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TYPES OF DIVIDENDS AND OTHER DISTRIBUTIONS the status of the operating contract in question which as renewed

expired in 1947.
NIELSON & CO. INC. VS. LEPANTO CONSOLIDATED MINING CO.
(GR. No. L-21601; December 28, 1968) ISSUE: Whether or not Nielson is entitled to his share in the stock
dividends.
On January 30, 1937, the parties have entered into an operating
agreement wherein Nielson & Co. would operate and manage the HELD: NO.
mining properties owned by Lepanto Consolidated Mining Co. for a
Stock dividends cannot be issued to a person who is not a
period of five years. Before the lapse of the five year period, the
parties have renewed the contract for another five years with stockholder in payment of services rendered.
modifications made by Lepanto on the management fee. Section 16 of the Corporation Law, in part, provides a follows:
On its modified contract Nielson will receive (1) 10% of the No corporation organized under this Act shall create or issue bills,
dividends declared and paid, when and as paid during the period of notes or other evidence of debt, for circulation as money, and no
the contract and at the end of each year, (2) 10% of any depletion corporation shall issue stock or bonds except in exchange for actual
reserve that may set up, and (3) 10% of any amount expended cash paid to the corporation or for: (1) property actually received by
during the year out of surplus earnings for capital account. it at a fair valuation equal to the par or issued value of the stock or
On January, 1942 operation of the mining properties was disrupted bonds so issued; and in case of disagreement as to their value, the
same shall be presumed to be the assessed value or the value
on account of the war. The Japanese forces thereafter occupied the
mining properties, operated the mines during the continuance of appearing in invoices or other commercial documents, as the case
the war, and who were ousted from the mining properties only in may be; and the burden or proof that the real present value of the
property is greater than the assessed value or value appearing in
August of 1945.
invoices or other commercial documents, as the case may be, shall
After the mining properties were liberated from the Japanese be upon the corporation, or for (2) profits earned by it but not
forces, Lepanto took possession thereof and embarked in rebuilding distributed among its stockholders or members; Provided, however,
and reconstructing the mines and mill. The restoration lasted for That no stock or bond dividend shall be issued without the approval
nearly three years and the mines have resumed its operation under of stockholders representing not less than two-thirds of all stock
the exclusive management of Lepanto. then outstanding and entitled to vote at a general meeting of the
corporation or at a special meeting duly called for the purpose.
Shortly after the mines were liberated from the Japanese invaders
in 1945, a disagreement arose between NIELSON and LEPANTO over
In the case at bar Nielson can not be paid in shares of stock which that is, if the corporation has original shares of stock unsold or
form part of the stock dividends of Lepanto for services it rendered unsubscribed, either coming from the original capitalization or from
under the management contract. We sustain the contention of the increased capitalization. Those shares of stock may be issued to
Lepanto that the understanding between Lepanto and Nielson was a person who is not a stockholder, or to a person already a
simply to make the cash value of the stock dividends declared as the stockholder in exchange for services rendered or for cash or
basis for determining the amount of compensation that should be property. But a share of stock coming from stock dividends declared
paid to Nielson, in the proportion of 10% of the cash value of the cannot be issued to one who is not a stockholder of a corporation.
stock dividends declared. In other words, Nielson must still be paid
his 10% fee using as the basis for computation the cash value of the A “stock dividend” is any dividend payable in shares of stock of the
stock dividends declared. corporation declaring or authorizing such dividend.

Moreover, from the above-quoted provision of Section 16 of the So, a stock dividend is actually two things: (1) a dividend, and (2) the
Corporation Law, the consideration for which shares of stock may enforced use of the dividend money to purchase additional shares
be issued are: (1) cash; (2) property; and (3) undistributed profits. of stock at par.16 When a corporation issues stock dividends, it
Shares of stock are given the special name “stock dividends” only if shows that the corporation’s accumulated profits have been
they are issued in lieu of undistributed profits. If shares of stocks are capitalized instead of distributed to the stockholders or retained as
surplus available for distribution, in money or kind, should
issued in exchange of cash or property then those shares do not fall
under the category of “stock dividends”. A corporation may legally opportunity offer. Far from being a realization of profits for the
issue shares of stock in consideration of services rendered to it by a stockholder, it tends rather to postpone said realization, in that the
person not a stockholder, or in payment of its indebtedness. A share fund represented by the new stock has been transferred from
of stock issued to pay for services rendered is equivalent to a stock surplus to assets and no longer available for actual distribution.17
issued in exchange of property, because services is equivalent to Thus, it is apparent that stock dividends are issued only to
stockholders. This is so because only stockholders are entitled to
property.14 Likewise a share of stock issued in payment of
indebtedness is equivalent to issuing a stock in exchange for cash. dividends. They are the only ones who have a right to a proportional
But a share of stock thus issued should be part of the original capital share in that part of the surplus which is declared as dividends. A
stock dividend really adds nothing to the interest of the
stock of the corporation upon its organization, or part of the stocks
issued when the increase of the capitalization of a corporation is stockholder; the proportional interest of each stockholder remains
properly authorized. In other words, it is the shares of stock that are the same.18If a stockholder is deprived of his stock dividends – and
originally issued by the corporation and forming part of the capital this happens if the shares of stock forming part of the stock
that can be exchanged for cash or services rendered, or property; dividends are issued to a non-stockholder — then the proportion of
the stockholder’s interest changes radically. Stock dividends are civil
fruits of the original investment, and to the owners of the shares ASC averred that it is not duty bound to withhold tax from the
belong the civil fruits. estate because it redeemed the said shares for purposes of
“Filipinization” of ASC and also to reduce its remittance abroad.
DECLARATION AND PAYMENT OF DIVIDENDS
ISSUE: Whether or not ASC’s arguments are tenable.
Commissioner of Internal Revenue vs. Court of Appeals and A.
Soriano Corp. HELD: NO.

Don Andres Soriano (American), founder of A. Soriano Corp. (ASC) The reason behind the redemption is not material. The proceeds
had a total shareholdings of 185,154 shares. Broken down, the from a redemption is taxable and ASC is duty bound to withhold the
shares comprise of 50,495 shares which were of original issue when tax at source. The Soriano Estate definitely profited from the
the corporation was founded and 134,659 shares as stock dividend redemption and such profit is taxable, and again, ASC had the duty
declarations. So in 1964 when Soriano died, half of the shares he to withhold the tax. There was a total of 108,000 shares redeemed
held went to his wife as her conjugal share (wife’s “legitime”) and from the estate. 25,247.5 of that was original issue from the capital
the other half (92,577 shares, which is further broken down to of ASC. The rest (82,752.5) of the shares are deemed to have been
25,247.5 original issue shares and 82,752.5 stock dividend shares) from stock dividend shares. Sale of stock dividends is taxable. It is
went to the estate. For sometime after his death, his estate still also to be noted that in the absence of evidence to the contrary, the
continued to receive stock dividends from ASC until it grew to at Tax Code presumes that every distribution of corporate property, in
least 108,000 shares. whole or in part, is made out of corporate profits such as stock
dividends.
In 1968, ASC through its Board issued a resolution for the
redemption of shares from Soriano’s estate purportedly for the It cannot be argued that all the 108,000 shares were distributed
planned “Filipinization” of ASC. Eventually, 108,000 shares were from the capital of ASC and that the latter is merely redeeming
redeemed from the Soriano Estate. In 1973, a tax audit was them as such. The capital cannot be distributed in the form of
conducted. Eventually, the Commissioner of Internal Revenue (CIR) redemption of stock dividends without violating the trust fund
issued an assessment against ASC for deficiency withholding tax-at- doctrine — wherein the capital stock, property and other assets of
source. The CIR explained that when the redemption was made, the the corporation are regarded as equity in trust for the payment of
estate profited (because ASC would have to pay the estate to the corporate creditors. Once capital, it is always capital. That
redeem), and so ASC would have withheld tax payments from the doctrine was intended for the protection of corporate creditors.
Soriano Estate yet it remitted no such withheld tax to the
government. LIABILITY FOR IMPROPER DIVEDENDS
G.R. No. L-30460 March 12, 1929 such dividends shall be in installment, so that, according to the
Board, the financial standing of the corporation may not be
C. H. STEINBERG, as Receiver of the Sibuguey Trading Company, impaired.
Incorporated, plaintiff-appellant, vs. GREGORIO VELASCO, ET AL.,
defendants-appellees. All of this acts, as alleged by plaintiff, is to the detriment and
prejudice of corporation’s creditors.
Plaintiff is the receiver of the Sibuguey Trading Company, a
domestic corporation. The defendants are residents of the ISSUE: WON the defendant-officers of the corporation acted in
Philippine Islands and grossly negligent, hence, liable.

Sibuguey Trading Company Inc. had an authorized capital stock of HELD: YES.
P20,000 divided into 2,000 shares of the par value of P10 each,
which only P10,030 was subscribed and paid. Ganzon and Mendaros The court cited the following:
are directors of the corporation. (Take note of this computation to “Upon each of those points, the rule is well stated in Ruling Case
avoid confusion) Law, vol. 7, p. 473, section 454 where it is said:
During the meeting of the Board of Directors of said corporation, General Duty to Exercise Reasonable Care. — The directors of a
knowing very well of the face value of the corporation previously corporation are bound to care for its property and manage its
stated, the defendants Ganzon along with other officers of the affairs in good faith, and for a violation of these duties resulting in
board passed a resolution authorizing the purchase by the waste of its assets or injury to the property they are liable to
corporation of large portion of its own capital stock in the total account the same as other trustees. Are there can be no doubt that
amount of P3,300 for 330 shares, par value at P10 each. at the time if they do acts clearly beyond their power, whereby loss ensues to
the purchase was made, the corporation was indebted in the sum of the corporation, or dispose of its property or pay away its money
P13,807.50, and that according to its books, it had accounts without authority, they will be required to make good the loss out
receivable in the sum of P19,126.02. of their private estates. This is the rule where the disposition made
On September 11, 1923, when the petition was filed for its of money or property of the corporation is one either not within the
dissolution upon the ground that it was insolvent, its accounts lawful power of the corporation, or, if within the authority of the
payable amounted to P9,241.19, and its accounts receivable particular officer or officers.
P12,512.47, or an apparent asset of P3,271.28 surplus over its And section 458 which says:
liabilities. Seeing this as profits, the board approved the distribution
of its dividends in the amount of P3,000. However, the payment of
Want of Knowledge, Skill, or Competency. — It has been said that dividends to the amount of P3,000, the real assets of the
directors are not liable for losses resulting to the corporation from corporation were diminished P6,300. It also appears from paragraph
want of knowledge on their part; or for mistake of judgment, 4 of the stipulation that the corporation had a "surplus profit" of
provided they were honest, and provided they are fairly within the P3,314.72 only. It is further stipulated that the dividends should "be
scope of the powers and discretion confided to the managing body. made in installments so as not to effect financial condition of the
But the acceptance of the office of a director of a corporation corporation." In other words, that the corporation did not then have
implies a competent knowledge of the duties assumed, and an actual bona fide surplus from which the dividends could be paid,
directors cannot excuse imprudence on the ground of their and that the payment of them in full at the time would "affect the
ignorance or inexperience; and if they commit an error of judgment financial condition of the corporation."
through mere recklessness or want of ordinary prudence or skill,
they may be held liable for the consequences. Like a mandatory, to It is, indeed, peculiar that the action of the board in purchasing the
whom he has been likened, a director is bound not only to exercise stock from the corporation and in declaring the dividends on the
proper care and diligence, but ordinary skill and judgment. As he is stock was all done at the same meeting of the board of directors,
bound to exercise ordinary skill and judgment, he cannot set up that and it appears in those minutes that the both Ganzon and
Mendaros were formerly directors and resigned before the board
he did not possess them.”
approved the purchase and declared the dividends, and that out of
The court held that if in truth and in fact the corporation had an the whole 330 shares purchased, Ganzon, sold 100 and Mendaros
actual bona fide surplus of P3,000 over and above all of its debt and 200, or a total of 300 shares out of the 330, which were purchased
liabilities, the payment of the P3,000 in dividends would not in the by the corporation, and for which it paid P3,300. In other words,
least impair the financial condition of the corporation or prejudice that the directors were permitted to resign so that they could sell
the interests of its creditors. their stock to the corporation. As stated, the authorized capital
stock was P20,000 divided into 2,000 shares of the par value of P10
It is very apparent that on June 24, 1922, the board of directors
each, which only P10,030 was subscribed and paid. Deducting the
acted on assumption that, because it appeared from the books of P3,300 paid for the purchase of the stock, there would be left
the corporation that it had accounts receivable of the face value of P7,000 of paid up stock, from which deduct P3,000 paid in
P19,126.02, therefore it had a surplus over and above its debts and
dividends, there would be left P4,000 only. In this situation and
liabilities. But as stated there is no stipulation as to the actual cash upon this state of facts, it is very apparent that the directors did not
value of those accounts, and it does appear from the stipulation act in good faith or that they were grossly ignorant of their duties.
that on February 28, 1924, P12,512.47 of those accounts had but
little, if any, value, and it must be conceded that, in the purchase of Creditors of a corporation have the right to assume that so long as
its own stock to the amount of P3,300 and in declaring the there are outstanding debts and liabilities, the board of directors
will not use the assets of the corporation to purchase its own stock, If a stockholder, in a stock corporation subscribes to a certain
and that it will not declare dividends to stockholders when the number of shares of stock, and makes partial payments for which he
corporation is insolvent. is issued certificates of stock, he is entitled to vote the latter,
notwithstanding the fact that he has not paid the balance of his
The amount involved in this case is not large, but the legal principles subscription which has been called for payment or declared
are important, and we have given them the consideration which delinquent. If the entire subscribed shares of stock are not paid, the
they deserve. paid shares of stock may not be deprived of the right to vote, until
OWNERSHIP OF SECURITIES: RIGHT TO ISSUANCE the entire subscribed shares of stock are fully paid, including
interest.
G.R. No. L-16236 June 30, 1965
COMPREHENSIVE:
IRINEO S. BALTAZAR, plaintiff-appellee, vs. LINGAYEN GULF
ELECTRIC POWER, CO., INC., , defendants-appellants. Plaintiffs Baltazar and Rose were among the incorporators of
Lingayen Gulf, the corporation. It is alleged that it has always been
BRIEF DIGEST: the practice and procedure of the Corporation to issue certificates
of stock to its individual subscribers for unpaid shares of stock. Of
Ireneo Baltazar subscribed 600 shares from Lingayen Gulf Electric
the 600 shares of capital stock subscribed by Baltazar, he had fully
Power Corporation (now referred to as corporation). It has been a
paid 535 shares of stock, and the Corporation issued to him several
practice of the corporation to issue a certificate of stock even if the
fully paid up and non-assessable certificates of stock, corresponding
unpaid balance in subscription contract is not yet fully paid. Irineo
to the 535 shares.
was able to pay 300 shares out of 600. When the new Board of
directors were elected, they adopted a resolution, as stated in the Defendants Ungson, Estrada, Fernandez and Yuzon, constituted the
said resolution those subscribers which has outstanding balance, majority of the holdover seven-member Board of Directors of the
will not be able to exercise their right to vote until they fully pay Corporation. Let the first group be called the Ungson group and the
was is due. Hence this petition. second, the Baltazar group.

ISSUE: If a stockholder who subscribed and pays only partially, for Annual stockholders' meeting of the Corporation had been fixed,
which he was issued a certificate of stock, is he entitled to vote? principally for the purpose of electing new officers and Board of
Directors for the calendar year 1955. the fight for control of the
HELD:
management and property of the corporation was close and keen.
The Ungson group (specially defendant Acena), in order to continue The following tentative amicable settlement, dated September 13,
retaining control management and property of the corp, in the 1958, formulated and entered into by some of the parties:
regular meeting of the Board of Directors, held on January 30, 1955,
1. As to the so-called water stocks P30,000.00 each of the holders of
passed 3 resolutions.
said stock, namely, Irineo Baltazar, Marvin Rose, and Bernardo
Resolution No. 2 declared all watered stocks issued to Acena, Acena, will return to the corporation P3,500 each, thereby retaining
Baltazar, Rose and Jubenville, "of no value and consequently P6,500 worth of stocks;
cancelled from the books of the Corporation.
2. With respect to Dr. Bernardo Acena, of the certificates of stock
Resolution No. 3 resolved that "... all unpaid subscriptions should allegedly representing, his profit, he will return to the corporation
bear interest annually from the year of subscription.. P3,500 of said share of stock and retain P7,500 worth thereof ;...

Resolution No. 4 resolved that "any and all shares of stock of the On February 20, 1959, the lower court rendered a decision,
Lingayen Gulf Electric Power Co., Inc., issued as fully paid-up to approving the agreement and dissolved the writ of preliminary
stockholders whose subscription to a number of shares have been injunction, with costs. Defendants on March 14, 1959 filed a motion
declared are hereby incapacitated to utilize or avail of the voting for reconsideration, asking that the agreement be amended in the
power until such delinquency interest is fully paid up. sense that delinquent stocks cannot be voted until fully paid in
accordance with the agreement.
On the authority of these resolutions, the Ungson group was
threatening and procuring to expel and oust the plaintiffs and their On March 18, 1959, plaintiffs, in cases Nos. 13211 and 13212, filed a
companion stockholders, for the ultimate purpose of depriving petition for immediate execution and for preliminary injunction
them of their right to vote in the said annual stockholders' meeting and/or mandamus, praying that a writ be issued, ordering the
scheduled for May 1, 1955. defendants, as controlling majority of hold-over board of directors,
to hold immediately the long delayed stockholders' meeting, and to
Baltazar and Rose prayed that a writ of preliminary injunction be allow the plaintiffs and all the stockholders, with still unpaid
issued, which was granted subscriptions, to vote all their stocks and subscriptions at said
Defendants set up counterclaims. praying that the resolutions be stockholders' meeting, as directed in the decision.
declared legal and valid. Plaintiffs filed their answer to defendants' On March 25, 1959, the Court issued an amending decision,
counterclaims. On August 8, 1955, the lower dismissed plaintiffs' pertinent portions of which are hereunder reproduced —
counterclaims.
..Regarding the right to vote, this Court likewise agrees that the  The present case does not come under the principle in Fua
facts considered during the negotiations do not warrant repeal of Cun because it was the practice of the company there since
the declaration of delinquency and complete restoration of voting its inception, to issue certificates of stock even for unpaid
rights until full payment of the unpaid stock subscriptions and. shares and gave voting power to stocks fully paid. And even
though no agreement existed, the ruling in said case does
On April 4, 1959 , plaintiffs filed a motion for reconsideration and/or
not now reflect the correct view on the matter, for better
new trial. On July 16, 1959, the trial court reversed its amending
than an agreement or practice, there is the law, which
decision in an order, the relevant parts thereof follow:
renders Fua Cun, obsolescent.
WHEREFORE, by way of amendment to both the original and  Sec. 37 of the Corporation Law, as amended by Act No.
amending decisions of this Court in the instant case, this Court 3518, approved 6 yrs after Fua Cun (1923), provides:
hereby expressly rules that all shares of the capital stock of the
SEC. 37. No certificate of stock shall be issued to a subscriber as fully
defendant corporation covered by fully paid capital stock shares
paid up until the full par value thereof, or the full subscription in the
certificates are entitled to vote in all meetings of the stockholders of
case of no par stock, has been paid by him to the corporation.
this corporation.
Subscribed shares not fully paid up may be voted provided no
ISSUES/HELD: subscription is unpaid and delinquent.

WON a shareholder with a balance of unpaid shares subscribed is  The present law requires as a condition before a
entitled to vote the paid shares – YES. shareholder can vote his shares, that his full subscription be
paid in the case of no par value stock; and in case of stock
WON previous payments should be applied to the interest first – corporation with par value, the stockholder can vote the
NO. shares fully paid by him only, irrespective of the unpaid
delinquent shares.
WON there was a waiver of right to enforce the voting power, by
o Since it was the practice of Lingayen to issue stock
virtue of the compromise agreement – NO.
certificates to not fully paid subscribers, it may not
RATIO: take away the right to vote granted by the
certificate.
WON a shareholder with a balance of unpaid shares subscribed is o Stock certificates may be issued for less than the
entitled to vote the paid shares – YES. number of shares subscribed for provided that The
par value of each represented by the certificate has
been paid, and It is not prohibited by the by-laws.
WON previous payments should be applied to the interest first – NO. payment of accrued interest for unpaid
subscriptions.
 As observed by the trial court, a corporation may now, in o Although NCC 1253 states that if a debt produces
the absence of contrary provisions in their by-laws, apply interest, payment of the principal is not deemed
payment made by, subscribers-stockholders, either as: made until the interest has been covered, this
a) full payment for the corresponding number of shares of stock, applies only when there is no agreement to the
the par value of each of which is covered by such payment; or contrary, which is obviously the situation in the case
at bar.
b) payment pro-rata to each and all the entire number of shares
subscribed for. WON there was a waiver of right to enforce the voting power, by
virtue of the compromise agreement – NO.
 In this case, Lingayen chose to apply payments by the
shareholders to definite shares of stock and had full paid-up  Certain clauses of the agreement are contrary to law and
shares certificates for the payments. Its call for payments of public policy and would cause injury to the Baltazar group
unpaid subscription and its declaration of delinquency only and other stockholders similarly situated. Estoppel cannot
affected the remaining number of shares. be predicated on acts which are prohibited by law or are
against public policy.
 Lingayen applied the payments made to the full par value of
shares subscribed, instead of the accrued interest. This OWNERSHIP OF SECURITIES: STOCK AND TRANSFER BOOK
being the case, the application of payments must be
deemed to have been agreed upon by the Lingayen and the CHUA GUAN vs. SAMAHANG MAGSASAKA
shareholders and cannot now be changed without the
Gonzalo H. Co Toco, is the owner of 5,894 shares of the capital stock
consent of the shareholders concerned. It would therefore
of Samahang Magsasaka Inc. represented by 9 certificates having a
result that a corporation may, upon the request of an
par value of P5 per share mortgaged said shares to Chua Chiu to
interested shareholder, apply payments by them to the full
guarantee the payment of a debt. The said certificates of stock were
par value of subscribed capital stock.
delivered with the mortgage to the mortgagee, Chua Chiu. The said
o The Corporation Law and the by-laws of Lingayen
mortgage was duly registered in the office of the registered of
do not contain any provision, prohibiting the
deeds of Manila and in the office of the said corporation. Chua Chiu
application of stockholders' payments to the full par
assigned all his right and interest in said mortgage to the Chua Guan
value of a corporation's capital stock, ahead of the
and the assignment in the office of the register of deeds in the City
of Manila and in the office of the said corporation.
Co Toco defaulted in the payment of said debt at maturity and Chua corporation presents considerable difficulty, as an equity in shares
Guan foreclosed said mortgage and delivered the certificates of of stock is of such an intangible character, and the Court has
stock and copies of the mortgage and assignment to the sheriff of obtained little aid from the decisions of other jurisdictions because
the City of Manila in order to sell the said shares at public auction. that form of mortgage is ill suited to the hypothecation of shares of
The plaintiff having been the highest bidder, the sheriff executed in stock and has been rarely used elsewhere. Section 4 of Act 1508
his favor a certificate of sale of said shares. The plaintiff tendered provides two ways for executing a valid chattel mortgage which
the certificates of stock standing in the name of Co Toco to the shall be effective against third persons. First, the possession of the
proper officers of the corporation for cancellation and demanded property mortgaged must be delivered to and retained by the
that they issue new certificates in the name of Chua Guan but the mortgagee; and, second, without such delivery the mortgage must
officers refused to issue. be recorded in the proper office.

An action for writ of mandamus was filed, praying that the Domicile of corporation decisive for purposes of execution,
defendants transfer the said 5,894 shares of stock to the plaintiff by attachment and garnishment of shares of stock
canceling the old certificates and issuing new ones in their stead. As
special defense, the defendants refused to cancel said certificates It is a common but not accurate generalization that the situs of
and to issue new ones in the name of Chua Guan because prior to shares of stock is at the domicile of the owner. The term situs is not
one of fixed or invariable meaning or usage. Nor should one lose
the date of the latter’s demand, 9 attachments had been issued and
served and noted on the books of the corporation against Co Toco’s sight of the difference between the situs of the shares and the situs
shares and Chua Guan objected to having these attachments noted of the certificate of shares. The situs of shares of stock for some
purposes may be at the domicile of the owner and for others at the
on the new certificates which he demanded.
domicile of the corporation; and even elsewhere. It is a general rule
ISSUE: Whether or not the mortgage takes priority over the writs of that for purposes of execution, attachment and garnishment, it is
attachment? not the domicile of the owner of a certificate but the domicile of the
corporation which is decisive.
HELD: NO.
By analogy with the foregoing and considering the ownership of
Attaching creditors are entitled to priority over the defectively shares in a corporation as property distinct from the certificates
registered mortgage of the appellant. which are merely the evidence of such ownership, it seems to be a
The registration of the said chattel mortgage in the office of the reasonable construction of section 4 of Act 1508 to hold that the
corporation was not necessary and had no legal effect. The practical property in the shares may be deemed to be situated in the
application of the Chattel Mortgage Law to shares of stock of a province in which the corporation has its principal office or place of
business. If this province is also the province of the owner's his possession. Moreover, the shares still standing in the name of
domicile, a single registration is sufficient. If not, the chattel the debtor on the books of the corporation will be liable to seizure
mortgage should be registered both at the owner's domicile and in by attachment or levy on execution at the instance of other
the province where the corporation has its principal office or place creditors.
of business. In this sense the property mortgaged is not the
certificate but the participation and share of the owner in the assets The transfer by endorsement and delivery of a certificate with
of the corporation. intention to pledge the shares covered thereby should be sufficient
to give legal effect to that intention and to consummate the juristic
Apart from the cumbersome and unusual method of hypothecating act without necessity for registration.
shares of stock by chattel mortgage, it appears that in the present
state of our law, the only safe way to accomplish the hypothecation G.R. No. 37078 September 27, 1933
of share of stock of a Philippine corporation is for the creditor to ENRIQUE MONSERRAT, plaintiff-appellee, vs. CARLOS G. CERON,
insist on the assignment and delivery of the certificate and to obtain ET AL., defendants.
the transfer of the legal title to him on the books of the corporation
by the cancellation of the certificate and the issuance of a new one  Petitioner, Monserrat, was president and manager of the
to him. From the standpoint of the debtor this may be Manila Yellow Taxicab Company Inc., and the owner of
unsatisfactory because it leaves the creditor as the ostensible owner P1,200 common shares of stock of the company. He
of the shares and the debtor is forced to rely upon the honesty and assigned the usufruct (right in a property owned by another
solvency of the creditor. Of course, the mere possession and for a limited time or until death) of half of his common
retention of the debtor's certificate by the creditor gives some shares of stock to Carlos Ceron (defendant).
security to the creditor against an attempted voluntary transfer by  The assignment included the right to enjoy the profits from
the debtor, provided by- laws of the corporation expressly enact the shares, prohibiting Ceron from selling, mortgaging,
that transfers may be made only upon the surrender of the encumbering, or exercising any act implying absolute
certificate. It is to be noted, however, that section 35 of the ownership.
Corporation Law enacts that shares of stock "may be transferred by  Ceron mortgaged some of the shares of stock of Manila
delivery of the certificate endorsed by the owner or his attorney in Yellow Taxicab, including the 600 common shares assigned
fact or other person legally authorized to make the transfer." The to him by Monserrat to Eduardo Matute, President to Erma,
use of the verb "may" does not exclude the possibility that a Inc as payment of his debt.
transfer may be made in a different manner, thus leaving the
creditor in an insecure position even though he has the certificate in
 Matute was not informed of the document that contained number of the certificate, and the number of shares
Ceron’s rights and prohibitions with regard to the 600 transferred.
common shares of stock from Monserrat.  Section 35 of the Corporation Law does not require any
 The CFI Manila rendered judgment in favor of the plaintiff entry except of transfers of shares of stock in order that
declaring the plaintiff the owner of the 600 shares of stock; such transfers may be valid as against third persons.
and declaring the mortgage constituted on the ownership of  The word transfer is defined as the act and effect of
the shares of stock null and void and without force and transferring; and the verb as to assign or waive the right in,
effect, although the mortgage on the usufruct enjoyed by or absolute ownership of, a thing in favor of another,
the mortgage debtor Ceron in the said 600 shares of stock is making him the owner thereof.
hereby declared valid; with costs against the defendants.  Section 3 of Act No. 1508, as amended by Act No. 2496,
defines the phrase (chattel mortgage) as: a conditional sale
Issue & Ruling:
of personal property as security for the payment of a debt…
Whether it is necessary to enter upon the books of the corporation a the condition being that the sale shall be avoided upon the
mortgage constituted on common shares of stock in order that such seller paying to the purchaser a sum of money or doing
mortgage may be valid and may have force and effect as against some other act named. If the condition is performed
third persons. according to its terms the mortgage and sale immediately
become void, and the mortgage is hereby divested of his
 Section 35 of the Corporation Law provides the following: title.
The capital stock of stock corporations shall be divided into  The chattel mortgage is not the transfer referred to in
shares for which certificates signed by the president or the section 35 of Act No. 1459 commonly known as the
vice-president, counter signed by the secretary or clerk and Corporation law, which transfer should be entered and
sealed with the seal of the corporation, shall be issued in noted upon the books of a corporation in order to be valid,
accordance with the by-laws. Shares of stock so issued are and which, means the absolute and unconditional
personal property and may be transferred by delivery of the conveyance of the title and ownership of a share of stock.
certificate indorsed by the owner or his attorney in fact or  Inasmuch as a chattel mortgage of the aforesaid title is not
other person legally authorized to make the transfer. No a complete and absolute alienation of the dominion and
transfer, however, shall be valid, except as between the ownership thereof, its entry and notation upon the books of
parties, until the transfer is entered and noted upon the the corporation is not necessary requisite to its validity.
books of the corporation so as to show the names of the
parties to the transaction, the date of the transfer the
Whether or not the defendant entity, Erma, Inc., had knowledge of G.R. No. L-19441 March 27, 1923
the document that states that the transfer of the 600 shares of
common stocks from Monseratt to Ceron was only for the usufruct FUA CUN (alias Tua Cun), plaintiff-appellee, vs. RICARDO
of the shares, and that Ceron bound himself not to alienate nor SUMMERS, in his capacity as Sheriff ex-oficio of the City of Manila,
encumber them. and the CHINA BANKING CORPORATION, defendants-appellants.

On August 26, 1920, one Chua Soco subscribed for 500 shares of
 The evidence shows that when Matute went to the office of
stock of the defendant Banking Corporation at a par value of P100
the Manila Yellow Taxicab Co., Inc., to examine the Stock
per share [P 50,000]. However, he only paid the sum of P 25,000
and Transfer Book of the said corporation, for the purpose
which is 1/2 of the subscription price, in cash for which a receipt
of ascertaining the actual status of Carlos G. Ceron's shares
was issued.
of stock, Matute found nothing but that the shares in
question were recorded therein in the name of said Carlos On May 18, 1921, Chua Soco executed a promissory note in favor of
G. Ceron, free from all liens and encumbrances. the plaintiff Fua Cun for the sum of P25,000 payable in ninety days
 The notation of liens and encumbrances was placed there and drawing interest at the rate of 1 per cent per month, securing
only on May 5, 1931, the same date on which the 600 the note with a chattel mortgage on the shares of stock subscribed
common shares were to have been sold at public auction, in for by Chua Soco, who also endorsed the receipt above mentioned
view of Carlos G. Ceron's default in the payment of the loan and delivered it to the mortgagee.
secured by them.
 Therefore, defendant entity Erma, Inc. as conditional The Fua Cun, the plaintiff, thereupon took the receipt to the
purchaser of the 600 shares of stock, acquired, in good manager of the defendant Bank and informed him of the
faith, Ceron’s right and title to the shares of stock. transaction with Chua Soco, but was told to await action upon the
 SC holds that: since section 35 of the Corporation Law does matter by the Board of Directors.
not require the notation upon the books of a corporation of
Meanwhile, Chua Soco appears to have become indebted to the
transactions relating to its shares, except the transfer of
China Banking Corporation in the sum of P37,731.68 for dishonored
possession and ownership thereof, as a necessary requisite
acceptances of commercial paper and in an action brought against
to the validity of such transfer, the notation upon the
him to recover this amount, Chua Soco's interest in the five hundred
aforesaid books of the corporation, of a chattel mortgage
shares subscribed for was attached and the receipt seized by the
constituted on the shares of stock in question is not
sheriff.
necessary to its validity.
Fua Cun thereupon brought the present action maintaining that by The Court stated that the payment of half the subscription price
virtue of the payment of the one-half of the subscription price of does not make the holder of stock the owner of half the subscribed
the 500 shares Chua Soco in effect became the owner 250 shares shares. Plaintiff's rights consist in equity in 500 shares and upon
and praying that his, the plaintiff's, lien on said shares, by virtue of payment of the unpaid portion of the subscription price he becomes
the chattel mortgage, be declared to hold priority over the claim of entitled to the issuance of certificate for the said 500 shares in his
the defendant Banking Corporation; that the defendants be ordered favor.
to deliver the receipt in question to him; and that he be awarded
However, shares for which no certificate of stock has been issued
the sum of P5,000 in damages for wrongful attachment.
may validly be mortgaged in whole (and not just with respect to the
The trial court rendered judgment in favor of the Fua Cun declaring portion paid-up) and the corporation receiving notice thereof is
that Chua Soco, through the payment of the P25,000, acquired the bound to respect the security arrangement.
right to two hundred and fifty shares fully paid up, upon which
shares the plaintiff holds a lien superior to that of the China Banking Equity in shares of stock may be assigned. The assignment becomes
Corporation and ordering that the receipt be returned to said effective as between the parties and as to third parties with notice.
Equity in shares of stock may be a subject of a chattel mortgage but
plaintiff. From this judgment the defendants appeal.
such will operate as a conditional equitable assignment.
ISSUE/S
2) Yes, the plaintiff has a superior lien over the bank.
1) Whether Chua Soco, through the payment of the P25,000,
acquired the right to 250 shares which were fully paid up. (main The claim of the defendant Banking Corporation upon which it
brought the action in which the writ of attachment was issued, was
issue for corp)
for the non-payment of drafts accepted by Chua Soco and had no
2) Whether the plaintiff holds a lien superior to that of the direct connection with the shares of stock in question.
defendant Banking Corporation and ordering that the receipt be
returned to said plaintiff. (main issue in the case) At common law a corporation has no lien upon the shares of
stockholders for any indebtedness to the corporation and our
HELD: attention has not been called to any statute creating such lien here.

1) No. On the contrary, 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 CFI: court dismissed the petition
contracted in good faith, and stock so purchased or acquired shall,
within six months from the time of its purchase, be sold or disposed Nava appealed on the basis that: Section 37: "no certificate of stock
of at public or private sale, or, in default thereof, a receiver may be shall be issued to a subscriber as fully paid up until the full par value
appointed to close up the business of the bank in accordance with thereof, or the full subscription in case of no par stock, has been
law." paid by him to the corporation"

The reasons for this doctrine are obvious; if banking corporations ISSUE:
were given a lien on their own stock for the indebtedness of the W/N officers of Peers Marketing Corporation can be compelled by
stockholders, the prohibition against granting loans or discounts mandamus to enter in its stock and transfer book the sale made
upon the security of the stock would become largely ineffective.
HELD: NO. Dismissal affirmed.
G.R. No. L-28120 November 25, 1976
No provision of the by-laws of the corporation covers that situation
RICARDO A. NAVA, petitioner-appellant. vs. PEERS MARKETING
CORPORATION, RENATO R. CUSI and AMPARO CUSI, respondents. SEC. 35. The capital stock of stock corporations shall be divided into
shares for which certificates signed by the president or the vice-
Teofilo Po as an incorporator subscribed to 80 shares of Peers president, countersigned by the secretary or clerk and sealed with
Marketing Corporation at P100 PV and paid 25%. No certificate of the seal of the corporation, shall be issued in accordance with the
stock was issued to him or to any incorporator, subscriber or by-laws. Shares of stock so issued are personal property and may be
stockholder. transferred by delivery of the certificate indorsed by the owner or
April 2, 1966: Po sold to Ricardo A. Nava for P2,000 20 of 80 shares his attorney in fact or other person legally authorized to make the
transfer. No transfer, however, shall be valid, except as between
Nava requested to register the sale in the books of the corporation. the, parties, until the transfer is entered and noted upon the books
of the corporation so as to show the names of the parties to the
Denied - Po has not paid fully the amount of his subscriptionPo was
transaction, the date of the transfer, the number of the certificate,
delinquent of the balance due so the corporation claimed on his and the number of shares transferred.
entire subscription of which included 20 shares sold to Nava.
No share of stock against which the corporation holds any unpaid
December 21, 1966: Nava filed this mandamus to register 20 shares claim shall be transferable on the books of the corporation.
in Nava's name in the corporation's transfer book.
SEC. 36. (re voting trust agreement)
The certificates of stock so transferred shall be surrendered and issued the corresponding certificate of stock which evidences their
cancelled, and new certificates therefor issued to such person or ownership of shares in a particular corporation
persons, or corporation, as such trustee or trustees, in which new
certificates it shall appear that they are issued pursuant to said Lost or Destroyed Certificate
agreement. Sec. 73. Lost or destroyed certificates. – The following procedure
shall be followed for the issuance by a corporation of new
A stock subscription is a subsisting liability from the time the
subscription is made. The subscriber is as much bound to pay his certificate(s) of stock in lieu of those which have been lost, stolen or
subscription as he would be to pay any other debt. The right of the destroyed.
corporation to demand payment is no less incontestable. 1. The registered owner of certificate(s) or his legal
representative shall file with the corporation an affidavit in triplicate
No clear legal duty on the part of the officers of the corporation to
register the 20 shares in Nava's name - no cause of action for setting forth, if possible, the circumstances as to how the
mandamus. certificate(s) were stolen or destroyed, the number of shares
represented by each certificate, the serial number (s) of the
Baltazar case: partial payment = entitled to vote the said shares certificate(s) and the name of the corporation which issued the
although he has not paid the balance of his subscription and a call same. He shall also submit such other information and evidence
or demand had been made for the payment of the par value of the which he may deem necessary;
delinquent shares
2. After verifying the affidavit and other information and
Thus, Ricardo Nava, to whom Teofilo Po transferred 20 of the 80 evidence with the books of the corporation, said corporation shall
shares the latter subscribed but has not yet fully paid, and for which publish a notice in a newspaper of general circulation published in
no certificate of stock has been issued, has no cause of action the place where the corporation has its principal office, once a week
against the officers of the corporation for the recognition and for three (3) consecutive weeks at the expense of the registered
recording of the transaction in the corporate books. The transfer of owner of the certificate(s) of stock which have been lost, stolen or
the shares to Nava is valid only between him and Po. destroyed. The notice shall state the name of said corporation, the
name of the registered owner and the serial number(s) of said
Issuance of Certificate certificate(s), and the number of shares represented by such
Once full payment for the stocks have been tendered to the certificate(s), and that after the expiration of one (1) year from the
corporation in any of the valid forms of consideration for the date of the last publication, if no contest has been presented to said
issuance of stocks, the purchaser or the subscribers entitled to be corporation regarding said certificate(s) of stock, the right to make
such contest shall be barred and said corporation shall cancel in its
books the certificate(s) of stock which have been lost, stolen or
destroyed and issue in lieu thereof new certificate(s) of stock, unless
the registered owner files a bond or other security in lieu thereof as
may be required, running for a period of one (1) year for a sum 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 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(s) of stock which have been lost, stolen or destroyed, the
issuance of the new certificate(s) of stock in lieu thereof shall be
suspended until the final decision by the court regarding the
ownership of said certificate(s) of stock which have 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(s) of stock in lieu of
those lost, stolen or destroyed pursuant to the procedure above-
described.

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