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DELINQUENT SHAREHOLDER

Being now the holder of certificate, what rights do you have among others?
Right to vote,
right to be voted upon,
right to dividends,
inspect the books
If the secretary in a meeting did not allow you to vote, what will you do?
If the refusal was not well grounded, i would file a case to compel the
corporate secretary.
One good reason would be? - Possession of delinquent shares
Why what is the effect of a delinquent SH?
Stripped of rights as a shareholder other than right to dividends
However, when corporation demanded payment for your balance in the subscription
contract, you told corporate secretary "i will pay the moment i get cash
dividends" how could that be resolved? Would it be a valid agreement for a
stockholder to demand payment of dividends before he will pay the balance on his
subscription contract? What do you think?
No. The shareholder cannot compel the corporation to declare dividends. This
situation involves two different relationships arising out of two different
contracts. An investment contract and a subscription contract.
How are these contracts different in a corporation setting?
SUBSCRIPTION CONTRACT
In a subscription contract, a subscriber initially pays for the down
payment, with a commitment to pay the balance. That is the commitment.
Because the subscriber committed to pay, he is the debtor of the corporation
and the latter can compel the subscriber to pay.
INVESTMENT CONTRACT
However, In an investment contract, the corporation never committed to
give the subscriber/shareholder profits. There was no commitment to the
declare profits, but there is only a commitment to declare such profits if
allowed under the circumstances.

In the investment contract, there was no guarantee. You took the risk. Of
course, we could always tolerate the exaggerations of trade. Exaggerations of
trade are tolerable. There are times that you will have the difficulty in getting
back your investments. These are the risk of investment. Thats the
difference from the debtor creditor relationship.

In short, there is no debtor-creditor relationship in an investment contract.


While in a subscription contract, the corporation is a creditor in relation to the
debtor shareholder.
WATERED STOCK
If you are the subscriber of the watered stock and you got the CERTIFICATE,
can you transfer it to another buyer? If you are the subscriber of the
watered stock and you got the certificate because it was made to appear that
it was fully paid.
YES. Certificate is valid so there can be transfer of ownership. Only the
consideration is invalid.
What about the watered STOCK?
If the sale is valid the watered stock is also valid. What is considered as
invalid there is the consideration for the watered stock.
Since the certificate is valid and the consideration is not, how do we resolve that
issue? So how do we recover the true value? Their liability being?
The directors or officers who consented to or who did not file an objection,
with the corporate secretary, to the watering of the stock is solidarily liable
together with the stockholder, who purchased the water stock, for the true
value of the watered stock (difference between the actual price paid and the
par or issue value)
Why would the law allow a stock certificate which has not been fully paid to be
transferred?
To maintain economic relations among corporations and the public. If we do
not allow that, every time a person buys shares of stocks, the buyer will
always ask if it was sold with proper consideration and it will lead to the
suffering of the economy. That is why certificates are made transferrable
even if it is not fully paid.
The transferability of the certificates would not mean anything if we have to
examine them every time we buy a share of stock because it would cause great
inconvenience.
Sir: We could no longer trust in the certificate and therefore it loses its credibility.
And if no one will trust in them, its transferability is rendered useless.
And so here comes now the transferee, he did not know this was a watered
stock. He went to the corporation and presented the said stock, duly endorsed. Is
the corporation obliged to recognize that he is now the stockholder of the
certificate?
The corporation must honor because there is nothing wrong with the
certificate. The mistake or deficiency was in the consideration. So, so long as

the certificate is legitimate then the


honor/acknowledge and effect the transfer.

corporation

is

obliged

to

DERIVATIVE SUIT
If the corporation does not transfer, the buyer can file a suit to compel the
corporation to issue. He will file in behalf of himself.
It is an INDIVIDUAL SUIT when one files a case in his own behalf for a cause of
action that belongs to him. If there are several holders of watered stock and you all
want to transfer but the corporation refuses. you can file a CLASS
SUIT/REPRESENTATIVE SUIT in behalf of yourself and in behalf of others similarly
situated.
DERIVATIVE SUIT
a suit file in behalf of the corporation.
The cause of action belongs to the corporation and you are suing for the
corporation.
He derives the right to file a case from the corporation.
Under what circumstances you may want to file a derivative suit?
In case of issuance of watered stock when you collect the difference of the
consideration from the board of director and the stockholder who bought the
watered stock, an interested SH may file a claim before the corporation and if
the corp does not act on it, he may now file a suit under the name of the
corporation to collect such deficiency.
REQUISITES:
Corporation should have a cause of action
That the shareholder demanded from the board to sue but the board denied
such demand
The SH must be a shareholder that the questionable transaction occurred or
cause of action accrued
The case should be brought in the name of the corporation
Can a watered stock be the subject of a derivative suit? In what way?
Yes it can. The cause of action to sue the directors who consented to the
issuance of the watered stock belongs to the corporation. The corporation is
represented by the directors hence they are the ones who should file the
case, however, since they are the ones that are to be sued, they wont.
Can a creditor file a derivative suit?

No, only the stockholders that are stockholders at the time of the suit can file
the derivative suit.
So we are ready for the Derivative suit. Here are stockholder now whos filing
against the directors because the directors refuse the file necessary case, so in the
end what would the result of the derivative suit?
The BOD will liable for the issuance of the watered stock and the nonissuance of the certificate of stock, in that manner the directors shall be
solidarily liable.
In the prayer of the derivative suit to be filed by the petitioning
stockholders prayed that they be awarded with damages and they
suffered sleepless nights because watered are issued, why the directors did
it to them, do you think they can recover damages from that?
NO. They cant recover the damages because the purpose of the derivative it
should be in favour of the corporation, and in the instant case it was not for
the benefit of the corp. such that the cause of action should belongs to the
corp.
On the other hand, they had not decided to file derivative suit, but a case on their
behalf, an individual case, they trying to recover the unpaid portion belongs to
the corp, that should be given to them, then the court should give to them the
unpaid balance, do you think they can do that?
NO. The balance there is considered as a legal capital of the corp, such that it
is the corp has the right to recover the balance, moreover if they are allowed
to recover the unpaid balance and be given to them the it would violate the
trust fund doctrine, because these are part of the capital of the corp, and if
they allowed to recover the balance then that would tantamount to
liquidation because it is part of the capital. And it is the corp is supposed to
recover it.
Notwithstanding that this can used by unscrupulous stockholder to file a case
against the corp and let the corp pay something to them and now they receiving
return of capital then if to allow that that would be liquidating the capital.

LOST, STOLEN OR DESTROYED CERTIFICATE


So if you happen to find a certificate of stocks in a taxi worth 10 million pesos, what
will you do? Can you sell it?
Yes sir I can sell it because certificate of stocks is transferrable So you find a
buyer and tell him you see the par value of this, this worth 10 million pesos
and I will sell it to you for only 2 million pesos will you buy it? Of course its
way more than profitable, someone will take them.
Thats why it is very important that if you are the stockholder who left in the taxi
what will you do?
Report it to the corporation and inform them that you lost your COS
(certificate of stocks) so that it will be reflected in the book of corporation. Of
course, you should report for all you know someone will claim it in the
corporation. And in order for the corporation to check whether it was really
lost.
Its important for the corporation not to just issue new COS because they want to be
sure. For all you know you have endorsed it to someone else and that someone will
come in the corporation and claim also. So what does the law require?
The following procedure shall be followed for the issuance by a corporation of new
certificates of stock in lieu of those which have been lost, stolen or destroyed:
Affidavit. The registered owner of a certificate of stock in a corporation or
his legal representative shall file with the corporation an affidavit in triplicate
setting forth, if possible, the circumstances as to:
how the certificate was lost, stolen or destroyed.
the number of shares represented by such certificate,
the serial number of the certificate and
the name of the corporation which issued the same.
He shall also submit such other information and evidence which he may deem
necessary;

Publication by the corporation. Corporation shall publish a notice in a


newspaper of general circulation published in the place where the corporation
has its principal office, once a week for three (3) consecutive weeks at the
expense of the registered owner of the certificate of stock which has been
lost, stolen or destroyed.
The notice shall state:

the name of said corporation,


the name of the registered owner and
the serial number of said certificate, and the
number of shares represented by such certificate,

If no contest, General Rule After the expiration of one (1) year from the date of the
last publication, the right to make such contest shall be barred and said
corporation shall cancel in its books the certificate of stock which has been lost,
stolen or destroyed and issue in lieu thereof new certificate of stock.
EXCEPTION:
Unless the registered owner files a bond or other security in lieu thereof as
may be required, effective for a period of one (1) year, for such amount and
in such form and with such sureties as may be satisfactory to the board of
directors, in which case a new certificate may be issued even before the
expiration of the one (1) year period provided herein.
IF there is a Contest If a contest has been presented to said corporation or if an
action is pending in court regarding the ownership of said certificate of stock which
has been lost, stolen or destroyed, the issuance of the new certificate of stock in
lieu thereof shall be suspended until the final decision by the court regarding the
ownership of said certificate of stock which has been lost, stolen or destroyed.
General Rule: No action may be brought against any corporation which shall have
issued certificate of stock in lieu of those lost, stolen or destroyed pursuant to the
procedure above-described. Except In case of fraud, bad faith, or negligence on
the part of the corporation and its officers.
Alright, if we do not want to wait for 1 year just put up a bond, and that bond will
answer to any other party who present himself as the owner who brought the
certificate with him and prove that it was not lost and in fact it was legally
transferred to him. Thats how important it is because it is transferrable. You
should execute an affidavit of loss stating the circumstances of loss I Mr J.R
C. and the true and lawful owner stocks certificate number 0-10-0-10, while one
evening I was in karaoke I drink too much and I left my stocks certificates beside a
lady you should recite the circumstances leading to the loss.