CORPORATION CODE
sole (meaning only one incorporator) and that
PEOPLE vs TAN BOON KONG
Facts: During 1924, in Iloilo, Tan Boon Kong as
manager of the Visayan General Supply Co.
engaged in the purchase and sale of sugar,
bayon, copra, and other native products and as
such must pay internal revenue taxes upon is
sales. However, he only declared 2.3 million in
sales but in actuality the sales amounted to 2.5
million, therefore failing to declare for the
purpose of taxation about 200,000, not having
paid the government 2,000 in taxes. Upon filing
by the defendant of a demurrer, the lower court
judge sustained said motion on the ground that
the offense charged must be regarded as
committed by the corporation and not its
officials.
Issue: WON the defendant as manager may be
held criminally liable.
Ruling: The court held that the judge erred in
sustaining the motion because it is contrary to a
great weight of authority. The court pointed out
that, a corporation can act only through its
officers and agents where the business itself
involves a violation law, the correct rule is that
all who participate in it are criminally liable. In
the present case, Tan Boon Kong allegedly made
a false return for purposes of taxation of the total
amount of sales for year 1924. As such, the filing
of false returns constitutes a violation of law.
Him being the author of the illegal act must be
held liable
ROMAN CATHOLIC APOSTOLIC
ADMINISTRATOR OF DAVAO vs REGISTER
OF DEEDS OF DAVAO
Facts: Mateo Rodis, a Filipino citizen and
resident of Davao, executed a deed of sale of a
parcel of land located in the same city in favor of
the Roman Catholic Administrator of Davao, a
corporation sole organized and existing in
accordance with Philippine laws. The incumbent
administrator is Msgr. Clovis Thibault, a
Canadian citizen. When the deed was presented
to the Register of Deeds for registration, it
required them to submit an affidavit stating that
the ownership of the corporation is 60% Filipino
citizens as required under the Constitution.
Roman Catholic stated that it was a corporation
the totality of the Catholic population in Davao
would become the owner of the property.
Register of Deeds doubted this and submitted the
case for en consulta in the Land Registration
Commission. LRC ruled that the requirement of
the Constitution must be followed and since the
60% cannot be complied with, the registration
should be denied. Hence, this appeal.
Issue: WON the Roman Catholic Apostolic
Church, a corporation sole being led by a
Canadian citizen, can lawfully acquire lands in
the Philippines.
Held: YES. Corporation sole a special form of
corporation usually associated with the clergy
designed to facilitate the exercise of the
functions of ownership of the church which was
registered as property owner. It is created not
only to administer the temporalities of the
church or religious society where the corporator
belongs, but also to hold and transmit the same
to his successor in said officer. The incumbent
administrator is not the actual owner of the land
but the constituents or those that make up the
church, thus it is their nationality that has to be
taken into consideration. The corporation sole
only holds the property in trust for the benefit of
the Roman Catholic faithful.
KUKAN vs REYES
Facts: March 1998, Kukan, Inc. conducted a
bidding for the supply and installation of
signages in a building being constructed in
Makati City. Morales tendered the winning bid
and was awarded the PhP 5 million contract.
Some of the items in the project award were later
excluded resulting in the corresponding
reduction of the contract price to PhP 3,388,502.
Despite his compliance with his contractual
undertakings, Morales was only paid the amount
of PhP 1,976,371.07, leaving a balance of PhP
1,412,130.93, which Kukan, Inc. refused to pay
despite demands. Shortchanged, Morales filed a
Complaint with the RTC against Kukan, Inc. for
a sum of money.
RTC ruled in favor of Morales. Morales moved
for and secured a writ of execution against
Kukan, Inc. The sheriff then levied upon various
personal properties found at what was supposed
to be Kukan, Inc.s office at Unit 2205, 88
Corporate Center, Salcedo Village, Makati City.
Alleging that it owned the properties thus levied
and that it was a different corporation from
Kukan, Inc., Kukan International Corporation
(KIC) filed an Affidavit of Third-Party Claim.
Applying the principle of piercing the veil of
corporate fiction, that an order be issued for the
satisfaction of the judgment debt of Kukan, Inc.
with the properties under the name or in the
possession of KIC, it being alleged that both
corporations are but one and the same entity.
Issue: Whether the trial and appellate courts
correctly applied the principle of piercing the
veil of corporate fiction.
Ruling: No. It bears reiterating that piercing the
veil of corporate fiction is frowned upon.
Accordingly, those who seek to pierce the veil
must clearly establish that the separate and
distinct personalities of the corporations are set
up to justify a wrong, protect fraud, or perpetrate
a deception. In the concrete and on the
assumption that the RTC has validly acquired
jurisdiction over the party concerned, Morales
ought to have proved by convincing evidence
that Kukan, Inc. was collapsed and thereafter
KIC purposely formed and operated to defraud
him. Morales has not to us discharged his
burden.
The levy placed upon the personal properties of
Kukan International Corporation is hereby
ordered lifted and the personal properties
ordered returned to Kukan International
Corporation.
MONTELIBANO vs BACOLOD-MURCIA
MILLING
Facts: Plaintiffs-appellants, Alfredo
Montelibano, Alejandro Montelibano, and the
Limited co-partnership Gonzaga and Company,
had been and are sugar planters adhered to the
defendant-appellees sugar central mill under
identical milling contracts. Originally executed
in 1919, said contracts were stipulated to be in
force for 30 years starting with the 1920-21 crop,
and provided that the resulting product should be
divided in the ratio of 45% for the mill and 55%
for the planters. Sometime in 1936, it was
proposed to execute amended milling contracts,
increasing the planters share to 60% of the
manufactured sugar and resulting molasses,
besides other concessions, but extending the
operation of the milling contract from the
original 30 years to 45 years. The Board of
Directors of the appellee Bacolod-Murcia
Milling Co., Inc., adopted a resolution granting
further concessions to the planters over and
above those contained in the printed Amended
Milling Contract. The appellants initiated the
present action, contending that three Negros
sugar centrals with a total annual production
exceeding one-third of the production of all the
sugar central mills in the province, had already
granted increased participation (of 62.5%) to
their planters, and that under the resolution the
appellee had become obligated to grant similar
concessions to the plaintiffs. The appellee
Bacolod-Murcia Milling Co., inc., resisted the
claim, and defended by urging that the
stipulations contained in the resolution were
made without consideration; that the resolution
in question was, therefore, null and void ab
initio, being in effect a donation that was ultra
vires and beyond the powers of the corporate
directors to adopt.
Issue: WON the board resolution is an ultra vires
act and in effect a donation from the board of
directors?
Held: No. There can be no doubt that the
directors of the appellee company had authority
to modify the proposed terms of the Amended
Milling Contract for the purpose of making its
terms more acceptable to the other contracting
parties. As the resolution in question was passed
in good faith by the board of directors, it is valid
and binding, and whether or not it will cause
losses or decrease the profits of the central, the
court has no authority to review them. Whether
the business of a corporation should be operated
at a loss during depression, or close down at a
smaller loss, is a purely business and economic
problem to be determined by the directors of the
corporation and not by the court. The appellee
Bacolod-Murcia Milling Company is, under the
terms of its Resolution of August 20, 1936, duty
bound to grant similar increases to plaintiffs-
appellants herein.
MSCI VS NWPC
On January 11, 1990, Asturias Sugar Central,
Inc. (ASCI, for brevity), executed a
Memorandum of Agreement with Monomer
Trading Industries, Inc. (MTII, for brevity),
whereby MTII shall acquire the assets of ASCI
by way of a Deed of Assignment provided that
an entirely new organization in place of MTII
shall be organized, which new corporation shall
be the assignee of the assets of ASCI.
By virtue of this Agreement, a new corporation
was organized and incorporated on February 15,
1990 under the corporate name Monomer Sugar
Central, Inc. or MSCI, the private respondent
herein.
On January 16, 1991, MSCI applied for
exemption from the coverage of Wage Order No.
RO VI-01 issued by the Board on the ground that
it is a distressed employer.
The petitioner herein MSCI-NACUSIP Local
Chapter (Union, for brevity), in opposition,
maintained that MSCI is not distressed; that
respondent applicant has not complied with the
requirements for exemption; and that the
financial statements submitted by MSCI do not
reflect the true and valid financial status of the
company, and that the paid-up capital would
have been higher than P5 million and thus
impairment would have been lower than 25%
had the pre-organization agreement between
ASCI and MTII been complied with.
The Board held that the paid-up capital of MSCI
on the aforesaid dates was actually
P64,688,528.00 and not P5 million as claimed by
MSCI in its application for exemption and, thus,
the established losses amounting to
P3,400,738.00 constitute an impairment of only
5.25% of the true paid-up capital of P64 million
plus,[2] which losses are not enough to meet the
required 25% impairment requirement. The
loans or advances extended by MTII, the other
party to the Agreement, to MSCI should
allegedly be treated as additional investments to
MSCI[3] and must therefore be included in
computing respondent's paid-up capital.
Issue: WON the loans and advances extended to
MSCI can be qualified as an increase in its
capital stock
Ruling: Commission aptly observed that the
loans and advances of MTII to respondent MSCI
cannot be treated as investments, unless the
corresponding shares of stocks are issued. But as
it turned out, such loans and advances were in
fact treated as liabilities of MSCI to MTII. The
treatment by the Board of these loans as part of
MSCI's capital stock without satisfying certain
mandatory requirements is proscribed under
Section 38 of the Corporation Code.
The requirements were unquestionably not
observed in this case. Henceforth, the paid-up
capital stock of MSCI for the period covered by
the application for exemption still stood at P5
million. The losses, amounting to P3,400,738.00
impaired MSCI's paid-up capital of P5 million
by as much as 68% enough to qualify MSCI as a
distressed employer. Respondent Commission
thus acted well within its jurisdiction in granting
MSCI full exemption from Wage Order No. RO
VI-01 as a distressed employer.
HI-YIELD REALTY vs CA
Facts: On July 31, 2003, Roberto H. Torres
(Roberto), for and on behalf of Honorio Torres &
Sons, Inc. (HTSI), filed a Petition for Annulment
of Real Estate Mortgage and Foreclosure Sale3
over two parcels of land located in Marikina and
Quezon City. The suit was filed against Leonora,
Ma. Theresa, Glenn and Stephanie, all surnamed
Torres, the Register of Deeds of Marikina and
Quezon City, and petitioner Hi-Yield Realty, Inc.
(Hi-Yield).
Petitioner moved to dismiss the petition on
grounds of improper venue and payment of
insufficient docket fees. The RTC denied said
motion in an Order4 dated January 22, 2004. The
trial court held that the case was, in nature, a real
action in the form of a derivative suit cognizable
by a special commercial court pursuant to
Administrative Matter No. 00-11-03-SC.5
Petitioner sought reconsideration, but its motion
was denied
Issue: whether the action to annul the real estate
mortgage and foreclosure sale is a mere incident
of the derivative suit.
Ruling: Both the RTC and Court of Appeals
ruled that the action is in the form of a derivative
suit although captioned as a petition for
annulment of real estate mortgage and
foreclosure sale.
A derivative action is a suit by a shareholder to
enforce a corporate cause of action.16 Under the
Corporation Code, where a corporation is an
injured party, its power to sue is lodged with its
board of directors or trustees. But an individual
stockholder may be permitted to institute a
derivative suit on behalf of the corporation in
order 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 actions, the
corporation is the real party-in-interest while the
suing stockholder, on behalf of the corporation,
is only a nominal party.
Requisites before a stockholder can file a
derivative suit:
a) the party bringing suit should be a shareholder
as of the time of the act or transaction
complained of, the number of his shares not
being material;
b) he has tried to exhaust intra-corporate
remedies, i.e., has made a demand on the board
of directors for the appropriate relief but the
latter has failed or refused to heed his plea; and
c) the cause of action actually devolves on the
corporation, the wrongdoing or harm having
been, or being caused to the corporation and not
to the particular stockholder bringing the suit.
For a derivative suit to prosper, the minority
stockholder suing for and on behalf of the
corporation must allege in his complaint that he
is suing on a derivative cause of action on behalf
of the corporation and all other stockholders
similarly situated who may wish to join him in
the suit; that earnest efforts were made to reach a
compromise among family
members/stockholders before he filed the case.
The Court finds that Roberto had satisfied these
requirements.
REPUBLIC PLANTERS BANK vs AGANA
Facts: On 18 September 1961, the Robes-
Francisco Realty & Development Corporation
(RFRDC) secured a loan from the Republic
Planters Bank in the amount of P120,000.00. As
part of the proceeds of the loan, preferred shares
of stocks were issued to RFRDC through its
officers then, Adalia F. Robes and one Carlos F.
Robes. In other words, instead of giving the legal
tender totaling to the full amount of the loan,
which is P120,000.00, the Bank lent such
amount partially in the form of money and
partially in the form of stock certificates
numbered 3204 and 3205, each for 400 shares
with a par value of P10.00 per share, or for
P4,000.00 each, for a total of P8,000.00. Said
stock certificates were in the name of Adalia F.
Robes and Carlos F. Robes, who subsequently,
however, endorsed his shares in favor of Adalia
F. Robes.
Said certificates of stock bear the following
terms and conditions: "The Preferred Stock shall
have the following rights, preferences,
qualifications and limitations, to wit: 1. Of the
right to receive a quarterly dividend of 1%,
cumulative and participating. xxx 2. That such
preferred shares may be redeemed, by the system
of drawing lots, at any time after 2 years from
the date of issue at the option of the
Corporation." On 31 January 1979, RFRDC and
Robes proceeded against the Bank and filed a
complaint anchored on their alleged rights to
collect dividends under the preferred shares in
question and to have the bank redeem the same
under the terms and conditions of the stock
certificates. The bank filed a Motion to Dismiss
3 private respondents' Complaint on the
following grounds: (1) that the trial court had no
jurisdiction over the subject-matter of the action;
(2) that the action was unenforceable under
substantive law; and (3) that the action was
barred by the statute of limitations and/or laches.
The bank's Motion to Dismiss was denied by the
trial court in an order dated 16 March 1979. The
bank then filed its Answer on 2 May 1979.
Thereafter, the trial court gave the parties 10
days from 30 July 1979 to submit their
respective memoranda after the submission of
which the case would be deemed submitted for
resolution. On 7 September 1979, the trial court
rendered the decision in favor of RFRDC and
Robes; ordering the bank to pay RFRDC and
Robes the face value of the stock certificates as
redemption price, plus 1% quarterly interest
thereon until full payment. The bank filed the
petition for certiorari with the Supreme Court,
essentially on pure questions of law.
Issues:
Whether the bank can be compelled to redeem
the preferred shares issued to RFRDC and
Robes.
Whether RFRDC and Robes are entitled to the
payment of certain rate of interest on the stocks
as a matter of right without necessity of a prior
declaration of dividend.
Ruling:
1. While the stock certificate does allow
redemption, the option to do so was clearly
vested in the bank. The redemption therefore is
clearly the type known as "optional". Thus,
except as otherwise provided in the stock
certificate, the redemption rests entirely with the
corporation and the stockholder is without right
to either compel or refuse the redemption of its
stock. Furthermore, the terms and conditions set
forth therein use the word "may". It is a settled
doctrine in statutory construction that the word
"may" denotes discretion, and cannot be
construed as having a mandatory effect. The
redemption of said shares cannot be allowed.
The Central Bank made a finding that the Bank
has been suffering from chronic reserve
deficiency, and that such finding resulted in a
directive, issued on 31 January 1973 by then
Gov. G. S. Licaros of the Central Bank, to the
President and Acting Chairman of the Board of
the bank prohibiting the latter from redeeming
any preferred share, on the ground that said
redemption would reduce the assets of the Bank
to the prejudice of its depositors and creditors.
Redemption of preferred shares was prohibited
for a just and valid reason. The directive issued
by the Central Bank Governor was obviously
meant to preserve the status quo, and to prevent
the financial ruin of a banking institution that
would have resulted in adverse repercussions,
not only to its depositors and creditors, but also
to the banking industry as a whole. The
directive, in limiting the exercise of a right
granted by law to a corporate entity, may thus be
considered as an exercise of police power.
2. Both Section 16 of the Corporation Law and
Section 43 of the present Corporation Code
prohibit the issuance of any stock dividend
without the approval of stockholders,
representing not less than two-thirds (2/3) of the
outstanding capital stock at a regular or special
meeting duly called for the purpose. These
provisions underscore the fact that payment of
dividends to a stockholder is not a matter of right
but a matter of consensus. Furthermore, "interest
bearing stocks", on which the corporation agrees
absolutely to pay interest before dividends are
paid to common stockholders, is legal only when
construed as requiring payment of interest as
dividends from net earnings or surplus only. In
compelling the bank to redeem the shares and to
pay the corresponding dividends, the Trial
committed grave abuse of discretion amounting
to lack or excess of jurisdiction in ignoring both
the terms and conditions specified in the stock
certificate, as well as the clear mandate of the
law.
SECURITIES CORPORATION CODE
PHILIPPINE ASSOCIATION OF STOCK
TRANSFER AND REGISTRY AGENCIES, INC., vs
CA
Facts: Petitioner Philippine Association of Stock
Transfer and Registry Agencies, Inc. is an
association of stock transfer agents principally
engaged in the registration of stock transfers in
the stock-and-transfer book of corporations.
On May 10, 1996, petitioners Board of
Directors unanimously approved a resolution
allowing its members to increase the transfer
processing fee they charge their clients from P45
per certificate to P75 per certificate, effective
July 1, 1996; and eventually to P100 per
certificate, effective October 1, 1996. The
resolution also authorized the imposition of a
processing fee for the cancellation of stock
certificates at P20 per certificate effective July 1,
1996. According to petitioner, the rates had to
be increased since it had been over five years
since the old rates were fixed and an increase of
its fees was needed to sustain the financial
viability of the association and upgrade facilities
and services.
Philippine Association of Securities Brokers and
Dealers, Inc. registered its objection to the
measure advanced by petitioner and requested
the SEC to defer its implementation. On June
27, 1996, the SEC advised petitioner to hold in
abeyance the implementation of the increases
until the matter was cleared with all the parties
concerned. Petitioner nonetheless proceeded
with the implementation of the increased fees.
Issue: WON the SEC has the power to regulate
fees.
Ruling: The regulatory and supervisory powers
of the Commission under Section 40 of the then
Revised Securities Act, in our view, were broad
enough to include the power to regulate
petitioners fees. Indeed, Section 47 gave the
Commission the power to enjoin motu proprio
any act or practice of petitioner which could
cause grave or irreparable injury or prejudice to
the investing public. The intentional omission in
the law of any qualification as to what acts or
practices are subject to the control and
supervision of the SEC under Section 47
confirms the broad extent of the SECs
regulatory powers over the operations of
securities-related organizations like petitioner.
UNION BANK VS SEC
Facts: On April 4, 1997, petitioner Union Bank
sought the opinion of Chairman Perfecto Yasay,
Jr. of respondent Commission as to the
applicability and coverage of the Full Material
Disclosure Rule on banks, contending that said
rules, in effect, amend Section 5 (a) (3) of the
Revised Securities Act which exempts securities
issued or guaranteed by banking institutions
from the registration requirement provided by
Section 4 of the same Act.
Chairman Yasay replied and informed the
petitioner that while the requirements of
registration do not apply to securities of banks
which are exempt under Section 5(a) (3) of the
Revised Securities Act, however, banks with a
class of securities listed for trading on the
Philippine Stock Exchange, Inc. are covered by
certain Revised Securities Act Rules governing
the filing of various reports with respondent
Commission.
On July 17, 1997, respondent Commission wrote
petitioner, enjoining the latter to show cause why
it should not be penalized for its failure to
submit a Proxy/Information Statement in
connection with its annual meeting held on May
23, 1997, in violation of respondent
Commissions Full Material Disclosure Rule.
Issue: WON petitioner is required to comply
with the respondent SECs full disclosure rules.
Held: The petition is not meritorious. Section 5
of the Revised Securities Act states that:
Sec 5. Exempt Securities. (a) Except as
expressly provided, the requirement of
registration under subsection (a) of Section four
of this Act shall not apply to any of the following
classes of securities:
(3) Any security issued or guaranteed by any
banking institution authorized to do business in
the Philippines, the business of which is
substantially confined to banking, or a financial
institution licensed to engage in quasi-banking,
and is supervised by the Central Bank.
This provision exempts from registration the
securities issued by banking or financial
institutions mentioned in the law. Nowhere does
it state or even imply that petitioner, as a listed
corporation, is exempt from complying with the
reports required by the assailed RSA
Implementing Rules.
It must be emphasized that petitioner is a
commercial banking corporation listed in the
stock exchange. Thus, it must adhere not only to
banking and other allied special laws, but also to
the rules promulgated by Respondent SEC, the
government entity tasked not only with the
enforcement of the Revised Securities Act, but
also with the supervision of all corporations,
partnerships or associations which are grantees
of government-issued primary franchises and/or
licenses or permits to operate in the Philippines.
That petitioner is under the supervision of the
Bangko Sentral ng Pilipinas (BSP) and the
Philippine Stock Exchange (PSE) does not
exempt it from complying with the continuing
disclosure requirements embodied in the assailed
Rules. Petitioner, as a bank, is primarily subject
to the control of the BSP; and as a corporation
trading its securities in the stock market, it is
under the supervision of the SEC. It must be
pointed out that even the PSE is under the
control and supervision of respondent. There is
no over-supervision here. Each regulating
authority operates within the sphere of its
powers. That stringent requirements are imposed
is understandable, considering the paramount
importance given to the interests of the investing
public.
Otherwise stated, the mere fact that in regard to
its banking functions, petitioner is already
subject to the supervision of the BSP does not
exempt the former from reasonable disclosure
regulations issued by the SEC. These
regulations are meant to assure full, fair and
accurate disclosure of information for the
protection of investors in the stock market.
Imposing such regulations is a function within
the jurisdiction of the SEC. Since petitioner
opted to trade its shares in the exchange, then it
must abide by the reasonable rules imposed by
the SEC.
NICOLAS VS CA
Facts: Nicolas and Buan entered into a Portfolio
Management Agreement, wherein the former
was to manage the stock transactions of the latter
for a period of three months with an automatic
renewal clause. However, upon the initiative of
the private Buan the agreement was terminated,
and thereafter he requested for an accounting of
all transactions made by the petitioner. 3 weeks
after the termination of the agreement, Nicolas
demanded from Buan an amount representing his
alleged management fees as provided for in the
Portfolio Management Agreement. But the
demands went unheeded, much to the chagrin of
the petitioner. Rebuffed, petitioner filed a
complaint or collection of sum of money against
the private respondent before the trial court. In
his answer, Buan contended that petitioner
mismanaged his transactions resulting in losses,
thus, he was not entitled to any management
fees. After hearing, the trial court rendered its
decision in favor of Nicolas, ordering Buan to
pay him for the management fees, attorneys fees
and expenses of litigation. Buan appealed the
decision to the CA. Finding merit in his case, the
appellate court reversed the trial courts finding
and ruled against Nicolas. Petitioners MR was
denied by the same court.
Issue: WON the CA committed reversible error
in overturning the decision of the RTC
Ruling: NO; To begin with, petitioner has the
burden to prove that the transaction realized
gains or profits to entitle him to said
management fees, as provided in the Agreement:
xxx For his services, the INVESTOR agrees to
pay the PORTFOLIO MANAGER 20% of all
realized profits every end of the month. xxx
Accordingly, petitioner submitted the profit and
loss statements for the covered, showing a total
profit of P341,318.34, of which 20% would
represent his management fees amounting to
P68,263.70. The CA declared that these
documents have no probative value.
Unfortunately, the profit and loss statements
presented by the petitioner are nothing but bare
assertions, devoid of any concrete basis or
specifics as to the method of arriving at the
amounts indicated in the documents. They are at
best just self-serving statements. In fact, it did
not even state when the stocks were purchased,
the type of stocks bought, when the stocks were
sold, etc. The statements simply tabulate the
number of shares acquired from each company, a
column for profit and the last column for loss.
The statements were not [even] authenticated by
an auditor, nor by the person who caused the
preparation of the same. In short, no evidentiary
value can be attributed to the profit and loss
statements submitted by the petitioner. These
documents can hardly be considered a credible
or true reflection of the transactions. We find that
petitioner has not proven the amounts indicated
adequately. Lastly, the futility of petitioners
action became more pronounced by the fact that
he traded securities for the account of others
without the necessary license from the SEC.
Clearly, such omission was in violation of
Section 19 of the Revised Securities Act which
provides that no broker shall sell any securities
unless he is registered with the SEC. Stock
market trading, a technical and highly
specialized institution in the Philippines, must be
entrusted to individuals with proven integrity,
competence and knowledge, who have due
regard to the requirements of the law.
LOPEZ LOCSIN LEDESMA vs CA
Facts: On August 14 and 26,1969 CMS Stock
Brokerage, Inc. (CMS for short) sold to Lopez,
Locsin, Ledesma and Co., Inc., (LLL for short)
on the floor of the Makati Stock Exchange,
among others, 2,650 Benguet Consolidated
shares for the total price of P297,650.00. CMS,
however, failed to deliver to LLL the 2,650
Benguet Consolidated shares. LLL refused to
accept delivery at that late time since its clients
for whom the purchases were made had "elected
to cancel" the orders. CMS replied that, pursuant
to the Rules and Regulations of the Makati Stock
Exchange, LLL had no right to cancel its orders.
LLL refused to acknowledge receipt of and sign
the covering disposal letter. What CMS did was
to deposit the letter with the Office of the Stock
Exchange's Executive Secretary with the
notation: "Refused Acceptance pending decision
of the Exchange."
Issue: What is the governing law between the
contract entered into by the parties.
Ruling: There is no dispute that the exchange
contracts in question were drawn up on the floor
of the Makati Stock Exchange between two (2)
member stockbrokers, CMS as the seller and
LLL, as the buyer for and on orders of the third
parties. As members of the stock exchange, they
are bound by the rules and by-laws of the
exchange.
The rule at issue in the instant case is Section I,
Article V of the Rules and Regulations. It reads:
In the event of a Selling Member failing to make
delivery within a reasonable period of time of
shares sold under delayed delivery contract, it
shall be the Buying Member duty to advise the
Selling Member in writing giving him 1 full
business day from the time of receipt of said
letter of demand to make delivery.
The Buying Member shall obtain a written
receipt from the Selling Member on the
duplicate copy of the letter of demand. This
receipt must state the time of delivery of the
letter of demand to the Selling Member.
Fifteen days shall be considered a reasonable
period of time within which to effect delivery
unless otherwise stated in the sales contract.
In the event a Selling Member is unable to make
delivery within said period, the Buying Member
shall deliver a copy of his letter of demand to the
Chairman of the Floor Trading & Arbitration
Committee who may purchase the shares for the
Selling Member's Account.
It would, therefore, be safe to say that unless the
buying member timely notifies the seller that he
is canceling his orders, then the orders placed by
the buying member still stand.