CORPORATION LAW DIGEST

CORPORATION LAW DIGESTUST Faculty of Civil Law

FILIPINAS BROADCASTING VS. AMECFACTS:Respondent filed a complaint for damages against the petitioner, Rima and Alegre (radio commentators) for exposing various alleged complaints of the students, parents and teachers against the petitioner, which amounts to libel and hence destroyed the reputation of the respondent. Trial court held that the broadcasts were libelous and held the petitioner and Alegre liable except Rima. Upon appeal to CA, the latter affirmed the decision of the trial court with modification, such that Rima was held solidarily liable with petitioner and Alegre liable to pay AMEC moral damages, attorneys fees and costs of suit. However, petitioner contends that AMEC cannot be entitled to moral damages, the latter being a corporation. ISSUE: WON AMEC is entitled to moral damagesHELD: Yes. Generally, a corporation or a juridical person is generally not entitled to moral damages because, unlike a natural person, it cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish or moral shock. Nevertheless, AMECs claim for moral damages falls under item 7 of Article 2219of the Civil Code. This provision expressly authorizes the recovery of moral damages in cases of libel, slander or any other form of defamation. Article 2219(7) does not qualify whether the plaintiff is a natural or juridical person. Therefore, a juridical person such as a corporation can validly complain for libel or any other form of defamation and claim for moral damages. Moreover, where the broadcast is libelousper se, the law implies damages. In such a case, evidence of an honest mistake or the want of character or reputation of the party libeled goes only in mitigation of damages. Neither in such a case is the plaintiff required to introduce evidence of actual damages as a condition precedent to the recovery of some damages.In this case, the broadcasts are libelousper se. Thus, AMEC is entitled to moral damages.

STOCKHOLDERS OF GUANZON VS. RDFACTS:5 stockholders of Guanzon executed a certificate of liquidation of the assets of the corporation by virtue of dissolving the corporation, distributing among themselves, in proportion to their shareholdings the assets of said corporation, including real properties located in Manila. However, when the certificate of registration was presented, it was denied by the RD on the ground of the query of WON the certificate merely involves a distribution of the corporation's assets or should be considered a transfer or conveyance.Appellants contend that the certificate of liquidation is not a conveyance or transfer but merely a distribution of the assets of the corporation which has ceased to exist for having been dissolved. However, the Comm. of the Land Registration opined that the certificate of liquidation in question, though it involves a distribution of the corporation's assets, represents a transfer of said assets from the corporation to the stockholders. Hence, in substance it is a transfer or conveyance.ISSUE:HELD:A corporation is a juridical person distinct from the members composing it. Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members. While shares of stock constitute personal property they do not represent property of the corporation. The corporation has property of its own which consists chiefly of real estate. A share of stock only typifies an aliquot part of the corporation's property, or the right to share in its proceeds to that extent when distributed according to law and equity but its holder is not the owner of any part of the capital of the corporation. Nor is he entitled to the possession of any definite portion of its property or assets. The stockholder is not a co-owner or tenant in common of the corporate property.The act of liquidation made by the stockholders of the F. Guanzon and Sons, Inc. of the latter's assets is not and cannot be considered a partition of community property, but rather a transfer or conveyance of the title of its assets to the individual stockholders. Indeed, since the purpose of the liquidation, as well as the distribution of the assets of the corporation, is to transfer their title from the corporation to the stockholders in proportion to their shareholdings, and this is in effect the purpose which they seek to obtain from the Register of Deeds of Manila, that transfer cannot be effected without the corresponding deed of conveyance from the corporation to the stockholders. It is, therefore, fair and logical to consider the certificate of liquidation as one in the nature of a transfer or conveyance.

LAPERAL DEVELOPMENT CORP. VS. CA and BANZONFACTS:In a previous case, private respondent, Banzon sought the recovery of attorneys fees from Laperal, petitioner and Imperial development corp. for professional services rendered by him. Subsequently, this case was settled through a compromise agreement. However, Banzon again filed another case against the aforementioned for the annulment of the compromise agreement and payment for attorneys fees in relation to the case involving Sunbeams. On appeal, CA held that attorneys fees are due to Banzon in certain cases specifically that which involves Sunbeams. Further, CA held that the case of Sunbeams could not have been included in the agreement because it was not included in the amended complaint. Also, Laperal and Sunbeams does not appear to be one and the same. Private respondent believed that Oliverio Laperal, being the president of the said company (Sunbeams), was directly obligated to him for the attorney's fees due him for his handling of the case for Sunbeams.Hence, this petition. ISSUE:HELD:It is settled that a corporation is clothed with a personality separate and distinct from that of the persons composing it.It may not generally be held liable for the personal indebtedness of its stockholders or those of the entities connected with it.Conversely, a stockholder cannot be made to answer for any of its financial obligations even if he should be its president.There is no evidence that Sunbeams and Laperal are one and the same person. While it is true that Laperal is a stockholder, director and officer of Sunbeams, that status alone does not make him answerable for the liabilities of the said corporation. Such liabilities include Banzon's attorney's fees for representing it in the case ofRepublic v. Sunbeams Convenience Foods, Inc.The private respondent's claim for attorney's fees in the Sunbeam case was waived by him not by virtue of the Compromise Agreement to which Sunbeams, not being a defendant in the civil case, could not have been a party. What militates against his claim is his own judicial admission that he had waived his attorney's fees for the cases he had handled from 1974 to 1981 for Oliverio Laperal and his corporations, including those not impleaded in his complaint in the aforesaid Civil Case.

PNB VS. HYDRO RESOURCES CORP.FACTS:Petitioners (PNB and DBP) foreclosed mortgages made on the properties of MMIC. As a result thereof, petitioners acquired all the assets and resumed the latters business by organizing NMIC. DBP and PNB owned 57% and 43% of the shares of NMIC, respectively, except for 5 qualifying shares. Subsequently, NMIC engaged the services of Hercon. Payments had been made. However, it was found that there was still an unpaid balance by NMIC in favor of Hercon. Despite several demands, the request was unheeded. Hence, a case was filed in court for the collection of money seeking to hold petitioners solidarily liable for the amount owing to Hercon. On the part of the petitioners, they contended that HRCC (Hercon, before it was merged) NMIC have separate juridical personality from that of the petitioners. They insist that the majority ownership by them of NMIC is not a sufficient ground for disregarding the separate corporate personality of NMIC because NMIC was not a mere adjunct, business conduit or alter ego of the petitioners. According to them, the application of the doctrine of piercing the corporate veil is unwarranted as nothing in the records would show that the ownership and control of the shareholdings of NMIC by the petitioners were used to commit fraud, illegality or injustice.HRCC, on the other hand, contended that a parent corporation may be held liable for the contracts or obligations of its subsidiary corporation where the latter is a mere agency, instrumentality or adjunct of the parent corporation, and that the petitioners were mere alter ego of the NMIC, thus, the doctrine of piercing the corporate veil must be applied.RTC ruled in favor of HRCC. It pierced the corporate veil of NMIC and held the petitioners solidarily liable with NMIC. Upon appeal, CA affirmed the decision of the trial court. Both the RTC and the Court of Appeals applied the alter ego theory and penetrated the corporate cover of NMIC based on two factors: (1) the ownership by DBP and PNB of effectively all the stocks of NMIC, and (2) the alleged interlocking directorates of DBP, PNB and NMIC.Hence, this petition. ISSUE: WON there is sufficient ground to pierce the veil of corporate fictionHELD:No. None of the tests has been satisfactorily met in this case. Also, while ownership by one corporation of all or a great majority of stocks of another corporation and their interlocking directorates may serve as indicia of control, by themselves and without more, however, these circumstances are insufficient to establish an alter ego relationship or connection between DBP and PNB on the one hand and NMIC on the other hand, that will justify the puncturing of the latters corporate cover. Further, "mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality."This Court has likewise ruled that the "existence of interlocking directors, corporate officers and shareholders is not enough justification to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations. In this case, nothing in the records shows that the corporate finances, policies and practices of NMIC were dominated by DBP and PNB in such a way that NMIC could be considered to have no separate mind, will or existence of its own but a mere conduit for DBP and PNB. Lastly, even assuming that DBP and PNB exercised control over NMIC, there is no evidence that the juridical personality of NMIC was used by DBP and PNB to commit a fraud or to do a wrong against HRCC.As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient reason to the contrary appears. When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons. Also, the corporate entity may be disregarded in the interest of justice in such cases as fraud that may work inequities among members of the corporation internally, involving no rights of the public or third persons. In both instances, there must have been fraud, and proof of it. For the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established. It cannot be presumed.It is well-settled that "where it appears that the business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of third persons, disregard legal fiction that two (2) corporations are distinct entities, and treat them as identical."A corporation is an artificial entity created by operation of law. It possesses the right of succession and such powers, attributes, and properties expressly authorized by law or incident to its existence. It has a personality separate and distinct from that of its stockholders and from that of other corporations to which it may be connected. As a consequence of its status as a distinct legal entity and as a result of a conscious policy decision to promote capital formation, a corporation incurs its own liabilities and is legally responsible for payment of its obligations. In other words, by virtue of the separate juridical personality of a corporation, the corporate debt or credit is not the debt or credit of the stockholder.This protection from liability for shareholders is the principle of limited liability.42Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced when the corporation is just an alter ego of a person or of another corporation. For reasons of public policy and in the interest of justice, the corporate veil will justifiably be impaled only when it becomes a shield for fraud, illegality or inequity committed against third persons.The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.Three-pronged test to determine the application of the alter ego theory, which is also known as the instrumentality theory, namely:(1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own;(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiffs legal right; and(3) The aforesaid control and breach of duty must have proximately caused the injury or unjust loss complained of.Piercing the corporate veil based on the alter ego theory requires the concurrence of three elements: control of the corporation by the stockholder or parent corporation, fraud or fundamental unfairness imposed on the plaintiff, and harm or damage caused to the plaintiff by the fraudulent or unfair act of the corporation. The absence of any of these elements prevents piercing the corporate veil.Only NMIC as a distinct and separate legal entity is liable to pay its corporate obligation to HRCC.

PALAY VS. CLAVEFACTS:Petitioner, through its president, executed a contract to sell in favor of the private respondent, Dumpit, which involves a land owned by the petitioner. The contract provided for the selling price of P23, 300, which shall be paid in installments with the necessary downpayment. Further, it provided for an automatic extrajudicial rescission upon default in payment, contained in Art. 6 thereof.6 years later, Dumpit wrote the petitioner a letter- request offering to update all his overdue accounts and seeking its written consent to the assignment of his rights to Lourdes Dizon. However, petitioner informed Dumpit that his contract had long been rescinded in accordance with Art. 6 of their contract and the lot has been resold. Dumpit questioned the validity of the rescission of his contract with NHA, which the latter decided in his favor. Petitioners president was held jointly and severally liable with the petitioner to refund Dumpit the amount the latter had paid to the petitioner. On appeal the the Office of the President, NHAs decision was affirmed. ISSUE: WON the doctrine of piercing the veil of corporate fiction is applicableHELD:No. Petitioners president, Onstott was made liable because he was then the President of the corporation and he a to be the controlling stockholder. No sufficient proof exists on record that said petitioner used the corporation to defraud Dumpit (private respondent). He cannot, therefore, be made personally liable just because he "appears to be the controlling stockholder". Mere ownership by a single stockholder or by another corporation is not of itself sufficient ground for disregarding the separate corporate personality.It is basic that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as when as from that of any other legal entity to which it may be related. As a general rule, a corporation may not be made to answer for acts or liabilities of its stockholders or those of the legal entities to which it may be connected and vice versa. However, the veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of justice; or for purposes that could not have been intended by the law that created it; or to defeat public convenience, justify wrong, protect fraud, or defend crime.; or to perpetuate fraud or confuse legitimate issues; or to circumvent the law or perpetuate deception; or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders.

LIDDEL CO. VS. CIRFACTS:Petitioner is a domestic corporation engaged in the business of importing and retailing automobiles, passenger cars and trucks. Subsequently, when the purpose clause of the Articles of Incorporation of the petitioner was amended so as to limit its business activities to importations of automobiles and trucks, petitioner was engaged in business as an importer and at the same time retailer of passenger cars and trucks. Liddell Motors, Inc. was then organized and registered with the SEC. Petitioner thereafter stopped retailing cars and trucks; it conveyed them instead to Liddell Motors, Inc. which in turn sold the vehicles to the public with a steep mark-up. Since then, petitioner paid sales taxes on the basis of its sales to Liddell Motors Inc. considering said sales as its original sales.Upon review of the transactions between the petitioner and Liddell Motors, Inc. the CIR determined that the latter was but analter egoof the petitioner. And, for sales tax purposes, those sales made by Liddell Motors, Inc. to the public were considered as the original sales of petitioner. Accordingly, CIR assessed against Liddell & Co. a sales tax deficiency.CTA upheld the position taken by the CIR.ISSUE: WON petitioner Liddell & Co. Inc., and the Liddell Motors, Inc. are identical corporations, the latter being merely the alter ego of the former;HELD:Yes. Both corporations are owned by Frank Liddel, and Liddell Motors, Inc. was an alter ego for the petitioner to evade payment of taxes.It was shown that the bulk of the business of petitioner was channeled through Liddell Motors, Inc. On the other hand, Liddell Motors, Inc. pursued no activities except to secure cars, trucks, and spare parts from petitioner and then sell them to the general public. These sales of vehicles by petitioner to Liddell Motors, Inc. for the most part were shown to have taken place on the same day that Liddell Motors, Inc. sold such vehicles to the public.It is of course accepted that the mere fact that one or more corporations are owned and controlled by a single stockholder is not of itself sufficient ground for disregarding separate corporate entities. It is lawful to obtain a corporation charter, even with a single substantial stockholder, to engage in a specific activity, and such activity may co-exist with other private activities of the stockholder. If the corporation is a substantial one, conducted lawfully and without fraud on another, its separate identity is to be respected.Accordingly, the mere fact that petitioner and Liddell Motors, Inc. are corporations owned and controlled by Frank Liddell directly or indirectly is not by itself sufficient to justify the disregard of the separate corporate identity of one from the other. However, under the law in force at the time of its incorporation the sales tax on original sales of cars was progressive. This progressive rate of the sales tax naturally would tempt the taxpayer to employ a way of reducing the price of the first sale. And Liddell Motors, Inc. was the medium created by petitioner to reduce the price and the tax liability."A taxpayer may gain advantage of doing business thru a corporation if he pleases, but the revenue officers in proper cases, may disregard the separate corporate entity where it serves but as a shield for tax evasion and treat the person who actually may take the benefits of the transactions as the person accordingly taxable."

PALACIO VS. FELY TRANSPORTATION CO.FACTS:Defendant hired Carillo as their driver of jeepney which was owned and operated by the defendant. While driving, Carillo run over Mario, the child of the plaintiff. As a result thereof, Mario sustained injuries which caused the plaintiff to incur expenses and was forced to litigate the matter that entailed the payment of attorneys fees. After trial, the court held Isabelo Calingasan, the employer, to be subsidiarily liable to pay damages, and not the defendant company, for the reason than Calingasan is one of the incorporators of the company.Calingasan argued that the sale of the jeepney was made long after the incident happened to the defendant company. Consequently, he cannot be held subsidiarily liable for the payment of damages. Hence, the claim was unfounded. On the other hand, plaintiff argued that the sale was made to evade the payment of Calingasans subsidiary civil liability. ISSUE: WON the doctrine of piercing the veil of corporate fiction is applicable, thus, defendant company and the employer can be held liable for payment of damagesHELD:Yes. Isabelo Calingasan and defendant may be regarded as one and the same person. It is evident that Calingasan's main purpose in forming the corporation was to evade his subsidiary civil liabilityresulting from the conviction of his driver. This is one case where the defendant corporation should not be heard to say that it has a personality separate and distinct from its members when to allow it to do so would be to sanction the use of the fiction of corporate entity as a shield to further an end subversive of justice. Furthermore, the failure of the defendant corporation to prove that it has other property than the jeep strengthens the conviction that its formation was for the purpose above indicated.Accordingly, defendants Fely Transportation and Calingasan should be held subsidiarily liable for P500.00 which Carillo was ordered to pay in the criminal case and which amount he could not pay on account of insolvency.

MARVEL BUILDING CORP. VS. DAVIDFACTS:This action was brought by plaintiffs as stockholders of the Marvel Building Corporation to enjoin the defendant CIR from selling at public auction various properties, all registered in the name of the said corporation. Said properties were seized and distrained by defendant to collect war profits taxes assessed against plaintiff Maria B. Castro.Plaintiffs alleged that the properties belonged to the corporation. On the other hand, defendant maintains that the said properties belong to Castro, being the sole owner of the subscribed stock of the corporation. However, the trial court held that the evidence failed to show that Castro is the true owner of all the stock certificates of the corporation. ISSUE:HELD:

ARCILLA VS. CAFACTS:Petitioner was able to secure credit from the private respondent taking advantage of their close friendship. By reason of such, private respondent extended said sum by reason of the representation made by the petitioner that he was a successful business man. Consequently, private respondent demanded for the payment of the petitioners obligation but those were unheeded. Hence, private respondent filed a complaint for collection of sum of money against the petitioner.Petitioner does not deny having business with the private respondent but alleges that the loan he secured was in the name of his family corporation, CSAR Marine Resources, and that the transaction between them began only when he requested the private petitioner to issue pro- forma invoices for said corporation to support a loan application. After trial, the court ordered the petitioner to pay the private respondent. On appeal, CA affirmed the decision of the trial court. Petitioner filed a MR alleging that the subject accounts are all in the name of the corporation, which has a distinct and separate personality from the petitioner. Newly discovered evidence was sought to be presented by the plaintiff, which the court granted and from which a modified judgment was rendered, ordering the plaintiff as the president of the corporation to pay the private respondent the sum demanded. By reason of this judgment, plaintiff secures a clarificatory judgment, wherein he sought to clarify that the corporation is the one made to be liable, and he has no personal liability over the loan contracted. Nonetheless, court denied his motion on the grounds that (a) the veil of corporate fiction should be pierced in this case; (b) since petitioner did not raise the issue of separate corporate identity in the pleadings in the trial court or in his Brief, he cannot raise it for the first time in a Motion for Clarificatory Judgment.ISSUE: WON the doctrine of piercing the veil of corporate fiction applies, thus plaintiff could be held liableHELD:Yes.Even assumingarguendothat the obligation was incurred in the name of the corporation, the petitioner would still be personally liable therefor because for all legal intents and purposes, he and the corporation are one and the same. Csar Marine Resources, Inc. is nothing more than his business conduit and alter ego. The fiction of a separate juridical personality conferred upon such corporation by law should be disregarded. He merely used the corporation for his personal purposes.

RAMOSO VS. CAFACTS:Commercial Credit Corporation (CCC) was registered with SEC as a general financing and investment corporation.CCC made proposals to several investors for the organization of franchise companies in different localities. Petitioners invested and bought majority shares of stocks, while CCC retained minority holdings.Management contracts were executed between each franchise company and CCC. CCC attempted to obtain a quasi-banking license from Central Bank of the Philippines.But there was a hindrance. By reason of such, CCC divests itself of its shareholdings in the franchise companies.It incorporated CCC Equity to take over the administration of the franchise companies under new management contracts.In the meantime, CCC continued providing a discounting line for receivables of the franchise companies through CCC Equity.Thereafter, CCC changed its name to General Credit Corporation (GCC).However, upon investigation, it was found that there are anomalies in the business of GCC. Petitioners allegedly discovered the dissipation of the assets of their respective franchise companies. Furthermore, GCC allegedly divested itself of its assets through a questionable offset of receivables arrangement with one of its creditors, Resource and Finance Corporation. Hence, petitioners filed a suit against GCC, CCC Equity and RFC.Petitioners pray for the piercing of the corporate fiction of GCC, CCC Equity, RFC and the franchise companies. They allege that (1) GCC was the alter-ego of CCC Equity and the franchise companies; (2) GCC created CCC Equity to circumvent CBs DOSRI Regulation; and (3) GCC mismanaged the franchise companies. They pray that should the afore-stated companies be considered as one, then petitioners liabilities should be nullifiedThe hearing officer ordered piercing the corporate veil of GCC, CCC Equity, and the franchise companies.He later declared that GCC was not liable to individual petitioners for the losses, since as investors they assumed the risk of their respective investments.The franchise companies and the individual petitioners were held not liable to GCC for the bad accounts incurred by the latter through the discounting process.Nevertheless, SEC reversed the decision of the hearing officer. Upon appeal, CA affirmed SEC. ISSUE: WON the doctrine of piercing the corporate veil applies in this caseHELD:No. There was neither fraud nor mismanagement in the control exercised by GCC and by CCC Equity, over the franchise companies.Whether the existence of the corporation should be pierced depends on questions of facts, appropriately pleaded.Mere allegation that a corporation is the alter ego of the individual stockholders is insufficient.The presumption is that the stockholders or officers and the corporation are distinct entities.The burden of proving otherwise is on the party seeking to have the court pierce the veil of the corporate entity.We note, however, that petitioners signed the continuing guaranty of the franchise companies bad debts in their own personal capacities.Consequently, they are responsible for their individual acts.The liabilities of petitioners as investors arose out of the regular financing venture of the franchise companies.There is no evidence that these bad debts were fraudulently incurred.Any taint of bad faith on the part of GCC in enticing investors may be resolved in ordinary courts, inasmuch as this is in the nature of a contractual relationship.Changing petitioners subsidiary liabilities by converting them to guarantors of bad debts cannot be done by piercing the veil of corporate identity.Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the instrumentality may be disregarded. The control and breach of duty must proximately cause the injury or unjust loss for which the complaint is made.Mere control on the part of GCC through CCC Equity over the operations and business policies of the franchise companies does not necessarily warrant piercing the veil of corporate fiction without proof of fraud.In order to determine whether or not the control exercised by GCC through CCC Equity over the franchise companies was used to commit fraud or wrong, to violate a statutory or other positive legal duty, or dishonest and unjust act in contravention of petitioners legal rights, the circumstances that caused the bankruptcy of the franchise companies must be taken into consideration.As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient reason to the contrary appears.When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons. Also, the corporate entity may be disregarded in the interest of justice in such cases as fraud that may work inequities among members of the corporationinternally,involvingnorights of the public or third persons.In both instances, there must have been fraud, and proof of it.For the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established. It cannot be presumed. CAs resolution is affirmed.

LIRAG TEXTILE MILLS, INC. VS. SSSFACTS:Petitioner Lirag textile and Basilio Lirag entered a purchase agreement with the respondent, wherein the latter will purchase from petitioners preferred shares of stock worth 1 million pesos and in accordance with the agreement that petitioner will repurchase the shares of stock at regular intervals of 1 year beginning with the 4th year following the date of issue. To guarantee the redemption of the stocks purchased by the petitioner, the payment of dividends and other obligations of the petitioners, Basilio Lirag signed the agreement, not only as the president of the corporation but also as a surety thereof. However, petitioners failed to redeem said shares of stock, and they had not paid the aforementioned dividends within the time set forth in the agreement. Hence, respondent SSS sent letters of demands to petitioners to redeem the foregoing stock certificates and pay said dividends and for Basilio to make good of his surety, but the demands were unheeded. Since it is provided for in the agreement that should the petitioners fail to effect any of the redemption, the entire obligation shall be immediately become due and demandable, respondent SSS filed a complaint for specific performance against the petitioners.On the part of the petitioners they contended that their failure to redeem the stock certificates was due to financial reverses denying the existence of any obligation to redeem the preferred stocks, on the ground that SSS became and still is a preferred stockholder of the corporation so that redemption depended upon the financial ability of said corporation. On the part of Basilio, he maintains that his liability only arises if the corporation is liable and does not perform its obligations under the agreement. On the other hand, respondent maintains that the agreement is a debt instrument, imposing upon the petitioners the obligation to pay the amount owed, and creating as between them the relation of creditor- debtor, and not that of a stockholder and a corporation.Court ruled in favor of respondent SSS. Hence, this petition.ISSUE: WON SSS is considered as a stockholder of the corporationHELD:No. A stockholder sinks or swims with the corporation and there is no obligation to return the value of his shares by means of repurchase if the corporation incurs losses and financial reverses, much less guarantee such repurchase through a surety. If parties intended SSS to be merely a stockholder of the petitioner corporation, it would have been sufficient that Preferred Certificates were issued in its name as the preferred certificates contained all the rights of a stockholder. The Purchase Agreement serves to define the rights and obligations of the parties and to establish the liability of petitioners in case of breach of contract. The rights given by the agreement to respondent SSS are rights not enjoyed by ordinary stockholders, such as the membership in the board is to insure against mismanagement which may result in losses not entirely unavoidable since payment for purposes of redemption as well as the dividends is expressly stipulated to come from profits/ surplus. Such a right is never exacted by an ordinary stockholder merely investing in the corporation. Moreover, the agreement provides that the failure of the petitioner to repurchase the preferred shares would render the entire obligation due and demandable. These features of the agreement clearly shows that the intent of the parties to be bound therein as debtor and creditor, and not as corporation and stockholder.

REPUBLIC PLANTERS BANK VS. AGANAFACTS:Private respondent corporation and Robes filed an action in court for specific performance to compel petitioner to redeem 800 preferred shares of stock with a face value ofP8,000.00 and to pay 1% quarterly interest thereon as quarterly dividend owing them under the terms and conditions of the certificates of stock.This case arose when private respondent corporation secured a loan from the petitioner in the amount of 120,000. As part of the loan, preferred shares of stock were issued to private respondent. Instead of giving the legal tender which amounts toP120,000.00, petitioner lent such amount partially in the form of money and partially in the form of stock certificates, each for 400 shares with a par value ofP10.00 per share. Said stock certificates were in the name of private respondent Robes, who subsequently, however, endorsed his shares in favor of Adalia F. Robes.Private respondents proceeded against petitioner and filed a complaint anchored on private respondents' alleged rights to collect dividends under the preferred shares in question and to have petitioner redeem the same under the terms and conditions of the stock certificates.After trial, the court ruled in favor of private respondents. ISSUE: WON petitioner can be compelled to redeem private respondents preferred shares of stockHELD: No. While the stock certificate does allow redemption, the option to do so was clearly vested in the petitioner bank. The redemption therefore is clearly the type known as "optional". Thus, except as otherwise provided in the stock certificate, the redemption rests entirely with the corporation and the stockholder is without right to either compel or refuse the redemption of its stock. Furthermore, the terms and conditions set forth therein use the word "may".The redemption of said shares cannot be allowed. CB made a finding that said petitioner has been suffering from chronic reserve deficiency, and that such finding resulted in a directive prohibiting the petitioner from redeeming any preferred share, on the ground that said redemption would reduce the assets of the Bank to the prejudice of its depositors and creditors. Redemption of preferred shares was prohibited for a just and valid reason. The directive issued by the Central Bank Governor was obviously meant to preserve the statusquo, and to prevent the financial ruin of a banking institution that would have resulted in adverse repercussions, not only to its depositors and creditors, but also to the banking industry as a whole. The directive, in limiting the exercise of a right granted by law to a corporate entity, may thus be considered as an exercise of police power.Further, Sec. 43 of the present Corporation Code prohibit the issuance of any stock dividend without the approval of stockholders, representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. These provisions underscore the fact that payment of dividends to a stockholder is not a matter of right but a matter of consensus. Furthermore, "interest bearing stocks", on which the corporation agrees absolutely to pay interest before dividends are paid to common stockholders, is legal only when construed as requiring payment of interest as dividends from net earnings or surplus only. Clearly, the respondent judge, in compelling the petitioner to redeem the shares in question and to pay the corresponding dividends, committed grave abuse of discretion amounting to lack or excess of jurisdiction in ignoring both the terms and conditions specified in the stock certificate, as well as the clear mandate of the law.

A preferred share of stock, on one hand, is one which entitles the holder thereof to certain preferences over the holders of common stock. The preferences are designed to induce persons to subscribe for shares of a corporation. Preferred shares take a multiplicity of forms. The most common forms may be classified into two: (1) preferred shares as to assets; and (2) preferred shares as to dividends. The former is a share which gives the holder thereof preference in the distribution of the assets of the corporation in case of liquidation;the latter is a share the holder of which is entitled to receive dividends on said share to the extent agreed upon before any dividends at all are paid to the holders of common stock.There is no guaranty, however, that the share will receive any dividends.Present Corporation Codeprovides that the board of directors of a stock corporation may declare dividends only out of unrestricted retained earnings.The declaration of dividends is dependent upon the availability of surplus profit or unrestricted retained earnings, as the case may be. Preferences granted to preferred stockholders, moreover, do not give them a lien upon the property of the corporation nor make them creditors of the corporation, the right of the former being always subordinate to the latter. Dividends are thus payable only when there are profits earned by the corporation and as a general rule, even if there are existing profits, the board of directors has the discretion to determine whether or not dividends are to be declared.Shareholders, both common and preferred, are considered risk takers who invest capital in the business and who can look only to what is left after corporate debts and liabilities are fully paid.Redeemable shares, on the other hand, are shares usually preferred, which by their terms are redeemable at a fixed date, or at the option of either issuing corporation, or the stockholder, or both at a certain redemption price.[A redemption by the corporation of its stock is, in a sense, a repurchase of it for cancellation. The present Code allows redemption of shares even if there are no unrestricted retained earnings on the books of the corporation. This is a new provision which in effect qualifies the general rule that the corporation cannot purchase its own shares except out of current retained earnings. However, while redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings, this is subject to the condition that the corporation has, after such redemption, assets in its books to cover debts and liabilities inclusive of capital stock. Redemption, therefore, may not be made where the corporation is insolvent or if such redemption will cause insolvency or inability of the corporation to meet its debts as they mature.

CIR VS. MANNINGFACTS:Under a trust agreement, Julius Reese who owned 24,700 shares of the 25,000 common shares of MANTRASCO, and the 3 private respondents who owned the rest, at 100 shares each, deposited all their shares with the Trustees (law firm). The trust agreement provided that upon Reeses death MANTRASCO shall purchase Reeses shares. The trust agreement was executed in view of Reeses desire that upon his death the Company would continue under the management of respondents. Upon Reeses death and partial payment by the company of Reesess share, a new certificate was issued in the name of MANTRASCO, and the certificate indorsed to the Trustees. Subsequently, the stockholders reverted the 24,700 shares in the Treasury to the capital account of the company as stock dividends to be distributed to the stockholders. When the entire purchase price of Reeses interest in the company was paid in full by the latter, the trust agreement was terminated, and the shares held in trust were delivered to the company.BIR concluded that the distribution of the 24,700 shares of Reese as stock dividends was in effect a distribution of the "assets or property of the corporation." It therefore assessed respondents for deficiency income taxes.CA absolved respondent from any liability for receiving the questioned stock dividends on the ground that their respective 1/3 interest in the Company remained the same before and after the declaration of the stock dividends.SC held that the newly acquired shares were not treasury shares; their declaration as treasury stock dividends was a complete nullity and affirmed the findings of BIR.ISSUE: WON the 24,700 shares declared as shares of stock are treasury sharesHELD:No. treasury shares are:1. more or less in agreement treasury shares are stocks issued and fully paid for and re-acquired by the corporation either by purchase, donation, forfeiture or other means. 2. Treasury shares are therefore issued shares, but being in the treasury they do not have the status of outstanding shares. 3. Consequently, although a treasury share, not having been retired by the corporation re-acquiring it, may be re-issued or sold again, such share, as long as it is held by the corporation as a treasury share, participates neither in dividends, because dividends cannot be declared by the corporation to itself, 4. nor in the meetings of the corporation as voting stock, for otherwise equal distribution of voting powers among stockholders will be effectively lost and the directors will be able to perpetuate their control of the corporation, 5. though it still represents a paid-for interest in the property of the corporation.The foregoing essential features of a treasury stock are lacking in the questioned sharesTreasury shares are stocks issued and fully paid for and re-acquired by the corporation either by purchase, donation, forfeiture or other means. They are therefore issued shares, but being in the treasury they do not have the status of outstanding shares. Consequently, although a treasury share, not having been retired by the corporation re-acquiring it, may be re-issued or sold again, such share, as long as it is held by the corporation as a treasury share, participates neither in dividends, because dividends cannot be declared by the corporation to itself, nor in the meetings of the corporations as voting stock, for otherwise equal distribution of voting powers among stockholders will be effectively lost and the directors will be able to perpetuate their control of the corporation though it still represent a paid for interest in the property of the corporation.A stock dividend, being one payable in capital stock, cannot be declared out of outstanding corporate stock, but only from retained earnings. always involves a transfer of surplus (or profit) to capital stock. It is a conversion of surplus or undivided profits into capital stock, which is distributed to stockholders in lieu of a cash dividend. essence of a stock dividend was the segregation out of surplus account of a definite portion of the corporate earnings as part of the permanent capital resources of the corporation by the device of capitalizing the same, and the issuance to the stockholders of additional shares of stock representing the profits so capitalizedDividend is any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits.Where the manifest intention of the parties to the trust agreement was, in sum and substance, to treat the shares of a deceased stockholder as absolutely outstanding shares of said stockholders estate until they were fully paid. the declaration of said shares as treasury stock dividend was a complete nullity and plainly violative of public policy.The manifest intention of the parties to the trust agreement was, in sum and substance, to treat the 24,700 shares of Reese as absolutely outstanding shares of Reeses estate until they were fully paid. Such being the true nature of the 24,700 shares, their declaration as treasury stock dividend in 1958 was a complete nullity and plainly violative of public policy. A stock dividend, being one payable in capital stock, cannot be declared out of outstanding corporate stock, but only from retained earnings.Kwin GamboaPage 12