business policies and is responsible for the efficiency of management.
The
Cebu Mactan Members Center, Inc. vs. Masahiro Tsukahara,
FACTS:
Cebu Mactan Members Center, Inc. (CMMCI) denied the borrowing obtain
by its President and Chairman of the Board (Mitsumasa Sugimoto) from
Masahiro Tsukahara. CMMCI claimed that the loans obtained by the CMMCI
President were his personal loans. CMMCI also contended that if the loans
were those of CMMCI, the same should have been supported by resolutions
issued by CMMCI’s board of directors.
It appears that on February 1994, the CMMCI President, purportedly on
behalf of CMMCI, obtained a loan amounting to P6,500,000 from Tsukahara.
As payment for the loan, CMMCI issued seven postdated checks
of CMMCI payable to Tsukahara. On 13 April 1994, Sugimoto, again
purportedly on behalf of CMCI, obtained another loan amounting to
P10,000,000 from Tsukahara. Sugimoto executed and signed a promissory
note in his capacity as CMMCI President and Chairman, as well as in his
personal capacity.
Upon maturity, the seven checks were presented for payment by Tsukahara,
but the same were dishonored by PNB, the drawee bank. After several failed
attempts to collect the loan amount totaling P16,500,000, Tsukahara filed a
case for collection of sum of money against CMMCI and Sugimoto with the
Regional Trial Court.
Tsukahara alleged that the amount of P16,500,000 was used by CMMCI for
the improvement of its beach resort, which included the construction of a
wave fence, the purchase of airconditioners and curtains, and the provision
of salaries of resort employees. He also asserted that Sugimoto, as the
President of CMMCI, “has the power to borrow money for said corporation
by any legal means whatsoever and to sign, endorse and deliver all checks
and promissory notes on behalf of the corporation.”
The Regional Trial Court ruled in favor of Tsukahara. The Court of Appeals
affirmed.
ISSUE: Whether the CMMCI President is given the power under CMMCI’s by-
laws to borrow money, execute contracts, and sign and indorse checks and
promissory notes, in the name and on behalf of CMMCI.
RULING:
A corporation, being a juridical entity, may act through its board of directors,
which exercises almost all corporate powers, lays down all corporate
general rule is that, in the absence of authority from the board of directors,
no person, not even its officers, can validly bind a corporation.
In this case, the corporate by-laws of CMMCI provide:
ARTICLE III
Officers
2. President. The President shall be elected by the Board of Directors from
their own number. He shall have the following powers and duties: x x x
c. Borrow money for the company by any legal means whatsoever, including
the arrangement of letters of credit and overdrafts with any and all banking
institutions;
d. Execute on behalf of the company all contracts and agreements which the
said company may enter into;
e. Sign, indorse, and deliver all checks, drafts, bill of exchange, promissory
notes and orders of payment of sum of money in the name and on behalf of
the corporation;
It is clear from the foregoing that the president of CMMCI is given the power
to borrow money, execute contracts, and sign and indorse checks and
promissory notes, in the name and on behalf of CMMCI. With such powers
expressly conferred under the corporate by-laws, the CMMCI president, in
exercising such powers, need not secure a resolution from the company’s
board of directors.
Loyola Grand Villas Homeowners (South) Association, Inc. vs. Court of
Appeals, 276 SCRA 681, August 7, 1997
FACTS
(LGVHAI) was organized as the association of homeowners and
residents of the Loyola Grand Villas. It was registered with the Home
Financing Corporation homeowners' association for Loyola Grand Villas
(which eventually became Home Insurance Guarantee Corporation.
However, the association was not able file its corporate by-laws. officers of
LGVHAI then tried to registered its By-Laws in 1988, but they failed to do so.
They also discovered that there were two other organizations within the
subdivision - the Loyola Grand Villas Homeowners (North) Association, Inc.
[North Association] and herein Petitioner Loyola Grand Villas Homeowners
(South) Association, Inc. ["South Association].
Upon inquiry, it was discovered that LGVHAI was dissolved for its
failure to submit its by-laws within the period required by the Corporation
Code and for its non-user of corporate charter because HIGC had not
received any report on the association's activities. These paved the way for
the formation of the North and South Associations. Petitioner then lodged a
complaint and questioned the revocation of its registration. Hearing Officer
Javier ruled in favor of LGVHAI, revoking the registration of the North and
South Associations. Petitioner South Association appealed the ruling,
contending that LGVHAI's failure to file its by-laws within the period
prescribed by Section 46 of the Corporation Code effectively automatically
dissolved the corporation. CA affirmed the Resolution of the HIGC Appeals
Board. The South Association filed the petition for review on certiorari.
ISSUE
WON the LGVHAI's failure to file its by-laws within the period
prescribed by Section 46 of the Corporation Code had the effect of
automatically dissolving the said corporation.
RULING
No. Automatic corporate dissolution for failure to file the by-laws on
time was never the intention of the legislature. Section 46 reveals the
legislative intent to attach a directory, and not mandatory, meaning for the
word ''must" in the first sentence thereof. The second paragraph of the law
which allows the filing of the by-laws even prior to incorporation. This
provision in the same section of the Code rules out mandatory compliance
with the requirement of filing the by-laws "within 1 month after receipt of
official notice of the issuance of its certificate of incorporation by the
Securities and Exchange Commission."
Even under the foregoing express grant of power and authority,
there can be no automatic corporate dissolution simply because the
incorporators failed to abide by the required filing of by-laws embodied in
Section 46 of the Corporation Code. There is no outright “demise” of
corporate existence. Proper notice and hearing are cardinal components of
due process in any democratic institution, agency or society. In other words,
the incorporators must be given the chance to explain their neglect or
omission and remedy the same. As the “rules and regulations or private laws
enacted by the corporation to regulate, govern and control its own actions,
affairs and concerns and its stockholders or members and directors and
officers with relation thereto and among themselves in their relation to it,”
by-laws are indispensable to corporations in this jurisdiction. These may not
be essential to corporate birth but certainly, these are required by law for an
orderly governance and management of corporations. Nonetheless, failure
to file them within the period required by law by no means tolls the
automatic dissolution of a corporatio
Fleischer vs Nolasco
Facts: Manuel Gonzalez was the original owner of the five shares of stock in
question of the Botica Nolasco, Inc. He assigned and delivered said five
shares to the plaintiff, Henry Fleischer, by accomplishing the form of
endorsement provided together with other credits, in consideration of a
large sum of money owed by Gonzalez to Fleischer. Dr. Eduardo Miciano,
who was the secretary-treasurer of said corporation, then offered to buy
from Henry Fleischer, on behalf of the corporation, said shares of stock, at
their par value of P100 a share, for P500. The by-laws of Botica Nolasco, Inc.
states that the said corporation have the preferential right to buy from
Manuel Gonzalez said shares. The plaintiff refused to sell them to the
defendant and the former requested Doctor Miciano to register said shares
in his name but the latter refused to do so, saying that it would be in
contravention of the by-laws of the corporation.
Later on, two days after the assignment of the shares to the plaintiff, Manuel
Gonzales made a written statement to the Botica Nolasco, Inc., requesting
that the five shares of stock sold by him to Henry Fleischer be noted
transferred to Fleischer's name. He also acknowledged in said written
statement the preferential right of the corporation to buy said five shares.
Gonzalez then wrote a letter to the Botica Nolasco, withdrawing and
cancelling his written statement, to which letter the Botica Nolasco replied,
declaring that his written statement was in conformity with the by-laws of
the corporation. They contend that his letter was of no effect, and that the
shares in question had been registered in the name of the Botica Nolasco,
Inc. Questioned article 12 creates in favor of the Botica Nolasco, Inc., a
preferential right to buy, under the same conditions, the share or shares of
stock of a retiring shareholder.
Issue: Whether or not article 12 of the by-laws of the corporation is in
conflict with the provisions of the Corporation Law
Held: Yes. Section 13, paragraph 7, empowers a corporation to make by-
laws, not inconsistent with any existing law, for the transferring of its stock.
It states that a corporation relating to transfer of stock should be in harmony
with the law on the subject of transfer of stock. The law on this subject is
found in section 35 of Act No. 1459 which provides that the shares of
stock "are personal property and may be transferred by delivery of the
certificate indorsed by the owner, etc." Said section 35 defines the nature,
character and transferability of shares of stock. Under said section they are
personal property and may be transferred as therein provided and does not
have restriction as to whom they may be transferred or sold. The by-law
now in question was adopted under the power conferred upon the
corporation by section 13, paragraph 7, above quoted; but in adopting said
by-law the corporation has transcended the limits fixed by law in the same
section, and has not taken into consideration the provisions of section 35 of
Act No. 1459.
As a 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. 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.
ENRIQUE SALAFRANCA, petitioner, vs. PHILAMLIFE (PAMPLONA) VILLAGE,
HOMEOWNERS ASSOCIATION, INC., BONIFACIO DAZO and THE
SECOND DIVISION, NATIONAL LABOR RELATIONS COMMISSION
(NLRC), respondents.
Facts:
In 1981, Enrique Salafranca was hired as an administrative officer by the
Philamlife Village Homeowners Associaiton, Inc. (PVHAI). Salafranca was
tasked to manage the village’s day to day activities. His employment was
originally for 6 months only but his contract was renewed multiple times
until 1983. But even after 1983, he was still allowed to continue work even
without a renewed contract. In 1987, PVHAI amended its by-laws. Among
the amendment was a provision that the administrative officer (Salafranca)
shall have a tenure which is co-terminus with the Board of Directors which
appointed him. In 1992, the tenure of said Board of Directors expired and so
Salafranca was terminated.
Issue:Whether or not Salafranca was illegally dismissed.
Ruling:Yes. At that time, Salafranca already enjoys security of tenure
because he is already a regular employee. It is true that PVHAI has the right
to amend its by-laws but such amendment must not impair existing
contracts or rights. In this case, the provision that Salafranca’s position shall
be co-terminus with the appointing Board impairs his right to security of
tenure which has already vested even prior to the amendment of the by-
laws in 1987.
BARRETTO VS. LA PREVISORA FILIPINA
Facts: This is an appeal from a decision rendered by the Court of First
Instance of Manila, ordering the defendant corporation to pay to each of the
three plaintiffs the amount of P507.02, including interest thereon from May
2, 1930, to date of payment, with costs.
The action which gave rise to this appeal was brought by Alberto Barretto,
Jose de Amusategui, and Jose Barretto, who had been directors of the
defendant corporation from its incorporation up to the month of March,
1929, to recover from the defendant, La Previsora Filipina, a mutual building
and loan association, 1 per cent to each of the plaintiffs of the net profits of
said corporation for the year 1929, which amount to P50,727.53, under and
in accordance with the following amendment to the by-laws of the
defendant corporation, which was made at a general meeting of the
stockholders thereof on February 23, 1929.
On the 29th day of August, 1930, the court below entered an order, in which
it held that the evidence offered by the plaintiffs showed a cause of action
on the part of the plaintiffs and constituted sufficient legal reason to require
the defendant corporation to present its evidence, if it so desired, in support
of the allegations contained in its answer, and denied the defendant's
motion to dismiss the complaint and set the case for a continuation of the
hearing on September 22, 1930. On September 4,1930, the defendant filed
its exception to the order of the trial court of August 29, 1930, in so far as it
declared that the evidence offered by the plaintiffs showed a cause of action
and denied the dismissal of the complaint.
On October 1, 1930, defendant moved the trial court for a reconsideration
of its decision of September 11, 1930, and that said decision be set aside,
and that the trial of the case be continued for the taking of the evidence of
the defendant, for the reasons stated therein. This motion was denied on
October 7, 1930, whereupon the defendant excepted to the decision and
the order of the court below denying its motion for a reconsideration, and
moved for a new trial on the ground that the decision was contrary to law
and the weight of the evidence. This motion was denied by the trial court on
October 18, 1930, and on October 25, 1930, the defendant filed its
exception to said order and gave notice of its intention to appeal from said
decision and orders, and the case has been brought to this court by way of
bill of exceptions.
Issue: WON defendant is liable to the plaintiff in accordance with the
amendment of the by laws.
Ruling: Building and loan associations are peculiar and special corporations.
They are founded upon principles of strict mutuality and equality of benefits
and obligations, and the trend of the more recent decisions is that any
contract made or by-law provision adopted by such an association in
contravention of the statute is ultra vires and void. It stands in a trust
relation to the contributors in respect to the funds contributed, and there is
an implied contract with its members that it shall not divert its funds or
powers to purposes other than those for which it was created. The
fundamental law of building and loan associations organized under the
different statutes throughout the American Union is that all members must
participate equally in the profits and bear the losses, if any, in the same
proportion, and any diversion of their funds to purposes not authorized by
the law of their creation is violative of the principles of mutuality between
the members, (See Bertche vs. Equitable Loan etc. Association, 147 Mo.,
343; 71 A. S.R., 571.) As correctly staled in the case of McCauley vs. Building
and Saving Assn. (97 Tenn., 421; 56 A. S. R., 813, 818), "Strict mutuality and
equality of benefits and obligations must be kept the groundwork and basis
of these associations, and if they are not so founded they are not truly
building and loan associations, entitled to the protection given such
associations by the statute." When we consider the fundamental nature and
purposes of building and loan associations, as above stated, in relation to
the subject matter of this by-law, it is obvious that the provisions thereof are
entirely foreign to the government of defendant corporation, inconsistent
with and subversive of the legislative scheme governing such associations,
and contrary to the spirit of the law, and cannot therefore be the basis of a
cause of action against the defendant corporation.
The judgment of the court below is reversed, and the complaint is dismissed
with the costs of this instance against the appellees. So ordered.
II
Trillana vs Quezon College, G. R. No. L-5003, June 27, 1953
Facts: Damasa Crisostomo subscribed 200 shares of capital stock with a par
value of P100 each through a letter sent to the Board of Trustees of the
Quezon College, enclosed with the letter are a sum of money as her initial
payment and her assurance of full payment after she harvested fish. On
October 26, 1948, Damasa Crisostomo passed away. As no payment appears
to have been made on the subscription mentioned in the foregoing letter,
the Quezon College, Inc. presented a claim before the CFI of Bulacan in her
testate proceeding, for the collection of the sum of P20,000, representing
the value of the subscription to the capital stock of the Quezon College, Inc.
which was then opposed by the administrator of the estate.
Issue: Whether or not the condition entered into by both parties are valid.
Held: No, Under article 1115 of the old Civil Code which provides as follows:
"If the fulfillment of the condition should depend upon the exclusive will of
the debtor, the conditional obligation shall be void.”
Velasco vs Poizat
Facts: Velasco is the assignee in the insolvency of Philippine Chemical
Product Company and is seeking to recover from Jean Poizat the unpaid
subscription made by him to the stock of the corporation. Poizat, one of the
incorporators and once the treasurer and manager of the corporation,
subscribed for 20 shares and paid in the par value of 5 shares (P500). While
in this capacity he called in and collected all subscriptions except 15 shares
subscribed by him and another 15 by Jose Infante. 2 resolutions were
adopted by the board: (1) proposal that the directors or SHs make good by
new subscription the 15 shares w/h had been surrendered by Infante, and
that the latter would be released from his obligation to the corporation; (2)
as to Poizat, who was absent, he should be required to pay the amount of
his subscription upon the 15 shares he owes to the corporation. Poizat, in a
letter states that he was also to be relieved from his subscription, and that
he prefers to lose the whole of the 25% rather than continue investing more.
Soon the company became insolvent, and Velasco as assignee sues Poizat for
his unpaid subscription.
Issue:
Whether or not, Poizat is liable on his subscription
Held:
Poizat is still liable on his subscription. A stock subscription is a contract
between the corporation on one side, and the subscriber on the other. It is a
rule that a subscription for shares of stock does not require an express
promise to pay the amount subscribed, as the law implies a promise to pay
on the part of the subscriber. A stock subscription is a subsisting liability
from the time the subscription is made, since it requires the subscriber to
pay interest quarterly from that date unless he is relieved from such liability
by the by-laws. There are two (2) remedies for the enforcement of stock
subscriptions: (1) the first is a special remedy which consists in permitting
the corporation to put up the unpaid stock for sale, and is merely a remedy
in addition to that which proceeds by action in court; (2) the other is an
action in court, which exists even though no mention thereof is made in
statute. Under the Insolvency Law, the assignee of the insolvent corporation
succeeds to all the corporate rights of action vested in the corporation prior
to its insolvency, and the assignee therefore has the same freedom with
respect to suing upon a stock subscription as directors themselves would
have had under Sec 49 above cited. Another reason: When insolvency
supervenes upon a corporation and the court assumes jurisdiction to wind it
up, all unpaid stock subscriptions become payable on demand, and are at
once recoverable in an action instituted by the assignee in court. It evidently
cannot be permitted that a subscriber should escape from his lawful
obligation by reason of the failure of officers to perform their duty in making
the call; and when the original mode of making the call becomes
impracticable, the obligation must be treated as due upon demand. As to
the Infante release, it is not prejudicial to the right of the corporation or its
assignee to recover from Poizat, although in releasing Infante, the board
overstepped its bounds and should still be liable on shares that were not
taken up and paid for by the corporation.
Velasco vs Poizat
Facts: Velasco is the assignee in the insolvency of Philippine Chemical
Product Company and is seeking to recover from Jean Poizat the unpaid
subscription made by him to the stock of the corporation. Poizat, one of the
incorporators and once the treasurer and manager of the corporation,
subscribed for 20 shares and paid in the par value of 5 shares (P500). While
in this capacity he called in and collected all subscriptions except 15 shares
subscribed by him and another 15 by Jose Infante. 2 resolutions were
adopted by the board: (1) proposal that the directors or SHs make good by
new subscription the 15 shares w/h had been surrendered by Infante, and
that the latter would be released from his obligation to the corporation; (2)
as to Poizat, who was absent, he should be required to pay the amount of
his subscription upon the 15 shares he owes to the corporation. Poizat, in a
letter states that he was also to be relieved from his subscription, and that
he prefers to lose the whole of the 25% rather than continue investing more.
Soon the company became insolvent, and Velasco as assignee sues Poizat for
his unpaid subscription.
Issue:
Whether or not, Poizat is liable on his subscription
Held:
Poizat is still liable on his subscription. A stock subscription is a contract
between the corporation on one side, and the subscriber on the other. It is a
rule that a subscription for shares of stock does not require an express
promise to pay the amount subscribed, as the law implies a promise to pay
on the part of the subscriber. A stock subscription is a subsisting liability
from the time the subscription is made, since it requires the subscriber to
pay interest quarterly from that date unless he is relieved from such liability
by the by-laws. There are two (2) remedies for the enforcement of stock
subscriptions: (1) the first is a special remedy which consists in permitting
the corporation to put up the unpaid stock for sale, and is merely a remedy
in addition to that which proceeds by action in court; (2) the other is an
action in court, which exists even though no mention thereof is made in
statute. Under the Insolvency Law, the assignee of the insolvent corporation
succeeds to all the corporate rights of action vested in the corporation prior
to its insolvency, and the assignee therefore has the same freedom with
respect to suing upon a stock subscription as directors themselves would
have had under Sec 49 above cited. Another reason: When insolvency
supervenes upon a corporation and the court assumes jurisdiction to wind it
up, all unpaid stock subscriptions become payable on demand, and are at
once recoverable in an action instituted by the assignee in court. It evidently
cannot be permitted that a subscriber should escape from his lawful
obligation by reason of the failure of officers to perform their duty in making
the call; and when the original mode of making the call becomes
impracticable, the obligation must be treated as due upon demand. As to
the Infante release, it is not prejudicial to the right of the corporation or its
assignee to recover from Poizat, although in releasing Infante, the board
overstepped its bounds and should still be liable on shares that were not
taken up and paid for by the corporation.
Donnina Halley vs. Printwell, Inc.
Facts: petitioner was an incorporator and original director of Business Media
Philippines, Inc. (BMPI), which, at its incorporation had an authorized capital
stock of P3,000,000.00 divided into 300,000 shares each with a par value of
P10.00,of which 75,000 were initially subscribed, while printwell on the
otherhand, engaged in commercial and industrial printing. BMPI (Business
Media Philippines Inc.) is a corporation under the control of its stockholders,
including Donnina Halley.In the course of its business, BMPI commissioned
PRINTWELL to print Philippines, Inc. (a magazine published and distributed
by BMPI) PRINTWELL extended 30-day credit accommodation in favor of
BMPI and in a period of 9 mos. BMPI placed several orders amounting to
316,000. However, only 25,000 was paid hence a balance of 291,000
PRINTWELL sued BMPI for collection of the unpaid balance and later on
impleaded BMPI’s original stockholders and incorporatorsto recover on their
unpaid subscriptions. It appears that BMPI has an authorized capital stock of
3M divided into 300,000 shares with P10 par value. Only 75,000 shares
worth P750,000 were originally subscribed of which P187,500 were paid up
capital. Halley subscribed to 35,000 shares worth P350,000 but only paid
P87,500.
Halley contends that: They all had already paid their subscriptions in full
BMPI had a separate and distinct personality BOD and SH had resolved to
dissolve BMPI, Thereafter the RTC and CA Defendant merely used the
corporate fiction as a cloak/cover to create an injustice (against PRINTWELL)
Rejected allegations of full payment in view of irregularity in the issuance of
ORs (Payment made on a later date was covered by an OR with a lower serial
number than payment made on an earlier date.
Issue:WON a stockholder who was in active management of the business
of the corporation and still has unpaid subscriptions should be made liable
for the debts of the corporation by piercing the veil of corporate fiction
Held: stockholder should be made liable up to the extent of her unpaid
subscription. It was found that at the time the obligation was incurred, BMPI
was under the control of its stockholders who know fully well that the
corporation was not in a position to pay its account (thinly capitalized). And,
that the stockholders personally benefited from the operations of the
corporation even though they never paid their subscriptions in full.
The stockholders cannot now claim the doctrine of corporate fiction
otherwise (to deny creditors to collect from SH) it would create an injustice
because creditors would be at a loss (limbo) against whom it would assert
the right to collect.
On piercing the veil:
Although the corporation has a personality separate and distinct from its SH,
such personality is merely a legal fiction (for the convenience and to
promote the ends of justice) which may be disregarded by the courts if it is
used as a cloak or cover for fraud, justification of a wrong, or an alter ego for
the sole benefit of the SH.
As to the Trust Fund Doctrine:
The RTC and CA correctly applied the Trust Fund Doctrine Under which
corporate debtors might look to the unpaid subscriptions for the satisfaction
of unpaid corporate debts. Subscriptions to the capital of a corporation
constitutes a trust fund for the payment of the creditors (by mere analogy)
In reality, corporation is a simple debtor.
Moreover, the 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 valuable consideration, or fraudulently, to the
prejudice of the 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.
The trust fund doctrine is not limited to reaching the SH’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
ANTONIO ESCAÑO,. FILIPINAS MINING CORPORATION, ET Al.,
STANDARD INVESTMENT OF THE PHILIPPINES,
Facts: the plaintiff-appellee obtained judgment against Silverio Salvosa
whereby the latter was ordered to transfer and deliver to the former 116
active shares and an undetermined number of shares in escrow of the
Filipinas Mining Corporation and to pay the sum of P500 as damages, with
the proviso that the escrow shares shall be transferred and delivered to the
plaintiff only after they shall have been released by the company. A writ of
garnishment was served by the sheriff of Manila upon the Filipinas Mining
Corporation to satisfy the said judgment; and Filipinas Mining Corporation
advised the sheriff of Manila that according to its books the judgment
debtor Silverio Salvosa was the registered owner of 1,000 active shares and
about 21,339 unissued shares held in escrow by the said corporation. The
sheriff sold the 1,000 active shares at public auction.
It appears that Silverio Salvosa sold to Jose P. Bengzon all his right, title, and
interest in and to 18,580 shares of stock of the Filipinas Mining Corporation
held in escrow which the said Salvosa was entitled to receive, and which
Bengzon in turn subsequently sold and transferred to Standard Investment
of the Philippines. Neither Salvosa's sale to Bengzon nor Bengzon's sale to
the Standard Investment of the Philippines was notified to and recorded in
the books of the Filipinas Mining Corporation more than three years after
the escrow shares in question were attached by garnishment served on the
Filipinas Mining Corporation as hereinbefore set forth.
On January 24, 1941, the defendant Filipinas Mining Corporation issued in
favor of the defendant Standard
Investment of the Philippines certificate of stock for the 18,580 shares
formerly held in escrow by Silverio Salvosa and which had been adversely by
the present plaintiff-appellee on the one hand and the Standard Investment
of the Philippines on the other, the first by virtue of garnishment
proceedings and the second by virtue of the sale made to it by Jose P.
Bengzon as aforesaid.
Issue: Whether or not the issuance by the Filipinas Mining Corporation of
the said 18,580 shares of its stock to the Standard Investment of the
Philippines was valid as against the attaching judgment creditor of the
original owner.
Ruling: It is Admitted that under this legal provision and the decision of this
Court in Uson vs. Diosomito, 61 Phil. 535, the transfer of duly issued shares
of stock is not valid as against third parties and the corporation until it is
noted upon the books of the corporation; but it is contended that the
transfer of unissued shares of stock held in escrow is valid against the whole
world although not notified to the corporation and not noted upon its
books. Since the sale, transfer, or assignment of unissued shares of stock
held in escrow is not specifically provided for by law, the question has to be
resolved by resorting to analogy. What is the reason of the law for requiring
the recording upon the books of the corporation of transfers of shares of
stock as a condition precedent to their validity against the corporation, and
third parties? We imagine that it is (1) to enable the corporation to know at
all times who its actual stockholders are, because mutual rights and
obligations exist between the corporation and its stockholders; (2) to afford
to the corporation an opportunity to object or refuse its consent to the
transfer in case it has any claim against the stock sought to be transferred, or
for any other valid reason; and (3) to avoid fictitious or fraudulent transfers.
Moreover, it seems illogical and unreasonable to hold that inactive or
unissued shares still held by the corporation in escrow pending receipt of
authorization from the Government to issue them, may be negotiated or
transferred unrestrictedly and more freely than active or issued shares
evidenced by certificates of stock.
We are, therefore, of the opinion and so hold that section 35 of the
Corporation Law, which requires the registration of transfers of shares stock
upon the books of the corporation as a condition precedent to their validity
against the corporation and third parties, is also applicable to unissued
shares held by the corporation in escrow.
RAZON VS. IAC
FACTS: Enrique Razon organized the E. Razon, Inc. for the purpose of bidding
for the arrastre services in South Harbor, Manila. Stock certificate No. 003
for 1,500 shares of stock of the corporation was issued in the name of late
Juan T. Chuidian. Vicente B. Chuidian, as an administrator, filed a complaint
against Enrique Razon for the delivery of certificate of stocks representing
the shareholdings of the deceased Juan T. Chuidian in the E. Razon, Inc. with
a prayer for an order to restrain the petitioner from disposing of the said
shares of stock. Petitioner alleged that after organizing the E. Razon, Inc.,
Enrique Razon distributed shares of stock previously placed in the names of
the withdrawing nominal incorporators to some friends including Juan T.
Chuidian.
Petitioner, in its answer, alleged that all the shares of stock in the
name of stockholders of record of the corporation were fully paid for by
Razon; that said shares are subject to the agreement between Razon, Inc.
and incorporators; that the shares of stock were actually owned and
remained in the possession of Razon. Neither the late Juan T. Chuidian nor
the Vicente Chuidan had paid any amount whatsoever for the 1,500 shares
of stock in question.
Court of First Instance of Manila declared that Enrique Razon, the
petitioner in is the owner of the said shares of stock. The Intermediate
Appellate Court, now Court however, reversed the trial court's decision and
ruled that Juan T. Chuidian, the deceased father of petitioner Vicente B.
Chuidian in is the owner of the shares of stock. Both parties filed separate
motions for reconsideration. Enrique Razon wanted the appellate court's
decision reversed and the trial court's decision affirmed while Vicente
Chuidian asked that all cash and stock dividends and all the pre-emptive
rights accruing to the 1,500 shares of stock be ordered delivered to him. The
appellate court denied both motions. Hence, these petitions.
ISSUE: Whether or not Juan T. Chuidian is the rightful owner of the stocks.
HELD: Yes. Chuidian is the rightful owner of the stocks. The law is clear that
in order for a transfer of stock certificate to be effective, the certificate must
be properly indorsed and that title to such certificate of stock is vested in the
transferee by the delivery of the duly indorsed certificate of stock. (Section
35, Corporation Code) Since the certificate of stock covering the questioned
1,500 shares of stock registered in the name of the late Juan Chuidian was
never indorsed to the petitioner, the inevitable conclusion is that the
questioned shares of stock belong to Chuidian. The petitioner's asseveration
that he did not require an indorsement of the certificate of stock in view of
his intimate friendship with the late Juan Chuidian cannot overcome the
failure to follow the procedure required by law or the proper conduct of
business even among friends. To reiterate, indorsement of the certificate of
stock is a mandatory requirement of law for an effective transfer of a
certificate of stock. Therefore, in the instant case, there is no dispute that
the questioned 1,500 shares of stock of E. Razon, Inc. are in the name of the
late Juan Chuidian in the books of the corporation.
Tan vs. SEC
FACTS: Alfonso Tan was the president of Visayan Educational Supply
Corporation when it was incorporated. Initially, 400 shares of stock was in
his name, represented by Stock Certificate Number 2. But when two other
incorporators, Young and Ong assigned to the corporation their shares,
Alfonso sold 50 shares to his brother Angelo, and another incorporator,
Alfredo Uy, sold 50 shares to Teodora S. Tan. The above sale was necessary
in order to complete the membership requirement of the Board of Directors.
Because of the mentioned transactions, Stock Certificate Number 2
was cancelled, and the corresponding stock certificates 6 and 8 were issued,
with certificate 6 representing 50 shares sold to Angelo, and certificate 8
representing the 350 shares for the petitioner Alfonso Tan. A certain Mr.
Buzon, was requested by Mr. Tan Su Ching to ask that Alfonso Tan endorse
the cancelled Stock Certificate Number 2. However, Alfonso did not sign
Stock Certificate Number 2 and only returned Stock Certificate Number 8.
Later on, Alfonso Tan withdrew from the corporation because he
was dislodged by respondent Tan Su Ching as president. Due to the
withdrawal, the cancellation of Stock Certificate 2 and 8 was effected and
recorded in the stock and transfer book. Alfonso then filed a case with Cebu
SEC, questioning the cancellation of his aforesaid Stock Certificates 2 and 8.
Petitioner argues that he was deprived of his shares despite the non-
endorsement or surrender of Stock Certificates 2 and 8 which is contrary to
Section 63 of the Corporation Code.
ISSUE: Whether or not the cancellation of Stock Certificate 2 and the
subsequent issuance of Stock Certificate Number 8 was null and void
because of the non-endorsement of Stock Certificate Number 2 by Alfonso
Tan.
HELD: No. The cancellation and the transfers of stock were valid. There was
a delivery of Stock Certificate No. 2 made by Alfonso Tan to the corporation
before it was replaced with Stock Certificate No. 6 for 50 shares to Angel Tan
and Stock Certificate No. 8 for 350 shares to the Alfonso.
From the facts deduced in the case, there was already delivery of
the unendorsed Stock Certificate No. 2, which made the issuance of Stock
Certificate Nos. 6 and 8 valid. All the acts required for the transferee to
exercise its rights over the acquired stocks were attendant and even the
corporation was protected from other parties, considering that the said
transfer was earlier recorded or registered in the corporate stock and
transfer book.
Furthermore, it is necessary to delineate the function of the stock
itself form the actual delivery or endorsement of the certificate of stock
itself because a certificate of stock is not necessary to render one a
stockholder in a corporation. The certificate is not stock in the corporation
but is merely evidence of the holder’s interest and status in the
corporation, his ownership of the share represented thereby, but is not in
law the equivalent of such ownership. It expresses the contract between
the corporation and the stockholder, but is not essential to the existence of
a share in stock or the nation of the relation of the shareholder to the
corporation. The fact of the matter is, the new holder, Angel S. Tan has
already exercised his rights and prerogatives as stockholder and was even
elected as member of the board of directors in the respondent corporation
with the full knowledge and acquiescence of petitioner. Due to the transfer
of 50 shares, Angel S. Tan was clothed with rights and responsibilities in the
board of the respondent corporation when he was elected as officer thereof.
Trillana vs Quezon College, G. R. No. L-5003, June 27, 1953
Facts: Damasa Crisostomo subscribed 200 shares of capital stock with a par
value of P100 each through a letter sent to the Board of Trustees of the
Quezon College, enclosed with the letter are a sum of money as her initial
payment and her assurance of full payment after she harvested fish. On
October 26, 1948, Damasa Crisostomo passed away. As no payment appears
to have been made on the subscription mentioned in the foregoing letter,
the Quezon College, Inc. presented a claim before the CFI of Bulacan in her
testate proceeding, for the collection of the sum of P20,000, representing
the value of the subscription to the capital stock of the Quezon College, Inc.
which was then opposed by the administrator of the estate.
Issue: Whether or not the condition entered into by both parties are valid.
Held: No, Under article 1115 of the old Civil Code which provides as follows:
"If the fulfillment of the condition should depend upon the exclusive will of
the debtor, the conditional obligation shall be void.”
BITONG V. CA (G.R. NO. 123553)
Facts:
Petitioner Bitong allegedly acting for the benefit of Mr. & Ms. Co. filed a
derivative suit before the SEC against respondent spouses Apostol, who
were officers in said corporation, to hold them liable for fraud and
mismanagement in directing its affairs. Respondent spouses moved to
dismiss on the ground that petitioner had no legal standing to bring the suit
as she was merely a holder-in-trust of shares of JAKA Investments which
continued to be the true stockholder of Mr. & Ms. Petitioner contends that
she was a holder of proper stock certificates and that the transfer was
recorded. She further contends that even in the absence of the actual
certificate, mere recording will suffice for her to exercise all stockholder
rights, including the right to file a derivative suit in the name of the
corporation. The SEC Hearing Panel dismissed the suit. On appeal, the SEC
En Banc found for petitioner. CA reversed the SEC En Banc decision.
Issue:
Whether or not petitioner is the true holder of stock certificates to be able
institute a derivative suit.
Ruling: NO.
Sec 63 of the Corporation Code envisions a formal certificate of stock which
can be issued only upon compliance with certain requisites. First, the
certificates must be signed by the president or vice-president, countersigned
by the secretary or assistant secretary, and sealed with the seal of the
corporation. A mere typewritten statement advising a stockholder of the
extent of his ownership in a corporation without qualification and/or
authentication cannot be considered as a formal certificate of stock. Second,
delivery of the certificate is an essential element of its issuance. Hence,
there is no issuance of a stock certificate where it is never detached from
the stock books although blanks therein are properly filled up if the person
whose name is inserted therein has no control over the books of the
company. Third, the par value, as to par value shares, or the full subscription
as to no par value shares, must first be fully paid. Fourth, the original
certificate must be surrendered where the person requesting the issuance of
a certificate is a transferee from a stockholder.
The certificate of stock itself once issued is a continuing affirmation or
representation that the stock described therein is valid and genuine and is at
least prima facie evidence that it was legally issued in the absence of
evidence to the contrary. However, this presumption may be rebutted. Aside
from petitioner’s own admissions, several corporate documents disclose
that the true party-in-interest is not petitioner but JAKA. It should be
emphasized that JAKA executed, a deed of sale over 1,000 Mr. & Ms. shares
in favor of respondent Eugenio D. Apostol. On the same day, respondent
Apostol signed a declaration of trust stating that she was the registered
owner of 1,000 Mr. & Ms. shares covered by a Certificate of Stock. And,
there is nothing in the records which shows that JAKA had revoked the trust
it reposed on respondent Eugenia D. Apostol. Neither was there any
evidence that the principal had requested her to assign and transfer the
shares of stock to petitioner. In fine, the records are unclear on how
petitioner allegedly acquired the shares of stock of JAKA.
Thus, for a valid transfer of stocks, the requirements are as follows: (a) There
must be delivery of the stock certificate; (b) The certificate must be
endorsed by the owner or his attorney-in-fact or other persons legally
authorized to make the transfer; and, (c) to be valid against third parties, the
transfer must be recorded in the books of the corporation. At most, in the
instant case, petitioner has satisfied only the third requirement. Compliance
with the first two requisites has not been clearly and sufficiently shown.
GERARDO GARCIA, plaintiff-appellee, vs. ANGEL SUAREZ, defendant-
appellant.
Facts:
Suarez subscribed to sixteen shares of the capital stock of the Compañia
Hispano-Filipina, Inc., a corporation which is duly formed and organized. Of
the sixteen subscribed shares, at the par value of P100 each, the appellant
only paid P400, the value of four shares. Garcia made demand to collect to
Suarez.
Issue:
WON a corporation has legal capacity to release a subscriber to its capital
stock from the obligation to pay for his shares?
Ruling
A stock subscription is a contract between the corporation and the
subscriber, and courts will enforce it for or against either. A corporation has
no legal capacity to release a subscriber to its capital stock from the
obligation to pay for his shares, and any agreement to this effect is invalid.
(Velasco vs. Poizat, 37 Phil., 802.) (Miranda vs. Tarlac Rice Mill Co., 57 Phil.,
619.)
A corporation has no power to release an original subscriber to its capital
stock from the obligation of paying for his shares, without a valuable
consideration for such release; . . . . (Philippine Trust Co. vs. Rivera, 44 Phil.,
469.)
ERNESTO M. APODACA, petitioner, vs. NATIONAL LABOR RELATIONS
COMMISSION, JOSE M. MIRASOL and INTRANS PHILS., INC., respondents.
Facts: Apocada bought shares to a corporation. However, unable to pay in
full, he was obliged to pay it through its wages by filing case in NLRC.
Issue:
WON NLRC has jurisdiction to determine such intra-corporate dispute
between the stockholder and the corporation as in the matter of unpaid
subscriptions?
Ruling: NLRC has no jurisdiction to determine such intra-corporate dispute
between the stockholder and the corporation as in the matter of unpaid
subscriptions. NLRC cannot validly set it off against the wages and other
benefits due petitioner. Article 113 of the Labor Code allows such a
deduction from the wages of the employees by the employer, only in three
instances, to wit:
ART. 113. Wage Deduction. — No employer, in his own behalf or in behalf of
any person, shall make any deduction from the wages of his employees,
except:
(a) In cases where the worker is insured with his consent by the employer,
and the deduction is to recompense the employer for the amount paid by
him as premium on the insurance;
(b) For union dues, in cases where the right of the worker or his union to
checkoff has been recognized by the employer or authorized in writing by
the individual worker concerned; and
(c) In cases where the employer is authorized by law or regulations issued by
the Secretary of Labor.
Pardo vs. Hercules Lumber Co. and Ferrer
FACTS: Respondent, Ignacio Ferrer, as acting secretary of the said company,
has refused to permit the petitioner or his agent to inspect the records and
business transactions of the said Hercules Lumber Company, Inc., at times
desired by the petitioner. The petitioner, Antonio Pardo, a stockholder in the
Hercules Lumber Company, Inc., one of the respondents herein, seeks by
original proceeding in the Supreme Court to obtain a writ of mandamus to
compel the respondents to permit the plaintiff and his duly authorized agent
and representative to examine the records and business transactions of said
company.
In this connection the answer asserts that in article 10 of the By-
laws of the respondent corporation it is declared that "Every shareholder
may examine the books of the company and other documents pertaining to
the same upon the days which the board of directors shall annually fix." It is
further averred that at the directors' meeting of the respondent corporation,
the board passed a resolution to the following effect:
"The board also resolved to call the usual general (meeting of shareholders)
for March 30 of the present year, with notice to the shareholders that the
books of the company are at their disposition from the 15th to 25th of the
same month for examination, in appropriate hours."
The contention for the respondent is that this resolution of the
board constitutes a lawful restriction on the right conferred by statute; and
it is insisted that as the petitioner has not availed himself of the permission
to inspect the books and transactions of the company within the ten days
thus defined, his right to inspection and examination is lost, at least for this
year.
ISSUE: Whether or not the by-law restricting the right of inspection is valid.
HELD: No. The general right given by the statute may not be lawfully
abridged to the extent attempted in this resolution. It may be admitted that
the officials in charge of a corporation may deny inspection when sought at
unusual hours or under other improper conditions; but neither the executive
officers nor the board of directors have the power to deprive a stockholder
of the right altogether. A by-law unduly restricting the right of inspection is
undoubtedly invalid.
It will be noted that our statute declares that the right of inspection can be
exercised "at reasonable hours." This means at reasonable hours on
business days throughout the year, and not merely during some arbitrary
period of a few days chosen by the directors.
Gonzales vs. PNB
FACTS:
The petitioner requested from the respondent that he be allowed to
examine the records of the latter. Petitioner claimed that he wanted to
determine the veracity of reports that the respondent has guaranteed the
obligation of another corporation in the purchase of a sugar mill and
that the respondent financed the construction of a bridge and a sugar mill.
When the respondent denied his request, the petitioner sought mandamus
from the CFI of Manila, adding that he acquired one (1) share of stock in PNB
and was thus entitled to examine the respondent’s records.
The CFI dismissed the petition on the ground that the petitioner
had improper motives and his purpose was not germane to his interest as a
stockholder. The petitioner argued that his right was unconditional.
ISSUE: Whether or not the petitioner could examine the records of the
respondent.
RULING:
NO. The former Corporation Law was already replaced by the
Corporation Code which requires that the person requesting the
examination of a corporation’s records must be acting in good faith and for a
legitimate purpose. Examination could not be granted on the ground of
mere curiosity. The petitioner acquired only one share of stock and did so
only after making a request to examine acts done by the respondent when
the former was still a stranger to the same. The circumstances showed that
the petitioner’s purpose was not germane to his interest as a
stockholder. Lastly, the right to examine the records of a corporation under
the Corporation Code was violative of the PNB’s charter. The petition was
dismissed.
Lanuza vs. CA
FACTS:
The Philippine Merchant Marine School (PMMI) was incorporated in
1952 with 700 founders’ shares and 76 common shares as its initial stock
subscription reflected in the articles of incorporation. It was only in 1978
when the company’s stock and transfer book was registered, recording 33 common
shares as the only issued and outstanding shares of PMMI.
In a dispute over the basis of a quorum in a stockholders’ meeting,
private respondents contend that the same should be based on the initial
subscribed capital stock as reflected in the 1952 articles of incorporation, and not on the
number of issued and outstanding shares as recorded in 1978 in the
company’s stock and transfer book.
Petitioners contend otherwise.
Both the SEC en banc and the Court of Appeals ruled in favor
of private respondents. Hence, this petition seeking to nullify the assailed
decision.
ISSUE: What should be the basis in determining the quorum in the
stockholders’ meeting?
HELD:
The initial subscribed capital stock as reflected in the articles of
incorporation should be made the basis in the determination of a quorum.
The articles of incorporation defines the charter of the corporation and its
contractual relations with the state and the stockholders. The contents thereof are binding
not only on the corporation but also on its shareholders. In the instant case,
the articles of incorporation indicate that the company had 776 issued and
outstanding shares. On the other hand, the stock and transfer book is not in
any sense a public record and only constitutes prima facie evidence. Hence, it
may be impeached by other competent evidence. Therefore, the same 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.
EUGENIO VERAGUTH vs ISABELA SUGAR COMPANY, INC.
FACTS: Veraguth, director and stockholder of Isabela Sugar Company, Inc.
required the respondent to show cause why they refuse to notify the
petitioner, as director, of the regular and special meetings of the BOD and
to place at his disposal at reasonable hours the minutes,
documents, and books of said corporati on for his inspecti on as
director and stockholder, and to issue immediately, upon payment
of the fees, certified copies of any documentation in connection with said
minutes,documents, and the books of the aforesaid corporation.
ISSUE: WON a director has the unqualified right to inspect the books and
records of the corporation.)
RULING: Yes. Section 51 of the Corporation law, provides that: “All business
corporations shall keep and carefully preserve a record of all business
transactions, and a minute of all meetings of directors,members, or
stockholders, in which shall be set forth in detail the ti me and
place of holding the meeting was regular or special, if special its ob1ect,
those present and absent, and every act done or ordered done at the
meeti ng. . . . The record of all business transacti ons of the
corporati on and the minutes of any meeting shall be open to the
inspection of any director, member, or stockholder of the corporati on at
reasonable hours.” Thus, Directors of a corporati on have the
unqualifi ed right to inspect the books and records of the
corporati on at all reasonable ti mes. However, a director
or stockholder has no absolute right to secure certi fi ed copies of
the minutes of the corporati on unti l these minutes have been written
up and approved by the directors.
In this case, when Veraguth telegraphed the secretary, asking the
latter to forward a certified copy of the resolution of the BOD concerning the
payment of attorney's fees in a certain case against Isabela Sugar Company
and others, the secretary answered stating that, since the minutes of the
meeting in questi on had not been signed by the directors present,
a certi fi ed copy could not be furnished and that as to other
proceedings of the stockholders, a request should be made to the president
of Isabela Sugar Company. It appears that the board of directors adopted a
resolution providing for inspection of the books and the taking of
copies “by authority of the President of the corporati on
previously obtained in each case.” “We do not think that anything
improper occurred when the secretary declined to furnish certi fi ed
copies of minutes which had not been approved by the BOD, and
that while so m u c h o f t h e l a s t r e s o l u ti o n o f t h e B O D a s
provides for prior approval of the preside nt of the
corporation before the books of the corporation can be inspected puts an
illegal obstacle in the way of a stockholder or director, that
resoluti on, so far as we are aware, has not been enforced to the
detriment of anyone.
CUA V. TAN
FACTS: Philippine Racing Club Inc. (PRCI) was organized to carry on the
business of a racecourse in all its branches and promote the breeding of
better horses in the Philippines. PRCI owns two real properties: (1) the Sta.
Ana Ractrack or the “Makati property” and (2) the “Cavite property”. PRCI
management decided that it was best to spin off the management and
development of the Makati property to a wholly owned subsidiary. It then
opted to acquire another domestic corporation, JTH Davies Holdings, Inc.
(JTH).
PRCI management determined that it could initially acquire 41,928,290
shares, or 95.55% of the outstanding capital stock of JTH. The PRCI Board of
Directors held a meeting on 26 Sep 2006. Among the directors present were
petitioners Santiago Sr., Santiago Jr., and Solomon, as well as respondent
Dulay. After deliberating on the matter of the acquisition of JTH by PRCI, all
the directors present, except respondent Dulay, voted affirmatively to pass
and approve the following resolutions: (1) Declaration of Intention to
Acquire and Purchase Shares of Stock of Another Company; (2) a Special
Stockholders’ meeting; (3) Authorized Attorney-in-Fact and Proxy. The next
day, PRCI entered into a Sale and Purchase Agreement for the acquisition
from JME of 99.5% of the outstanding capital stock of JTH. In the Special
Stockholders’ Meeting held on 7 November 2006, attended by stockholders
with 481,045,887 shares or 84.42% of the outstanding capital stock of PRCI,
the acquisition by PRCI of JTH was presented for approval. Several
stockholders expressed their satisfaction with PRCI’s decision to purchase
JTH shares due to the latter’s goodwill.
Thereafter, PRCI again engaged the assistance of SGV. It was then
determined that the Makati property could be transferred to JTH in
exchange for the unissued portion of the latter’s recently increase
authorized capital stock. The matter of the proposed exchange was
approved by the PRCI Board of Directors in its meeting, again with the lone
dissent of respondent Dulay. Subsequently, the Annual Stockholders’
Meeting of PRCI was scheduled. It included the property-for-shares
exchange between PRCI and JTH, which was supposed to be presented for
approval by stocjholders under their agenda during the special meeting.
However, respondents Miguel, et al., as minority stockholders of PRCI filed
before the RTC a Complaint, denominated as a Derivative Suit with prayer
for Issuance of TRO/Preliminary Injunction, against the directors of PRCI
and/or JTH based on their alleged devices or schemes amounting to fraud or
misrepresentation.
ISSUE: Whether or not respondents’ complaint constituted a valid derivative
suit? NO
RULING: It is well settled in this jurisdiction that where corporate directors
are guilty of a breach of trust — not of mere error of judgment or abuse of
discretion — and intracorporate remedy is futile or useless, a stockholder
may institute a suit in behalf of himself and other stockholders and for the
benefit of the corporation, to bring about a redress of the wrong inflicted
directly upon the corporation and indirectly upon the stockholders. A
derivative suit, however, must be differentiated from individual and
representative or class suits. Suits by stockholders or members of a
corporation based on wrongful or fraudulent acts of directors or other
persons may be classified into individual suits, class suits, and derivative
suits.
According to the SC, a shareholder's derivative suit seeks to recover for the
benefit of the corporation and its whole body of shareholders when injury is
caused to the corporation that may not otherwise be redressed because of
failure of the corporation to act. Thus, ‘the action is derivative, i.e., in the
corporate right, if the gravamen of the complaint is injury to the corporation,
or to the whole body of its stock and property without any severance or
distribution among individual holders, or it seeks to recover assets for the
corporation or to prevent the dissipation of its assets.’ In contrast,
"a direct action is one filed by the shareholder individually (or on behalf of
a class of shareholders to which he or she belongs) for injury to his or her
interest as a shareholder. The two actions are mutually exclusive: i.e., the
right of action and recovery belongs to either the shareholders (direct decedent are held by the administrator or executor. Consequently,
action) or the corporation (derivative action)." during such time, it is the administrator or executor who is entitled to
exercise the rights of the deceased as stockholder.

Puno vs. Puno Enterprises

FACTS:
Carlos L. Puno, who died on June 25, 1963, was an incorporator of
respondent Puno Enterprises, Inc.
On March 14, 2003, petitioner Joselito Musni Puno, claiming to be an heir of
Carlos L. Puno, initiated
a complaint for specific performance against respondent. Petitioner
averred that he is the son of the deceased with the latterâ s common-law
wife, Amelia Puno. As surviving heir, he claimed entitlement to the rights
and privileges of his late father as stockholder of respondent. The
complaint thus prayed that respondent allow petitioner to inspect its
corporate book, render an accounting of all the transactions it entered
into from 1962, and give petitioner all the profits, earnings, dividends, or
income pertaining to the shares of Carlos L. Puno.

ISSUE:
Whether or not Joselito Musni Puno as an heir is automatically entitled for
the stocks upon the death of
a shareholder.

RULING:
Upon the death of a shareholder, the heirs do not automatically become
stockholders of the corporation
and acquire the rights and privileges of the deceased as shareholder of the
corporation. The stocks must
be distributed first to the heirs in estate proceedings, and the transfer of the
stocks must be recorded in
the books of the corporation. Section 63 of the Corporation Code
provides that no transfer shall be valid, except as between the parties,
until the transfer is recorded in the books of the
corporation. During such interim period, the heirs stand as the
equitable owners of the stocks, the executor or administrator duly
appointed by the court being vested with the legal title to the stock.Until a
settlement and division of the estate is effected, the stocks of the