Stockholders Rights and Liabilities

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.