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CORPORATION LAW | B2015 CASE DIGESTS

TRIPLEX SHOE CO. V. RICE & HUTCHINS INC (ANASTACIO)

CORPORATION LAW | B2015 CASE DIGESTS

McCarty v. Langdea
1960 Hughes Alycat This digest only focuses on appellants first argument, which is the only one discussed by ampos! SUMMAR!" "c arty e#ecuted a written contract whereby he agreed to purchase shares of stoc$ from %state &ife! "c arty paid a down payment, but a balance was left! The balance and the mode for its payment was e'idenced by a promissory note! (hen "c arty was sued upon the note, he in'o$ed the constitutional prohibition on the issuance of shares of stoc$ in e#change for anything other than money, labor, or property! The ourt of i'il Appeals of Te#as held the note 'alid and enforceable! #OCTRINE" (here the rights of the creditors of the corporation are in'ol'ed, e'en though the stoc$ is issued in e#change of something other than money, property, or labor, such as a promissory note, liability on the notes in payment shall be enforced! This is in spite of a constitutional pro'ision )in Te#as* prohibiting such a consideration for the issuance is prohibited! There is a difference between prohibiting a certain form of transaction, and declaring that the transaction, and all securities issuing out of it, are utterly 'oid! Thus, a note gi'en by a subscriber for the issuance of stoc$, in the hands of a bona fide holder, is 'alid and enforceable! The stoc$holder who has paid nothing for his stoc$ is not permitted to ta$e shelter under the onstitution! $ACTS" H &angdeau is the recei'er of %state &ife +nsurance! He filed suit against ,ohn &! "c arty! &angdeau alleges that "c arty e#ecuted a written contract whereby he agreed to purchase 19,-.0 shares of stoc$ from %state &ife +nsurance at /001 share! The contract stated that /00 in cash was to be tendered as down payment, and a balance of /-2.,-20 was to be paid in up to -0 monthly installments, as e'idenced by a note! ISSUE" (34 the contract is enforceable 5%6 McCART!%S AR&UMENT" The contract is 'oid, since it 'iolates the 6ec! 10, Art! 6 of the Te#as onstitution, which states that7 84o corporation shall issue stoc$ or bonds e#cept for money paid, labor done or property actually recei'ed, and all fictitious increase of stoc$ or indebtedness shall

be 'oid!8 RATIO" 9unagan '! :ushey7 The issuance and sale of stoc$ for notes is in 'iolation of the Te#as onstitution! +n ;Te#as orporations< by Hildebrand, the author says ;The onstitution of Te#as only prohibits the issuance of stoc$ until fully paid for! Therefore, where a note is gi'en for stoc$, if it is understood that the stoc$ will not be issued to the subscriber until the note is paid, the contract is 'alid and not illegal!8 The law is much stronger where the rights of the creditors of the corporation are in'ol'ed, as in this case! +n such cases, e'en though the stoc$ is issued, liability on the notes in payment of such stoc$, is enforced! ,oy '! =odchau#7 The transaction was contrary to Te#as laws! +f the contro'ersy was between the corporation and the appellee, it is probable the court would drop the matter! Howe'er, the affairs of the corporation are in the hands of a recei'er, who represents not only the stoc$holders, but also the creditors! The rights of the creditors ha'e inter'ened and ha'e an important bearing on the case! (asher '! 6myer7 There is no declaration in the constitutional pro'ision that a transaction in which something other than money, property, or labor is recei'ed for the corporations stoc$, shall be utterly 'oid! (hat is declared 'oid is ;all fictitious increase of stoc$ or indebtedness,< 43T the issuance of stoc$ for other than money, property, or labor! 6o, for instance, if a security be accepted in payment for the stoc$, such as a subscriber>s note, which is not property, the onstitution does not say either that it, or the stoc$ issued for it, shall be 'oid! There is a difference between prohibiting a certain form of transaction )what the constitutional pro'ision actually does*, and declaring that the transaction, and all securities issuing out of it, are utterly 'oid )what "c arty suggests the pro'ision does*! The constitutional pro'ision was aimed against the ac?uisition of stoc$ by a one who has not lawfully paid therefor! +t was designed for the protection of the corporation and its creditors! +ts purpose is to gi'e integrity to the corporations capital! +t is to pre'ent false presence at its hands, and a'oid

CORPORATION LAW | B2015 CASE DIGESTS

imposition upon the public! 4one of these ob@ects would be promoted by declaring uncollectible a note gi'en by a subscriber, in the hands of a bona fide holder! Therefore, the stoc$holder who has paid nothing for his stoc$ is not permitted to ta$e shelter under the onstitution! He is not allowed to interpose it to defeat his obligation!

1!

R'(de v. #(c)*'(+ C(,+any et a-.


1920 Olney, J. Supreme Court of California sai

0!

SUMMAR!" A @udgment creditor of 9oc$Ahop filed an action against some of its stoc$holders to collect the unpaid balances on the par 'alue of their shares! The lower court found for the @udgment creditor! The 6upreme ourt re'ersed, holding that the stoc$holders, as innocent purchasers of the watered stoc$, cannot be held liable for the difference that e#isted between what was actually paid on their stoc$ and its par 'alue! #OCTRINE" (hen the corporation issues watered stoc$ and assumes an ostensible capitaliBation in e#cess of its assets, it commits constructi'e fraud upon the creditors! The transferee of watered stoc$ who ta$es it in ignorance of its real character is not re?uired, e'en at the suit of a creditor, to pay in anything more upon it! $ACTS" The @udgment creditor of 9oc$Ahop filed an action against some of its stoc$holders to collect from them what are claimed to be unpaid balances on the par 'alue of their shares! Allegations in the complaint: 1! 9efendants were subscribers and stoc$holders! 0! 3nly 0C cents on the dollar had been paid in on the par 'alue of their shares! Answer of the efen ants:

They were neither subscribers nor stoc$holders! a! ourt7 +t was admitted at the trial that they were so! i! The court accepted the plaintiffs theory that it made no difference whether the defendants were subscribers or not! ii! The fact that they were stoc$holders and that the shares they held, although issued as fully paid were in fact issued for property which the directors did not belie'e was e?ual in 'alue to the par 'alue of the shares were enough to warrant @udgment against them! The full par 'alue of their stoc$ had been paid! a! ourt7 3nly fi'eAtwelfths of the par 'alue had been paid! %'idence is enough to pro'e such!

ISSUE" (34 defendants are re?uired, because of the plaintiffs claim, to ma$e up any difference which may e#ist between what was actually paid on their stoc$ and its par 'alue! D4ote7 The 'alidity of the claim is not in issue!E RULIN&" NO! The innocent purchasers of watered stoc$ cannot be made to pay for the balance! RATIO" (here a person accepts the ownership of stoc$ which purports to be fully paid, he does not the stoc$ and enters upon the relation of stoc$holder upon any understanding that his stoc$ is liable for further calls on capital account or that he assumes any such obligation! 1! +n fact, he enters upon such relationship with @ust the contrary understanding! 3ne gi'ing credit to a corporation is entitled to rely upon its ostensible capitaliBation as the basis for the credit gi'en! 1! (hen the corporation issues watered stoc$ and assumes an ostensible capitaliBation in e#cess of its assets, it commits constructi'e fraud upon the creditors! 0! +n other words, the essence of the right of the creditor to brush aside the issuance of the stoc$ as fully paid, and to show that it was not such and to compel the payment of the balance upon it, is that the issuance as fully paid was as to him a fraud! The abo'e 'iew is followed in alifornia! The court is, therefore, free to

CORPORATION LAW | B2015 CASE DIGESTS

follow the rule that t'e tran./eree (/ 0atered .t(c) 0'( ta)e. 1t 1n 1gn(rance (/ 1t. rea- c'aracter 1. n(t re2 1red3 even at t'e . 1t (/ a cred1t(r3 t( +ay 1n anyt'1ng ,(re +(n 1t. 1! This is consistent with the principle that reco'ery is permitted in any case against the owner of stoc$ issued by the corporation as fully paid! DFemedy is against the original owner of the watered stoc$s!E 0! Any other rule would sub@ect the innocent purchaser of corporate stoc$ to obligations in large amounts of which he had no conception when he ac?uired such! #ISPOSITIVE" ,udgment re'ersed!

4IN& CROS4! MINUTE MAI# CORP. V. EATON (4ERNAR#O)

CORPORATION LAW | B2015 CASE DIGESTS

MI&UEL VELASCO3 a..1gnee (/ T'e P'1-1++1ne C'e,1ca- Pr(d ct C(. (Ltd.)3 +-a1nt1//*a++e--ant3 v.. 5EAN M. POI6AT
!arch 1", 191# Street, J. ron

sections -. and -2 of the orporation &aw )Act 4o! 1HC9*, and in particular that the action was instituted before the e#piration of the -0 days specified in section -2! ISSUES" (34 GoiBat is liable to pay the unpaid subscription! 5%6 RULIN&" 5%6! 6ection -6 of the orporation &aw clearly recogniBes that a stoc$ subscription is subsisting liability from the time the subscription is made, since it re?uires the subscriber to pay interest ?uarterly from that date unless he is relie'ed from such liability by the byAlaws of the corporation! The subscriber is as much bound to pay the amount of the share subscribed by him as he would be to pay any other debt, and the right of the company to demand payment is no less incontestable! RATIO" 1! There are two remedies for the enforcement of stoc$ subscriptions7 a! Germitting the corporation to put up the unpaid stoc$ for sale and dispose of it for the account of the delin?uent subscriber under section -2 to H2 of the orporation &awI or b. :y action in court, under section H91 0! +t is generally accepted doctrine that the statutory right to sell the subscriber>s stoc$ is merely a remedy in addition to that which proceeds by action in courtI and it has been held that the ordinary legal remedy by action e#ists e'en though no e#press mention thereof is made in the statute! -! Also, e'en if the directors failed to ma$e a call for the payment of the unpaid subscriptions when insol'ency super'enes upon a corporation and the court assumes @urisdiction to wind up, all unpaid stoc$ subscriptions become payable on demand, and are at once reco'erable in an action instituted by the assignee or recei'er appointed by the court! H! +t e'idently cannot be permitted that a subscriber should escape from his lawful obligation by reason of the failure of the officers of the corporation to perform their duty in ma$ing a callI and when the original model of ma$ing the call becomes impracticable, the obligation must be treated as due upon demand!
1

SUMMAR!" GoiBat subscribed to 00 shares but only paid for C shares of the Ghilippine hemical Groduct o! The :oard of 9irectors made a call for payment through a resolution but GoiBat refused to pay! The orporation became insol'ent! Assignee in insol'ency sued GoiBat for the 'alue of the unpaid subscription! 6 held that GoiBat is still liable to pay for the unpaid subscriptions! #OCTRINE" 1! There are two remedies for the enforcement of stoc$ subscriptions7 a! Germitting the corporation to put up the unpaid stoc$ for sale and dispose of it for the account of the delin?uent subscriber under section -2 to H2 of the orporation &awI or b! :y action in court, under section H9 0! +t is generally accepted doctrine that the statutory right to sell the subscriber>s stoc$ is merely a remedy in addition to that which proceeds by action in courtI and it has been held that the ordinary legal remedy by action e#ists e'en though no e#press mention thereof is made in the statute! $ACTS" 1! ,ean "! GoiBat subscribed for 00 shares of the stoc$ of The Ghilippine hemical Groduct ompany, and paid in upon his subscription the sum of GC00, the par 'alue of C shares! 0! "iguel Jelasco as assignee in insol'ency of the ompany is see$ing to reco'er from, the sum of G1,C00, or the 'alue of the remaining unpaid 1C shares he subscribed in! -! GoiBat defense7 a! the call made by the board of directors of the company to pay the unpaid subscriptions was not made pursuant to the re?uirements of

4othing in this Act shall pre'ent the directors from collecting, by action in any court of proper @urisdiction, the amount due on any unpaid subscription, together with accrued interest and costs and e#penses incurred

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#ISPOSITIVE" The @udgment of the lower court is therefore re'ersed, and @udgment will be rendered in fa'or of the plaintiff and against the defendant for the sum of one thousand fi'e hundred pesos )G1,C00*, with interest from ,uly 1-, 101H, and costs of both instances! 6o ordered!

the mandatory pro'ision are )a* to assure notice to all subscribers, and )b* to assure e?uality and uniformity in the assessment on stoc$holders! Also, release

from payment of unpaid subscriptions must be made by all the stoc$holders!


$ACTS" &ingayen =ulf %lectric Gower ompany )&ingayen =ulf* is a domestic corporation with an authoriBed capital stoc$ of G-00,000 di'ided into -,000 shares with a par 'alue of G100 per share! +rineo :altaBar ):altaBar* subscribed for 600 shares on account of which he had paid upon the corporations organiBation the sum of G1C,000! After incorporation, :altaBar made further payments, lea'ing a balance of G12,C00 unpaid for! &ingayen =ulf now claims such amount in this action! ,uly 0-, 19H67 6T3 LH3&9%F6 "T=7 A ma@ority of the 6H, among them :altaBar adopted SH Re.(- t1(n N(. 89! 1! +t was agreed upon by the 6H present t( ca-- t'e :a-ance of all unpaid subscribed capital stoc$ as of ,uly 0-, 19H6 A the first C0M payable within 60 days beginning August 1, 19H6, and the remaining C0M payable within 60 days beginning 3ctober 1, 19H6! 0! All unpaid subscription after the due dates of both calls would be sub@ect to 10M interest per annum! -! After the e#piration of 60 days> grace which would be on 9ecember 1, 19H6, for the first call, and on Nebruary 1, 19H., for the second call, all subscribed stoc$s remaining unpaid would re'ert to the corporation! 6ept 00, 19H67 &ingayen =ulfs letter to :altaBar reminding him that the first C0M of his unpaid subscription would be due on 3ctober 1! :altaBar re?uested that he be allowed to pay his unpaid subscription by Nebruary 1, 19H.! He also said that if he could not pay the balance of his subscription by Neb 1, his unpaid subscription would be re'erted to the corporation! 9ec! 19, 19H.7 :altaBar wrote another letter to &ingayens :39 offering to withdraw completely from the corporation by selling out to the corporation all his shares of stoc$ in the total amount of G0-,000! This offer was left unacted upon! April 1., 19H27 :3AF9 3N 9+F% T3F6 "T=7 They adopted Re.(- t1(n N(. 89! 1! +n effect set aside the 6H F%6! 4o! 1., on the ground that said Fes! was null and 'oid, and because the corporation was not in a financial position to absorb the unpaid balance of the subscribed capital stoc$! 0! The directors also decided t( ca-- ;<= (/ t'e n+a1d . :.cr1+t1(n within -0 days from April 1., 19H2 A the call payable within 60 days from receipt

LIN&A!EN &UL$ ELECTRIC PO7ER COMPAN!3 INC. v. IRINEO 4ALTA6AR


June $0, 19"$ !ontemayor, J %en

SUMMAR!" +reneo :altaBar was a stoc$holder of &ingayen =ulf! He had an unpaid balance on his subscription amounting to G12,C00! +n ,uly 19H6, the 6H had a meeting wherein they adopted a resolution calling for payment of all unpaid subscriptions! &etters were sent to :altaBar reminding him of his unpaid balance and of the due dates for payment of such! 6ubse?uently, almost a year after the due date fi#ed by the 6H in the 6H "T=, the companys :39 adopted a F%6, declaring 41J the 6H F%6 of ,uly 19H6! The :39, in said F%6, also made a call for payment of the unpaid subscriptions, including that of :altaBars! 9espite this, :altaBar still failed to pay! &ater, the companys legal counsel sent a letter by registered mail to :altaBar, demanding payment! :ecause of his failure to pay, an action to collect payment was filed against :altaBar! 9uring trial, the parties agreed that the :39s call for payment was not published in a newspaper of general circulation, as re?d by the orpo &aw! +n the trial court, one of :altaBars arguments was that the action was premature because there was no 'alid call! The trial court agreed with :altaBar and dismissed the case, on the ground, among others, that the call for payment were not published! +t also said that the 6H F%6, allegedly relie'ing :altaBar from liability, was 41J because it was not appro'ed by A&& stoc$holders! The 6upreme ourt agreed with the lower court and affirmed the dismissal! #OCTRINE" Knder the orporation &aw, notice of call for payment for unpaid subscribed stoc$ must be published, e#cept when the corporation is insol'ent, in which case, payment is immediately demandable! 6ection H0 is
"A49AT3F5 as regards publication, using the word 8must8! The reasons for

CORPORATION LAW | B2015 CASE DIGESTS

-!

of notice from the 6ecretaryATreasurer! &ingayens legal counsel was also authoriBed to ta$e all the necessary legal steps for the collection of the payment of the call!

1!

,une 10, 19H97 6T3 LH3&9%F6 "T=7 The stoc$holders were all present, either in person or by pro#y! They adopted Re.(- t1(n N(. > 1! +t was agreed to re'alue the stoc$s and assets of the company so as to attract outside in'estors to put in money for the rehabilitation of the company! 0! The president was authoriBed to ma$e all arrangement for such appraisal and the 6ecretary to call a meeting upon completion of the reassessment! :A&TAOAF admitted that he recei'ed notice from the 6ecretaryATreasurer demanding payment of the unpaid balance of his subscription! The GAFT+%6 agreed that the BODs call was not published in a newspaper of general circulation as re?uired by 6ection H0 of the orporation &aw! 6ept! 02, 19H97 &ingayens legal counsel wrote a letter to :altaBar demanding the payment of the unpaid balance of his subscription! opy of this letter was sent :y reg1.tered ,a1- to :altaBar! He ignored said demand! Hence, this action! :A&TAOAF7 disclaims liability on the following grounds7 1! Action is GF%"ATKF% because there was no valid callI and 0! =ranting that there was a 'alid call, he was re-ea.ed from the obligation of the balance of his subscription by 6H Fesolution 4o! 1. and 4o! H! :altaBars ounterclaim7 Feasonable compensation at the rate of G.00 per month as president of the company! ISSUES 1! (as the call by the 6H during the ,uly 19H6 "T= 'alidP 0! (as :altaBar released from the obligation of the unpaid balance of his subscription by 'irtue of 6H Fesolution 4os! 1. and HP -! +s :altaBar entitled to compensation as president of &ingayen =ulfP &3(%F 3KFT7 The call for payment embodied in 6H Fesolution 4o! 1. was null and 'oid for lac$ of publication! onse?uently, the complaint must be dismissed for being premature! 6aid resolution is 41J, insofar as it tried to relie'e :altaBar from liability, on the ground that the Fesolution was not appro'ed by all the stoc$holders of the corporation! :altaBar>s counterclaim for compensation also dismissed!

3KFT7 agrees with the lower court! The law requires that notice of any call for the payment of unpaid subscription should be made not only personally but also by publication. This is clear from the pro'isions of 6ection H0 of the orporation &aw7 6% ! H0! N(t1ce (/ ca-- /(r n+a1d . :.cr1+t1(n. , .t :e e1t'er +er.(na--y .erved upon each stoc$holder or de+(.1ted 1n t'e +(.t (//1ce, postage prepaid, addressed to him at his place of residence, if $nown, and if not $nown, addressed to the place where the principal office of the corporation is situated! T'e n(t1ce , .t a-.( :e + :-1.'ed once a wee$ for four successi'e wee$s in some newspaper of general circulation de'oted to the publication of general news published at the place where the principal office of the corporation is established or located, and posted in some prominent place at the wor$s of the corporation if any such there be! +f there be no newspaper published at the place where the principal office of the corporation is established or located, then such notice may be published in any newspaper of general news in the Ghilippines!

6ection H0 is "A49AT3F5 as regards + :-1cat1(n, using the word 8must8! The reasons for the mandatory pro'ision are )a* to assure notice to all subscribers, and )b* to assure e?uality and uniformity in the assessment on stoc$holders! A ,ustice Nisher in 8The Ghilippine &aw on 6toc$ orporations<7 84ot only must personal notice be gi'en in one of these manners, but the notice must also be published once a wee$, for four consecuti'e wee$s, in some newspaper!8 &ingayen in'o$ed the case of &elasco 's. (oi)at, wherein it was held that7 ;when the corporation becomes insol'ent, with proceedings instituted by creditors to wind up and distribute its assets, n( ca-- (r a..e..,ent 1. nece..ary before the institution of suits to collect unpaid balance on subscription!< A 3KFT7 :ut when the corporation is a SOLVENT (ne, the rule is7 ;+t is again insisted that plaintiffs cannot recover because the suit was not proceeded by a call or assessment against the defendant as a subscriber, and that until this is done no right of action accrues ! +n a suit by a sol'ent going corporation to collect a subscription, and in certain suits pro'ided by statute this would be true!< 0! +n order to effect release from the obligation to pay for unpaid subscription, there must be nan1,( . c(n.ent of the stoc$holders of the corporation! A 6ub@ect to certain e#ceptions, the =%4%FA& FK&% is that a 'ali an

CORPORATION LAW | B2015 CASE DIGESTS

*in ing su*scription for stoc+ of a corporation cannot *e cancelle so as to release the su*scri*er from lia*ility thereon without the consent of all the stoc+hol ers or su*scri*ers! A A subscription cannot be cancelled by the company, e'en under a secret or collateral agreement for cancellation made with the subscriber at the time of the subscription, as against persons who subse?uently subscribed or purchased without notice of such agreement! A EXCEPTIONS" a* (here it is gi'en pursuant to a bona fide compromise b* 3r to set off a debt due from the corporation A release, supported by consideration, will be effectual as against dissenting stoc$holders and subse?uent and e#isting creditors! A A release which might originally ha'e been held in'alid may be sustained after a considerable lapse of time! A:7 The release claimed by :altaBar does not fall under the e#ception abo'e referred to, because it was not gi'en pursuant to a *ona fi e compromise, or to set off a debt due from the corporation, and there was no consideration for it! Knder 6ec! 2C0 )of the orpo &aw*, after a 'alid subscription to the capital stoc$ of a corporation has been made and accepted, there can be no cancellation or release from the obligation without the consent of the corporation and all the stoc$holders A F%A6347 )Knder 6ec! 2CC* A contract of subscription is, at least in the sense which creates as estoppel, a contract among the se'eral subscribers! Nor this reason no one of the subscribers can withdraw from the contract without the consent of all the others, and thereby diminish, without the uni'ersal consent, the common fund in which all ha'e ac?uired an interest! A:7 The T found that the release attempted in 6H Fesolution 4o! 1. was not 'alid for lac$ of a unanimous 'ote! At least . stoc$holders were a:.ent from the meeting when said resolution was appro'ed! -! :altaBar is 43T %4T+T&%9 to the compensation )as Gresident* claimed! &igayens byAlaws are 6+&%4T as to the salary of the Gresident! (hile resolutions of the incorporators and stoc$holders pro'ide salaries for the =", secretaryAtreasurer and other employees, there was no pro'ision for the salary of the Gresident! A 3ther resolutions pro'ide for per iems to be paid to the Gresident and the directors of each meeting attended, G10 for the Gresident and G2 for each director, which were later increased to G0C and G1C, respecti'ely! A 34 &K6+347 The Gresident and the :39 were e#pected to .erve 01t'( t .a-ary, and that the per iems paid to them were sufficient compensation for

their ser'ices! 34 &K6+347 &ower ourt decision affirmed! omplaint must be dismissed for being premature!

M1randa v. Tar-ac R1ce M1-- C(


%ec 2, 19$2 &ic+ers, J. of the (hilippine SC %iway

SUMMAR!" Alberto "iranda e#ecuted a subscription agreement obligating himself to pay G10,000 as subscribed capital to the Tarlac Fice "ill ompany in C annual installments! :efore all the installments became due, "iranda assigned his property to the corporation in lieu of paying in cash and authoriBed the officers of the company to mortgage the land as security to solicit loans for G10,000! Gursuant to this agreement, the officers of the company mortgaged the land for G10,000 at the time when not all of the subscription installments are due! (hen the company defaulted, "iranda himself arranged for an e#tension of payment and subse?uently sold the land under pacto de retro! The company ceased its operations e'en before the last two subscription installments became due! (hen "iranda died, his administratri# sought to reco'er the subscription paid by "iranda on based on - arguments7 )1* the officers of the company e#ceeded their authority in mortgaging the land for G10,000 e'en if only G-,000 was due at that time from "iranda based on the subscription agreement )0* e'en when the subse?uent installments became due, "iranda was not bound to pay them because the company ceased their operations )-* the company did not compel the other stoc$holders to pay their subscription! The 6 ruled that the amounts paid by "iranda cannot be reco'ered anymore! #OCTRINE" The fact that a stoc$holder agreed to pay his subscription installments on certain fi#ed dates did not pre'ent him from authoriBing the officers as his attorneysAinAfact to pay his subscription earlier than the dates fi#ed in the subscription agreement!

CORPORATION LAW | B2015 CASE DIGESTS

The board of directors of e'ery corporation may at any time declare unpaid subscriptions to be due and payable to the corporation and may collect the same with interest as it may deem necessary! This power of the directors is absolute and cannot be limited by the subscription contract, but this does not mean that the directors may not rely on the subscription contract if they see fit to do so! 4o call or demand is necessary when a subscription is payable! +n such cases it is the duty of the subscriber to pay the subscription or installment as soon as it is due, without any call or demand, and, if he fails to do so, an action may be brought at any time! The fact that the corporation has ceased to do business or the fact that the other stoc$holders ha'e not been re?uired to pay for their shares does not @ustify ordering the corporation to return the subscriptions paid in by another stoc$holder! +f the directors ha'e failed to perform their duty with respect to the other stoc$holders, the law pro'ides a remedy therefor! $ACTS" Alberto "iranda e#ecuted a written contract whereby he subscribed for 100 shares of the capital stoc$ of Tarlac Fice "ill ompany, +nc! The par 'alue of each share was G100 ma$ing his total subscription e?ual to G10,000 to be paid on installment according to the subscription contract as follows7 3n or before 6eptember 01, 1906G1,000 3n or before ,anuary 01, 190. 0,000 3n or before ,anuary 01, 1902 0,000 3n or before ,anuary 01, 1909 0,C00 3n or before ,anuary 01, 19-0 0,C00 +n 190., Alberto "iranda e#ecuted a public document where he A 8assigned,8 mortgaged, or transferred his parcel of land in Tarlac to the Tarlac Fice "ill o! to pay his subscription in lieu of cash A appointed the Gresident, Jice Gresidents and Treasurer of the company as his attorneyAinAfact to transfer or mortgage his land to any local or foreign ban$ or indi'idual o to solicit money not e#ceeding G10,000 1n acc(rdance 01t' t'e

. :.cr1+t1(n c(ntract or to increase the capital of the said Tarlac Fice "ill ompany , in order to carry out the purposes for which said firm is to be organiBed

Gursuant to this assignment, the president and 'iceApresident of the Tarlac Fice "ill ompany, +nc! borrowed G10,000 from "ariano Tablante and as security for the loan, they also mortgaged to him the land assigned by "iranda! The G10,000 obtained from "ariano Tablante was retained by the corporation! (hen the promissory note became due, the company defaulted and Alberto "iranda himself arranged for an e#tension of time for payment! To meet the obligation, "iranda he sold the land under pacto de retro to Jicente Ganlilio for G10,000, and paid "ariano Tablante! The corporation ceased to do business from the year 1902 and Alberto "iranda died in 19-0! +n this action, the administrator of the estate of Alberto "iranda sought to reco'er the payments of the subscription made by "iranda to the corporation based on the ff reasons A The officers of the corporation 'iolated the terms of the power of attorney in mortgaging the land on 190. for G10,000, because the only sum then due to the corporation was G-,000 A (hen the remaining installments of the stoc$ subscription became due, Alberto "iranda was under no obligation to pay them, because the corporation had already ceased to do business A The corporation had ta$en no steps to compel the other stoc$holders to pay for the shares for which they had subscribed! ISSUE" (14 the amounts paid by "iranda to the corporation may be reco'ered RULIN&" 4o, the amounts paid by "iranda cannot be reco'ered

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RATIO" There is no ?uestion as to the 'alidity of subscription agreement! There is also no allegation of fraud on the part of the officers! (hen the property was mortgaged on 190. the amount due from Alberto "iranda in accordance with the subscription agreement was only G-,000! +t also does not appear from the e'idence that the directors called for the payment of any subscriptions from other stoc$holders! The fact that Alberto "iranda agreed to pay his subscription installments on certain fi#ed dates did not pre'ent him from authoriBing the officers as his attorneysAinAfact to pay his subscription earlier than the dates fi#ed in the subscription agreement! Argument of the "irandas administrator7 +n one paragraph of the power of attorney it is stated that the attorneysAinAfact are authoriBed to mortgage the property in any way con'enient to them in the amount not to e#ceed G10,000 in accor ance with the su*scription contract 6 7 Howe'er, the phrase 8in accordance with the subscription contract8 is followed by the words 8to increase the capital of Tarlac Fice "ill ompany, +nc!, in order to carry out the purposes for which said firm is to be organiBed!8 Knder the circumstances, it would be a strained construction of the power of attorney to hold that the officers were authoriBed to mortgage the land only for the amount then due in accordance with the subscription agreement! +t can hardly be contended that the power of attorney contemplated that the property should be mortgaged three times, that is, each time that an installment became due! +t was the intention of the parties that the property should be mortgaged immediately for a sum not to e#ceed G10,000, not only for the purpose of paying the subscription agreement, but also for the purpose of increasing the capital of the corporation! This 'iew is confirmed by the subse?uent conduct of the parties! Although the corporation retained the full amount of the loan from "ariano Tablante, Alberto "iranda ne'er sought to reco'er

from the corporation any part of the G10,000! The mortgage was e#ecuted on 190.I it was satisfied by Alberto "iranda on 1909 and he li'ed until 19-0! +t does not appear that he e'er sought to e'ade the satisfaction of the mortgage by alleging that his attorneysAinAfact e#ceeded their authority! 3n the contrary he repaid to "ariano Tablante the amount which the officers of the corporation had borrowed! The fact that he ne'er sought to reco'er from the corporation the sum borrowed by the officers tends to show that he ac?uiesced in the action ta$en by them! The phrase 8in accordance with the subscription contract8 in the power of attorney was intended to mean 8in pursuance of the subscription agreement8! 6uch phrase referred to the obligation to pay the subscription, and not to the dates when the installments were to be paid! 6ection -2 of the orporation &aw pro'ides that the board of directors of e'ery corporation may at any time declare due and payable to the corporation unpaid subscriptions to the capital stoc$ and may collect the same with interest accrued thereon or such percentage of said unpaid subscriptions as it may deem necessary! +n the boo$ 8The Ghilippine &aw of 6toc$ orporations8 by ,ustice Nisher7 This power of the directors is absolute and cannot be limited by the subscription contract, but this does not mean that the directors may not rely on the subscription contract if they see fit to do so! 4o call or demand is necessary when a subscription is payable! +n such cases it is the duty of the subscriber to pay the subscription or installment as soon as it is due, without any call or demand, and, if he fails to do so, an action may be brought at any time! (hen this action to reco'er the payment was filed, the last of the installments had already become payable in accordance with the subscription agreement! This is not an action by the corporation to reco'er on a subscription agreement, but an action by the administratri# of a stoc$holder to reco'er what was paid in to the corporation by the stoc$holder! The fact that the corporation has ceased to do business or the fact that the other stoc$holders ha'e not been re?uired to pay for their

CORPORATION LAW | B2015 CASE DIGESTS

shares does not @ustify ordering the corporation to return the subscriptions paid in by Alberto "iranda! +f the directors ha'e failed to perform their duty with respect to the other stoc$holders, the law pro'ides a remedy therefor! +n &elasco 's. (oi)at7 A stoc$ subscription is a contract between the corporation and the subscriber, and courts will enforce it for or against eitherI that a corporation has no legal capacity to release a subscriber to its capital stoc$ from the obligation to pay for his shares, and that any agreement to this effect is in'alid! +n this case, there is no allegation that Alberto "iranda cancelled his subscription agreement, or that the corporation attempted to release him therefrom! #ISPOSITIVE" The corporation cannot be re?uired to return the payments of subscription made by the stoc$holder "iranda

pursue against an unpaid share! The decision to pursue this remedy or those granted to corporations by the 1906 orporation &aw is within the discretion of the :oard of 9irectors, as an e#ercise of discretionary power by the corporation as an artificial being! #OCTRINE" ) orpoI onsideration for +ssuance of 6haresI How Gayment %nforced* The phrase 8Gro'ided, howe'er, that from this se'enty per cent Dof net profit after annual li?uidationE di'idend the board of directors may deduct such amount as it may deem fit for the payment, etc!8 can only be interpreted to mean that the board of directors has the discretion to apply that part of the profit in a certain way! 3riginal pronouncement in Jelasco '! GoiBat7 ;The first and most special remedy gi'en by the statute consists in permitting the corporation to put the unpaid stoc$ for sale and dispose of it for the account of the delin?uent subscriber! +n this case the pro'isions of sections -2 to H2, inclusi'e, of the orporation &aw are applicable and must be followed! The other remedy is by action in court concerning which we find in section H9 the following pro'ision7 Q4othing in this Act pre'ent the directors from collecting, by action in any court of proper @urisdiction, the amount due on any unpaid subscription, together with accrued interest and costs and e#penses incurred!< Festatement of Jelasco '! GoiBat7 +f the :oard does not use the power granted it by Art! H6, it has 0 other remedies7 1* 6ale of the unpaid stoc$ )R-2AH2 of the 1906 orporation &aw* 0* ourt action to collect amounts due )RH9, 1906 orporation &aw* The :oard>s decision to pursue sale of unpaid shares is a remedy granted to it by the orporation &awI in effect the e#ercise of discretionary power by the corporation as an artificial being created by law! The e#ercise of the discretionary powers to ta$e action on unpaid stoc$s )apply the profits, sell, or sue in court* is with the corporation through the :oard of directors! 4o right is 'ested in the stoc$holders! $ACTS" Arnaldo 9e 6il'a subscribed for 6C0 AboitiB shares S GC00 each!

#e S1-va v. A:(1t1? & C(. Inc


!arch $1, 192$ Araullo, !,! J.A.%.S. %ealino :ased on the original case!

SUMMAR!" This case originates from a suit by Arnaldo 9e 6il'a to en@oin AboitiB sale of 9e 6il'as unpaid shares! 9e 6il'a subscribed for 6C0 AboitiB shares )GC00 ea!* but was unable to pay for HC0 shares! The orporate 6ecretary notified 9e 6il'a through a letter that the :oard of 9irectors issued a resolution declaring the unpaid subscriptions due and payable on "ay -1, and that unpaid subscriptions after "ay -1 would be declared delin?uent and ad'ertised for sale at a public auction! After nonA payment and ad'ertisement, 9e 6il'a sued with the ebu N+ to en@oin the sale! +n@unction was granted by the N+! AboitiB sought a demurrer predicated on the lac$ of cause of action! The N+ found for AboitiB, dismissing 9e 6il'as suit! The 6 upheld the N+, finding that the byAlaw article cited by 9e 6il'a merely pro'ided a remedy to the corporation to

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3nly 000 shares ha'e been paid, )HC0 unpaid for a debt of G00C,000* April 00, 19007 The orporate 6ecretary notified de 6il'a through a letter that on the pre'ious day, the :oard of 9irectors issued a resolution declaring7 o That the unpaid subscriptions to be due and payable to the Treasurer on "ay -1 o 6hares still unpaid by "ay -1 and the accrued interest will be7 9eclared delin?uent and Ad'ertised for sale at public auction on ,une 16 Ad'ertisement was published "ay C, 19007 9e 6il'a sued AboitiB at the ebu N+, see$ing an in@unction against the sale! The N+ granted in@unction upon 9e 6il'as posting of a bond! AboitiB sought a demurrer arguing the lac$ of a cause of action! The demurrer was granted! Nor failure of 9e 6il'a to amend his complaint, the N+ dismissed it! o

these byAlawsI ten per cent )10M* for the general managerI ten per cent )10M* for the reser'e fund, and se'enty per cent ).0M* for the shareholders in e?ual partsI (ro'i e , howe'er, That from this se'enty per cent di'idend the :oard of 9irectors may deduct such amount as it may deem fit for the payment of the unpaid subscription to the capital stoc$ and not pay any di'idend to the holders of the said unpaid shares until they are fully paidI (ro'i e , further, That when all the shares ha'e been paid in full as pro'ided in the preceding paragraph, the :oard of 9irectors may also deduct such amount as it may deem fit for the creation of an emergency special fund, or e#traordinary reser'e fund when in its @udgment the same may con'enient for the de'elopment of the business of the corporation or for meeting any such contingencies as may arise from its operation, whene'er the distributable di'idend is found, after the foregoing deduction, to be not less than ten per cent )10M* of the paid up capital stoc$! 4o di'idend shall be declared or paid, e#cept when there remains a net profit after the payment of all the e#penses incurred, or allowances made, by the corporation to carry out the operation of its businessI so that no such di'idend may be declared as may affect the capital of the corporation! ISSUES" (hether AboitiB )the corporation* may declare unpaid shares to be delin?uent or collect their 'alue by a method other than as prescribed in its byAlaws! RULIN&" 43! RATIO" 1* As this in'ol'es a demurrer, the truth of the facts as alleged is assumed! 0* %#amination of Art! H67 a* The first part details the distribution of net profits from the annual li?uidation certain percentages to the7 i* :oard ii* general manager iii* reser'e fund i'* and stoc$holders ).0M e?ually to the stoc$holders* b* Howe'er, the :oard can collect the 'alue of the unpaid shares );subscribed to and not fullyApaid<* by deducting an amount )from

AR&UMENTS O$ #E SILVA 1* Fele'ant facts as alleged7 at the N+ le'el7 a* According to Art! H6 of AboitiB byAlaws, ;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 .0 per cent of the profit obtained, the same to be distributed among the subscribers, who shall not recei'e any di'idend until said shares were paid in full< b* The corporation 'iolated Art! H6 of its byAlaws through its actions since the Article itself prescribes an operati'e method of paying7 continuously paying for the shares until full amortiBation! i* This Article 'ests a right to 9e 6il'a! c* The actions of AboitiB were ultra 'ires acts for which there is no plain, speedy, and ade?uate remedy in the ordinary course of law! PERTINENT 4!*LA7 PROVISION" Art! H67 The net profit resulting from the annual li?uidation shall be distributed as follows7 Ten per cent )10M* for the :oard of 9irectors and in the manner prescribed in article twentyAsi# )06* of

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-* H*

C*

6*

the .0M* to be applied to the payment of the unpaid shares 'alue, in effect not paying the subscriber until full payment! c* The :oard is also authoriBed to create a special emergency fund or e#traordinary reser'e fund as it may find con'enient for de'elopment 3F to deal with contingencies arising from its operations, using that same unpaid portion of the .0M of the profits i* This power is limited by the pro'iso that the distributable di'idend remaining after deduction for the special emergency1e#traordinary reser'e fund is not less than 10M of the capital actually paid! Art! H6 shows that the :oard has the discretion as to what to do with the .0M )within certain limits*, not the delin?uent subscriber! +f the :oard does not use the power granted it by Art! H6, it has 0 other remedies )citing Jelasco '! GoiBat*7 a* ;The first and most special remedy gi'en by the statute consists in permitting the corporation to put the unpaid stoc$ for sale and dispose of it for the account of the delin?uent subscriber! +n this case the pro'isions of sections -2 to H2, inclusi'e, of the orporation &aw are applicable and must be followed! The other remedy is by action in court concerning which we find in section H9 the following pro'ision7 Q4othing in this Act pre'ent the directors from collecting, by action in any court of proper @urisdiction, the amount due on any unpaid subscription, together with accrued interest and costs and e#penses incurred!< b* :asically7 i* 6ale of the unpaid stoc$ )R-2AH2 of the 1906 orporation La0* ii* 3r court action to collect amounts due )RH9, 1906 orporation La0* 3n 9e 6il'as argument that byAlaws are contracts between corporation and stoc$holder, pre'ailing o'er statutory pro'isions7 a* Assuming arguendo 9e 6il'as argument, the :oard only has the discretion to apply part of the profits to the unpaid shares! This is not the only course of action the :oard can ta$e! b* The :oard also has the discretionary power to a'ail itself of the other remedies in the 1906 orporation &aw! +n the instant case7 a* The :oard has sought the sale of the unpaid shares! i* The :oard>s decision to pursue sale of unpaid shares is a

remedy granted to it by the orporation &awI in effect the e#ercise of discretionary power by the corporation as an artificial being created by law! ii* +t seemed to the board that applying part of the profits to the unpaid shares was not to the corporate ad'antage! b* The discretion to apply the profits lies with the board, not the stoc$holders! c* Thus, there can be no 'iolation of 9e 6il'as )stoc$holder* rights! i* This is also a discharge of an e#ecuti'e function by the :oard! d* onse?uently, there can be no cause of action based on the facts as alleged! #ISPOSITIVE" ANN+F"%9, costs against 9e 6il'a!

THE NATIONAL EXCHAN&E CO.3 INC. v. I.4. #EXTER


192# Street, J. ,rissy

SUMMAR!" The 4ational %#change o! instituted in the N+ an action to reco'er from 9e#ter a balance of G1C,000, the par 'alue of 1C0 shares of stoc$ of 6 6almon, which constitutes half of his total subscription, e'idenced in writing in this form7 ;+ hereby subscribe for -00 shares of the capital stoc$ of !6! 6almon and ompany, payable from the first di'idends declared on any and all shares of said company owned by me at the time di'idends are declared, until the full amount of this subscription has been paid!< The issue is whether the stipulation in the subscription has the effect of relie'ing the subscriber from personal liability in an action to reco'er the 'alue of the shares! The 6 affirmed the N+ in ruling that such stipulation is illegal for it obligates the subscriber to pay nothing for the shares e#cept as di'idends may accrue upon the stoc$! +n the contingency that di'idends are not paid, there is no liability at all! This is a discrimination in fa'or of the particular subscriber! #OCTRINE" As a general rule, an agreement between a corporation and a particular subscriber, by which the subscription is not to be payable, or

CORPORATION LAW | B2015 CASE DIGESTS

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 pre'enting the predominance of certain stoc$holders, or for any other purpose, is illegal and 'oid as in fraud of other stoc$holders or creditors or both, and cannot be either enforced by the subscriber or interposed as a defense in an action on the subscription! $ACTS" 3n Aug! 10, 1919, +!:! 9e#ter )defendant* signed a written subscription to the corporate stoc$ of !6! 6almon T o! in the following form7 ;+ hereby subscribe for -00 shares of the capital stoc$ of !6! 6almon and ompany, payable from the first di'idends declared on any and all shares of said company owned by me at the time di'idends are declared, until the full amount of this subscription has been paid!< Kpon this subscription, G1C,000 was paid in ,anuary 1900 from a di'idend declared by the company, supplemented by money supplied personally by defendant! :eyond this, nothing has been paid on the shares and no further di'idend has been declared! The 4ational %#change o!, +nc! )plaintiff*, as assignee )through the G4:* of !6! 6almon, instituted in N+ "anila an action to reco'er from +!:! 9e#ter a balance of G1C,000, the par 'alue of 1C0 shares of stoc$ of !6! 6almon, with interest and costs! C$I" +n fa'or of plaintiff! 6tipulation is in'alid! +n the absence of restrictions in its charter, a corporation, under its general power to contract, has the power to accept subscriptions upon any special terms not prohibited by positi'e law or contrary to public policy, pro'ided they are not such as to re?uire the performance of acts which are beyond the powers conferred upon it by its charter, and pro'ided they do not constitute a fraud upon other subscribers1stoc$holders, or upon such persons who are or may become creditors of the corporation! ISSUES" (hether the stipulation in the subscription )that subscription is payable from the first di'idends declared on the shares* has the effect of relie'ing the subscriber from personal liability in an action to reco'er the 'alue of the shares! RULIN&" 43! The stipulation is illegal!

RATIO" The prohibition against the issuance of shares by corporations e#cept for actual cash to the par 'alue of the stoc$ or its full e?ui'alent in property is enshrined in both the organic and statutory law of the Ghilippine +slands! &awma$ers used language directly suited to secure absolute e?uality among stoc$holders with respect to their liability upon stoc$ subscriptions! +f it is unlawful to issue stoc$ otherwise than as stated, the stipulation in this case, in a stoc$ subscription is illegal, for it obligates the subscriber to pay nothing for the shares e#cept as di'idends may accrue upon the stoc$! +n the contingency that di'idends are not paid, there is no liability at all! This is a discrimination in fa'or of the particular subscriber, hence the stipulation is unlawful! =eneral doctrine as stated in Corpus Juris7 ;4or has a corporation the power to recei'e a subscription upon such terms as will operate as a fraud upon the other subscribers or stoc$holders by sub@ecting the particular subscriber to lighter burdens, or by gi'ing greater rights and pri'ileges, or as a fraud upon creditors of the corporation by withdrawing or decreasing the capital! As a general rule, 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 pre'enting the predominance of certain stoc$holders, or for any other purpose, is illegal and 'oid as in fraud of other stoc$holders or creditors or both, and cannot be either enforced by the subscriber or interposed as a defense in an action on the subscription!< The law in force in this @urisdiction ma$es no distinction, in respect to the liability of the subscriber, between shares subscribed before incorporation is effected and shares subscribed thereafter! All ali$e are bound to pay full par 'alue in cash or in its e?ui'alent, and any attempt to discriminate in fa'or of one subscriber by relie'ing him of its liability wholly or in part is forbidden! This has reference primarily to subscriptions to shares that ha'e not been pre'iously issued! +t is concei'able that the power of the corporation to ma$e terms with the purchaser would be greater where the shares ha'e been ac?uired by the corporation in the course of commerce after they ha'e already been once issuedI but the shares in this case are not of the latter sort! #ISPOSITIVE" N+ affirmed!

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L ,an-an v.. C ra3 et a-. and #1?(n & C(. Inc.


!arch 21, 19$.o ar , J. /rancis

6toc$ subscription is a subsisting liability from the time subscription is made since it re?uires the subscriber to pay interest ?uarterly from that date unless relie'ed by the byAlaws! #ISPOSITIVE 9iBon is ordered to credit &umanlan G1-,2H0 against the G1C,109 @udgment of the N+ of "anila and to issue &umanlan the -00 shares of 9iBon upon payment of G1,069 deficiency!

SUMMAR!" &umanlan has only paid G1C00 of his G1C,000 worth subscription of 9iBons stoc$s! 9iBons recei'er sued &umanlan for the deficiency with ad'ances! #OCTRINE" 6ubscriptions to the capital of a corporation constitute fund to which creditors ha'e a right to loo$ for satisfaction of their claims and that the assignee in insol'ency can maintain an action upon any unpaid stoc$ subscription in order to realiBe assets for payment of its debts! $ACTS" &umanlan subscribed for -00 shares of 9iBon T o!, a Ghilippine orporation, at par 'alue of GC0 or total of G1C,000! - creditors of 9iBon filed a suit against 9iBon for appointment of a recei'er as the 9iBon had no assets e#cept credits against subscribers of 9iBons stoc$! Tayag was named as recei'er by the court! &umanlan has only paid G1,C00! Tayag filed a suit against &umanlan for G1C,109 which already included the amount owed plus loans and ad'ances by 9iBon to &umanlan! Gending appeal to the 6 , the creditors, directors and stoc$holders agreed that the subscribers in default should pay the creditors wherein &umanlan was assigned to pay JalenBuela! &umanlan agreed to pay and withdraw his appeal if 9iBon would collect only C0M of the amount subscribed by him! &umanlan paid JalenBuela! :ut 9iBon still as$ed for e#ecution of the sentence in the collection suit! The sheriff then le'ied on 0 parcels of land owned by &umanlan! ISSUES" (hether or not &umanlan is liable to 9iBon T o! +nc! RULIN&" 5es, but only to G1,069! RATIO" 6ubscriptions to the capital of a corporation constitute fund to which creditors ha'e a right to loo$ for satisfaction of their claims and that the assignee in insol'ency can maintain an action upon any unpaid stoc$ subscription in order to realiBe assets for payment of its debts!

$UA CUN (&ALURA)

V.

SUMMERS

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4a-ta?ar v. L1ngayen & -/3 et a-.


June $0, 190" (are es, J. Oswal (. 1m*at

0!

SUMMAR!" The Kngson =roup of &ingayen =ulf passed resolutions to the effect that )1* those with unpaid delin?uent shares, based on the subscriptions, are not entitled to 'ote in the 19CC :39 election, and )0* the pre'ious payments will be applied first to the accrued interest on unpaid subscriptions, then, to the 'alue of the shares! The :altaBar =roup filed a complaint to nullify the resolutions! The T appro'ed an amicable settlement entitling the :altaBar =roup to 'ote in the meantime! The 6 ruled that )1* based on the phraseology of Section $2, Corporation 3aw, the stoc$holders may 'ote their paid shares e'en when they ha'e unpaid subscriptions, and )0* the application of payments to interest before the principal does not apply in this case! #OCTRINE" Section $2, Corporation 3aw ma$es payment of the ;par 'alue< as prere?uisite for the issuance of certificates of par 'alue stoc$s, and ma$es payment of the ;full subscription< as prere?uisite for the issuance of certificates of no par 'alue stoc$s! 6tated in another way, the present law re?uires as a condition before a shareholder can 'ote his shares, that his full subscription be paid in the case of no par 'alue stoc+I and in case of stoc$ corporation with par 'alue, the stoc$holder can 'ote the shares fully paid by him only, irrespecti'e of the unpaid delin?uent shares! $ACTS" 1! +reneo :altaBar )600 shares* and "ar'in Fose )H00* ):altaBar =roup* were among the incorporators of &ingayen =ulf %lectric Gower o!, +nc! )&ingayen =ulf*, which had a total of G-00,000 capital stoc$, -,000 'oting shares, with a par 'alue of G1001share! a! D4hey allege that it was the practice of 3ingayen .ulf to issue certificates of stoc+s e'en for unpai shares.E b! :altaBar had C-C fully paid and 6C unpaid shares! He was issued certificates for the paid shares but not for the unpaid! 3ut of the C-C shares, he retained -H1, selling the others! c! Fose fully paid -.C shares and was issued certificates co'ering the same!

-!

H!

C! 6!

d! &argely on their 'otes, they were able to elect 0 members of the :39 out of . members! :ernardo Acena was also an incorporator holding 600 shares! a! He was issued certificates co'ering all of 600 shares! He was thus the largest indi'idual stoc$holder! b! &argely on Acenas 'otes, 9ominador Kngson, :rigido %strada, "antel NernandeB, and :enedicto 5uson )Kngson =roupI H out of . :39 members*! c! Kngson =roup were also small stoc$holders of &ingayen =ulf holding not more than 100 shares! :efore the annual stoc$holders meeting to elect new officers and new board members scheduled on "ay 1, 19CC, a realignment occurred, such that the =roups was almost e?ual in terms of the number of their fully paid up 'oting shares! The Kngson =roup, to retain control of the corporation, o'er the ob@ection of the other :39 members, passed - resolutions, ultimately aiming at depri'ing the :altaBar =roup of 'otes in the coming stoc$holders meeting7 a! 9eclaring all watered stoc$s of no 'alue and cancelled from the boo$sI b! Fesol'ing that all unpaid subscriptions should bear interest from the year of subscription and applying the payments already made, first, to the accrued interest, then, to the capital )thus , the certificates for fully paid shares are nullified if there are still unpaid interests, since the payment made will be applied instead to the accrued interests*I and c! 9eclaring that stoc$holders with delin?uent shares )unpaid or with accrued interest* are incapacitated to 'ote, e'en if they ha'e fully pai shares! The :altaBar =roup filed a complaint see$ing to nullify the resolutions and to nullify their implementation, and damages! The Kngson =roup, in their answers, alleged that7 a! 9uring the years when the :altaBar =roup were in power, they made no serious attempt to pre'ent the financial collapse of &ingayen =ulf, caused by accumulated indebtedness and poor management! There were losses of big sums of money from 'icious manipulation of funds, nepotism, unconscionable grant of big salaries and illegal payments! They also attempted to release themsel'es from liability of their unpaid subscriptions! b! The resolutions were merely functional instruments to preser'e the

CORPORATION LAW | B2015 CASE DIGESTS

assets of &ingayen =ulf! c! +n any case, the court has no @urisdiction to en@oin the upcoming election of :39 members! .! An amicable settlement was entered into, which, among others, pro'ided for7 a! The condonation of interest for the period from the incorporation of &ingayen =ulf to the granting of its franchiseI b! Feduction of interest from 6M to -MI c! Gayment of half of the unpaid balance within - months! 2! The trial court appro'ed the amicable settlement! +t held that7 a! The right to sue includes the power to enter into an amicable settlement! b! The Corporation 3aw, which pro'ided for 6M interest for unpaid subscriptions, is merely directory and allows the parties to reduce or condone the sameI c! +n the meantime, the subscribed shares of stoc$s are entitled to 'ote, until declared as delin?uent again! 9! Kpon "F of the Kngson =roup, the trial court amended its decision, ruling that, since the intention of the settlement was for the early collection of the unpaid balance, the holders of delin?uent shares should not be entitled to 'ote! Howe'er, upon "F of the :altaBar =roup, the trial court re'erted to its original decision! ISSUES@RULIN&S" 1! +f a stoc$holder, in a stoc$ corporation, subscribes to a certain number of shares, and he pays only partially, for which he is issued certificates of stoc$, is he entitled to 'ote such paid shares, e'en if he has unpaid balance, which has been called for payment or declared delin?uentP 5es, the Corporation 3aw superseded /ua Cun '. Summers, which held otherwise! 0! +f a stoc$holder subscribes to a certain number of shares and ma$es partial payment only, and declared delin?uent as to the rest, should pre'ious payments be applied to interestP 6o, the Article 12"$, CC, is directory, not mandatory, and yields to an agreement of the parties to the contrary! -! +s the :altaBar =roup estopped from assailing the amicable settlement, insofar as it pro'ided for payment of interest firstP 6o, certain clauses thereof are contrary to law! RATIO"

1! A stoc$holder is entitled to 'ote his fully paid shares, notwithstanding the fact that he has delin?uent unpaid shares! a! /ua Cun '. Summers held that, in the absence of special agreement to the contrary, a ;subscribers right consists only in e?uity entitling him to a certificate for the total number of shares subscribed for by him upon payment of the remaining portion of the subscription price!< b! +n this case, the practice of the corporation ion issuing certificates e'en for unpaid shares and gi'ing such shares 'oting power constitutes a ;special agreement!< c! +n any case, /ua Cun '. Summers has been superseded by Section $2, Corporation 3aw,2 which distinguishes between subscription to stoc$s with or without par 'alue7 i! +n case of par 'alue stoc$s, what must be paid is the full par 'alue thereof! ii! +n case of no par 'alue stoc$s, what must be paid is the full subscription! d! Thus, in case of par 'alue stoc$s, the stoc$holder may 'ote the shares fully paid by him, regardless of his unpaid delin?uent shares! e! Nor the purpose of this pro'ision, and in the absence of pro'isions in the byAlaws to the contrary, the corporation may apply the payments thus7 i! Null payment for the corresponding number of stoc$s the par 'alue of which is co'ered by such paymentI or ii! As payment pro rata of all the subscribed stoc$s! f! +n this case, the &ingayen =ulf chose the first, as e'idenced by the fact that it issued certificates for definite shares to the stoc$holders! g! Therefore, the fully paid shares ha'e 'oting rights! 3nly the unpaid shares may be depri'ed of the right to 'ote! 0! As to the application of pre'ious payment to the interest, supposedly pursuant to Article 112$, CC,$ the pro'ision does not apply! a! +t is merely directory, not mandatory, and yields to the agreement of the parties! b! +n this case, &ingayen =ulf, by issuing certificates for the fully paid shares, instead of applying the payments to the interest, is deemed to ha'e agreed otherwise!
0

###! 4o certificate of stoc$ shall be issued to a subscriber as fully paid up until the full par 'alue thereof, or the full subscription in the case of no par stoc$, has been paid by him to the corporation! ###! D+Ef the debt produces interest, payment of the principal shall not be deemed to ha'e been made until the interests ha'e been co'ered!

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c! The Corporation 3aw does not prohibit application of the payments to the 'alue of the shares rather than the interest, upon the option of the stoc$holder! -! %stoppel cannot be predicated on acts which are prohibited by law or are against public policy! #ISPOSITIVE" :altaBar =roup entitled to 'ote their fully paid shares!

recorded in the stoc$ and transfer boo$ as contemplated by the law! As a rule, the shares which may be alienated are those which are co'ered by certificates of stoc$! (ithout the stoc$ certificate, which is the e'idence of ownership of corporate stoc$, t'e a..1gn,ent 1. e//ect1ve (n-y :et0een t'e +art1e. t( t'e tran.act1(n! The deli'ery of the stoc$ certificate, which represents the shares to be alienated, is essential for the protection of both the corporation and its stoc$holders! Knder the facts of this case, the corporation has no clear legal duty to register the 00 shares in 4a'as name! As to 4a'as contention that a certificate of stoc$ may be issued for the shares which ha'e already been paid for although the entire subscription has not yet been fully paid, said argument is not supported by law or @urisprudence!
$ACTS" 1! Teofilo Go, as an incorporator, subscribed to 20 shares of Geers "ar$eting orporation at G 1001share or a total par 'alue of G 2,000! Go paid G 0,000 or 0CM of the amount of his subscription! N( cert1/1cate (/ .t(c) 0a. 1.. ed t( P( (r t( any 1nc(r+(rat(r3 . :.cr1:er (r .t(c)'(-der. 1! Go sold to Ficardo 4a'a for G 0,000, twenty of his 20 shares! +n the deed of sale, Go represented that he was the ;absolute and registered owner of 00 shares< of Geers "ar$eting! 0! 4a'a re?uested the officers of corporation to register the sale in the boo$s of the corporation! 6aid re?uest was denied because Go has not paid fully the amount of his subscription! The corporation said that Go was delin?uent in the payment of the balance due on his subscription! -! 4a'a filed a mandamus action with the N+ to compel the corporation, its e#ecuti'e 'ice president and secretary, to register the 00 shares in 4a'as name in the corporations transfer boo$! H! 9efense of the corporation7 4o shares of stoc$ against which the corporation holds an unpaid claim are transferable in the boo$s of the corporation! N+7 9ismissed the mandamus action!

Nava v. Peer. Mar)et1ng C(r+(rat1(n


2" 6o'em*er 1920 Justice A7uino 3in ain

SUMMAR!" Teofilo Go subscribed to 20 shares of Geers "ar$eting orp at G100 per share or a total par 'alue of G2,000! 4o certificate of stoc$ was issued to him or to any other subscriber1stoc$holder! Twenty of these shares were sold to 4a'a, the Getitioner! +n the deed of sale, Go represented himself as ;the absolute and registered owner of 00 shares< of the orporation! 4a'a thus sought from the officers of the corporation to register the sale in the corporate boo$s, but it was denied as Go had not fully paid the amount of his subscription! The corporation said that Go was delin?uent in the payment of the balance due on the entire subscription, and that the corporation had a claim on the entire subscription, including the 00 shares sold to 4a'a! Thus, 4a'a filed a mandamus case against the corporation in the N+ of 4egros 3ccidental to compel the officers to register the 00 shares in 4a'as name in the corporations transfer boo$! The N+ dismissed the petition! Thus, 4a'a filed an appeal before the 6 ! The 6 dismissed the action for mandamus! #OCTRINE" The transfer made by Go to 4a'a is not the ;alienation, sale or transfer of stoc$< that is supposed to be

CORPORATION LAW | B2015 CASE DIGESTS

ISSUES" "ay the corporation be compelled to enter in its stoc$ and transfer boo$ the sale made by Go to 4a'aP NO RATIO" 1! The transfer made by Go to 4a'a is not the ;alienation, sale of transfer of stoc$< that is supposed to be recorded in the stoc$ and transfer boo$, as contemplated in sec! C0 of the orporation &aw! =eneral rule7 The shares which may be alienated are those which are co'ered by certificates of stoc$ as shown in the 6ec! -CH and 6ec! -6C of the orporation &aw! According to 6ec! -C, shares of stoc$ may be transferred by deli'ery to the transferee of the certificate properly indorsed! The usual practice is for the stoc$holder to sign the form on the bac$ of the stoc$ certificate! The certificate may thereafter be transferred! +f the holder of the certificate desires to assume the legal rights of the shareholder to enable him to 'ote at a corporate election and to recei'e di'idends, he fills up the blan$s in the form by inserting his own name as transferee! Then, he deli'ers the certificate to the secretary of the corporation so that the transfer may be entered in the corporations boo$s! The certificate is surrendered and a new one issued to the transferee! +n the case at bar, the aforementioned procedure can not be
H

followed because there is no certificate of stoc$ in Gos name! Nurthermore, the corporation has a claim on said shares for the unpaid balance of Gos subscription! A stoc$ subscription is a subsisting liability from the time subscription is made! A corporation cannot release an original subscriber from paying for his shares without a 'aluable consideration or without the unanimous consent of the stoc$holders! 0! 4a'a argues that 6ec! -. of the orporation &aw re?uires full payment for the subscription, as a condition precedent for the issuance of the certificate of stoc$, only in the case of no par stoc$! This was the doctrine in 8alta)ar '. 3ingayen! The 6 said that 8alta)ar '. 3ingayen does not apply! +n the :altaBar case, it was held that where a stoc$holder subscribed to a certain number of shares with par 'alue and made a partial payment and was issued a certificate for the shares co'ered by partial payment, he is entitled to 'ote the said shares, although he has not paid the balance of his subscription! +n the case at bar, no stoc$ certificate was issued to Go! (ithout the stoc$ certificate, which is the e'idence of ownership of corporate stoc$, the assignment of corporate shares is effecti'e only between the parties to the transaction! The deli'ery of the stoc$ certificate, which represents the shares to be alienated, is essential for the protection of both the corporation and the stoc$holders! Also, the issue in 8alta)ar '. 3ingayen was whether the said shares had 'oting rights although the incorporator had not paid fully the amount of his subscription! That is not the issue in the case at bar! #ISPOSITIVE" +n 'iew of the foregoing considerations, the trial court>s @udgment dismissing the petition for man amus is affirmed! osts against the petitionerAappellant!

6% ! -C! The capital stoc$ of stoc$ corporations shall be di'ided into shares for which certificates signed by the president or the 'iceApresident, countersigned by the secretary or cler$ and sealed with the seal of the corporation, shall be issued in accordance with the byAlaws! 6hares of stoc$ so issued are personal property and may be transferred by deli'ery of the certificate indorsed by the owner or his attorney in fact or other person legally authoriBed to ma$e the transfer! 4o transfer, howe'er, shall be 'alid, e#cept as between the, parties, until the transfer is entered and noted upon the boo$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! 4o share of stoc$ against which the corporation holds any unpaid claim shall be transferable on the boo$s of the corporation!
C

6% ! -6! )re 'oting trust agreement* !!! The certificates of stoc$ so transferred shall be surrendered and cancelled, and new certificates therefor issued to such person or persons, or corporation, as such trustee or trustees, in which new certificates it shall appear that they are issued pursuant to said agreement!

CORPORATION LAW | B2015 CASE DIGESTS

NIELSON & COMPAN! v.. LEPANTO CONSOLI#ATE# MININ&


9ecember 02, 1962 Oaldi'ar, ,! &uisa 6K""AF57 &epanto and 4ielson entered into a management contract wherein 4ielson was to manage the mining properties of &epanto and 4ielson would recei'e 10M of any di'idends declared and paid, when and as paid, 4ielson should be paid 10M of the stoc$ di'idends declared by &epanto during the period of e#tension of the contract! 6 , in its first decision, ordered &epanto to deli'er to 4ielson fruits and stoc$ di'idends that accrued to it! 3n mr, 6 re'ersed itself! 93 TF+4%7 Knder 6ection 16 of the orporation &aw stoc$ di'idends can not be issued to a person who is not a stoc$holder in payment of ser'ices rendered! A corporation may legally issue shares of stoc$ in consideration of ser'ices rendered to it by a person not a stoc$holder, or in payment of its indebtedness! A share of stoc$ issued to pay for ser'ices rendered is e?ui'alent to a stoc$ issued in e#change of property, because ser'ices is e?ui'alent to property! Howe'er, it is the shares of stoc$ that are originally issued by the corporation and forming part of the capital that can be e#changed for cash or ser'ices rendered, or property! A share of stoc$ coming from stoc$ di'idends declared cannot be issued to one who is not a stoc$holder of a corporation! NA T6 &epanto is see$ing reconsideration of a 9ec! 1., 1966 6 decision decided against it and in fa'or of 4ielson! &epanto and 4ielson entered into a management contract wherein 4ielson was to manage and operate the mining properties and mill on behalf and for the account of &epanto for a certain number of years! &epanto terminated its contract with 4ielson two years early than what was stipulated in their management contract! &epanto too$ o'er and assumed

e#clusi'e management of its properties! the 9% 1. 6 9% +6+34 held, among others, that &epanto was liable to pay 4ielson compensation as pre'iously agreed upon in their management contract! 4ielson would recei'e 10M of any di'idends declared and paid, when and as paid, 4ielson should be paid 10M of the stoc$ di'idends declared by &epanto during the period of e#tension of the contract! "ore particularly, +t is not denied that on 4o'ember 02, 19H9, &epanto declared stoc$ di'idends worth G1,000,000!00I and on August 00, 19C0, it declared stoc$ di'idends worth G0,000,000!00*! +n other words, during the period of e#tension &epanto had declared stoc$ di'idends worth G-,000,000!00! Hence, 4ielson is entitled to recei'e l0M of the stoc$ di'idends declared, or shares of stoc$ worth G-00,000!00 at the par 'alue of G0!10 per share! &epanto was ordered to issue and deli'er to 4ielson those shares of stoc$s as well as all the fruits or di'idends that accrued to said shares! +66K% (34 it was correct for 6 to order &epanto to pay 4ielsons compensation with stoc$ di'idends A no FAT+3 &epanto7 the payment to 4ielson of stoc$ di'idends as compensation for its ser'ices under the management contract is a 'iolation of the orporation &aw court7 There is merit in the contention of &epanto! 6ection 16 of the corporation law, in part, says7 ; 4o corporation organiBed under this Act shall create or issue bills, notes or other e'idence of debt, for circulation as money, and no corporation shall issue stoc$ or bonds e#cept in e#change for actual cash paid to the corporation or for7 )1* property actually recei'ed by it at a fair 'aluation e?ual to the par or issued 'alue of the stoc$ or bonds so issuedI and in case of disagreement as to their 'alue, the same shall be presumed to be the assessed 'alue or the 'alue appearing in in'oices or other commercial documents, as the case may beI and the burden or proof that the real present 'alue of the property is greater than the assessed 'alueor 'alue appearing in in'oices or other commercial documents, as the case may be, shall be upon the corporation, or for )0* profits earned by it but not distributed among its stoc$holders or membersI Gro'ided, howe'er, That no stoc$ or bond di'idend shall be issued without the appro'al of stoc$holders representing not less than twoAthirds of all

CORPORATION LAW | B2015 CASE DIGESTS

stoc$ then outstanding and entitled to 'ote at a general meeting of the corporation or at a special meeting duly called for the purpose! ### ### ###4o corporation shall ma$e or declare any di'idend e#cept from the surplus profits arising from its business, or di'ide or distribute its capital stoc$ or property other than actual profits among its members or stoc$holders until after the payment of its debts and the termination of its e#istence by limitation or lawful dissolution7 Gro'ided, That ban$ing, sa'ings and loan, and trust corporations may recei'e deposits and issue certificates of deposit, chec$s, drafts, and bills of e#change, and the li$e in the transaction of the ordinary business of ban$ing, sa'ings and loan, and trust corporations!< Nrom the abo'eA?uoted pro'ision of 6ection 16 of the orporation &aw, the consideration for which shares of stoc$ may be issued are7 )1* cashI )0* propertyI and )-* undistributed profits! 6hares of stoc$ are gi'en the special name 8stoc$ di'idends8 only if they are issued in lieu of undistributed profits! +f shares of stoc$s are issued in e#change of cash or property then those shares do not fall under the category of 8stoc$ di'idends8! A corporation may legally issue shares of stoc$ in consideration of ser'ices rendered to it by a person not a stoc$holder, or in payment of its indebtedness! A share of stoc$ issued to pay for ser'ices rendered is e?ui'alent to a stoc$ issued in e#change of property, because ser'ices is e?ui'alent to property! :ut a share of stoc$ thus issued should be part of the original capital stoc$ of the corporation upon its organiBation, or part of the stoc$s issued when the increase of the capitaliBation of a corporation is properly authoriBed! +n other words, it is the shares of stoc$ that are originally issued by the corporation and forming part of the capital that can be e#changed for cash or ser'ices rendered, or propertyI Those shares of stoc$ may be issued to a person who is not a stoc$holder, or to a person already a stoc$holder in e#change for ser'ices rendered or for cash or property! :ut a share of stoc$ coming from stoc$ di'idends declared cannot be issued to one who is not a stoc$holder of a corporation! A 8stoc$ di'idend8 is a distribution of the shares of stoc$ of the corporation among the stoc$holders as di'idends! A stoc$ di'idend of a corporation is a di'idend paid in shares of stoc$ instead of cash, and is properly payable only out of surplus profits! (hen a corporation issues stoc$ di'idends, it shows that the corporation>s accumulated profits ha'e been capitaliBed instead of distributed to the stoc$holders or retained as surplus a'ailable for distribution, in money or $ind, should opportunity offer! Nar from being a realiBation of profits for the stoc$holder, it tends

rather to postpone said realiBation, in that the fund represented by the new stoc$ has been transferred from surplus to assets and no longer a'ailable for actual distribution! Thus, it is apparent that stoc$ di'idends are issued only to stoc$holders! This is so because only stoc$holders are entitled to di'idends! They are the only ones who ha'e a right to a proportional share in that part of the surplus which is declared as di'idends! +t is 3ur considered 'iew, therefore, that under 6ection 16 of the orporation &aw stoc$ di'idends can not be issued to a person who is not a stoc$holder in payment of ser'ices rendered! And so, in the case at bar 4ielson can not be paid in shares of stoc$ which form part of the stoc$ di'idends of &epanto for ser'ices it rendered under the management contract! (e sustain the contention of &epanto that the understanding between &epanto and 4ielson was simply to ma$e the cash 'alue of the stoc$ di'idends declared as the basis for determining the amount of compensation that should be paid to 4ielson, in the proportion of 10M of the cash 'alue of the stoc$ di'idends declared! the management contract stated that7 8The hairman stated that he belie'ed that it would be better to tie the computation of the 10M participation of 4ielson T ompany, +nc!, to the di'idend, because 4ielson will then be able to definitely compute its net participation by the amount of the di'idends declared8! it can be gleaned from this statement that the intention of &epanto, as e#pressed by its hairman ! A! 9e(itt, was to ma$e the 'alue of the di'idends declared U whether the di'idends were in cash or in stoc$ U as the basis for determining the amount of compensation that should be paid to 4ielson, in the proportion of 10M of the cash 'alue of the di'idends so declared! +t does not mean, howe'er, that the compensation of 4ielson would be ta$en from the amount actually declared as cash di'idend to be distributed to the stoc$holder, nor from the shares of stoc$s to be issued to the stoc$holders as stoc$ di'idends, but from the other assets or funds of the corporation which are not burdened by the di'idends thus declared! 9+6G36+T+J% G3FT+34 4ielson is entitled to payment by &epanto of G-00,000!00 in cash, which is e?ui'alent to 10M of the money 'alue of the stoc$ di'idends worth G-,000,000!00 whichwere declared on 4o'ember 02, 19H9 and on August 00, 19C0, with interest thereon at the rate of 6M from Nebruary 6, 19C2!

CORPORATION LAW | B2015 CASE DIGESTS

4ERAS 4ROA#CASTIN& CO. v. CRAUMER3 et a-.


!ay 2, 19-2 Sterns, J 3uciano, 6oel Christian O.

earnings or profits and not dependent for its e#istence upon a theoretical estimate of an appreciation in the 'alue of the assets! $ACTS" The defendants ) raumer and 0 other unnamed persons* and &andis incorporated and organiBed :er$s :roadcasting ompany for the purpose of constructing and operating a radio broadcasting station! AuthoriBed capital stoc$ was /100,000 consisting of 1,000 shares, each with /100 par 'alue! 6toc$ was issued to the H incorporators and they became the stoc$holders of the ompany! According to the boo$s, the stoc$ was fully paid for by the receipt from each of the shareholders of /C,000 and by the fi#ing of a 'alue of /20,000 upon an asset named ;Nranchise and Gromotion %#pense!< A year later, the latter item was written off and in its place were substantiated entries of7 1! /C0,000 as amount for ;9ue on Knpaid 6toc$ 6ubscriptions< and 0! A total of /-0,000 consisting of ;writeAups< or increases in the 'aluations of fi#ed assets of the company As to the /C0,000 Knpaid 6ubscriptions, each stoc$holder paid /H,000, thus reducing that item to /--,000! A year later, it was cancelled and in lieu thereof an item in the same amount was entered as an asset designated as ;=ood (ill and Gromotion %#pense!< This was reduced to /00,000 0 years later and /H,000 was eliminated from the ;writeAups< )item 0 abo'e*! As of 9ecember 19H-, balance sheet of the company showed assets in e#cess of liabilities and the issued capital stoc$ of /0,CHC!9H! NOTE HO7EVER t'at t'e . r+- . (/ a..et. de+ended (n t'e 1nc- .1(n 1n t'e a..et. (/ t'e B0r1te* +.C (/ DEF3<<< 0'1c' .t1-re,a1ned 1n t'e :a-ance .'eet. I/ t'e B0r1te* +.C acc( nt 0a. e-1,1nated3 t'ere 1. NO SURPLUS3 : t a de/1c1ency (/ DEG3>;>.<F! +n April 19HH, the defendants declared and paid a di'idend of /H,000! +n ,une 19HH, the H shareholders entered into an agreement for the sale of their stoc$ to certain parties for /010,000, sub@ect to appro'al of the Nederal ommunications ommission!

SUMMAR!" 9efendants in this case were incorporators and directors of :er$s :roadcasting who declared and paid out di'idends in 19HH for a total amount of /1-,000! These di'idends were declared on the basis of earning of the company during, which, together with the A&&%=%9 surplus at the end of 19H-, made a surplus in earnings of /1H,2CC!.0! The e#istence of the surplus of assets depended on the inclusion in the assets of the ;writeAups< of /06,000 which still remained in the balance sheet! +f the ;writeAups< account was eliminated, there is 43 6KFG&K6, but a deficiency of /0-,HCH!06! These ;writeAups< represented ;increases in the 'aluations of fi#ed assets of the company!< The new directors of the corporation sought to reco'er the di'idends paid alleging that it was paid out unlawfully since there really was no surplus! The 6 agreed and held the defendants liable to return the di'idends paid! The writeAups of /06,000 represented an unrealiBed appreciation in the 'alue of the companys fi#ed assets Thus, their inclusion in determining the e#istence of a surplus from which di'idends might be declared was K4&A(NK& #OCTRINE" apital of a corporation must not be impaired in any manner, e#cept, of course, as such an impairment may in'oluntary occur through losses resulting from the operation of companys business! +t is illegal to declare and pay di'idends from other than a surplus consisting of an e#cess in 'alue of assets o'er the aggregate of the liabilities and the issued capital stoc$! Feason behind prohibition7 )1* To afford a margin of protection for creditors in 'iew of the limited liability of the shareholders, and also )0* To protect the interest of the shareholders themsel'es by preser'ing the capital so that the purposes of which the corporation was formed may be carried out! The difficulty lies in the computation of the surplus from which di'idends may properly be declared and paid! +n this regard, one rule has been generally declared and paid7 6uch a surplus must be a bona fide and not an artificial or fictitious one! +t must be founded upon A TKA&

CORPORATION LAW | B2015 CASE DIGESTS

Gending appro'al from the ommission, the defendants, as directors, declared and paid further di'idends in ,uly, 3ctober, and 9ecember! All totaling /1-,000 in di'idends paid! These di'idends were declared on the basis of earning of the company during, which, together with the A&&%=%9 surplus at the end of 19H-, made a surplus in earnings of /1H,2CC!.0! :er$s :roadcasting, now under a new set of directors, brought the present action to reco'er for its treasury the /1-,000 which the defendants had allegedly unlawfully declared and paid out as di'idends! ISSUE7 (34 the defendants unlawfully declared and paid out di'idends, thereby gi'ing the orporation the right to reco'er the same! HEL#7 +! :asic Grinciple in orporation &aw7 apital of a corporation must not be impaired in any manner, e#cept, of course, as such an impairment may in'oluntary occur through losses resulting from the operation of companys business A! +t is illegal to declare and pay di'idends from other than a surplus consisting of an e#cess in 'alue of assets o'er the aggregate of the liabilities and the issued capital stoc$ 1! Feason behind prohibition7 a! To afford a margin of protection for creditors in 'iew of the limited liability of the shareholders, and also b! To protect the interest of the shareholders themsel'es by preser'ing the capital so that the purposes of which the corporation was formed may be carried out :! :ut the difficulty lies in the computation of the surplus from which di'idends may properly be declared and paid 1! +n this regard, one rule has been generally declared and paid7 6uch a surplus must be a bona fide and not an artificial or fictitious one a! +t must be founded upon A TKA& earnings or profits and not dependent for its e#istence upon a theoretical estimate of an appreciation in the 'alue of the assets 0! The same rule is also found in the orporation Act of

12.H )K6* ++! &%AF&5, in this case, the writeAups of /06,000 represented an unrealiBed appreciation in the 'alue of the companys fi#ed assets A! Thus, their inclusion in determining the e#istence of a surplus from which di'idends might be declared was K4&A(NK& :! 3nce eliminated, there would be no surplus, but a re'ealed deficiency in capital 1! +t would thus follow that the corporation is now entitled to reco'er from the defendants the amount improperly distributed by them as di'idends

#ISPOSITIVE7 Fecords remanded to enter @udgment in fa'or of the company and against defendants!

L1c' v. US R ::er
July $, 19-1 %istrict Court of 6ew Jersey !an)ano

SUMMAR!" K6 Fubber for the years 19-C, -6, -. was ha'ing net earnings but was still in deficit! %'entually, the corporation bounced bac$ and because of new stoc$s issued, the deficit was cancelled! +n 19H1, the corporation gained profits and paid di'idends to preferred and common stoc$s! &ich, an owner of nonAcumulati'e preferred stoc$s filed this case to en@oin K6 Fubber from paying di'idends to the common stoc$holder until payment in arrears for the years 19-C, -6, and -. to preferred stoc$ holders were paid in full! The ourt here ruled that the nonAcumulati'e preferred stoc$holders are not entitled to di'idends on said years because while there were net earnings, there were no profits to be distributed! The payment of di'idends to common stoc$holders was proper! #OCTRINE" umulati'e preferred stoc$ ha'e at all times and for all years past and present, until paid, priority in payment o'er any and all unpaid di'idends upon common stoc$, whether the net earnings for any particular past or present year were or were not sufficient to pay the stipulated cumulati'e di'idends upon preferred stoc$ for that year! 4oncumulati'e preferred stoc$ )wholly or partially* is limited to the unpaid di'idends for those years when such net earnings were sufficient

CORPORATION LAW | B2015 CASE DIGESTS

)wholly or in part* to pay such di'idends! The payment of di'idends on nonVcumulati'e preferred stoc$ are payable only out of net profits and for the years in which said net profits are actually earned! TEST )on whether there is cumulati'e di'idends for nonAcumulati'e preferred stoc$s*7 (34 there were, in the years in which di'idends were not declared, net profits a'ailable for the lawful declaration and payment of di'idends, but withheld from the nonVcumulati'e preferred stoc$holder and retained in the businessP $ACTS" 1! 6ophia &ich, a holder of nonVcumulati'e preferred stoc$ of K6 Fubber ompany, see$s to en@oin the payment of a di'idend on the common stoc$ declared on "arch C, 19H1! 0! &ich is a holder of -00 shares of nonVcumulati'e preferred stoc$ of K6 Fubber! -! +n each of the fiscal years 19-C, 19-6, and 19-., the annual net earnings of K6 Fubber were /0,0-1,-..!69, /10,1.0,H2H!H6, and /2,60.,900!90, respecti'elyI in each of the said years, howe'er, there was a deficit of /0C,2.0,H00!6., /1.,00H,1C2!C0, and /10,H.1,606!29, respecti'ely, and a corresponding impairment of capital! The deficit, representing the accrued losses of prior years, e#isted in 19-H and was carried o'er into the succeeding years! H! +n each of the said years the annual net earnings were applied to the deficit! There were no di'idends declared on either the preferred or the common stoc$ during the said fiscal years! C! K6 Fubber, in 19-2 reconstructed its capital structure! There was issued common stoc$ of the par 'alue of /10! This reconstruction reduced the capital liability and created a capital surplus, which was applied to the then e#isting deficit, resulting in its cancellation! 6! Thereafter, in 19-2, 19-9, and 19H0, the deficit ha'ing been cancelled, the annual net earnings for each of the said years were producti'e of net profits and were a'ailable for the declaration and lawful payment of di'idendsI in each of the said years di'idends on the nonVcumulati'e preferred stoc$ were declared and paid in full! 4o di'idends, howe'er, were declared on the common stoc$! .! "arch C, 19H1, the defendant declared a di'idend on both the preferred and common stoc$! 2! +t is to be noted that in 19-C, 19-6, and 19-., K6 Fubber, despite

9!

the deficit, maintained ade?uate reser'es! These reser'es were maintained both prior and subse?uent to the said periods! +t is to be further noted that the present declaration of di'idends does not directly in'ade the reser'es for paymentI the reser'es are maintained intact! The preferential rights of all preferred stoc$holders, including &ich, are as follows7
QThe holders of Nirst Greferred 6toc$ shall be entitled to recei'e semiV annually or ?uarterly all net earnings of the ompany determined and declared as di'idends in each fiscal year up to but not e#ceeding 2M per annum on all outstanding Nirst Greferred 6toc$ before any di'idend shall be set apart or paid upon any other stoc$ of the ompany! 6uch di'idends upon the Nirst Greferred 6toc$ shall not be cumulati'e and the Nirst Greferred 6toc$ shall not be entitled to participate in or to recei'e any profits or earnings other than, or additional to, such nonVcumulati'e 2M, di'idends!

ISSUES" 7ON t'e d1.tr1: t1(n (/ d1v1dend. t( t'e c(,,(n .t(c)'(-der. 1. +r(+erH !ESI LICH" the established preference as to di'idends e#tends not only to the current year, but to the prior years of 19-C, 19-6, and 19-., to the e#tent of the annual net earnings of the said yearsI and, that di'idends may not be paid on the common stoc$ until the di'idends are paid on the preferred stoc$ for the years in ?uestion! &ich relies upon the doctrine enunciated in the following cases7 :assett '! Knited 6tates ast +ron Gipe T Noundry o!, 9ay '! Knited 6tates ast +ron Gipe T Noundry o! In 4a..ett ca.e" The corporation accumulated from the net profits for the years 1900 to 190H, inclusi'e, a fund which was designated as Qreser'e for additional wor$ing capital! A substantial portion of the fund accumulated represented net profits withheld from nonVcumulati'e preferred stoc$holders and retained in the business, but a'ailable for the payment of di'idends! +n a succeeding year, there was a declaration of di'idends on the preferred stoc$I the said declaration of di'idends contemplated payment out of the accrued net profits! A common stoc$holder sought to en@oin the payment of the di'idends! He argued that the right of the holders of nonVcumulati'e

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preferred stoc$ to share in the undistributed net profits was lost on the passing of the fiscal year in which the net profits were earned! The court stated7 The corporation has no right to accumulate a reser'e fund from earnings which would be paid as di'idends to the holders of common stoc$, and afterward use it to pay di'idends to the preferred stoc$holders, when the net profits of the year for which the di'idend is declared are not sufficient for that purpose! 3n the other hand, when the reser'e fund is accumulated, in whole or in part, by the cutting down of di'idends which would ha'e been paid to preferred stoc$holders, that fund, so far as it represents moneys so retained, is a'ailable for the payment of subse?uent di'idends upon the preferred stoc$! To yield to the contention of the complainant would be to permit the directors of the corporation to defraud the preferred for the benefit of the common stoc$holdersI while to sanction the claim of the defendant would be to put it in the power of the directors to defraud the common for the benefit of the preferred stoc$holders! In #ay ca.e" Grosperous years were withheld from both the common and preferred stoc$holders and were transferred to a fund designated as Q(or$ing apital Feser'e!Q &ater, di'idends were declared on both the common and preferred stoc$I the said declaration of di'idends contemplated payment out of the fund thus accumulated! 9ay, a nonVcumulati'e preferred stoc$holder, sought to en@oin the payment of the di'idends on the common stoc$I he contended that di'idends could not be paid on the common stoc$ until all of the Qwithheld profitsQ applicable to the di'idends on the nonVcumulati'e preferred stoc$ had been paid! "oran, a common stoc$holder, sought to en@oin the payment of di'idends on the noncumulati'e preferred stoc$! ourt7 +t will be obser'ed that section 12 pro'ides not only that preferred stoc$holders shall be entitled to recei'e, and the corporation shall be bound to pay, a fi#ed yearly di'idend, but also declares that such di'idend shall be paid >before any di'idend shall be set apart or paid to the common stoc$! (hile the statute says that the preferred stoc$holders shall be entitled to recei'e and the company shall be bound to pay a fi#ed yearly di'idend out of the profits, when that obligation is to be performed is largely a matter of discretion of the directors! They are at liberty to pass di'idends year after year and pile up profits, if in their opinion it is for the welfare of the company that this be done and in the absence of fraud, actual or

constructi'e, their @udgment is controlling! :ut once ha'ing decided to di'ide the profits it becomes incumbent upon the directors to discharge the company>s obligation to pay the fi#ed yearly di'idends, and this before any di'idend shall be paid on the common stoc$! 3therwise, the rights of the preferred stoc$holders in the reser'e profits could be indefinitely ignored and altogether subordinated to those of the common stoc$! The ourt of %rrors and Appeals defined the limitations of the doctrine7 Qin the absence of refining differences of designation and preferences, and restrictions and ?ualifications thereof, preferred stoc$, so far as the payment of di'idends is concerned, may, spea$ing generally, be said to embrace cumulati'e preferred stoc$ and noncumulati'e preferred stoc$, the distinction between the two being, while di'idends upon each can only be paid out of profits or surplus, the di'idends upon c , -at1ve +re/erred .t(c) 'ave at a-- t1,e. and /(r a-- year. +a.t and +re.ent3 nt1- +a1d3 +r1(r1ty 1n +ay,ent (ver any and a-- n+a1d d1v1dend. +(n c(,,(n .t(c)3 0'et'er t'e net earn1ng. /(r any +art1c -ar +a.t (r +re.ent year 0ere (r 0ere n(t . //1c1ent t( +ay t'e .t1+ -ated c , -at1ve d1v1dend. +(n +re/erred .t(c) /(r t'at year I whereas the priority of di'idends upon n(nc , -at1ve +re/erred .t(c) (0'(--y (r +art1a--y) 1. -1,1ted t( t'e n+a1d d1v1dend. /(r t'(.e year. 0'en . c' net earn1ng. 0ere . //1c1ent (0'(--y (r 1n +art) t( +ay . c' d1v1dend..J QThe effort here is to pre'ent the payment of a di'idend on the common stoc$ in 'iolation of the priority rights of the preferred stoc$holders! +n the absence of fraud, two things are essential to accomplish this7 Nirst, affirmati'e action by the board of directors establishing the fact of earnings for the pre'ious years, now a'ailable for the payment of the withheld or >passed di'idends for those years upon the preferred stoc$I and, second, affirmati'e action of the board of directors declaring a di'idend upon the common stoc$ in 'iolation of the priority rights established of the preferred stoc$holders! The doctrine of the ast +ron Gipe cases is limited in its application! 9i'idends on preferred stoc$ are not payable absolutely and unconditionally, but only out of the sources designated by the statute7 QsurplusQ or Qnet profits!Q T'e +ay,ent (/ d1v1dend. (n n(nKc , -at1ve +re/erred .t(c) are +aya:-e (n-y ( t (/ net +r(/1t. and /(r t'e year. 1n 0'1c' .a1d net +r(/1t. are act a--y earned. The payment of di'idends on nonVcumulati'e preferred stoc$, e#cept from a source recogniBed by the

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statute, is unlawful! T'e r1g't (/ t'e n(nKc , -at1ve +re/erred .t(c)'(-der. 1. c(nd1t1(na+(n" $1r.t3 t'e accr a- (/ net +r(/1t.3 and3 .ec(nd3 t'e1r retent1(n 1n t'e : .1ne... +t presupposes net profits, from which the di'idends on the nonVcumulati'e preferred stoc$ may be lawfully paid, if the directors in their discretion elect so to do! The doctrine presupposes the accrual of net profits, as distinguished from annual net earnings, to which the nonV cumulati'e preferred stoc$holders> inchoate right to earned di'idends attaches! The di'idends on the noncumulati'e preferred stoc$ are Qcumulati'e to the e#tent of net profits actually earned and a'ailable for the lawful payment of di'idends, but withheld from the nonVcumulati'e preferred stoc$holders and retained in the business! The actual primary test of applicability )cumulati'e di'idends* is 0'et'er (r n(t t'ere 0ere3 1n t'e year. 1n 0'1c' d1v1dend. 0ere n(t dec-ared3 net +r(/1t. ava1-a:-e /(r t'e -a0/ - dec-arat1(n and +ay,ent (/ d1v1dend.3 : t 01t''e-d /r(, t'e n(nKc , -at1ve +re/erred .t(c)'(-der and reta1ned 1n t'e : .1ne... Net Pr(/1t. v. Net Earn1ng. 4et profits connotes the clear pecuniary gain remaining after deducting from the gross earnings of the business the e#penses incurred in its conduct, the losses sustained in its prosecution, and the capital in'ested! +t is a prere?uisite to the e#istence of net profits that the assets of a corporation e#ceed the liabilities, including the liability on the capital stoc$! (here the capital is impaired, annual net earnings, if insufficient to offset the impairment, do not constitute net profits! 4et profits is not synonymous with the term annual net earnings! Annual net earnings may be producti'e of net profits, or, as in the instant case, reducti'e of the deficit! CA4" There were, in 19-C, 19-6, and 19-., no net profits to which the inchoate right to di'idends could ha'e attached! There was, in each of the said years, a substantial deficit which greatly e#ceeded the annual net earnings of the corresponding year, and, to the reduction of which the annual net earnings were applied! +t is manifest that the annual net earnings of each of the said years resulted, not in a profit, but in a reduction of the deficit! There was in each of the said years no source from which di'idends could ha'e been paidI the payment of di'idends under the circumstances would ha'e been unlawful! +n ast +ron Gipe case, it was stated7 Q3ur statute forbids the payment of di'idends e#cept from surplus or >from the net profits arising from the business of the corporation! 4o di'idends out of net profits are earned until there is a balance of assets o'er liabilities, arising from the business of the corporation! Though the company is /C0,000 better off at the close of 19-2 than at the beginning, yet there will be no net profits at the end of the year, but only a smaller deficit! LICH" Qnet profitsQ is synonymous with Qannual net earningsQ, and that in determining the net profits for the years in ?uestion, the losses of preceding years may be disregarded! COURT" This theory would permit what the statute e#pressly prohibits, the payment of di'idends out of annual net earnings, e'en though such payment resulted in an impairment of capital! LICH7 argues, in the alternati'e, that in ast +ron Gipe cases, the nonV cumulati'e preferred stoc$holders> inchoate right to di'idends attaches to the annual net earnings, as distinguished from net profits, and that the net profits of the succeeding years are chargeable with the payment of di'idends to the nonVcumulati'e preferred stoc$holders to the e#tent of such earnings! COURT7 This argument is untenable! +t e#tends the doctrine beyond its clear intendment and engrafts upon the nonVcumulati'e preferred stoc$ a preference peculiar to cumulati'e preferred stoc$! +f the annual net earnings of a corporation are applied to legitimate corporate purposes, such as payment of debts, reduction of deficits, and restoration of impaired capital, the right of nonVcumulati'e preferred stoc$holders to the payment of di'idends is lost! +f the annual net earnings are applied against prior losses and are thereby completely absorbed, there are no net profits from which di'idends may be lawfully paid or to which the inchoate right to di'idends may attach! The payment of di'idends from annual net earnings, when the liabilities of a corporation e#ceed the assets, would be in derogation of the rights of

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creditors! The payment of di'idends while debts accrue would be contrary, not only to sound business practice, but to the legislati'e policy! LICH" in determining whether or not there were net profits a'ailable for the payment of di'idends in the years in ?uestion, the liability on the capital stoc$ should be diminished in an amount e?ui'alent to the 'alue of the shares of stoc$ issued as stoc$ di'idends! The capital liability thus created may be disregarded! COURT" contention is not sound! A stoc$ di'idend is a con'ersion of surplus or undi'ided profits into capital stoc$, which is distributed among the stoc$holders in lieu of cash! The liability of the corporation on the capital stoc$, issued as a stoc$ di'idend in lieu of cash, cannot be disregardedI in fact, it represents in'ested capital drawn from surplus in which stoc$holders had an interest! #1.+(.1t1ve" +n fa'or of K6 Fubber!

contra'ening shareholder rights manifest themsel'es! 3rdinarily, courts will not compel a di'idend unless the directors act fraudulently, un@ustly, or unreasonably so as to impair the rights of complaining stoc$holders to their @ust proportion of corporate profit! The mere fact that a large corporate surplus e#ists is not enough to warrant e?uitable inter'ention! Kltimately, the test resol'es itself into an e#amination of the good faith and reasonableness of the policy of retaining that which otherwise is a'ailable for di'idends!

Ae( g' v. St. Pa - M1-) C(.


April 1-, 19$9 Supreme Court of !innesota Jerome !arcelo

$ACTS" A Qrepresentati'e suit was instituted by ,ames Leough as trustee and G, Leough, on behalf of themsel'es and all other stoc$holders of the 6t! Gaul "il$ ompany! This suit was brought for the purpose of compelling the declaration of a cash di'idend! They are demanding the right to ha'e a cash di'idend declared upon the premise that those in charge of corporate affairs )Fyan family, Hanson family* are wrongfully and needlessly withholding profits a'ailable and conspiring to retain them for their benefit and to the pre@udice of the ma@ority! The Fyan and Hanson families were allegedly doing this by applying the surplus a'ailable for di'idends to their salaries and e#pense accounts as officers1directors which are e#orbitant and beyond their worth! Nor their part, respondents claim that the capitaliBation was for the purpose of a'oiding se'eral federal ta#es upon undistributed surplus reported by newspapers to be in the offing! )The remaining portion of the NA T6 part @ust shows the company accounts the ourt loo$ed at to ma$e a decision* The 6t! Gaul "il$ ompany was pre'iously operated as a partnership which was later incorporated in 191.! +ts business assets and liabilities upon incorporation were e#changed for C9. shares at /100 par 'alue! The original authoriBed capital was /100,000 with the right to engage in business when paidVin capital amounted to /C0,000! These C9. shares represent the only stoc$s issued until a 19-6 stoc$ di'idend issue! +n 4o'ember 19-0, the outstanding capital stoc$ was reduced to /H1,000 when the corporation purchased from G, Leough 12C of his shares! +n 19-6, the authoriBed capital stoc$ was increased to /-00,000 by amendment! A 6AtoA1 stoc$ di'idend was declared, and the amount necessary to co'er the issued shares )0,H.0 at /100 par or /0H.,000* was transferred from the surplus account to the capital account! This di'idend increased the number of outstanding shares to 0,22H, ma$ing a total capital of /022,H00!

SUMMAR!" A suit was instituted by the stoc$holders of the 6t! Gaul "il$ ompany against the company! The suit was brought for the purpose of compelling the declaration of a cash di'idend! Getitioners argue that those in charge of corporate affairs are wrongfully and needlessly withholding profits a'ailable and conspiring to retain them for their benefit and to the pre@udice of the ma@ority! C( rt7 onsidering that capital and surplus of the company amounted to /H-C,H91!.- for the year 19-6, as well as other factors )its lac$ of mortgages1liens or other substantial indebtedness, no immediate e#pansion plans, etc!* 3 the issuance of cash di'idends is proper! #OCTRINE" The determination of whether or not di'idends should be declared is essentially a matter of internal management! +t is primarily for the corporate directors in their sound discretion to decide! :ut their powers are not unlimited and @udicial re'iew should be secured when abuses

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Nrom 1C 9ecember 190H to 00 3ctober 19-C, /169,H.0 was distributed to stoc$holders representing a --CM return! +n addition, there was the stoc$ di'idend and a cash di'idend of 10M on all shares, new and old! As of -1 9ecember 19-6, the corporation had in'estments of /102,162!.0, including /99,261 in go'ernment bonds, and /16,00- in the common stoc$ of a wholly owned subsidiary )6outh 6t! Gaul 9airies, +nc!*! The ca+1ta- AN# . r+- . for 19-- was /-6-,1-C!09I for 19-C it was /H-2,-00!1HI for 19-6 it was />G;3>L8.9G! )not in the case surplus or capital surplus, basically is the amount a'ailable for distribution as di'idends! businessdictionary!com apital surplus is stoc$holders e?uity in e#cess of par 'alue of common stoc$, representing the e#cess of assets o'er liabilities* Nurthermore, the record does not disclose any mortgages or liens against the corporate property or any other substantial indebtedness! The sales are predominantly on a cash basis! The merchandise in'entory is small! There ha'e been sufficient accounts set up to co'er depletion and obsolescence! The buildings, plant and e?uipment are ade?uate for the business and in good condition! The union scale of wages is paid! TC" The trial court found that /-0H,061!6H capital and surplus was sufficient and held that all sums in e#cess were unreasonable and constituted a Q'iolation of the fiduciary relation e#isting between the officers1 directors and its stoc$holders and is fraudulent, oppressi'e, unreasonable, and un@ust! A di'idend was ordered totalling D8G83>;<.;M, which consisted of the amount representing what the court deemed to be held as e#cess capital and surplus on 9ecember -1, 19-6, plus /16,--0!60 o'erpaid to "ary Fyan, 6r!, /12,000 o'erpaid to Fichard, Harry and %mmett Fyan, and /10,-69!9. due the corporation by its wholly owned subsidiary. ISSUE" 7ON the issuance of cash di'idends is proper! !ES RATIO" +t seems clear that, in the light of the facts, the corporation did not ha'e a reasonable need for the large surplus accumulated and held as bonds or other easily li?uidated assets in 9ecember, 19-6! The merchandise in'entory was small with an almost daily cash turno'er! There were no substantial obligations to be met! The e'idence does not disclose any

immediate e#pansion program! Accounts for obsolescence and depreciation were ade?uately set up! +n short, the surplus was easily a'ailable for di'idends if the directors so elected! (e need not discuss the ?uestion whether standing alone this would ha'e been sufficient ground to order a di'idend! 3ther facts ma$e the case clear! The proposed ta# could as easily ha'e been a'oided by the dispersion of accumulated surplus as by its capitaliBation! The large surplus mentioned e#isted at the time "ary Fyan, Fichard, Harry and %mmett Fyan were recei'ing salaries in e#cess of their worth and draining from the corporation money otherwise a'ailable for di'idends! &i$ewise, mil$ and other creamery products were being con'erted by the Fyans and by Hanson at the rate of /0C each per month! Nurthermore, certain fraudulent e#pense items in fa'or of "ary Fyan, 6r!, were present upon the corporate accounts! Jiewed in light of these facts, the spectacle ta$es on a distinct color of fraud and bad faith! The capitaliBation of the surplus did not ser'e a corporate needI it was referable only to the desires and purposes of those in control to $eep the surplus under their control and sub@ect to their machinations! =enerally directors are the proper parties to determine whether a di'idend shall be in cash or by stoc$, and a court will not interfere with the fair e#ercise of their discretionI but where it appears from the e'idence, as here, that the ob@ect was to benefit primarily those in whom the discretion rests, e?uitable powers can be called into operation by proper application! 9irectors and officers of a corporation owe stoc$holders the acti'e duty of honesty and good faith in the transaction of the business of the corporation and in their dealings with it! The determination of whether or not di'idends should be declared is essentially a matter of internal management! +t is primarily for the corporate directors in their sound discretion to decide! :ut their powers are not unlimited and @udicial re'iew should be secured when abuses contra'ening shareholder rights manifest themsel'es! 3rdinarily, courts will not compel a di'idend unless the directors act fraudulently, un@ustly, or unreasonably so as to impair the rights of complaining stoc$holders to their @ust proportion of corporate profit! The mere fact that a large corporate surplus e#ists is not enough to warrant e?uitable inter'ention! Kltimately, the test resol'es itself into an e#amination of the good faith and reasonableness of the policy of retaining that which otherwise is a'ailable for di'idends!

CORPORATION LAW | B2015 CASE DIGESTS

#ISPOSITIVE" Trial ourt order affirmed!

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