MAKATI SPORTS CLUB V.

CHENG

FACTS: Board of Directors of Makati Sports Club (MSCI) adopted a resolution authorizing the sale of
19 unissued shares at a floor price. Defendant Cheng was a Treasurer and Director of plaintiff. Hodreal
expressed his interest to buy a share, so he sent a letter and he requested that his name be included in the
waiting list. McFoods also expressed interest in acquiring a share. A Deed of Absolute Sale was
executed and a Stock Certificate was issued to McFoods. McFoods then sent a letter to the plaintiff
giving advise (sic) of its offer to resell the share. It appears that while the sale between the plaintiff and
McFoods was still under negotiations, there were negotiations between McFoods and Hodreal for the
purchase by the latter of a share of the plaintiff. Upon request, a new certificate was issued. An
investigation was then conducted and the committee held that there is prima facie evidence to show that
defendant Cheng profited from the transaction because of her knowledge. Plaintiff’s evidence of fraud
are – [a] letter of Hodreal where he expressed interest in buying one share from the plaintiff with the
request that he be included in the waiting list of buyers; [b] declaration of Lolita Hodreal in her Affidavit
that she talked to Cheng who assured her that there was one (1) available share. The purchase to be
validated by paying 50% immediately and the balance after thirty (30) days; [c] Marian Punzalan, Head,
Membership Section of the plaintiff declared that she informed Cheng of the intention of Hodreal to
purchase one (1) share and she gave to Cheng the contact telephone number of Hodreal; and [d] the
authorization from Sabarre to claim the stock certificate. Thus, petitioner sought judgment that would
order respondents to pay the sum of P1,000,000.00, representing the amount allegedly defrauded, together
with interest and damages.

1. WON Cheng, in collaboration with Mc Foods, committed fraud in transacting the transfers.
(WON Mc Foods never intended to become a legitimate holder of its purchased share but did so
only for the purpose of realizing a profit. NO; WON Cheng confabulated with Mc Foods by
providing it with an insider’s information as to the status of the shares of stock of MSCI. NO)

It is noteworthy that Hodreal already expressed to the MSCI Membership Committee his intent to
purchase one Class “A” share and even requested if he could be included in the waiting list of buyers.
However, there is no evidence on record that the Membership Committee acted on this letter by replying
to Hodreal if there still were original, unissued shares then or if he would indeed be included in the
waiting list of buyers. All that Punzalan did was to inform Cheng of Hodreal’s intent and nothing more,
even as Cheng asked for Hodreal’s contact number. It may also be observed that, although established by
Punzalan’s affidavit that she informed Cheng about Hodreal’s desire to purchase a Class “A” share and
that Cheng asked for Hodreal’s contact number, it is not clear when Punzalan relayed the information to
Cheng or if Cheng indeed initiated contact with Hodreal to peddle Mc Foods’ purchased share.
While Punzalan declared that she received a Deed of Absolute Sale between MSCI and Mc
Foods of a Class “A” share signed by Atty. Rico Domingo and Cheng, in their respective capacities as
then President and Treasurer of MSCI, and by Ramon Sabarre, as President of Mc Foods, what she
merely did was to inquire from her immediate superior Becky Peñaranda what share to issue; and the
latter, in turn, replied that it should be an original share.
Charged with ascertaining the compliance of all the requirements for the purchase of MSCI’s
shares of stock, the Membership Committee failed to question the alleged irregularities attending Mc
Foods’ purchase of one Class “A” share. If there was really any irregularity in the transaction, this
inaction of the Management Committee belies MSCI’s cry of foul play on Mc Foods’ purchase of the
subject share of stock. In fact, the purchase price of P1,800,000.00 cannot be said to be detrimental to
MSCI, considering that it is the same price paid for a Class “A” share in the last sale of an original share
to Land Bank of the Philippines and in the sale by Marina Properties Corporation to Xanland Properties,
Inc.. What is more, the purchase price of P1,800,000.00 is P1,400,000.00 more than the floor price set by
the MSCI Board of Directors for a Class “A” share in its resolution. There is nothing wrong with the fact
that the first installment paid by Hodreal preceded the payment of Mc Foods for the same share of stock
to MSCI because eventually Mc Foods became the owner of a Class “A” share covered by Certificate.
Upon payment by Mc Foods of P1,800,000.00 to MSCI and the execution of the Deed of Absolute Sale
on December 15, 1995, it then had the right to demand the delivery of the stock certificate in its name.
The right of a transferee to have stocks transferred to its name is an inherent right flowing from its
ownership of the stocks.

2. WON Mc Foods violated Section 30(e) of MSCI’s Amended By-Laws on its pre-emptive rights,
which provides— SEC. 30. x x x . (e) Sale of Shares of Stockholder. Where the registered owner of share
of stock desires to sell his share of stock, he shall first offer the same in writing to the Club at fair market
value and the club shall have thirty (30) days from receipt of written offer within which to purchase such
share, and only if the club has excess revenues over expenses (unrestricted retained earning) and with the
approval of two-thirds (2/3) vote of the Board of Directors. If the Club fails to purchase the share, the
stockholder may dispose of the same to other persons who are qualified to own and hold shares in the
club. If the share is not purchased at the price quoted by the stockholder and he reduces said price, then
the Club shall have the same pre-emptive right subject to the same conditions for the same period of
thirty (30) days. Any transfer of share, except by hereditary succession, made in violation of these
conditions shall be null and void and shall not be recorded in the books of the Club. The share of stock
so acquired shall be offered and sold by the Club to those in the Waiting List in the order that their
names appear in such list, or in the absence of a Waiting List, to any applicant. NO.

When Mc Foods offered for sale one Class “A” share of stock to MSCI for the latter to exercise its pre-
emptive right as required by Section 30(e) of MSCI’s Amended By-Laws, it legally had the right to do so
since it was already an owner of a Class “A” share by virtue of its payment, and the Deed of Absolute
Share, notwithstanding the fact that the stock certificate was issued only later. A certificate of stock is the
paper representative or tangible evidence of the stock itself and of the various interests therein. The
certificate is not a stock in the corporation but is merely evidence of the holder’s interest and status in the
corporation, his ownership of the share represented thereby. It is not in law the equivalent of such
ownership. It expresses the contract between the corporation and the stockholder, but is not essential to
the existence of a share of stock or the nature of the relation of shareholder to the corporation.
Therefore, Mc Foods properly complied with the requirement of Section 30(e) of the Amended By-Laws
on MSCI’s pre-emptive rights. Without doubt, MSCI failed to repurchase Mc Foods’ Class “A” share
within the thirty (30) day pre-emptive period as provided by the Amended By-Laws. It was only when
MSCI received Mc Foods’ letter of offer to sell the share, that Mc Foods and Hodreal executed the Deed
of Absolute Sale over the said share of stock. While Hodreal had the right to demand the immediate
execution of the Deed of Absolute Sale after his full payment of Mc Foods’ Class “A” share, he did not
do so. Perhaps, he wanted to wait for Mc Foods to first comply with the pre-emptive requirement as set
forth in the Amended By-Laws. Neither can MSCI argue that Mc Foods was not yet a registered owner of
the share of stock when the latter offered it for resale, in order to void the transfer from Mc Foods to
Hodreal. The corporation’s obligation to register is ministerial upon the buyer’s acquisition of ownership
of the share of stock. The corporation, either by its board, its by-laws, or the act of its officers, cannot
create restrictions in stock transfers.

Moreover, MSCI’s ardent position that Cheng was in cahoots with Mc Foods in depriving it of
selling an original, unissued Class “A” share of stock for P2,800,000.00 is not supported by the evidence
on record. The mere fact that she performed acts upon authority of Mc Foods, i.e., receiving the
payments of Hodreal in her office and claiming the stock certificate on behalf of Mc Foods, do not by
themselves, individually or taken together, show badges of fraud, since Mc Foods did acts well within its
rights and there is no proof that Cheng personally profited from the assailed transaction.
BALTAZAR V. LINGAYEN GULF

FACTS: The Lingayen Gulf Electric Power Co., Inc., was doing business in the Philippines. Plaintiffs
Baltazar and Rose were among the incorporators, having subscribed to 600 and 400 shares of the capital
stock. It is alleged that it has always been the practice and procedure of the Corporation to issue
certificates of stock to its individual subscribers for unpaid shares of stock. The respondents Ungson,
Estrada, Fernandez and Yuson were small stockholders of the Corporation, all holding a total number of
fully paid-up shares of stock. Defendant Acena, was likewise an incorporator and stockholder, holding
600 shares of stock, for which certificate of stock were issued to him and as such, was the largest
individual stockholder thereof. Defendants Ungson, Estrada, Fernandez and Yuzon, constituted the
majority of the holdover seven-member Board of Directors of the Corporation, two (2) of said defendants
having been elected as members of the Board in the annual stockholders' meeting largely on the vote of
their co-defendant Acena, while the other two (2) were elected mainly on the vote of the plaintiffs and
their group of stockholders. Let the first group be called the Ungson group and the second, the Baltazar
group.

The Ungson group (specially defendant Acena), which had been in complete control of the management
and property of the Corporation, in order to continue retaining such control, over the objection oil three
majority members of the Board, passed three (3) resolutions: 1. Resolution No. 2, declared all watered
stocks issued to Acena, Baltazar, Rose and Jubenville, "of no value and consequently cancelled from the
books of the Corporation. 2. Resolution No. 3 resolved that "... all unpaid subscriptions should bear
interest annually from the year of subscription on the basis of quarterly payment, and any or all payments
already made on said unpaid subscriptions should be credited to pay interest first, then the capital debt
after all interest is fully paid. Hence, all shares of stock issued to and in favor of any stockholder or
stockholders of the Lingayen Gulf Electric Power Co., Inc., on account of payments on unpaid
subscriptions without the interest thereon — accrued and collectible having been fully paid from the date
of subscription as required by the Corporation Law, shall be declared of no value and cancelled from its
books, and if the payments already made exceeded the interest accrued and collectible by virtue of the
provision of law and the previous resolution of its board of directors, the excess should be applied to the
payment of the unpaid subscription. 3. Resolution No. 4 resolved that "any and all shares of stock of the
Lingayen Gulf Electric Power Co., Inc., issued as fully paid-up to stockholders whose subscription to a
number of shares have been declared delinquent with the accrued interest on the unpaid thereof per
Resolution of the Board of Directors which has been duly published in the "Manila Chronicle," are hereby
incapacitated to utilize or avail of the voting power until such delinquency with the accrued interest is
fully paid up as indicated in Resolution. On the authority of these resolutions, the Ungson group was
threatening and procuring to expel and oust the plaintiffs and their companion stockholders, for the
ultimate purpose of depriving them of their right to vote in the said annual stockholders' meeting.

1. If a stockholder, in a stock corporation, subscribes to a certain number of shares of stock, and he

pays only partially, for which he is issued certificates of stock, is he entitled to vote the latter,
notwithstanding the fact that he has not paid the balance of his subscription, which has been called
for payment or declared delinquent?

Fua Cun v. Summers: In the absence of special agreement to the contrary, a subscriber for a certain
number of shares of stock does not, upon payment of one-half of the subscription price, become entitled
to the issuance of certificates for one-half of the number of shares subscribed for; the subscriber's right
consists only in equity entitling him to a certificate for the total number of shares subscribed for by him
upon payment of the remaining portion of the subscription price.

The cited case connotes the principle that a partial payment of a subscription does not entitle the
stockholder to a certificate for the total number of shares subscribed by him; his right consists only in
equity to a certificate of the total number of shares subscribed for, upon payment of the remaining portion
of the subscription price. The saving clause in the quoted pronouncement, "in the absence of special
agreement to the contrary," reveals that the doctrine is not mandatory, but merely directory, which is not
violative of law, the rigor of the pronouncement may be relaxed. The cases at bar do not come under the
aegis of the principle enunciated in the Fua Cun v. Summers case, because it was the practice and
procedure, since the inception of the corporation, to issue certificates of stock to its individual subscribers
for unpaid shares of stock and gave voting power to shares of stock fully paid. And even though no
agreement existed, the ruling in said case, does not now reflect the correct view on the matter, for better
than an agreement or practice, there is the law, which renders the said case of Fua Cun-Summers,
obsolescent.

Section 37 of the Corporation Law, as amended by Act No. 3518, approved on March 1, 1929, six (6)
years after the promulgation of the Fua-Summers case (decided in 1923), provides: No certificate of
stock shall be issued to a subscriber as fully paid up until the full par value thereof, or the full
subscription in the case of no par stock, has been paid by him to the corporation. Subscribed shares not
fully paid up may be voted provided no subscription is unpaid and delinquent. As may readily be seen,
said Section 37 makes payment of the "par value" as prerequisite for the issuance of certificates of par
value stocks, and makes payment of the "full subscription" as prerequisite for the issuance of certificates
of no par value stocks. The present law requires as a condition before a share holder can vote his shares,
that his full subscription be paid in the case of no par value stock; and in case of stock corporation with
par value, the stockholder can vote the shares fully paid by him only, irrespective of the unpaid delinquent
shares. A corporation may now, in the absence of provisions in their by-laws to the contrary, apply
payment made by , subscribers-stockholders, either as: "(a) full payment for the corresponding number of
shares of stock, the par value of each of which is covered by such payment; or (b) as payment pro-rata to
each and all the entire number of shares subscribed for" (amended decision). In the cases at bar, the
defendant-corporation had chosen to apply payments by its stockholders to definite shares of the capital
stock of the corporation and had fully paid capital stock shares certificates for said payments; its call for
payment of unpaid subscription and its declaration of delinquency for non-payment of said call affecting
only the remaining number of shares of its capital stock for which no fully paid capital stock shares
certificates have been issued, "and only these have been legally shorn of their voting rights by said
declaration of delinquency" (amended decision).

OTHERS: The second paragraph of resolution No. 3, unilaterally declared as of no value and cancelled
all capital stock shares certificates issued as fully paid up, upon payments made by stockholders, when
interests on unpaid subscription from date of subscription were not previously and/or then and there paid.
Defendants-appellants, invoking Art. 1253 NCC (Art. 1173 of the Old Civil Code) which provides that "if
the debt produces interest, payment of the principal shall not be deemed to have been made until the
interests have been covered," and relying on an opinion of the Securities and Exchange Commission,
claim that said unilateral nullification and/or cancellation of previously issued capital stock shares
certificates was valid. This provision of law only applies in the absence of verbal or written agreement, to
the contrary; it is likewise merely directory, and not mandatory. (Art. 1252 NCC). In the present case, the
defendant-corporation had applied the payments made by the stockholders to the full par value of the
shares of stock subscribed by them, instead of the accepted interest, as shown by the capital stock shares
certificate issued for the payments made, and the stockholders had accepted such certificates issued for
such payments. This being the case, the said application of payments must be deemed to have been agreed
upon by the Corporation and the stockholders, and the same cannot now be changed without the consent
of the stockholders concerned. The Corporation Law and the by-laws of the defendant Corporation do not
contain any provision, prohibiting the application of stockholders' payments to the full par value of a
corporation's capital stock, ahead of the payment of accrued interest for unpaid subscriptions. It would,
therefore, result that a corporation may, upon request of an interested stockholder, as his option, apply
payment by them to the full par value of shares of capital leaving its collection later of the accrued
interest on unpaid subscriptions, and that once such option has been exercised and the corresponding
stock certificates have been issued, the corporation cannot, by a unilateral act, legally nullify and cancel
the capital stock certificates so issued.