GEORGE FONG VS. JOSE DUEÑAS | GR NO. 185592 | Brion, J.

TOPIC: PRE-INCORPORATION AGREEMENT

DOCTRINE: Under the Corporation Code, before a stock corporation may be incorporated and
registered, it is required that at least twenty-five percent (25%) of its authorized capital stock as
stated in the articles of incorporation, be first subscribed at the time of incorporation, and at least
twenty-five percent (25%) of the total subscription, be paid upon subscription.

FACTS
 Respondent Dueñas is engaged in the bakery, food manufacturing, and retailing business,
which are all operated under his two companies – DC Danton Inc (Dantos) and Bakcom Food
Industries, Inc. (Bakcom).
 Petitioner Fong and Duenas are former schoolmated at DLSU. Sometime in November 1996,
they entered into a verbal joint venture contract where they agreed to engage in the food
business and to incorporate a holding company under the name Alliance Holding, Inc
(Alliance).
 The parties agreed to contribute equal amounts of P32.5M with Fong paying in cash while
Dueñas with all his Dantos and Bakcom shares valued at P32.5M. Fong asked Dueñas to
submit supporting documents for the valuation of these shares.
 [On 25 Nov 1996] Fong started remitting in tranches his shares under the impression that it
will be apploed as his subscription to the 50% of Alliance’s total shareholdings.
 [on 13 June 1997] Fong sent a letter to Dueñas informing him of his decision to limit his total
contribution from the agreed P32.5M to P5M. He observed that despite his contribution,
Dueñas failed deliver the financial documents on the valuation of Danton and Bakcom.
Moreover, Dueñas failed to incorporate and register Alliance with SEC.
 [On 30 Oct 1997] Fong finally decided to cancel the joint venture agreement and asked for
the refund of P5M.
 [On 25 March 1998] Fong wrote a final letter of demand to Dueñas informing the latter that he
will file a judicial action against him should he still fail to return the P5M. Dueñas still did not
pay, which prompted Fong to file a complaint for sum of money and damages.
 RTC: in favor of Fong. Ordered Dueñas to return P5M.
Ruling: Dueñas erroneously invested Fong’s cash to his companies – Danton and
Bakcom. The signed receipts showed provided that each remittance should as advance
subscription to Fong’s shareholding in Alliance.
 CA: in favor of Dueñas. Annuled the decision of RTC.
Ruling: Fong’s letter evidenced his intention to convert his cash contributions from
“advances” to proposed corporation’s shares, to mere “investments” Dueñas correctly invested
money to his company since the agreement was that the share of Danton and Bakcom will be
used in the creation of Alliance Holdings, Inc. Hence, this petition.

ISSUE: WON the investment/advances made by Fong would form part of his capital contribution
to Alliance

HELD:
NO. Parties never agreed that Fong would invest his money in Danton and Bakcom. In the letter
submitted by Fong, he said that the money would be applied to his shareholding in Alliance.

Moreover, under the Corporation Code, before a stock corporation may be incorporated and
registered. It is required that at least 25% of its authorized capital stock as stated in the AOI be
first subscrubed at the time of incorporation, and atleast 25% of total subscription, be paid upon
subscription. To prove compliance with this requirement, the SEC requires the incorporators to
submit a treasurer’s affidavit and a certificate of bank deposit, showing the existence of an amount
complaint with the prescribed capital subscription.

In this light, Fong’s cash contributions play an indispensable part in Alliance’s incorporation. The
process necessarily requires money not only to fund Alliance’s registration with SEC but also its
initial capital subscription. Dueñas erred when he invested Fong’s contribution in his two
companies.

NOTES:
 Reasons of Fong for limiting the capital contribution to P5M:
o First, we were faced with the “personal” factor which was explained to you one time.
This has caused us to turn down a number of business opportunities;
o Secondly, since last year, the operation of Century 21 has been taking more time from
us than anticipated. That is why we decided to relinquish our original plan to manage
and operate “Boboli” knowing this limitation. For us, it does not make sense anymore
to go for a significant shareholding when we cannot be hands on and participate
actively as originally planned.
 Although the action was labeled as collection of sum of money, it was actually an action for
rescission.
 They both breached the joint venture agreement.
o DUEÑAS: by applying Fong’s contributions to his two companies and failed to deliver
the valuation documents of the companies’ shares to prove that the combined values
of their capital contributions amounted to P32.5M. These justified Fong’s rescission of
joint venture agreement under Art. 1191.
o FONG: Diminution of his capital share from P32.5M to P5M amounted to substantial
breach of joint venture agreement, which breach occur before he decided to reschinf
his agreement with Dueñas.
 Duena ̃ is ordered to return the P5M to Fong with 6% interest from finality of decision until
s
fully paid. The parties’ respective claims for damages are deemed EXTINGUISHED and each
of them shall bear his own damages.