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II, Corporations
Philippine Law School
Atty. Jose Gerardo A. Medina
Part V
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BY LAWS
By-laws are the product of the agreement of the stockholders or member and establish
the rules for the internal government of the corporation. It therefore cannot bind third
persons not privy to it. (Campos, Book I)
As general rule, the by-laws of a corporation are valid if they are reasonable and
calculated to carry into effect the objects of the corporation, and are not contradictory
to the general policy of the laws of the land. (Supreme Commandery of the Knights of
the Golden Rule vs. Ainswoth, 71 Ala., 436; 46 Am. Rep., 332.)
On the other hand, it is equally well settled that by-laws of a corporation must be
reasonable and for a corporate purpose, and always within the charter limits. They
must always be strictly subordinate to the constitution and the general laws of the land.
They must infringe the policy of the state, nor be hostile to public welfare. (46 Am.
Rep., 332.) They must not disturb vested rights or impair the obligation of a contract,
take away or abridge the substantial rights of stockholder or member, affect rights of
property or create obligations unknown to the law. (People's Home Savings Bank vs.
Superior Court, 104 Cal., Co., 649; 43 Am. St. Rep., 147; Ireland vs. Globe Milling
Co., 79 Am. St. Rep., 769.)
Section 46. Adoption of by-laws. – Every corporation formed under this Code
must, within one (1) month after receipt of official notice of the issuance of its
certificate of incorporation by the Securities and Exchange Commission, adopt
a code of by-laws for its government not inconsistent with this Code. For the
adoption of by-laws by the corporation the affirmative vote of the stockholders
representing at least a majority of the outstanding capital stock, or of at least a
majority of the members in case of non-stock corporations, shall be necessary.
The by-laws shall be signed by the stockholders or members voting for them
and shall be kept in the principal office of the corporation, subject to the
inspection of the stockholders or members during office hours. A copy thereof,
duly certified to by a majority of the directors or trustees countersigned by the
secretary of the corporation, shall be filed with the Securities and Exchange
Commission which shall be attached to the original articles of incorporation.
Page 1 of 43
Notwithstanding the provisions of the preceding paragraph, by-laws may be
adopted and filed prior to incorporation; in such case, such by-laws shall be
approved and signed by all the incorporators and submitted to the Securities
and Exchange Commission, together with the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by the Securities
and Exchange Commission of a certification that the by-laws are not
inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing the by-laws
or any amendment thereto of any bank, banking institution, building and loan
association, trust company, insurance company, public utility, educational
institution or other special corporations governed by special laws, unless
accompanied by a certificate of the appropriate government agency to the effect
that such by-laws or amendments are in accordance with law. (20a)
1. The time, place and manner of calling and conducting regular or special
meetings of the directors or trustees;
2. The time and manner of calling and conducting regular or special meetings
of the stockholders or members;
4. The form for proxies of stockholders and members and the manner of voting
them;
6. The time for holding the annual election of directors of trustees and the mode
or manner of giving notice thereof;
7. The manner of election or appointment and the term of office of all officers
other than directors or trustees;
Page 2 of 43
10. Such other matters as may be necessary for the proper or convenient
transaction of its corporate business and affairs. (21a)
Whenever any amendment or new by-laws are adopted, such amendment or new
by-laws shall be attached to the original by-laws in the office of the corporation,
and a copy thereof, duly certified under oath by the corporate secretary and a
majority of the directors or trustees, shall be filed with the Securities and
Exchange Commission the same to be attached to the original articles of
incorporation and original by-laws.
The amended or new by-laws shall only be effective upon the issuance by the
Securities and Exchange Commission of a certification that the same are not
inconsistent with this Code. (22a and 23a)
MEETINGS
Whenever, for any cause, there is no person authorized to call a meeting, the
Securities and Exchange Commission, upon petition of a stockholder or
member on a showing of good cause therefor, may issue an order to the
petitioning stockholder or member directing him to call a meeting of the
corporation by giving proper notice required by this Code or by the by-laws. The
petitioning stockholder or member shall preside thereat until at least a majority
of the stockholders or members present have chosen one of their number as
presiding officer. (24, 26)
A copy of the Notice dated March 4, 2002 for the March 15, 2002 stockholders'
meeting that was sent to respondents specifically stated:
“March 4, 2002
NOTICE
Furthermore, the agenda for the meeting, which includes the elections of the new
board of directors and ratification of acts of the incumbent board of directors and
management, was the standard order of business in a regular annual meeting of
stockholders of a corporation.
Thus, this Court holds that the March 15, 2002 annual stockholders' meeting was a
regular meeting. Hence, the requirement to state the object and purpose in case of a
Page 4 of 43
special meeting as provided for in Article VIII (5) of the PSI's by-laws does not apply
to the Notice for the March 15, 2002 annual stockholders' meeting.
Regarding the time for serving notice of the meeting to all the stockholders, Section
50 of Batas Pambansa Blg. 68 reads in part:
Under PSI's by-laws, notice of every regular or special meeting must be mailed or
personally delivered to each stockholder not less than five (5) days prior to the date
set for the meeting. . . .
In this case, the PSI's by-laws providing only for a five (5)-day prior notice must prevail
over the two (2)-week notice under the Corporation Code. By its express terms,
the Corporation Code allows "the shortening (or lengthening) of the period within
which to send the notice to call a special (or regular) meeting." Thus, the mailing of
the Notice to respondents on March 5, 2002 calling for the annual stockholders'
meeting to be held on March 15, 2002 is not irregular, since it complies with what was
stated in PSI's by-laws.
Ricafort v. Dicdican,
G.R. Nos. 202647-50 & 205921-24, March 9, 2016
The shorter notice of three days instead of two weeks for stockholders' regular or
special meeting is clearly allowed under Section 50 of the Corporation Code.
Notice of meetings shall be in writing, and the time and place thereof stated
therein.
All proceedings had and any business transacted at any meeting of the
stockholders or members, if within the powers or authority of the corporation,
shall be valid even if the meeting be improperly held or called, provided all the
Page 5 of 43
stockholders or members of the corporation are present or duly represented at
the meeting. (24 and 25)
Section 52. Quorum in meetings. – Unless otherwise provided for in this Code
or in the by-laws, a quorum shall consist of the stockholders representing a
majority of the outstanding capital stock or a majority of the members in the
case of non-stock corporations. (n)
Tan v. Sycip
G.R. No. 153468, August 17, 2006
For stock corporations, the "quorum" referred to in Section 52 of the Corporation Code
is based on the number of outstanding voting stocks. For nonstock corporations, only
those who are actual, living members with voting rights shall be counted in determining
the existence of a quorum during members' meetings. Dead members shall not be
counted.
Ruling:
Basis for Quorum : Generally, stockholders' or members' meetings are called for the
purpose of electing directors or trustees and transacting some other business calling
for or requiring the action or consent of the shareholders or members, such as the
amendment of the articles of incorporation and bylaws, sale or disposition of all or
substantially all corporate assets, consolidation and merger and the like, or any other
business that may properly come before the meeting.
Under the Corporation Code, stockholders or members periodically elect the board of
directors or trustees, who are charged with the management of the corporation. The
board, in turn, periodically elects officers to carry out management functions on a day-
to-day basis. As owners, though, the stockholders or members have residual powers
over fundamental and major corporate changes.
While stockholders and members (in some instances) are entitled to receive profits,
the management and direction of the corporation are lodged with their representatives
and agents — the board of directors or trustees. In other words, acts of management
pertain to the board; and those of ownership, to the stockholders or members. In the
latter case, the board cannot act alone, but must seek approval of the stockholders or
members.
Page 6 of 43
Conformably with the foregoing principles, one of the most important rights of a
qualified shareholder or member is the right to vote — either personally or by proxy —
for the directors or trustees who are to manage the corporate affairs. The right to
choose the persons who will direct, manage and operate the corporation is significant,
because it is the main way in which a stockholder can have a voice in the management
of corporate affairs, or in which a member in a nonstock corporation can have a say
on how the purposes and goals of the corporation may be achieved. Once the directors
or trustees are elected, the stockholders or members relinquish corporate powers to
the board in accordance with law.
In the absence of an express charter or statutory provision to the contrary, the general
rule is that every member of a nonstock corporation, and every legal owner of shares
in a stock corporation, has a right to be present and to vote in all corporate meetings.
Conversely, those who are not stockholders or members have no right to vote. Voting
may be expressed personally, or through proxies who vote in their representative
capacities. Generally, the right to be present and to vote in a meeting is determined
by the time in which the meeting is held. x x x
The Right to Vote in Stock Corporations: The right to vote is inherent in and
incidental to the ownership of corporate stocks. It is settled that unissued stocks may
not be voted or considered in determining whether a quorum is present in a
stockholders' meeting, or whether a requisite proportion of the stock of the corporation
is voted to adopt a certain measure or act. Only stock actually issued and outstanding
may be voted. Under Section 6 of the Corporation Code, each share of stock is entitled
to vote, unless otherwise provided in the articles of incorporation or declared
delinquent under Section 67 of the Code.
Neither the stockholders nor the corporation can vote or represent shares that have
never passed to the ownership of stockholders; or, having so passed, have again been
purchased by the corporation. These shares are not to be taken into consideration in.
determining majorities. When the law speaks of a given proportion of the stock, it must
be construed to mean the shares that have passed from the corporation, and that may
be voted.
Page 7 of 43
"Section 6. Classification of shares. — The shares of stock of stock
corporations may be divided into classes or series of shares, or both,
any of which classes or series of shares may have such rights, privileges
or restrictions as may be stated in the articles of incorporation: Provided,
That no share may be deprived of voting rights except those classified
and issued as "preferred" or "redeemable" shares, unless otherwise
provided in this Code: Provided, further, that there shall always be a
class or series of shares which have complete voting rights.
Under Section 52 of the Corporation Code, the majority of the members representing
the actual number of voting rights, not the number or numerical constant that may
originally be specified in the articles of incorporation, constitutes the quorum.
The March 3, 1986 SEC Opinion cited by the hearing officer uses the phrase "majority
vote of the members"; likewise Section 48 of the Corporation Code refers to 50 percent
of 94 (the number of registered members of the association mentioned therein) plus
one. The best evidence of who are the present members of the corporation is the
"membership book"; in the case of stock corporations, it is the stock and transfer book.
Section 25 of the Code specifically provides that a majority of the directors or trustees,
as fixed in the articles of incorporation, shall constitute a quorum for the transaction of
corporate business (unless the articles of incorporation or the bylaws provide for a
greater majority). If the intention of the lawmakers was to base the quorum in the
meetings of stockholders or members on their absolute number as fixed in the articles
of incorporation, it would have expressly specified so. Otherwise, the only logical
conclusion is that the legislature did not have that intention.
Effect of the Death of a Member or Shareholder: Having thus determined that the
quorum in a members' meeting is to be reckoned as the actual number of members of
the corporation, the next question to resolve is what happens in the event of the death
of one of them.
In stock corporations, shareholders may generally transfer their shares. Thus, on the
death of a shareholder, the executor or administrator duly appointed by the Court is
vested with the legal title to the stock and entitled to vote it. Until a settlement and
division of the estate is effected, the stocks of the decedent are held by the
administrator or executor.
On the other hand, membership in and all rights arising from a nonstock corporation
are personal and non-transferable, unless the articles of incorporation or the bylaws
of the corporation provide otherwise. In other words, the determination of whether or
not "dead members" are entitled to exercise their voting rights (through their executor
or administrator), depends on those articles of incorporation or bylaws.
Under the By-Laws of GCHS, membership in the corporation shall, among others, be
terminated by the death of the member. Section 91 of the Corporation Code further
provides that termination extinguishes all the rights of a member of the corporation,
unless otherwise provided in the articles of incorporation or the bylaws.
Applying Section 91 to the present case, we hold that dead members who are dropped
from the membership roster in the manner and for the cause provided for in the By-
Page 9 of 43
Laws of GCHS are not to be counted in determining the requisite vote in corporate
matters or the requisite quorum for the annual members' meeting. With 11 remaining
members, the quorum in the present case should be 6. Therefore, there being a
quorum, the annual members' meeting, conducted with six members present, was
valid.
Vacancy in the Board of Trustees: As regards the filling of vacancies in the board of
trustees, Section 29 of the Corporation Code provides:
Undoubtedly, trustees may fill vacancies in the board, provided that those remaining
still constitute a quorum. The phrase "may be filled" in Section 29 shows that the filling
of vacancies in the board by the remaining directors or trustees constituting a quorum
is merely permissive, not mandatory. Corporations, therefore, may choose how
vacancies in their respective boards may be filled up — either by the remaining
directors constituting a quorum, or by the stockholders or members in a regular or
special meeting called for the purpose.
The By-Laws of GCHS prescribed the specific mode of filling up existing vacancies in
its board of directors; that is, by a majority vote of the remaining members of the board.
While a majority of the remaining corporate members were present, however, the
"election" of the four trustees cannot be legally upheld for the obvious reason that it
was held in an annual meeting of the members, not of the board of trustees. We are
not unmindful of the fact that the members of GCHS themselves also constitute the
trustees, but we cannot ignore the GCHS bylaw provision, which specifically
prescribes that vacancies in the board must be filled up by the remaining trustees. In
other words, these remaining member-trustees must sit as a board in order to validly
elect the new ones.
x------------------------------x
Page 10 of 43
Lim v. Moldex Land, Inc.,
G.R. No. 206038, [January 25, 2017])
Lim is a unit owner of 1322 Golden Empire Tower (Golden Empire Tower), a
condominium project of Moldex Land, Inc. (Moldex). Condocor, a non-stock, non-profit
corporation, is the registered condominium corporation for the Golden Empire Tower.
Lim, as a unit owner of Golden Empire Tower, is a member of Condocor.
Lim claims that individual respondents are non-unit buyers, but all are members of the
Board of Directors of Condocor having been elected during its organizational meeting
in 2008.
Moldex became a member of Condocor on the basis of its ownership of the 220 unsold
units in the Golden Empire Tower. The individual respondents acted as its
representatives.
On July 21, 2012, Condocor held its annual general membership meeting. Only 29
of the 108 unit buyers were present. The declaration of quorum was based on the
presence of the majority of the voting rights, including those pertaining to the 220
unsold units held by Moldex through its representatives.
When the objection of Lim was denied, she and all the other unit owners present,
except for one, walked out and left the meeting. The Moldex representative
proceeded with the annual general membership meeting and elected the new
members of the Board of Directors for 2012-2013.
Page 11 of 43
Of these five (5) requirements, the existence of a quorum is crucial. Any act or
transaction made during a meeting without quorum is rendered of no force and effect,
thus, not binding on the corporation or parties concerned.
Section 52. Quorum in meetings. — Unless otherwise provided for in this Code
or in the by-laws, a quorum shall consist of the stockholders representing a
majority of the outstanding capital stock or a majority of the members in the
case of non-stock corporations.
The By-Laws of Condocor has no rule different from that provided in the Corporation
Code with respect the determination of the existence of a quorum. The quorum
during the July 21, 2012 meeting should have been majority of Condocor's members
in good standing. Accordingly, there was no quorum during the July 21, 2012
meeting considering that only 29 of the 108 unit buyers were present.
As there was no quorum, any resolution passed during the July 21, 2012 annual
membership meeting was null and void and, therefore, not binding upon the
corporation or its members. The meeting being null and void, the resolution and
disposition of other legal issues emanating from the null and void July 21, 2012
membership meeting has been rendered unnecessary.
To serve as a guide for the bench and the bar, however, the Court opts to discuss
and resolve the same:
Moldex may appoint a duly authorized representative: A corporation can act only
through natural persons duly authorized for the purpose or by a specific act of its board
of directors. Thus, in order for Moldex to exercise its membership rights and privileges,
it necessarily has to appoint its representatives.
Page 13 of 43
Xxx Prescinding therefrom, Moldex had the right to send duly authorized
representatives to represent it during the questioned general membership meeting.
This rule was reiterated in Section 92 of the Corporation Code, which states that x x x
No person shall be elected as trustee unless he is a member of the corporation. xxx
While Moldex may rightfully designate proxies or representatives, the latter, however,
cannot be elected as directors or trustees of Condocor. First, theCorporation
Code clearly provides that a director or trustee must be a member of record of the
corporation. Further, the power of the proxy is merely to vote. If said proxy is not a
member in his own right, he cannot be elected as a director or proxy.
x-----------------------------------x
What should be the basis of quorum for a stockholders' meeting — the outstanding
capital stock as indicated in the articles of incorporation or that contained in the
company's stock and transfer book?
In 1952, the Philippine Merchant Marine School, Inc. (PMMSI) was incorporated, with
seven hundred (700) founders' shares and seventy-six (76) common shares as its
initial capital stock subscription reflected in the articles of incorporation.
Dolores Onrubia, Elenita Nolasco, Juan O. Nolasco III, and the Estate of Faustina M.
Onrubia, and their predecessors who were in control of PMMSI registered the
company's stock and transfer book for the first time in 1978, recording thirty-three (33)
common shares as the only issued and outstanding shares of PMMSI. Sometime in
1979, a special stockholders' meeting was called and held on the basis of what was
considered as a quorum of twenty-seven (27) common shares, representing more than
two-thirds (2/3) of the common shares issued and outstanding.
In 1982, the heirs of one of the original incorporators, Juan Acayan, filed a petition with
the Securities and Exchange Commission (SEC) for the registration of their property
Page 14 of 43
rights over one hundred (120) founders' shares and twelve (12) common shares
owned by their father. The SEC hearing officer held that the heirs of Acayan were
entitled to the claimed shares and called for a special stockholders' meeting to elect a
new set of officers. The SEC En Banc affirmed the decision. As a result, the shares of
Acayan were recorded in the stock and transfer book.
On 06 May 1992, a special stockholders' meeting was held to elect a new set of
directors. Private respondents thereafter filed a petition with the SEC questioning the
validity of the 06 May 1992 stockholders' meeting, alleging that the quorum for the said
meeting should not be based on the 165 issued and outstanding shares as per the
stock and transfer book, but on the initial subscribed capital stock of seven hundred
seventy-six (776) shares, as reflected in the 1952 Articles of Incorporation. The SEC
directed the parties to call for a stockholders meeting on the basis of the stockholdings
reflected in the articles of incorporation for the purpose of electing a new set of officers
for the corporation. xxx
In the instant petition, petitioners Jesus V. Lanuza, Magadya Reyes, Bayani Reyes
and Ariel Reyes claim that the 1992 stockholders' meeting was valid and legal. They
submit that reliance on the 1952 articles of incorporation for determining the quorum
negates the existence and validity of the stock and transfer book which private
respondents themselves prepared. Xxx
The crucial issue in this case is whether it is the company's stock and transfer book,
or its 1952 Articles of Incorporation, which determines stockholders' shareholdings,
and provides the basis for computing the quorum.xxx
The articles of incorporation has been described as one that defines the charter of the
corporation and the contractual relationships between the State and the corporation,
the stockholders and the State, and between the corporation and its stockholders. Xxx
There is no gainsaying that the contents of the articles of incorporation are binding,
not only on the corporation, but also on its shareholders. In the instant case, the
articles of incorporation indicate that at the time of incorporation, the incorporators
were bona fide stockholders of seven hundred (700) founders' shares and seventy-six
(76) common shares. Hence, at that time, the corporation had 776 issued and
outstanding shares.
On the other hand, a stock and transfer book is the book which records the names
and addresses of all stockholders arranged alphabetically, the installments paid and
unpaid on all stock for which subscription has been made, and the date of payment
thereof; a statement of every alienation, sale or transfer of stock made, the date thereof
and by and to whom made; and such other entries as may be prescribed by law. A
stock and transfer book is necessary as a measure of precaution, expediency and
convenience since it provides the only certain and accurate method of establishing the
various corporate acts and transactions and of showing the ownership of stock and
like matters. However, a stock and transfer book, like other corporate books and
Page 15 of 43
records, is not in any sense a public record, and thus is not exclusive evidence of the
matters and things which ordinarily are or should be written therein. In fact, it is
generally held that the records and minutes of a corporation are not conclusive even
against the corporation but are prima facie evidence only, and may be impeached or
even contradicted by other competent evidence. Thus, parol evidence may be
admitted to supply omissions in the records or explain ambiguities, or to contradict
such records.
In 1980, Batas Pambansa Blg. 68, otherwise known as "The Corporation Code of the
Philippines" supplanted Act No. 1459. BP Blg. 68 xxx
Outstanding capital stock, on the other hand, is defined by the Code as:
Thus, quorum is based on the totality of the shares which have been subscribed and
issued, whether it be founders' shares or common shares. In the instant case, two
figures are being pitted against each other — those contained in the articles of
incorporation, and those listed in the stock and transfer book.
To base the computation of quorum solely on the obviously deficient, if not inaccurate
stock and transfer book, and completely disregarding the issued and outstanding
shares as indicated in the articles of incorporation would work injustice to the owners
and/or successors in interest of the said shares. This case is one instance where resort
to documents other than the stock and transfer books is necessary. The stock and
transfer book of PMMSI cannot be used as the sole basis for determining the quorum
as it does not reflect the totality of shares which have been subscribed, more so when
the articles of incorporation show a significantly larger amount of shares issued and
outstanding as compared to that listed in the stock and transfer book. As aptly stated
by the SEC in its Order dated 15 July 1996:
Page 16 of 43
that will change are the entries as to the owners of the shares but not as
to the amount of shares already subscribed.
This is precisely the reason why the Stock and Transfer Book was not
given probative value. Did the shares, which were not recorded in the
Stock and Transfer Book, but were recorded in the Articles of
Incorporation just vanish into thin air? . . . .
As shown above, at the time the corporation was set-up, there were already seven
hundred seventy-six (776) issued and outstanding shares as reflected in the articles
of incorporation. No proof was adduced as to any transaction effected on these shares
from the time PMMSI was incorporated up to the time the instant petition was filed,
except for the thirty-three (33) shares which were recorded in the stock and transfer
book in 1978, and the additional one hundred thirty-two (132) in 1982. But obviously,
the shares so ordered recorded in the stock and transfer book are among the shares
reflected in the articles of incorporation as the shares subscribed to by the
incorporators named therein.
One who is actually a stockholder cannot be denied his right to vote by the corporation
merely because the corporate officers failed to keep its records accurately. A
corporation's records are not the only evidence of the ownership of stock in a
corporation. In an American case, persons claiming shareholders status in a
professional corporation were listed as stockholders in the amendment to the articles
of incorporation. On that basis, they were in all respects treated as shareholders. In
fact, the acts and conduct of the parties may even constitute sufficient evidence of
one's status as a shareholder or member. In the instant case, no less than the articles
of incorporation declare the incorporators to have in their name the founders and
several common shares. Thus, to disregard the contents of the articles of incorporation
would be to pretend that the basic document which legally triggered the creation of the
corporation does not exist and accordingly to allow great injustice to be caused to the
incorporators and their heirs.
Special meetings of the board of directors or trustees may be held at any time
upon the call of the president or as provided in the by-laws.
Page 17 of 43
Lopez Realty, Inc. v. Spouses Tanjangco,
G.R. No. 154291, November 12, 2014
Lopez Realty, Inc. LRI and Dr. Jose Tanjangco (Jose) were the registered co-owners
of three parcels of land and the building erected thereon known as the "Trade Center
Building", which were covered by TCTs (subject properties). Jose's one-half share in
the subject properties were later transferred and registered in the name of his son
Reynaldo Tanjangco and daughter-in-law, Maria Luisa Arguelles (spouses
Tanjangco).
Except for Arturo and Teresita, the other stockholders were members of the Board of
Directors. Asuncion Lopez was LRI's Corporate Secretary.
July 27, 1981, a special meeting of the stockholders was held to discuss the sale of
the one-half share of LRI in the Trade Center Building based on the offer of the
Tanjangcos. Asuncion Lopez counter-offered and it was agreed by the body that
ASUNCION F. LOPEZ . . . be given the priority to accept [equal] the TANJANGCO
offer and the same to be exercised within ten (10 accept) days. Failure on her part to
act on the offer, the said offer will be deemed accepted.
Asuncion Lopez failed to exercise her option to purchase the subject properties within
the stated period. Thus, on August 17, 1981, while Asuncion was abroad, the
remaining directors convened in a special meeting, where Mr. ARTURO F. LOPEZ
was authorized by the Board to immediately negotiate with the Tanjangcos on the
matter of the latter's offer to purchase 1/2 of the Trade Center Building and in
connection therewith he is given full power and authority by the Board to carry out the
complete termination of the sale terms and conditions as embodied in the Resolution
of July 27, 1981 and in connection therewith is likewise authorized to sign for and in
behalf of Lopez Realty Incorporated.
Consequently, on November 4, 1981, LRI (via a derivative suit) and Asuncion filed
with the then Court of First Instance of Manila, a Complaint for annulment of sale,
cancellation of title, reconveyance and damages with prayer for the issuance of
temporary restraining order (TRO) and/or writ of preliminary injunction against the
spouses Tanjangco, Arturo and the Registrar of Deeds of Manila.
On July 30, 1982, the stockholders of LRI had a meeting where they voted to ratify
and confirm the sale of the subject properties to the spouses Tanjangco. xxx
Ruling: Ratification of the August 17, 1981 Board Resolution. The Court agrees
that the August 17, 1981 Board Resolution did not give Arturo the authority to act as
LRI's representative in the subject sale, as the meeting of the board of directors where
such was passed was conducted without giving any notice to Asuncion. Section 53 of
the Corporation Code provides for the following:
Page 18 of 43
SEC. 53. Regular and special meetings of directors or trustees. —
Regular meetings of the board of directors or trustees of every
corporation shall be held monthly, unless the by-laws provide
otherwise.
The Court took this matter up in Fontecha, involving herein parties, where it was held
that a meeting of the board of directors is legally infirm if there is failure to comply with
the requirements or formalities of the law or the corporation's by laws and any action
taken on such meeting may be challenged as a consequence:
However, the actions taken in such a meeting by the directors or trustees may be
ratified expressly or impliedly. "Ratification means that the principal voluntarily adopts,
confirms and gives sanction to some unauthorized act of its agent on its behalf. It is
this voluntary choice, knowingly made, which amounts to a ratification of what was
theretofore unauthorized and becomes the authorized act of the party so making the
ratification. The substance of the doctrine is confirmation after conduct, amounting to
a substitute for a prior authority. Ratification can be made either expressly or impliedly.
Implied ratification may take various forms — like silence or acquiescence, acts
showing approval or adoption of the act, or acceptance and retention of benefits
flowing therefrom." Xxx
In the present case, the ratification was expressed through the July 30, 1982 Board
Resolution. Asuncion claims that the July 30, 1982 Board Resolution did not ratify the
Board Resolution dated August 17, 1981 for lack of the required number of votes
because Juanito is not entitled to vote while Leo voted "no" to the ratification of the
sale even if the minutes stated otherwise.
Page 19 of 43
Asuncion assails the authority of Juanito to vote because he was not a director and he
did not own any share of stock which would qualify him to be one. On the contrary,
Juanito defends his right to vote as the representative of Teresita's estate. Upon
examination of the July 30, 1982 minutes of the meeting, it can be deduced that the
meeting is a joint stockholders and directors' meeting. The Court takes into account
that majority of the board of directors except for Asuncion, had already approved of
the sale to the spouses Tanjangco prior to this meeting. As a consequence, the power
to ratify the previous resolutions and actions of the board of directors in this case lies
in the stockholders, not in the board of directors. It would be absurd to require the
board of directors to ratify their own acts — acts which the same directors already
approved of beforehand. Hence, Juanito, as the administrator of Teresita's estate even
though not a director, is entitled to vote on behalf of Teresita's estate as the
administrator thereof. The Court reiterates its ruling in Tan v. Sycip, viz.:
Xxx In Dumlao, the Court ruled that the signing of the minutes by all the directors is
not a requisite and that the lack of signatures on the minutes does not mean that the
resolution was not passed by the board. However, there is a notable disparity between
the facts in Dumlao and the instant case. In Dumlao, the corporate secretary therein
recorded, prepared and certified the correctness of the minutes of the meeting despite
the fact that not all directors signed the minutes. In this case, it could not even be
established who recorded the minutes in view of Asuncion's refusal to do so, as
demonstrated during the cross examination of Benjamin by the petitioners' counsel
xxx
It is the signature of the corporate secretary, as the one who is tasked to prepare and
record the minutes, that gives the minutes of the meeting probative value and
credibility, as the Court explained in Dumlao, to wit:
Thus, without the certification of the corporate secretary, it is incumbent upon the other
directors or stockholders as the case may be, to submit proof that the minutes of the
meeting is accurate and reflective of what transpired during the meeting. Conformably
to the foregoing, in the absence of Asuncion's certification, only Juanito, Benjamin and
Rosendo, whose signatures appeared on the minutes, could be considered as to have
ratified the sale to the spouses Tanjangco.
Yet, notwithstanding the lack of Leo's signature to prove that he indeed voted in favor
of the ratification, the results are just the same for he owns one share of stock only.
Pitted against the shares of the other stockholders who voted in favor of ratification,
Asuncion and Leo were clearly outvoted:
In Cua, Jr., et al. v. Tan, et al., the Court held that by virtue of ratification, the acts of
the board of directors become the acts of the stockholders themselves, even if those
acts were, at the outset, unauthorized:
Section 54. Who shall preside at meetings. – The president shall preside at all
meetings of the directors or trustee as well as of the stockholders or members,
unless the by-laws provide otherwise. (n)
Section 57. Voting right for treasury shares. – Treasury shares shall have no
voting right as long as such shares remain in the Treasury. (n)
The trustee or trustees shall execute and deliver to the transferors voting trust
certificates, which shall be transferable in the same manner and with the same
effect as certificates of stock.
The voting trust agreement filed with the corporation shall be subject to
examination by any stockholder of the corporation in the same manner as any
other corporate book or record: Provided, That both the transferor and the
trustee or trustees may exercise the right of inspection of all corporate books
and records in accordance with the provisions of this Code.
Any other stockholder may transfer his shares to the same trustee or trustees
upon the terms and conditions stated in the voting trust agreement, and
thereupon shall be bound by all the provisions of said agreement.
No voting trust agreement shall be entered into for the purpose of circumventing
the law against monopolies and illegal combinations in restraint of trade or used
for purposes of fraud.
Unless expressly renewed, all rights granted in a voting trust agreement shall
automatically expire at the end of the agreed period, and the voting trust
certificates as well as the certificates of stock in the name of the trustee or
trustees shall thereby be deemed cancelled and new certificates of stock shall
be reissued in the name of the transferors.
The voting trustee or trustees may vote by proxy unless the agreement provides
otherwise. (36a)
TITLE VII
STOCKS AND STOCKHOLDERS
Section 60. Subscription contract. – Any contract for the acquisition of unissued
stock in an existing corporation or a corporation still to be formed shall be
Page 23 of 43
deemed a subscription within the meaning of this Title, notwithstanding the fact
that the parties refer to it as a purchase or some other contract. (n)
Section 62. Consideration for stocks. – Stocks shall not be issued for a
consideration less than the par or issued price thereof. Consideration for the
issuance of stock may be any or a combination of any two or more of the
following:
Shares of stock shall not be issued in exchange for promissory notes or future
service.
The same considerations provided for in this section, insofar as they may be
applicable, may be used for the issuance of bonds by the corporation.
The issued price of no-par value shares may be fixed in the articles of
incorporation or by the board of directors pursuant to authority conferred upon
it by the articles of incorporation or the by-laws, or in the absence thereof, by
the stockholders representing at least a majority of the outstanding capital
stock at a meeting duly called for the purpose. (5 and 16)
Page 24 of 43
Section 63. Certificate of stock and transfer of shares. – The capital stock of
stock corporations shall be divided into shares for which certificates signed by
the president or vice president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation shall be issued in
accordance with the by-laws. Shares of stock so issued are personal property
and may be transferred by delivery of the certificate or certificates indorsed by
the owner or his attorney-in-fact or other person legally authorized to make the
transfer. No transfer, however, shall be valid, except as between the parties,
until the transfer is recorded in the books of the corporation showing the names
of the parties to the transaction, the date of the transfer, the number of the
certificate or certificates and the number of shares transferred.
No shares of stock against which the corporation holds any unpaid claim shall
be transferable in the books of the corporation. (35)
Guy v. Guy,
G.R. No. 184068, April 19, 2016
GCI is a family-owned corporation of the Guy family duly organized and existing
under Philippine laws. Simny G. Guy (Simny) is a stockholder of record and
member of the board of directors of the corporation. Respondents Gilbert G.
Guy, Alvin Agustin T. Ignacio. et. al are also GCI stockholders of record who
were allegedly elected as new directors by virtue of the assailed stockholders'
meeting held on 7 September 2004.
NOTICE OF MEETING
Page 25 of 43
The newly elected Board of Directors may meet thereafter for the
purposes, among others, of election and appointment of officers, and
consideration of such other matters as may arise during the meeting.
On 30 September 2004, Simny, for himself and on behalf of GCI and Grace
Guy Cheu (Cheu), filed a Complaint against respondents before the RTC of
Manila for the "Nullification of Stockholders' Meeting and Election of Directors,
Nullification of Acts and Resolutions, Injunction and Damages with Prayer for
Temporary Restraining Order and/or Writ of Preliminary Injunction."
Page 26 of 43
Notice of any meeting may be waived, expressly or impliedly, by any
stockholder or member.
Under the by-laws of GCI, the notice of meeting shall be mailed not less than
five (5) days prior to the date set for the special meeting. The pertinent provision
reads:
The Corporation Code itself permits the shortening (or lengthening) of the
period within which to send the notice to call a special (or regular) meeting.
Thus, no irregularity exists in the mailing of the notice sent by respondent Gilbert
G. Guy on 2 September 2004 calling for the special stockholders' meeting to be
held on 7 September 2004, since it abides by what is stated in GCI's by-laws
as quoted above.
Simny avers that although the notice was sent by registered mail on 2
September 2004, the registry return card shows that he received it only on 22
September 2004 or fifteen (15) days after the stockholders' meeting was
Page 27 of 43
held. He insists that actual receipt of the notice of the stockholders' meeting
prior to the date of the meeting is mandatory. X x x
The provisions under Section 50 of the Corporation Code and the by-laws of
GCI are clear and unambiguous. They do not admit of two or more meanings,
nor do they make reference to two or more things at the same time. The
provisions only require the sending/mailing of the notice of a stockholders'
meeting to the stockholders of the corporation. Sending/mailing is different from
filing or service under the Rules of Court. Had the lawmakers intended to
include the stockholder's receipt of the notice, they would have clearly reflected
such requirement in the law. Absent that requirement, the word "send" should
be understood in its plain meaning . . . Clearly, respondents are only mandated
to notify petitioner by depositing in the mail the notice of the stockholders'
special meeting, with postage or cost of transmission provided and the name
and address of the stockholder properly specified. X x x
As correctly pointed out by Gilbert Guy, the applicable provisions of the by-laws
of Goodland are Article II, Sec. 2 which provides that the "special meeting of the
stockholders may be called . . . by order of the President and must be called
upon the written request of stockholders registered as the owners of one-third
(1/3) of the total outstanding stock and Article IV, Section 3 which provides that
"the Vice President, if qualified, shall exercise all of the functions and perform all
the duties of the President, in the absence or disability, for any cause, of the
latter."
Based on the evidence on record (the President was suffering from Alzheimer’s)
and considering the above quoted provisions of Goodland's By-laws, the RTC
and CA ruled in favor of Gilbert Guy.
The CA, in affirming the RTC ruling, further said: The evidence
conclusively show that defendant Gilbert [respondent Guy] is the owner
of more than one-third (1/3) of the outstanding stock of Goodland. In fact,
it is around 79.99%. Thus, pursuant to Art. II, Sec. 2 of the By-laws of
Goodland, defendant Gilbert [respondent Guy] may validly call such
special stockholders' meeting. (Emphasis supplied)
Da
Page 28 of 43
officers as may be provided for in the by-laws. Any two (2) or more positions
may be held concurrently by the same person, except that no one shall act as
president and secretary or as president and treasurer at the same time.
We, therefore, find no reversible error either in the CA or in the RTC Decision
after finding that notice of the special stockholders' meeting was properly issued
and the meeting properly called by respondent Gilbert.
Cheu was not a stockholder of record of GCI and was therefore not
entitled to any notice of meeting: Simny also asserts that the special
stockholders' meeting on 7 September 2004 was invalid for lack of due notice
to Grace Cheu, allegedly a stockholder of record of GCI. She was considered
as such for having been in possession of the stock certificates of stockholders
Paulino Delfin Pe and Benjamin Lim.
Page 29 of 43
SECTION 63. Certificate of Stock and Transfer of Shares. — The capital
stock of stock corporations shall be divided into shares for which
certificates signed by the president or vice-president, countersigned by
the secretary or assistant secretary, and sealed with the seal of the
corporation shall be issued in accordance with the by-laws. Shares of
stock so issued are personal property and may be transferred by delivery
of the certificate or certificates indorsed by the owner or his attorney-in-
fact or other person legally authorized to make the transfer. No transfer,
however, shall be valid, except as between the parties, until the
transfer is recorded in the books of the corporation so as to show
the names of the parties to the transaction, the date of the transfer,
the number of the certificate or certificates and the number of
shares transferred. (Emphasis supplied)
The Court affirmed this provision in Batangas Laguna Tayabas Bus Company,
Inc. v. Bitanga:
Page 30 of 43
Section 3. Certificates of stock may be sold, transferred or
hypot[h]ecated by indorsement or separate deed, but the corporation
shall not consider any transfer effective until the indorsed
certificate is submitted for cancellation and a new one issued in the
name of the transferee. (Emphasis supplied)
Based on the foregoing, the RTC and the CA found that Cheu was not a
stockholder of record of GCI. Hence, she was not entitled to be notified of the
subject special stockholders' meeting.
Clearly then, the evidence presented by Cheu to prove that she was a
stockholder of record — valid, existing and uncancelled Goodland Stock
Certificate Nos. 49, 50, 58 and 59 in the names of Paulino Delfin Pe and
Benjamin C. Lim — does not satisfy the requirements imposed by
the Corporation Code and the by-laws of GCI.
x---------------------------------x
Page 31 of 43
A 'transfer' is the act by which the owner of a thing delivers it to another with
the intent of passing the rights which he has in it to the latter, and a chattel
mortgage is not within the meaning of such term.
Andaya bought from Chute 2,200 shares of stock in the Rural Bank of Cabadbaran for
P220,000. The transaction was evidenced by a notarized document denominated as
Sale of Shares of Stocks. Chute duly endorsed and delivered the certificates of stock
to Andaya and, subsequently, requested the bank to register the transfer and issue
new stock certificates in favor of the latter.
The bank's corporate secretary refused to register the transfer due to a previous
stockholders' Resolution, wherein existing stockholders were given a right of first
refusal.
The bank eventually denied the request of Andaya. It reasoned that he had a conflict
of interest, as he was then president and chief executive officer of the Green Bank of
Caraga, a competitor bank. Respondent bank concluded that the purchase of shares
was not in good faith, and that the purchase "could be the beginning of a hostile bid to
take-over control of the [Rural Bank of Cabadbaran]." Citing Gokongwei v. Securities
and Exchange Commission, respondent insisted that it may refuse to accept a
competitor as one of its stockholders. It also maintained that Chute should have first
offered her shares to the other stockholders, as agreed upon during the 2001
stockholders' meeting.
Thus, in Pacific Basin Securities Co., Inc. v. Oriental Petroleum and Minerals Corp.,
this Court stressed that the registration of a transfer of shares is ministerial on the part
of the corporation:
Page 32 of 43
Clearly, the right of a transferee/assignee to have stocks transferred to
his name is an inherent right flowing from his ownership of the stocks.
The Court had ruled in Rural Bank of Salinas, Inc. v. Court of Appeals
that the corporation's obligation to register is ministerial, citing Fletcher,
to wit:
The Court further held in Rural Bank of Salinas that the only limitation
imposed by Section 63 of the Corporation Code is when the corporation
holds any unpaid claim against the shares intended to be transferred.
Consequently, transferees of shares of stock are real parties in interest having a cause
of action for mandamus to compel the registration of the transfer and the
corresponding issuance of stock certificates.
xxx Both parties refer to Section 98 of the Corporation Code to support their
arguments, which reads as follows:
SECTION 98. Validity of restrictions on transfer of shares. —
Restrictions on the right to transfer shares must appear in the articles of
incorporation and in the by-laws as well as in the certificate of stock;
otherwise, the same shall not be binding on any purchaser thereof in
good faith. Said restrictions shall not be more than onerous than granting
the existing stockholders or the corporation the option to purchase the
shares of the transferring stockholder with such reasonable terms,
conditions or period stated therein. If upon the expiration of said period,
the existing stockholders or the corporation fails to exercise the option
to purchase, the transferring stockholder may sell his shares to any third
person. (Emphases supplied)
It must be noted that Section 98 applies only to close corporations. Hence, before the
Court can allow the operation of this section in the case at bar, there must first be a
factual determination that respondent Rural Bank of Cabadbaran is indeed a close
corporation. There needs to be a presentation of evidence on the relevant restrictions
in the articles of incorporation and bylaws of the said bank. From the records or the
RTC Decision, there is apparently no such determination or even allegation that would
assist this Court in ruling on these two major factual matters. With the foregoing, the
validity of the transfer cannot yet be tested using that provision. These are the factual
matters that the parties must first thresh out before the RTC.
Page 33 of 43
Section 65. Liability of directors for watered stocks. – Any director or officer of
a corporation consenting to the issuance of stocks for a consideration less than
its par or issued value or for a consideration in any form other than cash, valued
in excess of its fair value, or who, having knowledge thereof, does not forthwith
express his objection in writing and file the same with the corporate secretary,
shall be solidarily, liable with the stockholder concerned to the corporation and
its creditors for the difference between the fair value received at the time of
issuance of the stock and the par or issued value of the same. (n)
Section 66. Interest on unpaid subscriptions. – Subscribers for stock shall pay
to the corporation interest on all unpaid subscriptions from the date of
subscription, if so required by, and at the rate of interest fixed in the by-laws. If
no rate of interest is fixed in the by-laws, such rate shall be deemed to be the
legal rate. (37)
Page 34 of 43
Zenaida V. Yu 2,000 P20,000.00 P5,000.00
Rizalino C. Viñeza 2,000 P20,000.00 P5,000.00
—————— ——————— ————————
TOTAL 75,000 P750,000.00 P187,500.00
===== ========= ==========
BMPI placed with Printwell several orders on credit totaling P316,342.76 of which
BMPI paid only P25,000.00. Printwell sued BMPI for the collection of the unpaid
balance of P291,342.76 in the RTC. Printwell then amended the complaint in order to
implead as defendants all the original stockholders and incorporators to recover on
their unpaid subscriptions.
The RTC rendered a decision in favor of Printwell, rejecting the allegation of payment
in full of the subscriptions in view of an irregularity in the issuance of the ORs and
observing that the defendants had used BMPI's corporate personality to evade
payment and create injustice. The CA upheld the RTC. Xxx
Halley submits that she had no participation in the transaction between BMPI and
Printwell; that BMPI acted on its own; and that she had no hand in persuading BMPI
to renege on its obligation to pay. Hence, she should not be personally liable. We rule
against the petitioner's submission.
Although a corporation has a personality separate and distinct from those of its
stockholders, directors, or officers, such separate and distinct personality is merely a
fiction created by law for the sake of convenience and to promote the ends of
justice. The corporate personality may be disregarded, and the individuals composing
the corporation will be treated as individuals, if the corporate entity is being used as a
cloak or cover for fraud or illegality; as a justification for a wrong; as an alter ego, an
adjunct, or a business conduit for the sole benefit of the stockholders. As a general
rule, a corporation is looked upon as a legal entity, unless and until sufficient reason
to the contrary appears. Thus, the courts always presume good faith, and for that
reason accord prime importance to the separate personality of the corporation,
disregarding the corporate personality only after the wrongdoing is first clearly and
convincingly established. It thus behooves the courts to be careful in assessing the
milieu where the piercing of the corporate veil shall be done.
Page 35 of 43
Although nowhere in Printwell's amended complaint or in the testimonies Printwell
offered can it be read or inferred from that the petitioner was instrumental in
persuading BMPI to renege on its obligation to pay; or that she induced Printwell to
extend the credit accommodation by misrepresenting the solvency of BMPI to
Printwell, her personal liability, together with that of her co-defendants, remained
because the CA found her and the other defendant stockholders to be in charge of the
operations of BMPI at the time the unpaid obligation was transacted and incurred, to
wit:
It follows, therefore, that whether or not the petitioner persuaded BMPI to renege on
its obligations to pay, and whether or not she induced Printwell to transact with BMPI
were not good defenses in the suit.
Unpaid creditor may satisfy its claim from unpaid subscriptions; stockholders
must prove full payment of their subscriptions. Both the RTC and the CA applied
the trust fund doctrine against the defendant stockholders, including the petitioner.
The petitioner argues, however, that the trust fund doctrine was inapplicable because
she had already fully paid her subscriptions to the capital stock of BMPI. She thus
insists that both lower courts erred in disregarding the evidence on the complete
payment of the subscription, like receipts, income tax returns, and relevant financial
statements.
The petitioner's argument is devoid of substance. The trust fund doctrine enunciates
. . . rule that the property of a corporation is a trust fund for the payment of creditors,
but such property can be called a trust fund 'only by way of analogy or metaphor.' As
Page 36 of 43
between the corporation itself and its creditors it is a simple debtor, and as between
its creditors and stockholders its assets are in equity a fund for the payment of its
debts.
The trust fund doctrine, first enunciated in the American case of Wood v.
Dummer, was adopted in our jurisdiction in Philippine Trust Co. v. Rivera, 34 where
this Court declared that:
We clarify that the trust fund doctrine is not limited to reaching the
stockholder's unpaid subscriptions. The scope of the doctrine when the
corporation is insolvent encompasses not only the capital stock, but also other
property and assets generally regarded in equity as a trust fund for the payment
of corporate debts. All assets and property belonging to the corporation held in
trust for the benefit of creditors that were distributed or in the possession of the
stockholders, regardless of full payment of their subscriptions, may be reached
by the creditor in satisfaction of its claim.
Also, under the trust fund doctrine, a corporation has no legal capacity to release an
original subscriber to its capital stock from the obligation of paying for his shares, in
whole or in part, without a valuable consideration, or fraudulently, to the prejudice of
creditors. The creditor is allowed to maintain an action upon any unpaid subscriptions
and thereby steps into the shoes of the corporation for the satisfaction of its debt. To
make out a prima facie case in a suit against stockholders of an insolvent corporation
to compel them to contribute to the payment of its debts by making good unpaid
balances upon their subscriptions, it is only necessary to establish that the
stockholders have not in good faith paid the par value of the stocks of the
corporation. Xxx
To reiterate, the petitioner was liable pursuant to the trust fund doctrine for the
corporate obligation of BMPI by virtue of her subscription being still unpaid. Printwell,
as BMPI's creditor, had a right to reach her unpaid subscription in satisfaction of its
claim.
Page 37 of 43
Interest is also imposable on the unpaid obligation. Absent any stipulation, interest is
fixed at 12% per annum from the date the amended complaint was filed on February
8, 1990 until the obligation (i.e., to the extent of the petitioner's personal liability of
P262,500.00) is fully paid.
Section 68. Delinquency sale. – The board of directors may, by resolution, order
the sale of delinquent stock and shall specifically state the amount due on each
subscription plus all accrued interest, and the date, time and place of the sale
which shall not be less than thirty (30) days nor more than sixty (60) days from
the date the stocks become delinquent.
Notice of said sale, with a copy of the resolution, shall be sent to every
delinquent stockholder either personally or by registered mail. The same shall
furthermore be published once a week for two (2) consecutive weeks in a
newspaper of general circulation in the province or city where the principal
office of the corporation is located.
Unless the delinquent stockholder pays to the corporation, on or before the date
specified for the sale of the delinquent stock, the balance due on his
subscription, plus accrued interest, costs of advertisement and expenses of
sale, or unless the board of directors otherwise orders, said delinquent stock
shall be sold at public auction to such bidder who shall offer to pay the full
amount of the balance on the subscription together with accrued interest, costs
of advertisement and expenses of sale, for the smallest number of shares or
fraction of a share. The stock so purchased shall be transferred to such
purchaser in the books of the corporation and a certificate for such stock shall
be issued in his favor. The remaining shares, if any, shall be credited in favor of
the delinquent stockholder who shall likewise be entitled to the issuance of a
certificate of stock covering such shares.
Should there be no bidder at the public auction who offers to pay the full amount
of the balance on the subscription together with accrued interest, costs of
advertisement and expenses of sale, for the smallest number of shares or
fraction of a share, the corporation may, subject to the provisions of this Code,
bid for the same, and the total amount due shall be credited as paid in full in the
books of the corporation. Title to all the shares of stock covered by the
subscription shall be vested in the corporation as treasury shares and may be
disposed of by said corporation in accordance with the provisions of this Code.
(39a-46a)
Valley Golf & Country Club (Valley Golf) is a duly constituted non-stock, non-profit
corporation which operates a golf course. The members and their guests are entitled
to play golf on the said course and otherwise avail of the facilities and privileges
Page 38 of 43
provided by Valley Golf. The shareholders are likewise assessed monthly membership
dues.
In 1961, the late Congressman Fermin Z. Caram, Jr. (Caram), the husband of the
respondent Rosa Vda de Caram, subscribed to, purchased and paid for in full, one
share (Golf Share) in the capital stock of Valley Golf. He was issued Stock Certificate
No. 389 dated 26 January 1961 for the Golf Share. The Stock Certificate likewise
indicates a par value of P9,000.00.
Beginning 25 January 1980, Caram stopped paying his monthly dues, which were
continually assessed until 31 June 1987.
Valley Golf claims to have sent five (5) letters to Caram concerning his delinquent
account within the period from 27 January 1986 until 3 May 1987. xxx The final letter,
dated 3 May 1987, issued a final deadline until 31 May 1987 for Caram to settle his
account, or otherwise face the sale of the Golf Share to satisfy the claims of Valley
Golf.
The Golf Share was sold at public auction on 11 June 1987 for P25,000.00 after the
Board of Directors had authorized the sale in a meeting on 11 April 1987, and the
Notice of Auction Sale was published in the 6 June 1987 edition of the Philippine Daily
Inquirer.
As it turned out, Caram had died on 6 October 1986. Respondent initiated intestate
proceedings before the Regional Trial Court (RTC) of Iloilo City, Branch 35, to settle
her husband's estate and the Golf Share was adjudicated to respondent, who paid the
corresponding estate tax due, including that on the Golf Share.
It was only through a letter dated 15 May 1990 that the heirs of Caram learned of the
sale of the Golf Share following their inquiry with Valley Golf about the share.
Respondent filed an action for reconveyance of the share with damages before the
Securities and Exchange Commission (SEC) against Valley Golf.
Ruling: As found by the SEC and the Court of Appeals, the Articles of Incorporation of
Valley Golf does not contain any provision authorizing the corporation to create any
lien on a member's Golf Share as a consequence of the member's unpaid
assessments or dues to Valley Golf. Before this Court, Valley Golf asserts that such a
provision is contained in its by-laws. We required the parties to submit a certified copy
of the by-laws of Valley Golf in effect as of 11 June 1987. 29 In compliance, Valley
Golf submitted a copy of its by-laws, originally adopted on 6 June 1958 30 and
amended on 26 November 1986. The amendments bear no relevance to the issue of
delinquent membership dues. The relevant provisions, found in Article VIII entitled
"Club Accounts", are reproduced below:
Section 1. Lien. — The Club has the first lien on the share of the
stockholder who has, in his/her/its name, or in the name of an assignee,
Page 39 of 43
outstanding accounts and liabilities in favor of the Club to secure the
payment thereof.
To bolster its cause, Valley Golf proffers the proposition that by virtue of the by-law
provisions a lien is created on the shares of its members to ensure payment of dues,
charges and other assessments on the members. Both the SEC and the Court of
Appeals debunked the tenability or applicability of the proposition through two common
thrusts.
Firstly, they correctly noted that the procedure under Section 67 of the Corporation
Code for the stock corporation's recourse on unpaid subscriptions is inapt to a non-
stock corporation vis-à-vis a member's outstanding dues. The basic factual backdrops
in the two situations are disperate. * In the latter, the member has fully paid for his
membership share, while in the former, the stockholder has not yet fully paid for the
share or shares of stock he subscribed to, thereby authorizing the stock corporation
to call on the unpaid subscription, declare the shares delinquent and subject the
delinquent shares to a sale at public auction.
Secondly, the two bodies below concluded that following Section 6 of the Corporation
Code, which provides:
the lien on the Golf Share in favor of Valley Golf is not valid, as the
power to constitute such a lien should be provided in the articles of
incorporation, and not merely in the by-laws.
Page 40 of 43
However, there is a specific provision under the Title XI, on Non-Stock Corporations
of the Corporation Code dealing with termination of membership. Section 91 of the
Corporation Code provides:
Clearly, the right of a non-stock corporation such as Valley Golf to expel a member
through the forfeiture of the Golf Share may be established in the by-laws alone, as is
the situation in this case. Thus, both the SEC and the appellate court are wrong in
holding that the establishment of a lien and the loss of the Golf Share consequent to
the enforcement of the lien should have been provided for in the articles of
incorporation.
Given that the cause for termination of membership in a non-stock corporation may be
established through the by-laws alone and need not be set forth in the articles of
incorporation, is there any cause to invalidate the lien and the subsequent sale of the
Golf Share by Valley Golf?
Section 72. Rights of unpaid shares. – Holders of subscribed shares not fully
paid which are not delinquent shall have all the rights of a stockholder. (n)
2. After verifying the affidavit and other information and evidence with the
books of the corporation, said corporation shall publish a notice in a
newspaper of general circulation published in the place where the
corporation has its principal office, once a week for three (3) consecutive
weeks at the expense of the registered owner of the certificate of stock
which has been lost, stolen or destroyed. The notice shall state the name
of said corporation, the name of the registered owner and the serial number
of said certificate, and the number of shares represented by such
certificate, and that after the expiration of one (1) year from the date of the
last publication, if no contest has been presented to said corporation
regarding said certificate of stock, the right to make such contest shall be
Page 42 of 43
barred and said corporation shall cancel in its books the certificate of stock
which has been lost, stolen or destroyed and issue in lieu thereof new
certificate of stock, unless the registered owner files a bond or other
security in lieu thereof as may be required, effective for a period of one (1)
year, for such amount and in such form and with such sureties as may be
satisfactory to the board of directors, in which case a new certificate may
be issued even before the expiration of the one (1) year period provided
herein: Provided, That if a contest has been presented to said corporation
or if an action is pending in court regarding the ownership of said certificate
of stock which has been lost, stolen or destroyed, the issuance of the new
certificate of stock in lieu thereof shall be suspended until the final decision
by the court regarding the ownership of said certificate of stock which has
been lost, stolen or destroyed.
Except in case of fraud, bad faith, or negligence on the part of the corporation
and its officers, no action may be brought against any corporation which shall
have issued certificate of stock in lieu of those lost, stolen or destroyed
pursuant to the procedure above-described. (R.A. 201a)
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