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Appraisal Rights is the right of a stockholder to dissent from a list of corporate acts and to compel payment of
the fair value of his shares and thereafter withdraw from the corporation.

 List of corporate acts wherein stockholders may exercise Appraisal Rights

(a) Amendments of Articles of Incorporation that changes the rights of any stockholder or class of shares

(b) Amendments of Articles of Incorporation that authorizes preference over existing class of shares

(c) Amendments of Articles of Incorporation that extends or shortens the corporate term

(d) In case of Merger or Consolidation

(e) In case of investment of corporate funds in other corporation or purpose different from their primary
purpose

(f) In any case with respect to close corporations when it has sufficient asset.

Difference of right to compel payment of paid value of shares between stockholders

in a close corporation and ordinary stock corporation

In a close corporation, stockholders may compel the former to purchase the fair value of their shares for
any reason whenever it has sufficient assets to cover its debts and liabilities aside from its capital stock and
thereafter withdraw from it. Stockholders may also compel the dissolution of a close corporation when a
corporate act is dishonest at the least or causes waste or misapplication of corporate assets.

In an ordinary stock corporation, stockholders may only compel the former to purchase the fair value of
their shares at the instance of corporate acts enumerated in the corporation code whenever it has
unrestricted retained earnings sufficient to cover its purchase.
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Corporate Books

 A corporation is required to keep various Corporate Books that are not limited from the following:

(a) Records of all business transactions

(b) Minutes of meetings of all stockholders and of the board of directors

(c) Stock and transfer book, in stock corporations

(d) Membership book, in non-stock corporations

(e) Financial statements

Right to Examine / Inspect Corporate Books

These books and records are subject to examination or inspection by the stockholders or members during
reasonable hours on any business day. They may also copy excerpts from said records. Even if by virtue of an
order or resolution of the board, an officer cannot bar a stockholder from his inspection and by doing so (either
the officer or the board members who passed the resolution) is punishable by fine and or imprisonment. The only
valid defense for such refusal is when the demanding stockholder has improperly used the information he
secured through prior examination, is not acting in good faith, or has no legitimate purpose in making his
demand.

The right to examine or inspection includes perusal of voting trust agreements. Moreover, the transferor who
conferred the right to vote (and other rights pertaining to the subject shares) as well as the trustee (transferee)
has the right to inspect.

Extent of Right to Examine by Stockholders and Directors

However, in comparison with ordinary stockholders, while they can only inspect the corporate books
during reasonable hours on business days, the directors or trustees may inspect the corporate books at
all reasonable hours; that is, even if outside the business days.
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Foreign Corporation

(For more information, see Ktrl+ Notes on FOREIGN CORPORATION)

Effect of appointment of a distributor domiciled in the Philippines

If a foreign corporation appointed a distributor/representative (this is different from resident agent, cos
they have a different purpose) here in the Philippines, would that count as “doing business”? It depends. If
the distributor is acting independently for its own name and account, then the appointment does not
constitute “doing business”.

Petition for Withdrawal of License

A foreign corporation who has been licensed to do business here in the Philippines may seek to
withdraw their business license. It is done by securing a certificate of withdrawal by filing a petition of
withdrawal of license with the SEC which shall thereafter issue the same. However, there are mandatory
conditions before a foreign corporation may file their petition. None compliance thereof would waste the petition.

 Requisites before a foreign corporation may petition for the withdrawal of its
license

(a) Settlement of claims accrued in the Philippines, if any

(b) Payment of taxes and other duties imposed by the Philippine Government

(c) Publication of the petition for withdrawal of license once a week for three (3) consecutive weeks in
a newspaper of general circulation in the Philippines.
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Stocks and Stockholders

Subscription to Shares of Stock

If through the corporation, a person can only purchase shares of stocks by subscription. It means that
such person must enter into a contract with the corporation so that he could acquire a fresh unissued stock –
this is called a subscription contract. Now, a person has a lot of option: like when he contemplates when to buy
a condominium unit, he may as well subscribe to different existing corporation but he might want to subscribe
with a corporation which is still in the process of organization – we call this pre-incorporation
subscription contract. This kind of subscription contract is irrevocable for a period stipulated in their
agreement which must be at least 6 months from the date of subscription. The stipulated period signifies a
promise, on the part of the incorporators, that on or about the end of it, the corporation shall materialize; so, if
the corporation did not materialize, it is only natural that the contract shall be rescinded and any
considerations made thereon must be given back. The period is not absolute and the contract may be
practically revoked (rescinded) with the consent of other subscribers. However, once the articles of
incorporation have been submitted to the SEC for registration and evaluation, the subscription contract
shall be absolutely binding.

Be it noted that payment is not limited to cash payment; so long as it has been evaluated by the
incorporators (during pre-incorporation) or the board members and further approved by the SEC, it is
considered a valuable consideration. However, promissory notes and promise of future service are not
considered valuable considerations. The same rules on valuable consideration apply for the issuance of bonds
by the corporation (so long as the issued bonds are registered with the SEC for the determination of the
sufficiency of its terms).

Ownership of Shares of Stock

Ownership of shares of stocks is evidenced by the issuance of stock certificate; however, legal interest
thereon may be evidenced by the subscription contract as parol evidence. Shares of stocks will only be
issued (in the form of stock certificate) after full payment of its subscription per its issued (par) value plus
interest (and expenses made in case of a delinquency sale). It follows that one cannot be issued a stock
certificate if he subscribed to 1M shares at Php 1.00 per share and only paid up to Php 500,000.00; thus, no
ownership of stock has been passed on. The reason is that stock subscriptions are indivisible and every
payment made thereon paid will be applied pro rata into his entire subscription and not just a part thereof
(e.g. 500K shares only as a part of 1M subscribed shares). One has to pay fully for what he subscribed into since
subscription is a contract and the parties under which contract has to follow the tenor of their agreement.

Another mode of ownership is through transfer of stock certificates. It is done by delivery of stock
through endorsement by the owner or his duly appointed representative. However, it will only be valid and
binding until the transfer is recorded in the corporate books. The reason is that the prior certificate must be
cancelled for a new certificate on said shares of stocks be issued under the name of the transferee, the new
owner of the shares of stock, under the condition that the subscription on the subject shares of stock must
have been fully paid but, to be clear, it does not include any indebtedness the prior shareholder may have
in favor of the corporation.

Note: voting trust agreement does not transfer ownership; it is only an agreement to protect the interest of
the trustee, by engaging with the decision-making processes of the corporation, to ensure that payment of the
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consideration he has from the stockholder-trustor he transacted with will not be prejudiced by a third party (which
is the corporation).

Concept of “watering the stocks”

The situation of the foregoing issues of “under-payment” of subscription is not uncommon. As a matter of
fact, stock certificates are still issued as fully paid stocks despite of the said circumstance. However, the
Corporation Code tags the said shares as watered stocks – shares of stocks issued by a corporation as fully
paid up on its face but actually has not been fully paid. This scheme is not only done through issuing stocks for
a monetary consideration lower than the issued value; it is also done through payment with a property other
than cash has been paid when actually such consideration has been overvalued in excess of its fair market
value, through gratuitous issuance without any payment at all, or through the guise of stock dividends when the
corporation has no surplus profits.

In these cases, the stockholder shall be liable for the difference between the par value issued and its
fair market value at the time of its issuance. Of course, someone would have vouch for a subscriber when
the “stock has been watered” and it is likely someone from the board of directors since they exercise the power
to issue stock certificates. If it has been found out that someone from the board has knowledge of the
watering, and despite such knowledge they did not formally (written and filed to corporate secretary) object
thereto, then such ignorance would cause him/them to be solidarily liable (like a surety) with the stockholder
concerned. The subscription contract underlying the issuance of watered stocks is void until it has been
paid in full since it involves a fraudulent transaction. However, the invalid issuance would not deprive
protection for the creditors as the malefactors are estopped from their misrepresentations and they may enforce
payment prior or subsequent to the issuance of watered stocks. The corporation may also answer in a quo
warranto proceeding in case the watering scheme affects the public.

No-par value shares are also susceptible to watering; however, the above-stated liability on watered no-
par value shares shall all fall upon the consenting or ignorant directors because no-par value shares are
deemed fully paid and non-assessable and the holder of no-par value shares shall not be liable to the
corporation or its creditors.

Problem Solving:

1. X Company has an authorized capital stock of Php 1,000,000,000 (1Billion pesos) divided into
1Billion shares at a par-value of Php 1.00 per share. 500 Million shares were duly subscribed and
are outstanding. The Articles of Incoporation denies the stockholders their pre-emptive rights.
Sometime, in the course of their operations, the fair market value of the shares rose up to Php 12.00
per share. The Board of Directors – A, B, C, D & E passed a resolution to issue the remaining 500
Million unissued shares and each of them directors subscribed to 100 Million shares at Php 2.00
per share. Barely a week later, they sold each of their 100 Million Shares at Php 12.00 per share.

Q. Is there a stock watering? Explain.

A. None. The corporation code states that stocks have been watered when it has been issued as fully
paid when actually, it’s par-value or issued value has not been fully paid up. There is nothing in the facts
that could attribute a misrepresentation on the actual payment of any stocks lower than their issued
value. The basis of payment of stock subscriptions is the issued value and not their fair market value.
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Q. What is the extent of liability of directors in case of stock watering?

A. The liability of directors depends on their knowledge or ignorance of the watering scheme. The
corporation code extends the directors’ liability solidarily with the liability of the holder of watered stocks
to pay the difference between the fair market value of the watered stock at the time of its issuance and
the issued value.

Q.. If there is no stock watering, may the foregoing acts of the Board of Directors be questioned?

A. Yes, because the directors violated their duties of loyalty in violation of the corporate opportunity
doctrine thereby acquiring forbidden profits. The law provides that when directors attempt to acquire any
interest adverse to the corporation in respect with the duties reposed in him in confidence, he shall be
liable as a trustee for the corporation and must account for the profits which otherwise would have
accrued to the corporation.

In this case, the directors’ liability arose when they profited from the board resolution that they passed; a
duty reposed in them that they corrupted to gain profits.

2. “Z” a stockholder transfers to “Y” an outsider his certificate of stock by endorsement and delivery.
Subsequently, “Y”, armed with the endorsed and delivered stock certificate, went to the corporate
secretary to register the transfer, cancel the certificate of stock under the name of “Z”, and to issue a
new certificate of stock in “Y’s” favor. However, the corporate secretary says “Yada!” and refused the
requests of “Y”. He sought your legal advice contemplating if he can institute an intra corporate case to
compel the corporation to record the same.

Q. What advice will you give?

A. Y has no cause of action to institute an intra-corporate dispute against the corporation because he
has no intra-corporate personality to stand on. The law provides that intra-corporate relationships are
three-fold, between and among the corporators, between the corporators and the corporation, and
between the corporation and the State; there is no intra-corporate relationship between a corporation or
a stock holder and, an outsider or a stranger. In this case, since Y has been refused registration, he is
effectively a third party, a stranger yet to become a corporator. However, the perfect remedy for “Y” is to
compel the corporate secretary to register the transfer.

Q. May the corporate secretary be compelled to record the transfer?

A. Yes, through filing for a writ of mandamus. The duty of a corporate secretary to record a valid
transfer of shares of stock is only ministerial; thereby, he may be compelled by securing a writ of
mandamus.

Q. If the corporation is a close corporation, and the transfer between Z and Y breached the qualifying
condition in its AoI, will your answer be the same if one stockholder objects?

A. Yes, the answer would be different and “Y” cannot compel the corporate secretary through
mandamus. The law provides that a close corporation has the right to refuse registration of transfers
breaching the restriction contained by its Articles of Incorporation or its by-laws unless no stockholder
objected thereto.

Moreover, the corporate secretary’s duty is no longer ministerial but discretionary. Being a stockholder
in a close corporation, the secretary has the right to object in the selection of who should be admitted in
their corporation under the principle of delectus personae.
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Negotiability of Certificates of Stock

Stock certificates are non-negotiable instruments. It is only considered as a quasi-negotiable

instrument: (a) it is negotiable because transfer may be done through endorsement and delivery; and, (b) it
is non-negotiable because the transferee would not be free from all defenses the lawful owner may have
against the transfer except estoppel. This means that even though the transferee engaged into the transfer in
good faith and without knowledge of the defect on the capacity of the apparent transferor, the lawful
owner shall not be stripped-off of his ownership so long as the latter has exercised his rights within the
prescriptive period.

Delinquent Shares of Stocks

Subscription contracts have terms and conditions including period of payments and, most of the time,
provisions about accrual of interest to which the holder and the corporation must abide. Like any transactions,
there is a due date for the payment of subscription; it may be by installment or any other mode depending on
the stipulations. It follows that the corporation may declare any unpaid subscription or a part thereof, if by
installment, due and payable at the stipulated period and if the stockholder failed to pay on time, naturally,
the corporation may collect accrued interest at the rate provided by the by-laws or at the legal rate, by
default.

The fact of non-full payment of subscription does not per se make a share of stocks delinquent. In fact
and in law, holders of shares which are not fully paid of shall still have undiminished rights as a
stockholder; remember that even watered stocks are considered fully paid stocks. It will only be a
delinquent share if it has been declared as such.

What makes a share delinquent is when its holder failed to pay the subscribed amount or a part thereof
plus the accrued interest within thirty (30) days from the maturity date. The primary effect of delinquency
shall subject the delinquent share available for sale at the discretion of the board of directors. In which, the
corporation may exercise its power to purchase the same, classify it as treasury shares, and re-issue
thereafter to prospective subscribers. The secondary effect shall strip the delinquent share of its voting
rights and other vested rights like pre-emptive rights. The only right it will retain is the right to distribution of
dividends on the basis of the paid portion.

To clarify, the status of delinquency attaches to the whole share until the balance and additional burden has
been paid or purchased, the reason is to deny voting rights and other rights on that particular share except rights
to have dividends; but, the actual delinquent share is only the unpaid portion. Thereafter, the portion of the
subscription paid up by the delinquent holder will still be retained by him and ownership thereon shall not be
severed; it’s just that, a new certificate of stock shall be issued upon him with respect to that paid subscription.

Delinquency Sale

Following from the above discussion, the board of directors may, through a resolution, order the sale of
delinquent stocks (the unpaid portion). The order of sale is like a notice to the delinquent shareholder informing
their intent to sell the delinquent shares and shall specify the following: a) the amount due; b) the accrued
interest; c) the date & time of sale which must be within 30 days to 60 days from the declaration of delinquency;
and, d) the place of sale. The notice of delinquency sale plus a copy of the resolution shall be sent to delinquent
stockholders, personally or by registered male. It shall be published once a week for two (2) consecutive weeks
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in a newspaper of general circulation in the province or city where the principal office of the corporation is
located.

This means that if ever the delinquent holder would want to pay the subscription, he must pay the
amount and accrued interest plus the expenses made by the corporation in furtherance of the sale. The
bidders shall pay the like amount at fractional basis in case they would not like to purchase the whole amount.

On the other hand, the corporation may likewise bid to purchase the delinquent stock, at the same
computed amount, under the condition that there is no remaining or no bidder at all and, that it must have
unrestricted retained earnings enough to cover the purchase. The purchased shares shall be re-
classified as treasury shares which can be re-issued in the future. If ever there still a portion that was not
purchased, in case the corporation did not purchase the whole amount, the same shall be credited back to
the delinquent shareholder.

After the sale is done, a new certificate of stock shall be issued for the delinquent shareholder
covering the portion he paid plus the credited portion, if any (which will remain unpaid of course), and
another certificate for the purchaser if it has not been purchased by the corporation.

What if the delinquent shareholder would like to recover his original subscription?
The only remedy the delinquent shareholder has is to file an action to recover the sold delinquent
stock. But first, he must pay the purchaser (the current holder or the corporation) the amount of sale plus the
legal interest accrued from the date of the sale; second, this remedy must be done by filing his complaint
(allege the payment ofcourse) within six months from the date of the sale with the regular courts (the RTC or
MTC with regards to the amount). The only causes or grounds allowed are the allegation of irregularity or
defect in the notice of sale or the allegation of irregularity or defect in the sale itself.

On the other hand, the corporation also has the remedy to seek help from the regular courts to collect the
amount due on any unpaid subscription, with accrued interest, costs and expenses in case they want to forego
with the sale. This is not an exercise of a power of a corporation but is in the nature of a judicial remedy since
after all, a subscription contract is still a contract.
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Questioning ouster of corporate officers

For as long as the controversy revolves around the question of the validity of the appointment, election, or of
removal of corporate directors and officers Elected or Appointed by the Board Of Directors, then the
controversy is exclusively cognizable by the special commercial court and not the NLRC. As long as the
particular officer involved was elected by the Board of Directors and he questions the propriety or the manner
or questions the validity by which he was removed or ousted: It is cognizable originally and exclusively by the
special commercial courts.

HOWEVER, This exclusive and original jurisdiction will not apply: (1) If the controversy is PURELY a labor
dispute; (2) If the main cause of action is for the recovery of unpaid wages, separation pay and attorney’s fees
“without questioning the validity of his removal” or his ouster. (Midland Construction v. Mobilia)

The main consideration therefore, for purposes of determining whether it is the NLRC or the special commercial court
that is possessed with jurisdiction is, whether or not the corporate officer involved asserts his right as such officer or
questions the manner or the validity by which he was removed or ousted therefrom. If that is the case, then it is the
special commercial court. If he does not question the manner in which he was removed, but he merely seeks for
separation pay, backwages, etc.—then the NLRC.