BO2 5th Batch

1. DELPHER TRADES CORPORATION, and DELPHIN PACHECO

vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, INC.,
FACTS: Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of Malinta
Estate to which they leased to Construction Components International Inc. the same
property and providing that during the existence or after the term of this lease the
lessor should he decide to sell the property leased shall first offer the same to the
lessee and the letter has the priority to buy under similar conditions.
On August 3, 1974, lessee Construction Components International, Inc. assigned its
rights and obligations under the contract of lease in favor of Hydro Pipes Philippines,
Inc. with the signed conformity and consent of lessors Delfin Pacheco and Pelagia
Pacheco.
On January 3, 1976, a deed of exchange was executed between lessors Delfin and
Pelagia Pacheco and defendant Delpher Trades Corporation ( a family corporation)
whereby the former conveyed to the latter the leased property together with
another parcel of land also located in Malinta Estate, Valenzuela, Metro Manila for
2,500 shares of stock of defendant corporation with a total value of P1,500,000.00.
On the ground that it was not given the first option to buy the leased property
pursuant to the proviso in the lease agreement, respondent Hydro Pipes Philippines,
Inc., filed an amended complaint for reconveyance in its favor under conditions
similar to those whereby Delpher Trades Corporation acquired the property from
Pelagia Pacheco and Delphin Pacheco.

ISSUE: whether or not the "Deed of Exchange" of the properties executed by the
Pachecos on the one hand and the Delpher Trades Corporation on the other was
meant to be a contract of sale which, in effect, prejudiced the private respondent's
right of first refusal over the leased property included in the "deed of exchange."
RULING: No. After incorporation, one becomes a stockholder of a corporation by
subscription or by purchasing stock directly from the corporation or from individual
owners thereof. In the case at bar, in exchange for their properties, the Pachecos
acquired 2,500 original unissued no par value shares of stocks of the Delpher Trades
Corporation. Consequently, the Pachecos became stockholders of the corporation by
subscription "The essence of the stock subscription is an agreement to take and pay
for original unissued shares of a corporation, formed or to be formed." It is

significant that the Pachecos took no par value shares in exchange for their
properties.
Moreover, there was no attempt to state the true or current market value of the real
estate. Land valued at P300.00 a square meter was turned over to the family's
corporation for only P14.00 a square meter.
It is to be stressed that by their ownership of the 2,500 no par shares of stock, the
Pachecos have control of the corporation. Their equity capital is 55% as against 45%
of the other stockholders, who also belong to the same family group.
In effect, the Delpher Trades Corporation is a business conduit of the Pachecos.
What they really did was to invest their properties and change the nature of their
ownership from unincorporated to incorporated form by organizing Delpher Trades
Corporation to take control of their properties and at the same time save on
inheritance taxes.
The "Deed of Exchange" of property between the Pachecos and Delpher Trades
Corporation cannot be considered a contract of sale. There was no transfer of actual
ownership interests by the Pachecos to a third party. The Pacheco family merely
changed their ownership from one form to another. The ownership remained in the
same hands. Hence, the private respondent has no basis for its claim of a light of
first refusal under the lease contract.

2. SOFRONIO T. BAYLA, ET AL., vs. SILANG TRAFFIC CO., INC.,

TRAFFIC CO., petitioner, vs. SOFRONIO BAYLA, ET AL

SILANG

Petitioners in G.R. No. 48195 instituted this action in the Court of First Instance of
Cavite against the respondent Silang Traffic Co., Inc. to recover certain sums of
money which they had paid severally to the corporation on account of shares of
stock they individually agreed to take and pay for under certain specified terms and
conditions. said agreement is entitled "Agreement for Installment Sale of Shares in
the Silang Traffic Company, Inc.,"; where the purchaser is designated as
"subscriber," the corporation is described as "seller"; that the agreement was
entered into on March 30, 1935, long after the incorporation and organization of the
corporation, which took place in 1927; and that the price of the stock was payable
in quarterly installments spread over a period of five years. It also appears that in
civil case No. 3125 of the Court of First Instance of Cavite mentioned in the
resolution of August 1, 1937, the right of the corporation to sell the shares of stock
to the person named in said resolution (including herein petitioners) was impugned
by the plaintiffs in said case, who claimed a preferred right to buy said shares.
Petitioners' action for the recovery of the sums is based on a resolution by the board
of directors of the respondent corporation. On the contrary, The respondent

corporation set up the following defenses: (1) That the resolution is not applicable to
the petitioners Sofronio T. Bayla, Josefa Naval, and Paz Toledo because on the date
thereof "their subscribed shares of stock had already automatically reverted to the
defendant, and the installments paid by them had already been forfeited"; and (2)
that said resolution of August 1, 1937, was revoked and cancelled by a subsequent
resolution of the board of directors of the defendant corporation dated August 22,
1937.
ISSUE: WON the contract in question is a subscription or a sale.
WON resolution of August 1, 1937, valid? - YES
RULING: Whether a particular contract is a subscription or a sale of stock is a
matter of construction and depends upon its terms and the intention of the parties.
In the Unson case just cited, this Court held that a subscription to stock in an
existing corporation is, as between the subscriber and the corporation, simply a
contract of purchase and sale.
"A subscription is the mutual agreement of the subscribers to take and pay for the
stock of a corporation, while a purchase is an independent agreement between the
individual and the corporation to buy shares of stock from it at stipulated price."
2. In some particulars the rules governing subscriptions and sales of shares are
different. For instance, the provisions of our Corporation Law regarding calls for
unpaid subscription and assessment of stock (sections 37-50) do not apply to a
purchase of stock. Likewise the rule that corporation has no legal capacity to
release an original subscriber to its capital stock from the obligation to pay for his
shares, is inapplicable to a contract of purchase of shares.
The contract in question being one of purchase and not subscription , there is no
legal impediment to its rescission by agreement of the parties. According to the
resolution of August 1, 1937, the recission was made for the good of the corporation
and in order to terminate the then pending civil case involving the validity of the
sale of the shares in question among others. To that rescission the herein petitioners
apparently agreed, as shown by their demand for the refund of the amounts they
had paid as provided in said resolution. It appears from the record that said civil
case was subsequently dismissed, and that the purchasers of shares of stock, other
than the herein petitioners, who were mentioned in said resolution were able to
benefit by said resolution. It would be an unjust discrimination to deny the same
benefit to the herein petitioners.
The attempted revocation of said rescission by the resolution of August 22, 1937,
was invalid, it not having been agreed to by the petitioners.
Thus, defendant Silang Traffic Co., Inc., was ordered to pay petitioners.

3. NIELSON & COMPANY, INC. vs. LEPANTO CONSOLIDATED

COMPANY [G.R. No. L-21601, December 28, 1968]

MINING

Quick Facts: Operating agreement was executed between Nielsen and Lepanto
wherein the former operated and managed the mining properties of the latter. Part
of the compensation was 10% of the dividends declared and 10% of any amount
expended during the year out of surplus earnings for capital account. Under the said
contract, the management contract shall remain in suspense in case fortuitous
event or force majeure, such as war or civil commotion, adversely affects the work
of mining and milling. The Pacific War broke out. After the mining properties were
liberated from the Japanese forces, LEPANTO took possession thereof and embarked
in rebuilding and reconstructing the mines and mill. Nielsen Coy filed a complaint
against Lepanto company for recovery of sum of money representing damages
suffered in view of the refusal of the latter to comply with the terms of a
management contract. CFI dismissed the complaint but reversed by the SC wherein
it ordered Lepanto to issue stock dividends to Nielson.

Facts: Operating agreement was executed before World War II (on 30 January 1937)
between Nielson & Co. Inc. and the Lepanto Consolidated Mining Co. whereby the
former operated and managed the mining properties owned by the latter for a
management fee and a participation in the net profits resulting from the operation
of the mining properties, for a period of 5 years. The compensation was later on
modified wherein 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. During 1941,
they agreed to renew the contract for another 5 years. The Pacific War broke out in
December 1941 and operation of the mining properties was disrupted on account of
the war. Mines were destroyed upon orders of the United States Army, to prevent
their utilization by the invading Japanese Army. After the mining properties were
liberated from the Japanese forces, LEPANTO took possession thereof and embarked
in rebuilding and reconstructing the mines and mill. A disagreement arose between
NIELSON and LEPANTO over the status of the operating contract which as renewed
expired in 1947. Under the terms thereof, the management contract shall remain in
suspense in case fortuitous event or force majeure, such as war or civil commotion,
adversely affects the work of mining and milling.

NIELSON brought an action against LEPANTO before the Court of First Instance of
Manila to recover certain sums of money representing damages allegedly suffered
by the former in view of the refusal of the latter to comply with the terms of a
management contract. LEPANTO in its answer denied the material allegations of the
complaint and set up prescription and laches, as bars against the institution of the
action.

After trial, the court a quo rendered a decision dismissing the complaint. The
Supreme Court reversed the decision of the trial court and enter in lieu thereof
another, ordering Lepanto to pay Nielson. One of the award was to issue and deliver
to Nielson stock dividends.
Issue: Whether Court erred in ordering Lepanto to issue and deliver to Nielson
shares of stock together with fruits thereof?
Ruling: Yes. Section 16 of the Corporation Law, the consideration for which
shares of stock may be issued are: (1) cash; (2) property; and (3)
undistributed profits.
Shares of stock are given the special name "stock
dividends" only if they are issued in lieu of undistributed profits. If shares of stocks
are issued in exchange of cash or property then those shares do not fall under the
category of "stock dividends". A corporation may legally issue shares of stock in
consideration of services rendered to it by a person not a stockholder, or in
payment of its indebtedness. A share of stock issued to pay for services rendered is
equivalent to a stock issued in exchange of property, because services is equivalent
to property.14 Likewise a share of stock issued in payment of indebtedness is
equivalent to issuing a stock in exchange for cash. But a share of stock thus issued
should be part of the original capital stock of the corporation upon its organization,
or part of the stocks issued when the increase of the capitalization of a corporation
is properly authorized. In other words, it is the shares of stock that are originally
issued by the corporation and forming part of the capital that can be exchanged for
cash or services rendered, or property; that is, if the corporation has original shares
of stock unsold or unsubscribed, either coming from the original capitalization or
from the increased capitalization. Those shares of stock may be issued to a person
who is not a stockholder, or to a person already a stockholder in exchange for
services rendered or for cash or property. But a share of stock coming from stock
dividends declared cannot be issued to one who is not a stockholder of a
corporation.
Shares Dividends may be distributed only to stockholders of the
corporation declaring the dividend. Lepanto contended that the payment
to Nielson of stock dividends as compensation for its services under their
management contract is a violation of the corporation law and that it was
not, and it could not be, the intention of the parties that the services of
Nielson should be paid in shares of stock taken out of stock dividends
declared by Lepanto. The court held that stock dividends cannot be issued
to a person who is not a stockholder in payment of services rendered. The
remedy was to have Lepanto pay for the value of the shares of stock.

Detailed discussion regarding the issue (in case hindi madaling

maintindihan yung doctrine basahin niyo na lang to): In its motion for
reconsideration, Lepanto contends that the payment to Nielson of stock dividends
as compensation for its services under the management contract is a violation of
the Corporation Law, and that it was not, and it could not be, the intention of
Lepanto and Nielson - as contracting parties - that the services of Nielson should be
paid in shares of stock taken out of stock dividends declared by Lepanto. We have
assiduously considered the arguments adduced by Lepanto in support of its
contention, as well as the answer of Nielson in this connection, and We have arrived
at the conclusion that there is merit in the contention of Lepanto.
Section 16 of the Corporation Law, in part, provides as follows:
No corporation organized under this Act shall create or issue bills, notes or other
evidence of debt, for circulation as money, and no corporation shall issue stock or
bonds except in exchange for actual cash paid to the corporation or for: (1) property
actually received by it at a fair valuation equal to the par or issued value of the
stock or 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 appearing in invoices or
other commercial documents, as the case 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 invoices or other commercial documents, as the case may be, shall be
upon the corporation, or for (2) profits earned by it but not distributed among its
stockholders or members; Provided, however, That no stock or bond dividend shall
be issued without the approval of stockholders representing not less than two-thirds
of all stock then outstanding and entitled to vote at a general meeting of the
corporation or at a special meeting duly called for the purpose.
xxx

xxx

xxx

No corporation shall make or declare any dividend except from the surplus profits
arising from its business, or divide or distribute its capital stock or property other
than actual profits among its members or stockholders until after the payment of its
debts and the termination of its existence by limitation or lawful
dissolution: Provided, That banking, savings and loan, and trust corporations may
receive deposits and issue certificates of deposit, checks, drafts, and bills of
exchange, and the like in the transaction of the ordinary business of banking,
savings and loan, and trust corporations. (As amended by Act No. 2792, and Act No.
3518; Emphasis supplied.)
From the above-quoted provision of Section 16 of the Corporation Law, the
consideration for which shares of stock may be issued are: (1) cash; (2) property;
and (3) undistributed profits. Shares of stock are given the special name "stock
dividends" only if they are issued in lieu of undistributed profits. If shares of stocks

are issued in exchange of cash or property then those shares do not fall under the
category of "stock dividends". A corporation may legally issue shares of stock in
consideration of services rendered to it by a person not a stockholder, or in
payment of its indebtedness. A share of stock issued to pay for services rendered is
equivalent to a stock issued in exchange of property, because services is equivalent
to property.14 Likewise a share of stock issued in payment of indebtedness is
equivalent to issuing a stock in exchange for cash. But a share of stock thus issued
should be part of the original capital stock of the corporation upon its organization,
or part of the stocks issued when the increase of the capitalization of a corporation
is properly authorized. In other words, it is the shares of stock that are originally
issued by the corporation and forming part of the capital that can be exchanged for
cash or services rendered, or property; that is, if the corporation has original shares
of stock unsold or unsubscribed, either coming from the original capitalization or
from the increased capitalization. Those shares of stock may be issued to a person
who is not a stockholder, or to a person already a stockholder in exchange for
services rendered or for cash or property. But a share of stock coming from stock
dividends declared cannot be issued to one who is not a stockholder of a
corporation.
A "stock dividend" is any dividend payable in shares of stock of the corporation
declaring or authorizing such dividend. It is, what the term itself implies, a
distribution of the shares of stock of the corporation among the stockholders as
dividends. A stock dividend of a corporation is a dividend paid in shares of stock
instead of cash, and is properly payable only out of surplus profits. 15 So, a stock
dividend is actually two things: (1) a dividend, and (2) the enforced use of the
dividend money to purchase additional shares of stock at par. 16 When a corporation
issues stock dividends, it shows that the corporation's accumulated profits have
been capitalized instead of distributed to the stockholders or retained as surplus
available for distribution, in money or kind, should opportunity offer. Far from being
a realization of profits for the stockholder, it tends rather to postpone said
realization, in that the fund represented by the new stock has been transferred from
surplus to assets and no longer available for actual distribution. 17 Thus, it is
apparent that stock dividends are issued only to stockholders. This is so because
only stockholders are entitled to dividends. They are the only ones who have a right
to a proportional share in that part of the surplus which is declared as dividends. A
stock dividend really adds nothing to the interest of the stockholder; the
proportional interest of each stockholder remains the same. 18If a stockholder is
deprived of his stock dividends - and this happens if the shares of stock forming part
of the stock 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 belong the civil fruits.
The term "dividend" both in the technical sense and its ordinary acceptation, is that
part or portion of the profits of the enterprise which the corporation, by its

governing agents, sets apart for ratable division among the holders of the capital
stock. It means the fund actually set aside, and declared by the directors of the
corporation as dividends and duly ordered by the director, or by the stockholders at
a corporate meeting, to be divided or distributed among the stockholders according
to their respective interests.20chanrobles virtual law library
It is Our considered view, therefore, that under Section 16 of the Corporation Law
stock dividends can not be issued to a person who is not a stockholder in payment
of services rendered. And so, in the case at bar Nielson can not be paid in shares of
stock which form part of the stock dividends of Lepanto for services it rendered
under the management contract. We sustain the contention of Lepanto that the
understanding between Lepanto and Nielson was simply to make the cash value of
the stock dividends declared as the basis for determining the amount of
compensation that should be paid to Nielson, in the proportion of 10% of the cash
value of the stock dividends declared. And this conclusion of Ours finds support in
the record.

4. LINCOLN PHILIPPINE LIFE INSURANCE COMPANY, INC. (now JARDINE-CMG

LIFE INSURANCE CO. INC.) v. COURT OF APPEALS and COMMISSIONER OF
INTERNAL REVENUE [G.R. No. 118043. July 23, 1998]
Facts: This is a petition for review on certiorari of the decision rendered on
November 18, 1994 by the Court of Appeals 1 reversing, in part, the decision
of the Court of Tax Appeals in C.T.A. Case No. 4583.
The facts are not in dispute.2 Petitioner, now the Jardine-CMG Life Insurance
Company, Inc., is a domestic corporation engaged in the life insurance business. In
1984, it issued 50,000 shares of stock as stock dividends, with a par value of P100
or a total of P5 million. Petitioner paid documentary stamp taxes on each certificate
on the basis of its par value.
Issue: Whether in determining the amount to be paid as documentary stamp tax, it
is the par value of the certificates of stock or the book value of the shares which
should be considered?
Ruling: The pertinent provision of law, as it stood at the time of the questioned
transaction, reads as follows:
SEC. 224. Stamp tax on original issues of certificates of stock. -- On every original
issue, whether on organization, reorganization or for any lawful purpose,
of certificates of stock by any association, company or corporation, there shall be
collected a documentary stamp tax of one peso and ten centavos on each two

hundred pesos, or fractional part thereof, of the par value of such

certificates: Provided, That in the case of the original issue of stock without par
value the amount of the documentary stamp tax herein prescribed shall be based
upon the actual consideration received by the association, company, or corporation
for the issuance of such stock, and in the case of stock dividends on the actual
value represented by each share.
Apparently, the Court of Appeals treats stock dividends as distinct from ordinary
shares of stock for purposes of the then 224 of the National Internal Revenue Code.
There is, however, no basis for considering stock dividends as a distinct class from
ordinary shares of stock since under this provision only certificates of stock are
required to be distinguished (into either one with par value or one without) rather
than the classes of shares themselves.
Indeed, a reading of the then 224 of the NIRC as quoted earlier, starting
from its heading, will show that the documentary stamp tax is not levied
upon the shares of stock per se but rather on the privilege of issuing
certificates of stock.
A stock certificate is merely evidence of a share of stock and not the share
itself. This distinction is clear in the Corporation Code, to wit:
SEC. 63. Certificate of stock and transfer of shares. - The capital stock of stock
corporations shall be divided into shares for which certificates signed by the
president or vice-president, countersigned by the secretary or assistant secretary,
and sealed with the seal of the corporation shall be issued in accordance with the
by-laws. Shares of stock so issued are personal property and may be transferred by
delivery of the certificate or certificates indorsed by the owner or his attorney-infact or other person legally authorized to make the transfer. No transfer, however,
shall be valid, except as between the parties, until the transfer is recorded in the
books of the corporation so as to show the names of the parties to the transaction,
the date of the transfer, the number of the certificate or certificates and the number
of shares transferred.
From the foregoing, it is clear that stock dividends are shares of stock and
not certificates of stock which merely represent them. There is, therefore,
no reason for determining the actual value of such dividends for purposes
of the documentary stamp tax if the certificates representing them
indicate a par value.

5. REPUBLIC v. ESTATE OF MENZI

Facts:
HMHMI was incorporated on May 20, 1982 by Menzi, Campos,
Cojuangco, Rolando C. Gapud (Gapud) and Zalamea. A Deed of Transfer and
Conveyance was executed by Menzi, Campos, Cojuangco and Zalamea on August
17, 1983, transferring the shares of stock registered in their names in various
corporations to HMHMI. The shares of stock transferred included the 198 block of
Bulletin shares, 90,866.5 of which were registered in the name of Campos; 90,877
in the name of Cojuangco; and 16,309 in the name of Zalamea.
the law firm of Siguion Reyna, Montecillo & Ongsiako requested that three (3)
certificates of stock representing 90,866.5, 90,877, and 16,309 Bulletin shares be
issued in favor of HMHMI in exchange for 21 certificates of stock in HMHMI. Atty.
Mendoza acknowledged receipt of the 21 certificates of stock but replied that the
transfer by Campos, Cojuangco and Zalamea of their Bulletin shares to HMHMI
cannot be recorded in the books of Bulletin because it was made in violation of
Bulletins Articles of Incorporation. Bulletin, however, bought the shares.
Accordingly, a Deed of Sale was executed on February 21, 1986 by Atty. Montecillo
whereby HMHMI sold the 198 block to Bulletin
The shares of Marcos, Yap, Cojuangco and their nominees or agents in the
Bulletin were sequestered by virtue of a Sequestration Order issued by the PCGG.
another Writ of Sequestration was issued by the PCGG, sequestering all the shares
of stock, as well as the assets, properties, records and documents of HMHMI.
Because of this Sequestration Order, the proceeds from the sale of the 198 block
which were deposited with Philtrust Bank were frozen.
Campos and Zalamea waived their shares in favor of the Government
With this factual backdrop, the Sandiganbayan ruled that Campos, Cojuangco
and Zalamea were nominees and dummies of Marcos. Hence, the 198 block which
these nominees transferred to HMHMI and which, in turn, were sold to Bulletin are
ill-gotten wealth.
Issue:
Whether or not the shares of stock of Bulletin Publishing Co. Inc.
registered and/or issued in the name of defendants Emilio T. Yap, Eduardo
Cojuangco, Jr., Cesar Zalamea and the late Hans M. Menzi (and/or his estate and/or
his holding company, HM Holding & Investment Corp.) are ill-gotten wealth of the
defendants Marcos spouses.
Held: The fact that the stock certificates covering the shares registered under the
names of Campos, Cojuangco and Zalamea were found in Menzis possession does
not necessarily prove that the latter owned the shares. A stock certificate is merely
tangible evidence of ownership of shares of stock. Its presence or absence does not
affect the right of the registered owner to dispose of the shares covered by the
stock certificate. Hence, as registered owners, Campos and Zalamea validly ceded

their shares in favor of the Government This assignment is now a fait accompli for
the benefit of the entire nation.
In light of the foregoing, we are not inclined to disturb the Sandiganbayans
evaluation of the weight and sufficiency of the evidence presented by the Republic
and its finding that the evidence adduced by the Estate of Menzi and HMHMI do not
prove their allegation that Campos, Cojuangco and Zalamea are Menzis nominees,
taking into account the express admission of Campos that he owned the shares
upon Marcos instruction, the declaration of Zalamea that he does not claim true
and beneficial ownership of the shares, and the absolute dearth of evidence
regarding Cojuangcos assertion that he is Menzis nominee.
6.) TAN v. SEC
Facts:
As incorporator, petitioner had 400 shares of the capital stock standing
at the par value of P100.00 per share, evidenced by Certificate of Stock No. 2. He
was elected as President, until 1982. Petitioner's certificate of stock No. 2 was
cancelled by the corporate secretary and respondent Patricia Aguilar by virtue of
Resolution No. 1981 (b), which was passed and approved while petitioner was still a
member of the Board of Directors of the respondent corporation. in order to
complete the membership of the five (5) directors of the board, petitioner sold fifty
(50) shares out of his 400 shares of capital stock to his brother Angel S. Tan. The
new stockholders attended the special meeting, Angel Tan was elected director
Accordingly, as a result of the sale by petitioner of his fifty (50) shares of
stock to Angel S. Tan Certificate of Stock No. 2 was cancelled and the corresponding
Certificates Nos. 6 and 8 were issued, signed by the newly elected fifth member of
the Board, Angel S. Tan as Vice-president, upon instruction of Alfonso S. Tan who
was then the president of the Corporation. The remaining 350 shares, Stock
Certificate No. 8 was issued in the name of petitioner Alfonso S. Tan. With respect
to the transaction of the fifty (50) shares of stock part of the Stock Certificate No. 2
of petitioner, it was submitted to its former owner, Alfonso Tan, but which the
purposely did not return. After petitioner was dislodged, he withdrew the stocks and
after the withdrawal of the stocks, the board held a meeting effecting the
cancellation of Stock Certificate Nos. 2 and 8 in the corporate stock and transfer
book 1 and submitted the minutes thereof to the SEC.
Petitioner questioned the cancellation of his stock no. 2 and no. 8 before the
SEC alleging that the deprivation of his shares despite the non-endorsement or
surrender of his Stock Certificate Nos. 2 and 8, was without the process. SEC ruled
that the cancellation of stocks, the cancellation of Stock no. 2 and the subsequent
issuance of stock certificate No. 8 is null an void, ordering the Corp Secretary to
make necessary corrections in the books of the corp. on appeal, the commission en
banc unanimously overturned the Decision of the Hearing Officer

Issue:

Whether or not the cancellation is void?

Held: 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 is not essential to the existence of a share in stock or the
nation of the relation of shareholder to the corporation.
Under the instant case, the fact of the matter is, the new holder, Angel S. Tan
has already exercised his rights and prerogatives as stockholder and was even
elected as member of the board of directors in the respondent corporation with the
full knowledge and acquiescence of petitioner. Due to the transfer of fifty (50)
shares, Angel S. Tan was clothed with rights and responsibilities in the board of the
respondent corporation when he was elected as officer thereof.
To follow the argument put up by petitioner which was upheld by the Cebu
SEC Extension Office Hearing Officer, Felix Chan, that the cancellation of Stock
Certificate Nos. 2 and 8 was null and void for lack of delivery of the cancelled
"mother" Certificate No. 2 whose endorsement was deliberately withheld by
petitioner, is to prescribe certain restrictions on the transfer of stock in violation of
the corporation law itself as the only law governing transfer of stocks. While Section
47(s) grants a stock corporations the authority to determine in the by-laws "the
manner of issuing certificates" of shares of stock, however, the power to regulate is
not the power to prohibit, or to impose unreasonable restrictions of the right of
stockholders to transfer their shares.

7. Torres vs. CA 278 Scra 793

Judge Manuel Torres, Jr. owns about 81% of the capital stocks of Tormil Realty &
Development Corporation (TRDC). TRDC is a small family owned corporation and
other stockholders thereof include Judge Torres nieces and nephews. However,
even though Judge Torres owns the majority of TRDC and was also the president
thereof, he is only entitled to one vote among the 9-seat Board of Directors, hence,
his vote can be easily overridden by minority stockholders. So in 1987, before the
regular election of TRDC officers, Judge Torres assigned one share (qualifying share)
each to 5 outsiders (petitioners Tobias, Jocson, Jurisprudencia, Azura and Pabalan)
for the purpose of qualifying them to be elected as directors in the board and
thereby strengthen Judge Torres power over other family members.
However, the said assignment of shares were not recorded by the corporate
secretary, Ma. Christina Carlos (niece) in the stock and transfer book of TRDC. When
the validity of said assignments were questioned, Judge Torres ratiocinated that it is

impractical for him to order Carlos to make the entries because Carlos is one of his
opposition. So what Judge Torres did was to make the entries himself because he
was keeping the stock and transfer book. He further ratiocinated that he can do
what a mere secretary can do because in the first place, he is the president.
Since the other family members were against the inclusion of the five outsiders,
they refused to take part in the election. Judge Torres and his five assignees then
decided to conduct the election among themselves considering that the 6 of them
constitute a quorum.
ISSUE: Whether or not the inclusion of the five outsiders are valid.
Whether or not the subsequent election is valid.
HELD: No. The assignment of the shares of stocks did not comply with procedural
requirements. It did not comply with the by laws of TRDC nor did it comply with
Section 74 of the Corporation Code.
It is precisely the brewing family discord between Judge Torres and private
respondents--his nephew and nieces that should have placed Judge Torres on his
guard. He should have been more careful in ensuring that his actions (particularly
the assignment of qualifying shares to his nominees) comply with the requirements
of the law. Petitioners cannot use the flimsy excuse that it would have been a vain
attempt to force the incumbent corporate secretary to register the aforestated
assignments in the stock and transfer book because the latter belonged to the
opposite faction.
It is the corporate secretarys duty and obligation to register valid transfers of
stocks and if said corporate officer refuses to comply, the transferor-stockholder
may rightfully bring suit to compel performance. In other words, there are remedies
within the law that petitioners could have availed of, instead of taking the law in
their own hands, as the cliche goes. In the absence of (any) provision to the
contrary, the corporate secretary is the custodian of corporate records. Corollarily,
he keeps the stock and transfer book and makes proper and necessary entries
therein.
Contrary to the generally accepted corporate practice, the stock and transfer book
of TORMIL was not kept by Ms. Maria Cristina T. Carlos, the corporate secretary but
by respondent Torres, the President and Chairman of the Board of Directors of
TORMIL. In contravention to the above cited provision, the stock and transfer book
was not kept at the principal office of the corporation either but at the place of
respondent Torres.
These being the
transfer book on
nominal shares
effect. Where the

obtaining circumstances, any entries made in the stock and

March 8, 1987 by respondent Torres of an alleged transfer of
to Pabalan and Co. cannot therefore be given any valid
entries made are not valid, Pabalan and Co. cannot therefore be

considered stockholders of record of TORMIL. Because they are not stockholders,

they cannot therefore be elected as directors of TORMIL. To rule otherwise would not
only encourage violation of clear mandate of Sec. 74 of the Corporation Code that
stock and transfer book shall be kept in the principal office of the corporation but
would likewise open the flood gates of confusion in the corporation as to who has
the proper custody of the stock and transfer book and who are the real stockholders
of records of a certain corporation as any holder of the stock and transfer book,
though not the corporate secretary, at pleasure would make entries therein.
The fact that respondent Torres holds 81.28% of the outstanding capital stock
of TORMIL is of no moment and is not a license for him to arrogate unto himself a
duty lodged to (sic) the corporate secretary.
All corporations, big or small, must abide by the provisions of the Corporation
Code. Being a simple family corporation is not an exemption. Such corporations
cannot have rules and practices other than those established by law.

8. Lanuza vs. CA 454 Scra 54

In 1952, the Philippine Merchant Marine School, Inc. (PMMSI) was incorporated, with
seven hundred (700) founders shares and seventy-six (76) common shares as its
initial capital stock subscription reflected in the articles of incorporation Onrubia et.
al, who were in control of PMMSI registered the companys stock and transfer book
for the first time in 1978, recording thirty-three (33) common shares as the only
issued and outstanding shares of PMMSI. In 1979, a special stockholders meeting
was called and held on the basis of what was considered as a quorum of twentyseven (27) common shares, representing more than two-thirds (2/3) of the common
shares issued and outstanding.
In 1982, the heirs of one of the original
incorporators, Juan Acayan, filed a petition with the Securities and Exchange
Commission (SEC) for the registration of their property rights over one hundred
(120) founders shares and twelve (12) common shares owned by their father. The
SEC hearing officer held that the heirs of Acayan were entitled to the claimed shares
and called for a special stockholders meeting to elect a new set of officers. The SEC
en banc affirmed the decision. As a result, the shares of Acayan were recorded in
the stock and transfer book. On May 6, 1992, a special stockholders meeting was
held to elect a new set of directors
Onrubia et al filed a petition with SEC
questioning the validity of said meeting alleging that the quorum for the said
meeting should not be based on the 165 issued and outstanding shares as per the
stock and transfer book, but on the initial subscribed capital stock of seven hundred
seventy-six (776) shares, as reflected in the 1952 Articles of Incorporation.
Issue: Whether it is the companys stock and transfer book, or its 1952 Articles of
Incorporation, which determines stockholders shareholdings, and provides the basis
for computing the quorum.

Held: It is the articles of incorporation, which has been described as one that
defines the charter of the corporation and the contractual relationships between the
State and the corporation, the stockholders and the State, and between the
corporation and its stockholders. There is no gainsaying that the contents of the
articles of incorporation are binding, not only on the corporation, but also on its
shareholders. In the instant case, the articles of incorporation indicate that at the
time of incorporation, the incorporators were bona fide stockholders of seven
hundred (700) founders shares and seventy-six (76) common shares. Hence, at that
time, the corporation had 776 issued and outstanding shares.
On the other hand, a stock and transfer book is the book which records the names
and addresses of all stockholders arranged alphabetically, the installments paid and
unpaid on all stock for which subscription has been made, and the date of payment
thereof; a statement of every alienation, sale or transfer of stock made, the date
thereof and by and to whom made; and such other entries as may be prescribed by
law.
A stock and transfer book is necessary as a measure of precaution, expediency and
convenience since it provides the only certain and accurate method of establishing
the various corporate acts and transactions and of showing the ownership of stock
and like matters. However, a stock and transfer book, like other corporate books
and records, is not in any sense a public record, and thus is not exclusive evidence
of the matters and things which ordinarily are or should be written therein. In fact, it
is generally held that the records and minutes of a corporation are not conclusive
even against the corporation but are prima facie evidence only, and may be
impeached or even contradicted by other competent evidence. Thus, parol evidence
may be admitted to supply omissions in the records or explain ambiguities, or to
contradict such records. Thus, quorum is based on the totality of the shares which
have been subscribed and issued, whether it be founders shares or common
shares. In the instant case, two figures are being pitted against each other those
contained in the articles of incorporation, and those listed in the stock and transfer
book.
To base the computation of quorum solely on the obviously deficient, if not
inaccurate stock and transfer book, and completely disregarding the issued and
outstanding shares as indicated in the articles of incorporation would work injustice
to the owners and/or successors in interest of the said shares. This case is one
instance where resort to documents other than the stock and transfer books is
necessary. The stock and transfer book of PMMSI cannot be used as the sole basis
for determining the quorum as it does not reflect the totality of shares which have
been subscribed, more so when the articles of incorporation show a significantly
larger amount of shares issued and outstanding as compared to that listed in the
stock and transfer book.

If at the onset of incorporation a corporation has 771 shares subscribed, the Stock
and Transfer Book should likewise reflect 771 shares. Any sale, disposition or even
reacquisition of the company of its own shares, in which it becomes treasury shares,
would not affect the total number of shares in the Stock and Transfer Book. All that
will change are the entries as to the owners of the shares but not as to the amount
of shares already subscribed. This is precisely the reason why the Stock and
Transfer Book was not given probative value.
At the time the corporation was set-up, there were already seven hundred seventysix (776) issued and outstanding shares as reflected in the articles of incorporation.
No proof was adduced as to any transaction effected on these shares from the time
PMMSI was incorporated up to the time the instant petition was filed, except for the
thirty-three (33) shares which were recorded in the stock and transfer book in 1978,
and the additional one hundred thirty-two (132) in 1982. But obviously, the shares
so ordered recorded in the stock and transfer book are among the shares reflected
in the articles of incorporation as the shares subscribed to by the incorporators
named therein.

(9) G.R. No. L-22442 August 1, 1924

ANTONIO
PARDO, petitioner,
vs.
THE HERCULES LUMBER CO., INC., and IGNACIO FERRER, respondents.
Facts:
Petitioner, Antonio Pardo, a stockholder in the Hercules Lumber Company, Inc. and
that the respondent, Ignacio Ferrer, as acting secretary of the said company, has
refused to permit the petitioner or his agent to inspect the records and business
transactions of the said Hercules Lumber Company, Inc., at times desired by the
petitioner. The contention for the respondent is that this resolution of the board
constitutes a lawful restriction on the right conferred by statute; and it is insisted
that as the petitioner has not availed himself of the permission to inspect the books
and transactions of the company within the ten days thus defined, his right to
inspection and examination is lost, at least for this year.
ISSUE:
Whether Pettioner has the right to inspect and examine the corporaet books.
HELD:
YES. The general right given by the statute may not be lawfully abridged to the
extent attempted in this resolution. It may be admitted that the officials in charge of
a corporation may deny inspection when sought at unusual hours or under other

improper conditions; but neither the executive officers nor the board of directors
have the power to deprive a stockholder of the right altogether. A by-law unduly
restricting the right of inspection is undoubtedly invalid. It will be noted that our
statute declares that the right of inspection can be exercised "at reasonable hours."
This means at reasonable hours on business days throughout the year, and not
merely during some arbitrary period of a few days chosen by the directors.

10. GONZALES VS PNB

FACTS
Petitioner as a taxpayer and stockholder, filed several cases involving PNB or the
members of the Board of Directors. Petitioner addressed a letter to the President of
the Bank requesting permission to look into the records of its transactions covering
the purchase of a sugar central by the Southern Negros Development Corp to be
financed by Japanese suppliers and financiers and the construction of the Passi
Sugar Mills in Iloilo. The Assistant Vice President and Legal Counsel of the Bank
answered petitioner's letter denying his request for being not germane to his
interest as a one-share stockholder for the cloud of doubt as to his real intention
and purpose in acquiring said share. Hence, he filed mandamus before the lower
court which denied the same on the ground that the right of a stockholder to
inspect the record of the business transactions of a corporation is not absolute and
the petitioner has not exhausted his administrative remedies.
ISSUE
Whether petitioner is qualified to inspect corporate records.
RULING
No. Among the changes introduced in the new Code with respect to the right of
inspection granted to a stockholder are the following the records must be kept at
the principal office of the corporation; the inspection must be made on business
days; the stockholder may demand a copy of the excerpts of the records or
minutes; and the refusal to allow such inspection shall subject the erring officer or
agent of the corporation to civil and criminal liabilities. However, while seemingly
enlarging the right of inspection, the new Code has prescribed limitations
to the same. It is now expressly required as a condition for such examination that
the one requesting it must not have been guilty of using improperly any information
through a prior examination, and that the person asking for such examination must
be "acting in good faith and for a legitimate purpose in making his demand.
Although the petitioner has claimed that he has justifiable motives in seeking the
inspection of the books of the respondent bank, he has not set forth the reasons
and the purposes for which he desires such inspection, except to satisfy himself as
to the truth of published reports regarding certain transactions entered into by the

respondent bank and to inquire into their validity. The circumstances under which
he acquired one share of stock in the respondent bank purposely to exercise the
right of inspection do not argue in favor of his good faith and proper motivation.
Admittedly he sought to be a stockholder in order to pry into transactions entered
into by the respondent bank even before he became a stockholder. His obvious
purpose was to arm himself with materials which he can use against the respondent
bank for acts done by the latter when the petitioner was a total stranger to the
same. He could have been impelled by a laudable sense of civic consciousness, but
it could not be said that his purpose is germane to his interest as a stockholder.
The Court find merit in the contention of the respondent bank that the inspection
sought to be exercised by the petitioner would be violative of the provisions of its
charter.

11. VERAGUTH VS ISABELA SUGAR

FACTS
Director Veraguth telegraphed the secretary of the company, asking the latter to
forward in the shortest possible time a certified copy of the resolution of the board
of directors concerning the payment of attorney's fees in the case against the
Isabela Sugar Company and others. To this the secretary made answer by letter
stating that, since the minutes of the meeting in question had not been signed by
the directors present, a certified copy could not be furnished and that as to other
proceedings of the stockholders a request should be made to the president of the
Isabela Sugar Company, Inc.
Thus, Eugenio Veraguth filed a petition for mandamus before the Supreme Court
praying for a show cause why he was not notified of the regular and special
meeting, and to compel to the corporation to notify him within the reglamentary
period, of all regular and special meetings of the board of directors of the Isabela
Sugar Central Company, Inc., and to place at his disposal at reasonable hours the
minutes, documents, and books of said corporation for his inspection as director and
stockholder, and to issue immediately, upon payment of the fees, certified copies of
any documentation in connection with said minutes, documents, and the books of
the aforesaid corporation..
ISSUE
Whether Veraguth may compel the secretary to provide him with the certified copy
of the board of resolution issued when he was not notified.
RULING

No. Directors of a corporation may have the unqualified right to inspect the books
and records of the corporation at all reasonable times. Pretexts may not be put
forward by officers of corporations to keep a director or shareholder from inspecting
the books and minutes of the corporation, and the right of inspection is not to be
denied on the ground that the director or shareholder is on unfriendly terms with
the officers of the corporation whose records are sought to be inspected. A director
or stockholder can not of course make copies, abstracts, and memoranda of
documents, books, and papers as an incident to the right of inspection, but cannot,
without an order of a court, be permitted to take books from the office of the
corporation. We do not conceive, however, that a director or stockholder
has any absolute right to secure certified copies of the minutes of the
corporation until these minutes have been written up and approved by the
directors.
Combining the facts and the law, we do not think that anything improper occurred
when the secretary declined to furnish certified copies of minutes which had not
been approved by the board of directors, and that while so much of the last
resolution of the board of directors as provides for prior approval of the president of
the corporation before the books of the corporation can be inspected puts an illegal
obstacle in the way of a stockholder or director, that resolution, so far as we are
aware, has not been enforced to the detriment of anyone. In addition, it should be
said that this is a family dispute, the petitioner and the individual respondents
belonging to the same family; that a test case between the petitioner and the
respondents has not been begun in the Court of First Instance of Occidental Negros
involving hundreds of thousands of pesos, and that the appellate court should not
intrude its views to give an advantage to either party. We rule that the petitioner
has not made out a case for relief by mandamus.

12. POLIAND INDUSTRIAL LIMITED VS. NATIONAL DEVELOPMENT COMPANY,

DEVELOPMENT BANK OF THE PHILIPPINES
G.R. NO. 143866. AUGUST 22, 2005
FACTS: Poliand is an assignee of the of the rights of Asian Hardwood over the
outstanding obligation of National Development Corporation (NDC), the latter being
the owner of Galleon which previously secured credit accommodations from Asian
Hardwood for its expenses on provisions, oil, repair, among others.
Galleon also obtained loans from Japanese lenders to finance acquisition of vessels
which was guaranteed by DBP in consideration of a promise by Galleon to secure a
first mortgage on the vessels. DBP later transferred ownership of the vessel to NDC.

A collection suit was filed after repeated demands of Poliand for the satisfaction of
the obligation from Galleon, NDC and DBP went unheeded.
ISSUE: Whether NDC or DBP or both are liable to POLIAND on the loan
accommodations and credit advances incurred by GALLEON?
RULING: NO. NEITHER were LIABLE.
POLIANDs cause of action against NDC is premised on the theory that when NDC
acquired all the shareholdings of GALLEON, the former also assumed the latters
liabilities, including the loan advances/credit accommodations obtained by
GALLEON from POLIANDs predecessors-in-interest. On the other hand, NDC asserts
that it could not have acquired GALLEONs equity and, consequently, its liabilities
because LOI No. 1155 had been rescinded by LOI No. 1195, and therefore, became
inoperative and non-existent.
NDC and DBP, not liable under LOI No. 1155
As a general rule, letters of instructions are simply directives of the President of the
Philippines, issued in the exercise of his administrative power of control, to heads of
departments and/or officers under the executive branch of the government for
observance by the officials and/or employees thereof. Being administrative in
nature, they do not have the force and effect of a law and, thus, cannot be a valid
source of obligation. However, during the period when then President Marcos
exercised extraordinary legislative powers, he issued certain decrees, orders and
letters of instruction which the Court has declared as having the force and effect of
a statute.
There is no doubt that LOI No. 1155 was issued on July 21, 1981 when then
President Marcos was vested with extraordinary legislative powers. LOI No. 1155
was specifically directed to DBP, NDC and the Maritime Industry Authority to
undertake the CERTRAIN tasks.
NDC, not liable under the Corporation Code
Ordinarily, in the merger of two or more existing corporations, one of the combining
corporations survives and continues the combined business, while the rest are
dissolved and all their rights, properties and liabilities are acquired by the surviving
corporation. The merger, however, does not become effective upon the mere
agreement of the constituent corporations.
As specifically provided under Section 79 of said Code, the merger shall only be
effective upon the issuance of a certificate of merger by the Securities and
Exchange Commission (SEC), subject to its prior determination that the merger is
not inconsistent with the Code or existing laws. Where a party to the merger is a

special corporation governed by its own charter, the Code particularly mandates
that a favorable recommendation of the appropriate government agency should first
be obtained. The issuance of the certificate of merger is crucial because not only
does it bear out SECs approval but also marks the moment whereupon the
consequences of a merger take place. By operation of law, upon the effectivity of
the merger, the absorbed corporation ceases to exist but its rights, and properties
as well as liabilities shall be taken and deemed transferred to and vested in the
surviving corporation.
The records do not show SEC approval of the merger. POLIAND cannot assert that no
conditions were required prior to the assumption by NDC of ownership of GALLEON
and its subsisting loans. Compliance with the statutory requirements is a condition
precedent to the effective transfer of the shareholdings in GALLEON to NDC. In
directing NDC to acquire the shareholdings in GALLEON, the President could not
have intended that the parties disregard the requirements of law. In the absence of
SEC approval, there was no effective transfer of the shareholdings in GALLEON to
NDC. Hence, NDC did not acquire the rights or interests of GALLEON, including its
liabilities.

13. ASSOCIATED BANK VS. COURT OF APPEALS

G.R. NO. 123793. JUNE 29, 1998
FACTS: Associated Banking Corporation and Citizens Bank and Trust Company
merged to form just one banking corporation known as Associated Citizens Bank,
the surviving bank. Lorenzo Sarmiento JR. executed in favor of Associated Bank a
promissory note whereby the former undertook to pay the latter the sum of
P2,500,000.00. Despite repeated demands the Sarmiento failed to pay the amount
due. He alleged as affirmative and[/]or special defenses that the complaint states
no valid cause of action; that the plaintiff is not the proper party in interest because
the promissory note was executed in favor of Citizens Bank and Trust Company.
Accordingly the court ruled that the earlier merger between the two banks could not
have vested Associated Bank with any interest arising from the promissory note
executed in favor of CBTC after such merger.
ISSUE: In a merger, does the surviving corporation have a right to enforce a
contract entered into by the absorbed company subsequent to the date of the
merger agreement, but prior to the issuance of a certificate of merger by the
Securities and Exchange Commission?
RULING: YES. Ordinarily, in the merger of two or more existing corporations, one of
the combining corporations survives and continues the combined business, while
the rest are dissolved and all their rights, properties and liabilities are acquired by

the surviving corporation. Although there is a dissolution of the absorbed

corporations, there is no winding up of their affairs or liquidation of their assets,
because the surviving corporation automatically acquires all their rights, privileges
and powers, as well as their liabilities.
The merger, however, does not become effective upon the mere agreement of the
constituent corporations. The procedure to be followed is prescribed under the
Corporation Code. Section 79 of said Code requires the approval by the Securities
and Exchange Commission (SEC) of the articles of merger which, in turn, must have
been duly approved by a majority of the respective stockholders of the constituent
corporations. The same provision further states that the merger shall be effective
only upon the issuance by the SEC of a certificate of merger. The effectivity date of
the merger is crucial for determining when the merged or absorbed corporation
ceases to exist; and when its rights, privileges, properties as well as liabilities pass
on to the surviving corporation.