Stocks and Stockholders
A. Rights of stockholders in general
Principle (at least in
stock corp) - stockholders may have all the profits but shall turn over the
complete management of the enterprise to directors.
But stockhoders retain
certain rights as follows:
(1) Right to attend
and vote in person or by proxy at stockholders’ meetings Secs. 50, 58.);
(2) Right to elect and
remove directors (Secs. 24, 28.);
(3) Right to approve
certain corporate acts (see comments under Secs. 49-54.);
(4) Right to adopt and
amend or repeal the by-laws or adopt new by-laws (Secs. 46, 48.);
(5) Right to compel
the calling of meetings of stockholders when for any cause there is no person
authorized to call a meeting (Sec. 50, last par.);
(6) Right to issuance
of certificate of stock or other evidence of stock ownership and be registered
as shareholder (see comments under Sec. 63.);
(7) Right to receive
dividends when declared (see comments under Sec. 43.);
(8) Right to
participate in the distribution of corporate assets upon dissolution (see
comments under Secs. 118-119.);
(9) Right to transfer
of stock on the corporate books (see comments under Sec. 63.);
(10) Right to
pre-emption in the issue of shares (see comments under Sec. 39.);
(11) Right to inspect
corporate books and records and to receive financial report of the
corporation’s operations (Secs. 74-75.);
(12) Right to be
furnished the most recent financial statement upon request and to receive a
financial report of the corporation’s operations (Sec. 75.);
(13) Right to bring
individual and representative or derivative suits (infra.);
(14) Right to recover
stock unlawfully sold for delinquency (Sec. 69.);
(15) Right to enter
into a voting trust agreement (Sec. 59.);
(16) Right to demand
payment of the value of his shares and withdraw from the corporation in certain
cases (see comments under Secs. 41 and 81.); and
(17) Right to have the
corporation voluntarily dissolved. (see comments under Secs. 118-119.)
B. Derivative suit
A derivative suit
- one brought by one or more stockholders or members in the name and on behalf
of the corporation to redress wrongs committed against it or to protect or
vindicate corporate rights, whenever the officials of the corporation refuse
to sue, or are the ones to be sued or hold control of the corporation. In
such action, the suing stockholder is regarded as a nominal party with the
corporation as the real party in interest. (Ibid., Gamboa vs.
Victoriano, 90 SCRA 40.)
Reason:
Minority stockholders,
petitioners do not have any statutory right to override the business judgments
of SBGCCI’s officers and Board of Directors on the ground of the latter’s
alleged lack of qualification to manage a golf course. (Nestor Ching v. Subic
Bay Golf)
Individual suit
When a wrong is
directly inflicted against a shareholder, the latter can maintain an individual
or direct suit in his own name against the corporation. Any recovery by the
stockholder belongs to him.
Representative suit
When a wrong is
committed against a group of stockholders, a stockholder may bring a suit in
behalf of himself and all other stockholders who are similarly situated. This
is called a shareholder’s representative
suit which is a kind of class
suit. Thus, suppose a group of stockholders has been denied the right to
vote. On the ground of economy, a stockholder may file a suit in behalf of
himself and all others because the questions of law and fact involved are
common to all of them. (Rule 3, Sec. 12, Rules of Court.)
A representative suit is also the method used by
minority stockholders to compel the declaration of dividends.
a. Nestor
Ching and Andrew Wellington v. Subic Bay Golf and Country Club, G.R. No.
174353, September 10, 2014
Petitioners claimed in the Complaint that defendant corporation did not
disclose to them the above amendment which allegedly makes the shares
non-proprietary, as it takes away the right of the shareholders to participate
in the pro-rata distribution of the assets of the corporation after its
dissolution. According to petitioners, this is in fraud.
Ruling:
Complaint is indeed a
derivative suit:
The reliefs sought in
the Complaint, namely that of enjoining defendants from acting as
officers and Board of Directors of the corporation, the appointment of a
receiver, and the prayer for damages in the amount of the decrease in the
value of the shares of stock, clearly show that the Complaint was filed to curb
the alleged mismanagement of SBGCCI. The causes of action pleaded by petitioners
do not accrue to a single shareholder or a class of shareholders but to the
corporation itself.
Derivative suits is not
a statutory right, there being no provision in the Corporation Code or related
statutes authorizing the same, but is instead a product of jurisprudence based
on equity.
However, a derivative
suit cannot prosper without first complying with the legal requisites for its
institution.
cralawred
Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies imposes the following requirements for derivative suits:
(1) He was a stockholder
or member at the time the acts or transactions subject of the action occurred
and at the time
the action was filed;
(2) He exerted
all reasonable efforts, and alleges the same with particularity in the
complaint, to exhaust all remedies available under the articles of
incorporation, by-laws, laws or rules governing the corporation or partnership
to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of;
and
(4) The suit is not a nuisance or harassment suit.
The RTC dismissed the Complaint for failure to comply with the second and
fourth requisites above.
Upon a careful examination of the Complaint, this Court finds that the same
should not have been dismissed on the ground that it is a nuisance or
harassment suit. Although the shareholdings of petitioners are indeed
only two out of the 409 alleged outstanding shares or 0.24%, the Court has held
that it is enough that a member or a minority of stockholders file a derivative
suit for and in behalf of a corporation. alawred
With regard, however, to the second requisite, we find that
petitioners failed to state with particularity in the Complaint that they had
exerted all reasonable efforts to exhaust all remedies available under the
articles of incorporation, by-laws, and laws or rules governing the corporation
to obtain the relief they desire. The Complaint contained no allegation whatsoever of any
effort to avail of intra-corporate remedies. Indeed, even if petitioners
thought it was futile to exhaust intra-corporate remedies, they should have
stated the same in the Complaint and specified the reasons for such
opinion. Failure to do so allows the RTC to dismiss the Complaint, even motu proprio, in accordance with
the Interim Rules. The requirement of this allegation in the Complaint is not a
useless formality which may be disregarded at will.
b. Alfredo
Villamor, Jr. v. John Umale, In substitution of Hernando Balmores, G.R. No.
172843, September 24, 2014
MC Home Depot occupied
a prime property (Rockland area) in Pasig. The property was part of the area
owned by Mid-Pasig Development Corporation (Mid-Pasig).
Respondent Balmores
prayed that a receiver be appointed from his list of nominees. He also
prayed for petitioners' prohibition from "selling, encumbering,
transferring or disposing in any manner any of [PPC's] properties, including
the MC Home [Depot] checks and/or their proceeds." He prayed for the accounting
and remittance to PPC of the MC Home Depot checks or their proceeds and for the
annulment of the board's resolution "vaiving PPC's rights in favor of
Villamor's law firm.alawlawlibrary
Ruling: Balmores' action in the trial court is not
a derivative suit
The fifth requisite for filing derivative suits, while not included in the
enumeration, is implied in the first paragraph of Rule 8, Section 1 of the
Interim Rules: The action brought by the stockholder or member must be "in
the name of [the] corporation or association. ..." This requirement has
already been settled in jurisprudence.
Respondent Balmores' action in the trial court failed to satisfy all the
requisites of a derivative suit.
Respondent Balmores failed to exhaust all available remedies to
obtain the reliefs he prayed for. Balmores was not able to show that this
comprised -all the remedies available under the articles of incorporation, bylaws,
laws, or rules governing PPC.
An allegation that appraisal rights were not available for the acts
complained of is another requisite for filing derivative suits under Rule 8,
Section 1(3) of the Interim Rules.
Section 81 of the Corporation Code provides the instances of appraisal right:
SEC. 81. Instances of appraisal
right.—
Any stockholder of a corporation shah1 have the right to dissent and demand
payment of the fair value of his shares in the following instances:
1. In case any amendment
to the articles of incorporation has the effect of changing or restricting the
rights of any stockholders or class of shares, or of authorizing preferences in
any respect superior to those of outstanding shares of any class, or of
extending or shortening the term of corporate existence;
2. In case of sale,
lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially
all of the corporate property and assets as provided in this Code; and
3. In case of merger or
consolidation.
Section 82 of the Corporation Code provides that the stockholder may exercise
the right if he or she voted against the proposed corporate action and if he
made a written demand for payment on the corporation within thirty (30) days
after the date of voting.
Granting that (a) respondent Balmores' attempt to communicate with the other
PPC directors already comprised all the available remedies that he could have
exhausted and (b) the corporation was under full- control of petitioners that
exhaustion of remedies became impossible or futile, respondent Balmores failed to allege that appraisal rights
were not available for the acts complained of here.
Neither did respondent Balmores implead PPC as party in the case
nor did he allege that he was filing on behalf of the corporation.
The
non-derivative character of respondent Balmores' action may also be gleaned
from his allegations in the trial court complaint. In the complaint, he
described the nature of his action as an action under Rule 1, Section l(a)(l)
of the Interim Rules, and not an action under Rule 1, Section l(a)(4) of the
Interim Rules, which refers to derivative suits. Thus, respondent Balmores
said:
1.1 This is an action
under Section 1 (a) (1), Rule 1 of the Interim Rules of Procedure for
Intra-corporate Controversies, involving devices or schemes employed by, or acts of, the
defendants as board of directors, business associates and officers of Pasig
Printing Corporation (PPC), amounting to fraud or misrepresentation, which are
detrimental to the interest of the plaintiff as stockholder of PPC.75 (Emphasis supplied)
Rule 1, Section 1 (a)(1) of the Interim Rules refers to acts of the board,
associates, and officers, amounting to fraud or misrepresentation, which may be
detrimental to the interest of the stockholders. This is different from a
derivative suit.
While devices and schemes of the board of directors, business associates,-or
officers amounting to fraud under Rule 1, Section l(a)(l) of the Interim Rules
are causes of a derivative suit, it is not always the case that derivative
suits are limited to such causes or that they are necessarily derivative suits.
Hence, they are separately enumerated in Rule 1, Section 1 (a) of the Interim
Rules:
Respondent Balmores' intent to file an individual suit removes it from the
coverage of derivative suits.
Liabilities of stockholders
(1) Liability to the
corporation for unpaid subscription (Secs. 67-70.);
(2) Liability to the
corporation for interest on unpaid subscription (Sec. 66.);
(3) Liability to
creditors of the corporation on unpaid subscription (Sec. 60.);
(4) Liability for
watered stock (Sec. 65.);
(5) Liability for
dividends unlawfully paid (Sec. 43.); and
(6) Liability for
failure to create corporation. (Sec. 10.)
Liability to the corporation for unpaid
subscription (Secs. 67-70.);
Subscription
Contract - contract for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed shall be deemed a subscription
contract. (Sec. 60)
Pre-incorporation subscription (Sec. 61)
Under Sections 13 and
14 (last par.), SEC shall not accept the articles of incorporation of any stock
corporation unless at least 25% of the authorized capital stock has been
subscribed and at least 25% of the total subscription has been fully paid. Pre-incorporation subscriptions are,
therefore, mandatory.
A subscriber becomes
a stockholder upon subscription even before full payment and may not legally be
released by the corporation from the obligation to pay for his shares.
Revocability of pre-incorporation
subscription.
(1) Conditions for
revocation. — Section 61 prescribes the conditions for the revocation of a
pre-incorporation subscription contract either by the subscriber or the
corporation.
(2) When
irrevocable. — The subscription is irrevocable for a period of at least six (6) months from the date of subscription,
notwithstanding any agreement to the contrary, except in the two instances
mentioned. In any case, it cannot be revoked after the submission of the
articles of incorporation to the Commission, although beyond the six (6)
months’ period.
(3) Reason for
irrevocability. — To prevent a
subscriber from speculating on the stocks of a proposed corporation. The
rule protects the corporation from financially irresponsible subscribers.
Effect of filing of articles of incorporation.
(1) The subscriber is
not bound indefinitely for the period of irrevocability is limited. However,
after submission of the articles of incorporation to the Securities and
Exchange Commission, a pre-incorporation subscription may no longer be revoked
although the period of six (6) months has already elapsed.
(2)
Upon incorporation (see Sec. 19.), both the incorporators and subscribers
become shareholders.
Certificate of stock
(1) A certificate
of stock is a written instrument signed by the proper officer of a
corporation stating or acknowledging that the person named therein is the owner
of a designated number of shares of its stock.
(2) It indicates the
name of the holder, the number, kind and class of shares represented, and the
date of issuance.
(3) It is not essential to make one a
stockholder in a corporation.
Consideration for stocks (Sec. 62)
(1)
Actual cash paid to the corporation;
(2)
Property, tangible or intangible, actually received by the corporation and
necessary or convenient for its use and lawful purposes at a fair
valuation equal to the par or issued value of the stock issued;
(3)
Labor performed for or services actually rendered to the corporation;
(4)
Previously incurred indebtedness by the corporation;
(5)
Amounts transferred from unrestricted retained earnings to stated capital; and
(6)
Outstanding shares exchanged for stocks in the event of reclassification or
conversion.
Certificate of stock and transfer of
shares (Sec. 63)
Right to issuance of certificate
of stock.
While a certificate of
stock is not necessary to render one a stockholder in a corporation, every
stockholder has a right to have a proper certificate issued to him as soon as
he has complied with the conditions which entitle him to one as by payment for
his shares or the like. (11 Fletcher 329-331.)
Right to transfer shares of stock.
Section 63 expressly
authorizes the transfer of the shares represented by the certificate by its
endorsement by the owner or his agent and delivery, so indorsed, to the
transferee.
Shares of stock are
personal property and the owner, as in the case of other personal property, has
an absolute and inherent right as an incident of his ownership, to sell and
transfer the same at will. (12 Fletcher 206.) To be binding on the corporation, however, the transfer must be
registered in the corporate books.
Restrictions on transfer of stock.
The law (Sec. 47[a].)
grants to 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 on the right of stockholders to
transfer their shares.
Examples:
(1) A by-law which
prohibits a transfer of stock without the consent or approval of all the
stockholders or of the president or board of directors is illegal as
constituting undue limitation on the right of ownership (Fleischer vs. Botica
Nolasco Co., Inc., 47 Phil. 583 [1925].) and in restraint of trade. (In re Klaus,
67 Wis. 401.)
(2) A provision in the
certificate that it is transferable only to some person first approved by the
board of directors unreasonably restricts the right of the stockholder to
dispose of his shares. (Douglas vs. Aurora Daily News Co., 160 III., A. 506.)
(3) For the same
reason, the condition “non-transferable” appearing on certificates of stock is
null and void. (Padget vs. Babcock, 59 Phil. 232 [1933].)
(a) In close
corporations, restrictions reasonably protecting existing stockholders in
their interests by giving them or the corporation the option to purchase stock
offered for sale (i.e., right of first refusal), are lawful as promotive
of good management and sound business enterprise. (see Casper vs. Kaltz-Simmer,
150 N.W. 1101.) Such restrictions must appear in the articles of incorporation
and in the by-laws as well as in the certificate of stock, otherwise, the same
shall not be binding on any purchaser in good faith. (Sec. 98.)
(b) Even in
widely-held corporations, the same restriction is legally permitted provided it
is stated in the articles of incorporation (see Sec. 6, par. 1.) and the option
period is not too long. A period of one (1) month is sufficient for the
stockholders or corporation to signify their desire to buy the shares of stock
being offered for sale by a stockholder. (SEC Opinion, Oct. 13, 1964.)
(4) Corporations which
will engage in any business or activity reserved for Filipino citizens are
required to indicate in the articles of incorporation and in all the
certificates the restriction against the “transfer of stock or interest which
will reduce the ownership of Filipino citizens to less than the required
percentage of the capital stock as provided by existing laws x x x.” (Sec. 15
[eleventh].)
Effects of an unregistered transfer
of shares.
(1) It is valid and
binding as between the transferor and the transferee (Sec. 63.);
(2) It is invalid insofar as the
corporation is concerned except when notice is given to the corporation for
purposes of registration:
(a) The transferor has the right to vote and be voted for, and has
the right to participate in any meeting;
(b) The transferor has the right to dividends as against the
corporation but the transferor, as the nominal owner of the share, is the trustee for the benefit of the real
owner;
(3) It is invalid as against corporate creditors, and the transferor is still liable to
the corporation. The transfer of stock by a shareholder does not relieve him
from liability to creditors of the corporation for unpaid subscription until
the transfer is consummated by being registered in the books of the
corporation; and
(4) It is invalid as
against the creditors of the transferor without notice of the transfer.
Liability for watered stock (Sec.
65.);
Issue of watered stock prohibited.
The law prohibits the
issuance of watered stock or stock issued for no value at all or for a
value less than its equivalent either in cash, property, shares, stock
dividends, or services. (see Sec. 62.)
Liability of subscriber –
Subscriber is liable
for the difference of P20.00. The issue
itself is not void, but the agreement that the share shall be paid for
less than its par or issued value is illegal and void and cannot be enforced.
(Phil. Trust and Company vs. Rivera, 44 Phil. 470.)
Reason for prohibition.
The issuance of
watered stock is prohibited to protect persons who may acquire stock and those
who may become creditors of the corporation on the faith of its outstanding
capital stock being fully paid.
The prohibition
secures equality among subscribers and prevents discrimination against those
who have paid in full the par or issued value of their shares.
Prohibition refers to original issue.
The prohibition to
issue “watered stock” refers only to the original issue of stocks but not to a
subsequent transfer of such stocks by the corporation, for then it would no
longer be an “issue” but a sale thereof. (Rochelle Roofing Co. vs. Burley,
[Mass.] 115 N.E. 478.)
Liability of consenting director and officer
The liability of the
consenting director or officer for the “water” in the stock is solidary (see
Arts. 1207, 1208, Civil Code.) with the stockholder concerned. This means
either of them can be held liable for the whole amount of the difference.
Payment of balance (Sec. 67)
When balance of subscription payable.
Under Section 67 (par.
2.), the payment of any unpaid subscription or any percentage thereof, together
with interest, if any, shall be made:
(a) on the date specified in the contract of
subscription; or
(b) in the absence of
any specified date in the contract of subscription, on the date stated in the CALL made by the board of directors.
The contract of
subscription or the call by the board of directors, as the case may be, may
require the payment of the entire unpaid subscription or only a certain
percentage thereof on the date specified for payment.
Requisites for a valid call.
The requisites for a
valid call are:
(1) It must be made in
the manner prescribed by law;
(2) It must be made by
the board of directors; and
(3) It must operate
uniformly upon all the shareholders.
It has been held that
a call made upon some of the subscribers is void (Seybreth vs. American
Commander Min. & Mill. Co., Idaho 254.) or which requires some to pay a
higher rate than others. (Great Western Peleg. Co. vs. Burnham, 79 Wis. 47.) A
call cannot be of such a character as to permit the directors to practice
favoritism or act oppressively. (North Milwaukee Town Site Co. vs. Bishop, 103
Wis. 492.)
Necessity for call.
The necessity for call
depends upon the provisions of the subscription contract. Call is necessary
when required by the contract, or when no time is fixed for payment.
Notice
Notice must be given
to the stockholder concerned. A call without notice to the subscriber is
practically no call at all. (Pike vs. Bangor Co., Short Line R.R., 68 Me. 445.)
The notice is regarded as a condition precedent to the right of recovery. It
must, therefore, be alleged and proved to maintain an action for the call.
(Baltazar vs. Lingayen Gulf Electric Power Co., Inc., 14 SCRA 522.) The right
to notice of call, however, may be waived by the subscriber.
Exception to Notice Requirement
1. When the
corporation becomes insolvent, the payment of stock subscription may be enforced
without the necessity of a prior call. (Velasco vs. Poizat, 37 Phil. 802.)
2. Also, no call is
necessary when the subscription is payable not upon call or demand by the
directors but immediately or on a specified day or on or before a specified
day, or when it is payable in installments at specified times. (Miranda vs.
Tarlac Rice Mill Co., 57 Phil. 619.)
Effect of failure to pay.
Failure to pay on such
date shall render the entire balance due and payable and make all the
stock covered by said subscriptions delinquent
and subject to sale at public auction.
Liability to pay interest –
The stockholder shall
be liable for interest at the legal rate (see Sec. 66.) on such balance, unless
a different rate of interest is provided in the by-laws, computed from such
date until full payment. (Sec. 67, par. 2.)
When stock becomes delinquent.
A stock becomes
delinquent upon failure of the holder
to pay the unpaid subscription or balance thereof within 30 days from
the date specified in the contract of subscription, or in the absence of a date
fixed in the contract of subscription, from the date stated in the call made by
the board of directors. (Ibid.)
Remedies to enforce payment of stock
subscription.
They are as follows:
(1) Extra-judicial
sale at public auction.
(2) Judicial
action.
(3) Collection from
cash dividends and withholding of stock dividends.
Statutory sanctions on stock delinquency.
(1) Rights denied
to stockholder. — Under Section 71, a stock delinquent for unpaid
subscription shall not be voted or be
entitled to vote or representation at any stockholders’ meeting, nor
entitle the holder thereof to any of the rights of a stockholder except the right to dividends subject to
the provisions of Section 43. At all elections of directors, it is
expressly declared by Section 24 “that no delinquent stock shall be voted.”
(2) Right given to
the corporation. — Under Section 43, the corporation has the right to first apply cash dividends due
on delinquent stock to the unpaid balance on the subscription plus cost
and expenses, while as to stock dividends, to
withhold the same from the delinquent stockholder until his unpaid
subscription is fully paid. This
right may be exercised by the corporation although it is not provided in its
by-laws.
Delinquency sale (Sec. 68)
Procedure for the sale of delinquent
stocks.
(1) BOARD RESO (CALL)
- The board of directors passes a resolution declaring payable the whole or a
certain percentage of the unpaid subscriptions, stating the date fixed for
payment. If the date for payment is specified in the contract of subscription,
no call is necessary (see Sec. 67, par. 1.);
(2) NOTICE - The
stockholders are given notice of the resolution by the secretary of the
corporation. If the stockholders do not pay within 30 days from the date
specified in the contract of subscription or on the date specified in the call
made by the board, all the stocks covered by the subscription shall thereupon
become delinquent and be subject to sale. (Ibid., par. 2.) Conversely,
unpaid shares which are not delinquent are not subject to sale (see Sec. 72.);
(3) BOARD RESO (SALE)
- The board of directors, by resolution, orders the sale of the delinquent
stocks, stating the amount due and the date, time, and place of sale with
notice to the delinquent stockholders which notice shall be published (Sec. 68,
pars. 1, 2.); and
(4) PUBLIC AUCTION - On
the date of the sale, so many shares of the stock as may be necessary to pay
the amount due on subscription, with accrued interest, costs of advertisement
and expenses of sale, will be sold at public auction to the highest bidder for cash. (Sec. 68, par.
3.)
When sale may be questioned (Sec. 69)
Recovery of stock unlawfully sold.
The grounds for the
recovery of stock unlawfully sold for delinquency are:
(1) irregularity or
defect in the notice of sale; and
(2) irregularity or
defect in the sale itself of the delinquent stock.
Court action to recover unpaid
subscription (Sec. 70)
Remedy by judicial action.
As a general rule, a
corporation may not maintain a suit for the enforcement of unpaid subscription
without first making a call as provided by law. (see Sec. 67.)
The statutory
authority for the recovery of unpaid subscription through judicial action is
found in the above provision. Note that the judicial remedy is limited to “the
amount due on any unpaid subscription with accrued interest, costs and
expenses.” Therefore, the corporation cannot recover any other claim against
the subscriber. The foregoing is also true in case of the extra-judicial sale
at public auction of delinquent shares. (Sec. 68, par. 3.)
Lost or destroyed certificates (Sec. 72)
Section 73 prescribes
the procedure to be followed for the issuance by a corporation of new
certificate(s) in lieu of those which have been lost, stolen, or destroyed.
The corporation is not liable to any person prejudiced by
the issuance of new certificate(s) of stock pursuant to the procedure described
except in case of fraud, bad faith, or negligence on the part of the
corporation and its officers.
