Sei sulla pagina 1di 12

FINANCING THE CORPORATION; CAPITAL STRUCTURE and right of said preferred stock; and the subsequent right to a reversion

right of said preferred stock; and the subsequent right to a reversion of the voting
(15.4.4) As to voting rights power to the common stock in the event of the payment of a full year's 6% dividend shall
be a continuing privilege and right of said common stock and its holders."
Ellingwood v. Wolf’s Head Oil Refining 38 A. 2d 743 (1944)
A demurrer was interposed by the preferred stockholders to such an interpretation as asserted.
DOCTRINE: A certificate of incorporation may contain any provision with respect to stock to be Rather, they said that as of December 12, 1942, and thereafter, the corporation was in default in
issued by corporation and voting rights to be exercised by stock that is agreed upon by the parties respect to the declaration and payments of dividends in the amount of two years' dividends upon
provided the provision agreed to is not against public policy. the preferred stock, and, while the voting period of the preferred stock was terminated by reason
of the payment of a full year's dividend at 6%, yet, the right to an election was not terminated but
FACTS: survived, and such right was subject to no further conditions than those to which it previously was
subjected, and that it may be exercised as often and as long as the corporation shall be found to
From the date of Wolf’s Head Oil Refining Company organization in 1929 until May 4, 1936, the be in default of the payment of 6% dividends on the preferred stock in the amount of two years.
directors of the corporation were elected by the majority common stockholders.
The appellant contends that the subsequent wording of the proviso in Article V of the certificate of
Prior to the stockholder’s meeting held on May 4, 1936, the holders of majority preferred stocj incorporation, "until the corporation shall have declared and paid for a period of a full year a 6%
gave notice to the corporation, since there existed a default in the declaration and payment of dividend on the preferred stock," restricts the above-quoted language of the article with respect to
dividends of 6% on the preferred stock in in an amount of two years' dividends, that they, the the duration of the time when the preferred stockholders have the right to elect to exercise the
preferred stockholders, elected to exercise their sole right to vote for the election of directors for sole right to vote for the election of directors and for all other purposes. Basically challenging the
the ensuing year at the 1936 stockholders' meeting. preferred stockholders’ right to vote at the annual meeting.

When the preferred stockholders and the common stockholders met at the annual meeting held This being the situation the court is called upon to determine the voting rights of the two classes
on May 3, 1943, the corporation was in default in respect to the declaration and payment of of stock under the pertinent charter provisions.
dividends in the amount of two years' dividends on the preferred stock. All of said arrearages of
dividends had accrued prior to 1942, and during said year 1942 the corporation declared and paid ISSUE: Whether or not the preferred stockholders were entitled to vote for the election of the
a full 6% dividend on the preferred stock. directors and for all other purposes at the annual meeting?

During the years 1936, 37, 38, 39, 40 and 41 various amounts of dividends were declared and HELD:
paid on the preferred stock, and various dividends were passed. It was not until the year 1942 that Yes. The decree of the Chancellor is affirmed. The persons whose names appeared on the ticket
four dividends aggregating 6% were declared and paid on the preferred stock. The sole right of nominated and voted for by the preferred stockholders are the legally elected directors of the
the preferred stockholders to elect the directors was not challenged by the holders of the common corporation.
stock from May, 1936, through 1942.
A certificate of incorporation may contain any provision with respect to the stock to be issued by
However, on May 4, 1943, the holders of a majority of the common stock asserted that they the corporation, and the voting rights to be exercised by said stock, that is agreed upon by the
possessed the sole right to vote for the election of directors for the ensuing year, for the reason stockholders, provided that the provision agreed to is not against public policy. The rights of
that a full year's dividend at 6% had been declared and paid to the holders of the preferred stock stockholders are contract rights and that it is necessary to look to the certificate of incorporation
during the year 1942; thus causing the right to elect the directors to revert to the holders of the to ascertain what those rights are.
common stock under the provisions of Article V:
Nothing is to be presumed in favor of preferences attached to stock, and when a corporate charter
"V. Except as otherwise required by the statutes of the State of Delaware, or as herein attempts to confer preferences upon any class of stock provided for by it the same should be
otherwise provided, the holders of the common stock shall exclusively possess voting expressed in clear language. The instrument should be considered in its entirety, and all of the
power for the election of directors, and for all other purposes, and the holders of the language reviewed together in order to determine the meaning intended to be given to any portion
preferred stock shall have no voting power; provided, however, that if at any time the of it.
corporation shall be in default in respect to the declaration and payment of dividends in
the amount of two years' dividends on the preferred stock, then the holders of a majority The charter of Wolf's Head Oil Refining Company, Incorporated, evidences an intention on the
of the preferred stock shall have an election to exercise the sole right to vote for the part of the incorporators to make provision for the protection of the preferred stockholders.
election of directors and for all other purposes, to the exclusion of any such right on the Article IV – preferred stockholders shall be entitled to full payment of the par value of
part of the holders of the common stock until the corporation shall have declared and their shares and all unpaid dividends accrued thereon, before any of the assets shall be
paid for a period of a full year a 6% dividend on the preferred stock, when the right to distributed to the common stockholders in case of "liquidation, dissolution or winding up
vote for the election of directors, and for all other purposes, shall revert to the holders of the affairs of the corporation"; also gives to the board of directors the optional right to
of the common stock. The election on the part of the holders of the preferred stock shall redeem the preferred stock in whole or in part
be consummated and effectuated by a notice to the corporation of their decision to
exercise such right by holders of a majority of the preferred stock. During the time within Article V - guarantees to the holders of the preferred stock "cumulative dividends
which the holders of the preferred stock are exercising under this election the right to thereon at the rate of six per cent for each and every fiscal year of the company."
vote upon their stock, the holders of the common stock shall have no right to vote upon
their stock. The said right of the preferred stock and its holders to exercise an election Article V gives to the holders of the common stock exclusive "voting power for the election of
to vote shall survive any exercise of such election and a subsequent reversion of the directors, and for all other purposes." This is followed by the provision that the preferred
right to vote to the common stock and its holders, and shall be a continuing privilege stockholders shall have no voting power
Corporation Law | G05 2nd Sem 2018-2019 | Atty. Peralta | Page 1
However, it also contains the proviso “that if at any time the corporation shall be in default in The capital stock was increased to $750,000 then later on it became $ 1,500,000, represented by
respect to the declaration and payment of dividends in the amount of two years dividends on the 8500 shares of common stock of the par value of $100 a share and provision was made for the
preferred stock, then the holders of a majority of the preferred shall have an election to exercise issuance of 6500 shares of preferred stock of the same par value.
the sole right to vote for the election of directors and for all other purposes, to the exclusion of any
such right on the part of the holders of the common stock until the corporation shall have declared In 1921, the capital stock of the Big Lend Company consisted entirely of common stock.
and paid for a period of a full year a 6% dividend on the preferred stock, when the right to vote for
the election of directors, and for all other purposes, shall revert to the holders of the common Also, Art. 6 of the AOI was amended:
stock.” "AMENDED ARTICLE VI
XXX
When a six per cent dividend for a period of a full year is paid on the preferred stock, the sole right "(d) In the event of any liquidation, dissolution or winding up of the Corporation the holders
to vote for directors and for all other purposes reverts to the common stockholders, of the preferred stock shall be entitled to be paid in full the par value thereof, and all
notwithstanding the fact that dividends in the amount of two years are due on the preferred stock. accrued unpaid dividends thereon before any sum shall be paid to or any assets distributed
If the preferred stockholders failed to again elect to exercise the sole right to vote, by giving notice among the holders of the common stock, but after payment to the holders of the preferred
to the corporation of their decision to exercise such right, as the charter requires them to do, the stock of the amounts payable to them as hereinbefore provided, the remaining assets and
common stockholders would be entitled to exercise the right to vote for the election of directors funds of the Corporation shall be paid to and distributed among the holders of the common
and for all other purposes. But if the corporation is still in default in the declaration and payment stock.(important )
of dividends in the amount of two years' dividends on the preferred stock, when a six per cent · In 1946, a survey of the corporate financial structure was authorized.
dividend is paid on preferred stock for the period of a full year, said preferred stockholders can The board of trustees adopted a resolution providing for the reduction of all capital assets to cash
still avail themselves of the right to vote for the election of directors and for all other purposes, if as speedily as circumstances might permit in order that, at a subsequent date, the stockholders
they comply with the conditions of the charter by giving notice to the corporation of their decision might consider and adopt a plan of liquidation, distribution, and dissolution of the corporation.
to exercise such right to vote.
Such a plan was later adopted, and respondents became the liquidating trustees.
The language used in the charter describing the conditions under which the preferred stockholders ● It developed that the net assets of the corporation were sufficient to redeem the
obtain the right to vote has nothing to say about the time when the arrearage in dividends on said preferred stock at par value, but if the preferred stockholders receive the promised
stock shall have accrued. dividends, assets instead of surplus profits will have to be used therefor.
● The result will be that the common stockholders will get no part of such assets.
When a majority of the preferred stockholders first elected to exercise their right to vote for the
election of directors and for all other purposes in 1936, the dividends accrued and unpaid on the The liquidating trustees, being in doubt as to who was entitled to receive the assets upon
preferred stock amounted to 22½%, of that said accrued and unpaid dividends was more than two liquidation after the redemption of the preferred stock, brought this action to secure a declaratory
years' dividends. From 1936 to May 3, 1943, additional dividends accrued on the preferred stock judgment.
amounting to 40½%, and that the dividends paid on said stock during that period amounted to
25½%. Arguments of the parties regarding Art. 6 of AOI:
● Appellant: "all accrued unpaid dividends" means that before there can be a dividend
Therefore it clearly appears that when the annual meeting of the corporation was held on May 3, there must be surplus profits, and that, since none ever existed, the right to such
1943, dividends amounting to 37½% were accrued and unpaid on the preferred stock. Thus it dividends never accrued and therefore none are payable.
appears that the corporation was in default in respect to the declaration and payment of dividends ● Respondents: subdivisions (a), (b), and (c) of Amended Article VI of the articles of
in the amount of two years' dividends. incorporation relate to the payment of dividends to preferred stockholders out of surplus
=22 ½% + (40 ½% - 25 ½ %) = 37 ½%, so preferred stockholders had the right to vote during May profits while the corporation is a going concern, but that subdivision (d) authorizes the
3, 1943. payment of accumulated and unpaid dividends out of assets upon liquidation of the
corporation, even though there be no surplus profits available. They argue that, the
corporation being in the process of liquidation, there can be no impairment of its capital
(15.4.5) Preference upon liquidation and, therefore, there is no longer any purpose in restricting the payment of dividends to
surplus profits.
Hay v. Hay 230 P. 2d 791 (1951)
Trial court entered a judgment declaring that the amended articles of incorporation required that
DOCTRINE: The holders of the preferred stock are entitled both to the par value of their stock and the holders of the cumulative preferred stock receive from the assets of the corporation, so far as
to the dividends which have not been declared or paid but which would have been declared or they might reach, an amount equal to six per cent per annum computed on the par value of each
paid if there had been surplus or net profits of the corporation wisely applicable to such dividends share from the date of issuance thereof to date of liquidation (January 18, 1947), and that the
during the periods when no dividends have been paid. holders of the common stock were not entitled to receive any distribution of assets until payment
of the six per cent per annum accrued dividend to the preferred stockholders had been fully made.
FACTS:
The Big Lend Company was organized in 1901 to conduct a general real-estate business, to ISSUE: Whether the holders of cumulative preferred stock upon liquidation of the
borrow and loan money, and to buy and sell merchandise. corporation are entitled to be paid accrued dividends from the corporate assets before the
common stockholders become entitled to participate in the distribution thereof (the
The capital stock consisted of $10,000 divided into 100 shares of common stock of the par value corporation having no earned surplus or net profits).
of $100 each

Corporation Law | G05 2nd Sem 2018-2019 | Atty. Peralta | Page 2


HELD: YES. Respondents are entitled under the provisions of subparagraph (d) to receive a sum conferring this extraordinary power upon corporations must be clear and definite in its terms. And
equal to all accrued unpaid dividends as well as the par value of their cumulative preferred stock of such preferred stock it is said that it is not ordinary preferred stock, nor technically is it preferred
in the liquidation of this corporation before appellants shall be entitled to participate therein. stock at all. It is sui generis, not governed by the ordinary rules, but by the provisions of the statutes
JUDGMENT OF TRIAL COURT IS AFFIRMED. by which it is authorized. Suffice it to say that the preferences given the holders of the preferred
stock in the conversion agreements here in controversy were not authorized by statute when
The two classes of stockholders contracted between themselves with respect to the division of the made. The stock was not statutory preferred stock of the kind just described.
assets in case of liquidation. Their agreement was that the preferred stockholders should receive
the par value of their stock plus an amount equal to "all accrued unpaid dividends thereon" before The argument is advanced that the certificates of preferred stock issued in exchange for bonds
any assets should be distributed to the common stockholders. were in fact certificates of indebtedness and not stock. We cannot concur in this view. It is true
It should be noted that the articles contain no condition to the effect that the surplus profits must that preferred stock, so-called, may be issued in such a way and under such terms as to make the
be equal to, or greater than, the total of all accrued unpaid dividends before such distribution could certificates thereof merely evidence of indebtedness and the holders creditors of the corporation
be made. The parties were contracting with reference to a possible future liquidation, a situation and not stockholders. Here, all facts and circumstances convincingly characterize the preferred
where the statutory prohibition (Rem. Rev. Stat., § 3823) against declaration of dividends out of stock issued by the street railway companies as preferred stock. In each instance, the
capital had no application. stockholders voted increases in the capital stock by the creation of preferred stock. The certificates
Therefore, the liquidating trustees have preference regardless of any consideration of profits or delivered to the holders of the bonds exchanged therefor designated the stock as preferred stock
surplus. and certified that the holders were entitled to the number of shares therein enumerated in the "full
paid preferred capital stock" of the companies. The holders of this stock had a right to vote in the
(15.4.6)Preference stockholder is not a creditor election of directors and were entitled to receive fixed yearly dividends payable semi-annually at
the times therein specified. The certificates contain every essential feature of a certificate of
Augusta Trust Co. v. Augusta Hallowell 134 Me. 314, 187 A.I. (1938) preferred stock and none of a contract creating the relation of a creditor of the corporation.

DOCTRINE: A statute conferring the extraordinary power upon corporations to issue certificates By surrendering their bonds and taking in lieu thereof preferred stock, the bondholders of these
of preferred stock, so--called, making the holders, creditors of the corporation as well as street railway companies ceased to be creditors and became mere stockholders. Those who have
stockholders and giving them a lien upon the property of the corporation with a priority over other not made the exchange and hold their bonds are entitled to the security of the mortgages shorn
creditors must be clear and definite in its terms. In this case, the preferences given to the holders of the illegal conversion agreements. The preferred stockholders are not entitled to share in the
of the preferred stock in the conversion agreements were not authorized by statute when made. assets of the companies until all creditors have been paid in full.
By surrendering their bonds and taking the preferred stock in lieu of the former, the bondholders
ceased to be creditors and became stockholders. Those who have not made the exchange and
hold their bonds are entitled to the security of the mortgages. The preferred stockholders are not (15.5) Nature of Subscription Contract
entitled to share in the assets of the company until all the creditors have been paid.
Garcia v. Lim Chu Sing 59 Phil. 562 (1934)
Limits on Preferred Stocks: DOCTRINE: The shares of a banking corporation do not constitute an indebtedness of the
a. They can be issued only with a stated par value corporation to the stockholder and, therefore, the stockholder is not a creditor of the bank for such
b. The preferences must be stated in both the articles of incorporation and in the certificate of shares. The indebtedness of a shareholder to a banking corporation cannot be compensated with
stock. the amount of his shares, there being no relation of creditor and debtor with respect to such shares.

FACTS: The Augusta Trust Company, a banking corporation, is the Trustee named in the General FACTS: Lim Chu Sing is the owner of shares of stock of the Mercantile Bank of China amounting
Convertible Mortgage which the Augusta, Hallowell Gardiner Railroad Co., a street railway to P10,000. The bank is now under liquidation.
corporation formerly furnishing transportation service in and between the cities represented in its
name, gave on to secure its issue of serial coupon bonds together with preferred stock which was Lim Chu Sing is a surety of Lim Cuan Sy. The principal Lim Cuan Sy had an account with the bank
issued in exchange for the bonds in accordance with the terms of the mortgage, which gave to the in the form of trust receipts, which were guaranteed by Lim Chu Sing as surety and with chattel
holders of the bonds the right and privilege of converting the same into preferred stock of the mortgage securities. Since Lim Cuan Sy failed to comply with his obligations with the bank, Lim
Company secured under the mortgage both as to principal and dividends equally and ratably with Chu Sing, as a surety, was required to sign a promissory note. On June 20, 1930, Lim Chu Sing
the bonds. All the franchises, lands, incomes, revenues and other property of every kind then executed a promissory note in the amount of P19,605.17, with interest at 6 percent per annum, in
owned or thereafter acquired by the Company were included in the conveyance to the Trustee favor of Mercantile Bank of China. Lim Chu Sing made several partial payments, but left an unpaid
and subjected to the lien of the mortgage. balance of P9,105.17.

The action is brought primarily to foreclose the several mortgages. The bank foreclosed the chattel mortgages and privately sold the property without Lim Chu Sing’s
knowledge and consent. The proceeds of the sale of the mortgaged chattels together with other
payments were applied to the amount of the promissory note, leaving the balance which the
ISSUE: W/N the holders of the preferred shares have the right to share in the proceeds of the sale plaintiff now seeks to collect. Lim Chu Sing is alleging that the debt of P9,106.17 may be
of the mortgaged property - NO. compensated with his credit amounting to P10,000 with the Mercantile Bank of China.

HELD: It is within the power of the legislature, by charter or statute, to prescribe that corporations ISSUE: Whether the P10,000, representing Lim Chu Sing’s value of the shares of stock with the
may issue certificates in the form of certificates of preferred stock, so-called, making the holders bank may be used to compensate the debt of P9,105.17
creditors of the corporation as well as stockholders, and giving them a lien upon the property of
the corporation with a priority over other creditors. Cook on Corp. It is held, however, that a statute
Corporation Law | G05 2nd Sem 2018-2019 | Atty. Peralta | Page 3
HELD: No. The shares of stock may not be used to compensate for the debt since there is no not to exceed ten per cent of the amount by us subscribed in any one month.”
creditor-debtor relationship with respect to the shares. -- Utah Hotel Co. v. Madsen, 43 Utah 285 (Utah 1913)
● Appellant and a large number of others had signed the foregoing agreement, and that
The shares of a banking corporation do not constitute an indebtedness of the corporation he had agreed to take fifty shares of the capital stock of the corporation men-tioned
to the stockholder and, therefore, the stockholder is not a creditor of the bank for such therein ; that the corporation therein mentioned was duly organized in accordance 'with
shares. The indebtedness of a shareholder to a banking corporation cannot be the terms and conditions and for the purpose mentioned in said agreement; that calls
compensated with the amount of his shares, there being no relation of creditor and debtor for the payment of the amounts subscribed for by the several subscribers were duly
with respect to such shares. made in the proportions and within the time specified in said agreement; and that
appellant was duly notified of each call as made and of the amount due thereon, but
A share of stock is not an indebtedness to the owner nor evidence of indebtedness, therefore, it notwithstanding that fact that he had failed and refused to pay the amount he had
is not a credit. agreed to pay or any part thereof, and that the whole amount of said subscription was
due and payable. The articles or agreement of incorporation was produced in evidence,
Stockholders, as such, are not creditors of the corporation. It is the prevailing doctrine of the and it appears upon the face thereof that the laws of this state were duly complied with
American courts, repeatedly asserted in the broadest terms, that the capital stock of a corporation in organizing the corporation. -- Utah Hotel Co. v. Madsen, 43 Utah 285, 288 (Utah
is a trust fund to be used more particularly for the security of creditors of the corporation, who 1913)
presumably deal with it on the credit of its capital stock.

Therefore, the defendant-appellant Lim Chu Sing not being a creditor of the Mercantile Bank of ISSUE:
China, although the latter is a creditor of the former, there is no sufficient ground to justify a W/N the above subscription agreement valid?
compensation. It is only Lim Chu Sing who is the debtor of the bank, not the other way around. HELD:
Other rulings: Yes.
The Court held that the agreement, being valid contract, bound the parties by its terms. There was
1) The failure to file an exception to a ruling rendered in open court denying a motion for the nothing in the law that prohibited the means by which the subscription agreement was entered
inclusion of a party as defendant deprives the petitioner, upon appeal, of the right to raise the into, in this case, by explicit contract. The Court held that in the absence of an explicit prohibition
question whether such denial was proper or improper. in the law against this kind of contract, and provided that it does not go against public policy and
morals, then it is a valid subscription agreement.
2) The percentage stipulated in a contract, for costs and attorney's fees for the collection of an
indebtedness, includes judicial costs. With regard to the issue of the Corporation’s acceptance of the agreement, the Court found that
the corporation itself sent notices demanding payment of the installments of the subscription. This
(15.5.1)Pre-incorporation subscription was held to be sufficient acceptance of the agreement.

Utah Hotel Co. v. Madsen 134 Pac. 557 (1913) Liability of Subscbibers. Comp. Laws 1907, secs. 314, 315, 316, and 332, providing for the
organization of business corporations, does not require that the subscribers to a
subscription for the capital stock shall sign the articles of incorporation or that the
subscription contract shall be incorporated into the articles in order to be enforceable; it
DOCTRINE: being perfectly competent for the subscribers to make a separate specific agreement to take and
The organization of business corporations, does not require that the subscribers to a subscription pay for a specified amount of the stock of the corporation to be issued when the corporation is
for the capital stock shall sign the articles of incorporation or that the subscription contract shall organized, which will be valid and enforceable whether the subscribers sign the articles of
be incorporated into the articles in order to be enforceable incorporation or not. (Page 288.)
Whoever subscribes to an unconditional agreement to take a given number of shares of a
FACTS: corporation thereby becomes a shareholder in respect to that number, subject to any valid
● This action is based upon the following agreement, which appellant admitted was signed conditions named in tlie subscription paper and to those' imposed by the general law. The act of
by himself: subscribing fixes the subscribers’ liability to the corporation and creditors, though he has not paid
“Salt 'Lake City, Utah, April 19, 1909. We, the under­signed, residents of the into the treasury of the corporation any part of his subscription or done any act in his character as
State of Utah, in consideration of one dollar to each by the other subscribers a stock-holder. (Page 293.) -- Utah Hotel Co. v. Madsen, 43 Utah 285 (Utah 1913)
paid, do hereby subscribe in the proportion hereinafter set opposite our
re-spective names, for the stock of a company to be organized, under the Wallace v. Eclipse Pocahontas Coal Co. 93 S.E. 293 (1919) (ABRIGO)
laws of the State of Utah, with a capital stock of fifteen hundred thousand Wallace v. Eclipse Pocahontas Coal Co. et.als.
($1,500,000) dollars, divided into fifteen thousand (15,000) shares of the par Charleston: February 4, 1919
value of one hundred ($100) dollars each. The principal place of busi-ness to
be located in Salt Lake City, Utah. The name of the company to be the Utah
Hotel Company. The general purpose of the company will be the erection and DOCTRINE:
ownership of a first class hotel to be built on the northeast intersection of As a general rule promoter of a corporation not yet organized, especially when their contracts are
South Temple and Main streets, Salt Lake City, Utah, and such other places made for and on behalf of the corporation, are regarded as the agents of the corporation, and
as may be provided in the articles of association, which are to be hereafter such contracts become binding upon them as well as upon the corporation after organization and
adopted. The pay-ment on the above subscription shall be payable in sums acceptance thereof by it.

Corporation Law | G05 2nd Sem 2018-2019 | Atty. Peralta | Page 4


FACTS: become binding upon them as well as upon the corporation after organization and acceptance
This is a suit for specific performance of a contract. The contract alleged that between plaintiff and thereof by it.
the defendants Perkins and Griffith, the latter acting for themselves and their associates O’Keeffe
and Weller, all pro-moters of the defendant corporation, organized afterward for the purpose of In the case at bar not only did the corporation have notice of Wallace’s right through its corporators
taking over and operating a tract of about 600 acres of coal in McDowell county, an option for a and agents, but all the stockholders of the corporation participating in the first meeting of
lease on which was then owned or controlled by the plaintiff. stockholders had notice that Wallace had at least some interest or claim, and Perkins and Griffith
knew the extent of it.
The substance of the contract was that in consideration that plaintiff would transfer, assign
or cause said lease to be assigned or transferred, first to Griffith, trustee, for him-self and Wallace was a subscriber to the capital stock of the corporation. His contract was to sell and
associates, and by him to the corporation when formed, the said Perkins, Griffith, O’Keeffe convey or cause to be conveyed to the corporation the leasehold and to accept in payment fully
and Weller would advance and supply the necessary money to pay the pur-chase price for paid up stock to the value of the property when fully equipped for mining and producing coal. When
said lease, namely $2,500.00, and to fully equip said property for operation for coal under the equipment was completed, he became entitled to the stock. One who has paid his subscription
the said lease, and when so equipped and ready for operation, plain-tiff was to have a one- to the capital stock of a corporation may by bill in equity compel the issuance of proper certificates
fifth interest in the property fully paid up, and that to effectually and fully carry out the therefore.
con-tract the defendant corporation was formed and organized with the definite and
positive agreement between plaintiff and the other promoters, acting for themselves on When shares of stock have some peculiar value to a purchaser and cannot be purchased on the
behalf of the corporation, that plaintiff was to have and receive in stock enough to represent market, or their value isn’t ascertainable with any degree of certainty, the purchaser may require
a one-fifth interest fully paid up in the corporation. specific performance of the contract.

And it is also alleged that of the $25,000.00 capital stock authorized, the estimated amount “The contract being so construed, what ought the decree below to have been? Of course the court
necessary to cover the cost of the lease and the equipment contemplated by the contract, plaintiff would not have been warranted in impressing plaintiff’s rights and interests as a trust upon the
was entitled to re-ceive at least fifty shares of the stock of the defendant cor-poration, while entire property and plant of the corporation. Clearly his contract was to take in payment stock in
but five shares had ever been issued to him. the corporation which he helped to organize and to which he caused the lease to be conveyed.
His bill was not framed in any other view, and the contract pleaded entitles him to no other relief
The bill further alleges full and complete performance of the contract by plaintiff on his part and or its equivalent. We are clearly of opinion however that the court was in error in limiting him to a
failure and refusal of the defendant company and of its promoters, officers and agents to execute money decree severally against the promoting shareholders. While they are no doubt liable jointly
the contract on their part. as well as severally, so is the corporation liable, as already indicated, either for the number, of
shares to which plaintiff may be entitled under the contract as now construed, if ascertainable or
The answers deny the contract as alleged and put in issue the material facts, and the answer of obtainable, if not, a money decree should be given against the corporation and Griffith, Perkins,
Weller and O’Keffe deny authority of Griffith and Perkins to bind them and want of notice of the Weller and O’Keeffe jointly for the value of the one-fifth of the property equipped for one operation
alleged rights of Wallace. as already stated.”

The decree appealed from, that the plain-tiff recover of the defendants the sum of one thousand Our conclusion is to reverse the decree and remand the cause with directions to the circuit court
and seventy-five dollars ($1075.00) each, ag-gregating the sum of $4,300.00, which the court to ascertain the value of the plant and property of the defendant corporation fully equipped with
found to be the value of forty-three shares of stock of which he had been deprived, being one-fifth one operation as indicated, and if the capital stock then authorized and unissued or issued and
of the shares issued less the five shares delivered to him and two shares contributed by him to outstanding and held by the said Griffith, Perkins, Weller and O’Keffe is sufficient to represent in
another stockholder according to an agreement which has no material bearing on the issues here value such one-fifth interest in said property such number of shares shall be decreed to be issued
presented. or transferred on the books of the corporation to plaintiff by the defendant corporation and said
promoting stockholders, and if not, then the plaintiff shall be decreed against the corporation and
The minutes of this meeting show that only the twenty-five shares subscribed were at first said stockholders jointly a money decree for the value of plaintiff’s interest in the property equipped
represented in person. Perkins was made chairman of the meeting, and Weller secretary. as aforesaid and as ascertained by the court, with interest thereon from the time when plaintiff
should have received said shares or the value thereof.
And thereupon the three present, namely Weller, Ayers and Perkins, as the very next business
proposed, proceeded to consider a preamble and res-olution, by whom presented does not (15.5.2)Post-incorporation subscription
appear, the manifest purpose of which was to resolute plaintiff as far as possible out of his interest
in the property and stock of the corpora-tion basing the proposition on facts differing materially Bayla, et.al. v. Silang Traffic Co., Inc.73 Phil. 557 (1942)
from those alleged and proven in this cause, and as far as material to this decision.
DOCTRINE:
ISSUE: Whether or not the corporation is liable upon a contract made for and on its behalf and The contract in question being one of purchase and not subscription as we have heretofore
fully executed on the part of Wallace. pointed out, we see no legal impediment to its rescission by agreement of the parties.
HELD: FACTS:
Yes. ● Petitioners in instituted this action in the CFI of Cavite against the respondent Silang
In this case the corporation as well as the promoters is liable to Wallace. As a general rule ● Traffic Co., Inc., to recover certain sums of money which they had paid severally to the
promoter of a corporation not yet organized, especially when their contracts are made for and on corporation on account of shares of stock they individually agreed to take and pay for
behalf of the corporation, are regarded as the agents of the corporation, and such contracts under certain specified terms and conditions:

Corporation Law | G05 2nd Sem 2018-2019 | Atty. Peralta | Page 5


● purchase price to be paid 5% upon the execution of the contract and the remainder in 2. No. The contract provides for interest of the rate of six per centum per annum on
installments of 5%, payable within the 1st month of each and every quarter starting July deferred payments. The provision regarding interest on deferred payments would not
1, 1935, w/ interest on deferred payments at 6%/annum until paid have been inserted if it had been the intention of the parties to provide for automatic
● They also agreed to forfeit in favor of seller in case of default w/o court proceedings forfeiture and cancellation of the contract. Moreover, the contract did not expressly
● The petitioners agreed to purchase the following number of shares and, up to April 30, provide that the failure of the purchaser to pay any installment would give rise to
1937, had paid the following sums on account thereof: forfeiture and cancellation without the necessity of any demand from the seller; and
Sofronio T. Bayla.......8 shares P360 under article 1100 of the Civil Code persons obliged to deliver or do something are not
Venancio Toledo........8 shares 375 in default until the moment the creditor demands of them judicially or extra-judicially
Josefa Naval..............15 shares 675 the fulfillment of their obligation, unless (1) the obligation or the law expressly
Paz Toledo................15 shares 675 provides that demand shall not be necessary in order that default may arise, (2) by
● BOD resolution Aug 1, 1937: rescinding the agreement reason of the nature and circumstances of the obligation it shall appear that the
● Petitioners' action for the recovery of the sums above mentioned is based on a designation of the time at which that thing was to be delivered or the service
resolution by the board of directors of the respondent corporation on August 1, 1937. rendered was the principal inducement to the creation of the obligation.
● The respondent corporation set up the following defenses:
1. (1) Resolution is not applicable to the petitioners Bayla, Naval, and Toledo Is the resolution of August 1, 1937, valid? The contract in question being one of purchase and not
because on the date thereof "their subscribed shares of stock had already subscription as we have pointed out, we see no legal impediment to its rescission by
automatically reverted to the defendant, and the installments paid by them agreement of the parties. To that rescission the petitioners apparently agreed, as shown by their
had already been forfeited"; and demand for the refund of the amounts they had paid as provided in said resolution. The
2. (2) Resolution of August 1, 1937, was revoked and cancelled by a subsequent attempted revocation of said rescission by the resolution of August 22, 1937, was invalid, it not
resolution of the board of directors of the defendant corporation dated August having been agreed to by the petitioners.
22, 1937.
● The trial court absolved the defendant from the complaint and declared forfeited in (15.6.3)Convertible Securities; stock options
favor of the defendant the shares of stock in question. It held that the resolution of
August 1, 1937, was null and void Merritt-Chapman & Scott Corp. v. New York Trust Co. 184 F. 2d 954
● CA modified the decision of the trial court. It affirmed the dismissal of the plaintiff’s
complained part thereof declaring their subscription canceled is reversed. Defendant is DOCTRINE: “A stock dividend does not change the proportional interest of each shareholder in
directed to grant plaintiffs 30 days after final judgment within which to pay the arrears the corporate enterprise. It changes only the evidence which represents the interest. It is a mere
on their subscription. “watering” of outstanding shares.”
● Both parties appealed to this Court by petition and cross-petition for certiorari.
FACTS: Stock purchase warrants were issued by Merritt-Chapman & Scott Corp. in bearer form.
ISSUE: Each certifies that the bearer is entitled to purchase full-paid and non-assessable shares of
W/N the contracts are subscriptions or sales of stock common stock of the corporation, at the price of $30 upon surrender of the warrant at the office of
W/N under the contract between the parties, the failure of the purchaser to pay any of the the New York Trust Co.
quarterly installments on the purchase price automatically gave rise to the forfeiture of the
amounts already paid and the reversion of the shares to the corporation. The basic purchase price of $30 was subject to downward revision, subject to certain
contingencies in the trusts deed. To insure availability of stocks purchasable under the warrants:
HELD:
The parties’ litigant, the trial court, and the Court of Appeals have interpreted or considered the 1. Trust deed required that stock certificates with aggregate amount of 40K shares shall
said agreement as a contract of subscription to the capital stock of the respondent corporation. It be delivered to the trustee.
should be noted, however, that said agreement is entitled "Agreement for Installment Sale of 2. It also constituted the Trust Co. as the corporation’s agent for the purpose of receiving
Shares in the Silang Traffic Company, Inc.,"; that while the purchaser is designated as the purchase price and to deliver stock certificates upon exercise of the warrants.
"subscriber," the corporation is described as "seller"; that the agreement was entered into on
March 30, 1935, long after the incorporation and organization of the corporation, which took place The trust deed provided that:
in 1927; and that the price of the stock was payable in quarterly installments spread over a period 1. Stock certificates deposited with the trustee shall not be deemed legally issued or
of five years. outstanding until delivered by the trustee.
2. The corporation. will, at all times during the life of the warrants, retain a number of
1. They are contracts of sale and not of subscription. "A subscription, properly speaking, authorized but unissued shares of the common stocks of the corporation represented
is the mutual agreement of the subscribers to take and pay for the stock of a corporation, by the stock certificates and stock scrip certificates then on deposit with the trustee,
while a purchase is an independent agreement between the individual and the and/or which the corporation may be required to deposit with the trustee (Sec. 7, Art.
corporation to buy shares of stock from it at stipulated price." In some particulars the III).
rules governing subscriptions and sales of shares are different. For instance, the
provisions of our Corporation Law regarding calls for unpaid subscription and On July 12, 1950, the corporation declared a stock dividend of 40% per share of no par common
assessment of stock (sections 37-50) do not apply to a purchase of stock. Likewise the stock on each legally issued and outstanding share of common stock.
rule that corporation has no legal capacity to release an original subscriber to its capital
stock from the obligation to pay for his shares, is inapplicable to a contract of purchase The dividend was payable on Oct. 16, 1950 from authorized but unissued shares to holders of the
of shares. stock as of the close of the business on Sept. 15, 1950. Its price was fixed at $20 per share.

Corporation Law | G05 2nd Sem 2018-2019 | Atty. Peralta | Page 6


It also directed the treasurer to transfer from the Earned Surplus Account to the Common Capital income debenture bearer bonds, issued under a trust indenture, calling for 8% interest, non-
Stock Account $20 for each dividend share, and directed the officers to give warrant holders cumulative. They were offered only to shareholders of the taxpayer but were assignable. The
outstanding under the trust deed and to The New York Trust Co. the 60-day notice required by debentures were payable in twenty years, December 31, 1956, with payment of general interest
Sec. 10, Art. III. in case the Corporation shall pay any stock dividend upon the outstanding conditioned upon the sufficiency of the net income to meet the obligation. The debenture holders
common stock; or take other specified actions which may affect the value of the stock purchase had priority of payment over stockholders but were subordinated to all other creditors. The
warrants. debentures were redeemable at the taxpayer's option and carried the usual acceleration
provisions for specific defaults. The debenture holders had no right to participate in management.
ISSUE: Whether or not the warrants had to be exercised before the specified period (in this case, Other changes not material here were made in the corporate structure. Debentures were issued
Sept. 15, 1950) in order for the warrant holders to share in the stock dividend to the amount of $150,000 face value. The greater part, $114,648, was issued in exchange for the
original preferred, with six percent cumulative guaranteed dividends, at its retirement price and
HELD: NO. the balance sold to stockholders at par, which was eventually paid with sums obtained by the
The warrants gave the holders thereof the privilege, unlimited in time, to purchase an aggregate purchasers from common stock dividends. Common stock was owned in the same proportions by
of 40,000 authorized but unissued shares. In 1928 when the warrants were issued, a definite the same stockholders before and after the reorganization.
number of the company's common shares were then outstanding. Had the warrant holders
forthwith exercised their option to purchase, they would have acquired a definite percentage of In the Talbot Mills case the taxpayer was a corporation which, prior to its recapitalization, had a
the common stock. capital stock of five thousand shares of the par value of $100 or $500,000. All of the stock with the
exception of some qualifying shares was held by members, through blood or marriage, of the
A stock dividend does not change the proportional interest of each shareholder in the Talbot family. In an effort to adjust the capital structure to the advantage of the taxpayer, the
corporate enterprise; it changes only the evidence which represents that interest. It is a company was recapitalized just prior to the beginning of the fiscal year in question, by each
mere "watering" of outstanding shares. stockholder surrendering four-fifths of his stock and taking in lieu thereof registered notes in
aggregate face value equal to the aggregate par value of the stock retired. This amounted to an
If the corporation were at liberty to declare stock dividends without making provision for warrant issue of $400,000 in notes to the then stockholders. These notes were dated October 2, 1939,
holders, the percentage of interest in the common-stock capital of the corporate enterprise which and were payable to a specific payee or his assignees on December 1, 1964. They bore annual
the warrant holders would acquire, if they thereafter purchased the shares subject to warrants, interest at a rate not to exceed 10% nor less than 2%, subject to a computation that took into
could be reduced practically to the point of extinction. consideration the net earnings of the corporation for the fiscal year ended last previous to the
annual interest paying date. There was, therefore, a minimum amount of 2% and a maximum of
Of course part of the injustice could be avoided by reducing the price to be paid for each share 10% due annually and between these limits the interest payable varied in accordance with
purchased under the warrants, but the privilege the warrant holders originally had of acquiring a company earnings. The notes were transferable only by the owner's endorsement and the notation
definite proportional interest in the common stock capital of the corporate enterprise would be lost of the transfer by the company. The interest was cumulative and payment might be deferred until
without recourse unless their contract with the corporation contained some provision to protect it. the note's maturity when 'necessary by reason of the condition of the corporation.' Dividends could
The purpose of section 7 was to supply such protection. It is a covenant by the corporation. not be paid until all then due interest on the notes was satisfied. The notes limited the corporation's
right to mortgage its real assets. The notes could be subordinated by action of the Board of
By this covenant the corporation recognized the possibility that a stock dividend might be declared Directors to any obligation maturing not later than the maturity of the notes. For the fiscal year in
and paid on outstanding shares before the warrants had been exercised, and promised in that question the maximum payment of 10% was made on the notes.
event to deposit with the trustee stock certificates representing that proportion of the dividend
shares which the shares subject to the warrants bore to all the common shares, and that the The payments in question on corporate obligations were for the years in the Kelley case, 1937,
trustee would deliver such dividend shares "without additional consideration," together with the 1938 and 1939; in the Talbot Mills case for the year 1940. Both corporations deducted the
purchasable shares, when the warrant holder pays for the latter. There is no suggestion in the payments as interest from their reports of gross income under statutory sections and regulations
language of section 7 to set any limit on the time when the warrant holders must exercise their set out in the footnote. The applicable statutes and regulations were identical for all periods. The
unlimited option to purchase common shares. Commissioner asserted deficiencies because the payments were considered dividends and not
interest.
For the foregoing reasons we conclude that the court erred in not accepting the appellants'
interpretation of the warrant holder's contract. At the argument it was agreed that if the There is not present in either situation the wholly useless temporary compliance with statutory
corporation were not stayed from distributing the dividend shares to stockholders of record on literalness which this Court condemned as futile, as a matter of law, in Gregory v. Helvering, 293
October 16, 1950, it would, in case of reversal of the judgment, deposit with the trustee certificates U.S. 465 , 55 S.Ct. 266, 97 A.L.R. 1355. The demonstrated possibility of sales by the holders of
representing dividend shares for the warrant holders and permit any warrant holder who may have the obligations to persons other than stockholders alone proves the differentiation. As material
exercised his warrant on or before the record date, in reliance on the judgment below, to rescind amounts of capital were invested in sock, we need not consider the effect of extreme situations
the transaction, if he so elects promptly after notice of reversal of the judgment, and be reinstated such as nominal stock investments and an obviously excessive debt structure.
as a warrant holder. Issue: Whether it is reasonably possible for determiners to reach the conclusion that the secured
annual payments were interest to creditors in the Talbot Mills case and dividends to stockholders
(15.6.4)Hybrid Securities in the Kelly case

John Kelley Co. v. Commissioner of Int. Revenue326 U.S. 521 (1946) Held:
In the Kelley case there were sales of the debentures as well as exchanges of preferred stock for
Facts: debentures, a promise to pay a certain annual amount, if earned, a priority for the debentures over
In the Kelley case, a corporation, all of whose common and preferred stock was owned directly or common stock, the debentures were assignable without regard to any transfer of stock, and a
as trustee by members of a family group, was reorganized by authorizing the issue of $250,000
Corporation Law | G05 2nd Sem 2018-2019 | Atty. Peralta | Page 7
definite maturity date in the reasonable future. These indicia of indebtedness support the Tax 4. Uniform rate of interest payable or income payable only out of profits
Court conclusion that the annual payments were interest on indebtedness. 5. Participation in the management and the right to vote
On the other hand, in the Talbot Mills case, the Tax Court found the factors there present of 6. The Trust indenture
fluctuating annual payments with a two per cent minimum, the limitation of the issue of notes to a. Trust Indenture: defines the right of the parties in a bond; executed between
stockholders in exchange only for stock, to be characteristics which distinguish the Talbot Mills the corporation and a trustee as representative of all the bondholders
notes from the Kelley Company debentures. Upon an appraisal of all the facts, the Tax Court b. Contents of the Trust Indenture:
reached the conclusion that the annual payments by Talbot Mills were in reality dividends and not ■ Description of the property mortgaged
interest. ■ Provisions for the care and maintenance of the property
■ Provisions for payment of taxes
We think these conclusions should be accepted by the Circuit Courts of Appeals and by ourselves. ■ Amount authorized under the issue
Judicial review of Tax Court decisions depends upon the Internal Revenue Code, Section 1141(c) ■ Conversion and redemption privileges
Powers (1), 26 U.S. C.A.Int.Rev.Code 1141(c)(1). ■ Conditions under which the mortgage may be released
■ Duties of the trustee
It reads: ■ Conditions for default
'To affirm, modify, or reverse. Upon such review, such courts shall have power to affirm or, if the ■ Remedies in case of default
decision of the Board is not in accordance with law, to modify or to reverse the decision of the FACTS:
Board, with or without remanding the case for a rehearing, as justice may require.' Jordan Company is a corporation organized for the purpose of engaging in real estate business.
It is only recently that we gave careful consideration to the problems of review of Tax Court On October 8, 1903, It was incorporated under the laws of the State of Georgia with an authorized
decisions. Dobson v. Commissioner, 320 U.S. 489 , 64 S.Ct. 239. That opinion emphasized that capital stock of $100,000.00.
our interpretation of Congressional purpose, in enacting the statute, just quoted for judicial review
of Tax Court decisions, was that Congress intended to leave to the final determination of the Tax On June 18, 1940, the first meeting of stockholders was held with with G. Gunby Jordan, O. S.
Court all issues which were not clear-cut questions of law. Jordan and Ralph C. Jordan subscribing to all of the stock which was issued, being $100,000 of
common stock. At this meeting the shareholders authorized the directors to issue $40,000 of
The provisions for review are the same now as they were when enacted in 1926. Congress, and debenture stock by a resolution which referred to said stock as a “form of obligation in the nature
all others interested, were then well aware of the difficulties in drawing a line between questions of certificates of indebtedness.”
of fact and questions of law. The legislation was upon a subject, the collection of the revenue, in
which federal administrative finality had been given wide scope. The Tax Court was originally Immediately thereafter, the shareholders adopted by-laws containing provisions for the issuance
established to 'secure an impartial and disinterested determination of the issues involved,'5 so of debenture stock, similar to those indicated in the charter, with one very significant exception.
that the taxpayer and the Government would have an independent review of the position of either Whereas the charter provided that the holders of debenture stock should rank pari passu with
on tax demands before payment of the tax or foreclosure of an asserted deficiency. Two years general creditors upon dissolution, the certificate as set out in the by-laws provided that upon
later its success was recognized by committee commendation and the enlargement of the finality dissolution the holders of debenture stock should rank after the general, creditors, equally with
of its decisions from 'prima facie evidence of the facts contained therein' to reviewability only 'if each other and prior to the holders of common stock. The by-laws further provided that the
the decision of the oard is not in accordance with law'6 As to the mischief which the limitation of debenture stock should conform to charter requirements and the certificate itself stated that it was
the scope of judicial review was to cure, we find only the words of the committee reports. Without subject to such restrictions as might be imposed by the Company’s charter and by-laws.
a clearer description by Congress of the intended line to separate reviewability of the Tax Court
decisions from non-reviewability, courts must interpret the review statute, as best they can, to After adopting the bylaws, the shareholders elected directors and authorized them to invest all
accomplish the declared Congressional purpose of adequate control of administrative action corporate assets ($100,000) in 2 pieces of property.
without substituting judicial opinion for that of the Tax Court upon the evidence. Note 7, supra.
The illustrations in the report, note 7, supra, are legal questions without doubt, except the The $40,000 of debenture stock authorized at the meeting was issued following the resolution of
possibility that the words 'application of the statute or any regulatio having the force of law' may BOD on October 13, 1905. On October 1, 1916, the stockholders individually authorized the
be thought to give a reviewing court power to pass upon the Tax Court's conclusion from the issuance of the remaining $60,000 of debenture stock permitted by its charter. At a meeting of the
primary or evidential facts. So that in the present cases, it might be said to be a question of law stockholders on February 7, 1917.
as to whether the primary facts adduced made the payments under consideration dividends or
interest. But we think such conclusion gives inadequate weight to the purpose of the Tax Court. On January 16, 1925, The 2nd issuance of debenture stock was authorized at a meeting of the
stockholders. The Directors had recommended the issuance of $100,000 of debenture stock.
This leads us to affirm the Talbot Mills decree and to reverse the Kelley judgment. It is so ordered. Thereafter, the full amount of debenture stock authorized by the charter was sold. Also, the
Judgment in No. 36 reversed; judgment in No. 47 affirmed. debenture stock should bear interest not to exceed 6 per cent. and should be offered at par and
interest.
Jordan v. Allen 85 F. Supp. 437 (1949)
After the authorization of the 1925 issue, the full amount of debenture stock authorized by the
DOCTRINE: Though the courts have refused to lay down a precise formula to be applied, they charter was sold. The certificates issued to the holders were identical with those issued in 1905.
have repeatedly set forth certain factors or criteria which
they considered significant in arriving at the true nature of the securities involved. They The Company paid the “interest” on the debenture stock regularly. Prior to 1940 a portion of this
usually include: issue was retied and during the years 1940, 1941, 1942, 1943 and 1944 the debenture stock
1. Treatment of the parties, remaining outstanding amounted to $97,100. During each of the taxable years each of the above
2. Maturity date and right to enforce collection mentioned years, the company paid to the holders of said debenture stock amounts aggregating
3. Rank on Dissolution $5,826. The Company deducted the sum of $5,826 as interest paid on outstanding obligations for
Corporation Law | G05 2nd Sem 2018-2019 | Atty. Peralta | Page 8
said taxable years. These deductions were disallowed by the Commissioner on the grounds that defendants AHC, Charles O. Jones, Inez M. Jones, Charles R. Jones, Kathryn Dorothea Jones,
they were payments of dividends rather than payments of interest and the deficiency assessments Barbara Ann Jones, and Mississippi Valley Trust Company (Mississippi).
resulting from such disallowance were made.

On December 27, 1946 the corporation filed its claim for refund. Six months having elapsed Bloom alleged that she represents a class which consisted of approximately 130 members who
without action by the Commissioner, the Company filed this suit. During the years in question all were the owners of a minority in value of certain bonds issued by AHC, and that the object of the
but approximately 375 shares of the debenture stock were held by holders of the Common Stock action was to obtain an adjudication of claims which affected specific property and the rights of
in the company or members of their families. the parties constituting the class.

On September 1, 1938, AHC executed and delivered a series of 647 bonds aggregating in
ISSUE: Whether the payments made to the holders of the Debenture Stock of the Jordan principal amount the sum of $250,000.00. The bonds on their face were made payable September
Company in 1940, 1941, 1942, 1943 and 1944 were in fact payments of interest on outstanding 1, 1948, with interest to that date at 5% per annum payable only out of net earnings and with
obligations as contended by the taxpayer? interest at the rate of 8% per annum from maturity until paid.

HELD: No. AHC, to secure payment of the bond, executed its deed of trust by which it mortgaged certain real
The payments are considered dividends paid on invested capital as determined by the estate owned by it in Kansas City, Missouri. The mortgage also covered furnishings and fixtures
Commissioner. If the payments were actually interest, they are deductible. On the other hand, if in the hotel property owned by AHC.
they were in fact dividends, they are not deductible. There is no doubt as to the true nature of the
securities here involved. They were stock and the payments made to the holders thereof were Mississippi was named as trustee in the deed of trust. The bonds and deed of trust contained
dividends and thus not deductible. provision empowering the bondholders of not less than 2/3 of the principal amount of the bonds,
by agreement with AHC to modify and extend the date of payment of the bonds provided such
The factors to be considered significant in arriving at the nature of the securities involved the extension affected all bonds alike.
following:
(1) treatment by the parties She then alleged that she was the owner of some of the bonds of the total principal amount of
(2) maturity date and right to enforce collection $3500, and that the other defendants were all members of the Jones family, and during the period
(3) rank on dissolution from May 1, 1948 to the time of the commencement of this action, they were the owners of a
(4) uniform rate of interest payable or income payable out of profits majority of the stock of AHC and controlling members of its BOD. They were also the owners and
(5) participation in management and the right to vote holders of more than 2/3 of the principal amount of the bonds, being the owners of more than 72%
thereof.
In the case,
(1) the company treated the debenture stocks as obligation and the payments as The defendants entered into an agreement with AHC on June 1, 1948 to extend the maturity date
interest; of said bonds from September 1, 1948 to September 1, 1958. It was also alleged that other
(2) holders if such stocks ranked ahead of the shareholders but inferior to general changes were similarly made, on various dates, in the provisions of the trust deed. Mississippi
creditors—These provisions with respect to the payment of interest, when so certified the modifications as provided in the trust deed. The purported changes were made on
considered, are those usually include in preferred stock certificates and are application of AHC and with the consent of the holders of 2/3 in principal value of the outstanding
rarely incidents of true obligations; bonds.
(3) the debenture stocks have no maturity date—There was no time set forth in the
certificate or prescribed in the charter or by laws at which the holders could No notice of said application for change in the due date of the bonds was given to the mortgage
demand payment of the principal sum; and bondholders and that plaintiff did not consent nor agree to the modification. She then alleged that
(4) payment of premiums upon retirement more consistent with retirement of stock than the modifications were invalid because they were not made in good faith and were not for the
with payment of past due obligations. equal benefit of all bondholders, but were made corruptly for the benefit of the defendants and
such modification deprived the plaintiff and the other mortgage bondholders of their rights and
Therefore, the absence of maturity date and the right to enforce payment of the principal sum by property. The modification extended, for 10 additional years, the powers and compensation of
legal action, when considered in connection with the other factors, leads the court to the Mississippi as trustee.
conclusion that the securities here involved were stocks and not obligations
LOWER COURT: Dismissed as to all individual defendants, including the Mississippi Valley Trust
(15.6.5)The Trust indenture Company. No judgment was entered against any of the defendants except AHC. The judgment
was a money judgment for the amount due on plaintiff's bonds. (All bondholders are entitled to
Aladdin Hotel Co. v. Bloom 200 F. 2d 627 notice)

DOCTRINE: The rights of the bondholders, however, are to be determined by their contract AHC appealed and contends that:
and courts will not make or remake a contract merely because one of the parties thereto ● the modification of the provisions of the trust deed extending the time of maturity of the
may become dissatisfied with its provisions, but if legal will interpret and enforce it. bonds was effected in strict compliance with the provisions of the contract of the parties
and hence was binding on all the bondholders;
FACTS: This was originally a class action brought by Josephine Loeb Bloom as plaintiff seeking ● if the acts of the parties to the contract in effecting such modification were not, in the
equitable relief for herself and other minority bondholders of the Aladdin Hotel Co. (AHC) against first instance authorized, they were subsequently ratified by the plaintiff and her
assignors;
Corporation Law | G05 2nd Sem 2018-2019 | Atty. Peralta | Page 9
● Palting, et al., (prospective investors in the shares of San Jose Petroleum) filed with the
SEC an opposition to registration and licensing of securities on the grounds that:
ISSUE: WON the Joneses acted in bad faith. 1) the tie-up between the issuer, SAN JOSE PETROLEUM, a Panamanian
corporation, and SAN JOSE OIL, a domestic corporation, violates the
HELD: NO. The contract made no provision for notice. It required that such application have the Constitution of the Philippines, the -Corporation Law and the Petroleum Act of
approval of those holding 2/3 or more in face value of the bonds. The only other limitation 1949;
contained in the contract with reference to the power to modify its terms was to the effect that 2) the issuer has not been licensed to transact business in the Philippines;
"such modification, change, alteration or extension shall affect all of the outstanding bonds 3) the sale of the shares of the issuer is fraudulent, and works or tends to work a
similarly. fraud upon Philippine purchasers; and
4) the issuer as an enterprise, as well as its business, is based upon unsound
It is urged that because the Joneses were acting in a dual capacity, they became trustees business .principles.
for the other bondholders, and as such, it was incumbent upon them to do no act ● Respondent corporation, however, claimed that it was a business enterprise enjoying
detrimental to the rights of the bondholders. The rights of the bondholders, however, are parity rights, which, with respect to mineral resources in the Philippines, may be exercised,
to be determined by their contract and courts will not make or remake a contract merely pursuant to the Laurel-Langley Agreement, only through the medium domestic
because one of the parties thereto may become dissatisfied with its provisions, but if legal corporation.
will interpret and enforce it. ● SEC granted the registration and licensed the sale of the Voting Trust Certificates. This
prompted Palting to appeal to the SC.
It remains to consider the contention that plaintiff, in her individual capacity, could not maintain
this action. The deed of trust provides that, ISSUE:
1) Whether Palting, as a perspective investor in respondent's securities, has personality
"No holder of any bond hereby secured shall have any right to institute any suit or other action to file present petition for review of the order of the SEC. YES
hereunder unless the Trustee shall refuse to proceed within thirty (30) days after written request 2) Whether San Jose Petroleum is entitled to parity rights in the Philippines. NO
thereto of the holders of not less than twenty per cent (20%) in face value of the bonds then 3) Whether the sale of respondent's securities is fraudulent, or would work or tend to
outstanding and after tender to it of indemnity satisfactory to the Trustee." work fraud to purchasers. YES

More than 20% of the bonds were in the hands of the minority bondholders but no written request HELD:
was made upon the trustee to bring this suit. The court has held that the trustee at all times acted 1) Palting has legal standing. A "prospective investor" may oppose the registration
in good faith and no reason appears why he was not requested to bring this suit. Plaintiff is the and licensing of the shares of stock of a corporation engaged in oil exploration.
owner of only $3500 face value of a bond issue of $250,000. According to her complaint there are The statement in the notice published by the Securities and Exchange Commission,
130 other minority bondholders and if she can maintain this action individually, then the defendant that "any person" opposed to the petition for registration and licensing of securities may
may be subjected to 130 other similar lawsuits. We think plaintiff could not maintain this action in file his written opposition, is in consonance with the generally accepted principle that
her individual capacity without first having complied with the provisions of the deed of trust which Blue Sky Laws are enacted to protect investors and prospective purchasers and to
vests in the trustee the right to maintain such an action. prevent fraud and preclude the sale of securities which are in fact worthless or worth
substantially less than the asking price.
(15.6.6.2) Registration of securities
When he took part in the hearing of the petition, he became a party and he may appeal to
Palting v. San Jose Petroleum Co.18 SCRA 924 (1966) the Supreme Court from the order granting the petition.

DOCTRINE: Implied from the Decision – The registration and licensing of the securities of a 2) A foreign corporation, which is not owned or controlled directly by American
corporation must be denied if: citizens but is owned and controlled by a Panamanian corporation, which in turn
is owned and controlled by two Venezuelan corporations, is not entitled to enjoy
1. The corporation violates a constitutional provision; or parity rights in the Philippines for these reasons:
2. The Articles of Incorporation violate the law on corporations. i. It is not owned or controlled directly by citizens of the United States, because it is
3. Exempt securities and transactions owned and controlled by a corporation, the OIL INVESTMENTS, another foreign
4. Registration of brokers, dealers and salesmen (Panamanian)corporation.
5. Registration of stock exchanges ii. Neither can it be said that it is indirectly owned and controlled by American citizens
6. Remedies of investor; SEC powers through the OIL INVESTMENTS, for this latter corporation is in turn owned and
controlled, not by citizens of the United States, but still by two foreign (Venezuelan)
corporations, the PANTEPEC OIL COMPANY and PANCOASTAL PETROLEUM.
FACTS: iii. Although it is claimed that these two last corporations are owned and controlled
● San Jose Petroleum (Panamanian corporation), filed with the SEC a sworn statement for respectively by 12,373 and 9,979 stockholders residing in the different American
the registration and licensing for sale in the Philippines of Voting Trust Certificates states, there is no showing in the certification furnished by respondent that the
representing 2M (later amended to 5M) shares of fits capital stock. stockholders of PANCOASTAL or those of them holding the controlling stock, are
● The entire proceeds of the sale of said securities will be devoted or used exclusively to citizens of the United States.
finance the operations of San Jose Oil (a domestic mining corporation). It was the express iv. Granting that these individual stockholders are American citizens, it is yet necessary
condition of the sale that every purchaser of the securities shall not receive a stock to establish that the different states of which they are citizens, allow Filipino citizens or
certificate, but a registered or bearer-voting-trust certificate. corporations or associations owned or controlled by Filipino citizens, to engage in the
Corporation Law | G05 2nd Sem 2018-2019 | Atty. Peralta | Page 10
exploitatioetc. of the natural resources of these states (see paragraph 3, Article VI of
the Laurel-Langley Agreement, supra). Respondent has presented no proof to this FACTS: Triplex Shoes Company was incorporated in 1919. Its certificate of incorporation provided
effect. that its total authorized capital stock should be 150,000 USD, divided into 750 preferred shares,
v. But even if the requirements mentioned in the two immediately preceding paragraphs of the par value of $100 each. The remaining 75,000 in shares of common stock without any par
are satisfied, nevertheless to hold that the set-up disclosed in this case, with a long value. During the first meeting, Albert Dillman was elected President, Elmer Solly as Vice
chain of intervening foreign corporations, comes within the purview of the Parity President and secretary, and Louis Dillman as Treasurer. In one set of minutes, these indviduals
Amendment regarding business enterprises indirectly owned or controlled by citizens composed the board of directors. In another set of minutes, Robinson and Emery had also been
of the United States, is to unduly stretch and strain the language and intent of the law. elected to the board. In the same meeting, the directors adopted a resolution giving 376 shares of
the common stock to Mr. Dillman, 114 common stock shares to Louis Dillman and 50 common
1) It cannot be doubted that the sale of respondent's securities would, to say the least, work or stock shares to Elmer Solly. Thereafter, Solly transferred his fifty shares to the two Dillmans, so
tend to work fraud to Philippine investors. Some of the provisions of the Articles of that Albert Dillman would have 401 shares and Louis would have 139 shares, both of the common
Incorporation of respondent SAN JOSE PETROLEUM are noteworthy; viz: stock.
i. the directors of the Company need not be shareholders;
ii. that in the meetings of the board of directors, any director may be represented and Before February 28, 1921, other common shares amounting to 121 were distributed to various
may vote through a proxy who also need not be a director or stockholder; and persons On February 28, 1921 during a special meeting of stockholders, a resolution authorizing
iii. that no contract or transaction between the corporation and any other association or an amendment to the certificate of incorporation was adopted but not filed until a later. It stated
partnership will be affected, except in case of fraud, by the fact that any of the directors that all of the outstanding common and preferred shares voted for the said amendment. The
or officers of the corporation is interested in, or is a director or officer of, such other amendment would reflect that the total authorized capital stock of this corporation consists of 2375
association or partnership, and that no such contract or transaction of the corporation preferred stock with a par value of $100 each, amounting to $237,500 and 1075 shares of common
with any other person or persons, firm, association or partnership shall be affected by stock, which shall be without nominal or par value. It also indicated that the sole voting power shall
the fact that any director or officer of the corporation is a party to or has an interest in, reside in the holders of the common stock. Rice and Hutchins, Inc. (petitioner of this case)
such contract or transaction, or has in anyway connected with such other person or purchased 249 shares of preferred stock and was given 83 shares of common stock as a bonus
persons, firm, association or partnership; and finally, that all and any of the persons on the basis of one share of common for three shares of preferred.
who may become director or officer of the corporation shall be relieved from all
responsibility for which they may otherwise be liable by reason of any contract entered During the stockholders annual meeting in 1922 they voted to pay for services rendered by Albert
into with the corporation, whether it be for his benefit or for the benefit of any other Dillman and Elmer Solly in the form of common stocks. In 1922, Rice Company purchased 250
person, firm, association or partnership in which he may be interested. preferred stock, with an additional 50 common shares. In May 1922, Rice again purchased 400
preferred stock, with an additional 80 shares of common. In 1925, Rice finally purchased 250
These provisions are in direct opposition to our corporation law and corporate practices preferred stock, with an additional 50 common shared. Hence, the total holdings of Rice Company
in this country. These provisions alone would outlaw any corporation locally organized was at 1149 preferred stock and 263 common shares. Due to the number of shares which Rice
or doing business in this jurisdiction. Consider the unique and unusual provision that no Company had, they were able to elect one director the board until 1928. However, in 1929 there
contract or transaction between the company and any other association or corporation shall be was an election contest over the directors for there were two tickets presented, one of Rice
affected except in case of fraud, by the fact that any of the directors or officers of the company Company and one of the Dillmans. The latter was declared to have been elected.
may be interested in or are directors or officers of such other association or corporation; and that
none of such contracts or transactions of this company with any person or persons, firms, The question lies as to the validity of the election of the Dillman faction and the existence of the
associations or corporations shall be affected by the fact that any director or officer of this common stock they claim to have.
company is a party to or has an interest in such contract or transaction or has any connection
with such person or persons, firms associations or corporations; and that any and all persons ISSUE: Did the Dillman faction actually have any common stock in order to perform the vote?
who may become directors or officers of this company are hereby relieved of all responsibility
which they would otherwise incur by reason of any contract entered into which this company HELD: NO, they did not have any common stock allowing them to vote.
either for their own benefit, or for the benefit of any person, firm, association or corporation in
which they may be interested. The original certificate of incorporation created two classes of stock: a preferred with par value
and a common with no par value. The preferred, however, was such only on name, no preference
The impact of these provisions upon the traditional judiciary relationship between the directors being stated, as required by law.
and the stockholders of a corporation is too obvious to escape notice by those who are called
upon to protect the interest of investors. The directors and officers of the company can do The stocks issued to the Dillman faction were no-par value shares, the consideration for which
anything, short of actual fraud, with the affairs of the corporation even to benefit themselves were never fixed as required by law. Hence, its issuance was void. The certificate of incorporation
directly or other persons or entities in which they are interested, and with immunity because of did not confer upon the Board of Directors authority to fix the consideration for no par value stock,
the advance condonation or relief from responsibility by reason of such acts. This and the other and therefore, the consideration could be fixed only by the stockholders as provided by the statute.
provision which authorizes the election of non-stockholders as directors, completely disassociate The stockholders never fixed the consideration for any of the no par value stock issued by the
the stockholders from the government and management of the business in which they have corporation after its organization, and there is no escape from the conclusion that all such stock
invested. was invalid at the tine of the election I question and not entitled to be voted. Moreover, the stocks
were issued to the Dillmans in consideration for services rendered in organizing the company and
(16) CONSIDERATION FOR ISSUANCE OF SHARES in agreeing to serve the company at a much smaller compensation. Clearly, the stocks were
(16.2)Liability on Watered Stocks issued not for services rendered but for services yet to be rendered, and are therefore, invalid for
having no valid consideration. The Dillman faction, therefore, cannot vote the invalid stocks they
Triplex Shoe Co. v. Rice & Hutchins, Inc. 152 A. 342 (1930) hold and the directors they elected into office cannot be held to be validly elected.
Corporation Law | G05 2nd Sem 2018-2019 | Atty. Peralta | Page 11
The Hutchison faction, on the other hand, who holds preferred stock but the preference of which
was not stated , was held to be validly elected into office although the amended certificate of
incorporation provided that “ The sole voting power shall reside in the holders of the common
stock.” The court interpreted the provision to mean that if there is any common stock legally issued
and outstanding, that is entitled to vote, the preferred stock cannot vote, but if there is no such
common stock, the situation is the same as would be if no common stock had been issued at all.

Corporation Law | G05 2nd Sem 2018-2019 | Atty. Peralta | Page 12

Potrebbero piacerti anche