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Case assignment for July23

Chua vs CA-Fortes

Doctrine: A derivative action is a suit by a shareholder to enforce a corporate cause ofaction. The corporation is a necessary party to the suit. And the relief which is granted is ajudgment against a third person in favor of the corporation. Similarly, if a corporation has a

defense to an action against it and is not asserting it, a stockholder may intervene anddefend on behalf of the corporation.

Facts: Private respondent Lydia Hao, treasurer of Siena Realty Corp., filed a complaintcharging Francis Chua and his wife, Elsa Chua of 4 counts of falsification of documentspursuant to Art. 172, in relation to Art. 171 of the RPC. In the information, it was allegedthat the accused, a private individual, commit acts of falsification upon a public documentby preparing, certifying and falsifying the Minutes of the Annual Stockholders meeting ofthe BoD of the Siena Realty Corp by making it appear that Lydia Hao was present and hasparticipated in said proceedings, when in truth and in fact, the accused fully well knew thatHao was never present during the Annual Stockholders Meeting and neither hasparticipated in the proceedings.

Petitioner argued that respondent had no authority whatsoever to bring a suit in behalf ofthe corporation since there was no Board Resolution authorizing her to file the suit.Moreover, he claims that a derivative suit is by nature peculiar only to intra-corporateproceedings & cannot be made part of a criminal action.Hao claimed, for her part, that the suit was brought under the concept of a derivative suit.She maintained that when the directors/trustees refused to file a suit even when there wasa demand from stockholders, a derivative suit was allowed.

Issues: W/N the criminal complaint is in the nature of a derivative suit? No.

Held: Under Sec. 36 of the Corp Code, read in relation to Sec. 23, where a corporation isan injured party, its power to sue is lodged w/ its board of directors/trustees. An individualstockholder is permitted to institute a derivative suit on behalf of the corporation whereinhe holds stocks in order to protect or vindicate corporate rights, whenever the officials ofthe corporation refuse to sue, or are the ones to be sued, or hold the control of thecorporation. In such actions, the suing stockholder is regarded as a nominal party, w/ thecorporation as the real party in interest.A derivative action is a suit by a shareholder to enforce a corporate cause of action. Thecorporation is a necessary party to the suit. And the relief which is granted is a judgmentagainst a 3rd person in favor of the corporation. Similarly, if a corporation has a defense toan action against it, and is not asserting it, a stockholder may intervene and defend onbehalf of the corp.Clearly, Siena Realty is an offended party and has a cause of action. And the civil case for

the corporate cause of action is deemed instituted with the criminal action.

The assertion that Hao filed a derivative suit in behalf of the corporation is inaccurate. Notevery suit filed in behalf of the corporation is a derivative suit. For a derivative suit toprosper, it is required that the minority stockholder suing for and on behalf of thecorporation must allege in his complaint that he is suiing on a derivative cause of action onbehalf of the corporation and all other stockholders similarly situated who may wish to joinhim in the suit. It is a condition sine qua non that the corporation be impleaded as a partybecause not only is the corporation an indispensable party, but it is also the present rulethat it must be served with process. The judgment must be made binding upon the corp inorder that the corp may get the benefit of the suit and may not bring subsequent suitagainst the same defendants for the same cause of action. In other words, the corporation

must be joined as party because it is its cause of action that is being litigated and becausejudgment must be a res judicata against it.

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In the criminal complaint filed by herein respondent, nowhere is it stated that she is filingthe same in behalf and for the benefit of the corporation. Thus the criminal complaintincluding the civil aspect therefore could not be deemed in the nature of a derivative suit.

San Miguel Corp vs Kahn-Kleto

Facts: 14 corporations initially acquired shares of outstanding capital stock of San Miguel

Corporation and constituted a Voting Trust thereon in favor of Andres Soriano, Jr. Whenthe latter died, Eduardo Cojuanco was elected the substitute trustee. However, after theEDSA revolution, Cojuanco fled of the country, and subsequently an agreement wasentered into between the 14 corporations and Andres Soriano III (as an agent of severalpersons) for the purchase of the shares held by the former. The buyer of the shares was Neptunia Corporation, a foreign corporation and wholly-

owned subsidiary of another subsidiary wholly owned by San Miguel Corporation.Neptunia paid the downpayment from the proceeds of certain loans. PCGG thensequestered the shares subject of the sale, so San Miguel suspended all the otherinstallments of the price to the sellers. The 14 corporations then sued for rescission and

damages. Meanwhile, PCGG directed San Miguel to issue qualifying shares to seven (7)individuals including Eduardo de los Angeles from the sequestered shares for them to holdin trust. Then, the San Miguel board of directors passed a resolution assuming the loansincurred by Neptunia for the downpayment. De los Angeles assailed the resolution allegingthat it was not passed by the board aside from its deleterious effects on the corporationsinterest. When his efforts to obtain relief within the corporation proved futile, he filed thisaction with the SEC. Respondent directors alleged that de los Angeles has no legal standing, having beenmerely imposed by the PCGG and that the twenty (20) shares owned by him personallycannot fairly and adequately represent the interest of the minority.

Ruling:

The requisi tes of a d erivat ive suit are:1. The party bringing the suit should be a stockholder as of the time of the act or

transactions complained of, the number of shares not being material;2. Exhaustion of intra-corporate remedies (has made a demand on the board of

directors for the appropriate relief but the latter has failed or refused to heed his plea); and3. The cause of action actually devolves on the corporation and not to the particular

stockholder bringing the suit. The bona fide ownership by a stockholder in his own right suffices to invest him withthe standing to bring a derivative suit for the benefit of the corporation. The number of his

shares is immaterial since he is not suing in his own behalf, or for the protection orvindication of his own particular right, or the redress of a wrong committed against himindividually but in behalf and for the benefit of the corporation. It is undisputed that apart from the qualifying shares given to him by the PCGG, heowns 20 shares in his own right, as regards which he cannot from any aspect be deemedto be beholden to the PCGG, his ownership of his shares being precisely what he invokesas the source of his authority to bring the derivative suit. Furthermore, it was not necessaryfor de los Angeles to be a director in order to bring a derivative suit. De los Angeles complaint is confined to the issue of the validity of the assumption bythe corporation of the indebtedness of Neptunia, allegedly for the benefit of certain of itsofficers and stockholders and is distinct from the ownership of the sequestered shares.The dispute concerns the acts of the board of directors claimed to amount to fraud and

misrepresentation which may be detrimental to the interest of the stockholders, or is onearising out of intra-corporate relations between and among stockholders, or between any

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or all of them and the corporation of which they are stockholders (meaning that the causeof action still belongs to the corporation).

Notes: In effect the result of the acts of the directors of San Miguel is the use of corporateassets for the benefit of certain directors/stockholders to the extent that the corporation willnot be able to devote its assets in acquiring its own shares. But even without the presenceof a self-interested director, still the transaction would result in a premature retirement of

the shares (meaning a reduction of capital).In a derivative suit, the number of shares of a suing stockholder is immaterial.

Even assuming that the suing stockholder only had qualifying shares, the law requires onlyone share without any distinction or qualification. Besides, it is the PCGGs duty topreserve the assets of the corporation.

PASCUAL vs OROZCO

Facts:That during the years 1903, 1904, 1905, and 1907 the defendants and appellees, withoutthe knowledge, consent, or acquiescence of the stockholders, deducted their respectivecompensation from the gross income instead of from the net profits of the bank, therebydefrauding the bank (BANCO ESPANOL FILIPINO) and its stockholders of approximatelyP20,000 per annum; that though due demands has been made upon them therefor,defendants refuse to refund to the bank the sums so misappropriated, or any part thereof;that defendants constitute a majority of the present board of directors of the bank, whoalone can authorize an action against them in the name of the corporation, and that priorto the filing of the present suit plaintiff exhausted every remedy in the premises within thisbanking corporation.The second cause of action sets forth that defendants and appellees immediatepredecessors in office in this bank during the years 1899, 1900, 1901, and 1902,committed the same illegality as to their compensation as is charged against the

defendants themselves; that in the four years immediately following the year 1902, thedefendants and appellees were the only officials or representatives of the bank who couldand should investigate and take action in regard to the sums of money thus fraudulentlyappropriated by their predecessors; that they were the only persons interested in the bankwho knew of the fraudulent appropriation by their predecessors; that they wholly neglectedto take any action in the premises or inform the stockholders thereof; that due demand hasbeen made upon defendants to reimburse the bank for this loss; that the bank itself cannot bring an action in its own name against the defendants and appellees, for the reasonalready stated, and that there remains no remedy within the corporation itself.This action was brought by the plaintiff Pascual, in his own right as a stockholder of thebank, for the benefit of the bank, and all the other stockholders thereof. The plaintiff sueson behalf of the corporation, which, even though nominally a defendant, is to all intents

and purposes the real plaintiff in this case. That such is the case is shown by the prayer ofthe complaint which is that judgment be entered in favor of the bank.So it is clear that the plaintiff, by reason of the fact that he is a stockholder in the bank(corporation) has a right to maintain a suit for and on behalf of the bank, but the extent ofsuch a right must depend upon when, how, and for what purpose he acquired the shareswhich he now owns. In the determination of these questions we can not see how, if it betrue that the bank is a quasi-public institution, it can affect in any way the final result.It affirmatively appears from the complaint that the plaintiff was not a stockholder duringany of the time in question in this second cause of action.

ISSUE: whether or not a stockholder can maintain a suit of this character upon a cause ofaction pertaining to the corporation when it appears that he was not a stockholder at the

time of the occurrence of the acts complained of and upon which the action is based.

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Held/Rato:NO.

The relators must be stockholders both at the time of occurance of the events constitutiongthe cause of action and at the time of the filing of the derivative suit.

In suits of this character the corporation itself and not the plaintiff stockholder is the realparty in interest. The rights of the individual stockholder are merged into that of thecorporation. It is a universally recognized doctrine that a stockholder in a corporation hasno title legal or equitable to the corporate property; that both of these are in the corporationitself for the benefit of all the stockholders. Since, therefore, the stockholder has no title, itis evident that what he does have, with respect to the corporation and his fellowstockholder, are certain rights sui generis. These rights are generally enumerated asbeing, first, to have a certificate or other evidence of his status as stockholder issued tohim; second, to vote at meetings of the corporation; third, to receive his proportionateshare of the profits of the corporation; and lastly, to participate proportionately in thedistribution of the corporate assets upon the dissolution or winding up. (Purdys Beach on

Private Corporations, sec. 554.)It is important that before the shareholder is permitted, in his own name to institute andconduct a litigation which usually belongs to the corporation, he should show to thesatisfaction of the court that he has exhausted all the means within his reach to attainwithin the corporation itself, the redress of his grievances, or action in conformity to hiswishes. He must make an earnest, not a simulated effort, with the managing body of thecorporation, to induce remedial action on their part, and this must be made apparent to thecourt. If the time permits, or has permitted, he must show, if he fails with the directors, thathe has made an honest effort to obtain action by the stockholders as a body, in the matterof which he complains.We are, therefore of the opinion, and so hold, that the judgment appealed from, sustainingthe demurrer to the first cause of action should be, and the same is hereby reversed; and

the judgment sustaining the demurrer to the second cause of action should be, and ishereby affirmed, without any special ruling as to costs. The record will be returned to thecourt whence it came for further proceedings in accordance with this decision. So ordered.

Chua vs CA

Doctrine: A derivative action is a suit by a shareholder to enforce a corporate cause ofaction. The corporation is a necessary party to the suit. And the relief which is granted is ajudgment against a third person in favor of the corporation. Similarly, if a corporation has adefense to an action against it and is not asserting it, a stockholder may intervene anddefend on behalf of the corporation.

Facts: Private respondent Lydia Hao, treasurer of Siena Realty Corp., filed a complaintcharging Francis Chua and his wife, Elsa Chua of 4 counts of falsification of documentspursuant to Art. 172, in relation to Art. 171 of the RPC. In the information, it was allegedthat the accused, a private individual, commit acts of falsification upon a public documentby preparing, certifying and falsifying the Minutes of the Annual Stockholders meeting ofthe BoD of the Siena Realty Corp by making it appear that Lydia Hao was present and hasparticipated in said proceedings, when in truth and in fact, the accused fully well knew thatHao was never present during the Annual Stockholders Meeting and neither hasparticipated in the proceedings.Petitioner argued that respondent had no authority whatsoever to bring a suit in behalf ofthe corporation since there was no Board Resolution authorizing her to file the suit.Moreover, he claims that a derivative suit is by nature peculiar only to intra-corporate

proceedings & cannot be made part of a criminal action.

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Hao claimed, for her part, that the suit was brought under the concept of a derivative suit.She maintained that when the directors/trustees refused to file a suit even when there wasa demand from stockholders, a derivative suit was allowed.Issues: W/N the criminal complaint is in the nature of a derivative suit? No.

Held: Under Sec. 36 of the Corp Code, read in relation to Sec. 23, where a corporation isan injured party, its power to sue is lodged w/ its board of directors/trustees. An individual

stockholder is permitted to institute a derivative suit on behalf of the corporation whereinhe holds stocks in order to protect or vindicate corporate rights, whenever the officials ofthe corporation refuse to sue, or are the ones to be sued, or hold the control of thecorporation. In such actions, the suing stockholder is regarded as a nominal party, w/ thecorporation as the real party in interest.A derivative action is a suit by a shareholder to enforce a corporate cause of action. Thecorporation is a necessary party to the suit. And the relief which is granted is a judgmentagainst a 3rd person in favor of the corporation. Similarly, if a corporation has a defense toan action against it, and is not asserting it, a stockholder may intervene and defend onbehalf of the corp.Clearly, Siena Realty is an offended party and has a cause of action. And the civil case for

the corporate cause of action is deemed instituted with the criminal action.

The assertion that Hao filed a derivative suit in behalf of the corporation is inaccurate. Notevery suit filed in behalf of the corporation is a derivative suit. For a derivative suit toprosper, it is required that the minority stockholder suing for and on behalf of thecorporation must allege in his complaint that he is suiing on a derivative cause of action onbehalf of the corporation and all other stockholders similarly situated who may wish to joinhim in the suit. It is a condition sine qua non that the corporation be impleaded as a partybecause not only is the corporation an indispensable party, but it is also the present rulethat it must be served with process. The judgment must be made binding upon the corp inorder that the corp may get the benefit of the suit and may not bring subsequent suitagainst the same defendants for the same cause of action. In other words, the corporation

must be joined as party because it is its cause of action that is being litigated and becausejudgment must be a res judicata against it.In the criminal complaint filed by herein respondent, nowhere is it stated that she is filingthe same in behalf and for the benefit of the corporation. Thus the criminal complaintincluding the civil aspect therefore could not be deemed in the nature of a derivative suit.

Garcia vs Lim Chu

Doctrine: A share of stock or the certificate thereof is not an indebtedness to the owner nor

evidence of indebtedness and, therefore, it is not a credit.

Stockholders, as such, are not creditors of the corporation. The capital stock of acorporation is a trust fund to be used more particularly for the security of creditorsof the corporation, who presumably deal with it on the credit of its capital stockFacts:Lim Cuan Sy delivered to Mercantile Bank of China a promissory note guaranteedby Lim Chu Sing as surety and also secured by a chattel mortgage. It also has astipulation that in case of default, the whole amount will become due anddemandable Lim Cuan Sy failed to comply with his obligation and so the bankrequired Lim Chu Sing as surety to deliver the promissory note (P19, 605.17) withinterest at 6% p.a.Lim Chu Sing had been paying the monthly installments with interest thereon,leaving a balance of P9,105.17, after which he defaulted in the payment of the

installments which made the promissory note due and demandable. The MercantileBank of China then foreclosed the chattel mortgage and privately sold the property

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without the knowledge of Lim Chu Sing. Lim Chu Sing is also the owner of sharesof stock at the Mercantile Bank amounting to P10,000. Mercantile Bank seeks toapply the amount of P10,000 representing the value of his shares of stock todefendants indebtedness of P9,105.17.Issue:

1. W/N it is proper to compensate the indebtedness with the value of the shares of stockHeld/Ratio:

1. No. The defendant-appellant Lim Chu Sing not being a creditor of the Mercantile Bankof China, although the latter is a creditor of the former, there is no sufficient ground tojustify a compensation. The shares of a banking corporation do not constitute anindebtedness of the corporation to the stockholder and, therefore, the latter is not acreditor of the former for such shares. he iTndebtedness of a shareholder to a bankingcorporation cannot be compensated with the amount of his shares therein, there being norelation of creditor and debtor with respect to such shares.

Bayla vs Silang

Bayla v. Silang Traffic Co., Inc (1942)contract of sale not subscription Doctrine:

Whether a particular contract is a subscription or a sale of stock is a matter of construction and dependsupon its terms and the intention of the parties

Section 61. Pre-incorporation subscription. - A subscription for shares of stock of a corporation still to

be formed shall be irrevocable for a period of at least six (6) months from the date of subscription, unlessall of the 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 ofsubscription: Provided, That no pre-incorporation subscription may be revoked after the submission of

the articles of incorporation to the Securities and Exchange Commission.

A subscription is the mutual agreement of the subscribers to take and pay for stock of a corporation,

while a purchase and sale is merely an independent agreement to buy shares of stock at a stipulatedprice.

Bayla was decided under the old Corporation Law. It laid down the distinctions between a subscription

contract and a purchase agreement over unissued shares of stocks (see p526 of Corp book). However,Section 60 of the Corporation Code removed such distinctions and now provides that all agreements

pertaining to the purchase of unissued shares of stock of a corporation would be considered assubscription agreements and governed by the principles of Corporate Law.

Facts:

Sofronio Bayla and other petitioners instituted this action in the CFI of Cavite against Silang TrafficCorporation in order to recover a sum of money they paid to the corporation on account of shares of

stock they each agreed to take and pay for under the condition that if the subscriber fails to pay any ofthe installments when due, or if they are levied upon by the creditors of the said subscriber, the shares

were to revert to the seller and the payments already made will also be forfeited to the seller, and that the

latter may take possession without court proceedings.

The Board of Directors of the Corporation issued a resolution on August 1, 1937 rescinding the

agreement, hence, Bayla and the other petitioners instituted this action. The corporation alleged that theresolution is not application to Bayla and the others because their subscribed shares of stock had alreadyautomatically reverted to the coporation and the installments made by them were already forfeited andthat the Aug. 1, 1937 resolution was cancelled by a subsequent resolution.

Issues:1. W/N the contract is a contract of subscription

2. W/N the failure of Bayla and the others to pay any installment can automatically give rise toforfeiture of the amounts and the reversion of the shares to the corporation

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3. W/N the Aug. 1, 1937 resolution was valid

Held/Ratio:1. NO. The contract is one of sale not subscription.

The said agreement is entitled Agreement for Installment Sale of Shares in the Silang Traffic Co, and

while the purchaser is designated as the subscriber and the corporation seller, the agreement wasentered into in 1935 long after the incorporation and organization of the corporation which took place in

1927. The purchase was to be payable in quarterly installments for five years. The lower court failed tosee the distinction between a subscription and a purchase. A subscription, properly speaking, is themutual agreement of the subscribers to take and pay for the stock of a corporation, while a purchase is an

independent agreement between the individual and the corporation to buy shares of stock from it atstipulated price.

2. NO.

The contract actually provided for an interest of 6% p.a. on deferred payments which would not havebeen present if the intention of the parties was the automatic forfeiture and cancellation of the contract.

Also, the contract did not expressly provide that demand shall not be necessary in order that default may

arise.

3. Yes. Since the contract is one of purchase, there is no legal impediment to its rescission by agreementof the parties. In the first resolution, the rescission was made for the good of the corporation and in orderto terminate the then pending civil case involving the validity of the sale of the shares in question among

others. Bayla and the others agreed to the rescission as shown by their demand for the refund of theamounts they had paid as provided in said resolution. But the subsequent revocation of the rescission in

the first resolution is invalid as it was not agreed to by the parties.

Ong yong vs TIU

Doctrines:

The rescission of the Pre-Subscription Agreement will effectively result in the

unauthorized distribution of the capital assets and property of the corporation,

thereby violating the Trust Fund Doctrine and the Corporation Code, since

rescission of a subscription agreement is not one of the instances when distribution

of capital assets and property of the corporation is allowed

When properties were assigned pursuant to a pre-incorporation subscription

agreement, but the corporation fails to issue the covered shares, the return of such

properties to the subscriber is a direct consequence of rescission and does not

amount to corporate distribution of assets prior to dissolution.

Even when the subscription agreement is denominated as a Pre-SubscriptionAgreement, it will nevertheless be governed under Section 60 of the Corporation

Code as a subscription agreement since is covered an agreement to subscribe to

the agreed increase in the authorized capital stock of the corporation.

Facts:

The Tiu family members are the owners of First Landlink Asia Development Corporation(FLADC). One of the corporations projects is the construction of Masagana Citimall inPasay City. However, due to financial difficulties (they were indebted to PNB for P190million), the Tius feared that the construction would not be finished. So to prevent theforeclosure of the mortgage on the two lots where the mall was being built, they invited the

Ongs to invest in FLADC. The two parties entered into a Presubscription Agreement:

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The total shares of capital stock would be 2,000,000. The division of the

shareholdings would be on a 50-50 basis (1,000,000 shares for each party)

the Ongs were to subscribe to 1,000,000 shares at a par value of P100 each

the Tius were to subscribe to an additional 549,800 shares at P100 each in

addition to their already existing subscription of 450,200 shares

Tius were entitled to nominate the VP and the Treasurer + 5 directors

Ongs were entitled to nominate the President, Secretary + 6 directors; they also

have the right to manage and operate the mall

To fill the deficiency of 549,800 shares of stock, the Tius commited to contribute toFLADC a building (equivalent to 200,000 shares) and two lots (equivalent to 300,000 and49,800 shares of stock). The Ongs contributed P100 Million (equivalent to 1 Million sharesof stock). They also paid P70 Million to FLADC and another P20 Million to the Tius (a totalof P190 Million) to pay off the loan from PNB.

Two years after, the Tius filed a case in SEC for the rescission of the Agreement dueto the following reasons: a) the Ongs refused to issue to them the shares of stock

corresponding to their property contributions; b) they were prevented from assuming thepositions of VP and Treasurer. In their defense, the Ongs contended that they could notissue the new shares to the Tius because the latter did not pay the capital gains tax andthe documentary stamp tax of the lots. And because of this, the SEC would not approvethe valuation of the property contribution of the Tius. (It turned out that one of the lots wasin FLADCs name all along, so issuance of new shares of stock was not needed becausethe lot was already a part of the corporations assets).

The SEC decided in favor of the Tius. The case eventually reached the CA, and itordered the liquidation of FLADC to enforce the rescission of the contract (restitution oftheir initial contributions, then whatever remaining assets would go to the Tius, includingthe mall which is already valued at P 1 Billion). The CA also concluded that both the Ongs

and the Tius were in pari delicto so technically they are not entitled to the remedy ofrescission. But the rescission was granted only to prevent squabbles and numerouslitigations between the parties. The SC upheld the decision of the CA. The Ongs then fileda Motion for Reconsideration, asserting that the decision would amount to unjustenrichment on the part of the Tius.

Issues:

1) W/N the Tius could legally rescind the presubscription agreement (whether they

have the personality to sue)

2) W/N rescission is the proper remedy3) W/N the liquidation of FLADC violated the Trust Fund Doctrine

Held/Ratio:

1) NO. The Agreement was in fact a subscription contract because it involves

unissued shares of the corporation. A subscription contract necessarily involves

the corporation as one of the contracting parties since the subject matter of the

transaction is property owned by the corporation its shares of stock. Thus, the

contract was actually between FLADC and the Ongs, and not between the Tius

and the Ongs (separate juridical personality). Therefore, the Tius had no

personality to file a case for rescission.

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2) NO. The Tius allege that the Ongs prevented them from assuming the positions of

Treasurer and VP. However, rescission is not the remedy for personal grievances.

The Corporation Code, SEC rules and even the Rules of Court provide for

appropriate and adequate intra-corporate remedies, other than rescission, in

situations like this. The breach committed by the Ongs was not substantial to

warrant the rescission of the contract. It would be unfair on the part of the Ongs

who actually helped the Tius. Hence, the Tius cannot demand the rescission of theagreement for they have other remedies under the law, and besides they do not

have the capacity to bring the suit.

3) YES. Even assuming that the Tius had the legal standing to sue, the case would

still not prosper because the rescission would be in violation of the Trust Fund

Doctrine.

This doctrine enunciates that subscriptions to the capital stock of acorporation constitute a fund to which the creditors have a right to look for thesatisfaction of their claims. This doctrine is the underlying principle in theprocedure for the distribution of capital assets, embodied in the Corporation Code,

which allows the distribution of corporate capital only in three instances: (1)amendment of the Articles of Incorporation to reduce the authorized capital stock,(2) purchase of redeemable shares by the corporation, regardless of the existenceof unrestricted retained earnings, and (3) dissolution and eventual liquidation ofthe corporation.

In this case, the rescission would certainly be a violation of the doctrine andalso of the Corporation Code because the rescission would result in theunauthorized distribution of the assets of the corporation. Rescission based on abreach in the terms of a subscription agreement is not one of the instances whendistribution of a corporations assets and property is allowed. It would not only b eunlawful but it would also be prejudicial to the corporate creditors who enjoy

absolute priority of payment over any individual stockholder.

[ADDITIONAL: if ever itanong ni Sir, this was mentioned kasi in the book]

The Tius also argued that the rescission would not result into liquidation because theircase is actually a petition to decrease the capital stock. As provided in Sec. 122 of theCorporation Code, distribution of any of its assets or property is permitted only after lawfuldissolution and payment of all debts and liabilities. An exception is by decrease of capitalstock. So the Tius claim that they do not violate the liquidation procedures under the law.They were asking the court to compel FLADC to file a petition with SEC to approve thedecrease in capital stock. The SC ruled that it has no right to intrude into the internalaffairs of the corporation so it cannot compel FLADC to file the petition. It was not actually

a decrease of capital stock because it failed to comply with certain requirements (no boarddecision, etc.).

Tan vs Sycip

Doctrines: A corporation can release a subscriber from liability on the subscription, in whole or

in part, only with the express or implied consent of all of the shareholders, and onlywhen there is no prejudice to corporate creditors.

Facts:

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Petitioner Grace Christian High School (GCHS) is a nonstock, non-profiteducational corporation with fifteen (15) regular members, who also constitute theboard of trustees.

During the annual members meeting held on April 6, 1998, there were onlyeleven (11) living member-trustees, as four (4) had already died. Out of theeleven, seven (7) attended the meeting through their respective proxies. Themeeting was convened and chaired by Atty. Sabino Padilla Jr. over the objection ofAtty. Antonio C. Pacis, who argued that there was no quorum.

In the meeting, Petitioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and JudithTan were voted to replace the four deceased member-trustees.

When the controversy reached the Securities and Exchange Commission (SEC),Tan et al. maintained that the deceased member-trustees should not be counted inthe computation of the quorum because, upon their death, members automaticallylost all their rights (including the right to vote) and interests in the corporation.

SEC Hearing Officer Malthie G. Militar declared the April 6, 1998 meeting null andvoid for lack of quorum.

Issues:

Having thus determined that the quorum in a members meeting is to bereckoned as the actualnumber of members of the corporation, but whathappens in the event of the death of one of them.

Ruling: In stock corporations, shareholders may generally transfer their shares. Thus, onthe death of a shareholder, the executor or administrator duly appointed by the Court isvested with the legal title to the stock and entitled to vote it. Until a settlement and divisionof the estate is effected, the stocks of the decedent are held by the administrator orexecutor.

On the other hand, membership in and all rights arising from a nonstockcorporation are personal and non-transferable, unless the articles of

incorporation or the bylaws of the corporation provide otherwise . In other words, the determination of whether or not dead members are

entitled to exercise their voting rights (through their executor or administrator),depends on those articles of incorporation or bylaws.

Under the By-Laws of GCHS, membership in the corporation shall, amongothers, be terminated by the death of the member.

Section 91 of the Corporation Code further provides that terminationextinguishes all the rights of a member of the corporation, unless otherwiseprovided in the articles of incorporation or the bylaws.

Applying Section 91 to the present case, we hold that dead members who aredropped from the membership roster in the manner and for the cause provided

for in the By-Laws of GCHS are not to be counted in determining the requisitevote in corporate matters or the requisite quorum for the annual membersmeeting. With 11 remaining members, the quorum in the present case shouldbe 6.

Therefore, there being a quorum, the annual members meeting, conductedwith sixmembers present, was valid.