11. Cyrus PADGETT v. BABCOCK & TEMPLETON, INC. and W.R.

restrain of trade (in the absence of a valid lien upon its shares, and except when a
BABCOCK
G.R. No. 38684 | 21 December 1933
FACTS
1. Padgett was an employee of Babcock & Templeton, Inc. (Babcock, Inc). During
the period that he rendered services to the company, Padgett bought 35 shares (P100
a share) of Babcock, Inc. at the suggestion of the president of said corporation.
2. Padgett also received 9 shares by way of bonus during Christmas seasons. Thus,
he became the owner of 44 shares for which 12 certificates were issued in his favor.
The word “nontransferable” appears on each and every one of these
certificates.
3. Padgett, before severing his connections with Babcock, Inc., proposed to the
president that Babcock, Inc. buy his 44 shares at par value plus interest, or that he be
authorized to sell them to other persons.
4. The said president offered to buy Padgett’s shares first at P85 each and then at
P80. Padgett did not agree.
5. The defendants admit that the 44 shares have become the property of Padgett.
They said that under the law Padgett has the right to have the restriction
“nontransferable”, that appeared on the 12 certificates, eliminated. After that,
Padgett may sell the said shares to anybody. But the company is not bound or
obliged to buy said shares at par value.
valid restrictive regulations and agreements exist).
-> Subject only to such restrictions, a stockholder cannot be controlled on or
restrained from exercising his right to transfer by the corporation, its officers, or
other stockholders (even though the sale is to a competitor of the company, to an
insolvent person, etc.)
-> Hence, the restriction consisting in the word “nontransferable” appearing on the
12 certificates is illegal and should be eliminated.
RECALL: Fleischer vs. Botica Nolasco
A clause in the by-laws of the corporation states that the owner of a share of stock
could not sell it to another person except to the said corporation.
ISSUE: W/N the said restriction is valid.
HELD: No. The only restraint imposed by the Corporation Code upon transfer of
shares is in Section 63: “ 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
as to show the names of the parties to the transaction, the date of the transfer, the
number of the certificate, and the number of shares transferred”

ISSUE
W/N the resstriction consisting in the word “nontransferable” appearing on the
certificates of shares is illegal.

HELD
Yes. It is illegal because it constitutes an undue limitation of the right of ownership
and is in restraint of trade.

General rule: Shares of corporate stock are regarded as property. Thus, the owner of
such shares may dispose of them as he sees fit.

Exception: Unless the (1) corporation has been dissolved, or (2) the right to dispose
or transfer is properly restricted, or (3) the owner’s privilege of disposing of his
shares has been hampered by his own action.

Any restriction on a stockholder’s right to dispose of his shares must be construed

strictly; and any attempt to restrain a transfer of shares is regarded as being in