subscribes to a certain number of shares of stoc( and ma(es partial payment only and declared delin8uent as to the rest, with interest, should previous payments on account of the capital, be first applied to interest, thus diminishing the voting power of the shares of stoc( already paid: <n other words, if the entire subscribed shares of stoc( are not paid, will the paid shares of stoc( be deprived of the right to vote, until the entire subscribed shares of stoc( are fully paid, including interest: Jeld# 1" Ahe present law re8uires as a condition before a share holder can vote his shares, that his $+ll +% cription %e p#i" in t!e c# e o$ no p#r 0#l+e tock> and in case of stoc( corporation with par value, the stoc(holder can vote the shares fully paid by him only, irrespective of the unpaid delin8uent shares" >s well7observed by the trial court, a corporation may now, in the absence of provisions in their by7laws to the contrary, apply payment made by , subscribers7stoc(holders, either as# @$a% full payment for the corresponding number of shares of stoc(, the par value of each of which is covered by such payment- or $b% as payment pro7rata to each and all the entire number of

shares subscribed for@ $amended decision%" <n the cases at bar, the defendant7 corporation had chosen to apply payments by its stoc(holders to definite shares of the capital stoc( of the corporation and had fully paid capital stoc( shares certificates for said payments- its call for payment of unpaid subscription and its declaration of delin8uency for non7payment of said call affecting only the remaining number of shares of its capital stoc( for which no fully paid capital stoc( shares certificates have been issued, @and only these have been legally shorn of their voting rights by said declaration of delin8uency" +" <n the present case, the defendant7corporation had applied the payments made by the stoc(holders to the full par value of the shares of stoc( subscribed by them, instead of the accepted interest, as shown by the capital stoc( shares certificate issued for the payments made, and the stoc(holders had accepted such certificates issued for such payments" Ahis being the case, the said application of payments must be deemed to have been agreed upon by the !orporation and the stoc(holders, and the same cannot now be changed without the consent of the stoc(holders concerned" Ahe !orporation Caw and the by7laws of the defendant !orporation do not contain any provision, prohibiting the application of stoc(holders= payments to the full par value of a corporation=s capital stoc(, ahead of the payment of accrued interest for unpaid subscriptions" <t would, therefore, result that a corporation may, upon re8uest of an interested stoc(holder, as his option, apply payment by them to the full par value of shares of capital leaving its collection later of the accrued interest on unpaid subscriptions, and that once such option has been exercised and the corresponding stoc( certificates have been issued, the corporation cannot, by a unilateral act, legally nullify and cancel the capital stoc( certificates so issued" 9JK/K1F/K, the order of the trial court of &uly 16, 19,9, $1% Kxpressly ruling @that all shares of the capital stoc(s of the defendant corporation covered by fully paid capital stoc( shares of certificates are entitle" to 0ote in #ll meeting of the stoc(holders of this corporation and resolutions Bos" +, * and 0 $Kxhs" !, !71 and !7+% of defendant corporation=s 4oard of 5irectors are hereby nullified insofar as they are inconsistent with this ruling@

G.+. N". ->28120 N"6e&3e$ 250 1976 +ICA+,O A. NAVA 6s. /EE+S 4A+KE)ING CO+/O+A)ION0 +ENA)O +. C.SI a!( A4/A+O C.SI

FAC)S: Aeofilo Po as an incorporator subscribed to eighty shares of Peers Mar(eting !orporation at one hundred pesos a share or a total par value of eight thousand pesos" Po paid two thousand pesos or twenty7five percent of the amount of his subscription" Bo certificate of stoc( was issued to him or, for that matter, to any incorporator, subscriber or stoc(holder"

Fn >pril +, 1966 Po sold to /icardo >" Bava for two thousand pesos twenty of his eighty shares" <n the deed of sale Po represented that he was @the absolute and registered owner of twenty shares@ of Peers Mar(eting !orporation"

Bava re8uested the officers of the corporation to register the sale in the boo(s of the corporation" Ahe re8uest was denied because Po has not paid fully the amount of his subscription" Bava was informed that Po was delin8uent in the payment of the balance due on his subscription and that the corporation had a claim on his entire subscription of eighty shares which included the twenty shares that had been sold to Bava"

ISS.E# 9hether or not the corporation may be compelled by mandamus to register the sale of shares

CASE NO. 36

*E-,# Bo" 9e hold that the transfer made by Po to Bava is not the @alienation, sale, or transfer of stoc(@ that is supposed to be recorded in the stoc( and transfer boo(, as contemplated in section ,+ of the !orporation Caw"

as such trustee or trustees, in which new certificates it shall appear that they are issued pursuant to said agreement"

>s a rule, the shares which may be alienated are those which are covered by certificates of stoc(, as shown in the following provisions of the !orporation Caw and as intimated in Jager vs" 4ryan, 19 Phil" 1*8"

>s prescribed in section *,, shares of stoc( may be transferred by delivery to the transferee of the certificate properly indorsed" @Aitle may be vested in the transferee by delivery of the certificate with a written assignment or indorsement thereof@ $18 !"&" " 9+8%" Ahere should be compliance with the mode of transfer prescribed by law $18 !"&" " 9*2%"

K!" *," Ahe capital stoc( of stoc( corporations shall be divided into shares for which certificates signed by the president or the vice7president, countersigned by the secretary or cler( and sealed with the seal of the corporation, shall be issued in accordance with the by7laws" hares of stoc( 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 authoriDed to ma(e the transfer" Bo transfer, however, shall be valid, except as between the, parties, until the transfer is entered and noted upon the boo(s 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"

Ahe usual practice is for the stoc(holder to sign the form on the bac( of the stoc( certificate" Ahe certificate may thereafter be transferred from one person to another" <f 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 blan(s in the form by inserting his own name as transferee" Ahen he delivers the certificate to the secretary of the corporation so that the transfer may be entered in the corporation=s boo(s" Ahe certificate is then surrendered and a new one issued to the transferee"

Bo share of stoc( against which the corporation holds any unpaid claim shall be transferable on the boo(s of the corporation"

Ahat procedure cannot be followed in the instant case because, as already noted, the twenty shares in 8uestion are not covered by any certificate of stoc( in Po=s name" Moreover, the corporation has a claim on the said shares for the unpaid balance of Po=s subscription" > stoc( subscription is a subsisting liability from the time the subscription is made" Ahe subscriber is as much bound to pay his subscription as he would be to pay any other debt" Ahe right of the corporation to demand payment is no less incontestable"

K!" *6" $re voting trust agreement% """

> corporation cannot release an original subscriber from paying for his shares without a valuable consideration or without the unanimous consent of the stoc(holders"

Ahe certificates of stoc( so transferred shall be surrendered and cancelled, and new certificates therefor issued to such person or persons, or corporation,

.nder 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 Bava=s name, Jence, there is no cause of action for mandamus"

CASE NO. 37 )AN 6 SEC 1>!A # Hisayan Kducational upply !orp" $/espondent% was registered on Fctober 1, 1979" >s incorporator, >lfonso " Aan had 022 shares of the capital stoc( at the par value of P122Mshare, evidenced by !ertificate of toc( Bo" +" Je was elected as President until 198+ and remained in the 4oard of 5irectors as director until >pril 19, 198*" Fn &anuary *1, 1981, <ncorporators >ntonia ;" ;oung and Aeresita ;" Fng, assigned to the corporation their shares, represented by certificate of stoc( Bo" 0 and ,, they were paid 023 corporate stoc(7in7trade Petitioner=s certificate of stoc( Bo" + was cancelled by the corporate secretary and respondent Patricia >guilar by virtue of /esolution Bo" 1981, which was passed and approved while petitioner was still a member of the 4oard of 5irectors of the respondent corporation" 5ue to the withdrawal of the + incorporators and in order to complete the membership of the , directors of the board, petitioner sold ,2 shares out of his 022 shares of capital stoc( to his brother >ngel " Aan" >nother incorporator, >lfredo 4" .y, also sold ,2 of his 022 shares of capital stoc( to Aeodora " Aan" Fn March +7, 1981# >ngel Aan was elected director" >s a result of the sale

by petitioner of his fifty $,2% shares of stoc( to >ngel " Aan on >pril 16, 1981, !ertificate of toc( Bo" + was cancelled and the corresponding !ertificates Bos" 6 and 8 were issued, signed by the newly elected fifth member of the 4oard, >ngel " Aan as Hice7president, upon instruction of >lfonso " Aan who was then the president of the !orporation" <t was alleged that >tty" /amireD prepared a Memorandum of >greement with respect to the transaction of the fifty $,2% shares of stoc( part of the toc( !ertificate Bo" + of petitioner, which was submitted to its former owner, >lfonso Aan, but which the purposely did not return" Fn &anuary +9, 198*, during the annual meeting of the corporation, respondent Aan u !hing was elected as President while petitioner was elected as Hice7president" Je, however, did not sign the minutes of said meeting which was submitted to the K! on March *2, 198*" Petitioner was dislodged from his position as president, he withdrew from the corporation on 1ebruary +7, 198*, on condition that he be paid with stoc(s7 in7trade e8uivalent to **"*3 in lieu of the stoc( value of his shares in the amount of P*,,222"22" >fter the withdrawal of the stoc(s, the board of the respondent corporation held a meeting on >pril 19, 198*, effecting the cancellation of toc( !ertificate Bos" + and 8 in the corporate stoc( and transfer boo( 1"

Ahe bone of centention raised by the petitioner is that the deprivation of his shares despite the non7endorsement or surrender of his toc( !ertificate Bos" + and 8, was without the process contrary to the provision of ection 6* of the !orporation !ode which re8uires that# Bo transfer, however, shall be valid, except as between the parties, until the transfer is recorded to the boo(s 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 !ebu K! Kxtension Fffice Jearing Ffficer ruled that a% Ahe cancellation of the complainant=s shares of stoc( with the Hisayan Kducational upply !orporation is null and voidb% Ahe earlier cancellation of stoc( certificate Bo" + and the subse8uent issuance of stoc( certificate Bo" 8 is also hereby declared null and voidK! en banc# overturned the decision" <t declared null and void of the sale of *,2 shares represented under stoc( certification Bo" 8, pursuant to the @in pari delicto@ doctrine"

endorsement and his deliberate non7endorsement" 1or all intents and purposes, however, since this was already cancelled which cancellation was also reported to the respondent !ommission, there was no necessity for the same certificate to be endorsed by the petitioner" >ll the acts re8uired for the transferee to exercise its rights over the ac8uired stoc(s were attendant and even the corporation was protected from other parties, considering that said transfer was earlier recorded or registered in the corporate stoc( and transfer boo(" <n the case of AuaDon v" Ca Provisora 1ilipina the court held that E4ut delivery is not essential where it appears that the persons sought to be held as stoc(holders are officers of the corporation, and have the custody of the stoc( boo(" 1urthermore, there is a necessity to delineate the function of the stoc( itself from the actual delivery or endorsement of the certificate of stoc( itself as is the 8uestion in the instant case" > certificate of stoc( is not necessary to render one a stoc(holder in corporation" Bevertheless, a certificate of stoc( is the paper representative or tangible evidence of the stoc( itself and of the various interests therein" Ahe certificate is not stoc( 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 e8uivalent of such ownership" <t expresses the contract between the corporation and the stoc(holder, but is not essential to the existence of a share in stoc( or the nation of the relation of shareholder to the corporation" .nder the instant case, the fact of the matter is, the new holder, >ngel " Aan has already exercised his rights and prerogatives as stoc(holder and was even elected as member of the board of directors in the respondent corporation with the full (nowledge and ac8uiescence of petitioner" 5ue to the transfer of fifty $,2% shares, >ngel " Aan was clothed with rights and responsibilities in the board of the respondent corporation when he was elected as officer thereof"

< .K# 9hether or not ec" 6* of the !orporation !ode is mandatory in nature, meaning that without actual delivery and endorsement of the certificate in 8uestions, there can be no transfer, or that such transfer is null and void" Jeld# !ourt held, that @/emedial law statues are to be construed liberally"@ Ahe term =may= as used in ad?ective rules, is only permissive and not mandatory" <n several earlier cases, the usage of the word @may@ was described as follows# Ahe word @may@is an auxilliary verb showing among others, opportunity or possibility" .nder ordinary circumstances, the phrase @may be@ implies the possible existence of something" <n this case, the @something@ is a law governing sectoral representation" Ahe phrase in 8uestion should, therefore, be understood to mean as prescribed by such law that governs the matter at the time " " " Ahe phrase does not and cannot, by its very wording, restrict itself to the uncertainly of future legislation" Moreover, it is safe to infer from the facts deduced in the instant case that, there was already delivery of the unendorsed toc( !ertificate Bo" +, which is essential to the issuance of toc( !ertificate Bos" 6 and 8 to angel " Aan and petitioner >lfonso " Aan, respectively" 9hat led to the problem was the return of the cancelled certificate $Bo" +% to >lfonso " Aan for his

4esides, in Philippine ?urisprudence, a certificate of stoc( is not a negotiable instrument" @>lthough it is sometime regarded as 8uasi7negotiable, in the sense that it may be transferred by endorsement, coupled with delivery, it is well7settled that it is non7negotiable, because the holder thereof ta(es it without pre?udice to such rights or defenses as the registered ownerMs or transferror=s creditor may have under the law, except insofar as such rights or defenses are sub?ect to the limitations imposed by the principles governing estoppel"