Case Summary (G.R. No. 19893)
Article 46 of the By‑laws (operative provision)
Article 46 allocates net profits as follows: 10% to the board of directors, 10% to the general manager, 10% to reserve, and 70% to shareholders equally. It further provides that from the 70% distributable to shareholders the board may deduct an amount it deems fit to apply to unpaid subscriptions, withholding dividends to holders of unpaid shares until fully paid. It also authorizes the board, after all shares are fully paid, to deduct an amount to create an emergency or extraordinary reserve, subject to a proviso that the remaining distributable dividend after such deduction be not less than 10% of paid‑up capital. The article concludes by stating no dividend shall be declared except from net profit, preserving capital.
Plaintiff’s legal theory
The plaintiff contended that article 46 created an exclusive, operative method for amortizing unpaid subscriptions — namely continuous deduction from the 70% dividend share — and that the corporation’s choice to declare delinquency and sell the shares under statutory procedures subverted and violated this contractual by‑law provision. He sought injunctive relief on the ground that the board had exceeded its executive authority and that he had no adequate remedy at law.
Trial court disposition and demurrer reasoning
The trial court sustained the defendant’s demurrer on the ground that the facts alleged did not constitute a cause of action. The court afforded leave to amend, which the plaintiff did not exercise; the complaint was dismissed and the preliminary injunction dissolved. The plaintiff excepted and brought the matter to the Supreme Court through the proper bill of exceptions.
Legal issue presented
Whether article 46 of the by‑laws, construed as between the corporation and its stockholders, precluded the board of directors from declaring unpaid subscriptions delinquent and proceeding under the statutory remedies (sale of unpaid shares or action for collection), thereby barring the corporation from invoking those statutory remedies.
Interpretation of article 46 — discretion vs. exclusive method
The Supreme Court construed article 46 as granting discretionary authority to the board to deduct from the 70% distributable dividend such sums as it deems fit to apply to unpaid subscriptions. The by‑law’s language ("may deduct such amount as it may deem fit") was held to confer discretionary power on the board, not to prescribe a fixed, exclusive, or mandatory method of collection. The provision that the board may create an emergency fund after shares are fully paid (subject to a minimum distributable dividend) further illustrated that the by‑law contemplates board judgment and discretion rather than a single immutable rule.
Statutory remedies under the Corporation Law and board choice
The Court emphasized that the Corporation Law itself furnishes specific remedies: the corporation may put up unpaid stock for sale and dispose of it for the account of the delinquent subscriber by following sections 37–49; alternatively, directors may collect the unpaid subscription by action in court under section 49. The board’s declaration of delinquency and the advertisement and sale were an exercise of the statutory remedy set forth by the Corporation Law. The Court found that the board complied strictly with those statutory provisions in electing the sale remedy.
Rejection of the contractual supremacy argument
Even assuming the by‑laws constitute a contract between the corporation and its stockholders, the Court held that article
...continue readingCase Syllabus (G.R. No. 19893)
Title and Citation
- 44 Phil. 755; G.R. No. 19893. March 31, 1923.
- Decision authored by Chief Justice Araullo.
Parties
- Plaintiff and Appellant: Arnaldo F. De Silva.
- Defendant and Appellee: Aboitiz & Company, Inc.
Material Facts
- The plaintiff subscribed for 650 shares of stock of the defendant corporation, each share having a par value of P500.
- The plaintiff had paid only the total value of 200 shares; 450 shares remained unpaid.
- The unpaid 450 shares were valued at P225,000, representing the plaintiff’s indebtedness to the corporation for unpaid subscriptions.
- On April 21, 1922, the board of directors adopted a resolution (formal notice sent April 22, 1922) declaring unpaid subscriptions to the capital stock to become due and payable on May 31 at the office of the corporation, payment to be made to the treasurer.
- The notice stated that shares not paid by May 31, together with accrued interest, would be declared delinquent, advertised for public sale, and sold on June 16 to pay the amount of the subscription, accrued interest, and advertisement and sale expenses, unless payment was made earlier.
- The proper advertisement was published as announced in the notice.
Procedural History
- Plaintiff filed a complaint in the Court of First Instance of Cebu on May 5, 1922.
- A preliminary injunction was issued against the defendant upon the plaintiff’s posting of a proper bond.
- The defendant filed a demurrer to the complaint asserting:
- The facts alleged did not constitute a cause of action; and
- Even if the plaintiff had a lawful claim, the extraordinary remedy sought (injunction) was not the most adequate or speedy remedy.
- The trial court, by order dated September 21, 1922, sustained the demurrer on the first ground and gave the plaintiff five days to amend.
- The plaintiff did not amend within the period allowed.
- On October 2, 1922, upon motion of the defendant, the trial court dismissed the complaint and ordered the dissolution of the preliminary injunction, with costs.
- The plaintiff excepted and sought annulment and a new hearing; this motion was denied by the lower court.
- The plaintiff brought the case to the Supreme Court by bill of exceptions.
Complaint: Relief Sought and Grounds Alleged
- Relief sought:
- Judgment declaring that the corporation exceeded its executive authority in prescribing another method of payment for subscriptions different from article 46 of its by‑laws;
- Decree that the unpaid 450 shares were not delinquent and prevention of their sale as advertised;
- Issuance of a writ of injunction enjoining defendant from proceeding with sale or other acts in connection with the complained acts; and
- Costs.
- Grounds alleged:
- Article 46 of the corporation’s by‑laws (quoted in the complaint) prescribes that unpaid shares subscribed by the incorporators “shall be paid out of the 70 per cent of the profit obtained,” and that subscribers holding unpaid shares shall not receive dividends until those shares are fully paid.
- By declaring the plaintiff’s unpaid shares due and delinquent and publishing the notice of sale, the corporation violated article 46, which plaintiff alleged prescribed an operative, continuous method of payment for subscriptions until full amortization, thereby interfering with plaintiff’s vested right under the by‑laws.
- The corporation’s acts were in excess of its powers and executive authority; plaintiff had no plain, speedy, or adequate remedy at law other than injunction to prevent the sale and alienation.
Article 46 of the By‑Laws (as quoted in the record)
- "ART. 46. The net profit resulting from the annual liquidation shall be distributed as follows: Ten per cent (10%) for the Board of Directors and in the manner prescribed in article twenty‑six (26) of these by‑laws; ten per cent (10%) for the general manager; ten per cent (10%) for the reserve fund, and seventy per cent (70%) for the shareholders in equal parts; Provided, however, That from this seventy per cent dividend the Board of Directors may deduct such amount as it may deem fit for the payment of the unpaid subscriptions to the capital stock and not pay any dividend to the holders of the said unpaid shares until they are fully paid: Provided, further, That when