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CASE ANALYSIS IV

M+W Zander Philippines, Inc. and Rolf Wiltschek vs. Trinidad M.

Enriquez
G.R. No. 169173, June 5, 2009
http://sc.judiciary.gov.ph/jurisprudence/2009/june2009/169173.htm

FACTS:

On June 4, 2001, respondent Enriquez was hired on probationary

basis as the Administration Manager and Executive Assistant to the
General Manager of petitioner M+W Zander Philippines, Inc. (M+W
Zander), a multi-national corporation engaged in construction and
facilities management. She was confirmed as a permanent employee on

December 4, 2001. As Administration Manager, respondents

responsibilities include taking charge of the management of administrative
personnel assigned to the head office, as well as the security of the
company staff and premises and the implementation of company rules.
As Executive Assistant to the General Manager, respondent was in
charge of scheduling, monitoring and tracking all the General Managers
appointments and personal finances and serving as the liaison among the
General Manager, the Division Heads, the Administrative Staff and
external contacts.

In January 2002, M+W Zander relieved its General Manager, Mr.

Eric Van Stiegeren, and in his place appointed Mr. Rolf Wiltschek
(Wiltschek). The appointment of Wiltschek as the Acting General Manager
was announced in a meeting held on January 31, 2002. On the same day,
a Letter of Appeal was signed by 29 employees of M+W Zander, opposing
the appointment of Wiltschek.

A day after the Letter of Appeal was released, a number of

employees did not report to work.
 Petitioners alleged that after the announcement of Wiltschek as the
new General Manager, respondent actively solicited signatures for a letter
opposing the appointment of Wiltschek (Letter of Appeal). The petitioners
claim that Enriquez used her influence and moral ascendancy to coerce
several employees into signing the letter of appeal, which state that
respondent sought their signature for the Letter of Appeal. Amador stated
in his affidavit that on February 1, 2002 one Abelardo Tayag asked him
not to go to work and Enriquez only called him to confirm that he did not
report for work. In Tecsons affidavit it was stated that on February 1, 2002,
he received a call from Enriquez in his mobile phone telling him not to
report to work since other employees will not report to work and that he
should just file for a sick leave since they were doing the same. Tecson
said he was already on his way to the office and refused to follow
Enriquez.

Upon discovering respondent Enriquezs participation in drafting and

in circulating the Letter of Appeal, as well as in the alleged work stoppage
that occurred a day after the release of the Letter, M+W Zander sent a
Notice to respondent Enriquez, requiring her to explain within 48 hours
from receipt of the notice why no disciplinary action should be taken
against her for willful breach of trust and using her authority and/or
influence as Administration Manager of M+W Zander over her
subordinates to stage a no work day on February 1, 2002. It was indicated
that willful breach of trust has a corresponding penalty of dismissal.
Meanwhile, respondent Enriquez was placed under preventive
suspension for 15 working days.

ISSUE:

Whether or not Wiltshcek be personally liable together with M+W

Zander?

RULING:

No.

Illegal dismissal; liability of corporate officer. The general manager of a

corporation should not be made personally answerable for the payment of
an illegally dismissed employees monetary claims arising from the
dismissal unless he had acted maliciously or in bad faith in terminating the
services of the employee. The employer corporation has a separate and
distinct personality from its officers who merely act as its agents.
The exception noted is where the official had acted maliciously or in bad
faith, in which event he may be made personally liable for his own act.
That exception is not applicable in the case at bar, because it has not
been proven that Wiltschek was impleaded in his capacity as General
Manager of petitioner corporation and there appears to be no evidence on
record that he acted maliciously or in bad faith in terminating the services
of respondent. His act, therefore, was within the scope of his authority and
was a corporate act for which he should not be held personally liable for.

Discussion Questions:
(1) Is there an instance where corporate officers liable are held jointly and
severally liable with the corporation? Explain and cite legal basis.

There is solidary liability when the obligation expressly so states,

when the law so provides, or when the nature of the obligation so
requires. MAM Realty Development Corporation v. NLRC, on solidary
liability of corporate officers in labor disputes, enlightens:

x x x A corporation being a juridical entity, may act only through its

directors, officers and employees.1wphi1 Obligations incurred by
them, acting as such corporate agents are not theirs but the direct
accountabilities of the corporation they represent. True solidary
liabilities may at times be incurred but only when exceptional
circumstances warrant such as, generally, in the following cases:

1. When directors and trustees or, in appropriate cases, the officers of

a corporation:

(a) vote for or assent to patently unlawful acts of the corporation;

(b) act in bad faith or with gross negligence in directing the corporate
affairs;

xxxx

In labor cases, for instance, the Court has held corporate directors and
officers solidarily liable with the corporation for the termination of
employment of employees done with malice or in bad faith

(2) In what instances corporate officers are held liable? Cite legal basis.
The provisions of the Corporation Code of the Philippines, which
states:

Sec. 31. Liability of directors, trustees or officers. Directors or trustees

who wilfully and knowingly vote for or assent to patently unlawful acts
of the corporation or who are guilty of gross negligence or bad faith in
directing the affairs of the corporation or acquire any personal or
pecuniary interest in conflict with their duty as such directors or trustees
shall be liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and other
persons.

Solidary liability will then attach to the directors, officers or employees

of the corporation in certain circumstances, such as:

1. When directors and trustees or, in appropriate cases, the officers of

a corporation: (a) vote for or assent to patently unlawful acts of the
corporation; (b) act in bad faith or with gross negligence in directing the
corporate affairs; and (c) are guilty of conflict of interest to the prejudice
of the corporation, its stockholders or members, and other persons;

2. When a director or officer has consented to the issuance of watered

stocks or who, having knowledge thereof, did not forthwith file with the
corporate secretary his written objection thereto;

3. When a director, trustee or officer has contractually agreed or

stipulated to hold himself personally and solidarily liable with the
corporation; or

4. When a director, trustee or officer is made, by specific provision of

law, personally liable for his corporate action.

Before a director or officer of a corporation can be held personally liable

for corporate obligations, however, the following requisites must
concur:

(1) the complainant must allege in the complaint that the director or
officer assented to patently unlawful acts of the corporation, or that the
officer was guilty of gross negligence or bad faith; and
(2) the complainant must clearly and convincingly prove such
unlawful acts, negligence or bad faith.
 While it is true that the determination of the existence of any of the
circumstances that would warrant the piercing of the veil of corporate
fiction is a question of fact which cannot be the subject of a petition for
review on certiorari under Rule 45, this Court can take cognizance of
factual issues if the findings of the lower court are not supported by the
evidence on record or are based on a misapprehension of facts

(3) How is the rule related to separate personality doctrine?

Corporation law is the principle that a corporation has a separate

personality distinct from its stockholders and from other corporations to
which it may be connected.

However, under the doctrine of piercing the veil of corporate entity,

the corporation's separate juridical personality may be disregarded, for
example, when the corporate identity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime.

Also, where the corporation is a mere alter ego or business conduit

of a person, or where the corporation is so organized and controlled
and its affairs are so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation, then its distinct
personality may be ignored.

In these circumstances, the courts will treat the corporation as a

mere aggrupation of persons and the liability will directly attach to them.
The legal fiction of a separate corporate personality in those cited
instances, for reasons of public policy and in the interest of justice, will
be justifiably set aside.

Edward A. Keller & Co., Ltd. vs. Cob Group Marketing, Inc. et al.
G.R. No. L-68097, January 16, 1986
http://www.lawphil.net/judjuris/juri1986/jan1986/gr_68097_1986.html
FACTS:

Edward A. Keller & Co., Ltd. appointed COB Group Marketing, Inc.
as exclusive distributor of its household products, Brite and Nuvan in
Panay and Negros, as shown in the sales agreement dated March 14,
1970 . Under that agreement Keller sold on credit its products to COB
Group Marketing.

As security for COB Group Marketing's credit purchases up to the

amount of P35,000, one Asuncion Manahan mortgaged her land to Keller.
Manahan assumed solidarily with COB Group Marketing the faithful
performance of all the terms and conditions of the sales agreement.

In July, 1970 the parties executed a second sales agreement

whereby COB Group Marketing's territory was extended to Northern and
Southern Luzon. As security for the credit purchases up to P25,000 of
COB Group Marketing for that area, Tomas C. Lorenzo, Jr. and his father
Tomas, Sr. (now deceased) executed a mortgage on their land in Nueva
Ecija. Like Manahan, the Lorenzos were solidarily liable with COB Group
Marketing for its obligations under the sales agreement.

The credit purchases of COB Group Marketing, which started on

October 15, 1969, limited up to January 22, 1971. On May 8, the board of
directors of COB Group Marketing were apprised by Jose E. Bax the firm's
president and general manager, that the firm owed Keller about P179,000.
Bax was authorized to negotiate with Keller for the settlement of his firm's
liability. On the same day, May 8, Bax and R. Oefeli of Keller signed the
conditions for the settlement of COB Group Marketing's liability. Twelve
days later, or on May 20, COB Group Marketing, through Bax executed
two second chattel mortgages over its 12 trucks (already mortgaged to
Northern Motors, Inc.) as security for its obligation to Keller amounting to
P179,185.16 as of April 30, 1971.

ISSUE:

Whether or not the lower courts erred in nullifying the admissions of

liability made in 1971 by Bax as president and general manager of COB
Group Marketing and in giving credence to the alleged overpayment
computed by Bax.

RULING:
 YES.

The lower courts not only allowed Bax to nullify his admissions as
to the liability of COB Group Marketing but they also erroneously rendered
judgment in its favor in the amount of its supposed overpayment in the
sum of P100,596.72, in spite of the fact that COB Group Marketing was
declared in default and did not file any counterclaim for the supposed
overpayment. The lower courts harped on Keller's alleged failure to thresh
out with representatives of COB Group Marketing their "diverse
statements of credits and payments". This contention has no factual basis.
That means that there was a conference on the COB Group Marketing's
liability. Bax in that discussion did not present his reconciliation
statements to show overpayment.

Bax admitted that Keller sent his company monthly statements of

accounts but he could not produce any formal protest against the
supposed inaccuracy of the said statements. He lamely explained that he
would have to dig up his company's records for the formal protest. He did
not make any written demand for reconciliation of accounts.

As to the liability of the stockholders, it is settled that a stockholder

is personally liable for the financial obligations of a corporation to the
extent of his unpaid subscription.

Discussion Questions:
(1) Who are liable to the creditors for unpaid subscription? What the basis
of their liability?

It is settled that a stockholder is personally liable for the financial

obligations of a corporation to the extent of his unpaid subscription
(Vda. de Salvatierra vs. Garlitos 103 Phil. 757, 763; 18 CJs 1311-2).

The trust fund doctrine, first enunciated in the American case of

Wood v. Dummerwas adopted in our jurisdiction in Philippine Trust Co.
v. Rivera,where this Court declared that:

It is established doctrine that subscriptions to the capital of a

corporation constitute a fund to which creditors have a right to look for
satisfaction of their claims and that the assignee in insolvency can
maintain an action upon any unpaid stock subscription in order to
 realize assets for the payment of its debts. (Velasco vs. Poizat, 37 Phil.,
802) xxx

We clarify that the trust fund doctrine is not limited to reaching the
stockholders unpaid subscriptions. The scope of the doctrine when the
corporation is insolvent encompasses not only the capital stock, but
also other property and assets generally regarded in equity as a trust
fund for the payment of corporate debts.

All assets and property belonging to the corporation held in trust for
the benefit of creditors that were distributed or in the possession of the
stockholders, regardless of full payment of their subscriptions, may be
reached by the creditor in satisfaction of its claim.

Also, under the trust fund doctrine, a corporation has no legal

capacity to release an original subscriber to its capital stock from the
obligation of paying for his shares, in whole or in part, without a
valuable consideration, or fraudulently, to the prejudice of creditors.
The creditor is allowed to maintain an action upon any unpaid
subscriptions and thereby steps into the shoes of the corporation for
the satisfaction of its debt.

To make out a prima facie case in a suit against stockholders of an

insolvent corporation to compel them to contribute to the payment of
its debts by making good unpaid balances upon their subscriptions, it
is only necessary to establish that the stockholders have not in good
faith paid the par value of the stocks of the corporation

(2) What are the remedies available to corporation to enforce payment on

unpaid stock subscription?

The provisions of the Corporation Law (Act No. 1459) given

recognition of two remedies for the enforcement of stock subscriptions.

The first and most special remedy given by the statute consists in
permitting the corporation to put up the unpaid stock for sale and
dispose of it for the account of the delinquent subscriber. In this case
the provisions of section 38 to 48, inclusive , of the Corporation Law
are applicable and must be followed.
The other remedy is by action in court, concerning which we find in
section 49 the following provision:
 Nothing in this Act shall prevent the directors from collecting, by action
in any court of proper jurisdiction, the amount due on any unpaid
subscription, together with accrued interest and costs and expenses
incurred.

It is generally accepted doctrine that the statutory right to sell the

subscriber's stock is merely a remedy in addition to that which
proceeds by action in court; and it has been held that the ordinary legal
remedy by action exists even though no express mention thereof is
made in the statute. (Instone vs. Frankfort Bridge Co., 2 Bibb [Ky.], 576;
5 Am. Dec., 638.)

(3) When do you considered stock subscription delinquent?

Shares are considered delinquent if the stockholder failed to pay any

unpaid subscription within 30 days from the due date thereof
(Corporation Code, sec. 67).

Jesus V. Lanuza et.al. vs. Court of Appeals

G.R. No. 131394. March 28, 2005
http://sc.judiciary.gov.ph/jurisprudence/2005/mar2005/131394.htm

JESUS V. LANUZA, MAGADYA REYES, BAYANI REYES and ARIEL

REYES
vs.
COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION,
DOLORES ONRUBIA, ELENITA NOLASCO, JUAN O. NOLASCO III,
ESTATE OF FAUSTINA M. ONRUBIA, PHILIPPINE MERCHANT
MARINE SCHOOL, INC.
G.R. No. 131394.March 28, 2005

FACTS:

Philippine Merchant Marine School, Inc. (PMMSI) had seven

hundred founders shares and seventy-six common shares as its initial
capital stock subscription reflected in the articles of incorporation.
However, private respondents and their predecessors who were in control
of PMMSI registered the companys stock and transfer book for the first
time in 1978, recording thirty-three (33) common shares as the only issued
and outstanding shares of PMMSI.
 Sometime in 1979, a special stockholders meeting was called and
held on the basis of what was considered as a quorum of twenty-seven
common shares, representing more than two-thirds of the common shares
issued and outstanding. In 1982, the heirs of one of the original
incorporators, Juan Acayan, filed a petition with the SEC for the
registration of their property rights over one hundred (120) founders
shares and twelve (12) common shares owned by their father. The SEC
held that the heirs were entitled to the claimed shares and called for a
special stockholders meeting to elect a new set of officers. As a result,
the shares of Acayan were recorded in the stock and transfer book.

A special stockholders meeting was held to elect a new set of

directors. Private respondents thereafter filed a petition with the SEC
questioning the validity of the 06 May 1992 stockholders meeting, alleging
that the quorum for the said meeting should not be based on the 165
issued and outstanding shares as per the stock and transfer book, but on
the initial subscribed capital stock of seven hundred seventy-six (776)
shares, as reflected in the 1952 Articles of Incorporation.

ISSUE:

Whether or not the basis of quorum for a stockholders meeting is

the outstanding capital stock as indicated in the articles of incorporation.

RULING:

YES.

The stock and transfer book of PMMSI cannot be used as the sole
basis for determining the quorum as it does not reflect the totality of shares
which have been subscribed, more so when the articles of incorporation
show a significantly larger amount of shares issued and outstanding as
compared to that listed in the stock and transfer book. A stock and
transfer book is one which records the names and addresses of all
stockholders arranged alphabetically, the instalments paid and unpaid on
all stock for which subscription has been made, and the date of payment
thereof; a statement of every alienation, sale or transfer of stock made,
the date thereof and by and to whom made; and such other entries as
may be prescribed by law.
To base the computation of quorum solely on the deficient stock and
transfer book, and completely disregarding the issued and outstanding
shares as indicated in the articles of incorporation would work injustice to
the owners and/or successors in interest of the said shares.
 It is to be explained, that if at the onset of incorporation a corporation
has 771 shares subscribed, the Stock and Transfer Book should likewise
reflect 771 shares. Any sale, disposition or even reacquisition of the
company of its own shares, in which it becomes treasury shares, would
not affect the total number of shares in the Stock and Transfer Book. All
that will change are the entries as to the owners of the shares but not as
to the amount of shares already subscribed.

Discussion Questions:
(1) How does the Court determine the quorum? What shares are
considered in the computation of the quorum? Illustrate as discuss in
the case.

A quorum shall consist of the stockholders representing a majority

of the outstanding capital stock or majority of the members in the
case of non-stock corporation.

The articles of incorporation has been described as one that defines

the charter of the corporation and the contractual relationships
between the State and the corporation, the stockholders and the State,
and between the corporation and its stockholders.[27] When PMMSI
was incorporated, the prevailing law was Act No. 1459, otherwise
known as The Corporation Law. Section 6 thereof states:

Sec. 6. Five or more persons, not exceeding fifteen, a majority of

whom are residents of the Philippines, may form a private corporation
for any lawful purpose or purposes by filing with the Securities and
Exchange Commission articles of incorporation duly executed and
acknowledged before a notary public, setting forth:

(7) If it be a stock corporation, the amount of its capital stock, in

lawful money of the Philippines, and the number of shares into which it
is divided, and if such stock be in whole or in part without par value
then such fact shall be stated; Provided, however, That as to stock
without par value the articles of incorporation need only state the
number of shares into which said capital stock is divided.

(8) If it be a stock corporation, the amount of capital stock or number

of shares of no-par stock actually subscribed, the amount or number of
 shares of no-par stock subscribed by each and the sum paid by each
on his subscription.

Thus, quorum is based on the totality of the shares which have been
subscribed and issued, whether it be founders shares or common
shares.[37] In the instant case, two figures are being pitted against
each other those contained in the articles of incorporation, and those
listed in the stock and transfer book.

To base the computation of quorum solely on the obviously

deficient, if not inaccurate stock and transfer book, and completely
disregarding the issued and outstanding shares as indicated in the
articles of incorporation would work injustice to the owners and/or
successors in interest of the said shares. This case is one instance
where resort to documents other than the stock and transfer books is
necessary. The stock and transfer book of PMMSI cannot be used as
the sole basis for determining the quorum as it does not reflect the
totality of shares which have been subscribed, more so when the
articles of incorporation show a significantly larger amount of shares
issued and outstanding as compared to that listed in the stock and
transfer book. As aptly stated by the SEC in its Order dated 15 July
1996

(2) What books and records are used to determine the outstanding
shares? Discuss the purpose and relevance of these books and
records.

To base the computation of quorum solely on the obviously

deficient, if not inaccurate stock and transfer book, and completely
disregarding the issued and outstanding shares as indicated in the
articles of incorporation would work injustice to the owners and/or
successors in interest of the said shares. This case is one instance
where resort to documents other than the stock and transfer books is
necessary. The stock and transfer book of PMMSI cannot be used as
the sole basis for determining the quorum as it does not reflect the
totality of shares which have been subscribed, more so when the
articles of incorporation show a significantly larger amount of shares
issued and outstanding as compared to that listed in the stock and
transfer book.
The National Exchange Co., Inc. vs. I.B. Dexter
G.R. No. L-27872 February 25, 1928
http://www.lawphil.net/judjuris/juri1928/feb1928/gr_l-
27872_1928.html

NATIONAL EXCHANGE CO., INC., petitioner

vs.
I.B. DEXTER, respondent
G.R. No. L-27872 February 25, 1928

FACTS:

This action was instituted in the Court of First Instance of Manila by

the National Exchange Co., Inc., as assignee (through the Philippine
National Bank) of C. S. Salmon & Co., for the purpose of recovering from
I. B. Dexter a balance of P15,000, the par value of one hundred fifty shares
of the capital stock of C. S. Salmon & co., with interest and costs. Upon
hearing the cause the trial judge gave judgment for the plaintiff to recover
the amount claimed, with lawful interest from January 1, 1920, and with
costs. From this judgment the defendant appealed.
It appears that on August 10, 1919, the defendant, I. B. Dexter,
signed a written subscription to the corporate stock of C. S. Salmon & Co.
in the following form: I hereby subscribe for three hundred (300) shares of
the capital stock of C. S. Salmon and Company, payable from the first
dividends declared on any and all shares of said company owned by me
at the time dividends are declared, until the full amount of this subscription
has been paid.
Upon this subscription the sum of P15,000 was paid in January,
1920, from a dividend declared at about that time by the company,
supplemented by money supplied personally by the subscriber. Beyond
this nothing has been paid on the shares and no further dividend has been
declared by the corporation. There is therefore a balance of P15,000 still
paid upon the subscription.

ISSUE:

Whether or not the stipulation contained in the subscription to the

effect that the subscription is payable from the first dividends declared on
the shares has the effect of relieving the subscriber from personal liability
in an action to recover the value of the shares.

RULING:
 NO.

In discussing this problem we accept as sound law the proposition

propounded by the appellant's attorneys and taken from Fletcher's
Cyclopedia as follows: In the absence of restrictions in its character, a
corporation, under its general power to contract, has the power to accept
subscriptions upon any special terms not prohibited by positive law or
contrary to public policy, provided they are not such as to require the
performance of acts which are beyond the powers conferred upon the
corporation by its character, and provided they do not constitute a fraud
upon other subscribers or stockholders, or upon persons who are or may
become creditors of the corporation.
Pursuant to such, we find that the Philippine Commission inserted
in the Corporation Law, enacted March 1, 1906, the following provision:
"no corporation shall issue stock or bonds except in exchange for actual
cash paid to the corporation or for property actually received by it at a fair
valuation equal to the par value of the stock or bonds so issued."
The prohibition against the issuance of shares by corporations
except for actual cash to the par value of the stock to its full equivalent in
property is thus enshrined in both the organic and statutory law of the
Philippine; Islands; and it would seem that our lawmakers could scarely
have chosen language more directly suited to secure absolute equality
stockholders with respect to their liability upon stock subscriptions. Now,
if it is unlawful to issue stock otherwise than as stated it is self-evident that
a stipulation such as that now under consideration, in a stock subcription,
is illegal, for this stipulation obligates the subcriber to pay nothing for the
shares except as dividends may accrue upon the stock. In the contingency
that dividends are not paid, there is no liability at all. This is discrimination
in favor of the particular subcriber, and hence the stipulation is unlawful.

Discussion Questions:

(1) Can a subscription be made payable from the first dividends declared
on the shares? Cite legal basis and relate your answer to the equality
of shares doctrine.

NO.

In discussing this problem we accept as sound law the proposition

propounded by the appellant's attorneys and taken from Fletcher's
Cyclopedia as follows: In the absence of restrictions in its character, a
 corporation, under its general power to contract, has the power to
accept subscriptions upon any special terms not prohibited by positive
law or contrary to public policy, provided they are not such as to require
the performance of acts which are beyond the powers conferred upon
the corporation by its character, and provided they do not constitute a
fraud upon other subscribers or stockholders, or upon persons who are
or may become creditors of the corporation.
Pursuant to such, we find that the Philippine Commission inserted
in the Corporation Law, enacted March 1, 1906, the following provision:
"no corporation shall issue stock or bonds except in exchange for
actual cash paid to the corporation or for property actually received by
it at a fair valuation equal to the par value of the stock or bonds so
issued."
The prohibition against the issuance of shares by corporations
except for actual cash to the par value of the stock to its full equivalent
in property is thus enshrined in both the organic and statutory law of
the Philippine; Islands; and it would seem that our lawmakers could
scarely have chosen language more directly suited to secure absolute
equality stockholders with respect to their liability upon stock
subscriptions. Now, if it is unlawful to issue stock otherwise than as
stated it is self-evident that a stipulation such as that now under
consideration, in a stock subcription, is illegal, for this stipulation
obligates the subcriber to pay nothing for the shares except as
dividends may accrue upon the stock. In the contingency that dividends
are not paid, there is no liability at all. This is discrimination in favor of
the particular subcriber, and hence the stipulation is unlawful.

(2) Give the rationale of the answer in number one.

The prohibition against the issuance of shares by corporations except

for actual cash to the par value of the stock to its full equivalent in
property is thus enshrined in both the organic and statutory law of the
Philippine; Islands; and it would seem that our lawmakers could scarely
have chosen language more directly suited to secure absolute equality
stockholders with respect to their liability upon stock subscriptions. Now,
if it is unlawful to issue stock otherwise than as stated it is self-evident
that a stipulation such as that now under consideration, in a stock
subcription, is illegal, for this stipulation obligates the subcriber to pay
nothing for the shares except as dividends may accrue upon the stock.
In the contingency that dividends are not paid, there is no liability at all.
This is discrimination in favor of the particular subcriber, and hence the
stipulation is unlawful.

(3) What is watered stock? Give examples of watered stock. Discuss

briefly.

Watered stock is stock issued not in exchange for its equivalent

either in cash, property, share, stock dividends, or services, It includes
stock:
(1) issued without consideration (bonus share); or

(2) issued as fully paid when the corporation has received a

lesser sum of money than its par or issued value (discount share);
or

(3) issued for a consideration other than actual cash, such as

property or services, the fair valuation of which is less than its
par or issued value; or

(4) issued as stock dividend when there are no sufficient

retained earnings or surplus.

Watered stock is an asset with an artificially-inflated value. The term is

most commonly used to refer to a form of securities fraud common under
older corporate laws that placed a heavy emphasis upon the par value of
stock.

For example, if the founders of Company XYZ invested 10 million

pesos in the company and then decided to take the company public by
selling 50 million shares priced at 3pesos (a $150 million pesos market
capitalization), analysts might say that Company XYZ is issuing watered
stock.

Another example is where the par value of par value shares or the
issued value of no par value shares is P100.00 and only P80.00 is paid to
the corporation but the share is issued as fully paid, the share is
considered "watered" or "fictitiously paid up" to the extent of P20.00, which
is the difference between the consideration paid and the par value or
issued value of the share taken. In such case, the subscriber is liable for
the difference of P20.00.
 The issue itself is not void, but the agreement that the shares shall
be paid for less than its par or issued value is illegal and void and
cannot be enforced. (Phil. Trust and Company vs.Rivera, 44 Phil. 470
[1923].)

Aquilino Rivera et.al. vs. The Hon. Alfredo C. Florendo et.al.

G.R. No. L-57586 October 8, 1986
http://www.lawphil.net/judjuris/juri1986/oct1986/gr_57586_1986.htm
l

AQUILINO RIVERA, ISAMU AKASAKO, FUJIYAMA HOTEL &

RESTAURANT, INC.
vs.
THE HON. ALFREDO C. FLORENDO, as Judge of the Court of First
Instance of Manila (Branch XXXVI), LOURDES JUREIDINI and
MILAGROS TSUCHIYA
G.R. No. L-57586. October 8, 1986

FACT:

Petitioner corporation was organized and register under Philippine

laws with a capital stock of P1,000,000.00 divided into 10,000 shares of
P100.00 par value each by the herein petitioner Rivera and four (4) other
incorporators. Sometime thereafter petitioner Rivera increased his
subscription from the original 1,250 to a total of 4899 shares.

Subsequently, Isamu Akasako, a Japanese national and co-

petitioner who is allegedly the real owner of the shares of stock in the
name of petitioner Aquilino Rivera, sold 2550 shares of the same to
private respondent Milagros Tsuchiya for a consideration of P440,000.00
with the assurance that Milagros Tsuchiya will be made the President and
Lourdes Jureidini a director after the purchase.

Aquilino Rivera who was in Japan also assured private respondents

by overseas call that he will sign the stock certificates because Isamu
Akasako is the real owner.

However, after the sale was consummated and the consideration

was paid with a receipt of payment therefor shown, Aquilino Rivera
refused to make the indorsement unless he is also paid.

ISSUE:
 Whether or not the respondent court of first instance have no
jurisdiction over the petition for mandamus and receivership "as well as in
placing the corporate assets under provisional receivership in the guise of
a writ of preliminary mandatory injunction.

RULING:

YES.

It has already been settled that an intracorporate controversy would

call for the jurisdiction of the Securities and Exchange Commission. On
the other hand, an intra-corporate controversy has been defined as "one
which arises between a stockholder and the corporate. There is no
distinction, qualification, nor any exemption whatsoever."

This Court has also ruled that cases of private respondents who are
not shareholders of the corporation, cannot be a "controversy arising out
of intracorporate or partnership relations between and among
stockholders, members or associates; between any or all of them and the
corporation, partnership or association, of which they are stockholders,
members or associates, respectively."

Discussion Questions:

(1) What is intra-corporate controversy? Give at least three (3)

examples.

It is one which arises between a stockholder and the

corporation or among the stockholders involving internal affairs of
the corporation.

An intra-corporate controversy is one which "pertains to any

of the following relationships:

(1) between the corporation, partnership or association and

the public;

(2) between the corporation, partnership or association and

the State in so far as its franchise, permit or license to operate is
concerned;
 (3) between the corporation, partnership or association and its
stockholders, partners, members or officers; and
(4) among the stockholders, partners or associates
themselves

(2) What is inter-corporate controversy? Give at least three (3)

examples.

It is one that arises between a mother corporation and

satellite corporation involving internal affairs of the
corporation.

For example, A Mother Corporation in Manila is having

problems in their internal affairs with the subsidiary
corporation in Cebu. This is an inter-corporate matter that can
be solved between the two.

(3) At PRESENT, who has the jurisdiction over intra-corporate

controversies? Cite legal basis.

In the recent case of Chateau De Baie Condominium Corporation v.

Sps. Moreno, an action involving the legality of assessment dues against
the condominium owner/developer, the Court held that, the matter being
an intra-corporate dispute, the RTC had jurisdiction to hear the same
pursuant to R.A. No. 8799.

(4) Discuss the rule relating to the transfer of shares of stock by

delivery.

For a valid transfer of stocks, the requirements are as follows:

(a) There must be delivery of the stock certificate;

(b) The certificate must be endorsed by the owner or his attorney-

in-fact or other persons legally authorized to make the transfer; and,

(c) to be valid against third parties, the transfer must be recorded in

the books of the corporation.

(5) Can a corporation validly refuse registration of transfer of shares if

the certificate of stock is not indorsed?
 Yes, a corporation can validly refuse registration
because the law is clear that in order that a transfer of stock
certificate must be properly indorsed and that to such
certificate of stock is vested in the transferee by the delivery
of the duly indorsed certificate(Razon vs IAC, 207 SCRA 234),
even without executing a deed of assignment or sale of the
shares which is necessary only when no certificate of stock
has yet been issued or where the same is not in the
possession for whatever reason of the transferor.

The delivery of the stock certificate which represents the

shares to be alienated is essential for the protection of both
the corporation and the stockholder concerned.