SECTION 41.

POWER TO ACQUIRE OWN SHARES

STEINBERG VS. VELASCO
FACTS
Plaintiff, C.H. STEINBERG is the receiver of
the Sibuguey Trading Company, a domestic
corporation. The defendants are residents of
the Philippine Islands.
On June 30, 1922, the board of directors of the
corporation authorized the purchase of,
purchased and paid for, 330 shares of the
capital stock of the corporation at the agreed
price of P3,300.
That at the time the purchase was made, the
corporation was indebted in the sum of
P13,807.50.
That according to its books, it had accounts
receivable in the sum of P19,126.02.
That on September 11, 1923, when the petition
was filed for its dissolution upon the ground
that it was insolvent, its account payable
amounted to P9,241.19 and its account
receivable P12,512.47 or an apparent asset of
P3,271.28 over and above its liabilities.
There is no stipulation or finding of facts as to
what was the actual cash value of its accounts
receivable. Neither is there any stipulation that
those accounts or any part of them ever have
been or will be collected, and it does not
appear that after his appointment on February
24, 1924, the receiver made a diligent effort to
collect them and that he was unable to do so.
It also appears from the minutes of the board
of directors that the president and manager
recommended that P3000 out of the surplus
account to be set aside for dividends payable,
and that payments be made in installments so
as not to effect the financial condition of the
corporation.

ISSUES

RULING

Whether or not the corporation has a

right to acquire own shares

Creditors of a corporation have the right

to assume that so long as there are
outstanding debts and liabilities, the BOD
will not use the assets of the corporation to
buy its own stock, and will not declare
dividends to stockholders when the
corporation is insolvent. In this case, it was
found that the corporation did not have an
actual bona fide surplus from which
dividends could be paid. Moreover, the
Court noted that the Board of Directors
purchased the stock from the corporation
and declared the dividends on the stock
at the same Board meeting, and that the
directors were permitted to resign so that
they could sell their stock to the
corporation.

SEC 42. Power to invest corporate funds in another corporation or business or for any other purposes *other than the primary purpose)
RUSTIA VS. AGUINALDO
FACTS

ISSUES

RULING

An action was commenced in the Court of First

Instance of Manila by Juan Rustia and
Filomena Rustia against Aguinaldo &
Aguinaldo.

Whether the tender and consignation

by the plaintiffs of the amount with
the Court will discharge their
obligation to the defendant

The Supreme Court held that the so-called

tender and consignation by the plaintiffs
were not tender and consignation at all
within the purview of the applicable
provision of the old Civil Code, and did not
discharge their obligation to the defendant.

After trial, the Court holds that the plaintiffs

have substantially complied with the
requirements of the law when they consigned
with the Court of First Instance the sum of
P4,395.90 in payment of the judgment against
them in the civil case no. 52786.
The court said that the consignation has
completely relieved the plaintiffs from any
liability arising out of the judgment. The
defendant is also ordered to deliver unto the
plaintiffs their shares of stock.
In the civil case no. 52786 decided by Judge
Arsenio Locsin, he sentenced the defendants,
Mr. & Mrs. Rustia to pay unto plaintiff
P3,100.40 with 6 percent interest per annum
and the plaintiff to surrender unto defendants
the shares of stock which they had purchased
through Aguinaldo and Aguinaldo.
A new hitch developed after the termination of
that case by reason of Aguinaldo and
Aguinaldos inability to surrender to Mr. & Mrs.
Rustia their Suyoc and Antamok shares
because there were covered by bigger lots
which could not be split on account of the
mining companies offices being closed due to
the current war.
Aguinaldo & Aguinaldo offered to guarantee
with proper security the delivery of those
shares when conditions became normal, but
Mr. & Mrs. Rustia were not agreeable to that.
They insisted that that the certificates of stock
which included shares belonging to other
customers be entrusted to them for
safekeeping, or that either Aguinaldo &
Aguinaldo buy their shares or sell to them

That the plaintiffs were condemned to pay

the defendant the sum of P3,100.40, the
amount which they were sentenced to pay
in Civil Case No. 52786 with legal interest
from the date of the institution of that
action.
The defendant should deliver to the
plaintiffs the shares of stock listed in the
decision on appeal plus dividends on said
shares in the sum of P387.50 found by
Judge Locsin and such additional
dividends as said shares are just and legal
upon the same principle that the plaintiffs
are made to pay interest on the debt from
that date.

others shares.
Following this impasse, Mr. & Mrs. Rustia
brought this action at bar, in which besides
consigning P4,395.90 in Japanese war notes,
they filed cross-claims for dividends on their
shares, for accounting, and damages, among
other things.

GOKONGWEI VS. SEC

FACTS

ISSUES

Petitioner, John Gokongwei, as stockholder of

respondent San Miguel Corporation filed with
the Securities and Exchange Commission a
petition for declaration of nullity of amended
by-laws, cancellation of certificate of filing of
amended by-laws, injunction and damages
with prayer for a preliminary injunction against
the majority of the members of the Board of
Directors and San Miguel Corporation as an
unwilling petitioner.

Whether or not the amended by-laws

of SMC of disqualifying a competitor
from nomination or election to the
Board of Directors of SMC are valid
and reasonable

FiRST CAUSE OF ACTION: Petitioner alleged

that on September 18, 1976, individual
respondents amended the bylaws of the
corporation basing their authority to do so on a
resolution of the stockholders adopted on
March 13, 1961.
It was contended that according to Section 22
of the Corporation Law and Article VIII of the
by-laws of the corporation, the power to
amend, modify, repeal or adopt new by-laws
may be delegated to the Board of Directors
only by the affirmative vote of stockholders,
representing not less than 2/3 of the
subscribed and paid up capital stock of the
corporation, which 2/3 should have been
computed on the basis of the capitalization at
the time of the amendment.
Since the amendment was based on the 1961
authorization, petitioner contended that the
Board acted without authority and in
usurpation of the power of the stockholders.
SECOND: it was alleged that the authority
granted in 1961 had already been exercised in
1962 and 1963, after which the authority of the
Board ceased to exist.
THIRD: petitioner averred that the membership
of the Board of Directors had changed since
the authority was given in 1961, there being six
new directors.
FOURTH, petitioner claimed that prior to the
questioned amendment, he had all the
qualifications to be a director of respondent
corporation, being a Substantial stockholder
thereof;

RULING
YES.
Section 21 of the Corporation Law
expressly provides that a corporation may
make by laws for the qualifications of
directors. Thus, it has been held than an
officer of a corporation cannot engage in a
business in direct competition with that of
the corporation where he is a director by
utilizing information he has received as
such officer, under the established law
that a director or officer of a corporation
may not enter into a competing enterprise
which cripples or injures the business of
the corporation of which he is an officer or
director.
It is also well established that corporate
officers are not permitted to use their
position of trust and confidence to further
their private interests.
It is not denied that a member of the Board
of Directors of the San Miguel Corporation
has access to sensitive and highly
confidential information, such as:
(a) marketing strategies and pricing
structure
(b) budget for expansion and diversification
(c) research and development
(d) sources of funding, availability of
personnel, proposals of mergers or tie-ups
with other firms.
It is obviously to prevent the creation of an
opportunity for an officer or director of San
Miguel Corporation, who is also the officer
or owner of a competing corporation, from
taking advantage of the information which
he acquires as director to promote his
individual or corporate interests to the
prejudice of San Miguel Corporation and
its stockholders, that the questioned
amendment of the by-laws was made.
Certainly, where two corporations are
competitive in a substantial sense, it would
seem improbable, if not impossible for the
director, if he were to discharge effectively
his duty, to satisfy his loyalty to both
corporations and place the performance of
his corporation duties above his personal
concerns.

 That as a stockholder, petitioner acquired s

rights inherent in stock ownership, such as the
rights to vote and to be voted upon in the
election of directors, and that amending the
bylaws, respondent purposely provided for
petitioners disqualification and deprived him of
his vested rights as aforementioned hence the
amended by-laws are null and void.

The offer and assurance of petitioner that

to avoid any possibility of his taking unfair
advantage of his position as director of
San Miguel Corporation, he would absent
himself from meetings at which confidential
matters would be discussed, would not
detract from the validity and
reasonableness of the by-laws here
involved. Apart from the impractical results
that would ensue from such arrangement,
it would be inconsistent with petitioners
primary motive in running for board
membership which is to protect his
investments in San Miguel Corporation.

As additional cause of action, it was alleged

that corporations have no inherent power to
disqualify a stockholder from being elected as
a director and, therefore, the questioned act is
ultra vires and void.
On October 28, 1971, petitioner filed with the
SEC an Urgent Motion for Production and
Inspection of Documents alleging that the
Secretary of respondent Corporation refused
to allow him to inspect its records despite
request made by petitioner for production of
certain documents enumerated in the request
and that respondent corporation had been
attempting to suppress information from its
stockholders despite a negative reply by the
SEC to its query regarding their authority to do
so.

Whether or not respondent SEC

gravely abused its discretion in
denying petitioners request for an
examination of the records of San
Miguel International, Inc. , a fully
owned subsidiary of San Miguel
Corporation

Pursuant to the second paragraph of

Section 51 of the Corporation Law, the
record of all business transactions of the
corporation and minutes of any meeting
shall be open to the inspection of any
director, member or stockholder of the
corporation at reasonable hours.
The stockholders right of inspection of the
corporations books and records is based
upon their ownership of the assets and
property of the corporation. It is, therefore,
an incident of ownership or interest be
termed an equitable ownership, a
beneficial ownership, or a ownership. This
right is predicated upon the necessity of
self-protection. The inspection has to be
germane to the petitioners interest as a
stockholder, and has to be proper and
lawful in character and not inimical to the
interest of the corporation.

The documents requested to be copied were:

a) minutes of the stockholders meeting field
on March 13, 1961;
b) copy of the management contract between
San Miguel Corporation and A. Soriano
Corporation (ANSCOR)
c) latest balance sheet of San Miguel
International, Inc.
d) authority of the stockholders to invest the
funds of respondent corporation in San Miguel
International, Inc.
e) lists of salaries, allowances, bonuses and
other compensation, if any, received by Andres
M. Soriano, Jr and/or its successor-in-interest.

In the case at bar, considering that the

foreign subsidiary is wholly owned by
respondent San Miguel Corporation and,
therefore, under its control, it would be
more in accord with equity, good faith and
fair dealing to construe the statutory right
of petitioner as stockholder to inspect the
books and records of the corporation as
extending to books and records of such
wholly subsidiary which are in respondent
corporations possession and control.

Whether or not the corporation has

the power to invest corporate funds
in another corporation or business or

YES.
40. Power to invest corporate funds. A

for any other purpose

private corporation has the power to invest

its corporate funds in any other
corporation or business, or for any purpose
other than the main purpose for which it
was organized, provide that its board of
directors has been so authorized in a
resolution by the affirmative vote of
stockholders holding shares in the
corporation entitling them to exercise at
least two-thirds of the voting power on
such a propose at a stockholders meeting
called for that purpose, and provided
further that no agricultural or mining
corporation, shall in anywise be interested
in any other agricultural or mining
corporation. When the investment is
necessary to accomplish its purpose or
purposes as stated in its articles of
incorporation the approval of the
stockholders is not necessary.
The Court held that the purchase of beer
manufacturing facilities by SMC was an
investment in the same business stated as
its main purpose in its Articles of
Incorporation, which is to manufacture and
market beer, therefore it does not need the
approval of the stockholders.

GOKONGWEI VS. SEC

FACTS

ISSUES

RULING

Petitioner, John Gokongwei seeks to nullify

and set aside the resolution en banc of
respondent Securities and Exchange
Commission sustaining the findings of the San
Miguel Corporation Board of Directors that
petitioner is engaged in a business competitive
with or antagonistic to that of the San Miguel
Corporation and therefore, ineligible for
election as director, pursuant to Section 3,
Article III of the amended by-laws.

Whether or not the resolution of SEC

sustaining the findings of the San
Miguel Corporation Board of
Directors that petitioner is engaged
in a business competitive with or
antagonistic to that of the San Miguel
Corporation should be annulled.

The Chief Justice and six justices of the

Supreme Court had already promulgated
their opinions that the validity of the
amended by-laws insofar and only insofar
as the parties herein are concerned, can
no longer be relitigated on the basis of the
law of the case doctrine and, therefore,
the enforcement of the amended by-laws
could not have been ipso factor stayed by
the motion for reconsideration.

Petitioner alleges that the matter of petitioners

disqualification should not have been heard in
view of the pendency of petitioners motion for
reconsideration with the court ; that when
respondent Commission sustained the
disqualification of petitioner, it failed to
consider that private respondents are
precluded from disqualifying petitioner
because of the rule of pari delicto; and that the
resolution of disqualification of the respondent
Board of Directors intended to perpetuate
themselves in power.

The alleged disqualification of some

members of the Board was never in issue
during the hearing of the disqualification
case, and petitioner has not submitted any
evidence in support of his contention.
The order of the respondent Commission
was based principally on the affidavits of
Nazario Avendano, Ruperto Sarandi, Jr.,
Fernando Constantino, Jose Picornell and
Mabini Antonio and documentary evidence
showing that petitioner is engaged in
agricultural and poultry business
competitive with that of San Miguel
Corporation. Petitioner did not adduce any
evidence to rebut the evidence of his
disqualification.

DE LA RAMA VS. MA-AO SUGAR CENTRAL CO., INC.

FACTS

ISSUES

This was a representative or derivative suit

commenced on October 20, 1953 in the First
Instance of Manila by four minority
stockholders against the Ma-ao Sugar Central
Co., Inc. and J. Amado Araneta and three
other directors of the corporation.

Whether or not a corporation has the

power to invest its fund in any other
corporation or business, or for any
purpose other than the main purpose
for which it was organized

The complaint stated five causes of action,

1. For alleged illegal and ultra-vires acts
consisting of self-dealing irregular loans, and
unauthorized investments
2. For alleged gross mismanagement
3. For alleged forfeiture of corporate rights
warranting dissolution
4. For alleged damages and attorneys fees
5. For receivership
The Lower Court dismisses the petition for
dissolution but condemns J.Amado Araneta to
pay unto Ma-ao Sugar Central Co., Inc. the
amount of P46,270.00 with 8% interest from
the date of the filing of this complaint, plus the
costs; the court reiterates the preliminary
injunction restraining the Ma-ao Sugar Central
Co., Inc. management to give any loans or
advances to its officers and orders it to refrain
from making investments in Acoje Mining,
Mabuhay Printing, and any other company
whose purpose is not connected with the
Sugar Central business; costs of plaintiffs to be
borne by the Corporation and J,Amado
Araneta.
Both parties appealed directly to the Supreme
Court.

RULING
YES.
40. Power to Invest corporate funds. A
private corporation has the power to invest
its corporate funds in any other corporation
or business, or for any purpose other than
the main purpose for which it was
organized, provided that its board of
directors has been so authorized in a
resolution by the affirmative vote of
stockholders holding shares in the
corporation entitling them to exercise at
least two-thirds of the voting power on
such a proposal at a stockholders meeting
called for that purpose, and provided
further, that n agricultural or mining
corporation shall in anywise be interested
in any other agricultural or mining
corporation. When the investment is
necessary to accomplish its purpose or
purposes as stated in its articles of
incorporation, the approval of the
stockholders is not necessary.
The Supreme Court reversed the decision
of the Lower Court when it ordered the
management of the Ma-ao Sugar Central
Co., Inc. to refrain from making
investments in Acoje Mining, Mabuhay
Printing and any other company whose
purpose is not connected with the sugar
central business. This portion of the
decision should be reversed because Sec
17 of the Corporation Law allows a
corporation to invest its fund in any other
corporation or business, or for any purpose
other than the main purpose for which it
was organized, provided that its board of
directors has been so authorized by the
affirmative vote of stockholders holding
shares etitling them to exerciseat least
two-thirds of the voting power.

NIELSON & CO. INC. VS. LEPANTO CONSOLIDATED MINING COMPANY

ISSUES

FACTS

On January 30, 1937, Nielson & Co. executed

an agreement with Lepanto Consolidated
Mining Co.

Whether or not the corporation

has a power to declare dividends

Lepanto owned the mining properties. Nielson

operated and maintained the said properties
for Php 2,500.00/month as management fee
plus 10% participation in the net profits for 5
years.
In 1940, the 10% share was disputed.
Lepantos Board of Directors authorized C.A.
De Witt, president to enter with an agreement
with Nielson modifying same provisions
effective January 1, 1940 such that Nielson
shall receive:
a) 10% of the dividends paid during the
contract period and every end of the year;
b) 10% of any depletion reserve that may
be set up;
c) 10% of any amount expended during the
year out of surplus earnings for capital
account.
In 1941, the parties renewed their contract for
another 5 years but the Pacific War broke out
in December 1941.
In January 1942, the operation of the mining
properties was disrupted on account of the
war.
In February 1942, the mill, power plant,
supplies on hand, equipment, concentrates on
hand and mines, were destroyed upon orders
of the United States Army, to prevent their
utilization by the invading Japanese Army. The
Japanese forces thereafter occupied the
mining properties, operated the mines during
the continuance of the war, and who were
ousted from the mining properties only in
August of 1945
After the mining properties were liberated from
the Japanese forces, LEPANTO took
possession thereof and embarked in rebuilding
and reconstructing the mines and mill; setting
up new organization; clearing the mill site;
repairing the mines; erecting staff quarters and
bodegas and repairing existing structures;
installing new machinery and equipment;
repairing roads and maintaining the same;

RULING
Section 16 of the Corporation Law, the
consideration for which shares of stock
may be issued are: (1) cash; (2) property;
and (3) undistributed profits.
Shares of stock are given the special name
"stock dividends" only if they are issued in
lieu of undistributed profits. If shares of
stocks are issued in exchange of cash or
property then those shares do not fall
under the category of "stock dividends".
A corporation may legally issue shares of
stock in consideration of services rendered
to it by a person not a stockholder, or in
payment of its indebtedness. A share of
stock issued to pay for services rendered is
equivalent to a stock issued in exchange of
property, because services is equivalent to
property.14 Likewise a share of stock
issued in payment of indebtedness is
equivalent to issuing a stock in exchange
for cash. But a share of stock thus issued
should be part of the original capital stock
of the corporation upon its organization, or
part of the stocks issued when the increase
of the capitalization of a corporation is
properly authorized.
In other words, it is the shares of stock that
are originally issued by the corporation and
forming part of the capital that can be
exchanged for cash or services rendered,
or property; that is, if the corporation has
original shares of stock unsold or
unsubscribed, either coming from the
original capitalization or from the increased
capitalization. Those shares of stock may
be issued to a person who is not a
stockholder, or to a person already a
stockholder in exchange for services
rendered or for cash or property. But a
share of stock coming from stock dividends
declared cannot be issued to one who is
not a stockholder of a corporation.
The term "dividend" both in the technical
sense and its ordinary acceptation, is that
part or portion of the profits of the
enterprise which the corporation, by its
governing agents, sets apart for ratable
division among the holders of the capital

salvaging equipment and storing the same

within the bodegas; doing police work
necessary to take care of the materials and
equipment recovered; repairing and renewing
the water system; and remembering.
The rehabilitation and reconstruction of the
mine was not completed until 1948.
On June 26, 1948, the mines resumed
operation under the exclusive management of
LEPANTO.
Shortly after the mines were liberated from the
Japanese invaders in 1945, a disagreement
arose between NIELSON and LEPANTO over
the status of the operating contract in question
which as renewed expired in 1947. Under the
terms thereof, the management contract shall
remain in suspense in case fortuitous event or
force majeure, such as war or civil commotion,
adversely affects the work of mining and
milling.
On November 28, 1949, Lepanto declared
stock dividends worth P1,000,000.00; and on
August 22, 1950, it declared stock dividends
worth P2,000,000.00). In other words, during
the period of extension Lepanto had declared
stock dividends worth P3,000,000.00.
On February 6, 1958, Nielson brought an
action against Lepanto before the Court of
First Instance (CFI) of Manila to recover
damages suffered in view of the refusal of
Lepanto to comply with the terms of a
management contract entered into between
them on January 30, 1937.
In its answer, Lepanto denied the allegations
and set up certain defenses, prescription and
laches as bars against the institution of the
action.

stock. It means the fund actually set aside,

and declared by the directors of the
corporation as dividends and duly ordered
by the director, or by the stockholders at a
corporate meeting, to be divided or
distributed among the stockholders
according to their respective interests.
Under Section 16 of the Corporation Law
stock dividends cannot be issued to a
person who is not a stockholder in payment
of services rendered. And so, in the case at
bar Nielson cannot be paid in shares of
stock which form part of the stock
dividends of Lepanto for services it
rendered under the management contract.
We sustain the contention of Lepanto that
the understanding between Lepanto and
Nielson was simply to make the cash value
of the stock dividends declared as the
basis for determining the amount of
compensation that should be paid to
Nielson, in the proportion of 10% of the
cash value of the stock dividends declared.

FISHER VS. TRINIDAD

FACTS
During the year 1919, the Philippine American
Drug Company was a corporation duly
organized and existing under the laws of the
Philippine Islands, doing business in the City of
Manila.
The appellant was a stockholder in said
corporation.
As a result of the business for that year, the
said corporation declared a stock dividend to
which the proportionate share of appellant was
P24,800. The stock dividend for that amount
was issued to the appellant.
Thereafter, the appellant, upon demand of the
appellee paid under protest, and voluntarily,
unto the appellee the sum of P889.91 as
income tax on said stock dividend.
For the recovery of that sum, P889.91, the
present case was instituted.

ISSUES
Whether the stock dividends in the
present case is an income and
taxable as such under the
provisions of Section 25 of Act No.
2833

RULING
Act No. 2833 of the Philippine Legislature
is an Act establishing an income tax. Sec.
25 of said Act attempts to define the
application of the income tax. The
definition follows:
The term dividend as used in this Law
shall be held to mean any distribution
made or ordered to be made by a
corporation, out of its earnings or profits
accrued since March first, nineteen
hundred and thirteen, and payable to its
shareholders, whether in cash or in stock
of the corporation, Stock dividend shall
be considered income, to the amount of
the earnings or profits distributed.
Generally speaking, stock dividends
represent undistributed increase in the
capital of corporations or firms, joint
companies, etc. for a particular period.
They are used to show the increased
interest or proportional shares in the
capital of each stockholder. In other words,
the inventory of the property of the
corporation, etc. for particular period
shows an increase in its capital, so that the
stock theretofore issued does not show the
real value of the stockholders interest, and
additional stock is issued showing the
increase in the actual capital, or property,
or assets of the corporation, etc.
The Court held that stock dividends are not
income, the same cannot be taxes under
that provision of Act No. 2833 which
provides for a tax upon income. Under the
guise of an income tax, property which is
not an income cannot be taxed. When the
assets of a corporation have increased so
as to justify the issuance of a stock
dividend, the increase of the assets should
be taken account of the Government in the
ordinary tax duplicates for the purposes of
assessment and collection of an additional
tax.