[No.27872.February25,1928] THE NATIONAL EXCHANGE Co., INC., plaintiff and appellee,vs.I.B.DEXTER,defendantandappellant.

1. CORPORATIONS; STOCK SUBSCRIPTIONS; SPECIAL STIPULATION.A special stipulation contained in a subscription to corporate stock which, if valid, would lessen the capital of the company and relieve the subscriber from liabilitytobesueduponthesubscriptionisillegal. 2. ID.;ID.;PAYMENT FOR SHARES; LEGAL PROVISIONS IN FORCE IN PHILIPPINE ISLANDS.In section 74 of the Organic Act of July 1, 1902, as well as in section 28 of the Jones Law of August 29, 1916, it is declared that all franchises granted by the Government of the Philippine Islandsshallforbidtheissuanceofstockexceptinexchange for actual cash or for property at a f air valuation equal to the par value of the stock. Pursuant to this provision the Philippine Commission inserted in section 16 of the Corporation Law of March 1, 1906, a provision declaring thatnocorporationshallissuestockexceptinexchangefor actual cash paid to the corporation or for property actually received by it at a fair valuation equal to the par value of thestock. 3. ID.; ID.; STIPULATION FOR PAYMENT OF SUBSCRIPTION FROM DIVIDENDS.Under the provisions above cited, a stipulation in a stock subscription totheeffectthatthesubscriptionshallbepayablefromthe firstdividendstobepaidonthesharesisunlawfulinsofar as it purports to relieve the subscriber f rom liability to be sued; and the subscriber is liable for the par value of the stocktothesameextentasifsuchstipulationhadnotbeen insertedinthecontract. 4. ID. ; ID. ; SHARES SUBSCRIBED AFTER INCORPORATION EFFECTED.The law in force in the Philippine Islands makes no distinction, in respect to the

liabilityofthesubscriber,betweensharessub

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PHILIPPINEREPORTSANNOTATED National Exchange Co. vs. Dexter scribed before incorporation is effected and shares subscribedthereafter.Allsubscribersalikeareboundtopay fullparvalueincashoritsequivalent,andanyattemptto discriminate in favor of one subscriber by relieving him of thisliabilitywhollyorinpartisforbidden.

APPEALfromajudgmentoftheCourtofFirstInstanceof Manila.Imperial,J. Thefactsarestatedintheopinionofthecourt. Ross, Lawrence & Selphand Antonio T. Carrascoso, jr., forappellant. Lucio Javillonarforappellee. STREET,J.: ThisactionwasinstitutedintheCourtofFirstInstanceof Manila by the National Exchange Co., Inc., as assignee (throughthePhilippineNationalBank)ofC.S.Salmon& Co.,forthepurposeofrecoveringfromI.B.Dexterabalance ofP15,000,theparvalueofonehundredfiftysharesofthe capitalstockofC.S.Salmon&Co.,withinterestandcosts. Upon hearing the cause the trial judge gave judgment for the plaintiff to recover the amount claimed, with lawful interest from J anuary 1, 1920, and with costs. From this judgmentthedefendantappealed. ItappearsthatonAugust10,1919,thedefendant,I.B. Dexter,signedawrittensubscriptiontothecorporatestock ofC.S.Salmon&Co.inthefollowingform: "Iherebysubscribeforthreehundred(300)sharesofthe capital stock of C. S. Salmon and Company, payable from the first dividends declared on any and all shares of said company owned by me at the time dividends are declared, untilthefullamountofthissubscriptionhasbeenpaid." UponthissubscriptionthesumofP15,000waspaidin January,1920,fromadividenddeclaredataboutthattime by the company, supplemented by money supplied personallybythesubscriber.Beyondthisnothinghasbeen

paidonthesharesandnofurtherdividendhasbeen
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declaredbythecorporation.Thereisthereforeabalanceof P15,000stillunpaiduponthesubscription. As the case reaches this court the sole question here presented for consideration is one of law, namely, whether the stipulation contained in the subscription to the effect that the subscription is payable from the first dividends declared on the shares has the effect of relieving the subscriberfrompersonalliabilityinanactiontorecoverthe valueoftheshares.Thetrialcourtheld,ineffect,thatthe stipulationmentionedisinvalid. In discussing this problem we accept as sound law the proposition propounded by the appellant's attorneys and takenfromFletcher'sCyclopediaasfollows: "In the absence of restrictions in its charter, a corporation, under its general power to contract, has the power to accept subscriptions upon any special terms not prohibited by positive law or contrary to public policy, providedtheyarenotsuchastorequiretheperformanceof acts which are beyond the powers conferred upon the corporation by its charter, and provided they do not constituteafrauduponothersubscribersorstockholders,or upon persons who are or may become creditors of the corporation."(Fletcher,Cyc.Corp.,sec.602,p.1314.) Under the American regime corporate franchises in the Philippine Islands are granted subject to the provisions of section74oftheOrganicActofJuly1,1902,which,inthe partherematerial,issubstantiallyreproducedinsection28 oftheAutonomyActofAugust29,1916.IntheOrganicAct it is, among other things, declared: "That all franchises, privileges,orconcessionsgrantedunderthisActshallforbid the issue of stock or bonds except in exchange f or actual cash or f or property at a f air valuation equal to the par valueofthestockorbondssoissued;***."(ActofCongress ofJuly1,190.2,sec.74.) Pursuant to this provision we find that the Philippine CommissioninsertedintheCorporationLaw,enacted
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March1,1906,thefollowingprovision:"***nocorporation shallissuestockorbondsexceptinexchangeforactualcash paidtothecorporationorforpropertyactuallyreceivedbyit at a fair valuation equal to the par value of the stock or bondssoissued."(ActNo.1459,sec.16,asamendedbyAct No.2792,sec.2.) The prohibition against the issuance of shares by corporations except for actual cash to the par value of the stockoritsfullequivalentinpropertyisthusenshrinedin boththeorganicandstatutorylawofthePhilippineIslands; anditwouldseemthatourlawmakerscouldscarcelyhave chosen language more directly suited to secure absolute equality among stockholders with respect to their liability uponstocksubscriptions.Now,ifitisunlawfultoissuestock otherwisethanasstateditisselfevidentthatastipulation such as that now under consideration, in a stock subscription, is illegal; for this stipulation obligates the subscribertopaynothingforthesharesexceptasdividends may accrue upon the stock. In the contingency that dividendsarenotpaid,thereisnoliabilityatall.Thisisa discrimination in favor of the particular subscriber, and hencethestipulationisunlawful. Thegeneraldoctrineofcorporationlawisinconformity with this conclusion, as may be seen from the following proposition taken from the standard encyclopedic treatise, CorpusJuris: "Nor has a corporation the power to receive a subscription upon such terms as will operate as a fraud upontheothersubscribersorstockholdersbysubjectingthe particular subscriber to lighter burdens, or by giving him greaterrightsandprivileges,orasafrauduponcreditorsof thecorporationbywithdrawingordecreasingthecapital.It is well settled therefore, as a general rule, that an agreement between a corporation and a particular subscriber,bywhichthesubscriptionisnottobepayable,or istobepayableinpartonly,whetheritisforthepurposeof pretendingthatthestockisreallygreaterthanitis,
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National Exchange Co. vs. Dexter orforthepurposeofpreventingthepredominanceofcertain stockholders,orforanyotherpurpose,isillegalandvoidas in fraud of other stockholders or creditors, or both, and cannotbeeitherenforcedbythesubscriberorinterposedas adefenseinanactiononthesubscription."(14C.J.,p.570.) The rule thus stated is supported by a long line of decisionsfromnumerouscourts,withlittleornodiversityof opinion. As stated in the headnote to the opinion of the SupremeCourtoftheUnitedStatesinthecaseofPutnam vs.NewAlbany,etc.RailroadCo.asreportedin21Law.ed., 361, the rule is that "Conditions attached to subscriptions, which,ifvalid,lessenthecapitalofthecompany,areafraud uponthegrantorofthefranchise,anduponthosewhomay becomecreditorsofthecorporation,anduponunconditional stockholders." In the appellant's brief attention is called to the third headnotetoBankvs.Cook(125lowa,111),whereitisstated thatacollateralagreementwithasubscribertostockthat his subscription shall not be collectible except from dividendsonthestock,isvalidasbetweenthepartiesanda completedefensetoasuitonnotesgivenfortheamountof thesubscription.Acarefulperusalofthedecisionwillshow that the rule thus broadly stated in the headnote is not justifiedbyanythinginthereporteddecision;forwhatthe court really held was that the making of such promise by theagentofthecorporationwhosoldthestockisadmissible inevidenceinsupportofthedefenseoffraudandfailureof consideration.Moreover,evenifthedecisionhadbeentothe effect supposed, the rule announced in the headnote could have no weight in a jurisdiction like this where there is a statutoryprovisionprohibitingsuchagreements. We may add that the law in force in this jurisdiction makes no distinction, in respect to the liability of the subscriber, between shares subscribed before incorporation iseffectedandsharessubscribedthereafter.Allalike
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areboundtopayfullparvalueincashoritsequivalent,and any attempt to discriminate in favor of one subscriber by relievinghimofthisliabilitywhollyorinpartisforbidden.

Inwhatisheresaidwehavereferenceofcourseprimarilyto subscriptions to shares that have not been previously issued.Itisconceivablethatthepowerofthecorporationto maketermswiththepurchaserwouldbegreaterwherethe shares which are the subject of the transaction have been acquired by the corporation in course of commerce, after they have already been once issued. But the shares with whichwearehereconcernedarenotofthissort. Thejudgmentappealedfrommustbeaffirmed,anditis soordered,withcostsagainsttheappellant. Malcolm, Ostrand, Johns, Romualdez, and VillaReal, JJ.,concur. Judgment affirmed. _______________

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