Title VII

Section 60: Subscription contract

-Any contract for the acquisition of unissued stock in an existing corporation or a corporation
still to be formed
shall be deemed a subscription
-Even if the parties refer to it as a purchase or some other contract
How participation in a corporation acquired
1. In a stock corporation
a. By subscription contract with an existing corporation for the acquisition of unissued shares
b. Purchase from the corporation of treasury shares
c. Transfer from a previous stockholder of the outstanding shares or existing shares
2. In a non-stock corporation
a. By contract with the corporation the modes entering into whoich vary according to the charter
and bylaws
of the particular corporation
Trust fund doctrine
-Stock corporations are in the nature of a trust fund in sense that they are to be maintained
unimpaired for the
protection of corporate creditors.
-To have a cause of action against the subscribers for the unpaid subscription, a corporate
creditor must first
exhaust his legal remedies against the corporation unless the corporation is insolvent.
Section 61: Pre-incorporation subscription
-Subscription of shares of a stock corporation to be formed shall be irrevocable for a period of at
least 6 months
from the date of subscription
-Unless all other subscribers consent to the revocation, or unless the incorporation of said
corporation fails to
materialize within said period or within a longer period as may be stipulated in the contract
subscription.
-No pre-incorporation subscription may be revoked after the submission of the AIO to the SEC
Pre-incorporation subscription mandatory
-The 25% of 25% rule explains.
Section 62: Consideration for stocks
-Stocks shall not be issued for a consideration less than the par or issued price
Consideration may be in any or combination of any of the following:
1. Actual cash paid to the corporation
2. Property, tangible or intangible, actually received by the corporation and necessary or
convenient for its
use and lawful purposes at a fair valuation equal to the par value or issued value of the stock
issued
3. Labor performed for or services actually rendered to the corporation
4. Previously incurred indebtedness of the corporation
5. Outstanding shares exchanged for stocks in the event of reclassification or conversion.
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Sources of capital
1. Funds furnished by shareholders
-Contributions of shareholders received by it as a consideration for the issuance of stock.
Notes: Shareholders are the owners of the corporation, through their ownership of the
corporation’s shares of
stock also called equity securities
 Capital contributed by stockholders in exchange for shares of stock is often referred to as
equity capital.
 Value received for stock issued appears in the capital section of the corporation’s balance
sheet.
2. Borrowings
-Loans or advances by creditors in return for which the creditors get securities called bonds for
long term
debts.
Notes:
Corporate bond-written promise by a corporation to pay a definite sum of money at a future
date, at a fixed rate
of interest.
Funded debt-Debt of the corporation represented by a bond, which may either be secured or
unsecured
-The code expressly empowers corporation to incur create or increase bonded indebtedness
3. Profits and stock dividends
-Profits and earning which are reinvested in the business.
-Sometimes a corporation issues stock dividends by means it retains part of the corporate
earnings.
Different modes by which shares may be issued
1. By subscription before and after incorporation, to original, unissued stock
2. By sale of treasury stock after incorporation for money, property or service.
3. By subscription to new stocks, when all the original stocks have been issued and the amount
of the capital
stock increased.
4. By making a stock dividend.
Limitations for issue of stocks
1. Shares of stock shall not be issued for a consideration less than the par or issued price.
Except: Treasury shares, they may be issued as long as the price is reasonable.
2. Where the consideration is other than actual cash, the valuation shall initially be determined
by the
incorporations or the Board of directors s.t. to approval by the SEC
3. Shares of stocks shall not be issued in exchange for promissory notes or future services
Notes: Negotiable instruments such as promissory notes and checks can be used as payments of
stocks but they
shall produce the effect of payment only when they have been cashed, or by the fault of the
creditor they have
been impaired.
Fixing of issued price of no-par value shares
1. The issued price if no-par value shares may be fixed in the AIO or by the board of directors
pursuant to
authority conferred upon it by the AIO or by-laws.
2. Or in the absence thereof, by the stockholders representing majority of the outstanding capital
stock at a
meeting duly called for the purpose.
Notes: Thus, the issued price of no-par value shares may vary from time to time as it is usually
fixed on the basis
of their book value. But they may not be issued for a consideration less than 5 php per share.
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Section 63: Certificate of stock and transfer of shares

 The capital stock shall be divided into shares for which certificates signed by the president or
vice
president, countersigned by the secretary or assistant secretary and sealed with the seal of the
corporation
shall be issued in accordance with the by-laws.
 Shares of stock issued are personal property.
Nature of certificate of stock
 Written instrument signed by the president or vice president, countersigned by the secretary or
assistant
secretary stating or acknowledging that the person named therein is the owner of a designated
number of
shares of its stock.
 Indicates the name of the holder, number, kind and class of shares represented and the date of
issuance.
 Certificate is not stock in the corporation but is merely evidence of the holder’s interest in the
corporation,
his ownership of the share represented thereby.
 Expresses contract between the corporation and the stockholder, it is not essential to make one
a
stockholder in a corporation or to the exercise of the rights of a stockholder.
Requirements for the effect of transfer
1. Endorsement by the registered owner
2. Delivery of the certificate
Right to issuance of certificate of stock
 Every stockholder has a right to have proper certificate issued to him as soon as he has
complied with the
conditions to entitle him to one as by payment for his shares
Effect of over-issuance of shares
 A corporation cannot issue share in excess of the maximum authorized it its AIO for they do
not exist.
 Over issued stock is absolutely void
 Corporation may be held liable in damages or for restitution to one who had innocently
advanced money
in the belief that the shares were lawfully issued.
Right to transfer fully paid shares of stock.
 Authorizes the transfer of shares represented by the certificate by its endorsement by the owner
or agent
and delivery, so endorsed to the transferee.
 To be binding on the corporation the transfer must be registered in the corporate books
 No shares of stock against which the corporation holds any unpaid claim shall be transferable
in the books
of the corporation.
Restrictions on transfer
 A by-law which prohibits a transfer of stock without the consent or approval of all the
stockholders or of
the president or board of directors is illegal as constituting undue limitation on the right of
ownership and
in restraint of trade
 A provision in the certificate that it is transferable ONLY to SOME person first approved by
the BOD
unreasonably restricts the right of the stockholder to dispose of his shares.
 The condition “non-transferable” appearing on certificate of stock is null and void.
 Corporations which will engage in any business reserved for Filipino citizens are required to
indicate in
the AIO and in all the certificates the restriction against “transfer of stock” which will reduce the
ownership of Filipino citizens to less than required percentage of capital stock
Different modes by which stock may be transferred.
1. Indorsement and delivery of the certificate
2. Transfer made in a separate instrument
3. Judicial or extra judicial settlement of the state
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Notes: In case a stockholder dies intestate (without a last will and testament) a judicial or extra
judicial
partition of his estate is necessary to transfer the shares of stocks in favor of his heirs
Validity of stock transfer
1. As between the parties
Notes: Registration is not necessary to enable the transferee to acquire the right of a stockholder
as against
the transferor. An unregistered transfer shall not be valid “except as between the parties”
 Parties may agree that shares of stock sold would not be registered in the name of the seller
until
the price has been fully paid.
2. As against third parties
The transfer of shares must first be entered and noted upon the books of the corporation so as to
show the
names of the parties to the transaction, date of transfer and the number of certificate and shares
transferred.
Effects of an unregistered transfer of shares
1. Valid and binding as between the transferor and transferee only
2. Invalid insofar as the corporation is concerned except when notice is given to the corporation
for purposes
of registration.
a. Transferor has the right to vote and be voted, and has the right to participate in any meeting.
b. Transferor has the right to dividends a s against the corporation but transferor as the nominal
owner of
the shares, is the trustee for the benefit of the real owner.
3. Invalid against corporate creditors and the transferor is still liable to the corporation.
4. Invalid against the creditors of the transferor without notice of the transfer.
Section 64: Issuance of stock certificates
-No certificate of stock shall be issued to a subscriber until the full amount of his subscription
together with
interest and expenses (in case of delinquent shares) if any is due, has been paid.
-Any unpaid subscription is an asset to which corporate creditors may look for payment and they
are entitled to
insist that it be collected.
Nature of relation of stockholder to the corporation
1. Relation based on contract
 Contractual
 Within the protection if of the Constitution prohibiting legislation impairing the obligation of
contract
2. Share not an indebtedness of corporation
3. Corporation owns its property as a distinct entity
 Properties registered in the name of the corporation are owned by it as an entity separate and
distinct from stockholders or members
 Consequently, shareholders have no title to the property which is owned by the entity known
as
the corporation.
Rights of stockholders in general
1. Right to attend and vote in person or by proxy at stockholders’ meeting
2. Right to elect and remove directors
3. Right to approve certain corporate acts
4. Right to adopt and amend or repeal the by-laws or adopt new by-laws.
5. Right to compel the calling of meetings of stockholders when for any cause there is no person
authorized
to call a meeting
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6. Right to issuance of certificate of stock or other evidence of stock ownership and be registered
as
shareholder
7. Right to receive dividends when declared
8. Right to participate in the distribution of corporate assets upon dissolution
9. Right to transfer of stock on corporate books
10. Right to pre-emption in the issue of shares
11. Right to inspect corporate books and records and to receive financial report of the
corporation’s operation
12. Right to be furnished the most recent financial statement upon request and to receive a
financial report of
the corporation’s operations.
13. Right to bring individual and representative or derivative right.
14. Right to recover stock unlawfully sold for delinquency
15. Right to enter into a voting trust agreement
16. Right to demand payment of the value of his shares and withdraw from the corporation in
certain cases.
17. Right to have the corporation voluntarily dissolved
Action by stockholders or members
1. Wrong or injury done directly against the corporation
 Gives rise to cause of action on the part of the corporation through the BOD/T and not
primarily of an
individual stockholder.
2. Lack of action on the part of officials of the corporation
 May maintain a derivative suit to enforce the corporate right of action in behalf of himself.
Derivative suit explained
 One brought by one or more stockholders in the name and on behalf of the corporation to
redress
wrongs committed against it or to protect or vindicate corporate rights, whenever the officials of
the
corporation refuse to sue, or the ones to be sued or hold control of the corporation.
 In such action, the suing stockholder is regarded as nominal party with the corporation as the
real party
in interest.
 Any recovery belongs to the corporation, but the plaintiff is entitled to reimbursement of legal
expenses.
Individual suit explained
 Action brought by a stockholder against the corporation for direct violation of his contractual
rights.
 Any recovery belongs to him.
Representative suit explained
 Group of stockholders may bring direct suits against a corporation in the form of a
representative suit or
class action/suit.
 Also a method used by minority stockholders to compel the declaration of dividends.
Liabilities of a stockholder
1. Liability to the corporation for unpaid subscription.
2. Liability to the corporation for interest on unpaid subscription
3. Liability to the corporation creditors of the corporation of unpaid subscription
4. Liability for watered stocks.
5. Liability for dividends unlawfully paid.
6. Liability for to create corporation’
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Section 65: Liability of directors for watered stocks.

-Any director or officer of a corporation consenting to the issuance of stocks for a consideration
less than its par
value or issued value
-or for a consideration in any form other than cash, valued in excess of its fair value
-or who having knowledge thereof, does not forthwith express his objection in writing and file
the same with the
corporate secretary, shall be solidarily liable with the stockholder concerned to the corporation
and its creditors
for the difference between than fair value received at the time of issuance of the stock and the par
or issued value
of the same.
Meaning of watered stock
 Stock issued for no value at all or for a value less than its equivalent either in cash, property or
services or
stock dividends
 Issued without consideration (bonus share)
 Issued as fully paid when the corporation has received a lesser sum of money than its par or
issued value
 Issued for a consideration other than actual cash, such as property or services, the fair
valuation of which
is less than its par or issued value
 Issued as stock dividend when there are no sufficient retained earnings or surplus.
Effect of issue of watered stock
1. As to the corporation, the issuance of watered stock is not merely ultra vires but is illegal per
se as it is
violation of section 62.
2. As to creditors, liability attaches whether or not creditors have relied on an over-valuation of
corporate
capital.
3. As to SEC, whether or not an issuance would amount to an issue of watered stock is well
within its
authority to inquire into in view of its powers and duty to enforce all law affecting corporations.
Section 66: Interest on unpaid subscription
-Subscribers for stock shall pay to the corporation interest on all unpaid subscriptions from the
date of
subscription, if so required by, and at the rate of interest fixed in the by-laws. If no rate of
interest is fixed in the
by-laws, such rate shall be deemed the legal rate (6% per annum).
Section 67: Payment of balance of subscription
-The BOD of any stock corporation may at any time declare due and payable to the corporation
unpaid
subscriptions to the capital stock and may collect the same or such percentage of said unpaid
subscription, in
either case with interest accrued, if any, as it may deem necessary.
-Any payment shall be made on the date specified in the contract of subscription or on the date
stated in the call
made by the board.
-Failure to pay on such date shall produce interest, unless a different date of interest is provided
in the by-laws.
-If within 30 days from the said date no payment is made, all stocks covered by said subscription
shall thereupon
become delinquent and shall be subject to sale as hereinafter provided, unless the BOD orders
otherwise.
Remedies to enforce payment of stock subscription
1. Extra-judicial sale at public auction.
2. Judicial action
3. Collection from cash dividends and withholding of stock dividends.
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Statutory sanctions on stock delinquency

1. Rights denied to stockholders
Note: Except the right to dividends subject to the provision of section 43.
2. Right given to the corporation
Note: Under sec 43, corporation has the right to first apply cash dividends due on delinquent
stock to the
unpaid balance on the subscription plus cost and expenses, while as stock dividends, to withhold
the same
from delinquent stockholder until his unpaid subscription is fully paid.
Payment of unpaid subscription or percentage
1. When to be made
A. On the date specified in the contract of subscription
B. In the absence of any specified date in the contract of subscription, on the date stated in the
call made
by the BOD.
2. Effect of failure to pay
 Shall render the entire balance due and payable and make all the stock covered by said
subscriptions delinquent and subject to sale at public auction.
3. Effect of payment
 Shall be restored to all the rights of a stockholder including the right to be issued other
certificates
of stock evidencing subscription.
When stock becomes delinquent
-Become delinquent upon failure of the holder to pay the unpaid subscription or balance thereof
within 30 days
from the date specified in the contract of subscription, or in the absence, from the date stated in
the call made by
the BOD.
Call and assessment defined and distinguished
Call – Declaration officially made by a corporation usually expressed in the form of a resolution
of the BOD
requiring the payment of all or a certain prescribed portion of a subscriber’s stock subscription.
Assessment – Used with reference to both paid and unpaid subscriptions
A. As to paid – a levy made upon stock of a corporation generally for the purpose of correcting
an
impairment of the capital, and indicates the proportionate amount requires to be paid by each
stockholder.
B. As to unpaid – term is used interchangeably with “call” or “installment”
Power of Board of Directors to make call
 No longer absolute because it is limited by the subscription contract.
 May make call anytime only when there is no date specified in the contract
Requisites for a VALID call
1. It must be made in the manner prescribed by law
2. It must be made by the BOD
3. It must operate uniformly upon all shareholders.
Notes: Where call is necessary, notice must be given to stockholder concerned. A call without
notice is
practically no call at all.
 When the corporation becomes insolvent, payment of stock subscription may be enforced
without
necessity of a prior call.
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Section 68: Delinquency sale

-The BOD may, by resolution, order the sale of delinquent stock and shall specifically state the
amount due on
each subscription plus all accrued interest, and the date, time and place of the sale which shall
not be less than 30
days nor more than n 60 days from the date the stocks become delinquent.
Requisites:
 Notice of said sale, with a copy of the resolution, shall be sent to every delinquent stockholder
either
personally or by registered mail.
 It shall be published once a week for two consecutive weeks in a newspaper of general
circulation in the
province or city where the principal office of the corporation is located.
Meaning of highest bidder
 Person offering at the sale to pay the full amount of the balance on the subscription together
with accrued
interest, cost of advertisement and expenses of sale, for the smallest number of shares or fraction
of a
share.
 Subscriber cannot incur any deficiency liability because the highest bid must not be less than
the full
amount due.
Absence of bidders
 Corporation may purchase for itself the delinquent stock.
 In such case, the delinquent subscriber shall also be released from liability with regards to his
subscription
which is deemed fully paid.
 Purchase of the corporation must be made out of net earnings in view of the trust fund
doctrine.
Section 69: When sale may be questioned
No action to recover delinquent stock sold can be sustained upon the ground of irregularity or
defect in the notice
of sale, or in the sale itself of the delinquent stock, unless than party seeking to maintain such
action first pays or
tenders to the party holding the stock the sum for which the same was sold, with interest from the
date of sale at
the legal rate; and no such action shall be maintained unless it is commenced by the filing of a
complaint within 6
months from the date of sale.
Grounds for recovery of stock unlawfully sold
1. Irregularity or defect in the notice of sale
2. Irregularity or defect in the sale itself of the delinquent stock
Note: Irregularity or defect in the call for unpaid subscription in the notice of delinquency is no
longer included
among the grounds for questioning the sale.
Section 70: Court action to recover unpaid subscription
 Nothing in this Code shall prevent the corporation from collecting by action in a court of
proper
jurisdiction the amount due on any unpaid subscription, with accrued interest, costs and
expenses.
 As a general rule, a corporation may not maintain a suit for the enforcement of unpaid
subscription
without first making a call as provided by law.
Section 71: Effect of delinquency
 No delinquent stock shall be voted or be entitled to vote or to representation at any
stockholder’s meeting,
nor shall the holder thereof be entitled to any of the rights of a stockholder except the right to
dividends in
accordance with the provisions of this Code, until and unless he pays the amount due on his
subscription
with accrued interest and the costs and expenses of advertisement, if any.
Downloaded by Ulrich Barrs (djdinbarroga@gmail.com)
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Section 72: Rights of unpaid shares

Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a
stockholder.
Notes: Before unpaid shares become delinquent, the holder thereof is not considered to have
violated any contract
with the corporation and therefore, he has all the rights of a stockholder which rights include the
right to vote.
Section 73: Lost or destroyed certificates
The following procedure shall be followed for the issuance by corporation of new certificates in
lieu of those
which have been lost, stolen or destroyed.
1. The registered owner of a certificate of stock in a corporation or his legal representative shall
file with the
corporation an affidavit in triplicate setting forth, if possible, the circumstances as to how the
certificate was lost,
stolen or destroyed, the number of shares represented by such certificate, the serial number of the
certificate and
the name of the corporation which issued the same. He shall also submit such other information
and evidence
which he may deem necessary;
2. After verifying the affidavit and other information and evidence with the books of the
corporation, said
corporation shall publish a notice in a newspaper of general circulation published in the place
where the
corporation has its principal office, once a week for three (3) consecutive weeks at the expense
of the registered
owner of the certificate of stock which has been lost, stolen or destroyed. The notice shall state
the name of said
corporation, the name of the registered owner and the serial number of said certificate, and the
number of shares
represented by such certificate, and that after the expiration of one (1) year from the date of the
last publication, if
no contest has been presented to said corporation regarding said certificate of stock, the right to
make such contest
shall be barred and said corporation shall cancel in its books the certificate of stock which has
been lost, stolen or
destroyed and issue in lieu thereof new certificate of stock, unless the registered owner files a
bond or other
security in lieu thereof as may be required, effective for a period of one (1) year, for such amount
and in such
form and with such sureties as may be satisfactory to the board of directors, in which case a new
certificate may
be issued even before the expiration of the one (1) year period provided herein: Provided, That if
a contest has
been presented to said corporation or if an action is pending in court regarding the ownership of
said certificate of
stock which has been lost, stolen or destroyed, the issuance of the new certificate of stock in lieu
thereof shall be
suspended until the final decision by the court regarding the ownership of said certificate of
stock which has been
lost, stolen or destroyed.
Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers, no
action may be
brought against any corporation which shall have issued certificate of stock in lieu of those lost,
stolen or
destroyed pursuant to the procedure above-described.