Capital Stock and Shares of Stock

CORPORATION
LAW REVIEWER (2013-2014)
ATTY. JOSE MARIA G. HOFILEA
CAPITAL STOCK & SHARES OF STOCK
treasury shares. Thus, quorum is based on the totality of the

shares which have been subscribed and issued, whether it be
founders shares or common shares. Lanuza v. Court of
Appeals, 454 SCRA 54 (2005).

I. Power of the Corporation to Issue Shares of Stock
The power to issue shares of stock in a corporation is lodged in

the board of directors and no stockholders meeting is required
to consider it because additional issuances of shares of stock
does not need approval of the stockholders what is only
capital is that portion of the authorized capital stock which has

been both subscribed and paidNot all funds or assets received
by the corporation can be considered paid-up capital, for this
term has a technical signification in Corporation Law. Such must
form part of the authorized capital stock of the corporation,
required is the board resolution approving the additional

issuance of shares. Majority Stockholders of Ruby Industrial
Corp. v. Lim, 650 SCRA 461 (2011).
subscribed and then actually paid up. MSCI-NACUSIP v.

National Wages and Productivity Comm., 269 SCRA 173 (1997).
Recall: Pre-emptive rights

o
The board has the discretion to decide to issue new

shares, but the shares must be offered to the current
stockholders first in accordance with their pre-emptive
rights, UNLESS such has been denied from the
stockholders in the articles of incorporation.
The outstanding capital stock is defined under Section 137 of

the Corporation Code as the total shares of stock issued to
subscribers or stockholders whether or not fully or partially paid
(as long as there is binding subscription agreement) except
The portion which have been paid by the stockholders,

represented by the account "Paid-up Capital"; and
The portion which is to be paid on the subscriptions,
represented by the account "Subscription Receivables."
The capital stock of a corporation cannot be subject to levy by

corporate creditors as to allow them to operate the affairs of
the corporation. The capital stock of the corporation represents
the interest and is the property of stockholders in the
corporation, who can only be deprived thereof in the manner
provided by law.2
Section 137. Outstanding capital stock defined.

The term "outstanding capital stock", as used in this Code, means the
total shares of stock issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or partially paid,
except treasury shares. (n)
The definition of capital stock clearly shows that its composed

of two items, namely:1
o

II. Concept of Capital Stock (Section 137)
By express provision of Section 13 of Corporation Code, paid-up
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.

(2013 ed.). Manila, Philippines: Rex Book Store.
2
J.R.S. Business Corp. v. Imperial Insurance, Inc., 11 SCRA 634, 639 (1964),
citing Therebee v. Baker, 35 N.E. Eq. [8 Stew.] 501, 505; In re Wells' Estate, 144
N.W. 174, 177, Wis. 294, cited in 6 WORDS AND PHRASES, 109.

NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
CORPORATION LAW REVIEWER (2013-2014)
usages have long been established in jurisprudence. Briefly,

capital refers to the value of the property or assets of a
corporation. The capital subscribed is the total amount of the
capital that persons (subscribers or shareholders) have agreed
to take and pay for, which need not necessarily be, and can be
more than, the par value of the shares. In fine, it is the amount
that the corporation receives, inclusive of the premium if any, in
consideration of the original issuance of the shares. NTC v.
Court of Appeals, 311 SCRA 508 (1999).
An investment, being in the nature of equity, is an

expenditure to acquire property or other assets in order to
produce revenue. It is the placing of capital or laying out of
money in a way intended to secure income or profit from its
employment. Unlike a deposit of money or a loan that earns
interest, cannot be assured of a dividend or an interest on the
amount invested, for dividends on investments are granted only
after profits or gains are generated. President of PDIC v. Reyes,
460 SCRA 473 (2005).
Revenue v. First Express Pawnshop Co., Inc., 589 SCRA 253

(2009).
The term capital and other terms used to describe the capital
structure of a corporation are of universal acceptance, and their
Advances for Future Subscription is a receivable account and

does not form part of the capital stock of the corporation since
it does not correspond to any particular issuance of shares of
stock. Central Textile Mills v. National Wage and Productivity
Comm., 260 SCRA 368 (1996). Consequently there is no liability
for the payment of the documentary stamp tax on such deposit
for future subscription for the reason that there is yet no
subscription that creates rights and obligations between the
subscriber and the corporation. Commissioner of Internal

III. Classification of Shares (Section 6)

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. Any or all of the shares or series of
shares may have a par value or have no par value as may be provided
for in the articles of incorporation: Provided, however, That banks,
trust companies, insurance companies, public utilities, and building
and loan associations shall not be permitted to issue no-par value
shares of stock.

Preferred shares of stock issued by any corporation may be given
preference in the distribution of the assets of the corporation in case
of liquidation and in the distribution of dividends, or such other
preferences as may be stated in the articles of incorporation which are
not violative of the provisions of this Code: Provided, That preferred
shares of stock may be issued only with a stated par value. The board
of directors, where authorized in the articles of incorporation, may fix
the terms and conditions of preferred shares of stock or any series
thereof: Provided, That such terms and conditions shall be effective


upon the filing of a certificate thereof with the Securities and Exchange
Commission.

Shares of capital stock issued without par value shall be deemed fully
paid and non-assessable and the holder of such shares shall not be

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

liable to the corporation or to its creditors in respect thereto:

Provided; That shares without par value may not be issued for a
consideration less than the value of five (P5.00) pesos per share:
Provided, further, That the entire consideration received by the
corporation for its no-par value shares shall be treated as capital and
shall not be available for distribution as dividends.

6. Merger or consolidation of the corporation with another

corporation or other corporations;

7. Investment of corporate funds in another corporation or business in
accordance with this Code; and

8. Dissolution of the corporation.
A corporation may, furthermore, classify its shares for the purpose of

insuring compliance with constitutional or legal requirements.

Except as otherwise provided in the articles of incorporation and
stated in the certificate of stock, each share shall be equal in all
respects to every other share.

Except as provided in the immediately preceding paragraph, the vote
necessary to approve a particular corporate act as provided in this
Code shall be deemed to refer only to stocks with voting rights.
Where the articles of incorporation provide for non-voting shares in

the cases allowed by this Code, the holders of such shares shall
nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

It is not correct to say that holders of the preferred shares lose

all their voting rights, since Section 6 of the Corporation Code
provides for the situations where non-voting shares like
preferred shares are granted voting rights. Philippine Coconut
Producers Federation. v. Republic, 600 SCRA 102 (2009).

A. Policies on Classification of Shares:
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or

substantially all of the corporate property;

The Corporation Code provides three (3) basic policies on share

classification:
1. Firstly, it expressly recognizes the freedom and power of a
corporation to classify shares.

2. Secondly, the Code expressly adopts the presumption of
equality of the rights and features of shares when nothing is
expressly provided to the contrary.
o Although a corporation has the power to classify its
shares of stock, provide for preferences and other
conditions, when nothing has been provided for in the
articles of incorporation, no presumption should exist to

distinguish one share from another.
The Securities and Exchange Commission has ruled that
the mere classification of shares into preferred shares
does not necessarily deprive them of voting rights. In
the absence of any restrictions in the articles of
incorporation or by-laws of the corporation, preferred
shares would be voting shares having the same rights as
common shares, since under Section 6 of the
Corporation Code, all shares shall equal rights except
when otherwise provided in the articles of
incorporation and state in the certificate of stock.
Consequently, where the articles of incorporation and
the certificates of stock are silent on the matter of
voting rights, all issued shares, regardless of their class

nomenclature, shall be considered to have equal voting
rights.1
3. Thirdly, the Code provides for voting rights for all types of
shares on matters it considers as fundamental measures. Under
SECURITIES AND EXCHANGE COMMISSION Opinion, 16 July 1996, XXX

SECURITIES AND EXCHANGE COMMISSION QUARTERLY BULLETIN 22 (No. 2, Dec.
1996).
Section 6, there shall always be a class or series of shares which

have complete voting rights.

B. Common Shares
A common stock represents the residual ownership interest in

the corporation. It is a basic class of stock ordinarily and usually
issued without extraordinary rights or privileges and entitles the
shareholder to a pro rata division of profits. Commissioner of
Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999).

C. Preferred Shares: Republic Planters Bank v. Agana, 269 SCRA 1
(1997):

Republic Planters Bank v. Agana

Facts: Robes-Francisco Realty & Development Corporation (RFRDC)
secured a loan from the Republic Planters Bank which were partly in the
form of cash and partly in the form of stock certificates. The stock
certificates were preferred shares in the names of Adalia F. Robes and
Carlos F. Robes who subsequently, however, endorsed his shares in
favor of Adalia. The terms for certificates of stocks include the right to
receive quarterly dividends and such shares may be redeemed at the
option of the Corporation 2 years from date of issue. RFRDC and Robes
proceeded against the Bank and filed a Complaint anchored on their
alleged rights to collect dividends under the preferred shares in
question and to have petitioner redeem the same under the terms and
conditions of the stock certificates.

Issue: Whether the bank can be compelled to redeem the preferred


shares issued to RFRDC and Robes.

Held: NO. While the stock certificate does allow redemption, the option
to do so was clearly vested in the bank. The redemption therefore is
clearly the type known as "optional". Thus, except as otherwise

1. Participating and Non-participating1
a. Participating preferred shares that entitle the holders
to participate with the holders of common shares in the
retained earnings after the amount of stipulated
dividend has been paid to the preferred shares.
provided in the stock certificate, the redemption rests entirely with the
corporation and the stockholder is without right to either compel or
refuse the redemption of its stock. Furthermore, payment of dividends
to a stockholder is not a matter of right but a matter of consensus as the
Corporation Code prohibits the issuance of any stock dividend without
the prior approval of the stockholders.

b. Non-participating preferred shares are those that

entitle holders of preferred shares only to the stipulated
preferred dividends and no more.
2. Cumulative and Non-cumulative2
a. Cumulative preferred shares entitle the holders
thereof to payment not only of current dividends but
also of back dividends not previously paid, when and if
Doctrine: A preferred share of stock, on one hand, is one which entitles

the holder thereof to certain preferences over the holders of common
stock. These are designed to induce persons to subscribe for shares of a
corporation. The most common forms may be classified into two: (1)
preferred shares as to assets; and (2) preferred shares as to dividends.
There is no guaranty, however, that the share will receive any dividends.
The present Corporation Code provides that the board of directors of a
stock corporation may declare dividends only out of unrestricted
retained earnings. Thus, the declaration of dividends is dependent upon
the availability of surplus profit or unrestricted retained earnings, as the
case may be. Preferences granted to preferred stockholders, moreover,
do not give them a lien upon the property of the corporation nor make
them creditors of the corporation, the right of the former being always
subordinate to the latter. Dividends are thus payable only when there
are profits earned by the corporation and as a general rule, even if there
are existing profits, the board of directors has the discretion to
determine whether or not dividends are to be declared.
dividends are declared, to the extent agreed upon,

before holders of common shares are paid. The
fundamental characteristic of cumulative stock is that if
the preferred dividend is not paid in full in any year,
whether or not earned, the deficiency must be made up
before any dividend may be paid on the common stock.
b. Non-cumulative preferred shares entitle the holders
merely to the payment of current dividends that are
paid, to the extent agreed upon before the holders of
common shares are paid.
3. Par Value and No Par Value

2


a. The Supreme Court characterized no-par value shares
thus: "[a] no-par value share does not purport to
represent any stated proportionate interest in the
capital stock measured by value, but only an aliquot
part of the whole number of such shares of the issuing
corporation. The holder of no-par shares may see from
holders of common stock.3
the certificate itself that he is only an aliquot sharer in

the assets of the corporation. But this character of
proportionate interest is not hidden beneath a false
appearance of a given sum of in money, as in the case of
par value shares. The capital stock of a corporation
issuing only no-par value shares is not set forth by a
stated amount of money, but instead is expressed to be
divided into a stated number of shares, such as 1,0000

shares. This indicates that a shareholder of 100 such
shares is an aliquot sharer in the assets of the
corporation, no matter what value they may have, to
the extent of 100/1,000 or 1/10. Thus, by removing the
par value of shares, the attention of persons interested
in the financial condition of a corporation is focused
The contractual rights and preferences of an issue of preferred

stock must be provided for in the articles of incorporation.4
o Under Section 6 of the Corporation Code, preferred
shares issued by any corporation may be given

preference in the distribution of the assets of the
corporation in case of liquidation and in the distribution
of dividends, or such other preferences as may be
stated in the articles of incorporation which are not
violative of the provisions of the Corporation Code.5
Under the policy of the Corporation Code that does not
grant benefits to a share unless expressly provided for
in the articles of incorporation, the naming of shares as
"preferred" without indicating what preferential rights
they are accorded, would not give such preferred shares
upon the value of assets and the amount of its debts."1
Preferred shares as to assets gives the holder thereof

preference in the distribution of the assets of the
corporation in case of liquidation.2
Preferred shares as to dividends give the holder the
right to receive dividends on said shares to the extent
agreed upon before any dividends at all are paid to the
Preferred stocks are those which entitle the shareholder to

some priority on dividends and asset distribution. CIR v. Court
of Appeals, 301 SCRA 152 (1999).
Republic Planters Bank v. Agana, 269 SCRA 1, 80 SCAD 1 (1997).

4
5
3
Delpher Trades Corp. v. Intermediate Appellate Court, 157 SCRA 349, 353-354
[1988], quoting directly from AGBAYANI, COMMENTARIES AND JURISPRUDENCE ON THE
COMMERCIAL LAWS OF THE PHILIPPINES, Vol. III, 1980 Ed., p. 107).


any right in addition to those enjoyed by common
shares.1
In the absence of provisions in the articles of incorporation

denying voting rights to preferred shares, preferred shares have
the same voting rights as common shares. However, preferred
shareholders are often excluded from any control, that is,
deprived of the right to vote in the election of directors and on
other matters, on the theory that the preferred shareholders
are merely investors in the corporation for income in the same
manner as bondholders. In fact, under the Corporation Code
only preferred or redeemable shares can be deprived of the
right to vote. Common shares cannot be deprived of the right to
vote in any corporate meeting, and any provision in the articles
of incorporation restricting the right of common shareholders to
vote is invalid. Gamboa v. Teves, 652 SCRA 690 (2011); affirmed
in Heirs of Gamboa v. Teves, 682 SCRA 397 (2012).

Gamboa v. Teves

Facts: Prime Holdings Inc. (PHI) owned 46% of the outstanding capital
stock of the Philippine Telecommunications Investment Corporation
(PTIC). PTIC owned 26% of the outstanding common shares of PLDT. The
shares held by PHI were sequestered by the PCGG and declared to be ill-
gotten wealth of the Marcos. This being the case, the Inter-Agency
Privatization Council (IPC) of the Philippine Government sold the shares
to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate of First Pacific

Company Limited (First Pacific), a Hong Kong-based investment

management and holding company and a shareholder of the Philippine
Long Distance Telephone Company (PLDT). (Note: First Pacific had a
right of first refusal in accordance with the Articles of Incorporation of
PTIC thats why the shares were sold to their affiliate company).

The petitioner questioned the sale on the ground that it also involved an
indirect sale of 12 million shares (or about 6.3 percent of the
outstanding common shares) of PLDT owned by PTIC to First Pacific.
With the this sale, First Pacifics common shareholdings in PLDT
increased from 30.7 percent to 37 percent, thereby increasing the total
common shareholdings of foreigners in PLDT to about 81.47%. This,
according to the petitioner, violates Section 11, Article XII of the 1987
Philippine Constitution which limits foreign ownership of the capital of a
public utility to not more than 40%.

Issue: Whether or not the term capital in Section 11, Article XII of the
Constitution refers to the total common shares only, or to the total
outstanding capital stock (combined total of common and non-voting
preferred shares) of PLDT, a public utility.

Held: YES. The Court partly granted the petition and held that the term
capital in Section 11, Article XII of the Constitution refers only to
shares of stock entitled to vote in the election of directors of a public
utility, i.e., to the total common shares in PLDT.

Holders of PLDT preferred shares are explicitly denied of the right to
vote in the election of directors. On the other hand, holders of common
shares are granted the exclusive right to vote in the election of


directors. To summarize, (1) foreigners own 64.27% of the common
shares of PLDT, which class of shares exercises the sole right to vote in
the election of directors, and thus exercise control over PLDT; (2)
Filipinos own only 35.73% of PLDTs common shares, constituting a
minority of the voting stock, and thus do not exercise control over PLDT;
voting or not, and claims that the term capital in section 11, article XII
of the constitution has long been settled and defined to refer to the
total outstanding shares of stock, whether voting or non-voting.

Issue: Whether or not the contention of Pangilinan et al. is correct.
(3) preferred shares, 99.44% owned by Filipinos, have no voting rights;

(4) preferred shares earn only 1/70 of the dividends that common
shares earn; (5) preferred shares have twice the par value of common
shares; and (6) preferred shares constitute 77.85% of the authorized
capital stock of PLDT and common shares only 22.15%. This kind of
ownership and control of a public utility is a mockery of the
Constitution.

Held: NO. The Supreme Court has never yet interpreted the meaning of
capital in the context of section 11, article XII of the Constitution. For
more than 75 years since the 1935 Constitution, the court has not
interpreted or defined the term capital found in various economic
provisions of the 1935, 1973 and 1987 constitutions. There has never
been a judicial precedent interpreting the term capital in the 1935,

Doctrine: Considering that common shares have voting rights which
translate to control, as opposed to preferred shares which usually have
no voting rights, the term capital in Section 11, Article XII of the
Constitution refers only to common shares. However, if the preferred
shares also have the right to vote in the election of directors, then the
term capital shall include such preferred shares because the right to
1973 and 1987 constitutions, until now. Hence, it is patently wrong and
utterly baseless to claim that the court in defining the term capital in
its 28 June 2011 decision modified, reversed, or set aside the purported
long-standing definition of the term capital, which supposedly refers
to the total outstanding shares of stock, whether voting or non-voting.

Doctrine: Capital refers only to those shares which have voting rights,
participate in the control or management of the corporation is exercised

through the right to vote in the election of directors. In short, the term
capital in Section 11, Article XII of the Constitution refers only to
shares of stock that can vote in the election of directors.
and not the total outstanding shares of stock.

Heirs of Gamboa v. Teves

Facts: Contesting the ruling in Gamboa v. Teves (2011), Pangilinan et al.
claims that Securities and Exchange Commission and DOJ have always
interpreted capital to refer to total outstanding shares of stock whether

D. Redeemable Shares (Section 8; Republic Planters Bank v. Agana,
269 SCRA 1 [1997])

Section 8. Redeemable shares.
Redeemable shares may be issued by the corporation when expressly
so provided in the articles of incorporation. They may be purchased or
taken up by the corporation upon the expiration of a fixed period,
regardless of the existence of unrestricted retained earnings in the


would now constitute a clear exception to the trust fund
doctrine.2
o Nevertheless, the consistency of policy of protecting
corporate creditors is still there in the sense that
creditors will not be misled since it is required that the
redemption feature must be stated both in the articles
books of the corporation, and upon such other terms and conditions as
may be stated in the articles of incorporation, which terms and
conditions must also be stated in the certificate of stock representing
said shares.

Redemption is repurchase, a reacquisition of stock by a

corporation which issued the stock in exchange for property,
whether or not the acquired stock is cancelled, retired or held in
the treasury. Essentially, the corporation gets back some of its

stock, distributes cash or property to the shareholder in
payment for the stock, and continues in business as before. The
redemption of stock dividends previously issued is used as a veil
for the constructive distribution of cash dividends.
Commissioner of Internal Revenue v. Court of Appeals, 301
SCRA 152 (1999).
o The Securities and Exchange Commission Rules
Governing Redeemable and Treasury Shares,1 expressly
define "redeemable shares" as shares of stock issued by
a corporation which the corporation can purchase or
take up from their holders as expressly provided for in
its articles of incorporation and certificates of stock
representing said shares.
of incorporation and the certificates of stock.

The Rules provide that all corporations which have
issued redeemable shares with mandatory redemption
features are required to set up and maintain a sinking
fund, which shall be deposited with a trustee bank and
not be invested in risky or speculative ventures. The
Rules also provide that redeemable shares may be
redeemed, regardless of the existence of unrestricted
retained earnings, "provided that the corporation has,
after such redemption, sufficient assets in its books to
cover debts and liabilities inclusive of capital stock."
In addition, the Securities and Exchange Commission
Rules provide that redeemable shares reacquired shall
be considered retired and no longer issuable, unless
otherwise provided in the articles of incorporation of
the redeeming corporation.
The express provisions of Section 8 which allows redemption
"regardless of the existence of unrestricted retained earnings"
It has been held that when the certificates of stock recognizes

redemption, but the option to do so is clearly vested in the
corporation, the redemption is clearly the type known as
optional and rest entirely with the corporation and the
Issued by the SECURITIES AND EXCHANGE COMMISSION on 26 April 1982. See

SECURITIES AND EXCHANGE COMMISSION Rules and Regulations (1986 ed.), at
p. 256.



stockholder is without right to either compel or refuse the
redemption of its stock.1
not enjoy such rights, and would necessarily include the

existence of common shares, which ordinarily would have the
right to vote and be voted into the board of directors. That
would have to be the rationale basis for the restriction provided
in Section 7 that such exclusive rights shall not exceed five (5)
years and subject to the approval of the Securities and Exchange

E. Founder Shares (Section 7)2

Section 7. Founders' shares.
Founders' shares classified as such in the articles of incorporation may
be given certain rights and privileges not enjoyed by the owners of
other stocks, provided that where the exclusive right to vote and be
voted for in the election of directors is granted, it must be for a limited
period not to exceed five (5) years subject to the approval of the
Securities and Exchange Commission. The five-year period shall
Commission. It would then also be reasonable to conclude that

a class of shares, even when not given the nomenclature of
founders share, would necessarily fall within the provision of
Section 7 (and therefore be classified as founders share)
whenever such class of shares are given the exclusive right to
vote and be voted for in the election of directors, and
necessarily such exclusive rights shall have a limited period of
commence from the date of the aforesaid approval by the Securities

and Exchange Commission.
five (5) years.3
What Constitutes Founders Share? Perhaps the most obvious

feature of founders share is that they are issued basically to the
founders or initial organizers of the corporation, but nothing in
the language of Section 7 expressly so provides. We must
presume that what makes shares as founders shares would be
that they are given the exclusive rights not given to other
stockholders, and specially the right to vote and be voted for in
the election of directors. The existence of founders shares must
necessarily include the fact that there are other shares that do
Effect When Exclusivity Period Expires: The Securities and

Exchange Commission has opined that upon the expiration of
the period within which the founders shares can exercise their

2
In Castillo v. Balinghasay, 440 SCRA 442 (2004), the position that when the
articles of incorporation provide expressly a class of shares to have the
exclusive right to vote and be voted for into the Board of Directors, that such
shares would essentially be founders share was raised but not resolved by the
Court.
exclusive right to vote and be voted for in the election of

directors, such exclusive right would only be transferred to
common shareholders who are supposed to exercise such right
had there been no founders share. Other classes of shares, such
as preferred shares, are not affected.4

4
SECURITIES AND EXCHANGE COMMISSION Opinion, 10 August 1995, XXX
SECURITIES AND EXCHANGE COMMISSION QUARTERLY BULLETIN 5 (No. 1, June
1996); SECURITIES AND EXCHANGE COMMISSION Opinion, 27 September 1989,
XXIV SECURITIES AND EXCHANGE COMMISSION QUARTERLY BULLETIN 23 (No. 1,
March 1990).


F. Treasury Shares (Section 9; Commissioner v. Manning, 66 SCRA 14
[1975]).

the number of issues shares or the amount of the stated

capital.1
Section 9. Treasury shares.

Treasury shares are shares of stock which have been issued and fully
issued out of the retained earnings previously used to support

their acquisition, provided that the amount of the said retained
earnings has not been subsequently impaired by losses.2 Any
declaration and issuance of treasury shares as property dividend
shall be disclosed and properly designated as property dividend
in the books of the corporation and in its financial statements.3
paid for, but subsequently reacquired by the issuing corporation by

purchase, redemption, donation or through some other lawful means.
Such shares may again be disposed of for a reasonable price fixed by
the board of directors.

used for a variety of corporate purposes, such as for a stock

bonus plan for management and employees, or for acquiring
another company. It may be held indefinitely, resold or retired.
While held in the companys treasury, the stock earns no
dividends and has no vote in company affairs. Philippine
purchase or acquisition, be sold or disposed of at a public or

private sale.4

G. Stock Warrants
The Securities and Exchange Commission has opined that

treasury shares have no effect on the stated capital of the
corporation unless and until they are cancelled or retired, in
which event the stated capital is reduced by the amount then
representing the shares. Treasury shares must be distinguished
from the authorized but unissued shares: the acquisition of
treasury shares does not reduce the number of issued shares or
the amount of stated capital and their sale does not increase
Rule on Treasury Shares for Banks No bank shall purchase or

acquire shares of its own capital stock or accept its own shares
as a security for a loan, except when authorized by the
Monetary Board; and in every case the stock so purchase or
acquired shall, within six (6) months from the time of its
A treasury share, which may be common or preferred, may be
Coconut Producers Federation, Inc. v. Republic, 600 SCRA 102

(2009).
Treasury shares may be declared as property dividend to be
Under the Securities and Exchange Commission Amended Rules

Governing Warrants, 5 a "warrant" is defined as "a type of
security which entitles the holder the right to subscribe to, the
SECURITIES AND EXCHANGE COMMISSION Opinion, 18 March 1987, Securities

and Exchange Commission QUARTERLY BULLETIN (No. 1, March 1987), at pp. 19-20.
2
Securities and Exchange Commission. 5(3), SECURITIES AND EXCHANGE
COMMISSION Rules Governing Redeemable and Treasury Shares (1982).
3
Securities and Exchange Commission. 5(3), SECURITIES AND EXCHANGE
COMMISSION Rules Governing Redeemable and Treasury Shares (1982).
4
Securities and Exchange Commission. 10, The General Banking Law of 2000
[RA 8791].
5
XXVIII SECURITIES AND EXCHANGE COMMISSION QUARTERLY BULLETIN 78 (No. 2,
June 1994).

directors of the issuing corporation."1
b. Non-detachable warrant which cannot be sold,

transferred or assigned to any person by the
warrantholder separate from, or independent of the
Beneficiary Securities.6
The Securities and Exchange Commission Amended Rules now

recognize two (2) types of Issuers of warrants, namely:2
a. A duly registered domestic corporation which issues or
proposes to issue Subscription Warrants; or
b. A person or a group of persons who issue(s) or
propose(s) to issue Covered Warrants.
The Securities and Exchange Commission Amended Rules define

a warrant certificate as the certificate representing the right
to a warrant which may be detachable or not, duly issued by
Securities and Exchange Commission. 1(1), XXVIII SECURITIES AND EXCHANGE

COMMISSION QUARTERLY BULLETIN 78 (No. 2, June 1994).
2
Securities and Exchange Commission. 1(11), XXVIII SECURITIES AND
EXCHANGE COMMISSION QUARTERLY BULLETIN 78 (No. 2, June 1994).
3
Warrantholders may exercise their right granted under a

warrant within the period approved by the Securities and
Exchange Commission which shall not be less than one (1) year,
nor more than five (5) years from the date of the issue of the
warrants.7 An Issuer of warrants must provide for a Warrants
Registry Book maintained by the warrants registrar independent
The Rules allow for two (2) types of warrants, namely:3

a. "Subscription Warrant" which entitles the holder
thereof the right to subscribe to a pre-determined
number of shares out of the unissued capital stock of
the Issuer;
b. "Covered Warrant" which entitles the holder thereof
the right to purchase from the Issuer a pre-determined
number of existing shares.
the Issuer to the warrantholder.4 There are therefore two (2)

types of warrant certificates, namely:
a. Detachable warrant which may be sold, transferred or
assigned to any person by the warrantholder separate
from, and independent of, the corresponding
Beneficiary Securities;5 and
unissued capital stock of a corporation or to purchase issued

shares in the future, evidenced by a Warrant Certificate,
whether detachable or not, which may be sold or offered for
sale to the public but does not apply to a right granted under an
Option Plan duly approved by the [Securities and Exchange
Commission] for the benefit of employees, officers and/or

5
COMMISSION QUARTERLY BULLETIN 78 (No. 2, June 1994). In case of detachable
warrants, the Covered Warrant Certificate must state on its face that the
Covered Warrant does NOT represent shares of stock, but a mere right to
purchase an indicated class or type of stock owned by the Issuer under the
terms and condition stated therein. Securities and Exchange Commission. 7,
XXVIII SECURITIES AND EXCHANGE COMMISSION QUARTERLY BULLETIN 78 (No. 2,
June 1994).
6
Secs. 1(9) and 12, XXVIII SECURITIES AND EXCHANGE COMMISSION QUARTERLY
BULLETIN 78 (No. 2, June 1994).
7
Securities and Exchange Commission. 1(12), XXVIII SECURITIES AND
EXCHANGE COMMISSION QUARTERLY BULLETIN 78 (No. 2, June 1994).


of the Issuer.1 Any sale, transfer, or assignment of a warrant

must be duly recorded in the Warrants Registry Book, and
unless recorded in therein, the transfer of warrants shall not be
binding on the Issuer.2
already rendered, then the initial payment shall not be

required.6
The Securities and Exchange Commission has issued the Rules

Governing the Grants of Stock Options, which defines a stock
option as "a privilege granted to a party to subscribe to a certain
portion of the unissued capital stock of a corporation within a
specified period and under the terms and conditions of the

grant, exercisable by the grantee at any time within the period
granted."3
The Rules provide that no corporation shall grant any stock
equitably;
c. Stock options granted to non-stockholders may be
granted only upon showing that the board has been
duly authorized to grant same by its charter or by a
resolution of the stockholders owning at least two-
thirds (2/3) of the outstanding capital stock of the
corporation, both voting and non-voting;
No exercise of the right of the option shall be valid unless

accompanied by the payment of not less than 40% of the total
Securities and Exchange Commission. 11, XXVIII SECURITIES AND EXCHANGE

2
Securities and Exchange Commission. 12, XXVIII SECURITIES AND EXCHANGE
3
Securities and Exchange Commission. 1, Rules Governing the Grants of Stock
Options (1977).
4
Options (1977).
The Rules also provide for the following guidelines:

a. Stock options may be granted on the basis of
proportionate interests of stockholders in the capital
stock;
b. Stock options granted to employees or officers who are
not members of the board may also be allowed after a
review of the scheme since it would be in consonance
with the policy of the government to widen corporate
base and to distribute corporate profits wider and more
option unless approval by the Securities and Exchange

Commission is first obtained. 4 Aside from a formal board
resolution authorizing the grant of the option, the Rules require
that the application with Securities and Exchange Commission
should contain a detailed statement as to the plan or scheme by
which the option shall be exercised.
price of the shares so purchased, which payment shall be

properly receipted for by the corporate treasurer, except where
the grantee is an employee or officer who is not a director of
the corporation in which case only 25% of the total price shall
be required, or allow a planned payroll deduction scheme.5 If
the option shall be for compensation or payment of services

H. Stock Options
Securities and Exchange Commission. 2(g), Rules Governing the Grants of

Stock Options (1997).
6
Securities and Exchange Commission. 2(g), Rules Governing the Grants of
Stock Options (1997).


d. Options granted to directors, managing groups and
corporate officers must be approved in a stockholders'
meeting by stockholders owning at least two-thirds
(2/3) of all the outstanding capital stock, voting or non-
voting;
e. The options must be exercised within a period of three
f.
(3) years from the approval thereof by the Securities

and Exchange Commission, or upon extension thereof
duly approved by the Securities and Exchange
Commission; and
No transfer of the right to an option shall be made
without the approval of the Securities and Exchange
Commission.1
price should not be lower than par or less than 80% of the
market price at the time of the exercise, or if there is no
transaction at the time of exercise, then the last asked price
whichever is higher; provided that if the shares are not listed,
the 80% referred to shall be based on book value.3

I. Re-Classification of Shares
of stock features like priority in dividend declarations or

absence of voting rights. Yet neither the reclassification nor
exchange per se yields income for tax purposes. . . In this case,
the exchange of shares, without more, produces no realized
income to the subscriber. There is only a modification of the
subscribers rights and privilegeswhich is not a flow of wealth
for tax purposes. The issue of taxable dividend may arise only
The Rules anticipates circumvention thereof through favorable

subscriptions which really are stock options. Therefore the Rules
provide that when a person has been allowed to subscribe to so
many shares as would make him a stockholder to at least 5% of
the total subscribed capital stock of the corporation at a price
below the current market price, even when the subscription is
above par, such subscription shall be considered and treated as
stock option and the subscriber must be required to tender
payment thereof to the corporation of at least 75% of the total
price of the subscription.2
Reclassification of shares does not always bring any substantial

alteration in the subscribers proportional interest. But the
exchange is differentthere would be a shifting of the balance
once a subscriber disposes of his entire interests and not when

there is still maintenance of proprietary interest. CIR v. Court
of Appeals, 301 SCRA 152 (1999).
The conversion of common shares into preferred shares,

pursued to the amendment of the SMC articles of incorporation,
is a legitimate exercise of corporate powers under the
Corporation Code. The conversion does not amount to SMC
using its funds to effect conversion, but would amount merely
to a reconfiguration of said (common) shares into preferred
Such subscriptions shall not also be transferable until full

payment thereof. If the shares are to be disposed of or sold, the

Options (1997).
2
Options (1997).

Options (1997).


shares. Philippine Coconut Producers Federation, Inc. v.
Republic, 600 SCRA 102 (2009).

IV. Hybrid Securities: Government v. Phil. Sugar Estates, 38 Phil. 15
(1918).

Tayabas Land Company, without any findings to costs.

Doctrine:

Government v. Phil. Sugar Estates

Facts: An action of quo warrant was brought by the Attorney-General in
behalf of the Republic of the Philippines against Philippine Sugar for its
dissolution on the ground that the latter had misused its corporate
authority and had engaged in the business of buying and selling real
in ruling that it is partnership (i.e., equity) arrangement:

a. There was no period fixed in the contract for the
repayment of the money, except that the first return
from sale of the land was to be devoted to the payment
of the capital, and there was no date fixed for such
payment;
b. The entire amount of the "credit" was not to be turned
over at once but was to be used by the "borrowing"
estate which was not part of its franchise.
Philippine Sugar entered into a contract with the Tayabas Land

Company for the purpose of engaging in the business of
purchasing lands along the right of way of the Manila Railroad
Company through the Province of Tayabas with a view to
reselling the same to the Manila Railroad Company at a profit.

Issue: Whether or not Philippine Sugar should be dissolved.

Held: YES. The judgment of the lower court should be modified. It is
hereby ordered and decreed that the franchise heretofore granted to
the defendant by which it was permitted to exist and do business as a
corporation in the Philippine Islands, be withdrawn and annulled and
that it be disallowed to do and to continue doing business in the
Philippine Islands, unless it shall within a period of six months after final
decision, liquidate, dissolve and separate absolutely in every respect
and in all of its relations, complained of in the petition, with The
In Government v. Philippine Sugar Estates Co. 38 Phil. 15 (1918),

the Supreme Court, in determining whether the arrangement
between two corporations was a contract of partnership or a
loan arrangement,1 noted the following features in the contract
company as it was needed;

c. The return on the capital was not by a fixed rate of
interest but 25% of the profits earned by the
"borrowing" company in "todos los negocios;"
d. The "lending" company agreed to pay 25% of all general
expenditures true and necessary that the "borrowing"
The issue arose from an alleged violation of then Section 13 of the old
Corporation Law which provided that no corporation shall be authorized to
conduct the business of buying and selling real estate or be permitted to hold
or own real estate except such as may reasonably necessary to enable it to
carry out the purposes for which it has been created; however, the section
authorized a corporation to loan funds upon real estate, security, and purchase
of real estate when necessary for the collection of loans, but it shall dispose of
real estate so obtained within five years after receiving the title.


company must make for the development of its
business;
e. The consent of the "lending" company was necessary
when the "borrowing" company desired to sell the land
at below an agreed market price, but was not required
if the selling price was over the benchmark figure; and
f.
The "lending" company acted as treasurer of the entire

enterprise.
The foregoing terms and conditions of the contract between the
two corporations indicated that although denominated as a loan
agreement, the arrangement between the companies was
actually one of partnership, with the amount "loaned"
constituting actual equity investment in the venture. The Court
held: "It is difficult to understand how this contract can be
considered a loan. There was no date fixed for the return of the
money and there was no fixed return to be made for the use of
the money. The return was dependent solely upon the profits of
the business. It is possible for the defendant to receive a return
from the business even after all of the `capital' has been
returned. The capital was to be returned as soon as the land
was sold and apparentlythere were to be no profits until this
capital was returned. The defendant was not to receive
anything for the use of said sum until after the capital had been
fully repaid, which is not consistent with the idea of loan. It is
not impossible to provide that the capital be repaid first but the
usual method is to pay the interest first. . ."
The other practical consideration for investors in choosing

between equity or loan investments in a corporation boils down
to tax considerations: the interests returns on loans or credit
investments are taxable to the lending company, whereas

dividend returns on equity investments are subject to zero rate
of income tax.1

V. Quasi-Reorganization

A. Reduction of Capital Stock (Section 38)

Section 38. Power to increase or decrease capital stock; incur, create
or increase bonded indebtedness.
No corporation shall increase or decrease its capital stock or incur,
create or increase any bonded indebtedness unless approved by a
majority vote of the board of directors and, at a stockholder's meeting
duly called for the purpose, two-thirds (2/3) of the outstanding capital
stock shall favor the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness. Written
notice of the proposed increase or diminution of the capital stock or of
the incurring, creating, or increasing of any bonded indebtedness and
of the time and place of the stockholder's meeting at which the
proposed increase or diminution of the capital stock or the incurring or
increasing of any bonded indebtedness is to be considered, must be
addressed to each stockholder at his place of residence as shown on
the books of the corporation and deposited to the addressee in the
Under the 1997 National Internal Revenue Code, although dividends received
by a domestic corporation from another domestic corporation are exempt from
income tax (Securities and Exchange Commission. 27[D][4]), beginning 1
January 1998, dividends declared from profits earned from that date to
individuals are subject to a final tax of 10% (Securities and Exchange
Commission. 24[B][2]).


post office with postage prepaid, or served personally.

A certificate in duplicate must be signed by a majority of the directors
of the corporation and countersigned by the chairman and the
secretary of the stockholders' meeting, setting forth:
Any increase or decrease in the capital stock or the incurring, creating

or increasing of any bonded indebtedness shall require prior approval
of the Securities and Exchange Commission.

One of the duplicate certificates shall be kept on file in the office of

1. That the requirements of this section have been complied with;

2. The amount of the increase or diminution of the capital stock;

3. If an increase of the capital stock, the amount of capital stock or
number of shares of no-par stock thereof actually subscribed, the
the corporation and the other shall be filed with the Securities and
Exchange Commission and attached to the original articles of
incorporation. From and after approval by the Securities and Exchange
Commission and the issuance by the Commission of its certificate of
filing, the capital stock shall stand increased or decreased and the
incurring, creating or increasing of any bonded indebtedness
authorized, as the certificate of filing may declare: Provided, That the
names, nationalities and residences of the persons subscribing, the

amount of capital stock or number of no-par stock subscribed by each,
and the amount paid by each on his subscription in cash or property,
or the amount of capital stock or number of shares of no-par stock
allotted to each stock-holder if such increase is for the purpose of
making effective stock dividend therefor authorized;

Securities and Exchange Commission shall not accept for filing any
certificate of increase of capital stock unless accompanied by the
sworn statement of the treasurer of the corporation lawfully holding
office at the time of the filing of the certificate, showing that at least
twenty-five (25%) percent of such increased capital stock has been
subscribed and that at least twenty-five (25%) percent of the amount
subscribed has been paid either in actual cash to the corporation or
4. Any bonded indebtedness to be incurred, created or increased;

5. The actual indebtedness of the corporation on the day of the
meeting;

6. The amount of stock represented at the meeting; and

7. The vote authorizing the increase or diminution of the capital stock,
that there has been transferred to the corporation property the

valuation of which is equal to twenty-five (25%) percent of the
subscription: Provided, further, That no decrease of the capital stock
shall be approved by the Commission if its effect shall prejudice the
rights of corporate creditors.

Non-stock corporations may incur or create bonded indebtedness, or
increase the same, with the approval by a majority vote of the board
or the incurring, creating or increasing of any bonded indebtedness.

of trustees and of at least two-thirds (2/3) of the members in a

meeting duly called for the purpose.


Bonds issued by a corporation shall be registered with the Securities
and Exchange Commission, which shall have the authority to
determine the sufficiency of the terms thereof. (17a)

Reduction of capital stock cannot be employed to avoid the

corporations obligations under the Labor Code. Madrigal & Co.
v. Zamora, 151 SCRA 355 (1987).

B. Stock Splits
On the other hand, in stock consolidations, new shares are

issued in replacement of old shares with a higher par or issued
value, without affecting the total value of the issued shares.

Stock consolidations are resorted to make each share have a
higher par or issued value and thereby make them more
expensive in acquiring and to bring the stock within higher end
of the market.3

VI. Shareholders Not Corporate Creditors. Garcia v. Lim Chu Sing, 59
Phil. 562 (1934).
In a stock split, each of the issued and outstanding shares is

simply broken up into a greater number of shares, each
representing a proportionately smaller interest in the

corporation. The usual purpose of a stock split is to lower the
price per share to a more marketable price and thus increase
the number of the potential shareholders. They encourage
investment.1

Facts: Lim Cuan Sy delivered to Mercantile Bank of China a promissory
note guaranteed by Lim Chu Sing as surety and also secured by a chattel
mortgage. It also has a stipulation that in case of default, the whole
Under Accounting Standards, when the number of additional

shares issued as a stock dividend is so great that it has, or may
reasonably be expected to have, the effect of materially
reducing the share market value, the transaction partakes of the
nature of a stock split. An issuance of additional shares of 20%
or more of the number of previously outstanding shares is
regarded as a stock split.2

C. Stock Consolidations

2
Statement of Financial Accounting Standards No. 18, par. 10.
Garcia v. Lim Chu Sing
amount will become due and demandable. Lim Cuan Sy failed to comply
with his obligation and so the bank required Lim Chu Sing as surety to
deliver the promissory note (P19, 605.17) with interest at 6% p.a.

Lim Chu Sing had been paying the monthly installments with interest on
thereon, leaving a balance of P9,105.17, after which he defaulted in the
payment of the installments which made the promissory note due and
demandable. The Mercantile Bank of China then foreclosed the chattel
mortgage and privately sold the property without the knowledge of Lim
Chu Sing. Lim Chu Sing is also the owner of shares of stock at the



corporation's capital, or the right to share in the proceeds when
the remaining assets of the corporation are distributed
according to law and equity, its holders do not own any part of
the assets represented by the capital of the corporation; nor are
the stockholders entitled to the possession of any definite
portion of the corporation's assets or properties. 2 Shares of
Mercantile Bank amounting to P10,000. Mercantile Bank seeks to apply

the amount of P10,000 representing the value of his shares of stock to
defendants indebtedness of P9,105.17.

Issue: Whether or not it is proper to compensate the indebtedness with
the value of the shares of stock

Held: NO. The defendant-appellant Lim Chu Sing not being a creditor of
the Mercantile Bank of China, although the latter is a creditor of the
former, there is no sufficient ground to justify a compensation.

Doctrine: The shares of a banking corporation do not constitute an
stock do not legally represent a proprietary claim of co-

ownership or tenancy-in-common in the assets and properties
of the corporation.3
The Supreme Court in Magsaysay-Labrador v. Court of Appeals,4
indebtedness of the corporation to the stockholder and, therefore, the

latter is not a creditor of the former for such shares. The indebtedness
of a shareholder to a banking corporation cannot be compensated with
the amount of his shares therein, there being no relation of creditor and
debtor with respect to such shares.
has characterized a stockholder's interest in corporate

contracts, transactions and properties, "if it exists at all, . . . is
indirect, contingent, remote, conjectural, consequential and
collateral. At the very least, their interest is purely inchoate, or
in sheer expectancy of a right in the management of the
corporation and to share in the profits thereof and in the
properties and assets thereof on dissolution, after payment of
the corporate debts and obligations."
Shares of stock in a corporation constitute personal property of

the stockholder, which he can contract with as in any other
form of property, like assignment by way of disposition, or
pledge by way of encumbrance. Shares of stock therefore are
properties and have intrinsic pecuniary value to the

VII. Subscription Contract (Sections. 60 and 72; overturned Trillana v.
Quezon Colegialla, 93 Phil. 383 [1953]).

the stockholder and the corporation. The subscription
stockholders.
Shares of stock, however, do not represent proprietary rights of

stockholders to the assets or properties of the corporation.
Although shares of stock represent aliquot parts of the

The subscription agreement underpins the relationship between
Boyer-Roxas v. Court of Appeals, 211 SCRA 470 (1992).

Magsaysay-Labrador v. Court of Appeals, 180 SCRA 266, 271-272 (1989);
Stockholders of F. Guanzon and Sons, Inc. v. Register of Deeds of Manila, 6
SCRA 373 (1962); Pascual v. Del Sanz Orozco, 19 Phil. 82, 86 (1911).
4
180 SCRA 266, 271 (1989).
3


agreement therefore is a special contract in Corporate Law;
although it is governed by the Law on Contracts, specifically as a
species of sale contracts, a subscription agreement has special
features that go beyond such discipline, and delve into the very
heart of Corporate Law.
subscription agreement shall exist upon meeting of the minds,

i.e., consent, it would necessarily mean that the covered shares
have therefore been issued by the corporation at that point in
time, since subscription and issuance as to a particular share of
stock happen exactly at same point in time, being merely
opposite sides of the same coin.

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 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)

It is subscription to shares of stock that creates the legal
subscriber becomes a stockholder of the corporation, and

through which he becomes the owners of the shares of stock
subscribed and exercise acts of ownership, subject to the
limiting provisions under the Corporation Code, such as the lien
which the corporation has over not fully paid shares under the
second paragraph of Section 63. In other words, unlike the
species sale, which constitutes merely a title and not a mode by
relationship between the stockholder and the corporation; it is

subscription, and not the payment of such subscription, that
grants to the stockholder the statutory and common rights
granted to stockholders.1
which ownership of the subject matter is transferred, a

subscription agreement constitutes the very mode by which the
covered shares are thereby issued and then owned by the
subscriber.
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)

A. When Shares Deemed Subscribed2
Therefore, a subscription agreement exists upon the meeting of

the minds of the corporation and the subscriber as to the
number and subscription value of shares. And since a
Fua Cun v. Summers, 44 Phil. 705 (1923).

2
What can be drawn from the provisions of Sections 60, 63, and
72 is that the entering into any contract for the acquisition of
unissued stock, which shall be deemed as subscription
agreement, would constitute itself the tradition by which the

B. Purchase Agreement: Bayla v. Silang Traffic Co., Inc., 73 Phil. 557
(1942).

Bayla v. Silang Traffic Co., Inc.

Facts: Sofronio Bayla and other petitioners instituted this action in the
CFI of Cavite against Silang Traffic Corporation in order to recover a sum


of money they paid to the corporation on account of shares of stock
they each agreed to take and pay for under the condition that if the
subscriber fails to pay any of the installments when due, or if they are
levied upon by the creditors of the said subscriber, the shares were to
revert to the seller and the payments already made will also be forfeited
contract over unissued shares of stocks. Section 60 of the present code

removed said distinctions and presently provides all agreements
pertaining to the purchase of unissued shares would be considered as
subscription agreements.

to the seller, and that the latter may take possession without court
proceedings. The agreement was later rescinded, although the Board of
Directors claim that such rescission is not applicable to Bayla and the
others because their failure to pay installments thereon had already
caused their shares and previous installments to be forfeited.

Issue: Whether or not the contract is a contract of subscription
o
o

Held: NO. The said agreement is entitled Agreement for Installment
Sale of Shares in the Silang Traffic Co, and while the purchaser is
designated as the subscriber and the corporation seller, the
agreement was entered into in 1935 long after the incorporation and
organization of the corporation which took place in 1927. The purchase
was to be payable in quarterly installments for five years. The lower
court failed to see the distinction between a subscription and a
purchase. Given that this is a sale, the rescission of such is valid.

Doctrine: A subscription, properly speaking, is the mutual agreement
of the subscribers to take and pay for the stock of a corporation, while a
purchase is an independent agreement between the individual and the
corporation to buy shares of stock from it at stipulated price.

NOTE: This case was decided under the old corporation law thats why
there were distinctions between a subscription contract and a purchase
Characteristics of Subscription Agreements. There can be a

subscription only with reference to shares of stock which have
never been issued, in the following cases:
The original issuance from authorized capital stock at

the time of incorporation;
The opening, during the life of the corporation, of the
portion of the original authorized capital stock
previously unissued; or
The increase of authorized capital stock achieved
through a formal amendment of the articles of
incorporation and registration thereof with the
Securities and Exchange Commission.
Any transaction covering issued shares of stock is not a

subscription agreement, and therefore is governed by the Law
on Sales on assignment.1
o
Bayla v. Silang Traffic Co., Inc., which was decided under

the Corporation Law, laid down the distinctions
between a subscription contract and a purchase
agreement. However, since the distinctions between a
subscription agreement and purchase of stock led to
various frauds being committed against stockholders
See Chapter XIV of the CLBs book LAW ON SALES (Rex Book Store, 1998 ed.),
on the characteristics of assignment of intangibles, like shares of stock, as a
species of sale.


and creditors of the corporation, Section 60 of the
Corporation Code removed such distinctions and now
provides that all agreements pertaining to the purchase
of unissued shares of stock of a corporation would be
considered as subscription agreements and governed by
the principles of Corporate Law.
incorporation agreement is replaced by the promoter's

contract, although this is merely an expectancy.1
subscribers. Whether it is a pre-incorporation agreement or an

ordinary subscription agreement, a subscription is essentially an
agreement among the stockholders. This is the second
relationship and the reason why it is provided in Section 61 that
a subscriber can only withdraw from the contract or agreement
when there is consent of all subscribers. Under this concept, a
subscription agreement is in a sense a contract among the

C. Pre-Incorporation Subscription (Section 61)

Section 61. Pre-incorporation subscription.
A subscription for shares of stock of a corporation still to be formed
shall be irrevocable for a period of at least six (6) months from the
several subscribers, and no one of the subscribers can thus

withdraw from the contract without the consent of all the
others and thereby diminish, without the universal consent of
all the others, the common fund in which all have acquired an
interest.2
date of subscription, unless all of the other subscribers consent to the

revocation, or unless the incorporation of said corporation fails to
materialize within said period or within a longer period as may be
stipulated in the contract of subscription: Provided, That no pre-
incorporation subscription may be revoked after the submission of the
articles of incorporation to the Securities and Exchange Commission.
(n)
Section 61 of the Corporation Code recognized that the

subscription agreement is a contract between the subscriber
and the corporation. Although the corporation is still non-
existent since it is still in the process of incorporation, it is still
bound, under the pre-incorporation agreement. The pre-
When properties were assigned pursuant to a pre-incorporation

subscription agreement, but the corporation fails to issue the
covered shares, the return of such properties to the subscriber
is a direct consequence of rescission and does not amount to
corporate distribution of assets prior to dissolution. On Yong v.
Tiu, 375 SCRA 614 (2002).
It also recognizes the contractual relationship among all the

On Yong v. Tiu

Facts: The Tiu family members are the owners of First Landlink Asia

2
SECURITIES AND EXCHANGE COMMISSION Opinion, 30 Oct. 1989, SECURITIES
AND EXCHANGE COMMISSION QUARTERLY BULLETIN 50-52 (1 March 1990).


Development Corporation (FLADC). One of the corporations projects is
the construction of Masagana Citimall in Pasay City. However, due to
financial difficulties (they were indebted to PNB for P190 million), the
Tius feared that the construction would not be finished. So to prevent
the foreclosure of the mortgage on the two lots where the mall was
mean its dissolution as provided in the Corporation Code." The

prohibition, therefore, under Section 122 against distribution of assets
or properties of the corporation does not apply.

The Court of Appeals correctly confirmed the rescission of the Pre-
being built, they invited the Ongs to invest in FLADC. The two parties
entered into a Presubscription Agreement whereby each of them would
hold 1,000,000 shares each and be entitled to nominate certain officers.
The Tius contributed a building and two lots, while the Ongs
contributed P100M.

Two years later, the Tuis filed for rescission of the Presubscription
Subscription Agreement on the basis of Art. 1191 of the Civil Code. Art.
1191. The power to rescind obligations is implied in reciprocal ones, in
case one of the obligors should not comply with what is incumbent
upon him. As a legal consequence of rescission, the order of the Court
of Appeals to return the cash and property contribution of the parties is
based on law, hence, cannot be considered an act of misappropriation.

Agremement because the Ongs refused to issue them their shares of

stock and from assuming positions of VP and Treasurer to which they
were entitled to nominate. The Ongs contended that they could not
issue the new shares to the Tius because the latter did not pay the
capital gains tax and the documentary stamp tax of the lots. And
because of this, the Securities and Exchange Commission would not
approve the valuation of the property contribution of the Tius. The
Doctrine: When properties were assigned pursuant to a pre-

incorporation agreement, but the corporation fails to issue the covered
shares, the return of such properties to the subscriber is a direct
consequence of rescission and does not amount to corporate
distribution of assets prior to dissolution.

NOTE: On 2003, The SC reversed itself on motion for reconsideration by
Court of Appeals ordered liquidation of FLADC to enforce rescission of

the contract which was granted only to prevent squabbles and
numerous litigations between the parties.

Issue: Whether or not the order of the Court of Appeals for the return
of the parties' contribution (distribution of FLADC assets, in the words of
the Ongs) violates Section 122 of the Corporation Code.

the Ongs which held: The rescission of the Pre-Subscription Agreement

will effectively result in the unauthorized distribution of the capital
assets and property of the corporation, thereby violating the Trust Fund
Doctrine and the Corporation Code, since rescission of a subscription
agreement is not one of the instances when distribution of capital assets
and property of the corporation is allowed. Rescission will, in the final
analysis, result in the premature liquidation of the corporation without
the benefit of prior dissolution in accordance with Sections 117, 118,
Held: NO. The Court of Appeals clarified in its Resolution promulgated

on August 17, 2000 that "in ordering liquidation, the Court does not
119 and 120 of the Corporation Code.


D. Release from Subscription Obligation: Tan v. Sycip, 499 SCRA 216
(2006).1

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 (as to other resolutions).

HOWEVER, the election of the four trustees cannot be legally upheld
Facts: Grace Christian High School (GCHS) is a nonstock, non-profit

educational corporation with fifteen (15) regular members, who also
constitute the board of trustees. During the annual members meeting
held on April 6, 1998, there were only eleven (11) living member-
trustees, as four (4) had already died. Out of the eleven, seven (7)
attended the meeting through their respective proxies. The meeting
was convened and chaired by Atty. Sabino Padilla Jr. over the objection
for the obvious reason that it was held in an annual meeting of the
members (where a majority of the Board were present), not of the
board of trustees. We cannot ignore the GCHS bylaw provision, which
specifically prescribes that vacancies in the board must be filled up by
the remaining trustees who must sit as a board in order to validly elect
the new ones.

of Atty. Antonio C. Pacis, who argued that there was no quorum. In the
meeting, Petitioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and
Judith Tan were voted to replace the four deceased member-trustees.

Held: NO. 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
Doctrine: Membership in and all rights arising from a non-stock

corporation are personal and non-transferable, unless the articles of
incorporation or the bylaws of the corporation provide otherwise. The
determination of whether or not dead members are entitled to
exercise their voting rights (through their executor or administrator)
depends on the articles of incorporation or bylaws.
Tan v. Sycip
articles of incorporation, constitutes the quorum. Under the By-Laws of

GCHS, membership in the corporation shall, among others, be
terminated by the death of the member. The dead members who are
dropped from the membership roster in the manner and for the cause
provided for in the By-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
Velasco v. Poizat, 37 Phil. 802 (1918); PNB v. Bituloc Sawmill, Inc., 23 SCRA
1366 (1968); National Exchange Co. v. Dexter, 51 Phil. 601 (1928).
One of the implications of considering the subscription contract

to be one entered into among stockholders is that it is beyond
the powers of the board of directors to release the subscribers
since the consent of all subscribers is necessary.2 And even if the
all the subscribers would approve the release of a particular
subscriber it is still not possible if the creditors would be
prejudiced, under the trust fund doctrine.3
Velasco v. Poizat, 37 Phil. 802 (1918)

3


E. Condition of Payment Provided in By-laws. De Silva v. Aboitiz & Co.,
44 Phil. 755 (1923).

De Silva v. Aboitiz & Co.1
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:

1. Actual cash paid to the corporation;

Facts: De Silva subscribed for 650 shares of stock. He has paid only 200
shares. Subsequently, the Board of said corporation declared, by
resolution, the unpaid subscription to be due and demandable; and
non-payment of which on the date fixed would amount to a sale of said
shares. De Silva questioned said authority of the Board, as the
corporation's by-laws provided that the Board may deduct an amount

2. Property, tangible or intangible, actually received by the
corporation and necessary or convenient for its use and lawful
purposes at a fair valuation equal to the par or issued value of the
stock issued;

3. Labor performed for or services actually rendered to the
from the net profit to be applied to unpaid subscriptions. He contended

that the Board cannot prescribe another manner of collecting unpaid
subscriptions when one has already been provided in the by-laws.

Held: The Court ruled that the Board of Directors has absolute
discretion to choose which remedy it deems proper in order to collect
on the unpaid subscriptions. If it does not which to make use of the
corporation;

4. Previously incurred indebtedness of the corporation;

5. Amounts transferred from unrestricted retained earnings to stated
capital; and

authority given to it in the by-law, it still has two other remedies. It may
put up the unpaid stock for sale as provided in Sections 38 to 48 of the
Corporation Law or by action in court.
6. Outstanding shares exchanged for stocks in the event of

reclassification or conversion.

Where the consideration is other than actual cash, or consists of
intangible property such as patents of copyrights, the valuation
thereof shall initially be determined by the incorporators or the board
of directors, subject to approval by the Securities and Exchange
Commission.

VIII. CONSIDERATION (Section 62):

Section 62. Considering for stocks.


Shares of stock shall not be issued in exchange for promissory notes or


of the cash consideration in order to make the subscription
agreement valid and binding. Indeed, a subscription agreement
is a consensual contract, perfect, valid and binding upon the
meeting of the minds of the parties on the subject matter (the
shares subscribed) and the consideration.
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)
the corporation and the subscriber may be "cash", the non-

payment of the consideration does not render the contract
invalid or void, for indeed the unpaid subscription constitutes
"subscription receivable" in the books of the corporation. Only
when there is a call by the board, or when under the terms of
the subscription agreement payment is due, is the stockholder
legally required to pay actual cash to the corporation, and
failure to do so would subject the shares to being declared
delinquent and leading to the suspension of the rights of a
stockholder.
Atty. Hofilea while youre free to choose how you pay for
your shares, the company must always receive the value for the
shares they are parting with.
Stock dividends are in the nature of shares of stock, the

consideration for which is the amount of unrestricted retained
earnings converted into equity in the corporations books.
Lincoln Phil. Life v. Court of Appeals, 293 SCRA 92 (1998).1

B. Property3

A. Cash2
The property which a corporation may accept in exchange for its

stock must be of a kind which the corporation may lawfully
acquire and hold in carrying out the purposes of its
incorporation, and which is necessary or proper for it to own in
carrying on its business. 4 It cannot lawfully issue stock for
property which its charter does not authorize it to acquire, or
for property acquired for an unauthorized purpose.
In spite of the wordings of Section 62 of cash actually paid to

the corporation, it is not required that there be actual payment
The basis for determining the documentary stamps due on stock dividends
declared would be their book value as indicated in the latest audited financial
statements of the corporation, and not the par value thereof. Commissioner of
Internal Revenue v. Lincoln Phil. Life Insurance Co., 379 SCRA 423 (2002).
2
Therefore, even though the consideration agreed upon between

4
Securities and Exchange Commission. 62, Corporation Code.

other stockholders. Compensation payable for services actually

rendered to the corporation is credit which is property and
whose value is ascertainable.
The property must be of substantial nature, having a pecuniary

value capable of being ascertained, and must be something real
and tangible as distinguished from something constructive or
speculative; and it must be of such character that it can be
delivered to the corporation, instead of being merely
communicated to its officers or employees. It must also be such
as is capable of being applied to the payment of debts and of
distribution among the stockholders.
The Securities and Exchange Commission has ruled that

property, such as financial instruments and receivables, may be
legally accepted as capital contributions, subject to the
following conditions:
a. Actually received by the corporation;
b. Necessary or convenient for the corporations use and
future is void under Section 62 of the Corporation Code, and the

corporation should not be estopped to deny that the services
constituted payment of the stock subscription even though it
has received the benefit thereof.

D. Shares3
lawful purpose; and

c. At a fair valuation equal to the par value of the stock
issued to be approved by the Securities and Exchange
Commission.1

C. Service2
A corporation is allowed to receive as payment for its stocks not

only money and property but also labor performed for or
services actually rendered to the corporation provided the
transaction is in good faith and no fraud is perpetrated upon
SECURITIES AND EXCHANGE COMMISSION Opinion, 25 January 1995, XXIX

1995)
2
An agreement to issue stock for services to be rendered in the
Stock dividends are in the nature of shares of stock, where the

consideration is the amount of unrestricted retained earnings
converted into equity in the corporations books.4
o Declaration of stock dividends should be distinguished
from reclassification or conversion of shares which do
not really affect the integrity of capital stock which has
been paid-up previously but only changes its
composition or manner of classification.

E. Retained Earnings

F. Watered Stocks (Section 65)

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

4
Lincoln Philippine Life v. Court of Appeals, 293 SCRA 92, 96 SCAD 542 (1998).


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
directors of any stock corporation may at any time declare due and
payable to the corporation unpaid subscriptions to the capital stock
and may collect the same or such percentage thereof, in either case
with accrued interest, if any, as it may deem necessary.

received at the time of issuance of the stock and the par or issued
value of the same. (n)
Payment of any unpaid subscription or any percentage thereof,

together with the interest accrued, if any, shall be made on the date
specified in the contract of subscription or on the date stated in the
call made by the board. Failure to pay on such date shall render the
entire balance due and payable and shall make the stockholder liable
for interest at the legal rate on such balance, unless a different rate of
interest is provided in the by-laws, computed from such date until full
Shares issued as fully paid when in truth the consideration

received is known to be less than the par value or issued value
of the shares are called "watered stock". The term sometimes is
used to include "bonus shares" under an agreement that
nothing shall be paid to the corporation for them, and "discount
shares" issued at a discount under an agreement to pay less
than the par value in money.1

G. Payment of Balance of Subscription (Sections 66 and 67):

payment. If within thirty (30) days from the said date no payment is
made, all stocks covered by said subscription shall thereupon become
delinquent and shall be subject to sale as hereinafter provided, unless
the board of directors orders otherwise. (38)

1. Nature of the Call (Section 67): The word call is capable of
three meanings, namely: (a) it may mean the resolution of the
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
board of directors for the payment of unpaid subscriptions; (b)

notification of such resolution made on the stockholders; or (c)
the time when subscriptions become payable.2
o A call must be uniform with respect to all holders of the
class of shares on which it is made who have already
paid an equal amount on their shares, and as a general
the by-laws, such rate shall be deemed to be the legal rate. (37)

Section 67. Payment of balance of subscription.
Subject to the provisions of the contract of subscription, the board of

SECURITIES AND EXCHANGE COMMISSION Opinion, 31 August 1995, XXX

1996).


rule it must not exceed the balance remaining unpaid
on their shares.
2. When Call Not Necessary: There are two (2) instances when call
is not necessary to make the subscriber liable for payment of
the unpaid subscription:
a. When, under the terms of the subscription contract,
subscription is payable, not upon call, but immediately,
or on a specified day, or when it is payable in
installments at specified times; and
b. If the corporation becomes insolvent, which makes the
liability on the unpaid subscription due and demandable
regardless of any stipulation to the contrary in the
subscription agreement.
Lingayen Gulf Electric Power Co. v. Baltazar, 93 Phil. 404

(1953).

Lingayen Gulf Electric Power Co. v. Baltazar

Facts: Companys president subscribed to shares and paid partially. The
Board made a call for payment through a resolution with the first 50%
payable within 60 days beginning August 1, 1946, and the remaining
50% payable within 60 days beginning October 1, 1946. The resolution
provided that all unpaid subscriptions after the due dates would be
subject to a 12% interest per annum, and if after February 1947 they
remain unpaid, they would revert to the corporation. This resolution
was set aside about a year later by Resolution No. 17 which stated that
the company was in no position to absorb unpaid shares, and the Board
decided to issue a call for payment of unpaid shares. Resolution No. 4
was passed a year later directing for the revaluation of shares. However,
the president refused to pay, prompting the corporation to sue. The

defense was that the call was invalid for lack of publication, and that the
defendant was released from liability by virtue of Resolution 17 and 4.

Issue: Whether or not the respondent is liable for unpaid subscription
despite the lack of publication.

Held: NO. Notice of any call for the payment of unpaid subscription
should be made not only personally but also by publication once a
week, for four consecutive weeks in some newspapers in accordance
with Section 40 of the Corporation Code. It will be noted that section 40
is mandatory as regards publication, using the word "must". The claim
that Baltazar was released from liability of paying under Resolution No.
17 and 4 does not hold water because the release attempted in
Resolution No. 17 of 1946 was not valid for lack of a unanimous vote. If
found that at least seven stockholders were absent from the meeting
when said resolution was approved.

Doctrine: In conclusion we hold that under the Corporation Law, notice
of call for payment for unpaid subscribed stock must be published,
except when the corporation is insolvent, in which case, payment is
immediately demandable. We also rule that release from such payment
must be made by all the stockholders.

The Lingayen v. Baltazar case faced the question on whether or

not a shareholder may be released from payment without
forfeiting his shares.
Atty. Hofilea iffy about the implication of releasing a

shareholder from obligation if with consent of the
stockholders, because it violates the trust fund doctrine.
A stockholder who is employed with the company, cannot offset

his unpaid subscription against his awarded claims for wages,
where there has been no call for the payment of such
subscription. Apodaca v. NLRC, 172 SCRA 442 (1989).

H. Delinquency on Subscription (Sections 68, 69, 70 and 71; Philippine
Trust Co. v. Rivera, 44 Phil. 469 [1923]; Miranda v. Tarlac Rice Mill Co.,
57 Phil. 619 [1932])

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.

Section 69. When sale may be questioned.
No action to recover delinquent stock sold can be sustained upon the
ground of irregularity or defect in the notice of sale, or in the sale itself
of the delinquent stock, unless the party seeking to maintain such
action first pays or tenders to the party holding the stock the sum for
which the same was sold, with interest from the date of sale at the
legal rate; and no such action shall be maintained unless it is


b. Failure to pay the subscription on the date specified on
the contract of subscription.
2. Effects of delinquency
a. It disqualifies the stockholder to be voted for or be
entitled to vote or to representation at any
stockholder's meeting;
commenced by the filing of a complaint within six (6) months from the
date of sale. (47a)

Section 70. Court action to recover unpaid subscription.
Nothing in this Code shall prevent the corporation from collecting by
action in a court of proper jurisdiction the amount due on any unpaid
subscription, with accrued interest, costs and expenses. (49a)

Section 71. Effect of delinquency.
No delinquent stock shall be voted for, be entitled to vote or to
representation at any stockholder's meeting, nor shall the holder
thereof be entitled to any of the rights of a stockholder except the
b. It disqualifies the stockholder to exercise any rights of a

stockholder except the right to dividends, until and
unless he pays the amount due on his subscription with
accrued interest and the costs and expenses of
advertisement, if any.
right to dividends in accordance with the provisions of this Code, until

and unless he pays the amount due on his subscription with accrued
interest, and the costs and expenses of advertisement, if any. (50a)
of the regular or special meeting of the stockholders, nor shall

the shares be included in the determination of a quorum for
shareholdings meetings. 2 The only right remaining to a
delinquent stockholder is the right to receive dividends under
Section 71 of the Corporation Code, but the cash dividend due
The prescriptive period to recover on unpaid subscription does
shall first be applied to the unpaid balance, while stock dividend

shall be withheld until the unpaid balance is fully paid. In effect,
the stockholders right to dividend is even restricted.3
3. Who May Question a Delinquency Sale? (Section 68 and 69).
not commence from the time of subscription but from the time
of demand by Board of Directors to pay the balance of
subscription. Garcia v. Suarez, 67 Phil. 441 (1939).
Who is the Highest Bidder? Remaining shares go to the
delinquent stockholder for the simple reason that Section 68

protects the delinquent stockholder himself. Corporations are
not supposed to make money out of the sale.1
1. Delinquency is achieved in either one of two ways:
a. Failure to pay the subscription on the date mentioned in
the call; or

The holders of delinquent shares shall not be entitled to notice

IX. CERTIFICATE OF STOCK (Section 63)

SECURITIES AND EXCHANGE COMMISSION Opinion, 13 March 1998, XXXII

1998).
3
SECURITIES AND EXCHANGE COMMISSION Opinion, 13 March 1998, XXXII
1998).


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-

Facts: Alfonso Tan owned 400 shares of Visayan Educational Supply
Corporation, and was president until 1982 and director until 1983. In
1981, two of Visayans incorporators withdrew from the company. To
laws. Shares of stock so issued are personal property and may be

transferred by delivery of the certificate or certificates endorsed 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
satisfy the 5-member minimum requirement of the Board of Directors,

petitioner Alfonso sold 50 of his shares to his brother Angel. With the
sale, Petitioner Alfonsos stock certificate no. 2 was cancelled, and stock
certificates no. 6 (Angels 50 shares) and no. 8 (remaining 350 shares)
were signed and issued by Angel as the new director and VP of Visayan,
upon orders of the president, Alfonso. Allegedly, Alfonso was required
to endorse stock certificate no. 2 but he failed to give it back 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)
decided to keep it. Later, Alfonso withdrew from the corporation on

condition that he be paid with stocks-in-trade equivalent to 33.3% in
lieu of the stock value of his shares in the amount of P35,000.00.
Subsequently, the board of Visayan voted and cancelled stock
certificates no. 2 and no. 8. Years later, Alfonso brought a case to the
Securities and Exchange Commission of Cebu questioning, for the first
time, the cancellation of stock certificates no. 2 and no. 8. He contends

A. Nature of Certificate:
A stock certificate is not necessary to render one a stockholder

in a corporation; nevertheless, it is the paper representative or
tangible evidence of the stock itself and the various interests
therein. The stock certificate expresses the contract between
the corporation and the stockholder, but it is not essential to
the existence of a share in stock or the creation of the relation
of shareholder to the corporation. Tan v. Securities and
Exchange Commission, 206 SCRA 740 (1992).1
C.N. Hodges v. Lezama, 14 SCRA 1030 (1965); Ponce v. Alsons Cement Corp.,
393 SCRA 602 (2002); Nautica Canning Corp. v. Yumul, 473 SCRA 415 (2005).
Tan v. Securities and Exchange Commission
the cancellation on the ground that there was never any endorsement
from Alfonso and that he never delivered his stock certificates,
rendering the transfer ineffective under Section 63 of the Corporation
Code.

Issue: Whether or not Alfonsos argument that the wording of Section
63 of the Corporation Code requires delivery as a mode of transfer is
correct.

Held: NO. The requirement of delivery under Section 63 is merely


directory and not mandatory. Furthermore, there is no doubt that there
was delivery of Stock Certificate No. 2 made by the petitioner to the
Corporation before its replacement with the Stock Certificate no. 6 no.
8. The problem arose when petitioner was given back stock certificate
no. 2 for him to endorse and instead he deliberately withheld it. The
transfer was recognized when Angel, became a director and the Vice
President of the company by reason of his fifty (50) shares from
Alfonso. The certificate is not stock in the corporation but is merely
evidence of the holders interest and status in the corporation, his
ownership of the share represented thereby, but is not in law the
equivalent of such ownership.

corporation as the owner, he is considered a

stockholder or record and is entitled to all the rights of a
stockholder.1
Atty. Hofilea at the end of the day, there may be

circumstances which the Court may allow as basis to dispense
justice.
1. Probative Value of Certificate of Stock
Even without the covering certificate of stock having been

issued, yet, the registered subscriber to the shares may validly
and legally transact with the shares, and sell and dispose of
them to any interested buyer thereof provided he complies with
the right of first refusal provided for in the by-laws (?) of the
corporation. Makati Sports Club, Inc. v. Cheng, 621 SCRA 103
(2010).

Doctrine: Section 63 provides that xxx Shares of stocks so issued are

personal property and may be transferred by delivery of the certificate
or certificates indorsed by the owner. The Court held that the use of
the word may is merely permissive rather than mandatory. The word
may indicates that the transfer may be effected in a manner different
from that provided for in the law.

The Securities and Exchange Commission has aptly ruled

that a person may own shares of corporate stock
without possessing a stock certificate which after all is
merely an evidence of ownership of the stock; and that
for as long as the subscriber to the stock is duly
recorded in the stock and transfer book of the
Makati Sports Club, Inc. v. Cheng

Facts: The Board of Directors of Makati Sports Club (MSCI) adopted a
resolution authorizing the sale of 19 unissued shares at a floor price.
Defendant Cheng was a Treasurer and Director of MSCI. Hodreal
expressed his interest to buy a share and requested his name be
A certificate of stock is the evidence of a holders interest and

status in a corporation it is prima facie evidence that the
holder is a shareholder of a corporation; it is not the share itself.
Lincoln Phil. Life v. Court of Appeals, 293 SCRA 92 (1998); Lao v.
included in the waiting list. McFoods also expressed interest in acquiring

a share. A Deed of Absolute Sale was executed and a Stock Certificate
was issued to McFoods. McFoods then sent a letter to the MSCI giving
Lao, 567 SCRA 558 (2008).

SECURITIES AND EXCHANGE COMMISSION Opinion, 6 January 1999, XXXIII
SECURITIES AND EXCHANGE COMMISSION QUARTERLY BULLETIN 44 (No. 1, June,
1999).


advise of its offer to resell the share. It appears that while the sale
between the MSCI and McFoods was still under negotiations, there
were negotiations between McFoods and Hodreal for the purchase by
the latter of a share of the MSCI. Upon request, a new certificate was
issued. An investigation was then conducted and the committee held
MSCI received McFoods letter of offer to sell the share, that McFoods
and Hodreal executed the Deed of Absolute Sale over the said share of
stock.

Doctrine: A certificate of stock is the paper representative or tangible
that there is prima facie evidence to show that defendant Cheng

profited from the transaction because of her knowledge.

MSCI asserts that McFoods never intended to become a legitimate
holder of its purchased Class A share but did so only for the purpose
of realizing a profit in the amount of P1,000,000 at the expense of the
former. MSCI further claims that Cheng confabulated [this means
evidence of the stock itself and of the various interests therein. The
certificate is not a stock in the corporation but is merely evidence of the
holders interest and status in the corporation, his ownership of the
share represented thereby. It 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 of stock or
the nature of the relation of shareholder to the corporation.
talked] with McFoods by providing it with an insiders information as to

the status of the shares of stock of MSCI and even, allegedly with
unusual interest, facilitated the transfer of ownership of the subject
share of stock from McFoods to Hodreal, instead of an original, unissued
share of stock.

Issue: Whether or not McFoods violated Section 30(e) of MSCIs
Amended By-Laws on its pre-emptive rights

Held: NO. When McFoods offered for sale one Class A share of stock
to MSCI for the latter to exercise its pre-emptive right as required by
Section 30(e) of MSCIs Amended By-Laws, it legally had the right to do
so since it was already an owner of a Class A share by virtue of its
payment, and the Deed of Absolute Share, notwithstanding the fact that
the stock certificate was issued only later. Without doubt, MSCI failed to
repurchase McFoods Class A share within the thirty (30) day pre-
emptive period as provided by the Amended By-Laws. It was only when

The fact that the stock certificates registered in the name of one
person are found in the possession of another stockholder does
not prove that the possessor is the owner of the covered shares.
A stock certificate is merely a tangible evidence of ownership of

shares of stock. Its presence or absence does not affect the right
of the registered owner to dispose of the shares covered by the
stock certificate. Republic v. Estate of Hans Menzi, 475 SCRA 20
(2005).
2. Issuance of Certificate of Stock
A certificate of stock could not be considered issued in

contemplation of law unless signed by the president or vice-
president and countersigned by the secretary or assistance
secretary. Bitong v. Court of Appeals, 292 SCRA 503 (1998).
The issuance or delivery of the certificate of stock is not

necessary to constitute the subscriber a stockholder of the
corporation; however, delivery is generally, an essential

element of the issuance of the certificate of stock itself. There is
no issuance of the certificate where it is never detached from
the certificate book although the blanks therein are properly
filled up, if the person whose name is inserted therein has no
control over the books of the corporation.1

B. Quasi-Negotiable Character of Certificate of Stock
While the issuance of a stock certificate is not a condition
A certificate of stock is merely a quasi-negotiable instrument in
precedent to render one a stockholder, under Section 63 of the

Corporation Code every stockholder has a right to have a proper
certificate issued to him by the corporation upon demand, as
soon as he has complied with the conditions under Section 64 of
the sense that it may be transferred by endorsement, coupled

with delivery; but it is not negotiable because the holder
thereof takes it without prejudice to such rights or defenses as
the registered owners or transferors creditors may have under
the Corporation Code which requires full payment of the

subscription.2
the law, except only insofar as such rights or defenses are

subject to the limitations imposed by the principles governing
estoppel. De los Santos v. Republic, 96 Phil. 577 (1955).

The Securities and Exchange Commission has opined that the

remedies available to a stockholder if a corporation wrongfully
refuses to issue a certificate of stock are as follows:
a. To file a suit for specific performance of an express or
implied contract;
b. To file for an alternative relief by way of damages where
specific performance cannot be granted;
c. To file a petition for mandamus to compel the issuance
of the certificate where the conditions, facts and
circumstances of the particular case bring it within the
legal rules which govern the granting of the writ; or
d. To rescind the contract of subscription if the

corporation wrongfully refuses to deliver a certificate,
and sue to recover back what has been paid.3
Tuazon v. La Previsora Filipina, 67 Phil. 36 (1938), quoting from 11 FLETCHER

CYC. CORP., at 324-325.
2
SECURITIES AND EXCHANGE COMMISSION Opinion, 6 January 1999, XXXIII
SECURITIES AND EXCHANGE COMMISSION QUARTERLY BULLETIN 44 (No. 2, June,
1999).
De los Santos v. Republic

Facts: This involves the title to 1,600,000 shares of stock of the Lepanto
Consolidated Mining Co., Inc. (Lepanto), a domestic corporation.
Originally, half of said shares of stock were claimed by Apolinario de los
Santos, and the other half, by Isabelo Astraquillo. During the pendency
of this case, Astraquillo has allegedly conveyed and assigned his interest
in his shares to de los Santos. The shares in question are covered by
several stock certificates issued in favor of Vicente Madrigal, who is
registered in the books of Lepanto as owner of said stocks and whose
indorsement in blank appears on the back of said certificates.
SECURITIES AND EXCHANGE COMMISSION Opinion, 8 January 1987, XXI

Securities and Exchange Commission QUARTERLY BULLETIN 1 (No. 1, March 1987);
SECURITIES AND EXCHANGE COMMISSION Opinion, 9 June 1988, XXII SECURITIES
AND EXCHANGE COMMISSION QUARTERLY BULLETIN 18 (Nos. 3, Sep. 1988).


De los Santos contends that he bought 55,000 shares from Juan Campos
and 1,200,000 shares from Carl Hess. On the other hand, the US
Attorney General contends that prior to the outbreak of the war in the
Pacific, said shares of stock were bought by Vicente Madrigal, in trust
aware of sufficient facts to put them on notice of the need of inquiring

into the regularity of the transactions and the title of the supposed
vendors. Indeed, the certificates of stock in question were in the name
of Madrigal. Obviously, Campos and Hess were not registered owners of
the corresponding shares of stock. Being presumed to know the law
for, and for the benefit of, the Mitsui Bussan Kaisha (Mitsuis), a
corporation organized in accordance with the laws of Japan, with branch
office in the Philippines. They further contend that Madrigal delivered
the corresponding stock certificates to the Mitsuis, which kept them in
its office in Manila, until the liberation of the city by the American forces
early in 1945. They add that the Mitsuis had never sold, or otherwise
disposed of the shares and that these must have been looted during the
and, as experienced traders in shares of stock, plaintiffs must have been

conscious of the consequent infirmities in the title of the supposed
vendors, or of the handicaps. Moreover, the aforementioned sales were
admittedly hostile to the Japanese, who had prohibited it and plaintiffs
had actual knowledge of these facts and of the risks attendant to the
alleged transaction. In other words, plaintiffs advisedly assumed those
risks and, hence, they cannot validly claim, against the registered
liberation.

After the war, pursuant to the all property vested in the United States,
or any of its officials, under the Trading with the Enemy Act, located in
the Philippines at the time of such vesting, or the proceeds thereof, shall
be transferred to the Republic of the Philippines (this is why the
Republic is a party).
stockholder, the status of purchasers in good faith.

Doctrine: Section 35 of the Corporation Law reads that A share of stock
may be transferred by endorsement of the corresponding stock
certificate, coupled with its delivery. However, the transfer shall not be
valid, except as between the parties, until it is entered and noted
upon the books of the corporation. No such entry in the name of the

Issue: Whether or not plaintiffs had purchased the shares of stock.

Held: NO. It appears that the only evidence on the alleged sale of the
shares of stock in question is the testimony of de los Santos. Campos
and Hess, the alleged vendors, could not take the witness stand because
both are already dead. The record shows that Madrigal had never
disposed of said shares of stock in any manner, except by turning over
plaintiffs having been made, it follows that the transfer allegedly

effected by alleged seller in their favor is not valid, except as between
themselves. It does not bind either Madrigal or the Mitsuis, who are not
parties to said alleged transaction.

the corresponding stock certificates to the Mitsuis, the beneficial and

true owners. At any rate, at the time of the alleged sales, plaintiffs were

Atty. Hofilea while stock certificates sound like its a

negotiable instrument (hence the term quasi-negotiable) its
actually not.
o Stock certificates are not quite negotiable instruments
though you can transfer them by delivery or
endorsement. It is still subject to defenses the endorser

might have. As such, where a stock certificate is
negotiated in blank, you should consider the
circumstances that might surround such blank stock
certificate determine the nature of holding.
Stock certificates are evidence of ownership. They are
transfer of shares only if the same is coupled with delivery. The

delivery of the stock certificate duly endorsed by the owner is
the operative act of transfer of shares from the lawful owner to
the new transferee. But to be valid against third parties, the
transfer must be recorded in the books of the corporation.
Bitong v. Court of Appeals, 292 SCRA 503 (1998); Raquel-
not like transfer certificate of title (TCT) of land.
Santos v. Court of Appeals, 592 SCRA 169 (2009).
Since certificates of stock are quasi-negotiable in nature, the

normal mode of dealing with such certificates is by the process
of endorsement and delivery. It must be noted that
endorsement and delivery of certificates of stock may be for
any of the three (3) purposes:1
a. For sale or assignment of the shares;
b. Pursuant to a trust or nominee arrangement; or
c. By way of pledge or encumbrance of the shares.
Endorsement is an essential ingredient in dealing with

certificates of stock, and generally cannot be dispensed with.
o In order for a transfer of stock certificate to be effective,
it 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.
Indorsement of the certificate of stock is a mandatory
requirement of law for an effective transfer of a
certificate of stock. Razon v. IAC, 207 SCRA 234 (1992).
The rule is that the endorsement of the certificate of stock by

the owner or his attorney-in-fact or any other person legally
authorized to make the transfer shall be sufficient to effect the


Bitong v. Court of Appeals

Facts: The 2 cases originated from a derivative suit filed by petitioner-
Bitong before the Securities and Exchange Commission. Petitioner
complained of irregularities committed by Eugenia Apostol, President
and Chairperson of the Board of Directors of Mr. & Ms. Publishing Co,
Inc. (Mr. & Ms. Co.) She claims that Eugenia and her husband Jose were
liable for fraud, misrepresentation, disloyalty, evident bad faith, conflict
of interest and mismanagement in directing the affairs of Mr. & Ms. Co.
to the damage and prejudice of the corporation, its stockholders,
including petitioner. These acts include cash advances to the Philippine
Daily Inquirer (of which Spouses Apostol were stockholder, directors
and officers), as well as purchase of PDI shares with money of Mr. & Ms.
Co.
Respondents aver that petitioner does not have personality to initiate
and prosecute a derivative suit because she was merely a holder-in-trust
of JAKA shares. It was recounted that Mr & Ms Co. stemmed from the
restructuring of a failed prior venture by organizing a new corporation
with the help of JAKA Investment Corporation and the Apostols.

Issue: Whether or not Bitong was a stockholder, therefore giving her


personality to prosecute a derivative suit against private respondents.

Held: NO. The records are unclear on how petitioner allegedly acquired
the shares of stock of JAKA. Petitioner being the CEO of JAKA and the
sole person in charge of all the business and financial transactions and
affairs of JAKA was supposed to be in the best position to show
convincing evidence on the alleged transfer of shares to her, if indeed
there was a transfer.

As found by the Securities and Exchange Commission Hearing Panel,
there was overwhelming evidence despite what appears on the
certificate of stock and stock and transfer book, petitioner was not a
bona fide stockholder of Mr. & Ms. Co. before March 1989 or at the
time the complained acts were committed to qualify her to institute a
stockholders derivative suit against private respondents. Bitong
admitted that Apostol (as president of the corporation) only signed her
certificate of stocks in 1989

Doctrine: For a valid transfer of stocks, the requirements are as follows:
1. There must be delivery of the stock certificate
2. Certificate must be endorsed by the owner or his attorney-in-
fact or other legally authorized to make the transfer
3. To be valid against 3rd persons, the transfer must be recorded
in the books of the corporation.
Considering that the requirements provided under Securities and
Exchange Commission. 63 of The Corporation Code should be
mandatorily complied with, the rule on presumption of regularity
cannot apply. The regularity and validity of the transfer must be proved.

Even when a formal Deed of Assignment covering the shares

was duly executed, without the endorsement and delivery of
the covering certificates of stocks, the covered shares cannot be
deemed to transferred and registered in the names of the
assignees. Rural Bank of Lipa City v. Court of Appeals, 366 SCRA
188 (2001); Rivera V. Florendo, 144 SCRA 643 (1986).

Rural Bank of Lipa City v. Court of Appeals

Facts: Reynaldo Villanueva, Sr., a stockholder of the Rural Bank of Lipa
City, executed a Deed of Assignment, assigning his shares, as well as
those of 8 other shareholders under his control with a total of 10, 467
shares, in favor of the stockholders of the Bank represented by its
directors Bernardo Bautista, Jaime Custodio and Octavio Katigbak. The
spouses Villanueva was indebted to the bank and in a board meeting
assured the bank that they would pay, otherwise the bank would be
entitled to liquidate their shareholdings, including those under their
control. The spouses failed to settle their obligation and ignored the
Banks demands, whereupon their shares of stock were converted into
Treasury Stocks.

In January 1994, a new set of officers was elected but the spouses
Villanueva were not notified, and so they questioned the validity of the
proceedings. The new set of officers informed Atty. Ignacio that the
Villanuevas were no longer entitled to notice of the said meeting since
they had relinquished their rights as stockholders in favor of the Bank.

Issue: Whether there was a valid transfer of the shares to the Bank that
would preclude the spouses Villanueva of any right to participate as


stockholder or board member

Held: NO. While it may be true that there was an assignment of the
spouses shares to the petitioners, said assignment was not sufficient to
effect the transfer of shares since there was no endorsement of the
Section 64. Issuance of stock certificates.

No certificate of stock shall be issued to a subscriber until the full
amount of his subscription together with interest and expenses (in
case of delinquent shares), if any is due, has been paid. (37)

certificates of stock by the owners, their attorneys-in-fact or any other

person legally authorized to make the transfer. Moreover, petitioners
admit that the assignment of shares was not coupled with delivery, the
absence of which is a fatal defect.

Still, while the assignment may be valid and binding on the petitioners
and private respondents, it does not necessarily make the transfer
effective. Consequently, the petitioners, as mere assignees, cannot
enjoy the status of a stockholder, cannot vote nor be voted for, and will
not be entitled to dividends, insofar as the assigned shares are
concerned. Parenthetically, the private respondents cannot, as yet, be
deprived of their rights as stockholders, until and unless the issue of
ownership and transfer of the shares in question is resolved with
finality.

Doctrine: The rule is that the delivery of the stock certificated duly
endorsed by the owner is the operative act of transfer of shares from
the lawful owner to the transferee. Thus, title may be vested in the
transferee only by delivery of the duly indorsed certificate of stock. For
a valid transfer of stocks, there must be strict compliance with the mode
of transfer prescribed by law.

C. Right to Certificate of Stock for Fully Paid Shares (Section 64)

The Board resolution which prohibited from voting shares of

stocks which were not fully paid, although certificates have
been issued for them. Not fully paid shares which are not
delinquent may not be denied their voting rights. It also held
that (under the old Corporation Law) unless prohibited by the b-
laws, certificates of stock may be issued for less than the
number of the shares subscribed for provided the par value of
ach of the stocks represented by each of the certificates has
been paid. Baltazar v. Lingayen Gulf Elect. Power Co., Inc., 14
SCRA 522 [1965]).

Baltazar v. Lingayen Gulf Elect. Power Co., Inc.

Facts: Plaintiffs Baltazar and Rose (Batazar Group) were incorporators of
Lingayen Gulf Electric Power Co, subscribed to 600 and 400 shares of
the capital stock, respectively. Of the 600 shares of capital stock
subscribed by Baltazar, he had fully paid 535 shares of stock, and the
Corporation issued to him several certificates of stock, corresponding to
the 535 shares. Of the 400 shares of stock subscribed by Rose, he had
375 shares of fully paid stock, duly covered by certificates of stock
issued to him. The respondents Ungson, Estrada, Fernandez and Yuson
(Ungson Group) were stockholders of the Corporation, all holding a total
number of fully paid-up shares of stock, of less than100 shares. and the
defendant Acena (part of the Ungson Group), was an incorporator and


stockholder, holding 600 shares of stock. Ungson, Estrada, Fernandez
and Yuzon, where Directors of the Corporation.

The Ungson group, passed three (3) resolutions which essentially says
that:
said payments; its call for payment of unpaid subscription and its
declaration of delinquency for non-payment of said call affecting only
the remaining number of shares of its capital stock for which no fully
paid capital stock shares certificates have been issued, and only do not
have voting rights by said declaration of delinquency.
1. All watered stocks issued to Acena, Baltazar, Rose and

Jubenville, of no value and consequently cancelled
2. All unpaid subscriptions will have interest, payments should be
applied to the interest first
3. That shares of stock, issued to stock holder, but still has unpaid
subscribed shares, all of his stock even those paid are not
entitled to vote. (basically it prohibited Baltazar et. al. the

Doctrine: The present law requires as a condition before a shareholder
can vote his shares, that his full subscription be paid in the case of no
par value stock; and in case of stock corporation with par value, the
stockholder can vote the shares fully paid by him only, irrespective of
the unpaid delinquent shares. A corporation may now, in the absence of
provisions in their by-laws to the contrary, apply payment made by
power to vote until all their subscriptions are paid.)

Baltazar and Rose filled a complaint to allow them to vote, their fully
paid up shares of stocks, and to declare said three resolutions illegal and
invalid. they had a tentative settlement. The lower court rendered a
decision, approving the agreement. The Ungsons did not agree with the
decision of the court hence this appeal.

Issue: Whether or not a shareholder, who subscribes to a number of
shares over which he partially pays and is issued certificates of stock, is
entitled to vote the latter

Held: YES. Where the corporation issued par value shares, the
stockholder can vote the shares fully paid by him, irrespective of the
unpaid delinquent shares. The corporation had chosen to apply
payments by its stockholders to definite shares of the capital stock of
the corporation and had fully paid capital stock shares certificates for
subscribers-stockholders either as: (a) full payment for the

corresponding number of shares of stock, the par value of each of which
is covered by such payment; or (b) as payment pro-rata to each and all
the entire number of shares subscribed for.

Atty. Hofilea despite jurisprudence, the law and the

Securities and Exchange Commission has interpreted states
that a subscription agreement is indivisible. As such so long as
you have an unpaid amount, you cannot enjoy the rights.

D. Lost or Destroyed Certificates (Section 63 and 73)

Section 73. Lost or destroyed certificates.
The following procedure shall be followed for the issuance by a
corporation of new certificates of stock in lieu of those which have
been lost, stolen or destroyed:


1. The registered owner of a certificate of stock in a corporation or his
legal representative shall file with the corporation an affidavit in
triplicate setting forth, if possible, the circumstances as to how the
certificate was lost, stolen or destroyed, the number of shares
represented by such certificate, the serial number of the certificate
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
and the name of the corporation which issued the same. He shall also
submit such other information and evidence which he may deem
necessary;

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
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)
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 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

While Section 73 of Corporation Code appears to be mandatory,

the same admits exceptions, such that a corporation may
voluntarily issue a new certificate in lieu of the original
certificate of stock which has been lost without complying with
the requirements under said section. It would be an internal
matter for the corporation to find measures in ascertaining who
are the real owners of stock for purposes of liquidation. It is
well-settled that unless proven otherwise, the stock and
transfer book is the best evidence to establish stock
ownership. (Securities and Exchange Commission Opinion,
dated 28 January 1999, addressed to Ms. Ma. Cecilia Salazar-
Santos).
A corporation may actually not heed the procedure under

Section 73 of the Corporation Code in accordance with the
Securities and Exchange Commission Opinion, but by doing so, it
cannot avail of the free and harmless clause provided in said

section, that 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(s) of stock in lieu of those lost, stolen or destroyed
and open itself to claims for damages. 1

E. Forged and Unauthorized Transfers.
Since certificates of stock are only quasi-negotiable instruments,

a transferee in good faith under a forged assignment acquires
no title which can be asserted against the true owner, unless
the true owners own negligence has been such as to create an
estoppel against him. Delos Santos v. Republic, 96 Phil. 577
(1955).
A bona fide pledgee or transferee of a stock from the apparent

owner is not chargeable with knowledge of the limitations laced
on said certificates by the real owner, or of any secret
agreement relating to the use which might be made of the stock
by the holder. When a stock certificate has been endorsed in
blank by the owner thereof, it becomes a street certificate so
that upon its face the holder is entitled to demand its transfer
into his name from the issuing corporation. As such the
certificate if quasi-negotiable and the transferee thereof is
justified in believing that it belongs to the older and transferor.
J. Santamaria v. HongKong and Shanghai Banking Corp., 89
Phil. 780 (1951).


J. Santamaria v. HongKong and Shanghai Banking Corp.

Facts: Mrs. Josefa T. Santamaria bought 10,000 shares of the Batangas
Minerals, Inc., through the offices of Woo, Uy-Tioco & Naftaly (a stock
brokerage firm). It was endorsed in blank to her. She then used the
certificate as a security for the purchase of 10,000 shares of the Crown
Mines, Inc. with R.J. Campos & Co., another brokerage firm. Two days
later, she returned to R.J. Campos & Co. to pay for the shares and
redeem her certificate only to find out that the firm was prohibited by
the Securities and Exchange Commission from transacting business.
Also, her stocks that were used as security have been transferred to
Hongkong and Shanghai Banking Corporation, who had come into
possession of the certificates because R.J. Campos & Co., Inc. had
opened an overdraft account with this bank and to this effect it had
executed a document where they pledged to the said bank "all stocks,
shares and securities which I/we may hereafter come into their
possession of my/our account and whether originally deposited for safe
custody only or for any other purpose whatever or which may
hereinafter be deposited by me/us in lieu of or in addition to the Stocks
Shares and Securities now deposited or for any other purposes
whatsoever."

Issue: Whether or not the stock certificate should be returned to Mrs.
Santamaria.

Held: NO. Santamaria was negligent in the transaction. Mrs. Santamaria
could have asked the corporation that had issued said certificate to
cancel it and issue another in lieu thereof in her name to apprise the
holder that she was the owner of said certificate. This she failed to do,


transfer book. Neugene Marketing, Inc. v. Court of Appeals,
303 SCRA 295 (1999).
and instead she delivered said certificate to R.J. Campos & Co. indorsed
in blank, thereby clothing the latter with apparent title to the shares
represented by said certificate including apparent authority to negotiate
it. This was the proximate cause of the damage suffered by her. She is,
therefore, estopped from claiming further title to or interest therein as
against a bona fide pledgee or transferee thereof.

HSBC was justified in believing that R.J. Campos and Company had title
thereto considering it was indorsed in blank, and, therefore, deemed
quasi- negotiable. Thus, HSBC cannot be blamed for believing that such
belonged to the holder and transferor. Furthermore, the bank was not
obligated to look beyond the certificate to ascertain the ownership of
Facts: NEUGENE had authorized capital stock of P3 MILLION (eventually

became P7 MILLION), P600K of which is subscribed and P150K of those
subscribed were paid up. On October 24, 1987, the private respondents,
Charles O. Sy, Arsenio Yang, Jr. and Lok Chun Suen, constituting 2/3 of
the total shares, sent notice to the directors of NEUGENE for a board
meeting to be held on November 30, 1987. They also sent notice for a
special stockholders meeting on the same day, November 30, 1987, to
the stock at the time it received the same from R.J. Campos and
Company.

Doctrine: A bona fide pledgee or transferee of a stock from the
apparent owner is not chargeable with knowledge of the limitations
placed on it by the real owner, or of any secret agreement relating to
the use which might be made of the stock by the holder (12 Fletcher,
consider the dissolution of NEUGENE in which they voted in

AFFIRMATIVE. Tan et al, brought an action to annul or set aside the said
Securities and Exchange Commission Certification on the Dissolution of
Neugene on the ground that Yang, Jr. et al. could not validly vote for
dissolution of NEUGENE because they had divested themselves of their
stockholdings when they endorsed their stock certificates in blank and
delivered the same to the Uy Family who subsequently transferred the
Corporations, section 5562, p. 521). "Where one of two innocent parties

must suffer by reason of a wrongful or unauthorized act, the loss must
fall on the one who first trusted the wrongdoer and put in his hands the
means of inflicting such loss."
certificates to Johnny Uy and later to Tan et al.

Yang, Jr. et al. contends that there never was any agreement entered
into by the Uy family to award NEUGENES stock certificates, because
subject stock certificates were endorsed in blank by Yang et al to the Uy
family for safe keeping.

Issue: Whether or not there was a valid transfer of shares, divesting
When the stock certificates have been endorsed in blank for

purposes of showing the nominee relations, the eventual
delivery and registration of the shares in violation of the trust
relationship and after their having been stolen, would be void,
even when such transfers have been registered in the stock and
Neugene Marketing, Inc. v. Court of Appeals

Yang Jr. et al of their stockholdings as of the date of the meeting when

they voted for the resolution dissolving NEUGENE.


Held: NO. The Court found that the certificates of stock were stolen and
therefore not validly transferred, and the transfers of stock relied upon
by Tan et al were fraudulently recorded in the Stock and Transfer Book
of NEUGENE under the column Certificates Cancelled. As nominees of
which shall be set forth in detail the time and place of holding the
meeting, how authorized, the notice given, whether the meeting was
regular or special, if special its object, those present and absent, and
every act done or ordered done at the meeting. Upon the demand of
any director, trustee, stockholder or member, the time when any
the Uy family, the approval by the Charles O. Sy, Lok Chun Suen and
Arsenio Yang, Jr., Jr., was necessary for the validity and effectivity of the
transfer of the stock certificates registered under their (Yang Jr et al)
names. In the case under consideration, not only did the transfers of
stock in question lack the requisite approval, Yang Jr et al categorically
declared under oath that subject certificates of stock of theirs were
stolen from the confidential vault of the Uy family and illegally
director, trustee, stockholder or member entered or left the meeting

must be noted in the minutes; and on a similar demand, the yeas and
nays must be taken on any motion or proposition, and a record
thereof carefully made. The protest of any director, trustee,
stockholder or member on any action or proposed action must be
recorded in full on his demand.

transferred to the names of petitioners in the Stock and Transfer Book

of NEUGENE. Lastly, there is no reliable showing of any valuable
consideration for the supposed transfer of subject stocks to Tan et al.

Doctrine: To constitute a valid transfer, a stock certificate must be
delivered and its delivery must be coupled with an intention of
constituting the person to whom the stock is delivered the transferred
The records of all business transactions of the corporation and the

minutes of any meetings shall be open to inspection by any director,
trustee, stockholder or member of the corporation at reasonable
hours on business days and he may demand, writing, for a copy of
excerpts from said records or minutes, at his expense.

Any officer or agent of the corporation who shall refuse to allow any
thereof. Furthermore, in order that there is a valid transfer, the person

to whom the stock certificates are endorsed must be a bona fide
transferee and for value.
director, trustees, stockholder or member of the corporation to

examine and copy excerpts from its records or minutes, in accordance
with the provisions of this Code, shall be liable to such director,
trustee, stockholder or member for damages, and in addition, shall be
guilty of an offense which shall be punishable under Section 144 of this
Code: Provided, That if such refusal is made pursuant to a resolution
or order of the board of directors or trustees, the liability under this
section for such action shall be imposed upon the directors or trustees

X. STOCK AND TRANSFER BOOK (Sections 63, 72 and 74):

Section 74. Books to be kept; stock transfer agent.
Every corporation shall keep and carefully preserve at its principal
office a record of all business transactions and minutes of all meetings
of stockholders or members, or of the board of directors or trustees, in
who voted for such refusal: and Provided, further, That it shall be a
defense to any action under this section that the person demanding to


examine and copy excerpts from the corporation's records and
minutes has improperly used any information secured through any
prior examination of the records or minutes of such corporation or of
any other corporation, or was not acting in good faith or for a
legitimate purpose in making his demand.
transfer books. The remedy of the one who wants such claim
over the unpaid shares to be recorded is to:
a. Require the owner to pay the shares completely.
b. Resort to subrogation (i.e. substitution of debtors) may
be allowed if the consent of the corporation (Board of
Directors), as creditor, is secured.

Stock corporations must also keep a book to be known as the "stock
and transfer book", in which must be kept a record of all stocks in the
names of the stockholders alphabetically arranged; the installments
paid and unpaid on all stock for which subscription has been made,
and the date of payment of any installment; 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 the by-laws may prescribe.
The stock and transfer book shall be kept in the principal office of the
corporation or in the office of its stock transfer agent and shall be
open for inspection by any director or stockholder of the corporation
at reasonable hours on business days.

No stock transfer agent or one engaged principally in the business of
registering transfers of stocks in behalf of a stock corporation shall be
allowed to operate in the Philippines unless he secures a license from
the Securities and Exchange Commission and pays a fee as may be
fixed by the Commission, which shall be renewable annually: Provided,
That a stock corporation is not precluded from performing or making
transfer of its own stocks, in which case all the rules and regulations
imposed on stock transfer agents, except the payment of a license fee
herein provided, shall be applicable. (51a and 32a; B. P. No. 268.)

Atty. Hofilea No claim over unpaid shares for which the

corporation has a claim will be recorded in the stock and
Sales and other dispositions of shares of stock must under

Section 63 be registered in the stock and transfer book: (a) to
enable the corporation to know at all times who are the actual
stockholders; (b) to afford the corporation an opportunity to
object or refuse its consent to such transfer when it has claims
against such shares; and (c) to avoid fictitious or fraudulent
transfers. Escao v. Filipinas Mining Corporation, 74 Phil. 71
(1944).

Escao v. Filipinas Mining Corporation

Facts: In the original case, the Court ordered Salvosa to transfer and
deliver to Escao 116 active shares and an undetermined number of
shares in escrow of Filipinas Mining. A writ of garnishment was served
to Filipinas Mining to satisfy judgment, and the shares were
subsequently sold in a public auction. HOWEVER, the said shares of
stocks were sold to Bengzon then to Standard investment of the
Philippines during the pendency of the said case. The transfers,
however, were not recorded in the books of Filipinas Mining and it was
only after around 3 years that the sale to Standard Investment was
recorded. On January 24, 1941 Filipinas Mining issued in favour of


Standard Investment certificate of stocks for 18,580 shares formerly
held in escrow. This then prompted Escao to file this present case
against Filipinas Mining Corp and Standard and Investment.

Issue: Whether or not the issuance by Filipinas Mining of the said shares
of stock to Standard was valid as against the attaching judgment
creditor (Escao) of the original owner, Salvosa.

Held: NO. The transfer of the escrow shares in question from Salvosa to
Bengzon and from Bengzon to the Standard Investment of the
Philippines, not having been recorded in the books of the corporation as
required by Section 35 of the Corporation Law, could not prevail over
the garnishment previously made by the plaintiff of the said shares.

Doctrine: In accordance with Section 35, for transfer of shares to be
valid against the corporation and third parties it must be recorded in the
book of records of the corporation. Even if the law expressly stated that
this is for issued shares, the Court held that through analogy such
requirement also applies to unissued shares held in escrow. There is no
valid reason for treating unissued shares held in escrow differently from
the issued shares insofar as the sale and transfer is concerned. In both
cases the possibility of fraudulent transfers exists and the aim of
requiring such recording of transfer is to prevent this. In this case,
therefore, the transfer of shares (whether issued shares or unissued
shares held in escrow) must be recorded in the book of record of the
corporation in order to be valid against the corporation and third
parties.

Shares for which no certificate of stock has been issued may

validly be mortgaged in whole (and not just with respect to the
portion paid-up) and the corporation receiving notice thereof is
bound to respect the security arrangement. Fua Cun v.
Summers, 44 Phil. 704 (1923).

Fua Cun v. Summers

Facts: Chua Soco subscribed for 500 shares of stock of China Bank at
P100 per share and paid 25,000 representing half of the subscription for
which a receipt was issued. Subsequently, Chua Soco issued a
promissory note in favor of the plaintiff, Fua Cun and secured the note
with a chattel mortgage on the said shares of stock. There came the a
point that Chua Soco became indebted to China Bank and failed to pay
such which lead to the attachment of the same shares of stock in favor
of the bank. Fua Cun contested this and claims that he acquired the
right to the 250 fully paid shares and he must be given priority over the
ownership plus damages. The bank argues that the interest held by
Chua Soco was merely an equity which could not be made the subject of
a chattel mortgage.

Issue: Whether or not Fua Cun has better rights over the bank.

Held: YES. Chua Soco does not own half of the shares. His right consists
only in an equity entitling him to a certificate for the total number of
shares subscribed for by him upon payment of the remaining portion of
the subscription price. There can be no doubt that an equity in shares of
stock may be assigned and that the assignment is valid as between the
parties and as to persons to whom notice is brought home. Such an


assignment exists here, though it was made for the purpose of securing
a debt. The attachment was levied after the bank had received notice of
the assignment of Chua Soco's interests to the plaintiff and was
therefore subject to the rights of the latter. It follows that as against
these rights the defendant bank holds no lien whatever.
thereof. Monserrat assigned to Ceron a usufruct of half of his shares

under a usurfruct agreement. Monserrat reserved for himself and his
heirs he right to vote derived from said shares of stock and to recover
the ownership thereof at the termination of the usufruct. Certificate of
Stock No. 7 was then issued in the name of Ceron. It was also recorded

Doctrine: In the absence of special agreement to the contrary, a
subscriber for a certain number of shares of stock does not, upon
payment of one-half of the subscription price, become entitled to the
issuance of certificates for one-half the number of shares subscribed
for; the subscriber's right consists only in an equity entitling him to a
certificate for the total number of shares subscribed for by him upon
on the Stock and Transfer Book of the company. Despite the agreement,
Ceron mortgaged to Matuto the shares he held (but were actually
owned by Monserrat). Ceron showed Matute the Stock and Transfer
Book of the company. Matute saw that the stocks were in the name of
Ceron, free from any lien or encumbrance. When Ceron mortgaged the
stocks, he did not inform Matute of Monserrats reservation.

payment of the remaining portion of the subscription price.
Issue: Whether or not it is necessary to enter upon the books of the

corporation a mortgage constituted on common shares of stock in order
for the mortgage to be valid

Held: NO. Ceron testified that when he mortgaged his shares, he said
nothing to Erma, Inc., about the existence of the deed, for fear he might
not succeed in obtaining the loan he applied for. Erma, Inc., as a
When the shares are covered by a stock certificate issued in the

name of the usufructuary by the original owner with the
agreement between them that they should not be disposed or
sold, but the registered owner had pledged the shares by
endorsement and delivery of the certificate to one who took
them in good faith and for value, the latter shall be preferred
since registration of a security arrangement covering shares of
stock does not require, for its validity and binding effect on the
world, to be registered in the stock and transfer book.
Monserrat v. Ceron, 58 Phil. 469 (1933).

Monserrat v. Ceron

Facts: Monserrat was the president and manager of Manila Yellow
Taxicab Co., Inc., and the owner of P1,200 common shares of stock
conditional purchaser of the shares of stock in question given as security

for the payment of his credit, acquired in good faith Ceron's right and
title to the 600 common shares of stock of the Manila Yellow Taxicab
Co., Inc., and as such conditional purchaser in good faith, it is entitled to
the protection of the law.

Doctrine: A chattel mortgage refers to personal property given as
security for payment of a debt. Such personal property has to be
delivered. But the transfer is not absolute, being a mere security. A
chattel mortgage is not a transfer because there is no intent of passing


the rights the transferor has to the transferee. A chattel mortgage is not
the transfer referred to in the (old) corporation law, which transfer
should be entered and noted upon the books of a corporation in order
to be valid. Only the transfer or absolute conveyance of the ownership
of the title to shares needs to be entered and noted upon the books of
the corporation. Hence, inasmuch as a chattel mortgage is not a

complete and absolute alienation of the dominion and ownership
thereof, its entry and notation upon the books of the corporation is not
a necessary requisite to its validity.
Ecija. It was represented by 9 certificates which Toco mortgaged to

Chiu. Chiu registered the mortgaged stocks in the register of deeds in
Manila. Later, Chiu assigned all his rights and interest to Chua Guan who
registered it in the register of deeds in Manila and in the office of the
corporation. When Toco defaulted in payment, the shares were
foreclosed by Chua Guan who was thereafter declared as the highest
bidder. When he tendered the certificates of cancellation and asked for
Summary of Points (Atty. Hofilea)

o
Much of the disputes come in when there are

competing interests involved. Because shares are
property, they can be dealt with (sold, mortgaged,
attached, etc.)
General Rule: for disposition/sale of shares, they are
valid as against third persons only when recorded in the
stock and transfer book of the corporation.
Between an assignee and a creditor, who has a better
right? Whoever performs all the acts required by law to
be binding on the world first has better right.
Chua Guan v. Samahang Magsasaka, Inc.

Facts: Toco, a resident of Manila, owns 5,894 shares of capital stock
with Samahang Magsasaka Inc., which has principal office in Nueva
the issuance of new shares in his name, the officers of the Corporation
refused because prior to Chua Guans demand, and even before the
notice of mortgage of Chiu, several attachments against the shares
covered by the certificates had been recorded in its books (the
corporation received the notice of mortgage only after 2 years from
date of registration). Chua Guan filed a writ of mandamus to require the
officers to transfer the shares of stock to him by cancelling the old
binding on third parties, registration thereof in the stock and

transfer book is not required and not legally effective. What is
necessary is that the chattel mortgage over the shares be
registered in the Registry of Deeds of the principal place of
business of the corporation, as well as in the Registry of Deeds
certificates and issuing new ones in their stead.

Issue: Whether or not the mortgage takes priority over the writ of
attachments.

Held: NO. The Corporation received the writ of attachments on the
shares prior to the notice of registration of the mortgage. The basis for
notice is the actual notice because there was no valid constructive
of the stockholders domicile. Chua Guan v. Samahang

Magsasaka, Inc., 62 Phil. 472 (1935).
notice. Chattel mortgage of shares should be registered both at the

owners domicile and in the province where the corporation has its
In order for the chattel mortgage on shares of stock be valid and


principal office. Thus, the mortgage should have been registered in the
Register of Deeds of Manila and Nueva Ecija. (It should be understood
that the property mortgaged is not the certificate but the participation
and share of the owner in the assets of the corporation.)

the books of the corporation, is valid as against a subsequent lawful

attachment of said shares, regardless of whether the attaching creditor
had actual notice of said transfer or not.

Held: NO. Section 35 requires that for a disposition of shares to be valid
Doctrine: The registration of the chattel mortgage in the office of the

corporation is not necessary and has no legal effect.
as against third parties, the same must be recorded in the books of the
corporation. Therefore, the transfer of the 75 shares in the Corporation
made by the Diosomito to Barcelon was not valid as to Uson, on January
18, 1932, the date on which she obtained her attachment lien on said
shares of stock which still stood in the name of Diosomito on the books
of the Corporation.

The failure to register a sale or disposition of shares of stock in

the books of the corporation would render the same invalid to
all persons, including the attaching creditors of the seller. Uson
v. Diosomito, 61 Phil. 535 (1935).

Uson v. Diosomito

Facts: Uson filed a civil action for debt against Diosomito, and an
attachment was duly issued and levied upon Diosomitos property
including his 75 shares in the North Electric Co., Inc. Uson won the case
and so the shares were sold in a public auction to satisfy the judgment.
Uson was the highest bidder, but not H.P.L. Jollye now claims to be the
owner of the 75 shares. He presented a certificate of stock issued to him
by the company. Apparently, Diosomito, the original owner of the
Doctrine: All transfers of shares not so entered are invalid as to

attaching or execution creditors of the assignors, as well as to the
corporation and to subsequent purchasers in good faith, and indeed, as
to all persons interested, except the parties to such transfers. All
transfers not so entered on the books of the corporation are absolutely
void; not because they are without notice or fraudulent in law or fact,
but because they are made so void by statute.

shares, sold the same to Barcelon and delivered to the latter the
corresponding certificates Nos. 2 and 19. Barcelon later sold the shares
to Jollye. It must be noted that the transfer of shares by Diosomito to
Barcelon was registered and noted on the books of the corporation 9
months AFTER the attachment had been levied on the said shares.

Issue: Whether or not a transfer of shares, not registered or noted on

The pledge of shares of stock covered by a certificate is valid

and binding on third parties, when the certificate of stock has
been endorsed and delivered to the creditor, notwithstanding
the fact that the contract does not appear in a public instrument
(chattel mortgage). Certificates of stockare quasi- negotiable
instruments in the sense that they may be given in pledge or
mortgage to secure an obligation. Bachrach Motor Co. v.
Lacson Ledesma, 64 Phil. 681 (1937).


Bachrach Motor Co. v. Lacson Ledesma

Facts: Bachrach Motors and Philippine National Bank were both
creditors of Lacson Ledesma, battling over his properties in Bacolod for
the purpose of satisfying their claims. Subject to the controversy are
Ledesmas stocks with the Talisay-Silay Milling Co.

Around 1923, Ledesma mortgaged various real properties to PNB for the
purpose of securing his debts, and in the same transactions, he pledged
Stock Certificate No.772 containing stocks and stock dividends in favor
of PNB. On the other hand, around 1927, Bachrach Motors obtained a
favorable judgment in civil case against Ledesma. A writ of execution of
said judgment was issued on the same year, and Jose Y. Orosa (special
sheriff), in compliance with the writ of execution, attached on the stocks
of Ledesma. That notice of said attachment was served not only upon
the Ledesma but also upon Talisay-Silay Milling Co., Inc. Bachrachs was
claiming that it had a preferred right over PNB, and they argued that the
stock certificate pledged to PNB were not the shares themselves. And
the shares being intangible in character cannot be delivered by pledge
to the possession of PNB.

Issue: Whether or not the certificate of stocks or of stock dividends may
be pledged.

Held: YES. There was a valid transfer and PNB had the preferred right
over the stocks/stock dividends of Ledesma. The stock dividends in
question were pledged to the bank 5 months prior to the garnishment
of Bachrach. It is admitted that the delivery of the certificate in question
and the pledge thereof were not made to appear in a public instrument.
It is true, according to Article 1865 of the Civil Code, that in order that a
pledge may be effective as against third person, evidence of its date
must appear in a public instrument in addition to the delivery of the
thing pledged to the creditor. HOWEVER, Section 4 of the Chattel
Mortgage Law implicitly modified Article 1865 of the Civil Code in the
sense that a contract of pledge and that of chattel mortgage to be
effective as against third persons, need not appear in a public
instrument. Provided, that the thing pledged or mortgaged be delivered
or placed in the possession of the creditor.

Doctrine: See above.

Only fully paid shares for which certificates of stock have been
issued are subject to the registration requirement in the stock
and transfer book in cases dealing with their sales and absolute
disposition. Nava v. Peers Marketing Corp., 74 SCRA 65 (1976).

Nava v. Peers Marketing Corp.

Facts: Teofilo Po subscribed to 80 shares of Peers Marketing and paid
25% of the amount of his subscription. Po then sold to Nava 20 of his 80
shares. Nava requested the officers of Peers Marketing to register the
sale in the books of the corporation but the corporation refused
because Po was delinquent in the payment of the balance of his
subscription. Nava filed a mandamus action to compel the corporation
to register the shares in Navas name. The respondents (executive VP
and secretary) pleaded the defense that no shares of stock which holds
an unpaid claim are transferable in the books of the corporation.


which ordinarily are or should be written therein. Lanuza v.
Court of Appeals, 454 SCRA 54 (2005).
Issue: Whether or not the officers of Peers Marketing can be compelled

by mandamus to register the sale in the books of the corporation

Held: NO. The transfer made by Po to Nava is not the alienation, sale,
or transfer of stock that is supposed to be recorded in the stock and
The books and records of a corporation, which include even the

stock and transfer book, are generally admissible in evidence in
favor of or against the corporation and its members to prove
the corporate acts, its financial status and other matters
including ones status as a stockholder. They are ordinarily the
best evidence of corporate acts and proceedings. However, the
books and records of a corporation are not conclusive even
against the corporation but prima facie evidence only. Parol
transfer book, as contemplated in section 52 of the Corporation Law. As

a rule, only those shares covered by certificates of stock may be
alienated. In this case, there is no clear legal duty on the part of the
officers of the corporation to register the twenty shares in Navas name,
There is no cause of action for mandamus as no stock certificate was
issued to Po. Without stock certificate, which is the evidence of
ownership of corporate stock, the assignment of corporate shares is
effective only between the parties.

Doctrine: Only those shares covered by certificates of stock may be
alienated. Without stock certificate, the assignment of corporate shares
is effective only between the parties to the transaction
evidence may be admitted to supply omissions in the records,

explain ambiguities, or show what transpired where no records
were kept, or in some cases where such records were
contradicted. The effect of entries in the books of the
corporation which purport to be regular records of the
proceedings of its board of directors or stockholders can be
destroyed by testimony of a more conclusive character than

A. Probative Value of Stock and Transfer Book
mere suspicion that there was an irregularity in the manner in

which the books were kept. 1
BUT: The stock and transfer book 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, like other
corporate books and records, is not in any sense a public record,
and thus is not exclusive evidence of the matters and things
The Securities and Exchange Commission has opined that

corporate books and records are merely private books and
records, and as such, they are subject to the general rule of
evidence which are commonly applicable to documentary
evidence.2
Bitong v. Court of Appeals, 292 SCRA 304, 96 SCAD 205 (1998).

SECURITIES AND EXCHANGE COMMISSION Opinion, 12 January 1994, XXVIII
1994), citing I5 FLETCHER CYC. CORP., 1976 rev. vol., Securities and Exchange
Commission. 2196 at p. 643; FLETCHER Securities and Exchange Commission.
2


B. Validity of Transfers:
Under Section 63 of Corporation Code, the sale of stocks shall

not be recognized as valid unless registered in the books of the
corporation insofar as third persons, including the corporation,
are concernedas between the parties to the sale, the transfer
shall be valid even if not recorded in the books of the
corporation. Batangas Laguna Tayabas Bus Co. v. Bitanga, 362
SCRA 635 (2001).

Batangas Laguna Tayabas Bus Co. v. Bitanga

Facts: The Potenciano group owned 87.5% of the outstanding capital
stock of Batangas Laguna Tayabas Bus Company, Inc. (BLTB). The
Potenciano group sold to BMB Property Holdings, Inc., represented by
its President, Benjamin Bitanga, their shares of stock representing
47.98% of the total outstanding capital stock of BLTB. Barely a month
after the Sale Agreement was executed, at a meeting of the
stockholders of BLTB, members of the Bitanga group were elected as
directors of the corporation, replacing the Potenciano group. During a
meeting of the Board of Directors, the newly elected directors of BLTB
(Bitanga group) scheduled the annual stockholders meeting on May 19,
1998, to be held at the principal office of BLTB in San Pablo, Laguna.
Potenciano requested for postponement but it was not acted upon by
Bitanga. On the scheduled day of the meeting, the majority of the
stockholders present rejected the postponement and voted to proceed

2196, at p. 644; and FLETCHER, Securities and Exchange Commission. 2197, at p.
648.
with the meeting. The Potenciano group was re-elected to the Board of
Directors, and a new set of officers was thereafter elected. However,
the Bitanga groups refused to relinquish their positions and this caused
unrest in the company. It is not disputed that the transfer of the shares
of the group of Dolores Potenciano to the Bitanga group has not yet
been recorded in the books of the corporation.

Issue: Whether or not the Potenciano group, in whose names those
shares still stand, were the ones entitled to attend and vote at the
stockholders meeting of the BLTB on 19 May 1998.

Held: YES. The Potenciano group, in whose names those shares still
stand, were the ones entitled to attend and vote at the stockholders
meeting. Indeed, until registration is accomplished, the transfer, though
valid between the parties, cannot be effective as against the
corporation. Thus, the unrecorded transferee, the Bitanga group in this
case, cannot vote nor be voted for.

Doctrine: The purpose of registration, therefore, is two-fold: to enable
the transferee to exercise all the rights of a stockholder, including the
right to vote and to be voted for, and to inform the corporation of any
change in share ownership so that it can ascertain the persons entitled
to the rights and subject to the liabilities of a stockholder.

Until challenged in a proper proceeding, a stockholder of record has a
right to participate in any meeting; his vote can be properly counted to
determine whether a stockholders resolution was approved, despite
the claim of the alleged transferee. On the other hand, a person who
has purchased stock, and who desires to be recognized as a stockholder


vote and to be voted for, and to inform the corporation of any
change in share ownership so that it can ascertain the persons
entitled to the rights and subject to the liabilities of a
stockholder. Until challenged in a proper proceeding, a
stockholder of record has a right to participate in any meeting;
his vote can be properly counted to determine whether a
for the purpose of voting, must secure such a standing by having the
transfer recorded on the corporate books. Until the transfer is
registered, the transferee is not a stockholder but an outsider.

As between the General Information Sheet and the corporate

books, it is the latter that is controlling. Lao v. Lao, 567 SCRA
558 (2008).
stockholders resolution was approved, despite the claim of the

alleged transferee. On the other hand, a person who has
purchased stock, and who desires to be recognized as a
stockholder for the purpose of voting, must secure such a
standing by having the transfer recorded on the corporate
books. Until the transfer is registered, the transferee is not a
stockholder but an outsider. Batangas Laguna Tayabas Bus
A transfer of shares which is not recorded in the books of the

corporation is valid only as between the parties, hence, the
transferor has the right to dividends as against the corporation
without notice of transfer but it serves as trustee of the real
owner of the dividends, subject to the contract between the
transferor and transferee as to who is entitled to receive the
dividends. Cojuangco v. Sandiganbayn, 586 SCRA 790 (2009).
The view that under Section 63 of the Corporation Code, the

sale of the stocks shall not be recognized as valid unless
registered in the books of the corporation is valid only insofar as
third persons, including the corporation, are concernedas
between the parties to the sale, the transfer shall be valid even
if not recorded in the books of the corporation. Batangas
Laguna Tayabas Bus Co. v. Bitanga, 362 SCRA 635 (2001).
A transferee has no right to intervene as a stockholder in

corporate issue on the strength of the transfer of shares
allegedly executed by a registered stockholder. It is explicit
under Section 63 that the transfer must be registered to affect
the corporation and third persons. Magsaysay-Labrador v.
COURT OF APPEALS, 180 SCRA 266 (1989).
Company, Inc. v. Bitanga, 362 SCRA 635 (2001). [CLV- I agree

with the dissenting opinion of Justice Puno: The rule [Section
63] is intended to protect the interest of the corporation and
third persons who may be prejudiced by the transfer of the
shares of stocks. It follows, therefore, that as between the
parties to the sale, the transfer shall be valid even if not
recorded in the books of the corporation.]
The purpose of registration is two-fold: to enable the transferee

to exercise all the rights of a stockholder, including the right to

A bona fide transfer of shares, not registered in the corporate

books, is not valid as against a subsequent lawful attachment of
said shares, regardless of whether the attaching creditor had
actual notice of said transfer or not. All transfers not so entered
on the books of the corporation are absolutely void; not
because they are without notice or fraudulent in law or fact, but
because they are made so void by statute. Garcia v. Jomouad,
323 SCRA 424 (2000).


Garcia v. Jomouad

Facts: Spouses Jose and Sally Atinon won a collection case against Jaime
Dico so sheriff Nicolas Jomouad proceeded to execute the Propriety
Ownership Certificate in the Cebu Country Club which was in Dicos
name. Claiming ownership over the subject certificate, Nemesio Garcia
filed the aforesaid action for injunction with prayer for preliminary
injunction to enjoin respondents from proceeding with the auction.

Garcia avers that Dico was his manager at Young Auto Supply. To assist
him in entertaining clients, Garcia lent his POC, then bearing the
number 1459, in the Cebu Country Club to Dico so the latter could enjoy
of the levy on execution.

Doctrine: Said provision of law strictly required the recording of the
transfer in the books of the corporation and not elsewhere, to be valid
against third parties.

the signing of privileges of its members. The Club issued POC No. 0668
in the name of Dico. Thereafter, Dico resigned as manager. Upon
demand of Garcia, Dico returned the POC. The latter then executed a
Deed of Transfer in favor of Garcia. The Club was furnished with a copy
of said deed but the transfer was not recorded in the books of the club
because Garcia failed to present proof of payment of the requisite
capital gains tax.

Issue: Whether or not a bona fide transfer of the shares of a
corporation, not registered or noted in the books of the corporation, is
valid as against a subsequent lawful attachment of said shares,
regardless of whether the attaching creditor had actual notice of said
transfer or not.

Held: NO. The transfer of the subject certificate made by Dico to Garcia
was not valid as to the spouses Atinon, the judgment creditors, as the
same still stood in the name of Dico, the judgment debtor, at the time

Atty. Hofilea youre not required to have a public

instruments to support your transaction, but ideally you should
always have one in order to support your transaction.
Pursuant to Section 63, a transfer of shares of stock not

recorded in the stock and transfer book is non-existent as far as
the corporation is concerned. As between the corporation on
the one hand, and its shareholders and third persons on the
other, the corporation looks only into its books for the purpose
of determining who its shareholders are. Ponce v. Alsons
Cement Corp., 393 SCRA 602 (2002).
The absence of a deed of sale evidencing the sale of shares of

stock does not necessarily show irregularity since Section 63 of
the Corporation Code itself does not require any deed for the
validity of the transfer of shares stock, it being sufficient that
such transfer be effected by delivery of the stock certificates
duly endorsed. The Corporation Code acknowledges that the
delivery of a duly indorsed stock certificate is sufficient to
transfer ownership of shares of stock in stock corporations.
Such mode of transfer is valid between the parties. In order to
bind third persons, however, the transfer must be recorded in
the books of the corporation. Clearly then, the absence of a
deed of assignment is not a fatal flaw which renders the transfer
invalid as the Republic posits. In fact, as has been held in Rural

Bank of Lipa City, Inc. v. Court of Appeals, [366 SCRA 188
(2001)] the execution not a deed of sale does not necessarily
make the transfer effective. Republic v. Estate of Hans Menzi,
475 SCRA 20, 38 (2005).
the Revised Rules of Court and the Corporation Code do not

require annotation in the corporations stock and transfer books
for the attachment of shares to be valid and binding on the
corporation and third parties. Chemphil Export & Import Corp.
v. COURT OF APPEALS, 251 SCRA 257 (1995).

C. Who May Make Entries:
Entries made on the stock and transfer book by any person
other than the corporate secretary, such as those made by the
President and Chairman, cannot be given any valid effect.
Torres, Jr. v. Court of Appeals, 278 SCRA 793 (1997).

G. Meaning of Unpaid Claims:

D. Registration with Securities and Exchange Commission changes
corporations must set-up and register their stock and transfer

book with the Securities and Exchange Commission within thirty
(30) days from receipt of their certificate of incorporation.
503 (1997).

H. Equitable Mortgage Assignment:

E. BIR Certification to Effect Transfer of Shares
the corporate secretary is not authorized to effect transfer of

shares to any new owner in the books of a corporation, unless
accompanied by a certification from the Commissioner of
Internal Revenue that the taxes, either estate tax, donor's tax,
have been paid.

F. Attachments:
XX SECURITIES AND EXCHANGE COMMISSION QUARTERLY BULLETIN 125

(Nos. 3 & 4, Sept. & Dec 1986).
It seems that the assignment of voting shares as security for a

loan operates to give the assignee not only the right to vote on
the shares, but would also treat the assignee as the owner of
the shares (not just an equitable mortgage): It is true that the
assignment was predicated on the intention that it would serve
as security vis--vis DBPs financial accommodation extended to
PJI, but it was a valid and duly executed assignment, subject to a
resolutory condition, which was the settlement of PJIs loan
Under Section 97 of the 1997 National Internal Revenue Code,
Unpaid claims under Section 63 refers to any unpaid

subscription, and not to any indebtedness which a stockholder
may owe the corporation arising from any other transactions,
like unpaid monthly dues. Fua Cun v. Summers, 44 Phil. 704
(1923); China Banking Corp. v. COURT OF APPEALS, 270 SCRA
The Securities and Exchange Commission Rules Requiring the

Maintenance of Stock and Transfer Book,1 require that all stock
Attachments of shares of stock are not included in the term

transfer as provided in Section 63 of Corporation Code. Both
obligation with DBP. APT v. Sandiganbayan, 341 SCRA 551,

560 (2000).

XI. Situs of Shares of Stocks (Section 55)


Section 55. Right to vote of pledgors, mortgagors, and administrators.
In case of pledged or mortgaged shares in stock corporations, the
pledgor or mortgagor shall have the right to attend and vote at
meetings of stockholders, unless the pledgee or mortgagee is expressly
given by the pledgor or mortgagor such right in writing which is
recorded on the appropriate corporate books. (n)

Executors, administrators, receivers, and other legal representatives
duly appointed by the court may attend and vote in behalf of the
stockholders or members without need of any written proxy. (27a)

Situs of shares of stock is the domicile of the corporation to

which they pertain to. Wells Fargo Bank and Union v. Collector,
70 Phil. 325 (1940).1

SUMMARY OF CURRENT DOCTRINAL RULINGS ON SHARES OF STOCK

If we analyze the doctrinal rules laid down by the Supreme Court in the
various decisions is has rendered covering dealings with shares of stock,
we can draw up the following summary:
1. A mortgage or pledge of shares of stock that would involve the
outright assignment or delivery and indorsement of the
certificates of stock to the pledgee or mortgagee would
constitute a valid mortgage even without registration with the
register of deeds, but it would always be subject to prior
Tayag v. Benguet Consolidated, Inc., 26 SCRA 242 (1968); cf. Perkins v. Dizon,
69 Phil. 186 (1939).

attachment or levy of the shares duly effected pursuant to the

Rules of Court by the judgment creditors of the registered
stockholder;
2. Outside of physical transfer of delivery of the certificates of
stock, a chattel mortgage over the shares of stock, whether or
not covered certificates of stock, would be valid and binding on
third parties only if the mortgage was registered with the
register of deeds or registers of deeds, as the case may be, of
the province or city where the mortgagor has his domicile and
where the corporation has its principal place of business;
3. A writ of attachment/execution against the shares of stock of
the judgment debtor would be valid and binding on the shares
and against third parties, the moment there is proper service of
the writ to the proper officer of the corporation pursuant to
Section 7(d), Rule 57 of the Rules of Court;
4. In any of the three (3) cases above, the pledge, mortgage,
attachment or levy of the shares of stock would thereupon be
valid and binding on the entire world upon their constitution or
completion of process; no registration of the pledge, mortgage,
attachment or levy in the stock and transfer book of the
corporation is required either to make any of them valid or
binding; and their registration in the stock and transfer book
would have no legal effect at all and such registration does not
produce the effect of notice to third parties;
5. As between two contending judgment creditor, it would seem
that the first to have the writ served upon the proper officer of
the corporation would be preferred;
6. As between contending pledgee/mortgagee and an attaching
creditor, if the registration requirement for the pledge or

mortgage happened first in point of time prior to service of the
writ to the proper corporate officer, the pledge or mortgage
shall be preferred; whereas, if the service of the writ to the
proper court officer happened ahead of the registration of the
pledge or mortgage, then the attaching creditor would be

In effect, by the strict application of Section 63 of the Corporation Code
to cover only the sale, assignment or absolute disposition of shares of
stock, the Supreme Court has placed a bias against voluntary sales,
assignments or dispositions of shares of stock vis--vis pledges,
preferred;
7. As between a pledge/mortgage duly constituted (even when
not registered in the stock and transfer book) and the buyer or
assignee of the shares, if the pledge or mortgage was
constituted and registered ahead of the registration of the sale
or assignment in the stock and transfer book (even when the
sale or assignment was perfected and consummated ahead of
mortgages, attachment or levy thereof. To be valid and binding on third

parties, the voluntary sale, assignment or disposition of the shares
requires the essential element of registration in the stock and transfer
book; otherwise the sale, assignment or disposition is considered void
as to third parties, even when they have actual notice. Whereas, when it
comes to pledge, mortgage, encumbrance, attachment or levy of shares,
registration thereof in the stock and transfer book is not essential either
the pledge or mortgage) the pledge or mortgage would still be

preferred because the registration of the sale or assignment in
the stock and transfer book is a necessary ingredient to make
the sale or assignment binding on third parties, including the
pledgee/mortgagee;
8. As between an attaching/levying creditor where there has been
proper service of the writ to the proper corporate officer (even
for validity or as a species of notifying third parties.

Consequently, a buyer or assignee would always have to declare the
contract to the entire world by registration in the stock and transfer
book in order to be valid, whereas all others who deal with the same
shares can complete their priority claim in private outside of the stock
and transfer book unknown to the rest of the world who may want to
when not registered in the stock and transfer book) and the
buyer or assignee of the shares, if writ was properly served
upon the corporate officer ahead of the registration of the sale
or assignment in the stock and transfer book (even when the
sale or assignment was perfected and consummated ahead of
the service of the writ) the attachment/levy would still be
preferred because the registration of the sale/assignment in the
stock and transfer book is a necessary ingredient to make the
voluntarily deal with the shares but would be in no position to ever be

fully assured on whether there is no lien completed against the shares.

We would have therefore the clearly inequitable situation where the
attaching or levying creditors using the stock and transfer book as the
conclusive basis by which to enforce the writ against shares still
standing in the name of the judgment debtor (although he has sold the
shares to another person), whereas a buyer in good faith and for value
sale or assignment binding on third parties, including on

attaching/ levying creditor.
who actually registers his purchase in the stock and transfer book at the
time when nothing was annotated therein of any lien, would be


precluded from using the stock and transfer book as his conclusive basis
to determine the clean title of his registered seller as a basis for securing
his title to the shares of stock.

In the same manner a pledgee or mortgagee who registers his pledge or
order to foster economic development. The transfer by endorsement

and delivery of a certificate with the intention to pledge the shares
covered thereby should be sufficient to give legal effect to that
intention and to consummate the juristic act without necessity of
registration."1
mortgage in the register of deeds may rely upon the stock and transfer
book as the conclusive basis by which to determine the validity and
priority of the pledge or mortgage of the shares still standing in the
name of the pledgor and mortgagor, and yet a buyer in good faith and
for value, and even to whom the clean certificate of stock have been
duly endorsed and delivered, and who actually registers his purchase in
the stock and transfer book at the time when they stood clean in the
name of the registered seller, is precluded from using the stock and
transfer book as his conclusive basis to determine the clean title of his
registered seller as the basis for securing his title to the shares of stock.

In these cases, the registration requirements under stock and transfer
books, instead of becoming the basis by which title to shares of stock
can clearly and conclusively be voluntarily sold and bought, and the
basis for assurance and protection to the investing public, has been
transformed into the very stumbling block to achieving the ideal
situation by which shares of stock can voluntarily be dealt with,
accompanied with a reasonable assurance of the clean title thereto.

Making registration in the stock and transfer book as the mandatory
means by which dealings with shares of stock can be valid and effective
as against both the corporation and third parties would make the
procedure simple and easier to verify. After all as the Supreme Court
said in Chua Guan "Loans upon stock securities should be facilitated in
Chua Guan v. Samahang Magsasaka, Inc., supra, at p. 482.


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CORPORATION

LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

CAPITAL STOCK & SHARES OF STOCK

treasury shares. Thus, quorum is based on the totality of the

The power to issue shares of stock in a corporation is lodged in

capital is that portion of the authorized capital stock which has

required is the board resolution approving the additional

subscribed and then actually paid up. MSCI-NACUSIP v.

Recall: Pre-emptive rights

The board has the discretion to decide to issue new

The outstanding capital stock is defined under Section 137 of

The portion which have been paid by the stockholders,

The capital stock of a corporation cannot be subject to levy by

Section 137. Outstanding capital stock defined.

The definition of capital stock clearly shows that its composed

By express provision of Section 13 of Corporation Code, paid-up

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

usages have long been established in jurisprudence. Briefly,

An investment, being in the nature of equity, is an

Revenue v. First Express Pawnshop Co., Inc., 589 SCRA 253

Advances for Future Subscription is a receivable account and

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

liable to the corporation or to its creditors in respect thereto:

6. Merger or consolidation of the corporation with another

A corporation may, furthermore, classify its shares for the purpose of

Where the articles of incorporation provide for non-voting shares in

It is not correct to say that holders of the preferred shares lose

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or

The Corporation Code provides three (3) basic policies on share

corporation to classify shares.

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

articles of incorporation, no presumption should exist to

voting rights, all issued shares, regardless of their class

SECURITIES AND EXCHANGE COMMISSION Opinion, 16 July 1996, XXX

Section 6, there shall always be a class or series of shares which

A common stock represents the residual ownership interest in

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

b. Non-participating preferred shares are those that

Doctrine: A preferred share of stock, on one hand, is one which entitles

dividends are declared, to the extent agreed upon,

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

holders of common stock.3

the certificate itself that he is only an aliquot sharer in

divided into a stated number of shares, such as 1,0000

The contractual rights and preferences of an issue of preferred

shares issued by any corporation may be given

upon the value of assets and the amount of its debts."1

Preferred shares as to assets gives the holder thereof

Preferred stocks are those which entitle the shareholder to

Republic Planters Bank v. Agana, 269 SCRA 1, 80 SCAD 1 (1997).

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

In the absence of provisions in the articles of incorporation

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.

Company Limited (First Pacific), a Hong Kong-based investment