1

Section 6. Classification of shares. The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided, further, That there shall always be a class or series of shares which have complete voting rights !ny or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no"par value shares of stock Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of li#uidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated par value The board of directors, where authori$ed in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be effective upon the filing of a certificate thereof with the %ecurities and &xchange Commission %hares of capital stock issued without par value shall be deemed fully paid and non"assessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided' That shares without par value may not be issued for a consideration less than the value of five (P) **+ pesos per share: Provided, further, That the entire consideration received by the corporation for its no"par value shares shall be treated as capital and shall not be available for distribution as dividends ! corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal re#uirements &xcept as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be e#ual in all respects to every other share ,here the articles of incorporation provide for non"voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters: - !mendment of the articles of incorporation' . !doption and amendment of by"laws' / %ale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property' 0 1ncurring, creating or increasing bonded indebtedness' ) 1ncrease or decrease of capital stock' 2 3erger or consolidation of the corporation with another corporation or other corporations' 4 1nvestment of corporate funds in another corporation or business in accordance with this Code' and 5 6issolution of the corporation &xcept as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights ()a+ Section 7. Founders shares. 7ounders8 shares classified as such in the articles of incorporation may be given certain rights and privileges not en9oyed by the owners of other stocks, provided that where the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited period not to exceed five ()+ years sub9ect to the approval of the %ecurities and &xchange Commission The five"year period shall commence from the date of the aforesaid approval by the %ecurities and &xchange Commission (n+ Section 8. Redeemable shares. :edeemable shares may be issued by the corporation when expressly so provided in the articles of incorporation They may be purchased or taken up by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation, and upon such other terms and conditions as may be stated in the articles of incorporation, which terms and conditions must also be stated in the certificate of stock representing said shares (n+ Section 9. Treasury shares. Treasury shares are shares of stock which have been issued and fully paid for, but subse#uently reac#uired by the issuing corporation by purchase, redemption, donation or through some other lawful means %uch shares may again be disposed of for a reasonable price fixed by the board of directors (n+

FIRST DIVISION [G.R. No. 51765. March 3, 1997] REPUBLIC PLANTERS BANK, petitioner, vs. !N. ENRI"UE A. AGANA, SR., a# Pr$#%&%'( )*&($, Co*r+ o, -%r#+ I'#+a'c$ o, R%.a/, Bra'ch 001III, Pa#a2 C%+2, R!BES3-RANCISC! REALT4 5 6E1EL!PMENT C!RP!RATI!N a'& A6ALIA -. R!BES, respondents. 6ECISI!N

2
ERM!SISIMA, )R., J.7 This is a petition for certiorari seeking the annulment of the Decision[1] of the then ourt of First Instance of Ri!al[2] for ha"ing #een ren$ere$ in gra"e a#use of $iscretion% &ri"ate respon$ents Ro#es'Francisco Realt( an$ De"elopment orporation )hereafter* +the orporation+, an$ -$alia F% Ro#es file$ in the court a quo* an action for specific performance to compel petitioner to re$eem .// preferre$ shares of stock 0ith a face "alue of &.*///%// an$ to pa( 11 2uarterl( interest thereon as 2uarterl( $i"i$en$ o0ing them un$er the terms an$ con$itions of the certificates of stock% The court a quo ren$ere$ 3u$gment in fa"or of pri"ate respon$ents4 hence* this instant petition% 5erein parties $e#ate onl( legal issues* no issues of fact ha"ing #een raise$ #( them in the court a quo% For rea$( reference* ho0e"er* the follo0ing narration of pertinent transactions an$ e"ents is in or$er6 On Septem#er 1.* 1781* pri"ate respon$ent orporation secure$ a loan from petitioner in the amount of &12/*///%//% -s part of the procee$s of the loan* preferre$ shares of stocks 0ere issue$ to pri"ate respon$ent orporation* through its officers then* pri"ate respon$ent -$alia F% Ro#es an$ one arlos F% Ro#es% In other 0or$s* instea$ of gi"ing the legal ten$er totaling to the full amount of the loan* 0hich is &12/*///%//* petitioner lent such amount partiall( in the form of mone( an$ partiall( in the form of stock certificates num#ere$ 92/: an$ 92/;* each for :// shares 0ith a par "alue of &1/%// per share* or for &:*///%// each* for a total of &.*///%//% Sai$ stock certificates 0ere in the name of pri"ate respon$ent -$alia F% Ro#es an$ arlos F% Ro#es* 0ho su#se2uentl(* ho0e"er* en$orse$ his shares in fa"or of -$alia F% Ro#es% Sai$ certificates of stock #ear the follo0ing terms an$ con$itions6 +The &referre$ Stock shall ha"e the follo0ing rights* preferences* 2ualifications an$ limitations* to 0it6 1% Of the right to recei"e a 2uarterl( $i"i$en$ of One &er entum )11,* cumulati"e an$ participating% <<< 2% That such preferre$ shares ma( #e re$eeme$* #( the s(stem of $ra0ing lots* at an( time after t0o )2, (ears from the $ate of issue at the option of the orporation% < < <%+ On =anuar( 91* 17>7* pri"ate respon$ents procee$e$ against petitioner an$ file$ a omplaint anchore$ on pri"ate respon$ents? allege$ rights to collect $i"i$en$s un$er the preferre$ shares in 2uestion an$ to ha"e petitioner re$eem the same un$er the terms an$ con$itions of the stock certificates% &ri"ate respon$ents attache$ to their complaint* a letter'$eman$ $ate$ =anuar( ;* 17>7 0hich* significantl(* 0as not formall( offere$ in e"i$ence% &etitioner file$ a @otion to Dismiss[9] pri"ate respon$ents? omplaint on the follo0ing groun$s6 )1, that the trial court ha$ no 3uris$iction o"er the su#3ect'matter of the action4 )2, that the action 0as unenforcea#le un$er su#stanti"e la04 an$ )9, that the action 0as #arre$ #( the statute of limitations an$Aor laches% &etitioner?s @otion to Dismiss 0as $enie$ #( the trial court in an Or$er $ate$ @arch 18* 17>7% [:] &etitioner then file$ its -ns0er on @a( 2* 17>7%[;] Thereafter* the trial court ga"e the parties ten )1/, $a(s from =ul( 9/* 17>7 to su#mit their respecti"e memoran$a after the su#mission of 0hich the case 0oul$ #e $eeme$ su#mitte$ for resolution%[8] On Septem#er >* 17>7* the trial court ren$ere$ the herein assaile$ $ecision in fa"or of pri"ate respon$ents% In or$ering petitioner to pa( pri"ate respon$ents the face "alue of the stock certificates as re$emption price* plus 11 2uarterl( interest thereon until full pa(ment* the trial court rule$6 +There #eing no issue of fact raise$ #( either of the parties 0ho file$ their respecti"e memoran$a $elineating their respecti"e contentions* a 3u$gment on the plea$ings* conforma#l( 0ith an earlier or$er of the ourt* appears to #e in or$er% From a further perusal of the plea$ings* it appears that the pro"ision of the stock certificates in 2uestion to the effect that the plaintiffs shall ha"e the right to recei"e a 2uarterl( $i"i$en$ of One &er entum )11,* cumulati"e an$ participating* clearl( an$ une2ui"oca#l( [sic] in$icates that the same are ?interest #earing stocks? 0hich are stocks issue$ #( a corporation un$er an agreement to pa( a certain rate of interest thereon ); Thompson* Sec% 9:97,% -s such* plaintiffs #ecome entitle$ to the pa(ment thereof as a matter of right 0ithout necessit( of a prior $eclaration of $i"i$en$% On the 2uestion of the re$emption #( the $efen$ant of sai$ preferre$ shares of stock* the "er( 0or$ings of the terms an$ con$itions in sai$ stock certificates clearl( allo0s the same% To allo0 the herein $efen$ant not to re$eem sai$ preferre$ shares of stock an$Aor pa( the interest $ue thereon $espite the clear import of sai$ pro"isions #( the mere in"ocation of allege$ entral Bank irculars prohi#iting the same is tantamount to an impairment of the o#ligation of contracts enshrine$ in no less than the fun$amental la0 itself% @oreo"er* the herein $efen$ant is consi$ere$ in estoppel from taking shelter #ehin$ a Ceneral Banking -ct pro"ision to the effect that it cannot #u( its o0n shares of stocks consi$ering that the "er( terms an$ con$itions in sai$ stock certificates allo0ing their re$emption are its o0n han$i0ork% -s to the claim #( the $efen$ant that plaintiffs? cause of action is #arre$ #( prescription* suffice it to state that the running of the prescripti"e perio$ 0as consi$ere$ interrupte$ #( the 0ritten e<tra3u$icial $eman$s ma$e #( the plaintiffs from the $efen$ant%+[>] -ggrie"e$ #( the $ecision of the trial court* petitioner ele"ate$ the case #efore us essentiall( on pure 2uestions of la0% &etitioner?s statement of the issues that it su#mits for us to a$3u$icate upon* is as follo0s6 +-% RDS&ONDDNT =EDCD O@@ITTDD - CR-VD -BESD OF DIS RDTION -@OENTINC TO F- G OR DH DSS OF =ERISDI TION IN ORDDRINC &DTITIONDR TO &-I RDS&ONDDNT -D-FI- F% ROBDS T5D -@OENT OF &.*219%87 -S INTDRDSTS FRO@ 1781 To 17>7 ON 5DR &RDFDRRDD S5-RDS%

9
B% RDS&ONDDNT =EDCD O@@ITTDD - CR-VD -BESD OF DIS RDTION -@OENTINC TO F- G OR DH DSS OF =ERISDI TION IN ORDDRINC &DTITIONDR TO RDDDD@ RDS&ONDDNT -D-FI- F% ROBDS? &RDFDRRDD S5-RDS FOR &.*///%// RDS&ONDDNT =EDCD O@@ITTDD - CR-VD -BESD OF DIS RDTION -@OENTINC TO F- G OR DH DSS OF =ERISDI TION IN DISRDC-RDINC T5D ORDDR OF T5D DNTR-F B-NG TO &DTITIONDR TO DDSIST FRO@ RDDDD@INC ITS &RDFDRRDD S5-RDS -ND FRO@ &-IINC DIVIDDNDS T5DRDON < < <% T5D TRI-F OERT DRRDD IN NOT 5OFDINC T5-T T5D O@&F-INT DODS NOT ST-TD - -ESD OF - TION% T5D TRI-F OERT DRRDD IN NOT 5OFDINC T5-T T5D F-I@ OF RDS&ONDDNT -D-FI- F% ROBDS IS B-RRDD BI &RDS RI&TION OR F- 5DS%+[.]

D%

D%

The petition is meritorious% Before passing upon the merits of this petition* it ma( #e pertinent to pro"i$e an o"er"ie0 on the nature of preferre$ shares an$ the re$emption thereof* consi$ering that these issues lie at the heart of the $ispute% - preferre$ share of stock* on one han$* is one 0hich entitles the hol$er thereof to certain preferences o"er the hol$ers of common stock% The preferences are $esigne$ to in$uce persons to su#scri#e for shares of a corporation% [7] &referre$ shares take a multiplicit( of forms% The most common forms ma( #e classifie$ into t0o6 )1, preferre$ shares as to assets4 an$ )2, preferre$ shares as to $i"i$en$s% The former is a share 0hich gi"es the hol$er thereof preference in the $istri#ution of the assets of the corporation in case of li2ui$ation4[1/] the latter is a share the hol$er of 0hich is entitle$ to recei"e $i"i$en$s on sai$ share to the e<tent agree$ upon #efore an( $i"i$en$s at all are pai$ to the hol$ers of common stock%[11] There is no guarant(* ho0e"er* that the share 0ill recei"e an( $i"i$en$s% En$er the ol$ orporation Fa0 in force at the time the contract #et0een the petitioner an$ the pri"ate respon$ents 0as entere$ into* it 0as pro"i$e$ that +no corporation shall make or $eclare an( $i"i$en$ e<cept from the surplus profits arising from its #usiness* or $istri#ute its capital stock or propert( other than actual profits among its mem#ers or stockhol$ers until after the pa(ment of its $e#ts an$ the termination of its e<istence #( limitation or la0ful $issolution%+ [12] Similarl(* the present orporation o$e[19] pro"i$es that the #oar$ of $irectors of a stock corporation ma( $eclare $i"i$en$s onl( out of unrestricte$ retaine$ earnings% [1:] The o$e* in Section :9* a$opting the change ma$e in accounting terminolog(* su#stitute$ the phrase unrestricte$ retaine$ earnings*+ 0hich ma( #e a more precise term* in place of +surplus profits arising from its #usiness+ in the former la0% Thus* the $eclaration of $i"i$en$s is $epen$ent upon the a"aila#ilit( of surplus profit or unrestricte$ retaine$ earnings* as the case ma( #e% &references grante$ to preferre$ stockhol$ers* moreo"er* $o not gi"e them a lien upon the propert( of the corporation nor make them cre$itors of the corporation* the right of the former #eing al0a(s su#or$inate to the latter% Di"i$en$s are thus pa(a#le onl( 0hen there are profits earne$ #( the corporation an$ as a general rule* e"en if there are e<isting profits* the #oar$ of $irectors has the $iscretion to $etermine 0hether or not $i"i$en$s are to #e $eclare$%[1;] Sharehol$ers* #oth common an$ preferre$* are consi$ere$ risk takers 0ho in"est capital in the #usiness an$ 0ho can look onl( to 0hat is left after corporate $e#ts an$ lia#ilities are full( pai$%[18] Re$eema#le shares* on the other han$* are shares usuall( preferre$* 0hich #( their terms are re$eema#le at a fi<e$ $ate* or at the option of either issuing corporation* or the stockhol$er* or #oth at a certain re$emption price% [1>] - re$emption #( the corporation of its stock is* in a sense* a repurchase of it for cancellation% [1.] The present o$e allo0s re$emption of shares e"en if there are no unrestricte$ retaine$ earnings on the #ooks of the corporation% This is a ne0 pro"ision 0hich in effect 2ualifies the general rule that the corporation cannot purchase its o0n shares e<cept out of current retaine$ earnings% [17] 5o0e"er* 0hile re$eema#le shares ma( #e re$eeme$ regar$less of the e<istence of unrestricte$ retaine$ earnings* this is su#3ect to the con$ition that the corporation has* after such re$emption* assets in its #ooks to co"er $e#ts an$ lia#ilities inclusi"e of capital stock% Re$emption* therefore* ma( not #e ma$e 0here the corporation is insol"ent or if such re$emption 0ill cause insol"enc( or ina#ilit( of the corporation to meet its $e#ts as the( mature%[2/] Je come no0 to the merits of the case% The petitioner argues that it cannot #e compelle$ to re$eem the preferre$ shares issue$ to the pri"ate respon$ent% Je agree% Respon$ent 3u$ge* in ruling that petitioner must re$eem the shares in 2uestion* state$ that6 +On the 2uestion of the re$emption #( the $efen$ant of sai$ preferre$ shares of stock* the "er( 0or$ings of the terms an$ con$itions in sai$ stock certificates clearl( allo0s the same%+[21] Jhat respon$ent =u$ge faile$ to recogni!e 0as that 0hile the stock certificate $oes allo0 re$emption* the option to $o so 0as clearl( "este$ in the petitioner #ank% The re$emption therefore is clearl( the t(pe kno0n as +optional+% Thus* e<cept as other0ise pro"i$e$ in the stock certificate* the re$emption rests entirel( 0ith the corporation an$ the stockhol$er is 0ithout right to either compel or refuse the re$emption of its stock%[22] Furthermore* the terms an$ con$itions set forth therein use the 0or$ +ma(+% It is a settle$ $octrine in statutor( construction that the 0or$ +ma(+ $enotes $iscretion* an$ cannot #e construe$ as ha"ing a man$ator( effect% Je fail to see ho0 respon$ent 3u$ge can ignore 0hat* in his 0or$s* are the +"er( 0or$ings of the terms an$ con$itions in sai$ stock certificates+ an$ construe 0hat is clearl( a mere option to #e his legal #asis for compelling the petitioner to re$eem the shares in 2uestion% The re$emption of sai$ shares cannot #e allo0e$% -s pointe$ out #( the petitioner* the entral Bank ma$e a fin$ing that sai$ petitioner has #een suffering from chronic reser"e $eficienc(* [29] an$ that such fin$ing resulte$ in a $irecti"e* issue$ on =anuar( 91* 17>9 #( then Co"% C% S% Ficaros of the entral Bank* to the &resi$ent an$ -cting hairman of the Boar$ of the petitioner #ank prohi#iting the latter from re$eeming an( preferre$ share* on the groun$ that sai$ re$emption 0oul$ re$uce the assets of the Bank to the pre3u$ice of its $epositors an$ cre$itors%[2:] Re$emption of preferre$ shares 0as prohi#ite$ for a 3ust an$ "ali$ reason% The $irecti"e issue$ #( the entral Bank Co"ernor 0as o#"iousl( meant to preser"e the status quo* an$ to pre"ent the financial ruin of a #anking institution that 0oul$ ha"e resulte$ in a$"erse repercussions* not onl( to its $epositors an$ cre$itors* #ut also to the #anking in$ustr( as a 0hole% The $irecti"e* in limiting the e<ercise of a right grante$ #( la0 to a corporate entit(* ma( thus #e consi$ere$ as an e<ercise of police po0er% The respon$ent 3u$ge insists that the $irecti"e constitutes an impairment of the o#ligation of contracts% It has* ho0e"er* #een settle$ that the onstitutional guarant( of non'impairment of o#ligations of contract is limite$ #( the e<ercise of the police po0er of the state* the reason #eing that pu#lic 0elfare is superior to pri"ate rights%[2;] The respon$ent 3u$ge also state$ that since the stock certificate grante$ the pri"ate respon$ents the right to recei"e a 2uarterl( $i"i$en$ of one &er entum )11,* cumulati"e an$ participating* it +clearl( an$ une2ui"oca#l( )sic, in$icates that the same are ?interest #earing stocks? or stocks issue$ #( a corporation un$er an agreement to pa( a certain rate of interest thereon% -s such* plaintiffs )pri"ate respon$ents herein, #ecome entitle$ to the pa(ment thereof as a matter of right 0ithout necessit( of a prior $eclaration of $i"i$en$%+[28] There is no legal #asis for this o#ser"ation% Both Sec% 18 of the orporation Fa0 an$ Sec% :9 of the present orporation o$e prohi#it the issuance of an( stock $i"i$en$ 0ithout the appro"al of stockhol$ers* representing not less than t0o'thir$s )2A9, of the

:
outstan$ing capital stock at a regular or special meeting $ul( calle$ for the purpose% These pro"isions un$erscore the fact that pa(ment of $i"i$en$s to a stockhol$er is not a matter of right #ut a matter of consensus% Furthermore* +interest #earing stocks+* on 0hich the corporation agrees a#solutel( to pa( interest #efore $i"i$en$s are pai$ to common stockhol$ers* is legal onl( 0hen construe$ as re2uiring pa(ment of interest as $i"i$en$s from net earnings or surplus onl(% [2>] learl(* the respon$ent 3u$ge* in compelling the petitioner to re$eem the shares in 2uestion an$ to pa( the correspon$ing $i"i$en$s* committe$ gra"e a#use of $iscretion amounting to lack or e<cess of 3uris$iction in ignoring #oth the terms an$ con$itions specifie$ in the stock certificate* as 0ell as the clear man$ate of the la0% -nent the issue of prescription* this ourt so hol$s that the claim of pri"ate respon$ent is alrea$( #arre$ #( prescription as 0ell as laches% -rt% 11:: of the Ne0 i"il o$e pro"i$es that a right of action that is foun$e$ upon a 0ritten contract prescri#es in ten )1/, (ears% The letter'$eman$ ma$e #( the pri"ate respon$ents to the petitioner 0as ma$e onl( on =anuar( ;* 17>7* or almost eighteen (ears after receipt of the 0ritten contract in the form of the stock certificate% -s note$ earlier* this letter'$eman$* significantl(* 0as not formall( offere$ in e"i$ence* nor 0ere an( other e"i$ence of $eman$ presente$% Therefore* 0e conclu$e that the onl( time the pri"ate respon$ents sa0 it fit to assert their rights* if an(* to the preferre$ shares of stock* 0as after the lapse of almost eighteen (ears% The same clearl( in$icates that the right of the pri"ate respon$ents to an( relief un$er the la0 has alrea$( prescri#e$% @oreo"er* the claim of the pri"ate respon$ents is also #arre$ #( laches% Faches has #een $efine$ as the failure or neglect* for an unreasona#le length of time* to $o that 0hich #( e<ercising $ue $iligence coul$ or shoul$ ha"e #een $one earlier4 it is negligence or omission to assert a right 0ithin a reasona#le time* 0arranting a presumption that the part( entitle$ to assert it either has a#an$one$ it or $ecline$ to assert it%[2.] onsi$ering that the terms an$ con$itions set forth in the stock certificate clearl( in$icate that re$emption of the preferre$ shares ma( #e ma$e at an( time after the lapse of t0o (ears from the $ate of issue* pri"ate respon$ents shoul$ ha"e taken it upon themsel"es* after the lapse of the sai$ perio$* to in2uire from the petitioner the reason 0h( the sai$ shares ha"e not #een re$eeme$% -s it is* not onl( t0o (ears ha$ lapse$* as agree$ upon* #ut an a$$itional si<teen (ears passe$ #efore the pri"ate respon$ents sa0 it fit to $eman$ their right% The petitioner* at the time it issue$ sai$ preferre$ shares to the pri"ate respon$ents in 1781* coul$ not ha"e kno0n that it 0oul$ #e suffering from chronic reser"e $eficienc( t0el"e (ears later% 5a$ the pri"ate respon$ents #een "igilant in asserting their rights* the re$emption coul$ ha"e #een effecte$ at a time 0hen the petitioner #ank 0as not suffering from an( financial crisis% 8 ERE-!RE, the instant petition* #eing impresse$ 0ith merit* is here#( CR-NTDD% The challenge$ $ecision of respon$ent 3u$ge is set asi$e an$ the complaint against the petitioner is $ismisse$% osts against the pri"ate respon$ents% S! !R6ERE6. Padilla, (Chairman), Bellosillo, Vitug, an$ Kapunan, JJ., concur.

[1] [2] [9] [:] [;] [8] [>] [.] [7]

&romulgate$ on Septem#er >* 17>7 in i"il ase No% 878;'&* penne$ #( District =u$ge Dnri2ue -% -gana* Sr%4 Rollo* pp% ;>';7% Branch HHVIII* Se"enth =u$icial District* &asa( it( Date$ Fe#ruar( 12* 17>7% Rollo, p. 37. Rollo* pp% 9.':/% Or$er $ate$ =ul( 9/* 17>74 Rollo* p% :9% Decision $ate$ Septem#er >* 17>7* pp% 2'94 Rollo* pp% ;.';7% &etition* pp% 1/'114 Rollo* pp% 11'12 DD FDON* The d DD FDON* p% 87* citing 2 Fletcher* p% :: -ct No% 1:;7* Sec% 18* as amen$e$ Dffecti"e @a( 1* 17./% The orporation o$e* Sec% 18 -@&OS* T5D OR&OR-TION ODD* p% 7 [177/ e$%]% DD FDON* p% 87* citing SD Opinion* Fe#ruar( 1/* 1787 d., at p% >;% d%* at p% >> -@&OS* p% 99% DD FDON* p% >8* citing SD Opinion of =anuar( 29* 17.; Decision $ate$ Septem#er >* 17>7 in i"il ase No% 878;'& penne$ #( =u$ge Dnri2ue -% -gana* Sr%* pp% 2'94 Rollo* pp% ;.';7% DD FDON* pp% >8'>>* citing Section . of the orporation Rollo* p% 12 Rollo, p% .% &hilippine National Bank !% Remigio* C%R% No% >.;/.* @arch 21* 177: Rollo, p% ;.% DD FDON* p% 82* citing Sec% :9 of the orporation o$e% o$e orporation o$e of the &hilippines* p% 82 )17.7 e$%,%

[1/] [11] [12] [19] [1:] [1;] [18] [1>] [1.] [17] [2/] [21] [22] [29] [2:] [2;] [28] [2>]

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[2.]

Oli!on !% ourt of -ppeals* et al%* C%R% 1/>/>;* Septem#er 1* 177:

S$c. 9. Tr$a#*r2 #har$#. ' Treasur( shares are shares of stock 0hich ha"e #een issue$ an$ full( pai$ for* #ut su#se2uentl( reac2uire$ #( the issuing corporation #( purchase* re$emption* $onation or through some other la0ful means% Such shares ma( again #e $ispose$ of for a reasona#le price fi<e$ #( the #oar$ of $irectors% Repu#lic of the &hilippines SUPREME C!URT @anila FIRST DIVISION

G.R. No. 19:576 )a'*ar2 ;9, 1999 C!MMISSI!NER !- INTERNAL RE1ENUE, petitioner* "s% T E C!URT !- APPEALS, C!URT !- TA0 APPEALS a'& A. S!RIAN! C!RP., respon$ents%

MARTINE<, J.: &etitioner ommissioner of Internal Re"enue ) IR, seeks the re"ersal of the $ecision of the ourt of -ppeals ) -,1 0hich affirme$ the ruling of the ourt of Ta< -ppeals ) T-, ; that pri"ate respon$ent -% Soriano orporation?s )hereinafter -NS OR, re$emption an$ e<change of the stocks of its foreign stockhol$ers cannot #e consi$ere$ as +essentiall( e2ui"alent to a $istri#ution of ta<a#le $i"i$en$s+ un$er* Section .9)#, of the 1797 Internal Re"enue -ct% 3 The un$ispute$ facts are as follo0s6 Sometime in the 179/s* Don -n$res Soriano* a citi!en an$ resi$ent of the Enite$ States* forme$ the corporation +-% Soriano I ia+* pre$ecessor of -NS OR* 0ith a &1*///*///%// capitali!ation $i"i$e$ into 1/*/// common shares at a par "alue of &1//Ashare% -NS OR is 0holl( o0ne$ an$ controlle$ #( the famil( of Don -n$res* 0ho are all non'resi$ent aliens% = In 179>* Don -n$res su#scri#e$ to :*789 shares of the ;*/// shares originall( issue$% 5 On Septem#er 12* 17:;* -NS OR?s authori!e$ capital stock 0as increase$ to &2*;//*///%// $i"i$e$ into 2;*/// common shares 0ith the same par "alue of the a$$itional 1;*/// shares* onl( 1/*/// 0as issue$ 0hich 0ere all su#scri#e$ #( Don -n$res* after the other stockhol$ers 0ai"e$ in fa"or of the former their pre'empti"e rights to su#scri#e to the ne0 issues% 6 This increase$ his su#scription to 1:*789 common shares% 7 - month later* : Don -n$res transferre$ 1*2;/ shares each to his t0o sons* =ose an$ -n$res* =r%* as their initial in"estments in -NS OR% 9 Both sons are foreigners% 19 B( 17:>* -NS OR $eclare$ stock $i"i$en$s% Other stock $i"i$en$ $eclarations 0ere ma$e #et0een 17:7 an$ Decem#er 2/* 1789% 11 On Decem#er 9/* 178: Don -n$res $ie$% -s of that $ate* the recor$s re"eale$ that he has a total sharehol$ings of 1.;*1;: shares 1; K ;/*:7; of 0hich are original issues an$ the #alance of 19:%8;7 shares as stock $i"i$en$ $eclarations% 13 orrespon$ingl(* one'half of that sharehol$ings or 72*;>> 1= shares 0ere transferre$ to his 0ife* DoLa armen Soriano* as her con3ugal share% The other half forme$ part of his estate% 15 - $a( after Don -n$res $ie$* -NS OR increase$ its capital stock to &2/@ 16 an$ in 1788 further increase$ it to &9/@% 17 In the same (ear )Decem#er 1788,* stock $i"i$en$s 0orth :8*27/ an$ :8*2.> shares 0ere respecti"el( recei"e$ #( the Don -n$res estate 1: an$ DoLa armen from -NS OR% 5ence* increasing their accumulate$ sharehol$ings to 19.*.8> an$ 19.*.8: 19 common shares each% ;9 On Decem#er 2.* 178>* DoLa armen re2ueste$ a ruling from the Enite$ States Internal Re"enue Ser"ice )IRS,* in2uiring if an e<change of common 0ith preferre$ shares ma( #e consi$ere$ as a ta< a"oi$ance scheme ;1un$er Section 98> of the 17;: E%S% Re"enue -ct% ;; B( =anuar( 2* 178.* -NS OR reclassifie$ its e<isting 9//*/// common shares into 1;/*/// common an$ 1;/*/// preferre$ shares% ;3 In a letter'repl( $ate$ Fe#ruar( 178.* the IRS opine$ that the e<change is onl( a recapitali!ation scheme an$ not ta< a"oi$ance% ;= onse2uentl(* ;5 on @arch 91* 178. DoLa armen e<change$ her 0hole 19.*.8: common shares for 19.*.8/ of the ne0l( reclassifie$ preferre$ shares% The estate of Don -n$res in turn* e<change$ 11*1:/ of its common shares* for the remaining 11*1:/ preferre$ shares* thus re$ucing its )the estate, common shares to 12>*>2>% ;6 On =une 9/* 178.* pursuant to a Boar$ Resolution* -NS OR re$eeme$ 2.*/// common shares from the Don -n$res? estate% B( No"em#er 178.* the Boar$ further increase$ -NS OR?s capital stock to &>;@ $i"i$e$ into 1;/*/// preferre$ shares an$ 8//*/// common shares% ;7 -#out a (ear later* -NS OR again re$eeme$ ./*/// common shares from the Don -n$res? estate* ;: further re$ucing the latter?s common sharehol$ings to 17*>2>% -s state$ in the Boar$ Resolutions* -NS OR?s #usiness purpose for #oth re$emptions of stocks is to partiall( retire sai$ stocks as treasur( shares in or$er to re$uce the compan(?s foreign e<change remittances in case cash $i"i$en$s are $eclare$% ;9 In 17>9* after e<amining -NS OR?s #ooks of account an$ recor$s* Re"enue e<aminers issue$ a report proposing that -NS OR #e assesse$ for $eficienc( 0ithhol$ing ta<'at'source* pursuant to Sections ;9 an$ ;: of the 1797 Re"enue o$e* 39 for the (ear 178. an$ the secon$ 2uarter of 1787 #ase$ on the transactions of e<change 91 an$ re$emption of stocks% 31The Bureau of Internal Re"enue

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)BIR, ma$e the correspon$ing assessments $espite the claim of -NS OR that it a"aile$ of the ta< amnest( un$er &resi$ential Decree )&%D%, 29 3; 0hich 0ere amen$e$ #( &%D%?s 8> an$ 1;>% 33 5o0e"er* petitioner rule$ that the in"oke$ $ecrees $o not co"er Sections ;9 an$ ;: in relation to -rticle .9)#, of the 1797 Re"enue -ct un$er 0hich -NS OR 0as assesse$% 3=-NS OR?s su#se2uent protest on the assessments 0as $enie$ in 17.9 #( petitioner% 35 Su#se2uentl(* -NS OR file$ a petition for re"ie0 0ith the T- assailing the ta< assessments on the re$emptions an$ e<change of stocks% In its $ecision* the Ta< ourt re"erse$ petitioner?s ruling* after fin$ing sufficient e"i$ence to o"ercome the prima "acie correctness of the 2uestione$ assessments% 36 In a petition for re"ie0 the - as mentione$* affirme$ the ruling of the T-% 37 5ence* this petition% The #one of contention is the interpretation an$ application of Section .9)#, of the 1797 Re"enue -ct 3: 0hich pro"i$es6 Sec% .9% Distri#ution of $i"i$en$s or assets #( corporations% K )#, #toc$ di!idends % - stock $i"i$en$ representing the transfer of surplus to capital account shall not #e su#3ect to ta<% 5o0e"er* if a corporation cancels or redeems stoc$ issued as a di!idend at such time and in such manner as to make the $istri#ution an$ cancellation or re$emption* in 0hole or in part* essentiall( e2ui"alent to the $istri#ution of a ta&a'le di!idend* the amount so $istri#ute$ in re$emption or cancellation of the stock shall #e consi$ere$ as ta&a'le income to the e<tent it represents a $istri#ution of earnings or profits accumulate$ after @arch first* nineteen hun$re$ an$ thirteen% )Dmphasis supplie$, Specificall(* the issue is 0hether -NS OR?s re$emption of stocks from its stockhol$er as 0ell as the e<change of common 0ith preferre$ shares can #e consi$ere$ as +essentiall( e2ui"alent to the $istri#ution of ta<a#le $i"i$en$+ making the procee$s thereof ta<a#le un$er the pro"isions of the a#o"e'2uote$ la0% &etitioner conten$s that the e<change transaction a tantamount to +cancellation+ un$er Section .9)#, making the procee$s thereof ta<a#le% It also argues that the Section applies to stock $i"i$en$s 0hich is the #ulk of stocks that -NS OR re$eeme$% Further* petitioner claims that un$er the +net effect test*+ the estate of Don -n$res gaine$ from the re$emption% -ccor$ingl(* it 0as the $ut( of -NS OR to 0ithhol$ the ta<'at'source arising from the t0o transactions* pursuant to Section ;9 an$ ;: of the 1797 Re"enue -ct% 39 -NS OR* ho0e"er* a"ers that it has no $ut( to 0ithhol$ an( ta< either from the Don -n$res estate or from DoLa armen #ase$ on the t0o transactions* #ecause the same 0ere $one for legitimate #usiness purposes 0hich are )a, to re$uce its foreign e<change remittances in the e"ent the compan( 0oul$ $eclare cash $i"i$en$s* =9 an$ to )#, su#se2uentl( +filipini!e$+ o0nership of -NS OR* as allege$l(* en"isione$ #( Don -n$res% =1 It like0ise in"oke$ the amnest( pro"isions of &%D% 8>% Je must emphasi!e that the application of Sec% .9)#, $epen$s on the special factual circumstances of each case%=; The fin$ings of facts of a special court ) T-, e<ercising particular e<pertise on the su#3ect of ta<* generall( #in$s this ourt* =3 consi$ering that it is su#stantiall( similar to the fin$ings of the - 0hich is the final ar#iter of 2uestions of facts% == The issue in this case $oes not onl( $eal 0ith facts #ut 0hether the la0 applies to a particular set of facts% @oreo"er* this ourt is not necessaril( #oun$ #( the lo0er courts? conclusions of la0 $ra0n from such facts% =5 -@NDSTI6 Je 0ill $eal first 0ith the issue of ta< amnest(% Section 1 of &%D% 8>
=6

pro"i$es6

1% In all cases of !oluntar( disclosures o" pre!iousl( unta&ed income and)or *ealth such as earnings* receipts* gifts* #e2uests or an( other ac2uisitions from an( source 0hatsoe"er 0hich are ta<a#le un$er the National Internal Re"enue o$e* as amen$e$* reali!e$ here or a#roa$ #( an( ta<pa(er* natural or 3u$icial4 the collection of all internal re"enue ta<es inclu$ing the increments or penalties or account of non'pa(ment as 0ell as all ci"il* criminal or a$ministrati"e lia#ilities arising from or inci$ent to such $isclosures un$er the National Internal Re"enue o$e* the Re"ise$ &enal o$e* the -nti'Craft an$ orrupt &ractices -ct* the Re"ise$ -$ministrati"e o$e* the i"il Ser"ice la0s an$ regulations* la0s an$ regulations on Immigration an$ Deportation* or an( other applica#le la0 or proclamation* are here#( con$one$ an$* in lieu thereof* a ta< of ten )1/1, per centum on such pre"iousl( unta<e$ income or 0ealth* is here#( impose$* su#3ect to the follo0ing con$itions6 )con$itions omitte$, [Dmphasis supplie$]% The $ecree con$ones +the collection of all internal re"enue ta<es inclu$ing the increments or penalties or account of non' pa(ment as 0ell as all ci"il* criminal or a$ministrati"e lia#le arising from or inci$ent to+ )"oluntar(, $isclosures un$er the NIR of pre"iousl( unta<e$ income an$Aor 0ealth +reali!e$ here or a#roa$ #( an( ta<pa(er* natural or 3uri$ical%+ @a( the 0ithhol$ing agent* in such capacit(* #e $eeme$ a ta<pa(er for it to a"ail of the amnest(M -n income ta<pa(er co"ers all persons 0ho $eri"e ta<a#le income% =7 -NS OR 0as assesse$ #( petitioner for $eficienc( 0ithhol$ing ta< un$er Section ;9 an$ ;: of the 1797 o$e% -s such* it is #eing hel$ lia#le in its capacit( as a 0ithhol$ing agent an$ not its personalit( as a ta<pa(er% In the operation of the 0ithhol$ing ta< s(stem* the 0ithhol$ing agent is the pa(or* a separate entit( acting no more than an agent of the go"ernment for the collection of the ta< =: in or$er to ensure its pa(ments4 =9 the pa(er is the ta<pa(er K he is the person su#3ect to ta< impose #( la04 59 an$ the pa(ee is the ta<ing authorit(% 51 In other 0or$s* the 0ithhol$ing agent is merel( a ta< collector* not a ta<pa(er% En$er the 0ithhol$ing s(stem* ho0e"er* the agent'pa(or #ecomes a pa(ee #( fiction of la0% 5is )agent, lia#ilit( is $irect an$ in$epen$ent from the ta<pa(er* 5; #ecause the income ta< is still impose on an$ $ue from the latter% The agent is not lia#le for the ta< as no 0ealth flo0e$ into him K he earne$ no income% The Ta< o$e onl( makes the agent personall( lia#le for the ta< 53 arising from the #reach of its legal $ut( to 0ithhol$ as $istinguish from its $ut( to pa( ta< since6 the go"ernment?s cause of action against the 0ithhol$ing is not for the collection of income ta<* #ut for the enforcement of the 0ithhol$ing pro"ision of Section ;9 of the Ta< o$e* compliance 0ith 0hich is impose$ on the 0ithhol$ing agent an$ not upon the ta<pa(er% 5= Not #eing a ta<pa(er* a 0ithhol$ing agent* like -NS OR in this transaction is not protecte$ #( the amnest( un$er the $ecree%

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o$al pro"isions on 0ithhol$ing ta< are man$ator( an$ must #e complie$ 0ith #( the 0ithhol$ing agent% 55 The ta<pa(er shoul$ not ans0er for the non'performance #( the 0ithhol$ing agent of its legal $ut( to 0ithhol$ unless there is collusion or #a$ faith% The former coul$ not #e $eeme$ to ha"e e"a$e$ the ta< ha$ the 0ithhol$ing agent performe$ its $ut(% This coul$ #e the situation for 0hich the amnest( $ecree 0as inten$e$% Thus* to curtail ta< e"asion an$ gi"e ta< e"a$ers a chance to reform* 56 it 0as $eeme$ a$ministrati"el( feasi#le to grant ta< amnest( in certain instances% In a$$ition* a +ta< amnest(* much like a ta< e<emption* is ne"er fa"ore$ nor presume$ in la0 an$ if grante$ #( a statute* the term of the amnest( like that of a ta< e<emption must #e construe$ strictl( against the ta<pa(er an$ li#erall( in fa"or of the ta<ing authorit(% 57 The rule on strictissimi +uris e2uall( applies% 5: So that* an( $ou#t in the application of an amnest( la0A$ecree shoul$ #e resol"e$ in fa"or of the ta<ing authorit(% Furthermore* -NS OR?s claim of amnest( cannot prosper% The implementing rules of &%D% 9>/ 0hich e<pan$e$ amnest( on pre"iousl( unta<e$ income un$er &%D% 29 is "er( e<plicit* to 0it6 Sec% :% ases not co"ere$ #( amnest(% K The follo0ing cases are not co"ere$ #( the amnest( su#3ect of these regulations6 <<< <<< <<< )2, Ta< lia#ilities 0ith or 0ithout assessments* on 0ithhol$ing ta< at source pro"i$e$ un$er Section ;9 an$ ;: of the National Internal Re"enue o$e* as amen$e$4 59 -NS OR 0as assesse$ un$er Sections ;9 an$ ;: of the 1797 Ta< #( the amnest(% T-H ON STO G DIVIDDNDS Ceneral Rule Sec% .9)#, of the 1797 NIR 0as taken from the Section 11;)g,)1, of the E%S% Re"enue o$e of 172.% 69 It lai$ $o0n the general rule kno0n as the proportionate test 61 0herein stock $i"i$en$s once issue$ form part of the capital an$* thus* su#3ect to income ta<% 6; Specificall(* the general rule states that6 - stock $i"i$en$ representing the transfer of surplus to capital account shall not #e su#3ect to ta<% 5a"ing #een $eri"e$ from a foreign la0* resort to the 3urispru$ence of its origin ma( she$ light% En$er the ES Re"enue o$e* this pro"ision originall( referre$ to +stock $i"i$en$s+ onl(* 0ithout an( e<ception% Stock $i"i$en$s* strictl( speaking* represent capital an$ $o not constitute income to its recipient% 63 So that the mere issuance thereof is not (et su#3ect to income ta< 6= as the( are nothing #ut an +enrichment through increase in "alue of capital in"estment%+ 65 -s capital* the stock $i"i$en$s postpone the reali!ation of profits #ecause the +fun$ represente$ #( the ne0 stock has #een transferre$ from surplus to capital an$ no longer a"aila#le for actual $istri#ution%+ 66 Income in ta< la0 is +an amount of mone( coming to a person 0ithin a specifie$ time* 0hether as pa(ment for ser"ices* interest* or profit from in"estment%+ 67 It means cash or its e2ui"alent% 6: It is gain $eri"e$ an$ se"ere$ from capital* 69 from la#or or from #oth com#ine$ 79 K so that to ta< a stock $i"i$en$ 0oul$ #e to ta< a capital increase rather than the income% 71 In a loose sense* stock $i"i$en$s issue$ #( the corporation* are consi$ere$ unreali!e$ gain* an$ cannot #e su#3ecte$ to income ta< until that gain has #een reali!e$% Before the reali!ation* stock $i"i$en$s are nothing #ut a representation of an interest in the corporate properties% 7; -s capital* it is not (et su#3ect to income ta<% It shoul$ #e note$ that capital an$ income are $ifferent% apital is 0ealth or fun$4 0hereas income is profit or gain or the flo0 of 0ealth% 73 The $etermining factor for the imposition of income ta< is 0hether an( gain or profit 0as $eri"e$ from a transaction% 7= The D<ception 5o0e"er* if a corporation cancels or redeems stoc$ issue$ as a di!idend at such time an$ in such manner as to make the distri'ution and cancellation or redemption* in 0hole or in part* essentiall( e2ui"alent to the $istri#ution of a ta&a'le di!idend* the amount so $istri#ute$ in re$emption or cancellation of the stock shall #e consi$ere$ as ta&a'le income to the e<tent it represents a $istri#ution of earnings or profits accumulate$ after @arch first* nineteen hun$re$ an$ thirteen% )Dmphasis supplie$,% In a response to the ruling of the -merican Supreme ourt in the case of ,isner !. -acom'er 75 )that pro rata stock $i"i$en$s are not ta<a#le income,* the e<empting clause a#o"e 2uote$ 0as a$$e$ #ecause pro"ision corporation foun$ a loophole in the original pro"ision% The( resorte$ to $e"ious means to circum"ent the la0 an$ e"a$e the ta<% orporate earnings 0oul$ #e $istri#ute$ un$er the guise of its initial capitali!ation #( $eclaring the stock $i"i$en$s pre"iousl( issue$ an$ later re$eem sai$ $i"i$en$s #( pa(ing cash to the stockhol$er% This process of issuance're$emption amounts to a $istri#ution of ta<a#le cash $i"i$en$s 0hich 0as lust $ela(e$ so as to escape the ta<% It #ecomes a con"enient technical strateg( to a"oi$ the effects of ta<ation% Thus* to plug the loophole K the e<empting clause 0as a$$e$% It pro"i$es that the re$emption or cancellation of stock $i"i$en$s* $epen$ing on the +time+ an$ +manner+ it 0as ma$e* is essentiall( e2ui"alent to a $istri#ution of ta<a#le $i"i$en$s*+ making the procee$s thereof +ta<a#le income+ +to the e<tent it represents profits+% The e<ception 0as $esigne$ to pre"ent the issuance an$ cancellation or re$emption of stock $i"i$en$s* 0hich is fun$amentall( not ta<a#le* from #eing ma$e use of as a $e"ice for the actual $istri#ution of cash $i"i$en$s* 0hich is ta<a#le% 76 Thus* the pro"ision ha$ the o#"ious purpose of pre"enting a corporation from a"oi$ing $i"i$en$ ta< treatment #( $istri#uting earnings to its sharehol$ers in t0o transactions K a pro rata stock $i"i$en$ follo0e$ #( a pro rata re$emption K that 0oul$ ha"e the same economic conse2uences as a simple $i"i$en$% 77 -lthough re$emption an$ cancellation are generall( consi$ere$ capital transactions* as such% the( are not su#3ect to ta<% 5o0e"er* it $oes not necessaril( mean that a sharehol$er ma( not reali!e a ta<a#le gain from such transactions% 7: Simpl( put* $epen$ing on the circumstances* the procee$s of re$emption of stock $i"i$en$s are essentiall( $istri#ution of cash $i"i$en$s* o$e% Thus* #( specific pro"ision of la0* it is not co"ere$

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0hich 0hen pai$ #ecomes the a#solute propert( of the stockhol$er% Thereafter* the latter #ecomes the e<clusi"e o0ner thereof an$ can e<ercise the free$om of choice% 795a"ing reali!e$ gain from that re$emption* the income earner cannot escape income ta<% :9 -s 2ualifie$ #( the phrase +such time an$ in such manner*+ the e<ception 0as not inten$e$ to characteri!e as ta<a#le $i"i$en$ e"er( $istri#ution of earnings arising from the re$emption of stock $i"i$en$% :1 So that* 0hether the amount $istri#ute$ in the re$emption shoul$ #e treate$ as the e2ui"alent of a +ta<a#le $i"i$en$+ is a 2uestion of fact* :; 0hich is $etermina#le on +the #asis of the particular facts of the transaction in 2uestion% :3 No $ecisi"e test can #e use$ to $etermine the application of the e<emption un$er Section .9)#,% The use of the 0or$s +such manner+ an$ +essentiall( e2ui"alent+ negati"e an( i$ea that a 0eighte$ formula can resol"e a crucial issue K Shoul$ the $istri#ution #e treate$ as ta<a#le $i"i$en$% := On this aspect* -merican courts $e"elope$ certain recogni!e$ criteria* 0hich inclu$es the follo0ing6 :5 1, the presence or a#sence of real #usiness purpose* 2, the amount of earnings an$ profits a"aila#le for the $eclaration of a regular $i"i$en$s an$ the corporation?s past recor$ 0ith respect to the $eclaration of $i"i$en$s* 9, the effect of the $istri#ution* as compare$ 0ith the $eclaration of regular $i"i$en$* :, the lapse of time #et0een issuance an$ re$emption* :6 ;, the presence of a su#stantial surplus :7 an$ a generous suppl( of cash 0hich in"ites suspicion as $oes a meager polic( in relation #oth to current earnings an$ accumulate$ surplus* :: RDDD@&TION -ND -N DFF-TION For the e<empting clause of Section* .9)#, to appl(* it is in$ispensa#le that6 )a, there is re$emption or cancellation4 )#, the transaction in"ol"es stock $i"i$en$s an$ )c, the +time an$ manner+ of the transaction makes it +essentiall( e2ui"alent to a $istri#ution of ta<a#le $i"i$en$s%+ Of these* the most important is the thir$% Re$emption is repurchase* a reac2uisition of stock #( a corporation 0hich issue$ the stock :9 in e<change for propert(* 0hether or not the ac2uire$ stock is cancelle$* retire$ or hel$ in the treasur(%99 Dssentiall(* the corporation gets #ack some of its stock* $istri#utes cash or propert( to the sharehol$er in pa(ment for the stock* an$ continues in #usiness as #efore% The re$emption of stock $i"i$en$s pre"iousl( issue$ is use$ as a "eil for the constructi"e $istri#ution of cash $i"i$en$s% In the instant case* there is no $ispute that -NS OR re$eeme$ shares of stocks from a stockhol$er )Don -n$res, t0ice )2.*/// an$ ./*/// common shares,% But 0here $i$ the shares re$eeme$ come fromM If its source is the original capital su#scriptions upon esta#lishment of the corporation or from initial capital in"estment in an e<isting enterprise* its re$emption to the concurrent "alue of ac2uisition ma( not in"ite the application of Sec% .9)#, un$er the 1797 Ta< o$e* as it is not income #ut a mere return of capital% On the contrar(* if the re$eeme$ shares are from stock $i"i$en$ $eclarations other than as initial capital in"estment* the procee$s of the re$emption is a$$itional 0ealth* for it is not merel( a return of capital #ut a gain thereon% It is not the stock $i"i$en$s #ut the procee$s of its re$emption that ma( #e $eeme$ as ta<a#le $i"i$en$s% 5ere* it is un$ispute$ that at the time of the last re$emption* the original common shares o0ne$ #( the estate 0ere onl( 2;*2:>%; 91 This means that from the total of 1/.*/// shares re$eeme$ from the estate* the #alance of .2*>;2%; )1/.*/// less 2;*2:>%;, must ha"e come from stock $i"i$en$s% Besi$es* in the a#sence of e"i$ence to the contrar(* the Ta< o$e presumes that e"er( $istri#ution of corporate propert(* in 0hole or in part* is ma$e out of corporate profits 9;such as stock $i"i$en$s% The capital cannot #e $istri#ute$ in the form of re$emption of stock $i"i$en$s 0ithout "iolating the trust fun$ $octrine K 0herein the capital stock* propert( an$ other assets of the corporation are regar$e$ as e2uit( in trust for the pa(ment of the corporate cre$itors% 93 Once capital* it is al0a(s capital% 9= That $octrine 0as inten$e$ for the protection of corporate cre$itors% 95 Jith respect to the thir$ re2uisite* -NS OR re$eeme$ stock $i"i$en$s issue$ 3ust 2 to 9 (ears earlier% The time alone that lapse$ from the issuance to the re$emption is not a sufficient in$icator to $etermine ta<a#ilit(% It is a must to consi$er the factual circumstances as to the manner of #oth the issuance an$ the re$emption% The +time+ element is a factor to sho0 a $e"ice to e"a$e ta< an$ the scheme of cancelling or re$eeming the same shares is a metho$ usuall( a$opte$ to accomplish the en$ sought% 96 Jas this transaction use$ as a +continuing plan*+ +$e"ice+ or +artifice+ to e"a$e pa(ment of ta<M It is necessar( to $etermine the +net effect+ of the transaction #et0een the sharehol$er'income ta<pa(er an$ the ac2uiring )re$eeming, corporation% 97 The +net effect+ test is not e"i$ence or testimon( to #e consi$ere$4 it is rather an inference to #e $ra0n or a conclusion to #e reache$% 9: It is also important to kno0 0hether the issuance of stock $i"i$en$s 0as $ictate$ #( legitimate #usiness reasons* the presence of 0hich might negate a ta< e"asion plan% 99 The issuance of stock $i"i$en$s an$ its su#se2uent re$emption must #e separate* $istinct* an$ not relate$* for the re$emption to #e consi$ere$ a legitimate ta< scheme% 199 Re$emption cannot #e use$ as a cloak to $istri#ute corporate earnings% 191 Other0ise* the apparent intention to a"oi$ ta< #ecomes $ou#tful as the intention to e"a$e #ecomes manifest% It has #een rule$ that6 [-]n operation 0ith no #usiness or corporate purpose K is a mere $e"ise 0hich put on the form of a corporate reorgani!ation as a $isguise for concealing its real character* an$ the sole o#3ect an$ accomplishment of 0hich 0as the consummation of a preconcei"e$ plan* not to reorgani!e a #usiness or an( part of a #usiness* #ut to transfer a parcel of corporate shares to a stockhol$er% 19; Depen$ing on each case* the e<empting pro"ision of Sec% .9)#, of the 1797 o$e ma( not #e applica#le if the re$eeme$ shares 0ere issue$ 0ith 'ona "ide #usiness purpose* 193 0hich is 3u$ge$ after each an$ e"er( step of the transaction ha"e #een consi$ere$ an$ the 0hole transaction $oes not amount to a ta< e"asion scheme% -NS OR in"oke$ t0o reasons to 3ustif( the re$emptions K )1, the allege$ +filipini!ation+ program an$ )2, the re$uction of foreign e<change remittances in case cash $i"i$en$s are $eclare$% The ourt is not concerne$ 0ith the 0is$om of these purposes #ut on their rele"ance to the 0hole transaction 0hich can #e inferre$ from the outcome thereof% -gain* it is the +net effect rather than the moti"es an$ plans of the ta<pa(er or his corporation+19= that is the fun$amental gui$e in a$ministering Sec% .9)#,% This ta< pro"ision is aime$ at

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the result% 195 It also applies e"en if at the time of the issuance of the stock $i"i$en$* there 0as no intention to re$eem it as a means of $istri#uting profit or a"oi$ing ta< on $i"i$en$s% 196 The e<istence of legitimate #usiness purposes in support of the re$emption of stock $i"i$en$s is immaterial in income ta<ation% It has no rele"ance in $etermining +$i"i$en$ e2ui"alence+% 197 Such purposes ma( #e material onl( upon the issuance of the stock $i"i$en$s% The test of ta<a#ilit( un$er the e<empting clause* 0hen it pro"i$es +such time an$ manner+ as 0oul$ make the re$emption +essentiall( e2ui"alent to the $istri#ution of a ta<a#le $i"i$en$+* is 0hether the re$emption resulte$ into a flo0 of 0ealth% If no 0ealth is reali!e$ from the re$emption* there ma( not #e a $i"i$en$ e2ui"alence treatment% In the metaphor of ,isner !. -acom'er* income is not $eeme$ +reali!e+ until the fruit has fallen or #een plucke$ from the tree% The three elements in the imposition of income ta< are6 )1, there must #e gain or an$ profit* )2, that the gain or profit is reali!e$ or recei"e$* actuall( or constructi"el(* 19: an$ )9, it is not e<empte$ #( la0 or treat( from income ta<% -n( #usiness purpose as to 0h( or ho0 the income 0as earne$ #( the ta<pa(er is not a re2uirement% Income ta< is assesse$ on income recei"e$ from an( propert(* acti"it( or ser"ice that pro$uces the income #ecause the Ta< o$e stan$s as an in$ifferent neutral part( on the matter of 0here income comes from% 199 -s state$ a#o"e* the test of ta<a#ilit( un$er the e<empting clause of Section .9)#, is* 0hether income 0as reali!e$ through the re$emption of stock $i"i$en$s% The re$emption con"erts into mone( the stock $i"i$en$s 0hich #ecome a reali!e$ profit or gain an$ conse2uentl(* the stockhol$er?s separate propert(% 119 &rofits $eri"e$ from the capital in"este$ cannot escape income ta<% -s reali!e$ income* the procee$s of the re$eeme$ stock $i"i$en$s can #e reache$ #( income ta<ation regar$less of the e<istence of an( #usiness purpose for the re$emption% Other0ise* to rule that the sai$ procee$s are e<empt from income ta< 0hen the re$emption is supporte$ #( legitimate #usiness reasons 0oul$ $efeat the "er( purpose of imposing ta< on income% Such argument 0oul$ open the $oor for income earners not to pa( ta< so long as the person from 0hom the income 0as $eri"e$ has legitimate #usiness reasons% In other 0or$s* the pa(ment of ta< un$er the e<empting clause of Section .9)#, 0oul$ #e ma$e to $epen$ not on the income of the ta<pa(er* #ut on the #usiness purposes of a thir$ part( )the corporation herein, from 0hom the income 0as earne$% This is a#sur$* illogical an$ impractical consi$ering that the Bureau of Internal Re"enue )BIR, 0oul$ #e pestere$ 0ith instances in $etermining the legitimac( of #usiness reasons that e"er( income earner ma( interpose$% It is not a$ministrati"el( feasi#le an$ cannot therefore #e allo0e$% The ruling in the -merican cases cite$ an$ relie$ upon #( -NS OR that +the re$eeme$ shares are the e2ui"alent of $i"i$en$ onl( if the shares 0ere not issued for genuine #usiness purposes+* 111 or the +re$eeme$ shares ha"e #een issued #( a corporation #ona fi$e+ 11; #ears no rele"ance in $etermining the non'ta<a#ilit( of the procee$s of re$emption -NS OR* rel(ing hea"il( an$ appl(ing sai$ cases* argue$ that so long as the re$emption is supporte$ #( "ali$ corporate purposes the procee$s are not su#3ect to ta<% 113 The a$option #( the courts #elo0 11= of such argument is mislea$ing if not misplace$% - re"ie0 of the cite$ -merican cases sho0s that the presence or a#sence of +genuine #usiness purposes+ ma( #e material 0ith respect to the issuance or $eclaration of stock $i"i$en$s #ut not on its su#se2uent re$emption% The issuance an$ the re$emption of stocks are t0o $ifferent transactions% -lthough the e<istence of legitimate corporate purposes ma( 3ustif( a corporation?s ac2uisition of its o0n shares un$er Section :1 of the orporation o$e* 115 such purposes cannot e<cuse the stockhol$er from the effects of ta<ation arising from the re$emption% If the issuance of stock $i"i$en$s is part of a ta< e"asion plan an$ thus* 0ithout legitimate #usiness reasons* the re$emption #ecomes suspicious 0hich e<empting clause% The su#stance of the 0hole transaction* not its form* usuall( controls the ta< conse2uences% 116 The t0o purposes in"oke$ #( -NS OR* un$er the facts of this case are no e<cuse for its ta< lia#ilit(% First* the allege$ +filipini!ation+ plan cannot #e consi$ere$ legitimate as it 0as not implemente$ until the BIR starte$ making assessments on the procee$s of the re$emption% Such corporate plan 0as not state$ in nor supporte$ #( an( Boar$ Resolution #ut a mere afterthought interpose$ #( the counsel of -NS OR% Being a separate entit(* the corporation can act onl( through its Boar$ of Directors% 117 The Boar$ Resolutions authori!ing the re$emptions state onl( one purpose K re$uction of foreign e<change remittances in case cash $i"i$en$s are $eclare$% Not e"en this purpose can #e gi"en cre$ence% Recor$s sho0 that $espite the e<istence of enormous corporate profits no cash $i"i$en$ 0as e"er $eclare$ #( -NS OR from 17:; until the BIR starte$ making assessments in the earl( 17>/?s% -lthough a corporation un$er certain e<ceptions* has the prerogati"e 0hen to issue $i"i$en$s* (et 0hen no cash $i"i$en$s 0as issue$ for a#out three $eca$es* this circumstance negates the legitimac( of -NS OR?s allege$ purposes% @oreo"er* to issue stock $i"i$en$s is to increase the sharehol$ings of -NS OR?s foreign stockhol$ers contrar( to its +filipini!ation+ plan% This 0oul$ also increase rather than re$uce their nee$ for foreign e<change remittances in case of cash $i"i$en$ $eclaration* consi$ering that -NS OR is a famil( corporation 0here the ma3orit( shares at the time of re$emptions 0ere hel$ #( Don -n$res? foreign heirs% Secon$l(* assuming arguendo* that those #usiness purposes are legitimate* the same cannot #e a "ali$ e<cuse for the imposition of ta<% Other0ise* the ta<pa(er?s lia#ilit( to pa( income ta< 0oul$ #e ma$e to $epen$ upon a thir$ person 0ho $i$ not earn the income #eing ta<e$% Furthermore* e"en if the sai$ purposes support the re$emption an$ 3ustif( the issuance of stock $i"i$en$s* the same has no #earing 0hatsoe"er on the imposition of the ta< herein assesse$ #ecause the procee$s of the re$emption are $eeme$ ta<a#le $i"i$en$s since it 0as sho0n that income 0as generate$ therefrom% Thir$l(* -NS OR argue$ that to treat as +ta<a#le $i"i$en$+ the procee$s of the re$eeme$ stock $i"i$en$s 0oul$ #e to impose on such stock an un$isclose$ lien an$ 0oul$ #e e<tremel( unfair to inter"ening purchase* i%e% those 0ho #u(s the stock $i"i$en$s after their issuance% 11: Such argument* ho0e"er* #ears no rele"ance in this case as no inter"ening #u(er is in"ol"e$% -n$ e"en if there is an inter"ening #u(er* it is necessar( to look into the factual milieu of the case if income 0as reali!e$ from the transaction% -gain* 0e reiterate that the $i"i$en$ e2ui"alence test $epen$s on such +time an$ manner+ of the transaction an$ its net effect% The un$isclose$ lien 119 ma( #e unfair to a su#se2uent stock #u(er 0ho has no capital interest in the compan(% But the unfairness ma( not #e true to an original su#scri#er like Don -n$res* 0ho hol$s stock $i"i$en$s as gains from his in"estments% The su#se2uent #u(er 0ho #u(s stock $i"i$en$s is in"esting capital% It 3ust so happen that 0hat he #ought is stock $i"i$en$s% The effect of its )stock $i"i$en$s, re$emption from that su#se2uent #u(er is merel( to return his capital su#scription* 0hich is income if re$eeme$ from the original su#scri#er% -fter consi$ering the manner an$ the circumstances #( 0hich the issuance an$ re$emption of stock $i"i$en$s 0ere ma$e* there is no other conclusion #ut that the procee$s thereof are essentiall( consi$ere$ e2ui"alent to a $istri#ution of ta<a#le $i"i$en$s% -s +ta<a#le $i"i$en$+ un$er Section .9)#,* it is part of the +entire income+ su#3ect to ta< un$er Section 22 in relation to Section 21 1;9 of the 1797 o$e% @oreo"er* un$er Section 27)a, of sai$ o$e* $i"i$en$s are inclu$e$ in +gross income+% -s income* it is su#3ect to income ta< 0hich is re2uire$ to #e 0ithhel$ at source% The 177> Ta< o$e ma( ha"e altere$ the situation #ut it $oes not change this $isposition% DH 5-NCD OF O@@ON JIT5 &RDFDRRDD S5-RDS 1;1 D<change is an act of taking or gi"ing one thing for another in"ol"ing 1;; reciprocal transfer 1;3 an$ is generall( consi$ere$ as a ta<a#le transaction% The e<change of common stocks 0ith preferre$ stocks* or preferre$ for common or a com#ination of either for #oth* ma( not pro$uce a recogni!e$ gain or loss* so long as the pro"isions of Section .9)#, is not applica#le% This is true in a tra$e #et0een t0o

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)2, persons as 0ell as a tra$e #et0een a stockhol$er an$ a corporation% In general* this tra$e must #e parts of merger* transfer to controlle$ corporation* corporate ac2uisitions or corporate reorgani!ations% No ta<a#le gain or loss ma( #e recogni!e$ on e<change of propert(* stock or securities relate$ to reorgani!ations% 1;= Both the Ta< ourt an$ the ourt of -ppeals foun$ that -NS OR reclassifie$ its shares into common an$ preferre$* an$ that parts of the common shares of the Don -n$res estate an$ all of DoLa armen?s shares 0ere e<change$ for the 0hole 1;/%/// preferre$ shares% Thereafter* #oth the Don -n$res estate an$ DoLa armen remaine$ as corporate su#scri#ers e<cept that their su#scriptions no0 inclu$e preferre$ shares% There 0as no change in their proportional interest after the e<change% There 0as no cash flo0% Both stocks ha$ the same par "alue% En$er the facts herein* an( $ifference in their market "alue 0oul$ #e immaterial at the time of e<change #ecause no income is (et reali!e$ K it 0as a mere corporate paper transaction% It 0oul$ ha"e #een $ifferent* if the e<change transaction resulte$ into a flo0 of 0ealth* in 0hich case income ta< ma( #e impose$% 1;5 Reclassification of shares $oes not al0a(s #ring an( su#stantial alteration in the su#scri#er?s proportional interest% But the e<change is $ifferent K there 0oul$ #e a shifting of the #alance of stock features* like priorit( in $i"i$en$ $eclarations or a#sence of "oting rights% Iet neither the reclassification nor e<change per se* (iel$s reali!e income for ta< purposes% - common stock represents the resi$ual o0nership interest in the corporation% It is a #asic class of stock or$inaril( an$ usuall( issue$ 0ithout e<traor$inar( rights or pri"ileges an$ entitles the sharehol$er to apro rata $i"ision of profits% 1;6 &referre$ stocks are those 0hich entitle the sharehol$er to some priorit( on $i"i$en$s an$ asset $istri#ution% 1;7 Both shares are part of the corporation?s capital stock% Both stockhol$ers are no $ifferent from or$inar( in"estors 0ho take on the same in"estment risks% &referre$ an$ common sharehol$ers participate in the same "enture* 0illing to share in the profits an$ losses of the enterprise% 1;: @oreo"er* un$er the $octrine of e2ualit( of shares K all stocks issue$ #( the corporation are presume$ e2ual 0ith the same pri"ileges an$ lia#ilities* pro"i$e$ that the -rticles of Incorporation is silent on such $ifferences% 1;9 In this case* the e<change of shares* 0ithout more* pro$uces no reali!e$ income to the su#scri#er% There is onl( a mo$ification of the su#scri#er?s rights an$ pri"ileges K 0hich is not a flo0 of 0ealth for ta< purposes% The issue of ta<a#le $i"i$en$ ma( arise onl( once a su#scri#er $isposes of his entire interest an$ not 0hen there is still maintenance of proprietar( interest% 139 J5DRDFORD* premises consi$ere$* the $ecision of the ourt of -ppeals is @ODIFIDD in that -NS OR?s re$emption of .2*>;2%; stock $i"i$en$s is herein consi$ere$ as essentiall( e2ui"alent to a $istri#ution of ta<a#le $i"i$en$s for 0hich it is FI-BFD for the 0ithhol$ing ta<'at'source% The $ecision is -FFIR@DD in all other respects% SO ORDDRDD% .a!ide, Jr., C.J., -elo, Kapunan and Pardo, JJ., concur. S$c. 65. L%a>%/%+2 o, &%r$c+or# ,or ?a+$r$& #+oc@#. 3 -n( $irector or officer of a corporation consenting to the issuance of stocks for a consi$eration less than its par or issue$ "alue or for a consi$eration in an( form other than cash* "alue$ in e<cess of its fair "alue* or 0ho* ha"ing kno0le$ge thereof* $oes not forth0ith e<press his o#3ection in 0riting an$ file the same 0ith the corporate secretar(* shall #e soli$aril(* lia#le 0ith the stockhol$er concerne$ to the corporation an$ its cre$itors for the $ifference #et0een the fair "alue recei"e$ at the time of issuance of the stock an$ the par or issue$ "alue of the same% )n 6I1I6EN6S 5 !T ER 6ISTRIBUTI!NS S$c. =3. Po?$r +o &$c/ar$ &%A%&$'&#. ' The #oar$ of $irectors of a stock corporation ma( $eclare $i"i$en$s out of the unrestricte$ retaine$ earnings 0hich shall #e pa(a#le in cash* in propert(* or in stock to all stockhol$ers on the #asis of outstan$ing stock hel$ #( them6 &ro"i$e$* That an( cash $i"i$en$s $ue on $elin2uent stock shall first #e applie$ to the unpai$ #alance on the su#scription plus costs an$ e<penses* 0hile stock $i"i$en$s shall #e 0ithhel$ from the $elin2uent stockhol$er until his unpai$ su#scription is full( pai$6 &ro"i$e$* further* That no stock $i"i$en$ shall #e issue$ 0ithout the appro"al of stockhol$ers representing not less than t0o'thir$s )2A9, of the outstan$ing capital stock at a regular or special meeting $ul( calle$ for the purpose% )18a, Stock corporations are prohi#ite$ from retaining surplus profits in e<cess of one hun$re$ )1//1, percent of their pai$'in capital stock* e<cept6 )1, 0hen 3ustifie$ #( $efinite corporate e<pansion pro3ects or programs appro"e$ #( the #oar$ of $irectors4 or )2, 0hen the corporation is prohi#ite$ un$er an( loan agreement 0ith an( financial institution or cre$itor* 0hether local or foreign* from $eclaring $i"i$en$s 0ithout itsAhis consent* an$ such consent has not (et #een secure$4 or )9, 0hen it can #e clearl( sho0n that such retention is necessar( un$er special circumstances o#taining in the corporation* such as 0hen there is nee$ for special reser"e for pro#a#le contingencies% )n, T2B$# o, 6%A%&$'&# a'& !+h$r 6%#+r%>*+%o'# N%$/#o' 5 Co. I'c. A#. L$Ba'+o Co'#o/%&a+$& M%'%'( Co. Ca#$ 6%($#+ N%$/#o' 5 Co. I'c. A#. L$Ba'+o Co'#o/%&a+$& M%'%'( Co. [GR L3;1691, ;: 6$c$C>$r 196:] -ac+#7 [CR F'218/1* 1> Decem#er 17884 Nal$i"ar )=,6 8 concur* 2 took no part] -n operating agreement 0as e<ecute$ #efore Jorl$ Jar II )on 9/ =anuar( 179>, #et0een Nielson O o% Inc% an$ the Fepanto onsoli$ate$ @ining o% 0here#( the former operate$ an$ manage$ the mining properties o0ne$ #( the latter for a management fee of &2*;//%// a month an$ a 1/1 participation in the net profits resulting from the operation of the mining properties* for a perio$ of ; (ears% In 17:/* a $ispute arose regar$ing the computation of the 1/1 share of Nielson in the profits% The Boar$ of Directors of Fepanto* reali!ing that the mechanics of the contract 0as unfair to Nielson* authori!e$ its &resi$ent to enter into an agreement 0ith Nielson mo$if(ing the pertinent pro"ision of the contract effecti"e 1

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=anuar( 17:/ in such a 0a( that Nielson shall recei"e )1, 1/1 of the $i"i$en$s $eclare$ an$ pai$* 0hen an$ as pai$* $uring the perio$ of the contract an$ at the en$ of each (ear* )2, 1/1 of an( $epletion reser"e that ma( #e set up* an$ )9, 1/1 of an( amount e<pen$e$ $uring the (ear out of surplus earnings for capital account% In the latter part of 17:1* the parties agree$ to rene0 the contract for another perio$ of ; (ears* #ut in the meantime* the &acific Jar #roke out in Decem#er 17:1% In =anuar( 17:2 operation of the mining properties 0as $isrupte$ on account of the 0ar% In Fe#ruar( 17:2* the mill* po0er plant* supplies on han$* e2uipment* concentrates on han$ an$ mines* 0ere $estro(e$ upon or$ers of the Enite$ States -rm(* to pre"ent their utili!ation #( the in"a$ing =apanese -rm(% The =apanese forces thereafter occupie$ the mining properties* operate$ the mines $uring the continuance of the 0ar* an$ 0ho 0ere ouste$ from the mining properties onl( in -ugust 17:;% -fter the mining properties 0ere li#erate$ from the =apanese forces* FD&-NTO took possession thereof an$ em#arke$ in re#uil$ing an$ reconstructing the mines an$ mill4 setting up ne0 organi!ation4 clearing the mill site4 repairing the mines4 erecting staff 2uarters an$ #o$egas an$ repairing e<isting structures4 installing ne0 machiner( an$ e2uipment4 repairing roa$s an$ maintaining the same4 sal"aging e2uipment an$ storing the same 0ithin the #o$egas4 $oing police 0ork necessar( to take care of the materials an$ e2uipment reco"ere$4 repairing an$ rene0ing the 0ater s(stem4 an$ retim#ering% The reha#ilitation an$ reconstruction of the mine an$ mill 0as not complete$ until 17:.% On 28 =une 17:. the mines resume$ operation un$er the e<clusi"e management of FD&-NTO% Shortl( after the mines 0ere li#erate$ from the =apanese in"a$ers in 17:;* a $isagreement arose #et0een NIDFSON an$ FD&-NTO o"er the status of the operating contract 0hich as rene0e$ e<pire$ in 17:>% En$er the terms thereof* the management contract shall remain in suspense in case fortuitous e"ent or force ma3eure* such as 0ar or ci"il commotion* a$"ersel( affects the 0ork of mining an$ milling% On 8 Fe#ruar( 17;.* NIDFSON #rought an action against FD&-NTO #efore the ourt of First Instance of @anila to reco"er certain sums of mone( representing $amages allege$l( suffere$ #( the former in "ie0 of the refusal of the latter to compl( 0ith the terms of a management contract entere$ into #et0een them on 9/ =anuar( 179>* inclu$ing attorne(?s fees an$ costs% FD&-NTO in its ans0er $enie$ the material allegations of the complaint an$ set up certain special $efenses* among them* prescription an$ laches* as #ars against the institution of the action% -fter trial* the court a 2uo ren$ere$ a $ecision $ismissing the complaint 0ith costs% The court state$ that it $i$ not fin$ sufficient e"i$ence to esta#lish FD&-NTO?s counterclaim an$ so it like0ise $ismisse$ the same% NIDFSON appeale$% The Supreme ourt re"erse$ the $ecision of the trial court an$ enter in lieu thereof another* or$ering Fepanto to pa( Nielson )1, 1/1 share of cash $i"i$en$s of Decem#er* 17:1 in the amount of &1>*;//%//* 0ith legal interest thereon from the $ate of the filing of the complaint4 )2, management fee for =anuar(* 17:2 in the amount of &2*;//%//* 0ith legal interest thereon from the $ate of the filing of the complaint4 )9, management fees for the si<t('month perio$ of e<tension of the management contract* amounting to &1;/*///%//* 0ith legal interest from the $ate of the filing of the complaint4 ):, 1/1 share in the cash $i"i$en$s $uring the perio$ of e<tension of the management contract* amounting to &1*://*///%//* 0ith legal interest thereon from the $ate of the filing of the complaint4 );, 1/1 of the $epletion reser"e set up $uring the perio$ of e<tension* amounting to &;9*72.%..* 0ith legal interest thereon from the $ate of the filing of the complaint4 )8, 1/1 of the e<penses for capital account $uring the perio$ of e<tension* amounting to &87:*98:%>8* 0ith legal interest thereon from the $ate of the filing of the complaint4 )>, to issue an$ $eli"er to Nielson an$ o% Inc% shares of stock of Fepanto onsoli$ate$ @ining o% at par "alue e2ui"alent to the total of Nielson?s 1/1 share in the stock $i"i$en$s $eclare$ on No"em#er 2.* 17:7 an$ -ugust 22* 17;/* together 0ith all cash an$ stock $i"i$en$s* if an(* as ma( ha"e #een $eclare$ an$ issue$ su#se2uent to No"em#er 2.* 17:7 an$ -ugust 22* 17;/* as fruits that accrue$ to sai$ shares4 pro"i$e$ that if sufficient shares of stock of Fepanto?s are not a"aila#le to satisf( this 3u$gment* Fepanto shall pa( Nielson an amount in cash e2ui"alent to the market "alue of sai$ shares at the time of $efault* that is* all shares of stock that shoul$ ha"e #een $eli"ere$ to Nielson #efore the filing of the complaint must #e pai$ at their market "alue as of the $ate of the filing of the complaint4 an$ all shares* if an(* that shoul$ ha"e #een $eli"ere$ after the filing of the complaint at the market "alue of the shares at the time Fepanto $ispose$ of all its a"aila#le shares* for it is onl( then that Fepanto place$ itself in con$ition of not #eing a#le to perform its o#ligation4 )., the sum of &;/*///%// as attorne(?s fees4 an$ )7, the costs% L$Ba'+o #$$@# +h$ r$co'#%&$ra+%o' o, +h$ &$c%#%o' r$'&$r$& o' 17 6$c$C>$r 1966. I##*$7 Jhether the management contract is a contract of agenc( or a contract of lease of ser"ices% $/&7 -rticle 1>/7 of the Ol$ i"il o$e* $efining contract of agenc(* pro"i$es that +B( the contract of agenc(* one person #in$s himself to ren$er some ser"ice or $o something for the account or at the re2uest of another%+ -rticle 1;::* $efining contract of lease of ser"ice* pro"i$es that +In a lease of 0ork or ser"ices* one of the parties #in$s himself to make or construct something or to ren$er a ser"ice to the other for a price certain%+ In #oth agenc( an$ lease of ser"ices one of the parties #in$s himself to ren$er some ser"ice to the other part(% -genc(* ho0e"er* is $istinguishe$ from lease of 0ork or ser"ices in that the #asis of agenc( is representation* 0hile in the lease of 0ork or ser"ices the #asis is emplo(ment% The lessor of ser"ices $oes not represent his emplo(er* 0hile the agent represents his principal% Further* agenc( is a preparator( contract* as agenc( +$oes not stop 0ith the agenc( #ecause the purpose is to enter into other contracts%+ The most characteristic feature of an agenc( relationship is the agent?s po0er to #ring a#out #usiness relations #et0een his principal an$ thir$ persons% +The agent is $estine$ to e<ecute 3uri$ical acts )creation* mo$ification or e<tinction of relations 0ith thir$ parties,% Fease of ser"ices contemplate onl( material )non'3uri$ical, acts%+ 5erein* the principal an$ paramount un$ertaking of Nielson un$er the management contract 0as the operation an$ $e"elopment of the mine an$ the operation of the mill% -ll the other un$ertakings mentione$ in the contract are necessar( or inci$ental to the principal un$ertaking K these other un$ertakings #eing $epen$ent upon the 0ork on the $e"elopment of the mine an$ the operation of the mill% In the performance of this principal un$ertaking Nielson 0as not in an( 0a( e<ecuting 3uri$ical acts for Fepanto* $estine$ to create* mo$if( or e<tinguish #usiness relations #et0een Fepanto an$ thir$ persons% In other 0or$s* in performing its principal un$ertaking Nielson 0as not acting as an agent of Fepanto* in the sense that the term agent is interprete$ un$er the la0 of agenc(* #ut as one 0ho 0as performing material acts for an emplo(er* for a compensation% It is true that the management contract pro"i$es that Nielson 0oul$ also act as purchasing agent of supplies an$ enter into contracts regar$ing the sale of mineral* #ut the contract also pro"i$es that Nielson coul$ not make an( purchase* or sell the minerals* 0ithout the prior appro"al of Fepanto% It is clear* therefore* that e"en in these cases Nielson coul$ not e<ecute 3uri$ical acts 0hich 0oul$ #in$ Fepanto 0ithout first securing the appro"al of Fepanto% Nielson* then* 0as to act onl( as an interme$iar(* not as an agent% Further* from the statements in the annual report for 1798* an$ from the pro"ision of paragraph HI of the @anagement contract* that the emplo(ment #( Fepanto of Nielson to operate an$ manage its mines 0as principall( in consi$eration of the kno0'ho0 an$ technical ser"ices that Nielson offere$ Fepanto% The contract thus entere$ into pursuant to the offer ma$e #( Nielson an$ accepte$ #( Fepanto 0as a +$etaile$ operating contract+% It 0as not a contract of agenc(% No0here in the recor$ is it sho0n that Fepanto consi$ere$ Nielson as its agent an$ that Fepanto terminate$ the management contract #ecause it ha$ lost its trust an$ confi$ence in Nielson% R$#+r%c+%o'# o' 6%A%&$'& 6%#+r%>*+%o' The amount of our $i"i$en$ $istri#utions is limite$ #( pro"isions of Russian la0% For e<ample* Russian la0 re2uires that* among other things* $i"i$en$s can onl( #e pai$ in an amount not e<cee$ing our retaine$ earnings as $etermine$ un$er R-S% In a$$ition* $i"i$en$s ma( onl( #e pai$ if the "alue of the compan(?s net assets is not less than the sum of the compan(?s charter capital* the compan(?s reser"e fun$ an$ the $ifference #et0een the li2ui$ation "alue an$ the par "alue of the issue$ an$ outstan$ing preferre$ stock of the compan(* if an(* as $etermine$ un$er R-S% Our retaine$ earnings for the (ears en$e$ Decem#er 91* 2//.* 2//> an$ 2//8 that 0as $istri#uta#le un$er Russian legislation amounte$ to REB :7*>/. million* REB :9*8:; million an$ REB 9;*1>1 million* respecti"el(%

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CIR 1 CA )a'*ar2 ;9, 1999 @on$a(* =anuar( 28* 2//7 &oste$ #( Fa#els6 ase Digests* Ta<ation offeeholic Jrites

-ac+#7 Sometime in the 179/Ps* Don -n$res Soriano* a citi!en an$ resi$ent of the Enite$ States* forme$ the corporation Q-% Soriano I iaR* pre$ecessor of -NS OR 0ith a 1*///*///%// capitali!ation $i"i$e$ into 1/*/// common shares at a par "alue of &1//Ashare% -NS OR is 0holl( o0ne$ an$ controlle$ #( the famil( of Don -n$res* 0ho are all non'resi$ent aliens% In 179>* Don -n$res su#scri#e$ to :*789 shares of the ;*/// shares originall( issue$% On Septem#er 12* 17:;* -NS ORPs authori!e$ capital stock 0as increase$ to &2*;//*///%// $i"i$e$ into 2;*/// common shares 0ith the same par "alue% Of the a$$itional 1;*/// shares* onl( 1/*/// 0as issue$ 0hich 0ere all su#scri#e$ #( Don -n$res* after the other stockhol$ers 0ai"e$ in fa"or of the former their pre'empti"e rights to su#scri#e to the ne0 issues% This increase$ his su#scription to 1:*789common shares% - month later* Don -n$res transferre$ 1*2;/ shares each to his t0o sons* =ose an$ -n$res =r%* as their initial in"estments in -NS OR% Both sons are foreigners% B( 17:>* -NS OR $eclare$ stock $i"i$en$s% Other stock $i"i$en$$eclarations 0ere ma$e #et0een 17:7 an$ Decem#er 2/* 1789% On Decem#er 9/* 178: Don -n$res $ie$% -s of that $ate* the recor$s re"eale$ that he has a total sharehol$ings of 1.;*1;: shares% ;/*:7; of 0hich are original issues an$ the #alance of 19:*8;7 shares asstock $i"i$en$ $eclarations% orrespon$ingl(* one'half of that sharehol$ings or 72*;>> shares 0ere transferre$ to his 0ife* DoLa armen Soriano* as her con3ugal share% The offer half forme$ part of his estate% - $a( after Don -n$res $ie$* -NS OR increase$ its capital stock to &2/@ an$ in 1788 further increase$ it to &9/@% In the same (ear )Decem#er 1788,* stock $i"i$en$s 0orth :8*27/ an$ :8*2.> shares 0ere respecti"el( recei"e$ #( the Don -n$res estate an$ DoLa armen from -NS OR% 5ence* increasing their accumulate$ sharehol$ings to 19.*.8> an$ 19.*.8: common shares each% On Decem#er 2.* 178>* DoLa armen re2ueste$ a ruling from the Enite$ States Internal Re"enue Ser"ice )IRS,* in2uiring if an e<change of common 0ith preferre$ shares ma( #e consi$ere$ as a ta< a"oi$ance scheme% B( =anuar( 2* 178.* -NS OR reclassifie$ its e<isting 9//*/// common shares into 1;/*/// common an$ 1;/*///preferre$ shares% In a letter'repl( $ate$ Fe#ruar( 178.* the IRS opine$ that the e<change is onl( a recapitali!ation scheme an$ not ta< a"oi$ance% onse2uentl(* on @arch 91* 178. DoLa armen e<change$ her 0hole 19.*.8: common shares for 19.*.8/ of the preferre$ shares% The estate of Don -n$res in turn e<change$ 11*1:/ of its common sharesfor the remaining 11*1:/ preferre$ shares% In 17>9* after e<amining -NS ORPs #ooks of account an$ recor$ Re"enue e<aminers issue$ a report proposing that -NS OR #e assesse$ for $eficienc( 0ithhol$ing ta<'at'source* for the (ear 178. an$ the 2n$ 2uarter of 1787 #ase$ on the transaction of e<change an$ re$emption of stocks% BIR ma$e the correspon$ing assessments% -NS ORPs su#se2uent protest on the assessments 0as $enie$ in 17.9 #( petitioner% -NS OR file$ a petition for re"ie0 0ith the T-* the Ta< ourt re"erse$ petitioners ruling% - affirme$ the ruling of the T-% 5ence this position% I##*$7 Jhether or not a person assesse$ for $eficienc( 0ithhol$ing ta< un$er Sec% ;9 an$ ;: of the Ta< capacit( as a 0ithhol$ing o$e is #eing hel$ lia#le in its agent%

$/&7 -n income ta<pa(er co"ers all persons 0ho $eri"e ta<a#le income% -NS OR 0as assesse$ #( petitioner for $eficienc( 0ithhol$ing ta<* as such* it is #eing hel$ lia#le in its capacit( as a 0ithhol$ing agent an$ not in its personalit( as ta<pa(er% - 0ithhol$ing agent* -% Soriano orp% in this case* cannot #e $eeme$ a ta<pa(er for it to a"ail of a ta< amnest( un$er a &resi$ential $ecree that con$ones Qthe collection of all internal re"enue ta<es inclu$ing the increments or penalties on account of non'pa(ment as 0ell as all ci"il* criminal* or a$ministrati"e lia#ilities arising from or inci$ent to "oluntar( $isclosures un$er the NIR of pre"iousl( unta<e$ income an$Aor 0ealth reali!e$ here or a#roa$ #( an( ta<pa(er* natural or 3uri$ical%R The ourt e<plains6 QThe 0ithhol$ing agent is not a ta<pa(er* he is a mere ta< collector% En$er the 0ithhol$ing s(stem* ho0e"er* the agent'pa(er #ecomes a pa(ee #( fiction of la0% 5is lia#ilit( is $irect an$ in$epen$ent from the ta<pa(er* #ecause the income ta< is still impose$ an$ $ue from the latter% The agent is not lia#le for the ta< as no 0ealth flo0e$ into him* he earne$ no income%R STEINBERG 1S. 1ELASC!D5; Ph%/. 953E 19;9F F- TS6 The #oar$ of $irectors of Si#ugue( Tra$ing ompan( authori!e$ the purchase of 99/ shares of stock of the corporation an$ $eclare$ pa(ment of &9T as $i"i$en$s to stockhol$ers% The $irectors from0hom 9// of the stocks 0ere #ought resigne$ #efore the #oar$ appro"e$ the purchase an$ $eclare$the $i"i$en$s% -t the time of purchase of stock san$ $eclaration of $i"i$en$s* the corporation ha$accounts pa(a#le amounting to &7*2:1 an$ accounts recei"a#le amounting to &12*;12* #ut the recei"er0ho ma$e $iligent efforts to collect the amounts recei"a#le 0as una#le to $o so% It has #een allege$that the pa(ment of cash $i"i$en$s to the stockhol$ers 0as 0rongfull( $one an$ in #a$ faith* an$ to thein3ur( an$ frau$ of the cre$itors of the corporation% The $irectors are sought to #e ma$e personall(lia#le in their capacit( as $irectors% 5DFD6 re$itors of a corporation ha"e the right to assume that so long as there are outstan$ing $e#tsan$ lia#ilities* the BOD 0ill not use the assets of the corporation to #u( its o0n stock* an$ 0ill not$eclare $i"i$en$s to stockhol$ers 0hen the corporation is insol"ent %In this case* it 0as foun$ that thecorporation $i$ not ha"e an actual #ona fi$e surplus from 0hich $i"i$en$s coul$ #e pai$% @oreo"er* the ourt note$ that the Boar$ of Directors purchase$ the stock from the corporation an$ $eclare$ the$i"i$en$s on the stock at the same Boar$ meeting* an$ that the $irectors 0ere permitte$ to resign sothat the( coul$ sell their stock to the corporation% Ci"en all of this* it 0as apparent that the $irectors $i$not act in goo$ faith or 0ere grossl( ignorant of their $uties% Dither 0a(* the( are lia#le for their actions0hich affecte$ the financial con$ition of the corporation an$ pre3u$ice$ cre$itors% /.R. 0o. 31231, #tein'erg !. Velasco et al., 45 Phil. 643 Repu#lic of the &hilippines SUPREME C!URT @anila DN B-N @arch 12* 1727

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C%R% No% 9/:8/ C. . STEINBERG, a# R$c$%A$r o, +h$ S%>*(*$2 Tra&%'( CoCBa'2, I'corBora+$&, plaintiff'appellant* "s% GREG!RI! 1ELASC!, ET AL., $efen$ants'appellees% 7ran$ 8. 9oung "or appellant. Pa'lo :oren;o and .el"in Jo!en "or appellees. STATEMENT &laintiff is the recei"er of the Si#ugue( Tra$ing ompan(* a $omestic corporation% The $efen$ants are resi$ents of the &hilippine Islan$s% It is allege$ that the $efen$ants* Cregorio Velasco* as presi$ent* Feli< $el astillo* as "ice'presi$ent* -n$res F% Na"allo* as secretar(' treasurer* an$ Rufino @anuel* as $irector of Tra$ing ompan(* at a meeting of the #oar$ of $irectors hel$ on =ul( 2:* 1722* appro"e$ an$ authori!e$ "arious la0ful purchases alrea$( ma$e of a large portion of the capital stock of the compan( from its "arious stockhol$ers* there#( $i"erting its fun$s to the in3ur(* $amage an$ in frau$ of the cre$itors of the corporation% That pursuant to such resolution an$ on @arch 91* 1722* the corporation purchase$ from the $efen$ant S% R% Can!on 1// shares of its capital stock of the par "alue of &1/* an$ on =une 27* 1722* it purchase$ from the $efen$ant Feli< D% @en$aros 1// shares of the par "alue of &1/* an$ on =ul( 18* 1722* it purchase$ from the $efen$ant Feli< D% @en$aros 1// shares of the par "alue of &1/* each* an$ on -pril ;* 1722* it purchase$ from the $efen$ant Dionisio Saa"e$ra 1/ shares of the same par "alue* an$ on =une 27* 1722* it purchase$ from the $efen$ant Valentin @atias 2/ shares of like "alue% That the total amount of the capital stock unla0full( purchase$ 0as &9*9//% That at the time of such purchase* the corporation ha$ accounts pa(a#le amounting to &19*./>%;/* most of 0hich 0ere unpai$ at the time petition for the $issolution of the corporation 0as financial con$ition* in contemplation of an insol"enc( an$ $issolution% -s a secon$ cause of action* plaintiff alleges that on =ul( 2:* 1722* the officers an$ $irectors of the corporation appro"e$ a resolution for the pa(ment of &9*/// as $i"i$en$s to its stockhol$ers* 0hich 0as 0rongfull( $one an$ in #a$ faith* an$ to the in3ur( an$ frau$ of its cre$itors% That at the time the petition for the $issolution of the corporation 0as presente$ it ha$ accounts pa(a#le in the sum of &7*2:1%17* +an$ practicall( 0orthless accounts recei"a#le%+ &laintiff pra(s 3u$gment for the sum of &9*9// from the $efen$ants Cregorio Velasco* Feli< $el astillo* -n$res F% Na"allo an$ Rufino @anuel* personall( as mem#ers of the Boar$ of Directors* or for the reco"er( from the $efen$ants S% R% Can!on* of the sum of &1*///* from the $efen$ant Feli< D% @en$aros* &2*///* an$ from the $efen$ant Dionisio Saa"e$ra* &1//* an$ un$er his secon$ cause of action* he pra(s 3u$gment for the sum of &9*///* 0ith legal interest against the #oar$ of $irectors* an$ costs% For ans0er the $efen$ants Feli< $el specific $enial% astillo* Rufino @anuel* S% R% Can!on* Dionisio Saa"e$ra an$ Valentin @atias ma$e a general an$

In his amen$e$ ans0er* the $efen$ant Cregorio Velasco a$mits paragraphs* 1* 2 an$ 9 of each cause of action of the complaint* an$ that the shares mentione$ in paragraph : of the first cause of action 0ere purchase$* #ut alleges that the( 0ere purchase$ #( "irtue of a resolution of the #oar$ of $irectors of the corporation +0hen the #usiness of the compan( 0as going on "er( 0ell%+ That the $efen$ant is one of the principal sharehol$ers* an$ that a#out the same time* he purchase other shares for his o0n account* #ecause he thought the( 0oul$ #ring profits% -s to the secon$ cause of action* he a$mits that the $i"i$en$s $escri#e$ in paragraph : of the complaint 0ere $istri#ute$* #ut alleges that such $istri#ution 0as authori!e$ #( the #oar$ of $irectors* +an$ that the amount represente$ #( sai$ $i"i$en$s reall( constitutes a surplus profit of the corporation*+ an$ as counterclaim* he asks for 3u$gment against the recei"er for &12*;12%:> for an$ on account of his negligence in failing to collect the accounts% -lthough $ul( ser"e$* the $efen$ant @en$aros $i$ not appear or ans0er% The $efen$ant Na"allo 0as not ser"e$* an$ the case against him 0as $ismisse$% -pril 9/* 172.* the case 0as trie$ an$ su#mitte$ on a stipulation of facts* #ase$ upon 0hich the lo0er court $ismisse$ plaintiff?s complaint* an$ ren$ere$ 3u$gment for the $efen$ants* 0ith costs against the plaintiff* an$ a#sol"e$ him from the cross'complaint of the $efen$ant Velasco* an$ on appeal* the plaintiff assigns the follo0ing errors6 1% In hol$ing that the Si#ugue( Tra$ing ompan(* Incorporate$* coul$ legall( purchase its o0n stock% 2% In hol$ing that the Boar$ of Directors of the sai$ orporation coul$ legall( $eclare$ a $i"i$en$ of &9*///* =ul( 2:* 1722% )! NS, J.: It is stipulate$ that on =ul( 2:* 1722* the $irectors of the corporation appro"e$ the purchase of stocks as follo0s6 One hun$re$ shares from S% R% Can!on for &1*///4 One hun$re$ shares from Feli< D% @en$aros at the same price4 0hich purchase 0as ma$e on =une 27* 17224 another One hun$re$ shares from Feli< D% @en$aros at the same price on =ul( 18* 17224 Ten shares from Dionisio Saa"e$ra at the same price on =une 27* 1722% That $uring such times* the $efen$ant Cregorio Velasco purchase$ 19 shares for the corporation for &19/4 Feli< $el astillo K :2 shares for &:2/4 -n$res Na"allo K 1; shares for &1;/4 an$ the $efen$ant @en$aros K 1/ shares for &1//% That $uring the time these "arious purchases 0ere ma$e* the total amount of su#scri#e$ an$ pai$ up capital stock of the corporation 0as &1/*/9/* out of the authori!e$ capital stock 2*/// shares of the par "alue of &1/ each% &aragraph : of the stipulation also recites6 Be it also a$mitte$ as a fact that the time of the sai$ purchases there 0as a surplus profit of the corporation a#o"e'name$ of &9*91:%>2%

1:
&aragraph ; is as follo0s6 That at the time of the repeate$l( mentione$ "arious purchases of the sai$ capital stock 0ere ma$e* the sai$ corporation ha$ -ccounts &a(a#le in the total amount of &19*./>%;/ as sho0n #( the statement of the corporation* $ate$ =une 9/* 1722* an$ the -ccounts Recei"a#le in the sum of &17*128%/2 accor$ing to the #ooks* an$ that the intention of the Boar$ of Directors 0as to resell the stocks purchase$ #( the corporations at a sum a#o"e par for each stock* this e<pectation #eing 3ustifie$ #( the then satisfactor( an$ soun$ financial con$ition of the #usiness of the corporation% It is also stipulate$ that on Septem#er 11* 1729* 0hen the petition for the $issolution of the corporation 0as presente$ to the court* accor$ing to a statement ma$e =une 9/* 1729* it has accounts pa(a#le aggregating &7*:1%17* an$ accounts recei"a#le for &12*;12%:>% &aragraph > of the stipulation recites6 That the same $efen$ants* mentione$ in paragraph 2 of this stipulation of facts an$ in the same capacit(* on the same $ate of =ul( 2:* 1722* an$ at the sai$ meeting of the sai$ Boar$ of Directors* appro"e$ an$ authori!e$ #( resolution the pa(ment of $i"i$en$s to its stockhol$ers* in the sum of three thousan$ pesos )&9*///,* &hilippine currenc(* 0hich pa(ments 0ere ma$e at $ifferent $ates* #et0een Septem#er 9/* 1722* an$ @a( 12* 1729* #oth $ates inclusi"e* at a time 0hen the corporation ha$ accounts less in amount than the accounts recei"a#le* 0hich resolution 0as #ase$ upon the #alance sheet ma$e as =une 9/* 1722* sai$ #alance sheet sho0ing that the corporation ha$ a surplus of &1*/87%:1* an$ a profit on the same $ate of &2*8;8%/.* or a total surplus amount of &9*>2;%:7* an$ a reser"e fun$ of &2*..7%29 for #a$ an$ $ou#tful accounts an$ $epreciation of e2uipment* there#( lea"ing a #alance of &9*91:%>2 of net surplus profit after pa(ing this $i"i$en$% It is also stipulate$ at a meeting of the #oar$ of $irectors hel$ on =ul( 2:* 1722* as follo0s6 8% The presi$ent an$ manager su#mitte$ to the Boar$ of Directors his statement an$ #alance sheet for the first semester en$ing =une 9/* 1722 an$ recommen$e$ that &9*/// K out of the surplus account #e set asi$e for $i"i$en$s pa(a#le* an$ that pa(ments #e ma$e in installments so as not to effect the financial con$ition of the corporation% That stockhol$ers ha"ing outstan$ing account 0ith the corporation shoul$ settle first their accounts #efore pa(ments of their $i"i$en$s coul$ #e ma$e% @r% astillo mo"e$ that the statement an$ #alance sheet #e appro"e$ as su#mitte$* an$ also the recommen$ations of the presi$ent% Secon$e$ #( @r% @anuel% -ppro"e$% &aragraph . of the stipulation is as follo0s6 That accor$ing to the #alance sheet of the corporation* $ate$ =une 9/* 1729* it ha$ accounts recei"a#le in the sum of &12*;12%:>* $ue from "arious contractor an$ la#orers of the National oal ompan(* an$ also emplo(ees of the herein corporation* 0hich the herein recei"er* after his appointment on Fe#ruar( 2.* 172:* although he ma$e $ue efforts #( personall( "isiting the location of the corporation* an$ of National oal ompan(* at its offices* at @alangas* @in$anao* an$ #( 0riting numerous letters of $eman$ to the $e#tors of the corporation* in or$er to collect these accounts recei"a#le* he 0as una#le to $o so as most of them 0ere 0ithout goo$s or propert(* an$ he coul$ not file an( suit against them that might ha"e an( propert(* for the reason that he ha$ no fun$s on han$ 0ith 0hich to pa( the filing an$ sheriff fees to @alangas* an$ other places of their resi$ences% From all of 0hich* it appears that on =une 9/* 1722* the #oar$ of $irectors of the corporation authori!e$ the purchase of* purchase$ an$ pai$ for* 99/ shares of the capital stock of the corporation at the agree$ price of &9*9//* an$ that at the time the purchase 0as ma$e* the corporation 0as in$e#te$ in the sum of &19*./>%;/* an$ that accor$ing to its #ooks* it ha$ accounts recei"a#le in the sum of &17*128%/2% That on Septem#er 11* 1729* 0hen the petition 0as file$ for its $issolution upon the groun$ that it 0as insol"ent* its accounts pa(a#le amounte$ to &7*2:1%17* an$ its accounts recei"a#le &12*;12%:>* or an apparent asset of &9*2>1%2. o"er an$ a#o"e its lia#ilities% But it 0ill #e note$ that there is no stipulation or fin$ing of facts as to 0hat 0as the actual cash "alue of its accounts recei"a#le% Neither is there an( stipulation that those accounts or an( part of them e"er ha"e #een or 0ill #e collecte$* an$ it $oes appear that after his appointment on Fe#ruar( 2.* 172:* the recei"er ma$e a $iligent effort to collect them* an$ that he 0as una#le to $o so* an$ it also appears from the minutes of the #oar$ of $irectors that the presi$ent an$ manager +recommen$e$ that &9*/// K out of the surplus account to #e set asi$e for $i"i$en$s pa(a#le* an$ that pa(ments #e ma$e in installments so as not to effect the financial con$ition of the corporation%+ If in truth an$ in fact the corporation ha$ an actual 'ona "ide surplus of &9*/// o"er an$ a#o"e all of its $e#t an$ lia#ilities* the pa(ment of the &9*/// in $i"i$en$s 0oul$ not in the least impair the financial con$ition of the corporation or pre3u$ice the interests of its cre$itors% It is "er( apparent that on =une 2:* 1722* the #oar$ of $irectors acte$ on assumption that* #ecause it appeare$ from the #ooks of the corporation that it ha$ accounts recei"a#le of the face "alue of &17*128%/2* therefore it ha$ a surplus o"er an$ a#o"e its $e#ts an$ lia#ilities% But as state$ there is no stipulation as to the actual cash "alue of those accounts* an$ it $oes appear from the stipulation that on Fe#ruar( 2.* 172:* &12*;12%:> of those accounts ha$ #ut little* if an(* "alue* an$ it must #e conce$e$ that* in the purchase of its o0n stock to the amount of &9*9// an$ in $eclaring the $i"i$en$s to the amount of &9*///* the real assets of the corporation 0ere $iminishe$ &8*9//% It also appears from paragraph : of the stipulation that the corporation ha$ a +surplus profit+ of &9*91:%>2 onl(% It is further stipulate$ that the $i"i$en$s shoul$ +#e ma$e in installments so as not to effect financial con$ition of the corporation%+ In other 0or$s* that the corporation $i$ not then ha"e an actual 'ona "ide surplus from 0hich the $i"i$en$s coul$ #e pai$* an$ that the pa(ment of them in full at the time 0oul$ +affect the financial con$ition of the corporation%+ It is* in$ee$* peculiar that the action of the #oar$ in purchasing the stock from the corporation an$ in $eclaring the $i"i$en$s on the stock 0as all $one at the same meeting of the #oar$ of $irectors* an$ it appears in those minutes that the #oth Can!on an$ @en$aros 0ere formerl( $irectors an$ resigne$ #efore the #oar$ appro"e$ the purchase an$ $eclare$ the $i"i$en$s* an$ that out of the 0hole 99/ shares purchase$* Can!on* sol$ 1// an$ @en$aros 2//* or a total of 9// shares out of the 99/* 0hich 0ere purchase$ #( the corporation* an$ for 0hich it pai$ &9*9//% In other 0or$s* that the $irectors 0ere permitte$ to resign so that the( coul$ sell their stock to the corporation% -s state$* the authori!e$ capital stock 0as &2/*/// $i"i$e$ into 2*/// shares of the par "alue of &1/ each* 0hich onl( &1/*/9/ 0as su#scri#e$ an$ pai$% De$ucting the &9*9// pai$ for the purchase of the stock* there 0oul$ #e left &>*/// of pai$ up stock* from 0hich $e$uct &9*/// pai$ in $i"i$en$s* there 0oul$ #e left &:*/// onl(% In this situation an$ upon this state of facts* it is "er( apparent that the $irectors $i$ not act in goo$ faith or that the( 0ere grossl( ignorant of their $uties% Epon each of those points* the rule is 0ell state$ in Ruling ase Fa0* "ol% >* p% :>9* section :;: 0here it is sai$6

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/eneral .ut( to ,&ercise Reasona'le Care% K The $irectors of a corporation are #oun$ to care for its propert( an$ manage its affairs in goo$ faith* an$ for a "iolation of these $uties resulting in 0aste of its assets or in3ur( to the propert( the( are lia#le to account the same as other trustees% -re there can #e no $ou#t that if the( $o acts clearl( #e(on$ their po0er* 0here#( loss ensues to the corporation* or $ispose of its propert( or pa( a0a( its mone( 0ithout authorit(* the( 0ill #e re2uire$ to make goo$ the loss out of their pri"ate estates% This is the rule 0here the $isposition ma$e of mone( or propert( of the corporation is one either not 0ithin the la0ful po0er of the corporation* or* if 0ithin the authorit( of the particular officer or officers% -n$ section :;. 0hich sa(s6 <ant o" Kno*ledge, #$ill, or Competenc(% K It has #een sai$ that $irectors are not lia#le for losses resulting to the corporation from 0ant of kno0le$ge on their part4 or for mistake of 3u$gment* pro"i$e$ the( 0ere honest* an$ pro"i$e$ the( are fairl( 0ithin the scope of the po0ers an$ $iscretion confi$e$ to the managing #o$(% But the acceptance of the office of a $irector of a corporation implies a competent kno0le$ge of the $uties assume$* an$ $irectors cannot e<cuse impru$ence on the groun$ of their ignorance or ine<perience4 an$ if the( commit an error of 3u$gment through mere recklessness or 0ant of or$inar( pru$ence or skill* the( ma( #e hel$ lia#le for the conse2uences% Fike a man$ator(* to 0hom he has #een likene$* a $irector is #oun$ not onl( to e<ercise proper care an$ $iligence* #ut or$inar( skill an$ 3u$gment% -s he is #oun$ to e<ercise or$inar( skill an$ 3u$gment* he cannot set up that he $i$ not possess them% re$itors of a corporation ha"e the right to assume that so long as there are outstan$ing $e#ts an$ lia#ilities* the #oar$ of $irectors 0ill not use the assets of the corporation to purchase its o0n stock* an$ that it 0ill not $eclare $i"i$en$s to stockhol$ers 0hen the corporation is insol"ent% The amount in"ol"e$ in this case is not large* #ut the legal principles are important* an$ 0e ha"e gi"en them the consi$eration 0hich the( $eser"e% The 3u$gment of the lo0er court is re"erse$* an$ )a,* as to the first cause of action* one 0ill #e entere$ for the plaintiff an$ against the $efen$ant S% R% Can!on for the sum of &1*///* 0ith legal interest from the 1/th of Fe#ruar(* 1728* an$ against the $efen$ant Feli< D% @e$aros for &2*///* 0ith like interests* an$ against the $efen$ant Dionisio Saa"e$ra for &1//* 0ith like interest* an$ against each of them for costs* each on their primar( lia#ilit( as purchasers of stock* an$ )#, against the $efen$ants Cregorio Velasco* Feli< $el astillo an$ Rufino @anuel* personall(* as mem#ers of the #oar$ of $irectors of the Si#ugue( Tra$ing ompan(* Incorporate$* as secon$aril( lia#le for the 0hole amount of such stock sol$ an$ purchase$ as a#o"e state$* an$ on the secon$ cause of action* 3u$gment 0ill #e entere$ )c, for the plaintiff an$ 3ointl( an$ se"erall( against the $efen$ants Cregorio Velasco* Feli< $el astillo an$ Rufino @anuel* personall(* as mem#ers of the #oar$ of $irectors of the Si#ugue( Tra$ing ompan(* Incorporate$* for &9*///* 0ith interest thereon from Fe#ruar( 1/* 1728* at the rate of 8 per cent per annum* an$ costs% So or$ere$% Johnson, #treet, -alcolm, =strand, Romualde; and Villa>Real, JJ., concur. 6. TRANS-ER !- IN1ESTMENT SECURITIES S$c. 6=. I##*a'c$ o, #+oc@ c$r+%,%ca+$#% ' No certificate of stock shall #e issue$ to a su#scri#er until the full amount of his su#scription together 0ith interest an$ e<penses )in case of $elin2uent shares,* if an( is $ue* has #een pai$% )9>,

Repu#lic of the &hilippines SUPREME C!URT @anila DN B-N G.R. No. L316;36 )*'$ 39, 1965

IRINE! S. BALTA<AR, plaintiff'appellee* "s% LINGA4EN GUL- ELECTRIC P!8ER, C!., INC., 6!MINA6!R C. UNGS!N, BRIGI6! G. ESTRA6A, MANUEL L. -ERNAN6E<, BENE6ICT! C. 4US!N a'& BERNAR6! ACENA, $efen$ants'appellants% ''''''''''''''''''''''''''''' G.R. No. L316;37 )*'$ 39, 1965

MAR1IN !. R!SE, plaintiff'appellee* "s% LINGA4EN GUL- ELECTRIC C!., INC., 6!MINA6!R, C. UNGS!N, BRIGI6! G. ESTRA6A, MANTEL L. -ERNAN6E<, BENE6ICT! C. 4US!N a'& BERNAR6! C. ACENA, $efen$ants'appellants% ''''''''''''''''''''''''''''' G.R. No. L316;3: )*'$ 39, 1965.

IRINE! S. BALTA<AR a'& MAR1IN !. R!SE, plaintiffs'appellees* "s% BERNAR6! ACENA, $efen$ant'appellant% Primicias and .el Castillo "or plainti""s>appellees. -anuel :. 7ernande; and Brigido /. ,strada "or and in their o*n 'ehal" as de"endants>appellants. PARE6ES, J.:

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In i"il ase C%R% No% F'18298 ) FI No% 19211,* Irineo S% Balta!ar* file$ the complaint against Finga(en Culf Dlectric &o0er Domina$or % Engson* Brigi$o C% Dstra$a* @anuel F% Fernan$e!* Bene$icto % Iuson an$ Bernar$o -cena% In i"il ase C%R% No% F'1829> ) FI No% 19212,* @ar"in O% Rose file$ the complaint against the same $efen$ants% In i"il ase C%R% No% F'1829. ) FI No% 199:/,* Balta!ar an$ Rose file$ their complaint against Bernar$o -cena alone% The Finga(en Culf Dlectric &o0er o%* Inc%* hereinafter referre$ to as orporation* 0as $oing #usiness in the &hilippines* 0ith principal offices at Finga(en* &angasinan* an$ 0ith an authori!e$ capital stock of &9//%///%// $i"i$e$ into 9*/// shares of "oting stock at &1//%// par "alue* per share% &laintiffs Balta!ar an$ Rose 0ere among the incorporators* ha"ing su#scri#e$ to 8// an$ :// shares of the capital stock* or a total par "alue of &8/*///%// an$ &:/%///%//* respecti"el(% It is allege$ that it has al0a(s #een the practice an$ proce$ure of the orporation to issue certificates of stock to its in$i"i$ual su#scri#ers for unpai$ shares of stock% Of the 8// shares of capital stock su#scri#e$ #( Balta!ar* he ha$ full( pai$ ;9; shares of stock* an$ the orporation issue$ to him se"eral full( pai$ up an$ non'assessa#le certificates of stock* correspon$ing to the ;9; shares% -fter ha"ing ma$e transfers to thir$ persons an$ ac2uire$ ne0 ones* Balta!ar ha$ to his cre$it* on the filing of the complaint 9:1 shares full( pai$ an$ non'assessa#le% 5e ha$ also 8; shares 0ith par "alue of &8*;//%//* for 0hich no certificate 0as issue$ to him% Of the :// shares of stock su#scri#e$ #( Rose* he ha$ 9>; shares of full( pai$ stock* $ul( co"ere$ #( certificates of stock issue$ to him% The respon$ents Engson* Dstra$a* Fernan$e! an$ Iuson 0ere small stockhol$ers of the orporation* all hol$ing a total num#er of full( pai$'up shares of stock* of not more than 1// shares* 0ith a par "alue of &1/*///%// an$ the $efen$ant -cena* 0as like0ise an incorporator an$ stockhol$er* hol$ing 8// shares of stock* for 0hich certificate of stock 0ere issue$ to him an$ as such* 0as the largest in$i"i$ual stockhol$er thereof% Defen$ants Engson* Dstra$a* Fernan$e! an$ Iu!on* constitute$ the ma3orit( of the hol$o"er se"en' mem#er Boar$ of Directors of the orporation* in 17;;* t0o )2, of sai$ $efen$ants ha"ing #een electe$ as mem#ers of the Boar$ in the annual stockhol$ers? meeting hel$ in @a( 17;:* largel( on the "ote of their co'$efen$ant -cena* 0hile the other t0o )2, 0ere electe$ mainl( on the "ote of the plaintiffs an$ their group of stockhol$ers% Fet the first group #e calle$ the ?ngson group an$ the secon$* the Balta;ar group% The $ate of the annual stockhol$ers? meeting of the orporation ha$ #een fi<e$* un$er its #('la0s* on the first Tues$a( of Fe#ruar( of e"er( (ear* #ut for one reason or another* the meeting 0as to #e hel$ on @a( 1* 17;;* principall( for the purpose of electing ne0 officers an$ Boar$ of Directors for the calen$ar (ear 17;;% In connection 0ith sai$ meeting since =anuar( 1* 17;;* there 0as a realignment effecte$* an$ the fight for control of the management an$ propert( of the corporation 0as close an$ keen% The total num#er of full( pai$'up shares hel$ #( stockhol$ers of one group* 0as almost e2ual the num#er of full( pai$'up shares hel$ #( the other group% The Engson group )speciall( $efen$ant -cena,* 0hich ha$ #een in complete control of the management an$ propert( of the orporation since =anuar( 1* 17;;* in or$er to continue retaining such control* o"er the o#3ection oil three ma3orit( mem#ers of the Boar$* in the regular meeting of the Boar$ of Directors* hel$ on =anuar( 9/* 17;;* passe$ three )9, resolutions )D<hs% -* B* ,% Resolution No% 2 )D<h% -,* $eclare$ all 0atere$ stocks issue$ to -cena* Balta!ar* Rose an$ =u#en"ille* +of no "alue an$ conse2uentl( cancelle$ from the #ooks of the orporation% Resolution No% 9 )D<h% B, resol"e$ that +%%% all unpai$ su#scriptions shoul$ #ear interest annuall( from the (ear of su#scription on the #asis of 2uarterl( pa(ment* an$ an( or all pa(ments alrea$( ma$e on sai$ unpai$ su#scriptions shoul$ #e cre$ite$ to pa( interest first* then the capital $e#t after all interest is full( pai$% -ll shares of stock issue$ to an$ in fa"or of an( stockhol$er or stockhol$ers of the Finga(en Culf Dlectric &o0er o%* Inc%* on account of pa(ments on unpai$ su#scriptions 0ithout the interest thereon K accrue$ an$ collecti#le ha"ing #een full( pai$ from the $ate of su#scription as re2uire$ #( the orporation Fa0* shall #e $eclare$ of no "alue an$ cancelle$ from its #ooks* an$ if the pa(ments alrea$( ma$e e<cee$e$ the interest accrue$ an$ collecti#le #( "irtue of the pro"ision of la0 an$ the pre"ious resolution of its #oar$ of $irectors* the e<cess shoul$ #e applie$ to the pa(ment of the unpai$ su#scription% For this purpose* the accountant of the corporation is $irecte$ to make an$ report the proper computation of the interest% Resolution No% : )D<h% , resol"e$ that +an( an$ all shares of stock of the Finga(en Culf Dlectric &o0er o%* Inc%* issue$ as full( pai$'up to stockhol$ers 0hose su#scription to a num#er of shares ha"e #een $eclare$ $elin2uent 0ith the accrue$ interest on the unpai$ thereof per Resolution No% :2* S% 17;:* of the Boar$ of Directors 0hich has #een $ul( pu#lishe$ in the +@anila hronicle*+ are here#( incapacitate$ to utili!e or a"ail of the "oting po0er until such $elin2uenc( 0ith the accrue$ interest is full( pai$ up as in$icate$ in Resolution No% 9* S% 17;;% On the authorit( of these resolutions* the Engson group 0as threatening an$ procuring to e<pel an$ oust the plaintiffs an$ their companion stockhol$ers* for the ultimate purpose of $epri"ing them of their right to "ote in the sai$ annual stockhol$ers? meeting sche$ule$ for @a( 1* 17;;% In their complaint* Balta!ar an$ Rose pra(e$ that a 0rit of preliminar( in3unction #e issue$ against the $efen$ants* en3oining them to desist and re"rain "rom carr(ing out the o'+ects and purposes o" the three resolutions a"orestated* an$ comman$ing them to allo0 plaintiffs an$ companions to "ote in the stockhol$ers? meeting* on @a( 1* 17;;* their "ull( paid up shares o" stoc$s* as e"i$ence$ #( stock certificates issue$ to them an$ outstan$ing on the stock #ook of the $efen$ant orporation* on or #efore =anuar( 9/* 17;;* to declare said three resolutions illegal and in!alid* an$ to pa( plaintiffs the sum of &1/*///%// each* as $amages% On -pril 27* 17;;* the trial court* after $ue hearing* issue$ &reliminar( In3unction* as pra(e$ for% The $efen$ants* in their ans0ers* allege that $uring the (ears that plaintiffs an$ their allies 0ere in control of the orporation* no serious effort 0as attempte$ to retrie"e it from its financial collapse* cause$ #( accumulate$ in$e#te$ness an$ #( poor an$ inefficient management* resulting in losses of #ig sums of mone( from "icious manipulation of fun$s* nepotism* unconsciona#le grant of #ig salaries an$ allo0ances* illegal pa(ments* unaccounte$ fun$s of alte< #usiness an$ sales $epartment store* etc%4 that $uring the time the management 0as in the han$s of plaintiffs )Rose* as manager,4 attempts 0ere ma$e to release themsel"es from lia#ilit( of their unpai$ su#scriptions4 that the three resolutions 0ere merel( functional instruments to #olster the faith in the assets of the $efen$ant orporation an$ $i$ not $epri"e the plaintiffs of their propert( 0ithout $ue process of la04 that the issuance of a 0rit of in3unction for the purpose of arresting the hol$ing of the election of the Boar$* 0as #e(on$ the 3uris$iction of the court% The( set up counterclaims% The( pra(e$ that the resolutions #e $eclare$ legal an$ "ali$* thus in"ali$ating the +0atere$ stocks+ of plaintiffs* if not pai$* an$ $is2ualif(ing o%* Inc%*

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the $elin2uent su#scri#ers* among 0hom 0ere the plaintiffs* "rom !oting totall( or partiall(* their su#scriptions4 to or$er plaintiffs to pa( the $efen$ant orporation "irst* the interest $ue an$ pa(a#le 2uarterl( at 81 per annum from =anuar( 11* 17:8 to Decem#er 91* 17;:* on their lia#ilit( un$er their $elin2uent su#scriptions* out of the installment ma$e therein4 to pa( $efen$ant entit( $amages un$er the counterclaims an$ e<penses for the enforcement of the collection4 an$ that after complete pa(ment of the interests an$ the #alance of their unpai$ su#scriptions* the $efen$ant orporation shoul$ issue the shares of stock to plaintiffs for their full su#scription% &laintiffs file$ their ans0er to $efen$ants? counterclaims* 0ith counterclaims against $efen$ants% On -ugust .* 17;;* the lo0er court issue$ an or$er $ismissing plaintiffs? counterclaims against -cena* Engson an$ Fernan$e! +0ithout pre3u$ice to filing the proper separate actions therefor #( the parties%+ onse2uentl(* an$ as heretofore mentione$* Balta!ar an$ Rose file$ ase No% 199:/ )supra,% The follo0ing tentati"e amica#le settlement* $ate$ Septem#er 19* 17;.* formulate$ an$ entere$ into #( some of the parties an$ their respecti"e attorne(s* #efore presi$ing =u$ge =esus &% @orfe* in the three cases* 0as su#mitte$6 1% -s to the so'calle$ 0ater stocks &9/*///%// each of the hol$ers of sai$ stock* namel(* Irineo Balta!ar* @ar"in Rose* an$ Bernar$o -cena* 0ill return to the corporation &9*;// each of sai$ stocks* there#( retaining &8*;// 0orth of stocks to #e consi$ere$ as "ali$ for each un$er this compromise4 2% Jith respect to Dr% Bernar$o -cena* of the certificates of stock allege$l( representing* his profit* he 0ill return to the corporation &9*;// of sai$ share of stock an$ retain &>*;// 0orth thereof 4 9% Jith respect to the interest on unpai$ #alance of su#scription it is agree$ that the su#scri#ers 0ith unpai$ su#scription #e gi"en the opportunit( to pa( in t0o installments* the first installment to co"er one'half of the unpai$ #alance to #e pai$ in three months* an$ the secon$ installment 0ill #e for the remaining unpai$ half pa(a#le in another three months* from the time of the appro"al of this agreements* 0ith the un$erstan$ing that those 0ho compl( 0ith this arrangement 0ill not pa( interest on the #alance of their su#scription* for the $ate of incorporation up to the grant of franchise on Fe#ruar( 2:* 17:.* 0hich shall #e $eeme$ as con$one$* an$ from 17:. the( 0ill pa( onl( as interest 91 compoun$e$ annuall(* it #eing un$erstoo$ that failure of an( su#scri#er to pa( an( of the installment here pro"i$e$ 0ill su#3ect the stockhol$ers concerne$ to the pro"ision of the corporation la0 of the pa(ment of 81 interest compoun$e$ 2uarterl(% :% -ll claims an$ counterclaims other than those co"ere$ #( the prece$ing paragraph of stipulation 0ill #e $eeme$ $ismisse$ 0ithout pre3u$ice* in all these three cases4 ;% -ll the resolutions of the Boar$ an$ the stockhol$ers in"ol"e$ in these instant cases 0ill #e $eeme$ mo$ifie$ in accor$ance 0ith this agreement% On Fe#ruar( 2/* 17;7* the lo0er court ren$ere$ a $ecision* appro"ing the agreement an$ re2uiring the parties to compl( 0ith the same* an$ $issol"e$ the 0rit of preliminar( in3unction* 0ith costs% The pertinent portions of the $ecision are6 In "ie0 of the agreement of the parties transcri#e$ a#o"e* this ourt is calle$ upon to $eci$e 0hether or not an( of the agreements of the parties as a#o"e transcri#e$ is contrar( to la0 or pu#lic polic(% First* as regar$s pars% 1 an$ 2* of sai$ agreement* the legal capacit( of the parties to sue an$ #e sue$ carries 0ith it the po0er to enter into an amica#le settlement of pen$ing litigations an$ to e<pressl( or implie$l( make a$missions of facts4 an$ the( coul$* therefore* agree an$ recogni!e as full( pai$ for an$ "ali$ the shares of stocks mentione$ in sai$ paragraphs of their agreement* 0hich agreement must #e hel$ "ali$ an$ #in$ing among the parties* an$ e"en as against their persons 0ho ha"e no proof that sai$ agreement 0as entere$ into in frau$ of cre$itors% The ne<t 2uestion for $ecision is 0hether or not a corporation ma( "ali$l( con$one interest on unpai$ su#scriptions to its capital stock% The fact that our orporation Fa0 authori!es pro"isions in the #('la0s of a corporation $ifferent from that set out in Sec% 9> of sai$ la0* sho0s that the pro"ision of sai$ la0 is to interest of unpai$ stock su#scriptions is merel( $irector(* so that a corporation ma( fi< a $ifferent interest rate* or con$one the pa(ment of interest altogether if such con$onation 0oul$* as in the instant cases* ser"e as in$ucement for earl( pa(ment of stock su#scriptions% The con$onation an$ re$uction of interest agree$ upon in par% 9 of the afore2uote$ agreement is* therefore* "ali$ in the a#sence of proof that sai$ agreement 0as entere$ into in frau$ of cre$itors% In connection 0ith par% ; of the afore2uote$ agreement* in relation to par% 9 thereof* this* ourt is of the opinion* an$ so hol$s* that the perio$s of time allo0e$ for making pa(ments un$er par% 9 of sai$ agreement* must #e counte$ from $ate of receipt of a cop( of this $ecision #( counsel of the parties* this $ecision constituting the final appro"al of sai$ agreement* an$ as to stockhol$ers 0ho are not parties to these cases* from $ate of notice of the sai$ time e<tension% The e<tension of time to pa(* as grante$ in par% 9 of the repealing pre"ious $eclaration of $elin2uenc( of the correspon$ing shares of stock* an$ all su#scri#e$ shares of stock* e<cept those or$ere$ to #e returne$ as pro"i$e$ in pars% 1 an$ 2 of sai$ agreement* 0ill therefore #e entitle$ to "ote until once again $eclare$ $elin2uent after the e<piration of the perio$s of time set out in par% 9 of sai$ agreement% Defen$ants on @arch 1:* 17;7 file$ a motion for reconsi$eration* alleging that the $ecision 0as partl( against the spirit an$ intention of the parties to the agreement an$ portions of the $ecision* carrie$ +pre3u$icial e"entualities*+ an$ asking that the same #e amen$e$ in the sense that +the pa(ment of o#ligations of $elin2uent incorporators has #een re$uce$ #( the agreement as state$ in paragraphs 9 an$ ;+ of sai$ agreement4 that $elin2uent stocks cannot #e "ote$ until full( pai$ in accor$ance 0ith the agreement an$ that if the plaintiffs in the a#o"e entitle$ cases coul$ not pa( in full their o#ligations 0ithin the perio$s state$ in the agreement* the resolutions of $elin2uenc( 0oul$ automaticall( stan$% On @arch 1.* 17;7* plaintiffs* in cases Nos% 19211 an$ 19212* file$ a petition for immediate e&ecution an$ for preliminar( in3unction an$Aor mandamus* pra(ing that a 0rit #e issue$* or$ering the $efen$ants* as controlling ma3orit( of hol$'o"er #oar$ of $irectors* to hol$ imme$iatel( the long $ela(e$ stockhol$ers? meeting* an$ to allo0 the plaintiffs an$ all the stockhol$ers* 0ith still unpai$ su#scriptions* to "ote all their stocks an$ su#scriptions at sai$ stockhol$ers? meeting* as $irecte$ in the $ecision% On @arch 2;* 17;7* the ourt issue$ an amending decision* pertinent portions of 0hich are hereun$er repro$uce$ K

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%%% % -fter hearing the parties in e<tensi"e oral argument* this ourt agrees 0ith the $efen$ants that par% ; of the compromise agreement of the parties* $ate$ Septem#er 19* 17;.* contemplates a mo$ification an$ not a repeal of the resolutions of the Boar$ of Directors an$ of the Stockhol$ers referre$ to in sai$ agreement% The 2uestion is* therefore* to 0hat e<tent has sai$ resolutions #een mo$ifie$M onsi$ering that the primar( intention of each of sai$ resolutions 0as to effect an earl( collection of unpai$ #alance of stock su#scriptions an$ interest thereon* an$ the mo"ing consi$eration for a compromise settlement of the instant cases is like0ise the earl( collection of the o#ligations of stockhol$ers of the $efen$ant corporation* the e<tension of time to pa(* as grante$ in par% 9 of sai$ agreement* 0as clearl( inten$e$ to co"er not onl( the accrue$ interest #ut also the unpai$ stock su#scription of the stockhol$ers* for to hol$ other0ise 0oul$ #e to $efeat the primar( purpose of earl( collection of sai$ o#ligations% onsi$ering the same paramount intention of sai$ resolution* an$ of the aforesai$ compromise agreement* it like0ise follo0s that the e<tension of time to pa( an$ the re$uction of interest em#o$ie$ in the sai$ agreement must appl( to all stockhol$ers similarl( situate$% Regar$ing the right to "ote* this ourt like0ise agrees 0ith the $efen$s its that the facts consi$ere$ $uring the negotiations for settlement effecte$ #( the parties in the ham#ers of the presi$ing 3u$ge $o not 0arrant repeal of the $eclaration of $elin2uenc( an$ complete restoration of "oting rights until full pa(ment of the unpai$ stock su#scriptions an$ interest 0ithin the time an$ to the e<tent mentione$ in par% 9 of the aforesai$ compromise agreement% To rule other0ise 0oul$ #e to encourage non'pa(ment of the #alance of stock su#scriptions an$ thus $efeat the paramount intention of the compromise agreement% State$ $ifferentl(* this ourt no0 hol$s that the e<tension of time to pa(* as grante$ in par% 9 of the aforesai$ compromise agreement* has the effect of lifting the pre"ious $eclaration of $elin2uenc( effecti"e as of full pa(ment of the #alance of sai$ stock su#scriptions an$ interest 0ithin the perio$s of time mentione$ in par% 9 of sai$ compromise agreement% In "ie0 of the uncertaint( #rought a#out #( the motion for reconsi$eration an$ the motion for e<ecution aforementione$* it 0oul$ #e un3ust to count the perio$s of time mentione$ in the aforesai$ compromise agreement from the $ate of receipt of the original $ecision of this ourt in these cases% The e<tension of time to pa( shoul$* therefore* #e counte$ from receipt #( counsel for the parties of a cop( of this amen$ing $ecision* an$ from receipt #( the other stockhol$ers of notice of sai$ e<tension of time4 an$ the in3unction in the instant case shoul$ #e $eeme$ in force for the $uration of sai$ e<tension of time to pa(% J5DRDFORD* the $ecision of this ourt ren$ere$ in these cases on Fe#ruar( 2/* 17;7 is here#( mo$ifie$ in the manner set out a#o"e* maintaining sai$ $ecision in all other respects% On -pril :* 17;7 * plaintiffs file$ a motion for reconsi$eration an$Aor ne0 trial* pra(ing that the amen$ing $ecision $ate$ @arch 2;* 17;7* #e reconsi$ere$ an$Aor further clarifie$% =n Jul( @3, @646* the trial court re!ersed its amending decision in an or$er* the rele"ant parts thereof follo06 J5DRDFORD* #( 0a( of amen$ment to #oth the original an$ amen$ing $ecisions of this ourt in the instant case* this Court here'( e&pressl( rules that all shares o" the capital stoc$ o" the de"endant corporation co!ered '( "ull( paid capital stoc$ shares certi"icates are entitled to !ote in all meetings o" the stoc$holders o" this corporation, and Resolutions 0os. 5, 3 and 2 (,&hs. C, C>@ and C>5) o" de"endantAs corporationAs Board o" .irectors are here'( nulli"ied inso"ar as the( are inconsistent the this ruling% The e<tensions of time to pa(* referre$ to in par% 9 of the settlement agreement of the parties* 0ill start to run from the $ate of receipt #( counsel for the parties of a cop( of this Or$er* an$ from receipt #( the other stockhol$ers of notice of sai$ e<tension of time% The in3unction grante$ in the instant case is here#( $issol"e$* an$ the in3unction #on$ file$ #( the plaintiffs is here#( cancelle$ an$ release$% Defen$ants on -ugust 1:* 17;7 perfecte$ their appeal against the a#o"e ruling* on purel( 2uestions of la0% &laintiffs'appellees $i$ not file an( #rief* manifesting that the( 0ere rel(ing on their arguments containe$ in their motion for reconsi$eration* $ate$ -pril :* 17;7 file$ 0ith the trial court% )pp% 219 to 21.* rec% on appeal, an$ on the reasons set forth in the trial court?s or$er* $ate$ =ul( 18* 17;7* thir$ $ecision )pp% 217 to 29/ R%-%,% &en$ing $ecision* the parties 0ere re2uire$ to sho0 cause 0h( the cases shoul$ not #e $ismisse$ for ha"ing #ecome moot or aca$emic* in "ie0 of the fact that the appellees* taking a$"antage of the $ecision of the trial court* +ha$ pai$ all other $elin2uencies an$ interest thereon*+ #ut the appellants manifeste$ that these cases shoul$ #e $eci$e$ on the issues raise$* to $etermine* once an$ for all* the "oting rights of the other $elin2uent su#scri#ers* in the election of the compan(?s Boar$ of Directors 0hich ha$ #een suspen$e$ since @a( 1* 17;;* #ecause of the litigation% The 2uestions poste$ in the appeal* in "ie0 of the a#o"e facts 0oul$* therefore* #e6 1% If a stockhol$er* in a stock corporation* su#scri#es to a certain num#er of shares of stock* an$ he pa(s onl( partiall(* for 0hich he is issue$ certificates of stock* is he entitle$ to "ote the latter* not0ithstan$ing the fact that he has not pai$ the #alance of his su#scription* 0hich has #een calle$ for pa(ment or $eclare$ $elin2uentM 2% If a stockhol$er su#scri#es to a certain num#er of shares of stock an$ makes partial pa(ment onl( an$ $eclare$ $elin2uent as to the rest* 0ith interest* shoul$ pre"ious pa(ments on account of the capital* #e first applie$ to interest* thus $iminishing the "oting po0er of the shares of stock alrea$( pai$M In other 0or$s* if the entire su#scri#e$ shares of stock are not pai$* 0ill the pai$ shares of stock #e $epri"e$ of the right to "ote* until the entire su#scri#e$ shares of stock are full( pai$* inclu$ing interestM 9% 5as estoppel or 0ai"er* #( "irtue of the settlement agreement* set inM Defen$ants'appellants claim that resolution No% : )D<h% '2,* *ithdra*ing or nulli"(ing the "oting po0er of all the aforesai$ shares of stock is "ali$* not0ithstan$ing the e<istence of partial pa(ments* e"i$ence$ #( certificates $ul( issue$ therefor% The( in"oke the ruling lai$ $o0n #( the ourt in the 7ua Cun !. #ummers case ):: &hil* >/;* @arch 2>* 1729, pertinent portion of 0hich states6

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n the a'sence o" special agreement to the contrar(* a su#scri#er for a certain num#er of shares of stock $oes not* upon pa(ment of one'half of the su#scription price* #ecome entitle$ to the issuance of certificates for one'half of the num#er of shares su#scri#e$ for4 the su#scri#er?s right consists onl( in equit( entitling him to a certificate for the total num#er of shares su#scri#e$ for #( him upon pa(ment o" the remaining portion o" the su'scription price% The cite$ case connotes the principle that a partial pa(ment of a su#scription $oes not entitle the stockhol$er to a certificate for the total num#er of shares su#scri#e$ #( him4 his right consists onl( in equit( to a certificate of the total num#er of shares su#scri#e$ for* upon pa(ment of the remaining portion of the su#scription price% In other 0or$s* it is conten$e$* as in the present case* that if Balta!ar su#scri#e$ to 8// shares of stock in a single su#scription* an$ he merel( pai$ for 9// shares* for 0hich he 0as gi"en full( pai$ certificates for 9// shares* he cannot "ote sai$ 9// shares* in an( meeting of the orporation* until he shall ha"e pai$ the remaining 9// shares of stock% The sa"ing clause in the 2uote$ pronouncement* +in the a#sence of special agreement to the contrar(*+ re"eals that the $octrine is not man$ator(* #ut merel( $irector(* 0hich is not "iolati"e of la0* the rigor of the pronouncement ma( #e rela<e$% The plaintiffs'appellees seem to sustain an a$"erse concept* postulating that once a stockhol$er has su#scri#e$ to a certain num#er of shares* although he has ma$e partial pa(ments onl(* #ut is issue$ a certificate for the pai$'up shares of stock* he is entitle$ to "ote the 0hole num#er of shares su#scri#e$ #( him* pai$ or not* until the sai$ unpai$ shares shall ha"e #een calle$ for pa(ment or $eclare$ $elin2uent% The cases at #ar $o not come un$er the aegis of the principle enunciate$ in the 7ua Cun !. #ummers case* #ecause it 0as the practice an$ proce$ure* since the inception of the corporation* to issue certificates of stock to its in$i"i$ual su#scri#ers for unpai$ shares of stock an$ ga"e "oting po0er to shares of stock full( pai$% -n$ e"en though no agreement e<iste$* the ruling in sai$ case* $oes not no0 reflect the correct "ie0 on the matter* for #etter than an agreement or practice* there is the la0* 0hich ren$ers the sai$ case of Fua un'Summers* o#solescent% Section 9> of the orporation Fa0* as amen$e$ #( -ct No% 9;1.* appro"e$ on @arch 1* 1727* si< )8, (ears a"terthe promulgation of the Fua'Summers case )$eci$e$ in 1729,* pro"i$es6 SD % 9>% %%% % No certificate of stock shall #e issue$ to a su#scri#er as full( pai$ up until the "ull par !alue thereo", or the "ull su'scription in the case o" no par stoc$, has 'een paid '( him to the corporation% Su#scri#e$ shares not full( pai$ up ma( #e "ote$ pro"i$e$ no su#scription is unpai$ an$ $elin2uent% The la0 3ust 2uote$ 0as originall( section 98 of the orporation Fa0 of 17/8* 0hich rea$s as follo0s6 SD % 98% %%% % No certificate of stock shall #e issue$ to a su#scri#er as full( pai$ up until the "ull par !alue thereo" has 'een paid '( him to the corporation% Su#scri#e$ shares not full( pai$ up ma( #e "ote$ pro"i$e$ no su#scription is unpai$ an$ $elin2uent% -s ma( rea$il( #e seen* sai$ Section 9> makes pa(ment of the +par !alue+ as prere2uisite for the issuance of certificates of par !alue stoc$s* an$ makes pa(ment of the +"ull su'scription+ as prere2uisite for the issuance of certificates of no par !alue stoc$s% No such $istinction 0as containe$ in section 98 of our orporation Fa0 of 17/8* correspon$ing to section 9> no0% The present la0 coul$ ha"e simpl( pro"i$e$ that no certi"icate o" par !alue and no par !alue stoc$ shall #e issue$ to a su#scri#er* as full( pai$ up* until the full su#scription has #een pai$ #( him to the corporation* i" "ull pa(ment o" su'scription 0ere inten$e$ is the criterion in the issuance of certificates* for #oth the par !alue and no par !alue stocks% State$ in another 0a(* the present la0 re2uires as a con$ition #efore a share hol$er can "ote his shares* that his "ull su'scription 'e paid in the case o" no par !alue stoc$B an$ in case of stock corporation 0ith par "alue* the stockhol$er can "ote the shares full( pai$ #( him onl(* irrespecti"e of the unpai$ $elin2uent shares% -s 0ell' o#ser"e$ #( the trial court* a corporation ma( no0* in the a#sence of pro"isions in their #('la0s to the contrar(* appl( pa(ment ma$e #( * su#scri#ers'stockhol$ers* either as6 +)a, full pa(ment for the correspon$ing num#er of shares of stock* the par "alue of each of 0hich is co"ere$ #( such pa(ment4 or )#, as pa(ment pro'rata to each an$ all the entire num#er of shares su#scri#e$ for+ )amen$e$ $ecision,% In the cases at #ar* the $efen$ant'corporation ha$ chosen to appl( pa(ments #( its stockhol$ers to $efinite shares of the capital stock of the corporation an$ ha$ full( pai$ capital stock shares certificates for sai$ pa(ments4 its call for pa(ment of unpai$ su#scription an$ its $eclaration of $elin2uenc( for non'pa(ment of sai$ call affecting onl( the remaining num#er of shares of its capital stock for 0hich no full( pai$ capital stock shares certificates ha"e #een issue$* +an$ onl( these ha"e #een legall( shorn of their "oting rights #( sai$ $eclaration of $elin2uenc(+ )amen$e$ $ecision,% The thir$ paragraph of the settlement agreement relates to interest on the unpai$ #alance of su#scription to the capital stock% The secon$ paragraph of resolution No% 9 )D<h% '1,* unilaterall( $eclare$ as of no "alue an$ cancelle$ all capital stock shares certificates issue$ as full( pai$ up* upon pa(ments ma$e #( stockhol$ers* 0hen interests on unpai$ su#scription from $ate of su#scription 0ere not pre"iousl( an$Aor then an$ there pai$% Defen$ants'appellants* in"oking -rt% 12;9 N )-rt% 11>9 of the Ol$ i"il o$e, 0hich pro"i$es that +if the $e#t pro$uces interest* pa(ment of the principal shall not #e $eeme$ to ha"e #een ma$e until the interests ha"e #een co"ere$*+ an$ rel(ing on an opinion of the Securities an$ D<change ommission* claim that sai$ unilateral nullification an$Aor cancellation of pre"iousl( issue$ capital stock shares certificates 0as "ali$% This pro"ision of la0 onl( applies in the a#sence of "er#al or 0ritten agreement* to the contrar( ). @anresa* p% 91>,4 it is like0ise merel( $irector(* an$ not man$ator(% )-rt% 12;2 N ,% In the present case* the $efen$ant'corporation ha$ applie$ the pa(ments ma$e #( the stockhol$ers to the full par "alue of the shares of stock su#scri#e$ #( them* instea$ of the accepte$ interest* as sho0n #( the capital stock shares certificate issue$ for the pa(ments ma$e* an$ the stockhol$ers ha$ accepte$ such certificates issue$ for such pa(ments% This #eing the case* the sai$ application of pa(ments must #e $eeme$ to ha"e #een agree$ upon #( the orporation an$ the stockhol$ers* an$ the same cannot no0 #e change$ 0ithout the consent of the stockhol$ers concerne$% The orporation Fa0 an$ the #('la0s of the $efen$ant orporation $o not contain an( pro"ision* prohi#iting the application of stockhol$ers? pa(ments to the full par "alue of a corporation?s capital stock* ahea$ of the pa(ment of accrue$ interest for unpai$ su#scriptions% It 0oul$* therefore* result that a corporation ma(* upon re2uest of an intereste$ stockhol$er* as his option* appl( pa(ment #( them to the full par "alue of shares of capital lea"ing its collection later of the accrue$ interest on unpai$ su#scriptions* an$ that once such option has #een e<ercise$ an$ the correspon$ing stock certificates ha"e #een issue$* the corporation cannot* #( a unilateral act* legall( nullif( an$ cancel the capital stock certificates so issue$% It is finall( argue$ #( $efen$ants'appellants that the plaintiffs'appellees 0ai"e$* un$er the agreement heretofore 2uote$* the right to enforce the "oting po0er the( 0ere claiming to e<ercise* an$ upon the principle of estoppel* the( are no0 prohi#ite$ from insisting on the e<istence of such po0er* en$ing 0ith the e<hortation* that +the( shoul$ lie upon the #e$ the( helpe$ #uilt* for a lasting peace in the interest of the corporation%+ It shoul$* ho0e"er* #e state$ as heretofore e<pose$* that certain clauses of the agreement are contrar( to la0 an$ pu#lic polic( an$ 0oul$ cause in3ur( to plaintiffs'appellees an$ other stockhol$ers similarl( situate$% Dstoppel cannot #e pre$icate$ on acts 0hich are prohi#ite$ #( la0 or are against pu#lic polic( )Benguet ons% @ining o% "% &ine$a* ;2 Off% Ca!% 1781* F' >291* @arch 2.* 17;84 Dugenio "% &er$i$o F'>/.9* @a( 17* 17;;4 III Rep% of the &hilippines Digest* p% 287'2>/,%

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J5DRDFORD* the or$er of the trial court of =ul( 18* 17;7* )1, D<pressl( ruling +that all shares of the capital stocks of the $efen$ant corporation co"ere$ #( full( pai$ capital stock shares of certificates are entitled to !ote in all meetings of the stockhol$ers of this corporation an$ resolutions Nos% 2* 9 an$ : )D<hs% * '1 an$ '2, of $efen$ant corporation?s Boar$ of Directors are here#( nullifie$ insofar as the( are inconsistent 0ith this ruling+4 an$ )2, Dissol"ing the in3unction grante$ in the cases an$ releasing the in3unction #on$ file$ #( the plaintiffs'appellees* is correct an$ the same shoul$ #e* as it is here#( affirme$% osts ta<e$ against the $efen$ants' appellants% Beng;on , C.J., Bautista Cngelo, Concepcion, Re(es, J.B.:., .i;on, Regala and Daldi!ar, JJ., concur. -a$alintal, J., concurs in the result. Barrera and Beng;on, J.P., JJ., too$ no part. S$c. 56. 1o+%'( %' ca#$ o, Go%'+ o?'$r#h%B o, #+oc@. ' In case of shares of stock o0ne$ 3ointl( #( t0o or more persons* in or$er to "ote the same* the consent of all the co'o0ners shall #e necessar(* unless there is a 0ritten pro<(* signe$ #( all the co'o0ners* authori!ing one or some of them or an( other person to "ote such share or shares6 &ro"i$e$* That 0hen the shares are o0ne$ in an +an$Aor+ capacit( #( the hol$ers thereof* an( one of the 3oint o0ners can "ote sai$ shares or appoint a pro<( therefor% )n, S$c. 55. R%(h+ +o Ao+$ o, B/$&(or#, Cor+(a(or#, a'& a&C%'%#+ra+or#. ' In case of ple$ge$ or mortgage$ shares in stock corporations* the ple$gor or mortgagor shall ha"e the right to atten$ an$ "ote at meetings of stockhol$ers* unless the ple$gee or mortgagee is e<pressl( gi"en #( the ple$gor or mortgagor such right in 0riting 0hich is recor$e$ on the appropriate corporate #ooks% )n, D<ecutors* a$ministrators* recei"ers* an$ other legal representati"es $ul( appointe$ #( the court ma( atten$ an$ "ote in #ehalf of the stockhol$ers or mem#ers 0ithout nee$ of an( 0ritten pro<(% )2>a, S$c. 199. A(r$$C$'+# >2 #+oc@ho/&$r#. 3 1% -greements #( an$ among stockhol$ers e<ecute$ #efore the formation an$ organi!ation of a close corporation* signe$ #( all stockhol$ers* shall sur"i"e the incorporation of such corporation an$ shall continue to #e "ali$ an$ #in$ing #et0een an$ among such stockhol$ers* if such #e their intent* to the e<tent that such agreements are not inconsistent 0ith the articles of incorporation* irrespecti"e of 0here the pro"isions of such agreements are containe$* e<cept those re2uire$ #( this Title to #e em#o$ie$ in sai$ articles of incorporation% 2% -n agreement #et0een t0o or more stockhol$ers* if in 0riting an$ signe$ #( the parties thereto* ma( pro"i$e that in e<ercising an( "oting rights* the shares hel$ #( them shall #e "ote$ as therein pro"i$e$* or as the( ma( agree* or as $etermine$ in accor$ance 0ith a proce$ure agree$ upon #( them% 9% No pro"ision in an( 0ritten agreement signe$ #( the stockhol$ers* relating to an( phase of the corporate affairs* shall #e in"ali$ate$ as #et0een the parties on the groun$ that its effect is to make them partners among themsel"es% :% - 0ritten agreement among some or all of the stockhol$ers in a close corporation shall not #e in"ali$ate$ on the groun$ that it so relates to the con$uct of the #usiness an$ affairs of the corporation as to restrict or interfere 0ith the $iscretion or po0ers of the #oar$ of $irectors6 &ro"i$e$* That such agreement shall impose on the stockhol$ers 0ho are parties thereto the lia#ilities for managerial acts impose$ #( this o$e on $irectors% ;% To the e<tent that the stockhol$ers are acti"el( engage$ in the management or operation of the #usiness an$ affairs of a close corporation* the stockhol$ers shall #e hel$ to strict fi$uciar( $uties to each other an$ among themsel"es% Sai$ stockhol$ers shall #e personall( lia#le for corporate torts unless the corporation has o#taine$ reasona#l( a$e2uate lia#ilit( insurance S$c. 7=. Boo@# +o >$ @$B+E #+oc@ +ra'#,$r a($'+% ' D"er( corporation shall keep an$ carefull( preser"e at its principal office a recor$ of all #usiness transactions an$ minutes of all meetings of stockhol$ers or mem#ers* or of the #oar$ of $irectors or trustees* in 0hich shall #e set forth in $etail the time an$ place of hol$ing the meeting* ho0 authori!e$* the notice gi"en* 0hether the meeting 0as regular or special* if special its o#3ect* those present an$ a#sent* an$ e"er( act $one or or$ere$ $one at the meeting% Epon the $eman$ of an( $irector* trustee* stockhol$er or mem#er* the time 0hen an( $irector* trustee* stockhol$er or mem#er entere$ or left the meeting must #e note$ in the minutes4 an$ on a similar $eman$* the (eas an$ na(s must #e taken on an( motion or proposition* an$ a recor$ thereof carefull( ma$e% The protest of an( $irector* trustee* stockhol$er or mem#er on an( action or propose$ action must #e recor$e$ in full on his $eman$% The recor$s of all #usiness transactions of the corporation an$ the minutes of an( meetings shall #e open to inspection #( an( $irector* trustee* stockhol$er or mem#er of the corporation at reasona#le hours on #usiness $a(s an$ he ma( $eman$* 0riting* for a cop( of e<cerpts from sai$ recor$s or minutes* at his e<pense% -n( officer or agent of the corporation 0ho shall refuse to allo0 an( $irector* trustees* stockhol$er or mem#er of the corporation to e<amine an$ cop( e<cerpts from its recor$s or minutes* in accor$ance 0ith the pro"isions of this o$e* shall #e lia#le to such $irector* trustee* stockhol$er or mem#er for $amages* an$ in a$$ition* shall #e guilt( of an offense 0hich shall #e punisha#le un$er Section 1:: of this o$e6 &ro"i$e$* That if such refusal is ma$e pursuant to a resolution or or$er of the #oar$ of $irectors or trustees* the lia#ilit( un$er this section for such action shall #e impose$ upon the $irectors or trustees 0ho "ote$ for such refusal6 an$ &ro"i$e$* further* That it shall #e a $efense to an( action un$er this section that the person $eman$ing to e<amine an$ cop( e<cerpts

21
from the corporation?s recor$s an$ minutes has improperl( use$ an( information secure$ through an( prior e<amination of the recor$s or minutes of such corporation or of an( other corporation* or 0as not acting in goo$ faith or for a legitimate purpose in making his $eman$% Stock corporations must also keep a #ook to #e kno0n as the +stock an$ transfer #ook+* in 0hich must #e kept a recor$ of all stocks in the names of the stockhol$ers alpha#eticall( arrange$4 the installments pai$ an$ unpai$ on all stock for 0hich su#scription has #een ma$e* an$ the $ate of pa(ment of an( installment4 a statement of e"er( alienation* sale or transfer of stock ma$e* the $ate thereof* an$ #( an$ to 0hom ma$e4 an$ such other entries as the #('la0s ma( prescri#e% The stock an$ transfer #ook shall #e kept in the principal office of the corporation or in the office of its stock transfer agent an$ shall #e open for inspection #( an( $irector or stockhol$er of the corporation at reasona#le hours on #usiness $a(s% No stock transfer agent or one engage$ principall( in the #usiness of registering transfers of stocks in #ehalf of a stock corporation shall #e allo0e$ to operate in the &hilippines unless he secures a license from the Securities an$ D<change ommission an$ pa(s a fee as ma( #e fi<e$ #( the ommission* 0hich shall #e rene0a#le annuall(6 &ro"i$e$* That a stock corporation is not preclu$e$ from performing or making transfer of its o0n stocks* in 0hich case all the rules an$ regulations impose$ on stock transfer agents* e<cept the pa(ment of a license fee herein pro"i$e$* shall #e applica#le% );1a an$ 92a4 B% &% No% 28.% /.R. 0o. 2516@, Chua /uan !. #amahang -agsasa$a nc. et al., 35 Phil. 275 Repu#lic of the &hilippines SUPREME C!URT @anila DN B-N No"em#er 2* 179; C%R% No% :2/71 G!N<AL! C UA GUAN, plaintiff'appellant* "s% SAMA ANG MAGSASAKA, INC., a'& SIMPLICI! !CAMP!, A6RIAN! G. S!TT!, a'& EMILI! 1ERGARA, a# Br$#%&$'+, #$cr$+ar2 a'& +r$a#*r$r r$#B$c+%A$/2 o, +h$ #aC$,$efen$ants'appellees% Buena!entura C. :ope; "or appellant. .omingo :. Vergara "or appellees. BUTTE, J.: This is an appeal from a 3u$gment of the ourt of First Instance of Nue"a Dci3a in an action for a 0rit of mandamus% The case is remarka#le for the follo0ing reason6 that the parties entere$ into a stipulation in 0hich the $efen$ants a$mitte$ all of the allegations of the complaint an$ the plaintiff a$mitte$ all of the special $efenses in the ans0er of the $efen$ants* an$ on this stipulation the( su#mitte$ the case for $ecision% The complaint alleges that the $efen$ant Samahang @agsasaka* Inc%* is a corporation $ul( organi!e$ un$er the la0s of the &hilippine Islan$s 0ith principal office in a#anatuan* Nue"a Dci3a* an$ that the in$i"i$ual $efen$ants are the presi$ent* secretar( an$ treasurer respecti"el( of the same4 that on =une 1.* 1791* Con!alo 5% o Toco 0as the o0ner of ;*.7: shares of the capital stock of the sai$ corporation represente$ #( nine certificates ha"ing a par "alue of &; per share4 that on sai$ $ate Con!alo 5% o Toco* a resi$ent of @anila* mortgage$ sai$ ;*.7: shares to hua hiu to guarantee the pa(ment of a $e#t of &2/*/// $ue on or #efore =une 17* 1792% The sai$ certificates of stock 0ere $eli"ere$ 0ith the mortgage to the mortgagee* hua hiu% The sai$ mortgage 0as $ul( registere$ in the office of the register of $ee$s of @anila on =une 29* 1791* an$ in the office of the sai$ corporation on Septem#er 9/* 1791% On No"em#er 2.* 1791* hua hiu assigne$ all his right an$ interest in the sai$ mortgage to the plaintiff an$ the assignment 0as registere$ in the office of the register of $ee$s in the it( of @anila on Decem#er 2.* 1791* an$ in the office of the sai$ corporation on =anuar( :* 1792% The $e#tor* Con!alo 5% o Toco* ha"ing $efaulte$ in the pa(ment of sai$ $e#t at maturit(* the plaintiff foreclose$ sai$ mortgage an$ $eli"ere$ the certificates of stock an$ copies of the mortgage an$ assignment to the sheriff of the it( of @anila in or$er to sell the sai$ shares at pu#lic auction% The sheriff auctione$ sai$ ;*.7: shares of stock on Decem#er 22* 1792* an$ the plaintiff ha"ing #een the highest #i$$er for the sum of &1:*97/* the sheriff e<ecute$ in his fa"or a certificate of sale of sai$ shares% The plaintiff ten$ere$ the certificates of stock stan$ing in the name of Con!alo 5% o Toco to the proper officers of the corporation for cancellation an$ $eman$e$ that the( issue ne0 certificates in the name of the plaintiff% The sai$ officers )the in$i"i$ual $efen$ants, refuse$ an$ still refuse to issue sai$ ne0 shares in the name of the plaintiff% The pra(er is that a 0rit of mandamus #e issue$ re2uiring the $efen$ants to transfer the sai$ ;*.7: shares of stock to the plaintiff #( cancelling the ol$ certificates an$ issuing ne0 ones in their stea$% The special $efenses set up in the ans0er are as follo0s6 that the $efen$ants refuse to cancel the sai$ certificates stan$ing in the name of Con!alo 5% o Toco on the #ooks of the corporation an$ to issue ne0 ones in the name of the plaintiff #ecause prior to the $ate 0hen the plaintiff ma$e his $eman$* to 0it* Fe#ruar( :* 1799* nine attachments ha$ #een issue$ an$ ser"e$ an$ note$ on the #ooks of the corporation against the shares of Con!alo 5% o Toco an$ the plaintiff o#3ecte$ to ha"ing these attachments note$ on the ne0 certificates 0hich he $eman$e$% These attachments note$ on the #ooks of the corporation against the shares of Con!alo 5% o Toco are as follo0s6 SS incomplete source TT It 0ill #e note$ that the first eight of the sai$ 0rits of attachment 0ere ser"e$ on the corporation an$ note$ on its recor$s #efore the corporation recei"e$ notice from the mortgagee hua hiu of the mortgage of sai$ shares $ate$ =une 1.* 1791% No 2uestion is raise$ as to the "ali$it( of sai$ mortgage or of sai$ 0rits of attachment an$ the sole 2uestion presente$ for $ecision is 0hether the sai$ mortgage takes priorit( o"er the sai$ 0rits of attachment%

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It is not allege$ that the sai$ attaching cre$itors ha$ actual notice of the sai$ mortgage an$ the 2uestion therefore narro0s itself $o0n to this6 Di$ the registration of sai$ chattel mortgage in the registr( of chattel mortgages in the office of the register of $ee$s of @anila* un$er $ate of =ul( 29* 1791* gi"e constructi"e notice to the sai$ attaching cre$itorsM In passing* let it #e note$ that the registration of the sai$ chattel mortgage in the office of the corporation 0as not necessar( an$ ha$ no legal effect% )@onserrat !s. eron* ;. &hil%* :87%, The long moote$ 2uestion as to 0hether or not shares of a corporation coul$ #e h(pothecate$ #( placing a chattel mortgage on the certificate representing such shares 0e no0 regar$ as settle$ #( the case of -onserrat !s. Ceron, supra% But that case $i$ not $eal 0ith an( 2uestion relating to the registration of such a mortgage or the effect of such registration% Nothing appears in the recor$ of that case e"en ten$ing to sho0 that the chattel mortgage there in"ol"e$ 0as e"er registere$ an(0here e<cept in the office of the corporation* an$ there 0as no 2uestion in"ol"e$ there as to the right of priorit( among conflicting claims of cre$itors of the o0ner of the shares% The hattel @ortgage Fa0* -ct No% 1;/.* as amen$e$ #( -ct No% 2:78* contains the follo0ing pro"ision6 SD % :% - chattel mortgage shall not #e "ali$ against an( person e<cept the mortgagor* his e<ecutors or a$ministrators* unless the possession of the propert( is $eli"ere$ to an$ retaine$ #( the mortgagee or unless the mortgage is recor$e$ in the office of the register of $ee$s of the pro"ince in 0hich the mortgagor resi$es at the time of making the same* or* if he resi$es the &hilippine Islan$s* in the pro"ince in 0hich the propert( is situate$6 Pro!ided, ho*e!er, That if the propert( is situate$ in a $ifferent pro"ince from that in 0hich the mortgagor resi$es* the mortgage shall #e recor$e$ in the office of the register of $ee$s of #oth the pro"ince in 0hich the mortgagor resi$es an$ that in 0hich the propert( is situate$* an$ for the purposes of this -ct the it( of @anila Shall #e $eeme$ to #e a pro"ince% The practical application of the hattel @ortgage Fa0 to shares of stock of a corporation presents consi$era#le $ifficult( an$ 0e ha"e o#taine$ little ai$ from the $ecisions of other 3uris$ictions #ecause that form of mortgage is ill suite$ to the h(pothecation of shares of stock an$ has #een rarel( use$ else0here% In fact* it has #een $ou#te$ 0hether shares of stock in a corporation are chattels in the sense in 0hich that 0or$ is use$ chattel mortgage statutes% This $ou#t is reflecte$ in our o0n $ecision in the case of 7ua Cun !s. #ummers and China Ban$ing Corporation ):: &hil%* >/;,* in 0hich 0e sai$6 +% % % an e2uit( in shares of stock is of such an intangi#le character that it is some0hat $ifficult to see ho0 it can #e treate$ as a chattel an$ mortgage$ in such a manner that the recor$ing of the mortgage 0ill furnish constructi"e notice to thir$ parties% % % %+-n$ 0e hel$ that the chattel mortgage there in"ol"e$6 +at least operate$ as a con$itional e2uita#le assignment%+ In that case 0e 2uote$ the follo0ing from Spal$ing !s. &aine?s -$m?r% ).1 G(%* :18,* 0ith regar$ to a chattel mortgage of shares of stock6 +These certificates of stock are in the pockets of the o0ner* an$ go 0ith him 0here he ma( happen to locate* as choses in action* or e"i$ence of his right* 0ithout an( means on the part of those 0ith 0hom he proposes to $eal on the faith of such a securit( of ascertaining 0hether or not this stock is in ple$ge or mortgage$ to others% 5e fin$s the name of the o0ner on the #ooks of the compan( as a su#scri#er of pai$'up stock* amounting to 1./ shares* 0ith the certificates in his possession* pa(s for these certificates their full "alue* an$ has the transfer to him ma$e on the #ooks of the compan(* there#( o#taining a perfect title% Jhat other in2uir( is he to make* so as to make his in"estment certain an$ secureM Jhere is he to look* in or$er to ascertain 0hether or not this stock has #een mortgage$M The chief office of the compan( ma( #e at one place to$a( an$ at another tomorro0% The o0ner ma( ha"e no fi<e$ or permanent a#o$e* an$ 0ith his notes in one pocket an$ his certificates of stock in the other K the one e"i$encing the e<tent of his interest in the stock of the corporation* the other his right to mone( o0ing him #( his $e#tor* 0e are aske$ to sa( that the mortgage is effectual as to the one an$ inoperati"e as to the other%+ But the case of 7ua Cun !s. #ummers and China Ban$ing Corporation, supra* $i$ not $eci$e the 2uestion here presente$ an$ ga"e no light as to the registration of a chattel mortgage of shares of stock of a corporation un$er the pro"isions of section : of the hattel @ortgage Fa0* supra% Section : of -ct No% 1;/. pro"i$es t0o 0a(s for e<ecuting a "ali$ chattel mortgage 0hich shall #e effecti"e against thir$ persons% First* the possession of the propert( mortgage must #e $eli"ere$ to an$ retaine$ #( the mortgagee4 an$* secon$* 0ithout such $eli"er( the mortgage must #e recor$e$ in the proper office or offices of the register or registers of $ee$s% If a chattel mortgage of shares of stock of a corporation ma( "ali$l( #e ma$e 0ithout the $eli"er( of possession of the propert( to the mortgagee an$ the mere registration of the mortgage is sufficient to constructi"e notice to thir$ parties* 0e are confronte$ 0ith the 2uestion as to the proper place of registration of such a mortgage% Section : pro"i$es that in such a case the mortgage resi$es at the time of making the same or* if he is a non' resi$ent* in the pro"ince in 0hich the propert( is situate$4 an$ it also pro"i$es that if the propert( is situate$ in a $ifferent pro"ince from that in 0hich the mortgagor resi$es the mortgage shall #e recor$e$ #oth in the pro"ince of the mortgagor?s resi$ence an$ in the pro"ince 0here the propert( is situate$% If 0ith respect to a chattel mortgage of shares of stock of a corporation* registration in the pro"ince of the o0ner?s $omicile shoul$ #e sufficient* those 0ho len$ on such securit( 0oul$ #e confronte$ 0ith the practical $ifficult( of #eing compelle$ not onl( to search the recor$s of e"er( pro"ince in 0hich the mortgagor might ha"e #een $omicile$ #ut also e"er( pro"ince in 0hich a chattel mortgage #( an( former o0ner of such shares might #e registere$% Je cannot think that it 0as the intention of the legislature to put this almost prohi#iti"e impe$iment upon the h(pothecation of shares of stock in "ie0 of the great "olume of #usiness that is $one on the faith of the ple$ge of shares of stock as collateral% It is a common #ut not accurate generali!ation that the situs of shares of stock is at the $omicile of the o0ner% The term situs is not one of fi<e$ of in"aria#le meaning or usage% Nor shoul$ 0e lose sight of the $ifference #et0een the situs of the shares an$ the situs of the certificates of shares% The situs of shares of stock for some purposes ma( #e at the $omicile of the o0ner an$ for others at the $omicile of the corporation4 an$ e"en else0here% ) f% Vi$al !s. South -merican Securities o%* 2>8 Fe$%* .;;4 Black Dagle @in% o% !s. onro(* 7: Okla%* 1774 221 &ac** :2; Norrie !s. Gansas it( Southern R(% o%* > Fe$% [2$]% 1;.%, It is a general rule that for purposes of e<ecution* attachment an$ garnishment* it is not the $omicile of the o0ner of a certificate #ut the $omicile of the corporation 0hich is $ecisi"e% )Fletcher* (clope$ia of the Fa0 of &ri"ate orporations* "ol% 11* paragraph ;1/8% f% sections :9/ an$ :;/* o$e of i"il &roce$ure%, B( analog( 0ith the foregoing an$ consi$ering the o0nership of shares in a corporation as propert( $istinct from the certificates 0hich are merel( the e"i$ence of such o0nership* it seems to us a reasona#le construction of section : of -ct No% 1;/. to hol$ that the propert( in the shares ma( #e $eeme$ to #e situate$ in the pro"ince in 0hich the corporation has its principal office or place of #usiness% If this pro"ince is also the pro"ince of the o0ner?s $omicile* a single registration sufficient% If not* the chattel mortgage shoul$ #e registere$ #oth at the o0ner?s $omicile an$ in the pro"ince 0here the corporation has its principal office or place of #usiness% In this sense the propert( mortgage$ is not the certificate #ut the participation an$ share of the o0ner in the assets of the corporation% -part from the cum#ersome an$ unusual metho$ of h(pothecating shares of stock #( chattel mortgage* it appears that in the present state of our la0* the onl( safe 0a( to accomplish the h(pothecation of share of stock of a &hilippine corporation is for the cre$itor to insist on the assignment an$ $eli"er( of the certificate an$ to o#tain the transfer of the legal title to him on the #ooks of the corporation #( the cancellation of the certificate an$ the issuance of a ne0 one to him% From the stan$point of the $e#tor this ma( #e unsatisfactor( #ecause it lea"es the cre$itor as the ostensi#le o0ner of the shares an$ the $e#tor is force$ to rel( upon the honest( an$ sol"enc( of the cre$itor% Of course* the mere possession an$ retention of the $e#tor?s certificate #( the cre$itor gi"es some securit( to the cre$itor against an attempte$ "oluntar( transfer #( the $e#tor* pro"i$e$ the #('la0s of the corporation e<pressl( enact that transfers ma( #e ma$e onl( upon the surren$er of the certificate% It is to #e note$* ho0e"er* that section 9; of the orporation Fa0 )-ct No% 1:;7, enacts that shares of stock +ma( #e transferre$ #( $eli"er( of the certificate en$orse$ #( the o0ner or his attorne( in fact or other person

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legall( authori!e$ to make the transfer%+ The use of the "er# +ma(+ $oes not e<clu$e the possi#ilit( that a transfer ma( #e ma$e in a $ifferent manner* thus lea"ing the cre$itor in an insecure position e"en though he has the certificate in his possession% @oreo"er* the shares still stan$ing in the name of the $e#tor on the #ooks of the corporation 0ill #e lia#le to sei!ure #( attachment or le"( on e<ecution at the instance of other cre$itors% ) f% E( &iaoco !s. @c@icking* 1/ &hil%* 2.8* an$ Eson !s.Diosomito* 81 &hil%* ;9;%, This unsatisfactor( state of our la0 is 0ell kno0n to the #ench an$ #ar% ) f% Fisher* The &hilippine Fa0 of Stock orporations* pages 189' 18.%, Foans upon stock securities shoul$ #e facilitate$ in or$er to foster economic $e"elopment% The transfer #( en$orsement an$ $eli"er( of a certificate 0ith intention to ple$ge the shares co"ere$ there#( shoul$ #e sufficient to gi"e legal effect to that intention an$ to consummate the 3uristic act 0ithout necessit( for registration% Je are full( conscious of the fact that our $ecisions in the case of -onserrat !s. Ceron,supra* an$ in the present case ha"e $one little perhaps to ameliorate the present uncertain an$ unsatisfactor( state of our la0 applica#le to ple$ges an$ chattel mortgages of shares of stock of &hilippine corporations% The reme$( lies 0ith the legislature% In "ie0 of the premises* the attaching cre$itors are entitle$ to priorit( o"er the $efecti"el( registere$ mortgage of the appellant an$ the 3u$gment appeale$ from must #e affirme$ 0ithout special pronouncement as to costs in this instance%[[1]] -alcolm, Villa>Real, mperial, and /oddard, JJ., concur. -oo+'o+$# [[ ]] 1 Resolution of No"em#er 2/* 179;% S$c. 73. Lo#+ or &$#+ro2$& c$r+%,%ca+$#% ' The follo0ing proce$ure shall #e follo0e$ for the issuance #( a corporation of ne0 certificates of stock in lieu of those 0hich ha"e #een lost* stolen or $estro(e$6 1% The registere$ o0ner of a certificate of stock in a corporation or his legal representati"e shall file 0ith the corporation an affi$a"it in triplicate setting forth* if possi#le* the circumstances as to ho0 the certificate 0as lost* stolen or $estro(e$* the num#er of shares represente$ #( such certificate* the serial num#er of the certificate an$ the name of the corporation 0hich issue$ the same% 5e shall also su#mit such other information an$ e"i$ence 0hich he ma( $eem necessar(4 2% -fter "erif(ing the affi$a"it an$ other information an$ e"i$ence 0ith the #ooks of the corporation* sai$ corporation shall pu#lish a notice in a ne0spaper of general circulation pu#lishe$ in the place 0here the corporation has its principal office* once a 0eek for three )9, consecuti"e 0eeks at the e<pense of the registere$ o0ner of the certificate of stock 0hich has #een lost* stolen or $estro(e$% The notice shall state the name of sai$ corporation* the name of the registere$ o0ner an$ the serial num#er of sai$ certificate* an$ the num#er of shares represente$ #( such certificate* an$ that after the e<piration of one )1, (ear from the $ate of the last pu#lication* if no contest has #een presente$ to sai$ corporation regar$ing sai$ certificate of stock* the right to make such contest shall #e #arre$ an$ sai$ corporation shall cancel in its #ooks the certificate of stock 0hich has #een lost* stolen or $estro(e$ an$ issue in lieu thereof ne0 certificate of stock* unless the registere$ o0ner files a #on$ or other securit( in lieu thereof as ma( #e re2uire$* effecti"e for a perio$ of one )1, (ear* for such amount an$ in such form an$ 0ith such sureties as ma( #e satisfactor( to the #oar$ of $irectors* in 0hich case a ne0 certificate ma( #e issue$ e"en #efore the e<piration of the one )1, (ear perio$ pro"i$e$ herein6 &ro"i$e$* That if a contest has #een presente$ to sai$ corporation or if an action is pen$ing in court regar$ing the o0nership of sai$ certificate of stock 0hich has #een lost* stolen or $estro(e$* the issuance of the ne0 certificate of stock in lieu thereof shall #e suspen$e$ until the final $ecision #( the court regar$ing the o0nership of sai$ certificate of stock 0hich has #een lost* stolen or $estro(e$% D<cept in case of frau$* #a$ faith* or negligence on the part of the corporation an$ its officers* no action ma( #e #rought against an( corporation 0hich shall ha"e issue$ certificate of stock in lieu of those lost* stolen or $estro(e$ pursuant to the proce$ure a#o"e'$escri#e$% )R% -% 2/1a, 2% Tra'#,$r o, S$c*r%+%$#

S$c. 63. C$r+%,%ca+$ o, #+oc@ a'& +ra'#,$r o, #har$#. ' The capital stock of stock corporations shall #e $i"i$e$ into shares for 0hich certificates signe$ #( the presi$ent or "ice presi$ent* countersigne$ #( the secretar( or assistant secretar(* an$ seale$ 0ith the seal of the corporation shall #e issue$ in accor$ance 0ith the #('la0s% Shares of stock so issue$ are personal propert( an$ ma( #e transferre$ #( $eli"er( of the certificate or certificates en$orse$ #( the o0ner or his attorne('in'fact or other person legall( authori!e$ to make the transfer% No transfer* ho0e"er* shall #e "ali$* e<cept as #et0een the parties* until the transfer is recor$e$ in the #ooks of the corporation sho0ing the names of the parties to the transaction* the $ate of the transfer* the num#er of the certificate or certificates an$ the num#er of shares transferre$% No shares of stock against 0hich the corporation hol$s an( unpai$ claim shall #e transfera#le in the #ooks of the corporation% )9;,

U#o' A. 6%o#oC%+o $+ a/. )179;,1 , D i o s o m i t o * 0 h o o 0 n e $ > ; s h a r e s ) o f t h e N o r t h D l e c t r i c o % * I n c % * , * s o l $ sai$ shares to Barcelon an$ $eli"ere$ to the latter the correspon$ing stockcertificates%2 , E s o n s u e $ D i o s o m i t o f o r a $ e # t a n $ t h a t u p o n i n s t i t u t i o n o f s a i $ a c t i o n a n attachment 0as $ul( issue$ an$ le"ie$ upon >; shares )of the North Dlectric o%*Inc%*, 0hich stoo$ in Diosomito name on the #ooks of the compan( 0hen theattachment 0as le"ie$%9 , B a r c e l o n o n l ( p r e s e n t e $ t h e c e r t i f i c a t e s f o r r e g i s t r a t i o n 7 m o n t h s a f t e r t h e attachment ha$ #een le"ie$%: , S u # s e 2 u e n t l ( * E s o n o # t a i n e $ 3 u $ g m e n t a g a i n s t t h e $ e f e n $ a n t D i o s o m i t o % ; , T o satisf( sai$ 3u$gment* the sheriff sol$ sai$ shares at pu#lic auction%8,The plaintiff Tori#ia Eson 0as t h e h i g h e s t # i $ $ e r a n $ s a i $ s h a r e s 0 e r e a$3u$icate$ to her% )See D<hi#it G%,> , I n t h e p r e s e n t a c t i o n * 5 % & % F % = o l l ( e c l a i m s t o # e t h e o 0 n e r o f s a i $ > ; shares of the North Dlectric o%* Inc%* an$ presents a certificate of stock issue$ tohim #( the compan( on Fe#ruar( 19* 1799

2:
%I S S E D 6 J h e t h e r a # o n a f i $ e t r a n s f e r o f t h e s h a r e s o f a c o r p o r a t i o n * n o t registere$ or note$ on the #ook*4 of the corporation* is "ali$ as against asu#se2uent la0ful attachment of sai$ shares* regar$less of 0hether the attachingcre$itor ha$ actual notice of sai$ transfer or notM 5DFD6The transfer of the >; shares in the North Dlectric o m p a n ( % Inc%* ma$e #( the $efen$ant Diosomito to the $efen$ant Barcelon 0as not "ali$as to the plaintiff'appellee* Tori#ia Eson* on =anuar( 1.* 1792* the $ate on 0hichshe o#taine$ her attachment lien on sai$ shares of stock 0hich still stoo$ in thename of Diosomito* on the #ooks of the corporation%The right of the o0ner of the shares of stock of a &hilippine corporation tot r a n s f e r t h e s a m e # ( $ e l i " e r ( o f t h e c e r t i f i c a t e * 0 h e t h e r i t # e r e g a r $ e $ a s statutor( or common la0 right* is limite$ an$ restricte$ #( the e<press pro"isionthat6 +no transfer* ho0e"er* shall #e "ali$* e<cept as #et0een the parties* until the transfer isentere$ an$ note$ upon the #ooks of the corporation%+ Th$r$,or$, a' a++achC$'+ /%$' Br$Aa%/# oA$r a Br%or *'r$(%#+$r$& >o'a ,%&$#+oc@ +ra'#,$r. /.R. 0o. 25@34, ?son !. .iosomito et al., 3@ Phil. 434 Repu#lic of the &hilippines SUPREME C!URT @anila DN B-N =une 1>* 179; C%R% No% :219; T!RIBIA US!N, plaintiff'appellee* "s% 1ICENTE 6I!S!MIT!, ET AL., $efen$ants% 1ICENTE 6I!S!MIT!, EMETERI! BARCEL!N, .P.L. )!LL4E a'& N!RT ELECTRIC C!MPAN4, INC., appellants% :ino #. /a'riel "or appellant .iosomito. ,meterio Barcelon and -.B. Villanue!a "or appellant Barcelon. Ross, :a*rence and #elph "or appellants Joll(e and 0orth ,lectric Co., nc. ,ncarnacion and Crca "or appellee. BUTTE, J.: This is an appeal from a $ecision of the ourt of First Instance of a"ite in"ol"ing the o0nership of se"ent('fi"e shares of stock in the North Dlectric ompan(* Inc% The plaintiff'appellee claims to #e the o0ner of these shares #( "irtue of purchase at a sheriff?s sale for the sum of &2*81>%1.% It appears that Tori#ia Eson ha$ file$ a ci"il action for $e#t in the ourt of First Instance of a"ite* No% 2;2;* against Vicente Diosomito an$ that upon institution of sai$ action an attachment 0as $ul( issue$ an$ le"ie$ upon the propert( of the $efen$ant Diosomito* inclu$ing se"ent('fi"e shares of the North Dlectric o%* Inc%* 0hich stoo$ in his name on the #ooks of the compan( 0hen the attachment 0as le"ie$ on =anuar( 1.* 1792% Su#se2uentl(* on =une 29* 1792* in sai$ ci"il case No% 2;2;* Tori#ia Eson o#taine$ 3u$gment against the $efen$ant Diosomito for the sum of &2*9// 0ith interest an$ costs% To satisf( sai$ 3u$gment* the sheriff sol$ sai$ shares at pu#lic auction in accor$ance 0ith la0 on @arch 2/* 1799% The plaintiff Tori#ia Eson 0as the highest #i$$er an$ sai$ shares 0ere a$3u$icate$ to her% )#ee D<hi#it G%, In the present action* 5%&%F% =oll(e claims to #e the o0ner of sai$ >; shares of the North Dlectric o%* Inc%* an$ presents a certificate of stock issue$ to him #( the compan( on Fe#ruar( 19* 1799% There is no $ispute that the $efen$ant Vicente Diosomito 0as the original o0ner of sai$ shares of stock* ha"ing a par "alue of &>*;//* an$ that on Fe#ruar( 9* 1791* he sol$ sai$ shares to Dmeterio Barcelon an$ $eli"ere$ to the latter the correspon$ing certificates Nos% 2 an$ 17% But Barcelon $i$ not present these certificates to the corporation for registration until the 18th of Septem#er* 1792* 0hen the( 0ere cancelle$ an$ a ne0 certificate* No% 27* 0as issue$ in fa"or of Barcelon* 0ho transferre$ the same of the $efen$ant 5%&%F% =oll(e to 0hom a ne0 certificate No% 2; 0as issue$ on Fe#ruar( 19* 1799% It 0ill #e seen* therefore* that the transfer of sai$ shares #( Vicente Diosomito* the 3u$gment $e#tor in suit No% 2;2;* to Barcelon 0as not registere$ an$ note$ on the #ooks of the corporation until Septem#er 18* 1792* 0hich 0as some nine months after the attachment ha$ #een le"ie$ on sai$ shares in ci"il case No% 2;2; as a#o"e state$% Thus arises in this case one of the most "e<ing 2uestions in the la0 of corporations* namel(* 0hether a 'ona "ide transfer of the shares of a corporation* not registere$ or note$ on the #ooks of the corporation* is "ali$ as against a su#se2uent la0ful attachment of sai$ shares* regar$less of 0hether the attaching cre$itor ha$ actual notice of sai$ transfer or not% This is the first case in 0hich this 2uestion has #een s2uarel( presente$ to us for $ecision% The case of E( &iaco !s% @c@icking )1/ &hil%* 2.8,* $eci$e$ in 17/.* arose #efore the &hilippine orporation Fa0* -ct No% 1:;7* took effect )-pril 1* 17/8,% The cases of Fua un !s% Summer an$ hina Banking orporation* :: &hil%* >/; [1729] an$ Fleischer !s% Botica Nolasco o%* :> &hil%* ;.9 [172;] are not in point% Section 9; of the orporation Fa0 is as follo0s6 SD % 9;% The capital stock of stock corporations shall #e $i"i$e$ into shares for 0hich certificates signe$ #( the presi$ent or the "ice' presi$ent* countersigne$ #( the secretar( or clerk an$ seale$ 0ith the #('la0s% Shares of stock so issue$ are personal propert( an$ ma( #e transferre$ #( $eli"er( of the certificate in$orse$ #( the o0ner or his attorne( in fact or other person legall( authori!e$ to make the transfer% No transfer* ho0e"er* shall #e "ali$* e<cept as #et0een the parties* until the transfer is entere$ an$ note$ upon the #ooks of the corporation so as to sho0 the names of the parties to the transaction* the $ate of the transfer* the num#er of the certificate* an$ the num#er of shares transferre$% No shares of stock against 0hich the corporation hol$s an( unpai$ claim shall #e transfera#le on the #ooks of the corporation% The sentence of the foregoing section imme$iatel( applica#le in the present case is as follo0s6

2;
No transfer* ho0e"er* shall #e "ali$* e<cept as #et0een the parties* until the transfer is entere$ an$ note$ upon the #ooks of the corporation so as to sho0 the names of the parties to the transaction* the $ate of the transfer* the num#er of the certificate* an$ the num#er of shares transferre$% The appellants cites $ecision from a num#er of states of the -merican Enion 0hich hol$ that an unregistere$ transfer is "ali$ as against the lien of a su#se2uent attachment sue$ out #( a cre$itor of the assignor* 0hether such cre$itor has notice of the transfer or not% These $ecisions are foun$e$ upon the theor( that the attachment reaches onl( such title or interest as the $efen$ant ma( ha"e in the propert( at the time of the le"(4 an$ if all title an$ interest ha$ pre"iousl( passe$ #( assignment from the $e#tor to a thir$ person* the attaching cre$itor o#tains nothing #( the le"(4 that the o0ner of shares of stock has the common la0 right to $ispose of the same as personal propert(% But 0ith the e<ception of alifornia* to 0hich reference 0ill #e ma$e later* none of the $ecisions cite$ #( the appellants construe$ statues i$entical 0ith ours% @uch of the confusion 0hich is to #e foun$ in the $ecision has arisen #ecause the courts ha"e faile$ to note the $ifference in the "arious statutes of the -merican Enion on the 2uestion consi$ere$ here% For an illuminating $iscussion of this confusion the follo0ing authorities ma( #e consulte$6 Fletcher* (clope$ia of the Fa0 of &ri"ate orporations )1792,* "ol% 12* pages 9;.'9.7% -merican an$ Dnglish -nnotate$ ases* "ol% 21* pages 1971'1:/>% -merican Fa0 Re"ie0* "ol% 9;* pages 29.'2;1% ;; ent% F% =%* 2:9'2;1% The statutes on this point ma( #e put roughl( in three groups6 First* those that pro"i$e* in su#stance* that no transfer of shares is "ali$ for an( purpose unless registere$ on the #ooks of the corporation% This rule apparentl( once pre"aile$ in olora$o an$ the District of olum#ia #oth of 0hich ha"e since amen$e$ it #( statute% Secon$* that group 0hich* like our o0n -ct No% 1:;7* hol$s to the rule that no transfer shall #e "ali$ e<cept as #et0een the parties until the transfer is $ul( registere$% This group* accor$ing to the #est information a"aila#le here* inclu$es or has inclu$e$ the State of -ri!ona* alifornia* the Territor( of 5a0aii* I$aho* Io0a* Ne"a$a* Ne0 @e<ico* North Dakota* Oklahoma* South Dakota* Jashington* Jisconsin% The thir$s group 0hich inclu$es the remaining 3uris$ictions follo0s the rule an$ the $octrine in"oke$ #( the appellant in this case* 0hich* #( amen$ment of the statutes* is #ecoming the pre"ailing rule in the Enite$ States% The $ecision of the Supreme ourt of alifornia in the case of National Bank of the &acific !s% Jestern &acific Rail0a( ompan( )1;> al%* ;>9 [171/]4 1/. &ac%* 8>8,* sitting in $i"ision of three* construe$ section 92: of the i"il o$e of alifornia 0hich is i$entical 0ith section 9;* supra* of the &hilippine orporation Fa0% The court stresse$ the pro"ision that the shares of stock in a corporation are personal propert( an$ ma( #e transferre$ #( en$orsement an$ $eli"er( of the certificate% The opinion also en$ea"ors to $istinguish the prior $ecisions of Jeston !s% Bear Ri"er an$ -u#urn Jater an$ @ining o% ); al%* 1.8,4 Strout !s% Natoma Jater an$ @ining ompan( )7 al%* >.,* an$ Naglee !s% &acific Jharf ompan( )2/ al%* ;27,* 0hich are fre2uentl( cite$ in other 3uris$ictions as sustaining the theor( of the superiorit( of the attachment lien o"er the unregistere$ stock transfer% )#ee F(n$on"ille National Bank!s% Folsom* > N%@%* 811 [1.7:]4 9. &ac%* 2;9%, The alifornia $ecision lea"es us uncon"ince$ that the statutes 0hich fall in the secon$ group a#o"e mentione$ shoul$ #e gi"en the same effect as the statute in the thir$ group 0ithout an( necessit( for legislati"e amen$ment% Je prefer to a$opt the line follo0e$ #( the Supreme ourts of @assachusetts an$ of Jisconsin% )#ee le0s !s% Frie$man* 1.2 @ass%* ;;;4 88 N%D% 2/1* an$ n re @urph(* ;1 Jis%* ;174 . N%J%* :17%, In the latter case the court ha$ un$er consi$eration a statute i$entical 0ith our o0n section 9;* supra* an$ the court sai$6 Je think the true meaning of the language is* an$ the o#"ious intention of the legislature in using it 0as* that all transfers of shares shoul$ #e entere$* as here re2uire$* on the #ooks of the corporation% -n$ it is e2uall( clear to us that all transfers of shares not so entere$ are in!alid as to attaching or e<ecution cre$itors of the assignors* as 0ell as to the corporation an$ to su#se2uent purchasers in goo$ faith* an$ in$ee$* as to all persons intereste$* e<cept the parties to such transfers% -ll transfers not so entere$ on the #ooks of the corporation are a#solutel( "oi$4 not #ecause the( are 0ithout notice or frau$ulent in la0 or fact* #ut #ecause the( are ma$e so "oi$ #( statute% Some of the states* inclu$ing Jisconsin* 0hich has hel$ to the rather* strict #ut 3u$icial interpretation of the statutor( language here in 2uestion ha"e amen$e$ the statute so as to fall in line 0ith the more li#eral an$ rational $octrine of the thir$ group referre$ to a#o"e% This court still a$heres to the principle that its function is +us dicere non +us dare% To us the language of the legislature is plain to the effect that the right of the o0ner of the shares of stock of a &hilippine corporation to transfer the same #( $eli"er( of the certificate* 0hether it #e regar$e$ as statutor( on common la0 right* is limite$ an$ restricte$ #( the e<press pro"ision that +no transfer* ho0e"er* shall #e "ali$* e<cept as #et0een the parties* until the transfer is entere$ an$ note$ upon the #ooks of the corporation%+ Therefore* the transfer of the >; shares in the North Dlectric ompan(* Inc%* ma$e #( the $efen$ant Diosomito to the $efen$ant Barcelon 0as not "ali$ as to the plaintiff'appellee* Tori#ia Eson* on =anuar( 1.* 1792* the $ate on 0hich she o#taine$ her attachment lien on sai$ shares of stock 0hich still stoo$ in the name of Diosomito on the #ooks of the corporation% Je ha"e consi$ere$ the remaining assignments of error of the appellants an$ fin$ing no merit in them in results that the 3u$gment must #e affirme$ 0ith costs against the appellants% -alcolm and .ia;, JJ., concur. /oddard, J., agree *ith Justice 8ull. S$Bara+$ !B%'%o'# ULL, J., concurring6 I agree that the foregoing opinion is soun$ in reason an$ upon authorit(% But I think attention shoul$ #e calle$ to the case of :anci !s. 9angco );2 &hil%* ;89* ;8>,4 0hich in"ol"e$ a Torrens title an$ the Fan$ Registration Fa0* -ct No% :78% The pro"isions of section ;/ of -ct No% :78 seem to me analogous to those of section 9; of the orporation Fa0* an$ consistenc( 0oul$ in$icate that the 3u$gments in the t0o cases shoul$ #e similar% /.R. 0o. 26113, ,scaEo !. 7ilipinas -ining Corp. et al., 72 Phil. 7@@ Repu#lic of the &hilippines SUPREME C!URT @anila DN B-N =ul( 2.* 17:: C%R% No% :7//9 ANT!NI! ESCAH!, plaintiff'appellee* "s%

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-ILIPINAS MINING C!RP!RATI!N, ET AL., $efen$ants% STAN6AR6 IN1ESTMENT !- T E P ILIPPINES, appellant% Jose P. Beng;on "or appellant. -atias ,. Vergara and Jose -a. Re(es "or appellee. !<AETA, J.7 This case 0as su#mitte$ to an$ $eci$e$ #( the ourt of First Instance of @anila upon an agree$ statement of facts 0hich ma( #e restate$ as follo0s6 On @arch .* 179>* the plaintiff'appellee o#taine$ 3u$gment in the ourt of First Instance of @anila against Sil"erio Sal"osa 0here#( the latter 0as or$ere$ to transfer an$ $eli"er to the former 118 acti"e shares an$ an un$etermine$ num#er of shares in escro0 of the Filipinas @ining orporation an$ to pa( the sum of &;// as $amages* 0ith the pro"iso that the escro0 shares shall #e transferre$ an$ $eli"ere$ to the plaintiff onl( after the( shall ha"e #een release$ #( the compan(% On =une 2;* 179>* a 0rit of garnishment 0as ser"e$ #( the sheriff of @anila upon the Filipinas @ining orporation to satisf( the sai$ 3u$gment4 an$ on =ul( 27* 179>* the Filipinas @ining orporation a$"ise$ the sheriff of @anila that accor$ing to its #ooks the 3u$gment $e#tor Sil"erio Sal"osa 0as the registere$ o0ner of 1*/// acti"e shares an$ a#out 21*997 unissue$ shares hel$ in escro0 #( the sai$ corporation% The sheriff sol$ the 1*/// acti"e shares at pu#lic auction* reali!ing therefrom onl( the sum of &1/* 0hich 0as applie$ in partial satisfaction of the 3u$gment for $amages in the sum of &;//% The present case* 0hich 0as institute$ #( -ntonio DscaLo against the Filipinas @ining orporational an$ the Stan$ar$ In"estment of the &hilippines* relates to the escro0 shares in"ol"e$ in the garnishment procee$ing a#o"e mentione$% It appears that after the complaint in the original case of ,scaEo !s. #al!osa 0as file$ #ut #efore 3u$gment 0e as ren$ere$ therein* that lis to sa(* on No"em#er 21* 1798* Sil"erio Sal"osa sol$ to =ose &% Beng!on all his right* title* an$ interest in an$ to 1.*;./ shares of stock of the Filipinas @ining orporation hel$ in escro0 0hich the sai$ Sal"osa 0as entitle$ to recei"e* an$ 0hich Beng!on in turn su#se2uentl( sol$ an$ transferre$ to the present $efen$ant'appellant* Stan$ar$ In"estment of the &hilippines% Neither Sal"osa?s sale to Beng!on nor Beng!on?s sale to the Stan$ar$ In"estment of the &hilippines 0as notifie$ to an$ recor$e$ in the #ooks of the Filipinas @ining orporation until Decem#er >* 17:/* that is to sa(* more than three (ears after the escro0 shares in 2uestion 0ere attache$ #( garnishment ser"e$ on the Filipinas @ining orporation as herein#efore set forth% On =anuar( 2:* 17:1* the $efen$ant Filipinas @ining orporation issue$ in fa"or of the $efen$ant Stan$ar$ In"estment of the &hilippines certificate of stock for the 1.*;./ shares formerl( hel$ in escro0 #( Sil"erio Sal"osa an$ 0hich ha$ #een a$"ersel( #( the present plaintiff'appellee on the one han$ an$ the Stan$ar$ In"estment of the &hilippines on the other* the first #( "irtue of garnishment procee$ings an$ the secon$ #( "irtue of the sale ma$e to it #( =ose &% Beng!on as aforesai$% The 2uestion to $etermine is 0hether the issuance #( the Filipinas @ining orporation of the sai$ 1.*;./ shares of its stock to the Stan$ar$ In"estment of the &hilippines 0as "ali$ as against the attaching 3u$gment cre$itor of the original o0ner* Sil"erio Sal"osa* namel(* the present plaintiff'appellee -ntonio DscaLo% In a$$ition to the a#o"e stipulate$ facts* the trial court foun$ from the supplementar( oral e"i$ence a$$uce$ #( the plaintiff +that se"eral promises 0ere ma$e #( the secretar( of the $efen$ant Filipinas @ining orporation that as soon as the escro0 shares pertaining to Sil"erio Sal"osa 0ere release$ he )the secretar(, 0oul$ notif( the plaintiff so that the latter might take the proper action for the e<ecution of the 3u$gment ren$ere$ in the sai$ case entitle$ +-ntonio DscaLo "s% Sil"erio Sal"osa*+ ci"il case No% ;/;>; of the ourt of First Instance of @anila% But the secretar(* instea$ of compl(ing 0ith his promises* issue$ the escro0 shares to the $efen$ant Stan$ar$ In"estment of the &hilippines % % %+ The trial court hel$ that the transfer of the escro0 shares in 2uestion from Sal"osa to Beng!on an$ from Beng!on to the Stan$ar$ In"estment of the &hilippines* not ha"ing #een recor$e$ in the #ooks of the corporation as re2uire$ #( section 9; of the orporation Fa0* coul$ not pre"ail o"er the garnishment pre"iousl( ma$e #( the plaintiff of the sai$ shares* an$ ren$ere$ 3u$gment +or$ering the $efen$ants Filipinas @ining orporation an$ the Stan$ar$ In"estment of the &hilippines to issue to the plaintiff out of the escro0 shares 0hich formerl( #elonge$ to Sil"erio Sal"osa* :*1;2 shares of the Filipinas @ining orporation an$ to pa( to him the $i"i$en$s 0hich ha"e #een an$ ma( #e $eclare$ on sai$ shares until the $eli"er( thereof to the plaintiff4 an$ or$ering the sheriff to le"( e<ecution on the remaining shares 0hich formerl( #elonge$ to Sil"erio Sal"osa in or$er to satisf( the #alance of the 3u$gment ren$ere$ in the ci"il case entitle$ +-ntonio DscaLo "s% Sil"erio Sal"osa*+ ci"il case No% ;/;>; of the ourt of First Instance of @anila* 0ith costs against the $efen$ants%+ From that 3u$gment the Stan$ar$ In"estment of the &hilippines has appeale$ to this ourt an$ makes the follo0ing assignment of errors6 1% The trial court erre$ in hol$ing that section 9; of -ct 1:;77 an$ the $octrine lai$ $o0n in the case of ?son !s. .iosomito* 81 &hil%* ;9;* are applica#le to the case at #ar% 2% The trial court erre$ in +or$ering the sheriff to le"( e<ecution on the remaining shares of the 1.*;./ shares to satisf( the #alance of the 3u$gment ren$ere$ in ci"il case No% ;/;>; of the ourt of First Instance of @anila+4 an$ in not hol$ing that #ecause of the $ela( or neglect for an unreasona#le length of time #( the plaintiff to enforce his e<ecution* the 1.*;./ shares affecte$ in this litigation has #een $ischarge$ thru his 0ai"er or a#an$onment% 1% Sections :91 an$ :92 of the o$e of i"il &roce$ure )no0 sections > an$ . of Rule ;7,* 0hich 0ere in force at the time the garnishment in 2uestion 0as ser"e$ on the $efen$ant Filipinas @ining orporation* pro"i$e as follo0s6 Sec% :91% ,&ecuting =rder o" Cttachment as to de'ts and Credits% K De#ts an$ cre$its* an$ other personal propert( not capa#le of manual $eli"er(* shall #e attache$ #( lea"ing 0ith the person o0ing such $e#ts or ha"ing in his possession or un$er his control* such cre$its an$ other personal propert(* a cop( of the or$er of attachment an$ a notice that the $e#ts o0ing #( him to the $efen$ant* or the cre$its an$ other personal propert( in his possession or un$er his control* #elonging to the $efen$ant* are attache$ in pursuance of such or$er% Sec% :92% ,""ect o" Cttachment o" .e'ts and Credits% K -ll persons ha"ing in their possession or un$er their control an( cre$its or other personal propert( #elonging to the $efen$ant* or o0ing an( $e#ts to the $efen$ant at the time of ser"ice upon them of a cop( of the or$er of attachment an$ notice as pro"i$e$ in the last section* shall #e* unless such propert( #e $eli"ere$ up or transferre$* or such $e#ts #e pai$ to the clerk of the court in 0hich the action is pen$ing* lia#le to the plaintiff for the amount of such cre$its* propert(* or $e#ts* until the attachment #e $ischarge$* or an( 3u$gment reco"ere$ #( him #e satisfie$%+ En$er the section last a#o"e 2uote$* the Filipinas @ining orporation #ecame lia#le to the plaintiff for the shares of stock mentione$ in its return to the sheriff of =ul( 27* 179>* 0herein it informe$ the latter in response to the notice of garnishment +that accor$ing to its #ooks sai$ Sil"erio Sal"osa 0as the registere$ o0ner of 1*/// acti"e shares e"i$ence #( certificate of stock No% 29; an$ a#out 21*99. unissue$ shares hel$ in escro0 #( the $efen$ant Filipinas @ining orporation%+

2>
ounsel for the appellant Stan$ar$ In"estment of the &hilippines conten$s that a $istinction shoul$ #e $ra0n #et0een issue$ shares e"i$ence$ #( certificates of stock an$ unissue$ shares hel$ in escro0* in that 0hile the transfer of the former is su#3ect to the restriction containe$ in section 9; of the orporation Fa0* that of the latter is not% The sai$ section* insofar as pertinent here* rea$s as follo0s6 % % % Shares of stock so issue$ are personal propert( an$ ma( #e transferre$ #( $eli"er( of the certificate in$orse$ #( the o0ner or his attorne( in fact or other person legall( authori!e$ to make the transfer% No transfer* ho0e"er* shall #e "ali$* e<cept as #et0een the parties* until the transfer is entere$ an$ note$ upon the #ooks of the corporation so as to sho0 the names of the parties to the transaction* the $ate of the transfer* the num#er of the certificate* an$ the num#er of shares transferre$% It is a$mitte$ that un$er this legal pro"ision an$ the $ecision of this ourt in ?son !s. .iosomito* 81 &hil% ;9;* the transfer of $ul( issue$ shares of stock is not "ali$ as against thir$ parties an$ the corporation until it is note$ upon the #ooks of the corporation4 #ut it is conten$e$ that the transfer of unissue$ shares of stock hel$ in escro0 is "ali$ against the 0hole 0orl$ although not notifie$ to the corporation an$ not note$ upon its #ooks% Since the sale* transfer* or assignment of unissue$ shares of stock hel$ in escro0 is not specificall( pro"i$e$ for #( la0* the 2uestion has to #e resol"e$ #( resorting to analog(% Jhat is the reason of the la0 for re2uiring the recor$ing upon the #ooks of the corporation of transfers of shares of stock as a con$ition prece$ent to their "ali$it( against the corporation* an$ thir$ partiesM Je imagine that it is )1, to ena#le the corporation to kno0 at all times 0ho its actual stockhol$ers are* #ecause mutual rights an$ o#ligations e<ist #et0een the corporation an$ its stockhol$ers4 )2, to affor$ to the corporation an opportunit( to o#3ect or refuse its consent to the transfer in case it has an( claim against the stock sought to #e transferre$* or for an( other "ali$ reason4 an$ )9, to a"oi$ fictitious or frau$ulent transfers% Do these reasons hol$ as to the transfer of unissue$ shares hel$ in escro0M To sustain appellant?s contention is to $eclare that the( $o not% But 0e see no "ali$ reason for treating unissue$ shares hel$ in escro0 $ifferentl( from issue$ shares insofar as their sale an$ transfer is concerne$% In #oth cases the corporation is entitle$ to kno0 0ho the actual o0ners of the shares are* an$ to o#3ect to the transfer upon an( "ali$ groun$% Fike0ise* in #oth cases the possi#ilit( of fictitious or frau$ulent transfers e<ists% The onl( reason a$"ance$ #( the appellant for e<empting the transfer of unissue$ shares from recor$ing is that in case of unissue$ shares there is no certificate num#er to #e recor$e$% But that is a mere $etail 0hich $oes not affect the reasons #ehin$ the rule% The lack of such $etail $oes not make it impossi#le to recor$ the transfer upon the #ooks of the corporation so as to sho0 the names of the parties to the transaction* the $ate of the transfer* an$ the num#er of shares transferre$* 0hich are the most essential $ata% -s a matter of fact* the $efen$ant Filipinas @ining orporation 0as a#le to take not of the transfer of the escro0 shares in 2uestion to the Stan$ar$ In"estment of the &hilippines on Decem#er >* 17:/* 0ithout kno0ing the certificate num#er that 0oul$ correspon$ to sai$ shares% @oreo"er* it seems illogical an$ unreasona#le to hol$ that inacti!e or unissue$ shares still hel$ #( the corporation in escro0 pen$ing receipt of authori!ation from the Co"ernment to issue them* ma( #e negotiate$ or transferre$ unrestricte$l( an$ more freel( than acti"e or issue$ shares e"i$ence$ #( certificates of stock% Je are* therefore* of the opinion an$ so hol$ that section 9; of the orporation Fa0* 0hich re2uires the registration of transfers of shares stock upon the #ooks of the corporation as a con$ition prece$ent to their "ali$it( against the corporation an$ thir$ parties* is also applica#le to unissue$ shares hel$ #( the corporation in escro0% 2% En$er its secon$ assignment of error appellant conten$s that appellee has #een guilt( of laches in neglecting for an unreasona#le length of time to enforce its le"( on the 1.*;./ shares of stock in 2uestion #( ha"ing them sol$ at pu#lic auction* an$ that* conse2uentl(* sai$ le"( shoul$ #e consi$ere$ $ischarge$ through 0ai"er or a#an$onment% Je fin$ no factual #asis for the allege$ laches an$ a#an$onment% The trial court foun$ that the secretar( of the $efen$ant Filipinas @ining orporation ha$ repeate$l( promise$ the plaintiff that he 0oul$ notif( the latter as soon as the escro0 shares pertaining to Sil"erio Sal"osa 0ere release$ so that he ))plaintiff, might take the proper action for the e<ecution of his 3u$gment% The Filipinas @ining orporation ha"ing a$"ise$ the sheriff that it 0as hol$ing the escro0 shares of the 3u$gment $e#tor Sil"erio Sal"osa* the plaintiff as e<ecution cre$itor ha$ the right to 0ait for the release or issuance of sai$ shares #efore ha"ing the same sol$ at pu#lic auction* so long as the perio$ of fi"e (ears 0ithin 0hich to e<ecution his 3u$gment ha$ not (et lapse$% @oreo"er* the 3u$gment itself pro"i$e$ +that the escro0 shares shall #e transferre$ an$ $eli"ere$ to the plaintiff onl( after the( ha"e #een release$ #( the compan(%+ It is state$ in the stipulation of facts that it 0as onl( after shares in fa"or of the Stan$ar$ In"estment of the &hilippines that the plaintiff -ntonio DscaLo came to kno0 that =ose &% Beng!on an$ the Stan$ar$ In"estment of the &hilippines ha$ ac2uire$ Sil"erio Sal"osa?s rights to the shares in 2uestion% Epon these facts* together 0ith the consi$eration that the $ela( ha$ not in an( 0a( misle$ the appellant to its pre3u$ice* 0e fin$ appellant?s secon$ assignment of error untena#le% The 3u$gment appeale$ from is affirme$* 0ith costs% 9ulo, C.J., -oran, 8orrilleno, and Baco'o, JJ., concur. Paras, J., concurs in the result. SD OND DIVISION

[G.R. N!. 139:9;. 6$c$C>$r 19, ;99;]

1ICENTE C. P!NCE, petitioner, vs. ALS!NS CEMENT C!RP!RATI!N, a'& -RANCISC! M. GIR!N, )R., respondents. 6ECISI!N "UISUMBING, ).7 This petition for re"ie0 seeks to annul the $ecision [1] of the ourt of -ppeals* in -'C%R% S& No% :8872* 0hich set asi$e the $ecision[;] of the Securities an$ D<change ommission )SD , Dn Banc in SD '- No% ;:; an$ reinstate$ the or$er [3] of the 5earing Officer $ismissing herein petitionerPs complaint% -lso assaile$ is the -Ps resolution [=] of -ugust 1/* 1777* $en(ing petitionerPs motion for reconsi$eration% On =anuar( 2;* 1778* plaintiff )no0 petitioner, Vicente % &once* file$ a complaint [5] 0ith the SD for man$amus an$ $amages against $efen$ants )no0 respon$ents, -lsons ement orporation an$ its corporate secretar( Francisco @% Ciron* =r% In his complaint* petitioner allege$* among others* that6

2.
<<< ;% The late Fausto C% Cai$ 0as an incorporator of Victor( ement orporation )V shares of sai$ corporation% ,* ha"ing su#scri#e$ to an$ full( pai$ 297*;//

8% On Fe#ruar( .* 178.* plaintiff an$ Fausto Cai$ e<ecute$ a QDee$ of En$ertakingR an$ QIn$orsementR 0here#( the latter ackno0le$ges that the former is the o0ner of sai$ shares an$ he 0as therefore assigningAen$orsing the same to the plaintiff% - cop( of the sai$ $ee$Ain$orsement is attache$ as -nne< Q-R% >% On -pril 1/* 178.* V 0as rename$ Floro ement orporation )F for #re"it(,% for #re"it(, as sho0n #( the -men$e$ -rticles of

.% On Octo#er 22* 177/* F 0as rename$ -lsons ement orporation )Incorporation of - * a cop( of 0hich is attache$ as -nne< QBR%

7% From the time of incorporation of V up to the present* no certificates of stock correspon$ing to the 297*;// su#scri#e$ an$ full( pai$ shares of Cai$ 0ere issue$ in the name of Fausto C% Cai$ an$Aor the plaintiff% 1/% Despite repeate$ $eman$s* the $efen$ants refuse$ an$ continue to refuse 0ithout an( 3ustifia#le reason to issue to plaintiff the certificates of stocks correspon$ing to the 297*;// shares of Cai$* in "iolation of plaintiffPs right to secure the correspon$ing certificate of stock in his name%[6] -ttache$ to the complaint 0as the Dee$ of En$ertaking an$ In$orsement [7] upon 0hich petitioner #ase$ his petition for man$amus% Sai$ $ee$ an$ in$orsement rea$ as follo0s6 DDDD OF ENDDRT-GINC GNOJ -FF @DN BI T5DSD &RDSDNTS6 I* VI DNTD % &ON D* is the o0ner of the total su#scription of Fausto Cai$ 0ith Victor( ement orporation in the total amount of TJO 5ENDRDD T5IRTI NIND T5OES-ND FIVD 5ENDRDD )&297*;//%//, &DSOS an$ that Fausto Cai$ $oes not ha"e an( lia#ilit( 0hatsoe"er on the su#scription agreement in fa"or of Victor( ement orporation% )SCD%, VI DNTD % &ON D Fe#ruar( .* 178. ONFOR@D6 )SCD%, F-ESTO C-ID INDORSD@DNT I* F-ESTO C-ID is in$orsing the total amount of TJO 5ENDRDD T5IRTI NIND T5OES-ND FIVD 5ENDRDD )297*;//%//, stocks of Victor( ement orporation to VI DNTD % &ON D% )SCD%, F-ESTO C-ID Jith these allegations* petitioner pra(e$ that 3u$gment #e ren$ere$ or$ering respon$ents )a, to issue in his name certificates of stocks co"ering the 297*;// shares of stocks an$ its legal increments an$ )#, to pa( him $amages%[:] Instea$ of filing an ans0er* respon$ents mo"e$ to $ismiss the complaint on the groun$s that6 )a, the complaint states no cause of action4 man$amus is improper an$ not a"aila#le to petitioner4 )#, the petitioner is not the real part( in interest4 )c, the cause of action is #arre$ #( the statute of limitations4 an$ )$, in an( case* the petitionerPs cause of action is #arre$ #( laches% [9] The( argue$* inter alia* that there #eing no allegation that the allege$ QINDORSD@DNTR 0as recor$e$ in the #ooks of the corporation* sai$ in$orsement #( Cai$ to the plaintiff of the shares of stock in 2uestionKassuming that the in$orsement 0as in fact a transfer of stocksK0as not "ali$ against thir$ persons such as -FSONS un$er Section 89 of the orporation o$e% [19] There 0as* therefore* no specific legal $ut( on the part of the respon$ents to issue the correspon$ing certificates of stock* an$ man$amus 0ill not lie%[11] &etitioner file$ his opposition to the motion to $ismiss on Fe#ruar( 17* 1778 conten$ing that6 )1, man$amus is the proper reme$( 0hen a corporation an$ its corporate secretar( 0rongfull( refuse to recor$ a transfer of shares an$ issue the correspon$ing certificates of stocks4 )2, he is the proper part( in interest since he stan$s to #e #enefite$ or in3ure$ #( a 3u$gment in the case4 )9, the statute of limitations $i$ not #egin to run until $efen$ant refuse$ to issue the certificates of stock in fa"or of the plaintiff on -pril 19* 1772% -fter respon$ents file$ their repl(* SD Fe#ruar( 27* 1778* 0hich hel$ that6 < < < Insofar as the issuance of certificates of stock is concerne$* the real part( in interest is Fausto C% Cai$* or his estate or his heirs% Cai$ 0as an incorporator an$ an original stockhol$er of the $efen$ant corporation 0ho su#scri#e$ an$ full( pai$ for 297*;// shares of stock )-nne< +B+,% In accor$ance 0ith Section 9> of the ol$ orporation Fa0 )-ct No% 1:;7, o#taining in 178. 0hen the $efen$ant corporation 0as incorporate$* as 0ell as Section 8: of the present orporation o$e )Batas &am#ansa Blg% 8.,* a stockhol$er 0ho has full( pai$ for his su#scription together 0ith interest an$ e<penses in case of $elin2uent shares* is entitle$ to the issuance of a certificate of stock for his shares% -ccor$ing to paragraph 7 of the omplaint* no stock certificate 0as issue$ to Cai$% 5earing Officer Dnri2ue F% Flores* =r% grante$ the motion to $ismiss in an Or$er $ate$

27
omes no0 the plaintiff 0ho seeks to step into the shoes of Cai$ an$ there#( #ecome a stockhol$er of the $efen$ant corporation #( $eman$ing issuance of the certificates of stock in his name% This he cannot $o* for t0o reasons6 there is no recor$ of an( assignment or transfer in the #ooks of the $efen$ant corporation* an$ there is no instruction or authorit( from the transferor )Cai$, for such assignment or transfer% In$ee$* nothing is allege$ in the complaint on these t0o points% < < < In the present case* there is not e"en an( in$orsement of an( stock certificate to speak of% Jhat the plaintiff possesses is a $ocument #( 0hich Cai$ suppose$l( transferre$ the shares to him% -ssuming the $ocument has this effect* ne"ertheless there is neither an( allegation nor an( sho0ing that it is recor$e$ in the #ooks of the $efen$ant corporation* such recor$ing #eing a prere2uisite to the issuance of a stock certificate in fa"or of the transferee%[1;] &etitioner appeale$ the Or$er of $ismissal% On =anuar( 8* 177>* the ommission Dn Banc re"erse$ the appeale$ Or$er an$ $irecte$ the 5earing Officer to procee$ 0ith the case% In ruling that a transfer or assignment of stocks nee$ not #e registere$ first #efore it can take cogni!ance of the case to enforce the petitionerPs rights as a stockhol$er* the ommission Dn Banc cite$ our ruling in C'e+o !s. .e la Cru;* 1:7 S R- 8;: )17.>, to the effect that6 <<< -s the SD maintains* QThere is no re2uirement that a stockhol$er of a corporation must #e a registere$ one in or$er that the Securities an$ D<change ommission ma( take cogni!ance of a suit seeking to enforce his rights as such stockhol$erR% This is #ecause the SD #( e<press man$ate has Qa#solute 3uris$iction* super"ision an$ control o"er all corporationsR an$ is calle$ upon to enforce the pro"isions of the orporation o$e* among 0hich is the stock purchaserPs right to secure the correspon$ing certificate in his name un$er the pro"isions of Section 89 of the o$e% Nee$less to sa(* an( pro#lem encountere$ in securing the certificates of stock representing the in"estment ma$e #( the #u(er must #e e<pe$itiousl( $ealt 0ith through a$ministrati"e man$amus procee$ings 0ith the SD * rather than through the usual te$ious regular court proce$ure% <<< -ppl(ing this principle in the case on han$* a transfer or assignment of stocks nee$ not #e registere$ first #efore the ommission can take cogni!ance of the case to enforce his rights as a stockhol$er% -lso* the pro#lem encountere$ in securing the certificates of stock ma$e #( the #u(er must #e e<pe$itiousl( taken up through the so'calle$ a$ministrati"e man$amus procee$ings 0ith the SD than in the regular courts%[13] The ommission Dn Banc also foun$ that the 5earing Officer erre$ in hol$ing that petitioner is not the real part( in interest% < < < -s appearing in the allegations of the complaint* plaintiff'appellant is the transferee of the shares of stock of Cai$ an$ is therefore entitle$ to a"ail of the suit to o#tain the proper reme$( to make him the rightful o0ner an$ hol$er of a stock certificate to #e issue$ in his name% @oreo"er* $efen$ant'appellees faile$ to sho0 that the transferor nor his heirs ha"e refute$ the o0nership of the transferee% -ssuming these allegations to #e true* the corporation has a mere ministerial $ut( to register in its stock an$ transfer #ook the shares of stock in the name of the plaintiff'appellant su#3ect to the $etermination of the "ali$it( of the $ee$ of assignment in the proper tri#unal% [1=] Their motion for reconsi$eration ha"ing #een $enie$* herein respon$ents appeale$ the $ecision[15] of the SD resolution[16] $en(ing their motion for reconsi$eration to the ourt of -ppeals% Dn Banc an$ the

In its $ecision* the ourt of -ppeals hel$ that in the a#sence of an( allegation that the transfer of the shares #et0een Fausto Cai$ an$ Vicente % &once 0as registere$ in the stock an$ transfer #ook of -FSONS* &once faile$ to state a cause of action% Thus* sai$ the -* Qthe complaint for man$amus shoul$ #e $ismisse$ for failure to state a cause of action%R [17] petitionerPs motion for reconsi$eration 0as like0ise $enie$ in a resolution[1:] $ate$ -ugust 1/* 1777% 5ence* the instant petition for re"ie0 on certiorari alleging that6 I% U T5D 5ONOR-BFD OERT OF -&&D-FS DRRDD IN 5OFDINC T5-T T5D O@&F-INT FOR ISSE-N D OF - DRTIFI -TD OF STO G FIFDD BI &DTITIONDR F-IFDD TO ST-TD - -ESD OF - TION BD -ESD IT DID NOT -FFDCD T5-T T5D TR-NSFDR OF T5D S5-RDS )SEB=D T @-TTDR OF T5D O@&F-INT, J-S RDCISTDRDD IN T5D STO G -ND TR-NSFDR BOOG OF T5D OR&OR-TION* ITINC SD TION 89 OF T5D OR&OR-TION ODD% II% U T5D 5ONOR-BFD OERT OF -&&D-FS DRRDD IN NOT -&&FIINC T5D -SDS OF Q-BD=O VS% DD F- RENR* 1:7 S R- 8;: -ND QRER-F B-NG OF S-FIN-S* IN %* DT -F VS% OERT OF -&&D-FS* DT -F%R* C%R% NO% 788>:* =END 28* 1772% III% U T5D 5ONOR-BFD OERT OF -&&D-FS DRRDD IN -&&FIINC - 1711 -SD* Q5-CDR VS% BRI-NR* 17 &5IF% 19.* TO DIS@ISS T5D O@&F-INT FOR ISSE-N D OF - DRTIFI -TD OF STO G% [19] -t issue is 0hether the ourt of -ppeals erre$ in hol$ing that herein petitioner has no cause of action for a 0rit of man$amus% &etitioner first conten$s that the act of recor$ing the transfer of shares in the stock an$ transfer #ook an$ that of issuing a certificate of stock for the transferre$ shares in"ol"es onl( one continuous process% Thus* 0hen a corporate secretar( is presente$ 0ith a $ocument of transfer of full( pai$ shares* it is his $ut( to recor$ the transfer in the stock an$ transfer #ook of the corporation* issue a ne0 stock certificate in the name of the transferee* an$ cancel the ol$ one% - transferee 0ho re2uests for the issuance of a stock certificate nee$ not spell out each an$ e"er( act that nee$s to #e $one #( the corporate secretar(* as a re2uest for issuance of stock certificates necessaril( inclu$es a re2uest for the recor$ing of the transfer% Drgo* the failure to recor$ the transfer $oes not mean that the transferee cannot ask for the issuance of stock certificates% Secon$l(* accor$ing to petitioner* there is no la0* rule or regulation re2uiring a transferor of shares of stock to first issue e<press instructions or e<ecute a po0er of attorne( for the transfer of sai$ shares #efore a certificate of stock is issue$ in the name of the transferee an$ the transfer registere$ in the #ooks of the corporation% 5e conten$s that 8ager !s. Br(an* 17 &hil% 19. )1711,* an$ Ri!era !s. 7lorendo* 1:: S R- 8:9 )17.8,* cite$ #( respon$ents* $o not appl( to this case% These cases contemplate a situation 0here a certificate of stock has #een issue$ #( the compan( 0hereas in this case at #ar* no stock certificates ha"e #een issue$ e"en in the name of the original stockhol$er* Fausto Cai$%

9/
Finall(* petitioner maintains that since he is un$er no compulsion to register the transfer or to secure stock certificates in his name* his cause of action is $eeme$ not to ha"e accrue$ until respon$ent -FSONS $enie$ his re2uest% Respon$ents* in their comment* maintain that the transfer of shares of stock not recor$e$ in the stock an$ transfer #ook of the corporation is non'e<istent insofar as the corporation is concerne$ an$ no certificate of stock can #e issue$ in the name of the transferee% Entil the recor$ing is ma$e* the transfer cannot #e the #asis of issuance of a certificate of stock% The( a$$ that petitioner is not the real part( in interest* the real part( in interest #eing Fausto Cai$ since it is his name that appears in the recor$s of the corporation% The( conclu$e that petitionerPs cause of action is #arre$ #( prescription an$ laches since 2: (ears elapse$ #efore he ma$e an( $eman$ upon -FSONS% Je fin$ the instant petition 0ithout merit% The his petition for man$amus 0as properl( $ismisse$% ourt of -ppeals $i$ not err in ruling that petitioner ha$ no cause of action* an$ that

There is no 2uestion that Fausto Cai$ 0as an original su#scri#er of respon$ent corporationPs 297*;// shares% This is clear from the numerous plea$ings file$ #( either part(% It is also clear from the -men$e$ -rticles of Incorporation [;9] appro"e$ on -ugust 7* 177;[;1] that each share ha$ a par "alue of &1%// per share% -n$* it is un$ispute$ that petitioner ha$ not ma$e a pre"ious re2uest upon the corporate secretar( of -FSONS* respon$ent Francisco @% Ciron =r%* to recor$ the allege$ transfer of stocks% The orporation o$e states that6

SD % 89% Certi"icate o" stoc$ and trans"er o" shares%VThe capital stock of stock corporations shall #e $i"i$e$ into shares for 0hich certificates signe$ #( the presi$ent or "ice'presi$ent* countersigne$ #( the secretar( or assistant secretar(* an$ seale$ 0ith the seal of the corporation shall #e issue$ in accor$ance 0ith the #('la0s% Shares of stock so issue$ are personal propert( an$ ma( #e transferre$ #( $eli"er( of the certificate or certificates in$orse$ #( the o0ner or his attorne('in'fact or other person legall( authori!e$ to make the transfer% No transfer* ho0e"er* shall #e "ali$* e<cept as #et0een the parties* until the transfer is recor$e$ in the #ooks of the corporation so as to sho0 the names of the parties to the transaction* the $ate of the transfer* the num#er of the certificate or certificates an$ the num#er of shares transferre$% No shares of stock against 0hich the corporation hol$s an( unpai$ claim shall #e transfera#le in the #ooks of the corporation% &ursuant to the foregoing pro"ision* a transfer of shares of stock not recor$e$ in the stock an$ transfer #ook of the corporation is non'e<istent as far as the corporation is concerne$% [;;] -s #et0een the corporation on the one han$* an$ its sharehol$ers an$ thir$ persons on the other* the corporation looks onl( to its #ooks for the purpose of $etermining 0ho its sharehol$ers are% [;3] It is onl( 0hen the transfer has #een recor$e$ in the stock an$ transfer #ook that a corporation ma( rightfull( regar$ the transferee as one of its stockhol$ers% From this time* the conse2uent o#ligation on the part of the corporation to recogni!e such rights as it is man$ate$ #( la0 to recogni!e arises% 5ence* 0ithout such recor$ing* the transferee ma( not #e regar$e$ #( the corporation as one among its stockhol$ers an$ the corporation ma( legall( refuse the issuance of stock certificates in the name of the transferee e"en 0hen there has #een compliance 0ith the re2uirements of Section 8: [;=] of the orporation o$e% This is the import of Section 89 0hich states that QNo transfer* ho0e"er* shall #e "ali$* e<cept #et0een the parties* until the transfer is recor$e$ in the #ooks of the corporation sho0ing the names of the parties to the transaction* the $ate of the transfer* the num#er of the certificate or certificates an$ the num#er of shares transferre$%R The situation 0oul$ #e $ifferent if the petitioner 0as himself the registere$ o0ner of the stock 0hich he sought to transfer to a thir$ part(* for then he 0oul$ #e entitle$ to the reme$( of man$amus%[;5] From the corporationPs point of "ie0* the transfer is not effecti"e until it is recor$e$% Enless an$ until such recor$ing is ma$e the $eman$ for the issuance of stock certificates to the allege$ transferee has no legal #asis% -s #et0een the corporation on the one han$* an$ its sharehol$ers an$ thir$ persons on the other* the corporation looks onl( to its #ooks for the purpose of $etermining 0ho its sharehol$ers are%[;6] In other 0or$s* the stock an$ transfer #ook is the #asis for ascertaining the persons entitle$ to the rights an$ su#3ect to the lia#ilities of a stockhol$er% Jhere a transferee is not (et recogni!e$ as a stockhol$er* the corporation is un$er no specific legal $ut( to issue stock certificates in the transfereePs name% It follo0s that* as hel$ #( the ourt of -ppeals6 < < < until registration is accomplishe$* the transfer* though "ali$ #et0een the parties* cannot #e effecti"e as against the corporation% Thus* in the a#sence of an( allegation that the transfer of the shares #et0een Cai$ an$ the pri"ate respon$ent [herein petitioner] 0as registere$ in the stock an$ transfer #ook of the petitioner corporation* the pri"ate respon$ent has faile$ to state a cause of action%[;7] &etitioner insists that it is precisel( the $ut( of the corporate secretar(* 0hen presente$ 0ith the $ocument of full( pai$ shares* to effect the transfer #( recor$ing the transfer in the stock an$ transfer #ook of the corporation an$ to issue stock certificates in the name of the transferee% On this point* the SD Dn Banc cite$ Rural Ban$ o" #alinas, nc. !s. Court o" Cppeals* [;:] 0here 0e hel$ that6 For the petitioner Rural Bank of Salinas to refuse registration of the transferre$ shares in its stock an$ transfer #ook* 0hich $ut( is ministerial on its part* is to ren$er nugator( an$ ineffectual the spirit an$ intent of Section 89 of the orporation o$e% Thus* respon$ent ourt of -ppeals $i$ not err in uphol$ing the $ecision of respon$ent SD affirming the Decision of its 5earing Officer $irecting the registration of the :>9 shares in the stock an$ transfer #ook in the names of pri"ate respon$ents% -t all e"ents* the registration is 0ithout pre3u$ice to the procee$ings in court to $etermine the "ali$it( of the Dee$s of -ssignment of the shares of stock in 2uestion% In Rural Ban$ o" #alinas, nc. * ho0e"er* pri"ate respon$ent @elania Cuerrero ha$ a Special &o0er of -ttorne( e<ecute$ in her fa"or #( lemente Cuerrero* the registere$ stockhol$er% It ga"e Cuerrero full authorit( to sell or other0ise $ispose of the :>9 shares of stock registere$ in lementePs name an$ to e<ecute the proper $ocuments therefor% &ursuant to the authorit( so gi"en* @elania assigne$ the :>9 shares of stock o0ne$ #( Cuerrero an$ presente$ to the Rural Bank of Salinas the $ee$s of assignment co"ering the assigne$ shares% @elania Cuerrero pra(e$ for the transfer of the stocks in the stock an$ transfer #ook an$ the issuance of stock certificates in the name of the ne0 o0ners thereof% Base$ on those circumstances* there 0as a clear $ut( on the part of the corporate secretar( to register the :>9 shares in fa"or of the ne0 o0ners* since the person 0ho sought the transfer of shares ha$ e<press instructions from an$ specific authorit( gi"en #( the registere$ stockhol$er to cause the $isposition of stocks registere$ in his name% That cannot #e sai$ of this case% The $ee$ of un$ertaking 0ith in$orsement presente$ #( petitioner $oes not esta#lish* on its face* his right to $eman$ for the registration of the transfer an$ the issuance of certificates of stocks% In 8ager !s. Br(an* 17 &hil% 19. )1711,* this ourt hel$ that a petition for man$amus fails to state a cause of action 0here it appears that the petitioner is not the

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registere$ stockhol$er an$ there is no allegation that he hol$s an( po0er of attorne( from the registere$ stockhol$er* from 0hom he o#taine$ the stocks* to make the transfer* thus6 It appears* ho0e"er* from the original as 0ell as the amen$e$ petition* that this petitioner is not the registere$ o0ner of the stock 0hich he seeks to ha"e transferre$* an$ e<cept in so far as he alleges that he is the o0ner of the stock an$ that it 0as +in$orse$+ to him on Fe#ruar( ; #( the Br(an'Fan$on ompan(* in 0hose name it is registere$ on the #ooks of the Visa(an Dlectric ompan(* there is no allegation that the petitioner hol$s an( po0er of attorne( from the Br(an'Fan$on ompan( authori!ing him to make $eman$ on the secretar( of the Visa(an Dlectric ompan( to make the transfer 0hich petitioner seeks to ha"e ma$e through the me$ium of the man$amus of this court% Jithout $iscussing or $eci$ing the respecti"e rights of the parties 0hich might #e properl( asserte$ in an or$inar( action or an action in the nature of an e2uita#le suit* 0e are all agree$ that in a case such as that at bar, a mandamus should not issue to compel the secretary of a corporation to make a transfer of the stock on the books of the company, unless it affirmatively appears that he has failed or refused so to do, upon the demand either of the person in whose name the stock is registered, or of some person holding a power of attorney for that purpose from the registered owner of the stock. There is no allegation in the petition that the petitioner or an(one else hol$s a po0er of attorne( from the Br(an'Fan$on ompan( authori!ing a $eman$ for the transfer of the stock* or that the Br(an'Fan$on ompan( has e"er itself ma$e such $eman$ upon the Visa(an Dlectric ompan(* an$ in the a#sence of such allegation 0e are not a#le to sa( that there 0as such a clear in$isputa#le $ut(* such a clear legal o#ligation upon the respon$ent* as to 3ustif( the issuance of the 0rit to compel him to perform it% En$er the pro"isions of our statute touching the transfer of stock )secs% 9; an$ 98 of -ct No% 1:;7,*[;9] the mere in$orsement of stock certificates $oes not in itself gi"e to the in$orsee such a right to ha"e a transfer of the shares of stock on the #ooks of the compan( as 0ill entitle him to the 0rit of man$amus to compel the compan( an$ its officers to make such transfer at his $eman$* #ecause* un$er such circumstances the $ut(* the legal o#ligation* is not so clear an$ in$isputa#le as to 3ustif( the issuance of the 0rit% -s a general rule an$ especiall( un$er the a#o"e'cite$ statute* as #et0een the corporation on the one han$* an$ its sharehol$ers an$ thir$ persons on the other* the corporation looks onl( to its #ooks for the purpose of $etermining 0ho its sharehol$ers are* so that a mere in$orsee of a stock certificate* claiming to #e the o0ner* 0ill not necessaril( #e recogni!e$ as such #( the corporation an$ its officers* in the a#sence of e<press instructions of the registere$ o0ner to make such transfer to the in$orsee* or a po0er of attorne( authori!ing such transfer%
[39]

In Ri!era !s. 7lorendo* 1:: S R- 8:9* 8;> )17.8,* 0e reiterate$ that a mere in$orsement #( the suppose$ o0ners of the stock* in the a#sence of e<press instructions from them* cannot #e the #asis of an action for man$amus an$ that the rights of the parties ha"e to #e threshe$ out in an or$inar( action% That 8ager an$ Ri!era in"ol"e$ petitions for man$amus to compel the registration of the transfer* 0hile this case is one for issuance of stock* is of no moment% It has #een ma$e clear* thus far* that #efore a transferee ma( ask for the issuance of stock certificates* he must first cause the registration of the transfer an$ there#( en3o( the status of a stockhol$er insofar as the corporation is concerne$% - corporate secretar( ma( not #e compelle$ to register transfers of shares on the #asis merel( of an in$orsement of stock certificates% Jith more reason* in our "ie0* a corporate secretar( ma( not #e compelle$ to issue stock certificates 0ithout such registration%[31] &etitionerPs reliance on our ruling in C'e+o !s. .e la Cru;, 1:7 S R- 8;: )17.>,* that notice gi"en to the corporation of the sale of the shares an$ presentation of the certificates for transfer is e2ui"alent to registration is misplace$% In this case there is no allegation in the complaint that petitioner e"er ga"e notice to respon$ents of the allege$ transfer in his fa"or% @oreo"er* that case arose #et0een an$ among the principal stockhol$ers of the corporation* &ocket Bell* $ue to the refusal of the corporate secretar( to recor$ the transfers in fa"or of Telectronics of the corporationPs controlling ;81 shares of stock 0hich 0ere co"ere$ #( $ul( en$orse$ stock certificates% -s aforesai$* the re2uest for the recor$ing of a transfer is $ifferent from the re2uest for the issuance of stock certificates in the transfereePs name% Finall(* in C'e+o 0e $i$ not sa( that transfer of shares nee$ not #e recor$e$ in the #ooks of the corporation #efore the transferee ma( ask for the issuance of stock certificates% The ourtPs statement* that Qthere is no re2uirement that a stockhol$er of a corporation must #e a registere$ one in or$er that the Securities an$ D<change ommission ma( take cogni!ance of a suit seeking to enforce his rights as such stockhol$er among 0hich is the stock purchaserPs right to secure the correspon$ing certificate in his name*R[3;] 0as a$$resse$ to the issue of 3uris$iction* 0hich is not pertinent to the issue at han$% -#sent an allegation that the transfer of shares is recor$e$ in the stock an$ transfer #ook of respon$ent -FSONS* there appears no #asis for a clear an$ in$isputa#le $ut( or clear legal o#ligation that can #e impose$ upon the respon$ent corporate secretar(* so as to 3ustif( the issuance of the 0rit of man$amus to compel him to perform the transfer of the shares to petitioner% The test of sufficienc( of the facts allege$ in a petition is 0hether or not* a$mitting the facts allege$* the court coul$ ren$er a "ali$ 3u$gment thereon in accor$ance 0ith the pra(er of the petition%[33] This test 0oul$ not #e satisfie$ if* as in this case* not all the elements of a cause of action are allege$ in the complaint%[3=] Jhere the corporate secretar( is un$er no clear legal $ut( to issue stock certificates #ecause of the petitionerPs failure to recor$ earlier the transfer of shares* one of the elements of the cause of action for man$amus is clearl( missing% That petitioner 0as un$er no o#ligation to re2uest for the registration of the transfer is not in issue% It has no pertinence in this contro"ers(% One ma( o0n shares of corporate stock 0ithout possessing a stock certificate% In Fan !s. #,C* 2/8 S R- >:/ )1772,* 0e ha$ occasion to $eclare that a certificate of stock is not necessar( to ren$er one a stockhol$er in a corporation% But a certificate of stock is the tangi#le e"i$ence of the stock itself an$ of the "arious interests therein% The certificate is the e"i$ence of the hol$erPs interest an$ status in the corporation* his o0nership of the share represente$ there#(% The certificate is in la0* so to speak* an e2ui"alent of such o0nership% It e<presses the contract #et0een the corporation an$ the stockhol$er* #ut it is not essential to the e<istence of a share in stock or the creation of the relation of sharehol$er to the corporation% [35] In fact* it rests on the 0ill of the stockhol$er 0hether he 0ants to #e issue$ stock certificates* an$ a stockhol$er ma( opt not to #e issue$ a certificate% In <on !s. <ac$ <ac$ /ol" and Countr( Clu', nc. * 1/: &hil% :88 )17;.,* 0e hel$ that consi$ering that the la0 $oes not prescri#e a perio$ 0ithin 0hich the registration shoul$ #e effecte$* the action to enforce the right $oes not accrue until there has #een a $eman$ an$ a refusal concerning the transfer% In the present case* petitionerPs complaint for man$amus must fail* not #ecause of laches or estoppel* #ut #ecause he ha$ allege$ no cause of action sufficient for the issuance of the 0rit% 8 ERE-!RE* the petition is 6ENIE6 for lack of merit% The $ecision of the ourt of -ppeals* in -'C%R% S& No% :8872* 0hich set asi$e that of the Securities an$ D<change ommission Dn Banc in SD '- No% ;:; an$ reinstate$ the or$er of the 5earing Officer* is here#( A--IRME6. No pronouncement as to costs% S! !R6ERE6. Bellosillo, (Chairman), -endo;a, Custria>-artine;, an$ Calle+o, #r., JJ., concur%

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[1] [2] [9] [:] [;] [8] [>] [.] [7]

Rollo* pp% 12/'199% d. at 1/.'112% - Rollo* pp% 1>2'1>>% Rollo* pp% 1;7'18/% d. at 2:'2>% d. at 2:'2;% d. at 2.% d. at 28% d. at 9>% d. at :1':2% d. at :9'::% Rollo* pp% 1/:'1/8% d. at 11/% Rollo* p% 111% #upra, note 2% Rollo* pp% 119'118% d. at 12.% d. at 1;7'18/% d. at 19'1:% d. at 9/'98% d% at 27% -* 1./

[1/] [11] [12] [19] [1:] [1;] [18] [1>] [1.] [17] [2/] [21] [22]

Eson !s% Diosomito* 81 &hil% ;9;* ;:/ )179;,4 Carcia !s% =omoua$* 929 S R- :2:* :2. )2///,4 @agsa(sa('Fa#ra$or !s% S R- 288* 2>9 )17.7,%
[29] [2:]

5ager !s% Br(an* 17 &hil% 19.* 1:/'1:1 )1711,%

SD % 8:% ssuance o" stoc$ certi"icates%VNo certificate of stock shall #e issue$ to a su#scri#er until the full amount of his su#scription together 0ith interest an$ e<penses )in case of $elin2uent shares,* if an( is $ue* has #een pai$%
[2;] [28] [2>] [2.] [27] [9/] [91] [92] [99] [9:] [9;]

#ee 5ager !s% Br(an, supra at 1:1'1:2% #upra, note 29% Rollo* p% 12.% 21/ S R- ;1/* ;18 )1772,% No0 Sections 89 an$ 8: of the orporation o$e% #upra* note 29 at 1:2'1:9% #ee 5ager !s% Br(an, 17 &hil% 19.* 1:1'1:9 )1711,% -#e3o !s% Dela ru!, 1:7 S R- 8;:* 88.'887 )17.>,% &araLa2ue Gings Dnterprises* Inc% !s% -* 28. S R- >2>* >97 )177>,% #ee @atha( !s% The onsoli$ate$ Bank an$ Trust Tan !s% SD * 2/8 S R- >:/* >:7'>;/ )1772,% o%* ;. S R- ;;7* ;>8';>. )17>:,%

orporate Fa0 ase Digest6 &once V% -lsons ement orp% )2//2, G.R. N!. 139:9; 6$c$C>$r 19, ;99; Fessons -pplica#le6

F- TS6

Nature of ertificate of Stock ) orporate Fa0, Reme$( if Registration is Refuse$ ) orporate Fa0,

Fe#ruar( .* 178.6 Vicente % &once an$ Fausto Cai$* incorporator of Victor( ement orporation )V ,* e<ecute$ a QDee$ of En$ertakingR an$ QIn$orsementR 0here#( Cai$ ackno0le$ges that &once is the o0ner of the shares an$ he 0as therefore assigningAen$orsing it to &once V 0as rename$ Floro ement orporation )F , an$ then to -lsons ement orporation )- , Ep to the present* no certificates of stock correspon$ing to the 297*;// su#scri#e$ an$ full( pai$ shares of Cai$ 0ere issue$ in the name of Fausto C% Cai$ an$Aor the plaintiff%

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Despite repeate$ $eman$s* the refuse$ to issue the certificates of stocks SD 5earing Officer Dnri2ue F% Flores* =r% grante$ the motion to $ismiss Epon appeal* the ommission Dn Banc re"erse$ the $ecision of the 5earing Officer &once* file$ a complaint 0ith the SD for man$amus -6 man$amus shoul$ #e $ismisse$ for failure to state a cause of action in the a#sence of an( allegation that the transfer of the shares 0as registere$ in the stock an$ transfer #ook ISSED6 JAN the cert% of stocks of Cai$ can #e transferre$ to &once

5DFD6 NO% petition Denie$% SD % 89% Certi"icate o" stoc$ and trans"er o" shares%VThe capital stock of stock corporations shall #e $i"i$e$ into shares for 0hich certificates signe$ #( the presi$ent or "ice'presi$ent* countersigne$ #( the secretar( or assistant secretar(* an$ seale$ 0ith the seal of the corporation shall #e issue$ in accor$ance 0ith the #('la0s% Shares of stock so issue$ are personal propert( an$ ma( #e transferre$ #( $eli"er( of the certificate or certificates in$orse$ #( the o0ner or his attorne('in'fact or other person legall( authori!e$ to make the transfer% No +ra'#,$r, ho?$A$r, #ha// >$ Aa/%&, $Ic$B+ a# >$+?$$' +h$ Bar+%$#, *'+%/ +h$ +ra'#,$r %# r$cor&$& %' +h$ >oo@# o, +h$ corBora+%o' #o a# +o #ho? +h$ 'aC$# o, +h$ Bar+%$# +o +h$ +ra'#ac+%o', +h$ &a+$ o, +h$ +ra'#,$r, +h$ '*C>$r o, +h$ c$r+%,%ca+$ or c$r+%,%ca+$# a'& +h$ '*C>$r o, #har$# +ra'#,$rr$&. No shares of stock against 0hich the corporation hol$s an( unpai$ claim shall #e transfera#le in the #ooks of the corporation% the stock an$ transfer #ook is the #asis for ascertaining the persons entitle$ to the rights an$ su#3ect to the lia#ilities of a stockhol$er Jhere a transferee is not (et recogni!e$ as a stockhol$er* the corporation is un$er no specific legal $ut( to issue stock certificates in the transfereePs name% in a case such as that at #ar* a Ca'&aC*# shoul$ not issue to compel the secretar( of a corporation to make a transfer of the stock on the #ooks of the compan( unless it affirmati"el( appears that he has faile$ or refuse$ so to $o* upon the $eman$ either of the person in 0hose name the stock is registere$* or of some person hol$ing a po0er of attorne( for that purpose from theregistere$ o0ner of the stock% mere in$orsee of a stock certificate* claiming to #e the o0ner* 0ill not necessaril( #e recogni!e$ as such #( the corporation an$ its officers* in the a#sence of e<press instructions of the registere$ o0ner to make such transfer to the in$orsee* or a po0er of attorne( authori!ing such transfer man$amus ' proper reme$( to make him the rightful o0ner an$ hol$er of a stock certificate to #e issue$ in his name

Repu#lic of the &hilippines SUPREME C!URT @anila SD OND DIVISION G.R. No. 95696 March 3, 199; AL-!NS! S. TAN, &etitioner* "s% SECURITIES AN6 E0C ANGE C!MMISSI!N, 1ISA4AN E6UCATI!NAL SUPPL4 C!RP., TAN SU C ING, AL-RE6! B. U4, ANGEL S. TAN a'& PATRICIA AGUILAR, Respon$ents%

PARAS, J.: &etitioner file$ a petition for certiorari against the pu#lic respon$ent Securities an$ D<change ommission an$ its co'respon$ents* after the former in an en 'anc Or$er* o"erturne$ 0ith mo$ification* the $ecision of its e#u SD D<tension hearing officer* Feli< han* in SD ase No% '//78* $ate$ @a( 29* 17.7* on Octo#er 1/* 177/* un$er SD '- No% 289% )Rollo, pp% 9 an$ :, Sought to #e re"erse$ #( petitioner* is the ruling of the ommission* specificall( $eclaring that6 1% onfirming the "ali$it( of the resolution of the #oar$ of $irectors of the Visa(an D$ucational Suppl( orporation so far as it cancelle$ Stock ertificate No% 2 an$ split the same into Stock ertificates No% 8 )for -ngel S% Tan, an$ No% . )for -lfonso S% Tan,4 2% In"ali$ating the sale of shares represente$ un$er Stock ertificate No% . #et0een -lfonso S% Tan an$ the respon$ent corporation 0hich con"erte$ the sai$ stocks into treasur( shares* as 0ell as those transactions in"ol"e$ in the 0ith$ra0al of the stockhol$ers from the respon$ent corporation for #eing contrar( to la0* #ut or$ering the neither part( ma( reco"er pursuant to -rticle 1:12 )1, i"il o$e of the &hilippines4 an$ 9% Re"oking the Or$er of 5earing Officer Feli< han to reinstate complainant?s original :// shares of stock in the #ooks of the corporation in "ie0 of the "ali$it( of the sale of ;/ shares represente$ un$er stock certificate No% 84 an$ the nullit( of the sale 9;/ shares represente$ un$er stock certificate No% .* pursuant to the +in pari $elicto+ $octrine aforecite$% )Rollo* p% :, The antece$ent facts of the case are as follo0s6 Respon$ent corporation 0as registere$ on Octo#er 1* 17>7% -s incorporator* petitioner ha$ four hun$re$ )://, shares of the capital stock stan$ing in his name at the par "alue of &1//%// per share* e"i$ence$ #( ertificate of Stock No% 2% 5e 0as electe$ as &resi$ent

9:
an$ su#se2uentl( reelecte$* hol$ing the position as such until 17.2 #ut remaine$ in the Boar$ of Directors until -pril 17* 17.9 as $irector% )Rollo* p% ;, On =anuar( 91* 17.1* 0hile petitioner 0as still the presi$ent of the respon$ent corporation* t0o other incorporators* namel(* -ntonia I% Ioung an$ Teresita I% Ong* assigne$ to the corporation their shares* represente$ #( certificate of stock No% : an$ ; after 0hich* the( 0ere pai$ the correspon$ing :/1 corporate stock'in'tra$e% )Rollo* p% :9, &etitioner?s certificate of stock No% 2 0as cancelle$ #( the corporate secretar( an$ respon$ent &atricia -guilar #( "irtue of Resolution No% 17.1 )#,* 0hich 0as passe$ an$ appro"e$ 0hile petitioner 0as still a mem#er of the Boar$ of Directors of the respon$ent corporation% )Rollo* p% 8, Due to the 0ith$ra0al of the aforesai$ incorporators an$ in or$er to complete the mem#ership of the fi"e );, $irectors of the #oar$* petitioner sol$ fift( );/, shares out of his :// shares of capital stock to his #rother -ngel S% Tan% -nother incorporator* -lfre$o B% E(* also sol$ fift( );/, of his :// shares of capital stock to Teo$ora S% Tan an$ #oth ne0 stockhol$ers atten$e$ the special meeting* -ngel Tan 0as electe$ $irector an$ on @arch 2>* 17.1* the minutes of sai$ meeting 0as file$ 0ith the SD % These facts stan$ unchallenge$% )Rollo* p% :9, -ccor$ingl(* as a result of the sale #( petitioner of his fift( );/, shares of stock to -ngel S% Tan on -pril 18* 17.1* ertificate of Stock No% 2 0as cancelle$ an$ the correspon$ing ertificates Nos% 8 an$ . 0ere issue$* signe$ #( the ne0l( electe$ fifth mem#er of the Boar$* -ngel S% Tan as Vice'presi$ent* upon instruction of -lfonso S% Tan 0ho 0as then the presi$ent of the orporation% )@emoran$um of the &ri"ate Respon$ent* p% 1;, Jith the cancellation of ertificate of stock No% 2 an$ the su#se2uent issuance of Stock ertificate No% 8 in the name of -ngel S% Tan an$ for the remaining 9;/ shares* Stock ertificate No% . 0as issue$ in the name of petitioner -lfonso S% Tan* @r% Bu!on* su#mitte$ an -ffi$a"it )D<h% 27,* alleging that6 7% That in "ie0 of his ha"ing taken 99 1A9 interest* I 0as personall( re2ueste$ #( @r% Tan Su hing to re2uest @r% -lfonso Tan to make proper en$orsement in the cancelle$ ertificate of Stock No% 2 an$ ertificate No% .* #ut he $i$ not en$orse* instea$ he kept the cancelle$ )17.1, ertificate of Stock No% 2 an$ returne$ onl( to me ertificate of Stock No% .* 0hich I $eli"ere$ to Tan Su hing% 1/% That the cancellation of his stock )Stock No% 2, 0as kno0n #( him in 17.14 that it 0as Stock No% .* that 0as $eli"ere$ in @arch 17.9 for his en$orsement an$ cancellation% ) 'id* p% 1., From the same -ffi$a"it* it 0as allege$ that -tt(% Ramire! prepare$ a @emoran$um of -greement 0ith respect to the transaction of the fift( );/, shares of stock part of the Stock ertificate No% 2 of petitioner* 0hich 0as su#mitte$ to its former o0ner* -lfonso Tan* #ut 0hich the purposel( $i$ not return% ) 'id%* p% 1., On =anuar( 27* 17.9* $uring the annual meeting of the corporation* respon$ent Tan Su hing 0as electe$ as &resi$ent 0hile petitioner 0as electe$ as Vice'presi$ent% 5e* ho0e"er* $i$ not sign the minutes of sai$ meeting 0hich 0as su#mitte$ to the SD on @arch 9/* 17.9% )Rollo* p% :9, Jhen petitioner 0as $islo$ge$ from his position as presi$ent* he 0ith$re0 from the corporation on Fe#ruar( 2>* 17.9* on con$ition that he #e pai$ 0ith stocks'in'tra$e e2ui"alent to 99%91 in lieu of the stock "alue of his shares in the amount of &9;*///%//% -fter the 0ith$ra0al of the stocks* the #oar$ of the respon$ent corporation hel$ a meeting on -pril 17* 17.9* effecting the cancellation of Stock ertificate Nos% 2 an$ . )D<h% 2>.' , in the corporate stock an$ transfer #ook 1 )D<h% 1'1'-, an$ su#mitte$ the minutes thereof to the SD on @a( 1.* 17.9% )Rollo* p% ::, Fi"e );, (ears an$ nine )7, months after the transfer of ;/ shares to -ngel S% Tan* #rother of petitioner -lfonso S% Tan* an$ three )9, (ears an$ se"en )>, months after effecting the transfer of Stock ertificate Nos% 2 an$ . from the original o0ner )-lfonso S% Tan, in the stock an$ transfer #ook of the corporation* the latter file$ the case #efore the e#u SD D<tension Office un$er SD ase No% '//78* more specificall( on Decem#er 9* 17.9* 2uestioning for the first time* the cancellation of his aforesai$ Stock ertificates Nos% 2 an$ .% )Rollo* p% ::, The #one of centention raise$ #( the petitioner is that the $epri"ation of his shares $espite the non'en$orsement or surren$er of his Stock ertificate Nos% 2 an$ .* 0as 0ithout the process contrar( to the pro"ision of Section 89 of the orporation o$e )Batas &am#ansa Blg% 8.,* 0hich re2uires that6 % % % No transfer* ho0e"er* shall #e "ali$* e<cept as #et0een the parties* until the transfer is recor$e$ to the #ooks of the corporation so as to sho0 the names of the parties to the transaction* the $ate of the transfer* the num#er of the certificate or certificates an$ the num#er of shares transferre$% -fter hearing* the e#u SD D<tension Office 5earing Officer* Feli< han rule$* that6 a, The cancellation of the complainant?s shares of stock 0ith the Visa(an D$ucational Suppl( orporation is null an$ "oi$4 #, The earlier cancellation of stock certificate No% 2 an$ the su#se2uent issuance of stock certificate No% . is also here#( $eclare$ null an$ "oi$4 c, The Secretar( of the orporation is here#( or$ere$ to make the necessar( corrections in the #ooks of the corporation reinstating thereto complainant?s original :// shares of stock% )Rollo* pp% 97':/,

9;
&ri"ate respon$ent in the original complaint 0ent to the Securities an$ D<change an$ ommission on appeal* an$ on Octo#er 1/* 177/* the commission en 'anc unanimousl( o"erturne$ the Decision of the 5earing Officer un$er SD '- No% 289% )Or$er* Rollo* pp% :2':7, The petition for certiorari centere$ on three ma3or issues* 0ith other issues consi$ere$ as su#or$inate to them* to 0it6 1% The meaning of shares of stock are personal propert( an$ ma( #e transferre$ #( $eli"er( of the certificate or certificates in$orse$ #( the o0ner or his attorne('in'fact or other person legall( authori!e$ to make the transfer% )Rollo* p% 1/, The case of 0a!a !s. peers -ar$eting corporation )>: S R- 8;, 0as cite$ #( petitioner making the reference to commentaries taken from 1. %=%S% 72.'79/* that the transfer #( $eli"er( to the transferee of the certificate shoul$ #e properl( in$orse$* an$ that +There shoul$ #e compliance 0ith the mo$e of transfer prescri#e$ #( la0%+ Esing Section 9;* no0 Section 89 of the orporation o$e* the pro"ision of the la0* rea$s6 SD % 89% Certi"icate o" stoc$ and trans"er o" shares% K The capital stock an$ stock an$ corporations shall #e $i"i$e$ into shares for 0hich certificates signe$ #( the presi$ent an$ "ice presi$ent* countersigne$ #( the secretar( or assistant secretar(* an$ seale$ 0ith the seal of the corporation shall #e issue$ in accor$ance 0ith the #('la0s% Shares of stocks so issue$ are personal propert( an$ ma( #e transferre$ #( $eli"er( of the certificate or certificates in$orse$ #( the o0ner or his attorne('in'fact or other person legall( authori!e$ to make the transfer% No transfer* ho0e"er* shall #e "ali$* e<cept as #et0een the parties* until the transfer is recor$e$ in the #ooks of the corporation so as to sho0 the names of the parties to the transaction* the $ate of the transfer* the num#er of the certificate or certificates an$ the num#er of shares transferre$% No shares of stocks against 0hich the corporation hol$s an( unpai$ claim shall #e transfera#le in the #ooks of the corporations% There is no $ou#t that there 0as $eli"er( of Stock ertificate No% 2 ma$e #( the petitioner to the orporation #efore its replacement 0ith the Stock ertificate No% 8 for fift( );/, shares to -ngel S% Tan an$ Stock ertificate No% . for 9;/ shares to the petitioner* on @arch 18* 17.1% The pro#lem arose 0hen petitioner 0as gi"en #ack Stock ertificate No% 2 for him to en$orse an$ he $eli#eratel( 0ithel$ it for reasons of his o0n% That the Stock ertificate in 2uestion 0as returne$ to him for his purpose 0as atteste$ to #( @r% Bu!on in his -ffi$a"it* the pertinent portion of 0hich has #een earlier 2uote$% The proof that Stock ertificate No% 2 0as split into t0o )2, consisting of Stock ertificate No% 8 for fift( );/, shares an$ Stock ertificate No% . for 9;/ shares* is the fact that petitioner surren$ere$ the latter stock )No% ., in lieu of &2 million pesos 1 0orth of stocks* 0hich the #oar$ passe$ in a resolution in its meeting on -pril 17* 17.9% Thus* on Fe#ruar( 2>* 17.9* petitioner in$icate$ he 0as 0ith$ra0ing from the corporation on con$ition that he #e pai$ 0ith stock'in'tra$e correspon$ing to 99%91 )D<h% 27:,* 0hich ha$ onl( a par "alue of &9;*///%//% In this same meeting* the transfer of Stock ertificate Nos% 2 an$ . from the original o0ner* -lfonso S% Tan 0as or$ere$ to #e recor$e$ in the corporate stock an$ transfer #ook )D<h% +I'1'-+, thereafter su#mitting the minutes of sai$ meeting to the SD on @a( 1.* 17.9 )D<hs% 12 an$ I,% )Or$er* Rollo* p% ::, It is also $ou#tless that Stock ertificate No% . 0as e<change$ #( petitioner for stocks'in'tra$e since he 0as operating his o0n enterprise engage$ in the same #usiness* other0ise* 0h( 0oul$ a #usinessman #e intereste$ in ac2uiring &2*///*///%// 0orth of goo$s 0hich coul$ possi#l( at that time* fill up 0arehouseM In fact* he e"en pa$locke$ the 0arehouse of the respon$ent corporation* after 0ith$ra0ing the thirt('three an$ one'thir$ )99 1A91, percent stocks% -ccor$ingl(* the @emoran$um of -greement prepare$ #( the respon$ents? counsel* -tt(% Ramire! e"i$encing the transaction* 0as also presente$ to petitioner for his signature* ho0e"er* this $ocument 0as ne"er returne$ #( him to the corporate officer for the signature of the other officers concerne$% )Rollo* p% 2., -t the time the 0arehouse 0as pa$locke$ #( the petitioner* the remaining stock in"entor( 0as "alue$ at &>*:;:*1.7%/; of 0hich 88 2A9 percent thereof #elonge$ to the pri"ate respon$ents% ) 'id%* p% 2., It 0as "er( o#"ious that petitioner $e"ise$ the scheme of not returning the cancelle$ Stock ertificate No% 2 0hich 0as returne$ to him for his en$orsement* to skim off the largesse of the corporation as sho0n #( the tra$ing of his Stock ertificate No% . for goo$s of the corporation "alue$ at &2 million 0hen the par "alue of the same 0as onl( 0orth &9;*///%//% ) 'id%* p% :>/, 5e also use$ this scheme to renege on his in$e#te$ness to respon$ent Tan Su hing in the amount of &1 million% )Decision* p% 8, It is not remote that if petitioner coul$ ha"e cashe$ in on Stock ertificate No% 2 0ith the remain$er of the goo$s that he pa$locke$* he 0oul$ ha"e $one so* until the respon$ent corporation 0as #le$ entirel(% -long this line* petitioner put up the argument that he 0as responsi#le for the gro0th of the corporation #( the alleging that $uring his incum#enc(* the corporation gre0* prospere$ an$ flourishe$ in the court of #usiness as e"i$ence$ #( its au$ite$ financial statements* an$ grosse$ the follo0ing incomes from6 17./ K &.*8;.*:1:%1/* 17.1 K &.*/97*.18%8>* 17.2 K &>*9/8*18.%8>* 17.9 K &;*.>:*:;9%;;* 17.: K &9*711*88>%>8% ) 'id%* Rollo* p% 2:, @oreo"er* petitioner asserte$ that he 0as ouste$ from the corporation #( reason of his efforts to esta#lish fiscal controls an$ to $eman$ an accounting of corporate fun$s 0hich 0ere accor$ingl( #eing transferre$ an$ $i"erte$ to certain of pri"ate respon$ents? personal accounts 0hich 0ere allege$l( misapplie$* misappropriate$ an$ con"erte$ to their o0n personal use an$ #enefit% ) 'id%* p% 12;, 2% &etitioner further claims that +)T,he cancellation an$ transfer of petitioner?s shares an$ ertificate of Stock No% 2 )D<h% -, as 0ell as the issuance an$ cancellation of ertificate of Stock No% . )D<h% @, 0as patentl( an$ palpa#l( unla0ful* null an$ "oi$* in"ali$ an$ frau$ulent%+ )Rollo* p% 7, -n$* that Section 89 of the orporation o$e of the &hilippines is +man$ator( in nature+* meaning that 0ithout the actual $eli"er( an$ en$orsement of the certificate in 2uestion* there can #e no transfer* or that such transfer is null an$ "oi$% )Rollo, p% 1/, These arguments are all moti"ate$ #( self'interest* using foreign authorities that are slante$ in his fa"or an$ e"en mis2uoting local authorities to prop up his erroneous posture an$ all these attempts are inten$e$ to stifle 3ustice* truth an$ e2uit(%

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ontrar( to the un$erstan$ing of the petitioner 0ith respect to the use of the 0or$ +ma(+* in the case of #hau" !. Court o" Cppeals* )171 S R- >19* 2> No"em#er 177/,* this ourt hel$* that +Reme$ial la0 statues are to #e construe$ li#erall(%+ The term ?ma(? as use$ in a$3ecti"e rules* is onl( permissi"e an$ not man$ator(% In se"eral earlier cases* the usage of the 0or$ +ma(+ 0as $escri#e$ as follo0s6 Fhe *ord Gma(Gis an au&illiar( !er' sho*ing among others, opportunit( or possi'ilit(. ?nder ordinar( circumstances, the phrase Gma( 'eG implies the possi'le e&istence o" something% In this case* the +something+ is a la0 go"erning sectoral representation% The phrase in 2uestion shoul$* therefore* #e un$erstoo$ to mean as prescri#e$ #( such la0 that go"erns the matter at the time % % % Fhe phrase does not and cannot, '( its !er( *ording, restrict itsel" to the uncertainl( o" "uture legislation% )Fegaspi "% Dstrella* 1.7 S R- ;.* 2: -ug% 177/* Dn Banc, Iears #efore the a#o"e rulings concerning the interpretation of the 0or$ +ma(+* this ourt hel$ in Chua !. #amahang -agsasa$a* that +the 0or$ +ma(+ in$icates that the transfer ma( #e effecte$ in a manner $ifferent from that pro"i$e$ for in the la0%+ )82 &hil% :>2, @oreo"er* it is safe to infer from the facts $e$uce$ in the instant case that* there 0as alrea$( $eli"er( of the unen$orse$ Stock ertificate No% 2* 0hich is essential to the issuance of Stock ertificate Nos% 8 an$ . to angel S% Tan an$ petitioner -lfonso S% Tan* respecti"el(% Jhat le$ to the pro#lem 0as the return of the cancelle$ certificate )No% 2, to -lfonso S% Tan for his en$orsement an$ his $eli#erate non'en$orsement% For all intents an$ purposes* ho0e"er* since this 0as alrea$( cancelle$ 0hich cancellation 0as also reporte$ to the respon$ent ommission* there 0as no necessit( for the same certificate to #e en$orse$ #( the petitioner% -ll the acts re2uire$ for the transferee to e<ercise its rights o"er the ac2uire$ stocks 0ere atten$ant an$ e"en the corporation 0as protecte$ from other parties* consi$ering that sai$ transfer 0as earlier recor$e$ or registere$ in the corporate stock an$ transfer #ook% Follo0ing the $octrine enunciate$ in the case of Fua;on !. :a Pro!isora 7ilipina* 0here this ourt hel$* that6 But $eli"er( is not essential 0here it appears that the persons sought to #e hel$ as stockhol$ers are officers of the corporation* an$ ha"e the custo$( of the stock #ook % % % )8> &hi% 98,% Furthermore* there is a necessit( to $elineate the function of the stock itself from the actual $eli"er( or en$orsement of the certificate of stock itself as is the 2uestion in the instant case% - certificate of stock is not necessar( to ren$er one a stockhol$er in corporation% Ne"ertheless* a certificate of stock is the paper representati"e or tangi#le e"i$ence of the stock itself an$ of the "arious interests therein% The certificate is not stock in the corporation #ut is merel( e"i$ence of the hol$er?s interest an$ status in the corporation* his o0nership of the share represente$ there#(* #ut is not in la0 the e2ui"alent of such o0nership% It e<presses the contract #et0een the corporation an$ the stockhol$er* #ut is not essential to the e<istence of a share in stock or the nation of the relation of sharehol$er to the corporation% )19 -m% =ur% 2$* >87, En$er the instant case* the fact of the matter is* the ne0 hol$er* -ngel S% Tan has alrea$( e<ercise$ his rights an$ prerogati"es as stockhol$er an$ 0as e"en electe$ as mem#er of the #oar$ of $irectors in the respon$ent corporation 0ith the full kno0le$ge an$ ac2uiescence of petitioner% Due to the transfer of fift( );/, shares* -ngel S% Tan 0as clothe$ 0ith rights an$ responsi#ilities in the #oar$ of the respon$ent corporation 0hen he 0as electe$ as officer thereof% Besi$es* in &hilippine 3urispru$ence* a certificate of stock is not a negotia#le instrument% +-lthough it is sometime regar$e$ as 2uasi' negotia#le* in the sense that it ma( #e transferre$ #( en$orsement* couple$ 0ith $eli"er(* it is 0ell'settle$ that it is non'negotia#le* #ecause the hol$er thereof takes it 0ithout pre3u$ice to such rights or $efenses as the registere$ o0nerAs or transferror?s cre$itor ma( ha"e un$er the la0* e<cept insofar as such rights or $efenses are su#3ect to the limitations impose$ #( the principles go"erning estoppel%+ )De los Santos "s% @cCrath* 78 &hil% ;>>, To follo0 the argument put up #( petitioner 0hich 0as uphel$ #( the e#u SD D<tension Office 5earing Officer* Feli< han* that the cancellation of Stock ertificate Nos% 2 an$ . 0as null an$ "oi$ for lack of $eli"er( of the cancelle$ +mother+ ertificate No% 2 0hose en$orsement 0as $eli#eratel( 0ithhel$ #( petitioner* is to prescri#e certain restrictions on the transfer of stock in "iolation of the corporation la0 itself as the onl( la0 go"erning transfer of stocks% Jhile Section :>)s, grants a stock corporations the authorit( to $etermine in the #('la0s +the manner of issuing certificates+ of shares of stock* ho0e"er* the po*er to regulate is not the po*er to prohi'it, or to impose unreasona'le restrictions o" the right o" stoc$holders to trans"er their shares. )Dmphasis supplie$, In 7leisher !. Botica 0olasco Co., nc%* it 0as hel$ that a #('la0 0hich prohi#its a transfer of stock 0ithout the consent or appro"al of all the stockhol$ers or of the presi$ent or #oar$ of $irectors is illegal as constituting un$ue limitation on the right of o0nership an$ in restraint of tra$e% ):> &hil% ;.9, 9% -ttempt to mislea$ K &etitioner shoul$ #e hel$ guilt( of manipulating the pro"ision of Section 89 of the orporation Fa0 for contumaciousl( 0ithhol$ing the en$orsement of Stock ertificate No% 2 0hich 0as returne$ to him for the purpose* 0asting time an$ resources of the ourt* e"en after he ha$ recei"e$ the stocks'in'tra$e e2ui"alent to &2*///*///%// in lieu of his 9;/ shares of stock 0ith a par "alue of &9;*///%// onl(* an$ thereafter 0ith$ra0ing from the respon$ent corporation% Not content 0ith the fantastic return of his in"estment in the corporation an$ #ent on sucking out the corporate resources #( filing the instant case for $amages an$ seeking the nullit( of the cancellation of his ertificate of Stock Nos% 2 an$ .* petitioner e"en attempte$ to mislea$ the ourt #( erroneousl( 2uoting the ruling of the ourt in C. 0. 8odges !. :e;ama* 0hich has some parallelism 0ith the instant case 0as the parties in"ol"e$ therein 0ere also close relati"es as in this case% The 2uote$ portion appearing on p% 11 of the petition* 0as cut short in such a 0a( that rele"ant portions thereof 0ere purposel( left out in or$er to impress upon the ourt that the unen$orse$ an$ uncancelle$ stock certificate No% 1>* 0as uncon$itionall( $eclare$ null an$ "oi$* flagrantl( omitting the 3ustif(ing circumstances regar$ing its ac2uisition an$ the reason gi"en #( the ourt 0h( it 0as $eclare$ so% The histor( of certificate No% 1> is 2uote$ #elo0* sho0ing the reason 0h( the certificate in 2uestion 0as consi$ere$ null an$ "oi$* as follo0s6

9>
)&,etitioner 5o$ges $i$ not cause to #e entere$ in the #ooks of the corporation as he ha$ his stock certificate No% 1> 0hich* therefore ha$ not #een en$orse$ #( him to an(#o$( or cancelle$ an$ 0hich he consi$ere$ still su#sisting% =n #eptem'er @H, @64H, petitioner 8odges again sold his a"oresaid 5,531 shares o" stoc$ co!ered '( his stoc$ certi"icate 0o. @7 on installment 'asis to his co>petitioner Ricardo /urrea, 'ut continued $eeping the stoc$ certi"icate in his possession *ithout endorsing it to /urrea or causing the sale to 'e entered in the 'oo$s o" the corporation, 'elie!ing that said shares o" stoc$ *ere his until "ull( paid "or. ?p to the present, petitioner 8odges has in his possession and under his control his a"oresaid stoc$ certi"icate 0o. @7, unendorsed and uncancelled (,&hs. C I C>@), a "act $no*n to the respondents. )1: S R- p% 1/92, The pertinent mis2uote$ portion follo0s6 Before the stockhol$ers? meeting of the Fa &a! ice &lant O ol$ Storage o%* Inc%* K hereinafter referre$ to as the orporation ' 0hich 0as sche$ule$ to #e hel$ on -ugust 8* 17;7* petitioners %N% 5o$ges an$ Ricar$o Currea file$ 0ith the FI of Iloilo* a petition K $ockete$ as i"il ase No% ;281 of sai$ court K for a 0rit of prohi#ition 0ith preliminar( in3unction* to restrain respon$ents =ose @anuel Fe!ama* as presi$ent an$ secretar(* respecti"el(* of sai$ orporation from allo0ing their #rother'in'la0 an$ #rother* respecti"el(* respon$ent Ben3amin F% Bor3a* to "ote in sai$ meeting on the aforementione$ 2*29/ shares of stock% Epon the filing of sai$ petition an$ of a #on$ in the sum of &1*///* the 0rit of preliminar( in3unction pra(e$ for 0as issue$% -fter $ue trial* or on @arch 2.* 178/* )start of petitioner?s 2uotation, +The court of origin ren$ere$ a $ecision hol$ing that* in "ie0 of the pro"ision in stock certificate no% 1>* in the name of 5o$ges* to the effect that he % % % is the o0ner of T0o Thousan$ T0o 5un$re$ Thirt( shares of the capital stock of Fa &a! Ice &lant O ol$ Storage o%* Inc%* transferra#le onl( on the #ooks of the corporation #( the hol$er hereof in person or #( attorne( upon surren$er of this certificate properl( en$orse$% stock certificate no% 1.* issue$ in fa"or of Bor3a an$ the entr( thereof at his instance in the #ooks of the corporation 0ithout stock certificate no% 1> #eing first properl( en$orse$* surren$ere$ an$ cancelle$* is null an$ "oi$% % % % + )en$ of 2uotation #( petitioner* #ut the ruling* continues 0ithout the perio$ after the 0or$ "oi$%, +an$ that it 0oul$ #e unconsciona#le an$ for Bor3a to "ote on sai$ shares of stock* kno0ing that he ha$ cease$ to ha"e actual interest therein since Septem#er 1>* 17;.* 0hen 5o$ges #ought such interest at the pu#lic auction hel$ in the procee$ings for the foreclosure of his chattel 0as ren$ere$ making sai$ preliminar( in3unction permanent an$ $eclaring 5o$ges as the one entitle$ to "ote on the shares of stock in 2uestion% &etitioner ought to ha"e e"en inclu$e$ the follo0ing 0hich 0as the reason for $eclaring the follo0ing 0hich 0as the reason for $eclaring the une$orse$* unsurren$ere$ an$ uncancelle$ stock certificate* null an$ "oi$6 % % % It is* moreo"er* o#"ious that 5o$ges retaine$ it )stock certificate no% 1>, 0ith Bor3a?s consent% It 0as e"i$entl( part of their agreement* or implie$ therein* that 5o$ges 0oul$ keep the stock certificate an$ thus remain in the recor$s of the orporation as o0ner of the shares* $espite the aforementione$ sale thereof an$ the chattel mortgage thereon% n other *ords, the parties thereto intended 8odges to continue, "or all intents and purposes, as o*ner o" said share, until Bor+a shall ha!e "ull( paid its stipulated price% ) 'id* pp% 1/99'1/9:, Other issues raise$ #( the petitioner* su#or$inate to the principal issues a#o"e* )e<cept the ruling #( the respon$ent respect to the +pari $elicto+ $octrine 0hich is not accepta#le to this ourt, are of no moment% ommission 0ith

onsi$ering the circumstances of the case* it appearing that petitioner is guilt( of manipulation* an$ high'han$e$ness* circum"enting the clear pro"isions of la0 in shiel$ing himself from his 0rong$oing contrar( to the protecti"e mantle that the la0 inten$e$ for innocent parties* the ourt fin$s the e<cuses of the petitioner as un0orth( of #elief% J5DRDFORD* in "ie0 of the foregoing* the Or$er of the ommission un$er SD '- No% 289 $ate$ Octo#er 1/* 177/ is here#( -FFIR@DD #ut mo$ifie$ 0ith respect to the +nullit( of the sale of 9;/ shares represente$ un$er stock certification No% .* pursuant to the +in pari $elicto+ $octrine% The court hol$s that the con"ersion of the 9;/ shares 0ith a par "alue of onl( &9;*///%// at &1//%// per share into treasur( stocks after petitioner e<change$ them 0ith &2*///*///%// 0orth of stocks'in'tra$e of the corporation* is "ali$ an$ la0ful% Jith regar$ to the $amages #eing claime$ #( the petitioner* the respon$ent ommission is not empo0ere$ to a0ar$ such* other than the imposition of fine an$ imprisonment un$er Section ;8 of the orporation o$e of the &hilippines* as amen$e$% SO ORDDRDD% -elencio>8errera, Padilla, Regalado and 0ocon, JJ., concur.

-oo+'o+$# 1 The increase in "alue of the original &9;*/// 0orth of shares to &2*///*/// is not surprisingl( for the firm ha$ prospere$ to a 0orth of a#out &.*///*/// an$ #ecause of the moral ascen$anc( of el$er relati"es 0ho after all ha$ manage$ to steer the compan(?s 0orth to millions% orporate Fa0 ase Digest6 Tan V% SD )1772, C%R% No% 7;878 @arch 9* 1772 Fessons -pplica#le6

Nature of ertificate of Stock ) orporate Fa0, Rights to ertificate of Stock for Full( &ai$ Shares ) orporate Fa0,

9.
F- TS6 Octo#er 1* 17>76 Visa(an D$ucational Suppl( orp% -s incorporator* -lfonso S% Tan ha$ :// shares of the capital stock at the par "alue of &1//Ashare* e"i$ence$ #( ertificate of Stock No% 2 electe$ as &resi$ent until 17.2 Boar$ of Directors as $irector until -pril 17* 17.9 =anuar( 91* 17.16 incorporators -ntonia I% Ioung an$ Teresita I% Ong* 0ith$re0 #( assigning to the corp% their shares* represente$ #( certificate of stock No% : an$ ;* the( 0ere pai$ :/1 corporate stock'in'tra$e ertificate of stock No% 2 0as cancelle$ #( the corporate secretar( an$ &atricia -guilar #( "irtue of Resolution No% 17.1 0hich 0as passe$ an$ appro"e$ 0hile he 0as still a mem#er of the BOD Due to the 0ith$ra0al of the 2 incorporators an$ in or$er to complete the mem#ership of the ; $irectors of the #oar$* he sol$ ;/ shares out of his :// shares of capital stock to his #rother -ngel S% Tan -nother incorporator* -lfre$o B% E(* also sol$ ;/ of his :// shares of capital stock to Teo$ora S% Tan @arch 2>* 17.16 -ngel Tan 0as electe$ $irector an$ on @arch 2>* 17.1 ertificate of Stock No% 2 0as cancelle$ an$ the ertificates Nos% 8 in the name of -ngel S% Tan an$ . in the name of -lfonso S% Tan* @r% Bu!on 0ere issue$ an$ $eli"ere$ )stock split,* signe$ #( the ne0l( electe$ fifth mem#er of the Boar$* -ngel S% Tan as V&* upon instruction of -lfonso S% Tan 0ho 0as then the presi$ent -lfonso S% Tan 0as gi"en #ack Stock ertificate No% 2 for him to en$orse an$ he $eli#eratel( 0ithhel$ it for reasons of his o0n ' so as if no $eli"er( ertificate of Stock No% . 0as $eli"ere$ to Tan Su hing =anuar( 27* 17.96 Tan Su hing 0as electe$ as &resi$ent* Tan as V& #ut $i$ not sign the minutes Fe#ruar( 2>* 17.96 $islo$ge$ from his position as presi$ent* he 0ith$re0 from the corporation pai$ 0ith stock'in'tra$e correspon$ing to 99%91 par "alue of &9;*///%// -pril 17* 17.96 Boar$ meeting cancelle$ Stock ertificate Nos% 2 an$ . an$ minutes su#mitte$ to SD Decem#er 9* 17.96 -lfonso S% Tan file$ the SD case 2uestioning for the first time* the cancellation of Stock ertificates Nos% 2 an$ . No transfer* ho0e"er* shall #e "ali$* e<cept as #et0een the parties* until the transfer is recor$e$ to the #ooks of the corporation so as to sho0 the names of the parties to the transaction* the $ate of the transfer* the num#er of the certificate or certificates an$ the num#er of shares transferre$% SD % 89% Certi"icate o" stoc$ and trans"er o" shares% K The capital stock an$ stock an$ corporations shall #e $i"i$e$ into shares for 0hich certificates signe$ #( the presi$ent an$ "ice presi$ent* countersigne$ #( the secretar( or assistant secretar(* an$ seale$ 0ith the seal of the corporation shall #e issue$ in accor$ance 0ith the #('la0s% Shares of stocks so issue$ are personal propert( an$ Ca2 #e transferre$ #( $eli"er( of the certificate or certificates in$orse$ #( the o0ner or his attorne('in'fact or other person legall( authori!e$ to make the transfer% No transfer* ho0e"er* shall #e "ali$* e<cept as #et0een the parties* until the transfer is recor$e$ in the #ooks of the corporation so as to sho0 the names of the parties to the transaction* the $ate of the transfer* the num#er of the certificate or certificates an$ the num#er of shares transferre$% No shares of stocks against 0hich the corporation hol$s an( unpai$ claim shall #e transfera#le in the #ooks of the corporations% SD 6 hel$ cancellation of the shares of stock ' "oi$ SD en #anc6 o"erturne$ ' nullit( of the sale of 9;/ shares represente$ un$er stock certification No% .* pursuant to the +in pari $elicto+ $octrine% ISSED6 JAN transfer is "ali$ 0Ao $eli"er(

5DFD6 IDS% -ffirme$% -lfonso S% Tan $e"ise$ the scheme of not returning the cancelle$ Stock ertificate No% 2 0hich 0as returne$ to him for his en$orsement* to skim off the largesse of the corporation as sho0n #( the tra$ing of his Stock ertificate No% . for goo$s of the corporation "alue$ at &2@ 0hen the par "alue of the same 0as onl( 0orth &9;G 5e also use$ this scheme to renege on his in$e#te$ness to respon$ent Tan Su hing in the amount of &1 million "ali$ transfer e"en if no $eli"er( certificate of stock is not a negotia#le instrument -lthough it is sometimes regar$e$ as 2uasi'negotia#le* in the sense that it ma( #e transferre$ #( en$orsement* couple$ 0ith $eli"er(* it is 0ell'settle$ that it is non'negotia#le* #ecause the hol$er thereof takes it 0ithout pre3u$ice to such rights or $efenses as the registere$ o0nerAs or transferror?s cre$itor ma( ha"e un$er the la0* e<cept insofar as such rights or $efenses are su#3ect to the limitations impose$ #( the principles go"erning estoppel% negotia#le instrument either in$orsement W $eli"er( or $eli"er( X hol$er in $ue course X #etter right than real o0ner certificate of stock X o0ner #etter right transfer "ali$ #et0een parties recor$e$ in the #ooks ' to #in$ others inclu$ing the corporation NOTD6 -lthough there are : t(pes of transactions* onl( transfer is recor$e$ in the stocks an$ transfer #ooks% paper representati"e or tangi#le e"i$ence of the stock itself an$ of the "arious interests therein not necessar( to ren$er one a stockhol$er in corporation since stocks 0ere alrea$( cancelle$ an$ reporte$ to the respon$ent ommission* there 0as no necessit( to en$orse -ll the acts re2uire$ for the transferee to e<ercise its rights o"er the ac2uire$ stocks 0ere atten$ant an$ e"en the corporation 0as protecte$ from other parties* consi$ering that sai$ transfer 0as earlier recor$e$ or registere$ in the corporate stock an$ transfer #ook #% Reme$( if Transfer is Refuse$

97
/.R. 0o. 3531, 8ager !. Br(an, 5@ Phil. 453 Repu#lic of the &hilippines SUPREME C!URT @anila DN B-N =anuar( 1.* 1711 C%R% No% 829/ A. R. AGER, petitioner* "s% ABERT ). BR4AN, respon$ent% <ol"son I <ol"son "or petitioner. 8aussermann, Cohn I 7isher "or respondent. )! NS!N, J.6 This 0as an original action commence$ in the Supreme ourt to secure a 0rit of mandamus against the $efen$ant to compel him* as secretar( of the Visa(an Dlectric ompan(* to transfer upon the #ooks of sai$ compan( certain shares mentione$ in the petition% The petition alleges6 That (our petitioner is a resi$ent of the cit( of @anila* &hilippine Islan$s* #ut temporaril( resi$ing in the cit( of Shanghai* hina* an$ that the respon$ent is a resi$ent of an$ $omicile$ in the cit( of e#u* &hilippine Islan$s% That on =anuar( first* 171/* the respon$ent 2ualifie$ as the secretar( of the Visa(an Dlectric ompan(* after ha"ing #een $ul( electe$* an$ that $efen$ant 0as on =anuar( 1* 171/* e"er since has #een an$ no0 is the secretar( of the Visa(an Dlectric ompan(* a corporation $ul( organi!e$ an$ e<isting un$er an$ #( "irtue of the la0s of the &hilippines Islan$s% That prior to Fe#ruar( ;* 171/* (our petitioner 0as the sole o0ner of one hun$re$ shares of capital stock of the sai$ Visa(an Dlectric ompan( an$ among 0hich shares 0ere6 ertificate No% ;; representing ; shares4 ertificate No% 82 representing 1/ shares4 ertificate No% 89 representing 1/ shares% These certificates 0ere issue$ in the name of Br(an'Fon$on O o% an$ #( them in$orse$ to (our petitioner% That on Fe#ruar( ;* 171/* (our petitioner entere$ into an agreement 0ith one @artin @% Fe"ering for the purchase an$ sale from (our petitioner to the sai$ Fe"ering of (our petitioner?s interest in the sai$ Visa(an Dlectric ompan(* #eing the one hun$re$ shares herein#efore mentione$ an$ inclu$ing the 2; shares herein#efore particularl( mentione$% That this agreement 0as finall( signe$ on Fe#ruar( 2;* 171/% That the aforementione$ agreement #et0een (our petitioner an$ the sai$ Fe"ering gre0 out of the fact that certain parties among 0hom 0ere Br(an'Fon$on O o%* of 0hich the respon$ent 0as an$ is mem#er* 0ere at that time tr(ing #( "arious means an$ manipulations to get control of the sai$ Visa(an Dlectric ompan(* an$ the sai$ Fe"ering an$ (our petitioner 0ere $esirous of pre"enting their thus securing control% That in the aforesai$ agreement #et0een (our petitioner an$ the sai$ Fe"ering it 0as un$erstoo$ an$ agree$ that $eli"er( of all the stock shoul$ #e ma$e free from all incum#rances an$ the necessar( transfers ma$e on the #ooks of the compan(% That the respon$ent $oes not 2uestion the title of (our petitioner to the aforementione$ shares of the sai$ Visa(an Dlectric ompan(* an$ that he has no reason to 2uestion such title% That the shares of the sai$ Visa(an Dlectric ompan( are transfera#le onl( on the #ooks of the compan( an$ therefore (our petitioner has repeate$l( $eman$e$ an$ re2ueste$ the respon$ent* as secretar( of the sai$ Visa(an Dlectric ompan( to transfer on the #ooks of the compan( the aforesai$ shares* "i!6 ertificate No% ;; representing ; shares4 ertificate No% 82 representing 1/ shares4 ertificate No% 89 representing 1/ shares4 to the name of -% R% 5ager* 0ho 0as the true o0ner of same of -% R% 5ager* (our petitioner* ma( full( an$ faithfull( carr( out his agreement 0ith the sai$ Fe"ering herein#efore mentione$% That the sai$ -l#ert =% Br(an* the respon$ent* in$i"i$uall(* as a mem#er of the firm of Br(an'Fon$on O ompan(* an$ as secretar( of the sai$ Visa(an Dlectric ompan( has refuse$ an$ neglects to transfer or permit the transfer of the sai$ aforementione$ shares on the #ooks of the compan( in the name of (our petitioner% That this refusal on the part of the respon$ent is ar#itrar(* malicious* an$ contrar( to la0% That the respon$ent as secretar( of the sai$ Visa(an Dlectric ompan( is the onl( person 0hose $ut( it is to transfer shares on the #ooks of the sai$ compan(% That (our petitioner has no plain* spee$(* a$e2uate* an$ complete reme$( at la0* as a suit in $amages for the "alue of the shares 0oul$ not #e spee$(* a$e2uate* nor complete* #ecause then other parties than (our petitioner an$ @artin @% Fe"ering might #ecome the o0ners of the sai$ shares* this #eing the apparent $esire of the respon$ent an$ #eing the e<press con$ition that (our petitioner $esires to pre"ent* an$ #eing the foun$ation of the agreement entere$ into #( (our petitioner an$ the sai$ @artin @% Fe"ering% Jherefore (our petitioner respectfull( pra(s that this honora#le court issue a *rit o" mandamus a$$resse$ to -l#ert =% Br(an* as secretar( of the Visa(an Dlectric ompan( or$ering the sai$ -l#ert =% Br(an to forth0ith transfer on the #ooks of the compan( to the name to (our petitioner the follo0ing shares in the sai$ Visa(an Dlectric ompan( !i;6

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ertificate No% ;; representing ; shares4 ertificate No% 82 representing 1/ shares4 ertificate No% 89 representing 1/ shares% -n or$er a$$resse$ to -l#ert =% Br(an* in$i"i$uall(* as a mem#er of the firm of Br(an'Fon$on O ompan(* restraining the sai$ -l#ert =% Br(an from in an( 0a( interfering 0ith the transfer of the aforementione$ shares on the #ooks of the sai$ Visa(an Dlectric ompan(* for the costs of this action* together 0ith such further an$ other relief as this honora#le court ma( $eem meet an$ proper an$ that these procee$ings #e e<pe$ite$ un$er section ;1.* o$e of i"il &roce$ure% To this petition the $efen$ants presente$ the follo0ing $emurrer6 No0 comes the $efen$ant in the case name$ a#o"e an$ $emurs to the complaint on the groun$ that acts constituting cause of action are not therein allege$% The 2uestion presente$ is* Jill the courts of the &hilippine Islan$s* un$er the pro"isions of the o$e of &roce$ure in i"il -ctions )secs% 222'22;* ;1;, issue the 0rit of mandamus* un$er the facts allege$ in the complaint* for the purpose of compelling the secretar( of a pri"ate corporation to transfer stock upon the #ooks of the corporationM The 5onora#le -rthur F% San#orn* 3u$ge of the Enite$ States $istrict court for the 0estern $istrict of Jisconsin* in his article entitle$ +-andamus+ )28 (% of Fa0 an$ &roce$ure ) (c,* at p% 9:>,* sai$6 B( the 0eight of authorit( mandamus 0ill not lie in or$inar( cases to compel a corporation of its officers to transfer stock on its #ooks an$ issue ne0 certificates to the transferee* since the 0rit )in such a case, is a purel( pri"ate one* an$ there is generall( an a$e2uate reme$( #( an action against the corporation for $amages% In support of this conclusion =u$ge San#orn cites cases from the States as follo0s6 Cali"ornia% K )Gim#all "s% The Enion Jater ompan(* :: al%* 1>94 19 -merican Reports* 1;>,4 Connecticut% K )To#e( "s% 5akes* ;: onn%* 2>:4 1 -merican State Reports* 11:,4 /eorgio% K )Terrel "s% Ceorgia R(% o%* 11; Ca%* 1/:,4 -assachusetts% K )Stockpole "s% Se(mour* 12> @ass%* 1/:,4 -ichigan% K ) lark "s% 5ill* 192 @ich%* :9:,4 -innesota% K )Berker "s% @arshall* 1; @inn%* [198] 1>>,4 -issouri% K )State "s% Rom#auer* :8 @o%* 1;;,4 -ontana% K )Durfee "s% 5arper* 22 @on%* 9;:,4 0e* Jers(% K )Cal#raith "s% &eople?s Buil$ing -ssociations etc%* :9 N% =% Fa0* 9.7,4 0e* 9or$% K )&eople "s% @iller* 11: N% I%* 898,4 =hio% K )Freon "s% arriage ompan(* :2 Ohio St%* 9/4 ;1 -m% Reps%* >7:,4 =regon% K )Slemmons "s% Thompson* 29 Oregon* 21;,4 Penns(l!ania% K )Burmingham Fire Ins% o% "s% ommon0ealth* 72 &a% St%* >2,4 Rhode sland% K )Jilkinson "s% &ro"i$ence Bank* 9 R% I%* 22%, The a#o"e $octrine is the general rule in Dnglan$* as 0ell as in ana$a% )Re< "s% Fon$on -ssurance ompan(* ; B% an$ -l$%* .77,% Section 9;* -ct No% 1:;7* pro"i$es among other things* that6 No share of stock against 0hich the corporation holds an( unpaid claim* shall #e transfera#le on the #ooks of the corporation% To permit the 0rit of mandamus to issue for the purpose of compelling the officers of a corporation* in cases like the present one* to transfer stock upon the #ooks of the corporation* might* un$er certain circumstances* re2uire such officers to transfer stock against 0hich the corporation hol$s unpai$ claims% These claims might easil( arise #et0een the time of the issuance of the 0rit an$ the ser"ice of the same upon such officers% If the court shoul$ issue the 0rit* it might re2uire an officer to transfer stock un$er con$itions 0here the la0 e<pressl( prohi#ite$ such transfer% The 0rit ofmandamus 0ill ne"er issue to compel a person to "iolate an e<press pro"ision of the la0% The act re2uire$ to #e performe$ must #e one 0hich the la0 speciall( en3oin as a $ut( resulting from an office* trust* or station or unla0full( e<clu$es the plaintiff from the use$ an$ en3o(ment of a right or office to 0hich he is entitle$ an$ from 0hich he is unla0full( preclu$e$% )Sec% 222 of -ct No% 17/%, No la0 has #een calle$ to our attention 0hich speciall( re2uires the performance of the act of transferring the stock* 0hile there is a la0 e<pressl( prohi#iting its transfer* e<cept un$er certain con$itions% )Sec% 9;* -ct No% 1:;7%, In the case of To#e( "s% 5akes );: onn%* 2>:, =ustice arpenter* in $iscussing the 2uestion 0hether man$amus 0oul$ issue or not* in an application for such 0rit to compel the secretar( of a pri"ate corporation to transfer stock on the #ooks of the corporation* to a purchaser* an$ to issue a certificate thereof* sai$6 +This suit is against a pri"ate corporation* an$ its o#3ect is to enforce a mere pri"ate right% It is in no sense a procee$ing to enforce the performance of a pu#lic $ut(% Je ha"e no prece$ent in this State for allo0ing this 0rit to compel the transfer of stock in a pri"ate corporation* an$ the authorities else0here are against it*+ K citing in support of his conclusions cases6 ushman "s% Tha(er @anufacturing o%* )>8 N% I%* 98;,* To0n "s% Nichols* )>9 @e%* ;1;,* States "s% &eoples? Buil$ing -ssociation ):9 N% =% Fa0* 9.7,* Bank "s% 5arrison )88 Ca%* 878,% =ustice arpenter continues #( sa(ing6 There is another groun$ on 0hich the 0rit 0as properl( refuse$% It is familiar la0 that the 0rit 0ill not or$inaril( issue if the plaintiff has other reme$ies% If the corporation improperl( refuses to transfer the stock it is clearl( lia#le for the $amages in an action at la0% In the case of Gim#all "s% Enion Jater ompan( ):: al%* 1>9, the supreme court of alifornia sai$6

It has #een so fre2uentl( $eci$e$ that a part( entitle$ to stock in a pri"ate corporation has an action for $amages against the corporation for the refusal of its officers to transfer the stock to him upon the compan(?s #ooks* that it must #e consi$ere$ as a settle$ principle of la0% )Ging "s% Bank of Dnglan$* 2 Douglass* ;284 Shiple( "s% @echanics? Bank* 1/ =ohnson* :.:4 Jilkinson "s% &ro"i$ence Bank* 9 R% I%* 224 D< parte Fireman?s Ins% o%* 8th 5ill )N% I%,* 2:94 -merican -s(lum* etc%* "s% &hoeni< Bank* : onn%* 1>24 Sargeant "s% Franklin Ins% o%* . &ickering )@ass%,* 7/%, In the case of Shiple( "s% @echanics? Bank )1/ =ohnson* N% I%* :.:, an application 0as ma$e for mandamus to compel a corporation to transfer to the petitioners certain stock o0ne$ #( them* an$ in $eci$ing the 2uestion* the court sai$6

:1
The applicants ha"e an a$e2uate reme$(* #( special action on the case* to reco"er the "alue of the stock* if the #ank ha"e un$ul( refuse$ to transfer it% There is no nee$ of the e&traordinar( remed( '( mandamus in so ordinar( a case% It might as 0ell #e re2uire$ in e"er( case in 0hich an or$inar( action 0oul$ lie% This court has fre2uentl( $eci$e$ that man$amus* #eing an e<traor$inar( reme$(* 0ill not issue 0hen another a$e2uate reme$( e<ists un$er the or$inar( proce$ure% )5oe( "s% Bal$0in* 1 &hi% Rep%* ;;1 @anotoc "s% @c@icking* 1/ &hil% Rep%* 1174 &eterson "s% &eterson* ase No% 298/4[[1]] ru! 5errera "s% @c@icking* 1: &hil% Rep%* 8:14 Ta#igue et al% "s% Du"al* 18 &hil% Rep%* 92:%, For the reasons a#o"e state$ the $emurrer is here#( sustaine$ an$ the petition is here#( $ismisse$ 0ith costs* 0ithout pre3u$ice to the right of the plaintiff to commence an or$inar( action in the ourt of First Instance to secure an or$er $irecting the $efen$ant to transfer the stock in 2uestion upon the #ooks of the compan(* after it is allege$ an$ pro"e$ that the corporation hol$s no unpai$ claims against it% Crellano, C.J., and Forres, J., concur. -apa, J., concurs in the result. S$Bara+$ !B%'%o'# M!RELAN6, J., $issenting6 I $issent% I am of the opinion that man$amus ought to issue in this case% Carson and Frent, JJ., concur% -oo+'o+$# [[ ]] 1 Not pu#lishe$% Ba+o'( B*ha2 A#. CA 1=7 SCRA = )a'. 7 , 19:7 Facts61%-rt% 22/16 N 6 In contracts an$ 2uasi V contracts * the $amages for 0hich the o#ligor 0ho acte$ in goo$ faith is lia#le shall #e those that ate the naturalan$ pro#a#le conse2uences of the #reach of the o#ligation * an$ 0hich the parties ha"e foreseen or coul$ ha"e reasona#l( foreseen at the time theo#ligation 0as constitute$ % In case of frau$ * #a$ faith * malice or 0antonattitu$e * the o#ligor shall #e responsi#le for all $amages 0hich ma( #ereasona#l( attri#ute$ to the non V performance of the o#ligation% ]2%Batong Buha( Col$ @ines* Inc% issue$ Stock ertificate No% 18./> co"ering82*:7; shares 0ith a par "alue of &/%/1 per share to Francisco -guac 0ho 0asthen legall( marrie$ to &aula C% -guac* #ut the sai$ spouses ha$ li"e$separatel( for more than fourteen )1:, (ears prior to the sai$ $ate% OnDecem#er 18* 1787* Francisco -guac sol$ his 82*:7; shares co"ere$ #( Stock ertificate No% 18./> for the sum of &7*9>:%>/ in fa"or of Inco @ining* thesai$ transaction #eing e"i$ence$ #( a $ee$ of sale )D<hi#it D,% The sai$ sale0as ma$e #( Francisco -guac 0ithout the kno0le$ge or consent of his 0ife&aula C% -guac9%&aula calle$ up Batong Buha( Col$ @ines telling them to 0ithhel$ the transfer of stock to Inco% Since the stocks 0ere con3ugal propert(%:%Batong #uha( $i$ 3ust that% Inco is suing 0h( Batong #uha( 0ithhel$%;% FI or$ere$ that Batong Buha( effect the transfer of stock certificates to Inco% 5o0e"er Inco appeale$ to the - citing that the lo0er court faile$ to a0ar$$amages for the 0rongful refusal of petitioner to transfer the su#3ect shares of stock an$ allege$ failure to a0ar$ attorne(Ps fees * cost of in3unction #on$ an$e<penses of litigation%@a( the ourt of -ppeals a0ar$ $amages #( 0a( of unreali!e$ profits $espite thea#sence of supporting e"i$ence* or merel( on the #asis of pure assumption*speculation or con3ecture4 or can the respon$ent reco"er $amages #( 0a( of unreali!e$ profits 0hen it has not sho0n that it 0as $amage$ in an( manner #(the act of petitionerM Ruling6 No*The petitioner alleges that the appellate court gra"el( an$ categoricall( erre$ ina0ar$ing $amages #( 0a( of unreali!e$ profit )or lucro cesante, to pri"aterespon$ent% &etitioner compan( also alleges that the claim for unreali!e$ profitmust #e $ul( an$ sufficientl( esta#lishe$* that is* that the claimant must su#mit proof that it 0as in fact $amage$ #ecause of petitioner?s act or omission%The stipulation of facts of the parties $oes not at all sho0 that pri"ate respon$entinten$e$ to sell* or 0oul$ sell or 0oul$ ha"e sol$ the stocks in 2uestion onspecifie$ $ates* Jhile it is true that shares of stock ma( go up or $o0n in "alue)as in fact the concerne$ shares here reall( rose from fifteen )1;, centa"os tot0ent( three or t0ent( four )29A2:, centa"os per share an$ then fell to a#out t0o)2, centa"os per share* still 0hate"er profits coul$ ha"e #een ma$e are purel( /.R. 0o. , @27 #CRC 2 Repu#lic of the &hilippines SUPREME C!URT @anila DN B-N DD ISION Decem#er 91* 17.8 C%R% No% * * "s% *% , J.7 This is a petition to re"ie0 the $ecision $ate$ -ugust 2>* 17>8 of the ourt of -ppeals ) -, in -'C%R% No% ;1919'R 0hich mo$ifie$ the $ecision of the then ourt of First Instance ) FI, of @anila* Branch 11 in i"il ase No% >71.9 -lso sought for re"ie0 are the resolutions of the aforename$ court $ate$ Octo#er 21* 17>8 an$ No"em#er 12* 17>8 0hich $enie$ petitioner?s motion for reconsi$eration of the su#3ect $ecision an$ petition an$Aor motion for ne0 trial* respecti"el(% The $ispositi"e portion of the FI 3u$gment rea$s6 J5DRDFORD* the ourt ren$ers 3u$gment en3oining the $efen$ants to effect the transfer of the shares co"ere$ #( Stock ertificate No% 18./> to an$ in the name of plaintiff IN OR&OR-TDD @ining orporation* an$ the 0rit of preliminar( man$ator( in3unction issue$ on @arch 18* 17>/ is here#( $eclare$ permanent% SO ORDDRDD% Epon the other han$* the $ecretal portion of the - $ecision states6 J5DRDFORD* the 3u$gment appeale$ from is here#( mo$ifie$ #( a$$ing the follo0ing to the $ispositi"e portion thereof6

:2
Or$ering $efen$ant Batong Buha( Col$ @ines* Inc% to pa( to the plaintiff the sum of &;*82;%;;* 0ith interest at the legal rate from @arch ;* 17>/ until full pa(ment4 an$ $ismissing the complaint 0ith respect to $efen$ant Del Rosario an$ ompan(% Defen$ant Batong Buha( shall pa( the costs% IT IS SO ORDDRDD% )pp% 8>'8.* Rollo, The antece$ent facts* as foun$ #( the ourt of -ppeals* are as follo0s6 The $efen$ant Batong Buha( Col$ @ines* Inc% issue$ Stock ertificate No% 18./> co"ering 82*:7; shares 0ith a par "alue of &/%/1 per share to Francisco -guac 0ho 0as then legall( marrie$ to &aula C% -guac* #ut the sai$ spouses ha$ li"e$ separatel( for more than fourteen )1:, (ears prior to the sai$ $ate% On Decem#er 18* 1787* Francisco -guac sol$ his 82*:7; shares co"ere$ #( Stock ertificate No% 18./> for the sum of &7*9>:%>/ in fa"or of the plaintiff* the sai$ transaction #eing e"i$ence$ #( a $ee$ of sale )D<hi#it D,% The sai$ sale 0as ma$e #( Francisco -guac 0ithout the kno0le$ge or consent of his 0ife &aula C% -guac% On the same $ate of the sale* Decem#er 18* 1787* &aula C% -guac 0rote a letter to the presi$ent of $efen$ant Batong Buha( Col$ @ines* Inc% asking that the transfer of the shares sol$ #( her hus#an$ #e 0ithhel$* inasmuch as the same constitute$ con3ugal propert( an$ her share of procee$s of the sale 0as not gi"en to her )D<hi#it 1,% On =anuar( ;* 17>/* un$er a co"ering letter $ate$ Decem#er 28* 1787* plaintiff?s counsel presente$ Stock ertificate No% 18./> $ul( en$orse$ #( Francisco -guac for registration an$ transfer of the sai$ stock certificate in the name of the plaintiff )D<hi#it F,% The sai$ letter 0as a$$resse$ to $efen$ant Del Rosario an$ ompan( 0hich 0as the transfer agent of Batong Buha( at that time% In a letter $ate$ Fe#ruar( 2:* 17>/ also a$$resse$ to Del Rosario an$ ompan(* plaintiff?s counsel re2ueste$ information as to the action taken on the transfer of Stock ertificate No% 18./> in fa"or of the plaintiff* nothing a#out 0hich ha"ing hear$ $espite the lapse of o"er a month )D<hi#it 5,% In a repl( letter $ate$ Fe#ruar( 2.* 17>/* Del Rosario an$ ompan( informe$ plaintiff?s counsel that Batong Buha( has referre$ the matter to their attorne(s* inasmuch as there 0as a +technical pro#lem that has $e"elope$ in the transfer of stock*+ an$ further a$"ise$ that the plaintiff communicate $irectl( 0ith Batong Buha( for further $etails )D<hi#it 1,%l0phlYitM It $e"elope$ that 0hen Batong Buha( 0as a#out to effect the cancellation of Stock ertificate No% 18./> an$ transfer the 82*:7; shares co"ere$ there#( to the plaintiff an$ ha$* in fact* prepare$ ne0 Stock ertificate No% 2>8;/ $ate$ =anuar( ;* 17>/* it recei"e$ the letter of &aula C% -guac a$"ising it to 0ithhol$ the transfer of the su#3ect shares of stock on the groun$ that the same are con3ugal propert(% On @arch 2* 17>/ Francisco -guac 0as charge$ in a criminal complaint &asil Galinga'-pa(ao* $ockete$ as riminal ase No% 1/* entitle$ +&eople "s% Francisco -guac* et al%+ The $efen$ants 3ustif( their refusal to transfer the shares of stock of Francisco -guac in the name of the plaintiff in "ie0 of their apprehension that the( might he hel$ lia#le for $amages un$er -rticle 1>9 of the i"il o$e an$ the ruling of the Supreme ourt in Buco( "s% &aulino* 29 S R- 2:.% On @arch ;* 17>/* in "ie0 of the $efen$ant?s inaction on the re2uest for the transfer of the stock certificate in its name* the plaintiff commence$ this action #efore the ourt of First Instance of @anila* pra(ing that the $efen$ants #e or$ere$ to issue an$ release the transfer stock certificate co"ering 82*:7; shares of $efen$ant Batong Buha(* formerl( registere$ in the name of Francisco -guac* in fa"or of the plaintiff* an$ for the reco"er( of compensator(* e<emplar( an$ correcti"e $amages an$ attorne(?s fees% - 0rit of preliminar( man$ator( in3unction 0as pra(e$ for to or$er the $efen$ants to issue imme$iatel( the transfer certificate co"ering the aforesai$ shares of stock of $efen$ant Batong Buha( in the name of the plaintiff% The trial court grante$ the pra(er for the issuance of the 0rit of preliminar( man$ator( in3unction in its or$er of @arch 18* 17>/% In compliance there0ith* Stock ertificate No% 18./> 0as cancelle$ an$ ne0 Stock ertificate No% 2>8;/ $ate$ =anuar( ;* 17>/ 0as issue$ to an$ recei"e$ #( the plaintiff on =ul( 2/* 17>/%+ On Octo#er 2.* 17>1* the trial court han$e$ $o0n its 3u$gment or$ering the $efen$ant )herein petitioner, to effect the transfer of the shares co"ere$ #( Stock ertificate No% 18./> in the name of herein respon$ent Incoporate$ @ining orporation an$ $eclaring permanent the 0rit of preliminar( man$ator( in3unction issue$ on @arch 18* 17>/% &ri"ate respon$ent seasona#l( appeale$ the aforesai$ $ecision to the ourt of -ppeals anchore$ on the lo0er court?s allege$ failure to a0ar$ $amages for the 0rongful refusal of petitioner to transfer the su#3ect shares of stock an$ allege$ failure to a0ar$ attorne(?s fees* cost of in3unction #on$ an$ e<penses of litigation% On -ugust 2>* 17.8* respon$ent appellate court ren$ere$ the su#3ect $ecision the $ispositi"e portion of 0hich has alrea$( #een 2uote$ hereina#o"e% 5ence* this petition% In assailing the $ecision of the ourt of -ppeals* petitioner poses the follo0ing issues6 1% @a( the ourt of -ppeals a0ar$ $amages #( 0a( of unreali!e$ profits $espite the a#sence of supporting e"i$ence* or merel( on the #asis of pure assumption* speculation or con3ecture4 or can the respon$ent reco"er $amages #( 0a( of unreali!e$ profits 0hen it has not sho0n that it 0as $amage$ in an( manner #( the act of petitionerM 2% @a( the appellate court $en( the petitioner the chance to present e"i$ence $isco"ere$ after 3u$gment 0hich 0ere not onl( "er( material to its case* #ut 0oul$ also sho0 the untena#ilit( an$ illegalit( of pri"ate respon$ent?s positionM Je ans0er the first issue in the negati"e%

:9
The petitioner alleges that the appellate court gra"el( an$ categoricall( erre$ in a0ar$ing $amages #( 0a( of unreali!e$ profit )or lucro cesante, to pri"ate respon$ent% &etitioner compan( also alleges that the claim for unreali!e$ profit must #e $ul( an$ sufficientl( esta#lishe$* that is* that the claimant must su#mit proof that it 0as in fact $amage$ #ecause of petitioner?s act or omission% The stipulation of facts of the parties $oes not at all sho0 that pri"ate respon$ent inten$e$ to sell* or 0oul$ sell or 0oul$ ha"e sol$ the stocks in 2uestion on specifie$ $ates% Jhile it is true that shares of stock ma( go up or $o0n in "alue )as in fact the concerne$ shares here reall( rose from fifteen )1;, centa"os to t0ent( three or t0ent( four )29A2:, centa"os per share an$ then fell to a#out t0o )2, centa"os per share* still 0hate"er profits coul$ ha"e #een ma$e are purel( S&D EF-TIVD* for it 0as $ifficult to pre$ict 0ith an( $ecree of certaint( the rise an$ fall in the "alue of the shares% Thus this ourt has rule$ that speculati"e $amages cannot #e reco"ere$% It is eas( to sa( no0 that ha$ pri"ate respon$ent gaine$ legal title to the shares* it coul$ ha"e sol$ the same an$ reape$ a profit of &;*82:%7; #ut it coul$ not $o so #ecause of petitioner?s refusal to transfer the stocks in the former?s name at the time $eman$ 0as ma$e* #ut then it is also true that human nature* #eing 0hat it is* pri"ate respon$ent?s officials coul$ also ha"e refuse$ to sell an$ instea$ 0ait for e<pecte$ further increases in "alue% In "ie0 of 0hat has #een sai$* Je fin$ no necessit( to $iscuss the secon$ issue% J5DRDFORD* the assaile$ $ecision an$ resolutions of the ourt of -ppeals are here#( SDT -SIDD* an$ a ne0 one is here#( ren$ere$ RDINST-TINC the $ecision of the trial court% No costs% SO ORDDRDD% Feria ) hairman,* Fernan* -lampa( an$ Cutierre!* =r%* ==%* concur% /.R. 0o. :>@1@55, <on !. <ac$ <ac$ /ol" and Countr( Clu' nc., @12 Phil. 233 Repu#lic of the &hilippines SUPREME C!URT @anila DN B-N -ugust 9/* 17;. C%R% No% F'1/122 LEE E. 8!N a/%a# RAM!N LEE, plaintiff'appellant* "s% 8ACK 8ACK G!L- a'& C!UNTR4 CLUB, INC., $efen$ant'appellee% ,milio Ja!ier "or appellant. Juan F. Chuidian "or appellee. PARAS, C. J.7 On Decem#er 2* 17:2* the $efen$ant )a non'stock corporation, issue$ to I0ao Teru(ama @em#ership ertificate No% 2/1 0hich 0as assigne$ to @% T% Re(es on -pril 22* 17::% Su#se2uentl( in the same (ear 17::* @% T% Re(es transferre$ an$ assigne$ sai$ certificate to the plaintiff% On -pril 28* 17;;* the plaintiff file$ an action in the ourt of First Instance of @anila against the $efen$ant* alleging that shortl( after the reha#ilitation of the $efen$ant after the 0ar* the plaintiff aske$ the $efen$ant to register in its #ooks the assignment in fa"or of the plaintiff an$ to issue to the latter a ne0 certificate* #ut that the $efen$ant ha$ refuse$ an$ still refuses to $o so unla0full(4 an$ pra(ing that the plaintiff #e $eclare$ the o0ner of one share of stock of the $efen$ant an$ that the latter #e or$ere$ to issue a correspon$ent ne0 certificate% On =une 8* 17;;* the $efen$ant file$ a motion to $ismiss* alleging that from 17::* 0hen the plaintiff?s right of action ha$ accrue$* to -pril 28* 17;;* 0hen the complaint 0as file$* ele"en (ears ha"e elapse$* an$ that therefore the complaint 0as file$ #e(on$ the ;'(ear perio$ fi<e$ in -rticle 11:7 of the i"il o$e% On =ul( 9/* 17;;* the ourt of First Instance of @anila issue$ an or$er $ismissing the complaint% -s plaintiff?s motion for reconsi$eration file$ on -ugust 2>* 17;; an$ secon$ motion for reconsi$eration file$ on Septem#er 19* 17;;* 0ere #oth $enie$* the plaintiff has taken the present appeal% The certificate in 2uestion contains a con$ition to the effect that no assignment thereof +shall #e effecti"e 0ith respect to the clu# until such assignment is registere$ in the #ooks of the clu#* as pro"i$e$ in the B('Fa0s%+ The $ecisi"e 2uestion that arises is 0hether the plaintiff 0as #oun$* un$er sai$ con$ition an$ B('Fa0s of the $efen$ant or an( statutor( rule for that matter* to present an$ register the certificate assigne$ to him in 17:: 0ithin an( $efinite or fi<e$ perio$% The $efen$ant has not ma$e herein an( pretense to that effect4 #ut it conten$s that from the moment the certificate 0as assigne$ to the plaintiff* the latter?s right to ha"e the assignment registere$ commence$ to e<ist% This contention is correct* #ut it 0oul$ not follo0 that sai$ right shoul$ #e e<ercise$ imme$iatel( or 0ithin a $efinite perio$% The e<istence of a right is one thing* an$ the $uration of sai$ right is another% On the other han$* it is state$ in the appeale$ or$er of $ismissal that the plaintiff sought to register the assignment on -pril 19* 17;;4 0hereas in plaintiff?s #rief it is allege$ that it 0as onl( in Fe#ruar(* 17;;* 0hen the $efen$ant refuse$ to recogni!e the plaintiff% If* as alrea$( o#ser"e$* there is no fi<e$ perio$ for registering an assignment* ho0 can the complaint #e consi$ere$ as alrea$( #arre$ #( the Statute of Fimitations 0hen it 0as file$ on -pril 28* 17;;* or #arel( a fe0 $a(s )accor$ing to the lo0er court, an$ t0o months )accor$ing to the plaintiff,* after the $eman$ for registration an$ its $enial #( the $efen$ant% &laintiff?s right 0as "iolate$ onl( sometime in 17;;* an$ it coul$ not accor$ingl( ha"e asserte$ an( cause of action against the $efen$ant #efore that% The $efen$ant seems to #elie"e that the plaintiff 0as compelle$ imme$iatel( to register his assignment% -n( such compulsion is o#"iousl( for the #enefit of the plaintiff* #ecause it is onl( after registration that the transfer 0oul$ #e #in$ing against the $efen$ant% But 0e are not here concerne$ 0ith a situation 0here the plaintiff claims an(thing against the $efen$ant allege$l( accruing un$er the outstan$ing certificate in 2uestion #et0een the $ate of the assignment to the plaintiff an$ the $ate of the latters $eman$ for registration an$ issuance of a ne0 certificate% The $efen$ant has also intimate$ propert( hol$ings of =apanese nationals 0ere "este$ after the li#eration upon the -lien &ropert( -$ministration or usto$ian4 that the plaintiff shoul$ ha"e thereupon registere$ the assignment to him of ertificate No% 2/1 issue$ to I0ao Teru(ama4 an$ that in the meantime rights to sai$ certificate #( their pre'0ar registere$ -merican o0ners 0ere file$ 0ith the

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$efen$ant an$ correspon$ingl( acte$ upon% These* ho0e"er* are matters 0hich ma( affect the "ali$it( of the assignment to the plaintiff or his right to register the same constituting special $efenses* #ut certainl( ha"e no #earing on the 2uestion of prescription% Jherefore* the appeale$ or$er is here#( re"erse$ an$ the case reman$e$ to the court of origin for further procee$ings% So or$ere$ 0ith costs against the $efen$ant% Beng;on, Padilla, -ontema(or, Re(es, C., Bautista Cngelo, Concepcion, Re(es, J.B.:., ,ndencia and 7eli&, JJ., concur. op(right Z 2//>'2/1: &hilippineFa0%info Theme #( Theme 5orse &. 1a/%&%+2 o, R$#+r%c+%o'# LaC>$r+ A#. -oI ;6 Bh%/ 5:: D@,F This is an action #rought to reco"er a penalt( prescri#e$ on a contract as punishment for the #reach thereof% Darl( in 1711 the firm kno0n as =ohn R% D$gar O o%* engage$ in the retail #ook an$ stationer( #usiness* foun$ itself in such con$ition financiall( that its cre$itors* inclu$ing the plaintiff an$ the $efen$ant* together 0ith man( others* agree$ to take o"er the #usiness* incorporate it an$ accept stock therein in pa(ment of their respecti"e cre$its% - fe0 $a(s after the incorporation 0as complete$ plaintiff an$ $efen$ant entere$ into the follo0ing agreement6 <<< the un$ersigne$ mutuall( an$ reciprocall( agree not to sell* transfer* or other0ise $ispose of an( part of their present hol$ings of stock in sai$ =ohn R% D$gar O o% Inc%* till after one (ear from the $ate hereof% Dither part( "iolating this agreement shall pa( to the other the sum of one thousan$ )&1*///, pesos as li2ui$ate$ $amages* unless pre"ious consent in 0riting to such sale* transfer* or other $isposition #e o#taine$% Not0ithstan$ing this contract the $efen$ant Fo< sol$ his stock in the sai$ corporation to D% % @c ullough of the firm of D% % @c ullough O o% of @anila* a strong competitor of the sai$ =ohn R% D$gar O o%* Inc% The learne$ trial court $eci$e$ the case in fa"or of the $efen$ant upon the groun$ that the intention of the parties as it appeare$ from the contract in 2uestion 0as to the effect that the agreement shoul$ #e goo$ an$ continue onl( until the corporation reache$ a soun$ financial #asis* an$ that that e"ent ha"ing occurre$ some time #efore the e<piration of the (ear mentione$ in the contract* the purpose for 0hich the contract 0as ma$e an$ ha$ #een fulfille$ an$ the $efen$ant accor$ingl( $ischarge$ of his o#ligation thereun$er% The complaint 0as $ismisse$ upon the merits% ISSED6 Di$ the court erre$ in the construction of the contractM 5DFD6 +-s for us* 0e $o not construe or interpret this la0% It $oes not nee$ it% Je appl( it% B( appl(ing the la0* 0e conser"e #oth pro"isions for the #enefit of litigants% The first an$ fun$amental $ut( of courts* in our 3u$gment* is to appl( the la0% onstruction an$ interpretation come onl( after it has #een $emonstrate$ that application is impossi#le or ina$e2uate 0ithout them% The( are the "er( last functions 0hich a court shoul$ e<ercise% The ma3orit( of the la0 nee$ no interpretation or construction% The( re2uire onl( application* an$ if there 0ere more application an$ less construction* there 0oul$ #e more sta#ilit( in the la0* an$ more people 0oul$ kno0 0hat the la0 is%+ In the case at #ar the parties e<pressl( stipulate$ that the contract shoul$ last one (ear% No reason is sho0n for sa(ing that it shall last onl( nine months% Jhate"er the o#3ect 0as in specif(ing the (ear* it 0as their agreement that the contract shoul$ last a (ear an$ it 0as their 3u$gment an$ con"iction that their purposes 0oul$ not #e su#"erse$ in an( less time% Jhat reason can gi"e for refusing to follo0 the plain 0or$s of the men 0ho ma$e the contractM Je see none% In this 3uris$iction penalties pro"i$e$ in contracts of this character are enforce$ % It is the rule that parties 0ho are competent to contract ma( make such agreements 0ithin the limitations of the la0 an$ pu#lic polic( as the( $esire* an$ that the courts 0ill enforce them accor$ing to their terms% ) i"il o$e* articles 11;2* 11;9* 11;:* an$ 11;;4 Forno0 "s% 5offmeister* 8 &hil% Rep%* 994 &alacios "s% @unicipalit( of a"ite* 12 &hil% Rep%* 1:/4 Csell "s% Goch* 18 &hil% Rep%* 1%, The onl( case recogni!e$ #( the i"il o$e in 0hich the court is authori!e$ to inter"ene for the purpose of re$ucing a penalt( stipulate$ in the contract is 0hen the principal o#ligation has #een partl( or irregularl( fulfille$ an$ the court can see that the person $eman$ing the penalt( has recei"e$ the #enefit of such or irregular performance% In such case the court is authori!e$ to re$uce the penalt( to the e<tent of the #enefits recei"e$ #( the part( enforcing the penalt(% In this 3uris$iction* there is no $ifference #et0een a penalt( an$ li2ui$ate$ $amages* so far as legal results are concerne$% In either case the part( to 0hom pa(ment is to #e ma$e is entitle$ to reco"er the sum stipulate$ 0ithout the necessit( of pro"ing $amages% In$ee$ one of the primar( purposes in fi<ing a penalt( or in li2ui$ating $amages* is to a"oi$ such necessit(% The suspension of the po0er to sell has a #eneficial purpose* results in the protection of the corporation as 0ell as of the in$i"i$ual parties to the contract* an$ is reasona#le as to the length of time of the suspension% Je $o not here un$ertake to $iscuss the limitations to the po0er to suspen$ the right of alienation of stock* limiting oursel"es to the statement that the suspension in this particular case is legal an$ "ali$% The 3u$gment is re"erse$* the case reman$e$ 0ith instructions to enter a 3u$gment in fa"or of the plaintiff an$ against the $efen$ant for &1*///* 0ith interest4 0ithout costs in this instance% /.R. 0o. 5352@, 7leischer !. Botica 0olasco Co. nc., 27 Phil. 4H3 Repu#lic of the &hilippines SUPREME C!URT @anila DN B-N @arch 1:* 172; C%R% No% 292:1 ENR4 -LEISC ER, plaintiff'appellee* "s% B!TICA N!LASC! C!., INC., $efen$ant'appellant% Cntonio /on;ale; "or appellant. ,milio -. Ja!ier "or appellee. )! NS!N, J.: This action 0as commence$ in the ourt of First Instance of the &ro"ince of Oriental Negros on the 1:th $a( of -ugust* 1729* against the #oar$ of $irectors of the Botica Nolasco* Inc%* a corporation $ul( organi!e$ an$ e<isting un$er the la0s of the &hilippine Islan$s% The plaintiff pra(e$ that sai$ #oar$ of $irectors #e or$ere$ to register in the #ooks of the corporation fi"e shares of its stock in the name of 5enr( Fleischer* the plaintiff* an$ to pa( him the sum of &;// for $amages sustaine$ #( him resulting from the refusal of sai$ #o$( to register the shares of stock in 2uestion% The $efen$ant file$ a $emurrer on the groun$ that the facts allege$ in the complaint $i$ not constitute sufficient cause of action* an$ that the action 0as not #rought against the proper part(* 0hich 0as the Botica Nolasco* Inc% The $emurrer 0as sustaine$* an$ the plaintiff 0as grante$ fi"e $a(s to amen$ his complaint%

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On No"em#er 1;* 1729* the plaintiff file$ an amen$e$ complaint against the Botica Nolasco* Inc%* alleging that he #ecame the o0ner of fi"e shares of stock of sai$ corporation* #( purchase from their original o0ner* one @anuel Con!ale!4 that the sai$ shares 0ere full( pai$4 an$ that the $efen$ant refuse$ to register sai$ shares in his name in the #ooks of the corporation in spite of repeate$ $eman$s to that effect ma$e #( him upon sai$ corporation* 0hich refusal cause$ him $amages amounting to &;//% &laintiff pra(e$ for a 3u$gment or$ering the Botica Nolasco* Inc% to register in his name in the #ooks of the corporation the fi"e shares of stock recor$e$ in sai$ #ooks in the name of @anuel Con!ale!* an$ to in$emnif( him in the sum of &;// as $amages* an$ to pa( the costs% The $efen$ant again file$ a $emurrer on the groun$ that the amen$e$ complaint $i$ not state facts sufficient to constitute a cause of action* an$ that sai$ amen$e$ complaint 0as am#iguous* unintelligi#le* uncertain* 0hich $emurrer 0as o"errule$ #( the court% The $efen$ant ans0ere$ the amen$e$ complaint $en(ing generall( an$ specificall( each an$ e"er( one of the material allegations thereof* an$* as a special $efense* allege$ that the $efen$ant* pursuant to article 12 of its #('la0s* ha$ preferential right to #u( from the plaintiff sai$ shares at the par "alue of &1// a share* plus &7/ as $i"i$en$s correspon$ing to the (ear 1722* an$ that sai$ offer 0as refuse$ #( the plaintiff% The $efen$ant pra(e$ for a 3u$gment a#sol"ing it from all lia#ilit( un$er the complaint an$ $irecting the plaintiff to $eli"er to the $efen$ant the fi"e shares of stock in 2uestion* an$ to pa( $amages in the sum of &;//* an$ the costs% Epon the issue presente$ #( the plea$ings a#o"e state$* the cause 0as #rought on for trial* at the conclusion of 0hich* an$ on -ugust 21* 172:* the 5onora#le N% apistrano* 3u$ge* hel$ that* in his opinion* article 12 of the #('la0s of the corporation 0hich gi"es it preferential right to #u( its shares from retiring stockhol$ers* is in conflict 0ith -ct No% 1:;7 ) orporation Fa0,* especiall( 0ith section 9; thereof4 an$ ren$ere$ a 3u$gment or$ering the $efen$ant corporation* through its #oar$ of $irectors* to register in the #ooks of sai$ corporation the sai$ fi"e shares of stock in the name of the plaintiff* 5enr( Fleischer* as the sharehol$er or o0ner thereof* instea$ of the original o0ner* @anuel Con!ale!* 0ith costs against the $efen$ant% The $efen$ant appeale$ from sai$ 3u$gment* an$ no0 makes se"eral assignment of error* all of 0hich* in su#stance* raise the 2uestion 0hether or not article 12 of the #('la0s of the corporation is in conflict 0ith the pro"isions of the orporation Fa0 )-ct No% 1:;7,% There is no contro"ers( as to the facts of the present case% The( are simple an$ ma( #e state$ as follo0s6 That @anuel Con!ale! 0as the original o0ner of the fi"e shares of stock in 2uestion* Nos% 18* 1>* 1.* 17 an$ 2/ of the Botica Nolasco* Inc%4 that on @arch 11* 1729* he assigne$ an$ $eli"ere$ sai$ fi"e shares to the plaintiff* 5enr( Fleischer* #( accomplishing the form of en$orsement pro"i$e$ on the #ack thereof* together 0ith other cre$its* in consi$eration of a large sum of mone( o0e$ #( Con!ale! to Fleischer )D<hi#its -* B* B'1* B'2* B'9* B':,4 that on @arch 19* 1729* Dr% D$uar$o @iciano* 0ho 0as the secretar('treasurer of sai$ corporation* offere$ to #u( from 5enr( Fleischer* on #ehalf of the corporation* sai$ shares of stock* at their par "alue of &1// a share* for &;//4 that #( "irtue of article 12 of the #('la0s of Botica Nolasco* Inc%* sai$ corporation ha$ the preferential right to #u( from @anuel Con!ale! sai$ shares )D<hi#it 2,4 that the plaintiff refuse$ to sell them to the $efen$ant4 that the plaintiff re2ueste$ Doctor @iciano to register sai$ shares in his name4 that Doctor @iciano refuse$ to $o so* sa(ing that it 0oul$ #e in contra"ention of the #('la0s of the corporation% It also appears from the recor$ that on the 19th $a( of @arch* 1729* t0o $a(s after the assignment of the shares to the plaintiff* @anuel Con!ales ma$e a 0ritten statement to the Botica Nolasco* Inc%* re2uesting that the fi"e shares of stock sol$ #( him to 5enr( Fleischer #e note$ transferre$ to Fleischer?s name% 5e also ackno0le$ge$ in sai$ 0ritten statement the preferential right of the corporation to #u( sai$ fi"e shares )D<hi#it 9,% On =une 1:* 1729* Con!ale! 0rote a letter to the Botica Nolasco* 0ith$ra0ing an$ cancelling his 0ritten statement of @arch 19* 1729 )D<hi#it ,* to 0hich letter the Botica Nolasco on =une 1;* 1729* replie$* $eclaring that his 0ritten statement 0as in conformit( 0ith the #('la0s of the corporation4 that his letter of =une 1:th 0as of no effect* an$ that the shares in 2uestion ha$ #een registere$ in the name of the Botica Nolasco* Inc%* )D<hi#it H,% -s in$icate$ a#o"e* the important 2uestion raise$ in this appeal is 0hether or not article 12 of the #('la0s of the Botica Nolasco* Inc%* is in conflict 0ith the pro"isions of the orporation Fa0 )-ct No% 1:;7,% -ppellant in"oke$ sai$ article as its groun$ for $en(ing the re2uest of the plaintiff that the shares in 2uestion #e registere$ in his )plaintiff?s, name* an$ for claiming that it )Botica Nolasco* Inc%, ha$ the preferential right to #u( sai$ shares from Con!ale!% -ppellant no0 conten$s that article 12 of the sai$ #('la0s is in conformit( 0ith the pro"isions of -ct No% 1:;7% Sai$ article is as follo0s6 -RT% 12% Fas acciones $e la orporacion pue$en ser transferi$as a otra persona* pero para 2ue estas transferencias tengan "ali$e! legal* $e#en constar en los registros $e la orporacion con el $e#i$o en$oso $el accionista a cu(o nom#re se ha e<pe$i$o la accion o acciones 2ue se transfieran* o un $ocumento $e transferencia% ,ntendiendose que* ningun accionista transferira accion alguna a otra persona sin participar antes por escrito al Secretario'Tesorero% ,n igualdad de condiciones, la sociedad tendra el derecho de adquirir para si la accion o acciones que se traten de trans"erir% )D<hi#it 2%, The a#o"e'2uote$ article constitutes a #('la0 or regulation a$opte$ #( the Botica Nolasco* Inc%* go"erning the transfer of shares of stock of sai$ corporation% The latter part of sai$ article creates in fa"or of the Botica Nolasco* Inc%* a preferential right to #u(* un$er the same con$itions* the share or shares of stock of a retiring sharehol$er% 5as sai$ corporation an( po0er* un$er the orporation Fa0 )-ct% No% 1:;7,* to a$opt such #('la0M The particular pro"isions of the orporation Fa0 referring to transfer of shares of stock are as follo0s6 SD % 19% D"er( corporation has the po0er6 <<< <<< <<<

)>, Fo ma$e '(>la*s, not inconsistent *ith an( e&isting la** for the fi<ing or changing of the num#er of its officers an$ $irectors 0ithin the limits prescri#e$ #( la0* an$ for the trans"erring o" its stoc$* the a$ministration of its corporate affairs* etc% <<< <<< <<< SD % 9;% The capital stock of stock corporations shall $e $i"i$e$ into shares for 0hich certificates signe$ #( the presi$ent or the "ice' presi$ent* countersigne$ #( the secretar( or clerk an$ seale$ 0ith the seal of the corporation* shall #e issue$ in accor$ance 0ith the #('la0s% #hares o" stoc$ so issued are personal propert( and ma( 'e trans"erred '( deli!er( o" the certi"icate indorsed '( the o*ner or his attorne( in fact or other person legall( authori!e$ to make the transfer% 0o trans"er, ho*e!er, shall 'e !alid, e&cept as 'et*een the parties, until the trans"er is entered and noted upon the 'oo$s o" the corporation so as to sho* the names o" the parties to the transaction, that date o" the trans"er, the num'er o" the certi"icate, and the num'er o" shares trans"erred. No share of stock against 0hich the corporation hol$s an( unpai$ claim shall #e transfera#le on the #ooks of the corporation%

:8
Section 19* paragraph >* a#o"e'2uote$* empo0ers a corporation to make '(>la*s, not inconsistent *ith an( e&isting la*, "or the trans"erring o" its stoc$% It follo0s from sai$ pro"ision* that a #('la0 a$opte$ #( a corporation relating to transfer of stock shoul$ #e in harmon( 0ith the la0 on the su#3ect of transfer of stock% The la0 on this su#3ect is foun$ in section 9; of -ct No% 1:;7 a#o"e 2uote$% Sai$ section specificall( pro"i$es that the shares of stock Gare personal propert( and ma( 'e trans"erred '( deli!er( o" the certi"icate indorsed '( the o*ner, etc.G Sai$ section 9; $efines the nature* character an$ transfera#ilit( of shares of stock% En$er sai$ section the( are personal propert( an$ ma( #e transferre$ as therein pro"i$e$% Sai$ section contemplates no restriction as to 0hom the( ma( #e transferre$ or sol$% It $oes not suggest that an( $iscrimination ma( #e create$ #( the corporation in fa"or or against a certain purchaser% The hol$er of shares* as o0ner of personal propert(* is at li#ert(* un$er sai$ section* to $ispose of them in fa"or of 0homsoe"er he pleases* 0ithout an( other limitation in this respect* than the general pro"isions of la0% Therefore* a stock corporation in a$opting a #('la0 go"erning transfer of shares of stock shoul$ take into consi$eration the specific pro"isions of section 9; of -ct No% 1:;7* an$ sai$ #('la0 shoul$ #e ma$e to harmoni!e 0ith sai$ pro"isions% It shoul$ not #e inconsistent there0ith% The #('la0 no0 in 2uestion 0as a$opte$ un$er the po0er conferre$ upon the corporation #( section 19* paragraph >* a#o"e 2uote$4 #ut in a$opting sai$ #('la0 the corporation has transcen$e$ the limits fi<e$ #( la0 in the same section* an$ has not taken into consi$eration the pro"isions of section 9; of -ct No% 1:;7% -s a general rule* the #('la0s of a corporation are "ali$ if the( are reasona#le an$ calculate$ to carr( into effect the o#3ects of the corporation* an$ are not contra$ictor( to the general polic( of the la0s of the lan$% )Supreme omman$er( of the Gnights of the Col$en Rule !s% -ins0orth* >1 -la%* :984 :8 -m% Rep%* 992%, On the other han$* it is e2uall( 0ell settle$ that #('la0s of a corporation must #e reasona#le an$ for a corporate purpose* an$ al0a(s 0ithin the charter limits% The( must al0a(s #e strictl( su#or$inate to the constitution an$ the general la0s of the lan$% The( must not infringe the polic( of the state* nor #e hostile to pu#lic 0elfare% ):8 -m% Rep%* 992%, The( must not $istur# "este$ rights or impair the o#ligation of a contract* take a0a( or a#ri$ge the su#stantial rights of stockhol$er or mem#er* affect rights of propert( or create o#ligations unkno0n to the la0% )&eople?s 5ome Sa"ings Bank !s% Superior ourt* 1/: al%* 8:74 :9 -m% St% Rep%* 1:>4 Irelan$ !s% Clo#e @illing o%* >7 -m% St% Rep%* >87%, The "ali$it( of the #('la0 of a corporation is purel( a 2uestion of la0% )South Flori$a Railroa$ o% !s% Rho$es* 2; Fla%* :/%, Fhe po*er to enact '(>la*s restraining the sale and trans"er o" stoc$ must 'e "ound in the go!erning statute or the charter. Restrictions upon the traffic in stock must ha"e their source in legislati"e enactment* as the corporation itself cannot create such impe$iments% B(' la0 are inten$e$ merel( for the protection of the corporation* an$ prescri#e regulation an$ not restriction4 the( are al0a(s su#3ect to the charter of the corporation% The corporation* in the a#sence of such a po0er* cannot or$inaril( in2uire into or pass upon the legalit( of the transaction #( 0hich its stock passes from one person to another* nor can it 2uestion the consi$eration upon 0hich a sale is #ase$% - #('la0 cannot take a0a( or a#ri$ge the su#stantial rights of stockhol$er% ?nder a statute authori;ing '(> la*s "or the trans"er o" stoc$, a corporation can do no more than prescri'e a general mode o" trans"er on the corporate 'oo$s and cannot +usti"( an unreasona'le restriction upon the right o" sale% ): Thompson on orporations* sec% :19>* p% 8>:% Fhe right o" unrestrained trans"er o" shares inheres in the !er( nature o" a corporation* an$ courts 0ill carefull( scrutini!e an( attempt to impose restrictions or limitations upon the right of stockhol$ers to sell an$ assign their stock% Fhe right to impose an( restraint in this respect must 'e con"erred upon the corporation either '( the go!erning statute or '( the articles o" the corporation. t cannot 'e done '( a '(>la* *ithout statutor( or charter authorit(% ): Thompson on orporations* sec% :99:* pp% .1.* .17%, The +us disponendi* #eing an inci$ent of the o0nership of propert(* the general rule )su#3ect to e<ceptions hereafter pointe$ out an$ $iscusse$, is that e!er( o*ner o" corporate shares has the same uncontrolla'le right to alien them *hich attaches to the o*nership o" an( other species o" propert(% - sharehol$er is un$er no o#ligation to refrain from selling his shares at the sacrifice of his personal interest* in or$er to secure the 0elfare of the corporation* or to ena#le another sharehol$er to make gains an$ profits% )1/ (c%* p% ;>>%, It follo0s from the foregoing that a corporation has no po*er to pre!ent or to restrain trans"ers o" its shares, unless such po*er is e&pressl( con"erred in its charter or go!erning statute% This conclusion follo0s from the further consi$eration that '(>la*s or other regulations restraining such trans"ers, unless deri!ed "rom authorit( e&pressl( granted '( the legislature, *ould 'e regarded as impositions in restraint o" trade% )1/ (c%* p% ;>.%, The foregoing authorities go farther than the stan$ 0e are taking on this 2uestion% The( hol$ that the po0er of a corporation to enact #('la0s restraining the sale an$ transfer of shares* shoul$ not onl( #e in harmon( 0ith the la0 or charter of the corporation* #ut such po0er shoul$ #e e<pressl( grante$ in sai$ la0 or charter% The onl( restraint impose$ #( the orporation Fa0 upon transfer of shares is foun$ in section 9; of -ct No% 1:;7* 2uote$ a#o"e* as follo0s6 +No transfer* ho0e"er* shall #e "ali$* e<cept as #et0een the parties* until the transfer is entere$ an$ note$ upon the #ooks of the corporation so as to sho0 the names of the parties to the transaction* the $ate of the transfer* the num#er of the certificate* an$ the num#er of shares transferre$%+ This restriction is necessar( in or$er that the officers of the corporation ma( kno0 0ho are the stockhol$ers* 0hich is essential in con$ucting elections of officers* in calling meeting of stockhol$ers* an$ for other purposes% #ut an( restriction of the nature of that impose$ in the #('la0 no0 in 2uestion* is ultra !ires* "iolati"e of the propert( rights of sharehol$ers* an$ in restraint of tra$e% -n$ moreo"er* the #('la0s no0 in 2uestion cannot ha"e an( effect on the appellee% 5e ha$ no kno0le$ge of such #('la0 0hen the shares 0ere assigne$ to him% 5e o#taine$ them in goo$ faith an$ for a "alua#le consi$eration% 5e 0as not a pri"( to the contract create$ #( sai$ #('la0 #et0een the sharehol$er @anuel Con!ale! an$ the Botica Nolasco* Inc% Sai$ #('la0 cannot operate to $efeat his rights as a purchaser% -n unauthori!e$ #('la0 for#i$$ing a sharehol$er to sell his shares 0ithout first offering them to the corporation for a perio$ of thirt( $a(s is not #in$ing upon an assignee of the stock as a personal contract* although his assignor kne0 of the #('la0 an$ took part in its a$option% )1/ (c%* ;>74 Irelan$ !s% Clo#e @illing o%* 21 R%I%* 7%, Jhen no restriction is place$ #( pu#lic la0 on the transfer of corporate stock* a purchaser is not affecte$ #( an( contractual restriction of 0hich he ha$ no notice% )Brinkerhoff'Farris Trust an$ Sa"ings o% !s% 5ome Fum#er o%* 11. @o%* ::>%, The assignment of shares of stock in a corporation #( one 0ho has assente$ to an unauthori!e$ #('la0 has onl( the effect of a contract #(* an$ enforcea#le against* the assignor4 the assignee is not #oun$ #( such #('la0 #( "irtue of the assignment alone% )Irelan$ !s% Clo#e @illing o%* 21 R%I%* 7%, - #('la0 of a corporation 0hich pro"i$es that transfers of stock shall not #e "ali$ unless appro"e$ #( the #oar$ of $irectors* 0hile it ma( #e enforce$ as a reasona#le regulation for the protection of the corporation against 0orthless stockhol$ers* cannot #e ma$e a"aila#le to $efeat the rights of thir$ persons% )Farmers? an$ @erchants? Bank of Fine"ille !s% Jasson* :. Io0a* 998%, ounsel for $efen$ant inci$entall( argues in his #rief* that the plaintiff $oes not ha"e an( right of action against the $efen$ant corporation* #ut against the presi$ent an$ secretar( thereof* inasmuch as the signing an$ registration of shares is incum#ent upon sai$ officers pursuant to section 9; of the orporation Fa0% This contention cannot #e sustaine$ no0% The 2uestion shoul$ ha"e #een raise$ in the lo0er court% It is too late to raise it no0 in this appeal% Besi$es* as state$ a#o"e* the corporation 0as ma$e $efen$ant in this action upon the $emurrer of the attorne( of the original $efen$ant in the lo0er court* 0ho conten$e$ that the Botica Nolasco* Inc%* shoul$ #e ma$e the part( $efen$ant in this action% -ccor$ingl(* upon or$er of the court* the complaint 0as amen$e$ an$ the sai$ corporation 0as ma$e the part( $efen$ant%

:>
Jhene"er a corporation refuses to transfer an$ register stock in cases like the present* man$amus 0ill lie to compel the officers of the corporation to transfer sai$ stock upon the #ooks of the corporation% )28 (c% 9:>4 5ager !s% Br(an* 17 &hil%* 19.%, In "ie0 of all the foregoing* 0e are of the opinion* an$ so hol$* that the $ecision of the lo0er court is in accor$ance 0ith la0 an$ shoul$ #e an$ is here#( affirme$* 0ith costs% So or$ere$% -alcolm, Villamor, =strand, Johns, and Romualde;, JJ., concur.

$. -or($& Tra'#,$r# /.R. 0o. :>5H1H, #antamaria and #antamaria !. 8#BC and Faplin, H6 Phil. 7H1 Repu#lic of the &hilippines SUPREME C!URT @anila DN B-N -ugust 91* 17;1 C%R% No% F'2./. )!SE-A SANTAMARIA, a##%#+$& >2 h$r h*#>a'&, -RANCISC! SANTAMARIA, )r., plaintiff'appellee* "s% T E !NGK!NG AN6 S ANG AI BANKING C!RP!RATI!N a'& R. 8. TAPLIN, $efen$ants'appellant% 0icodemus :. .asig and #otto and #otto "or plainti"" and appellant. Jui+ano, Rosete and Fi;on "or de"endants and appellants. BAUTISTA ANGEL!, J.7 This is an appeal from a $ecision of the ourt of First Instance of @anila or$ering the 5ongkong an$ Shanghai Banking orporation to pa( the plaintiff the sum of &.*/:1%2/ plus the costs of suit% The case 0as certifie$ to this ourt of -ppeals% The facts of this case foun$ #( the ourt of -ppeals are as follo0s6 Sometime in Fe#ruar(* 179>* @rs% =osefa T% Santamaria #ought 1/*/// shares of the Batangas @inerals* Inc%* through the offices of Joo* E('Tioco O Naftal(* a stock #rokerage firm an$ pa( therefore the sum of &.*/:1%2/ as sho0n #( receipt D<h% B% The #u(er recei"e$ Stock ertificate No% ;1>* D<h% +F+* issue$ in the name of Joo* E('Tioco O Naftal( an$ in$orse$ in #ank #( this firm% On @arch 7* 179>* @rs% Santamaria place$ an or$er for the purchase of 1/*/// shares of the ro0n @ines* Inc% 0ith R%=% ampos O o%* a #rokerage firm* an$ $eli"ere$ ertificate No% ;1> to the latter as securit( therefor 0ith the un$erstan$ing that sai$ certificate 0oul$ #e returne$ to her upon pa(ment of the 1/*/// ro0n @ines* Inc% shares% D<h% D% is the receipt of the certificate in 2uestion signe$ #( one @r% osculluela* @anager of the R%=% ampos O o%* Inc% -ccor$ing to certificate D<h% D* R% =% ampos O o%* Inc% #ought for @rs% =osefa Santamaria 1/*/// shares of the ro0n @ines* Inc% at %22; a share* or the total amount of &2*2;/% -t the time of the $eli"er( of a stock ertificate No% ;1> to R%=% ampos O o%* Inc% this certificate 0as in the same con$ition as that 0hen @rs% Santamaria recei"e$ from Joo* E('Tioco O Naftal(* 0ith the sole $ifference that her name 0as later 0ritten in lea$ pencil on the upper right han$ corner thereof% T0o $a(s later* on @arch 11* @rs% Santamaria 0ent to R%=% ampos O o%* Inc% to pa( for her or$er of 1/*/// ro0n @ines shares an$ to get #ack ertificate No% ;1>% osculluela then informe$ her that R%=% ampos O o%* Inc% 0as no longer allo0e$ to transact #usiness $ue to a prohi#ition or$er from Securities an$ D<change ommission% She 0as also inform that her Stock certificate 0as in the possession of the 5ongkong an$ Shanghai Banking orporation% ertificate No% ;1> came into possession of the 5ongkong an$ Shanghai Banking orporation #ecause R%=% ampos O o%* Inc% ha$ opene$ an o"er$raft account 0ith this #ank an$ to this effect it ha$ e<ecute$ on -pril 18* 1798 a $ocument of h(pothecation* D<hi#it 1* #( the term of 0hich R%=% ampos O o%* Inc% ple$ge$ to the sai$ #ank +all stocks* shares an$ securities 0hich IA0e ma( hereafter come into their possession of m(Aour account an$ 0hether originall( $eposite$ for safe custo$( onl( or for an( other purpose 0hate"er or 0hich ma( hereinafter #e $eposite$ #( meAus in lieu of or in a$$ition to the Stocks Shares an$ Securities no0 $eposite$ or for an( other purposes 0hatsoe"er%+ On @arch 11* 179>* as sho0n #( D<hi#it C% ertificate No% ;1>* alrea$( in$orse$ #( R%=% ampos o% Inc% to the 5ongkong O Shanghai Banking orporation* 0as sent #( the latter to the office of the Batangas @inerals* Inc% 0ith the re2uest that the same #e cancelle$ an$ a ne0 certificate #e issue$ in the name of R%J% Taplin as trustee an$ nominee of the #anking corporation% Ro#ert J% Taplin 0as an officer of this institution in charge of the securities #elonging to or claime$ #( the #ank% -s per this re2uest the Batangas @inerals* Inc% on @arch 12* 179>* issue$ ertificate No% >1; in lieu of ertificate No% ;1>* in the name of Ro#ert J% Taplin as trustee an$ nominee of the 5ongkong O Shanghai Banking orporation% )D<hi#its C* 5* I* =* 1* : an$ ;%, -ccor$ing to @rs% Santamaria* she ma$e the claim to the #ank for her certificate* though she $i$ not remem#er the e<act $ate* #ut it 0as most likel( on the follo0ing $a( of that 0hen she 0ent to osculluela for the purpose of pa(ing her or$er for 1/*/// shares of the ro0n @ines* Inc%* or else on @arch 19* 179>% In her inter"ie0 0ith Taplin* the #ank?s representati"e* she informe$ him that the certificate #elonge$ to her* an$ she $eman$e$ that it #e returne$ to her% Taplin then replie$ that the #ank $i$ not kno0 an(thing a#out the transaction ha$ #et0een her an$ R%=% ampos O o%* Inc%* an$ that he coul$ not $o an(thing until the case of the #ank 0ith ampos shall ha"e #een terminate$% This $eclaration 0as not contra$icte$ #( the a$"erse part(% +In i"il ase No% ;122:* R%=% ampos O o%* Inc% 0as $eclare$ insol"ent* an$ on =ul( 12* 179>* the 5ongkong O Shanghai Banking orporation aske$ permission in the insol"enc( court to sell the R%=% ampos O o%* Inc%* securities liste$ in its motion #( "irtue of the $ocument of h(pothecation D<hi#it 1% In an or$er $ate$ =ul( 1;* 179>* the insol"enc( court grante$ this motion%

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+On =une 9* 179.* to 1/*/// shares of Batangas @inerals* Inc% represente$ #( ertificate No% >1;* 0ere sol$ to the same #ank #( the Sheriff for &9// at the foreclosure sale authori!e$ #( sai$ or$er% )D<hi#its F* 2 an$ 9%, R%=% ampos* the presi$ent of R%=% ampos O o%* Inc%* 0as prosecute$ for estafa an$ foun$ guilt( of this crime an$ 0as sentence$ #( the @anila ourt of First Instance in riminal ase No% ;::2.* to an imprisonment an$ to in$emnif( the offen$e$ part(* @rs% =osefa Santamaria* in the amount of &.*/:1%2/ representing the "alue of the 1/*/// shares of Batangas @inerals* Inc% )D<hi#its I an$ =%, The $ecision 0as later confirme$ #( the ourt of -ppeals% )D<hi#its =%, The offen$e$ part( an$ R% J% Taplin 0ere among the 0itnesses for the prosecution in this criminal case No% ;::2.% )D<hi#its :%, Jhen @rs% Santamaria faile$ in her efforts to force the ci"il 3u$gment ren$ere$ in her fa"or in the criminal case #ecause the accuse$ #ecame insol"ent* she file$ her complaint in this case on Octo#er 11* 17:/% -t the trial #oth parties agree$ that the 1/*/// Batangas @inerals shares formerl( represente$ #( ertificate No% ;1> an$ thereafter #( ertificate No% >1;* ha"e no actual market "alue% The errors assigne$ #( the $efen$ants'appellants as committe$ #( the lo0er court are6 I The trial court erre$ in fin$ing that the plaintiff'appellee 0as not chargea#le 0ith negligence in the transaction 0hich ga"e rise to this case% II The trial court erre$ in hol$ing that it 0as the o#ligation of the #ank to ha"e in2uire$ into the o0nership of the certificate 0hen it recei"e$ it from R%=% ampos O ompan( an$ in conclu$ing that the #ank 0as negligent for not ha"ing $one so% III The trial court erre$ on or$ering $efen$ants'appellants to pa( to plaintiff the sum of &.*/:1%2/% 1% Defen$ants'appellants conten$ in the first place that the trial court erre$ in fin$ing that the plaintiff'appellee 0as not chargea#le 0ith negligence in the transaction 0hich ga"e rise to this case% - careful anal(sis of the facts seems to 3ustif( this contention% ertificate of stock No% ;1> 0as ma$e out in the name of Jo* E('Tioco O Naftal(* #rokers* an$ 0as $ul( in$orse$ in #ank #( sai$ #rokers% This certificate of stock 0as $eli"ere$ #( plaintiff to R%=% ampos O o%* Inc% to compl( 0ith a re2uirement that she $eposit something on account if she 0ante$ to #u( 1/*/// shares of ro0n @ines Inc% In making sai$ $eposit* plaintiff $i$ not take an( precaution to protect herself against the possi#le misuse of the shares represente$ #( the certificate of stock% &laintiff coul$ ha"e aske$ the corporation that ha$ issue$ sai$ certificate to cancel it an$ issue another in lieu thereof in her name to apprise the hol$er that she 0as the o0ner of sai$ certificate% This she faile$ to $o* an$ instea$ she $eli"ere$ sai$ certificate* as it 0as* to R%=% ampos O o%* Inc%* there#( clothing the latter 0ith apparent title to the shares represente$ #( sai$ certificate inclu$ing apparent authorit( to negotiate it #( $eli"ering it to sai$ compan( 0hile it 0as in$orse$ in #lank #( the person or firm appearing on its face as the o0ner thereof% The $efen$ant Bank ha$ no kno0le$ge of the circumstances un$er 0hich the certificate of stock 0as $eli"ere$ to R%=% ampos O o%* Inc%* an$ ha$ a perfect right to assume that R%=% ampos O o%* Inc% 0as la0full( in possession of the certificate in "ie0 of the fact that it 0as a street certificate* an$ 0as in such form as 0oul$ entitle an( possessor thereof to a transfer of the stock on the #ooks of the corporation concerne$% There is no 2uestion that* in this case* plaintiff ma$e the negotiation of the certificate of stock to other parties possi#le an$ the confi$ence she place$ in R%=% ampos O o%* Inc% ma$e the 0rong $one possi#le% This 0as the pro<imate cause of the $amage suffere$ #( her% She is* therefore* estoppe$ from claiming further title to or interest therein as against a 'ona "ide ple$ge or transferee thereof* for it is a 0ell'kno0n rule that a 'ona "ide ple$gee or transferee of a stock from the apparent o0ner is not chargea#le 0ith kno0le$ge of the limitations place$ on it #( the real o0ner* or of an( secret agreement relating to the use 0hich might #e ma$e of the stock #( the hol$er )Fletcher* (clope$ia of orporations* section ;;82* Vol% 12* p% ;21,% On the other han$* it appears that this certificate of stock* in$orse$ as it 0as in #lank #( Joo* E('Tioco O Naftal(* stock #rokers* 0as $eli"ere$ to The 5ongkong an$ Shanghai Banking orporation #( R%=% ampos O o%* Inc%* $ul( in$orse$ #( the latter* pursuant to a letter of h(pothecation e<ecute$ #( R%=% ampos O o%* Inc%* in fa"or of sai$ Bank )D<hi#it +1+,% The sai$ certificate 0as $eli"ere$ to the Bank in the or$inar( course of #usiness* together 0ith man( other securities* an$ at the time it 0as $eli"ere$* the Bank ha$ no Gno0le$ge that the shares represente$ #( the certificate #elonge$ to the plaintiff for* as alrea$( sai$* it 0as in the form of street certificate 0hich 0as transfera#le #( mere $eli"er(% The rule is +0here one of t0o innocent parties must suffer #( reason of a 0rongful or unauthori!e$ act* the loss must fall on the one 0ho first truste$ the 0rong $oer an$ put in his han$s the means of inflicting such loss+ )Fletcher (clope$ia of orporations* supra,% It is therefore clear that plaintiff* in failing to take the necessar( precautions upon $eli"ering the certificate of stock to her #roker* 0as chargea#le 0ith negligence in the transaction 0hich resulte$ to her o0n pre3u$ice* an$ as such* she is estoppe$ from asserting title to it as against the $efen$ant Bank% 2% The ne<t contention of the $efen$ant is that the trial court erre$ in hol$ing that it 0as the o#ligation of the $efen$ant Bank to ha"e in2uire$ into the o0nership of the certificate 0hen it recei"e$ it from R%=% ampos O o%* Inc% an$ in conclu$ing that the Bank 0as negligent for not ha"ing $one so* contrar( to the claim of the plaintiff that $efen$ant Bank acte$ negligentl(* if not in #a$ faith* in accepting $eli"er( of sai$ certificate from R=% ampos O o%* Inc% Fet us no0 see the material facts on this point% ertificate No% ;1> came into the possession of the $efen$ant Bank #ecause R%=% ampos O o%* Inc% ha$ opene$ an o"er$raft account 0ith sai$ Bank an$ to this effect it ha$ e<ecute$ on -pril 18* 17:8* a letter of h(pothecation #( the terms of 0hich R%=% ampos O o%* Inc% ple$ge$ to the sai$ Bank +all Stocks* Shares an$ Securities 0hich IA0e ma( hereafter come into their possession on m(Aour account an$ 0hether originall( $eposite$ for safe custo$( onl( or for an( other purpose 0hate"er or 0hich ma( hereafter #e $eposite$ #( meAus in lieu of or in a$$ition to the Stocks* Shares* an$ Securities no0 $eposite$ or for an( other purpose 0hatsoe"er%+ On @arch 19* 179>* plaintiff 0ent to the office of the Bank to claim for her certificate% In her inter"ie0 0ith one Ro#ert J% Taplin* the officer in charge of the securities of that institution* she informe$ him that the certificate #elonge$ to her an$ she $eman$e$ that it #e returne$ to her% Taplin then replie$ that the Bank $i$ not kno0 an(thing a#out the transaction ha$ #et0een her an$ that he coul$ not $o an(thing until the case of the Bank 0ith R%=% ampos O o%* Inc% ha$ #een

:7
terminate$% It further appears that 0hen the certificate of stock 0as $eli"ere$ #( plaintiff to R%=% ampos O o%* Inc%* the manager thereof* Se#astian osculluela* 0rote in pencil on the right margin the name of =osefa T% Santamaria* pursuant to the practice follo0e$ #( sai$ firm to 0rite on that part of the certificate the name of the o0ner for purposes of i$entification% Epon the facts thus state$* the 2uestion that asserts itself is6 0as the $efen$ants Bank o#ligate$ to in2uire 0ho 0as the real o0ner of the shares represente$ #( the certificate of stock* an$ coul$ it #e charge$ 0ith negligence for ha"ing faile$ to $o soM It shoul$ #e note$ that the certificate of stock in 2uestion 0as issue$ in the name of the #rokerage firm'Joo* E('Tioco O Naftal( an$ that it 0as $ul( in$orse$ in #lank #( sai$ firm* an$ that sai$ in$orsement 0as guarantee$ #( R%=% ampos O o%* Inc%* 0hich in turn in$orse$ it in #lank% This certificate is 0hat it is kno0n as street certificate% Epon its face* the hol$er 0as entitle$ to $eman$ its transfer into his name from the issuing corporation% The Bank 0as not o#ligate$ to look #e(on$ the certificate to ascertain the o0nership of the stock at the time it recei"e$ the same from R%=% ampos O o%* Inc%* for it 0as gi"en to the Bank pursuant to their letter of h(pothecation% D"en if sai$ certificate ha$ #een in the name of the plaintiff #ut in$orse$ in #lank* the Bank 0oul$ still ha"e #een 3ustifie$ in #elie"ing that R%=% ampos O o%* Inc% ha$ title thereto for the reason that it is a 0ell'kno0n practice that a certificate of stock* in$orse$ in #lank* is $eeme$ quasi negotia#le* an$ as such the transferee thereof is 3ustifie$ in #elie"ing that it #elongs to the hol$er an$ transferor )5e(man !s. 5amilton National Bank* 288 S%J% 1/:94 Fletcher* (clope$ia of orporations* Vol% 12* pp% ;21';2:* ;2;' ;2>4 @cNeil !s. Tenth National Bank* > -m% Rep% 9:1,% The onl( e"i$ence in the recor$ to sho0 that the certificate of stock in 2uestion ma( not ha"e #elonge$ to R%=% ampos O o%* Inc% is the testimon( of the plaintiff to the effect that she ha$ approache$ Ro#ert J% Taplin on @arch 19* 179>* an$ informe$ him that she 0as the true o0ner of sai$ certificate an$ $eman$e$ the return thereof* or its "alue* #ut e"en assuming for the sake of argument that 0hat plaintiff has state$ is true* such an inci$ent 0oul$ merel( sho0 that plaintiff has an a$"erse claim to the o0nership of sai$ certificate of stock* #ut that 0oul$ not necessaril( place the Bank in the position to in2uire as to the real #asis of her claim* nor 0oul$ it place the Bank in the o#ligation to recogni!e her claim an$ return to her the certificate outright% - mere claim an$ of o0nership $oes not esta#lish the fact of o0nership% The right of the plaintiff in such a case 0oul$ #e against the transferor% In fact* this is the attitu$e plaintiff has a$opte$ 0hen she file$ a charge for estafa against Rafael =% ampos* 0hich culminate$ in his prosecution an$ con"iction* an$ it is onl( 0hen she foun$ him to #e insol"ent that she $eci$e$ to go against the Bank% The fact that on the right margin of the sai$ certificate the name of the plaintiff appeare$ 0ritten* granting it to #e true* can not #e consi$ere$ sufficient reason to in$icate that its o0ner 0as the plaintiff consi$ering that sai$ certificate 0as in$orse$ in #lank #( her #rokers Joo* E('Tioco O Naftal(* 0as guarantee$ #( in$orsement in #lank #( R%=% ampos O o%* Inc%* an$ 0as transferre$ in $ue course #( the latter to the Bank un$er their letter of h(pothecation% Sai$ indicium coul$ at #est gi"e the impression that the plaintiff 0as the original hol$er of the certificate% The ourt has notice$ that the $efen$ant Bank 0as 0illing from the "er( #eginning to compromise this case #( $eli"ering to the plaintiff certificate of stock No% >1; that 0as issue$ to sai$ Bank #( the issuer corporation in lieu of the original as allege$ an$ pra(e$ for in its amen$e$ ans0er to the complaint $ate$ -pril 2* 17:1% onsi$ering that in the light of the la0 an$ prece$ents applica#le in this case* the most that plaintiff coul$ claim is the return to her of the sai$ certificate of stock )5o0son !s. @echanics Sa"% Bank* 1.9 -tl%* p% 87>,* the ourt* regar$less of the conclusions arri"e$ at as a#o"e state$* is incline$ to grant the formal ten$er ma$e #( the $efen$ant to the plaintiff of sai$ certificate% Jherefore* the $ecision of the lo0er court is here#( mo$ifie$ in the sense of or$ering the $efen$ant to $eli"er to the plaintiff certificate of stock No% >1;* 0ithout pronouncement as to costs% Paras, C.J., 7eria, Beng;on and Jugo, JJ., concur% Padilla, J., concurs in the result% DE L ! !"#$ ! %. &C'("$), "$$ (#E* 'E#E("L + $)E ,#-$ED !$"$E!./ 0)-L 122 34.115 +"C$! In this case* De Fos Santos conten$s that he ac2uire$ 1%8 million shares of the Fepanto onsoli$ate$ @ining o%* Inc% from t0o people4 namel(* =uan ampos an$ arl 5ess* sometime in17:2% The shares are registere$ in the name of Vicente @a$rigal in the #ooks of the corporation% -fterthe 0ar* the propert( 0as se2uestere$ #( the appropriate state agenc( since it 0as classifie$ as =apanesepropert(% -s la0(er for the state* the -ttorne( Ceneral argues that the sai$ shares 0ere #ought #(@a$rigal* in trust for* an$ for the #enefit of the @itsuis* a =apanese corporation* 0ho is the true o0nerthereof% -fter such purchase* @a$rigal $eli"ere$ such shares to the @anila office of the @itsuis 0ith his#lank in$orsement on it% It 0as 3ust kept there% The sai$ shares 0ere ne"er sol$ an$ 0ere most pro#a#l(lost or stolen $uring li#eration% -!!,E Jhether or not the conteste$ certificates of stock coul$ #e transferre$ to De Fos Santos% )ELD The Supreme ourt rule$ that it cannot #e transferre$ to De Fos Santos% It 0as esta#lishe$ that@a$rigal ne"er $ispose$ of the sai$ shares in an( manner 0hatsoe"er* e<cept #( turning o"er thecorrespon$ing stock certificates to the @itsuis% Furthermore* the managers of @itsui $uring theconcerne$ perio$ attest that the @itsuis neither sol$* con"e(e$* or alienate$ the sai$ shares of stock* nor$eli"ere$ the aforementione$ stock certificates* to an(#o$( $uring the sai$ perio$% Finall(* e"en one ofthe e"i$ence of a receipt of the allege$ purchase #( De Fos Santos from ampos an$ 5ess* 0ho 0ere notthe registere$ o0ners* 0as lost though a fire% In summar(* if the o0ner of the certificate has in$orse$ itin #lank* an$ it is stolen from him* no title is ac2uire$ #( an innocent purchaser for "alue S$c. 99. No'3+ra'#,$ra>%/%+2 o, C$C>$r#h%B% ' @em#ership in a non'stock corporation an$ all rights arising therefrom are personal an$ non'transfera#le* unless the articles of incorporation or the #('la0s other0ise pro"i$e% )n,

III.

MANAGEMENT STRUCTURE -% OR&OR-TD COVDRN-N D 1% &o0ers of the Boar$ or Trustees

S$c+%o' ;3. Fhe 'oard o" directors or trustees. V Enless other0ise pro"i$e$ in this o$e* the corporate po0ers of all corporations forme$ un$er this o$e shall #e e<ercise$* all #usiness con$ucte$ an$ all propert( of such corporations controlle$ an$ hel$ #( the #oar$ of $irectors or trustees to #e electe$ from among the hol$ers of stocks* or 0here there is no stock* from among the mem#ers of the corporation* 0ho shall hol$ office for one )1, (ear until their successors are electe$ an$ 2ualifie$% )2.a, D"er( $irector must o0n at least one )1, share of the capital stock of the corporation of 0hich he is a $irector* 0hich share shall stan$ in his name on the #ooks of the corporation% -n( $irector 0ho ceases to #e the o0ner of at least one )1, share of the capital stock of the corporation of 0hich he is a $irector shall there#( cease to #e a $irector% Trustees of non'stock corporations must #e mem#ers thereof% - ma3orit( of the $irectors or trustees of all corporations organi!e$ un$er this o$e must #e resi$ents of the &hilippines%

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SD OND DIVISION G.R. No. L3=96;9 Ma2 5, 1979 RICAR6! L. GAMB!A, L46IA R. GAMB!A, !N!RI! 6E 1A RAMA, E6UAR6! 6E LA RAMA, a'& +h$ EIRS !- MERCE6ES 6E LA RAMA3B!RR!ME!, petitioners* "s% !N. !SCAR R. 1ICT!RIAN! a# Pr$#%&%'( )*&($ o, +h$ Co*r+ o, -%r#+ I'#+a'c$ o, N$(ro# !cc%&$'+a/, Bra'ch II, BEN)AMIN L!PUE, SR., BEN)AMIN L!PUE, )R., LE!NIT! L!PUE, a'& LUISA U. 6ACLES respon$ents% ,&equiel F. C Cle+andro "or petitioners. CcuEa, :ira;an I Cssociates "or pri!ate respondents.

C!NCEPCI!N )R., J,: &etition for certiorari to re"ie0 the or$er of the respon$ent 3u$ge* $ate$ =anuar( 2* 17>;* $en(ing the petitioners? motion to $ismiss the complaint file$ in i"il ase No% 1/2;> of the ourt of First Instance of Negros Occi$ental* entitle$* GBen+amin :opue #r., et al., plainti""s, !ersus Ricardo /am'oa, et al., de"endants,+ as 0ell as the or$er $ate$ -pril :* 17>;* $en(ing the motion for the reconsi$eration of Sai$ or$er% In the aforementione$ i"il ase No% 1/2;> of the ourt of First Instance of Negros Occi$ental* the herein petitioners* Ricar$o F% Cam#oa* F($ia R% Cam#oa* 5onorio $e la Rama* D$uar$o $e la Rama* an$ the late @erce$es $e la Rama'Borromeo* no0 represente$ #( her heirs* as 0ell as Ramon $e la Rama* &a! $e la Rama'Battistu!!i* an$ Dn!o Battistu!!i* 0ere sue$ #( the herein pri"ate respon$ents* Ben3amin Fopue* Sr%* Ben3amin Fopue* =r%* Feonito Fopue* an$ Fuisa E% Dacles to nullif( the issuance of .29 shares of stock of the Inocentes $e la Rama* Inc% in fa"or of the sai$ $efen$ants% The gist of the complaint* file$ on -pril :* 17>2* is that the plaintiffs* 0ith the e<ception of -nastacio Dacles 0ho 0as 3oine$ as a formal part(* are the o0ners of 1*92. shares of stock of the Inocentes $e la Rama* Inc%* a $omestic corporation* 0ith an authori!e$ capital stock of 9*/// shares* 0ith a par "alue of &1//%// per share* 2*1>> of 0hich 0ere su#scri#e$ an$ issue$* thus lea"ing .29 shares unissue$4 that upon the plaintiffs? ac2uisition of the shares of stock hel$ #( Rafael Fe$esma an$ =ose Sicangco* =r%* then &resi$ent an$ Vice'&resi$ent of the corporation* respecti"el(* the $efen$ants @erce$es R% Borromeo* 5onorio $e la Rama* an$ Ricar$o Cam#oa* remaining mem#ers of the #oar$ of $irectors of the corporation* in or$er to forestall the takeo"er #( the plaintiffs of the afore'name$ corporation* surreptitiousl( met an$ electe$ Ricar$o F% Cam#oa an$ 5onorio $e la Rama as presi$ent an$ "ice'presi$ent of the corporation* respecti"el(* an$ thereafter passe$ a resolution authori!ing the sale of the .29 unissue$ shares of the corporation to the $efen$ants* Ricar$o F% Cam#oa* F($ia R% Cam#oa* 5onorio $e la Rama* Ramon $e la Rama* &a! R% Battistu!!i D$uar$o $e la Rama* an$ @erce$es R% Borromeo* at par "alue* after 0hich the $efen$ants 5onorio $e la Rama* F($ia $e la Rama'Cam#oa* an$ Dn!o Battistu!!i 0ere electe$ to the #oar$ of $irectors of the corporation4 that the sale of the unissue$ .29 shares of stock of the corporation 0as in "iolation of the plaintiffs? an$ pre'empti"e rights an$ ma$e 0ithout the appro"al of the #oar$ of $irectors representing 2A9 of the outstan$ing capital stock* an$ is in $isregar$ of the strictest relation of trust e<isting #et0een the $efen$ants* as stockhol$ers thereof4 an$ that the $efen$ants F($ia $e la Rama'Cam#oa* 5onorio $e la Rama* an$ Dn!o Battistu!!i 0ere not legall( electe$ to the #oar$ of $irectors of the sai$ corporation an$ has unla0full( usurpe$ or intru$e$ into sai$ office to the pre3u$ice of the plaintiffs% Jherefore* the( pra(e$ that a 0rit of preliminar( in3unction #e issue$ restraining the $efen$ants from committing* or continuing the performance of an act ten$ing to pre3u$ice* $iminish or other0ise in3ure the plaintiffs? rights in the corporate properties an$ fun$s of the corporation* an$ from $isposing* transferring* selling* or other0ise impairing the "alue of the .29 shares of stock illegall( issue$ #( the $efen$ants4 that a recei"er #e appointe$ to preser"e an$ a$minister the propert( an$ fun$s of the corporation4 that $efen$ants F($ia $e la Rama'Cam#oa* 5onorio $e la Rama* an$ Dn!o Battistu!!i #e $eclare$ as usurpers or intru$ers into the office of $irector in the corporation an$* conse2uentl(* ousting them therefrom an$ $eclare Fuisa E% Dacles as a legall( electe$ $irector of the corporation4 that the sale of .29 shares of stock of the corporation #e $eclare$ null an$ "oi$4 an$ that the $efen$ants #e or$ere$ to pa( $amages an$ attorne(?s fees* as 0ell as the costs of suit % 1 -cting upon the complaint* the respon$ent 3u$ge* after proper hearing* $irecte$ the clerk of court +to issue the correspon$ing 0rit of preliminar( in3unction restraining the $efen$ants an$Aor their representati"es* agents* or persons acting in their #ehalf from the commission or continuance of an( act ten$ing in an( 0a( to pre3u$ice* $iminish or other0ise in3ure plaintiffs? rights in the corporate properties an$ fun$s of the corporation Inocentes $e la Rama* Inc%? an$ from $isposing* transferring* selling or other0ise impairing the "alue of the certificates of stock allege$l( issue$ illegall( in their names on Fe#ruar( 11* 17>2* or at an( $ate thereafter* an$ or$ering them to $eposit 0ith the lerk of ourt the correspon$ing certificates of stock for the .29 shares issue$ to sai$ $efen$ants on Fe#ruar( 11* 17>2* upon plaintiffs? posting a #on$ in the sum of &;/*///%//* to ans0er for an( $amages an$ costs that ma( #e sustaine$ #( the $efen$ants #( reason of the issuance of the 0rit* cop( of the #on$ to #e furnishe$ to the $efen$ants% + ; &ursuant thereto* the $efen$ants $eposite$ 0ith the clerk of court the corporation?s certificates of stock Nos% ./ to .8* inclusi"e* representing the $ispute$ .29 shares of stock of the corporation% 3 On Octo#er 91* 17>2* the plaintiffs therein* no0 pri"ate respon$ents* entere$ into a compromise agreement 0ith the $efen$ants Ramon $e la Rama* &a! $e la Rama Battistu!!i an$ Dn!o Battistu!!i * = 0here#( the contracting parties 0ith$re0 their respecti"e claims against each other an$ the aforename$ $efen$ants 0ai"e$ an$ transferre$ their rights an$ interests o"er the 2uestione$ .29 shares of stock in fa"or of the plaintiffs* as follo0s6 9% That the $efen$ants Ramon F% $e la Rama* &a! $e la Rama Battistu!!i an$ Dn!o Battistu!!i 0ill 0ai"e* ce$e* transfer or other 0ise con"e(* as the( here#( 0ai"e* ce$e* transfer an$ con"e(* free from all liens an$ encum#rances unto the plaintiffs* in such proportion as the plaintiffs ma( among themsel"es $etermine* all of the rights* interests* participations or title that the $efen$ants Ramon F% $e la Rama* &a! $e la Rama Battistu!!i Dn!o Battistu!!i no0 ha"e or ma( ha"e in the eight hun$re$ t0ent('three ).29, shares in the capital stock of the corporation INO DNTDS DDF- R-@-* IN %? 0hich 0ere issue$ in the names of the $efen$ants in the a#o"e'entitle$ case on or a#out Fe#ruar( 11* 17>2* or at an( $ate thereafter an$ 0hich shares are the su#3ect'matter of the present suit% The compromise agreement 0as appro"e$ #( the trial court on Decem#er :* 17>2* 5 -s a result* the $efen$ants file$ a motion to $ismiss the complaint* on No"em#er 17* 17>:* upon the groun$s6 )1, that the plaintiffs? cause of action ha$ #een 0ai"e$ or a#an$one$4

;1
an$ )2, that the( 0ere estoppe$ from further prosecuting the case since the( ha"e* in effect* ackno0le$ge$ the "ali$it( of the issuance of the $ispute$ .29 shares of stock% The motion 0as $enie$ on =anuar( 2* 17>;% 6 The $efen$ants also file$ a motion to $eclare the $efen$ants Ramon F% $e la Rama* &a! $e la Rama Battistu!!i an$ Dn!o Battistu!!i in contempt of court* for ha"ing "iolate$ the 0rit of preliminar( in3unction 0hen the( entere$ into the aforesai$ compromise agreement 0ith the plaintiffs* #ut the respon$ent 3u$ge $enie$ the sai$ motion for lack of merit% 7 On Fe#ruar( 1/* 17>;* the $efen$ants file$ a motion for the reconsi$eration of the or$er $en(ing their motion to $ismiss the complaint? an$ su#se2uentl(* an -$$en$um thereto* claiming that the respon$ent court has no 3uris$iction to interfere 0ith the management of the corporation #( the #oar$ of $irectors* an$ the enactment of a resolution #( the $efen$ants* as mem#ers of the #oar$ of $irectors of the corporation* allo0ing the sale of the .29 shares of stock to the $efen$ants 0as purel( a management concern 0hich the courts coul$ not interfere 0ith% Jhen the trial court $enie$ sai$ motion an$ its a$$en$um* the $efen$ants file$ the instant petition for certiorari for the re"ie0 of sai$ or$ers% The petition is 0ithout merit% The 2uestione$ or$er $en(ing the petitioners? motion to $ismiss the complaint is merel( interlocutor( an$ cannot #e the su#3ect of a petition for certiorari% The proper proce$ure to #e follo0e$ in such a case is to continue 0ith the trial of the case on the merits an$* if the $ecision is a$"erse* to reiterate the issue on appeal% It 0oul$ #e a #reach of or$erl( proce$ure to allo0 a part( to come #efore this ourt e"er( time an or$er is issue$ 0ith 0hich he $oes not agree% Besi$es* the or$er $en(ing the petitioners? motion to $ismiss the complaint 0as not capriciousl(* ar#itraril(* or 0himsicall( issue$* or that the respon$ent court lacke$ 3uris$iction o"er the cause as to 0arrant the issuance of the 0rit pra(e$ for% -s foun$ #( the respon$ent 3u$ge* the petitioners ha"e not 0ai"e$ their cause of action against the petitioners #( entering into a compromise agreement 0ith the other $efen$ants in "ie0 of the e<press pro"ision of the compromise agreement that the same +shall not in an( 0a( constitute or #e consi$ere$ a 0ai"er or a#an$onment of an( claim or cause of action against the other $efen$ants%+ There is also no estoppel #ecause there is nothing in the agreement 0hich coul$ #e construe$ as an affirmati"e a$mission #( the plaintiff of the "ali$it( of the resolution of the $efen$ants 0hich is no0 sought to #e 3u$iciall( $eclare$ null an$ "oi$% The foregoing circumstances an$ the fact that no consi$eration 0as mentione$ in the agreement for the transfer of rights to the sai$ shares of stock to the plaintiffs are sufficient to sho0 that the agreement 0as merel( an a$mission #( the $efen$ants Ramon $e la Rama* &a! $e la Rama Battistu!!i an$ Dn!o Battistu!!i of the "ali$it( of the claim of the plaintiffs% The claim of the petitioners* in their -$$en$um to the motion for reconsi$eration of the or$er $en(ing the motion to $ismiss the complaint* 2uestioning the trial court?s 3uris$iction on matters affecting the management of the corporation* is 0ithout merit% The 0ell' kno0n rule is that courts cannot un$ertake to control the $iscretion of the #oar$ of $irectors a#out a$ministrati"e matters as to 0hich the( ha"e legitimate po0er of* 19 action an$ contractsintra !ires entere$ into #( the #oar$ of $irectors are #in$ing upon the corporation an$ courts 0ill not interfere unless such contracts are so unconsciona#le an$ oppressi"e as to amount to a 0anton $estruction of the rights of the minorit(% 11 In the instant case* the plaintiffs a"er that the $efen$ants ha"e conclu$e$ a transaction among themsel"es as 0ill result to serious in3ur( to the interests of the plaintiffs* so that the trial court has 3uris$iction o"er the case% The petitioners further conten$ that the proper reme$( of the plaintiffs 0oul$ #e to institute a $eri"ati"e suit against the petitioners in the name of the corporation in or$er to secure a #in$ing relief after e<hausting all the possi#le reme$ies a"aila#le 0ithin the corporation% -n in$i"i$ual stockhol$er is permitte$ to institute a $eri"ati"e suit on #ehalf of the corporation 0herein he hol$s stock in or$er to protect or "in$icate corporate rights* 0hene"er the officials of the corporation refuse to sue* or are the ones to #e sue$ or hol$ the control of the corporation% In such actions* the suing stockhol$er is regar$e$ as a nominal part(* 0ith the corporation as the real part( in interest% 1; In the case at #ar* ho0e"er* the plaintiffs are alleging an$ "in$icating their o0n in$i"i$ual interests or pre3u$ice* an$ not that of the corporation% -t an( rate* it is (et too earl( in the procee$ings since the issues ha"e not #een 3oine$% Besi$es* mis3oin$er of parties is not a groun$ to $ismiss an action% 13 J5DRDFORD* the petition shoul$ #e* as it is here#( DIS@ISSDD for lack of merit% Jith costs against the petitioners% SO ORDDRDD% Cntonio, Cquino, #antos and C'ad #antos JJ., concur. Go@o'(?$% A#. S$c*r%+%$# a'& EIcha'($ CoCC%##%o' [GR L3=5911, 11 ABr%/ 1979] -ac+#7 [SD ase 19>;] On 22 Octo#er 17>8* =ohn Cokong0ei =r%* as stockhol$er of San @iguel orporation* file$ 0ith the Securities an$ D<change ommission )SD , a petition for +$eclaration of nullit( of amen$e$ #('la0s* cancellation of certificate of filing of amen$e$ #('la0s* in3unction an$ $amages 0ith pra(er for a preliminar( in3unction+ against the ma3orit( of the mem#ers of the Boar$ of Directors an$ San @iguel orporation as an un0illing petitioner% -s a first cause of action* Cokong0ei allege$ that on 1. Septem#er 17>8* -n$res Soriano* =r%* =ose @% Soriano* Dnri2ue No#el* -ntonio Ro<as* Dmeterio BuLao* Jalthro$e B% on$e* @iguel Ortigas* an$ -ntonio &rieto amen$e$ #( #(la0s of the corporation* #asing their authorit( to $o so on a resolution of the stockhol$ers a$opte$ on 19 @arch 1781* 0hen the outstan$ing capital stock of the corporation 0as onl( &>/*197%>:/%//* $i"i$e$ into ;*;19*7>: common shares at &1/%// per share an$ 1;/*/// preferre$ shares at &1//%// per share% -t the time of the amen$ment* the outstan$ing an$ pai$ up shares totalle$ 9/*12>*/:9* 0ith a total par "alue of &9/1*2>/*:9/%//% It 0as conten$e$ that accor$ing to section 22 of the orporation Fa0 an$ -rticle VIII of the #('la0s of the corporation* the po0er to amen$* mo$if(* repeal or a$opt ne0 #('la0s ma( #e $elegate$ to the Boar$ of Directors onl( #( the affirmati"e "ote of stockhol$ers representing not less than 2A9 of the su#scri#e$ an$ pai$ up capital stock of the corporation* 0hich 2A9 shoul$ ha"e #een compute$ on the #asis of the capitali!ation at the time of the amen$ment% Since the amen$ment 0as #ase$ on the 1781 authori!ation* Cokong0ei conten$e$ that the Boar$ acte$ 0ithout authorit( an$ in usurpation of the po0er of the stockhol$ers% -s a secon$ cause of action* it 0as allege$ that the authorit( grante$ in 1781 ha$ alrea$( #een e<ercise$ in 1782 an$ 1789* after 0hich the authorit( of the Boar$ cease$ to e<ist% -s a thir$ cause of action* Cokong0ei a"erre$ that the mem#ership of the Boar$ of Directors ha$ change$ since the authorit( 0as gi"en in 1781* there #eing 8 ne0 $irectors% -s a fourth cause of action* it 0as claime$ that prior to the 2uestione$ amen$ment* Cokog0ei ha$ all the 2ualifications to #e a $irector of the corporation* #eing a su#stantial stockhol$er thereof4 that as a stockhol$er* Cokong0ei ha$ ac2uire$ rights inherent in stock o0nership* such as the rights to "ote an$ to #e "ote$ upon in the election of $irectors4 an$ that in amen$ing the #('la0s* Soriano* et% al% purposel( pro"i$e$ for Cokong0ei?s $is2ualification an$ $epri"e$ him of

;2
his "este$ right as afore'mentione$* hence the amen$e$ #('la0s are null an$ "oi$% -s a$$itional causes of action* it 0as allege$ that corporations ha"e no inherent po0er to $is2ualif( a stockhol$er from #eing electe$ as a $irector an$* therefore* the 2uestione$ act is ultra "ires an$ "oi$4 that -n$res @% Soriano* =r% an$Aor =ose @% Soriano* 0hile representing other corporations* entere$ into contracts )specificall( a management contract, 0ith the corporation* 0hich 0as a"o0e$ #ecause the 2uestione$ amen$ment ga"e the Boar$ itself the prerogati"e of $etermining 0hether the( or other persons are engage$ in competiti"e or antagonistic #usiness4 that the portion of the amen$e$ #('la0s 0hich states that in $etermining 0hether or not a person is engage$ in competiti"e #usiness* the Boar$ ma( consi$er such factors as #usiness an$ famil( relationship* is unreasona#le an$ oppressi"e an$* therefore* "oi$4 an$ that the portion of the amen$e$ #('la0s 0hich re2uires that +all nominations for election of $irectors shall #e su#mitte$ in 0riting to the Boar$ of Directors at least fi"e );, 0orking $a(s #efore the $ate of the -nnual @eeting+ is like0ise unreasona#le an$ oppressi"e% It 0as* therefore* pra(e$ that the amen$e$ #('la0s #e $eclare$ null an$ "oi$ an$ the certificate of filing thereof #e cancelle$* an$ that Soriano* et% al% #e ma$e to pa( $amages* in specifie$ amounts* to Cokong0ei% On 2. Octo#er 17>8* in connection 0ith the same case* Cokong0ei file$ 0ith the Securities an$ D<change ommission an +Ergent @otion for &ro$uction an$ Inspection of Documents+* alleging that the Secretar( of the corporation refuse$ to allo0 him to inspect its recor$s $espite re2uest ma$e #( Cokong0ei for pro$uction of certain $ocuments enumerate$ in the re2uest* an$ that the corporation ha$ #een attempting to suppress information from its stockhol$ers $espite a negati"e repl( #( the SD to its 2uer( regar$ing their authorit( to $o so% The motion 0as oppose$ #( Soriano* et% al% The orporation* Soriano* et% al% file$ their ans0er* an$ their opposition to the petition* respecti"el(% @ean0hile* on 1/ Decem#er 17>8* 0hile the petition 0as (et to #e hear$* the corporation issue$ a notice of special stockhol$ers? meeting for the purpose of +ratification an$ confirmation of the amen$ment to the B('la0s+* setting such meeting for 1/ Fe#ruar( 17>>% This prompte$ Cokong0ei to ask the SD for a summar( 3u$gment insofar as the first cause of action is concerne$* for the allege$ reason that #( calling a special stockhol$ers? meeting for the aforesai$ purpose* Soriano* et% al% a$mitte$ the in"ali$it( of the amen$ments of 1. Septem#er 17>8% The motion for summar( 3u$gment 0as oppose$ #( Soriano* et% al% &en$ing action on the motion* Cokong0ei file$ an +Ergent @otion for the Issuance of a Temporar( Restraining Or$er+* pra(ing that pen$ing the $etermination of Cokong0ei?s application for the issuance of a preliminar( in3unction an$ or Cokong0ei?s motion for summar( 3u$gment* a temporar( restraining or$er #e issue$* restraining Soriano* et% al% from hol$ing the special stockhol$ers? meeting as sche$ule$% This motion 0as $ul( oppose$ #( Soriano* et% al% On 1/ Fe#ruar( 17>>* remation issue$ an or$er $en(ing the motion for issuance of temporar( restraining or$er% -fter receipt of the or$er of $enial* Soriano* et% al% con$ucte$ the special stockhol$ers? meeting 0herein the amen$ments to the #('la0s 0ere ratifie$% On 1: Fe#ruar( 17>>* Cokong0ei file$ a consoli$ate$ motion for contempt an$ for nullification of the special stockhol$ers? meeting% - motion for reconsi$eration of the or$er $en(ing Cokong0ei?s motion for summar( 3u$gment 0as file$ #( Cokong0ei #efore the SD on 1/ @arch 17>>% [SD ase 1:29] Cokong0ei allege$ that* ha"ing $isco"ere$ that the corporation has #een in"esting corporate fun$s in other corporations an$ #usinesses outsi$e of the primar( purpose clause of the corporation* in "iolation of section 1>'1A2 of the orporation Fa0* he file$ 0ith SD * on 2/ =anuar( 17>>* a petition seeking to ha"e -n$res @% Soriano* =r% an$ =ose @% Soriano* as 0ell as the corporation $eclare$ guilt( of such "iolation* an$ or$ere$ to account for such in"estments an$ to ans0er for $amages% On : Fe#ruar( 17>>* motions to $ismiss 0ere file$ #( Soriano* et% al%* to 0hich a consoli$ate$ motion to strike an$ to $eclare Soriano* et% al% in $efault an$ an opposition a$ a#un$antiorem cautelam 0ere file$ #( Cokong0ei% Despite the fact that sai$ motions 0ere file$ as earl( as : Fe#ruar( 17>>* the ommission acte$ thereon onl( on 2; -pril 17>>* 0hen it $enie$ Soriano* et% al%?s motions to $ismiss an$ ga"e them t0o )2, $a(s 0ithin 0hich to file their ans0er* an$ set the case for hearing on -pril 27 an$ @a( 9* 17>>% Soriano* et% al% issue$ notices of the annual stockhol$ers? meeting* inclu$ing in the -gen$a thereof* the +reaffirmation of the authori!ation to the Boar$ of Directors #( the stockhol$ers at the meeting on 2/ @arch 17>2 to in"est corporate fun$s in other companies or #usinesses or for purposes other than the main purpose for 0hich the orporation has #een organi!e$* an$ ratification of the in"estments thereafter ma$e pursuant thereto%+ B( reason of the foregoing* on 2. -pril 17>>* Cokong0ei file$ 0ith the SD an urgent motion for the issuance of a 0rit of preliminar( in3unction to restrain Soriano* et% al% from taking up Item 8 of the -gen$a at the annual stockhol$ers? meeting* re2uesting that the same #e set for hearing on 9 @a( 17>>* the $ate set for the secon$ hearing of the case on the merits% The SD * ho0e"er* cancelle$ the $ates of hearing originall( sche$ule$ an$ reset the same to @a( 18 an$ 1>* 17>>* or after the sche$ule$ annual stockhol$ers? meeting% For the purpose of urging the ommission to act* Cokong0ei file$ an urgent manifestation on 9 @a( 17>>* #ut this not0ithstan$ing* no action has #een taken up to the $ate of the filing of the instant petition% Cokong0ei file$ a petition for petition for certiorari* man$amus an$ in3unction* 0ith pra(er for issuance of 0rit of preliminar( in3unction* 0ith the Supreme ourt* alleging that there appears a $eli#erate an$ concerte$ ina#ilit( on the part of the SD to act% I##*$7 1% Jhether the corporation has the po0er to pro"i$e for the )a$$itional, 2ualifications of its $irectors% 2% Jhether the $is2ualification of a competitor from #eing electe$ to the Boar$ of Directors is a reasona#le e<ercise of corporate authorit(% 9% Jhether the SD gra"el( a#use$ its $iscretion in $en(ing Cokong0ei?s re2uest for an e<amination of the recor$s of San @iguel International* Inc%* a full( o0ne$ su#si$iar( of San @iguel orporation% :% Jhether the SD gra"el( a#use$ its $iscretion in allo0ing the stockhol$ers of San @iguel orporation to ratif( the in"estment of corporate fun$s in a foreign corporation% $/&7 1% It is recogni!e$ #( all authorities that +e"er( corporation has the inherent po0er to a$opt #('la0s ?for its internal go"ernment* an$ to regulate the con$uct an$ prescri#e the rights an$ $uties of its mem#ers to0ar$s itself an$ among themsel"es in reference to the management of its affairs%?+ In this 3uris$iction un$er section 21 of the orporation Fa0* a corporation ma( prescri#e in its #('la0s +the 2ualifications* $uties an$ compensation of $irectors* officers an$ emplo(ees%+ This must necessaril( refer to a 2ualification in a$$ition to that specifie$ #( section 9/ of the orporation Fa0* 0hich pro"i$es that +e"er( $irector must o0n in his right at least one share of the capital stock of the stock corporation of 0hich he is a $irector%+ -n( person +0ho #u(s stock in a corporation $oes so 0ith the kno0le$ge that its affairs are $ominate$ #( a ma3orit( of the stockhol$ers an$ that he implie$l( contracts that the 0ill of the ma3orit( shall go"ern in all matters 0ithin the limits of the act of incorporation an$ la0full( enacte$ #('la0s an$ not for#i$$en #( la0%+ To this e<tent* therefore* the stockhol$er ma( #e consi$ere$ to ha"e +parte$ 0ith his personal right or pri"ilege to regulate the $isposition of his propert( 0hich he has in"este$ in the capital stock of the corporation* an$ surren$ere$ it to the 0ill of the ma3orit( of his fello0 incorporators% It can not therefore #e 3ustl( sai$ that the contract* e<press or implie$* #et0een the corporation an$ the stockhol$ers is infringe$ #( an( act of the former 0hich is authori!e$ #( a ma3orit(%+ &ursuant to section 1. of the orporation Fa0* an( corporation ma( amen$ its articles of incorporation #( a "ote or 0ritten assent of the stockhol$ers representing at least t0o'thir$s of the su#scri#e$ capital stock of the corporation% If the amen$ment changes* $iminishes or restricts the rights of the e<isting sharehol$ers* then the $issenting minorit( has onl( one right* "i!%6 +to o#3ect thereto in 0riting an$ $eman$ pa(ment for his share%+ En$er section 22 of the same la0* the o0ners of the ma3orit( of the su#scri#e$ capital stock ma( amen$ or repeal an( #('la0 or a$opt ne0 #('la0s% It cannot #e sai$* therefore* that Cokong0ei has a "este$ right to #e electe$ $irector* in the face of the fact that the la0 at the time such right as stockhol$er 0as ac2uire$ containe$ the prescription that the corporate charter an$ the #('la0 shall #e su#3ect to amen$ment* alteration an$ mo$ification%

;9
2% -lthough in the strict an$ technical sense* $irectors of a pri"ate corporation are not regar$e$ as trustees* there cannot #e an( $ou#t that their character is that of a fi$uciar( insofar as the corporation an$ the stockhol$ers as a #o$( are concerne$% -s agents entruste$ 0ith the management of the corporation for the collecti"e #enefit of the stockhol$ers* +the( occup( a fi$uciar( relation* an$ in this sense the relation is one of trust%+ +The or$inar( trust relationship of $irectors of a corporation an$ stockhol$ers is not a matter of statutor( or technical la0% It springs from the fact that $irectors ha"e the control an$ gui$ance of corporate affairs an$ propert( an$ hence of the propert( interests of the stockhol$ers% D2uit( recogni!es that stockhol$ers are the proprietors of the corporate interests an$ are ultimatel( the onl( #eneficiaries thereof%+ - $irector is a fi$uciar(% Their po0ers are po0ers in trust% 5e 0ho is in such fi$uciar( position cannot ser"e himself first an$ his cestuis secon$% 5e cannot manipulate the affairs of his corporation to their $etriment an$ in $isregar$ of the stan$ar$s of common $ecenc(% 5e cannot #( the inter"ention of a corporate entit( "iolate the ancient precept against ser"ing t0o masters% 5e cannot utili!e his insi$e information an$ strategic position for his o0n preferment% 5e cannot "iolate rules of fair pla( #( $oing in$irectl( through the corporation 0hat he coul$ not $o so $irectl(% 5e cannot "iolate rules of fair pla( #( $oing in$irectl( through the corporation 0hat he coul$ not $o so $irectl(% 5e cannot use his po0er for his personal a$"antage an$ to the $etriment of the stockhol$ers an$ cre$itors no matter ho0 a#solute in terms that po0er ma( #e an$ no matter ho0 meticulous he is to satisf( technical re2uirements% For that po0er is at all times su#3ect to the e2uita#le limitation that it ma( not #e e<ercise$ for the aggran$i!ement* preference* or a$"antage of the fi$uciar( to the e<clusion or $etriment of the cestuis% The $octrine of +corporate opportunit(+ is precisel( a recognition #( the courts that the fi$uciar( stan$ar$s coul$ not #e uphel$ 0here the fi$uciar( 0as acting for t0o entities 0ith competing interests% This $octrine rests fun$amentall( on the unfairness* in particular circumstances* of an officer or $irector taking a$"antage of an opportunit( for his o0n personal profit 0hen the interest of the corporation 3ustl( calls for protection% It is not $enie$ that a mem#er of the Boar$ of Directors of the San @iguel orporation has access to sensiti"e an$ highl( confi$ential information* such as6 )a, marketing strategies an$ pricing structure4 )#, #u$get for e<pansion an$ $i"ersification4 )c, research an$ $e"elopment4 an$ )$, sources of fun$ing* a"aila#ilit( of personnel* proposals of mergers or tie'ups 0ith other firms% It is o#"iousl( to pre"ent the creation of an opportunit( for an officer or $irector of San @iguel orporation* 0ho is also the officer or o0ner of a competing corporation* from taking a$"antage of the information 0hich he ac2uires as $irector to promote his in$i"i$ual or corporate interests to the pre3u$ice of San @iguel orporation an$ its stockhol$ers* that the 2uestione$ amen$ment of the #('la0s 0as ma$e% ertainl(* 0here t0o corporations are competiti"e in a su#stantial sense* it 0oul$ seem impro#a#le* if not impossi#le* for the $irector* if he 0ere to $ischarge effecti"el( his $ut(* to satisf( his lo(alt( to #oth corporations an$ place the performance of his corporation $uties a#o"e his personal concerns% The offer an$ assurance of Cokong0ei that to a"oi$ an( possi#ilit( of his taking unfair a$"antage of his position as $irector of San @iguel orporation* he 0oul$ a#sent himself from meetings at 0hich confi$ential matters 0oul$ #e $iscusse$* 0oul$ not $etract from the "ali$it( an$ reasona#leness of the #('la0s in"ol"e$% -part from the impractical results that 0oul$ ensue from such arrangement* it 0oul$ #e inconsistent 0ith Cokong0ei?s primar( moti"e in running for #oar$ mem#ership K 0hich is to protect his in"estments in San @iguel orporation% @ore important* such a propose$ norm of con$uct 0oul$ #e against all accepte$ principles un$erl(ing a $irector?s $ut( of fi$elit( to the corporation* for the polic( of the la0 is to encourage an$ enforce responsi#le corporate management% 9% &ursuant to the secon$ paragraph of section ;1 of the orporation Fa0* +)t,he recor$ of all #usiness transactions of the corporation an$ minutes of an( meeting shall #e open to the inspection of an( $irector* mem#er or stockhol$er of the corporation at reasona#le hours%+ The stockhol$er?s right of inspection of the corporation?s #ooks an$ recor$s is #ase$ upon their o0nership of the assets an$ propert( of the corporation% It is* therefore* an inci$ent of o0nership of the corporate propert(* 0hether this o0nership or interest #e terme$ an e2uita#le o0nership* a #eneficial o0nership* or a 2uasi'o0nership% This right is pre$icate$ upon the necessit( of self' protection% It is generall( hel$ #( ma3orit( of the courts that 0here the right is grante$ #( statute to the stockhol$er* it is gi"en to him as such an$ must #e e<ercise$ #( him 0ith respect to his interest as a stockhol$er an$ for some purpose germane thereto or in the interest of the corporation% In other 0or$s* the inspection has to #e germane to the petitioner?s interest as a stockhol$er* an$ has to #e proper an$ la0ful in character an$ not inimical to the interest of the corporation% The +general rule that stockhol$ers are entitle$ to full information as to the management of the corporation an$ the manner of e<pen$iture of its fun$s* an$ to inspection to o#tain such information* especiall( 0here it appears that the compan( is #eing mismanage$ or that it is #eing manage$ for the personal #enefit of officers or $irectors or certain of the stockhol$ers to the e<clusion of others%+ Jhile the right of a stockhol$er to e<amine the #ooks an$ recor$s of a corporation for a la0ful purpose is a matter of la0* the right of such stockhol$er to e<amine the #ooks an$ recor$s of a 0holl('o0ne$ su#si$iar( of the corporation in 0hich he is a stockhol$er is a $ifferent thing% Stockhol$ers are entitle$ to inspect the #ooks an$ recor$s of a corporation in or$er to in"estigate the con$uct of the management* $etermine the financial con$ition of the corporation* an$ generall( take an account of the ste0ar$ship of the officers an$ $irectors% herein* consi$ering that the foreign su#si$iar( is 0holl( o0ne$ #( San @iguel orporation an$* therefore* un$er Its control* it 0oul$ #e more in accor$ 0ith e2uit(* goo$ faith an$ fair $ealing to construe the statutor( right of petitioner as stockhol$er to inspect the #ooks an$ recor$s of the corporation as e<ten$ing to #ooks an$ recor$s of such 0holl( o0ne$ su#si$iar( 0hich are in the corporation?s possession an$ control% :% Section 1>'1A2 of the orporation Fa0 allo0s a corporation to +in"est its fun$s in an( other corporation or #usiness or for an( purpose other than the main purpose for 0hich it 0as organi!e$+ pro"i$e$ that its Boar$ of Directors has #een so authori!e$ #( the affirmati"e "ote of stockhol$ers hol$ing shares entitling them to e<ercise at least t0o'thir$s of the "oting po0er% If the in"estment is ma$e in pursuance of the corporate purpose* it $oes not nee$ the appro"al of the stockhol$ers% It is onl( 0hen the purchase of shares is $one solel( for in"estment an$ not to accomplish the purpose of its incorporation that the "ote of appro"al of the stockhol$ers hol$ing shares entitling them to e<ercise at least t0o'thir$s of the "oting po0er is necessar(% -s state$ #( the corporation* the purchase of #eer manufacturing facilities #( S@ 0as an in"estment in the same #usiness state$ as its main purpose in its -rticles of Incorporation* 0hich is to manufacture an$ market #eer% It appears that the original in"estment 0as ma$e in 17:>'17:.* 0hen S@ * then San @iguel Bre0er(* Inc%* purchase$ a #eer #re0er( in 5ongkong )5ongkong Bre0er( O Distiller(* Ft$%, for the manufacture an$ marketing of San @iguel #eer thereat% Restructuring of the in"estment 0as ma$e in 17>/'17>1 thru the organi!ation of S@I in Bermu$a as a ta< free reorgani!ation% -ssuming arguen$o that the Boar$ of Directors of S@ ha$ no authorit( to make the assaile$ in"estment* there is no 2uestion that a corporation* like an in$i"i$ual* ma( ratif( an$ there#( ren$er #in$ing upon it the originall( unauthori!e$ acts of its officers or other agents% This is true #ecause the 2uestione$ in"estment is neither contrar( to la0* morals* pu#lic or$er or pu#lic polic(% It is a corporate transaction or contract 0hich is 0ithin the corporate po0ers* #ut 0hich is $efecti"e from a purporte$ failure to o#ser"e in its e<ecution the re2uirement of the la0 that the in"estment must #e authori!e$ #( the affirmati"e "ote of the stockhol$ers hol$ing t0o'thir$s of the "oting po0er% This re2uirement is for the #enefit of the stockhol$ers% The stockhol$ers for 0hose #enefit the re2uirement 0as enacte$ ma(* therefore* ratif( the in"estment an$ its ratification #( sai$ stockhol$ers o#literates an( $efect 0hich it ma( ha"e ha$ at the outset% Besi$es* the in"estment 0as for the purchase of #eer manufacturing an$ marketing facilities 0hich is apparentl( rele"ant to the corporate purpose% The mere fact that the corporation su#mitte$ the assaile$ in"estment to the stockhol$ers for ratification at the annual meeting of 1/ @a( 17>> cannot #e construe$ as an a$mission that the corporation ha$ committe$ an ultra "ires act* consi$ering the common practice of corporations of perio$icall( su#mitting for the ratification of their stockhol$ers the acts of their $irectors* officers an$ managers% a% @ust act as a #o$(

;:
S$c+%o' ;5. Corporate o""icers, quorum. V Imme$iatel( after their election* the $irectors of a corporation must formall( organi!e #( the election of a presi$ent* 0ho shall #e a $irector* a treasurer 0ho ma( or ma( not #e a $irector* a secretar( 0ho shall #e a resi$ent an$ citi!en of the &hilippines* an$ such other officers as ma( #e pro"i$e$ for in the #('la0s% -n( t0o )2, or more positions ma( #e hel$ concurrentl( #( the same person* e<cept that no one shall act as presi$ent an$ secretar( or as presi$ent an$ treasurer at the same time% The $irectors or trustees an$ officers to #e electe$ shall perform the $uties en3oine$ on them #( la0 an$ the #('la0s of the corporation% Enless the articles of incorporation or the #('la0s pro"i$e for a greater ma3orit(* a ma3orit( of the num#er of $irectors or trustees as fi<e$ in the articles of incorporation shall constitute a 2uorum for the transaction of corporate #usiness* an$ e"er( $ecision of at least a ma3orit( of the $irectors or trustees present at a meeting at 0hich there is a 2uorum shall #e "ali$ as a corporate act* e<cept for the election of officers 0hich shall re2uire the "ote of a ma3orit( of all the mem#ers of the #oar$% Directors or trustees cannot atten$ or "ote #( pro<( at #oar$ meetings% )99a,

I#/aC%c 6%r$c+ora+$ o, +h$ Ph%/%BB%'$# A#. Co*r+ o, ABB$a/# [GR 117:97, 1= Ma2 1997] -ac+#7 Sometime in 17>1* Islamic lea$ers of all @uslim ma3or tri#al groups in the &hilippines hea$e$ #( Dean esar -$i# @a3ul organi!e$ an$ incorporate$ the ISF-@I DIRD TOR-TD OF T5D &5IFI&&INDS )ID&,* the primar( purpose of 0hich is to esta#lish an Islamic enter in [ue!on it( for* the construction of a +@os2ue )pra(er place* @a$rasah )-ra#ic School,* an$ other religious infrastructures+ so as to facilitate the effecti"e practice of Islamic faith in the area% To0ar$s this en$* that is* in the same (ear* the Fi#(an go"ernment $onate$ mone( to the ID& to purchase lan$ at uliat* Tan$ang Sora* [ue!on it(* to #e use$ as a enter for the Islamic populace% The lan$* 0ith an area of :7*8;2 s2uare meters* 0e co"ere$ #( t0o titles6 T Ts RT'28;2/ )1>8818, an$ RT'28;21 )1>/;8>,* #oth registere$ in the name of ID&% In 17>1* the Boar$ of Trustees of the ID& 0as compose$ of Senator @amintal Tamano* ongressman -li Dimaporo* ongressman Salipa$a &en$atun* Dean esar -$i# @a3ul* Sultan 5arun -l'Rashi$ Fucman* Delegate -hma$ -lonto* ommissioner Datu @ama Sinsuat an$ @a(or -minka$ra -#u#akar% In 17>2* after the purchase of the lan$ #( the Fi#(an go"ernment in the name of ID&* @artial Fa0 0as $eclare$ #( the late &resi$ent Fer$inan$ @arcos% @ost of the mem#ers of the 17>1 Boar$ of Trustees like Senators @amintal Tamano* Salipa$a &en$atun* -hma$ -lonto* an$ ongressman -l'Rashi$ Fucman fle0 to the @i$$le Dast to escape political persecution% Thereafter* t0o @uslim groups sprung* the arpi!o Croup* hea$e$ #( Dngineer Farouk arpi!o* an$ the -##as Croup* le$ #( @rs% Nora($a Tamano an$ -tt(% Fir$aussi -##as% Both groups claime$ to #e the legitimate ID&% Significantl(* on 9 Octo#er 17.8* the SD * in a suit #et0een these t0o conten$ing groups* came out 0ith a Decision in SD ase 28.> $eclaring the election of #oth the arpi!o Croup an$ the -##as Croup as ID& #oar$ mem#ers to #e null an$ "oi$% Neither group* ho0e"er* took the necessar( steps prescri#e$ #( the SD in its 9 Octo#er 17.8 Decision* an$ no "ali$ election of the mem#ers of the Boar$ of Trustees of ID& 0as e"er calle$% -lthough the arpi!o Croup attempte$ to su#mit a set of #('la0s* the SD foun$ that* asi$e from that Dngineer Farouk arpi!o an$ -tt(% @usi# Buat* those 0ho prepare$ an$ a$opte$ the #('la0s 0ere not #ona fi$e mem#ers of the ID&* thus ren$ering the a$option of the #('la0s like0ise null an$ "oi$% On 2/ -pril 17.7* 0ithout ha"ing #een properl( electe$ as ne0 mem#ers of the Boar$ of Trustees of ID&* the arpi!o Croup cause$ to #e signe$ an allege$ Boar$ Resolution of the ID&* authori!ing the sale of the su#3ect t0o parcels of lan$ to the Iglesia ni risto )IN , for a consi$eration of &22*9:9*://%//* 0hich sale 0as e"i$ence$ #( a Dee$ of -#solute Sale 12 $ate$ 2/ -pril 17.7% On 9/ @a( 1771* the 17>1 ID& Boar$ of Trustees hea$e$ #( former Senator @amintal Tamano* or the Tamano Croup* file$ a petition #efore the SD )SD ase :/12, seeking to $eclare null an$ "oi$ the Dee$ of -#solute Sale signe$ #( the arpi!o Croup an$ the IN since the group of Dngineer arpi!o 0as not the legitimate Boar$ of Trustees of the ID&% @ean0hile* IN * pursuant to the Dee$ of -#solute Sale e<ecute$ in its fa"or* file$ an action for Specific &erformance 0ith Damages against the "en$or* arpi!o Croup* #efore Branch .1 of the Regional Trial ourt of [ue!on it( ) i"il ase ['7/'879>, to compel sai$ group to clear the propert( of s2uatters an$ $eli"er complete an$ full ph(sical possession thereof to IN % Fike0ise* IN file$ a motion in the same case to compel one @rs% Feticia &% Figon to pro$uce an$ surren$er to the Register of Dee$s of [ue!on it( the o0ner?s $uplicate cop( of T Ts RT'28;21 an$ RT'28;2/ co"ering the t0o parcels of lan$* so that the sale in IN ?s fa"or ma( #e registere$ an$ ne0 titles issue$ in the name of IN % @rs% Figon 0as allege$ to #e the mortgagee of the t0o parcels of lan$ e<ecute$ in her fa"or #( certain -#$ulrahman R%T% Fin!ag an$ Ro0ai$a Busran'Sampaco claime$ to #e in #ehalf of the arpi!o Croup% =u$ge elia Fipana' Re(es of Branch .1* Regional Trial ourt of [ue!on it(* $enie$ ID&?s motion to inter"ene on the groun$ of lack of 3uri$ical personalit( of the ID&'Tamano Croup an$ that the issues #eing raise$ #( 0a( of inter"ention are intra'corporate in nature* 3uris$iction thereto properl( pertaining to the SD % -pprise$ of the pen$enc( of SD ase :/12 in"ol"ing the contro"erte$ status of the ID&' arpi!o Croup #ut 0ithout 0aiting for the outcome of sai$ case* =u$ge Re(es* on 12 Septem#er 1771* ren$ere$ &artial =u$gment in i"il ase ['7/'879> or$ering the ID&' arpi!o Croup to compl( 0ith its o#ligation un$er the Dee$ of Sale of clearing the su#3ect lots of s2uatters an$ of $eli"ering the actual possession thereof to IN % Thereupon =u$ge Re(es in another Or$er* $ate$ 2 @arch 1772* pertaining also to i"il ase ['7/'879>* treate$ IN as the rightful o0ner of the real properties an$ $ispose$% On 8 -pril 1772* the Or$er 0as amen$e$ #( =u$ge Re(es $irecting Figon +to $eli"er the o0ner?s $uplicate copies of T T Nos% RT'28;21 )1>/;8>, an$ RT'28;2/ )1>8818, to the Register of Dee$s of [ue!on it( for the purposes state$ in the Or$er of @arch 2* 1772%+ @ortgagee Figon 0ent to the ourt of -ppeals* thru a petition for certiorari ) -'CR S&'2>7>9,* assailing the Or$ers of =u$ge Re(es% The appellate court $ismisse$ her petition on 2. Octo#er 1772% En$aunte$* Figon file$ a petition for re"ie0 #efore the Supreme ourt )CR 1/>>;1,% In the meantime* the SD * on ; =ul( 1779* finall( came out 0ith a Decision in SD ase :/12* Declaring the #('la0s su#mitte$ #( the ID&' apri!o group as unauthori!e$* an$ hence* null an$ "oi$4 $eclaring the sale of the t0o )2, parcels of lan$ in [ue!on it( co"ere$ #( the Dee$ of -#solute Sale entere$ into #( Iglesia ni Gristo an$ the Islamic Directorate of the &hilippines* Inc% null an$ "oi$4 $eclaring the election of the Boar$ of Directors 29 of the corporation from 17.8 to 1771 as null an$ "oi$4 an$ Declaring the acceptance of the respon$ents* e<cept Farouk arpi!o an$ @usni# Buat* as mem#ers of the ID& null an$ "oi$% The IN file$ a @otion for Inter"ention* $ate$ > Septem#er 1779* in SD ase :/12* #ut the same 0as $enie$ on account of the fact that the $ecision of the case ha$ #ecome final an$ e<ecutor(* no appeal ha"ing #een taken therefrom% IN ele"ate$ SD ase :/12 to the ourt of -ppeals #( 0a( of a special ci"il action for certiorari ) -'CR S& 9927;,% On 2. Octo#er 177:* the appeallate court promulgate$ a Decision granting IN ?s petition% The portion of the SD Decision in SD ase :/12 0hich $eclare$ the sale of the t0o )2, lots in 2uestion to IN as "oi$ 0as or$ere$ set asi$e #( the ourt of -ppeals% Thus* the ID&'Tamano Croup #rought the petition for re"ie0* $ate$ 21 Decem#er 177:* to the Supreme ourt% Jhile the petition 0as pen$ing* ho0e"er* the Supreme ourt ren$ere$ 3u$gment in CR 1/>>;1 on the petition file$ #( @rs% Feticia &% Figon% The Decision* $ate$ 1 =une 177;* $enie$ the Figon petition an$ affirme$ the 2. Octo#er 1772 Decision of the ourt of -ppeals in -'CR S&'2>7>9 0hich sustaine$ the Or$er of =u$ge Re(es compelling mortgagee Figon to surren$er the o0ner?s $uplicate copies of T Ts RT'28;21 )1>/;8>, an$ RT'28;2/ )1>8818, to the Register of Dee$s of [ue!on it( so that the Dee$ of -#solute Sale in IN ?s fa"or ma( #e properl( registere$% I##*$7 Jhether the Tan$ang Sora propert( 0as legitimatel( sol$ to the IN %

;;
$/&7 -s far #ack as 9 Octo#er 17.8* the SD * in ase 28.>* in a suit #et0een the arpi!o Croup an$ the -##as Croup* alrea$( $eclare$ the election of the arpi!o Croup )as 0ell as the -##as Croup, to the ID& Boar$ as null an$ "oi$ for #eing "iolati"e of the -rticles of Incorporation% Nothing thus #ecomes more settle$ than that the ID&' arpi!o Croup 0ith 0hom IN contracte$ is a fake Boar$% &remises consi$ere$* all acts carrie$ out #( the arpi!o Boar$* particularl( the sale of the Tan$ang Sora propert(* allege$l( in the name of the ID&* ha"e to #e struck $o0n for ha"ing #een $one 0ithout the consent of the ID& thru a legitimate Boar$ of Trustees% -rticle 191. of the Ne0 i"il o$e la(s $o0n the essential re2uisites of contracts* an$ 0here all these elements must #e present to constitute a "ali$ contract% For* 0here e"en one is a#sent* the contract is "oi$% Specificall(* consent is essential for the e<istence of a contract* an$ 0here it is 0anting* the contract is non'e<istent% 5erein* the ID&* o0ner of the su#3ect parcels of lan$* ne"er ga"e its consent* thru a legitimate Boar$ of Trustees* to the $ispute$ Dee$ of -#solute Sale e<ecute$ in fa"or of IN % This is* therefore* a case not onl( of "itiate$ consent* #ut one 0here consent on the part of one of the suppose$ contracting parties is totall( 0anting% Inelucta#l(* the su#3ect sale is "oi$ an$ pro$uces no effect 0hatsoe"er% The arpi!o Croup'IN sale is further $eeme$ null an$ "oi$ a# initio #ecause of the arpi!o Croup?s failure to compl( 0ith Section :/ of the orporation o$e pertaining to the $isposition of all or su#stantiall( all assets of the corporation% The Tan$ang Sora propert(* it appears from the recor$s* constitutes the onl( propert( of the ID&% 5ence* its sale to a thir$'part( is a sale or $isposition of all the corporate propert( an$ assets of ID& falling s2uarel( 0ithin the contemplation of the foregoing section% For the sale to #e "ali$* the ma3orit( "ote of the legitimate Boar$ of Trustees* concurre$ in #( the "ote of at least 2A9 of the #ona fi$e mem#ers of the corporation shoul$ ha"e #een o#taine$% These t0in re2uirements 0ere no met as the arpi!o Croup 0hich "ote$ to sell the Tan$ang Sora propert( 0as a fake Boar$ of Trustees* an$ those 0hose names an$ signatures 0ere affi<e$ #( the arpi!o Croup together 0ith the sham Boar$ Resolution authori!ing the negotiation for the sale 0ere* from all in$ications* not #ona fi$e mem#ers of the ID& as the( 0ere ma$e to appear to #e% -pparentl(* there are onl( 1; official mem#ers of the ID& inclu$ing the . mem#ers of the Boar$ of Trustees% -ll tol$* the $ispute$ Dee$ of -#solute Sale e<ecute$ #( the fake arpi!o Boar$ an$ IN 0as intrinsicall( "oi$ a# initio% Facts6 Orientalist ompan( 0as engage$ in the #usiness of maintaining an$ con$ucting a theatre in the cit( of @anila for the e<hi#ition of cinematographic films% engage$ in the #usiness of marketing films for a manufacturer or manufacturers* there engage$ in the pro$uction or $istri#ution of cinematographic material% In this enterprise the plaintiff 0as represente$ in the cit( of @anila #( his son* =ose Ramire!% The $irectors of the Orientalist ompan( #ecame apprise$ of the fact that the plaintiff in &aris ha$ control of the agencies for t0o $ifferent marks of films* namel(* the QDclair FilmsR an$ the Q-ilano Films4R an$ negotiations 0ere #egun 0ith sai$ officials of the Orientalist ompan( #( =ose Ramire!* as agent of the plaintiff% The $efen$ant Ramon =% Fernan$e!* one of the $irectors of the Orientalist ompan( an$ also its treasure* 0as chiefl( acti"e in this matter% Ramon =% Fernan$e! ha$ an informal conference 0ith all the mem#ers of the compan(Ps #oar$ of $irectors e<cept one* an$ 0ith appro"al of those 0ith 0hom he ha$ communicate$* a$$resse$ a letter to =ose Ramire!* in @anila* accepting the offer containe$ in the memoran$um the e<clusi"e agenc( of the ,clair films an$ @ilano films% In $ue time the films #egan to arri"e in @anila* it appears that the Orientalist ompan( 0as 0ithout fun$s to meet these o#ligations% -ction 0as institute$ #( the plaintiff to Orientalist ompan(* an$ Ramon =% Fernan$e! for sum of mone(% Issue6 JON the Orientalist o% is lia#le for the acts of its treasurer* Fernan$e!M 5el$6 Ies% It 0ill #e o#ser"e$ that Ramon =% Fernan$e! 0as the particular officer an$ mem#er of the #oar$ of $irectors 0ho 0as most acti"e in the effort to secure the films for the corporation% The negotiations 0ere con$ucte$ #( him 0ith the kno0le$ge an$ consent of other mem#ers of the #oar$4 an$ the contract 0as ma$e 0ith their prior appro"al% In the light of all the circumstances of the case* 0e are of the opinion that the contracts in 2uestion 0ere thus inferentiall( appro"e$ #( the compan(Ps #oar$ of $irectors an$ that the compan( is #oun$ unless the su#se2uent failure of the stockhol$ers to appro"e sai$ contracts ha$ the effect of a#rogating the lia#ilit( thus create$%

G.R. No. L31::95

A*(*#+ 1=, 1967

T E B!AR6 !- LI"UI6AT!RS1 r$Br$#$'+%'( T E G!1ERNMENT !- T E REPUBLIC !- T E P ILIPPINES, plaintiff' appellant* "s% EIRS !- MA0IM! M. KALA8, ; )UAN B!CAR, ESTATE !- T E 6ECEASE6 CASIMIR! GARCIA, 3 a'& LE!N!R M!LL, $efen$ants'appellees% SANC E<, J.: The National oconut orporation )N- O O* for short, 0as chartere$ as a non'profit go"ernmental organi!ation a"o0e$l( for the protection* preser"ation an$ $e"elopment of the coconut in$ustr( in the &hilippines% Ceneral manager an$ #oar$ chairman 0as @a<imo @% Gala04 $efen$ants =uan Bocar an$ asimiro Carcia 0ere mem#ers of the Boar$4 $efen$ant Feonor @oll #ecame $irector onl( on Decem#er 22* 17:>% -n unhapp( chain of e"ents conspire$ to $eter N- O O from fulfilling some contracts entere$% Nature super"ene$% Four $e"astating t(phoons "isite$ the &hilippines6 the first in Octo#er* the secon$ an$ thir$ in No"em#er* an$ the fourth in Decem#er* 17:>% oconut trees throughout the countr( suffere$ e<tensi"e $amage% opra pro$uction $ecrease$% &rices spiralle$% Jarehouses 0ere $estro(e$% ash re2uirements $ou#le$% Depri"ation of e<port facilities increase$ the time necessar( to accumulate shiploa$s of copra% [uick turno"ers #ecame impossi#le* financing a pro#lem% The #u(ers threatene$ $amage suits% -ll the settlements sum up to &1*9:9*2>:%;2% N- O O* represente$ #( the Boar$ of Fi2ui$ators* seeks to reco"er the a#o"e sum of &1*9:9*2>:%;2 from general manager an$ #oar$ chairman @a<imo @% Gala0* an$ $irectors =uan Bocar* asimiro Carcia an$ Feonor @oll% It charges Gala0 0ith negligence un$er -rticle 17/2 of the ol$ i"il o$e )no0 -rticle 21>8* ne0 i"il o$e,4 an$ $efen$ant #oar$ mem#ers* inclu$ing Gala0* 0ith #a$ faith an$Aor #reach of trust for ha"ing appro"e$ the contracts 0ithout prior appro"al of the Boar$% The lo0er court came out 0ith a 3u$gment $ismissing the complaint% 5ence* plaintiff appeale$ $irect to this ourt%&laintiff le"elle$ a ma3or attack on the lo0er court?s hol$ing that Gala03ustifie$l( entere$ into the contro"erte$ contracts 0ithout the prior appro"al of the corporation?s $irectorate% &laintiff leans hea"il( on N- O O?s corporate #('la0s% -rticle IV )#,* hapter III thereof* recites* as amongst the $uties of the general manager* the o#ligation6 +)#, To perform or e<ecute on #ehalf of the orporation upon

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prior appro"al of the Boar$* all contracts necessar( an$ essential to the proper accomplishment for 0hich the organi!e$%R orporation 0as

ISSED6 Jhether or not the acts of the respon$ent as Ceneral @anager 0ithout prior appro"al of the Boar$ are "ali$ corporate acts%

5DFD6 Not of de minimisimportance in a proper approach to the pro#lem at han$* is the nature of a general manager?s position in the corporate structure% - rule that has gaine$ acceptance through the (ears is that a corporate officer +intruste$ 0ith the general management an$ control of its #usiness* has implie$ authorit( to make an( contract or $o an( other act 0hich is necessar( or appropriate to the con$uct of the or$inar( #usiness of the corporation% -s such officer* +he ma(* 0ithout an( special authorit( from the Boar$ of Directors perform all acts of an or$inar( nature* 0hich #( usage or necessit( are inci$ent to his office* an$ ma( #in$ the corporation #( contracts in matters arising in the usual course of #usiness% Settle$ 3urispru$ence has it that 0here similar acts ha"e #een appro"e$ #( the $irectors as a matter of general practice* custom* an$ polic(* the general manager ma( #in$ the compan( 0ithout formal authori!ation of the #oar$ of $irectors% In "ar(ing language* e<istence of such authorit( is esta#lishe$* #( proof of the course o" 'usiness* the usage and practices of the compan( an$ #( the $no*ledge 0hich the #oar$ of $irectors has* or must #e presumed to ha"e* of acts an$ $oings of its su#or$inates in an$ a#out the affairs of the corporation% In the case at #ar* the practice of the corporation has #een to allo0 its general manager to negotiate an$ e<ecute contracts in its copra tra$ing acti"ities for an$ in N- O O?s #ehalf *ithout prior #oar$ appro"al% If the #('la0s 0ere to #e literall( follo0e$* the #oar$ shoul$ gi"e its stamp of prior appro"al on all corporate contracts% But that #oar$ itself* #( its acts an$ through ac2uiescence* practicall( lai$ asi$e the #('la0 re2uirement of prior appro"al% En$er the gi"en circumstances* the Gala0 contracts are "ali$ corporate acts% Vie0e$ in the light of the entire recor$* the 3u$gment un$er re"ie0 must #e* as it is here#(* affirme$% DN B-N G.R. No. L3;9333 )*'$ 39, 1967

EMILIAN! ACUHA, plaintiff'appellant* "s% BATAC PR!6UCERS C!!PERATI1E MARKETING ASS!CIATI!N, INC., )USTIN! GALAN!, TE!6!R! NARCIS!, PABL! BACTIN, D6R.F EMMANUEL BUMANGLAG, 1ENANCI! 6IRIC, MARC!S ES"UI1EL, E1ARIST! CA!ILI, -I6EL BATTULA4AN, 6AMIAN R!SSINI, RA4MUN6! BATALL!NES, PLACI6! "UIA!IT, a'& LE!N ". 1ERAN! $efen$ants'appellees% -arque; and -arque; "or plainti"">appellant. ,stanislao C. 7ernande; "or de"endants>appellees. MAKALINTAL, J.: -ppeal taken from the or$er $ate$ Septem#er 1/* 1782 of the ourt of First Instance of Ri!al* Branch V )[ue!on it(, $ismissing plaintiff?s complaint on the groun$ that it states no cause of action* an$ $ischarging the 0rit of preliminar( attachment issue$ therein% On -ugust 7* 1782* plaintiff Dmiliano -cuLa file$ a complaint* 0hich 0as later amen$e$ on -ugust 19* against the $efen$ant Batac &ro$ucers ooperati"e @arketing -ssociation* Inc%* hereinafter calle$ the Batac &rocoma* Inc%* or alternati"el(* against all the other $efen$ants name$ in the caption% The complaint allege$* inter alia* that on or a#out @a( ;* 1782 it 0as tentati"el( agree$ upon #et0een plaintiff an$ $efen$ant Feon [% Verano* as @anager of the $efen$ant Batac &rocoma* Inc%* that the former 0oul$ seek an$ o#tain the sum of not less* than &2/*///%// to #e a$"ance$ to the $efen$ant Batac &rocoma* Inc%* to #e utili!e$ #( it as a$$itional fun$s for its Virginia to#acco #u(ing operations $uring the current re$r(ing season4 that plaintiff 0oul$ #e constitute$ as the corporation?s representati"e in @anila to assist in han$ling an$ facilitating its continuous shipments of to#acco an$ their $eli"er( to the re$r(ing plants an$ in spee$ing up the prompt pa(ment an$ collection of all amounts $ue to the corporation for such shipments4 that for his ser"ices plaintiff 0oul$ #e pai$ a remuneration at the rate of &/%;/ per kilo of to#acco4 that sai$ tentati"e agreement 0as fa"ora#l( recei"e$ #( the Boar$ of Directors of the $efen$ant Batac &rocoma Inc%* an$ on @a( 8* 1782 all the $efen$ants name$ a#o"e* 0ho constitute$ the entire Boar$ of Directors of sai$ corporation )e<cept Feon [% Verano* 0ho 0as its @anager,* together 0ith $efen$ants =ustino Calano an$ Teo$oro Narciso* as &resi$ent an$ Vice'&resi$ent* respecti"el(* unanimousl( authori!e$ $efen$ant Feon [% Verano* #( a formal resolution* +to e<ecute an( agreement 0ith an( person or entit(* on #ehalf of the corporation* for the purpose of securing a$$itional fun$s for the corporation* as 0ell as to secure the ser"ices of such person or entit(* in the collection of all pa(ments $ue to the corporation from the &VT- for an( to#acco sol$ an$ $eli"ere$ to sai$ a$ministration4 gi"ing an$ conferring upon the @anager* full an$ complete authorit( to #in$ the corporation 0ith such person or entit( in an( agreement* an$ un$er such consi$erations* 0hich the sai$ @anager ma( $eem e<pe$ient an$ necessar( for that purpose4 that plaintiff 0as ma$e to un$erstan$ #( all of sai$ $efen$ants that the original un$erstan$ing #et0een him an$ $efen$ant Feon [% Verano 0as accepta#le to the corporation* e<cept that the remuneration for the plaintiff?s ser"ices 0oul$ #e &/%9/ per kilo of to#acco4 that on @a( 1/* 1782* the formal +-greement+ 0as e<ecute$ #et0een plaintiff an$ $efen$ant Feon [% Verano* as @anager of the $efen$ant corporation* $ul( authori!e$ #( its Boar$ of Directors for such purpose* an$ signe$ #( $efen$ants =ustino Calano an$ Dr% Dmmanuel Bumanglag as instrumental 0itnesses an$ ackno0le$ge$ #( -tt(% Fernan$o -lcantara* the Secretar( an$ Fegal ounsel of the $efen$ant corporation4 that upon plaintiff?s in2uir(* he 0as assure$ #( these $efen$ants that a formal appro"al of sai$ +-greement+ #( the Boar$ 0as no longer necessar(* as it 0as a mere +formalit(+ appen$e$ to its authori!ing resolution an$ as all the mem#ers of the Boar$ ha$ alrea$( agree$ to the same4 that on the same $ate* @a( 1/* 1782* plaintiff ga"e an$ turne$ o"er to the $efen$ant corporation* thru its treasurer* Domina$or T% ocson the sum of &2/*///%//* in the presence of $efen$ants Feon [% Verano* =ustino Calano* Dr% Dmmanuel

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Bumanglag an$ -tt(% Fernan$o -lcantara* for 0hich sai$ treasurer issue$ to plaintiff its correspon$ing Official Receipt No% 19/.;24 that from then on* plaintiff $iligentl( an$ religiousl( kept his part of the +-greement4+ that plaintiff e"en furnishe$ the $efen$ant corporation* upon re2uest of its @anager Feon [% Verano three thousan$ )9*///, sacks 0hich it utili!e$ in the shipment of its to#acco costing &8*///%// an$ that plaintiff ha$ personall( a$"ance$ out of his o0n personal fun$s the total sum of &;*///%// 0ith the full kno0le$ge* ac2uiescence an$ consent of all the in$i"i$ual $efen$ants4 that after the $efen$ant corporation 0as ena#le$ to replenish its fun$s 0ith continuous collections from the &VT- for to#acco $eli"ere$ $ue to the help* assistance an$ inter"ention of plaintiff* for 0hich the sai$ corporation collecte$ from the &VT- the total sum of &9.1*:7;%//* the +-greement+ 0as $isappro"e$ #( its Boar$ of Directors on =une 8* 1782% Epon the foregoing allegations plaintiff pra(s6 )a, that an or$er of attachment #e issue$ against the properties of $efen$ant corporation4 )#, that after $ue trial* 3u$gment #e ren$ere$ con$emning $efen$ant corporation* or alternati"el(* all the other in$i"i$ual $efen$ants* 3ointl( an$ se"erall(* to compl( 0ith their contractual o#ligations an$ to pa( plaintiff the sum of &9//*///%// for his ser"ices* plus &91*///%// for cash a$"ances ma$e #( him an$ &2;*///%// for attorne(?s fees% On -ugust 1:* 1782* the lo0er court or$ere$ the issuance of a 0rit of preliminar( attachment against the properties of the $efen$ants an$ on the follo0ing $a(* after the plaintiff ha$ poste$ the re2uire$ #on$* the 0rit 0as accor$ingl( issue$ #( the lerk of ourt%@K*phL@.EMt On -ugust 22* 1782* the $efen$ants file$ a motion to $ismiss the complaint on the groun$ that it state$ no cause of action an$ to $ischarge the preliminar( attachment on the groun$ that it 0as improperl( or irregularl( issue$% In support of the motion $efen$ants allege$ that the contract for ser"ices 0as ne"er perfecte$ #ecause it 0as not appro"e$ or ratifie$ #ut 0as instea$ $isappro"e$ #( the Boar$ of Directors of $efen$ant Batac &rocoma* Inc%* an$ that on the #asis of plaintiff?s plea$ings the contract is "oi$ an$ unenforcea#le% Defen$ants further $enie$ the fact that plaintiff ha$ performe$ his part of the contract* alleging that he ha$ not in an( manner inter"ene$ in the $eli"er( an$ pa(ment of to#acco pertaining to the $efen$ant corporation% On -ugust 2;* 1782* plaintiff file$ a 0ritten opposition to the motion to $ismiss an$ to $ischarge the preliminar( attachment% On Septem#er 1/* 1782* the trial court sustaine$ $efen$ants? motion an$ issue$ the follo0ing or$er6 In resume the ourt #elie"es that the complaint states no cause of action an$ that contract in 2uestion is "oi$ a' initio% IN VIDJ OF T5D FORDCOINC* the amen$e$ complaint file$ in this case is here#( or$ere$ DIS@ISSDD* 0ithout special pronouncement as to costs% onse2uentl(* the 0rit of preliminar( attachment issue$ herein is or$ere$ $ischarge$% 5o0e"er* it is of recor$ that the $efen$ants has )sic, $eposite$ the ourt the amount of &2/*://%// representing the amount of mone( in"este$ #( the plaintiff plus the correspon$ing interest thereon% &laintiff* #( "irtue of this or$er* ma( 0ith$ra0 the same in $ue time* if he so $esires* upon proper receipt therefor% From the foregoing or$er plaintiff interpose$ the present appeal% -ppellant has assigne$ four errors* 0hich 0e shall consi$er seriatim6 The first assignment rea$s6 +-s the $efen$ants? motion to $ismiss the complaint an$ to $ischarge the preliminar( attachment 0as #ase$ on the specific groun$ that the complaint states no cause of action )Sec% 1 [f]* Rule .* Rules of ourt,* the lo0er court shoul$ not ha"e gone #e(on$* an$ it shoul$ ha"e limite$ itself* to the facts allege$ in the complaint in consi$ering an$ resol"ing sai$ motion to $ismiss% It is a settle$ principle that 0hen a motion to $ismiss is #ase$ on the groun$ that the complaint $oes not state a cause of action )Rule .* Section 1* par% > of the ol$ Rules4 Rule 18* Section 1%* par% [g] of the Re"ise$ Rules, the a"erments in the complaint are $eeme$ h(potheticall( a$mitte$ an$ the in2uir( is limite$ to 0hether or not the( make out a case on 0hich relief can #e grante$% If sai$ motion assails $irectl( or in$irectl( the "eracit( of the allegations* it is improper to grant the motion upon the assumption that the a"erments therein are true an$ those of the complaint are not ) arreon "s% &ro"% Boar$ of &ampanga* ;2 O%C% 8;;>%, The sufficienc( of the motion shoul$ #e teste$ on the strength of the allegations of facts containe$ in the complaint* an$ no other% If these allegations sho0 a cause of action* or furnish sufficient #asis #( 0hich the complaint can #e maintaine$* the complaint shoul$ not #e $ismisse$ regar$less of the $efenses that ma( #e a"erre$ #( the $efen$ants% )=osefa $e =esus* et al% "s% Santos Belarmino* ;/ O%C% 9//:'9/8.4 Ver!osa "s% Rigonan* C%R% No% F'8:;7* -pril 29* 17;:4 Dima(uga "s% Dima(uga* ;1 O%C% 297>'2://%, The first groun$ upon 0hich the or$er of $ismissal issue$ #( the lo0er court is pre$icate$ is that the Boar$ of Directors of $efen$ant corporation $i$ not appro"e* the agreement in 2uestion K in fact $isappro"e$ it #( a resolution passe$ on =une 8* 1782 K an$ that as a conse2uence the +suspensi"e con$ition+ attache$ to the agreement 0as ne"er fulfille$% The specific stipulation referre$ to #( the ourt as a suspensi"e con$ition states6 +pro"i$e$* ho0e"er that the contract entere$ into #( sai$ manager to carr( out the purposes a#o"e'mentione$ shall #e su#3ect to the appro"e #( the Boar$%+ - perusal of the complaint re"eals that it contains sufficient allegations in$icating such appro"al or at least su#se2uent ratification% On the first point 0e note the follo0ing a"erments6 that on @a( 7th the plaintiff met 0ith each an$ all of the in$i"i$ual $efen$ants )0ho constitute$ the entire Boar$ of Directors, an$ $iscusse$ 0ith them e<tensi"el( the tentati"e agreement an$ he 0as ma$e to un$erstan$ that it 0as accepta#le to them* e<cept as to plaintiff?s remuneration4 that it 0as finall( agree$ #et0een plaintiff an$ all sai$ Directors that his remuneration 0oul$ #e &/%9/ per kilo )of to#acco,4 an$ that after the agreement 0as formall( e<ecute$ he 0as assure$ #( sai$ Directors that there 0oul$ #e no nee$ of formal appro"al #( the Boar$% It shoul$ #e note$ in this connection that although the contract re2uire$ such appro"al it $i$ not specif( 3ust in 0hat manner the same shoul$ #e gi"en% On the 2uestion of ratification the complaint alleges that plaintiff $eli"ere$ to the $efen$ant corporation the sum of &2/*///%// as calle$ for in the contract4 that he ren$ere$ the ser"ices he 0as re2uire$ to $o4 that he furnishe$ sai$ $efen$ant 9*/// sacks at a cost of &8*///%// an$ a$"ance$ to it the further sum of &;*///%//4 an$ that he $i$ all of these things 0ith the full kno0le$ge* ac2uiescence an$ consent of each an$ all of the in$i"i$ual $efen$ants 0ho constitute the Boar$ of Directors of the $efen$ant corporation% There is a#un$ant authorit( in support of the proposition that ratification ma( #e e<press or implie$* an$ that implie$ ratification ma( take $i"erse forms* such as #( silence or ac2uiescence4 #( acts sho0ing appro"al or a$option of the contract4 or #( acceptance an$ retention of #enefits flo0ing therefrom% Significantl( the "er( resolution of the Boar$ of Directors relie$ upon #( $efen$ants appears to militate against their contention% It refers to plaintiff?s failure to compl( 0ith certain promises he ha$ ma$e* as 0ell as to his interpretation of the contract 0ith respect to his

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remuneration 0hich* accor$ing to the Boar$* 0as contrar( to the intention of the parties% The resolution then procee$s to +$isappro"e an$Aor rescin$+ the sai$ contract% The i$ea of conflicting interpretation* or rescission on the groun$ that one of the parties has faile$ to fulfill his o#ligation un$er the contract* is certainl( incompati#le 0ith $efen$ants? theor( here that no contract ha$ (et #een perfecte$ for lack of appro"al #( the Boar$ of Directors% -ppellants? secon$ assignment of error rea$s6 +-ssuming that in resol"ing the $efen$ants? motion to $ismiss the lo0er court coul$ consi$er the ne0 facts allege$ therein an$ the $ocuments anne<e$ thereto it committe$ an error in e<ten$ing such consi$eration #e(on$ ascertaining onl( if an issue of fact has #een presente$ an$ in actuall( $eci$ing instea$ such fact in issue%+ The assignment is 0ell taken* an$ is the logical corollar( of the rule that a motion to $ismiss on the groun$ that the complaint fails to state a cause of action a$$resses itself to the a"erments in the complaint an$* a$mitting their "eracit(* merel( 2uestions their sufficienc( to make out a case on 0hich the court can grant relief% -ffi$a"its* such as those presente$ #( $efen$ants in support of the motion* can onl( #e consi$ere$ for the purpose of ascertaining 0hether an issue of fact is presente$* #ut not as a #asis for $eci$ing the factual issue itself% This shoul$ a0ait the trial on the merits% The thir$ assignment of error assails the lo0er court?s ruling that e"en assuming that a contract ha$ #een perfecte$ no action can #e maintaine$ thereon #ecause its o#3ect 0as illegal an$ therefore "oi$% Specific reference 0as ma$e #( sai$ court to an affi$a"it e<ecute$ #( appellant on @a( 1/* 1782 0hich rea$s6 That I* D@IFI-NO - E-* the part( of the Secon$ &art in the contract entere$ into 0ith the Batac &rocoma* Inc%* the part( of the First &art in same contract $eclares that the amount of &/%9/ per kilo is referre$ to upgra$e$ to#acco onl( as $eli"ere$% This supplements paragraph three of the contract referre$ to% Deli"eries $o0ngra$e$ or maintaine$ at the re$r(ing plant are $eeme$ not inclu$e$% The lo0er court* in its or$er of $ismissal* hel$ that +the upgrading of to#accos is clearl( prohi#ite$ un$er our la0s*+ an$ hence the contract cannot #e "ali$l( ratifie$% D"i$entl( the court ha$ in min$ a frau$ulent upgrading of to#acco #( appellant as part of the ser"ices calle$ for un$er the contract% This conclusion* ho0e"er* is s2uarel( tra"erse$ #( appellant in another affi$a"it attache$ to his repl( an$ opposition to the motion to $ismiss* in 0hich he e<plaine$ the circumstances 0hich le$ to the e<ecution of the one relie$ upon #( the court* an$ the real meaning of the 0or$ +upgra$e$+ therein% It is therein state$6 That after the e<ecution of the agreement )-nne< +B+ to the amen$e$ complaint in sai$ i"il ase No% ['8;:>,* @essrs% Verano* Calano an$ Dr% Bumanglag of the $efen$ant orporation in$icate$ to me that if the price of &/%9/ per kilo stipulate$ there to #e pai$ to me 0ere to #e in$iscriminatel( applie$ to all $eli"eries of to#accos* the orporation 0oul$ #e place$ in a $isa$"antageous an$ losing position* an$ the( procee$e$ to e<plain to me the follo0ing* K )a, that 0hen the farmers sell their to#accos to the Facoma* the( $o so in #unches of assorte$ 2ualities 0hich ma( #elong either to lass -* B* * D an$ D* an$ upon such purchase the( are initiall( gi"en an ar#itrar( classification of an( of such classes as the case ma( #e* the ten$enc( generall( #eing to gi"e them a lo0er classification to e2uali!e or a"erage the assorte$ 2ualities as much as possi#le* an$ this is 0hat is terme$ +$o0ngra$ing4+ )#, that after the to#accos ha"e #een purchase$ #( the Facoma from the farmers* the( are then reassorte$ an$ re'classifie$ in accor$ance 0ith their actual 2ualit( or gra$e as foun$ #( the officials of the Facoma* K thus in a #unch 0hich are purchase$ as lass * D or D* upon reclassification those foun$ to #elong to lass - are separate$ from lass B* those #elonging to lass B are separate$ from lass * an$ so on* an$ these #unches so reclassifie$ necessaril( ha"e a higher gra$e than the farmers* an$ this is 0hat is terme$ +upgra$ing+ upon $eli"er( original ar#itrar( classification gi"en 0hen purchase$ from the 0hich 0as use$ in the a$$en$um4 )c, the Facoma* in turn* $eli"ers these properl( re'classifie$ to#accos to the re$r(ing plant* an$ there* a group of officials compose$ of a representati"e of the re$r(ing plant* the Bureau of Internal Re"enue* the Ceneral -u$iting Office* the &VTan$ the Facoma representati"e* then e<amines an$ gra$es the to#accos* an$ if the classification gi"en #( the Facoma is foun$ correct an$ not change$* then an$ onl( then 0oul$ or shoul$ #e entitle$ to collect the &/%9/ per kilo* an$ this the( sai$ is 0hat is terme$ +gra$e maintaine$+ K on the other han$* if these officials foun$ the classification incorrect an$ lo0ers the classification gi"en #( the Facoma* thus class - to B* or from B to * then the to#accos are consi$ere$ or sai$ to #e +$o0ngra$e$+ an$ in that e"ent I shoul$ not recei"e an( centa"o for such $eli"eries* an$ it is in this sense that I 0as ma$e to un$erstan$ the term4 Belie"ing implicitl( in the foregoing e<planations of the $efen$ants an$ in the reasona#leness of their proposal* I agree$ rea$il( an$ -tt(% Fernan$o -lcantara* Fegal ounsel an$ Secretar( of the $efen$ant orporation forth0ith prepare$* $rafte$ an$ t(pe$ the +a$$en$um+ in 2uestion in their o0n t(pe0riter of the orporation4 an$ as I am not a la0(er an$ 0as not 0ell "erse$ 0ith the usage* customs an$ phraseolog( usuall( use$ in to#acco tra$ing* I relie$ in a#solute goo$ faith that* as e<plaine$ #( the $efen$ants* there 0as nothing 0rong nor illegal in the use of the 0or$s +upgra$ing+ an$ +$o0ngra$ing+ use$ in sai$ a$$en$um* 0hich -tt(% -lcantara unfortunatel( use$ in the same4 -part from the a#o"e* $efen$ants kne0 the ph(sical impossi#ilit( of +upgra$ing+ the to#accos at the re$r(ing plant* #ecause at the time of the transaction* onl( the &TF O R 0as allo0e$ to accept to#acco for re$r(ing an$ un$er the e<isting regulations an$ practices the $eli"er( area for to#accos at the re$r(ing plant is enclose$ #( a high 0ire fence inaccessi#le to the general pu#lic an$ the onl( ones 0ho actuall( make the gra$ing of to#accos $eli"ere$* are the )1, -merican representati"e of the re$r(ing plant )&TF O R ,* )2, the &VT-* )9, the BIR* an$ ):, the Ceneral -u$iting Office in the presence of the representati"e of the F- O@-* an$ since the re$r(ing plant is compelle$ to purchase :11 of all to#accos $eli"ere$ an$ re$rie$ un$er their negotiate$ management contract* it is highl( impro#a#le that the representati"e of the re$r(ing plant )&TF O R , 0hose conformit( to the actual gra$ing $one must appear in the correspon$ing +guia+ or tall( sheet* 0oul$ allo0 the +upgra$ing+ of to#accos* asi$e from the fact that stringent measures ha$ #een $e"ise$ un$er the present a$ministration to pre"ent the +upgra$ing+ of to#accos #( an( part(% ertainl(* an impossi#le con$ition coul$ not ha"e #een contemplate$ #( me an$ the $efen$ants4 )Recor$ on -ppeal* pp% 1>1'1>;,% The foregoing e<planation* on its face* is satisfactor( an$ $epri"es the term +upgra$e$+ of the sinister an$ illegal connotation attri#ute$ to it #( the lo0er court% To #e sure* 0hether the allegations in this su#se2uent affi$a"it are true or not is a 2uestion of fact4 #ut it is precisel( for this reason that the( can neither #e summaril( a$mitte$ nor re3ecte$ for purposes of a motion to $ismiss% Due process $eman$s that the( #e the su#3ect of proof an$ consi$ere$ onl( after trial on the merits%

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The other errors assigne$ #( appellant are merel( inci$ental to those alrea$( $iscusse$* an$ re2uire no separate treatment% Jherefore* the or$er appeale$ from is set asi$e an$ the case is reman$e$ to the court a quo for further procee$ings* 0ithout pre3u$ice to* the right of plaintiff'appellant to ask for another 0rit of attachment in sai$ court* as the circumstances ma( 0arrant% osts against $efen$ants'appellees% Concepcion, C.J., Re(es, J.B.:., Beng;on, J.P., Daldi!ar, #anche; and Castro, JJ., concur. .i;on, J., too$ no part. DN B-N G.R. No. L337331 March 1:, 1933

-RE6 M. AR6EN, ).6. IG SMIT , a'& )! N C. ART, %' +h$%r o?' >$ha/, a'& %' +ha+ a// o+h$r #+oc@ho/&$r# o, +h$ Ba/a+oc M%'%'( CoCBa'2, $+c., plaintiffs'appellants* "s% BENGUET C!NS!LI6ATE6 MINING C!MPAN4, BALAT!C MINING C!MPAN4, . E. REN<, )! N 8. )AUSSERMANN, a'& A. 8. BEAM, $efen$ants'appellees% /i''s and -c.onough and Roman =;aeta "or appellants. .e<itt, Per$ins and Brad( "or appellees. Ross, :a*rence and #elph "or appellee Balatoc -ining Compan(. STREET, J.: This action 0as originall( institute$ in the ourt of First Instance of the it( of @anila #( F% @% 5ar$en* acting in his o0n #ehalf an$ that of all other stockhol$ers of the Balatoc @ining o% 0ho might 3oin in the action an$ contri#ute to the e<pense of the suit% Jith the plaintiff 5ar$en t0o others* =% D% 5ighsmith an$ =ohn % 5art* su#se2uentl( associate$ themsel"es% The $efen$ants are the Benguet onsoli$ate$ @ining o%* the Balatoc @ining o%* 5% D% Ren!* =ohn J% 5aussermann* an$ -% J% Beam% The principal purpose of the original action 0as to annul a certificate co"ering 8//*/// shares of the stock of the Balatoc @ining o%* 0hich ha"e #een issue$ to the Benguet onsoli$ate$ @ining o%* an$ to secure to the Balatoc @ining o%* the restoration of a large sum of mone( allege$ to ha"e #een unla0full( collecte$ #( the Benguet onsoli$ate$ @ining o%* 0ith legal interest* after $e$uction therefrom of the amount e<pen$e$ #( the latter compan( un$er a contract #et0een the t0o companies* #earing $ate of @arch 7* 172>% The complaint 0as after0ar$s amen$e$ so as to inclu$e a pra(er for the annulment of this contract% Shortl( prior to the institution of this la0suit* the Benguet onsoli$ate$ @ining o%* transferre$ to 5% D% Ren!* as trustee* the certificate for 8//*/// shares of the Balatoc @ining o% 0hich constitute the principal su#3ect matter of the action% This 0as $one apparentl( to facilitate the splitting up to the shares in the course of the sale or $istri#ution% To pre"ent this the plaintiffs* upon filing their original complaint* procure$ a preliminar( in3unction restraining the $efen$ants* their agents an$ ser"ants* from selling* assigning or transferring the 8//*/// shares of the Balatoc @ining o%* or an( part thereof* an$ from remo"ing sai$ shares from the &hilippine Islan$s% This e<plains the connection of Ren! 0ith the case% The other in$i"i$ual $efen$ants are ma$e merel( as officials of the Benguet onsoli$ate$ @ining o% Epon hearing the cause the trial court $ismisse$ the complaint an$ $issol"e$ the preliminar( in3unction* 0ith costs against the plaintiffs% From this 3u$gment the plaintiffs appeale$% The facts 0hich ha"e gi"en rise this la0suit are simple* as the financial interests in"ol"e are immense% Briefl( tol$ these facts are as follo0s6 The Benguet onsoli$ate$ @ining o% 0as organi!e$ in =une* 17/9* as a sociedad anonima in conformit( 0ith the pro"isions of Spanish la04 0hile the Balatoc @ining o% 0as organi!e$ in Decem#er 172;* as a corporation* in conformit( 0ith the pro"isions of the orporation Fa0 )-ct No% 1:;7,% Both entities 0ere organi!e$ for the purpose of engaging in the mining of gol$ in the &hilippine Islan$s* an$ their respecti"e properties are locate$ onl( a fe0 miles apart in the su#pro"ince of Benguet% The capital stock of the Balatoc @ining o% consists of one million shares of the par "alue of one peso )&1, each% Jhen the Balatoc @ining o% 0as first organi!e$ the properties ac2uire$ #( it 0ere largel( un$e"elope$4 an$ the original stockhol$ers 0ere una#le to suppl( the means nee$e$ for profita#le operation% For this reason* the #oar$ of $irectors of the corporation or$ere$ a suspension of all 0ork* effecti"e =ul( 91* 1728% In No"em#er of the same (ear a general meeting of the compan(?s stockhol$ers appointe$ a committee for the purpose of interesting outsi$e capital in the mine% En$er the authorit( of this resolution the committee approache$ -% J% Beam* then presi$ent an$ general manager of the Benguet ompan(* to secure the capital necessar( to the $e"elopment of the Balatoc propert(% -s a result of the negotiations thus #egun* a contract* formall( authori!e$ #( the management of #oth companies* 0as e<ecute$ on @arch 7* 172>* the principal features of 0hich 0ere that the Benguet ompan( 0as to procee$ 0ith the $e"elopment an$ construct a milling plant for the Balatoc mine* of a capacit( of 1// tons of ore per $a(* an$ 0ith an e<traction of at least .; per cent of the gol$ content% The Benguet ompan( also agree$ to erect an appropriate po0er plant* 0ith the aerial tramlines an$ such other surface #uil$ings as might #e nee$e$ to operate the mine% In return for this it 0as agree$ that the Benguet ompan( shoul$ recei"e from the treasurer of the Balatoc ompan( shares of a par "alue of &8//*///* in pa(ment for the first &8//*/// #e thus a$"ance$ to it #( the Benguet ompan(% The performance of this contract 0as spee$il( #egun* an$ #( @a( 91* 1727* the Benguet ompan( ha$ spent upon the $e"elopment the sum of &1*:1>*7;2%1;% In compensation for this 0ork a certificate for si< hun$re$ thousan$ shares of the stock of the Balatoc ompan( has #een $eli"ere$ to the Benguet ompan(* an$ the e<cess "alue of the 0ork in the amount of &.1>*7;2%1; has #een returne$ to the Benguet ompan( in cash% @ean0hile $i"i$en$s of the Balatoc ompan( ha"e #een enriching its stockhol$ers* an$ at the time of the filing of the complaint the "alue of its shares ha$ increase$ in the market from a nominal "aluation to more than ele"en pesos per share% Jhile the Benguet ompan( 0as pouring its million an$ a half into the Balatoc propert(* the arrangements ma$e #et0een the t0o companies appear to ha"e #een "ie0e$ #( the plaintiff 5ar$en 0ith complacenc(* he #eing the o0ner of man( thousan$s of the shares of the Balatoc ompan(% But as soon as the success of the $e"elopment ha$ #ecome apparent* he #egan this litigation in 0hich he has #een 3oine$ #( t0o others of the eight( sharehol$ers of the Balatoc ompan(% Briefl(* the legal point upon 0hich the action is plante$ is that it is unla0ful for the Benguet ompan( to hol$ an( interest in a mining corporation an$ that the contract #( 0hich the interest here in 2uestion 0as ac2uire$ must #e annulle$* 0ith the conse2uent o#literation of the certificate issue$ to the Benguet ompan( an$ the correspon$ing enrichment of the sharehol$ers of the Balatoc ompan(%

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Jhen the &hilippine Islan$s passe$ to the so"ereignt( of the Enite$ States* in the attention of the &hilippine ommission 0as earl( $ra0n to the fact that there is no entit( in Spanish la0 e<actl( correspon$ing to the notion of the corporation in Dnglish an$ -merican la04 an$ in the &hilippine Bill* appro"e$ =ul( 1* 17/2* the ongress of the Enite$ States inserte$ certain pro"isions* un$er the hea$ of Franchises* 0hich 0ere inten$e$ to control the la0making po0er in the &hilippine Islan$s in the matter of granting of franchises* pri"ileges an$ concessions% These pro"isions are foun$ in section >: an$ >; of the -ct% The pro"isions of section >: ha"e #een superse$e$ #( section 2. of the -ct of ongress of -ugust 27* 1718* #ut in section >; there is a pro"ision referring to mining corporations* 0hich still remains the la0* as amen$e$% This pro"isions* in its original form* rea$s as follo0s6 +%%% it shall #e unla0ful for an( mem#er of a corporation engage$ in agriculture or mining an$ for an( corporation organi!e$ for an( purpose e<cept irrigation to #e in an( 0ise intereste$ in an( other corporation engage$ in agriculture or in mining%+ En$er the gui$ance of this an$ certain other pro"isions thus enacte$ #( ongress* the &hilippine ommission entere$ upon the enactment of a general la0 authori!ing the creation of corporations in the &hilippine Islan$s% This rather ela#orate piece of legislation is em#o$ie$ in 0hat is calle$ our orporation Fa0 )-ct No% 1:;7 of the &hilippine ommission,% The e"i$ent purpose of the commission 0as to intro$uce the -merican corporation into the &hilippine Islan$s as the stan$ar$ commercial entit( an$ to hasten the $a( 0hen the sociedad anonima of the Spanish la0 0oul$ #e o#solete% That statute is a sort of co$ification of -merican corporate la0% For the purposes general $escription onl(* it ma( #e state$ that the sociedad anonima is something "er( much like the Dnglish 3oint stock compan(* 0ith features resem#ling those of #oth the partnership is sho0n in the fact that socie$a$* the generic component of its name in Spanish* is the same 0or$ that is use$ in that language to $esignate other forms of partnership* an$ in its organi!ation it is constructe$ along the same general lines as the or$inar( partnership% It is therefore not surprising that for purposes of loose translation the e<pression sociedad anonima has not infre2uentl( the other han$* the affinit( of this entit( to the -merican corporation has not escape$ notice* an$ the e<pression sociedad anonima is no0 generall( translate$ #( the 0or$ corporation% But 0hen the 0or$ corporation is use$ in the sense of sociedad anonima an$ close $iscrimination is necessar(* it shoul$ #e associate$ 0ith the Spanish e<pression sociedad anonima either in a parenthesis or connecte$ #( the 0or$ +or+% This latter $e"ice 0as a$opte$ in sections >; an$ 171 of the orporation Fa0% In $rafting the orporation Fa0 the &hilippine ommission inserte$ #o$il(* in su#section );, of section 19 of that -ct )No% 1:;7, the 0or$s 0hich 0e ha"e alrea$( 2uote$ from section >; of the -ct of ongress of =ul( 1* 17/2 )&hilippine Bill,4 an$ it is of course o#"ious that 0hate"er meaning originall( attache$ to this pro"ision in the -ct of ongress* the same significance shoul$ #e attache$ to it in section 19 of our orporation Fa0% -s it 0as the intention of our la0makers to stimulate the intro$uction of the -merican orporation into &hilippine la0 in the place of the sociedad anonima* it 0as necessar( to make certain a$3ustments resulting from the continue$ co'e<istence* for a time* of the t0o forms of commercial entities% -ccor$ingl(* in section >; of the orporation Fa0* a pro"ision is foun$ making the sociedad anonima su#3ect to the pro"isions of the orporation Fa0 +so far as such pro"isions ma( #e applica#le+* an$ gi"ing to the sociedades anonimas pre"iousl( create$ in the Islan$s the option to continue #usiness as such or to reform an$ organi!e un$er the pro"isions of the orporation Fa0% -gain* in section 171 of the orporation Fa0* the o$e of ommerce is repeale$ in so far as it relates to sociedades anonimas% The purpose of the commission in repealing this part of the o$e of ommerce 0as to compel commercial entities thereafter organi!e$ to incorporate un$er the orporation Fa0* unless the( shoul$ prefer to a$opt some form or other of the partnership% To this pro"ision 0as a$$e$ another to the effect that e<isting sociedades anonimas* 0hich electe$ to continue their #usiness as such* instea$ of reforming an$ reorgani!ing un$er the orporation Fa0* shoul$ continue to #e go"erne$ #( the la0s that 0ere in force prior to the passage of this -ct +in relation to their organi!ation an$ metho$ of transacting #usiness an$ to the rights of mem#ers thereof as #et0een themsel"es* #ut their relations to the pu#lic an$ pu#lic officials shall #e go"erne$ #( the pro"isions of this -ct%+ -s alrea$( o#ser"e$* the pro"ision a#o"e 2uote$ from section >; of the -ct ongress of =ul( 1* 17/2 )&hilippine Bill,* generall( prohi#iting corporations engage$ in mining an$ mem#ers of such from #eing intereste$ in an( other corporation engage$ in mining* 0as amen$e$ #( section > of -ct No% 9;1. of the &hilippine Fegislature* appro"e$ #( ongress @arch 1* 1727% The change in the la0 effecte$ #( this amen$ment 0as in the $irection of li#erali!ation% Thus* the inhi#ition containe$ in the original pro"ision against mem#ers of a corporation engage$ in agriculture or mining from #eing intereste$ in other corporations engage$ in agriculture or in mining 0as so mo$ifie$ as merel( to prohi#it an( such mem#er from hol$ing more than fifteen per centum of the outstan$ing capital stock of another such corporation% @oreo"er* the e<plicit prohi#ition against the hol$ing #( an( corporation )e<cept for irrigation, of an interest in an( other corporation engage$ in agriculture or in mining 0as so mo$ifie$ as to limit the restriction to corporations organi!e$ for the purpose of engaging in agriculture or in mining% -s originall( $ra0n* our orporation Fa0 )-ct No% 1:;7, $i$ not contain an( appropriate clause $irectl( penali!ing the act of a corporation* a mem#er of a corporation * in ac2uiring an interest contrar( to paragraph );, of section 19 of the -ct% The &hilippine Fegislature un$ertook to reme$( this situation in section 9 of -ct No% 2>72 of the &hilippine Fegislature* appro"e$ on Fe#ruar( 1.* 1717* #ut this pro"ision 0as $eclare$ in"ali$ #( this court in/o!ernment o" the Philippine slands !s. ,l 8ogar 7ilipino );/ &hil%* 977,* for lack of an a$e2uate title to the -ct% Su#se2uentl( the Fegislature reenacte$ su#stantiall( the same penal pro"ision in section 21 of -ct No% 9;1.* un$er a title sufficientl( #roa$ to comprehen$ the su#3ect matter% This part of -ct No% 9;1. #ecame effecti"e upon appro"al #( the Co"ernor'Ceneral* on Decem#er 9* 172.* an$ it 0as therefore in full force 0hen the contract no0 in 2uestion 0as ma$e% This pro"ision 0as inserte$ as a ne0 section in the orporation Fa0* forming section 177/ )-, of sai$ -ct as it no0 stan$s% Omitting the pro"iso* 0hich seems not to #e pertinent to the present contro"ers(* sai$ pro"ision rea$s as follo0s6 SD % 17/ )-,% Penalties% K The "iolation of an( of the pro"isions of this -ct an$ its amen$ments not other0ise penali!e$ therein* shall #e punishe$ #( a fine of not more than fi"e thousan$ pesos an$ #( imprisonment for not more than fi"e (ears* in the $iscretion of the court% If the "iolation is committe$ #( a corporation* the same shall* upon such "iolation #eing pro"e$* #e $issol"e$ #( quo *arranto procee$ings institute$ #( the -ttorne('Ceneral or #( an( pro"incial fiscal #( or$er of sai$ -ttorne(' Ceneral6 % % % % Epon a sur"e( of the facts sketche$ a#o"e it is o#"ious that there are t0o fun$amental 2uestions in"ol"e$ in this contro"ers(% The first is 0hether the plaintiffs can maintain an action #ase$ upon the "iolation of la0 suppose$l( committe$ #( the Benguet ompan( in this case% The secon$ is 0hether* assuming the first 2uestion to #e ans0ere$ in the affirmati"e* the Benguet ompan(* 0hich 0as organi!e$ as a sociedad anonima* is a corporation 0ithin the meaning of the language use$ #( the ongress of the Enite$ States* an$ later #( the &hilippine Fegislature* prohi#iting a mining corporation from #ecoming intereste$ in another mining corporation% It is o#"ious that* if the first 2uestion #e ans0ere$ in the negati"e* it 0ill #e unnecessar( to consi$er the secon$ 2uestion in this la0suit%

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Epon the first point it is at once o#"ious that the pro"ision referre$ to 0as a$opte$ #( the la0makers 0ith a sole "ie0 to the pu#lic polic( that shoul$ control in the granting of mining rights% Furthermore* the penalties impose$ in 0hat is no0 section 17/ )-, of the orporation Fa0 for the "iolation of the prohi#ition in 2uestion are of such nature that the( can #e enforce$ onl( #( a criminal prosecution or #( an action of quo *arranto% But these procee$ings can #e maintaine$ onl( #( the -ttorne('Ceneral in representation of the Co"ernment% Jhat room then is left for the pri"ate action 0hich the plaintiffs seek to assert in this caseM The $efen$ant Benguet ompan( has committe$ no ci"il 0rong against the plaintiffs* an$ if a pu#lic 0rong has #een committe$* the $irectors of the Balatoc ompan(* an$ the plaintiff 5ar$en himself* 0ere the acti"e in$ucers of the commission of that 0rong% The contract* supposing it to ha"e #een unla0ful in fact* has #een performe$ on #oth si$es* #( the #uil$ing of the Balatoc plant #( the Benguet ompan( an$ the $eli"er( to the latter of the certificate of 8//*/// shares of the Balatoc ompan(% There is no possi#ilit( of reall( un$oing 0hat has #een $one% No#o$( 0oul$ suggest the $emolition of the mill% The Balatoc ompan( is secure in the possession of that impro"ement* an$ talk a#out putting the parties in status quo ante #( restoring the consi$eration 0ith interest* 0hile the Balatoc ompan( remains in possession of 0hat it o#taine$ #( the use of that mone(* $oes not 2uite meet the case% -lso* to mulct the Benguet ompan( in man( millions of $ollars in fa"or of in$i"i$uals 0ho ha"e not the slightest e2uita#le right to that mone( in a proposition to 0hich no court can gi"e a rea$( assent% The most plausi#le presentation of the case of the plaintiffs procee$s on the assumption that onl( one of the contracting parties has #een guilt( of a mis$emeanor* namel(* the Benguet ompan(* an$ that the other part(* the Balatoc ompan(* is 0holl( innocent to participation in that 0rong% The plaintiffs 0oul$ then ha"e us appl( the secon$ paragraph of article 19/; of the i"il o$e 0hich $eclares that an innocent part( to an illegal contract ma( reco"er an(thing he ma( ha"e gi"en* 0hile he is not #oun$ to fulfill an( promise he ma( ha"e ma$e% But* supposing that the first hur$le can #e safel( "aulte$* the general reme$( supplie$ in article 19/; of the i"il o$e cannot #e in"oke$ 0here an a$e2uate special reme$( is supplie$ in a special la0% It has #een so hel$ #( this court in /o Chioco !s. -artine; ):; &hil%* 2;8* 2./,* 0here 0e refuse$ to appl( that article to a case of nullit( arising upon a usurious loan% The reason gi"en for the $ecision on this point 0as that the Esur( -ct* as amen$e$* contains all the pro"isions necessar( for the effectuation of its purposes* 0ith the result that the reme$( gi"en in article 19/; of the i"il o$e is unnecessar(% @uch more is that i$ea applica#le to the situation no0 #efore us* 0here the special pro"isions gi"e ample reme$ies for the enforcement of the la0 #( action in the name of the Co"ernment* an$ 0here no ci"il 0rong has #een $one to the part( here seeking re$ress% The "ie0 of the case presente$ a#o"e rest upon consi$erations arising upon our o0n statutes4 an$ it 0oul$ seem to #e unnecessar( to ransack the -merican $ecisions for analogies pertinent to the case% Je ma( o#ser"e* ho0e"er* that the situation in"ol"e$ is not unlike that 0hich has fre2uentl( arisen in the Enite$ States un$er pro"isions of the National Bank -ct prohi#iting #anks organi!e$ un$er that la0 from hol$ing real propert(% It has #een uniforml( hel$ that a trust $ee$ or mortgage$ con"e(ing propert( of this kin$ to a #ank* #( 0a( of securit(* is "ali$ until the transaction is assaile$ in a $irect procee$ing institute$ #( the Co"ernment against the #ank* an$ the illegalit( of such tenure supplies no #asis for an action #( the former pri"ate o0ner* or his cre$itor* to annul the con"e(ance% )National Bank !s% @atthe0s* 7. E% S%* 8214 Gerfoot !s% Farmers O @% Bank* 21. E% S%* 2.1%, Other analogies point in the same $irection% )South O -la% R% Cinniss !s% B% O @% onsol% etc% @ining o%* 27 @ont%* :2.4 5olmes O Criggs @fg% o% !s% 5olmes O Jessell @etal o%* 12> N% I%* 2;24 Oel#ermann !s% N% I% O N% R% o%* >> 5un%* 992%, @ost suggesti"e perhaps of all the cases in ompaLia -!ucarera $e arolina !s% Registrar )17 &orto Rico* 1:9,* for the reason that this case arose un$er a pro"ision of the Foraker -ct* a la0 analogous to our &hilippine Bill% It appears that the registrar ha$ refuse$ to register t0o $ee$s in fa"or of the ompaLia -!ucarera on the groun$ that the lan$ there#( con"e(e$ 0as in e<cess of the area permitte$ #( la0 to the compan(% The &orto Rican court re"erse$ the ruling of the registrar an$ or$ere$ the registration of the $ee$s* sa(ing6 Thus it ma( #e seen that a corporation limite$ #( the la0 or #( its charter has until the State acts e"er( po0er an$ capacit( that an( other in$i"i$ual capa#le of ac2uiring lan$s* possesses% The corporation ma( e<ercise e"er( act of o0nership o"er such lan$s4 it ma( sue in e3ectment or unla0ful $etainer an$ it ma( $eman$ specific performance% It has an a#solute title against all the 0orl$ e<cept the State after a proper procee$ing is #egun in a court of la0% %%% The -ttorne( Ceneral is the e<clusi"e officer in 0hom is confi$e$ the right to initiate procee$ings for escheat or attack the right of a corporation to hol$ lan$% 5a"ing sho0n that the plaintiffs in this case ha"e no right of action against the Benguet ompan( for the infraction of la0 suppose$ to ha"e #een committe$* 0e forego cn( $iscussion of the further 2uestion 0hether a sociedad anonima create$ un$er Spanish la0* such as the Benguet ompan(* is a corporation 0ithin the meaning of the prohi#itor( pro"ision alrea$( so man( times mentione$% That important 2uestion shoul$* in our opinion* #e left until it is raise$ in an action #rought #( the Co"ernment% The 3u$gment 0hich is the su#3ect of his appeal 0ill therefore #e affirme$* an$ it is so or$ere$* 0ith costs against the appellants% C!anceEa, C.J., Villamor, =strand, Villa>Real, C'ad #antos, 8ull, Vic$ers, mperial and Butte, JJ., concur. ar&$' A# B$'(*$+ Co'#o/%&a+$& M%'%'( D,lta vires actsF Facts6 Benguet @ining )as a sociedad anonima, in an agreement 0ith Balatoc @ining )a corporation, un$ertook to #uil$ a milling plant an$ a po0er plant for the latter% In consi$eration thereof* Balatoc in turn* $eli"ere$ si< hun$re$ thousan$ shares of stock of the compan( in fa"or of Benguet @ining% Jhen the pro3ect #ecame successful an$ the "alue of the shares of Balatoc @ining appreciate$* plaintiff 5ar$en* #eing an o0ner of thousan$s of shares in Balatoc mining sought to annul the transactions entere$ #( the t0o mining entities #ecause the la0 prohi#its mining companies like Benguet @ining to hol$ an( interest in a mining corporation like Balatoc @ining% It is the contention of Benguet @ining that it is not prohi#ite$ from $oing so #ecause it is a socie$a$ anonima an$ not a corporation% Issue6 )1, 0hether the plaintiffs has a right of action against $efen$ant corporation%% )2, -ssuming the first 2uestion to #e ans0ere$ in the affirmati"e* the Benguet ompan(* 0hich 0as organi!e$ as a socie$a$ anonima* is a corporation prohi#ite$ a mining corporation from #ecoming intereste$ in another mining corporation% Ruling6

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)1, The $efen$ant Benguet ompan( has committe$ no ci"il 0rong against the plaintiffs* an$ if a pu#lic 0rong has #een committe$* the $irectors of the Balatoc ompan(* an$ the plaintiff 5ar$en himself* 0ere the acti"e in$ucers of the commission of that 0rong% The contract* supposing it to ha"e #een unla0ful in fact* has #een performe$ on #oth si$es* #( the #uil$ing of the Balatoc plant #( the Benguet ompan( an$ the $eli"er( to the latter of the certificate of 8//*/// shares of the Balatoc ompan(% There is no possi#ilit( of reall( un$oing 0hat has #een $one% No#o$( 0oul$ suggest the $emolition of the mill% The Balatoc ompan( is secure in the possession of that impro"ement* an$ talk a#out putting the parties in status 2uo ante #( restoring the consi$eration 0ith interest* 0hile the Balatoc ompan( remains in possession of 0hat it o#taine$ #( the use of that mone(* $oes not 2uite meet the case% -lso* to mulct the Benguet ompan( in man( millions of $ollars in fa"or of in$i"i$uals 0ho ha"e not the slightest e2uita#le right to that mone( in a proposition to 0hich no court can gi"e a rea$( assent% )2, 5a"ing sho0n that the plaintiffs in this case ha"e no right of action against the Benguet ompan( for the infraction of la0 suppose$ to ha"e #een committe$* 0e forego cn( $iscussion of the further 2uestion 0hether a socie$a$ anonima create$ un$er Spanish la0* such as the Benguet ompan(* is a corporation 0ithin the meaning of the prohi#itor( pro"ision alrea$( so man( times mentione$% That important 2uestion shoul$* in our opinion* #e left until it is raise$ in an action #rought #( the Co"ernment