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Corporate Law Case Digest: Ong Yong V.

Tiu (2003)
G.R. No. 144476 April 8, 2003
Lessons Applicable: Pre-incorporation Subscription (Corporate Law)

FACTS:
1994: construction of the Masagana Citimall in Pasay City was threatened with stoppage, when its
owner, the First Landlink Asia Development Corporation (FLADC), owned by the Tius, became
heavily indebted to the Philippine National Bank (PNB) for P190M
To save the 2 lots where the mall was being built from foreclosure, the Tius invited Ong Yong,
Juanita Tan Ong, Wilson T. Ong, Anna L. Ong, William T. Ong and Julia Ong Alonzo (the
Ongs), to invest in FLADC.
Pre-Subscription Agreement: Ongs and the Tius agreed to maintain equal shareholdings in
FLADC
Ongs: subscribe to 1,000,000 shares
Tius: subscribe to an additional 549,800 shares in addition to their already existing subscription of
450,200 shares
Tius: nominate the Vice-President and the Treasurer plus 5 directors
Ongs nominate the President, the Secretary and 6 directors (including the chairman) to the board
of directors of FLADC and right to manage and operate the mall.
Tius: contribute to FLADC a 4-storey building P20M (for 200K shares)and 2 parcels of land
P30M (for 300K shares) and P49.8M (for 49,800 shares)
Ongs: paid P190M to settle the mortgage indebtedness of FLADC to PNB (P100M in cash for
their subscription to 1M shares)
February 23, 1996: Tius rescinded the Pre-Subscription Agreement
February 27, 1996: Tius filed at the Securities and Exchange Commission (SEC) seeking
confirmation of their rescission of the Pre-Subscription Agreement
SEC: confirmed recission of Tius
Ongs filed reconsideration that their P70M was not a premium on capital stock but
an advance loan
SEC en banc: affirmed it was a premium on capital stock
CA: Ongs and the Tius were in pari delicto (which would not have legally entitled them to
rescission) but, "for practical considerations," that is, their inability to work together, it was best
to separate the two groups by rescinding the Pre-Subscription Agreement, returning the original
investment of the Ongs and awarding practically everything else to the Tius.
ISSUE: W/N Specific performance and NOT recission is the remedy

HELD: YES. Ongs granted.


did not justify the rescission of the contract
providing appropriate offices for David S. Tiu and Cely Y. Tiu as Vice-President and Treasurer,
respectively, had no bearing on their obligations under the Pre-Subscription Agreement since the
obligation pertained to FLADC itself
failure of the Ongs to credit shares of stock in favor of the Tius for their property contributions
also pertained to the corporation and not to the Ongs
the principal objective of both parties in entering into the Pre-Subscription Agreement in 1994
was to raise the P190 million
law requires that the breach of contract should be so "substantial or fundamental" as to defeat the
primary objective of the parties in making the agreement
since the cash and other contributions now sought to be returned already belong to FLADC, an
innocent third party, said remedy may no longer be availed of under the law.
Any contract for the acquisition of unissued stock in an existing corporation or a corporation still
to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the
fact that the parties refer to it as a purchase or some other contract
allows the distribution of corporate capital only in three instances: (1) amendment of the Articles
of Incorporation to reduce the authorized capital stock,24 (2) purchase of redeemable shares by the
corporation, regardless of the existence of unrestricted retained earnings,25 and (3) dissolution and
eventual liquidation of the corporation.
They want this Court to make a corporate decision for FLADC.
The Ongs' shortcomings were far from serious and certainly less than substantial; they were in
fact remediable and correctable under the law. It would be totally against all rules of justice,
fairness and equity to deprive the Ongs of their interests on petty and tenuous grounds.



ONG YONG vs. TIU
"All the words I can recall, could never capture all.. the loveliness of you"

See what I mean? See how romantic the lyrics in those days? Pamatay!. Got this from
my dad's music collection. Damn it.. will somebody kick me way back in time.
Scotteeeyy!?

Alright, let's get this job done. This is a wonderful story of two Filipino-Chinese
families, ONE BLOCK-MAILING THE OTHER.

It started with a construction of a building, particularly a mall. The Masagana
Citymall in Pasay City. I dont know if youve seen it. Its somewhere there, you
might have been in there you just didnt know it. The construction was threatened
with stoppage. Its owner company FLADC (First Landlink Asia Development
Corporation) which was owned by the Tius encountered financial difficulties. It
was heavily indebted to PNB for P190 Million.

Heres what the Tius did to get into this predicament. It mortgaged the 2 lands
where the mall was being erected and used the money to erect the building. The
thing was, the building construction was taking so long so it naturally follows the
(ROI) return of investments is temporarily put to a stagnant position, hence putting
the mortgage contract with the PNB in a brink of foreclosure.

So to stave off a foreclosure end-result of the mortgaged 2 lands, the Tius invited the
Ongs to invest in FLADC. Both families entered a Pre-Subscription Agreement and
under this agreement the Ongs and the Tius contracted to maintain equal
shareholdings in FLADC. (so its like the Tius is saying to the Ongs, come on in, mi
casa es su casa!.. of course that's just a whole bologny) The Ongs were to subscribe
to 1 Million shares at a par value of P100.00 each while the Tius were to subscribe
to an additional approximately half a million shares at P100.00 each in addition to
their already existing subscription of roughly half a million.

Heres where the bone of contention started..

In addition to the previous said agreement between both families, they agreed that
the Tius were entitled to nominate the Vice President and the Treasurer plus 5
Directors while the Ongs were entitled to nominate the President, the Secretary and
6 other Directors, including the Chairman of the Board of Directors. Moreover, the
Ongs were given the right to manage and operate the mall. (So inferring from this
said agreement, indirectly parang sinasabe ng Tius Okay lang hawakan nyo yung
top position, basta hawak namen yung pera" Utak den eh no?)

So buying themselves into the company, lets compute.. 1M x 100 pesos =100M, so
the Ongs paid P100 Million in cash for 1M shares of stock. The Tius committed to
contribute to the company a 4 storey building and 2 parcels of land respectively
valued at P20M for 200T shares and P30M for 300T shares and P50M for 50T
shares to cover the additional stock subscription. So basically their even right?

But the Ongs chipped in another P70M to FLADC and but wait, there's more,
nagdagdag pa ng P20M handed to the Tius, over and above the P100M investment,
so a total of P190M right? (So parang sinabe ng Ongs sa Tius Sige bayaran nyo na
P190M utang sa PNB para clean slate tayo, para good credit standing tayo kung
uutang tayo ulet E di tuwang-tuwa yung Tiu). So ganun nga nangyare, the P190M
Ong investment was used to settle the P190M mortgage indebtedness of FLADC to
PNB.

Okay na maganda na.. e kaso

The business harmony between the Ongs and the Tius in FLADC however was short-
lived, because the Tius RESCINDED the PRE-SUBSCRIPTION AGREEMENT. They
accused the Ongs of 1. refusing to credit FLADC shares covering their real property
contribution. (Hala! San galing yun??). 2. Preventing two of the Tius from assuming
positions as VP and Treasurer.

So obviously its an INTRA-CORPORATE CONTROVERSY, wag na tayo makialam pa,
lets not dig deeper into it.

Basically we see here a RESCISSION on grounds of BREACH OF CONTRACT.

ISSUE:

Question, Can they RESCIND?

HELD:

NO THEY CANNOT RESCIND.

Court said the Pre-Subscription Agreement will still be governed by Sec. 60 of the
Corporation Code.

Now why did they say that?

In subscription contracts kase the subject matter of contract are usually unissued
shares. In this case, the subject matter of contract between the Ongs & the Tius was
the 1M unissued shares, binili nga ng mga Ongs diba para makapasok sila as
shareholders. Now the court said since these were unissued shares, the parties Pre-
Subscription Agreement was in fact a subscription contract as defined under Section
60, Title VII of the Corporation Code okay? And according to the code a subscription
contract necessarily involves the corporation as one of the contracting parties since
the subject matter of the transaction is property owned by the corporation, its
shares of stock. Thus, the subscription contract (denominated by the parties as a
Pre-Subscription Agreement) whereby the Ongs invested P100 million for
1,000,000 shares of stock was, from the viewpoint of the law, one between the Ongs
and FLADC, not between the Ongs and the Tius. Otherwise stated, the Tius did not
contract in their personal capacities with the Ongs since they were not selling any of
their own shares to them. It was FLADC that did. Gets?

Now, punta tayo sa rescission..

Considering therefore, that the real contracting parties to the subscription
agreement were FLADC and the Ongs alone, a civil case for rescission on the ground
of breach of contract filed by the Tius in their personal capacities therefore will not
prosper, because only FLADC (not the Tius) had the legal personality to file suit
rescinding the subscription agreement with the Ongs simply because it was the real
party in interest therein.

Remember the INCHOATE nature of the stockholders interest in the corporation?
The corporation has a strong juridical personality separate and dinstinct from the
stockholders right? In Guanzon & Sons vs. Register of Deeds I think they even made
distinction between partition and conveyance in the transfer of corporate assets to
its shareholders, if partition kase that means they own it kaya pinagparte-parte nila,
the court said no the corporate personality is separate and distinct kaya its a
conveyance not a partition. Gets?

Now lets say the Tius were adversely affected by the Ongs unwillingness to let them
assume their positions, as we refer to their intra-corporate controversy, the court
said that rescission due to breach of contract is definitely the wrong remedy for
their personal grievances. The Corporation Code, SEC rules and even the Rules of
Court provide for appropriate and adequate intra-corporate remedies, other than
rescission, in situations like this. Rescission is certainly not one of them, specially if
the party asking for it has no legal personality to do so and the requirements of the
law have not been met. (the principle kase is.. if the code allows it e di konting away
lang & mababaw na dahilan rescission na). Imagine the court even said A contrary
doctrine will tread on extremely dangerous ground because it will allow just any
stockholder, for just about any real or imagined offense, to demand rescission of his
subscription and call for the distribution of some part of the corporate assets to him
without complying with the requirements of the Corporation Code.

Hence, the Tius, in their personal capacities, cannot seek the ultimate and
extraordinary remedy of rescission of the subject agreement based on a less than
substantial breach of subscription contract. Not only are they not parties to the
subscription contract between the Ongs and FLADC; they also have other available
and effective remedies under the law.

And remember the Trust Fund Doctrine? That doctrine prevents this thing to
happen. E biro mo nga naman here you are like a good natured wide eyed trusting
little child bringing all you have to the table in good faith trusting that it will be in
good hands and will grow profit, tapos magugulat ka nalang biglang iiicha-pwera ka
and uuwi kang walang dala.

If there'll be rescission then there'll be distribution. And the court said "Distribution
of corporate assets and property cannot be made to depend on the whims and
caprices of the stockholders, officers or directors of the corporation"

The court said.. Apparently, the Tius do not realize the illegal consequences of
seeking rescission and control of the corporation to the exclusion of the Ongs..

We are appalled by the attempt by the Tius, in the words of the Court of Appeals, to
pull a fast one on the Ongs because that was where the problem precisely started. It
is clear that, when the finances of FLADC improved considerably after the equity
infusion of the Ongs, the Tius started planning to take over the corporation again
and exclude the Ongs from it."

After all is said and done, no one can close his eyes to the fact that the Masagana
Citimall would not be what it has become today were it not for the timely infusion of
P190 million by the Ongs in 1994. There are no ifs or buts about it.

The court said even further "Without the Ongs, the Tius would have lost everything
they originally invested in said mall. If only for this and the fact that this Resolution
can truly pave the way for both groups to enjoy the fruits of their investments
assuming good faith and honest intentions we cannot allow the rescission of the
subject subscription agreement. The Ongs shortcomings were far from serious and
certainly less than substantial; they were in fact remediable and correctable under
the law. It would be totally against all rules of justice, fairness and equity to deprive
the Ongs of their interests on petty and tenuous grounds."

So there you go. Never can anyone say it more clearly than the highest court.

So here we found out that a pre-subscription agreement no matter it is termed is a
subscription agreement according to the code, and a subscription agreement cannot
be rescinded on grounds of intra-corporate issues such as in this case prevention to
assume office. The Corporation Code, the SEC Rules, and the Rules of Court in fact
provide intra-corporate remedies and rescission is certainly not one of them
because it is contrary and clearly violates the Trust Fund Doctrine.

The Ongs won this case.