CORPORATION LAW | 11

SEC-OGC Opinion No. 10-15 Delinquent Stocks, Delinquency Sale, Effect of Delinquency23 April 2010

Nature: Letter addressed to Dr. Federico Arcenas, the President of the Medicus Philippine Maramedical & Technical School (Iloilo), Inc.

Opinion referred to the Doctors query regarding delinquent stockholders. Medicus PH made a call for payment of unpaid subscriptions and declared a major subscription as delinquent[footnoteRef:1] as of ov 2008. The subscription amounted to 59.99% of the total stocks, 46.12% of which remained unpaid. [1: A delinquent subscription refers to subscription declared by the board of directors as such after the subscriber failed to settle the same after 30 days from the date when the subscription became due as specified in the contract of subscription or in the call made by the board of directors. (SEC Memorandum Circular No. 11, Series 2008)]

A public auction was held, ending up in failure. Thus, Dr. Arcenas requested clarification on the following:

Query IWhat is the effect of delinquency on the voting rights of the stockholder? Does it affect only the unpaid shares or the whole subscription of the delinquent stockholder?

Effect of delinquency on the voting rights of the stockholder: No voting rightsSince Medicus made a call for payment for unpaid subscriptions and declared the subject subscription delinquent Sec. 71 applies; it provides that "No delinquent stock shall be voted for or be entitled to vote or to representation at any stockholder's meeting xxx." The delinquent stocks cannot be voted for or be entitled to vote at any stockholders' meeting. Sec. 24: [on election of directors]: "xxx no delinquent stock shall be voted."

Sec. 64: "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."

Doctrine: A subscription contract is one, entire and indivisible. The stockholder is not entitled to a certificate of stock until full payment of his subscription together with interest, and expenses if any is due. The entire delinquent subscription cannot be voted for or be entitled to vote. Sec. 67[footnoteRef:2] cited; [2: xxx Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, if any, 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 render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance, unless a different rate of interest is provided in the' by-laws, computed from such date until full payment. If within thirty (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 board of directors orders otherwise."]

Assuming that the delinquency affects the whole subscription of the delinquent stockholder, are the stockholders of the remaining paid up subscriptions (40.01 % of the total stocks), not delinquent, the only ones entitled to vote during the stockholders' meeting? The remaining stockholders (40.01% of total stock) are entitled to vote during the stockholders meeting but cannot do so for failure to meet a quorum[footnoteRef:3]. [3: Sec. 52 provides that: Unless otherwise provided for in this Code or in the by-laws, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock xxx."]

Quorum must be provided by by-laws, else the one in Code must be followed; Because Medicus's major stockholder (59.99% of total stocks) has been declared delinquent, only 40.01% of the stocks are entitled to vote during the stockholders' meeting, based on Sec. 71[footnoteRef:4]. [4: Section 71. Effect of delinquency. - No delinquent stock shall be voted for 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.]

Even if the subscriptions are not fully paid, as long as they are not delinquent, the stockholders thereof are entitled to vote, based on Sec. 72[footnoteRef:5]. [5: 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.]

Art. II, Sec. 5, Medicus by-laws:"Unless otherwise provided by law, in all regular or special meetings of stockholders, a majority of the outstanding capital stock must be present or represented in order to constitute a quorum. If no quorum is constituted, the meeting shall be adjourned until the requisite amount of stock shall be present."

Because only 40.01% of the total stocks are entitled to vote, Medicus cannot muster a quorum.

Query II: Is there a limit to the number of times that unpaid subscriptions may be auctioned? NO

Sec. 68[footnoteRef:6] provides for the sale in a public auction of delinquent shares. Nothing therein provides a limit to the number of times an unpaid subscription may be auctioned: [6: Section 68.Delinquency sale. -. The board of directors may, by resolution, order the sale of delinquent stock and shall.~pecificallystate the amount due on each subscription plus all accrued interest, and the date, time and place of thesale which shall not be less than thirty (30) days nor more than sixty (60) days from the date the stocks become delinquent.Notice of said sale, with a copy of the resolution, shall be sent to every delinquent stockholder either personally or by registered mail. The same shall furthermore be published once a week for two (2) consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation is located.Unless the delinquent stockholder pays to the corporation, on or before the date specified for the sale of the delinquent stock, the balance due on his subscription, plus accrued interest, costs of advertisement and expenses of sale, or unless the board of directors otherwise orders, said delinquent stock shall be sold at public auction to such bidder who shall offer to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share. The stock so purchased shall be transferred to such purchaser in the books of the corporation and a certificate for such stock shall be issued in his favor. The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares.Should there be no bidder at the public auction who offers to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share, the corporation may, subject to the provisions of this Code, bid for the same, and the total amount due shall be credited as paid in full in the books of the corporation. Title to all the shares of stock covered by the subscription shall be vested in the corporation as treasury shares and may be disposed of by said corporation in accordance with the provisions of this Code.]

The Corporation Code allows remedies for the enforcement of liability for unpaid subscriptions:1. Put up delinquent unpaid subscription for sale under Section 68; and 2. File an action in court under Section 70.

Query III: In the event that the auction is successful, should the certificate of stocks cover only the unpaid portion of the subscription? NO, certificate must cover entire subscription. If so, what is the effect on the paid shares of the delinquent stockholder?

When the auction is successful, the corporation must issue a certificate of stock covering the entire subscription and not for "only the unpaid portion of the subscription." This is consistent with the SEC's interpretation of Sec. 64. Before Sec. 64's effectivity, Sec. 37 was interpreted by the SC in Baltazar & Lingayen Gulf Electric Power Co. Inc. ruling that, a corporation may, in the absence of provisions in the by-laws to the contrary, apply payments made by the subscribers- stockholders, either as: Full payment for the corresponding number of stocks the par value of which is covered by such payment, or As proportionate payment of each and all entire number of subscribed shares. If the corporation has chosen one option it cannot change to the other without the unanimous consent of the stockholders. After the effectivity of the Corporation Code, the SEC, in its opinion, held that Sec. 64 "renders the ruling in the Lingayen Gulf case obsolete. Considering that this rule is mandatory, by-laws provisions following said ruling are therefore rendered of no effect."

Query IV: Can Medicus sell portions of the delinquent shares ('in small pieces'') even while they are not treasury shares inasmuch as the corporation cannot buy all the remaining shares of the delinquent stockholder? NO Principle of indivisibility of subscription [under Sec. 64] - the subscription cannot be divided into portions. SEC in one opinion stated that IF THE STOCKHOLDER HAS NOT PAID THE FULL AMOUNT OF HIS SUBSCRIPTION, HE CANNOT TRANSFER PART OF IT IN VIEW OF THE INDIVISIBLE NATURE OF SUBSCRIPTION CONTRACT. However, the entire subscription, although not yet fully paid, may be transferred to a single transferee, who as a result of the transfer, must assume the unpaid balance. But this is upon consent of the corporation since the transfer of subscription right is a novation of contract which, under Art. 1293, CC, cannot be made without the creditor's consent.

Bing Crosby Minute Maid Corp v EatonSC:Eaton argued that to hold him liable for the difference, there must be a finding that Bing Crosby did not rely on the par value of the shares issued when it extended credit to the corporation. Court held that there was no finding as to that matter; thus, the case should be remanded. It is relevant to find out if Bing Crosby relied on the par value of the shares or not, according to the misrepresentation theory. If the creditor did rely on the par value, the holder of the watered stock, Eaton, would be liable.The issuance of watered stock is viewed as a misrepresentation of the corporation's capital. Creditors who rely on this misrepresentation are entitled to recover the "water" from the holders of the watered shares. Court found that there is no finding on the issue of reliance (although there was evidence against Bing Crosby Minute Maid Corp. indicating it did not rely on the par value of the shares). Under the misrepresentation theory, reliance by the creditor is a prerequisite to the liability of a holder of watered stock. The trial court was justified in ordering a new trial because of the absence of a finding on that issue.

FACTS:Eaton formed a corporation to acquire his going frozen foods business. The Commissioner of Corporations issued a permit (authorizing the corporation to sell and issue not more than 4,500 shares of $10 par value stock) to Eaton and other named individuals in consideration of the transfer of the business. The permit provided that 1,022 shares be deposited in escrow[footnoteRef:7]and not be transferred without the written consent of the commissioner, and that the escrowed shares not be sold or issued until the prospective shareholders named in the permit waived certain rights to dividends and to participation in any distribution of assets. [7: A bond, deed, or other document kept in the custody of a third party as security or trust, taking effect only when a specified condition has been fulfilled]

Eaton transferred his business to the corporation. The corporation placed 1,022 shares in escrow in his name pursuant to the provisions of the permit. The remaining 3,478 shares were issued outright to Eaton and after three years were transferred to the other persons named in the permit.

Although the 1,022 shares were listed on the corporate records as held by Eaton (accompanied by the notation "escrowed"), they were never released from escrow. The corporation had financial difficulties and executed an assignment of its assets for the benefit of creditors to a credit association. Bing Crosby Minute Maid Corporation recovered a judgment against the corporation for $21,246.42. A writ of execution on the judgment was returned unsatisfied.

The trial court found that the value to the corporation of the consideration from Eaton was $34,780.83; that 4,500 shares of stock having a par value of $10 each were issued to Eaton and he became the owner of those shares; that subsequent to the issue of the shares the corporation purchased merchandise from Bing Crosby Minute Maid Corporation and has not yet paid for all of it; that some $15,000 of the judgment Bing Crosby Minute Maid Corporation recovered from the corporation remains unsatisfied, and that the corporation is insolvent.

The judgment for Bing Crosby Minute Maid was for $10,219.17--approximately the par value of the 1,022 shares of stock placed in escrow. The judgment was based on the trial court's conclusion that Eaton was liable for the difference between the par value of the 4,500 shares and the value of the consideration Eaton paid for them.

Is Eaton liable to Bing Crosby Minute Maid Corporation for the difference between the par value of the shares and the consideration Eaton paid? NO FINDING YET, CASE REMANDED. There must be a finding of Bing Crosby Minute Maid Corporations (as creditor) reliance on the par value of the shares issued to Eaton.

In this state a shareholder is ordinarily not personally liable for the debts of the corporation; he undertakes only the risk that his shares may become worthless. There are, however, certain exceptions to this rule of limited liability. 1. A subscriber to shares who pays in only part of what he agreed to pay is liable to creditors for the balance. Although the trial court in the present case found that Eaton had agreed to pay par value for the 4,500 shares registered in his name, the record on appeal discloses no evidence supporting this finding. Therefore, Eatons liability cannot be predicated upon the theory that a subscribing shareholder is liable for the full consideration agreed to be paid for the shares.2. Liability for holding watered stock, which is stock issued in return for properties or services worth less than its par value. Bing Crosby seeks Eaton liable under this; Accordingly, this case calls for an analysis of the rights of a creditor of an insolvent corporation against a holder of watered stock. Holders of watered stock are generally held liable to the corporation's creditors for the difference between the par value of the stock and the amount paid in.

Eatons: He was never the owner of nor acquired title to the 1,022 shares, because of the escrow, as to enable Bing Crosby Minute Maid Corporation, a creditor, to proceed against him for their pair value. SC: No; Section 25508 of the Corporations Code authorizes the Commissioner of Corporations to require that shares be placed in escrow. Although he could not transfer the shares, it appears that despite the escrow he was entitled to count them in determining the extent of his rights to vote and to participate in dividends and asset distributions. The critical feature of the escrow for purposes of the present case is the absence of any restriction on representations that the escrowed shares were outstanding and fully paid. Although the escrow contained provisions designed to protect future stockholders, it afforded no special protection to future creditors of the corporation. Therefore, the escrow did not affect the rights of future creditors and it would appear that despite the escrow Eaton acquired sufficient title to the 1,022 shares to permit Bing Crosby Minute Maid Corporation to proceed against him for their par value.Eaton: The trial court must first make a finding on a material issuethat of Bing Crosby Minute Maid Corporations not relying on the par value of the shares in extending credit to his corporation.The liability of a holder of watered stock has been based on one of two theories: the misrepresentation theory or the statutory obligation theory.1. The misrepresentation theory is the one accepted in most jurisdictions. The courts view the issue of watered stock as a misrepresentation of the corporation's capital. Creditors who rely on this misrepresentation are entitled to recover the "water" from the holders of the watered shares. Statutes expressly prohibiting watered stock are commonplace today.2. Statutory obligation theory Under this theory the holder of watered stock is held responsible to creditors whether or not they have relied on an overvaluation of corporate capital.

Eatons answer: in extending credit to the corporation, Bing Crosby Minute Maid Corporation did not rely on the par value of the shares issued, but only on independent investigation and reports as to the corporation's current cash position, its physical assets and its business experience.

Bing Crosbys admission:1. The district manager believed that the original capital of the corporation amounted to only $25,000, and2. The only financial statement of the corporation that Bing Crosby Minute Maid Corporation ever saw showed a capital stock account of less than $33,000.

SC: These admissions would be sufficient to support a finding that Bing Crosby Minute Maid Corporation did not rely on any misrepresentation arising out of the issuance of watered stock. The court made no finding on the issue of reliance. If the misrepresentation theory prevails in California, that issue was material and Eaton was entitled to a finding thereon. If the statutory obligation theory prevails, the fact that Bing Crosby Minute Maid Corporation did not rely on any misrepresentation arising out of the issuance of watered stock is irrelevant and accordingly a finding on the issue of reliance would be surplusage.

It is therefore necessary to determine which theory prevails in this state.

Bing Crosby: even under the misrepresentation theory a creditor's reliance on the misrepresentation arising out of the issuance of watered stock should be conclusively presumed. SC: No; If it should prevail, the misrepresentation theory and the statutory obligation theory would be essentially identical. This court has held that under the misrepresentation theory a person who extended credit to a corporation (1) before the watered stock was issued, or (2) with full knowledge that watered stock was outstanding, cannot recover from the holders of the watered stock. These decisions indicate that under the misrepresentation theory reliance by the creditor is a prerequisite to the liability of a holder of watered stock. The trial court was therefore justified in ordering a new trial because of the absence of a finding on that issue. DISPOSITION: New trial granted.

Miguel Velasco (assignee of Philippine Chemical Product Co.) v. Jean Poizat1918 | Street, J.

SV: Poizat, a stockholder subscribed for 20 shares to Philippine Chemical Product Co. However, he had only paid 25% and still owed the price of 15 shares. SC ruled that Corporations have a choice either to put the shares up for sale or file an action in court for the payment of the unpaid shares. In this case, the Corporation chose to file an action, and such is a valid exercise of its statutory remedies available to it.

Facts: Poizat was a stock holder in the company from the inception of the enterprise. In fact, for a time, he was its treasurer and manager. Poizat and one Infante had remaining balances of 15 shares subscribed by them. (P1,500) On July 13, 1914, a board meeting occurred where they adopted 2 resolutions. Re: Infantes 15 shares: He had already paid 25% of the subscription and an understanding had been reached by him and management by which he was to be released from the obligation, it being agreed upon that he would not have a refund for the 25% payment and his shares to be given up for sale. Re: Poizats 15 shares: Poizant to be required to pay the amount of his 15 shares which he still owed to the company. In case he should refuse, the management should be authorized to undertake judicial proceedings against him. Poizat received notice of the resolution and replied saying that he wanted the same conditions given to Infante to apply to him. He explained, I prefer to lose the whole 25% I have already paid rather than to continue investing more money in what I consider to be ruinous proposition. The company soon went into voluntary insolvency. Velasco was named as assignee.

Issue: WON Poizat is still liable for the remainder of the amount of his subscription over his 15 shares (YES)

Ruling: Petition granted

Ratio: Poizat is liable for his subscription. A stock subscription is a contract between the corporation on one side, and the subscriber on the other, and courts will enforce it for or against either. The subscription for shares of stocks does not require an express promise to pay the amount subscribed, as the law implies a promise to pay on the part of the subscriber. Section 36 of the Corporation Law clearly recognizes that a stock subscription is subsisting liability from the time the subscription is made, since it requires the subscriber to pay interest quarterly from that date unless he is relieved from such liability by the by-laws of the corporation. The subscriber is as much bound to pay the amount of the share subscribed by him as he would be to pay any other debt, and the right of the company to demand payment is no less incontestable. The Corpo Law provides 2 remedies to enforce payment of stock subscriptions. 1. Permitting the corporation to put up the unpaid stock for sale and dispose of it for the account of the delinquent subscriber. (Section 38-48) 2. Action in court (Section 49) Nothing it his Act shall prevent the director from collecting, by action in any court of proper jurisdiction, the amount due on any unpaid subscription, together with accrued interest and costs and expenses incurred. In this case that a matured stock subscription is unpaid, none of the provisions contained in section 38 to 48, inclusive, of Act No. 1459 can be permitted to obstruct or impede the action to recover thereon.

By virtue of the first subsection of section 36 of the Insolvency Law (Act No. 1956) the assignee of the insolvent corporation succeeds to all the corporate rights of action vested in the corporation prior to its insolvency When insolvency supervenes upon a corporation and the court assumes jurisdiction to wind up, all unpaid stock subscriptions become payable on demand, and are at once recoverable in an action instituted by the assignee or receiver appointed by the court. It evidently cannot be permitted that a subscriber should escape from his lawful obligation by reason of the failure of the officers of the corporation to perform their duty in making a call; and when the original model of making the call becomes impracticable, the obligation must be treated as due upon demand. If the corporation must be treated still an active entity, and this action should be dismissed for irregularity in the making of the call, other steps could be taken by the board to cure the defect and another action could be brought; but where the company is being wound up, no such procedure would be practicable. The better doctrine is that when insolvency supervenes all unpaid subscriptions become at once due and enforceable The circumstance that the board of directors in their meeting ofJuly 13, 1914, resolved to release Infante from his obligation upon a subscription for 15 shares is no wise prejudicial to the right of the corporation or its assignee to recover from Poizat upon a subscription made by him. In releasing Infante the board transcended its powers, and he no doubt still remained liable on such of his shares as were not taken up and paid for by other persons.

Arnaldo de Silva v Aboitiz and Co1923 | Araullo, C.J.Aboitiz corporation decided to declare the unpaid shares of De Silva as delinquent, then advertised them for sale. De Silva filed a complaint saying that there is a specific provision in the by-laws of the corporation that prescribes the operative method of paying for the shares, thus, Aboitiz exceeded its authority when they prescribed a different way (declaring them delinquent + advertisement for sale). SC ruled that the by-law provision clearly shows that the method was merely discretionary on the part of the corporation.

FACTS:De Silva subscribed for 650 shares of stock of Aboitiz (500 each). He paid only for 200 shares, the remaining 450 shares unpaid, for which he was indebted to Aboitiz for P225,000.

April 22: De Silva was notified by the secretary of the corporation of a resolution adopted by the board of directors, declaring the unpaid subscriptions to the capital stock to have become due and payable on May 31, and that all shares not paid then will be declared delinquent, advertised for sale at public auction and sold on June 16.

The advertisement was published. De Silva filed a complaint in CFI Cebu against Aboitiz, praying for a judgment in his favor, decreeing that the corporation in prescribing another method of paying the subscription to the capital stock different from that provided in its by-laws, and in declaring the shares delinquent and directing its sale exceeded its executive authority. He asked for a writ of injunction. His grounds were: According to art. 46 of the by-laws of Aboitiz, all the shares subscribed to by the incorporation that were not paid or at the time of the incorporation, shall be paid out of the 70% of the profit obtained, the same to be distributed among subscribers, who shall not receive any dividend until the said shares were paid in full In declaring De Silvas unpaid subscription to have become due and payable and publishing the notice declaring them delinquent, Aboitiz violated art. 46, which prescribed an operative method of paying for the shares

Aboitiz filed a demurrer to the complaint on the ground that the facts alleged did not constitute a cause of action.

The court ruled in favor of Aboitiz and sustained the demurrer, giving De Silva 5 days to amend his complaint. The period elapsed without any amendment. Court dismissed the complaint.

May the corporation, under art. 46 of its by-laws, declare the unpaid shares delinquent or collect their value by another method different from that prescribed in the article? YES

Art. 46[footnoteRef:8] cited [8: The net profit resulting from the annual liquidation shall be distributed as follows: 10% for the Board of Directors and in the manner prescribed in art. 26 of these by-laws; 10% for the general manager; 10% for the reserve fund, and 70% for the shareholders in equal parts; Provided, however, That from this 70% dividend the Board of Directors may deduct such amount as it may deem fit for the payment of the unpaid subscription to the capital stock and not pay any dividend to the holders of the said unpaid shares until they are fully paid; Provided, further, That when all the shares have been paid in full as provided in the preceding paragraph, the Board of Directors may also deduct such amount as it may deem fit for the creation of an emergency special fund, or extraordinary reserve fund when in its judgment the same may convenient for the development of the business of the corporation or for meeting any such contingencies as may arise from its operation, whenever the distributable dividend is found, after the foregoing deduction, to be not less than 10% of the paid up capital stock.No dividend shall be declared or paid, except when there remains a net profit after the payment of all the expenses incurred, or allowances made, by the corporation to carry out the operation of its business; so that no such dividend may be declared as may affect the capital of the corporation.]

First part of the article specifies the manner in which the net profit from the annual liquidation should be distributed. The article also authorizes the board of directors to collect the value of the shares not fully paid by deducting from the 70% distributable among shareholders the amount. In no other way can the words "Provided, however, that from this seventy per cent dividend the board of directors may deduct such amount as it may deem fit for the payment, etc." It is discretionary on the part of the board of directors to do whatever is provided in the said article relative to the application of a part of the 70% of the profit distributable in equal parts on the payment of the shares subscribed to and not fully paid. It lies therefore within the discretion of the board of directors to make use of such authority. If the board of directors does not wish to make, or does not make, use of said authority it has two other remedies for accomplishing the same purpose The first and most special remedy given by the Statute (Corporation Law!) consists in permitting the corporation to put the unpaid stock for sale and dispose of it for the account of the delinquent subscriber. Here, sections 38 to 48 of the Corporation Law are applicable. The other remedy is by action in court, applying sec. 49 of the Corporation Law. Nothing in this Act prevent the directors from collecting, by action in any court of proper jurisdiction, the amount due on any unpaid subscription, together with accrued interest and costs and expenses. Here, the board of directors elected to avail itself of the first remedy, which is binding upon it and its stockholders. The board of directors made use of the discretionary power granted to it by the law, as it did not deem it advantageous to the corporation to apply on the payment of said shares as authorized by the by-law.

De Silva: provision in the by-law should prevail against the law, being that the by-law is in the nature of a contract between it and its stockholders, and that the by-laws already provide an operative method for the payment of stock subscriptions continuously until the full amortization thereof SC: admitting that the provision in the by-laws may be regarded as a contract between the corporation and its stockholders, it cannot be said that the article has prescribed the sole and exclusive method for the purpose of providing an operative method for payment of the unpaid subscription. The provision is clear that the adoption of that method lies within the discretion of the board of directors. In fact, the Corporation Law itself provides discretionary power to the board of directors to avail itself for the same purpose to either of the 2 remedies provided in secs. 38 to 49 Here, Aboitiz made use of its discretionary power to take advantage of the first remedy provided by the Corporation Law. De Silva has no right under art. 46 of the by-laws to prevent the board from following any other method than that in the by-laws Thus, Aboitiz has not violated, nor disregarded any right of De Silva recognized by the said by-laws, nor exceeded its authority in the discharge of its executive functions

National Exchange Co v Dexter1928 | Street, J.1919, Dexter signed a written subscription to the corporate stock of C. S. Salmon & Co. in the following form:

I hereby subscribe for the first 300 shares of the capital stock of C. S. Salmon and Company, payable from the first dividends declared on any and all shares of said company owned by me at the time dividends are declared, until the full amount of this subscription has been paid.

Upon this subscription the sum of P15,000 was paid in January 1920 from a dividend declared at about that time by the company, supplemented by money supplied personally by the subscriber. From that time, nothing had been paid on the shares and no further dividend has been declared by the corporation. There is therefore a balance of P15,000 still paid upon the subscription.

WON the stipulation to the effect that the subscription is payable from the first dividends declared on the shares has the effect of relieving the subscriber from personal liability in an action to recover the value of the shares. NO!

As cited by IB Dexter, taken from Fletcher's Cyclopedia:In the absence of restrictions in its character, a corporation, under its general power to contract, has the power to accept subscriptions upon any special terms not prohibited by positive law or contrary to public policy, provided they are not such as to require the performance of acts which are beyond the powers conferred upon the corporation by its character, and provided they do not constitute a fraud upon other subscribers or stockholders, or upon persons who are or may become creditors of the corporation.

Philippine Commission inserted in the Corporation Law, enacted March 1, 1906, the following provision: No corporation shall issue stock or bonds except in exchange for actual cash paid to the corporation or for property actually received by it at a fair valuation equal to the par value of the stock or bonds so issued.

The prohibition against the issuance of shares by corporations except for actual cash to the par value of the stock to its full equivalent in property is thus enshrined in both the organic and statutory law of the Philippine Islands. If it is unlawful to issue stock otherwise than as stated; Thus the stipulation now under consideration is illegal, for this stipulation obligates the subscriber to pay nothing for the shares except as dividends may accrue upon the stock. In the contingency that dividends are not paid, there is no liability at all. This is a discrimination in favor of the particular subscriber, and hence the stipulation is unlawful.

As stated in the US SC case of Putnan vs. New Albany, etc. Railroad Co: Conditions attached to subscriptions, which, if valid, lessen the capital of the company, are a fraud upon the grantor of the franchise, and upon those who may become creditors of the corporation, and upon unconditional stockholders."

In the appellant's brief he cited the third headnote to Bank vs. Cook where it was stated that a collateral agreement with a subscriber to stock that his subscription shall not be collectible except from dividends on the stock, was valid as between the parties and a complete defense to a suit on notes given for the amount of the subscription. A careful persual of the decision will show that the rule thus broadly stated in the headnote is not justified by anything in the reported decision, for what the court really held was that the making of such promise by the agent of the corporation who sold the stock is admissible in evidence in support of the defense of fraud and failure of consideration. Moreover, even if the decision had been to the effect supposed, this could have no weight in this jurisdiction where there is a statutory provision prohibiting such agreements. The law in force in this jurisdiction makes no distinction, in respect to the liability of the subscriber, between shares subscribed before incorporation is effected and shares subscribed thereafter. All like are bound to pay full value in cash or its equivalent, and any attempt to discriminate in favor of one subscriber by relieving him of this liability wholly or in part is forbidden.

The judgment appealed from must be affirmed, and it is so ordered, with costs against the appellant.