corpo triplex shoe

8/12/2019 Corpo Triplex Shoe

1/29

CORPORATION LAW | B2015CASE DIGESTS

TRIPLEX SHOE CO. V. RICE &HUTCHINS INC (ANASTACIO)


2/29


McCarty v. Langdea1960

HughesAlycat This digest only focuses on appellants first argument, which is the

only one discussed by ampos!

SUMMAR!" "carty e#ecuted a written contract whereby he agreed topurchase shares of stoc$ from %state &ife! "carty paid a down payment,but a balance was left! The balance and the mode for its payment wase'idenced by a promissory note! (hen "carty was sued upon the note, hein'o$ed the constitutional prohibition on the issuance of shares of stoc$ ine#change for anything other than money, labor, or property! The ourt ofi'il Appeals of Te#as held the note 'alid and enforceable!

#OCTRINE" (here the rights of the creditors of the corporation arein'ol'ed, e'en though the stoc$ is issued in e#change of something other

than money, property, or labor, such as a promissory note, liability on thenotes in payment shall be enforced! This is in spite of a constitutionalpro'ision )in Te#as* prohibiting such a consideration for the issuance isprohibited! There is a difference between prohibiting a certain form oftransaction, and declaring that the transaction, and all securities issuing outof it, are utterly 'oid! Thus, a note gi'en by a subscriber for the issuance ofstoc$, in the hands of a bona fide holder, is 'alid and enforceable! Thestoc$holder who has paid nothing for his stoc$ is not permitted to ta$eshelter under the onstitution!

$ACTS" H &angdeau is the recei'er of %state &ife +nsurance! He filed suitagainst ohn &! "carty! &angdeau alleges that "carty e#ecuted a written

contract whereby he agreed to purchase 19,-.0 shares of stoc$ from %state&ife +nsurance at /0 share! The contract stated that /0 in cash was to betendered as down payment, and a balance of /-2.,-20 was to be paid in upto -0 monthly installments, as e'idenced by a note!

ISSUE" (34 the contract is enforceable 5%

McCART!%S ARUMENT"The contract is 'oid, since it 'iolates theec! 1, Art! 6 of the Te#as onstitution, which states that7 84o corporationshall issue stoc$ or bonds e#cept for money paid, labor done or propertyactually recei'ed, and all fictitious increase of stoc$ or indebtedness shall

be 'oid!8

RATIO"unagan '! :ushey7The issuance and sale of stoc$ for notes is in 'iolation of the Te#as

onstitution! +n ;Te#as orporations< by Hildebrand, the author says ;Theonstitution of Te#as only prohibits the issuance of stoc$ until fully paidfor! Therefore, where a note is gi'en for stoc$, if it is understood that thestoc$ will not be issued to the subscriber until the note is paid, the contractis 'alid and not illegal!8

The law is much stronger where the rights of the creditors of thecorporation are in'ol'ed, as in this case! +n such cases, e'en though thestoc$ is issued, liability on the notes in payment of such stoc$, is enforced!

oy '! =odchau#7The transaction was contrary to Te#as laws! +f the contro'ersy was between

the corporation and the appellee, it is probable the court would drop thematter! Howe'er, the affairs of the corporation are in the hands of arecei'er, who represents not only the stoc$holders, but also the creditors!The rights of the creditors ha'e inter'ened and ha'e an important bearingon the case!

(asher '! myer7There is no declaration in the constitutional pro'ision that a transaction inwhich something other than money, property, or labor is recei'ed for thecorporations stoc$, shall be utterly 'oid! (hat is declared 'oid is ;allfictitious increase of stoc$ or indebtedness,< 43T the issuance of stoc$ forother than money, property, or labor! o, for instance, if a security be

accepted in payment for the stoc$, such as a subscriber>s note, which is notproperty, the onstitution does not say either that it, or the stoc$ issued forit, shall be 'oid! There is a difference between prohibiting a certain form oftransaction )what the constitutional pro'ision actually does*, and declaringthat the transaction, and all securities issuing out of it, are utterly 'oid )what"carty suggests the pro'ision does*!

The constitutional pro'ision was aimed against the ac?uisition of stoc$ by aone who has not lawfully paid therefor! +t was designed for the protection ofthe corporation and its creditors! +ts purpose is to gi'e integrity to thecorporations capital! +t is to pre'ent false presence at its hands, and a'oid


3/29


imposition upon the public! 4one of these ob@ects would be promoted bydeclaring uncollectible a note gi'en by a subscriber, in the hands of a bonafide holder! Therefore, the stoc$holder who has paid nothing for his stoc$ isnot permitted to ta$e shelter under the onstitution! He is not allowed tointerpose it to defeat his obligation!

R'de v. #c*'+ C,+any et a-.1920

Olney, J.Supreme Court of California

sai

SUMMAR!" A @udgment creditor of oc$hop filed an action againstsome of its stoc$holders to collect the unpaid balances on the par 'alue oftheir shares! The lower court found for the @udgment creditor! Theupreme ourt re'ersed, holding that the stoc$holders, as innocent

purchasers of the watered stoc$, cannot be held liable for the differencethat e#isted between what was actually paid on their stoc$ and its par'alue!

#OCTRINE"(hen the corporation issues watered stoc$ and assumes anostensible capitaliBation in e#cess of its assets, it commits constructi'efraud upon the creditors!

The transferee of watered stoc$ who ta$es it in ignorance of its realcharacter is not re?uired, e'en at the suit of a creditor, to pay in anythingmore upon it!

$ACTS" The @udgment creditor of oc$hop filed an action against someof its stoc$holders to collect from them what are claimed to be unpaidbalances on the par 'alue of their shares!

Allegations in the complaint:1! efendants were subscribers and stoc$holders!! 3nly C cents on the dollar had been paid in on the par 'alue of

their shares!

Answer of the efenants:

1! They were neither subscribers nor stoc$holders!a! ourt7 +t was admitted at the trial that they were so!

i! The court accepted the plaintiffs theory that itmade no difference whether the defendants weresubscribers or not!

ii! The fact that they were stoc$holders and that theshares they held, although issued as fully paidwere in fact issued for property which thedirectors did not belie'e was e?ual in 'alue tothe par 'alue of the shares were enough towarrant @udgment against them!

! The full par 'alue of their stoc$ had been paid!a! ourt7 3nly fi'etwelfths of the par 'alue had been paid!

%'idence is enough to pro'e such!

ISSUE" (34 defendants are re?uired, because of the plaintiffs claim, toma$e up any difference which may e#ist between what was actually paid on

their stoc$ and its par 'alue! D4ote7 The 'alidity of the claim is not in issue!E

RULIN" NO! The innocent purchasers of watered stoc$ cannot be madeto pay for the balance!

RATIO" (here a person accepts the ownership of stoc$ which purports tobe fully paid, he does not the stoc$ and enters upon the relation ofstoc$holder upon any understanding that his stoc$ is liable for further callson capital account or that he assumes any such obligation!

1! +n fact, he enters upon such relationship with @ust the contraryunderstanding!

3ne gi'ing credit to a corporation is entitled to rely upon its ostensiblecapitaliBation as the basis for the credit gi'en!1! (hen the corporation issues watered stoc$ and assumes an

ostensible capitaliBation in e#cess of its assets, it commitsconstructi'e fraud upon the creditors!

! +n other words, the essence of the right of the creditor to brushaside the issuance of the stoc$ as fully paid, and to show that it wasnot such and to compel the payment of the balance upon it, is thatthe issuance as fully paid was as to him a fraud!

The abo'e 'iew is followed in alifornia! The court is, therefore, free to


4/29


follow the rule that t'e tran/eree / 0atered tc 0' tae 1t 1n1gnrance / 1t rea- c'aracter 1 nt re21red3 even at t'e 1t / acred1tr3 t +ay 1n anyt'1ng ,re +n 1t.

1! This is consistent with the principle that reco'ery is permitted inany case against the owner of stoc$ issued by the corporation as

fully paid! DFemedy is against the original owner of the wateredstoc$s!E! Any other rule would sub@ect the innocent purchaser of corporate

stoc$ to obligations in large amounts of which he had noconception when he ac?uired such!

#ISPOSITIVE" udgment re'ersed!

4IN CROS4! MINUTE

MAI# CORP. V. EATON(4ERNAR#O)


5/29


MIUEL VELASCO3 a1gnee / T'eP'1-1++1ne C'e,1ca- Prdct C.

(Ltd.)3 +-a1nt1//*a++e--ant3

v. 5EAN M. POI6AT!arch 1", 191#

Street, J.ron

SUMMAR!" GoiBat subscribed to 0 shares but only paid for C shares ofthe Ghilippine hemical Groduct o! The :oard of irectors made a callfor payment through a resolution but GoiBat refused to pay! Theorporation became insol'ent! Assignee in insol'ency sued GoiBat for the'alue of the unpaid subscription! held that GoiBat is still liable to payfor the unpaid subscriptions!

#OCTRINE"1! There are two remedies for the enforcement of stoc$ subscriptions7

a! Germitting the corporation to put up the unpaid stoc$ for sale anddispose of it for the account of the delin?uent subscriber undersection -2 to 2 of the orporation &awI or

b! :y action in court, under section 9! +t is generally accepted doctrine that the statutory right to sell the

subscriber>s stoc$ is merely a remedy in addition to that whichproceeds by action in courtI and it has been held that the ordinarylegal remedy by action e#ists e'en though no e#press mention thereofis made in the statute!

$ACTS"1! ean "! GoiBat subscribed for 0 shares of the stoc$ of The Ghilippine

hemical Groduct ompany, and paid in upon his subscription the sumof GC00, the par 'alue of C shares!

! "iguel Jelasco as assignee in insol'ency of the ompany is see$ing toreco'er from, the sum of G1,C00, or the 'alue of the remaining unpaid1C shares he subscribed in!

-! GoiBat defense7a! the call made by the board of directors of the company to pay the

unpaid subscriptions was not made pursuant to the re?uirements of

sections -. and -2 of the orporation &aw )Act 4o! 1C9*, and inparticular that the action was instituted before the e#piration of the-0 days specified in section -2!

ISSUES" (34 GoiBat is liable to pay the unpaid subscription! 5%

RULIN" 5%! ection -6 of the orporation &aw clearly recogniBes thata stoc$ subscription is subsisting liability from the time the subscription ismade, since it re?uires the subscriber to pay interest ?uarterly from that dateunless he is relie'ed from such liability by the bylaws of the corporation!The subscriber is as much bound to pay the amount of the share subscribedby him as he would be to pay any other debt, and the right of the companyto demand payment is no less incontestable!

RATIO"1! There are two remedies for the enforcement of stoc$ subscriptions7

a! Germitting the corporation to put up the unpaid stoc$ for sale and

dispose of it for the account of the delin?uent subscriber undersection -2 to 2 of the orporation &awI or

b. :y action in court, under section 91

! +t is generally accepted doctrine that the statutory right to sell thesubscriber>s stoc$ is merely a remedy in addition to that which proceedsby action in courtI and it has been held that the ordinary legal remedyby action e#ists e'en though no e#press mention thereof is made in thestatute!

-! Also, e'en if the directors failed to ma$e a call for the payment of theunpaid subscriptions when insol'ency super'enes upon a corporationand the court assumes @urisdiction to wind up, all unpaid stoc$subscriptions become payable on demand, and are at once reco'erable

in an action instituted by the assignee or recei'er appointed by thecourt!! +t e'idently cannot be permitted that a subscriber should escape from

his lawful obligation by reason of the failure of the officers of thecorporation to perform their duty in ma$ing a callI and when theoriginal model of ma$ing the call becomes impracticable, theobligation must be treated as due upon demand!

14othing in this Act shall pre'ent the directors from collecting, by action in any court of

proper @urisdiction, the amount due on any unpaid subscription, together with accrued interestand costs and e#penses incurred


6/29


#ISPOSITIVE" The @udgment of the lower court is therefore re'ersed, and@udgment will be rendered in fa'or of the plaintiff and against the defendantfor the sum of one thousand fi'e hundred pesos )G1,C00*, with interest fromuly 1-, 101, and costs of both instances! o ordered!

LINA!EN UL$ ELECTRICPO7ER COMPAN!3 INC. v. IRINEO

4ALTA6ARJune $0, 19"$

!ontemayor, J%en

SUMMAR!" +reneo :altaBar was a stoc$holder of &ingayen =ulf! He hadan unpaid balance on his subscription amounting to G12,C00! +n uly 196,

the H had a meeting wherein they adopted a resolution calling for paymentof all unpaid subscriptions! &etters were sent to :altaBar reminding him ofhis unpaid balance and of the due dates for payment of such! ubse?uently,almost a year after the due date fi#ed by the H in the H "T=, thecompanys :3 adopted a F%, declaring 4J the H F% of uly 196!The :3, in said F%, also made a call for payment of the unpaidsubscriptions, including that of :altaBars! espite this, :altaBar still failedto pay! &ater, the companys legal counsel sent a letter by registered mail to:altaBar, demanding payment! :ecause of his failure to pay, an action tocollect payment was filed against :altaBar! uring trial, the parties agreedthat the :3s call for payment was not published in a newspaper ofgeneral circulation, as re?d by the orpo &aw! +n the trial court, one of

:altaBars arguments was that the action was premature because there wasno 'alid call! The trial court agreed with :altaBar and dismissed the case, onthe ground, among others, that the call for payment were not published! +talso said that the H F%, allegedly relie'ing :altaBar from liability, was4J because it was not appro'ed by A&& stoc$holders! The upreme ourtagreed with the lower court and affirmed the dismissal!

#OCTRINE" Knder the orporation &aw, notice of call for payment forunpaid subscribed stoc$ must be published, e#cept when the corporation isinsol'ent, in which case, payment is immediately demandable! ection 0 is"A4AT3F5 as regards publication, using the word 8must8! The reasons for

the mandatory pro'ision are )a* to assure notice to all subscribers, and )b* to

assure e?uality and uniformity in the assessment on stoc$holders! Also, releasefrom payment of unpaid subscriptions must be made by all the stoc$holders!

$ACTS" &ingayen =ulf %lectric Gower ompany )&ingayen =ulf* is adomestic corporation with an authoriBed capital stoc$ of G-00,000 di'ided into-,000 shares with a par 'alue of G100 per share! +rineo :altaBar ):altaBar*subscribed for 600 shares on account of which he had paid upon thecorporations organiBation the sum of G1C,000! After incorporation, :altaBarmade further payments, lea'ing a balance of G12,C00 unpaid for! &ingayen =ulfnow claims such amount in this action!

uly -, 1967 T3LH3&%F "T=7 A ma@ority of the H, among them:altaBar adopted SH Re-t1n N. 89!1! +t was agreed upon by the H present t ca-- t'e :a-anceof all unpaid

subscribed capital stoc$ as of uly -, 196 the first C0M payable within60 days beginning August 1, 196, and the remaining C0M payable within60 days beginning 3ctober 1, 196!

! All unpaid subscription after the due dates of both calls would be sub@ect to1M interest per annum!

-! After the e#piration of 60 days> grace which would be on ecember 1,196, for the first call, and on Nebruary 1, 19., for the second call, allsubscribed stoc$s remaining unpaid would re'ert to the corporation!

ept , 1967 &ingayen =ulfs letter to :altaBar reminding him that the firstC0M of his unpaid subscription would be due on 3ctober 1! :altaBar re?uestedthat he be allowed to pay his unpaid subscription by Nebruary 1, 19.! He alsosaid that if he could not pay the balance of his subscription by Neb 1, his unpaidsubscription would be re'erted to the corporation!

ec! 19, 19.7 :altaBar wrote another letter to &ingayens :3 offering to

withdraw completely from the corporation by selling out to the corporation allhis shares of stoc$ in the total amount of G-,000! This offer was leftunacted upon!

April 1., 1927 :3AF 3N +F%T3F "T=7 They adopted Re-t1nN. 89!1! +n effect set aside the H F%! 4o! 1., on the ground that said Fes! was

null and 'oid, and because the corporation was not in a financial position toabsorb the unpaid balance of the subscribed capital stoc$!

! The directors also decided t ca-- ;


7/29


of notice from the ecretaryTreasurer!-! &ingayens legal counsel was also authoriBed to ta$e all the necessary legal

steps for the collection of the payment of the call!

une 10, 1997 T3LH3&%F "T=7 The stoc$holders were all present,either in person or by pro#y! They adopted Re-t1n N. >1! +t was agreed to re'alue the stoc$s and assets of the company so as to

attract outside in'estors to put in money for the rehabilitation of thecompany!

! The president was authoriBed to ma$e all arrangement for such appraisaland the ecretary to call a meeting upon completion of the reassessment!

:A&TAOAF admitted that he recei'ed notice from the ecretaryTreasurerdemanding payment of the unpaid balance of his subscription! The GAFT+%agreed that the BODs call was not published in a newspaper of generalcirculation as re?uired by ection 0 of the orporation &aw!

ept! 2, 1997 &ingayens legal counsel wrote a letter to :altaBar demanding

the payment of the unpaid balance of his subscription! opy of this letter wassent :y reg1tered ,a1- to :altaBar! He ignored said demand! Hence, thisaction!

:A&TAOAF7 disclaims liability on the following grounds71! Action is GF%"ATKF% because there was no valid callI and! =ranting that there was a 'alid call, he was re-eaedfrom the obligation of

the balance of his subscription by H Fesolution 4o! 1. and 4o! !:altaBars ounterclaim7 Feasonable compensation at the rate of G.00 permonth as president of the company!

ISSUES1! (as the call by the H during the uly 196 "T= 'alidP

! (as :altaBar released from the obligation of the unpaid balance of hissubscription by 'irtue of H Fesolution 4os! 1. and P-! +s :altaBar entitled to compensation as president of &ingayen =ulfP

&3(%F 3KFT7 The call for payment embodied in H Fesolution 4o! 1. wasnull and 'oid for lac$ of publication! onse?uently, the complaint must bedismissed for being premature! aid resolution is 4J, insofar as it tried torelie'e :altaBar from liability, on the ground that the Fesolution was notappro'ed by all the stoc$holders of the corporation! :altaBar>s counterclaim forcompensation also dismissed!

1! 3KFT7 agrees with the lower court! The law requires that notice of anycall for the payment of unpaid subscription should be made not only

personally but also by publication.This is clear from the pro'isions ofection 0 of the orporation &aw7

%! 0! Nt1ce / ca-- /r n+a1d :cr1+t1n ,t :e e1t'er+erna--y erved upon each stoc$holder or de+1ted 1n t'e +t//1ce, postage prepaid, addressed to him at his place of residence, if$nown, and if not $nown, addressed to the place where the principaloffice of the corporation is situated! T'e nt1ce ,t a- :e+:-1'edonce a wee$ for four successi'e wee$s in some newspaperof general circulation de'oted to the publication of general newspublished at the place where the principal office of the corporation isestablished or located, and posted in some prominent place at thewor$s of the corporation if any such there be! +f there be no newspaperpublished at the place where the principal office of the corporation isestablished or located, then such notice may be published in anynewspaper of general news in the Ghilippines!

ection 0 is "A4AT3F5 as regards +:-1cat1n, using the word 8must8!The reasons for the mandatory pro'ision are )a* to assure notice to allsubscribers, and )b* to assure e?uality and uniformity in the assessment onstoc$holders!

ustice Nisher in 8The Ghilippine &aw on toc$ orporations


8/29


*ining su*scription for stoc+ of a corporation cannot *e cancelle so asto release the su*scri*er from lia*ility thereon without the consent of all

the stoc+holers or su*scri*ers! A subscription cannot be cancelled by the company, e'en under a secret or

collateral agreement for cancellation made with the subscriber at the timeof the subscription, as against persons who subse?uently subscribed or

purchased without notice of such agreement! EXCEPTIONS"

a* (here it is gi'en pursuant to a bona fide compromiseb* 3r to set off a debt due from the corporationA release, supported by consideration, will be effectual as againstdissenting stoc$holders and subse?uent and e#isting creditors! A release which might originally ha'e been held in'alid may be

sustained after a considerable lapse of time!A:7 The release claimed by :altaBar does not fall under the e#ception abo'ereferred to, because it was not gi'en pursuant to a *ona fiecompromise, or toset off a debt due from the corporation, and there was no consideration for it!

Knder ec! 2C0 )of the orpo &aw*, after a 'alid subscription to the capitalstoc$ of a corporation has been made and accepted, there can be no cancellationor release from the obligation without the consent of the corporation and all thestoc$holders F%A347 )Knder ec! 2CC* A contract of subscription is, at least in the

sense which creates as estoppel, a contract among the se'eral subscribers!Nor this reason no one of the subscribers can withdraw from the contractwithout the consent of all the others, and thereby diminish, without theuni'ersal consent, the common fund in which all ha'e ac?uired an interest!

A:7 The T found that the release attempted in H Fesolution 4o! 1. was not'alid for lac$ of a unanimous 'ote! At least . stoc$holders were a:ent fromthe meeting when said resolution was appro'ed!

-! :altaBar is 43T %4T+T&% to the compensation )as Gresident* claimed!&igayens bylaws are +&%4T as to the salary of the Gresident! (hileresolutions of the incorporators and stoc$holders pro'ide salaries for the =",secretarytreasurer and other employees, there was no pro'ision for the salary ofthe Gresident! 3ther resolutions pro'ide forper iemsto be paid to the Gresident and thedirectors of each meeting attended, G10 for the Gresident and G2 for eachdirector, which were later increased to GC and G1C, respecti'ely! 34&K+347 The Gresident and the :3 were e#pected to erve 01t'ta-ary, and that theper iemspaid to them were sufficient compensation for

their ser'ices!

34&K+347 &ower ourt decision affirmed! omplaint must be dismissedfor being premature!

M1randa v. Tar-ac R1ce M1-- C%ec 2, 19$2

&ic+ers, J. of the (hilippine SC%iway

SUMMAR!"Alberto "iranda e#ecuted a subscription agreement obligating himself topay G10,000 as subscribed capital to the Tarlac Fice "ill ompany in Cannual installments! :efore all the installments became due, "irandaassigned his property to the corporation in lieu of paying in cash andauthoriBed the officers of the company to mortgage the land as security to

solicit loans for G10,000! Gursuant to this agreement, the officers of thecompany mortgaged the land for G10,000 at the time when not all of thesubscription installments are due! (hen the company defaulted, "irandahimself arranged for an e#tension of payment and subse?uently sold theland under pacto de retro! The company ceased its operations e'en beforethe last two subscription installments became due! (hen "iranda died,his administratri# sought to reco'er the subscription paid by "iranda onbased on - arguments7 )1* the officers of the company e#ceeded theirauthority in mortgaging the land for G10,000 e'en if only G-,000 was dueat that time from "iranda based on the subscription agreement )* e'enwhen the subse?uent installments became due, "iranda was not bound topay them because the company ceased their operations )-* the company

did not compel the other stoc$holders to pay their subscription!

The ruled that the amounts paid by "iranda cannot be reco'eredanymore!

#OCTRINE"The fact that a stoc$holder agreed to pay his subscription installments on

certain fi#ed dates did not pre'ent him from authoriBing the officers as his

attorneysinfact to pay his subscription earlier than the dates fi#ed in the

subscription agreement!


9/29


The board of directors of e'ery corporation may at any time declare

unpaid subscriptions to be due and payable to the corporation and may

collect the same with interest as it may deem necessary! This power of the

directors is absolute and cannot be limited by the subscription contract,

but this does not mean that the directors may not rely on the subscription

contract if they see fit to do so! 4o call or demand is necessary when a

subscription is payable! +n such cases it is the duty of the subscriber to pay

the subscription or installment as soon as it is due, without any call or

demand, and, if he fails to do so, an action may be brought at any time!

The fact that the corporation has ceased to do business or the fact that the

other stoc$holders ha'e not been re?uired to pay for their shares does not

@ustify ordering the corporation to return the subscriptions paid in by

another stoc$holder! +f the directors ha'e failed to perform their duty with

respect to the other stoc$holders, the law pro'ides a remedy therefor!

$ACTS"Alberto "iranda e#ecuted a written contract whereby he subscribed for 100

shares of the capital stoc$ of Tarlac Fice "ill ompany, +nc! The par 'alue

of each share was G100 ma$ing his total subscription e?ual to G10,000 to be

paid on installment according to the subscription contract as follows7

3n or before eptember 1, 196G1,000

3n or before anuary 1, 19. ,000

3n or before anuary 1, 192 ,000

3n or before anuary 1, 199 ,C00

3n or before anuary 1, 19-0 ,C00

+n 19., Alberto "iranda e#ecuted a public document where he

8assigned,8 mortgaged, or transferred his parcel of land in Tarlac to the

Tarlac Fice "ill o! to pay his subscription in lieu of cash

appointed the Gresident, Jice Gresidents and Treasurer of the company

as his attorneyinfact to transfer or mortgage his land to any local or

foreign ban$ or indi'idual

o to solicit money not e#ceeding G10,000 1n accrdance 01t' t'e

:cr1+t1n cntractor

o to increase the capital of the said Tarlac Fice "ill ompany , in

order to carry out the purposes for which said firm is to be

organiBed

Gursuant to this assignment, the president and 'icepresident of the Tarlac

Fice "ill ompany, +nc! borrowed G10,000 from "ariano Tablante and as

security for the loan, they also mortgaged to him the land assigned by

"iranda!

The G10,000 obtained from "ariano Tablante was retained by the

corporation! (hen the promissory note became due, the company defaulted

and Alberto "iranda himself arranged for an e#tension of time for payment!

To meet the obligation, "iranda he sold the land under pacto de retro to

Jicente Ganlilio for G10,000, and paid "ariano Tablante! The corporation

ceased to do business from the year 192 and Alberto "iranda died in19-0!

+n this action, the administrator of the estate of Alberto "iranda sought to

reco'er the payments of the subscription made by "iranda to the

corporation based on the ff reasons

The officers of the corporation 'iolated the terms of the power of

attorney in mortgaging the land on 19. for G10,000, because the only

sum then due to the corporation was G-,000

(hen the remaining installments of the stoc$ subscription became due,

Alberto "iranda was under no obligation to pay them, because the

corporation had already ceased to do business

The corporation had ta$en no steps to compel the other stoc$holders to

pay for the shares for which they had subscribed!

ISSUE" (4 the amounts paid by "iranda to the corporation may be

reco'ered

RULIN"4o, the amounts paid by "iranda cannot be reco'ered


10/29


RATIO"

There is no ?uestion as to the 'alidity of subscription agreement! There is

also no allegation of fraud on the part of the officers!

(hen the property was mortgaged on 19. the amount due from Alberto

"iranda in accordance with the subscription agreement was only G-,000! +t

also does not appear from the e'idence that the directors called for the

payment of any subscriptions from other stoc$holders!

The fact that Alberto "iranda agreed to pay his subscription installments on

certain fi#ed dates did not pre'ent him from authoriBing the officers as his

attorneysinfact to pay his subscription earlier than the dates fi#ed in the

subscription agreement!

Argument of the "irandas administrator7 +n one paragraph of the power of

attorney it is stated that the attorneysinfact are authoriBed to mortgage theproperty in any way con'enient to them in the amount not to e#ceed

G10,000 in accorance with the su*scription contract

7 Howe'er, the phrase 8in accordance with the subscription contract8 is

followed by the words 8to increase the capital of Tarlac Fice "ill

ompany, +nc!, in order to carry out the purposes for which said firm is to

be organiBed!8 Knder the circumstances, it would be a strained construction

of the power of attorney to hold that the officers were authoriBed to

mortgage the land only for the amount then due in accordance with the

subscription agreement! +t can hardly be contended that the power of

attorney contemplated that the property should be mortgaged three times,

that is, each time that an installment became due!

+t was the intention of the parties that the property should be mortgaged

immediately for a sum not to e#ceed G10,000, not only for the purpose of

paying the subscription agreement, but also for the purpose of increasing

the capital of the corporation! This 'iew is confirmed by the subse?uent

conduct of the parties! Although the corporation retained the full amount of

the loan from "ariano Tablante, Alberto "iranda ne'er sought to reco'er

from the corporation any part of the G10,000! The mortgage was e#ecuted

on 19.I it was satisfied by Alberto "iranda on 199 and he li'ed until

19-0! +t does not appear that he e'er sought to e'ade the satisfaction of the

mortgage by alleging that his attorneysinfact e#ceeded their authority! 3n

the contrary he repaid to "ariano Tablante the amount which the officers of

the corporation had borrowed! The fact that he ne'er sought to reco'er from

the corporation the sum borrowed by the officers tends to show that he

ac?uiesced in the action ta$en by them! The phrase 8in accordance with the

subscription contract8 in the power of attorney was intended to mean 8in

pursuance of the subscription agreement8! uch phrase referred to the

obligation to pay the subscription, and not to the dates when the

installments were to be paid!

ection -2 of the orporation &aw pro'ides that the board of directors of

e'ery corporation may at any time declare due and payable to the

corporation unpaid subscriptions to the capital stoc$ and may collect thesame with interest accrued thereon or such percentage of said unpaid

subscriptions as it may deem necessary! +n the boo$ 8The Ghilippine &aw of

toc$ orporations8 by ustice Nisher7 This power of the directors is

absolute and cannot be limited by the subscription contract, but this does

not mean that the directors may not rely on the subscription contract if they

see fit to do so!

4o call or demand is necessary when a subscription is payable! +n such

cases it is the duty of the subscriber to pay the subscription or installment as

soon as it is due, without any call or demand, and, if he fails to do so, an

action may be brought at any time!

(hen this action to reco'er the payment was filed, the last of the

installments had already become payable in accordance with the

subscription agreement! This is not an action by the corporation to reco'er

on a subscription agreement, but an action by the administratri# of a

stoc$holder to reco'er what was paid in to the corporation by the

stoc$holder! The fact that the corporation has ceased to do business or the

fact that the other stoc$holders ha'e not been re?uired to pay for their


11/29


shares does not @ustify ordering the corporation to return the subscriptions

paid in by Alberto "iranda! +f the directors ha'e failed to perform their

duty with respect to the other stoc$holders, the law pro'ides a remedy

therefor!

+n &elasco 's. (oi)at7 A stoc$ subscription is a contract between the

corporation and the subscriber, and courts will enforce it for or against

eitherI that a corporation has no legal capacity to release a subscriber to its

capital stoc$ from the obligation to pay for his shares, and that any

agreement to this effect is in'alid!

+n this case, there is no allegation that Alberto "iranda cancelled his

subscription agreement, or that the corporation attempted to release him

therefrom!

#ISPOSITIVE"The corporation cannot be re?uired to return the paymentsof subscription made by the s toc$holder "iranda

#e S1-va v. A:1t1? & C. Inc!arch $1, 192$

Araullo, !!J.A.%.S. %ealino

:ased on the original case!

SUMMAR!" This case originates from a suit by Arnaldo e il'a to

en@oin AboitiB sale of e il'as unpaid shares! e il'a subscribed for6C0 AboitiB shares )GC00 ea!* but was unable to pay for C0 shares! Theorporate ecretary notified e il'a through a letter that the :oard ofirectors issued a resolution declaring the unpaid subscriptions due andpayable on "ay -1, and that unpaid subscriptions after "ay -1 would bedeclared delin?uent and ad'ertised for sale at a public auction! After nonpayment and ad'ertisement, e il'a sued with the ebu N+ to en@ointhe sale! +n@unction was granted by the N+! AboitiB sought a demurrerpredicated on the lac$ of cause of action! The N+ found for AboitiB,dismissing e il'as suit! The upheld the N+, finding that the bylawarticle cited by e il'a merely pro'ided a remedy to the corporation to

pursue against an unpaid share! The decision to pursue this remedy orthose granted to corporations by the 1906 orporation &aw is within thediscretion of the :oard of irectors, as an e#ercise of discretionary powerby the corporation as an artificial being!

#OCTRINE" )orpoI onsideration for +ssuance of haresI HowGayment %nforced*

The phrase 8Gro'ided, howe'er, that from this se'enty per cent Dof netprofit after annual li?uidationE di'idend the board of directors may deductsuch amount as it may deem fit for the payment, etc!8 can only beinterpreted to mean that the board of directors has the discretion to applythat part of the profit in a certain way!

3riginal pronouncement in Jelasco '! GoiBat7 ;The first and most specialremedy gi'en by the statute consists in permitting the corporation to putthe unpaid stoc$ for sale and dispose of it for the account of the delin?uent

subscriber! +n this case the pro'isions of sections -2 to 2, inclusi'e, ofthe orporation &aw are applicable and must be followed! The otherremedy is by action in court concerning which we find in section 9 thefollowing pro'ision7 Q4othing in this Act pre'ent the directors fromcollecting, by action in any court of proper @urisdiction, the amount due onany unpaid subscription, together with accrued interest and costs ande#penses incurred!s decision to pursue sale of unpaid shares is a

remedy granted to it by the orporation &awI in effect thee#ercise of discretionary power by the corporation as anartificial being created by law!

ii* +t seemed to the board that applying part of the profits to theunpaid shares was not to the corporate ad'antage!

b* The discretion to apply the profits lies with the board, not thestoc$holders!c* Thus, there can be no 'iolation of e il'as )stoc$holder* rights!

i* This is also a discharge of an e#ecuti'e function by the :oard!d* onse?uently, there can be no cause of action based on the facts as

alleged!

#ISPOSITIVE" ANN+F"%, costs against e il'a!

THE NATIONAL EXCHANE

CO.3 INC. v. I.4. #EXTER192#

Street, J.rissy

SUMMAR!" The 4ational %#change o! instituted in the N+ an actionto reco'er from e#ter a balance of G1C,000, the par 'alue of 1C0 sharesof stoc$ of almon, which constitutes half of his total subscription,e'idenced in writing in this form7 ;+ hereby subscribe for -00 shares of thecapital stoc$ of !! almon and ompany, payable from the firstdi'idends declared on any and all shares of said company owned by me atthe time di'idends are declared, until the full amount of this subscription

has been paid!< The issue is whether the stipulation in the subscription hasthe effect of relie'ing the subscriber from personal liability in an action toreco'er the 'alue of the shares! The affirmed the N+ in ruling thatsuch stipulation is illegal for it obligates the subscriber to pay nothing forthe shares e#cept as di'idends may accrue upon the stoc$! +n thecontingency that di'idends are not paid, there is no liability at all! This is adiscrimination in fa'or of the particular subscriber!

#OCTRINE" As a general rule, an agreement between a corporation anda particular subscriber, by which the subscription is not to be payable, or


14/29


is to be payable in part only, whether it is for the purpose of pretendingthat the stoc$ is really greater than it is, or for the purpose of pre'entingthe predominance of certain stoc$holders, or for any other purpose, isillegal and 'oid as in fraud of other stoc$holders or creditors or both, andcannot be either enforced by the subscriber or interposed as a defense in

an action on the subscription!

$ACTS" 3n Aug! 10, 1919, +!:! e#ter )defendant* signed a writtensubscription to the corporate stoc$ of !! almon o! in the followingform7 ;+ hereby subscribe for -00 shares of the capital stoc$ of !! almonand ompany, payable from the first di'idends declared on any and allshares of said company owned by me at the time di'idends are declared,until the full amount of this subscription has been paid!s@udgment dismissing the petition for manamusis affirmed! osts againstthe petitionerappellant!


20/29


NIELSON & COMPAN! v.LEPANTO CONSOLI#ATE#

MININecember 2, 1962

Oaldi'ar, !&uisa

K""AF57 &epanto and 4ielson entered into a management contractwherein 4ielson was to manage the mining properties of &epanto and4ielson would recei'e 10M of any di'idends declared and paid, when andas paid, 4ielson should be paid 10M of the stoc$ di'idends declared by&epanto during the period of e#tension of the contract! , in its firstdecision, ordered &epanto to deli'er to 4ielson fruits and stoc$ di'idendsthat accrued to it! 3n mr, re'ersed itself!

3TF+4%7Knder ection 16 of the orporation &aw stoc$ di'idends can not

be issued to a person who is not a stoc$holder in payment of ser'icesrendered!

A corporation may legally issue shares of stoc$ in considerationof ser'ices rendered to it by a person not a stoc$holder, or in payment ofits indebtedness! A share of stoc$ issued to pay for ser'ices rendered ise?ui'alent to a stoc$ issued in e#change of property, because ser'ices ise?ui'alent to property! Howe'er, it is the shares of stoc$ that areoriginally issued by the corporation and forming part of the capital thatcan be e#changed for cash or ser'ices rendered, or property! A share ofstoc$ coming from stoc$ di'idends declared cannot be issued to one whois not a stoc$holder of a corporation!

NAT&epanto is see$ing reconsideration of a ec! 1., 1966 decision

decided against it and in fa'or of 4ielson!&epanto and 4ielson entered into a management contract wherein

4ielson was to manage and operate the mining properties and mill on behalfand for the account of &epanto for a certain number of years! &epantoterminated its contract with 4ielson two years early than what wasstipulated in their management contract! &epanto too$ o'er and assumed

e#clusi'e management of its properties!the % 1. %++34 held, among others, that &epanto was

liable to pay 4ielson compensation as pre'iously agreed upon in theirmanagement contract! 4ielson would recei'e 10M of any di'idendsdeclared and paid, when and as paid, 4ielson should be paid 10M of thestoc$ di'idends declared by &epanto during the period of e#tension of thecontract! "ore particularly, +t is not denied that on 4o'ember 2, 199,&epanto declared stoc$ di'idends worth G1,000,000!00I and on August ,19C0, it declared stoc$ di'idends worth G,000,000!00*! +n other words,during the period of e#tension &epanto had declared stoc$ di'idends worthG-,000,000!00! Hence, 4ielson is entitled to recei'e l0M of the stoc$di'idends declared, or shares of stoc$ worth G-00,000!00 at the par 'alue ofG0!10 per share! &epanto was ordered to issue and deli'er to 4ielson thoseshares of stoc$s as well as all the fruits or di'idends that accrued to saidshares!

+K% (34 it was correct for to order &epanto to pay 4ielsonscompensation with stoc$ di'idends no

FAT+3&epanto7 the payment to 4ielson of stoc$ di'idends as compensation for itsser'ices under the management contract is a 'iolation of the orporation&aw

court7There is merit in the contention of &epanto!ection 16 of the corporation law, in part, says7 ; 4o corporation

organiBed under this Act shall create or issue bills, notes or other e'idenceof debt, for circulation as money, and no corporation shall issue stoc$ orbonds e#cept in e#change for actual cash paid to the corporation or for7 )1*property actually recei'ed by it at a fair 'aluation e?ual to the par or issued'alue of the stoc$ or bonds so issuedI and in case of disagreement as to their'alue, the same shall be presumed to be the assessed 'alue or the 'alueappearing in in'oices or other commercial documents, as the case may beIand the burden or proof that the real present 'alue of the property is greaterthan the assessed 'alueor 'alue appearing in in'oices or other commercialdocuments, as the case may be, shall be upon the corporation, or for )*profits earned by it but not distributed among its stoc$holders or membersIGro'ided, howe'er, That no stoc$ or bond di'idend shall be issued withoutthe appro'al of stoc$holders representing not less than twothirds of all


21/29


stoc$ then outstanding and entitled to 'ote at a general meeting of thecorporation or at a special meeting duly called for the purpose! ### ######4o corporation shall ma$e or declare any di'idend e#cept from thesurplus profits arising from its business, or di'ide or distribute its capitalstoc$ or property other than actual profits among its members orstoc$holders until after the payment of its debts and the termination of itse#istence by limitation or lawful dissolution7 Gro'ided, That ban$ing,sa'ings and loan, and trust corporations may recei'e deposits and issuecertificates of deposit, chec$s, drafts, and bills of e#change, and the li$e inthe transaction of the ordinary business of ban$ing, sa'ings and loan, andtrust corporations!s accumulated profits ha'ebeen capitaliBed instead of distributed to the stoc$holders or retained assurplus a'ailable for distribution, in money or $ind, should opportunityoffer! Nar from being a realiBation of profits for the s toc$holder, it tends

rather to postpone said realiBation, in that the fund represented by the newstoc$ has been transferred from surplus to assets and no longer a'ailable foractual distribution! Thus, it is apparent that stoc$ di'idends are issued onlyto stoc$holders! This is so because only stoc$holders are entitled todi'idends! They are the only ones who ha'e a right to a proportional sharein that part of the surplus which is declared as di'idends!

+t is 3ur considered 'iew, therefore, that under ection 16 of theorporation &aw stoc$ di'idends can not be issued to a person who is not astoc$holder in payment of ser'ices rendered! And so, in the case at bar4ielson can not be paid in shares of stoc$ which form part of the stoc$di'idends of &epanto for ser'ices it rendered under the managementcontract! (e sustain the contention of &epanto that the understandingbetween &epanto and 4ielson was simply to ma$e the cash 'alue of thestoc$ di'idends declared as the basis for determining the amount ofcompensation that should be paid to 4ielson, in the proportion of 10M ofthe cash 'alue of the stoc$ di'idends declared!

the management contract stated that7 8The hairman stated that hebelie'ed that it would be better to tie the computation of the 10Mparticipation of 4ielson ompany, +nc!, to the di'idend, because 4ielsonwill then be able to definitely compute its net participation by the amount ofthe di'idends declared8! it can be gleaned from this statement that theintention of &epanto, as e#pressed by its hairman ! A! e(itt, was toma$e the 'alue of the di'idends declared U whether the di'idends were incash or in stoc$ U as the basis for determining the amount of compensationthat should be paid to 4ielson, in the proportion of 10M of the cash 'alue ofthe di'idends so declared! +t does not mean, howe'er, that the compensationof 4ielson would be ta$en from the amount actually declared as cashdi'idend to be distributed to the stoc$holder, nor from the shares of stoc$sto be issued to the stoc$holders as stoc$ di'idends, but from the other assetsor funds of the corporation which are not burdened by the di'idends thusdeclared!

+G3+T+J% G3FT+34 4ielson is entitled to payment by &epanto ofG-00,000!00 in cash, which is e?ui'alent to 10M of the money 'alue of thestoc$ di'idends worth G-,000,000!00 whichwere declared on 4o'ember 2,199 and on August 0, 19C0, with interest thereon at the rate of 6M fromNebruary 6, 19C2!


22/29


4ERS 4ROA#CASTIN CO.v. CRAUMER3 et a-.

!ay , 19-Sterns, J

3uciano, 6oel Christian O.

SUMMAR!"efendants in this case were incorporators and directors of:er$s :roadcasting who declared and paid out di'idends in 19 for atotal amount of /1-,000! These di'idends were declared on the basis ofearning of the company during, which, together with the A&&%=%surplus at the end of 19-, made a surplus in earnings of /1,2CC!.! Thee#istence of the surplus of assets depended on the inclusion in the assetsof the ;writeups< of /6,000 which still remained in the balance sheet! +fthe ;writeups< account was eliminated, there is 43 KFG&K, but adeficiency of /-,C!06! These ;writeups< represented ;increases in the'aluations of fi#ed assets of the company!< The new directors of the

corporation sought to reco'er the di'idends paid alleging that it was paidout unlawfully since there really was no surplus! The agreed and heldthe defendants liable to return the di'idends paid! The writeups of/6,000 represented an unrealiBed appreciation in the 'alue of thecompanys fi#ed assets Thus, their inclusion in determining the e#istenceof a surplus from which di'idends might be declared was K4&A(NK&

#OCTRINE" apital of a corporation must not be impaired in anymanner, e#cept, of course, as such an impairment may in'oluntary occurthrough losses resulting from the operation of companys business! +t isillegal to declare and pay di'idends from other than a surplus consisting ofan e#cess in 'alue of assets o'er the aggregate of the liabilities and the

issued capital stoc$!Feason behind prohibition7 )1* To afford a margin of protection

for creditors in 'iew of the limited liability of the shareholders, and also)* To protect the interest of the shareholders themsel'es by preser'ingthe capital so that the purposes of which the corporation was formed maybe carried out! The difficulty lies in the computation of the surplus from whichdi'idends may properly be declared and paid! +n this regard, one rule hasbeen generally declared and paid7 uch a surplus must be a bona fide andnot an artificial or fictitious one! +t must be founded upon ATKA&

earnings or profits and not dependent for its e#istence upon a theoreticalestimate of an appreciation in the 'alue of the assets!

$ACTS" The defendants )raumer and other unnamed persons* and&andis incorporated and organiBed :er$s :roadcasting ompany for thepurpose of constructing and operating a radio broadcasting station!

AuthoriBed capital stoc$ was /100,000 consisting of 1,000 shares,each with /100 par 'alue! toc$ was issued to the incorporators and theybecame the stoc$holders of the ompany!

According to the boo$s, the stoc$ was fully paid for by the receiptfrom each of the shareholders of /C,000 and by the fi#ing of a 'alue of/20,000 upon an asset named ;Nranchise and Gromotion %#pense!< A yearlater, the latter item was written off and in its place were substantiatedentries of7

1! /C0,000 as amount for ;ue on Knpaid toc$ ubscriptions< and! A total of /-0,000 consisting of ;writeups< or increases in the

'aluations of fi#ed assets of the company

As to the /C0,000 Knpaid ubscriptions, each stoc$holder paid /,00,thus reducing that item to /--,00! A year later, it was cancelled and in lieuthereof an item in the same amount was entered as an asset designated as;=ood (ill and Gromotion %#pense! inchoate right to earned di'idendsattaches! The di'idends on the noncumulati'e preferred stoc$ areQcumulati'e to the e#tent of net profits actually earned and a'ailable for thelawful payment of di'idends, but withheld from the nonVcumulati'epreferred stoc$holders and retained in the business!

The actual primary test of applicability )cumulati'e di'idends* is 0'et'err nt t'ere 0ere3 1n t'e year 1n 0'1c' d1v1dend 0ere nt dec-ared3net +r/1t ava1-a:-e /r t'e -a0/- dec-arat1n and +ay,ent /d1v1dend3 :t 01t''e-d /r, t'e nnKc,-at1ve +re/erred tc'-derand reta1ned 1n t'e :1ne.

Net Pr/1t v. Net Earn1ng4et profits connotes the clear pecuniary gain remaining after deductingfrom the gross earnings of the business the e#penses incurred in its conduct,the losses sustained in its prosecution, and the capital in'ested! +t is aprere?uisite to the e#istence of net profits that the assets of a corporatione#ceed the liabilities, including the liability on the capital stoc$! (here thecapital is impaired, annual net earnings, if insufficient to offset theimpairment, do not constitute net profits! 4et profits is not synonymouswith the term annual net earnings! Annual net earnings may be producti'eof net profits, or, as in the instant case, reducti'e of the deficit!

CA4"There were, in 19-C, 19-6, and 19-., no net profits to which theinchoate right to di'idends could ha'e attached! There was, in each of thesaid years, a substantial deficit which greatly e#ceeded the annual netearnings of the corresponding year, and, to the reduction of which theannual net earnings were applied! +t is manifest that the annual net earningsof each of the said years resulted, not in a profit, but in a reduction of thedeficit! There was in each of the said years no source from which di'idendscould ha'e been paidI the payment of di'idends under the circumstanceswould ha'e been unlawful!

+n ast +ron Gipe case, it was stated7 Q3ur statute forbids the payment ofdi'idends e#cept from surplus or >from the net profits arising from thebusiness of the corporation!

4o di'idends out of net profits are earned until there is a balance of assetso'er liabilities, arising from the business of the corporation! Though thecompany is /C0,000 better off at the close of 19-2 than at the beginning, yetthere will be no net profits at the end of the year, but only a smaller deficit!

LICH"Qnet profitsQ is synonymous with Qannual net earningsQ, and that indetermining the net profits for the years in ?uestion, the losses of precedingyears may be disregarded!

COURT"This theory would permit what the statute e#pressly prohibits, thepayment of di'idends out of annual net earnings, e'en though such paymentresulted in an impairment of capital!

LICH7 argues, in the alternati'e, that in ast +ron Gipe cases, the nonVcumulati'e preferred stoc$holders> inchoate right to di'idends attaches tothe annual net earnings, as distinguished from net profits, and that the netprofits of the succeeding years are chargeable with the payment ofdi'idends to the nonVcumulati'e preferred stoc$holders to the e#tent of suchearnings!

COURT7 This argument is untenable! +t e#tends the doctrine beyond itsclear intendment and engrafts upon the nonVcumulati'e preferred stoc$ apreference peculiar to cumulati'e preferred stoc$!

+f the annual net earnings of a corporation are applied to legitimatecorporate purposes, such as payment of debts, reduction of deficits, andrestoration of impaired capital, the right of nonVcumulati'e preferredstoc$holders to the payment of di'idends is lost! +f the annual net earningsare applied against prior losses and are thereby completely absorbed, thereare no net profits from which di'idends may be lawfully paid or to whichthe inchoate right to di'idends may attach!

The payment of di'idends from annual net earnings, when the liabilities of acorporation e#ceed the assets, would be in derogation of the rights of


27/29


creditors! The payment of di'idends while debts accrue would be contrary,not only to sound business practice, but to the legislati'e policy!

LICH"in determining whether or not there were net profits a'ailable forthe payment of di'idends in the years in ?uestion, the liability on the capitalstoc$ should be diminished in an amount e?ui'alent to the 'alue of theshares of stoc$ issued as stoc$ di'idends! The capital liability thus createdmay be disregarded!

COURT" contention is not sound! A stoc$ di'idend is a con'ersion ofsurplus or undi'ided profits into capital stoc$, which is distributed amongthe stoc$holders in lieu of cash! The liability of the corporation on thecapital stoc$, issued as a stoc$ di'idend in lieu of cash, cannot bedisregardedI in fact, it represents in'ested capital drawn from surplus inwhich stoc$holders had an interest!

#1+1t1ve" +n fa'or of K Fubber!

eg' v. St. Pa- M1- C.April 1-, 19$9

Supreme Court of !innesotaJerome !arcelo

SUMMAR!" A suit was instituted by the stoc$holders of the t! Gaul"il$ ompany against the company! The suit was brought for the purposeof compelling the declaration of a cash di'idend! Getitioners argue thatthose in charge of corporate affairs are wrongfully and needlesslywithholding profits a'ailable and conspiring to retain them for their

benefit and to the pre@udice of the ma@ority! Crt7 onsidering thatcapital and surplus of the company amounted to /-C,91!.- for the year19-6, as well as other factors )its lac$ of mortgagesliens or othersubstantial indebtedness, no immediate e#pansion plans, etc!* 3 the issuanceof cash di'idends is proper!

#OCTRINE" The determination of whether or not di'idends should bedeclared is essentially a matter of internal management! +t is primarily forthe corporate directors in their sound discretion to decide! :ut their powersare not unlimited and @udicial re'iew should be secured when abuses

contra'ening shareholder rights manifest themsel'es! 3rdinarily, courtswill not compel a di'idend unless the directors act fraudulently, un@ustly,or unreasonably so as to impair the rights of complaining stoc$holders totheir @ust proportion of corporate profit! The mere fact that a largecorporate surplus e#ists is not enough to warrant e?uitable inter'ention!Kltimately, the test resol'es itself into an e#amination of the good faithand reasonableness of the policy of retaining that which otherwise isa'ailable for di'idends!

$ACTS" A Qrepresentati'e suit was instituted by ames Leough as trusteeand G Leough, on behalf of themsel'es and all other stoc$holders of the t!Gaul "il$ ompany! This suit was brought for the purpose of compellingthe declaration of a cash di'idend! They are demanding the right to ha'e acash di'idend declared upon the premise that those in charge of corporateaffairs )Fyan family, Hanson family* are wrongfully and needlesslywithholding profits a'ailable and conspiring to retain them for their benefit

and to the pre@udice of the ma@ority! The Fyan and Hanson families wereallegedly doing this by applying the surplus a'ailable for di'idends to theirsalaries and e#pense accounts as officersdirectors which are e#orbitant andbeyond their worth! Nor their part, respondents claim that the capitaliBationwas for the purpose of a'oiding se'eral federal ta#es upon undistributedsurplus reported by newspapers to be in the offing!

)The remaining portion of the NAT part @ust shows the companyaccounts the ourt loo$ed at to ma$e a decision* The t! Gaul "il$ompany was pre'iously operated as a partnership which was laterincorporated in 191.! +ts business assets and liabilities upon incorporationwere e#changed for C9. shares at /100 par 'alue! The original authoriBed

capital was /100,000 with the right to engage in business when paidVincapital amounted to /C0,000! These C9. shares represent the only stoc$sissued until a 19-6 stoc$ di'idend issue! +n 4o'ember 19-0, the outstandingcapital stoc$ was reduced to /1,00 when the corporation purchased fromG Leough 12C of his shares! +n 19-6, the authoriBed capital stoc$ wasincreased to /-00,000 by amendment! A 6to1 stoc$ di'idend wasdeclared, and the amount necessary to co'er the issued shares ),. at/100 par or /.,000* was transferred from the surplus account to thecapital account! This di'idend increased the number of outstanding sharesto ,22, ma$ing a total capital of /22,00!


28/29


Nrom 1C ecember 19 to 3ctober 19-C, /169,.0 was distributed tostoc$holders representing a --CM return! +n addition, there was the stoc$di'idend and a cash di'idend of 10M on all shares, new and old!

As of -1 ecember 19-6, the corporation had in'estments of /12,162!.,including /99,261 in go'ernment bonds, and /16,00- in the common stoc$of a wholly owned subsidiary )outh t! Gaul airies, +nc!*!

The ca+1ta- AN# r+- for 19-- was /-6-,1-C!9I for 19-C it was

/-2,-!1I for 19-6 it was />G;3>8.9G! )not in the case surplus orcapital surplus, basically is the amount a'ailable for distribution as

di'idends! businessdictionary!comapital surplus is stoc$holders e?uityin e#cess of par 'alue of common stoc$, representing the e#cessof assetso'er liabilities*

Nurthermore, the record does not disclose any mortgages or liens against thecorporate property or any other substantial indebtedness! The sales arepredominantly on a cash basis! The merchandise in'entory is small! Thereha'e been sufficient accounts set up to co'er depletion and obsolescence!The buildings, plant and e?uipment are ade?uate for the business and ingood condition! The union scale of wages is paid!

TC" The trial court found that /-0,061!6 capital and surplus wassufficient and held that all sums in e#cess were unreasonable andconstituted a Q'iolation of the fiduciary relation e#isting between theofficers directors and its stoc$holders and is fraudulent, oppressi'e,unreasonable, and un@ust! A di'idend was ordered totalling D8G83>;


29/29


#ISPOSITIVE" Trial ourt order affirmed!

corpo triplex shoe

Documents