Nielson & Co v Lepanto Consolidated Mining Co.

F: MR filed by Lepanto Corp which involves an agreement subsequently extended, as to the

compensation of Nielson (a promoter?) which provides that he is entitled to receive 10% of any
dividends declared and paid by Lepanto.

Nielson is not a SH of the corporation. During the extension period the corporation declared
dividends worth P3M. SC ruled that Nielson was entitled to the 10% of the dividends paid and
declared and Lepanto was ordered to issue and deliver to Nielson shares of stocks as

well as fruits or dividends accruing to the same. Lepanto contends that payment to Nielson of
stock dividends as compensation violates the Corporation Law.

I: W/n the corporation can be compelled to issue and deliver to Nielson shares of stock and the
fruits thereof

H: Under the Code stock dividends cannot be issued to a person who is not a SH in payment of
services rendered. Nielson cannot be paid in shares of stock which form part of the stock
dividends of Lepanto.
 The understanding between Lepanto and Nielson was simply to make the
cash value of the stock dividends as the basis for determining the amount of compensation that
should be paid to Nielson.

R: Consideration for shares of stock: (1) cash; (2) property; (3) undistributed profits.
 A
corporation may legally issue shares of stock in consideration of services rendered by a person
not a SH, or in payment of indebtedness, which is equivalent to issuing a stock in exchange for
cash. But a share of stock thus issued should be part of the original capital stock of the
corporation, or part of the stocks issued when the increase in capitalization was properly
authorized. In other words, it is the shares that are originally issued by the corporation and
forming the part of capital that can be exchanged for cash or services rendered, or property—if
the corporation has original shares of stock unsold or unsubscribed, either coming from the
original capitalization or from the increased capitalization—these may be issued to a person
already a SH.
 But a share of stock coming from stock dividends cannot be issued to one who is
not a SH of a corporation.

A stock dividend is any dividend payable in shares of stock of the corporation declaring or
authorizing it—a distribution of shares among SHs, as dividends. It is actually 2 things: (1) a
dividend; (2) the enforced use of dividend money to purchase additional shares at par. When a
corporation issues stock dividends, it shows that the corporation’s accumulated profits have been
capitalized instead of distributed to the SHS or retained as surplus. Far from being a realization of
profits, it tends rather to postpone said realization, in that the fund represented by the new stock
has been transferred from the surplus to the assets and are thus no longer available for actual
distribution. It really adds nothing to the interest of each SH; the proportional interest remains the
same. It is the civil fruits of the original investment, and to the owners of the shares go the fruits.

Although Lepanto says that the value of the dividends declared should be the basis for
determining the amount of compensation due to Nielson, it does not mean that the compensation
should be taken from the amount actually declared as cash dividends to be distributed to the
SHs. Otherwise there would be a dilution of the dividend that corresponds to each share of stock
held by the SHs.
Decision modified....Nielson to get P300,000 in cash, as equivalent to 10% of thew value of the
3M stock dividend.


Berks Broadcasting v Craumer.

F: Craumer et al together with one Landis (4 people), are the incorporators and directors of the
Berks Broadcasting Company. The books indicate that the stock is fully paid (auth. Capital stock
= $100K) , through cash ($5K each) and the fixing of a value of $80K upon an asset denominated
“Franchise and Promotion Expense.” 
A year later, this was written off and in its place were
substituted 1) $50K as an amount “Due on Unpaid Stock Subscriptions” -- (each SH paid $4.2K
reducing the item to $23,300. Then it was cancelled altogether and was replaced w/ the entry
“Goodwill and Promo Expense) and 2) “write-ups” or increases in the valuation of fixed assets
over and above depreciation costs, totaling $30K. 
Balance sheet showed assets in excess
(“surplus”) of liabilities iao $2,545.94. However, the existence of that alleged surplus depended on
the inclusion of the assets of the write-ups of $26K; otherwise, there would be a deficiency to the
extent of almost $24K. Directors sold their stock, and declared a series of dividends totaling $13K
based on the earnings of the company of 12K+ plus the “surplus.” 
The corporation, now under
the control of new SHs, sued the directors to recover the $13K which was allegedly unlawfully
declared and paid out as dividends. 


H: GR: Capital of a corporation must not be impaired in any manner
 Exception: impairments
involuntarily made through losses resulting from business operations. It is illegal to declare and
pay dividends from other than a surplus consisting of an excess in the value of the assets over
the aggregate of the liabilities and the capital stock. The object of this prohibition is to afford a
margin of protection for creditors in view of the limited liability of the SHs, and to protect the
interest of the SHs themselves by preserving the capital so that the purposes of the corporation
will be carried out.
 The surplus must be a bona fide and not an artificial or fictitious one; it must
be founded upon actual earnings or profits and not be dependent for its existence upon a
theoretical estimate of an appreciation in the value of the company’s assets. Such appraisals and
conjectural valuations cannot be considered for the purpose of dividends because are subject to
market fluctuations, and are merely anticipatory of future profits, and may never be actually
realized as an asset of the company. 
It is thus clear that since the “write-ups” of $26,000
represented an unrealized appreciation in the value of the fixed assets, their inclusion in
determining the existence of a surplus from which dividends might be declared was unlawful, and
since when eliminated there would be not a surplus, but a deficiency in capital.

---Sir: so long as the assets (even if they appreciate in value) are not yet disposed, dividends
cannot be declared based on the appreciated value (because it is still an expectancy).

CAMPOS: Since our Corpo Code allows dividends only out of unrestricted retained earnings, an
increase in the value of existing assets cannot be a source of even a stock dividend.

Lich v US Rubber. F: Lich is a holder of 300 non-cumulative PS of United States Rubber

Company. She seeks to enjoin payment of a dividend on common stock declared.
 During 3
fiscal years (1935-37), the corporation experienced a deficit of close to $24M, $17M and $10M for
each of the 3 years, and a corresponding impairment of capital. In each of these years, the
annual net earnings were applied to the deficit, and no dividends were declared.
The company underwent a reconstruction of its capital structure. It issued, in lieu of no-par value
CS, CS of par value $10. In the next 3 years the deficit was reduced and cancelled and net profts
were made available for dividends for non-cumulative PS, but not common shares. The company
then declared a dividend, from the net profits for the current year and from no other fund, on both
PS and CS. In the deficit years, the company maintained adequate reserves, which remain intact
even when dividends were declared. Lich contends that the preference of PS holders as to
dividends extends not only to the current year, but to the prior deficit years, and dividends cannot
be paid out to CS holders until dividends are paid to PS on the years in question and the
arrearages must be paid in full.

H: the doctrine of the Cast Iron Pipe Cases, based on sound equitable principles, is a departure
from the GR that holders of non-cumulative preferred stock lose with the close of the fiscal year
all rights in the undistributed net profits of that year. It preserves to the holders of the non-
cumulative PS their right in the undivided net profits withheld from them and retained in the
business, but otherwise available for the payment of dividends. The right to earned dividends is
not extinguished upon the mere passing of the fiscal year. The doctrine, however, cannot be
extended by implication beyond its clear intendment.

It may be generally stated that as to the payment of dividends the holders of PS are in no better
position than the holders of CS except as to priority of payment. Dividends on PS are not payable
absolutely and unconditionally, but only out of the sources designated by law. The payment of
dividends on non-cumulative PS is further circumscribed by the certificate of incorporation and
stock certificate; dividends on such stock are payable only out of net profits and for the years in
which the same were earned.

Thus the right of non-cumulative PS is conditional upon: (1) accrual of net profits (2) retention of
the same in the business. If there are no net profits, the deficiency is not chargeable against the
net profits of succeeding years. The test of applicability is W/N there were in the years in which
dividends were not declared, net profits available for the lawful declaration and payment of
dividends, but withheld from non-cumulative PS and retained in the business. Net profits
connotes clear pecuniary gain remaining after deducting from gross earnings the expenses
incurred. It is not synonymous with annual net earnings, which may be productive of net profits, or
reductive of the deficit. In this case there were in 1935-37 no net profits to which the inchoate
right to dividends could have attached. There was a substantial deficit in each of the three years
which greatly exceeded the annual net earnings of the corresponding year. It is manifest
therefore that the annual net earnings of each year resulted, not in a profit, but in a reduction of
the deficit. There was no source from which dividends could be paid out lawfully; the payment of
dividends under such circumstance would have been unlawful. The corporation is charged with
the duty of maintaining the integrity of the capital, on the faith of which credit was extended, as a
trust fund for the security of creditors.

When a man buys stock instead of bonds, he takes a greater risk in the business. No one
suggests that he has a right to the dividends if there are no net earnings. But the investment
presupposes that the business is to go on, and therefore even if there are net earnings, the
holder of stock is entitled to have a dividend declared only out of such part of them as can be
applied to the dividends consistently with a wise administration of a going concern. If the annual
net earnings of a corporation are justifiable applied to legitimate corporate purposes, such as
payment of debts, reduction of deficits, and restoration of impaired capital, the right of non-
cumulative preferred SHs to the payments of dividends is lost. The payment of dividends from
annual net earnings, when the liabilities of a corporation exceed the assets, would be in
derogation of the rights of creditors. The payment of dividends under such circumstances, while
debts accrue, would be contrary to sound business practice.

Keough v St Paul Milk. F: Action to compel corporation to declare a cash dividend, on the
ground that those in charge of the corporate affairs (the Ryans) are wrongfully and needlessly
withholding profits available for cash dividends and conspiring to retain them for their benefit and
to the prejudice of the majority. The business, assets, liabilities of the partnership were
exchanged for 597 shares of the St Paul Milk Co. The 597 shares represent the only stock issued
until the stock dividend. By amendment, the authorized capital was increased to $300K. A 6-to-1
stock dividend was declared and the amount necessary to cover the issued shares was
transferred from the surplus account to the capital account. When the corporation paid out its first
dividend, a total of $169,470 was distributed to SHs or about a 335% return. There were no
mortgages or liens or any other substantial indebtedness. Sales are predominantly cash basis.
Fixed assets were in good condition. Wages were paid. The corporation had investments in
bonds, CS in a wholly-owned subsidiary, but the merchandise inventory was small. TC held that a
liberal and reasonable capitalization and surplus was the sum equal to the original outstanding
stock plus 2/3 of the accumulated surplus, and that all sums in excess were unreasonable and
constituted a violation of the fiduciary relation. Keough et al claims that the capitalization in 1936
by the Ryans of a large percentage of the accumulated surplus without reason or necessity other
than to keep it within the corporation under the dominating control of the Ryans. The Ryans
contend that the capitalization was for avoiding possible federal taxes upon undistributed surplus.
TC found that the capitalization was to strengthen control of the Ryans over the corporation and
surplus to prevent a distribution of earnings.

Issue: WON corp can be compelled to declare dividends.

H: In this case, YES> The determination of w/n to declare a dividend is essentially a matter of
internal management. It is primarily for the corporate directors in their sound discretion to decide,
and judicial review may be secured when abuses contravening the SHs rights manifest
themselves. A court will not compel a dividend unless the directors act fraudulently, unjustly, or
unreasonably so as to impair the rights of the complaining SHs to their just proportion of the
corporate profit. Generally the mere fact that a large corporate surplus exists is not enough to
warrant equitable intervention. Ultimately the test is an examination of the GF and
reasonableness of the policy of retaining that which is otherwise available for dividends.

The corporation did not have a reasonable need for the large surplus accumulated and held as
bonds or other easily liquidated assets. Inventory was small, cash turnover was liquid, no
substantial obligations, no expansion program, accounts for depreciation were set up—in short,
the surplus was easily available for dividends, if the directors so elected to do so. The large
surplus existed at the time the Ryans were receiving salaries in excess of their worth and draining
from the corporation money otherwise available for dividends. The capitalization of the surplus did
not serve a corporate need; it was referable only to the desires and purposes of those in control
to keep it under their control and subject to their machinations.

Furthermore, fraudulent expense items and other anomalies point to the intent of the directors.
Generally directors are proper parties to determine whether a divided shall be in cash of stock,
and a court will not interfere with the exercise of their discretion; but where it
appears that the object was to primarily benefit those in whom the discretion rests, equitable
powers can be called into operation. Directors and officers of the corporation owe SHs the active
duty of honesty and GF in the transaction of the business and in their dealings. While it is true
that the court cannot ordinarily compel a corporation to declare a dividend at the suit of a minority
SH, yet where dividends are withheld for an unlawful purpose—to deprive a SH of his rights—he
may have the aid of equity for adequate protection.

A stock dividend really takes nothing from the property of the corporation, and adds nothing to the
interest of the SHs. Its property is not diminished, and their interests are not increased. Where
profits clearly warrant payment would be proper, the SHs cannot be cut off by a stock dividend
when it purpose is wrongfully to keep the profits of the business with the control of those
dominating the affairs so as to be available to them. Such action is oppressive and evinces BF
sufficient to justify equitable intervention.

Dodge v Ford Motor Co. F: Action by John Dodge, a minority SH, against the Ford Motor
Company to compel the declarations of dividends.
 --TC granted motion and ordered the
payment of dividends.
 -- At this time, Ford Motor Co had just concluded its most prosperous
year of operations. Demand for Ford cars continued. It could make and market 500,000 cars.
Sales of parts and repairs increase. It had assets of more than $132M, COH $54M, surplus of
$112M.

-- Liabilities continue the corporation as a semi-eleemosynary institution, and not as a business

concern. Henry Ford himself testified that the company he built had made too much money, had
too large profits, and that a sharing of profits with the public, by reducing the prices. It expected a
profit upwards of $60M. Ford’s defense was that its policy was to reduce the selling price of Ford
cars while improving their quality, with the goal of producing 1M cars per year.

There was a general plan for expansion of the productive capacity of the business. Management
decided not to reduce in the meantime the price, but to maintain the same and accumulate a
large enough surplus to pay for the proposed expansion of plant and equipment. There was a
large daily, weekly, monthly, receipt of cash. The output was practically continuous and within a
few days, turned into cash.

-- Dodge et al contend that the plan was to the selling price of cars should be attained. Ford
argues that although a manufacturing corporation cannot engage in humanitarian works as its
principal business, the fact that it is organized for profit does not prevent the existence of implied
powers to carry on with humanitarian motives such as charity as are incidental to the main
business of the corporation.

H: the plan does not call for and is not intended to produce immediately a more profitable
business but a less profitable one, with the apparent immediate effect to diminish the value of
shares and return to SHs. There is no doubt that certain sentiments, philantrophic and altruistic,
creditable to Ford, had largely influenced the policy to be pursued by the company. There is an
obvious difference between an incidental humanitarian expenditure of corporate funds for the
employees, and a general purpose and plan to benefit all mankind at the expense of others.
There should be no confusion of the duties Mr Ford conceives as owed to the general public and
the duties which in law he and his directors owe to the protesting minority SHs. A business
corporation is organized for the benefit and profit of the SHs. The powers of directors are to be
exercise to that end. Discretion of directors is to be exercised in the means to attain that end, and
does not include the end itself, through the reduction of profits or nondistribution thereof. It is not
within the lawful powers of the board to shape and conduct the affairs of a corporation for the
incidental benefit of SHs and for the primary purpose of benefiting others.

The Court however did not interfere in the proposed expansion of the business of Ford Motor. It is
recognized that plans must often be made for a long future, for expected competition, for
continuing as well as an immediately profitable venture. The experience of FMC is evidence of
capable management of its affairs. But it noted that the company took from the public money
required for its plan but that the considerable salaries of Mr Ford were not diminished.

--It is true that a considerable cash balance must be at all times carried by such a concern. But,
cash is coming in and output immediately converted into cash... So, it would appear that,
accepting and approving the plan of the directors, it was their duty to distribute a very large sum
of money to stockholders.

Burk v Ottawa Gas & Electric Co. F: Suit by preferred SHs of Ottawa Gas, demanding an
accounting of all property and assets and declare and payment of dividends. Burk claims that
earnings of the business were such that the directors owed them an imperative duty to declare a
dividend.

--Ottawa Gas maintain that the corporate has been unable to declare a dividend because its
funds were exhausted by expenditures which it was obliged to make, which was for the
extensions of the company’s plant. TC ruled the extensions necessary and for the betterment of
the plant and its patrons.

H: Reversed and remanded to TC. Under the certificate of PS, the conditions which the holder
may demand a dividend depend on the precise terms of the contract upon which it is issued.

The fair interpretation of the contract between the corporation and the PS holder is that if in any
year net profits are earned, a dividend is to be declared. To hold that the board has a discretion to
declare or not a dividend when it has funds it can use is to hold that one of the parties to a
contract has the option to pay something to the other or not, at its own election since, if the
dividend is not declare, the benefits of accumulated profits are practically lost to these SHs. Such
a construction should be avoided.

The directors owe a positive duty to pay a dividend to the PS whenever in any year there were
net profits available. Inasmuch as the only possible source of profit to the preferred SH from his
investment is the distribution of earnings in the year in which they accrue, he has

the right to insist that an accounting be taken annually, and that the surplus of one year, available
for a dividend, shall not be carried over to meet a possible deficiency of the next.

The holder of PS, is however not generally a creditor until a dividend is declared, but if a dividend
ought to have been declared in a certain year to such SHs, they should be regarded as creditors
to such extent from such time or times. The company’s contract with the PS is not to pay him at
all events the amount of 6% of the net profits, but to declare a dividend on that basis. The
obligation of the corporation to pay dividends on the PS out of the yearly net profits is subordinate
to whatever obligation it owes to the public. Therefore if it was necessary for the corporation to
use the surplus in any year to make extension to which patrons were entitled, a dividend for that
year would have been excused.

McLaran v. Crescent Planning Mill Co. F: McLaran is the administrator of the estate of Humber,
owner of 57 paid-up shares of stock of the Crescent Planning Mill Co. and director of the
company as well as President. The company declared a dividend of 6%, divided into 4 payments
of 1/1/2% each. No other action taken to set apart a fund out of which to pay the dividend
although the company was solvent and had adequate surplus. Nonetheless the officers
st
proceeded to pay Humber and other SHs the 1 installment of the dividend. The next installment
was not paid, the board having discovered an error in the financial statements of the company
such that its assets were overstated by $6000. The board then voted to rescind and recall the
order paying out the dividends and defer the payment indefinitely. The company was still perfectly
solvent and had amply funds to pay the dividend. Humber demanded payment of his dividend but
was refused on account of the recent action by the board. The corporation contends that there
was no declaration because the board failed to set aside funds for the purpose, and that by virtue
of the resolution its former action was rescinded and the payouts were recalled and put on hold.

I: W/n the mere declaration of a dividend by a solvent corporation creates a debt in favor of the
SH

I: W/n the corporation, having declared a dividend and paid one installment, turn around and
rescind installments yet unpaid

H: Case concerns the declaration of a cash dividend by a solvent corporation possessed of ample
undivided profits and surplus. The corporation contends that a resolution declaring a dividend is
not sufficient to create a dividend or create a debt from the corporation in the absence of further
action in setting apart a fund for the purpose. The court held that if the declaration of the dividend
is fairly and properly made, out of profits existing at the time it was declared, the relation of debtor
and creditor is thereby established between the corporation and the SHs for the payment of the
dividend to the SH. The declaration of dividends operates as a severance thereof from the stock
in the general mass of the corporate property, and raises an implied promise on the part of the
corporation to pay the SH the amount of the dividend. Action on the part of the corporation in
setting aside the fund for the specific purpose constitutes such moneys as a trust fund in the
hands of the corporation for the use of the SHs and in the event of bankruptcy of the corporation,
the SHs are not required to go in pro rata with the general creditors for such unpaid dividends, but
may proceed as against a trustee on account of such trust fund. Mere declaration of the dividend,
without more, by competent authority under proper circumstances, creates a debt against the
corporation ifo the SHs the same way as any other general creditor of the concern. The setting
apart of a fund thereafter, passes one step further toward securing the payment of the debt to the
SH.

Thus the mere declaration of the dividend itself, without the setting aside of the fund, creates a
debt, and the act of declaring a dividend from the stock and corpus of the corporate property is
ipso facto, in and of itself, the setting apart, setting aside and segregating such dividends and it
creates an immediate right of the SH to demand and recover the same when due.
Marcus v. RH Macy & Co Inc. F: Marcus is registered owner of 50 shares of common stock of
RH Macy.
 --Resp had auth capitalization of 500K shares of cumulative PS ($100 pv) and 2.5M
CS no par. Issued: 165K PS and 1.656M CS 
--PS had no voting rights except for specified
contingencies. 
 --A proposal was approved during the SHs meeting that the articles be
amended as to add voting rights—equal share for share—as enjoyed by holders of the common
stock, to the rights of preferred SHs.
 --Marcus objected to the proposed amendment and notified
the corporation. She also demanded payment for the common stock then owned by her. During
the said meeting, her common stock was voted against such amendment.

--She then sues to determine the value of her stock as a basis of the enforcement of payment
therefor. Her application for the appointment of appraisers having denied, and affirmed by the
Appellate court.

I: WON Marcus can invoke her appraisal right and to enforce payment of the value of her stock.

H: YES.
 --The amendment granted to the PS additional rights which increased their voting
privileges from a right to vote only in specified contingencies to voting rights equal share for share
to those which CS are entitled. The result was that the aggregate number of shares having voting
rights equal to those of the CS was substantially increased and thereby the voting power of each
common share outstanding was altered or limited by the resulting prorata diminution of its
potential worth as a factor in the management of the corporation.

--Such alteration or limitation in the voting power of the CS held by Marcus, considering that she
objected to the amendment, notified the company, and the corporation caused her shares to be
voted against the proposal to amend, was sufficient to qualify her to invoke the statutory
procedure which is the basis for her present action.

-- By thus limiting the voting power of Marcus’ common shares to a proportionate extent, the
corporate action to which she objected was of such a character as to afford her a legal basis to
invoke the procedure as a means to accomplish the appraisal of her stock and payment therefor.

--Even if she owns only 50 shares, which the corporation argues as de minimis compared to the
entire universe of shares of the corporation, and even if it is claimed that she is not in GF, as
argued that if she did have a bona fide desire to sell her CS she could have done so during the
said meeting for 3X the amount of her investment, the court ruled that since the law does not
mention a minimum percentage or value of stock which must be owned by a non-consenting SH
to qualify him to invoke the statutory procedure, it should be applied as is.

Philippine Trust Co. v. Rivera. F: PhilTrust is the assignee in the insolvency case of La
Cooperativa Naval Filipina. It sues Marciano Rivera, an incorporator who subscribed for 450
shares of the insolvent, to recover the balance of P22,500, alleged to have been due on his
subscription to the stock of the insolvent. (Orig capitalization of Naval = P100,000, at P100 par or
1,000 shares.

Rivera subscribed to 450 shares ((P45K)

--Rivera claims that during a SHs mtg, it was agreed that the capital of the company be reduced
by 50% and the subscribers released from the obligation to pay any unpaid balance of their
subscription in excess of 50% of the total subscribed shares.
 --There was no compliance with
the formalities of the statute relative to the reduction of capital stock. TC ruled that the resolution
was without effect and that Rivera was still liable for his unpaid subscription.

H: Resolution invalid. subscriptions to the capital of a corporation constitute a fund to which

creditors have a right to look for satisfaction of their claims and that the assignee in insolvency
can maintain an action upon any unpaid stock subscription in order to realize assets for the
payment of debts.

A corporation has no power to release an original subscriber to its capital stock from the
obligation of paying for his unpaid shares without a valuable consideration for such a release.
Strict compliance with the requirements of law is necessary.

The resolution releasing the SHs from their obligation to pay 50% of their respective subscriptions
was an attempted withdrawal of so much capital from the fund which the company’s creditors are
entitled to rely and, having been effected without statutory compliance, was wholly ineffective.

CAMPOS: As a practical matter, even if requirements to reduce capitalization are complied with,
if creditors would be prejudiced by the reduction, it is most unlikely that the SEC will approve it.

— Resolution releasing the SHs from their obligation to pay the 50% of their
subscriptions was an attempted withdrawal of so much capital from the fund upon which
the company’s creditors were entitled ultimately to rely on and having been effected
without compliance with the statutory requirements, was wholly ineffectual. 


— The subscription to the capital of a corporation constitute a fund to which creditors

have a right to look for satisfaction of their claims and that the assignee in insolvency can
maintain an action upon any unpaid stock subscription in order to realize assets for the
payments of its debts 


— Subscriptions payable can be cancelled if there is a reduction in capital stock: 


Which is possible if done with the consent of the creditors, or if they will not prejudiced by such
move, in which case their consent is not necessary.

Uson v Diasomoto. F: Unson is the creditor of Diosomoto, who is original owner of 75 shares of
North Electric which were levied by a writ of attachment to satisfy the judgment creditor. Uson
obtained judgment against Diosomoto and the shares were sold at public auction to the judgment
creditor Uson. 
--Diosomoto sold the shares attached to Barcelon and delivered the
corresponding certificates. The transfer to Barcelon was not registered and noted on the books of
the corporation until after 9 months after the attachment was levied and later (9 months after)
transferred to HPE Jollye. HPL Jollye claims to be owner of the 75 shares and presents a
certificate of stock issued by North Electric. 
I: W/n a bona fide transfer of shares of a
corporation, not registered or noted on the books, is valid as against a subsequent lawful
attachment of said shares, regardless of whether the attaching creditor had actual notice of the
transfer or not . 


H: GR: NO> No transfer is valid except as between the parties unless it is duly registered. All
transfers of shares must be entered on the books of the corporation. All transfers not so validly
entered are invalid as to attaching or execution creditors of the assignors, of the corporation, and
as to all subsequent purchasers in GF, and even to all parties interested. All transfers not so
entered on the books are absolutely void, not because they are without notice or fraudulent in
law, but because they are made void by the statute. Courts in the Phils adhere to the principle
that the right of the owner of the shares to transfer to same by delivery of the certificate, whether
it be regarded as statutory or common law right, is limited and restricted by the express provision
that “no transfer shall be valid except as between the parties, until the transfer is entered and
noted upon the books of the corporation.

The right of the owner of the shares of a corporation to transfer the same by delivery of the
certificate, whether it be regarded by the express provision that “no transfer however shall be
valid except as between the parties, until the transfer is entered and noted upon the books of the
corporation.”

--The transfer of 75 shares in the NEC, made by Diosomito to Barcelon was not valid as to Uson,
on Jan 18, 1932, the date on w/c they still stood in the name of Diosomito on the books of the
corp.

Nautica Canning Corp v Yumul. F: Roberto C. Yumul was appointed COO/General Manager of
Nautica. On the same date, First Dominion Prime Holdings, Inc., Nautica’s parent company,
through its Chairman Alvin Y. Dee, granted Yumul an Option to Purchase up to 15% of the total
stocks it subscribed from Nautica. A Deed of Trust and Assignment was executed between First
Dominion Prime Holdings, Inc. and Yumul whereby the former assigned 14,999 of its subscribed
shares in Nautica to the latter. The deed stated that the 14,999 “shares were acquired and paid
for in the name of the ASSIGNOR only for convenience, but actually executed in behalf of and in
trust for the ASSIGNEE.” After Yumul’s resignation from Nautica on August 5, 1996, he wrote a
letter to Dee requesting the latter to formalize his offer to buy Yumul’s 15% share in Nautica on or
before August 20, 1996; and demanding the issuance of the corresponding certificate of shares in
his name should Dee refuse to buy the same. Dee, through Atty. Fernando R. Arguelles, Jr.,
Nautica’s corporate secretary, denied the request claiming that Yumul was not a stockholder of
Nautica. Yumul requested that the Deed of Trust and Assignment be recorded in the Stock and
Transfer Book of Nautica, and that he, as a stockholder, be allowed to inspect its books and
records. Yumul’s requests were denied allegedly because he neither exercised the option to
purchase the shares nor paid for the acquisition price of the 14,999 shares. Atty. Arguelles
maintained that the cash dividend received by Yumul is held by him only in trust for First
Dominion Prime Holdings, Inc. Nautica et al contend that Yumul was not a stockholder of Nautica;
that he was just a nominal owner of one share as the beneficial ownership belonged to Dee who
paid for said share when Nautica was incorporated. They also allege that Yumul was given the
option to purchase shares of stocks in Nautica under the Option to Purchase, and since he failed
to exercise the option, there was thus no cause or consideration for the Deed of Trust and
Assignment, which makes it void for being simulated or fictitious.

H: The SEC and CA correctly found Yumul to be a stockholder of Nautica, of one share of stock
recorded in Yumul’s name, although allegedly held in trust for Dee. Nautica’s Articles of
Incorporation and By-laws, as well as the General Information Sheet filed with the SEC indicated
that Yumul was an incorporator and subscriber of one share. Even granting that there was an
agreement between Yumul and Dee whereby the former is holding the share in trust for Dee, the
same is binding only as between them. From the corporation’s vantage point, Yumul is its
stockholder with one share, considering that there is no showing that Yumul transferred his
subscription to Dee, the alleged real owner of the share, after Nautica’s incorporation. Other than
petitioners’ self-serving assertion that the beneficial ownership belongs to Dee, they failed to
show that the subscription was transferred to Dee after Nautica’s incorporation. The conduct of
the parties also constitute sufficient proof of Yumul’s status as a stockholder. On April 4, 1995,
Yumul was elected during the regular annual stockholders’ meeting as a Director of Nautica’s
Board of Directors. Thereafter, he was elected as president of Nautica. Thus, Nautica and its
stockholders knowingly held respondent out to the public as an officer and a stockholder of the
corporation.

The SC refrained from ruling on whether or not Yumul can compel the corporate secretary to
register said deed. It held it to be a question which is civil in nature and thus beyond the ambit of
the SEC, the court of origin of the current action. It is only after an appropriate case is filed and
decision rendered thereon by the proper forum can the issue be resolved.

Razon v IAC. F: Enrique Razon organized the E. Razon, Inc. for the purpose of bidding for the
arrastre services in South Harbor. Vicente Chuidian is the administrator of the intestate estate of
Juan Telesforo Chuidian. A stock certificate for 1,500 shares of stock of E Razon Inc was issued
in the name of Juan T. Chuidian. On the basis of the 1,500 shares of stock, the late Juan T.
Chuidian and after him, Vicente Chuidian, were elected as directors of E. Razon, Inc. Enrique
Razon had not questioned the ownership by Juan T. Chuidian of the shares of stock in question
and had not brought any action to have the certificate of stock over the said shares cancelled.
The certificate of stock was in the possession of defendant Razon who refused to deliver said
shares to the plaintiff, until the same was surrendered by defendant Razon and deposited in a
safety box in Philippine Bank of Commerce. 1,500 shares of stook under Stock Certificate No.
003 were delivered by the late Chuidian to Enrique because it was the latter who paid for all the
subscription on the shares of stock in the defendant corporation and the understanding was that
he (defendant Razon) was the owner of the said shares of stock and was to have possession
thereof until such time as he was paid therefor by the other nominal incorporators/ stockholders.
Since then, Enrique Razon was in possession of said stock certificate even during the lifetime of
the late Chuidian, from the time the late Chuidian delivered the said stock certificate to Razon. By
agreement of the parties delivered it for deposit with the bank under the joint custody of the
parties. TC ruled Razon owns the shares, IAC reverses.

Razon claims that the shares of stock were registered in the name of Chuidian only as nominal
stockholder and with the agreement that the said shares of stock were owned and held by the
petitioner but Chuidian was given the option to buy the same. Vicente B. Chuidian insists that the
appellate court's decision declaring his deceased father Juan T. Chuidian as owner of the 1,500
shares of stock of E. Razon, Inc. should have included all cash and stock dividends and all the
pre-emptive rights accruing to the said 1,500 shares of stock.

I: Who owns the shares? Does ownership of the said shares include all cash and dividends? H:
(1) Chuidian owns the shares. For an effective, transfer of shares of stock the mode and manner
of transfer as prescribed by law must be followed. As provided under the Corporation Code of the
Philippines, shares of stock may be transferred by delivery to the transferee of the certificate
properly indorsed. Title may be vested in the transferee by the delivery of the duly indorsed
certificate of stock. However, no transfer shall be valid, except as between the parties until the
transfer is properly recorded in the books of the corporation. In the instant case, there is no
dispute that the questioned 1,500 shares of stock of E. Razon, Inc. are in the name of the late
Juan Chuidian in the books of the corporation. Moreover, the records show that during his lifetime
Chuidian was elected member of the Board of Directors of the corporation which clearly shows
that he was a stockholder of the corporation. From the point of view of the corporation, therefore,
Chuidian was the owner of the 1,500 shares of stock. In such a case, the petitioner who claims
ownership over the questioned shares of stock must show that the same were transferred to him
by proving that all the requirements for the effective transfer of shares of stock in accordance with
the corporation's by laws, if any, were followed or in accordance with the provisions of law. Razon
however did not present any by-laws which could show that the 1,500 shares of stock were
effectively transferred to him. In the absence of the corporation's by-laws or rules governing
effective transfer of shares of stock, the provisions of the Corporation Law are made applicable to
the instant case.

The law is clear that in order for a transfer of stock certificate to be effective, the certificate must
be properly indorsed and that title to such certificate of stock is vested in the transferee by the
delivery of the duly indorsed certificate of stock. (Section 35, Corporation Code) Since the
certificate of stock covering the questioned 1,500 shares of stock registered in the name of the
late Juan Chuidian was never indorsed to the petitioner, the inevitable conclusion is that the
questioned shares of stock belong to Chuidian. The petitioner's asseveration that he did not
require an indorsement of the certificate of stock in view of his intimate friendship with the late
Juan Chuidian can not overcome the failure to follow the procedure required by law or the proper
conduct of business even among friends. To reiterate, indorsement of the certificate of stock is a
mandatory requirement of law for an effective transfer of a certificate of stock. The
preponderance of evidence also supports the findings that the shares of stock were given to Juan
T. Chuidian for value. Juan T. Chuidian was the legal counsel who handled the legal affairs of the
corporation. We give credence to the testimony of the private respondent that the shares of stock
were given to Juan T. Chuidian in payment of his legal services to the corporation. Razon failed
to overcome this testimony.

(2) The cash and stock dividends and all the pre-emptive rights are all incidents of stock
ownership. The rights of stockholders are generally enumerated as follows: [F]irst, to have a
certificate or other evidence of his status as stockholder issued to him; second, to vote at
meetings of the corporation; third, to receive his proportionate share of the profits of the
corporation; and lastly, to participate proportionately in the distribution of the corporate assets
upon the dissolution or winding up.

— Oral testimony to show that one is the principal or beneficial owner of shares for which he has
allowed a certificate of stock to be issued in the name of his alleged nominee will not be sufficient
basis to claim rightful ownership over the shares of stock.


— The law is clear that in order for a transfer of stock certificate to be effective, the certificate
must be properly indorsed and that title to such certificate of stock is vested in the transferee by
delivery of the duly indorsed stock certificate.

Rural Bank of Salinas v. CA. F: Clemente G. Guerrero, President of the Rural Bank of Salinas,
Inc., executed a Special Power of Attorney in favor of his wife, private respondent Melania
Guerrero, giving and granting the latter full power and authority to sell or otherwise dispose of
and/or mortgage 473 shares of stock of the Bank registered in his name. Pursuant to said Special
Power of Attorney, private respondent Melania Guerrero, as Attorney-in-Fact, executed a Deed of
Assignment for 472 shares out of the 473 shares, in favor of private respondents, and executed a
Deed of Assignment for the remaining one (1) share of stock in favor of private respondent
Francisco Guerrero, Sr. Melania Guerrero presented to petitioner Rural Bank of Salinas the two
(2) Deeds of Assignment for registration with a request for the transfer in the Bank's stock and
transfer book of the 473 shares of stock so assigned, the cancellation of stock certificates in the
name of Clemente G. Guerrero, and the issuance of new stock certificates covering the
transferred shares of stocks in the name of the new owners thereof. However, petitioner Bank
denied the request of respondent Melania Guerrero.


I: W/n the courts can compel by Mandamus the Rural Bank of Salinas to register in its stock
and transfer book the transfer of 473 shares of stock to private respondents.


 H: Section 5 (b) of P.D. No. 902-A grants to the SEC the original and exclusive jurisdiction to
hear and decide cases involving intracorporate controversies. An intracorporate controversy has
been defined as one which arises between a stockholder and the corporation. There is no
distinction, qualification, nor any exception whatsoever. The case at bar involves shares of stock,
their registration, cancellation and issuances thereof by petitioner Rural Bank of Salinas. It is
therefore within the power of respondent SEC to adjudicate. Said Section (Sec. 35 of Act 1459
[now Sec. 63 of the Corporation Code]) contemplates no restriction as to whom the stocks may
be transferred. It does not suggest that any discrimination may be created by the corporation in
favor of, or against a certain purchaser. The owner of shares, as owner of personal property, is at
liberty, under said section to dispose them in favor of whomever he pleases, without limitation in
this respect, than the general provisions of law, 
 the only limitation imposed by Section 63 of
the Corporation Code being any unpaid claim held by the corporation against the shares intended
to be transferred, which is absent in this case. The right of a transferee/assignee to have stocks
transferred to his name is an inherent right flowing from his ownership of the stocks. Whenever a
corporation refuses to transfer and register stock in cases like the present, mandamus will lie to
compel the officers of the corporation to transfer said stock in the books of the corporation"
(Fleisher vs. Botica Nolasco). The corporation's obligation to register is ministerial. In transferring
stock, the secretary of a corporation acts in purely ministerial capacity, and does not try to decide
the question of ownership. The duty of the corporation to transfer is a ministerial one and if it
refuses to make such transaction without good cause, it may be compelled to do so by
mandamus. For the petitioner Rural Bank of Salinas to refuse registration of the transferred
shares in its stock and transfer book, which duty is ministerial on its part, is to render nugatory
and ineffectual the spirit and intent of Section 63 of the Corporation Code.

J Santamaria v HSBC. F: Josefa Santamaria is the owner of 10000 shares of Batangas Minerals
Inc thru the offices of the Woo stockbrokerage firm. She then placed an order for 10000 shares of
Crown Mines thru RJ Campos & Co stockbrokerage firm and delivered the certificate of stock of
her shares in Batangas Minerals as security. Her name was penciled on the certificate she
delivered. The certificate then came into the possession of HSBC by virtue of a document of
hypothecation, wherein Campos pledged all shares and securities in its possession to HSBC
because of an overdraft account it had with the bank. The certificate was indorsed by Campos to
HSBC. HSBC then requested the Batangas Minerals to cancel the same and a new certificate
was issued in the name of HSBC’s nominee Robert Taplin. Mrs Santamaria then tendered
payment for the Crown Mine shares with Campos, but the latter was now prohibited from
transacting business due to its insolvency proceedings. She demanded that HSBC return her
certificate, but Taplin replied that the bank did not know anything about her transaction with
Campos. She sues HSBC.


I: W/n Santamaria could be charged with negligence for failing to take necessary precautions in
negotiating her stock certificate.


H: In making deposit of her certificate, Santamaria did not take any precaution to protect herself
against the possible misuse of shares. She could have asked Batangas Minerals to cancel it and
issue another in her name to apprise the holder that she was the owner of the certificate. This she
failed to do so, and instead she delivered the certificate to Campos and 
clothing the latter with
apparent title to the shares represented by said certificate, including apparent authority to
negotiate it by delivering it to HSBC. HSBC had no knowledge of the circumstances under which
the certificate of stock was delivered to Campos and had the perfect right to assume that Campos
was in lawful possession, in view of the fact that it was a street certificate, which is transferable by
mere delivery. Santamaria made the negotiation of the certificate to other parties possible and the
confidence she placed in Campos made the wrong done possible. This was the proximate cause
of the damage suffered by her. She is thus estopped from claiming further title to or interest
therein as against a bona fide pledgee or transferee thereof. The certificate was delivered by
Campos to HSBC in the ordinary course of business, together with many other securities, and at
the time of delivery, HSBC had no knowledge that the shares belonged to Santamaria. She was
thus chargeable with negligence in failing to take the necessary precautions upon delivering the
certificate to her broker.

I: w/n HSBC was obligated to inquire who was the real owner of the shares, and w/n it could be
charged with negligence for failure to do so.
 H: Upon its face, the holder of the certificate was
entitled to demand its transfer into his name from the issuing corporation. HSBC was not
obligated to look beyond the certificate to ascertain the ownership of the stock because it was
given pursuant to its contract of hypothecation. A stock certificate, indorsed in blank, is deemed
quasi-negotiable, and as such the transferee thereof is justified in believing that it belongs to the
holder and transferor. The fact that her name was penciled on the certificate cannot be
considered sufficient reason to indicate that she was the owner, considering that certificate was
indorsed in blank by her brokers and guaranteed by indorsement in blank by Campos.

— a bona fide pledgee or transferee of a stock from the apparent owner is not
chargeable with knowledge of the limitations placed on said certificates by the real owner,
or of any secret agreement relating to the use which might be made of stock by the
holder. 


— When a stock certificate is endorsed in blank, it constitutes what is termed as

a “street certificate” so that upon its face, the holder is entitled to demand its transfer into
his name from the issuing corporation. Such certificate is quasi- negotiable. 


— Santamaria could not recover the certificates since she could have asked that
the corporation that issued it to cancel and issue another. Her negligence was the
immediate cause of the damage, since the certificate was endorsed be her to constitute
as a street certificate. 

A De Los Santos v. JH McGrath, Atty General of the US. F: Involves the true ownership of
1,600,000 shares of Lepanto Mining. The original owner was the Mitsui Co, a Japanese
corporation, and was held in trust by Vicente Madrigal, in whose name the shares were registered
in the books of Lepanto. Madrigal delivered the certificates to the Mitsui office in the RP, which
kept the same until the liberation of Manila by the US. The Mitsuis nor Madrigal had never sold or
disposed of the shares, which was alleged to have been looted or stolen during the liberation. By
virtue of vesting order P-12, title in the shares was ordered vested in the Alien Property Custodian
of the US, which was succeeded in this action by the US Atty General. De Los Santos and
Astraquillo however claim to be owners of 1,600,000 
 shares of Lepanto Mining, alleging that
they bought 1,100,000 from Carl Hess and 500,000 from Juan Campos. All evidence and persons
who could testify as to their ownership of the shares no longer existed. Hess was executed by the
Japanese and Campos killed during the liberation. A receipt made in a purported sale by
Astraquillo of the shares was curiously destroyed by fire.

I: Who owns the certificates


 H: Under the Code, a share of stock may be transferred by endorsement of the certificate
coupled with delivery. The transfer is not valid except as between the transferring parties, unless
it is entered and noted upon the books of the corporation. No such entry in the name of de los
Santos and Astraquillo having been made, it follows that the transfer allegedly effected by Hess
and Campos is not valid, except as between themselves. It does not bind the Madrigals or the
Mitsuis who are not parties to the alleged transaction. Although a stock certificate is sometimes
regarded as quasi-negotiable, in the sense that it may be transferred by endorsement, coupled
with delivery, it is well-settled that the instrument is non-negotiable, because the holder thereof
takes it without prejudice to such rights or defense as the registered owner or credit may have
under the law. If the owner of the certificate has endorsed it in blank, and it is stolen from him, no
title is acquired by an innocent purchaser for value. The doctrine that a bona fide purchaser of
shares under a forged or unauthorized transfer acquires no title as against the true owner does
not apply where the circumstances are such as to estop the latter from asserting his title. Where
one of two innocent parties must suffer by reason of a wrongful or unauthorized act, the loss must
fall on the one who first trusted the wrongdoer and put in his hands the means of inflicting such
loss. But negligence which will work an estoppel of this kind must be the proximate cause of the
damage and must be in or immediately connected with the transfer itself.

Moreover, delos Santos and Astraquillo were aware of sufficient facts to put them on notice of the
need of inquiring into the regularity of the transactions and the title of supposed vendors. The
certificates were in the name of Madrigal. Obviously therefore, the alleged sellers were not the
registered owners of the certificates and shares of stock. They must have been conscious of the
infirmities in title. The purported sales were also admittedly hostile to the Japanese, who had
prohibited it, and plaintiffs had actual knowledge of these facts and of the risks attendant. In other
words, they assumed those risks and cannot validly claim against the registered SH, the status of
purchasers in GF.

— A stock certificate is not a negotiable instrument, but it is regarded as quasi-

negotiable in the sense that it may be transferred by endorsement coupled with delivery



— A transferee under a forged assignment acquires no title which can be asserted

against the true owner, unless the true owner’s own negligence has been such as to
create an estoppel against him 

— The doctrine that a bona fide purchaser of shares under a forged or unauthorized
transfer acquires no title as against the true owner does not apply where the
circumstances are such as to estop the latter from asserting his title 


— It is not negotiable because the holder takes it without prejudice to such rights or
defenses as registered owners or transferor’s creditor may have under the law, except
insofar as such rights or defenses are subject to the limitations imposed by the principles
governing estoppel