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WWW for January 27, 2014 discussion 1. Q: Liability of Directors for watered stocks A: Any Director or Officer of a corporation consenting to the issuance of stocks for a consideration less than its par or for a consideration in any form other than cash, valued in excess of its fair value, or who, having knowledge thereof, shall be solidarily liable with the stockholder concerned to the corporation and its creditors for the difference between fair value received at the time of issuance of the stock and the par or issued value of the same.

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Q: What happens to the stocks? A: The stocks remain valid.

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Q: Can it be transferred? A: Yes.

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Q: Should the stocks be transferred, can the subsequent stockholder be held liable for the deficiency? A: there are two opinions: 1. 2. He could not be held liable because he purchase the stock in good faith. He could be made liable but he could ask for reimbursement from the transferor provided he is in good faith.
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SIR: Once a subscriber transfers subsequently the watered stocks to a third party, will that 3 party be made liable for the balance, being now the owner of the shares? A: Generally, the subsequent subscriber should not be made liable because that is a valid stock and he has every reason to trust the certificate of stock otherwise the public could no longer trust this system of shareholdings then nobody would buy stocks any more.

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Heres stock worth P100 that you wanted to subscribe for 1 share but he paid only 50 and the director said its all yours and because you are a pretty girl, i will give you 50% discount. Is it watered stock? Are you now the owner? Can you transfer it? Yes.

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And so the transferee will default the share because it was worth 500 pesos and it was still going up. And so the transferee said Ill pay 500 for this and so he bought the stock. However, it was learned that the stock in his possession was watered stock. Can the subsequent transferee be made liable for the balance? The transferee does not have to check all the time if it is fully paid or if it is watered stock. That is not his obligation, otherwise nobody will buy shares of stock. The trust of the public will be affected.

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So can you compel him to pay? No. It will be the subscriber who will be liable to pay beacuse it is him who entered into a a contract with the corporation.

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Is there a chance where the 2nd opinion will be entertained? Yes, to go after the transferee to seek refund.

10. However it will be a long process. Do you think that opinion will hold water? It will be more for the first opinion beacuse in the end the subscriber will be made liable.

11. Will the subsequent transferee be held liable in accordance with the 2nd opinion? The trust of the public will be affected if they have to check before purchasing. Generally he should no longer be made liable because its a valid stock. I have every reason to trust the certificate and stockholder. If the public can no longer trust this syst em, nobody would buy stocks any more. Unless if the transferee is a transferee in bad faith, having knowledge that it was watered stock. Then he should be liable. There could be other circumstances that could show that the transferee is in bad faith and not in due course. 12. When stocks are issued, when will they normally be paid? Either on the date stated in the subscription contract or if none, made on call by the BOD

13. When can I demand the certificate? Upon full payment of all the shares or when the by-laws allow the pro-rata issuance of certificate of stocks to the extent to the number of shares that can be accommodated by such payment.

14. If youre a stockholder owning 10% of the capital of the corporation and one of the assets of the corporation is a parcel of land also worth 10% of the entire capital of the corporation, can you demand for the conveyance of that asset of the corporation? No, the stockholder only has inchoate right of the corporation. The corporation owns the property.

15. Is he at least a co-owner? He is not also a co-owner of the properties of the corporation.

16. Can the corporation demand for the balance on the unpaid subscriptions. Yes, because that is the contract. Once you make the call, the corporation can demand for the balance of the unpaid subscriptions.

17. On the other hand, earlier we said, as far as dividends are concerned, can the stockholders demand for dividends? No, because it is the corporations discretion to declare dividends or not. Because as a stockholder, the risk in his investment is whether the corporation will make profits or not.

18. Here is a contract of subscription, and the in the contract we said that corporation can demand for the payment balance of the unpaid subscription from any stockholder. And in the same contract, the stockholder, cannot compel the corporation to declare dividends. How do we explain that? When the stockholder entered into the contract of subscription, he entered into it as an investor. He assumed the risk whether profits will be realized/gain or not. In the case of the corporation, with regards to the unpaid subscription, it pertains to a creditor debtor relationship. In that case, the stockholder, upon subscription, is indebted to the corporation with regards to the unpaid subscription.

So far as the balance is concerned, the relationship between the stockholder and the corporation is debtor and creditor. In so far as the dividends are concerned, the stockholder may or may not be paid dividends (no debtor-creditor relationship). 19. Earlier we said there were instances when the stockholder or the officers or directors of the corporation may be personally liable. What are these instances? Conflict of interest/Torts committed Disloyalty Violations of the Self-dealing Rule Interlocking directors Watered stocks

Watered stocks is now the new addition to this list.So, these are instances when a stockholder may sue any director or officer. And that Stockholder may sue in behalf of the corporation against any of these directors. 20. On the other hand. if you are a stockholder and do not agree with the majority decision, what do you do? If you are a stockholder who disagrees with the decision of the majority, you can exercise your appraisal right. It is the right to have your stocks appraised to be sold so that you would cease to participate in the corporation.

21. But this could be an instance that you do not want. While you want to protect the corporation, you may not want to leave. What could be the other option? The other option is to file a derivative suit in behalf of the corporation.

Exercising your appraisal right is just one cause of action, it can be very disadvantageous to the Stockholder since your only option is to leave. But if you dont want to leave, the law provides another option in the form of a derivative suit. 22. What is a derivative suit? It is an instance allowed by law, since generally, a corporation can only act by its directors. I think the law allowed instances, when these same directors or officers who are supposed to act in behalf of the corporation, when they are acting against the interest of the corporation, a derivative suit is the remedy where the stockholders may file an action against these erring directors in behalf of the corporation.

Sir: there is now an instance where a stockholder can lead? in suing the liable officers. Because normally you cannot. As stockholders, you have no authority to file a case against the corporation. You have no authority to file a case against the directors. Because the principle of the law is , you are a member of the organization, and it is illogical if you are allowed to sue the corporation, the very corporation which you are a part of, because you are a part of the corporation, if you sue the corporation, you are suing yourself. Thats the principle, You are a part, you are a stockholder, you own shares of stock, you have a capital, imagine!? If you sue the corporation whose assets are 100M, and as a stockholder you want to sue the corporation for damages worth a hundred million, once you are awarded that 100m, you are awarding yourself with your own money because you have a part in that 100m, let as assume u hold 90% so heres a stockholder suing a corporation which he own, this cant be allowed. However, we have a remedy - the derivative suit.

23. In a derivative suit, who sues who? The corporation suing the officers or the directors. Because the stockholders cannot sue the directors because once he sue the directors, he is suing the corporation

24. Sir: The stockholder cannot sue because once he sues the directors, he is suing the corporation, but once the corporation sues the directors, at least the corporation is now going against the personal liability of the directors but if you allow the stockholder to sue the director, you are suing that director in his capacity as a director, then you are suing your own corporation. But in a derivative suit, the real party is the corporation itself. The reason why it is called a derivative suit? A: It is in fact the stockholder who is suing in behalf of the corporation. The stockholder derived his cause of action from the corporation.

25. Sir: Exactly. It is called a derivative suit because the party suing is not the real party; he derived his authority to sue from the corporation itself because it is the corporation who should have the cause of action. So that if one stockholder found stealing in the directors house, is it a derivative suit? A: No sir. Because the cause of action does not belong to the corporation.

26. Sir: Because the cause of action does not belong to the corporation and he himself sues the stockholder. But in a derivative suit? A: The injury or cause of action is with the corporation.

27. Sir: The cause of action belongs to the corporation. In remedial law, we have what we call representative suit, is this a representative suit? A: No sir. A representative suit is different from a derivative suit since in a representative suit, the cause of action really belongs to the stockholder, suing in behalf of his co-stockholders. Lets say for example sir, the stockholder is prevented from attending a meeting, so the cause of action is with the individual stockholders, however, they are suing the officers in behalf of the other stockholders.

28. Sir: A representative suit is different from a derivative suit? A: It is different sir because in a derivative suit, it is the stockholder suing in behalf of the corporation since the cause of action belongs to the corporation. However, in a representative suit, the stockholder is representing his co-stockholders who have the same cause of action as to that of the suing stockholder, so the cause of action really belongs to the stockholder.

Sir: in other words, the difference between the two, in a representative suit one party files a case in behalf of himself and of many others similarly situated. He himself has a cause of action, but there are others similar to him who also has a cause of action. 29. Q: What is a Class Suit? A: There is a common cause of action that belongs to many others but only some sue in behalf of others.

Sir: Do you remember PEPSI COLA? They printed out crowns with 1M php prize on them. Instead of printing out just 10, 1000 crowns were printed with the prize. The winners filed a class suit. 30. Q: So the remedy is a derivative suit. What are the conditions before a derivative suit could be filed? A: There must be: 1. 2. 3. 4. A cause of action available to the corporation. Administrative remedies must be exhausted. He must be a stockholder at the time when the cause of action accrued . It must be stated in the complaint that the stockholder is filing in the name of the corporation .