Corpo Subscription Contract Cases

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SUBSCRIPTION CONTRACT

G.R. No. L-28120 November 25, 1976

RICARDO A. NAVA, petitioner-appellant.vs.

PEERS MARKETING CORPORATION, RENATO R. CUSI and AMPARO CUSI, respondents-appellees.

Rolando M. Medalla, for appellant.

Jose Y. Montalvo, for appellees.

AQUINO, J:

This is a mandamus case, Teofilo Po as an incorporator subscribed to eighty shares of Peers

Marketing Corporation at one hundred pesos a share or a total par value of eight thousand pesos.Po paid two thousand pesos or twenty-five percent of the amount of his subscription. No certificateof stock was issued to him or, for that matter, to any incorporator, subscriber or stockholder.

On April 2, 1966 Po sold to Ricardo A. Nava for two thousand pesos twenty of his eighty shares. Inthe deed of sale Po represented that he was "the absolute and registered owner of twenty shares"of Peers Marketing Corporation.

Nava requested the officers of the corporation to register the sale in the books of the corporation.The request was denied because Po has not paid fully the amount of his subscription. Nava wasinformed that Po was delinquent in the payment of the balance due on his subscription and that thecorporation had a claim on his entire subscrip tion of eighty shares which included the twenty sharesthat had been sold to Nava.

On December 21, 1966 Nava filed this mandamus action in the Court of First Instance of NegrosOccidental, Bacolod City Branch to compel the corporation and Renato R. Cusi and Amparo Cusi, itsexecutive vice-president and secretary, respectively, to register the said twenty shares in Nava'sname in the corporation's transfer book.

The respondents in their answer pleaded the defense that no shares of stock against which thecorporation holds an unpaid claim are transferable in the books of the corporation.

After hearing, the trial court dismissed the petition. Nava appealed on the ground that the decision"is contrary to law ". His sole assignment of error is that the trial court erred in applying the ruling inFua Cun vs. Summers and China Banking Corporation, 44 Phil. 705 to justify respondents' refusal inregistering the twenty shares in Nava's name in the books of the corporation.

The rule enunciated in the Fua Cun case is that payment of one-half of the subscription does notentitle the subscriber to a certificate of stock for one-half of the number of shares subscribed.

Appellant Nava contends that the Fua Cun case was decided under section 36 of the CorporationLaw which provides that "no certificate of stock shall be issued to a subscriber as fully paid up untilthe full par value thereof has been paid by him to the corporation". Section 36 was amended by ActNo. 3518. It is now section 37. Section 37 provides that "no certificate of stock shall be issued to asubscriber as fully paid up until the full par value thereof, or the full subscription in case of no parstock, has been paid by him to the corporation".

The issue is whether the officers of Peers Marketing Corporation can be compelled by mandamus toenter in its stock and transfer book the sale made by Po to Nava of the twenty shares forming partof Po's subscription of eighty shares, wi th a total par value of P8,000 and for which Po had paid onlyP2,000, it being admitted that the corporation has an unpaid claim of P6,000 as the balance due onPo's subscription and that the twenty shares are not covered by any stock certificate.

Apparently, no provision of the by-laws of the corporation covers that situation. The parties did notbother to submit in evidence the by-laws nor invoke any of its provisions. The corporation caninclude in its by-laws rules, not inconsistent with law, governing the transfer of its shares of stock(Sec. 137 , Act No. 1459; Fleischer vs. Botica Nolasco Co., 47 Phil. 583, 589).

We hold that the transfer made by Po to Nava is not the "alienation, sale, or transfer of stock" thatis supposed to be recorded in the stock and transfer book, as contemplated in section 52 of the

Corporation Law.

As a rule, the shares which may be alienated are those which are covered by certificates of stock, asshown in the following provisions of the Corporation Law and as intimated in Hager vs. Bryan, 19Phil. 138 (overruling the decision in Hager vs. Bryan, 21 Phil. 523. See 19 Phil. 616, notes, andHodges vs. Lezama, 14 SCRA 1030).

SEC. 35. The capital stock of stock corporations shall be divided into shares forwhich certificates signed by the president or the vice-president, countersignedby the secretary or clerk and sealed with the seal of the corporation, shall beissued in accordance with the by-laws. Shares of stock so issued are personalproperty and may be transferred by delivery of the certificate indorsed by theowner or his attorney in fact or other person legally authorized to make thetransfer. No transfer, however, shall be valid, except as between the, parties,

until the transfer is entered and noted upon the books of the corporation so asto show the names of the parties to the transaction, the date of the t ransfer,the number of the certificate , and the number of shares transferred.

No share of stock against which the corporation holds any unpaid claim shall betransferable on the books of the corporation.

SEC. 36. (re voting trust agreement) ...

The certificates of stock so transferred shall be surrendered and cancelled, andnew certificates therefor issued to such person or persons, or corporation, assuch trustee or trustees, in which new certificates it shall appear that they areissued pursuant to said agreement.

xxx xxx xxx



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(Emphasis supplied).

(In the case of nonstock corporations a membership certificate is usually issued. Lee E. Won vs.Wack Wack Golf & Country Club, Inc., 104 Phil. 466; Wack Wack Golf & Country Club, Inc. vs. Won,L-23851, March 26, 1976, 70 SCRA 165).

As prescribed in section 35, shares of stock may be transferred by delivery to the transferee of thecertificate properly indorsed. "Title may be vested in the transferee by delivery of the ce rtificate witha written assignment or indorsement thereof" (18 C.J.S. 928). There should be compliance with themode of transfer prescribed by law (18 C.J.S. 930).

The usual practice is for the stockholder to sign the form on the back of the stock certificate. Thecertificate may thereafter be transferred from one person to another. If the holder of the certificatedesires to assume the legal rights of a shareholder to enable him to vote at corporate elections andto receive dividends, he fills up the blanks in the form by inserting his own name as transferee.Then he delivers the certificate to the sec retary of the corporation so that the transfer may beentered in the corporation's books. The certificate is then surrendered and a new one issued to thetransferee. (Hager vs. Bryan , 19 Phil. 138, 143-4).

That procedure cannot be followed in the instant case because, as already noted, the twenty shares

in question are not covered by any certificate of stock in Po's name. Moreover, the corporation has aclaim on the said shares for the unpaid balance of Po's subscription. A stock subscription is asubsisting liability from the time the subscription is made. The subscriber is as much bound to payhis subscription as he would be to pay any other debt. The right of the corporation to demandpayment is no less incontestable. (Velasco vs. Poizat, 37 Phil. 802; Lumanlan vs. Cura, 59 Phil. 746).

A corporation cannot release an original subscriber from paying for his shares without a valuableconsideration (Philippine National Bank vs. Bitulok Sawmill, Inc.,L-24177-85, June 29, 1968, 23 SCRA 1366) or without the unanimous consent of the stockholders(Lingayen Gulf Electric Power Co., Inc. vs. Baltazar, 93 Phil 404).

Under the facts of this case, there i s no clear legal duty on the part of the officers of the corporationto register the twenty shares in Nava's name, Hence, there is no cause of action for mandamus .

Nava argues that under section 37 a certificate of s tock may be issued for shares the par value ofwhich have already been paid for although the entire subscription has not been fully paid. Hecontends that Peers Marketing Corporation should issue a certificate of stock for the twenty shares,notwithstanding that Po had not paid fully his subscription for the eighty shares, because section 37requires full payment for the subscription, as a condition precedent for the issuance of the certificateof stock, only in the case of no par stock.

Nava relies on Baltazar v Lingayen Gulf Electric Power Co., Inc., L-16236-38, June 30, 1965, 14SCRA 522, where it was held that section 37 "requires as a condition before a shareholder can votehis shares that his full subscription be paid in the case of no par value stock ; and in case of stockcorporation with par value, the stockholder can vote the shares fully paid by him only, irrespectiveof the unpaid delinquent shares".

There is no parallelism between this case and the Baltazar case. It is noteworthy that inthe Baltazar case the stockholder, an incorporator, was the holder of a certificate of stock for theshares the par value of which had been paid by him. The issue was whether the said shares had

voting rights although the incorporator had not paid fully the total amount of his subscription. Thatis not the issue in this case.

In the Baltazar case, it was held that where a stockholder subscribed to a certain number of shareswith par value and he made a partial payment and was issued a certificate for the shares covered byhis partial payment, he is entitled to vote the said shares, although he has not paid the balance ofhis subscription and a call or demand had been made for the payment of the par value of the

delinquent shares.

As already stressed, in this case no stock certificate was issued to Po. Without stock certificate,which is the evidence of ownership of corporate stock, the assignment of corporate shares iseffective only between the parties to the transaction (Davis vs. Wachter, 140 So. 361).

The delivery of the stock certificate, which represents the shares to be alienated , is essential for theprotection of both the corporation and its s tockholders (Smallwood vs. Moretti, 128 So. 2d 628).

In view of the foregoing considerations, the trial court's judgment di smissing the petitionfor mandamus is affirmed. Costs against the petitioner-appellant.

SO ORDERED.

Fernando (Chairman), Barredo, Antonio and Concepcion, Jr., JJ., concur.

G.R. No. 126891 August 5, 1998

LIM TAY, petitioner,vs.COURT OF APPEALS, GO FAY AND CO. INC., SY GUIOK, and THE ESTATE OF ALFONSOLIM, respondents.

PANGANIBAN,J.:

The duty of a corporate secretary to record transfers of stocks is ministerial. However, he cannot becompelled to do so when the transferee's title to said shares has no prima facie validity or isuncertain. More specifically, a pledgor, prior to foreclosure and sale, does not acquire ownershiprights over the pledged shares and thus cannot compel the corporate secretary to record his allegedownership of such shares on the basis merely of the contract of pledge. Similarly, the SEC does notacquire jurisdiction over a dispute when a party's claim to being a shareholder is, on the face of thecomplaint, invalid or inadequate or is otherwise negated by the very allegations of such complaint.Mandamus will not issue to establish a right, but only to enforce one that is already established.

Statement of the Case



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There are the principles, used by this Court in resolving this Petition for Review on Certiorari beforeus, assailing the October 24, 1996 Decision 1 of the Court of Appeals 2 in CA-GR SP No. 40832, thedispositive portion of which reads:

IN THE LIGHT OF ALL THE FOREGOING, the Petition at bench i s DENIED DUECOURSE and is hereby DISMISSED. With costs against the [p]etitioner. 3

By the foregoing disposition, the Court of Appeals effectively affirmed the March 7, 1996Decision 4 of the Securities and Exchange Commission (SEC) en banc :

WHEREFORE, in view of all the foregoing, judgment is hereby rendereddismissing the appeal on the ground that mandamus will only issue upon a clearshowing of ownership over the assailed shares of stock, [t]he determination ofwhich, on the basis of the foregoing facts, is within the jurisdiction of theregular courts and not with the SEC. 5

The SEC en banc upheld the August 16, 1993 Decis ion 6 of SEC Hearing Officer Rolando C.Malabonga, which dismissed the action for mandamus filed by petitioner.

The Facts

As found by the Court of Appeals, the facts of the case are as follows:

. . . On January 8, 1980, Respondent-Appellee Sy Guiok secured a loan from the[p]etitioner in the amount of P40,000 payable within six (6) months. To securethe payment of the aforesaid loan and interest thereon, Respondent Guiokexecuted a Contract of Pledge in favor of the [p]etitioner whereby he p ledgedhis three hundred (300) shares of stock in the Go Fay & Company Inc.,Respondent Corporation, for brevity's sake. Respondent Guiok obliged himselfto pay interest on said loan at the rate of 10% per annum from the date of saidcontract of pledge. On the same date, Alfonso Sy Lim secured a loan from the[p]etitioner in the amount of P40,000 payable in six (6) months. To secure thepayment of his loan, Sy Lim executed a "Contract of Pledge" covering his three

hundred (300) shares of stock in Respondent Corporation. Under said contract,Sy Lim obliged himself to pay interest on his loan at the rate of 10% per annumfrom the date of the execution of said contract.

Under said "Contracts of Pledge," Respondent[s] Guiok and Sy Limcovenanted, inter alia , that:

3. In the event of the failure of the PLEDGOR to pay theamount within a period of six (6) months from the datehereof, the PLEDGEE is hereby authorized to foreclose thepledge upon the said shares of stock hereby created byselling the same at public or private sale with or withoutnotice to the PLEDGOR, at which sale the PLEDGEE may bethe purchaser at his option; and the PLEDGEE is herebyauthorized and empowered at his option to transfer thesaid shares of stock on the books of the corporation to hisown name and to hold the certificate issued in lieu thereof

under the terms of this pledge, and to sell the said sharesto issue to him and to apply the proceeds of the sale to thepayment of the said sum and interest, in the mannerhereinabove provided;

4. In the event of the foreclosure of this p ledge and thesale of the pledged certificate, any surplus remaining in the

hands of the PLEDGEE after the payment of the said sumand interest, and the expenses, if any, connected wi th theforeclosure sale, shall be paid by the PLEDGEE to thePLEDGOR;

5. Upon payment of the said amount and interest in full,the PLEDGEE will, on demand of the PLEDGOR, redeliver tohim the said shares of stock by surrendering the certificatedelivered to him by the PLEDGOR or by retransferring eachshare to the PLEDGOR, in the event that the PLEDGEE,under the option hereby granted, shall have caused suchshares to be transferred to him upon the books of theissuing company."(idem , supra )

Respondent Guiok and Sy Lim endorsed their respective shares of stock in blankand delivered the same to the [p]etitioner. 7

However, Respondent Guiok and Sy Lim failed to pay their respective loans andthe accrued interests thereon to the [p]etitioner. In October, 1990, the[p]etitioner filed a "Petition for Mandamus" against Respondent Corporation,with the SEC entitled "Lim Tay versus Go Fay & Company. Inc., SEC Case No.03894", praying that:

PRAYER

WHEREFORE, premises considered, it is respectfully prayedthat an order be issued di recting the corporate secretary of[R]espondent Go Fay & Co., Inc. to register the stocktransfers and issue new certificates in favor of Lim Tay. It islikewise prayed that [R]espondent Go Fay & Co., Inc[.] beordered to pay all dividends due and unclaimed on the saidcertificates to [P]laintiff Lim Tay.

Plaintiff further prays for such other relief just and equitablein the premises. ( page 34 ,Rollo )

The [p]etitioner alleged, inter alia , in his Petition that the controversy betweenhim as stockholder and the Respondent Corporation was intra-corporate in viewof the obstinate refusal of the corporate secretary of Respondent Corporation torecord the transfer of the shares of stock of Respondent Guiok and Sy Lim in

favor of and under the name of the [p]etitioner and to issue new certificates ofstock to the [p]etitioner.



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The Respondent Corporation filed its Answer to the Complaint and alleged, as Affirmative Defense, that:

AFFIRMATIVE DEFENSE

7. Respondent repleads and incorporates herein byreference the foregoing allegations.

8. The Complaint states no cause of action against[r]espondent.

9. Complainant is not a stockholder of [r]espondent. Hence,the Honorable Commission has no jurisdiction to enter thepresent controversy since their [sic ] is no intracorporaterelationship between complainant and respondent.

10. Granting arguendo that a pledge was constituted overthe shareholdings of Sy Guiok in favor of the complainantand that the former defaulted in the payment of hisobligations to the latter, the same did not automaticallyvest [i]n complainant ownership of the pledged shares.( pace 37 , Rollo )

In the interim, Sy Lim died. Respondents Guiok and the Intestate Estate of Alfonso Sy Lim, represented by Conchita Lim, filed their Answer-In-Interventionwith the SEC alleging, inter alia , that:

xxx xxx xxx

3. Deny specifically the allegation under paragraph 5 of theComplaint that, failure to pay the loan within the contractperiod automatically foreclosed the pledged shares ofstocks and that the share of stocks are automaticallypurchased by the plaintiff, for being false and distorted, thetruth being that pursuant to the [sic ] paragraph 3 of thecontract of pledges, Annexes "A" and "B", it is clear thatupon failure to pay the amount within the stipulated period,the pledgee is authorized to foreclose the pledge andthereafter, to sell the same to sati sfy the loan. [H]owever,to this point in time, plaintiff has not performed anyoperative act of foreclosing the shares of stocks of[i]ntervenors in accordance with the Chattel Mortgage law,[n]either was there any sale of stocks — by way of publicor private auction — made after foreclosure in favor of theplaintiff to speak about, and therefore, the respondentcompany could not be force[d] to [sic ] by way ofmandamus, to transfer the subject shares of stocks from

the name of your [i]ntervenors to that of the plaintiff in theabsence of clear and legal basis for such;

4. DENY specifically the allegations under paragraphs 6, 7and 8 of the complaint as to the existence of the allegedintracorporate dispute between plaintiff and company forbeing without proper and legal basis. In the first place,plaintiff is not a stockholder of the respondent corporation;there was no foreclosure of shares executed in accordancewith the Chattel Mortgage Law whatsoever; there were no

sales consummated that would transfer to the plaintiff thesubject shares of stocks and therefore, any demand totransfer the shares of stocks to the name of the plaintiffhas no legal basis. In the second place, [i]ntervenors hadbeen in the past negotiating possible compromise and atthe same time, had tendered payment of the loan securedby the subject pledges but plaintiff refused unjustifiably tooblige and accept payment o[r] even agree on thecomputation of the principal amount of the loan andinterest on top of a substantial amount offered just to settleand compromise the indebtedness of [i]ntervenors;

II. SPECIAL AFFIRMATIVE DEFENSES

Intervenors replead by way of reference all the foregoingallegations to form part of the special affirmative defenses;

5. This Honorable Commission has no jurisdiction over theperson of the respondent and nature of the action, plaintiffhaving no personality at all to compel respondent by way ofmandamus to perform certain corporate function[s];

6. The complaint states no cause of action;

7. That respondent is not [a] real party in interest;

8. The appropriation of the subject shares of s tocks byplaintiff, without compliance with the formality of law,amounted to "[p]actum commis[s]orium" therefore, nulland void;

9. Granting for the sake of argument only that there was avalid foreclosure and sale of the subject st[o]cks in favor ofthe plaintiff — which [i]ntervenors deny — still paragraph 5of the contract allows redemption, for which intervenors arewilling to redeem the share of stocks pledged;

10. Even the Chattel Mortgage law allowed redemption ofthe [c]hattel foreclosed;

11. As a matter of fact, on several occasions, [i]ntervenorshad made representations with the plaintiff for thecompromise and settlement of all the obligations secured



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by the subject pledges — even offering to paycompensation over and above the value of the obligations,interest[s] and dividends accruing to the share of stocksbut, plaintiff unjustly refused to accept the offer ofpayment; ( pages 39-42 , Rollo )

The [r]espondents-[i]ntervenors prayed the SEC that judgment be rendered in

their favor, as follows:

IV. PRAYER

It is respectfully prayed to this Honorable Commission afterdue hearing, to dismiss the case for lack of merit, orderingplaintiff to accept payment for the loans secured by thesubject shares of stocks and to pay plaintiff:

1. The sum of P50,000.00, as moral damages;

2. the sum of P50,000.00, as attorneys fees; and,

3. costs of suit.

Other reliefs just and equitable [are] likewise prayed for.( pages 42-43 , Rollo )

After due proceedings, the [h]earing [o]fficer promulgated a Decision dismissing[p]etitioner's Complaint on the ground that although the SEC had jurisdictionover the action, pursuant to the Decision of the Supreme Court in the case of"Rural Bank of Salinas, et al . vs. Court of Appeals, et al ., 210 SCRA 510", hefailed to prove the legal bas is for the secretary of the Respondent Corporationto be compelled to register s tock transfers in favor of the [p]etitioner and toissue new certificates of stock under his name ( pages 67-77 , Rollo ). The[p]etitioner appealed the Decision of the [h]earing [o]fficer to the SEC, but, onMarch 7, 1996, the SEC promulgated a Decision, dismiss ing [p]etitioner's appealon the grounds that: (a) the issue between the [p]etitioner and the[r]espondents being one involving the ownership of the shares of stock p ledgedby Respondent Guiok and Sy Lim, the SEC had no jurisdiction over the actionfiled by the [p]etitioner; (b) the latter had no cause of action for mandamusagainst the Respondent Corporation, the right of ownership of the [p]etitionerover the 300 shares of stock pledged by Respondent Guiok and Sy Lim nothaving been as yet, established, p reparatory to the institution of said Petitionfor Mandamus with the SEC.

Ruling of the Court of Appeals

On the issue of jurisdiction, the Court of Appeals ruled:

In ascertaining whether or not the SEC had exclusive jurisdiction over[p]etitioner's action, the [a]ppellate [c]ourt must delve into and ascertain: (a)

whether or not there is a need to enlist the expertise and technical know-how ofthe SEC in resolving the issue of the ownership of the shares of stock; (b) thestatus of the relationships of the parties; [and] (c) the nature of the questionthat is the subject of the controversy. Where the controversy is purely a civilmatter resoluble by civil law principles and there is no need for the applicationof the expertise and technical know-how of the SEC, then the regular courtshave jurisdiction over the action. 8 [citations omitted]

On the issue of whether mandamus can be availed of by the petitioner, the Court of Appeals agreedwith the SEC,viz .:

. . . [T]he [p]etitioner failed to estab lish a clear and legal right to the writ ofmandamus prayed for by him. . . . Mandamus will not issue to enforce a rightwhich is in substantial dispute or to which a substantial doubt exists . . . . Theprincipal function of the writ of mandamus is to command and expedite, andnot to inquire and adjudicate and, therefore it i s not the purpose of the writ toestablish a legal right, but to enforce one which has already beenestablished. 9 [citations omitted]

The Court of Appeals debunked petitioner's claim that he had acquired ownership over the shares byvirtue of novation, holding that respondents' indorsement and delivery of the shares were pursuantto Articles 2093 and 2095 of the Civil Code and that petitioner's receipt of dividends was incompliance with Article 2102 of the same Code. Petitioner's claim that he had acquired ownership ofthe shares by virtue of prescription was likewise dismissed by Respondent Court in this wise:

The prescriptive period for the action of Respondent[s] Guiok and Sy Lim torecover the shares of stock from the [p]etitioner accrued only from the timethey paid their loans and the interests thereon and [made] a demand for theirreturn. 10

Hence, the petitioner brought before us this Petition for Review on Certiorari in accordance withRule 45 of the Rules of Court. 11

Assignment of Errors

Petitioner submits, for the consideration of this Court, these issues: 12

(a) Whether the Securities and Exchange Commission had jurisdiction over thecomplaint filed by the petitioner; and

(b) Whether the petitioner is entitled to the relief of mandamus as against therespondent Go Fay & Co., Inc.

In addition, petitioner contends that it has acquired ownership of the shares "through extraordinaryprescription," pursuant to Article 1132 of the Civil Code, and through respondents' subsequent acts,which amounted to a novation of the contracts of pledge. Petitioner also claims that there

was dacion en pago , in which the shares of stock were deemed sold to petitioner, the considerationfor which was the extinguishment of the loans and the interests thereon. Petitioner likewise claimsthat laches bars respondents from recovering the subject shares.



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The Court's Ruling

The petition has no merit.

First Issue : Jurisdiction of the SEC

Claiming that the present controversy is intra-corporate and falls within the exclusive jurisdiction ofthe SEC, petitioner relies heavily on Abejo v. De la Cruz , 13 which upheld the jurisdiction of the SECover a suit filed by an unregistered stockholder seeking to enforce his rights. He al so seeks supportfrom Rural Bank of Salinas, Inc. v. Court of Appeals , 14 which ruled that the right of a transferee oran assignee to have stocks transferred to his name was an inherent right flowing from his ownershipof the said stocks.

The registration of shares in a stockholder's name, the issuance of s tock certificates, and the right toreceive dividends which pertain to the said shares are all rights that flow from ownership. Thedetermination of whether or not a shareholder is entitled to exercise the above-mentioned rightsfalls within the jurisdiction of the SEC. However, if ownership of the shares is not clearly establishedand is still unresolved at the time the action for mandamus is filed, then jurisdiction lies with theregular courts.

Sec. 5 of Presidential Decree No. 902-A sets forth the jurisdiction of the SEC as follows:

Sec. 5. In addition to the regulatory and adjudicative functions of the Securitiesand Exchange Commission over corporations, partnerships and other forms ofassociations registered with it as expressly granted under existing laws anddecrees, it shall have original and exclusive jurisdiction to hear and decide casesinvolving:

(a) Devices or schemes employed by or any acts of the board of directors,business associates, its officers or partners, amounting to fraud andmisrepresentation which may be detrimental to the interest of the public and/orof stockholders, partners, members of associations or organizations registeredwith the Commission;

(b) Controversies arising out of intra-corporate or partnership relations,between and among stockholders, members, or associates; between any or allof them and the corporation, partnership or association of which they arestockholders, members or associates, respectively; and between suchcorporation, partnership or association and the State insofar as it concerns theirindividual franchise or right to exist as such entity;

(c) Controversies in the election or appointment of directors, trustees, officersor managers of such corporations, partnerships or associations.

(d) Petitions of corporations, partnerships or associations to be declared in thestate of suspension of payments in cases where the corporation, partnership or

association possesses property to cover all its debts but foresees theimpossibility of meeting them when they respectively fall due or in cases wherethe corporation, partnership or association has no sufficient assets to cover its

liabilities, but is under the Management Committee created pursuant to thisdecree. 15

Thus, a controversy "among stockholders, partners or associates themselves" 16 is intra-corporate innature and falls within the jurisdiction of the SEC.

As a general rule, the jurisdiction of a court or tribunal over the subject matter is determined by theallegations in the complaint. 17 In the present case, however, petitioner's claim that he wasthe owner of the shares of stock in question has no prima facie basis.

In his Complaint, petitioner alleged that, pursuant to the contracts of pledge, he became the ownerof the shares when the term for the loans expired. The Complaint contained the following pertinentaverments:

xxx xxx xxx

3. On [J]anuary 8, 1990, under a Contract of Pledge, Lim Tay received threehundred (300) shares of stock of Go Fay & Co., Inc., from Sy Guiok as securityfor the payment of a loan of [f]orty [t]housand [p]esos (P40,000.00) Philippinecurrency, the sum of which was payable within six (6) months [with interest] atten percentum (10%) per annum from the date of the execution of thecontract; a copy of this Contract of Pledge is attached as Annex " A " and madepart hereof;

4. On the same date January 8, 1980, under a similar Contract of Pledge, LimTay received three hundred (300) shares of stock of Go Pay & Co., Inc. from Alfonso Sy Lim as security for the payment of a loan of [f]orty [t]housand[p]esos (P40,000.00) Philippine currency, the sum of which was payable withinsix (6) months [with interest] at ten percentum (10%) per annum from the dateof the execution of the contract; a copy of this Contract of Pledge is attached as Annex "B " and made part hereof;

5. By the express terms of the agreements, upon failure of the borrowers to pay

the stated amounts within the contract period, the pledge is foreclosed and theshares of stock are purchased by [p]laintiff, who is expressly authorized andempowered to transfer the duly endorsed shares of stock on the books of thecorporation to his own name; . . . 18 (emphasis supplied)

However, the contracts of pledge, which were made integral parts of the Complaint, contain thiscommon proviso:

3. In the event of the failure of the PLEDGOR to pay the amount within a periodof six (6) months from the date hereof, the PLEDGEE is hereby authorized toforeclose the pledge upon the said shares of stock hereby created by selling thesame at public or private sale with or without notice to the PLEDGOR, at whichsale the PLEDGEE may be the purchaser at his option; and the PLEDGEE ishereby authorized and empowered at his option, to transfer the said shares ofstock on the books of the corporation to his own name and to hold thecertificate issued in lieu thereof under the terms of this pledge, and to sell the



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said shares to issue to him and to apply the proceeds of the sale to thepayment of the said sum and interest, in the manner hereinabove provided;

This contractual stipulation, which was part of the Complaint, shows that plaintiff wasmerely authorized to foreclose the pledge upon maturity of the loans, not to own them. Suchforeclosure is not automatic, for it must be done in a public or private sale. Nowhere did theComplaint mention that petitioner had in fact foreclosed the pledge and purchased the shares after

such foreclosure. His status as a mere pledgee does not, under civil law, entitle him to ownership ofthe subject shares. It is a lso noteworthy that petitioner's Complaint did not aver that said shareswere acquired through extraordinary prescription, novation or laches. Moreover, petitioner's claim,subsequent to the filing of the Complaint, that he acquired ownership of the said shares throughthese three modes is not indubitable and still has to be resolved. In fact, as will be shown, suchallegation-has no merit. Manifestly, the Complaint by itself did not contain any prima facie showingthat petitioner was the owner of the shares of stocks. Quite the contrary, it demonstrated that hewas merely a pledgee, not an owner. Accordingly, it failed to lay down a sufficient basis for the SECto exercise jurisdiction over the controversy. In fact, the very allegations of the Complaint and itsannexes negated the jurisdiction of the SEC.

Petitioner's reliance on the doctrines set forth in Abejo v. De la Cruz and Rural Bank of Salinas, Inc.v. Court of Appeals is misplaced. In Abejo , he Abejo spouses sold to Telectronic Systems, Inc.shares of stock in Pocket Bell Phil ippines, Inc. Subsequent to such contract of sale, the corporate

secretary, Norberto Braga, refused to record the transfer of the shares in the corporate books andinstead asked for the annulment of the sale, claiming that he and his wife had a preemptive rightover some of the shares, and that his wife's shares were sold without consideration or consent.

At the time the Bragas questioned the validity of the sale, the contract had already been perfected,thereby demonstrating that Telectronic Systems, Inc. was already the prima facie owner of theshares and, consequently, a stockholder of Pocket Bell Philippines, Inc. Even if the sale were to beannulled later on, Telectronic Systems, Inc. had, in the meantime, title over the shares from thetime the sale was perfected until the time such sale was annulled. The effects of an annulmentoperate prospectively and do not, as a rule, retroact to the time the sale was made. Therefore, atthe time the Bragas questioned the validity of the tranfers made by the Abejos, Telectronic Systems,Inc. was already a prima facie shareholder of the corporation, thus making the dispute between theBragas and the Abejos "intra-corporate" in nature. Hence, the Court held that "the issue is not onownership of shares but rather the non-performance by the corporate secretary of the ministerial

duty of recording transfers of shares of stock of the corporation of which he is secretary." 19

Unlike Abejo , however, petitioner's ownership over the shares in this case was not yet perfectedwhen the Complaint was filed. The contract of pledge certainly does not make him the owner of theshares pledged. Further, whether prescription effectively transferred ownership of the shares,whether there was a novation of the contracts of pledge, and whether laches had set in weredifficult legal issues, which were unpleaded and unresolved when herein petitioner asked thecorporate secretary of Go Fay to effect the transfer, in his favor, of the shares pledged to him.

In Rural Bank of Salinas , Melenia Guerrero executed deeds of assignment for the shares in favor ofthe respondents in that case. When the corporate secretary refused to register the transfer, anaction for mandamus was instituted. Subsequently, a motion for intervention was filed, seeking theannulment of the deeds of assignment on the grounds that the same were fictitious and antedated,

and that they were in fact donations because the considerations therefor were below the book valueof the shares.

Like the Abejo spouses, the respondents in Rural Bank of Salinas were already primafacie shareholders when the deeds of assignment were questioned. If the said deeds were to beannulled later on, respondents would still be considered shareholders of the corporation from thetime of the assignment until the annulment of such contracts.

Second Issue : Mandamus Will NotIssue to Establish a Right

Petitioner prays for the issuance of a writ of mandamus, directing the corporate secretary ofrespondent corporation to have the shares transferred to his name in the corporate books, to issuenew certificates of stock and to deliver the corresponding dividends to him. 20

In order that a writ of mandamus may issue, it is essential that the person petitioning for the samehas a clear legal right to the thing demanded and that it is the imperative duty of the respondent toperform the act required. It neither confers powers nor imposes duties and is never issued indoubtful cases. It is simply a command to exercise a power already possessed and to perform aduty already imposed. 21

In the present case, petitioner has failed to establish a clear legal right. Petitioner's contention thathe is the owner of the said shares is completely without merit. Quite the contrary and as already

shown, he does not have any ownership rights at all. At the time petitioner instituted his suit at theSEC, his ownership claim had no prima facie leg to stand on. At best, his contention was disputableand uncertain Mandamus will not issue to establish a legal right, but only to enforce one that isalready clearly established.

Without Foreclosure andPurchase at Auction, PledgorIs Not the Owner of Pledged Shares

Petitioner initially argued that ownership of the shares pledged had passed to him, uponRespondents Sy Guiok and Sy Lim's failure to pay their respective loans. But on appeal, peti tionerclaimed that ownership over the shares had passed to him, not via the contracts of pledge, but byvirtue of prescription and by respondents' subsequent acts which amounted to a novation of thecontracts of pledge. We do not agree.

At the outset, it must be underscored that petitioner did not acquire ownership of the shares byvirtue of the contracts of pledge. Article 2112 of the Civil Code states:

The creditor to whom the credit has not been satisfied in due time, mayproceed before a Notary Public to the sale of the thing pledged. This sale shallbe made at a public auction, and with notification to the debtor and the ownerof the thing pledged in a proper case, stating the amount for which the publicsale is to be held. If at the first auction the thing is not sold, a second one withthe same formalities shall be held; and if at the second auction there is no saleeither, the creditor may appropriate the thing pledged. In this case he shall beobliged to give an acquittance for his entire claim.

Furthermore, the contracts of pledge contained a common proviso, which we quote again for thesake of clarity:



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3. In the event of the failure of the PLEDGOR to pay the amount within a periodof six (6) months from the date hereof, the PLEDGEE is hereby authorized toforeclose the pledge upon the said shares of stock hereby created by selling thesame at public or private sale with or without notice to the PLEDGOR, at whichsale the PLEDGEE may be the purchaser at his option; and "the PLEDGEE ishereby authorized and empowered at his option to transfer the said shares ofstock on the books of the corporation to his own name, and to hold thecertificate issued in lieu thereof under the terms of this pledge, and to sell thesaid shares to issue to him and to apply the proceeds of the sale to thepayment of the said sum and interest, in the manner hereinaboveprovided; 22

There is no showing that petitioner made any attempt to foreclose or sell the shares through publicor private auction, as stipulated in the contracts of pledge and as required by Article 2112 of theCivil Code. Therefore, ownership of the shares could not have passed to him. The pledgor remainsthe owner during the pendency of the pledge and prior to foreclosure and sale, as explicitly providedby Article 2103 of the same Code:

Unless the thing pledged is expropriated, the debtor continues to be the ownerthereof.

Nevertheless, the creditor may bring the actions which pertain to the owner ofthe thing pledged in order to recover it from, or defend it against a thirdperson.

No Ownershipby Prescription

Petitioner did not acquire the shares by prescription either. The period of prescription of any causeof action is reckoned only from the date the cause of action accrued.

Since a cause of action requires as an essential element not only a legal right of the plaintiff and acorrelative obligation of the defendant, but also an ac t or omission of the defendant in violation ofsaid legal right, the cause of action does not accrue until the party obligated refuses, expressly orimpliedly, to comply with its duty." 23 Accordingly, a cause of action on a written contract accrueswhen a breach or violation thereof occurs.

Under the contracts of pledge, private respondents would have a right to ask for the redelivery oftheir certificates of stock upon payment of their debts to petitioner, consonant with Article 2105 ofthe Civil Code, which reads:

The debtor cannot ask for the return of the thing pledged against the will of thecreditor, unless and until he has paid the debt and its interest, with expenses ina proper case. 24

Thus, the right to recover the shares based on the written contract of pledge between petitioner andrespondents would arise only upon payment of their respective loans. Therefore, the prescriptiveperiod within which to demand the return of the thing pledged should begin to run only after thepayment of the loan and a demand for the thing has been made, because it is only then thatrespondents acquire a cause of action for the return of the thing pledged.

Prescription should not begin to run on the ac tion to demand the return of the thing pledged whilethe loan still exists. This is because the right to ask for the return of the thing pledged will not ariseso long as the loan subsists. In the present case, the prescriptive period did not begin to run whenthe loan became due. On the other hand, it is petitioner's right to demand payment that may be indanger of prescription.

Petitioner contends that he can be deemed to have acquired ownership over the certificates of stock

through extraordinary prescription, as provided for in Article 1132 of the Civil Code which states:

Art. 1132. The ownership of movables prescribes through uninterruptedpossession for four years in good faith.

The ownership of personal property also prescribes through uninterruptedpossession for eight years, without need of any other condition. . . . .

Petitioner's argument is untenable. What is required by Article 1132 is possession in the concept ofan owner. In the present case, petitioner's possess ion of the stock certificates came about becausethey were delivered to him pursuant to the contracts of pledge. His possession as a pledgee cannotripen into ownership by prescription. As aptly pointed out by Justice Jose C. Vitug:

Acquisitive prescription is a mode of acquiring ownership by a possessorthrough the requisite lapse of time. In order to ripen into ownership, possessionmust be in the concept of an owner, public, peaceful and uninterrupted. Thus,possession with a juridical title, such as by a usufructory, a trustee, a lessee,agent or a pledgee, not being in the concept of an owner, cannot ripen intoownership by acquisitive prescription unless the juridical relation is firstexpressly repudiated and such repudiation has been communicated to the otherparty. 25

Petitioner expressly repudiated the pledge, only when he filed his Complaint and claimed that hewas not a mere pledgee, but that he was already the owner of the shares. Based on the foregoing,petitioner has not acquired the certificates of stock through extraordinary prescription.

No Novationin Favor of Petitioner

Neither did petitioner acquire the shares by virtue of a novation of the contract of pledge. Novationis defined as "the extinguishment of an obligation by a subsequent one which terminates it, eitherby changing its object or principal conditions, by substituting a new debtor in place of the old one,or by subrogating a third person to the rights of the creditor." 26 Novation of a contract must not bepresumed. "In the absence of an express agreement, novation takes place only when the old andthe new obligations are incompatible on every point." 27

In the present case, novation cannot be presumed by (a) respondents' indorsement and delivery ofthe certificates of stock covering the 600 shares, (b) petitioner's receipt of dividends from 1980 to1983, and (c) the fact that respondents have not instituted any action to recover the shares since1980.

Respondents' indorsement and delivery of the certificates of stock were pursuant to paragraph 2 ofthe contract of pledge which reads:



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2. The said certificates had been delivered by the PLEDGOR endorsed in blankto be held by the PLEDGEE under the pledge as security for the payment of theaforementioned sum and interest thereonaccruing. 28

This stipulation did not effect the transfer of ownership to petitioner. It was merely in compliancewith Article 2093 of the Civil Code, 29 which requires that the thing pledged be placed in the

possession of the creditor or a third person of common agreement; and Article 2095,30

which statesthat if the thing pledged are shares of stock, then the "instrument proving the right pledged" mustbe delivered to the creditor.

Moreover, the fact that respondents allowed the petitioner to receive dividends pertaining to theshares was not meant to relinquish ownership thereof. As stated by respondent corporation, thesame was done pursuant to an agreement between the petitioner and Respondents Sy Guiok and SyLim, following Article 2102 of the civil Code which provides:

It the pledge earns or produces fruits, income, dividends, or interests, thecreditor shall compensate what he receives with those which are owing him; butif none are owing him, or insofar as the amount may exceed that which is due,he shall apply it to the principal. Unless there is a stipulation to the contrary, thepledge shall extend to the interest and the earnings of the right pledged.

Novation cannot be inferred from the mere fact that petitioner has not, since 1980, instituted anyaction to recover the shares. Such action is in fact premature, as the loan is still outstanding.Besides, as already pointed out, novation is never presumed or inferred.

No Dacion en Pagoin Favor of Petitioner

Neither can there be dacion en pago , in which the certificates of stock are deemed sold topetitioner, the consideration for which is the extinguishment of the loans and the accrued intereststhereon. Dacion en pago is a form of novation in which a change takes place in the object involvedin the original contract. Absent an explicit agreement, petitioner cannot simply presume dacion enpago .

Laches Nota Bar to Petitioner

Petitioner submits that "the inaction of the individual respondents with respect to the recovery ofthe shares of stock serves to bar them from asserting rights over said shares on the basis oflaches." 31

Laches has been defined as "the failure or neglect, for an unreasonable length of time, to do thatwhich by exercising due diligence could or should have been done earlier; it is negligence oromission to assert a right within a reasonable time, warranting a presumption that the party entitledto assert it either has abandoned it or declined to assert it." 32

In this case, it is in fact petitioner who may be guilty of laches. Petitioner had all the time to demandpayment of the debt. More important, under the contracts of pledge, petitioner could have

foreclosed the pledges as soon as the loans became due. But for st ill unknown or unexplainedreasons, he failed to do so, preferring instead to pursue his baseless claim to ownership.

WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED. Costs againstpetitioner.

SO ORDERED.

Davide, Jr., Bellosillo, Vitug and Quisumbing, JJ., concur.

THE RURAL BANK OF LIPA CITY, INC., THE OFFICERS AND DIRECTORS, BERNARDOBAUTISTA, JAIME CUSTODIO, OCTAVIO KATIGBAK, FRANCISCO CUSTODIO,and JUANITA BAUTISTA OF THE RURAL BANK OF LIPA CITY, INC., petitioners,vs. HONORABLE COURT OF APPEALS, HONORABLE COMMISSION ENBANC,SECURITIES AND EXCHANGE COMMISSION, HONORABLE ENRIQUE L.FLORES, JR., in his capacity as Hearing Officer, REYNALDO VILLANUEVA, SR.,

AVELINA M. VILLANUEVA, CATALINO VILLANUEVA, ANDRES GONZALES, AURORA LACERNA, CELSO LAYGO, EDGARDO REYES, ALEJANDRA TONOGAN

and ELENA USI, respondents.

D E C I S I O N

YNARES-SANTIAGO, J .:

Before us is a petition for review on certiorari assailing the Decision of the Court of Appealsdated February 27, 1996, as well as the Resolution dated March 29, 1996, in CA-G.R. SP No. 38861.

The instant controversy arose from a dispute between the Rural Bank of Lipa City,Incorporated (hereinafter referred to as the Bank), represented by its officers and members of itsBoard of Directors, and certain stockholders of the said bank. The records reveal the followingantecedent facts:

Private respondent Reynaldo Villanueva, Sr., a stockholder of the Rural Bank of Lipa City,executed a Deed of Assignment,[1] wherein he assigned his shares, as well as those of eight (8)other shareholders under his control with a total of 10,467 shares, in favor of the stockholders ofthe Bank represented by its directors Bernardo Bautista, Jaime Custodio and OctavioKatigbak. Sometime thereafter, Reynaldo Villanueva, Sr. and his wife, Avelina, executed an Agreement[2] wherein they acknowledged their indebtedness to the Bank in the amount of FourMillion Pesos (P4,000,000.00), and stipulated that said debt will be paid out of the proceeds of thesale of their real property described in the Agreement.

At a meeting of the Board of Directors of the Bank on November 15, 1993, the Villanuevaspouses assured the Board that their debt would be paid on or before December 31 of that sameyear; otherwise, the Bank would be entitled to liquidate their shareholdings, including those undertheir control. In such an event, should the proceeds of the sale of said shares fail to satisfy in fullthe obligation, the unpaid balance shall be secured by other collateral sufficient therefor.

When the Villanueva spouses failed to settle their obligation to the Bank on the due date, theBoard sent them a letter[3] demanding: (1) the surrender of all the stock certificates issued to them;and (2) the delivery of sufficient collateral to secure the balance of their debt amounting to

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P3,346,898.54. The Villanuevas ignored the bank’s demands, whereupon their shares of stock wereconverted into Treasury Stocks. Later, the Villanuevas, through their counsel, questioned thelegality of the conversion of their shares.[4]

On January 15, 1994, the stockholders of the Bank met to elect the new directors and set ofofficers for the year 1994. The Villanuevas were not notified of said meeting. In a letter datedJanuary 19, 1994, Atty. Amado Ignacio, counsel for the Villanueva spouses, questioned the legalityof the said stockholders’ meeting and the validity of all the proceedings therein. In reply, the new

set of officers of the Bank informed Atty. Ignacio that the Villanuevas were no longer entitled tonotice of the said meeting since they had relinquished their rights as stockholders in favor of theBank.

Consequently, the Villanueva spouses filed with the Securities and Exchange Commission(SEC), a petition for annulment of the stockholders’ meeting and election of directors and officers onJanuary 15, 1994, with damages and prayer for preliminary injunction[5], docketed as SEC Case No.02-94-4683. Joining them as co-petitioners were Catalino Villanueva, Andres Gonzales, AuroraLacerna, Celso Laygo, Edgardo Reyes, Alejandro Tonogan, and Elena Usi. Named respondents werethe newly-elected officers and directors of the Rural Bank, namely: Bernardo Bautista, JaimeCustodio, Octavio Katigbak, Francisco Custodio and Juanita Bautista.

The Villanuevas’ main contention was that the stockholders’ meeting and election of officersand directors held on January 15, 1994 were invalid because: (1) they were conducted in violationof the by-laws of the Rural Bank; (2) they were not given due notice of said meeting and electionnotwithstanding the fact that they had not waived their right to notice; (3) they were deprived oftheir right to vote despite their being holders of common stock with corresponding voting rights; (4)their names were irregularly excluded from the list of stockholders; and (5) the candidacy ofpetitioner Avelina Villanueva for directorship was arbitrarily disregarded by respondent BernardoBautista and company during the said meeting.

On February 16, 1994, the SEC issued a temporary restraining order enjoining therespondents, petitioners herein, from acting as directors and officers of the Bank, and fromperforming their duties and functions as such.[6]

In their joint Answer,[7] the respondents therein raised the following defenses:

1) The petitioners have no legal capacity to sue;

2) The petition states no cause of action;

3) The complaint is insufficient;

4) The petitioners’ claims had already been paid, waived, abandoned, or otherwiseextinguished;

5) The petitioners are estopped from challenging the conversion of their shares.

Petitioners, respondents therein, thus moved for the lifting of the temporary restraining orderand the dismissal of the petition for lack of merit, and for the upholding of the validity of thestockholders’ meeting and election of directors and officers held on January 15, 1994. By way ofcounterclaim, petitioners prayed for actual, moral and exemplary damages.

On April 6, 1994, the Villanuevas’ application for the issuance of a writ of preliminaryinjunction was denied by the SEC Hearing Officer on the ground of lack of sufficient basis for theissuance thereof. However, a motion for reconsideration[8] was granted on December 16, 1994,

upon finding that since the Villanuevas’ have not disposed of their shares, whether voluntarily orinvoluntarily, they were still stockholders entitled to notice of the annual stockholders’ meeting was

sustained by the SEC. Accordingly, a writ of preliminary injunction was issued enjoining thepetitioners from acting as directors and officers of the bank .[9]

Thereafter, petitioners filed an urgent motion to quash the writ of preliminaryinjunction,[10] challenging the propriety of the said writ considering that they had not yet received acopy of the order granting the application for the writ of preliminary injunction.

With the impending 1995 annual stockholders’ meeting only nine (9) days away, the

Villanuevas filed an Omnibus Motion[11] praying that the said meeting and election of officersscheduled on January 14, 1995 be suspended or held in abeyance, and that the 1993 Board ofDirectors be allowed, in the meantime, to act as such. One (1) day before the scheduledstockholders meeting, the SEC Hearing Officer granted the Omnibus Motion by issuing a temporaryrestraining order preventing petitioners from holding the stockholders meeting and electing theboard of directors and officers of the Bank .[12]

A petition for Certiorari and Annulment with Damages was filed by the Rural Bank, itsdirectors and officers before the SEC en banc ,[13] naming as respondents therein SEC Hearing OfficerEnrique L. Flores, Jr., and the Villanuevas, erstwhile petitioners in SEC Case No. 02-94-4683. Thesaid petition alleged that the orders dated December 16, 1994 and January 13, 1995, which allowedthe issuance of the writ of preliminary injunction and prevented the bank from holding its 1995annual stockholders’ meeting, respectively, were issued by the SEC Hearing Officer with grave abuseof discretion amounting to lack or excess of jurisdiction. Corollarily, the Bank, its directors and itsofficers questioned the SEC Hearing Officer’s right to restrain the stockholders’ meeting and election

of officers and directors considering that the Villanueva spouses and the other petitioners in SECCase No. 02-94-4683 were no longer stockholders with voting rights, having already assigned alltheir shares to the Bank.

In their Comment/Opposition, the Villanuevas and other private respondents argued that thefiling of the petition for certiorari was premature and there was no grave abuse of discretion on thepart of the SEC Hearing Officer, nor did he act without or in excess of his jurisdiction.

On June 7, 1995, the SEC en banc denied the petition for certiorari in an Order,[14] whichstated:

In the case now before us, petitioners could not show any proof of despotic or arbitrary exercise ofdiscretion committed by the hearing officer in issuing the assailed orders save and except theallegation that the private respondents have al ready transferred their stockholdings in favor of the

stockholders of the Bank. This, however, is the very issue of the controversy in the case a quo andwhich, to our mind, should rightfully be litigated and proven before the hearing officer. This is sobecause of the undisputed fact the (sic) private respondents are still in possession of the stockcertificates evidencing their stockholdings and as held by the Supreme Court in Embassy Farms, Inc.v. Court of Appeals, et al., 188 SCRA 492 , citing Nava v. Peers Marketing Corp., the non-delivery ofthe stock certificate does not make the transfer of the shares of stock effective. For an effectivetransfer of stock, the mode of transfer as prescribed by law must be followed.

We likewise find that the provision of the Corporation Code cited by the herein peti tioner,particularly Section 83 thereof, to support the claim that the private respondents are no longerstockholders of the Bank is misplaced. The said law applies to acquisition of shares of stock by thecorporation in the exercise of a stockholder’s right of appraisal or when the said stock holder opts todissent on a specific corporate act in those instances provided by law and demands the payment ofthe fair value of his shares. It does not contemplate a ―transfer‖ whereby the stockholder, in the

exercise of his right to dispose of his shares (jus disponendi) sells or assigns his stockholdings infavor of another person where the provisions of Section 63 of the same Code should be compliedwith.















































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The hearing officer, therefore, had a basis in issuing the questioned orders since the privaterespondents’ rights as stockholders may be prejudiced should the writ of injunction not beissued. The private respondents are presumably stockholders of the Bank in view of the fact thatthey have in their possession the stock certificates evidencing their stockholdings. Until provenotherwise, they remain to be such and the hearing officer, being the one directly confronted withthe facts and pieces of evidence in the case, may issue such orders and resolutions which may benecessary or reasonable relative thereto to protect their rights and interest in the meantime that thesaid case is still pending trial on the merits.

A subsequent motion for reconsideration[15] was likewise denied by the SEC en banc in aResolution[16] dated September 29, 1995.

A petition for review was thus filed before the Court of Appeals, which was docketed as CA-G.R. SP No. 38861, assailing the Order dated June 7, 1995 and the Resolution dated September 29,1995 of the SEC en banc in SEC EB No. 440. The ultimate issue raised before the Court of Appealswas whether or not the SEC en banc erred in finding:

1. That the Hon. Hearing Officer in SEC Case No. 02-94-4683 did not commit any grave abuse ofdiscretion that would warrant the filing of a petition for certiorari;

2. That the private respondents are still stockholders of the subject bank and further stated that ―it

does not contemplate a transfer‖ whereby the stockholders, in the exercise of his right to dispose ofhis shares (Jus Disponendi ) sells or assigns his stockholdings in favor of another person where theprovisions of Sec. 63 of the same Code should be complied with; and

3. That the private respondents are presumably stockholders of the bank in view of the fact thatthey have in their possession the stock certificates evidencing their stockholdings.

On February 27, 1996, the Court of Appeals rendered the assailed Decision[17] dismissing thepetition for review for lack of merit. The appellate court found that:

The public respondent is correct in holding that the Hearing Officer did not commit grave abuse ofdiscretion. The officer, in exercising his judicial functions, did not exercise his judgment in acapricious, whimsical, arbitrary or despotic manner. The questioned Orders issued by the Hearing

Officer were based on pertinent law and the facts of the case.

Section 63 of the Corporation Code states: ―x x x Shares of stock so issued are personal propertyand may be transferred by delivery of the certificate or certificates indorsed by the owner x x x. Notransfer, however, shall be valid, except as between the parties, until the transfer is recorded in thebooks of the corporation so as to show the names of the parties to the transaction, the date of thetransfer, the number of the certificate or certificates and the number of shares transferred.‖

In the case at bench, when private respondents executed a deed of assignment of their shares ofstocks in favor of the Stockholders of the Rural Bank of Lipa City, represented by Bernardo Bautista,Jaime Custodio and Octavio Katigbak, title to such shares will not be effective unless the dulyindorsed certificate of stock is delivered to them. For an effective transfer of shares of stock, themode and manner of transfer as prescribed by law should be followed. Private respondents are still

presumed to be the owners of the shares and to be stockholders of the Rural Bank.

We find no reversible error in the questioned orders.

Petitioners’ motion for reconsideration was likewise denied by the Court of Appeals in anOrder[18] dated March 29, 1996.

Hence, the instant petition for review seeking to annul the Court of Appeals’ decision dat edFebruary 27, 1996 and the resolution dated March 29, 1996. In particular, the decision ischallenged for its ruling that notwithstanding the execution of the deed of assignment in favor of thepetitioners, transfer of title to such shares is ineffective until and unless the duly indorsed certificateof stock is delivered to them. Moreover, petitioners faulted the Court of Appeals for not taking into

consideration the acts of disloyalty committed by the Villanueva spouses against the Bank.

We find no merit in the instant petition.

The Court of Appeals did not err or abuse its discretion in affirming the order of the SEC enbanc , which in turn upheld the order of the SEC Hearing Officer, for the said rulings were inaccordance with law and jurisprudence.

The Corporation Code specifically provides:

SECTION 63. Certificate of stock and transfer of shares . – The capital stock of stock corporationsshall be divided into shares for which certificates signed by the president or vice president,countersigned by the secretary or assistant secretary, and sealed with the seal of the corporationshall be issued in accordance with the by-laws. Shares of stocks so issued are personal propertyand may be transferred by delivery of the certificate or certificates indorsed by the owner or hisattorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shallbe valid, except as between the parties, until the transfer is recorded in the books of the corporationso as to show the names of the parties to the transaction, the date of the transfer, the number ofthe certificate or certificates and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be transferable in thebooks of the corporation. (Underscoring ours)

Petitioners argue that by virtue of the Deed of Assignment,[19] private respondents hadrelinquished to them any and all rights they may have had as stockholders of the Bank. While itmay be true that there was an assignment of private respondents’ shares to the petitioners, saidassignment was not sufficient to effect the transfer of shares since there was no endorsement of thecertificates of stock by the owners, their attorneys-in-fact or any other person legally authorized to

make the transfer. Moreover, petitioners admit that the assignment of shares was not coupled withdelivery, the absence of which is a fatal defect. The rule is that the delivery of the stock certificateduly endorsed by the owner is the operative act of transfer of shares from the lawful owner to thetransferee.[20] Thus, title may be vested in the transferee only by delivery of the duly indorsedcertificate of stock .[21]

We have uniformly held that for a valid transfer of stocks, there must be strict compliancewith the mode of transfer prescribed by law.[22] The requirements are: (a) There must be deliveryof the stock certificate; (b) The certificate must be endorsed by the owner or his attorney-in-fact orother persons legally authorized to make the transfer; and (c) To be valid against third parties, thetransfer must be recorded in the books of the corporation. As it is, compliance with any of theserequisites has not been clearly and sufficiently shown.

It may be argued that despite non-compliance with the requisite endorsement and delivery,the assignment was valid between the parties, meaning the private respondents as assignors and

the petitioners as assignees. While the assignment may be valid and binding on the petitioners andprivate respondents, it does not necessarily make the transfer effective. Consequently, thepetitioners, as mere assignees, cannot enjoy the status of a stockholder, cannot vote nor be voted


































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for, and will not be entitled to dividends, insofar as the assigned shares areconcerned. Parenthetically, the private respondents cannot, as yet, be deprived of their rights asstockholders, until and unless the issue of ownership and transfer of the shares in question isresolved with finality.

There being no showing that any of the requisites mandated by law [23] was complied with, theSEC Hearing Officer did not abuse his discretion in granting the issuance of the preliminaryinjunction prayed for by petitioners in SEC Case No. 02-94-4683 (herein private

respondents). Accordingly, the order of the SEC en banc affirming the ruling of the SEC HearingOfficer, and the Court of Appeals decision upholding the SEC en banc order, are valid and inaccordance with law and jurisprudence, thus warranting the denial of the instant petition for review.

To enable the shareholders of the Rural Bank of Lipa City, Inc. to meet and elect theirdirectors, the temporary restraining order issued by the SEC Hearing Officer on January 13, 1995must be lifted. However, private respondents shall be notified of the meeting and be allowed toexercise their rights as stockholders thereat.

While this case was pending, Republic Act No. 8799[24] was enacted, transferring to the courtsof general jurisdiction or the appropriate Regional Trial Court the SEC’s jurisdiction over all casesenumerated under Section 5 of Presidential Decree No. 902-A.[25] One of those cases enumerated isany controversy ―arising out of intra-corporate or partnership relations, between and amongstockholders, members, or associates, between any and/or all of them and the corporation,partnership or association of which they are stockholders, members or associates, respectively; and

between such corporation, partnership or association and the state insofar as it concerns theirindividual franchise or right to exist as such entity.‖ The instant cont roversy clearly falls under thiscategory of cases which are now cognizable by the Regional Trial Court.

Pursuant to Section 5.2 of R.A. No. 8799, this Court designated specific branches of theRegional Trial Courts to try and decide cases formerly cognizable by the SEC. For the Fourth JudicialRegion, specifically in the Province of Batangas, the RTC of Batangas City, Branch 32 is thedesignated court.[26]

WHEREFORE, in view of all the foregoing, the instant petition for review on certiorari isDENIED. The Decision and Resolution of the Court of Appeals in CA-G.R. SP No. 38861 are hereby AFFIRMED. The case is ordered REMANDED to the Regional Trial Court of Batangas City, Branch 32,for proper disposition. The temporary restraining order issued by the SEC Hearing Officer datedJanuary 13, 1995 is ordered LIFTED.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Kapunan, and Pardo, JJ., concur. Puno, J., in the result.

VICENTE C. PONCE, petitioner, vs . ALSONS CEMENT CORPORATION, and FRANCISCO M.GIRON, JR., respondents .

D E C I S I O N

QUISUMBING, J.:

This petition for review seeks to annul the decision [1] of the Court of Appeals, in CA-G.R. SPNo. 46692, which set aside the decision[2] of the Securities and Exchange Commission (SEC) EnBanc in SEC-AC No. 545 and reinstated the order[3] of the Hearing Officer dismissing herein

petitioner’s complaint. Also assailed is the CA’s resolution[4] of August 10, 1999, denying petitioner’smotion for reconsideration.

On January 25, 1996, plaintiff (now petitioner) Vicente C. Ponce, filed a complaint[5] with theSEC for mandamus and damages against defendants (now respondents) Alsons Cement Corporationand its corporate secretary Francisco M. Giron, Jr. In his complaint, petitioner alleged, amongothers, that:

x x x

5. The late Fausto G. Gaid was an incorporator of Victory Cement Corporation (VCC), havingsubscribed to and fully paid 239,500 shares of said corporation.

6. On February 8, 1968, plaintiff and Fausto Gaid executed a ―Deed of Undertaking‖ and ―Indorsement‖ whereby the latter acknowledges that the former is the owner of said shares and hewas therefore assigning/endorsing the same to the plainti ff. A copy of the said deed/indorsement isattached as Annex ―A‖.

7. On April 10, 1968, VCC was renamed Floro Cement Corporation (FCC for brevity).

8. On October 22, 1990, FCC was renamed Alsons Cement Corporation (ACC for brevity) as shownby the Amended Articles of Incorporation of ACC, a copy of which is attached as Annex ―B‖.

9. From the time of incorporation of VCC up to the present, no certificates of stock corresponding tothe 239,500 subscribed and fully paid shares of Gaid were issued in the name of Fausto G. Gaidand/or the plaintiff.

10. Despite repeated demands, the defendants refused and continue to refuse without any justifiable reason to issue to plaintiff the certificates of stocks corresponding to the 239,500 sharesof Gaid, in violation of plaintiff’s right to secure the corresponding certificate of stock in his name.[6]

Attached to the complaint was the Deed of Undertaking and Indorsement[7] upon whichpetitioner based his petition for mandamus. Said deed and indorsement read as follows:

DEED OF UNDERTAKING

KNOW ALL MEN BY THESE PRESENTS:

I, VICENTE C. PONCE, is the owner of the total subscription of Fausto Gaid with Victory CementCorporation in the total amount of TWO HUNDRED THIRTY NINE THOUSAND FIVE HUNDRED(P239,500.00) PESOS and that Fausto Gaid does not have any liabil ity whatsoever on thesubscription agreement in favor of Victory Cement Corporation.

(SGD.) VICENTE C. PONCE

February 8, 1968

CONFORME:












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(SGD.) FAUSTO GAID

INDORSEMENT

I, FAUSTO GAID is indorsing the total amount of TWO HUNDRED THIRTY NINE THOUSAND FIVEHUNDRED (239,500.00) stocks of Victory Cement Corporation to VICENTE C. PONCE.

(SGD.) FAUSTO GAID

With these allegations, petitioner prayed that judgment be rendered ordering respondents (a)to issue in his name certificates of stocks covering the 239,500 shares of stocks and its legalincrements and (b) to pay him damages.[8]

Instead of filing an answer, respondents moved to dismiss the complaint on the grounds that:(a) the complaint states no cause of action; mandamus is improper and not available to petitioner;(b) the petitioner is not the real party in interest; (c) the cause of action is barred by the statute oflimitations; and (d) in any case, the petitioner’s cause of action is barred by laches .[9] Theyargued, inter alia , that there being no allegation that the alleged ―INDORSEMENT‖ was recorded inthe books of the corporation, said indorsement by Gaid to the plaintiff of the shares of stock inquestion —assuming that the indorsement was in fact a transfer of stocks —was not valid against

third persons such as ALSONS under Section 63 of the Corporation Code .

[10]

There was, therefore,no specific legal duty on the part of the respondents to issue the corresponding certificates of stock,and mandamus will not lie.[11]

Petitioner filed his opposition to the motion to dismiss on February 19, 1996 contending that:(1) mandamus is the proper remedy when a corporation and its corporate secretary wrongfullyrefuse to record a transfer of shares and issue the corresponding certificates of stocks; (2) he is theproper party in interest since he stands to be benefited or injured by a judgment in the case; (3) thestatute of limitations did not begin to run until defendant refused to issue the certificates of stock infavor of the plaintiff on April 13, 1992.

After respondents filed their reply, SEC Hearing Officer Enrique L. Flores, Jr. granted themotion to dismiss in an Order dated February 29, 1996, which held that:

x x x

Insofar as the issuance of certificates of stock is concerned, the real party in interest is Fausto G.Gaid, or his estate or his heirs. Gaid was an incorporator and an original stockholder of thedefendant corporation who subscribed and fully paid for 239,500 shares of stock (Annex "B"). Inaccordance with Section 37 of the old Corporation Law (Act No. 1459) obtaining in 1968 when thedefendant corporation was incorporated, as well as Section 64 of the present Corporation Code(Batas Pambansa Blg. 68), a stockholder who has fully paid for his subscription together withinterest and expenses in case of del inquent shares, is entitled to the issuance of a certificate ofstock for his shares. According to paragraph 9 of the Complaint, no stock certificate was issued toGaid.

Comes now the plaintiff who seeks to step into the shoes of Gaid and thereby become a stockholderof the defendant corporation by demanding issuance of the certificates of stock in his name. This

he cannot do, for two reasons: there is no record of any assignment or transfer in the books of thedefendant corporation, and there is no instruction or authority from the transferor (Gaid) for suchassignment or transfer. Indeed, nothing is alleged in the complaint on these two points.

x x x

In the present case, there is not even any indorsement of any stock certificate to speak of. Whatthe plaintiff possesses i s a document by which Gaid supposedly transferred the shares tohim. Assuming the document has this effect, nevertheless there is neither any allegation nor anyshowing that it is recorded in the books of the defendant corporation, such recording being aprerequisite to the issuance of a stock certificate in favor of the transferee.[12]

Petitioner appealed the Order of dismissal. On January 6, 1997, the Commission En Bancreversed the appealed Order and directed the Hearing Officer to proceed with the case. In rulingthat a transfer or assignment of stocks need not be registered first before it can take cognizance ofthe case to enforce the petitioner’s rights as a stockholder, the Commission En Banc cited our rulingin Abejo vs. De la Cruz , 149 SCRA 654 (1987) to the effect that:

xxx As the SEC maintains, ―There is no requirement that a stockholder of a corporation must be aregistered one in order that the Securities and Exchange Commission may take cognizance of a suitseeking to enforce his rights as such stockholder‖. This is because the SEC by express mandate has ―absolute jurisdiction, supervision and control over all corporations‖ and is called upon to enforcethe provisions of the Corporation Code, among which is the stock purchaser’s right to secure thecorresponding certificate in his name under the provisions of Section 63 of the Code. Needless tosay, any problem encountered in securing the certificates of stock representing the investmentmade by the buyer must be expeditiously dealt with through administrative mandamus proceedingswith the SEC, rather than through the usual tedious regular court procedure. xxx

Applying this principle in the case on hand, a transfer or assignment of stocks need not beregistered first before the Commission can take cognizance of the case to enforce his rights as astockholder. Also, the problem encountered in securing the certificates of stock made by the buyermust be expeditiously taken up through the so-called administrative mandamus proceedings withthe SEC than in the regular courts.[13]

The Commission En Banc also found that the Hearing Officer erred in holding that petitioner isnot the real party in interest.

x x x

As appearing in the allegations of the complaint, plaintiff-appellant is the transferee of the shares ofstock of Gaid and is therefore entitled to avail of the suit to obtain the proper remedy to make himthe rightful owner and holder of a stock certificate to be issued in his name. Moreover, defendant-appellees failed to show that the transferor nor his heirs have refuted the ownership of thetransferee. Assuming these allegations to be true, the corporation has a mere ministerial duty toregister in its stock and transfer book the shares of stock in the name of the plaintiff-appellantsubject to the determination of the validity of the deed of assignment in the proper tribunal. [14]

Their motion for reconsideration having been denied, herein respondents appealed thedecision[15] of the SEC En Banc and the resolution[16] denying their motion for reconsideration to theCourt of Appeals.

In its decision, the Court of Appeals held that in the absence of any allegation that thetransfer of the shares between Fausto Gaid and Vicente C. Ponce was registered in the stock andtransfer book of ALSONS, Ponce failed to state a cause of action. Thus, said the CA, ―the complaint








































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for mandamus should be dismissed for failure to state a cause of action. ‖ [17] petitioner’s motion forreconsideration was likewise denied in a resolution[18] dated August 10, 1999.

Hence, the instant petition for review on certiorari alleging that:

I. … THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE COMPLAINT FORISSUANCE OF A CERTIFICATE OF STOCK FILED BY PETITIONER FAILED TO STATE A CAUSE OF

ACTION BECAUSE IT DID NOT ALLEGE THAT THE TRANSFER OF THE SHARES (SUBJECT MATTEROF THE COMPLAINT) WAS REGISTERED IN THE STOCK AND TRANSFER BOOK OF THECORPORATION, CITING SECTION 63 OF THE CORPORATION CODE.

II. … THE HONORABLE COURT OF APPEALS ERRED IN NOT APPLYING THE CASES OF ―ABEJO VS. DE LA CRUZ‖, 149 SCRA 654 AND ―RURAL BANK OF SALINAS, INC., ET AL VS. COURT OF APPEALS, ET AL.‖, G.R. NO. 96674, JUNE 26, 1992.

III. … THE HONORABLE COURT OF APPEALS ERRED IN APPLYING A 1911 CASE, ―HAGER VS.BRYAN‖, 19 PHIL. 138, TO DISMISS THE COMPLAINT FOR ISSUANCE OF A CERTIFICATE OF STOCK .[19]

At issue is whether the Court of Appeals erred in holding that herein petitioner has no cause

of action for a writ of mandamus.Petitioner first contends that the act of recording the transfer of shares in the stock and

transfer book and that of issuing a certificate of stock for the transferred shares involves only onecontinuous process. Thus, when a corporate secretary is presented with a document of transfer offully paid shares, it is his duty to record the transfer in the stock and transfer book of thecorporation, issue a new stock certificate in the name of the transferee, and cancel the old one. Atransferee who requests for the issuance of a stock certificate need not spell out each and every actthat needs to be done by the corporate secretary, as a request for issuance of stock certificatesnecessarily includes a request for the recording of the transfer. Ergo, the failure to record thetransfer does not mean that the transferee cannot ask for the issuance of stock certificates.

Secondly, according to petitioner, there is no law, rule or regulation requiring a transferor ofshares of stock to first issue express instructions or execute a power of attorney for the transfer ofsaid shares before a certificate of stock is issued in the name of the transferee and the transfer

registered in the books of the corporation. He contends that Hager vs. Bryan , 19 Phil. 138 (1911),and Rivera vs. Florendo , 144 SCRA 643 (1986), cited by respondents, do not apply to thiscase. These cases contemplate a situation where a certificate of stock has been issued by thecompany whereas in this case at bar, no stock certificates have been issued even in the name of theoriginal stockholder, Fausto Gaid.

Finally, petitioner maintains that since he is under no compulsion to register the transfer or tosecure stock certificates in his name, his cause of action is deemed not to have accrued untilrespondent ALSONS denied his request.

Respondents, in their comment, maintain that the transfer of shares of stock not recorded inthe stock and transfer book of the corporation is non-existent insofar as the corporation isconcerned and no certificate of stock can be issued in the name of the transferee. Until therecording is made, the transfer cannot be the basis of issuance of a certificate of stock. They addthat petitioner is not the real party in interest, the real party in interest being Fausto Gaid since it is

his name that appears in the records of the corporation. They conclude that petitioner’s cause ofaction is barred by prescription and laches since 24 years elapsed before he made any demand upon ALSONS.

We find the instant petition without merit. The Court of Appeals did not err in ruling thatpetitioner had no cause of action, and that his petition for mandamus was properly dismissed.

There is no question that Fausto Gaid was an original subscriber of respondent corporation’s239,500 shares. This is clear from the numerous pleadings filed by either party. It is also clearfrom the Amended Articles of Incorporation[20] approved on August 9, 1995[21] that each share hada par value of P1.00 per share. And, it is undisputed that petitioner had not made a previousrequest upon the corporate secretary of ALSONS, respondent Francisco M. Giron Jr., to record the

alleged transfer of stocks.

The Corporation Code states that:

SEC. 63. Certificate of stock and transfer of shares . –The capital stock of stock corporations shall bedivided into shares for which certificates signed by the president or vi ce-president, countersigned bythe secretary or assistant secretary, and sealed with the seal of the corporation shall be issued inaccordance with the by-laws. Shares of stock so issued are personal property and may betransferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-factor other person legally authorized to make the transfer. No transfer, however, shall be valid, exceptas between the parties, until the transfer is recorded in the books of the corporation so as to showthe names of the parties to the transaction, the date of the transfer, the number of the certificate orcertificates and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be transferable in thebooks of the corporation.

Pursuant to the foregoing provision, a transfer of shares of stock not recorded in the stockand transfer book of the corporation is non-existent as far as the corporation is concerned.[22] Asbetween the corporation on the one hand, and its shareholders and third persons on the other, thecorporation looks only to its books for the purpose of determining who its shareholders are .[23] It isonly when the transfer has been recorded in the stock and transfer book that a corporation mayrightfully regard the transferee as one of its stockholders. From this time, the consequent obligationon the part of the corporation to recognize such rights as it is mandated by law to recognize arises.

Hence, without such recording, the transferee may not be regarded by the corporation as oneamong its stockholders and the corporation may legally refuse the issuance of stock certificates inthe name of the transferee even when there has been compliance with the requirements of Section

64[24] of the Corporation Code. This is the import of Section 63 which states that ―No transfer,however, shall be valid, except between the parties, until the transfer is recorded in the books of thecorporation showing the names of the parties to the transaction, the date of the transfer, thenumber of the certificate or certificates and the number of shares transferred.‖ The situation wouldbe different if the petitioner was himself the registered owner of the stock which he sought totransfer to a third party, for then he would be entitled to the remedy of mandamus.[25]

From the corporation’s point of view, the transfer is not effective until it is recorded. Unlessand until such recording is made the demand for the issuance of stock certificates to the allegedtransferee has no legal basis. As between the corporation on the one hand, and its shareholdersand third persons on the other, the corporation looks only to its books for the purpose ofdetermining who its shareholders are.[26] In other words, the stock and transfer book is the basis forascertaining the persons entitled to the rights and subject to the liabilities of a stockholder. Where atransferee is not yet recognized as a stockholder, the corporation is under no specific legal duty to

issue stock certificates in the transferee’s name. It follows that, as held by the Court of Appeals:











































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x x x until registration is accomplished, the transfer, though valid between the parties, cannot beeffective as against the corporation. Thus, in the absence of any allegation that the transfer of theshares between Gaid and the private respondent [herein petitioner] was registered in the stock andtransfer book of the petitioner corporation, the private respondent has failed to state a cause ofaction.[27]

Petitioner insists that it is precisely the duty of the corporate secretary, when presented with

the document of fully paid shares, to effect the transfer by recording the transfer in the stock andtransfer book of the corporation and to issue stock certificates in the name of the transferee. Onthis point, the SEC En Banc cited Rural Bank of Salinas, Inc. vs. Court of Appeals , [28] where we heldthat:

For the petitioner Rural Bank of Salinas to refuse registration of the transferred shares in its stockand transfer book, which duty is ministerial on its part, is to render nugatory and ineffectual thespirit and intent of Section 63 of the Corporation Code. Thus, respondent Court of Appeals did noterr in upholding the decision of respondent SEC affirming the Decision of its Hearing Officerdirecting the registration of the 473 shares in the stock and transfer book in the names of privaterespondents. At all events, the registration is without prejudice to the proceedings in court todetermine the validity of the Deeds of Assignment of the shares of stock in question.

In Rural Bank of Salinas, Inc., however, private respondent Melania Guerrero had a SpecialPower of Attorney executed in her favor by Clemente Guerrero, the registered stockholder. It gaveGuerrero full authority to sell or otherwise dispose of the 473 shares of stock registered inClemente’s name and to execute the proper documents therefor. Pursuant to the authority sogiven, Melania assigned the 473 shares of stock owned by Guerrero and presented to the RuralBank of Salinas the deeds of assignment covering the assigned shares. Melania Guerrero prayed forthe transfer of the stocks in the stock and transfer book and the issuance of stock certificates in thename of the new owners thereof. Based on those circumstances, there was a clear duty on the partof the corporate secretary to register the 473 shares in favor of the new owners, since the personwho sought the transfer of shares had express instructions from and specific authority given by theregistered stockholder to cause the disposition of stocks registered in his name.

That cannot be said of this case. The deed of undertaking with indorsement presented bypetitioner does not establish, on its face, his right to demand for the registration of the transfer andthe issuance of certificates of stocks. In Hager vs. Bryan , 19 Phil. 138 (1911), this Court held that a

petition for mandamus fails to state a cause of action where it appears that the petitioner is not theregistered stockholder and there is no allegation that he holds any power of attorney from theregistered stockholder, from whom he obtained the stocks, to make the transfer, thus:

It appears, however, from the original as well as the amended petition, that this petitioner is not theregistered owner of the stock which he seeks to have transferred, and except in so far as he allegesthat he is the owner of the stock and that it was "indorsed" to him on February 5 by the Bryan-Landon Company, in whose name it is registered on the books of the Visayan Electric Company,there is no allegation that the peti tioner holds any power of attorney from the Bryan-LandonCompany authorizing him to make demand on the secretary of the Visayan Electric Company tomake the transfer which petitioner seeks to have made through the medium of the mandamus ofthis court.

Without discussing or deciding the respective rights of the parties which might be properly asserted

in an ordinary action or an action in the nature of an equitable suit, we are all agreed that in a casesuch as that at bar, a mandamus should not issue to compel the secretary of acorporation to make a transfer of the stock on the books of the company, unless it

affirmatively appears that he has failed or refused so to do, upon the demand either ofthe person in whose name the stock is registered, or of some person holding a power ofattorney for that purpose from the registered owner of the stock. There is no allegation inthe petition that the petitioner or anyone else holds a power of attorney from the Bryan-LandonCompany authorizing a demand for the transfer of the stock, or that the Bryan-Landon Companyhas ever itself made such demand upon the Visayan Electric Company, and in the absence of suchallegation we are not able to say that there was such a clear indisputable duty, such a clear legalobligation upon the respondent, as to justify the issuance of the writ to compel him to perform it.

Under the provisions of our statute touching the transfer of stock (secs. 35 and 36 of Act No.1459),[29] the mere indorsement of stock certificates does not in i tself give to the indorsee such aright to have a transfer of the shares of stock on the books of the company as will entitle him to thewrit of mandamus to compel the company and its officers to make such transfer at his demand,because, under such circumstances the duty, the legal obligation, is not so clear and indisputable asto justify the issuance of the writ. As a general rule and especially under the above-cited statute, asbetween the corporation on the one hand, and its shareholders and third persons on the other, thecorporation looks only to its books for the purpose of determining who its shareholders are, so thata mere indorsee of a stock certificate, claiming to be the owner, will not necessarily be recognizedas such by the corporation and its officers, in the absence of express instructions of the registeredowner to make such transfer to the indorsee, or a power of attorney authorizing such transfer.[30]

In Rivera vs. Florendo , 144 SCRA 643, 657 (1986), we reiterated that a mere indorsement bythe supposed owners of the stock, in the absence of express instructions from them, cannot be thebasis of an action for mandamus and that the rights of the parties have to be threshed out in anordinary action. That Hager and Rivera involved petitions for mandamus to compel the registrationof the transfer, while this case is one for issuance of stock, is of no moment. It has been madeclear, thus far, that before a transferee may ask for the issuance of stock certificates, he must firstcause the registration of the transfer and thereby enjoy the status of a stockholder insofar as thecorporation is concerned. A corporate secretary may not be compelled to register transfers ofshares on the basis merely of an indorsement of stock certificates. With more reason, in our view, acorporate secretary may not be compelled to issue stock certificates without such registration.[31]

Petitioner’s reliance on our ruling in Abejo vs. De la Cruz, 149 SCRA 654 (1987), that noticegiven to the corporation of the sale of the shares and presentation of the certificates for transfer isequivalent to registration is misplaced. In this case there is no allegation in the complaint thatpetitioner ever gave notice to respondents of the alleged transfer in his favor. Moreover, that case

arose between and among the principal stockholders of the corporation, Pocket Bell, due to therefusal of the corporate secretary to record the transfers in favor of Telectronics of the corporation’scontrolling 56% shares of stock which were covered by duly endorsed stock certificates. Asaforesaid, the request for the recording of a transfer is different from the request for the issuance ofstock certificates in the transferee’s name. Finally, in Abejo we did not say that transfer of sharesneed not be recorded in the books of the corporation before the transferee may ask for the issuanceof stock certificates. The Court’s statement, that ―there is no requirement that a stockholder of acorporation must be a registered one in order that the Securities and Exchange Commission maytake cognizance of a suit seeking to enforce his rights as such stockholder among which is the stockpurchaser’s right to secure the corresponding certificate in his name,‖ [32] was addressed to the issueof jurisdiction, which is not pertinent to the issue at hand.

Absent an allegation that the transfer of shares is recorded in the stock and transfer book ofrespondent ALSONS, there appears no basis for a clear and indisputable duty or clear legal

obligation that can be imposed upon the respondent corporate secretary, so as to justify theissuance of the writ of mandamus to compel him to perform the transfer of the shares topetitioner. The test of sufficiency of the facts alleged in a petition is whether or not, admitting thefacts alleged, the court could render a valid judgment thereon in accordance with the prayer of the



























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petition.[33] This test would not be satisfied if, as in this case, not all the elements of a cause ofaction are alleged in the complaint.[34] Where the corporate secretary is under no clear legal duty toissue stock certificates because of the petitioner’s failure to record earlier the transfer of shares, oneof the elements of the cause of action for mandamus is clearly missing.

That petitioner was under no obligation to request for the registration of the transfer is not inissue. It has no pertinence in this controversy. One may own shares of corporate stock withoutpossessing a stock certificate. In Tan vs. SEC , 206 SCRA 740 (1992), we had occasion to declare

that a certificate of stock is not necessary to render one a stockholder in a corporation. But acertificate of stock is the tangible evidence of the stock itself and of the various intereststherein. The certificate is the evidence of the holder’s interest and status in the corporation, hisownership of the share represented thereby. The certificate is in law, so to speak, an equivalent ofsuch ownership. It expresses the contract between the corporation and the stockholder, but it isnot essential to the existence of a share in stock or the creation of the relation of shareholder to thecorporation.[35] In fact, it rests on the will of the stockholder whether he wants to be issued stockcertificates, and a stockholder may opt not to be issued a certificate. In Won vs. Wack Wack Golfand Country Club, Inc., 104 Phil. 466 (1958), we held that considering that the law does notprescribe a period within which the registration should be effected, the action to enforce the rightdoes not accrue until there has been a demand and a refusal concerning the transfer. In thepresent case, petitioner’s complaint for mandamus must fail, not because of laches or estoppel, butbecause he had alleged no cause of action sufficient for the issuance of the writ.

WHEREFORE, the petition is DENIED for lack of merit. The decision of the Court of Appeals, in CA-G.R. SP No. 46692, which set aside that of the Securities and Exchange CommissionEn Banc in SEC-AC No. 545 and reinstated the order of the Hearing Officer, is hereby AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

Bellosillo, (Chairman), Mendoza, Austria-Martinez, and Callejo, Sr., JJ., concur.

[G.R. No. 144476. April 8, 2003]

ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T. ONG,WILLIE T. ONG, and JULIE ONG ALONZO, petitioners, vs. DAVID S. TIU, CELY Y.TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU, LOURDES C.TIU, INTRALAND RESOURCES DEVELOPMENT CORP., MASAGANA TELAMART,INC., REGISTER OF DEEDS OF PASAY CITY, and the SECURITIES ANDEXCHANGE COMMISSION, respondents .

[G.R. No. 144629. April 8, 2003]

DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU,LOURDES C. TIU, and INTRALAND RESOURCES DEVELOPMENTCORP., petitioners, vs . ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNAL. ONG, WILLIAM T. ONG, WILLIE T. ONG, and JULIA ONG

ALONZO, respondents .

R E S O L U T I O N

CORONA, J .:

Before us are the (1) motion for reconsideration, dated March 15, 2002, of petitioner movantsOng Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong and Julia Ong Alonzo(the Ongs); (2) motion for partial reconsideration, dated March 15, 2002, of petitioner movant WillieOng seeking a reversal of this Court’s Decision,[1] dated February 1, 2002, in G.R. Nos. 144476 and144629 affirming with modification the decision[2] of the Court of Appeals, dated October 5, 1999,which in turn upheld, likewise with modification, the decision of the SEC en banc, dated September11, 1998; and (3) motion for issuance of writ of execution of petitioners David S. Tiu, Cely Y. Tiu,Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu (the Tius) of ourFebruary 1, 2002 Decision.

A brief recapitulation of the facts shows that:

In 1994, the construction of the Masagana Citimall in Pasay City was threatened withstoppage and incompletion when its owner, the First Landlink Asia Development Corporation(FLADC), which was owned by the Tius, encountered dire financial difficulties. It was heavilyindebted to the Philippine National Bank (PNB) for P190 million. To stave off foreclosure of themortgage on the two lots where the mall was being built, the Tius invited Ong Yong, Juanita TanOng, Wilson T. Ong, Anna L. Ong, William T. Ong and Julia Ong Alonzo (the Ongs), to invest inFLADC. Under the Pre-Subscription Agreement they entered into, the Ongs and the Tius agreed tomaintain equal shareholdings in FLADC: the Ongs were to subscribe to 1,000,000 shares at a parvalue of P100.00 each while the Tius were to subscribe to an additional 549,800 shares at P100.00each in addition to their already existing subscription of 450,200 shares. Furthermore, they agreedthat the Tius were entitled to nominate the Vice-President and the Treasurer plus five directors whilethe Ongs were entitled to nominate the President, the Secretary and six directors (including thechairman) to the board of directors of FLADC. Moreover, the Ongs were given the right to manageand operate the mall.

Accordingly, the Ongs paid P100 million in cash for their subscription to 1,000,000 shares ofstock while the Tius committed to contribute to FLADC a four-storey building and two parcels of landrespectively valued at P20 million (for 200,000 shares), P30 million (for 300,000 shares) and P49.8million (for 49,800 shares) to cover their additional 549,800 stock subscription therein. The Ongspaid in another P70 million[3] to FLADC and P20 million to the Tius over and above their P100 millioninvestment, the total sum of which (P190 million) was used to settle the P190 million mortgageindebtedness of FLADC to PNB.

The business harmony between the Ongs and the Tius in FLADC, however, was shortlivedbecause the Tius, on February 23, 1996, rescinded the Pre-Subscription Agreement. The Tiusaccused the Ongs of (1) refusing to credit to them the FLADC shares covering their real propertycontributions; (2) preventing David S. Tiu and Cely Y. Tiu from assuming the positions of andperforming their duties as Vice-President and Treasurer, respectively, and (3) refusing to give themthe office spaces agreed upon.

According to the Tius, the agreement was for David S. Tiu and Cely S. Tiu to assume thepositions and perform the duties of Vice-President and Treasurer, respectively, but the Ongsprevented them from doing so. Furthermore, the Ongs refused to provide them the space for their










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executive offices as Vice-President and Treasurer. Finally, and most serious of all, the Ongs refusedto give them the shares corresponding to their property contributions of a four-story building, a1,902.30 square-meter lot and a 151 square-meter lot. Hence, they felt they were justified insetting aside their Pre-Subscription Agreement with the Ongs who allegedly refused to comply withtheir undertakings.

In their defense, the Ongs said that David S. Tiu and Cely Y. Tiu had in fact assumed thepositions of Vice-President and Treasurer of FLADC but that it was they who refused to comply with

the corporate duties assigned to them. It was the contention of the Ongs that they wanted the Tiusto sign the checks of the corporation and undertake their management duties but that the Tiusshied away from helping them manage the corporation. On the issue of office space, the Ongspointed out that the Tius did in fact already have existing executive offices in the mall since theyowned it 100% before the Ongs came in. What the Tius really wanted were new offices which wereanyway subsequently provided to them. On the most important issue of their alleged failure tocredit the Tius with the FLADC shares commensurate to the Tius’ property contributions, the Ongsasserted that, although the Tius executed a deed of assignment for the 1,902.30 square-meter lot infavor of FLADC, they (the Tius) refused to pay P 570,690 for capital gains tax and documentarystamp tax. Without the payment thereof, the SEC would not approve the valuation of the Tius’property contribution (as opposed to cash contribution). This, in turn, would make it impossible tosecure a new Transfer Certificate of Title (TCT) over the property in FLADC’s name. In any event, itwas easy for the Tius to simply pay the said transfer taxes and, after the new TCT was issued inFLADC’s name, they could then be given the corresponding shares of stocks. On the 151 square-

meter property, the Tius never executed a deed of assignment in favor of FLADC. The Tius initiallyclaimed that they could not as yet surrender the TCT because it was ―still being reconstituted‖ bythe Lichaucos from whom the Tius bought it. The Ongs later on discovered that FLADC had inreality owned the property all along, even before their Pre-Subscription Agreement was executed in1994. This meant that the 151 square-meter property was at that time already the corporateproperty of FLADC for which the Tius were not entitled to the issuance of new shares of stock.

The controversy finally came to a head when this case was commenced[4] by the Tius onFebruary 27, 1996 at the Securities and Exchange Commission (SEC), seeking confirmation of theirrescission of the Pre-Subscription Agreement. After hearing, the SEC, through then Hearing OfficerRolando G. Andaya, Jr., issued a decision on May 19, 1997 confirming the rescission sought by theTius, as follows:

WHEREFORE, judgment is hereby rendered confirming the rescission of the Pre-Subscription Agreement, and consequently ordering:

(a) The cancellation of the 1,000,000 shares subscription of the individual defendants inFLADC;

(b) FLADC to pay the amount of P170,000,000.00 to the individual defendantsrepresenting the return of their contribution for 1,000,000 shares of FLADC;

( c) The plaintiffs to submit with (sic) the Securities and Exchange Commissionamended articles of incorporation of FLADC to conform with this decision;

(d) The defendants to surrender to the plaintiffs TCT Nos. 132493, 132494, 134066(formerly 15587), 135325 and 134204 and any other title or deed in the name ofFLADC, failing in which said titles are declared void;

(e) The Register of Deeds to issue new certificates of titles in favor of the plaintiffs andto cancel the annotation of the Pre-Subscription Agreement dated 15 August 1994on TCT No. 134066 (formerly 15587);

(f) The individual defendants, individually and collectively, their agents andrepresentatives, to desist from exercising or performing any and all acts pertainingto stockholder, director or officer of FLADC or in any manner intervene in themanagement and affairs of FLADC;

(g) The individual defendants, jointly and severally, to return to FLADC interest paymentin the amount of P8,866,669.00 and all interest payments as well as any paymentson principal received from the P70,000,000.00 inexistent loan, plus the legal rate of

interest thereon from the date of their receipt of such payment until fully paid;

(h) The plaintiff David Tiu to pay individual defendants the sum of P20,000,000.00representing his loan from said defendants plus legal interest from the date ofreceipt of such amount.

SO ORDERED.[5]

On motion of both parties, the above decision was partially reconsidered but only insofar asthe Ongs’ P70 million was declared not as a premium on capital stock but an advance (loan) by theOngs to FLADC and that the impos ition of interest on it was correct.[6]

Both parties appealed[7] to the SEC en banc which rendered a decision on September 11,1998, affirming the May 19, 1997 decision of the Hearing Officer. The SEC en banc confirmed the

rescission of the Pre-Subscription Agreement but reverted to classifying the P70 million paid by theOngs as premium on capital and not as a loan or advance to FLADC, hence, not entitled to earninterest.[8]

On appeal, the Court of Appeals (CA) rendered a decision on October 5, 1999, thus:

WHEREFORE, the Order dated September 11, 1998 i ssued by the Securities and ExchangeCommission En Banc in SEC AC CASE NOS. 598 and 601 confirming the rescission of the Pre-Subscription Agreement dated August 15, 1994 is hereby AFFIRMED, subject to the followingMODIFICATIONS:

1. The Ong and Tiu Groups are ordered to liquidate First Landlink AsiaDevelopment Corporation in accordance with the following cash and propertycontributions of the parties therein.

(a) Ong Group – P100,000,000.00 cash contribution for one (1) millionshares in First Landlink Asia Development Corporation at a par value ofP100.00 per share;

(b) Tiu Group:

1) P45,020,000.00 original cash contribution for 450,200 shares in FirstLandlink Asia Development Corporation at a par value of P100.00per share;

2) A four-storey building described in Transfer Certificate of Title No.

15587 in the name of Intraland Resources and DevelopmentCorporation valued at P20,000,000.00 for 200,000 shares in FirstLandlink Asia Development Corporation at a par value of P100.00per share;























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3) A 1,902.30 square-meter parcel of land covered by TransferCertificate of Title No. 15587 in the name of Masagana Telamart, Inc.valued at P30,000,000.00 for 300,000 shares in First Landlink AsiaDevelopment Corporation at a par value of P100.00 per share.

2) Whatever remains of the assets of the First Landlink Asia DevelopmentCorporation and the management thereof is (sic) hereby ordered transferred

to the Tiu Group.

3) First Landlink Asia Development Corporation is hereby ordered to pay theamount of P70,000,000.00 that was advanced to it by the Ong Group upon thefinality of this decision. Should the former incur in delay in the paymentthereof, it shall pay the legal interest thereon pursuant to Article 2209 of theNew Civil Code.

4) The Tius are hereby ordered to pay the amount of P20,000,000.00 loaned themby the Ongs upon the finality of this decision. Should the former incur in delayin the payment thereof, it shall pay the legal interest thereon pursuant to Article 2209 of the New Civil Code.

SO ORDERED.[9]

An interesting sidelight of the CA decision was its description of the rescission made by theTius as the ―height of ingratitude‖ and as ―pulling a fast one‖ on the Ongs. The CA moreover foundthe Tius guilty of withholding FLADC funds from the Ongs and diverting corporate income to theirown MATTERCO account.[10] These were findings later on affirmed in our own February 1, 2002Decision which is the subject of the instant motion for reconsideration.[11]

But there was also a strange aspect of the CA decision. The CA concluded that both the Ongsand the Tius were in pari delicto (which would not have legally entitled them to rescission) but, ―forpractical considerations,‖ that is, their inability to work together, it was best to separate the twogroups by rescinding the Pre-Subscription Agreement, returning the original investment of the Ongsand awarding practically everything else to the Tius.

Their motions for reconsideration having been denied, both parties filed separate petitions for

review before this Court.

In their petition docketed as G.R. No. 144476, Ong et al. vs. Tiu et al., the Ongs argued thatthe Tius may not properly avail of resciss ion under Article 1191 of the Civil Code considering that thePre-Subscription Agreement did not provide for reciprocity of obligations; that the rights over thesubject matter of the rescission (capital assets and properties) had been acquired by a third party(FLADC); that they did not commit a substantial and fundamental breach of their agreement sincethey did not prevent the Tius from assuming the positions of Vice-President and Treasurer of FLADC,and that the failure to credit the 300,000 shares corresponding to the 1,902.30 square-meterproperty covered by TCT No. 134066 (formerly 15587) was due to the refusal of the Tius to pay therequired transfer taxes to secure the approval of the SEC for the property contribution and,thereafter, the issuance of title in FLADC’s name. They also argued that the liquidation of FLADCmay not legally be ordered by the appellate court even for so called ―practical considerations‖ oreven to prevent ―further squabbles and numerous litigations,‖ since the same are not valid grounds

under the Corporation Code. Moreover, the Ongs bewailed the failure of the CA to grant interest ontheir P70 million and P20 million advances to FLADC and David S. Tiu, respectively, and to awardcosts and damages.

In their petition docketed as G.R. No. 144629, Tiu et al. vs. Ong et al., the Tius, on the otherhand, contended that the rescission should have been limited to the restitution of the parties’respective investments and not the liquidation of FLADC based on the erroneous perception by thecourt that: the Masagana Citimall was threatened with incompletion since FLADC was in financialdistress; that the Tius invited the Ongs to invest in FLADC to settle its P190 million loan from PNB;that they violated the Pre-Subscription Agreement when it was the Lichaucos and not the Tius whoexecuted the deed of assignment over the 151 square-meter property commensurate to 49,800shares in FLADC thereby failing to pay the price for the said shares; that they did not turn over tothe Ongs the entire amount of FLADC funds; that they were diverting rentals from lease contractsdue to FLADC to their own MATTERCO account; that the P70 million paid by the Ongs was anadvance and not a premium on capital; and that, by rescinding the Pre-Subscription Agreement,they wanted to wrestle away the management of the mall and prevent the Ongs from enjoying theprofits of their P190 million investment in FLADC.

On February 1, 2002, this Court promulgated its Decision (the subject of the instant motions),affirming the assailed decision of the Court of Appeals but with the following modifications:

1. the P20 million loan extended by the Ongs to the Tius shall earn interest at twelvepercent (12%) per annum to be computed from the time of judicial demand whichis from April 23, 1996;

2. the P70 million advanced by the Ongs to the FLADC shall earn interest at ten percent(10%) per annum to be computed from the date of the FLADC Board Resolution

which is June 19, 1996; and

3. the Tius shall be credited with 49,800 shares in FLADC for their propertycontribution, specifically, the 151 sq. m. parcel of land.

This Court affirmed the fact that both the Ongs and the Tius violated their respectiveobligations under the Pre-Subscription Agreement. The Ongs prevented the Tius from assuming thepositions of Vice-President and Treasurer of the corporation. On the other hand, the Decisionestablished that the Tius failed to turn over FLADC funds to the Ongs and that the Tius divertedrentals due to FLADC to their MATTERCO account. Consequently, it held that rescission was notpossible since both parties were in pari delicto . However, this Court agreed with the Court of Appeals that the remedy of specific performance, as espoused by the Ongs, was not practical andsound either and would only lead to further ―squabbles and numerous litigations‖ between theparties.

On March 15, 2002, the Tius filed before this Court a Motion for Issuance of a Writ ofExecution on the grounds that: (a) the SEC order had become executory as early as September 11,1998 pursuant to Sections 1 and 12, Rule 43 of the Rules of Court; (b) any further delay would beinjurious to the rights of the Tius since the case had been pending for more than six years; and (c)the SEC no longer had quasi-judicial jurisdiction under RA 8799 (Securities Regulation Code). TheOngs filed their opposition, contending that the Decision dated February 1, 2002 was not yet finaland executory; that no good reason existed to issue a warrant of execution; and that, pursuant toSection 5.2 of RA 8799, the SEC retained jurisdiction over pending cases involving intra-corporatedisputes already submitted for final resolution upon the effectivi ty of the said law.

Aside from their opposition to the Tius’ Motion for Issuance of Writ of Execution, the Ongsfiled their own ―Motion for Reconsideration; Alternatively, Motion for Modification (of the February 1,2002 Decision)‖ on March 15, 2002, raising two main points: (a) that specific performance and notrescission was the proper remedy under the premises; and (b) that, assuming rescission to beproper, the subject decision of this Court should be modified to entitle movants to theirproportionate share in the mall.















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On their first point (specific performance and not rescission was the proper remedy), movantsOng argue that their alleged breach of the Pre-Subscription Agreement was, at most, casual whichdid not justify the rescission of the contract. They stress that providing appropriate offices for DavidS. Tiu and Cely Y. Tiu as Vice-President and Treasurer, respectively, had no bearing on theirobligations under the Pre-Subscription Agreement since the said obligation (to provide executiveoffices) pertained to FLADC itself. Such obligation arose from the relations between the said officersand the corporation and not any of the individual parties such as the Ongs. Likewise, the allegedfailure of the Ongs to credit shares of stock in favor of the Tius for their property contributions alsopertained to the corporation and not to the Ongs. Just the same, it could not be done in view of theTius’ refusal to pay the necessary transfer taxes which in turn resulted in the inability to secure SECapproval for the property contributions and the issuance of a new TCT in the name of FLADC.

Besides, according to the Ongs, the principal objective of both parties in entering into the Pre- Subscription Agreement in 1994 was to raise the P190 million desperately needed for the paymentof FLADC’s loan to PNB . Hence, in this light, the alleged failure to provide office space for the twocorporate officers was no more than an inconsequential infringement. For rescission to be justified,the law requires that the breach of contract should be so ―substantial or fundamental‖ as to defeatthe primary objective of the parties in making the agreement. At any rate, the Ongs claim that itwas the Tius who were guilty of fundamental violations in failing to remit funds due to FLADC anddiverting the same to their MATTERCO account.

The Ongs also allege that, in view of the findings of the Court that both parties were guilty ofviolating the Pre-Subscription Agreement, neither of them could resort to rescission under theprinciple of pari delicto . In addition, since the cash and other contributions now sought to bereturned already belong to FLADC, an innocent third party, said remedy may no longer be availed ofunder the law.

On their second point (assuming rescission to be proper, the Ongs should be given theirproportionate share of the mall), movants Ong vehemently take exception to the second item in thedispositive portion of the questioned Decision insofar as it decreed that whatever remains of theassets of FLADC and the management thereof (after liquidation) shall be transferred to theTius. They point out that the mall itself, which would have been foreclosed by PNB if not for theirtimely investment of P190 million in 1994 and which is now worth about P1 billion mainly because oftheir efforts, should be included in any partition and distribution. They (the Ongs) should notmerely be given interest on their capital investments. The said portion of our Decision, according tothem, amounted to the unjust enrichment of the Tius and ran contrary to our own pronouncementthat the act of the Tius in unilaterally rescinding the agreement was ―the height of ingratitude‖ and

an attempt ―to pull a fast one‖ as it would prevent the Ongs from enjoying the fruits of their P190million investment in FLADC. It also contravenes this Court’s assurance in the questioned Decisionthat the Ongs and Tius ―will have a bountiful return of their respective investments derived fromthe profits of the corporation.‖

Willie Ong filed a separate ―Motion for Partial Reconsideration‖ dated March 8, 2002, pointingout that there was no violation of the Pre-Subscription Agreement on the part of the Ongs; that,after more than seven years since the mall began its operations, rescission had become not onlyimpractical but would also adversely affect the rights of innocent parties; and that it would be highlyinequitable and unfair to simply return the P100 million investment of the Ongs and give theremaining assets now amounting to about P1 billion to the Tius.

The Tius, in their opposition to the Ongs’ motion for reconsideration, counter that thearguments therein are a mere re-hash of the contentions in the Ongs’ petition for review andprevious motion for reconsideration of the Court of Appeals’ decision. The Tius compare the

arguments in said pleadings to prove that the Ongs do not raise new issues, and, based on well-settled jurisprudence,[12] the Ongs’ present motion is therefore pro-forma and did not prevent theDecision of this Court from attaining finality.

On January 29, 2003, the Special Second Division of this Court held oral arguments on therespective positions of the parties . On February 27, 2003, Dr. Willie Ong and the rest of the movantsOng filed their respective memoranda. On February 28, 2003, the Tius submitted theirmemorandum.

We grant the Ongs’ motions for reconsideration.

This is not the first time that this Court has reversed itself on a motion for reconsideration.

In Philippine Consumers Foundation, Inc. vs. National Telecommunications Commission ,[13]

thisCourt, through then Chief Justice Felix V. Makasiar, said that its members may and do change theirminds, after a re-study of the facts and the law, illuminated by a mutual exchange of views .[14] Aftera thorough re-examination of the case, we find that our Decision of February 1, 2002 overlookedcertain aspects which, if not corrected, will cause extreme and irreparable damage and prejudice tothe Ongs, FLADC and its creditors.

The procedural rule on pro-forma motions pointed out by the Tius should not be blindlyapplied to meritorious motions for reconsideration. As long as the same adequately raises a validground[15] (i.e., the decision or final order is contrary to law), this Court has to evaluate the merits ofthe arguments to prevent an unjust decision from attaining finality. In Security Bank and TrustCompany vs. Cuenca ,[16] we ruled that a motion for reconsideration is not pro-forma for the reasonalone that it reiterates the arguments earlier passed upon and rejected by the appellate court. Weexplained there that a movant may raise the same arguments, if only to convince this Court that itsruling was erroneous. Moreover, the rule (that a motion is pro-forma if it only repeats the

arguments in the previous pleadings) will not apply if said arguments were not squarely passedupon and answered in the decision sought to be reconsidered. In the case at bar, no ruling wasmade on some of the petitioner Ongs’ arguments . For instance, no clear ruling was made on why anorder distributing corporate assets and property to the stockholders would not violate the statutorypreconditions for corporate dissolution or decrease of authorized capital stock. Thus, it would servethe ends of justice to entertain the subject motion for reconsideration since some important issuestherein, although mere repetitions, were not considered or clearly resolved by this Court.

Going now to the merits, we resolve whether the Tius could legally rescind the Pre-Subscription Agreement. We rule that they could not.

FLADC was originally incorporated with an authorized capital stock of 500,000 shares with theTius owning 450,200 shares representing the paid-up capital. When the Tius invited the Ongs toinvest in FLADC as stockholders, an increase of the authorized capital stock became necessary togive each group equal (50-50) shareholdings as agreed upon in the Pre-Subscription

Agreement. The authorized capital stock was thus increased from 500,000 shares to 2,000,000shares with a par value of P100 each, with the Ongs subscribing to 1,000,000 shares and the Tius to549,800 more shares in addition to their 450,200 shares to complete 1,000,000 shares. Thus, thesubject matter of the contract was the 1,000,000 unissued shares of FLADC stock allocated to theOngs. Since these were unissued shares, the parties’ Pre-Subscription Agreement was in fact asubscription contract as defined under Section 60, Title VII of the Corporation Code:

Any contract for the acquisition of unissued stock in an existing corporation or a corporation still tobe formed shall be deemed a subscription within the meaning of this Title, notwithstanding the factthat the parties refer to it as apurchase or some other contract (Italics supplied).

A subscription contract necessarily involves the corporation as one of the contracting partiessince the subject matter of the transaction is property owned by the corporation – its shares of

stock. Thus, the subscription contract (denominated by the parties as a Pre-Subscription Agreement)whereby the Ongs invested P100 million for 1,000,000 shares of stock was, from the viewpoint ofthe law, one between the Ongs and FLADC, not between the Ongs and the Tius. Otherwise stated,













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the Tius did not contract in their personal capacities with the Ongs since they were not selling any oftheir own shares to them. It was FLADC that did.

Considering therefore that the real contracting parties to the subscription agreement wereFLADC and the Ongs alone, a civil case for rescission on the ground of breach of contract filed bythe Tius in their personal capacities will not prosper. Assuming it had valid reasons to do so, onlyFLADC (and certainly not the Tius) had the legal personality to file suit rescinding the subscriptionagreement with the Ongs inasmuch as it was the real party in interest therein. Article 1311 of the

Civil Code provides that ―contracts take effect only between the parties, their assigns and heirs…‖Therefore, a party who has not taken part in the transaction cannot sue or be sued for performanceor for cancellation thereof, unless he shows that he has a real interest affected thereby. [17]

In their February 28, 2003 Memorandum, the Tius claim that there are two contractsembodied in the Pre-Subscription Agreement: a shareholder’s agreement between the Tius and theOngs defining and governing their relationship and a subscription contract between the Tius, theOngs and FLADC regarding the subscription of the parties to the corporation. They point out thatthese two component parts form one whole agreement and that their terms and conditions areintrinsically related and dependent on each other. Thus, the breach of the shareholders’ agreement,which was allegedly the consideration for the subscription contract, was also a breach of the latter.

Aside from the fact that this is an entirely new angle never raised in any of their previouspleadings until after the oral arguments on January 29, 2003, we find this argument too strained forcomfort. It is obviously intended to remedy and cover up the Tius’ lack of legal personality to

rescind an agreement in which they were personally not parties-in-interest. Assuming arguendo thatthere were two ―sub-agreements‖ embodied in the Pre-Subscription Agreement, this Court fails tosee how the shareholders agreement between the Ongs and Tius can, within the bounds of reason,be interpreted as the consideration of the subscription contract between FLADC and the Ongs. Therewas nothing in the Pre-Subscription Agreement even remotely suggesting such allegedinterdependence. Be that as it may, however, the Tius are nevertheless not the proper parties toraise this point because they were not parties to the subscription contract between FLADC and theOngs. Thus, they are not in a position to claim that the shareholders agreement between them andthe Ongs was what induced FLADC and the Ongs to enter into the subscription contract. It is theOngs alone who can say that. Though FLADC was represented by the Tius in the subscriptioncontract, FLADC had a separate juridical personality from the Tius. The case before us does notwarrant piercing the veil of corporate fiction since there is no proof that the corporation is beingused ―as a cloak or cover for fraud or illegality, or to work injustice.‖ [18]

The Tius also argue that, since the Ongs represent FLADC as its management, breach by theOngs is breach by FLADC. This must also fail because such an argument disregards the separate juridical personality of FLADC.

The Tius allege that they were prevented from participating in the management of thecorporation. There is evidence that the Ongs did prevent the rightfully elected Treasurer, Cely Tiu,from exercising her function as such. The records show that the President, Wilson Ong, supervisedthe collection and receipt of rentals in the Masagana Citimall ;[19] that he ordered the same to bedeposited in the bank ;[20] and that he held on to the cash and properties of thecorporation.[21] Section 25 of the Corporation Code prohibits the President from acting concurrentlyas Treasurer of the corporation. The rationale behind the provision is to ensure the effectivemonitoring of each officer’s separate f unctions.

However, although the Tius were adversely affected by the Ongs’ unwillingness to let themassume their positions, rescission due to breach of contract is definitely the wrong remedy for their

personal grievances. The Corporation Code, SEC rules and even the Rules of Court providefor appropriate and adequate intra-corporate remedies, other than rescission, insituations like this. Rescission is certainly not one of them, specially if the party asking for it hasno legal personality to do so and the requirements of the law therefor have not been met. A

contrary doctrine will tread on extremely dangerous ground because it will allow just anystockholder, for just about any real or imagined offense, to demand rescission of his subscriptionand call for the distribution of some part of the corporate assets to him without complying with therequirements of the Corporation Code.

Hence, the Tius, in their personal capacities, cannot seek the ultimate and extraordinaryremedy of rescission of the subject agreement based on a less than substantial breach ofsubscription contract. Not only are they not parties to the subscription contract between the Ongs

and FLADC; they also have other available and effective remedies under the law.

All this notwithstanding, granting but not conceding that the Tius possess the legal standing tosue for rescission based on breach of contract, said action will nevertheless still not prosper sincerescission will violate the Trust Fund Doctrine and the procedures for the valid distribution of assetsand property under the Corporation Code.

The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine Trust Co.vs. Rivera ,[22] provides that subscriptions to the capital stock of a corporation constitute a fund towhich the creditors have a right to look for the satisfaction of their claims.[23] This doctrine is theunderlying principle in the procedure for the distribution of capital assets, embodied in theCorporation Code, which allows the distribution of corporate capital only in three instances: (1)amendment of the Articles of Incorporation to reduce the authorized capital stock ,[24] (2) purchaseof redeemable shares by the corporation, regardless of the existence of unrestricted retainedearnings,[25] and (3) dissolution and eventual liquidation of the corporation. Furthermore, the

doctrine is articulated in Section 41 on the power of a corporation to acquire its own share s[26] andin Section 122 on the prohibition against the distribution of corporate assets and property unless thestringent requirements therefor are complied with.[27]

The distribution of corporate assets and property cannot be made to depend on the whimsand caprices of the stockholders, officers or directors of the corporation, or even, for that matter, onthe earnest desire of the court a quo ―to prevent further squabbles and future litigations‖ unless theindispensable conditions and procedures for the protection of corporate creditors are followed.Otherwise, the ―corporate peace‖ laudably hoped for by the court will remain nothing but a dreambecause this time, it will be the creditors’ turn to engage in ―squabbles and litigations‖ should thecourt order an unlawful distribution in blatant disregard of the Trust Fund Doctrine.

In the instant case, the rescission of the Pre-Subscription Agreement will effectively result inthe unauthorized distribution of the capital assets and property of the corporation, thereby violatingthe Trust Fund Doctrine and the Corporation Code, since rescission of a subscription agreement is

not one of the instances when distribution of capital assets and property of the corporation isallowed.

Contrary to the Tius’ allegation, rescission will, in the final an alysis, result in the prematureliquidation of the corporation without the benefit of prior dissolution in accordance with Sections117, 118, 119 and 120 of the Corporation Code.[28] The Tius maintain that rescinding thesubscription contract is not synonymous to corporate liquidation because all rescission will entailwould be the simple restoration of the status quo ante and a return to the two groups of their cashand property contributions. We wish it were that simple. Very noticeable is the fact that the Tius donot explain why rescission in the instant case will not effectively result in liquidation. The Tiusmerely refer in cavalier fashion to the end-result of rescission (which incidentally is 100% favorableto them) but turn a blind eye to its unfair, inequitable and disastrous effect on the corporation, itscreditors and the Ongs.

In their Memorandum dated February 28, 2003, the Tius claim that rescission of theagreement will not result in an unauthorized liquidation of the corporation because their case isactually a petition to decrease capital stock pursuant to Section 38 of the Corporation Code. Section122 of the law provides that ―(e)xcept by decrease of capital stock…, no corporation shall distribute



















































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any of its assets or property except upon lawful dissolution and after payment of all its debts andliabilities.‖ The Tius claim that their case for rescission, being a petition to decrease capital stock ,does not violate the liquidation procedures under our laws. All that needs to be done, according tothem, is for this Court to order (1) FLADC to file with the SEC a petition to issue a certificate ofdecrease of capital stock and (2) the SEC to approve said decrease. This new argument has nomerit.

The Tius’ case for rescission cannot validly be deemed a petition to decrease capital stock

because such action never complied with the formal requirements for decrease of capital stockunder Section 33 of the Corporation Code. No majority vote of the board of directors was evertaken. Neither was there any stockholders meeting at which the approval of stockholders owning atleast two-thirds of the outstanding capital stock was secured. There was no revised treasurer’saffidavit and no proof that said decrease will not prejudice the creditors’ rights. On the contrary, alltheir pleadings contained were alleged acts of violations by the Ongs to justify an order ofrescission.

Furthermore, it is an improper judicial intrusion into the internal affairs of the corporation tocompel FLADC to file at the SEC a petition for the issuance of a certificate of decrease of stock.Decreasing a corporation’s authorized capital stock is an amendment of the Articles of Incorporation.It is a decision that only the stockholders and the directors can make, considering that they are thecontracting parties thereto. In this case, the Tius are actually not just asking for a review of thelegality and fairness of a corporate decision. They want this Court to make a corporate decision forFLADC . We decline to intervene and order corporate structural changes not voluntarily agreed uponby its stockholders and directors.

Truth to tell, a judicial order to decrease capital stock without the assent of FLADC’s directorsand stockholders is a violation of the ―business judgment rule‖ which states that:

xxx xxx xxx (C)ontracts intra vires entered into by the board of directors are binding upon thecorporation and courts will not interfere unless such contracts are so unconscionable and oppressiveas to amount to wanton destruction to the rights of the minority, as when plaintiffs aver that thedefendants (members of the board), have concluded a transaction among themselves as will resultin serious injury to the plaintiffs stockholders.[29]

The reason behind the rule is aptly explained by Dean Cesar L. Villanueva, an esteemedauthor in corporate law, thus:

Courts and other tribunals are wont to override the business judgment of the board mainly because,courts are not in the business of business, and the laissez faire rule or the free enterprise systemprevailing in our social and economic set-up dictates that it is better for the State and its organs toleave business to the businessmen; especially so, when courts are ill-equipped to make businessdecisions. More importantly, the social contract in the corporate family to decide the course of thecorporate business has been vested in the board and not with courts.[30]

Apparently, the Tius do not realize the illegal consequences of seeking rescission and controlof the corporation to the exclusion of the Ongs. Such an act infringes on the law on reduction ofcapital stock. Ordering the return and distribution of the Ongs’ capital contribution without dissolvingthe corporation or decreasing its authorized capital stock is not only against the law but is alsoprejudicial to corporate creditors who enjoy absolute priority of payment over and above anyindividual stockholder thereof.

Stripped to its barest essentials, the issue of rescission in this case is not difficult tounderstand. If rescission is denied, will injustice be inflicted on any of the parties? The answer is

no because the financial interests of both the Tius and the Ongs will remain intact and safe withinFLADC. On the other hand, if rescission is granted, will any of the parties suffer aninjustice? Definitely yes because the Ongs will find themselves out in the streets with nothing butthe money they had in 1994 while the Tius will not only enjoy a windfall estimated to be anywherefrom P450 million to P900 million[31] but will also take over an extremely profitable business withoutmuch effort at all.

Another very important point follows. The Court of Appeals and, later on, our Decision dated

February 1, 2002, stated that both groups were in pari delicto, meaning, that both the Tius and theOngs committed breaches of the Pre-Subscription Agreement. This may be true to a certain extentbut, judging from the comparative gravity of the acts separately committed by each group, we findthat the Ongs’ acts were relatively tame vis-à-vis those committed by the Tius in not surrenderingFLADC funds to the corporation and diverting corporate income to their own MATTERCOaccount. The Ongs were right in not issuing to the Tius the shares corresponding to the four-storybuilding and the 1,902.30 square-meter lot because no title for it could be issued in FLADC’s name,owing to the Tius’ refusal to pay the transfer taxes. And as far as the 151 square-meter lot wasconcerned, why should FLADC issue additional shares to the Tius for property already owned by thecorporation and which, in the final analysis, was already factored into the shareholdings of the Tiusbefore the Ongs came in?

We are appalled by the attempt by the Tius, in the words of the Court of Appeals, to ―pull afast one‖ on the Ongs because that was where the problem precisely started. It is clear that, whenthe finances of FLADC improved considerably after the equity infusion of the Ongs, the Tius startedplanning to take over the corporation again and exclude the Ongs from it. It appears that the Tius’refusal to pay transfer taxes might not have really been at all unintentional because, by failing topay that relatively small amount which they could easily afford, the Tius should have expected thatthey were not going to be given the corresponding shares. It was, from every angle, the perfectexcuse for blackballing the Ongs. In other words, the Tius created a problem then used that sameproblem as their pretext for showing their partners the door. In the process, they stood to berewarded with a bonanza of anywhere between P450 million to P900 million in assets (from aninvestment of only P45 million which was nearly foreclosed by PNB), to the extreme and irreparabledamage of the Ongs, FLADC and its creditors.

After all is said and done, no one can close his eyes to the fact that the Masagana Citimallwould not be what it has become today were it not for the timely infusion of P190 million by theOngs in 1994. There are no ifs or buts about it.

Without the Ongs, the Tius would have lost everything they originally invested in said mall. Ifonly for this and the fact that this Resolution can truly pave the way for both groups to enjoy thefruits of their investments — assuming good faith and honest intentions — we cannot allow therescission of the subject subscription agreement. The Ongs’ shortcomings were far from seriousand certainly less than substantial; they were in fact remediable and correctable under the law. Itwould be totally against all rules of justice, fairness and equity to deprive the Ongs of their interestson petty and tenuous grounds.

WHEREFORE, the motion for reconsideration, dated March 15, 2002, of petitioners Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong and Julie Ong Alonzo andthe motion for partial reconsideration, dated March 15, 2002, of petitioner Willie Ong are herebyGRANTED. The Petition for Confirmation of the Rescission of the Pre-Subscription Agreementdocketed as SEC Case No. 02-96-5269 is hereby DISMISSED for lack of merit. The unilateralrescission by the Tius of the subject Pre-Subscription Agreement, dated August 15, 1994, is herebydeclared as null and void.

The motion for the issuance of a writ of execution, dated March 15, 2002, of petitioners DavidS. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu ishereby DENIED for being moot.













Corpo Subscription Contract Cases

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