Chapter XII – Consideration for Shares
instead of being merely communicated to the
Form of Consideration
— Under Sec 62, stocks shall not be issued for a consideration less than the
par or issued price thereof, and shall not be issued in exchange for PNs
or future services, but only for cash actually paid, property actually
received and necessary to the business, or services actually rendered to
the corporation
o Whenever a corporation issues shares, it must receive a
consideration equal to or at least their par or issued value
o Such consideration need not be paid in full at the time of issuance,
but the unpaid portion shall be a debt and must be paid
— Consideration may be in any two or more of the ff forms:
o Actual cash paid to the corporation
 Villanueva: it is not required that there be actual payment of
cash consideration in order to make the subscription
agreement valid and binding
 Subscription agreement is a consensual contract, which is
perfected and valid and binding upon meeting of the minds
on the subject matter—the shares itself—and the
consideration
 Non-payment of the consideration does not render the
subscription contract void
 Only upon call by the board or when the terms of the
subscription agreement makes payment due and
demandable, would the SH be legally required to pay actual
cash to the corporation
• Failure to do so would subject the shares to a
delinquency declaration and suspend the rights of
the SH
 Notes receivable vs. subscription receivable as
consideration: notes would be counted as an asset by the
corporation, subscription receivables as deductions from
SH’s equity
o Property, tangible or intangible, actually received by the corporation
and necessary or convenient for its use and lawful purposes
 Requisites:
• must lawfully acquired and held
• must be necessary and proper for it to own in
carrying on its business
• must be of substantial nature, having pecuniary
value capable of being ascertained
• must be real and tangible
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• must be of a nature that it can be delivered
officers
 includes services which have already been performed as
long as they are capable of valuation and are fairly
valued
 receivables may be accepted as valid payment
• must be subject to verification by the SEC
• shares to be held in escrow until actual payment
of the amount
o Labor performed for or services actually rendered to the
corporation
 Must be actually rendered and value ascertainable
 Must be in GF and no fraud is perpetrated
 Future services not allowed as consideration and such
agreement is VOID (62)
• Villanueva: Corporation should not be estopped to
deny that the services constituted payment of the
stock subscription even though it has received
the benefit thereof
 a corporation under a management contract may be
issued shares in payment for the reasonable value of its
services; but since it is not a SH of the managed
corporation, such shares must come from the unissued
shares of the latter’s original authorized capital stock and
not in the form of stock dividends (Nielson case)
o Previously incurred indebtedness by the corporation
 May either be accounts payable or notes payable
 Valuation must have been established prior to even
negotiating on the subscription agreement
 Set-off of corporate indebtedness: also covered by 62
o Amounts transferred from unrestricted retained earnings to
stated capital
 Covers the declaration of stock dividends and has the
effect of capitalizing unrestricted retained earnings
 Consideration therefor is merely book entries
o Outstanding shares exchanged for stocks in the event of
reclassification or conversion
 Changes the composition or manner of classification of
the capital stock and should not affect its integrity
Liability on watered stocks
— Watered Stocks: Shares issued as fully paid when in truth no
 consideration is paid, or the the consideration received is known to be
less than the par value or issued value of the shares
o Includes bonus shares and discount shares issued at a discount or
under an agreement to pay less than par value in money
o Shares issued as fully paid up but no consideration is actually paid in
form or consideration is inadequate because it is not equal to the
par or issued value, the SH is liable to the corporation and its
creditors for the unpaid portion
o Shares issued as fully paid up in consideration of property at an
overvaluation
— Stock watering prohibited because:
o Corporation is deprived of needed capital and the opportunity to
market its securities to its own advantage
o Existing and future SHs who are also injured by the dilution of their
proportionate interests in the corporation
o Present and future creditors who are injured as the corporation is
deprived of the assets or capital and reduces the value of the
corporate assets which stand as a substitute for the SHs personal
liability to them
o Persons who deal with it or purchase its securities who are deceived
because stock watering is invariable accompanied with misleading
corporate accounts and financial statements
— Code makes directors liable for watered stocks under Sec 65
o If he consents to the issuance, or…
o … having knowledge thereof, does not forthwith express his
objection in writing and file it with the corporate secretary
 directors become solidarily liable
 liability will be to ALL directors, whether they became such
prior or subsequent to the issuance of watered stock
 reliance of the creditors is immaterial and fraud is not an
element of liability
 even no-par stocks can be watered stocks where they are
issued for less than their issued value
— Three theories for the liability
o Subscription contract theory—the subscription contract is the source
and measure of the duty of a subscriber to pay for his shares; if the
contract releases him from further liability, the subscriber ceases to
be liable
 Prohibited in RP jurisdiction
o Fraud or misrepresentation theory—holds a SH liable for watered
stock on the basis of tort or misrepresentation. The wrong done to
the creditor is fraud or deceit in falsely representing that the par
value has been paid or agreed to be paid in full
o Trust fund doctrine—all corporate creditors would have legal basis to
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recover against SHs and guilty officers
 Prevailing view in RP
Triplex Shoe Co v Rice & Hutchins Inc.
F: Triplex’ authorized capital stock totaled $150K, broken down into
$75000 PS (par value $100), and $75000 no par CS.
Directors meeting: Albert Dillman – Pres; Solly – VP and Sec, and Louis
Dillman – Treasurer ….. agreed to receive lower compensation and in
consideration of other services to be rendered and for managing the co.,
additional stocks were to be given as follows: A Dillman – 376 CS, L
Dillman – 114 CS, Solly – 50 CS. (Solly transferred stock to 2 Dillmans).
An amendment was proposed, 2375 PS and 175 no-par CS. Rice and
Hutchins purchased 249 shares of PS and 83 shares CS (as bonus). The
Dillman’s own 540 CS shares. During election of directors, the “B” ticket
of the Dillmans were elected. Rice questions the election, saying the
there was no consideration for the CS at the incorporation of Triplex.
Issue: WON there was any CS voted for the B Ticket at the 1929 election
that was legally issued and outstanding at that time?
H: No, there was none. (Chancellor’s decision: No outstanding Cs and PS
stocks were voted).
The no par value CS issued before and after the amendment was invalid
because consideration was never fixed.
The certificate must state the total number of shares authorized that are
without nominal or par value. The provision in the articles that a certain
part of capital is in shares of CS no par and without stating the number of
shares is not authorized and is meaningless in the eyes of the law. Thus
the CS in the original AOI was invalid stock.
The consideration of the shares issued to Dillman were alleged to have
been for services rendered in organizing the company, and in agreeing to
serve at a smaller compensation that they would get otherwise. Clearly
the consideration mentioned, consisting of services, was not of such as
the law contemplates. The services do not appear to be essentially
different or greater than the services ordinarily rendered in the promotion
and organization of the corporation. (also, services still to be rendered
are not lawful consideration) -- Hence, no proper and lawful
consideration was for the CS at the 1st Board Meeting.
McCarty v Langdeau: F: Langdeau is the receiver of Estate Life
Insurance Co, and McCarty is the President of the company. Langdeau sues
McCarty for the unpaid balance of his stock subscription, iao $387,380 (he
paid only $20) representing 19, 370 shares of no par stock.
The contract between the corporation and McCarty was that he would:
-- pay a minimum of $20/month for the balance not exceeding 30 months,
evidenced by a note, payable w/o interest.
--that the company will have a lien on his shares until the note is paid.
-- He was to receive as much stock as his actual payments , but the
company would be able to vote the stock while the contract is in force (to be
voted by McCarty)
-Yet despite his default (only made a total payment of $8,120), the company
did not elect to terminate the contract. He claims that the contract is void
for it violates the constitution of Texas (“no corp. shall issue stock or bond
except for money paid, labor done or property actually received, and all
fictitious increase of stock or indebtedness shall be void.”)
H: --the contract is enforceable
No declaration in the consti prohibition that a transaction in w/c something
other than money, labor or property shall be received in payment of the
stock is utterly void. If a security is to be accepted in payment for the stock,
e.g. a subscriber’s note, w/c is not property for such purpose, the Consti
doesn’t say that it, or the stock issued for it, shall be void. The word “void”
is used only once and has reference to the distinct clause w/c says that all
fictitious increase of stock or indebtedness shall be void.
--the affairs of the corporation in this case are in the hands of a receiver who
represents not only the SHs, but also the creditors, and the rights of
creditors have now intervened. The constitution of Texas prohibits such a
transaction and makes it unlawful
. It was aimed against his acquiring stock except upon lawful payment. It
was designed for the protection of the corporation and its creditors. In such
a case as this where the SH has paid nothing for his stock and deceived the
public, he cannot be permitted to take shelter under the constitutional
prohibition, which protects the corporation and its creditors.
--Purpose is to give integrity to the corp’s capital. It is to prevent false
pretense at its hands, and avoid imposition upon the public. None of these
objects would be promoted by declaring a note given by a subscriber for
stock subscription in the hands of a bonafide stockholder.
Rhode v Dock-Hop Co. F: Judgment creditors of a corporation sues the
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original SHs or incorporators of the Dock-Hop Co, seeking to collect on
the unpaid balances on the par value of their shares. Complaint alleged
that only 25c on the dollar had been paid in on the par value of their
shares (watered stocks). Defendants deny however, that they are
subscribers, or that the full value of their stock had not been paid.
I: W/n SHs are required to make up any difference which may exist
between what was actually paid on their stock and its par value.
Yes -- but NOT as to the transferee of the watered stocks, which are the
defendants herein. (lower court ruling is reversed)
H: Court found that only 5/12 of the par value had been paid. At the
lower court, it ruled for the plaintiff on the theory that it made no
difference WON the defendants were subscribers: the mere fact that that
they were SHs and the shares they held , although issued as fully
paid were in fact issued for property w/c the directors didn’t believe
was equal in value, were enough to warrant judgment against them.
Where a person accepts the ownership of stock which purports to be
fully paid, it cannot be said of him that he accepts the stock and enters
upon the relation of SH for the corporation. On the contrary, he accepts
the ownership of the stock and enters upon the relationship of SH with
the contrary understanding. What then is the principle upon which the
holder of watered stock is under any circumstances held obligated to
supply substance and make good what it pretended the corporation
received by did not?
The SH is held upon the principle that one giving credit to the corporation
is entitled to rely upon its ostensible capitalization as the basis for the
credit given, and that, when the corporation issues watered stock, and
thereby assumes an ostensible capitalization in excess of its real assets,
the transaction necessarily involves the misleading of subsequent
creditors, and whether done with that purpose actually in mind or not, is
at least constructive fraud upon such creditors. In other words, the
essence of the right of the creditor to brush aside the issuance of stock as
fully paid, and to show that it was not such and to compel payment, is
that its issuance as fully paid was as to him a fraud.
--the transferee of watered stock who takes it in ignorance of its real
character is not required, even at the suit of the of a creditor of the
company, to pay anything more upon it.
Campos: The innocent purchaser of watered stocks is thus treated like
the holder in GF of nego instrument, based on the policy of encouraging
the free transferability of shares as a means of enhancing the growth of
commerce and industry. Apparently the remedy of the defrauded creditor
would be against the original owner of the watered stocks.
How payment of Shares enforced
— Under 66, subscribers for stock shall pay to the corporation, interest on
all unpaid subscriptions from date of the same, if so required and fixed in
the by-laws
o No rate= legal interest
o Any unpaid balance would be a debt owed by the subscriber to the
corporation
o Lingayen Gulf v Baltazar: He may not be released from such
obligation to pay the unpaid balance, unless it is with the consent of
all the SHs, without prejudice to creditors, and upon adequate
consideration
 but a corporation may enter into a bona fide compromise
with a subscriber who is unable to pay his shares which he
has surrendered to the corproation
— Under 67, board may at any time, declare due and payable to the
corporation unpaid subscriptions to the capital stock and may collect the
same or such percentage thereof, with accrued interest in each case and
subject to the provisions of the contract of subscription
— How payment is applied?
o Full payment for corresponding number of shares, par value covered
by such payment, or…
o … payment pro-rata to each and all the entire number of shares
subscribed
— Under 13: 25% of total subscription must be paid, paid-up capital not
less than P5,000.00
o Balance payable on dates fixed in the subscription contract
o No fixed dates, upon call by the board
— Call on unpaid subscriptions
o Resolution of the board
o Notification of the resolution on the SHs
o The time when subscriptions become payable
— When call not necessary
o The subscription contracts expressly states that it shall be payable
not upon call, but immediately or on a specified day or upon
installments
o Corporation becomes insolvent, regardless of any contrary
stipulation in the subscription contract
— The corporation has two (2) alternatives for the enforcement of a
subscription contract:
(1) The sale of delinquent stocks
(2) Court action
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1. delinquency sale; requisites
— Under 68 the board may, by resolution, order the sale of delinquent
stock and specifically state:
o the amount due and all accrued interest
o date, time, place of the sale (30-60 days)
o notice of sale with copy of resolution sent to every delinquent SH
either personally or by registered mail
— When delinquent? Sec 67
o Unpaid subscription shall be made on the date specified in the
contract or on date stated in the call
o No payment within 30 days from said dates= all stocks covered
shall become delinquent
— How do shares become delinquent?
o Failure to pay upon call
o Failure to pay on date specified in subscription agreement
— 69: no action to recover delinquent stock sold can be sustained on
the ground of irregularity or defect in the notice or in the sale itself
— amount of subscription may be payable in installments and may
specify the date or dates when payments are to be made
o if unpaid still, balance becomes automatically due and
demandable without need for a call
o until such date arrives, no demand or call for payment may be
validly made by the board
o Call by the board: the board may at any time declare all or any
part of the subscription due and payable where there is no date
fixed in the subscription contract
 Power to make a call discretionary with the board
 Once made, call must operate uniformly on all SHs in
order to prevent favoritism or oppression (Lingayen Gulf
v. Baltazar)
 No payment despite call, whole balance of subscription
becomes due and payable
o 68: If not paid within 30 days from date fixed in subscription
contract or date stated in the call, ALL stocks covered by the
subscription, become AUTOMATICALLY delinquent and may be
sold by the corporation at a delinquent sale
 notice of sale and copy of resolution must be given to all
delinquent SHs
 publication at least 2 weeks prior to sale
 lacking any of these requirements, delinquent sale would
be VOIDABLE at the instance of the delinquent SH within
6 months from the sale and tenders payment to the
purchaser
  if corporation acquires delinquent shares, they become
treasury shares which may be disposed of by the corporation
at such reasonable price as the board may fix
2. court action
— Under 70: nothing in the Code prevents the corporation from collecting
by action in a court the amount due on any unpaid subscription with
accrued interest, costs, and expenses
— If corporation chooses to sue in court, a valid call would still be a
requisite to liability (Da Silva v Aboitiz)…
— …unless the corporation becomes insolvent—all unpaid subscriptions
become payable and are immediately recoverable in a court action by
the assignee in insolvency for the benefit of the creditors (Velasco v
Poizat)
Velasco v Poizat. F: Velasco is the assignee in the insolvency of Philippine
Chemical Product Company and is seeking to recover from Jean Poizat the
unpaid subscription made by him to the stock of the corporation.
Poizat, one of the incorporators and once the treasurer and manager of the
corporation, subscribed for 20 shares and paid in the par value of 5 shares
(P500).
While in this capacity he called in and collected all subscriptions except 15
shares subscribed by him and another 15 by Jose Infante.
2 resolutions were adopted by the board: (1) proposal that the directors or
SHs make good by new subscription the 15 shares w/h had been
surrendered by Infante, and that the latter would be released from his
obligation to the corporation; (2) as to Poizat, who was absent, he should be
required to pay the amount of his subscription upon the 15 shares he owes
to the corporation. Poizat, in a letter states that he was also to be relieved
from his subscription, and that he prefers “to lose the whole of the 25%
rather than continue investing more money in a… ruinous proposition.”
Soon the company became insolvent, and Velasco as assignee sues Poizat
for his unpaid subscription.
H: Poizat is still liable on his subscription. A stock subscription is a contract
between the corporation on one side, and the subscriber on the other. It is a
rule that a subscription for shares of stock does not require an express
promise to pay the amount subscribed, as the law implies a promise to pay
on the part of the subscriber. A stock subscription is a subsisting liability
from the time the subscription is made, since it requires the subscriber to
pay interest quarterly from that date unless he is relieved from such liability
by the by-laws.
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There are two (2) remedies for the enforcement of stock subscriptions:
(1) the first is a special remedy which consists in permitting the
corporation to put up the unpaid stock for sale, and is merely a remedy in
addition to that which proceeds by action in court; (2) the other is an
action in court, which exists even though no mention thereof is made in
statute.
Under the Insolvency Law, the assignee of the insolvent corporation
succeeds to all the corporate rights of action vested in the corporation
prior to its insolvency, and the assignee therefore has the same freedom
with respect to suing upon a stock subscription as directors themselves
would have had under Sec 49 above cited.
Another reason: When insolvency supervenes upon a corporation and the
court assumes jurisdiction to wind it up, all unpaid stock subscriptions
become payable on demand, and are at once recoverable in an action
instituted by the assignee in court.
It evidently cannot be permitted that a subscriber should escape from his
lawful obligation by reason of the failure of officers to perform their duty
in making the call; and when the original mode of making the call
becomes impracticable, the obligation must be treated as due upon
demand.
As to the Infante release, it is not prejudicial to the right of the
corporation or its assignee to recover from Poizat, although in releasing
Infante, the board overstepped its bounds and should still be liable on
shares that were not taken up and paid for by the corporation.
— Poizat continued to be liable on his subscription
— When insolvency supervenes and court assumes jurisdction to wind
up, unpaid stock subscriptions become payable on demand and are
at once recoverable in an action by the assignee in insolvency
Lingayen Gulf Electric v Baltazar. F: Baltazar subscribed for 600
shares (P100 par value) of Lingayen Gulf and paid P15000, plus another
payment leaving a balance of P18500 unpaid.
In a SH meeting it was agreed to call the balance of all unpaid
subscribed capital stock, the first 50% payable within 60 days, remaining
50% payable within 60 days hence. All unpaid subscription after due
dates of both calls would be subject to 12% interest. All remaining unpaid
shares would revert to the corporation.
Baltazar offered to withdraw completely from the corporation by selling
out all his shares of stock. Another resolution (No. 17) was adopted
rescinding the previous resolution because the corporation was not in a
financial position to absorb the unpaid balance of the subscribed capital
stock. Yet another resolution (No. 4) was adopted to revalue the stock and
assets of the corporation to attract outside investors.
Although Baltazar was informed of the demand for payment the call however
was not published in a newspaper of general circulation. Another demand
was made upon Baltazar, who ignores the same upon the grounds that 1.
action is premature because there was no valid call, and 2. granting there
was a valid call, he was released from liability thru SH Res. Nos. 17 and 4. .
The corporation sues. TC rules ifo Baltazar, holding that the resolution was
null and void for lack of publication.
H: TC was correct that the law requires that notice of any call for the
payment of unpaid subscription should be made not only personally but also
by publication. The publication requirement is mandatory, and the reason is
because it is not only to assure notice to all subscribers, but also to assure
equality and uniformity in the assessment on SHs. Not only must personal
notice be given in one of these matters, but the notice must also be
published once a week, for 4 consecutive weeks in some newspapers.
The court reiterated the ruling in Velasco v Poizat, where the corporation
involved was insolvent, in which case all unpaid stock subscriptions become
payable on demand and are immediately recoverable in an action instituted
by the assignee. But when the corporation is a solvent concern, the
rule is that the suit demanding for payment of unpaid subscriptions must be
preceded by a call or assessment against the subscribers, and only then will
there be a right of action.
As to claim of Baltazar that Resolution 17 released him from obligation to
pay, in order to effect the release, there must be unanimous consent of the
SHs (here, 7 SHs were absent when said Res was made) . The GR is that a
valid and binding subscription cannot be cancelled so as to release the
subscriber from liability thereon without the consent of all the SHs.
Furthermore, a subscription cannot be cancelled by the company, even
under a secret or collateral agreement for cancellation made with the
subscriber at the time of the subscription, as against persons who
subsequently suebscribed or purchased without notice of such agreement.
Exceptions: pursuant to a bona fide compromise, or to set off a debt due
from the corporation, a release, supported by consideration, will be effectual
as against dissenting SHs and subsequent and existing creditors. A release
which might originally have been held invalid may be sustained after a
considerable lapse of time. In the present case, the release claimed by the
Baltazar does not fall under the exceptions referred to, because it was not
given pursuant to a bona fide compromise or to set off a debt due from the
corporation and there was no consideration for it.
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(held: not indivisible)
— Reason for mandatory provision that call should be strictly complied
with: to assure notice to all subscribers, and to assure equality and
uniformity in the assessment on SHs
— A contract of subscription is at least in the sense that it creates an
estoppel, a contract among the several subscribers, and thus none of
the subscribers can withdraw from the contract without the consent
of the rest and thereby diminish the common fund which all have an
interest in
— Notice for call of payment for unpaid subscriptions must be
published, except when the corporation is insolvent—payment is
immediately demandable
— GR: A valid and binding subscription for stock of a corporation cannot
be cancelled so as to release the subscriber from liability thereon,
without the consent of all the SHs
— Exceptions in Lingayen really do not constitute a gratuitous release
since a valuable consideration is actually received by the corporation
such as the cancellation of corporate debt
Da Silva v Aboitiz & Co Inc. F: Da Silva subscribes for 650 shares (par
value of P500) of Aboitiz. He pays only for 200 shares, as there are
remaining 450 shares unpaid (P225,000). Thru a Res., the board
declared and informed all subscribers and SHs that all shares unpaid by
31 May shall be declared delinquent and to be sold at a delinquency sale
on the following June 16. Ad was published as announced in the notice.
Da Silva sued Aboitiz Co., contending that in prescribing another method
for payment of subscription different from that in the by-laws, the
corporation had exceeded its authority. He claims that in Art 46 of the by-
laws, all shares subscribed shall be paid out of the 70% of the profit
obtained, to be distributed among the subscribers and said Res., violates
the said by-law.
I: W/N under the by-laws the corporation may declare the unpaid shares
delinquent or collect their value through another method.
H: YES> The by-law also authorizes and empowers the board to
collect the value of the shares subscribed and unpaid by deducting from
the 70%, distributable in equal parts among the SHs, to be applied on the
payment of the shares. It also authorizes the creation of a special
emergency fund, applying the 70% of the profit on the payment of shares
not fully paid. Thus it is discretionary on the corporation to do whatever is
provided in the said article relative to the application of a part of the 70%
of the profit distributable. It also shows that it is the board and not he
delinquent subscriber that may and must judge and decide whether or not
such value must be paid out of the 70% of the profit. It lies therefore, within
the discretion of the board to make use of such authority.
If the board opts not the make use of such authority, it has two other
remedies to accomplish the same purpose, as declared by the Court in
Velasco v Poizat: (1) put up the unpaid stock for sale; or (2) direct action in
court. In this case the board elected to avail of the first remedy, and
complying strictly with the requirements of law, the directors made use of
the discretionary power granted by the law and declared that the payment
of the subscription to 450 unpaid shares was due and demandable, and that
said shares were delinquent.
— The Board has absolute discretion to choose which remedy it deems
proper in order to collect the unpaid subscriptions
— Two other remedies: delinquency sale and action in court
National Exchange v Dexter. F: IB Dexter subscribed to 300 shares of CS
Salmon & Co., which shall be “payable from the first dividends declared on
any and all shares of said company owned by me at the time dividends are
declared, until full amount of subscription has been paid.” The subscription
was initially paid P15,000, from a dividend declared by the company,
supplemented by Dexter’s own money.
Dexter incurs a balance of P15000 (par value of 150 shares) still unpaid on
his subscription. The assignee of Salmon, National Exchange Co, sues
Dexter to recover the balance. TC ruled ifo National Exchange.
I: w/n the subscription is payable from the first dividends declared has the
effect of relieving the subscriber from personal liability in an action to
recover the balance
H: Of course not. A corporation has the power to accept subscriptions upon
any special terms not prohibited or contrary to law or public policy, provided
it does not require the performance of corporate acts beyond the powers
conferred, and do not constitute a fraud upon other subscribers, SHs, or
creditors. If it is unlawful to issue stock otherwise than as stated it is self-
evident that a stipulation in a stock subscription that obligates the
subscriber to pay nothing for the shares except as dividends may accrue
upon the stock is illegal. This is discriminatory ifo the subscriber, to the
detriment of the others. Nor has a corporation the power to receive a
subscription such terms as will operate as a fraud upon the other
subscribers or SHs by subjecting them to lighter burdens, or by giving
greater rights and privileges, or as a fraud upon creditors. As a general rule,
an agreement between a corporation and a subscriber, by which the
subscription is not he be payable, or is to be payable in part only… is illegal
and void as in fraud of creditors or other SHs.
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Campos: …Besides assuring equality among SH, the law seeks to protect
corporate creditors. Making payment of subscription dependent on the
existience of profits or dividends would be contrary to the policy behind
the law.
Lumanlan v Cura. F: Lumanlan subscribed for 300 shares (par value
P50) of Dizon & Co., paying only P1500 of the P15000 par value of the
shares. Creditors sued the company, and prayed for a receiver as it
appears that the corporation had no assets except credits against those
who had subscribed for shares of stock.
Tayag was appointed receiver for the purpose of collecting the unpaid
subscriptions. Tayag sues Lumanlan for the unpaid shares. TC orders
Lumanlan to pay the corporation (plus interest). Pending Lumanlan’s
appeal, he agreed to assume the obligation of the corporation to
Valenzuela (P8,000), and that if he withdraws his appeal, the corporation
would collect only 50% of the amount subscribed by him. Lumanlan then
paid Valenzuela and was subrogated in place of Valenzuela (P11,840 incl.
interest).
Disregarding the agreement and notwithstanding payment made to
Valenzuela, the corporation asked for the execution of the judgment in
the previous suit and his properties in Tarlac were levied upon. BPI as
creditor of the corporation intervenes as the assignee in the insolvency
case of the corporation.
H: As it is evident that there are other creditors of the corporation, the
corporation has a right to collect all unpaid stock subscriptions and any
other amounts due it. Subscriptions to the capital of the corporation
constitute a fund to which creditors have a right to look for the
satisfaction of their claims and that the assignee in insolvency can
maintain an action upon any unpaid stock subscription. A stock
subscription is an existing liability from the time subscription is made.
Thus the TC ruling is modified and that the corporation is ordered to
credit Lumanlan P13840 against the judgment previous (P15109), and to
issue to Lumanlan 300 shares of its capital stock upon payment of the
difference of the amount (P1269).
Effect of Delinquency
— Effects of delinquency: (Sec 71)
o Cannot be vote for or be entitled to vote or to representation at
any SH meeting
o Holder not entitled to any rights of a SH
 Except right to dividends (restricted by law)
 Cash dividends would first be applied to the unpaid
 balance
 Stock dividends are withheld until payment of unpaid
balance
o Not entitled to notice of any of the meetings
o Shares not included in the determination of a quorum
— 43: Once stocks become delinquent due to nonpayment, the holder
loses all his rights as SH except only the right to dividends, which will
not be paid to him but will be applied to the unpaid balance of his
subscription plus costs and expenses
o SH cannot vote at the election or at any meeting on any matter
o SH cannot even be counted as part of the quorum
o SH cannot be vote for as director
Rights and Obligations of holders of Unpaid, but Non-delinquent
Stock
— Enjoy all privileges of a SH:
o the right to vote
o the right to receive dividends
o But liable to pay interest if in by-laws
 Interest is not due unless by-laws provide so
 By-laws provide for interest but silent as to rate: legal
interest applies
o But SH cannot register shares transferred
 Although valid between the parties, it cannot affect the
corporation
 But corporation can allow registration, but it cannot issue a
stock certificate until it is fully paid
Fua Cun v Summers. F: Chua Soco subscribed for 500 shares (P100 par) of
China Banking Corporation, paying ½ and leaving a balance of P25,000.
He issued a PN ifo Fua Cun for the balance, securing the note with a CM on
the shares of stock, and endorsing the receipt of the stock purchase). Chua
Soco was also indebted to China Bank (P37,731.68), and upon default his
interest in the 500 shareas was attached and the receipt seized by the
sheriff. The attachment was levied after the bank knew of the fact that the
receipt had been endorsed to Fua Cun.
Fua Cun then sued, contending that by virtue of payment of ½ the
subscription price of the shares, Chua Soco in effect became the owner of
250 shares and sought to have his lien on the shares be declared to hold
priority over the claim of the bank. China Bank argued that the interest of
Chua Soco was merely an equity which cannot be made the subject of a CM.
TC ruled ifo Fua Cun.
H: TC erred in holding that Chua Soco became owner of 250 shares. Fua
8
Cun’s rights consist in an equity of 500 shares and upon payment of the
unpaid portion, he becomes entitled to the issuance of the certificate for
500 shares in his favor.
As to the CM, the CM would not prevail over liens of third persons without
notice; an equity in shares is of such an intangible character that is
somewhat difficult to see how it can be treated as chattel and mortgaged
in the same manner that the recording of the same will furnish
constructive notice to third parties.
There can be no doubt that an equity in shares of stock may be assigned
and that the assignment is valid as between the parties and as to person
to whom notice is brought home. Such an assignment exists here, though
it was made for the purpose of securing a debt. As against the rights of
fua cun, the bank had no lien unless by virtue of the attachment, but the
attachment was levied after the bank had received notice of the
assignment of Chua Soco’s interest to fua Cun and was therefore subject
to the rights of the latter.
Baltazar v Lingayen Gulf Electric. F: Baltazar and Rose were
incorporators of the Lingayen Gulf Electric Power Co. and subscribed to:
Baltazar = 600 shares (paid 535 shares – after transfers, owned 341
shares w/ cert. plus 65 shares w/o certificate)
Rose = 400 shares (paid 375 shares w/ certs)
 leaving unpaid a certain portion thereof. It is the company practice to
issue certificates of stock to its individual subscribers for unpaid shares of
stock. Defendants Ungson et al are small SHs ( <100 shares) of the
corporation, and are the majority of the board. Co-defendant Acena is the
largest single SH with 600 shares and was responsible for election to the
board of two of the 4 majority board members (Ungson Group). Baltazar
was responsible for the election of the other 2 (Baltazar Group).
Ungson Group which controlled the corporation passed 3 resolutions
which threatened to expel the plaintiffs and prevent them from exercising
their voting rights: (1) declaring watered stocks issued to Acena,
Baltazar, Rose and Jubenville of no value and cancelled the same; (2) all
unpaid subscriptions to bear interest, and all payments to be credited to
interest first, capital debt second, and ; (3) all stock declared delinquent
on the accrued interest are incapacitated to avail of voting power.
Baltazar and Rose sought to allow them to vote their fully paid-up shares
and to declare the resolutions invalid. A compromise deal was executed,
but enforcement by the TC was enjoined by the Ungon Group and asked
for amendment. TC amended but was opposed by Baltazar. The Court
then reversed the amending decision, ruling that all shares of the capital
stock of the corporation covered by fully paid shares are entitled to vote
in all meetings.
Baltazar claims that once a SH has subscribed to a certain number of
shares, although he has made partial payments, but is issued a certificate amount of subscription. No certificate of stock was issued.
for the paid-up shares, he is entitled to vote the whole number of shares --Po sold to Nava 20 of the shares. In the deed of sale Po represented that
subscribed, whether paid or not. The corporation counters that under the he was the absolute and registered owner of the 20 shares sold.
doctrine in the Fua Cun case, a partial payment of a subscription does not -- Nava requested the corporation to register the sale, but was denied
entitle the SH to a certificate for the total number of shares subscribed by because Po had not fully paid the amount of subscription. (was informed
him, and his right consists only in equity to a certificate of the total number that Po was delinquent in payment of his subscription and that corp had
the claim to his entire subscription ofDock-Hop:
80 shares).the transferee of watered stock who
of shares subscribed for, upon payment of the remaining portion of the Nava filed a mandamus
takes itthe in ignorance of its real character cannot
subscription price. action to compel the corporation to register shares in the books. TC
be compelled, even at a suit of the creditor, to
dismissed petition.
pay anything more upon it…
I: W/N a SH with a balance of unpaid shares subscribed is entitled to vote the --Nava contends the ruling in Fua Cun is not applicable in affirming
corporation’s refusal to register in theHolder
booksinthe GFsale to him of 20 shares.
latter
Transferee steps in the shoes whichof the transferor as
Nava relies on the ruling in Baltazar v Lingayen Gulf Electric, held
to benefits, but not to liability
H: YES> The present case does not come under the principle in Fua Cun that the corpo law requires as a condition before a SH can vote his shares
Creditors
case of clam that the but
alleged SHs have shares,
because it was the practice of the company since its inception, to issue that his full subscription be paid in the no par stock; in par
issued as fully paid, but were issued for property
certificates of stock even for unpaid shares and gave voting power to stocks value stocks, the SH can vote his shares fully paid by him, only,
irrespective of the unpaid delinquentnot equal in value to the par value; property was
fully paid. The present law requires as a condition before a SH can vote that shares.
overvalued
his full subscription be paid in the case of no par value shares, and with
2 contracts
to enterare involved:
respect to par value shares, the SH can vote the shares full paid, irrespective I: W/N the corporation can be compelled in its books the sale
corporation-transferor
of the unpaid delinquent shares. A corporation may now, in the absence of made by Po to Nava of 20 shares
transferor-transferee
provisions in their by-laws to the contrary, apply payments made by
transferees not liable to corporation if in GF
subscribers either as full payment for the corresponding number of stock or H: NO>> The Nava transfer is not the alienation sale or transfer of
Lingayen Gulf: I cannot dispose of any
as payment pro-rata to each and all the entire number of shares subscribed. stock contemplated in the old Law. As a rule, shares which may be
unsubscribed shares if I still have unpaid shares
In this case, corporation chose to apply payments by the SHs to definite alienated are those which are covered by certificates of stock.
There would bebe a rescission similar to Bayla…
shares of stock and had full paid-up shares certificates for the payments. Its As prescribed in the corpo law, shares of stock may transferred by
Dexter & Aboitiz: no guaranteed profits in any
call for payments of unpaid subscription and its declaration of delinquency delivery to the transferee of the certificate properly indorsed. However,
business!
only affecting the remaining number of shares. that cannot be followed in the instant case because the 20 shares are not
Dexter:
name.payment of subscriptions
covered by any stock certificate in Po’s Moreover, a corporation came from
dividends
Here the corporation applied the payments made to the full par value of has a claim on the said shares for the unpaid balance of the subscription.
Aboitiz: payment of subscription came from a
shares subscribed, instead of the accrued interest. This being the case, the A stock subscription is a subsisting liability from the time the subscription
fund
application of payments must be deemed to have been agreed upon by the is made. The subscriber is as much bound to pay his subscription as he
would be to pay any other debt. The Is thisofviolative of the principle that SHs only have
corporation and the SHs and cannot now be changed without the consent of right the corporation to demand
an inchoate rightrelease
over corporate property?
the SHs concerned. It would therefore result that a corporation may, upon payment is no less contestable. A corporation cannot an original
Cannot negate obligation of subscriber to pay for
the request of an interested SH, apply payments by them to the full par subscriber from paying for his shares without valuable consideration,
his unpaid subscription
value of subscribed capital stock. without the unanimous consent of the SHs.
It should be unconditional…
… ofunless there are unrestricted retained earnings
— Since it was the practice of the corporation to issue stock certificates to There is no clear duty here on the part the officers of Peers to register
the payment comes out of his pocket!
not fully paid subscribers, it may not take away the right to vote granted the 20 shares in Nava’s name. The court also ruled that there is no
SHs/subscriber is NOT a creditor!
by the certificate parallelism between Nava and the Baltazar case. In the latter, the SH-
GR: cannot piecemeal assign rights to the shares,
— Stock certificates may be issued for less than the number of shares incorporator was the holder of a stock certificate, and the issue was
if subscription
although not the paid in full had
subscribed for whether the said shares had voting rights incorporator
not fully paid the subscription, which SHs asthe
a whole
o Provided the par value of each represented by the certificate has is not issuebenefits
in this case. There is
Corporation and creditors also benefit…
been paid no stock certificate issued to Po, and without it—which is the evidence of
… but rights of creditor conditioned
o And it is not prohibited by the by-laws ownership of the stock—the assignment of corporate shares is effective upon solvency
of corporation
only between the parties to the transaction. The delivery of the stock
Secof 43both
allows
theunpaid subscriptions
Nava v Peers Marketing Corp. F: --Po was an incorporator of Peers certificate is essential for the protection corporation and its to be paid out
of dividends
Marketing and subscribed to 80 shares (P100 p.v.) paying 25% of the SHs.
Exceptions: delinquent shares; cannot pay out as
9 stock/property dividends
Fua Cun and Nava: indivisibility of shares
Payments applied to all shares covered by the
subscription
Fua Cun: contract of subscription is indivisible, but
 o Convenient for purposes of transfer by way of collateral or
absolute sale
— Fua Cun, Lingayen Gulf and Nava cases were all decided before the Code  But SH not entitled to certificate until he has fully paid
— Fua Cun: a contract of subscription is INDIVISIBLE, unless the contrary is the subscription
provided o Certifies that the person named is a holder or owner of the stated
o Partial payment DOES NOT entitle the SH to the issuance of a number of shares in the corporation
certificate covering shares corresponding to the amount paid  Indicates the kind of shares issued to him, date of
o Payment is in effect PRO-RATED among all the shares, so that no one issuance and par value or no par value of the shares
share is fully paid  Signed by the proper officers of the corporation and bears
— Lingayen Gulf: shares may be deemed fully paid for the amount paid the corporation seal
that corresponds thereto o Should not be issued for more than the number of shares
o It was the practice of the corporation in Lingayen to issue authorized by the AOI
certificates for stocks it considered to be fully paid, although the  Any stock certificate which represents an over-issue of
subscription has not been paid shares would be void and no rights or liabilities can arise
— SEC: in interpreting the two cases, a corporation has two (2) alternatives therefrom in favor of or against holders thereof
in applying payment for subscriptions:  Bona fide purchasers would only have the right to
o Either apply the amount paid as full payment for the corresponding damages for misrepresentation against the corporate but
shares, (Lingayen) or… cannot acquire the rights of SHs
 Certificate of stock would then be issued o Not a negotiable instrument (De Los Santos v Atty General
o … as payment pro-rata on each of the entire number of shares supra)…
Money or property rights
subscribed for (Fua Cun and Nava) o … but quasi-negotiable; endorsement and delivery of certificate
Ownership/title
 no certificate of stock may be issued until the subscription is may be for any of three purposes:
Use
full paid Proper sale andbut
 valuation, assignment
subject toofSHshares
approval and SEC
— 64: no corporation can issue a certificate of stock until the subscriber  to
approval pursuant to awatered
eliminate trust orstock
nominee agreement
has paid his subscription in full  pledge or
Who determines encumbrance
if money of the
or property shareas
dividends
o applies to par and no-par shares Sale ofofshares,
o Default unpaideven with endorsement
subscribers? Liability ofand delivery of the
corporation
o Lingayen gulf case no longer applies certificates,
and shall notas
other subscribers bewell
valid, except as between the parties,
o Speaks of only of subscription until it is entered
Beneficiaries and noted corporation,
of subscription: in the books SHs,
and the sale is not
creditors
absolutely
I pay void due: I am not a creditor/debtor
subscription
Issuance of Certificate — 63:Inevery
no way SHwill
hasmy
a right
rightstobe
demand the issuance of a proper
impaired
certificate when requirements of 64 have been complied with
Limited liability
— Under 63: capital shall be divided into shares for which certificates — Remedies available can
Stock certificate; to a be
SHdisposed/transferred
for wrongful non-issuance
(cf by the
signed by the Pres or VP, countersigned by the Secretary, sealed with corporation:
Fleischer)
the seal of the corporation Suit to
o Right fordividends
specific performance
— Under 64: no certificate of stock shall be issued until the full amount + o AllAlternative
these are relief by wayby
not enjoyed of subscriber
damages NOT paid fully
interest has been paid Petition
o Partial for mandamus
payment: cannot getto compel the
any part ofissuance
shares
o But an unpaid subscription NOT declared delinquent can be voted Delinquency sale: all of the subscriptions
upon in meetings and are entitled to collect dividends Loss orWhat shouldCertificate
Destroyed be bought? Only what is due.
— Issuance is not necessary to constitute the subscriber of shares as a SH Purchaser would appear to have bought at a discount
of the corporation Sec 73Delinquent party gets a free ride…
o But delivery is an essential element of the issuance itself (an … but in reality, it never really happens that way!
endorsement for negotiability) Inimical effects of non-paying subscriber:
— Nature of certificate: suspension of voting and economic rights
o The best evidence of the acquisition of rights and status of a SH, but Danger that he loses everything
NOT required for rights to vest No bidder: shares go back to corporation
No incentive for corporation in delinquency sale
10 Sec 73: obscure provision
Holding period
Benefits stems from issuance of stock certificate; can
assert ownership rights
 Property Cash
Valuation Yes No need
Payment In full Partial; installment
Warranties Yes None
Subject to dispute Yes No
Necessary/essential to Yes No necessary
business
Registration of Ownership of shares
property in corporate
name

Delinquency sale : covers unpaid subscription; seeking for the delinquent SH

to cough up the balance.

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