CAPITAL STRUCTURE
I. CAPITAL STOCK: is the amount fixed in the
articles of incorporation, to be subscribed and
paid in or agreed to be paid in by the
stockholders of a corporation, in money,
property, services, or other means at the
organization of the corporation or afterwards
and upon which it is conduct its business, such
contribution being made either directly through
stock subscription or indirectly through the
declaration of stock dividends.
II. CAPITAL: used broadly to indicate the entire
property or assets of the corporation. It includes
the amount invested by the stockholders plus
the undistributed earnings less losses and
expenses.
 capital refers to the value of the property or
assets of a corporation. (NTC v. CA)
III. AUTHORIZED: amount of capital stock as
specified in the articles of incorporation. It is
synonymous with capital stock where the shares
of the corporation have par value. If the shares
of stock have no par value, the corporation has
no authorized capital stock, but it has capital
stock the amount of which is not specified in the
articles of incorporation as it cannot be
determined until all the shares have been issued.
IV. SUBSCRIBED: is the amount of capital stock
subscribed, whether fully paid or not.
V. PAID-UP: is that portion of the subscribed or
outstanding capital stock that is actually paid.
VI. OUTSTANDING CAPITAL STOCK: is the portion of
the capital stock which is issued and held by
persons other than the corporation itself.
PRE-REQUISITES OF INCORPORATION
a. Treasurer’s affidavit: Pre- incorporation:
atleast 25% of the amount of the authorized
capital stocks have been actually
subscribed and that atleast 25% of such
subscription paid.
b. Articles of incorporation and documents
i. Affidavit certifying compliance
with subscription and paid-up
requirements as to capital stock
c. Filing with SEC
d. Favourable recommendation of the
appropriate government agency
e. Issuance of certificate of incorporation
VII. TRUST FUND DOCTRINE:
1. The subscribed capital stock of the
corporation is a trust fund for the payment
of debts of the corporation which the
creditors have the right to look up to satisfy
their credits, and which the corporation
may not dissipate. The creditors may sue the
stockholders directly for the latter’s unpaid
subscription.
Application of the TFD:
a. Where the corporation has distributed its capital among the
stockholders without providing for the payment of creditors;
b. Where it had released the subscribers to the capital stock
from their subscriptions;
c. Where it has transferred the corporate property in fraud of
its creditors; and
d. Where the corporation is insolvent.
Coverage of the TFD:
a. If the corporation is solvent, the TFD extends to the capital
stock represented by the corporation’s legal capital.
b. If the corporation is insolvent, the TFD extends to the capital
stock of the corporation as well as all of its property and assets.
Exceptions to the TFD:
The Code allows distribution of corporate capital only in these
instances:
a. Amendment of Articles of Incorporation to reduce
authorized capital stock;
b. Purchase of Redeemable shares by the corporation
regardless of existence of unrestricted retained earnings;
c. Dissolution and eventual liquidation of the corporation;
d. In close corporation, when there should be a deadlock and
the SEC orders the payment of the appraised value of the
stockholder’s share (Sec. 104).
PLDT v. NTC and NTC v. CA
The Trust Fund doctrine considers this subscribed capital as a
trust fund for the payment of the debts of the corporation, to
which the creditors may look for satisfaction. Until the
liquidation of the corporation, no part of the subscribed
capital may be returned or released to the stockholder
(except in the redemption of redeemable shares) without
violating this principle. Thus, dividends must never impair the
subscribed capital; subscription commitments cannot be
condoned or remitted; nor can the corporation buy its own
shares using the subscribed capital as the considerations
therefor.
CONTROL TEST vs. GRANDFATHER RULE
Gamboa v. Teves
Both the Voting Control Test and the Beneficial Ownership Test
must be applied to determine whether a corporation is a
“Philippine national.”
Voting Control Test Beneficial Control
(Ownership) Test
using only the voting stock to primordial consideration is
determine whether a situs of control
corporation is a Philippine
national
CLASSIFICATION OF SHARES shares and by which new shares contracts
are created. It is often associated with the
Par value No par value execution and delivery of a share
One with a specific money Without stated value certificate but the issue of the shares is not
value fixed in the articles and appearing on the face of dependent on the delivery of a certificate
appearing in the certificate certificate of stock
for the shares. In other words, one can be
of stock
an owner of shares in a corporation even
Voting Non-voting
With voting rights Without voting rights without any certificate of shares being
Common Preferred issued to him.
Entitles the holder to a pro One with stated par value
rata division of the profits, if which entitles the holder to WHAT IS A “SUBSCRIPTION”?
there are any, and in its assets certain preferences over the
upon dissolution, without holders of common shares  It is an offer to acquire a specified number
preference or advantage in of unissued shares of an existing corporation
that respect over other or one still to be formed. It may be
stockholders or class of
o Pre-incorporation subscription: one
stockholders but equally with
all other stockholders except entered into before incorporation.
preferred stockholders  It constitutes binding
contract to subscribers.
 Mandatory
KINDS OF PREFERRED SHARES  Irrevocable for 6 months
from subscription, unless
A. Preferred share as to assets : share which gives the there is failure to
holder preference in the distribution of the assets of materialize
the corporation  Maybe revoked upon
B. Preferred share as to dividends : entitles holder to submission of AI to SEC
receive dividends on said share to the extent agreed o post-incorporation subscription:
upon before any dividends on said share to the entered into after the
extent agreed upon before any dividends at all are incorporation for the acquisition of
paid to the holders of common stock. unissued stock.
a. Cumulative preferred share: entitles the  Deemed subscription
holder not only to the payment of current regardless of its
dividends but also to dividends in arrears. nomenclature
 Subscriber becomes SH
b. Non-cumulative preferred share: payment upon acceptance by the
of current dividends only in preference to corporation of the offer
common stockholders. o Conditional subscription: subject
to condition which may be past
event unknown to the parties,
future, uncertain event, that is, an
FOUNDER’S SHARES
event which may or may not
happen.
 Shares issued to organizers and promoters of
 Subscriber does not
a corporation in consideration of some
become SH until
supposed right or property.
condition is fulfilled
 Subscription is void if
REDEEMABLE SHARES
condition is void.
 Shares, usually preferred, which by their o Absolute subscription: not subject
terms are redeemable at a fixed date or at to condition
the option of either the issuing corporation  subscriber becomes
or the stockholder or both at a certain liable to the subscription
redemption price.  becomes SH upon
acceptance
TREASURY SHARES o Subscription with a special term:
corporation agrees to do
 Shares which have been lawfully issued for something, the fulfilment of which
the corporation and fully paid for and later not being a condition precedent
reacquired by it either by purchase, to the accrual of liability of the
redepmption, donation, forfeiture or other subscriber or the acquisition of the
lawful means. rights of a stockholder.
 Absolute subscription

WHAT IS AN “ISSUE”?
ACQUISITION AND OWNERSHIP OF SHARES IN A CORPORATION;
 Generally employed to indicate the making EXTENT OF PROPRIETARY RIGHT/ DOCTRINE OF LIMITED LIABILITY
of a share contract, that is, transactions by
which a person becomes the owner of
a. Subscription contract with an existing corporation for
acquisition of unissued shares
b. Purchase of treasury shares
c. Transfer from a previous SH of the outstanding shares or
existing subscription to shares
CONSIDERATION FOR STOCKS
 Shall not be issued for consideration less than par value
1. Actual cash
2. Property necessary or convenient for its use and
lawful purposes at a fair valuation
3. Labor
4. Previously incurred indebtedness
5. Amounts transferred from unrestricted retained
earnings
6. Outstanding shares exchanged for stocks in the
event of reclassification or conversion
 Consideration other than cash : Determined
by incorporators or BOD, subject to
approval by SEC
 Promissory note not allowed
 Price for NPS: AI
APODACA vs. NLRC --- April 18, 1989
Firstly, the NLRC has no jurisdiction to determine such intra-
corporate dispute between the stockholder and the
corporation as in the matter of unpaid subscriptions. This
controversy is within the exclusive jurisdiction of the Securities
and Exchange Commission.
Secondly, assuming arguendo that the NLRC may exercise
jurisdiction over the said subject matter under the
circumstances of this case, the unpaid subscriptions are not
due and payable until a call is made by the corporation for
payment. Private respondents have not presented a resolution
of the board of directors of respondent corporation calling for
the payment of the unpaid subscriptions. It does not even
appear that a notice of such call has been sent to petitioner
by the respondent corporation.
What the records show is that the respondent corporation
deducted the amount due to petitioner from the amount
receivable from him for the unpaid subscriptions. 3 No doubt
such set-off was without lawful basis, if not premature. As there
was no notice or call for the payment of unpaid subscriptions,
the same is not yet due and payable.
Lastly, assuming further that there was a call for payment of
the unpaid subscription, the NLRC cannot validly set it off
against the wages and other benefits due petitioner. Article
113 of the Labor Code allows such a deduction from the
wages of the employees by the employer, only in three
instances, to wit:
ART. 113. Wage Deduction. — No employer, in his own behalf
or in behalf of any person, shall make any deduction from the
wages of his employees, except:
(a) In cases where the worker is insured with his consent by the
employer, and the deduction is to recompense the employer
for the amount paid by him as premium on the insurance;
(b) For union dues, in cases where the right of the worker or his
union to check-off has been recognized by the employer or
authorized in writing by the individual worker concerned; and
(c) In cases where the employer is authorized by law or
regulations issued by the Secretary of Labor.
FUA CUN vs. SUMMERS --- March 27, 1923
Promissory Note (balance)
Chua Soon is indebted to China Bank. Fua Cun filed an action
for payment of ½ of the subscription price as Chua Sun
became the owner of the other half; praying that his lien by
virtue of a chattel mortgage be declared to hold priority. Trial
Court favoured him and held that plaintiff holds a lien superior
to that of the China bank.
*CB brought an action for writ of attachment*
SC: Section 120 of the Corporation Act provides that "no bank
organized under this Act shall make any loan or discount on
the security of the shares of its own capital stock, nor be the
purchaser or holder of any such shares, unless such security or
purchase shall be necessary to prevent loss upon a debt
previously contracted in good faith, and stock so purchased or
acquired shall, within six months from the time of its purchase,
be sold or disposed of at public or private sale, or, in default
thereof, a receiver may be appointed to close up the business
of the bank in accordance with law.
the interest held by Chua Soco was merely an equity which
could not be made the subject of a chattel mortgage. Though
the courts have uniformly held that chattel mortgages on
shares of stock and other choses in action are valid as
between the parties, there is still much to be said in favor of
the defendants' contention that the chattel mortgage here in
question would not prevail over liens of third parties without
notice; an equity in shares of stock is of such an intangible
character that it is somewhat difficult to see how it can be
treated as a chattel and mortgaged in such a manner that
the recording of the mortgage will furnish constructive notice
to third parties.
These certificates of stock are in the pockets of the owner, and
go with him where he may happen to locate, as choses in
action, or evidence of his right, without any means on the part
of those with whom he proposes to deal on the faith of such a
security of ascertaining whether or not this stock is in pledge or
mortgaged to others.
NATIONAL EXCHANGE vs. DEXTER --- February 25, 1928
The prohibition against the issuance of shares by corporations
except for actual cash to the par value of the stock to its full
equivalent in property is thus enshrined in both the organic
and statutory law of the Philippine; Islands; and it would seem
that our lawmakers could scarely have chosen language
more directly suited to secure absolute equality stockholders
with respect to their liability upon stock subscriptions. Now, if it
is unlawful to issue stock otherwise than as stated it is self-
evident that a stipulation such as that now under
consideration, in a stock subcription, is illegal, for this stipulation
obligates the subcriber to pay nothing for the shares except as
dividends may accrue upon the stock. In the contingency that
dividends are not paid, there is no liability at all. This is a
discrimination in favor of the particular subcriber, and hence
the stipulation is unlawful.
Nor has a corporation the power to receive a subscription
upon such terms as will operate as a fraud upon the other
subscribers or stockholders by subjecting the particular
subcriber to lighter burdens, or by giving him greater rights and
privileges, or as a fraud upon creditors of the corporation by
withdrawing or decreasing the capital. It is well settled
therefore, as a general rule, that an agreement between a
corporation and a particular subscriber, by which the
subscription is not to be payable, or is to be payable in part
only, whether it is for the purpose of pretending that the stock
is really greater than it is, or for the purpose of preventing the
predominance of certain stockholders, or for any other
purpose, is illegal and void as in fraud of other stockholders or
creditors, or both, and cannot be either enforced by the
subcriber or interposed as a defense in an action on the
subcription.

NELSON vs. LEPANTO MINING --- December 17, 1966
10% share in profits of 1941 operations.
The facts relative to the matter of profit sharing follow: In the
management contract entered into between the parties on
January 30, 1937, which was renewed for another five years, it
was stipulated that Nielson would receive a compensation of
P2,500.00 a month plus 10% of the net profits from the
operation of the properties for the preceding month. In 1940, a
dispute arose regarding the computation of the 10% share of
Nielson in the profits. The Board of Directors of Lepanto,
realizing that the mechanics of the contract was unfair to
Nielson, authorized its President to enter into an agreement
with Nielson modifying the pertinent provision of the contract
effective January 1, 1940 in such a way that Nielson shall
receive (1) 10% of the dividends declared and paid, when
and as paid, during the period of the contract and at the end
of each year, (2) 10% of any depletion reserve that may be set
up, and (3) 10% of any amount expended during the year out
of surplus earnings for capital account. Counsel for the
appellee admitted during the trial that the extract of the
minutes as found in Exhibit B is a faithful copy from the original.
Mr. George Scholey testified that the foregoing modification
was agreed upon.
Lepanto claims that this new basis of computation should be
rejected (1) because the contract was clear on the point of
the 10% share and it was so alleged by Nielson in its complaint,
and (2) the minutes of the special meeting held on August 21,
1940 was not signed.
Coming now to the facts, We find that the right of Nielson to its
10% participation in the 1941 operations accrued on
December 21, 1941 and the right to commence an action
thereon began on January 1, 1942 so that the action must be
brought within ten (10) years from the latter date. It is true that
the complaint was filed only on February 6, 1958, that is sixteen
(16) years, one (1) month and five (5) days after the right of
action accrued, but the action has not yet prescribed for
various reasons which We will hereafter discuss.
TRILLANA vs QUEZON COLLEGE --- June 27, 1953
Damasa Crisostomo died on October 26, 1948. As no payment
appears to have been made on the subscription mentioned in
the foregoing letter, the Quezon College, Inc. presented a
claim before the Court of First Instance of Bulacan in her
testate proceeding, for the collection of the sum of P20,000,
representing the value of the subscription to the capital stock
of the Quezon College, Inc. This claim was opposed by the
administrator of the estate, and the Court of First Instance of
Bulacan, after hearing issued an order dismissing the claim of
the Quezon College, Inc. on the ground that the subscription
in question was neither registered in nor authorized by the
Securities and Exchange Commission. From this order the
Quezon College, Inc. has appealed.
There is nothing in the record to show that the Quezon
College, Inc. accepted the term of payment suggested by
Damasa Crisostomo, or that if there was any acceptance the
same came to her knowledge during her lifetime
Indeed, the need for express acceptance on the part of the
Quezon College, Inc. becomes the more imperative, in view of
the proposal of Damasa Crisostomo to pay the value of the
subscription after she has harvested fish, a condition obviously
dependent upon her sole will and, therefore, facultative in
nature, rendering the obligation void, under article 1115 of the
old Civil Code which provides as follows: "If the fulfillment of
the condition should depend upon the exclusive will of the
debtor, the conditional obligation shall be void. If it should
depend upon chance, or upon the will of a third person, the
obligation shall produce all its effects in accordance with the
provisions of this code."
UNPAID SUBSCRIPTION
 Interest on unpaid subscription: rate is indicated in the by-
laws. This is waivable as long as no corporate creditors are
prejudiced.
 Right of unpaid shares: not delinquent – shall have the
rights of a stockholder
 Collection of unpaid subscription
i. Subject to the provisions of the contract, the BOD
may at any time declare due and payable unpaid
subscription 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.
ii. Call: a declaration made by a corporation usually
expressed in the form of a resolution of the board
of directors requiring the payment of all or a
certain prescribed portion of a subscriber’s stock
subscription.
 Requisites for valid call
o it must be made in the manner prescribed
by law
o made by BOD
o operate uniformly upon all SH
o notice
iii. When necessary: depends upon the provisions of
the contract / amount that may be called
depends on the terms of the contract
VELASCO vs. POIZAT --- March 15, 1918
Corporation Law clearly recognizes that a stock subscription is
a subsisting liability from the time the subscription is made,
since it requires the subscriber to pay interest quarterly from
that date unless he is relieved from such liability by the by-laws
of the corporation. The subscriber is as much bound to pay the
amount of the share subscribed by him as he would be to pay
any other debt, and the right of the company to demand
payment is no less incontestable.
iv. When not necessary
 Insolvency of corporation
 Insolvency of subscriber
 If the subscription is payable not upon call
or demand but immediately
 Payable on a specified day or before the
specified day
 Installments
v. Failure: subscription is subject to sale
Court action
LUMANLAN vs. CURA --- March 21, 1934
WON the corporation as the right to collect
SC: It is established doctrine that subscriptions to the capital of
a corporation constitute a fund to which the creditors have a
right to look for satisfaction of their claims and that the
assignee in insolvency can maintain an action upon any
unpaid stock subscription in order to realize assets for the
payment of its debts.

KELLER vs. COB GROUP MARKETING --- January 16, 1986
SC: We think that Poizat is liable upon this subscription. A stock
subscription is a contract between the corporation on one
side, and the subscriber on the other, and courts will enforce it
for or against either. It is a rule, accepted by the Supreme
Court of the United States, that a subscription for shares of
stock does not require an express promise to pay the amount
subscribed, as the law implies a promise to pay on the part of
the subscriber.
The provisions of the Corporation Law (Act No. 1459) given
recognition of two remedies for the enforcement of stock
subscriptions. The first and most special remedy given by the
statute consists in permitting the corporation to put up the
unpaid stock for sale and dispose of it for the account of the
delinquent subscriber. In this case the provisions of section 38
to 48, inclusive , of the Corporation Law are applicable and
must be followed. The other remedy is by action in court,
concerning which we find in section 49 the following provision:
Nothing in this Act shall prevent the directors from collecting,
by action in any court of proper jurisdiction, the amount due
on any unpaid subscription, together with accrued interest
and costs and expenses incurred.
HOW SHARES BECOME DELINQUENT
- If within 30 days from the said date no payment is made,
all stocks thereupon become delinquent and shall be
subject to sale, unless the BOD orders otherwise.
EFFECT OF DELINQUENCY
- Denial of voting rights or representation
- Affects the entire subscription: one, entire and indivisible
- Not included in determining quorum
- Not entitled to rights of SH but shall be entitled to receive
dividends (43: power to declare dividends)
DELINQUENCY SALE
- Thru resolution
- State the amount due on each subscription + interest,
date, time, and place
- Sale shall not be less than 30 nor more than 60 days from
date of delinquency
- Notice of sale + copy of resolution – sent to every DSH
 Personal / registered mail
- Publication: 1/ week – 2 weeks
- Public auction – highest bidder
- If no bidder who offers to pay in full, the corporation may
bid
GROUNDS TO QUESTION DELINQUENCY SALE
 Irregularity or defect in the notice of sale
 Or in the sale itself
 Requirements for maintaining action
- pay or tender 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
- file case within 6 months from the date of sale
ISSUANCE OF SHARES OF STOCK
- no certificate shall be issued to a subscriber until full
payment of his subscription together with interest and
expenses
Fua Cun vs. Summers
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 of the
number of shares subscribed for; the subscriber's right consists
only in 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.
Baltazar vs. Lingayen Gulf
Section 37 of the Corporation Law, as amended by Act No.
3518, approved on March 1, 1929, six (6) years after the
promulgation of the Fua-Summers case (decided in 1923),
provides:
SEC. 37. ... . No certificate of stock shall be issued to a
subscriber as fully paid up until the full par value thereof, or the
full subscription in the case of no par stock, has been paid by
him to the corporation. Subscribed shares not fully paid up
may be voted provided no subscription is unpaid and
delinquent.
Tan vs. Sec
A certificate of stock is the paper representative or tangible
evidence of the stock itself and of the various interests therein.
The certificate is not stock in the corporation but is merely
evidence of the holder’s interest and status in the corporation,
his ownership of the share represented thereby, but is not in
law the equivalent of such ownership. It expresses the contract
between the corporation and the stockholder, but it is not
essential to the existence of a share in stock or the creation of
the relation of shareholder to the corporation.
A by-law which prohibits a transfer of stock without the
consent or approval of all the stockholders or of the president
or board of directors is illegal as constituting undue limitation
on the right of ownership and in restraint of trade.
Embassy Farms vs. CA
The indorsed certificate of stock was not actually delivered to
AGA so that EBE is still the controlling stockholder of Embassy
Farms despite the execution of the memorandum of
agreement and the turnover of control and management of
the Embassy Farms to AGA on August 2, 1984.
RIGHT TO TRANSFER OF SHARES/VALIDITY OF RESTRICTIONS ON
RIGHT
Requisites:
 Restrictions must appear in
- articles
- by-laws
- certificate of stock
Effect if not indicated : not binding to the purchaser in
good faith
2. not more onerous than granting the existing stockholder
or the corporation the option to purchase the shares of
 the transferring stockholders with such reasonable terms.
Conditions, and period stated therein
Right of first refusal
- a stockholder who wants to sell his shares must first offer it
either to the corporation or to other existing stockholders
Makati Sports Club vs. Cheng
SEC. 30. x x x .
(e) Sale of Shares of Stockholder. Where the registered owner
of share of stock desires to sell his share of stock, he shall first
offer the same in writing to the Club at fair market value and
the club shall have thirty (30) days from receipt of written offer
within which to purchase such share, and only if the club has
excess revenues over expenses (unrestricted retained earning)
and with the approval of two-thirds (2/3) vote of the Board of
Directors. If the Club fails to purchase the share, the
stockholder may dispose of the same to other persons who are
qualified to own and hold shares in the club. If the share is not
purchased at the price quoted by the stockholder and he
reduces said price, then the Club shall have the same pre-
emptive right subject to the same conditions for the same
period of thirty (30) days. Any transfer of share, except by
hereditary succession, made in violation of these conditions
shall be null and void and shall not be recorded in the books
of the Club.
The share of stock so acquired shall be offered and sold by the
Club to those in the Waiting List in the order that their names
appear in such list, or in the absence of a Waiting List, to any
applicant.
Padgett vs Babcock and Templeton
1. SHARES OF CAPITAL STOCK; ILLEGAL RESTRICTION IMPOSED
THEREON. — The restriction consisting in the word
"nontransferable" appearing on the twelve (12) certificates,
Exhibits F to F-11, is illegal on the ground that it constitutes an
undue limitation of the right of ownership and is in restraint of
trade. It should, therefore, be eliminated.
2. ID.; OBLIGATION TO PURCHASE. — There is no existing law nor
authority in support of the plaintiff’s claim to the effect that the
defendants are obliged to purchase his shares at par value
plus the interest demanded thereon. In this respect it is hereby
held that there has been no such contract, either express or
implied, between the plaintiff and the defendants.
3. ID.; NON-EXISTENT OR IMAGINARY OBLIGATION. — In the
absence of a similar contractual obligation and a legal
provision applicable thereto, it is logical to conclude that it
would be unjust and unreasonable to compel the said
defendants to comply with a non- existent or imaginary
obligation. Whereupon, the judgment originally rendered to
that effect is untenable and should be set aside.
Yuchengco vs Velayo
1. CIVIL LAW; CONTRACTS; CONTRACT VOID AND
INEXISTENT FROM THE BEGINNING; CONTRACTS PROHIBITED OR
DECLARED VOID BY LAW; A CASE OF; STOCK PURCHASE
AGREEMENT WITHOUT PRIOR APPROVAL. OF THE DEPARTMENT
OF TOURISM; CASE AT BAR. — It is well-settled that any contract
entered into must be in accordance with, and not repugnant
to, an applicable statute whose terms are deemed embodied
therein (Maritime Company of the Phil. v. Reparations
Commission, 40 SCRA 70) and without the need for the parties
of expressly making reference to it. (Lakas ng Manggagawang
Makabayan v. Abiera, 36 SCRA 437). Where the provision of
Sec. 4 Part IV of the Rules and Regulations Governing the
Business of Tour Operators and Tour Guides requiring the prior
approval of the Department of Tourism for the validity of any
transfer of rights to a license of a tour operator or ownership of
shares or interests in any tour agency is clear and mandatory,
and in the case at bar, it was admitted by both parties that
the Stock Purchase Agreement was made without the prior
approval of the Department of Tourism, such agreement
would be inexistent and null and void from the beginning
pursuant to paragraph 7, Article 1400 of the New Civil Code.
2. ID.; ID.; ID.; ID.; DOCTRINE OF RES SUO DOMINO PERIT
CANNOT APPLY THERETO; CASE AT BAR. — Inasmuch as the
agreement between the parties is null and void from the
beginning, it produces no legal effect and no valid transfer of
ownership of Ric Tours Phil., to the appellees, therefore, took
place upon delivery to them by the appellant of the shares of
stock of said corporation as to make them suffer the
consequence of the subsequent revocation by the
Department of Tourism of the license of Ric Tours Phil., as they
would indeed suffer much loss after parting with their money
for which they would receive nothing. The doctrine of res suo
domino perit advanced by the defendant cannot, therefore,
be applied.
3. ID; ID; ID; ID; KNOWLEDGE OF THE RULE REQUIRING
PRIOR APPROVAL BY THE DEPARTMENT OF TOURISM OF THE
STOCK PURCHASE AGREEMENT; OBLIGATION OF THE VENDOR
ALONE; DOCTRINE OF PARI DELICTO CANNOT APPLY; CASE AT
BAR. — Appellant as the vendor in the sale of the shares of
stock of RIC Tours Phil. is obligated not only to transfer the
ownership of and deliver, but also to warrant the thing which is
the object of the sale, i.e., the 2,265 shares of stock of Ric Tours
Phil., pursuant to article 1495 of the New Civil Code. Delivery,
alone, of said shares of stock is not sufficient, for the appellant,
as the vendor, must also warrant clear title to the same, in
accordance with the aforesaid provision. Consequently, only
appellant is charged with knowledge of the rules requiring
prior approval by the Department of Tourism of all sales of
shares of stock of tour operators, for it is he as the vendor, who
is under obligation to give the appellees-vendees clear title to
the property he is conveying. The pari delicto doctrine,
therefore, can neither be applied.
Lim Tay vs CA
Without Foreclosure and purchase at Auction, Pledgee is not
the Owner of Pledged Shares
Unless the thing pledged is expropriated, the debtor continues
to be the owner thereof.
TRANSFER OF SHARES OF STOCK AND REGISTRATION
- No shares of stock against which the corporation holds
any unpaid claim shall be transferable in the books of the
corporation.
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 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 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 presented to said
corporation or if an action is pending in court regarding the
ownership of said certificate of stock which has been lost,
stolen or destroyed, the issuance of the new certificate of
stock in lieu thereof shall be suspended until the final decision
by the court regarding the ownership of said certificate of
stock which has been lost, stolen or destroyed.
Except in case of fraud, bad faith, or negligence on the part of
the corporation and its officers, no action may be brought
against any corporation which shall have issued certificate of
stock in lieu of those lost, stolen or destroyed pursuant to the
procedure above-described.
CORPORATE BOOKS AND RECORDS
Books to be kept:
1. Record of all business transaction
- Includes journal, ledger, financial statements, income tax
returns, vouchers, receipts, contracts and all papers
pertaining to the operation of the corporation of interest
to its stockholders
2. Minutes of all meetings of SH/M and BOD/T
Minutes: brief statement not only of what transpired at a
meeting, usually of SH/M or BOD/T, but also at meeting of an
executive committee.
3. Stock and transfer book
- A stock and transfer book (STB) as defined in Section 74 of
the Corporation Code of the Philippines, contains the
records of all stocks in the names of the stockholders
alphabetically arranged; the installment 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.
Stock transfer agent
-
INSPECTION OF CORPORATE BOOKS AND RECORDS
Basis of inspection: SH/M have a right to be full informed as to
the condition of the corporation, in the manner its affairs are
conducted and how its capital stock to which they
contributed is employed and managed
Grounds for denial:
1. If the person improperly used information secured
through any prior examination of the records or
minutes
2. Not acting in good faith or for a legitimate purpose
RIGHT TO FINANCIAL STATEMENTS
- Within 10 days from written request of SH/M, corporation
shall furnish FS.
Inclusions in FS
 Balance sheet as of the end of the last taxable yr.
 Profit and loss statement for said yr., showing in
reasonable detail its assets and liabilities and the result of
its operations.
MERGER AND CONSOLIDATION in the articles for corporations organized under the
Code
Purpose: d. Such other provisions with respect to the proposed
merger or consolidation as are deemed necessary or
Method (procedure) desirable

1. Approval plan by BOD/T ARTICLES OF MERGER OR CONSOLIDATION

2. Submission of plan to stockholders or member for
approval - Executed by each constituent corporations
3. Execution of formal contract  Signed by president/VP
4. Submission to SEC for approval  Certified by sec / assistant sec
5. Conduct of hearing by SEC
6. Issuance of certificate by SEC Contents

Common Forms of corporate combinations 1. Plan of merger/consolidation

1. Asset sales: a union of corporations may be effected
by one corporation selling all or substantially all of its
assets to another (note qualitative and quantitative
tests). Such sale is usually, though not necessarily
made in the course of the dissolution of the vendor
corporation.
2. Lease of assets: a corporation, without being
dissolved, leases its property to another corporation
for which the lessor merely receives rental paid by
the lessee. The lease of assets is similar to asset sales
except that under a lease, nothing passes except the
right to use the property leased.
3. Stock sales: the purpose of a holding company is to
acquire sufficient amount of the stock of another
corporation for the purpose of acquiring control. The
acquiring corporation is called the parent or holding
company. The corporation whose stocks are
acquired is known as the subsidiary corporation.
4. Merger: (absorption) two or more corporations unite,
one corporation which retains its corporate existence
absorbing or merging in itself the others which
disappear as a separate corporation of one
corporation by another which survives. (A+B= A/B)
5. Consolidation: (union) two or more corporations
unite, giving rise to a new corporate body and
dissolving the constituent corporations which cease
to exist as separate corporations. (A+B=C)
Constitutent corporation Consolidated corporation
Corporations proposing to Newly formed corporation by
merge or consolidate virtue of a consolidation
Corporations that cease to
exist by virtue of a merger or
consolidation
CORPORATE APPROVALS REQUIRED:
a. Majority vote of BOD/T
b. 2/3 vote of SH/M representing OCS
PLAN OF MERGER OR CONSOLIDATION
2. # of shares outstanding/ # of members
3. # of shares or members voting for and against such
plan
EFFECTS OF MERGER/CONSOLIDATION (section 80)
1. The constituent corporations shall become a single
corporation which, in case of merger, shall be the surviving
corporation designated in the plan of merger; and, in case of
consolidation, shall be the consolidated corporation
designated in the plan of consolidation;
2. The separate existence of the constituent corporations shall
cease, except that of the surviving or the consolidated
corporation;
3. The surviving or the consolidated corporation shall possess all
the rights, privileges, immunities and powers and shall be
subject to all the duties and liabilities of a corporation
organized under this Code;
4. The surviving or the consolidated corporation shall
thereupon and thereafter possess all the rights, privileges,
immunities and franchises of each of the constituent
corporations; and all property, real or personal, and all
receivables due on whatever account, including subscriptions
to shares and other choses in action, and all and every other
interest of, or belonging to, or due to each constituent
corporation, shall be deemed transferred to and vested in
such surviving or consolidated corporation without further act
or deed; and
5. The surviving or consolidated corporation shall be
responsible and liable for all the liabilities and obligations of
each of the constituent corporations in the same manner as if
such surviving or consolidated corporation had itself incurred
such liabilities or obligations; and any pending claim, action or
proceeding brought by or against any of such constituent
corporations may be prosecuted by or against the surviving or
consolidated corporation. The rights of creditors or liens upon
the property of any of such constituent corporations shall not
be impaired by such merger or consolidation.

Contents

a. Names of the corporations proposing to merge or

consolidate
b. Terms of the merger or consolidation and the mode
of carrying the same into effect
c. Statement of the changes, if any, in the articles of the
surviving corporation in case or merger; and with
respect to the consolidated corporation in case of
consolidation, all statements required to be set forth
 APPRAISAL RIGHT

BPI vs. BPI Employees Union
In voluntary mergers, absorption of the dissolved corporations
employees or the recognition of the absorbed employees
service with their previous employer may be demanded from
the surviving corporation if required by provision of law or
contract.
PNB vs Andrada Electric
As a rule, a corporation that purchases the assets of another
will not be liable for the debts of the selling corporation,
provided the former acted in good faith and paid adequate
consideration for such assets, except when any of the
following circumstances is present: (1) where the purchaser
expressly or impliedly agrees to assume the debts, (2) where
the transaction amounts to a consolidation or merger of the
corporations, (3) where the purchasing corporation is merely a
continuation of the selling corporation, and (4) where the
transaction is fraudulently entered into in order to escape
liability for those debts.
Babst vs. CA
Whether or not BPI consented to the assumption by DBP of the
obligations of ELISCON?
There exist clear indications that BPI was aware of the
assumption by DBP of the obligations of ELISCON. In fact, BPI
admits that —
"the Development Bank of the Philippines (DBP), for a time,
had proposed a formula for the settlement of Eliscon’s past
obligations to its creditors, including the plaintiff [BPI], but the
formula was expressly rejected by the plaintiff as not
acceptable (long before the filing of the complaint at bar).”
Associated Bank vs. CA
The merger, however, does not become effective upon the
mere agreement of the constituent corporations.
- Right to demand payment of the fair value of his shares,
after dissenting from a proposed corporate action
involving a FUNDAMENTAL change in the charter or
articles in the cases provided by law.
INSTANCES OF APPRAISAL RIGHT
1. Amendment of articles that has the effect of
changing or restricting the rights of any stockholder
or class of shares, or of authorizing preferences in
any respect superior to those of outstanding shares
of any class, or of extending or shortening the term
of corporate existence;
2. In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of all or
substantially all of the corporate property and
assets;
3. Merger or consolidation
REQUIREMENT OF EXERCISE
- Written demand within 30 days after the date on which
the vote was taken for payment of the fair value of his
shares
Effect of failure to make demand within 30 days: waiver
EFFECT OF DEMAND AND TERMINATION OF RIGHT

1. All rights accruing to such shares including voting and

dividend rights shall be suspended
2. He shall be entitled to receive payment of the fair
value of his shares as agreed upon between him and
the corporation or as determined by the appraisers
chosen by them.

WHO BEARS COSTS OF APPRAISAL RIGHT

1. By the corporation
a. Where the price offered to pay the
dissenting stockholder (DSH) is lower than
the FV as determined by the appraisers
b. Where an action is filed by the DSH to
recover such FV and the refusal of the DSH
to receive payment is found by the court to
be justified
2. By the DSH
a. Where the price offered by the corporation
is approximately the same as the FV
b. Where the same action is filed by the DSH
and the refusal to accept payment is
unjustified

NOTATION ON STOCK CERTIFICATES OF DISSENTING

STOCKHOLDERS

 The DSH is required to submit within 10 days after

demanding payment for his shares, the
corresponding certificate/s of stock for notation that
such shares are dissenting shares

TRANSFER OF DISSENTING SHARES

 Transferee shall become a regular SH with the right to
receive all dividend distributions which would have
accrued to such shares
 The right of the transferor as a DSH to be paid the FV
of the shares shall cease.